& Co. Ltd. Vs. The Commissioner of Income-Tax, Ernakulam  Insc 461 (5 September 2001)
Bharucha, Y.K. Sabharwal & Ashok Bhan Ashok Bhan, J.
by the judgment/order of the High Court, the assessee- appellant has come up in
appeal. By the impugned judgment, the High Court in a reference made under
Section 256(1) of the Income Tax Act, 1961 (for short, the Act) by the
Income-Tax Appellate Tribunal, Cochin (for
short the Tribunal) has answered the following question of law in the negative.
on the facts and in the circumstances of the case, the Tribunal is right in law
and fact in holding that the assessees activity of curing coffee amounts to
manufacturing and the assessee is entitled to relief under Section 32A of the Income-
tax Act? i.e. against the assessee and in favour of the Revenue.
High Court opined that the assessee is not entitled to the investment allowance
under Section 32A of the Act in respect of the machinery used for curing coffee
and its sale.
facts giving rise to the above question of law are:- The Assessment Years in
question are 1980-1981 and 1983-1984.
is a public limited company. It is engaged in the export of coir products,
distribution of insecticides and pesticides, running and managing of estates on
service contracts. In addition, the assessee has coffee curing plants. For the
machinery installed for curing of the coffee, the assessee claimed investment
allowance under Section 32A for both the Assessment Years. The Income Tax
Officer held that the assessee was not entitled to the investment allowance. Assessee
preferred appeal before the Commissioner of Income-Tax (Appeals) [for short
C.I.T. (Appeals)] who allowed the appeals and held that the assessee was
entitled to the investment allowance as provided under Section 32A of the Act.
further appeal by the revenue, the Tribunal noticed that a similar issue had
come before it in ITA No.421/Coch/1984 in the assessees own case wherein the
Tribunal had held that the assessee was entitled to the investment allowance.
Following its earlier decision, the Tribunal upheld the order of C.I.T.
matter was taken up in reference before the High Court. To ascertain the
factual position as to what is meant by curing of coffee, the Court directed
the counsel for the parties to produce the order of the Tribunal for the
earlier Assessment Year, which was taken on record.
appreciate as to what is understood by the word coffee as is generally known in
the commercial parlance, the High Court referred to the Encyclopedia
Britannica, Volume 6 (1972 edition) and concluded that coffee is a beverage
made from the roasted seeds (beans) of the coffee plant. The said beverage is
consumed as either a hot or cold drink and is considered to be having an
invigorating effect. Coffee is prepared by either a dry or a wash process. In
the dry process, known as natural process, the coffee cherries are thoroughly
rinsed in water and then spread out on cement patios in the open air and sun to
dry. After drying, the coffee is repeatedly run through fanning and hulling
machines to remove the hulls, dried pulp and parchment. As against this, the
wash process is quite different. In this process, the cherries are first put
through a pulping machine that breaks them open and virtually squeezes the
beans out of the pulpy skin. Such beans go into large tanks where they are left
for about 24 hours. Fermentation in the process is avoided, because it loosens
what is known as a jelly like substance understood as honey in regard thereto.
Even in this process, after washing, the coffee is spread out in patios to dry.
It takes two to three weeks in the sun for the coffee to become thoroughly
dried and during this time it requires shuffling and turning over so as to give
sufficient natural heat depending on the climatic conditions. The usual
expected aroma is available only after the process of roasting. Roasting also
changes the colour giving it a brown colour and a consequent process of
chemical change also. The process of roasting brings with its splendid aromatic
qualities and pleasing taste.
noticed that the Tribunal had inspected the factory premises to have a first-hand
knowledge of the operations carried on by the assessee- Company. The inspection
was made by the Tribunal in the presence of both the parties through their
representatives. The factual observation of the Tribunal as a result of the
inspection found that following nine processes are involved in curing of
Receipt of coffee from the Estates;
Storage of coffee in covered godowns;
Drying of coffee to the required standards prescribed by the coffee Board in
Grading of coffee mechanically;
Garbling and manual grading;
Out-turning of garbled coffee; and
Tribunal also found that to deal with the nine processes, the assessee has the
factory area where godowns for storage of uncured/clean coffee, coffee drying
yards, machine rooms, garbling sheds, etc. are located.
operations start with the drying of coffee in the drying yards in bright
sunlight. Then comes the stage of hulling. It means, the outer husk of the
coffee bean has to be carefully removed, if necessary, by mechanical operations
to obtain coffee seeds which can further be processed. The Tribunal found that
in the hulling process pre-cleaning, destining, elimination of husk, separation
of unhulled beans and polishing is done. Thereafter gradation is done. The
process of gradation requires separation of good coffee for the purpose of
grading by a process of what is known as garbling/manual grading. At times, the
process of gradation is done by mechanical means as well. After grading the
polishing is done on the basis of grading. The Tribunal held that in this
process assessee was involved in the activity of manufacturing the coffee beans
from the raw material plucked from the plant.
High Court accepted the factual matrix but in conclusion as to whether it
amounts to manufacturing activity differed with the Tribunal and held:
find that all the nine stages of the process do not show any kind of change or
a commercially different commodity is not seen to be passing through the
various stages of the process. It cannot be ignored that in common parlance,
coffee means, coffee powder, a beverage consumed as either a hot or cold drink.
At no stage, this colour combination between manufacture and production has its
relevant portion of Section 32A is reproduced below:
(1) In respect of a ship or an aircraft or machinery or plant specified in
sub-section (2), which is owned by the assessee and is wholly used for the
purposes of the business carried on by him, there shall, in accordance with and
subject to the provisions of this section, be allowed a deduction, in respect
of the previous year in which the ship or aircraft was acquired or the
machinery or plant was installed or, if the ship, aircraft, machinery or plant
is first put to use in the immediately succeeding previous year, then, in
respect of that previous year, of a sum by way of investment allowance equal to
twenty-five per cent of the actual cost of the ship, aircraft, machinery or
plant to the assessee:
that no deduction shall be allowed under this section in respect of - (a) xxx xxx
xxx (b) xxx xxx xxx (c) xxx xxx xxx (d) xxx xxx xxx (2) The ship or aircraft or
machinery or plant referred to in sub-section (1) shall be the following,
namely:- (a) xxx xxx xxx (b) xxx xxx xxx (i) xxx xxx xxx (ii) xxx xxx xxx (iii)
in any other industrial undertaking for the purposes of business of
construction, manufacture or production of any article or thing, not being an
article or thing specified in the list in the Eleventh Schedule.).
short point for consideration is whether the High Court was right in coming to
the conclusion that the assessee was not involved in any manufacturing or
production activity in the process of curing the coffee.
word manufacture has not been defined in the Act. In the absence of a
definition of the word manufacture it has to be given a meaning as is
understood in common parlance. It is to be understood as meaning the production
of articles for use from raw or prepared materials by giving such materials new
forms, qualities or combinations whether by hand labour or machines. If the
change made in the article results in a new and different article then it would
amount to a manufacturing activity.
Court while determining as to what would amount to a manufacturing activity
held in Deputy Commissioner of Sales Tax v. M/s. Pio Food Packers, 1980 Supp.
SCC 174: that the test for determination whether manufacture can be said to
have taken place is whether the commodity which is subjected to the process of
manufacture can no longer be regarded as the original commodity, but is
recognized in the trade as a new and distinct commodity. It was observed:
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 recognized as a new and distinct article that a manufacture can be said to
to facts of the present case, the assessee after plucking or receiving the raw
coffee berries makes it undergo nine processes to give it the shape of coffee
beans. The net product is absolutely different and separate from the input. The
change made in the article results in a new and different article which is
recognized in the trade as a new and distinct commodity. The coffee beans have
an independent identity distinct from raw material from which it was
manufactured. A distinct change comes about in the finished product.
of the learned counsel for the Revenue that the assessee was doing only the
processing work and was not involved in the manufacture and producing of a new
article cannot be accepted.
process is a manufacturing process when it brings out a complete transformation
in the original article so as to produce a commercially different article or
commodity. That process itself may consist of several processes. The different
processes are integrally connected which results in the production of a
commercially different article. If a commercially different article or
commodity results after processing then it would be a manufacturing activity.
The assessee after processing the raw berries converts them into coffee beans
which is commercially different commodity. Conversion of the raw berry into
coffee beans would be a manufacturing activity.
the reasons stated above, we are of the opinion that the High Court was wrong
in its opinion that the processing of the raw berries into coffee beans ready
for consumption would not be a manufacturing activity disentitling the assessee
to the investment allowance provided under Section 32A of the Act.
the appeals are allowed with costs. The impugned order/judgment of the High
Court is set aside and that of the Tribunal is restored. The question of law is
answered in the affirmative i.e. in favour of the assessee and against the