1. These three appeals in the case of the same assessee relate to the assessment years 1976-77, 1977-78 and 1978-79. The appeals with reference to the assessment years 1976-77 and 1977-78 are by the revenue, while the appeal for the assessment year 1978-79 is by the assessee. The point involved in all these three appeals is the same, namely, whether the assessee is a trading company as defined in Section 109(iia) of the Income-tax Act, 1961 ('the Act'). For the purpose of levy of additional tax on the undistributed income of certain companies under Section 104 of the Act, the rate of levy is 37 per cent in the case of a trading company and only 25 per cent in the case of any other company. The assessee is a company holding auctions of mainly tea. To some extent, it also holds auctions of rubber produced by a large number of tea estates. The auctions are held twice a week at Cochin.
The ITO has stated in his order under Section 104 for the assessment year 1976-77, the manner in which the assessee conducts its business of auction of tea. It has been submitted before us by the assessee's learned counsel that the statements contained in this order of the ITO are not entirely correct. It is agreed that the assessee provided the necessary information regarding the quality and quantity of the tea put up for auction. It is also agreed that the quantity' of tea that is brought to auction is kept in the godowns of the assessee, but, it is submitted, that after the auction is completed, the assessee does not involve itself in the subsequent transactions, to the extent to which the ITO has stated in his order. It is submitted that the assessee collects the sale price only if the sale price is given to it by the buyers and, therefore, is not responsible for ensuring payment of the amounts due to the concerned estates whose tea the assessee auctions.
Since this involves the determination of the exact factual position, this is dealt with initially in this order.
2. In support of its contention that the assessee's involvement in the transactions is not to the same extent as alleged by the ITO, the rules framed by the Tea Trade Association of Cochin have been produced. It is pointed out that Rule 1 of Part II, titled as 'The Principles of the Association' provides that all the auction sales shall be held under and subject to the rules of the Association for the time being in force. Rule 2 in this part lays down that the samples distributed before the sale, drawn in the customary manner, shall form the basis of the sale as regards the nature and description of the tea, but not the state and condition thereof, that the buyers must take all reasonable steps to satisfy themselves as to the state and condition of the tea.
Rule 14(c) of Part IV only provides that the brokers shall make full payment if received from buyers to the owners, etc., of the value less the charges involved. Rule 16(a) provides that if the buyer fails to pay for the tea or any part thereof on the due date for payment, the goods may be re-sold either by auction or private sale, at the option of the seller. These are the rules on which the assessee's counsel relied on to show that the assessee, as a broker-ewm-auctioneer, is not involved in the transactions between a buyer and a seller, except to the extent of conducting the auctions, specifying the quality and quantity of the goods sold, etc. However, it was understood from the counsel of the assessee that these auction sales also come within the purview of the provisions of the Indian Sale of Goods Act and that the assessee, as an auctioneer and broker, is indemnified by the seller against the claims of the buyer, regarding the quality and quantity of the goods sold in auction. In fact, a warranty regarding the nature and quality of the goods sold under the signature of the assessee forms part of the sale invoice, which is also issued by the assessee. It is difficult to accept the contention of the assessee that the assessee's involvement in the auctions is only to the extent of a middleman and not more. The assessee guarantees the nature and quality of the goods under the warranty issued by the buyer. It would follow from this that the buyer would be able to proceed against the assessee under law and the assessee's remedy is only against the seller under the indemnity given to it by the seller. We may, therefore, take it as a position in fact that the assessee is not just a middleman but has a greater involvement in the transactions, than claimed by the assessee.
3. The ITO on appreciation of the factual position, considered that the assessee deals in the goods or merchandise manufactured by others. It would appear from the order that the ITO was of the opinion that the assessee's role just falls short of a trader, that is, a person who buys the commodities manufactured by others, falling within the definition of 'trading company given in Section 109(iia). The ITO took the same stand for the three assessment years. The assessee appealed against these orders. The Commissioner (Appeals), Sri K.C. Thomas, disposing of the appeal for the first two assessment years, held that the assessee is not a trading company within the meaning of Section 109(iia). Accepting the fact as found by the ITO, he came to the conclusion that the holding of the tea auctions, the collection of the sale proceeds or the transmission thereafter to the seller typified merely the duties and functions of a middleman or a broker and that none of these functions would exceed the limits of the broker's functions or trespass on the field of a trader in the strict sense of the term. It would appear that in this particular sentence, the Commissioner (Appeals) was assigning a meaning to the term 'trader' which perhaps was not necessary in. the context of the definition of a 'trading company' specifically provided in Section 109(iia). The Commissioner (Appeals) for these two assessment years proceeds further to say that the construction put on Section 109(iia) by the ITO distorts and confuses the distinct concepts in commercial parlance of 'dealers' and 'brokers', though in a subsequent sentence he accepts that the concept of 'dealing' itself has not been separately defined.
Yet he was of the opinion that the meaning and significance of that concept cannot be in doubt, since obviously it meant purchase and sale of a commodity and not the bare performance of certain services in respect thereof. He also finds support for his conclusion by reference to the order of the Government of India, Ministry of Law, Justice and Company Affairs, entitled 'The Manufacturing and Other Companies (Auditor's Report) Order, 1975'. This order was intended to lay down guidelines for the conduct of an audit of a company's accounts to be undertaken in the cases of companies of various descriptions. He was of the opinion that this was prima facie a closely connected piece of delegated legislation and the meaning assigned in this order to the term 'trading company' could with advantage be adopted for the present purpose as well. In that order of 1975, a 'trading company' has been defined as meaning 'a company engaged in the business of buying and selling goods'. In a sense he held that in order to be a trading company under Section 109(iia) the company must have acquired ownership of the goods dealt in by it.
4. For the assessment year 1978-79, however, the Commissioner (Appeals), Sri C.P.A. Vasudevan, came to a different conclusion. He points out that the provisions of Section 109(iia) have to be interpreted in the terms of the main provision, namely, Section 104 which levies additional tax on certain companies. Under this provision, it is pointed out by him that the companies are divided into different categories on the method of binary classification, proceeding by way of successive division into two groups, the first possessing certain qualities, while the second does not. He points out that the first division is between investment companies and others, as provided in Section 104, read with Section 109(iia). The second division is dividing the residue into two, namely, non-manufacturing companies and the rest [Section 104(1)(b), read with Section 109(iia)]. This particular classification which is relevant here proceeds first in the definition of 'non-manufacturing company' by calling them 'trading companies' and grouping all companies other than the non-manufacturing companies into residuary category. It has been pointed out by him that this classification of a trading company and the 'manufacturing company' is not between dealer and non-dealer but between those companies which deal in goods manufactured by someone else and the companies which deal in goods of their own manufacture. The Commissioner (Appeals) is of the opinion that the emphasis in Section 109(iia) is not on the term 'dealing' as has been laid by his predecessor, but on the question whether the particular category of company manufactures the goods dealt in or not. He has pointed out that the words 'deal in' have a much wider connotation than the words 'trade in', that a share broker, for instance, must be considered to be dealing in shares even if he does not buy and sell on his own account and so is the case of a car broker and the tea broker.
5. The departmental representative relies on the orders of the ITO and on the appellate order for the assessment year 1978-79. It is also pointed out that Section 109(iia) does not describe a 'trading company' as a 'dealer' but only as a company dealing in certain types of commodities. It is submitted that the word 'deal' merely means transacts business in and does not require that the person dealing in should be a trader in the sense that he buys and sells the commodities in question. It is also pointed out that under the Kerala General Sales Tax Act the auctioneer is also included in the definition of a tea dealer. On behalf of the assessce, reliance is placed on the appellate orders for the assessment years 1976-77 and 1977-78. It is submitted that the definition of the term 'dealer' given under the Kerala General Sales Tax Act and similar definitions contained in other sales tax enactments cannot be taken into account here because those definitions are specifically made for the purpose of those enactments.
6. We have carefully considered those submissions. We agree with the assessee that the definition of the term 'dealer' appearing in certain sales tax enactments would have no relevance to the question here.
These definitions are for the specific purposes of those enactments and would not, in fact, give any guidance on the question before us. We are, however, unable to agree with the assessee and the Commissioner (Appeals), Shri K.C. Thomas, for the assessment years 1976-77 and 1977-78. In those appellate orders, the emphasis has been laid on the interpretation given not on the term 'dealing in' but on the term 'dealer'. It is true that a dealer necessarily has to deal in the commodities of which he is the dealer, but dealing in the commodities cannot be considered to be confined only to the dealers. By 'dealers', in this context, the Commissioner (Appeals) for the assessment years 1976-77 and 1977-78 obviously meant traders. This is obviously irrelevant in the context of Section 109(iia). We are only concerned with the question whether a company deals in certain types of commodities. It cannot be said that the company here does not deal in tea, merely because it is not a dealer thereof, that is to say, it is not a trader on its own account in tea. When it auctions tea, it must be considered to be dealing in tea, that is to say, it does transact business in tea as an auctioneer, i.e., in the course of the conduct of its auction business, it deals in this particular commodity, namely, tea. Therefore, it must be said that the assessee is a company dealing in the particular types of commodities which would bring it within the purview of Section 109(iia) and, therefore, it becomes a 'trading company' for this purpose.
7. In his appellate order for the assessment years 1976-77 and 1977-78, the Commissioner (Appeals) sought support for his view from the definition of the term 'trading company' contained in an order issued by the Ministry of Law, for the purpose of laying down the guidelines for audit of the various categories of companies. We do not understand how this definition contained in that order would be relevant for the purpose, that is considered here. Section 109(iia) itself purports to define the term 'trading company' and there can be no question of looking to any other enactment or rules or notifications issued as the secondary piece of legislation for interpreting the term 'trading company' contained in Section 109. It has been held by the Supreme Court in Nawn Estates (P.) Ltd. v. CIT  106 ITR 45, that even a definition contained in Section 87(f) of the Indian Companies Act, 1913 of the expression 'investment companies' would have no relevance to the interpretation of the term 'investment' appearing in Section 23A of the 1922 Act. It has been held that in the context of Section 23A of the 1922 Act resort should be had not to the technical meaning of the term but to its popular meaning, with reference to the context in which the term occurs. It is clear that a guideline issued by the Ministry of Law for the purpose of the audit of the companies under the Companies Act would have no bearing on the question before us.
8. We would, therefore, hold that the assessee is a trading company within the meaning of the term 'trading company' in Section 109(iia) and, therefore, the ITO is justified in levying additional tax under Section 104. on the basis that the assessee is a trading company. The orders of the Commissioner (Appeals) for the assessment years 1976-77 and 1977-78 are reversed and the orders of the ITO for these two assessment years are restored. The orders of the Commissioner (Appeals) and the ITO for the assessment year 1978-79 are confirmed.
9. The appeals by the revenue for the assessment years 1976-77 and 1977-78 are allowed. The appeal by the assessee for the assessment year 1978-79 is dismissed.