Conclusion: Conversion of Paddy into Rice by the process of de-husking would amount to “maufacture” as not only the form underwent a change but also the value addition happened by such process as a different commercial article came into being and therefore, assessee was entitled to deduction under Section 80 IA/IB during the relevant assessment years.
Held: Department held that the process of dehusking of Paddy for obtaining Rice did not amount to ‘Manufacture’ and therefore, asseseee was not entitled to the said benefit under Section 80 IA/IB during the relevant assessment years. It was held when the Paddy in the husk was converted into Rice by the process of dehusking, by manual or mechanical process, there was transformation of article. A husked Paddy was not a de-husked Rice, and not only the form underwent a change but also the value addition happened by such process as a different commercial article came into being. Thus, the department was not justified in denying the deduction to assessee as Rice and Paddy were two different things having different value.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
The Revenue has filed these appeals under Section 260A of the Income Tax Act, 1961, (for short “the Act”) aggrieved by the order dated 18.07.2008 passed by the learned Income Tax Appellate Tribunal (for short “the Appellate Tribunal”) for the assessment years 1999-2000, 2000-2001, 2001-2002, 2002-2003 and 2003-2004. The learned Appellate Tribunal allowed the appeals of the Assessee and held that it is entitled to deduction under Section 80IA/80IB of the Act for the aforesaid assessment years.
2. The said provisions of the Act allowed a deduction of total undertaking or enterprise engaged in infrastructure development, etc. and deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings, also.
3. The crux of the matter and the substantial question of law raised in the present appeals filed by the Revenue is:
“Whether in the facts and in circumstances of the case, the Income Tax Appellate Tribunal was right in holding that conversion of Paddy into Rice is a manufacturing activity and therefore, the Assessee is entitled to deduction u/s 80 IA/IB of the Act in respect of the profit from such activity or not?”
4. The requirement stipulated in the said provision is that the Industrial undertaking should fulfil inter alia the following condition:
“It manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plaints, in any part of India” (Section-80-IA)
5. Admittedly,the process of dehusking of Paddy, and conversion into Rice with the help of labour and machines undertaken by the Assessee does not fall in the negative Eleventh Schedule, to the Act, but the question raised by the Revenue before this Court is that the process of dehusking of Paddy for obtaining Rice does not amount to ‘Manufacture’ and therefore, the Asseseee was not entitled to the said benefit under Section 80 IA/IB of the Act during the aforesaid relevant Assessment Years.
6. Mr.M.Swaminathan, learned counsel for the Revenue relied upon the following Judgments to support his aforesaid contentions.
(i) Firstly he relied upon the Judgment of CESTAT, Regional Bench Chandigarh in the case of Dunar Foods Limited Vs.,
Commissioner of Central Excise, Panchkula [2017 (346) 612 (Tri-Chan.)] wherein the learned CESTAT held that conversion of Paddy into Rice did not amount to ‘Manufacture’ and therefore, the Assesee raised an objection by stating that dehusking of Paddy was not excisable goods. The learned Tribunal relied upon the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Cynamid India Limited [Civil Appeal Nos.4403 and 4404 of 1996] with regard to the same for holding so in favour of the Assessee. Paragraphs 29 to 31 of the said order of the learned Tribunal are quoted below for ready reference.
“29. Therefore, the decision in the case of M/s.Cynamid India Ltd., is applicable to the facts of this case wherein the Apex Court has observed as under:
“5. The High Court has answered the question in favour of the assessee and against the Revenue. Having referred to the definition of `agricultural 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’.
5. 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 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 `agricultural product’ or `product of agriculture’.
30. As the Hon’ble Apex Court has held that conversion of Paddy into Rice is not a distinct operation and the Rice and husk remain in their natural form as a result of dehusking and are covered by the term ‘ agricultural product’.
31.Therefore, we hold that the test of manufacture has been failed as the goods are not manufactured goods as per Section 2 (f) of Central Excise Act, accordingly the question of excisability does not arise. Therefore, the Issue No. 1 is answered in favour of the appellants.”
7. The learned counsel further brought to the notice of the Court that the SLP filed against the said order of CESTAT was dismissed by
the Hon’ble Supreme Court on 03.04.2017 in Civil Appeal No.D5237 of 2017 reported in [2017 (354) E.L.T. A57 (S.C.)] .
8. Mr.M.Swaminathan, the learned counsel for the Appellant/Revenue also relied on the decision of the Karnataka High Court in Commissioner of Commercial Taxes Vs. B.Raghurama Shetty & others [1975 43 CCH 0053 (Kar)], wherein, the Division Bench of Karnataka High Court, in paragraphs 7 and 12 of the Judgment, held as follows:
“7. …. The mere bestowal of labour on an article, even if applied through machinery, will not make an article manufactured goods, unless the treatment has progressed so far that transformation ensues and an article different from the original product is
brought into existence. When skin of a plantain is peeled before eating, can it be said that the peeled plantain fruit is a manufactured article ? No new substance which was not existing has been brought into existence. Similarly, if an orange is peeled and the fruit is taken out, no new article is brought into existence and the fruit taken out cannot be said to be a manufactured product. Rice is fashioned by nature in the form of Paddy and obtaining of Rice is a mere liberation of the natural product. In getting the Rice imbedded in Paddy no transformation takes place and no manufactured article is got. “
“12.As Paddy does not suffer any transformation and a new and different article does not emerge when it is milled or hulled, the process of milling or hulling cannot be called a process of manufacture and Rice cannot be called as a manufactured article. The use of the expression “convert” in obtaining Rice from Paddy is itself, in our opinion, inappropriate and in accurate, because, by removing the husk by whatever process it may be, one thing is not converted into another thing. There is, therefore, no consumption of Paddy in the manufacture of other goods for sale or otherwise. The view taken by the Tribunal in this behalf must, therefore, be upheld. “
The Court, therefore, concluded that the respondents were not liable to pay tax on the purchase turnover of the Paddy milled in their Mills either on the ground that they had consumed Paddy in the ‘manufacture of other goods for sale or otherwise’ or ‘disposed of such
goods in any manner other than by way of sale in the State’.
9. The learned counsel for the Revenue thus submitted that the assessee was not engaged in any manufacturing activity and therefore, he is not entitled to the benefit under Section 80 IA/80 IB of the Act.
10. On the other hand, the learned counsel for the Assessee Mr.A.S.Sriraman, urged before us that the provisions of 80 IA/80 IB of the Act are not restricted to the word of ‘Manufacture’ but it employs the words “Manufacture or production”. He submitted that the word “production” is wider in ambit and scope and it has a wider connotation than the word “manufacture” and if any different commercial article comes into existence by the process of industrial activity undertaken by the Assessee, then the Assessee would be entitled to such benefit under Section 80 IA/80 IB of the Act. He also submitted that even dehusking of Paddy with the help of labour and machinery brings into existence, a different commercial article and one could not eat the Paddy as such in the place of Rice, without dehusking the same. Therefore, as soon as a different commercial article is brought into existence, the same falls in the definition “Manufacture”. He drew the attention of this Court to the definition of the word “Manufacture” as inserted in the Act by the Finance (No.2) Act, 1998, with effect from 01.04.2009, which reads as under:
‘(29BA) “manufacture” with its grammatical variations means a change in a non-living physical object or article or thing,-
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;]
11. The learned counsel for the Assessee also relied upon the following Judgments to support his contentions.
12. Firstly, he relied upon the decision of Ganesh Trading Company Vs. State of Haryana (1974 3 SCC 620), wherein, the Hon’ble Supreme Court dealt with the same question as to whether the Paddy and Rice can be considered as identical goods for the imposition of sales tax. Paragraphs 2 to 5 of the said Judgment are quoted for ready reference.
“2. The only question that arises for decision in these appeals is whether Paddy and Rice can be considered as identical goods for the purpose of imposition of “sales tax”. Under the concerned Sales Tax Act exemption from payment of sales tax is provided if the very Paddy in respect of which purchase tax was levied was sold and not if that Paddy is converted into Rice and sold. It is contended on behalf of the appellants that Paddy and Rice are identical goods and, therefore, when the law grants an exemption in respect of Paddy, that exemption is also available to transactions relating to Rice. The argument proceeded on the basis that Rice was nothing but dehusked Paddy. Both Rice and Paddy are identical goods. When Paddy was dehusked, there is no change in the identity of the goods.
3. In support of their contention, the appellants cited to us certain dictionary meanings of the word “Paddy” to show that Rice is nothing but dehusked Paddy. This Court has firmly ruled that in finding out the true meaning of the entries mentioned in a Sales Tax Act, what is relevant is not the dictionary meaning, but how those entries are under stood in common parlance, specially in commercial circles. Sales tax primarily deals with dealers who are engaged in commercial activity. Therefore, what is of the essence is to find out whether in commercial circles, Paddy is considered as identical with Rice. In this connection reference may be usefully made to the decision of this Court in Ramavatar Budhaiprasad v. Assistant Sales Tax Officer, Akola ., wherein this Court was called upon to consider whether betel leaves could be considered as vegetables. Dictionary meaning showed that betel leaves are a class of vegetables, but yet this Court ruled that the word “vegetable” should be construed in its popular sense, meaning that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it. On that basis this Court came to the conclusion that betel leaves could not be considered as vegetables. In Commissioner of Sales Tax, Madhya Pradesh, Indore v. Jaswant Singh Charan Singh ., this Court held that the word “coal” included “charcoal” on the ground that in ordinary parlance “coal” includes “charcoal”. In State of Punjab v. Chandu Lal Kishori Lal  25 S.T.C. 52 (S.C.); ., the question was whether “cotton” included “cotton seeds”. This Court held that they were two distinct commercial goods though before the seeds were separated both the cotton and the seeds were part of one commodity.
4. In support of their contention that the meaning given in the commercial circles is not of the essence and what is of essence is the identity of the goods, the learned Counsel for the appellants relied on the decision of this Court in Stale of Madhya Bharat (now State of Madhya Pradesh) v. Hiralal  17 S.T.C. 313 (S.C.). There the relevant entry read “iron and steel”. The question was whether when a dealer purchased scrap iron locally and imported iron plates from outside and after converting them into bars, flats and plates in his mills, sold them in the market, they continued to be “iron and steel”. This Court ruled that in spite of the change effected because of the process the goods had undergone, the goods sold in the market did not cease to be “iron and steel”. We do not think that this decision is of any assistance to the appellants because both the goods purchased as well as sold were “iron and steel”.
5. It was contended on behalf of the appellants that the essential question that we have to decide is whether the goods sold differed in identity from the goods purchased. It was urged that merely because Paddy was dehusked and Rice produced, there
was no change in the identity of the goods. Identity of goods is one of the essential elements to be borne in mind in deciding the nature of the transaction. It was so decided in Tungabhadra Industries Ltd. v. Commercial Tax Officer, Kurnool  11 S.T.C. 827 (S.C.) : . In that case the question arising for decision was whether hydrogenated oil continued to be groundnut oil. This Court held that the hydrogenated groundnut oil continued to be groundnut oil. In arriving at that conclusion this Court took into
consideration that the essential nature of the goods had not changed after the groundnut oil had been subjected to chemical process. Similar view was taken by this Court in State of Gujarat v. Sakarwala Brothers  19 S.T.C. 24 (S.C). Therein the question whether patasa, harda and alchidana could be considered as “sugar”. This Court held that when sugar was processed into patasa, harda and alchidana, it did not hange its essential characteristic. Its identity continued to be the same. Now, the question for our decision is whether it could be said that when Paddy was dehusked and Rice produced, its identity remained. It was true that Rice was produced out of Paddy but it is not true to say that Paddy continued to be Paddy even after dehusking. It had changed its identity. Rice is not known as Paddy. It is a misnomer to call Rice as Paddy. They are two different things in ordinary parlance. Hence quite clearly when Paddy is dehusked and Rice produced, there has been a change in the identity of the goods. In this view it is not necessary for us to refer to the decisions of some of the High Courts read to us at the time of hearing.”
13. He further relied upon the decision of the Hon’ble Supreme Court in Income Tax Officer Vs. Arihant Tiles & Marbles P Ltd.,[2010 320 ITR 79 (SC)], wherein a three Judge Bench of the Hon’ble Supreme Court dealt with the provisions of Section 80-IA itself and dealt with the activity of the conversion of marble blocks into slabs and tiles. While holding that the process undertaken by the Assessee, to be eligible for such deduction, the Supreme Court relied upon its earlier views in the case of CIT Vs. Sesa Goa Ltd., [ (2004) 271 ITR 331 SC] and also CIT Vs.N.C.Budharaja and Company and another [1993 114 CTR (SC) 420] and held that the word “production” is wider in ambit and it has a wider connotation than the word “manufacture”. It was held that while every manufacture can constitute production, but every production need not amount to manufacture. The word “production”, when used in juxtaposition with the word “manufacture”, it mean bringing into existence new goods by a process which may or may not amount to manufacture. The word “production” takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. The Court also relied upon all the earlier decision in the case of Aman Marble Industries (P) Ltd. Vs. CCE 2003 [(157) ELT 393 (SC)].
14. On the consideration of case laws relied upon by both the sides and the provisions of the Act itself, we are of the considered opinion that the benefit of Deduction under Section 80IA/and 80IB of the Act was intended to promote the industrial activity in the field of infrastructural development and other sectors and those engaged, in the process of manufacture or production of articles or things not included in the Eleventh schedule of the Act, were held entitled to avail such deduction.
15. The words “manufacture” or “production” employed jointly in the said provisions do not permit us to take a narrow or pedantic approach in the matter. On the other hand, a pragmatic and purposive interpretation deserves to be put to these words of wider connotations.
16. These words “Manufacture or production” cover within their ambit any activity by which, a different commercial article, having a different commercial value, is brought into existence by the process of ‘Manufacture or Production’. When the Paddy in the husk is converted into Rice by the process of dehusking, by manual or mechanical process it cannot be said, by any stretch of imagination that there is no transformation of article. A husked Paddy is not a de-husked Rice, and not only the form undergoes a change but also the value addition happens by such process. A different commercial article undoubtedly comes into being. The industrial activity by employing men and machine in the industrial undertaking of the Assessee is not even doubted by the Revenue. It is also not in dispute that Rice and Paddy are two different things, but the only contention which the Revenue seeks to raise before us is that the said process of dehusking is not covered by the terms “Manufacture”. We cannot accept this submission for the simple reason that while the investment in the Industry is made by the Assessee and carrying of industrial activity is not disputed and the article in question viz., husked Paddy and Rice are two different articles having different value, what can be the reason to deny them the benefit under Section 80 IA and 80 IB of the Act. We see no reason, much less any justifiable reason, for denial of the said benefit to the Assesee before us.
17. We find that the definition of the word “Manufacture” though was not available in the Assessment Years before us upto 2003-2004, but the said definition embodies the concept of transformation of object or article into different commercial article as was discussed in several judicial pronouncements from time to time. If a different commercial article comes into existence as understood by the persons who deal with those things, a different approach need not be taken by the Courts of law to hold otherwise. The dehusked Paddy and Rice obviously are not sold on the same rate nor can they be consumed for same purpose in the same form. Therefore, the process of dehusking of Paddy into Rice with the aid of labour and machinery is definitely an industry activity undertaken by the Assessee. The cases relied on by the learned counsel for the Revenue are not only in different contexts but finally resulted in giving benefit to the Assessee, depending upon the context of the concerned enactment. Even in case before the CESTAT, in the case of Dunar Foods Limited (supra) it was held that Rice and the husk remain in the natural form and both of them continue to be covered by the term “agricultural product” as was held by the Hon’ble Supreme Court in the case of M/s.Cynamid India Ltd., (supra). In the said case, the Hon’ble Supreme Court held that the conversion of Paddy into Rice is not a industrial operation and the Rice and husk remain in their natural form as a result of dehusking and are covered by the term ‘agricultural product’ and therefore, the Assessee was entitled to the benefit under Section 35 of the Income Tax Act, which was designed for development of agricultural research specified thereunder. Similarly, the Division Bench of Karnataka High Court, in the case of B.Raghurama Chetty case (supra) held that the said process of dehusking and milling of Paddy did not bring about new and different article and therefore, Paddy could not be said to have been consumed in the process of manufacture of Rice and hence, it will not amount to violation of the provision of Section 6 (1) of the Karnataka Sales Tax Act and the Assessee would not be liable to pay Additional Sale Tax.
18. Therefore, we are of the opinion that it would depend upon the context in which the words “Manufacture or production” have to be
interpreted by the Court of law. In the present case, the context is whether the industrial activity in the form of dehusking of Paddy into Rice amounts to Industrial undertaking engaged in the ‘ Manufacture or production’ of Rice or not.
19. In the said context, in view of the aforesaid cases, we find no reason to hold that the activity of dehusking of Paddy into Rice will not amount to “manufacture or production”. We do not find justification to give a narrower meaning to these terms, which, by themselves independently or jointly as employed in the said provisions of Section 80IA are wide enough to cover the industrial activity
undergone by the Assessee.
20. We do not find any merit in the appeals filed by the Revenue and the same are accordingly dismissed and the, Question of law framed, above is answered in favour of the Assessee and against the Revenue. As a sequel, the Assessee is entitled to the benefit of deduction under Section 80 IA for the assessment year viz.,1999- 2000 and Deduction under Section 80IB of the Act for remaining Assessment years i.e, 2001-2002, 2002-2003 and 2003-2004. No order as to costs.