IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.6692-6723 OF 2003

Vijay Ship Breaking Corpn. & Ors. ...Appellant(s)

Versus

Commnr. of Income Tax, Ahmedabad ...Respondent(s)

W I T H

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)

O R D E R

Leave granted in Special Leave Petitions.

Two questions, as stated hereinbelow, arise for determination in this batch

of Civil Appeals:

“(1)  Whether  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.

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Answer to Question No.1:

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.

In  the  case  of  Commissioner  of  Income Tax Vs.  N.C.Budharaja  & Co.,

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

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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 following reasons:

Firstly, in the case of Ship Scrap Traders Vs. Commissioner of Income Tax,

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

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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'.   

Secondly, the 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

Commissioner of Income Tax Vs.  Sesa Goa Ltd., reported in 271 ITR 331.  In that

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 No.2:

As  regards  the  second  question,  we  may  state  that  in  this  case,  the

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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:

“Explanation  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

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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.

Accordingly,  Civil  Appeals filed by the assessee(s)  are allowed and Civil

Appeal filed by the Department is dismissed, with no order as to costs.

                         ...................J.               (S.H. KAPADIA)

                        ...................J.

                                       (B. SUDERSHAN REDDY) New Delhi, October 01, 2008.

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