TMI Blog2004 (5) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed by Tribunal. - - - - - Dated:- 13-5-2004 - Judge(s) : ARUN MISHRA., N. S. AZAD. JUDGMENT The judgment of the court was delivered by Arun Mishra J. - This appeal has been preferred by the assessee against the order passed by the Income-tax Appellate Tribunal on October 6, 1999, in I.T.A. No. 545/Jab of 1997 relating to the assessment year 1994-95. The Income-tax Appellate Tribunal has allowed the appeal filed by the Commissioner of Income-tax holding that deduction under section 80HH and section 80-I of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on the income arising from brass scrap obtained in the process of breaking and dismantling of guns is not an income derived from the industrial undertaking of iron rerolling and allowed the depreciation on truck at 25 per cent, as against 40 per cent, when the truck has been used for transporting the goods of others and hire charges amounting to Rs. 36,000 were received. The assessee carries on the business of running a rerolling mill wherein rerolled products of iron and steel are manufactured. The assessee filed a return of income supported by an audit report from the chartered accountant unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plea that the assessee had purchased guns and the income from brass scrap which could not be used for rerolling, thus, was not entitled to deduction under sections 80HH and 80-I of the Act. This appeal has been admitted by this court on the following substantial question of law: "Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal is justified in law in holding that the income from sale of brass scrap obtained by breaking and dismantling the guns is not derived from industrial undertaking so as to attract the provisions of sections 80HH and 80-I of the Income-tax Act?" Shri H.S. Shrivastava, learned senior counsel, appearing with Shri Sandesh Jain for the appellant, has submitted that the learned Income-tax Appellate Tribunal has erred in law in disallowing the deduction under sections 80HH and 80-I of the Act. The scrap was obtained by dismantling discarded guns, iron is used for the purpose of rerolling, brass was separated by dismantling of the guns by mechanical and manual process, thus, the same was a processing and process of manufacture. It was not necessary that the brass obtained should have been further used in rerolling mill, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a hotel which has started functioning, after the 31st day of December, 1970, but before the 1st day of April, 1973, this sub-section shall have effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1974." Section 80-I of the Act also provides for deduction from profits and gains of an amount equal to 20 per cent, thereof where the gross total income of an assessee includes any "profits and gains derived from an industrial undertaking" or a ship or the business of a hotel. Sub-section (2) of section 80-I of the Act provides the fulfilment of certain conditions for claiming deductions. Sub-section (1) of section 80-I is quoted below: "80-I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.-(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with and subject to the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the petitioner containing the brass inside which was removed by dismantling the guns can be said to be in the process of manufacture and income derived out of an industrial undertaking. The assessee derived income from rerolling work. The assessee has shown total sale of Rs. 8,22,90,065. Survey under section 133A was conducted in the assessee's premises on January 15, 1994. At the time of survey the assessee had surrendered a value of brass scrap estimated at Rs. 10 lakhs. In our opinion the brass scrap has no direct nexus with the appellant's industrial undertaking. Brass is not the raw material connected with the manufacture activity of the industrial undertaking. It cannot be said that the brass scrap is a profit or gain which directly flows, neither it has close connection with the undertaking. By removal of the brass scrap which is not useful for steel rerolling work of industrial undertaking no different distinct article comes, it is incidental as apparent from the appellant's reply (A1). The apex court in CIT v. Sterling Foods [1999] 237 ITR 579; [1999] 4 SCC 98, has considered the question of profits, gains and deductions under section 80HH of the Act. What is profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1948] 16 ITR 325 when it said: 'The word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.' This definition was approved and reiterated in 1955 by a Constitution Bench of this court in the decision of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 at page 7. It is clear, therefore, that the words 'derived from' in section 80HH of the Income-tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself. Learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re or production." The claim of the assessee under section 80HH of the Act was rejected in CIT v. Relish Foods [1999] 237 ITR 59 (SC). In CIT v. Gem India Manufacturing Co. [2001] 249 ITR 307; [2001] 10 SCC 733, the apex court has held that when raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a raw article or thing which is the result of manufacture or production. Therefore, the apex court has held that the activity of the assessee engaged in cutting and polishing of diamond amounted to manufacture or production of goods and on that basis the assessee was not entitled to deduction under section 80-I of the Act. The apex court has considered the question thus: "The High Court, as aforestated, concluded that the case was covered by its decision in the case of CIT v. London Star Diamond Co. (I.) Ltd. [1995] 213 ITR 517 (Bom). It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of section 2(8) of the Finance Act, 1975, and that, in answering that question, the High Court had held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid clause comprehends and takes within its ambit a dam, a bridge, a building, a road, a canal and so on? We find it difficult to say so. Would any person who has constructed a dam say that he has manufactured an article or that he has produced an article? Obviously not. If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storeyed building. To say that all of them fall within the meaning of the word 'articles' is to overstrain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices, etc. But to say that the end-product, the dam, is an article is to be unfaithful to the normal connotation of the word. A dam is constructed; it is not manufactured or produced. The expressions 'manufacture' and 'produce' are normally associated with movables-articles and goods, big and small-but they are never employed to denote the construction activity of the nature involved in the construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assam (P.) Ltd. [1996] 220 ITR 577, a Division Bench of the Guwahati High Court has held that the assessee was entitled to get rebate under section 80HH of the Act only to the extent of any profits or gains derived from an industrial undertaking, and if the assessee carried on some other business no deduction was available on such profits and gains, therefore, deduction under section 80HH was disallowed. Shri H.S. Shrivastava, learned senior counsel for appellant, has placed reliance on a decision of the Division Bench of this court in Girdharilal Nannelal v. Commissioner of Sales Tax [1971] 27 STC 316 (MP). This court considered the question under the Madhya Pradesh General Sales Tax Act, 1958, of the process of manufacture. In the context of the facts, the taxing authority came to the conclusion that Yelmele Cotton Company had purchased raw cotton for purposes of manufacture and converted it into ginned, pressed and packed cotton capable of being used in mills and thus the company was engaged in a process of manufacture and had purchased the cotton for consumption, they charged the assessee at a rate applicable to sales for consumption. The process of converting the raw cotton ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is required to be applied is: does the processing of the original commodity bring into existence a commercially different and distinct commodity? On an application of this test, it is clear that the blending of different qualities of ore possessing differing chemical and physical composition so as to produce ore of the contractual specifications cannot be said to involve the process of manufacture, since the ore that is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together. What is produced as a result of blending is commercially the same article, namely, ore, though with different specifications than the ore which is blended and hence it cannot be said that any process of manufacture is involved in blending of ore. It still remains to consider whether the ore blended in the course of loading through the mechanical ore handling plant can be said to undergo processing when it is blended. The answer to this question depends upon what is the true meaning and connotation of the word 'processing' in section 8(3)(b) and rule 13. This word has not been defined in the Act and it must therefore be interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount to 'processing' of ore within the meaning of section 8(3)(b) and rule 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities of such ore on the conveyor-belt of the mechanical ore handling plant. But to our mind it is immaterial as to how the blending is done and what process is utilised for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical compositions as a result of blending and so far as this aspect of the question is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and physical compositions." When the ratio of the above decision is applied to the instant case no sustenance is provided to the cause espoused by the appellant/assessee. The composition of brass scrap is not at all changed, that is only removed as that is not useful to the assessee for the activity of manufacturing which it is carrying on of steel rerolling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which was separated as mentioned in explanation (A1) by the assessee. It cannot be said to be a by-product obtained in the process of manufacture. Learned counsel for the appellant has further relied upon a decision of 28 the Bombay High Court in Ship Scrap Traders v. CIT [2001] 251 ITR 806, wherein the Division Bench has considered the question of deduction under section 80HHA and section 80-I of the Act, the meaning of "industrial undertaking", "manufacture" and "produce". It has been held that ship breaking needs expertise and results in production of articles, the same amounts to manufacture. The assessee engaged in ship breaking is entitled to special deduction under sections 80HHA and 80-I of the Act. The ratio of the case has a different field to operate in as in the instant case dismantling of the guns is not an activity of the assessee. Only incidentally the guns were purchased in the relevant year for the purpose of rerolling as per explanation (A1) of the assessee. In our opinion, there is no direct nexus in the activity of separation of brass scrap from the guns which were purchased for utilisation in rerolling of steel scrap. In the activity of ship breaking, sever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity of processing of chillies was itself to be considered whether it was processing. The question involved was different. Chillies itself was the product marketable for the purpose of export which required fumigation and the matter was remitted to the High Court for reconsideration of the question in accordance with law. Learned counsel for the appellant has further relied upon a decision of the apex court in B.P. Oil Mills Ltd. v. Sales Tax Tribunal [1998] 111 STC 188 (SC). The apex court has considered the definition of "manufacture" in section 2(e-1) of the U.P. Trade Tax Act. The apex court has held that when any commodity is subjected to a process or treatment with a view to its development or preparation for the market it would amount to processing. In each process suffered, the commodity would experience a change. The process to which the crude oil is subjected to make it refined oil brings the latter within the meaning of the expression "goods manufactured" in section 3 of the Act. The apex court has held that there is a radical change when crude oil undergoes change as marketable refined oil. Learned counsel has further relied upon a decision of the apex court in 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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