STATE OF TAMIL NADU Vs. RMO ELECTRICS

JUDGEMENT

(1.)

(2.) IN these two tax revision cases, a common point is raised though the facts are slightly different. IN the first case, Thermo Electrics is the assessee. It is a sole proprietrix concern. The assessee was a dealer in heating mantles and was dealing in the purchase and sale of those articles. She was also manufacturing and selling standard cells (Toshnival brand ). Under an agreement dated 1st July, 1970, she agreed to give the knowhow of manufacturing the standard cells to Thermo Electrics Madras Manufacturing, hereinafter referred to as TEMM, a firm of partnership in consideration of a 10 per cent. royalty on the net sale price marketed by TEMM. Under that agreement, TEMM was given the exclusive right to manufacture and sell the standard cells in four States, namely, Madras, Andhra, Kerala and Mysore. If TEMM wants to market the goods in other States, it would have to enter into a separate agreement with the assessee. As part of the agreement, the assessee sold all the raw materials which she had, as listed in appendix A to the agreement, for the prices mentioned therein. Similarly, she sold the semi-finished products and finished products listed in appendix B for the prices mentioned in that appendix. The finished products included in this appendix did not exhaust the stocks which she held, but only a portion of it was given to TEMM and the remaining was retained by her for the purpose of sale in the areas other than four States in respect of which TEMM was given the exclusive right. Under that agreement, the assessee also transferred all the tools, jigs, fixtures, furniture and other items as listed in appendix C on their book value which is also mentioned in that appendix. For the assessment year 1970-71, the assessee returned a total and taxable turnover of Rs. 1,746. 09 (sic) and Rs. 1,528 respectively. On the ground that the raw materials listed in appendix A to the agreement and the semi-finished products and finished products listed in appendix B thereto were sold by the assessee during the assessment year, the assessing officer sought to include a sum of Rs. 1,59,753. 83 in the taxable turnover. The assessing officer did not propose to include the value of the tools mentioned in appendix C, which was valued at Rs. 250. The assessee objected to the proposal to include the sum of Rs. 1,59,753. 85 on the ground that they were realisation on the sale of the business as a whole and that the sale was also not in the course of carrying on her business, but it was a case of winding up of the manufacturing unit. The assessing officer did not accept this contention and included the turnover as proposed in the pre-assessment notice. On appeal, however, the Appellate Assistant Commissioner held that so far as the raw materials were concerned, it could not be said to be a sale in the regular course of business activity of the assessee and that, therefore, it is not liable to be included in the turnover, but confirmed the assessment so far as it related to the value of the semi-finished products and finished products. The assessee preferred a further appeal to the Tribunal in respect of the semi-finished products and finished products and the revenue filed an enhancement petition in respect of the raw materials. Before the Tribunal, the revenue relied strongly on the decision of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd. ([1973] 31 S. T. C. 426 (S. C. ).), in support of its contention that the entire turnover was liable to be taxed. The Tribunal held that the sale of capital assets or sterilised assets could not be considered to be a sale in the course of business or in connection with or incidental or auxiliary to the business carried on by the assessee and that, therefore, the sales of the materials mentioned in appendix A and appendix B were not liable to be taxed. According to the Tribunal, the decision in State of Tamil Nadu v. Burmah Shell Co. Ltd. ([1973] 31 S. T. C. 426 (S. C. ).) did not dispense with the basis necessity that the assessee must be carrying on the business at the time when the transaction took place and the necessity of its being incidental or auxiliary to the actual business carried on. IN the view of the Tribunal when the assessee agreed to give the knowhow to TEMM and as part of the agreement sold the raw materials and semi-finished and finished products, the raw materials, semi-finished products and finished products, which were the current assets before the agreement, became sterilised assets awaiting disposal having become a mere investment of a dead business activity. IN other words, the Tribunal seems to think that the knowhow is given first and by reason of it, the manufacturing activity of the assessee had come to a dead-end and the sale of the raw materials, semi-finished and finished products takes the next place, when she was no longer a dealer in the manufacture and sale of standard cells. Thus, according to the Tribunal, at the time when the sale was made, the assessee was not manufacturing the standard cells and the goods sold were freezed assets. Thus, both on the ground that it was a sale of the capital assets and, therefore, could not be treated as a sale in the course of business and also on the ground that the sale was after she had ceased to do any business, the Tribunal held that the entire turnovers relating to appendix A and appendix B were not liable to be included in the gross turnover. It is questioning this view of Tribunal, the revenue has filed T. C. No. 287 of 1974.

(3.) ONE other argument advanced by the learned counsel appearing in T. C. No. 287 of 1974, which had found acceptance by the Tribunal may now be considered. That argument was that by reason of the assessee agreeing and giving the knowhow to TEMM, the sale of the raw materials, semi-finished and finished products shall be deemed to have taken place after the assessee had ceased to carry on the business of manufacture and sale and that, therefore, it would amount to a sale of sterilised assets not liable to be included in the gross turnover. Apart from the non-acceptability of this proposition, we find factually there is no basis for such an argument. The knowhow agreement provided only for a right to manufacture and sell the standard cells in favour of TEMM in respect of the four States. The right to manufacture and sell as such by the assessee was not given up under the agreement. If she had chosen, she could have carried on the business and sale of standard cells in the areas other than the four States in respect of which the right was conferred on TEMM. It was also found as a fact that the assessee had retained some portion of the finished products for sale in North India and she had not given up that business of manufacture and sale of standard cells as such. It is, therefore, not a case where the sale took place after the business activity was given up by the assessee. We may also add that the assessee was not a dealer in respect of only the manufacture and sale of standard cells; but she was a dealer in the matter of purchase and sale of heating mantles. The assessee also could not rely on rule 6 (d) as that provision provided for a deduction only if the amounts realised by the dealer was by the sale of his or her business as a whole. In this case, the business had not been sold as a whole. The assessee could still carry on the business of manufacture and sale of standard cells in the areas other than the four States in respect of which the right was conferred on TEMM. Further, in our view, rule 6 (d) contemplates the transfer of the business as a going concern and not a case of transfer of some of the assets alone. We, therefore, as unable to agree with the Tribunal that the transaction is not liable to be taxed on the ground that they are sales of freezed assets.