1. These appeals are by the revenue and they arise out of a common order of the Commissioner (Appeals). The assessee is common and, hence, they can be taken up together and disposed of conveniently by a common order. The assessee is a private limited company doing business in tobacco. The accounting year is Diwali year and so it ended by 31-10-1975, 31-10-1976, 31-10-1977, 31-10-1978 and 31-10-1979, respectively, for the assessment years 1976-77 to 1980-81.
2. The first ground is against the allowance of business promotion expenses for the assessment years 1976-77 to 1980-81 and the amounts involved are Rs. 3,280, Rs. 534, Rs. 3,127, Rs. 10,480 and Rs. 7,858, respectively. These amounts were disallowed by the ITO on the ground that they include sums spent towards club subscriptions and entertainment expenditure in respect of guests. In the assessment year 1977-78, it is stated that the disallowance was of the expenditure incurred towards tea, coffee and biscuits supplied to the guests and visitors. The learned Commissioner (Appeals) states that he had verified the particulars of the expenditure for these several assessment years and found to have been laid out for providing tea, coffee, etc., by way of ordinary hospitality solely guided by custom and business expediency. He, therefore, found that this expenditure is fully covered by the decision of the Andhra Pradesh High Court in Addl.
CIT v. Maddi Venkataratnam & Co. Ltd.  119 ITR 514 and, therefore, he directed the ITO to allow the expenditure as claimed by the assessee fully.
3. Explanation 2 to proviso (b) under Section 37(2A) of the Income-tax Act, 1961 ('the Act') was inserted by the Finance Act, 1983, with retrospective effect from 1-4-1976 in which the term 'entertainment expenditure' was stated to convey the following meaning: For the removal of doubts, it is hereby declared that for the purposes of this sub-section and Sub-section (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.
The meaning ascribed to the term 'entertainment expenditure' under the above Explanation is retrospective in operation and it should be deemed to have come into effect from 1-4-1976, i.e., for the assessment year 1976-77 onwards. As can be seen from the wording of the Explanation extracted above, even provision of food or beverages either by reason of express or implied contract or custom or usage of trade would now come under the definition of 'entertainment expenditure'. Therefore, the decision of the Andhra Pradesh High Court in the case of Maddi Venkataratnam & Co. Ltd. (supra), on the basis of which the lower appellate authority cancelled the disallowances, can no longer be held to be good law from the date of the retrospective operation of Explanation 2 to Section 37(2A), i.e., from 1-4-1976. Therefore, in view of the insertion of the above Explanation, applying the ratio of the Andhra Pradesh High Court's decision referred to above to cases relating to the assessment year 1976-77 onwards can no longer be correct. However, under the said Explanation, a bifurcation is to be made between two categories of entertainment expenses--expenditure incurred on food and beverages provided by the assessee (i) to its employees in office, factory or other place of work; and (ii) to others including customers, guests, etc. In view of the Explanation, we hold that the inpugned order of the learned Commissioner (Appeals) for the assessment years 1977-78 to 1980-81 relating to business promotion expenses is not correct under law and, therefore, it should be set aside. However, for making the bifurcation contemplated under the Explanation into two categories, we have to send back the matters to the ITO with a direction to make the bifurcation and to allow such of the expenses which are incurred on food and beverages provided by the assessee to its employees in the office, factory or other place of their work and to disallow the rest of the expenses in the assessment years 1977-78 to 1980-81.
4. The next point which is raised by the revenue for the assessment years 1976-77 to 1979-80 is against the finding of the learned Commissioner (Appeals) that the assessee-company was engaged in the manufacturing or producing of articles within the meaning of Section 80J(1) of the Act. Originally, the assessee had not claimed this relief. However, by its letter dated 30-1-1976, it claimed relief under Section 80J. The said letter was filed when the matter was pending before the IAC. There was a direction from the IAC to examine the facts properly and consider the assessee's claim under Section 80J. The assessee filed two sets of computations. The two sets are provided now at pages 3, 5 and 7 of the paper compilation filed before us. According to the first set of computation the relief claimed was Rs. 34,157 and according to the second set, the relief claimed was Rs. 3,23,775. The ITO held that under Section 80J(2), the relief cannot be given unless the industrial undertaking begins to manufacture or produce articles or operates its cold storage plant. In the opinion of the ITO, the assessee does not produce any article. The assessee may be processing tobacco but as no article such as cigarettes and cigars have been produced by the assessee, it is not entitled to relief under Section 80J. On that score, the ITO rejected the relief under Section 80J to the assessee.
5. On appeal, the learned Commissioner (Appeals) found that the ITO was not correct in view of the third proviso to Sub-section (4) of Section 80J introduced by the Finance Act, 1979, with effect from 1-4-1979.
According to the said sub-section, the conditions to be fulfilled by an industrial undertaking to become eligible for deduction under Section 80J, it must have begun to manufacture or produce articles within a period of 33 years next following 1-4-1948. The third proviso referred to above reduced this period to 31 years in case of an industrial undertaking which manufactures or produces any article specified in the Eleventh Schedule. Item 2 in the list of articles in the Eleventh Schedule is 'Tobacco and tobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff.' This, according to the learned Commissioner (Appeals), indicates beyond any doubt that an industrial undertaking which manufactures tobacco is entitled to the benefit of deduction under Section 80J, provided it has commenced manufacture before 31-3-1979. In the context of tobacco, the word 'manufacture' had to be necessarily understood as 'processing'. He followed the decision of the Allahabad High Court in Tarai Development Corpn. v. CIT  120 ITR 342, wherein the expression 'manufacture' was held to include 'processing' and on that ground he held that the assessee in this case is an industrial undertaking entitled to the benefit of relief under Section 80J, provided the various conditions specified are fulfilled.
He also held that the assessee would be entitled to relief under Section 80J for the five successive assessment years. He also held that if processing of tobacco commenced in the previous year relevant to the assessment year 1973-74, the assessee would be entitled to the benefit under Section 80J up to and including the assessment year 1977-78.
However, if such processing is commenced in an earlier previous year, the benefit would not be available for the assessment year 1977-78.
Therefore, he directed the ITO to verify the aspect and allow an appropriate deduction under Section 80J for the relevant assessment years as may be found allowable. Now the finding as well as the direction is assailed in these second appeals before us. Thus, the matter stands for our consideration.
6. It is argued by the learned departmental representative that neither the word 'manufacture' nor the word 'processing' was defined either under the Income-tax Act or under the Andhra Pradesh General Sales Tax Act. However, there are certain tests to be applied before a good is to be considered to be a manufactured good. The tests, according to the learned departmental representative, are as follows: (1) The end product which comes out should be a commercially viable product.
(2) The product must be materially different from the original goods.
It is argued before us that subjecting tobacco to drying, redrying, stripping, etc., by the assessee cannot be called undertaking a manufacturing process and, consequently, the assessee cannot be called an industrial undertaking. Mere processing of goods cannot earn the benefits of Section 80J to the assessee. Before claiming the benefit under Section 80J, the assessee should prove that it is 'manufacturing' some goods. What is meant by 'manufacturing' goods and what are the tests to be applied before a thing is said to have been manufactured are laid out clearly in the decision of the Supreme Court in Dy. CST v.Pio Food Packers AIR 1980 SC 1227. The question in that case was whether there was consumption of a commodity in the process of manufacture within the meaning of Section 5A(1)(a) of the Kerala General Sales Tax Act, 1963. In fact, the section was also extracted in the body of the decision. In that case, the assessee purchases pineapples, removes the inedible portion, the end crown, skin and inner core, thereafter the fruit is sliced and the slices are filled in cans.
Sugar is added as a preservative. The cans are sealed under temperature and then put in boiling water for sterlization. While considering the provisions of the above section, the Supreme Court laid down the several criteria to determine what constitutes manufacture. The criteria laid down are as follows: (from the headnote): ...There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. 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. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity.
Applying the criteria, the Supreme Court held from the facts of that case that although a degree of processing is involved in preparing the pineapple slices from the original fruit, the commodity continues to possess the original identity, notwithstanding the removal of inedible portion, slicing and thereafter canning it or adding sugar to preserve it. Applying the ratio laid down by the Supreme Court in the above decision, the point canvassed was that simply because the assessee was carrying on some processing and exporting tobacco, this did not satisfy the requirements of Section 80J. Even after processing, the end product was not commercially different from the original one. When it is dried and stripped, the ultimate material, viz., tobacco, remained as tobacco and after undergoing the process, it does not transform itself into a different commodity and, therefore, it cannot be said to be a manufactured product in the hands of the assessee, was the argument advanced by Mr. N. Santhanam, the learned departmental representative.
7. The learned departmental representative also relies on the decision again rendered by the Supreme Court in Chowgule & Co. (P.) Ltd. v.Union of India AIR 1981 SC 1014. This time, the Supreme Court was considering the provisions of Section 8(3)(b) of the Central Sales Tax Act, 1956, and also Rule 13 of the Central Sales Tax Rules, 1957. In a bid to prove that the assessee was carrying on manufacturing, it had put seven operations it had been undertaking, and they are as follow: (v) transport of the ore from the river side to the harbour by means of barges; (vi) stacking of the ore at the harbour in different stock piles according to its physical and chemical composition; and (vii) blending of the ore from different stock piles with a view to producing ore of the required specifications and loading it into the ship by means of the mechanised ore handling plant.
The question was whether goods purchased by the assessee for use in the above operations could be said to be goods purchased for use in the manufacture or processing of goods for sale or in mining so as to attract the lower rate of sales tax under Section 8(1)(b) of the Central Sales Tax Act. As far as the interpretation of the word 'manufacture' is concerned, the Hon'ble Supreme Court followed the previous reported decision in Pio Food Packers' case (supra) and held that the blending of different qualities of ore possessing different chemical and physical composition so as to produce ore of the contractual specifications cannot be said to involve a process of manufacture since the ore then is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together.
8. It is also argued that even if a commodity undergoes chemical or physical change when it is processed, it can be said to have been processed but not manufactured. The impugned order of the Commissioner (Appeals) was severally criticised by the learned departmental representative and it is stated that the Commissioner (Appeals) drew maximum inspiration from the Eleventh Schedule. He criticised the impugned order as incorrect by arguing that guidance to interpret a section in the Act should not have been obtained from the Schedule. He also argued that the Eleventh Schedule is not only relevant for the purposes of Section 80J but also for the purposes of appreciating the claim under Section 32A of the Act. He also brought to our notice the decision of the Amritsar Bench in Raj Manohar & Bros. v. ITO  1 ITD 90. There the Bench found the difference between 'manufacture' and 'processing' of goods as follows (from the head note): There is a difference between the manufacture and processing of goods. Manufacture means making of articles or material commercially different from the basic components by physical or mechanical process. If the goods to which some labour is applied remained essentially the same commercial articles, it cannot be said that the final project is the result of manufacture. The term 'processing' has in one sense a wider connotation than the term 'manufacture'. At some point processing and manufacturing merge. Where the commodity retains a specific identity through the processing stage, it will be said to have been processed and not manufactured. Ginning cotton is certainly processing of goods but cannot be considered as manufacture. However, where something different is produced as compared to the raw materials, one can use the word 'manufacture' or 'produced' articles. The words 'processing of goods' has not been used in Sections 80J and 80HH.From the above, it is sought to be argued that simply because some labour is applied to the goods and if the goods remain essentially the same commercial article, it cannot be said that the final product is the result of manufacture. In that case, ginning cotton was not considered to be manufactured. He also referred to the decision of the Bombay Bench 'B' in the case of National Construction Corpn. v. IAC  3 ITD 677, where it is held that an assessee engaged in construction of buildings cannot be allowed relief under Section 80J as construction cannot be treated as manufacture. Therefore, according to the learned departmental representative, keeping in view the limited processing done in the hands of the assessee, viz., drying, redrying, stripping and stacking, etc., it cannot be said that the assessee is an 'industrial company' as it is not manufacturing anything or does not bring about an altogether different commodity.
9. Countering these arguments, Shri M.J. Swamy, the learned advocate for the assessee, contended that in the case on hand, the facts certainly prove that the end product which comes out after various processes of manufacture undertaken by the assessee is a different commodity altogether and it is commercially a different product and, therefore, the test laid down in Pio Food Packers' case (supra) was fulfilled. He has cited before us the decision of the Madras Bench 'B' of the Tribunal in IT Appeal No. 605 (Mad.) of 1975-76 dated 16-10-1976 where the Bench considered the case of an assessee who carries on similar manufacturing process to that of the present assessee before us. In that case also, the assessee purchases raw tobacco from the ryots and the final product which it produces is redried tobacco.
According to the assessee, the contention was that raw tobacco which it purchases is entirely different from the redried tobacco which it ultimately produces, packs and keeps ready for export. In that case, the various stages through which the tobacco purchased by the assessee undergoes several processes are as follows: The assessee purchases fluecured tobacco leaves, grades the tobacco and performs stripping operation, i.e., removal of the mid rim.
According to Agmark rules, 60 per cent of the stem was to be removed for the purpose of making tobacco strips. Then the tobacco strips as well as leaves are subjected to what is called redrying process in a redrying plant. In the redrying plant, the product undergoes three stages: (i) drying, (ii) cooling, and (iii) reordering.
The Madras Bench, in its order, minutely went through the effect of the processes and held ultimately as follows: It is, therefore, clear that the redried tobacco is commercially a different product from the fluecured roughly graded tobacco which the assessee purchases. The assessee, therefore, clearly manufactures or produces articles within the meaning of Section 80J and we agree with the conclusion of the Appellate Assistant Commissioner that the assessee is entitled to the relief claimed.
The learned counsel for the assessee also brought to our notice the judgment of the Supreme Court in AIR 1970 SC 639 (sic). No doubt, the decision was rendered under the Factories Act, 1948, but their Lordships rendered the decision only after considering the various processes which the tobacco underwent at the hands of the accused in that case. In the headnote, the facts as well as the decision was rendered as follows: The materials on the record show that in the company's Eluru premises, sun-cured tobacco leaves brought from the growers were subjected to the process of moistening, stripping and packing. The tobacco leaves were moistended so that they may be handled without breakages. The moistening was done for 10 to 14 days by sprinkling water on stalks which were stripped from the leaves. The Thukku (wholly spoilt) and Pagu (partly spoilt) leaves were separated. From time to time they were packed in gunny bags and exported to the company's factory at Bombay where they were used for manufacturing cigarettes. All these processes are carried over in the tobacco industry. In the circumstances all these processes are manufacturing processes within Section 2(k)(i), as the definition in Section 2(k)(i) of the Act (Factory Act) is widely worded.
It is argued that from the facts of the above case, it is clear that the various processes undertaken in Eluru branch were considered and they were held to be part of manufacturing process undertaken by the accused in that case. Though, no doubt, it is a decision rendered under the Factories Act, we should not lose sight of the fact that their Lordships considered the various processes undertaken by the accused and rendered their decision stating that they amount to manufacturing of tobacco. Therefore, it is clear, according to the learned counsel for the assessee, that the argument of the learned departmental representative that the activity carried on by the assessee-company does not involve manufacturing and the assessee is not a new industrial undertaking is quite erroneous and the order of the learned Commissioner (Appeals) is pre-eminently just and does call for any interference from this Tribunal.
10. Thus, we considered the arguments advanced on both sides. We are inclined to agree with the submissions made on behalf of the assessee.
We respectfully agree with the Madras Bench of this Tribunal (to which one of us, the learned Accountant Member, is a party) when it held that the redried tobacco, which is the end product, is commercially different from the fluecured tobacco which the assessee purchases from the farmers. We also hold that the important test laid down by the Hon'ble Supreme Court in Pio Food Packers' case (supra), viz., that the article produced should be regarded in trade by those who deal in it as distinct in identity from the commodity involved in the manufacture, is clearly fulfilled in this case. Further, the matter is fully covered by the decision of the Madras Bench with which we respectfully agree. We, therefore, hold that no interference is called for with the finding of the learned Commissioner (Appeals) holding that the assessee is a new industrial undertaking entitled to relief under Section 80J.11. Now, the question remains as to what amount the assessee is entitled under Section 80J for each of the assessment years under consideration. We have already stated that two types of calculations were furnished by the assessee for each of the assessment years under consideration involving bigger as well as smaller claims. We have perused the copies of the claims made. If the debts and liabilities are to be considered as part of capital base, then the assessee is entitled to the bigger claim made in each of the years. If, however, Rule 19A of the Income-tax Rules, 1962, is to be applied and if debts and liabilities are to be excluded while computing capital base, then the assessee would be entitled to the smaller sum of claim made by it in each of the assessment years. The whole matter is now pending before the Supreme Court including the retrospective amendment brought out by the Legislature in Section 80J. We, therefore, direct that the matter should go back to the ITO for quantification of the relief under Section 80J in view of the impending decision of the Hon'ble Supreme Court in the matter.
12. In the result, the appeals filed by the revenue are deemed to be partly allowed.