1. By this reference at the instance of the revenue the following question is referred for our determination :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption of tax under section 15C of the Indian Income-tax Act, 1922, for the assessment year 1960-61 ?'
2. The assessee is a limited company whose shares are entirely held by the Government. It was incorporated on March 30, 1954, and on June 1, 1954, it took over the project for manufacture of penicillin and other antibiotic products, which was initially started by the Government of India. The company commenced actual operations for manufacturing crude penicillin as from December 12, 1954. In the profit and loss account for the year ending March 31, 1955, it showed a closing stock of crude penicillin worth Rs. 16,727. The first samples of crude penicillin which were manufactured by the assessee-company on December 14, 1954, were required to be sent to U.S.A. and U.K. for obtaining certificates as to their qualities. The requisite were received some time in June, 1955, and the assessee-company started manufacture of sterile penicillin from August, 1955, onwards. It is not disputed that sterile penicillin is the only product which can be sold in the market.
3. It will be useful to the total income of the assessee-company for the assessment years 1955-56 to 1959-60, and the said figures of total income are determined as under :
Rs.1955-56 Business loss 3,30,422Les : Depreciation 7,00,174--------Total Loss C/F 10,30,596---------1956-57 Business income 4,77,688Les : Depreciation allowed 36,91,322---------Loss on account ofunabsorbed depreciation C/F 32,13,634---------1957-58 Business income 12,37,786Les : Depreciation allowed 23,18,515---------Loss on account ofunabsorbed depreciation C/C 10,80,729---------1958-59 Business income 48,54,243Les : Depreciation allowed 18,50,111---------30,04,132Les : Loss of 1955-56allowed to be set offunder section 24(2) 3,30,422---------26,73,710Les : Unabsorbed depreciationset of under section 10(2)(vi),clause (b)Out of 1955-5 : 7,00,174Out of 1956-5 : 19,73,536 26,73,710--------- ---------NIL---------1959-60 Business income 1,60,07,163Les : Depreciation allowed 13,35,614-----------1,46,71,549Les : Unabsorbeddepreciation ofprevious yearsRs.23,20,827Reduction admissible asa result of the decisionsof Appellate AssistantCommissioner in assessmentyears 1955-56 to 1958-591,60,25524,81,082Total income 1,21,90,467-----------
4. For the assessment year 1960-61, for which the relevant previous year ended on March 31, 1960, a question arose whether the assessee-company was entitled to exemption under the provisions of section 15C of the Act. Such exemption was claimed by the assessee-company but the claim was rejected by the Income-tax Officer. The Income-tax Officer, inter alia, took the view that it is no correct that the assessee-company's actual manufacturing operations commenced with effect from August, 1955; that for the accounting year ending March 31, 1955 (the relevant year corresponding to assessment year 1955-56), the company in its profit and loss account showed a closing stock of crude penicillin worth Rs. 16,737. he took the view that the process of manufacture must certainly have commenced in the accounting year 1954-55, as the sales were effected in the accounting year 1955-56. Further, he took the view that the beginning of the manufacturing process was certainly in the accounting year 1954-55, as the balance-sheet and profit and loss accounts for the year ending March 31, 1955, showed that a substantial quantity of raw materials and stores were consumed, wages were paid and electricity charges were incurred.
5. In the appeal by the assessee, the Appellate Assistant Commissioner reversed the order of the Income-tax Officer and held that the assessee-company was entitled to exemption under section 15C of the Act for the assessment year 1960-61 also. On a further appeal by the revenue before the Tribunal, the Judicial Member of the Tribunal and the Accountant Member were unable to agree as regards the conclusion. The Judicial Member was of the view that the assessee-company was not entitled to the benefit under the provisions of section 15C in the assessment year 1960-61, while the Accountant member was of a contrary view. Ultimately, the matter was referred to the President, who concurred in the view that was taken by the Accountant Member. The Judicial Member in his order, inter alia, held that it cannot be denied that when the assessee-company started to manufacture crude penicillin it began to manufacture or produce penicillin as the process of manufacturing crude penicillin cannot be separated from the process of manufacturing the final product of saleable penicillin, i. e., sterile penicillin. He, therefore, pointed out that it would be difficult to consider the several stages in the manufacture of an article as independent and entirely unconnected operations which have no connection with the finished product. According to him, all the stages constituted only one individual process of manufacture of the finished product. He took the view that as soon as the assessee-company started manufacturing crude penicillin it could be said that the assessee began to manufacture or produce articles, viz., penicillin, though the actual finished products took some time to come into existence. The Accountant Member, however, disagreed with the view taken by the Judicial Member and he held that regular production of the end product commenced only in August, 1956, relevant to the assessment year 1956-57. According to him, mere production of crude penicillin, which until a final certificate as to quality was received may not be regarded as of any use, and cannot be regarded as the beginning of the manufacture or production of the article. In this view of the Accountant Member, ultimately the President concurred.
6. It is urged by Mr. Joshi, on behalf of the revenue, that once the assessee-company begins or has begun to manufacture or produce articles, which may not be the finished product, still the provisions of section 15C(2)(ii) are attracted and the benefit of exemption given by sub-section (1) of this section is available to the company. Such benefit is available only for a period of five years as provided in sub-section (6) and as in the present case the first year for which exemption could be claimed under section 15C was the year 1955-56, the five-year period was exhausted in the assessment year 1959-60, and for the relevant assessment year 1960-61, the assessee-company was not entitled to any exemption under section 15C.
7. For the purpose of determining the question in issue it will be relevant to refer to the appropriate sub-sections of section 15C, which are as under :
'15C. (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gain derived from any industrial undertaken to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.
(2) This section applies to any industrial undertaking which -
(i) is not formed by the splitting up, or the reconstruction of business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on or before the 1st day of April, 1948;
(ii) has begun or begins to manufacture or produce articles in any part of the taxable territories at any time within a period of thirteen years from the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;
(iii) employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power:
Provided that the Central Government may, by notification in the Official Gazette, direct that the exemption conferred by this section shall not apply to any particular industrial undertaking......
(6) The provisions of this section shall apply to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding.'
8. The object of section 15C is to encourage establishment of new industrial undertakings. The profits of the industrial undertaking to which this section applies are exempt from tax to the extent of 6 per cent. per annum on the capital employed in the undertaking.
9. Appropriate rules have been made for computing the capital employed. Relief under this section is available for the first five years after production commences.
10. The question that arises for consideration in this case depends upon the correct interpretation of the expression 'has begun or begins to manufacture or produce articles' used in section 15C(2)(ii). The first question that arises for consideration will be whether a were trial production will be regarded as beginning to manufacture or produce articles. On behalf of he revenue, the counsel has not contended to that extent, but his submission, however, is that before a finished product is produced by the assessee-company it is necessary to produce some other product at an earlier stage, mere production of that material at an earlier stage will be sufficient to come to the conclusion that the assessee-company had begun or begins to manufacture or produce articles. Reliance was placed by him upon two facts which are not disputed, namely, that the assessee-company commenced production or manufacture of crude penicillin on December 14, 1954, and that in the profit and loss account for the period ending March 31, 1955, there was a closing stock of crude penicillin worth Rs. 16.727. The argument was that sterile penicillin which is a final product saleable in the market can never be produced until first crude penicillin is produced or manufactured and if that be so, mere production or manufacture or crude penicillin will be regarded as beginning of manufacture or production of articles within the meaning of section 15C(2)(ii). The word 'articles' used in this expression has to be interpreted regard being had to the object with which this section was enacted. Undoubtedly, the object was to encourage establishment of new industrial undertakings and such object was sought to be achieved by granting an exemption from tax to the extent of 6 per cent. per annum on the capital employed in the undertaking in the manner prescribed. If the object is to give exemption from tax, that presupposes that the real object is that the profits are capable of being earned by the company. If such be the object, then until the assessee-company reaches a stage where it is in a position to decide that a final product, which could ultimately be sold in the market, could be manufactured or produced by it, it will be idle formality to say that it had started manufacture or production of articles simply because trial products are prepared with a view to verify whether they can be ultimately used in the preparation or manufacture of the final products. It is undoubtedly true that commencement of operations for manufacture of crude penicillin took place on December 14, 1954, and there was some closing stock of crude penicillin at the end of March, 1955, but even the assessee-company itself did not know whether the crude penicillin manufactured or produced by it would at all be useful to them for the production or manufacture of sterile penicillin which is only a saleable product in the market. Facilities for testing crude penicillin are not available in this country and samples were required to be sent to U.S.A. and U.K. with a view to find out its quality. It was only in the month of June, 1955, that a certificate as to the quality of the crude penicillin was received by the assessee-company and regular production was thereafter commenced only from and after August, 1955. If, on testing, the crude penicillin, which was sent for a certificate, was found useless it will be difficult to take the view that the assessee-company has begun to manufacture or produce articles, meaning thereby, articles which will ultimately be useful for manufacturing or producing finished products with the object of selling for which the assessee-company was incorporated. In our view, if regard be had to the object with which the section was enacted, then the word 'articles' in section 15C(2)(ii) can only be interpreted to mean articles which are definitely capable of being used by the assessee-company for manufacture or production of finished things which are to be ultimately sold by the company. Such a thing took place for the first time from and after August, 1955, and so the benefit of exemption under section 15C arose to the assessee-company for the fist time in the assessment year 1956-57, for which the relevant accounting year ended on march 31, 1956.
11. The provisions of sub-section (6) lay down that they will apply to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding. The first financial year in respect of which the benefit of the section is available being 1956-57, the company was entitled to claim exemption also for the assessment year 1960-61, as four years succeeding ended in that period.
12. Reliance was placed by Mr. Joshi upon a decision of this court in Commissioner of Income-tax v. Tata Locomotive & Engineering Co. Ltd.
13. The controversy that arose in this case was whether the assessee-company can be regarded as having begun to manufacture or produce articles if it purchases spare parts in a foreign country and assembles them for the first time in this country and sell them as finished products or it can be regarded as manufacturing or producing only when it starts manufacturing its own spare parts used after assembling for sale of finished products. There was no controversy in the Tata Locomotive & Engineering Co.'s case as regards the year in which the finished product was first produced as a result of assemblage. The High Court, after referring to the normal meaning of the words 'manufacture' or 'produce' and referring to the view of the Gujarat High Court and the Calcutta High Court, took the view that it must be held that assembling of those parts into the finished product, which is an automobile, amounts to the manufacture or production of the automobile. In Tata Locomotive & Engineering Co.'s case the High Court was not called upon to consider a question whether mere manufacture or production of an intermediary trial article - which is required to be tested before a decision can be taken whether it will be useful for manufacturing the end product for the sale of which the company is incorporated - should be regarded as the beginning to manufacture or produce articles. This decision, in our opinion, is of no assistance to the revenue in determining the question referred to us.
14. In the result, the question referred to us is answered in the affirmative, in favour of the assessee. The revenue shall pay the cost of the assessee.