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PETITIONER: M/S.  TUNGABHADRA INDUSTRIES LTD.

       Vs.

RESPONDENT: THE COMMERCIAL TAX OFFICER, KURNOOL.

DATE OF JUDGMENT: 18/10/1960

BENCH: AYYANGAR, N. RAJAGOPALA BENCH: AYYANGAR, N. RAJAGOPALA DAS, S.K. HIDAYATULLAH, M. GUPTA, K.C. DAS SHAH, J.C.

CITATION:  1961 AIR  412            1961 SCR  (2)  14  CITATOR INFO :  R          1964 SC1372  (3,12,13)  RF         1974 SC1362  (5)  R          1978 SC 945  (13,15)  R          1978 SC1496  (12)  RF         1980 SC1227  (6)  D          1981 SC1649  (13)  E&R        1985 SC1293  (84)  RF         1989 SC 516  (17,18)  C          1989 SC1316  (13)  F          1990 SC  27  (7)

ACT: Sales   Tax--Hydrogenated  groundnut  oil  (Vanaspati),   if groundnut  oil--Madras  General  Sales  Tax  (Turnover   and Assessment) Rules, 1939, rr. 4, 5 and 18.

HEADNOTE: The  appellant  purchased groundnuts out of which  it  manu- factured  groundnut  oil  ;  it also  refined  the  oil  and hydrogenated  it converting it into Vanaspati.  It sold  the oil in all the three states.  Under the Madras General Sales Tax  Act, 1939, and the Turnover and Assessment  Rules,  for determining the taxable turnover the appellant was  entitled to  deduct  the purchase price of the  groundnuts  from  the proceeds  of the sale of all groundnut oil.  The High  Court held  that  the appellant was entitled to the  deduction  in respect of the sales of unrefined and refined groundnut  oil but  not in respect of the sales of hydrogenated oil on  the ground  that  Vanaspati  was not " groundnut  oil  "  but  a product of groundnut oil. Held,  that the appellant was entitled to the  deduction  in respect  of  the sales of hydrogenated groundnut  oil  also. The  hydrogenated groundnut oil continued to be "  groundnut oil  " notwithstanding the processing which was  merely  for the  purpose  of  rendering  the oil  more  stable.   To  be groundnut oil two conditions had to be satisfied-it must  be from groundnut and it must be " oil ". The hydrogenated  oil was  from groundnut and in its essential nature it  remained an  oil.  It continued to be used for the same  purposes  as

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groundnut oil which had not undergone the process.  A liquid state was not an essential characteristic of a vegetable oil ; the mere fact that hydrogenation made it semisolid did not alter its character as an oil.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 498 of 1958. Appeal from the judgment and order dated February 11,  1955, of the Andhra Pradesh High Court in T. R. C. No. 120 of 1953 arising  out  of the judgment and order dated  December  29, 1952, of the Sales Tax Tribunal, Madras, in Tribunal  Appeal No. 857 of 1951. A.   V. Viswanatha Sastri, M. Ranganatha Sastri and M. S. K. Sastri, for the appellants. D. Narasaraju, Advocate-General for the State of 15 Andhra Pradesh., T. V. R. Tatachari, D. Venkatappayya Sastri and T. M. Sen, for the respondent. 1960.  October 18.  The Judgment of the Court was  delivered by AYYANGAR  J.-This appeal on a certificate under Art. 133  of the Constitution granted by the High Court of Andhra Pradesh raises  for consideration principally the  question  whether hardened  or  hydrogenated groundnut  oil  (commonly  called Vanaspati)  is " groundnut oil " within the meaning of  Rule 18(2) of the Madras General Sales-Tax (Turnover and  Assess- ment) Rules, 1939. Tungabhadra Industries Ltd.-the appellant in this appeal-has a  factory of considerable size at Kurnool in the  State  of Andhra  Pradesh.   The  company  purchases  groundnuts   and groundnut   kernels  within  the  State   and   manufactures groundnut  oil and also refined oil as well as  hydrogenated oil all of which it sells.  The appeal is concerned with the assessment to salestax of this company for the year 1949-50. Section 3 of the Madras General Sales-Tax Act, 1939, enacts: " 3. (1) Subject to the provisions of this Act,- (a) every dealer shall pay for each year a tax on his  total turnover for such year; and (b)  the  tax shall be calculated at the rate of three  pies for every rupee in such turnover. (2)............................................. (3)............................................. (4)  For  the  purposes  of  this  section  and  the   other provisions  of  this Act, turnover shall  be  determined  in accordance with such rules as may be prescribed: Provided  that  no such rules shall come into  force  unless they  are  approved  by  a  resolution  of  the  Legislative Assembly. (5)  The  taxes  under  sub-sections (1) and  (2)  shall  be assessed,  levied and collected in such manner and  in  such installments, if any, as may be prescribed: Provided that- (i)  in  respect of the same transaction of sale, the  buyer or the seller, but not both, as determined by 16 (ii) where  a  dealer  has been taxed  in  respect  of   the purchase of any goods in accordance with the rules  referred to  in  clause (i) of this proviso, he shall  not  be  taxed again in respect of any sale of such goods effected by him." Rules  were  made by virtue inter alia of  these  provisions entitled  "  The  Madras  General  Sales-Tax  Turnover   and Assessment  Rules, 1939 ". Of these, those relevant  to  the present context are Rules 4 & 5. Rule 4 reads:

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"4.(1)  Save as provided in sub rule (2) the gross  turnover of  a  dealer for the purposes of these rules shall  be  the amount for which goods are sold by the dealer. (2)  In  the  case  of the undermentioned  goods  the  gross turnover  of a dealer for the purposes of these rules  shall be the amount for which the goods are bought by the dealer- (a) groundnut-". The result of the combined operation of s. 4(1)&(2) in  the’ case  of  those who purchased groundnut and  having  crushed them sold the oil obtained was, that they had to pay tax  on both  their  purchases of groundnut and their sales  of  oil produced therefrom.  This was considered by the rule  making authority to be an unfair burden and relief was  accordingly provided  by Rules 5 and 18 of the same rules, the  material portions of which ran: "  5.  (1) The tax or taxes under section 3......  shall  be levied on the net turnover of a dealer.  In determining  the net  turnover  the amounts specified in clauses (a)  to  (1) shall,  subject  to  the conditions  specified  therein,  be deducted from the gross turnover of a dealer. Clause (k) of this rule reads: (k)  in  the case of a registered manufacturer of  groundnut oil and cake, the amount which he is entitled to deduct from his  gross turnover under rule 18 subject to the  conditions specified in that rule." (This  rule was amended by a notification dated November  9, 1951, by the addition of the words 17 " groundnut oil ", but this modification of the rule is  not relevant  to  the present case which is concerned  with  the assessment of a period anterior to the modification). Rule  18 referred to here reads, to quote only the  material words: " 18. (1) Any dealer who manufactures groundnut oil and cake from  groundnut  and/or  kernel purchased  by  him  may,  on application  to the assessing authority having  jurisdiction over  the  area  in which he carries  on  his  business,  be registered as a manufacturer of groundnut oil and cake. (2)  Every  such  registered manufacturer of  groundnut  oil will be entitled to a deduction under clause (k) of sub-rule (1)  of  rule 5 equal to the value of the  groundnut  and/or kernel, purchased by him and converted into oil and cake  if he has paid the tax to the State on such purchases: Provided  that  the  amount for which the  oil  is  sold  is included in his net turnover: Provided further that the amount of the turnover in  respect of which deduction is allowed shall not exceed-the amount of the  turnover  attributable to the groundnut  and/or  kernel used  in  the  manufacture of oil and included  in  the  net turnover. Explanation.-For the purpose of this sub-rule(a) 143 lb.  of groundnut  shall  be taken to be equivalent to  100  lb.  of kernel; (b)  143  lb.  of  groundnut  or  100  lb.  of  kernel  when converted into oil will normally be taken to yield 40 lb. of oil; and (c)  one candy of oil shall be taken to be equivalent to 500 lb. of oil." Then  follow other provisions not relevant for the  purposes of the present appeal. The appellant was registered as a manufacturer of  groundnut oil  under  r.  18(1).  That  the  appellant  purchased  the groundnuts, the value of which was claimed as a deduction in the turnover within the State and paid tax on such  purchase to  the  State  was  not in  dispute.   Nor  was  there  any

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controversy that the sale 18 price  of  the oil expressed out of and sold either  as  raw groundnut oil, refined oil or hydrogenated oil was, included in the turnover of the appellant. The  Deputy Commercial Tax Officer, Kurnool,  who  completed the  assessment  of the appellant accepted  the  figures  of purchases  and sales submitted by it, and dealing  with  the claim  for  the  deduct-ion of the purchase  price  of.  the groundnuts  from the proceeds of the sale of all oil by  the company-raw, refined and hydrogenated-granted a deduction in respect of the purchase price of the groundnuts attributable to  the unrefined oil sold by the appellant, but  held  that the  appellant was not entitled to the deduction claimed  in respect of the refined and hydrogenated oil for the  reason that it was only unrefined or unprocessed groundnut oil that was  connoted  by  the expression  groundnut  oil’  in  rule 5(1)(k)  read  with rule 18(1) and (2) of the  Turnover  and Assessment  Rules.  This order of the Deputy Commercial  Tax Officer was affirmed by the Commercial Tax Officer on appeal and  the appellant filed a further appeal to  the  Sales-Tax Appellate Tribunal.  The second appellate authority  upfield the  contention  of the appellant in regard to the  sale  of refined  oil but rejected it in so far as it related to  the sales  of  hydrogenated  oil.   The  matter  was  thereafter brought up before the High Court of Andhra Pradesh by a  Tax Revision  Case  filed under s. 13(b)(1) of the Act  and  the learned   Judges  upheld  the  view  of  the  Tribunal   and disallowed  the  claim  of the appellant  to  the  deduction claimed in regard to the sales turnover of hydrogenated oil. They  granted  the  certificate under  Art.  133  which  has enabled the appellant to file an appeal to this Court. The  claim of the appellant to the deduction under r.  18(2) on  the  sales  of refined groundnut oil  is  no  longer  in dispute.  The ground upon which both the Tribunal as well as the  High  Court  decided  against  the  allowance  of   the deduction in respect of the sales of hydrogenated oil, while upholding the appellants’ case as regards refined oil may be briefly  stated  thus: The exemption or deduction  from  the sale-turnover  under  r. 18(2), is on its  terms  applicable only to the sale of the oil in the form in which it is  when extracted 19 out of the kernel.  When raw groundnut oil is converted into refined oil, there is no doubt processing, but this consists merely  in removing from raw groundnut oil that  constituent part  of the raw oil which is not really oil.  The  elements removed in the refining process consist of free fatty acids, phosphotides  and unsaponifiable matter.  After the  removal of  this nonoleic matter therefore, the oil continues to  be ground.  nut oil and nothing more.  The matter removed  from the  raw groundnut oil not being oil cannot be  used,  after separation, as oil or for any purpose for which oil could be used.   In other words, the processing consists in the  non- oily  content  of the raw oil being separated  and  removed, rendering  the  oily content of the oil 100 per  cent.   For this reason refined oil continues to be groundnut oil within the meaning of rules 5(1)(k) and 18(2) notwithstanding  that such  oil  does not possess the  characteristic  colour,  or taste, odour, etc. of the raw groundnut oil. But  in the case of hydrogenated oil which is prepared from refined  oil by the process of passing hydrogen into  heated oil  in the presence of a catalyst (usually finely  powdered nickel),  two atoms of hydrogen are absorbed.  A portion  of the  oleic acid which formed a good part of the  content  of

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the  groundnut  oil in its raw state is  converted,  by  the absorption  of the hydrogen atoms, into stearic acid and  it is this which gives the characteristic appearance as well as the semi-solid-condition which it attains.  In the  language of  the  Chemist,  an  inter-molecular  or   configurational chemical  change takes place which results in the  hardening of  the oil.  Though it continues to be the same edible  fat that  it  was  before the  hardening,  and  its  nutritional properties  continue  to be the same, it  has  acquired  new properties  in  that the tendency to  rancidity  is  greatly removed,  is  easier  to keep and to  transport.   Both  the Tribunal  as  well as the learned Judges of the  High  Court held  that the hydrogenated oil (or Vanaspati) ceased to  be groundnut  oil by reason of the chemical changes which  took place  which resulted in the acquisition of  new  properties including the loss of its fluidity. In other words, 20 they  held  that Vanaspati or hydrogenated oil  was   not  " groundnut oil " but a product of groundnut oil, manufactured out  of  groundnut  oil and therefore not  entitled  to  the benefit of the deduction under r. 18(2). The  arguments of Mr. Visvanatha Sastri for  the  appellants were  briefly two: (1) The reasons behind the rules  5(k)  & 18(2)  which  were designed to afford  relief  against  what would  amount  practically to double taxation  of  the  same assessee both when he purchased and when he sold the  goods, required  that the appellants’ claim should be allowed.  (2) Hydrogenated  groundnut oil was no less groundnut  oil  than either  refined  or even unrefined oil.  The fact  that  the quality  of the oil had been improved does not negative  its continuing   to  be  oil  and  the  materials   before   the departmental  authorities and the Court established that  it continued to be oil and was nothing more. The argument based on the reason of the rule can. not  carry the  appellant  far,  since in the present  case  it  is  an exemption  from tax which he invokes and of which  he  seeks the  benefit.  If the words of the rule are insufficient  to cover the case, the reason behind the rule cannot be availed of to obtain the relief Nor could it be said to be a case of double  taxation of the same goods at the purchase and  sale points  which  is forbidden by s. 3(5) of the Act.   If  the view  adopted by the learned Judges of the High  Court  that hydrogenated  groundnut oil is not " groundnut oil "  but  a product  of  groundnut oil were correct, learned  Coun.  sel cannot urge that he would still be entitled to the deduction for which provision is made in r. 18(2). Consequently it is the second of the submissions alone which really  requires to be examined.  In doing so it  would  be convenient  to consider the reasoning on the basis of  which the  view’ that hydrogenated oil was not " groundnut  oil  " was sought to be sustained before us. The learned Advocate-General of Andhra Pradesh who  appeared for the respondent-Commercial Tax Officer sought to  support the  decision of the High Court by two lines  of  reasoning. The first was that 21 the  exemption  applied only to the sale of the  oil  as  it emerged from the presser and that any processing of the  oil including refining, in order to remove even’ the  impurities and  free  fatty  acids, took it out of the  category  of  " groundnut  oil  " as used in the rule.  In support  of  this submission  he  referred us to the Table  of  Conversion  of groundnuts and kernel into oil set out in the Explanation to r.  18(2), extracted earlier, and submitted that the 40  lb. of oil for every 100 lb. of kernel was based on the yield of

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raw  groundnut  oil  and that this was  an  indication  that nothing  other  than raw groundnut oil was  intended  to  be covered by the expression " groundnut oil " in the rule. We  must however point out that this last submission has  no factual  basis to support it.  It is not known  whether  the proportion  of  40 lb. of oil for every 100  lb.  of  kernel represents  the  average  weight  of  oil  extractable  from different  varieties of groundnut kernels or is the  average of the different types of oils which may be produced out  of different  varieties  of  kernels.  In the  absence  of  any definite data in this regard it is impossible to accept  the argument   that  the  Table  of  Conversion  justifies   any particular construction of what was meant by " groundnut oil " in the main part of the rule. Nor  is  the learned Advocate-General  well-founded  in  his submission that the processing of the oil in order to render it more acceptable to the customer by improving its  quality would render the oil a commodity other than " groundnut  oil "  within the meaning of the rule, For instance, if the  oil as  extracted  were kept still in a vessel for a  period  of time, the sediment normally present in the oil would  settle at  the bottom leaving a clear liquid to be drawn out.   The learned Advocate-General cannot go so far as to say, that if this  physical  process was gone through, the oil  that  was decanted from the sediment which it contained when it issues out  of the expresser, ceased to be di groundnut oil  "  for the purposes of the rule.  If the removal of impurities by a process  of sedimentation does not render groundnut oil  any the  less so, it follows that even the process of  refining, by the 22 application of chemical methods for removing impuri ties  in the  oil, would not detract from the resulting oil  being  " groundnut  oil  " for the purpose of the rule.   It  may  be mentioned that processes have been discovered by which  even on extraction from the oil mill, the oil issues without  any trace  of  free fatty acids.  It could hardly  be  contended that  if such processes were adopted what comes out  of  the expresser  is  not  groundnut oil.  The  submission  of  the learned  Advocate-General  based on a  contention  that  the Tribunal  and the learned Judges of the High Court erred  in holding that even refined groundnut oil was " groundnut  oil " for the purpose of the rule, must be rejected. The  next  question  is whether if  beyond  the  process  of refinement of the oil, the oil is hardened, again by the use of chemical processes it is rendered any the less  groundnut oil ". In regard to this, the learned Advocate-General first laid  stress  on  the fact that while  normally  oil  was  a viscous liquid, the hydrogenated oil was semi-solid and that this change in its physical state was itself indicative of a substantial  modification of the identity of the  substance. We  are unable to accept this argument.  No  doubt,  several oils  are  normally viscous fluids, but they do  harden  and assume   semi-solid  condition  on  the  lowering   of   the temperature.    Though   groundnut   oil   is,   at   normal temperature,  a  viscous  liquid, it  assumes  a  semi-solid condition if kept for a long enough time in a  refrigerator. It is therefore not correct to say that a liquid state is an essential characteristic of a vegetable oil and that if  the oil is not liquid, it ceases to be oil.  Mowrah oil and Dhup oil  are instances where vegetable oils assume a  semi-solid state  even  at  normal temperatures.   Neither  these,  nor cocoanut  oil which hardens naturally on even a slight  fall in temperature, could be denied the name of oils because  of their not being liquid.  Other fats like ghee are  instances

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where the physical state does not determine the identity  of the commodity. The next submission of the learned Advocate General was that in the course of hydrogenation the oil 23 absorbed two atoms of hydrogen and that there was an  inter- molecular  change  in the content of  the  substance.   This however  is not decisive of the matter.  The  question  that has  still  to  be  answered  is  whether  hydrogenated  oil continues even after the change to be " groundnut oil ".  If it is, it would be entitled to the benefit of the  deduction from  the turnover, or to put it slightly  differently,  the benefit  of,  the  deduction from  the  turnover  cannot  be denied, unless the hydrogenated groundnut oil has ceased  to be  " groundnut oil ". To be groundnut oil,  two  conditions have  to  be satisfied.  The oil in question  must  be  from groundnut  and secondly the commodity must be " oil ".  That the  hydrogenated  oil  sold by the appellants  was  out  of groundnut not being in dispute, the only point is whether it continues  to  be oil even after hydrogenation.   Oil  is  a chemical compound of glycerine with fatty acids or rather  a glyceride  of  a mixture of fatty  acids-principally  oleic, linoleic,  stearic  and  palmitic,  the  proportion  of  the particular fat varying in the case of the oil from different oil-seeds  and  it remains a glyceride of fatty  acids  even after the hardening process, though the relative  proportion of  the  different types of fatty acids undergoes  a  slight change.   In  its essential nature therefore no  change  has occurred  and it remains an oil-a glyceride of fatty  acids- that it was when it issued out of the press. In our opinion, the learned Judges of the High Court laid an undue  emphasis on the addition by way of the absorption  of the  hydrogen atoms in the process of hardening and  on  the consequent inter-molecular changes in the oil.  The addition of  the hydrogen atoms was effected in order to  saturate  a portion  of the oleic and linoleic constituents of  the  oil and  render the oil more stable thus improving  its  quality and  utility.  But neither mere absorption of other  matter, nor inter-molecular changes necessarily affect the  identity of a substance as ordinarily understood.  Thus for  instance there are absorptions of matter and inter-molecular  changes which  deteriorate the quality or utility of the oil and  it might   be  interesting  to  see  if  such   additions   and alterations could be taken to 24 render it any the less " oil ". Groundnut oil when it issues out of the expresser normally contains a large proportion of unsaturated fatty acids-oleic and linoleic-which with  other fatty  acids  which are saturated are  in  combination  with glycerine   to  form  the  glyceride  which  is  oil.    The unsaturated  fatty  acids  are unstable,  i.  e.,  they  are subject  to oxidative changes.  When raw oil is  exposed  to air particularly if humid and warm, i.e., in a climate  such as  obtains  in  Madras,  oxygen  from  the  atmosphere   is gradually  absorbed  by  the unsaturated  acid  to  form  an unstable  peroxide (in other words the change  involves  the addition  of  two  atoms  of  oxygen)  which  in  its   turn decomposes breaking up into aldehydes.  It is this oxidative change  and particularly the conversion into aldehydes  that is  believed  to  be responsible for  the  sharp  unpleasant odour,  and  the  characteristic taste of  rancid  oil.   If nothing  were done to retard the process the  rancidity  may increase  to  such extent as to render it  unfit  for  human consumption.   The change here is both additive  and  inter- molecular,  but  yet  it could hardly be  said  that  rancid

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groundnut oil is not groundnut oil.  It would undoubtedly be very  bad groundnut oil but still it would be groundnut  oil and  if so it does not seem to accord with logic  that  when the quality of the oil is improved in that its resistance to the natural processes of deterioration through oxidation  is increased, it should be held not to be oil. Both the Tribunal as well as the High Court have pointed out that  except for its keeping quality without  rancidity  and ease of packing and transport without leakage,  hydrogenated oil  serves  the same purpose as a cooking  medium  and  has identical food value as refined groundnut oil.  There is  no use  to  which the groundnut oil can be put  for  which  the hydrogenated oil could not be used, nor is there any use  to which  the hydrogenated oil could be put for which  the  raw oil   could  not  be  used.   Similarly  we  consider   that hydrogenated  oil  still continues to be " groundnut  oil  " notwithstanding  the  processing  which is  merely  for  the purpose of rendering the oil more stable thus improving  its keeping qualities for 25 those  who desire to consume groundnut oil.  In our  opinion the  assessee-company was entitled to the,, benefit  of  the deduction of the purchase price of the kernel-or  groundnut, under  r.  18(2),  which went into the  manufacture  of  the hydrogenated  groundnut oil from the sale turnover  of  such oil. One  other point which is involved in the appeal relates  to the claim of the appellant to a deduction in respect of  the freight-charges  included  in the price  of  the  commodity. Under  r. 5(1)(g) of the Turnover and Assessment  Rules,  in determining  the net turnover of a dealer he is entitled  to have deducted from his gross turnover " all amounts  falling under  the following two heads, when specified  and  charged for by the dealer separately, without excluding them in  the price of the goods sold : (i) freight; (ii).................... The appellant claimed exemption on a sum of Rs. 3,88,377-13- 3  on the ground that it represented the freight in  respect of  the goods sold by the appellant asserting that they  had been charged for separately.  The assessing-officer rejected the claim and this rejection was upheld by the  departmental authorities and by the High Court in Revision.  It would  be seen  that in order to claim the benefit of  this  exemption the  freight should (1) have been specified and charged  for by the dealer separately, and (ii) the same should not  have been  included in the price of the goods sold.  The  learned Judges  of  the  High  Court  held  that  neither  of  these conditions  was  satisfied  by the  bills  produced  by  the appellant.   We consider, the decision of the High Court  on this  point  was correct.  In the specimen  bill  which  the learned  Counsel  for the appellants has placed  before  us, after  setting out the quantity sold by weight (23,760  lb.) the  price is specified as 15 annas 9 pies per lb.  and  the total amount of the price is determined at Rs. 23  388-12-0. From this the railway freight of Rs. 1,439-12-0 is  deducted and  the balance is shown as the sum on which sales-tax  has been computed. 26 From the contents of this invoice it would be seen that  the appellant  has  charged  a price inclusive  of  the  railway freight  and  would  therefore be outside the  terms  of  r. 5(1)(g)  which requires that in order to enable a dealer  to claim the deduction it should be charged for separately  and not included in the price of goods sold.  The conditions  of

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the  rule not having been complied with, the  appellant  was not entitled to the deduction in respect of freight. The  result therefore is that the appeal is allowed in  part and  the order of the High Court in so far as it  denied  to the  appellant the benefit of the deduction in the  turnover provided by r. 18(2) of the Turnover and Assessment Rules is set aside. In  view  of the appellant having succeeded  only  in  part, there will be no order as to costs in this appeal. Appeal allowed in part.