Court rules rice milling not manufacturing under Karnataka Sales Tax Act, exempts from tax liability.

The court held that converting paddy into rice does not amount to "manufacture" under the Karnataka Sales Tax Act, as it does not result in a new substance. Therefore, the respondents, rice mill owners, were not liable to pay tax on the purchase turnover of paddy. Additionally, since there was no transfer of paddy to another party, it was not considered disposal of goods other than by sale. As a result, the court dismissed the revision petitions, ruling in favor of the respondents.

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Issues Involved:
1. Whether the conversion of paddy into rice amounts to "manufacture" u/s 6(i) of the Karnataka Sales Tax Act, 1957.
2. Whether there was disposal of such goods in any manner other than by way of sale in the State.

Summary:

Issue 1: Conversion of Paddy into Rice as "Manufacture"

The respondents, registered dealers owning rice mills, were taxed on the purchase turnover of paddy u/s 6(i) of the Karnataka Sales Tax Act, 1957. The Sales Tax Appellate Tribunal held that dehusking paddy to get rice does not amount to "manufacture." The State challenged this conclusion, arguing that paddy and rice are different articles and that converting paddy into rice constitutes "manufacture." The court examined whether hulling or milling paddy results in the consumption of paddy in the manufacture of other goods for sale. The court noted that "manufacture" involves a transformation where a new and different article emerges. It concluded that dehusking paddy to obtain rice does not result in a new substance, and thus, rice cannot be considered a manufactured article. The court upheld the Tribunal's view that there is no consumption of paddy in the manufacture of other goods for sale.

Issue 2: Disposal of Goods Other than by Sale

The State alternatively contended that the assessees disposed of the goods in a manner other than by sale in the State. The court clarified that "dispose" involves a transfer of title in goods. Referring to legal definitions, the court stated that disposal means passing out of control from one to another. Since there was no transfer of paddy to anyone else, it cannot be said that there was disposal of the goods in any manner other than by sale. The court also noted that the rice obtained from paddy was already subjected to sales tax, and taxing the same transaction at both purchase and sale points is inconceivable. Therefore, the court held that the respondents were not liable to pay tax on the purchase turnover of paddy either on the ground of consumption in manufacture or disposal other than by sale.

Conclusion:

The revision petitions were dismissed, and the respondents were not liable to pay tax on the purchase turnover of paddy milled in their mills.

Petitions dismissed.

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