1976 (2) TMI 47 - AT - VAT and Sales Tax

Issues Involved:

1. Levy of purchase tax under Section 13 of the Bombay Sales Tax Act, 1959.
2. Definition and applicability of the term "dealer" under Section 2(11) of the Act.
3. Reconsideration of the Tribunal's decision in Tata Mills Ltd. vs. The State of Maharashtra.
4. Interpretation of Sections 13 and 25 of the Act and Rule 41-A of the Bombay Sales Tax Rules, 1959.
5. Consideration of profit motive in determining dealer status.
6. Impact of capital assets on business activity and tax liability.

Issue-wise Detailed Analysis:

1. Levy of Purchase Tax under Section 13 of the Bombay Sales Tax Act, 1959:

The primary issue was whether purchase tax under Section 13 is attracted in respect of the purchase of machinery used in the manufacture of goods. The appellants argued that the machinery, being a capital asset, was not subject to purchase tax as it was not consumed or used up in the manufacturing process. The Tribunal had to determine if the appellants were "dealers" under Section 2(11) of the Act concerning the purchase transaction, which would fix the liability for payment of tax under Section 13.

2. Definition and Applicability of the Term "Dealer" under Section 2(11) of the Act:

The appellants contended that they were not dealers concerning the purchase transaction as the machinery was a capital asset and not bought with a profit motive. The Tribunal examined whether the appellants' activity of purchasing machinery constituted a business activity with a profit motive, as defined in Section 2(11). The Tribunal referred to various judgments to determine if the purchase of capital assets like machinery could be considered a business activity.

3. Reconsideration of the Tribunal's Decision in Tata Mills Ltd. vs. The State of Maharashtra:

The Third Bench of the Tribunal had directed the matter to a Larger Bench, questioning whether the decision in Tata Mills Ltd. required reconsideration. The Tribunal had to decide if the principles laid down in Tata Mills Ltd., which relied on the Bombay High Court's decision in Famous Cine Laboratory and Studio Ltd., were applicable to the present case. The Tribunal concluded that the decision of Tata Mills Ltd. did not require reconsideration as it involved Section 13 post-amendment, while the current case dealt with Section 13 prior to its amendment.

4. Interpretation of Sections 13 and 25 of the Act and Rule 41-A of the Bombay Sales Tax Rules, 1959:

The Tribunal considered the identical phraseology used in Sections 13 and 25 of the Act and Rule 41-A of the Rules. The Tribunal noted that the policy followed by the Department for the last 15 years included machinery in the recognition certificate and granted set-off under Rule 41-A for machinery purchases. The Tribunal also referred to various entries in the Act and notifications that indicated machinery was used in the manufacture of goods, supporting the interpretation that purchase tax under Section 13 should not be levied on machinery purchased for manufacturing goods.

5. Consideration of Profit Motive in Determining Dealer Status:

The Tribunal emphasized that profit motive is a crucial factor in determining whether an activity constitutes a business. The Tribunal referred to judgments that highlighted the necessity of a profit motive for an activity to be considered a business. The Tribunal concluded that the appellants did not purchase the machinery with a profit motive, as the machinery was a capital asset used in manufacturing goods and not resold.

6. Impact of Capital Assets on Business Activity and Tax Liability:

The Tribunal examined whether the purchase of capital assets like machinery could be considered a business activity subject to purchase tax. The Tribunal referred to judgments that distinguished between fixed and circulating capital assets and concluded that the machinery, being a capital asset, was not purchased with a profit motive. The Tribunal held that the purchase of machinery for use in manufacturing goods did not attract purchase tax under Section 13, as it was not consumed or used up in the manufacturing process.

Conclusion:

The Tribunal concluded that purchase tax under Section 13 is not attracted in respect of the purchase of machinery used in the manufacture of goods. The Tribunal also held that the decision in Tata Mills Ltd. did not require reconsideration as it involved Section 13 post-amendment. The Tribunal directed the matter to the Third Bench for disposal of the appeal in light of its findings.

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