2009 (6) TMI 924 - HC - VAT and Sales Tax

Whether in the facts and circumstances of the case the Tribunal is legally correct on holding that the cotton borrowed and returned on loan basis is not a sale as defined under Section 2 (n) of the Tamil Nadu General Sales Tax Act 1959? Whether the order of the Tribunal is right in affirming the deletion of consequential penalty levied uner Section 12 (5) (iii) of the Tamil Nadu General Sales Tax Act 1959? Held that - By virtue of the prescription of cotton as set out in Entry 2 of Second Schedule of the Act the assessee who had borrowed cotton to certain value was only obliged to return the same value in order to fulfil and conclude the said loan transaction. Once the documentary evidence in the form of registers of the assessee as well as that of its sister concerns disclose that the loan transaction was fully discharged by the assessee there was no occasion for the assessing authority to reopen the assessment under the guise that the claim of loan transaction by the assessee was not fully established. Therefore the conclusion of the Tribunal merits acceptance for the simple reason that the loan transaction in the case on hand by any stretch of imagination cannot be construed as a sale transaction in order to impose levy of tax. Questions of law raised in this revision are answered against the petitioner and in favour of the assesse.

Summary

Issues Involved:
1. Whether the cotton borrowed and returned on a loan basis constitutes a sale under Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959.
2. Whether the Tribunal was correct in affirming the deletion of the consequential penalty levied under Section 12(5)(iii) of the Tamil Nadu General Sales Tax Act, 1959.

Issue-wise Detailed Analysis:

1. Whether the cotton borrowed and returned on a loan basis constitutes a sale under Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959:

The primary question was whether the transaction of borrowing and returning cotton could be classified as a sale under Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959. The assessee, a cotton textile mill, borrowed cotton from a sister concern and returned it. The assessing authority initially treated this as a last purchase of cotton, leading to a revised turnover and tax liability. However, the Tribunal overturned this decision.

The Tribunal concluded that the transaction did not involve a sale as defined under Section 2(n) because there was no transfer of property in goods for cash, deferred payment, or other valuable consideration. The Tribunal emphasized that the borrowed cotton was returned, satisfying the lender, and thus no sale occurred.

The court supported the Tribunal's view, noting that the definition of "sale" under Section 2(n) requires a transfer of property in goods, which did not happen in this loan transaction. The court stated, "In a loan transaction, when there is no transfer of property in respect of goods lent, it is very difficult for us to accept that there was transfer of property involved in such a loan transaction."

The court also referred to Entry 2 of the Second Schedule of the Act, which describes cotton inclusively, without differentiating between varieties. The court rejected the Appellate Assistant Commissioner's view that the assessee needed to prove the scarcity or non-availability of cotton and that the same variety was returned.

2. Whether the Tribunal was correct in affirming the deletion of the consequential penalty levied under Section 12(5)(iii) of the Tamil Nadu General Sales Tax Act, 1959:

The second issue was whether the Tribunal correctly affirmed the deletion of the penalty levied under Section 12(5)(iii). The assessing authority had imposed a penalty, which the Tribunal set aside. The court upheld the Tribunal's decision, finding no grounds for interference.

The court noted that the Tribunal had thoroughly examined the borrowal details and concluded that the loan transactions were legitimate and fully discharged by the assessee. The court stated, "Once the documentary evidence in the form of registers of the assessee as well as that of its sister concerns disclose that the loan transaction was fully discharged by the assessee, there was no occasion for the assessing authority to reopen the assessment."

The court also distinguished the present case from the decision of the Full Bench of the Tamil Nadu Taxation Special Tribunal in Sri Akilandeswari Mills Pvt Ltd vs. Commercial Tax Officer, stating that the factual matrix in the present case was different and the loan transaction was adequately proved.

Conclusion:

The court concluded that the loan transaction did not constitute a sale under Section 2(n) and that the Tribunal's decision to set aside the penalty was justified. The court dismissed the revision petition, answering the questions of law in favor of the assessee and against the petitioner. The Tax Case (Revision) was dismissed with no costs.