High Court of Judicature at Allahabad

R e s e r v e d

I.T.R. Number 198 of 1983

Commissioner of Income Tax----------------------------------Appellant

Versus

M/s Sultan and Sons Rice Mill

Pilibhit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Respondent

Hon'ble R.K.Agarwal,J.

Hon'ble Prakash Krishna.J

(Delivered by Hon'ble Prakash Krishna, J.)

At the instance of revenue following question of law has been referred by the Income Tax Appellate Tribunal, Delhi, for opinion of this Court:

"WHETHER on the facts and in the circumstances of the case the assessee was entitled to relief under section 80-J and 80-HH for the assessment years 1976-77 and 1977- 78."

The assessee is a registered firm manufacturing rice and dealing in food grains. Its claim for relief under section 80-J and 80-HH of the Income Tax Act (here in after referred to as the Act) in respect of its rice manufacturing business was dis-allowed by the Income Tax Officer on the ground that the assessee did not employ ten or more workers in the manufacturing process and, therefore, it did not satisfy the condition of Section 80-J (4) (IV) and section 80-HH (2) (iv) of the Act. The claim of the assessee was accepted by the Commissioner of Income Tax (A) for the assessment year 1976-77 as well as by the Income Tax Appellate Tribunal.

The controversy in the present case centres round to the question of number of workers employed in the manufacturing process carried on by the Industrial undertaking. Section 80-J(4) of the Act reads as under:

"(4) This section applies to any industrial undertaking which fulfills all the following conditions namely:

(i) It is not formed by the splitting up or the reconstruction of a business already in existence;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose

(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 Ist 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.

(iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power:"

The aforesaid sub- section lays down the conditions which an Industrial undertaking has to fulfill in order to claim the benefit of Section 80-J of the Act. In the present case it is not in dispute that the assessee- respondent does not fulfill the conditions no (i), (ii) and (iii) of Section 80-J of the Act. The claim was rejected by the Income Tax Officer only on the ground that in the rice Mill of the assessee less than ten persons were employed as workers in the manufacturing process carried on with the aid of power. The Income Tax Officer relying on the definition of " manufacturer", as given in the Factories Act observed that the assessee's rice plant was automatic and to manufacture rice and rice bran, paddy was stored at one point of machine and when the machine was started the paddy was sucked by the machine automatically and the rice and rice bran came out of the other end and to run the machine, service of one mechanic and two labourers was needed as the whole process was automatic and, therefore, in the manufacturing process number of persons employed never exceeded ten. The Appellate Assistant Commissioner as well as the Tribunal have accepted the contention of the assessee that the word " manufacturing process" should be given a wide interpretation. Ordinarily, it starts with the procurement of raw- material and terminate with the production of finished article. All the workers engaged through out the process would be considered to be employed in the manufacturing process of rice and rice bran.

Ordinarily, the provision in taxing statute-granting incentive for promoting growth and development should be construed liberally. These provision should be interpreted so as to advance the objective of the provision and not to frustrated it (M/s Bajaj Tempo Limited Vs. Commissioner of Income Tax (1992) Vol.196 ITR, 188). The Apex Court in the case of Textile Machinery Corporation Limited Vs. Commissioner of Income Tax (1997) Vol.107 ITR, 195, while interpreting Section 15-C of the old Income Tax Act, 1922 which correspondence to Section 80-J of the Act has observed that the principle object of the section is to encourage setting up of new industrial undertaking by offering tax incentives within a period of 13 years from April 1, 1948. The section is an exemption section. After the country has gained independence in 1947 it is most essential to give Phillips of trade industries from all quarter. That seems to be a background for insertion of Section 15-C of the Act, which correspondence to Section 80-J of the Act.

At this juncture it is desirable to notice the findings recorded by the Tribunal, relevant to the issue involved in the present reference. Repelling the contention of the departmental representative the Tribunal found that the rice mill business is a seasonal business and, therefore, it is not necessary that all the workers should have been engaged or employed throughout the year. After taking in to consideration the trading and profit and loss account for the year ended 31-03-1997 the Tribunal found that payments were made to the hulling labourers, Chaukidar, Mistri, helpers and Munims. It found that all these persons are employed in the manufacturing process. The books of account also shows details of persons who were engaged as Palledar, hulling labour, Bhoosi Hatwai, Fataknewala (Women labour and paddy dryer). It has come to the conclusion that in a rice factory the labourers will be engaged as and when needed. It cannot be doubted that Palledar will be needed in the factory because they have to take bags in side the factory and they are also needed for putting paddy in the machine. Hulling labourers ill be needed when work goes on and bhoosi has to be removed and cleaning has to be done before the paddy is put in machine and the paddy has to be dried. No period of employment is required under section 80-J and 80-HH for employing the particular type of worker. On consideration of material on record a finding has been written by the Tribunal that the assessee has employed more than ten workers in the factory and it is not necessary that all the workers should be paid for the entire period when the factory runs.

The question which now falls for determination is whether all the workers described above can be said to be employed in the manufacturing process of the industrial undertaking within the meaning of Section 80-HH (2) (iv) and 80-J (4) (iv) of the Act. The Tribunal has answered it by placing reliance upon a judgment of Apex Court reported in [1963] INSC 144; A.I.R. 1964 SC 737 J.K.Cotton Spinning and Weaving Mill Company Vs. Labour Appellate Tribunal of India. The Apex Court was considering the controversy in that case from different angle with reference to the expression " employee in any industry occurring under Industrial Disputes Act". The question involved there in was to the effect that the above expression would included the persons employed in operation incidental to main industry. The facts of that case do show that the person Malis (Gardener) employed in the Banglow with attached garden in the colony of the Mill were employed by the Mill to look after these garden and their conditions of service are determined by the Mill. Their work was supervised and controlled by the mill and payment was made by the mill. In this background it was held that Malis were included within the expression "employed in any industry" in the definition of "workmen" in section 2 (s) of the Industrial Disputes Act. The Apex Court was considering entirely a different controversy in that case, not involved in the present case. The interpretation by Supreme Court on the expression "employed in any industry" will have hardly any bearing to the Taxing statute like Income Tax while construing Section 80-HH and 80-J of the Act.

Learned counsel for the assessee submitted that in absence of any definition of the word " worker" under Income Tax Act, the Court has to take its ordinary meaning, which may mean casual, permanent or temporary. Reliance was placed upon (1985) 152 ITR C.I.T Vs. K.G.Yediurappa & Company in support of the contention that the worker should include casual, permanent or temporary worker. Further reliance was placed upon (1986) 162 I.T.R.640 C.I.T. Vs. Harit Synthetics Fabrics (P) Ltd. The Bombay High Court in the case has held that it is not requisite that new Industrial undertaking should have employed ten or more workers throughout the entire period in which relief was claimed. A reading of the provision requires that in order to qualify for the relief and satisfy the requirement, the undertaking must have employed ten or more workers substantially during the period in which relief was claimed. Theory of substantial compliance of the provision of Section 80-J (4) (iv) of the Act was propounded in this case. The aforesaid judgment has been followed by Bombay High Court in its subsequent judgment reported in C.I.T.Vs. Orderods (1) (P) Ltd (1989) 176 I.T.R.470. It was held that in order to clarify for relief and satisfied the requirement of the provision; the undertaking must have employed ten or more workers substantially during the period for which relief was claimed. There could be no hard and fast rule by which one could determine whether there has been substantial compliance.

Learned counsel for the department has placed reliance upon ( 1993) 204 I.T.R. C.I.T.Versus N.C.Budhraja & Company and others. The Apex Court in that case was considering the controversy as to whether construction of a Dam can be regarded as manufacturing or production of article. It was held that construction of a Dam does not amount to manufacture or production of article. It was further observed that the principle of adopting liberal interpretation which advances the purpose and object of the beneficent provision cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the Court to re- write Section or substitute the word on its own for the actual words employed by the legislature in the name of giving effect to the supposed under lying object. The above rule does not the case of the department and it does not throw any light on the present controversy.

The provision of Section 80-HH and 80-J have been enacted with a view to encourage the establishment of new Industrial undertaking and object has been sought to be achieved by granting expression or concession from tax on certain portion of profits for the specified period. Sub section (4) of Section 80-J lays down conditions which an industrial undertaking is required to fulfill to claim the benefit under section 80-J of the Act. Section 80-J of the Act applies to the Industrial undertaking and prescribes conditions qua Industrial undertaking and to grant relief to the assessee. Section 80-J(4) (iv) has to be interpreted in the light of other provision of Section 80-J. The emphasis under section 80-J is on the phrase "Industrial undertaking manufacturer or produces articles" ten or more workers would be employed in the manufacturing process carried on by the industrial undertaking. The word "employed ten or more workers in the manufacturing process normally would cover the entire process carried on by the Industrial undertaking or converting the raw- material into finished goods. The work of ten or more persons employed in the manufacturing process should be integrally connected with the manufacturing of rice. Their work should be reasonably connected with and be part of the manufacturing process of rice. The ITO while holding that only two or three persons are required to run automatic rice plant has interpreted the word " manufacturing process in a very narrow manner". The manufacturing process includes within its ambit that the raw material to be filled in the plant in such shape and condition, which may be acceptable or can be feeded in the plant. In the case of rice mill the Palledars are required to bring paddy from the Store or Godown to the starting point of the Plant. Drying of paddy is also necessary, as found by the Tribunal before putting the paddy in the plant. The workers are also required to clean the plant and remove bhoosi, husk etc. The assessee claimed that the manufacturing process started after the point of purchase of paddy. Paddy is cleaned and dried and there after brought and put in to machine. The rice comes out of the machine along with broken rise there after. There is further cleaning of rice to make it fit for marketing. The finished product emerges only when it is marketable .All these activities are integral part of the manufacturing process of rice. These activities have to be necessarily carried out to obtain finished product i.e. rice in the marketable condition after removing the broken rice and cleaning it if it is necessary.

The Apex Court in the case of J.K.Cotton Spinning and Weaving Mills Vs. Sales Tax Officer ( 1965) 16 STC, 563 while interpreting the expression " in the manufacture of goods" in Section 8 (3)(b) of the Central Sales Tax Act has held that normally it compass the entire process carried on by the dealer of converting the raw- material into finished goods. We are conscious of the fact that the above expression was interpreted by the Apex Court in context of Central Sales Tax Act. But in our opinion the same interpretation can also be put to the expression "employed ten or more worker in the manufacturing process." Our view also finds support from the object and purpose for enactment of Section 80-HH and 80-J of the Act. The section is intended to encourage of setting up of new industry. It must be construed liberally in the broad commercial sense from the common sense ( CIT Vs. Orient Limited, 94 ITR 73) .The expression "manufacturing process" should be interpreted in its ordinary sense and should not be confined or restricted to the actual manufacturing alone. The process which are intimately connected with actual manufacturing process will also be within the aforesaid expression. The Tribunal, as a last fact finding authority has found that the workers employed for bringing the paddy bags from out side and keeping it in the factory can also be called "workers employed in the manufacturing process" as the manufacturing process can not be carried on unless paddy bags are available, represents the correct view of law and is in consequence with a plain meaning of the word implied under section 80-J (4) (iv) of the Act. The Apex Court in the case of C.I.T. Vs. Gwalior Reyon Silk Manufacturing Company Ltd. (1992) 196 I.T.R. 149has held as follows with regard to the interpretation of Statute granting deduction, exemption, or relief to the tax payer:

" It is settled law that the expression used in the Taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of statute to effectuate the legislative intention. It is equally settled law that if the language is plain and un -ambiguous one can only look fairly at the language used and interpreted by to give effect to the legislative intention. Never the less tax laws have to be interpreted reasonably and in consonance with justice adopting purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee."

It is said that a statute is best understood if we know the reason for it. The reason for a statute is the safest guide to its interpretation. The words of a statute take their colour from the reason for it. No provision in the statute and no word of the statute may be construed in isolation. Every provision and every word must be looked at generally before any provision or word is attempted to be construed. The setting and pattern are important. In Poppatlal Shah Vs. State of Madras[1953] INSC 27; , A.I.R. 1953 SC 274 the Apex Court has observed as follows:

" It is settled rule of construction that to ascertain the legislative intents all the constituent parts of a statute are to be taken together and each word, phrase or sentence is to be considered in the light of the general purpose and object of the Act itself."

Further Supreme Court in the case of Federation of A.P.Chamber Vs. State of A.P. (2001) 247 ITR page 36 at page 39 has made following observations:

"A taxing statute is to be strictly construed. In the illuminating words of Lord Wensleydale and reaffirmed by Lord Halsbury and Lord Simon, " the subject is not to be taxed without clear words for that purpose; and also that every Act of Parliament must be read according to the natural construction of its words " (See Micklethwait In re [1855] EngR 863; (1855) 11 Ex 452; Tennant Vs. Smith (1892) AC 150(HL) and Saraswati Sugar Mills Vs. Haryana State Board AIR 1992 SC 224). In a classic passage, Lord Cairns stated that " if the person sought to be taxed comes within the letter of the law, he must be taxed however great the hardship may appear to be judicial mind to be (see Parting ton Vs. Attorney General (1869) LR 4 (HL) 100 referred to in (Inspector of Taxes) Vs. Higgs (1974) UKHL 5; (1974) 3 All ER 949 (HL)

Supreme Court in the decision reported in CIT Vs. J.H.Gotla ( 1985) 156 ITR 323 has observed as follows:

"If a strict and literal construction of the statute leads to an absurd result i.e. a result not intended to be sub served by the object of the legislation ascertained from the scheme of the legislation then if another construction is possible part from the strict literal construction then that construction should be preferred to the strict literal construction.

Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational result."

What is even more significant is the observation of the Court in this case wherein it was observed (head note):

"Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction

In a subsequent decision reported in Saroj Aggarwal Vs. CIT (1985) 156 ITR 497 (SC) again the Supreme Court observed as follows (head note)"

"Facts should be viewed in natural perspective having regard to the compulsion of the circumstances of a case. Where it is possible to draw two inferences from the facts and where there is no evidence of any dishonest or improper motive on the part of the assessee, it would be just and equitable to draw such inference in such a manner that would lead to equity and justice. Too hyper technical or legalistic approach should be avoided in looking at a provision which must be equitably interpreted and justly administered."

We are of the view that the various process starting from purchase of the raw-material and till the sale of finished goods form the integral part of the manufacturing process and the workers and labourers employed in these process are workers employed in the manufacturing process.

In view of the above discussion the Tribunal has rightly interpreted the provision of law and there is no legal error in the order of the Tribunal. We ,therefore, answer the question in affirmative i.e. against the department and in favour of the assessee.

Dated: 5.11.2004

IA