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" for deductions under ss. 80HHA and 80-I. Since "industrial undertaking" is undefined in the IT Act, it was construed liberally in a commercial sense; the activity qualified as an industrial undertaking, and commencement after the specified date was undisputed. Applying the SC test that manufacture/production requires transformation yielding commercially distinct movable articles, the HC held that ship-breaking results in new, independently saleable commercial commodities different from the original ship, including by-products and residual products. Consequently, the Tribunal's view was reversed, deductions under ss. 80HHA and 80-I were allowed, and the appeals were allowed in favour of the assessee.

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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.

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