1999 (2) TMI 530 - SC - VAT / Sales Tax

Manufacturing unit keeps four-year sales-tax exemption despite later capital increase beyond Rs.3 lakh; no mala fides found

SC held that a manufacturing unit which met the statutory conditions when it applied for sales-tax exemption (capital investment not exceeding Rs. 3 ... Construction of the relevant provisions of the U.P. Sales Tax Act, 1948 and the Government notification issued thereunder granting exemption from sales tax of certain goods for specified period - fulfilment of conditions prescribed for units having capital investment exceeding Rs. 3 lakhs - manufacturing unit - registered both under the provisions of the Act and the Central Sales Tax Act, 1956 - granted a term loan - Held that:- It is admitted that the respondent fulfilled the relevant conditions at the time when it applied for exemption, as its capital investment did not exceed Rs. 3 lakhs. Under the notification extracted earlier, the period of exemption in case of unit with capital investment not exceeding Rs. 3 lakhs was four years. Such period was to be reckoned from the date of first sale if such sale took place not later than six months from the date of starting production and in other cases from the date following the expiration of six months from the date of starting production subject to the condition that the unit had not discontinued production of such goods for a period exceeding six months at a stretch in any assessment year. Neither the section nor the notification contains any condition that if the capital investment of the unit exceeds Rs. 3 lakhs after the grant of exemption, such exemption would cease to operate unless and until the conditions prescribed for units having capital investment exceeding Rs. 3 lakhs are fulfilled. In the absence of such express provision there is no warrant for the stand taken by the appellant that after July 23, 1986 the unit was not entitled to the benefit of exemption as its capital investment exceeded Rs. 3 lakhs from such date. The object of granting exemption from payment of sales tax has always been for encouraging capital investment and establishment of industrial units for the purpose of increasing production of goods and promoting the development of industry in the State. It is not the case of the appellant that there was any mala fides on the part of the respondent in obtaining exemption in the first instance as a unit with a capital investment below ₹ 3 lakhs and increasing the capital investment subsequently to an amount exceeding ₹ 3 lakhs with a view to defeat the provisions of any of the relevant statutes. The bona fides of the respondent have never been questioned by the appellant. Issues Involved:1. Interpretation of Section 4-A of the U.P. Sales Tax Act, 1948.2. Conditions for sales tax exemption for industrial units.3. Impact of increased capital investment on existing sales tax exemption.4. Applicability of subsequent amendments to the U.P. Sales Tax Act, 1948.5. Legal principles for interpreting exemption clauses in taxing statutes.Detailed Analysis:1. Interpretation of Section 4-A of the U.P. Sales Tax Act, 1948The key issue in this case revolves around the interpretation of Section 4-A of the U.P. Sales Tax Act, 1948, which deals with the exemption from sales tax for certain goods for a specified period. The section allows the State Government to exempt sales tax to promote industrial development and increase production. The exemption is subject to certain conditions and is valid for a maximum period of seven years from the date of the first sale by the manufacturer.2. Conditions for Sales Tax Exemption for Industrial UnitsThe respondent's manufacturing unit met the initial conditions for sales tax exemption as its capital investment was below Rs. 3 lakhs at the time of application. The unit was registered under the Factories Act, 1948, and had a term loan sanctioned. The exemption was granted from August 9, 1985, to July 22, 1986. The unit later shifted to a new site, increasing its capital investment to Rs. 3,86,299, and obtained registration under the Factories Act effective August 11, 1989. The authorities argued that the exemption ceased once the capital investment exceeded Rs. 3 lakhs.3. Impact of Increased Capital Investment on Existing Sales Tax ExemptionThe pivotal question was whether the increased capital investment disqualified the unit from continuing to receive the exemption initially granted. The court noted that neither Section 4-A nor the relevant notification explicitly stated that exceeding the Rs. 3 lakhs capital investment threshold would nullify the exemption. The High Court held that the relevant date for fulfilling the conditions was the date from which the unit first became eligible for exemption, i.e., August 9, 1985. The court emphasized that the object of the exemption was to encourage capital investment and industrial development, and a subsequent increase in investment should not negate the exemption.4. Applicability of Subsequent Amendments to the U.P. Sales Tax Act, 1948The appellant argued that the subsequent amendment to Section 4-A, effective from September 13, 1985, should guide the interpretation of the original provision. However, the court rejected this argument, stating that subsequent legislation could only be used to interpret an earlier ambiguous Act, which was not the case here. The amendment was deemed remedial and not applicable retrospectively to the respondent's situation.5. Legal Principles for Interpreting Exemption Clauses in Taxing StatutesThe court discussed the principles for interpreting exemption clauses, citing previous judgments. It was noted that exemption provisions should be strictly construed, but provisions granting incentives for economic growth should be liberally construed. The court referred to the Bajaj Tempo Ltd. case, emphasizing that restrictions on exemptions should be construed reasonably to advance the objective of promoting industrial development.ConclusionThe court concluded that the exemption granted to the respondent from August 9, 1985, should not cease merely because the capital investment exceeded Rs. 3 lakhs due to the purchase of land and construction of a new building. The appeal was dismissed, and the High Court's judgment was upheld, affirming the respondent's entitlement to the exemption for the full period of four years from August 9, 1985. The court emphasized that the purpose of the exemption was to encourage industrial development, and the respondent's bona fides were not in question. The appeal was dismissed with no order as to costs.