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1979 Supreme(Ori) 80
IN THE HIGH COURT OF ORISSA
R.N. Misra, N.K. Das, JJ.
COMMISSIONER OF INCOME TAX - APPELLANT
Versus
N.C. BUDHARAJA AND COMPANY - RESPONDENT
Special Jurisdiction Case Nos. 97, 98 and 99 of 1978
Decided On : 13-11-1979
Important Points
Subject
Income Tax - Deductions
Act Referred
Headnote
INCOME TAX - Section 80HH - Industrial undertaking - Whether a firm of contractors engaged in the construction of a dam is entitled to the benefit of deduction u/s 80HH - Held, yes.
Fact of the Case:
The assessee, a firm of contractors, had undertaken the construction of an irrigation project. The ITO granted the assessee the benefit of deduction u/s 80HH of the Income Tax Act, 1961. The CIT, however, held that the assessee was not entitled to the deduction as it was not an industrial undertaking engaged in the manufacture or production of articles. The Tribunal, on appeal, held that the assessee was entitled to the deduction.
Finding of the Court:
The court held that the assessee was entitled to the benefit of deduction u/s 80HH of the Act. The court held that the assessee was an industrial undertaking and that it was not necessary for the assessee to be engaged in the manufacture or production of articles in order to be entitled to the deduction.
Issues: Whether a firm of contractors engaged in the construction of a dam is entitled to the benefit of deduction u/s 80HH of the Income Tax Act, 1961.
Ratio Decidendi: The court held that the assessee was an industrial undertaking and that it was not necessary for the assessee to be engaged in the manufacture or production of articles in order to be entitled to the deduction. The court held that the assessee was entitled to the deduction as it had undertaken the construction of an irrigation project, which was an industrial undertaking.
Final Decision: The court answered the question referred in the affirmative and held that the assessee was entitled to the benefit of deduction u/s 80HH of the Act.
G. Rath, R.K. Rath, N.C. Panigrahi and G.S. Sarangi, for the Respondent
JUDGMENT :
R.N. Misra, J. - The Income Tax Appellate Tribunal, Cuttack Bench, has stated these cases as directed by this court on the applications of the revenue u/s 256(2) of the Income Tax Act, 1961 (hereafter referred to as "the Act") and has referred the following common question for opinion of the court:
"Whether, on the facts found by the Appellate Tribunal, the assessee is entitled to the benefit provided u/s 80HH of the Income Tax Act, 1961?"
2. The relevant assessment years are 1974-75 and 1975 76. S.J.C. 97 and 98 of 1975 relate to one registered firm which had undertaken construction of a minor irrigation project in the district of Dhankanal. The first reference is with respect to the assessment year 1974-75 and the other for the subsequent assessment year. S.J.C. No, 99 of 1978 relates to assessment year 1975-76 and the assessee therein, another registered firm, undertook erection of the Sundar Irrigation Project. According to the assertion of the revenue, the firms had come into existence for execution of the particular works and were to stand dissolved when the works were over. The ITO while assessing the firms conceded relief u/s 80HH of the Act to both the assessees. The CIT in exercise of powers u/s 263 of the Act came to hold :
"The concession provided u/s 80HH is available to an industrial undertaking which manufactures or produces articles...... It would thus appear that to constitute manufacture or produce articles it is necessary that the material subjected to manufacture should be changed or modified and something tangible should come out as a result of manufacturing process to make it capable of being sold...... In short the firm cannot be held as an industrial undertaking merely because it has to undertake certain manufacturing process in the course of construction of the irrigation project."
and directed the ITO to withdraw the relief and modify the assessments of the firms as also the partners. The assessees appealed to the Appellate Tribunal. The Tribunal found :
"The assessee before us is engaged in the construction of a dam which is an irrigation project of considerable magnitude. It employed considerable labour, machinery and capital as is apparent from its balance-sheet and profit and loss account. The work was done for a considerable period of time. The net product is only one, i.e., a particular dam. The product became the property of the contract as soon as it was brought into existence. For the purpose of building the dam, the assessee had to excavate, bring big boulders, break them into small ones and engage in a variety of engineering activities. In other words, it displaced certain materials from the site of the dam and brought other materials to the said site and performed various engineering processes. It is true that the net product is composed of its components but the commercial use and value of the net product is completely different from those of its components. These activities are not only 'processing' as held in the case of Addl. Commissioner of Income Tax Vs. Farrukhabad Cold Storage (P.) Ltd. but also come within 'manufacture' as held in the case of Commissioner of Income Tax, Bombay City I Vs. Tata Locomotive and Engineering Co. Ltd.. The article finally produced had considerable commercial value for which a heavy payment was received by the assessee. Taking all the facts and circumstances of the case into consideration, we have no doubt in our mind that the assessee was engaged in 'industrial activities' as opposed to 'trading activities' or 'agricultural operations' in a backward area within the meaning of Section 80HH of the Act."
3. Accordingly, the Tribunal vacated the order of the Commissioner and restored the benefit extended by the ITO. The revenue challenges the action of the Tribunal-
Section 80HH, as far as relevant, provides :
"(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel,
