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Ahmedabad Silk Factory Private 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. 18 of 1963
Judge
Reported in(1965)0GLR612; [1966]18STC23(Guj)
ActsBombay Sales Tax Laws (Special Exemptions) Act, 1957 - Sections 2(1), 2(7) and 4; Bombay Sales Tax Act, 1953; Additional Duties of Excise (Goods of Special Importance) Act, 1957; Central Excises Act, 1944
AppellantAhmedabad Silk Factory Private Ltd.
RespondentCommissioner of Sales Tax, Gujarat State, Ahmedabad
Appellant Advocate C.C. Gandhi, Adv.
Respondent Advocate J.M . Thakore, Advocate-General; i/b M.M. Thakore and; M
Cases ReferredAnwarkhan Mehboob Co. v. State of Bombay
Excerpt:
.....of the central excises and salt act, 1944, and the additional duties of excise act and duties of excise, additional as well as original, were chargeable on that process. the controversy between the parties, therefore, centred round the question whether the terms of sub-section (2) of section 4 were satisfied in so far as these sales were concerned. this argument is in our opinion not well-founded and must be rejected. all these being different varieties of cloth would be scheduled good and would be governed by section 4 and when this stock of scheduled goods is sold by the registered dealer on or after the appointed day, the sales would attract sales tax under sub-section (2) of section 4. but when this stock of schedule goods is converted into a stock of different scheduled goods and..........are here concerned only with scheduled goods and we will, therefore, say no more about designated goods. scheduled goods being goods specified in schedule i, we must turn to schedule i in order to find out what were scheduled goods. when we turn to that schedule, we find that entry 1 specified the following goods : 'all varieties of cloth manufactured in mills or on power-looms, excluding pure silk cloth.' 3. all varieties of cloth, whether grey or finished, were thus included in scheduled goods. section 4 granted exemption from payment of sales tax in respect of sales tax purchases of scheduled goods and that exemption was in the following terms :- '4. (1) notwithstanding anything contained in the relevant sales tax law or any rules, notifications or orders made or issued thereunder,.....
Judgment:

Bhagwati, J.

1. The assessee is a private limited company carrying on business as manufacturer of cloth and was a registered dealer under the provisions of the Bombay Sales Tax Act, 1953. On 13th December, 1957, being the day appointed by the State Government in respect of cloth manufactured in mills or on power-looms under Section 2(1) of the Bombay Sales Tax Laws (Special Exemptions) Act, 1957 (hereinafter referred to as the Sales Tax Exemption Act) the assessee had stock of grey or unfinished cloth of the value of Rs. 2,13,676. The assessee converted this stock of grey or unfinished cloth into finished cloth by performing the process of bleaching, dyeing and printing on it and sold such finished cloth in the market during the period 13th December, 1957, to 31st March, 1958. The assessee in its assessment to sales tax for the assessment period 1st April, 1957, to 31st March, 1958, claimed that the sales of finished cloth effected by it as aforesaid were exempt from sales tax by reason of sub-section (1) of section 4 of the Sales Tax Exemption Act inasmuch as finished cloth sold by it constituted scheduled goods within the meaning of that expression as defined in section 2(7) of the Sales Tax Exemption Act and no sales tax was, therefore, payable under the Bombay Sales Tax Act, 1953, on the sale of such finished cloth effected on and after 13th December, 1957, being the appointed day. The claim for exemption was, however, negatived by the Sales Tax Officer on the ground that the finished cloth sold by the assessee was covered by sub-section (2) of section 4 and the sales of finished cloth were, therefore, taxable under the provisions of the Bombay Sales Tax Act, 1953. An appeal to the Assistant Commissioner of Sales Tax followed, but the appeal was unsuccessful and so was the revision application preferred before the Deputy Commissioner of Sales Tax. The assessee thereupon approached the Tribunal, but the Tribunal also took the same view and hence the present reference.

2. Though the question referred to us are two in number, they raise the same controversy, namely, whether the sales tax of finished cloth effected by the assessee are covered by sub-section (2) of section 4 of the Sales Tax Exemption Act. The determination of this controversy obviously depends on the true interpretation of sub-section (2) of section 4, but in order to arrive at a proper meaning of that provision, it is necessary to consider not only the language of that provision but also the context and setting in which that provision occurs and the object and purpose of the legislation. The genesis of the enactment of the Sales Tax Exemption Act is to be found in the decision of the Central Government to enact the Additional Duties of Excise (Goods of Special Importance) Act, 1957, (hereinafter referred to as the Additional Duties of Excise Act). The Central Government proposed to levy additional duties of excise on certain goods which it considered to be goods of special importance in inter-State trade or commerce and these taxes were to be levied in substituted of the sales taxes levied by the Union and the States on those goods, for the object was not to increase the burden on the consumer but having regard to the special importance of those goods in inter-State trade or commerce, to have uniform taxes on those goods in place of different sales taxes levied by different States and for the loss of sales tax, the States were to be compensated by payment of a part of the net proceeds of these taxes levied and collected during the financial year. With a view to giving effect to this proposal, the State Legislature passed the Sales Tax Exemption Act and that Act came into force on 14th December, 1957. As the long title and the preamble show, the Sales Tax Exemption Act was passed inter alia to exempt from sales tax laws in force in the State of Bombay, the sales or purchases of goods on which the Central Government proposed to levy additional duties of excise. These goods were divided into two categories : one category consisting of goods specified in Schedule I and the other category consisting of goods specified in Schedule II. The former were described as 'scheduled goods' under section 2(7) while the latter were described as 'designated goods' under section 2(3). We are here concerned only with scheduled goods and we will, therefore, say no more about designated goods. Scheduled goods being goods specified in Schedule I, we must turn to Schedule I in order to find out what were scheduled goods. When we turn to that schedule, we find that Entry 1 specified the following goods :

'All varieties of cloth manufactured in mills or on power-looms, excluding pure silk cloth.'

3. All varieties of cloth, whether grey or finished, were thus included in scheduled goods. Section 4 granted exemption from payment of sales tax in respect of sales tax purchases of scheduled goods and that exemption was in the following terms :-

'4. (1) Notwithstanding anything contained in the relevant sales tax law or any rules, notifications or orders made or issued thereunder, no tax shall be payable under the relevant sales tax law on the sale or purchase of any schedule goods effected on and after the appointed day.

(2)(a) Save as provided in clause (b), nothing in sub-section (1) shall apply to the shock of scheduled goods held by a registered dealer on the appointed day and remaining unsold on the day immediately preceding the appointed day, and which has not become liable to the payment of additional duty of excise under any Central law made after the 1st day of November 1957 (hereinafter referred to as non-dutiable stock of scheduled goods).

(b) Any sale or purchase of non-dutiable stock of schedule goods made upto the end of the 30th June, 1958, shall continue to be liable to the payment of tax under the relevant sales tax law as amended in the manner and to the extent specified in Schedule III as if this Act had not been passed, and any sale or purchase of such stock made after the expiry of the said period shall be exempt from payment of any tax under the relevant sales tax law.'

4. Section 5 required every dealer liable to pay sales tax under the relevant sales tax law to furnish to the Collector or other specified authority, a declaration in the prescribed form specifying therein, as at the close of the day immediately preceding the appointed day, various particulars in regard to the stock of scheduled goods held by him including the kind of goods. Now what is appointed day was defined in section 2(1) and it said that 'appointed day' with reference to any goods means the date, whether before or after the commencement of the Act, which the State Government may, by notification in the Official Gazette, appoint in respect of the goods for the purposes of the Act. The State Government appointed 13th December, 1957, as the date in respect of all varieties of cloth manufactured in mills or on power-looms (excluding pure silk cloth) being goods specified in Entry 1 of Schedule I and that was, therefore, the appointed day in respect of those goods. Soon after the Sales Tax Exemption Act was passed by the State Legislature, the final step in the implementation of the proposal of the Central Government to levy additional duties of excise on certain goods in replacement of sales taxes levies by the Union and the States on those goods, was taken by the Parliament by passing the Additional Duties of Excise Act imposing additional duties of excise on those goods. That Act came into force on 24th December, 1957. The object of that Act was, as we have already pointed out, to quote from the Bill which preceded that Act 'to impose additional duties of excise in replacement of the sales taxes levied by the Union and the States on sugar, tobacco and mill-made textiles and to distribute the net proceeds of these taxes, except the proceeds attributable to Union territories, to the States' and section 3, sub-section (1), of that Act imposed certain additional duties of excise on various goods including cotton fabrics in the following terms :

'3. Levy and collection of additional duties. - (1) There shall be levied and collected in respect of the following goods, namely, sugar, tobacco, cotton fabrics, rayon or artificial silk fabrics and woollen fabrics produced or manufactured in India and on all such goods lying in stock within the precincts of any factory, warehouse or other premises where the said goods were manufactured, stored or produced, or in any premises appurtenant thereto, duties of excise at the rate or rates specified in the First Schedule to this Act.'

5. The expression 'manufacture' was not defined in the Additional Duties of Excise Act but in the Central Excises and Salt Act, 1944, which is the principal Act dealing with imposition of duties of excise, that expression was defined to include 'any process incidental or ancillary to the completion of a manufactured product'. The process of bleaching, dyeing and printing cloth was, therefore, included within the connotation of the expression 'manufacture' both for the purpose of the Central Excises and Salt Act, 1944, and the Additional Duties of Excise Act and duties of excise, additional as well as original, were chargeable on that process.

6. Turning back to the provisions of the Sales Tax Exemption Act, we must now examine the true meaning and legal effect of those provisions but before we do so, it would be desirable first to consider the facts of the case. The assessee held a stock of grey or unfinished cloth of the value of Rs. 2,13,676 on 13th December, 1957, being the appointed day, and it was common ground between the parties that this stock of grey or unfinished cloth did not become liable to the payment of additional duty of excise under the Additional Duties of Excise Act or under any other Central law made after 1st November, 1957. After the appointed day, the assessee subjected this stock of grey or unfinished cloth to the process of bleaching, dyeing and printing and produced finished cloth out of it and it was this finished cloth which was sold by the assessee. Now finished cloth sold by the assessee was certainly a variety of cloth manufactured in mills or on power-looms and was, therefore, within the category of scheduled goods and the sales of finished cloth effected by the assessee were after 13th December, 1957, i.e., after the appointed day. These sales would, therefore, be exempt from sales tax under sub-section (1) of section 4 unless they are covered by sub-section (2) of section 4. This position was, it may be pointed out, not disputed on behalf of the revenue and the revenue conceded that unless the sales could be brought within sub-section (2) of section 4, no sales tax would be chargeable on these sales. The controversy between the parties, therefore, centred round the question whether the terms of sub-section (2) of section 4 were satisfied in so far as these sales were concerned. That raised a question of construction of sub-section (2) of section 4.

7. Now if we look at both sub-sections (1) and (2) of section 4, the scheme embodies in these sections appears to be fairly clear. Sub-section (1) of section 4 exempted from sales tax, sales or purchases of scheduled goods effected on and after the appointed day but by reason of sub-section (2) of section 4, that exemption did not extend to sales or purchases of scheduled goods held by a registered dealer on the appointed day and remaining unsold on the day immediately preceding the appointed day, provided such goods did not become liable to payment of additional duty of excise under any Central law made after 1st November, 1957. Of course the exemption was withdrawn only to the extent to which any sales or purchases of such goods might be effected by a registered dealer upto 30th June, 1958, but that time limit is not material to the determination of the question before us. It is clear from these provisions and that is also amply supported by the discussion in the foregoing paragraph that the object of the Legislature broadly was to grant exemption from sales tax in those cases where additional duties of excise were payable, the latter being in replacement of the former and with that object in view the Legislature enacted a general provision that sales or purchases of scheduled goods effected on and after the appointed day should be exempt from sales tax because ordinarily those goods being manufactured after the coming into force of the Additional Duties of Excise Act would bear additional duties of excise but where those goods were in stock with a registered dealer on the appointed day having remained unsold with him and were sold subsequent to the appointed day, the Legislature provided that they should not be exempt from sales tax because being manufactured before the date when the Additional Duties of Excise Act came into force, they would not ordinarily be liable to payment of additional duties of excise. There might however be cases where such goods, though manufactured prior to the coming into force of the Additional Duties of Excise Act, might be liable to payment of additional duties of excise and the Legislature, therefore, made it clear that the exemption from sales tax should stand withdrawn only in those cases where those goods did not become liable to the payment of additional duties of excise. If for any reason, those goods became liable to payment of additional duties of excise, then even if those goods were in stock with a registered dealer on the appointed day having remained unsold with him and were sold subsequent to the appointed day, the sales would still be within the general exemption from sales tax. The broad principle thus given effect to by the Legislature was that additional duties of excise being in substitution of sales tax, there should be exemption from sales tax where additional duties of excise were payable. If this principle underlying the provisions enacted in sub-sections (1) and (2) of section 4 is borne in mind, there is no difficulty at all in arriving at the true interpretation of sub-section (2) of section 4. Turning back to sub-section (2) of section 4 it is clear that the sales and purchases which are taken out from the scope and ambit of the exemption contained in sub-section (1) are sales and purchases of scheduled goods held by a registered dealer on the appointed day and remaining unsold with him on the day immediately preceding the appointed day provided of course they have not become liable to payment of additional duties of excise. If scheduled goods in stock with a registered dealer on the appointed day had been sold prior to the appointed day, the sales would have borne sales tax. Then merely because they remained unsold and were sold on or after the appointed day, there is no reason why they should be exempt from sales tax when there is no other change in the situation such as imposition of any additional duties of excise. Sub-section (2) of section 4 thus refers to sales and purchases of those very scheduled goods which are in stock with a registered dealer on the appointed day and which he could have sold but which remained unsold with him on the day immediately preceding the appointed day. If such schedule goods in stock with a registered dealer on the appointed day are not sold on or after the appointed day but are converted into different commercial articles by a process of manufacture and such different commercial articles are sold, sub-section (2) of section 4 cannot apply. In such a case it cannot be said that the scheduled goods which were in stock with a registered dealer on the appointed day are sold; what are sold would be different goods constituting a different commercial commodity and such sales would be outside the scope and ambit of sub-section (2) of section 4. This would appear to be the position on a plain grammatical construction of sub-section (2) of section 4 but we may point out that this construction has the added merit of being in conformity with the object and purpose of the enactment which we have discussed above. It is evident that if some process of manufacture is performed on scheduled goods in stock with a registered dealer on the appointed day and as a result they are converted into different goods, additional duties of excise would be chargeable on that process of manufacture and when those different goods are sold, they would have borne additional duties of excise and it is, therefore, natural, consistently with the object and policy of the enactment, that being subjected to payment of additional duties of excise, their sales should be exempt from sales tax provided of course they can still be said to be scheduled goods. Any other view would result in imposition of both additional duties of exercise and sales tax on scheduled goods and that would defeat the object and purpose of the enactment.

8. The argument of the learned Advocate-General appearing on behalf of the revenue was that on a true construction of sub-section (2) of section 4 it was not necessary that the stock of scheduled goods held by a registered dealer on the appointed day must retain its identity as that particular kind of goods and that it was sufficient if it continued to remain schedule goods though of a different kind. 'Scheduled goods' were defined to mean goods specified in Schedule I and Entry 1 of Schedule I referred to all varieties of cloth manufactured in mills or on power-looms, excluding pure silk cloth. Any variety of cloth was, therefore, included in the expression 'scheduled goods' and consequently so long as the cloth sold by a registered dealer on or after the appointed day was cloth held by him on the appointed day and remaining unsold on the day immediately preceding the appointed day, sub-section (2) of section 4 was attracted, irrespective of the fact whether the cloth sold was of the same variety as the cloth held on the appointed day or of a different variety. It did not, therefore, make any difference, argued the learned Advocate-General, to the applicability of sub-section (2) of section 4 that the cloth held by a registered dealer on the appointed day was bleached, dyed and printed or any other process was performed on it and it was then sold. This argument is in our opinion not well-founded and must be rejected. The description of scheduled goods given in Entry 1 of Schedule I is a generic description to denote goods in respect of which section 4 has made provision and whatever be the variety of cloth, excluding of course pure silk cloth, it would be included in 'scheduled goods' and would be governed by section 4. The stock of goods held by a registered dealer on the appointed day may include diverse varieties of cloth. The goods may consist of grey cloth, finished cloth, sarees, handkerchiefs etc. All these being different varieties of cloth would be scheduled good and would be governed by section 4 and when this stock of scheduled goods is sold by the registered dealer on or after the appointed day, the sales would attract sales tax under sub-section (2) of section 4. But when this stock of schedule goods is converted into a stock of different scheduled goods and a sale is thereafter effected of the stock of those different scheduled goods, sub-section (2) of section 4 cannot have any application.

9. So much on principle. Turning now to the authorities, the first decision to which we mist refer is the decision of the Supreme Court in Kailash Nath v. State of U.P. ([1957] 8 S.T.C. 358), on which strong reliance was placed by the learned Advocate-General on behalf of the revenue. The question arose in that case in regard to a notification issued by the Uttar Pradesh Government under the provisions of the U.P. Sales Tax Act, 1948. The notification provided that with effect from 1st December, 1949, the provisions of section 3 of the Act shall not apply to sales of cotton cloth or yarn manufactured in Uttar Pradesh, made on or after 1st December, 1949, with a view to export such cloth or yarn outside the territories of India on condition that such cloth or yarn was actually exported and proof of such actual export was furnished. The petitioners who owned a textile mill sold certain quantities of cotton cloth manufactured by them to their constituents who thereafter printed such cloth with hand-made apparatus and exported it overseas as hand-printed cloth. The question arose whether the petitioners were entitled to exemption under the notification. One of the arguments advanced on behalf of the revenue to defeat the claim of the petitioners to exemption was that the goods which were exported by the constituents were different from the goods sold by the petitioners to the constituents and it could not, therefore, be said that the cloth or yarn sold by the petitioners was actually exported. This argument was negatived by the Supreme Court and the Supreme Court held that the words 'such cloth or yarn' meant cloth or yarn manufactured in Uttar Pradesh and sold and that it had nothing to do with the transformation by printing and designs on the cloth. The cloth exported was the same as the cloth sold with this variation or difference that the colour had changed by printing and processing. This decision, therefore, turned on the words used in the notification and since what was required by the notification was that the cloth which was manufactured by the petitioners in Uttar Pradesh and sold to their constituents should be actually exported by them, the terms of the notification were satisfied so long as the cloth actually exported by the constituents was the same as the cloth manufactured by the petitioners in Uttar Pradesh and sold to the constituents. This decision does not lay down that even after processing, grey cloth remains the same kind of goods. Once processing takes place and grey cloth is bleached, dyed and printed, the finished cloth cannot be said to be the same commercial commodity as the grey cloth. As a result of being subjected to the process of bleaching, dyeing and printing, the grey cloth is turned into a different commercial commodity, namely, finished cloth and when finished cloth is sold, it would not be correct to say that the sale is of the same commercial commodity as grey cloth.

10. Mr. C. C. Gandhi, learned Advocate appearing on behalf of the assessee, cited before us a decision of the Nagpur High Court in State of Madhya Pradesh v. Wasudeo ([1955] 6 S.T.C. 30), where the question was whether a person who cuts trees into logs or rafters and sells them as such can be said to be a dealer who manufactures or produces goods within the meaning of section 2(1)(a) of the C.P. and Berar Sales Tax Act, 1947. Bhutt, J., held that logs or rafters into which the trees were shaped by the accused had a definite commercial value and they were goods manufactured or produced by the accused within the meaning of the section. This decision has no direct relevance on the point before us, but it does go to show that in order that the process performed on an article may be a process of manufacture resulting in the production of a new commercial commodity, it is not necessary that the basis or essential properties of the original commodity should be changed or should undergo a transformation. To the same effect we find the decision in G. R. Kulkarni v. The State ([1957] 8 S.T.C. 294). There the question was whether the breaking of boulders into metal was 'manufacture' within the meaning of section 2(i)(a) of the Madhya Pradesh Sales Tax Act, 1947. Hidayatullah, C.J., delivering the judgment of the court observed that the essence of manufacture is the changing of one object into another for the purposes of making it marketable and since in the breaking of boulders into metal, there was some process, manual though it be, for the purpose of shaping the stones into another marketable commodity, there was a manufacturing process performed by the assessee within the meaning of section 2(i)(a) of the Act. A Division Bench of the Madhya Pradesh High Court in Hiralal Jitmal v. Commissioner of Sales Tax ([1957] 8 S.T.C. 325), also took the same view and observed that 'to manufacture' means, to bring into being a commercial article for sale in the business in which the dealer is engaged, that is, an article which by itself has a commercial value and which can be the subject-matter of a sale for a price in the course of the business of selling or supplying in which he is engaged. Dixit, J., quoted with approval the following observations of Das, J., in North Bengal Stores Ltd. v. Board of Revenue, Bengal ([1946] 1 S.T.C. 157) :

'The essence of manufacturing, I apprehended, is that something is produced or brought into existence which is different from that out of which it is made, in the sense that the thing produced is by itself commercial commodity which is capable as such of being sold or supplied. It does not mean that the materials with which the thing is manufactured must necessarily lose their identity or become transformed in their basic or essential properties.'

11. It is, therefore, clear that when the process of bleaching, dyeing and printing is performed on grey cloth, what is produced is a new commercial commodity even though the basic or essential properties are not in any way transformed and finished cloth remains as much cloth as grey cloth. In such a case finished cloth is manufactured or produced out of grey cloth and finished cloth cannot be said to be the same goods as grey cloth. This view of ours finds support in rule 6 of the Bombay Sales Tax (Exemptions, Set-off and Composition) Rules, 1954, made by the Government of Bombay in exercise of its powers under section 45 of the Bombay Sales Tax Act, 1953, where bleached, dyed or printed cloth is regarded as a different kind of goods produced out of grey cloth by subjecting it to the process of bleaching, dyeing or printing.

12. Before we leave this question, we must refer to another decision of the Supreme Court, namely, that in Anwarkhan Mehboob Co. v. State of Bombay ([1960] 11 S.T.C. 698). This decision was strongly relied on by Mr. C. C. Gandhi on behalf of the assessee but we do not think it has any direct relevance to the question before us. That was a case where a question arose whether there is consumption of raw tobacco when bidi pattis are prepared out of it. It was conceded by counsel appearing on behalf of the assessee that raw tobacco and bidi pattis are distinct and different commercial articles and the only argument which was advanced was that when raw tobacco is converted into bidi pattis there is no consumption of raw tobacco within the meaning of the Explanation to Article 286 of the Constitution. That argument was negatived by the Supreme Court which held that whenever a commodity is so dealt with as to change it into another commercial commodity, there is consumption of the first commodity within the meaning of the Explanation to Article 286. The Supreme Court, therefore, took the view that when raw tobacco is converted into bidi pattis there is consumption of raw tobacco. We are here not concerned with the question whether there can be said to be any consumption of grey cloth when finished cloth is produced out of it and this decision has, therefore, no direct bearing on the question before us, but it certainly shows this much, namely, that a new commodity may be produced out of an existing commodity by performing a process though the basic and essential properties of that commodity may remain unchanged.

13. We are, therefore, of the view that when the stock of grey or unfinished cloth held by the assessee on the appointed day was converted into finished cloth by bleaching, dyeing and printing and the finished cloth so produced by the assessee was sold on and after the appointed day, there was no sale of the stock of scheduled goods held by the assessee on the appointed day and remaining unsold on the day immediately preceding the appointed day within the meaning of sub-section (2) of section 4 and the sales of finished cloth effected by the assessee were not covered by sub-section (2) of section 4. Our answers to the questions referred to us will, therefore, be in the affirmative as regards question No. 1 and in the negative as regards question No. 2. The Commissioner will pay the costs of the reference to the assessee.

14. Reference answered accordingly.


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