M/S. J. K. Cotton Spinning and Weaving Ltd. vs Sales Tax Officer, Kanpur and Another

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 857 of 1964

Decision Date: 28 October 1964

Coram: J.C. Shah, S.M. Sikri

In the matter titled M/S J K Cotton Spinning & Weaving Ltd. versus Sales Tax Officer, Kanpur and another, the Supreme Court of India delivered its judgment on 28 October 1964. The opinion was authored by Justice J C Shah, who was joined by Justices S M Sikri and Subbarao. The petitioner was M/S J K Cotton Spinning & Weaving Ltd., a limited company engaged in the manufacture of textile goods, tiles and various other commodities at Kanpur. The respondents were the Sales Tax Officer, Kanpur and an additional respondent. The case is reported in 1965 AIR 1310 and 1965 SCR (1) 900, with subsequent citations appearing in later reports. The dispute concerned the application of the Central Sales Tax Act, 1956, particularly sections 7, 8(1) and 8(3)(b) read with Rule 13 made under section 13 of the Act. The petitioner applied for registration under section 7 of the Act and requested that certain categories of goods be listed in its registration certificate so that it could enjoy the benefit conferred by section 8(1). Section 8(3)(b), together with Rule 13, provides that the benefit may be claimed for goods that are “intended for use in the manufacture or processing of goods for sale.” Initially, the Sales Tax Officer accepted the petitioner’s claim with respect to all the goods named in the application. Subsequently, however, the Officer issued an order deleting from the registration certificate a list of items comprising drawing material, photographic material, building materials including lime and cement (except cement used in the manufacture of tiles for resale), electricals, iron and steel, and coal. The petitioner challenged this order by filing a petition under Article 226 of the Constitution. The High Court dismissed the petition, holding that the categories of drawing materials, photographic materials, colour, chemicals, electrical machinery and building materials such as cement and lime were not covered by the expression “in the manufacture or processing of goods for sale” as interpreted in section 8(3)(b) read with Rule 13. Dissatisfied with that decision, the petitioner appealed to this Court. The Supreme Court held that the High Court was not authorized to broaden the scope of the petition beyond the specific order of the Sales Tax Officer, nor could it adjudicate on matters that were not raised in the proceedings. Specifically, the Court stated that the High Court should not have examined whether other categories of goods—such as colour, chemicals, and machinery—that the Sales Tax Officer had not directed to be deleted, fell within the ambit of section 8(3)(b) read with Rule 13. The Court emphasized that the proper test is whether a particular process is so integrally connected with the ultimate production of goods that, but for that process, the manufacture or …

The Court explained that when a process is so essential to the production of goods that without it the manufacture or processing would be impossible or commercially impracticable, the goods required for that process are included within the phrase “in the manufacture of goods.” The Court clarified that it is not necessary for such goods to be strictly “ingredients or commodities in the creation of goods,” nor must they be “directly and actually needed for turning out or making of the goods.” Applying this principle, the Court held that drawing and photographic materials employed to create designs for cloth that the company intends to produce, as well as electrical equipment that is necessary for production—examples being humidifiers and exhaust fans—qualify for the special treatment prescribed in section 8(1). In contrast, the Court said that electrical equipment not directly linked to the manufacturing process, such as ordinary fans, coolers, and air‑conditioning units, together with building materials like lime and cement that are not required for the manufacture of tiles for resale, do not fall within that category. The Court relied upon the decision in Indian Copper Corporation Ltd. v. Commissioner of Commercial Taxes, Bihar and Others in reaching this conclusion. [905 F‑G] [907 F‑G; 908 A‑B]

The judgment concerned Civil Appeal No. 857 of 1964, which was filed by special leave against the order dated 27 April 1964 of the Allahabad High Court in Civil Miscellaneous Writ Petition No. 2367 of 1962. Counsel for the appellant and counsel for the respondents appeared before the Court, which was delivered by Justice Shah. The appellant, J. K. Cotton Spinning and Weaving Mills Company Ltd., is a public limited company with its registered office in Kanpur and is engaged in the manufacture of cotton textiles, tiles and other commodities for sale. On 21 June 1957 the company applied to the Sales Tax Officer, Sector II, Kanpur, for registration as a dealer under section 7(1) of the Central Sales Tax Act, 1956. In that application the company sought specification in the registration certificate of a long list of goods it ordinarily purchased in inter‑State trade, including cotton staple fibre, yam, wastes, coal, petrol, machinery, electricals, spares, hardwares, dyes and colours, chemicals, auxiliaries, oils, lubricants, tallows, starches, woollen clothings, gums, clays, salt, beltings, bobbins, shuttles, wooden accessories and other mill stores necessary for the manufacture of cloth, yarn, tiles and paints. The Sales Tax Officer granted the certificate as requested. Subsequently the certificate was amended to add further categories such as industrial gases, drawing instruments, photographic materials, packing materials (including wood, paper, straw and card‑boards) and building materials such as iron, steel, cement, lime, fire bricks and refractories. By a notice dated 19 July 1961 the Sales Tax Officer cancelled the specification for coal and called upon the company to show cause why the certificate should be amended to exclude drawing instruments, photographic materials, building materials including iron, steel, cement and lime, and certain goods covered by the term “electricals.” The company filed a show‑cause response, contending that all the articles specified in the certificate were required for its business.

In this case the Sales Tax Officer issued an order dated 9 August 1962 directing that certain articles be removed from the company’s registration certificate. The items specified for deletion were “Drawing material, photographic material, building material including lime and cement (except cement used in manufacture of tiles for re‑sale), electricals, iron and steel and coal.” The officer also directed the company to surrender the registration certificate within three days so that the proposed amendments could be effected. In response, the company filed a petition before the High Court of Judicature at Allahabad seeking a writ of certiorari, requesting the court to call for the record of the case and to set aside the order dated 9 August 1962. During the hearing, the company’s counsel did not press the petition on the grounds of iron, steel and coal. Instead, the counsel argued that the remaining items fell within the scope of section 8(3)(b) of the Central Sales Tax Act read with Rule 13 framed under section 13 of the Act, and therefore the officer’s order was illegal. The counsel further contended that those items had been included in the registration certificate after a statutory due enquiry, and consequently the Sales Tax Officer had acted without jurisdiction in attempting to amend the certificate.

The High Court rejected the company’s contention that the officer lacked jurisdiction to revise a certificate that had been issued after a due enquiry. The court held that drawing instruments, photographic materials, colours, chemicals, electricals, machinery and building materials such as cement and lime were not included within the expression “in the manufacture or processing of goods for sale” as understood in section 8(3)(b) read with Rule 13. Accordingly, the High Court dismissed the petition. The company appealed the dismissal to the Supreme Court. In the appeal, the company’s counsel deliberately refrained from renewing the argument that the officer had no authority to modify the certificate merely because the original certificate had been issued after a due enquiry. The counsel relied on section 7(4) of the Act, which provides that a certificate of registration granted under section 7(1) may be cancelled by the issuing authority for any sufficient reason. The counsel argued that if the certificate erroneously listed articles that did not fall within the ambit of section 8(3)(b) read with Rule 13, such an error constituted a sufficient reason under section 7(4) to justify cancellation of the wrongly included items. The Supreme Court noted that the High Court, in rejecting the petition, had considered issues that were never actually in dispute between the company and the Sales Tax Officer. Specifically, the officer’s order did not delete “machinery,” “colours,” or “chemicals” from the certificate, and the exclusion of “building materials, cement and lime” was expressly limited so that it would not apply to cement used in the manufacture of tiles for resale.

In this case, the Court observed that the Sales Tax Officer had rejected the Company’s claim only with respect to certain categories of goods. Those categories comprised drawing instruments, photographic materials, building materials including lime and cement, except for cement that was used in the manufacture of tiles for re‑sale, as well as electrical goods, iron, steel and coal. The Court further held that the High Court was not authorized to broaden the petition that challenged the correctness of the Sales Tax Officer’s order. The High Court could not consider issues that had never been raised between the parties, nor could it decide that other classes of goods, which the Sales Tax Officer had not ordered to be deleted, fell outside the scope of section 8(3)(b) read with Rule 13. Section 6 of the Act, which functioned as the charging provision, imposed a liability on every dealer to pay tax from the date specified by the Central Government. The liability arose on all sales effected by the dealer in the course of inter‑State trade or commerce during any year, commencing from the date that had been notified by the Government. Section 7 established the mechanism for the registration of dealers, and section 8 prescribed the rates of tax that were applicable to sales made in the course of inter‑State trade or commerce. Sub‑section (1) of section 8, as it existed at the relevant time, specified the rates of tax to be paid on the turnover of a dealer who sold, in the course of inter‑State trade or commerce, goods to a registered dealer and whose goods were described in sub‑section (3). Sub‑section (2) dealt with the rate of tax payable by any dealer in situations that did not fall within sub‑section (1) and concerned the sale of any goods in the course of inter‑State trade or commerce. Sub‑section (3) provided that the goods referred to in clause (b) of sub‑section (1) were to be understood as follows: (a) in the case of declared goods, the goods were of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods, where the goods were intended for re‑sale by that dealer; and (b) in the case of goods other than declared goods, the goods were likewise of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as intended for re‑sale, or were subject to any rules made by the Central Government for use by the dealer in the manufacture or processing of goods for sale, in mining, or in the generation or distribution of electricity or any other form of power. Section 13 gave the Central Government the authority to make rules on various matters, including the enumeration of goods or classes of goods that could be used in the manufacture or processing of goods for sale, in mining, or in the generation or distribution of electricity or any other form of power. Exercising this power, the Central Government framed Rule 13, which, as amended and read at the material time, provided that the goods referred to in clause (b) of sub‑section (3) of section 8 were the goods that a registered dealer might purchase for use as raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel or lubricants in the manufacture or processing of goods for sale, or in mining, or in the generation or distribution of electricity or any other form of power.

The Court explained that the Rule framed under the authority of section thirteen specifies that any goods which a registered dealer may purchase must be intended for use by the dealer in the capacity of raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel or lubricants, and that such use must relate to the manufacture or processing of goods for sale, to mining activities, or to the generation or distribution of electricity or any other form of power. The High Court had earlier held that drawing and photographic materials were excluded from the definition of goods intended for use in manufacturing because those materials are required only for preparing designs. The High Court reasoned that designing constitutes a process separate from the actual manufacture, which it defined as the act of making or fabricating raw materials by hand, art or machinery into forms suitable for use. Nevertheless, the High Court acknowledged that without designs it would be impossible to produce textile goods on a commercial scale, since factories that produce uniform patterns rely on designs to guide production. The Court noted that the High Court, and counsel for the Sales Tax Officer, maintained that goods intended for use in manufacture or processing must be those that function as an ingredient or commodity in the creation of the final product, or that are directly and actually needed for turning out the product. Section eight, sub‑section three, clause (b) empowers the Sales Tax Officer, subject to any rules made by the Central Government, to specify goods intended for use by the dealer in manufacturing or processing for sale, in mining, or in power generation or distribution. Under Rule thirteen, the Central Government has listed the categories of goods covered by that provision, and the intended use must correspond precisely to the categories enumerated in the rule. Accordingly, a mere intention to use an item in manufacturing does not satisfy the requirement; the intention must be to employ the item as raw material, processing material, machinery, plant, equipment, tool, store, spare part, accessory, fuel or lubricant. A broad survey of the many possible applications of such goods demonstrates that the narrow interpretation adopted by the High Court is not justified.

In this case, the Court explained that the phrase “in the manufacture of goods” must be understood to include the whole sequence of operations carried out by a dealer to transform raw material into a finished product. The Court held that where a particular operation is so closely linked to the final output that, without it, the manufacturing or processing would become commercially impractical, the items required for that operation must be treated as falling within the expression “in the manufacture of goods”. To illustrate this principle, the Court described a cotton‑textile manufacturing unit. In such a unit, raw cotton first undergoes cleaning, then carding, after which it is spun into yarn. The yarn is subsequently woven into cloth, which is then placed on rolls, dyed, calendered and finally pressed. All of these steps are interdependent and together constitute the manufacture of cloth. The Court observed that it would be unreasonable to consider only the equipment used in the weaving stage as part of the manufacture while excluding the goods used in the earlier stages such as cleaning and spinning. Interpreting the expression narrowly would create many inconsistencies. For example, under a restrictive view, raw cotton, weaving machines and transport vehicles would qualify under Rule 13, but spinning machinery—without which the entire business could not operate—would be excluded. The Court concluded that Rule 13 cannot be used to impose limitations that are not expressly and unambiguously intended.

Furthermore, the Court stated that goods employed as equipment, tools, stores, spare parts or accessories in manufacturing, processing, mining, and the generation or distribution of power do not need to be raw ingredients or directly involved in the physical creation of the final product in order to obtain the special treatment granted by section 8(1). The Court emphasized that if a process or activity is so essential to the ultimate production that, in practice, the absence of that process would make manufacturing commercially untenable, then items required for that process, as described in Rule 13, are eligible for the special provision. The Court clarified that this does not mean every item “in connection with” or “in relation to” manufacturing automatically falls within Rule 13. To illustrate the scope, the Court referred to its own earlier judgment concerning a company that both mined ore and produced copper. In that case, vehicles used merely to move ore from the mine to the factory and to transport finished copper to storage were held to be covered by Rule 13, and the spare parts and accessories needed for those vehicles were also included. The Court cited Indian Copper Corporation Ltd v. Commissioner of Commercial Taxes, Bihar and Ors (1) as authority for this view. Finally, the Court agreed with the High Court’s observation that the proper construction of the statute must avoid artificial limits that would exclude necessary equipment from the intended range of the rule.

The Court observed that without the preparation of designs it would be impossible for the workmen to produce goods for sale. It held that if the design process is so closely linked with the manufacture of cloth, there is no reason to treat the design activity as outside the manufacturing process for the purposes of Rule 13 read with section 8(3)(b). The Court recognised that the design process may be separate from the actual turning out of finished goods, but it rejected any restriction that would limit the phrase “in the manufacture of goods” to the act of producing the goods alone. According to the Court, the expression “in the manufacture” embraces all processes that are directly related to the actual production. Consequently, goods that are intended to be used as equipment in the manufacture of goods for sale are expressly admissible for special specification. The Court therefore classified drawing and photographic materials, which fall under the description of goods intended for use as equipment in the design process that is directly related to the actual production of goods and without which commercial production would be impracticable, as goods intended for use “in the manufacture of goods”. By contrast, the Court stated that building materials such as lime and cement, which are not required in the manufacture of tiles for sale, cannot be regarded as falling within the meaning of Rule 13 either as raw materials in the manufacture or processing of goods or even as “plant”. While acknowledging that buildings must be erected to house the factory and its machinery, the Court noted that determining whether a building constitutes “plant” within the meaning of Rule 13 is a difficult question on which it need not express an opinion. However, for a good to qualify for specification under section 8(3)(b), it must be intended for use in the manner described in Rule 13, that is, in the manufacture of goods. Building materials used as raw material for constructing “plant” therefore cannot be said to be used as plant in the manufacture of goods. The Legislature contemplated that goods qualifying under section 8(3)(b) must be intended for use as raw materials, as plant, or as equipment in the manufacture or processing of goods, and the Court held that building materials do not fall within this description. Accordingly, the High Court was correct in rejecting the Company’s claim on this ground.

The Court further examined the term “electricals”, describing it as somewhat vague, but noted that in a factory producing cotton and other textiles certain electrical equipment is commercially necessary at the present stage of development. For example, without electric lighting it would be very difficult to carry on the business, and electrical humidifiers, exhaust fans and similar equipment are, in modern technological conditions, normally regarded as necessary to effectively conduct the manufacturing process. The Court expressed that it could not agree with the High Court’s view that “electrical equipment” must be an ingredient of the finished goods or a commodity used in the creation of goods in order to fall within the terms of Rule 13. The Court indicated that if, considering the normal conditions prevailing in the industry, the production of the finished goods would be difficult without the use of such electrical equipment, the equipment would be regarded as intended for use in the manufacture of goods for sale, and this test is satisfied by the expression “electricals”. However, the Court clarified that “electricals” would not include electrical equipment not directly connected with the manufacturing process, such as office equipment like fans, coolers or air‑conditioning units, which would not be admissible for special rates under section 8(1). On this basis, the Court set aside the order of the High Court and directed that the Sales Tax Officer’s order be modified by deleting from paragraph‑4 the words “drawing materials, photographic materials and electricals”, while leaving the remainder of the order unchanged.

In this case the Court explained the test for determining whether electrical items may receive the special rate. The Court stated that an item must either be an ingredient of the finished goods to be prepared or be a commodity that is used in creating the goods. The Court further observed that when, taking into account normal conditions prevailing in the industry, the production of the finished goods would be difficult without the use of electrical equipment, such equipment is regarded as intended for use in the manufacture of goods for sale; the Court held that the expression “electricals” satisfies this test. The Court clarified that the term does not include electrical equipment that is not directly connected with the manufacturing process. Office equipment such as fans, coolers and air‑conditioning units, for example, would not be admissible to the special rates under section 8(1). Accordingly the Court set aside the order passed by the High Court and directed that the order of the Sales Tax Officer be modified by deleting from paragraph 4 the words “drawing materials, photographic materials and electricals”. The remainder of the Sales Tax Officer’s order was left to stand. The Court found that the Company had substantially succeeded, allowed the appeal with costs, and recorded that the appeal was allowed.