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K.C.P. Limited Vs. the State of Madras - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtChennai High Court
Decided On
Case NumberTax Case No. 197 of 1963 (Revision No. 126)
Judge
Reported in[1965]16STC156(Mad)
AppellantK.C.P. Limited
RespondentThe State of Madras
Appellant AdvocateS. Swaminathan, ;K. Ramagopal and ;Kalyanasundaram, Advs.
Respondent AdvocateT. Selvaraj, Adv. for ;Government Pleader
DispositionPetition allowed
Cases Referred(Sri Vivekanand Mills Ltd. v. Slate of Bombay
Excerpt:
- - as the assessee got a good price he sold the ship as a whole, for a consideration of about rs. after adverting to the scope of the definition clauses, turnover',sale' and 'dealer',the bench of the bombay high court pointed out that the essential test to find out whether the particular sale is in the course of the business of a dealer is to determine whether it had reasonable connection with the nature of the business carried on by the dealer and that the fact that a particular commodity was not sold at any prior point of time in the course of the business activities of the assessee or that the test of frequency and volume was not satisfied were relevant circumstances for a proper determination of the issue. that test is not satisfied in the instant case; but learned counsel.....ramamurti, j.1. the k.c.p. ltd., is a company carrying on business at 38, mount road, with a variety of' business activities, their main business being the manufacture and sale of machinery and parts of machinery and accessories. for their manufacturing operations the company is maintaining a foundry and in 1952 the company purchased two arc furnaces for a sum of rs. 2,13,512-81. the arc furnaces were purchased by the company for being erected in its factory to facilitate its business of manufacture of machinery and parts thereof. in the account books and the balance sheets of the company the two arc furnaces were classified under the heading 'workshop equipment'. the arc furnaces were however found to be wholly unsuitable for the purpose for which they were purchased and they were.....
Judgment:

Ramamurti, J.

1. The K.C.P. Ltd., is a company carrying on business at 38, Mount Road, with a variety of' business activities, their main business being the manufacture and sale of machinery and parts of machinery and accessories. For their manufacturing operations the company is maintaining a foundry and in 1952 the company purchased two arc furnaces for a sum of Rs. 2,13,512-81. The arc furnaces were purchased by the company for being erected in its factory to facilitate its business of manufacture of machinery and parts thereof. In the account books and the balance sheets of the company the two arc furnaces were classified under the heading 'workshop equipment'. The arc furnaces were however found to be wholly unsuitable for the purpose for which they were purchased and they were therefore sold in 1958 to a purchaser in Calcutta for a sum of Rs. 4,20,000. In the assessment for the year 1958-59 the company contended that it was not liable to pay sales tax on this turnover of Rs. 4,20,000 on the ground that the two arc furnaces were not sold in the course of the business of the company but that the sale represented an isolated sale of the fixed capital asset of the company, as the same was found to be unsuitable for being installed in their factory. The assessing authorities and the Tribunal rejected this claim of the assessee; hence this revision.

2. For a person to be 'a dealer' under the Act he should carry on the business of buying and selling goods whether for cash or for deferred payment, and the entire controversy has centred round this aspect, i.e., that buying and selling is qualified by the words 'carries on the business'. The question therefore arises as to when a person can be said to carry on the business of buying or selling, in which event only he will be liable to pay sales tax on the turnover of his dealings.

3. On behalf of the assessee it was contended that the arc furnaces were purchased for the purpose of being installed in the factory to be used as a capital asset, and not as a stock-in-trade, that at the time when they were purchased, the assessee had no idea of selling the same, that the purchase was not actuated by any kind of profit motive, that the business which they carried on was an entirely different business, namely, production of machinery and parts, and the sale thereof, and that the sale of the arc furnaces when they were found to be unserviceable was not made in the course of their normal business activity, and that this isolated sale has no reasonable connection with the nature of the business carried on by the assessee. On behalf of the State it was contended that the sale of the arc furnaces even though did not satisfy the test of continuity or frequency could still be regarded as a sale in the course of business as the assessee was carrying on the business of selling machinery and parts, after manufacturing the same. In substance the argument of the State is when the assessee carries on the business of selling machinery of various kinds and patterns, the sale of arc furnaces should also be regarded as a sale of machinery in the normal course of its business activity.

4. Counsel on both sides drew our attention to several decisions which have laid down some useful tests for determining when a purchase or a sale should be held to have taken place in the course of carrying on of a business. An examination of the decisions cited shows that though different tests governing different sets of circumstances have been laid down, the decision in each case turned upon its own peculiar facts and that it is neither possible nor feasible to lay clown any uniform test or condition governing all cases. Everyone of the tests, such as, degree of frequency, volume, continuity and regularity of transactions, the nature of the goods sold and purchased, the main intention or the purpose with which the dealer purchased the goods in question, the absence or presence of a profit motive, and the circumstances under which the goods were sold, are undoubtedly relevant circumstances, but the crucial question to determine is whether the sales in question were effected by the dealer in the course of or as part of his business activity or whether they are sales independent of and outside the dealer's normal business activity. An examination of some of the decisions will be useful as laying down the principles and tests for deciding the question.

5. In Gannon Dunkerley and Co. v. State of Madras [1954] 5 S.T.C. 216, the assessees who carried on the business as engineers and contractors supplied food-grains for the benefit of the workmen and recovered the cost of the food-grains by debiting the value against the wages of the workmen, and one of the questions that arose for decision was whether the assessees were liable to pay sales tax on the value of the food-grains which they had supplied to the workmen on the ground that the assessees were carrying on the business of buying and selling food-grains. The claim of the department was negatived by the Bench of this Court. It was observed therein that it was implicit in the definition of a 'dealer' that the sale should be in the course of carrying on of a business, and that the word 'business' was not used in the Act in a general sense but should be understood in a restricted and commercial sense, i.e., that the activity must be with a view to earn profit. The matter was put thus at page 242:--

If we omit the expression 'who carries on the business of in the definition of dealer, it would only mean that a dealer is a person who merely buys or sells goods. The object of the Act is not to impose tax upon such a person. The words 'buying and selling' are qualified by the expression 'carries on the business of. The context, therefore, requires that the word must be understood in a restricted and commercial sense that the activity was with a view to earn profit.

6. In Deputy Commissioner of Commercial Taxes, Coimbatore Division v. Sri Lakshmi Saraswabhi Motor Service, Gudiyattam [1954] 5 S.T.C. 128, a transport company which carried on the business of providing transport sold the buses when they became unserviceable or useless as old buses or scraps. It was held that the transport company was not liable to pay sales tax on the turnover of the sale of such second-hand buses as the company cannot be held to carry on the business of buying or selling buses, and that the isolated transactions would not make the company a dealer in buses within the meaning of the Act. The principle that emerges from this decision is that if the assessee carries on a particular business activity not involving the business activity of buying and selling, a sale by the assessee of any of the assets of its business would not make him a dealer in regard to those sales.

7. In State of Bombay v. Ahmedabad Education Society [1956] 7 S.T.C. 497, the Ahmedabad Education Society entered into a contract with the contractor for construction of buildings for colleges and quarters for staff and hostels for students. With a view to reduce the cost, the Society manufactured bricks and supplied the bricks manufactured to the contractor. The Society also obtained the requisite permits from the Government to import steel for their construction purposes. The Society had surplus bricks and imported steel both of which were sold by the Society. The question arose whether the Society was liable to pay sales tax in respect of the turnover of the aforesaid sales as a 'dealer' within the meaning of the Bombay Sales Tax Act. It was held that the Society was not a dealer within the definition, as the Society had no intention of selling the bricks and the steel, when they were manufactured and procured, and that the Society was not carrying on the business of selling or supplying these goods. This decision emphasizes the significance of the use of the words 'carries on the business of' in the definition clause, to signify that the person must indulge in not merely the activity of selling but the activity must be one of carrying on the business of selling. The vital distinction between an activity which is a business activity and an activity which is not a business activity was pointed out in this decision. The matter was put thus at page 502:

When the steel was ordered, nothing was further from the mind of the Society than any idea of selling it to any one whatsoever. Therefore, in our opinion, even though it might be said that the bricks and steel were sold or supplied by the Society, inasmuch as they did not carry on the business of selling or supplying these goods they do not come within the ambit of the definition of 'dealer' contained in Section 2(c). In our opinion, on the facts of this case it is clear that the Society never carried on the business of selling or supplying any goods.

8. The next decision to which reference can be made is Steelage Industries Ltd. v. State of Bombay [1957] 8 S.T.C. 376. In that case the assessee who was carrying on the business of manufacture and sale of steel furniture sold a motor car, which was purchased for the use of the managing director, after its use for more than three years. It was held that the assessee was not liable to pay sales tax in respect of the sale proceeds of the resale of the car. Learned Counsel for the petitioner-assessee in the instant case placed considerable reliance upon this decision. Here again the Bench of the Bombay High Court adverted to the scope of the definition clause of a dealer. The Bombay High Court held that even though the sale was a sale of an item forming part of the assets, the sale of the motor car was not a part of the business activity of the assessee. It was held that in order to regard a transaction, a part of the business activity, the test of volume and the degree of frequency of similar transactions must be fulfilled, and that a casual sale of a single item would not make the sale a part of the business activity of the assessee, the casual sale having no connection with the business activity of the assessee. Even though the facts may be different the ratio of this decision undoubtedly supports the contention of the assessee in the instant case.

9. Learned Counsel for the petitioner next drew our attention to the Bench decision of this Court in Nnagaraja v. Stale of Madras [1959] 10 S.T.C. 605. In that case the assessee sold to certain factories sugar-cane grown on lands owned by the assessee, on lands held on lease by the assessee, and on lands the produce of which was sold benami. It was held that the mere fact that in respect of these transactions the assessee obtained some monetary advantage was an irrelevant consideration. It was pointed out that what is taxable is the turnover of sales by a dealer and not every sale as such.

10. Learned Counsel for the petitioner next drew our attention to the decision in State of M.P. v. Bengal Nagpur Cotton Mills Ltd. [1961] 12 S.T.C. 333. In that case the assessee who was carrying on the business of manufacturing textiles, constructed certain buildings through contractors and the assessee supplied steel and cement to the contractors and debited the price of the materials to the contractors' account. It was held that the assessee was not liable to sales tax on the price of the materials so supplied to the contractors, as the assessee was not a dealer carrying on the business of selling or supplying steel and cement. In this decision it was observed that it was not sufficient that the sale is by a dealer carrying on the business of selling some commodity, and that the business of the dealer must be the selling or supplying the particular commodity sought to be taxed. It was observed that the mere fact that the activity is continuous and repeated does not make it a business activity as understood in the commercial sense, and that the words 'carries on the business of selling or supplying goods' in the definition of a dealer must be construed in its commercial sense in which the profit motive was implicit. This decision supports the contention of the assessee in the instant case as it emphasizes that the selling or buying must be connected with the business activity of the dealer coupled with a profit motive.

11. Reference can next be made to the decision in Ebrahim & Co. v. State of Bombay [1962] 13 S.T.C. 877 on which reliance was placed by counsel on both sides. In that case the assessee was carrying on the business of selling separated parts of ship machinery, and in the course of the business the assessee purchased a ship with a view to either use it as a ship for trading or breaking it and selling the separated parts. As the assessee got a good price he sold the ship as a whole, for a consideration of about Rs. 4 lakhs. The question arose whether the sale price of the ship was liable to be included in the turnover of the assessee. It was held that the activity of the assessee 'selling the ship' had a very close connection with and akin to his normal business and was in the course of his business activity, and he was therefore liable to pay sales tax on that turnover. After adverting to the scope of the definition clauses, 'turnover', 'sale' and 'dealer', the Bench of the Bombay High Court pointed out that the essential test to find out whether the particular sale is in the course of the business of a dealer is to determine whether it had reasonable connection with the nature of the business carried on by the dealer and that the fact that a particular commodity was not sold at any prior point of time in the course of the business activities of the assessee or that the test of frequency and volume was not satisfied were relevant circumstances for a proper determination of the issue. After an examination of the relevant case law the matter was put thus at page 888:

The ratio that emerges from the consideration of all these cases is to ascertain in each case whether the sale in question was a business activity carried on by the assessee; in other words, whether the sale has any reasonable connection with the normal course of business of the assessee, and whether the intention of the assessee was to effect that sale in the course of his business.

12. On facts, the learned Judges held that the sale of the ship as a whole, had a very close connection with and was akin to the normal course of the business of the company, namely breaking up of the ship and selling separate parts. It must be noticed that the ultimate decision turned upon the peculiar facts; the ratio of that decision is that the sale must have reasonable connection with the normal course of business of a dealer. That test is not satisfied in the instant case; there is considerable force in the contention of the learned Counsel for the petitioner, as the sale of arc furnaces has no reasonable or close connection with the normal course of business of the assessee, namely the manufacture and sale of machinery and parts of machinery. Learned counsel for the petitioner next drew our attention to the Bench decision of the Madhya Pradesh High Court in Commissioner of Sales Tax v. Ram Dulare Balkishan & Bors. [1963] 14 S.T.C. 202, which dealt with a transport company selling its unserviceable cars, trucks, and tyres and other used motor accessories. The Bench decision of the Madras High Court in Deputy Commissioner of Commercial Taxes, Coimbatore v. Sri Lakshmi Saraswathi Motor Service [1954] 5 S.T.C. 128 referred to earlier, was followed and it was held that the assessee's sales of unserviceable vehicles and motor accessories were not sales by a dealer in the course of his business of selling or supplying those goods. In this case the learned Judges did not accept the contention that frequency, regularity and volume of sales effected by the assessee would be sufficient to make him a dealer within the meaning of the Act. The learned Judges were further of the opinion that an activity though continuous, serious and large cannot assume the characteristics of a business unless it is an activity coming within the definition of 'dealer', or an activity carried on as a business with a view to earn profit. The ratio of this decision is that the test of frequency, regularity and volume may be offset by the total absence of any profit motive, so as to take the case out of the definition of a dealer. Learned Counsel contends that the same principle should apply to the instant case. But learned Counsel appearing for the State however urges that the test of frequency, regularity and volume of sales effected by the assessee is the predominant test and that whatever may be the main business of the assessee, if the sales that are effected are either the bye-products or the second-hand materials or the assets of the business, or are a continuous course of activity involving frequent and regular sales, those sales themselves would amount to carrying on of a 'business' so as to attract the definition of a 'dealer'. It may be that in a particular case if the number and volume of the sales effected are so great the definition of a dealer would be easily satisfied. As in the instant case the test of frequency, regularity and volume is not satisfied, we think it unncessary to express our final opinion as to what circumstances would effect the inference flowing from regularity, frequency and volume.

13. We may next refer to the Bench decision of the Allahabad High Court in Mining & Chemical Industries v. Commissioner of Sales Tax [1963] 14 S.T.C. 391 on which learned Counsel for the petitioner placed considerable reliance. In that case a company which was carrying on the business of manufacturing and selling chemicals sold the machinery as the company closed its business on account of loss and debts. It was held that the company was not liable to pay sales tax on the sale price of the machinery. The learned Judges held that the definition of a dealer must be related to the specific commodity in which the business was done by the assessee, and that as the assessee was never engaged in the business of selling that machinery the turnover was not liable to sales tax. The principle that emerges from this decision is that a person cannot be regarded as a dealer in relation to certain goods unless it was his normal course of business to buy and sell such goods. The argument that the machinery was connected with the assessee's business being part of the assets of the business and therefore the sale proceeds thereof would be liable to sales tax, was not accepted. It is true that the sale of the machinery in that case was effected as a result of the winding up of the business. But that does not affect the abovesaid principle laid down in the decision, which supports the contention of the assessee in the instant case.

14. Learned Counsel appearing for the State drew our attention to decisions of this Court in Saclak Thamby & Co. v. State of Madras [1963] 14 S.T.C. 753, Fiaz Ahmed & Co. v. State of Madras [1964] 15 S.T.C. 201 and the recent decision of the Supreme Court in Stale of Andhra Pradesh v. Abdul Bakshi & Bros. [1964] 15 S.T.C. 644 dealing with tanners and dealers in hides and skins. In Sadak Thamby & Co. v. State of Madras [1963] 14 S.T.C. 753, the assessees were dealers in tanned hides and skins and they were sought to be assessed to sales tax on the turnover representing the purchase value of the tanning materials which were purchased and used by the assessees in their business. The assessees' contention was that they were not dealers in tanning materials, that the tanning materials were not purchased by them with a view to carry on business or sell them but that they were purchased solely for the purpose of being used in their business for tanning so as to enable them to sell tanned hides and skins. The reasonings contained in this decision show that the learned Judges accepted the test, that, to satisfy the definition of a dealer, the course of business activity of the assessee should be actuated by a profit-making motive, and that that test was amply satisfied in that case as the tanning materials were purchased by the dealer with a view to employ it in his business and thus earn profit while selling tanned hides and skins. The following observations at page 757 contain the principle of the decision:

It seems to us that none of the above decisions deals with the point that we have to deal with in the present case. The assessees are undoubtedly dealers in hides and skins. They purchase the tanning materials for the purpose of tanning raw hides (which also they purchase) and selling the tanned product. It is impossible to say that the purchase of the tanning materials is wholly devoid of profit-making motive. The use of the tanning materials in the tanning process contributes to the making of profit as a dealer and it should therefore follow that even the business of purchasing these tanning materials involves the profit motive. If the existence of the profit motive in entering into the transaction brings the series of transactions within the expression 'in the course of business', there seems to be no room for doubt that the process of buying had the profit motive as a necessary ingredient.

15. We do not see how this decision supports the State in the instant case. On the other hand, the reference at page 757 to the decisions in State of M.P. v. Bengal Nagpur Cotton Mills Ltd. [1961] 12 S.T.C. 333, and State of Bombay v. Ahmedabad Education Society [1956] 7 S.T.C. 497 shows that this Court was inclined to accept the view that the definition of a dealer is not satisfied merely because a dealer, carrying on business of selling or supplying some commodity, sells some other commodity, even though it happened to be a part of the assets of his business.

16. The decision in Sadak Thamby & Co. v. State of Madras [1963] 14 S.T.C. 753 was referred to with approval in State of Andhra Pradesh v. Abdul Bakshi & Bros. [1964] 15 S.T.C. 644, a recent decision of the Supreme Court dealing with a dealer in hides and skins. In this case the assessee carried on the business of tanning hides and skins and of selling the tanned skins. The question arose whether the purchase value of the tanning materials purchased by the assessee was liable to sales tax. The Andhra Pradesh High Court by its judgment in Abdul Bakshi and Bros. v. State of Andhra Pradesh [1960] 11 S.T.C. 526 took the view that it was not enough if a person carried on some business but that the assessee must do business in the particular type of goods and that mere purchase of some goods for consumption would not bring the assessee within the ambit of Section 2(e) and Rule 5(2) containing the definition of a 'dealer' and the 'purchase turnover'. The Andhra Pradesh High Court also held that the purchase of the particular commodity (in respect of which sales tax was sought to be levied) should be actuated by a profit motive. The Supreme Court in State of Andhra Pradesh v. Abdul Bakshi & Bros. [1964] 15 S.T.C. 644 did not accept this view of the matter and reversed the decision of the Andhra Pradesh High Court. A perusal of the judgment of the Supreme Court shows that to regard an activity as a business, there must be a course of dealings with a profit motive, and that for a person to be a dealer the activity need not be one of buying, selling or supplying the same commodity. The Supreme Court has observed that if the commodity was purchased in the course of business either for sale or for use with a view to make profit within the integrated activity of buying and disposal, the test of the definition of a dealer would be satisfied. The matter was put thus at page 647:

We are unable to agree with this view of the High Court. A person to be a dealer must be engaged in the business of buying or selling or supplying goods. The expression 'business' though extensively used is a word of indefinite import. In taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. But to be a dealer a person need not follow the activity of buying, selling and supplying the same commodity. Here buying for personal consumption, i.e., without a profit motive, will not make a person dealer within the meaning of the Act, but a person who consumes a commodity bought by him in the course of his trade, or use in manufacturing another commodity for sale, would be regarded as a dealer. The Legislature has not made sale of the very article bought by a person a condition for treating him as a dealer: the definition merely requires that the buying of the commodity mentioned in Rule 5(2) must be in the course of business, i.e., must be for sale or use with a view to make profit out of the integrated activity of buying and disposal. The commodity may itself be converted into another salable commodity, or it may be used as an ingredient or in aid of a manufacturing process leading to the production of such salable commodity.

It cannot be said in the present case that tanning bark was bought by the respondents for any purpose unconnected with the business carried on by them, viz., manufacture and sale of the dressed hides and skins. Consumption in the business and not sale of the commodity bought therefore does not exclude the respondents from the definition of dealer qua the tanning bark. This is the view which has, in our judgment, been rightly taken by the Madras High Court in the interpretation of a similar statute in operation in the State of Madras in Sadak Thamby & Co. v. Stale of Madras [1963] 14 S.T.C. 753.

17. Relying upon the abovesaid observations learned Counsel for the State contended that in the instant case the arc furnaces were purchased for use in the business which was carried on by the assessee with a view to manufacture machinery and parts thereof and thus make profit and would therefore be liable to pay sales tax. We see no force in this contention. In the first place the important test of continuity of the course of dealing is not satisfied, so as to make it a business activity. In the case before the Supreme Court there was a continuous course of dealing consisting of purchases of tanning materials. Secondly, the turnover which was liable to sales tax in that case was a purchase turnover and the fact of purchase with a profit motive satisfied the test of a dealer. In the instant case the facts are entirely different.

18. The next decision to be referred to is the decision of this Court in Fiaz Ahmed & Co. v. Stale of Madras [1964] 15 S.T.C. 201. That case dealt with a case of assessees who were mere tanners, whose occupation was to tan hides and skins for certain specified charges. For the purpose of tanning they purchased tanning materials and it was held that they were liable to pay sales tax on the purchase value of the tanning materials. The decision in Sadak Thamby & Co. v. Slate of Madras [1963] 14 S.T.C. 753, referred to earlier, was followed. In that decision it was observed that the purchase of the tanning materials was directly and intimately connected with the carrying on of the tanning business of the assessee, and the fact that the tanning materials were purchased only for consumption in the business and not for sale would not take the assessee from the definition of a dealer. This decision does not help the contention of the State as the definition of a dealer does not require the dealer to carry on business of buying and selling but it is enough if the dealer carries on the business of buying so long as it is in the course of business actuated with a profit motive.

19. Learned Counsel for the department next relied on a recent Bench decision of this Court in Gannon Dunkerley & Co. v. Government of Madras [1964] 15 S.T.C. 40. In that case the assessees carried on the business as building contractors doing construction works and they sold surplus broken bricks, jelly and cement after the completion of their building contract. The question arose as to whether the turnover of the sale of those materials was liable to sales tax. This Court took the view that the necessity for the disposal of the surplus materials was ingrained in the very nature of the business which the assessees carried on and they should therefore be regarded as dealers selling those goods in the course of their business. It was also observed that the profit motive need not exist in each and every part of the business carried on by a dealer, but that the profit motive embracing the business of the dealer as a whole would be sufficient. It is true that in that case the building materials were purchased mainly with a view to consume and use them in the building work of the assessees and not with a view to sell them for profit. Relying upon that aspect of the case learned Counsel for the department contended that the principle of that decision would apply to this case, even though, there was no profit motive at the time when the arc furnaces were purchased. We are unable to agree with this contention as that was only a part of the case. The State cannot rely upon the observations made concerning the profit motive divorced from the real context. It was observed, on the facts of the case, that the necessity for the disposal of the surplus materials was ingrained in the very nature of the business which test is wholly absent in the instant case. A sale of a capital asset like arc furnaces because they were found to be unsuitable for being erected in the foundry, cannot be said to be an activity ingrained in the business which the assessee was carrying on. Further the test of reasonable connection with the normal course of business, which test has been accepted by the learned Judges, is completely absent in the instant case.

20. We may next refer to the Bench decision of the Maharashtra High Court in Commissioner of Sales Tax v. Hindoostan Spinning and Weaving Co. Ltd. [1964] 15 S.T.C. 69 In that case the assessee-company carrying on the business of manufacturing cloth sold some of the old machinery and replaced the same by new machinery. The question arose as to whether the company was a dealer within the meaning of the Bombay Sales Tax Act in regard to the sale of its old machinery and whether it was liable to pay sales tax on the sale proceeds thereof. It was held that even though the sale of the old machinery was one of the items of such several sales effected by the assessee during the previous' years, the sale could not be said to be in the course of the business activity, and that the assessee was not a dealer as regards that sale.

21. On the facts it was found that in 1953-54 the assessee-company had disposed of old machinery of the value Rs. 2,65,709 and odd; in 1954-55 the old machinery sold was worth Rs. 36,960, and in the subsequent years the value of the old machinery sold was Rs. 73,059 and odd and Rs. 3,12,761 and odd. The argument on behalf of the State in that case was, that having regard to the volume and the frequency of the transactions the sales should be held to have been effected in the course of the business activity of the assessee, especially when there was a provision in the memorandum and articles of association empowering the company to resell from time to time its machinery. That case was not a case of a single instance of an isolated sale but a series of transactions extending over several consecutive years. Even so, an examination of the reasonings of the learned Judges shows that they were inclined to follow the decision of the Madhya Pradesh High Court in Commissioner of Sales Tax, Madhya Pradesh v. Ram Dulare Balkishan and Bros. [1963] 14 S.T.C. 202 referred to earlier in' preference to the Full Bench decision of the Kerala High Court in Gosri Dairy, Vytilla v. State of Kerala [1961] 12 S.T.C. 683. In the Kerala case the sale of the dry cattle was a regular annual feature and was carried on continuously from year to year by the assessee, and the sales constituted its systematic and regular activity. The Kerala High Court took the view that the sale of the dry cattle was co-extensive with the business of the manufacturer of dairy products and the frequency and regularity and the volume of the sales themselves would amount to the carrying on of a business so as to satisfy the definition of a dealer. The Madhya Pradesh High Court, on the other hand, took the view that the sale of unserviceable vehicles and motor accessories even though frequent, continuous and large would not attract the definition of a dealer as there was no profit motive. In the case before the Maharashtra High Court, Commissioner of Sales Tax v. Hindoostan Spinning and Weaving Co., Ltd. [1964] 15 S.T.C. 69, the Bench took the view that the sale of the old machinery by the assessee was not done with a view to make profit but only with a view to replace it by a new machinery, the old ones having become unserviceable or useless. In other words, the ratio of this decision is that the total absence of a profit motive was sufficient to offset the effect of the frequency and the regularity and the volume of the sales. In the instant case there was only one isolated sale of the arc furnaces and it is not necessary to determine when the sales of unserviceable articles embarked in the business should be held to be co-extensive with the carrying on of a business, so as to make the assessee, a dealer within the meaning of the Act. It is sufficient to notice that the trend of the later decisions seems to be that frequency, regularity and volume, though relevant factors, and are helpful in determining whether any particular transaction is in the course of business or not, but by themselves they will not be sufficient to hold that the particular transaction is a business transaction. Cases may arise in which it may be difficult to decide to which category, the one or the other, that the sales may belong. But our attention has not been drawn to any single decision in which the view has been taken that a single instance of an isolated sale would amount to carrying on of a business when the business activity of the dealer is of an entirely different description in different commodity.

22. Learned Counsel for the assessee relied upon the Bench decision of this Court in P.K.N. Co. Ltd. v. Commissioner of Income-tax : [1963]47ITR195(Mad) in support of his contention that the mere fact that in the memorandum and articles of association a company has been invested with, power to buy and sell is not sufficient to hold that the company is carrying on business unless as a fact it was found that the company had conducted certain business transactions referred to in the memorandum and articles of association. He also relied upon the statement of the law to the same effect in Commissioner of Sales Tax v. Hindoostan Spinning and Weaving Co., Ltd. [1964] 15 S.T.C. 69 just now referred to.

23. Counsel appearing for the department could not controvert the correctness of this contention. But he urged that because the assessee in the instant case carried on the business of selling machinery and parts thereof the sale of arc furnaces should be regarded as the normal business activity of the company and that no difference should be drawn between the business of selling machinery manufactured by the assessee and the machinery which was purchased by the assessee, though no doubt for being erected in the foundry, but later on found to be unserviceable. We are not inclined to accept this contention.

24. Learned Counsel for the assessee placed considerable reliance upon the Bench decision of the Gujarat High Court in Ambica Mills Ltd. v. State of Gujarat [1964] 15 S.T.C. 367. In that case the assessee who owned two textile mills embarked upon a programme of modernising the machinery and as part of that programme sold old looms, carding engines, and other machinery, and the question arose whether the assessee was liable to pay sales tax in respect of the turnover of those sales. On the facts, it was found that the sales fulfilled the test of volume and degree of frequency and that the assessees had also realised sales tax in respect of 12 out of 16 sales. The Bench of the Gujarat High Court took the view that the test of volume and the degree of frequency should not be regarded as decisive factors, as the sales were not made with any profit motive, but such sales were effected only in the course of the assessees' programme of modernising their machinery. The view was taken that a person cannot be said to be carrying on the business of selling assets of a business when sales of such assets have been made only because the assets have become useless and unserviceable by the usual wear and tear or because of the necessity for substituting modern machinery. The ratio of this decision is that the total absence of a profit motive and the special circumstances in which the sales were effected were sufficient to offset the inference which would flow from frequency, regularity and volume of the transactions in question. The learned Judges were not inclined to accept the view taken in the Full Bench decision of the Kerala High Court and they preferred to follow the decision of the Maharashtra1 and the Madhya Pradesh High Courts referred to earlier. After referring to the decision of the Supreme Court in Venkakaswami Naidu & Co. v. Commissioner of Income-tax : [1959]35ITR594(SC) in which the Supreme Court laid down the tests for determining the factors which would constitute the carrying on of a business the learned Judges put the matter thus at page 376:

It will be seen from these observations that though transactions effected by a person may be indicative of several factors, none of them by itself would be decisive and, therefore, it would be necessary to consider them all from the point of view of their cumulative effect and then ascertain if that gives the transaction a distinctive character. If the goods sold were originally purchased solely and exclusively with the intention to resell at profit and the purchaser had no intention to hold them for himself or using or enjoying them, that would be a relevant factor indicative of trade or business unless such factor is offset by other factors showing to the contrary.. But in spite of such initial intention, there might exist factors in a given case where the Court might come to the conclusion that the transaction of the subsequent sale was in the course of business.

25. The learned Judges referred to with approval an unreported decision of the Bombay High Court in S.T. Ref. No. 36 of 1958 (Sri Vivekanand Mills Ltd. v. Slate of Bombay) decided on 23rd July, 1959. In that case the assessees sold 411 bales of California cotton which was the sale in dispute. The learned Judges held that the facts did not indicate that the assessees were disposing of the cotton as an incident to their normal business, but that the sale in dispute was a casual transaction as the cotton was found unsuitable for manufacturing yarn, and that merely because the person sells goods or commodities which have become unserviceable or unsuitable for his business the sale by him would not make him a dealer in respect of those goods. While holding that the sales of the old machinery cannot be said to constitute business or business activity of the assessee, the learned Judges summed up the position as follows at page 392:

It is, therefore, impossible to over-emphasize the element of frequency in such a case. In fact, if the. entire machinery had been sold in one lot, it could hardly have made any significant difference. What has to be remembered is that the sales were effected because new and modern machinery was substituted for the old and obsolete machinery. The sales, therefore, were realisations of the assets of the mills effected in consequence of their phased programme for installation of modern plant and machinery and were not in pursuance of a design or a scheme for profit-making. In view of these circumstances, neither the volume nor the degree of frequency in the present case would be a decisive test. It cannot be disputed that the machinery that was disposed of was not purchased with any original intention to sell it. It was obviously purchased and installed for its use for producing textile goods. As we have said before, ordinarily one cannot be said to be carrying on business of selling assets and therefore, sales of such assets, when they have become useless or unserviceable either by reason of their having to be substituted by modern machinery or by the usual wear and tear, cannot be regarded as business or business activity.

26. With respect, this is a correct statement of the law and applying this test we have no hesitation in holding that the turnover of the sale of arc furnaces is not liable to sales tax. The fact that the sale price exceeded the cost price of the arc furnaces does not mean either that it is a business activity or that it is actuated by a profit motive. Such difference between the cost price and the sale price may only augment the revenues of the company but it does not alter the legal character of the transaction so as to make it a business activity of a dealer. In order to ascertain the existence or otherwise of a profit motive all the surrounding circumstances and the motive which operated at the time of the sale as well as the original purchase should be taken into account.

27. In the course of the hearing our attention was also drawn to the details of the sales of the machinery and parts thereof sold by the assessee during the years 1958-59. On a perusal of the same we are clearly of the opinion that it is impossible to hold that the sale of the arc furnaces was either ingrained in the business activity of the assessee or would constitute its normal business activity. Judged by any test, test of frequency, volume, regularity and continuity or the existence of profit motive or test of reasonable connection with the normal business activity of the assessee, it is impossible to hold that an isolated sale of a capital asset as in the instant case would amount to a sale in the course of the business which the assessee carries on.

28. For all these reasons we hold that the turnover in question is not liable to sales tax and we allow the revision petition and reverse and set aside the decisions of the Tribunal and the assessing authorities.

29. No costs.


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