Tungabhadra Industries Ltd., Kurnool Vs. Commercial Tax Officer, Kurnool - Court Judgment

Chandra Reddy, J .

(1) This interpretation of Rr. 18 (2) and 5 (1) (g). Turnover and Assessment Rules framed by the Government in exercise of the powers conferred by R. 3, Sub-rr. 4 and 5, Madras General Sales Tax Act is involved in this Revision Case. The dispute relates to the assessment year 1949-50. The petitioner is registered as a manufacturer under R. 18. The assessee-company purchase ground-nuts and converts them into oil both refined and hydrogenated. A deduction was claimed both under R. 18 (2) and R. 5 (1) (g). The department declined to grant the deduction under both the heads on the ground that in the first case the oil sold by the petitioners was not the same commodity which was obtained by pressing the kernel and in regard to the second that the freight was not included in the price of the commodity as contemplated in R. 5 (1) (g).

(2) On appeal, the Sales Tax Tribunal allowed the deduction in respect of refined oil but refused it with regard to the hydrogenated oil and freight charges. The Tribunal held that the hydrogenated oil otherwise called vanaspathi was not the same thing the oil obtained from crushing the groundnut and therefore fell outside the scope of the R. 18 (2). As regards the freight charge, it was decided that the benefit under R. 5 (1) (g) was not available to the petitioners at it was not shown as something different from the price of the goods sold

(3) The view of the Tribunal on both the matters is canvassed before us in this Revision case.

(4) We will first deal with the claim for deduction under R. 5 (1) (g). Turnover and Assessment Rules, as it can be disposed of easily. The contention of Mr. Rajah Ayyar in this behalf is that deduction is allowable in the case of freight charges as they are shown as separate items in the bills.

(5) In order to appreciate this argument, it is necessary to refer to the relevant rule :

'(5) (1) The tax or taxes under S. 3 or 5 or the notification or notifications under S. 6 (1) shall be levied on the net turnover of a dealer. In determining the net turn-over the amounts specified in cls. (a) to (k) shall, subject to the conditions specified therein, be deducted from gross turn-over of a dealer---

* * * * *

(g) all amounts falling under the following two heads, when specified and charged for by the dealer separately, without including them in the price of the goods sold :

(i) ireight.

(ii) charges for packing and delivery and other such like services :

(6) The point for consideration is whether freight charges in this case are covered by cl. (g). This rule requires that the freight should not be included in the price of the goods sold. In this case, undeniably, the petitioners have charged a price inclusive of the railway freight and then gave a deduction in respect of the railway freight. The effect of this rule is that is railway - freight which is payable by the buyer separately i.e., independent of the sale consideration is paid by him into the bands of the seller who has undertaken to transport goods, it will not be regarded as aprt of the turn-over, though it is included in the bill, and would be a permissible deduction. If, on the other hand, the price stipulated for a commodity is inclusive of the freight on the understanding that the goods would be delivered at the place of the buyer free of freight, as seems to be the case here, it will form an integral part of the turn-over.

(7) On the admitted facts of this case, it is difficult to apply cl. (g) to this case. The fact that the petitioner has maintained a separate railway freight katha does not bring the case within the scope of that clause. Mr. Rajah Ayyar, the learned counsel for the petitioner, then submitted that the sums collected from the buyer constituted only gross turn-over and to arrive at the turn-over as defined in the Act the freight deducted out of the sale price should be excluded from it. We do not think this can be accepted. For one thing, it was not on this ground that the deduction was claimed. Secondly, we are unable to see how the definition of turn-over could be invoked in favour of the petitioner. Section 2. cl. (i), Madras General Sales Tax Act says that 'turn-over' means

'the aggregate amount for which the goods are either bought or sold by a dealer whether for cash or for deferred payment or other valuable consideration provided that the proceeds of the sale by a person of agricultural or horticultural produce grown by himself of grown on any land in which he had an interest whether as owner, usufructuary mortgagee, tenant or otherwise shall be excluded from his turn-over'.

We are not concerned in this enquiry with the change introduced into this definition by the recent amendment by the Andhra Legislature. It is seen that whatever money is realised by way of consideration for the sale of goods or paid for the purchase of goods forms part of the turn-over. The essential element of turn-over is that the sums collected should be towards the price stipulated or agreed to be paid by the buyer or sold as the case may be. If any dicount is given by a trader by way of trade discount, that could be excluded from the turn-over under cl. (a). Otherwise the aggregate amount collected by the dealer will be the basis of the assessment. From what precedes, it follows that the taxing authorities rightly disallowed the claim under this head and the petition to that extent is dismissed.

(8) But, the more difficult and substantial question relates to the construction of R. 18 (2), Turnover and Assessment Rules. This Rule recites :

'18 (1) Any dealer who manufactures ground nut oil and cakes from ground-nut and / or kernel purchased by him may, on application to teh assessing authority having jurisdiction over the area in which he carried on his business, be registered as a manufacturer of ground-nut oil and cake.

(2) Every such manufacturer shall be entitled to a deduction under cl. (k) of sub-r. (1) of R. 5 equal to the value of the ground-nut and (or) kernal purchased and converted by him into oil and cake provided that the amount for which the oil is sold is included in his turn-over'.

(9) It is seen that but for R. 18, a dealer who buys ground-nuts for the purpose of manufacturing them into oil, will not get the benefit of any deduction. Under R. 4 (2) in the case of ground-nuts, the taxation is at the purchase point. Therefore, the purchaser is allowed to deduct the price by him out of the sales both of the ground-nut or kernel thereof or oil extracted from the kernals.

(10) The point for decision is whether the exemption granted to manufacturers of ground-nut oil popularly known as Vanaspathi. This in its turn depends upon whether the expression 'oil' is comprehensive enough to include hydrogenated oil as contended by Mr. Rajah Ayyar, counsel for the petitioner or confined to oils which have not undergone the process of hydrogenation as maintained by the Advocate General. It is not necessary in this contract to deal with the extreme contention of the Advocate General that the rule contemplates only relief in respect of oil so extracted from the kernels i.e., in a crude from, by oil mills, though we do not feel that this construction is warranted by the plain words of the rule.

(11) Mr. Rajah Ayyar submitted that sub-r. (2) of R. 18 was framed to give effect to sub-s (5) of S. 3 of the Act which is in these terms :--

'Provided that ---

(i) * * * *

(ii) Where a dealer has been taxed in respect of the purchase of any goods in accordance with the rules referred to in cl. (i) of this proviso, he shall not be taxed again in respect of any sale of such goods effected by him'.

It is argued that the proviso embodies the preinciple that there should be no double taxation and in interpreting R. 18, this concept should be borne in mind. It may be that the object of the rule is to give effect to the conception underlying the proviso, but that is not decisive of the matter. The question for consideration is whether the intendment of the rule as gathered from its language is the one suggested for the petitioner.

We have, therefore, to consider whether the hydrogenated ground-nut oil is ground-nut oil for the purpose of sub-r. (2). To understand the relative view-points, it is necessary to ascertain the meaning and the process of hydrogenation. The meaning of the word 'hydrogenate', as given in Chambers 20th Century Dictionary, is 'to cause to combine with hydrogen, as in the hardening of oils by converting an olein into a stearin by addition of hydrogen in the presence of catalyst such as nickel or palladium'.

In Schmidts Organic Chemistry, it is stated:-

'Thus when oleic acid is treated with hydrogen at ordinary temperature in the presence of colloidal palladium it yields stearic aicd'.

(12) In para. 6 of the affidavit filed by the petitioner's expert, it is described thus:--

'By a process of passing hydrogen into the heated oil in the presence of catalyst, the oil is hardened to a melting point of 37 degrees 'c'-'. In the Chapter dealing with hydrogenation, of fats in 'Industrial and Manufacturing Chemistry, Par I, Organic' at page 110 a it is stated:

'Oleic acid is an unsaturated acid only differing from stearic acid by the absence of two hydrogen atoms. Several processes have been proposed for making oleic acid take up these two hydrogen atoms and become stearic acid.

This fuming hydroidic acid reduces oleic acide to stearic acid so does heating with iodine other attempts to reduce oleic acid to stearic acid have also been successful Recently, it has been shown that when oleic acid is treated with nickel powder in the presence of hydrogen, it takes up hydrogen and gives an almost theoretical yield of hard stearic acid'.

Thus what happens by the process of hydrogenation is, the unsaturated oleic acid present in the raw oil is converted into saturated compound, namely, stearic acid, by the chemical combination of two atoms of hydrogen with oleic acid.

(13) It is clear that there is some literation in chemical characteristics and contents of the oil. Therefore the chemical composition of the hydrogenated oil to some extent differs from that of the ground-nut oil. It is argued by the learned counsel or the petitioiners that the purpose of hydrogenating the oil is only to convert it into a semi-solid substance, to remove the rancidity and to give it a preserving quality and by hardening the oil it does not transform itself into a different product.

In spite of the chemical process the oil does not lose is form or its original properties. Some emphasis was ladi by the counsel for the petitioners on the admission of the Government Analyst that the catalyst which was utalised in the process of hydrogenation was subsequently removed from the hardened substance. On the basis of this it is maintained that as no foreign matter exists in the hydrogenated oil it should be treated as the same substance as original ground-nut oil.

(14) We are unable to assent to this proposition. It is not the presence or absence of catalyst that determines the question. As already stated what has to be considered is whether there is change in the chemical composition in the susbtance as a result of the chemical process.

(15) The position for the petitioiner is summed up thus in paras 8 and 9 of the affidavit filed by its expert:

'In the language of the chemist, the fat might have undergone an intermolecular or configurational chemical change but commercially it still remains an edible fat with all the enregy-giving and other properties of original oil. This is also confirmed by various other data such as digestiva co-efficient, calorific value etc of the vegetable product, which is practically the same as that of the oil. Digestive co-effecient is the percentage of the fat which is absorbed by the system during digestion'.

(16) In support of this contention, Mr. Rajah Ayyar called in aid a rulling of the Madhya Pradesh Board of Revenue in 'Tomco sales Department, Kingsway, Nagpur v. The State', 1952-3 STS Revn. 463 (A) and another of the Assam High Court inKapildeoram Baijnath Prasad v. L. Das AIR 1954 Assam 170 (B). Neither of these decisions is of any assistance to the petitioner. The first one is a case of cocogem.

Exemption was claimed from taxation for cocogem on the ground that it was a vegetable oil within the meaning of Sch 2 Central Provinces and Berar Sales Tax Act, 1947 which exempted, inter alia, from sales tax vegetable oils except hydrogenated oil. The contention of the assessee that cocogem was not a hydrogenated oil and therefore qualified for exemption found favour with the Board of Revenue. The position is different when the hydrogenated oil is sought to be brought within the purview of the rule granting deduction.

(17) in AIR 1954 Assam 170 (B) the controversy was whether Chira and Muri were forms of rice within the meaning of item 1 to Sch 3, Assam Sales TAx Act, 1947 which exempts from taxation all cereals and pulses mincluding all forms of rice. The learned Judges there had only to consider whether these two commodities could be included in the expression 'all forms of rice.'

The opinion expressed by the Bench was that these articles had not lost their character as cereals. The conclusion of Sarjoo Prosad C. J. is summarised thus at P. 172:

'I am, however, inclined to think that there is much substances in the view taken by the learned Commissioner of Taxes. It has been contended on behalf of the petitioner that Chira and Muri do not require any real mechanical or chemical process for their preparation; because Chira is rice beaten and Muri is rice parched; and las such, they are simply different forms of rice'.

(18) These observations cannot give rice to an argument that despite complicated chemical process, the substance subjected to that process still retains its original character. In our opinioin, notwithstanding that the properties in theoriginal oil substantially remain the same, it is difficult to regard it is oil within the connotation of Rs. 18(2). The chemical contents of ground-nut oil undergo a change.

There is a difference in chemical structure between the two substancealthough all the chemicalk contents do not disappear. We, therefore, think that the ground-nut oil subjected to the processof hydrogenation is a different product because its physcial qualities differ from that of the original oil and chemical compoisition is alterated.

(19) Another argument addressed to us is that for mercantile and commercial purposes, hydrogenated ground-nut oil is ground-nut oil and is therefore oil within the intendment of R. 18(2). It may be that the ordinary and popular sense of a commodity might furnish a test in judging whether the commodity is the same. But, we do not think that either in common parlance or for merchantable purpose hydrogenated oil is regarded as ground-nut oil.

It is popularly called Vanaspathi. In the market, it does not pass of as one of the forms of ground-nut oil. In fact, very, few of the consumers are aware of thesubstance of the oil from which it is prepared.

(20) The Advocate General drew our attention to some, passages in -- 'Stanley v. Western Insurance Co.', (1868) 3 Ex 71 (C), in which the word 'gas' in the clause 'for such loss or damage as shall arise from explosion by gas' in an insurance policy fell to be considered. IN that connection Kelly C. B., remarked thus:

'The words of the policy are to be construed not according to their strictly philosophical or scientific meaning, but in their ordinary and popular sense. Now in the ordinary language not only of men of business, and the owners of property (the subject of insruance) but even of scientific men themselves the explosion in the present case would not be said to have been caused by gas. It was not therefore within saying to the exception, which, indeed, was obviously intended by the parties only to refer to gas in the more limited sense of ordinary illuminating gas'.

'......................... .................................. ...................................... we should not be justified in adding words to give it the most artificial meaning which Mr. Quain contended for. Next, what is the meaning of 'gas'? I apprehend it means gas as ordinarily understood by mankind, and not as the word may be used in works of art.'

On the basis of these passages, it is argued by the Commercial Tax Department that a connotation should be given to the word 'oil' as ordinarily understood in the market or by the consumers. According to the learned Advocate General a restricted meaning should be given to the word 'oil' in the rule and should not be given a wider import than that warranted by that expression.

This case can only be used for the limited purpose, namely, as furnishing one of the criteria in judging the nature of the hydrogenated oil.

(21) The Advocate General next relied on -- 'Cotton v. Vogan & Co.', 1896-AC 457 (D). There under the Metage on Grain (Port of London) Act 1872 (C. C) S. 4 of the Corporation of London could demand a duty in respect of grain brought into the partof London for sale. The respondents brought into the port of London with the review of their being subjected to a process of grinding and crushing & then selling the meal resulting from such crushing and also the crushed grain after mixing it in certain proportion with beans, peas, oats, etc.

The respondent company oposed the levy of duty on these articles on the plea that the grain was not imported for sale and the only sale was of artciles manufactured by the firm which were not subjected to duty. This contention found favour with their Lordships who opined that it was only grain that was brought in to be sold as grain that was leviable to duty and if the grain was imported for the purpose of being turned into a thing and being sold not as grains, it could not attract the relevant provisions of the Act. In our view, the doctrine of this case is not quite applicable to the isntant case.

(22) In the ultimate analyis, the question has to be answered with reference to the language of the rule and with reference to the chemical changes that have been effected by the process of hydrogenation. The Advocate General particularly called in aid the following passage in the speech of Lord Herschell, who delivered the leading opinion:

'Mr. Danckwerts half argued that the thing sold might come within the definition of 'grain contamed in this statute; butI do not think that contention is really a possible one.

The Legislature was dealing with Commercial matters in the City of London with imports the nature of which was welknown, and if it had intended to include what had been always regarded and terated as manufactured articles, such as flour and meal, as distingusihed from the natural products of earth untreated except by gathering, the language would have been altogether to that which is to be found in this statute.

Therefore, I think it is impossible to construe these words as including such products as those which were sold in the present case.'

On the basis of these observations, it is contended that the Legislature was aware of the manufacture of Vanaspathi and if it were the intention to incude that commodity, it wouold have defined the oil in a comprehensive way so as to bring within its scope Vanaspathi also. According to him, the omission is significant. We do not think that the failure to mention hydrogenated oil is decisive of the matter.

It could equally be argued that if the intendment of the section was to include this commodity, the Legislature would have stated so in express terms. So we cannot speculate on the presumed intentions of the Legislature in this respect. We have to give effect to the intention of the Legislature as expressed in the language of the enactment. It is not necessary for us to pursuethis matter any further.

We have already expressed the opinion that hydrogenated oil is a product of ground-nut oil and it is difficult to construe the word 'oil' as including such products. The answer to this question, in our opinion, seems to be clearly in the negative.

(23) Lastly Mr. Rajah Ayyar relied on the Notification issued by the Government of India on 30-7--1949 directing the containers of Vegetable on product commonly known as Vanaspathi should bear among other things the words hydrogenasted groundnut oil hydrogenated groundnut and cocoanut oil' as the case may be, marked in capital letters not less than half an inch high in English and the equivalent of the same in one or more Vernacular languages in sucha manner as to be plainly visible to any purchaser.

(24) Subsequently, the following Notification dated 14-11-1949 was issued by the Government of India :

'The question of banning the use of the words 'Vanaspathi' and 'Vegatable product' on the containers in which hydrogenated oil is packed has been examined and it has been since decided by Government of India not to ban the use of these words on the containers.

As there would now be no ban on the use of these words on the containers the temporary concession allowed to the industry to affix a separate label showing the words 'hydrogenated groundnut oil' and its equivalent in Hindi along with their old lables is therefore being withdrawn from 1-1-1950.

All the manufacturers will be required from 1-1-1950 onwards to incorporate the words 'Hydrogenated ground-nut oil' or 'hydrogenated ground-nut and cotton seed oil' or 'hydrogenated ground-nut and cocoanutoil' as the case may be and its Hindi equivalent 'Mughaphali Aur Narial ka Jamaya tel' on the main approved labels.

As prescribed in thenotification, the letter containing the description must be in capital letters not less than half an inch high in English. The word 'Vanaspathi', 'Vegetable product' and 'Vegetable oil product' whenever it appears on the labels shall, however, not be more than 1/8th of an inch high in English.'

(25) We fail to see how these notifications support the contention of the petitioner merely because the Government desired that it should be described as hydrogenated oil. On the other hand, it shows that hydrogenated ground-nut oil commonly known as Vanaspathi is a product of the ground-nut oil.

It should be remembered that these notifications were issued under Cl. 5(1), Vegetable Oil Product Control Order which was promulgated in exercise of the powers conferred by sub-s (1) of S. 3, Essential Supplies (Temporary Powers) Act, 24 of 1946 and in supersession of the Vegetable Oil Product Control Order, 1946.

(26) It is useful to turn to the definition of 'Vegetable Oil Product' in this order. Section 2(e) says 'Vegetable Oil Product' menas

'any vegetable oil subjected to a process of hydrogenation in any form or any preparation thereof for cooking purposes containing not less than 50 per cent. hydrogenated vegetable oil.'

(27) This definition makes it clear that when once a vegetable oil undergoes a process of hydrogenation, it is transformed into a product of the oil. It was considered by Mr. Rajah Ayyar that on thelanguage of the sub-section, it is only hydrogenated oil containing not less than 50 percent. of hydrogenated vegetable oil that coild be called a vegetable oil prdouct.

We find no basis for this construction. This interpretation would drpirve the definitionof good portion of its content. It contemplates two categories of the product :

(i) Vegetable Oil subject to a process of hydrogenation in any form;

(ii) any preparation of the vegetable oil for cooking purposes with not less than 50 per cent of hydrogenated vegetable oil.

(28) We may also refer to S. 5(1) of this Order, which is in the following words:

'Every producer and every recognised dealer comply with such directions regarding the sales, stocks and distribution of vegetable oil products as may from time to time be given to him by the controller.'

As already stated it is under this provision that the two notifications mentioned above have been issued. It is manifest thathydrogenated oil is only a product of the oil from which it is prepared. The scheme of all the notifications and orders is only in accordance with this concept. The Vegetable Oil Products Control Order of 1946 also proceeds on thesame assumption.

(29) Mr. Rajah Ayyar next called in aid S. 2, Vegetable Oils and Oil-cakes (Forward Contracts Prohibition) Order, 1944:

'2. In this order .................................

(i) 'article to which this Order applies' means any of the vegetable oils (whether raw, refined, or solidfied) or oil-cakes specifiedin column 1 of theschedule to this order......................'

It was argued that since the expression 'vegetable oil' used in this section is inclusive of solidified oil which is synanymous with hydrogenated oil, we have to understand the word 'hydrogenated oil' in the same sense. We doubt very much whether this reasoning is acceptable. The object of that Order was the prohibition of forward contracts inclusive of all kinds of oils, whether raw, refined or solidfied.

In that context, it was not necessary for the Legislature to clarify the position and to draw a distinction between vegetable oil and vegetable oil product as nothing turned upon such a distinction. This vegetable oil product is also called hydrogenated oil and its inclusion inj S. 2 is not an index to the means of the word 'hydrogenated oil' in whatever context and in whatever enactment it occurs.

This order was issued underR. 81, sub-cl (1), Defence of India Rules which regulated the production, distribution and maintenance of supplies of essential commodities for effective prosecution of the war.

(30) All vegetable oil,s which were also essential to the life of the community, had to be controlled, among other things, in accordance with the requirements of the community. That being the only purpose of that order the essential distinction between the two commodities has not been brought out in that Order.

(31) Mr. Rajah Ayyar next invited our attention to the schedule annexed toR. 81-D in which only vegetable oils are mentioned and argued that it really hydrogenated oil was not a kind of vegetable oil, specific mention of it would have een made, for hydrogenated oils are as essential as ordinary vegetable oil for the life of the community.

This argument can be disposed of by remarking thatthe list is not exhaustive and is only illustrtive. As is seen from the definition of essential article in R. 81-D(aa) essential article means an artcile which the Provincial Government or the District Magistrate, being of opinion that the maintenance of the supply thereof is essential to the life of the community, declares by order in writing to be an essential article. Under this, it is left to the Provinciald Government or the District Magistrate to declare any article to be an essential article within the purview of the sub-rule.

We, therefore, feel no assistance can be derived by the petitioner by any of the notifications referred to above. On the other hand, they clearly indicate that hydrogenated oil is not oil in its original shape and therefore cannot get the benefit of Rs. 18(2), Turnover and Assessment Rules.

(32) Mr. Rajah Ayyar finally submitted that this being a fiscal enactment it should be construed in favour of the subject whenever there is anydoubt, and as the connotation of this term is not free from any doubt, the benefit of the doubt may be given to the assessee.

It is no doubt true that in interpreting the fiscal enactment if there is nay doubt or ambiguity in the expression of thelegislative intent he benefit of such doubt should go to the subject, but it is equally true that when exemption from taxation or deduction is claimed they should not be extended beyond the express requirements of the language of the provision.

It is for the person claiming a benefit under a provision granting, exmeptioin to establish the conditions which attract the applicability of such exemption. In this case, as remarked by us, it would be straining the language of the word 'oil' an enlarging the definition if we should uphold the plea of the petitioner. In our opinion, the petitioner is not entitled to invoke R. 18(2) and the decision of the appellate tribunal is correct.

(33) In the result the petitioin is dismissed with costs which we fix at Rs.250/-.

(34) Petition dismissed.