Commissioner of Income Tax vs King Fisheries (P) Ltd.

K. Narayana Kurup, J.—The revenue is the applicant in all these Income Tax Reference Cases with the Assessee (s) figuring as Respondent (s). We are concerned with the assessment years 1978-79 in ITR 123 of 1986, 1977-78 in ITR 169 of 1986, assessment years 1974-75 and 1975-76 in ITR Nos. 3 and 4 of 1987 and assessment year 1980-81 in ITR 100/1995. The Assessee-company is engaged in the business of catching, purchasing, processing and exporting fish and selling the same. The Assessee-company put forward a plea that it is entitled to claim deduction u/s 80J and 80HH of the Income Tax Act, 1961 (for short ''the Act''). The Income Tax Officer negatived the said plea. In appeal, the Appellate Assistant Commissioner upheld the pleas of the Assessee (s). In Second Appeal, the Income Tax Appellate Tribunal concurred with the Commissioner of Income Tax (Appeals) by placing reliance on the decision of the Special Bench of the Tribunal in the case of M/s Poyilakkada Fisheries (P) Ltd. vide order dated 12th June 1985 in I.T.A. No. 35 Coch) 1982 wherein the Tribunal had held in similar circumstances that the Assessee therein was entitled to relief u/s 80J of the Act with reference to the capital employed in the undertaking as a whole. Following the reasoning in the said order, the Tribunal confirmed the order of the Commissioner of Income Tax (Appeals) and dismissed the appeal preferred by the Revenue. Thereafter, the Revenue filed reference applications before the Tribunal u/s 256(1) of the Act requiring the Tribunal to refer to this Court for its opinion, the question of law set out therein. The Tribunal, thereupon referred the question of law to this Court. The common question raised in ITR 123 and 169 of 1986 is as follows:

Whether the Assessee-company which is engaged in the business of catching, purchasing, processing and exporting fish is entitled to claim deduction u/s 80J of the Act.

The common question raised in ITR Nos. 3 and 4 of 1987 and ITR No. 100 of 1995 reads as follows:

Whether the Assessee, which is carrying on the business of same nature, is entitled to claim deduction u/s 80HH of the Income Tax Act.

The relevant portion of Sections 80J and 80HH of the Income Tax Act are extracted below:

80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.- (1) Where the gross total income of an Assessee includes any profits and gains derived from an industrial undertaking or a ship 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 (reduced by the deduction, if any, admissible to the Assessee u/s 80HH or Section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year):

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(4) This section applies to any industrial undertaking which fulfils all the following conditions, namely:

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(iii) it manufactures or produces articles, of operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;

80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.- (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, in any backward area;

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When the matter came up for hearing before the Division Bench, it was brought to its notice the principles laid down in Commissioner of Income Tax Vs. Marwell Sea Foods, wherein this Court had taken the view that Assessees carrying on similar activity as in the present cases, are entitled to deduction u/s 80J of the Act (vide Commissioner of Income Tax Vs. Poyilakkada Fisheries Pvt. Ltd., and Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., On the very same principle, it was held in Commissioner of Income Tax Vs. Marwell Sea Foods, that Assessee carrying on similar activities, is entitled to deduction u/s 80HH and if these decisions are to be followed, the question raised in the present reference cases are to be answered in favour of the Assessee and against the Revenue. But the learned Standing Counsel for the Revenue submitted that a fresh view had to be taken on this issue in the light of certain observations contained in the decision of the Supreme Court in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, . Learned Counsel for the Assessee on the other hand pointed out that the observation made by the Apex Court in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, has to be understood in the context it was made. Learned Counsel for the Assessee has also brought to the notice of this Court the decision of the other High Courts in their favour rendered under similar circumstances. After hearing both sides, the Bench felt that the arguments put forward by the Counsel require ''''serious consideration by a larger Bench for an authoritative decision on the issue." Accordingly, the Registry was directed to place the above mentioned reference cases before the Hon''ble Chief Justice for appropriate orders for being posted before a larger Bench. It was under the above circumstances that the matter was posted before this Full Bench.

Heard Counsel on both sides at length.

Since the question(s) of law raised in all these ITR cases is the same, they are being disposed of by a common judgment. Since ITR Nos. 123 and 169 of 1986 are being treated as the main case, the decision on ITR Nos. 3 and 4 of 1987 and ITR No. 100/1995 will depend upon the outcome of the decision in ITR Nos. 123 and 169 of 1986. To recapitulate, the question raised in ITR Nos. 123 and 169 of 1986 is:

Whether the Assessee-company, which is engaged in the business of catching, purchasing, processing and exporting fish, is entitled to claim deduction u/s 80J of the Act.

The point for consideration is whether the Assessee in these cases can be considered to be an industrial undertaking manufacturing or processing article entitling them to the relief u/s 80J of the Act. An identical question was the subject matter of the Bench decision of this Court in Commissioner of Income Tax Vs. Marwell Sea Foods, wherein it was held that processing of prawns amounts to production of article and the business will be an industrial undertaking for the purpose of Section 80HH of the Act. The Bench after posing the question whether or not the prawns in question are articles produced or manufactured by the Assessee so as to attract the benefit of the section went on to observe as follows:

It is true that ordinarily the process by which the prawns are prepared for the market is not referred to in common parlance as manufacture or production. But it must be borne in mind that Section 80HH confers a benefit on the new industry for the ultimate development of backward areas. * * * * There is substance in the contention that, if processed or frozen fish and fish products are regarded as articles "manufactured" or "produced" for the purpose of the development rebate, it was the legislative intent to attribute the same meaning to the identical expression appearing in another provision of the same statute, the object of which is to confer a benefit on the newly established industrial undertaking with a view to the advancement of the backward areas. * * * * In this context, we must refer to the finding of the Appellate Assistant Commissioner (at page 8 of the paper book) which was confirmed in appeal by the Tribunal. There is a detailed description of the process by which prawns are prepared for export. One of the vital stages of this process is beheading, peeling and deveining of the prawns. Both the appellate authorities understood the various stages through which prawns are prepared for export as processes involving production or manufacture. The Tribunal having affirmed the finding of the Appellate Assistant Commissioner, we should be extremely slow to doubt the correctness of that finding unless it is perverse. In our view, the finding is not only not perverse, but it is perfectly in harmony with the legislative intent as disclosed by the Scheme of the relevant provisions of the statute. Accordingly, we answer question Nos. 2 and 3 in the affirmative, that is, in favour of the Assessee and against the Revenue.

Following the decision in Commissioner of Income Tax Vs. Marwell Sea Foods, supra this Court held in Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., that processing of prawns will amount to production of articles and so it is an industrial undertaking for the purpose of Section 80J of the Act. This Court further held that the Tribunal was justified in affording relief to the Assessee u/s 80J of the Act. Both Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., and Commissioner of Income Tax Vs. Marwell Sea Foods, were followed by this Court in Commissioner of Income Tax Vs. Poyilakkada Fisheries Pvt. Ltd., in the following terms:

The second point that falls to be considered is whether the Assessee is eligible for allowance u/s 80J and Section 32A of the Income Tax Act. In the case of the very same Assessee the matter came up before us for the assessment years 1976-77 and 1978-79 at the instance of the Revenue in ITR Nos. 124 and 125 of 1986 [ Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., ]. An identical question was considered therein. Following the earlier Bench decision of this Court in Commissioner of Income Tax Vs. Marwell Sea Foods, , this Court held in ITR Nos. 124 and 125 of 1986 [see Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., ], that ''processing of prawns will amount to production of articles and so it is an industrial undertaking for the purpose of Section 80J of the Income Tax Act''. This Court further held ''that the Tribunal was justified in affording relief to the Assessee herein u/s 80J of the Act''.

In the light of earlier Bench decision in the case of the very same Assessee in ITR Nos. 124 and 125 of 1986 [see Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., ], we answer question No. 2 in the affirmative-against the Revenue and in favour of the Assessee. The Appellate Tribunal was justified in holding that the entire business of the Assessee is eligible for the allowance u/s 80J of the Act.

The Calcutta High Court had occasion to consider an identical question in Commissioner of Income Tax Vs. Union Carbide India Ltd., and Commissioner of Income Tax Vs. Union Carbide India Ltd., . In Commissioner of Income Tax Vs. Union Carbide India Ltd., the facts are as follows:

The Assessee-company acquired trawlers with sophisticated equipment like echo-sounders, electronic fish finding equipment, radars, etc., for deep sea fishing and set up a "Deep Sea Fishing Division" for fishing shrimps in deep seas. The trawlers and the equipment were utilised not only for fishing but also for decapitating, peeling and packing shrimps in special containers and freezing them in special quick-freezing chambers installed in the vessels. The Assessee claimed relief u/s 80J of the Income Tax Act, 1961, in respects of its undertaking, "Deep Sea Fishing Division". The Income Tax Officer rejected the claim for relief on the ground that the profits and gains from the activity of catching fish in deep sea with ships could not be regarded as profits and gains derived from ships. The Tribunal found that the undertaking of the Assessee was actually engaged in the production of articles, namely, frozen fish and fish products, if not manufacturing the same, that the Deep Sea Fishing Division of the Assessee was a separate undertaking and carried on an integrated activity for the marketing of shrimps, that unless the shrimps caught underwent the processes carried out by the undertaking, they would not be marketable in the export market, that if a particular item was required to be processed in order to become marketable, the operation involved processing and that, therefore, the undertaking of the Assessee was engaged in manufacture and production and was entitled to relief u/s 80J.

On a reference the Calcutta High Court upheld the Tribunal''s order that as a result of the operations carried out by the Assessee in its "Deep Sea Fishing Division", the natural produce, that is, the shrimps caught from the deep seas, was converted into frozen fish and fish products and that the operations consisting of cleaning, peeling, packing and freezing the shrimps-without which the same were not marketable-resulted in the bringing into existence of a new commercial product. Moreover, in view of item 30 in Schedule V of the Income Tax Act, 1961, which item covered processed (including frozen) fish and fish products, a person who owned machinery or plant engaged in the manufacture or production of processed fish (including frozen) and fish products was entitled to development rebate u/s 33 at a higher rate. If, for the purpose of a higher development rebate under the said section, processed fish (including frozen) and fish products were the result of production or manufacture, afortiori on Analogy it should be held that for the purpose of Section 80J of the Act such items should be capable of being produced or manufactured. Therefore, the Deep Sea Fishing Division of the Assessee was held to be an "industrial undertaking" within the meaning of Section 80J of the Act and entitled to relief under the section. The aforesaid decision was followed by the Calcutta High Court in Commissioner of Income Tax Vs. Union Carbide India Ltd., wherein the facts are as follows: The Assessee derived income from business in various manufacturing and other activities. They claimed investment allowance in respect of its Deep Sea Fishing Division II. The Income Tax Officer rejected the claim of the Assessee on the ground that catching and/or processing of fish cannot be said to produce an article or thing and such activities do not constitute an industrial undertaking. The Commissioner of Income Tax (Appeals), following the order of the Tribunal in the Assessee''s own case for the assessment year 1978-79 allowed the claim of the Assessee. The Tribunal, however, upheld the said order of the Commissioner of Income Tax (Appeals), following the earlier decision of the Court in Commissioner of Income Tax Vs. Union Carbide India Ltd., where the Court had held that deep sea fishing division of the Assessee is an industrial undertaking within the meaning of Section 80J of the Act. It has come out on record that the Assessee-company acquired trawlers with sophisticated equipments like echo-sounders, electronic fish finding equipment, radars etc. for deep sea fishing and set up a Deep Sea Fishing Division for fishing shrimps in deep seas. The trawlers and the equipment were utilised not only for fishing but also for decapitating, peeling and packing shrimps in special containers and freezing them in special quick-freezing chambers installed in the vessels. Investment allowance will be allowed in respect of new machinery or plant inter alia for the purpose of, production of articles or things except certain articles or things specified in the list to the Eleventh Schedule. The question is whether the Assessee produces any article in its Deep Sea Fishing Division. The operations consisted of cleaning, peeling, packing and freezing the shrimps without which the same were not marketable and as a result of such processing, a new commercial product came into existence and as such, the Assessee was held to be entitled to development rebate u/s 33 of the Act at a higher rate. By an analogy, the Calcutta High Court took the view that if for the purpose of a higher development rebate u/s 33 of the Act, processed fish (including frozen) and fish products are the result of production or manufacture, it should be held that for the purpose of Section 32A, such items should be capable of being produced or manufactured. According to the Calcutta High. Court, the processing of fish in this case amounted to production of an article. Therefore, the deep sea fishing division of the Assessee which is an industrial undertaking within the meaning of Section 80J of the Act is also entitled to relief u/s 32A of the Act.

The Madras High Court has followed the decision of the Calcutta High Court and the decision of this Court in Commissioner of Income Tax Vs. Orient Marine Products Pvt. Ltd., and held that the Assessee''s activities in processing the shirmps, frog legs, prawns and lobsters amounted to manufacturing activities as contemplated u/s 80J of the Act, 1961 and as such the Assessee was entitled to deduction u/s 80J of the Act for the assessment year 1974-75. In the light of the judicial pronouncements noted supra, we are satisfied that the activities carried on by the Assessee amounts to an activity of production, if not manufacture. Neither of the words ''manufacture'' or ''production'' is defind in the Act, but according to the Oxford English Dictionary ''production'' means, amongst other things, that which is produced, a thing that results from any action process or effort, a product of human activity or effort. It is obvious, therefore, that the raw fish which has undergone extensive processing by way of peeling, decapitating, etc. will certainly fall within the dictionary meaning of the word ''production''. Accordingly, on the facts disclosed, we are not satisfied that an interference is called for with the order of the Tribunal. In our view, this results in production of an article, entitling the Assessee(s) to deduction u/s 80J of the Act. Viewed in the above perspective and having regard to the object and scheme of the Act, we hold that for production of processed and frozen fish, the Assessee(s) would be entitled to relief u/s 80J of the Act.

No doubt, learned Counsel for the Revenue submits that a fresh look has to be made on this issue in the light of certain observations contained in the decision of the Supreme Court in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, . According to the learned Counsel, the view taken by this Court in Commissioner of Income Tax Vs. Marwell Sea Foods, that peeling, deveining and beheading of the prawn would amount to production as contemplated by Sections 80J and 80HH of the Act can no longer be accepted as correct in the light of the following observation of the Apex Court in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, :

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.

Learned Counsel for the Revenue further points out that considering the very same process for the purpose of entitlement under Sub-section (3) of Section 5 of the Central Sales Tax Act, 1956 the Summit Court in Sterling Foods v. The State of Karnataka and Anr. (1986) 63 S.T.C. 239 took the view that prawns, lobsters and shrimps continue to be the same goods even after suffering the processing and if that be so, according to the learned Counsel, it cannot be contended that the process would involve ''production'' so as to, come within the purview of Section 80J or Section 80HH of the Act. Having bestowed our anxious consideration on the aforesaid contentions, we are afraid we cannot accept the same. In this connection, it has to be pointed out that the observation made by the Supreme Court in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, has to be understood in the context it was made. In Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, , the claim was put forward u/s 80HH of the Act in respect of an activity of construction of a Dam. The Income Tax Officer allowed the same. The Commissioner of Income Tax however, reversed the order of the Income Tax Officer to the extent of grant of relief u/s 80HH of the Act. He was of the opinion that the Assessee engaged in construction of a dam cannot be said to be engaged in manufacture or production of an article in as much as "a dam is constructed and not manufactured. It would be absurd to say that the Assessee is manufacturing dam or the dam is 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". He also referred to the fact that the Assessee firm was constituted only for the purpose of constructing a particular dam, on the completion of which work the firm would cease to exist automatically. The Assessee preferred an appeal before the Income Tax Appellate Tribunal which was allowed on the ground inter alia that the activity of construction of a dam can be characterised as processing as well as manufacturing. At the instance of the revenue the aforesaid question namely; whether the activity of construction of a dam can be characterised as processing as well as manufacturing was referred for the opinion of the High Court. The High Court agreed with the Tribunal that the Assessee-firm constituted for the purpose of constructing a dam for storing water can be called an "industrial undertaking". The High Court agreed with the Tribunal that the word ''article'' need not be confined to mere movables and that "there would be no justification to hold that a dam is not an article in that sense of the term". The correctness of the said view was the question before the Supreme Court in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, . The Supreme Court after adverting to the scheme, context and legislative history of the provision observed that the Statute cannot always be interpreted with dictionary in one hand and the Statute in the other. It also observed that regard must also be had to scheme, context and legislative history of provision and a literal and pedantic interpretation would inevitably lead to absurdity. The Apex Court after posing the question "would any person who has constructed a dam say that he has manufactured an article or that he has produced an article"?, answered the question with an emphatic negative viz.; obviously not and held as follows:

If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storied building. To say that all of them fall within the meaning of word ''articles'' is to overstrain the language beyond its normal and ordinary meaning. It is eqally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices, fete. But to lay that the end product, the dam, is an article is to be unfaithful to the normal connotation of the word. A darn is constructed; it is not manufactured or produced. The expressions ''manufacture'' and ''produce'' are normally associated with movable-articles and goods, big and small-but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building.

The Supreme Court in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, cited supra took the view that a dam cannot be treated as an ''article'' occurring in Section 80HH of the Act. Moreover, in the earlier portion of the very same judgment the Supreme Court had observed that the word ''production'' had wider connotation than the word ''manufacture''. While every ''manufacture'' can be characterised as ''production'', every ''production'' need not amount to manufacture. Therefore, even when the end result of the process is not a new article, there can be ''production'' even though there is no ''manufacture''. In the aforesaid view, Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, can be of no assistance to the revenue as the context and setting in which it was rendered are entirely different.

The reliance by the learned Counsel for the Revenue on Sterling Foods v. The State of Karnataka (1986) 63 S.T.C. 239 is also misplaced. The aforesaid decision was rendered in the context of the provisions of the Sales Tax Act. When Commissioner of Income Tax Vs. Marwell Sea Foods, and Commissioner of Income Tax Vs. Poyilakkada Fisheries Pvt. Ltd., and 93 cited supra were rendered in the year 1987 and 1992. Sterling Foods'' case (1986) 63 S.T.C. 239 was available, but no reference was made to the above case by this Court in the three decisions referred to above. It is also relevant to note that the SLP filed from Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., cited supra was dismissed by the Supreme Court by order dated 12th July 1995. This would also show that the dictum laid down in Sterling Foods'' case (1986) 63 S.T.C. 239 has no application to Section 80J of the Income Tax Act. Exemption under the Section is intended to be an incentive to an Assessee who owns a new industrial undertaking. We cannot also lose sight of the fact that the section which is intended to encourage the setting up of Hew industrial enterprises must be construed liberally [see Commissioner of Income Tax, Tamil Nadu-I Vs. Simpson and Company, , 286-7] in a board sense from a common sense point of view [see Commissioner of Income Tax Vs. Orient Paper Mills Ltd., , 83] and in a manner that will promote the object of the legislature. Viewed in the above back-drop, we have no hesitation in rejecting the contention of the learned Counsel for the Revenue based on the aforesaid decision of the Supreme Court.

In the result, on a construction of Section 80J of the Act and in view of the scheme and object of the Act, we hold that for production or manufacture of processed fish, the Assessee (s) would be entitled to relief u/s 80J of the Act. For the aforesaid reasons we answer the question referred to in ITR Nos. 123 and 169 of 1986 in the affirmative and in favour of the Assessee.

For the very same reason we hold that the Assessee is entitled to the benefit u/s 80HH of the Act also. Thus we answer the question referred to in ITR Nos. 3 and 4 of 1987 and 100 of 1995 in the affirmative and in favour of the Assessee.

A copy of this judgment under the seal of the Court and signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench, as required by law.

*A reproduction from ILR (Kerala Series).