Holding

The assessees are entitled to a set‑off of the entire tax paid on the purchases of sulphuric acid and cotton respectively, provided the goods were used in the manufacture of taxable goods for sale.

Summary

The Supreme Court considered two appeals by the Commissioner of Sales Tax challenging set‑off claims made by Bharat Petroleum Corporation Ltd. (an oil refinery) and Phulgaon Cotton Mills Ltd. Both assessees had paid sales tax on raw materials—sulphuric acid and raw cotton—used in manufacturing processes that produced both taxable and non‑taxable outputs, including by‑products (acid sludge and cotton waste) that were sold and attracted tax. They claimed a full set‑off of the purchase tax under Section 42 of the Bombay Sales Tax Act and Rules 41/41A, arguing that the raw materials were used in the manufacture of taxable goods. The lower authorities either partially allowed or denied the set‑off, while the Tribunal and High Court allowed the full claim. The Court held that the only condition for set‑off is that the purchased goods be used in the manufacture of taxable goods for sale; there is no requirement that the taxable goods be sold by the manufacturer, nor is any apportionment based on turnover required. Consequently, the assessees were entitled to a full set‑off of the tax paid on the raw materials.

Issues considered

The applicability of Rule 41/41A for granting a set‑off of purchase tax when raw materials are used to produce both taxable and non‑taxable goods
Whether the set‑off must be proportionately limited based on the turnover of taxable versus non‑taxable outputs
Whether the rule requires that the taxable goods be sold by the manufacturing dealer himself

Legislation cited

Bombay Sales Tax Act, 1959s. 12, s. 2(17), s. 25, s. 42

Subjects

sales taxset‑offpurchase taxRule 41Rule 41Aby‑productapportionmenttaxable goodsmanufacturerBombay Sales Tax Actcomposite manufacturingacid sludgecotton waste

Judgment

COMMISSIONER OF SALES TAX, BOMBAY ETC.ETC. A
v.
BHARAT Plf'.TROLEUM CORPORATION LTD. ETC. ETC.

FEBRUARY 18, 1992
B
[S. RANGANATHAN, V. RAMASWAMI AND S.C. AGRAWAL, JJ.]

Bombay Sales Tax Act, 1959/Bombay Sales Tax Rules, 1959:

Section 42/Rules 41 and 41-A-Sales tax--Right to claim set-off-Sales
tax paid on purchase of raw material used in manufacture of no11-taxable c
goods and taxable by-products for sale-Whether set-off would be available
011 the e11tire amou/lf of tax paid on purchase of raw materiaf-Whether
pri11ciple of apponio11mellt on basis of tumover of taxable and non-taxable
goods could be i11voke~Wliether raw material purchased by manufacturer-
dealer-· should be used for mam1facn1ring taxable goods only and sale of D
manufactured goods should be made by ma11ufacntrer-dealer himse!f-By-
product yielded in the process of manufacture of main product-Whether
manufacturer of main product-manufacntrer of by-product also.

The assessee-Oil refinery, predecessor-in-interest to the respondent
Corporation in one of the appeals had registered itself as a dealer under E
the Bombay Sales Tax Act, 1959. During the Calendar year 1961, it had
purchased sulphuric acid from a chemical company for processing and
refining crude oil and manufacturing kerosene for a marketing company.
On the sulphuric acid so purchased sales tax was recovered from it by the
chemical company. While the refined kerosene which was not taxable upto F
31.3.1961 was sold by the marketing company, the acid sludge yielded in
the purification process was sold by the refinery. The refinery paid sales
tax on the acid sludge sold by it, and claimed a set off (and a refund, if
need be) of the sales tax paid by it on its purchase of sulphuric acid, on
the ground that all the conditions set out in clause (e) of Rule 41 of the
Bombay Sales Tax Rules, 1959 were fulfilled, viz., it was manufacturer G
within the meaning of Section 2 (17) of the Act, that it was also a registered
dealer, that it manu!actured taxable goods for sale, that while acid sludge
was taxable throughout the year, kerosene was taxable with effect from
1.4.1961 onwards and that tax was recovered on the raw material pur-
chased by it by the chemical company. H
807
808 SUPREME COURT REPORTS (1992] 1 S.C.R.

A The Sales Tax Officer allowed the set off only partly. On appeal, the
Appellate Assistant Commissioner held that the asses'see was entitled to
no set off at all under Rule 41 since what was maouractured by the assessee
was kerosene and not acid sludJe, and the kerosene was sold not by the
assessee-manuracturer, but by some other company. The Appellate
Tribunal, however, allowed the assessee's claim in rull and on rererence
B
this was upheld by the High Court.

The respondeni Cotton Mill in the other appeals purchased raw
unginned cotton from agriculturists and unregistered dealers during
periods 1.7.73 to 30.6.74 and 1.7.74 to 30.6.75 and paid sales tax on the raw
C cotton so purchased. The cotton was ginned yielding place to ginned .
. cotton and cotton seed. The respondent oianuractured yarn and cloth
from the ginned cotton. The cotton waste and yarn waste obtained in the
course of manufacture were also sold by the assessee. It paid sales tax on
the yarn and cotton waste sold by it and claimed a set off, under 41-A or
D .the Rules, or the sales tax paid on the purchase value or the entire raw
cotton purchased hy it.

The Sales Tax Officer allowed a set off or only part of the purchase
tax' paid on the raw cotton purchased by the assessee proportionate to the
extent or yarn sales. On appeal, the Appellate Tribunal allowed a set off
E or the entire purchase tax paid on the raw cotton, machinery and other
purchases, which had been used in the process or manuracture or cotton
waste. It, however, directed 4hat the deductions should be so allowed as
not to result in a double deduction of the same amount of purchase tax.

F In the appeals, ily Special leave, before this Court, OD behalf or the
State Government, it was contended that Rules 41 and 41-A were intended
to give relief to a dealer in respect of purchase of goods which were used
in the manufacture of taxable goods for sale, that the manufactured goods,
viz., pure kerosene was neither sold by the respondent so as to attract sales
tax in his hands nor, was it liable to sales tax at all for the first three
G months, and the cotton purchased on payment of tax was used for the
manufacture of cloth which was not liable to sales tax, and that a set off
could not be allowed merely because a by-product or waste product, viz.,
acid sludge and cotton waste was sold for a nominal turn-over, which was
subject to tax, and that the set off should be split up proportionately and
H allowed only to a proportionate extent, on the basis of the respective
C.S.T. v. BHARAT PETROLEUM 809

turnover of the taxable and non-taxable goods, and an apportionment of A
such nature was implicit in a tax law and was also in consonance with the
object and purpose of the rules.

On behalf of one of the respondents it was contended that under Rule
41 it was not a requirement that the manufaclured goods had to be sold
by the manufacturing dealer himself an\!, that the sulphuric acid pur- B
chased was wholly used in the manufacture of two items -kerosene and
acid sludge- one of which, viz., the sludge, was taxable and also subjected
to tax, and the amount of set off was specified in the rule itselr as the
amount of purchase tax paid on the goods so used, and could not be scaled
down proportionately merely because the turnover of the taxable goods was c
insignificant. The other respondent adopted these contentions.

Dismissing the appeals, this Court,
I, HELD : 1.1 The assessees are entitled to a set off of the entire tax
paid by them on the purchases of sulphuric acid and cotton respectively. D
The only condition under the rule is that the goods purchased on payment
of tax should have been used in the manufacture of taxable goods for sale.
.._y Their concurrent user for the manufacture of another item of goods which
may or may not be taxable is immaterial though kerosene was also taxable
for nine months in the year and yarn was also manufactured and it was E
subject to tax.

Commissioner of Sales Tax v. Bumwil Sile// Refi11e1ic.1 Limited, (1978)
41 S.T.C. 337, referred to.

1.2. The principle of apportionment on the basis of turnovers of F
various items of goods manufactured and restriction of the quantum of
set olf to a proportion based on the turnover of taxable goods to the total
turnover cannot be accepted. No doubt under the rules, situations are
conceivable where severance of taxable element is implicit, but the type of
user in the instant case is a composite one, in which it is not possible to G
correl.ate any part of the purchased goods as having irtme in for the
purpose of manufacture of taxable goods.

Anglo-Frenc/1 Textiles v. C.J. T., (1954) 25 J.T.R. 27, S.C.; Tata Iron &
Steel Co. v. State A.I.R. 1963 S.C. 577 and Best & Co. v. C.J. T. (1966) 60
J.T.R. 11, S.C., distinguished. H
810 SUPREME COURT REPORTS [1992] 1 S.C.R.

A 1.3 In the instant case the entire sulphuric acid purchased has no
doubt been used in the manufacture of kerosene though perhaps not a
drop of acid clings to the kerosene manufactured. Equally, the entire
sulphuric acid has gone into the composition of the acid sludge. Having
r,e'gard to the nature of the interactions in the instant case, it is incon·
tr11vertible that the entire sulphuric acid purhased has gone into the
B manufacture of the sludge. The rules do not require that the purchased
goods must have been used only for the manufacture of taxable goods for
sale. Therefore, it is not possible to cut down the quantum of relief clearly
outlined in the rule on the basis of some general principle claimed to
uhderline the provision.
c
1.4 The basis for the relief provided is not very clear cut. Various
reliefS-have been provided in a group of rules which come in for ,~pplication
in various situations. The relief may be based on the principle that the
manufactured product is taxed either in the hands of the sa"le assessee or
D in someone else's hands, or that the manufactured goods are exported
which may yield no tax but earn foreign exchange, or even that the
purchases are utilised for manufacture of goods in the State thus con·
tributing to the industrial development of the State. It is, therefore,
difficult to read into the provision a quantitative correlation of the goods
resulting in a taxable turnover and the purchases of raw materials on
E which tax has been paid.

1.5 Rule 41 does not contemplate that the goods purchased by the
dealer should be used for manufacture of taxable goods for sale by him.
No such restriction can be read into this rule.

F 2.1 Where a subsidiary product is. turned out regularly and con·
tinuously in the course of a manufacturing business and is also sold ..,
regularly from time to time, an intention can be attributed to the manufac·
turer to manufacture and sell the subsidiary product.

G State of Gujarat v. Raipur Manufacturing Co. Ltd., (1967) 19 S.T.C. 1,
relied on.

2.2 The assessees in the instant case do purchase sulphuric acid
and unginned cotton for use in a manufacturing process, which yield not
only kerosene and yarn/cloth, but also acid sludge and cotton waste. There
H is also no evidence to suggest that acid sludge is not a commercial
I ....
C.S.T. v. BHARAT PETROLEUM [RANGANA1HAN, J.] 811

'
~ ~

comm<nlity with a market· hut an item of waste. A
'
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1031 of
1979 etc. etc.

From the Judgment and Order dated 23/24.11.1977 of the Bombay
High Court in Sales Tax Reference No. 92 of 1976. B
S.K. Dholakia, S.M." Jadhav arid A.S. Bhasme for the Appellants.

Vinod A. Bobde, Ms. A.K.Verma, U.A. Rana, P.G. Gokhale, Ms.
Sangeeta Aggarwal and D.N. Mishra for the Respondents.
c
The Judgement of the Court \Vas delivered by

RANGANATHAN', J, These are appeals by the Revenue arising out
of proceedings under the Bombay Sales Tax Act, 1959 (hereinafter called
'the Act'). The respondents, Bharat Petroleum Corporation Ltd. (in CA
1031 of 1979) and Phulgaon Cotton Mills Ltd. (in the four other appeals) D
are assessees to sales tax. They claimed a set-off, against the sales tax
-,. payable by them for the years in question, of certain sums, invoking the
provisions of rules 41 and 4lA framed under the Act, as they stood at the
relevant time. As the wording of these rules, in so far as it is material for
our present purposes, is identical and the basis of the claim was also E
common, it will be· convenient t? dispose of both sets of appeals by a
common judgment and we proceed to do so.

The set off claimed by the assessees was in terms of s. 42 and rules
41 and 4lA, which may now be referred to :
F
(1) Section 42 reads thus :

"42. Draw-back, set off, refund etc. - The State Government may
provide by rules that-

(a) in such circumstances and subject to such conditions as may G
be specified in the rules a draw-back, set off or refund of the
whole or any part of the tax-

(i) xx xx xx
~
(ii) paid or levied or le,iable in respect of any earlier sale or H
812 SUPREME COURT REPORTS (1992) 1 S.C.R.
,_
A purchase of goods under this Act or any earlier law, be granted
to the purchasing dealer ; ·

(b) xx xx xx

The State Government has notified various rules from time to
B time in exercise of this power which are collected in Chapter
VII of the Rules. Of these we are concerned with rules 41 and
41A.

(2) Rule 41 (omitted w.e.f. 24.6.81) was aver¥ long rule con-
taining several clauses. In so far as is relevant for our present
c purposes, it was in the following terms:

"41. Drawback, set-off etc. of tax paid by a manufacturer - In
assessing the amount of tax payable in respect of any period by
a Fegistered dealer, who manufactures taxable goods for sale
(hereinafter in this rule referred to as the "Manufacturing
D
dealer"), the Commissioner shall grant to him a draw-back, ·
set-off or as the case may be a refund of the aggregate of the
'/'~
following sums, that is to say : -

(a) xx xx xx
E
(aa) xx xx xx

(b) xx xx xx

(bb) xx xx xx
F xx xx
(c) xx

(cc) xx xx xx

(d) xx xx xx
G (e) a sum recovered from the Manufacturing dealer by another
registered dealer by way of sales tax or, general sales tax or both,
as the case rnay be, on the purchase by hi.m, of goods from such
registered dealer, being goods specified in schedule C to the Act
other than in entries 1 to 11 (both inclusive) and 15 therein and ~

H in Schedule D oiher than in entries 1 to 4 (both inclusive)
C.S.T. v. BHARAT PETROLEUM [RANGANATHAN, J.] 813

therein and in Schedule E other than in entries 1 and 2 therein, A
when the purchasing dealer did not hold a recognition or when
the dealer held a recognition but effected the purchase other-
wise than against a certificate under section 12 of the Act
provided that such goods are used by him in the manufacntre of
taxable goods for sale or in the packing of taxable goods B
manufactured by him for sale.

Explanation : xx xx xx

(Material portions Underlined)
c
(3) The relevant portion of rule 4lA, which has been invoked
in the case of Phulgaon Cotton Mills Ltd., reads thus :

"41A. {1) Drawback, set off etc. of tax paid by a manufacntrer in
respect of purchases made on or after the 15th July 1962 : In
assessing the amouflt of tax payable in respect of any period by D
a Registered dealer who manufactures taxable goods for sale or
export* {hereinafter in this rule referred to as the "manufac-
turing dealer"), the Commissioner shall, in respect of the pur-
hases made by such dealer on or after the 15th July, 1962 of any
goods specified in Schedule B, C, D or E and used by him E
within the State in the manufacture of taxable goods (**)which
have in fact been sold by him {and not given away as samples
or otherwise) or which have been exported by:him or used by
him in the packing of goods so manufactured grant him a
draw-back, set off or, as the case may be, a refund of the
aggregate of the following sums, that is to say: F

(a) a sum recovered from the manufacturing dealer by other
Registered Dealers by wiry of sales tax, or general sales tax, as
the case may be, both, on the purchase by him from such
registered dealers, when the manufacturing dealer did not hold G
. a Recognition or when he held a recognition but effected the

The words "or export" were inserted by a notification dated 31.8.70.
** The words ''which have in fact. ... ::.~. so manU.factured" were substituted by a notification
dated 15.1.1976 for the words "for sale or export or in the-packing of goods so manufac·
turcd for sale or export'.'. H
814 SUPREME COURT REPORTS (1992] 1 S.CR.

A purchase otherwise than against a certificate under section 11
of the Act;

(b) xx xx xx

(c) xx xx xx
B
(d) xx xx xx

(Material portions underlined)

(4) There was also a claim under rule 43AB but we are not ~
c concerned with that in the present appeals.

Now to turn to the facts which give rise to these appeals.

A. Bunnah Shell

D The Bharat Petroleum Corporation Ltd. is before us as the successor-
in-interest of the Burritah Shell Refineries Ltd. which is the assessee with
which we are concerned. We shall refer to it as the 'refinery' to distinguish
it from the Burmah Shell Oil Storage and Distributing Company oflndia Ltd. ~
which will be. briefly referred to hereinafter as the 'Marketing company'.
E We are concerned with the period from 1.1.1961 to 31.12.1%1. The.
refinery registered itself as a 'dealer' under the Act and possessed a
recognition certificate under section 25, after having failed in a plea, raised
in earlier assessment years, that it was not a 'dealer' and was not required
to be registered as such. It had entered into a contract with the marketing
F company under which it agreed to process and refine crude oil belonging
to the marketing company and manufacture kerosene for it. This contract
was in the nature of a bailment by the marketing company to the refinery,
the refinery taking the crude oil and returning it after purification, as
refined kerosene. For the performance of this task it received payments
G from the manufacturing company by way refining charges on the basis of
the job-work done from time to time. ·The refmed kerosene was eventually
sold by the marketing company and the refinery had nothing to do with the
sales. It may be mentioned here that there was no sales tax payable on
sales of kerosene till 31.3.1961 but it became liable to sales tax thereafter.

For the above .purification proccess, the refinery needed to use
..,,
H
C.S.T. v. BHARAT PETROLEUM [RANGANATHAN, J.] 815

sulphuric acid. During the calendar year 1961, it purchased 3048.760 MT A
of acid fo~ Rs. 3,52,742 from Dharmsi Morarji Chemical Co .. Ltd.
(hereinafter referred to as "Dharmsis") under an agreeement dated
9.6.1955 which was to remain in force for a period of ten years from
1.1.1966 (Sic). On the sulphuric acid it so purchased, a sales tax of Rs.
13,421.15 (Rs. 15,107.72, according to the High Court) was reovered from
B
it by Dharmsis, as the refinery did not purchase it on the strength of the
recognition certificate held by it as the certificate could have been utilised
only if the goods purchased had been intended to be used by it in the
manufacture of goods for sale by itself, whe;eas the manufactured kerosene
was sold by the marketing company. When the sulphuric acid was used in
the refining process, the crude oil got refined and purified but the im- c
purities therein precipitated into the acid and yielded "acid sludge". The
refinery's contract with Dharmsis provided that the acid sl11dge should be
sold by the refinery to the Dharmsis which, apparently, had its own uses
for the sludge. Accordingly, the refinery sold 3541. 985 MT of acid sludge,
during the relevant period, for Rs. 68, 108 - the correctness of this figure D
was unsuccessfully contested before the High Court - and on this amount
it paid sales tax. The record does not show the amount of sales tax paid
by the refinery on this account, but, having regard to the nature of the
commodity and turnover involved, it must, admittedly, have been a very
small amount.
E
Having done this, the refinery claimed that, as against the sales tax
paid by it for the period in question (including the tax paid on the acid
sludge), it was entitled to a set off (and a refund, if need be) of the amount
of Rs. 13, 421.15 paid by it as sales tax on its purchases of sulphuric acid.
Its argument is that it is entitled to this refund as all the conditions set out
F
in clause (e) rule 41 were fulfilled this-wise:

(a) It is a 'manufacturer', as the process of refining carried out
by it falls within the wide definition of 'manufacture' contained
in s.2( 17) of the Act viz. :
G
"2(17) 'manufacture', with. all its grammatical variations and
cognate expressions, means producing, making, extracting, al-
tering, ornamenting, finishing or otherwise treating, or adapting
any goods; but does not include such manufactures or manufac-
turing processes as may be prescribed". H
816 SUPREME COURT REPORTS [1992) 1 S.C.R.
,...
A It is also a Registered dealer.

(b) It manufactured taxable goods for sale. The" acid sludge
manufactured by it was taxable throughout the year and the
pure kerosene manufactured by it was taxable. w.e.f. 1-4-1961
onwards.
B
(c)- Tax had been recovered from it on its purchases of sul-
phuric acid from Dharmsis who are Registe_red dealers as the
purhases had not been effected on the basis of a recognition
certificate.
i..
C The Sales Tax Officer allowed the set off only to the extent of
Rs.1,101.40 without giving any details as to the manner in which this figure
had been arrived at. On appeal, the Appellate Assistant Commissioner
held that the assessee was entitled to no set off at all under rule 41 as what
was manufactured by the assessee was kerosene and not acid sludge and
D the kerosene was sold not by the assessee-manufacturer but by some other
company. The Appellate Tribunal, however, allowed the assessee's claim
in full and its view was upheld, on reference, by the High Court. Hence
the present appeal.

B. Phulgaon Cotton
E
In the case of Phulgaon Cotton Mills, we are concerned with four
accounting periods: 1-7-73 to 30-6-74, 1-7-74 to 30-6-75, 1-7-75 to 30- 6-76
and 1-7-76 to 30-6-77. The issue as to the application of rule 41A arises
in the following circumstances.

F The assessee purchased raw unginned cotton from agriculturists and
unregistered dealers. The cotton was ginned, yielding ginned cotton and
seeds. One of the issues raised in the assessments was as to whether
purchase tax should be paid on the total value of the raw cotton purchf!SW
or on the said purchase price less the value of the cotton seeds obtained
G therefrom. This question was answered against the assessee and is no
more in issue before us. ·

The assessee manufactured yarn and cloth from the ginned cotton.
Besides cotton and yarn, cotton waste and yarn waste were also obtained
in the course of the manufacture and these were also sold by the assessee.
H Some quantity of the fabrics produced by the assessee were also exported.
C.S.T. v. BHARAT PETROLEUM [RANGANATHAN, J.) 817
. .., During the periods 1-7-73 to 30-6-74 and 1-7-74 to 30--6-75, the assessee A
had paid sales tax on the purchase value of the entire raw cotton purchased
by it. It, therefore, claimed a set off, under rule 41A, of the purchase tax
.so paid as it had to pay sales tax on the yarn and cotton waste sold by it
'
It also claimed set off under rule 43AB in respect of the three periods other
than between 1-7-74 and 30-6-75 but we are not concerned "1th this claim.
B
The Sales Tax Officer allowed only partial relief to the assessee under rule
41A. He permitted a set off not of the entire purchase tax paid by the
assessee on the raw cotton purchased by it but only of a part thereof
proportionate to the extent of yarn sales. The Appellate Tribunal however
upheld the contention of the assessee. It allowed a set off of the entire
purchase tax paid by the assessee on the raw cotton, machinery and other c
purchases which had been used in the process ·of manufacture of cotton-
waste. In doing so it followed th~ principle of the decision of the High
Court in the case of Bunnah-Shell Refineries, (1978) 41 S.T.C.337. It
observed:

D
"21. ........ When the raw-cotton is ginned or ginned cotton is
used in the process of manufacturing yarn, there is bound to
be cotton waste. In view of these facts, the appellant ml! also
be entitled to full set-off so far as the purchases of cotton are
concerned, which have resulted in the production of taxable
commodity i.e. cotton waste. Each and every ounce of cotton E
is used in the manufacture of cotton waste which is a taxable
commodity. The question of, therefore, allomng proportionate
set-off so far as the purchases of cotton or machinery which
are used in manufacturing of cotton waste does not arise. 17ze
appellant is entitled to full set-off so far as purchases of cotton F
111achinery and other purchases, which are used in the manufac-
ture of cotton waste, a taxable conunodity. There is no conflict
in the decisions given 1:iy the Tribunal in earlier rulings given
in the appellant's own cases. No such argument of production
of cotton waste by-product simultaneously was canvassed. All
that was canvassed was that yarn waste was a taxable bye- G
product. Hence, full set-off on purhase of cotton be allowed.
Tribunal negatived this contention by pointing out that there is.
no simultaneous production of yarn and cloth. First yarn is
manufactured and then cloth. Thus question of referring this
issue to larger Bench does not arise. The cases will have, H
818 SUPREME COURT REPORTS [1992] 1 S.C.R.

A therefore, to go back to the Assistant Commissioner for decid-
ing the quantum of set-off admissible under Rule 41-A on these
basis for all the periods".

The Tribunal, however, directed that the deductions should be so
allowed as not to result in a double deduction of the same amount of
B purchase tax.

Aggrieved by the order of the Tribunal, the Commissioner of Sales
Tax filed petitions for special leave to appeal to this Court therefrom as
no useful purpose would be served by approaching the High Court on
c reference in view of the decision of that Court in the Burmah-Shell
Refineries case on the point at issue having gone against the Revenue.
Leave was granted by this Court on 3-9-90 and hence the four civil appeals
by the Revenue in the case of Phulgaon Cotton Mills Limited.

D Before dealing with the issue on the interpretation of rules 41 and
41A which has been debated. before us, we wish to poi~t out the difficulties
encountered by us as the facts in the case of Phuigaon Cotton Mills are not
quite clear from the record. From the Tribunal's order, it is seen that,
during the periods 1-7-75 to 30-6-76 and 1-7-76 to 30-6-77, the a.sessee
purchased no raw cotton from unregistered dealers and no purchase tax
E was levied thereon. Nevertheless, some relief under rule 41A was allowed
by the Officer in the assessments for these periods as well. The basis on
which a claim was made, and partially allowed, under rule 41A in respect
of these periods.is not known. Also, the Tribunal has allowed full relief on
the basis that since cotton was used in the manufacture of cotton waste,
F the assessee was entitled to relief in respect of purchase tax paid on raw
cotton though for these years there was no such tax. But the order of the
Tribunal refers also to "set off so far as purchases of machinery and other
purchases" indicating ihat perhaps some purchase tax had been paid in
respect of those purchases and set off had been sought in respect thereof.
But, even assuming this, the discussion regarding cotton-waste appears to
G be pointless since, admittedly, the yarn manufactured was liable to sales
tax and, on the Tribunal's reasoning, this was sufficient to enable the
assessee to claim set off of the purchase tax paid on cotton, m«<:hinery and
other materials used in the manufacture. But these aspects have not beeu
touched upon before us. The arguments before us, as we .shall refer
H presently, revolved round a very simple issue. We shall discuss this issue
C.S.T. v. BHARAT PETROLEUM [RANGANAIBAN, J.] 819

and leave the other aspects touched upon above to be clarified, if need be, A
when the-assessment is finally redone in the light of our judgment.

Shri Dholakia, learned counsel for the State of Maharashtra, submits
that the issue in these appeals is a very simple one. Rules 41 and 41A are
intended to give relief to a dealer in respect of purchase of goods which
are used in the manufacture of taxable goods for sale, the clear idea being
B
that where the manufactured goods will also be liable to sales tax in the
hands of the manufacturer there should be a relief of the taxes paid by him
on the goods putchased by him for use in such manufacture, so as to avoid
double taxation. In the Bharat Petroleum case, the manufactured goods
viz. pure kerosene were neither sold by the respondent so as to attract C
sales tax in his hands nor, indeed, liable to sales tax at all for the first three
months. So also, in the case of .Phulgaon Cotton Mills, the cotton pur-
chased on payment of tax was used for the manufacture of cloth which was
not liable to sales tax. A set off cannot be allowed merely because a
bye-product or waste product (viz. the acid sludge in the one case and the D
cotton waste in the other) was sold for a nominal turnover which was
subject to tax. Even assuming that the sulphuric acid or cotton purchased
can be said to have been used for the manufacture of two commodities
(viz. kerosene and acid sludge in the one case and cloth and cotton wa.ste
in the other), the set off under the rules relied upon should be split up
proportionately and allowed only lo a proportionate extent, the proportion E
being decided on the basis of the respective turnovers of the taxable and
non-taxable goods. He submits that though the rules do not specifically
provide for such a bifurcation, an apportionment of such nature is almost
invariably implicit in a tax law and is also consonant with the object and ·
purpose of the rules. He, therefore, submits that the Hig.h Court and F
Tribunal ought to have restricted the relief only to a proportionate extent
as done by the sales lax officer. He points out that the basis on which the
apportionment was made by the officer had not been specifically chal-
lenged before the appellate authorities and is not in issue before us.

On the other hand, Sri Bobde, learned counsel appearing for Bharat G
Petroleum laid stress on two aspects of the rule. First, he points out that,
under the rule, it is not a requirement that the manufactured goods have
to be sold by the manufacturing dealer himself. The fact is that the
kerosene constituted taxable goods after 1.4.61 and was sold by the market-
" ing company. The second aspect of the rule is that, admittedly, the H
820 SUPREME COURT REPORTS. [1992] 1 S.C.R.

A sulphuric acid purchased was wholly used in the manufacture of two
items-kerosene and acid sludge- one of which viz. the sludge was taxable
and also subjected to tax. Once this condition is fulfilled, the amount of
set off is specified in the rule itself as the amount of purchase tax paid on
the goods so used and cannot be scaled down proportionately merely
because, according to the department, the turnover of the taxable goods is
B insignificant. Sri Ran~, learned counsel appearing for the Phulgaon Cotton
Mills, adopts this argument mutatis mutandis.

We have given deep thought to these contentions and we have come
to the conclusion that, plausible and attractive as the argument urged on
c bfhalf of the State is, the conclusion arrived at by the High Court and the
Appellate Tribunal has to be upheld. But before dealing with this aspect,
we may dispose of two minor questions. The first wpich arises in the
Bharat Petroleum case is whether rule 41 contemplates that the goods
purchased by the dealer_should be used for manufacture of taxable goods
D for sale by him. The High Court has given good reasons, with which we
are inclined to agree, for holding that no such restrictions can be read into
this rule but this contention is of no significance in view of our contusion
that the assessee would be entitled to the set off claimed even on the basis
of the taxable sales of acid sludge effected by it. The other point is whether
the assessces can be said to manufacture "acid sludge" and "cotton waste"
E respectively. It is suggested for the State that the assessees arc purchasing
acid and cotton for the manufacture of kerosene and yarn/cloth respective-
ly and it is lud.icrous to suggest that the assessecs are purchasing sulphuric·
acid and cotton for manufacturing acid sludge and cotton waste. Put like
that the assessce's contention seems a little artificial. But the contention
F is not really absurd. For, the assessees do purchase sulphuric acid and
cotton for use in a manufacturing process which yields not only kerosene
and yarn/cloth but also acid sludge and cotton waste. As pointed out in
State of Gujarat v. Raipur Manufacturing Co. Ltd., (1967} 19 S.T.C. 1, where
a subsidiary product is turned out regularly and continuously in the course
of a manufacturing business and .is also sold regularly from time to time,
G an intention can be attributed to the manufacturer to manufacture and sell
not merely the main item manufactured but also the subsidiary products.
There is also no evidence on record to suggest, at least so far as acid sludge
is concerned, that it is not a commercial commodity with a market but an
item of waste. The contract with Dharmsis speaks to the contrary and
H moreover, as pointed out by the High Court, the assessee had been
C.S.T. v. BHARAT'J>ETROLEUM [RANGANATHAN, J.] 821

· practically compelled by the Department to apply for and obtain a recog- A
nition certificate for the ·manufacture of sludge and. it had also paid tax as
dealers in acid sludge. These two contentions have, therefore, to be
rejected.

Turning now to the main question, we are inclined to agree with
B
respondents' counsel that they are entitled to a set off of the entire tax paid
b~ them on the purchases of sulphuric acid and cotton respectively. The
only condition under the rule is that the goods purchased on payment of
tax should have been used in the manufacture of taxable goods for sale.
Their concurrent user for the manufacture of another item of goods which
may or may not be taxable is immaterial though we may point out that in c
the Bharat Petroleum case, the kerosene was also taxable for nine months
in the year and in the case of Plmlgaon Cotton Mills, yarn was also
manufactured and it was subject to tax. Sri Dholakia contends for an
implicit principle of apportionment on the basis of turnovers of various
items of goods manufactured and restriction of the quantum of set off to D
a proportion based on the turnover of taxable goods to the total turnover.
He cited certain decisions under the Income-tax and Sales Tax Acts in

r support of this contention : Anglo-French Textiles v. C.l. T., (1954) 25 I.T.R.
27, S.C.; Tata Iron & Steel Co. v. State, A.LR. 1963 S.C. 577 and Best & Co.
v. C.l. T., (1966) 60 I.T.R. 11, S.C. We do not think these cases are of
assistance. The first two cases dealt with the question as to when profits E
and gains can be said to accrue or arise i~ a manufacturing business and
the third held that when a receipt is a composite one of capital and revenue
nature, it is open to the Revenue to apportion the same and bring the latter
to tax. These are situation in which the taxable element is severable.
Under the rules presently under corisideration also, situations are concciv- F
able where1 such severance is implicit. For instance, suppose the cotton
purchased is utilised partly for manufacture of cloth that is taxable and part
for manufacture of cloth that is not taxable or partly for the manufacture
of yarn which is taxable and is sold and partly for manufacture of cloth
which is not taxable. In these instances, it is clear that only some of the G
cotton is utilised for the first p11rpose and some for the second purpose
and so only the purchase tax paid in respect of the quantity utilised for the
first purpose will be eligible for set off. But the type of user with which
we are concerned is a composite one in which it is not possible to correlate
any part of the purhased goods as having gone in for the purpose of
manufacture of taxable goods. The position is picturesquely brought out in H
822 SUPREME COURT REPORTS [1992] 1 S.C.R.

A the case of Bharat Petroleum. The entire sulphuric acid purchased has no
doubt been used in the manufacture of kemsene though perhaps not a drop
/
of acid clings to the kerosene manufactured. Equally, the entire sulphuric
acid has gone into the composition of the acid sludge. The 3048.760 M.T.
of acid have dissolved· the impurities in the crude oil and conglomerated
with them to constitute 3541.485 M.T. of acid sludge. Having regard to
B
the nature of the interactions here, it is incontrovertible that the entire
sulphuric acid purchased has gone into the manufacture of the sludge. The
rules do not require that the purchased goods must have been used only
for the manufacture of taxable goods for sale. In this situation, it is not .
possible to cut down the quantum of relief clearly outlined in the rule on
c the basis of some general principle claimed to underlie the provision. As
Sri Bobde rightly pointed out, the basis for the relief provided is not very
clear cut. Various reliefs have been provided in a group of rules which
come in for application in various situations. The relief may be based on
the principle that the manufactured product is taxed either in the hands of
D the same assessee or in someone else's hands, or that the manufactured
goods are exported which may yield no tax but earn foreign exchange, or
even that the purchases are utilised for manufacture of goods in the State
thus contributing to the industrial development of the State. It is, therefore
difficult to read into the provision a quantitative correlation of the goods
resulting in a taxable turnover and the purchases of raw materials on which
E tax has been paid. In this background, the straight forward answer to the
,
question raised lies in the \iteral interpretation of the language of the rules
without straining to discover some doubtful principle for denying relief.

For the above reasons, we ag_ree with the view taken by the High
Court and followed by the Tribunal and dismiss these appeals. We,
F however, make no order regarding costs.

N.P.V. Appeals dismissed.