2004 (2) TMI 32 - HC - Income Tax

Tea blending not manufacturing for investment allowance. Court ruling on assessee's eligibility.

The court held that the assessee, engaged in blending and packaging tea, was not considered a manufacturer or producer of a new marketable commodity, thus ... Whether by blending various categories of teas and selling them after packaging with a new brand name, the assessee is to be held to be involved in manufacturing or in production of a new marketable commodity and, therefore, it is entitled to deduction for investment allowance under section 32A - Assessing Officer held that at best the assessee can be considered to be engaged in 'processing' only for which deduction for investment allowance under section 32A of the Act would not be available – Held that the assessee is not entitled to deduction for investment allowance under section 32A of the Income-tax Act, 1961, as the assessee cannot be held to be a manufacturer or producer Issues Involved:1. Whether the assessee is entitled to deduction for investment allowance under section 32A of the Income-tax Act, 1961, by being considered as a manufacturer or producer of a new marketable commodity through blending and packaging tea.Issue-wise Detailed Analysis:1. Entitlement to Deduction for Investment Allowance under Section 32A:The primary issue in this case was whether the assessee, a public limited company engaged in blending and packaging tea, could be considered a manufacturer or producer of a new marketable commodity, thereby qualifying for investment allowance deduction under section 32A of the Income-tax Act, 1961. The assessee argued that its process of blending various categories of teas and selling them under different brand names constituted manufacturing or production of a new item. The Assessing Officer, however, held that the assessee was merely engaged in 'processing' and thus not eligible for the deduction.The assessee's appeal was dismissed by the appellate authority and subsequently by the Tribunal, leading to the present appeal.Arguments by the Assessee:Dr. Pal, representing the assessee, cited the judgment of the Karnataka High Court in Brooke Bond Lipton India Ltd. v. State of Karnataka, where it was held that packed blended tea produced by the assessee was a manufactured product. The special leave petition against this judgment was dismissed by the Supreme Court, which the assessee argued made it binding under Article 141 of the Constitution. Dr. Pal also referenced various other judgments to support the claim that blending and packaging tea constituted manufacturing or production.Arguments by the Revenue:Mr. Kapoor, representing the Revenue, contended that the process undertaken by the assessee did not result in a new product, as tea remained tea even after blending and packaging. He argued that the dismissal of the special leave petition by the Supreme Court did not make the Karnataka High Court's judgment a declaration of law. He relied on the Supreme Court's judgment in Kunhayammed v. State of Kerala, which clarified that dismissal of a special leave petition does not equate to a declaration of law by the Supreme Court.Court's Analysis:The court noted that the scope of the appeal was limited to determining whether the assessee's activities constituted manufacturing or production of a new marketable commodity. The court reviewed the Karnataka High Court's judgment and observed that the blending and packaging process involved sophisticated mechanical processes and resulted in value addition, making the final product distinct from the original garden teas.However, the court also considered a conflicting judgment by another Division Bench of the same High Court in Appeejay Pvt. Ltd. v. CIT, which held that blending different types of tea and selling them did not amount to manufacturing or production under section 32A or 80J of the Income-tax Act.Conclusion:The court concluded that the dismissal of the special leave petition by the Supreme Court did not constitute a declaration of law under Article 141. Therefore, the judgment of the coordinate Bench in Appeejay Pvt. Ltd., which held that blending tea did not amount to manufacturing or production, was binding. The court found that the sophisticated mechanical processes and electro-mechanical weighers used in the Karnataka case were not present in the current case. Consequently, the assessee could not be considered a manufacturer or producer and was not entitled to the deduction for investment allowance under section 32A. The appeal was dismissed.Separate Judgments:S. K. Gupta J. concurred with the judgment.