# COMMISSIONER OF TRADE TAX, U.P. AND ANR v. MIS. KAJARIA CERAMICS LTD

- **Citation:** [2005] Supp. 1 S.C.R. 437
- **Court:** Supreme Court of India
- **Decided:** 2005-07-12
- **Case number:** Civil Appeal No. 4601 of2000
- **Bench:** Ruma Pal, Arun Kumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-trade-tax-u-p-and-anr-v-mis-kajaria-ceramics-ltd-20754
- **Pages:** 35

## Headnote

B
UP. Trade Tax Act, 1948:
Section 4A-Exemption Notification of 1991-Benefit of. from payment
of trade tax, to industrial units undergoing expansion under-Extent of C
benefits available-Held: Benefit of 1991 Notification is limited to a
percentage of the additional fixed. capital investment and not to a percentage
of the aggregate of the original and additional fixed capital.
Section 4A-Exemption Notification of{p91-Benefit of. from payment D
of trade tax, to industri(Jl units undergoing. expansion-Expansion of units
thrice within period of five years-Assessee claiming exemption under 1991
notification that during the peri<fd of five years ther;e ~as. one single expansion
in three phases-Sustainabilit)(of_:.Held: Admitted facts that there were
three separate expansion-EacH:tiime assessee n;Jifi additional investment,
increased its capacity to produ~e and in fact· produced goods there was E
expansion-Whe_n expansion done unit was in PfD_duction for less than three
years-Three separate applications were maintainable and not one composite
application for three years-H~nce, finding of tid Authority that there .were
. ,., .;:..
.
'
.
. ·.
three expansions uphtdd and ·clai11i
1 of assessee not sustainable.
· ·. ··· _
•
.
•'.
10'"'
j.
Section 4A explanation 4-Fixed capital J~vt:stments-Meaning of- F
Preoperative expenses, if includible-Held: Preope;ativf'! expenses like interest
to financial institutions, rights sh~res issue expenses, foreign technician
expenses and foreign travel expenses does not reflect value -0f items forming
part of fixed capital investment for 1991 Notification and the Act-Hence,
not includible under head of fixed capiial investment for purpose · of'fection G
4A-Also cannot be brought within the definition by any principle of statutory
interpretation.
Sections 4A, BA, 15A(l)(qq)-Exemption Notification of 1991-Grant
of eligibility certificate pursuant to Order of High Court-Assessee units not
~7
H
438
SUPREME COURT REPORTS (2005) SUPP. I S.C.R.
A collecting or realising any tax-Also order not stayed by this Court-Unit
finally not entitled to exemption-Relief against recovery of tax-Entitlement
of-Held: Assessee unit is not entitled to any relief-State Government is
entitled to recover tax from the unit-Dealer has to pay tax which it did not
collect ji-om customers even if it was under fear of punishment under section
B l 5A(l)(qq)(viii).
Respondent-Company having obtained industrial licence in 1988 was
engaged in manufacturing anfl selling of ceramic tiles since then. The annual
production capacity ofthe respondent was 12000 tonnes per annum (TPA).
The .respondents obtained six years tax exemption from 1988-1994 in terms
C of the Notification of 1985 issued under section 4A of the U.P. Trade Tax Act,
1948. The annual production capacity of the respondent was increased from
12000 TP A to 26000 TPA, from 26000 TPA to 40000 TPA and from 40000
TPA to 60000 TPA respectively during the period in year 1990, 1991 and
1994. The respondents were granted eligibility certificate. There was total
additional investment in three expansions .. Meanwhile, the Notification of 1991
D was issued and exemption was granted to a new unit and to units which had
undertaken expansion, diversification or modernization. A Circular of 1993
was also issued whereby units which had started production upto 31.3.1990
and which could enjoy unlimited exemption for a fixed period, and which had
undertaken expan.sion, diversification or modernization would get the benefit
E of exemption.
After exemption period from 1988-1994 came to an end, respondent filed
application under 1991 Notification claiming that there was one expansion
during the period from 1988-1994 by which annual production capacity of
the respondent's unit was increased from 12000 TPA to 60000 TPA.
p
Meanwhile the 1995 Notification was filed which granted benefits to units
which were either new o.r had undertaken expansion, diversification or
modernization on or after 1.4.1995 but n

## Text

_Characters 0–39,927 of 89,402. This is a partial read: ask again with offset=39927 for what follows._

COMMISSIONER OF TRADE TAX, U.P. AND ANR.
A
v.
MIS. KAJARIA CERAMICS LTD.
JULY 12, 2005
[RUMA PAL AND ARUN KUMAR, JJ.]
B
UP. Trade Tax Act, 1948:
Section 4A-Exemption Notification of 1991-Benefit of. from payment
of trade tax, to industrial units undergoing expansion under-Extent of C
benefits available-Held: Benefit of 1991 Notification is limited to a
percentage of the additional fixed. capital investment and not to a percentage
of the aggregate of the original and additional fixed capital.
Section 4A-Exemption Notification of{p91-Benefit of. from payment D
of trade tax, to industri(Jl units undergoing. expansion-Expansion of units
thrice within period of five years-Assessee claiming exemption under 1991
notification that during the peri<fd of five years ther;e ~as. one single expansion
in three phases-Sustainabilit)(of_:.Held: Admitted facts that there were
three separate expansion-EacH:tiime assessee n;Jifi additional investment,
increased its capacity to produ~e and in fact· produced goods there was E
expansion-Whe_n expansion done unit was in PfD_duction for less than three
years-Three separate applications were maintainable and not one composite
application for three years-H~nce, finding of tid Authority that there .were
. ,., .;:..
.
'
.
. ·.
three expansions uphtdd and ·clai11i
1 of assessee not sustainable.
· ·. ··· _
•
.
•'.
10'"'
j.
Section 4A explanation 4-Fixed capital J~vt:stments-Meaning of- F
Preoperative expenses, if includible-Held: Preope;ativf'! expenses like interest
to financial institutions, rights sh~res issue expenses, foreign technician
expenses and foreign travel expenses does not reflect value -0f items forming
part of fixed capital investment for 1991 Notification and the Act-Hence,
not includible under head of fixed capiial investment for purpose · of'fection G
4A-Also cannot be brought within the definition by any principle of statutory
interpretation.
Sections 4A, BA, 15A(l)(qq)-Exemption Notification of 1991-Grant
of eligibility certificate pursuant to Order of High Court-Assessee units not
~7
H
438
SUPREME COURT REPORTS (2005) SUPP. I S.C.R.
A collecting or realising any tax-Also order not stayed by this Court-Unit
finally not entitled to exemption-Relief against recovery of tax-Entitlement
of-Held: Assessee unit is not entitled to any relief-State Government is
entitled to recover tax from the unit-Dealer has to pay tax which it did not
collect ji-om customers even if it was under fear of punishment under section
B l 5A(l)(qq)(viii).
Respondent-Company having obtained industrial licence in 1988 was
engaged in manufacturing anfl selling of ceramic tiles since then. The annual
production capacity ofthe respondent was 12000 tonnes per annum (TPA).
The .respondents obtained six years tax exemption from 1988-1994 in terms
C of the Notification of 1985 issued under section 4A of the U.P. Trade Tax Act,
1948. The annual production capacity of the respondent was increased from
12000 TP A to 26000 TPA, from 26000 TPA to 40000 TPA and from 40000
TPA to 60000 TPA respectively during the period in year 1990, 1991 and
1994. The respondents were granted eligibility certificate. There was total
additional investment in three expansions .. Meanwhile, the Notification of 1991
D was issued and exemption was granted to a new unit and to units which had
undertaken expansion, diversification or modernization. A Circular of 1993
was also issued whereby units which had started production upto 31.3.1990
and which could enjoy unlimited exemption for a fixed period, and which had
undertaken expan.sion, diversification or modernization would get the benefit
E of exemption.
After exemption period from 1988-1994 came to an end, respondent filed
application under 1991 Notification claiming that there was one expansion
during the period from 1988-1994 by which annual production capacity of
the respondent's unit was increased from 12000 TPA to 60000 TPA.
p
Meanwhile the 1995 Notification was filed which granted benefits to units
which were either new o.r had undertaken expansion, diversification or
modernization on or after 1.4.1995 but not later on 31.3.2000. Division Level
O;immittee (DLC) ignored the first two expans_ions for achieving the expansion
of 40000 MT and granted an exemption only in respect of the last expansion
G'
of the unit from 40000 TP A to 60000 TPA taking 40038 MT as base·
production with the production commencing from 28.3.1994. DLC included
the cost of land and site building and plant and machinery in the total fixed
capital investment but excluded expenses such as interest payable to financial
institutions, expenditure incurred for rights_ issue, foreign travel and foreign
technician expenses as claimed by respondents. Thereafter, an eligibility
H certificate was issued. Aggrieved respondent filed an appeal. The Tribunal
I
'
..
/
'
•
COMMR. OF TRADE TAX, U.P. v. KAJA RIA CERAMICS LTD.
4 39
held that there was only one expansion and that the benefit under the 1991 A
Notificatio~ was to be calculated as a percentage of the additional fixed capital
investment and not as a percentage of the fixed capital investment prior to the_
expansion. It, however, included the expenses on rights issue, foreign
technicians, foreign travel, laboratory equipment, fire fighting equipment and
establishment of water distribution schemes in the value of the fixed capital B
investment Both the appellants and the respondent filed a revision. The High
Court held that the tax benefit would be calculated at the specified percentage
of the original and additional fixed capital investment and struck down the
Circular of 1993 and directed the DLC to issue a revised eligibility certificate.
Hence the present appeals.
The questions which arose for consideration in these appeals are:
(i) Whether under the 1991 Notification, unit undergoing expansion is
entitled to the benefit of exemption on the additional fixed capital investment
or the total fixed capital investment?
c
(ii) Whether the respondents' claim of one integra~ed expansion from D
12000 TPA to 60000 TPA during 1988 to 1994 is sustainable in fact or in
law?
(iii) Whether certain preoperative expenses form part of 'fixed capital
investment"' under section 4A of the Act and the 1991 Notification?
(iv) Whether the respondents, allegedly not having collected or realized
any tax after the grant of the eligibility certificate, pursuant to the High
Court's judgment, and which was not stayed by this Court, are entitled to any
relief?
Allowing the appeals, the Court
HELD: 1.1 The different methods of computation contained in paragraph
4 of the 1991 Notification serve two separate purposes and that is to determine
E
F
the two relevant investments for the distinct benefits available to two different
kinds of units viz. new units and established units which have undertaken
expansion etc. Significantly there is no mode prescribed for determination of G
originai fi:~ed ~apital investment as far as the I~tter kind of unit is concerned
nor additional fixed capital investment in respect of the former. The High Court
did not consider the logical consequences of paragraph 4 of the Notification
providing only for the computation of additional fixed capital investment as
far as'units _undertaking an expansion etc.,were concerned. The High Court H
440
SUPREME COURT REPORTS [2005] SUPP. l S.C.R.
A misread paragraph 4, the only reasonable interpretation of which is that as
far as new units were concerned the 'original fixed capital investment' would
have to be computed and as far as units undertaking' expansion etc. were
concerned 'additional fixed capital investment alone would have, to be computed.
(455-E-G)
B
1.2. Form XLVI appended to the UP Trade Tax Rules, 1948 prescribes
the details for an application for exemption from or reduction in rate of tax to
new units the date of starting production whereof fell on or after 1.4.1990 or
to units which have undertaken expansion, diversification or modernization
on or after 1.4.1990 under Section 4A of the U.P. Trade Tax Act. Serial No.
C 6(a) gives the necessary particulars of the fixed capital investment in case of
the latter kind of unit. There are three columns viz., Original investment
(without giving margin for depreciation), additional investment in the
expansion etc on the date of commencement of the period of facility and a
certificate of valuation of the additional fixed capital investment. The
investments contemplated are in (i) land (ii) building and (iii) plant, machinery,
D equipment, apparatus and components. The certificates in respect of items (i)
and (ii) as far as additional fixed capital investment are to be giVen by the
Collector of the District and the evaluator approved by the Income Tax
Department respectively. The valuation of the third item is to be given by a
chartered accountant. The note to Serial No. 6(a) also requires a certificate
E from a chartered accountant of the original fixed capital investment. The
particulars indicate that while fixed capital investment includes original and
additional investments a distinction is made between the two. The purpose is
patently to enable the Department 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
F percentage is to be calculated on an aggregate of both original and additional
investments. (455-H; 456-A-D)
1.3. The three notifications namely the one issued in 1985, 1991 and
1995 form part ofa pattern. The 1985 notification granted benefit to new units
provided their original investment exceeded Rs. 3 lacs of their entire turnover.
G 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
H units which had undertaken backward integration again limiting the benefit
I I
COMMR. OF TRADE TAX, U.P. 1-. KAJA RIA CERAMICS LTD.
441
to the investment made. All three notifications were issued under the same A
section and for the same purpose of effecting development and were part of a
chain of progress without any overlapping. Not only would the contents of each
notification derive its meaning from Section 4A as each is derived from and
refers back to the section, but also if a phrase used in one of the notifications
is still ambiguous, then for the purpose resolving the ambiguity the contents B
of the previous or subsequent notifications can be looked into. (456-E-H)
Pappu Sweets and Biscuits v. CIT, UP., (1998) Supp 2 SCR 119, referred
to.
Cape Branch Syndicate v. I.R.C, (1921) 2 KB 403, referred to.
1.4. 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. (457-E-F)
1.5. The Circular can be read as a contemporaneous understanding and
exposition of the intention and purport of the Notification. Courts have treated
contemporary official statements as contemporary exposition and used them
as aids to interpret even recent statutes. (458-B)
Collector v. Andhra Sugar, (1988) 3 Supp SCR 543 and Karnataka
SSIDCL v. CIT, [2002] Supp 4 SCR 453, referred to.
1.6. The High Court erred in striking down the circular of 1993 by
holding that the circular was contrary to what the High Court thought was
c
D
E
the clear intention behind the notification instead of seeing the circ.ular as p
contemporaneous evidence of such intention. Therefore, the position was
abundantly clear. Old units undertaking expansion, diversification or
modernization would be entitled to get benefit of tax reduction on the additional
fixed capital investment made. The respondent acted on this. (458-E-F)
1.7. The respondent had only claimed in its amended application that it G
should have been given exemption on the additional fixed capital investment
relating to the three expansions before the tribunal. The particulars of the
items of investment including land and buildings claimed related only to this.
It was only the third expansion which should be granted the benefit under the
J 991 ·Notification. Thus, there was no issue raised before the Tribunal by the H
442
SUPREME COURT REPORTS [2005] ,SUPP. I S.C.R.
A 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 fo 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. (458-H; 459-A-B]
\
v
B
1.8. The appellants' submission that the High Court's interpretation of
the 1991 Notification leads to anomalous results also appears to b~ sound.
The High Court has correctly found that "the object of granting ex~mption
from payment of sales tax has always been for encouraging capital investment
and establishment of industrial units for the purpose of increasing production
c of goods and promoting the development of industry in the State". If the
intention of the State Government, as expressed in Section 4A itself is to
encourage investment, it is unlikely that the investment already made would
entitle an industry to any further benefit again. Yet if th'e respondent's
reasoning is accepted which was affirmed by the High Court, there may be
multiple expansions qualifying for the benefit of the 1991 Notification and
D the original investment would be taken into account every time. Apart from
the fact that a new unit would have to face competition from an old established
unit, a new unit would be additionally handicapped by the greater benefits being
granted to the old established businesses. It is unlikely that any new unit
could be persuaded to set up industries in such adverse circumstances leading
E to a situation which was certainly not envisaged either under Section 4A or
under any of the notifications issued thereunder. [459~C-F]
1.9. The Notification is merely sought to be construes. Although
consequences cannot and should not alter the statutory language but they may
at least fix its meaning. The benefit of the 1991 Notification with regard to
F the units undertaking expansion etc. like the respondent, is limited to a
percentage of the additional fixed capital investment and not the original and
additional fixed· capital only and not to a percentage of the aggregate of the
original and additional fixed capital. [459-G-H; 460-A]
2.1. Each of the admitted facts show that there were in fact three
G separate expansions. For each of the three expansion~, separate industrial
licences were applied for and obtained from the Central Government. Separate
negotiations for finances were entered into between the respondent and the
financial institutions. The correspondence exchanged shows that the
expansions were separate and the respondent had .made three separate
H
applications, one for each expansion. The High Court or the Tribunal did not
~
COMMR. OF TRADE TAX, U.P. v. KAJARIA CERAMICS LTD.
443
advert to these facts and their conclusion that there was only one expansion A
was perverse. (461-C-E)
2.2. Admittedly the respondent produced goods in excess of what was
its base production as a result of the establishment of its original unit in
1991 when the first expansion was completed. With the production of the first
tile after the first expansion the period of facility under the 1991 Notification B
commenced and the expansion was complete. The years of the first expansion
would then be taken into account for determining the base production for the
second expansion, and the moment this was exceeded as a result of the second
expansion the expansion was complete. The same process would apply to the
third expansion. Therefore, each time the respondent made an additional C
investment, increased its capacity to produce and in fact produced goods there
was an expansion. [464-B-C]
2.3. The respondent cannot in terms of this statutory scheme claim in
one breath that a single expansion commenced from 1988 and was completed
in 1994 and at the same time say that the base production was the figure of D
production in 1992-93 viz. 40038 MT. The base production must statutorily
precede the expansion and cannot be a figure taken while the expansion has
already progressed. The figure of 40038 MT was accepted by the DLC as the
base production. The appellants have similarly accepted this figure. But this
is in keeping with their submission that there were in fact three expansions
and that the figure of 40038 MTs is the base production for the third and last E
expansion. (464-D-E]
2.4. The respondents relied on the second proviso to Explanation 6 of
the Notification 1991 as well as Notifications of 1996 and 1997 that the
notifications permit fixed capital investment even after the commencement of F
facility and was an instance of the clubbing permitted under the second proviso.
The two notifications of 1996 and 1997 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. The clubbing under the second proviso does not relate to the
date of production and the commencement of the facility but to the base G
production. Neither of the notifications refers to the second proviso nor were
they in operation during the relevant period. [464-F; 465-A-BJ
2.5. The High Court relied on Circulars of 1996 and 1997 and concluded
that the respondent could only make one composite application after S years.
H
444
SUPREME COURT REPORTS (2005) SUPP. I S.C.R.
A It should not have done so since the circular was issued subsequent to the
relevant period and after the respondent had filed its revised application for
exemption under section 4A, and the construction put by the circular on the
definition of base production is questionable and has in any event no statutory
force. In any event the definition of base production in Explanation 6 which
B was amended in 1998 w.e. f. 1.4.1990 clearly says that ifthe unit has been in
production for less than five years, the maximum production achieved during
any one of the preceding assessment years would be taken as the base
production. Therefore, the appellants rightly submitted 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 5 years.
C There were in fact and in law three expansions. (465-H; 466-A-D)
3.1. Explanation 4 to section 4A has defined fixed capital investment
saying that it 'means " investment in land and building and such plant,
machinery, equipment apparatus, components, moulds, dyes, jigs and fi~tures
as have not been used or acquired for use in any other factory or workshop in
.. D India". The language of the definition of the phrase in Explanation 4 to Section
4A is sufficiently clear and unambiguous. This coupled with the use of the
word 'mean·s' in the Explanation shows that the definition is exhaustive.
Therefore, apart from what is stated in the definition, no other item of.expense
is includible under the head of fixed capital investment for the purposes of
E section 4A of the Act. (466-F-G)
Feroze N. Dotiwala v. P. M Wadhwani, (2003) 1 SCC 433 and PLD
Corporation Ltd, v. Presiding Officer, (1990] 3 SCR 111, relied on.
3.2. This principle of statutory interpretation is reinforced not only by
the particulars itemized in form XL VI of the Rules but also by the procedures
F for determination of ~xed capital investment specified in paragraphs 3 and 4
of the 1991 Notification, all of which underscore the definition's restrictive
nature. There is and indeed could be no reference either in the for:m or in the
1991 Notification to any item outside the definition in Explanation 4 to Section
4A. (467-E]
· ,
G
3.3. Th-e items of expenditure-Interest paid on loans by financial
institutions, expenses in connection with a rights issue of shares, expenses
on foreign technicians or foreign travel do not reflect the value of the items
forming part of the fixed capital investment for the purposes of the Act or
1991 Notification and cannot by any principle of statutory interpretation be
brought within the definition of the phrase in Explanation 4 to section 4A.
H
(468-B-C)
COMMR. OF TRADE TAX, UP. , .. KAJARIA CERAMICS LTD.
445
3.4. The underlying object of the scheme of exemption under Section A
4A of the Act, is to grant benefit by way of a quid pro quo for the actual value
of assets brought into the State. The determination of such value would
necessarily have to be an objective exercise. For the purposes of the Income
Tax Act, 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. B
Therefore, the perspective of the two statutes is different. 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 UP Act and the 1991 Notification. [467-F-G; 468-A[
C
Challapalli Sugars Ltd. v. CIT. (1975) 98 !TR 167; Commissioner of
Income Tax v. Motor Industries Co. Ltd., (1988) 173 !TR 374 and CIT v.
Polychem Ltd. (1975) 98 ITR 574, referred to.
4.1. The State Government is entitled to recover the sales tax from the D
assessJe companies irrespective of the fact that the assessee companies may
have lost the chance of passing on their liability to pay sales tax to their
purchasers. The Act itself envisages a situation where a dealer may be called
upon to pay the tax which it may not have collected from its customers. Further,
even if the dealer is under the fear of punishment under section 15A (qq)
(viii) does not realise amount by way of tax on the sale of its goods in E
compliance with the provisions of section SA (2) during the period it is exempt
from paying tax, it would still have to pay the tax under sub section (4) of
section 4A 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
imperative word 'shall' in sub section (4) but also from the non obstante clause F
with which section 4A opens. [470-G-H]
State of Rajasthan v. J. K. Udaipur Udyog Limited, [2004[ 7 SCC 673,
relied on.
4.2. The Circulars may be of varying kinds. The circulars relied on G
were merely official communications to the subordinate officers directing
compliance with the decision of the High Court. They were not clarifications
of statutory provisions that they would represent the official understanding
of those statutory provisions and would be binding on the taxing authority.
Nor was there any statutory provision in the UP Act which makes circulars
issued thereunder binding on the authorities. Respondent's objection to the H
•
446
SUPREME COURT REPORTS (2005) SUPP. I S.C.R.
A recovery of the tax that the appellants had accepted the decision orthe High
Court and Circulars had been issued even prior to the refusal to stay the
impugn.ed judgment by this Court cannot be accepted. In absence ofanyorder
of stay by this Court, the appellants were bound to comply with the impugned .
decision. Such compliance by itself cannot destroy the appellants rights to
B press their appeals before this Court. (468-F-H; 469-A)
Collector of Central Excise, Vadodra v. Dhiren Chemical Industries,
(2002) 2 SCC 127 and Commissioner of Sales Tax, UP. v. Indra Industries,
(2000) 9 sec 66, referred to.
5. The High Court has found that the respondent had taken the benefit
C of the increased capacity of the unit which came about by reason of the first
two expansions in the sense that the exemption on entire sales turnover
relatable to such increased capacity had been enjoyed by the respondent under
the 1985 Notification. The DLC had also granted tax benefit to the respondent
only in respect of the third expansion excluding the preoperative expenses.
D Even though for other reasons, having regard to the decision on the various
is,ues against the respondent, this is the highest relief that the respondent
could claim and which the appellants concede would be the most equitable.
' . (471-B-C)
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4601 of2000.
.
.
/
;
--
'
.
E
F
G
From the Judgment and Order dated. 13.1.2000 of the Allahabad High ·
Court in T.T.R. No. 700of1997.
·
·
·.
_,,,_
WITH
~..
.
C.A. No. 4602 of2000. .
'--._
G.K. Banerjee, Punit Dutt Tyagi, S. Aggarwal and Mukesh Verma with /
him for the Appellants.
·
Gopal Subrarnanium, Bharatji Aggarwal, Dhruv Agarwal, Praveen _Kumar,
Umesh Khaitan and Nishant Menon with them for the Respondent.
The Judgment of the Court was delivered by
RUMA PAL, J. The issue in these appeals is the extent of the entitlement
of the . .respondent to. the benefit of exemption from payment of trade tax ..
granted under a notification dated 27th July, 1991 issued under Section4A ··
H of the U.P. Trade Tax Act, 1948 (hereinafter referred to as '.the Act')
r
·-·
-~ --
..
COMMR. OFJRADE TAX, UP. v. KAJARIA CERAMICS LTD. [RUMA PAL, J.l
447
. The respondent manufactures and sells ceramic tiles in its ·factory at A
Sikandarabad, District Btilandshahar in the State of Uttar Pradesh since 1988
having received an industrial licence from the Government of India to do so .
. The an;{ual production capacity of the respondent was 12000 TPA (tonnes .
per annum). The total investment made in the unit upto 12th August, 1988
was Rs.16,21,54,452 and thefirst sale was effected on 16th August, 1988.
A notification issued on 26th December, 1985 (referred to as the 1985
Notification) under Section 4-A of.th.e Act granted a six-years' tax exemption
B
in re~pect 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
first day of March, 1990. Admittedly the respondent's unit fulfilled the C
conditions mentioned in the notification and, siilce its inv.estments exceeded
Rs. 3 lakhs, it was granted ex.emption for six years which was reckoned from
the date of first sale i.e. from 16th August, ·]988 to 15th August, 1994.
.
During the period 1st April, 1990 to 15th August, 1990 the capacity of
the respondent's unit was increased from 12000 to 26000 tonnes per annum . .- D
A!further fixed capital investment of Rs. I I, 14,95,641 was made and the eligibility
. certificate which had been granted was suitably revised on I Ith April, 1991
noting the increased production capacity of the unit to 26000 TPA. Again
between 16th August, 1990 to 28th December, 1991, the respondent made an
additional fixed capital investment of Rs.12,50,66,080 and increased the units
. capacity from 26000 to 40000 TP A. Finally the capacity was increased to 60000 E
TPA by making a further llivestment of Rs. 29,95,20,778 by 28th March, 1994.
Th_e total additional inv~stment in the three expansions was Rs. 54,51,03;544.
.
In the meanwhile a notification dated 27th July, 1991 (referred to as the
1991 Notification) had been issued granting an exemption from tax to a new p·
. ·unit and also to units which had undertaken expansion, diversification or
modernization. It provided similar reHef from payment of tax under the Act to
new units excluding units mentioned in Annexure II to the second Notification
as well as to goods manufactured in units other than units of the type
mentioned in Annexure II which had undertaken expansion, diversification or
modernization on or after !st April, 1990 but not later
ti!~~ 3 lst March, 1995 G
in specified areas. Under paragraph l(B) (I) (a) no tax was payable or, as the
case may be the tax was payable at reduced raies specified in Column IV of
Annexure I on the turnover of sales by such units in respect of inter a/ia
"the quantity of goods manufactured in excess of ihe base production in the
case of units undertaking expansion or modernization". Paragraph I B (2) (ii) H
448
SUPREME COURT REPORTS (2005) SUPP. 1 S.C.R.
A provided that in the case of units undertaking expansion or modernization the
period of such facility was to be reckoned from the first date of production
of goods manufactured in excess of the base production. The benefits under
the Notification were available only on production of an eligibility certificate
. granted by the named authority to the assessing authority. Annexure I provided _,
B __ for the rates of tax applicable in respect of such units situated in different
districts named in that Annexure. The rate of exemption of tax applicable was
fixed on the basis of the investment and varied according to the location of
the unit as specified in Annexure 1 to the Notification. The respondent's unit
was covered by Serial No. 2( i ) of Annexure I to the notification which
covered the district of Bulandshahr within which the respondent'~ factory is
C 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.
D
On 30th June, 1993, a Circular was issued by the Commissioner of Sales
' Tax clarifying that units which had started production upto 31st March, 1990
and which could enjoy unlimited exemption for a fixed period, and which Jiad
undertaken expansion, diversification or modernization would get the benefit
of exemption ofreduction from the specified dates confined to 100% to 150%
E of the additional fixed capital investment.
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 15th August, 1994, on 16th September, 1994, the respondent
made three separate applications under cover of a letter dated 15th September,
F 1994 to the General Manager, District Industries Centre for recommendation
to the Divisional Level Committee stating that the respondent company had
started its production on 12th August, 1988 with an installed capacity of
12000 TPA and that it had "undertaken three successive expansions during
1990 to 1994. First it increased the capacity from 12000 MT to 26000 in
August, 1990 and raised it to 40000 MT in December, 1991and60000 MT in
G March, 1994".
However, on 21st November, 1994 the respondent ~ithdrew all three
applications and on 17th July, 1995, filed a revised application claiming that
there was one expansion from 12th August, 1988 to 28th March, 1994 by
H which the annual production capacity of the respondent's unit was increased
COMMR. OF TRADE TAX, U.P. v. KAJARIA CERAMICS LTD. [RUMA PAL, J.]
449
from 12000 TPA to 60000 TPA by making an additional fixed capital investment A
of Rs. 54,51,03,549.
Before the revised application under the 1991 Notification was filed by
the respondent a third notification was.issued on 31st March, 1995 (referred
to as the 1995 Notification) granting benefits to units which were either new
or had undertaken expansion, diversification or modernization on or after· l st B
April, 1995 but not later on 31st March, 2000. The difference in this notification
with the earlier notifications is not only with regard to the period but also in
the allowance of the benefit to any finished goods manufactured in such a
unit which had undertaken "backward integration" during the same period.
The limits to which exemption was granted has been mentioned in Annexure C
I. Units where the fixed capital investment exceeded Rs. 50 crores would, like
the earlier notification, be wholly exempted from payment of tax. Where the
investment was not Rs. SO crores, the benefit was granted at reducing
percentages - the maximum (at least as far as certain districts including
Bulandshahar were concerned) being 200% of the fixed capital investment or,
as the case may be, additional fixed capital investment.
D
On the basis of the revised application and in accordance with the
procedure prescribed, an inquiry was made and a report submitted by the
Trade Tax Officer to the Divisional Level Committee (DLC ). The DLC by its
decision dated 7th July, 1996 granted an exemption only in respect of the
expansion of the unit from 40000 TPA to 60000 TPA. The base production was E
taken at 40038 MT. The benefit in respect of the first and second expansions
for achieving the expansion of 40000 MT was not granted. The production
· was also taken to have commenced from 28th March, 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 & machinery. Other expenses claimed F
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.
·
Aggrieved by the DLC's decision, the respondent filed an appeal under G
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 H
450
SUPREME COURT REPORTS [2005) SUPP. I S.C.R.
A as a percentage of the fixed capital investment prior to the expansion but as
a percentage of the additional fixed capital investment. However the expenses
on rights issue, foreign technicians, foreign travel, laboratory equipment, fire
fighting equipment and establishment of water distribution schemes were
included in the value of the fixed capital investment.
B
The appellants filed a trade tax revision before the High Court. The
respondent also filed a trade tax revision before the High Court challenging
the limitation of the grant of exemption to the additional fixed capital investment.
By the impugnedjudgmen, the High Court allowed the respondent's application
and dismissed .the State's application holding that the respondent's unit was
C entitled to include the fixed capital investment ofRs.16,21,54,452/- as on 12th
August, 1988 in the fixed capital investment under the 1991 notification and
that the tax benefit would be calculated at the specified percentage of the
original and additional fixed capital investment. The Circular dated 30th June
1993 was struck down and the DLC was directed to issue a revised eligibility
certificate to the respondent in accordance with the finding.
D
E
Two appeals have been preferred from both these decisions by the
Trade Tax Authorities, both of which are being disposed of by this judgment.
As no stay was granted by us at the time of the admission of the appeals,
tax relief was granted to the respondent by the appellants as directed by the
High Court.
According to the appellants the 1985 Notification granted tax relief only
to new units and did not extend to units undergoing expansion, diversification
or modernization. The 1991 Notification expanded the category of units to the
latter category for the first time. As far as the fixed capital investments were
F concerned it is submitted that Explanations 1,2,4 and 5 to Section 4A of the
Act showed that there was a distinction between original and additional fixed
capital investment and that contextually, the phrase "fixed capital investment"
..!:, .
used in the notification when read in the case of a new unit should mean
'original fixed capital investment' and in the case of a unit undertaking
expansion, diversification or modernization to mean 'additional fixed capital
G investment resulting in such expansion, diversification or modernization. It is
submitted that that was how the respondent had understood the matter
initially. Any 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
H same investment. Multiple expansions would also allow the same original
COMMR. OF TRADE TAX, U.P. v. KAJARIA CERAMICS LTD. [RUMA PAL, J.)
451
investment to be counted for each expansion and an expansion by only 25% A
of the original investment would mean that the unit would have a tax benefit
including the 100% 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 additio.nal fixed capital investment in B
the case of expansion, diversification or modernization. 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 4A
be construed to include any item apart from the items specified therein. On
the question whether there was one or three separate expansions, the C
Appellants contended that there was no evidence whatsoever to show that
the three expansions were part of one integrated scheme. They say that
treating the expansion as one would be contrary to the statute. Finally it is
submitted that if at all the respondent had not collected any tax on the
strength of the eligibility certificate issued by the authorities consequent to
the High Courts judgment ( which was disputed ) that did not, according to D
the appellants, debar the State Government from recovering its dues from the
respondent. It is said that the respondent had the option of collecting the tax
from the customers and applying for a refund.
Countering these submissions, the respondent has submitted that E
Section 4A fixed the eligibility criteria for the grant of benefits under the Act
and the actual grant of the benefit was effected by the notification and in
tenns thereof. Thus the 1991 notification linked the extent of the benefit to
the fixed capital investment in contrast to the additional fixed capital investment
provided in the 1995 notification. There was a conscious decision to grant
older units the benefit in respect of the additional production by linking the F
same to the original and the additional fixed capital investment. The distinct!on
was deliberate and unambiguous. If, as a result, older units underta~ing
expansion, diversification or modernization were in a better position than new
units, this would not, according to the respondent, make the grant
discriminatory or arbitrary, nor was there any warrant in law not to give effect G
to the language used. It was then submitted that there was no bar under the
1991 Notification against claiming exemption in three phases of expansion at
the end of the third phase nor was there any time limit to do so .... It was
contended that the Tribunal had correctly allowed the preoperative expenses
M. f)art of the value of the plant and machinery which was includible in the
respondent's fixed capital investment.