Exempt by-product and evidentiary burden in tax assessment: levy cannot rest on presumption without reliable proof.

A by-product arising only incidentally from manufacture of an exempt main product takes the same exempt character unless the department proves an independent taxable manufacture by reliable evidence. Tax cannot be imposed on assumptions that production was through an expeller or that diesel was used where the record contains no supporting material. Non-maintenance of a manufacturing register does not, by itself, justify an adverse inference or supply the missing factual basis for levy when the main product is exempt. The stated principle is that fiscal liability must rest on evidence, not conjecture or presumption.

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Issues: (i) Whether khal, being a by-product of exempt ghani oil, was also exempt from tax; (ii) whether tax could be imposed on the basis of presumption that oil was manufactured through an expeller and diesel was used, in the absence of supporting evidence; (iii) whether adverse inference could be drawn for non-maintenance of manufacturing register when the main product was exempt.

Issue (i): Whether khal, being a by-product of exempt ghani oil, was also exempt from tax.

Analysis: The exemption granted to the main product was undisputed. The by-product emerged only as a result of manufacture of the exempt main product and did not constitute an independent item of manufacture by itself. On that basis, the by-product could not be denied the benefit of exemption merely because it arose incidentally in the course of manufacturing the exempt product.

Conclusion: The by-product khal was exempt from tax, in favour of the assessee.

Issue (ii): Whether tax could be imposed on the basis of presumption that oil was manufactured through an expeller and diesel was used, in the absence of supporting evidence.

Analysis: The finding of manufacture by expeller was based only on assumption from the presence of the expeller and not on any material showing actual use or capacity. Likewise, there was no evidence that diesel had been purchased or used for manufacture. A fiscal levy cannot rest on conjecture or presumption where the record does not support the conclusion reached by the authority.

Conclusion: Taxation on the basis of presumption alone was unsustainable, in favour of the assessee.

Issue (iii): Whether adverse inference could be drawn for non-maintenance of manufacturing register when the main product was exempt.

Analysis: The alleged lapse in maintaining the manufacturing register could not independently justify the levy where the product manufactured was itself exempt and the authorities had not established actual taxable manufacture through reliable evidence. The claimed procedural defect did not supply the missing factual foundation for taxation.

Conclusion: No adverse inference was warranted, in favour of the assessee.

Final Conclusion: The levy and the appellate findings could not be sustained, and the revisions were allowed.

Ratio Decidendi: Where a by-product arises only incidentally from manufacture of an exempt main product, it follows the exempt character of the main product unless the department proves an independent taxable manufacture by reliable evidence; tax cannot be imposed on mere presumption or conjecture.

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