Bombay High Court
Commissioner Of Income-Tax vs London Star Diamond Co. (I) Ltd. on 15 November, 1994
Equivalent citations: [1995]213ITR517(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference made under section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was an industrial company within the meaning of section 2(8) of the Finance Act, 1975 ?"
2. This reference pertains to the assessment year 1975-76. The assessee is a limited company which deals in diamonds. Its main activities comprise import of raw diamonds and after cutting and polishing the same, export thereof out of India. The assessee claimed to be an "industrial company" within the meaning of section 2(8) (c) of the Finance Act, 1975. This claim of the assessee was rejected by the Income-tax Officer. The assessee appealed against the above order to the Commissioner of Income-tax (Appeals) who accepted the contention of the assessee and held it to be an "industrial company". The appeal of the Revenue against the order of the Commissioner (Appeals) was rejected by the Income-tax Appellate Tribunal ("the Tribunal"). Hence, this reference at the instance of the Revenue.
3. There is no factual dispute in this case in regard to the nature of the activities carried on by the assessee. The activities of the assessee comprise import of rough diamonds, cutting and polishing the same and exporting the cut and polished diamonds out of India. The only question that arises for consideration is whether, by being engaged in the above activities, the assessee-company can be held to be an industrial company within the meaning of sub-clause (c) of clause (8) of section 2 of the Finance Act, 1975.
4. Sub-clause (c) of clause (8) of section 2 defines as "industrial company" for the purposes of that Act and the First Schedule thereto as follows :
"'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 or in the manufacture or processing of goods or in mining."
Explanation. - For the purpose of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture of processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VIA of the Income-tax Act) is not less than fifty-one per cent, of such total income."
5. It is clear from the above definition that a company which is mainly engaged in the manufacture or processing of goods and whose income attributable to such activities is more than 51 per cent. of its total income is an "industrial company" within the meaning of the above clause. The only controversy is whether cutting and polishing of rough diamonds for the purpose of export amounts to manufacture or processing of goods. The expressions "manufacturing" and "processing", which came up for interpretation from time to time, have received both wide as well as narrow interpretation from the courts depending upon the context in which they were used. In the Finance Act, 1975, in the above clause, the expression used is "engaged in the manufacture or processing of goods". In the Income-tax Act itself at various other places where concession is given in respect of profits of industrial undertakings, "industrial undertaking" has been defined for that particular purpose. We may take, for example, the definition of "industrial undertaking" contained in sub-section (4) of section 80J of the Act for the purpose of grant of relief under section 80J. It reads :
"(4) This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of ..... machinery or plant previously used for any purpose;
(iii) it manufactures or produces articles ...
(iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power : ......"
6. It is evident from the above definition that in order to be an industrial company, it should "manufacture or produce articles." The word "processing" is conspicuous by its absence in the above definition. As against this, the expression used in the definition of "industrial company" in clause (c) of section 2(8) of the Finance Act, 1975, is "engaged in the manufacture or processing of goods". The use of different expressions by the Legislature in the definition of the same expression for different purpose is not accidental. It rather appears to be a deliberate act of the Legislature intended to extend the benefit of the particular provisions also to companies which are engaged in the business of processing of goods which in the ordinary course would not tantamount to or be regarded as "manufacture".
7. The words "processing" has not been defined in the Income-tax Act or the relevant Finance Act. According to the New Webster's Dictionary of the English Language (Encyclopaedic Edition), "process" means "to treat or prepare by some particular process; to convert an agricultural commodity into marketable form by some special treatment ...." According to Black's Law Dictionary (Sixth Edition), process is a "mode, method or operation whereby a result is produced and means to prepare for market or to convert into marketable form". In common parlance, "processing" implies an action which brings forth some change or alteration in the nature and character of the goods or material which is subjected to the act of processing. Thus "process" is a word which has various meanings, some wider than others.
8. There is, however, an essential different between "processing of goods" and "manufacture of goods". Though as processing, manufacturing also implies a change, every change does not result in manufacturing. Something more is necessary for that purpose. There must be transformation; a new and different article must emerge, having a distinctive name, character or use. Only then it can be said that there is "manufacture". As observed by Pathak J. in Deputy CST v. Pio Food Packers :
"Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place."
9. From the above discussion, it is clear that the expressions "manufacture" and "processing" used in section 2(8) (c) of the Finance Act, 1975, are not inter-changeable. These two expressions have been used to bring within the definition of "industrial company", companies which strictly speaking do not "manufacture" goods but are engaged merely in the "processing" of goods. The expression "processing" has thus been used to widen the meaning of "industrial company". So construed, a company engaged in processing of goods to convert them into marketable form would also be an "industrial company" within the meaning of section 2(8) (c) of the Finance Act, 1975.
10. Diamond is naturally crystallised, nearly pure carbon. It has various uses. A clear, flawless piece of this stone after being cut and polished gets transformed into an article of jewellery. Raw diamonds and cut and polished diamonds are different and distinct marketable commodities, having different uses. That being so, it is difficult to hold that a company engaged in cutting and polishing raw diamonds for the purpose of exporting the same is into engaged in the "processing" of raw diamonds. Processing is much wider than "manufacture". It includes activities which may not tantamount to "manufacture". Cutting and polishing of rough diamonds is definitely a process which amounts to "processing of goods" to convert them into marketable form, if not "manufacture" of goods. We are, therefore, of the clear opinion that the assessee is engaged in the business of processing of goods within the meaning of sub-clause (c) of clause (8) of section 2 of the Finance Act, 1975.
11. In the instant case, we are, however, not in a position to ascertain and hold whether the assessee fulfils the requirement of the Explanation to the said clause which requires that a company shall be deemed mainly engaged in the business of processing of the goods only if its income from such activities is into less than 51 per cent. of its total income. The Tribunal, while giving effect to our above finding will ascertain the factual position and decide accordingly.
12. In the result, we hold that the business of cutting and polishing of raw diamonds amounts to business of processing of goods and if the assessee-company's attributable to such activity is not less than 51 per cent. of its total income, it would be an "industrial company" within the meaning of sub-clause (c) of clause (8) of section 2 of the Finance Act, 1975. The question referred to us is, therefore, answered in the above terms.
13. No order as to costs.