Commissioner of Income Tax vs Madurai Pandian Engineering Corporation Ltd.

R. Jayasimha Babu, J.—The assessee which is a retreader which has established its plant in a backward area claims relief under Sections

80J and 80HH of the Income Tax Act, 1961, in respect of the assessment years 1979-80 and 1980-81. At the instance of the Revenue, the

following question has been referred to us for our decision :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the business of tyre retreading

amounted to the production of a new article and that, therefore, the assessee was entitled to the relief under Sections 80J and 80HH of the Income

Tax Act, 1961

The Appellate Tribunal held that by retreading, a new article is produced and for giving that finding it had relied upon the decision of the Delhi High

Court in the case of Addl. CIT v. Kalsi Tyre (P.) Ltd. [1981] 151 ITR 636. It was held by the Delhi High Court in that case that retreading of

worn out tyres to give it a new lease of life is an industrial process, and that activity of processing amounts to an industrial or manufacturing activity.

It was held that for all practical purposes and in the commercial sense of the term, the treaded tyres were almost a new article and they were

separately sold in the market in the same way as newly manufactured tyres.

Learned counsel for the Revenue submitted that the decision of the Tribunal is erroneous. It was submitted that the decision of the Delhi High

Court on which the Appellate Tribunal relied was rendered in the context of the definition of industrial company u/s 2(6)(d) of the Finance Act,

1968, which definition was made applicable to companies, inter alia, engaged in the manufacture or processing of goods or in mining. The fact that

processing is involved in retreading by itself would not render it a process of manufacture, as according to counsel, no new commercial product

comes into being as a result of that processing. Counsel also submitted that to the extent that the Delhi High Court held that a different commercial

article comes into existence, that statement should be regarded as erroneous in view of the judgment of the Supreme Court in the case of P.C.

Cheriyan Vs. Mst. Barfi Devi, .

In the case of P.C. Cheriyan Vs. Mst. Barfi Devi, , the Supreme Court has considered the question as to whether the lease of premises for

carrying on the business of retreading tyres would be regarded as a manufacturing process u/s 106 of the Transfer of Property Act (IV of 1982).

After noticing that the expression ""manufacturing process"" is not defined in the Transfer of Property Act and that it was required to be considered

in its popular sense, the court referred to the definition of ""manufacture"" in the Permanent Edition of Words and Phrases, volume 26, wherein the

meaning of that word was set out as implying a change, but that every change is not manufacture and yet every change in an article is the result of

treatment, labour and manipulation, and that something more is necessary, that there must be transformation, and a new and different article must

emerge having a distinctive name, character or use. The court referred to the decisions of the Supreme Court in the case of South Bihar Sugar

Mills Ltd., etc. Vs. Union of India (UOI) and Others, and Allenbury Engineers Pvt. Ltd. Vs. Ramkrishna Dalmia and Others, , as also to the

decision of the High Court of Australia in the case of Federal Commissioner of Taxation v. Jack Zinader Proprietary Limited [1948] 78 CLR 336

and held that ""the broad test for determining whether a process is a manufacturing process, is whether it brings about a complete transformation of

the old components so as to produce a commercially different article or commodity. Applying the test so evolved by the court to the retreading of

tyres, it was held that the retreading of old tyres does not bring into being a commercially distinct or different entity. The old tyre retains its original

character or identity as a tyre. Retreading does not completely transform it into another commercial article although it improves its performance and

serviceability as a tyre. The court observed that retreading of old tyres is just like resoling of old shoes. Just as resoling of old shoes, does not

produce a commercially different article having a different identity, so from retreading no new or distinct article emerges.

Learned counsel for the respondent assessee contended relying upon the decision of the apex court in the case of Commissioner of Income Tax,

Orissa and Others Vs. N.C. Budharaja and Company and Others, , that the word ""manufacture"" as it is used in Section 80HH of the Act is to be

interpreted in a popular sense having regard to the communicated (sic) in that case. The Supreme Court in that judgment approved the test stated

by Pathak J., as he then was in the case of Deputy CST v. Pio Food Packers [1980] 46 STC 63, . That test is as under (at page 423) :

Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent

of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing

at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes take

the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and

distinct article, that a manufacture can be said to take place.

The court adopted that test for determining the scope of the word ""manufacture"" in Section 80HH, although the decision in the case of Deputy

Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Pio Food Packers, , was rendered in a matter which arose under

the Sales Tax Act. That test is not materially different from the test which the court had adopted in the case of P.C. Cheriyan Vs. Mst. Barfi Devi, .

Emphasis is laid on the coming into existence of a commodity which is recognised as a new and distinct article commercially different from the one

with which the process commenced.

The apex court also considered the word ""production"" and ""produce"" occurring in Section 80HH along with the word ""manufacture"" and

pointed out that the term ""production"" has a wider connotation than the word ""manufacture"" and that while every manufacture can be characterised

as production, every production need not amount to manufacture. The court observed 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.

It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. Regarding

the word ""articles"", the court observed ""the word is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation-

-the sense in which it is understood in the commercial world. It is equally well to keep in mind the context, since a word takes, its colour from the

context . . . The expressions ''manufacture'' and ''produce'' are normally associated with movables--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.

Learned counsel contended that even if the making of a retreaded tyre and the process involved therein cannot be regarded as ""manufacture"" it

can still be regarded as an instance of production of an article as retreaded tyre is a movable, and is an article for the purpose of Section 80HH.

The difficulty, however, lies in the fact that the article must be one, which is ""produced"". Unless it is shown that the article has been produced by

the assessee, the benefit under the section cannot be claimed. On this, the assessee is unable to establish that the article is a new article, that it has

come into existence as a result of the same having been produced by the assessee. As pointed out by the apex court, the word ""production"" or

produce"" has been used in the Section in juxtaposition with the word ""manufacture"" and it would take in bringing into existence new goods by a

process which may or may not amount to manufacture. The article referred to in the Section, therefore, has reference to new articles and brought

into existence by a process of manufacture or by any other mode, which can be regarded as production. The resultant article whether it is by

manufacture or by way of production must be a new article. The term ""new"" is not found in the Section. It must be held to be implicit in the word

manufacture"". Having regard to the fact that the word ""production"" or the word ""produce"" is used in juxtaposition with the word ""manufacture

these terms also must be regarded as referring to production, which brings into existence a new article.

As to what is a new article has been explained by Pathak J., as he then was, in the test proposed by him, in the case of Pio Food Packers

[1980] 46 STC 63, adopted by the apex court in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company

and Others, , to Section 80HH of the Income Tax Act An article is new when the substance out of which it is made is different and distinct from

the new article. The new article being commercially different from the one from out of which the new article was made. The identity of the old

article must cease and the distinct identity of the new article must have been established commercially. On this aspect, we may usefully refer to the

recent decision of the Supreme Court in the case of Union of India (UOI) and Others Vs. J.G. Glass Industries Ltd. and Others, , wherein the

court held after a review of the earlier decisions of the Supreme Court interpreting the word ""manufacture"" used in the Sales Tax Act and in the

Central Excises Act, that (page 844) ""On an analysis of the aforesaid rulings, a two fold test emerges for deciding whether the process is that of

''manufacture''. First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original

commodity ceases to exist ; secondly, whether the commodity which was already in existence will serve no purpose but for the said process."" In

that case, the court was dealing with a claim that printing of names or logos on the bottles brings into existence a new commercial commodity. The

court rejected the claim by observing that the plain bottles are themselves commercial commodities and the basic character of the commodity, viz.,

being bottles does not change as a result of the printing of names or logos on the bottles.

Counsel submitted that even by applying the test stated in the case of Union of India (UOI) and Others Vs. J.G. Glass Industries Ltd. and

Others, , production of retreaded tyres must be held to be an instance of manufacture, as the worn out tyres, which are retreaded, have no

commercial value and it is only after retreading, they acquire a value, although at all stages they are regarded as tyres intended for the same use.

This argument overlooks the fact that the new tyre is manufactured, and that a new tyre is intended to serve the user for a fairly long period of time.

The tyre continues to be a tyre throughout and when it is worn out, it may be either discarded or its life renewed by retreading, so that it is made

serviceable for some more time. The commodity at all stages is the tyre. There is no change in the character of that commodity. A different and

distinct commodity cannot be said to have come into existence as a result of the retreading.

Counsel for the respondent submitted that the object of Section 80J is to promote the establishment of industrial undertakings in backward areas

and that object will not be well served unless a liberal interpretation is given to the terms used in the provisions of the Act, which confer benefits to

new industrial undertakings. Counsel referred to the decision of the apex court in the case of Bajaj Tempo Ltd., Bombay Vs. Commissioner of

Income Tax, Bombay City-II, Bombay, . That decision was rendered u/s 15C of the Indian Income Tax Act, 1922. It was submitted that it

corresponds to Section 80J of the 1961 Act. The court observed in that decision, that Section 15C of the Act of 1922, read as a whole is a

provision directed towards encouraging industrialisation by permitting an assessee setting up a new industrial undertaking, to claim relief from tax

and that a provision in a taxing statute granting incentives for promoting growth and development, should be Construed liberally. Any restriction in

the provision conferring the incentives has to be so construed so as to advance the objective of the provision and not to frustrate it.

While we agree with counsel that Section 80HH is a provision conferring incentive for establishment of industrial undertakings in backward

areas, the nature and extent of the incentive offered thereunder has to be determined having due regard to the language employed in the provision.

The words ""manufacture"" or ""produce articles"" used in the provision have not been defined in the Income Tax Act. The word ""manufacture"" has

been considered by the Supreme Court and the High Courts on numerous occasions and the common thread which runs in all the decisions is that

it is only when a new and distinct commodity commercially accepted as such, comes into existence as a result of the processing, that a commodity

can be said to have been manufactured. The Supreme Court as in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C.

Budharaja and Company and Others, , held that that is the meaning to be attached to the word ""manufacture"" used in Section 80HH. Having

regard to the fact that the word ""article"" used in the Section is an article which is manufactured or produced and the word ""produce"" having been

used in juxtaposition with the word ""manufacture"" it connotes the bringing into existence of new goods. The result of production should be the

coming into existence of a new article. The terms ""production"" and ""produce"" would also take in by-products, intermediate products and residual

products. All of them should be products or articles, which are capable of being regarded as new articles. By holding that a ""new"" article should

emerge from manufacture or production new words are not being added to Section 80HH. The term new has been employed in the decisions of

the courts only to indicate the end result of the process of production or manufacture. It is only when that result can be said to have been achieved,

that the industrial undertaking which brings about such a result by its process of production or manufacture, would qualify for the benefits conferred

under the Section. The Supreme Court in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and

Others, , after noticing the arguments advanced before it that the liberal interpretation which would advance the purpose and object underlying the

provisions should be adopted, held that that principle cannot be caried to the extent of doing violence to the plain and simple language used in the

enactment.

It is, therefore, not possible to agree with the submissions made for the assessee that the retreading of tyres results in the production of an

article for the purpose of Section 80HH.

Though the finding given by the apex court in the case of P.C. Cheriyan Vs. Mst. Barfi Devi, , with regard to the retreaded tyres was in the

context of the Transfer of Property Act and the words ""manufacturing purposes"" used in Section 106 of that Act, the test that was applied in that

decision is not different from the test that has been accepted by the Supreme Court for the purposes of Section 80HH in the case of Commissioner

of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, . The apex court has held in the case of P.C. Cheriyan Vs.

Mst. Barfi Devi, , that retreading does not transform the old tyre into another commercial article and that from retreading, no new or distinct article

emerges.

Our answer to the question referred to us, therefore, is that the Appellate Tribunal was not right in holding that the business of tyre retreading

amounts to the production of a new article entitling the assessee to the relief under Sections 80J and 80HH of the Income Tax Act. The Revenue

shall be entitled to costs in the sum of Rs. 1,000.