Blending of tea by the assessee amounted to "processing" within the meaning of Section 2 (7) (c) of the Finance Act, 1978.

( 1 ) THIS is a reference under Section 256 (1) of the I. T. Act, 1961. The Tribunal has referred the following question to this court: "whether, on the facts and in the circumstances of the case, the assessee is an 'industrial company' in terms of Clause 2 (7) (c) of the Finance Act, 1978?"

( 2 ) THE assessment year involved is 1978-79, for which the previous year ended 30th April, 1978. The assessee in this year, as in the past, carried on the business of purchasing tea of different qualities in auction, blending the same by mixing one type of tea with another and then selling the tea so blended in packets. It appears that the assessee in the course of its assessment had claimed that by carrying on the above business it was an "industrial company" in terms of Section 2 (7) (c) of the Finance Act, 1978, and so it was entitled to the concessional rate of tax allowed to such a company. In order to appreciate the contentions, it would be necessary to refer to the relevant sections of the Finance Act of the year 1978. The Finance Act provides the definition 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. "

( 3 ) THOUGH the Explanation thereto is not relevant for our present purpose, it is necessary to refer to the Explanation because it being one of the subjects for consideration by the Kerala High Court that decision would be better understood if the Explanation is kept in view. The Explanation reads as follows :"explanation.--For the purposes 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 or 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. "

( 4 ) THE assessee, therefore, claimed that it was entitled to concessional rate allowed to such a type of company. The claim of the assessee was negatived by the ITO, though there was no discussion in the assessment order on this aspect. The Tribunal proceeded on the view that the claim had been ignored on the ground a similar claim of it was negatived in the assessment year 1977-78, by the ITO and that view of the ITO was upheld by the AAC.

( 5 ) THE assessee being aggrieved by the said order of the ITO, on the point at issue, went up in appeal before the Commissioner (Appeals), who agreed with the ITO. According to the Commissioner (Appeals), the decisions relied on by the assessee, before him, were not attracted in the present case. The assessee, by blending the tea after purchasing it and selling it as a tea could not be said to be engaged in the manufacture or processing of goods. According to him, tea had remained tea and no new different article had emerged by blending undertaken by the assessee.

( 6 ) THE assessee went up in appeal before the Tribunal. In the appeal, it was urged on behalf of the assessee that tea was being purchased by the assessee from auctions in different lots. The tea so purchased was stored by it according to the lots. Samples of such lots were then tested and blend numbers were allotted on the reports of various tea testing results which disclosed various qualities of tea. Those blend numbers were then despatched to the factory for the alleged manufacture of processing as per instructions. The manufacturing operation, according to the assessee, was done by manual labour by undergoing the following operations: (1) Chanal Dhalia, (2) Bulking (Full chest), (3) Bulking (Half Chest), (4) Chests Palnai, (5) Gross weighing, etc. , (6) S