1965 (9) TMI 52 - HC - Income Tax

Court rules on manufacturing activities for tax purposes under Indian Income-tax Act

COMMISSIONER OF INCOME-TAX, GUJARAT Versus AJAY PRINTERY PRIVATE LTD.

The court concluded that the respondent-company's business activities constituted manufacturing or processing of goods as contemplated in section 23A ... - Issues Involved:1. Interpretation of the phrase 'in the case of an Indian company whose business consists wholly in the manufacture or processing of goods' in Explanation 2 to section 23A of the Indian Income-tax Act, 1922.2. Whether the respondent-company's business activities constituted manufacturing or processing of goods as contemplated in section 23A (Explanation 2, clause (ii)) of the Indian Income-tax Act, 1922.Issue-wise Detailed Analysis:1. Interpretation of the Phrase 'in the case of an Indian company whose business consists wholly in the manufacture or processing of goods' in Explanation 2 to section 23A of the Indian Income-tax Act, 1922:The court examined the meaning of the terms 'manufacture' and 'processing of goods' as they appear in clause (ii) of Explanation 2 to section 23A. The court noted that these terms had not been defined within the Act, indicating that the legislature intended for them to be understood in their ordinary sense. The court referenced various judicial decisions to elucidate the ordinary meaning of these terms, including the Supreme Court decision in J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Sales Tax Officer, where it was held that 'manufacture' encompasses the entire process of converting raw materials into finished goods.The court also considered the decision in North Bengal Stores Ltd. v. Board of Revenue, Bengal, where it was held that a dispensing chemist producing compounds from raw drugs was engaged in manufacturing. The court emphasized that 'manufacture' implies transforming raw materials into a new product, which may or may not involve the raw materials losing their identity. The court further cited Hiralal Jitmal v. Commissioner of Sales Tax, where it was held that printing and dyeing textiles constituted manufacturing.The court concluded that the terms 'manufacture' and 'processing of goods' should be interpreted in their ordinary commercial sense, which includes any process that transforms raw materials into a new product with a distinct identity and use.2. Whether the Respondent-Company's Business Activities Constituted Manufacturing or Processing of Goods as Contemplated in Section 23A (Explanation 2, Clause (ii)) of the Indian Income-tax Act, 1922:The respondent-company was engaged in printing balance-sheets, profit and loss accounts, pamphlets, dividend warrants, and share certificates. The Income-tax Officer and the Appellate Assistant Commissioner had held that these activities did not constitute manufacturing or processing of goods, requiring the company to declare a dividend of 60% of its net income. However, the Tribunal had upheld the respondent-company's contention that its activities amounted to manufacturing or processing, requiring only a 45% dividend declaration.The court analyzed whether the respondent-company's activities of printing and producing various documents from paper and ink constituted manufacturing. The court noted that the process involved transforming raw materials (paper and ink) into a new product (printed documents) with a distinct identity and use. The court drew parallels to the example of a goldsmith transforming gold into an ornament and a chemist producing a compound from raw drugs, both of which were considered manufacturing.The court held that the respondent-company's activities of printing documents constituted manufacturing, as the raw materials were transformed into a new product with a distinct commercial value. The court rejected the revenue's reliance on the Calcutta High Court decision in Sati Prasanna Mukherjee v. Md. Fazal, noting that it dealt with a different issue.Conclusion:The court concluded that the respondent-company's business activities constituted manufacturing or processing of goods as contemplated in section 23A (Explanation 2, clause (ii)) of the Indian Income-tax Act, 1922. Consequently, the company was required to declare a dividend of only 45% of its net income. The court answered the reference question in the affirmative and awarded costs to the respondent-company.