Judgment:
1. This is an appeal by the assessee which is directed against the order of the Dy. CIT (Appeals) Range-I, Bangalore, dated 8-3-1991 on the only issue that whether the processing activity involved in the saw-mill business attracts the provisions of Section 44AC and Section 206C of the Income-tax Act, 1961 and whether the appellant is carrying on trading activity which means buying and selling timber without involving any processing of the timber.
2. A copy of registration certificate issued by the Directorate of Industries and Mines, Udyog Bhavan, Panaji, dated 22-3-1988 is filed on record. The Assessing Officer addressed a letter dated 16-4-1992 to the Chief Conservator of Forest, Karnataka, authorising him not to collect tax at source under Sub-section (1) of Section 206C in respect of purchase of timber by the assessee, because the assessee was processing timber in manufacturing activity. He wrote another letter dated 23-9-1988 to the Chief Conservator of Forests, Goa, Karnataka and Maharashtra stating that the timber was to be utilised for the purpose of manufacturing articles or things and not for trading purposes. He has further authorised the Chief Conservator of Forests not to collect tax at source under Sub-section (1) of Section 206C in respect of goods processed from timber. Similar letter was also written on 27-11-1989 by the Assessing Officer to the Dy. Conservator of Forest. It is true that the assessee used to purchase the timber from various departments. If the timber is purchased from the various departments and directly sold to third party without processing it then in that case the profit is to be estimated at fixed rate of 15 per cent applying the provisions of Section 44AC as well as Section 206C.3. The assessee apparently purchased the timber from the various departments. The appellant processed the timber in its saw mill.
Processing timber means to cut the timber, to bring it to a particular shape and make marketable for sale. In that event, the provisions tried to be applied by the Assessing Officer are not applicable. Therefore, the appellant's case that the estimation of profit at a rate of 15 per cent cannot be made in this case because, the assessee did not sell the timber directly to third party without processing it. Further, it is the case of the assessee that it is manufacturing furniture and other articles from the timber purchased and for that reason also the provisions tried to be applied by the Assessing Officer are not applicable. There is a considerable substance in the appellant's contention. The appellant's applications on record prove that the timbers were purchased for the purpose of manufacturing articles or things and not for trading purpose. It was informed by the Assessing Officer himself not to collect the tax at source under Section 206C of the Act in respect of items specified in para 2 of his letters. If the appellant was purchasing the timber and directly selling it to the third party, in that event, the Assessing Officer himself should not have written to the Chief Conservator of Forests not to collect the tax at source because the assessee was purchasing timber for processing and manufacturing. Writing these letters would clearly establish that the provisions of Sections 44AC and 206A(l) would not be applicable.
4. The interpretation of processing and manufacturing is given by the Supreme Court in the case of Saraswati Sugar Mills v. Haryana State Board 'Processing' is an action, operation or method of treatment applying it to something; it is refining, development, preparation or converting of material especially that in a raw state into marketable form. Processing essentially effectuates a change in form, contour, physical appearance or chemical combination or otherwise by artificial or natural means and in its more complicated form involves progressive action in performing, producing or making something.
'Manufacture' is transformation of an article which is commercially different from the one which is converted. The essence of manufacture is the change of the object to another for the purpose of making it marketable.
Similarly, the Supreme Court in the case of Union of lndia v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 held that the word 'manufacture' used as a verb is generally understood to mean as ringing into existence a new substance and does not mean merely to produce some change in a substance, however, minor in consequence the change may be.
The essential point is that in 'manufacture' something is brought into existence which is different from that originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of processing it is not necessary to produce a commercially different article.
5. In this view of the matter, the assessee succeeds and the appeal is allowed.