ORDER :

S.H. Kapadia, J.

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.As Nos. 6692-6723/2003 for deciding these appeals.

Answer to Question No.1:

2. 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.

3. In the case of Commissioner of Income Tax v. 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.

4. The 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.

5. 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 v. 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