2004 (11) TMI 22 - HC - Income Tax

Court rules in favor of firm: broad interpretation of 'manufacturing process' under Income-tax Act.

Commissioner of Income-Tax Versus Sultan And Sons Rice Mill.

The court held in favor of the assessee, a registered firm engaged in manufacturing rice and dealing in food grains, regarding the entitlement to relief ... Relief under sections 80J and 80HH - number of workers employed in the manufacturing process carried on by the industrial undertaking - assessee is a registered firm manufacturing rice and dealing in food grains. Its claim for relief under sections 80J and 80HH in respect of its rice manufacturing business was disallowed on the ground that the assessee did not employ ten or more workers in the manufacturing process and, therefore, it did not satisfy the conditions of section 80J(4)(iv) and section 80HH(2)(iv) - We are of the view that the various processes starting from purchase of the raw material and till the sale of finished goods from an integral part of the manufacturing process and the workers and labourers employed in these processes are workers employed in the manufacturing process. - Tribunal has rightly interpreted the provision of law and there is no legal error in the order of the Tribunal in allowing relief Issues Involved:1. Entitlement of the assessee to relief under sections 80J and 80HH of the Income-tax Act, 1961.2. Interpretation of 'manufacturing process' and the number of workers employed in the process.Detailed Analysis:Issue 1: Entitlement of the Assessee to Relief Under Sections 80J and 80HHThe primary issue was whether the assessee, a registered firm manufacturing rice and dealing in food grains, was entitled to relief under sections 80J and 80HH for the assessment years 1976-77 and 1977-78. The Income-tax Officer had disallowed the claim on the grounds that the assessee did not employ ten or more workers in the manufacturing process, thus not meeting the conditions of section 80J(4)(iv) and section 80HH(2)(iv) of the Act. However, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal accepted the assessee's claim.Issue 2: Interpretation of 'Manufacturing Process' and Number of Workers EmployedThe court examined whether the assessee employed the requisite number of workers in the manufacturing process. Section 80J(4) specifies that an industrial undertaking must employ ten or more workers in a manufacturing process carried on with the aid of power, or twenty or more workers without the aid of power. The Income-tax Officer had interpreted the term 'manufacturing process' narrowly, considering only the workers directly operating the machine. The Tribunal, however, adopted a broader interpretation, including all workers involved from the procurement of raw materials to the production of the finished product.Findings and Interpretation:1. Broad Interpretation of 'Manufacturing Process':The Tribunal and the court emphasized a liberal interpretation of the term 'manufacturing process,' aligning with the objective of tax incentives to promote industrial growth. The court referenced the Supreme Court's judgment in Bajaj Tempo Ltd. v. CIT, which advocated for a liberal construction of provisions granting incentives for growth and development.2. Inclusion of All Workers Involved:The Tribunal found that various workers, including hulling laborers, chaukidar, mistri, helpers, and munims, were employed in the manufacturing process. The court agreed that all these workers, even if not employed throughout the year, were integral to the manufacturing process. The court cited CIT v. Harit Synthetics Fabrics P. Ltd., which held that substantial compliance with the requirement of employing ten or more workers suffices.3. Rejection of Narrow Interpretation:The court rejected the narrow interpretation that only considered workers directly operating the machine. It held that the manufacturing process includes activities like cleaning, drying, and transporting raw materials, which are essential for producing the finished product.4. Legal Precedents and Principles:The court referred to various legal precedents, including J.K. Cotton Spinning and Weaving Mill Co. v. Labour Appellate Tribunal of India and CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd., to support its interpretation. It emphasized that tax laws should be interpreted reasonably and in favor of the assessee, adopting a purposive approach.Conclusion:The court concluded that the assessee had employed more than ten workers in the manufacturing process, as required by sections 80J(4)(iv) and 80HH(2)(iv). The Tribunal's interpretation was upheld, and the question was answered in the affirmative, in favor of the assessee and against the Department. The judgment reinforced the principle that provisions granting tax incentives should be construed liberally to advance their objective.