Ginning of cotton amounts to manufacture and a ginning factory is a new industrial undertaking entitled to deduction under section 80J of the Income-tax Act, 1961. Expenditure incurred on customers is not allowable as entertainment expenditure.

1. - The Income-tax Appellate Tribunal has referred the following questions of law arising out of its order dated February 29, 1980, in respect of the assessment year 1976-77 under section 256(1) of the Income-tax Act, 1961 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that a ginning factory is not a new industrial undertaking and as such not entitled to the deduction under section 80J of the Income-tax Act, 1961, on the capital employed ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that expenditure incurred on customers is an entertainment expenditure ?"

2. The brief facts of the case are that the assessee derives its income from purchase of cotton and sale of cotton and cotton seeds which is obtained after ginning of the same in its factory at Bali. A claim under section 80J/80HH was made in the revised return submitted by the assessee. The Income-tax Officer found that the assessee's capital at the beginning of the accounting year was Rs. 32,381 against his capital with Surendra Finance Co., of Rs. 55,921. The Income-tax Officer came to the conclusion that the assessee had no surplus money which he could have used at Bali and the amount to the extent of Rs. 2,25,472 was raised by way of loan from three parties and the entire capital invested in the branch at Bali represented borrowed money and in accordance with the provisions of rule 19A of the Income-tax Rules, 1962, the relief under section 80J is to be computed after excluding the liabilities from the total value of assets, and, since there was no investment of the assessee found therefore he was held not entitled for the deduction claimed (sic). It was also observed that the ginning of kapas is not manufacturing or processing of goods. In respect of the claim under section 80HH, it was observed that Bali is not a backward area and as such no relief can be given. The claim for deduction of Rs. 650 was disallowed as it was found that the expenses are in the nature of entertainment expenditure being incurred on tea, sugar, etc. In the appeal before the Appellate Assistant Commissioner, it was held that the expenditure of Rs. 650 is an expenditure in the nature of entertainment expenditure and is not allowable. In respect of the claim under section 80J, the Appellate Assistant Commissioner came to the conclusion that the assessee has raised a loan to the extent of Rs. 2,25,472 from three parties and thus, the entire capital invested represented borrowed money and as such no relief is admissible. It was further observed that the assessee is not engaged in the activities of processing of goods or production of articles.

3. In the second appeal before the Income-tax Appellate Tribunal, the claim for Rs. 650 as entertainment expenditure was disallowed and with regard to the claim under section 80J, it was observed that the word "manufacture" has various shades of meaning, but generally it involves a process of manual labour, with or without the aid of machinery by which one object is changed into another for selling it. Processing has a wider meaning than the term "manufacture". Sometimes processing and manufacturing will merge, where the commodity retains a substantial identity through the processing stage ; it will be said to have been processed and not manufactured. The appeal on this ground was also rejected.

4. We have considered the matter. In accordance with the provisions of section 80J, it is necessary that the profits and gains must be derived by an assessee from an industrial undertaking which manufactured or produced articles. The ordinary meaning of "manufacture" is to bring into existence an article or a product which is understood as a different commercial commodity in common parlance. In the process, the raw material is transformed either by physical or manual labour or by aid of power or by chemical reaction into a different commercial commodi