DIRECTOR OF SUPPLIES & DISPOSALs, CAI, CUTTA A

MEMBER,

BOARD OF

REVENUE',

WEST

BENGAL,

CALCUTTA

April 24, 1967

[J. C. SHAH, S. M. SIKRI AND V. RAMASWAMI, JJ.]

Bengal Finance (Sales-tax) Act (6 of 1941), s. 2(c)-Dealer-Central Government disposing of surplus war material-If liable to sales-tax as dealer.

Section 2(c) of the Bengal Finance (Sales-tax) Act, 1941 defines a "dealer" as meaning any person who carries on the business of selling goods in West Bengal and as including the Government. The appellant was a widespread organisation of the Government of India set up for the disposal of surplus American war equipment which included goods of great diversity and which had been taken over by the Government of India after the Second World War. The Government of India received the equipment free of cost. A part of the equipment was appropriated by the Government of India to their own use, some elj.uipment was sold to the State Governments and other autonomous bodies, and the rest was sold to the public-. The sales were spread over a number of years and goods of the value of several lakhs had been sold in auctions held from. time to time. after advertising in newspapers.

On t'he question whether the appellant wa8 a "dealer" and therefore liable to pay sales-tax, HELD: (Per Sikri and Ramaswami JJ.) : In disposing of the goods the appellant was not carrying on the business of selling goods, and therefore, the appellant was not a "dealer" within the meaning of s, 2(c) of the Act, and, the transactions of sale . were not liable to be taxed under the Act. The appellant was not selling the goods for profit but was merely disposing them of by way of realisation . of capital. [786

B-D]

Comniissioner of Taxes v. British Australian Wool Realisation Association, [1931] A.C. 224 (P.C.) applied.

State of Andhra Pradesh v. Ml s. Abdul Bakihi & Bros., (1964] 7 S.C.R. 664; 15 S.T.C. 644 (S.C.) and State of Gujarat v. Raipur Manufacturing Co. Ltd., [1967] 1 S.C.R. 618; 19 S.T.C. 1 (S.C.), referred to.

Per Shah J. (dissenting) : It could be inferred from the totality of circumstances that the appellant was not merely realising capital, but was carr1dng on bu'siness, and was therefore a deaJer within: the meaning of s. 2( c) of the Act and liable to be assessed to sales-tax. [780 A, HJ It cannot be soid that because the Government of India received the equipment free of cost it could not set up a business to dispose of that equipment. l11ere was an organised course of activity which was -sys .. tematic and with the set puroose of makin~ profit; and the tests of volume, frequency, continuity and system generally. applied for deciding whether there was an intention to carry on business were also 'Satisfied. [779 G-H;

780 F-GJ

N11rai11 Swadeshi Mills v. Commissioner of Excess Profit Tax, 26 I.T.R. 765 (S.C.) and State of Andhra Pradesh v. Abdul Bakshi & Bros., [196-11 7 S.C.R. 664; 15 S.T.C. 644 (S.C.) referred to.

DIRECTOR, SUPPLIES V. BOARD OF REVENUE (Shah, /.) 779

Commissioner of Taxes v. British Australian Wool Realisation Associl/tio11 Ltd. [1931] A. C. 224 (P.C.) explained and distinguished.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 616 of 1966.

Appeal by special leave from the judgment and order dated November 26, 1964 of the Calcutta High Court in Sales Tax Reference No. 4 of 1962.

R. Ganapathy Iyer, V. D. Maha; an and S. P. Nayyar, for the appellant.

B. Sen, P. K. Chatter; ee, G. S. Charter; ee for P. K. Bose, for the respondent.

S!WI, J. delivered a dissenting Opinion. The Judgment of SIKRI and RAMASWAMI, JJ. was delivered by RAMASWAMI J.

Shah, J. I regret my inability to agree with the view expressed by Ramaswami, J.

Section 2(c) of the Bengal Finance (Sales Tax) Act, 1941,. defines a "dealer" as meaning "any person who carries on the business of selling goods in West Bengal and as including the Government."

The Government of India set up an organisation-the Direc torate of Disposals (United States Transfer Directorate )-to dis- E pose. of war equipment taken over by them from the American forces after the Second World War. This organisation had several branches under its control. A part of the equipment was appropriated by the Government of India to their own use; some equip ment was sold to the State Governments and other autonomous

bodies; and the rest was sold to the public. The taxing authorities held that the Directorate was a dealer within the meaning of the Bengal Finance (Sales Tax) Act, 1941, and the High Court of Calcutta in a reference made under s. 21 (3) agreed with that view. .

It is common ground that the Government of India paid no consideration for acquiring the equipment; they merely set up un organisation to dispose of the equipment. It •)s not, and cannot

be argued that because the Government of India received the equipment free of cost it could not set up a business to dispose of that equipment. An owner of goods may commnce business in those goods by converting them into stock-in-trade of his business.

The sales made by the Government of India through the Directorate were not casual : they wore spread over a numbor of years.

The equipment Included goods of peat dlvonity which wore dis posed of with the help of a widespread organisation. Tho goods offered for sale wore frequently advorlllscd In newspapers and

auctions were held from time to time to dispose of the f:OOds. Was the Government of India in entering upon this activity merely realiz; ing capital or was it carrying on business in the American surplus war equipment ?

This Court observed in The State of Andhra Pradesh v .. II.

Abaul Bakshi and Bros.(1):

"The expression 'business' though extensively used is a word of indefinite jmport. In taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour Of a person, normally with the object of making profit. To regard an act; ivity as business there must be a course of dealings, either actually continu.ed or contemplated to be continued with a profit motive, and not for sport or pleasure."

In Narain Swadeshi Weaving Mills v. Commissioner of Ex cess Profits Tax('), Das, J., delivering the judgment of the Court observed:

"The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose."

An owner of goods may dispose of his property in one lot or from time to time in different 1ots. By merely realizing the value of a capital asset, the owner does not become a dealer. Where, however, he sets up an organisation-a substantial a11d systematic cours"' of activity-to sell the goods with a profit motive, he may in. the light of other circumstances be deemed to have entered into an activity in the nature of business or trade. The line between the two classes of cases is thin and sometimes may be blurred. But in the present case, it cannot be said that the activity undertaken by the Government of India for dispcsal of the' American surplus war eq_uipment was merely an activity of the nature of realizat.ion of capital.

There was an organised course of activity, it was .systematic and it was with a set purpose of making profit. The tests of frequency, continuity and system which are generally employed in determining whether an activity for the disposal of goods owned by a person indicates an intention to carry on business are satisfied in this case. -The inference does not arise merely from the ex:istence of a selling organisation or systematic sales, but from the totality of circumstances.

In Commissioner of Taxes v. British Australian Wool Reali zation Association :Limited('), the Judicial Committee was called

(2) 26 I. T. R. 76S.

(I} IS S. T. C. 644. (3l [1931] A. C. 224.

DlllECTOR, SUPPLIES V. BOARD OF REVENUE (Shah, ]. ) 7 8 ~

upon to consi!f!::r whether surplus resulting from sale of wooI acquired for tf:ie purpose of the First World War was exigible II> income-tax under the Income Tax Act, 1915 (Victorja; 6 Geo. 5 No. 2668). The Judicial Committee agreeing with the Supreme Court of Victoria held that the sale of surplus wool merely result-

B ed in realisation of capital assets and no part oI it was income chargeable to tax. The assessee Company was incorporated for the purpose of selling surplus wool originally acquired during the

war. The Commonwealth Government of Australia transferred to the Company its undivided half of the. Australian wool, and its share Of p(Ofits already realised, in consideration of the issue of. priority wool certificates and tu1ly pliid shares. The Company, also agree4 to sell on l:>ehalf of the British Government the rest of the wool for a commission. The proceeds of sale of the half share of the Australian wool exceeded the cost at which it had been

taken into the books of the Company. After the priority wool certificates were redeemed, and the whole of the capital credited as paid on the shares was paid off, a large surplus rell'ained in the hands of the Company. The Supreme Court of Victoria held that the surplus proceeds of the sale did not arise from trade, but

were realization of capital assets and were therefore not taxable under the Income Tax Act, 1915, and with that the Judicial Com mittee agreed. The .transaction was unusual. Vast quantities of wool had accurnula, ted both in the hands of the British Government and of the Commonwealth Government: they had to be realized or E wasted. It was of vital Interest to the Commonwealth of Australia that the realization of surplus wool should not be. conducted so as to destroy the market for the current production: t was also essential that the operation of realization shoiild be conducted with due regard to the legitimate interests of the British consumers.

With a view to devise an: effective machinery to serve this twin objective, the Company which was to act as a common agency for F disposal of surplus wool in the hands of the two Governments was

~ up with a nominal capital. The constitution of the Company was the direct result of an agreement between the two Governments, aru1 the attainment of the Government purposes was seeured by agreements which the Company entered into with the

two Governments. The Government of the Commonwealth

assigned the profits accrued from sales of surplus Australian wool, in consideration of fully paid up shares and priority certificates to be issued in the names of persons or. bodies nominated by the Commonwealth Government. There was a separate agreement between the British Government and the Company about . the disposal of wool belonging to that Government. Inierest of the

Commonwealth Go {ernment in the surplus wool-a sum exceedill'g ;£ 6 million was transferred 'to the COmpany, and it beCame an instrument of conversion of the whole of the surplus wool still Ul)SOld. For the share of the Commonwealth GoYemment in the

wool it became a medium of distribution of the net surplus amongst A the original suppliers of wool. The Company also took over the organization under which the .rezation of wool was proceeding for over two years before it was set up, "and a realization of surplus wool whose sole or even primary purpose was the acquisition of gain, whether by the Imperial Government in respect of one moiety, or by the Association or its members in respect of the B other was never again entertained". The Judicial Committee observed at p. 249 :

" • . . • in tt'uth and in fact !the Assoc:ia.- tion' s interest in the wool always was fixed .ilaP, ital and never was circulatio~ capital. Its purpose with reference to it was to realize the asset,. having done so to dis- C tribute the proceeds among those entiled and then itself to disappear.''

The Judicial Committee again observed at p. 252 :

"All that its British board did was to utilize on its behalf the organization under which they had acted D when, as a committee of the Ministry.of Munitions, they were enaged in the same task of realization. In other words, m their Lordships' judgment there is in the special case neither a finding, nor any statemnt of facts warranting the conclusion that this Association ever indulged in any activity except that of realization E which, as Rowlatt, J., has aid, 'is not a trade'.

Upon the facts stated, any other conclusion would be tantamount to saying that a realization such as that effected by the Asaoclation must be a trade because of the bringing into existence of a selling organization made necessary only by reason of the mere magnitude of the realization-a proposition not to be entertained." F

I have stated the facts of the case before the Judicial Committee and. the reasoning of the Board in some detail to indicate that the case bears , little analogy with the case we are dealing with.

I am unable to hold that a case which has been decided on its very special facts can be deemed to be an authorit¥ governin~ the G present case. The deci9ion of the Judicial Committee enunciates no new principle : it applies settled principles to a very unusual set of facts.

There is no finding by the Sales Tax Tribunal that the Directorate was only set up for realizatfon of the surplus equipment, and 8 the High Court has declined to raise any such Inference. The High Court has clearly found that the Directorate of Disposals (the United States Transfer Directorate) was carrying on business

DIRECTOR, SUPPLIES v. BOARD OF REVENUE (Ramaswami, J.) 783

within the meaning of s. 2 ( c) of the Bengal Finance (Sales Tax) Act, 1941. It is difficult to upset that finding of the High Court i.n an appeal with spec;:ial leave, and to hold that on the facts established the Directorate of Disposals was not carrying on business of selling goods.

The appeal must therefore fail.

Ramaswami, J. This appeal is brought, by special leave, from the judgment of the Calcutta Righ Court dated November 26, 1964 in a reference under s. 21(3) of the Bengal Finance (Sales Tax) Act, 1941 (Bengal Act VI of 1941 ) , hereinafter referred to as the 'Act'.

The Director of Disposals, the United States Transfer Directorate, is an organisation of the Government of India. It is res ponsible for the disposal of surplus American war equipment which had been taken over by the Government ol' India. When the equipment was substantially disposed of, iis work was redud to a great extent and therefore it merged with the office of the Regional Commissioner (Disposals) on January 11, 1950. Later on the Supply and Disposal Services of the Government of India were merged and the department was r.edesignated as Directorate of Supplies & Disposals. The function of this directorate was to dispose of surplus goods and to purchase goods on behalf of the Government of India.

The Director of Supplies & Disposals (hereinafter called the appellant') was asked by the Sales-tax officials of the West Bengal Government to get himself registered as a 'dealer' under the Act. The appellant declined to do so, contending that he was not a 'dealer' and that he was not engBged in the business of buying and se!Hng and was therefore not liable to pay any sales-tax, but the contention of the appellant was over ruled and he was assessed to sales-tax for three periods from April 1, 1949 uptil May 31, 1951. The appellant took the matter in appeal to the Assistant Commissioner of Commercial Taxes, Calcutta who modified the orders of assessment, holding that the

suplies made by the appellant were liable to be taxed except those

h1ch were proved to be mere transfers to its sister departments in the Government of India. The appellant filed revision petitions to the Commissioner of Commercial Taxes and to the Board of Revenue, but these petitions were dismissed. As directed by the High Court, the Board of Revenue referred the following question of law for th.e decision of the High Court under s. 21 ( 3) of the Act:-

"Whether the Director of Supplles and Disposals United States Transfer Directorate having his olllce situated at No. 6, Esplanade East, Calcutta, carries on the business of sellin11 goods in West Beniial and is, therefore, a 'Dealer', within the meaning of section 2 ( c) of A the Bengal Finance (Sales Tax) Act, 1941 ?" .

By its judgment dated November 26, 1964, the High Court answered the question in the affirmative and against the appellant.

The question to be considered in this appeal is whether the appellant is .t 'dealer' within the meaning of s. 2 ( c) of the Act defining a 'dealer' as "any .person who carries on the business of selling goods in West Bengal and as including the Government''.

It was argued on behalf of the appellant that the surplus material was left in India at the conclusion of the last war by the American Government to be dealt with by the Government of India just as it pleased. The Govellllllent could have used the goods itself or made a gift of them to others or thrown them away as scrap. As a matter of fact, it. was pointed out that a considerable portion of the sutjlllls material was used by the Government itself and the balance instead of being thrown away was sold to the public, and that selling of such material did not involve carrying on of a 'business' and the appellant was therefore not liable to be taxed as a 'dealer' under s. 2(c) of the Act. The opposite view-point was put forward on behalf. of the respondent.· It was submitted that surplus material was sold in a series of transactions and goods of the value of several lakhs had beeri sold and there was a profit motive behind the transactions. It was contended that the sales were not casual but they were spread over a number of years and the surplus good$ were disposed of with the help of a widespread organisation. It was also said that the goods which were offered for sale were advertised in the newspapers and auctions were also held from time to time. As pointed out by this Court in State of Andhra Pradesh v. M/s Abdul Bakshi and Bros.(') a person to be a dealer must .be engaged in the business of buying or selling or. supplying goods.

The expression "business" though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive; there mus, t be some real and systematic or organised course. of activity or conduct with a set purpose of making profit. To mfer from a course of transactions that it is intended thereby to carry on business ordinarily there must exist the characteristics of volume, frequency, continuity. and system indicating an intention to continue the activity of carrying oi; i the ~nsactions !or a profit.

But no single test or group of tests 1s dec1S1ve of the mtentton to carry on the busb:iess. It must be decided in the circumstances of

(I) IS S:T.C. 644.

DIRECTOR, SUPPLIES v. BOARD OF REVENUE(Ramaswami, J.) 785

each particular case whether an inference could be raised that the assessee is .carrying on the business or purchasing or selling of goods within the meaning of the statute.

Jn a recent decision of this Court in The State of Gujarat v.

Raipur Manufacturing Co. Ltd.(') the question arose whether a company which carried on the business of manufacturing and selling cotton textiles was liable to sales-tax when disposing of old and discarded items such as stores, machinery, iron scrap, cans, boxes, Cotton ropes, rags, etc. It was held that the mere fact that the sales of the items were frequent and their volume wa~ large did not lead to the :eresumption that when the goods were acquired there was an intenlion to carry on the business in these discarded materials, and a person who solagoods whic)l were unservicea):>le or unsuitable for his business did not on that account become a dealer in those. goods, u.nless he had an intention to carry on the business of selling those goods. At page 7 of the Report Shah, J. speaking for the Court, observed as follows :-·

"It is clear from these cases that to attribute an intention to carry on business of selling goods it is not sufficient that the assessee was carrying on business in some commodity and he disposes of for a price articles discarded, surplus or unserviceable. It was urged, however, on behalf of the State that where a dealer with a view to reduce the cost of production disposed of uns11rviceable articles used in the manufacture of goods and credits the price received in his accounts, he must be deemed to have a profit-motive, for it would be uneconomical for the business to store unserviceable articles and; to survive as an economic unit. But the question is of intention to carry on business of selling any particular class of. gO?ds.

Undoubtely from the frequency, volume, conunwty and regulanty of transactions carried on with a profit-motive, an inference that it was inten~ to carry on. business in the commodity may arise.

But it does not anse merely because the price received by sale of discarded goods enters the accounts of the trader and. my on an overall view enhance his total profit, or md1rectly reduce the cost of production of goods in the business of selling in which he Is engaged.

An ttempt to realize price by sale of surplus unservice- . ble or discarded goods does not necessarily lead to an mference that business is intended to be carried on in those goods, and the fact that unserviceable goods are sold and not stored so that badly needed space is available for the business of the assessee also does not lead to

(I) 19 S.T.C I.

the inference that business is intended to be carried on in selling those goods."

Having examined the facts found by the High Court in the present case, we are satisfied that the appellant was not carrying on the business of buying or s.elling goods within the meaning of s. 2 ( c) of the Act. It is not disputed that large quantities of war material were handed over to the Government of India under the

proviions of the IndoU.S. agreement for the prosecution of the war. A part of the war material was used by the Governmeni for defence and military activitie~ and there was a huge surplus left with the Government of India which was either no longer useful or had become obsolete. We are of the opinion that in disposing of this surplus war material the appellant was not carrying on the business of selling goods and the transactions of sale were not liable to be tax.ed under the provisions of the Act. IO our opinion, the appellant was not setting surplus goods for profit but he was merely disposing of the surplus material by way of realisation and the transactions were therefore not taxable as sales falling within the provisipns of the Act. The view that we have expressed is borne out by the decision of the Judicial Committee in Commis sioner of Taxes v. British Australian Wool Realizaricin Association Limited(') in which the respondent-company was incorporated

.i~ 1920 in Victoria pursuant to an agreement between the Impc

rm! and Commonwealth Governments, for the purpose of selling the undisposed of surplus of wool acquired for the war, and di>· tributing the proceeds.

The Commonwealth Government trunsferred to the company its undivided half of the Australian wool and in cash its share of profits u'lready realized, in consideration of the issue of priority wool certificates and fully-paid shares to its nominees, the wool suppliers. The company also agreed with the Imperial Government to sell on its behalf for a commission all the rest of the wool, whether Australian or not. The wool wus all sold during the years 1921to1924; the company had no other <lealings in wool. The proceeds of the half share of the Austral'ian

wool largely exceeded the sum at which it had been taken into the books of the company. The priority wool certificates were redeemed, and the whole of the capital credited as paid on the shares was paid off under successive schemes sanctioned by the Court; there remained a large surplus in the hands of the liq•1ida tor of the company. Assessments were made l!JlOn the company

under the Income Tax Act, 1915, of Victoria, 1ri' respect o~ P, roportions of the surplus proceeds of sale und of the comm1ss1011

earned. The company raised objections thereto, and a spcci~I case was stated for the opinion of the Supreme Court of Victoria which held that. the surplus proceeds of sale were not a result of the trade but realization of capital assets and were therefore not

-(f) (1931) A.C. 224.

DIRECTOR, SUPPLIES v. BOARO OF REVENUE(Ramaswami, /.) 787

taxable under the Act. The judgment of the Supreme Court of Victoria was affirmed by the Judicial Committee which held that the surplus resulted merely .from the realisation of capital assets. and therefore no part of it was income chargeable to tax. At page 250 of the Report, Lord Blanesburgh stated as follows :-

"To their Lordships, therefore, there is disclosed, on their view of the facts here, a case entirely within the terms of the following words from the judgment in Cali fornian Copper Syndicate v. Harris [ (1904) 5 Tax Cas. 159, 165], which have since been so often cited with approval : 'It is quite a well settled princiiple in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit ....... . assessable to income tax.' Equally applicable, in the view of their Lordships, are the words of Lord Dunedin in Commissioner of Taxes v. Melbourne Trust [(1914) A.C. 1001, 1009], where he says: 'If the liquidator of one of the banks had made an estimate of the various assets held by him for realization, and then on real.ization had obtained more than that estimate, such surplus would not have been profh assessable to income tax." I E Lord Blanesburgh further observed at page 252 of the Report :

"All that its British board did Was to utilize on its behalf the organization under which they had acted when, as a committee of the Ministry of Munitions, they were .engaged in the same task of realization. In other words, in their Lordships' judgment there is in the special case neither a finding, nor any statement of facts wa<ranting the conclusion that this Association ever indOiged in any activity except that of realization which, as Rowlatt, J. has said, 'is not a trade.' Upon the facts

tated, any othr c~:mclusion would be tantamount to sayug .that a realtzal!on such as that effected by the Assoctlion must be a trade because of the bringing into existence of a selling organization made necessary only by re!l!'<?n of the mere magnitude of :he realization-a propos1t1on not to be entertained."

The material facts of this case are closely parallel to those in the present case ad it must e held that the appellant was not c~ mg on the busmess of selhng goods and was not a "dealer" withm the meaning of the Bengal Finance (Sales Tax) Act, 1941 <Bengal Act Vl of 1941).

For these reasons we hold that the appellant did not carry on the business of selling goods in West Bengal and therefore was not a dealer wi!hin the meaning of s. 2 ( c) of the Act and the question referred to the High Court under 5. 21 (3) of the Ar must be answered in the negative and in favour of the appellant.

We accordingly set aside the judgment of the High Court dated November 26, 1964 and allow this appeal with costs.

ORDER

In accordance with the opinion of the majority, this appeal is allowed with costs.

V.P.S.