A. V. Balasubramanyam, Judicial Member - (1.)THESE cross-appeals arise out of the order of the CIT(A), dated 20-7-1988, passed in relation to assessment for the year 1983-84.
(2.)The assessee is a firm carrying on export business of cashew kernels and shell oil. Alleging that it is an industrial undertaking engaged in the manufacture or production of an article, two claims were made. One was for deduction under Section 80HH and the other was under Section 80J. Both were rejected by the Income-tax Officer almost for identical reasons. In appeal, the CIT(A) sustained the rejection in respect of the relief under Section 80HH. But the claim for 80J relief succeeded before the first appellate authority. The assessee is in appeal re-asserting its claim for relief under Section 80HH. The revenue has brought an appeal objecting to the relief allowed under Section 80J. Since the related facts are mostly common, the two appeals were consolidated for a common hearing.
Some relevant facts may be stated at the outset. Though the office of the assessee is in Quilon, the location of the industry is in a backward area and the CIT(A) mentions that there was no dispute about this. The assessee's business activity is like this: It purchases cashew nuts from various parties. These nuts are subjected to sun drying by the assessee itself. The articles arc given to another concern for getting the same roasted and shells peeled off. The assessee gets back the articles in that state and packs them up and ship as finished product. The finished product is called cashew kernels. This seems to be the state of affairs in which the manufacturing or production activity is carried on. The authorities below state that the assessee's activity was not one of manufacture or production of an article or thing. According to them it was a mere trading activity of purchasing and selling, for some of the important things such as roasting and dehusking are done by a third party.

(3.)SRI K.L. Kulathu, appearing for the assessee, placed great reliance upon the decision of the Madras High Court in the case of Dinod Cashew Corporation. v. Dy. CTO [1986] 61 STC 1. The petitioner therein exported cashew kernels after processing the raw cashew nuts purchased by it. The point was whether the cashew kernels exported and the raw cashew nuts purchased were commercially two different items. Though the question cropped up in the context of sales tax law, the logic explained in the judgment has all bearing to the appeals before us. The cashew nuts purchased were subjected to required process which ultimately resulted in cashew kernels. The two were said to be commercially different articles if the test of identity is to be applied. It follows that the new product is different from the article with which a start was made. It is a familiar principle that when a commercially new article is produced, either by a manual force or mechanical force or even by nature's own process, such as drying in sunlight, there is manufacture or processing of goods. If an authority is required, reference may be made to the decision of the Kerala High Court in the case of CIT v. Casino (P.) Ltd. [1973] 91 ITR 289 and this is what their Lordships have stated while considering the phrase "manufacture or processing of goods":
The term 'manufacture or processing of goods' has not been defined by the Finance Act, 1968. In its ordinary meaning 'manufacture' is a process which results in an alteration or change in the goods which are subjected to such manufacture. A Commercially new article is produced. The production may be by manual force, mechanical force or even by nature's own process such as drying by heat of the sun as in a salt pan. The real test is to see whether a commodity which in a commercial sense is different from the raw materials has resulted due to the manufacture. 'Processing' has in one sense a wider meaning than the term manufacture. But, in the context of the Finance Act, 1968, this does not appear to be the position. The Finance Act, 1968, gives certain benefits to industrial companies which satisfy certain requirements. The four categories of companies which are included in the term are those mainly engaged in the business of generation or distribution of electricity or any other form of power, or mainly engaged in the construction of ships or similarly engaged in mining, or in the manufacture or processing of goods. This indicates that the reference is to manufacturing concerns as against trading concerns.

In the Income-tax Act also the expression' 'manufacture or produce articles" found in Section 80HH(2) is not defined. The same comment applies to a similar expression found in Section 80J(4). Therefore, the ordinary meaning has to be given and if that is done, turning of raw cashew nuts into cashew kernels involves an activity of manufacture or production of an article.