1999 (4) TMI 597 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Eligibility for tax exemption under entry 175.
2. Definition and computation of "capital investment."
3. Inclusion of unpaid liabilities in fixed capital investment.
4. Interpretation of legislative instruments and policy resolutions.
5. Discrimination in treatment of borrowed capital and deferred payment liabilities.

Detailed Analysis:

1. Eligibility for Tax Exemption under Entry 175:
The petitioner is a private limited company engaged in manufacturing lime, cement paint, and lime material, registered under the Gujarat Sales Tax Act, 1969, and the Central Sales Tax Act, 1956. The State Government issued a notification under section 49(2) of the State Act, inserting entry 175, which grants tax exemption on purchases of raw materials, processing materials, consumable stores, or packing materials by a specified manufacturer. The petitioner was granted an eligibility certificate determining the amount of tax exemption up to Rs. 21,00,565. The petitioner falls under item 8 of the Table in Part III of annexure V, allowing exemption up to 70% of the fixed capital investment or Rs. 2.5 crores, whichever is less, within 12 years from the commencement of commercial production.

2. Definition and Computation of "Capital Investment":
The core issue is whether the computation of fixed capital investment should exclude the amount outstanding and unpaid to the supplier of fixed capital assets, such as land, building construction, and plant and machinery. The petitioner argued that borrowed capital included in fixed capital investment should not be excluded merely because the supplier deferred the payment. The revenue contended that the term "capital investment" should include only those assets "acquired and paid for" during the scheme's operative period.

3. Inclusion of Unpaid Liabilities in Fixed Capital Investment:
The court found that the term "capital investment" is not a term of art and can vary based on context and purpose. The notification granting exemption did not define "capital investment," but the Government Resolution dated May 6, 1986, which laid down the policy for granting incentive packages, defined "eligible fixed capital investment" to include various assets acquired and paid for, excluding working capital and certain other expenses. The court concluded that the term "paid" should be interpreted to mean that the acquirer has incurred a legal obligation to pay, whether immediately or in the future.

4. Interpretation of Legislative Instruments and Policy Resolutions:
The court emphasized that the notification under section 49(2) granting exemption is legislative in character and should be construed as subordinate legislation. The Government Resolution, while not part of the notification, provides context and can aid in interpreting unclear terms. The court noted that the notification and the resolution are intrinsically linked, with the notification implementing the policy outlined in the resolution.

5. Discrimination in Treatment of Borrowed Capital and Deferred Payment Liabilities:
The court highlighted that interpreting "paid" to mean actual payment would create an unworkable scheme and result in discriminatory treatment. Two assessees in similar situations, one borrowing from the market and the other deferring payment to the supplier, would be treated differently. The court found no rational basis for such discrimination and concluded that the scheme aims to incentivize capital investment, not the source of credit.

Conclusion:
The court allowed the petition, directing the respondents to recompute the eligible fixed capital investment and corresponding tax exemption amount, considering liabilities incurred for acquiring fixed capital assets, whether paid immediately or deferred. The court also directed the respondents to recompute the subsidy amount under the Government Resolution dated May 6, 1986, in line with the observations made. The rule was made absolute with no order as to costs.

Application allowed.