Punjab-Haryana High Court
B.S. Bajaj And Sons vs Commissioner Of Income-Tax on 5 August, 1996
Equivalent citations: [1996]222ITR418(P&H)
Author: Ashok Bhan
Bench: Ashok Bhan
ORDER--Issue not carried in appeal. Ratio : As the issue was not carried in appeal the same does not merge with appellate order, therefore, the order of the assessing officer did not merge with the order of the Appellate Assistant Commissioner and the Commissioner of Income Tax had the jurisdiction to interfere with the order of the assessing officer under section 263. Held : Commissioner of Income Tax's jurisdiction is restricted only to that part of the order of assessment which is not dealt with in appeal. What merges with the appellate order is only that part of the order of the Income Tax Officer under section 143 of the Act as was the subject-matter of the appeal and no more. Immunity from proceedings under section 263 of the Act is restricted to this extent, therefore, in the circumstances of the case the order of the assessing officer did not merge with the order of the Appellate Assistat Commissioner and the Commissioner of Income Tax had the jurisdiction to interfere with the order of the assessing officer under section 263. Case Law Analysis : Punjab State Civil Supplies Corpn. Ltd. v. CIT (1993) 200 ITR 536 (P&H)(FB) followed. Application : Also to current assessment years. Income Tax Act 1961 s.263 JUDGMENT Ashok Bhan, J.
1. This judgment shall dispose of Income-tax Reference No. 104 (B.S. Bajaj and Sons v. CIT) ; Income-tax Reference No. 89 (Raj Manohar and Brothers v. CIT) ; Income-tax Reference No. 70 (Raj Manohar and Brothers v. CIT) ; Income-tax Reference No. 117 (Anoop and Co. v. CIT) ; Income-tax Reference No. 123 (Gulam Din Vidya v. CIT) and Income-tax Reference No. 127 (Oriental Timber Traders v. CIT), Income-tax Reference No. 11 of 1982, as in all these cases common questions of law are involved, based on the same or similar set of facts. The assessees in all these reference petitions are forest lessees.
2. The facts are taken from Income-tax Reference No. 104 of 1982.
3. At the instance of the assessee, the following questions of law have been referred to this court for its opinion :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the order of the Income-tax Officer did not merge with the order of the Appellate Assistant Commissioner and the Commissioner had the jurisdiction to interfere with the order of the Income-tax Officer under Section 263 of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the assessee was not entitled to relief under Sections 80J and 80HH of the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the benefit of the Board's circular and the letter of the Minister of State for Finance could not be extended to the assessee ?"
4. The same questions of law have been referred in Income-tax Reference No. 70 of 1982. The two questions referred in Income-tax References Nos. 117, 123 and 127 of 1982, are equal to questions Nos. 2 and 3 referred in Income-tax Reference No. 104 of 1982. The question referred in Income-tax Reference No. 89 of 1982 is similar to question No. 2 in Income-tax Reference No. 104 of 1982. The opinion given on questions Nos. 2 and 3 in Income-tax Reference No. 104 of 1982 shall be the opinion on questions Nos. 1 and 2 in Income-tax References Nos. 117, 123 and 127 of 1982. Similarly, the opinion given on question No. 2 in Income-tax Reference No. 104 of 1982 would be the same as to the question referred in Income-tax Reference No. 89 of 1982.
5. The relevant facts giving rise to these questions are as under :
The assessee is a firm deriving income from extracting timber from the forests taken on lease from the Government. The assessee had claimed deductions under Sections 80J and 80HH of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), in respect of its business. The Income-tax Officer allowed the claim of the assessee. Later on, the Commissioner of Income-tax initiated proceedings under Section 263 of the Act for revising the assessment framed by the Income-tax Officer. The revisional authority was of the view that the assessee was not deriving income from any industrial undertaking which could be eligible for deductions under Sections 80J and 80HH of the Act. Relying upon the two decisions of this court in Sidhu Ram Atam Parkash v. State of Haryana [1974] 34 STG 344 and Pyare Lal Khushwant Rai v. State of Punjab [1974] 34 STC 341, it was held that the contractor was making logs and converting them into rafters, planks and firewood, either by manual labour or mechanical process and did not bring into existence any new substance and, therefore, could not be said to be manufacturing or producing anything new, saleable as such. It also recorded a finding that the assessee was giving further contracts to various parties and the workers required for carrying out the operations were engaged by the sub-contractors and were not employed by the assessee. It was held that the assessee had only appointed the supervisory staff and the workers who carried out the operations of cutting the trees were employed by the sub-contractors. The supervisory staff could not be said to be the workers employed in a manufacturing process. It was concluded that the conditions stated in Clause (iv) of both Sub-sections (2) of Section 80HH and Sub-section (4) of Section 80J were also not satisfied in the assessee's case. Thus, on the merits, it was found by the revisional authority that the assessee was not manufacturing or producing articles within the meaning of Sections 80J and 80HH of the Act.
6. The preliminary objection raised by the assessee that the jurisdiction of the revisional authority was barred as the order of the Income-tax Officer had been the subject-matter of appeal before the Appellate Assistant Commissioner was also rejected. It was held that the question of relief under Sections 80J and 80HH of the Act had not been raised in the appeal and, therefore, it could not be held that the order of the Income-tax Officer had merged as a whole with the order of the Appellate Assistant Commissioner.
7. In appeal, the Tribunal upheld the order passed by the Commissioner of Income-tax. It agreed with the findings recorded by the Commissioner of Income-tax that the assessee did not bring into existence a new item saleable as such and, therefore, did not manufacture anything. However, the Tribunal did not agree with the Commissioner of Income-tax that the workers engaged through the sub-contractors were not the workers of the undertaking. It was held that the workers engaged by the sub-contractors were the workers of the assessee. The Tribunal further held that the clarification given by the Central Board of Direct Taxes regarding the provisions of the Wealth-tax Act and the letter of the Minister of State for Finance to a Member of Parliament, could not extend the benefit of the provisions of Sections 80J and 80HH of the Act to the assessee. The letter of the Board related to wealth-tax matters and there being a difference in the language of the provisions of the Wealth-tax Act and the Income-tax Act, the same could not be made applicable in the case of the assessee and that the letter of the Minister of State for Finance also put a condition that the benefit would be available if the process involved was manufacture of a new commodity, saleable as such. Since, the assessee was not manufacturing any new commodity, saleable as such the letter of the Minister of State for Finance did not help the assessee and on the basis of this letter the assessee could not be extended the benefits of Sections 80J and 80HH of the Act.
8. Thereafter, the assessee filed a petition under Section 256(1) of the Act, in pursuance to which the aforementioned questions of law have been referred to us for opinion :
Question No. 1 in Income-tax Reference No. 104 of 1982 :
So far as question No. 1 is concerned, the same stands concluded by a Full Bench decision of this court in Punjab State Civil Supplies Corporation Ltd. v. CIT [1993] 200 ITR 536, wherein it was held as under (headnote) :
" Once an appeal against an order of the Income-tax Officer under Section 143(3) of the Income-tax Act, 1961, has been heard and decided by the Appellate Assistant Commissioner, the Commissioner, under Section 263 of the Income-tax Act, 1961, has no jurisdiction with regard to issues considered and decided in appeal. In other words, his jurisdiction is restricted only to that part of the order of assessment which is not dealt with in appeal. What merges with the appellate order is only that part of the order of the Income-tax Officer under Section 143 of the Act as was the subject-matter of the appeal and no more. Immunity from proceedings under Section 263 of the Act is restricted to this extent."
Question No. 1 is, therefore, answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
Question No. 3 in Income-tax Reference No. 104 of 1982 :
Counsel for the assessee contended that the question "whether deductions under Sections 80J and 80HH could be claimed in the case of forest lessee" was considered by the Central Board of Direct Taxes in consultation with the Ministry of Law and it was clarified that the forest lessees would be entitled to the benefits available under Sections 80J and 80HH of the Act. Circular No. 329 dated February 22, 1982, and the advice given by the Law Ministry is reproduced below ([1982] 135 ITR (St.) 7) :
"Circular No. 329, dated 22nd February, 1982.
To All Commissioners of Income-tax.
Sir, Subject : Deductions under Sections 80HH and 80J in the case of forest lessees--Regarding.
A reference was made to the Board as to whether undertakings engaged in extraction of timber and other forest produce by leasing out forests would be entitled to deductions under Sections 80HH and 80J of the Income-tax Act, 1961.
2. The matter was considered by the Board in consultation with the Ministry of Law which had given an opinion (copy enclosed) that the answer to the question posed would depend on the nature of the activity of the forest lessees ; however, if the process involved is not merely conversion of standing trees into firewood but also manufacture of new saleable commodities, the benefit of deduction under Sections 80J and 80HH would be available.
3. These instructions may please be brought to the notice of all officers working in your charge.
Yours faithfully, (Sd.) V.B. Srinivasan, Secretary, Central Board of Direct Taxes.
(F. No. 178/53/80-IT(AI)).
Notes in the Ministry of Law (Department of Legal Affairs, Advice (B) Section :
We have gone through the order passed by the Income-tax Appellate Tribunal on October 21, 1981, in the appeal filed by the forest lessees of Jammu and Kashmir. Before the Tribunal, the assessee advanced arguments on the basis of a letter written by the Minister of State for Finance to a Member of Parliament, wherein it is stated that if the process involved in the business of the Members of the Jammu Forest Lessee's Association is not merely conversion of standing trees into firewood but also manufacture of new commodity saleable as such, the benefit of Section 80J/80HH of the Income-tax Act, 1961, will be available.
2. The Tribunal observed that it cannot be held that the assessee is manufacturing any new commodity as such.
3. If the process involved is merely conversion of standing trees into firewood or similar articles, it cannot be said that a new commodity saleable as such has come into existence. As pointed out in our previous opinion dated November 25, 1974, the transformation of wood into sleepers could be considered to be a change in the sense of a manufacture, since a new commodity saleable as such, namely, sleepers, is brought into existence by such process.
4. In other words, it is not merely the cuttings of trees and selling of firewood that would amount to manufacture. The process should involve the making of a different commodity having distinctive name, character or use. In the case of trees, the making of sleepers would amount to such a process as would amount to manufacture.
5. The result is that to the extent the Jammu Forest Lessees convert standing trees into sleepers, they would be entitled to the benefit of Section 80J/80HH of the Income-tax Act.
(Sd.) P. K. Kartha, J. S. and L. A. 9-2-82."
9. It was contended that question No. 3, in view of the circular issued by the Central Board of Direct Taxes, has been wrongly decided by the Tribunal.
10. Before the Tribunal, the assessee had pressed in service a letter from the Board addressed to the Jammu Forest Lessees Association, clarifying that the provisions of Clauses (xxxi) and (xxxii) of Sub-section (1) of Section 5 of the Wealth-tax Act would be applicable to the various contractors. Drawing an analogy from the clarification issued by the Central Board of Direct Taxes, it was claimed that the assessee was entitled to the deduc-tions under Sections 80J and 80HH of the Act. The letter written by the Minister of State for Finance to a Member of Parliament stating therein that the benefits of Sections 80J and 80HH of the Act would be available to the forest lessees provided they were manufacturing a new commodity saleable as such was also placed on record.
11. The Tribunal found that there was a difference between the language of the provisions of the Wealth-tax Act and the Income-tax Act and, therefore, the clarification issued by the Central Board of Direct Taxes in relation to the provisions of the Wealth-tax Act, could not extend the benefit of Sections 80J and 80HH of the Act to the assessee. Similarly, the Tribunal found that the letter of the Minister of State for Finance was of no help to the assessee as in that letter as well there was a condition of "manufacture of a new commodity saleable as such", which the assessee was not doing, in view of the decision of this court in Sidhu Ram Atam Parkash's case [1974] 34 STC 344. Accordingly, it could not be held that the assessee was manufacturing any new commodity saleable as such.
12. Prima facie, circulars issued by the Board are binding on the Department but the clarification which had been issued by the Board under Clauses (xxxi) and (xxxii) of Sub-section (1) of Section 5 of the Wealth-tax Act, could not be made applicable to the assessee as its case was to be examined in the light of Sections 80J and 80HH of the Act. The letter written by the Minister of State for Finance to a Member of Parliament could not bind a quasi-judicial Tribunal as the same was not statutory having any legal force. The Tribunal had decided the appeal in January, 1982, whereas the circular was issued in the month of February, 1982. Circular No. 329 (see [1982] 135 ITR (St.) 7), dated February 22, 1982, thus, was not before the Tribunal when the appeal was decided. On the facts present before the Tribunal, the conclusion arrived at by it was correct. Accordingly, question No. 3 is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
13. As to what is the effect of the circular issued subsequent to the decision of the Tribunal shall be considered in the later part of this judgment.
Question No. 2 in Income-tax Reference No. 104 of 1982 :
14. Counsel for the parties are agreed that it would suffice if the reference is made to the relevant provisions of Section 80HH only as the provisions of Section 80J of the Act are similar to the provisions of Section 80HH of the Act, so far as it relates to the controversy in the present case.
15. The relevant provisions of Section 80HH of the Act are reproduced below :
" 80HH. (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, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, but before the 1st day of April, 1990, in any backward area ;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area :
Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section ;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area ;
(iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.
Explanation. -- Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. of the total value of the machinery or plant used in the business, then, for the purposes of Clause (iii) of this sub-section, the condition specified therein shall be deemed to have been fulfilled."
16. There is no dispute that the assessee is an industrial undertaking and fulfils the conditions (ii), (iii) and (iv) of Sub-section (2) of Section 80HH of the Act. The dispute is whether it satisfies the condition of "manufacture or produce articles" occurring in Clause (i) of Sub-section (2) of Section 80HH of the Act. The Tribunal, relying upon the decision of this court in Sidhu Ram Atam Parkash's case [1974] 34 STC 344, held that the assessee was a forest contractor cutting standing trees and converting logs into planks, rafters and firewood and did not produce anything different from the logs which was the raw material with the assessee. For the purpose of convenience of transport, logs are cut into various sizes and there is no further working on them for converting them for any particular use ; that the activity of the assessee remained processing of wood and not manufacture as interpreted in Sidhu Ram Atam Parkash's case [1974] 34 STC 344 (P & H). It was concluded that the assessee could not be held to be manufacturing or producing articles and, therefore, not eligible to the deductions claimed under Sections 80J and 80HH of the Act.
17. In Pyare Lal Khushwant Rai's case [1974] 34 STC 341 (P & H), it was held that where an assessee purchases firewood removed from the trees from the forest, transports the same to his business premises/shop and sells the same as firewood it cannot be called a manufacturer or carrying on a manufacturing business. In Sidhu Ram Atam Parkash's case [1974] 34 STC 344, this court was considering as to whether a forest contractor whose business is to cut the standing trees was a manufacturer entitling him to claim exemption from payment of sales tax under the Punjab General Sales Tax Act. Relying upon the following observations of the Supreme Court in Union of India v. Delhi Cloth and General Mills Co. Ltd., AIR 1963 SC 791, 794 (at page 345 of 34 STC) :
"According to learned counsel 'manufacture' is complete as soon as by the application of one or more processes, the raw material undergoes some change. To say this is to equate 'processing' to 'manufacture' and for this we can find no warrant in law. The word 'manufacture' used as a verb is generally understood to mean as 'bringing into existence a new substance' and does not mean merely 'to produce some change in a substance', however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases, volume 26, from an American judgment. The passage runs thus :
' "Manufacture" implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation ; a new and different article must emerge having a distinctive name, character or use.'"
it was concluded by this court in Sidhu Ram Atam Parkash's case [1974] 34 STC 344 thus (at page 346) :
" Applying the above definition to the instant case, the question is when the logs are converted into planks and rafters, does it mean that a manufacturing process has been gone into ? In other words, has a new substance or article come into existence or merely some change in a substance has occurred ? As we look at the matter, when a log, either by manual labour or mechanical process, is converted into a plank or a rafter, a new substance does not come into being and this process is not covered by the definition of the word 'manufacture' as given by the Supreme Court."
18. In Sidhu Ram Atam Parkash's case [1974] 34 STC 344 (P & H), the point in issue was as to who would become a "manufacturer" for the purposes of relief under the Punjab General Sales Tax Act. The court considered and opined on the word "manufacture" whereas under Section 80HH of the Act, we are concerned with the words "manufacture or produces an article". The Legislature has used two separate words "manufacture" and "produces an article" with an "or" in between. Thus, both have to be read separately and the meaning assigned to them. These two words cannot have the same meaning. To "produce" an article has a wider connotation than "manufacture". Every "manufacture" can be said to be production but not vice versa.
19. In CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412 (SC), while considering the same provision, their Lordships of the Supreme Court held that the word "production" has a wider connotation than the word "manufacture". Every "production" may not amount to "manufacture" whereas every "manufacture" can be termed as "production". "Manufacture" does not imply only a change but something more is necessary. A new and different article must emerge having a distinct name, character or use to bring it within the meaning of the word "manufacture". The word "produce an article" may not amount to a "manufacture" but it would include all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. It was held as under (at page 423) :
" The words 'manufacture' and 'production' have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this court in Deputy CST v. Pio Food Packers [1980] 46 STC 63, among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak J., as he then was, stated the test in the following words (at page 65) :
'Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place.' The word 'production' or 'produce' 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."
20. Forest contractors certainly produce articles from the felled trees, after cutting, while converting them into planks, rafters, etc. In producing planks, rafters, etc., the assessee was producing articles, which were different from the trees which were being cut. The tree itself was not a saleable commodity but when cut into pieces in the form of planks, rafters, etc., its nature and utility change. The assessee is, thus, held to be producing articles even if it is held that it was not manufacturing as such. It brings into existence new goods by some process which may or may not amount to manufacture, as observed by the Supreme Court in N.C Budharaja's case [1993] 204 ITR 412. Thus, even if it is held that the assessee was not a manufacturer certainly it was producing articles, entitling it to the relief under Sections 80J and 80HH of the Act.
21. Now, we take up the effect of Circular No. 329 (see [1982] 135 ITR (St.) 7), dated February 22, 1982, issued by the Central Board of Direct Taxes, after the decision given by the Tribunal.
22. The circulars issued by the Central Board of Direct Taxes are binding on the officers of the Department of Income-tax. Benevolent circulars providing administrative relief to the assessee, even if they are issued subsequent to the decision by an authority under the Act, have to be taken notice of, and given effect to, if found applicable in the given facts. The circular, even if produced in the High Court for the first time during the course of hearing, has to be taken note of and the assessee will be entitled to the benefit of the circular, if found entitled, irrespective of the fact that it was not produced before the authorities below or was issued by the Central Board of Direct Taxes subsequent to the decision given by the Tribunal.
23. Relying upon two recent decisions of the Supreme Court in the case of Bengal Iron Corporation v. CTO [1993] 90 STC 47 and Kerala Financial Corporation v. CIT [1994] 210 ITR 129, counsel for the Revenue argued that the circular issued by the Central Board of Direct Taxes under Section 119 of the Act cannot override or detract from the Act as Section 119 empowers the Board to issue orders, instructions or directions, for the "proper administration" of the Act or for such other purposes specified in Sub-section (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act and, certainly, the same would not be binding on a court or a quasi-judicial authority.
24. As against this, counsel for the assessee placed reliance upon the judgment of a Constitution Bench of the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC of I. T. [1965] 56 ITR 198, and the two subsequent judgments of the Supreme Court consisting of two hon'ble judges each in Ederman Lines Ltd. v. CIT [1971] 82 ITR 913 and K.P. Varghese v. ITO [1981] 131 ITR 597, following the view taken by the Constitution Bench in Navnit Lal C. Javeri's case [1965] 56 ITR 198 (SC), to contend that even if a circular issued by the Central Board of Direct Taxes providing administrative relief to an assessee deviates from the provisions of the Act, the same would be binding on the Income-tax Officers.
25. There is an apparent conflict of opinion between the decisions of the Supreme Court cited before us by the respective counsel for the parties. No doubt, it has also been held in Union of India v. K.S. Subramanian, AIR 1976 SC 2433, that the High Court is duty bound to follow the opinion expressed by the larger Bench of the Supreme Court. We need not involve ourselves in this controversy and we are of the opinion that Circular No. 329 (see [1982] 135 ITR (St.) 7), dated February 22, 1982, issued by the Board does not override the provisions of the Act. It is clarificatory in nature. It is a benevolent circular issued in favour of the assessee providing administrative relief and says that if the process involved is not merely conversion of standing trees into firewood but also manufacture of new saleable commodities, the benefit of deduction under Sections 80J and 80HH would be available. We have already held that even if the case of the assessee does not fall within the definition of the word "manufacture", it certainly falls within the ambit and scope of the word "produces an article". This circular is clarificatory in nature extending benefit to the assessee in consonance with the provisions of the Act and does not run counter to the same. In view of these findings, we need not examine the larger issue as to "when the circular deviates from the provisions of the Act providing administrative relief to an assessee, has to be given effect to or not ?" Circular No. 329 (see [1982] 135 ITR (St.) 7), dated February 22, 1982, issued by the Central Board of Direct Taxes reinforces the view taken by us and the assessee would be entitled to take benefit of the same.
26. For the reasons stated above, we answer question No. 2 in the negative, i.e., in favour of the assessee and against the Revenue. No costs.