1993 (9) TMI 6 - SC - Income Tax

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 ... Manufacture or produce articles - construction, manufacture or production of any article or thing - industrial undertaking - investment allowance - manufacture versus production - test of new and distinct commodityManufacture or produce articles - industrial undertaking - Construction of a dam does not amount to manufacturing or producing an article within the meaning of section 80HH(2)(i). - HELD THAT: - The Court applied the established test for 'manufacture' - whether the process converts the original commodity into a new and distinct article recognised in trade - and held that a dam, though composed of manufactured components, is an immovable constructed work and not a movable 'article' contemplated by the provision. The word 'articles' must be read in its commercial context together with the preceding words 'manufacture or produce'; construing 'articles' to include immovable structures would be to overstrain the language and depart from the statute's ordinary meaning. Reliance on dictionary definitions detached from context was rejected and the High Court's contrary conclusion was held impermissible.Assessee not entitled to deduction under section 80HH for construction of a dam; construction activity is not 'manufacture or produce articles' under the section.Manufacture or produce articles - industrial undertaking - Laying foundations by the pressure-piling process does not amount to manufacture or production of articles for the purposes of section 84(2)(iii). - HELD THAT: - The Court examined the pressure-piling method and concluded that laying in-situ piles is an integral part of a larger construction work and results in fixtures forming part of the completed structure; it is a works contract activity on the spot rather than production of distinct movable articles. If complete construction of structures (dams, bridges, buildings) is not 'manufacture or produce articles', the discrete activity of laying foundations cannot be characterised differently simply because of technological innovation. The High Court's affirmative answer was therefore reversed.Assessee engaged in pressure-piling foundations is not a newly established industrial undertaking within section 84 by reason of 'manufacture or production of articles.'Construction, manufacture or production of any article or thing - investment allowance - industrial undertaking - Machinery and plant installed for construction of dams and irrigation canals do not qualify for investment allowance under section 32A(2)(b)(iii) as 'for the purposes of business of construction ... of any article or thing.' - HELD THAT: - The Court held that sub-clause (iii) must be read in its statutory and legislative-historical context. The words 'construction' and 'thing' derive meaning from earlier provisions and the Schedules (Ninth/Eleventh) which concern movable 'articles or things' (including ships). The retention of 'construction' in the amended provision relates to items like ships; the term 'thing' was not intended to expand the phrase to immovable works such as dams, bridges, roads or canals. Reliance on dictionary meanings in isolation was rejected; the scheme, context and legislative history demonstrate that the sub-clause does not encompass construction of immovable structures and therefore the new machinery so used is not within the investment-allowance provision.Investment allowance under section 32A(2)(b)(iii) not available for machinery/plant installed for construction of dams, canals or similar immovable structures.Final Conclusion: The appeals challenging High Court and Tribunal decisions were allowed: construction of immovable structures (dams, bridges, canals, buildings) and allied on-site works (including pressure piles) do not amount to 'manufacture or produce articles' under sections 80HH/84, and machinery used for such construction does not qualify for investment allowance under section 32A(2)(b)(iii). 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.