Karnataka High Court
Sri Neelakanteshwar Oil Industries vs State Of Karnataka And Another on 27 October, 1994
Equivalent citations: ILR1995KAR52
Author: R.V. Raveendran
Bench: R.V. Raveendran
JUDGMENT R.V. Raveendran, J.
1. The petitioner is a registered dealer under the Karnataka Sales Tax Act, 1957 (in short "the Act"). The petitioner established a new small-scale industrial unit for manufacture of edible oil and edible oil cake by crushing groundnuts, which went into commercial production on April 29, 1994.
2. By Notification No. FD 239 CSL 90 (I), dated June 19, 1991, the Government of Karnataka, in exercise of its powers conferred under sub-section (1) of section 8-A of the Act, exempted with immediate effect the tax payable under the said Act in respect of the goods manufactured and sold by new industrial units described in column (2) of the table given in the said notification, located in the zones specified in column (3) of the table, to the extent indicated in column (4) and during the period specified in column (5) of the said table. Item (1) of the said table exempts tiny/small-scale/medium/large-scale industrial units situated in zone II (specified in annexure I to Government Order No. CI/138/SPC/90 dated September 27, 1990), the extent of exemption being 100 per cent tax exemption without any monetary limit and the period of exemption being three years from the date of commencement of commercial production.
3. The petitioner's new unit is situated in zone II falling under item No. (1) of the table given in the said notification dated June 19, 1991 and therefore eligible for 100 per cent tax exemption as provided in the notification, without monetary limit for a period of three years from the date of the petitioner going into commercial production. The Department of Industries and Commerce issued a certificate dated September 26, 1994 confirming that the petitioner is entitled to such exemption regarding Central sales tax and Karnataka sales tax.
4. In connection with the provisional assessment under section 12-B(2) of the Act, the assessing authority (second respondent) issued the following endorsement dated October 18, 1994 to the petitioner :
"As per the Notification No. FD 239 CSL 90 (I), dated 19th June, 1991 under section 8-A of the KST Act, 1957, the assessee-firm, Sri Neelakanteshwar Oil Industries, Gangavati, is eligible for exemption from payment of sales tax in respect of goods manufactured and sold by them for a period of 3 years. But, they are liable to pay purchase tax on purchase of groundnuts."
The petitioner has filed this petition seeking a direction restraining the second respondent from enforcing his endorsement dated October 18, 1994 (annexure B) which requires payment of purchase tax on the raw material (groundnut) purchased by it for manufacturing goods and seeking a further direction to the respondents not to impose any tax on the petitioner. The petitioner seeks total exemption from payment of any kind of tax under the Act in regard to its unit for a period of three years from April 29, 1994.
5. The petitioner contends that the 100 per cent exemption that is granted under the notification dated June 19, 1991, extends not only to sales tax payable on the "goods manufactured and sold" by the petitioner, but to all taxes payable under the Karnataka Sales Tax Act by the petitioner and that would include the purchase tax payable on raw materials purchased by it, for manufacturing goods. The petitioner contends that the effect of the notification granting 100 per cent exemption is to exempt the petitioner from payment of any tax, that is sales tax, purchase tax or turnover tax under the KST Act in respect of its taxable turnover; and consequently the petitioner is not liable to pay purchase tax in regard to the raw materials (groundnuts) purchased by it for manufacturing oil and oil-cakes; the petitioner relied on the decision of this Court in Anitha Cashew Industries v. Commercial Tax Officer, II Circle, Udupi reported in [1993] 90 STC 163 and contended that the exemption provision should be construed liberally so that the exemption granted, does not become illusory.
6. The learned Government Pleader, on the other hand, contended that the notification dated June 19, 1991, is clear and unambiguous and it grants exemption of the tax payable only in respect of "goods manufactured and sold" and not in respect of "goods purchased for the purpose of manufacture and sale of goods"; that when the exemption provision is clear and unambiguous, it cannot be extended to matters not specified; and that the decision in Anitha Cashew Industries is inapplicable to the facts of this case.
7. On the aforesaid contentions, the following two points arise for consideration :
(a) Whether a provision for exemption can be construed as extending to a matter, which is not expressly provided. On the principles relating to construction of exemption clauses, whether the notification dated June 19, 1991, can be construed as exempting payment of purchase tax on raw materials purchased by new industrial units.
(b) Whether having regard to the decision in Anitha Cashew Industries , the notification dated June 19, 1991, should be construed as exempting payment of purchase tax on raw materials.
Re. Point (a) :
8. Let me first examine the principles relating to interpretation of exemption clauses in taxation statutes.
8.1. I may start with the following oft-quoted passage in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 64, relating to construction of taxing statute, which apply with equal force to provisions relating to exemptions :
"In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."
In Crawford's treatise on "The Construction of Statutes" (1940 Edition), it is observed thus (at page 506) :
"Provisions providing for an exemption may be properly construed strictly against the person who makes the claim of an exemption. In other words, before an exemption can be recognized, the person or property claimed to be exempted must come clearly within the language apparently granting the exemption."
The reason for such strict interpretation is expounded in Bank of Commerce v. State of Tennessee 40 L Ed 645 thus :
"Taxes being the sole means by which sovereignties can maintain their existence, any claim on the part of any one to be exempt from the full payment of his share of taxes on any portion of his property must on that account be clearly defined and founded on plain language. There must be no doubt or ambiguity used upon which the claim to the exemption is founded. It has been said that a well-founded doubt is fatal to the claim; no implications will be indulged in for the purpose, of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power."
The above view is echoed by a Full Bench of the Patna High Court in Gupta Brick Works v. Commercial Taxes Tribunal [1958] 58 STC 267 in the following words :
"The exemption is entirely in the nature of a concession and is an exception to the rule of general incidence of tax. It is for the State to determine the period of exemption or concession which it wishes to grant and no inherent right to claim such an exemption arises in favour of the exemptees. There are no equities in the levying of a tax or the grant of exemption therefrom. It is dependent on the sovereign will of the Legislature and its competence to impose or exempt the same."
8.2. In Union of India v. Wood Papers Ltd. , the Supreme Court has laid down the principles regarding construction of exemption provisions and they are extracted below :
"Literally exemption is freedom from liability, tax or duty. Fiscally it may assume varying shapes, specially in a growing economy. For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective, etc. That is why its construction, unlike charging provision, has to be tested on different touchstone. In fact an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden or progressive approach of fiscal provisions intended to augment State revenue. But once exception or exemption becomes applicable no rule or principle requires it to be construed strictly. Truly speaking, liberal and strict construction of an exemption provision are to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction."
8.3. In Collector of Central Excise, Bombay v. Parle Exports (P.) Ltd. , the Supreme Court held :
"The expressions in the Schedule and in the notification for exemption should be understood by the language employed therein bearing in mind the context in which the expressions occur. The words used in the provision, imposing taxes or granting exemption should be understood in the same way in which these are understood in ordinary parlance in the area in which the law is in force or by the people who ordinarily deal with them ..... The notification must be read as a whole in the context of the other relevant provisions. When a notification is issued in accordance with power conferred by the statute, it has statutory force and validity and, therefore, the exemption under the notification is, as if it were contained in the Act itself ..... The principle is well-settled that when two views of a notification are possible, it should be construed in favour of the subject as notification is part of a fiscal enactment. But in this connection, it is well to remember ......... that it is only, however, in the event of there being a real difficulty in ascertaining the meaning of a particular enactment that the question of strictness or of liberality of construction arises ..... in a taxing Act provisions establishing an exception to the general rule of taxation are to be construed strictly against those who invoke its benefit. While interpreting an exemption clause, liberal interpretation should be imparted to the language thereof, provided no violence is done to the language employed. It must, however, be borne in mind that absurd results of construction should be avoided."
8.4. In Commissioner of Wealth Tax, A.P. v. Officer-in-charge (Court of Wards), Paigah , the Supreme Court observed :
"It is not correct to give as wide a meaning as possible to terms used in a statute simply because the statute does not define an expression. The correct rule is that courts have to endeavour to find out the exact sense in which the words have been used in a particular context. They are entitled to look at the statute as a whole and give an interpretation in consonance with the purposes of the statute and what logically follows from the terms used. They are to avoid absurd results."
In Controller of Estate Duty v. Venugopala Varma Rajah , the Supreme Court referred to the well-settled principle that the burden of establishing exemption lies upon the assessee. This was reiterated by the Supreme Court in Tata Oil Mills Co. Ltd. v. Collector of Central Excise .
8.5. In Mangalore Chemicals & Fertilizers Limited v. Deputy' Commissioner of Commercial Taxes , the Supreme Court held as follows :
"The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the Legislature manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only where the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation."
It is also held that once the initial hurdle regarding applicability of exemption is crossed, the condition prescribed may be liberally construed. This will be evident from the following passage from the same decision :
"The consequence of loss of exemption from tax flowing from the non-compliance of condition prescribed for eligibility for exemption would be the result if a condition was a substantive one and one fundamental to the policy underlying the exemption. Its stringency and mandatory nature must be justified by the purpose intended to be served. The mere fact that it is statutory does not matter one way or the other. There are conditions and conditions. Some may be substantive, mandatory and based on considerations of policy and some others may merely belong to the area of procedure. It will be erroneous to attach equal importance to the non-observance of all conditions irrespective of the purposes they were intended to serve. A distinction between the provisions of statute which are of substantive character and were built-in with certain specific objectives of policy on the one hand and those which are merely procedural and technical in their nature on the other must be kept clearly distinguished."
9. The following principles relating to interpretation of exemption provisions in taxation laws emerge from the decisions referred to above :
(i) The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the Legislature. When the words used are plain and clear, they have to be construed in the ordinary sense. There is no occasion to resort to any interpretative process, if the words clearly, unambiguously and directly convey the meaning.
(ii) All taxing laws should be strictly construed and the assessee shall not be liable to be taxed unless the language of the statute clearly imposes the liability to pay the tax. Similarly all exemptions from tax must also be strictly construed and limited to the exemption itself; that is, there can be no extension or widening of the ambit of exemption at the stage of applicability of exemption. But, once the subject of exemption is clearly identified, then the exemption shall be made available to the identified subject, by adopting a liberal construction.
(iii) Where the words of exemption are not defined, the proper course is not to give them the widest meaning, but find out the true meaning with reference to the context, by reading the exemption notification as a whole and by keeping in view, the object and purpose of the exemption and the consequences of the different interpretations.
(iv) An interpretation which makes the exemption illusory and has the effect of giving by one hand and taking away by the other, should be avoided; at the same time a liberal interpretation which will do violence to the language employed or which will lead to absurd results, should not also be resorted to.
(v) It is always for the person claiming the benefit of exemption to clearly establish that he is entitled to the exemption and this burden cannot be shifted on the Revenue.
10. Having set out the principles, let me examine the notification dated June 19, 1991, in the light of the said principles. The description of the subject-matter of the exemption is "tax payable in respect of goods manufactured and sold by new industrial units". These words are clear, specific and unambiguous. In such a case having recourse to interpretative tools will not arise. Consequently the question of considering or applying an interpretation beneficial or favourable to the assessee also does not arise. Only where two interpretations are possible, the question of adopting an interpretation favourable to the assessee would arise. Where the words are clear, the plain and straight meaning should be given to them and there is no question of adopting an interpretation favourable to the assessee. What is not stated cannot be included in a provision relating to exemption. The guideline recommended by the Supreme Court in Wood Papers case is "Do not extend or widen the ambit at the stage of applicability. But once that hurdle is crossed construe it liberally". Therefore, it is not possible to read into the words "tax payable in respect of goods manufactured and sold by new industrial units" the words "and tax payable in respect of raw materials".
11. The notification of June 19, 1991, is issued under section 8-A of the Act. Section 8-A provides that the State Government may by notification make an exemption, or reduction in rate, in respect of tax payable under the Act, (a) on the sale or purchase of any specified goods or class of goods, at all points in the series of sales of successive dealers; or (b) by any specified class of persons, in regard to the whole or any part of their turnover; or (c) on the sale or purchase of any specified class of goods by any specified class of dealers in regard to the whole or part of their turnover; and any such exemption from tax or reduction in the rate of tax will be subjected to such restrictions and conditions as may be specified in the notification. Thus the exemption or reduction in rate of tax can be granted either in regard to sales or purchases; in regard to specified goods or class of goods; at a single point or at multi-points; or in regard to whole of the turnover or part of the turnover of specified class of persons. It is therefore clear that the wording of the exemption notification will determine the subject of exemption. The notification dated June 19, 1991, exempts the tax payable under the Act "in respect of goods manufactured and sold by new industrial units". The subject-matter of exemption is the goods that is manufactured and sold by the new industrial units. Hence, the exemption is only in regard to the taxes payable in respect of the subject of exemption, that is, "goods manufactured and sold". In the absence of any difficulty in ascertaining the meaning of the words and in the absence of ambiguity and in the absence of any indication that the exemption was intended to be extended, the subject-matter of exemption cannot be extended to raw materials purchased by the new industrial units. The stage of operation of exemption is the sale of manufactured goods and not the purchase of raw materials required for manufacturing goods. If the intention of the State Government was to exempt purchase tax on raw materials, the notification would have clearly stated so. It should be noted that the Government has issued several notifications exempting payment of tax on the raw materials purchased, in given cases.
12. The learned counsel for the petitioner contended that if the petitioner is made to pay purchase tax on groundnuts purchased by it for being used in the manufacture of oil, then the exemption given would become illusory; that whatever benefit that was given by exempting sales tax on oil manufactured and sold is taken away by requiring the petitioner to pay purchase tax on the groundnuts and the petitioner will be in no better position than the other manufacturers who do not enjoy the benefits of exemption under the notification dated June 19, 1991. The argument is not sound. By virtue of the exemption under the notification dated June 19, 1991, the petitioner will be able to sell the groundnut oil to its customers without incurring liability to pay any sales tax for a period of three years; whereas persons who do not have the benefit of the exemption under the said notification, will have to sell the groundnut oil manufactured by them and pay sales tax on the turnover. Thus there is a price advantage to the petitioner to the extent of sales tax, by virtue of the notification. Consequently the petitioner will be in a position to offer its product at a lower price and thereby attract more customers; or alternatively, if it sells at the market price, it will be able to make more profit as it has no liability to pay sales tax on its turnover. Thus the exemption granted is not illusory and even without any exemption regarding purchase tax on raw materials, the petitioner is entitled to a tangible and substantial exemption. If on the other hand, the petitioner is also given exemption from payment of purchase tax on the raw materials, as claimed, then it would amount to granting exemption at two stages, that is one exemption at the stage of purchase of raw material and another exemption at the stage of manufacture and sale of goods. Such double exemption is neither intended nor permissible.
Re. Point (b) :
13. The learned counsel relied on the decision of this Court in Anitha Cashew Industries v. Commercial Tax Officer reported in [1993] 90 STC 163. In that decision this Court was concerned with a similar notification dated March 31, 1983, issued under section 8-A of the Karnataka Sales Tax Act, 1957, exempting "the tax or taxes payable under the said Act, on the turnover of goods manufactured in Karnataka and sold". The petitioner therein was engaged in the business of converting raw cashew into cashew kernel. The assessee's request for exemption of purchase tax payable on the purchase turnover of raw cashew was rejected by the Revenue. Under explanation VI to the Second Schedule to the Act, "where a tax has been levied in respect of cashew under item 88. The kernel pressed out of the said cashew shall not be liable to tax under section 5". In view of the said explanation which was applicable to all manufacturers of cashew kernel, the goods manufactured and sold by the petitioner therein, was exempted from payment of tax at the point of sale, even without reference to the exemption notification dated March 31, 1983, consequently though the exemption notification applied to the petitioner therein, did not give any advantage to the petitioner therein, when compared to other manufacturers to whom the notification did not apply. As a result, the object and purpose of the notification to lend a helping hand to new industries in their teething period, became illusory and was set at naught. In that background, this Court examined the object and purpose of the said Government notification and held that the petitioner therein was entitled to exemption from payment of purchase tax in respect of the raw cashew purchased.
14. Anitha Cashew is thus based on different facts and is based on a principle which is an exception to the rules of construction. In Anitha Cashew case , the "goods manufactured and sold" by the assessee was not subject to tax at all. Hence grant of exemption from tax under the notification dated March 31, 1983, became "illusory". In other words, though the notification dated March 31, 1983, purported to extend a benefit by way of exemption to new units, no such benefit was really extended as there was no need for the exemption at all, in the case of manufacturers of cashew kernels. The notification dated March 31, 1983 if literally applied, did not give any benefit to new units manufacturing cashew kernels at all. The result was in spite of the notification granting exemption, such new units were in the same position as other units. The only way a lending hand could be given to the new units manufacturing cashew kernel under the said notification, was by exempting the raw materials (raw cashew) from purchase tax. Thus to avoid the benefit under the notification becoming illusory and infructuous, on the peculiar facts, the said notification dated March 31, 1983, was interpreted as exempting purchase tax on raw cashew purchased by the assessee. As Anitha Cashew case can be distinguished on facts, I do not propose to examine the contention that the said decision is erroneous as being contrary to the principles of interpretation laid down in the several decisions of the Supreme Court referred to above. The principles laid down in Anitha Cashew case show that it can apply only to cases where the "goods manufactured and sold" are not subject to tax at all (as in the case of cashew kernel).
15. On the basis of the above discussion the two points raised for consideration have to be answered in the negative. The notification dated June 19, 1991, does not exempt tax payable on purchase of raw materials. Hence the impugned endorsement dated October 18, 1994 (annexure B) does not suffer from any error. The petitioner is liable to pay purchase tax on the raw material (ground-nuts) purchased by it for manufacturing the goods sold, namely groundnut oil. There is therefore no merit in this petition and accordingly it is rejected.
Mr. S. A. Nazeer, learned High Court Government Pleader, is permitted to file his memo of appearance within six weeks.
16. Writ petition dismissed.