Commissioner
of Trade Tax U.P. & Anr Vs. M/S. Kajaria Ceramics Ltd., [2005] Insc 350 (12 July 2005)
Ruma
Pal & Arun Kumar
With C.A. No. 4602/2000 RUMA PAL, J
The
issue in these appeals is the extent of the entitlement of the respondent to
the benefit of exemption from payment of trade tax granted under a notification
dated 27th July, 1991 issued under Section 4A of the U.P. Trade Tax Act, 1948 (
hereinafter referred to as 'the Act') The respondent manufactures and sells
ceramic tiles in its factory at Sikandarabad, District Bulandshahr in the State
of Uttar Pradesh since 1988 having received an industrial licence from the
Government of India to do so. The annual production capacity of the respondent
was 12000 TPA (tonnes per annum). The total investment made in the unit upto 12th August, 1988 was Rs.16,21,54,452/- and the first
sale was effected on 16th
August, 1988.
A
notification issued on 26th December, 1985 (referred to as the 1985
Notification) under Section 4-A of the Act granted a six-years' tax exemption
in respect of new units having an investment in excess of 3 lakhs starting
production on or after the first date of October, 1982 but not later than the
first day of March, 1990. Admittedly the respondent's unit fulfilled the
conditions mentioned in the notification and, since its investments exceeded Rs.
3 lakhs, it was granted exemption for six years which was reckoned from the
date of first sale i.e. from 16th August, 1988
to 15th August, 1994.
During
the period 1st April, 1990 to 15th August, 1990 the capacity of the
respondent's unit was increased from 12000 to 26000 tonnes per annum. A further
fixed capital investment of Rs.11,14,95,641/- was made and the eligibility
certificate which had been granted was suitably revised on 11th April, 1991 noting the increased production
capacity of the unit to 26000 TPA. Again between 16th August, 1990 to 28th
December, 1991, the respondent made an additional fixed capital investment of
Rs.12,50,66,080/- and increased the units capacity from 26000 to 40000 TPA.
Finally the capacity was increased to 60000 TPA by making a further investment
of Rs. 29,95,20,778/- by 28th
March, 1994. The total
additional investment in the three expansions was Rs. 54,51,03,544.
In the
meanwhile a notification dated 27th July, 1991
(referred to as the 1991 Notification ) had been issued granting an exemption
from tax to a new unit and also to units which had undertaken expansion,
diversification or modernization. It provided similar relief from payment of
tax under the Act to new units excluding units mentioned in Annexure II to the
second Notification as well as to goods manufactured in units other than units
of the type mentioned in Annexure II which had undertaken expansion,
diversification or modernization on or after 1st April, 1990 but not later than
31st March, 1995 in specified areas. Under paragraph 1(B) (1) (a) no tax was
payable or, as the case may be the tax was payable at reduced rates specified
in Column IV of Annexure I on the turnover of sales by such units in respect
of inter alia "the quantity of goods manufactured in excess of the base
production in the case of units undertaking expansion or modernization".
Paragraph
1B (2) ( ii ) provided that in the case of units undertaking expansion or
modernization the period of such facility was to be reckoned from the first
date of production of goods manufactured in excess of the base production. The
benefits under the Notification were available only on production of an
eligibility certificate granted by the named authority to the assessing
authority. Annexure I provided for the rates of tax applicable in respect of
such units situated in different districts named in that Annexure. The rate of
exemption of tax applicable was fixed on the basis of the investment and varied
according to the location of the unit as specified in Annexure 1 to the
Notification. The respondent's unit was covered by Serial No. 2( i ) of
Annexure 1 to the notification which covered the district of Bulandshahr within
which the respondent's factory is situated. The relief was granted for 9 years
and was fixed at 'nil' in case of units with a fixed capital investment
exceeding 50 crores and in the case of other units at different percentages
subject to 150 per cent of the fixed capital investment in the case of small
scale units and 125 per cent of the fixed capital investment in the case of
medium and large scale units.
On
30th June, 1993, a Circular was issued by the Commissioner of Sales Tax
clarifying that units which had started production upto 31st March, 1990 and
which could enjoy unlimited exemption for a fixed period, and which had
undertaken expansion, diversification or modernization would get the benefit of
exemption of reduction from the specified dates confined to 100% to 150% of the
additional fixed capital investment.
When
the 1991 Notification came into force, the respondent was still enjoying the
benefit of the 1985 notification. After that period of exemption came to an end
on 15th August, 1994, on 16th September, 1994, the respondent made three
separate applications under cover of a letter dated 15th September, 1994 to the
General Manager, District Industries Centre for recommendation to the
Divisional Level Committee stating that the respondent company had started its
production on 12th August, 1988 with an installed capacity of 12000 TPA and
that it had "undertaken three successive expansions during 1990 to 1994.
First it increased the capacity from 12000 MT to 26000 in August, 1990 and
raised it to 40000 MT in December, 1991 and 60000 MT in March, 1994".
However,
on 21st November, 1994 the respondent withdrew all three applications and on
17th July, 1995, filed a revised application claiming that there was one
expansion from 12th August, 1988 to 28th March, 1994 by which the annual
production capacity of the respondent's unit was increased from 12000 TPA to
60000 TPA by making an additional fixed capital investment of Rs.54,51,03,549/-
Before the revised application under the 1991 Notification was filed by the
respondent a third notification was issued on 31st March, 1995 ( referred to as
the 1995 Notification ) granting benefits to units which were either new or had
undertaken expansion, diversification or modernization on or after 1st April,
1995 but not later on 31st March, 2000. The difference in this notification
with the earlier notifications is not only with regard to the period but also
in the allowance of the benefit to any finished goods manufactured in such a
unit which had undertaken "backward integration" during the same
period. The limits to which exemption was granted has been mentioned in
Annexure I. Units where the fixed capital investment exceeded Rs. 50 crores
would, like the earlier notification, be wholly exempted from payment of tax.
Where the investment was not Rs. 50 crores, the benefit was granted at reducing
percentages - the maximum (at least as far as certain districts including Bulandshahar
were concerned) being 200% of the fixed capital investment or, as the case may
be, additional fixed capital investment.
On the
basis of the revised application and in accordance with the procedure
prescribed, an inquiry was made and a report submitted by the Trade Tax Officer
to the Divisional Level Committee ( DLC ). The DLC by its decision dated 7th July, 1996 granted an exemption only in
respect of the expansion of the unit from 40000 TPA to 60000 TPA. The base
production was taken at 40038 MT. The benefit in respect of the first and
second expansions for achieving the expansion of 40000 MT was not granted. The production
was also taken to have commenced from 28th March, 1994 as a result of expansion. The total
figure of investment accepted by the DLC included the cost of land and site
building and plant & machinery. Other expenses claimed by the respondent
such as interest payable to financial institutions, expenditure incurred for
rights issue, foreign travel and foreign technical expenses were not included.
An eligibility certificate based on the decision of the DLC was accordingly
issued.
Aggrieved
by the DLC's decision, the respondent filed an appeal under Section 10 of the
Act to the Trade Tax Tribunal.
The
Tribunal accepted the respondent's claim except to the extent that the
exemption was limited to a percentage of the additional fixed capital
investment of Rs.54,51,03,544/-. In other words, the Tribunal held that there
was only one expansion and not three and that the benefit under the 1991
notification was not to be calculated as a percentage of the fixed capital
investment prior to the expansion but as a percentage of the additional fixed
capital investment. However the expenses on rights issue, foreign technicians,
foreign travel, laboratory equipment, fire fighting equipment and establishment
of water distribution schemes were included in the value of the fixed capital
investment.
The
appellants filed a trade tax revision before the High Court. The respondent
also filed a trade tax revision before the High Court challenging the
limitation of the grant of exemption to the additional fixed capital investment.
By the impugned judgment , the High Court allowed the respondent's application
and dismissed the State's application holding that the respondent's unit was
entitled to include the fixed capital investment of Rs.16,21,54,452/- as on
12th August, 1988 in the fixed capital investment under the 1991 notification
and that the tax benefit would be calculated at the specified percentage of the
original and additional fixed capital investment. The Circular dated 30th June 1993 was struck down and the DLC was directed
to issue a revised eligibility certificate to the respondent in accordance with
the finding.
Two
appeals have been preferred from both these decisions by the Trade Tax
Authorities, both of which are being disposed of by this judgment. As no stay
was granted by us at the time of the admission of the appeals, tax relief was
granted to the respondent by the appellants as directed by the High Court.
According
to the appellants the 1985 Notification granted tax relief only to new units
and did not extend to units undergoing expansion, diversification or
modernization. The 1991 Notification expanded the category of units to the
latter category for the first time. As far as the fixed capital investments
were concerned it is submitted that Explanations 1,2,4 and 5 to Section 4A of
the Act showed that there was a distinction between original and additional
fixed capital investment and that contextually, the phrase "fixed capital
investment" used in the notification when read in the case of a new unit
should mean 'original fixed capital investment' and in the case of a unit
undertaking expansion, diversification or modernization to mean 'additional
fixed capital investment resulting in such expansion, diversification or
modernization. It is submitted that that was how the respondent had understood
the matter initially. Any other construction, according to the respondents,
would lead to absurd consequences not only by granting benefits to older units
at the expense of new units but also by granting double benefit in respect of
the same investment. Multiple expansions would also allow the same original
investment to be counted for each expansion and an expansion by only 25% of the
original investment would mean that the unit would have a tax benefit including
the 100% earlier invested. This, according to the appellants was not the object
of the notification. The appellants contend that the ambiguity in the 1991
Notification was clarified by the 1995 Notification which explicitly says that
tax benefits would be on the additional fixed capital investment in the case of
expansion, diversification or modernization. According to the Appellants the
High Court should not have struck down the Circular issued in 1993 which had
earlier clarified the issue. In any event it is submitted, the fixed capital
investment could not, in the light of explanation 4 to Section 4A be construed
to include any item apart from the items specified therein. On the question
whether there was one or three separate expansions, the Appellants contended
that there was no evidence whatsoever to show that the three expansions were
part of one integrated scheme. They say that treating the expansion as one
would be contrary to the statute.
Finally
it is submitted that if at all the respondent had not collected any tax on the
strength of the eligibility certificate issued by the authorities consequent to
the High Courts judgment ( which was disputed ) that did not, according to the
appellants, debar the State Government from recovering its dues from the respondent.
It is said that the respondent had the option of collecting the tax from the
customers and applying for a refund.
Countering
these submissions, the respondent has submitted that Section 4A fixed the
eligibility criteria for the grant of benefits under the Act and the actual
grant of the benefit was effected by the notification and in terms thereof.
Thus
the 1991 notification linked the extent of the benefit to the fixed capital
investment in contrast to the additional fixed capital investment provided in
the 1995 notification. There was a conscious decision to grant older units the
benefit in respect of the additional production by linking the same to the
original and the additional fixed capital investment. The distinction was
deliberate and unambiguous. If, as a result, older units undertaking expansion,
diversification or modernization were in a better position than new units, this
would not, according to the respondent, make the grant discriminatory or
arbitrary, nor was there any warrant in law not to give effect to the language
used.
It was
then submitted that there was no bar under the 1991 Notification against
claiming exemption in three phases of expansion at the end of the third phase
nor was there any time limit to do so. It was contended that the Tribunal had
correctly allowed the preoperative expenses as part of the value of the plant
and machinery which was includible in the respondent's fixed capital
investment. It is said that to limit the phrase 'fixed capital investment' as
excluding the expenses for setting up and commissioning the expanded unit would
lead to an anomalous result as all the expenses incurred in connection with
such fabrication, installation and commissioning forms part of the value of
this plant. This was an accepted principle of accountancy and the respondent
had only taken such amounts which it had paid on the plant before the
commencement of the production as a result of such expenses. It was next
submitted that the decision of the High Court had been accepted by the
appellants and circulars had been issued by the authorities to this effect even
prior to the refusal of stay by this Court, and it was not open to the State to
re-agitate the issue. Besides, according to the respondent, it had not availed
of even 50% of the benefit which it could have claimed under the 1991
Notification in terms of the High Court's judgment. Finally the submission is
that the respondent had not realised any tax during the period nor could it
have done so under Section 8A (2) read with Section 15A (1) (qq) of the Act. In
the circumstances even if the appeal were to be allowed the tax should not be
directed to be recovered as this would lead to a closure of the respondent's
unit.
The
issues which have arisen for the decision in this appeal and which have been
formulated fairly by the appellants are :
I.
Whether a unit undergoing expansion is entitled under the notification dated
27.07.1991 to the benefit of exemption on the additional fixed capital
investment as a result of such expansion, or the total fixed capital investment
(being the aggregate of the original as well as the additional fixed capital investment
) ? II. Whether the Respondents' claim of one integrated expansion from 12000
TPA to 60000 TPA during the period 12.8.88 to 28.3.94 is sustainable in fact or
in law ? III. Whether or not certain preoperative expenses form part of
"Fixed Capital Investment" for the purpose of Section 4A of the U.P.
Trade Tax Act and the notification dated 27.07.1991 ? IV. Whether the
Respondents, ( allegedly ) not having collected or realized any tax on the
strength of the eligibility certificate, granted pursuant to the High Court's
judgment, and which was not stayed by this Hon'ble Court, are entitled to any
relief ? ISSUE - I Section 4A of the Act was introduced in the Act for the
stated purposes of increasing the production of goods or for promoting the
development of industry in the State or any of the districts. Under Section 4-A
sub-section (1) the State Government may by notification, declare that the
turnover of sales is exempt from trade tax for a period not exceeding 12 years
subject to such conditions as may be specified in the notification. The 1991
Notification cannot therefore be read in isolation but in the context and
within the parameters of Section 4A of the Act under which it was issued. As we
have noticed at the outset, the varying amounts of the benefit available under
the 1991 Notification have been tabulated in Annexure I thereto. The basis of
the exemption or reduction on tax is the fixed capital investment the quantum
of relief being a percentage of such investment. The phrase "fixed capital
investment" will have to be read harmoniously not only with the other
provisions of the Notification itself but also in the light of section 4A.
'Fixed
Capital Investment' has been defined in paragraph 3 of the 1991 Notification as
being determinable in the case of an industrial undertaking financed by a term
loan advanced by a public financial institution or a Scheduled Bank according
to the certificate to that effect issued by such institution or a bank and in
any other case according to
(a) value
of the land certified by the Collector;
(b) value
of building certified by an evaluator approved by the Income Tax Department for
the purpose
(c) the
value of plant, machinery, equipment, apparatus and components certified by a
Chartered Accountant.
Paragraph
4 provided:
"In
determining the fixed capital investment as defined in clause (4) of the
Explanation in case of 'New units' or 'Additional Fixed Capital Investment'
referred to in sub- clause (d) of clause (5) of the Explanation in case of
'unit which have undertaken expansion, diversification or modernization' the
investment in only such land, building, plant, machinery, equipment, apparatus
and component or, as the case may be, such additional land, building, plant,
machinery, equipment apparatus and component shall be taken into account as
were acquired on or before the relevant date of commencement of the period of
facility notified under sub-section (1) of Section 4-A of the Act."
(Emphasis supplied).
This
paragraph therefore links original fixed capital investments to new units and
additional fixed capital investments to already established units undertaking
expansion, modernization etc. for the purposes of Clauses (4) and clause (5)
(d) of the Explanation. There appears to be no clause (4) or (5) to any
Explanation in the 1991 Notification. Clearly the reference is to the
Explanation in Section 4A of the Act which has defined "fixed capital
investment" and "unit which has undertaken expansion diversification
or modernization" in clauses (4) and (5) respectively. The relevant
extracts of these clauses read as follows :-
"(4)
'Fixed capital investment' means investment in land and building and such
plant, machinery, equipment apparatus, components, moulds, dyes, jigs and
fixtures as have not been used or acquired for use in any other factory or
workshop in India:
(5) 'unit
which has undertaken expansion, diversification or modernization' means an
industrial undertaking
(a) of
a dealer who is not a defaulter in payment of any due under this Act, or the
Central Sales Tax Act, 1956 or under any loan scheme administered by the Pradeshiya
Industrial and Investment Corporation of Uttar Pradesh regarding trade tax on
sale or purchase of goods;
(b) whose
first date of production of goods,
( i )
Of a nature different from those manufactured earlier by such undertaking in
case of units undertaking diversification, and (or)
(ii)
Manufactured in excess of base production, in such undertaking in case of units
undertaking expansion or modernization, falls at any time after March 31, 1990.
( c )
the production capacity whereof has increased by at least twenty five percent
as a result of expansion of modernization or wherein goods of a nature
different from these manufactured earlier are manufactured after
diversification;
(d)
Wherein an additional fixed capital investment of at least twenty five percent,
of such original fixed capital investment (without providing for depreciation)
is made.
What
is of significance is that a distinction is made between 'additional' and
'original' fixed capital investment' not only in clause (d) of clause (5) to
the Explanation in Section 4A of the Act but in the body of the entire clause the
first relating to old units undertaking expansion etc. and the second to new
units.
Paragraph
4 of the Notification also refers only to the additional fixed capital
investment in determining the fixed capital investment as far as units which
have undertaken expansion, diversification or modernization are concerned. The emphasised
portions of the paragraph as quoted earlier indicate the mode of determination
of additional fixed capital investment as far as units which have undertaken
expansion etc. and original fixed capital investment as far as new units are
concerned.
The
High Court held that sub clause (d) of Explanation 5 to Section 4A had nothing
to do with the extent of benefit of exemption which could be granted to a unit
undertaking modernization, expansion for diversification but referred to the
field of eligibility. As far as paragraph 4 of the 1991 notification was
concerned, according to the High Court, it merely provided how the fixed
capital investment as defined in Explanation-4 in the case of new units or in
the case of additional fixed capital investment referred to in sub clause (d)
of Explanation 5 was to be computed. It did not provide that in the case of a
unit undertaking modernization expansion or diversification only additional
fixed capital investment shall be considered.
We
disagree. The different methods of computation contained in paragraph 4 of the
1991 Notification serve two separate purposes and that is to determine the two
relevant investments for the distinct benefits available to two different kinds
of units viz. new units and established units which have undertaken expansion
etc. Significantly there is no mode prescribed determination of original fixed
capital investment as far as the latter kind of unit is concerned nor
additional fixed capital investment in respect of the former. The High Court
did not consider the logical consequences of paragraph 4 of the notification
providing only for the computation of additional fixed capital investment as
far as units undertaking an expansion etc.
were
concerned. In our opinion the High Court misread paragraph 4 of the
notification, the only reasonable interpretation of which is that as far as new
units were concerned the 'original fixed capital investment' would have to be
computed and as far as units undertaking expansion etc.
were
concerned 'additional fixed capital investment alone would have to be computed.
Form
XLVI appended to the UP Trade Tax Rules, 1948 ( referred to hereafter as the
Rules) prescribes the details for an application for exemption from or
reduction in rate of tax to new units the date of starting production whereof
fell on or after 1st April, 1990 or to units which have undertaken expansion,
diversification or modernization on or after 1st April, 1990 under Section 4A
of the Act. Serial No. 6(a) gives the necessary particulars of the fixed
capital investment in case of the latter kind of unit. There are three columns
viz., Original investment (without giving margin for depreciation), Additional
investment in the expansion etc on the date of commencement of the period of
facility and a certificate of valuation of the additional fixed capital
investment. The investments contemplated are in (1) land (ii) building and
(iii) plant, machinery, equipment, apparatus and components. The certificates
in respect of items (1) and (ii) as far as additional fixed capital investment
are to be given by the Collector of the District and the evaluator approved by
the Income Tax Department respectively. The valuation of the third item is to
be given by a chartered accountant. The note to Serial No. 6(a) also requires a
certificate from a chartered accountant of the original fixed capital
investment.
The
particulars indicate that while fixed capital investment includes original and
additional investments a distinction is made between the two. The purpose is
patently to enable the Department to verify the calculation of the percentage
of increase in the additional investment by reason of the expansion over the
original. It does not mean that in respect of units undertaking expansion the
percentage is to be calculated on an aggregate of both original and additional
investments.
The
three notifications namely the one issued in 1985, 1991 and 1995 form part of a
pattern. The 1985 notification granted benefit to new units provided their
original investment exceeded Rs. 3 lacs of their entire turnover. The 1991
Notification extended the benefit to old units undertaking expansion and which
may have already got the benefit, like the respondent, of the original
investment made under the 1985 Notification subject to the old unit making a
further investment and the benefit was limited to a percentage of that
investment.
Similarly
the 1995 Notification further extended the benefit to units which had
undertaken backward integration again limiting the benefit to the investment
made. All three notifications were issued under the same section and for the
same purpose of effecting development and were part of a chain of progress
without any overlapping. Not only would the contents of each notification
derive its meaning from Section 4A as each is derived from and refers back to
the section, but also if a phrase used in one of the notifications is still
ambiguous, then for the purpose resolving the ambiguity the contents of the
previous or subsequent notifications can be looked into. Indeed that is what
the High Court did. It relied upon the 1995 notification for construing the
1991 notification, an exercise which was recognised as permissible in Pappu
Sweets & Biscuits v. CTT, U.P. (1998) Supp 2 SCR 119. Because the 1995
notification explicitly states in Annexure 1 to that notification that the
exemption is calculatable on the fixed capital investment or as the case may be
'additional fixed capital investment', the High Court was of the view that when
the 1991 notification only used the words 'fixed capital investment' in
Annexure 1 as the basis of calculation of benefit without making any such
distinction, all units whether new or old were entitled to the benefit of the
original and the additional fixed capital investment.
Apart
from being contrary to the language of paragraph 4 of the 1991 Notification,
the decision in Pappu Sweets, on which the High Court founded its reasoning
does not support the conclusion of the High Court. In Pappu Sweets, the very
same notifications namely the 1991 and 1995 Notifications were considered. The
question was whether the word 'Sweetmeats" under the 1991 Notification
could be read as including 'toffees'. A Bench of 3 Judges of this Court held
that the 1995 Notification could be looked into for clarifying the ambiguity in
the 1991 Notification. The 1995 Notification did not use the word 'Sweetmeats'
at all but mentioned different kinds of condiments but did not mention toffees.
On the principle enunciated in Cape Branch Syndicate v. I.R.C (1921) 2 KB 403
to the effect that "if there be any ambiguity in the earlier legislation,
then the subsequent legislation may fix the proper interpretation which is to
be put upon the earlier Act" , it was held that the word 'Sweetmeats' in
the 1991 Notification did not include toffees. Therefore the 1995 Notification
was seen as clarificatory of the 1991 Notification. Applying the same reasoning
we hold that the ambiguity in the 1991 Notification as to the meaning to be put
on the phrase 'fixed capital investment' in Annexure I was removed by the
clarification in Annexure I of the 1995 Notification by its reference to
additional fixed capital investment as far as established units undertaking
expansion etc. were concerned.
In
fact even before the issuance of the 1995 Notification a circular had been
issued by the Department in 1993 inter alia to the following effect- "(4)
- Units starting production on or after 1.4.90 if undertake expansion
diversification or modernization in accordance with clause 5 of explanation to
Sec. 4A than such unit shall be entitled to facility exemption/reduction in
rate of tax on the production in excess of base products or on the manufacture
of new product for a period of 8,9,10 years from the date of expansion
diversification modernization and shall be limited to the extent of 100% to
150% of additional fixed capital investment".
The
Circular can be read as a contemporaneous understanding and exposition of the
intention and purport of the Notification. Courts have treated contemporary
official statements as contemporary exposition and used them as aids' to
interpret even recent statutes.
Thus
in Collector v. Andhra Sugar [1988 ] 3 Supp (SCR) 543 Mukharji, J (as His
Lordship then was ) said "It is well settled that the meaning ascribed by
the authority issuing the Notification, is a good guide of a contemporaneous
exposition of the position of law. Reference may be made to the observations of
this Court in K.P. Varghese v. The Income Tax Officer, Ernakulam [1982]1 SCR
629. It is a well settled principle of interpretation that courts in construing
a Statute will give much weight to the interpretation put upon it at the time
of its enactment and since, by those whose duty has been to construe, execute
and apply the same enactment." SCR 453, 460.) The High Court therefore
erred in striking down the circular by holding that the circular was contrary
to what the High Court thought was the clear intention behind the notification
instead of seeing the circular as contemporaneous evidence of such intention.
The
position was therefore abundantly clear. Old units undertaking expansion,
diversification or modernization would be entitled to get benefit of tax
reduction on the additional fixed capital investment made. The respondent acted
on this and in its application dated 27th October, 1995 for grant of
Eligibility Certificate for expansion of its capacity addressed to the
Chairman, Committee of Sales Tax Exemption & Commissioner said "According
to rules the Company is entitled to get full exemption from Trade Tax for a
period of nine years subject to monetary limit of 125% of additional fixed
capital investment with effect from the first date of production in excess of
base production." Before the Tribunal too, the respondent had only claimed
in its amended application that it should have been given exemption on the
capital investment of Rs.54,51,03,544/- namely the additional fixed capital investment
relating to the three expansions. The particulars of the items of investment
including land and buildings claimed related only to this. The appellants
contention before the Tribunal was that only the third expansion should be
granted the benefit under the 1991 Notification. There was thus no issue raised
before the Tribunal by the respondent that the original investment should be
included in computing the tax benefit under the 1991 Notification. Even if the
High Court found that the issue was raised in the grounds of Appeal, it should
not have allowed the respondent to raise it in revision when clearly it had not
been pressed before the Tribunal.
Furthermore
the appellants' submission that the High Court's interpretation of the 1991
Notification leads to anomalous results also appears to be sound. The High
Court has correctly found that "the object of granting exemption from
payment of sales tax has always been for encouraging capital investment and
establishment of industrial units for the purpose of increasing production of
goods and promoting the development of industry in the State". If the
intention of the State Government, as expressed in Section 4A itself is to
encourage investment, it is unlikely that the investment already made would
entitle an industry to any further benefit again. Yet if we accept the
respondent's reasoning (which was affirmed by the High Court), there may be
multiple expansions qualifying for the benefit of the 1991 Notification and the
original investment would be taken into account every time. Apart from the fact
that a new unit would have to face competition from an old established unit, a
new unit would be additionally handicapped by the greater benefits being
granted to the old established businesses. It is unlikely that any new unit
could be persuaded to set up industries in such adverse circumstances leading
to a situation which was certainly not envisaged either under Section 4A or
under any of the notifications issued thereunder.
The
respondent may be correct in contending that if as a result of the
notifications new units lose market or face tough composition the same cannot
be said to be arbitrary or discriminatory. The contention would have been
apposite if there were a challenge to the constitutionality of the notification.
There
is no such challenge. We are merely seeking to construe the notification and
although consequences cannot and should not alter the statutory language but
they may at least fix its meaning.
It is
patent to us therefore that the benefit of the 1991 Notification as far as
units undertaking expansion etc. like the respondent are concerned is limited
to a percentage of the additional fixed capital investment and not the original
and additional fixed capital only and not to a percentage of the aggregate of
the original and additional fixed capital.
ISSUE
NO. 2 Were there three separate expansions of the respondent's unit as claimed
by the appellants or only one as asserted by the respondent and affirmed by
both the Tribunal and the High Court ?. The issue is a mixed question of law
and fact. Were it only a question of fact no doubt we would have stayed our
hands and let the matter rest there unless ofcourse the concurrent conclusion
of both fora could be said to be perverse. However the appellants' contention
is that the decision is factually perverse and erroneous in law.
The
DLC had taken the last expansion as the only expansion and granted relief to
the respondent on that basis.
The
first two expansions were ignored. The Tribunal held that the three expansions
were phases of a single scheme of expansion. It is not very clear what
persuaded the Tribunal to hold so. The High Court held that the Tribunal's
finding was a conclusion of fact and could not be reversed except on the ground
of perversity. It also independently came to the same conclusion on the grounds
1)
that the DLC had categorically observed that the dealer had made the expansion
in phases and that the respondents pleading that there was one scheme for
expansion prepared earlier was not disputed by it;
2) the
Enquiry report submitted by the Trade Tax Officer did not observe that there
were three separate schemes of expansion.
The
High Court also relied on a circular dated 26th September, 1996 in support of
its finding. Whether it could have done so is a question of law and will be
addressed after the factual reasons are assessed.
The
High Court was right in saying that the question is essentially one of fact but
it has lost right of the basic principle that the onus to prove a fact is on
the person asserting it. Since it was the respondent's case that there was a
single scheme of expansion which was implemented in three phases the onus was
on the respondent which it has not discharged. A scheme of expansion would
necessarily warrant estimates, plans, drawings and all the other steps which go
into the process of formulating a scheme. There is not a single piece of
evidence to this effect. Merely because the DLC uses the phrase
"phase" would not do. Apart from the fact that there is a dispute as
to the correct translation of the relevant Hindi word which has been translated
as 'phase', the appellants have consistently though unsuccessfully reiterated
their stand of there being three expansions. A mere plea before the DLC by the
respondent cannot cure this very crucial lacuna in the respondent's case.
As far
as the Trade Tax Officer's Report is concerned, the terms or the scope of the
enquiry have not been shown to us.
Was he
called upon to determine whether there was one expansion or three ? The report
is prepared in a set proforma. It gives a picture of the various investments
made and when they were made. That is all. It does not in any way support the
respondent's submission on this issue.
Although
not strictly speaking necessary, we may now consider on the other hand the
admitted facts each of which go to show that there were in fact three separate
expansions. For each of the three expansions, separate industrial licences were
applied for and obtained from the Central Government.
Separate
negotiations for finances were entered into between the respondent and the
financial institutions. The correspondence exchanged shows that the expansions
were separate. For example, a letter dated 17th July, 1989 written by the IFCI
to the respondent in connection with the first expansion refers to "your
(the respondents) expansion scheme envisaging increase in the installed
capacity for the manufacture of ceramic wall and floor tiles from 12000 TPA to
26000 TPA at Sikanderabad". Finally as noticed earlier, the respondent had
itself made three separate applications, one for each expansion. In the
covering letter it was said that the respondent had undertaken three successive
expansions". These facts were not adverted to either by the High Court or
the Tribunal and their conclusion that there was only one expansion was
perverse.
This
brings us to the law. Sub-Section (2) of Section 4A provides for the conditions
which may be imposed in the notification in order to obtain an exemption or
reduction in the rate of tax. Two of such conditions are :
"(c)
in respect of those goods only which are manufactured in a unit which has
undertaken expansion, diversification or modernization on or after April 1,
1990, and which, in case of diversification, are different from the goods
manufactured before such diversification, and in the case of expansion of
modernization are additional production as a result of such expansion or
modernization; and
(d) only
if the manufacturer furnishes to the assessing authority an Eligibility
Certificate granted by such Officer, in accordance with such procedure, as may
be specified." Paragraph 1 (B) 1 of the 1991 Notification accordingly
specified inter alia that the benefit of tax exemption or reduction would be
available on the turnover of sales of the goods manufactured in certain
industries which had undertaken expansion, diversification or modernization
between 1st April, 1990 and 31st March, 1995.
Reading
the quoted provisions of Section 4A with paragraph 1 (B) (1) (a) of the
Notification it is clear that the benefit under the notification must be
limited to those goods which are additionally produced as a result of expansion
or modernization. In other words the benefit was relatable to the expansion. We
then come to Explanation (5) to Section 4A of the Act. It has been quoted
verbatim earlier on. To recapitulate briefly : Explanation 5 defines a
"unit which has undertaken expansion, diversification or
modernization". It contains four clauses which provide the conditions of the
definition. Clause (a) requires that the dealer should not be a defaulter.
Clause (b) defines "first date of production of goods". Clause ( c )
refers to the minimum extension of capacity, namely 25% as a result of
expansion. Clause (d) requires a minimum additional fixed capital investment of
25% .
Explanation
6 defines the expression "base production".
(the
original definition has been replaced in 1998 with retrospective effect from 1.4.90
) as:- "(a) eighty percent of the installed annual production capacity; or
(d) maximum production achieved during any one of the preceding five
consecutive assessment years or if the unit were in production for less than
five years, the maximum production achieved during any one of the preceding
assessment years, whichever is higher" These definitions are reflected in
the 1991 Notification.
Base
production of unit undertaking expansion or modernization has been provided for
under paragraph 5 according to which it shall be deemed to be :
"a)
maximum production achieved during any one of the preceding five consecutive
assessment year, or b) 80 per cent of the installed annual production capacity,
whichever is higher".
Determination
of base production has been provided also in paragraph 6 as follows :- a)
Turnover of sale of goods in any assessment year to the extent of the quantity
covered by base production of that year and the stock of base production of
previous years shall be deemed to be the turnover of base production.
b)
Only the turnover of goods in any assessment year in excess of the quantity
referred to in clause (a) shall be entitled to the facility of exemption from
or reduction in the rate of tax.
Base
production therefore refers to the pre additional investment stage or the
maximum production in the already installed pre-expanded unit. The excess
production as a result of the expansion is entitled to the benefit of exemption
or reduction of tax.
The
commencement of the facility according to Section 4A (1) would be the date
declared in the 1991 Notification.
Paragraph
1 (B) (2) (ii) says that the period of facility shall be reckoned from the
first date of production of goods manufactured in excess of the base
production.
So
with the commencement of an additional investment which must overtake the original
investment by at least 25% the expansion commences. Ofcourse the ultimate
expansion must result in an increased capacity of at least 25%. Then the first
excess production over the base production brought about by such increased
capacity and ultimately by the additional investment would be the 'first date
of production' and the expansion would be completed and the period of facility
would commence.
Section
4A (5) (a) provides that a manufacturer shall be entitled to the facility of
exemption from, or reduction in, the rate of tax notified under subsection (1) "(a)
If he applies for such facility within six months from the relevant date of
commencement of the period of facility referred to in that Sub-Section or by
30th September, 1992, whichever expires later, for the entire period notified
under that Sub- Section".
Now a
dealer may, for whatever reason apply for the facility of exemption later. This
would not mean that the facility starts from the date of application but that
the dealer is entitled to the facility from the date of the application till
the period of the operation of Notification is over. This is clear from clause
(b) of sub-section (5) of Section 4A which provides :
(b) If
he applies for such facility later than the date specified in Clause (a) only
for part of the period notified under Sub-Section (1) which shall be computed
from the date of application till the end of the period of the facility".
Admittedly
the respondent produced goods in excess of what was its base production as a
result of the establishment of its original unit in 1991 when the first
expansion was completed.
With
the production of the first tile after the first expansion the period of
facility under the 1991 Notification commenced and the expansion was complete.
The
years of the first expansion would then be taken into account for determining
the base production for the second expansion, and the moment this was exceeded
as a result of the second expansion the expansion was complete. The same
process would apply to the third expansion. Therefore each time the respondent
made an additional investment, increased its capacity to produce and in fact
produced goods there was an expansion.
The
respondent cannot in terms of this statutory scheme claim in one breath that a
single expansion commenced from 1988 and was completed in 1994 and at the same
time say that the base production was the figure of production in 1992-93 viz.
40038 MT. The base production as we have seen must statutorily precede the
expansion and cannot be a figure taken while the expansion has already
progressed. The figure of 40038 MT was accepted by the DLC as the base
production as it had rejected the respondent's claim relating to the first two
expansions and limited it to the third expansion. The appellants have similarly
accepted this figure of 40038 MTs. But this is in keeping with their contention
that there were in fact three expansions and that the figure of 40038 MTs is
the base production for the third and last expansion.
The
respondent has however relied on the second proviso to Explanation 6 of the
Notification as well as Notifications dated 19th July, 1996 and 21st February,
1997 in support of its contention that there was one expansion. To quote the
language of the second proviso to Explanation 6 as it originally stood:
"Provided
further that where investment made during certain period is clubbed together
for the purpose of determining the fixed capital investment, the production
immediately prior to the date on which such investment was first started to be
made in respect of expansion or modernization shall be taken into account for
determining the base production." The clubbing under the second proviso
does not relate to the date of production and the commencement of the facility
but to the base production.
The
two notifications referred to declare that new units or old units making an
additional fixed capital investment of fifty crore rupees or more would be
entitled to exemption from tax for a period of three years on or after
specified dates. According to the respondent the notifications permit fixed
capital investment even after the commencement of facility and was an instance
of the clubbing permitted under the second proviso.
Neither
of the notifications refer to the second proviso nor were they in operation
during the relevant period.
The
circular dated 26th September, 1996 was relied on by the High Court presumably
to overcome the effect of Section 4A (5) (a) & (b) quoted earlier. Although
the circular itself does not attempt to explain or clarify these provisions. It
purports to construe the provisions relating to base production and reads :
"Reference
was made to the government in respect of grant of exemption on the goods
produced by new industrial units as defined u/s. 4A(2) of Uttar Pradesh Trade
Tax Act, having undertaken diversification or modernization as to whether a
unit which has undertaken diversification/ modernization after establishment
but before completion of 5 years, would be entitled to benefit of diversification/
modernization or not ? If such unit is granted benefit under the said policy
than how the calculation of base production in accordance with sub section (5)
of Section 4A shall be made ? In the matter under reference, the government
vide its letter No. TT-1167/Eleven-9(101)/96 dtd. 4/6/1996 have informed that
according to the present provisions base production shall be deemed to be
maximum production achieved during any one of the preceding five consecutive
assessment years or 80 percent of the installed annual production capacity,
which ever is higher. If any unit undertakes diversification, modernization
before five years from its establishment than the aforesaid provisions shall be
applicable even thereafter meaning thereby that it shall not be entitled to
exemption unless there is production in the preceding five consecutive
assessment years." The High Court therefore concluded that the respondent
could only make one composite application after five years. It should no have
done so.
For
one, the circular was issued subsequent to the relevant period and after the
respondent had filed its revised application for exemption under Section 4A.
For another, the construction put by the circular on the definition of base
production is questionable and has in any event no statutory force. In any
event the definition of base production in Explanation 6 which was amended in
1998 with effect from 1st April, 1990 (quoted earlier) clearly says that if the
unit has been in production for less than five years, the maximum production
achieved during any one of the preceding assessment years would be taken as the
base production. The appellants are therefore right in contending that three
separate applications were maintainable at all material times despite the fact
that when such expansions were done the unit was in production for less than
five years.
We
accordingly hold that there were in fact and in law three expansions and decide
the issue in favour of the appellants.
ISSUE
NO. 3 The respondent had claimed preoperative expenses as part of the fixed
capital investment which included interest to financial institutions, rights
shares issue expenses, foreign technician expenses and foreign travel expenses.
The Tribunal allowed the claim relying on Challapalli Sugars Ltd. vs- CIT
(1975) 98 ITR 167, Commissioner of Income Tax vs- Motor Industries Co. Ltd.,
(1988) 173 ITR 374 and CIT v. Polychem Ltd. : 1975 98 ITR 574 on the ground
that the expenses were necessary to undertake the expansion scheme. The view
was affirmed by the High Court, in our opinion, wrongly.
We
have already noted in connection with Issue I that Explanation 4 to section 4A
has defined fixed capital investment saying that it "means
"investment in land and building and such plant, machinery, equipment
apparatus, components, moulds, dyes, jigs and fixtures as have not been used or
acquired for use in any other factory or workshop in India".
The
language of the definition of the phrase in Explanation 4 to Section 4A is
sufficiently clear and unambiguous. This coupled with the use of the word
"means" in the Explanation shows that the definition is exhaustive.
As has been observed in Feroze N. Dotiwala v. P. M. Wadhwani (2003) 1 SCC 433, 442
:
"Generally,
when the definition of a word begins with "means" it is indicative of
the fact that the meaning of the word has been restricted; that is to say, it
would not mean anything else but what has been indicated in the definition
itself Therefore, unless there is any vagueness of ambiguity, no occasion will arise
to interpret the term in a manner which may add something to the meaning of the
word which ordinarily does not so mean by the definition itself, more
particularly, where it is a restrictive definition." According to the
Constitution Bench in PLD Corporation Ltd., v. Presiding Officer [1990] 3 SCR
111, 150 when the statute says that a word or phrase shall mean certain things
it is a "hard and fast definition, and no other meaning can be assigned to
the expression than is put down. A definition is an explicit statement of the
full connotation of a term".
Therefore
apart from the actual investment in or cost of the specific items of land,
building, plant, machinery, equipment apparatus, components moulds dyes, jigs
and fixtures, no other item of expense is includible under the head of fixed
capital investment for the purposes of section 4A of the Act.
This
principle of statutory interpretation is reinforced not only by the particulars
itemized in form XLVI of the Rules but also by the procedures for determination
of fixed capital investment specified in paragraphs 3 and 4 of the 1991
notification, all of which underscore the definition's restrictive nature.
There is and indeed could be no reference either in the form or in the 1991
notification to any item outside the definition in Explanation 4 to Section 4A.
Besides
the underlying object of the scheme of exemption under Section 4A of the Act,
is to grant benefit by way of a quid pro quo for the actual value of assets
brought into the State. The determination of such value would necessarily have
to be an objective exercise. For the purposes of the Income Tax Act on the
other hand, a tax on income may allow the valuation of an asset taking into
consideration circumstances which may be entirely personal to the assessee
under which the asset is purchased subject to certain permissible limits. The
perspective of the two statutes is therefore different and everything that may
go into the cost of an asset for the purpose of the Income Tax Act may not be
relevant for an objective determination of its value under the U.P. Act. It is
also noteworthy that the definition of 'fixed capital investment' in
Explanation 4 talks of investment in land, building, plant, machinery etc. and
not investment in relation to or in connection with them. The Tribunal and the
High Court failed to construe these statutory provisions and relied upon
judgments delivered in connection with the Income Tax Act, the provisions and
purpose of which could hardly be said to be in pari materia with the provisions
of the UP Act and the 1991 Notification.
The
four items of expenditure which the High Court accepted viz. Interest paid on
loans by financial institutions, expenses in connection with a rights issue of
shares, expenses on foreign technicians or foreign travel do not reflect the
value of the items forming part of the fixed capital investment for the
purposes of this Act or 1991 Notification and cannot by any principle of
statutory interpretation be brought within the definition of the phrase in
Explanation 4 to Section 4A. The issue is thus decided against the respondent
and in favour of the appellants.
ISSUE
- 4 The respondent's objection to the recovery of the tax is that the
appellants by Circulars dated 31st October, 2000 and 14th November, 2000 had
accepted the judgment of the High Court even prior to the refusal to stay the
impugned judgment by this Court. It is submitted that circulars issued by the
Department are binding upon them and that this was laid down in Collector of
Central Excise, Vadodra v. Dhiren Chemical Industries (2002) 2 SCC 127 and
Commissioner of Sales Tax, UP vs- Indra Industries (2000) 9 SCC 66.
The
objection is misconceived. Circulars may be of varying kinds. The circulars
relied on were merely official communications to the subordinate officers
directing compliance with the decision of the High Court. They were not
clarifications of statutory provisions in which event, as was held in CST v. Indra
(supra), they would represent the official understanding of those statutory
provisions and would be binding on the taxing authority. Nor was there any
statutory provision in the UP Act corresponding to Section 37B of the Central
Excise Act, 1944 by the Central Board of Excise and Customs which make
circulars issued there under binding on the authorities as was held in CCE vs Dhiren
Chemicals (supra) . The appellants' appeals before this Court were filed before
any action was taken on the High Court's decision. We granted leave to appeal
on 11th August, 2000 and issued notice on the interim
relief claimed by the appellants. Stay was finally refused on contest on 4th January, 2001. In the absence of any order of
stay by this Court, the appellants were bound to comply with the impugned
decision. Such compliance by itself cannot destroy the appellants rights to
press their appeals before this Court.
The
preliminary objection is accordingly rejected.
The
respondent then submitted that it has not availed of even 50% of the total
benefit under the notification in terms of the impugned judgment and it has not
and could not in law have realised any tax during the period of the facility
which expired on 31st
March, 2003. Reference
has been made to Section 8A (2) read with Section 15A (1) (qq) to contend that
the prohibition on the collection of tax from consumers by a dealer which is
itself not liable to pay tax is backed by severe penalties. It is said that the
recovery of the tax would lead to the ultimate closure of the Respondent's unit
which would be contrary to the very concept, object and intention of the
exemption provision and policy of the state.
The
appellants on the other hand have relied on the State of Rajasthan v. J. K. Udaipur
Udyog Limited (2004) 7 SCC 673 to contend that even if the respondent had not
passed on its liability to and collected tax from its consumers, it was bound
to pay the tax which it could and should have paid on the tiles sold by it
during the period of facility. The factual basis of the respondent's claim that
it had not collected tax from its customers is also disputed. It is said that
the respondent had the option of collecting the tax and applying for refund
under Section 29A of the Act in terms of paragraph II of the Industrial Policy.
A
similar contention was considered by us in State of Rajasthan v. J. K. Udaipur Udyog Ltd., (
supra) where after considering the authorities on the issue we held :
"The
mere circumstance that the respondent Companies having availed of the Exemption
Scheme were prohibited from collecting the tax from their customers or that
they had not collected the sales tax from their customers (which assertion is
strongly disputed by the appellants), is of no consequence. The primary
liability to pay the sales tax is on the seller. The seller may or may not be
entitled to recover the same from the purchaser. The State Government is
entitled to recover the same from the respondent Companies irrespective of the
fact that the respondent Companies may have lost the chance of passing on their
liability to pay sales tax to their purchasers".
We see
no reason to differ from this view. Indeed the Act itself envisages a situation
where a dealer may be called upon to pay the tax which it may not have
collected from its customers. We have seen earlier that sub section (2) of
section 4A of the Act provides for the conditions which may be imposed in an
exemption notification. Apart from the conditions already noted by us,
paragraph 2 of the 1991 notification stated that the facility of exemption from
or reduction in the rate of tax shall be subject to the condition :
"(iv)
that the said unit furnishes to the assessing authority concerned an
eligibility certificate granted in this behalf by the General Manager, District
Industries centre, Area Development Officer (Industry) of the concerned Industrial
Development Authority, Additional or Joint Director of Industries of the range
or Additional or Joint Director Industries of the concerned Industrial
Development Authority, as the case may be".
In our
narration of facts in an earlier part of this judgment we have seen how the
respondent had, with the completion of each of the expansions, applied for and
obtained an amendment of the eligibility certificate granted to it on 5th May, 1990 in respect of the original unit.
Sub
section (3) of Section 4A however allows the Commissioner by order to cancel or
amend the eligibility certificate before or after the expiration of the period
of exemption under certain circumstances. In such event the dealer is liable to
pay the tax which ought to have been paid under sub section (4) which provides:
"(4)
For the removal of doubts, it is hereby declared that where an Eligibility
Certificate has been cancelled or amended under sub-section (3), the dealer
shall be liable to pay tax on his turnover of the period during which the
facility of exemption or reduction under this Section is not admissible to
him." Therefore even if the dealer under the fear of punishment under
section 15A (qq) (viii) does not realise amount by way of tax on the sale of
its goods in compliance with the provisions of section 8A (2) during the period
it is exempt from paying tax, it would still have to pay the tax under sub
section (4) of section 4A if it is found that it was not entitled to such
exemption. The overriding nature of this consequence follows not only from the
use of the imperative word "shall" in sub section (4) but also from
the non obstante clause with which section 4A opens.
Given
the clear language, it is not necessary for us to express any view on section
29A of the Act or the industrial policy underlying section 4A or the 1991
Notification.
The
High Court has found that the respondent had taken the benefit of the increased
capacity of the unit which came about by reason of the first two expansions in
the sense that the exemption on entire sales turnover relatable to such
increased capacity had been enjoyed by the respondent under the 1985
Notification. The DLC had also granted tax benefit to the respondent only in
respect of the third expansion excluding the preoperative expenses. Albeit for
other reasons, in our opinion, having regard to our decision on the various
issues against the respondent, this is the highest relief that the respondent
could claim and which the appellants concede would be the most equitable.
The
appeals are accordingly allowed. The decisions of High Court and Tribunal are
set aside and the decision of the Divisional Level Committee is affirmed. There
will be no order as to costs.
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