Munjal Synthetics Private Limited vs State of Punjab

Sukhdev Singh Kang, J.—This bunch of General Sales Tax References Nos. 13 to 18 of 1985 and C.W.P. Nos. 3218 and 3439 of 1985, which raise common questions of law and fact are proposed to be disposed of by this common judgment.

Munjal Synthetics Private Ltd., Ludhiana, is in the business of manufacture and sale of leather board, etc. It is a registered dealer under the Punjab General Sales Tax Act. The Assessing Authority, vide orders dated November 25, 1975 and January 24, 1977, framed assessments for the years 1973-74 and 1974-75. The Assistant Excise and Taxation Commissioner, Ludhiana, exercising the powers of Commissioner, initiated proceedings u/s 21 of the Punjab General Sales Tax Act, 1948 (for short "the Act"), for revising the orders of the Assessing Authority. He came to the conclusion that the assessee had sold goods on the strength of a certificate of registration and paid tax at the concessional rate of 1 per cent whereas these sales were liable to bear tax at the rate of 6 per cent. He allowed the revisions, vide orders dated February 18, 1982 and created additional demands for both these years. For the year 1975-76, the Assessing Authority rejected the accounts of the dealer and created additional demands under the Act and the Central Sales Tax Act, respectively. Dissatisfied, the dealer filed appeals which were dismissed by the Deputy Excise and Taxation Commissioner.

For the year 1976-77, the same story was repeated. The Assessing Authority created an additional demand. The appeal filed by the dealer failed. For the year 1977-78 also, the Assessing Authority rejected the accounts of the dealer and created additional demand and imposed a penalty u/s 13(3) of the Act. The appeals against those orders also failed. The dealer filed two revision petitions against the orders of the Deputy Excise and Taxation Commissioner. They also remained unsuccessful. The dealer then filed four appeals before the Sales Tax Tribunal. The revision petitions as well as the appeals filed by the dealer were dismissed by the Tribunal.

The dealer filed six applications for stating the case and referring the questions of law arising out of the orders of the Tribunal for the opinion of this Court u/s 22 of the Act. The applications were allowed and the learned Presiding Officer of the Sales Tax Tribunal, Punjab, vide order dated November 28, 1984, has stated the case and submitted the following two questions for our opinion :

(1) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that leather sheets do not fall under entry (10) of the notification ibid., namely, "hides and skins" in raw or dressed state.

(2) If the answer to question (1) be in the negative, the effect thereof on tax liability of the assessee.

For the assessment years 1978-79 and 1979-80, the petitioner has filed Civil Writ Petitions Nos. 3439 and 3218 of 1985 raising these very questions.

Entry (10) of the Notification No. S.O. 26/P.A. 46/48/S. 5/72 dated August 10, 1972, of the Punjab Government issued u/s 5 reads as under:

"(10) the rate of tax on hides and skins whether in raw or dressed state shall be (two paise) in a rupee."

The dealer-assessee has placed on the file a memorandum explaining the manufacturing process of the leather sheets which are manufactured by it, which is as under :

The waste leather cutting after removing visible non-leather materials are fed into fibriser machine for crushing.

The hard portion, after crushing, if any found are removed from the crushed leather powder, then the remaining crushed leather powder is screened through the screening machine.

After the screening, the leather powder is refined after washing with water and chemicals to remove dust, dirt, resins, greases and oil substance.

After refining process, the leather powder is mixed with latex in a tank thoroughly.

The mixture in such a way formed is poured into trays through pipes and dried out by the vacuum process which are formed into sheets.

Then the semi-formed sheets are pressed under hydraulic press and dried in the sun.

The sheets so formed are cut into marketable size with cutting machines.

It is evident from a perusal of the above detailed manufacturing process that the waste leather cuttings after removing the visible non-leather materials are fed into a fibriser machine. The crushing machine crushes the waste leather cuttings. These are turned into leather powder. The hard particles which do not turn into leather powder are removed. Then the remaining crushed leather powder is screened through a screening machine. This screened powder is refined after washing it with water and chemicals so as to remove dust, dirt, resins, greases and oil substances. The result of these processes is that the waste leather pieces lose their identity totally. All the fibre matters are crushed into powder, the harder ones which are not turned into powder are removed. The resins, grease and oil, etc., are also removed while washing with water and chemicals. This crushed leather powder is then impregnated with latex. The fine particles of leather dust are thus bound together by an artificial binding agent. The end-product is an entirely new commodity substantially different from the natural skins and hides. The final Court had an occasion to consider as to whether leather splits and coloured leather continue to be hides and skins in State of Tamil Nadu Vs. Mahi Traders and Others, . Their Lordships were referred to an opinion of the Leather Development Wing of the Ministry of Commerce and Industry regarding the meaning of the expression "hides and skins in dressed state" and which is reproduced at page AIR 1170 STR 233 . It reads :

"Hides and skins are obtained from either slaughtered or dead animals. The raw hides and skins thus obtained are known to be in the green state. These are easily putrescible ; if proper precautions are not taken they would easily rot and decay. Since tanneries are not always located very near the source of raw hides and skins, the question of preserving them for a temporary period till they reach a tanning centre assumes importance. Raw hides and skins are ''cured'' by either wet salting, dry salting or drying. In the ''cured state'' the raw materials can be preserved for a temporary period. In the third state of temporary preservation, the hides and skins are ''picked''. During the next stage they are tanned in which state they can be preserved almost indefinitely. These tanned hides and skins are processed further to yield dressed hides and skins which are ready for use. ''Dressed'' or finished material could also be preserved almost indefinitely.

From the above, it will be seen that the expression ''hides and skins in the raw or dressed state'' refers at one end to the raw material obtained from the slaughtered or dead animals and at the other end to the tanned and finished material ; the expression, therefore, seems to include the other intermediate stages indicated in the previous paragraphs. Dressing, according to the authoritative interpretations, would mean the conversion of tanned hides and skins by further suitable processing into leathers of different types which are ready for use".

Similarly, a glossary of terms relating to hides, skins and leather published by the I.S.I. in 1960 defines leather as "the main skin or hide of animals prepared by tanning, which still retains its original fibrous structure more or less intact, from which hair or wool may or may not have been removed and which has been treated so as to be imputrescible even after treating with water."

Dressed hides and dressed leather retain substantially the normal form and texture. They are tanned and cured to make them of the required tensile strength, flexibility and water resisting properties. The hair or wool is generally removed as a first step towards tanning. These are rendered imputrescible.

The petitioners'' case is that the commodity produced by them is leather sheets. Most important characteristic of leather is that the skin or hide of the animal after tanning retains its original fibrous structure more or less intact However, in the present case, the cut pieces of leather or hides are first crushed into a leather powder by a fibriser machine. All the uncrushed fibrous matter is removed. Thereafter, the leather powder is screened. In the process cut pieces of skins and hides are crushed or grounded into a fine powder. The harder fibrous matters which are not crushed are removed. Thus, the fibrous structure is totally destroyed. The leather pieces do not retain their shape or structure. They change into a powder, free of resins, greases and oils which are very important components of natural leather. This powder is then mixed with latex and that liquid is poured into trays through pipes and dried out by vacuum process and the mixture then turns into sheets. The commodity that comes into being cannot be termed leather, what to say dressed skins or hides.

Shri P.S. Patwalia, learned counsel for the petitioner, had relied on State of Tamil Nadu Vs. Mahi Traders and Others, , to contend that the cut pieces of hides and skins remain hides and skins. Similarly, coloured leather continues to be dressed skin. Indeed, their Lordships have held that leather splits are nothing but cut pieces of hides and skins. Similarly, coloured leather also continues to be hides and skins. However, these findings do not in any way advance the case of the petitioner. In State of Tamil Nadu Vs. Mahi Traders and Others, , the hides and skins were not subjected to any process which may result into total dislocation of their fibrous structure. Coloured leather has undergone only a process which may aptly be described as processing. It did not materially change the basic fibrous structure of the skins and hides which underwent this process.

Mr. Patwalia also referred us to a Constitution Bench decision of the final Court in Tungabhadra Industries Ltd. v. Commercial Tax Officer [1960] 11 STC 827, wherein their Lordships have held that groundnut oil even after undergoing hydrogenation process remained groundnut oil. It did not cease to be so. Their Lordships held that though the groundnut oil, at normal temperature, was a viscous liquid it assumes a semi-solid condition if kept for a long enough time in a refrigerator. It was, therefore, not correct to say that a liquid state was an essential characteristic of a vegetable oil and that if the oil is not liquid, it ceases to be oil. In the process of hydrogenation, atoms of hydrogen get absorbed in the molecules of groundnut oil and the oil gets hardened. But neither mere absorption of other matter nor inter-molecular changes necessarily affects the identity of a substance as ordinarily understood, and therefore, the quality of oil is improved in that its resistance to the natural processes of deterioration through oxidation is increased, it does not cease to be oil. So, it is apparent from the above that the process of hydrogenation did not change substantially the basic characteristics of groundnut oil. It only improved its quality. The processes involved in this case are not comparable to the manufacturing process in the case in hand.

Mr. Patwalia then contended that in order to determine as to in which entry a particular commodity fell, the court should not take recourse to the technical text books or dictionaries, but should rely on the opinions and views of the persons who deal with that particular commodity in the course of their trade or business. In other words, it should be determined as to how the commodity is understood in common parlance. There is no quarrel with this proposition. When any term or expression is not defined, the courts find out how the term or expression is understood in common parlance, i.e., by persons who deal in or with that commodity. However, in the present case, there is no evidence as to what is understood by the expression leather board or leather pieces manufactured by the petitioner. During the proceedings culminating in the orders impugned in C.W.P. No. 3218 of 1985, the petitioner had produced bill book No. 2 of 1978-79 showing the sale made to various dealers. In these bill books the goods sold were described as leather sheets. The affidavits of six registered dealers stating their understanding that the goods sold to them were leather board which in common parlance is understood as hides and skins. The authorities did not accept this evidence in view of the process of manufacture of the commodity in question. They held that the opinions of the dealers would not change the character of the goods sold. The Sales Tax Tribunal has also taken the same view. So, it is a finding of fact that in common parlance leather board or leather sheets manufactured by the petitioner are not understood as dressed hides and skins. We, thus, do not agree with the learned counsel for the petitioner that in common parlance leather board or leather sheets manufactured by the petitioner are treated as dressed skins and hides. We are of the considered view that the leather board or leather sheets manufactured by the petitioner are not dressed hides and skins.

In this view of the matter we answer question No. 1 in the affirmative and in favour of the department. In view of the fact that our answer to question No. 1 is in the affirmative, it is not necessary to answer question No. 2. In this view of the matter, C.W.P. Nos. 3218 and 3439 of 1985 fail and are dismissed with no order as to costs.