2003 (8) TMI 513 - HC - VAT and Sales Tax

Issues Involved:
1. Whether "skimmed milk powder" when sold as milk after adding water is considered "fresh milk" under the Kerala General Sales Tax Act, 1963.
2. Whether the Deputy Commissioner had sufficient material to invoke suo motu proceedings under section 35 of the Act.
3. Whether the turnover of skimmed milk powder should be included in the taxable turnover for the assessment year 1991-92.
4. Whether the exemption granted to "fresh milk" under S.R.O. No. 342 of 1963 applies to skimmed milk powder used to make milk.

Detailed Analysis:

1. Nature of Skimmed Milk Powder:
The primary issue was whether skimmed milk powder, when reconstituted into milk by adding water, qualifies as "fresh milk" exempt from tax under S.R.O. No. 342 of 1963. The court noted that skimmed milk powder is a product of milk and is reconstituted as milk, but it cannot be considered "fresh milk" as defined under the exemption notification. The term "fresh milk" refers to the original milk obtained directly from the farm, not reconstituted milk. The court cited the division bench decision in Ernakulam Regional Co-operative Milk Producers Union v. State of Kerala, which held that "fresh milk" must be the original milk and not a reconstituted product.

2. Suo Motu Proceedings by Deputy Commissioner:
The Deputy Commissioner initiated suo motu proceedings under section 35 of the Act, noting that the assessee had effected inter-State purchases of skimmed milk powder and had not disclosed the transactions in their accounts. The court found that the Deputy Commissioner had sufficient material to invoke suo motu jurisdiction, as the assessee had not produced evidence to show that the skimmed milk powder was used for making milk. The Tribunal's finding that there was no material before the Deputy Commissioner to invoke suo motu jurisdiction was deemed factually incorrect and legally unsustainable.

3. Inclusion of Skimmed Milk Powder in Taxable Turnover:
The court held that the turnover of skimmed milk powder should be included in the taxable turnover for the assessment year 1991-92. The skimmed milk powder purchased by the assessee was used for processing fresh milk for sale, and therefore, it fell under entry 122 of the First Schedule to the Act, which deals with milk products, including milk powder. The sale of skimmed milk powder is liable to tax at the point of first sale by a dealer who is liable to tax under section 5 of the Act at the rate of 8%.

4. Exemption Under S.R.O. No. 342 of 1963:
The assessee contended that since skimmed milk powder is used to make milk, it should be treated as "fresh milk" and thus be exempt from tax. The court rejected this argument, clarifying that the exemption under S.R.O. No. 342 of 1963 applies only to fresh milk and not to milk products like skimmed milk powder. The court distinguished the case from the Andhra Pradesh High Court decision in State of Andhra Pradesh v. Guntur District Milk Producers Co-operative Unit Ltd., which held that skimmed milk powder is dehydrated pasteurised milk and thus exempt. The court found that this decision did not align with the provisions of the Kerala General Sales Tax Act and the specific entries in the First Schedule and S.R.O. No. 342 of 1963.

Conclusion:
The court concluded that the Deputy Commissioner was correct in setting aside the assessment order and including the turnover of skimmed milk powder in the taxable turnover. The order of the Sales Tax Appellate Tribunal was set aside, and the order of the Deputy Commissioner was restored. The petition was allowed.

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