Granite processing is not manufacture, but first-sale tax treatment and penalty failed where the record showed no concealment.

Cutting and polishing rough granite blocks was treated as not amounting to manufacture under the Karnataka Sales Tax regime, so the circular could validly reflect that position, but it could not, for the relevant pre-amendment period, treat polished granite as a separate commodity subject to first-sale tax under clause 3(b) because that conflicted with binding precedent. Penalty for use of Form No. 37 and related declarations was unsustainable because the assessment record did not show concealment, false particulars, or mala fide misuse, and the department had itself permitted use of the form for conversion of rough granite into polished granite. The penalty orders were therefore quashed and the circular was interfered with only to the limited extent of the first-sale treatment.

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Issues: (i) Whether the Commissioner's circular could validly treat cutting and polishing of rough granite blocks as non-manufacturing activity and direct levy of tax on polished granite as first sale. (ii) Whether the levy of penalty on the petitioners for use of Form No. 37 and related declarations was sustainable.

Issue (i): Whether the Commissioner's circular could validly treat cutting and polishing of rough granite blocks as non-manufacturing activity and direct levy of tax on polished granite as first sale.

Analysis: The circular was issued under Section 3-A(2) of the Karnataka Sales Tax Act, 1957 to clarify the position on granite processing. The Court relied on the earlier Division Bench view that cutting and polishing of granite blocks does not amount to manufacture, and held that the activity does not alter the substance of the commodity. At the same time, the Court held that the portion of the circular treating polished granite as a separate commodity for first-sale tax under clause 3(b) was inconsistent with the binding view in Foredge Granite, especially for transactions prior to the amendment of Section 6-B. The Court also noted that the later discussion in Goa Granites did not decide the specific manufacturing issue under the Karnataka Sales Tax Act.

Conclusion: The circular was upheld insofar as it recognised that cutting and polishing of rough granite blocks is not manufacture, but it was held invalid to the extent it treated sale of polished granite as a first sale liable to tax under clause 3(b).

Issue (ii): Whether the levy of penalty on the petitioners for use of Form No. 37 and related declarations was sustainable.

Analysis: Penalty under the Act required a prior assessment-stage satisfaction regarding concealment or suppression. The assessment orders did not record any finding that the petitioners had concealed sales, furnished false particulars, or acted with mala fide intent. The record also showed that the department itself had permitted use of Form No. 37 for purchase of rough granite for conversion into polished granite, so the petitioners could not be treated as having intentionally misused the form. In these circumstances, the conditions for penalty were not established.

Conclusion: The penalty orders were unsustainable and were quashed.

Final Conclusion: The petitions succeeded in substantial part: the impugned penalty orders were set aside, and the circular was interfered with only to the extent it conflicted with the binding view on first-sale treatment of polished granite for the relevant period.

Ratio Decidendi: Where the processing of rough granite into cut and polished granite does not amount to manufacture under the applicable sales tax regime, tax consequences and penalty cannot be imposed on a contrary premise unless the statute expressly supports such treatment and the assessment record establishes the necessary foundation for penalty.

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