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TMI Blog2004 (5) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ning 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 under section 44AB of the Act. The income as per accounts has been accepted in the assessment. In the profit and loss account, a profit of Rs. 17,11,794 was shown to be included, income from sale of brass scrap at Rs. 9,98,006. This was shown separately during the course of survey conducted at his place on January 15, 1994, under section 133A of the Act. The assessee had offered to pay tax on Rs. 10 lakhs in respect of the brass so obtained. During the course of assessment the assessee was asked to explain surrender of Rs. 10 lakhs. It was submitted that he had purchased 182 HOW Carrier Guns from Central Ordinance Depot (COD), Jabalpur, in an auction vide letter dated June 30, 1993. In breaking and dismantling of the guns brass scrap 10.96 MT in quantity was obtained and the balance was iron scrap. It was contended that this activity was production of goods, hence, income from industrial undertaking. The value of the brass was estimated at Rs. 10 lakhs and offered for taxation at the time of survey, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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, thus, disallowance of the claim for deduction under sections 80HH and 80-I of the Act is arbitrary and illegal. Shri Rohit Arya, learned senior counsel, appearing with Shri Ajit Ade, for the Revenue, has submitted that the brass obtained on dismantling of the guns cannot be said to be income arising out of the industrial unit. He has further submitted that there is no substantial change in the matter, "manufacture" implies a change, every change is not a "manufacture". Thus, it cannot be said that the brass is an income from industrial undertaking, hence, no interference is called for in this appeal. Section 80HH of the Act provides that deduction with respect to the "profits and gains derived from an industrial undertaking". Deduction is permissible equal to 20 per cent, of the profits and gains. Sub-section (2) of section 80HH provides for fulfilment of certain conditions for applicability of section 80HH of the Act. Sub-section (4) of section 80HH provides that the deduction shall be allowed in computin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, 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 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: Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel, as if for the words 'twenty per cent.', the words 'twenty-five per cent.' had been substituted." What is of significance under sections 80HH and 80-I of the Act is that deduction is allowable on the profits and gains arising out of an industrial undertaking. The question for consideration is whether brass scrap can be said to be profit or gain arising out of an industrial undertaking and as per process of manufacture. It is clear from explanation (A1) filed under section 133A of the Act by 13 the assessee that the assessee deals in steel scrap. It has been mentioned in para. 1 of the explanation that "But in this year the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and gain derived from industrial undertaking. The apex court has held that there must be, for the application of the words "derived from", a "direct nexus" between the profits and gains with the industrial undertaking. In case nexus is not direct, only incidental, sale consideration therefrom cannot be held to constitute profits and gains derived from the assessee's industrial undertaking. The apex court has held thus: "We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government where-under the export entitlements become available. There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e derivation of profits on the deposit made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself. Learned counsel appearing on behalf of the appellant has referred to several decisions of the Madras High Court in order to contend that the word 'derived from' could be construed to include situations, where the income arose from something having a close connection with the industrial undertaking itself. All the decisions cited by the appellant have been considered by the Madras High Court in the case of Pandian Chemicals Ltd. [1998] 233 ITR 497. We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd. 's case [1998] 233 ITR 497 with respect to those decisions to hold that they do not in any way allow the word 'derived' in section 80HH to be construed in the manner contended by the appellant." The apex court in CIT v. Relish Foods [1999] 237 ITR 59 has considered the question of exemption under section 80HH of the Act to industrial undertakings engaged in "manufacture" or "production". The apex court has held that mere buying of shrimps, peeling and freezing them did not entitle the assessee to exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the 'processing of goods' to convert them into marketable form. The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. There can be little difficulty in holding that the 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 new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached." In CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412; AIR 1993 SC 2529, the apex court has considered the words "production" or "produce" when used in juxtaposition with the word "manufacture" takes in bringing into existen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 80HH 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 is submitted by counsel for the respondent-assessee that since section 80HH 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 permiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the cotton for consumption, they charged the assessee at a rate applicable to sales for consumption. The process of converting the raw cotton into marketable cotton is a process of manufacture. The ratio has no application to the instant case as the business of the appellant/assessee is of rerolling of steel scrap, brass is not the material remotely connected with the process of rerolling of steel scrap in which the appellant/assessee is involved. Learned counsel for appellant has further relied upon a decision of the apex court in Chowgule and Co. Pvt. Ltd. v. Union of India [1981] 47 STC 124 (SC). The question involved was whether blending of ore in the course of loading it into the ship through the mechanical ore handling plant constituted manufacture or processing of ore? The meaning of the word "processing" has been considered by the apex court. It was held that when chemical and physical compositions of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to "processing". The apex court has held thus: "The point which arises for consideration under the first question is as to whether blending of ore i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notation 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 interpreted according to its plain natural meaning. Webster's Dictionary gives the following meaning of the word 'process': 'to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, development or preparation for the market, etc., to convert into marketable form as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurising, fruits and vegetables by sorting and repacking.' Where therefore any commodity is subjected to a process or treatment with a view to its 'development or preparation for the market, as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of section 8(3)(b) and rule 13. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged, 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. Brass is not by-product in the process of manufacture. There is no nexus between brass and steel rerolling. Learned counsel has further relied upon a decision of the apex court in CST v. Rewa Coal Fields Ltd. [1999] 32 VKN 538; [2002] 125 STC 212. The question which arose for consideration was what can be treated as raw material consumed in the process of manufacture. The assessee operated a coalmine. The apex court has held that kerosene oil was required for lanterns for illumination purposes and not as a fuel to power any machine. Hence, it could not be treated as a raw material consumed in the process of manufacture. Dry cells, torches and cells and electrical bulbs were held not to be qualified to be articles consumed in the process of manufacture or consumed in the mining of the coal. They may be used for purposes incidental to the mining, but are not integral thereto. So far as drilling bits are concerned, it was held that they are consumed in the mining of coal, to that extent the assessee's submission was upheld. In the instant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of brass scrap from the guns which were purchased for utilisation in rerolling of steel scrap. In the activity of ship breaking, several articles were obtained; viz.; ferrous metals, non-ferrous metals which includes brass. The meaning of the word "manufacture" has been considered which implies a change but every change is not a manufacture. There must be a transformation of kind and a new different item should have been emerged having different features. The word "manufacture" does not mean merely some change in the substance, but the expression "manufacture" has in ordinary acceptation a wide connotation: it means making of articles, or material commercially different from the basic components, by physical labour or mechanical process. The word "production" has a wider connotation than "manufacture". Scrap iron and steel which were obtained by the assessee by dismantling and breaking up of the ship must be regarded as a different commercial commodity from the ship itself, and hence the activity would amount to manufacture. The goods manufactured would be scrap iron and steel obtained or manufactured by the dismantling and making up of the ship, and the goods used in the manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when crude oil undergoes change as marketable refined oil. Learned counsel has further relied upon a decision of the apex court in 30 Collector of Central Excise v. Orient Paper Mills [1990] 186 ITR 105; [1990] 77 STC 203. The apex court has considered the question of law on raw material or component part under the Central Excise Rules, 1944. The apex court has held that excise duty is a duty on manufacture. Manufacture is the process or activity which brings into existence new, identifiable and distinct goods. Anything required to make the goods marketable, must form part of the manufacture and any raw material or any materials used for the same would be a component part for the end-product. As already mentioned above, brass is not a raw material for steel rerolling and cannot be said to be a component part for the main product. The decision is not attracted to the facts of the instant case as brass cannot be said to be having any nexus with the activity in which the assessee's industrial undertaking is involved. In our opinion, there is no nexus with the brass scrap obtained on dismantling of the guns in the main activity of the appellant of steel rerolling. Gun is not the ess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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