1972 (10) TMI 17 - HC - Income Tax

Court rules hotel food preparation not manufacturing under Finance Act

Commissioner of Income-Tax, Kerala Versus Casino Private Limited.

The court concluded that the activity of preparing food in the assessee's hotel did not constitute 'manufacture or processing of goods' within the meaning ... Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is legally correct in holding that the activity carried on by the assessee in preparing articles of food from raw materials, constitutes 'manufacture or processing of goods' within the meaning of section 2(6)(d) of the Finance Act, 1968, and that the assessee is an 'Industrial company' within the meaning of the definition contained in that section Issues Involved:1. Whether the activity carried on by the assessee in preparing articles of food from raw materials constitutes 'manufacture or processing of goods' within the meaning of section 2(6)(d) of the Finance Act, 1968.2. Whether the assessee qualifies as an 'industrial company' under the Finance Act, 1968.Issue-Wise Detailed Analysis:1. Definition and Interpretation of 'Manufacture or Processing of Goods':The primary issue revolves around whether the activity of preparing food from raw materials in a hotel constitutes 'manufacture or processing of goods' under section 2(6)(d) of the Finance Act, 1968. The court noted that the term 'manufacture or processing of goods' is not explicitly defined in the statute, implying that it should be understood in its ordinary or common parlance. The court emphasized that the legislature likely intended for the term to be interpreted as it is commonly understood, rather than in a technical or scientific sense.The court referred to various judicial precedents to elucidate the meaning of 'manufacture' and 'processing.' It cited cases where the transformation of raw materials into a commercially different article was considered manufacturing. For instance, converting gold into ornaments or leather into shoes was deemed manufacturing because the final product was commercially distinct from the raw materials.However, the court also highlighted that not every change qualifies as manufacturing. For example, in the case of Commissioner of Sales Tax v. Harbilas Rai and Sons, the Supreme Court held that applying labor to pig bristles did not constitute manufacturing because the final product remained essentially the same commercial article.2. Application to the Assessee's Activities:The court examined whether the preparation of food in the assessee's hotel could be considered manufacturing or processing. The assessee argued that the food produced was commercially different from the raw materials, thus qualifying as manufacturing. However, the court emphasized the need to interpret the term in the context of the Finance Act, 1968.The court reasoned that the term 'manufacture or processing of goods' should be understood as it would be by the common man or in common parlance. It concluded that customers visiting a hotel would not typically describe the preparation of food as manufacturing or processing. The court noted that referring to food preparation as manufacturing would seem strange to customers and employees alike. Therefore, the court held that the activity carried on by the assessee did not constitute manufacturing or processing of goods in the ordinary sense.3. Classification as an 'Industrial Company':The court then addressed whether the assessee qualified as an 'industrial company' under section 2(6)(d) of the Finance Act, 1968. The definition includes companies mainly engaged in the generation or distribution of power, construction of ships, mining, or manufacturing or processing of goods. The court noted that the assessee did not fall within the first three categories and focused on whether it was engaged in manufacturing or processing.The court emphasized the distinction between manufacturing concerns and trading concerns. It observed that while manufacturing concerns engage in production as their main activity, trading concerns primarily focus on selling goods. The court concluded that a hotel, like the assessee's, is mainly intended for trading and not for production or manufacturing. The conversion of raw materials into foodstuffs in a hotel is incidental to its trading activity.Therefore, the court held that the assessee could not be classified as an 'industrial company' under the Finance Act, 1968. The court disagreed with the Appellate Tribunal's view and answered the question in the negative, ruling in favor of the revenue and against the assessee.Conclusion:The court concluded that the activity of preparing food in the assessee's hotel did not constitute 'manufacture or processing of goods' within the meaning of section 2(6)(d) of the Finance Act, 1968. Consequently, the assessee did not qualify as an 'industrial company' under the said Act. The question referred to the court was answered in the negative, favoring the revenue.