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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.