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TMI Blog1976 (2) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... rom Simplex Mills by purchase voucher dt. 27th July, 1964. Though Simplex Mills were registered dealers, the lower authorities had held the impugned purchase as from unregistered dealer on the ground that the impugned sale was a casual sale in the hands of Simplex Mills, Mr. B.K. Sharma, the learned Advocate, who appeared before the Third Bench of this Tribunal, for his part, relied upon the decision of the First Bench of this Tribunal in the case of Tata Mills Ltd. vs. The State of Maharashtra (Second Appeal No. 536 of 1974) decided on 30th June, 1975. The First Bench, in that case, had relied upon the decision of the Bombay High Court in the case of The Famous Cine Laboratory and Studio Ltd. vs. The State of Maharasthra (36 STC page 104) and held that qua the purchase of capital asset, the assessee was not a dealer within the meaning of s. 2(11) of the Act. The order of levy of purchase tax under s.13 of the Act in respect of machinery purchased of textile mill was, therefore, set aside. Mr. Sharma, therefore, submitted before the Third Bench, that his case was on all fours with the case decided by the First Bench and therefore, he was entitled to succeed. Mr. Dandekar the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, directed the papers to be placed before the President for constituting a Larger Bench to decide the following question :— "Whether the purchase-tax under s. 13 is attracted in respect of purchase of machinery and other capital assets which are used in the manufacture of goods for sale and that the decision given in Second Appeal No. 536 of 1974 decide on 30th June, 1974 in the case of Tata Mills Ltd. requires reconsideration." It is patent that the third Bench of the Tribunal can to the above view not only because it was of the opinion that the point at issue in the case of Famous Cine Laboratory Studio Ltd. on which reliance was placed by the First Bench in deciding the case of Tata Mills Ltd. was quite different in as much as there the assessee was hiring out studio to producers and processing films of customers and it was in that context that it was held that qua the machinery purchase which was a capital asset, the assessee was not a dealer but also because (a) the main ingredients of ss. 13 and 25 of the Act, and r. 14-A of the Rules are the same i.e. for purchase of goods for use in the manufacture of goods for sale (b) the policy followed by the Department f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Tata Mills Ltd. the decision in that case required reconsideration. The said order was passed by the Third Bench on 28th Nov., 1975. 3. It is thereafter that the appeal has been referred to us, a Larger Bench, by the Honourable President for giving our decision on the point involved. When the matter came up for hearing before us, Mr. N.C. Mehta, the learned Chartered Accountant, who appeared along with Mr. S.S. Gaitonde, Advocate, and Mr. B.K. Sharma, Advocate, for the appellants and Mr. A.B. Ghanekar, Assistant Commissioner (Legal) who appeared along with Mr. N. B. Dandekar STO (Legal) for the Department, agreed that the question referred to the Larger Bench by the Third Bench requires to be reframed. They also agreed that the controversy arising in the case would be properly resolved if the question for decision is reframed as under :— "Whether purchase tax under s. 13 is attracted in respect of purchase of machinery used in the manufacture of goods ?" They further agreed that this controversy could be and may also be resolved without reference to s. 25 of the Act and r. 41-A of the Rules to which too a reference has been made by the Third Bench in its judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition and disposal of goods and buying and selling alone cannot be considered to determine whether a particular buying and selling operation constitutes a "business". He also submitted that volume, frequency, continuity and regularity of transactions of buying and selling cannot be the decisive tests and the decisive text in a transaction as the present one would be profit motive qua the purchase transaction and since obviously there was no profit motive qua the purchase transaction as such that test remains unsatisfied in the present case. He also emphasised that it is necessary to note in the present case that the machinery purchased is nothing but a capital asset of the appellants and since the same has not been consumed or used up, it is not possible to hold that purchase tax is attracted under s. 13 even though the machinery has not been resold. In making these submission, he referred to the following judgements with regard to fixed, and circulating capital assets :— (1) CIT, Hyderabad Deccan vs. Vazir Sultan Sons (2) Karanepura Development Co. Ltd. vs. CIT, West Bengal (3) Observations of the Mr. Palkhivala in his book 'Income Tax' Sixth Edition, Volume I, at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be an activity with the intention of making profit and since profit motive was present and prevaded through-out, the appellants have to be held to be dealers qua the purchase even though it may be a purchase of a capital asset. He for his part submitted that he had no quarrel with the propositions of law as laid down in the various other judgments referred to by Mr. Mehta but argued that the latest two judgements of the Bombay High Court on which reliance has been placed by Mr. Mehta viz., CST vs. D.V. Save and The Famous Cine Laboratory and Studio Ltd. and since that judgement shows that the Gujarat High Court had not come to the conclusion that the assessee in that case was a dealer in respect of motor trucks and as such was not liable to purchase tax because there was nothing on the record to show that the motor trucks were purchased with the initial intention of making profit and constituted capital assets, he added that it is clear from that judgment that in case there was evidence of profit motive, the decision of the High Court would have been quite different. Hence, since the Bombay High Court has fully agreed with the principle laid down in the above judgment, in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d "dealer" as used in s. 13 is in a description sense and should not be read in a defined sense. The appellants, he added are admittedly dealers under s. 3 of the Act and so whether they are dealers qua the purchase in question need not be considered. According to him and also according to Mr. Dandekar, who too advanced arguments on this aspect s. 13 is enacted for plugging loopholes and leakages and so once a particular assessee is a "dealer" within the meaning of s. 3 of the At purchases made by him which have not borne tax at an earlier stage, would be liable to purchase tax, when they are made for the purpose of the business of the assessee. Mr. Dandekar also illustrated how there will be loss of revenue to Government, by giving 10 instances as found in his chart, filed by him before us. Hence, he argued that s. 13 should be construed strictly so as to ensure that there is no loss of revenue to the Government. He added that in the instant case since it is not disputed that the machinery is not resold and it is also clear that the sale was a casual sale of the vendor, in case no purchase tax is levied there would be loss of revenue to Government and since when a sale event does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill not make a person dealer, without the meaning of the Act, but a person who consumes a commodity bought by him in the course of his trade, or use in manufacturing another commodity for sale, would be regarded as a dealer. It has further held therein that the commodity itself may be converted into another salable commodity. In that case, for the purpose of their business, the respondents had purchased hides and skins and also tanning barks and other materials required in their tennary. The assessee, at the time of assessment, contended that the tanning bark was bought for consumption in the tannery and they were, therefore, not dealers in tenning bark. The STO rejected the contention of the respondents and his order was confirmed in appeals. The High court of Andhra Pradesh in the Petition filed before it, modified the order, passed by the taxing authorities and excluded from the consumption of the taxable turnover, the price paid by the respondents for tanning bark used in the tennary. In the appeal filed before the Supreme Court disagreed with the view taken by the High Court holding the view as already mentioned above. This, is no doubt, not a case directly on the point but is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion to continue the activity of carrying on the transaction must exist. But no test is decisive of the intention to carry on the business and in the light of all the circumstances an inference that a person desires to carry on the business of selling goods may be raised. It is further laid down therein specifically thus :— "Mere sale of a commodity which the assessee required for the purpose of its business and which has been purchased for use in that business will not justify an inference that a business of selling that commodity was intended, unless there are circumstances existing at the time when the commodity was purchased or which have come into existence later which establish such an intention". It is also observed therein that the burden of proving that the Company was carrying on business lay upon the sales tax authorities and if they made no investigation and have come to the conclusion merely because of the frequency and the value of the sales, the inference cannot stand. Applying the tests laid down in the above ruling conversely to the purchase in question it would follow that an inference that the purchase was made with the intention of carrying on business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery for the purpose of manufacture but when profit accrues in that manner it comes to us that the purchase cannot be held to be one made with a profit motive as the profit is not directly connected with the purchase activity but is connected with the final activity of production for which the machinery purchase is not responsible and the machinery cannot, therefore, he held to be used as an ingredient or in aid of the manufacturing process leading to the production of the salable commodity. 12. Then in the case of K.B. Mehta Company, Ahmedabad the Gujarat High Court has considered the provision of s. 2(11)3 and 13 of the Bombay Sales Tax Act, 1959, for the purpose of liability to pay purchase tax. It is held therein that in order that a liability to pay purchase tax is attracted, with regard to the purchases made in the execution of a works contract, the contractor who makes the purchase, must be a "dealer" as defined in Bombay Sales Tax Act, 1959, and must also be liable under s. 3 thereof. It is also held therein that the definition of the word dealer stipulates that the person concerned should be carrying on the business of buying or selling goods and works contracts, is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity is of capital nature and not totally consumed or used up during the course of that activity, no such presumption about the purchase tax liability would arise. For instance, if for the execution of a contract for building construction, the articles like stone crusher, cement mixture or motor trucks are purchased, they would prima facie be capital assets and since such capital assets are not consumed or used up in execution of the contract, the prima facie presumption referred to above, does not arise in their case. (iv) The prima facie presumption about the liability to pay purchase tax under s. 13 would be 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 frequency, continuity, profit making regularity, volume of trade etc. if, of course, such factors are found to be relevant looking to the circumstances of the case. And after applying those principles to the case before it, the High Court found that the three trucks were capital assets, and since there was noth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be clear that merely because capital assets are purchased an assessee cannot be held not to be a "dealer" qua the same but he can not be held to be a dealer qua the same only when the profit motive is not present from the initial stage and in the present case it is not disputed by the appellants that the machinery was purchased for use for manufacturing goods and selling the same by making a profit, it must be held that the appellant are dealers qua the purchase. The said argument of Mr. Ghanekar however fails to appeal to us for two reasons. Firstly because the machinery in question is not consumed or used up in the process of manufacture and that beings so it is not possible with the initial intention of making a profit in respect of the goods manufactured and sold. Secondly because there is absolutely no material in this case which warrants an inference that the machinery in question was purchased with the initial intention of making profits in that so far it remains unsold. Probably what the Gujarat High Court meant in para 5 of its judgment on which much stress was laid by Mr. Ghanekar was for coming to a conclusion that a particular purchase of a capital asset was a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that s. 13 specifically refers to a "dealer" who is liable to pay tax under s. 3 of the Act. Next it is manifest that even in those decisions the dispute was with regard to levy of purchase tax under s. 13 of the Act. Lastly on a perusal of the earliest judgment of the Bombay High Court in D.V. Save's case it will be clear that while agreeing with the broad principles laid down by the Gujarat High Court in its judgment in the case of K.B. Mehta Co. Ahmedabad the Bombay High Court has laid down some of its own propositions may be in an attempt to elaborate the propositions laid down by the Gujarat High Court in the judgment referred to above and those observations as made by the Bombay High court, it is needless to say, are positively binding on us. Those observations also cannot, according to us, he held to be made out of context as was attempted to be argued by Mr. Ghanekar, we are indeed surprised that Mr. Ghanekar made such an attempt and suffice it to say that whatever arguments he had made in that behalf deserve to be rejected straightway without any further comments. As regards the judgment in J.N. Bagga Ors. vs. All India Reporter Ltd. it only lays down the general propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing loopholes and leakage and thus prevent loss of revenue to Government. Hence they maintained that when the sale event does not become taxable then the purchase event can be taxed. Mr. Dandekar as we have already mentioned above, furnished us chart of ten illustrations of possible points of leakages of tax on sales and remedy thereof. It is not up to us to speculate upon the intention of the Legislature and what we have to do is to interpret a provision of the ST Act as it stands, of which act this Tribunal is a creature. And on considering s. 13 along with ss. 2(11) and 3 of the Act, suffice it to say that the arguments advanced before us on behalf of the Department in the above connection fail and accepting them would make any purchase whatsoever connected with the business of an assessee liable to tax. That certainly does not appear to us to be the scheme of the Act. Furthermore, it is to be remembered that even in the cases before the Bombay High Court in which the latest two judgments have been given, the question was of levy of purchase tax and after considering all the relevant provisions the High Court has come to the conclusion that in such a case what is to be decided i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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