K C P LIMITED Vs. STATE OF MADRAS

JUDGEMENT

(1.) THE K. C. P. Ltd. , is a company carrying on business at 38, Mount Road, with a variety of business activities, their main business being the manufacture and sale of machinery and parts of machinery and accessories. For their manufacturing operations the company is maintaining a foundry and in 1952 the company purchased two arc furnaces for a sum of Rs. 2, 13, 512-81. THE arc furnaces were purchased by the company for being erected in its factory to facilitate its business of manufacture of machinery and parts thereof. In the account books and the balance sheets of the company the two arc furnaces were classified under the heading "workshop equipment". THE arc furnaces were however found to be wholly unsuitable for the purpose for which they were purchased and they were therefore sold in 1958 to a purchaser in Calcutta for a sum of Rs. 4, 20, 000. In the assessment for the year 1958-59 the company contended that it was not liable to pay sales tax on this turnover of Rs. 4, 20, 000 on the ground that the two arc furnaces were not sold in the course of the business of the company but that the sale represented an isolated sale of the fixed capital asset of the company, as the same was found to be unsuitable for being installed in their factory. THE assessing authorities and the Tribunal rejected this claim of the assessee; hence this revision. For a person to be "a dealer" under the Act he should carry on the business of buying and selling goods whether for cash or for deferred payment, and the entire controversy has centred round this aspect, i. e. , that buying and selling is qualified by the words "carries on the business". THE question therefore arises as to when a person can be said to carry on the business of buying or selling, in which event only he will be liable to pay sales tax on the turnover of his dealings. On behalf of the assessee it was contended that the arc furnaces were purchased for the purpose of being installed in the factory to be used as a capital asset, and not as a stock-in-trade, that at the time when they were purchased, the assessee had no idea of selling the same, that the purchase was not actuated by any kind of profit motive, that the business which they carried on was an entirely different business, namely, production of machinery and parts, and the sale thereof, and that the sale of the arc furnaces when they were found to be unserviceable was not made in the course of their normal business activity, and that this isolated sale has no reasonable connection with the nature of the business carried on by the assessee. On behalf of the State it was contended that the sale of the arc furnaces even though did not satisfy the test of continuity or frequency could still be regarded as a sale in the course of business as the assessee was carrying on the business of selling machinery and parts, after manufacturing the same. In substance the argument of the State is when the assessee carries on the business of selling machinery of various kinds and patterns, the sale of arc furnaces should also be regarded as a sale of machinery in the normal course of its business activity. on both sides drew our attention to several decisions which have laid down some useful tests for determining when a purchase or a sale should be held to have taken place in the course of carrying on of a business. An examination of the decisions cited shows that though different tests governing different sets of circumstances have been laid down, the decision in each case turned upon its own peculiar facts and that it is neither possible nor feasible to lay down any uniform test or condition governing all cases. Everyone of the tests, such as, degree of frequency, volume, continuity and regularity of transactions, the nature of the goods sold and purchased, the main intention or the purpose with which the dealer purchased the goods in question, the absence or presence of a profit motive, and the circumstances under which the goods were sold, are undoubtedly relevant circumstances, but the crucial question to determine is whether the sales in question were effected by the dealer in the course of or as part of his business activity or whether they are sales independent of and outside the dealer's normal business activity. An examination of some of the decisions will be useful as laying down the principles and tests for deciding the question. In Gannon Dunkerley and Co. v. State of Madras the assessees who carried on the business as engineers and contractors supplied food-grains for the benefit of the workmen and recovered the cost of the food-grains by debiting the value against the wages of the workmen, and one of the questions that arose for decision was whether the assessees were liable to pay sales tax on the value of the food-grains which they had supplied to the workmen on the ground that the assessees were carrying on the business of buying and selling food-grains. THE claim of the department was negatived by the Bench of this Court. It was observed therein that it was implicit in the definition of a "dealer" that the sale should be in the course of carrying on of a business, and that the word "business" was not used in the Act in a general sense but should be understood in a restricted and commercial sense, i. e. , that the activity must be with a view to earn profit. THE matter was put thus at page 242 :- "if we omit the expression'who carries on the business of in the definition of dealer, it would only mean that a dealer is a person who merely buys or sells goods. THE object of the Act is not to impose tax upon such a person. THE words'buying and selling'are qualified by the expression'carries on the business of. THE context, therefore, requires that the word must be understood in a restricted and commercial sense that the activity was with a view to earn profit. " *

(2.) IN Deputy Commissioner of Commercial Taxes, Coimbatore division v. Sri Lakshmi Saraswathi Motor Service, Gudiyattam a transport company which carried on the business of providing transport sold the buses when they became unserviceable or useless as old buses or scraps. It was held that the transport company was not liable to pay sales tax on the turnover of the sale of such second-hand buses as the company cannot be held to carry on the business of buying or selling buses, and that the isolated transactions would not make the company a dealer in buses within the meaning of the Act. The principle that emerges from this decision is that if the assessee carries on a particular business activity not involving the business activity of buying and selling, a sale by the assessee of any of the assets of its business would not make him a dealer in regard to those sales. IN State of Bombay v. Ahmedabad education Society the Ahmedabad Education Society entered into a contract with the contractor for construction of buildings for colleges and quarters for staff and hostels for students. With a view to reduce the cost, the Society manufactured bricks and supplied the bricks manufactured to the contractor. The society also obtained the requisite permits from the Government to import steel for their construction purposes. The Society had surplus bricks and imported steel both of which were sold by the Society. The question arose whether the society was liable to pay sales tax in respect of the turnover of the aforesaid sales as a "dealer" within the meaning of the Bombay Sales Tax Act. It was held that the Society was not a dealer within the definition, as the society had no intention of selling the bricks and the steel, when they were manufactured and procured, and that the Society was not carrying on the business of selling or supplying these goods. This decision emphasizes the significance of the use of the words "carries on the business of" in the definition clause, to signify that the person must indulge in not merely the activity of selling but the activity must be one of carrying on the business of selling. The vital distinction between an activity which is a business activity and an activity which is not a business activity was pointed out in this decision. The matter was put thus at page 502 : "when the steel was ordered, nothing was further from the mind of the Society than any idea of selling it to any one whatsoever. Therefore, in our opinion, even though it might be said that the bricks and steel were sold or supplied by the Society, inasmuch as they did not carry on the business of selling or supplying these goods they do not come within the ambit of the definition of'dealer'contained in section 2 (c ). IN our opinion, on the facts of this case it is clear that the Society never carried on the business of selling or supplying any goods. " *

(3.) THE decision in Sadak Thamby & Co. v. State of Madras was referred to with approval in State of Andhra Pradesh v. Abdul Bakshi & bros. a recent decision of the Supreme Court dealing with a dealer in hides and skins. In this case the assessee carried on the business of tanning hides and skins and of selling the tanned skins. THE question arose whether the purchase value of the tanning materials purchased by the assessee was liable to sales tax. THE Andhra Pradesh High Court by its judgment in Abdul Bakshi and Bros. v. State of Andhra Pradesh took the view that it was not enough if a person carried on some business but that the assessee must do business in the particular type of goods and that mere purchase of some goods for consumption would not bring the assessee within the ambit of section 2 (e) and rule 5 (2)containing the definition of a "dealer" and the "purchase turnover". THE Andhra Pradesh High Court also held that the purchase of the particular commodity (in respect of which sales tax was sought to be levied) should be actuated by a profit motive. THE Supreme Court in State of andhra Pradesh v. Abdul Bakshi & Brosdid not accept this view of the matter and reversed the decision of the Andhra Pradesh High Court. A perusal of the judgment of the Supreme Court shows that to regard an activity as a business, there must be a course of dealings with a profit motive, and that for a person to be a dealer the activity need not be one of buying, selling or supplying the same commodity. THE Supreme Court has observed that if the commodity was purchased in the course of business either for sale or for use with a view to make profit within the integrated activity of buying and disposal, the test of the definition of a dealer would be satisfied. THE matter was put thus at page 647 : "we are unable to agree with this view of the High court. A person to be a dealer must be engaged in the business of buying or selling or supplying goods. THE expression'business'though extensively used is a word of indefinite import. In taxing statutes if 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. But to be a dealer a person need not follow the activity of buying, selling and supplying the same commodity. Here buying for personal consumption, i. e. , without a profit motive, will not make a person dealer within the meaning of the Act, but a person who consumes a commodity bought by him in the course of his trade, or use in manufacturing another commodity for sale, would be regarded as a dealer. THE Legislature has not made sale of the very article bought by a person a condition for treating him as a dealer : the definition merely requires that the buying of the commodity mentioned in rule 5 (2) must be in the course of business, i. e. , must be for sale or use with a view to make profit out of the integrated activity of buying and disposal. THE commodity may itself be converted into another salable commodity, or it may be used as an ingredient or in aid of a manufacturing process leading to the production of such salable commodity. It cannot be said in the present case that tanning bark was bought by the respondents for any purpose unconnected with the business carried on by them, viz. , manufacture and sale of the dressed hides and skins. Consumption in the business and not sale of the commodity bought therefore does not exclude the respondents from the definition of dealer qua the tanning bark. This is the view which has, in our judgment, been rightly taken by the Madras high Court in the interpretation of a similar statute in operation in the State of Madras in Sadak Thamby & Co. v. State of Madras Relying upon the abovesaid observations learned counsel for the State contended that in the instant case the arc furnaces were purchased for use in the business which was carried on by the assessee with a view to manufacture machinery and parts thereof and thus make profit and would therefore be liable to pay sales tax. We see no force in this contention. In the first place the important test of continuity of the course of dealing is not satisfied, so as to make it a business activity. In the case before the supreme Court there was a continuous course of dealing consisting of purchases of tanning materials. Secondly, the turnover which was liable to sales tax in that case was a purchase turnover and the fact of purchase with a profit motive satisfied the test of a dealer. In the instant case the facts are entirely different.