1997 (9) TMI 139 - AT - Income Tax

Ship-breaking not manufacturing/production: Tribunal denies tax deductions. Revenue challenge dismissed.

The Tribunal held that ship-breaking activities do not qualify as manufacturing or production processes, thus denying deductions under sections 80HH and ... - Issues Involved:1. Eligibility of ship-breaking activities as an industrial undertaking for deductions under sections 80HH and 80-I of the Income Tax Act, 1961.2. Deletion of additions under section 43B of the Income Tax Act, 1961.Issue 1: Eligibility of Ship-Breaking Activities for Deductions under Sections 80HH and 80-IThe primary issue brought before the Appellate Tribunal was whether the activity of ship-breaking qualifies as an industrial undertaking involved in the manufacture or production of articles or things, thereby making it eligible for deductions under sections 80HH and 80-I of the Income Tax Act, 1961. The assessees engaged in ship-breaking claimed these deductions, but the Assessing Officer (AO) rejected the claims on the grounds that the assessees were not considered industrial undertakings and that their activities did not involve manufacturing or production processes.On appeal, the CITs(A) held that ship-breaking was an industrial undertaking, following decisions from the Bombay and Ahmedabad Benches of the Tribunal. The Revenue challenged this finding, arguing that the activity of ship-breaking does not amount to manufacturing or production of goods. The Revenue cited the case of Asstt. CIT vs. Virendra & Co., where it was held that breaking or dismantling ships cannot be considered manufacturing or production.The Tribunal analyzed the definitions of 'processing', 'manufacture', and 'production', noting that these terms are not interchangeable. The Tribunal concluded that ship-breaking involves a process of dismantling and selling scrap, which does not result in the emergence of new and different articles having a distinctive name, character, or use. Therefore, the activity does not qualify as manufacturing or production.The Tribunal drew support from the judgment of the Bombay High Court in CST vs. Delhi Iron & Steel Co. Pvt. Ltd., where it was held that dismantling a ship and selling the parts does not involve any process of manufacture. Similarly, the Supreme Court in State of Tamil Nadu vs. Raman & Co. upheld that the sale of scrap obtained from dismantling condemned articles is not a manufacturing process.The Tribunal concluded that the assessees' activities do not involve manufacturing or production, and therefore, they are not entitled to deductions under sections 80HH and 80-I. The Tribunal reversed the findings of the CITs(A) and restored those of the respective AOs.Issue 2: Deletion of Additions under Section 43BIn ITA Nos. 926 and 927, the Revenue raised an additional ground regarding the deletion of additions under section 43B of the Income Tax Act, 1961. The AO had added outstanding sales-tax liabilities to the assessees' income, but the CIT(A) deleted these additions based on the Tribunal's earlier decisions.The Tribunal, after hearing both sides, held that the issue is covered in favor of the assessee by the judgment of the Gujarat High Court in CIT vs. Chandulal Venichand & Ors. and the Supreme Court in Allied Motors (P) Ltd. vs. CIT. Accordingly, the Tribunal dismissed the Revenue's grounds regarding section 43B.ConclusionIn conclusion, the Tribunal allowed the Revenue's appeals regarding the eligibility of ship-breaking activities for deductions under sections 80HH and 80-I, reversing the CITs(A)'s findings. However, the Tribunal dismissed the Revenue's grounds regarding the additions under section 43B, upholding the CIT(A)'s deletions.