The main legal point established is that the interpretation of 'processing' under the Finance (No. 2) Act, 1977, encompasses activities that involve physical transformation of raw materials into finished products, as evidenced by the activities of the assessee.

Jagannatha Shetty, J.

1. This is a reference under s. 256(1) of the I.T. Act, 1961, and the question of law referred is :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in treating the assessee either as a manufacturer of goods or as engaged in the processing of goods within the meaning of section 2(7)(c) of the Finance (No. 2) Act, 1977 ?"

2. The assessee is a company. It claimed that it was an industrial company as defined under s. 2(7)(c) of the Finance (No. 2) Act, 1977. If it was an industrial company, it would be entitled to be taxed at a concessional rate. The ITO rejected that claim and assessed the income by applying normal rate of taxation, but in appeal before the AAC, the assessee succeeded.

The Department preferred an appeal before the Tribunal. The Tribunal after hearing the arguments, made a local inspection of the assessee's premises to know what the assessee was really doing. The members of the Tribunal personally observed the operation of the computers installed by the assessee. A note was also prepared by the learned counsel for the assessee and given to the members of the Tribunal. That note gives the full description of the activities of the assessee with the help of the computers. The members of the Tribunal, after personal observation and after considering the note given by the assessee's representative, observed :

"It may be stated that the data which the assessee receives in the form of cash vouchers, invoices, goods received notes, etc., is comparable to the manuscript in publishing of a book. The publisher does not manufacture or process the manuscript, but he manufactures books, processes the paper and ink through the printing press. It is immaterial that in this case much of the processing by the assessee involves not by the printing press but by the punching machine. It is a different form of printing which can be read only by the machine, but in respect of collation of data, it is much faster than the printing press. The end product which comes out and which is sent to the customers are the various reports like receipt and payment account, trial balance, stock account, sales analysis, etc., and they are in printed form which the customer can read and understand. In our opinion, all these activities of the assessee-company definitely amount to processing of goods, i.e., raw-material which is in the form of paper or card and which goes through different machines and the data is punched on the card and stored in the machine and different printed statements come out which can be used by the customers. Looking to the activities of the assessee, we are in no doubt whatsoever that they amount to processing of goods."

3. The Tribunal has also opined that the activities of the assessee may amount to manufacture of goods, but rested its conclusion on the ground that the assessee is engaged in the processing of goods and is, therefore, an industrial company.

4. Industrial company was defined during the relevant assessment year under s. 2(7)(c) of the Finance (No.) 2) Act, 1977, to mean :

"'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."

The word "processing", although not defined under s. 2(7)(c) of the Finance (No. 2) Act, 1977, has to be understood in its plain natural meaning. The scope of the word has been explained by the Supreme Court in Chowgule and Co. Pvt. Ltd. v. Union of India [1981] 47 STC 124, 130, wherein it was observed :

"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 prepara