Cit Vs. Himalayan Magnesite Ltd. - Court Judgment

Excerpt:
counsels: a.n. mahajan, for the assessee. head note: income tax deduction under section 80j--entitlementonly trial production undertaken by assesseethe assessee claimed deduction under section 80j which was not allowed by the assessing authority as no production took place during the previous year relevant to the assessment year 1980-81. only trial production took place in the relevant assessment year. regular production had started only in june 1981, i.e., during subsequent assessment year. the claim was also not accepted by the cit(a). however, the tribunal allowed the assessee s claim. held: since no regular production was done in the previous year relevant to the assessment year in question, the tribunal had committed illegality in granting deduction under section 80j. income tax act, 1961 s.80j in the allahabad high court r.k. agarwal & prakash krishna, jj. - indian penal code, 1860 [c.a. no. 45/1860]. section 302; [m.c. jain, r.c. deepak & k.k. misra, jj] murder plea as to accused being minor school register and transfer certificate not proved before court according to law held, it has to be ignored and question of age is to be determined on other evidence and circumstances surfacing on record. age determined on the basis of x-ray plates and report prepared by c.m.o., is the correct age of accused. accused was declared to be child on the date of commission of offence of murder. however, considering fact that now accused was around 41 years, he cannot be sent to approved school. accused was directed to pay fine of rs.25,000/- under section 302 i.p.c., amount of fine was directed to be paid as compensation to wife of deceased. mohammad - the claim was also not accepted by the cit (appeals). the tribunal directed the income tax officer to allow deduction claimed under section 80j, in case other conditions are satisfied.prakash krishna, j. the income tax appellate tribunal, delhi, at the instance of 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 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: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 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 subsequent assessment year. the claim was also not accepted by the cit (appeals). the tribunal directed the income tax officer to allow deduction claimed under section 80j, in case other conditions are satisfied.3. heard sri a.n. mahajan, learned standing counsel for the department. none appeared on behalf of the assessee.4. 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.'5. a close reading of the aforesaid provision shows that deduction under section 80j shall be allowed in respect of assessment year relevant to the previous year in which industrial undertaking begins to manufacture or produce article or to operate its cold storage plant or plants or ship is first brought into use. the word begins to manufacture or produce article are indicative of 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 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.6. the revenue has placed reliance upon a judgment of bombay high court, in the case of cit v. hindustan antibiotics ltd. : [1974]93itr548(bom) . the court interpreted the expression 'has begun or begins to manufacture the produced article' used in section 15c(2)(ii) of the old income tax act, 1922. the question arose whether mere trial production will be regarded as beginning to manufacture of produced articles. it was held that until the assessee reaches to a stage where it is in a position to decide that 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 final article, it does not amount to commencement of manufacture of article 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 undertaking. the profit of industrial undertaking to which this section apply are exempt from the 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 the articles, etc.7. the aforesaid judgment has been followed by madras high court in the case of addl. cit v. southern structurals ltd. : [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 proto-type would not be enough to say that the assessee had commenced manufacture of 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 manufacturer of wagon. it was held that mere production of proto-type is hot production of articles, as such, because if ministry of railways, had rejected the proto-type or had suggested substantial modification then it would not have been possible for the assessee to go into production of wagons in accordance with proto-type already produced and the process of manufacture in accordance with 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 15 of the indian income tax act, 1922, has held as follows:'. . . 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. ...' (p. 896)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 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 site of the fact that there is difference between trial production and the production of goods or articles. section 80j of the act talks about 'regular production' and not about 'trial production'.8. in the result we answer the question in negative, i.e., in favour of the revenue and against the assessee.