1997 (6) TMI 365 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under sections 80HH and 80-I for shipbreaking activity.
2. Imposition of additional tax under section 104.

Issue-wise Detailed Analysis:

1. Deduction under sections 80HH and 80-I for shipbreaking activity:

For the assessment years 1987-88 and 1989-90, the assessee claimed deductions under sections 80HH and 80-I, which were denied on the grounds that shipbreaking did not constitute a manufacturing activity. The CIT(Appeals)-VI, Mumbai, ruled in favor of the assessee, relying on the Tribunal's decision in Rama Shipbreaking Ltd. and the Bombay High Court's decision in CST v. Indian Metal Traders.

The Revenue appealed, citing the Bombay High Court's decision in CST v. Delhi Iron & Steel Co. (P.) Ltd. and the Tribunal's decision in Asstt. CIT v. Virendra & Co., which held that shipbreaking does not amount to manufacturing. The Tribunal examined the rival contentions and agreed with the reasoning in Virendra & Co., noting that the definition of "manufacture" under section 2(17) of the Bombay Sales Tax Act, 1959, was broader than the definition under sections 80-I and 80HHA of the Income-tax Act.

The Tribunal emphasized that the term "manufacture" implies a transformation resulting in a new and different article with a distinctive name, character, or use. Referring to several Supreme Court judgments, including CIT v. N.C. Budharaja & Co. and Empire Industries Ltd. v. Union of India, the Tribunal concluded that shipbreaking does not meet this criterion. The activity merely involves breaking the ship and selling the derived materials without any manufacturing process. Consequently, the Tribunal held that the assessee's shipbreaking activity does not qualify as manufacturing under sections 80HHA and 80-I, thus denying the deductions.

2. Imposition of additional tax under section 104:

For the assessment year 1987-88, the Assessing Officer imposed additional tax under section 104. The CIT(Appeals) canceled this levy, reasoning that section 104 does not apply to manufacturing concerns. However, since the Tribunal determined that the assessee's shipbreaking activity does not constitute manufacturing, the CIT(Appeals)' decision was reversed, and the original order of the Assessing Officer was restored.

Conclusion:

The appeals of the Revenue were allowed, setting aside the orders of the CIT(Appeals) and restoring those of the Assessing Officer. The Tribunal concluded that shipbreaking does not amount to manufacturing within the meaning of sections 80HHA and 80-I, and thus, the assessee is not entitled to the claimed deductions. Additionally, the imposition of additional tax under section 104 was upheld.