1966 (10) TMI 101 - SC - VAT and Sales Tax

Whether the petitioners can be said to be dealers in cotton within the meaning of the definition of dealer in section 2(6) of the Bombay Sales Tax Act 1953? Whether the sale of 411 bales of Californian cotton effected by them during the assessment year 1953-54 can be included in their total turnover and be charged to sales tax? Held that - Appeal dismissed. There was no intention on the part of the respondents to carry on business of selling cotton and that the High Court was right in its conclusion

Summary

Issues Involved:

1. Whether the petitioners can be considered "dealers" in cotton under section 2(6) of the Bombay Sales Tax Act, 1953.
2. Whether the sale of 411 bales of Californian cotton during the assessment year 1953-54 can be included in the petitioners' total turnover and be charged to sales tax.

Detailed Analysis:

Issue 1: Whether the petitioners can be considered "dealers" in cotton under section 2(6) of the Bombay Sales Tax Act, 1953.

The petitioners are manufacturers of cotton textile goods and purchase cotton as a raw material for their business. During the assessment year 1953-54, they sold 411 bales of Californian cotton, which were part of their raw material inventory, due to surplus. The Sales Tax Officer included these sales in their turnover and charged sales tax. The petitioners contended that their primary business was manufacturing textiles, not dealing in cotton, and that the sales were casual and resulted in a loss. The Tribunal rejected these contentions, noting that the petitioners had sold surplus cotton in other years and that their Memorandum of Association allowed for buying and selling cotton. The Tribunal concluded that selling surplus cotton was a business activity incidental to their manufacturing business.

The High Court, however, considered the initial intention behind purchasing the cotton, which was to use it in manufacturing, and found that the sales were not part of a business activity. The High Court emphasized that the burden of proving that the sales were part of a business activity lay with the taxing authority. The High Court concluded that the petitioners were not dealers in cotton as the sales were incidental to their manufacturing business and not carried out with a profit motive.

Issue 2: Whether the sale of 411 bales of Californian cotton during the assessment year 1953-54 can be included in the petitioners' total turnover and be charged to sales tax.

The petitioners explained that the sale of 411 bales was due to an unexpected early arrival of a consignment, resulting in surplus cotton. They sold the surplus to avoid blocking their finances. The High Court found that the sales were not made with the intention of trading in cotton but were necessitated by business prudence to manage surplus stock. The High Court noted that the petitioners had not deliberately purchased excess cotton with the intention of selling it for profit.

The Supreme Court upheld the High Court's decision, agreeing that the sales were not part of a business activity of selling cotton. The Court noted that the petitioners had a legitimate business reason for selling the surplus cotton and that there was no intention to engage in the business of selling cotton. The Court concluded that the sale of the 411 bales was not liable to be included in the petitioners' turnover for sales tax purposes.

Conclusion:

The Supreme Court dismissed the appeal, holding that the petitioners were not dealers in cotton and that the sale of 411 bales of Californian cotton was not liable to be included in their turnover for sales tax purposes. The Court emphasized the importance of the initial intention behind purchasing the cotton and the absence of a profit motive in the sales. The appeal was dismissed with costs.