M/S. Modi Spinning and Weaving Mills Co., Ltd. vs Commissioner of Income-Tax, Punjab and Anr.

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 534 of 1964

Decision Date: 5 October 1964

Coram: M. Hidayatullah, P.B. Gajendragadkar, K.N. Wanchoo, Raghubar Dayal, J.R. Mudholkar

In the case of M/S. Modi Spinning & Weaving Mills Co., Ltd. versus the Commissioner of Income‑Tax, Punjab and another, the Supreme Court of India delivered its judgment on 5 October 1964. The judgment was authored by Justice M. Hidayatullah and was pronounced by a bench consisting of Justices M. Hidayatullah, P. B. Gajendragadkar, K. N. Wanchoo, Raghubar Dayal and J. R. Mudholkar. The petitioner was M/S. Modi Spinning & Weaving Mills Co., Ltd., while the respondent was the Commissioner of Income‑Tax, Punjab and an additional party. The decision was reported in 1965 AIR 957 and 1965 SCR (1) 592, and further citation details appeared in subsequent reports as F 1967 SC1022 (6), R 1967 SC1616 (19, 35), RF 1967 SC1895 (38) and D 1978 SC 897 (19). The statutory provision at issue was Section 5(2)(a)(ii) of the Punjab General Sales Tax Act, 1948 (XLVI of 1948) as amended by Punjab Act XIII of 1959.

Section 7 of the Punjab General Sales Tax Act, 1948 required every dealer who was liable to pay tax under the Act to obtain a registration certificate in the prescribed Form III as a condition for carrying on business in the State. Form III had to specify the class or classes of goods for the purpose of applying Section 5(2)(a)(ii). That subsection provided an exemption from inclusion in the taxable turnover of a dealer for goods sold to a registered dealer who purchased them with the intention of using them “in the manufacture in the State of Punjab of any goods for sale.” The same subsection also stipulated that if the goods were not used for the declared purpose, the purchaser would become liable to pay sales tax on them. The form for making such a declaration was prescribed by Rule 26 of the Act and was designated Form S.T. XXII. The words “in the State of Punjab” were introduced into Section 5(2)(a)(ii) by the 1959 amendment, and consequential amendments were made to Rule 26 and to Form S.T. XXII, but Form III was not amended until 1961.

The appellants, who were registered dealers under the Act, had obtained a Form III registration certificate in 1956. For the assessment year 1959‑60 they claimed an exemption on the basis of unginned cotton that they had purchased, ginned in Punjab, and subsequently sent to Modinagar in Uttar Pradesh for the manufacture of cloth there. The Sales Tax authorities disallowed the exemption claim, prompting the appellants to file a writ petition in the High Court, which was dismissed. They then approached the Supreme Court with a certificate of fitness. The appellants advanced several submissions: (1) that the Form III certificate did not impose any condition that the cotton purchased under that certificate must be manufactured in Punjab; (2) that if the statute required manufacturing in Punjab, the ginning of raw cotton in Punjab satisfied that requirement because ginning constituted a manufacturing process; (3) that no tax could be levied because the charge under Section 5 was incomplete after the 1959 amendment, since the amended section and rules required a modified registration certificate that had not been issued because the prescribed form was unavailable; and (4) that Sections 4 and 5 of the Act, which imposed a tax rate of four percent, should be held inoperative because they conflicted with Sections 14 and 15 of the Central Sales Tax Act, 1956, which established a maximum rate.

The Court held that the company was incorrect in interpreting the registration certificate in isolation. It ruled that Sections 5 and 7 must be read together with Rule 26 and Form S.T. XXII to give effect to the statutory scheme.

The appellants argued that the certificate of registration issued in Form III did not contain any express condition requiring that cotton purchased under that certificate be manufactured within the State of Punjab. They further submitted that, even if the statutory provision demanded that the manufacturing take place in Punjab, the fact that the raw cotton was ginned in Punjab satisfied that requirement, because they maintained that ginning constituted a manufacturing process. In their third contention the appellants claimed that the levy under section 5 of the Punjab General Sales Tax Act could not be enforced after the amendment made in 1959, since the amendment and the accompanying rules imposed a requirement that a modified certificate of registration be issued on a form that had not yet been prescribed. Accordingly, they argued that the tax provision was incomplete and could not be applied. Their fourth contention was that sections 4 and 5 of the Act, which imposed a tax rate of four per cent, should be held inoperative because those sections conflicted with sections 14, 593 and 15 of the Central Sales Tax Act, 1956, which established a maximum permissible rate. The Court held, firstly, that the appellant’s approach of reading the registration certificate in isolation was erroneous. Sections 5 and 7 must be read in conjunction with rule 26, Form S.T. XXII and the accompanying declaration. Consequently, even though the old registration certificate did not expressly contain the words “in the State of Punjab,” it must be deemed to be implicitly supplemented by the relevant sections, the rule and the form, all of which operated together. The company was required to obey the Act and the Rules and could not rely solely on the unamended certificate. Secondly, the Court observed that it was unnecessary to decide whether ginning constituted a manufacturing process, because another condition of the provision—namely, that the manufacturing must result in goods intended for sale—was not fulfilled by the appellants, who admitted that the cotton was used to produce cloth. Thirdly, the contention that section 5 was incomplete without the prescribed form for the certificate of registration was rejected. The Court held that the old form should be regarded as having been modified, and that even without such modification the section and the rules were complete and did not depend on the new form. The registration certificate merely served as evidence that the company was a registered dealer for certain commodities used in manufacture, including cotton, and the failure to issue a new form did not render section 5 or the rule ineffective. Fourthly, the Court ruled that the challenged provisions of the Punjab General Sales Tax Act were not invalidly enacted despite the disparity between the rate in that Act and the maximum rates specified in section 15 of the Central Sales Tax Act. The purpose of Article 286(3) of the Constitution was not to annihilate all State charging provisions that conflicted with the central limit, but to modify them so that they conform to the constitutional restriction. Accordingly, the State law was held to be subject to the conditions and restrictions imposed by Parliament, and the rate prescribed by the State would stand modified to align with the central ceiling.

In this appeal, the Court noted that the State legislation would continue to operate, merely modified by the provisions of the Central Act, and therefore the effect of the Central Act was limited to altering the State provision without nullifying it. The matter came before the Civil Appellate Jurisdiction as Civil Appeal No 534 of 1964, challenging the decision of the Punjab High Court dated 18 February 1963 in Civil Writ No 1527 of 1962. Counsel for the appellant presented arguments, while counsel for the respondents, including the Solicitor‑General, responded. The judgment was delivered by Hidayatullah J. The appeal, filed by way of certificate, contested the inclusion of certain items in the turnover of Modi Spinning & Weaving Mills Co. Ltd., Modinagar, for the purpose of assessing sales tax for the fiscal year 1959‑60. In that year the Company submitted a sales return indicating a gross turnover of Rs 40,89,954‑24 and a taxable turnover of Rs 1,30,296‑81. While calculating the taxable turnover, the Company deducted Rs 10,85,842‑74 on the basis of unginned cotton that it had purchased under a registration certificate issued on 3 January 1956. The Assessing Authority in Patiala District, identified also as the District Taxation Officer, disallowed this deduction. The Company also claimed exemption with respect to purchases of oil seeds amounting to Rs 4,47,437‑33, invoking section 5(2)(a)(ii) of the Punjab General Sales Tax Act, 1948, and sought to exclude those purchases from the taxable turnover. The Taxing Authority likewise rejected this claim. Subsequently the Company instituted a petition under articles 226 and 227 of the Constitution in the High Court; however, the order under appeal dismissed the petition. During the hearing, counsel for the appellant withdrew the claim concerning oil seeds, and the Court therefore did not consider that portion of the dispute. The tax in question was levied under the Punjab General Sales Tax Act, 1948 (Act XLVI of 1948), which had been amended periodically, the latest amendment relevant to this case being Punjab Act XIII of 1959. Section 2(1) of the Act defined “turn‑over” as the total of amounts from sales and purchases, and parts thereof, actually made by any dealer during a specified period, after deducting any sums allowable as trade discount. Section 4 prescribed the incidence of tax, making every dealer whose turnover exceeded the taxable quantum liable to tax; because the Company’s turnover exceeded that quantum, the Court found no need to examine the section in detail. Section 5 then set out the rate of tax, stating that, subject to the Act, a tax would be levied on the taxable turnover each year at rates not exceeding those notified by the State Government, with further limitations on rates for declared goods as defined in the Central Sales Tax Act, 1956.

Section 5 of the Punjab General Sales Tax Act provided that a tax would be levied each year on the turnover of a dealer at a rate that could not be higher than four paise per rupee, as specified by a notification of the State Government. The provision also stated that, in addition, the rate of tax could not exceed two paise per rupee for any goods that were declared under clause (c) of section 2 of the Central Sales Tax Act, 1956. Furthermore, the tax on such declared goods could not be charged on either the purchase or the sale of those goods at more than one stage of the transaction. This clause was introduced into the Act with effect from 1 April 1960 by Act No. 18 of 1960.

The Act also defined “taxable turnover” in subsection (2) of section 5. It explained that taxable turnover meant the portion of a dealer’s gross turnover during a particular period after deducting certain amounts. Specifically, the deduction comprised the dealer’s turnover for that period attributable to (i) sales made to a registered dealer of goods that the seller declared, in a prescribed form, to be intended for resale in the State of Punjab, for interstate trade, for export from India, or for goods listed in the seller’s registration certificate that were to be used by the purchaser in manufacturing goods for sale in Punjab; and (ii) sales made to a registered dealer of containers or other packing materials for those goods. The provision required that, for such sales, a declaration properly completed and signed by the purchasing dealer, containing the prescribed particulars on the prescribed form, be furnished by the selling dealer. An additional condition stipulated that if the buyer used the goods for purposes other than those for which they were sold, the buyer would be liable to pay tax on the purchase at the same rate that applied to the sale, even though the purchase was not covered by clause (ff) of section 2.

Registration of dealers was governed by section 7 of the Act. Subsection (1) made it mandatory for any dealer who was liable to pay tax under the Act to be registered and to possess a valid registration certificate before carrying on business as a dealer. Subsection (2) required every dealer who needed to be registered to submit an application in the manner prescribed to the appropriate authority. If the authority was satisfied that the application complied with the requirements, then under subsection (3) the authority would, following the applicable rules and upon payment of the prescribed fees, register the applicant and issue a registration certificate in the prescribed format. The certificate could specify the class or classes of goods for which the dealer was authorized, as mentioned in sub‑clause (ii) of clause (a) of subsection (2) of section 5. The words in subsection (2)(a)(ii) had been substituted by Act No. 13 of 1959, and the amendment was reflected in the text of the provision.

The amendment inserting the new provision took effect on 20 April 1959 by virtue of Punjab Act No. 18 of 1960. When section 5(2)(a)(ii) was altered by adding the phrase “in the State of Punjab,” a phrase that had not previously existed, rule 26 of the Punjab General Sales Tax Rules, 1949 was concurrently revised. Rule 26, as amended by a series of notifications, the latest of which was issued on 29 September 1961, states the following: “A dealer who wishes to deduct from his turnover the amount relating to a sale on the ground that he is entitled to such a deduction under the provisions of sub‑clause (ii) of clause (a) of subsection (2) of section 5 of the Act shall, on demand, produce in respect of that sale the copy of the relevant cash memo or bill, according as the sale is a cash sale or a sale on credit, and a written declaration in Form S.T. XXII by the purchasing dealer or by his agent, that the goods in question are intended for sale in the State of Punjab or that such goods are specified in his certificate of registration for use by him in the manufacture in the State of Punjab of any goods for sale.” Although the words “in Form S.T. XXII” through to the end of the provision were inserted as early as 28 June 1955, the specific words “in the State of Punjab” were added on 1 February 1960, following the enactment of Act 13 of 1959. Form S.T. XXII itself was also altered on 1 February 1960. This form is used for declarations to be furnished by registered dealers who purchase goods from another registered dealer in order to claim exemption from tax under rule 26 read with section 5 of the Act. The revised Form S.T. XXII required the purchasing dealer to declare that the goods were intended for “manufacture in the State of Punjab for sale.” Unfortunately, although the statute and the rule anticipated that the certificate of registration would be amended in the same manner, the certificate referred to in Form S.T. III was not updated until a Government Notification dated 29 September 1961 prescribed the new form, which occurred after the assessment period relevant to the present case. Consequently, the Company possessed a certificate of registration that did not contain any condition stipulating that the goods must be used by the dealer “in the manufacture in the State of Punjab of goods for sale.” The underlined words that now appear in the statutory language were absent from the older certificate held by the Company. The Company contended that, based on the certificate it had been granted, there was no requirement that cotton purchased under that certificate be subjected to manufacture in Punjab. The Company explained that it bought raw cotton for manufacturing purposes, ginned the cotton in its ginning mills located in Punjab, and then transported the bales to Modinagar in Uttar Pradesh where the Company’s cloth‑manufacturing mills processed the cotton into finished fabric. On that basis, the Company claimed that the circumstances of its operations satisfied the statutory requirements.

The Company argued that its purchases of raw cotton were exempt from tax under section 5 (2) (a) (ii) of the Sales Tax Act. It further submitted that even if the statutory provision required the manufacturing to take place in the State of Punjab, the condition was met because the raw cotton was ginned in Punjab. The Company maintained that ginning of cotton constituted a manufacturing process that transformed raw cotton into ginned cotton, and therefore the statutory requirements were satisfied. A third contention advanced by the Company was that the charging provision, section 5, could not operate after the amendments made in 1959 because the amendment and the accompanying rules demanded a modified certificate of registration, which had never been issued since the required Form had not yet been prescribed. Finally, the Company claimed that sections 4 and 5 of the Act imposed a tax rate of four per cent (four paise per rupee), a rate that conflicted with sections 14 and 15 of the Central Sales Tax Act, 1956, which set a maximum limit; consequently, the higher rate should be held inoperative. The Court noted that, with the exception of the last argument, all of the Company’s submissions were based on the failure to prescribe a new certificate of registration in conformity with the amended section and rule. The Company admitted that it purchased raw cotton in Punjab, ginned the cotton in its Punjab ginning mills, and then shipped the resulting bales to its spinning and weaving mills located at Modinagar in Uttar Pradesh for the purpose of producing cloth. It also conceded, both in its oral submissions and in the factual narration of two writ petitions filed under Article 32 and later withdrawn, that the ginned cotton bales were not sold but were used for cloth manufacture outside Punjab.

The Court observed that the Company’s approach of reading the certificate of registration in isolation was erroneous. Sections 5 and 7 must be read together with rule 26 and Form S.T. XXII, the declaration form. Accordingly, even though the original registration certificate did not contain the words “in the State of Punjab,” those words are implied and incorporated through the combined operation of the sections, the rule, and the declaration form. The Company therefore could not rely on an unamended certificate to evade compliance with the Act and the Rules. The Court emphasized that the decisive question was whether the Company had complied with the statutory provisions and the accompanying rules in the present circumstances. While the Company had cited several authorities to argue that “manufacture” could include the ginning process, the Court found it unnecessary to decide that issue because section 5 (2) (a) (ii) explicitly requires that the goods specified in the certificate of registration be used by the dealer “in the manufacture in the State,” a condition that the Company had not satisfied.

In this case, the Court observed that Section 5 of the Punjab General Sales Tax Act required that, for a dealer to claim exemption, three separate conditions had to be satisfied. The first condition demanded that the goods for which exemption was claimed must be intended for the use of the dealer himself. The second condition required that those goods be manufactured within the State of Punjab. The third condition stipulated that the manufacturing activity must produce goods that are destined for sale. The Court noted that it was unnecessary to decide whether the subsequent sale of the goods also had to occur in Punjab, because the facts showed that no sale within the State had taken place. The exemption, therefore, could be relied upon only if the company fulfilled all three requirements. The Court found that the third requirement – that the manufactured goods be for sale – was not satisfied in the present facts. The expression “for sale” in the statutory language was understood to describe the character of the goods, indicating that the goods produced in Punjab must be intended for sale rather than for internal use or for further processing outside the State that would result in a different product. The company had manufactured bales of ginned cotton in Punjab, but it had admitted that those bales were not offered for sale in Punjab; instead, they were sent to its spinning and weaving mills located in Uttar Pradesh. Consequently, the Court concluded that the exemption could not be claimed because the requirement that the manufactured goods be for sale had not been met.

The Court then turned to the contention that Section 5 was incomplete because it did not prescribe the appropriate form for the registration certificate. The Court held that this argument did not require further discussion. It had already determined that the older registration form should be treated as having been implicitly modified, and regardless of that determination, the operative provisions of Section 5 and the corresponding Rules did not depend on the existence of a newly prescribed form. The registration certificate served merely as evidence that the company was a registered dealer for certain commodities, including cotton, which were to be used in manufacturing. The failure to prescribe or issue a new form therefore did not render Section 5 or the Rules ineffective.

Subsequently, counsel for the petitioner argued that the maximum tax rate of four per cent specified in subsection (1) of Section 5 should fail because of the provisions of Sections 14 and 15 of the Central Sales Tax Act. He pointed out that the second proviso to Section 5(1) became effective only on 1 April 1960, and that before that date the section could not operate. Section 14 of the Central Sales Tax Act classifies certain goods of special importance in inter‑state trade, specifically mentioning cotton in its unmanufactured state, whether ginned or unpinned. Section 15 then imposes restrictions on the tax on such declared goods, stating that the tax payable shall not exceed two per cent of the sale or purchase price and that it shall not be levied at more than one stage. Relying on this provision, the petitioner argued that the rate prescribed in Section 5(1) was inconsistent with the Central Sales Tax Act and therefore should be held invalid. The Court rejected this argument, observing that Article 286(3) of the Constitution provides that any State law imposing a tax on goods declared by Parliament as being of special importance is subject to the restrictions and conditions that Parliament may specify. Accordingly, the Court held that the provision of the Central Sales Tax Act did not defeat the validity of the rate prescribed in Section 5(1) of the Punjab General Sales Tax Act.

The provision stated that, with respect to any sale or purchase of such goods occurring within the State, the tax rate could not exceed two per cent of the sale or purchase price, and the tax could be levied at only one stage; clause (b) was left unfilled. The Company argued that, because of the declaration and the provision quoted as Section 15(a), the tax rate conflicted with Section 15 of the Central Sales Tax Act, and consequently sub‑section (1) of Section 5 of the Punjab General Sales Tax Act should be invalid as a law properly enacted. The Court rejected the submission identified as Sup.C.1/65‑13, observing that Article 286(3), under which the declaration was made, provided that “Any law of a State shall, in so far as it imposes, or authorises the imposition of, a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter‑State trade or commerce, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify.” The Court explained that the purpose of clause (3) of Article 286 was not to eliminate every charging provision in State sales‑tax statutes that differed from Section 15(a) of the Central Sales Tax Act, but rather to amend those provisions so that they conformed to the parliamentary restrictions. Accordingly, the State law was deemed subject to the restrictions and conditions imposed by Parliament, and the rate fixed in the State Act would consequently be modified. The effect of Article 286(3) was reflected in the second proviso to Section 5(1); however, the Court noted that this proviso was introduced out of abundant caution and that the same result would have followed even without it. In its judgment, the Court found that none of the contentions raised by the Company could be sustained. As a result, the appeal was dismissed, and the Court ordered that the appellant bear the costs of the proceeding.