State of Madras v. M/S. K. C. P. Ltd.

Grover, J. This is an appeal by special leave in which the >Ole question for decision is whether the respondent comp~ny was liable to pay sales tax on an am~unt of Rs. 4,20,000 ben~g I the sale-price of two arc furnaces which had been purchased m

1952 and sold in 1958. · I The respondent company carried on business at 38, Mount

Road, Madras. Its main business being the manufacture and sale of machinery and parts of machinery and accessories. For manufacturing parts of the machinery, the company maintained a foundry and in 1952 it purchased two arc furnaces for a sum of Rs. 2,13,512.81 for the purpose of using the same in its foun-dry. In the account books and the balance sheet of the com-pany these furnaces were shown under the heading "workshop equipment". According to the company the furnaces were found to be unsuitable for the purpose for which they had been pur-chased and therefore they were disposed of in 1958 to a purchas-er in Calcutta for a sum of Rs. 4,20,000. For the assessment year 1958-59 the assessing authorities sought 10 include the amount of Rs. 4,20,000 in the turnover of the company although it was maintained by the cOtjlpany that the sale represented an isolated sale of its fixed capital assets. The appeal before the Sales Tax Appellate Tribunal, Madras, also failed. The view of the tribunal may be stated in its own words :-

"It is not denied that the appellant comes within the scope of the definition of "dealer". It has to be seen whether the sale of the two arc furnaces had a reasonable connection with the normal course of busi-ness of the assessee. The fact that the appellant could not use them or that they are surplus machinery cannot take it out of the ambit of the appellant's business of sales of machinery or part of machinery. The neces-sity to dispose of unwanted machinery is ingrained in the very nature of business of sale of machinery which the assessee was carrying on and it had to effect sales of such surplus materials". · A revision petition was presented to the High Court of Madras under s. 38 of the Madras General Sales Tax Act (Act I of 1959) read withs. 9(3) of the Central Sale Tax Act, 1956 (Act LXXIV •of 1956), hereinafter called the Madras Act and the Central Act respectively. Before die High Court it was argued on behali of the asse;see that the furnaces were purchased for the purpose of being installed in the factory. It was therefore to be used as capital asset and not as a part of the stock-in-trade. At the time of purchase the asseSiice had no idea of selling the furnaces and there was no intention of making any profit. The business which was carried 'On by the assessee was entirely different, namely, production of machinery and parts and the sale of t11c furnaces. when they were found to be unserviceable, was not made in the course of the normal business activity of the asse>see. The posi-tion taken up on behalf of the State was that when the asse1see carried on t11e business of selling machinery of various kinds the ~ale of arc furnaces must be regarded as sale of machinery in the normal course of its business activity. '11te learned Judges of the High Court referred lo a large number of decided cases including the decision of this cOUrt in State of Andhra Pradesh v. Abdul Bakshi & Bros.('} Reliance was finally placed on the observa-tior.s in Ambico Mills Ltd. v. State of Gujarat(') in which it was 0bs~rved inter alia that the machinery which had been disposed of had been obviously purchased and installed for use for produc-tion of te~tile goods. The view taken in that decision was that a person could not be said to be carrying on business of selling assets of that business when sale of such asse(.) had been made only because they had become useless and unserviceable by usual we:ir and tear or because of the necessity for substituting modern machinery. In the present case the learned Madras Judges were of !he opinion that it was impossible to hold that !he sale of the arc furnaces was either ingrained in the business activity of the asscssec or would constitute its normal business aclivity. Accord-ing lo them the mere fact that the sale price exceeded the cost price of the arc furnace was not sufficient to establish that their rnle was a business activity or that it was actuated by the profit motive. It was consequently held that the turnover of the assessee was not liable to sales tax.

Mr. A. K. Sen for the appellant contends that the Jssessee being of a dealer in heavy machinery and accessories thereof the sale arc furnaces could not be said to be wholly different and unconnected with its usual business activity. lie has emphasised the fact that the assessee had admit!edly made a profit of Rs. 2,07,000 from the aforesaid transaction and in addition col· lectecl sales tax from the Calcutta dealer. He has called atten· tion to the finding of the Appellate Assistant Commissioner of Commercial Taxes that the sale in the present case wa, not on;: of used asset and that whatever the intention at the time of the . purchase might be, once the, machinery was found not usab!c. the

MADRAS v. K. c. P. LTD. (Grover, !.) 781 asses.see "has got necessarily to get into a business venture of selling it and in point of fact sold it at good profit". It is further urged that the arc furnaces became a part of stock or machinery for sale because the assessee was dealing in manufacture and sale of heavy machinery and it must be deemed to have put the fur-naces into its stock in due course of business activity. Mr. Sen has next pointed out that the respondent fell squarely within the definition of the word "dealer" as defined bys. 2(b) of the Cen-tral .Act. In suPpOrt of his submission Mr. Sen sought to rely on a decision of this Court in The State of Andhra Pradesh v. Abdul Bakshi & Bros. ( 1) In that case the respondents had pur-chased undressed hides and skins and tanning bark together with other material required in their tannery as they carried on the busi-ness of tanning hides· and skins and of selling tanned skins in th~ town of Hyderabad. For the assessment year 1954-55 the Sales Tax Officer sought to include in the total turnover a certain amount representing the price paid for buying tanning bark required in their tannery, The respondents submitted that the tanning bark had been bought for consumption in tannery and not for sale and they were accordingly not dealers in tanning bark. Therefore the price paid for buying tanning bark was not liable to duty under the Hyderabad General Sales Tax Act. The departmental autho-rities as also the Sales Tax Appellate Tribunal rejected this con-tention but it was accepted.by the High Court of Andhra Pradesh. The High Court rejected the claim of the taxing authorities to tax the tanning bark on the ground that the purchaser was liable to pa)'. tax only when he was carrying on business of buying and ~ellmg the commodity and not when he brought it for consumption m .the. process for manufacturing an article to be sold by him. This view was reversed and it was observed as a follows :

"A person to be a dealer must be engaged in the bus:nes~ of selling or buying or supplying goods. The expression "business" though extensively med is a word of indefinite import. In taxing statutes it is used in the sense of an occupation or profession which occu-pies the time, attention and labour of a person, nor-nrnll!' with the. object of making profit. To regard an a~tlVlty as busmess there must be a course of dealings, either actually continued or contemplated 10 be conti-nued with a profit motive, and not for sport or plea-sure".

Mr. Sen has laid stress on what has been said further at pages 647 and 648 :-

"The Legislature has not made sale of the very article bought by a person a condition for treating him as a

dealer : the definition merely requires that the buying of the commodity mentioned in rule 5 ( 2) must be in the course of business, i.e. must be for sale or use wilh a view to make profit out of the integrated activity of buying and disposal. The commodity may itself be converted into another saleable commodity, or it may be used as an ingredient or in aid of a manufacturing process leading to the production of such saleable commodity".

The facts in the decision of chis Court under discussion were different and distingttishable from· the present case. The tanning bark was actually consumed in the process of manufacturing another commodity and it was either used as an ingredient or for aiding the process of manufacture which cannot be said about the arc furnaces which were indisputably bought (or being install-ed in the foundry as a part of the manufacturing plant. The words "in aid of a manufacturing process" have to be read in the context in which they aPpear in the passage extracted above and cannot be taken to mean that even a part of manufacturing plant will become a salable commodity if it is found to be unusable or no longer required. Such a view is untenable and cannot be regarded as sustainable in the light of !he decision of this Court. In State of Gujarat v. Raipur Manufacturing Co. Ltd.('), the lribunal had held chat where a cotton textile mill had managed to collect unserviceable article in the course of manufacture of cloth which were sold, sales of these articles must be regarded as a part of the business of the textile mill if the transactions of sale were large and frequent. After referring to the definition and the expression "dealer" in s. 2 ( 6) of the Bombay Sales Tax Act, 1953 and the other relevant provision of that Act as also the law laid down in the State of A11dl1ra Pradesh v. Abdul Bakshi & Bros. (2) it was observed that by the use of the expression "profit motive" it was not intended chat profit muse, in fact, be earned nor did the expression cover a mere desire to make some monetary gain out of the transaction or even a series of transactions. It predi-cates a motive which pervades the whole series of transactions effected by the person in the course of his activity. Where a per· son came to own, in the course of his business of manufacturing or selling a commodity some other commodity which is not a by-product tJr a subsidiary product of that business and he sold that commodity, cogent evidence that he had the intention to carry on the business of selling that commodity would be required. It was further observed that where a person in the course of carry-ing on the business was required to dispose of what might be called his fixed assets or his discarded goods acquired in the course of business, an inference that he desired to carry on the -- - . ·--- fl) 19 S.T.C I (2) i< S.l.C 1•44. •

MADRAS v. K. c. P. LTD. (Grover,!.) 783 business of selling his fixed assets or discarded goods would not ordinarily arise. In the State of Gujarat v. Vivekananda Mills('), the assessee was carrying on the business of manufactur-ing cotton fabrics. It had agreed to purchase under user's import licence 500 bales of Californian cotton in January 1953. Be-lieving thaJ the shipment would arrive after six months the assessee made arrangement to purchase 300 bales of similar cotton to meet its immediate requirements. The consignment of Californian cotton arrived unexpectedly in April 1953. A large sum of money belonging to the assessee was blocked up and with the sanction of the authorities the assessee sold 411 bales of this cotton to other mills. It was held that in selling the cotton with a view to avoid locking up of funds, it could not be inferred that the assessee had sold the goods with the intention to carry on the business of sell-ing cotton and the sales were not liable to tax. It was clear from the supplemental statement of the case which had been sub-mitted that though the assessee had been se!ling cotton from the year 1946 onwards except for three intervening years the sales were in respect of goods purchased for the busine<s of manufac-turing cotton cloth and the sales had been effected either because the cotton was surplus or the assessee had to accommodate its sister concern or with the view that the finances were not blocked up by detaining cotton which the assessee did not need for its business.

The facts and circumstances which have been established in the present case are stronger than those in the previous decisions of this Court. The furnaces were admittedly imported for the purpose of being installed as a part of the plant in the foundry of the assessee. There is no material whatsoever to show that there was any intention at the time when the furnaces were purchased of selling them at a profit. According to Mr. Sen himself the assessee decided to sell the furnaces because it was discovered that they were too big to be installed in the manufacturing plant. The case of the assessee throughout was and no evidence or mat.?- rial to the contrary existed that the furnaces had been shown in the books of the assessee under the classification "workshop equipment". The same entries existed in the balance sheet. Although the assessee was dealing in the sale of heavy machinery and machinery part it was nowhere proved that furnaces were ever manufactured or sold by it or were part of its business or ingrained therein. The arc furnaces were either fixed assets or discarded goods which had been found to be unserviceable or unsuitable. The assessee could therefore hardly be said to be a dealer within the definitiou given in s. 2(b) of the Central Act which is

" "dealer"' means any person who carries on the business of selling goods, and includes a Government which carries on such business."

This definition has to be read in the light of the principles which have been laid down by this Court in the cases relcrred to above.

It must therefore be held that the High Court rightly came to the conclusion that the sale proceeds of the furnaces could not he included in the turnover of the asscssee for the purpose of determining the liability of the assessce to sales tax. The appeal fails and is dismissed with costs.

Appeal dismissed.