Friday 6 December 2013

Whether when a cement manufacturer is also engaged in mining operation to source raw material, mining activity tends to lose independent identity so as to be ineligible for Sec 80HH benefits

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.
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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