Supreme Court Upholds State in Sales Tax Assessment on Tanning Bark Purchase Turnover. Purchase of Tanning Bark for Consumption in Manufacturing Process Held Taxable as Dealer Purchase Under Section 2(e) and Rule 5(2) of Hyderabad General Sales Tax Act, 1950.

Case Note & Summary

The appeal before the Supreme Court of India arose from a sales tax assessment under the Hyderabad General Sales Tax Act, 1950 for the assessment year 1954-55. The respondent, a registered dealer carrying on the business of tanning hides and skins and selling tanned skins in Hyderabad, purchased undressed hides and skins as well as tanning bark and other materials required in the tannery. The Sales Tax Officer, Circle IV, Hyderabad, determined the respondent's total turnover at Rs. 5,70,417-12-4 (O.S.), which included Rs. 61,431-14-9 (O.S.) representing the price paid for buying tanning bark. The respondent disputed liability on this amount, contending that tanning bark was bought for consumption in the tannery and not for sale, and therefore the respondent was not a dealer in tanning bark. The tax authorities rejected this contention, and the Deputy Commissioner of Commercial Taxes, Hyderabad Division, and the Sales Tax Appellate Tribunal, Hyderabad, confirmed the assessment. The respondent then filed a revision petition before the High Court of Andhra Pradesh under Section 22(1) read with Rule 40 of the Andhra Pradesh General Sales Tax Act VII of 1957. The High Court modified the order of the taxing authorities and excluded from the taxable turnover the price paid for the tanning bark used in the tannery. The State of Andhra Pradesh appealed to the Supreme Court by special leave. The legal issues before the Supreme Court were whether the respondent was a 'dealer' within the meaning of Section 2(e) of the Hyderabad General Sales Tax Act, 1950, with respect to tanning bark purchased for consumption in the manufacturing process, and whether the purchase price was taxable under Rule 5(2) of the Sales Tax Rules. The State argued that the purchase of tanning bark was in the course of the respondent's business and therefore the respondent was a dealer. The respondent, who did not appear, maintained that buying for consumption rather than sale excluded the respondent from the definition of dealer. The Supreme Court examined Section 2(e), which defines 'dealer' as a person engaged in the business of buying, selling or supplying goods. Section 2(m) defines 'turnover' as the aggregate amount for which goods are either bought or sold by a dealer. Section 4 imposes tax on turnover. Rule 5(1) provides that turnover shall be the amount for which goods are sold, but Rule 5(2) provides that in the case of specified commodities, including tanning bark, the turnover shall be the amount for which the goods are bought by the dealer. The High Court had held that a purchaser is liable to pay tax under Rule 5(2) only when carrying on business of buying and selling a commodity specified in sub-rule (2), and not when buying it for consumption in a manufacturing process. The Supreme Court disagreed. The Court held that 'business' in taxing statutes means an occupation or profession with the object of making profit, involving a course of dealings continued or contemplated with a profit motive, and not for sport or pleasure. To be a dealer, a person need not follow the activity of buying, selling and supplying the same commodity. Mere buying for personal consumption without a profit motive does not make a person a dealer, but a person who consumes a commodity bought in the course of trade or uses it in manufacturing another commodity for sale is regarded as a dealer. The buying of the commodity mentioned in Rule 5(2) must be in the course of business, i.e., for sale or use with a view to make profit out of the integrated activity of buying and disposal. The commodity may itself be converted into another saleable commodity, or it may be used as an ingredient or in aid of a manufacturing process leading to the production of such saleable commodity. In the present case, the tanning bark was bought for a purpose connected with the business of manufacturing and selling dressed hides and skins. The Court approved the view of the Madras High Court in L.M.S. Sadak Thamby and Company v. The State of Madras, 14 S.T.C. 753. Consequently, the Supreme Court allowed the appeal, set aside the order of the High Court, and restored the order of the Sales Tax Appellate Tribunal. No order was made as to costs. The final holding was that the purchase price of tanning bark was includible in the taxable turnover, and the respondent was a dealer qua tanning bark despite consuming it in the manufacturing process.

Headnote

Issue of Consideration

Final Decision

The Supreme Court allowed the appeal, set aside the order of the High Court, and restored the order of the Sales Tax Appellate Tribunal. The purchase price of tanning bark was held includible in taxable turnover. No order as to costs.

Law Points