THE issue before the Bench is - Whether when a cement
manufacturer is also engaged in mining operation to source its key raw material,
the mining activity tends to lose its independent identity so as to be
ineligible for Sec 80HH benefits. And the question is answered against the
assessee.
Held that,
Facts of the
case
The assessee, a company, had
been carrying on business of manufacturing cement, and such
manufacturing unit
was situated in a backward area in the State of Andhra Pradesh. The assessee had
also a mine having deposit of large quantity of lime. Hence, the assessee also
carried on mining operation of the lime and the same was used as a raw material
in manufacturing cement. In this matter, the opinion of the HC was sought for in
relation to the AY 1987-88. During assessment, assessee claimed deduction u/s
80HH as it was carrying on the business of manufacturing cement in the backward
area and had fulfilled all the conditions for getting deduction under the said
section. It was contended by the assessee that it was not engaged simply in
mining operation, but its main business was actually manufacturing of cement.
The product of the mining operation, being the raw material, was used for
manufacturing cement. The AO, however, had not allowed such deduction on the
ground that since the assessee had been carrying on business of mining
operation, by virtue of sub- section (10) of Section 80HH, such deduction cannot
be permitted.
On
appeal, the CIT(A) had accepted the contention of the assessee and directed for
grant of deduction as it it had found that the assessee-company had been
carrying on the business of manufacturing cement and there was no embargo u/s
80HH to allow such deduction. The Revenue against the order of the CIT(A) went
in appeal to the Tribunal. The Tribunal had held that the assessee's main
business was manufacturing of cement, which was entitled to deduction u/s 80HH,
and there was no absolute prohibition that if the industrial undertaking was
engaged in mining, then it would cease to be entitled to claim the deduction in
respect of items manufactured or produced, which were entitled to deduction u/s
80HH, and that the assessee, in such a situation, can be said to had been
running two industrial undertakings, one in respect of mining and the other in
respect of manufacturing cement, and the profits attributable to mining would
not be entitled to deduction u/s 80HH, whereas profits attributable to
manufacturing of cement would enjoy the deduction and the profits could be
allocated between the two activities/undertakings of the assessee. Following
that order, the Tribunal directed AO to determine the profits attributable to
manufacturing of cement and allow deduction with regard to that.
Before the HC, the assessee's
counsel submitted that Tribunal erred in holding that the assessee was having
two separate business activities in division for granting deduction u/s 80HH. It
was contended that the Tribunal factually held that the main business activity
of the assessee was manufacturing of cement and the mining operation carried on
by it was not meant for sale in the market and the same was used as a raw
material in manufacturing of cement. Therefore, the question of deriving profit
on this mining operation does not and cannot arise. Had the assessee sold the
product of mining operation in the market, then profit would have been derived
from the mining activity. It was further contended that the entire output of the
mining operation of lime was charged as a raw material for the manufacture of a
different product than the cement. Therefore, the entire profit derived from
manufacturing of cement should have been taken into consideration for the
purpose of granting deduction u/s 80HH and a portion of the profit should not
have been taken in order to deprive the benefit of deduction as far as the
mining operation was concerned. It was also submitted that actually no profit
was derived for mining operation and in order to hold the two manufacturing
activities as separate and distinct activities, they must be independent in all
senses.
On
the other hand, the Revenue's counsel submitted that factually the assessee was
carrying on two business activities, one was mining operation and another was
manufacturing of cement, and both the units were always treated to be separate
and distinct business activities. It was further submitted that it was
immaterial whether the product arising out of the mining operation was directly
sold in the market or not, and that the assumed profit can easily be
ascertained. Such legal course of action was permissible under the law. It was
submitted that the raw material extracted from mining operation for
manufacturing cement had certainly got its market value if it was purchased from
open market and such market value had to be taken into consideration and the
same would be treated as cost price of the raw material, and certainly the cost
price must be much less than the market price, and therefore, the emerging
difference price can be treated to be a profit. It was further contended that in
the previous AYs Tribunal held that the assessee had been running two separate
industrial undertakings and out of running of the same, the profit must had been
derived and this factual position was accepted by the assessee. In the relevant
AYs, it was not contended that the factual situation, as far as running of two
separate industrial undertakings was concerned, was different. It was further
submitted that the words "derived from" were having a very restrictive meaning
unlike the words "attributable to". So the legislature had laid emphasis on the
words "profit derived from" and not "attributable to" and by virtue of
sub-section (10) of Section 80HH, it had been expressly prohibited for granting
deduction in relation to the mining activity.
Held that,
++
the argument of Mr. S. Ravi is that a manufacturer cannot trade with itself.
Therefore, unless there is a factual sale in the market, no profit can be
derived from this mining operation. In order to derive the entire profit, the
cement manufacturing unit has to be taken into account and the product has to be
sold in the market and then the profit will be ascertained. We are of the view
that this submission, at the first blush, sounds logic, but while keeping in
view the matter, we find that this logic does not have any basis. It is the
admitted position that lime is one of the raw materials in manufacturing cement
and in order to manufacture the finished products, raw material is essential and
the cost thereof is one of the factors for cost price of the finished goods.
Therefore, in the manufacturing activity of cement unit, the cost of the
finished product has to be ascertained and in that process, the cost of lime has
also to be taken into consideration. In the case on hand, the lime, being a raw
material, is not procured from open market and it has got its own indigenous
supply. Therefore, the cost of the lime extracted from mining operation has to
be ascertained from the cost price and it is found, while doing so, that the
cost of lime of its own source (ordinarily it happens) is lesser than the market
price. Therefore, the difference between the cost price of indigenous source and
the market price is obviously the profit. Moreover, once lime is used from its
indigenous source to manufacture the finished products and by virtue of sale of
such finished products if there is any profit, then obviously that profit is
also related to the mining operation;
++ in
the case of Tata Iron & Steel Co. Ltd, SC had observed that it appears from
the above authoritative pronouncement that the segregation of profit of two
different business activities is permissible under law. It is an undisputed
position that Section 80HH of the said Act uses the words "profit derived from"
and not "attributable to". Therefore, what is the import of the words "derived
from" has been explained by the Supreme Court in the case of Liberty India.
Therein the Supreme Court had made it clear that the connotation of the words
"derived from" is narrower as compared to that of the words "attributable to".
Hence, while reading the provision of Section 80HH of the said Act, the profit
derived from the cement manufacturing activity is deductable thereunder and not
otherwise;
++ in
the case of Pandian Chemicals Ltd, the words "derived from" have been mentioned
while dealing with Section 80HH of the said Act. Therein the Supreme Court,
while following an old decision of the Privy Council in case of CIT v. RAJA
BAHADUR KAMAKHYA NARAYAN SINGH (2002-TIOL-677-SC-IT), and further the
decision of the Constitutional Bench of SC in case of MRS. BACHA F. GUZDAR v.
CIT (2002-TIOL-843-SC-IT-CB), held
that the words "derived from" in Section 80HH of the said Act must be understood
as something which has a direct or immediate nexus with the assessee's
industrial undertaking. Thus the profit, which has been derived in relation to
the manufacturing activity of the cement, has to be taken into consideration and
not for other manufacturing activity particularly for mining activity as the
legislature has expressly excluded the mining activities from the purview of the
deductability benefits under Section 80HH of the said Act. It is the settled
proposition of law that while interpreting the provision of a statute, this has
to be considered literally as it appears, and it cannot be given a purposive
meaning. Hence, when the legislature has excluded the mining activity with the
specific words, this has to be accepted. The decision in case of Textile
Machinery Corporation Ltd, has no manner of application as it is found from fact
that in the previous assessment years the assessee's two business activities
have been treated to be a separate functional activity. In that case, the
Supreme Court held that for the reconstruction of existing business, there must
be transfer of the assets of the existing business to the new industrial
undertaking. This judgment is really intended to cite for holding that the
mining activity is a part and parcel of the cement manufacturing activity and it
has got no independent functioning. In view of the earlier fact finding by the
Tribunal, which has reached finality, this judgment is not helpful in this case.
Under the circumstances, while upholding the argument of Mr. S.R. Ashok and
expressing our inability to persuade ourselves to accept the argument of Mr. S.
Ravi, we hold that the assessee is having two independent industrial
undertakings, one is mining activity and the other is cement manufacturing
activity. We are also of the opinion that apportionment of the profit derived
from cement manufacturing activity can be apportioned in order to find the
profit derived from mining activity. Accordingly, we answer the questions in the
favour of Revenue
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