1. In this reference under Section 256(1) made at the instance of the Additional Commissioner of Income-tax, Madras-II, the following question has been referred for the opinion of this court :
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the benefit of relief under Section 84 of the Income-tax Act, 1961, should be allowed for the assessment year 1964-65 also '
2. The assessee entered into a contract with the Government of India, Ministry of Railways, to manufacture and deliver 250 railway wagons at a specified price. Being a new industrial undertaking, the assessee claimed relief under Section 84 of the Income-tax Act, 1961. The assessee was granted the relief under Section 84 of the Income-tax Act or its earlier counterpart, as the case may be, up to the assessment year 1963-64. When the question of the availability of the relief to the assessee came up for consideration for the assessment year 1964-65, the Income-tax Officer took the view that the manufacture of railway wagons had begun in the calendar year 1958, relevant for the assessment year 1959-60, and that the last and final year of relief could only be 1963-64 and that, therefore, the assessee was not entitled to the relief for the assessment year 1964-65. Against this order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner who upheld the finding of the Income-tax Officer and rejected the assessee's claim for the relief. The assessee thereafter took the matter on appeal to the Appellate Tribunal. The Tribunal held that the assessee was eligible for the relief for the assessment year 1964-65 as the assessee could not be said to have begun manufacturing or producing railway wagons in any commercial sense in the calendar year 1958, relevant for the assessment year 1959-60. The result of the order of the Appellate Tribunal was that the assessee was held to be eligible for the relief under Section 84 for this assessment year also. It is this order of the Tribunal which is challenged by the department by the question extracted already.
3. Section 84 as it was in the statute book in the year under reference, to the extent relevant, is as follows :
' (1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking......to which this section applies, as does not exceedsix per cent. per annum on the capital employed in such undertaking......computed in the prescribed manner.'
4. Sub-section (7) of Section 84 which is also relevant in the context of thiscase runs as follows :
' The provisions of this section shall, in relation to an industrial undertaking, apply to the assessment-
(i) for the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles, and
(ii) where the assessee is a co-operative society, for the six assessment years immediately succeeding, and where the assessee is any other person, for the four assessment years immediately succeeding.'
5. The question that arises is as to when the assessee-undertaking began to manufacture or produce articles From the year in which it began to manufacture or produce articles it would be eligible for the relief for the next four assessment years as provided in Clause (ii) above. In other words, the assessee-undertaking would be eligible for the relief contemplated under the said provision for five assessment years. The question as to whether the assessee had begun to manufacture or produce articles has to be considered only in the context of the facts in each case. In the present case, it has been found by the Tribunal that the Ministry of Railways placed an order on January 13, 1957, in accordance with which there was an agreement or contract for building railway wagons and supplying them to the railways. In the contract there is a guarantee clause which provided for the assessee to guarantee that the wagon supplied would be built fully in accordance with the specifications provided by the Ministry of Railways. It was further provided in the agreement that the assessee guaranteed that its designs strictly followed the approved drawings. In pursuance of these terms and conditions of the contract, the assessee manufactured a proto-type wagon and put the same for approval of the Director of Inspection (Rolling Stock). The officer on Special Duty (Rolling Stock) inspected this proto-type wagon on January 14, 1959. This wagon was accepted by him for general workmanship subject to certain rectifications. It was thereafter the assessee received a communication from the Director of Inspection (Rolling Stock) authorising the assessee to go in for bulk production. The Tribunal has found that the first batch of six wagons was accepted after inspection and despatched on August 14, 1959, On an analysis of the above, the Tribunalcame to the conclusion that the assessee had manufactured only a prototype wagon in the calendar year 1958 for the approval of the Director of Inspection as per the terms and conditions of the contract and only after getting this approval it went in for the bulk production in the year 1959. Thus, on the basis of this finding which is not challenged before us, we have to consider the question whether the assessee had commenced the manufacture or production of articles in 1958, when the proto-type was produced or in 1959 when the commercial production began.
6. There can be no dispute about the fact that the article that is relevant in the context of the present case is the wagon as such. Production of a proto-type is not production of an article as such, because if the Ministry of Railways had rejected the proto-type or had suggested substantial modifications thereto, then it would not have been possible for the assessee to go into production of the wagons in accordance with the proto-type already produced and the process of manufacture in accordance with the rectified type of wagon would take some further time. Therefore, the mere manufacture of proto-type would not be enough to show that the assessee had begun to manufacture or produce articles. The manufacture or production of articles must be in some commercial sense.
7. This aspect has come in for consideration in a case which arose for consideration of the Bombay High Court in Commissioner of Income-tax v. Hindustan Antibiotics Ltd. : 93ITR548(Bom) . In that case the assessee had undertaken a project for the manufacture of penicillin. It started actual operations for the manufacture of crude penicillin in December, 1954. The first samples of crude penicillin were required to be sent to the U.S.A. and the U.K. for obtaining certificates as to their qualities. The certificates were obtained in June, 1955, and thereafter, the assessee started regular production of sterile penicillin, the only product that could be sold in the market, and this was done in August, 1955. On the question whether the manufacture of sterile penicillin had started and whether the assessee was entitled to the exemption under Section 15C of the Indian Income-tax Act, 1922, for the assessment year 1960-61, it was held that production of articles by the assessee had begun only in August, 1955, and that the benefit of the exemption under Section 15C arose to the assessee for the first time in the assessment year 1956-57, and the assessee was entitled to the exemption under Section 15C for the assessment year 1960-61 also. Incoming to the above conclusion, the Bombay High Court observed as follows (page 553) :
' 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 inthe undertaking in the manner prescribed. If the object is to give exemption from tax, that pre-supposes 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 the U.S.A. and the 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.'......
8. The test as propounded above shows that it is not necessary to find out as to when the assessee commenced manufacturing operations as such, but to find out as to when the assessee began to manufacture or produce the articles, as such. The mere manufacture of proto-type may have resulted in commencement of operations, but that would not be enough, as the actual commencement of manufacture or production of the articles is the test. The passage quoted above makes it clear that the articles contemplated are articles of finished products for whose manufacture and sale the undertaking has come into existence. We are in complete agreement with this view. Applying this test, by manufacturing the proto-type, theassessee could not be said to have manufactured an article which was capable of being ultimately sold by the assessee. The assessee-undertaking was established for manufacturing wagons. The proto-type is not the wagon as such. It is only the design which had taken a concrete shape. This shape had to be approved to see if it corresponded to the design so that the bulk order could be given by the railways. On the facts of this case we are satisfied that the assessee began to manufacture the wagon as such only from the year 1959, and if that be the case, there is no dispute that the assessee will be eligible for the relief under Section 84 for this assessment year also.
9. Our attention was drawn to a decision of a Bench of this court in Madras Machine Tools . v. Commissioner of Income-tax : 98ITR119(Mad) . That was a case on slightly different facts. In that case the assessee had obtained an industrial licence for the manufacture of centre lathes and bench grinders, and a few machines were installed in June, 1957. Power supply was sanctioned only in August, 1958, and thereafter further machines were installed. The accounts of the company which was started on April 11, 1957, were closed for the first time on May 31, 1958. During the first period, a small amount of Rs. 3,397 was shown as receipts by sales and repair charges. There were some expenditure on electricity, purchase of stores, payment of wages, etc., resulting in a profit of Rs. 907. The assessee claimed that it started manufacturing articles only from the assessment year 1959-60 and that, therefore, the relief under Section 84 would be available for the year 1963-64 also. The Tribunal held that as the assessee had started manufacture and production of articles prior to April 1, 1958, relevant for the assessment year 1958-59, the benefit under Section 84 would only enure up to the assessment year 1962-63 and would not be available for the assessment year 1963-64. This court held that the manufacture and production of lathes and bench grinders could alone be taken into consideration for the purpose of applying Section 84(7) and that the undertaking had not begun the manufacture and production of articles on any commercial scale before 31st May, 1958, and hence the first year of production being 1959-60, the assessee could claim the benefit of Section 84 for 1963-64 also. This judgment also supports the conclusion which we have arrived at.
10. For the reasons mentioned above, we answer the question in the affirmative and against the revenue. The assessee will be entitled to its costs. Counsel's fee Rs. 500.