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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: N.C. BUDHARAJA & CO. and another JUDGMENT
Court Name: Supreme Court of India Judge(s): N. Venkatachala, B. P. Jeevan Reddy Title:COMMISSIONER OF INCOME-TAX vs N.C. BUDHARAJA & CO. and another
JUDGMENT
Reported As: 1995 PTD 95 204 I T R 42 Result: Appeals allowed Judgment JUDGMENT ' B.P. JEEVAN REDDY, J.--- Two groups of appeals are placed before us for hearing. The first group involves the interpretation of identical words occurring in section 80-HH and section 84, viz., "manufacture or produce article" whereas the second group is concerned with the words "construction, manufacture or production of any article or thing" in section 32-A of the Income Tax Act, 1961. Civil Appeals Nos.4238 to 4240 of 1983 can be said co be representative of the first group whereas the - second group of appeals. Comprise Civil Appeals Nos.4239 to 4248 of 1992. ' The first group of appeals are directed against the judgment of a Division Bench of the Orissa High Court answering the question referred to it under section 256(2) in favour of the assessee. The question referred is to the following effect: "Whether, on the facts found by the Appellate Tribunal, the assessee is entitled to the benefit provided under section 80-HH of the Income Tax Act, 1961?" The assessm ent years concerned are 1974-75 and-1975-76. The respondent-assessee is a firm of contractors constituted for the purpose of construction of a dam in Orissa. It was constituted under a partnership deed dated 14th January, 1972. It was given the contract of constructing a dam in
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Dhenkanal District which is a notified backward district for the purpose of section 80HH. In proceedings for assessm ent of its income for the relevant years, the respondent claimed the relief under the said provision. The Income-tax Officer allowed the same. The Commissioner of Income- tax, however, revised the order of the Income-tax Officer to the extent of grant. Of relief under section 80-HH. He was of the opinion that the assessee, engaged in the construction of a darn, cannot be said to be engaged in manufacture or production of an article inasmuch as' "a dam is constructed and 'not manufactured. It would be absurd to say that the assessee is manufacturing a darn or that the dam is capable of being sold. In short, the firm cannot be held as an industrial undertaking merely because it has to undertake certain manufacturing process in the course of construction of the irrigation project". He also referred to the fact that the assessee firm was constituted only for the purpose of constructing a particular dam, on the completion of which work the firm would cease to exist automatically. The assessee preferred an appeal before the Income- tax Appellate Tribunal which was allowed on the following reasoning and findings:-- (a) The activity of constructing a dam can be characterized as an industrial -activity. The work undertaken by the assessee-firm can, therefore, be called an "industrial undertaking". (b) The word "articles" occurring in clause (i) of subsection (2) of section 80-HH is not confined to movables nor to small things produced in large quantities. (c) The activity of construction of a dam can be characterized as processing as well as manufacturing. ' At the instance of the Revenue the aforesaid question was referred for the opinion of the High Court. The High Court agreed with the Tribunal that the assessee-firm constituted for the purpose of constructing a dam for storing water can be called an "industrial undertaking". The High Court opined that the definition of "industry" in the Industrial Dispute Act can well be relied upon to ascertain the meaning of the expression "industrial undertaking", inasmuch as the said expression has not been defined in the Act or the Rules. The High Court also agreed with the Tribunal that the word "article" need not be confined to mere movables and that "there would be no justification to hold that a dam is not an article in that sense of the term". The correctness of the said view is questioned in these appeals. ' Learned counsel for the Revenue, Shri, J. Ramamurthy attacked mainly the opinion of the High Court with respect to the meaning attached by it to the word "article". He submitted that the activity of constructing a dam cannot and does not fall within the words "manufacture or produce articles" in section 80HH(2)(i). He relied upon the decisions in CIT v. N.U.C. Private Ltd. (1980) 126 ITR 377 (Born.), in CIT v. Shah Construction Co. Ltd. (1983), 142 ITR 696 (Born.), in Chowgule and Co. P. Ltd. v. Union of India (1981) 47 STC 124 (SC) and in Delhi Cold Storage P. Ltd. v. CIT (1991) 191 ITR 656 (SC) in support of his submission. He submiued that the contrary view taken in some of the decisions of the. High Courts, does not represent the correct view. On the other hand. Shri B.B. Ahuja and Shri B. Sen, learned counsel appearing for the respondent assessee, supported the reasoning and conclusion of the High Court and the Tribunal. They relied upon the commended for our acceptance the reasoning in the order under appeal as well as the reasoning in CIT v. Pressure Piling Co. (India) P. Ltd. (1980) 126 ITR 333 (Bom.), Shankar Construction Co. v. CIT (1991) 189 ITR 463 (Kar.) and in CIT v. Tiecicon P. Ltd. (1987) 168 ITR. 744 (SC): ' Section 80HH occurs in Chapter VI-A, which provides for "deductions to be made in computing total income. Subsection (1) of section 80Hl1 provides that "Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or the business of a hotel, to which this section applied, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. Thereof." Subsection (2) says that section
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80HH applies to any industrial undertaking which fulfils all the four conditions prescribed therein. It would he appropriate to set out subsection (2) in its entirety: "(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely: (i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, but before the 1st day of April, 1990, in any backward area; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area: ' Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33-B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area; (iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power ' Explanation.---Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. Of the total value of the machinery or plant used in the business, then, for the purposes of clause (iii) of this subsection, the condition specified therein shall be deemed to have been fulfilled." ' Subsection (4) provides that the deduction specified in subsection (1) shall be allowed for a period of ten years beginning with the assessment year relevant. To the previous year in which the industrial undertaking "begins to manufacture or produce articles". Subsection (1) thus confers a substantial benefit. It provides for deduction-for a period of ten years--of an amount equal to 20 per cent. From the profits and gains of an industrial undertaking which fulfils all the four conditions specified in subsection (2), All the four conditions must be satisfied simultaneously. We are, however, concerned in these appeals with the first of the four conditions. It says that the industrial undertaking must have begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area. (By the Finance Act, 1990, the words "but before the 1st day of April, 1990" were inserted in the said clause, thus limiting the operation of the section till that date only). ' Both the Tribunal and the. High Court have held that the work undertaken by the assessee, or to put it differently, the assessee, which has undertaken the work of construction of a :dam, can be characterised as an industrial undertaking. Counsel for the Revenue has not addressed any arguments on this aspect. We shall, therefore, express no opinion on the question whether the assessee respondent or the work undertaken by it constitutes an industrial undertaking. We shall proceed on the assumption for the purpose of these cases that it does. The only question, therefore, is whether the assessee has begun to manufacture or produce articles after the specified date in an area notified as a backward area. It is not in dispute that the assessee commenced its work after the 31st day of December, 1970 and that the work carried on by. It is in a notified backward area. In short, the limited question is whether the construction of a dam to store water (reservoir) can be characterized as amounting to manufacturing or producing an article or articles, asr the case may be. The words "manufacture" and "production" have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word "production" has a wider connotation than the word "manufacture". While every manufacture can be characterized as production, every production need not amount to
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manufacture. The meaning of the expression "manufacture" was considered by this Court in Deputy CST v. Pio Food Packers (1980) 46 STC 63, among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised. In the trade as a new and distinct commodity. Pathak, J., as he then was, stated the test in the following words (at page 65):-- ' Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place." ' The word "production" or "produce" when used in juxtaposition with the word "manufacture" takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. The next word to be considered is "articles", occurring in the said clause. What does it mean? The word is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation--the sense in which it is understood in the commercial world. It is equally well to keep in mind the context since a word takes its colour from the context. The word "articles" is preceded by the words "it has begun or begins to manufacture or produce." Can we say that the word "articles" in the said 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 riot. 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 construction of a dam or for that matter a bridge, a road or a building. The decisions of the Bombay High Court in CIT v. NUC Private Ltd. (1980) 126 ITR 377 and in. CIT v. Shah Construction Co. Ltd. (1983) 142 ITR 696, relied upon by Sri Murthy, are no doubt not decisions rendered under section 80-HH or under section 84--they arose under the relevant Finance Acts, the question being whether the assessees were industrial companies--but they do contain observations which tend to support the stand of the Revenue. ' It may be that the respondent is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. The petitioner is not claiming the deduction provided by section 80-HH on the value of the said manufactured articles but on the total value of the dam as such In such a situation, it is immaterial whether the manufactured articles which go into the construction of a dam are manufactured by him or purchased by him from another person. We need not express any opinion on the question what would be the position if the 'respondent had claimed the benefit of section 80-HH on the value of the articles manufactured or produced by him which articles have gone into/consumed in the construction of the dam.
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' In the judgment under appeal, the Orissa High Court has relied upon the meaning assigned to the word "article" in the Shorter Oxford English Dictionary, to the effect--"a commodity' a piece of goods or property". Since article means a piece of property, the learned Judges said, it can as well mean immovable property. Accordingly, they held, a dam is also an article. In our opinion, the High Court was not right in dissociating the said, word from its context, viz. The preceding words, which has led them to attach an unnatural meaning to the said word. ' Mr. Sen relied upon the decision of the House of Lords in Longhurst v. Guildford Godalming and District Water Board (1961) 3 All ER 545 to support the view taken by the High Court. The question in that case was whether the pump house wherein water was stored under pressure after being filtered and chlorinated in the filter house can be called a "factory" within the meaning of the Factories Act, 1937. "Factory" was defined in the said Act in the following words (at page 549): "Subject to the provisions of this section, the expression "factory" means any premises in which, or within the close or cartilage or precincts of which, persons are employed in manual labour in any process for or incidental to any of the following purposes, namely:-- (a) the making of any article or of part of any article; or (b) the altering, repairing, ornamenting, finishing, cleaning, or washing, or the breaking-up or demolition of any article; or (c) the adapting for sale of any article; being premises in which, or within the close or cartilage or precincts of which, the work is carried on by way of trade or for purposes of gain and to or over which the employer of the persons employed therein has the right of access or control..." ' It was argued that the water which was filtered and chlorinated and then put under pressure in the pump house is an article. The House of Lords held that though the water in the filter beds was an 'article" for the purpose of the definition of the factory and the filter house can thus be called a factory, yet the pump house which pumped water to the consumers was not a part of the factory. We are unable to see how the principle of the said decision is of any help to the assessee herein. It is submitted by counsel for the respondent-assessee that since section 80-HH is intended to encourage establishment of industrial undertakings in backward areas for the reason that such establishment leads to development of that area besides providing employment, we must adopt a liberal interpretation which advances the purpose and object underlying the provision. The said principle, however, cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the Court to rewrite the section or substitute words of its own for the actual words employed by the Legislature in the name of giving effect to the supposed underlying object. After all, the underlying object of any provision has to. Be gathered on a reasonable interpretation of the language employed by the Legislature. ' For all the above reasons, we are of the opinion that it is not possible to accede to the contention that the activity of construction of a dam can be characterised as manufacture or producing of article or articles, as the case may be, within the meaning of section 80-HH(2)(i) of the Act. ' Another set of appeals in the first group (Civil Appeals Nos.5865 and 5866 of 1983) are preferred against the judgment of the Bombay High Court in CIT v. Pressure Piling Co. (India) P. Ltd. (1980) 126 ITR 333. The respondent assessee in these appeals is engaged in the business of laying foundations for buildings and other structures by a specialized patented method known as pressure piling. For the assessm ent years 1963-64 and 1964-65, it claimed the benefit under section 84 of the Income Tax Act, 1961, on the ground that it is a newly-established industrial undertaking within the meaning of the said provision. The Income-tax Officer denied the said relief on the ground that the assessee did not satisfy the condition in section 84(2)(iii). In other words, he was of the opinion that the assessee was not engaged in manufacture or production of articles. The assessee's appeal to the Appellate Assistant Commissioner was dismissed, whereupon he carried the matter in further appeal to the Tribunal. There a difference of opinion arose between the
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Accountant Member and the Judicial Member who heard the appeal. The Accountant Member was for allowing the appeal whereas the Judicial Member was for its dismissal. The matter was referred to a third Member, who agreed with the Accountant Member. Thereupon, the Revenue applied for and obtained reference of the following question under section 256(1) of the Income-tax Act: "Whether, on the facts and in the circumstances of the case, the assessee-company was engaged in the "manufacture" or "production of articles" within the meaning of section 84(1) of the Indian Income Tax Act, 1961, for the assessm ent year 1963-64, and relief under section 84(1) and section 101 for the assessm ent year 1964-65?" ' The High Court examined the process by which the assessee carried out its work and held that it can be characterised as manufacture or production of an article. Accordingly, it answered the question referred in the affirmative, i,e,, in favour of the assessee and against the Revenue. The correctness of the said view is questioned in these appeals. ' The process adopted by the assessee for laying pressure piles has been set out in the statement of the case in the following words (at page 335): "Pressure piles are cast in site and piles are formed in bore holes previously excavated by suitable boring plant at each pile position. The borings are sunk to suitable bearing stratum and concrete is then introduced into the holes under applied air pressure. This, when set forms a permanent pile giving a very high surface friction in addition to the bearing value obtained at a foot of the pile. The method adopted of sinking pressure piles is as under: A boring is first made for each pile, the hole being bored with steel tubes. As the boring proceeds, these steel tubes are sunk in the ground, the soil being excavated through the tube itself in the manner employed by well bores. In this way, the underlying soil is thoroughly explored, samples of the succeeding strata being obtained as each hole is sunk. This permits the correct depth of boring to be determined in every case. If necessary, steel reinforcements of any required design can then be lowered down the casing and fixed in a correct position so that the rods will be properly embedded when concrete is added. If the bore hole is dry, concrete is introduced to the casings and compressed air is admitted. The air pressure forces the concrete down the casing and presses it into the interstices of the bottom part of the bored hole from which the casing is withdrawn. In this way, the actual diameter of pile is made to exceed that of the casing itself and it also forms a rough surface that bonds into the-strata penetrated by the pile. As each section of the tube is raised above ground, it is unscrewed and further batch of concrete is added. This process is continued until the pile is completed." ' Section 84. In so far as it is relevant for our purpose, reads thus: "84 Income of newly-established industrial undertakings or hotels.--- (1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent. Per annum on the capital employed in the undertaking or hotel, computed in the prescribed manner. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:-- (i) it is not formed by the splitting up, or the reconstruction of a business already in existence; (ii) it is not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose; (iii) it has begun or begins to manufacture or produce articles in any part of India at any time within a period of eighteen years from the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking..." It would be noticed that the language of section 84(2)(iii) in so far as it is relevant, is identical with the relevant language in section 80-HH. In the light of our discussion hereinbefore, can it be said
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that the assessee herein is engaged in manufacture or production of articles? We find it difficult to say so. According to the statement of case, the process adopted by the assessee, in short, is this: in the first instance holes are bored into earth at the site of construction with steel tubes; as the boring proceeds, these steel tubes are sunk into the ground; the soil is excavated through the tube itself; after reaching the correct depth, concrete is poured into the casings and compressed air is admitted; the air pressure forces the concrete down the casing and presses it into interstices; if necessary, steel reinforcements are also provided to keep the rods in correct position. In this manner a strong foundation is laid. Upon that foundation further construction--whether it is a building, bridge, dam or any other structure--is raised. Can it be said that the said activity is one of manufacturing or producing articles? If the construction of a dam, a bridge or a building as a whole does not amount to manufacture or production of an article, it is difficult to see how the laying of a foundation or foundations for such dam, bridge or building can be characterised as manufacturing or production of articles. The process of laying a foundation is an integral part of the construction of a dam, bridge or building. Each such structure Pequires a foundation. The assessee does no more than lay the foundation(s) by a technologically innovative method, which lends to the strength of the foundation. It cannot be said that if a person constructs the entire dam including the foundation, he is not manufacturing or producing an article but…
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