IN
THE ITAT PUNE BENCH (SPECIAL BENCH)
Dhariwal
Industries Ltd.
v.
Assistant
Commissioner of Income-tax (Inv.), Circle 2(1)/Additional Commissioner of
Income-tax, Range-1, Pune
G.
C. Gupta and C. L. Sethi, Judicial Member
And
D. K. Srivastava, Acountant Member
IT
Appeal Nos. 203 (PN) of 1996, 1182 (Pune) of 1997, 169 (Pune) of 1998, 864 and
865 (Pune) of 2002, 960 and 961 (Pune) of 2003 and 1612 (PN) of 2004
[Assessment
years 1993-94 to 1995-96 and 1997-98 to 2001-02]
August
14, 2007
Section 80-I, read with section 80-IA and Eleventh Schedule, of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings, etc. after certain dates - Assessment years 1993-94 to 1995-96 and 1997-98 to 2001-02 - During relevant years, assessee was engaged in business of manufacture and sale, inter alia, of gutkha and in respect of those manufacturing activities, it claimed deduction under section 80-I, read with section 80-IA - However, Assessing Officer held that gutkha manufactured by assessee was a tobacco preparation within meaning of Item No. 2 in List of Articles or things appearing in Eleventh Schedule to Act and, hence, assessee was not entitled to deduction claimed - As against that, case of assessee was that gutkha was not a tobacco preparation inasmuch as tobacco was neither a dominant nor substantial ingredient in gutkha and further, that listing of products in Item No. 2 was quite exhaustive and in absence of inclusion of gutkha therein, scope of ‘tobacco preparations’ could not, therefore, be extended beyond specific products enumerated in Item No. 2 - Whether notwithstanding fact that gutkha contains tobacco only to extent of 6-7 per cent, since tobacco in gutkha retains all qualities of tobacco including pharmacology of nicotine and physiological and psychological effects of nicotine and to same extent as in other forms of tobacco use, gutkha would fall under expression ‘tobacco preparations’ - Held, yes - Whether further, without prejudice to aforesaid, word ‘chewing tobacco’ in Item No. 2 would also cover ‘gutkha’ within its sweep and ordinary meaning and, hence, absence of its individual denomination in Item No. 2 of Eleventh Schedule is not material - Held, yes - Whether, thus, gutkha containing tobacco would be ‘tobacco preparations’ and ‘chewing tobacco’ within meaning of Item No. 2 of Eleventh Schedule and, hence, assessee was not entitled to claim deduction under section 80-I/80-IA - Held, yes
During the assessment years 1993-94 to 1995-96 and 1997-98 to 2001-02, the assessee-company was engaged in the business of manufacture and sale, inter alia, of gutkha. In respect of its manufacturing activities, the assessee claimed deduction under section 80-I/80-IA. For all the assessment years in question, the issue before the Special Bench was as to whether gutkha manufactured by the assessee fell under the expression ‘tobacco preparations’ within the meaning of Item No. 2 of the Eleventh Schedule to the Act so as to deprive the assessee of the special relief under sections 80-I and 80-IA. The revenue contended that the benefit of section 80-I could not be granted to any industrial undertaking if it was found engaged in the manufacture or production of any article or thing specified in the Eleventh Schedule, that in view of Item No. 2 in the ‘List of articles or things’ appearing in the Eleventh Schedule, an industrial undertaking manufacturing or producing ‘Tobacco and tobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff’ was not eligible for deduction under section 80-IA and, consequently, the assessee was not entitled to the benefit of section 80-I/80-IA. On the other hand, the assessee contended that gutkha was not a tobacco preparation as the expression ‘tobacco preparations’ would cover only those preparations in which substantial, main and dominant ingredient was tobacco and since tobacco constituted 6-7 per cent in gutkha, it could not be said that tobacco was substantial, main and dominant ingredient in gutkha so as to call it a ‘tobacco preparations’. It was further contended that the listing of products in Item No. 2 was quite exhaustive and the scope of ‘tobacco preparations’ could not, therefore, be extended beyond the specific products enumerated therein, and fact that gutkha was not included in the list, indicated that it could not be said to be a ‘tobacco preparations’.
‘Tobacco’ as used in Item No. 2 of the Eleventh Schedule connotes the
processed narcotic leaves obtained from the plants in genus Nicotiana. In
addition to ‘tobacco’, Item No. 2 in the Eleventh Schedule also uses another
expression, namely, ‘tobacco preparations’. The element of tobacco is common in
both ‘tobacco’ and ‘tobacco preparations’. But, it does not mean that both the
expression, namely, ‘tobacco’ and ‘tobacco preparations’ carry the same meaning
the import. If the meaning of both of them had been the same, there would then
have been no occasion to use both of them in Item No. 2. When the Legislature
enacts a particular phrase in a statute the presumption is that it is saying
something which has not been said immediately before. The rule that a meaning
should, if possible, be given to every word in the statute implies that the
words add something which has not been said before. Leaves of plants in genus
Nicotiana are first processed before being put to use. There can be two forms
in which the said processed leaves can be put to use. First form of use is
where the said leaves are used directly after being processed. The phrase
‘tobacco’ in Item No. 2 would, therefore, cover a product in which processed
tobacco leaves are used directly in substantial quantity, like, cigarette,
cheroot, hookah, etc. ‘Tobacco preparations’ would cover all those preparations
and products which are prepared using tobacco if the properties to tobacco are
retained in the preparation without undergoing any metamorphosis as a result of
addition of other ingredients. In such a case, the preparation would qualify to
be called a ‘tobacco preparations’. Notwithstanding the fact that gutkha
contains tobacco to the extent of 6-7 per cent, the tobacco in gutkha retains
all the qualities of tobacco including the pharmacology effects of nicotine and
the physiological and psychological effects of nicotine and to the same extent
as in other forms of tobacco use. It has also to be kept in view that the
quantity and rate of absorption of nicotine present in chewing tobacco is much
higher, faster and far more effective than in the use of smoking tobacco as the
chewing tobacco is absorbed directly and immediately in the body in full
quantity through extremely sensitive month tissues. [
Tobacco has a very unpleasant taste and, therefore, it is orally consumed better when it is mixed with other ingredients. That is why the Legislature has taken care to include ‘tobacco preparations’ together with ‘tobacco’ in Item No. 2. Tobacco, in the form of processed leaves, is never the only constituent in spit or chewing tobacco. It is neither possible nor practicable to orally consume tobacco, i.e., processed leaves for several reasons. That is why several ingredients are added so as to make the ‘chewing tobacco’ taste pleasant, palatable and attractive for human consumption. All these are matters of common knowledge. gutkha or pan masala containing tobacco will not become tobacco-less preparations on the sole ground that the content to tobacco is 6-7 per cent ignoring the fact that the said composition of tobacco in gutkha or pan masala containing tobacco carries the same pharmacology of nicotine and physiological or psychological effects of nicotine as other tobacco products, like cigarettes, cheroots, etc. [Para 34]
The assessee vehemently contended that a preparation would not be a
tobacco preparation unless tobacco was its main or dominant ingredient.
According to him, an ingredient would be a dominant ingredient in any
preparation if it constituted a substantial portion in the overall composition
of the preparation either in terms of quantity or value or base. An ingredient
in a preparation would be a dominant one if its properties dominate or prevail
over other ingredients present in the preparation regardless of the fact that
smaller quantity of such an ingredient is used in the preparation than the
quantities of other ingredients. Gutkha having tobacco content of 5 to 7 per
cent carries the same pharmacology of nicotine and causes the same
physiological and psychological effect as any other tobacco preparation or
product individually specified in Item No. 2. Other ingredients are added to
make the spit or chewable tobacco. i.e., gutkha taste pleasant and
palatable and this is what is exactly done in the manufacturing of gutkha and
pan masala containing tobacco. Thus, the tobacco content present in Gutkha has
dominant effect over all other ingredients in gutkha. Other ingredients in
gutkha simply make it tasty and easy to chew the tobacco present in gutkha
without affecting the quality or potency of the tobacco. It is neither the size
nor the length nor the quantum of the ingredient in a preparation which can
decide by itself as to what is the dominant or main ingredient in a preparation
but the strength or potency of an ingredient which would decide as to what is
the dominant ingredient in a preparation. Therefore, it could not be said that
gutkha and pan masala containing tobacco should not be treated as tobacco
preparation only because of the fact that tobacco constituted a small portion, i.e.,
6 to 7 per cent to their overall composition. [
Besides, the expression ‘tobacco preparations’ has to be understood in
contradistinction to a ‘tobacco-less preparation’. As a ‘tobacco-less
preparation’ cannot become a ‘tobacco preparation’, a ‘tobacco preparation’, by
the same logic, cannot become ‘tobacco-less preparation’. It cannot be said
that ‘Gutkha’ is a ‘tobacco-less preparation’. [
The assessee then contended that the seven items enumerated in Item No.
2, namely, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes
and cigarettes, chewing tobacco and snuff were quite exhaustive and therefore
would restrict the scope of ‘tobacco preparations’ to those seven products
alone and that there was therefore no scope to treat gutkha and pan masala
containing tobacco as ‘tobacco preparations’. A careful perusal of the
aforesaid seven items in Item No. 2 of the Eleventh Schedule would show that
all the seven items fall in the category of (i) smoking tobacco, or (ii)
smokeless tobacco, i.e., chewing tobacco or snuff. Therefore, the
expression ‘tobacco preparations’ in Item No. 2 needs to be construed in a
manner that includes all the aforesaid three forms of tobacco use namely
smoking tobacco and smokeless tobacco comprising of chewing tobacco and snuff.
Those seven items make it absolutely clear that all the aforesaid three forms
of tobacco use have been included within the phrases ‘tobacco’ and ‘tobacco
preparations’. The purpose of enumerating seven items in Item No. 2 is to
include all forms of tobacco use and cover them either in ‘tobacco’ or in ‘tobacco
preparations’ and not to restrict the phrase ‘tobacco preparations’ to those
seven items alone. That is why general phrases like ‘tobacco’ or in ‘tobacco
preparations’ are followed by specific words in Item No. 2. It is not the
purpose of enumeration of all the aforesaid items that the words ‘tobacco
preparations’ should receive interpretation so a to restrict the expression
‘tobacco’ or in ‘tobacco preparations’ to those seven items alone. If that had
been the intention of the Legislature, then there was no need to use the words
‘tobacco’ or in ‘tobacco preparations’ in Item No. 2. The Legislature, in that
case, would have specified those seven items alone without using the expression
‘tobacco’ or in ‘tobacco preparations’ preceding them. This further strengthens
the view that the purpose of enumeration of all the seven items in Item No. 2
is to illustrate, by way of example, the various forms of tobacco use and to
cover all of them under the expression ‘tobacco’ and ‘tobacco preparations’.
What is intended by the inclusion of seven items in Item No. 2 is that all the
aforesaid forms of tobacco use must be included under the expression ‘tobacco’
or in ‘tobacco preparations’ and that none of them must be excluded from their
purview. Therefore, listing of the seven items in Item No. 2 is not intended to
convert the smokeless use of tobacco like ‘Gutkha’ from being a ‘tobacco
preparations’ into a ‘tobacco-less preparations’. Without prejudice to the
aforesaid, if the aforesaid seven items were still to be treated as exhaustive
or limiting/restricting the meaning of the words ‘Tobacco preparations’, then
the limiting/restriction placed by them would be that the expression ‘tobacco
preparations’ would extend to cover the use of tobacco either as smoking tobacco
or smokeless tobacco and to no other form of tobacco use. In that case also,
the smokeless use of tobacco will cover gutkha manufactured by the assessee
and, thus, fall under the expression ‘tobacco preparations’. [
The assessee, however, contended that the words ‘such as’ in Item No. 2
are always words of limitation. The said contention could not be accepted. In
the contextual setting of Item No. 2 of the Eleventh Schedule, the expression
‘such as’ indicates that what are mentioned thereafter are only illustrative of
the various forms of tobacco use and ‘tobacco preparations’. Therefore, all the
seven items specified in Item No. 2 of the Eleventh Schedule are illustrations
of various forms of ‘tobacco preparations’ and their use. [
Even assuming for a while that the expression ‘such as’ in Item No. 2 is
in the nature of limitation, in the event of that assumption, the natural
question would be whether gutkha manufactured by the assessee fell under any of
the items specified in Item No. 2 of the Eleventh Schedule. One of the items
mentioned therein is chewing tobacco. If the gutkha and pan masala containing
tobacco fall under ‘chewing tobacco’, they would be specifically also covered
by Item No. 2 of the Eleventh Schedule. ‘Chewing tobacco’ is something, which
one neither smokes nor swallows. All one has to do is to slosh it around in his
mouth and spit out the brown juices every few seconds. It may be pretty
disgusting but after all this is what is called ‘chewing tobacco’ or spit
tobacco - a form of smokeless tobacco. It is well known that gutkha and pan
masala containing tobacco are chewed and would therefore also fall under the
expression ‘chewing tobacco’ which is one of the items denominated in Item No.
2 of the Eleventh Schedule. It was not the case of the assessee that ‘Gutkha’
was chewed sans tobacco in it. Tobacco in gutkha is also chewed. Gutkha is,
thus, nothing but a different form of tobacco use through mouth. Gutkha belongs
to the genus ‘chewing tobacco’ as also ‘tobacco preparations’. Thus gutkha and
pan masala containing tobacco will be covered not only by the expression,
namely, ‘tobacco preparations’ but also by the specific denomination, namely
‘chewing tobacco’ in Item No. 2 of the Eleventh Schedule. Thus, the submission
of the assessee that gutkha was not a tobacco preparation because it was not
specifically covered by any of the items denominated in Item No. 2 of the
Eleventh Schedule did not help the assessee even if the words ‘such as’ in Item
No. 2 were treated as words of limitation. [
Further, the Eleventh Schedule was inserted in the Act by the Finance
(No. 2) Act 1977 with effect from 1-4-1978. It is a fact that the use of gutkha
and pan masala with tobacco was not widely known at that point of time notwithstanding
its production in smaller quantities by some company since 1970. Therefore, pan
masala containing tobacco or gutkha could not be included in Item No. 2. It
does not, however, alter the fact that the Legislature was well aware, when the
Eleventh Schedule was inserted in the Act, about the various forms of tobacco
use and, therefore, included all the forms of tobacco use prevalent at that
time, namely, smoking tobacco and smokeless tobacco specifically including
‘chewing tobacco’ in Item No. 2 of the Eleventh Schedule. Widespread use of
gutkha is a recent phenomenon. It nevertheless falls within the ambit of
‘tobacco preparations’ as also within the ambit of ‘Chewing tobacco’ in Item
No. 2 of the Eleventh Schedule. [
Further, the name of the assessee-company itself was ‘Dhariwal Tobacco
Products (P.) Ltd.’ Which showed that the assessee itself treated its own
products as tobacco products. Though, the assessee had since changed its name,
but that did not alter the perception of the assessee itself about the nature
of the products manufactured by it. [
Therefore, it was to be held that:
(i) The expressions ‘tobacco’ and ‘tobacco preparations’ in Item No. 2 of the Eleventh Schedule in the Act do not mean one and the same thing. While the expression ‘tobacco’ means processed narcotic leaves and, hence, ‘tobacco’ would mean a product in which the said leaves are substantially used in terms of quantity, value or base, the expression ‘tobacco preparations’ means a preparation using tobacco if the pharmacology of nicotine and physiological and psychological effects of nicotine are dominant and the properties of nicotine, a substance derived from tobacco, do not undergo any metamorphosis as a result of addition of other ingredients in the preparation. Tested on this principle, ‘Gutkha’ falls under the expression ‘tobacco preparations’.
(ii) The test whether an ingredient is a dominant one in a preparation is relevant for judging whether a preparation falls under the expression ‘tobacco preparations’ or not. The dominant nature of an ingredient in a preparation must be judged in the light of the fact whether the properties of that ingredient are retained and dominate the preparation without undergoing any metamorphosis as a result of the addition of other ingredients in the preparation. Tested on this principle also, gutkha falls under expression ‘tobacco preparations’.
(iii) The words ‘such as’ used in Item No. 2 are merely illustrative and not exhaustive. They are indicative of what are mentioned thereafter. In the contextual setting of Item No. 2 of the Eleventh Schedule, the words ‘such as’ are mere indication of various forms of tobacco use, namely, (i) smoking tobacco; and (ii) smokeless tobacco comprising of various forms of ‘chewing tobacco’ and ‘snuff’. Without prejudice to the aforesaid, the words ‘tobacco preparations’ in Item No. 2 would also cover ‘Gutkha’ within its sweep and ordinary meaning.
(iv) The fact that gutkha is not one of the items individually enumerated in Item No. 2 of the Eleventh Schedule does not mean that it does not fall under the expressions ‘tobacco preparations’ and ‘chewing tobacco’ used therein. In substance, gutkha is well covered by the aforesaid expressions and, hence, absence of its individual denomination in Item No. 2 of the Eleventh Schedule is not material. This is more so as gutkha was not widely used at the time when the Eleventh Schedule was inserted in the Act.
(v) In popular sense also, gutkha is used for its tobacco content, the taste of which is further enhanced by other ingredients present in gutkha. Those who are not interested in tobacco would never use gutkha for the reason that other variants of pan masala without tobacco are available in the market and, therefore, persons interested in using the other ingredients of gutkha would use them for the sake of taste of other ingredients and not gutkha. Besides, the name of the assessee, namely Dhariwal Tobacco Products (P.) Ltd., indicated that the assessee treated itself as a manufacturer of tobacco product and its gutkha as a tobacco products. Subsequent alteration in the name would not dilute the nature of the products produced by the assessee. Thus, it is evident that all concerned understand gutkha as falling under ‘tobacco preparations’ as well as under ‘chewing tobacco’ in Item No. 2.
(vi) Classification of goods under legislations dealing with levy of taxes and duties on them is relevant only for the purpose of those legislations. They are not relevant for the purpose of interpreting the expressions ‘tobacco’, ‘tobacco preparations’ and ‘chewing tobacco’. The meaning of the aforesaid expression used in Item No. 2 has to be seen in their contextual setting in Item No. 2 of the Eleventh Schedule.
(vii) The judgment of the Allahabad High Court declining to admit
the reference application filed by the department against the order of a
Division Bench of the Tribunal at Allahabad in Kothari Products Ltd.’s case
(supra) and the Supreme Court declining to interfere with the aforesaid
judgment of High Court is an authority for the proposition that the issue
whether gutkha falls under the expression ‘tobacco preparations’ within the
meaning of Item No. 2 of the Eleventh Schedule is a pure question of fact. The
finding of fact in the instant case would be that gutkha manufactured by the
assessee fell under the expressions ‘tobacco preparations’ as well as ‘chewing
tobacco’ within the meaning of Item No. 2 of the Eleventh Schedule. [
Thus, it was to be held that gutkha and pan masala containing tobacco are
‘tobacco preparation’ and ‘chewing tobacco’ within the meaning of Item No. 2 of
the Eleventh Schedule to the Act. Since the assessee was manufacturing or
producing gutkha, which is one of the items covered by the Eleventh Schedule,
the assessee was not entitled to claim deduction under section 80-I/80-IA. [