Manufacture under sales tax law excludes mere granite polishing, while penalty was unsustainable amid genuine classification doubt.

Mere cutting and polishing of granite stones was not treated as manufacture for concessional treatment under the Karnataka Sales Tax Act, so a broad construction of "manufacturing unit" was rejected and the Revenue's view on that point was upheld. Penalty under sections 5A(2) and 5A(3) was, however, unsustainable because the assessee's classification was genuinely doubtful, the authorities had earlier accepted the activity as manufacturing, and the department itself had issued a circular reflecting uncertainty. The revision petition therefore failed overall, with the penalty set aside.

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Issues: (i) Whether the expression "manufacturing unit" in section 5A of the Karnataka Sales Tax Act, 1957 was to be construed in a strict sense. (ii) Whether penalty levied under section 5A(2) and section 5A(3) of the Karnataka Sales Tax Act, 1957 was sustainable on the facts of the case.

Issue (i): Whether the expression "manufacturing unit" in section 5A of the Karnataka Sales Tax Act, 1957 was to be construed in a strict sense.

Analysis: The dispute turned on whether cutting and polishing of granite stones amounted to manufacture for the purpose of availing concessional tax treatment under section 5A. The Court relied on the earlier binding view that mere polishing of stones does not result in manufacture of a new article. On that basis, the Tribunal's approach of treating the expression "manufacturing unit" in a broad sense was held to be erroneous.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Issue (ii): Whether penalty levied under section 5A(2) and section 5A(3) of the Karnataka Sales Tax Act, 1957 was sustainable on the facts of the case.

Analysis: The penalty proceedings were founded on the view that the assessee had wrongly claimed the benefit of the concessional rate by treating its activity as manufacturing. The Court noted that the assessing authorities themselves had earlier accepted the activity as manufacturing, and the department had also issued a circular showing uncertainty regarding the proper treatment of granite cutting and polishing. In those circumstances, the Court held that there was no justification for treating the assessee's conduct as a misdeclaration warranting penalty.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The revision petition failed as a whole, though the Court upheld the Revenue's view on the meaning of "manufacturing unit" while setting aside the penalty imposed on the assessee.

Ratio Decidendi: Mere polishing of granite stones does not amount to manufacture, but penalty for availing concessional tax treatment is not justified where the classification was genuinely doubtful and the revenue authorities themselves had treated the activity as manufacturing.

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