TMI Blog1980 (7) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... it is necessary to state that the assessee is a company which is engaged, inter alia, in the manufacture of nylon yarn. In 1969, the Inspector of Central Excise informed the assessee that it should apply for a licence for manufacture of polymer chips. Since the assessee, according to it, was engaged in the business of manufacturing nylon yarn, it explained to the Asst. Collector of Central Excise in November, 1969, that in the course of its manufacture of nylon-6 from caprolactum, production of polymer chips formed only an intermediate stage and could not be treated as independent products in the continuous and integrated process of manufacture of nylon yarn. The assessee, therefore, disputed its liability to pay excise duty on the production of polymer chips. In December, 1969, the Asst. Collector of Central Excise did not accept the assessee's plea and asserted that the production of polymer chips was liable to excise duty and the assessee's attention was invited to s. 3 of the Central Excises and Salt Act, 1944, and r. 9 of the Rules made thereunder. On January 23, 1978, the Asst. Collector of Central Excise, Poona, issued a show-cause notice to the assessee on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nylon-6 produced by the assessee was a petrochemical and the assessee was entitled to higher development rebate in respect of the plant and machinery installed for that purpose, in view of the fact that it was covered by item (18) of the Vth Schedule to the I.T. Act, 1961. Being aggrieved by the aforesaid decision on this aspect also, the revenue went up in appeal before the Tribunal. Before the Tribunal, it was pointed out on behalf of the revenue that nylon-6 could not at all be called petrochemicals. In this connection, reliance was placed on the opinion of one Dr. B. S. Ramanathan, Chief Chemist, Central Revenues Control Laboratory, to which our attention was also drawn during the hearing of the reference and reliance was also placed on a book by G. A. Purdy " Petrochemical Prehistoric to Petrochemicals ". In this connection, reliance was also placed on two decisions on this point--one given by the Tribunal of the Allahabad Bench and the other by the Bombay Bench, and these were elaborately discussed and evidence was adduced on this point and these decisions were also made part of the records of this case and have also been filed before us. The decisions of these two. Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utes, normally, a charge is created which may also be described as a declaration of liability, namely, indicating what will be liable to taxation. The second stage is the quantification of that liability in the form of an assessment. The third stage is the recovery. This is normally the well-settled pattern. In fiscal statutes the mischief of taxation is on the happening or occurrence of the taxable event. Different taxes provide for the different kinds of taxable events. The sales tax is a tax on sale. Sale of goods attracts the duty, provided the sale is dutiable and the assessee comes within the purview of the Act. Similarly, under the Central Excises and Salt Act, 1944, the duty is attracted on the production or the manufacture of the goods unlike the sale of goods. In income-tax, similarly, it is attracted on the income of the year, not on the receipt of money on a particular occasion as such. In order to appreciate the liability under central excise, it is necessary to refer to certain provisions of the Central Excises and Salt Act, 1944. Under the said Act, s. 3 provides that there shall be levied and collected in such manner as may be prescribed duties of excise on all ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 which deals with the duty chargeable only on removal of the goods from the factory premises or from an approved place of storage. Sub-rule (1) of the said r. 49 stipulates that payment of duty shall not be required in respect of excisable goods made in a factory until they are about to be issued out of the place or premises specified under r. 9 or are about to be removed from a store-room or other place of storage approved by the Collector under r. 47. The proviso to the said sub-r. (1) stipulates that the manufacturer shall on demand pay the duty leviable on any goods which are not accounted for in the manner specifically provided in these rules, or which are not shown to the satisfaction of the proper officer to have been lost or destroyed by natural causes or by unavoidable accident during handling or storage in such store-room or other approved premises. The purpose of reference to this provision of the Central Excises and Salt Act, 1944, and the Rules thereunder is to emphasise that the taxable event under the Central Excises and Salt Act, 1944, is on the manufacture or production irrespective of or independent of future user either in the manufacture of further goods or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court reffered to the decision of the Full Bench of the Supreme Court in the case of In re Bill to amend section 20 of the Sea Customs Act, 1878, AIR 1963 SC 1760, 1776, where Chief Justice Sinha observed for the Full Bench of the Supreme Court as follows: " This will show that the taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. We may in this connection contrast sales-tax which is not imposed with reference to goods sold, where the taxable event is the act of sale. Therefore, though both excise duty and sales tax are levied with reference to goods, the two are very different imposts ; in one case the imposition is on the act of manufacture or production while in the other it is on the act of sale. In neither case, therefore, can it be said that the excise duty or sales tax is a tax directly on the goods, for, in that event, they will really become the same tax. It would thus appear that duties of excise partake of the nature of indirect taxes as known to standard works on economics and are to be distinguished from direct taxes like taxes on property and income. " Referring to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessees whose turnover exceed the minimum limit indicated in the Act, were liable to pay sales tax on the sales effected and the taxable event took place on the sale. Similarly, in the case of the Central Excises and Salt Act, the tax liability accrues on the manufacture and production of the goods. This aspect was also highlighted in the case of CIT v. Royal Boot House [1970] 75 ITR 507 (Cal). About the liability under the Sales Tax Act, it was held by this court there that where the assessee followed the mercantile system of accounting and had made a provision for its payment in its account, even though the assessee had not actually paid the tax over to the authorities, but had only made a provision for the same, the assessee was entitled to deduction in respect of the provision for sales tax from his income under s. 10(2)(xv) of the Indian I.T. Act, 1922. It was pointed out that under the provisions of the sales tax statute the liability was not dependent upon assessment or payment but was an obligation to pay the tax either annually, quarterly or monthly, as the case may be. The Supreme Court observed in the case of Kedarnath jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed, the appeal destroyed the finality of the decision. Further, the excise dept. was still raising demands against the company for the excise duty in spite of that decision of the Delhi High Court. In these circumstances, the Allahabad High Court was of the view that s. 41 was not attracted at all and the ITO could not be permitted to take recourse to s. 41(1) on the ground that he would be able to undo the mischief later on by giving relief to the petitioner-company under s. 154 of the Act. The ITO had no jurisdiction to invoke s. 41(1) of the Act and will have to tax after allowing deduction of Rs. 2,87,60,109. The Allahabad High Court was of the same view with regard to current liability. The company was following the mercantile system of accounting which could legitimately claim a deduction in respect of the business liability even if such a liability had not been quantified or paid or even when such liability had been disputed. The assessee was, therefore, entitled, according to the Allahabad High Court, to claim deduction in respect of the liability to pay excise duty for which it had made a provision in its account books. In the said decision, reference was made to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the second question, we have to bear in mind that the question involves interpretation of item (18) in Sch. V to the I.T. Act, 1961. Under s. 33(1)(b)(B)(i) of the said Act certain development rebate stipulated in the said section is granted in respect of certain plant, machinery and articles and item (18) of Sch. V, as it stands today, reads as follows: " (18). Petrochemicals including corresponding products manufactured from other basic raw materials like calcium carbide, ethyl alcohol or hydrocarbons from other sources. " In order to appreciate this question, it may not be inappropriate to refer to the legislative past. In Part A of Sch. V of the I.T. Act, 1961, as it applied to the assessment years 1962-63 and 1963-64, man-made fibre other than viscose rayon were included in the general chemicals. At that time, Pt. A of Sch. V, included several items and item 4 was " chemicals which read as follows : " 4. Chemicals (other than fertilisers) of the following types (a) Inorganic heavy chemicals; (b) Organic heavy chemicals; (c) Fine chemicals (including photographic chemicals); (d) Synthetic rubber; (e) Man-made fibres, other than viscose rayon; (f) Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance was placed on behalf of the revenue on the decision of the Supreme Court in the case of Porritts Spencer (Asia) Ltd. v. State of Haryana [1978] 42 STC 433 ; AIR 1979 SC 300; [1979] 1 SCR 545. There the Supreme Court had to construe whether dryer felts made out of cotton or woollen yarn by the process of weaving according to the warp and woof pattern and commonly used as absorbent of moisture in the process of manufacture in paper manufacturing units fell within the ordinary and common parlance meaning of the word " textiles " in item 30 of Sch. B to the Punjab General Sales Tax Act, 1948, and as such were exempt from tax. It will be instructive, to appreciate this decision, to refer to item 30 of Sch. B to that Act, which reads as follows: " All varieties of cotton, woollen or silken textiles, including rayon, artificial silk or nylon, whether manufactured by handloom or powerloom or otherwise but not including pure silk fabrics, carpets, druggets, woollen durees and cotton floor durees. " The Supreme Court, after discussing several relevant authorities on this point, observed that textiles in item 30 in Sch. B to that Act must be interpreted according to its popular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be urged that nylon being a textile could not be considered to be petrochemical within item (18) of Sch. V to the I.T. Act, 1961. As we have noted, the expression "textile", at item 30 of Sch. B of the Act, with which the Supreme Court was dealing, had an extended meaning. In that context, the expression " dryer felts " was considered to be textile. That decision, in our opinion, does not in any way support the contention of the revenue that nylon-6, with which we are concerned, if it otherwise comes within the expression " petrochemical " as understood by the people who deal with the subject " petrochemicals ", then the same could not be considered to be petrochemical. Reliance was also placed on the decision of the Allahabad High Court in the case of Juggilal Kamalapat Cotton Spinning and Weaving Mills Co. Ltd. v. Textiles Committee, Bombay [1972] 2 Tax LR 2104. There, the learned single judge of the Allahabad High Court was dealing with a writ petition under art. 226 of the Constitution and the question was whether nylon and rayon yarn fell within the definition of " textiles ", because these were made of fibres and also because these were made of artificial silk. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nthetic products. According to the scientists engaged in experiments in the laboratory, plastic and nylon had definite connotations and on account of the fact that they were alike products or were drawn from essentially the same class of articles, there was no overlapping in understanding the words. Undoubtedly, the imaginative manufacturer with the assistance of the scientific knowledge available to him made a hundred and one uses of nylon, but essentially in the commercial field, nylon belonged to the textile group while plastics belong to a non-textile section. In the commercial sense, nylon (both twine and fabric) was different from " plastic goods Therefore, nylonware or twine would not be covered by the terms plastic in entry No. 7C of the said notification dated 30th December, 1976, dealing with taxable goods and accordingly it was held that nylon goods would be exigible to tax at the rate under s. 5(1) of the Act and not at the higher rate at 7 per cent. Entry 7C of the notification provides as follows: " Plastic celluloid, bakelite goods and goods made of similar substance, plastic sheets and fabrics and articles made of such sheets and fabrics. " The contention was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as dealt with as oil seed and groundnut was mostly used for manufacture of groundnut oil. Groundnut was, therefore, oil seed for the purpose of purchase tax under the U.P. Sales Tax Act, 1948. Learned advocate for the revenue drew our attention to the observations appearing at para. 3 of the said judgment, where Hegde J. noted that there could hardly be any doubt that in commercial circles groundnut was dealt with as oil seed. His Lordship further observed that commercial journals and newspapers while collecting the market price of oil seeds list the groundnuts as one of the species of oil seed. Learned judge went on to observe that it was clear from the conclusion that in commercial circles groundnut was treated as oil seeds. Reliance was placed on the aforesaid observations for the proposition upon which the revenue had relied, in the instant case, before the Allahabad Tribunal indicated, in the words of the Tribunal, " on the other hand, the revenue had filed certain papers at pages 159 to 196 of the paper book to show that nylon-6 is not petrochemical ". At pp. 159 to 171, the revenue has filed various papers showing the nature of (the business of) M/s. J. K. Synthetic (the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we may incidentally mention that the Full Bench of the Kerala High Court in the case of CIT v. West India Steel Co. Ltd. [1977] 108 ITR 601, after referring to several decisions, had come to a contrary conclusion. But we have already mentioned that we are not concerned with the expression " iron and steel (metal) ". While we are on this it may also be instructive to refer to the fact that Sch. V includes certain items which give an indication as to how these should be construed whether by extended meaning or by circumscribed meaning. For example, " iron and steel " is indicative that it should be construed with the expression " metal Similarly, zinc is circumscribed by the expression " metal " in item No. (2). The expressions " coal, lignite and iron ore " are also so indicative. Then, fertilisers are defined to mean certain kind of fertilizers. Item No.(17)is also indicative, viz., electronic equipment, is described as certain types of equipments. But the expression " petrochemical " in item No. (18) is an inclusive definition because it provides petrochemical including the well-known expression in the statute and extends the meaning of the expression. Bearing the aforesaid princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eze; it is also an intermediate in the manufacture of synthetic fibres such as terylene (Petroleum-Pre-historic to Petrochemicals by G. A. Purdy, pp. 434-435). The term, however, has not been defined in IS: 4639-1968, entitled 'Glossary of Petroleum Terms'. From the above, it is seen that nylon-6 manufactured from caprolactum may not, in my opinion, be covered by the term 'petrochemical'. As regards caprolactum, it is an intermediate which constitutes the raw material for the production of nylon-6. It may be produced from cuclohexane, benzene or toluene as primary raw materials. Caprolactum is monomer which can be polymerised to nylon-6. As already stated above, petrochemicals in general are primary and intermediate compounds between petroleum or natural gas and finished products Thus, since the scope of the term 'petrochemicals' is rather wide, caprolactum, in my opinion, may be considered as a petrochemical." The Tribunal has noted the said opinion. But it has to be borne in mind that the Tribunal also referred to the decision of the Bombay Tribunal as also to the decision of the Allahabad Tribunal where Dr. Ramanathan's view had been analysed and it had been observed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee or the association. Thus, the Ministry agreed with the view of the assessee and the Income-tax Officer. In this connection, the assessee has referred to the various letters addressed to the C.B.D.T. which are appearing at pages 154 to 156 of the assessee's paper book. Statement made at bar by the assessee was neither contradicted nor supported at the time of the hearing and, therefore, the result is that the statement made by the assessee stands. As such, even the opinion of the Ministry of Petroleum was that nylon-6 is petrochemical and the assessee was entitled for higher development rebate and exemption u/s. 80E(1) of the Act." For this, the Tribunal also found it unsafe to rely on the said opinion of Dr. Ramanathan, when the revenue itself had not relied and proceeded upon the same. Reliance was also placed, as we have mentioned before, on certain observations in the book published under the heading Petroleum--Pre-historic to Petrochemical by G. A. Purdy, at p. 458, where at p. 448 of the book it was observed as follows: " Production of Basic Hydrocarbons: The term petrochemical has many definitions, all of which have supporters. Chemicals that origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggestion of the revenue that the term' petrochemical 'does not include the end product. The wide range of materials placed by the assessee before us leaves no room for doubt that nylon is included in the term' petrochemicals'. It may be mentioned that it is not an end product. It has no use or utility as such. It is only a raw material for the textile industry ; moreover it can be converted back into caprolactum. There is equally no warrant for the suggestion of the revenue that a petrochemicals industry is one which itself starts with petroleum oil as a raw material. If that were so, only the refineries which deal with petroleum oil as recovered from the wells would be eligible for the reliefs. If that were the intention of the legislature it would have expressly referred to refinery instead of referring to petrochemicals, etc., in item No. (18). If the construction advocated by Mr. Hajarnavis is accepted, the entire purpose of the provision in offering incentives to persons to start petrochemicals industry would be defeated as the relief would be available only to refineries which are beyond the reach of the public. In the assessment years 1962-63 and 1963-64, 'man made fibres o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner of Income-tax giving details, reasons and information with following enclosures : (a) Extract from Hack's Chemical Dictionary, (b) Extract from Webster's Third International Dictionary, 1961 Edition, (c) Extract from International Petroleum Encyclopaedia, (d) Extract from the Book 'Petrochemicals the New World of Synthetics' by Ray. T. Wendland, 1969 Edition, (e) Article on 'Petrochemical Dawn of a New Era by Balbir Singh, Dy. Minister, under Ministry of Petroleum and Chemicals which appeared in Polymen India, pages 9 to 10-Aug. 27, (f) Certificate from Mr. V. K. Mathur, Head of the Deptt. of Chemical Engg. Technology, Banaras Hindu University, (g) Certificate from Prof. T. R. Seshadri F. R. S. Emeritus Professor, Deptt. of Chemistry, University of Delhi, (h) Letter from Dr. M. S. Mathana, Director, Indian Institute of Technology, Kanpur, and (i) Certificate from Shri B. Garudadwaja of Indian Institute of Petroleum, Dehradun. (ii) Certificate from Mr. D. S. Varman, Prof. of Fibra Science and Head of Textile Technology Department, Indian Institute of Technology, Delhi (submitted with the company's letter dated 2-3-74 to the Addl. Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AdvocateGeneral of U.P. on behalf of the revenue and dealt with the same in the manner following: " We further advert to the arguments of the Advocate-General that in section 33(1)(b)(B)(i)(a) and section 80K(1), the exemption and/or deduction is allowed to the assessee for certain articles and goods but the exemption or deduction are not allowed to any industry. The Advocate-General has also urged during the course of arguments that if the assessee comes within the exemption clause it should be allowed the benefit; otherwise not. We agree with the principle stated by the Advocate-General and we think that even the assessee cannot have any grievance over it. If the section along with Schedules 5 6 are taken into consideration, this is clear that the deduction or exemption is available to the industry which are producing articles or goods indicated in these Schedules. In this connection, we also appreciate the arguments advanced on behalf of the assessee that an industry is not known by the raw material which it uses but it is known by the finished product which it produces. For example, a glass industry is not known as a sand industry which is the basic raw material for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore we part with this aspect of the matter, we advert to one aspect upon which some arguments were advanced and it is better to express our views. The question is, whether a particular item comes within a particular entry or not is a question of fact or a question of law. It may be that where an interpretation of that item involves the principle which will be required to be followed in a particular case then it may become a question of law. But where there is no dispute as to the principle which is to be followed in interpreting the expression, as in this case, there is no dispute that the expression must be understood in the sense in which the commercial people dealing with the subject-matter of the statute understand it and there is also no dispute as to the other principle required to be followed in construing this expression. Whether in a particular case an item would fall within the expression included in the Schedule, would be a question of fact unless it is contended that there was no evidence on which it was possible to come to the conclusion or the evidence which were there were not relevant evidence that were considered, which is also not the case here. In some cases it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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