Andhra HC (Pre-Telangana)
Coromandel Lubricants vs Commissioner Of Commercial Taxes, ... on 13 October, 1995
Equivalent citations: [1996]102STC274(AP)
Author: V. Rajagopala Reddy
Bench: V. Rajagopala Reddy
JUDGMENT V. Rajagopala Reddy, J.
1. The assessee, M/s. Coromandel Lubricants, Visakhapatnam, was a firm dealing in manufacturing and sale of paraffin wax and special lubricant oils. They consisted of four partners. For the year 1980-81, they filed nil returns, stating that the firm has been dissolved and a limited company in the name of M/s. Coromandel Lubricants Pvt. Ltd., has been formed, with the same four partners as directors, simultaneously transferring to the new company, the finished goods, plant and machinery, fittings, raw materials, laboratory equipment, stock of stores, furniture and car of the value of Rs. 9,59,455.28. The value of each item was shown, separately, as follows :
Rs.
Finished goods ... 4,46,960.02 Raw materials ... 56,838.50 Plant and machinery ... 3,46,928.44 Electrical fittings ... 24,804.61 Pipe and fittings ... 16,114.26 Laboratory equipment ... 13,929.72 Furniture ... 5,439.75 Office equipment ... 1,837.62 Motor car ... 11,104.00 Stock of stores ... 35,464.36
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... 9,59,455.28
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2. The Commercial Tax Officer brought to tax, the said amount of Rs. 9,59,455.28 rejecting the objection of the appellant that the above items were sold after the closure of the unit and the said sale could not be treated as "sale". On appeal, the Deputy Commissioner of Commercial Taxes, Kakinada, accepting the contention of the appellant, held that the transfer of plant and machinery, furnished goods, etc., to the new company did not amount to sale and the entire turnover of Rs. 9,59,455.28 was, therefore, excluded from tax. The respondent, in the exercise of the revisional powers conferred on him under section 20 of the Andhra Pradesh General Sales Tax Act, 1957 (for short, "the Act"), by an order dated December 4, 1987, set aside the order of the appellate authority and restored the order of the Commercial Tax Officer holding that the word "business" has a wide meaning under the Act and any transaction incidental to it comes within the ambit of the definition of "business". Similarly the word "sale" means every transfer of property and the combined reading of the definitions of "business", "sale" and "turnover" does not exclude from the ambit of the Act the transaction disputed in the instant case. The decision of the Commissioner is challenged in this special appeal filed under section 23(1) of the Act.
3. The principal contention raised before us was that on the dissolution of the firm and on the formation of a new company, the business of the firm came to an end and the transfer of the plant and machinery, finished goods, etc., to the new company could not be treated as sale of goods in the course of business of the assessee. The levy of tax being on the quantum of turnover of sales or purchases of goods, in the course of trade or business, the sale proceeds of such plant and machinery and stock-in-trade, etc., could not constitute "turnover" and therefore was not exigible to tax. It was also contended, since there was sale of business as a whole, it cannot be treated as incidental to or ancillary to such trade or business. In support of his contentions, the learned counsel relied on several decisions, which will be referred to later.
4. On these facts and contentions the only question that arises is :
Whether, after the dissolution of the firm of the assessee and closure of its business, the sale of plant and machinery, finished goods, raw materials, etc., could be treated as sale "in the course of business" within the meaning of section 2(n) of the Act and the proceeds thereof could be liable to tax ?
5. In order to answer the question, it is necessary to refer to certain definitions given in section 2(1) of the Act. The expression "sale" as defined in clause (n), relevant to our purpose, means -
"Every transfer of the property in goods whether as such goods or in any other form in pursuance of a contract or otherwise by one person to another in the course of trade or business, for cash, or for deferred payment, or for any other valuable consideration or......."
6. Clause (bbb) defines "business" as follows :
"Section 2(1)(bbb) : 'business' includes :
(i) any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture whether or not such trade, commerce, manufacture, adventure, or concern is carried on or undertaken with a motive to make gain or profit and whether or not any gain, or profit accrues therefrom; and
(ii) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern."
7. The word "turnover" as defined in clause (s) means, among others, "the total amount set out in the bill of sale". Under section 5 of the Act tax is leviable on the turnover of sales or purchases of goods. The levy is, therefore, on the sale of goods, i.e., on the transfer of property in goods by one person to another "in the course of trade or business". The definition of "business" as amended by Act 7 of 1966, is an inclusive definition. It means trade, commerce or manufacture or adventure or concern in the nature of trade, commerce or manufacture or adventure or concern in the nature of trade, commerce or manufacture. It also includes any transaction in connection with or incidental to such trade, commerce, manufacture or adventure or concern. The meaning given to the expression "turnover" is comprehensive enough to include any commercial activity which is directly or in any way connected with the business of the dealer.
8. The term "business" as amended, has come up for consideration before the Supreme Court in State of Tamil Nadu v. Burmah Shell Oil Storage and Distributing Co. of India Ltd. [1973] 31 STC 426. The Burmah Shell Company, a dealer in oils, sold scrap consisting of oil drums, hose pipes, advertisement materials, canteen sales, etc., and contended that there was no sale at all in the true sense and even if there was, it was not as a dealer. The Madras High Court held that though the sales were connected with the trading activity of the assessee, it would not be sufficient to hold that the assessee was carrying on business in such sales. The Supreme Court, disagreeing with the view of the Madras High Court, held as follows :
"......... It will be observed that under the definition of 'business' even commercial transactions carried on without a motive to make gain or profit, or whether or not any profit accrues from such activity are included in that definition. The amended sub-clause (ii) also includes within that definition transaction in connection with, or incidental or ancillary to, such trade, manufacture or adventure or concern. The question is, whether the word 'such' in sub-clause (ii) of clause (d) of section 2 refers to the trade, etc., defined in sub-clause (i). It was contended before the Madras High Court that it is not so and that incidental or ancillary activity must partake the nature of business in its generic sense."
9. In this connection, the Supreme Court considered the decisions in Deputy Commissioner of Commercial Taxes, Coimbatore Division, Coimbatore v. Sri Thirumagal Mills Limited [1967] 20 STC 287 (Mad.) and Hyderabad Asbestos Cement Products Limited v. State of Andhra Pradesh [1972] 30 STC 26 (AP) and approved the view taken by the A.P. High Court, where it was held :
"......... that in view of the definition of 'business' as amended by the Amendment Act of 1966, proof of profit-motive is unnecessary to constitute business and that the transaction of supply of food and drink to the workmen in the canteen maintained by the assessee, in pursuance of the Factories Act and the Rules, were sales and constituted business for the purpose of the Act."
10. The Supreme Court therefore, held :
"......... We think the view adopted by the Andhra Pradesh High Court is in consonance with our own reading of the section which we have indicated earlier.
..............
.......... The sale of scrap in these appeals, which as we have said earlier, consisted of spoiled drums, hose pipes, etc., were all held to be connected with the business of the company. This finding is a finding of fact but even otherwise the very nature of the particular scrap prima facie would indicate that they are connected with the business of the company. The assessee being an oil company has to use oil drums, hose pipes, jerry cans, etc., as part of its trading activity and any sale of these unserviceable goods as scrap is a transaction connected with its trade or commerce."
11. The decision of the Supreme Court in State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 19 STC 1, where the sale of stores, machinery and iron scrap, etc., was held by the Supreme Court to be not part of or incidental to the main business of selling textiles and, therefore, was not taxable, was explained and distinguished by the Supreme Court in Burmah Shell case [1973] 31 STC 426 stating :
"...... In that case, as already pointed out, what was held under the analogous Bombay Sales Tax Act, which was similar to that under the Madras Sales Tax Act, prior to its amendment in 1964, the sale of scrap does not necessarily lead to an inference that business which was an element in determining the liability of the dealer for the turnover in such goods was intended to be carried on in those goods........."
12. That case arose under the unamended definition of the word "business" and was explained and distinguished by the Supreme Court. In State of Tamil Nadu v. Binny Ltd. [1982] 49 STC 17 the assessee who was carrying on business in manufacture and sale of textiles in a factory sold the clothes in its own stores to its employees. The question that arose in that case was whether such sale was in the course of business. In dealing with the question, the Supreme Court considered the meaning of "business". Following Burmah Shell case it was held that it was not necessary for the transaction in question to partake the characteristics of the business, but it was sufficient if it was in connection with or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern. In that view the Supreme Court held that the activity of selling clothes to the workmen was incidental to the business of manufacture of textiles and such sales were transactions falling within the definition of "business" as defined in section 2(d)(ii) of the Tamil Nadu General Sales Tax Act, 1959. In State of Tamil Nadu v. Thermo Electrics [1977] 39 STC 317 (Mad.), the assessee sold all the raw materials, stores, semi-finished products and claimed exemption on the said sales on the ground that there was sale of business as a whole and that it was not a sale in the course of a business and it was the case of the winding up of the manufacturing unit. The Madras High Court held that rule 6(d) of the Tamil Nadu General Sales Tax Rules contemplates transfer of business as a whole and not a case of transfer of some of the assets and hence the said rule was not applicable. It was also held :
"......... If the assessee is a dealer with reference to the business carried on by him, every transaction of sale, whether it is of a capital asset or a stock-in-trade, would be liable to be included in the turnover of the assessee........ Further, in view of the categorical pronouncement of the Supreme Court in State of Tamil Nadu v. Burmah Shell Co. Ltd. [1973] 31 STC 426, every sale of a dealer would be liable to be included in the gross turnover of the assessee and it could not be deleted on the ground that it was a sale of capital asset."
13. The Supreme Court reiterated its view in considering similar provisions of the Rajasthan Sales Tax Act in District Controller of Stores v. Assistant Commercial Taxation Officer [1976] 37 STC 423. In State of Tamil Nadu v. Shakti Estates , a reserve forest was acquired with a view to raise coffee and cardamom plantation thereon. The assessee had to cut trees to clear a portion of the forest, resulting in cutting trees. The cut trees were sold as firewood and timber. The question arose was whether the price realised by the assessee on the sale of firewood, timber, sleepers and charcoal, was assessable to sales tax. The principal contention was that they are no doubt dealers in coffee or cardamom or other crops to be grown on the estates but they are by no means dealers in firewood, timber, etc., and that their intention to acquire forest was not to deal in forest produce, whether as firewood, timber, etc., but to start a plantation. Rebutting the contentions, the Supreme Court held :
"......... The facts show that each of the assessees has acquired a huge forest area which contains a large number of trees. When the assessee purchased the forest or got it on lease for starting a plantation thereon, it was aware of the existence of trees (some of them quite valuable) on the land and the price paid must inevitably have included some value for these trees as well. The assessees also knew full well that before they could start the plantation, as well as during the running of it, they would have to clear the forest in stages by cutting off the trees standing thereon and disposing of the same from time to time. Each of these assessees is a firm the purpose of which is to carry on business. It will be quite proper and natural to infer that the intention of the assessees at the time of purchase included not only an intention to grow and sell coffee and cardamom and other crops but also an intention to dispose of the trees standing on the land to the best advantage in the circumstances....... They went in for the acquisition of an asset fully realising its potentialities for exploitation not merely as a plantation but also, incidentally, by disposing of the existing growth on the land. It seems impossible to say that they did not intend to do this also while going in for the acquisition. If one purchases an asset with a view to turn it to account in such manner, we think, one is certainly carrying out an adventure in the nature of trade.
Moreover, we have also to give full effect to the definitions in the statute we are concerned with. The definition of a 'business' also includes 'any transaction in connection with or incidental to or ancillary' to a trade and thus, even on the assessees' own arguments, these activities were incidental and ancillary to the business which the assessee was carrying on or definitely intended to carry on."
14. The principle in "Burmah Shell" case and in District Controller of Stores v. Assistant Commercial Taxation Officer , was noticed and applied to the facts. It is significant that even sales effected before the business was started were held to fall within the expression "business". The expression "business" was therefore construed with its widest amplitude by the Supreme Court in Burmah Shell case [1973] 31 STC 426 which principle was reiterated by the Supreme Court in its subsequent decisions and followed by several High Courts as including any commercial activity of the dealer which is connected with or incidental or ancillary to its business, or part of its integral whole or being in contemplation of the assessee with or without profit motive. When such is the concept of the term business, the point to be considered is whether its ambit should be restricted in the case of sales effected by the assessee during the closure of the business or the dissolution of the firm of the assessee or sale of the business as a whole.
15. It becomes, now, necessary to notice the consequence of dissolution of a firm since the sale in the instant case was necessitated by the dissolution of the firm. The Indian Partnership Act, 1932, gives the meaning of dissolution of a firm and the liabilities of the firm and its partners upon the dissolution. Section 39 of the Indian Partnership Act reads :
"39. Dissolution of a firm. - The dissolution of partnership between all the partners of a firm is called the 'dissolution of the firm'."
16. Section 45 of the Partnership Act provides for the liability of the partners to third parties even after dissolution of the firm in certain circumstances, until public notice was given. Under section 46 of the Partnership Act, the partners have a right to wind up the business after dissolution. Section 47 of the Partnership Act makes it plain that the authority of the partner to bind the firm, and the mutual rights and obligations of the partners, continue so far as may be necessary to wind up the affairs of the firm and to complete the unfinished transactions. Section 55 of the Partnership Act provides for the sale of goodwill, separately or along with other property of the firm. All these transactions are the steps to be taken in the winding up of the firm and before the accounts of firm are settled after dissolution. Until the liabilities of the firm and its partners are discharged, incomplete contracts are executed, assets of the firm are sold and final accounts are settled it cannot be said that on the date of dissolution of the firm the business would come to an end. Since the plant, machinery, finished goods were sold during the winding up of the firm and before actual closure of business, the sales should be treated as sale of goods, before the business was said to be, finally closed on and in the course of business. The proceeds are therefore, liable for levy of sales tax.
17. The next specious plea was since there was sale of business as a whole and business being not goods the turnover has to be exempted from tax. Rule 6(h) of the A.P. General Sales Tax Rules (for short, "the Rules") provides that even in case of sale of business as a whole the proceeds thereof have to be included in the turnover. It says that in determining the taxable turnover, the amount realised by the dealer by the sale of the goodwill of his business when specified separately, without including it in the amount realised by the sale of his business as a whole, shall be deducted from the turnover of the dealer. In other words rule 6(h) of the Rules does not exempt from taxation the turnover realised from the sale of the business of the assessee as a whole. It exempts only the amount realised from the sale of goodwill, if sold separately. Since "goodwill" was not specified and sole separately, in selling the plant and machinery, finished goods, etc., the disputed turnover, even assuming that there is sale of business as a whole, is liable to be taxed. This rule, in our view, is an answer, in a way, to the question whether the proceeds of sale of business is a taxable turnover.
18. But it should be remembered that each item was valued separately and sold. Hence, there is no difficulty to arrive at the value of their turnover. In fact the business as such was not separately valued and sold and what we are concerned with is the turnover of the above items. There is no factual basis of assume that there was sale of business as a whole to the company. The case of the assessee was that the firm was dissolved and a private limited company was formed. The goodwill and know-how were not separately valued. It is significant that the partners of the firm became the directors of the new company and continued the business. In this background it is difficult to accept the argument that the business was sold. The argument is, therefore, misplaced.
19. Section 15-B of the Act also makes it plain that the assessing authority shall make an assessment of the firm even after its dissolution, as if no dissolution had taken place and every partner is liable to pay the tax levied on the firm. Hence, the firm is liable, even after its dissolution, to be assessed.
20. We now refer to the decisions cited before us : Sri Ram Sahai v. Commissioner of Sales Tax [1963] 14 STC 275 (All.), is a case where the assessee, a dealer in cloth, closed his business and sold the entire business for a lumpsum, together with stock-in-trade. Under rule 44 of the U.P. Sales Tax Rules, the amounts realised on account of the sale of business as a whole is liable to be deducted in the turnover. The question referred to the Allahabad High Court was as to the applicability of rule 44, to the turnover representing the proceeds of sale of business together with stock-in-trade. While holding that the rule was applicable, the court, noticing the contention that when a dealer sells his business there may be some stock-in-trade which is sold along with the goodwill and that there is no reason why proceeds of the sale of the stock-in-trade should not be included in his turnover even though proceeds of the sale of the goodwill are excluded, held :
"....... It may be accepted that when a business is sold along with stock-in-trade, that is, the goods remaining unsold, proceeds of the sale of the latter should be included in the turnover. In the present case though the assessee has sold some stock-in-trade along with its business, the amount of the proceeds of the sale of it is not shown separately from the amount of the proceeds of the sale of the goodwill, etc., and it is not possible to say that a particular portion of the proceeds of the sale of the business should be included in the turnover."
21. In this case it should be noted that the business was sold in lumpsum along with stock-in-trade. Since sale price of stock-in- trade was not shown separately, it was held as not possible to include its price in the turnover. In the instant case, basing on the factual background, we have held earlier, that there was no sale of business as such to the private limited company. This vital feature distinguishes the case from the case cited and other cases to be considered presently. Further the Rules do not have any provision analogous to rule 44 of the U.P. Sales Tax Rules. On the contrary rule 6(h) of the Rules provides for the inclusion of sale proceeds of business as a whole except that of goodwill, if it was sold separately. Further the observation of the learned Judges that :
"the business is not goods, proceeds of the sale of business do not amount to turnover."
is only in the nature of obiter and is not the ratio of the case, since the question referred to the court related to the applicability of rule 44 of the U.P. Sales Tax Rules. Hence, the above decision has no application to the facts of the instant case and will not help the appellant. In Deputy Commissioner (C.T.), Coimbatore v. K. Behanan Thomas [1977] 39 STC 325 (Mad.) the closing stock held by the assessee in the branch of Ooty was sold as a whole and the sale value of stock held was eligible for exemption. Under rule 6(d) of the Tamil Nadu General Sales Tax Rules, 1959, the amounts realised by the sale of business as a whole shall be deducted from the total turnover. The sale of business of a branch was held as sale of business "as a whole" and accordingly the turnover was held liable to be exempted. The counsel particularly relied upon the following observations of the learned Judges :
"........... When a person who is carrying on business sells the entire business or a branch of the business, he sells the same as a running business or a going concern. The sale proceeds of such a transaction cannot be said to constitute turnover as defined in the Act, because the sale proceeds are not proceeds of sale of goods made in the course of business as defined in the Act. The closure of a branch by sale thereof as a running concern to another person, apart from not constituting a sale of goods, cannot also be said to be a transaction in connection with or incidental or ancillary to such trade, commerce, adventure or concern mentioned in section 2(d)(i) of the Act."
22. The above decision of the Madras High Court stands on a different footing. Rule 6(d) of the Tamil Nadu General Sales Tax Rules, exempted the proceeds of the "sale of business as a whole" from taxable turnover. Relying upon rule 6(d) of the Tamil Nadu General Sales Tax Rules, the assessee claimed exemption of the proceeds of such sales and its claim was upheld. The Andhra Pradesh General Sales Tax Rules do not provide for such an exemption. On the other hand rule 6(h) of the Rules, as mentioned earlier, exempted only the proceeds of goodwill, when the business was sold as a whole and not the proceeds of the sale of business. It is significant to note that the learned Judges have observed that :
"The sale of the stock-in-trade for the purpose of closing down the business is different from the sale of the business as a whole as a running concern."
23. In fact that is what happened in our case; for the purpose of finalisation of affairs of the firm, the plant and machinery was sold, and there was no transfer of business. The case is, therefore, distinguishable on facts. The same reasoning applies to another decision of the Madras High Court in Monsanto Chemicals of India (P) Limited v. State of Tamil Nadu [1982] 51 STC 278, where rule 6(d) of the Tamil Nadu General Sales Tax Rules, was applied. Commissioner of Sales Tax, M.P. v. L. Vasudeo Rao [1981] 48 STC 447 (MP) is a case where the sale proceeds of an off-set machine was sought to be taxed and it was objected to on the ground that it had to be sold since that branch of business was closed down and the sale was fixed asset of the assessee not liable to tax. It was held by the High Court of Madhya Pradesh that :
"........ it was sold on account of the closure of the printing business by the assessee. The printing machine was not purchased with the intention of carrying on business by selling the said machine whether with profit or without profit. In order that a particular transaction of sale may be termed as forming part of the business activity of an assessee it must be found that it was made in the course of trade, commerce, or adventure in the nature of trade or commerce by the assessee........ In the present case the assessee sold his fixed assets on the closure of his business and it cannot be said that this transaction was in the course of trade, commerce or adventure in the nature of trade and commerce and so it cannot be included in the term 'business'."
24. The reasoning in this decision again runs contrary to the views expressed by the Supreme Court in Burmah Shell case [1973] 31 STC 426 and in State of Tamil Nadu v. Shakti Estates . The decision rested upon the decision in State of Gujarat v. Raipur Manufacturing Co. Ltd. , which was rendered under the unamended definition of the expression "business". This decision was explained and distinguished in Burmah Shell case , which was not noticed by the learned Judges. In Commissioner of Commercial Taxes v. Krudd Industries Ltd. [1991] 83 STC 127 (WBTT) the business of the assessee was closed in 1965. For the assessment year ending with December 31, 1968, the assessee showed sales of raw materials, stores and old machinery and claimed exemption from tax on the ground that said sales were not in the course of business of the assessee. The West Bengal Taxation Tribunal upheld the objection. It is seen that three years after the business was closed, the stores, old machinery, etc., was sold. It cannot, therefore, be said that the sale was incidental to the business of the assessee. The facts of the present case are entirely different and on this ground the decision cannot be held applicable to the instant case. The decision in State of Tamil Nadu v. The Hindu [1978] 41 STC 105 (Mad.), relates to the turnover representing the sale of old newspapers, print waste, cut waste, etc., by the publisher of the Hindu. Regarding the exigibility of tax of old newspapers, there was no dispute in view of the decision in State of Tamil Nadu v. Indian Express (Madurai) Limited [1974] 34 STC 231 (Mad.). The dispute remained only with regard to the sale of glazed newsprint. The argument was it was procured for publication of "Sport and Pastime" and when its publication was stopped the available print of glazed newsprint was disposed of and that was not in the course of business of the assessee. This argument was repelled in view of the amended definition of the term of "business" in section 2(d) of the Tamil Nadu General Sales Tax Act, which is analogous to section 2(bbb) of the Act. It was observed that :
"The sale of glazed newsprint purchased for printing 'Sport and Pastime', when that publication ceased, is certainly a transaction incidental or ancillary to the business of the respondent, namely, that of printing, publishing and selling newspapers. As a matter of fact, the reasoning of the decision of this Court in State of Tamil Nadu v. Indian Express (Madurai) Ltd. [1974] 34 STC 231 already referred to, will apply to this question also. This Court observed in that judgment :
'............ It is not in dispute that paper was acquired by the assessees for the purpose of carrying on their business of printing, publishing and sale of newspapers. In the course of such business, if the paper procured by them or the newspapers published by them remain unused or unsold, as the case may be, they will be regularly selling those articles for the best possible price. In such circumstances, it is not possible to hold that the sale effected by the assessees of unsold newspapers and other waste products is not connected with their main business.' Consequently, in view of the definition of the term 'business' contained in section 2(d) and in view of the decision referred to above, the turnover is liable to be taxed."
25. In so holding, the decision in District Controller of Stores, Northern Railway, Jodhpur v. Assistant Commercial Taxation Officer , was relied upon where the sale of unserviceable materials and scrap iron by the railway was held by the Supreme Court as liable to tax.
26. The decisions cited which relate to exemption of sale proceeds of business from levy of tax, are not applicable to the facts of the instant case where no "sale of business" is involved.
27. We, therefore, hold that the sale of plant and machinery, fittings, raw materials, laboratory equipment, stock of stores, furniture and car was incidental to and connected to the closure of business, on the dissolution of the firm and was "in the course of business" within the meaning of section 2(n) of the APGST Act, 1957, and the proceeds thereof are liable to tax. The Commissioner of Commercial Taxes was right in passing the impugned order. The special appeal is, therefore, dismissed. In the circumstances, no costs.
28. Petition dismissed.