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Standard Refinery Co. v. Sales Tax Commissioner, U.P
Factual and Procedural Background
This is a reference under section 11 of the U.P. Sales Tax Act at the instance of M/s Standard Refinery Co. (the assessee). Two questions of law were referred:
- Whether excise duty paid by the assessee in respect of rectified spirit and vend fee paid in respect of denatured spirit are to be included in the turnover for purposes of payment of sales tax?
- Whether, in the circumstances of the case, the assessee could be assessed to tax under section 21 of the U.P. Sales Tax Act?
The assessee manufactured rectified and methylated spirit at Unnao. For the assessment year 1949–50 the assessee filed a return and was assessed on the turnover shown. In its return the assessee disclosed that it had paid about Rs. 34,000 to the Government as excise duty and vend fee under the U.P. Excise Act, but it did not include that amount in its turnover.
Subsequently a Sales Tax Officer issued a notice under section 21 calling upon the assessee to show cause why the Rs. 34,000 should not be included in turnover as an escaped part of turnover. The assessee did not appear in person and maintained that there was no case of escaped assessment. The Sales Tax Officer proceeded ex parte and made an assessment including that amount. On appeal the Judge (Appeals) rejected the contention that assessment under section 21 was invalid but accepted the plea that the excise duty and vend fee could not be included in turnover. The Commissioner of Sales Tax filed a revision; the Judge (Revisions) allowed the revision and set aside the decision of the Judge (Appeals). The assessee then sought a reference under section 11 of the Act and the High Court referred the two questions above for decision.
Legal Issues Presented
- Whether excise duty and vend fee recovered by the assessee from purchasers (having been paid earlier by the assessee to Government) must be included in the assessee's turnover for sales tax purposes.
- Whether the assessing authority could validly assess the amount under section 21 of the U.P. Sales Tax Act (i.e., whether section 21 applies to such a case of omitted or escaped assessment).
Arguments of the Parties
Assessee's Arguments (as stated in the opinion)
- The amount paid by the assessee as excise duty and vend fee was paid on behalf of purchasers and hence could not legally form part of the assessee's turnover because it was not realised as part of sale proceeds.
- The transaction was one of agency: the assessee merely paid duties on behalf of customers and recovered the exact amounts, so these sums should not be treated as consideration forming part of turnover.
- Reliance was placed on decisions of the Supreme Court in George Oakes (Private) Limited v. State of Madras (two reported citations), which counsel contended supported the assessee's position.
Opposite Party / Revenue (as reflected in the opinion)
- The Sales Tax Officer issued a notice under section 21 treating the excise duty and vend fee as amounts that escaped assessment and sought to include them in turnover.
- The Commissioner of Sales Tax, by seeking revision, pressed the view that the Judge (Appeals) was wrong to exclude the excise duty and vend fee from turnover and that the assessment under section 21 was valid.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| George Oakes (Private) Limited v. State of Madras [1961] 12 S.T.C. 476; A.I.R. 1962 S.C. 1037 | The principle that when a seller passes on a tax and the buyer agrees to pay it in addition to the price, the tax forms part of the entire consideration; money realised as tax may become part of the dealer's circulating capital and thus be part of turnover. | The Court treated this authority as contrary to the assessee's contention: it applied the principle to hold that the excise duty and vend fee recovered by the assessee were part of the sale consideration/turnover because the amounts were added to price, realised from customers to recoup a capital outlay and became part of the dealer's circulating capital. |
| George Oakes (Private) Limited v. State of Madras [1962] 13 S.T.C. 98; A.I.R. 1962 S.C. 1352 | The same ratio as above concerning inclusion of tax passed on to the buyer in the seller's turnover and the notion that such sums can be treated as turnover because they become part of the business's circulating capital. | The Court relied on the reasoning in this later decision to reinforce that sums collected to recoup excise duty/vend fee merged into the dealer's business funds and thus were properly includible in turnover. |
Court's Reasoning and Analysis
The Court proceeded in stages:
- Interpretation of the parties' positions: The Court accepted the assessee's clarification that the first question aimed to determine whether amounts paid by the assessee on behalf of purchasers (excise duty and vend fee) should be included in turnover.
- Examination of the facts: The opinion records that the excise duty and vend fee had been paid by the assessee in advance under rules of the U.P. Excise Act, and the assessee recovered a proportionate amount from customers at the time of sale by adding that amount to the price.
- Consideration of authorities: Counsel relied on two Supreme Court decisions (both George Oakes) said to support the assessee. The High Court analysed those decisions and concluded that their reasoning did not support the assessee; rather, they showed that where the seller passes on a tax and the buyer agrees to pay it, that tax becomes part of the total consideration and can properly be treated as turnover because it becomes part of the seller's circulating capital.
- Application to the present facts: The Court found that the assessee had paid the excise duty and vend fee from its funds and then realised from customers an amount to compensate that investment. When realised, the sums merged with the assessee's capital/circulating funds; they were not held in a manner befitting a strict agency receipt but were added to price to recoup the assessee's outlay. Hence the sums were part of sale consideration and were properly includible in turnover.
- On section 21: The Court analysed the language of section 21 and held it to be wide enough to permit assessment where an assessing authority has not assessed the whole or part of turnover by mistake or omission (whether of fact or law). The court expressly stated that concealment or discovery of fresh material are not prerequisites for invoking section 21.
- Explanation II to definition of turnover: The Court noted this provision (which would include sums charged for anything done by the dealer) but said it was unnecessary to decide the case on that Explanation and expressed no opinion on that alternate basis.
Holding and Implications
Holding: Both questions referred were answered in the affirmative.
Direct consequences for the parties:
- The Court held that the amount of excise duty and vend fee which the assessee paid and subsequently realised from customers was properly includible in the assessee's turnover for the assessment year in question.
- The Court held that the assessing authority could validly make an assessment under section 21 of the U.P. Sales Tax Act in the circumstances described (i.e., to bring to tax amounts omitted from assessment by mistake or omission), and that concealment was not a necessary element for invoking section 21.
- The Court assessed costs of the reference at Rs. 100 to be paid by the assessee to the opposite party.
- Copies of the judgment were directed to be sent to the Judge (Revisions), Sales Tax, and the Commissioner, Sales Tax, U.P., pursuant to section 11(6) of the U.P. Sales Tax Act.
Broader implications: The opinion itself does not purport to set out broader legal consequences beyond the parties; accordingly, the decision's direct effect is to include the specified excise duty and vend fee in the assessee's turnover and to uphold the applicability of section 21 to the circumstances described.
Disposition: Reference answered accordingly; costs Rs. 100 payable by the assessee to the opposite party.
K.B Asthana, J.:— This is a reference under section 11 of the U.P Sales Tax Act at the instance of M/s. Standard Refinery Co. (hereinafter called the assessee) in which the following questions of law have been referred for decision by this Court.
“(1) Whether excise duty paid by the applicants in respect of the rectified spirit and vend fee paid in respect of denatured spirit are to be included in the turnover for purposes of payment of sales tax?
(2) Whether in the circumstances of the case the applicants could be assessed to tax under section 21 of the U.P Sales Tax Act?”
2. From the statement of the case it appears that the assessee carries on the business of the manufacture among other things of rectified and methylated spirit at Unnao. For the assessment year 1949-50 the assessee was assessed by Sri B.N Srivastava, Sales Tax Officer, on the turnover returned by the assessee.
3. It may be mentioned that a figure of Rs. 34,000 and odd was shown by the assessee as having been paid to the Government as excise duty and vend fee under the U.P Excise Act. This figure of Rs. 34,000 and odd was not included by the assessee in its turnover. Subsequently Sri J.S Mathur, Sales Tax Officer, issued a notice under section 21 of the Act to the assessee calling upon it to show cause why the figure of Rs. 34,000 be not included in its turnover and be assessed as that part of the turnover escaped assessment. The assessee did not appear before the Sales Tax Officer despite repeated notices and contented itself by merely replying that it was not liable to be assessed under section 21 of the Act as there was no escaped assessment in its case. The Sales Tax Officer took the proceedings ex parte and made an assessment. The assessee thereupon appealed and raised two main pleas, namely, that no case of escaped assessment under section 21 was made out under the circumstances of the case and that the amount of Rs. 34,000 which was paid by the assessee as excise duty and vend fee to the Government in fact was paid on behalf of the customers, which such customers were under a duty to pay, and it could not legally form part of the turnover of the assessee as that amount was not realised as a part of the sale proceeds. The learned Judge (Appeals) rejected the plea of the assessee in respect of the validity of the assessment under section 21 of the Act but accepted the plea that the amount paid by the assessee as excise duty and vend fee could not legally be included in the turnover of the assessee. Against the order of the Judge (Appeals), the Commissioner of Sales Tax filed a revision. The learned Judge (Revisions) allowed the revision and set aside the decision of the learned Judge, (Appeals). On behalf of the assessee the decision of the learned Judge (Appeals) was sought to be supported on the ground that the assessment could not legally have been made under section 21 of the Act. The learned Judge (Revisions) considered this plea raised by the assessee and rejected the same. Thereupon the assessee applied under section 11 of the Act for referring a case for the decision of the High Court on certain questions of law arising in the case. This application was allowed and the questions mentioned above have been referred to this Court.
4. Sri A.K Kirty, the learned counsel appearing for the assessee, has, at the very outset, stated that question No. (1) is not happily worded. What was meant was that the amount paid by the assessee on, behalf of the purchasers as excise duty and vend fee could not legally form a part of the turnover of the assessee for purposes of payment of sales tax, We think that the question framed does clearly bring out the intention of the assessee as stated by its counsel and it is in that light that we proceed to answer the question. It is not disputed that on the facts found, the amount which the assessee paid as excise duty and vend fee was realised by it from the customers to whom the requisite quantity of methylated spirit and rectified spirit was sold from the bonded warehouse. What was contended on behalf of the assessee was that inasmuch as under the rules under the U.P Excise Act the customers who came to take delivery of the spirit bought had to pay the excise duty and the vend fee before the goods sold could be cleared from the warehouse; what the assessee did was nothing more than first paying the necessary excise duty and vend fee on the customers' behalf and then realising the same separately from the customers in order to afford convenience to them. It has not been denied that the proportionate amount of the excise duty and the vend fee was realised by the assessee at the time when the sale took place. Sri Kirty sought assistance from the decision of the Supreme Court in the case of George Oakes (Private) Limited v. State Of Madras [1961] 12 S.T.C 476; A.I.R 1962 S.C 1037.. He also referred to another case of George Oakes (Private) Limited v. State Of Madras [1962] 13 S.T.C 98; A.I.R 1962 S.C 1352. decided by the Supreme Court. On the reasoning which their Lordships of the Supreme Court adopted in the two cases cited, Sri Kirty urged that since the amount which was realised by the assessee from its customers as excise duty and vend fee was paid to the Government by, it and was not allowed to be mixed up with its assets, that amount so realised from the customers at the time of the sale of the spirit could not legally form a part of the sale proceeds. We think that neither the dicta of the Supreme Court in the cases cited nor the reasoning supports this contention of the learned counsel, rather they militate against the conclusions which the learned counsel asked us to arrive at on the facts of the present case. It would be seen that their Lordships of the Supreme Court in the above cited cases held in connection with the definition of “turnover” under the Madras General Sales Tax (Definition of Turnover and Validation of Assessments) Act, that:
“When the seller passes on the tax and the buyer agrees to pay sales tax in addition to the price, the tax is really part of the entire consideration and the distinction between the two amounts—tax and price—loses all significance from the point of view of legislative competence.”
5. The reason explained by their Lordships in the latter case is that the dealer who realises the tax does not hand it over forthwith to Government but keeps it with him, and turns it over in his business before he parts with it. Thus, the tax becomes a part of the circulating capital of the tradesman, and is turnover in his business. The price paid by the purchaser is not so much money for the article plus tax but a composite sum. Therefore, in calculating the total turnover, there is nothing wrong in treating-the tax as part of the turnover, because turnover means the amount of money which is turned over in the business.
6. On the facts of the present case it is clear that the assessee who was the manufacturer paid the excise duty and the vend fee on the amount of the spirit manufactured by him and kept in the warehouse and on the occasion of the sale to its customers, apart from the cost of the spirit sold to the customers, a proportionate amount which the assessee had already spent in payment of the excise duty and vend fee was also realised. Such amount was added by the assessee to the price. It is difficult to agree with Sri Kirty that the transaction in the present case would be any different from the transaction which fell for consideration in the cases cited before the Supreme Court. The basis seems to be that whatever is realised at the time of the sale, even when added as a separate item to the price for any specific purpose, if it mingles with and mixes up with the capital and asset of the seller, then it can be included in his turnover. It is clear to us that the stand taken by the assessee that it did not realise the amount representing the excise duty and vend fee as the price but merely as an agent of the customer for passing it on to the Government is untenable. It is not disputed that the excise duty and vend fee were paid in advance. What the assessee realised from his customer was in order to compensate the investment which he had already made from its capital, and when it realised the same from the customer that again formed part of its capital. It appears to us that at the time of the sale this amount was not realised as excise duty or vend fee as such, but only to make up the investment which the assessee had already made on the payment of the excise duty and the vend fee. We are, therefore, of the opinion that the amount which the assessee claimed to have been paid as excise duty and vend fee in the assessment year in question was liable to be included in his turnover for that year.
7. In view of what we have held above, it is not necessary for us to advert to Explanation (II) to the definition of the “turnover” under the U.P Sales Tax Act which says that the amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time or before the delivery thereof. The learned Senior Standing Counsel submitted that even under the explanation the amount of excise duty and vend fee which was paid by the assessee at the time when the goods were sold would be included in his turnover because it charged the same for doing something in respect of the goods at that time. We express no opinion on this aspect. Our answer to the first question, therefore, is in the affirmative.
8. The second question in our judgment offers no difficulty. As already held by this Court the language of section 21 of the U.P Sales Tax Act is wide enough to cover any case in which even by mistake, whether of fact or law, or by a mere omission the assessing authority does not assess the whole or a part of the turnover in any particular year. For the application of section 21 it is not necessary that there should be any concealment on the part of the assessee or that any fresh material should be discovered before an assessment can be made. It was urged that since the assessee had already disclosed in its return the figure of-Rs. 34,000 as the amount of excise duty and vend fee but had not included it in his turnover and the assessing authority had not taxed it on that amount, there was no concealment on its part and the assessing authority again could not assess on that amount on the ground that it had escaped assessment. This submission on behalf of the assessee is untenable and cannot be supported by the language of section 21 as explained above.
9. Our answer to the second question is in the affirmative.
10. Having answered the above two questions against the assessee, we assess the costs of this reference at Rs. 100 which would be paid by the assessee to the opposite party.
11. The copies of this judgment will be sent under the signature of the Registrar and the seal of the Court to the Judge (Revisions), Sales Tax, and the Commissioner, Sales Tax, U.P, as required under section 11(6) of the U.P Sales Tax Act.
12. Reference answered accordingly.
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