1981 (4) TMI 260 - HC - VAT and Sales Tax

Summary

Issues:
1. Interpretation of the term "business" under section 2(bb) of the M.P. General Sales Tax Act, 1958.
2. Whether the purchase of building materials for construction of a factory before the commencement of business constitutes a transaction in the course of business.

Analysis:

The High Court of Madhya Pradesh considered references made under section 44(1) of the M.P. General Sales Tax Act, 1958, regarding the imposition of purchase tax on building materials purchased by M/s. Synthetics Ltd., Ujjain, for the construction of a factory. The crucial question was whether the purchases were made "in the course of business." The Court examined the definition of "business" under section 2(bb) of the Act, which includes any trade, commerce, or manufacture, and transactions incidental to such activities. The Revenue contended that the purchase of building materials was connected to the main business and cited a previous case to support this argument. However, the Court emphasized that for levy of purchase tax, the purchase must be made in the course of business and be directly related to the business activities.

The Court noted that the assessee had not commenced its manufacturing business during the assessment periods in question. Therefore, the purchases of building materials for factory construction could not be considered as purchases made in the course of business. The Court rejected the argument that any transaction connected to the main business was liable for purchase tax, highlighting that the building construction was not directly linked to the manufacturing of synthetic yarn. The Court distinguished this case from previous Supreme Court decisions emphasizing that profit-making was not a prerequisite for defining an activity as business, but direct nexus with the business activity was necessary for levy of purchase tax.

Considering the facts and circumstances, the Court concluded that the purchases of building materials by M/s. Synthetics Ltd., Ujjain, before commencing its manufacturing business were not made in the course of business. Therefore, the Tribunal was justified in setting aside the purchase tax imposed on these transactions. The Court answered the reference in the affirmative, ruling in favor of the assessee. No costs were awarded in the matter.

In summary, the judgment focused on the interpretation of the term "business" under the Sales Tax Act and clarified that purchases made before the commencement of business activities were not liable for purchase tax. The decision highlighted the necessity of a direct connection between the purchases and the business activities for the imposition of such taxes.