Shipbreaking is not manufacture when it only dismantles scrap and does not create a commercially distinct article.

Shipbreaking was held not to constitute manufacture or production for deductions under sections 80HH, 80HHA and 80-I because the statutory test requires a process that creates a new and commercially distinct article with a different name, character or use. Dismantling a ship purchased as scrap and segregating recovered materials for sale did not meet that standard, so the deductions were denied. The additional tax under section 104 was also held leviable because the cancellation of that levy depended only on the rejected premise that the assessee was engaged in manufacturing; once that premise failed, the levy was restored.

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Issues: (i) Whether shipbreaking activity amounts to manufacture or production so as to qualify for deduction under sections 80HH, 80HHA and 80-I of the Income-tax Act, 1961. (ii) Whether additional tax under section 104 of the Income-tax Act, 1961 was leviable on the assessee.

Issue (i): Whether shipbreaking activity amounts to manufacture or production so as to qualify for deduction under sections 80HH, 80HHA and 80-I of the Income-tax Act, 1961.

Analysis: The expression "manufacture" in the income-tax provisions had to be applied in its statutory context and not by importing the wider meaning given under the Bombay Sales Tax Act, 1959. The governing test was whether the process brought into existence a new and distinct article with a different name, character or use. Shipbreaking merely involved dismantling a ship purchased as scrap and segregating its materials for sale. No transformation into a commercially distinct new article took place, and the activity did not amount to a manufacturing process for the purposes of the deduction provisions.

Conclusion: Shipbreaking did not amount to manufacture or production under sections 80HH, 80HHA and 80-I, and the assessee was not entitled to the deductions.

Issue (ii): Whether additional tax under section 104 of the Income-tax Act, 1961 was leviable on the assessee.

Analysis: The levy under section 104 had been cancelled by the first appellate authority only on the premise that the assessee was engaged in a manufacturing concern. Once the shipbreaking activity was held not to be manufacture, that premise failed and the levy had to stand restored.

Conclusion: The additional tax under section 104 was leviable and the Assessing Officer's order was restored.

Final Conclusion: The revenue succeeded on all substantive issues. The appellate orders were set aside and the assessment orders were restored.

Ratio Decidendi: For the purposes of sections 80HH, 80HHA and 80-I of the Income-tax Act, 1961, manufacture requires a process that results in a new and commercially distinct article; mere shipbreaking and sale of recovered material does not satisfy that test.

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