Case: State Of Madras Vs. M/S.K.C.P. Ltd

2. The respondent company carried on business at 38, Mount Road , Madras, its main business being the manufacture and sale of machinery and parts of machinery and accessories. For manufacturing parts of the machinery, the company, maintained a foundry and in 1952 in purchased two arc furnaces for a sum of Rs. 2,13,512.81 for the purpose of using the same in its foundry. In the account books and the balance sheet of the company these furnaces were shown under the heading "workshop equipment". According to the company the furnaces were found to be unsuitable for the purpose for which they had been purchased and therefore they were disposed of in 1958 to a purchaser in Calcutta for a sum of Rs. 4,20,000. For the assessment year 1958-59 the assessing authorities sought to include the amount of Rs. 4,20,000 in the turnover of the company although it was maintained by the company that the sale represented an isolate sale of its fixed capital assets. The appeal before the Sales Tax Appellate Tribunal, Madras also failed. The view of the tribunal may be stated in its ownis not denied that the appellant comes within the scope of the definition of "dealer". It has to be seen whether the sale of the two arc furnaces had a reasonable connection with the normal course of business of the assessee. The fact that the appellant could not use them or that they are surplus machinery cannot take it out of the ambit of the appellants business of sales of machinery or part of machinery. The necessity to dispose of unwanted machinery is ingrained in the very nature of business of sale of machiery which the assessee was carrying on and it had to effect sales of such surplus materials."A revision petition was presented to the High Court of Madras under Section 38 of the Madras General Sales Tax Act (Act I of 1959) read with Section 9 (3) of the Central Sales Tax Act 1956 (Act LXXIV of 1956), hereinafter called the Madras Act and the Central Act respectively. Before the High Court it was argued on behalf of the assessee that the furnaces were purchased for the purpose of being installed in the factory. It was therefore to be used as capital asset and not as a part of the stock-in-trade. At the time of purchase the assessee had no idea of selling the furnaces and there was no intention of making any profit. The business which was carried on by the assessee was entirely different, namely production of machinery and parts and the sale of the furnaces, when they were found to be unserviceable, was not made in the course of the normal business activity of the assessee. The position taken up on behalf of the State was that when the assessee carried on the business of selling machinery of various kinds the sale of arc furnaces must be regarded as sale of machinery in the normal course of its business activity. The learned Judges of the High Court referred to a large number of decided cases including the decision of this court in State of Andhra Pradesh v. Abdul Bakshi and Bros., 1964 - 15 STC 644  = (AIR 1965 SC 531 ). Reliance was finally placed on the observations in Ambica Mills Ltd. v. State of Gujarat, 1964-15 STC 367  (Guj) in which it was observed inter alia at the machinery which had been disposed of had been obviously purchased and installed for use for production of textile goods. The view taken in that decision was that a person could not be said to be carrying on business of selling assets of that business when sale of such assets had been made only because they had become useless and unserviceable by usual wear and tear or because of the necessity for substituting modern machinery. In the present case the learned Madras Judges were of the opinion that it was impossible to hold that the sale of the arc furnaces was either ingrained in the business activity of the assessee or would constitute its normal business activity. According to them the mere fact that the sale price exceeded the cost price of the arc furnaces was not sufficient to establish that their sale was a business activity or that it was actuated by the profit motive. It was consequently held that the turnover of the assessee was not liable to sales tax.

Court's reasoning:
The facts in the decision of the Court under discussion were different and distinguishable from the present case. The tanning bark was actually consumed in the process of manufacturing another commodity and it was either used as an ingredient or for adding the process of manufacture which cannot be said about the arc furnaces which were indisputably bought for being installed in the foundry as a part of the manufacturing plant. The words "in aid of a manufacturing process" have to be read in the context in which they appear in passage extracted above and cannot be taken to mean that even a part of manufacturing plant will become a saleable commodity if it is found to be unusable or no longer required. Such a view is untenable and cannot be regarded as sustainable in the light of the decision of thiswas further observed that where a person in the course of carrying on the business was required to dispose of what might be called his fixed assets or his discarded goods acquired in the course of business, an inference that he desired to carry on the business of selling his fixed assets or discarded goods would not ordinarily arise.The facts and circumstances which have been established in the present case are stronger than those in the previous decisions of this Court. The furnaces were admittedly imported for the purpose of being installed as a part of the plant in the foundry of the assessee. There is no material whatsoever to show that there was any intention at the time when the furnaces were purchased of selling them at a profit. According to Mr. Sen himself the assessee decide to sell the furnaces because it was discovered that they were too big to be installed in the manufacturing plant. The case of the assessee throughout was and no evidence or material to the contrary existed that the furnaces had been shown in the books of the assessee under the classification "workshop equipment."The same entries in the balance sheet. Although the assessee was dealing in the sale of heavy machinery and machinery parts it was nowhere proved that furnaces were ever manufactured or sold by it or were part of its business or ingrained therein. The arc furnaces were either fixed assets or discarded goods which had been found to be unserviceable or unsuitable.It must therefore be held that the High Court rightly came to the conclusion that the sale proceeds of the furnaces could not be included in the turnover the assessee for the purpose of determining the liability of the assessee to sales tax.