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TMI Blog1983 (12) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... 1977-78, it is stated that the disallowance was of the expenditure incurred towards tea, coffee and biscuits supplied to the guests and visitors. The learned Commissioner (Appeals) states that he had verified the particulars of the expenditure for these several assessment years and found to have been laid out for providing tea, coffee, etc., by way of ordinary hospitality solely guided by custom and business expediency. He, therefore, found that this expenditure is fully covered by the decision of the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam Co. Ltd. [1979] 119 ITR 514 and, therefore, he directed the ITO to allow the expenditure as claimed by the assessee fully. 3. Explanation 2 to proviso (b) under section 37(2A) of the Income-tax Act, 1961 ('the Act') was inserted by the Finance Act, 1983, with retrospective effect from 1-4-1976 in which the term 'entertainment expenditure' was stated to convey the following meaning : " For the removal of doubts, it is hereby declared that for the purposes of this sub-section and sub-section (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes expenditure on provision of hospitality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The next point which is raised by the revenue for the assessment years 1976-77 to 1979-80 is against the finding of the learned Commissioner (Appeals) that the assessee-company was engaged in the manufacturing or producing of articles within the meaning of section 80J(1) of the Act. Originally, the assessee had not claimed this relief. However, by its letter dated 30-1-1976, it claimed relief under section 80J. The said letter was filed when the matter was pending before the IAC. There was a direction from the IAC to examine the facts properly and consider the assessee's claim under section 80J. The assessee filed two sets of computations. The two sets are provided now at pages 3, 5 and 7 of the paper compilation filed before us. According to the first set of computation the relief claimed was Rs. 34,157 and according to the second set, the relief claimed was Rs. 3,23,775. The ITO held that under section 80J(2), the relief cannot be given unless the industrial undertaking begins to manufacture or produce articles or operates its cold storage plant. In the opinion of the ITO, the assessee does not produce any article. The assessee may be processing tobacco but as no article suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years as may be found allowable. Now the finding as well as the direction is assailed in these second appeals before us. Thus, the matter stands for our consideration. 6. It is argued by the learned departmental representative that neither the word 'manufacture' nor the word 'processing' was defined either under the Income-tax Act or under the Andhra Pradesh General Sales Tax Act. However, there are certain tests to be applied before a good is to be considered to be a manufactured good. The tests, according to the learned departmental representative, are as follows : (1) The end product which comes out should be a commercially viable product. (2) The product must be materially different from the original goods. (3) Manufacturing and processing are different aspects. It is argued before us that subjecting tobacco to drying, redrying, stripping, etc., by the assessee cannot be called undertaking a manufacturing process and, consequently, the assessee cannot be called an industrial undertaking. Mere processing of goods cannot earn the benefits of section 80J to the assessee. Before claiming the benefit under section 80J, the assessee should prove that it is 'manufacturing' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the original fruit, the commodity continues to possess the original identity, notwithstanding the removal of inedible portion, slicing and thereafter canning it or adding sugar to preserve it. Applying the ratio laid down by the Supreme Court in the above decision, the point canvassed was that simply because the assessee was carrying on some processing and exporting tobacco, this did not satisfy the requirements of section 80J. Even after processing, the end product was not commercially different from the original one. When it is dried and stripped, the ultimate material, viz., tobacco, remained as tobacco and after undergoing the process, it does not transform itself into a different commodity and, therefore, it cannot be said to be a manufactured product in the hands of the assessee, was the argument advanced by Mr. N. Santhanam, the learned departmental representative. 7. The learned departmental representative also relies on the decision again rendered by the Supreme Court in Chowgule Co. (P.) Ltd. v. Union of India AIR 1981 SC 1014. This time, the Supreme Court was considering the provisions of section 8(3)(b) of the Central Sales Tax Act, 1956, and also rule 13 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manohar Bros. v. ITO [1982] 1 ITD 90. There the Bench found the difference between 'manufacture' and 'processing' of goods as follows : " There is a difference between the manufacture and processing of goods. Manufacture means making of articles or material commercially different from the basic components by physical or mechanical process. If the goods to which some labour is applied remained essentially the same commercial articles, it cannot be said that the final project is the result of manufacture. The term 'processing' has in one sense a wider connotation than the term 'manufacture'. At some point processing and manufacturing merge. Where the commodity retains a specific identity through the processing stage, it will be said to have been processed and not manufactured. Ginning cotton is certainly processing of goods but cannot be considered as manufacture. However, where something different is produced as compared to the raw materials, one can use the word 'manufacture' or 'produced' articles. The words 'processing of goods' has not been used in sections 80J and 80HH. " From the above, it is sought to be argued that simply because some labour is applied to the goods and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, (ii) cooling, and (iii) reordering. The Madras Bench, in its order, minutely went through the effect of the processes and held ultimately as follows : " It is, therefore, clear that the redried tobacco is commercially a different product from the fluecured roughly graded tobacco which the assessee purchases. The assessee, therefore, clearly manufactures or produces articles within the meaning of section 80J and we agree with the conclusion of the Appellate Assistant Commissioner that the assessee is entitled to the relief claimed. " The learned counsel for the assessee also brought to our notice the judgment of the Supreme Court in AIR 1970 SC 639 (sic). No doubt, the decision was rendered under the Factories Act, 1948, but their Lordships rendered the decision only after considering the various processes which the tobacco underwent at the hands of the accused in that case. In the headnote, the facts as well as the decision was rendered as follows : " The materials on the record show that in the company's Eluru premises, sun-cured tobacco leaves brought from the growers were subjected to the process of moistening, stripping and packing. The tobacco leaves were moistended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terference is called for with the finding of the learned Commissioner (Appeals) holding that the assessee is a new industrial undertaking entitled to relief under section 80J. 11. Now, the question remains as to what amount the assessee is entitled under section 80J for each of the assessment years under consideration. We have already stated that two types of calculations were furnished by the assessee for each of the assessment years under consideration involving bigger as well as smaller claims. We have perused the copies of the claims made. If the debts and liabilities are to be considered as part of capital base, then the assessee is entitled to the bigger claim made in each of the years. If, however, rule 19A of the Income-tax Rules, 1962, is to be applied and if debts and liabilities are to be excluded while computing capital base, then the assessee would be entitled to the smaller sum of claim made by it in each of the assessment years. The whole matter is now pending before the Supreme Court including the retrospective amendment brought out by the Legislature in section 80J. We, therefore, direct that the matter should go back to the ITO for quantification of the relief u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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