TMI Blog1998 (2) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... e had not commenced production during the previous year 1983-84, relevant to the assessment year 1984-85. For the two subsequent assessment years, the Assessing Officer rejected the claim of the assessee on the ground that the assessee was not carrying on any manufacturing activity. The Assessing Officer brought to tax a sum of Rs. 18,467, as "income from other sources" and rejected the claim of 'business loss' returned by the assessee. The Assessing Officer also negatived the claim of the assessee with respect to the deduction of Central subsidy. Aggrieved by the order of assessment, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Madras- 34 (for short the "CIT(A)") who held that the process of heat treatment, pressing of crankshafts, etc., was a manufacturing activity and, hence, investment allowance claimed by the assessee on the basis that it was carrying on manufacturing activity was sustainable. The Commissioner of Income-tax (Appeals) relied upon the report sent by the assessee to the State Industries Promotion Corporation of Tamil Nadu Limited (for short "SIPCOT"), the minutes of the assessee's board meeting and a letter from BOFCO En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is right in law in holding that the assessee is engaged in the manufacturing activity ? (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is entitled for investment allowance for plant and machinery employed in the business ?" The Income-tax Appellate Tribunal, by its order in R. A. Nos. 802, 803 and 804 (Mad.) of 1991, dated August 28, 1991, rejected the reference applications on the ground that the three questions sought to be referred to this court were not referable questions of law and the question as to the date of commencement of commercial production is a question of fact. Aggrieved by the order, as above, the Revenue, at the instance of the Commissioner of Income-tax, Tamil Nadu-IV, Madras, prayed for issuance of a direction to the Tribunal to state a case and refer the questions of law, as stated above, to this court for its opinion, resorting to the present actions---Tax Cases Petitions Nos. 592 to 594 of 1997. When these actions, listed for hearing today (February 24, 1987), were taken up, Mrs. Chitra Venkataraman, the learned counsel representing Mr. C. V. Rajan, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be referred to this court for opinion. We concur with the opinion so recorded by the Tribunal, on question No. 1 and the same is answered accordingly. The issue involved for consideration under questions Nos. 2 and 3 is as to whether the activities of the assessee can ever be construed to be in the nature of manufacturing activities entitling it for investment allowance for the plant and machinery employed in the business for the assessment years 1984-85, 1985-86 and 1986-87 ? It is an undisputed fact that the assessee had been engaged in the business of receiving raw or untreated crankshafts, forgings and castings from its clients and subjecting them to heat treatment to toughen them up and sell the same in the market for being used as automobile parts. The raw and untreated crankshafts, as such, cannot at all be used as spare parts in automobiles. Such raw or untreated crankshafts received from the clients of the assessee had been subjected to heat treatment with a view to increase wear and tear resistance and augmentation of tensile strength. In this process, of course, there is no change in physical appearance, though there is a qualitative change suitable for a different p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly apply to complex forging configurations with adjacent differences in section thickness, or to very high hardenability steels and alloys. When stability of critically dimensioned finished parts permits only light machining of the forging after final heat treatment to final properties, special treatments are available including marquenching (martempering) stress relieving, and multiple tempering." Many applications, such as crankshafts, cam-shafts, gears, forged rolls, rings, certain bearings, and other machinery components, require increased surface hardness for heat resistance. The important surfaces usually are hardened after machining by flame or induction hardening, carburizing, carbonitriding or nitriding. These processes are listed in the approximate order of increasing cost and decreasing maximum temperature. The latter consideration is important in that dimensional saturation usually decreases with decreasing temperature. This is particularly true of nitriding, which is usually performed below the tempering temperature for the steel used in the forging. Most of these special treatments are performed by the forging customer or on their behalf. Although most forge plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operational characteristics of products. As a general rule, major structures and machines have more heat treated elements. The theory of heat treatment is a part of physical metallurgy. One of the main problems with which physical metallurgy is concerned is how the structure of metals and alloys is related with their properties of engineering importance. Heating or cooling of a metal can change its structure, which causes variations in the mechanical, physical and chemical properties and affects the behaviour of the metal in processing and operation. The theory of heat treatment studies thermally induced alterations in the structure and properties of metals and alloys which do not disappear when the thermal factor stopped acting. As regards the depth and diversity of structural changes, heat treatment is incomparably more effective than mechanical or other methods of metal treatment." (iv) In the book "Elements of Mechanical Engineering by Mr. K. P. Roy and Mr. S. K. Hajra Choudhury, third edition (Asia Publishing House), under the heading "Heat treatment", the learned authors said thus : "Heat treatment of metals may be defined as an operation or combination of different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reatment in the broadest sense of the definition. The response of various metals and alloys, however, is by no means equal. Almost any pure metal or alloy can be softened (annealed) by means of a suitable heating and cooling cycle ; however, the number of alloys that can be strengthened or hardened by heat treatment is far more restricted. Practically all steels respond to one or more type of heat treatment. This is the major reason why steels account for over 80 per cent. of total metal production." We may now refer to certain decisions emerging from the superior courts of jurisdiction-the apex court and the High Courts, relied on by learned counsel appearing for the assessee, as relatable to the question as to whether an article is or is not a manufacture or whether a process or operation is not manufacturing ? (i) In Arthur E. Newell v. CIT [1997] 223 ITR 776 (AAR), the observations of their Lordships of the Authority for Advance Rulings, relevant for the present purpose, read as under (pages 785-786) : "The expression 'manufacture' involves the concept of changes effected to a basic raw material resulting in the emergence of, or transformation into, a new commercial com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this court in Dy. CST v. Pio Food Packers [1980] 46 STC 63, among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak, J., as he then was, stated the test in the following words : '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 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 recognised as a new and distinct article that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o increase the wear and tear resistance to remove the inordinate stress and increase tensile strength. The raw untreated crank shafts and the like can never be used in an automobile industry. Thus, in the crank shafts subjected to the process of heat treatment, etc., a qualitative change is effected, to be fit for use in automobiles, although there is no physical change in them. In such state of affairs, it cannot at all be stated that the crank shafts, subjected to heat treatment, etc., cannot at all change the status of new products of different quality for a different quality for a different purpose altogether. In this view of the matter, we are of the view that the activities of the assessee in relation to raw or untreated crank shafts being subjected to heat treatment, etc., is definitely a "manufacturing activity" entitling it to claim "investment allowance" under section 32A of the Income-tax Act. We answer questions Nos. 2 and 3 accordingly. In fine, we hold that the assessee is engaged in manufacturing activities in relation to crankshafts being subjected to heat treatment, etc., for the assessment years 1984-85, 1985-86 and 1986-87 and, consequently, entitled to "investme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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