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PETITIONER: STATE OF MADRAS

       Vs.

RESPONDENT: M/S.K.C.P. LTD.

DATE OF JUDGMENT: 20/08/1968

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. RAMASWAMI, V.

CITATION:  1969 AIR  348            1969 SCR  (1) 778  CITATOR INFO :  RF         1971 SC2054  (1)

ACT: Central  Sales  Tax  Act LXXIV of 1956-Ss.  2(b)  and  9(3)- Assessee  engaged  in  manufacture and  sale  of   machinery parts-Purchasing   furnaces for its foundry-On  their  being found  unsuitable selling them at a profit-If a ’dealer’  in respect of such sale-Whether sales tax payable on such sale.

HEADNOTE: The  respondent Company carried on business  of  manufacture and  sale of machinery and parts of machinery etc.  For  its manufacturing  activities,  it maintained a foundry  and  in 19’52  it   purchased   two  arc furnaces for  use  in  this foundry.   As the furnaces were found unsuitable  they  were sold  to a purchaser at a profit.  For the  assessment  year 195859 the sales tax assessing authorities included the sale price  of  the  furnaces  in the  turnover  of  the  Company although  it  was maintained by the Company  that  the  sale represented  art isolated sale of its fixed capital  assets. An  appeal to the Sales Tax Appellate Tribunal was  rejected but  the High Court allowed a revision petition on the  view that  it  was impossible to hold that the sale  of  the  are furnaces  was  either  ingrained in the business activity of the  assessee  or  would  constitute  its   normal  business activity;  and  that  the  mere fact  that  the  sale  price exceeded  the  cost  price  of  the  arc  furnaces  was  not sufficient  to   establish   that the sale  was  a  business activity or that it was actuated by the profit motive. On appeal to this Court. HELD:  The  High Court had rightly concluded that  the  sale proceeds  of  the  furnaces could not be   included  in  the turnover of  the  assessee for determining its liability  to sales tax. The  furnaces were  admittedly imported for the  purpose  of being installed as a part of the plant in the foundry of the assessee.  There was no material to show that there was  any intention  at the time when the furnaces were purchased   of selling   them  at  a profit.  Although   the  assessee  was dealing  in the sale of heavy machinery and machinery  parts it  was nowhere proved that furnaces were ever  manufactured

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or  sold  by it or were part of its  business  or  ingrained therein.   The   are  furnaces were either fixed  assets  or discarded goods which had been found to be unserviceable  Or unsuitable.  The assessee could not therefore be said to  be a  dealer  within  the definition given in s.  2(b)  of  the Central Act. [783 F-784 B] State  of Andhra pradesh v. Abdul Bakshi & Bros., 15  S.T.C. 644 and State of Gularat v. Raipur Manufacturing  Co.  Ltd., 19  S.T.C.  1; distinguished. Ambica   Mills  Ltd.  v.  State   of   Gujarat,   15  S.T.C. 367,  State Gujarat v. Vivekananda Mills, 19 S.T.C. 103, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 731 of 1966. 779 Appeal  by special leave from the judgment and  order  dated October  22, 1964 of the Madras High Court in Tax  Case  No. 197 of 1963 (Revision No. 126). A.K. Sen and A.V. Rangam, for the appellant. S.T. Desai and T.A. Ramachandran, for the respondent. The Judgment of the Court was delivered by Grover, J.   This is an appeal by special leave in which the sole  question  for  decision  is  whether  the   respondent company  was  liable to pay sales tax on an  amount  of  Rs. 4,20,000 being the sale-price of two arc furnaces which ’had been purchased in 1952 and sold in 1958. 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 foundry.  In the account books and the balance sheet of the company 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 purchased and therefore they were  disposed of in 1958 to a purchaser in Calcutta  for  a sum  of Rs. 4,20,000.  For the assessment year  1958-59  the assessing authorities sought  to  include  the amount of Rs. 4,20,000  in  the turnover of the company  although  it  was maintained  by  the  company 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  business               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  necessity   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

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Madras under s. 38 of the Madras General Sales Tax Act  (Act 1  of 1959) read with s. 9(3) of the Central Sale  Tax  Act, 1956 (Act LXXIV of 1956), hereinafter called the Madras  Act and the Central Act 780 respectively. ’Before the High Court it was argued on behalf of  the  assessee 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 assessee 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 the furnaces, when  they were  found to be unserviceable, was not made in the  course of  the  normal  business activity  of  the  assessee.   The position  taken up on behalf of the State was that when  the assessee  carried  on the business of selling  machinery  of various  kinds the sale of arc furnaces must be regarded  as sale  of  machinery  in the normal course  of  its  business activity.  The learned Judges of the High Court referred  to a  large number of decided cases including the  decision  of this  Court  in State of Andhra Pradesh v.  Abdul  Bakshi  & Bros.(1) Reliance was finally placed on the observations  in Ambica  Mills  Ltd. v. State of Gujarat(2) in which  it  was observed  inter  alia  that the  machinery  which  had  been disposed  of had been obviously purchased and installed  for use for production of textile 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  assets  had  been made only because  they  had  become useless and unserviceable by usual wear and tear or  because of the necessity for substituting modern machinery.  In  the present  case the learned Madras Judges were of the  opinion that  it  was impossible to hold that the sale  of  the  arc furnaces  was either ingrained in the business  activity  of the  assessee  or  ’would  constitute  its  normal  business activity.   According  to them the mere fact that  the  sale price  exceeded  the cost price of the arc furnace  was  not sufficient  to  establish  that their sale  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  assessee being  a dealer  in heavy machinery and accessories  thereof the  sale  of arc furnaces could not be said  to  be  wholly different and unconnected with its usual business  activity. He has emphasised the fact that the assessee had  admittedly made a profit of Rs. 2,07,000 from the aforesaid transaction and  in  addition  collected sales  tax  from  the  Calcutta dealer.   He  has  called attention to the  finding  of  the Appellate  Assistant Commissioner of Commercial  Taxes  that the sale in the present’ case was not one of used asset  and that  whatever  the intention at the time  of  the  purchase might be, once the machinery was found not usable, the (1)  15 S.T.C. 644.                           (2) 15  S.T.C. 367. 781 assessee  "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 furnaces into its  stock  in due  course of business activity.  Mr. Sen has next  pointed

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out that the respondent fell squarely within the  definition of  the word "dealer" as defined by s. 2(b) of  the  Central 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 purchased  undressed  hides  and  skins  and  tanning   bark together  with other material required in their  tannery  as they carried on the business of tanning hides and skins  and of  selling tanned skins in the 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  sate 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 authorifles as also the Sales Tax Appellate Tribunal rejected this contention 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 pay  tax  only when  he was carrying on business of buying and selling  the commodity and not when he brought it for consumption in  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    business  of  selling  or   buying   or               supplying  goods.  The  expression  "business"               though   extensively  used  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". 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 (1) 15 S.T.C. 644. 782               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 with 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 this Court  under  discussion were  different and distinguishable 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 for being installed in the foundry as  a part  of the manufacturing plant.   The words "in aid  of  a

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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  the decision  of  this  Court. In State of  Gujarat  v.   Raipur Manufacturing Co. Ltd.(1),  the tribunal had held that 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 Andhra Pradesh  v. Abdul  Bakshi & Bros.(2) it was observed that by the use  of the  expression  "profit motive" it was  not  intended  that profit must, 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 predicates a  motive  which pervades the whole series  of  transactions effected by the person in the course of his activity.  Where a  person  came  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 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 carrying 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 (1)  19  S.T.C. 1.                           (2)  15  S.T.C. 644. 783 business  of  selling his fixed assets  or  discarded  goods would  not ordinarily  arise.  In the  State of Gujarat   v. Vivekananda  Mills(1),  the  assessee was  carrying  on  the business of manufacturing cotton fabrics.  It had agreed  to purchase   under   user’s  import  licence  500   bales   of Californian  cotton  in January 1953.   Believing  that  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 selling cotton and the sales were not liable to tax.  It was clear from the supplemental statement of the case which  had been  submitted  that though the assessee had  been  selling cotton   from  the  year  1946  onwards  except  for   three intervening  years  the  sales  were  in  respect  of  goods purchased for the business of manufacturing 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

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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 material 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 definition given in s. 2(b)  of  the Central Act which is (1) 19 S.T.C. 103. 784               "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 referred 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 be included in the turnover of the  assessee  for the purpose of determining the liability of the assessee  to sales tax.  The appeal fails and is dismissed with costs. Appeal dismissed. R.K.P.S. 785