1981 (3) TMI 213 - SC - VAT and Sales Tax

Whether the respondents - assessee are liable to pay purchase tax under section 6(i) of the Karnataka Sales Tax Act, 1957 on the turnover consisting of the price paid by them for purchasing paddy for the purpose of converting it into rice for sale, in their respective rice mills? Held that - Appeals are allowed, the judgments of the High Court against which these appeals are filed are set aside and the turnover in question in each case is held to be taxable under section 6(i) of the Act.

Summary

Issues:
Whether the assessees are liable to pay purchase tax under section 6(i) of the Karnataka Sales Tax Act, 1957 on the turnover consisting of the price paid for purchasing paddy for converting it into rice for sale in their rice mills.

Detailed Analysis:
The case involved a dispute regarding the liability of the assessees, who owned rice mills in Karnataka, to pay purchase tax on the turnover of purchasing paddy for converting it into rice for sale. The assessing authority levied purchase tax on the assessees, which was upheld by the appellate authority but overturned by the Karnataka Sales Tax Appellate Tribunal, except in one case. The Tribunal ruled that the conversion of paddy into rice did not constitute a manufacturing process, exempting the turnover from tax under section 6(i) of the Act.

The State Government contended that as paddy, a taxable commodity, was converted into rice for sale, the assessees were liable to tax under section 6(i) for consuming paddy in manufacturing a different commodity. However, the assessees argued that paddy and rice were the same, thus not constituting manufacturing "other goods" as per the Act.

The Supreme Court referred to previous judgments establishing that paddy and rice are distinct commodities, emphasizing that milling paddy involves a manufacturing process. The Court rejected the argument that the assessees did not consume paddy when producing rice, explaining that consumption in an economic sense includes the transformation of raw materials into semi-finished goods, adding value at each stage of production.

The Court cited precedents to support its interpretation, stating that since paddy sales were untaxed under section 5 and the assessees consumed paddy to produce rice for sale, section 6(i) applied. The Court dismissed concerns of double taxation, clarifying that paddy and rice, being different commodities, could be taxed at separate points.

In conclusion, the Court allowed the appeals, setting aside the High Court judgments and holding the turnovers taxable under section 6(i) of the Act, with no costs awarded.

This judgment aligns with previous decisions on the distinction between paddy and rice, emphasizing the economic concept of consumption in manufacturing processes and upholding the application of section 6(i) to the assessees' activities.