574. Undertakings engaged in extraction of timber and other forest produce by leasing out forests – Whether eligible for deduction under the section
1. 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.
2. The matter was considered by the Board in consultation with the Ministry of Law which had given an opinion [Annex] 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 fire-wood but also manufacture of new saleable commodities, the benefit of deduction under sections 80J and 80HH would be available.
Circular No. 329 [F. No. 178/53/80-IT(A-I)], dated 22-2-1982.
ANNEX – OPINION OF MINISTRY OF LAW REFERRED TO IN CLARIFICATION
1. We have gone through the order passed by the Income-tax Appellate Tribunal on21-10-1981 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 Lessees’ 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 25-11-1974, 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.
JUDICIAL ANALYSIS
EXPLAINED IN – The above circular was considered in B.S. Bajaj & Sons v. CIT [1996] 222 ITR 418 (Punj. & Har.), and the court observed :
“. . .Circular No. 329, 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, 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.” (pp. 431-432)
EXPLAINED IN – The above circular was explained in Keshablal Hansraj Patel v. WTO [1985] 23 TTJ (Cal. – Trib.) 361, as follows :
“It is clear that the Circular issued says that mere conversion of standing trees into firewood will not amount to manufacture. The circular is not concerned with the meaning of ‘processing of goods’ as it refers to sections 80J and 80HH only. But this circular indirectly helps the case of the assessee because the assessee was not engaged merely in producing firewood and the case of the assessee was not that the firm, in which he was a partner, was a manufacturer . . . .” (p. 363)
EXPLAINED IN – B.S. Bajaj & Sons v. CIT [1996] 222 ITR 418 (Punj. & Har.) with the following observation :
“Circular No. 329, 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.”
