M. Narayanan Nambiyar Vs. State of Kerala - Court Judgment

V.P. Gopalan Nambiyar, C.J.

1. These tax revision cases relate to the same assessee for differentassessment years, namely, the assessment years 1970-71 to 1973-74, bothinclusive. The accounts of the assessee were rejected and the assessment wasmade on best of judgment basis. The assessee was conducting a rice and flourmill called Dhanalakshmi Rice and Flour Mills, Ezhome, near Payangadi. Theonly point that is urged in these revision petitions is that the estimate ofthe purchase turnover of paddy, liable to tax under Section 5A of the GeneralSales Tax Act, made by the Sales Tax Officer and sustained by the Tribunal,was unjustified and unwarranted in law. In view of the contentions raised, itis unnecessary to notice the amount of purchase turnover of paddy brought totax under the best of judgment. The contention raised is that paddy, purchasedlocally and milled and converted into rice, would not attract the provisionsof Section 5A of the Act so as to render the dealer liable to levy of tax.Section 5A, Clause (1) and Sub-clause (a) thereof, which is the relevantprovision, reads:

5A. Levy of purchase tax.--(1) Everydealer who, in the course of his business, purchases from a registered dealeror from any other person any goods, the sale or purchase of which is liable totax under this Act, in circumstances in which no tax is payable under Section5, and either-- (a) consumes such goods in the manufacture ofother goods for sale or otherwise;

The sectionhas recently come in for examination before this Court in at least twodecisions. In Deputy Commissioner of Sales Tax v. Pio Food Packers [1978]K.L.T. 279, the question arose whether sale of pine-apple, the inedibleportions of which had been removed (namely, the crown, the skin and the core)and which, thereafter, was sliced, filled in cans adding sugar as apreservative, sealed under temperature, and put into boiling water forsterilisation, could be said to involve 'consumption' of the raw pine-applefor the purpose of 'manufacture' of 'other goods'. This Court discussed themeaning of the three expressions emphasised supra. With respect to thetreatises and judicial decisions, it was explained that while everymanufacture involves a change, every change is not a manufacture. It wasfurther noticed that there must be a transformation of the article into a newand different one, the resultant article being commercially different from theoriginal one, which is subjected to a change amounting to a manufacturingprocess. It was well-recognised that, in the consideration and the practicalapplication of these principles or decisions to concrete facts, philosophy andsophistry are bound to play their due share. That, it was pointed out, wouldalone explain the apparently conflicting decisions on more or less similar, ifnot identical, facts.

2. The present case adds one more to theperplexing list of cases which fall to be resolved by the practicalapplication of the principles expounded in the earlier decisions regarding thethree terms or concepts emphasised above. That there is 'consumption' of thepaddy within the meaning of that expression, as explained in the treatises andjudicial decisions, when paddy is milled or dehusked to result in theproduction of rice, seems clear enough; but the difficult questions to befaced are: Does the process of dehusking or milling amount to a process ofmanufacture And, is the rice produced as a result of the operation a new ordifferent product or article vis-a-vis the paddy from which it was produced ?In other words, is the rice 'other goods' qua the paddy from which it wasmilled or dehusked We are confronted with the oft-repeated aphorism thatwhile every manufacture involves a change, every change is not a manufacture.This has been noticed and referred to in the treatises and decisions noticedin Deputy Commissioner of Sales Tax v. Pio Food Packers 1978 K.L.T. 279Unaided by authorities, and as a matter of first impression, we are inclinedto take the view that a manufacturing process is involved in the dehusking ofpaddy or in the milling of paddy into rice in the mills. As a matter of firstimpression again, we are inclined also to think that paddy and rice arecommercially two different articles or commodities. We propound to ourselvesthe question: Would the world of trade and commerce accept the two commoditiesas one and the same Or regard them as commercially different commodities? Weshould think the latter to be the correct answer. These first impressions ofours should furnish the answer against the assessee.

3. But we are upagainst a wall of judicial decisions not easy to scale or batter down. Weshall attempt to grapple with them as best as possible. The counsel for theassessee relied on the decision of the Mysore High Court in State v. RaghuramaShetty [1975] 35 S.T.C. 360. The question there directly arose under Section6(i) of the Karnataka Sales Tax Act of 1957, as to whether the turnover ofrice, sold after purchasing paddy and milling the same, was liable to beassessed to sales tax under the provisions of the Act. The question waspractically the same as arises for consideration here, and arose withreference to a section almost similarly worded. It was ruled that the meredehusking of paddy and getting rice out of the same would not amount to'manufacture', and that, on the facts and circumstances, there was no'consumption' of paddy resulting in the 'manufacture' of other goods in theterms of the section. The position was discussed with respect to thetreatises, which are referred to also by the Division Bench of our High Courtin the Pine-apple case 1978 K.L.T. 279 noticed previously. The decision isdirectly in favour of the assessee. So is the decision of the Allahabad HighCourt in Bakhat Ram Takhat Ram v. State of U.P. [1973] 32 S.T.C. 14 renderednot with respect to a section so strongly the same as, or similar to, the oneinvolved in this case, but in relation to the terms of an exemptionnotification. The question there arose whether rice in its commercially knownform, or in its original state as paddy, could be included within theexpression 'foodgrains' for the purpose of earning the exemption under Section3-D, Clause (1), of the U.P. Sales Tax Act. The decision is not as stronglyappropriate to the point under consideration as the Mysore case1. But we maynote the following observations:

Reverting now to the maincontention, what has to be seen is as to whether paddy is a 'foodgrain' ornot. Foodgrain is a comprehensive term, which includes all grains which areused as food by human beings. Paddy, as such, no doubt, is not fit for humanconsumption, but encased inside it is rice, which is taken out from paddy by aprocess called husking or hulling. In other words, paddy is nothing butunhusked rice. In Webster's New International Dictionary, the meaning of paddyis 'in commerce, unmilled or rough rice, whether growing or cut, also, rice ingeneral'. According to the Oxford English Dictionary, paddy means 'the rice inthe straw or (in commerce) in the husk'. In Encyclopaedia Britannica, we findmentioned in the heading 'preparation of rice': 'The kernel of rice, as itleaves the thresher, is enclosed by the hull or husk and is known as paddy orrough rice. Rough rice is used for seed and feed for livestock, but most of itis milled for human consumption'. Even in the commercial world, paddy isregarded as a foodgrain.

The view expressed in the treatisesreferred to, militate against regarding paddy and rice as commercially twodifferent commodities, or regarding rice as 'other goods' vis-a-vis the paddyfrom which it is produced.

4. As against these, the learned GovernmentPleader placed reliance on the decision of the Supreme Court in Ganesh TradingCo. v. State of Haryana [1973] 32 S.T.C. 623 (S.C.). The question there arosewith respect to the provisions of the Punjab and Haryana Sales Tax Act as towhether the dealers, who bought paddy, dehusked it, either in their own millsor in other mills, and sold rice to the Government and other registereddealers, were entitled to exclude the turnover relating to the paddypurchased. Under the concerned Sales Tax Act, exemption was provided frompayment of sales tax, if the identical paddy in respect of which purchase taxwas levied, was sold again, and not if the paddy sold constituted a differentor other distinct commodity. The contention was that paddy and rice arecommercially identical and, therefore, the exemption granted in respect ofpaddy would enure for the rice as well. The Supreme Court observed:

Now, the question for our decision is whether it could be saidthat when paddy was dehusked and rice produced, its identity remained. It wastrue that rice was produced out of paddy but it is not true to say that paddycontinued to be paddy even after dehusking. It had changed its identity. Riceis not known as paddy. It is a misnomer to call rice as paddy. They are twodifferent things in ordinary parlance. Hence quite clearly when paddy isdehusked and rice produced, there has been a change in the identity of thegoods. In this view it is not necessary for us to refer to the decisions ofsome of the High Courts read to us at the time of hearing.

There is yet another difficulty in the way of the appellants. Both thePunjab Sales Tax Act, as well as that Act as amended by Haryana, make adistinction between rice and paddy in their respective Sales Tax Acts. Riceand paddy are treated differently.

Theapproach to the question as to whether rice and paddy constitute two differentcommodities or not deserves notice and comparison with the views reflected inthe Allahabad and Mysore decisions and in the treatises and lexicons referredto therein. In Sri Siddhi Vinayaka Coconut & Co. v. State of A.P. [1974] 34S.T.C. 103 (S.C.) the question arose as to whether 'watery coconuts' and 'drycoconuts' are two different commercial commodities. With respect to theprovisions of the Andhra Pradesh General Sales Tax Act, 1957, the SupremeCourt, after noticing the relevant provisions of the Act and the schedule,which had clearly treated the two different varieties of coconuts as differentcommodities, observed:.This Court has in a number ofcases held that the same commodity at different stages could be treated andtaxed as commercially different articles. In A. Hajee Abdul Shukoor & Co. v.State of Madras [1964] 15 S.T.C. 719 (S.C.) this Court held that 'hides andskins in the untanned condition are undoubtedly different as articles ofmerchandise than tanned hides and skins' and pointed out that 'the fact thatcertain articles are mentioned under the same heading in a statute or theConstitution does not mean that they all constitute one commodity'. We mayalso refer to the decisions in Jagannath v. Union of India [1962] 2 S.C.R. 118where tobacco in the whole leaf and tobacco in the broken leaf were treated astwo different commodities, East India Tobacco Co. v. State of Andhra Pradesh[1962] 13 S.T.C. 529 (S.C.) where Virginia tobacco and country tobacco weretreated as two different commodities, and Venkataraman v. State of Madras[1970] 25 S.T.C. 196 (S.C.) where cane jaggery and palm jaggery were treatedas two different commodities.

The decision is quiteenlightening as to the approach to be made, for the purposes of sales taxlegislation, in viewing the spectrum of commercially differentcommodities.

5. The learned Government Pleader complained that thedecision of the Mysore High Court in State v. Raghurama Shetty [1975] 35S.T.C. 360 did not consider either the decision in Ganesh Trading Co. v. Stateof Haryana [1973] 32 S.T.C. 623 (S.C.) (sic) or the one in Sri Siddhi VinayakaCoconut & Co. v. State of A.P. [1974] 34 S.T.C. 103 (S.C.) both of which werepronouncements of the Supreme Court. Attention was drawn to the decision inState of Tamil Nadu v. Pyare Lal Malhotra [1976] 37 S.T.C. 319 (S.C.) wherethe Supreme Court emphasised the principle that each commercial commoditybecomes a separate object of taxation in a series of sales of that commodityso long as the commodity retained its identity. The learned Government Pleaderalso drew our attention to the decision in K.C. Pazhanimala v. State A.I.R.1969 Ker. 154 (F.B.). That decision was rendered, no doubt, under a differentbackground, and with respect to the provisions of the Essential CommoditiesAct. The observations made by the Full Bench are interesting and enlighteningon the aspect that arises for consideration here. Observed the learnedJudges:

19. The preamble of the impugned order only showsthat it was for maintaining and increasing the supplies of rice and paddy andfor securing their equitable distribution and availability at fair prices. Thefirst question to be decided is whether the effect of the impugned order is toregulate by licences or permits the production or manufacture of any essentialcommodity. Rice is an essential commodity. Conversion of paddy into ricethrough the rice mills is production or manufacture of rice. The termproduction can only mean making goods available for human wants. To constitutemanufacture there must be a transformation of that article into anotherarticle which is commercially different from the one which was converted. Theessence of manufacture is the change of one object to another for the purposeof making it marketable. In market rice is a different commodity from paddyand therefore when there is a conversion of paddy into rice through rice millsthere is either production of rice or manufacture of rice from paddy. Theobject of the impugned order is therefore to control the same for the purposeof making paddy and rice available to the community at fair prices. Theimpugned order therefore falls under Section 3(2)(a) of the EssentialCommodities Act. It was argued on behalf of the State that the purpose of theimpugned order is to regulate by licences or permits the use of any essentialcommodity. According to the State, paddy is used for manufacturing ricethrough mills and what is sought to be regulated by the impugned order is thesame use. The expression 'use' is a word of very wide significance. Theexpression in Section 3(2)(d) is not use and consumption but use orconsumption. The two expressions, therefore, connote different meanings. InMurray's New English Dictionary, the word 'use' is defined as:

'act of employing a thing for any (especially a profitable)purpose; the fact, state, or condition of being so employed: utilization oremployment for or with some aim or purpose, application or conversion to some(especially good or useful) end'.

Referencewas also made by the learned Government Pleader to the decision of this Courtin Commissioner of Income-tax, Kerala v. Casino (Pvt.) Ltd. [1973] 91 I.T.R.289 where a Division Bench of this Court adopted a liberal construction of theterms 'manufacturing' or 'processing' of goods. The decisions cited have onlytended to confirm the impression, which we formed in the first blush, that aprocess of 'manufacture' is involved in the production of rice by millingpaddy, and that rice so produced represents 'other goods' different anddistinct in nature and character from the paddy from which it wasproduced.

6. In the course of arguments, we were somewhat troubled bythe consequences of our conclusion. We asked the learned Government Pleaderwhether it would not jar on the ears to hold that the rustic process of aconversion of rice through the pestle and mortar should be a process ofmanufacture. The rapid extermination of such antiquated methods by the modernsophisticated ones, no less than the rapidly expanding network of sales taxlegislations, attempting to bring into the tax-gatherer's net many thingswhich might seem to stand outside its fold, should, we think, supply asufficient answer to our bewilderment. And there is yet scope for philosophyand sophistry to run riot.

In the view that we take, the AppellateTribunal was right in its conclusion. We affirm its judgment and dismiss thesetax revision cases with no order as to costs.