M/S. ASPINWALL AND CO. LTD.versusTHE COMMISSIONER OF INCOME-TAX, ERNAKULAM.

                    M/S. ASPINWALL AND CO. LTD.                                  A
                                       v.
       THE COMMISSIONER OF INCOME-TAX, ERNAKULAM.

                          SEPTEMBER 5, 2001.

   [S.P. BHARUCHA, Y.K. SABHARWAL AND ASHOK BHAN, JJ.]                           B


      Income Tax Act, 1961:

     Section 32-/nvestment Allowance-Machinery installed for curing
coffee-Assessee claiming investment allowance-Whether entitled-Held,             C
processing of raw berry into coffee beans amounts to manufacturing activity--
Assessee entitled to investment allowance under Section 32A--Section 256.

      Words & Phrases- 'Manufacture '-Meaning of in common parlance.

       Appellant-assessee had claimed investment allowance under Section 32A     D
of the Income Tax Act, 1961 for machinery installed for curing of coffee in
its coffee curing plants, for the assessment years 1980-81 and 1983-84 which
was rejected by the Income Tax Officer but allowed in appeal by the
Commissioner of Income Tax (Appeals). On further appeal by Revenue,
Appellate Tribunal upheld the order of C.I.T. (Appeals) on the basis of its      E
own order in a similar issue involving the assessee and held that assessee was
involved in the activity of manufacturing coffee beans from raw material
plucked from plant. In a reference made under Section 256(1) of the Act, High
Court held that assessee was not entitled to investment allowance under
Section 32A of the Act in respect of machinery used for curing coffee and its
sale as it was not involved in any manufacturing or production activity in       F
the process of curing coffee. Hence this appeal by the assessee.

     Respondent-Revenue contended that assessee was doing only processing
work and was not involved in manufacture and production of new article.

      Allowing the appeal, the Court                                             G

      HELD: 1. The word 'manufacture' has not been defined in the Income
Tax Act, 1961. In the absence of a definition of the word 'manufacture' it
has to be given a meaning as is understood in common parlance. It is to be
understood as meaning the production of articles for use from raw or             H
                                    559
    560                     SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A   prepared materials by giving such materials new forms, qualities or
    combinations whether by hand labour or machines. The process is a
    manufacturing process when it brings out a complete transformation in the
    original article so as to produce a commercially different article or commodity.
    That process itself may consist of several processes. The different processes
    are integrally connected which results ii) the production of a commercially
B   different article. If a commercially different article or commodity results after
    proq:ssing then it would be a manufacturing activity. [546-F, GI

          Deputy Commissioner a/Sales Tax v. Mis Pio Food Packers, [1980) Supp.
    sec 174, relied on.
c          2. The assessee after plucking or receiving the raw berries makes it
    undergo nine processes to give it the shape of coffee beans. The net product
    is absolutely different and separate from the input. The change made in the
    article results in a new and different article which is recognized in the trade
    as a new and distinct commodity. The coffee beans have an independent
D   identity distinct from material from which it was manufactured. A distinct
    change comes about in the finished product. The processing of the raw berries
    into coffee beans would be a manufacturing activity and the assessee is entitled
    to investment allowance provided under Section 32A of the Act. (565-D, G, H[

E        CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 8832-
    8833 of 1997.

          From the Judgment and Order dated 25.9.96 of the Kerala High Court
    in l.T.R. Nos. 43 and 44 of 1993.

          C.N. Sree Kumar for the Appellant.
F
         B.B. Ahuja, Rajiv Nanda, B.V. Bairam Das and Ms. Sushma Suri for
    the Respondent.

          The Judgment of the Court was delivered by

G         ASHOK BHAN, J. Aggrieved by the judgment/order of the High Court,
    the assessee-appellant has come up in appeal. By the impugned judgment, the
    High Court in a reference made under Section 256(1) of the Income Tax Act,
    1961 (for short, 'the Act') by the Income-Tax Appellate Tribunal, Cochin
    (for short 'the Tribunal') has answered. the following question of law in the
H   negative.
           ASPINWALL AND CO. LTD. v. C.l.T. [ASHOKBHAN,J.]                  561

        "Whether, on the facts and in the circumstances of the case, the            A
        Tribunal is right in law and fact in holding that the assessee's activity
        of curing coffee amounts to manufacturing and the assessee is entitled
        to relief under Section 32A of the Income-tax Act?"

Le. against the assessee and in favour of the Revenue.
                                                                                    B
      The High Court opined that the assessee is not entitled to the investment
allowance under Section 32A of the Act in respect of the machinery used for
curing coffee and its sale.

      The relevant facts giving rise to the above question of law are:-
                                                                                    c
       The Assessment Years in question are 1980-1981 and 1983-1984. The
assessee is a public limited company. It is engaged in the export of coir
products, distribution of insecticides and pesticides, running and managing of
estates on service contracts. In addition, the assessee has coffee curing plants.
For the machinery installed for curing of the coffee, the assessee claimed
investment allowance under Section 32A for both the Assessment Years. The           D
Income Tax Officer held that the assessee was not entitled to t~e investment
allowance. Assessee preferred appeal before the Commissioner of Income-
Tax (Appeals) (for short 'C.J.T. (Appeals)] who allowed the appeals and held
that the assessee was entitled to the investment allowance as provided under
Section 32A of the Act.                                                             E
      On further appeal by the revenue, the Tribunal noticed that a similar
issue had come before it in ITA No.42 l/Coch/1984 in the assessee's own
case wherein the Tribunal had held that the assessee was entitled to the
investment allowance. Following its earlier decision, the Tribunal upheld the
order of C.l.T. (Appeals).                                                          F
      The matter was taken up in reference before the High Court. To ascertain
the factual position as to what is meant by curing of coffee, the Court directed
the counsel for the parties to produce the order of the Tribunal for the earlier
Assessment Year, which was taken on record.
                                                                                    G
      To appreciate as to what is understood by the word 'coffee' as is generally
known in the commercial pariance, the High Court referred to the Encyclopedia
Britannica, Volume 6 (1972 edition) and concluded that 'coffee' is a beverage
made from the roasted seeds (beans) of the coffee plant. The said beverage
is consumed as either a hot or cold drink and is considered to be having an         H
    562                      SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A   invigorating effect. Coffee is prepared by either a dry or a wash process. In
    the dry process, known as natural process, the coffee cherries are thoroughly
    rinsed in water and then spread out on cement patios in the open air and sun
    to dry. After drying, the coffee is repeatedly run through fanning and hulling
    machines to remove the hulls, dried pulp and parchment. As against this, the
B   wash process is quite different. In this process, the cherries are first put
    through a pulping machine that breaks them open and virtually squeezes the
    beans out of the pulpy skin. Such beans go into large tanks where they are
    left for about 24 hours. Fermentation in the process is avoided, because it
    loosens what is known as a jelly like substance understood as ·honey' in
    regard thereto. Even in this process, after washing, the coffee is spread out
C   in patios to dry. It takes two to three weeks in the sun for the coffee to
    become thoroughly dried and during this time it requires shuffling and turning
    over so as to give sufficient natural heat depending on the climatic conditions.
    The usual expected aroma is available only after the process of roasting.
    Roasting also changes the colour giving it a brown colour and a consequent
    process of chemical change also. The process of roasting brings with its
D   splendid aromatic qualities and pleasing taste.

          It was noticed that the Tribunal had inspected the factory premises to
    have a first-hand knowledge of the operations carried on by the assessee-
    Company. The inspection was made by the Tribunal in the presence of both
E   the parties through their representatives. The factual observation of the Tribunal
    as a result of the inspection found that following nine processes are involved
    in curing of coffee:

           "(!) Receipt of coffee from the Estates;

           (2) Storage of coffee in covered godowns;
F
           (3) Drying of coffee to the required standards prescribed by the
               coffee Board in drying yards;

           (4) Hulling/Pealing/Polishing;

           (5) Grading of coffee mechanically;
G          (6) Colour sorting;

           (7) Garbling and manual grading;

           (8)   Out-turning of garbled coffee; and

           (9)   Bulking".
H
           ASPINWALL AND CO. LTD. v. C.l.T. [ASHOK BHAN, J.)              563

      The Tribunal also found that to deal with the nine processes, the assessee A
has the factory area where godowns for storage of uncured/clean coffee,
coffee drying yards, machine rooms, garbling sheds, etc. are located.

       Curing operations start with the drying of coffee in the drying yards in
bright sunlight. Then comes the stage of hulling. It means, the outer husk of
the coffee bean has to be carefully removed, if necessary, by mechanical B
operations to obtain coffee seeds which can further be processed. The Tribunal
found that in the hulling process pre-cleaning, destining, elimination of husk,
separation of unhulled beans and polishing is done. Thereafter gradation is
done. The process of gradation requires separation of good coffee for the
purpose of grading by a process of what is known as garbling/manual grading. C
At times, the process of gradation is done by mechanical means as well. After
grading the polishing is done on the basis of grading. The Tribunal held that
in this process assessee was involved in the activity of manufacturing the
coffee beans from the raw material plucked from the plant.

      The High Court accepted the factual matrix but in conclusion as to        D
whether it amounts to manufacturing activity differed with the Tribunal and
held:

       "We find that all the nine stages of the process do not show any kind
       of change or a commercially different commodity is not seen to be
       passing through the various stages of the process. It cannot be ignored E
       that in common parlance, 'coffee' means, coffee powder, a beverage
       consumed as either a hot or cold drink. At no stage, this colour
       combination between manufacture and production has its
       manifestation·'.

     The relevant portion of Section 32A is reproduced below:                   F
        "32A.( 1)In respect of a ship or an aircraft or machinery or plant
        specified in sub-section (2), which is owned by the assessee and is
        wholly used for the purposes of the business carried on by him, there
        shall, in accordance wit~ and subject to the provisions of this section, G
      · be allowed a dedµction, in respect of the previous year in which the
        ship or aircraft was acquired or the machinery or plant was installed
        or, if the ship, aircraft, machinery or plant is first put to use in the
        immediately succeeding previous year, then, in respect of that previous
        year, of a sum by way of investment allowance equal to twenty-five
        per cent of the actual cost of the ship, aircraft, machinery or plant to H
    564                      SUPREME COURT REPORTS (2001) SUPP. 2 S.C.R.

A          the assessee:
           Provided that no deduction shall be allowed under this section in
                respect of -
                (a)    xxx                  xxx               xxx
B               (b)    xxx                  xxx               xxx
                (c)    xxx                  xxx               xxx
                (d)    xxx                  xxx               xxx
           (2) The ship or aircraft or machinery or plant referred to in sub-
C              section (I) shall be the following, namely:-
                (a)    xxx                  xxx               xxx
                (b)    xxx                  xxx               xxx
                (i)    xxx                  xxx               xxx
D               (ii)   xxx                  xxx               xxx
           (iii) in any other industrial undertaking for the purposes of business
                 of construction, manufacture or production of any article or thing,
                 not being an article or thing specified in the list in the Eleventh
                 Schedule.)".
E
         The short point for consideration is whether the High Court was right
    in coming to the conclusion that the assessee was not involved in any
    manufacturing or production activity in the process of curing the coffee.

         The word' manufacture' has not been defined in the Act. In the absence
F of a definition of the word 'manufacture' it has to be given a meaning as is
  understood in common parlance. It is to be understood as meaning the
  production of articles for use from raw or prepared materials by giving such
  materials new forms, qualities or combinations whether by hand labour or
  machines. If the change made in the article results in a new and different
G article then it would amount to a manufacturing activity.

          This Court while determining as to what would amount to a
    manufacturing activity held in Deputy Commissioner of Sales Tax v. Mis. Pio
    Food Packers, [1980] Supp. SCC 174: that the test for determination whether
    manufacture can be said to have taken place is whether the commodity which
H   is subjected to the process of manufacture can no longer be regarded as the
           ASPINWALL AND CO. LTD. v. C.l.T. (ASHOK BHAN, J.]              565
original commodity, but is recognized in the trade as a new and distinct A
commodity. It was observed:

        "Commonly manufacture is the end result of one or more processes
        through which the original commodity is made to pass. The nature
        and extent of processing may vary from one case to another, and
        indeed there may be several stages of processing and perhaps a B
        different kind of processing at each stage. With each process suffered,
        the original commodity experiences a change. But it is only when the
        change, or a series of changes, take the commodity to the point where
        commercially it can no longer be regarded as the original commodity
        but instead is recognized as a new and distinct article that a C
        manufacture can be said to take place."

       Adverting to facts of the present case, the assessee after plucking or
receiving the raw coffee berries makes it undergo nine processes to give it
the shape of coffee beans. The net product is absolutely different and separate
from the input. The change made in the article results in a new and different D
article which is recognized in the trade as a new and distinct commodity. The
coffee beans have an independent identity distinct from raw material from
which it was manufactured. A distinct change comes about in the finished
product.

      Submission of the learned counsel for the Revenue that the assessee E
was doing only the processing work and was not involved in the manufacture
and producing of a new article cannot be accepted. The process is a
manufacturing process when it brings out a complete transformation in the
original article so as to produce a commercially different article or commodity.·
That process itself may consist of several processes. The different processes
are integrally connected which results in the production of a commercially F
different article. If a commercially different article or commodity results after
processing then it would be a manufacturing activity. The assessee after
processing the raw berries converts them into coffee beans which is
commercially different commodity. Conversion of the raw berry into coffee
beans would be a manufaciuring activity.                                          G
      For the reasons stated above, we are of the opinion that the High Court
was wrong in its opinion that the processing of the raw berries into coffee
beans ready for consumption would not be a manufacturing activity disentitling
the assessee to the investment allowance provided under Section 32A of the
Act.                                                                             H
    566                   SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A         Accordingly, the appeals are allowed with costs. The impugned order/
    judgment of the High Court is set aside and that of the Tribunal is restored.
    The question of law is answered in the affirmative i.e. in favour of the
    assessee and against the revenue.

    A.K.T.                                                     Appeals allowed.




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