Purposive interpretation of fiscal incentive rules allows full set-off for new industry even when finished goods are sold outside the State

Rule 42-A of the Gujarat Sales Tax Rules was construed purposively as an incentive for certified new industries, so the set-off for tax paid on raw materials used in manufacture was not confined to goods sold within the State. The ordinary statutory meaning of "sale" yielded to the scheme, object and structure of the rule, which contained no express situs restriction. On that basis, full set-off remained available even where finished goods were sold outside the State, and the purchase tax levy and consequential penalty were unsustainable once the full set-off applied.

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Issues: (i) Whether rule 42-A of the Gujarat Sales Tax Rules, 1970 permits a certified new industry to claim set-off of tax paid on raw materials used in manufacture of goods even when the finished goods are sold outside the State. (ii) Whether, on the facts, the levy of purchase tax and penalty could stand once full set-off under rule 42-A was available.

Issue (i): Whether rule 42-A of the Gujarat Sales Tax Rules, 1970 permits a certified new industry to claim set-off of tax paid on raw materials used in manufacture of goods even when the finished goods are sold outside the State.

Analysis: The relevant expression in rule 42-A was construed in the setting of the scheme of drawback, set-off and refund under the Act and the Rules. The statutory definition of "sale" in section 2(28) of the Gujarat Sales Tax Act, 1969 ordinarily confined sale to a sale made within the State, but the Court held that the context, object and structure of rule 42-A justified departure from that dictionary meaning. The rule was designed as an incentive to new industries, and a restrictive construction limiting the benefit to goods sold only within the State would defeat that purpose. The text of the rule, including the condition requiring use of the purchased goods within the State in the manufacture of goods for sale, the availability of set-off on machinery and purchase tax, and the absence of any express situs restriction, all indicated that the benefit was not confined to intra-State sales of the finished goods.

Conclusion: A certified new industry was entitled to full set-off under rule 42-A even though the manufactured goods were sold outside the State.

Issue (ii): Whether, on the facts, the levy of purchase tax and penalty could stand once full set-off under rule 42-A was available.

Analysis: Once the assessee was held entitled to the entire set-off, there was no breach of the relevant declaration and no surviving difference between tax assessed and tax paid that could justify the further levy. The purchase tax levy proceeded on the mistaken assumption that the set-off was restricted to goods sold within the State, and the penalty was consequential upon that premise.

Conclusion: The orders levying purchase tax and imposing penalty were not sustainable.

Final Conclusion: The reference was answered in favour of the assessee, and the Tribunal's view granting the whole set-off and setting aside purchase tax and penalty was upheld.

Ratio Decidendi: Where a fiscal incentive provision is enacted to promote new industry, the statutory expression must be read contextually and purposively, and a defined term may depart from its ordinary or dictionary meaning if the scheme, object and structure of the provision so require.

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