1. The only point involved in this appeal pertains to the assessee's claim for weighted deduction of Rs. 64,040 under Section 35B of the Income-tax Act, 1961 ('the Act').
2. The assessee is a firm and exports bed-spreads, scarves, garments, etc. The assessment year is 1979-80 and the relevant previous year ended on 31-3-1979.
3. In its return of income as well as at the time of the assessment proceedings, the assessee claimed deduction of Rs. 64,040 on account of the following expenditure incurred by it:Items Farrukhabad Delhi Total Rs. Rs. Rs.Samples 11,324 17,269F. Postage 15,352 3,065Commission 10,560 50,798Payments to CottonService Charges 12,504Expenditure in res-Salaries, Delhi Office 17,650Rent, Salaries,Council -- 745Sales Promotion toCustomers 5,763Bank commission 21,883 While framing the assessment on 29-4-1981, the ITO ignored the assessee's claim for weighted deduction in the following manner: During the course of hearing it was observed that the assessee has not been carrying on Export Certificate for the year under consideration but it was only granted to him for the assessment year 1980-81. When required to explain as to why the claim under Section 35B may not be disallowed, it was stated that the relief is admissible to them as they are small scale exporters coming within the purview of Section 35B(a) as they are exporting goods manufactured by them. The contention of the assessee is not correct.
The assessee printed bed-spreads, scarves and garments etc., and this process cannot come under the definition of Industrial Undertaking as defined in Explanation 1 to Section 35B. No mechanical provision is involved in the nature of the business in which the assessee is involved. No machinery for carrying on any processing has been installed by the assessee and by no stretch of imagination the business of the assessee can be brought into the ambit of an Industrial Undertaking. Had it been a base as put in by the assessee himself he would have not missed his claim under Section 80J in the past where his income was ranging from 1 to 2 lakhs of rupees. It is simple after he has failed to establish himself as a Export House for the accounting period under consideration that a half-hearted case has been made out by taking a recourse to the alternative provisions. Since the assessee's case does not fall under either of the clauses to Section 35B the claim under Section 35B is ignored.
4. In appeal before the Commissioner (Appeals) it was submitted, on behalf of the assessee, that, since it was an 'Industrial Undertaking' as defined in Section 35B(1A), read with Section 32A(2), of the Act, it was entitled for weighted deduction as claimed by it. It was also submitted that the assessee, being a small scale exporter, comes within the definition of Small Scale Industrial Undertaking, the ITO ought to have allowed the assessee's claim for weighted deduction of Rs. 64,040.
The Commissioner (Appeals), however, upheld the action of the ITO as under: I have gone through the facts and circumstances of the case and heard the Counsel for the appellant. For the purposes of this provision the term 'Small Scale Exporter' means a person who exports goods manufactured or produced in any 'Small Scale Industrial Undertaking' has the same meaning as assigned to it in Clause (2) of the Explanation below Section 32A(2) of the Income-tax Act, 1961.
The expression 'Export House Certificate' means a valid 'Export House Certificate' issued by the Chief Controller of Imports & Exports. Admittedly, the assessee does not hold any certificate of the Chief Controller of Imports and Exports, Government of India. So far as the question of 'small scale exporters' is concerned, the assessee had to export goods manufactured or produced in any 'Small Scale Industrial Undertaking'. As has been observed by the ITO, the assessee has never claimed the benefit of the weighted deduction under Section 35B of the Act because, according to the assessee, the claim did not fall within the ambit of Section 35B. The assessee only prints the bedspreads, scarves and garments. Prima facie, it does not involve any manufacturing in the real sense of the term.
The process involved is also not at all mechanical which could produce any goods and it cannot take the shape of a 'Small Scale Industrial Undertaking'. As has been discussed in detail by the ITO in his assessment order, I do not think that the assessee's case falls within the definition of 'Small Scale Industrial Undertaking' for claiming the benefit of a 'Small Scale Exporter' of goods under Section 35B(1A) of the Act.
6. The items of expenditure on which the deduction has been claimed also do not merit for allowance under Section 35B of the Act. I, therefore, hold that the ITO was justified in not allowing the benefit of the claim under Section 35B for an amount of Rs. 64,040.
5. Being aggrieved by the order of the Commissioner (Appeals), the assessee has come up in appeal before the Tribunal. Inviting our attention to the relevant portions of Sections 35B and 32A, the learned counsel for the assessee submitted that, since the assessee was an 'Industrial Undertaking', the Commissioner (Appeals) ought to have accepted the assessee's claim for weighted deduction of Rs. 64,040.
Thereafter, the learned counsel for the assessee invited our attention to the decision of the Hon'ble Gujarat High Court in the case of CIT v.Ajay Printery (P.) Ltd.  58 ITR 811 and of the Hon'ble Allahabad High Court in the case of Singh Engg. Works (P.) Ltd. v. CIT  119 ITR 891 wherein the meaning of the words 'manufacture' and 'production' have been discussed by the Hon'ble High Courts and submitted that, since the assessee was converting plain cloth into printed and dyed bed-spreads, scarves, etc., which was an 'Industrial Undertaking', it was entitled for weighted deduction under Section 35B. The learned counsel for the assessee also relied on a decision of the Hon'ble Madhya Pradesh High Court reported in 8 STC 325 and another decision in the case of G.N. Khanna v. CWT  3 Taxman 392 (All.). Finally, relying on a recent decision of the Hon'ble Allahabad High Court in the case of CWT v. Radhey Mohan Narain  135 ITR 372, the learned counsel for the assessee pointed out that on almost identical facts and circumstances obtaining in that case the Hon'ble Allahabad High Court was pleased to hold that the assessee in that case was an 'Industrial Undertaking' and was, therefore, entitled to exemption under Section 5(1)(xxxii) of the Wealth-tax Act, 1957. He, therefore, urged that the ITO should be directed to accept the assessee's claim for weighted deduction under Section 35B as claimed by the assessee. Faced with this position, the learned representative for the department strongly relied on the orders of the income-tax authorities and justified their action.
Inviting our attention to Annexure 'A' to the assessment order giving depreciation chart, the learned representative for the department highlighted the fact that the assessee had not any machinery/plant worth the name by virtue of which it can be claimed to be an 'Industrial Undertaking'. He also referred to us page 875, Vol. I of the Book of Kanga and Palkhivala, 7th Edition.
6. We have considered the rival submissions of the parties and we find considerable force in the submissions made on behalf of the assessee.
The relevant portions of Sections 35B and 32A read as under: 35B. (1A) Notwithstanding anything contained in Sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after the 31st day of March, 1978, unless the following conditions are fulfilled, namely:-- (i) the business of expert of goods and is either a small-scale exporter or a holder of an Export House Certificate ; or (ii) the business of provision of technical know-how, or the rendering of services in connection with the provision of technical know-how, to persons outside India ; and (b) the expenditure referred to in that sub-section is incurred by the assessee wholly and exclusively for the purposes of the business referred to in Sub-clause (i) or, as the case may be, Sub-clause (ii) of Clause (a).
(a) 'small-scale exporter' means a person who exports goods manufactured or produced in any small-scale industrial undertaking or undertakings owned by him: Provided that such person does not own any industrial undertaking which is not a small-scale industrial undertaking ; (b) 'Export House Certificate' means a valid Export House Certificate issued by the Chief Controller of Imports and Exports, Government of India ; (c) 'provision of technical know-how' has the meaning assigned to it in Sub-section (2) of Section 80MM ; (d) 'small-scale industrial undertaking' has the meaning assigned to it in Clause (2) of the Explanation below Sub-section (2) of Section 32A. 32A. (2) an industrial undertaking shall be deemed to be a small-scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year, for the purposes of the business of the undertaking does not exceed ten lakh rupees ; and for this purpose the value of any machinery or plant shall be,-- (a) in the case of any machinery or plant owned by the assessee, the actual cost thereof to the assessee ; and (b) in the case of any machinery or plant hired by the assessee, the actual cost thereof as in the case of the owner of such machinery or plant.
The short question with which we are concerned in the present appeal is whether the activities carried on by the assessee could be treated as 'industrial undertaking'. If the assessee fulfils this condition then it would be entitled to claim weighted deduction under Section 35B. If, on the other hand, it fails to fulfil this condition, it would not be entitled to claim weighted deduction under that section. It is, no doubt, true that both the parties had elaborately argued the point involved in this appeal. However, in view of the latest decision of the Hon'ble Allahabad High Court in the case of Radhey Mohan Narain (supra), we do not think it necessary to discuss the various meanings of the words 'manufacture' and 'production' and 'Industrial Undertaking' etc. In the case of Radhey Mohan Narain (supra), the firm was engaged in buying plain cloth and, thereafter, cutting it into pieces and dyeing it in different colours. Thereafter, the bed-spreads, scarves, etc., were cut out from the rolls of plain cloth so dyed and printed which were sold in the market. On these facts, the assessee as well as its partners in that case claimed that it was an 'Industrial Undertaking' whereby the assessee and its partners could claim exemption under Section 5(1)(xxi) of the 1957 Act. The following observation appearing at pages 374 and 375 would be sufficient to dispose of the matter in the present appeal: In processing the original article need not lose its identity altogether but some changes are brought into it. When a cloth is dyed, printed and cut into pieces, the original identity of the cloth is not lost but a change is brought about as a result of going through these different processes and the end product is different from the feed in material.
The methods or techniques adopted to convert the plain white cloth into printed and dyed bed-spreads, scarves and garments entitles the business to be treated as an industrial undertaking belonging to the firm of which the assessee is a partner. The assessee is, therefore, entitled to claim exemption with regard to the value of his interest in the undertaking under Section 5(1)(xxxii) of the Act. (pp.
374-75) In view of what is stated above, the stand taken on behalf of the assessee that it is an 'Industrial Undertaking' is unassailable. In this view of the matter, the assessee would be entitled to claim weighted deduction under Section 35B. However, since the ITO has not discussed individual items of the expenditure on which the assessee had claimed weighted deduction under Section 35B, it would be necessary to send the matter back to him for a fresh decision on this limited issue.
We would, therefore, set aside the orders of the income-tax authorities on this point and restore the case once more to the file of the ITO with a direction to give his decision afresh keeping in mind the observations made in this order and after giving an opportunity of being heard to the assessee in this regard.