Activities of purchasing kendu leaves and making it ready for marketing & selling for bidi manufacturing is not ‘processing’ & so liable for TCS
JUDGMENT Susanta Chatterji, Actg. C.J.
1. The writ petitioner has asked for the following reliefs :
“… to admit this writ petition, issue Rule nisi and call upon the opposite parties to show cause as to why the present petition under Article 226 of the Constitution shall not be allowed and issue writ/writs, direction/directions/order as this court may deem proper and more particularly to issue ;
(1) Writ of mandamus quashing the circulars of the Central Board of Direct Taxes, dated January 10, 17, 1996, vide annexure-5 series ;
(2) Writ of certiorari quashing the decision of opposite party No. 4 vide order dated April 8, 1996, rejecting the petition of the petitioner for exemption certificate under Section 206C of the Act ;
(3) Writ of mandamus declaring that screening process adopted by the petitioner amounts to processing within the proviso to Section 206C of the Act and to direct the opposite party No. 5 to grant such certificate so that the opposite party No. 6 agents/servants/branch officers will not realize income-tax at the point of purchase of tendu leaves ;
(4) Such other order/direction/declaration/
2. The petitioner is an assessee under the Income-tax Act and carries on business of trading in petroleum products as well as purchase and sale of processed bidi leaves. The petitioner is a permanent resident of Dhenkanal and for generations the family of the petitioner is staying in Dhenkanal having their lands and building, business premises. For decades, the petitioner is an income-tax assessee.
3. The petitioner claims that he purchases processed kendu (bidi) leaves from Orissa Forest Development Corporation Ltd., opposite party No. 6, from its kendu leaves division at Angul and the Regional Marketing Executive of the said Corporation at 6-A, Raja Subodh Mallik Square, Calcutta.
4. It is placed on record that kendu leaves are purchased by the petitioner in bundles. Sometimes these bundles contain leaves as plucked, i.e., cracked leaves, fungus-infested leaves, discoloured leaves, immature leaves, small size leaves. These leaves are not suitable for use in making bidi. Therefore, the petitioner has to adopt a process of eliminating the aforementioned types of leaves. Thereafter these leaves are dried again by a special procedure. Only after such processing the leaves are made ready for bidi manufacturing,
5. It is contended that the Orissa Forest Development Corporation never used to collect income-tax from the petitioner as per Section 206C of the Income-tax Act, at 15 per cent. by way of “Collection at source”. However, since the first proviso to Section 206C exempted such collection of income-tax in respect of processing of such forest produce, the petitioner submitted an application before opposite party No. 4 for grant of exemption certi-ficate/non-deduction certificate so that the Orissa Forest Development Corporation would not realise income-tax at the time of purchase. Opposite party No. 4 had granted such certificate. Copy of such certificate is annexed as annexure-1 to the writ petition. The petitioner claims that again he applied for such a certificate on April 3, 1996, for the period April 1, 1996 to March 31, 1997. Copy of such application is annexed as annexure-2 to the writ petition.
6. By order dated April 8, 1996, opposite party No. 4 rejected the application of the petitioner dated April 3, 1996. The grounds of rejection of such certificate are as follows :
(a) The nature of activities carried out by the petitioner cannot be termed as processing.
(b) The processing is carried out for making the leaves a saleable and marketable commodity.
(c) Such operations do not result in change of product.
(d) Opposite party No. 4 placed reliance on the circulars issued by the Central Board of Direct Taxes dated January 10, 1996 and January 17, 1996.
7. The petitioner has also placed on record that the clarification as made by the Central Board of Direct Taxes vide its letter dated January 23, 1989, is as follows :
“The operation of drying and sprinkling of water, etc., on kendu leaves purchased by traders would constitute ‘processing’. As a result, traders who sell the leaves after the aforesaid operation is carried out would not fall within the ambit of Sections 44AC and 206C. No tax would be collectible at source from the purchases made by such traders and, therefore, profits and gains would be computed in accordance with the other provisions of the Income-tax Act.”
8. It is submitted on behalf of the petitioner that Section 44AC has since been abolished and the same is not relevant so far as the present dispute is concerned- However, on the basis of the aforementioned view of the Central Board of Direct Taxes the provisions of Section 206C has been interpreted so far and corresponding benefit was being enjoyed by the traders purchasing and selling processed kendu leaves. It is submitted that curiously enough by letters dated January 10, 1996, and January 17, 1996, the Central Board of Direct Taxes has reversed its view and issued circulars vide File No. 149/160/95-TPL directing that the operations of drying, sprinkling of water, bundling of kendu leaves, etc., do not result in any change in the products. Therefore, it cannot be equated with “processing”. Accordingly, the provisions of Section 206C shall be applicable to the case of kendu leaves traders.
9. It is submitted by the petitioner that the view of the apex court is clear as per the decision reported in Bengal Iron Corporation v. Commercial Tax Officer, AIR 1993 SC 2414 ;  90 STC 47. The relevant portion is quoted as follows (headnote of AIR 1993 SC) :
“Clarifications/circulars issued by the Cental Government and/or State Government regarding taxability of certain item represent merely their understanding of the statutory provisions. They are not binding upon the courts . . . The understanding of the Government, whether in favour or against the assessee is nothing more than its understanding and opinion. It is doubtful whether such clarifications and circulars bind the quasi-judicial functioning of the authorities under the Act. While acting in quasi judicial capacity, they are bound by law and not by any administrative instructions, opinions, clarifications or circulars . . .”
10. Stating all these facts in detail the petitioner has asked for the reliefs as indicated above.
11. A counter affidavit has been filed on behalf of the opposite parties Nos. 2, 3 and 4. Besides controverting the allegations made in the writ petition it is disclosed, inter alia, that the petitioner carries on business of trading in petroleum products as well as kendu (bidi) leaves and purchases kendu leaves from the Orissa Forest Development Corporation Ltd., opposite party No. 5, from its kendu leaf division, Angul. Opposite party No. 4 passed an order as per annexure-3 to the writ petition rejecting the request of the petitioner for issue of no-deduction certificate. It is submitted in the counter affidavit that the order passed by opposite party No. 4 in annexure-3 is revisable by virtue of the provision contained in Section 264 of the Income-tax Act and in view of the alternative remedy the writ petition is liable to be dismissed.
12. We have heard learned counsel of both sides. The only dispute that arises in the writ petition is with regard to the interpretation of the word “processing” and, whether the activities undertaken to make kendu leaves saleable and marketable condition amount to processing, as mentioned in Section 20GCof the Income-tax Act.
13. A large number of reported decisions have been cited from the Bar. The following cases have been referred to in support of the case of the petitioner :
Commissioner of Sales Tax v. Bist (D. S.),  44 STC 392 (SC), CWT v. Syed Amjad Ali,  202 ITR 19 (All), CIT v. London Star Diamond Co. (I.) Ltd.,  213 ITR 517 (Bom), CIT v. Lakhtar Cotton Press Co. (Pvt) Ltd., [19831 142 ITR 503 (Guj), Poonam Chand Prem Raj v. CIT,  207 ITR 895 (Raj), Delhi Cold Storage P. Ltd. v. CIT,  191 ITR 656 (SC) and CIT v. Ashwinkumar Gordhanbhai and Bros. Pvt. Ltd.,  212 ITR 614 (Guj).
On behalf of the opposite parties, Mr. P. Mishra relied on and referred to the following cases for appreciation of the court :
Commissioner of Sales Tax v. Bist (D. S.),  44 STC 392 (SC), Nil-giri Ceylon Tea Supplying Co. v. State of Bombay  10 STC 500 (Bom), Chandreswar Singh v. State of Assam,  42 STC 424 (Gauhati), Chow-gule and Co. Pvt. Ltd. v. Union of India,  47 STC 124 (SC), Videocon International Ltd. v. Asst. Commissioner of Commercial Taxes,  98 STC 545 (WBTT), Venkatrao Narayanrao Ambekar v. Alma Sugar Mills, AIR 1979 Bom 38, Collector of Sales Tax v. Abdul Rehman Alladin,  14 STC 803 ; AIR 1964 Guj 27, Singh Engineering Works Pvt. Ltd. v. CIT,  119 ITR 891 (All) and Delhi Cold Storage P. Ltd. v. CIT,  191 ITR 656 (SC).
14. The genesis of the case has been decided in Chowgule and Co. Pvt. Ltd. v. Union of India,  47 STC 124 (SC). For better appreciation the same is given below (headnote) :
“The word ‘processing’ in Section 8(3)(b) of the Central Sales Tax Act, 1956, and Rule 13 of the Central Sales Tax (Registration and Turnover) Rules, 1957, has not been defined in the Act and it must be interpreted according to its plain and natural meaning. Where any commodity is subjected to a process or treatment with a view to its ‘development or preparation for the market’, 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. 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’.”
15. This point has specifically been considered in Collector of Sales Tax v. Abdul Rehman Alladin,  14 STC 803 ; AIR 1964 Guj 27 ; CIT v. Ashwin Kumar Gordhanbhai and Bros. Pvt. Ltd.,  212 ITR 614 (Guj) and CIT v. London Star Diamond Co. (I.) Ltd.,  213 ITR 517 (Bom). It is conclusively found by judicial decisions that the activities undertaken by the petitioner in purchasing kendu leaves in bundles and thereafter the process of eliminating various types of leaves, namely, cracked leaves, fungus-infested leaves, discoloured leaves, immature leaves, small size leaves procedure has been adopted to dry the leaves in a special way. These activities cannot be termed and treated as processing. The apex court has made it clear in Bengal Iron Corporation v. CTO,  90 STC 47 ; AIR 1993 SC 2414 and Kerala Financial Corporation v. CIT,  210 ITR 129 (SC) and Madras Bar Association v. CBDT,  216 ITR 240 (Mad), that any subsequent clarification and circular contrary to judicial pronouncement and interpretation of law made by the competent court cannot have any binding effect on the judicial and quasi-judicial decisions. In view of such settled principle of law and in view of the admitted position this court does not find any problem to adjudicate the matter and answer the dispute by observing that the activities of the petitioner in dealing with kendu leaves after purchase in bundles and to make ready for marketable and saleable for bidi manufacturing are not processing. If it is not processing the petitioner is not entitled to obtain the certificate as envisaged under Section 206C of the Income-tax Act. The circulars issued by the Central Board of Direct Taxes, dated January 10, 1996 and January 17, 1996, as per annexure-5 series cannot have any overriding effect upon statutory law and in view of the interpretation of law made by the apex court and different High Courts.
16. For the foregoing reasons, we dismiss the writ petition. There is no order as to costs.
C.R. Pal, J.