2003 (8) TMI 489 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Classification of yeast for taxation purposes under the Kerala General Sales Tax Act, 1963.
2. Whether yeast is a chemical or a living organism.
3. Applicability of the common parlance theory and functional test.
4. Relevance of the decision in State of Gujarat v. Bhagwati General Agency (Import) [1991] 83 STC 347 (Guj).

Detailed Analysis:

Issue 1: Classification of yeast for taxation purposes under the Kerala General Sales Tax Act, 1963.

The primary dispute is whether yeast should be classified as a chemical or an unclassified item for taxation under the Kerala General Sales Tax Act, 1963. The State, as the revision petitioner, contends that yeast should be classified as a chemical, while the respondents argue that it is a living organism and thus an unclassified item.

Issue 2: Whether yeast is a chemical or a living organism.

The court examined various definitions and descriptions of yeast from scientific literature, dictionaries, and encyclopedias. It was established that yeast is described as a "microscopic single-celled fungus" and a "unicellular fungus that reproduces vegetatively by budding or fission." The court noted that yeast is a living organism, a fungus, and not a lifeless substance. The court emphasized that merely because yeast is used in a chemical process (fermentation) does not make it a chemical substance. The Central Food Technological Research Institute, Mysore, also confirmed that yeast is a living organism and not a chemical.

Issue 3: Applicability of the common parlance theory and functional test.

The court addressed the State's argument that yeast should be classified as a chemical by applying the common parlance theory and functional test. The court held that such an approach is warranted only if there is ambiguity in an entry. Since entry 29 is meant for chemicals and yeast is a living organism, no further explanation is required. The court referred to the Supreme Court's decision in Indo International Industries v. Commissioner of Sales Tax, Uttar Pradesh [1981] 47 STC 359, which emphasized that terms in a taxing statute should be understood in their common parlance or commercial sense.

Issue 4: Relevance of the decision in State of Gujarat v. Bhagwati General Agency (Import) [1991] 83 STC 347 (Guj).

The court distinguished the decision in State of Gujarat v. Bhagwati General Agency (Import), where the Gujarat High Court held that yeast powder manufactured by a chemical process involving molasses and ammonia is a chemical. The court noted that the decision did not address whether yeast is a living organism. The Kerala High Court emphasized that yeast is not chemically manufactured but is a living organism that multiplies by budding or fission. Therefore, the decision in the Gujarat case does not apply to the present case.

Conclusion:

The court concluded that yeast cannot be classified as a chemical under entry 29 (previously entry 42) of the Kerala General Sales Tax Act, 1963. It also cannot be classified under entry 56, which pertains to food items. The court held that yeast is a living organism and not a chemical, and thus should be treated as an unclassified item for taxation purposes. The tax revision cases were dismissed, and all questions were answered in favor of the assessee.