Canteen sales not taxable under U.P. Sales Tax Act

The Allahabad High Court held that the canteen sales operated by the Fertilizer Corporation of India Limited were not liable for sales tax under the U.P. Sales Tax Act. The Court determined that the canteen's activities were incidental to the main business of manufacturing fertilizers and did not amount to the business of buying and selling goods. Relying on the interpretation that ancillary activities do not constitute business for tax purposes, the Court allowed the revision, declaring the turnover of canteen sales as non-taxable. The assessee was also awarded costs of Rs. 200.

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Issues Involved:
1. Liability of the canteen run by the Fertilizer Corporation of India Limited for sales tax under the U.P. Sales Tax Act.
2. Whether running the canteen constitutes "carrying on business of buying and selling goods."

Detailed Analysis:

1. Liability of the Canteen for Sales Tax:

The primary issue was whether the canteen operated by the Fertilizer Corporation of India Limited, under a statutory obligation for employee welfare, was liable for sales tax under the U.P. Sales Tax Act. The canteen was run on a non-profit basis as mandated by section 46 of the Factories Act and rule 68 of the Rules framed under the Factories Act. Despite this, the Sales Tax Officer imposed a tax on the sales turnover of the canteen, which was Rs. 1,10,961.12, applying a rate of two percent, resulting in a tax of Rs. 2,219.22.

The assessee's appeal against this imposition was dismissed, and the revising authority upheld the tax liability, following the precedent set by the Allahabad High Court in Swadeshi Cotton Mills Company Ltd. v. Sales Tax Officer, which held that canteen sales were taxable. However, the single Judge, upon reviewing similar cases from the Calcutta, Karnataka, and Delhi High Courts, noted that these courts had ruled that canteen sales were not liable to tax. The single Judge also considered the Supreme Court's decision in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi, which stated that sales in restaurants were not taxable under the Sales Tax Act. Consequently, the matter was referred to a larger Bench.

2. Definition of "Carrying on Business of Buying and Selling Goods":

The second issue was whether the operation of the canteen fell within the definition of "carrying on business of buying and selling goods." The term "dealer" and "business of buying or selling goods" were crucial in this context. The U.P. Sales Tax Act's definition of "dealer" included any person or association carrying on the business of buying or selling goods, regardless of profit motive, after the 1963 amendment. This broadened the scope to include non-profit activities.

The Court examined various amendments to the U.P. Sales Tax Act and compared them with definitions in other states. The Calcutta High Court, in Fort Gloster Industries Ltd. v. Member, Board of Revenue, West Bengal, and the Karnataka High Court, in Motor Industries Co. Ltd. v. State of Mysore, held that the running of a canteen was not a commercial activity and thus not taxable. These decisions emphasized that the activity must be commercial, even if profit motive was not required.

The Supreme Court's decision in State of Tamil Nadu v. Burmah Shell Oil Storage and Distributing Co. of India Ltd. was also considered, where it was held that canteen sales were taxable under the amended definitions of "business" and "dealer" in the Madras General Sales Tax Act. However, for the period before the amendment, the Supreme Court upheld the Madras High Court's decision that canteen sales were not taxable.

Conclusion:

The Allahabad High Court concluded that the canteen sales were not liable to tax under the U.P. Sales Tax Act. The Court held that the canteen's operation was incidental or ancillary to the main business of manufacturing fertilizers and did not constitute the business of buying and selling goods. This conclusion was based on the Supreme Court's interpretation that ancillary activities do not constitute business for tax purposes. Consequently, the revision was allowed, and the turnover of canteen sales was declared non-taxable. The assessee was awarded costs of Rs. 200.

Petition allowed.

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