1959 (12) TMI 17 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Vires of Punjab Act No. 7 of 1958
2. Taxation on Declared Goods (cotton, iron scrap, oil-seeds)
3. Constitutionality and Compliance with Central Sales Tax Act, 1956
4. Definition and Implications of 'Manufacture' vs. 'Processing'

Detailed Analysis:

1. Vires of Punjab Act No. 7 of 1958:
The petitioners challenged the vires of Punjab Act No. 7 of 1958, which amended the East Punjab General Sales Tax Act, 1948. The amendment imposed new or additional liabilities in the form of sales or purchase tax on the petitioners for the goods they deal in, such as raw cotton, non-ferrous metals, oil-seeds, and iron scrap. The main contention was that the amendment was unconstitutional as it contravened the provisions of the Central Sales Tax Act, 1956, particularly Section 15, which imposes restrictions on the taxation of declared goods.

2. Taxation on Declared Goods:
The amendment deleted item 29 (cotton, ginned or unginned) from the list of exempted goods and increased the tax rate. It also altered the definition of "turnover" to include both sales and purchases, resulting in double taxation. The petitioners argued that the amendment violated Section 15 of the Central Sales Tax Act, which stipulates that tax on declared goods (such as cotton, iron scrap, and oil-seeds) should not exceed 2% and should not be levied at more than one stage.

3. Constitutionality and Compliance with Central Sales Tax Act, 1956:
The court noted that the deletion of item 29 from the original Act was not unconstitutional. However, the main argument was whether the Punjab Act No. 7 of 1958 conformed to the restrictions of Section 15 of the Central Sales Tax Act. The court concluded that the Punjab Act was invalid to the extent that it imposed additional tax on declared goods like cotton, as it violated the conditions set out in Section 15. The petitioners dealing in cotton were entitled to the benefits of Section 15, and the additional tax imposed by the Punjab Act was declared invalid.

4. Definition and Implications of 'Manufacture' vs. 'Processing':
A significant point of contention was whether the process of ginning cotton constituted 'manufacture' or 'processing'. The court concluded that ginning does not alter the character of raw cotton; both ginned and unginned cotton are considered the same commodity. Thus, ginning is not a manufacturing process but merely a processing step. This interpretation was crucial in determining the tax liability, as the court ruled that ginned and unginned cotton should be treated as the same commodity for tax purposes.

Conclusion:
The court held that the Punjab State could not impose a tax on sales and purchases of declared goods like cotton in contravention of the Central Sales Tax Act. The petitioners dealing in cotton were entitled to a tax rate not exceeding 2% on sales within the state and no tax on sales outside the state. However, the petitioners dealing in oil-seeds and non-ferrous metals were not granted relief as their activities involved manufacturing processes that changed the character of the original commodity, making them liable for the tax. The court ordered the respondents to refrain from imposing or authorizing the imposition of tax on sales and purchases of all kinds of cotton (indigenous or imported), whether ginned or unginned, baled, pressed, or otherwise, but not including cotton waste.

Ordered accordingly.