Case B56

Judges:
AM Donovan Ch
JD Davies M
GR Thompson M

Court:
No. 2 Board of Review

Judgment date: 1 September 1970.

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A. M. Donovan (Chairman), J. D. Davies and G. R. Thompson (Members): The taxpayer, a private company and a producer of split peas, claimed, in its return of income for the substituted accounting period ended 29 July 1967, the special deduction for investment in manufacturing plant provided by the provisions of sec. 62AA of the Income Tax Assessment Acts. The plant in question is a new silo erected for the taxpayer in that year and the deduction claimed is $5,264. The taxpayer considers that a deduction of $2,005 relative to another silo erected in a prior year is properly disallowed. The silo is conceded by the Commissioner to be plant save for one portion which forms an annexe to the main silo building and provides shelter to a reception pit into which dried peas are dumped from delivery trucks prior to their being conveyed into the silo proper. It is said by the Commissioner's representative that this annexe merely provides shelter for the reception pit and does not function as plant. This Board has, however, shown reluctance to notionally separate some part of a building from the whole and regard that part as plant or not plant because of the separate function which it plays in the taxpayer's operations. We think the annexe should be regarded as an integral part of the silo as a whole and that the whole is plant. The proper functioning of the silo requires its reception pit or bin to be sheltered from the elements.

2. The principal issue, however, is whether the split peas produced by the taxpayer are ``manufactured goods... derived from other goods'' within the meaning of sec. 62AA(2)(a)(i) of the Act. The taxpayer receives dried field peas into its silo. Field peas are edible fresh only during a very limited period of maturity and are not, therefore, sold as fresh peas in shops and, moreover,

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are not, like blue boiler peas, suitable for sale as whole dried peas for they have an inedible skin and also a germ which, if retained in the pea after the skin is removed, leads to rancidity. Field peas can be grown and harvested, however, quite cheaply, and the taxpayer finds it economical to acquire dried field peas and to put these peas through processes which remove, firstly, the foreign matter acquired from the harvesting processes, and, secondly, the skin and germ. The grinding process which removes the skin and the germ splits the peas through their natural division into halves leaving split peas for which there is an extensive market as dried food.

3. From the time when the dried peas are received into the taxpayer's reception pit until they are finally packed or bagged, the peas proceed through a series of processes by means of highly mechanised plant, human labour taking apparently little part in the processes. The peas pass through a number of machines which, by various techniques, remove all foreign matter, the dirt, foreign seeds, shells, stones and under-sized, over-sized and broken peas, leaving only clean peas which are then graded into suitable sizes. These graded or sized peas are passed through machines which grind off their skin or outer shell and split them down their natural divisions allowing the germ to fall away. The shells, germ, dust and broken pieces of pea are removed; and the split peas are passed through a steam or sterilising process which both kills the bacteria on and near the surface and gives the halves a translucent and appealing appearance. The split peas are bagged or packaged.

4. This brief description does not do justice to the many processes through which the peas are passed; but it is sufficient if we have conveyed that tons of whole peas are fed into one end of a production line and tons of split peas appear at the other end in due course after passing through many machines taking up a large area in a factory. The volume alone leads to the inference that commercial production of split peas must necessarily be a machine or factory and not a hand operation. No evidence was given to the Board as to the history of the production of split peas and we do not know for certain whether it was at any time achieved by a natural process or a hand operation. The evidence before the Board is, however, against that view, for it was said that the removal of the skin and the subsequent removal of the germs by the splitting of the peas are necessary for the production of edible dried food from field peas but that, although a person with a knife would be able to achieve this, he would not find it easy to do so.

5. The terms of sec. 62AA were discussed in
M.P. Metals Pty. Ltd. v. F.C. of T., 117 C.L.R. 631 and by this Board in
16 T.B.R.D. 71 Case R71. ``Manufactured goods'', like ``plant'' is a difficult term having no precise defined or legal connotation but depending for its application upon conventional usages of language. Conventional use of language is not necessarily founded or dependent upon logic and neither ``plant'' nor ``manufactured'' are, in conventional use, often used as terms of definition. We have to consider whether split peas are ``manufactured goods'' and ``goods... derived from other goods''. In Case R71, at p. 352 of the report, the Chairman and Mr. Davies said: ``The word `manufacture' originally conveyed, as a verb, the action or process of making by hand. It came later to mean, as a verb, the making of articles or material by physical labour or mechanical power; and its application is now most commonly found, in ordinary usage, in relation to production on a large scale. But its meaning is not so limited and, as a verb, the word `manufacture' is properly used to describe the making of an artificial as distinct from a natural product. As an adjective, however, and the word is so used in the section, `manufactured' has ordinarily a more restricted use and connotation. One cannot be precise about the matter, but it is possible to point to examples.''

6. Split peas cannot be categorised happily as either artificial or natural products. They belong to a nether world. They derive from a natural product but are not themselves in a form consistent with natural processes or laws. To produce a split pea it is necessary to proceed to a further stage than, for example, to remove the protective shell of an almond or the skin from a banana. The almond and the banana in such circumstances are, like the pea removed from its pod, natural products. But nature has no purpose for a split pea. In the M.P. Metals case, at p. 637, Windeyer J. said-

``Ordinarily speaking, manufactured goods are goods produced for sale, commodities of commerce. Ordinarily speaking, the term is restricted to commodities made from

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inanimate objects: a butcher who kills a sheep would not normally be called a manufacturer of mutton. And it has become common for some purposes to distinguish between manufactured goods and agricultural products. But which description is apt in a particular case may depend upon the matter in hand. For example, a butter factory is a place where butter is manufactured....''

His Honour there highlighted the precise difficulties with which we are faced.

7. In Ref. B.89/1968, an unreported decision of the No. 3 Board of Review, that Board took the view that crushed oats, whole oats and rolled oats were not manufactured goods. The Board took the view that the oats were still identifiable as oats, though processed, and were neither manufactured goods nor manufactured goods derived from other goods. In the present reference, the Commissioner's representative submitted that the taxpayer's production does not result in an end product identifiable as a different thing from that with which it starts. He submitted that the split peas are still identifiable as peas, though split. We think, on the whole, though not without doubt, that the split peas should be regarded as not only commercially but factually different goods to the goods with which production commences. We think those different goods, the split peas, should be regarded as manufactured, the processes which the goods undergo being essentially factory and large volume processes. We are of the opinion, then, that the split peas produced by the taxpayer are manufactured goods derived from other goods within the meaning of sec. 62AA.

8. For these reasons, we would uphold the taxpayer's objection and would amend the assessment to allow to the taxpayer a further deduction of $5,264.

Claims allowed in part