Kohinoor Fashion Jewellery vs State of Kerala

C.N. Ramachandran Nair, J.—The question raised in the revision case is whether the Tribunal was justified in sustaining the assessment u/s 5A of the Kerala General Sales Tax Act, 1963 on the value of old gold ornaments brought by the partners of the firm towards capital. We have heard counsel for the petitioner and the Special Government Pleader.

On the facts it is clear that the old ornaments brought by the partners towards capital were accounted as trading stock after crediting the value in the capital accounts of the partners. The firm was free to sell old gold ornaments as such or after polishing or repair or after remaking. It is stated that the old ornaments were remade into new ornaments and sold the same by the firm as part of the stock-in-trade. Even though the assessing officer treated the transaction as purchase and assessed the purchase value in the hands of the firm u/s 5A, the first appellate authority cancelled the assessment holding that items brought in the capital account cannot be treated as purchase by the firm. The Tribunal after being satisfied about the facts as stated above and by reference to Explanation (3D) to Section 2(xxi) pertaining to definition of "sale" as contained in the KGST Act, reversed the order of the first appellate authority and sustained the, assessment. The counsel for the petitioner relied on a single Bench decision of the court in C.M. Hamsa Haji Vs. Sales Tax Officer, Tirur, whereunder this Court held that transfer of goods by a partner to the firm towards his capital does not amount to sale in the course of trade or business by a "dealer" to attract tax under the KGST Act. We find that this Court was only considering the case of liability u/s 5(1) of the KGST Act at the hands of the seller and not purchase tax liability at the hands of the partnership. We, therefore, hold that this decision relied on by the petitioner has no application on the facts of this case. Moreover, the scope of this decision is substantially neutralized by virtue of the introduction of Explanation (3D) to Section 2(xxi) by Act 17 of 1984 with effect from April 1, 1984 which is as follows:

(xxi) ''sale'' with all its grammatical variations and cognate expressions means every transfer (whether in pursuance of a contract or not) of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge;

Explanation (3D).- Unless otherwise expressly provided in this Act, any transfer, delivery or supply of any goods referred to in this Clause shall be deemed to be a sale of those goods by the person making the transfer, delivery, or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made.

Even after the introduction of the above provision, the transfer of goods by the partner to the firm as capital contribution will not attract tax liability u/s 5(1) at the hands of the partnership because it is not a transaction in the course of business. However, the transaction of purchase will attract tax u/s 5A of the KGST Act as the firm namely, the transferee admittedly took this as stock in trade, remade the old ornaments into new ornaments and sold the same in the course of business. Therefore, we are in agreement with the view expressed by the Tribunal. We accordingly confirm the order of the Tribunal and dismiss the revision case.