2004 (1) TMI 654 - HC - VAT / Sales Tax

FCI damaged rice and wheat certified for cattle feed qualify as tax-exempt cereals under Fifth Schedule entry 15

KN. Nilugal Versus District Manager, Food Corporation of India, District Office, Hubli/Raichur and another

Karnataka HC held that damaged rice and wheat certified by FCI as fit for cattle/poultry feed qualify as 'cereals' and are exempt from tax under entry 15 ... Classification - buying and selling damaged foodgrains (wheat and rice) from Food Corporation of India - demand for payment of tax - specified purposes for which such damaged foodgrains can be used - term 'cereals' - HELD THAT:- We hold that 'rice' and 'wheat' which are not fit for human consumption but fit for being used as animal feed for livestock and poultry, will still be a 'cereal', subject to any definition to the contrary. Accordingly, we hold that damaged rice and wheat that has been classified and certified by FCI as fit for cattle/poultry feed, will fall under 'cereal' and be exempt from tax under entry 15 of the Fifth Schedule. But if FCI categorises the damaged grains as fit only for manure or fit only for manufacture of inedible industrial starch, then it will not be a 'cereal' falling under entry 15 of the Fifth Schedule. FCI, by its letter dated May 30, 2000 called upon the petitioner to pay sales tax at 10 per cent plus 5 per cent of tax as cess in regard to sale of damaged rice already effected. from the record, it has to be held that FCI is not entitled to claim any tax on damaged rice/wheat sold for use as cattle/poultry feed. The tax, refund of which is claimed, relates to the period 1993-1994 to 1998-1999. First respondent has been assessed to tax in regard to those years and amount recovered by it as tax in regard to the sales in favour of the petitioner has been remitted to the State Government. Therefore, we do not consider it a fit case for directing the first respondent to refund the amount collected as tax. It is open to the petitioner to seek a refund from the State Government under section 18-AA(4) of the Act. As and when such application is made, the State Government will have to consider and dispose of the same in accordance with law and the observations made above. Accordingly, we allow this writ petition in parts. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether damaged wheat and rice fall under entry 15 of the Fifth Schedule (entries 64 and 40A of the Fifth Schedule prior to April 1, 1998) or under section 5(1) of the Karnataka Sales Tax Act, 1957.Whether the demand for payment of tax under section 5(1) of the Act as per FCI's letter dated May 30, 2000, is valid.Whether the first respondent is liable to refund the sales tax paid on the purchase of damaged wheat and rice.2. ISSUE-WISE DETAILED ANALYSISRe: Point No. (i)The primary issue is whether damaged wheat and rice, which are fit for cattle/poultry feed, fall under the definition of 'cereals' in the Fifth Schedule and are thus exempt from tax or whether they should be taxed under section 5(1) of the Act.The Court examined the relevant legal framework, including entries in Schedule V and Part A of the Second Schedule. The Court noted that the term 'cereals' is not explicitly defined in the Act, but section 14 of the Central Sales Tax Act, 1956, includes paddy, rice, and wheat under 'cereals.'Key precedents considered include:The case of Yarana Feeds Farms, where it was held that non-edible dry fish still fell under the category of 'fish' and was exempt from tax.The case of State of Tamil Nadu v. Sri Venkateswara and Co., where inedible starch made from contaminated rice was considered a 'rice product.'The case of Commissioner of Sales Tax, U.P. v. Prag Ice and Oil Mills, where non-edible groundnut oil was still considered 'groundnut oil.'The Supreme Court's decision in Tungabhadra Industries Ltd. v. Commercial Tax Officer, which held that hydrogenated groundnut oil was still 'groundnut oil.'The Court concluded that 'edibility' or suitability for human consumption is not a necessary criterion for determining whether a commodity falls under the category of 'cereals.' The Court held that damaged rice and wheat fit for cattle/poultry feed continue to be 'cereals' and are therefore exempt from tax under entry 15 of the Fifth Schedule.Re: Point No. (ii)The issue here is the validity of the demand for sales tax made by FCI in its letter dated May 30, 2000. The Court, having determined that damaged rice and wheat fit for cattle/poultry feed are exempt from tax, held that FCI is not entitled to claim any tax on such sales.Re: Point No. (iii)The question of whether FCI is liable to refund the sales tax collected was considered. The Court noted that FCI collected the tax based on a bona fide interpretation of the Commissioner's clarification and had remitted the tax to the State Government. The Court declined to order a refund from FCI but allowed the petitioner to seek a refund from the State Government under section 18-AA(4) of the Act.3. SIGNIFICANT HOLDINGSThe Court's significant holdings include:'Damaged wheat and rice sold by FCI as fit for cattle/poultry feed will fall under entry 15 of the Fifth Schedule (from April 1, 1998 and earlier under entries 64 and 40A of the Fifth Schedule) and therefore exempted from tax.'The demand for payment of sales tax and cess dated May 30, 2000, is quashed.The petitioner is granted liberty to seek a refund of tax from the State Government in accordance with law.The Court emphasized that 'cereals' include grains used for human or livestock consumption and that the exemption applies regardless of whether the grains are fit for human consumption.