2000 (1) TMI 947 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Eligibility for tax exemption based on fixed capital investment.
2. Interpretation of fixed capital investment in the context of tax exemption notifications.
3. Inclusion of pre-operative expenses and interest in fixed capital investment.
4. Application of multiple phases of expansion for tax exemption.

Detailed Analysis:

1. Eligibility for Tax Exemption Based on Fixed Capital Investment:
The dealer, M/s. Kajaria Ceramics Ltd., applied for tax exemption under the U.P. Sales Tax Act, 1948, based on fixed capital investment, including both original and additional investments. The Divisional Level Committee granted partial exemption, which was contested by both the dealer and the Commissioner of Trade Tax.

2. Interpretation of Fixed Capital Investment in the Context of Tax Exemption Notifications:
The court analyzed various notifications and provisions under Section 4-A of the U.P. Sales Tax Act, 1948. The key notifications were dated December 26, 1985, July 27, 1991, and March 31, 1995. The court noted that:
- The 1985 notification provided unlimited exemption based on total turnover.
- The 1991 notification linked exemption to fixed capital investment without distinguishing between original and additional investments.
- The 1995 notification introduced a distinction between fixed capital investment for new units and additional fixed capital investment for units undergoing expansion, modernization, or diversification.

The court concluded that the 1991 notification did not make a distinction between original and additional fixed capital investment and thus, the dealer was entitled to exemption on the total fixed capital investment, including both original and additional investments.

3. Inclusion of Pre-Operative Expenses and Interest in Fixed Capital Investment:
The dealer claimed inclusion of pre-operative expenses and interest on loans in the fixed capital investment. The Tribunal allowed this inclusion based on accounting standards and judicial precedents, including the Supreme Court decision in Challapalli Sugars Ltd. v. Commissioner of Income-tax, A.P., which allowed capitalization of interest on borrowings for the purchase of fixed assets before production starts. The court upheld this inclusion, noting that such expenses are necessary for the establishment or running of the factory.

4. Application of Multiple Phases of Expansion for Tax Exemption:
The dealer undertook expansion in three phases. The Divisional Level Committee initially denied exemption for the first two phases due to the lack of separate applications. However, the Tribunal found that the expansion was part of an integrated plan and allowed exemption for the entire fixed capital investment. The court agreed, noting that the expansion was carried out under one integrated scheme, and the applications for exemption were filed within the permissible period.

Conclusion:
- Trade Tax Revision No. 700 of 1997: The court allowed the dealer's revision, holding that the dealer was entitled to include the original fixed capital investment in the exemption under the 1991 notification.
- Trade Tax Revision No. 53(L) of 1997: The court dismissed the department's revision, upholding the Tribunal's decision to include pre-operative expenses and interest in the fixed capital investment and allowing exemption for the entire fixed capital investment.
- The Divisional Level Committee was directed to issue a revised eligibility certificate to the dealer in accordance with the court's findings.

Final Judgment: The dealer's petition was allowed, and the department's petition was dismissed.