Purchase tax on paddy upheld for rice mill, while exemption on rice products had to be recomputed on overall tax incidence.

Paddy purchased by a rice mill from unregistered or undisclosed sources attracted purchase tax under section 5A because paddy and rice are declared goods and the exemption on finished rice did not remove liability on the raw material. The levy was therefore valid. The exemption certificate for rice products also had to be worked out on the overall tax incidence, so the section 5A tax on paddy could be adjusted in computing the exemption, with the assessing authority required to recalculate the relief for the relevant years according to that method.

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Issues: (i) Whether tax under section 5A of the Kerala General Sales Tax Act, 1963 could be levied on paddy purchased by a rice mill enjoying sales tax exemption on its finished products; (ii) Whether the tax so levied could be adjusted against the exemption available under the exemption certificate and, if so, on what basis.

Issue (i): Whether tax under section 5A of the Kerala General Sales Tax Act, 1963 could be levied on paddy purchased by a rice mill enjoying sales tax exemption on its finished products.

Analysis: Paddy and rice are declared goods, and the statutory scheme under section 15(c) of the Central Sales Tax Act, 1956 permits regulation of levy so that the incidence on the raw material and the finished product is viewed together. The mill had purchased paddy from unregistered or undisclosed sources and manufactured rice out of it. In such circumstances, the conditions for levy under section 5A were satisfied. The exemption on sale of rice products did not eliminate the statutory liability on the purchase of paddy where no levy at the hands of a taxable selling dealer was shown.

Conclusion: The levy under section 5A on paddy was valid and the assessee's challenge failed.

Issue (ii): Whether the tax so levied could be adjusted against the exemption available under the exemption certificate and, if so, on what basis.

Analysis: The exemption certificate covered the sale of rice and allied products manufactured by the assessee. The tax determined on paddy under section 5A was part of the overall tax incidence to be considered while applying the exemption scheme. The exemption was to be worked out by taking the tax on rice without first granting rebate for the tax on paddy, and the assessing authority was directed to verify the exemption for the relevant years and apply the scheme accordingly.

Conclusion: The tax under section 5A could be set off against the exemption available under the certificate in the manner indicated by the Court.

Final Conclusion: The levy on paddy was upheld, but the exemption computation was required to be reworked in accordance with the prescribed set-off method.

Ratio Decidendi: Where a rice mill purchases paddy from unregistered or undisclosed sources and manufactures exempted rice products, liability under section 5A attaches to the purchase of paddy, and the exemption scheme must be applied on the overall tax incidence without treating the levy on paddy as excluded from the exemption computation.

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