1998 (10) TMI 17 - HC - Income Tax

New Industrial Undertaking, New Industrial Undertaking In Backward Area, Special Deduction, Condition Precedent

Summary

Issues Involved:
1. Whether extracting granite from hills and processing it by cutting rough edges before export amounts to manufacture or production of articles or things under sections 80J and 80HH of the Income-tax Act, 1961.

Detailed Analysis:

1. Nature of Activity:
The core issue is whether the activity of extracting granite and processing it by cutting rough edges before export qualifies as "manufacture" or "production" of articles or things under sections 80J and 80HH of the Income-tax Act, 1961. The assessee's business involves drilling holes in granite hills, using explosives to extract blocks, washing them to check for cracks, and exporting them without further processing like polishing or cutting.

2. Tribunal's Findings:
The Tribunal held that the assessee was producing articles by extracting granite from the earth and converting them into exportable sizes, thereby adding value to the original product.

3. Revenue's Argument:
The Revenue contended that the Tribunal erred in its judgment. According to the Revenue, merely extracting and cutting rough edges of granite blocks does not constitute "manufacture" or "production" of any article. They relied on precedents like CIT v. Lucky Mineral Pvt. Ltd. and Muddeereswara Mining Industries v. CIT, which held that activities similar to those of the assessee did not amount to manufacture or production.

4. Assessee's Argument:
The assessee argued that the terms "manufacture" and "production" should be interpreted in their natural meaning. They contended that the activity of blasting rock formations, extracting granite blocks, and making them fit for export involves skill and labour, resulting in a commercially different article with high value. They cited various judicial precedents supporting the broader interpretation of "production."

5. Judicial Precedents:
Several cases were discussed:
- CIT v. N. C. Budharaja and Co.: The Supreme Court observed that "production" has a wider connotation than "manufacture."
- Chrestien Mica Industries Ltd. v. State of Bihar: The Supreme Court held that mining and processing mica amounted to production.
- CIT v. Univmine (P.) Ltd.: The Delhi High Court held that mining marble amounted to production.
- CIT v. M. R. Gopal: This court held that converting boulders into small stones is a manufacturing process.
- CIT v. Mysore Minerals Ltd.: The Karnataka High Court held that extracting granite and cutting it into various sizes amounts to manufacture or production.
- CIT v. Singareni Collieries Co. Ltd.: The Andhra Pradesh High Court held that extracting minerals is production.
- CIT v. S. L. Agarwala and Co.: The Orissa High Court held that converting big iron ingots into smaller pieces is production.

6. Court's Analysis:
The court analyzed the processes involved in the assessee's activity and concluded that:
- Extraction of granite does not involve a series of processes that transform the input into a product with a distinct commercial identity.
- The activity is more akin to mining rather than manufacturing.
- The term "production" involves processes that are complex and involve skill and labour, which were not evident in the assessee's activity.
- The extracted granite blocks remain the same commodity and do not undergo significant transformation.

7. Conclusion:
The court concluded that the assessee's activity of extracting granite and cutting rough edges does not amount to manufacture or production of articles or things. Therefore, the benefit under sections 80J and 80HH of the Income-tax Act is not applicable to the assessee.

8. Final Judgment:
The question referred to the court was answered in the negative, in favor of the Revenue and against the assessee.