TMI Blog1966 (10) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... ence came on for hearing before a Division Bench of the Gujarat High Court consisting of J.M. SHELAT, C.J., and BHAGWATI, J., and the reference was answered in favour of the assessee on 18th November, 1963. The following judgment of the High Court was delivered by SHELAT, C.J.- The question arising in this reference is whether the petitioners can be said to be dealers in cotton within the meaning of the definition of "dealer" in section 2(6) of the Bombay Sales Tax Act, 1953, and whether the sale of 411 bales of Californian cotton effected by them during the assessment year 1953-54 can be included in their total turnover and be charged to sales tax. The petitioners are manufacturers of cotton textile goods and for the purpose of conducting their aforesaid business, they have necessarily to purchase cotton from time to time. During the year 1953-54, the petitioners purchased cotton of the value of Rs. 47,75,769 and out of the cotton so purchased, they sold 411 bales of Californian cotton for Rs. 3,89,445 in two lots on the 31st of May, 1953, to the Khatau Mills Ltd., and the Edward Textile Mills Ltd. The price paid by the petitioners for these 411 bales was Rs. 3,91,433, wherea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n at times and to sell such cotton and that it was admitted on behalf of the petitioners that in other years also, there had been sales of such surplus cotton. The Tribunal also observed that the Memorandum of Association of the petitioner-company set out amongst other objects, for which the company had been established, buying of cotton-seeds, cotton, silk, wool etc., and the sale of the same and that article 87 of the Articles of Association of the company provided that the company had power to buy and sell cotton-seeds, cotton etc. The Tribunal at the same time observed that though a large number of objects are usually mentioned in the Memorandum of Association of companies, all such objects are not necessarily implemented or realised. However, the Tribunal was of the view that there had always been a possibility of surplus cotton having to be sold and that as the imported Californian cotton in question could not be used in the mills, that cotton should be treated as surplus cotton liable to be sold. According to the Tribunal, this possibility must have been present in the mind of the petitioners from the beginning and though occasions for such sales had not been numerous "it ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners' letter shows that they had first entered into an agreement with Messrs Ramdas Khimji Bros. of Bombay on the 15th of January, 1953, for procuring 500 bales of American quality of strict middling type with 1-5/32" length. According to them, the shipment normally used to arrive after about six months and therefore they apprehended that they would run short of the requisite cotton before the supply arrived from America. They, therefore, entered into a contract with Gopal Mills Co. Ltd., on the 31st of January, 1953, for the purchase of 300 bales of the same type of cotton. To their surprise, the indented goods arrived much earlier than was expected, namely, on the 8th of April, 1953. It was in these circumstances that there was a surplus of cotton and consequently, they had to look out for a buyer to purchase the aforesaid surplus cotton. Since the indented goods were to arrive at Bombay, they entered into contracts of sale with Bombay purchasers in order to save such expenses as freight etc. According to this letter, these sales had to be resorted to by them so that their investment may not unnecessarily be blocked up in surplus cotton. They also made it clear that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a dealer. Those decided cases also lay down that the burden of establishing those circumstances offsetting the initial intention or object, is on the taxing authority. They also show that profit motive was an equally relevant factor in considering the question whether the sales effected by an assessee mean business or business activity incidental to the business in respect of which the assessee is a registered dealer or a dealer liable to be registered. Now, the fact that the Memorandum of Association of the petitioner-mills or article 87 of the Articles of Association, gave power to the petitioners to deal in cotton-seeds, cotton, silk, wool etc., does not mean, as the Tribunal itself has observed, that the petitioners have been dealing in those commodities and, therefore, that fact by itself would not be a determinative factor. Similarly, the fact that the petitioners have effected sales of cotton during the years prior to the assessment year, though an indication, is not a conclusive criterion, as the determination of the question before us depends upon the cumulative effect of the facts and circumstances due to which the sales were effected by the petitioners. As we have held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales in question. These bales had to be sold as the petitioners found that as cotton first purchased by them arrived earlier than anticipated, their purchase of these bales remained in their hand as surplus and which, if retained, would unnecessarily mean blocking up of their capital. It would not, there- fore, be right to say as the Tribunal has held, that the sales were made either with the anticipation of profit or for the purpose of avoiding loss, that is to say, loss in the business of manufacturing textile goods. The facts in the case clearly disclose that the petitioners purchased the cotton for the purpose of using it in their business of manufacturing cotton textiles, that they sold the surplus cotton, not with the object of making profit, but because it was redundant, and if not sold, would mean unnecessarily blocking up of their finance which no businessman with any reasonable prudence would do. Merely because there was a possibility in a manufacturing business of there being some surplus of raw materials left over, even if coupled with the circumstance that the businessman was aware of such possibility, would not render the disposal of such surplus as part of or inciden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Sales Tax in revision. A revision application to the Sales Tax Tribunal, Bombay, also met with no success. At the instance of the respondents, the Tribunal referred the following question to the High Court of judicature at Bombay: "Whether on the facts and circumstances of the case, the Tribunal was right in holding that the respondents were dealers in respect of cotton and the sale of cotton was liable to be taxed." In July, 1959, the High Court called for a supplementary statement of the case from the Tribunal observing: "The statement of facts does not indicate whether the assessee was as an incident of its normal business disposing of cotton purchased by it, nor does it indicate whether the sale of cotton in question was one of many such transactions in the course of its business. If the sale of 411 bales of Californian cotton was a casual transaction, not as an incident of the business of the assessee, but because the cotton was regarded as unsuitable for manufacturing yarn or for some other similar reasons, it cannot be said that it became a part of the business activity of the assessee and made it a dealer in cotton." The Tribunal, thereafter, submitted a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract with Gopal Mills Co. Ltd. on 31st January, 1953, for the purchase of 300 bales of same type. Surprisingly our indented goods arrived on 8th April, 1953. Hence, a position of over-supply arose and we had actually to move out for a buyer for adjusting our supply position to normality and as this type of cotton was normally consumed by Bombay mills, we tried to find customer in Bombay, and disposed of the cotton in Bombay after taking permission of the Textile Commissioner of the Government of India, without which permission no sales can be effected. We sold off our indented goods, as we did not intend to sell the bales purchased from Gopal Mills Ltd., because there would be some saving in freight; if we would bring the indented goods to Ahmedabad, and sell the cotton bales purchased from Gopal Mills and despatch them to Bombay, there would be an unnecessary expenditure for charges of freight etc. 5.. The sales had to be effected because, otherwise, our finance also would have been blocked up. 6.. Again, as we had purchased the goods sold under an user's import licence, there was definitely no intention to trade in the indented cotton. Hence, the sales cannot be imputed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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