TaxTMI 
TaxTMI 
2005 (7) TMI 351
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt manufactures and sells ceramic tiles in its factory at Sikandarabad, District Bulandshahar in the State of Uttar Pradesh since 1988 having received an industrial licence from the Government of India to do so. The annual production capacity of the respondent was 12,000 TPA (tonnes per annum). The total investment made in the unit up to August 12, 1988 was Rs. 16,21,54,452 and the first sale was effected on August 16, 1988. 3.. A notification issued on December 26, 1985 (referred to as "the 1985 notification") under section 4-A of the Act granted a six- years' tax exemption in respect of new units having an investment in excess of 3 lakhs starting production on or after the first date of October, 1982 but not later than the thirty-first day of March, 1990. Admittedly the respondent's unit fulfilled the conditions mentioned in the notification and, since its investments exceeded Rs. 3 lakhs, it was granted exemption for six years which was reckoned from the date of first sale, i.e., from August 16, 1988 to August 15, 1994. 4.. During the period April 1, 1990 to August 15, 1990 the capacity of the respondent's unit was increased from 12,000 to 26,000 tonn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich covered the district of Bulandshahar within which the respondent's factory is situated. The relief was granted for 9 years and was fixed at "nil" in case of units with a fixed capital investment exceeding 50 crores and in the case of other units at different percentages subject to 150 per cent of the fixed capital investment in the case of small-scale units and 125 per cent of the fixed capital investment in the case of medium and large scale units. 6.. On June 30, 1993, a circular was issued by the Commissioner of Sales Tax clarifying that units which had started production up to March 31, 1990 and which could enjoy unlimited exemption for a fixed period, and which had undertaken expansion, diversification or modernisation would get the benefit of exemption of reduction from the specified dates confined to 100 per cent to 150 per cent of the additional fixed capital investment. 7.. When the 1991 notification came into force, the respondent was still enjoying the benefit of the 1985 notification. After that period of exemption came to an end on August 15, 1994, on September 16, 1994, the respondent made three separate applications under cover of a letter dated Septem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fit in respect of the first and second expansions for achieving the expansion of 40,000 M.T. was not granted. The production was also taken to have commenced from March 28, 1994 as a result of expansion. The total figure of investment accepted by the DLC included the cost of land and site building and plant and machinery. Other expenses claimed by the respondent such as interest payable to financial institutions, expenditure incurred for rights issue, foreign travel and foreign technical expenses were not included. An eligibility certificate based on the decision of the DLC was accordingly issued. 11.. Aggrieved by the DLC's decision, the respondent filed an appeal under section 10 of the Act to the Trade Tax Tribunal. The Tribunal accepted the respondent's claim except to the extent that the exemption was limited to a percentage of the additional fixed capital investment of Rs. 54,51,03,544. In other words, the Tribunal held that there was only one expansion and not three and that the benefit under the 1991 notification was not to be calculated as a percentage of the fixed capital investment prior to the expansion but as a percentage of the additional fixed capital i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny other construction, according to the respondents, would lead to absurd consequences not only by granting benefits to older units at the expense of new units but also by granting double benefit in respect of the same investment. Multiple expansions would also allow the same original investment to be counted for each expansion and an expansion by only 25 per cent of the original investment would mean that the unit would have a tax benefit including the 100 per cent earlier invested. This, according to the appellants was not the object of the notification. The appellants contend that the ambiguity in the 1991 notification was clarified by the 1995 notification which explicitly says that tax benefits would be on the additional fixed capital investment in the case of expansion, diversification or modernisation. According to the appellants the High Court should not have struck down the circular issued in 1993 which had earlier clarified the issue. In any event it is submitted, the fixed capital investment could not, in the light of Explanation (4) to section 4-A be construed to include any item apart from the items specified therein. On the question whether there was one or three sepa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t had only taken such amounts which it had paid on the plant before the commencement of the production as a result of such expenses. It was next submitted that the decision of the High Court had been accepted by the appellants and circulars had been issued by the authorities to this effect even prior to the refusal of stay by this Court, and it was not open to the State to re-agitate the issue. Besides, according to the respondent, it had not availed of even 50 per cent of the benefit which it could have claimed under the 1991 notification in terms of the High Court's judgment. Finally the submission is that the respondent had not realised any tax during the period nor could it have done so under section 8-A(2) read with section 15-A(1)(qq) of the Act. In the circumstances even if the appeal were to be allowed the tax should not be directed to be recovered as this would lead to a closure 16.. The issues which have arisen for the decision in this appeal and which have been formulated fairly by the appellants are: I. Whether a unit undergoing expansion is entitled under the notification dated July 27, 1991 to the benefit of exemption on the additional fixed capita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urpose (c) the value of plant, machinery, equipment, apparatus and components certified by a chartered accountant. Paragraph 4 provided: "In determining the fixed capital investment as defined in clause (4) of the Explanation in case of 'new units' or 'additional fixed capital investment' referred to in sub-clause (d) of clause (5) of the Explanation in case of 'units which have undertaken expansion, diversification or modernisation' the investment in only such land, building, plant, machinery, equipment, apparatus and component or, as the case may be, such additional land, building, plant, machinery, equipment, apparatus and component shall be taken into account as were acquired on or before the relevant date of commencement of the period of facility notified under sub-section (1) of section 4-A of the Act." (Emphasis supplied). 19.. This paragraph therefore links original fixed capital investments to new units and additional fixed capital investments to already established units undertaking expansion, modernisation, etc., for the purposes of clause (4) and clause (5)(d) of the Explanation. There appears to be no clause (4) or (5) to any Expl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rmination of additional fixed capital investment as far as units which have undertaken expansion, etc., and original fixed capital investment as far as new units are concerned. 22.. The High Court held that sub-clause (d) of Explanation (5) to section 4-A had nothing to do with the extent of benefit of exemption which could be granted to a unit undertaking modernisation, expansion or diversification but referred to the field of eligibility. As far as paragraph 4 of the 1991 notification was concerned, according to the High Court, it merely provided how the fixed capital invest- ment as defined in Explanation (4) in the case of new units or in the case of additional fixed capital investment referred to in sub-clause (d) of Explanation (5) was to be computed. It did not provide that in the case of a unit undertaking modernisation, expansion or diversification only additional fixed capital investment shall be considered. 23.. We disagree. The different methods of computation contained in paragraph 4 of the 1991 notification serve two separate purposes and that is to determine the two relevant investments for the distinct benefits available to two different kinds of units, viz., ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....partment to verify the calculation of the percentage of increase in the additional investment by reason of the expansion over the original. It does not mean that in respect of units undertaking expansion the percentage is to be calculated on an aggregate of both original and additional investments. 25.. The three notifications namely, the one issued in 1985, 1991 and 1995 form part of a pattern. The 1985 notification granted benefit to new units provided their original investment exceeded Rs. 3 lacs of their entire turnover. The 1991 notification extended the benefit to old units undertaking expansion and which may have already got the benefit, like the respondent, of the original investment made under the 1985 notification subject to the old unit making a further investment and the benefit was limited to a percentage of that investment. Similarly the 1995 notification further extended the benefit to units which had undertaken backward integration again limiting the benefit to the investment made. All three notifications were issued under the same section and for the same purpose of effecting development and were part of a chain of progress without any overlapping. Not only woul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....notification. Applying the same reasoning we hold that the ambiguity in the 1991 notification as to the meaning to be put on the phrase "fixed capital investment" in annexure I was removed by the clarification in annexure I of the 1995 notification by its reference to additional fixed capital investment as far as established units undertaking expansion, etc., were concerned. 27.. In fact even before the issuance of the 1995 notification a circular had been issued by the department in 1993, inter alia, to the following effect- "(4) Units starting production on or after April 1, 1990 if undertake expansion, diversification or modernisation in accordance with clause (5) of Explanation to section 4-A then such unit shall be entitled to facility of exemption/reduction in rate of tax on the pro- duction in excess of base production or on the manufacture of new product for a period of 8, 9, 10 years from the date of expansion, diversification or modernisation and shall be limited to the extent of 100 per cent to 150 per cent of additional fixed capital investment." 28.. The circular can be read as a contemporaneous understanding and exposition of the intention and purport of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tention before the Tribunal was that only the third expansion should be granted the benefit under the 1991 notification. There was thus no issue raised before the Tribunal by the respondent that the original investment should be included in computing the tax benefit under the 1991 notification. Even if the High Court found that the issue was raised in the grounds of appeal, it should not have allowed the respondent to raise it in revision when clearly it had not been pressed before the Tribunal. 33.. Furthermore the appellants' submission that the High Court's interpretation of the 1991 notification leads to anomalous results also appears to be sound. The High Court has correctly found that "the object of granting exemption from payment of sales tax has always been for encouraging capital investment and establishment of industrial units for the purpose of increasing production of goods and promoting the development of industry in the State". If the intention of the State Government, as expressed in section 4-A itself is to encourage investment, it is unlikely that the investment already made would entitle an industry to any further benefit again. Yet if we accept the res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o hold so. The High Court held that the Tribunal's finding was a conclusion of fact and could not be reversed except on the ground of perversity. It also independently came to the same conclusion on the grounds (1) that the DLC had categorically observed that the dealer had made the expansion in phases and that the respondent's pleading that there was one scheme for expansion prepared earlier was not disputed by it; (2) the enquiry report submitted by the Trade Tax Officer did not observe that there were three separate schemes of expansion. The High Court also relied on a circular dated September 26, 1996 in support of its finding. Whether it could have done so is a question of law and will be addressed after the factual reasons are assessed. 38.. The High Court was right in saying that the question is essentially one of fact but it has lost sight of the basic principle that the onus to prove a fact is on the person asserting it. Since it was the respondent's case that there was a single scheme of expansion which was implemented in three phases the onus was on the respondent which it has not discharged. A scheme of expansion would necessarily warrant estimates,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s only which are manufactured in a unit which has undertaken expansion, diversification or modernisation on or after April 1, 1990, and which, in case of diversification, are different from the goods manufactured before such diversification, and in the case of expansion or modernisation are additional production as a result of such expansion or modernisation; and (d) only if the manufacturer furnishes to the assessing authority an eligibility certificate granted by such officer, in accordance with such procedure, as may be specified." 42.. Paragraph (1-B)(1) of the 1991 notification accordingly specified, inter alia, that the benefit of tax exemption or reduction would be available on the turnover of sales of the goods manufactured in certain industries which had undertaken expansion, diversification or modernisation between April 1, 1990 and March 31, 1995. 43.. Reading the quoted provisions of section 4-A with paragraph (1-B) (1) (a) of the notification it is clear that the benefit under the notification must be limited to those goods which are additionally produced as a result of expansion or modernisation. In other words the benefit was relatable to the expansion. We t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tification. Paragraph (1-B)(2)(ii) says that the period of facility shall be reckoned from the first date of production of goods manufactured in excess of the base production. 49.. So with the commencement of an additional investment which must overtake the original investment by at least 25 per cent the expansion commences. Of course the ultimate expansion must result in an increased capacity of at least 25 per cent. Then the first excess production over the base production brought about by such increased capacity and ultimately by the additional investment would be the "first date of production" and the expansion would be completed and the period of facility would commence. 50.. Section 4-A (5)(a) provides that a manufacturer shall be entitled to the facility of exemption from, or reduction in, the rate of tax notified under sub-section (1)- "(a) If he applies for such facility within six months from the relevant date of commencement of the period of facility referred to in that sub-section or by 30th September, 1992, whichever expires later, for the entire period notified under that sub-section." 51.. Now a dealer may, for whatever reason apply for the facility of ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e was one expansion. To quote the language of the second proviso to Explanation (6) as it originally stood: "Provided further that where investment made during certain period is clubbed together for the purpose of determining the fixed capital investment, the production immediately prior to the date on which such investment was first started to be made in respect of expansion or modernisation shall be taken into account for determining the base production." 56.. The clubbing under the second proviso does not relate to the date of production and the commencement of the facility but to the base production. 57.. The two notifications referred to declare that new units or old units making an additional fixed capital investment of fifty crore rupees or more would be entitled to exemption from tax for a period of three years on or after specified dates. According to the respondent the notifications permit fixed capital investment even after the commencement of facility and was an instance of the clubbing permitted under the second proviso. Neither of the notifications refer to the second proviso nor were they in operation during the relevant period. 58.. The circular dated Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... right in contending that three separate applications were maintainable at all material times despite the fact that when such expansions were done the unit was in production for less than five years. 61.. We accordingly hold that there were in fact and in law three expansions and decide the issue in favour of the appellants. ISSUE NO. 3 62.. The respondent had claimed pre-operative expenses as part of the fixed capital investment which included interest to financial institutions, rights shares issue expenses, foreign technician expenses and foreign travel expenses. The Tribunal allowed the claim relying on Challapalli Sugars Ltd. v. Commissioner of Income-tax [1975] 98 ITR 167 (SC), Commissioner of Income-tax v. Motor Industries Co. Ltd. [1988] 173 ITR 374 (Kar) and Commissioner of Income-tax v. Polychem Ltd. [1975] 98 ITR 574 (Bom) on the ground that the expenses were necessary to undertake the expansion scheme. The view was affirmed by the High Court, in our opinion, wrongly. 63.. We have already noted in connection with issue 1 that Explanation (4) to section 4-A has defined fixed capital investment saying that it means "investment in land and building and such plant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ht into the State. The determination of such value would necessarily have to be an objective exercise. For the purposes of the Income-tax Act on the other hand, a tax on income may allow the valuation of an asset taking into consideration circumstances which may be entirely personal to the assessee under which the asset is purchased subject to certain permissible limits. The perspective of the two statutes is therefore different and everything that may go into the cost of an asset for the purpose of the Income-tax Act may not be relevant for an objective determination of its value under the U.P. Act. It is also noteworthy that the definition of "fixed capital investment" in Explanation (4) talks of investment in land, building, plant, machinery, etc., and not investment in relation to or in connection with them. The Tribunal and the High Court failed to construe these statutory provisions and relied upon judgments delivered in connection with the Income-tax Act, the provisions and purpose of which could hardly be said to be in pari materia with the provisions of the U.P. Act and the 1991 notification. 69. The four items of expenditure which the High Court accepted, viz., interes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hts to press their appeals before this Court. The preliminary objection is accordingly rejected. 72.. The respondent then submitted that it has not availed of even 50 per cent of the total benefit under the notification in terms of the impugned judgment and it has not and could not in law have realised any tax during the period of the facility which expired on March 31, 2003. Reference has been made to section 8-A(2) read with section 15-A (1) (qq) to contend that the prohibition on the collection of tax from consumers by a dealer which is itself not liable to pay tax is backed by severe penalties. It is said that the recovery of the tax would lead to the ultimate closure of the respondent's unit which would be contrary to the very concept, object and intention of the exemption provision and policy of the State. 73.. The appellants on the other hand have relied on the State of Rajasthan v. J.K. Udaipur Udyog Ltd. See [2004] 137 STC 438 (SC); [2004] 3 RC 444 (SC). (2004) 7 SCC 673 to contend that even if the respondent had not passed on its liability to and collected tax from its consumers, it was bound to pay the tax which it could and should have paid on the tiles sol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tificate granted to it on May 5, 1990 in respect of the original unit. 77.. Sub-section (3) of section 4-A however, allows the Commissioner by order to cancel or amend the eligibility certificate before or after the expiration of the period of exemption under certain circumstances. In such event the dealer is liable to pay the tax which ought to have been paid under sub-section (4) which provides: "(4) For the removal of doubts, it is hereby declared that where an eligibility certificate has been cancelled or amended under sub- section (3), the dealer shall be liable to pay tax on his turnover of the period during which the facility of exemption or reduction under this section is not admissible to him." 78.. Therefore even if the dealer under the fear of punishment under section 15-A(1)(qq) (viii) does not realise amount by way of tax on the sale of its goods in compliance with the provisions of section 8-A(2) during the period it is exempt from paying tax, it would still have to pay the tax under sub-section (4) of section 4-A if it is found that it was not entitled to such exemption. The overriding nature of this consequence follows not only from the use of the imperativ....