The Judgment of the Court was delivered by
K. Shivashankar Bhat, J.:— The following question has been referred under section 256(2) of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is not an industrial company within the meaning of section 2(9)(c) of the Finance Act, 1976?”
2. The relevant assessment year is 1976–77. According to the assessee, it is a company which carries on the business of manufacturing and sale of wooden packing boxes, granite slabs, sinks and tombstones and grinding stones and export of granite blocks. The major component of the sales is sale of granite blocks. These are stated to be manufactured by it by employing a contractor, who is to deliver the granite blocks at the office of the assessee at Madras, and it has appointed supervisors to check the specification of the granite blocks manufactured by the contractor. In addition to checking up the product, the assessee's own staff made final adjustments of these granite blocks so that transportation of the same will be safer. Therefore, the assessee contends that it is mainly engaged in the manufacture or processing of goods. However, the findings regarding the relevant facts recorded by the Income-tax Officer are:
“The company, M/s. Hind Nippon Rural Industries (P) Ltd., is engaged in the business of manufacture and sale of wooden packing boxes (2) manufacture and sale of granite slabs, sinks and tombstones and grinding stones (3) export of granite blocks to foreign companies and rebagging of wheat bags. The manufacturing unit of the company with regard to granite slabs, sinks, etc., is in Bangalore. The total turnover of the assessee is Rs. 39,82,406. Out of this the break-up of the sales is as follows:
(Rs.)
Sale of granite blocks (exported from quarries straight to Madras Harbour)
38,49,968
Sale of granite slabs and sinks
15,789
Sale of packing boxes
3,632
Rebagging charges of wheat bags
21,708
Labour charges for granite polishing Other receipts:
43,465
Interest
47,660
Miscellaneous
184
Total
39,82,406
With regard to the sale of granite blocks, the assessee has admitted that as per the agreements with the quarry owners, the quarry owner would extract the granite and would cut the granite blocks as per the specifications prescribed by the assessee. Quarry owners also undertook to supply the blocks to the assessee at the Madras Harbur or anywhere in Madras. During the year under consideration regarding the total sales of Rs. 38,49,968, the only expenses incurred by the assessee-company were supervisory charges at the quarries of the employees of the assessee-company to see that the granite blocks were made as per the specifications of the assessee-company.”
3. The Appellate Assistant Commissioner, however, accepted the assessee's claim by holding that granite blocks are not found in nature as such and they required processing which, in this case, were done by the assessee's contractors; therefore, the assessee was an “industrial company”.
4. The Appellate Tribunal reversed this finding. The Tribunal observed:
“It is not the assessee's case that the contractors who supply granite to the assessee are extracting granite from the quarry on behalf of the assessee. But it appears that the assessee's employees are allowed to size and polish the stone ready for supply at the quarry itself because according to the agreement the stones are to be transported from the quarry direct to the port for export. It was claimed that the sizing and polishing would fall within the scope of processing of goods and, hence, the assessee should be given the concessional rate. We find that the sizing and polishing are only incidental activities of the assessee whose main business is the export of stones.”
5. Consequently, the Tribunal held that the assessee does not fall within the concept of an “industrial company”, even if a most liberal construction is applied to a Circular dated February 17, 1975, issued by the Central Board of Direct Taxes.
6. It is clear that quarrying is not done by the assessee. It purchases the granite blocks with specifications as to their sizes given to the owners of granites. Those who carry on the quarrying activities cut and size these granite blocks to the satisfaction of the assessee, though the assessee polishes them and may clip the sizes in some cases to suit their export. Out of a total turnover of Rs. 39,82,406, the charges incurred for polishing were only Rs. 43,465.
7. The contention advanced before us, by Sri Sarangan, learned counsel for the assessee, is that the percentage of turnover attributable to the processing activity, in terms of money, is entirely irrelevant [except when the case falls under the Explanation to clause (c) of section 2(9)] to attract the main clause of the said provision. The assessee has been purchasing and exporting the granite slabs, etc., these granite blocks require processing, without which they cannot be exported or sold; if so, the processing of granite blocks is part of the main activity of the assessee; in other words, it was argued, that the main activity of the assessee was processing of goods, which is an integral part of the assessee's business.
8. Several decisions were cited to show that the concept of processing is quite wide so as to include any activity necessary to make an article of trade marketable such as book-binding (of printed sheets — decision of the Delhi High Court in Orient Longman Ltd. v. Commissioner Of Income-Tax, Delhi-Ii, [1981] 130 ITR 477); refrigeration; powdering of raw lumps of minerals (CIT v. Kutch Oil and Allied Industries Pvt. Ltd., [1987] 163 ITR 237 (Guj); tea blending and packing (decision of the Calcutta High Court in G.A Renderian Ltd. v. Commissioner Of Income-Tax, West Bengal-I., [1984] 145 ITR 387). The leading case on the meaning of the word “processing”, is, Chowgule and Co. Pvt. Ltd. v. Union of India, [1981] 47 STC 124, 130 : (1981) 1 SCC 653 : AIR 1981 SC 1014, wherein, it was observed at page 1018:
“This word has not been defined in the Act and it must therefore be interpreted according to its plain natural meaning. Webster's Dictionary gives the following meaning 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 marketable form as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting 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 commodity within the meaning of section 8(3)(b) and rule 13. The nature and extent of processing may vary from case to case; in one case, the processing may be 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 in regard to it, such operation would amount to processing of the commodity.”
9. We are of the view that this aspect of the case actually does not arise for consideration in this case. The finding is that the granite blocks are sold to the assessee to the specifications stated by the assessee; therefore, the processing was already done by the seller as part of the consideration for sale. The assessee has its staff to see that the requisite specifications were satisfied by its sellers. The works that may be effected by the assessee are only marginal in cases where the specifications were not fully satisfied by the vendors. It is clear that the main activity of the assessee is the sale or export of the granite blocks which had already come into existence, before the assessee bought them. The case of the assessee is comparable to a bookseller and not a printer of books; the assessee is like a trader of tea packets or powdered minerals, having obtained them after the commodity has been processed. The alleged processing, if at all, carried out by the assessee is too marginal to elevate its status to that of a main activity of the assessee.
10. Relying on the Explanation to the provision, Sri Sarangan contended that the income of the assessee is also “attributable” to the processing of goods as, without such processing (even if it is only marginal), income could not be derived by the assessee. The word “attributable” in the explanation, it was contended, has a wider meaning, as observed by the Supreme Court, under a different context, in Cambay Electric Supply Industrial Co. Ltd. v. CIT, [1978] 113 ITR 84 (SC).
11. We have already held that the processing of granite blocks carried out by the assessee is not its normal activity; it is only as an exceptional measure that the processing, if at all, is done. The income of the assessee cannot, in the circumstances, be “attributable” to such an activity (unless such an income is at least 51% of the total income).
12. The approach we have adopted finds support from a decision of this court in Koshy'S Private Limited v. Commissioner Of Income-Tax, Karnataka, [1985] 154 ITR 53. The question was whether the total income from bakery and restaurant forming more than 51 per cent. of the total income entitled the assessee, there, to claim the benefit as an “industrial company”. After referring to the width of the meaning of the word “processing”, the Bench proceeded to hold, on facts, thus, at page 58:
“Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation is ‘processing’ or ‘manufacture’.
Having thus seen the broad distinction between ‘manufacture’ and ‘processing’, we may now turn to the facts of the case. In the restaurant, the menu list contains different varieties of food and beverages. Some preparations offered to customers are mixtures of a number of articles of food. It is quite common that some readymade drinks and food are also offered which never undergo any processing or handling by the workmen. Some preparations, however, may undergo some kind of processing.
But there is no evidence of the income separately attributable to such preparations. In the absence of such evidence, the assessee's claim that the entire income from the restaurant section could be attributable to activities falling within the meaning of ‘manufacture’ or ‘processing’ of goods cannot, therefore, be entertained.
As observed by the Kerala High Court in Casino (Pvt.) Ltd.'s case, [1973] 91 ITR 289, a restaurant, by and large, is a trading concern and the object of the restaurant is not the manufacturing or processing of goods for the purpose of sale.”
13. It is implicit in the above finding that merely because some articles may undergo some kind of processing, the entire income cannot be attributed to the processing of the said articles. It is also implicit in the finding that the object of the activity carried on by the assessee is relevant to consider the nature of the main activity of the assessee. Therefore, we are of the view that the assessee in this case was rightly held, as not an “industrial company” within the meaning of section 2(9)(c) of the Finance Act, 1976.
14. The question is accordingly answered in the affirmative and in favour of the Revenue.