1975 (7) TMI 93 - AT - Income Tax

Summary

Issues Involved:
1. Liability to pay purchase tax under Section 5A of the Kerala General Sales Tax Act (KGST Act) for converting timber logs into scantlings and planks.
2. Interpretation of the term "manufacture" under the KGST Act.
3. Applicability of case law and precedents in determining whether the conversion of timber logs constitutes manufacturing.

Detailed Analysis:

Liability to Pay Purchase Tax under Section 5A of the KGST Act:
The appellants, timber dealers, reported a taxable turnover and claimed exemptions. The Assessing Officer (AO) found that a significant portion of their purchases were from unregistered dealers and converted into scantlings and planks. Consequently, the AO assessed the appellants on a purchase turnover of Rs. 93,248.66 under Section 5A of the KGST Act, which mandates purchase tax on goods consumed in the manufacture of other goods. The first appeal confirmed the liability under Section 5A but remanded for further investigation on certain transactions.

Interpretation of the Term "Manufacture":
The appellants contended that converting timber logs into scantlings does not involve a manufacturing process and thus should not attract tax under Section 5A. They cited several judgments to support their claim that mere conversion does not amount to manufacturing. The Tribunal examined various precedents, including:

- Ramaswami & Ors. vs. The State of Andhra Pradesh: The High Court held that converting logs into planks does not constitute manufacturing as no new substance is created.
- Sindhu Ram Atam Parkash vs. The State of Haryana: The court ruled that converting logs into planks does not result in a new article and thus is not manufacturing.
- Mohanlal Vishram vs. CIT of Sales Tax, Madhya Pradesh: The court held that converting timber into battens does not alter its character as timber.

However, the Additional State Representative argued for a broader interpretation of "manufacture," suggesting that the term should be understood in its common usage rather than a technical sense. He cited the Kerala High Court's ruling in CIT, Kerala vs. Casino (Private) Ltd., which supported a liberal interpretation of "manufacture."

Applicability of Case Law and Precedents:
The Tribunal analyzed several rulings to determine whether the conversion of timber logs constitutes manufacturing:
- Shaw Brothers and Company vs. The State of West Bengal: Held that sawing planks from timber amounts to manufacturing.
- Bacha Tewari and Another vs. Divisional Forest Officer: Held that chopping timber into firewood is a manufacturing process.
- A. Hajee Abdul Shukoor and Company vs. The State of Madras: Held that raw hides and skins and dressed hides and skins are different commodities.

The Tribunal concluded that converting timber logs into planks or scantlings results in a new article with different uses and characteristics, thus constituting manufacturing under Section 5A. This interpretation aligns with the rulings of the Calcutta, Madhya Pradesh, and Orissa High Courts.

Separate Judgments Delivered:
- Majority Opinion: The Tribunal, following the majority opinion, held that the appellants are liable to be assessed under Section 5A of the KGST Act. The conversion of timber logs into scantlings and planks is considered manufacturing, creating a commercially new article. Consequently, the second appeal was dismissed.
- Dissenting Opinion (M. Mohammed Ibrahim): The dissenting member argued that the conversion of timber logs into planks does not constitute manufacturing. He cited the Karnataka High Court's ruling in The State vs. Raghurama Shetty and other Supreme Court judgments to support the view that no transformation occurs merely by cutting logs into planks.

Final Order:
In view of the majority opinion, the second appeal was allowed, and the STO was directed to modify the order of assessment, deleting the turnover included under Section 5A. Refund of excess tax, if any, was ordered accordingly.