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Commissioner of Income-tax Vs. Casino (Pvt.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Referred Case No. 99 of 1970
Judge
Reported in[1973]91ITR289(Ker)
ActsFinance Act, 1968 - Sections 2(6)
AppellantCommissioner of Income-tax
RespondentCasino (Pvt.) Ltd.
Appellant Advocate P.A. Francis, Adv.
Respondent Advocate P.P. Devassy and; M. Abraham, Advs.
Cases Referred(Thomas v. District Judge
Excerpt:
direct taxation - manufacture - section 2 (6) of finance act, 1968 - whether activity carried on by assessee in preparing articles of food from raw materials constitute 'manufacture or processing of goods' within meaning of section 2 (6) (d) and that assessee 'industrial company' within meaning of definition contained in section 2 (6) (d) - allegedly food stuffs produced by assessee in his hotel using raw material were commercially different from such raw materials - production of food materials in assessee's hotel cannot be regarded as manufacturing and processing goods in hotel - in popular and technical sense assessee not manufacturing and processing goods thus not industrial concern - question answered in negative. - - it is now well settled that in construing a term used in a.....subramonian poti, j.1. this is a reference to this court under section 256(1) of the income-tax act, 1961, arid the question referred to us is :' whether, on the facts and in the circumstances of the case, the appellate tribunal is legally correct in holding that the activity carried on by the assessee in preparing articles of food from raw materials, constitutes ' manufacture or processing of goods ' within the meaning of section2(6)(d) of the finance act, 1968, and that the assessee is an ' industrial company ' within the meaning of the definition contained in that section '2. the assessee is a private limited company running a hotel business. in connection with the assessment of the company for the year 1968-69, the assessee claimed to be an ' industrial company ' as the term is denned.....
Judgment:

Subramonian Poti, J.

1. This is a reference to this court under Section 256(1) of the Income-tax Act, 1961, arid the question referred to us is :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is legally correct in holding that the activity carried on by the assessee in preparing articles of food from raw materials, constitutes ' manufacture or processing of goods ' within the meaning of section2(6)(d) of the Finance Act, 1968, and that the assessee is an ' Industrial company ' within the meaning of the definition contained in that section '

2. The assessee is a private limited company running a hotel business. In connection with the assessment of the company for the year 1968-69, the assessee claimed to be an ' industrial company ' as the term is denned in the Finance Act, 1968. The claim to be assessed at the rate of tax applicable to an industrial company, namely, at 55 per cent, of the net income, was not accepted by the Income-tax Officer. Before the Appellate Assistant Commissioner it was contended by the assessee that the activity of the assessee is one of converting the raw materials into finished products, namely, foodstuffs, and, therefore, the assessee was carrying on the activity of manufacturing. A company engaged in the process of manufacturing being included in the definition of an industrial company by the definition in Section 2(6)(d) of the Finance Act, 1968, the assessee claimed that it should be taxed at the rate applicable to an industrial company. The Appellate Assistant Commissioner found that though manufacturing operations were carried on by the assessee in the conduct of its business, a hotel could not be deemed to be a manufacturing unit in the sense in which the term is ordinarily understood. He dismissed the appeal. The assessee filed a further appeal before the Income-tax Appellate Tribunal. The Tribunal considered the meaning to be given to the term ' manufacture ' and also considered the judicial interpretation of the term in certain decisions of courts and found that the activity carried on by the assessee in manufacturing articles of food from raw materials such as grains, pulses, meat, vegetables, etc., constituted 'manufacture or processing of goods' within the meaning of Section 2(6)(d) of the Finance Act and, therefore, the assessee was an industrial company. This reference has arisen out of the said order of the Tribunal.

3. Section 2(6)(d) of the Finance Act, 1968, defines an ' industrial company '. That reads thus :

' 2. (6) For the purposes of this section and the First Schedule,--. ... (d) ' industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.

Explanation.--For the purposes of this clause a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making anydeduction under Chapter VIA of the Income-tax Act) is not less than fifty-one per cent, of such total income. '

4. Section 2(1) of the Finance Act provides that:

' Subject to the provisions of Sub-sections (2) and (3), for the assessment year commencing on the 1st day of April, 1968, income-tax shall be charged at the rates specified in Part I of the First Schedule and, in the cases to which Paragraphs A, B, C and D of that Part apply, shall be increased by a surcharge for purposes of the Union and a special surcharge for purposes of the Union calculated in either case in the manner provided therein.'

5. Paragraph F of Part I of the First Schedule deals with the rates of income-tax in the case of a company other than the Life Insurance Corporation of India. In the case of a domestic company where the company is not one in which the public are substantially interested, and if it be an industrial company, the tax is 55 per cent, on so much of the income as does not exceed Rs. 10,00,000 and on the balance, if any, at 60 per cent. If the domestic company is one where public are not substantially interested and is also not an industrial company, the rate of tax is 65 per cent, of the total income. The total income of the assessee does not exceed Rs. 10,00,000 and it is a domestic company in which the public are not substantially interested. Therefore, if it is an industrial company the tax it has to pay for the assessment year 1968-69 is 55 per cent, of its total income whereas if it is not an industrial company it has to pay tax at 65 per cent.

6. An industrial company, as the definition points out, must belong to one or other of the categories mentioned in Section 2(6)(d) of the Finance Act. That definition refers to four categories, namely :

(1) a company mainly engaged in the business of generation or distribution of electricity or any other form of power.

(2) a company mainly engaged in the business of construction of ships,

(3) so engagad in mining, and

(4) so engaged in the manufacture or processing of goods.

7. The meaning of the term ' mainly engaged ' is indicated in the Explanation but with that we are not concerned at present. There is no dispute that the assessee does not fall within the first of the three categories mentioned just now. The controversy is whether the nature of the activity carried on by the assessee in running its hotel could be said to be a business of manufacture or processing of goods. According to the assessee, it is because the assessee prepares articles of food out of raw materials such as grains, pulses, meat and vegetables, materials, which, on production] are entirely different from the materials which go into such production. Therefore, according to the assessee, it would only be appropriate to characterise its activity as one of manufacture. Of course, there is an alternative casethat if this could not, for any reason, be characterised as one of manufacture of goods, it would at least be processing of goods and that would be sufficient to bring the assessee within the scope of the term ' industrial company ' as the term stood defined. The case of the assessee has apparently appealed to the Appellate Tribunal though the Income-tax Officer and the Appellate Assistant Commissioner did not accept it. The order of the Appellate Tribunal indicates that the various decisions referred to by it has persuaded it to adopt the view that the assessee manufactures or processes goods.

8. We are concerned in this reference with the ambit of the term ' manufacture or processing of goods '. This is not a term which Parliament has chosen to define for the purpose of the Act. No artificial or technical meaning has been given to this term. This necessarily means that Parliament has intended that the term should be understood as it would be in ordinary or common parlance.

9. The term ' manufacture or processing of goods ' or almost similar terms appear in many statutes where also such terms are not seen defined. However, the scope of these terms has been the subject of discussion in a number of judicial decisions. These decisions are only of limited assistance in the construction of the term with which we are concerned here since ultimately this would depend, to a considerable extent, on the context of the enactment. It is now well settled that in construing a term used in a statute its meaning as is understood according to what is ascribed to it in common parlance in preference to its scientific or technical meaning has normally to be accepted. The legislature is supposed to have employed a term in the concerned statute not in its dictionary sense but as is understood by the common man or, in other words, in the ' popular sense ', meaning the sense in which the people conversant with the subject-matter with which the statute is dealing will refer to it. The natural meaning, according to the accepted usages of English speech, must be given to the term. The context or the setting in which the term appears and the nature of the enactment is also of relevance in understanding the meaning of the term. It must be said here, by way of abundant caution, that though this is normally the rule, this need not be taken to be an absolute rule of construction. It is not difficult to visualise cases where a statute may employ a term to be read, in its peculiar context, according to its literal meaning and not in the popular or commercial sense. But, these exceptions are easy to find from the nature of the statute and the context in which the relevant term is employed in the statute. To cite an instance of the case of such exception and to illustrate our point, reference may be made to the case in Varkey v. Agricultural Income-tax and Rural Sales Tax Officer, [1954] 5 S.T.C. 348 (Trav. Coch.).Though green leaves plucked from tea bushes may not, in the commercial or popular sense, fall within the term ' tea ', the Supreme Court held in that case that in the scheme of Section 3 of the Travancore General Sales Tax Act, 1124, seeking to tax the turnover of tea, coffee, rubber, etc., the term ' tea ' must be understood to have been used in the statute in the sense of a product of plant life and not as the term is used in commerce.

10. As we have said, since the rule of construction which we have summarised here appears to be well-settled, we need not refer to the many decisions on this point, though we may, usefully, make a reference to the decision of the Supreme Court in Commissioner of Sales Tax v. Jaswant Singh Charan Singh, [1967] 19 S.T.C. 469; [1967] 2 S.C.R. 720; A.I.R. 1967 S.C. 1454, 1457. The Supreme Court was concerned there with the meaning of the term ' coal ' as used in the Madhya Pradesh General Sales Tax Act, 1958. The incidence of tax in regard to the turnover of coal was only 2% while that was more in regard to many other goods. The question was whether charcoal would also be coal. It was not disputed that in the technical or scientific sense coal was materially different from charcoal though it was not so in common parlance. Coal is technically understood as a mineral product though that is not the case with charcoal. Dealing with this question the Supreme Court had occasion to consider its earlier decision in Ramavatar Budhaiprasad v. Assistant Sales Tax Officer, Akola, [1961] 12 S.T.C. 286; (1962] I S.C R. 279; A.I.R. 1961 S.C. 1325. Though betel leaves would botanically be a vegetable, the Supreme Court had held that, in the context of the sales tax law with which the court was concerned in that case, betel leaves would not be said to be vegetable. No man ordinarily thinks of betel leaves as 'vegetables' as that term is commonly understood. In His Majesty the King v. Planters Nut and Chocolate Company Ltd., [1951] C.L.R. (Ex.) 122 to which also reference was made by the Supreme Court, the question was whether salted peanuts and cashewnuts fell within the category of either fruits or vegetables. In spite of expert opinion let in in that case, the court found that this was not fruit or vegetable within the meaning of the Excise Tax Act, 1927, as it would not be so understood in matters of commerce in Canada and the botanist's conception of the subject-matter was not to be the relevant criterion. Summing up the question, the Supreme Court said thus :

'.... the test that would be applied is what would be the meaning which persons dealing with coal and consumers purchasing it as fuel would give to that word. A sales tax statute being one levying a tax on goods must, in the absence of a technical term or a term of science or art, be presumed to have used an ordinary term as coal according to the meaning ascribed to it in common parlance. Viewed from that angle both a merchant dealing in coal and a consumer wanting to purchase it would regard coal not in its geological sense but in the sense as ordinarily understood and would include ' charcoal' in the term ' coal'. It is only when the question of the kind or variety of coal would arise that a distinction would be made between coal and charcoal; otherwise, both of them would in ordinary parlance as also in their commercial sense be spoken as coal.'

11. We do not think that we should speak any more on this point. Wewill approach the question of construction in this case bearing this rule ofconstruction in mind.

12. Could it be said that the assessee produces the goods for serving its customers in the restaurant by manufacturing or processing them. This necessarily takes us to the question of the scope of the term ' manufacture and processing ' as understood in the technical sense as well as in the popular sense. It is necessary to see whether there is any departure from the technical sense in the use of this term in the popular sense. There is a fairly large volume of case law concerning the meaning of these terms. But, we do not think that an exhaustive reference is either necessary or is called for in this case. We shall, however, briefly refer to some of the decisions which appear to us to be particularly relevant to the situation before us.

13. We shall begin by referring to one of the early cases, one the decision in which was not non-controversial. We mean the decision in North Bengal Stores Ltd. v. Board of Revenue, Benga, [1938-50] 1 S.T.C. 157, 163 (Ca].). The appellant before the Calcutta High Court contended in that case that being a dispensing chemist, his business was not liable to be registered under the Bengal General Sales Tax Act, 1941. The answer to the question referred depended upon the question whether the appellant there was a manufacturer. It was conceded that a manufacturing chemist, who makes up specific medicines in considerable quantities for sale to members of the public, is a manufacturer. But it was contended that the dispensing of a doctor's prescription for individual patients was not manufacture. Gentle J., answering the question, observed that the process of dispensing by mixing the medicines according to the prescription is one of producing the goods for sale and since in order to answer the question in favour of the revenue it was sufficient to find that the dealer by himself manufactures or produces the goods for sale the question was to be answered in favour of the revenue. Das J. in a separate judgment, considered the scope and meaning of the term ' manufacture '. The learned judge noticed that the term ' manufacture ' is, however, used in common parlance in a wider sense. According to him the term' to manufacture goods' in common parlance means ' to bring goods into being' and to manufacture or produce goods for sale means ' to bring into being or to produce something in a form in which it will be capable of being sold or supplied in the course of business'. The learned judge said thus:

' The essence of manufacturing, I apprehend, is that something is produced or brought into existence which is different from that out of which it is made, in the sense that the thing produced is by itself commercial commodity which is capable as such of being sold or supplied. It does not mean that the materials with which the thing is manufactured must necessarily lose their identity or become transformed in their basic or essential properties. When a goldsmith takes up a lump of gold and fashions it into an ornament the gold remains gold but the ornament produced is, commercially, as well as in common parlance, something different from a mere lump of gold. When a cobbler uses leather and makes a pair of boots, the leather does not lose its existence, it still remains leather, but the pair of boots is, commercially, as in ordinary speech, a thing different from the leather with which it is made. When a carpenter makes a box out of wood, the box, though it is still wood, is different from mere wood. When a tailor makes a suit of clothes, it does not cease to be cloth, but commercially it is a different thing. In each of these cases a thing is made which is capable of being sold or supplied as a particular commercial article.'

14. Applying the test the learned judge took the view that the finished product was different from the medicines which was employed for its making and therefore the case was one of manufacture. The learned judge concluded that it was a case where the company was a dealer as it manufactured or produced goods. In Dr. Sukh Deo v. Commissioner of Sales Tax, [1963] 14 S.T.C. 581, 584, 585 (All.) where a similar question arose, the court took the view that the preparation of mixtures in accordance with prescriptions, to be used solely by the patients, cannot be termed ' manufacture ', however wide a meaning may be given to that word. The decision in North Bengal Stores Ltd. v. Board of Revenue, Bengal, was sought to be explained. The court noticed that if in the earlier case, the chemist was held to be a dealer because he produced goods the decision was of no help to the case before the court. The view of Das J. in the earlier case that the chemist also did manufacture goods did not appeal to the court. Desai C. J., speaking for the Bench, said that preparing medicines according to the prescriptions could not have been intended by the State Government to come within the word ' manufacture ' as used in the notification. This was explained thus :

' There cannot be a manufacture unless the resulting produce is a commercially different article. When the assessee mixes together the ingredients mentioned in a prescription and supplies the mixture to the patient he does not produce an article commercially different from the ingredients from which it is produced. The resultant article has no name other than ' mixture' and a ' mixture ' cannot be said to be an article commercially different from the ingredients that are mixed. '

15. The court rightly observed :

' The word ' manufacture ' cannot be given the same meaning in every statute regardless of context and I do not think that the word used in the notification can be given the same meaning as the word used in the statute dealt with in that case.'

16. Whether the process of ginning cotton is one of manufacture or processing was the question that arose before the Punjab High Court in Raghbir Chand Som Chand v. Excise and Taxation Officer, [1960] 11 S.T.C. 149, 164, 166 (Punj.). It was contended by the petitioners in that case that no tax was leviable under the East Punjab General Sales Tax Act, 1956, on the purchase of unginned cotton used for ginning. The scope of the term ' manufacture ' had to be considered in that case. The court observed that the definitions given by lexicographers are couched in general terms and ' do not help in drawing a sharp line of demarcation between mere processing short of manufacture, and making finished articles after manufacturing them '. It was further observed that:

'..... .every change is not manufacture, in spite of the fact thatevery change in an article may be the result of treatment, labour and manipulation. For purposes of manufacture something more is necessary and there must be a transformation; a new and different article must emerge having a distinctive name, character or use. '

17. The difference between the ambit of the terms ' manufacture' and ' processing ' was incidentally considered byothe learned judges and it was held thus :

' At some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been ' manufactured' within the meaning of Article 203(b)(6). '

18. That no manufacturing process was involved in ginning cotton and the process of ginning did not create anything new or distinctive, was again held by the Punjab High Court in Patel Cotton Co. Private Ltd. v. State of Punjab, [1964] 15 S.T.C. 865 (Pnnj.). The question whether dealers engaged in the business of making gold ornaments were running a manufactory arose for decision in the Orissa High Court in Jammula Srirangam Bros. v. Sales Tax Officer, [1966] 17 S.T.C. 69 (Orissa) A manufactory was understood as a place where a manufacture was being carried on. The question as to what was ' manufacture ' had, therefore, to be considered in that case. The court took the view that ornaments were manufactured because the process by which gold was converted from its natural state to the article of commerce known as ornament is one of manufacture. We do not think we should multiply reference to cases in view of the pronouncement of the Supreme Court in Commissioner of Sales Tax v. Harbilas Rai and Sons, [1968] 21 S.T.C. 17, 20 (S.C.) which appears to be sufficient to cover the question we are now considering. The case was one where the liability to be taxed under the Sales Tax Act in force in Uttar Pradesh arose for consideration. The assessee sold pig bristles at London and contended that the sales made at London were not taxable. They would be taxable only if though sold outside the State the goods so sold were produced or manufactured in Uttar Pradesh by the purchaser or manufacturer thereof. The contention of the assessee was that they purchased pig bristles and exported them without subjecting them to any process of manufacture so much so it could not be said that they had produced or manufactured the pig bristle. It was no doubt true that the assessee applied some labour on the bristles purchased. The assessee had them boiled and washed with soap and other chemicals., sorted out according to their sizes and colours and then tied in separate bundles of different sizes. This was held to be not manufacture. Dealing with this question, Sikri J., as he then was, said thus :

' In our view, the word ' manufacture ' has various shades of meaning, and in the context of sales tax legislation, if the goods to which some labour is applied remain essentially the same commercial article, it cannot be said that the final product is the result of manufacture.'

19. The result of our discussion can be summed up in these terms : Manufacture is a process which results in an alteration or change in the goods which are subjected to such manufacture. A commercially new different article is produced. May be that is produced by manual labour or mechanical force or even by nature's own process such as drying by heat of the sun as in a salt pan (Ardeshir H. Bhiwandiwala v. State of Bombay, [1961] II L.L.J. 77; 20 F.J.R. 113 (S.C.)) or fermentation of toddy (Thomas v. District Judge, Alleppey, [1965] K.L.J. 487 (Ker.)). The esential question is whether a commodity which, in a commercial sense, is different from the raw materials has resulted.

20. Notwithstanding what we have said above every case where the court is called upon to consider the meaning of the term ' manufacture ' has to be considered with reference to the context of the enactment. The mere fact that the definition is satisfied does not necessarily mean that there is manufacture. That should ultimately depend upon the meaning of the term in the sense in which the legislature has apparently used it in the concerned statute. Processing has in one sense a wider meaning than the term facture ' as even manufacture may be a process. But, in the context of the'manu-Act with which we are now dealing, namely, the Finance Act, 1968, that does not appear to be the position. The definition of industrial company in Section 2(6)(d) of that Act refers to various categories of companies and one of them is that mainly engaged in the manufacture or processing of goods. It is evident from the context in which the word ' processing ' is used that it is complementary to the term ' manufacture ' and, therefore, would not be such as to cover manufacture also. In other words, activities of a nature in regard to goods which may not amount to manufacture but which would result in the doing of something to the goods to change or alter their form may be taken in by the term ' processing '. We need not go into the scope of the term ' processing ' in the circumstances of the case, as the contention of the assessee is that there has been a material change or alteration in the goods resulting in the production of a commercially different article, and if we find that notwithstanding this to be the case, it does not amount to manufacture, naturally the question as to the scope of the term ' processing ' need not be gone into further.

21. The assessee's contention that the food-stuffs produced in its hotel using raw materials such as pulses, meat, wheat and the like, are commercially different from such raw materials is a matter on which there cannot be any scope for controversy. It is for this reason that the assessee urges that it is an ' industrial company' as, according to it, the accepted test stands satisfied. But, we have to remember that the term must be understood in the context of the enactment. We will have to see whether persons concerned, the customers of the hotel and the employees, would employ the term in the sense in which it is sought to be construed. The particular provision of the Finance Act with which we are concerned here prescribes specific rates of tax and the assessee seeks to be included within the definition ot the term ' industrial company ', so as to get the benefit of the lesser rate of taxation. This benefit is given only to industrial companies which satisfy certain requirements. The four categories of companies which are included in the scope of the term are those mainly engaged in the business of generation or distribution of electricity or any other form of power or mainly engaged in the construction of ships or similarly engaged in mining or in the manufacture or processing of the goods. The context is apparent from this definition. The question ultimately would be whether in common parlance the activity of the assessee could be said to be one of manufacture or processing of the goods, whatever may be the technical meaning of the term. The assessee is dealing every day with his customers. Could it be said that the customers visiting the assessee's hotel would ask for the items in the menu list to be manufactured and supplied to them. We do not think that it would be appropriate to refer, in the ordinary sense in which we understand in the English language, to the production of food materials in the assessee's hotel as manufacture. Any customer visiting a hotel would ask to be supplied with the food and beverages that is for sale in the hotel and if the waiter is to tell the customer that his order is being ' manufactured ', it is likely that the customer would feel something strange about it. It would not pass off, normally, unnoticed. Equally so the customer may not also appreciate if he is told that the wheat or the meat which are used as raw materials are being ' processed ' as we understand the term ordinarily. ' Processing ', in such context, would mean something less than the complete loss of identity of the goods which is the case when the food materials are prepared in the hotel. Hence, if construction of the term in the popular sense is the test to be applied, we do not think that it is possible to say that the assessee manufactures or processes goods in its hotel.

22. We have already referred to the definition of ' industrial company '. It is possible to read in the context of the definition that the reference is to the manufacturing activity. We can easily draw a distinction between manufacturing concerns and trading concerns. It is true that any manufacturing concern must also normally engage in trading activity in the sense it must also sell. But, for that reason alone, it does not become a trading concern, as the main object of the concern is manufacture and the sale of the goods manufactured is incidental. There may be trading concerns which may sometimes engage in production which is incidental to trading. It nevertheless will continue to be a trading concern. A hotel, according to us, is one such as it is mainly intended for trading and not for production or manufacture. The various items of foodstuffs and beverages produced in a hotel are intended for the trading and the conversion of the raw materials into foodstuffs is only a process in trading. Notwithstanding this the concern would essentially be a trading concern. We are referring to this distinction, because it appears to us that the definition of the term ' industrial company ' indicates that the reference in regard to companies manufacturing or processing of goods is to manufacturing concerns and not to trading concerns. That is the more reason why in the popular sense we cannot consider the assessee as manufacturing goods. Counsel for the revenue points out to us that in the scheme of the Income-tax Act the business of a hotel and that of an industrial undertaking are treated differently as could be seen from a reference to these terms in Section 80-J of the Act. We do not think that reference to this is necessary.

23. The result is that we are unable to agree with the view taken by the Appellate Tribunal that the assessee is an ' industrial company ' within the meaning of the definition contained in Section 2(6)(d) of the Finance Act, 1968. We do not think that the activity carried on by the assessee in preparing articles of food from raw materials constitutes manufactureor processing of goods'. Therefore, we answer the question referred to usin the negative, that is, in favour of the revenue and against the assessee.But, in the circumstances of the case, parties are directed to suffer costs.A copy of this judgment with the signature of the Registrar and sealof the High Court will be sent to the Income-tax Appellate Tribunal,Cochin Bench.


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