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TMI Blog1970 (12) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... r as the facts are concerned, we shall, in this case, narrate the facts only relating to the opponent-assessee M/s. K.B. Mehta Company. 4.. The opponent is a partnership firm and is admittedly doing business as a building contractor. It is registered under the Act. For the purpose of its business, the opponent-firm purchases building materials like sand, bricks etc. but so far as this reference is concerned, we are not called upon to consider the purchases made by the opponent-assessee of such building materials. It is, however, found from the record of the case that on 9th November, 1964, the opponent-assessee purchased three trucks from M/s. Rashmi Transport Co., Ahmedabad, for the amount of Rs. 1,00,000. It transpires from the evidence that M/s. Rashmi Transport Co., Ahmedabad, are also registered dealers under the Act. The assessment proceedings, out of which this reference arises, are for the period from 1st April, 1964, to 31st March, 1965. During the course of this assessment, the concerned Sales Tax Officer proposed to levy a purchase tax under section 13 of the Act on the amount of Rs. 1,00,000, for which the above-referred three trucks were purchased by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is liable to pay purchase tax under section 13 of the Act, it is first necessary to find whether the assessee was a "dealer" as defined in section 2(11) of the Act. The Tribunal, therefore, proceeded to consider the definition of the word "dealer" as given in the Act and found that the dealer is one who carries on the business of buying or selling goods. So far as the works contracts are concerned, the Tribunal proceeded to consider whether the purchases, which are made by the person in fulfilment of the works contracts, would amount to carrying on business of buying goods. On this question, the Tribunal was of the opinion that in order that a commodity may be said to have been bought in the course of business, it is necessary that such commodity must be sold or used with a profit-motive by converting it into another salable commodity or using such commodity as an ingredient or in aid of manufacturing process, which would result in production of another salable commodity. In the opinion of the Tribunal, therefore, it was essential that the integrated activity of buying and disposal should result in production of a salable commodity in order to hold that the purchases m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se as well as 8 other cases, referred to above, has preferred different references. So far as this reference is concerned, the following two questions are referred at the instance of the department by the Tribunal for the opinion of this court: "(1) Whether on the facts and in the circumstances of the case the opponent-firm who is a building contractor undertaking indivisible works contracts for construction of buildings is a dealer within the meaning of section 2(11) of the Bombay Sales Tax Act, 1959, and (2) Whether on the facts and in the circumstances of the case the purchases of trucks made by the opponent-firm are liable to purchase tax under section 13 of the Bombay Sales Tax Act, 1959?" We find that so far as the first question is concerned, it should be reframed with a view to bring out the real controversy between the parties. It is accordingly reframed as under: "(i) Whether on the facts and in the circumstances of the case the opponent-firm who is a building contractor undertaking indivisible works contracts for construction of buildings is a dealer within the meaning of section 2(11) of the Bombay Sales Tax Act, 1959, with reference to the purchases made by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This is, in substance, a brief summary of the contentions raised on behalf of the department in order to show that the assessee, who purchases his goods for the completion of a works contract, is a "dealer" within the meaning of section 2(11) and is, therefore, liable to pay purchase tax contemplated by section 13 of the Act. 14.. As against this, the contention which is raised on behalf of the different assessees including the assessee of this reference is that in order to bring a person within the definition of the word "dealer", it is necessary for the department to show that he is doing business in the particular commodity on which purchase tax is sought to be levied. According to the learned Advocates of the assessees, what happens in a works contract is that the person keeping the contract intends to execute that contract and not to deal in the business of buying and selling a particular commodity, which is utilised in carrying out that contract. The argument was that the definition of the word "dealer" contemplates business qua goods and, therefore, if the business is found to be the business of keeping works contracts, it cannot be contended successfully that the said bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is purchase, there shall be levied, subject to the provisions of sub-section (3) of section 7- (1) in the case of goods specified in Schedule B, C or D, a purchase tax on the turnover of such purchases at the rate set out against them in the respective Schedule, and (2) in the case of goods specified in Schedule E, a purchase tax on the turnover of such purchases at a rate equivalent to the rate of sales tax set out against them in Schedule E." A brief analysis of the provisions contained in this section reveals that purchase tax becomes payable only if the following requirements are satisfied: (a) The person concerned must be a dealer (as defined in the Act), (b) he must be liable to pay tax under section 3, (c) the purchases made by him must be from one who is not a registered dealer, and (d) the goods purchased should not have been resold within the period stipulated by the section. It is only in cases, where all these four conditions are satisfied that it can be said that a liability to pay purchase tax under this section attaches to the person concerned. It is found that section 13, in the form quoted above, was effective on and from 1st May, 1964, but even before that d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the other relevant provisions of the Act with a view to properly appreciate the controversy between the parties. We, therefore, presently propose to make a brief reference to the other relevant provisions of the Act. 20.. Reference to the preamble as well as the long title of the Act shows that the Act seeks to levy a tax on "sale or purchase" of certain goods in the State. The point to be noted is that the tax is not sought to be levied on "sale and purchase" but on "sale or purchase". The disjunctive word "or" which separates the word "sale" from the word "purchase" is important in showing that the tax contemplated is either on sale or on purchase of certain goods, as contemplated by the Act. After having said this about the preamble as well as the long title of the Act, we proceed to refer to certain statutory definitions, which are relevant for understanding the different terms, which arise to be considered in this reference. Section 2 is the section giving various definitions, wherein clause (13) defines the word "goods" as under: "'goods' means all kinds of movable property not being newspapers or actionable claims, or stocks, shares or securities and includes all m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. These sections also provide for deduction from turnover before the tax liability attaches. Broadly speaking these deductions are of three categories, namely: (1) turnover of resales of goods on the purchase on which the dealer is liable to pay purchase tax under section 13 or 14, (2) turnover of resales of goods purchased by a dealer on or after the appointed day from a registered dealer and (3) turnover of sales or resales of goods, which do not fall under the above two categories and which are made to an authorised dealer, or a commission agent or a recognised dealer, on a certificate as provided by section 12. Each of the sections 7 to 10 makes a reference to different Schedules, which are Schedules 'A' to 'E'. These Schedules contain classification of goods for the purpose of levy of tax at specified rates. For the purpose of this and other references, it is not necessary to go into the details as regards these Schedules. It is, however, necessary to note at this stage the relevance and the nature of the deductions from the total turnover as contemplated by sections 7 to 10. A close study of these deductions shows that so far as possible, the Legislature has intended to levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion of this judgment. Sections 13 and 14 are the two sections which create liability to pay "purchase " tax. The foregoing sections, which are referred to above, create liability to pay "sales" tax. Under section 13 if the goods are purchased by a dealer from a registered dealer, then no liability to pay sales tax attaches on such purchases. The reason appears to be that under section 46 of the Act, a registered dealer is enabled to collect from his customers the tax, which he is himself liable to pay to the department. Therefore, section 13 provides that if purchases have been made from a registered dealer, then purchase tax would not be levied. However, if the goods are purchased from a dealer, who is not registered, and are not resold within the period of 12 months, liability to pay purchase tax is attracted. The reason appears to be that a dealer, who is not a registered dealer, is not authorised by any of the provisions of the Act to collect tax from his customers and if purchases are made from such a dealer, the goods would go totally free of tax. Provisions of section 13, therefore, clearly point out the intention of the Legislature to levy the tax, at least at one point, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im within the definition of the word "dealer". What then is meant by the word "business"? The Act does not define this word. But one has not to enter into any legal research for finding out its meaning because, by now, there is a plethora of judicial pronouncements on the meaning of this word. While deciding the case of Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax[1954] 26 I.T.R. 765 (S.C.)., the Supreme Court dealt with the meaning of this word, and S.R. Das, J. (as he then was) defined it as connoting "some real, substantial and systematic or organised course of activity or conduct with a set purpose". This meaning given to the word is obviously very wide and comprehensive. Even this court is found to have exhaustively dealt with the subject in Ambica Mills Ltd. and Another v. The State of Gujarat and Another[1964] 15 S.T.C. 367. After reviewing various authorities this court has summarised the connotation of this expression in the following words: "The word 'business' having a wide connotation, spreading over a vast and an indefinite field of activity, the courts have to apply different tests to different types of sales involving a variety of articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration, it cannot be disputed that keeping of a works contract is a "business" within the meaning of section 2(11) of the Act. The keeping and execution of a works contract is undoubtedly an activity which is real, substantive, systematic and organised, and surely, that activity is undertaken by the person concerned with a set purpose of making gains. It cannot be gainsaid that the whole course of that activity, which begins from entering into the contract and ends till the final execution thereof is motivated by a desire to make profit. It, therefore, follows that the works contract taken as a whole constitutes a "business" activity. 27.. The learned Advocates of the assessees do not dispute the position that a works contract is a "business". But their contention is that if goods are purchased in execution of that contract, these purchases do not amount to a "business" because they are merely incidental to the dominant and all pervading purpose of carrying out the contract. They contended that in such cases the intention of the person, who makes the purchases, is not to deal with the goods, which are purchased but to discharge the legal obligations which are incurred at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be carried out without making purchases of the building materials. The purchase of these materials, therefore, becomes an unavoidable and integral part of the whole business activity in question. In other words, the purchases, which are found to be essential for executing a works contract, form a necessary corollary to the business in question. This position, therefore, completely reveals the nature of the relationship which different purchases made with a view to execute the works contract, bear to the main contract itself. In our opinion, therefore, if the purchases are essential and unavoidable for fulfilling the contractual obligations, then they become an integral part of the contract itself. 30.. If this is so, the question which would arise to be considered is, whether the individual steps, which become an integral part of an activity, and for the absence of which, the said activity would be rendered practically impossible, would possess any character, which is different from the character of the activity itself. In our opinion, the correct answer to this question must necessarily be in the negative. If the "business" is a continuous, systematic and organised activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en looked at the initial intention or the object with which the goods are purchased or sold. In this connection, we may only refer to the following pertinent observations made by the Supreme Court in The State of Gujarat v. Vivekanand Mills [1967] 19 S.T.C. 103 at p. 107 (S.C.).: "Nevertheless, there is to a certain extent consensus of opinion in those decided cases that the word 'business' has to be construed in a commercial sense and that the initial intention or object with which the goods in question are purchased is a relevant factor in deciding whether the sale thereof was a part of the business or a business activity of the assessee and that if the initial intention in purchasing the goods in question was to use the goods in the business of the assessee, such as manufacturing goods or articles, then, unless that factor was offset by circumstances showing that the assessee intended to indulge in a business activity by entering into transactions of sale, the mere fact that the assessee sold the goods so purchased would not render him a dealer." These observations do establish a principle that one of the important factors to be scrutinised at the time of deciding whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contract. 35.. In this connection we should note that in Sales Tax Reference No. 5 of 1969, we have taken a view that when in an execution of a works contract, which is an indivisible contract for supply of labour and materials, some materials are supplied by the contractor to the owner, the said supply does not amount to "sale" as contemplated by the Act. The reason, which has prompted us to take that view was that in such a case, goods are not sold qua goods and property therein passes from the contractor to the owner only incidentally. It is in view of this decision that it is argued that the goods which are purchased in execution of the works contract and which are used up in that execution, are not "sold" but are only "consumed". 36.. In view of this contention, the question which arises to be considered is, what is the effect of the above stated position on the character of the purchases made in execution of a works contract. While considering this point, the first pertinent question which requires to be answered is whether in order to render the purchase of goods in execution of a works contract a "business", it is necessary that these purchases should always be follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trees into sheets and effected sale of those sheets to its customers. It was an admitted position that conversion of latex into sheets was a process essential for the transport and marketing of the produce. The taxing authorities sought to levy tax on the turnover represented by the sale of sheets. The Supreme Court did not approve of this on the ground that the conversion of latex into sheets and the subsequent sale of those sheets did not constitute a "business" activity as the primary intention of the assessee in engaging himself in such activities was not to carry on the "business" of sale or supply of agricultural produce. It is obvious that here also the decision is primarily based on the finding that the sale of sheets was not a part of any "business" activity. 38.. All the above referred cases are cases wherein tax was sought to be levied on the turnover of sales. It is an admitted position that the various Sales Tax Acts, which were previously in force in different States in India, made no specific impost on purchases. It is also an admitted position that so far as this State is concerned, impost on purchases was specifically made by the Sales Tax Act, 1953, with effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impost is sought to be levied. There can be little doubt that the expression "business" in the definition of 'dealer' is used in a a commercial sense. A person who buys large quantities of any category of goods for the purpose of consumption or for any other purpose unconnected with the business in that commodity, cannot be regarded as a businessman within the mischief of rule 5." It should be noted at this stage that according to the Andhra Pradesh General Sales Tax Act, under the provisions of which this decision is given, the definition of the word "dealer" was to a certain extent similar to the definition of that word given in the Act. That definition was as under: "'Dealer' means any person, local authority, company, firm, Hindu undivided family or any association or associations of persons engaged in the business of buying, selling or supplying goods in the Hyderabad State whether for a commission, remuneration or otherwise and includes a State Government which carries on such business and any society, club or association which buys or sells or supplies goods to its members." 40.. In view of this decision of the Andhra Pradesh High Court, the department approached the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxed, and (2) profit-motive must be with regard to the commodities on which the impost is sought to be levied. When the matter went to the Supreme Court, the Supreme Court seems to have rejected both these principles. If the short judgment, which is delivered by the Supreme Court, is again perused, as it is found in the above quoted extract, it will be noticed that the Supreme Court has made four important propositions while repelling the assessees' contention and reversing the judgment of the Andhra Pradesh High Court. These four propositions are: (1) To be a dealer, a person need not follow the activity of buying and selling and supplying the same commodity. (2) A person, who consumes the commodity bought by him in the course of his trade or use in manufacturing another commodity for sale, would be regarded as a dealer. (3) Buying of a commodity must be for sale or use with a view to make profit out of the integrated activity of buying and disposal. (4) Consumption in the business and not sale of the commodity bought does not exclude the respondents-assessees from the definition of dealer qua the tanning bark. These four propositions made by the Supreme Court, in our opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the series of transactions within the expression 'in the course of business', there seems to be no room for doubt that the process of buying had the profit-motive as a necessary ingredient." Proceeding further, they have observed as under: "Under the Madras General Sales Tax Act also, dealer means 'any person who carries on the business of buying, selling, supplying or distributing goods directly or otherwise'. In so far as the definition is concerned, the buying of the goods must be in the course of business, which decisions have interpreted to mean that it should be associated with the profit-motive. It does not appear to be necessary that having bought goods the dealer should sell them as such. It may be that the dealer is engaged in the production of goods in the course of which the goods which he purchased are utilised and converted into other goods or are necessary ingredients in the manufacture of the goods sold. It seems difficult to see why the purchase should be deemed to be devoid of the profit-motive in an integrated transaction of that nature." These observations, in our opinion, contain a complete answer to the contentions raised by the learned Advocates of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales Tax Acts, prevalent in the Andhra Pradesh and Madras included therein even a concept of supplying along with the concept of buying and selling. So far as the actual position is concerned, it is undoubtedly true that unlike the Gujarat Act, the Acts, which were prevalent at the relevant time in the Andhra Pradesh and Madras, contemplated that even a person who does the business of supplying goods would be covered by the definition of the word "dealer". There is, thus, undoubtedly this much difference between the statutory definition given to the word "dealer" in these States. But the question is whether that difference in the definition is in any manner material. Neither of the High Courts has based its decision in any manner on this difference. They have simply interpreted the words "carrying on the business of buying or selling goods" as appearing in these enactments. Exactly the same words are found even in the Act under our consideration. In our opinion, therefore, neither the Supreme Court decision nor the above referred decisions of the Madras High Court can be distinguished in the manner in which the Tribunal has preferred to do. 45.. The above referred decisions give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the business of buying is by the express definition of the term in section 2(d) a 'dealer'. This court held in State of Andhra Pradesh v. H. Abdul Bakshi Bros.[1964] 15 S.T.C. 644 (S.C.)., that it is not predicated of a dealer that he must carry on the business of buying and selling the same goods. A person who buys goods for consumption in the process of manufacture of articles to be sold by him is a dealer within the meaning of the Hyderabad General Sales Tax Act, 1950 (14 of 1950)." It is apparent from these observations that the Supreme Court has again reaffirmed the principle that in order to find whether particular purchases are covered by the expression "business", it is not always necessary that these purchases should be followed by corresponding sales. Of course, while deciding this case, the Supreme Court has also relied upon the provisions of section 7 of the Madhya Pradesh Act but that does not make any difference in view of the fact that the principle established in H. Abdul Bakshi's case[1964] 15 S.T.C. 644 (S.C.). is reaffirmed by this decision even apart from the provisions of section 7 of the Madhya Pradesh Act. 46.. Here, we may also note that there are two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elling the said materials either in the original form or in some form of manufactured goods in which that material has been used. On behalf of the revenue, however, it was contended before the High Court that the correct ratio of the decision given by the Supreme Court in H. Abdul Bakshi's case[1964] 15 S.T.C. 644 (S.C.). was that any activity of buying goods in the business of a dealer will qualify for his being considered a "dealer" within the meaning of the Sales Tax Act, provided the article bought by the person is consumed by him in the course of trade, or the commodity is itself converted into another salable commodity or is used in aid of or as an ingredient in the manufacturing process for producing any commodity which is salable. In other words, what was contended on behalf of the revenue was that it is not essential in order that a buying activity in the course of business should attract the charge under the Sales Tax Act that the article, which is used or consumed in producing some other article is necessarily sold in the market. Thus, the department's contention in that case was exactly the same as in the case before us, namely, that the question whether the ultimate ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harge of purchase tax, irrespective of whether the material or goods so purchased form or do not form any integrated activity connected with the purchase of the goods, such as either transformation of the goods produced or production of some other goods which are marketable. The liability having been created under the Sales Tax Act, in our opinion, it is incumbent that, even if the liability for payment of purchase tax is created under the Act in respect of any goods purchased, such goods must be a part of the activity of the business, namely, the business of purchase and sale or supply of goods. If the purchase of goods is for an altogether different purpose unconnected with the production of any goods, or if it is not for the purpose of making other goods which are capable of being sold, we do not think the mere purchase of goods will attract a charge under section 13." Then proceeding further the learned judges are found to have made the following observations, which appear to be completely in favour of the stand taken by the learned Advocates of the assessees during the course of hearing before us. They say: "As observed by the Supreme Court, the goods purchased must be eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of and for the purpose of the concerned business and, therefore, the purchase of the consumed goods must be treated as "business". The fact that the said business activity resulted in manufacture of articles, which were salable, was purely incidental. In other words, there is no justification for the belief that salability of the purchased goods either in the same form or in any form, is considered by the Supreme Court in Abdul Bakshi's case[1964] 15 S.T.C. 644 (S.C.). as a sine qua non of a business. 51.. Speaking of the works contract, when the contractor enters into a composite contract for supply of labour and materials, he fixes his rates only after taking into consideration the cost of the materials with the result that the supply rates always reflect the price of the materials supplied. Now even if it is believed that such a supply of materials does not legally amount to "sale" qua those materials, the fact remains that the said supply was purely a part of the whole business and that the contractor concerned gets the consideration for the said supply from the composite contract rates, which are agreed upon. Therefore, the consumption of the purchased materials, though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an unregistered dealer. It should be recalled that tax liability under section 13 is invited only if the purchase in question is made from a dealer, who is not a registered dealer. Now if the assessees' contention about the interpretation of section 2(11) of the Act is accepted, the assessee, who makes purchases from an unregistered dealer, would not have to pay any purchase tax. Since he makes purchases from an unregistered dealer, the said unregistered dealer would be unable to collect any sales tax from him. But the assessee, who would make purchases from a registered dealer, would be liable to the collection of sales tax by the said registered dealer as provided by section 46 of the Act. It is thus evident that in a works contract, it would be more profitable to the contractor to make purchases from an unregistered dealer rather than a registered dealer, if the interpretation put by the learned Advocates of the assessees on section 2(11) of the Act is accepted. In other words, acceptance of this interpretation would result in preference to an unregistered dealer, which the Legislature could not have contemplated. 54.. For these reasons, with due respect to the learned judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xecution of the contract, the Prima facie presumption referred to above, does not arise in their case. (4) The prima facie presumption about the liability to pay purchase tax under section 13 would a rebuttable one and can be rebutted by an assessee by leading evidence to show that, for some reason, the purchase did not amount to business. While doing so, it would always be open to him to show that the purchase of the goods in question did not bear the imprint of business on account of some other factors such as lack of frequency, continuity, profit-motive, regularity, volume of trade etc. if, of course, such factors are found to be relevant looking to the circumstances of the case. In our opinion, these are the four broad principles on which liability for payment of purchase tax in a works contract can be conveniently worked out. 58.. We find that there is no other contention raised by the learned Advocates of the assessees, which remains to be considered. Therefore, before closing this judgment, we would like to sum up what we have stated above. We find that the following principles emerge from the above discussion: (1) In order that a liability to pay purchase tax is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x liability would arise with regard to such an article. (11) The prima facie presumption referred to above, regarding the liability to pay purchase tax under section 13 is a rebuttable one. This then is the summary of the principles, which emerge from the above discussion. 59.. Now speaking of the facts involved in this reference, the only purchases on which the purchase tax is sought to be levied are the purchases of three motor trucks. With regard to these purchases, we have already quoted the findings of the Tribunal as found in para. 34 of its judgment. These findings contain some findings of facts and it is evident from them that the trucks constitute capital assets and that there is nothing in the record of the case to show that they were purchased with the initial intention of making profit. Since the first question is confined only to these purchases, and since no other purchase of articles, such as building materials, are involved in the facts of this case, our answer to question No. (1) is in the negative. In view of this answer, question No. (2) does not arise to be considered. We, therefore, dispose of this reference accordingly. In view of the answer, which we have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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