Calcutta High Court
Delhi Cloth And General Mills Co. Ltd. vs Commercial Tax Officer, Central ... on 22 January, 1975
Equivalent citations: [1975]36STC575(CAL)
JUDGMENT Chittatosh Mookerjee, J.
1. The petitioner-company is a manufacturer of various kinds of textile goods. Its 1factories are situated at Delhi. It sells articles manufactured in its factories in different places in West Bengal and it is a registered dealer under the Bengal Finance (Sales Tax) Act, 1941.
2. The Commercial Tax-Officer, Central Section, West Bengal, made an assessment order for the four quarters ending 30th June, 1962, in respect of the petitioner's business [vide annexure D to the petition). The Commercial Tax Officer by his assessment order disallowed the claim of the petitioner for exemption from payment of tax under Section 5(2) (a) (vi) of the Bengal Finance (Sales Tax) Act read with Rule 3(28) of the Sales Tax Rules in respect of sales of stitched bed-sheets and stitched towels amounting to Rs. 1,44,198.13. The Commercial Tax Officer refused to accept the contention of the petitioner-company that the above items were cotton fabrics and subject to the levy of excise duty. The Commercial Tax Officer accordingly disallowed the said claim for deduction and included a sum of Rs. 1,44,198.13 within the petitioner's taxable turnover for the period in question and assessed tax thereupon.
3. The petitioner-company being aggrieved by the said assessment order dated 8th June, 1966, preferred an appeal under Section 20(1) of the Bengal Finance (Sales Tax) Act, 1941. The Assistant Commissioner, Commercial Taxes, Calcutta (South) Circle, dismissed the said appeal. The Assistant Commissioner upheld the views of the Commercial Tax Officer that the petitioner was not entitled to get exemption from payment of sales tax upon the sale proceeds of bed-spreads, bed-sheets, towels and napkins. According to the Assistant Commissioner, the said items were stitched materials and not "cotton fabrics" and, therefore, the petitioner could not claim benefit of exemption under Rule 3(28) of the Sales Tax Rules.
4. The petitioner-company in this writ petition has, inter alia, prayed that the above assessment order dated 8th June, 1966, and also the appellate order dated 19th March, 1968, be quashed, and the respondents be commanded to forbear from demanding and realizing sales tax on the basis of the said impugned assessment order. According to the petitioner-company both the Commercial Tax Officer and the Assistant Commissioner committed errors apparent on the face of records in holding that the bed-sheets, bed-spreads, towels and napkins manufactured in the petitioner's mill and sold during the period in question were not "cotton fabrics" within the meaning of entry No. 19 of Schedule I of the Central Excises and Salt Act, 1944. The said items of sale were exempted under Section 5(2)(a)(vi) of the Bengal Finance (Sales Tax) Act read with Rule 3(28) of the Bengal Sales Tax Rules. Sales tax under the Bengal Finance (Sales Tax) Act, 1941, is payable by dealer on his taxable turnover at the rates specified under Sub-section (1) of Section 5 of the said Act. Sub-section (2) of Section 5 specifies the items for sale which are to be deducted from the gross turnover for the purpose of determining the taxable turnover. Clause (vi) of Sub-section (2) of Section 5 is "such, other sales as may be prescribed". Rule 3 of the Bengal Sales Tax Rules enumerates the different kinds of sales which are exempted from payment of sales tax. Clause 28(a) reads "sales of cotton fabrics, rayon or artificial silk fabrics, woollen fabrics and tobacco other than cigarettes". The following explanation appears below to Clause 28 :
In this clause, the expressions 'cotton fabrics', 'rayon or artificial silk fabrics', 'woollen fabrics' and 'tobacco' respectively, have the same meaning as in items 10, 22, 21 and 4 of the First Schedule to the Central Excises and Salt Act, 1944 (1 of 1944).
5. The Additional Duties of Excise (Goods of Special Importance) Act, 1957, had been enacted to provide :
for the levy and collection of additional duties of excise on certain goods and for the distribution of a part of the net proceeds thereof among the States in pursuance of the principles of distribution formulated and the recommendations made by the Finance Commission in its report dated the 30th day of September, 1957, and to declare those goods to be of special importance in inter-State trade or commerce.
6. Section 2(c) of the said Act lays down:
The words and expressions 'sugar', 'tobacco', 'cotton fabrics', 'woollen fabrics' and 'rayon or artificial silk fabrics' shall have the meaning respectively assigned to them in items Nos. 1, 4, 19, 21, and 22 of the First Schedule to the Central Excises and Salt Act, 1944.
7. The petitioner-company annexed to its writ petition a copy of the letter dated 26th July, 1965, addressed to the Superintendent, Central Excise, Delhi Division, Defence Colony, New Delhi. The petitioner-company requested the Superintendent, Central Excise, to confirm that the bed-sheets, bed-spreads, towels, napkins which were stitched at the end inside the petitioner's mill premises were being cleared from the mills after paying excise duty, additional excise duty in lieu of sales tax and cess. The petitioner-company in the said letter stated that the said articles were cut from pieces in bona fide consumer lengths and the ends of such cut lengths made into bed-sheets, bed-spreads, towels, napkins, dusters. The Superintendent, Central Excise, New Delhi, by his letter dated 17th August, 1965, replied as follows :
It is certified that you have been as a special case permitted by the Board to cut the running pieces of cotton fabrics in the licensed premises and to stitch at both ends for the purpose of making bad-sheets, bed-spreads, cotton towels, cotton napkins and you pay basic duty, additional duty and cess at the time of their clearance on the basis of area of original running length piece of cotton fabrics from which these were made." {vide annexures A and B to the petition).
8. The Commercial Tax Officer in his assessment order (vide annexure D to the petition) and the Assistant Commissioner in his order (vide annexure E to the petition) have also recorded that the petitioner-company manufactured "cotton fabrics", which are cut into pieces. The said pieces were stitched inside the mill premises and made into bed-sheets, bed-spreads, towels and napkins. The only point (to be considered) whether the said stitched pieces were still cotton fabrics and whether their sales were exempted from payment of sales tax.
9. Entry No. 19 of the First Schedule of the Central Excises and Salt Act, 1944, was as follows :
'Cotton fabrics' mean all varieties of fabrics manufactured either wholly or partly from cotton, and include dhoties, sarees, chadars, bed-sheets, bed-spreads, counterpanes and table-cloths, but do not include any such fabric-
(a) if it contains 40 per cent or more by weight of wool;
(b) if it contains 40 per cent or more by weight of silk ;
(c) if it contains 60 per cent or more by weight of rayon or artificial silk ;
(1) Cotton fabrics, superfine-that is to say, (Eighty paise per
fabrics in which the average count of yarn is 48s or square metre.)
more.
(2) Cotton fabrics, fine-that is to say, fabrics (Eighty paise per
in which the average count of yarn is 35s or more square metre.)
but is less than 48s.
(3) Cotton fabrics, medium-that is to say, (Sixty paise per
fabrics in which the average count of yarn is 17s or square metre.)
more but is less than 35s.
(4) Cotton fabrics, coarse-that is to say, (Sixty paise per
fabrics in which the average count of yarn is less square metre.)
than 17s.
(5) Cotton fabrics, not otherwise specified. (Eighty paise per
square metre.)
10. Thus, all varieties of ''cotton fabrics" manufactured either wholly or partly from cotton and containing "cotton fabric" including those containing "wool fabric", "silk fabric" and "rayon fabric" not exceeding the percentage mentioned in entry 19 were covered by the said entry No. 19 of the First Schedule of the Central Excises and Salt Act, 1944. The said term in entry No. 19 expressly mentioned that dhoties, sarees, chadars, bed-sheets, bed-spreads, counterpanes and table-cloths have been included. Maxwell on Interpretation of Statutes, 12th Edition, at page 270, with reference to the "Construction imposed by Statute" observes :
Sometimes, it is provided that a word shall 'mean' what the definition section says it shall mean; in this case, the word is restricted to the scope indicated in the definition section. Sometimes, however, the word 'include' is used 'in order to enlarge the meaning of words or phrases occurring in the body of the statute ; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. In other words, the word in respect of which 'includes' is used bears both its extended statutory meaning and 'its ordinary, popular and natural sense' whenever that would be properly applicable.
11. Thus, it may be legitimately contended that the legislature by providing that "cotton fabrics" within the meaning of entry 19 of the First Schedule of the Central Excises and Salt Act, 1944, would include dhoties, sarees, bed-sheets, bed-spreads, etc., brought within its fold all such articles which answered the said description according to their ordinary, popular and natural senses. It is not disputed that the bed-sheets, bedspreads, towels, napkins, etc., sold by the petitioner-company during the relevant period were manufactured with cotton fabric. According to the dictionary meaning, "fabric" means "things put together ; woven material, and cotton textile material (see Concise Oxford Dictionary, Shorter Oxford Dictionary, Volume I, 3rd Edn.).
12. I find no substance in the contention raised on behalf of the petitioner that entry No. 19 included only those "cotton fabrics" which are manufactured as chadars, bed-sheets, bed-spreads, etc., as such, and not those which are prepared by cutting woven textile materials into shorter lengths and then stitching up the two ends. Entry No. 19 did not specify that bed-sheets, bed-spreads, etc., whose ends have been stitched shall be excluded. As already stated, the said entry has specified that all varieties of cotton including dhoties, sarees, bed-sheets, bed-spreads, etc., would be included. Only when by such stitching the essential nature or character of cotton fabrics is altered or changed the particular article would be outside the ambit of the said entry No. 19. On the other hand, in case such cutting into shorter lengths and stitching of the two ends are accessory to and, therefore, part of the process of manufacturing such bed-sheets, bed-spreads, chadars, etc., cutting and stitching cannot result in putting the finished articles beyond the scope of entry No. 19. In my view, the materials on record do not indicate that in the instant case, by executing works of cutting into shorter lengths and stitching the bed-spreads, bed-sheets, towels, etc., cease to be cotton fabrics. On the other hand, the same continued to be cotton fabrics in their natural and accepted meaning. Such cutting and stitching were really part of the process of manufacturing bed-spreads, bed-sheets, etc.
13. Whether execution of a particular kind of work results in production of a new and different material would depend upon a number of tests-the nature of the work carried out, whether the material undergoes alteration or change in its essential nature and character-or in other words, whether a new product emerges. On the other hand, where no new quality or character is imported there is no transformation of material. In the case of embroidery work or execution of any other artistic work on "cotton fabrics" obviously something is added to the cotton fabrics so as to make new and distinctive materials.
14. The Supreme Court in Tungabhadra Industries Ltd., Kurnool v. Commercial Tax Officer, Kurnool A.I.R. 1961 S.C. 412, considered the question whether hardened or hydrogenated groundnut oil (commonly called vanaspati) is still groundnut oil within the meaning of Rule 18(2) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. The learned Judges of the Supreme Court in Tungabhadra Industries case A.I.R. 1961 S.C. 412, paras. 16-19 observed that even after such manufacturing process there was no change in the essential nature of the groundnut oil.
15. Recently, the Supreme Court in Lt. Governor, Delhi v. Ganesh Flour Mills Co. Ltd. A.I.R. 1973 S.C. 705, held that the tin sheets or tin plates used by vegetable oil dealers were materials intended for being used for packing of goods for sale. According to the Supreme Court, the fact that tin sheets and tin plates had to be subjected to the process of cutting and moulding into tin containers would not by itself take them out of the aforesaid category. The cutting and moulding only facilitated the actual user In packing. The ratio decidendi of the aforesaid decision is that the mere fact that a material undergoes a process is not decisive and the test in these cases is whether by such processing the material undergoes a change in its essential nature and character and whether a new product is thereby manufactured.
16. The decision of the Division Bench of this Court in Ishwardas Kapoor and Sons v. Member, Board of Revenue, Bengal [1960] 1 S.T.C. 153, which was relied upon by the Assistant Commissioner of Sales Tax is clearly distinguishable on facts. The assessees who were dealers in cloths including Benarsi sarees had claimed that no sales tax was payable on sale of hand-woven cloth which after coming out of the loom was subjected to needle work thereby increasing its value. The Division Bench answered the said question thus :
So far as the first question is concerned, in my opinion, the exception with respect to hand-loom-woven cloth applies only to that cloth simpliciter. If its value is increased, other work being carried out upon it, whether it be by hand or by machinery in the way of embroidery, tapestry or the like, then the cloth or the shawl or whatever it may be, is not as it comes from the hand-loom, is not hand-loom-woven cloth simpliciter, but becomes something more than that. In my opinion, the provisions of the section and item 16 apply only to hand-loom-woven cloth which is sold in the same state in which it is when finished and removed from the loom. Therefore, it follows that the answer to the first question is in the negative." (vide page 154 of the reports).
17. Thus, this court had held in Ishwardas Kapoor's case that after execution of needle work a new product which was something more than hand-loom-woven cloth had come into existence. In the instant case, however, mere cutting into shorter lengths and stitching the ends by themselves did not result in a new product. As already stated, the petitioner claimed such cutting and stitching were parts of the manufacturing process of the bed-sheets, bed-spreads, etc., and even after such work the same continued to be cotton fabrics as commonly understood. In Pravin Bros. v. State of Gjuarat [1964] 15 S.T.C. 478, the assessee after purchasing takas of malmal and voil cloth and cutting them into five yards pieces and three yards pieces from them superimposed embroidery work on those pieces and sold the five yards pieces as sarees and three yards pieces as ladies' underwear. A Division Bench of the Gujarat High Court held that because of the embroidery work having been subsequently superimposed on the cloth and the same being not incidental or ancillary process to its manufacture, the cut pieces were not cotton fabrics. According to the Division Bench, stitched embroidery work was something which was an additional thing superimposed on an already manufactured cotton fabric, and it was that additional thing which was neither incidental nor ancillary to the completion of the process of its manufacture which brought it under entry 3 of Schedule E of the Bombay Sales Tax Act, 1959.
18. Mr. Sen Gupta, the learned Advocate for the respondents, himself drew my attention to the recent decision of the Patna High Court in Sri Ram Hosiery Works v. State of Bihar [1974] 34 S.T.C. 320. Untwalia, C. J. (as he then was), delivered the opinion of the Division Bench on the question whether hosiery banyans were exempt from the levy of sales tax under item 23 of Schedule III of the notification dated 1st July, 1959, issued under Section 4(3) (a) of the Bihar Sales Tax Act, 1959. The Division Bench of the Patna High Court held that "hosiery cloth" was not meant to be included in the expression "cotton fabrics" used in the notification and, therefore, the said articles were not exempt from levy of sales tax. Untwalia, C. J. (as he then was), while considering the scope of entry 19 of Schedule I of the Central Excises and Salt Act, 1944, observed that "cotton fabrics" as defined in the said items meant all varieties of fabrics manufactured from cotton. According to the learned Chief Justice, "cotton fabrics" would generally mean woven material. The learned Chief Justice further observed :
The words occurring in item 19 after the word 'include', namely, dhoties, sarees, chadars, etc., go to indicate as to what is meant by cotton fabrics. It means cotton cloth, and although dhoties, sarees, chadars, etc., could be included in the expression 'cotton cloth' because of borders being there or some stitching being there, one could say that they have ceased to be a piece of cotton cloth and, therefore, the word 'include' makes them go within the ambit of the expression 'cotton fabrics'. If the legislature thought to include dhoties, sarees, chadars, etc., by an express language in the expression 'cotton fabrics' and if they meant to include hosiery cloth or hosiery goods in it, they would have surely described them as being Inclusive in the definition. Dhoties, sarees, chadars, etc., in common parlance and description are nearer to the expression 'cotton cloth' than knitted hosiery cloth meant for manufacture of hosiery goods.
19. Thus, the learned Chief Justice of the Patna High Court in Sri Ram Hosiery Works v. State of Bihar [1974] 34 S.T.C. 320 was inclined to hold that dhoties, sarees, chadars, etc., even after being stitched were within the ambit of the expression "cotton fabrics".
20. It is unnecessary to prolong this judgment by referring to various other decisions cited at the Bar as it appears that courts have generally applied the above tests regarding change in the essential nature and character of an article for the purpose of deciding whether a manufacturing process results in production of a new material. Both the Appellate Assistant Commissioner and the Commercial Tax Officer committed errors apparent on the face of records by not applying the correct legal tests. The Commercial Tax Officer did not record any finding whether the value of cotton fabrics manufactured in the petitioner's mill were increased as a result of such cutting and stitching. It is true that the Assistant Commissioner, Commercial Taxes, had observed that as a result of fashioning and stitching the turn-ups and borders the bed-sheets, bed-spreads, towels and napkins changed their earlier character and value and could no longer be treated as cotton fabrics simpliciter. But neither the Commercial Tax Officer nor the Assistant Commissioner applied their mind to the definition of "cotton fabrics" in entry 19, which expressly included dhotles, sarees, chadars, bed-sheets, bed-spreads, etc., within the said expression. When the said entry No. 19 did not exclude stitched bed-sheets, bed-spreads, etc., there was no basis for holding that stitched materials although continued to retain the essential nature of the "cotton fabric" were liable to. sales tax. I, however, make it clear that in case dyeing, printing or embroidery works are made on such bed-sheets, bed-spreads, towels, napkins, etc., the materials may not retain their essential character of cotton fabric and may become something more.
21. In the instant case, there is no finding that apart from cutting and stitching works, any such embroidery, printing or dyeing works were done.
22. In the result, this rule succeeds, and the petitioner is entitled to claim exemption under Rule 3(28) of the Bengal Sales Tax Rules in respect of its sale proceeds of bed-sheets, bed-spreads, towels, napkins, which were stitched in the mill premises.
23. I accordingly make this rule absolute. Let a writ of certiorari be issued quashing the impugned assessment order dated 8th June, 1968 (annexure D to the petition), and the appellate order dated 19th March, 1968 (annexure E to the petition). Let a writ of mandamus be issued commanding the respondents to forbear from making any assessment for sales tax in respect of the petitioner's sale of bed-sheets, bed-spreads, cotton towels and cotton napkins in respect of the four quarters ending on 30th June, 1963. The respondents would be, however, at liberty to make fresh assessment in respect of the said four quarters in accordance with law in respect of sale of goods which were subject to sales tax.
24. There will be no order as to costs.
25. The operation of this order be stayed for 6 (six) weeks.