1. These appeals are by the revenue against the order of the Commissioner (Appeals) holding that the machinery employed in retreading of tyres is entitled to investment allowance under Section 32A of the Income-tax Act, 1961 ('the Act'). 2. There is an earlier order of the Tribunal in this very case where it was held that retreading does not bring into existence any article and, therefore, the assessee was not entitled to initial depreciation under Section 32(1)(vi) of the Act. Since, however, there were conflicting views on the issue whether retreading results in manufacture or production of an article, the case was referred to a Special Bench for deciding the question of the assessee's entitlement to allowance under Section 32A, 2.1 It was, however, pointed out by the learned departmental representative that no investment allowance had been claimed or allowed for the assessment year 1981-82. The appeal for that year has, therefore, been wrongly filed. Accordingly, IT Appeal No. 38 is dismissed.
3. The learned departmental representative mainly based his arguments on the fact that retreading of tyres is not the same thing as the manufacturing of new tyres. At best, it can be a process of repairing tyres. The assessee does not start with the basic raw materials and manufacture a tyre. He has already got the core, viz., used tyres, and that retreading is done by strapping on the threads. The process was actually one of repair and not manufacture.
3.1 In support, he relied on a decision of the Bombay Bench of the Tribunal in Tyreage (P.) Ltd. v. ITO  12 Taxman 47. It was held in that case that retreading was not manufacture of tyres but only repair. Reliance was placed on the decision of the Supreme Court in P.C. Cheriyan v. Mst. Barfi Devi AIR 1980 SC 86 where it was held that the broad test for determining whether a process is a manufacturing process is whether it brings out a complete transformation of the old components so as to produce a commercially distinct or different entity or commodity. The Tribunal applied the above reasoning to hold that retreading was tantamount to repair and not manufacture.
4. Reference was also invited to the decision of the Karnataka High Court in the case of Koshy's (P.) Ltd, v. CIT. Particular reference was invited to para 9 of the judgment where it is stated that the end-product which comes into existence after the manufacturing process is complete, should have a different name and should be put to a different use. In other words, the commodity should be so transformed so as to lose its original character. This observation is taken from the Supreme Court decision in Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127. Reference was then made to the decision of the Full Bench of the Punjab & Haryana High Court in Nirmla Textile Finishing Mills (P.) Ltd. v. ITO  152 ITR 429. It was held there that the mere process of dyeing, finishing, scouring and singeing of fabrics and textiles of all kinds only results in giving a good finish to a particular article, but these processes by themselves do not amount to 'manufacture or production of textiles'. It was thus argued that retreading does not involve manufacture of any new article. The learned departmental representative, accordingly, submitted that the order of the Commissioner (Appeals) should be reversed.
4.1 Another argument advanced was that since the Tribunal had, in this very case, for an earlier year, taken a decision that retreading did not involve any manufacture, it was bound to follow its earlier decision.
5. The learned Counsel for the assessee, Shri Madan, referred us to the definition of 'production' in Chambers Dictionary to mean an article which is created. A bald tyre is useless. Although retreading is done on a tyre which retains about five per cent of the thread, the worn out tyre would be as good as useless and by the process of retreading new life is given to the tyre making it as good as a new tyre. He sought to counter the argument of the learned departmental representative that retreading is repair by submitting that the process of repairing a type and retreading are entirely different. Cutting groove in a tyre or doing some patch work is repair. But in the case of retreading fresh rubber is put on the old casing. The process is as good as manufacture because in the case of manufacturing a new tyre right from the basic material casing is also manufactured, while in retreading the process is similar except that the casing is not manufactured but is already there. It is like purchasing various parts of a machine and assembling them into a new article. In such a case there will be no controversy about the production of an article. Similarly, in the case of retreading also no controversy should arise just because the casing is not manufactured. The production of an article did not involve manufacturing of each and every part which goes into the final product.
5.1 Next he referred to certain books on Economics to support the theory that production means creation of utilities that have value. The old casing of a tyre by retreading acquires utility and value is added to it and such addition of value or utility is equal to production. He then referred to printing of books and printing of cloth which are treated as manufacture although the printer does not produce the book or the cloth himself.
5.2 Reference was then made to the decision of the Delhi High Court in the case of Addl. CIT v. Kalsi Tyre (P.) Ltd.  131 ITR 636 where it was held that the assessee employed certain industrial processes to worn out tyres and gave it a new lease of life. The process, though not equivalent to the manufacture of a new tyre, stopped a 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, a retreaded tyre was almost a new article and was separately sold in the market in the same way as a newly manufactured tyre. Special leave petition against the judgment had also been dismissed. He, thus, submitted that retreading produced a new article and, therefore, the assessee was entitled to investment allowance.
6. Shri S. Swaminathan, the learned Counsel appearing for Intervenor No. 1, referred to a large number of decisions in sales tax matters.
Out of them we may refer to State v. Chrestien Mica Industries Ltd.  7 STC 626 (Pat.), Hiralal Jitmal v. CST  8 STC 325 (MP), 2-5 STC 52, 47 STC 124 (sic) and CIT v. Krishna Copper & Steel Rolling Mills  119 ITR 256 (Punj.). According to him, the first case sets out the proposition that manufacture does not mean that the final product should lose its original character; for example, splitting of mica. The second case pointed out that in order to produce a thing transformation was not necessary. The third case held that ginning of cotton resulted in manufacture. The fourth case held that mining iron ore and dressing, washing, screening and blending it for export constituted manufacture. The fifth case held that production of iron steel bars from scrap amounted to manufacture.
6.1 The sum and substance of the argument was that in manufacture the basic material from which the process is started need not lose its original character. Hence, retreading amounts to manufacture although the original quality of the basic material is retained.
7. Shri K.R. Prasad, appearing for Intervenor No. 2, submitted that it was not necessary to discuss the difference between processing and manufacture. The important issue in this case is whether the assessee produced an article or not. He relied on a decision of the Allahabad High Court in the case of Singh Engg. Works (P.) Ltd. v. CIT [ 1979] 119 ITR 891. It was held that production as distinguished from manufacture is nothing except bringing into existence a product after processing raw materials in a manner which may not change the inherent quality or chemical composition of the raw material. He, accordingly, submitted that by retreading, an article is produced and the assessee is entitled to investment allowance.
Investment allowance.--(1) In respect of a ship or an aircraft or machinery or plant specified in Sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee: (2) The ship or aircraft or machinery or plant referred to in Sub-section (1) shall be the following, namely:-- (a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft; (b) any new machinery or plant installed after the 31st day of March, 1976,-- (i) for the purposes of business of generation or distribution of electricity or any other form of power; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or (iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule.
The point to be decided is whether the assessee manufactures or produces any article or thing which is, however, not specified in the Eleventh Schedule of the Act. If it is a small-scale industrial undertaking, even this restriction does not apply and the assessee would be entitled to investment allowance even if it produces articles specified in the Eleventh Schedule. Therefore, the discussion has to proceed on the point whether the assessee has manufactured or produced any article. Discussion on the difference between manufacturing and processing would be entirely irrelevant. In the case of manufacture an article is definitely produced. Therefore, there will not be any difficulty in granting investment allowance to such a concern but when it comes to processing, an article may, or may not be produced.
Therefore, the emphasis has to be on the production of an article whether it is by manufacturing or processing.
8.1 In the light of the above proposition laid down by us, we have to consider whether retreaded tyre is an article produced by the assessee or whether it amounts to mere repair as contended by the revenue. Let us take the case of Kalsi Tyre (P.) Ltd. (supra). There the question was whether the assessee was an industrial company engaged in the manufacturing or processing of goods and, thus, entitled to a concessional rate of tax as envisaged by the Finance Act, 1968. In that case, the revenue sought to rely on the decision of the Kerala High Court in the case of CIT v. Casino (P.) Ltd.  91 ITR 289. That was a case of a hotel. The Delhi High Court while holding that Casino's case (supra) did not apply to retreading of tyres observed as follows: While we agree that a very wide connotation of the word 'processing' may not be appropriate in the context of Section 2(6)(d), we are of opinion that the above decision does not assist the case of the revenue here. There is no contrast in the present case, as there was in the Kerala case, between a manufacturing concern and a trading concern. In the present case, the assessee applies certain industrial processes to a worn out tyre and gives it a new lease of life; the process, though not equivalent to the manufacture of a new tyre, stops very little short of it. The nature of the activity in the present case, which is clearly an activity of processing in the sense earlier discussed, is also akin in nature to an industrial or manufacturing activity. 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. (p. 640) 8.2 From the above decision it is clear that the retreaded tyre is almost a new article although the processing might fall slightly short of manufacture. There is no doubt that an article has been manufactured, the article being almost new.
8.3 The fact that for retreading to be effective, the old tyre has to retain a minimum percentage of surface and, as argued by the learned departmental representative, it is still a tyre before retreading starts and by retreading, a tyre remains a tyre, is not of much relevance. The retreaded tyre is sold like a new tyre. Casing is the basis. In our opinion, the fact that the casing in this case retains some threads before retreading makes no difference. It is like selecting an article of a particular strength before proceeding to produce an article. In our opinion, the decision of the Delhi High Court makes it clear that a retreaded tyre is at par with newly manufactured tyre and, therefore, it is to be construed that the assessee, by retreading old tyres produces an article. The discussion in the judgment makes it clear that retreading cannot be treated at the same level as repair.
9. We next go to the decision in the case of Singh Engg. Works (P.) Ltd. (supra). The relevant portions of the judgment are quoted: Production as distinguished from manufacture is nothing except bringing into existence a product after processing the raw materials in a manner which may not change the inherent quality or chemical composition of the raw material.
The Legislature has deliberately used not merely the word 'manufacture' but also 'construction or production' along with 'manufacture'. The relevant phrase is not 'manufacture and production' but 'manufacture or production or construction'. The processing to which the billets are put in order to make iron rods and bars is, in my opinion, 'production'. (p. 895) 9.1 Applying the above two decisions we have no hesitation in holding that by retreading the assessee produces an article.
9.2 It is not repair as contended by the revenue. The fact that the starting point is an old tyre hardly makes any difference. The retreaded tyre is an article almost as good as the new tyre and is certainly not the same as the old tyre with which the processing started. Certain basic similarities between the old tyre and the new tyre do not efface the fact that a processing akin to manufacture has been performed on the old tyre and the new tyre is certainly an article produced out of the old tyre. The strapping of extra rubber on the casing of the old tyre is too far removed from repairing to hold that the two articles, namely, the old worn out tyre and the retreaded tyre are the same. In any case, the price difference between the old casing and the retreaded tyre alone is sufficient to indicate that the casing has acquired a strength and longevity by retreading which a repair could never confer on it.
9.3 We, accordingly, hold that the assessee produces an article by retreading and it is entitled to investment allowance.