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PETITIONER:

M/S. CHILLIES EXPORTS HOUSE LTD.

Vs.

RESPONDENT:

COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT: 22/04/1997

BENCH:

S.C. AGRAWAL, K.S. PARIPOORNAN

ACT:

HEADNOTE:

JUDGMENT:

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:-

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"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

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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

of this Court in Chowgule & Co. Vs. Union of India (47 STC

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

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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

Sri OmPrakas Gupta # Vs.

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

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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

processing of goods. In commissioner of Income-Tax Vs.

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

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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

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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

Nippon Rural Industries Pvt. Ltd. (No. 1) Vs.Commissioner

of Income-Tax (201 ITR 581 ) and Hind Nippon Rural

Industries pvt. Ltd. (No.2) Vs. Commissioner of Income-Tax

(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

coordinate Bench in New DelhiCold Storage P. Ltd. Vs.

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

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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.