D.K. Seth, J.
1. The deduction under Sections 32A, 80HH and 80J of the IT Act, 1961 relevant to asst. yrs. 1983-84 and 1985-86 is in controversy before us.
The Department's submission:
2. Mr. S.N. Dutta, learned counsel for the Department, had pointed out that the learned Tribunal and the AO were right in holding that the business of the assessee did not qualify for the deduction under the said three sections. Since conversion of trees into logs does not change the nature and character of the tree and when it is converted into logs, it retains the same characteristics of wood and as such it does not amount to production, particularly, when no new commodity emerges out of such activity.
Submission of the assessee/appellant:
3. Mr. R.N. Dutta, learned counsel appearing on behalf of the assessee, on the other hand, contends that a tree when felled is not a commercially saleable article but when it is de-embarked and cut into pieces and logs are produced by seasoning the same, it becomes a commercially saleable article or thing. The concept of manufacture need not be introduced thereto.
Applicability of the decisions cited:
4. Both the learned counsel in support of their respective contentions have relied upon various decisions to which we shall be referring at appropriate stage. In order to assert that the conversion of trees into logs does not bring out a new commodity and as such would not amount to production, Mr. S.N. Dutta had relied upon a decision in CCE v. Kutty Flush Doors & Furniture Co. (P) Ltd. . This decision may not help us in the present context since it was a case under the Central Excises and Salt Act, 1944, where the classification of particular goods was the subject matter for consideration. This may not help us to interpret the principles relating to determination of question where classification is not at all material.
4.1 Mr. S.N. Dutta next relied upon the decision in Dy. CST v. Pio Food Packers . This case was also related to sales-tax for determining as to the consumption of a commodity in the process of manufacture which also may not help us for the purpose of interpretation of the provisions of the Income-tax Act, (IT Act); inasmuch as there the only consideration was whether the particular raw material was consumed for manufacturing of new article or thing. Therefore, that decision would not help us in the present context.
4.2 In order to counter the said proposition, Mr. R.N. Dutta relied on a decision of the Supreme Court in Gem Granites v. CIT , wherein it was held that provisions in Central
Excise Tariff Act and Customs Tariff Act may not come in proper aid to construing the provisions of the IT Act in course of interpretation of statutes. In the said decision, the apex Court had observed that both under the Customs Tariff Act and the Central Excise Tariff Act, a distinction is made between minerals and processed minerals relevant for classification. However, a classification which is relevant for the purpose of determining the rate of duty under those Acts cannot be imported into the IT Act which makes no such distinction.
Interpretation : Principles : Object and purpose:
5. Before we proceed to decide the question as to what would mean by production for the purpose of the three sections with which we are now concerned, we may look at the object and purpose of incorporation of these provisions in the IT Act. A plain reading of these provisions clearly indicates from the very scheme that has been provided for that these are really in the form of incentive for industrial growth and development. The object cannot be overlooked while interpreting statute. A construction, which advances the object, is to be preferred than that which is opposed to it.
5.1 It was so held in Bajaj Tempo Ltd. v. CIT cited by Mr. R.N. Dutta. In the said decision, the apex Court had observed that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. Relying on Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd. v. CIT , it had observed further that the law providing for concession for tax purposes to encourage industrial activity should be liberally construed. Relying on the decision in CIT v. Strawboard Manufacturing Co. Ltd. and dealing with Section
15C(1), the apex Court had pointed out that the provision thereof was directed towards encouraging industrialization by permitting an assessee for setting up a new undertaking to claim the benefit of not paying tax to the extent of 6 per cent in a year on the capital employed. Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But, that turned out to be the unintended consequence of construing the clause literally, as was done by the High Court, for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control are lost sight of.
Sections 32A, 80HH, 80J: Production : Meaning of:
6. Keeping this principle in mind, we may now proceed to undertake the exercise of interpreting the provisions of the said three sections, which we may now summarize as hereafter.
6.1 Sec. 32A provides for certain deduction in the computation of the income from the profits and gains from the business by way of investment allowance. Similar benefit is allowed further under Section 80HH when such industrial undertaking is operating in backward areas. Further, similar incentive was allowed to new industrial undertaking under Section 80J. Admittedly, the assessee had its industrial undertaking in the Andaman & Nicobar Islands, which is admittedly a backward area. The industrial undertaking of the assessee was established on 27th Jan., 1977 whereas the cut off date of eligibility is 31st March, 1976. Thus, factually the assessee, a new industrial undertaking operating in a backward area having invested within the meaning of Section 32A, qualifies for the test to come within the scope and ambit of the said three sections. But, in order to obtain the benefit, the business of the assessee must be that of an industrial undertaking owned by the assessee and engaged in a business operation in relation to manufacture and production of an article or thing, the crux of the eligibility criteria under the provisions of the said three sections in common. Therefore, we need not deal with the said three sections separately. The entitlement of the assessee cannot be disputed or denied provided it is established that the business of the assessee was industrial undertaking and this industrial undertaking operating in a backward area is engaged in manufacture or production of an article or a thing established after 31st March, 1976 and had made the investment.
6.2 Therefore, we are now called upon to decide as to whether the establishment of the assessee is an industrial undertaking, first and second, if it is an industrial undertaking whether it is engaged in manufacture or production of an article or thing.
Assessee : Whether industrial undertaking:
6.3 In relation to Industrial Disputes Act, 1947, the question was considered in the case of Bangalore Water Supply & Sewerage Board v. R. Rajappa and Ors. , it was held that any undertaking which is engaged in production which includes any goods (article, thing) or service calculated to satisfy human wants and wishes other than religious and spiritual, are industries. This decision had brought almost all establishments within the sweep of industry unless excluded by special statute governing a particular kind of establishment. Applying the said test the establishment of the assessee is definitely an industrial undertaking when it is engaged in production of certain commodities or things. Admittedly, the assessee's establishment employs more than 20 persons and carried on the operation with the aid of power. The words 'industrial undertaking' cropped up many a times before the High Courts and the Supreme Court. The industrial undertaking has not been defined in the IT Act. Therefore, it must be given the ordinary meaning of an industry. It cannot have a meaning different than that has been defined in the Bangalore Water Supply & Sewerage Board (supra). The interpretation of the words industrial undertaking does not pose much difficulty before us and as such we do not find any reason to hold otherwise than that the establishment of the assesses is an industrial undertaking. This, however, has also not been disputed either by the AO or by the learned Tribunal while this was so held by the CIT(A).
6.3.1 This question cropped up in P. Alikunju, M.A. Nazeer Cashew Industries v. CIT . In the said decision, the Kerala High Court dealing with Section 54D of the IT Act, 1961 took the following view :
"What then is an 'industrial undertaking'? The IT Act does not define what is 'an undertaking' or what is an 'industrial undertaking'. It has, therefore, become necessary to construe these words. Words used in a statute dealing with matters relating to the general public are presumed to have been used in their popular rather than their narrow, legal or technical sense. Loquitur ut vulgus, that is, according to the common understanding and acceptation of the terms, is the doctrine that should be applied in construing the words used in statutes dealing with matters relating to the public in general. In short, if an 'Act is directed to dealings with matters affecting everybody generally, the words used have the meaning attached to them in the common and ordinary use of language.' [Vide Unwin v. Hanson (1891) 2 QB 115 (CA), per Lord Esher M.R. at p. 119]. That the IT Act is of general application, is beyond dispute. It, therefore, follows that the meaning that should be given to these words 'industrial undertaking' must be the natural meaning. It is all the more so because the IT Act is one consolidating and amending the law relating to income-tax and super-tax [see Rao Bahadur Ravulu Subba Rao and Ors. v. CIT ].
'Undertaking' in common parlance means an 'enterprise', 'venture', 'engagement'. It can as well mean "the act of one who undertakes or engages in a project or business" (Webster). An undertaking mentioned in Section 54D must be one maintained by a person for the purpose of carrying on his business. - 'Undertaking' for the purpose of this section, however, must be an 'industrial undertaking'. The demonstrative adjective 'industrial' qualifying the word 'undertaking' unmistakably and with precision shows that the undertaking must be one which partakes of the character of a business. That, that is the meaning that is intended by Parliament is clear from the context in which these words have been used in the section...."
Eligibility of deduction : Whether satisfied :
6.4 Each and every industrial undertaking would not be eligible for this deduction. It is only the industrial undertaking that satisfies the test, as indicated hereinabove, common to all these three sections, would only be eligible and qualified to such deduction. An industrial undertaking which is engaged in manufacture and production of an article or thing would be eligible for the deduction under the head "Investment allowance" under Section 32A; it would be eligible for the deduction under Section 80HH if situated in backward area; it would, if established after 31st March, 1976, be eligible to the deduction allowed under Section 80J. As discussed above in the present case, all the above ingredients are undisputedly satisfied.
Production : Meaning of:
6.5 In the present case, the learned Tribunal had proceeded to deny the relief on the ground that the establishment does not undertake manufacture of any article or thing. Mr. R.N. Dutta in his usual fairness, at the very outset, pointed out that the assessee had never claimed to manufacture logs. The relief is claimed on the ground that the establishment of the assessee is engaged in production of logs. The facts are not in dispute in the present case. It is admitted that the assessee is engaged in business of felling trees, cutting them into pieces, and converting the pieces into logs to make them commercially saleable article. Trees cannot be sold in the open market with all its branches and leaves even if felled, as a whole. The branches are slopped, the trunk is cut into pieces and then converted into logs which primarily involves effort or exercise or enterprising or undertaking of some process. Mr. R.N. Dutta had pointed out that the trunk has to be de-embarked in order to extract the timber. The conversion of trunk into logs is the first step towards extraction of timber for which human efforts are necessary. In order to make it a saleable commercial article, the logs are seasoned. The commercial activity that the assessee undertakes is sale of logs, the main purpose of the assessee's business. The enterprise undertaken in the industrial undertaking of the assessee is to produce commercially saleable logs out of the felled trees. Thus, the production of logs, though may not involve manufacture, yet a production within the meaning of Sections 32A, 80HH and 80J, respectively.
6.6. Mr. S.N. Dutta had relied on the decision in Appeejay (P) Ltd. v. CIT , wherein, it was held that the blending of tea was not a manufacture or production since it does not bring out an article or thing out of the process of blending. The tea remains tea even after such process. According to Mr. S.N. Dutta, this decision by the Division Bench of this Court is binding. He cited the decision in CIT v. Indian Press Exchange Ltd. , wherein it was held that so far as this Court is concerned the decision of this Court is binding and this Court cannot take a contrary view following any other High Court. There is no doubt or dispute with regard to the said proposition unless there are decisions of the apex Court or the decision is per incuriam. But, at the same time, it is an accepted proposition that a decision becomes binding only when the ratio decided therein becomes applicable as a precedent in the facts and circumstances of the case in which it is sought to be applied.
6.7 The decision in Appeejay (P) Ltd. (supra) was considered in the context of Section 80J(4)(iii) as it stood for the relevant assessment year. We may not derive much help from the said decision since it related to the blending tea purchased from the market. The process of blending is undertaken by purchasing tea of different varieties from the market and blend them in different proportion, which does not bring out a thing or commodity other than tea. In this context, it was held that blending of tea was not a process engaged in production of an article or thing. The tea that was purchased from the market for the purpose of being blended is equally a saleable commodity and could have been sold even without blending and it does not become a saleable commodity only on account of its being blended. Therefore, on facts, this decision is distinguishable and cannot be of any help for the purpose with which we are now concerned. Inasmuch as the preparation of logs by converting the felled trees is a process of extracting timber undertaken to produce a commercially saleable thing or article distinct from blending of tea.
6.8 The question was considered in CIT v. Abdul Ahad Najar . In the said decision, the assessee was engaged in extraction of timber and other forest produce. The Jammu and Kashmir High Court had held that the conversion of felled trees into logs, plank, etc. would amount to a manufacturing process. We may not, however, agree to the said proposition to the extent it was so held by the Jammu and Kashmir High Court since the conversion of logs in our view would not amount to manufacture since no article other than wood is brought out and no change in the characteristics is effected. Conversion of tree into logs would not change the character, which remains wood as before. Admittedly, in this case also the assessee did not claim conversion of felled tree to logs as manufacture. In fact, as we have already observed, we do not think that conversion of tree into logs would amount to manufacture. Now we are supposed to examine whether it amounts to production. An establishment, which is engaged in production of something, is an industrial undertaking eligible under this provision. In CIT v. G.S. Atwal & Co. (Gua) , this Court held as follows :
"Ordinarily speaking if a manufacturing activity or an article, producing activity is carried on, an undertaking carrying on such activity is to be classed as an industrial one. It might be small-scale or large-scale, that does not matter much. Even if an undertaking is manufacturing or producing articles, but is still not to be classed as an industrial one for this, clear indications have to be given as to why this difference should be made in the case of the undertaking in question, so that it stands out from the general category...."
6.9 The de-embarking of the trunk of the tree and cutting the same into pieces and seasoning the same in order to convert the tree trunk into logs as commercially saleable commodity requires the human effort to undertake such process and the end product is something different from the tree though its characteristics remain wood but definitely is an article or thing which is commercially saleable and as such the process undertaken for conversion of trees into logs as commercially saleable commodity would amount to production within the meaning of the provisions of the said section.
6.10 In CWT v. Radhey Mohan Naiain , while dealing with Section 5(1)(xxxi), Explanation and (xxxii) of the WT Act, 1957, the question was answered in relation to the meaning of processing of goods. In the said decision it was held that the word "process" would be understood in the sense in which it is understood in common parlance. In processing the original article need not lose its identity altogether but some changes are brought into it. In the said case, plain white cloth were printed and dyed for converting them into bed-spreads, scarves, garments, etc., were held to be a process undertaken by an industrial undertaking.
6.11 The Supreme Court in CIT v. Sesa Goa Ltd., (2004) 271 ITR 331 (SC) while considering the question under Section 32A(2)(b)(iii) for granting investment allowance dealt with the question of production in a case where the assessee's industrial undertaking was engaged in the business of excavating, mining and processing mineral ore. Mineral ore was not excluded by the Eleventh Schedule. The only question was whether such business was one of manufacture or production of ore. It had noted the issue as dealt with by different High Courts over a period of time. The High Courts held that the activity amounted to "production" and answered the issue in question in favour of the assessee. The High Court of Andhra Pradesh did so in CIT v. Singareni Collieries Co. Ltd. , the Calcutta High Court in
Khalsa Brothers v. CIT and CIT v. Mercantile
Construction Co. (1994) 74 Taxman 41 (Cal) and the Delhi High Court in CIT v. Univmines (P) Ltd. . The Supreme Court noted further that the Revenue did not questioned any of these decisions, at least not successfully, and the position of law was taken as settled. In the said decision in Sesa Goa Ltd. (supra), the apex Court had held that :
"The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This Court had, as early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar (1961) 12 STC 150 (SC), defined the word 'production', albeit, in connection with the Bihar Sales-tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning 'amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort'. From the wide definition of the word 'production', it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word 'production' since ore is 'a thing', which is the result of human activity or effort....
It is, therefore, not necessary, as has been sought to be contended by learned counsel for the Revenue, that the mined ore must be a commercially new product....
Learned counsel appearing on behalf of the assessee, correctly submitted that the other provisions of the Act, particularly Section 33(1)(b)(B) r/w item No. 3 of the Fifth Schedule to the Act, would show that mining of ore is treated as 'production'. Section 35E also speaks of production in the context of mining activity. The language of these sections is similar to the language of Section 32A(2). There is no reason for us to assume that the word 'production' was used in a different sense in Section 32A."
6.12 The Supreme Court in CIT v. N.C. Budharaja & Co. and Anr. Etc. Etc. had held that the word "production" is much wider than the word "manufacture". It was held at p. 423, that :
"The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterized as production, every production need not amount to manufacture. The word 'production' or 'produce' when use 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."
6.13 Having regard to the proposition as discussed above, particularly in view of the decision in Sesa Goa Ltd. (supra), it appears that the word "production" has been used in a very wide sense within the scope of Section 32A to mean to bring out a commercially new product. In the said case mining, processing of ore was held to be a production though the ore did not lose its characteristics and remained ore. Ore without being mined may not be a commercially saleable commodity but when mined it is definitely a commercially saleable commodity. If we read this decision of the apex Court in between lines, we would find that it is not the saleability of the goods commercially alone would be the factor, on the other hand, the Supreme Court proceeded on the concept of raising or converting into a commercially new product. The tree trunk could as well be saleable as the unprocessed ore for being used for processed ore or preparation of logs without changing its quality and characteristics but even then the processed ore or the logs become a commercially new product within the ratio decided in Sesa Goa Ltd. 's case (supra).
6.14 In Mysore Minerals Ltd. v. CIT , while
considering Section 32, the apex Court had laid down that the provision that confers benefit on the assessee should be so interpreted and the words used therein should be assigned such meaning as would enable the assessee to secure the benefit intended to be given by the legislature to the assessee. It is also well-settled that where there are two possible interpretations of a taxing provision, the one which is favourable to the assessee should be preferred.
7. Having regard to the propositions as discussed above, 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 thereunder for the asst. yrs. 1983-84 and 1985-86, respectively.
8. In the result, the appeal succeeds. The order passed by the learned Tribunal is hereby set aside.
8.1 We answer the question in the affirmative in favour of the assessee.
8.2 The appeal is, thus, allowed. There will, however, be no order as to costs.
Soumitra Pal, J.
9. I agree.