The Judgment of the Court was delivered by
K.K Usha, J.:— This tax revision case at the instance of the Commissioner of Income-tax arises out of the order passed by the Income-tax Appellate Tribunal, Cochin Bench, in I.T.A No. 587.Cochin of 1988. The relevant assessment year is 1979-80. The following questions are referred for the opinion of this court:
“(1) Whether, on the facts and in the circumstances of the case, the assessee engaged in purchasing different qualities of tea and blending the same for the purpose of export, is entitled to weighted deduction in the light of section 35B(1A) of the Income-tax Act, 1961, in respect of the expenditure incurred in connection with its exports for the assessment year 1979-80?
(2) Whether, on the facts and in the circumstances of the case, the levy of interest under section 215 is valid and the Tribunal is right in law in declining to interfere with the cancellation of interest by the Commissioner of Income-tax (Appeals)?”
2. The relevant facts are as follows: The assessee is a registered firm engaged in the business of export of tea. For the assessment year 1979-80, the Assessing Officer disallowed the claim of the assessee for weighted deduction in respect of the expenditure incurred in connection with the exports in view of the provisions of section 35B(1A) introduced by the Finance Act, 1978. The Commissioner of Income-tax (Appeals) upheld the claim of the assessee for weighted deduction on the ground that the assessee was a small scale unit in the light of certification of registration granted by the Directorate of Industries, Kerala State, and the assessee was processing and manufacturing tea and, therefore, the embargo in section 35B(1A) of the Income-tax Act will not be applicable to the case of the assessee. On appeal by the Revenue, the Tribunal took the view that the assessee was a small scale industrial unit for manufacturing or processing products such as packet tea, etc. Relying on a decision of the Calcutta High Court in G.A Renderian Ltd. v. CIT, [1984] 145 ITR 387, the Tribunal held that purchase of tea of different qualities and blending the same by mixing one type with another type will fall within the meaning of industrial company even though the work was done manually. After referring to the decision of the Supreme Court in Chowgule and Co. P. Ltd. v. Union of India, [1981] 47 STC 124, it further held that the activity of the assessee cannot be said to be a manufacturing activity, but it was engaged in processing activity and in such processing there was production of tea itself. According to the Tribunal, section 35B(1A) was a short-lived one. Placing a liberal construction the Tribunal upheld the order of the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) took the view that the Income-tax Officer was not justified in levying the interest under sections 139 and 215 in the case of the assessee, since it was not a case of regular assessment under section 143(3) or 144 but was an assessment under section 143(3) read with section 147. Therefore, the Income-tax Officer was directed to delete the interest levied under sections 139 and 215. The Tribunal following a decision of this court in Thehhanatu Firms v. CIT, [1993] 202 ITR 389, upheld the levy of interest under section 139(8), but declined to interfere with the cancellation of interest under section 215 of the Act.
3. It was contended on behalf of the Revenue that the assessee was not entitled to weighted deduction in respect of the expenditure incurred in connection with the exports in view of the provisions of section 35B(1A) introduced by the Finance Act, 1978. The above provision which came into effect from April 1, 1978, was omitted by Act 21 of 1979 with effect from April 1, 1980. Therefore, as far as the assessment year 1979-80 is concerned, the effect of the above provision is relevant for the assessee. Sub-section (1A) reads as follows:
“(1A) Notwithstanding anything contained in sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after the 31st day of March, 1978, unless the following conditions are fulfilled, namely:—
(a) the assessee referred to in that sub-section is engaged in—
(i) the business of export of goods and is either a small-scale exporter or a holder of an Export House Certificate; or
(ii) the business of provision of technical know-how, or the rendering of services in connection with the provision of technical know-how, to persons outside India; and
(b) the expenditure referred to in that sub-section is incurred by the assessee wholly and exclusively for the purposes of the business referred to in sub-clause (i) or, as the case may be, sub-clause (ii) of clause (a).
Explanation— For the purposes of this sub-section, —
(a) ‘small-scale exporter’ means a person who exports goods manufactured or produced in any small-scale industrial undertaking or undertakings owned by him:
Provided that such person does not own any industrial undertaking which is not a small scale industrial undertaking;
(b) ‘Export House Certificate’ means a valid Export House Certificate issued by the Chief Controller of Imports and Exports, Government of India;
(c) ‘provision of technical know-how’ has the meaning assigned to it in sub-section (2) of section 80MM;
(d) ‘small-scale industrial undertaking has the meaning assigned to it in clause (2) of the Explanation below sub-section (2) of section 32A.
(2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year.”
4. The Kerala Government had certified that the assessee is registered as a small scale industrial unit for manufacturing or processing products such as packet tea with raw materials of tea, polythene, cartons, etc. The Tribunal entered a finding on the basis of the documents produced by the assessee mainly the certificates issued by the Kerala Government that the assessee is a small scale unit though recognition as such has been granted to it by the Kerala Government in the subsequent year. This finding was not challenged before us. The only contention raised by learned counsel for the Revenue was that the activity of the assessee, namely, blending of the tea, packing and selling the same would not amount to processing and, therefore, the assessee cannot be treated as an industrial company. Reliance was placed by learned counsel on a decision of the Bombay High Court in Nilgiri Ceylon Tea Supplying Co. v. State of Bombay, [1959] 10 STC 500. In the above case, a Bench of the Bombay High Court had considered the scope of section 8(a) of the Bombay Sales Tax Act, 1953. There was a proviso to section 8(a), which reads as follows:
“Provided that the goods have not been processed or altered in any manner after such purchase”.
5. The Department took the view that when different varieties of tea purchased by the assessee were blended together, it undergoes a process and the goods are altered after purchase. The court observed that the expression “process” has not been defined in the Act. The meaning of the word “process” given in Webster's Dictionary was quoted as follows:
“… 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.”
6. Thereafter, the court observed that in the case at hand there has been nothing but a manual application of energy to the different quantities of tea purchased by the assessees in certain proportions so as to evolve a mixture of tea which was sold as tea mixture of the assessees. It took the view that the quantities of tea purchased by the assessees cannot since the date of purchase be regarded as processed within the meaning of the proviso to clause (a) of section 8 of the Act. There is not even application of mechanical force so as to subject the commodity to a process, manufacture, development, or preparation. The commodity has remained in the same condi- tion. Even though certain skill is involved in preparing the tea mixture which was marketed it cannot be regarded as processing within the meaning of the proviso.
7. The above decision was discussed in detail by the Calcutta High Court in G.A Renderian Ltd. v. CIT, [1984] 145 ITR 387 and dissented from. The question that came up for consideration before the Calcutta High Court was whether the assessee who carried on the business of purchasing tea of different qualities, blending the same by mixing one type with another and selling the tea so blended in packets can be brought under the definition of an industrial company, in terms of section 2(7)(c) of the Finance Act, 1978. The court took the view that the blending operation done by the assessee would come within the term “process” in the definition of industrial company. The manufacturing operation, according to the assessee, was done by manual labour by undergoing the following operations:
“(1) Chanal dhalia (spreading),
(2) Bulking (full chest),
(3) Bulking (half chest),
(4) Chests palnai (breaking the bulk and spreading),
(5) Gross weighing, etc.,
(6) Salani marking and palnai.”
8. After such operation the blended tea became ready for packing. Again there were various operations in packing like filling, weighing, passing on printed packets or tins, chest closing, gross weighing, gunny wrapping and double damp proof cloth wrapping. The Tribunal in the above case took the view that blending of tea as above would not amount to manufacture or process. The Calcutta High Court did not agree with the Tribunal. Placing reliance on the decision of the Supreme Court in Chowgule and Co. P. Ltd. v. Union of India, [1981] 47 STC 124, it took the view that the blending would come within the term “process”, even though it may not amount to manufacture. It also noted that the Supreme Court in the above case did not approve the observations of the Bombay High Court in Nilgiri Ceylon Tea Supplying Co. v. State of Bombay, [1959] 10 STC 500. Ultimately, the Calcutta High Court took the view that the operation which is conducted by the assessee, namely, blending of tea, would amount to processing.
9. In Chowgule and Co. P. Ltd. v. Union of India, [1981] 47 STC 124, the Supreme Court had to interpret the expression “processing” in section 8(3)(b) of the Central Sales Tax Act, 1956, and rule 13 of the Central Sales Tax Rules. The assessee therein was engaged in blending of ore of different qualities for obtaining ore of requisite specification and the question arose whether it would amount to processing within the contemplation of section 8(3)(b). The Supreme Court observed that though the blending of different qualities of ore possessing differing chemical and physical composition so as to produce ore of the contractual specifications could not be said to involve the process of manufacture, since the ore that was produced could not be regarded as a commercially new and distinct commodity from the ore of different specifications blended together, the operation of blending would amount to processing of ore within the meaning of section 8(3)(b) and rule 13. In coming to the above conclusion, the apex court also referred to the meaning of the word “processing” in Webster's Dictionary. It was then observed as follows (see [1981] 47 STC 124, 131 and [1984] 145 ITR 394):
“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. The nature and extent of the change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Sri Om Prakas Gupta v. CCT, [1965] 16 STC 935. What is necessary in order to characterise an operation as ‘processing’ is that the commodity must, as a result of the operation, experience some change. Here, in the present case, diverse quantities of ore possessing different chemical and physical compositions are blended together to produce ore of the requisite chemical and physical compositions demanded by the-foreign purchaser and obviously, as a result of this blending, the quantities of ore mixed together in the course of loading through, the mechanical ore handling plant experience change in their respective chemical and physical compositions, because what is produced by such blending is ore of a different chemical and physical composition. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to ‘processing’ of ore within the meaning of section 8(3)(b) and rule 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities of such ore on the conveyor-belt of the mechanical ore handling plant. But to our mind it is immaterial as to how the blending is done and what process is utilised for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical compositions as a result of blending and so far as this aspect of the question is concerned, it is impossible, to argue that they do not suffer any change in their respective chemical and physical compositions.”
10. After referring to the observations of the Bombay High Court in Nilgiri Ceylon Tea Supplying Co. v. State of Bombay, [1959] 10 STC 500 regarding the application of mechanical force so as to subject the commodity to a process, the Supreme Court observed as follows (at page 132 of 47 STC and at page 396 of 145 ITR):
“The question is not whether there is manual application of energy or there is application of mechanical force. 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 constitutes ‘processing’.”
11. Tea is an agricultural crop produced throughout the year in India in the States of Assam, West Bengal, Tamil Nadu, Kerala and Karnataka. The quality of tea produced would depend upon the soil, the weather pattern, the age of the tea bush and the elevation at which the tea is grown. Blending requires highly specialised expertise to identify different sources and grades of tea and to mix them in the right proportion so as to make available a consistent product (brand) to the consumers throughout the year. The tea produced during a particular period of the year will have special qualities. For example, the best teas from Assam known for their, strength, brightness and thickness called “second flush” are produced between mid-May and end-June. Such tea with special quality will be stored and used judiciously while blending is carried on throughout the year. It is so done to keep the consistency in quality of tea to satisfy the consumers throughout the year. The tea thus blended will have to go through the different process of packing and labelling as explained in G.A Renderian Ltd. v. CIT, [1984] 145 ITR 387 (Cal). It is not contended before us that there is any difference in the process which is being carried on by the assessee in this case.
12. In the light of the observations made by the Supreme Court in Chowgule and Co. P. Ltd. v. Union of India, [1981] 47 STC 124, regarding the requirements to be satisfied to bring a particular activity under the term, “processing”, we are inclined to agree with the learned judges of the Calcutta High Court that blending of tea would come under the term processing used in the definition of industrial company. In this context it is relevant to note the definition of the term a “seasonal factory” under section 2(19A) of the Employees' State Insurance Act, 1948. The above sub-section reads as follows:
“(19A) ‘seasonal factory’ means a factory which is exclusively engaged in one or more of the following manufacturing processes, namely, cotton ginning, cotton or jute pressing, decortication of groundnuts, the manufacture of coffee, indigo, lac, rubber, sugar (including gur) or tea or any-manufacturing process which is incidental to or connected with any of the aforesaid processes and includes a factory which is engaged for a period not exceeding seven months in a year—
(a) in any process of blending, packing or repacking of tea or coffee.”
13. The above would show the Employees' State Insurance Act which is also a Central enactment has treated blending, packing and repacking of tea as a process. We, therefore, agree with the finding of the Tribunal that the assessee is entitled to weighted deduction in respect of the expenditure incurred in connection with its exports.
14. As regards the question of levy of interest under section 215 of the Income-tax Act, we are of the view that the dictum laid down by a Full Bench of the Kerala High Court in Lally Jacob v. ITO, [1992] 197 ITR 439, has to be applied. In the above case the question considered was whether any assessment made for the first time by resort to section 147 will also be a regular assessment for the purpose of invoking section 217 of the Act. The Tribunal did not follow the dictum in the above decision observing that what was considered by the Full Bench was only the interest payable under section 217 and not under section 215. We are afraid that the above view is not correct. The principle evolved in the judgment should be equally applied in a case under section 215 also. As a matter of fact, a contention was raised before the Full Bench relying on the Taxation Laws (Amendment) Act, 1984, adding sub-section (6) to section 215 with effect from April 1, 1985, that till such amendment the assessment made under section 147 cannot be regarded as regular assessment. This contention was repelled by the Full Bench. It was held that even in the absence of subsection (6) of section 215 such assessments will be regular assessments. Sub-section (6) of section 215 is only a clarification of the earlier law as different High Courts have expressed different opinions on the question and by the inclusion of that sub-section alone, it cannot be said that, for the previous assessment years such assessments cannot be treated as regular assessments. According to us, the dictum laid down by the Full Bench has to be applied in cases arising under section 215 also. In the light of the above, we answer question No. 1 in the affirmative, in favour of the assessee and against the Revenue. Question No. 2 is answered in the negative, against the assessee and in favour of the Revenue.
15. A copy of this judgment under the seal of the High Court and signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench.
Comments