COMMISSIONER OF INCOME TAX Vs. ABDUL AHAD NAJAR

JUDGEMENT

(1.) BY this reference under Section 256(1) of the Income-tax Act, 1961 (the "Act"), the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (the "Tribunal"), has referred the following two questions of law to this court for opinion at the instance of the Revenue :

(2.) THE controversy in this reference pertains to the assessment year 1975-76. THE material facts giving rise to this reference are as follows. THE asses-see, who is a forest lessee, was engaged in the business of forest exploitation. For the assessment year 1975-76, the assessee submitted a revised return and claimed deduction of Rs. 33,060, being the sum equal to six per cent, of the capital employed, as deduction under Section 80J of the Act. In the covering letter attached to the revised return, the assessee claimed that the assessee fulfilled all the conditions of a newly established industrial undertaking within the meaning of Section 80J of the Act since it was engaged in the manufacture and production of articles. THE case of the assessee was that the planks sawn out of logs and articles produced therefrom were different in shape from logs. THE assessee relied upon the order of the Appellate Assistant Commissioner, Jullundur, where he had held that the assessee in that case, who derived income from forest exploitation, was an industrial undertaking engaged in the manufacture and pro duction of articles and was entitled to deduction under Section 80J. THE Income-tax Officer did not accept the above contention of the assessee. According to him, the assessee did not fulfil one of the pre-requisites of grant of relief under Section 80J that the industrial undertaking should manufacture or produce articles because he had effected substantial sales in the form of logs, as out of total sales of Rs. 40,42,169 sale of log's amounted to Rs. 16,75,653 which was about 40 per cent, of the total turnover of the assessee. THE Income-tax Officer held that the process of converting trees into log's did not involve much sawing operations as after felling the trees it had been cut into logs and sold as such. THE Income-tax Officer observed that no planks were sawn out of the logs and, therefore, the log's produced were not at all different in content from the trees and the sale of logs did not involve any manufacturing operations. THE Income-tax Officer further observed that the process of sawing of logs into planks also did not involve any manufacture of articles because, according to him, planks could not be considered to be articles as those could not be put to any use, but could be put to use only after they were further processed by carpenters. THE Income-tax Officer also observed that the assessee had not put up any machinery such as sawing machines for sawing of planks but the entire work of sawing was entrusted to other sawing machine owners who had been paid huge amounts as sawing charges. According to the Income-tax Officer, the assessee having not employed any machinery of his own for sawing operations, he could not be considered as having carried out manufacturing operations. THE Income-tax Officer did not accept the contention of the assessee that even wages paid for getting timber sawn would involve manufacturing operations whether it was carried out by the assessee himself or with the help of other sawing machine owners. According to the Income-tax Officer, relief under Section 80J of the Act would be available only if the assessee carries on the manufacturing operations with the aid of its own machinery. As no sawing machines had been deployed by the assessee, he held that the assessee could not be said to be an industrial undertaking. THE Income-tax Officer also held that the manufacturing process could not be carried on by bare hands and until and unless machinery was employed in the business, there would be no manufacturing operations. As the assessee had not employed any machinery for sawing planks, according to the Income-tax Officer, he could not be said to have fulfilled the conditions of Section 80J and, as such, he was not entitled to relief under that section. Aggrieved by the order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner of Income-tax. THE contention of the assessee before the Appellate Assistant Commissioner was that the forest operations carried on by him amounted to manufacturing process. In support of this contention, he relied upon a letter dated December 2, 1974, of the Central Board of Direct Taxes addressed to Shri J. L. Kuthiala, Vice President, Jammu Forest Lessees Association, confirming that the provisions of Clauses (xxxi) and (xxxii) of Sub-section (1) of Section 5 of the Wealth-tax Act, 1957, would be applicable to such of the undertakings of the forest lessees as are engaged in the business of extraction of wood from forests, i.e., felling, roping, lopping, removing the bark of trees, cutting logs and trees into required lengths of sleepers, sawing the same by manual labour or by sawing machines into sleepers, transporting the same by dry slides, wet slides, ropeways and ultimately launching into stream and river. THE Appellate Assistant Commissioner held that the use of machinery was not indispensable to a manufacturing process and even for the conversion of the standing trees into logs, labour was required as something is converted into something else, viz., logs. He was of the opinion that logs could be said to be a new product emerging out of manufacturing process. He, therefore, held that the assessee was entitled to relief under Section 80J of the Act. THE Revenue appealed to the Tribunal. THE Tribunal did not find any reason to interfere with the order of the Appellate Assistant Commissioner and dismissed the appeal. While doing so, the Tribunal referred to the letter of the Under Secretary, Central Board of Direct Taxes, addressed to Shri J. L. Kuthiala, Vice President, Jammu Forest Lessees Association, cited above, wherein it was stated that the forest lessees who were engaged in the business of extraction of wood, felling, roping, lopping, removing the bark of trees and cutting logs into required length of sleepers and from the trees and sawing the same by manual labour or by sawing machines into sleepers and transporting the same by dry slide, wet slide, ropeways and ultimately launching into stream and river would be treated as an industrial undertaking and observed that the instructions or circulars of the Central Board of Direct Taxes were binding on the income-tax authorities and that they were required to give effect to such instructions if they were for the benefit of the assessees. Since the instructions in question were for the benefit of the assessee, the Tribunal held that the Income-tax Officer was not justified in not giving effect to the same and rejecting the claim of the assessee for relief under Section 80J of the Act. THE Tribunal confirmed the order of the Appellate Assistant Commissioner holding that the assessee fulfilled all the conditions laid down under Section 80J(4) of the Act and that it was entitled to the statutory deduction thereunder. Aggrieved by the order of the Tribunal, the Revenue applied for reference of the questions of law arising out of the order of the Tribunal to this court for opinion under Section 256(1) of the Act, which the Tribunal allowed. Hence, this reference.

(3.) IN fact, the question whether the forest lessees of Jammu and Kashmir were entitled to the benefit of Section 80J of the Act came up for consideration of the Central Board of Direct Taxes (the Board) as for back as IN the year 1982. The Board, after obtaININg legal opINion from the MINistry of Law, Government of India, issued the followINg circular on February 22, 1982 (see [1982] 135 ITR (St.) 7) :