1. These four appeals relating to the assessment years 1979-80 to 1982-83 by the assessee are against the order of the Commissioner, Vidarbha, Nagpur, under Section 263 of the Income-tax Act, 1961 ('the Act'), setting aside the assessments for these years and directing the ITO to examine the activities carried on by the assessee and allow exemption under Section 80HH of the Act only in respect of those items which would qualify for being categorised as manufacturing activities.
The facts in this regard, the rival submissions and our conclusion thereon are discussed hereunder.
2. The assessee, a private trust, carried on the business of purchasing forest, felling the trees and converting them into logs and, subsequently, sawing them into timber of various sizes and varieties fit to be used in construction of buildings and also for being put to other uses inclusive of manufacture of furniture. The business operations of the assessee were carried on in a backward area.
Deduction under Section 80HH was claimed in respect of the profits and gains derived from the industrial undertaking consisting of the above-mentioned operations. In the assessments completed on 5-10-1981,17-11-1981, 22-3-1982 and 12-5-1982 for these years, the deductions claimed in this behalf were allowed by the ITO.3. The Commissioner, on going through the assessment records, was of the view that the deductions allowed by the ITO in this behalf were not proper as there was no manufacturing activity involved in the process of felling trees and conversion of the same into logs and, subsequently, into planks of various sizes, fit for use in building activities. He, accordingly, required of the assessee to show cause why the assessments should not be set aside with a view to regulating the deductions under Section 80HH only in respect of those items, which actually could be categorised as manufacturing activities. The learned representative of the assessee filed an explanation before the Commissioner, stating that all the activities carried on by the assessee fell within the compass of manufacturing activities inasmuch as, standing timber was converted into logs of different sizes and, subsequently, the same was converted into sawn timber of different varieties fit for use in various activities and, therefore, the final product was entirely a different commercial commodity, which had a market of its own. Reliance was placed on CIT v. N.C. Budharaja & Co.
[1980] 121 ITR 212 (Ori.).
4. The Commissioner did not accept the above submissions and set aside the assessments as mentioned earlier to be re-done as per the directions contained in his order. He held that no manufacturing activity was involved in the sale of firewood. He was of the opinion that all the activities of the assessee did not represent manufacturing activities and, therefore, he directed the ITO to examine each activity and allow deduction under Section 80HH only in respect of those activities, which actually represented manufacturing of commodity.
5. Aggrieved with the same, the assessee is in appeal before us. The submissions made on behalf of the assessee may be summarised as under.
The Commissioner failed to give a specific direction as to which activity of the assessee did not qualify for being categorised as manufacturing activity and, therefore, his order is illegal inasmuch as, he has left it to the ITO to make fresh enquiries in this regard.
Reliance was placed on J.P. Srivastava & Sons (Kanpur) Ltd. v. CIT [1978] 111 ITR 326 (All.). The following passage of this decision was relied upon: We are of opinion that the approach of the Commissioner is erroneous. The failure of the Income-tax Officer to deal with the claim of the assessee in the assessment order may be an error, but an erroneous order by itself is not enough to give jurisdiction to the Commissioner to revise it under Section 33B. It must further be shown that the order was prejudicial to the interests of the revenue. It is not each and every order passed by the Income-tax Officer which can be revised under Section 33B. Section 33B contemplates a notice to the assessee. In response to the notice the assessee may show to the Commissioner that the order sought to be revised is not prejudicial to the interests of the revenue. In that event, the Commissioner would have no jurisdiction to take any further action. He would be competent to take action only if he rejects the plea of the assessee. It thus becomes necessary for the Commissioner to examine the merits of the objection raised by the assessee. He cannot delegate that power to the Income-tax Officer by setting aside the assessment order and directing him to make fresh assessment after taking into consideration the objection of the assessee.
It was submitted with reference to the above, that the Commissioner should examine each and every item on its merits and he cannot delegate that power to the ITO by setting aside the assessment. As to whether the operations in which the assessee was engaged, namely, purchasing of forests, cutting down the trees, making them into logs and finally converting them into planks of various sizes for use in various activities, would qualify for being categorised as manufacturing activities, the appellant's representative brought to our notice the following two decisions of the Calcutta High Court under the Sales Tax Act, wherein it was held that sawing of planks from timber or sizing the same amounts to manufacture and the person carrying on such business is a manufacturer. Our attention was also drawn to the second decision, wherein it has been held by the Calcutta High Court that chopping of timber into firewood is a manufacturing process, and, therefore, firewood is a manufactured article--Shaw Bros. & Co. v.State of West Bengal [1963] 14 STC 878 (Cal.) and Bachha Tewari v.Divisional Forest Officer [1963] 14 STC 1067 (Cal.).
On the basis of the above decisions, the appellant's representative contended that the assessee's activities could be categorised as manufacturing activities and, therefore, the assessee would be entitled to the deduction under Section 80HH, being an industrial undertaking.
As regards the observation of the Commissioner that sale of firewood would not qualify for being treated as a manufacturing activity, the appellant's representative drew our attention to the second of the above-mentioned decisions, wherein it has been held that chopping of timber into firewood is a manufacturing process. He further submitted that, in any event, firewood is a bye-product in the course of manufacture of timber into planks of various sizes and, therefore, the same was an integral part of the industrial undertaking, consisting of the above manufacturing activity being one of the bye-products. In this connection, he invited our attention to the decision of the Tribunal in the case of Pondicherry Distilleries Ltd. v. ITO [1984] 8 ITD 39 (Mad.), wherein with reference to the claim for Section 80HH relief, the Tribunal has held that the relief under this section was admissible even in respect of interest on deposits of money held as part of the industrial undertaking as it is nothing but an ingredient of the profits and gains derived from such undertaking. Finally, reliance was also placed on N.C. Budharaja & Co.'s case (supra) and it was submitted that the assessee was registered under the Factories Act, 1948, as a saw mill was being operated.
6. On behalf of the revenue, the learned departmental representative made the following submissions: The Commissioner considered the entire deduction as erroneous and, therefore, set aside the assessments for being done after a thorough scrutiny in the light of the remarks made in his order and, therefore, there was no legal lacuna in the order of the Commissioner. The Commissioner had not confined himself to the profits generated by sale of firewood and the reference made by him to the same was only to indicate that the same would not be entitled to be treated as a manufacturing activity. Under Section 263, the Commissioner has the power to pass such orders as the circumstances of the case warrant, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Therefore, the directions given by the Commissioner to the ITO to make a fresh assessment after examination of each activity, is well within the powers conferred on the Commissioner under Section 263. There was absolutely no abdication of the power of the Commissioner in favour of the ITO. He had applied his mind to the facts of the case and then only came to the conclusion that the assessments made by the ITO were erroneous in various respects.
There was absolutely no delegation of any power to the ITO.7. As regards the merits, the activities of the assessee amount to only processing and do not amount to manufacture. The final product also continues to be wood whereas in the manufacturing activity, the final product is totally different from the original raw material. He, therefore, submitted that Section 80HH deduction was not admissible to the assessee in this case.
8. After a careful consideration of the facts and circumstances, we are of the opinion that the assessee is entitled to deduction under Section 80HH in respect of the profits derived from the activities carried on by it. We, however, do not agree with the submission made on behalf of the assessee that the order of the Commissioner suffers from a legal lacuna, though, however, we agree with the submission that sawing of planks from timber or sizing the same, amounts to manufacture. For this, we rely on the decision of the Calcutta High Court in Shaw Bros.
& Co.'s case (supra), where the question was whether the sawing and sizing of things into planks was a manufactured commodity. The contention on behalf of the appellant-assessee, in that case, was that by sawing the timber and producing planks of various sizes, no manufactured commodity had come into existence. The Calcutta High Court did not agree with this view. They held as follows: When planks are sawed out of logs, what is produced is a different thing from logs capable of being put to different uses. Therefore, when planks are made from logs or damaged wood, a new kind of commodity is manufactured because plank made out of timber is not timber in its nascent state.
In the second case of Bachha Tewari's case (supra) the same High Court has held that chopping of timber into firewood is a manufacturing process and, therefore, firewood is a manufactured article. In this context, their Lordships held that manufacturing process meant bringing into being a commercial article for sale in the business in which the dealer is engaged, namely, an article which by itself has a commercial value and which can be the subject-matter of sale for price.
Accordingly, they held that there was no reason to exclude the chopping of timber into firewood from the ambit of manufacturing process. The ratio decidendi of the above-mentioned two decisions, though under the Sales Tax Act, is equally applicable under the 1961 Act inasmuch as, what is at issue for Section 80HH deduction is whether a new manufactured article has emerged and, therefore, there was an industrial undertaking entitled to the relief under this section. As regards firewood, though independently by virtue of the above-mentioned decision, deduction under Section 80HH is admissible, even otherwise we find, that the same represents an integral part of the industrial undertaking, being a byeproduct in the course of manufacture of planks and, therefore, following the decision of the Tribunal in Pondicherry Distilleries Ltd.'s case (supra), we would hold that even sale of firewood would be eligible for deduction under Section 80HH. It is needless for us to refer to N.C. Budharaja's case (supra). In the above view of the matter, we are of the opinion that the activities of the assessee can be taken to be manufacturing activities inasmuch as, commercially viable commodities have emerged out of the same and, therefore, there was an industrial undertaking as required for the purpose of the deduction under Section 80HH. In this view of the matter, we uphold the claim for deduction under Section 80HH in respect of the profits of the industrial undertaking and cancel the orders of the Commissioner under Section 263.