http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

CASE NO.: Appeal (civil)  1072 of 2008

PETITIONER: State of Punjab & Others etc.etc

RESPONDENT: M/s. Perfect Synthetics etc.etc

DATE OF JUDGMENT: 07/03/2008

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.1072 OF 2008

KAPADIA, J.

This civil appeal filed by the State of Punjab is directed  against judgment and order dated 4.7.06 passed by Punjab  and Haryana High Court in CWP No.2271 of 2006 by which it  has been held that the assessee was entitled to deduction  under Rule 29(xii) of the Punjab General Sales Tax Rules,  1949 (for short, "1949 Rules").

2.      Respondent-assessee M/s. Perfect Synthetics is a  partnership firm engaged in the business of purchase, sale  and manufacturing of yarn.  In this civil appeal we are  concerned with assessment year 2001-02.  Assessee is  registered under Punjab General Sales Tax Act, 1948 (for  short, "1948 Act").  Assessee claims that after purchasing raw- material from exempted units within the State it has used the  same in the manufacture of yarn, majority of yarn being sold  in the course of intra-state sales and tax on finished goods  being paid.  Some of the units from whom the assessee  purchased raw-material stood exempted from payment of tax  under Punjab General Sales Tax (Deferment and Exemption)  Rules, 1991 (for short, "1991 Rules").

3.      It is the grievance of the assessee that in calculating its  taxable turnover, in terms of Rule 29(xii) of the 1949 Rules,  deduction is not being allowed by the Department on the  ground that the goods purchased by the assessee are liable to  tax at the first stage of sale and since no tax on purchase of  raw-material from exempted units has been paid the assessee  is not entitled to deduction under Rule 29(xii) of the 1949  Rules.

4.      Therefore, the short controversy which arises for  determination in this appeal is : "Whether the assessee is entitled to deduction, from  gross turnover, the purchase value of the raw- material which the assessee bought from exempted  units?"

5.      According to appellant, the assessee is not entitled to  such deduction as the said purchase value is not subjected to  tax at the first stage of sale as the raw-material is purchased  from the exempted units.  According to appellant, only the  purchase value which stood subjected to tax at first stage of  sale under Section 5(1-A) of the 1948 Act is entitled to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

deduction under Rule 29(xii) of the 1949 Rules.

Scheme of the Act  6.      Section 4 of the 1948 Act is the charging section which  provides for levy of tax.  Section 5(1-A) of the 1948 Act enables  the State Government to specify certain goods, tax on which is  leviable at the first stage of sale thereof.  Under Section 5(1-A)  the State Government is empowered to issue notification  specifying the goods on which the tax under sub-section (1)  had to be levied at the first stage of sale thereof.  Such  notification was issued in the present case on 25.7.90 which is  reproduced hereinbelow: "Notification dated 25.7.1990

Punjab Government

Notification No. SO 38/P.A. 46/48 S-5/90 dated  25.07.1990

Published in Punjab Government Gazette ordinary,

Dated 25.07.1990.

In exercise of the powers conferred by sub-Section  (1-A) of Section 5 of the Punjab General Sales Tax Act,  1948 (Punjab Act No.46 of 1948), the President of India  is pleased to direct that with effect from the date of  publication of this Notification in the Official Gazette,  the tax under sub-section (1) of the said Section shall be  levied at the first stage of the sale of goods other than  declared goods manufactured and sold by a dealer who  has been allowed the benefit of deferment of or  exemption from the liability to pay tax under Punjab  General Sales Tax (Deferment and Exemption) Rules,  1991 and which stage in his case shall be the stage of  sale when such dealer sells the goods from the premises  of his manufacturing industrial unit for the first time in  the State of Punjab."

7.      Section 5(2) of the 1948 Act provides for definition of the  word "taxable turnover" to mean part of the dealer’s gross  turnover which remains after deducting therefrom the dealer’s  turnover during the relevant period on such other sales or  purchases as may be prescribed. 8.      We quote hereinbelow Section 5(2)(a)(vii) which reads as  follow:

"5. Rate of tax:-  (2) In this Act the expression "taxable turnover" means  that part of a dealer’s gross turnover during any period,  which remain after detecting therefrom - (a) his turnover during that period on - (vii) such other sales or purchases as may be  prescribed;"

9.      We quote hereinbelow Rule 29(xii) of the 1949 Rules  which reads as under: "RULE-29: IN CALCULATING HIS TAXABLE  TURNOVER A REGISTERED DEALER MAY DEDUCT  FROM HIS GROSS TURNOVER

(xii)   The purchase value of goods which have already  been subjected to tax under section 5(1-A) or section  5(3), as the case may be used or consumed by him in  manufacture in Punjab of goods other than goods

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

declared tax free under section 6 for sale:

       (i)     in Punjab;

       (ii)    in the course of inter-State trade or  commerce;

       (iii)   In the course of export out of territory of  India;

       Provided that the dealer produces copies of cash  memos or bills prescribed under rule-55A at the time  of assessment or when called upon to do so, by notice,  by the competent authority under the Act."

10.     Section 30-A of the 1948 Act enables the State  Government to exempt any class of industries from payment of  tax subject to such conditions as may be prescribed.  In  exercise of powers conferred under Section 30-A, the State  Government has framed the 1991 Rules providing for various  benefits of exemption from payment of tax and the conditions  thereof.  In this connection, it is important to note that  exemption is given to the dealers and not to the goods.  The  quantum of exemption to the unit is based on three factors,  namely, capital invested, area in which the unit was located  and the nature of industry.  Rule 5 of the 1991 Rules provides  for a mode of availing benefit of exemption.

11.     We quote hereinbelow Rule 9(1), (2)  and (3) of the 1991  Rules which read as under: "RULE 9:   RETURN, ASSESMENT ETC.

(1)     The unit holding deferment or exemption  certificate shall continue to file the return in the  manner specified under the Act and the rules  made thereunder.

(2)     Notwithstanding anything contained in these  rules, the unit holding deferment or exemption  certificate issued under these rules, shall attach  an attested copy of deferment or exemption  certificate, as the case may be, in lieu of proof of  payment of tax alongwith the return till the  deferred or exempted amount of tax is fully availed  of or the period of deferment or exemption expires  under these rules, whichever is earlier.

(3)     The assessment of an eligible unit in respect  of which deferment or exemption certificate has  been granted shall be made in accordance with  the provisions of the Act and the rules made  thereunder as early as possible and shall be  completed by the 31st day of December in respect  of the assessment year immediately preceding  there to and the additional demand so determined,  if any, shall be paid as per the provisions of the  Act and the rules made thereunder."

ISSUE 12.     The question which arises for determination in this civil  appeal is:

"What is the meaning of the words "the purchase

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

value of the goods which have been subjected to tax  under Section 5(1-A) in Rule 29(xii)?

FINDINGS 13.     According to the Department, the words "subjected to  tax" in Rule 29(xii), quoted above, would mean goods which  had suffered the tax under that section. In that connection the  Department has placed reliance on the judgment of the  Constitution Bench of this Court in the case of  M/s. Gannon  Dunkerley and Co. and ors.  v.  State of Rajasthan and ors.  \026 (1993) 1 SCC 364 in which Rule 29(2) of Rajasthan Sales Tax  Rules came to be interpreted.

14.     We find no merit in the said argument of the Department.  In this connection, we have to construe the scheme of the  1948 Act. As stated above, Section 4 is the charging section  whereas Section 5(1-A) indicates the point at which the levy  takes place. The said "1948 Act" refers to single point levy of  tax on the first sale. The Notification dated 25.7.1990  specifically incorporates the provisions of Rule 9 of the 1991  Rules which requires the unit holding exemption certificate to  file the return under the Act and for the assessment of an  eligible unit in respect of which exemption certificate has been  granted. The said notification read in entirety thus indicates  the exemption given to the eligible unit under the Act is only  qua the payability. The said exemption to the eligible unit is  not in the matter of assessment. The reason is obvious. The  exemption is granted to the unit for 10 years or till the  exemption entitlement gets exhausted, whichever is earlier.  Therefore, under the notification, exemption is only qua  payability and not in respect of assessment. That is the reason  for incorporating Rule 9 into Notification dated 25.7.1990  which requires the eligible unit to file its returns in the  manner specified under the Act, to attach requisite documents  and for assessment in accordance with the provisions of the  Act. Even with regard to payability, it may be noted that,  under the scheme of the 1948 Act, the calculated tax gets  appropriated towards the scheme entitlement. Taking this  linkage into account, we are of the view that the words  "subjected to tax" cannot be equated to the words "having  suffered tax". There is one more point to be noted. Section 5(1)  of the 1948 Act refers to rate of tax whereas Section 5(1-A)  refers to the stage at which the tax is to be levied. As stated  above, Section 5(1-A) refers not only to the stage of sale at  which the tax is to be levied, it also refers to the issuance of  notification by the State Government on which date alone the  tax becomes leviable. Therefore, the scheme of 1948 Act is  different from the scheme of Section 5(1) of Rajasthan Sales  Tax Act, 1954 considered by the Constitution Bench of this  Court in Gannon Dunkerley (supra). Section 5(1) of Rajasthan  Sales Tax  Act, 1954 referred only to the rate of fixation and  not to the stage of taxation. One more distinguishing feature  which is required to be mentioned is that under Section 30-A  read with Rule 4 and Rule 4-A of 1991 Rules, exemption is  given to the dealer/unit whereas Rule 29(xii) of 1949 Rules  framed under 1948 Act gives deduction to the goods. Since the  said Rule 29(xii) refers to the purchase value of the goods  which stood subjected to tax it becomes clear that under the  scheme of 1948 Act even the eligible unit has to be assessed to  tax. Under that assessment, the Department had to compute  the tax liability. The Department had to compute the amount  of tax payable by the eligible unit as such tax has to be  appropriated towards the exemption entitlement. Therefore,  the words used in Rule 29(xii) are "the purchase value of goods

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

which had been subjected to tax under Section 5(1-A)".   Hence, we cannot equate the scheme of 1948 Act and the  Rules framed thereunder with the scheme of the Rajasthan  Sales Tax Act, 1954.

15.     Before concluding we may refer to the judgment of the  Constitution Bench of this Court in the case of M/s. Gannon  Dunkerley and Co. and ors. V. State of Rajasthan and ors.  (supra).  In that case it was held that the goods, on which no  tax was leviable under Section 5(1) of Rajasthan Sales Tax Act,  1954, were not subjected to any tax and, therefore, there was  no question of such goods having suffered tax at the rates  prescribed under Section 5 of the said Act.  We quote  hereinbelow paras 68 and 69 of the said judgment which read  as under: "68. The constitutional validity of a statute has to be  determined on the basis of its provisions and on the  ambit of the operation as reasonably construed and if,  so judged, it does not pass the test of constitutionality it  cannot be pronounced valid merely because it is  administered in a manner which might not conflict with  the constitutional requirements. [See: Collector of  Customs v. Nathella Sampathu Chetty \026 (1962) 3 SCR  786] The rules framed under the Rajasthan Sales Tax  Act would not, therefore, be of any assistance in  resolving the question regarding the validity of Section  5(3). We have, however, examined the rules that have  been framed and we find that they do not improve the  position. The relevant provisions in this regard are  contained in sub-rule (2) of Rule 29 of the Rajasthan  Sales Tax Rules which makes provision for deductions  from the turnover in the case of a works contract. The  said sub-rule (2) contains two clauses. Clause (i), which  is referable to the proviso to sub-section (3) of Section 5,  provides for deduction of the value of the goods  transferred in execution of works contract, whether as  goods or in some other form, which have already  suffered tax at the rates prescribed by Section 5 or  which are exempted from tax under Section 4. Clause  (ii) is referable to Explanation (i) of Section 2(t) and it  provides for deduction of all sums towards labour  charges, which are directly co-related with the goods,  property in which has passed in the execution of works  contract, whether as goods or in some other form.

69. Shri Krishnamurthy Iyer, the learned counsel  appearing for the State of Rajasthan, has submitted  that the words "which have already suffered tax at the  rates prescribed under Section 5" are wide enough to  permit deduction in respect of goods on which no tax is  leviable under sub-section (1) of Section 5 of the Act,  namely, sales in the course of inter-State trade or  commerce or sales outside the State or in the course of  import and export as well as sales of goods which have  been declared to be of special importance in the course  of inter-State trade or commerce under Section 14 of the  Central Sales Tax Act and are governed by Section 15 of  the said Act. We find it difficult to accept this  contention. The words "which have already suffered at  the rates prescribed under Section 5" only refer to the  goods which have already been subjected to tax under  the Act at the rates specified under Section 5, and their  value is to be excluded from the turnover. The goods on  which no tax is leviable under sub-section (1) of Section  5 are not subject to any tax under the Act and there is

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

no question of such goods having suffered tax at the  rates prescribed under Section 5. In this context we  may again refer to the definition of taxable turnover  contained in Section 2(s) of the Rajasthan Sales Tax Act  wherein provision is made under clauses (i) to (iv) for  deduction from the turnover for arriving at the taxable  turnover. Clause (i) refers to sale of goods "on which no  tax is leviable under this Act" and clause (ii) refers to  sale of goods "which have already been subjected to tax  under this Act." These clauses show that the legislature  has made a distinction between a sale of goods on  which no tax is leviable and a sale of goods which has  already been subjected to tax under the Act. Clause (i)  of sub-rule (2) of Rule 29 is a provision similar to that  contained in clause (ii) of Section 2(s). It is, therefore,  not possible to construe clause (i) of sub-rule (2) of Rule  29 to mean that sales on which no tax is leviable under  sub-section (1) of Section 5 are to be excluded from the  turnover for the purpose of computing tax on such  turnover in relation to a works contract."        16.     It is important to note that under Rule 29(2) of the  Rajasthan Sales Tax Rules, 1955, provision was made for  deduction from the turnover in the case of a works contract.   Sub-rule (2) contained two clauses.  Clause (i) referred to the  proviso to Section 5(3) which inter alia provided for deduction  of the value of the goods transferred in execution of works  contract which had suffered tax at the rates prescribed by  section or which stood exempted from tax under Section 4.   Clause (ii) referred to Section 2 and it provided for deduction of  labour charges.  In this case, we are concerned only with  clause (i) which provided for deduction of value of goods  transferred in execution of works contract which had suffered  tax at the rates prescribed by Section 5.  The underlined  sentence is relied upon by the learned counsel appearing on  behalf of the Department to contend that the present case is  similar to the case of M/s. Gannon Dunkerley (supra).  We do  not agree with this contention.  It is important to note that  Rule 29(2) of the Rajasthan Sales Tax Rules, 1955 used the  words "goods which had suffered tax at the rates prescribed  under Section 5".  Therefore, Section 5 of the Rajasthan Sales  Tax Act, 1954 dealt with only the rate of tax.  Therefore,   Section 5 of the Rajasthan Sales Tax Act, 1954 contemplated  only rate fixation and not to the stage of taxation whereas in  the present case, we are concerned with Section 5(1-A) of 1948  Act which, as stated above, refers to the stage at which the tax  has to be levied, namely, first stage of sale.  Moreover, the  expression "which had already suffered tax" is not there in  Rule 29(xii) of 1949 Rules.  In fact, Rule 29(xii) does not say  the goods should have suffered tax or the tax should have  been paid or that the goods had been subjected to tax under  Section 4 or under the said Act and, therefore, the scheme of  the Act in question is quite different from the scheme of  Rajasthan Sales Tax Act, 1954.  Therefore, in our view the  judgment of the Constitution Bench in M/s. Gannon  Dunkerley (supra) has no application to the facts of the  present case.  For the same reasons, the judgment of the  Division Bench of this Court in the case of State of M.P. and  ors. v. Indore Iron & Steel Mills Pvt. Ltd.-(1998) 6 SCC 416  has also no application to the present case.          17.     For the aforestated reasons, we find no infirmity in the  impugned judgment.  Hence, this civil appeal is accordingly  dismissed with no order as to costs.