REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.1929 OF 2004

State of Uttar Pradesh & Ors.              ...Appellant(s)

Versus

M/s. Vam Organic Chemicals Limited        ...Respondent(s)

W I T H

Civil  Appeal  Nos.1930/2004,  1931-1932/2004,  1933/2004,  2810-2938/2004, 4298/2009, 4299/2009 and Civil Appeal No.  2056/2010 @ S.L.P. (C) No.6979/2010 @ CC 2279/2009

J U D G M E N T

S.H. KAPADIA,J.

Heard learned counsel on both sides.

Delay condoned.

Leave  granted  in  the  special  leave  

petition.

In  all  these  matters,  respondents  are  

manufacturers of notified goods.  These respondents have  

been  given central  registration under  Section 7  of the  

Central  Sales  Tax  Act,  1956,  and  also  Recognition  

Certificate under Section 4-B of the Uttar Pradesh Trade  

Tax Act, 1948, for purchase of high speed diesel oil at  

concessional rate.  These certificates have been given on  

different dates by the appellants.

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The lead matter is State of Uttar Pradesh &  

Ors. vs. M/s. Vam Organic Chemicals Limited [Civil Appeal  

No.1929 of 2004].

M/s.  Vam  Organic  Chemicals  Limited  is  a  

public  limited  company  incorporated  under  the  Indian  

Companies Act, having it's registered office at Amroha,  

Uttar Pradesh.  It has established a continuous process  

chemical industry for the manufacture of Vinyl Pyridine,  

Picoline, etc. [for short, `chemicals'].  The said Company  

is registered under the Uttar Pradesh Trade Tax Act, 1948  

[for  short,  `1948  Act'],  as  well  as  under  the  Central  

Sales Tax Act, 1956 [for short, `1956 Act'], as a dealer.

M/s.  Vam  Organic  Chemicals  Limited  [for  

short, “Company”] was granted a Registration Certificate  

under Section 7 of 1956 Act in which a List of Items was  

annexed.  As per the said List, the Company was entitled  

to purchase goods under 1956 Act.  The Company was also  

granted  a  Recognition  Certificate  under  Section  4-B  of  

1948 Act authorizing it to purchase goods on concessional  

rates.   On  the  basis  of  the  Recognition  Certificate  

granted  by  the  State,  the  Company  became  entitled  to  

purchase  various  goods  against  Form  III-B,  which  was  

issued  by  the  Assessing  Authority  on  payment  of  

concessional rate of tax.  Since the Company had obtained  

Registration Certificate under Section 7 of 1956 Act, it  

purchased high speed diesel oil [`HSD', for short] against  

Form-C from Indian Oil Corporation Limited.  The Company  

had also  bought HSD  against  Form III-B  from Indian Oil

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Corporation  Limited  under  which  Indian  Oil  Corporation  

Limited  charged  the  tax  at  the  rate  of  two  per  cent  

against Form III-B.

On 12th June, 2000, a meeting was organised  

by  the  Principal  Secretary,  Finance,  Uttar  Pradesh,  in  

which a decision was taken that the benefit of Form III-B  

for purchase of HSD to be used in Diesel Generating Sets  

in  the  factory  should  not  be  given  the  benefit  of  

concessional rate since such HSD was not directly used in  

the manufacture of notified goods [chemicals]; rather, it  

was used for generating electricity in the Generating Set  

which  electricity  was  then  captively  used  for  

manufacturing  chemicals.   On  the  basis  of  the  said  

decision  dated  12th June,  2000,  the  Additional  

Commissioner, Trade Tax, Meerut, Uttar Pradesh, issued a  

Circular  on  20th June,  2000,  to  all  the  subordinate  

officers  for  it's  implementation  and,  accordingly,  all  

Trade Tax Authorities of the State, who, at the relevant  

time,  were  under  the  administrative  control  of  the  

Commissioner, issued notices for deletion of HSD, an item  

mentioned in the Company's Recognition Certificate.  It is  

this show-cause notice which came to be challenged by M/s.  

Vam Organic Chemicals Limited and others by filing writ  

petitions in the Allahabad High Court.

In the writ petition filed by the Company,  

it was submitted that HSD was a fuel, which was absolutely  

essential for operating the Diesel Generating Set [D.G.  

Set]  in the factory as the Company's factory was engaged  

in  a  continuous  process  chemical  industry  and,  in  the  

absence of HSD,  the D.G. Set  would become non-functional

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and  if  electricity  cannot  be  generated,  it  would  be  

impossible  to  produce  chemicals.   According  to  the  

Company, HSD is used in D.G. Sets to generate electric  

energy which is required for chemical industry.  In this  

connection, reliance was placed on Explanation to Section  

4-B  of  1948  Act.   In  reply,  it  was  the  case  of  the  

Department that HSD is used in the D.G. Set for generating  

electric  energy  which  is  not  only  used  for  chemical  

industry  but is  also used  for electrical  appliances in  

office, factory and to supply electricity for working of  

lights, fans, etc.  According to the Department, HSD is  

used in the Generating Set for production of electricity;  

that the unit of the Company was not registered/recognised  

for production of electricity; that it was not a public  

utility service under the relevant Electricity Act; and,  

hence,  the  Company  cannot  call  HSD  a  fuel/raw-material  

used  for  production  of  electricity  in  this  case.  

According  to  the  Department,  in  the  present  case,  the  

notified goods consisted of chemicals and not electricity,  

hence, HSD was not used in the process of production of  

chemicals  directly.   For  the  afore-stated  reasons,  the  

Department  submitted  that,  on  the  facts  and  in  the  

circumstances of this case, HSD cannot be included in the  

Recognition Certificate of the Company.  By the impugned  

judgements, the High Court came to the conclusion that the  

stand of the Department was highly technical.  According  

to the High Court, HSD was used by the Company for the  

manufacture of chemicals [notified goods], as mentioned in  

Section 4-B(2)  of 1948  Act.   According to it,  the word

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“directly” is not mentioned in Section 4-B(2) of 1948 Act.  

It further held that Section 4-B(2) of 1948 Act does not  

mention that the goods, referred to in sub-section (1),  

should  be  used  directly  for  the  manufacture  of  the  

notified goods.  In the light of the said reasoning, the  

High  Court  came  to  the  conclusion,  by  the  impugned  

judgements,  that  the  show-cause  notices  issued  by  the  

Department calling upon the Companies to show-cause as to  

why  HSD  should  not  be  deleted  from  the  Recognition  

Certificate based on the Circulars dated 20th June, 2000,  

etc.,  be  set  aside.   That,  it  was  not  open  to  the  

Department  to delete  HSD, furnace  oil, liquid  fuels or  

gaseous fuels from the Recognition  Certificate as such  

oil [HSD] constituted a fuel required for the manufacture  

of chemicals in terms of the Explanation to Section 4-B(2)  

of 1948 Act.  Against the said judgements, the State has  

come to this Court by above-mentioned civil appeals.  We  

may  clarify  that,  in  all,  there  are  approximately  138  

appeals against the impugned judgements of the Allahabad  

High Court in various writ petitions.  Suffice it to state  

that common issue arises for determination in this batch  

of  cases,  namely,  Whether  the  Department  was  right  in  

issuing show-cause notices calling upon the Companies to  

show-cause as to why HSD should not be deleted as an item  

from  their  respective  Recognition  Certificates  issued  

under Section 4-B(2) of 1948 Act?

Mr.  Sunil  Gupta,  learned  senior  counsel  

appearing  for  the  Department,  invited  our  attention  to  

Annexure CA(I) of the Paper Book, which is a List of Items  

registered under  Section 4-B  of 1948 Act.  It appears to

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be a List annexed to the Registration Certificate.  What  

is argued by the learned senior counsel is that, under  

Section 4-B(2) of 1948 Act read with Explanation thereto,  

a dealer has to satisfy the Assessing Authority, empowered  

to  issue  Recognition  Certificate,  that  he  requires  the  

duly  itemised  goods  mentioned  in  the  Recognition  

Certificate  for  use  in  the  manufacture  by  him  of  any  

notified goods [final product].  According to the learned  

senior counsel, the Recognition Certificate, including the  

List of Items under Section 4-B(2) of 1948 Act, cannot be  

read  in  isolation.   Each  Item  in  the  List  is  duly  

recognised  by  the  Assessing  Authority  looking  to  its  

requirement  for  use  in  the  manufacture  of  the  final  

product  [notified  goods].   In  this  connection,  it  was  

submitted that HSD does find place in the said List but if  

the  said  Item  is  used  to  make  the  Generating  Set  

functional for generating electric energy which, in turn,  

is  captively  consumed  in  the  manufacture  of  chemical  

goods,  then,  in  that  event,  an  assessee  will  not  be  

entitled  to  the  benefit  of  concessional  rate  of  tax.  

Learned counsel invited our attention to several items in  

the  said  List,  including  air-conditioners,  stabilizers,  

electrical panels and Diesel Generating Set. It was argued  

on behalf of the Department that if HSD is used in the  

Generating Set, it would not amount to it being used in  

the manufacture of chemical goods but it would amount to  

HSD being used to operate the machines.  On the other  

hand, it was urged on behalf of the assessee(s) that, in  

the absence of  HSD, it was not  possible  to operate  the

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D.G. Set; that, the assessee(s) has installed several D.G.  

Sets in it's factory for the manufacture of electricity  

which  Sets  cannot  function  without  the  use  of  HSD.  

According  to the  assessee(s), there  is nothing  in sub-

section (2) of Section 4-B of 1948 Act to suggest that HSD  

should  be used  directly in  the manufacture  of chemical  

goods.  In any event, according to the assessee(s), in the  

List  enclosed  with  the  Recognition  Certificate,  Diesel  

Generating  Set  is  mentioned.   Therefore,  HSD,  in  any  

event, is directly used to operate Diesel Generating Set.  

What is argued on behalf of the assessee(s) is that, if  

D.G.  Set  is  an  item  duly  recognised  by  the  Assessing  

Authority, the machines cannot operate without the use of  

HSD and, in the circumstances, there is, in any event, a  

direct use of HSD in the working of the D.G. Set.  As  

stated above, the High Court has accepted the contentions  

advanced on behalf of the assessee(s).

At the outset, we quote hereinbelow Section  

4-B(2) with the Explanation as also Section 4-B(4)(ii) of  

1948 Act:

“4-B.  Specific  Relief  to  certain  manufacturers.--

[1] xxx xxx xxx

[2] Where a dealer requires any goods, referred  to  in  sub-section  (1)  for  use  in  the  manufacture  by  him  in  the  State,  of  any  notified  goods,  or  in  the  packing  of  such  notified  goods  manufactured  or  processed  by  him, and such notified goods are intended to be  sold by him in the State or in the course of  inter-State  trade or commerce or in the course

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of export out of India, he may apply to the  assessing authority in such form and manner and  within such period as may be prescribed, for  the  grant  of  a  recognition  certificate  in  respect thereof, and if the applicant satisfies  such  requirements  including  requirement  of  depositing late fee, and conditions as may be  prescribed, the assessing authority shall grant  to him in respect of such goods a recognition  certificate in such form and subject to such  conditions, as may be prescribed.

Explanation.-- For the purposes of this sub- section--

[a] `goods required for use in the manufacture'  shall  mean  raw  materials,  processing  materials,  machinery,  plant,  equipment,  consumable  stores,  spare  parts,  accessories, components, sub-assemblies,  fuels or lubricants; and

[b]  `notified goods' means such goods as may,  from  time  to  time  be  notified  by  the  State Government in that behalf.

[4][ii]  The  assessing  authority  may  amend  a  recognition  certificate  granted  under  sub- section (2), either of its own motion or on the  application of the dealer, where the dealer has  changed the name or place of his business or  has  closed  down  any  branch  or  has  opened  a  branch or for any other sufficient reason:

Provided  that  no  recognition  certificate shall be cancelled or amended by  Assessing Authority of its own motion except  after reasonable opportunity of being heard has  been given to the dealer.”

We are looking at the present controversy  

from a different point of view.  The High Court has not  

examined, in the present case,  the nature of the power  

exercised by

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the Assessing Authority under Section 4-B(4)(ii) of 1948  

Act.  This point of view arises because, in this case(s),  

a  show-cause  notice  has  been  issued  to  the  assessee  

calling  upon  the  assessee  to  show-cause  as  to  why  HSD  

mentioned  in  its  Recognition  Certificate  should  not  be  

deleted as it is being used for generating electricity in  

the Generating Set which electricity is then consumed by  

the factory.  A number of writ petitions were filed in the  

Allahabad High Court against the show-cause notices.  The  

High Court intervened at the show-cause notice stage.  If  

one looks at Section 4-B(4)(ii) of 1948 Act, one finds  

that the Assessing Authority is vested with discretionary  

power to amend the Recognition Certificate granted under  

sub-section (2) of Section 4-B of 1948 Act either on it's  

own motion or on the application of the dealer where the  

dealer has changed his name or place of business or has  

closed down his branch office or for any other sufficient  

reason.  By way of proviso, it has been clarified that no  

Recognition Certificate shall be cancelled or amended by  

the Assessing Authority on it's own motion without giving  

reasonable  opportunity  of  being  heard  to  the  dealer  

[assessee].  If one looks at the Scheme of Section 4-B of  

1948 Act, one finds that a statutory power is given to the  

Assessing Authority to issue the Recognition Certificate  

in respect of the notified goods.  There could be a number  

of notified goods. In fact, in 1998, “electricity” itself  

was one of the notified goods.  In our view, under the  

Scheme  of  Section  4-B(2)  of  1948  Act,  the  Assessing  

Authority is  vested  with the  statutory  power  to issue

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Recognition  Certificate  in  respect  of  items  enumerated  

therein, which are required by the dealer for use in the  

manufacture of any notified goods.  In the present case,  

the  assessee(s)  is  manufacturing  chemical  goods.   On  

issuance  of  the  Recognition  Certificate,  a  concessional  

rate  of  tax  becomes  applicable  in  respect  of  items  

enumerated  in  such  certificate.   It  is  a  conditional  

exemption which is given to the dealer [assessee].  It is  

important to bear in mind that a Recognition Certificate  

is issued under Section 4-B of 1948 Act  in respect of  

notified goods [See sub-section (2A) of Section 4-B].   

Power to grant exemption from payment of  

duty or to pay concessional duty is expressly conferred on  

the  Assessing  Authority.   It  is  a  case  of  conditional  

exemption.   While  exercising  that  power,  generally  no  

hearing or reasons are required to be given unless the Act  

so  provides.   In  this  case,  a  proviso  is  inserted  in  

Section 4-B(4)(ii) of 1948 Act to say that no Recognition  

Certificate shall be cancelled or amended by the Assessing  

Authority without giving reasonable opportunity of being  

heard to the dealer.  It is for this reason that, in the  

present case, the Assessing Authority has given show-cause  

notices to all the respondent-dealers calling upon them to  

show-cause  as  to  why  HSD,  as  an  item,  should  not  be  

deleted from the Recognition Certificate.

In  the  present  case,  the  Department  

submitted,  before  us,  that,  by  mistake,  HSD  has  been  

included in the List.  The Department seeks to rectify  

that mistake.  The question,   before  us,  is – whether  

the  Department  is

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precluded  from  doing  so?   This  question  has  not  been  

answered by the High Court.  In our view, under Section 4-

B(4)(ii) of 1948 Act, the Assessing Authority is vested  

with  discretionary  power  to  amend  a  Recognition  

Certificate granted under sub-section (2) of Section 4-B  

of  1948  Act  either  on  it's  own  motion  or  on  the  

application of the dealer for any sufficient reason.  This  

pre-condition of “sufficiency of reasons” requires a show-

cause notice to be given to the dealer in whose favour a  

Recognition Certificate exists calling upon him to show-

cause as to why an item should not be deleted in a given  

case.   Therefore,  in  our  view,  each  case  needs  to  be  

examined  by  the  Assessing  Authority  if  it  seeks  to  

exercise  it's  authority  to  delete  an  item  from  a  

Recognition  Certificate.   Same  is  the  position  if  the  

Assessing  Authority  seeks  to  cancel  a  Recognition  

Certificate  for the  reasons indicated  in the  said sub-

section.  Not only that, while amending or cancelling a  

Recognition Certificate, the Assessing Authority is also  

required to give reasons for amending or cancelling the  

existing Recognition Certificate or for deleting an item  

therefrom.

One more aspect needs to be highlighted.  

Under the proviso to Section 4-B(4)(ii) of 1948 Act, the  

words  used  are  “no  recognition  certificate  shall  be  

cancelled  or amended  by Assessing  Authority of  its own  

motion except after  reasonable   opportunity  of being  

heard”.    It   is  important   to  note  that   the  word  

“rectification”  does

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not find place in the said proviso.  Conceptually, the  

word  “rectification”  is  different  from  the  word  

“amendment”.   This  point  is  relevant  because,  in  the  

present case, the stand of the Department is that HSD is  

inserted in the Recognition Certificate by mistake.  The  

Department  seeks  to  delete  that  item  on  the  ground  of  

mistake.  That would not be possible.  When a Recognition  

Certificate is issued, a benefit of concessional rate of  

tax is given to the dealer.  He arranges his business  

affairs on those lines.  Therefore, that benefit cannot be  

withdrawn retrospectively.  Such benefit can be withdrawn,  

at the highest, from the date of the show-cause notice  

when the Assessing Authority proposes to delete an item  

from the Recognition Certificate.  In our view, such a  

show-cause  notice  has  been  given  in  each  of  the  cases  

before  us.   Accordingly,  we  construe  such  show-cause  

notice to be for amending the Recognition Certificate in  

the  facts  and  circumstances  of  this  case,  particularly  

because, in some of the cases, we find that Recognition  

Certificates have been issued as far back as in 1980.

For the reasons given hereinabove, we remit all  

these cases to the Assessing Authority with a direction to  

treat the show-cause notice(s) issued for the purposes of  

amending  the  existing  Recognition  Certificate(s).   Each  

assessee will be given a hearing.  Each case for amendment  

of Recognition Certificate will be decided in accordance  

with the procedure laid down in Section 4-B(4)(ii) of 1948  

Act.  The  Assessing Authority  will decide  each  case on

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it's own merits uninfluenced by the decision of the High-

Power Committee dated 12th June, 2000.  It will also decide  

each of such cases uninfluenced by Circulars issued by the  

Additional Commissioner dated 20th June, 2000, and others.  

The Assessing Officer will decide each case on it's own  

merits uninfluenced by the observations made by the High  

Court in the impugned judgements.   

One  more  clarification  needs  to  be  

mentioned.  In some of these cases, pursuant to the show-

cause notice(s), the Assessing Authority has also passed  

adjudication orders in terms of the Circulars issued by  

the Commissioner.  In view of our order herein, we direct  

the Assessing Officer to decide these cases de novo on the  

basis of the show-cause notices and also uninfluenced by  

the  observations  made  in  the  orders  of  adjudication  

earlier.  In each case, the Assessing Officer will give a  

reasoned  order.   However,  if  an  order  amending  the  

Recognition  Certificate  is  issued  by  the  Assessing  

Authority, the same will operate only from the date of  

issuance of show-cause notice.

Subject to what is stated hereinabove, this  

batch of civil appeals filed by the State of Uttar Pradesh  

stand disposed of with no order as to costs.

......................J.                   [S.H. KAPADIA]

......................J.               [AFTAB ALAM]

New Delhi, February  26, 2010.