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State Of Tamil Nadu v. Binny Ltd., Madras .
Factual and Procedural Background
The assessee, a leading manufacturer of textiles with a factory in Tamil Nadu, maintained a store within the factory premises where its workmen could purchase provisions. During assessment year 1967-68, the Sales Tax Authorities treated the sales effected in this workmen's store as liable to tax under the Tamil Nadu General Sales Tax Act, 1959. The assessee contended that the store was run without profit motive and therefore did not amount to “business” under Section 2(d) of the Act. The Sales Tax Authorities rejected this contention and assessed the sales to tax. On appeal, the Tribunal ruled in favour of the assessee. The State’s revision before the High Court was dismissed, the High Court relying on its earlier decision in Deputy Commissioner of Commercial Taxes v. Sri Thirumagal Mills Ltd. (1967) 20 STC 287. The State obtained a certificate and filed the present appeal before the Supreme Court.
Legal Issues Presented
- Whether sales of provisions effected by the assessee in its workmen's store constitute “business” within the meaning of Section 2(d) of the Tamil Nadu General Sales Tax Act, 1959.
- Consequently, whether such sales are assessable to sales tax for the assessment year 1967-68.
Arguments of the Parties
Assessee's Arguments
- The store was run solely to provide a facility to workmen and lacked any profit motive; therefore, the activity was not “business” under Section 2(d).
- For clause (ii) of Section 2(d) to apply, there must be a direct connection between the sales and the manufacture of textiles, which was allegedly absent.
State's Arguments
- Reliance on State of Tamil Nadu v. Burmah Shell Company Ltd. (1973) 3 SCC 511, in which “profit motive” was held irrelevant after the 1964 amendment to Section 2(d).
- The sales were “in connection with or incidental or ancillary to” the assessee’s textile-manufacturing business and therefore fell squarely within clause (ii) of Section 2(d).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Deputy Commissioner of Commercial Taxes v. Sri Thirumagal Mills Ltd. (1967) 20 STC 287 (Madras HC) | Held that sales in a fair-price shop were not taxable because the activity lacked profit motive. | Relied upon by the High Court below, but noted by the Supreme Court to have been overruled. |
| State of Tamil Nadu v. Burmah Shell Company Ltd. (1973) 3 SCC 511 | Clarified that after the 1964 amendment, a transaction need not itself bear the characteristics of business if it is incidental or ancillary to an existing business. | Supreme Court followed this decision, overruling the High Court’s reliance on Thirumagal Mills and applying the wider definition of “business.” |
| Royal Talkies, Hyderabad v. Employees State Insurance Corporation (1978) 4 SCC 204 | Defined “incidental” work as one that appertains to the primary purpose, citing canteen facilities in a cinema. | Court used the analogy to hold that a workmen’s store is similarly incidental to textile manufacture. |
Court's Reasoning and Analysis
The Court first observed that the High Court’s reasoning was based on Thirumagal Mills, a precedent already overruled by Burmah Shell. Section 2(d) of the Act, as amended on 1 September 1964, embraces two limbs: (i) trade, commerce, or manufacture regardless of profit motive, and (ii) any transaction “in connection with, or incidental or ancillary to” such activities.
Invoking Burmah Shell, the Court held that clause (ii) does not require the impugned transaction to possess the ordinary attributes of business so long as it is connected with an existing business under clause (i). Applying this to the facts, the Court reasoned:
- The assessee indisputably carried on the business of manufacturing textiles (clause (i)).
- Providing a store for workmen within the factory premises facilitates the workforce and is naturally incidental to the manufacturing business.
- The absence of a profit motive is immaterial after the statutory amendment.
To fortify this interpretation, the Court cited Royal Talkies, where a cinema-owner’s canteen was deemed incidental to operating a theatre. By parity of reasoning, the workmen's store was incidental to the textile business. Therefore, sales from the store fell within the statutory definition of “business,” rendering them taxable.
Holding and Implications
Appeal Allowed. The Supreme Court set aside the High Court’s judgment and the Tribunal’s order, reinstating the assessment made by the Sales Tax Authorities that sales from the workmen’s store are taxable under the Tamil Nadu General Sales Tax Act, 1959. Costs were awarded to the State.
Implications: The decision affirms that, post-1964 amendment, any transaction incidental or ancillary to a primary business—regardless of profit motive—is subject to sales tax under the Act. This clarifies the tax liability of in-house facilities such as fair-price shops and canteens run by industrial establishments, though the ruling is confined to interpretation of Section 2(d) and does not announce a broader, new legal principle.
P.N Bhagwati, J.— The only question which arises for consideration in this appeal by certificate is whether sales of provisions effected by the assessee in a workmen's Store maintained by it are assessable to tax under the Tamil Nadu General Sales Tax Act, 1959. The assessee carries on business of manufacture and sale of textiles in a factory situate in the State of Tamil Nadu. It is one of the leading manufacturers of textiles in the country. It is running a store in the premises of the factory where workmen can buy provisions. In the course of assessment of the assessee to Sales Tax for Assessment Year 1967-68 under the Tamil Nadu General Sales Tax Act, 1959, the question arose whether the sales effected by the assessee in the store were taxable. The assessee contended that in respect of the sales effected by it in the store it was not carrying on a business within the meaning of Section 2(d) of Act because there was no profit motive in running the store and this activity was being carried on by it only for the purpose of providing a facility to workmen. This contention was negatived by the Sales Tax Authorities and they brought the sales of provisions in the Store to tax. The assessee carried the matter in appeal to the Tribunal where the assessee succeeded and this led to the filing of a revision application by the State before the High Court. The High Court by a brief order dismissed the revision application and following its earlier decision in Deputy Commissioner of Commercial Taxes v. Sri Thirumagal Mills Ltd. (1967) 20 STC 287 (Mad HC) Held that the sales in question were not taxable. The State thereupon preferred the present appeal after obtaining the necessary certificate from the High Court.
2. Now, it may be pointed out at the outset that the decision in the Thirumagal Mills case (1967) 20 STC 287 (Mad HC) on which the High Court relied for deciding the present question in favour of the assessee, has been subsequently overruled by this Court in the State of Tamil Nadu v. Burmah Shell Company Limited (1973) 3 SCC 511. The view taken by the High Court in Thirumagal Mills case (1967) 20 STC 287 (Mad HC) was that sales effected in a fair price shop maintained by the assessee were not taxable even after the amendment made in the Tamil Nadu General Sales Tax Act, 1959 with effect from September 1, 1964, because the activity carried on in the fair price shop was not of a commercial nature and did not partake of the character of business. This view did not find favour with the court in Burmah Shell case (1973) 3 SCC 511 and in the judgment delivered in that case Jaganmohan Reddy, J., speaking on behalf of the court, pointed out that the view taken in Thirumagal Mills case (1967) 20 STC 287 (Mad HC) did not take into account the word “such” in clause (ii) of Section 2(d) of the Act and the Madras High Court was in error in holding that in order to come within clause (ii) of Section 2(d), it was necessary to show that the transaction had the characteristics of business. Section 2(d) as it stood again after its amendment from September 1, 1964 defined “business” in the following terms:
“2. (d) ‘business’ includes—
(i) any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any profit accrues from such trade, commerce, manufacture, adventure or concern; and
(ii) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern;”
3. This Court observed in the Burmah Shell case (1973) 3 SCC 511 that for the purpose of attracting the applicability of clause (ii) of Section 2(d), it was not necessary that the transaction in question must partake of the characteristics of business, but it was sufficient if it was “in connection with or incidental or ancillary to such trade, commerce, manufacture, adventure or concern”. The word “such” in clause (ii) was in the opinion of the court, referable to trade, commerce, manufacture, adventure or concern referred to in clause (i) and if there was in existence some trade, commerce, manufacture, adventure or concern falling within clause (i), any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture, adventure or concern, would constitute “business” within the meaning of clause (ii), even though the transaction by itself may not have the characteristics of business as understood in ordinary parlance. Now, the business which was carried on by the assessee was manufacture of textiles and the transaction of sale of provisions in the store were, in the submission of Mr S.T Desai appearing on behalf of the State, in connection with or incidental to such business. This contention was seriously disputed by Mr Ramachandran on behalf of the assessee and he urged that there was no connection between the activity of manufacture of textile carried on by the assessee and the sales of provisions in the Store maintained by it nor was it possible to say that the sales effected by the assessee were incidental to the manufacture of textiles. Mr Ramachandran contended that in order to attract the applicability of clause (ii) of Section 2(d) it was necessary that the connection between the sales of provisions in the Store and the manufacture of textile must be direct and such direct connection was, according to him, wanting in the present case. We do not think the contention of Mr Ramachandran is at all justified. It is indeed difficult to see how it can at all be said that the activity of selling provisions to the workmen in the Store was not incidental to the business of manufacture of textiles in the factory. The sales which were effected in the Store were to the workmen employed in the factory where textiles were being manufactured and the provision of this facility to the workmen was certainly incidental to the carrying on the business of manufacture of textiles. This view finds support from the decision of this Court in Royal Talkies, Hyderabad v. Employees State Insurance Corporation (1978) 4 SCC 204, (1979) 1 SCR 80 where the question was as to whether a canteen maintained by a cinema owner in the premises of the cinema could be said to be incidental to the business of running the cinema. Krishna Iyer, J., speaking on behalf of the court, pointed out that [: SCC (L&S) p. 505] “a thing is incidental to another if it merely appertains to something else as primary. Surely, such work should not be extraneous or contrary to the purpose of the establishment but need not be integral to it either.” Applying this test the court Held that it was impossible to contend that “a canteen or cycle stand or cinema magazine booth is not even incidental to the purpose of the theatre. The cinema-goers ordinarily find such work an advantage, a facility, an amenity and sometimes a necessity. All that the statute requires is that the work should not be irrelevant to the purpose of the establishment.” Now, if a canteen maintained by a cinema owner for the benefit of cinemagoers can be regarded as incidental to the purpose of the cinema theatre which is to carry on the business of exhibiting films in the theatre, we fail to see how a Store run by the owner of a textile undertaking for sale of provisions to the workmen employed in the factory can be said to be anything other than incidental to the business of manufacture of textiles. We are clearly of the view that the activity of selling provisions to workmen in the Store was incidental to the business of manufacture of textiles and the sales were, therefore, transactions falling within the definition of “business” in clause (ii) of Section 2(d). We must, in the circumstances, hold that the assessee carried on business of selling pro visions in the Store and the sales attracted the liability to tax under the Tamil Nadu General Sales Tax Act, 1959 as it existed during the year of assessment.
4. We accordingly allow the appeal, set aside the judgment of the High Court as also the order made by the Tribunal and restore the order of the Sales Tax Authorities holding that the sales in question were assessable to tax under the Tamil Nadu General Sales Tax Act, 1959. The assessee will pay the costs of the appeal to the State.
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