Co-operative Society—Deduction u/s. 80P(2) (a)(iii)—Matter remanded to the Commissioner of Income-tax (Appeals) to determine whether the activity of obtaining sugar from the sugar cane constituted manufacture?

The
assessee, a co-operative sugar mill, bought sugarcane grown by its
members. It undertook a particular operation whose outcome was a final
product in the form of sugar. The question before the Supreme Court was
whether the final product (sugar) would make the assessee entitled to
claim to benefit of section 80P(2)(a)(iii) in respect of marketing of
the agricultural produce grown by its members?

According to the
Supreme Court, the crucial issue was, whether at the time of marketing
of sugar, the same could be said to have retained the character of
agricultural produce (sugarcane) grown by members of the society or did
it represent an independent commercial commodity which no longer had the
character of agricultural produce? In short, the controversy was,
whether the operation undertaken by the assessee constituted
“manufacture”?

According to the assessee, the process undertaken
was not a “manufacture”. Broadly, according to the assessee, sugar
(also called “sucrose”) is synthesised by the sugarcane plant from water
and atmospheric carbon dioxide by the method of photosynthesis.
Sugarcane, according to the assessee, is produced in the agriculture
fields. In the sugar factory, after juice is extracted from the
sugarcane, it is boiled. Microscopic crystals coalesce together to form
macroscopic crystals and molasses.

This, according to the
assessee, did not constitute “manufacture”. In this connection, reliance
was placed by the assessee on the opinion given by the technical
advisor at the request of the National Federation of Co-operative Sugar
Factories Ltd.

According to the Department, the above operation/
activity constituted “manufacture”. In this connection, the Department
placed reliance on paragraph 10 of the judgment in the case of CIT vs .
Oracle Software India Limited reported in (2010) 320 ITR 546 (SC), where
it was observed as follows (page 551):

“The term ‘manufacture’
implies a change, but every change is not a manufacture, despite the
fact that every change in an article is the result of a treatment of
labour and manipulation. However, this test of manufacture needs to be
seen in the context of the above process. If an operation/process
renders a commodity or article fit for use for which it is otherwise not
fit, the operation/process falls within the meaning of the word
‘manufacture’.”

According to the Supreme Court, the above test
had to be applied and adjudicated on a case-tocase basis. It depended on
the type of product which ultimately emerged from a given operation. In
its view, this aspect had not been examined by the courts below.

For
the above reasons, the Supreme Court remitted the case back to the
Commissioner of Income-tax (Appeals) to re-examine the matter, directing
that (i) Commissioner of Income-tax (Appeals) would give an opportunity
to the assessee to put forth the opinion of an independent expert who
shall not be from the society or federation; (ii) A copy of the written
opinion shall be given to the Department; (iii) The Department would be
free to engage its own expert who, in turn, will give his opinion; (iv)
The parties be given liberty to cross-examine the experts. The
Commissioner of Income-tax (Appeals) would thereafter decide the case
and ascertain whether the operation undertaken by the assessee is or is
not “manufacture”. The Supreme Court disposed of the civil appeals
accordingly.