Dam construction not manufacture or production; no s.80HH deduction or s.32A(2)(b)(iii) investment allowance for civil works

SC held that construction of a dam cannot be characterised as "manufacture" or "production" of an "article" under s. 80HH; such expressions are associated with movable goods, not immovable constructions like dams, bridges, roads, canals or buildings. Consequently, the assessee was not entitled to deduction under s. 80HH. Interpreting s. 32A(2)(b)(iii), SC further held that the words "construction, manufacture or production of any article or thing" are confined to movable articles or things (including ships) and do not extend to civil construction works such as dams or canals; investment allowance was therefore not available for machinery used in such works. The Revenue's appeal was allowed, including against the HC decision granting s. 32A benefit for machinery employed in digging borewells.

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Issues Involved:
1. Interpretation of "manufacture or produce articles" in Section 80HH and Section 84 of the Income-tax Act, 1961.
2. Interpretation of "construction, manufacture or production of any article or thing" in Section 32A of the Income-tax Act, 1961.
3. Determination of whether construction activities can be classified as "industrial undertakings" eligible for tax benefits under the specified sections.

Issue-wise Detailed Analysis:

1. Interpretation of "manufacture or produce articles" in Section 80HH and Section 84:
The first group of appeals addresses the interpretation of the terms "manufacture or produce articles" as used in Section 80HH and Section 84 of the Income-tax Act, 1961. The primary question was whether the construction of a dam could be considered as manufacturing or producing an article.

The Orissa High Court had previously ruled in favor of the assessee, stating that the construction of a dam could be characterized as an industrial activity and that a dam could be considered an article. However, this view was contested by the Revenue, which argued that constructing a dam does not fall within the ambit of manufacturing or producing articles. The Supreme Court agreed with the Revenue, stating that a dam is constructed, not manufactured or produced, and thus does not qualify as an article under the said sections. The Court emphasized that the words "manufacture" and "produce" are typically associated with movable goods and not with construction activities.

2. Interpretation of "construction, manufacture or production of any article or thing" in Section 32A:
The second group of appeals dealt with the interpretation of the terms "construction, manufacture or production of any article or thing" in Section 32A of the Income-tax Act, 1961. The issue was whether machinery and plant used in construction activities, such as building dams and canals, qualify for investment allowance under this section.

The Karnataka High Court had ruled in favor of the assessee, allowing the investment allowance. However, the Supreme Court disagreed, stating that the terms "construction" and "thing" in Section 32A should not be interpreted to include immovable properties like dams, bridges, roads, and canals. The Court held that the legislative history and context of the provision indicate that it applies to movable objects, and thus, construction activities do not qualify for the investment allowance.

3. Determination of whether construction activities can be classified as "industrial undertakings":
The appeals also involved determining whether construction activities, such as building dams and laying foundations, could be classified as "industrial undertakings" eligible for tax benefits under the specified sections.

The Supreme Court noted that both the Tribunal and the High Court had characterized the construction of a dam as an industrial undertaking, and no arguments were presented by the Revenue to contest this view. Therefore, the Court proceeded on the assumption that the assessee's activities constituted an industrial undertaking. However, the Court clarified that even if the construction activities were considered industrial undertakings, they still did not meet the criteria of manufacturing or producing articles as required by the relevant sections of the Income-tax Act.

Conclusion:
The Supreme Court allowed the appeals filed by the Commissioner of Income-tax, holding that the construction of dams and similar activities do not qualify as manufacturing or producing articles under Section 80HH and Section 84. Additionally, the Court ruled that machinery and plant used in such construction activities do not qualify for investment allowance under Section 32A. The Court emphasized the importance of interpreting the terms in their normal commercial sense and within the context of the legislative provisions.

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