Shree B.R. Steels vs Additional Commissioner of Commercial Tax

Manindra Mohan Shrivastava, J.

This common order shall govern disposal of Writ Petition (T) Nos. 4775, 5448 and 5449 of 2006 involving identical issues based on similar facts for consideration between the same parties in respect of different assessment years. The petitioner in these three writ petitions, a proprietorship concern registered with the Commercial Tax Department, has filed three writ petitions aggrieved by the orders, by which, he has been re-assessed to tax under the provisions of the Entry Tax Act, 1976 (hereinafter referred to as "the Act"). In all the three writ petitions, the petitioner is aggrieved by order of reassessment passed on different dates in respect of assessment years 2001-02, 2002-03 and 2003-04. In all the cases, initially, at the time of assessment, the petitioner was not subjected to any entry tax in respect of purchase of M.S. iron and steel scrap from Bharat Aluminium Company (in short, "BALCO")-respondent No. 4. Later on, in all three cases, reassessment notice purporting to be under section 28(1) of the Commercial Tax Act, 1994 (in short, "the Act of 1994") read with section 13 of the Act was issued and reassessment proceedings were drawn.

"(I) In W.P. (T) No. 4775 of 2006, reassessment order was passed on January 16, 2006 for the period April 1, 2000 to March 31, 2001 by the Assistant Commissioner, Commercial Tax, Durg. A revision was preferred by the writ petitioner before the Additional Commissioner, Commercial Tax, which was dismissed on May 29, 2006.

(II) In W.P. (T) No. 5449 of 2006, reassessment order was passed on January 16, 2006 for the period April 1, 2001 to March 31, 2002 by the Assistant Commissioner, Commercial Tax, Durg. A revision was preferred by the writ petitioner before the Additional Commissioner, Commercial Tax, which was dismissed on May 29, 2006.

(III) In W.P. (T) No. 5448 of 2006, reassessment order was passed on January 13, 2006 for the period April 1, 2002 to March 31, 2003 by the Assistant Commissioner, Commercial Tax, Durg. A revision was preferred by the writ petitioner before the Additional Commissioner, Commercial Tax, which was dismissed on May 29, 2006."

The petitioner during different period as indicated hereinabove had purchased M.S. steel scrap from BALCO, Korba and claimed it as tax paid purchases made from registered dealer. On such purchases, no tax was claimed to be payable by the petitioner and assessment was initially made treating those purchases as tax paid and no tax was levied. This was so because at the time of original assessment made, the respondents did not impose tax in the matter of purchase of M.S. steel scrap from seller, i.e., BALCO, who did not make any endorsement in the sale invoices that they were local goods and not tax paid. However, later on, in each of the three cases, the respondent authorities issued notices under section 28(1) of the Act of 1994 in form 47. The petitioner filed his reply in response to reassessment notice in each case. In sum and substance, the reply of the petitioner was that the notices were vague and there was no indication in the notices as to on what basis, reassessment proceedings were being initiated. There was no indication in the notice that assessment had been opened either because there was under-assessment or it was a case of escapement or concealment or whether goods were now being treated as local goods in the hands of BALCO. The petitioner, in its objection/reply to reassessment notice stated that at the time of original assessment proceedings, all invoices made from BALCO were reflected in the returns and also in the statement during assessment, on which basis, assessment was made. The petitioner presumed that the assessing authority has initiated reassessment proceedings on change of opinion that the petitioner was liable for payment of entry tax in respect of purchases of M.S. steel scrap made by it from BALCO. The petitioner also objected to proposed penalty by staring that as the seller-BALCO had not made any endorsement in the invoices that the M.S. steel scrap purchased by the petitioner are local goods and are not tax paid, the omission is not attributable to the petitioner, as such, no entry tax on goods is leviable.

The assessing authority, however vide orders dated January 16, 2006, January 16, 2006 and January 13, 2006 passed in reassessment for three different assessment years held that the M.S. steel scrap purchased by the petitioner were wrongly indicated as tax paid though in respect of such purchases, the petitioner was liable to pay entry tax, and therefore, such purchases had escaped assessment for the purpose of levy of entry tax. In the reassessment proceedings drawn by the respondents in the aforesaid three different assessment years, entry tax and penalty was levied on the petitioner as follows :

(I) For assessment year 2000-01, entry tax of Rs. 22,820 as also penalty of Rs. 22,820 were levied.

(II) For assessment year 2001-02, entry tax of Rs. 1,61,385 as also penalty of Rs. 1,61,385 were levied.

(III) For assessment year 2002-03, entry tax of Rs. 5,34,652 as also penalty of Rs. 5,29,549 were levied."

Revisions preferred in each of the cases were dismissed by the Additional Commissioner, Commercial Tax, Raipur, giving rise to these three writ petitions involving identical issue for consideration.

The learned counsel for the petitioner contended that the petitioner purchased M.S. steel scrap from BALCO. The BALCO purchased plant and machinery and building structural and when caused entry of those items into local limits, the entry tax was paid by the BALCO on plant and machinery and building structural. The steel scrap were generated during the course of repair and maintenance/dismantling of structural, plant and machinery/civil structural. The scrap so generated can neither be said to be generated by manufacturing process nor can be said to be purchase of goods as specified in Schedule II in a local area so as to qualify as local goods in relation to local area and liable for levy of entry tax. The scrap is not a manufactured product out of the goods which have been purchased. It is only a scrap. Therefore, the BALCO while selling those M.S. steel scrap rightly did not make any endorsement in the invoices/bills that they are local goods and not tax paid under the provisions of section 7(1) of the Act. These invoices did not contain any such endorsement as required under section 7(1) of the Act, which clearly meant that the BALCO had sold and the petitioner purchased M.S. steel scrap, which were already tax paid by the BALCO. As such, there was no liability on the part of the petitioner to again make payment of entry tax while purchasing those items from BALCO. Initially, at the time of making original assessment when returns were submitted before the assessing authority, despite specific details submitted which included the quantity and the nature of item purchased by the petitioner from BALCO and all the invoices open to scrutiny by the assessing authority which did not contain any specification as it being local goods not tax paid, the assessing authority did not hold that such purchase of M.S. steel scrap were local goods by treating it to be a new commercial commodity out of any process of manufacturing. But later on, the authorities changed their opinion that the M.S. Steel scrap purchased by the petitioner from BALCO were local goods different from iron and steel purchased by BALCO and brought into local area. According to him, the power conferred on the assessing authority to carry out reassessment under section 28(1) of the Act of 1994 read with section 13 of the Act did not empower the assessing authority to open assessment on change of opinion. He further submits that the present one is not a case where purchase of M.S. steel scrap has been either under-assessed or escaped assessment or assessed at lower rate or deduction has been wrongly made from their account. In the absence of any such contingencies, reassessment was not permissible under the law only because there is a change of opinion. In support of his submission, learned counsel for the petitioner relied upon the decisions in the case of Sales Tax Officer, Ganjam Vs. Uttareswari Rice Mills, , C. Sathiraju and Sons Vs. State of Andhra Pradesh, : C. Sathiraju and Sons Vs. State of Andhra Pradesh, , Suburban Industries Kalinga Private Limited v. Sales Tax Officer, Bhubaneswar [1993] 90 STC 280 (Orissa), State of Andhra Pradesh Vs. Ampro Food Products Limited, and Madhya Pradesh Industries Ltd. Vs. Income Tax Officer, Special Investigation Circle ''B'', Nagpur, .

The learned counsel for the petitioner further argued that in any case in view of the authoritative pronouncement of the Supreme Court in the case of Grasim Industries Ltd. Vs. Union of India (UOI), , metal scrap generated during the process of repair and maintenance of the machinery of a manufacturing plant, cannot be said to be a by-product as a result of manufacturing activity in relation to production of any product. He further submits that in the case of M.P. Traders & Agents, Indore v. Commissioner of Sales Tax [1997] 107 STC 441 (MP) : [1996] 23 Cur.T.J. 320, the Division Bench of the High Court of Madhya Pradesh has clearly held that the scrap is not a product under any manufacturing process out of the goods, which have been purchased. It does not involve process of manufacturing. The scrap is like a waste product and not materially different from the basic goods which had been used by the BALCO. Therefore, under these circumstances, the orders of reassessment passed by the assessing officer and confirmation of such reassessment order by the revisional authority are illegal and unsustainable in law.

Per contra, learned State counsel submits that the present is not a case of change of opinion but a case where purchase of steel scrap escaped assessment on entry tax and it was because factually incorrect information was placed before the assessing authority at the time of original assessment that entry tax has already been paid whereas no such tax was paid. Learned State counsel submits that though at the time of purchasing plant and machinery and other items and causing its entry in the local area, BALCO pays entry tax, the steel scrap which are generated are different from those items purchased and brought to the local area by the BALCO. The steel scrap are generated during the process of manufacturing and have different identity than the plant and machinery and building structural, therefore, they are local goods manufactured by BALCO and at the time of sale of such M.S. steel scrap by BALCO to the petitioner, the sale invoices ought to contain the endorsement as "local goods tax not paid" as required under section 7(1) of the Act. The invoices did not contain any such endorsement and it was incorrectly stated before the assessing authority that the goods are tax paid. On this factually incorrect information made before the assessing officer, entry tax in respect of purchase of metal scrap was not levied by the assessing authority. Later on, it came to the notice and knowledge of the assessing authority that the M.S. steel scrap are different commercial commodity produced during the process of manufacture; such metal scrap are different items. Therefore, reassessment notice under section 28 was given to the petitioner and the reassessment of those metal scrap purchased have been held in respect of local goods, and therefore, the petitioner was rightly held liable for payment of entry tax in respect of purchase of such M.S. steel scrap. Learned State counsel relying upon the order passed by the Board of Revenue, M.P. Gwalior in the case of Raj Enterprises Fastners Pvt. Ltd., Indore v. Commissioner of Commercial Tax, Madhya Pradesh [1999] 32 VKN 155 submits that metal scrap are by-product and fall under a different category and they cannot be treated as tax paid. Learned State counsel relied upon the judgment of the Supreme Court in the case of State of Tamil Nadu Vs. Pyare Lal Malhotra and Others, , in which, the Supreme Court held that M.S. steel scrap are generated out of manufacturing process and are different and distinct, and therefore, the authority rightly opened the assessment in exercise of power under section 28(1) of the Act of 1994 and levied entry tax in respect of M.S. steel scrap purchased by the petitioner from the BALCO which earlier had escaped assessment on incorrect factual information that the goods were tax paid.

It is not in dispute that the petitioner during three assessment years purchased M.S. steel scrap from BALCO. The orders passed by the assessing authority at the first instance in three cases and placed on record also show that initially when the assessment was made, the return submitted by the petitioner included details with regard to nature and quantity of items purchased by the petitioner during the relevant assessment years. The details of invoices issued by the BALCO admittedly did not contain any endorsement of such sold items being local goods tax not paid under the provisions of section 7(1) of the Act. The petitioner purchased M.S. steel scrap from the BALCO. The BALCO while selling those M.S. steel scrap, the petitioner did not declare the M.S. steel scrap as local goods and for this reason, no endorsement as required under section 7(1) of the Act was made.

Under Chhattisgarh Entry Tax Act, 1976, entry tax is leviable on the entry of goods in the local area for the consumption, use or sale therein section 3 of the Act deals with incidence of taxation. Entry tax is leviable on the entry in the course of business of a dealer of goods specified in Schedule It into local area for consumption, use and sale therein. Such tax is liable to be paid by every dealer liable to tax under the Sales Tax Act who has effected entry of such goods. Sub-section (1)(b)(i) of section 3 of the Act however provides that no tax under sub-section (1) shall be levied in respect of goods specified in Schedule II other than local goods purchased from a registered dealer on which entry tax is payable or paid by the registered dealer.

Section 7 of the Act provides that every registered dealer who, in the course of his business, manufactures, produces or grows any goods specified in Schedule II in a local area and sells such local goods to any of the registered dealer, the sale documents shall mention that such goods are local goods and no entry tax has been paid on them.

The statutory scheme upon conjoint reading of section 3/7 of the Act reveals that the incidence of taxation is not sale and purchase but the entry of goods into local area and the tax is to be paid by the dealer who has effected entry of goods. It is only when a dealer who has effected entry of goods and paid entry tax and then in the course of his business, manufactures, produces or grows any goods specified in Schedule II in that local area and while effecting sale of such goods endorses in the sale document that such goods are local goods and no entry tax has been paid on them that the purchaser is liable for payment of entry tax on such local goods.

In the present case, the BALCO while effecting entry of plant and machinery and building structural into the local area paid entry tax and this is the factual position which has not been disputed by any of the parties before the court. Once those iron and steel items have been subjected to entry tax, the steel scrap which are being generated out of repair and maintenance of those plant and machinery and building structural, in the absence of any endorsement made in the sale document by the seller-BALCO, would not create any liability for payment of entry tax by its purchaser, i.e., the petitioner. Present is not a case where the BALCO has treated or declared M.S. steel scrap manufactured by it being goods specified in Schedule II in a local area and endorsement to that effect in the sale document that they are local goods but not tax paid. In the absence of any such declaration by BALCO, there was no liability cast on the petitioner under section 3 of the Act to pay entry tax in respect of purchases of M.S. steel scrap made by it from BALCO.

When the petitioner submitted its return in respect of different assessment year before the assessing officer, as the original order of assessment goes to show, the petitioner declared the nature and quantity of material purchased by it. The bill invoices issued by the BALCO during transaction of sale and purchase of M.S. steel scrap, did not contain any endorsement that they are local goods not tax paid so as to require the petitioner to pay entry tax. Therefore, the petitioner in his submission before the authority at the time of assessment rightly submitted that the goods were tax paid. It was the burden of the Revenue, as held in the case of Mohan Singh and Sons v. Commissioner of Sales Tax, Madhya Pradesh [1996] 29 VKN 243 that such goods are local goods. However, the assessing authority during the course of original assessment, despite all such details submitted before it, did not form any opinion that the M.S. steel scrap which were purchased by the petitioner from BALCO were different items manufactured by BALCO within the local area and thus, the local goods within the meaning of its definition as provided in clause (f) of section 2 of the Act. Obviously at the time of assessment, the opinion formed by the authority was that the M.S. steel scrap purchased by the petitioner were not local goods as they are not different than the items namely plant and machinery and building structural which were brought into the local area by the BALCO and already tax paid.

However, later on, the assessing authority changed its opinion, which is reflected from the impugned orders of reassessment in three cases. In the reassessment orders, it is clearly reflected that the assessing authority now changed his opinion and held that M.S. steel scrap are different products and qualified as local goods manufactured by BALCO. On this change of opinion, the assessing authority in the reassessment proceedings proceeded to levy entry tax as also penalty on the petitioner. Reassessment was also affirmed by the revisional authority.

Once on facts, it is held that the basis for reassessment is change of opinion, it has to be held that such reassessment is impermissible under the law, in view of the well-settled legal position laid down in the case of Sales Tax Officer, Ganjam Vs. Uttareswari Rice Mills, , while examining ambit and scope of reassessment under section 12(8) of the Orissa Sales Tax Act, which is pari materia provisions contained in section 28(1) of the Act of 1994. It was held that existence of a reason that the turnover of dealer escaped assessment or has been under-assessed is a condition precedent to issuance of notice of reassessment under section 12(8) of the Act and the existence of such reason is sine qua non for the issuance of notice.

In the case of Ritu Investments Private Limited Vs. Deputy Commissioner of Income Tax, , dealing with the power of reassessment of assessing authority under section 147 of the Income-tax Act, it has been held that change of opinion cannot clothe the assessing officer with the jurisdiction to initiate the proceeding under section 147 of the Act. It has been further held that an error of judgment does not confer such a jurisdiction on the assessing officer. Dealing with the provisions contained in section 19 of the Madhya Pradesh General Sales Tax Act, 1958, which is in pari materia of section 28(1) of Act of 1994 involved in the present case. Having application in the present case, the High Court of the Madhya Pradesh in the case of Eisher Motors Ltd. and Another Vs. State of M.P. and Others, , has held that change of opinion cannot be made a basis to carry out reassessment in the garb that the turnover has escaped assessment. The Orissa High Court in the case of Naba Bharat Ferro Alloys Ltd. and Another Vs. State of Orissa and Others, , has also held that change of opinion could not be made a basis to make reassessment.

The honourable Supreme Court in the case of Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, examining ambit and scope of power of reassessment under section 147 in respect of income escaping assessment held thus (page 564 in 320 ITR) :

"On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the assessing officer to make a back assessment, but in section 147 of the Act (with effect from April 1, 1989), they are given a go-by and only one condition has remained, viz., that where the assessing officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post-April 1, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words ''reason to believe'' failing which, we are afraid, section 147 would give arbitrary powers to the assessing officer to re-open assessments on the basis of ''mere change of opinion'', which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re- assess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of ''change of opinion'' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ''change of opinion'' as an in-built test to check abuse of power by the assessing officer..."

In the facts of present case, reassessment proceedings have been drawn by the assessing authority on the ground that the purchase has escaped assessment, is clearly illegal and unsustainable in law in view of the authoritative pronouncement of the Supreme Court in the case of Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, .

Upon scrutiny of order passed by the assessing authority at the time of assessment and reassessment in the facts and circumstances of the present case and having held in discussions hereinabove that the main operative reason for reassessment was change of opinion rather than purchase of M.S. steel scrap by the petitioner from the BALCO having escaped assessment, applying well settled legal position laid down in plethora of decisions cited above, I am of the considered opinion that the reassessment carried out by the assessing authority was impermissible under section 28(1) of the Act of 1994.

For yet another reason, the order of reassessment levying entry tax on purchase of M.S. steel scrap by the petitioner from BALCO by holding it to be local goods manufactured out of any manufacturing process and being by-product different from plant and machinery and building structural has to be held illegal and unsustainable in law in view of the decision of the Supreme Court in the case of Grasim Industries Ltd. Vs. Union of India (UOI), . The issue requiring consideration was whether metal scrap was waste generated while repairing of worn out machinery or parts of cement manufacturing plant and amounts to manufacture and thereby exigible to excise duty. The Supreme Court, after examining the nature of the process, out of which, M.S. scrap was generated held thus (pages 187 and 188 in 11 GSTR) :

"In the present case, it is clear that the process of repair and maintenance of the machinery of the cement manufacturing plant, in which M.S. scrap and iron scrap arise, has no contribution or effect on the process of manufacturing of the cement, which is the excisable end-product, as since welding electrodes, mild steel, cutting tools, M.S. angles, M.S. channels, M.S. beams, etc., which are used in the process of repair and maintenance are not raw material used in the process of manufacturing of the cement, which is the end-product. The issue of getting a new identity as M.S. scrap and iron scrap as an end-product due to manufacturing process does not arise for our consideration. The repairing activity in any possible manner cannot be called as a part of manufacturing activity in relation to production of end-product. Therefore, the M.S. scrap and iron scrap cannot be said to be a by-product of the final product. At the best, it is the by- product of the repairing process which uses welding electrodes, mild steel, cutting tools, M.S. angles, M.S. channels, M.S. beams, etc."

The aforesaid decision of the Supreme Court is directly and squarely applicable in the present case also.

Reliance placed by learned counsel for the State in the case of State of Tamil Nadu Vs. Pyare Lal Malhotra and Others, is misconceived. In that case, the Supreme Court had examined with reference to items mentioned in various schedule as to whether use of metal scrap in the process of manufacture with a result of production of manufactured goods can be said to produce altogether new commercial commodity different from metal scrap. In that case, it was found that under manufacturing process, the commercial commodity was found different from metal scrap. The present is not a case of use of M.S. steel scrap in a manufacturing process resulting in manufacturing of new commercial commodity having its own identity. Present is a case where M.S. steel scrap are generated during the process of repair and maintenance of plant and machinery without there being any process of manufacture of some other end-product. Therefore, M.S. steel scrap generated during repairing activity cannot be said to be a by-product as a result of manufacturing activity in relation to production of any product. The M.S. steel scrap cannot be said to be by-product or final product. It is at the most a by-product of the repairing process and not manufacturing process. In the result, all the writ petitions are allowed. The orders passed in reassessment in three cases by the assessing authority and affirmed by the revisional authority are set aside. No orders as to cost.