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CASE NO.: Appeal (civil)  439 of 2007

PETITIONER: M/s B.G. Shirke Construction Technologies (P) Limited

RESPONDENT: The Addl. Commissioner of Commercial Taxes

DATE OF JUDGMENT: 02/02/2007

BENCH: Dr. ARIJIT PASAYAT & S.H. KAPADIA

JUDGMENT: J U D G M E N T (Arising out of S.L.P. (C) No. 21522 of 2005)

Dr. ARIJIT PASAYAT, J.

       Leave granted.

       Challenge in this appeal is to the judgment rendered by a  Division Bench of the Karnataka High Court dismissing the  appeal filed by the appellant under Section 24(1) of the  Karnataka Sales Tax Act, 1957 (in short the ’Act’).  Appellant  called in question legality or otherwise of the orders passed by  the Additional Commissioner of Commercial Taxes, Zone-II,  Gandhinagar, Bangalore, dated 12.6.2002.

       Background facts in a nutshell are as follows:

       The appellant is a dealer registered under the provisions  of the Act.  It is borne on the files of the Deputy Commissioner  of Commercial Taxes (Assessment), 46th Circle, Bangalore. The  main activity of the appellant is construction of mass houses  for Karnataka Housing Board.  For its business activity, the  appellant manufactures pre-fabricated pillars, columns,  beams etc., and then  those items are used for the execution of  the civil works contract.  

       During the financial year ending on 31.3.1996, i.e.  assessment year 1995-96 the assessee had purchased Tower  Cranes from another registered dealer and had availed  concessional rate of tax at 4% on the said purchases by  producing declaration Form No.37.  While computing the tax  liability of the assessee for the assessment year 1995-96, the  assessing authority had noticed that the Tower Cranes so  purchased by the assessee are nothing but machinery covered  under Sl. No.1(iii) of Part ’M’ of the Second Schedule to the Act  and since the company had not fulfilled all the conditions  prescribed under the notification No.FD.43.CSL 94(iv) dated  31.3.1994, it was not eligible to claim any benefit under the  notification and, therefore, had initiated proceedings under  Section 8-A (5)(a) of the Act.  In the said proceeding, it was the  stand of the assessee-appellant  that it is an industrial unit  located in the State and the purchase of the machinery made  by it is used in the manufacturing of goods for sale and,

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therefore, eligible and also entitled to take the benefit of the  notification issued by the State Government dated 31.3.1994.   The assessing authority, after considering the objection of the  assessee, came to the conclusion that the nature of the  business activity carried on by the assessee is not one of  manufacturing or processing of goods for sale and, therefore, it   has contravened the specified conditions under the  notification.  Accordingly, he raised a demand of an amount  equal to the difference between the tax payable and tax paid  amounting to Rs.10,71,745/- and also penalty amounting to  Rs.18,00,531/- as envisaged under Section 8A(5)(a) of the Act.

       Aggrieved by the aforesaid order, the assessee carried the  matter in an appeal before the first appellate authority.  The  said authority allowed the appeal and set aside the orders  passed by the assessing authority, on the ground that the  assessee satisfied all the conditions prescribed in the  notification and, therefore, was entitled to take the benefit of  the notification issued by the State Government dated  31.3.1994.

       The Additional Commissioner of Commercial Taxes, being  of the view that the order passed by the first appellate  authority is erroneous and also prejudicial to the interest of  the revenue, initiated proceedings under Section 22-A (1) of  the Act, and came to the conclusion that the first appellate  authority was not justified in allowing the appeal and in  setting aside the order passed by the assessing authority  dated 3.3.2001.  The revisional authority, who revised the  orders passed by the first appellate authority assigned several  reasons. However, the amount of penalty was reduced by 50%.   Appellant filed an appeal under Section 24(1) of the Act.           

       Stand of the appellant before the High Court was that the  Assessing Authority was not justified in holding that the  assessee had contravened the conditions specified in the  notification issued by the State Government dated 31.3.1994  and, therefore, levy of penalty under Section 8A(5)(a) of the Act  was not justified. On the contrary, stand of the respondent- State was that since the assessee did not satisfy all the  conditions specified in the notification, the Assessing  Authority as well as the Revisional Authority were justified in  directing the assessee to pay the amount equal to the  difference between tax payable and the tax paid under the Act  and also in levying the penalty for contravention of the  conditions specified in the notification dated 31.3.1994.  The  High Court after analyzing the notification came to hold that  the order passed by the authorities did not warrant any  interference.         Learned counsel for the appellant submitted that the  authority empowered to issue the notification had made it  abundantly clear that the dealer who effects the sale of  machinery can take the benefit of the notification only after  fulfilling the other two conditions mentioned in the notification  i.e. (1) that the dealer should produce a declaration in Form  37 duly filled and signed by the manufacturing industrial unit  i.e. the purchasing dealer and (2) satisfactorily prove that what  has been sold to a registered dealer is an industrial input for  use by him/it as a component part of  raw material or packing  material for manufacture and sale inside the State.

       The High Court observed that what was purchased by the  appellant by the appellant is a "Tower Crane".  By no stretch  of imagination the High Court observed that "Tower Crane"  would be considered as an industrial input for use either as a

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’component part’ or as a ’raw material’ of any other goods.   Accordingly, the appeal was dismissed as noted above.  

       In support of the appeal, learned counsel for the  appellant submitted that a narrow construction has been put  on the expression "industrial input". By giving a broader  interpretation, it should have been held that the appellant was  entitled to get the benefit of the notification.   

       Per contra, learned counsel for the respondent supported  the judgment and orders of the authorities below and the  impugned judgment of the High Court.

       In order to appreciate the rival submissions the  notification which forms focal point of controversy is to be  quoted.  The same reads as follows:

"In exercise of the powers conferred by Section  8-A of the KST Act, 1957 (Karnataka Act 25 of  1957, the Government of Karnataka hereby  reduces with effect from the first day of April,  1994, the rate of tax payable by a dealer under  Section 5 of the said Act to four per cent on,

(i)     raw edible oil when sold to a  manufacturer in the State for  processing of refined oil; and      (ii)    Machinery covered under Sl.  No.1(iii)(a) of part M of II Schedule  when sold to an Industrial Unit  located in the State for use by such  unit in the manufacturer or  processing of goods for sale.

Subject to the condition that the dealer  produces before the assessing authority a  declaration in Form 37 duly filled in and  signed by the said manufacturer or industrial  unit, as the case may be and subject to further  condition that all the provisions relating to  taxation of industrial inputs under Section 5-A  of the said Act shall apply mutatis mutandis to  the notification."

       Stand of the appellant before the High Court and in this  appeal is that the appellant is a civil contractor and it  manufactures pre-fabric beams and column for sale and,  therefore, is an industrial unit.  Though the High Court had  reservation about accepting this stand, it held that it did not  intend examination of that issue.  The expressions "industrial  inputs" ’"component parts" and "raw material" have been  explained in the explanation appended to this provision itself.   The expression "industrial inputs" means either component  part or raw material or packing material.  The expression "raw  material" means any material from which another product can  be made through the process of manufacture, either by itself  or in combination with another material; or a processing of  any other solvent (including chemicals) used for testing  analysis or research used in the solvent extraction process or  a catalyst required in the manufacturing process, but it does  not include fuels and consumable stores of similar types.  All  these conditions require to be satisfied by the dealer effecting  the sale of machinery of all kinds to an industrial unit to claim  reduced rate of tax under the notification.              

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       There is no dispute that a crane is a hoisting machine  used to lift and move heavy loads.  There are different types of  cranes and Tower Crane is one such crane which is mostly  used to construct high rise buildings.  It has been noted by the  High Court that most Tower Cranes also called "Climbing  Cranes", have built in jacks that raise the cranes through  openings in the floor as the building goes up. The cranes are  taken apart and lowered after completion of the buildings.  As  rightly observed by the High Court the Tower Cranes cannot  be considered as industrial inputs for use either as a  component part or as a raw material of any other goods.

       The residual question is the quantum of penalty.  The  Assessing Authority had imposed penalty of Rs.18,00,531/-  The sum was reduced to 50% of the amount by the revisional  authority. Section 8A(5)(a) which is relevant provision relating  to imposition of penalty reads as follows:-

"Where any restriction or condition specified  under sub Section (2) in respect of goods  taxable at the point of sale is contravened or is  not observed by the purchaser of such goods,  notwithstanding that such a purchaser is not  a dealer or that the sale value of such goods is  less than the turnover specified in sub Section  (5) of Section 5, such purchaser shall be liable  to pay an amount equal to the difference  between the tax payable at the rates specified  under the Act and the tax paid at the rates  specified under the notification on the goods  purchased in respect of which such  contravention or non-observance has taken  place, as if the provision of the notification  under sub-Section (1) did not apply to such  purchases and in addition, such purchaser  shall also be liable to pay by way of penalty a  sum not exceeding the amount equivalent to  the amount of tax leviable on the sale price of  such goods."      

       The outer limit of the amount of penalty is a sum not  exceeding the amount equivalent to the amount of tax leviable  on the sale price of the goods.  It has been accepted by the  respondent that the amount of tax payable is Rs.10,28,875/-  though originally it was calculated at Rs.10,71,745/-.  The  appellant had purchased the Tower Cranes to the extent of  Rs.1,71,47,917.80 in the year 1995 and had availed  concessional rate of tax of 4% on the said purchase by  producing declaration in Form-37 i.e. declaration prescribed  under Section 5A of the Act.                   

       Learned counsel for the appellant has submitted that  there was a finding recorded by the Joint Commissioner of  Commercial Taxes (Appeals) under Section 20(5) of the Act  that the order of the Assessing Authority imposing tax and  penalty was not maintainable.  The revisional order passed by  the Additional Commissioner, Commercial Tax under Section  22(A)(1) of the Act set aside such order.  Since there was a  finding in favour of the assessee-appellant, the inevitable  conclusion is that the claim of the assessee to avail  concessional rate of tax was based on a possible view. We find  no substance in that plea.  Revisional authority has  elaborately discussed the legal and factual position to  conclude that the claim made by the assessee-appellant was

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untenable and not sustainable.  In fact, the High Court has  also analysed the position in great detail as noted above.  We  concur with the view expressed by the High Court about the  non-acceptability  of the claim and levy of tax and penalty.   However, so far as the question of quantum of penalty is  concerned, it is to be noted that the legitimate amount which  was to be collected by the Revenue was not deposited by the  assessee-appellant because of the claim at concessional rate of  tax. Considering the quantum of tax involved and the period  for which the amount was withheld, we are of the view that  levy of penalty of rupees five lakhs would suffice.  The amount  shall be deposited within a period of one month from today if  not already done. The appeal is allowed, so far as the quantum  of penalty is concerned only and dismissed so far as other  aspects are concerned.  There shall be no order as to costs.