K.N. Seth, J. - (1.) THE assessee is a limited company and derives income from manufacture and processing of carpets. For the assessment years 1966-67 and 1967-68 the ITO taxed the income at 65 per cent. when he completed the original assessment. THE assessee went up in appeal. It also made an application before the ITO under Section 154 of the I.T. Act on December 3, 1968, claiming that it was an industrial company in which the public are not substantially interested and it was liable to be taxed at fifty-five per cent. instead of sixty-five per cent.
(2.) THE AAC granted certain reliefs to the assessee in the appeals preferred by it. THE ITO, while revising his assessment orders pursuant to the order of the AAC, calculated tax at the rate of 55 per cent. Subse- quently, he issued a show-cause notice under Section 154 for rectification of the mistake on the ground that the tax should have been charged at sixty-five per cent. The ITO on March 3, 1970, passed two separate orders--one on the application of the assessee under Section 154 and the other on the notice issued by him under the same provision he rejected the application of the assessee on the reasoning that the profit on manufacture does not exceed 51% of the total profit which is mainly due to sale of import licences and rectified the revised assessment order charging the tax at the rate of 65%. The assessee filed two appeals against the orders passed on its application for the two assessment years. Both the appeals were rejected by the AAC. Thereafter, the assessee filed two appeals before the Income-tax Appellate Tribunal. The Tribunal allowed the appeals, set aside the order of the AAC, restored the appeals to their original numbers and directed the AAC to hear the appeals on merits and according to law. The AAC, by his order dated September 20, 1973, held that the assessee-company is mainly engaged in the business of manufacture and processing of goods and is entitled to be classified as an industrial company. He set aside the order of the ITO dated March 31, 1978, and directed him to revise the assessments for the years 1966-67 and 1967-68 by charging tax at the rate of 55% in place of 65%. On appeal by the Revenue, the Tribunal allowed the appeal on the view that from an examination of the profit and loss account and the balance-sheet it could not be ascertained that the assessee was an industrial company and there being no error apparent on the record the order of the ITO taxing the income at the rate of 65% could not be rectified under Section 154 of the Act. At the instance of the assessee the following question has been referred for the opinion of this court: " Whether, on the facts and circumstances of the case, the assessments were liable to be rectified under Section 154 of the Act. If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case, the assessee was an industrial company entitled to be assessed to tax @ 55% instead of 65% assessed by the Income-tax Officer ? "
(3.) THERE is no dispute that the assessee-company derives its income from the manufacture and processing of carpets. In its application under Section 154 the assessee claimed to be an industrial company with an income below rupees ten lakhs and prayed for rectification of the assessment order by taxing the income at the rate of 55% instead of 65%. In response to the notice issued by the ITO under Section 154 the same stand was taken. The relevant and material portion of Clause (d) of Section 2(7) which defines an " industrial company " is as follows : " (d) ' Industrial company ' means a company which is mainly engaged in the business of......manufacture or processing of goods...... Explanation.--For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of......manufacture or processing of goods......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 VI-A of the Income-tax Act) is not less than fifty-one per cent. of such total income." As noted earlier, the assessee is a company engaged in the business of manufacture and processing of carpets and its income is derived from that activity.;