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M/S. Chillies Exports House Ltd. Vs. Commissioner of Income Tax [1997] INSC 448 (22 April 1997)

S.C. AGRAWAL, K.S. PARIPOORNAN

ACT:

HEADNOTE:

JU D G ME N T Paripoornan, J.

Anidentical question oflaw arises for consideration in this batch of three appeals. The appellant is thesame firm in all the threeappeals. The appellant-assesseeis a public limitedcompanycarrying on inter aliathe business of exporting chillies to United Statesof America, USSR and Ceylon.The only question that arisesfor consideration is "whether the appellant is an 'industrial company' as defined in therespective Finance Acts and can therefore be taxed only at 55%? The revenue is the respondentin all the appeals.

2. Civil Appeal No. 3637 of1983 is filedagainst the judgment of the Madras High Court dated 18.12.1981 in Tax Case No. 469 of1978 (ReferenceNo. 289of 1978) and relates to theassessment year 1974-75. Civil AppealNo. 8017 of 1995 is preferred against thejudgment of the sameHigh Court dated 4.4.1995 inTax Case No. 998 of 1982 and relates to theassessment year 1976-77 (Judgment of the High Court vs reported in220 ITR 411). Civil Appeal No.15346 of1996 is preferred against the judgment ofthe same High Court dated 27.6.1996 in TaxCase (Reference) No. 893 of 1984 and relates to the assessment year 1977-78. Regarding the assessment year1974-1975, we are concerned with the Finance Act of1974, Section 2(8)(c); for the assessment year 1976- 77 finance Act, 1976, section 2(9)(c); and for the assessment year 1977-78 Finance ActNo.2 of1977 section 2(7)(c). A similar provision occurring as section 2(6) (c) of thefinanceAct No.2 of 1971 and relating to the income tax assessmentof theappellant for the assessmentyear 1971-72was construed by the Madras High Court and the decision was rendered on 8.12.1977 and thejudgment is reported as AdditionalCommissioner ofIncome-Tax, Madras-I vs. Chillies Export House Ltd. (115 ITR73 ).

3. Since thelanguage of different Finance Acts relating to the issue incontroversy is substantially relating to the issue in controversy is substantiallythe same, we shall quote the earliest provision contained in the Finance Act of 1974 relating to the assessment year1974-75. It is as follows:- "2. Income-tax.- (8) For the purpose of this section and the First Schedule,- (a) ..........................

(b)................................

(c) "Industrial company"means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships orin the manufacture or processingof goods orin mining." xxxxxx xxx xxx "Paragraph F In the case of acompany, other than theLife Insurance Corporation of India established under the Life Insurance Corporation Act, 1956(31 of 1956),-- Ratesof income-tax I. In the case of adomestic company,-- (1) Wherethe company is a company in which the public are substantially interested,-- (i) in a case where 45 per cent the total income of the total does not exceed income;

Rs.1,00,000 (ii) in a case where 55 per cent the total income of the total exceeds Rs.1,00,000 income;

(2) wherethe company is not a company in whichthe public are substantially interested, -- (i) in the case of an industrial company,-- (a) on so much of 55 per cent.;

the total income as does not exceed Rs.2,00,000 (emphasis supplied)

4. The basicfacts relevantto all the three appeals are not indispute. The question that arises for consideration is whether the appellant-assessee is an"industrial company" withinthe meaning of the Finance Acts aforesaid (hereinafter referred to as the Act) and the tax should be levied at the concessional rate of 55%only. The asessee, a public limitedcompany, is carrying onthe business ofsale and purchase ofchillies. Chillies are exportedto USSR, USA and Ceylon. The chillies purchased bythe assessee company are sorted andgradedas per Agmark specifications. Better qualitychillies are picked up and sorted out for export and before export they areclippedand stemmed andsubjected to fumigation under expert technical hands in order to prevent deterioration and witha viewto give better polish and appearance andduring that process they are treatedwith methyl bromide. A Substantial part of the goods are exported. According tothe assessee, it is engaged in the "business of processing of goods" and so entitled to the concessional rate of income tax as perthe Finance Act. The revenuedisputes this claim. Accordingto it, no processing is involved and thegoods purchased and exported are chillies and the assessee cannot be considered to be an "industrial company" carrying on the business of processing of goods. The identical matter came up for consideration before the Madras HighCourt relating to the same assessee- appellant for the assessment year 1971-72 and the Courtheld that the assessee is not an industrial company coming within the meaning ofsection2(6)(c)of the Finance Acct No.2 of 1971. The saiddecision is reported in115 ITR73. When the matter came upfor consideration in subsequent years 1974- 75,1976-77 and1977-78, the earlier decisionrendered for the assessment year 1971-72(115ITR 73)was followed without discussion. Inthis batch of appeals, the appellant assails the reasoning and conclusion of the High Courtcontained in its judgment dated 8.12.1977 relating to the assessment year 1971-72 (115 ITR 73) as incorrect and unsustainable.

5. We heard counsel. Appellant's counsel Vehemently contended thatthe decision of the High Courtrendered for the assessment year 1971-72 (115 ITR 73) did not consider in an appropriateperspective the requirement ofthe relevant provisions of the Finance Act or the meaning to be given to the word "processing of goods". As stated, the assessee- appellant purchased chillies. They weresorted and graded as per Agmark specifications. Better quality chillieswere picked up and sorted out for export and before exportthey were clipped and stemmed and subjected to fumigation under expert technical hands in orderto prevent deterioration and with aview togive better polish and appearance and during that process they were treated withe methyl bromide. It is common ground that theappellant got the chillies fumigated by M/s. Mysodet Pvt. Ltd., Bangalore by paying charges therefor under a contract . On the basis of these facts, the High Court in the earlier decision (115 ITR 73 ) concluded that the relevant section of the Finance Act --section2(6) (C) --suggests that the appellant company itself should engage in the entire activitywhich leads to the final processing of the goods . Inthe said decision, theHigh Court took the view that the appellant -assessee is concerned onlywith the activity of sorting and grading of chillies as per Agmark specificationsand making them fit for export andbeforeexporting clipping andstemming of chillies. The activity relating to fumigation by the treatment with methyl bromide was doneBy M/s.MysodetPvt.

Ltd. and the assesseedid not engagein thistreatment of preservation and cannot claim the benefit of the concession specified in the Finance Act.

6. Wewere referred to a few decisions by both the sides to understand the scope of the word "processing" contained in therespective Finance Acts and also as to how it was understood by the Board of Direct Taxes. We shall refer to them in brief.(These decisions were not available when the Madras High Court rendered theearlierdecision reported in 115 ITR 73 dated 8.12.1977). Construingthe word " processing" occurring in section 8(3)(b) ofthe Central Sales Tax Act and (Registration and Turnover)Rules, 1957, to decide whether theore blended in the course of loading throughthe mechanicalore handling plant con be said to undergoprocessing when it is blended,a threeMember Bench 124 at pp. 130-131) stated thus:- "Whether the oreblended in the course of loading through the mechanical ore handling plant can besaid to undergo processing when itis blended. The answer to this question depends upon what is the true meaning and connotation of the word "processing " in section 8(3) (b) and rule 13. This word has not been defined in the Act and it must therefore be interpreted according to its plain naturalmeaning.

Webster'sDictionary gives the followingmeaning of the word "process"to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, development or preparation for the market, etc., to convert into marketableform as live stock by slaughtering, grain bymilling, cotton by spinning, milk by pasteurising, fruits and Vegetables bysorting and repacking." Where therefore any commodity is subjected to a process or treatment with a view to its "development or preparation for the market", as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commoditywithinthe meaning of Section 8(3) (b) and rule 13. The nature andextent of processing may vary from case to case; inone case the processing maybe slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. wherever a commodity undergoes a change as a result of some operation performed on it or inregardto it, such operation would amount to processing of the commodity.The nature and extent of the change is notmaterial. It may bethat camphor powder may just be compressedinto camphor cubes by application of mechanicalforce or pressurewithout addition or admixture of any other material and yet the operationwould amount to processing of camphor powder as held by the Calcutta HighCourt in Commissioner of Commercial Taxes (1965 (16) STC935).What is necessary in order to characterise an operation as"processing" is that the commodity must, as result ofthe operation,experience some change.' (emphasis supplied) The abovedecision was followed by differentHigh Courts in giving effect to similar provisions in Finance Acts in different contexts. InCommissioner ofIncome-Tax , Gujarat-I vs. Lakhtar cotton Press Co.(Pvt.) Ltd. (142 ITR 503) the Gujarat High Court held that when theassessee was carrying on the business of ginning and pressing of cotton, and cotton received in bulk was mechanicallypressedinto small units andpacked in commercial acceptablebales, it is an operation which results inthe change of commodity and amountsto processing of goods and the company engaged in such an activity is an industrial companyentitled to concessional rate oftax since itis engaged in the Datacons (P.) Ltd. (155 ITR 66) the Karnataka High Court held that conversion of dat furnished by customersinto balancesheets, stock account, etc., amounts to processing of goods withinthe meaning of term contained in the Finance Act andso, theassessee is entitled toconcessional rate of tax. The Allahabad High Court in Commissioner of Wealth-Tax vs. Syed AmjadAli (202 ITR 19 ) heldthat the activity of crushing of tobacco leaves and separating stems anddust therefrom amounts to processing within the meaning of the relevant expression that occurred in Wealth Tax Act. The BombayHigh Court in Shree Mulchand Co. Ltd. vs. Commissioner of Income-Tax (162 ITR 764) held that when a companypurchases wool, sortsout the same in different qualities and colours and staple lengths and then hand- washed to eliminate dirt, etc., and dried it in sun and blendeduniformly for sale and export, a new commercial commodity is broughtinto existence and the operation carriedon amounts toprocessing of goods andthe assessee is an industrial company, entitled toconcessional rate of tax under Finance Act2 of 1971. TheKerala High Court in Commissioner of Income-Tax vs. Rajmohan Cashews (P.)Ltd.

(185 ITR 472) held that when the assesseecompany was engagedcompany was engaged in processing raw cashewnuts and the major operation of processing work was done by outsideagencies on behalf ofthe assessee and charges, therefor, werepaid by the assessee, the assessee was engagedin manufactureand processingof the goods and was an industrial company within the meaning of section 2(6) (c) of theFinanceAct, 1972. The Court held that the factthat the processingwas not done in the factory ofthe assessee but inthe factory ofsomeone else would not necessarily mean that the assessee is not mainly engaged in the processing of the goods provided there is material toshow that the processing was done by the outside agency for and on behalf of the assessee isnot mainly engaged in the processing of the goods provided there is material toshow that the processing was done by the outside agency for and on behalf of the assessee and the charges incurred therefor were paid bythe assessee directly. Reference may also be made, in this connection, to circular No. 347 dated 7th July, 1982, issued bythe Central Board of Direct Taxes, Printedat 137ITR (Statutes) p. 14, which is to the following effect:- "Circular No. 347, dated 7th July, 1982.

To All Commissioners of Income-tax Sir, Subject: Book publishing - whether industrialcompanies.

TheBoard hasreceived representations that companies engaged in publishing of books should be treated as industrial companiesfor the purpose of section 104 of the Income-Tax Act, 1961. Reference has beenmade in this connection tothe decisions of the Madrasand Calcutta High Courts inthe cases ofCit, Madras V. CommercialLaws of India Pvt. Ltd.

[1977] 107 ITR 822, and Addl. CIT, West Bengal-II v.A. Mukherjee & Co. (P.) Ltd. [1978] 113ITR 718, respectively. In the Madras decision it hasbeen held that folding and stitching the printed sheets and converting them into parts or books, asthe case may be, constituted processing of goods, In the Calcutta decision, itwas held that it iswholly unnecessary for a publisher of books to bean owner of a printing press or to be himself a book binder to be a manufacturer of books. A publisher may get the booksprintedfrom any printer, but the printer is a mere contractor and the publisher carries on the business of manufacturing and processing of goods.

2. The Board has been advised to accept these decisions.In view thereof, book publishing companies even though they may themselves not be engaged in the printing or binding of books qualify to be treated asindustrial companies for the purpose of section 104 as well as forthe concessional tax treatment given to industrial companies.

3. The contentsof thecircular may kindlybe brought to the notice ofall officers working under your charge." (emphasis supplied) Onthe basis ofthe above materials,counsel for appellant vehemently contends that theentire approachmade by theHigh Court and the conclusion reached by is unsustainable and the above materials were notavailable to the Madras High Courtwhen itrendered the parent decision in 1977 (115 ITR 73). It was contended that themain reasoning in the said decision (115 ITR73) is to the effect that the activity doneby the assessee, namely, sorting and gradingof chillies asper Agmark specifications and making them fit for export and beforeexport clippingand stemming of chillies were alone doneby them but the activity relating to fumigationby thetreatment of methyl bromide was done by another on its behalf, and so the assessee cannot claim the benefit and the totality of the activities cannot be considered ashaving been done by theassessee and it is on thisbasis of reasoning, it was heldthat inthis view it cannotbe saidthat the assessee was engaged in the processing of goods within themeaningof Finance Act No. 2 of 1971. Theplea urged before us is that theword "processing" has been understood in a very widesense by the three member Bench ofthis Court in Chowgulecase (supra) and by various High Courts referred to hereinabove and,even if oneor more of such activitiesin the series are entrusted to any other personlike a contractor, to enable the assessee to complete the task, it will not disable or disentitle theassessee to claim theconcessional rate of tax.

7. Onthe other hand, counsel for the Revenue submitted that the decision in chowgulecase (supra) renderedby a three member Bench of this Court has been givena restricted scope in a later three member decision of this court in Delhi Cold Storage P.Ltd. vs. Commissioner of Income-Tax (191 ITR 656).In that case a private limited company was runninga cold storage.It was held that the articles stored in cold storage did not undergo any process.The question was posed as towhetherthe cold storage company can beheld to have been engaged in theprocessing of goods. A three member Bench of this court ,after quotingthe passage subsequent to the onequoted by us hereinabove - Chowgule case (47 STC 124 at 131) heldthat the word processing" is of wider amplitude, and has various aspects and meaning and observed at p. 660, " the judgment indicates that processing involves bringing intoexistence a different substancefrom what the material wasat thecommencement ofthe process" Counselcontended thatin thiscase the goods purchased and exported are the same, namely, chillies. And so, it cannot be stated thatby processinga different substance was broughtinto existence. It was further stated that the activity of fumigationin the present appeals is similar to preservation by refrigeration.It wasfurther arguedthat the activity carried on by theassessee is only marginal or minimaland so the assessee cannot be said to be carrying on the business of processing of goods. Reference wasalso made to the decisionsof Karnataka High Court inHind of Income-Tax (201 ITR 581 ) and Hind Nippon Rural (201 ITR 588).

8. Onhearing the rival pleas urged before us, it is evident thatthe various aspectshighlighted in the decisions adverted to hereinabove as also the Circular of the Central Board of Direct Taxes werenot Available to the Madras High Court when it rendered its main decision in1977 (115 ITR 73). The ultimate conclusion as towhether the assessee was carrying on the business of processing of goods would dependupon the consideration of all relevant materials available inthe case. The Madras High Court has eschewed from consideration one important activity carried on in the matter, namely , the activity relating to the fumigation by the treatment with methyl bromide on the ground that itwas done by another (M/s. Mysodet Pvt. ltd., Bangalore) on behalf of the assessee. That is and irrelevant or immaterial factor. The sole question is, whetheron a consideration of the totality of the activities including the one relatingto the fumigation by the treatment withmethyl bromide which enables the goods to be exported as a marketable commodity, amounted tothe business of processing of goods. The High court had omitted to consider the matter in that perspective. It also does not stand to reason to state that the dictum laid down by the three member Bench inChowgule case(supra) hasbeen departed from in the later decision rendered by another Commissioner of Income-Tax (191 ITR 656). Itappearsthat since in cold storage there was only an act ofpreservation -- without anypositive action-- this Court was inclined to take the view that the company running cold storage is not an industrial company and no process isinvolved. Fumigation requires positive action. The dictionary meaning of thesaid word is, "to treat (somethingcontaminated or infected 0 with fumes or smoke" (Collins English Dictionary). Webster's Comprehensive Dictionary InternationalEdition - p.512, gives the meaning for the word,"fumigate" thus, "To subject to smoke or fumes, asfor disinfection ". Archaic -- to perfume. Whether "refrigeration " and"fumigation " are of the same or similarimport, or whether there is any difference, isa matter whichrequires a close look. It appearsthat though the goodspurchased by the assessee in order to make it marketable or more marketable in the export market -- a sensitive market. These andother considerations require proper evaluation and an indepth analysis and assistance from technical persons may berequired to ascertain how far and to what extent the various activities carriedon, by the assessee to render the chillies purchased locallyas oneof export quality can be termedas "carrying on thebusiness of processingof goods". The entire matter requires a second look. A better investigation into the different activities carriedon bythe assessee which resulted in making thegoods fit for export and how far the cumulative effect of those activitieswill amount to"the processing of goods" should be arrived at inthe light of the various decisions referred to hereinabove. Since such an indepthinvestigation and analysis ofthe matter has not been made, we are of the view that the decisionin the three instantappealssolely based onthe earliest decision of the High Court of Madras,rendered in 115 ITR 73, whensuch materials werenot available,cannot stand. we, therefore, set aside the judgmentsin all the appeals and order a remit of themattersto the High Court for adenovo consideration according to law.

9. The appeals are, therefore, allowed. There shall be no order as to costs.

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