The assessee firm was engaged in the business of ship
breaking at Alang port during the previous year, relevant to the assessment year
1995-96. Old and condemned ships were acquired by the assessee for demolishing.
The Assessing Officer in his order, inter alia, applying the ratio of decision
in CIT vs N.C. Budharaja & Co. [204 ITR 412 (SC), held that ship breaking would
not constitute a manufacturing activity and, therefore, disallowed the claim of
deductions u/s. 80 HH and 80-I of the Act. The Commissioner of Income Tax
(Appeals) agreed with the above view of the Assessing Officer. On appeal, the
Tribunal, relying on the decision in Ship Scrap Traders (251 ITR 806) and
Virendra & Co. vs ACIT (251 ITR 806), inter alia, held that ship breaking
results in production of articles and amounts to manufacture, and that
deductions should be allowed to the assessee under sections 80HH and 80-I of the
Act. On appeal by the revenue, the High Court, inter alia, reversed the order of
the Tribunal holding that ship breaking activity is not an activity of
manufacture or production of any article or thing for the purpose of availing of
the benefit of deductions under section 80HH and 80I of the Act.
On appeal by the assessee, the Supreme Court observed that
the impugned judgment of the Gujarat High Court proceeds on the basis that when
a ship breaking activity is undertaken, the articles which emerged from the
activity continued to be part of the ship; such parts did not constitute new
goods and, consequently, the assessee was not entitled to claim the benefits
under sections 80HH and 80-I of the 1961 Act, as there was neither production
nor manufacture of new goods by the process of ship breaking.
The Supreme Court held that the legislature has used the
words “manufacture” or “production”. Therefore, the word “production” cannot
derive its colour from the word “manufacture”. Further, even in accordance with
the dictionary meaning of the 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”.
The Supreme Court also drew support from its judgment in CIT vs Sesa Goa Ltd
[2004] 271 ITR 331, which affirmed the judgment of the Bombay High Court in the
case of Ship Scrap Traders (supra). The Supreme Court held that the Tribunal, in
the present case, was right in allowing the deductions under section 80 HH and
80-I to the assessee, holding that the ship breaking activity gave rise to the
production of a distinct and different article.
Another question that arose before the Supreme Court in this
petition was whether the assessee was bound to deduct TDS under section 195(1)
of the Act, in respect of usance interest paid for the purchase of vessel for
ship breaking. The Supreme Court held that it was not required to examine this
question because after the impugned judgment which was delivered on March 20,
2003, the Income Tax Act was amended on September 18, 2003, with effect from
April 1, 1983. By reason of the said amendment, Explanation 2 was added to
section 10(15) (iv) (c). On reading Explanation 2, it was clear that usance
interest was exempt from payment of income-tax, if paid in respect of ship
breaking activity. 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
internet is assessable in India. And since internet was not assessable in India,
there was no question of TDS being deducted by the assessee.
