2005 (1) TMI 17 - HC - Income Tax

Industrial Undertaking - deduction under sections 32A 80HH and 80J of the Income-tax Act 1961 - we are of the view that de-embarking and seasoning the tree trunks and converting the same into logs would amount to production of a new commercial article or thing within the meaning of sections 32AB 80HH and 80J. The assessee is entitled to the benefit of deductions - appeal succeeds

Summary

Issues Involved:
1. Eligibility for deductions under sections 32A, 80HH, and 80J of the Income-tax Act, 1961.
2. Whether the conversion of trees into logs qualifies as "production" or "manufacture."
3. Interpretation of the term "industrial undertaking."

Detailed Analysis:

Eligibility for Deductions under Sections 32A, 80HH, and 80J:
The assessee sought deductions under sections 32A (investment allowance), 80HH (deduction for undertakings in backward areas), and 80J (deduction for new industrial undertakings) of the Income-tax Act, 1961, for the assessment years 1983-84 and 1985-86. The primary contention was whether the assessee's activities qualified for these deductions.

Conversion of Trees into Logs: Production or Manufacture:
The Department argued that the conversion of trees into logs did not amount to "production" or "manufacture" as it did not result in a new commodity. They cited various cases, including Collector of Central Excise v. Kutty Flush Doors and Furniture Co. (P.) Ltd., and Deputy Commissioner Sales Tax (Law), Board of Revenue (Taxes) v. Pio Food Packers, to support their stance.

Conversely, the assessee contended that felling trees and converting them into logs involved significant processing, making the logs commercially saleable, thus qualifying as "production." They relied on the Supreme Court's decision in Gem Granites v. CIT, which differentiated the interpretation of "production" under different statutes.

Interpretation of "Industrial Undertaking":
The court examined whether the assessee's establishment qualified as an "industrial undertaking." Referring to the Industrial Disputes Act, 1947, and the case of Bangalore Water Supply and Sewerage Board v. A. Rajappa, it was determined that any establishment engaged in production to satisfy human wants qualifies as an industrial undertaking. The court also referred to P. Alikunju, M.A. Nazeer Cashew Industries v. CIT, which emphasized the ordinary meaning of "industrial undertaking."

Detailed Judgment:
1. Industrial Undertaking: The court concluded that the assessee's establishment, employing more than 20 persons and using power, qualified as an industrial undertaking. This was not disputed by the Assessing Officer or the Tribunal.

2. Production: The court held that the conversion of tree trunks into logs involved significant human effort and processing, making the logs commercially saleable. This process was deemed "production" within the meaning of sections 32A, 80HH, and 80J. The court distinguished this from the blending of tea, as discussed in Appeejay Pvt. Ltd. v. CIT, and aligned with the broader interpretation of "production" as seen in CIT v. Abdul Ahad Najar and CIT v. G.S. Atwal and Co. (GUA).

3. Precedents and Interpretation: The court referred to several precedents, including CIT v. Sesa Goa Ltd., which defined "production" broadly to include activities resulting in commercially saleable products. The court emphasized that tax provisions granting incentives should be interpreted liberally to advance their objective, as held in Bajaj Tempo Ltd. v. CIT and Mysore Minerals Ltd. v. CIT.

Conclusion:
The court concluded that the assessee's activities of de-embarking, seasoning tree trunks, and converting them into logs qualified as "production" of a new commercial article or thing. Thus, the assessee was entitled to the deductions under sections 32A, 80HH, and 80J for the relevant assessment years.

Order:
The appeal was allowed, and the Tribunal's order was set aside. The court answered the question in the affirmative, in favor of the assessee, with no order as to costs.