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TMI Blog1981 (10) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Sidhu Ram Atam Parkash [1974] 34 STC 344 and the case of Pyare Lal Khushwant Rai v. State of Punjab [1974] 34 STC 341. In these decisions, it has been held that a forest contractor making logs and converting them into rafter, plank and fire wood either by manual labour or mechanical process does not bring into existence any new substance and it could not be considered as manufacturer. The Commissioner, therefore, issued notice to the assessee. On behalf of the assessee, the following objections were raised : 2. It was submitted that the order of the ITO sought to be revised under section 263 had been the subject-matter of appeal before the Commissioner (Appeals). It was contended that the order of the ITO ceased to exist and has merged into the order of the Commissioner (Appeals) totally though the question raised now had not been the subject-matter of appeal before the Commissioner (Appeals). The Commissioner (Appeals) however, did not accept this plea of the assessee as, according to him, the scope of the appeal before the Commissioner (Appeals) was very limited and he had reduced the income by Rs. 4,624 on some other grounds. He observed that the relief unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that under the provisions of the above sections the deduction could be allowed only if all the conditions laid down in the sections are fulfilled. He found that the conditions prescribed were that the industrial undertaking should be engaged in production of articles by employing a given number of workers in a manufacturing process carried on by it. He, therefore, found that a manufacturing process was necessary for entitling an industrial undertaking to claim deduction under those sections. The Commissioner was of the view that producing articles would have to be given the same meaning as manufacture and in his opinion while manufacture may be with the help of machinery, producing goods may be with or without the help of machinery. 4. The Commissioner found that the Punjab and Haryana High Court had based its conclusion on the decision of the Supreme Court in the case of Union of India v. Delhi Cloth General Mills AIR 1963 SC 791. In that case the Supreme Court held that processing could not be equated to manufacture and manufacture could mean bringing into existence a new substance and does not mean merely to produce some change in a substance, however, minor in consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith which the Commissioner has interfered was actually the order of the Commissioner (Appeals) and not the order of the ITO. For this submission reliance was placed on the decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. wherein it was held that where any such appeal was filed before the AAC and the AAC disposed of the appeal the entire assessment order merged in the appellate order irrespective of the points urged by the parties or decided by the appellate authority. Further reliance was placed on the decision of the Madras High Court in the case of CIT v. City Palayacot Co. [1980] 122 ITR 430. However, we find that as far as this decision was concerned, the judgment was against the theory of whole merger in the case of any appeal. It was held in this case by the Madras High Court that the doctrine of merger will have to be taken into account in the light of what was in controversy before the appellate authority or what could have been considered by the appellate authority. The Madras High Court had followed certain earlier decisions of the Madras High Court, Karnataka High Court and the Kerala High Court. However, they dissented from the judgment of the Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to items not forming the subject-matter of the appellate order is left untouched and does not merge in the order of the AAC. In coming to the above conclusion, the High Court had relied upon the decision of the Supreme Court referred to above. After review of all the decisions, the Madras High Court has also come to a similar conclusion in the case in City Palaycot. In our opinion, the decisions of the Gujarat High Court and the Madras High Court which is mainly based on the decisions of the Supreme Court has to be held to represent the correct view on the matter. As in this case, the admitted position is that the question regarding the allowance of relief under sections 80J and 80HH had not been considered or decided by the Commissioner (Appeals), it has to be held that there was no merger of the assessment order with the appellate order and the Commissioner could exercise his jurisdiction under section 263 in respect of the order passed by the ITO. This plea of the assessee has, therefore, to be rejected. 8. On the merits of the case, as already stated above, the Commissioner had held that relief under sections 80J and 80HH could not be allowed to the assessee as the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut into pieces in the form of plank itself, scants or rafters, nature and utility changes. It was, therefore, contended that the assessee should be held to be producing articles even if it is held that they were not manufacturing as such. In this connection, it was pointed out that "industrial undertaking" has not been defined in section 80J and one will have to go to other provisions for ascertaining its meaning. He referred to the definition in the Wealth-tax Act as given in Explanation to section 5(2)(xxxi). According to this Explanation, industrial undertaking means an undertaking engaged in among many other things in the manufacturing or processing of goods. It was contended that the same meaning should be given for the purpose of sections 80J and 80HH and wherever there, were processing of goods such activity could be eligible for benefit under the Wealth-tax Act and which should also be eligible for benefit under sections 80J and 80HH under the Income-tax Act. In this connection, a reference was also made to the definition of "industrial company" as given in the Finance Act for the purpose of special rate of Companies Taxation. 10. Regarding the argument of the Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply and the question of allowance of deduction under sections 80J and 80HH have to be decided on the basis of the requirement in those sections themselves. It was contended that cutting the trees into logs and then into planks, rafter was not producing articles as the things produced were not new in its nature. For this, he strongly relied on the decisions of the Punjab and Haryana High Court. 12. The learned departmental representative further submitted that the provisions must be construed strictly and the assessee must show that the fulfilment of the conditions before the deduction claimed by him can be allowed. It was further submitted that the workers were not engaged by the industrial undertaking and all the workers were being engaged by the contractors who were to do different parts of the job, i.e., cutting of the trees and its transportation. It was submitted that the undertaking itself should employ the workers and then alone conditions laid down in that section can be fulfilled. He had submitted that the assessee was not the employer of the labour but the contractors were and the workers could not be considered as the worker engaged by the industrial undertaking. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation ; a new and different article must emerge having a distinctive name, character or use." Applying the above principles, the High Court held that by chopping of the branches or by cutting into small pieces the nature was not changed and there was no transformation in different articles having distinctive names and characters. The High Court dissented from the judgment of the Calcutta High Court in the case of Shaw Bros. Co. v. State of West Bengal and held that such activity was not a manufacturing activity. 15. In the case of Sidhu Ram Atam Parkash, the assessee was a forest contractor cutting the standing trees and converting the logs into planks, rafters or firewood. Here again the High Court relied upon the decision of the Supreme Court in the case of Delhi Cloth General Mills Co. Ltd. and held that when a log, either by manual labour or mechanical process, is converted into a plank or a rafter, a new substance does not come into being and this process is not covered by the definition of the word "manufacture". In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logs, which were the raw materials for the assessee. For the purpose of convenience of transport, the logs are cut into various small sizes and there is no further working on them for converting them for any particular use. For example, some person may manufacture furniture out of it and some other person may make some other articles for the purpose of buildings. Insofar as no such further operation has taken place, the activity of the assessee remains processing of goods and not manufacture as interpreted by the Honourable Punjab and Haryana High Court. We, therefore, agree with the learned Commissioner that the assessee being a forest contractor, cutting trees into logs and converting them into planks and rafters could not be held to be manufacturing or producing articles. As already stated above, this view has to be taken having regard to the decision of the Punjab and Haryana High Court. 18. The other point which is consequential is whether the assessee engages workers in a manufacturing process. As already stated by us, the activity of the assessee was not a manufacturing activity and, hence, the workers could not be held to be engaged in a manufacturing activity. Thus, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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