Cotton rags remain cotton fabrics for exemption when their manufactured character from cotton is retained.

Cotton rags collected from tailor shops and households were treated as cotton fabrics for exemption purposes because the relevant State entry was read by reference to the statutory definition of cotton fabrics under central excise law. The decisive test was the manufactured character of the goods: cloth made wholly or partly from cotton does not cease to be cotton fabric merely because it is cut, torn, worn out, or sold as rag material for another use. On that basis, pieces of cloth, including chindies and rags, remained exempt cotton fabrics and the disputed turnover was held exempt from tax.

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Issues: Whether cotton rags collected from tailor shops and households fall within the expression "cotton fabrics" in item 5 of the Fourth Schedule to the Andhra Pradesh General Sales Tax Act, 1957, so as to qualify for exemption from tax.

Analysis: The expression "cotton fabrics" in the State Act was to be understood by reference to the meaning assigned in item 19 of the First Schedule to the Central Excises and Salt Act. That definition covers all varieties of fabrics manufactured wholly or partly from cotton. The character of the goods as cotton fabrics does not change merely because the cloth has been cut, torn, used, worn out, or collected in rag form. The decisive question is whether the goods are manufactured from cotton, not the shape, condition, or ultimate use to which they are put. Pieces of cloth, including rags and chindies, remain manufactured cotton fabrics even when sold for use as raw material by paper mills.

Conclusion: Cotton rags are cotton fabrics within item 5 of the Fourth Schedule and the disputed turnover is exempt from tax. The revision cases were therefore allowed in favour of the assessee.

Ratio Decidendi: A cotton fabric does not cease to be cotton fabric merely because it is worn, torn, cut into rags, or sold for a different end use; exemption entries incorporating a statutory definition must be applied according to the essential manufactured character of the goods.

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