The State Of Tamil Nadu v. Thermo Electrics (And Another Case)

1. In these two. tax revision cases, a common point is raised though the facts are slightly different. In the first case, Thermo Electrics is the assessee. It is a sole proprietrix concern. The assessee was a dealer in heating mantles and was dealing in the purchase and sale of those articles. She was also manufacturing and selling standard cells (Toshnival brand). Under an agreement dated 1st July, 1970, she agreed to give the knowhow of manufacturing the standard cells to Thermo Electrics Madras Manufacturing, hereinafter referred to as temm, a firm of partnership, in consideration of a 10 per cent royalty on the net sale price marketed by temm. Under that agreement, temm was given the exclusive right to manufacture and sell the standard cells in four States, namely, Madras, Andhra, Kerala and Mysore. If temm wants to market the goods in other States, it would have to enter into a separate agreement with the assessee. As part of the agreement, the assessee sold all the raw materials which she had, as listed in appendix A to the agreement, for the prices mentioned therein. Similarly, she sold the semi-finished products and finished products listed in appendix B for the prices mentioned in that appendix. The finished products included in this appendix did not exhaust the stocks which she held, but only a portion of it was given to temm and the remaining was retained by her for the purpose of sale in the areas other than four States in respect of which temm was given the exclusive right. Under that agreement, the assessee also transferred all the tools, jigs, fixtures, furniture and other items as listed in appendix C on their book value which is also mentioned in that appendix. For the assessment year 1970-71, the assessee returned a total and taxable turnover of Rs. 1,746.09 (sic) and Rs. 1,528 respectively. On the ground that the raw materials listed in appendix A to the agreement and the semi-finished products and finished products listed in appendix B thereto were sold by the assessee during the assessment year, the assessing officer sought to include a sum of Rs. 1,59,753.85 in the taxable turnover. The assessing officer did not propose to include the value of the tools mentioned in appendix C, which was valued at Rs. 250. The assessee objected to the proposal to include the sum of Rs. 1,59,753.85 on the ground that they were realisations on the sale of the business as a whole and that the sale was also not in the course of carrying on her business, but it was a case of winding up of the manufacturing unit. The assessing officer did not accept this contention and included the turnover as proposed in the pre-assessment notice. On appeal, however, the Appellate Assistant Commissioner held that so far as the raw materials were concerned, it could not be said to be a sale in the regular course of business activity of the assessee and that, therefore, it is not liable to be included in the turnover, but confirmed the assessment so far as it related to the value of the semi-finished products and finished products. The assessee preferred a further appeal to the Tribunal in respect of the semi-finished products and finished products and the revenue filed an enhancement petition in respect of the raw materials. Before the Tribunal, the revenue relied strongly on the decision of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd., in support of its contention that the entire turnover was liable to be taxed. The Tribunal held that the sale of capital assets or sterilised assets could not be considered to be a sale in the course of business or in connection with or incidental or auxiliary to the business carried on by the assessee and that, therefore, the sales of the materials mentioned in appendix A and appendix B were not liable to be taxed. According to the Tribunal, the decision in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.) did not dispense with the basic necessity that the assessee must be carrying on the business at the time when the transaction took place and the necessity of its being incidental or auxiliary to the actual business carried on. In the view of the Tribunal when the assessee agreed to give the knowhow to temm and as part of the agreement sold the raw materials and semi-finished and finished products, the raw materials, semi-finished products and finished products, which were the current assets before the agreement, became sterilised assets awaiting disposal having become a mere investment of a dead business activity. In other words, the Tribunal seems to think that the knowhow is given first and by reason of it, the manufacturing activity of the assessee had come to a dead-end and the sale of the raw materials, semi-finished and finished products takes the next place, when she was no longer a dealer in the manufacture and sale of standard cells. Thus, according to the Tribunal, at the time when the sale was made, the assessee was not manufacturing the standard cells and the goods sold were freezed assets. Thus, both on the ground that it was a sale of the capital assets and, therefore, could not be treated as a sale in the course of business and also on the ground that the sale was after she had ceased to do any business, the Tribunal held that the entire turnovers relating to appendix A and appendix B were not liable to be included in the gross turnover. It is questioning this view of Tribunal, the revenue has filed T.C. No. 287 of 1974.

2. In the other tax revision case, the assessee was the erstwhile Burmah Shell Oil Storage and Distributing Co. of India Ltd., which is now taken over and designated as Bharat Refineries Limited. The disputed turnover related to two items of Rs. 2,58,104.04 and Rs. 17,444.35. The assessment year in question is 1972-73. During the year, the assessee had closed down or wound up certain storing stations due to shrinkage of business and sold the various tanks and pumps of those stations. In some other cases, on the ground that the storage points were no longer economical or had become obsolete and redundant, the tanks and pumps were sold. In some other cases, the assessee replaced the existing tanks with tanks of larger capacity and sold the old tanks. The disputed turnover of Rs. 2,58,104.04 related to the sales of those tanks, pumps, pump shelters, barbed wire fencing, gates, sentry room material, conical filling machines, etc. During the assessment year, the assessee sold also different kinds of scrap and the sale value is the sum of Rs. 17,444.35, which is the disputed turnover. The assessing officer disallowed the claim of the assessee relying on the decision in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.), that these two items were liable to be included in the gross turnover on the ground that the sales were in the course of or incidental or auxiliary to its business. This order was confirmed by the Appellate Assistant Commissioner. Before the Tribunal, in so far as the turnover of Rs. 2,58,104.04 was concerned, the assessee claimed that the sales related to discredited or redundant capital assets and they had to be sold for the various reasons mentioned earlier and that they were not sold in the course of its business. It was also its case that the sales could not be held to be incidental or auxiliary to its business of storage, distribution and sale of petrol and petroleum products. It also claimed that the scrap also was not liable to be included as transactions incidental or auxiliary to its business. Though the Tribunal agreed with the assessee that the disputed turnover of Rs. 2,58,104,04 represented the sale value of discredited capital assets, in the view that they amounted to rationalisation of its business activities and that the sale made during the course of such rationalisation should be deemed to be incidental to its business, held that they were liable to be included in the gross turnover. Following the decision of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.), the value of scrap also was included in the taxable turnover. The assessee is the petitioner in this revision case.

3. The learned counsel appearing for the assessees in both these cases strenuously contended that the sale of capital assets could not be deemed to be either a sale in the course of business or a sale incidental or auxiliary to the business of the assessees and the decision of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.) could not be applied to a case of sale of capital assets. It was also the case of the learned counsel that a transaction could be said to be incidental or auxiliary to the trade, commerce, manufacture, adventure or concern carried on by the assessee, only when such activity promotes or aids the business of the assessee and not when they were sold as unserviceable or obsolete material no longer required for the purpose of the business. The learned counsel also wanted to interpret and understand the amended definition of Section 2(d) of the Tamil Nadu General Sales Tax Act in its historical background and with reference to the mischief sought to be remedied by the amendment. So read, according to the learned counsel, only such transactions of sale of by-products or subsidiary products or which have a close link with the business carried on by the assessee alone could be brought in for the purpose of taxation as incidental or auxiliary to the business carried on by the assessee. It is not necessary for us to quote the definition of Section 2(d) of the Act, as it stood prior to the amendment by Madras Act No. 15 of 1964 and as it stood subsequent to the amendment. It is extracted in the judgment of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.) Prior to the amendment, in two decisions in State of Gujarat v. Vivekanand Mills [1967] 19 S.T.C. 103 (S.C.) and State of Madras v. K.C.P. Ltd. [1969] 23 S.T.C. 173 (S.C.), the Supreme Court had held that in order to bring a transaction of sale to tax, the sale must have a reasonable connection with the normal business activity of the assessee and unless there is such connection to its normal business activity, it could not be included in the assessable turnover. In State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.), the Supreme Court considered the effect of the amendment of the definition of the word "business" in Section 2(d)of the Act with reference to certain sales effected by the Burmah Shell Co. Ltd. The Supreme Court pointed out that under the amended definition of the word "business" even commercial transactions carried on without a motive to make gain or profit or whether or not any profit accrues from such activity were included in the definition. It also included within that definition, transaction in connection with, or incidental or ancillary to such trade, commerce, manufacture, adventure or concern. The Supreme Court then proceeded to consider the question as to whether the incidental or ancillary activity must partake the nature of business in its generic sense. Number of decisions were considered and ultimately approving the view of the Andhra Pradesh High Court in Hyderabad Asbestos Cement Products Ltd. v. State of Andhra Pradesh [1972] 30 S.T.C. 26, it was held that under both parts of the definition of the word "business", profit-motive is now immaterial and the concept of business in respect of matters falling under Section 2(d)(ii) in the commercial sense put forward and accepted in the earlier cases must be abandoned.

4. The unacceptability of the theory that sales of capital assets could not be included in the gross turnover even as incidental or ancillary transaction is apparent, if we look into the facts of the case in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.) The three different turnovers involved in that case are these: (i) the turnover relating to supply of tea and edibles to the workmen in the canteen established by the company ; (ii) the turnover of sales of advertisement materials such as calendars, purses and key chains ; (iii) the turnover relating to sales of scrap such as unserviceable oil drums, rubber hoses, jerry cans, rims, unserviceable pipe fittings and old furniture. The Supreme Court held that the sale of advertisement materials and all those items characterised under the heading of scrap including old furniture were liable to be included in the gross turnover. This was in the view that, even in respect of transactions falling under Section 2(d)(ii), the concept of transaction in the commercial sense with profit-motive is not essential. We may also state that though the amendment of Section 2(d) of the Act was intended to get over certain decisions, we could not understand the meaning of the amended provision only with reference to the ratio of those decisions ; but it had to be understood with reference to the clear language used. Though it is a well-known rule of construction that an amendment will have to be understood with reference to the mischief sought to be remedied, if the language warrants a wider construction, we have to give that wider construction and cannot restrict the meaning by this principle of construction. So, the only question for consideration is whether the assessee is a dealer within the meaning of Section 2(g) and the transaction is a sale within the meaning of Section 2(n). If the assessee is a dealer with reference to the business carried on by him, every transaction of sale, whether it is of a capital asset or a stock-in-trade, would be liable to be included in the turnover of the assessee. The question whether it is a capital asset or a stock-in-trade is foreign to the taxability under the Sales Tax Act and may be relevant only for the purpose of applying the provisions of the Income-tax Act. Reliance placed by the Tribunal on some of the decisions under the Income-tax Act are absolutely of no assistance. Further, in view of the categorical pronouncement of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.), every sale of a dealer would be liable to be included in the gross turnover of the assessee and it could not be deleted on the ground that it was a sale of capital asset. The Supreme Court expressed the same view again in considering similar provisions of the Rajasthan Sales Tax Act in District Controller v. Assistant Commercial Taxation Officer (1976) S.C.W.R. 75. The decision of the Mysore High Court in Government Soap Factory, Bangalore v. Labour Court A.I.R. 1970 Mys. 225 related to the definition of the word "worker" in the Industrial Disputes Act, which could not be applied to the sales tax provisions, especially in view of the decision of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 S.T.C. 426 (S.C.) No separate argument was advanced in respect of the turnover of Rs. 17,444.35 relating to sales of scrap of Bharat Refineries Ltd. We, accordingly, hold that all the transactions in question are liable to be included in the gross turnover.

5. One other argument advanced by the learned counsel appearing in T.C. No. 287 of 1974, which had found acceptance by the Tribunal may now be considered. That argument was that by reason of the assessee agreeing and giving the knowhow to temm, the sale of the raw materials, semi-finished and finished products shall be deemed to have taken place after the assessee had oeased to carry on the business of manufacture and sale and that, therefore, it would amount to a sale of sterilised assets not liable to be included in the gross turnover. Apart from the non-acceptability of this proposition, we find factually there is no basis for such an argument. The knowhow agreement provided only for a right to manufacture and sell the standard cells in favour of temm in respect of the four States. The right to manufacture and sell as such by the assessee was not given up under the agreement. If she had chosen, she could have carried on the business and sale of standard cells in the areas other than the four States in respect of which the right was conferred on temm. It was also found as a fact that the assessee had retained some portion of the finished products for sale in North India and she had not given up that business of manufacture and sale of standard cells as such. It is, therefore, not a case where the sale took place after the business activity was given up by the assessee. We may also add that the assessee was not a dealer in respect of only the manufacture and sale of standard cells; but she was a dealer in the matter of purchase and sale of heating mantles. The assessee also could not rely on Rule 6(d) as that provision provided for a deduction only if the amounts realised by the dealer was by the sale of his or her business as a whole. In this case, the business had not been sold as a whole. The assessee could still carry on the business of manufacture and sale of standard cells in the areas other than the four States in respect of which the right was conferred on temm. Further, in our view, Rule 6(d) contemplates the transfer of the business as a going concern and not a case of transfer of some of the assets alone. We, therefore, are unable to agree with the Tribunal that the transaction is not liable to be taxed on the ground that they are sales of freezed assets.

6. Yet another argument advanced by the learned counsel for the assessee in the first case, T.C. No. 287 of 1974, was that the raw materials, semi-finished products, after they were converted into finished products and the finished products transferred by the assessee to temm, were all taxed when temm sold the same and that since the sale of these electrical goods are taxable only at single point on the first sale in this State and since they had been taxed at the hands of tumm, the assessee should not be held liable. We are wholly unable to understand this argument. If the assessee's transaction was the first sale, it is that transaction that could have been taxed by the State. It is not an answer by the assessee in such a case to say that the second sale had already been taxed and, therefore, the first sale should not be taxed. It is for the person who effected the second sale to raise the contention that, being a second sale, it is not liable to be taxed and it is not for the assessee who made the first transaction of sale to raise that contention. In the view that the transaction by the assessee is the first sale, it is liable to be taxed. The assessing officer was right in including the turnover in the assessment. We, accordingly, allow T.C. No. 287 of 1974 and dismiss T.C. No. 439 of 1974. The revenue will be entitled to its costs in both these tax revision cases. Counsel's fee Rs. 150 in each.