Exemption scheme conditions bind all goods in the unit, but penalty fails absent culpable intent.

A sales tax exemption scheme covering a new industrial unit as a whole continued to bind the manufacturer under condition 9 even though the exemption certificate was limited to cotton seeds, because the restriction did not exclude cotton manufactured in the same unit. The demand for sales tax and interest on cotton sales was therefore upheld. However, penalty for sales against forms under the general provisions was quashed because the assessee had a bona fide belief, supported by the authority's own conduct, that the exemption applied only to cotton seeds and the record did not establish the culpable intent required for penalty.

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Issues: (i) Whether condition 9 of entry 175 of the sales tax exemption scheme applied to sales of cotton when the exemption certificate granted by the sales tax authority was restricted to cotton seeds only; (ii) whether the penalty levied for making sales of cotton against forms under the general provisions could be sustained.

Issue (i): Whether condition 9 of entry 175 of the sales tax exemption scheme applied to sales of cotton when the exemption certificate granted by the sales tax authority was restricted to cotton seeds only.

Analysis: The eligibility certificate covered the new industrial unit as a whole and the goods manufactured therein, namely cotton and cotton seeds. The exemption limit was based on the fixed capital investment of the unit, not on a product-wise segmentation. The restriction in condition 9 attached to the status of the specified manufacturer and the sales of goods manufactured in the unit, irrespective of whether exemption was actually sought or granted only for one product. Restricting the exemption certificate to cotton seeds did not exclude cotton from the operation of the scheme or release the manufacturer from the scheme conditions.

Conclusion: The petitioner remained bound by condition 9 in respect of cotton also, and the demand of sales tax and interest on the cotton sales was upheld.

Issue (ii): Whether the penalty levied for making sales of cotton against forms under the general provisions could be sustained.

Analysis: The petitioner had applied for and obtained exemption only for cotton seeds, and the sales tax authority had accepted that course of action. In that background, the petitioner could legitimately entertain a bona fide belief that the scheme conditions operated only in relation to cotton seeds. The record also did not show invocation of the harsher consequences contemplated by the scheme for serious breach. The element of mens rea necessary to sustain penalty was therefore absent.

Conclusion: The penalty was not sustainable and was quashed.

Final Conclusion: The challenge failed on the tax and interest component but succeeded on the penalty component, resulting in only partial relief to the petitioner.

Ratio Decidendi: Where a tax exemption scheme grants benefit to a specified manufacturer for a unit as a whole, the scheme conditions continue to govern all goods manufactured in that unit even if the exemption certificate is issued for only one product; however, penalty cannot be imposed absent a culpable intent where the assessee acted under a bona fide interpretation supported by the authority's own conduct.

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