2001 (5) TMI 43 - HC - Income Tax

Ship-breaking of government-bought unserviceable vessels treated as manufacturing activity; deductions allowed under ss. 80HHA and 80-I.

Ship-breaking of unserviceable vessels purchased through government agencies was examined to determine whether it constitutes 'manufacture or production' ... Entitlement to the benefit of ss. 80HHA and 80-I - Manufacture Or Production - industrial undertakings - Concept of 'ship-breaking activity' - Conversion of unserviceable ships obtained through Government agencies, like Metal Scrap Trading Corporation Ltd. (MSTC) - Whether, the Tribunal was justified in holding that the ship-breaking activities in which assessees were engaged did not amount to manufacturing or production activities for the purpose of deductions under ss.80HHA and 80-I of the Act. not entitling them, to claim deductions under the said provisions of the Act? - HELD THAT:- The IT Act does not define the expression 'industrial undertaking'. Therefore, reference to its definition in similar enactments or adoption of its ordinary meaning is inevitable. Considering the object of the enactment of the provision under consideration, the said expression will have to be construed liberally in a broader commercial sense, keeping its object in mind. There is no much debate on this aspect of the matter. The concept of industrial undertaking need not be necessarily be confined to manufacture and production of articles and even in the absence of either of them there could be an industrial undertaking. The assessees are, therefore, well within the expression of industrial undertaking. In this view of the matter, the only question arises, therefore, is whether the assessees had begun to manufacture or produce the articles after the specified date in any backward area. It is not in dispute that the assessees have commenced their work after the specified date. There must be a transformation of kind and new different item should have been emerged having different features. For manufacture there should be some alteration in the nature or character of the goods. By process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the things produced is by itself a commercial commodity capable of being sold or supplied. The material from which thing or article is produced or manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. The apex Court in the case of CIT vs. N.C. Budharaja & Co. [1993 (9) TMI 6 - SUPREME COURT] observed that the word 'production' or 'produce' takes into account au the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. The apex Court while considering the next word 'articles' occurring in the said clause and noticed that the word 'articles' is preceded by the words 'it has begun of begins to manufacture or produce' and reached to the conclusion that the expressions 'manufacture' and ' produce' are normally associated with movables i.e., articles and goods, big and small. Applying the said yardstick adopted by the apex Court and considering the peculiar nature of the ship-breaking activity as mapped in para. 6 we are of the view that the ship-breaking activity gives rise to manufacture and production of altogether a new commercial articles or things which are commercially identifiable in the commercial world other than the ship and, therefore, the assessees should be held entitled to claim deductions under ss. 80HHA and 80-I of the Act. Thus, we answer the question referred to us for out opinion in the negative i.e., in favour of the assessee and against the Revenue. The appeals are allowed. Issues: Whether ship-breaking activity carried out by the assessees amounts to 'manufacture or produce any articles or thing' for the purpose of claiming deductions under sections 80HHA and 80-I of the Income-tax Act, 1961.Analysis: The statutory phrases 'manufacture' and 'produce' must be construed in their ordinary and commercial sense and in the context in which they appear; 'produce' has a wider connotation than 'manufacture' and, when used together, the words indicate that production may include processes not strictly manufacturing in narrow sense. The test applied is whether the activity effects a transformation resulting in a new and distinct commercial commodity having its own name, character, use and market identity. Ship-breaking was found to involve systematic processes, labour and specialised technique that convert a ship (the input) into identifiable outputs (re-rollable steel, melting steel, cast iron scrap, non-ferrous metals, timber, PVC etc.) which are commercially distinct from the ship and are used as raw material by other industries. Prior authoritative decisions treating ship-breaking as manufacture or production were followed where facts show the ship purchased is a ship (not merely scrap) and the activity effectuates transformation into distinct commercial articles; decisions distinguishing cases where the purchaser bought condemned ships already amounting to scrap were held fact-specific and inapplicable here.Conclusion: The ship-breaking activities constitute manufacture or production of articles or things within the meaning of sections 80HHA and 80-I of the Income-tax Act, 1961; the findings adverse to the assessees are set aside and the appeals are allowed.