JUDGMENT B.P. Jeevan Reddy, C.J.
1. A common question is referred by the Income-tax Appellate Tribunal in these two income-tax references under Section 256(1) of the Income-tax Act, 1961. The question is :
"Whether, on the facts and in the circumstances of the case, the assembly of parts in a component and of various components resulting in the formation of tractor which has propulsion amounts to manufacture and the assessee was thus an industrial undertaking entitled to relief under Sections 80-I and 80J of the Income-tax Act, 1961 ?"
2. In I. T. R. No. 614 of 1977, a further question is referred. It reads thus :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment of Rs. 1,06,181 being the additional price paid to the U. P. Government towards the cost of raw material and finished goods was a revenue expenditure and a legitimate deduction from the income of the assessment year 1969-70 ?"
3. The facts relevant to the first question are the following : The assessee is U. P. State Agro-Industrial Corporation Ltd., Lucknow. It is a Government company as defined in the Companies Act, The assessment years relevant to I. T. R. No 1268 of 1977 are 1970-71, 1971-72 and 1972-73 whereas the assessment year concerned in I. T. R. No. 614 of 1977 is 1969-70. During the relevant previous years, though the assessee did not itself manufacture tractors or any parts thereof, it received tractors from Czechoslovakia in a knocked down or semi-knocked down condition. In the words of the Tribunal, "there are innumerable parts which go to make a tractor. Broadly speaking, it consists of 23 components each of which in turn consists of numerous parts. These components also were not received as such, but were received in a knocked-down or semi-knocked-down condition. The nature of the assessee's business, therefore, was that in the first instance, it assembled the components and then assembled those components so as to complete the tractor." The tractor was known as Zetor 2011. On the above facts, the question arose whether the assessee is an "industrial undertaking". Both Sections 80-I and 80J provide for certain deductions. Deductions are allowable where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking subject to and in accordance with these sections. For the availability of the deductions, however, the total income of the assessee must include profits and gains derived from an industrial undertaking. The assessee claimed the said deduction, which was disallowed by the Income-tax Officer. The Tribu-nal, however, held that the assessee is an "industrial undertaking" in so far as it was engaged in assembling of tractors. It is this view which is questioned by the Revenue before us.
4. It is argued by learned standing counsel for the Revenue that what the assessee does is merely to assemble the various parts and that no part of the tractor is manufactured by it. The assessee, it is argued, was merely selling Zetor 2011 tractors manufactured in Czechoslavakia. The tractors were imported not as fully fitted tractors. Various components were imported and what the assessee was doing was to knit them together. The said activity, it is argued, can by no stretch of imagination make it an industrial undertaking. It does not matter, it is argued, whether the component parts are 23 in number or more or less. It is equally irrelevant whether each of these components or parts is made up of a number of parts. All that the petitioner was doing was to assemble the parts or components together and sell the tractors under their original name, it is also pointed out that the assessee had not even taken out a licence or permit for manufacture of tractors. On the other hand, it is argued by Sri Bharatji Agrawal, learned counsel for the assessee, that the activity of the assessee did not consist merely of assembling. There were innumerable parts imported as part components. These various parts were first assembled into 23 components, which 23 components then assembled together in turn resulted in a tractor. The components imported by the assessee did not have propulsion and could not be called a tractor. They were merely parts or components. The assessee brought into being a tractor, may be under the name of Zetor 2011. The activity of the assessee required labour, skill and management.
5. The expression "industrial undertaking" is not defined either in Section 80-I or Section 80J. But a perusal of Sub-section (2) of Section 80-I and Sub-section (4) of Section 80J makes it clear that an industrial undertaking means an undertaking which manufactures or produces articles. Now, what does "manufacturing" or "producing" mean in this context ? In other words, the question is whether the activity carried on by the assessee does amount to manufacture or production of articles.
6. Sri Bharatji Agrawal relied upon the decisions of the Bombay High Court and the Madras High Court in CIT v. Tata Locomotive and Engineering Co. Ltd. [1968] 68 ITR 325 and Ashok Motors Ltd. v. CIT [1961] 41 ITR 397 respectively. In CIT v. Tata Locomotive and Engineering Co. Ltd. [1968] 68 ITR 325, the assessee was Tata Locomotive and Engineering Co. Ltd. In November, 1953, it applied to the Government for permission to manufacture bus/truck chassis at its workshop at Jam; shedpur in collaboration with a Wept German company. Its proposal contemplated progressive indigenisation. In the first instance, the assessee was to assemble 500 chassis. During the previous year relevant to the assessment year 19S5-56, the assessee assembled 443 vehicles from out of "complete knocked down" packs imported from West Germany. These vehicles were sold by the assessee at a profit. What the assessee really did was to put together the several parts received in a knocked down condition and prepare a new running bus or truck, as the case may be. A question arose whether the said activity amounted to manufacture. The Bombay High Court held that assembling of the imported parts into a finished chassis amounted to the manufacture or production of an article within the meaning of Section 15C(2)(ii) of the Indian Income-tax Act, 1922 (corresponding to Section 80J of the present Act). In that case, the court took note of the fact that the assembly stage was part and parcel of the entire industrial undertaking of the assessee, whereby they manufactured or produced bus/truck chassis which were wholly indigenous. The assembly stage, in the circumstances, was not a different industrial undertaking but one intimately connected with the subsequent stages, whereby the Indian bus/truck chassis were progressively manufactured. In the course of discussion, the learned judges examined the various meanings of the expression "manufacture" and "produce" and concluded that whichever view is taken, the activity of the assessee did amount to manufacture or production of automobiles without bodies. In Ashok Motors Ltd. v. CIT [1961] 41 ITR 397 (Mad), the question considered was altogether different and we do not find any discussion relevant to the question before us. Besides the above decisions, learned counsel relied upon certain other decisions to which a brief reference would be in order. In Name Tulaman Manufacturers Pvt. Ltd. v. Collector of Central Excise [1989] 1 SCC 172, a case arising under the Central Excise Act, the question was whether the appellant therein manufactured weighbridges and as such was liable to duty under the Act. Of the three main components of a weighbridge, the assessee manufactured only one component and imported or purchased the other two components from others. Having thus obtained the three components, either by manufacture or by purchase, the appellant fitted and assembled them so that they can work as one machine. On the above facts, the Supreme Court held that the appellant must be deemed to have manufactured the weighbridge and was, therefore, liable to duty thereon and he could not be heard to say that since he manufactured only one of the three components, he was liable to duty only on the value of such components. The decision in Tarai Development Corporation v. CIT [1979] 120 ITR 342 is one rendered by a Bench of this court and there it was held that processing of seeds amounts to manufacturing or producing of an article for the purpose of Section 80J. Learned counsel for the assessee also drew our attention to the definition of "manufacture" contained in Clause (iii) of the Explanation appended to Section 10A of the Act. The same definition occurs in the Explanation appended both to Sections 10A and 10B. It reads thus : "Manufacture" includes any :--
(a) process, or
(b) assembling, or
(c) recording of programmes on any disc, tape, perforated media or other information storage device."
7. Learned counsel submitted that though Sections 10A and 10B deal with special provisions applicable to newly established industrial undertakings in a "free trade zone" or newly established hundred per cent. export-oriented undertakings, they are still relevant as they throw light upon the meaning of the said expression. Learned standing counsel for the Revenue brought to our notice two decisions, one of the Kerala High Court and another of the Madras High Court. The decision of the Kerala High Court in CIT v. Casino (P.) Ltd. [ 1973] 91 ITR 289 merely says that a hotel being mainly a trading concern cannot be treated as an industrial company within the meaning of Section 2(6)(d) of the Finance Act, 1968. The decision of the Madras High Court in CIT v. Standard Motor Products of India Ltd. [1962] 46 ITR 814 related to an assessee who was engaged in the manufacture of motor cars and tractors. It imported parts and components for assembling cars and tractors. Out of these imported parts it used some of them for assembling cars and the remaining parts were sold as spare parts. The assessee claimed relief under Section 15C of the 1922 Act on the entire income, but the Income-tax Officer excluded the profits derived by the company from the sale of spare parts. This was questioned by the assessee and the High Court ultimately held that profits from the sale of spare parts did not form part and parcel of the assessee's income from an industrial undertaking and was, therefore, not entitled to exemption under Section 15C.
8. We find it difficult to lay down as a proposition that any and every activity of assembling amounts to manufacture or production of articles. One has to go further and examine the precise activity. If the question arises under Section 80-I or 80-J, the object underlying the sections and the trend of the decisions of the courts in the country may also have to be kept in view. The activity in the instant case is, no doubt, one of assembling, but it is not a case where a tractor was imported in a knocked down condition and re-erected. A large number of parts were imported and they were first knit into 23 components, which, in turn, were fitted together to result in a tractor. The object of Sections 80-I and 80J is to provide relief and encouragement to newly established industrial undertakings and to certain other specified types of industrial undertakings. The trend of decisions under Section 80J is towards a liberal construction of the Section, which would be evident from a perusal of the several decisions collected at pages 965 and 966 of the Commentary on the Income-tax Act by Kanga and Palkhivala (8th Edition). In the light of the said trend, we are constrained to hold that the activity of the assessee in these cases does amount to manufacture/production of articles and, therefore, it is entitled to the benefit of the said two provisions, though left to ourselves, we would have held otherwise.
9. The first question is, accordingly, answered in the affirmative, that is, in favour of the assessee and against the Revenue.
10. Now, coming to the second question referred in I. T. R. No. 614 of 1977, the following facts are relevant. The assessee-Corporation is a Government company. Fifty per cent. Of the shares are held by the Government of India and the remaining fifty per cent. by the Government of Uttar Pradesh. It had purchased certain assets of the Department of Agriculture, Government of Uttar Pradesh at book value. During the relevant previous year, the assessee was required to pay an extra amount of Rs. 1,06,181 to the U.P. Government for the assets purchased by it as a result of subsequent adjustment. The assessee claimed the said amount by way of deduction, which was disallowed by the Income-tax Officer. The Income-tax Officer was of the opinion that it was in the nature of a capital expenditure. However, on appeal, the Appellate Assistant Commissioner held that the said expenditure was not capital in nature and must, therefore, be allowed. The Tribunal affirmed the finding of the Appellate Assistant Commissioner. A perusal of the order of the Appellate Assistant Commissioner makes it clear that the assets purchased are "raw materials, tools, stock, machinery and land". So far as raw materials, tools and stock are concerned, there can be no dispute that the amount spent on their purchase is not a capital expenditure. So far as machinery and land are concerned, there is room for controversy, but since none of the authorities below have tried to make a distinction between these items and have treated the entire amount as one indivisible claim for deduction, we are not now inclined to remit the matter for separating the value of machinery and land. Indeed, the question referred indicates that the additional price was paid towards the purchase of "raw material and finished goods". If so, it is certainly a revenue expenditure and a legitimate, deduction.
11. For the above reasons, we answer the second question in I. T. R. No. 614 of 1977, also in the affirmative, that is, in favour of the assessee and against the Revenue.
12. There shall be no order as to costs.