jUDGMENT

Dalveer Bhandari, J.

1. This appeal is directed against the judgment dated 18th January, 2000 passed in ITR No. 10 of 1996 by the High Court of Kerala at Ernakulam.

2. The short question which arises for adjudication by this court is whether the respondent assessee who is engaged in purchase of different qualities of tea and blending the same for the purpose of export is entitled to weighted deduction under section 35B (1A) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) in respect of expenditure incurred for its export for the assessment year 1979-80.

3. Brief facts which are necessary to dispose of this appeal are as under:

The assessee is a registered firm engaged in the business of export of tea. The respondent assessee purchases tea of diverse grades and brands and blends the same by mixing different kinds of tea. In this appeal, we are called upon to examine whether the business activity of the respondent assessee falls within the ambit of production, manufacturing or processing? The respondent assessee would be entitled to weighted deduction under section 35B(1A) of the Act in case the goods exported were manufactured or produced in small scale industrial undertaking but, in case it falls short of production or manufacture, then the respondent would not be entitled to the benefit under section 35B(1A) of the Act. The said benefit, according to the relevant statute, is restricted to only goods produced or manufactured in the small scale industrial undertaking for export. The benefit cannot be extended in case the goods are merely processed by the small scale industrial undertaking. In order to derive benefit under section 35B (1A) the goods have to be either manufactured or produced by the small scale industrial undertaking.

4. Section 35B (1A) was introduced with effect from 01.04.1978 and the respondent assessee claimed entitlement to weighted deduction being a small scale exporter. The Income Tax Officer disallowed the claim of the respondent assessee.

5. The respondent assessee aggrieved by the said order preferred an appeal before the Commissioner of Income Tax (Appeals). The appeal filed by the respondent assessee was allowed on the ground that the respondent assessee was a small scale industrial unit in the light of certificate of registration granted to it by the Directorate of Industries, Kerala State. The respondent was engaged in purchasing different kinds of tea and blending the same for the purpose of export and was entitled to the weighted deduction under section 35B (1A) of the Act.

6. In an appeal filed by the appellant against the decision of the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal endorsed the view of the Commissioner of Income Tax (Appeals). The Tribunal in its order relied on the decisions of the Calcutta High Court in G.A. Renderian Ltd. v. Commissioner of Income-Tax, West Bengal-I 1984 (145) ITR 387 and also of this court in Chowgule & Co. (P) Ltd. & Another v. Union of India & Others (1981) 1 SCC 653 and held that the respondent assessee was entitled to weighted deduction under section 35B (1A) of the Act.

7. The Revenue challenged the judgment of the Tribunal before the High Court. The High Court upheld the judgment of the Tribunal. The Revenue, aggrieved by the impugned judgment of the High Court, has preferred this appeal.8.In order to properly comprehend the controversy involved in this case, it would be proper to reproduce section 35B (1A) & (2) as introduced by the Finance Act, 1978: (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 p