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Issues involved: Interpretation of whether the assessee is considered a manufacturer or engaged in the processing of goods under section 2(7)(c) of the Finance (No. 2) Act, 1977.
Summary: The High Court of Karnataka addressed a reference under section 256(1) of the Income Tax Act, 1961, regarding the classification of the assessee, a company, as either an industrial company or engaged in processing goods for tax purposes. The company claimed to be an industrial company entitled to concessional tax rates, which was initially rejected by the Income Tax Officer but upheld by the Appellate Authority. The Department appealed to the Tribunal, which conducted a local inspection of the company's premises and observed the operation of the computers used by the assessee to process data. The Tribunal concluded that the activities of the assessee amounted to processing of goods, possibly even manufacturing, based on the operations observed. The definition of an industrial company under section 2(7)(c) of the Finance (No. 2) Act, 1977, includes companies engaged in the manufacture or processing of goods. The Tribunal's decision was supported by the principles outlined in previous court decisions, emphasizing that any operation resulting in a change to a commodity constitutes processing. The activities of the assessee involved receiving data in various forms, processing it using IBM Unit Record Machine Computers, and producing reports like balance sheets and stock accounts for customers. The process included feeding data into punching machines, verifying accuracy, sorting, collating, and processing through computers to generate final statements printed on continuous stationery. The Court noted that these activities involved a physical transformation of raw materials into finished products, akin to manufacturing or processing activities. Referring to precedents from other High Courts, the Karnataka High Court affirmed the Tribunal's decision, stating that the assessee's activities fell within the concept of processing of goods, if not manufacturing. The Court highlighted cases where printing and binding activities were considered manufacturing of goods. Ultimately, the Court upheld the Tribunal's view, answering the question in favor of the assessee and against the Revenue.
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