State of Madras Vs. M/S. Swastik
Tobacco Factory, Vedaranyam  INSC 295 (14 December 1965)
14/12/1965 SUBBARAO, K.
CITATION: 1966 AIR 1000 1966 SCR (3) 79
RF 1977 SC 879 (27) R 1980 SC 169 (12) R 1980
SC1227 (6) RF 1987 SC1885 (8)
Madras General Sales Tax (Turnover and
Assessment) Rules 1939, r. 5 (1) (i) Excise duty paid on raw tobacco-Raw
tobacco processed and sold as chewing tobacco-Excise duty whether to be
deducted from turnover of chewing tobacco under r. 5(1)(i).
The respondent factory used to purchase raw
tobacco and after processing it, sell it as chewing tobacco. Excise duty was
paid by the factory in respect of raw tobacco purchased by it. In sales tax
proceedings the factory contended that the excise duty so paid to the Central
Government must be deducted to arrive at the net turnover under r. 5(1)i) of
the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. The
assessing officer as well as the Appellate Assistant Commissioner rejected the
contention but it was accepted by the Tribunal. The revision filed by the.
State in the High Court was dismissed, whereupon the State appealed to this
Court by special leave.
It was contended on behalf of the appellant that
the raw tobacco was converted by a manufacturing process into chewing tobacco,
a different commodity and that, therefore, under r. 5(1)(i) of the Rules, as
excise duty was paid only in respect of raw tobacco and not chewing tobacco the
said duty was not deductible from the turnover of the assesses.
HELD : 'Me object of the concession in r.
5(1)(i) is presumably to avoid payment of tax on tax in respect of the same
goods. This concession would have no relevance if the goods subjected to excise
duty were different from the goods sold. Tobacco when converted by a process of
manufacture into chewing tobacco becomes a different marketable product.
Duty on raw tobacco cannot therefore be said
to be paid in respect of the manufactured product. [82 B-D] The expression
"in respect of the goods" in r. 5(1)(i) means only on the
goods", and cannot take in the raw material out of which the goods were
made. [83 E] Inland Revenue Commissioners v. Court & Co.  2 All.
E.R. 722 and Asher v. Seaford Court Estates Ltd.,
 A.C. 508, considered.
The excise duty paid by the respondent was
only on the raw tobacco and not on the goods sold by it, and therefore, the
said duty could not be deducted from its turnover under r.
5(1) (i). [83 E-F]
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 90 andand 91 of 1965.
Appeals by special leave from the judgment
and order dated September 4, 1963 of the Madras High Court in Tax Cases Nos.
120 and 121 of 1963.
80 A. Ranganandhan Chetty and A. V. Rangam,
for the appellant.
T. A. Ramachandran and O. C. Mathur for the
The Judgment of the Court was delivered by
Subba Rao, J. These appeals, by special leave, raise the question of the true
construction of the provisions of r. 5(1) (i) of the Madras General Sales Tax
(Turnover and Assessment) Rules, 1939, hereinafter referred to as the Rules.
The facts are not in dispute and they may be
The respondent, Messrs Swastik Tobacco
Factory, is a dealer in tobacco. It purchased raw tobacco; by processing it in
a prescribed manner, converted it into chewing tobacco and sold it as such in
small paper packets. The said process has been described by a Division Bench of
the Madras High Court in Bell Mark Tobacco Co. v. Government of Madras(1) thus
"Taking, however, the cumulative effect
of the various processes to which the assessee subjected the tobacco before he
sold it is clear that what was eventually sold by the assessee was a
manufactured product, manufactured from the tobacco that the assesses had
purchased. Soaking in jaggery water is not the only process to be considered.
The addition of flavouring essences and shredding of the tobacco should
establish that what the assesses sold was a product substantially different
from what he had purchased." for the purpose of these appeals, it was not
disputed that the respondent purchased raw tobacco, converted it by a
manufacturing process into chewing tobacco and sold it in small paper packets.
The respondent paid excise duty in respect of the raw tobacco purchased by it.
For the assessment years 1955-56 and 1956-57, the Assistant-cumDeputy
Commercial Tax Officer assessed the respondent to sales tax on the turnover of
Rs. 10,67,923-10-9 and Rs.
7,71,661-11-0 respectively. The respondent,
claimed that the excise duty paid by it to the Central' Government in respect
of the raw tobacco should be deducted from the turnover ascertained by the said
Officer. But his contention was rejected. On appeal, the order of the said
Officer was confirmed by the Appellate Assistant Commissioner of Commercial
Taxes. On a further appeal to the Sales Tax Appellate Tribunal, the assessee,
in addition to the question of deduction, raised (1) (1961) 12 S.T.C. 126,132.
81 an additional ground that the entire
turnover of the sales on chewing tobacco was not liable to be assessed. The
Tribunal set aside the order of the Appellate Assistant Commissioner. The State
carried the matter in two revisions to the High Court of Madras. A Division
Bench of the said High Court agreed with the view expressed by the Tribunal and
dismissed the revisions. Hence the present appeals.
Mr. A. V. Rangam, learned counsel for the
State, argued that the raw tobacco was converted by a manufacturing process
into, chewing tobacco, a different commodity and that, therefore, under r. 5(1)
of the Rules, as excise duty was paid only in respect of the raw tobacco and
not chewing tobacco, the said duty was not deductible from the turnover of the
assessee. He did not contest the correctness of the decision of the High Court
on the question of the taxability of the chewing tobacco under S. 5(vii) of the
Mr. T. A. Ramachandran, learned counsel for
the respondent, contended that the said rule was couched in a comprehensive
language so as to take in excise duty paid on raw tobacco converted by a
manufacturing process into chewing tobacco.
The relevant rule reads thus :
"Rule 5. (1) The tax or taxes under
section 3 or 5 or 5A or the notification or notifications under section 6(1)
shall be levied on the net turnover of the dealers.
In determining the net turnover the amounts
specified in the following clauses shall, subject to the condition specified
therein, be deducted from the gross turnover of a dealer :
(i) the excise duty, if any, paid by the
dealer to the Central Government in respect of the goods sold by him;
Both the advocates argued, on the basis of
the factual position,. that packets of chewing tobacco were goods different
from tobacco from which the said goods were manufactured. While the learned counsel
for the State laid emphasis on the words "goods sold by him", the
learned counsel for the respondent relied upon the expression "in respect
of" preceding the said words. If, instead of the expression "in
respect of', the word "on" were there, the intention of the rule
would be manifest and the answer to the question raised would be obvious. The
excise duty paid by the respondent was only on the raw tobacco and not on the
goods' sold by it and, therefore, the said duty was not deductible there under.
So far there is no dispute. But it was said that the 82 expression "in
respect of" made all the difference. The words "in respect of",
it was said, meant "attributable" and, therefore, the argument
proceeded, the excise duty paid on the tobacco, though it was not paid on the
goods sold by the respondent, was attributable to the said goods sold.
The object of the concession is presumably to
avoid payment of tax on tax in respect of the same goods. If excise duty was
paid by a dealer on certain goods, it would be deducted from the gross turnover
of the dealer in regard to the said goods, as otherwise, in effect, sales-tax
would have to be paid on the amount paid towards excise duty. This concession
could have no relevance if the goods subjected to excise duty were different
from the goods sold. Raw tobacco, when converted by a process of manufacture
into chewing tobacco, becomes a different marketable product.
There will be no comparison between the raw
tobacco and the chewing tobacco in the matter of demand or even price. Duty on
raw tobacco may have some effect on the cost of the manufactured product, but
it cannot possibly be said that the said duty is paid in respect of the
Rule 5(1)(i) of the Rules, therefore, permits
deduction from the gross turnover of the dealer only the excise duty paid by
him in respect of the same goods sold by him.
Learned counsel for the :respondent cited
some English decisions in support of his contention that the expression
"in respect of the goods" was very wide and that it took in the
raw-material out of which the goods were made.
The House of Lords in Inland Revenue
Commissioners v. Courts & Co.(1), in the context of payment of estate duty,
construed the words "in respect of" in S. 5(2) of the Finance Act,
1894 (57 & 58 Vict. c. 30) and observed that the phrase denoted some
imprecise kind of nexus between the property and the estate duty. The House of
Lords in Asher v. Seaford Court Estates Ltd. (2) in construing the provisions
of S. 2, sub-s. (3) of Increase of Rent and Mortgage Interest (Restrictions)
Act, 1920 (10 & 11 Geo. 5, c. 17), held that the expression "in
respect of' must be read as equivalent to "attributable". The Privy
Council in Bicber, Ltd. v. Commissioners of Income-tax(1) observed that the
said words could mean more than "consisting of" or
It is not necessary to refer to other
decisions. It may be accepted that the said expression received a wide
interpretation, (1)  2 All. E.R. 722, 732.
(3)  3 All. E.R. 294.
(2) L.R.  A.C. 508.
83 having regard to the object of the
provisions and the setting in which the said words appeared. On the other hand,
Indian tax laws use the expression "in respect of" as synonymous with
the expression "on" : see Art. 288 of the Constitution of India; s. 3
of the Indian Income-tax Act, 1922; ss. 3(2) and 3(5), Second Proviso, of the
Madras General Sales Tax Act, 1939; s. 3(1A) of the Central Excise and Salt
Act, 1944; and ss. 9 of the Kerala Sales Tax Act.
We should not be understood to have construed
the said provisions, but only have referred to their to state the legislative
practice. Consistent with the said practice, r. 5(1)(i) of the Rules uses the
same expression. When the said rule says "excise duty paid in respect of
the goods", the excise duty referred to is the excise duty paid under s. 3(1),
read with the Schedule, of the Central Excises and Salt Act, 1944 (1 of 1944).
Under the, said section, read with the Schedule, excise duty is levied on the
goods described in the Schedule. Therefore, when r. 5(1)(i) of the Rules refers
to the duty paid in respect of the goods to the Central Government, it
necessarily refers to the duty paid on the goods mentioned in the Schedule. As
the duty exempted from the gross turnover is the duty so paid under the Central
Act, read with the Schedule, the expression "in respect of" in the
context can only mean excise duty paid on goods. In our view, the expression
"in respect of the goods" in r. 5(1)(i) of the Rules means only
"on the goods".
Even if the word "attributable" is
substituted for the words "in respect of", the result win not be
different, for the duty paid shall be attributable to the goods. If it was paid
on the raw material it can be attributable only to the raw material and not to
the goods. We, therefore, hold that only excise duty paid on the goods sold by
the assessee is deductible from the gross turnover under r. 5(1)(i) of the
We cannot, therefore, agree with the
construction of r. 5(1)(i) of the Rules accepted by the High Court.
No other question was raised before us. In
the result, we modify the order of the High Court accordingly. In the
circumstances, we direct the parties to bear their respective costs.