Commissioner of Income-tax Vs. Himalyan Magnesite Ltd. - Court Judgment

Prakash Krishna, J.

1. The Income-tax Appellate Tribunal, Delhi, at the instance of the Revenue has referred the following question of law under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') for the opinion of this court :

'Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-company was entitled to deduction under Section 80J of the Income-tax Act, 1961 ?'

2. The facts giving rise to the present reference are as follows :

3. The assessment year 1981-82 is involved. The assessee-respondent is a company and it claimed deduction under Section 80J of the Act which was not allowed by the assessing authority as no production took place during the previous year relevant to the assessment year 1980-81. The only trial production took place in this relevant assessment year. The regular production had started only in June, 1981, i.e., during the subsequent assessment year. The claim was also not accepted by the Commissioner of Income-tax (Appeals). The Tribunal directed the Income-tax Officer to allow the deduction claimed under Section 80J, in case other conditions are satisfied.

4. Heard Sri A. N. Mahajan, learned standing counsel for the Department. None appeared on behalf of the assessee.

5. Learned standing counsel has placed reliance upon Sub-section (2) of Section 80J of the Act and submitted that since no regular production was done in the previous year relevant to the assessment year in question, the Tribunal has committed illegality in granting deduction under Section 80J of the Act. It is relevant to reproduce Section 80J(2) of the Act, which reads as follows :

'(2) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year :

Provided that in the case of an assessee, being a co-operative society, the provisions of this sub-section shall have effect as if for the words 'four assessment years', the words 'six assessment years' had been substituted.'

6. A close reading of the aforesaid provision shows that deduction under Section 80J shall be allowed in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use. The words 'begins to manufacture or produce article' are indicative of the legislative intention. These words do show that manufacturing or production of article should be on regular basis, i.e., in the sense of commercial production with a view to sell the manufactured goods or articles in the market. Regular manufacturing activity is different from trial production. In the case of trial production only the working of the plant and machinery and the quality of the things produced is checked not with a view to sell the manufactured goods or produced articles in the open market. This is only a testing of the machinery and plant and finished goods.

7. The Revenue has placed reliance upon a judgment of the Bombay High Court, in the case of CIT v. Hindustan Antibiotics Ltd. reported in : [1974]93ITR548(Bom) . The court interpreted the expression 'has begun or begins to manufacture or produced article' used in Section 15C(2)(ii) of the old Income-tax Act, 1922. The question arose whether a mere trial production will be regarded as beginning to manufacture or produce articles. It was held that until the assessee reaches a stage where it is in a position to decide that a final product can be manufactured, it cannot be said to have commenced manufacturing of articles. But the assessee has to produce trial production to verify whether it can be used ultimately in the manufacture of the final article, it does not amount to commencement of manufacture of articles for the purposes of Section 15C of the old Income-tax Act. It may be stated that since Section 15C of the old Income-tax Act is materially equivalent to Section 80J of the present Act. The object of Section 80J is to encourage new industrial undertakings. The profits of an industrial undertaking to which this section applies are exempt from tax up to a prescribed limit per annum on the capital employed in the undertaking. Therefore, the intention of the Legislature is to grant incentive to the newly established undertaking which begins to manufacture or produce articles, etc.

8. The aforesaid judgment has been followed by the Madras High Court in the case of Addl. CIT v. Southern Structural Ltd. reported in : [1977]110ITR164(Mad) , in which it has been held that for the purposes of Section 84 (as it then was) with the mere manufacture of a prototype would not be enough to say that the assessee had commenced manufacture of an article which can be sold ultimately. In that case also a question arose as to when the assessee undertaking began to manufacture or produce articles. The assessee undertaking would be eligible for relief under Section 84 with reference to the beginning of production or manufacture of article. The assessee was a manufacturer of wagons. It was held that mere production of a prototype is not production of articles, as such, because if the Ministry of Railways had rejected the prototype or had suggested substantial modification then it would not have been possible for the assessee to go into production of the wagons in accordance with the prototype already produced and the process of manufacture in accordance with the rectified type of wagons would take some further time. The Bombay High Court in Metropolitan Springs (P.) Ltd. v. CIT : [1981]132ITR893(Bom) with reference to Section 15C of the Indian Income-tax Act, 1922, has held as follows (page 896):

'the view of the Tribunal that once the materials are fed into the machine, whether for trial production or commercial production, it would amount to a manufacture for the purpose of the said sub-section is incorrect ...'

9. In view of the above discussion we are of the view that the Tribunal was not correct in holding that the assessee-company was entitled to deduction under Section 80J of the Act. The Tribunal in its order has placed reliance upon certain decisions of the apex court on the question of 'manufacture'. However, those decisions are misplaced and are not applicable to the controversy involved in the case in hand. To avail of the benefit of deduction under Section 80J of the Act it is essential that regular production should take place during the previous year, relevant to the assessment year in question. This aspect of the matter was not considered by the Tribunal. It lost sight of the fact that there is a difference between the trial production and the production of goods or articles. Section 80J of the Act talks about 'regular production' and not about 'trial production'.

10. In the result, we answer the question in the negative, i.e., in favour of the Revenue and against the assessee.