Vijay Ship Breaking
Corpn. & Ors. Vs. Commissioner of Income Tax, Ahmadabad  INSC 1687 (1
JURISDICTION CIVIL APPEAL NOS.6692-6723 OF 2003 Vijay Ship Breaking Corpn.
& Ors. ...Appellant(s) Versus Commnr. of Income Tax, Ahmedabad
CIVIL APPEAL NOS.1742/2005, 2294/2005, 1496/2006, 2787/2005, 2725/2004,
4747/2007, 4749-4750/2007, 4752/2007, 4071/2007, CIVIL APPEAL NOS. 6023, 6024
& 6025 OF 2008 (Arising out of S.L.P.(C) Nos. 10893/06, 21174/07 &
24323/07) ORDER Leave granted in Special Leave Petitions.
Two questions, as
stated hereinbelow, arise for determination in this batch of Civil Appeals:
appellant-assessee was entitled to deduction under Sections 80-HH and 80-I of
the Income Tax Act, 1961 in respect of ship breaking activity undertaken by it?
(2) Whether 'usance interest' partakes of the character of purchase price and,
therefore, not liable to deduction at source under Section 195(1) of the Income
Tax Act, 1961?"
We may refer to
C.A.Nos.6692-6723/2003 for deciding these appeals.
Answer to Question
The Income Tax, 1961
Act does not define the expression 'industrial undertaking'. Section 80HH falls
under Chapter VIA. Section 80HH falls under sub-Chapter C which deals with
"deductions in case of certain incomes". Section 80HH deals with
deduction in respect of profits and gains from newly established industrial
undertakings. Under Section 80HH(1), it is, inter alia, provided that where
gross total income of an assessee includes any profits and gains derived from
an industrial undertaking to which the section applies, then, a deduction shall
be allowed in computing the total income of the assessee for such profits and
gains of an amount equal to 20% thereof. However, under Section 80HH(2), the
deduction applies only to an industrial undertaking which fulfils certain
conditions, namely, that the industrial undertaking must be involved in the
activity of "manufacturing or producing articles". It is this expression
in clause (i) of sub-section (2) of Section 80HH which arises for consideration
before us in this case.
reported in 204 ITR
412, a Division Bench of this Court held that the word 'production' has a wider
connotation than the word 'manufacture'. It was further held that the word
'production' when used in juxtaposition with the word 'manufacture' takes in
bringing into existence new goods by a process which may or may not amount to
manufacture. It also takes in all the by-products, intermediate products and
residual products which emerge in the course of manufacture of goods.
Learned counsel Shri
Ranbir Chandra, appearing on behalf of the Department, emphasizes the words
"new goods". In fact, the impugned judgment of the Gujarat High Court
also proceeds on the basis that when a ship breaking activity is undertaken,
the articles which emerged from the activity of ship breaking continued to be
the part of the ship; that such parts do not constitute new goods and,
consequently, in this case, the impugned judgment proceeds to hold that the
assessee was not entitled to claim the benefit under Sections 80HH and 80I of
the 1961 Act as there was neither production nor manufacture of new goods by
the process of ship breaking.
We do not agree with
the view taken by the Gujarat High Court in the impugned judgment for the
reported in 251 ITR
807, the Bombay High Court has analysed the entire ship breaking activity, the
articles which emerged from that activity, the various steps which are required
to be undertaken for ship breaking activity and, consequently, after placing
reliance on the judgment of this Court in Budharaja's case (supra), it has held
that the ship breaking activity resulted in production of articles which
emerged when the ship breaking activity stood undertaken. In our view, the
important test which distinguishes the word 'production' from 'manufacture' is
that the word 'production' is wider than the word 'manufacture' as held in
Budharaja's case. Further, it is true that in Budharaja's case, the Division
Bench has used the word 'new article'. However, what the Division Bench meant
was that a distinct article emerges when the process of ship breaking is
undertaken. Further, the Legislature has used the words 'manufacture' or
'production'. Therefore, the word 'production' cannot derive its colour from
the word 'manufacture'. Further, even according to the dictionary meaning of
word 'production', the word 'produce' is defined as something which is brought
forth or yielded either naturally or as a result of effort and work (see
Webster's new international dictionary). It is important to note that the word
'new' is not used in the definition of the word 'produce'.
judgment of the Bombay High Court in the case of Ship Scrap Traders (supra)
stands affirmed by the judgment of this Court in the case of case, the question
arose before a Bench of three Judges of this Court was as to whether extraction
and processing of mineral ore amounts to production within the meaning of the
word in Section 32A(2)(b)(iii) of the 1961 Act? It was held that the word
'production' is wider than the word 'manufacture'. It was held that the word
'production' has a wider connotation than the word 'manufacture'. It was
further held that the mined ore need not be a new product. In fact, the
Department had raised an identical argument in that case stating that the mined
ore was not a new product and, consequently, there was no production. This
argument has been specifically rejected in Sesa Goa's case.
For the aforestated
reasons, therefore, we are of the view that the Tribunal in the present case
was right in allowing the deduction under Sections 80HH and 80I to the assessee
holding that the ship breaking activity gave rise to the production of a
distinct and different article. Accordingly, the said question is answered in
favour of the assessee and against the Department.
Answer to Question
As regards the second
question, we may state that in this case, the controversy which arose for
determination was whether the assessee was bound to deduct TDS under Section
195(1) of the 1961 Act in respect of usance interest paid for purchase of the
vessel for ship breaking? According to the Department, TDS was deductible under
Section 195(1) whereas, according to the assessee, such interest partook of the
character of the purchase price and, therefore, TDS was not deductible.
Therefore, the key question which arose for determination was whether the
assessee was in default for not deducting TDS under Section 195(1) of the 1961
Act? It may be mentioned that we are not required to examine this question in
the light of the impugned judgment because after the impugned judgment which
was delivered on March 20, 2003, the Income Tax Act was amended on 18th
September, 2003 with effect from 1st April, 1983. By reason of said amendment,
Explanation-2 was added to Section 10(15)(iv)(c), which reads as under:
2---For the removal of doubts, it is hereby declared that the usance interest
payable outside India by an undertaking engaged in the business of
ship-breaking in respect of purchase of a ship from outside India shall be
deemed to be the interest payable on a debt incurred in a foreign country in
respect of the purchase outside India."
On reading that
Explanation, it is clear that usance interest is exempt from payment of income
tax if paid in respect of ship breaking activity. This amendment came into
force only after the impugned judgment. It was not there when the impugned
judgment was delivered.
For the aforestated
reasons, question No.2 as to whether the assessee was bound to deduct TDS under
Section 195(1) is answered in favour of the assessee and against the
Department. The assessee was not bound to deduct tax at source once
Explanation-2 to Section 10(15)(iv)(c) stood inserted as TDS arises only if the
tax is assessable in India. Since tax was not assessable in India, there was no
question of TDS being deducted by the assessee. Therefore, question No.2 is
answered in favour of the assessee and against the Department.
Appeals filed by the assessee(s) are allowed and Civil Appeal filed by the
Department is dismissed, with no order as to costs.
(B. SUDERSHAN REDDY)