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PETITIONER: STATE OF GUJARAT

       Vs.

RESPONDENT: M/S.  RAIPUR MANUFACTURING COMPANY LTD.

DATE OF JUDGMENT: 30/09/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR 1066            1967 SCR  (1) 618  CITATOR INFO :  R          1967 SC1826  (15)  R          1969 SC 348  (3)  RF         1971 SC2054  (1)  F          1973 SC1045  (3,6)  R          1976 SC  10  (9)  R          1976 SC1813  (20)  F          1985 SC1748  (4,11)  R          1992 SC 959  (16)

ACT: Bombay Sales-tax Act (3 of 1953), s. 2(6)-Dealer-"Carries on business", test for.

HEADNOTE: The  respondent-Company  was  carrying on  the  business  of manufacturing  and  selling cotton  textiles.   In  1953-54, because cloth, the company sold (i) old discarded items such as stores, machinery, iron scrap,, cans boxes, cotton ropes, rags  etc., (ii) coal; (iii) by-products such as  kolsi"  or cinders, and waste caustic liquor.  In the case of the first item the sales were frequent, the volume was large, and  the price  realised was credited in the profit and loss  account of  the  Company,  thus  indirectly  reducing  the  cost  of production  of the textiles.  In the case of coal it  was  a commodity  which the company required for its  business  and which  had been purchased for use in that  business.   There was, however, ,no evidence as to what was the total quantity of coal purchased by the company and what percentage thereof was sold except that the value of the coal sold exceeded Rs. 16,000.   In  the  case of the third  item  though  the  by- products  could not be used by the company, they were  goods which were produced continuously and regularly day after day in the Company’s manufacturing process, and for which, there was  a  market.   The  sales-tax  authorities  brought   the turnover  from  the sales of all these  commodities  to  tax under the Bombay Sales-tax Act, 1953.  The High Court, on  a reference, held in favour of the Company. in appeal to this Court, HELD  : (1) In disposing of miscellaneous old and  discarded items,  the Company was not carrying on business of  selling those  items.   In order that receipts from the  sale  of  a

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commodity may be included in the taxable turnover it must be shown  that  the assessee was carrying on business  in  that particular  commodity,,  and to prove that fact it  must  be established  that the assessee had an intention to carry  on business in that commodity.  The characteristics of  volume, frequency, continuity and regularity indicating an intention to  continue  the activity of carrying on  the  transactions with a profit motive must exist.  But no test is decisive of the  intention to carry on the business, and  the  intention has  to be inferred in the light of all  the  circumstances. Where a person comes to own in the course of his business of manufacturing  or selling a commodity, some other  commodity which is not a. by-product or a subsidiary pro-duct of  that business, and he sells that commodity, cogent evidence  that he  has  intention  to carry on  business  of  selling  that commodity  would  be  -required.  In the  present  case,  no presumption can be raised, on the facts, that when the goods were  acquired  there  was  an intention  to  carry  on  the business  in those discarded materials, nor can it  be  said that  the  goods became part of or an incident of  the  main business of -selling textiles., as they were not by-products or   subsidiary   products   arising  in   the   course   of manufacturing textiles. [621 E-H; 624 B-C, E] (ii) There  were no circumstances existing at the time  when the  coal was purchased, or which have come  into  existence late, which establish an intention to carry on a business of selling  coal.  The burden of proving that the  Company  was carrying on the, business of selling coal lay 619 upon the Sales-tax Authorities and if they held against  the Company  merely because of the frequency and the  volume  of the sales, the inference cannot be sustained. [626 A-C] (iii)     The  "Kolsi"  or  cinders and  the  waste  caustic liquor were byproducts or subsidiary products in the  course of  manufacture of textiles and sale thereof was  incidental to  the business of the Company.  An intention to  carry  on business  in those commodities may be reasonably  attributed to  the Company and the turnover with respect to  those  two commodities would be liable to sales-tax. [624 G-H; 625 E-F] Case law referred to. Observation on p. 685 paragraph 7 in Gorsi Dairy V. State of Kerala [(1961) 12 S.T.C. 683] not approved.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 603 of 1966. Appeal  by special leave from the judgment and  order  dated November 14th/15th, 1963 of the Gujarat High Court in Sales- tax Reference No. 3 of 1962. N.   S. Bindra and R. H. Dhebar, for the appellant. S.   T.  Desai,  C.  C.  Gandhi and I  N.  Shroff,  for  the respondents. The Judgment of the Court was delivered by Shah, J. M/s Raipur Manufacturing Company hereinafter called ’the  Company’-carries on the business of manufacturing  and selling  cotton textiles.  In the account year  1953-54  the Company  besides  selling cloth sold coal and  25  different items of discarded or unserviceable goods and waste products from  the factory.  The goods sold may be  classified  under three heads : (1)  Old  containers-cans,  boxes etc  ;  discarded  stores, machinery & iron scrap ; miscellaneous discarded items, such as, cotton ropes’, chindis (rags) etc.

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(2)  Kolsi (cinders), waste caustic liquor. (3) Coal. The Sales-tax authorities brought the turnover from sales of those  commodities  to tax under the Bombay Sales  Tax  Act, 1953  and their order was confirmed in appeal by  the  Sales Tax  Tribunal.  The Tribunal was of the view that "a  cotton textile  mill manages to collect unserviceable  articles  in the course of manufacture of cloth" and since these articles have  to be sold, if it is to survive as an  economic  unit, sales  of  those articles must be regarded "as part  of  the business  of the textile mill" if the transactions  of  sale are large and frequent.  The Tribunal did not deal with  the sale of coal independently of the sale of other goods. At  the  instance  of  the  Company,  three  questions  were referred  to  the High Court of Gujarat, out  of  which  one alone is material in this appeal: 620 .lm15 "Whether on the facts and in the circumstances of the  case, was the Tribunal correct in holding that the applicants were liable  to be taxed on the sale of stores and old  machinery and other sundry articles ?" The High Court answered the question in the negative.   With special  leave,  the State of Gujarat has appealed  to  this Court. Section  5 of Bombay Act 3 of 1953 imposes a general tax  at specified  rates on his taxable turnover in respect of  sale of goods upon every dealer who was liable to pay general tax under  the Bombay Sales Tax Ordinance No. III of 1952  whose turnover  in respect of all the sales exceeds  Rs.  30,000/- during the year commencing on April 1, 1952.  The expression "dealer"  is defined in s. 2(6) as meaning "any  person  who carries  on  the business of selling goods in the  State  of Bombay, whether for commission, remuneration or otherwise  - - -".  Section 2(8) defines "goods" as meaning "all kinds of movable  property other than newspapers, actionable  claims, stocks,  shares and securities, and includes all  materials, articles  and commodities." Section 2(13) defines "sale"  as meaning "a sale of goods made within the State of Bombay for cash or deferred payment or other valuable consideration and includes  any supply by a society or club or an  association to   its  members  on  payment  of  price  or  on  fees   or subscription,  but  does not include . .  ."  Section  2(14) defines  "sale  price" as meaning "the amount payable  to  a dealer as valuable consideration for the sale of any  goods, less  any  sum allowed as cash discount according  to  trade practice,  .  .  .". "Turnover" is defined in  s.  2(20)  as meaning "the aggregate of the amounts of sale price received and  receivable by a dealer in respect of any sale of  goods made  during a given period after deducting the  amount,  if any, refunded by a dealer to a purchaser, in respect of  any goods  purchased  and returned by the purchaser  within  the prescribed period." Under  the Bombay Sales Tax Act, 1953, the aggregate of  the price  received  and  receivable by  a  person  carrying  on business  of selling goods is liable to be included  in  his taxable  turnover.   It follows as a corollary that  in  the turnover of a person carrying on the business of selling one commodity will not be included the price received by him  by sale of another commodity unless he carries on the  business of  selling  that  other commodity.  That  is  so,  because, within the meaning of s. 2(6) of Bombay Act 3 of 1953 to  be a  dealer  a person must carry on the  business  of  selling those  goods, price whereof is sought to be included in  the turnover.  In other words, he must carry on the business  of

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selling  a commodity before his turnover from sale  of  that commodity is taxable.  As pointed out by this Court in State of Andhra Pradesh v. M/s Abdul Bakshi and Bros.(’) a  person to be a dealer must be engaged (1) (1964] 7 S.C.R. 664: A.I.R.1965 S.C. 531.                             621 in  the  business of buying or selling or  supplying  goods. The expression "business" though extensively used in  taxing statutes,  is  a  word  of  indefinite  import.   In  taxing statutes,  it  is  used in the sense of  an  occupation,  or profession which occupies the time, attention and labour  of a  person,  normally with the object of making  profit.   To regard  an  activity as business there must be a  course  of dealings,  either actually continued or contemplated  to  be continued  with  a  profit  motive, and  not  for  sport  or pleasure.   Whether  a  person  carries  on  business  in  a particular commodity must depend upon the volume, frequency, continuity  and regularity of transactions of  purchase  and sale  in  a  class  of  goods  and  the  transactions   must ordinarily be entered into with a profit motive.  By the use of  the expression "profit motive" it is not  intended  that profit  must  in fact be earned.  Nor  does  the  expression cover  a  mere desire to make some monetary gain  out  of  a transaction or even a series of transactions.  It predicates a  motive which pervades the whole series,  of  transactions effected  by the person in the course of his  activity.   In actual practice, the profit motive may be easily discernible in  some  transactions : in others it would have to  be  in- ferred from a review of the circumstances attendant upon the transaction.   For instance, where a person who purchases  a commodity  in bulk and sells it in retail it may be  readily inferred  that he has a profit motive in entering  into  the series  of  transactions of purchase and  sale.   A  similar inference may be raised where a person manufactures finished goods  from raw materials belonging to him or  purchased  by him, and sells them.  But where a person comes to own in the course  of  his  business  of  manufacturing  or  selling  a commodity, some other commodity which is not a byproduct  or a  subsidiary  product of that business and  he  sells  that commodity, cogent evidence that he has intention to carry on business of selling that commodity would be required.  Where a person in the course of carrying on a business is required to  dispose  of what may be called his fixed assets  or  his discarded  goods acquired in the course of the business,  an inference  that  he  desired to carry  on  the  business  of selling  his  machinery or fixed assets or  discarded  goods would  not  ordinarily  arise.  To infer from  a  course  of transactions  that  it  is  intended  thereby  to  carry  on business   ordinarily   the   characteristics   of   volume, frequency, continuity and regularity indicating an intention to  continue  the activity of carrying on  the  transactions must  exist.   But no test is decisive of the  intention  to carry on the business: in the light of all the circumstances an inference that a person desires to carry on the  business of selling goods may be raised. A large number of cases were cited at the Bar in support  of the  contention that the goods sold by the Company  must  be deemed  to  have been sold as part of the business  of  the, Company, and on that account the turnover in respect thereof was liable to taxation. 622 It is not necessary to enter upon a detailed examination  of those  cases, because a majority of those cases  are  merely illustrative of the general principles set out hereinbefore. A  few representative cases may be briefly referred to.   In

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State  of  Bombay  v.  The  Ahmedahad  Education  Society(’) certain  goods  manufactured  or imported  by  an  Education Society  for  the purpose of its own use  were,  when  found surplus, disposed of at cost, without any profit.  The  Bom- bay High Court held that no business of selling or supplying was  intended to be carried on in those goods.  In State  of M.P.  v. Bengal Nagpur Cotton Mills Ltd.(2) a Company  which carried on the business of manufacturing textiles,  supplied steel and cement on several occasions to their  contractors, who were constructing buildings for the Company, and debited the price of the materials to the contractor’s account.   It was held that the Company was not liable to pay sales tax as the  Company was not a dealer carrying -on the  business  of selling  steel  and cement.  In Commissioner of  Sales  Tax, Madhya Pradesh, Indore v. Ram Dulare Balkishan and Bros,.(3) a  transport operator who sold unserviceable  cars,  trucks, tyres  and  motor accessories was held -not to be  a  dealer even  though  the  activity  was  "continuous,  serious  and large."  In  The State of Mysore v. The  Bangalore  Woollen, Cotton  and  Silk  Mills  Co.  Ltd,.  (4)  the  assessee   a manufacturer  of textiles who sold unserviceable goods  like waste cotton, useless ropes, scrap iron, worn out and broken parts of machinery, old paper, and tubes, was held not to be a dealer.  In that case, no distinction (presumably  because there   was  no  evidence  in  that  case   justifying   the distinction)  was  made  between  waste  cotton  and   other commodities sold. It is clear from these cases that to attribute an  intention to  carry on business of selling goods it is not  sufficient that the assessee was carrying on business in some commodity and  he disposes of for a price articles discarded,  surplus or  unserviceable.  It was urged, however, on behalf of  the State that where a dealer with a -view to reduce the cost of production  disposed of unserviceable articles used  in  the manufacture  of goods and credits the price received in  his accounts, he must be deemed to have a profit motive, for  it would   be   uneconomical   for  the   business   to   store unserviceable  articles and to survive as an economic  unit. But  the  question is of intention to carry on  business  of selling any particular class of goods.  Undoubtedly from the frequency, volume, continuity and regularity of transactions carried  on with a profit motive, an inference that  it  was intended  to carry on business in the commodity  may  arise. But  it does not arise merely because the price received  by sale  of discarded goods enters the accounts of  the  trader and  may  on  an overall view enhance Ms  total  profit,  or indirectly  reduce  the cost of production of goods  in  the business  of selling of which he is engaged.  An attempt  to realize price by sale of (1)7 S.T.C. 497. (2)14 S.T.C. 202. (2)  12 S.T.C. 333. (4)  13 S.T.C. 106. 623 surplus   unserviceable   or  discarded   goods   does   not necessarily  lead to an inference that business is  intended to  be  carried  on  in  those  goods,  and  the  fact  that unserviceable  goods are sold and not stored so  that  badly needed  space is available for the business of the  assessee also  does  not  lead  to the  inference  that  business  is intended to be carried on in selling those goods. Counsel  for  the State strongly relied upon a  judgment  of this  Court in State of Andhra Pradesh v. H. Abdul  Bakhi  & Bros.(’)  in support of the contention that goods  purchased for the purpose of being used in a manufacturing process are

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liable to purchase tax since the manufacturer must be deemed to  be carrying on business of purchasing those  goods.   It was  held  in  H. Abdul Bakhi’s case()  that  a  person  who consumes  a  commodity bought by him in the  course  of  his trade  or  uses it in manufacturing  another  commodity  for sale,  is a dealer, since the Legislature has not made  sale of  the  very  article bought by a person  a  condition  for treating  hint as a dealer.  But the principle of that  case has  no application in the present case.  In that case  this Court  declined to accept the view which prevailed with  the High  Court  of  Andhra  Pradesh that  unless  a  person  is carrying on business both of purchasing and selling the same commodity,  purchase  of  articles used  in  the  course  of manufacture  of  another commodity is not in the  course  of carrying on the business of purchasing that article. Counsel  for the State also relied upon the judgment of  the Kerala  High Court in Gosri Dairy, Vyttila v. The  State  of Kerala(2).   In  -that  case the  assessee  firm  which  was registered as a dealer in dairy products sold a part of  its live-stock every year and replaced the same by fresh  stock. The  question arose whether the proceeds of such sales  were to be treated as part of the turnover of the assessee liable to  sales tax.  It was held that the  frequency,  regularity and  volume of sale transactions by the assessee  were  such that they could be regarded as "an activity in the course of the business of the assessee", and therefore the  assessee’s sales  of  cattle were part of its business.  The  Court  in that case inferred that the transactions by the assessee  in respect of its assets disclosed an intention to carry on the business in those assets.  We are not concerned to decide in this  case  whether the ultimate decision of the  Court  was correct, but we are unable to agree with the view  expressed by  the High Court that "as regards sales tax all the  sales of a dealer in the course of his business attract taxation". Merely because a person is carrying on business of selling a commodity, it cannot be inffered from sale by him of another commodity in the course of that business that he is carrying on business in that other commodity also. (1) A.I.R. 1965 S.C. 53.                  (2) 12 S.T.C. 683. 624 We may now consider whether the turnover from the goods sold by the Company was taxable.  The goods sold broadly fall, as already  observed,  under three heads: viz.,  old  discarded machinery, stores and scrap and miscellaneous goods ; coal ; and  byproducts and subsidiary products such as "kolsi"  and waste  caustic liquor, though not usable by the factory  are goods   regularly   and   continuously   produced   in   its manufacturing  processes.   We are unable to  hold  that  in disposing  of miscellaneous old and discarded items such  as stores,  machinery, iron scrap, cans, boxes,  cotton  ropes, rags  etc. the Company was carrying on business  of  selling those  items  of goods.  These sales were frequent  and  the volume  was large, but it cannot be presumed that  when  the goods  were acquired there was an intention to carry on  the business  in  those  discarded  materials  ;  nor  are   the discarded  goods,  by-products or subsidiary product  of  or arising  in the course of the manufacturing  process.   They are  either fixed assets of the Company or are  goods  which are  incidental  to  the acquisition or  use  of  stores  or commodities  consumed in the factory.  Those goods are  sold by  the Company for a price which goes into the  profit  and loss  account of the business and may indirectly be said  to reduce the cost of production of the principal item, but  on that  account  disposal  of those goods cannot  be  said  to become  part  of  or an incident of  the  main  business  of

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selling  textiles.   In order that receipts from sale  of  a commodity  may be included in the taxable turnover, it  must be established that the assessee was carrying on business in that particular commodity, and to prove that fact it must be established  that the assessee had an intention to carry  on business in that commodity.  A person who sells goods  which are unserviceable or unsuitable for his business does not on that  account become a dealer in those goods, unless he  has an  intention  to  carry on the business  of  selling  those goods. But  in dealing with the liability to pay tax on  the  price for  sale  of "kolsi" and "waste caustic  liquor"  different considerations  arise.  As found by the High  Court  "kolsi" (cinders)  are  small  pieces of coal which  are  not  fully burnt.   It appears that "kolsi" is not capable of  "extreme fuel  potency  required in the furnaces"  of  the  appellant Company,  but it is still capable of being used in  "lighter furnaces".   This  "kolsi" is discharged from  the  furnaces regularly  and  continuously  day after  day.   The  Company collects  that "kolsi" and sells it to intending  purchasers in  bulk.   "Kolsi"  would be appropriately  regarded  as  a subsidiary  product in the course of  manufacture.   "Kolsi" results  from  coal which remains unburnt : it  is  on  that account a subsidiary product.  When such subsidiary  product is turned out in the factory regularly and continuously  and is  being sold from time to time, an intention to  carry  on business in "kolsi" may be reasonably attributed to the Com- pany.  In this connection, the principle in the judgment  of the 625 Bombay High Court in The Aryodaya Spinning and Weaving  Com- pany  Ltd  v. The State of Bombay(’) would apply.   In  that case a textile manufacturing Company produced "cotton waste" in  the  course of its manufacture of cloth and  yarn.   The cotton  waste which was not required for use in the  factory was disposed of regularly and the Bombay High Court regarded that as a subsidiary product or incident of the business  of the  assessee.  The normal business of the assessee in  that case  was the business of manufacturing and  selling  cotton textiles and cotton yarn, but it could still be regarded  as allied  or  incidental  to  business  activity.   The   same principle,  in  our  judgment, applies to  the  disposal  of "kolsi" which was discharged continuously and regularly  out of the furnaces of the appellant Company. "Waste  caustic liquor" is also regularly  and  continuously accumulated in the tanks in the process of mercerisation  of cloth.   As pointed out by the High Court, sodium  hydroxide in water is used in different processes for mercerisation of cloth.   The  liquid  is kept in a tank in  which  cloth  is dipped.   After this process is over, cloth  passes  through other  tanks  where water is sprinkled over it and  in  that process  some of the sodium hydroxide falls into  the  tank. The  liquid  is a light solution of sodium  hydroxide  which cannot  be  used in the process of  mercerisation,  nor  for other  process  in the factory of the Company.   This  waste material which is called "waste caustic liquor" has still  a market  amongst  other  manufacturers  or  launderers.   For reasons  which  we  have already set  out  in  dealing  with "kolsi", we are of the view that waste caustic liquor may be regarded  as  a by-product or a subsidiary  product  in  the course of manufacture and the sale thereof is incidental  to the  business of the Company and the turnover in respect  of both  "kolsi" and "waste caustic liquor" would be liable  to sales tax. It  appears  from the statement furnished that coal  of  the

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value of Rs. 16,083/- was sold by the Company under 12 bills in  the year 1953-54.  Coal is purchased by the Company  for the purpose of lighting its furnaces and heating boilers.  A part  of the coal purchased was sold.  The  Tribunal  merely stated  in  respect  of all the items  of  goods  sold  that looking  to  the  volume and frequency of  their  sale,  the Company  should be regarded as a dealer in respect of  those goods.   Unless there is evidence to show that there was  an intention  to  carry on business of selling coal,  the  mere fact that coal of the value exceeding Rs. 16,000/- was  sold will  not  by itself make the Company a dealer  carrying  on business  in coal.  We have no evidence on the record as  to what the total quantity of the coal purchased by the Company was, and what percentage thereof was sold.  No investigation has been made as to the circumstances in which the coal came to be sold.  Mere sale of a com- (1)  11 S.T.C. 141. 626 modity  which  a  Company requires 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 may be pointed out that the burden of proving that the Company was carrying on  business of  selling coal lay upon the Sales-tax authorities  and  if they  made no investigation and have come to the  conclusion mere  because of the frequency and the volume of the  sales, the inference cannot be sustained. On  that view of the case, the answer recorded by  the  High Court on the first question will be modified as follows : "In  the  negative, except as to ’kolsi’ and  waste  caustic liquor". There will be no order as to costs in this appeal. V.P.S.                               Appeal allowed in part.