Allowed

Madura Coats Pvt. Ltd. v. the Joint Dy. Commr. of

Madras HC14 Dec 2018TC/1813/2008

Case brief

AI extract

What is this about?

High Court allowed appeals against Tribunal's order denying deduction under Section 80 HH for a dipping plant, ruling the activity constituted manufacture. Court also held employer contributions to a Death Relief Fund allowed under Section 37.

What did the court decide?

Substantial questions of law relating to deduction under Section 80HH and allowability of Death Relief Fund contribution held in favour of the assessee.

Madura Coats Pvt. Ltd. Vs the Joint Dy. Commr. of — Income Tax | Madras HC (2018)

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In the High Court of Judicature at Madras Dated: 14.12.2018

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Coram

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The Honourable Mr.JUSTICE VINEET KOTHARI

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The Honourable Dr.JUSTICE ANITA SUMANTH

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TAX CASE (APPEAL) Nos.1813 to 1820 of 2008

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M/s. Madura Coats Private Limited, Formerly known as Madura Coats ltd., New Jail Road, Madurai ……Appellant in all TCAs Vs.

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The Deputy Commissioner of Income Tax, Company Circle –I, Special Range II, Madurai. ...... Respondent in all TCAs

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COMMON PRAYER: APPEAL filed under Section 260 A of Income-tax Act, 1961 praying against the impugned common order dated 28.02.2007 passed by the Income Tax Appellate Tribunal, ‘D’ Bench, Chennai in ITA Nos.1960 to 1962/Mds/2000 and 65/Mds/2002, for the Assessment years 1986-87, 1989-90, 1991-92 and 1995-96 and I.T.A. Nos.1193/Mds/2002, 900, 1437, 1619, 1620, 1621, 1624, 1628 and 1818/MDs/2004 for the A.Y.1998-99, 1994-95, 1996-97, 1990-91, 1993-94, 1997-98, 1999-2000, 2000-01 and 1992-93 and ITA No.1037/Mds/1998 for the assessment years 1994-95 and ITA No.1140/Mds/98 for the AY 1994-95 and ITA 104 & 105/Mds/2002 for the AY 1994-95 and 199596.

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For Appellant : Mr.T.Surya Narayana for

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M/s.King and Patridge in all TCAs

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For Respondent : M.Swaminathan

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Senior Standing Counsel in all TCAs assisted by Ms.Pushpa and Premalatha

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http://www.judis.nic.in

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COMMON JUDGMENT

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(Judgment of this Court delivered by DR. ANITA SUMANTH, J.)

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These Appeals relate to assessment years 1991-92, 1992-93, 1993-

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94, 1994-95, 1995-96, 1998-99 and arise out of orders dated 28.02.2007

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passed in cross appeals filed by the assessee, the appellant before us, and the revenue, by the Income Tax Appellate Tribunal (in short 'Tribunal').

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Heard Mr.T.Suryanarayana for King & Patridge, learned counsel for the appellant and Mr.M.Swaminathan, learned Senior Standing Counsel assisted by Ms.Pushpa and Ms.Premalatha, learned counsels for the respondent.

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This Court vide order dated 26.11.2008 admitted the following

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substantial questions of law for determination in the respective assessment years:

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T.C.(A)Nos.1813, 1815, 1818 to 1820 of 2008:

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(Assessment Years 1994-95, 1991-92, 1998-99, 1990-91, 1993-94, 1992-93)

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Whether the Tribunal is right in law in disallowing the claim of deduction under Section 80 HH of the Income Tax Act, 1961 in respect of the dipping plant since according to the Tribunal the activity carried on by the dipping plant is in the nature of processing only and not manufacture of the assessment year 1994-95, 1991-92, 1998-99, 1990-91 1993-94 and 1992-93?

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T.C.(A)Nos.1813 to 1817 of 2008:

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(Assessment Years 1994-95, 1991-92, 1995-96 and 1998-99)

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Whether the Tribunal was right in holding that the payment made to the Labour Welfare Association is not allowable deduction for the assessment years 1994-95, 1991-92 and 1995-96?

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T.C.(A)No.1815 of 2008 (Assessment year 1991-1992)

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Whether the facts and in the circumstances of the case, the Tribunal is right in holding that the reassessment made under Section 147 of the Income Tax act is valid?

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The appellant is a public limited company engaged in the business of

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manufacturing of cloth, industrial fabrics, readymade garments, sewing threads etc. Two issues arise for determination in this batch of appeals and we take up the substantial question of law relating to grant of deduction under section 80HH of the Income tax Act 1961 (in short ‘the Act’) first. The relevant facts are common in respect of all assessment years involved.

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The appellant claimed a deduction under Section 80 HH of the Act in

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respect of its dipping plant. The claim was questioned by the Assessing Officer who was of the view that the plant did not undertake any manufacturing or production activity, mandatory for the allowance of deduction under Section 80 HH of the Act. Despite the appellants' objection explaining the nature of activity carried out by the plant, the claim was rejected on the ground that the activity carried on amounted only to 'processing' and not 'manufacture'.

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The appellant was successful in appeal before the Commissioner of Income Tax (Appeals) (in short ‘CIT (A)’) who applied the ratio of the decision of the Madras High Court in the case of CIT v. Tamil Nadu Heat Treatment and

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Fetting Services (P) Limited (238 ITR 529) in support of his decision to accept the claim of the assessee.

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In further appeal by the Revenue, the order of the CIT (A) was reversed by the Tribunal after an elaborate discussion concluding that the activity engaged by the dipping plant amounted to 'processing' and not 'manufacture' and the assessee was hence not eligible to the relief claimed.

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A specific argument was raised by the assessee to the effect that since the output from the dipping plant was entirely different and distinct from the input, being grey fabric, and a new product had emerged after the treatment in the dipping plant, the activity would amount to 'manufacture'. This was negated by the Tribunal stating that the furnished product was akin to the input used and no different from the grey fabric itself.

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The dipping of the fabric, according to the Tribunal, was only for the purposes of marketability and would not impact the position that the activity involved only a series of processes and not 'manufacture' or 'production'. The Tribunal relied on the Judgment of the Supreme Court in the case of Nilgiri Tea Company (10 STC 500) in support of its conclusion as aforesaid.

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We are not in agreement with the Tribunal. The provisions of Section 80HH provide for a deduction of the profits derived by the assessee from the activity of ‘manufacture’ or ‘production’. A detailed examination of the activity engaged in by the assessee is thus required. The orders of the lower authorities set out the nature of work engaged in by the dipping plant as follows:

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‘Dipping plant separated to dip and heat stabilise product like tyre cord, warp sheets, synthetic ducks, products of conveyor belting where the dimentional stability is not important criteria.

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Further only after the said products are dipped and heat set, they are compatible for rubber adhesion, synthetic warp sheets or synthetic industrial fabrics are used in products where dimentional stability is an important criteria. Also synthetic products are not compatible with rubber. So the fabrics are dipped in a chemical solution namely resouncinol, formaldehyds and alter combination to make them compatible with rubber. This also enhances rubber adhesion.

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Fabric is dipped in the above solution and heat stabilised by employing 3 techniques namely time, temperature and Tension in the machine called dipping plant.’

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The activity of dipping is, thus, key to stabilising and heat- setting

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the products. It is only after such dipping and heat stabilisation that the material would be compatible for rubber adhesion in various products requiring dimensional stability. The input used is industrial fabric or yarn and what emerges after the aforesaid activity is a commercially distinct product, different from the input used. The conclusion of the Tribunal to the effect that the activity engaged is a mere process does not appear to be justified as it is seen from the explanation provided before the authorities that a series of processes are carried out resulting in the final products. Such a series of processes in itself, in our view, amounts to the activity of 'manufacture'.

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We may profitably cite the decision of this Court in the case of

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Tamil Nadu Heat Treatment and Fetting Service (supra) that considered the process of heat treatment to crankshafts. The Division Bench in that case was concerned with the question of whether the subjecting of automobile parts to heat treatment would amount to manufacture. The Bench notes that the heat

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treatment increased their wear and tear resistance, removing the inordinate stress to which they were exposed. The tensile strength and durability of the products was substantially enhanced. In fact, untreated crankshafts, not subject to the processes as aforesaid, could not be utilised in the automobile industry. On the aforesaid facts, this court held that the process amounted to manufacture.

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Likewise, in the present case, untreated yarn/grey fabric could not be put to use in products involving the use of rubber, such as tyres and conveyor belts sans the treatment in the dipping plant and the series of processes has thus, in our view, resulted in a product that is distinct in terms of commercial use.

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The case of Nilgiri tea relied on by the Tribunal is distinguishable on facts. The Bench, in that case, was concerned with the blending of various teas. It is evident that a blend of tea would still continue to be tea and can be consumed as such either prior to or subsequent to such blending. It is for this reason that the Bench concluded that the activity of blending would not amount to manufacture. This case does not advance the stand of the revenue in the least.

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We may also, in this context, refer to the definition of the term 'manufacture' inserted in the Act by Finance (No.2) Act 2009, with effect from 1.4.2009 reading as follows:

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‘[29(BA) “manufacture, with its grammatical variations, means a change in a non-living physical object or article or thing,--

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(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

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(b) bringing into existence of new and distinct object or article or thing with a different chemical composition or integral structure;]

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As per the above definition, any activity that would result in the transformation or change in the character of the object or article or thing, such that a new and distinct object is brought into existence would amount to 'manufacture'. The definition statutorily enshrines one of the long settled tests of what would constitute 'manufacture'. Thus, notwithstanding that the definition itself has been inserted only with effect from 01.04.2009, the test has itself has been consistently applied by the Courts even prior thereto in determining whether an activity would amount to manufacture or not.

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In the light of the discussion above, the substantial question of law relating to disallowance of deduction under section 80HH of the Act, arising in Tax case (A) Nos.1813, 1815, 1818 to 1820 of 2008 in relation to Assessment Years 1994-95, 1991-92, 1998-99, 1990-91, 1993-94 and 1992-93 respectively is held in favour of the assessee and against the Revenue.

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The second substantial question of law relates to the disallowance of a contribution made by the assessee to a Labour Welfare Association, and arises in Tax case (A) Nos.1813 to 1817 of 2008 (Assessment Years 1994-95, 1991-92, 1995-96 and 1998-99).

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The Appellant had claimed certain amounts paid to the Labour Welfare Association as allowable under Section 37 of the Act. The Assessing Authority was of the view that the amounts were not permitted allowances in terms of Section 40A (9) of the Act that bars a claim made of any sum paid by the assessee as an employer towards the setting up or formation of, or as http://www.judis.nic.in

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contribution to, any fund, trust, company, association of persons, body of individuals, registered society or any other institution for any purpose, except where such the payment is made for the purposes and to the extent provided under Section 36, Sub Section (1) clause (iv) or clause (v) of the Act, being Provident Fund, Gratuity Fund or Pension Scheme. Since the amounts were not made as contributions towards any of the aforesaid categories, the same were disallowed.

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The disallowance was challenged in first appeal and the Commissioner of Income tax (Appeals) (in short ‘CIT (A)’) accepted the ground of challenge allowing the claim following the decision of this Court in the case of Cheran Engineering Corporation Vs. Commissioner of Income Tax (238 ITR 892) . The aforesaid order was challenged by the revenue before the Income Tax Appellate Tribunal, that, vide the impugned order, reversed the conclusion of the CIT(A). The Tribunal confirms the order of Assessment holding that the bar in Section 40A (9) would apply in the present case, since the contributions made to the Labour Welfare Association are not covered by the provision of Section 36 (i) (iv) or (v) of the Act.

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We find that the appellant has made four contributions towards Labour Welfare viz., to the (i) Labour Welfare Association, (ii) Employees Death Relief Fund, (iii) Madurai Labour Welfare Association (iv) United India Insurance Company as Insurance Premium. We are concerned in this appeal only with the contribution made to the Death Relief Fund as the authorities have accepted the allowability of the other contributions made. We are of the view that the contribution made by the employer to the Death Relief Fund is also an allowable http://www.judis.nic.in business expenditure in terms Section 37 of the Act in so far as the expenditure

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is incurred wholly and exclusively for the welfare of its employees and is for the purposes of the business. Similar contributions made by the assessee towards labour welfare have been accepted by the revenue and no distinguishing features have been brought out before us to persuade us to take a different view in the case of this contribution. We draw support in this regard from a decision

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of the jurisdictional Court in the case of Cheran Engineering Corporation

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(supra).

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The substantial question of law relating to disallowance of contribution made by the assessee to the Labour Welfare Association raised in Tax case (A) Nos.1813 to 1817 of 2008 (Assessment Years 1994-95, 1991-92, 1995-96 and 1998-99) is held in favour of the assessee and against the Revenue.

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