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Alembic Glass Industries Ltd. Vs. Commissioner of Sales Tax, Gujarat State, Ahmedabad - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtGujarat High Court
Decided On
Case NumberSales Tax Reference No. 7 of 1969
Judge
Reported in[1973]31STC142(Guj)
ActsBombay Sales Tax Act, 1959 - Sections 12; Central Sales Tax Act, 1956 - Sections 8(3)
AppellantAlembic Glass Industries Ltd.
RespondentCommissioner of Sales Tax, Gujarat State, Ahmedabad
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate B.R. Shah, Assistant Government Pleader,; M.G. Doshit and R.M. Gandhi and;
Cases ReferredSaraswati Oil Mills v. State of Gujarat
Excerpt:
(i) sales tax - ultra vires - section 12 of bombay sales tax act, 1959, rule 11 (1a) of bombay sales tax (exemptions, set-off and composition) rules, 1954, section 18b (2) of bombay sales tax act, 1953, and section 8 (3) of central sales tax act, 1956 - whether proviso to rule 11 (1a) ultra vires of rule making power of state government - condition prescribed by words 'raw materials or processing materials, fuel, lubricants, containers or packing materials' found to be ultra vires and in excess of rule making power of government - whole impugned proviso not found to be ultra vires. (ii) set off - whether by deletion of proviso to section 18b (2) right to set off extended to sales tax paid by manufacturer - by deletion of proviso right to set off extended not to all classes of goods -.....mehta, j.1. the main question which is involved in this reference is whether proviso (a), which is attached to rule 11(1a) of the bombay sales tax (exemptions, set-off and composition) rules, 1954 (hereinafter referred to as 'the rules'), is ultra vires the provisions contained in section 18b(2) of the bombay sales tax act, 1953 (hereinafter referred to as the 'act'), the question arises in this way : 2. the applicant m/s. alembic glass industries ltd. is a dealer registered under the act, and carries on the business of manufacturing various articles of glass. it has been assessed to sales tax for the period from 1st april, 1957, to 31st march, 1958. during the course of the assessment proceedings, the said assessee claimed a set-off for the amount of rs. 7,367 under sub-rule (1a) of rule.....
Judgment:

Mehta, J.

1. The main question which is involved in this reference is whether proviso (a), which is attached to rule 11(1A) of the Bombay Sales Tax (Exemptions, Set-off and Composition) Rules, 1954 (hereinafter referred to as 'the Rules'), is ultra vires the provisions contained in section 18B(2) of the Bombay Sales Tax Act, 1953 (hereinafter referred to as the 'Act'), The question arises in this way :

2. The applicant M/s. Alembic Glass Industries Ltd. is a dealer registered under the Act, and carries on the business of manufacturing various articles of glass. It has been assessed to sales tax for the period from 1st April, 1957, to 31st March, 1958. During the course of the assessment proceedings, the said assessee claimed a set-off for the amount of Rs. 7,367 under sub-rule (1A) of rule 11 of the Rules. The amount claimed as set-off is the tax paid by the assessee on goods such as machinery, tools, electric motors, drills, switches, fusements, iron plates, angles, springs, etc., used during the process of manufacturing of goods on which the assessee has rendered itself liable to pay a tax under section 8 of the Act. The taxing authorities rejected this claim of set-off put forward by the assessee holding that these goods did not amount to 'raw materials or processing materials' used in the manufacturing of goods, and since proviso (a) attached to sub-rule (1A) of rule 11 of the Rules contemplates a set-off only if the goods are used as 'raw materials or processing materials, etc.', the assessee is not entitled to the set-off in question.

3. The assessee's other contention was that the above-referred proviso (a) to rule 11(1 A) is ultra vires the provisions of section 18B(2) of the Act under which the said rule is framed. This contention of the assessee was based on the fact that sub-section (2) of section 18B of the Act is amended by Bombay Act 16 of 1957 as from 1st July, 1957, and the effect of that amendment is to take away from the State Government a power to restrict the scope of the set-off contemplated by the main provisions of sub-section (2) of section 18B of the Act. We shall elaborate this contention of the assessee at a subsequent stage but it would be sufficient at this stage to note that the lower authorities rejected even this contention of the assessee.

4. The assessee thereupon approached the Sales Tax Tribunal but there also it failed on both these points. It has, therefore, preferred this reference. In this reference, the Tribunal has referred to this court the following questions of law for opinion :

'(1) Whether the proviso to rule 11(1A) of the Bombay Sales Tax (Exemptions, Set-off and Composition) Rules, 1954, is ultra vires and in excess of the rule-making powers of the State Government

(2) Whether by reason of the deletion of the proviso to section 18B(2) of the Bombay Sales Tax Act, 1953, the right to set-off was extended to sales tax paid by the manufacturer on all classes of goods purchased by him

(3) Whether the items such as electric motors, tools, drills, switches, iron plates, angles, springs, etc., are processing materials or raw materials within the meaning of that expression in the proviso to rule 11(1A) of the Bombay Sales Tax (Exemptions, Set-off and Composition) Rules, 1954 ?

(4) Whether on the facts and in the circumstances of the case, the applicant is entitled to a set-off in respect of the sales tax paid on purchases of items of machinery and goods and spare parts such as electric motors, tools, drills, switches, iron plates, angles, springs, etc., under the Bombay Sales Tax Act, 1953, read with the Bombay Sales Tax (Exemptions, Set-off and Composition) Rules, 1954 ?'

5. Before attempting to answer these questions, it would be proper to make a reference to the relevant provisions of the Act and the Rules and also to point out the changes brought about by Bombay Act 16 of 1957 as from 1st July, 1957. It may not be out of place to mention here that the assessee's claim for set-off is with regard only to the tax paid on purchases made by it from 1st July, 1957, onwards. It may also be noted that the Act, i.e., the Bombay Sales Tax Act, 1953, has undergone some amendments by Bombay Act 16 of 1957 and these amendments are found to have been made in view of the fact that section G of the Central Sales Tax Act, 1956, which is a charging section creating liability to tax on inter-State sales, was brought into force from 1st July, 1957.

6. The dispute between the parties is with regard to the validity and applicability of proviso (a) attached to sub-rule (1A) of rule 11 of the Rules. This rule 11 provides for grant of drawback, set-off, or refund of sales tax or general tax or purchase tax in certain cases. Sub-rule (1) is in the following terms :

'(1) In assessing the amount of sales tax payable by a registered dealer who manufactures or processes any goods for sale in respect of any period, the Collector shall grant him a drawback, set-off or refund, as the case may be, of the excess, if any, of the amount mentioned in clause (I) below over the amount mentioned in clause (II) below :-

(I) The aggregate of the sums -

(i) recovered from the dealer by other registered dealers by way of -

(a) general sales tax on the purchase of goods specified in entries 1 to 18 (both inclusive) of Schedule B to the Act, and

(b) sales tax on the purchase of goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act;

(ii) recovered from the dealer by other registered dealers or licensed dealers during the period from the 1st November, 1952, to the 31st March, 1954, by way of general tax or special tax or both on his purchases of these goods which have remained with him unsold and are held by him in the State of Bombay on the 1st day of April, 1954, and are not intended by such dealer for resale;

(iii) calculated in the manner specified in sub-rule (i) of rule 11A; and

(iv) payable as purchase tax under clause (a) of section 10 on the purchase of such goods by the dealer :

Provided that such goods have been used as raw materials, processing materials, fuel, lubricants, containers or packing materials in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B for sale. And the goods so manufactured or processed are not goods on the sale of which no sales tax is payable under rule 5 or clause (i) of rule 7.

(II) Three pies in the rupee on the aggregate of the sale prices of goods which have been so manufactured or processed, where -

(i) the sale is not liable to tax by virtue of the provisions of section 48; or

(ii) the dealer has claimed a deduction under clause (b) of section 8 in respect of the sale :

Provided that where the goods which have been so manufactured or processed fall under entry 23 or 24 of Schedule B to the Act, the amount under this clause shall be computed at the rate of one-fourth per cent., instead of three pies in the rupee.' It is an admitted position that before 1st July, 1957, the drawback, set-off or refund was granted to an assessee under the provisions of this sub-rule. From 1st July, 1957, onwards, sub-rule (1A) has been added : vide G.N.F.D. No. S.T.R. 1457-G-l, dated 30th June, 1957. This sub-rule (1A) is in the following terms :

'(1A) In assessing the amount of sales tax payable by a registered dealer who manufactures or processes any goods for sale in respect of any period, the Collector shall grant him a drawback, set-off or refund, as the case may be, of an amount equal to the aggregate of the sums -

(i) recovered from the dealer by other registered dealers by way of sales tax or general sales tax;

(ii) calculated in the manner specified in sub-rule (i) of rule 11A; and

(iii) payable as purchase tax under clause (a) of section 10 on the purchase of such goods by the dealer;

(iv) recovered from the dealer by other registered dealers by way of sales tax under section 7A or payable as purchase tax under the said section after deducting therefrom one per cent., and in the case of goods falling under entry 23 or 24 of Schedule B to the Act, one quarter per cent. of the sale price of the goods which have been so manufactured or processed by him where the sale of the goods takes place at any place in India outside the State of Bombay, the goods having been transported to such place on or after the 1st day of July, 1957 :

Provided that :-

(a) such goods have been used as raw materials, processing materials, fuel, lubricants, containers or packing materials in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale;

(b) and the goods so manufactured or processed are not the goods on the sale of which no sales tax is payable under rule 5 or clause (i) of rule 7.'

It is further found by reference to rule 18, which was inserted in the Rules by the above-referred notification and which also came into effect from 1st July, 1957, that sub-rule (1) of rule 11 has limited application. This rule 18 is in the following terms : '18. Sub-rules (1) and (2B) of rule 11 not to apply to certain sales. - The provisions of sub-rules (1) and (2B) of rule 11 shall not be applicable to sale of goods made on and after the 1st day of July, 1957.'

It is apparent from tills newly inserted rule 18 that the above-quoted sub-rule (1) of rule 11 is not applicable to the sale of goods made after 1st day of July, 1957. Since in this reference we are concerned with the sale of goods made on or after 1st July, 1957, it is an admitted position that it is sub-rule (1A), quoted above, which governs the facts of the case. It would not be improper even at this stage to note that proviso (a), which is attached to sub-rule (1A), says that in order to get set-off contemplated by that sub-rule, the assessee has to show that the goods in question have been used as 'raw materials or processing materials' in the manufacture or processing of the goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale. It is this proviso, the vires of which are challenged in this reference.

7. Now, if a reference is made to the Act proper, it will be found that section 45 of the Act empowered the State Government to make rules for carrying out the purposes of the Act. Sub-section (2) of section 45 says that in particular and without prejudice to the generality of the power vested in the State Government to make rules, such rules may provide for various things which are enumerated in clauses (a) to (za) of the sub-section. For the purpose of this reference, we are concerned only with two of these clauses, namely, clauses (da) and (nb). Clause (da) is in the following terms :

'(da) the manner in which the goods shall be used in the manufacture or processing of any goods for sale for the purpose of section 9 or 10C or sub-section (2) of section 18B.'

While clause (nb) is in the following terms :

'(nb) any of the matters specified in section 18B.'

From these two clauses, it is apparent that the State Government is authorised to make rules to provide for (1) the manner in which the goods shall be used in the manufacture of the goods for sale for the purpose of section 18B(2), and (2) any of the matters specified in section 18B. It is, therefore, necessary to see what are the provisions of section 18B. Section 18B of the Act provides for the rule-making power of the State Government for granting drawback, set-off, refund, etc. Sub-section (1) thereof is in the following terms :

'18B. (1) The State Government may by rules provide that -

(a) the tax leviable under section 8, 9, 10 or 10A shall not be payable in respect of any specified class of sales or purchases;

(b) a drawback, set-off or refund of the whole or part of the tax leviable on any class of sales or purchases under section 8, 9, 10 or 10A shall be granted to the purchasing dealer in such circumstances and subject to such conditions as may be specified;

(c) the sale price or purchase price shall in the case of any class of sales or purchases be reduced for the purpose of levy of tax under section 8, 9, 10 or 10A to such extent and in such manner as may be specified.'

The section also contains sub-section (2), which is the subject-matter of contention between the parties in this reference. But sub-section (2), which is at present found in the section is in terms which are different from the terms of original sub-section (2), which has been replaced. For the sake of convenience, we shall first quote the original sub-section (2) of this section which was in the following terms :

'(2) Any rules made under sub-section (1) shall provide that in the case of a registered dealer who manufactures or processes any goods for sale there shall be set-off against the sales tax payable by him under section 8, the excess, if any, of the amount mentioned in clause (I) below over the amount mentioned in clause (II) below :-

(I) The aggregate of the sums -

(i) recovered from the dealer by other registered dealers by way of -

(a) general sales tax on the purchase of goods specified in entries 1 to 18 (both inclusive) of Schedule B, and

(b) sales tax on the purchase of goods specified in entries 19 to 22 (both inclusive) and 25 to 80 (both inclusive) of Schedule B, and

(ii) payable as purchase tax under clause (a) of section 10 on the purchase of such goods by the dealer :

Provided that such goods have been used in the prescribed manner in the manufacture or processing of any goods specified in entries 19 to 22 (both inclusive) and 25 to 80 (both inclusive) of Schedule B for sale. (II) Three pies in the rupee on the aggregate of the sale prices of goods which have been so manufactured or processed, where -

(i) the sale is not liable to tax by virtue of the provisions of section 46; or

(ii) the dealer has claimed a deduction under clause (b) of section 8 in respect of the sale.'

This original sub-section (2) remained in force from 1st April, 1954, to 30th June, 1957, but the sub-section (2) which is at present found in the statute was brought into force from 1st July, 1957, by the above-referred Bombay Act 16 of 1957. It is in the following terms :

'(2) Any rules made under sub-section (1) shall provide that in the case of a registered dealer who manufactures or processes any goods for sale there shall be set-off against the sales tax payable by him under section 8, the aggregate of sums -

(i) recovered from the dealer by other registered dealers by way of -

(a) general sales tax on the purchase of goods specified in entries 3, 6 to 9, 13, 14, 17 and 18 of Schedule B, and

(b) sales tax on the purchase of goods specified in entries 19 to 22 (both inclusive) and 25 to 80 (both inclusive) of Schedule B; and

(ii) payable as purchase tax under clause (a) of section 10 on the purchase of goods by such dealer

after deducting therefrom one per cent. of the sale price of any goods manufactured or processed, where the sale of the goods takes place outside the pre-Reorganisation State of Bombay, excluding the transferred territories.'

8. It is apparent from the above-quoted provisions of section 18B of the Act that this section empowers the State Government to make rules for the grant of drawback, set-off and refund. These are the specific powers granted to the State Government on the subject of the grant of drawback, set-off and refund. Rule 11, to which reference is already made above, is found to have been made by the State Government not only under the general powers vested in it under section 45 of the Act, but also under the above-referred provisions of section 18B. It should also be noted here that clause (b) of sub-section (1) of section 18B clothes the State Government with a general power to provide for drawback, set-off or refund either wholly or in part under certain circumstances and subject to certain conditions, as may be specified in the Rules. But if a reference is made to sub-section (2) of section 18B, it will be found that it makes specific provisions about the set-off claimed by the manufacturers or purchasers under certain circumstances. The point to be noted at this stage is that both the sub-sections of section 18B clothes the State Government with powers to make rules suitable and consistent with the provisions of this section.

9. Now, the contention of the assessee is that proviso (a), which is attached to sub-rule (1A) of rule 11, to which we have already made a reference above, is inconsistent with sub-section (2) of section 18B as it is found at present inasmuch as the proviso restricting the assessee's right to get a set-off, which was found in the original sub-section (2) of this section, has been omitted after 1st July, 1957, from the newly inserted sub-section (2) and also because, the wordings of this newly inserted sub-section (2) show that there is a specific mandate to give set-off under the circumstances mentioned therein up to the aggregate of the sums mentioned in clauses (i) and (ii) thereof. It was contended that since the amended sub-section (2) of section 18B does not restrict an assessee's right to obtain set-off, as contemplated by the terms of that sub-section, no such restriction can be placed by any rule framed under the power obtained by the State Government under that sub-section. Therefore, according to the assessee, even if it is believed that electric equipments, tools, etc., regarding which the set-off is claimed, are neither 'raw materials' nor 'processing materials' used in the manufacture of the goods concerned, it would none the less be entitled to the set-off as contemplated by sub-section (2) of section 18B and in so far as the proviso attached to sub-rule (1A) of rule 11 puts restriction to this right to obtain set-off, the same is void and ultra vires the provisions contained in the parent section.

10. As against this, the contention of the revenue is that even though the amended sub-section (2) of section 18B does not contain a proviso, which the substituted sub-section had power to prescribe the conditions on which the set-off can be given are inherent in the State Government in view of the provisions contained in section 45(2)(da) and clause (b) of sub-section (1) of section 18B of the Act.

11. In this connection, it would first be necessary to understand the scheme of sub-section (2) of section 18B as it stood before the amendment. It is already quoted by us above and reference to it shows that according to this old sub-section, an assessee, who was a manufacturer or a processor of any goods for sale, was entitled to a set-off against the sales tax payable by him under section 8 of the Act to the extent of an excess, if any, of the amounts mentioned in clause (i) over the amounts mentioned in clause (ii) of that sub-section. In other words, the assessee in question was entitled to only that amount of set-off by which the sum calculated in accordance with clause (i) exceeded the sum calculated in accordance with clause (ii). Now, while calculating the sum in accordance with clause (i) of this old sub-section (2), the following proviso was to be taken into account :

'Provided that such goods have been used in the prescribed manner in the manufacture or processing of any goods specified in entries 19 to 22 (both inclusive) and 25 to 80 (both inclusive) of Schedule B for sale.'

Thus, it is apparent that the above-quoted proviso, which was attached to clause (i) of sub-section (2) of section 18B, as it stood before 1st July, 1957, contemplated the use in the prescribed manner of the goods in question in the manufacture or processing of the goods specified in the proviso. In other words, the sub-section itself empowered the State Government to frame rules prescribing the manner in which the goods in question should have been used during the manufacturing process. It was, therefore, by virtue of this power given by the proviso that rule 11 prescribed for the manner in which the goods should be found to have been used in the manufacturing process. If, in this connection, a reference is again made to sub-rule (1) of rule 11, it will be found that it is governed by the following proviso :

'Provided that such goods have been used as raw materials, processing materials, fuel, lubricants, containers or packing materials in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B for sale.'

It is apparent that this proviso to sub-rule (1) of rule 11 is quite in consonance with the above-referred proviso, which was attached to sub-section (2) of section 18B, as it stood before 1st July, 1957. It may again be recalled that sales, which have taken place before 1st July, 1957, are covered by the above-referred sub-rule (1) of rule 11 but the sales which have taken place after 1st July, 1957, are not covered by that sub-rule as provided in rule 18 to which reference is already made above. Under the circumstances, the above-referred proviso attached to sub-rule (1) of rule 11, which prescribes the manner in which the goods concerned should be found to have been used during the manufacturing process, was quite in consonance with the parent sub-section (2), which also contained a similar proviso, which is quoted by us above. But the difficulty has arisen after the amendment of section 18B as from 1st July, 1957, because by this amendment, which was brought into statute book by Bombay Act 16 of 1957, the whole scheme of sub-section (2) has been changed. This will be apparent by a mere comparison of the amended provisions of sub-section (2) and the old provisions, which are quoted above. According to the amended scheme, sub-section (2) contemplates a rule which 'shall provide' that in case of a registered dealer, who manufactures any goods for sale, there 'shall be' a set-off against the sales tax payable by him under section 8 of the Act, the aggregate of the sums which are specifically mentioned in clauses (i) and (ii) of the sub-section. Of course, this set-off is to be given after deducting therefrom one per cent. of sale price of the goods manufactured or processed. But the point to be noted is that unlike the old subsection (2) the amended sub-section (2) does not contain any proviso, authorising the State Government to prescribe 'the manner' in which the goods should be found to have been used during the manufacturing process. Therefore, the question is whether sub-rule (1A) of rule 11, which prescribes the manner in which the goods should be found to have been used in the process of manufacturing, has any justification in view of the deletion of the above-referred proviso from sub-section (2).

12. While considering the question it may not be forgotten that the rule-making powers are derived by the State Government from the statute and, therefore, it would not be open to the State Government to frame any rule, which is in excess of the power, which is specifically vested in the State by the Legislature. Therefore, the point is what are the powers vested in the State Government by the statute itself for the purpose of framing rules regarding grant of drawback, set-off and refund

13. It is undoubtedly true that section 45 of the Act and clause (b) of sub-section (1) of section 18B clothe the State Government with general powers of framing rules for the purpose of giving drawback, set-off and refund. It is also true that while exercising this general power it is open to the State Government to prescribe the conditions and the circumstances under which the drawback, refund or set-off would be given. But these general powers, which are vested in the State Government, are further controlled by the provisions of sub-section (2) of section 18B. According to this sub-section (2), whenever any refund rules are framed under sub-section (1) for the grant of drawback, set-off or refund, it is incumbent on the State Government to provide that in case, of a dealer, who manufactures or processes any goods for sale, a set-off of the aggregate sums mentioned in clauses (i) and (ii) must be given. In this connection, it should be borne in mind that sub-section (2) uses the mandatory expression 'shall' at two places. It first states that the rules 'shall provide' and it further specifies the provision, which is required to be made by saying that the provision should be for set-off of the aggregate sums mentioned in the succeeding clauses of the sub-section.

In our opinion, therefore, the mandate, which is contained in sub-section (2) is not only for making a rule to provide a set-off, but also for the quantum of the said set-off, as prescribed in the two clauses of the sub-section. This particular aspect of the matter should be considered along with the fact that the proviso prescribing the manner in which the goods should be found to have been used in the process of manufacture, which was attached to the old sub-section (2), has been deleted in the substituted sub-section (2). This deletion of the said proviso, therefore, supplies another strong indication revealing the mind of the Legislature and suggesting that the mandate, which the Legislature has provided in the opening lines of sub-section (2), was intended to be carried out with perfection. If this is the situation, it must follow that by substituting sub-section (2) as it is found today in the statute, the Legislature wanted to create a limitation on the general powers of the State to frame rules for the purpose of granting drawback, set-off and refund, which are vested in the State Government by virtue of section 45 and sub-section (1) of section 18B of the Act. Now, it is a recognised principle of construction that whenever a general provision is found in one part of the statute followed by a specific provision on the same subject-matter, then the specific provision should prevail over the general provision, subject of course, to the conditions under which the specific provision would come into play. That being the situation, even though under the general provisions of law, as contained in section 45 and sub-section (1) of section 18B, the State Government is empowered to impose conditions as to the grant of drawback, set-off and refund, the rule of harmonious construction requires that in order to give effect to the specific mandate contained in sub-section (2) of section 18B, it must be held that whenever the State Government prefers to make rules for granting drawback, set-off or refund, these rules must provide that in case of a registered dealer, who manufactures any goods for sale, the set-off of the aggregate sum as mentioned in clauses (i) and (ii) of sub-section (2) should be given against the sales tax payable by such a dealer under section 8 of the Act. In other words, it is not open to the State Government to frame any rules, which would encroach upon the right of the dealer or manufacturer to obtain a set-off as contemplated by sub-section (2) of section 18B.

14. Shri Shah, who appeared on behalf of the department, specifically drew our attention to the above-quoted clause (da) of sub-section (2) of section 45, and contended that in spite of the amendment introduced by Bombay Act 16 of 1957, in sub-section (2) of section 18B of the Act, this clause still continues to remain in the statute book and since this clause empowers the State Government to make rules for 'the manner in which the goods shall be used' in the manufacture of any goods for sale for the purpose of sub-section (2) of section 18B, the impugned proviso (a) of sub-rule (1A) of rule 11 would be wholly saved. We find that this contention is not available to the department for two reasons; (1) clause (da) on which the reliance is placed is the empowering clause, the power under which can be exercised only if the 'manner' in which the goods are required to be used in the process of manufacture is found prescribed in any of the provisions of the statute. This clause makes specific reference to sub-section (2) of section 18B, which, previous to 1st July, 1957, did provide for the said 'manner'. It was only after 1st July, 1957, that the provision as regards the said 'manner' was dropped in the amended sub-section. Therefore, the result is that sub-section (2) of section 18B, as it is found after the amendment, does not provide for any 'manner' in which the goods are required to be used in manufacturing process. (2) The second reason is that even at present sub-rule (1) of rule 11 remains a valid rule so far as the sales which have taken place before 1st July, 1957, are concerned. As already noted above, this sub-rule (1) contains a proviso specifying the 'manner' in which the goods concerned should be found to have been used as raw materials, etc., in the manufacturing process. Therefore, this proviso of sub-rule (1) of rule 11 finds its jurisdiction by reference to clause (da) on which Shri Shah puts reliance. Be that as it may, so far as the amended sub-section (2) of section 18B is concerned, it is found to be the only statutory provision, which should govern the cases of set-off to be granted to the dealers, who are manufacturing or processing any goods for sale, and since this sub-section does not contemplate the framing of any rule prescribing the manner in which the goods should be found to have been used during the manufacturing process, clause (da) would not be of any help to the department.

15. Shri Shah then contended that the impugned proviso gets its jurisdiction even from the scheme of the amended sub-section (2) of section 18B. He pointed out that sub-section (2) contemplates neither a drawback nor a refund but only a 'set-off' and, therefore, these provisions can be invoked only for the purpose of claiming a 'set-off'. He argued that the fact that the sub-section is confined only to the claims of 'set-off' is suggestive of the underlying principle that the goods regarding which the claim is made should have been used for manufacturing the articles, the sale of which attracts the payment of sales tax under section 8 of the Act. In amplification of this argument it was contended that the purpose for providing the manner in which the goods concerned should be found to have been used in the manufacture, is to avoid the subjection of the goods concerned to sales tax at two points. In case of raw materials, which are used for the purpose of manufacturing a finished article, sales tax would have already been paid at the time of their purchase. It was pointed out that if these very goods are again used in manufacturing a particular article, and if this article is again subjected to sales tax, it would amount to taxing the same raw materials over again and, therefore, it was with a view to avoid tax at two points that the impugned proviso (a), which is attached to sub-rule (1A) of rule 11, contemplates that the goods regarding which set-off is claimed, should be found to have been used as 'raw materials or processing materials' during the course of manufacture. This contention is based on the premise that machinery or its spare parts, which are used for the purpose of manufacturing of the goods for sale, are not used during the process of manufacture. But we find that such a contention cannot be sustained. It is evident that in order to produce a finished product by the process of manufacture, one has not only to utilise the raw materials and other goods necessary for manufacturing the same, but has also to utilise the machinery required to manufacture it. In other words, without the help of machinery, the finished article cannot be obtained in the form in which it is salable in the market. Therefore, it is not possible to say that in bringing about that finished article only the raw materials and other accessories are used and not the machinery with the help of which that article is manufactured. It cannot be gainsaid that without the help of the machinery, that article could not have assumed the form in which it is found salable in the market and it can equally be not gainsaid that when some machinery is used for the purpose of manufacturing a salable article, the machinery so used gets depreciated to a certain extent. That being so, even if it is believed that under the scheme of sub-section (2) of section 18B of the Act, a set-off can be claimed only with regard to that article, which is used for the purpose of bringing about the goods manufactured for sale, that requirement is satisfied in the case of machinery and spare parts, which are really put to use for the purpose of the said manufacture. Since it is an admitted fact in this case that all those articles, with regard to which the assessee has claimed set-off, have been used in the manufacture of the goods meant for sale, we are of the opinion that this contention of Shri Shah cannot be sustained.

16. In this connection, we may make a reference to the decision given by the Supreme Court in J.K. Cotton Spinning and Weaving Mills Co. Ltd. v. The Sales Tax Officer, Kanpur, and Another ([1965] 16 S.T.C. 563 (S.C.)), wherein the expression 'in the manufacture of goods' as appearing in section 8(3)(b) of the Central Sales Tax Act, 1956, was considered. While considering the meaning of this expression, the Supreme Court has observed that this expression should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. It is further observed that the expression 'in the manufacture of goods' takes within its ambit, all processes which are directly related to the actual production and, therefore, even drawing and photographic materials falling within the description of goods intended for use as 'equipment' in the process of designing, which is directly related to the actual production of goods and without which commercial production would be inexpedient, must be regarded as goods intended for use 'in the manufacture of goods'. Referring to 'electrical equipment', the Supreme Court has held that if, having regard to normal conditions prevalent in the industry, production of the finished goods would be difficult without the use of electrical equipment, the equipment would be regarded as intended for use in the manufacture of goods for sale. These observations, therefore, are clear enough to show that machinery or its spare parts, which are used for bringing out a finished article after the process of manufacture, can be treated as goods used in the process of manufacture. We find that even a Division Bench of this court has taken a similar view in Sales Tax Reference No. 9 of 1962 decided on 20th November, 1963. There, this court construed the provisions contained in section 12(b) of the Bombay Sales Tax Act, 1959, and while considering these provisions, construed the meaning of the expression 'in the manufacture of taxable goods'. While discussing the meaning of this expression, the following observations are found to have been made :

'The question which, therefore, arises for determination is what goods can be said to be goods purchased for use in the manufacture or packing of taxable goods. Of course, so far as goods purchased for use in packing of taxable goods are concerned, there is no difficulty of construction and in fact there is no dispute as to what goods would be comprised in that category. But what are the goods comprised in the category which may be described by the words 'goods ... purchased ... for use ... in the manufacture of taxable goods' Are the words limited in their application to goods which go to make up the finished goods in the sense that they merge in or become integral part of finished goods or do the words extend to all goods which are used in the process of manufacture in the sense that manufacture would not be possible without using them We think that the latter is the correct meaning of the words used in the section.'

A little further this court has observed on the same point as under :

'What we are called upon to do is to construe the words used in the section and on a plain and grammatical construction we are of the view - and this view is fortified by reference to the other provisions of the Act - that the goods in respect of which the Legislature intended to grant exemption are not limited to goods which in the process of manufacture merge in or become integral part of the finished goods but include all goods which are required for carrying out the process of manufacture of finished goods. Manufacture of goods means the process of converting raw materials into finished goods and whatever goods are required for converting raw materials into finished goods can be said to be goods used in the manufacture of finished goods. Every item of goods which has a use in the manufacture of finished goods, which plays some role in the process of manufacture and without which manufacture would not be possible, would be goods used in the manufacture of finished goods. This, in our opinion, is the true interpretation of the words used in the section.'

17. It is thus clear that even the machinery and its spare parts, which are used for manufacture of the goods for sale, are the goods which have been helpful in bringing about the finished articles regarding which sales tax becomes payable under section 8 of the Act. In this view of the matter, the contention raised by Shri Shah On this point, would not survive.

18. From the above discussion, it follows that the impugned proviso, in so far as it is inconsistent with the provisions of sub-section (2) of section 18B, as it is found after the amendment, would be ultra vires the powers vested in the State Government by the said sub-section. It is, therefore, necessary to consider how far and to what extent this proviso goes beyond the powers vested in the State Government to make rules within the framework of sub-section (2) of section 18B. We have also noted above that the said sub-section makes a mandatory provision for the set-off of the aggregate sums contemplated by clauses (i) and (ii). Only three conditions are attached to the grant of this set-off, and they are : (1) that the dealer concerned must be either a manufacturer or a processor of any goods for sale; (2) he should be found claiming a set-off against the sales tax payable by him under section 8; and (3) the sales tax which is payable by him under section 8 should be with regard to the goods manufactured or processed by him. The rules, which are contemplated by sub-section (2) of section 18B, therefore, should not impose any further condition except the three conditions, which are mentioned above. In other words, if these three conditions are satisfied, then the dealer concerned would be entitled to claim a set-off of the aggregate sums contemplated by the sub-section. There is nothing in the sub-section to show that the goods on which the set-off is contemplated by the sub-section, should be used as 'raw materials, processing materials, fuel, lubricants, containers or packing materials'. Under these circumstances, that part of the impugned proviso, which limits the set-off only to the goods, which have been used as 'raw materials, processing materials, fuel, lubricants, containers or packing materials' is found to be beyond the scope of sub-section (2) of section 18B. We, therefore, hold that this part of the impugned proviso is ultra vires as it falls beyond the scope of and is inconsistent with sub-section (2) of section 18B.

19. The proviso, however, imposes another type of condition, namely, that the goods should be found to have been used 'in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B of the Act for sale'. The question is whether this condition is beyond the scope of the set-off contemplated by sub-section (2) of section 18B. Our answer to this question is in the negative because considering the scheme of sub-section (2) of section 18B, as it is found in the amended form, we find that this condition is quite consistent with the same. The condition requires that the goods should be found to have been used in the manufacture or processing of the goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale. Now, if again a reference is made to sub-section (2) of section 18B, it will be found that sub-clause (b) of clause (i) thereof contemplates sales tax on the purchase of goods specified in entries 19 to 22 and 25 to 80 of Schedule B. In other words, in the aggregate amount of set-off, which is contemplated by sub-section (2), sales tax paid on the purchase of the goods specified in the above-referred entries of Schedule B is to be taken into account. These are the same goods which, according to the second condition of the impugned proviso, should be found to have been used in the manufacture for sale. The scheme of sub-section (2) is to give encouragement to the manufacturers or processors by way of a set-off against the sales tax payable by them on the goods 'manufactured or processed' by them. In other words, the set-off is contemplated only on the materials which have been helpful in bringing about the manufactured or processed goods in the finished form. Under the circumstances, even though sub-section (2) does not specifically say in so many words that the set-off, which is contemplated by it, should be controlled by a condition that the goods, in question should have been used for the manufacture of goods for sale, looking to the scheme of the sub-section, we have no doubt in our mind that the goods, regarding which the set-off is contemplated, should be the goods used by the manufacturer or processor in his capacity as manufacturer or processor and should have been instrumental in producing the finished articles in a manufactured state for sale. Under these circumstances, we are of the opinion that the condition requiring that the goods, regarding which a set-off can be claimed under sub-section (2) of section 18B, should have been used 'in the manufacture or processing' of any goods specified in entries 19 to 80 (both inclusive) of Schedule B for sale, is valid. Thus, this part of the impugned proviso is found to be intra vires the provisions of sub-section (2) of section 18B of the Act.

20. The view which we are taking on this point is supported by the meaning of the word 'set-off' as distinguished from the meanings of the expressions 'counter-claim' and 'payment', as given in Halsbury's Laws of England, 3rd Edition, Volume 34, at page 395. The same is as under :

'In its effect set-off is essentially different from counter-claim in that set-off is a ground of defence, a shield and not a sword, which if established, affords as answer to the plaintiff's claim wholly or pro tanto, whereas counter-claim as such affords no defence to the plaintiff's claim, but is a weapon of offence which enables a defendant to enforce a claim against the plaintiff as effectually as in an independent action. Where facts pleaded by way of counter-claim constitute a set-off they may be additionally pleaded as such.'

Following is the distinction between 'set-off' and 'payment' made by the same author :

'Set-off is entirely distinct from payment. Payment is satisfaction of a claim made by or on behalf of a person against whom the claim is brought. The person paying performs the obligation in respect of which the claim arises, which thereby becomes extinguished. Set-off excepts a person entitled thereto from making any satisfaction of a claim brought against him, or of so much of the claim as equals the amount which he is entitled to set-off, and thus to the extent of his set-off he is discharged from performance of the obligation in respect of which the claim arises.'

These observations show that whenever a set-off is claimed, that claim should have some nexus with amount against which it is advanced. Therefore, the set-off of sales tax on the purchases of the goods which are specified in entries 19 to 22 and 25 to 80 of Schedule B would have its justification only if these goods are found to have been used in the process of manufacture as contemplated by the impugned proviso (a) attached to sub-rule (1A) of rule 11.

21. Shri Kaji, who appeared on behalf of the assessee, contended that looking to the specific provisions contained in sub-section (2) of section 18B, no part of the impugned proviso (a) would be saved because the sub-section does not admit of any condition, which can be imposed upon the grant of set-off contemplated by that sub-section. In support of this contention, he relied upon some of the observations made by this court in the decision given in Saraswati Oil Mills v. State of Gujarat ([1966] 18 S.T.C. 163). If a reference is made to this decision, it will be found that even there, the vires of, the impugned proviso (a) attached to sub-rule (1A) of rule II were challenged on the same grounds on which they are challenged in this matter. But the court did not decide this question of vires because it found in that case that the concerned assessee was not entitled to any set-off in view of the fact that he was not liable to pay sales tax on the manufactured goods under section 8 of the Act. However, during the course of its judgment, this court is found to have made some casual observations with regard to the effect of the proviso which was found in the old sub-section (3) of section 18B of the Act. These observations are as under :

'It is true that when sub-section (2) of section 18B was amended in 1937, the proviso was omitted from the amended sub-section and, therefore, it could be possible to say that the restriction to the right of set-off laid down in the original sub-section as a result of that proviso was removed and, therefore, if the State Government were to frame rules regarding set-off under sub-section (1), it would be mandatory on it to provide for set-off in respect of taxes paid by a dealer even though the goods on which he has paid those taxes were not used by him in the manufacture or processing of goods falling under entries 19 to 22 and 25 to 80 of Schedule B.'

These observations do lend some support to the point of view which is canvassed by Shri Kaji, but we find that these are merely casual observations in view of the fact that in that decision the court has specifically observed that it was not necessary to decide the vires of the impugned provisions covered by clause (a) attached to sub-rule (1A) of rule 11.

22. We find that one of the questions which is referred to us by the Tribunal is whether the items such as electric motors, tools, drills, switches, iron plates, angles, Springs, etc., are 'processing materials' or 'raw materials' within the meaning of the impugned proviso. On this question, we have no doubt that the items, which are quoted above, form part and parcel of machinery which is used for manufacturing or processing the finished goods. These items cannot, therefore, be called either 'processing materials' or 'raw materials' within the meaning of the impugned proviso.

23. In view of this decision our answers to the questions, referred to us by the Tribunal, are as under :

(1) The whole of the impugned proviso (a) is not found to be ultra vires and in excess of the rule-making power of the State Government. But only the condition which is prescribed by the words 'raw materials or processing materials, fuel, lubricants, containers or packing materials' is found to be ultra vires and in excess of the rule-making power of the State Government.

For the sake of clarification, we would like to mention that it is only proviso (a) which is in dispute and, therefore, though the question is widely framed, we have taken it to be referring only to proviso (a).

(2) On the second question, our answer is that by reason of the deletion of the proviso to section 18B(2) of the Sales Tax Act, 1953, right to set-off was extended not to all classes of goods but only to those goods which are used in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale.

(3) On the third question, our answer is that the items which are referred to in this question are neither 'processing materials' nor 'raw materials' within the meaning of those expressions found in proviso (a) to rule 11(1A).

(4) On the fourth question, our answer is in the affirmative, if the items mentioned in this question are found used in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale.

We, therefore, dispose of this reference accordingly. The opponent shall bear the costs of the applicant.

24. Reference answered accordingly.


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