29 September 2004
Supreme Court
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ASSOCIATED CEMENT COS. LTD. Vs STATE OF BIHAR .

Bench: ARIJIT PASAYAT,C.K. THAKKER
Case number: C.A. No.-001488-001488 / 2004
Diary number: 12573 / 2003
Advocates: GAGRAT AND CO Vs


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CASE NO.: Appeal (civil)  1488 of 2004

PETITIONER: Associated Cement Companies Ltd.

RESPONDENT: State of Bihar & Ors.

DATE OF JUDGMENT: 29/09/2004

BENCH: ARIJIT PASAYAT & C.K. THAKKER

JUDGMENT: J U D G M E N T

ARIJIT PASAYAT, J.

    Challenge in this appeal is to the legality of judgment rendered by  a Division Bench of the Patna High Court.

       Appellant questioned legality of the notices issued on 30.5.2002  and 24.6.2002 by the Deputy Commissioner, Commercial Taxes, Patna  Special Circle, Patna (Respondent No.3) proposing to levy tax for the  assessment years 1998-99, 1999-2000 and 1.4.2000 to 14.11.2000 under the  Bihar Finances Act, 1981 (in short the ’Act’) before the High Court.   Notices were issued on the purported basis that the appellant was not  entitled to adjustment of tax paid under the Bihar Tax on Entry of Goods  into Local Areas for Consumption, use or Sale Therein Act, 1993  (hereinafter referred to as the ’Entry Tax Act’). The High Court upheld  validity of the notice and action taken by concerned respondents.   

       Factual position in a nutshell is as follows:

       Appellant is a public limited company registered under the  Companies Act, 1956 (in short the ’Act’) and  has two manufacturing  units -one at Sindri and another at Jhinkpani.  Prior to bifurcation of  the erstwhile State of Bihar the units were registered under the Act and  as well as under the Entry Tax Act and the consolidated registration was  made at Patna Special Circle, under the Act. On 15th November, 2000, the  erstwhile State of Bihar was bifurcated into two States, namely, State  of Jharkhand and the State of Bihar and the said two manufacturing units  of the appellant now have fallen in the State of Jharkhand.

       In the year 1995, the State Government has come out with  Industrial Policy to give incentives to the new units or the existing  units having additional/incremental production with regard to payment of  sales tax. In terms of the aforesaid policy, claim of the appellant is  that it invested money for additional/incremental production cement in  the unit at Sindri and with regard to aforesaid additional/incremental  production exemption was granted in terms of the aforesaid industrial  policy as well as under the provisions of the Act for the period from  1.4.1998 to 31.3.2007 The appellant also claimed exemption under the  provisions of the Act on the basis of the aforesaid Industrial Policy  which was denied by the State and then he filed a writ petition before  the High Court and the same was dismissed and the matter is pending  before this Court.  

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       According to the appellant it was entitled to adjust the entry tax  paid under the Entry Tax Act while computing the tax payable under the  Act. Appellant questioned correctness of the notices issued by filing  writ petition (CWJC No.7821 of 2002). By the impugned judgment dated  28.3.2003 the Division Bench of the High Court dismissed the writ  petition holding that there was no scope of such adjustment.

       Reference was made to various provisions of the Act i.e. Section  3(1) of the Entry Tax Act and the exemption notification No. SO 37 dated  25th February, 1993 issued by the State Government. It was held that  "tax" as defined under clause 2(x) of the Act includes additional tax.  Clause 2 of the exemption notification issued clearly stipulated that if  there was liability under the Act then that shall be reduced to the  extent of tax paid under the Ordinance issued in relation to the entry  tax.  It was further held that as additional tax is also a part of tax  as stipulated in clause 2 of the Act, the appellant is entitled to  benefit under the notification and its liability for payment of  additional tax has to be adjusted against payment of tax under the Entry  Tax Act.

       Learned counsel for the appellant submitted that the High Court  has failed to notice the clear language used in the Act and the Entry  Tax Act. Bifurcation sought to be introduced as regards each goods which  have suffered tax and those which were exempted from payment of tax is  not legally permissible.  According to the respondents it is only that  part of the turnover which has suffered tax and it is the tax levied in  respect of such turnover which is available to be adjusted in terms of  the exemption notification and not otherwise.  This was stated to be an  erroneous reading of the relevant provision.  

       Learned counsel for the respondent submitted that the exemption  notification has to be construed strictly.  There cannot be any  exemption by implication.  When there is no liability to tax because of  the exemption granted, the question of any adjustment of tax in respect  of goods which have not suffered tax does not arise.                  It would be appropriate to take note of the relevant  provisions  of the Entry Tax Act and the Act.  Section 2(c) of the Entry Tax Act  reads as follows:

"2(c): "Entry of goods" with all its grammatical  variations and cognate expressions means Entry of  goods into a local area from any place outside that  local area or any place outside the State for  consumption use, or sale therein.

[Provided that in case of such goods which are liable  to tax under Section 12(1), of the Bihar Finance Act,  1981, entry of Goods shall mean entry of goods into  local area from any place outside the State for  consumption, use or sale therein.]"

Section 3 of the Entry Tax Act is the charging section under the said  Act. Same reads as follows:

"3. Charge of Tax- (1) There shall be levied and  collected a tax on entry of scheduled goods into a  local area for consumption, use or sale therein at  such rate not exceeding 5 percentum of the import  value of such goods as may be specified by the State  Government in a notification published in a official  gazette  subject to such conditions as may be  prescribed.

       Provided different rates for different

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scheduled goods and different local areas may be  specified by the State Government.

(2)     The tax leviable under this Act shall be paid  by every dealer liable to pay tax under Bihar  Finance Act, 1981 or any other person who brings or  causes to be brought into the local areas such  scheduled goods whether on his own account or on  account of his principal or takes delivery or is  entitled to take delivery of such goods on such  entry:

       Provided no tax shall be leviable in respect of  entry of such scheduled goods effected by a person  other than the dealer if, the value of such goods  does not exceed 25 thousands in a year.

       Provided further that where an importer of  scheduled goods liable to pay tax under the Act,  becomes liable to pay tax under the Bihar Finance  Act, 1981 (Bihar Act, 5 1981) by virtue of sale of  such scheduled goods, his liability to pay tax under  the Bihar Finance Act, 1981 shall stand reduced to  the extent of tax paid under the Act.

       (3)     The liability to pay tax on scheduled  goods shall only be at the point of first entry into  a local area and any subsequent entry or entries  into any other local area or areas of the said  scheduled goods shall not be subject to tax provided  the subsequent importing dealer produces before the  assessing officer the original copy of the cash  memo, invoice, bill or challan issued to him by the  dealer from whom he purchased or received the said  scheduled goods, and files a true and complete  declaration in the form and manner prescribed".

       Section 2(d) of the Act defines "Dealer".  Section 3(h) defines  "Goods" and Section 3(j) defines "Gross Turnover". Section 3 of the Act  is the charging section which reads as follows:

"3. Charge of tax \026 (1) Subject to the provisions of  this part, the sales tax or the purchase tax as the  case may be, shall be paid by every dealer \026 (a)     with effect from the date of commencement  of the Bihar Finance Act, 1981 if his  gross turnover during a period not  exceeding twelve  months immediately  preceding the said date exceeded the  specified quantum; (b)     to whom clause (a) does not apply, with  effect from the date immediately following  the day on which his gross turnover during  a period not exceeding twelve months  immediately preceding such date first  exceeded the specified quantum. Explanation \026 In this section, the expression,  ’specified quantum’ means \026 (i)     in relation to an importer, nil; (ii) in relation to any dealer, who himself  manufactures any goods, nil; (iii) in relation to any dealer engaged in the  execution of works contract \026 Where the total

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value of works contracts taken together exceeds  Rs. Twenty-five thousand in a year; (iv) in relation to any dealer engaged in the  delivery or supply of goods as a result of  transfer of the right to use any goods for any  purpose \026 nil; (v) in relation to any other dealer,  Rs.1,00,000.

Provided that the State Government may,  by notification published in the Official  Gazette and subject to condition of one month’s  previous notice, increase or reduce the amount  of specified quantum.

(2)     Such tax shall be payable to a dealer to whom  clause (a) of sub-section (1) applies on sales and  purchases made inside Bihar on and from the date of  commencement of the Bihar Finance Act, 1981 and by a  dealer to whom clause (b) of the said sub-section  applies on such sales and purchases made on or from  the date immediately following the day mentioned in  the said clause (b).           (3)     ............

(4)     ............

(5)     ............

(6)     ............

(7)     ............

(8)     Notwithstanding anything contained in other  sub-sections, a dealer registered under the Central  Sales Tax Act, 1956 (LXXIV of 1956) shall  irrespective of the quantum of his gross turnover, be  liable to pay sales tax on his ale, made, inside  Bihar, of any goods which he has purchased after  furnishing a declaration under sub-section (4) of  Section 8 of the said Act or any goods in the  manufacture or possessing of which goods so purchased  by him have been used:

Provided that sales tax shall not be payable if  the dealer shows to the satisfaction of the  prescribed authority that the sale is deductible from  his gross turnover under clause (c) of sub-section  (1) of Section 21 for purpose of determining his  taxable turnover.

(9)     ............

(10)    The tax for each year may, with the previous  approval of the Commissioner, be estimated and  collected in advance during a year in such  instalments as may be fixed by the prescribed  authority.  For the purpose the prescribed authority  may require the dealer to furnish an advance estimate  of his taxable turnover for that year and may  provisionally determine the amount of tax payable by  the dealer in respect of the year.  Thereupon the  dealer shall pay the amount so determined by such

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date as may be fixed by such authority."                             Section 6 deals with charge of additional tax and Section 7 deals  with exemption. Section 7 is a pivotal  provision so far as present  dispute is concerned. It reads as under:

"7. Exemption \026 (1) No tax shall be payable under  this Part on sales or purchases of goods which have  taken place \026  

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

(b)     outside the State;

(c)     in the course of import of goods into,  or export of goods out of the territory  of India.

(2)     The provisions of the Central Sales Tax Act,  1956 (LXXIV of 1956) shall apply for determining  when sale or purchase of goods shall be deemed to  have taken place in any of the ways mentioned in  clauses (a), (b) or (c) of sub-section (1).  

(3)     The State Government may, by notification and  subject to such conditions or restrictions as it may  impose, exempt from the sales tax or purchase tax \026

(a)     sales of any goods or class or  description of goods;

(b)     sales of any goods or class or  description of goods to or by any class  of dealers;

(c)     purchase of any goods by any class of  dealers or any purchase or category or  description of purchases of such goods.

(4)     Where exemption from the levy of tax under this  Part on any sale or purchase of goods is claimed by  a dealer under the provisions of this section or  Section 21, the burden of proof shall lie on such  dealer and the prescribed authority may require the  dealer to substantiate the claim in the prescribed  manner."                    Literally "exemption" is freedom from liability, tax or duty.   Fiscally it may assume varying shapes, specially, in a growing economy.  In fact, an exemption provision is like an exception and on normal  principle of construction or interpretation of statutes it is construed  strictly either because of legislative intention or on economic  justification of inequitable burden of progressive approach of fiscal  provisions intended to augment State revenue.  But once exception or  exemption becomes applicable no rule or principle requires it to be  construed strictly.  Truly speaking liberal and strict construction of  an exemption provision is to be invoked at different stages of  interpreting it.  When the question is whether a subject falls in the  notification or in the exemption clause then it being in nature of  exception is to be construed strictly and against the subject but once  ambiguity or doubt about applicability is lifted and the subject falls  in the notification then full play should be given to it and it calls  for a wider and liberal construction.  (See Union of India and Ors. v.  Wood Papers Ltd. and Anr. (1990 (4) SCC 256), Mangalore Chemicals and

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Fertilisers Ltd. v. Deputy Commissioner of Commercial Taxes and Ors.  (1992 Supp (1) SCC 21) to which reference has been made earlier.  

Notification no.37 dated 25th February, 1993 is also relevant,  more particularly, clause (2) thereof.          There is no dispute that in  terms of clause (1) cement is one of the scheduled goods. Clause (2)  reads as under:

"Where an Importer of India made foreign liquor,  Vegetable and Hydro-generated Oil or Cement is liable  to pay tax under sub-section (2) of Section 3 of the  Ordinance becomes liable to pay tax under the Bihar  Finance Act, 1981 by virtue of sale of such scheduled  goods, his liability under the Bihar Finance Act,  1981 shall be reduced to the extent of tax paid under  the Ordinance."  

       It is to be noted that reference therein is made to the Ordinance  i.e. Bihar Ordinance No.1/93. The same has been enacted. The  notification has been issued in exercise of the powers conferred by sub- section (1) of Section 3 of the  Entry Tax Act and proviso to sub- section (1) of Section 12 of the Act.   

       A bare reading of clause (2) of the notification makes the  position clear that liability of importer of cement under the Act shall  be reduced to the extent of tax paid under the Entry Tax Act where such  importer become liable to pay tax under the Act by virtue of sale of the  scheduled goods.   

       Stand of the respondents appears to be that since there was no  liability in respect of portion of sales because of notification of the  State Government SO No.479 dated 22.12.1995 as part of the Industrial  Policy 1995 granting exemption from payment of sales tax on production  of extended industrial unit which undertakes expansion of their  capacity, no question of adjustment arises. To put differently stand of  the respondent is that when there was no tax liability on such sales,  there was no liability to pay any tax and, therefore, the benefit of  adjustment available under clause (2) of the notification SO No. 37  dated 25.2.1993 does not arise.  The interpretation put forward by the  respondents found acceptance by the High Court.   

       Crucial question, therefore, is whether the appellant had any  "liability" under the Act.  The answer to this lies in Section 3 of the  Act which is extracted above and is the charging section. In sub-section  (1) subject of the provision of the part (i.e. part I)  sales tax or  purchase tax, as the case may be, shall be paid by every dealer as  provided in the section itself.  Section 7 speaks of exemption.  Sub- section (3) of Section 7 stipulates that State Government may, by  notification and subject to such conditions or restrictions as it may  impose, exempt from sales tax or purchase tax certain sales or purchases  as the case may be.  The question of exemption arises only when there is  a liability.  Exigibility to tax is not the same as liability to pay  tax. The former depends on charge created by the Statute and latter on  computation in accordance with the provisions of the Statute and rules  framed thereunder if any. It is to be noted that liability to pay tax  chargeable under Section 3 of the Act is different from quantification  of tax payable on assessment. Liability to pay tax and actual payment of  tax are conceptually different. But for the exemption the dealer would  be required to pay tax in terms of Section 3. In other words, exemption  presupposes a liability. Unless there is liability question of exemption  does not arise.  Liability arises in term of Section 3 and tax become  payable at the rate as provided in Section 12.  Section 11 deals with  the point of levy and rate and concessional rate.   

       The word "liable" in the Concise Oxford Dictionary means "legally

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bound, subject to a tax or penalty, under an obligation". In Black’s Law  Dictionary (6th Edn.) the word "liable" means "bound or obliged in law  or equity; responsible, chargeable, answerable, compellable to make  satisfaction, compensation, or restitution...... obligated, accountable  for or chargeable with". The above position was noted in Zungarrao  Bhikaji Nagarkar v. Union of India and Ors. (1997 (7) SCC 409)

Tax at the appropriate rate would have become payable but for the  exemption. Decision in Australian Mutual Society v. IRC (1962 AC 135  (P.C.) has stated the position as follows:

       "The phrase "exempt from taxation" (Land and  Income Tax Act, 1954 (No.6701)  (New Zealand)  Section 86(1) does not cover income that is not at  all within the reach of the New Zealand tax laws. It  refers to income that would, had it not been for the  exemption, otherwise have been so taxable".

  Therefore, it cannot be said that as tax was not paid on portion  of the turnover of the scheduled goods i.e. cement, the assessee- appellant had no liability under the Act. It was definitely liable to  pay tax under the Act, but for the exemption. There is no dispute that  the assessee-appellant was liable to pay tax under sub-section (3) of  Section 3 of the Entry Tax Act.  Therefore, it was entitled to reduction  to the extent of tax paid under the Entry Tax Act while working out tax  payable by it under the Act.                                              Above being the position the notices issued by the respondent are  without legal sanction and are quashed.  The judgment of the High Court  is set aside.   The appeal is allowed with no order as to costs.