M/S. Tungabhadra Industries Ltd vs The Commercial Tax Officer, Kurnool on 18 October, 1960

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 498 of 1958

Decision Date: 18 October 1960

Coram: N. Rajagopala Ayyangar, S.K. Das, M. Hidayatullah, K.C. Das Gupta, J.C. Shah

The case was titled M/S. Tungabhadra Industries Ltd versus The Commercial Tax Officer, Kurnool, with the judgment rendered on 18 October 1960 by the Supreme Court of India. The judgment was authored by Justice N. Rajagopala Ayyangar and the bench also included Justices S. K. Das, M. Hidayatullah, K. C. Das Gupta and J. C. Shah. The petitioner was M/S. Tungabhadra Industries Ltd and the respondent was the Commercial Tax Officer of Kurnool. The decision was recorded on the same day, 18 October 1960, and the bench was identified as the Ayyangar bench. The official citation of the decision is 1961 AIR 412 and 1961 SCR (2) 14, with additional citator references indicating subsequent citations in later years. The dispute concerned the application of the Madras General Sales‑Tax (Turnover and Assessment) Rules, 1939, specifically rules 4, 5 and 18, to the taxation of hydrogenated groundnut oil, commonly called Vanaspati, when the oil was derived from groundnuts.

The petitioner purchased raw groundnuts and groundnut kernels within the State of Andhra Pradesh, processed them in its large Kurnool factory into crude groundnut oil, refined oil and finally hydrogenated oil (Vanaspati), and sold the various oils in three states. Under the Madras General Sales‑Tax Act, 1939, and the accompanying rules, the purchaser was permitted to deduct the cost of the raw groundnuts from the total turnover obtained from the sale of all groundnut oil. The High Court had allowed such deduction for the sales of unrefined and refined groundnut oil but had denied it for the sales of hydrogenated oil, reasoning that Vanaspati was not “groundnut oil” but a product derived therefrom.

The Supreme Court held that the petitioner was also entitled to the deduction for the sales of hydrogenated groundnut oil. The Court explained that for an oil to qualify as “groundnut oil” it must satisfy two criteria: it must be obtained from groundnuts and it must be an oil. The hydrogenated oil met both criteria because it originated from groundnuts and, despite the hydrogenation process, retained the essential character of an oil. The Court further observed that the oil continued to be used for the same purposes as the unprocessed groundnut oil, and that a liquid state was not an essential characteristic of vegetable oil; the semisolid condition resulting from hydrogenation did not change its nature.

The judgment was issued in Civil Appeal No. 498 of 1958, an appeal from the Andhra Pradesh High Court’s order dated 11 February 1955 (T.R.C. No. 120 of 1953), which itself arose from the Sales Tax Tribunal, Madras, order dated 29 December 1952 (Tribunal Appeal No. 857 of 1951). Counsel for the petitioners included A. V. Viswanatha Sastri, M. Ranganatha Sastri and M. S. K. Sastri, while the respondent was represented by the Advocate‑General for the State of Andhra Pradesh.

Counsel for the respondent comprised R. Tatachari, D. Venkatappayya Sastri and T. M. Sen, and the judgment was delivered on 18 October 1960 by Justice Ayyangar. The appeal, which was filed on a certificate under Article 133 of the Constitution and granted by the High Court of Andhra Pradesh, principally raised the question whether hardened or hydrogenated groundnut oil, commonly referred to as Vanaspati, fell within the definition of “groundnut oil” prescribed in Rule 18(2) of the Madras General Sales‑Tax (Turnover and Assessment) Rules, 1939. The appellant, Tungabhadra Industries Ltd., operated a large manufacturing plant at Kurnool in the State of Andhra Pradesh. The company purchased groundnuts and groundnut kernels within the State, and used them to produce groundnut oil, refined oil and hydrogenated oil, all of which it sold. The dispute concerned the assessment of sales tax on the company’s turnover for the financial year 1949‑50. Section 3 of the Madras General Sales‑Tax Act, 1939 provided that every dealer was required to pay, each year, a tax on his total turnover at the rate of three pies per rupee, subject to the provisions of the Act. The section further stipulated that turnover for the purposes of the Act and its other provisions would be determined in accordance with rules prescribed by the Legislature, and that no such rule could take effect unless approved by a resolution of the Legislative Assembly. It also prescribed that the tax payable under subsections (1) and (2) would be assessed, levied and collected in the manner and installments, if any, as prescribed, and that in respect of the same sale transaction either the buyer or the seller, but not both, would be taxed, according to the rule‑making authority. Pursuant to these statutory provisions, the Madras General Sales‑Tax Turnover and Assessment Rules, 1939 were framed, and among those rules Rule 4 and Rule 5 were relevant to the present case. Rule 4 stated that, except as provided in sub‑rule (2), the gross turnover of a dealer for the purposes of the rules would be the amount for which goods were sold by the dealer. Sub‑rule (2) specified that for certain goods, including groundnut, the gross turnover would be the amount for which the goods were purchased by the dealer. The combined operation of sub‑section 4(1) and sub‑rule 4(2) meant that a dealer who bought groundnuts, crushed them and sold the resulting oil was required to pay tax both on the purchase of the groundnuts and on the sale of the oil obtained from them. This was considered by the rule making authority to be an unfair burden and relief was accordingly provided by Rules 5 and 18 of the same rules, the material portions of which ran:

The Court explained that the earlier rule which imposed tax on both the purchase of groundnut and the subsequent sale of oil had become an unreasonable burden, and therefore relief was provided through Rules 5 and 18 of the same set of regulations. Rule 5, paragraph 1, stipulated that the tax prescribed in section 3 was to be levied on the net turnover of a dealer, and that, in computing net turnover, the amounts listed in clauses (a) to (i) could be deducted from the dealer’s gross turnover, provided the conditions attached to each deduction were satisfied. Clause (k) of Rule 5 specifically provided that, where the dealer was a registered manufacturer of groundnut oil and cake, the dealer could deduct from his gross turnover the amount allowed under Rule 18, subject to the conditions laid down in that rule. The Court noted that Rule 5 had been amended by a notification dated 9 November 1951 to insert the words “groundnut oil,” but that this amendment was irrelevant to the present dispute because the assessment concerned a period before the amendment took effect. Rule 18, as quoted by the Court, dealt with the registration and deduction rights of manufacturers of groundnut oil and cake. Sub‑rule 18(1) permitted any dealer who manufactured groundnut oil and cake from groundnut or kernel purchased by him to apply to the appropriate assessing authority for registration as a manufacturer of groundnut oil and cake. Sub‑rule 18(2) granted every such registered manufacturer of groundnut oil a deduction under clause (k) of Rule 5 equal to the value of the groundnut or kernel purchased and processed into oil and cake, provided that the tax on those purchases had been paid to the State, that the revenue from the sale of the oil was included in the dealer’s net turnover, and that the portion of turnover for which the deduction was claimed did not exceed the turnover attributable to the groundnut or kernel used in the oil manufacture and already included in net turnover. The rule also contained an explanation that, for the purpose of the deduction, 143 pounds of groundnut were treated as equivalent to 100 pounds of kernel; that 143 pounds of groundnut or 100 pounds of kernel normally yielded 40 pounds of oil when processed; and that one candy of oil was deemed equivalent to 500 pounds of oil. The Court clarified that the remaining provisions of the rules were not relevant to the appeal. It then recorded that the appellant had indeed been registered as a manufacturer of groundnut oil pursuant to Rule 18(1), and that there was no dispute that the appellant had purchased groundnuts, claimed the purchase value as a deduction in the turnover, and had paid the applicable tax on those purchases to the State. Likewise, there was no controversy that the sales price of the oil—whether sold as raw groundnut oil, refined oil, or hydrogenated oil—had been included in the appellant’s turnover. Finally, the Court noted that the Deputy Commercial Tax Officer of Kurnool, who completed the assessment of

The appellant accepted the purchase and sale figures that it had herself submitted to the tax authorities for the assessment, and the Deputy Commercial Tax Officer examined the claim for a deduction of the purchase price of groundnuts from the proceeds of all oil sales, including raw, refined and hydrogenated varieties. The officer granted a deduction with respect to the purchase price of groundnuts attributable to the unrefined oil sold by the appellant, but he held that the appellant was not entitled to claim a deduction for the refined and hydrogenated oil because the expression “groundnut oil” in rule 5(1)(k) read with rules 18(1) and 18(2) of the Turnover and Assessment Rules was understood to refer only to unrefined or unprocessed groundnut oil. The appellant challenged this decision, and the Commercial Tax Officer affirmed the Deputy Officer’s order on appeal, prompting the appellant to file a further appeal before the Sales‑Tax Appellate Tribunal. The Tribunal upheld the appellant’s contention regarding the sale of refined oil, but it rejected the claim for a deduction in relation to the sales of hydrogenated oil. Subsequently, the matter was taken to the High Court of Andhra Pradesh through a Tax Revision Case filed under section 13(b)(1) of the Act; the High Court adopted the Tribunal’s view, disallowing the deduction claimed for hydrogenated oil turnover, and it issued a certificate under article 133 that enabled the appellant to approach this Court. The appellant’s claim to a deduction under rule 18(2) for the sale of refined groundnut oil is now undisputed, while the question of deduction for hydrogenated oil remains resolved against the appellant.

The reasoning underlying the decisions of both the Tribunal and the High Court may be summarized as follows: the exemption or deduction from the sale‑turnover provided by rule 18(2) applies strictly to the sale of oil in the form in which it exists when extracted from the kernel. When raw groundnut oil is converted into refined oil, processing unquestionably occurs, but such processing involves merely removing from the raw oil those constituents that are not actually oil, namely free fatty acids, phospholipids and unsaponifiable matter. After the elimination of this non‑oleic material, the remaining product is still groundnut oil and nothing more; the removed matter, being non‑oil, cannot be used as oil or for any purpose for which oil is suitable. In other words, the refining operation separates and discards the non‑oily fraction of the raw oil, leaving a product that is 100 percent oily. Consequently, refined oil continues to fall within the meaning of “groundnut oil” as defined in rules 5(1)(k) and 18(2), and therefore the deduction is permissible for refined oil but not for hydrogenated oil, which undergoes a further chemical transformation that changes its essential character.

In the factual context, the oil in question did not retain the characteristic colour, taste, odour, or other sensory attributes of raw groundnut oil. The process of hydrogenation, however, involved passing hydrogen into the heated refined oil in the presence of a catalyst, usually finely powdered nickel, resulting in the absorption of two hydrogen atoms. This absorption transformed a portion of the oleic acid— which formed a substantial part of the oil’s composition in its raw state— into stearic acid. The formation of stearic acid gave the oil its distinctive appearance and caused it to become semi‑solid. From the perspective of chemistry, the procedure produced an intermolecular or configurational chemical change that caused the oil to harden. Although the product remained the same edible fat and retained its nutritional qualities, it acquired new properties, such as a greatly reduced tendency to become rancid, and it became easier to store and transport.

The Tribunal, together with the learned Judges of the High Court, concluded that the hydrogenated oil, commonly referred to as Vanaspati, ceased to be groundnut oil because of the chemical changes that endowed it with new properties, particularly the loss of fluidity. In other words, they held that Vanaspati or hydrogenated oil was not “groundnut oil” but rather a product manufactured from groundnut oil, and therefore it was not eligible for the deduction provided under rule 18(2).

The counsel for the appellants, Mr. Visvanatha Sastri, presented two concise arguments. First, he contended that the purpose of rules 5(k) and 18(2) was to prevent a practical double taxation of the same assessee when the goods were purchased and subsequently sold, and that this purpose required the appellants’ claim to be allowed. Second, he argued that hydrogenated groundnut oil was no less groundnut oil than either refined or unrefined oil; the improvement in quality did not negate its identity as oil, and the material before the departmental authorities and the Court established that it remained oil and nothing more.

The counsel further observed that the reasoning based on the purpose of the rule could not advance the appellant’s position because the matter at hand involved an exemption from tax that the appellant sought to obtain. He maintained that if the wording of the rule did not expressly cover the situation, the underlying purpose could not be invoked to secure relief. Moreover, he argued that this was not a case of double taxation of the same goods at the points of purchase and sale, a situation prohibited by section 3(5) of the Act. Consequently, if the view adopted by the learned Judges of the High Court—that hydrogenated groundnut oil is not “groundnut oil” but a product of groundnut oil—were correct, the counsel could not persuade the Court that the exemption under rule 18(2) should still apply.

In the case before the Court, the petitioner could not claim that the deduction provided for in rule 18(2) remained available to him. Consequently, only the second of the petitioner’s submissions required detailed examination. The Court found it useful to analyse the reasoning that underpinned the view that hydrogenated oil did not fall within the expression “groundnut oil.” The Advocate‑General of Andhra Pradesh, who appeared for the respondent Commercial Tax Officer, sought to uphold the High Court’s decision by advancing two lines of argument. The first line asserted that the exemption contemplated under the rule applied solely to oil as it left the presser, and that any further processing—including refining to eliminate impurities and free fatty acids—removed the oil from the category of “groundnut oil” as used in the rule. To support this contention, the Advocate‑General referred to the Table of Conversion of groundnuts and kernel into oil set out in the Explanation to rule 18(2). He argued that the conversion factor of 40 pounds of oil for every 100 pounds of kernel was based on the yield of raw groundnut oil, and that this indicated that the rule intended to cover only raw groundnut oil and nothing else.

The Court, however, observed that this submission lacked any factual foundation. It was not established whether the 40‑pound‑per‑100‑pound figure represented an average yield of oil extractable from various groundnut varieties, or whether it reflected an average of the different types of oils that could be produced from those varieties. In the absence of definitive data, the Court could not accept the argument that the Table of Conversion justified a particular construction of the term “groundnut oil” in the principal part of the rule. Moreover, the Court found the Advocate‑General’s contention that processing the oil to improve its quality for customers would transform it into a commodity other than “groundnut oil” under the rule to be untenable. For example, if the freshly extracted oil were left standing in a vessel, the natural sediment would settle at the bottom, allowing a clear liquid to be drawn off. The Advocate‑General could not assert that such a physical process, which merely decants the oil from its sediment, caused the oil to cease being “groundnut oil” for the purposes of the rule. Since the removal of impurities by sedimentation does not alter the character of groundnut oil, the Court concluded that even subsequent processes, such as refining, would not diminish its status as “groundnut oil” within the meaning of the rule.

In the judgment the Court observed that the act of refining groundnut oil by applying chemical methods to eliminate impurities did not, by itself, remove the oil from the definition of “groundnut oil” for the purposes of the rule. The Court noted that modern technological processes have been developed whereby, even at the stage of extraction from the oil mill, the oil can be obtained free of any detectable free fatty acids. The Court held that it would be difficult to argue that oil produced by such refined processes could cease to be groundnut oil merely because of the method employed to obtain it. Consequently, the Court rejected the learned Advocate‑General’s contention that the Tribunal and the High Court judges were wrong in holding that refined groundnut oil remained “groundnut oil” within the meaning of the rule. The Court then turned to the next issue, namely whether the further treatment of the oil by hydrogenation—a chemical process that hardens the oil—would alter its character so that it could no longer be regarded as groundnut oil. The learned Advocate‑General asserted that because ordinary oil is a viscous liquid, the transformation of the oil into a semi‑solid form after hydrogenation indicated a substantial change in the identity of the substance. The Court could not accept this argument. While it acknowledged that many oils are normally viscous fluids, it pointed out that oils can become semi‑solid when the temperature is lowered. The Court explained that groundnut oil, although a viscous liquid at ordinary temperature, will assume a semi‑solid condition if it is kept sufficiently long in a refrigerator. Accordingly, the Court rejected the proposition that a liquid state is an essential characteristic of a vegetable oil and that loss of liquidity destroys its identity as an oil. The Court cited examples such as Mowrah oil and Dhup oil, which become semi‑solid even at normal temperatures, and coconut oil, which hardens with a slight drop in temperature; none of these substances lose the designation of “oil” merely because they are not liquid. The Court also referred to ghee as a fat whose physical state does not determine its commodity identity. The learned Advocate‑General further submitted that during hydrogenation the oil absorbs two atoms of hydrogen, resulting in an intermolecular change in its composition. The Court considered this point not decisive. The remaining question, the Court said, was whether hydrogenated oil, despite the chemical alteration, continued to be “groundnut oil”. If the answer were affirmative, the oil would be entitled to the deduction from turnover that the rule permitted; conversely, such a deduction could be denied only if the hydrogenated product ceased to be “groundnut oil”. The Court clarified that for an oil to qualify as “groundnut oil” two criteria must be satisfied: first, the oil must be derived from groundnut; second, the commodity must retain the character of oil. The Court observed that the fact that the hydrogenated oil sold by the appellant was obtained from groundnut was not in dispute; the sole issue was whether the product remained an oil after the hardening process.

In this case, the oil sold by the appellants was obtained from groundnut, and that fact was not contested. The only question that required determination was whether the product continued to be an oil after it had undergone hydrogenation. Oil, as defined in scientific terms, is a chemical compound formed by glycerine combined with fatty acids, or more precisely a glyceride of a mixture of fatty acids. The principal fatty acids present in such oils are oleic, linoleic, stearic and palmitic, and the exact proportion of each fatty acid varies according to the particular oil‑seed from which the oil is extracted. Even after the hardening or hydrogenation process, the substance remains a glyceride of fatty acids, although the relative proportion of the different fatty acids may change slightly. Consequently, in its essential nature no fundamental alteration occurs; the substance retains its character as an oil—a glyceride of fatty acids—just as it was when it first emerged from the press.

The Court observed that the judges of the High Court had placed excessive emphasis on the addition of hydrogen atoms during the hardening procedure and on the resulting inter‑molecular changes in the oil. The addition of hydrogen atoms was undertaken to saturate a portion of the oleic and linoleic constituents of the oil, thereby making the oil more stable and improving its quality and utility. However, neither the mere absorption of additional matter nor the inter‑molecular changes that follow necessarily affect the identity of a substance as it is ordinarily understood. For example, there are instances where substances absorb other matter and undergo inter‑molecular changes that actually deteriorate their quality or utility, yet such alterations do not transform the substance into something other than oil.

Groundnut oil, when it is first pressed, normally contains a high proportion of unsaturated fatty acids—chiefly oleic and linoleic—which, together with saturated fatty acids, combine with glycerine to form the glyceride that constitutes oil. These unsaturated fatty acids are inherently unstable because they are prone to oxidative changes. When raw oil is exposed to air, especially in warm and humid conditions such as those found in Madras, oxygen from the atmosphere is gradually absorbed by the unsaturated acids, leading to the formation of an unstable peroxide. This peroxide subsequently decomposes, breaking down into aldehydes. The oxidative conversion to aldehydes is widely recognized as the cause of the sharp, unpleasant odor and characteristic taste associated with rancid oil. If no measures are taken to retard this process, rancidity can progress to a point where the oil becomes unfit for human consumption. Although this change involves both the addition of oxygen atoms and inter‑molecular rearrangement, it would be unreasonable to assert that rancid groundnut oil ceases to be groundnut oil; it remains groundnut oil, albeit of poor quality.

By the same logic, the Court concluded that improving the oil’s resistance to natural oxidative deterioration through hydrogenation does not alter its fundamental character. The hydrogenated product still functions as a cooking medium, possesses the same food value as refined groundnut oil, and can be used in all the same applications. Thus, the improvement in stability and quality does not justify treating the hydrogenated product as something other than groundnut oil.

The Tribunal and the High Court had observed that, apart from the improved keeping quality, freedom from rancidity and ease of packing and transport, hydrogenated oil performed the same function as a cooking medium and possessed the same nutritional value as refined groundnut oil. They noted that there was no use for which raw groundnut oil could be employed that hydrogenated oil could not fulfill, nor any purpose for which hydrogenated oil could be used that raw oil could not satisfy. Accordingly, the Court regarded hydrogenated oil as continuing to be “groundnut oil” despite the processing undertaken solely to render the oil more stable for consumers who prefer groundnut oil. In its opinion, the assessee‑company was therefore entitled to claim the deduction of the purchase price of the groundnut kernels under rule 18(2) of the Turnover and Assessment Rules, the cost of which had been incorporated in the turnover generated from the sale of the hydrogenated groundnut oil.

The appeal also raised the question of whether the appellant could claim a deduction for freight charges that were included in the price of the commodity. Rule 5(1)(g) of the Turnover and Assessment Rules allowed a dealer, in computing net turnover, to deduct from gross turnover “all amounts falling under the following two heads, when specified and charged for by the dealer separately, without excluding them in the price of the goods sold: (i) freight; (ii) …”. The appellant sought exemption for an amount of Rs 3,88,377‑13‑3, asserting that this represented freight on the goods sold and that it had been charged for separately. The assessing officer rejected the claim, a decision that was upheld by the departmental authorities and by the High Court on revision. The Court explained that to qualify for the exemption, the freight must (1) be specified and charged for separately by the dealer and (2) not be included in the price of the goods sold. The High Court had found that the appellant’s bills did not satisfy either condition. The specimen bill presented by counsel showed that after stating the quantity sold—23,760 lb—the price was listed as 15 annas 9 pies per pound, giving a total price of Rs 23,388‑12‑0. From this total, railway freight of Rs 1,439‑12‑0 was subtracted, and the balance formed the basis for sales‑tax computation. This presentation indicated that the appellant had charged a price inclusive of the railway freight, contrary to the requirement that freight be charged separately. Consequently, the Court affirmed the High Court’s decision that the appellant was not entitled to the freight deduction. The appeal was therefore allowed in part: the order denying the deduction under rule 18(2) was set aside, but no deduction for freight was permitted, and no costs were awarded.

In the present case the Court observed that the manner in which the freight charge had been shown on the invoice placed the charge outside the scope of rule 5(1)(g). That rule stipulates that, for a dealer to be permitted to claim a deduction for freight, the freight must be billed as a distinct item and must not be incorporated into the total price of the goods sold. Because the invoice demonstrated that the freight amount had been included in the overall price rather than shown separately, the conditions laid down in the rule were not satisfied. Consequently the appellant could not rely on the provision to obtain a deduction in respect of the railway freight. As a result the Court concluded that the appeal should be allowed in part. Accordingly, the portion of the High Court’s order that had refused to allow the appellant the deduction permitted under rule 18(2) of the Turnover and Assessment Rules was set aside. Since the appellant succeeded only with respect to this particular issue and did not obtain a full victory, the Court declined to make any order as to costs. No further relief was granted beyond the reversal of the High Court’s decision on the deduction. The final disposition was that the appeal was allowed in part.