1983 (9) TMI 261 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Assessment of the petitioner-firms under the U.P. Sales Tax Act for the year 1973-74.
2. Whether the collar lining sold by the petitioners was a variety of cotton fabric exempt from tax.
3. Legality of reassessment proceedings initiated u/s 21 of the U.P. Sales Tax Act.

Summary:

Issue 1: Assessment of the petitioner-firms under the U.P. Sales Tax Act for the year 1973-74
The petitioners, M/s. Palco Lining Company and M/s. K.P. Traders, are partnership firms engaged in purchasing and selling collar lining, which they claim is cotton fabric and thus exempt from tax. The Sales Tax Officer initially accepted their account books and found the purchases and sales duly vouched. He concluded that the collar lining sold was cotton fabric, rendering the turnover exempt from tax through an order dated 30th June, 1976.

Issue 2: Whether the collar lining sold by the petitioners was a variety of cotton fabric exempt from tax
The Sales Tax Officer later issued a notice u/s 21 of the Act, suggesting that some turnover had escaped assessment. The basis for this notice was a statement by partners of the petitioners admitting that the sold items were collars made out of cloth but no tax had been paid on these sales. The petitioners argued that what was sold was not "collar" but two pieces of cotton cloth affixed together, known as collar lining, which tailors used to make collars. They contended that the assessing authority had already examined and concluded that the article sold was cotton fabric and thus exempt from tax. The court noted that reassessment u/s 21 is not permissible merely due to a change of opinion by the assessing authority.

Issue 3: Legality of reassessment proceedings initiated u/s 21 of the U.P. Sales Tax Act
The court examined whether the collar lining would attract tax liability as a separate commercial commodity. It referred to the definition of fabric and concluded that collar lining, being made out of cotton yarn, does not lose its identity as cotton fabric merely by being cut and affixed. The court found support from the Supreme Court's decision in Maharaja Book Depot v. State of Gujarat, which held that exercise books made out of paper did not lose their identity as paper. Similarly, collar lining does not cease to be cotton fabric and is entitled to exemption from tax. The court also referenced decisions from other High Courts supporting this view.

The court rejected the department's argument that the matter should be left for determination by the departmental authorities, citing the Supreme Court's stance in Delhi Cloth & General Mills Co. Ltd. v. State of Rajasthan. It concluded that reassessment proceedings based on a mere change of opinion are not permissible. The court allowed the petitions, quashed the notices issued u/s 21, and awarded costs to the petitioners.