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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2806 OF 2015

Commercial Taxes Officer ... Appellant

Versus

A Infrastructure Ltd.                 ...    Respondent

WITH CIVIL APPEAL NO. 2807 OF 2015 CIVIL APPEAL NO. 2808 OF 2015 CIVIL APPEAL NO. 2809 OF 2015 CIVIL APPEAL NO. 2810 OF 2015

J U D G M E N T

Dipak Misra, J.

This  batch  of  appeals,  by  special  leave,  calls  in

question the legal acceptability of the common order dated

19th December, 2013 passed by the learned Single Judge of

the High Court of Judicature for Rajasthan, at Jodhpur in a

batch of revision petitions filed by the assessee-respondent

assailing  the  judgment  dated  23.11.2011  passed  by  the

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Rajasthan Tax Board, Ajmer (for short ‘the Board’) in Appeal

No.  680 of  2009 and other  connected appeals whereby it

had affirmed the decision rendered in appeals by the Deputy

Commissioner  (Appeals)  who  had  upheld  the  assessment

orders passed by the Commercial Taxes Officer in respect of

various quarters  of  the  years 2006-2007,  2007-2008 and

2008-2009 disallowing the claim of Input Tax Credit (ITC)

and charging interest under Sections 18, 22 and 55(4) of the

Rajasthan  Value  Added  Tax  Act,  2003  (for  brevity  “the

2003Act”).  

2. The facts giving rise to this batch of appeals are that

the  assessee-company  is  engaged  in  the  business  of

manufacturing  Asbestos  Cement  Pressure  Pipe  and

Asbestos  Cement  Sheets  and  it  had  availed  ITC  on  the

purchase of raw material used in the manufacture of A.C.

Sheets.   The  assessing  authority  issued  notice  to  the

assessee for the purpose of disallowing ITC on purchase of

raw  material  used  in  manufacturing  A.C.  Sheets  for  the

period mentioned  hereinabove  and pursuant  to  the  show

cause  notice  the  assessee  filed  a  detailed  reply  and

eventually  the  assessing  authority  passed  orders  under

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Section  22  of  the  Act  disallowing  the  ITC  and  charged

interest.  The said orders were assailed before the Appellate

Authority  which  declined  to  interfere  with  the  orders

appealed  against,  compelling  the  assessee  to  file  second

appeals before the Board which placed reliance on ACTO v.

M/s.  Suncity Trade Agency1 and dismissed the appeals.

The  Board  while  dismissing  the  appeals  opined  that  the

assessee-Company,  a  manufacturing  unit,  had  not  been

charged on the sales of its product, as per the notification

which squarely fall under the definition of exempted goods

and hence, the final product was exempted, but it was not

entitled  to  avail  ITC as  the  notification clearly  postulated

that  the units/institution was not  exempted from the tax

but the sales of its goods were exempted from tax as per the

definition of “Exempted Goods”.

3. The grievance of dismissal constrained the assessee to

file the revision petitions before the High Court, and seeking

interference in the revision petition it was contended that

the  scheme  of  Section  8  of  the  Act  which  deals  with

exemption  of  tax  and  the  notification  issued  under  the

Rajasthan Sales Tax Act, 1994 (for short, ‘the 1994 Act’) and 1 (2006) 147 STC 405

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the  various  notifications  issued  under  the  said  Act  from

time  to  time  deal  with  A.C.  Sheets  and  in  view  of  the

postulates laid down in the notification dated 09.03.2007,

issued  under  sub-section  (3A)  of  Section  8  wherein  the

manufacturer  of  asbestos  cement  sheets  and bricks have

been exempted and, therefore, it could not be said that A.C.

Sheets manufactured by the assessee were exempted goods

which is the pre-requisite for denying ITC under Section 18

of the Act.  Reliance was placed on the judgment of ACTO v.

Abishek  Granites  Ltd.2 to  buttress  the  proposition  that

exemption  to  unit  is  different  from the  exemption  to  the

transaction  of  sale  of  the  commodity.   It  was  also

highlighted before the High Court that when two views are

possible,  the  view  in  favour  of  the  assessee  should  be

accepted and for the said purpose reliance was placed on

CIT  v.  Kulu  Valley  Transport  Co.  (P)  Ltd3.   The

background  of  the  issue  of  notification  dated 09.03.2007

and  the  communication  issued  by  the  Commissioner,

Commercial Taxes, Rajasthan, Jodhpur were stressed upon

2 23 Tax-world 285 3 (1970) 2 SCC 192

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to bolster the plea that assessee was exempted from tax and

not the A.C. Sheets manufactured by it.  

4. The  stand  of  the  assessee  was  controverted  by  the

revenue  contending,  inter  alia,  that  vide  notification  S.O.

372,  manufacturers  of  A.  C.  Sheets  and  Bricks  were

included at S. No. 20 in Schedule-II, which entitles the units

to claim exemption on the sale of manufactured goods on

the  fulfillment  of  certain  conditions  and  in  view  of  the

specific conditions stipulated in Section 18(1)(A) of the Act,

ITC was not allowed.  Reliance was placed on notification

S.O. 377, dated 09.03.2007 issued under Section 8(3) of the

Act to harp that A.C. Sheets clearly fall within the category

of exempted goods.  Reference was made to the definition of

‘exempted goods’ and ‘goods’ contained in Section 2(13) &

(15) of the Act.  It was further submitted that irrespective of

whether the notification was issued under sub-Section (1) or

(3) or (3A) or (4), the goods would fall within the definition of

exempted goods and consequently the assessee would not

be  entitled  to  ITC.   For  the  said  purpose,  reliance  was

placed on M/s. Sun City Trade Agency (supra).  

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5. The  High Court  referred  to  the  dictionary  clause  as

enumerated in  Section 2(13)  which deals  with  “exempted

goods”, Section 2(15) that defines the terms “goods”, Section

8  which  provides  for  “exemption  of  tax”  and  Section  18

which deals with “Input Tax Credit and thereafter, referred

to the notification dated 16.03.2005 under the 1994 Act and

the notifications dated 01.06.2006, 05.07.2006, 09.03.2007

and the amendment notification issued on the same day by

the Finance Department (Tax Division).  The learned Single

Judge  analysed  the  provisions  of  the  Act  and  the

notifications and took note of the fact that under the 1994

Act  exemption granted related to sale  of  A.C.  Sheets  and

Bricks,  subject  to  the  conditions  indicated  therein.   The

High  Court  further  noted  that  the  notification  dated

01.06.2006  which  had  been  issued  in  exercise  of  power

under Section 8(2) and Schedule-I which was amended and

A.C. Sheets and Bricks having contents of fly ash 25% more

than  by  weight  was  inserted  as  entry  60A,  and  further

adverted  to  the  notification  issued  under  the  same

provision,  on  05.07.2006  vide  which  the  Schedule-I  was

amended and entry 60A was substituted. After so stating,

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the learned Single Judge referred to the notifications issued

on 09.03.2007 that deals with A.C. Sheets and also noted

the fact that vide S.O. 371 issued under Section 8(2) of the

Act, the existing entry 60A was deleted from Schedule-I and

further by S.O. 377 issued under Section 8(3A) of the Act

which  pertained  to  “manufacturers  of  asbestos  cement

sheets and bricks” were added in Schedule-II and it provides

the conditions for availing exemption for sale of A.C. Sheets

and Bricks manufactured in the state.   

6. On the aforesaid basis, the Court proceeded to further

observe  that  by  notification  dated  16.03.2005  under  the

1994  Act  and  the  notifications  dated  16.02.2006  and

05.07.2006  read  with  notification  dated  09.03.2007  A.C.

Sheets and Bricks were exempted.  The goods, that is,  A.C.

Sheets  and  Bricks  were  taken  out  by  S.O.  371  and  the

manufacturers of A.C. Sheets and Bricks were exempted by

inclusion  in  Schedule-II  by  S.O.  372  and  conditions  for

availing  such  exemption  by  the  manufacturers  were

indicated  by  S.O.  377.  On  the  basis  of  the  aforesaid

analysis,  the revisional  Court  opined that  it  is  significant

that while S.O. 371 had been issued under Section 8(2) of

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the Act, S.O. 372 and 377 had been issued under Section

8(3A)  and  (3)  respectively,  which  provisions,  as  noticed

hereinbefore, dealt with Schedule-I under Section 8(2) and

Schedule-II  under  Sections  8(3)  and  (3A),  which  in  turn

related  to  exemption  of  goods  and  exemption  of  persons

respectively,  therefore,  it  was  apparent  from  the

notifications issued on 09.03.2007 that the intention of the

State was to exempt the manufacturers of A.C. Sheets and

Bricks subject  to  fulfillment of  conditions  as indicated in

S.O.  377  and  to  take  away  exemption  available  to  A.C.

Sheets and Bricks as goods, as was available before the said

date on account of its inclusion in Schedule-I.  

7. As the impugned order would show,  the High Court

distinguished  the  judgment  rendered  in  Sun City Trade

Agency (supra), on the ground that the said decision dealt

with  a  situation  wherein  the  exemption  notification

pertaining  to  stainless  steel  flats,  ingots  and  billets  were

exempted  from  tax  on  the  conditions  indicated  in  the

notification  and  it  had  been  held  therein  that  merely

because  the  exemption  is  conditional  or  given  subject  to

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fulfillment of certain conditions it does not mean that such

goods would fall outside the definition of exempted goods.  

8. The  learned  Single  Judge  referred  to  the  definition

contained  in  Section  2(13)  of  the  Act  which  deals  with

exempted goods and not with exemption of person or class

as indicated in Section 8(3) of the Act, and observed that the

intention of the legislature in incorporating Section 18(1)(e)

of the Act takes away the exempted goods from the purview

of the ITC and not the person or class of persons exempted

under Section 8(3) and the intention of the legislature was

not to include exempted goods in the category of exempted

persons  as  mentioned  in  Section 18(1)(e)  of  the  Act,  and

hence, it was demonstrable that the goods and dealers are

treated separately and the same was also evident from the

provision of Section 5 of the Act.   

9. As  is  evident,  the  High  Court  further  proceeded  to

opine that the goods included in Schedule-II were entitled

for  ITC  inasmuch  as  the  said  conditions  indicated  for

exemption related to Self-Help Groups and those who had

been  registered  with  the  Khadi  and  Village  Industries

Commission  or  Rajasthan  Khadi  and  Village  Industries

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Board by the notifications S.O. 376 and S.O. 378 issued on

09.03.2007 wherein a specific stipulation had been made to

the extent that no input tax credit shall be claimed by such

dealers  in  respect  of  purchase  of  raw materials  used  for

manufacture of aforesaid goods.  Thereafter, the High Court

proceeded to observe:-

“If the persons included in Schedule-II were not entitled  to  claim  ITC,  there  was  no  reason  to include the said conditions for the above noted persons. Apparently, it is the sale of goods made by  person  or  persons  included  in  Schedule-II, which is exempt and not the goods manufactured by  them,  whereas,  for  denying  ITC,  the requirement is that of ‘exempted goods’.”   

 10. Being of this view the learned Single Judge held that:-

“In view of express language of Section 18(1)(e) of the Act, notifications S.O. 371 and S.O. 372 read with  S.O.  377,  the  petitioner  who  is  a manufacturer of  A.C. Sheets is entitled to avail ITC and the authorities below were not justified in  denying  Input  Tax  Credit  to  the  petitioner based on interpretation put by them on inclusion of  the  petitioner  in  Schedule-II  under  Section 8(3A) and notification S.O. 377 dated 09.03.2007 issued under Section 8(3) of the Act.”   

11. The  expression  of  the  said  view  and  the  ultimate

setting  aside  of  the  orders  of  the  Court  below,  as  stated

earlier, is the subject matter of assail in these appeals.  

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12.   We  have  heard  Mr.  Shovan  Mishra  and  Mr.  Milind

Kumar,  learned  counsel  for  the  appellant  and  Mr.  Paras

Kuhad, learned senior counsel for the respondent.  

13. To appreciate the controversy at hand, it is necessary

to  scrutinize  the  various  provisions  of  the  Act  and  the

notifications  that  have  been  issued  from  time  to  time.

Section 2(13) and 2(15) define “exempted goods” and “goods”

respectively, and they are extracted below:-

“Section  2(13)  “Exempted  goods”  means  any goods exempted from tax in accordance with the provisions of this Act;

xxx xxx xxx

Section 2(15) “goods” means all kinds of movable property,  whether  tangible  or  intangible,  other than  newspapers,  money,  actionable  claims, stocks,  shares  and  securities,  and  includes materials, articles and commodities used in any form in the execution of works contract, livestock and all other things attached to or forming part of the land which is agreed to be served before sale or under the contract of sale.”

14. Section 8 deals with exemption of tax and Section 18

lays  down  the  method,  the  manner  and  the  conditions

prescribed for availing the input tax credit. Section 8 and

the relevant portion of Section 18 are reproduced below:-

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“Section 8 – Exemption of tax –

(1) The goods specified in the Schedule-I shall be exempt from tax, subject to such conditions as may be specified therein.  

(2) Subject to such conditions as it may impose, the  State  Government  may,  if  it  considers necessary  so  to  do  in  the  public  interest,  by notification in the Official Gazette, add to or omit from,  or  otherwise  amend  or  modify  the Schedule-I,  prospectively  or  retrospectively,  and thereupon the Schedule shall be deemed to have been amended accordingly.  

(3) The State Government in the public interest, by notification in the Official Gazette, may exempt whether prospectively or retrospectively from tax the sale or  purchase by any person or class of persons as mentioned in Schedule-II, without any condition  or  with  such  condition  as  may  be specified in the notification.

(3A) Subject to such conditions as it may impose, the  State  Government  may,  if  it  considers necessary  so  to  do  in  the  public  interest,  by notification in the Official Gazette, add to or omit from,  or  otherwise  amend  or  modify  the Schedule-II,  prospectively or retrospectively, and thereupon the Schedule shall be deemed to have been amended accordingly.  

(4) The State  Government may,  if  it  considers necessary in the public interest so to do, notify grant of exemption from payment of whole of tax payable under this Act in respect of any class of sales or purchases for the purpose of promoting the  scheme  of  Special  Economic  Zones  or promoting exports, subject to such conditions as may be laid down in the notification.  

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(5) Every notification issued under this section shall  be  laid,  as  soon  as  may  be  after  it  is  so issued, before the House of the State Legislature, while it is in session for a period of not less than 30 days, which may comprised in one session or in two successive sessions and if before the expiry of  the  sessions  and  if  before  the  expiry  of  the sessions in which it is so laid or of the session immediately  following  the  House  of  the  State Legislature  makes  any  modification  in  such notification or resolves that any such notification should not be issued, such notification thereafter have effect only in such modified form or be of no effect, as the case may be, so however, that any such modification or annulment shall be without prejudice  to  the  validity  of  anything  previously done thereunder.”

Section 18 – Input Tax Credit:- (1) Input  tax  credit  shall  be  allowed,  to registered dealers, other than the dealers covered by sub-section (2)  of  Section 3 or Section 5, in respect  of purchase of any taxable goods made within the State from a registered dealer to the extent and in such manner as may be prescribed, for the purpose of :-

(a) sale within the State of Rajasthan or;

(b) sale in the course of  Inter-State  trade and commerce; or  

(c) sale  in  the  course  of  export  outside  the territory of India; or

(d) being  used  as  packing  material  of  goods, other than exempted goods, for sale; or

(e) being used as raw material except those as may be notified by the State Government in the  manufacture  of  goods  other  than exempted goods, for sale within the State or

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in  the  course  of  Inter-State  trade  or commerce; or

(f) ........

(g) ........”

15. As has been stated earlier, the High Court has referred

to various notifications. The notification dated 16th March,

2005 was issued under Section 15 of the Rajasthan Sales

Tax Act, 1994. It is as under:-

“Notification dated 16.03.2005 under the Act of 1994:-

S.  No.  1874;  F.4(78)FD/Tax/2004-168  dated 16.03.2005

In  exercise  of  the  powers  conferred  by section 15 of the Rajasthan Sales Tax Act 1994 (Rajasthan  Act  No.  22  of  1995)  and  in supersession  of  this  Department’s  Notification No.  F.4/(68)FD/Tax-Div/99-271  (S.No.  1147), dated, January 24, 2000 (as amended from time to  time),  the  State  Government  being  of  the opinion that it is expedient in the public interest so  to  do,  hereby  exempts  form tax  the  sale  of asbestos  cement  sheets  and  bricks, manufactured in the State by an industrial unit having fly ash as its main raw material  on the following conditions, namely:-

1. that such fly ash shall constitute twenty five percent or more in the contents by weight of such asbestos cement sheets and bricks; and  

2. that  such  unit  commences  commercial production by 31.12.2006.  

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This  notification  shall  remain  in  force  upto 23.1.2010.”

16. The  said  notification  as  mentioned  therein  was  to

remain in force upto 23.1.2010. When the said notification

was  in  vogue  another  notification  dated  1.6.2006  was

issued  under  Section  8  of  the  2003  Act.  The  said

notification is as under:-

     “Notification Jaipur, Dated : 01.06.2006

In  exercise  of  the  powers  conferred  by sub-section  (2)  of  Section  8  of  the  Rajasthan Value Added Tax Act, 2003 (Rajasthan Act No. 4 of  2003),  the  State  Government  being  of  the opinion that it is expedient in the public interest so  to  do,  hereby  makes  the  following  further amendments  is  SCHEDULE-I  appended  to  the said Act; namely :-

AMENDMENTS

4. After the existing S.No. 60 and before S.No. 61, the following new S. No. and entries thereto shall be inserted, namely :-

”

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“60A. Asbestos  cement sheets and bricks having contents of fly  ash  25%  or more by weight.

Subject  to  the condition  of  entry  in Registration Certificate of the selling dealer.”

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17. On  05.07.2006  another  notification  was  issued  in

exercise  of  the  powers  conferred  by  sub-section  (2)  of

Section 8 of the 2003 Act. On 09.03.2007, S.O. 371 was

issued by the Finance Department (Tax Division) vide which

S. No. 68A from Schedule-I appended to the Act (2) deleted.

May  it  be  noted  that  S.  No.  60A  was  substituted  by

notification dated 05.07.2006 which has been referred to

hereinbefore.  

18. The  notification  dated  09.03.2007,  S.O.  372  was

issued by the Finance Department (Tax Division) and the

said  department  also  issued  another  notification  on  the

same  day  which  is  relevant.  Both  the  notifications  are

reproduced below:-

“Notification dated 09.03.2007 S.O. 372:- FINANCE DEPARTMENT

(TAX DIVISION)

NOTIFICATION  Jaipur, March 9, 2007

S.O. 372 – In exercise of the powers conferred by sub-section  (3A)  of  Section  8  of  the  Rajasthan Value Added Tax Act, 2003 (Rajasthan Act No. 4 of 2003), the State Government being of the opinion that it is expedient in the public interest so to do, hereby  makes  the  following  amendments  is Schedule-II appended to the said Act, namely :-

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AMENDMENTS

In Schedule-II appended to the said Act:-

(1) ........ (2) After  the  existing  S.No.18  and  entries thereto  the  following  new  S.Nos.  and  entries thereto shall be added; namely :-

19 Self Help Group 20 Manufacturers of asbestos cement sheets and

bricks

Notification dated 09.03.2007, S.O. 377

“FINANCE DEPARTMENT   (TAX DIVISION)

  NOTIFICATION        Jaipur, March 9, 2007

S.O. 377 – In exercise of the powers conferred by sub-section (3) of Section 8 of the Rajasthan Value Added  Tax  Act,  2003  (Rajasthan  Act  No.  4  of 2003), the State Government being of the opinion that it is expedient in the public interest so to do, hereby exempts from payment of tax, the sale of asbestos cement sheets and bricks manufacturers in the State having contents of fly ash twenty five per  cent  or  more  by  weight,  on  the  following conditions, namely :-   (1) that  the  goods  shall  be  entered  in  the

registration certificate of the selling dealer;

(2) that the exemption shall be for such goods manufactured by the dealer who commenced commercial  production  in  the  State  by 31.12.2006; and  

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(3) that the exemption shall be available up to 23.01.2010.”

19. As we find the High Court in the impugned order has

referred to the provisions of the Act and the notifications.

On  a  careful  scrutiny  of  the  order  passed  by  the  High

Court,  it  is  perceivable  that  it  has  proceeded  on  the

foundation that there is a distinction between the exempted

units and exempted sales, and finally manufactured sales

area, or to put it differently, the final transactions of goods

or a sale when it takes place. Thus, the distinction as laid

down by the learned Single Judge is based on exemption of

unit and exemption on transaction or sale.  

20. On an analysis of the scheme of the Act, it is manifest

that there is difference between exempted goods, i.e., goods

on which no Value Added Tax is payable and are, therefore,

not taxable and other cases where a particular transaction

when it satisfies specific condition is not taxable.  In this

regard reference to the authority in State of Tamil Nadu

v. M.K. Kandaswami & others4, would be seemly, for this

Court  had  adverted  to  three  distinct  concepts;  taxable

persons,  taxable  goods and taxable  events and how they

4 (1975) 4 SCC 745

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were distinguished.  It was observed in the said case that if

the  said distinction is  overlooked,  it  may lead to serious

error in construction and application of a taxing provision

or  enactment.   In  the  case  of  taxable  or

non-taxable/exempted goods, the focal point and the focus

is on the character and class of goods in relation to their

exigibility.  Referring to the provisions of Section 7-A of the

Madras General Sales Tax, 1959, the expression in the Act

“taxable  goods”,  it  was  opined  as  regards  the  goods

mentioned in the First Schedule of the Act that the sale and

purchase  was  liable  to  tax  at  the  rate  and  at  the  point

specified therein.  It was further held that the goods which

were exempt were not taxable goods and, therefore, could

not  be  brought  to  charge  and  taxed.   However,

notwithstanding the goods being taxable goods, there could

be  circumstances  in  a  given  case  by  reason  of  which  a

particular sale or purchase would not attract sales tax.

21. Be it  noted, in the said decision, Section 7-A of the

Madras General Sales Tax Act, 1959, which reads as under,

fell for consideration:-

“(1)  Every  dealer  who  in  the  course  of  his business purchases from a registered dealer  or

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from any  other  person,  any  goods  (the  sale  or purchase of which is liable to tax under this Act) in  circumstances  in  which  no  tax  is  payable under Sections 3, 4 or 5, as the case may be, and either-

(a) consumes such goods in the manufacture of other goods for sale or otherwise; or

(b)  disposes  of  such  goods  in  any  manner other than by way of sale in the State; or

(c)  dispatches  them  to  a  place  outside  the State  except  as  a  direct  result  of  sale  or purchase in the course of inter-State trade or commerce,  shall  pay  tax  on  the  turnover relating to the purchase aforesaid at the rate mentioned in Sections 3, 4 or 5 as the case may  be  whatever  be  the  quantum  of  such turnover in a year:

Provided  that  a  dealer  (other  than  a  casual trader  or  agent  of  a  non-resident  dealer) purchasing goods the sale of which is liable to tax under  sub-section (1)  of  Section 3 shall not  be  liable  to  pay  tax  under  this sub-section, if his total turnover for a year is less than twenty-five thousand rupees.”

Section  7-A,  it  was  observed,  provided  for  such

situations where the goods were taxable goods in the hands

of the purchasing dealer, if any of the conditions (a), (b) and

(c) of sub-section (1) of Section 7-A was satisfied.  In the

facts of the case, it was noticed that the goods in question

were chargeable to tax as they were taxable goods under

Schedule I, but exemption had been granted.  Reversing the

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decision of the High Court, reference was made to an earlier

decision of the Supreme Court in Ganesh Prasad Dixit Vs.

Commissioner of Sales Tax5 and a decision of Kerala High

Court  in  Malabar  Fruit  Products  Co.  Vs.  Sales  Tax

Officer, Palai6 (1972) 30 STC 537 (Ker).   

22. With reference to the decision in Ganesh Prasad Dixit

(supra) and the language in Madhya Pradesh General Tax

Act, 1959, it was observed:

“29.  The  impugned  Section  7-A  is  based  on Section 7 of the Madhya Pradesh Act.  Although the  language  of  these  two  provisions  is  not completely  identical,  yet  their  substance  and object  are  the  same.   Instead  of  the  longish phrase, “the goods, the sale or purchase of which is  liable  to  tax  under  this  Act”  employed  in Section 7-A of the Madras Act, Section 7 of the Madhya  Pradesh  Act  conveys  the  very connotation  by  using  the  convenient,  terse expression, “taxable goods”.  The ratio decidendi of  Ganesh  Prasad  (supra)  is  therefore,  an apposite  guide  for  construing  Section  7-A. Unfortunately,  that  decision,  it  seems,  was not brought to the notice of the learned Judges of the High Court.”

23. With reference to Kerala General Sales Tax, 1963, this

Court  noted  the  following  reasoning  given  by  the  Single

Judge of the Kerala High Court :-

5  (1969) 1 SCC 492 6  (1972) 30 STC 537 (Ker)

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“32. Holding  that  Section  5-A,  was  valid  and intra  vires  the  State  Legislature,  the  learned Judge explained the scheme of the section, thus:-

Though  normally  a  sale  by  a  registered dealer or by a dealer attracts tax, there may be circumstances under which the seller may not be liable as, for example, when his turnover is below the  specified  minimum.   In  such  cases  the “goods” are liable to be taxed, but the sales takes place in circumstances in which no tax is payable at the point in which tax is levied under the Act. If  the  goods  are  not  available  in  the  State  for subsequent taxation by reason of one or other of the circumstances mentioned in clauses (a),  (b) and  (c)  of  Section  5A(1)  of  the  Act  then  the purchaser  is  sought  to  be  made  liable  under Section 5A.

*  *  *

Another instance I can conceive of is a case of  a  dealer  selling  agricultural  or  horticultural produce grown by him or grown in any land in which  he  has  interested,  whether  as  owner, usufructuary  mortgagee,  tenant  or  otherwise. From  the  definition  of  “turnover”  in  Section  2 (xxvii) of the Act it is evident that the proceeds of such sale would be excluded from the turnover of a  person  who  sells  goods  produced  by  him by manufacture,  agriculture,  horticulture  or otherwise,  though  merely  by  such  sales  he satisfies  the  definition  of  ‘dealer’  in  the  Act. Thus,  such  a  person  selling  such  produce  is treated as a dealer within the meaning of the Act and  the  sales  are  of  goods  which  are  taxable under the Act but when he sells these goods, it is not part of his turnover.  Therefore, it is a case of a dealer selling goods liable to tax under the Act in  circumstances  in  which  no  tax  is  payable under the Act.  In such a case, the purchaser is sought to be taxed under Section 5A provided the

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conditions  are  satisfied.   The  case  of  growers selling goods to persons to whom Section 5A thus applies is covered by this example.”

24. In CST v. Pine Chemicals Limited7, this Court posed

the following question:-

“7. The  simple  question  before  us  is  whether the Bench which decided Pine Chemicals is right in holding that the benefit of the said sub-section is available even where the goods are exempted with  reference  to  industrial  unit  and  for  a specified period, viz., period of five years from the date the relevant unit goes into production.  In other  words,  the  question  is  whether  an exemption  of  the  nature  granted  under Government Order No. 159 dated 26-03-1971 is an  exemption  available  “only  in  specified circumstances  or  under  specified  conditions” within the meaning of the Explanation to Section 8(2-A), as contended by the State or is it a case where  the  goods  are  exempt  from  the  tax ‘generally’ within the meaning of Section 8(2-A), as  contended  by  the  respondents/dealers?  We are of the opinion that the respondents/dealers’ contention cannot be accepted in view of the clear and unambiguous language of the sub-section.”

25. Thus,  the  Court  drew  a  distinction  between  goods,

generally exempt from tax after noticing that Section 8(2A)

of the Central Sales Tax Act specifically uses the expression

“exempt from tax generally or subject to tax generally at a

rate which is lower than 4%”, and accordingly observed that

when  the  goods  are  exempt  under  certain  specified

7 (1995) 1 SCC 58

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circumstances alone, the exemption is not a general, but a

conditional one.  In such circumstances, it cannot be said

that  the  goods  are  exempt  from  tax  generally  for  the

exemption may vary from unit to unit and would depend

upon date  of  commencement  of  production of  each unit.

Reference  was  made  to  earlier  decision  in  Indian

Aluminium  Cables  Limited  v.  State  of  Haryana8,

wherein  it  has  been held  that  exemption  from tax  when

conferred by conditions or in certain circumstances, there

was no exemption from tax generally.

26. At this juncture, we are required to understand the

effect  of  the  principles  spelt  out  in  above  decisions

especially in K.N. Kandaswami and Others (supra) on the

facts  of  the  present  case.   There  is  no  doubt  that  a

distinction has to be drawn between exempted goods, which

means  complete  exemption  for  the  specified  goods,  and

when the goods are taxable goods, but a transaction or a

person is granted exemption.  When the goods are exempt,

there would be no taxable transactions or exemption to a

taxable person.  In other cases, goods might be taxable, but

exemption could be given in respect of a taxable event, i.e., 8 (1976) 4 SCC 27

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exemption to specified transactions from liability of tax or

exemption  to  a  taxable  person,  though  the  goods  are

taxable.   Such  exemptions  operate  in  circumscribed

boundaries and not as expansive as in the case of taxable

goods.   Exemptions  with  reference  to  taxable  events  or

taxable persons would not exempt the goods as such, for a

subsequent  transaction  or  when  the  goods  are  sold  or

purchased  by  a  non-specified  person,  the  subsequent

transaction or the taxable person would be liable to pay tax.

It  is,  in  this  context,  it  has  been  highlighted  by  the

respondent  and,  in  our  opinion,  absolutely  correctly  that

Section 4 of the Act provides for levy of tax in a situation

where  the  goods,  which  were  not  exempted  but  could

otherwise not be subjected to tax on account of exemption

granted to a person or to a transaction.  The goods remain

taxable  goods  through  exemption  stands  granted  to  a

particular individual or a specified transaction.  That being

so, all subsequent transactions in those goods, which are

not specifically exempt and not undertaken by an exempted

person  could  be  subjected  to  taxation.   Therefore,  the

appellant  though  exempted  from  payment  of  tax,

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subsequent transactions of sale of asbestos cement sheets

would  be  taxable.  The  transaction  of  sale  by  the

manufacturer/dealer covered by the exemption notifications

issued under Section 8(3) of the Act would be protected or

an exempted transaction, but the goods not being exempted

goods  would  be  taxable  and  could  be  taxed  on  the

happening  of  a  taxable  or  charging  event.   It  is  simply

because the goods are not  exempt from tax or exempted

goods, but are taxable.  As a logical corollary it follows that

the Value Added Tax would have to be paid on the taxable

goods  in  a  subsequent  transaction  by  the  purchasing

dealer.

27. As a sequitur,  we are obliged to observe that  if  the

contention  of  the  appellant  is  to  be  accepted,  the

respondent though covered by exemption notification under

Section 8(3) of the Act could be at a disadvantage because

finally  when  the  subsequent  sale  is  made  by  a

non-exempted  dealer  or  tax  stands  paid  on  the

non-exempted  transfer,  the  goods,  i.e.,  asbestos  cement

sheet, would suffer the tax on the entire sale consideration.

This  would  place  an  exempted  manufacturer-dealer  at  a

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disadvantageous  position  and  make  his  products

uncompetitive inspite of the exemption notifications under

Section 8(3) of the Act.

28. In  the  context  of  the  issue  in  question,  the

respondents  have  rightly  highlighted  that  where  the

appellant  wanted  to  restrict  the  benefit  of  ITC  when  a

particular  dealer  or  transaction was exempted,  it  was so

stipulated  in  the  exemption  notification  issued  under

Sections  8(3)  and  8(4)  of  the  Act.   Such  notifications

admittedly do exist and were issued by the appellant.  They

are  also  right  in  drawing  support  from  the  note  sheets

relating to Finance Bill 2007 as also the communications

issued by Commissioner of  Commercial  Taxes.   The note

sheets and the communication of the Commissioner draw a

clear distinction between exemptions when the goods were

not taxable as they do fall  under the First Schedule and

when  an  exemption  was  granted  under  the  Second

Schedule, which relates to specified transaction of sale or

exempted dealers even when the goods were taxable goods.

In  latter  cases,  subsequent  dealers  undertaking  sale  of

goods would be liable to pay tax on sale of such products.

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There can be no shadow of doubt that subsequent dealers

undertaking sale of  goods manufactured and sold by the

respondent  company would be liable to pay tax on such

products.

29. In view of the aforesaid premised reasons, we do not

find any merit in these appeals and accordingly they stand

dismissed.  There shall be no order as to costs.  

.............................J. [Dipak Misra]

..........................., J. [Prafulla C. Pant]

New Delhi November 24, 2015

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