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CASE NO.: Appeal (civil)  3019 of 2004

PETITIONER: M/s. Jhunjhunwala & Ors

RESPONDENT: State of U.P. & Ors

DATE OF JUDGMENT: 22/09/2006

BENCH: ARIJIT PASAYAT & S.H. KAPADIA

JUDGMENT: J U D G M E N T

With CIVIL APPEAL  NOS. 202 OF 2005, 3020 OF 2004 AND 3021 OF 2004 AND CIVIL APPEAL NO.      4232      OF 2006 (Arising out of SLP (C) No.5645/2005) AND  CIVIL APPEAL NO.      4233 OF 2006 (Arising out of SLP (C) No.5646/2005)

ARIJIT PASAYAT, J.

                Leave granted in SLP (C) Nos. 5645 of 2005 and 5646 of 2005.

       These appeals involve identical questions and, therefore,  are taken up for disposal together. In each of the appeals  challenge is to legality of the judgment rendered by a Division  Bench of the Allahabad High Court holding that the  appellant/each of the appellants, as the case may be, was  liable to pay tax as "manufacturer" under Section 2(ee) of the  Uttar Pradesh Trade Tax Act, 1948 (in short the ’Act’).  It was  also held that the circular dated 13.12.2000 issued by the  Commissioner of Trade Tax, was valid in law.   

Background facts in a nutshell as projected in these  appeals are as follows- Writ petitioners who are the appellants are dealers  registered with the concerned trade tax Authority under the  Act and the Central Sales Tax Act, 1956 (in short the ’Central  Act’). The appellants claim to be doing business as commission  agents to effect the commission business of horticulture  produces of agriculturists.  Earlier there was no levy of tax on  their transactions under the Act.  They, as commission agents,  were selling timber grown by the agriculturists and were  therefore exempt from tax.  On account of the amendment of  Section 2(ee) of the Act with effect from 1.12.1988 the Trade  tax authorities proposed to levy tax purportedly on the basis of  the amendment even though writ petitioners were selling  timber grown by the agriculturists on their own land.  It was  submitted that there was no question of any liability to pay  "trade tax" as they could not have been treated as  manufacturers of timber even after the aforesaid amendment  as well as the circular.  The High Court proceeded on the basis  that the definition of Section 2(ee) was wide enough to cover

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the case of the appellant.  In any event it was held that Section  3-AAAA empowered the authorities to levy and collect tax.  The  circular of the Commissioner of Trade Tax was also held to be  legal.

In support of the appeals, learned counsel for the  appellants submitted that the High Court proceeded on  entirely erroneous premises.  There could be no question of  any levy of tax unless the seller is a manufacture-dealer.  The  High Court proceeded on the basis as if their case is covered  under Section 2(ee)(ii) of the Act.  That provision applies to  transactions between two registered dealers.  No liability could  have been created by a circular of the Commissioner.  The  definition of "Manufacturer" in terms of Section 2(ee) does not  encompass the case of the appellants.

In response, learned counsel for the State of Uttar  Pradesh submitted that a combined reading of Section 2(ee)  and Section 3-AAAA makes the position clear that validity of  the circular has been rightly upheld by the High Court.

In order to appreciate the rival submissions, the  provisions of the Act and the circular issued by the  Commissioner need to be noted.  Section 2(e-1) defines  "Manufacture" and Section 2(ee) defines "Manufacturer" while  Section 3-AAAA deals with transaction regarding certain  services.  They read as follows:-

"2(e-1) ’Manufacture" means producing,  making, mining, collecting, extracting,  altering, ornamenting, finishing, or otherwise  processing, treating or adapting any goods;  but does not include such manufactures or  manufacturing processes as may be  prescribed;

2(ee) ’Manufacturer’ in relation to any goods  means the dealer who makes the first sale of  such goods in the State after their  manufacture and includes:

(i)     a dealer who sells bicycles in completely  knocked down form;

(ii)    a dealer who makes purchases from any  other dealer not liable to tax on his sale under  the Act other than sales exempted under  Sections 4,4-A and 4-AAA."

     (Underlined for emphasis)

Section 3-AAAA. Liability to tax on  purchase of goods in certain circumstances  - Subject to the provision of Section 3, every  dealer who purchases any goods liable to tax  under this Act

(a) from any registered dealer in  circumstances in which no tax is payable by  such registered dealer, shall be liable to pay  tax on the purchase price of such goods at the  same rate at which, but for such  circumstances, tax would have been payable

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on the sale of such goods:

(b) from any person other than a registered  dealer whether or not tax is payable by such  person, shall be liable to pay tax on the  purchase price of such goods at the same rate  at which tax is payable on the sale of such  goods:

Provided that no tax shall be leviable on  the purchase price of such goods in the  circumstances mentioned in clauses (a) and (b), if

(i)     such goods purchased from a registered  dealer have already been subjected to  tax or may be subjected to tax under  this Act;

(ii)    tax has already been paid in respect of  such goods purchased from any person  other than a registered dealer;

(iii)   the purchasing dealer resells such goods  within the State or in the course of inter- State trade or commerce or exports out  of the territory of India in the same form  and condition in which he had  purchased them;  

(iv)    such goods are liable to be exempted  under Section 4-A of this Act.

Explanation: For the purpose of this section  and of Section 3-AAA, the sale of-

(i)     ginned cotton after ginning raw cotton  purchased as aforesaid; or

(ii)    dressed hides and skins or tanned  leather, after dressing or tanning raw  hides and skins purchased as aforesaid;  or

(iii)   rice during the period commencing on  September 2, 1976 and ending with April  30, 1977 after hulling paddy purchased  as aforesaid;  

shall be deemed to be in same form and  condition."  

The Commissioner’s circular dated 13.12.2000 which  was impugned before the High Court reads as follows:

"\005..with regard to the above the tax  payability has been prescribed at the  manufacturers and importers points, after  promulgation of Section-2(ee) of the Trade Tax  Act such traders purchases or sells from  unregistered traders, falls within the category

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of manufacturers.  Thus all the produce  purchased from the farmers, timbers, ballis,  bamboos, which are being grown, cut or  sawing, but their produce does not include  burning woods have been purchases and sold  to other traders falls within the category of  manufacturer under Section 2(ee) of Uttar  Pradesh Tax Act.  Keeping in view this  provision after 1.12.1998 the payability of tax  is made out on the registered dealer who  purchase the above produce from the  unregistered traders."

The High Court appears to have completely lost sight of  challenge before it and went on to decide issues which are  really not relevant.  It took note of paragraph 3(c )(iii) of the  Counter Affidavit filed by the respondent before the High  Court which reads as follows:

"Many of the big dealers, sells after  showing the purchase from such alleged  manufacturer dealer who are not liable to pay  tax under the act and do not pay tax because  the manufacturer- dealer liable to pay tax, only  if, its sales exceeds Rs. 1 lakh in any assessment  year.  To prevent the evasion of tax and in the  interest of revenue, these dealers have been  brought by bringing in amending Section 2(ee)  so as to include such within the definition of  manufacturer."

According to the High Court, the object of enacting  amendment to Section 2(ee) was to prevent evasion of tax.   Even if the aforesaid object is in any way relevant for the  purpose of the present dispute, the object appears to be to  levy tax on manufacturer-dealer and/or manufacturer-dealer  who did not pay tax as his turnover did not exceed Rs.1 lakh  in any assessment year.   

It was, therefore, necessary to be established that the  seller was a manufacturer-dealer.  Commissioner’s circular  could not have created a liability by drawing inference that  the purchases from farmers who have been grown, cut or  sawn timbers, ballis, bamboos  will brings them within the  umbrella of expression ’manufacturer’.  The view that tax  liability has been prescribed at the manufacturers and  importers points and therefore after the amendment traders  who purchase the timber from unregistered dealers fall  within the category of manufacturer is indefensible.  There is  no logic for such a conclusion, where the statutory definition  does not say so.  It needs no emphasis that the circular  cannot create tax liability. That is precisely what has been  done which the High Court has failed to notice.  Therefore, to  that extent the circular cannot be of any assistance for  levying tax. The crucial words in the definition of  "Manufacturer" is the sale of goods "after their manufacture".  As noted above, the expression "manufacture" cannot cover  types of transactions referred to in the commissioner’s  circular Whether an activity amounts to manufacture has to  be factually determined. There cannot be a direction to treat  a particular type of transaction to be a manufacturing  activity without examining the factual scenario. There cannot  be a generalization in such matters

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Learned counsel for the State submitted that even  purchases from a person who is not a registered dealer is  also liable to tax in terms of Section 3-AAAA of the tax and  the circular is, therefore, in order. The argument is not  acceptable for the simple reason that in Section 3-AAAA the  sine qua non for liability is that the goods must be liable to  tax under the Act. That aspect has to be factually  determined. The Commissioner’s circular is not and cannot  be a substitute for such determination.  The assessments in  these cases appear to have been done solely on the basis of  the view expressed in the circular.   

We, therefore, set aside the assessments/appellate  orders under challenge and direct the assessing officer to  consider the case of the appellants without treating them to  be manufacturers for the purpose of levy of tax, solely on the  basis of the Circular.    The appeals are accordingly disposed of. No costs.