THE COMMISSIONER OF INCOME TAXversusM/S CYNAMID INDIA LTD.

                                                                                  -.


               THE COMMISSIONER OF INCOME TAX                                 A
                                    v.
                      MIS CYNAMID INDIA LTD.

                             APRIL 13, 1999

              [S.P. BHARUCHA AND R.C. LAHOTI, JJ.]                            B

      Income-tax Act 1961-Section 35 B & C-Exemption claimed towards
expenditure incurred-Disallowed by the Tribunal on the ground that the
product on which claim was made was not an agricultural product-High
Court set aside the order of Tribunal-On appeal, held, the term "agricultural C
product" should be construed liberally and exemption claimed could be
allowed.

      Respondent-Assessee manufactured animal feed with rice husk as
the main raw material The Assessee incurred certain expenditure towards
distribution of Literature and pamphlets containing ~odern ·techniques for    D
increasing yields, amongst the cultivators. The asseslee claimed deduction
U/s 35 B and C of the Income-tax Act for the expenditure incurred for
distribution of pamphlets and also for export promotion.

     The Tribunal disallowed the deduction claimed by the assessee on the, E
ground that rice husk was not a "Product of agriculture" because the same
was not the direct outcome of agricultural endeavour.

      Rice husk is the process of dehusking and therefore paddy alone could
be considered as an agricultural product. The High Court however disagreed
with the view taken by the Tribunal and set aside the order of the Tribunal   F
Hence this appeal.

     Dismissing the appeal, this Court

      HELD : The High Court was right in holding that the operation of
dehusking of paddy is not an industrial or manufacturing operation; it is an G
agricultural operation; both rice and husk remain in their natural form as
a result of dehusking and are covered by the term "Agricultural Product"
which is to be construed liberally so as. to include not only the primary
product but also a product which undergoes a simple operation. (603-E-FJ

     CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4403-4404               H
                            601
    602                    SUPREME COURT REPORTS                   [1999) 2 S.C.R.

A   of 1996.

           From the Judgment and Order dated 8.12.93 of the Bombay High Court
    in 1.T.R. NO. 41of1982.

          J. Ramamurthy, SJ( dwivedi, S. Rajappa and B. Krishna Prasad for the
B Appellant.
          Ex-parte for the Respondent.

          The Judgment of the Court was delivered by

C        R.C. LAHOTI, J. In a reference under Section 256 of the Income-tax
    Act, 1961, the following three questions amongst others were answered by
    the High Court in favour of the assessee and against the Revenue :-

            For Assessment Years 1974-75 and 1975-76.
            4.   Whether, on the facts and in the circumstances of the case, the
D                Tribunal was right in holding that the assessee was not entitled
                 to deduction of Rs. 66,352 plus Rs. 1,60,428 for assessment year
                 1974-75 and Rs. 2,00,599 for the assessment year 1975-76 under
                 Section 35C of the Income Tax Act, 1961 ?

            For Assessment Year 1974-75.
E
            6.   Whether, on the facts and in the circumstances of the case, the
                 Tribunal was right in holding that the assessee's claim for
                 weighted deduction at 33 l/3% being export promotion expenses
                 incurred from l.12.1972 to 28.2.1973 and at 50% on Rs. 42,207
                 being export promotion expenses from l.3.1973 to 30.l l.1973
F                ought not to be allowed ?
            For Assessment Year 1975-76.
            8.   Whether, on the facts and in the circumstances of the case, the
                 Tribunal was right in holding that the weighted deduction under
G                Section 3 SB of the Income-tax Act, 1961 on only 50% of the
                 amount of Rs. 20, 706 ought to be allowed ?
                                                       I
          There were in all eight questions forming subject-matter of reference
    before the High Court and as to which the Revenue had filed these appeals.
    However, vide order dated 3.l l.1995,this Court has entertained the appeals
H   confined to abovesaid three questions only.
             C.l.T. v. CYNAMID INDIA LTD. [R.C. LAHOTI, J.]                   603
      So far as question numbers 6 and 8 are concerned, at the very outset            A
the learned counsel for the Revenue has very fairly stated that the quantum
of revenue involved is very small and therefore the Revenue does not press
the appeals to that extent. He has made his submissions confined to question
no. 4 only.

       Section 35C of the Income-tax Act, 1961 (as it stood ·during the B
assessment years 1974-75 and 1975-76) provided for deduction in respect of
certain expenses referable to use as raw material of any product of agriculture
etc. in manufacture or processing. The assessee manufactures an animal feed
known as "AUROFAC" wherein rice husk is mainly used as raw-material. The
deductions claimed by the assessee were in respect of the expenditure incurreo C
by it in disseminating literature, pamphlets etc. containing information on
modem techniques and methods of agriculture designed for increasing the
yield of rice amongst the cultivators and farmers who grow rice. The Tribunal
disallowed the deduction on the ground that the rice husk was not a 'product
of agriculture' because it was not a direct outcome of agricultural endeavour.
According to the Tribunal what was produced by the cultivator was paddy D
which alone could be considered as an agricultural product. The husk was
the result of process of de-husking which was not an agriculture.

     The High Court has answered the question in favour of the assessee
and against the Revenue. Having referred to the definition of 'agricultural           E
product' in Black's Law Dictionary, the High Court has held that the operation
of de-husking paddy is not an industrial or manufacturing operation as
commonly understood; it is essentially an agricultural operation and such
changes as are brought about in the product are an outcome of agricultural
operation. Both rice and husk remain in their natural form as a result of de-
husking and are covered by the term 'agricultural product'.                           F
      The High Court has also formed an opinion that Section 35C of the
Income-tax Act, 1961 was designed to encourage development of agriculture
and therefore gave a weighted deduction in respect of expenditure incurred
in providing to the agriculturists services and facilities specified threin. The      G
term 'agricultural product' or 'product of agriculture' is required to be constured
liberally so as to include not merely the primary product as it actually grows,
but also a product which undergoes a simple operation so as to make it more
saleable or more useable. The rice and the husk though separated remain as
they were produced and hence continue to be 'agricultmal product' or 'product
of agriculture'.                                                                      H
    604                   SUPREME COURT REPORTS                 [1999] 2 S.C.R.

A        We find ourselves in entire agreement with the view taken by the High
    Court and hold the appeals filed by the Revenue devoid of any merit. The
    appeals are dismised. No costs as respondent has not made appearance.

    B.K.G.                                                 Appeals dismissed.




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