http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 12

PETITIONER:

COMMISSIONER OF SALES TAX, BOMBAY ETC.ETC.

Vs.

RESPONDENT:

BHARAT PETROLEUM CORPORATION LTD. ETC.ETC.

DATE OF JUDGMENT18/02/1992

BENCH:

RANGNATHAN, S.

BENCH:

RANGNATHAN, S.

RAMASWAMI, V. (J) II

AGRAWAL, S.C. (J)

CITATION:

1992 AIR 959 1992 SCR (1) 807

1992 SCC (2) 579 JT 1992 (2) 601

1992 SCALE (1)398

CITATOR INFO :

D 1992 SC2078 (13)

ACT:

Bombay Sales Tax Act, 1959/Bombay Sales Tax Rules, 1959:

Section 42/Rules 41 and 41-A-Sales tax-Right to claim

set-off-Sales tax paid on purchase of raw material used in

manufacture of non-taxable goods and taxable by-products for

sale-Whether set-off would be available on the entire amount

of tax paid on purchase of raw material-Whether principle of

apportionment on basis of turnover of taxable and non-

taxable goods could be invoked-Whether raw material

purchased by manufacturer dealer should be used for

manufacturing taxable goods only and sale of manufactured

goods should be made by manufacturer-dealer himself-By-

product yielded in the process of manufacturer of main

product-Whether manufacture of main product-manufacturer of

by-product also.

HEADNOTE:

The assessee-Oil refinery, predecessor-in-interest to

the respondent Corporation in one of the appeals had

registered itself as a dealer under the Bombay Sales Tax Act,

1959. During the Calendar year 1961, it had purchased

sulphuric acid from a chemical company for processing and

refining crude oil and manufacturing kerosene for a

marketing company. On the sulphuric acid so purchased sales

tax was recovered from it by the chemical company. While the

refined kerosene which was not taxable upto 31.3.1961 was

sold by the marketing company, the acid sludge yielded in

the purification process was sold by the refinery. The

refinery paid sales tax on the acid sludge sold by it, and

claimed a set off (and a refund, if need be) of the sales

tax paid by it on its purchase of sulphuric acid, on the

ground that all the conditions set out in clause (e) of Rule

41 of the Bombay Sales Tax Rules, 1959 were fulfilled, viz.,

it was manufacturer within the meaning of Section 2 (17) of

the Act, that it was also a registered dealer, that it

manufactured taxable goods for sale, that while acid sludge

was taxable throughout the year, kerosene was taxable with

effect from 1.4.1961 onwards and that tax was recovered on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 12

the raw material purchased by it by the chemical company.

808

The Sales Tax Officer allowed the set off only partly.

On appeal, the Appellate Assistant Commissioner held that

the assessee was entitled to no set off at all under Rule 41

since what was manufactured by the assessee was kerosene and

not acid sludge, and the kerosene was sold not by the

assessee-manufacturer, but by some other company. The

Appellate Tribunal, however, allowed the assessee's claim in

full and on reference this was upheld by the High Court.

The respondent Cotton Mill in the other appeals

purchased raw unginned cotton from agriculturists and

unregistered dealers during periods 1.7.73 to 30.6.74 and

1.7.74 to 30.6.75 and paid sales tax on the raw cotton so

purchased. The cotton was ginned yielding place to ginned

cotton and cotton seed. The respondent manufactured yarn and

cloth from the ginned cotton. The cotton waste and yarn

waste obtained in the course of manufacture were also sold

by the assessee. It paid sales tax on the yarn and cotton

waste sold by it and claimed a set off, under 41-A of the

Rules, of the sales tax paid on the purchase value of the

entire raw cotton purchased by it.

The Sales Tax Officer allowed a set off of only part of

the purchase tax paid on the raw cotton purchased by the

assessee proportionate to the extent of yarn sales. On

appeal, the Appellate Tribunal allowed a set off of the

entire purchase tax paid on the raw cotton, machinery and

other purchases, which had been used in the process of

manufacture of cotton waste. It, however, directed that the

deductions should be so allowed as not to result in a double

deduction of the same amount of purchase tax.

In the appeals, by Special leave, before this Court, on

behalf of the State Government, it was contended that Rules

41 and 41-A were intended to give relief to a dealer in

respect of purchase of goods which were used in the

manufacture of taxable goods for sale, that the manufactured

goods, viz., pure kerosene was neither sold by the

respondent so as to attract sales tax in his hands nor, was

it liable to sales tax at all for the first three months,

and the cotton purchased on payment of tax was used for the

manufacture of cloth which was not liable to sales tax, and

that a set off could not be allowed merely because a by-

product or waste product, viz., acid sludge and cotton waste

was sold for a nominal turn-over, which was subject to tax,

and that the set off should be split up proportionately and

allowed only to a proportionate extent, on the basis of the

respective

809

turnover of the taxable and non-taxable goods, and an

apportionment of such nature was implicit in a tax law and

was also in consonance with the object and purpose of the

rules.

On behalf of one of the respondents it was contended

that under Rule 41 it was not a requirement that the

manufactured goods had to be sold by the manufacturing

dealer himself and that the sulphuric acid purchased was

wholly used in the manufacture of two items-kerosene and

acid sludge-one of which, viz., the sludge, was taxable and

also subjected to tax, and the amount of set off was

specified in the rule itself as the amount of purchase tax

paid on the goods so used, and could not be scaled down

proportionately merely because the turnover of the taxable

goods was insignificant. The other respondent adopted these

contentions.

Dismissing the appeals, this Court,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 12

HELD: 1.1 The assessees are entitled to a set off of the

entire tax paid by them on the purchases of sulphuric acid

and cotton respectively. The only condition under the rule

is that the goods purchased on payment of tax should have

been used in the manufacture of taxable goods for sale.

Their concurrent user for the manufacture of another item of

goods which may or may not be taxable is immaterial though

kerosene was also taxable for nine months in the year and

yarn was also manufactured and it was subject to tax.

Commissioner of Sales Tax v. Burmah Shell Refineries

Limited, (1978) 41 S.T.C. 337, referred to.

1.2. The principle of apportionment on the basis of

turnovers of various items of goods manufactured and

restriction of the quantum of set off to a proportion based

on the turnover of taxable goods to the total turnover

cannot be accepted. No doubt under the rules, situations are

conceivable where severance of taxable element is implicit,

but the type of user in the instant case is a composite one,

in which it is not possible to correlate any part of the

purchased goods as having gone in for the purpose of

manufacture of taxable goods.

Anglo-French Textiles v. C.I.T., (1954) 25 I.T.R. 27,

S.C.; Tata Iron & Steel Co. v. State A.I.R. 1963 S.C. 577

and Best & Co. v. C.I.T. (1966) 60 I.T.R. 11, S.C.,

distinguished.

810

1.3 In the instant case the entire sulphuric acid

purchased has no doubt been used in the manufacture of

kerosene though perhaps not a drop of acid clings to the

kerosene manufactured. Equally, the entire sulphuric acid

has gone into the composition of the acid sludge. Having

regard to the nature of the interactions in the instant

case,it is incontrovertible that the entire sulphuric acid

purchased has gone into the manufacture of the sludge. The

rules do not require that the purchased goods must have

been used only for the manufacture of taxable goods for

sale. Therefore, it is not possible to cut down the quantum

of relief clearly outlined in the rule on the basis of some

general principle claimed to underline the provision.

1.4 The basis for the relief provided is not very clear

cut. Various reliefs have been provided in a group of rules

which come in for application in various situations. The

relief may be based on the principle that the manufactured

product is taxed either in the hands of the same assessee or

in someone else's hands, or that the manufactured goods are

exported which may yield no tax but earn foreign exchange,

or even that the purchases are utilised for manufacture of

goods in the State thus contributing to the industrial

development of the State. It is, therefore, difficult to

read into the provision a quantitative correlation of the

goods resulting in a taxable turnover and the purchases of

raw materials on which tax has been paid.

1.5 Rule 41 does not contemplate that the goods

purchased by the dealer should be used for manufacture of

taxable goods for sale by him. No such restriction can be

read into this rule.

2.1 Where a subsidiary product is turned out regularly

and continuously in the course of a manufacturing business

and is also sold regularly from time to time, an intention

can be attributed to the manufacturer to manufacture and

sell the subsidiary product.

State of Gujarat v. Raipur Manufacturing Co. Ltd.,

(1967) 19 S.T.C. 1, relied on.

2.2 The assessees in the instant case do purchase

sulphuric acid and unginned cotton for use in a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 12

manufacturing process, which yield not only kerosene and

yarn/cloth, but also acid sludge and cotton waste. There is

also no evidence to suggest that acid sludge is not a

commercial

811

commodity with a market but an item of waste.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1031 of

1979 etc.etc.

From the Judgment and Order dated 23/24.11.1977 of the

Bombay High Court in Sales Tax Reference No. 92 of 1976.

S.K. Dholakia, S.M. Jadhav and A.S. Bhasme for the

Appellants.

Vinod A. Bobde, Ms. A.K. Verma, U.A. Rana, P.G. Gokhale,

Ms. Sangeeta Aggarwal and D.N. Mishra for the Respondents.

The Judgement of the Court was delivered by

RANGANATHAN,J. These are appeals by the Revenue arising

out of proceedings under the Bombay Sales Tax Act, 1959

(hereinafter called `the Act'). The respondents, Bharat

Petroleum Corporation Ltd. (in CA 1031 of 1979) and Phulgaon

Cotton Mills Ltd. (in the four other appeals) are assessees

to sales tax. They claimed a set-off, against the sales tax

payable by them for the years in question, of certain sums,

invoking the provisions of rules 41 and 41 A framed under

the Act, as they stood at the relevant time. As the wording

of these rules, in so far as it is material for our present

purposes, is identical and the basis of the claim was also

common, it will be convenient to dispose of both sets of

appeals by a common judgment and we proceed to do so.

The set off claimed by the assessees was in terms of s.

42 and rules 41 and 41A, which may now be referred to :

(1) Section 42 reads thus :

``42.Draw-back, set off, refund etc.- The State

Government may provide by rules that-

(a)in such circumstances and subject to such

conditions as may be specified in the rules a

draw-back, set off or refund of the whole or any

part of the tax-

(i) xx xx xx

(ii) paid or levied or leviable in respect of any

earlier sale or

812

purchase of goods under this Act or any earlier

law, be granted to the purchasing dealer ;

(b) xx xx xx

The State Government has notified various rules

from time to time in exercise of this power which

are collected in Chapter VII of the Rules. Of these

we are concerned with rules 41 and 41A.

(2) Rule 41 (omitted w.e.f. 24.6.81) was a very

long rule containing several clauses. In so far as

is relevant for our present purposes, it was in the

following terms:

``41. Drawback, set-off etc. of tax paid by a

manufacturer - In assessing the amount of tax

payable in respect of any period by a Registered

dealer, who manufactures taxable goods for sale

(hereinafter in this rule referred to as the

``Manufacturing dealer''), the Commissioner shall

grant to him a draw-back, set-off or as the case

may be a refund of the aggregate of the following

sums, that is to say :-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 12

(a) xx xx xx

(aa) xx xx xx

(b) xx xx xx

(bb) xx xx xx

(c) xx xx xx

(cc) xx xx xx

(d) xx xx xx

(e) a sum recovered from the Manufacturing dealer

by another registered dealer by way of sales tax

or, general sales tax or both, as the case may be,

on the purchase by him, of goods from such

registered dealer, being goods specified in

schedule C to the Act other than in entries 1 to

11(both inclusive) and 15 therein and in Schedule D

other than in entries 1 to 4 (both inclusive)

813

therein and in Schedule E other than in entries 1

and 2 therein, when the purchasing dealer did not

hold a recognition or when the dealer held a

recognition but effected the purchase otherwise

than against a certificate under section 12 of the

Act provided that such goods are used by him in the

manufacture of taxable goods for sale or in the

packing of taxable goods manufactured by him for

sale.

Explanation : xx xx xx

(Material portions Underlined)

(3) The relevant portion of rule 41A, which has

been invoked in the case of Phulgaon Cotton Mills

Ltd., reads thus :

"41A.(1) Drawback, set off etc. of tax paid by a

manufacturer in respect of purchases made on or

after the 15th July 1962 : In assessing the

amount of tax payable in respect of any period by a

Registered dealer who manufactures taxable goods

for sale or export* (hereinafter in this rule

referred to as the ``manufacturing dealer''), the

Commissioner shall, in respect of the purchases

made by such dealer on or after the 15th July,

1962 of any goods specified in Schedule B, C, D, or

E and used by him within the State in the

manufacture of taxable goods (**) which have in

fact been sold by him (and not given away as

samples or otherwise) or which have been exported

by him or used by him in the packing of goods so

manufactured grant him a draw-back, set off or, as

the case may be, a refund of the aggregate of the

following sums, that is to say:

(a) a sum recovered from the manufacturing dealer

by other Registered Dealers by way of sales tax,

or general sales tax, as the case may be, both, on

the purchase by him from such registered dealers,

when the manufacturing dealer did not hold a

Recognition or when he held a recognition but

effected the

---------------------------

* The words ``or export''were inserted by a notification

dated 31.8.70.

** The words ``which have in fact.......so

manufactured''were substituted by a notification dated

15.1.1976 for the words ``for sale or export or in the

packing of goods so manufactured for sale or export''.

814

purchase otherwise than against a certificate under

section 11 of the Act;

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 12

(b) xx xx xx

(c) xx xx xx

(d) xx xx xx

(Material portions underlined)

(4)There was also a claim under rule 43AB but we

are not concerned with that in the present appeals.

Now to turn to the facts which give rise to these

appeals.

A.Burmah Shell

The Bharat Petroleum Corporation Ltd.is before us as the

successor-in-interest of the Burmah Shell Refineries Ltd.

which is the assessee with which we are concerned. We shall

refer to it as the `refinery'to distinguish it from the

Burmah Shell Oil Storage and Distributing Company of India

Ltd. which will be briefly referred to hereinafter as the

`Marketing company'.

We are concerned with the period from 1.1.1961 to

31.12.1961. The refinery registered itself as a `dealer'

under the Act and possessed a recognition certificate under

section 25,after having failed in a plea, raised in earlier

assessment years, that it was not a `dealer' and was not

required to be registered as such. It had entered into a

contract with the marketing company under which it agreed to

process and refine crude oil belonging to the marketing

company and manufacture kerosene for it. This contract was

in the nature of a bailment by the marketing company to the

refinery, the refinery taking the crude oil and returning it

after purification, as refined kerosene. For the performance

of this task it received payments from the manufacturing

company by way refining charges on the basis of the job-

work done from time to time. The refined kerosene was

eventually sold by the marketing company and the refinery

had nothing to do with the sales. It may be mentioned here

that there was no sales tax payable on sales of kerosene

till 31.3.1961 but it became liable to sales tax thereafter.

For the above purification process, the refinery needed

to use

815

sulphuric acid. During the calendar year 1961, it purchased

3048.760 MT of acid for Rs. 3,52,742 from Dharmsi Morarji

Chemical Co. Ltd.(hereinafter referred to as ``Dharmsis'')

under an agreement dated 9.6.1955 which was to remain in

force for a period of ten years from 1.1.1966 (Sic). On the

sulphuric acid it so purchased, a sales tax of Rs.13,421.15

(Rs.15,107.72, according to the High Court) was recovered

from it by Dharmsis, as the refinery did not purchase it on

the strength of the recognition certificate held by it as

the certificate could have been utilised only if the goods

purchased had been intended to be used by it in the

manufacture of goods for sale by itself, whereas the

manufactured kerosene was sold by the marketing company.

When the sulphuric acid was used in the refining process,

the crude oil got refined and purified but the impurities

therein precipitated into the acid and yielded ``acid

sludge''. The refinery's contract with Dharmsis provided

that the acid sludge should be sold by the refinery to the

Dharmsis which, apparently, had its own uses for the sludge.

Accordingly, the refinery sold 3541.985 MT of acid sludge,

during the relevant period, for Rs.68,108 - the correctness

of this figure was unsuccessfully contested before the High

Court - and on this amount it paid sales tax. The record

does not show the amount of sales tax paid by the refinery

on this account, but, having regard to the nature of the

commodity and turnover involved, it must, admittedly, have

been a very small amount.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 12

Having done this, the refinery claimed that, as against

the sales tax paid by it for the period in question

(including the tax paid on the acid sludge), it was entitled

to a set off(and a refund, if need be) of the amount of Rs.

13,421.15 paid by it as sales tax on its purchases of

sulphuric acid. Its argument is that it is entitled to this

refund as all the conditions set out in clause (e) rule 41

were fulfilled this-wise :

(a) It is a `manufacturer', as the process of

refining carried out by it falls within the wide

definition of `manufacture' contained in s.2(17) of

the Act viz. :

``2(17) `manufacture', with all its grammatical

variations and cognate expressions, means

producing, making, extracting, altering,

ornamenting, finishing or otherwise treating, or

adapting any goods; but does not include such

manufactures or manufacturing processes as may be

prescribed''.

816

It is also a Registered dealer.

(b) It manufactured taxable goods for sale. The

acid sludge manufactured by it was taxable

throughout the year and the pure kerosene

manufactured by it was taxable .w.e.f. 1-4-1961

onwards.

(c) Tax had been recovered from it on its purchases

of sulphuric acid from Dharmsis who are Registered

dealers as the purchases had not been effected on

the basis of a recognition certificate.

The Sales Tax Officer allowed the set off only to the

extent of Rs. 1,101.40 without giving any details as to the

manner in which this figure had been arrived at. On appeal,

the Appellate Assistant Commissioner held that the assessee

was entitled to no set off at all under rule 41 as what was

manufactured by the assessee was kerosene and not acid

sludge and the kerosene was sold not by the assessee-

manufacturer but by some other company. The Appellate

Tribunal, however, allowed the assessee's claim in full and

its view was upheld, on reference, by the High Court. Hence

the present appeal.

B.Phulgaon Cotton

In the case of Phulgaon Cotton Mills, we are concerned

with four accounting periods : 1-7-73 to 30-6-74, 1-7-74 to

30-6-75, 1-7-75 to 30-6-76 and 1-7-76 to 30-6-77. The issue

as to the application of rule 41A arises in the following

circumstances.

The assessee purchased raw unginned cotton from

agriculturists and unregistered dealers. The cotton was

ginned, yielding ginned cotton and seeds. One of the issues

raised in the assessments was as to whether purchase tax

should be paid on the total value of the raw cotton

purchased or on the said purchase price less the value of

the cotton seeds obtained therefrom. This question was

answered against the assessee and is no more in issue before

us.

The assessee manufactured yarn and cloth from the ginned

cotton. Besides cotton and yarn, cotton waste and yarn waste

were also obtained in the course of the manufacture and

these were also sold by the assessee. Some quantity of the

fabrics produced by the assessee were also exported.

817

During the periods 1-7-73 to 30-6-74 and 1-7-74 to 30-6-75,

the assessee had paid sales tax on the purchase value of the

entire raw cotton purchased by it. It, therefore, claimed a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 12

set off, under rule 41A, of the purchase tax so paid as it

had to pay sales tax on the yarn and cotton waste sold by

it. It also claimed set off under rule 43AB in respect of

the three periods other than between 1-7-74 and 30-6-75 but

we are not concerned with this claim. The Sales Tax Officer

allowed only partial relief to the assessee under rule 41A.

He permitted a set off not of the entire purchase tax paid

by the assessee on the raw cotton purchased by it but only

of a part thereof proportionate to the extent of yarn sales.

The Appellate Tribunal however upheld the contention of the

assessee. It allowed a set off of the entire purchase tax

paid by the assessee on the raw cotton, machinery and other

purchases which had been used in the process of manufacture

of cotton-waste. In doing so it followed the principle of

the decision of the High Court in the case of Burmah-Shell

Refineries, (1978) 41 S.T.C. 337. It observed :

``21. ......When the raw-cotton is ginned or ginned

cotton is used in the process of manufacturing

yarn, there is bound to be cotton waste. In view of

these facts, the appellant will also be entitled to

full set-off so far as the purchases of cotton are

concerned, which have resulted in the production of

taxable commodity i.e. cotton waste. Each and every

ounce of cotton is used in the manufacture of

cotton waste which is a taxable commodity. The

question of, therefore, allowing proportionate set-

off so far as the purchases of cotton or machinery

which are used in manufacturing of cotton waste

does not arise. The appellant is entitled to full

set-off so far as purchases of cotton machinery and

other purchases, which are used in the manufacture

of cotton waste, a taxable commodity. There is no

conflict in the decisions given by the Tribunal in

earlier rulings given in the appellant's own cases.

No such argument of production of cotton waste by-

product simultaneously was canvassed. All that was

canvassed was that yarn waste was a taxable by-

product. Hence, full set-off on purchase of cotton

be allowed. Tribunal negatived this contention by

pointing out that there is no simultaneous

production of yarn and cloth. First yarn is

manufactured and then cloth. Thus question of

referring this issue to larger Bench does not

arise. The cases will have,

818

therefore, to go back to the Assistant Commissioner

for deciding the quantum of set-off admissible

under Rule 41-A on these basis for all the

periods."

The Tribunal, however, directed that the deductions

should be so allowed as not to result in a double deduction

of the same amount of purchase tax.

Aggrieved by the order of the Tribunal, the Commissioner

of Sales Tax filed petitions for special leave to appeal to

this Court therefrom as no useful purpose would be served by

approaching the High Court on reference in view of the

decision of that Court in the Burmah-Shell Refineries case

on the point at issue having gone against the Revenue. Leave

was granted by this Court on 3-9-90 and hence the four civil

appeals by the Revenue in the case of Phulgaon Cotton Mills

Limited.

Before dealing with issue on the interpretation of rules

41 and 41A which has been debated before us, we wish to

point out the difficulties encountered by us as the facts in

the case of Phulgaon Cotton Mills are not quite clear from

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 12

the record. From the Tribunal's order, it is seen that,

during the periods 1-7-75 to 30-6-76 and 1-7-76 to 30-6-77,

the assessee purchased no raw cotton from unregistered

dealers and no purchase tax was levied thereon.

Nevertheless, some relief under rule 41A was allowed by the

Officer in the assessments for these periods as well. The

basis on which a claim was made, and partially allowed,

under rule 41A in respect of these periods is not known.

Also, the Tribunal has allowed full relief on the basis that

since cotton was used in the manufacture of cotton waste,

the assessee was entitled to relief in respect of purchase

tax paid on raw cotton though for these years there was no

such tax. But the order of the Tribunal refers also to "set

off so far as purchases of machinery and other purchases''

indicating that perhaps some purchase tax had been paid in

respect of those purchases and set off had been sought in

respect thereof. But, even assuming this, the discussion

regarding cotton-waste appears to be pointless since,

admittedly, the yarn manufactured was liable to sales tax

and, on the Tribunal's reasoning, this was sufficient to

enable the assessee to claim set off of the purchase tax

paid on cotton, machinery and other materials used in the

manufacture. But these aspects have not been touched upon

before us. The arguments before us, as we shall refer

presently, revolved round a very simple issue. We shall

discuss this issue

819

and leave the other aspects touched upon above to be

clarified, if need be, when the assessment is finally redone

in the light of our judgment.

Shri Dholakia, learned counsel for the State of

Maharashtra, submits that the issue in these appeals is a

very simple one. Rules 41 and 41A are intended to give

relief to a dealer in respect of purchase of goods which are

used in the manufacture of taxable goods for sale, the clear

idea being that where the manufactured goods will also be

liable to sales tax in the hands of the manufacturer there

should be a relief of the taxes paid by him on the goods

purchased by him for use in such manufacture, so as to avoid

double taxation. In the Bharat Petroleum case, the

manufactured goods viz. pure kerosene were neither sold by

the respondent so as to attract sales tax in his hands nor,

indeed, liable to sales tax at all for the first three

months. So also, in the case of Phulgaon Cotton Mills, the

cotton purchased on payment of tax was used for the

manufacture of cloth which was not liable to sales tax. A

set off cannot be allowed merely because a bye-product or

waste product (viz. the acid sludge in the one case and the

cotton waste in the other) was sold for a nominal turnover

which was subject to tax. Even assuming that the sulphuric

acid or cotton purchased can be said to have been used for

the manufacture of two commodities (viz. kerosene and acid

sludge in the one case and cloth and cotton waste in the

other), the set off under the rules relied upon should be

split up proportionately and allowed only to a proportionate

extent, the proportion being decided on the basis of the

respective turnovers of the taxable and non-taxable goods.

He submits that though the rules do not specifically provide

for such a bifurcation, an apportionment of such nature is

almost invariably implicit in a tax law and is also

consonant with the object and purpose of the rules. He,

therefore, submits that the High Court and Tribunal ought to

have restricted the relief only to a proportionate extent as

done by the sales tax officer. He points out that the basis

on which the apportionment was made by the officer had not

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 12

been specifically challenged before the appellate

authorities and is not in issue before us.

On the other hand, Sri Bobde, learned counsel appearing

for Bharat Petroleum laid stress on two aspects of the rule.

First, he points out that, under the rule, it is not a

requirement that the manufactured goods have to be sold by

the manufacturing dealer himself. The fact is that the

kerosene constituted taxable goods after 1.4.61 and was sold

by the marketing company. The second aspect of the rule is

that, admittedly, the

820

sulphuric acid purchased was wholly used in the manufacture

of two items-kerosene and acid sludge - one of which viz.

the sludge was taxable and also subjected to tax. Once this

condition is fulfilled, the amount of set off is specified

in the rule itself as the amount of purchase tax paid on the

goods so used and cannot be scaled down proportionately

merely because, according to the department, the turnover of

the taxable goods is insignificant. Sri Rana, learned

counsel appearing for the Phulgaon Cotton Mills, adopts this

argument mutatis mutandis.

We have given deep thought to these contentions and we

have come to the conclusion that, plausible and attractive

as the argument urged on behalf of the State is, the

conclusion arrived at by the High Court and the Apellate

Tribunal has to be upheld. But before dealing with this

aspect, we may dispose of two minor questions. The first

which arises in the Bharat Petroleum case is whether rule 41

contemplates that the goods purchased by the dealer should

be used for manufacture of taxable goods for sale by him.

The High Court has given good reasons, with which we are

inclined to agree, for holding that no such restrictions can

be read into this rule but this contention is of no

significance in view of our conclusion that the assessee

would be entitled to the set off claimed even on the basis

of the taxable sales of acid sludge effected by it. The

other point is whether the assesees can be said to

manufacture ``acid sludge'' and ``cotton waste''

respectively. It is suggested for the State that the

assessees are purchasing acid and cotton for the manufacture

of kerosene and yarn/cloth respectively and it is ludicrous

to suggest that the assessees are purchasing sulphuric acid

and cotton for manufacturing acid sludge and cotton waste.

Put like that the assessee's contention seems a little

artificial. But the contention is not really absurd. For,

the assessees do purchase sulphuric acid and cotton for use

in a manufacturing process which yields not only kerosene

and yarn/cloth but also acid sludge and cotton waste. As

pointed out in State of Gujarat v. Raipur Manufacturing Co.

Ltd.,(1967) 19 S.T.C.1, where a subsidiary product is turned

out regularly and continuously in the course of a

manufacturing business and is also sold regularly from time

to time, an intention can be attributed to the manufacturer

to manufacture and sell not merely the main item

manufactured but also the subsidiary products. There is also

no evidence on record to suggest, at least so far as acid

sludge is concerned, that it is not a commercial commodity

with a market but an item of waste. The contract with

Dharmsis speaks to the contrary and moreover, as pointed out

by the High Court, the assessee had been

821

practically compelled by the Department to apply for and

obtain a recognition certificate for the manufacture of

sludge and it had also paid tax as dealers in acid sludge.

These two contentions have, therefore, to be rejected.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 12

Turning now to the main question, we are inclined to

agree with respondents' counsel that they are entitled to a

set off of the entire tax paid by them on the purchases of

sulphuric acid and cotton respectively. The only condition

under the rule is that the goods purchased on payment of tax

should have been used in the manufacture of taxable goods

for sale. Their concurrent user for the manufacture of

another item of goods which may or may not be taxable is

immaterial though we may point out that in the Bharat

Petroleum case, the kerosene was also taxable for nine

months in the year and in the case of Phulgaon Cotton Mills,

yarn was also manufactured and it was subject to tax. Sri

Dholakia contends for an implicit principle of apportionment

on the basis of turnovers of various items of goods

manufactured and restriction of the quantum of set off to a

proportion based on the turnover of taxable goods to the

total turnover. He cited certain decisions under the Income-

tax and Sales Tax Acts in support of this contention :

Anglo-French Textiles v. C.I.T., (1954) 25 I.T.R. 27, S.C.;

Tata Iron & Steel Co. v. State, A.I.R. 1963 S.C. 577 and

Best & Co. v. C.I.T.,(1966) 60 I.T.R. 11, S.C. We do not

think these cases are of assistance. The first two cases

dealt with the question as to when profits and gains can be

said to accrue or arise in a manufacturing business and the

third held that when a receipt is a composite one of capital

and revenue nature, it is open to the Revenue to apportion

the same and bring the latter to tax. These are situation in

which the taxable element is severable. Under the rules

presently under consideration also, situations are

conceivable where such severance is implicit. For instance,

suppose the cotton purchased is utilised partly for

manufacture of cloth that is taxable and part for

manufacture of cloth that is not taxable or partly for the

manufacture of yarn which is taxable and is sold and partly

for manufacture of cloth which is not taxable. In these

instances, it is clear that only some of the cotton is

utilised for the first purpose and some for the second

purpose and so only the purchase tax paid in respect of the

quantity utilised for the first purpose will be eligible for

set off. But the type of user with which we are concerned

is a composite one in which it is not possible to correlate

any part of the purchased goods as having gone in for the

purpose of manufacture of taxable goods. The position is

picturesquely brought out in

822

the case of Bharat Petroleum. The entire sulphuric acid

purchased has no doubt been used in the manufacture of

kerosene though perhaps not a drop of acid clings to the

kerosene manufactured. Equally, the entire sulphuric acid

has gone into the composition of the acid sludge. The

3048.760 M.T. of acid have dissolved the impurities in the

crude oil and conglomerated with them to constitute 3541.485

M.T. of acid sludge. Having regard to the nature of the

interactions here, it is incontrovertible that the entire

sulphuric acid purchased has gone into the manufacture of

the sludge. The rules do not require that the purchased

goods must have been used only for the manufacture of

taxable goods for sale. In this situation, it is not

possible to cut down the quantum of relief clearly outlined

in the rule on the basis of some general principle claimed

to underlie the provision. As Sri Bobde rightly pointed out,

the basis for the relief provided is not very clear cut.

Various reliefs have been provided in a group of rules which

come in for application in various situations. The relief

may be based on the principle that the manufactured product

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 12

is taxed either in the hands of the same assessee or in

someone else's hands, or that the manufactured goods are

exported which may yield no tax but earn foreign exchange,

or even that the purchases are utilised for manufacture of

goods in the State thus contributing to the industrial

development of the State. It is, therefore, difficult to

read into the provision a quantitative correlation of the

goods resulting in a taxable turnover and the purchases of

raw materials on which tax has been paid. In this

background, the straight forward answer to the question

raised lies in the literal interpretation of the language of

the rules without straining to discover some doubtful

principle for denying relief.

For the above reasons, we agree with the view taken by

the High Court and followed by the Tribunal and dismiss

these appeals. We, however, make no order regarding costs.

N.P.V. Appeals dismissed

823