INCOME-TAX OFFICER Vs. A JOSEPH LOUIS

JUDGEMENT

(1.) Accountant Member - These two appeals filed by the Revenue arise out of the common order passed by the Commissioner of Income-tax (A) for the asst. years 1983-84 and 1984-85.

(2.) The assessee is stated to be engaged in the manufacture of arrack and its sale. For the purpose of manufacture of arrack, the assessee had installed certain machinery and plant during the accounting years relevant to the asst. years 1983-84 and 1984-85. He claimed investment allowance in respect of the machinery and plant installed by him in his business as well as deductions under under section 80-I and 80HH of the Income-tax Act, 1961. Though the industries manufacturing alcoholic spirits are not entitled to investment allowance because they are included in the 11th Schedule, such prohibition does not extend to small scale industries involving such business activity. It is accepted by the Department that the assessee is a small scale industrial undertaking and so the prohibition under 11th Schedule does not apply to him. The assessees claim was that he purchases rectified spirit from the State Government, gets it tested for its ethyl alcohol content, specific gravity, miscibility with water and for other purposes. After satisfying himself that the rectified spirit is useful for arrack blending, it is mixed with water in certain vats and air compressors. The mixing of rectified spirit with water is done in certain specified proportions in order to get arrack of specified strength. This blending is made in the vats where the arrack is allowed to cure about 72 hours, during the course of which it gets fermented. The resultant product is tested, bottled, packed and sold by the assessee exclusively to a Government organization.

(3.) The assessees contention before the ITO was that it was an industrial undertaking manufacturing arrack and as such is entitled to investment allowance and other deductions under section 80-I and 80HH. This claim of the assessee was rejected by the ITO on the ground that mere mixing of rectified spirit with water does not involve any manufacturing activity, so as to result in a totally new product. For coming to the above decision, he followed the decision of the Kerala High Court in the case of Cit V. Casino (P.) Ltd., 1973 91 ITR 289. On appeal, the CIT (A) upheld the assessees claim. He considered that the various processes involved in the conversion of rectified spirit into arrack by blending, with treated water, amounted to a manufacturing activity, as it brings forth a commercially new product. He accordingly accepted the assessees claim for reliefs under the above sections.