1. The assessee is a private limited company having the business of catching and purchasing fish, processing them and exporting them. In the earlier years the assessee had been dealing in cashew kernels as well.
2. During the year of account the assessee debited a sum of Rs. 12,01,787 as provision for purchase tax and surcharge. This included a sum of Rs. 2,86,436 being purchase tax and surcharge on cashew kernels relating to the assessment year 1975-76. The assessee had made the claim for allowance of this amount for the assessment year 1975-76 but the claim was rejected. The claim was renewed in 1977-78, it being urged that the ITO had agreed to allow this amount in the year in which the payment was obligatory. The ITO making the assessment for the assessment year 1977-78 held that the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v, CIT 11971] 82 ITR 363 stated that a liability can be allowed in the year to which the liability related. Since in the present case the liability related to the assessment year 1975-76 it could not be allowed in 1977-78. The Commissioner (Appeals), however, held that the disallowance was not justified. The addition on this score was, therefore, deleted. This is challenged in the present departmental appeal.
3. The learned counsel for the department has pointed out that the assessee had made a claim of this amount for the assessment year 1975-76. The amount in question undisputedly related to the accounting year relevant to the assessment year 1975-76. On the basis of the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd.'s case (supra), the claim was not allowable in the assessment year 1977-78. In support of his case reliance was placed in the decisions of the Kerala High Court in L.J. Patel & Co. v. CIT  97 ITR 152 and CIT v. K.A.Karim & Sons  133 ITR 515 (FB). According to the learned counsel, the decision in CIT v. North Arcot District Co-operative Spg. Mills Ltd.  148 ITR 406 (Mad.) cited for the other side related to interest on instalment payments-a case of contractual liability whereas in the present case we are concerned with a statutory liability. Even though a different view was spelt out in the case of CIT v. Nathmal Tolaram  88 ITR 234 (Gauhati) this has been clearly dissented from by the Kerala High Court in L.J. Patel & Co.'s case (supra) and K.A. Karim & Sons' case (supra), the Madras High Court in CIT v. V.Krishnan  121 ITR 859 and the Punjab and Haryana High Court in CIT v. United India Woollen Mills  132 ITR 457 at page 461. There was no question at all, therefore, of allowing this claim for the assessment year 1977-78 in view of the clear judicial pronouncements in Kedarnath Jute Mfg. Co. Ltd.'s case (supra).
4. For the assessee it is pointed out that a valid claim made for the assessment year 1975-76 has been rejected by the Income-tax Department.
It would not be" open for the department to hold, when a claim was made in the subsequent year, that it related to an earlier year. The decision in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) only held that even an expenditure not provided for in the books could be deducted if properly deductible. The assessment for the earlier year must, in that case, be open. In the present case, according to the learned counsel, the Commissioner (Appeals) has allowed it in the assessment year 1977-78 considering all the facts. The Supreme Court decision also has to be interpreted and applied in the light of the method of accounting followed by the assessee. There may be not only methods, such as the mercantile or cash system, but others like hybrid. Even in a system of accounts maintained in a particular fashion, according to the learned counsel, a particular method of recording the expenditure entry for some specific item can be followed from year to year. A blind application of the Supreme Court decision, therefore, was not warranted by the judgment itself, nor fair.
5. Apart from the above the assessee was under the honest impression that being an exporter it was not liable to pay purchase tax on these items. In view of the specific belief it could not have made a provision for the expenditure in the books. Reference is made in this connection to several passages in the Sampath lyengar's Law of Income-tax, Seventh edition, Vol. 2 at page 1657. Relying on North Arcot District Co-operative Spg. Mills Ltd.'s case (supra), it is pointed out that a different method of accounting, if consistent, can be followed in respect of individual items. The counsel has further relied on the decisions in CIT v. R. Shantilal & Co.  82 ITR 214 (Cal.), Nathmal Tolaranfs case (supra), CIT v. Banwari Lal Madan Mohan  110 ITR 868 (All.) and Addl. CIT v. Rattan Chand Kapoor  149 ITR 1 (Delhi). The decisions in L.J. Patel & Co. and K.A. Karim & Sons' cases (supra) did not apply to the facts or the issues in the present case since the assessee did not even know about the liability in the first place and secondly the entire discussion was subject to the method of accounting followed by the assessee.
6. We have here an extreme case of the inconsistency the department has followed in dealing with the claim. For the assessment year 1975-76, when the assessee properly made a claim, the ITO rejected it. The assessee's learned counsel has urged that the ITO at that time clearly held the expenditure to be allowable for the assessment year 1977-78.
Even so, when the assessment for 1977-78 came up, the same ITO held that the judicial decisions and the law as interpreted by the Supreme Court required the expenditure to be allowed in the earlier year and so it was not allowable in 1977-78. The learned counsel for the department was fair enough to say that since the law permitted the allowance only for the assessment year 1975-76, if the assessee were to make an application to the department for the allowance of the expenditure for the particular year to which it relates, namely, 1975-76, the department would be kind enough to look into the matter. Even here it might be noted that the department has not given an assurance that the amount would be allowed for the earlier year. Be that as it may, we find that even on merits, the assessee's claim should be upheld.7. The assessee's case that it believed that as an exporter it would not be subjected to the purchase tax has not been shown to be wrong or a make-belief. Apparently, the assessee did not make any provision for this expenditure in the henest belief that he was not liable for the same. If that be so even from the strictly accountancy point of view there was no necessity for it to make a provision or an entry in this regard. Apart from this, this was almost the first year of the business of the assessee. The company came into existence during the assessment year 1975-76. As regards the claim for purchase tax it could certainly follow a method of making a provision in the year when the demand notice is received. This is supported by the decision in North Arcot District Co-operative Spg. Mills Ltd.'s case (supra). In the present case, the purchase tax in question related to the assessment year 1975-76, the year ending for that being 20-2-1975. The sales tax assessment for that period was made only on 30-9-1976 and the demand notice was also issued on that day. The assessee's claim for the assessment year 1975-76 was rejected by the ITO. The assessment order for that year was passed on 9-6-1977 after the demand notice was issued. On the basis of method of accounting also this should be a proper deduction for the assessment year 1977-78. It was pointed out before us by the learned counsel for the department that even during this year the assessee did not pay the purchase tax. When the demand notice was received it was proper for the assessee, as a prudent businessman, to have made a provision for the expenditure for the accounting year during which it was received. The amount might be paid at any time subsequently. In our view, therefore, the assessee had made a proper claim and in the year in which it should be allowed.
Incidentally it requires to be mentioned that the decision in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) as rightly contended by the learned counsel for the assessee, only stressed the point that even though the expenditure is not debited to the profit and loss account, if it had already arisen the assessee could claim it. In that decision there is nothing to show that depending on other factors like complete ignorance of the existence of any liability or the method of accounting followed, the claim can be allowed only in that year. This view does not get support even from the other decisions referred to for the department.
It would be strange for an assessee to think of a claim and debit it into the profit and loss account for a year when he does not even know of it. The decision in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) and similar decisions refer to cases where there is a specific liability.
If the assessee was under the honest impression that there was no purchase tax on goods to be exported he could certainly not have made an entry for 1975-76. The Supreme Court decision does not also require him to do so. We, therefore, uphold the order of the Commissioner (Appeals) on this point.
8. The assessee claimed deduction under Section 80J of the Income-tax Act, 1961 ('the Act') on the capital employed in its business.
According to the ITO, the assessee's business consisted of catching offish, maintaining a cold storage, processing of fish and export and sale of fish. Deduction under Section 80J was allowable only in respect of the cold storage or the freezing plant of the assessee. He, therefore, requested the assessee to file a balance sheet showing the assets, liabilities, etc., of the cold storage. Since the above was not furnished, the assessee objecting to the proposal of the ITO, the ITO rejected the claim.
9. On appeal, it was claimed for the assessee that it had fishing trawlers which could be treated as ships ; it was processing fish and marine products as an industry and that it has a cold storage. In view of the above, the assessee was entitled to relief under Section 80J on the entire business. Even if the assessee could not be treated as a manufacturer, it was a producer of frozen fish and other marine products especially for the export market and thus entitled to the deduction. The Commissioner (Appeals) accepted the claim of the assessee. Since, however, in his view the ITO had not discussed in the assessment order all other aspects of the matter he directed the ITO to look into the claim and to determine the deduction under Section 80J on the basis that in producing processed marine products the asssssee was 'running an industrial undertaking'. The department has challenged the order of the Commissioner (Appeals).
10. The learned counsel for the department has pointed out that the assessee claimed relief under Section 80J on the entire capital used in the business. The ITO disallowed the claim. Under Section 80J(4) the assessee was entitled to the relief under the section only under certain circumstances. Manufacture or production of articles was a necessity for the allowance of the relief. The assessee in its business did the work of grading, washing, etc., of the fish by using machines.
Even though some work was done on the fish, it did not become a pulp or any other article satisfying the statutory conditions. The expression 'manufacture' and 'production' are not defined in the Act and must, therefore, according to the learned counsel, bear the ordinary meaning.
Referring to authorities in this connection it is pointed out that 'manufacture' implies that commercially a new product is brought into existence. Every change in an article is the result of treatment, labour and manipulation but every change is not 'manufacture'. In order to constitute 'manufacture' something more is necessary and the expending of labour must be carried to such an extent that the article suffers a series of transformations. A new and different article must emerge. Reference is made in this connection to the decisions in Dy.
Commissioner, Sales Tax v. Pio Food Packers AIR 1980 SC 1227 and Chowgule & Co. (P.} Ltd. v. Union of India AIR 1981 SC 1014. These decisions clearly establish that in manufacture the end product must be a commercial commodity different and distinct from the original item.
The counsel has relied on the three tests for 'manufacture' elaborately discussed in Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127. In the present case, there is no 'manufacture' as understood and clarified by these decisions. Reference is also made to the decisions in CIT v.Casino (P.) Ltd. [19-73] 91 ITR 289 (Ker.), Singh Engg. Works (P.) Ltd. v. CIT 119 ITR 891 (All.), CIT v. Pressure Piling Co. (India) (P.) Ltd.  126 ITR 333 (Bom.). CIT v. Hindus than Metal Refining Works (P.) Ltd.  128 ITR 472 (Cal.) and CIT v. Tata Locomotive & Engg. Co. Ltd.  68 ITR 325 (Bom.) The decisions of the Tribunal reported in Kanakadhara Industries v. Third ITO  7 ITD 142 (Mad.) and Y.A.C. Sand Dredging Co. v. Eighth ITO  10 ITD 452 (Bom.) also support the department's case. In the present case, the commodity obtained after the alleged processing is exactly the same as that which existed earlier. In fact the chemicals used in the process are only for the preservation of the original material. The pressure exerted is only for reducing the space occupied, this being an important factor governing export business.
11. The assessee's case, according to the learned counsel, cannot be brought even under the expression 'production'. In fact the essential elements in both 'manufacture' and 'production' as the authorities indicate, are the same. 'Manufacture' implies a transformation from the raw stage to that of the end product by manual or mechanical process.
'Production' includes these and in addition processes of a bilogical or natural type. The instances of production of dressed and frozen chicken are referred to in this connection. The basic concept of both 'production' and 'manufacture' are the same. In both what we get after the processing should be distinct, commercially different and a new product. The learned counsel has relied in this connection on the decisions in Tata Locomotive Engg. Co. Ltd.'s case (supra), Casino (P.) Ltd.'s case (supra), Pressure Piling Co. India (P.) Ltd.'s case (supra) and Hindusthan Metal Refining Works (P.) Ltd.'s case (supra). The decision in Kanakadhara Industries' case (supra) also supports his case. The processes to which the raw materials in the present case are subjected have been elaborately discussed in the decision of the Tribunal in Neroth Oil Mills Co. (P.) Ltd. [IT Appeal No. 99 (Coch.) of 1973-74 dated 29-1-1975]. Both the facts of the case as well as the decisions clearly indicate that the assessee does not satisfy the conditions of manufacturing or producing articles required by Section 80J.12. The learned counsel for the assessee has pointed out that there is a clear distinction between the raw materials in this case and the finished product. What is caught or brought from outside are not the same as the things sold. Referring to the provisions of sections 80J, 33 and 32A of the Act it is pointed out that the words 'manufacture' and 'production' occur in the three sections 80J, 33 and 32A. The provisions of the Fifth Schedule of the Act are equally noticeable. In this connection special mention is made of Fifth Schedule wherein at entry 30 reference is made to 'processed (including frozen) fish and fish products'. The use of these expressions clearly indicates that the Legislature has understood frozen fish and fish products as something different from the previous existing commodity. The decision in Singh Engg. Works (P.) Ltd.'s case (supra) is of great significance in this context. Other decisions of the High Courts referred to also support his case.
13. On behalf of the interveners Naik Ice & Cold Storage, Ratnagiri, Ratna Sea Foods, Ratnagiri and Gadhre Marine Products, Ratnagiri Shri Gadgil pointed out that in several decisions the Tribunal accepted the applicability of these reliefs in the case of fish industry. These asses-sees also caught fish with the help of boats and trawlers, got them converted into hardened slabs and exported them. The applicability of Sections 32A and 80HH of the Act only has been in dispute in these cases, the ITO having accepted the applicability of Section 80J to these cases himself. The ITO actually proceeded on the basis that the entire plant is a cold storage. That 'production' is involved in processing fish is clear, according to the learned counsel, from item 30 of the Fifth Schedule. Section 33(1)(b)(B)(i) is referred to in this connection. The decision in Tarai Development Corpn. v. CIT [l979] 120 ITR 342 (All.) deals with a case of processed seeds, wherein an exactly similar situation arose. Referring to item 28 of the Fifth Schedule their Lordships of the Allahabad High Court held that processed seeds involve production of seeds. That the fact that the items in dispute are specifically mentioned as items in the Fifth Schedule is sufficient to bring them under 'production'. In other words, .according to the learned counsel the statute itself recognises processed fish as a commodity resulting from manufacture or production. The decision of the Kerala High Court in CIT v. Castlerock Fisheries  126 ITR 382 in fact supports the assessee's case especially what is stated at page 387 of the report. The meaning of the word 'product' given in the dictionaries is also referred to. The Shorter Oxford Dictionary refers to a product as 'not only a thing produced by nature but also anything produced by an action, operation and work'. In the light of the above, according to the learned counsel, the Cochin Bench decision in the case of ITO v. Elite Sea Foods  3 ITD 348 should be regarded as the more acceptable one. In Casino (P.) Ltd.'s case (supra), Hindusthan Metal Refining Works (P.) Ltd.'s case (supra), Pressure Piling Co, India (P.) Ltd.'s case (supra) and Tata Locomotive Engg. Co. Ltd.'s case (supra) stress was laid on a change in nature but no distinction between manufacture or production was considered. The present case would be covered by 'production' and, according to the learned counsel, the direct authority of Singh Engg. Works (P.) Ltd.'s case (supra) entitles the asses-see to the relief claimed.
14. Alternatively it is claimed that the present case falls even under the test for 'manufacture' laid down in Pio Food Packer's case (supra), Chowgule & Co. (P.) Ltd.'s case (supra) and Idandas's case (supra). In fact even in earlier cases like Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 and CST v. Dr. Sukh Deo  23 STC 385 (SC) the matter was considered. Emphasis was laid on a material change to the final product from the raw materials. But all these decisions indicate that whether there is a manufacture or not depends on the facts of each case. A rule of thumb cannot be applied. The learned counsel has also pointed out that the decisions stress that it is not necessary in every case that the characteristics of the original material should change. It is not necessary that the material used in the process, production or manufacture should lose its basic property or get transformed itself. A complete transformation is not regarded as absolutely necessary. Stress is laid in this connection on the decisions in CIT v. Lakhtar Cotton Press Co. (P.) Ltd.  142 ITR 503 (Guj.) and North Bengal Stores Ltd. v. Member, Board of Revenue 1 STC 157 (Cal.). That the general principles evolved have to be applied to the particular facts is clear from the decisions in Lakhtar Cotton Press Co. (P.) Ltd.'s case (supra) and CIT v. Perfect Liners  142 ITR 654 (Mad.). The Tribunal decisions in Andhra Pradesh State Seeds Development Corpn. v. ITO  5 ITD 624 (Hyd.) and Nishit Synthetics (P.) Ltd. v. ITO  7 ITD 486 (Ahd.) are also of relevance.
15. Without prejudice to the above, the learned counsel has raised a further alternative argument. According to him, the running of a cold storage itself is 'manufacture'. This is clarified by the Tribunal decision in the case of Garg Cold Storage v. ITO  21 ITO (All.) 425. Since the provisions are intended as a concession a liberal construction is necessary lest the intended advantages should be lost to the assessee.
16. Shri Rangamani, intervener on behalf of George Maijo, Cuddalore referred to the Tribunal decision in the case of Harwell Sea Foods [IT Appeal No. 265/329 (Coch.) of 1978-79] a case of the same business where the same members of the Tribunal held that there was 'production'. In Neroth Oil Mills' case (supra), the important question was whether under Section 84 of the Act there was an industrial undertaking or not. The question of manufacturing or production was not considered of great importance. In Harwell Sea Food's case (supra) the Tribunal considering the detailed processes leading to the manufacture of an exportable commodity held that the word 'fish' and the end products are not the same because the end products could not be restored to their original conditions ; the process could not be reversed and the exportable item by itself was an article produced by the assessee by a method of processing. The elaborate discussion on the nature of the business and claim for relief in the case of Relish Foods [IT Appeal Nos. 333 and 334 (Coch.) of 1980 dated 26-11-1981] is referred to support the assessee's case. In fact in the case of Bharat Sea Foods (supra), for the assessment year 1975-76, the department itself accepted this position. The same was done in the case of A.M.Moosa, where the nature of the business was exactly the same. In the latter case, for the assessment year 1979-80, the department took proceedings to withdraw the relief granted earlier but subsequently dropped the same, thus, clearly indicating that even the department in several cases accepted the claims of the assessee that processed fish constituted 'manufacture', or 'production' entitled to relief under the relevant sections. Referring to the sales tax cases where processing of fish was said to leave the same commodity as end product it is pointed out that the question for consideration under Section 5(3) of the Central Sales Tax Act was entirely different from that coming up for consideration under the Income-tax Act. The Sales tax Act, according to the learned counsel, does not require in fact any elaborate enquiry into the process of manufacture or production. On the contrary it gave the assessee certain exemptions and advantages in order to achieve certain policy objectives. The decisions reported in the context of the Sales Tax Act should, therefore, be appreciated against this background. The argument of the learned counsel in this context is that being an exemption-giving section the High Court and other authorities have interpreted the sales tax provisions in a liberal manner to help the assessee. The same interpretation should not be addressed or applied to different provisions under the Act to give just the reverse policy effect, namely, to deny the assessee a benefit that is clearly intended for him in the larger interest.
17. The learned counsel has in this connection referred to a series of decisions where the fact of 'production and manufacture' has been accepted, such as Dehusking of rice-Laxmi Chand Badri Narain v. CST  27 STC 21 (MP), Boulders broken into metal-Kulkarni v. State 8 STC 294, Caning of furniture- Furniture House v. CST  Law Diary 126 (AIL), Assembling of cycle parts into cycle-Vijaya Cycle & Rikshaw Co. v. CST  27 STC 573 (All.), Dyeing and printing of textile cloth- Hiralal Jitmal v. CST 8 STC 325 (MP) and also CST v. Radha Dyeing & Printing Mills 48 STC 61 (Bom.), Mining of mica-Chrestien Mica Industries Ltd. v. State of Bihar  12 STC 150 (SC), Timber chopped into firewood-Bachha Tewari v. Divisional Forest Officer  14 STC 1067 (Cal.) 18. Shri K. Narayanan, intervener on behalf of Sea Pearl Industries, has pointed out that the sections in question are benevolent sections under the Act giving concessions and relief. Such sections should be liberally interpreted. The interpretation of 'manufacture, processing and production' must be seen as a whole. Even the circulars issued by the CBDT have kept this object in view as would be clear from the circulars issued in connection with the export of cut and polished diamonds and gem stones, refining crude oil, timber and forestry (items 325 to 327 of Direct Taxes Circulars, Vol. I, 1985 Edition by Bhargava). In this last circular the CBDT has accepted even chopping of timber into fire-wood as a manufacturing process. In this context attention is drawn to the judicial dictum specifically obtaining in CIT v. R.M. Ameen  82 ITR 194 (Guj.) to the effect : ... the Court is called upon to construe the terms of any provision found in a statute, the Court should not confine its attention only to the particular provision which falls for consideration but. the Court should also consider other parts of the statute which throw light on the intention of the Legislature and serve to show that the particular provision ought not to be construed as if it stood alone and apart from the rest of the statute. (p. 202) Looked at in the light of the above healthy principle of interpretation the assessee's claim should, according to the learned counsel, succeed.
Apart from the specific mention of processed fish and processed seeds in items 30 and 28 of the Fifth Schedule, Section 80J also has clubbed the running of cold storage with a manufacturing industry. The three heads under which relief is granted under Section 80J are ships, manufacturing industry and hotels. If the type of interpretation sought for by the department were to be justified, according to the learned counsel, cold storage would not have found a place where it is in Section 80J. The expression 'in a manufacturing process also occurs in Section 80HH. In short it is the case of the learned counsel that not only should the general principles and the general meaning of these expressions be applied to the facts of the case but a comprehensive and purposeful interpretation should be adopted consistent with the liberal and benevolent approach of the circulars of the CBDT.19. The assessee-company is engaged in the business of catching fish, processing them arid also in the export of marine products. It claimed relief under Section 80J in respect of its business. Under Section 80J where the gross total income of an assessee includes any profit and gains derived from any industrial undertaking or a ship or the business of a hotel to which that section applies, relief is granted by way of a deduction from such profits and gains. Sub-section (4) of Section 80J lays down the conditions requisite for the grant of the relief and is as under : (4) This section applies to any industrial undertaking which fulfils all the following conditions, namely :- (iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking ;" The assessee-company catches fish and also purchases them in the market and subjects them to different processes, etc., leading finally to a commodity which is mostly exported to foreign countries. One account of the activity carried on by the assessee is as under : The catch of raw prawns from the various coasts and landing centres are transported to the factories in insulated trucks after icing to preserve the fish and maintain low temperature. The goods on arrival are inspected and spoiled portions of the goods are separated.
Subsequently, the shrimps are beheaded, peeled and deveined by hand and all foreign materials are hand-picked. Then goods are sorted, graded for different sizes and thoroughly washed and inspected under hygienic conditions. They are then packed into 5 Ibs. waxed cartons lined with polythene film after adding sufficient quantity of water to give the required fill. These cartons in trays are charged into double contact plate freezers. The plates of the freezers are held at the temperature of minus 40 degree F.H. for a period of 3 to 4 hours, when the contents of the waxed carton freeze into a very hard block. After freezing is completed, the cartons are packed 10. to a case to make up a 50 Ibs. master case. The master cases are then tied with 3 pieces of hoop iron and are stored in cold storage rooms which will maintain the steady temperature of minus 10 degree F.H. until the time of export.
20. The entire operation is said to go through several stages. A list of 18 stages the fish caught goes through is given as under : I. Landing : Catch brought to the shore, more often preserved in crushed ice.
II. Sorting : Catch sorted out according to species, size and variety.
IV. Washing and icing : Shrimp washed and mixed with a lot of crushed ice before loading in transport vehicles.
V. Transportation : Transportation to peeling sheds, often in insulated vans.
VI. Washing and weighment : Shrimp are again washed and weighed after arrival at the destination.
VII. Beheading I Peeling : Depending upon the quality of shrimp, the shrimp is either beheaded leaving the shell on for HL (Headless) freezing or beheaded and peeled for PUD (Peeled Undeveined) freezing.
VIII. Deveining : Operation of deveining done by removing the gut from the shrimp.
IX. Icing and transportation : Shrimp mixed with crushed ice before transportation to freezing units.
X. Washing, weighing and storing : At the receipt point for freezing, shrimp once again washed and weighed. If next operation is likely to be delayed, shrimp stored in tubs.
XI Grading : Shrimp graded in different species and sizes. Each lot washed and kept for further processing.
XII. Washing, draining, weighing and filling : Each lot washed, water drained by using draining table, predetermined quantities weighed out into waxed cartons inner lined by a thin polythene sheet. Shrimp arranged in carton in slab form. Filled cartons arranged in metallic trays. Glazing water added to all the cartons arranged in the trays, coded clips of paper placed in each carton.
Carton itself superscribed with name of the species, count and code as prescribed by Export Inspection Agency for identification.
XIII. Loading into freezers : Trays containing slabs loaded into freezers. Vertical compressive force applied for positive contact of the plates with the material.
XIV. Freezing : Most important stage in sea food processing is to complete the freezing as quickly as possible. Refrigeration machinery has to be kept in excellent conditions.
XV. Unloading and packing : Trays taken out from freezer and slabs packed in corrugated master cartons (10 slabs in a master carton) and strapped. Packed master cartons kept in frozen store maintained at temperature below 18 degree centigrade.
XVI. Inspection : Export Inspection Agency Officials inspect frozen product by drawing out samples.
XVII: Stacking and storage : Frozen material certified for export by EIA properly stacked in the frozen store for distinguishing different lots.
XVIII. Transport for shipment : Frozen cargo transported in insulated vans to ports for shipment. In case of delay, kept in frozen store near the wharf.
From the above it would be clear that the assessee subjects the fish it has caught on its own or purchased from the market to a series of operations, partly physical and partly chemical, until it results in slabs of fish material. In the light of the provisions of Section 80J the question before us is whether the above processes starting with the catching of fish and ending with the exportable slabs of fish results in manufacture or production as required by Section 80J. The benefit of Section 80J is available to an industrial undertaking. The industrial undertaking must further be manufacturing or producing articles or operating cold storage plant or plants. Neither the ITO nor the first appellate authority in the present case seems to have gone into the question of industrial undertaking as such. Both of them have concentrated on the manufacturing or production part of the activity.
It, therefore, seems to have been assumed that there is an industrial activity involved in the case in question. The ITO has not even discussed the question of manufacture or production. The Commissioner (Appeals), on the other hand, has come to the conclusion that in producing the processed marine products the assessee is running an industrial undertaking. The arguments before us were directed mainly to the questions of 'manufacture' and 'production'. A reading of Section 80J would show that the relief is available to an assessee whose gross total income includes profits and gains derived from an industrial undertaking. The further condition laid down by Section 80J(4) is that of manufacturing or producing articles. There could, therefore, be industrial undertakings not manufacturing or producing articles, which in view of the stipulation in Sub-section (4) of Section 80J will not be entitled to the relief. In view of the confused use of the expression 'industrial undertaking' with or without the further qualification of manufacturing or producing by the authorities below, it is perhaps necessary for us to go into the question as to whether the activity of the assessee in the present case constitutes an industrial undertaking in the first place. The further question is whether for the purpose of the exemption under Section 80J, manufacturing or production of articles is involved.
21. Like 'manufacture' or 'production' an 'industrial undertaking' also does not seem to have been defined in this connection in the statute.
Even so, any activity involved in transformation of one article into another or the processing of an article by the use of manual, mechanical or biological or industrial processes would certainly constitute an industrial undertaking. Industry implies work or labour and any institution where on a basic commodity work or labour is spent would constitute an industrial undertaking. Perhaps it is in view of the above general concept that the authorities below and the department have not disputed the 'industrial undertaking' aspect of the dispute but only on manufacturing or production of articles.
22. The three Supreme Court decisions in Pio Food Packer''s case (supra), Chowgule & Co. (P.) Ltd.'s case (supra) and Idandas's case (supra) lay down the test as to what is manufacture.
23. Pio Food Packer's case (supra) dealt with a case of processing of pineapple fruit into its slices for selling in sealed cans. It is observed as under: ... The goods purchased should be consumed, the consumption should be in the process of manufacture, and the result must be the manufacture of other goods. There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture.
Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity "between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity. (p. 1228) This case dealt with Section 5A(1)(a) of the Kerala General Sales Tax Act, 1963 envisaging the consumption of a commodity in the manufacture of another commodity. The concept of manufacturing was explained in this context.
24. The Chowgule & Co. (P.) Ltd.'s case (supra) explained what is processing. Their Lordships of the Supreme Court held that though the blending of different qualities of ore possessing differing chemical and physical composition so as to produce ore of the contractual specifications cannot be said to involve the process of manufacture, since the ore that is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together, the operation of blending would amount to processing of ore.
The strict question of manufacture or production or the distinction between them do not seem to have been dealt with in this case under Section 8(3)(b) of the Central Sales Tax Act.
25. In Idandas' case (supra) the third of the cases, the Supreme Court laid down the test to determine whether a lease was granted for the purpose of 'manufacturing process'. The three tests laid down are that it must be proved that a certain commodity was produced, that the process of production must involve either labour or machinery and that the end product which comes into existence after the manufacturing process is complete, should have a different name and should be put to a different use. In other words, the commodity should be so transformed as to lose its original character. In that case, wheat was transformed by the manufacturing process involving both labour and machinery into flour. Applying the test their Lordships held that the case came clearly within a manufacturing process.
26. In the discussions before us reliance has been placed by both sides on the above decisions of the Supreme Court and also certain decisions of the High Courts to support the case of manufacture or alternatively production. In a matter of this type, as laid down by their Lordships of Gujarat High Court in Lakhtar Cotton Press Co. (P.) Ltd.'s case (supra) a rule of thumb cannot be applied but the facts of each case must be analysed to find out whether there is manufacture or production. Other decisions of the High Courts have dealt with production as different from manufacture. The Allahabad High Court in Singh Engg. Works (P.) Ltd.'s case (supra) have laid down that steel led to the production of a commodity by processing such as in that case. In Tarai Development Corpn.'s case (supra), the Allahabad High Court has characterised processing seeds as production. In Tata Locomotive & Engg. Co. Ltd.'s case (supra), the Bombay High Court explained the word 'manufacture' as having a wider and narrow connotation. In the wider sense it simply meant to make or fabricate or bring into existence an article or a product either by physical labour or by power and the word 'manufacture' in ordinary parlance meant a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The narrow meaning implied transforming raw materials into a commercial commodity or a finished product which was an entity by itself. They also specified that this does not necessarily mean that the materials with which the commodities are so manufactured must lose their identity. In their Lordships' view the words 'manufacture' and 'produce' apply to bring into existence something which is different from its components. They were dealing with the case of assembling of automotive bus or truck chassis from imported parts in a 'knocked down' condition. They held that even though the component parts from which the automotive chassis is made retain their individual identity in the whole article which is manufactured or produced, the article produced was totally different from the parts manufactured or involved therein.
27. Analysing the decisions certain broad principles emerge. Some activity, work or processing is to be done on some material. The activity or work should result in the transformation of that material into something else. It is not necessary that the final material should be entirely different from the component parts. The component parts could even retain their individual identity in the whole article. The end article should be different from the article with which the activity or processing was started. A heavy dose of processing rarely leaves a commodity unchanged structurally and otherwise. As a corollary the principle emerge that an article subjected to an amount of processing would get gradually transformed and finally it could come to a stage where it is an entirely different article. Whether such a different article is produced at the final stage or an intervening stage would depend on the facts of each case. Where such a different article is produced in the interim there has already been the production or manufacture of an article and nothing in this context depends on whatever further processing or activity is carried on. In other words, it is not necessary that a different article emerges only at the end stage ; it can emerge even at an intermediary stage. There is a difference between manufacture and production. The former has a narrow and wider meaning. Production is used in a wider sense. It would comprise of manufacturing of an article also. Apart from transformation resulting from manual or mechanical processes it takes in natural or biological processes also. In both, transformation of a type leading to the availability of a product different from the original product seems to be envisaged.
28. The above general principles well laid down by the Courts have to be applied to the present case to decide whether there is manufacture, production, etc., so as to bring the case within the exemption of Section 80J. In our view, the industrial undertaking in the present case, satisfies the test for production. It is not necessary in that view of the matter to consider whether the strict requirements of manufacture are satisfied. Part of the activity of the assessee is catching fish from the wide sea. While fish cannot be said to be manufactured, the activity of the assessee in hiring the trawlers, taking them to the sea, spreading the nets and going through all other operations certainly result in the production of fish for consumption.
The end result of all the activities in that case results in the availability of fish. It would be incorrect, therefore, to say that the activities produce the fish even as cultivation produces paddy or vegetables. It may not be necessary to hold that a person produces a commodity in this context. It may not be correct to say that the assessee-company produces fish but the activities result in fish which was not there earlier and in this sense fish is the product of the trawling, netting and fishing activities.
29. The fish caught or purchased from outside are subjected to several processes. It is true that it may not be strictly proper to regard processing activities like washing, cleaning, carrying the fish to the shore or the factory, etc., as manufacture. But certainly the activities such as cutting of the head and tail, peeling, deveining, etc., finally reducing what was an animal fish-alive or dead-into what is merely a mass of edible material is certainly a manner of producing the latter material. The two cannot even be said to be the same for the purposes of Section 80J or the other sections of the Act in question.
To do so would lead to as much an absurdity as to say that a live man is the same as the flesh of a man or a live goat is the same as meat.
We have no doubt that even at this stage what was an animal alive or dead has become a mere edible material like meat or processed vegetable. This product is further subjected to both physical and chemical processes. It is subjected to heavy pressure and temperature below zero degree. The learned counsel for the department has explained all these processes as merely convenient modes adopted for reducing the volume and preserving. We do not think that this approach would be correct. Even though these results also incidentally arise, when a mass-like material is subjected to excessive pressure at below freezing point temperature and on the top of it when this is done after the addition of chemicals, one cannot be sure that the resulting product can in any way be the same as the original product. What internal transformation, chemical or physical, takes place has not been detailed before us but subjecting a pressured article to a temperature far below the freezing point such as minus 40 F for a period of time is certainly not a matter of preserving the article. It may be noted that the higher pressure and low temperature operations are limited only to a period of four hours. If, as the learned counsel for the department urges, these were only for preservation, a temperature far below the freezing point is not necessary. It cannot be limited to four hours also. Nor is it necessary to exert high pressures for the purpose of reducing the volume to the transportable limit. Apart therefore from the general understanding that the shrimp we started with and the shrimp blocks available for consumption do contain the shrimp constituents, there could be nothing common between the two. What is available at the end for the purpose of export is something entirely different from what was there at the beginning and became the end product of elaborate processing done on the original shrimp. We hold, therefore, that the entire process results in the production of an article. Whether this product could be called a newly manufactured 'product' in the sense it is understood in some other statutes such as the Sales Tax Act is a different question. For these reasons, we uphold the order of the Commissioner (Appeals).
30. The assessee also operated a storage plant. As the operator of the storage plant it is entitled to the relief under Section 80J. The ITO himself has accepted this proposition though he has not given the relief even in respect of this part of the assessee's business. An excuse is put forward saying that the assessee has not given the details of capital relating to the storage plant. In a composite or integrated business with a composite sets of accounts maintained, accurate details of the type called for may not be possible to be taken out. Even so the ITO was bound to estimate the extent of the capital involved in the storage plant part of the business and grant the relief. In our opinion, he erred in not doing so. That apart, where the assessee does an integrated operation and has a whole business involving the storage plant, if the storage plant is entitled to the relief under Section 80J, we do not see how the relief can be denied for the entire business. A storage plant is useful only if it is worked. The assessee can work its storage plant for preserving the products of others or its own goods. Where it does not take goods from others the whole integrated activity and the storage plant is fed by goods purchased and processed by the assessee, the entire business could be regarded as working a storage plant for profit. In the context of Section 80J, we see no difference between a storage plant wherein the assessee puts others' goods and recovers rent and the other case where the assessee itself purchases goods, puts them in the storage plant and sells them. In both the cases, the cold storage plant is operated. The fact that in one case the rental from outsiders is the receipt of the storage plant rather than the difference between the purchase and the sale price of the assessee's own commodities, may not, in out view, make any difference. In other words, where the assessee operates its cold storage plant or plants and as an integrated part of such operation deals in its own commodities that itself would entitle the assessee to the relief under Section 80J in respect of the entire activity. In the present case, in addition to the above, the assessee un-disputedly processes material from the raw stage to a consumable one. We have, therefore, no hesitation in holding that from both points of view, the assessee is entitled to relief under Section 80J as the producer of goods or articles and as one who operates one or more cold storage plant or plants.
31. Arguments were advanced before us about the user of the expression 'processed' in items 28 and 30 of the Fifth Schedule. The judicial decisions cited have clearly held that whatever be the general understanding of the expression 'manufacture' or 'production' in other statutes as far as the Act is concerned in the light of the Fifth Schedule and the items therein, processed fish even as processed seeds would constitute an article of production. These decisions also clearly support the assessee's case.
32. The Kerala High Court decision in Neroth Oil Mills Co. (P.) Ltd.'s case (supra) considered the case of prawns purchased locally, cleaned, peeled, processed and packed as prawns for sale by export outside India in the context of Section 5(3). Their Lordships referred to the decision in Pio Food Packer's case (supra) especially the observations : ... Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing it must be regarded as still retaining its original identity. (p. 1229) Their Lordships of the Kerala High Court observed that "commercially prawns which are purchased by the asssssee and prawns exported after processing for the purpose of such export are one and the same commodity as rightly held by the Sales Tax Appellate Tribunal." Even though the subject-matter of the decision in the case is the same as in the present appeal, their Lordships were concerned with the identity of the commodities at two stages of processing for the purpose of Section 5(3). The purpose of the legislation was to relieve an assessee dealing in certain specified type of products. This is based on a matter of policy. It would defeat the very purpose of the legislation if processing alone deprived the assessee of the exemption.
It was in that context that stress was laid on the absence of an essential difference in identity between the original commodity and the processed article. What we are concerned with in the present case is a legislation laying emphasis as a matter of policy on processing, production, manufacture, operating a cold storage plant, etc., rather than encouraging the production of an article like pineapple or prawns.
The very object of the legislation in the present case, therefore, is certainly different if not even opposed to the objects of the sales tax enactments. It would, therefore, not be proper even to adopt the criteria considered in sales tax cases for the purpose of interpreting the income-tax decisions. That this is so is clear from the specific items mentioned as items 28 and 30 in the Fifth Schedule on which emphasis has been laid by the Allahabad High Court in income-tax decisions. Apart from the position obtaining for sales tax purposes, and without going into the question of 'manufacture' or consumption in the manufacture of a commodity, the decision in the present appeal would rest on the clear case of production. We uphold the order of the Commissioner (Appeals) in this regard.
33. The last point in dispute relates to the grant of investment allowance under Section 32A. This was denied to the assessee on the ground that the company is not an industrial undertaking manufacturing or producing an article. Our discussions in connection with the application of Section 80J would leave us no doubt as to the availability of the relief under Section 32A as well to the assessee.
On this point also we do not interfere with the order of the Commissioner (Appeals).