Judgment:
P.K. Balasubramanyan,J.
1. This income-tax reference is at the instance of the Revenue under Section 256(1) of the Income-tax Act, 1961. The questions referred to are as follows :
'1. Whether, on the facts and in the circumstances of the case, the asses-see is entitled to deduction under Section 80-I of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that 'the assessee was employing a process which was akin to manufacture resulting in the production of commercially a new commodity different from the old and worn out castings' and is not the above finding wrong and unreasonable in law and fact ?
3. Whether, on the facts and in the circumstances of the case and also in view of the fact that no new Article or thing with a substantially changed identity of a product is emerged from the preretreaded tyre, the Tribunal is right in law and fact in holding that 'even if retreading does not amount to manufacture, it amounts to production' and is not the above finding wrong and unreasonable ?
4. Whether, on the facts and in the circumstances of the case, does retreading amount to production of an article or thing ?'
2. The facts pertaining to the questions are as follows. The assessee is a registered firm with the previous year ending on June 30, 1986, relevant to the assessment year 1987-88. The assessee is engaged in retreading of tyres and claimed deduction under Section 80-I of the Income-tax Act (hereinafterreferred to as 'the Act'). This was allowed in the assessment order dated March 8, 1988. The Commissioner of Income-tax acting under Section 263 of the Act was of the view that the assessee was engaged only in a manufacturing process which is not equal to the manufacturing of a new tyre and hence the deduction granted under Section 80-I was erroneous and prejudicial to the interests of the Revenue. Thus he directed the Assessing Officer to withdraw the relief granted under Section 80-I of the Act. The assessee filed an appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal held that the assessee was employing a process which was akin to manufacture resulting in the production of commercially a new commodity different from the old and worn out castings. Therefore, the assessee is entitled to deduction under Section 80-I of the Act.
3. We heard learned counsel for the Revenue, Sri P. K. Ravindranatha Menon. Learned counsel for the Revenue contended that retreading is only replacing the tread. It does not involve manufacture or production of a new article. On the other hand, learned counsel for the assessee, Sri Santhosh, contended that a worn out tyre by retreading becomes a new commodity and it can be used and sold as a new commodity. He further contended that the word 'manufacture' in Section 80-I should be given the same meaning as was given to the word in Explanation (iii) to Section 10A of the Act.
4. Before we go into that question, we shall discuss the relevant provisions of Section 80-I of the Act as it stood at that time.
'80-I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.--(I) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent, thereof ; . . .
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :--. . .
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, . . . (emphasis1 supplied)'
5. The question for consideration is whether there is any manufacture or production of any article or thing in retreading of a tyre. Learned counsel for the Revenue brought to our notice the meaning of the word 'retread' in Webster's Dictionary. Retread means tread again; to replace the worn tread of the outer cover of a rubber tyre with a new tread. Learned counsel for the assessee submitted that the decision in Addl. CIT v. Kalsi Tyre P. Ltd. : [1981]131ITR636(Delhi) , is apt for a decision in this case. In that case the question that came up for consideration was whether the assessee was entitled to a concessional rate of tax provided to an industrial company by the Finance Act, 1968. 'Industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. There it was contended that the assessee-company which was carrying on the business of retreading tyres was an industrial company. In considering this question, Ranganathan J. (as he then was), speaking for the Bench, held as follows (headnote) :
'The assessee employed certain industrial processes to worn out tyres and gave it a new lease of life and the process, though not equivalent to the manufacture of a new tyre, stopped very little short of it. The nature of the activity of the assessee, which was processing, was akin to an industrial or manufacturing activity. Further, for all practical purposes and in the commercial sense of the term, the retreaded tyres were almost a new article and they were separately sold in the market in the same way as newly manufactured tyres. Therefore, the assessee was an industrial company as defined in Section 2(6)(d) entitled to the concessional rate of tax as applicable to an industrial company.'
6. The Division Bench further held that, the only reason why it cannot be called manufacture is that the old article has not completely lost its identity or got converted into a new type of goods. But as pointed out by the Tribunal, for all practical purposes and in the commercial sense of the term, the retreaded tyre is almost a new article and indeed it is well known that retreaded tyres are also separately sold in the market in the same way as newly manufactured tyres.
7. The next decision which was cited at the Bar is CIT v. N. C. Budharaja and Co. : [1993]204ITR412(SC) . There the Supreme Court considered the meaning of the words 'manufacture', 'production' and 'article'. It held as follows (page 423): 'The words 'manufacture' and 'production' have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this court in Deputy CST v. Pio Food Packers [1980] 46 STC 63, among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak J., as he then was, stated the test in the following words (page 65) :
'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'.'
8. For the word 'production' or 'produce', in the above case the Supreme Court held that it means 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. The next word to be considered is 'articles'. 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 word 'articles' is preceded by the words 'manufactures or produces'. In the above case, the question was whether a dam was an article. The court held that it cannot be an article.
9. Another decision cited is the decision in Delhi Cold Storage P. Ltd. v. CIT : [1991]191ITR656(SC) , where the Supreme Court held that the appellant-company running a cold storage was not an industrial company for the purpose of Section 2(7)(c) of the Finance Act, 1973. It was held that in a cold storage there was no processing of goods. In a Bench decision of this court in CWT v. Mrs. Daisy Paul : [1990]183ITR22(Ker) , the question that arose for consideration was whether by reboring the engine, it becomes a new commercial article. In that case, the asses-see was 3 firm carrying on the work of reboring the automobile and marine engines. In that case, the Tribunal held that the activity of Popular Garage clearly amounts to processing of the engine as a result of which an engine which had become unusable becomes usable and gets a new lease of life, that it is entirely different from the repairing activities carried on in a workshop and the work required a high degree of skill and precision. It was finally held that the work cannot be equated with the replacement of worn out parts of an automobile or repairing of the same. But in that case the court was of the view that the matter requires further information on facts and hence, it was remanded to the Tribunal. It cannot also come within the word 'produce'. According to Ramanatha lyer's Law Lexicon, the words 'to produce' refer to a finished or a semi-finished article made from a raw material. Thus molasses can fairly be called the produce of a sugar mill (see page 1025, Reprint edition 1987).
10. Thus, according to us, there is no manufacture or production of a new article in the retreading of a tyre. It may be a commodity in the market. The onlything is a worn out tyre becomes usable. We cannot also import the definition of manufacture in Explanation (iii) to Section 10A of the Act. Hence, the questions are answered in the negative and against the assessee.