State of Andhra Pradesh vs Abdul Bakhi and Bros

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 473 of 1963

Decision Date: 8 April 1964

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

In this matter the Supreme Court of India rendered its judgment on the eighth day of April, 1964, in the case titled State of Andhra Pradesh versus Abdul Bakhi and Brothers. The opinion was authored by Justice J. C. Shah and was delivered by a bench that comprised Justice J. C. Shah, Justice S. M. Sikri, Justice Subbarao and Justice K. Sikri. The State of Andhra Pradesh appeared as the petitioner and Abdul Bakhi and Brothers were the respondents.

The judgment was recorded on 08 April 1964 and the decision is reported in the 1965 All India Reporter at page 531 and in the 1964 Supplementary Court Reports, series 7, page 664. Subsequent citations to this decision appear in various law reports, including the 1967 Supreme Court reports numbered 1066, 1131 and 1826; the 1969 reports numbered 348 and 1276; the 1970 report numbered 253; the 1972 report numbered 87; and the 1985 report numbered 1748. The operative statutory provision concerned the Hyderabad General Sales Tax Act, 1950, particularly the definition of “dealer” under sections 2(e) and 2(m), and the Sales Tax Rules, revenue rulings 5(1) and 5(2). The central issue was whether the price paid by the respondents for acquiring tanning bark, which they used in the process of tanning hides and skins, should form part of the taxable turnover.

According to the headnote, the respondents were registered dealers who carried on the business of tanning hides and skins and subsequently selling the tanned skins in the city of Hyderabad. The tax authorities, acting under the Hyderabad General Sales Tax Act, computed the respondents’ total turnover for the assessment year by including the amount paid for the tanning bark that was purchased for use in the tanning process. The respondents argued that the cost of the tanning bark should be excluded from the turnover because the bark was bought for their own consumption in the manufacturing process and not for resale, and therefore they should not be regarded as “dealers” with respect to that particular commodity. The tax officials rejected this contention and maintained the assessment.

The respondents filed a petition before the High Court invoking section 22(1) of the Hyderabad General Sales Tax Act. The High Court accepted the respondents’ argument, held that the price of the tanning bark was not part of the taxable turnover, and consequently altered the assessment. The State of Andhra Pradesh appealed this decision and obtained special leave to appeal before the Supreme Court.

In its analysis, the Court held that the High Court erred in concluding that a purchaser is liable to tax under rule 5(2) of the Sales Tax Rules only when engaged in a business of buying and selling the specific commodity mentioned in sub‑rule (2). The Court clarified that liability for tax also arises when the purchaser acquires the commodity for consumption in a process that ultimately produces a commodity intended for sale. The Court explained that for an activity to be characterised as a business, there must be a course of dealing that is either actually continued or contemplated, pursued with a profit motive and not merely for sport or pleasure. However, to be deemed a dealer, a person need not be involved in the entire sequence of buying, selling and supplying the identical commodity. The statutory requirement is that the purchase of the commodity covered by rule 5(2) must occur in the course of business, meaning that it is undertaken for sale or for use with a view to deriving profit from the integrated activity of acquisition and disposal. The commodity may be transformed into another marketable product or it may serve as an ingredient or a facilitative element in a manufacturing process that yields a marketable product.

Applying this principle to the facts of the present case, the Court observed that the respondents did not acquire the tanning bark for any purpose unrelated to their business. The consumption of the tanning bark formed an essential part of the respondents’ manufacturing process, and therefore the purchase could not be separated from the business activity. Consequently, the price paid for the tanning bark formed part of the respondents’ total turnover and was liable to tax under the Hyderabad General Sales Tax Act.

The Court observed that the use of tanning bark in the manufacturing process did not remove the respondents from the statutory definition of a dealer with respect to that bark, and it cited the decision in Sadak Thamby and Company v. State of Madras, 14 S.T.C. 753, as authority for that proposition. The matter before the Court arose from a civil appeal numbered 473 of 1963, which was entertained on special leave after the Andhra Pradesh High Court had rendered a judgment and order on 22 March 1960 in Tax Revision Case No. 88 of 1960. Counsel for the appellant, namely A. Ranganadham Chetty, B. R. G. K. Achar and R. N. Sachthey, presented arguments on behalf of the State of Andhra Pradesh, while the respondent failed to appear before the Court on 8 April 1964. The judgment was delivered by Shah, J. The respondents were registered dealers under the Hyderabad General Sales Tax Act, 1950, and they conducted a tanning business in Hyderabad, dealing in hides, skins and the sale of tanned skins. In the ordinary course of that business they purchased undressed hides and skins together with tanning bark and other materials necessary for operating their tannery. For the assessment year 1954‑55 the Sales‑tax Officer of Circle IV, Hyderabad, recorded a total turnover of Rs 5,70,417‑12‑4 (O.S.) comprising hides, skins, wool and tanning bark. The respondents contested the inclusion of Rs 61,431‑14‑9 (O.S.) in the turnover, asserting that the amount represented the purchase price of tanning bark required for consumption within the tannery and not for resale, and therefore they claimed that they were not dealers in tanning bark and that the purchase price should not be subject to tax under the Hyderabad General Sales Tax Act. The Sales‑tax Officer rejected this contention, and the assessment was upheld by the Deputy Commissioner, Central Tax, Hyderabad Division, and subsequently confirmed by the Sales Tax Appellate Tribunal, Hyderabad. However, the Andhra Pradesh High Court, hearing a petition under section 22(1) read with rule 40 of the Andhra Pradesh General Sales Tax Act VII of 1957, modified the assessment by excluding the price paid for tanning bark from the taxable turnover. The State of Andhra Pradesh obtained special leave to appeal this decision before the Supreme Court. Section 2(e) of the Hyderabad General Sales Tax Act defines “dealer” as any person, local authority, company, firm, Hindu undivided family or any association of persons engaged in the business of buying, selling or supplying goods in the Hyderabad State, whether for commission, remuneration or otherwise, and it expressly includes a State Government that carries on such business as well as societies, clubs or associations that buy, sell or supply goods to their members. Section 2(m) defines “turnover” as the aggregate amount for which goods are either bought by or sold by a dealer, irrespective of whether the consideration is paid in cash, deferred or by any other valuable means. Under section 4 a tax of three pies per rupee in Indian currency is levied on the portion of turnover that is attributable to transactions in goods other than exempted goods.

The Court explained that a tax of rupees in the local currency is levied on the portion of a dealer’s annual turnover that is attributable to transactions involving goods other than those that are exempted. Rule 5(1) stipulates that, except as provided in sub‑rule (2), a dealer’s turnover for the purposes of the rules is to be measured by the amount for which the dealer sells goods. Rule 5(2) adds that for certain specified commodities the turnover is to be measured by the amount for which the dealer purchases those commodities. The commodities listed under Rule 5(2) include groundnut, whether shelled or unshelled; bidi leaves; tarwar and other tanning barks; til, karad and castor seed; cotton, including kappas; linseed, turmeric, coriander and other agricultural produce such as all varieties of dhal and paddy, whether husked or unhusked, that are not otherwise exempted under the Act, but expressly excluding cotton seed, sugarcane, tea and coffee seeds; hides and skins; and wool, bones and horns. The High Court of Andhra Pradesh had rejected the taxing authority’s attempt to impose tax on the tanning bark purchased by the respondents. The High Court reasoned that a purchaser is liable to tax under Rule 5(2) only when he is engaged in the business of buying and selling a commodity specified in sub‑rule (2), and not when he acquires the commodity for consumption in a manufacturing process that creates an article for sale. Accordingly, the High Court held that if a dealer buys any commodity listed in Rule 5(2) for use in his business but not for resale, he is not considered to be engaged in the business of buying, selling or supplying that commodity, and the price paid for such purchase does not attract tax. The Supreme Court disagreed with that interpretation. It affirmed that a person qualifies as a dealer only if he is engaged in the business of buying, selling or supplying goods. While the term “business” is broad, in the context of taxation statutes it denotes an occupation or profession that occupies a person’s time, attention and labour, normally with the objective of making a profit. To deem an activity a business, there must be a series of transactions, either actually ongoing or intended to continue, carried out with a profit motive and not merely for sport or pleasure. Nevertheless, the Court clarified that a dealer need not be involved in buying, selling and supplying the same commodity. Pure personal consumption without a profit motive does not make a person a dealer under the Act. However, a person who purchases a commodity and then consumes it in the course of his trade, or uses it as an ingredient in manufacturing another commodity for sale, is to be regarded as a dealer. The legislation does not require that the specific article bought be sold; the definition of dealer does not condition dealer status on the sale of the exact item purchased.

In this case the Court explained that Rule 5(2) required the purchase of a commodity only when such purchase was made in the course of business, meaning that the commodity had to be bought for the purpose of sale or for use with a view to generate profit through the combined activity of acquiring and disposing of it. The Court further observed that the commodity could be transformed into a different marketable product, or could serve as an ingredient or a supporting material in a manufacturing process that ultimately produced a marketable article. Applying this principle, the Court held that the tanning bark bought by the respondents could not be said to have been acquired for any purpose that was unrelated to their ongoing business of manufacturing and selling dressed hides and skins. Although the respondents consumed the bark in their manufacturing operations rather than selling the bark itself, such consumption did not remove them from the statutory definition of a dealer in relation to the tanning bark. The Court noted that this interpretation aligned with the reasoning of the Madras High Court in the earlier decision of L.M.S. Sadak Thamby and Company v. State of Madras, where a similar provision was construed. Consequently, the Court allowed the appeal, set aside the order of the High Court, and restored the order of the Sales‑tax Appellate Tribunal. No costs were awarded, and the appeal was dismissed. (1) 14 S.T.C., 753