V.K. Singhal, J.
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 commodity.
5. Corpus Juris Secundum defines “manufacture” as “the production of articles for use from raw or prepared materials by giving these materials new forms, qualities, proportion or combinations, whether by manual labour or by machinery ; also anything made for use from raw or prepared materials”.
6. In the case of Union of India v. Delhi Cloth and General Mills Co, Ltd., AIR 1963 SC 791, it was observed by the apex court that the word “manufacture” used as a verb is generally understood to mean “bringing into existence a new substance” and does not mean merely “to. produce some change in a substance”, however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases, Vol. 26 from an American judgment. The passage runs thus : “‘manufacture’ implies a change, but every change is not manufacture, and yet every change of an article is the result of treatment, labour and manipulation. But, something more is necessary and there must be transformation ; a new and different article must emerge having a distinctive name, character or use.”
7. In CIT v. R. Narayanaswami NaicKer and Sons [1984] 149 ITR 283 (Mad) and in Girdharilal Nannelal v. CSr [1971] 27 STC 316 (MP), it was held that ginning and pressing of cotton amounts to manufacture. This court in CTO v. Mohanlal Chiranji Lal [1985] 60 STC 356 (Raj) has also held that ginning of cotton is also a process of manufacture. In view of the decision of this court, we are of the view that the decision of the Income-tax Appellate Tribunal, that simply ginning the cotton cannot be called manufacturing of any goods and a ginning factory is not a new industrial undertaking, and as such not entitled to the deduction under Section 80) of the Income-tax Act, 1961, on the capital employed, is not correct. The question regarding the capital employed, as to whether the borrowed capital is included in the term “capital employed” has not been referred and has been concluded by the decision given by the apex court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308.
8. Regarding the claim of the assessee for deduction of Rs. 650, it is submitted by learned counsel for the assessee that the said amount falls within the category of entertainment expenditure then a deduction of Rs. 5,000 is to be allowed even in respect of entertainment expenditure. The provisions of Section 37(2B) of the Income-tax Act, at the relevant time, were as under :
“Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970.”
9. This sub-section was inserted by Act No. 19 of 1970, with effect from April 1, 1970. According to this sub-section even the deduction of Rs. 5,000 is not allowable to the assessee. In the result, we are of the opinion that the Tribunal was justified in holding that the expenditure incurred of Rs. 650 is not allowable. It is also to be seen that the assessee has agreed before the Income-tax Officer for disallowance of such expenditure and it has nowhere subsequently been stated that the admission of the assessee was under duress or any other reason justifying the reagitating of the said matter. Accordingly, the reference is answered on this point against the assessee and in favour of the Revenue. No order as to costs.