Manufacture requires a new commercial commodity; mere cutting of woollen felt trimmings did not justify penalty or deny exemption.

Cutting trimmings or chindies of compressed woollen felt into different shapes and sizes did not amount to manufacture, because the process did not create a new commercially distinct commodity and the felt retained its identity as cloth where pliability remained. The goods therefore continued to qualify for exemption under entry 6 of Schedule I on the facts stated. Penalty under section 43(1) was also unjustified, because full and correct disclosure of the facts, coupled with a bona fide claim to exemption, did not make the return false merely because the claim failed.

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Issues: (i) Whether cutting the trimmings or chindies of compressed woollen felt into different shapes and sizes amounts to manufacture and produces a new commercial commodity, so as to deny exemption under entry 6 of Schedule I. (ii) Whether the penalty imposed under section 43(1) of the Act was legal and proper.

Issue (i): Whether cutting the trimmings or chindies of compressed woollen felt into different shapes and sizes amounts to manufacture and produces a new commercial commodity, so as to deny exemption under entry 6 of Schedule I.

Analysis: Felt that satisfies the test of pliability continues to fall within the concept of cloth. The process of merely cutting trimmings into smaller shapes and sizes does not, by itself, transform the original felt into a commercially distinct article. Manufacture requires a change that results in a new and distinct commodity in commercial parlance, and where identity with the original article is retained, manufacture is not established.

Conclusion: The cutting of chindies of compressed woollen felt does not amount to manufacture and does not create a new commercial commodity distinct from the original felt; such cuttings remain cloth if the underlying felt answers the test of pliability.

Issue (ii): Whether the penalty imposed under section 43(1) of the Act was legal and proper.

Analysis: Where the facts are fully and correctly disclosed, the mere raising of a legal claim to exemption does not render the return false for the purpose of penalty. On that basis, the penalty provision could not be invoked merely because the assessee asserted exemption for the goods in question.

Conclusion: The penalty imposed under section 43(1) was not justified.

Final Conclusion: The references were answered in favour of the assessee, with the goods retaining their exempt character on the facts found and the penalty being unsustainable.

Ratio Decidendi: A process that merely cuts or trims an article without creating a new commercially distinct commodity does not amount to manufacture, and a bona fide legal claim to exemption does not, by itself, justify penalty where the relevant facts are fully disclosed.

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