1. This is a departmental appeal against the findings of the Commissioner (Appeals) that the assessee is entitled to deduction under Section 80HH of the Income-tax Act, 1961 ('the Act').
2. The assessee is a private limited company. Their business is said to be repairs of barges. The assessee-company claimed that they were entitled to deduction under Section 80HH of 20 per cent of their profits. Their ground was that they had started an industrial undertaking in a backward area. The industrial undertaking, according to them, was the repairing of the barges., The ITO appears to have accepted that the assessee has complied with the requirements of that Section, except the conditions mentioned in Clause (i) of Sub-section (2) of that section. According to him, the assessee's activity of manufacture or production was started before 31-12-1970 and, therefore, they were not entitled to the deduction. He also relied on the facts that the assessee had claimed deduction under Section 80J, in respect of the same activity for the assessment year 1971-72, which shows that the manufacturing activity had started before 30-12-1970. He rejected the claim of the assessee.
3. Before the Commissioner (Appeals), it was submitted that although the assessee engaged in an industrial activity prior to 31-12-1970, no manufacturing operation was carried on. It was also submitted that for the year ended 31-3-1971, the only receipt was the repairing charges of Rs. 18,895. This did not involve any manufacturing activity. The Commissioner (Appeals) accepted that the assessee had not carried on any manufacturing activity before 31-12-1970. He pointed out that there was no finding by the Tribunal which heard the matter, for the assessment year 1971-72, in respect of the deduction under Section 80J, that the assessee had engaged in manufacturing activity before 31-12-1970. He held that the assessee was entitled to the deduction.
4. The department is in appeal before us. Shri Wakharkar, for the department, submitted that there is an evidence to show that the assessee-company had started manufacturing activity in the course of the accounting year 1970-71. The very fact that deduction under Section 80J was allowed show this. He also referred to the bill for the barge repairs, amounting to Rs. 18,895 and submitted that the dates of the bill are before 31-12-1970. He, therefore, submitted that the finding of the Commissioner (Appeals) is erroneous. Alternatively, he submitted that assuming that what the assessee carried on, did not amount to manufacture. He submitted that what is to be seen is the area of operation and not the nature of operation. For this purpose, he relied on the decision in CIT v. N.C. Budharaja & Co.  121 ITR 212 (Ori.). Shri Patil for the assessee supported the finding of the Commissioner (Appeals). He submitted that the fact shows there was no manufacturing activity before 31-12-1970. He pointed out that in order to be eligible for deduction under Section 80J, it is not necessary that manufacturing activity should be for the whole year. In any case, he submitted that the Tribunal which went into the question of Section 80J has not given any findings being adverse to the assessee on this point. With regard to the bill of Rs. 18,895 he submitted that no manufacturing activity reflected therein. Alternatively, he submitted that at best, the assessee's claim for deduction under Section 80J for 1971-72 will have to be given up. To a query from the Bench, he explained the activities of the assessee that they were manufacturing certain spare parts which are required for repairing works. But he agreed that the repairing works and the manufacturing are one integral activity.
5. We have considered the facts of the case. We are of the opinion that the assessee has started the manufacturing or production activity well before 31 12-1970. Therefore, it is not (repeat not) entitled to the deduction under Section 80J for the assessment year 1971-72, which shows that the assessee has started production during the accounting year relevant to the assessment year 1971-72 (sic). Section 80J(2) allows the deduction only in the year in which the industrial undertaking begins to manufacture or produce articles, so production or manufacture of articles during the accounting year is established. Now the accounting year of the company is the financial year. The first year, therefore, is 1-4-1970 to 31-3-1971. We, therefore, have to see whether the manufacturing activity which was admitted for this accounting year took place before 31-12-1970, or not. The repair bill in respect of barge for Rs. 18,895 clearly shows that the work was undertaken before that date. Now, Shri Patil explained that the bill did not reflect any manufacturing activity. That is correct. The bill is only for painting and repairing of barge. But it is an admitted position before us that the repairing work and manufacturing activity are an integral part of one activity. Once this is conceded, it is not necessary to see further whether the activity pertained to the manufacturing part or to the repairing part. It would, therefore, be seen that the manufacturing activity taken as a whole had been in existence before the crucial date of 31-12-1970. Thus, the assessee becomes ineligible for the deduction.
6. The Commissioner (Appeals) had examined the bill of Rs. 18,895 and had considered the individual items therein, to find out whether those items reflected any manufacturing activity. Such an approach is not correct on the admitted position that the activities contained in the bill and the manufacturing activity are one integrated activity. It is not correct to dissect the various steps in the assessee's activities into manufacturing and non-manufacturing activities. We, therefore, reverse the decision of the Commissioner (Appeals) and restore the order of the ITO on this point.
7. The second issue in this appeal is the direction of the Commissioner that the ITO should hear the assessee before he levied the interest under Section 139(8). The assessee-company had filed its return on 8-2-1977. There is clearly delay in filing the return. The advance tax paid was not sufficient to cover the tax liability, so the ITO levied interest under Section 139(8), amounting to Rs. 25,664. In the appeal before the Commissioner (Appeals), the assessee had stated in ground No. 8 that the company was aggrieved by the charging of interest and had prayed for appropriate relief. The Commissioner had cancelled the levy of interest on the ground that the ITO has not given opportunity of hearing before the levy of interest. He has, however, directed the ITO to levy interest, if necessary, after hearing the assessee. The authority relied on by the Commissioner is the decision of the Karnataka High Court in CIT v. Executors of the Estate of Late H.H.Rajkuverba Dowager Maharani Saheb of Gondal  115 ITR 301. In that case, the Karnataka High Court has considered a case where the ITO failed to levy interest under Section 217. The Commissioner under Section 263 directed the ITO to levy such interest on the ground that there are circumstances under which the levy of interest could be waived as per the rules. The Karnataka High Court has held that a hearing must be given before the interest could be levied.
8. They were considering specifically the levy of interest under Sections 215,216 and 217. We are here concerned with the levy of interest under Section 139. On this point, there is a decision of the Karnataka High Court (Mysore as it was then called) in the case of Indian Telephone Industries Co-operative Society Ltd. v. ITO  86 ITR 566. Two contentions had been raised by the assessee in that Case: (i) that the levy of interest was permissible only on an application made by the assessee and (ii) a hearing should be given before levy of interest. Both were rejected by the High Court.
9. The scheme of the levy of interest and the rules for waiver or reduction of interest appears to be this. The levy of interest under Section 139 is automatic, if there is a delay in filing the return and the tax payable exceeds the advance income-tax and tax deducted at source. The ITO has no discretion in the matter. But the assessee can ask for either a waiver of the interest or its reduction as per the provision in Rule 117A. The rule specifically states that the ITO may 'reduce or waive'. This envisages that the levy of interest may precede the application for waiver or reduction of interest. After the levy of interest, it is open for the ITO if the assessee shows that his case comes within the exemptions given in Rule 117A, to held that the interest levied can be reduced. The word 'reduced' presupposes an earlier levy of interest at a higher figure. We will, therefore, restore the order of the ITO but it is open for the assessee to show that there were circumstances to invoke the provisions of Rule 117A. In the result the departmental appeal is allowed.