John, T.J. vs The Sales Tax Officer and Others

T.V. Ramakrishnan, J.—The only question which was considered and decided by the learned Single Judge as per the impugned judgment is whether the Appellant has set up his small scale industrial unit styled as J.J.T. Oil Mills at Pattikkad during the period commencing from April 1, 1979 and ending with 21st October 1980 or not? The learned Single Judge has found that the Appellant has not set up his unit within the said period. If the finding is found to be sustainable, dismissal of the O.P. by the impugned judgment is only to be upheld in the light of the decision of the Supreme Court reported in 1987 (1) KLT 283 (Pournami Oil Mills v. State of Kerala). As such, the only question to be considered in the appeal is whether the above finding of the learned Single Judge is sustainable in law?

We have heard the Counsel on both sides at length. However, we feel that in the manner in which we propose to dispose of the appeal, it is not necessary to state the facts of the case in detail.

In the O.P., the Appellant has claimed full exemption from payment of sales tax in respect of his unit which comes roughly to more than Rs. 44 lakhs due from 1980-81 onwards. Respondents have initiated revenue recovery steps for the realisation of the same. All the assets belonging to the Appellant have already been sold and the Appellant is under orders of arrest also. It is while revenue recovery steps were initiated the Appellant has preferred the O.P.

During the course of the arguments in the appeal, the learned Counsel for the Appellant has filed C.M.P. No. 1924/96 praying for receiving 13 exhibits, marked ''A'' to ''M'', as additional evidence in the appeal. The Appellant has produced the above documents in a fresh attempt to substantiate his contention that his small scale industrial unit was set up between 1st April 1979 and 21st October 1980, though actual business commenced only on 10th November 1980. All the exhibits are only photocopies and the learned Government Pleader has objected to the receipt of such exhibits disputing generally the genuineness of them. The contents of the new exhibits, if genuine, would clearly show that the Appellant has purchased on 25th October 1979 a plot of land in Pattikad in Panacherry Panchayat measuring 17 and odd cents and has put up a small building therein bearing door No. 137A of Ward V of Panacherry Panchayat. Further, it is evident that the Appellant has entered into a loan arrangement with the local branch of the Punjab National Bank to finance him to purchase certain machineries and a motor of 30 H.P. and other equipments for the purpose of J.J.T. Oil Mills as its proprietor. They will also show that he has purchased certain machineries for an amount of Rs. 72,877.10 paying an advance of Rs. 1,000 on 27th June 1980 from one Equipment Agencies, Kallai Road, Calicut. The Appellant has also purchased a 30 H.P. motor from M/s Teejey Bricks and Castings for an amount of Rs. 15,000 on 3rd July 1980. Machineries and Motor purchased and assembled in the building 137A of Ward V were inspected by the S.S.I. Officer of the Punjab National Bank on several occasions and have been certified as properly assembled and in good order. S.S.I. Officer has also certified that the assembled machineries are ready for trial run. The Appellant has also obtained a licence dated 4th September 1980 from the Panchayat for (i) using a motor of 30 H.P., (ii) storing copra, and (iii) manufacture of oil with reference to building with door No. 137A/V, for a period up to 31st March 1981 on payment of Rs. 53 as licence fee. Ext. ''M'' dated 7th October 1980 would show that sizable quantity of copra was also purchased for J.J.T. Oil Mills from one Copra broker and commission agent. Analysing the new documents we find that if all of them are genuine, they may help the Appellant to a very great extent to establish his contention. However, since the Appellant has produced the above documents only in this appeal and that too only photocopies, it may not be proper on our part to admit them as additional documents in this appeal and to take a final decision on the claim of the Appellant based upon such documents as well, treating them as genuine especially when the learned Government Pleader wanted the department to be given an opportunity to challenge the genuineness of them.

As such, having due regard to the entire facts and circumstances of the case, nature of the question to be decided and the stakes involved in the case for both parties, we are of the view that the Appellant should be given a further opportunity to produce all available evidence in support of his contention and to establish the same before the 1st Respondent, and to direct the 1st Respondent to take a fresh decision on the question whether the Appellant has set up his S.S.I. Unit styled as J.J.T. Oil Mills in Pattikad between 1st April 1979 and 21st October 1980 and to pass appropriate orders on the claim for exemption and refund of the tax already paid, put forward by the Appellant. In the circumstances, we would set aside the impugned judgment so as to enable the 1st Respondent to consider the question formulated above and to pass fresh orders in the matter in the light of the directions and observations contained in this judgment.

However, before disposing of the appeal finally, we think that it is proper and necessary to consider the rival contentions raised by learned Counsel for the parties on the real meaning or import of the expression "set up" and to record our considered view on the above aspect for the guidance of the 1st Respondent while considering the question directed to be considered by us. On behalf of the Appellant, it was argued by learned Counsel Sri M.S. Narayanan that though the date of commencement of business in his unit was 10th November 1980 as shown in Ext. R-1 (a), he has set up his S.S.I. Unit by erecting all the machineries in the building bearing door No. 137A of Ward V of Panachery Panchayat and getting Annexure ''L'' licence and electric connection as evidenced by Ext. P-2 by 6th October 1980 well before the expiry of the period. He has done all that is required to be done on his part to begin the trial run of the machineries and commencement of production before the expiry of the period in question. As such, it has to be held that J.J.T. Oil Mill was set up or established before 21st October 1980, well within the period in question. Strong reliance was placed on the decisions reported in Commissioner of Wealth-tax Madras Vs. Ramaraju Surgical Cotton Mills Ltd., and the decisions of this Court in T.R.C. 18 to 22 of 1991 and T.R.C. 200 of 1989.

On the other hand, learned Government Pleader for revenue Sri Rajan Nair has contended that a unit can be treated as ''set up'' or established only after commencement of the business and as such in the light of the admission contained in Ext. R-1 (a) that the date of commencement of business is on 10th November 1980, the unit can be treated as ''set up'' only thereafter. In other words, it was strenuously asserted that commencement of business always precedes the setting up of a unit. Relying upon the meaning of the word ''Business'' as explained in Senairam Doongarmall Vs. Commissioner of Income Tax, Assam, it was contended that till the date of commencement of production a unit cannot be treated as ''set up''. All actions alleged to have been taken by the Appellant even if true can only amount to actions preceding commencement of business in the sense of activities carried out with the object of earning profit as laid down in Senairam Doongarmall Vs. Commissioner of Income Tax, Assam,

Having considered the rival contentions, we think that the word ''set up'' as far as this case is concerned is to be understood as explained in Commissioner of Wealth-tax Madras Vs. Ramaraju Surgical Cotton Mills Ltd., The word ''set up'' has to be taken as equivalent to the word ''established''. Operations for establishment cannot be equated with the establishment of the unit itself or its setting up. Commencement of operations for establishment of a unit must always precede setting up or establishment of the unit. It is only when a unit is ready to go into business and to start production, it can be considered as set up. In the decision the Supreme Court was considering the scope of the expression ''set up'' used in Section 5(1)(xxi) of the Wealth Tax, the relevant portion of which is as follows:

5(1)(xxi)-that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to Clause (d) of Section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking:

Provided that-

(a) * * * * (b) * * * *

Provided further that this exemption shall apply to any such company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit.

The rival contentions raised in the above case are thus: The contention of the Department was that a Unit is liable to be treated as ''set up'' as soon as some operations like placing orders for machineries for the Unit or investment in land and building etc. are carried out and even before a unit is ready to commence business or production. On the other hand, the contention of the Assessee was that a unit can be said to be set up only when the unit is ready to commence business or production. Considering the rival contentions, the Supreme Court has laid down thus:

A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. The expression used in the proviso, under which the period for which the exemption is available is to be determined, is not the same as used in the principal clause. In the proviso, the period of five successive years of exemption was to commence with the assessment year next following the date on which the company commences operations for the establishment of the unit. Operations for the establishment of a unit, from the very nature or that expression, can only signify steps that have to be taken to establish the unit. The word ''set up'' in the principal clause, in our opinion, is equivalent to the word ''established'', but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause. This is also the meaning that the Bombay High Court derived in the case of Western India Vegetable Products Ltd. Vs. Commissioner of Income Tax, Bombay City, where that Court was concerned with the interpretation of the expression ''set up'' as used in Section 2(11) of the income tax Act. That Court held:

It seems to us that the expression ''setting up'' means, as is defined in the Oxford English Dictionary, ''to place on foot'' or ''to establish'' and is contradistinction to ''commence''. The distinction is this that when a business is established and is ready to commence business, then it can be said of that business that it is set up. But before it is ready to commence business it is not set up.

The distinction between operations to be carried out anterior to the setting up and the actual setting up as well as the distinction between setting up and the commencement of business or production in a unit has been brought out clearly by the Supreme Court in the abowe passage. The view taken by this Court in the unreported decisions in T.R.C. 18 to 22 of 1991 and T.R.C. 200 of 1989 is the same. In T.R.C. 200/1989 with reference to the very same notification on the basis of which the Appellant in this case has claimed exemption, this Court has held thus:

..The Unit was set up as provided in the G.O. dated 11th April 1979 clearly before 20th October 1980. The Assessee had taken all possible measures to get electrical connection as early as possible to commence the commercial production in the Unit. It was obtained only on 21st April 1981. We are of the view that once the Unit is set up and is ready for commercial production and the working in the mill could have been started, the mere fact that the electrical connection was given on a later date, will not in any way diseatitle the Unit from getting exemption under the G.O. dated 11th April 1979.

We are of the view that the context in which the expression ''set up'' has been used in the relevant notification in this case is similar to the context in which the said expression is used in Section 5(1)(xxi) of the Wealth Tax Act and it is therefore fully justifiable to understand the meaning of the said expression as expalined in Commissioner of Wealth-tax Madras Vs. Ramaraju Surgical Cotton Mills Ltd., and indicated in T.R.C. 200/1989 and T.R.C. 18 to 22 of 1991 also. As such, we would direct the 1st Respondent to bear in mind the meaning of the expression ''set up'' indicated by the Supreme Court and this Court in the above quoted passages while deciding the question directed to be considered, by us above. If so desires, the Appellant may file a detailed representation before the 1st Respondent raising all the points in support of his case as early as possible. As we are directing a reconsideration of the entire claim put forward by the Appellant for exemption from sales tax for a period of 5 years from 1980-81 and for refund of the sales tax already paid for the said period, we would direct all pending and further proceedings for recovery of sales tax from the Appellant for the above period to be kept in abeyance till final orders are passed by the 1st Respondent.

Writ Appeal is allowed as indicated above.