State of Gujarat Vs. M/S. Raipur
Manufacturing Company Ltd.  INSC 194 (30 September 1966)
CITATION: 1967 AIR 1066 1967 SCR (1) 618
R 1967 SC1826 (15) R 1969 SC 348 (3) RF 1971
SC2054 (1) F 1973 SC1045 (3,6) R 1976 SC 10 (9) R 1976 SC1813 (20) F 1985
SC1748 (4,11) R 1992 SC 959 (16)
Bombay Sales-tax Act (3 of 1953), s.
2(6)-Dealer-"Carries on business", test for.
The respondent-Company was carrying on the
business of manufacturing and selling cotton textiles. In 1953-54, because
cloth, the company sold (i) old discarded items such as stores, machinery, iron
scrap,, cans boxes, cotton ropes, rags etc., (ii) coal; (iii) by-products such
as kolsi" or cinders, and waste caustic liquor. In the case of the first
item the sales were frequent, the volume was large, and the price realised was
credited in the profit and loss account of the Company, thus indirectly
reducing the cost of production of the textiles. In the case of coal it was a
commodity which the company required for its business and which had been
purchased for use in that business. There was, however, ,no evidence as to what
was the total quantity of coal purchased by the company and what percentage
thereof was sold except that the value of the coal sold exceeded Rs.
16,000. In the case of the third item though
the byproducts could not be used by the company, they were goods which were
produced continuously and regularly day after day in the Company's
manufacturing process, and for which, there was a market. The sales-tax
authorities brought the turnover from the sales of all these commodities to tax
under the Bombay Sales-tax Act, 1953. The High Court, on a reference, held in
favour of the Company.
in appeal to this Court,
HELD : (1) In disposing of miscellaneous old
and discarded items, the Company was not carrying on business of selling those
items. In order that receipts from the sale of a commodity may be included in
the taxable turnover it must be shown that the assessee was carrying on
business in that particular commodity,, and to prove that fact it must be
established that the assessee had an intention to carry on business in that
commodity. The characteristics of volume, frequency, continuity and regularity
indicating an intention to continue the activity of carrying on the
transactions with a profit motive must exist. But no test is decisive of the
intention to carry on the business, and the intention has to be inferred in the
light of all the circumstances.
Where a person comes to own in the course of
his business of manufacturing or selling a commodity, some other commodity
which is not a. by-product or a subsidiary pro-duct of that business, and he
sells that commodity, cogent evidence that he has intention to carry on
business of selling that commodity would be -required. In the present case, no
presumption can be raised, on the facts, that when the goods were acquired
there was an intention to carry on the business in those discarded materials,
nor can it be said that the goods became part of or an incident of the main
business of -selling textiles., as they were not by-products or subsidiary
products arising in the course of manufacturing textiles. [621 E-H; 624 B-C, E]
(ii) There were no circumstances existing at the time when the coal was
purchased, or which have come into existence late, which establish an intention
to carry on a business of selling coal. The burden of proving that the Company
was carrying on the, business of selling coal lay 619 upon the Sales-tax
Authorities and if they held against the Company merely because of the
frequency and the volume of the sales, the inference cannot be sustained. [626
A-C] (iii) The "Kolsi" or cinders and the waste caustic liquor were
byproducts or subsidiary products in the course of manufacture of textiles and
sale thereof was incidental to the business of the Company. An intention to
carry on business in those commodities may be reasonably attributed to the
Company and the turnover with respect to those two commodities would be liable
to sales-tax. [624 G-H; 625 E-F] Case law referred to.
Observation on p. 685 paragraph 7 in Gorsi
Dairy V. State of Kerala [(1961) 12 S.T.C. 683] not approved.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 603 of 1966.
Appeal by special leave from the judgment and
order dated November 14th/15th, 1963 of the Gujarat High Court in Salestax
Reference No. 3 of 1962.
N. S. Bindra and R. H. Dhebar, for the
S. T. Desai, C. C. Gandhi and I N. Shroff,
for the respondents.
The Judgment of the Court was delivered by
Shah, J. M/s Raipur Manufacturing Company hereinafter called 'the
Company'-carries on the business of manufacturing and selling cotton textiles.
In the account year 1953-54 the Company besides selling cloth sold coal and 25
different items of discarded or unserviceable goods and waste products from the
factory. The goods sold may be classified under three heads :
(1) Old containers-cans, boxes etc ;
discarded stores, machinery & iron scrap ; miscellaneous discarded items,
such as, cotton ropes', chindis (rags) etc.
(2) Kolsi (cinders), waste caustic liquor.
The Sales-tax authorities brought the
turnover from sales of those commodities to tax under the Bombay Sales Tax Act,
1953 and their order was confirmed in appeal by the Sales Tax Tribunal. The
Tribunal was of the view that "a cotton textile mill manages to collect
unserviceable articles in the course of manufacture of cloth" and since
these articles have to be sold, if it is to survive as an economic unit, sales
of those articles must be regarded "as part of the business of the textile
mill" if the transactions of sale are large and frequent. The Tribunal did
not deal with the sale of coal independently of the sale of other goods.
At the instance of the Company, three
questions were referred to the High Court of Gujarat, out of which one alone is
material in this appeal:
620 .lm15 "Whether on the facts and in
the circumstances of the case, was the Tribunal correct in holding that the
applicants were liable to be taxed on the sale of stores and old machinery and
other sundry articles ?" The High Court answered the question in the
negative. With special leave, the State of Gujarat has appealed to this Court.
Section 5 of Bombay Act 3 of 1953 imposes a
general tax at specified rates on his taxable turnover in respect of sale of
goods upon every dealer who was liable to pay general tax under the Bombay
Sales Tax Ordinance No. III of 1952 whose turnover in respect of all the sales
exceeds Rs. 30,000/during the year commencing on April 1, 1952. The expression
"dealer" is defined in s. 2(6) as meaning "any person who
carries on the business of selling goods in the State of Bombay, whether for
commission, remuneration or otherwise -". Section 2(8) defines
"goods" as meaning "all kinds of movable property other than
newspapers, actionable claims, stocks, shares and securities, and includes all
materials, articles and commodities." Section 2(13) defines "sale"
as meaning "a sale of goods made within the State of Bombay for cash or
deferred payment or other valuable consideration and includes any supply by a
society or club or an association to its members on payment of price or on fees
or subscription, but does not include . . ." Section 2(14) defines
"sale price" as meaning "the amount payable to a dealer as
valuable consideration for the sale of any goods, less any sum allowed as cash
discount according to trade practice, . . .". "Turnover" is
defined in s. 2(20) as meaning "the aggregate of the amounts of sale price
received and receivable by a dealer in respect of any sale of goods made during
a given period after deducting the amount, if any, refunded by a dealer to a
purchaser, in respect of any goods purchased and returned by the purchaser
within the prescribed period." Under the Bombay Sales Tax Act, 1953, the
aggregate of the price received and receivable by a person carrying on business
of selling goods is liable to be included in his taxable turnover. It follows
as a corollary that in the turnover of a person carrying on the business of
selling one commodity will not be included the price received by him by sale of
another commodity unless he carries on the business of selling that other
commodity. That is so, because, within the meaning of s. 2(6) of Bombay Act 3
of 1953 to be a dealer a person must carry on the business of selling those
goods, price whereof is sought to be included in the turnover. In other words,
he must carry on the business of selling a commodity before his turnover from
sale of that commodity is taxable. As pointed out by this Court in State of
Andhra Pradesh v. M/s Abdul Bakshi and Bros.(') a person to be a dealer must be
engaged (1) (1964] 7 S.C.R. 664: A.I.R.1965 S.C. 531.
621 in the business of buying or selling or
The expression "business" though
extensively used in taxing statutes, is a word of indefinite import. In taxing
statutes, it is used in the sense of an occupation, or profession which
occupies the time, attention and labour of a person, normally with the object
of making profit. To regard an activity as business there must be a course of
dealings, either actually continued or contemplated to be continued with a
profit motive, and not for sport or pleasure. Whether a person carries on
business in a particular commodity must depend upon the volume, frequency,
continuity and regularity of transactions of purchase and sale in a class of
goods and the transactions must ordinarily be entered into with a profit
motive. By the use of the expression "profit motive" it is not
intended that profit must in fact be earned. Nor does the expression cover a
mere desire to make some monetary gain out of a transaction or even a series of
transactions. It predicates a motive which pervades the whole series, of
transactions effected by the person in the course of his activity. In actual
practice, the profit motive may be easily discernible in some transactions : in
others it would have to be inferred from a review of the circumstances attendant
upon the transaction. For instance, where a person who purchases a commodity in
bulk and sells it in retail it may be readily inferred that he has a profit
motive in entering into the series of transactions of purchase and sale. A
similar inference may be raised where a person manufactures finished goods from
raw materials belonging to him or purchased by him, and sells them. But where a
person comes to own in the course of his business of manufacturing or selling a
commodity, some other commodity which is not a byproduct or a subsidiary
product of that business and he sells that commodity, cogent evidence that he
has intention to carry on business of selling that commodity would be required.
Where a person in the course of carrying on a business is required to dispose
of what may be called his fixed assets or his discarded goods acquired in the
course of the business, an inference that he desired to carry on the business
of selling his machinery or fixed assets or discarded goods would not ordinarily
arise. To infer from a course of transactions that it is intended thereby to
carry on business ordinarily the characteristics of volume, frequency,
continuity and regularity indicating an intention to continue the activity of
carrying on the transactions must exist. But no test is decisive of the
intention to carry on the business: in the light of all the circumstances an
inference that a person desires to carry on the business of selling goods may
A large number of cases were cited at the Bar
in support of the contention that the goods sold by the Company must be deemed
to have been sold as part of the business of the, Company, and on that account
the turnover in respect thereof was liable to taxation.
622 It is not necessary to enter upon a detailed
examination of those cases, because a majority of those cases are merely
illustrative of the general principles set out hereinbefore.
A few representative cases may be briefly
referred to. In State of Bombay v. The Ahmedahad Education Society(') certain
goods manufactured or imported by an Education Society for the purpose of its
own use were, when found surplus, disposed of at cost, without any profit. The
Bombay High Court held that no business of selling or supplying was intended to
be carried on in those goods. In State of M.P. v. Bengal Nagpur Cotton Mills
Ltd.(2) a Company which carried on the business of manufacturing textiles,
supplied steel and cement on several occasions to their contractors, who were
constructing buildings for the Company, and debited the price of the materials
to the contractor's account. It was held that the Company was not liable to pay
sales tax as the Company was not a dealer carrying -on the business of selling
steel and cement. In Commissioner of Sales Tax, Madhya Pradesh, Indore v. Ram
Dulare Balkishan and Bros,.(3) a transport operator who sold unserviceable
cars, trucks, tyres and motor accessories was held -not to be a dealer even
though the activity was "continuous, serious and large." In The State
of Mysore v. The Bangalore Woollen, Cotton and Silk Mills Co. Ltd,. (4) the
assessee a manufacturer of textiles who sold unserviceable goods like waste
cotton, useless ropes, scrap iron, worn out and broken parts of machinery, old
paper, and tubes, was held not to be a dealer. In that case, no distinction
(presumably because there was no evidence in that case justifying the
distinction) was made between waste cotton and other commodities sold.
It is clear from these cases that to
attribute an intention to carry on business of selling goods it is not
sufficient that the assessee was carrying on business in some commodity and he
disposes of for a price articles discarded, surplus or unserviceable. It was
urged, however, on behalf of the State that where a dealer with a -view to
reduce the cost of production disposed of unserviceable articles used in the
manufacture of goods and credits the price received in his accounts, he must be
deemed to have a profit motive, for it would be uneconomical for the business
to store unserviceable articles and to survive as an economic unit.
But the question is of intention to carry on
business of selling any particular class of goods. Undoubtedly from the
frequency, volume, continuity and regularity of transactions carried on with a
profit motive, an inference that it was intended to carry on business in the
commodity may arise.
But it does not arise merely because the
price received by sale of discarded goods enters the accounts of the trader and
may on an overall view enhance Ms total profit, or indirectly reduce the cost
of production of goods in the business of selling of which he is engaged. An
attempt to realize price by sale of (1)7 S.T.C. 497.
(2)14 S.T.C. 202.
(2) 12 S.T.C. 333.
(4) 13 S.T.C. 106.
623 surplus unserviceable or discarded goods
does not necessarily lead to an inference that business is intended to be
carried on in those goods, and the fact that unserviceable goods are sold and
not stored so that badly needed space is available for the business of the
assessee also does not lead to the inference that business is intended to be
carried on in selling those goods.
Counsel for the State strongly relied upon a
judgment of this Court in State of Andhra Pradesh v. H. Abdul Bakhi &
Bros.(') in support of the contention that goods purchased for the purpose of
being used in a manufacturing process are liable to purchase tax since the
manufacturer must be deemed to be carrying on business of purchasing those
goods. It was held in H. Abdul Bakhi's case() that a person who consumes a
commodity bought by him in the course of his trade or uses it in manufacturing
another commodity for sale, is a dealer, since the Legislature has not made
sale of the very article bought by a person a condition for treating hint as a
dealer. But the principle of that case has no application in the present case.
In that case this Court declined to accept the view which prevailed with the
High Court of Andhra Pradesh that unless a person is carrying on business both
of purchasing and selling the same commodity, purchase of articles used in the
course of manufacture of another commodity is not in the course of carrying on
the business of purchasing that article.
Counsel for the State also relied upon the
judgment of the Kerala High Court in Gosri Dairy, Vyttila v. The State of
Kerala(2). In -that case the assessee firm which was registered as a dealer in
dairy products sold a part of its live-stock every year and replaced the same
by fresh stock.
The question arose whether the proceeds of
such sales were to be treated as part of the turnover of the assessee liable to
sales tax. It was held that the frequency, regularity and volume of sale
transactions by the assessee were such that they could be regarded as "an
activity in the course of the business of the assessee", and therefore the
assessee's sales of cattle were part of its business. The Court in that case
inferred that the transactions by the assessee in respect of its assets
disclosed an intention to carry on the business in those assets. We are not
concerned to decide in this case whether the ultimate decision of the Court was
correct, but we are unable to agree with the view expressed by the High Court
that "as regards sales tax all the sales of a dealer in the course of his
business attract taxation".
Merely because a person is carrying on
business of selling a commodity, it cannot be inffered from sale by him of
another commodity in the course of that business that he is carrying on
business in that other commodity also.
(1) A.I.R. 1965 S.C. 53. (2) 12 S.T.C. 683.
624 We may now consider whether the turnover
from the goods sold by the Company was taxable. The goods sold broadly fall, as
already observed, under three heads: viz., old discarded machinery, stores and
scrap and miscellaneous goods ; coal ;
and byproducts and subsidiary products such
as "kolsi" and waste caustic liquor, though not usable by the factory
are goods regularly and continuously produced in its manufacturing processes.
We are unable to hold that in disposing of miscellaneous old and discarded
items such as stores, machinery, iron scrap, cans, boxes, cotton ropes, rags
etc. the Company was carrying on business of selling those items of goods.
These sales were frequent and the volume was large, but it cannot be presumed
that when the goods were acquired there was an intention to carry on the
business in those discarded materials ; nor are the discarded goods,
by-products or subsidiary product of or arising in the course of the
manufacturing process. They are either fixed assets of the Company or are goods
which are incidental to the acquisition or use of stores or commodities
consumed in the factory. Those goods are sold by the Company for a price which
goes into the profit and loss account of the business and may indirectly be
said to reduce the cost of production of the principal item, but on that
account disposal of those goods cannot be said to become part of or an incident
of the main business of selling textiles. In order that receipts from sale of a
commodity may be included in the taxable turnover, it must be established that
the assessee was carrying on business in that particular commodity, and to
prove that fact it must be established that the assessee had an intention to
carry on business in that commodity. A person who sells goods which are
unserviceable or unsuitable for his business does not on that account become a
dealer in those goods, unless he has an intention to carry on the business of
selling those goods.
But in dealing with the liability to pay tax
on the price for sale of "kolsi" and "waste caustic liquor"
different considerations arise. As found by the High Court "kolsi"
(cinders) are small pieces of coal which are not fully burnt. It appears that
"kolsi" is not capable of "extreme fuel potency required in the
furnaces" of the appellant Company, but it is still capable of being used
in "lighter furnaces". This "kolsi" is discharged from the
furnaces regularly and continuously day after day. The Company collects that
"kolsi" and sells it to intending purchasers in bulk.
"Kolsi" would be appropriately regarded as a subsidiary product in
the course of manufacture. "Kolsi" results from coal which remains
unburnt : it is on that account a subsidiary product. When such subsidiary
product is turned out in the factory regularly and continuously and is being
sold from time to time, an intention to carry on business in "kolsi"
may be reasonably attributed to the Company. In this connection, the principle
in the judgment of the 625 Bombay High Court in The Aryodaya Spinning and
Weaving Company Ltd v. The State of Bombay(') would apply. In that case a
textile manufacturing Company produced "cotton waste" in the course
of its manufacture of cloth and yarn. The cotton waste which was not required
for use in the factory was disposed of regularly and the Bombay High Court
regarded that as a subsidiary product or incident of the business of the
assessee. The normal business of the assessee in that case was the business of
manufacturing and selling cotton textiles and cotton yarn, but it could still
be regarded as allied or incidental to business activity. The same principle,
in our judgment, applies to the disposal of "kolsi" which was
discharged continuously and regularly out of the furnaces of the appellant Company.
"Waste caustic liquor" is also
regularly and continuously accumulated in the tanks in the process of
mercerisation of cloth. As pointed out by the High Court, sodium hydroxide in
water is used in different processes for mercerisation of cloth. The liquid is
kept in a tank in which cloth is dipped. After this process is over, cloth
passes through other tanks where water is sprinkled over it and in that process
some of the sodium hydroxide falls into the tank.
The liquid is a light solution of sodium
hydroxide which cannot be used in the process of mercerisation, nor for other
process in the factory of the Company. This waste material which is called
"waste caustic liquor" has still a market amongst other manufacturers
or launderers. For reasons which we have already set out in dealing with
"kolsi", we are of the view that waste caustic liquor may be regarded
as a by-product or a subsidiary product in the course of manufacture and the
sale thereof is incidental to the business of the Company and the turnover in
respect of both "kolsi" and "waste caustic liquor" would be
liable to sales tax.
It appears from the statement furnished that
coal of the value of Rs. 16,083/was sold by the Company under 12 bills in the
year 1953-54. Coal is purchased by the Company for the purpose of lighting its
furnaces and heating boilers. A part of the coal purchased was sold. The
Tribunal merely stated in respect of all the items of goods sold that looking
to the volume and frequency of their sale, the Company should be regarded as a
dealer in respect of those goods. Unless there is evidence to show that there
was an intention to carry on business of selling coal, the mere fact that coal
of the value exceeding Rs. 16,000/was sold will not by itself make the Company
a dealer carrying on business in coal. We have no evidence on the record as to
what the total quantity of the coal purchased by the Company was, and what
percentage thereof was sold. No investigation has been made as to the
circumstances in which the coal came to be sold. Mere sale of a com(1) 11
626 modity which a Company requires for the
purpose of its business and which has been purchased for use in that business
will not justify an inference that a business of selling that commodity was
intended, unless there are circumstances existing at the time when the
commodity was purchased or which have come into existence later which establish
such an intention. It may be pointed out that the burden of proving that the
Company was carrying on business of selling coal lay upon the Sales-tax
authorities and if they made no investigation and have come to the conclusion
mere because of the frequency and the volume of the sales, the inference cannot
On that view of the case, the answer recorded
by the High Court on the first question will be modified as follows :
"In the negative, except as to 'kolsi'
and waste caustic liquor".
There will be no order as to costs in this
V.P.S. Appeal allowed in part.