P L D 1962 (W (PLP)

S. A. MAHMOOD, J.-On an application to the Appellate Tribunal Pakistan under section 17 (1) of the Sales-tax Act, 1951, (Act III of 1951), (hereinafter called the Act) the Tribunal has referred the following question to this Court for opinion :- "Whether, in the circumstances of the case, the Tribunal was right in holding that the sales of goods exempted from pay ment of tax by a notification made under section 7 of the Sales- tax Act 1951, could not be taken into account for the purpose of determining the `turnover' within the meaning of Notifica tion No. 10, dated the 27th of June '1951, (as amended by Notification No. 4-S. T., dated the 15th of March 1954), made under section 8 (2) of the Act." 2. We are concerned with the sales-tax for the year 1954-55, in the case of Messrs Agha Textile Mills, Gujranwala, the assessee, who manufactured art-silk yarn cloth with the help of 22 handlooms and six powerlooms. The entire sales of cloth, including those of handlooms for the relevant year was estimated as Rs. 80,000. The sales of handloom cloth amounted to Rs. 37,856. The sales of cloth produced by powerlooms were estimated at Rs. 42,154. The sale of cloth woven on handlooms was exempted from sales-tax by the Central Government in exercise of power under section 7 (1) of the Act by Notifica tion No. 7, dated the 27th of June 1951. The licensed manufac turers or producers were also exempted by the Central Government from payment of sales-tax on goods manufactured or produced by them in the case of a manufacturer or producer carrying on a cottage industry and making a turnover not exceed ing Rs. 25,000, and other classes of manufacturers or producers, where the turnover did not exceed Rs. 60,000 a year by Notifica tion No. 10, dated the 27th of June 1951, as amended by Notification No. 4-S. T., dated the 15th of March 1954, which was issued in exercise of power under section 8 (2) of the Act. The Sales-tax Officer added together the assessee's sales of hand loom cloth and of the cloth produced by powerlooms, and having calculated the total turnover of the assessee at Rs. 80,000, which was in excess of the exempted limit of Rs. 60,000, he imposed sales-tax on Rs. 42,154, the value of sale of cloth produced by powerlooms, without taxing the sales of handloom cloth. The assessee's case was that he was not liable to assess ment to sales-tax because the sales of handloom cloth were totally exempted under section 7 (1) of the Act, and because sale of cloth produced on powerlooms, was below the taxable limit and was covered by the exemption granted by the Notification under section 8 (2) of the Act. He appealed to the Appellate Assistant Commissioner, who maintained the order of the Sales- tax Officer. The assessee then appealed to the Appellate Tribunal, which reversed the decision. It held that when the Central Government, acting under section 7 of the Act, had exempted the levy of sales-tax on a commodity, its effect was to take it out of the purview of section 3 altogether, with the result that the particular goods, or class of goods, ceased to be goods to which section 3 applied. The reasoning was that if the charging section did not apply, ex-hypothesi all other sections of the Act did not come into operation, and that the Department could only succeed if it could show that what had gone out under section 7 could be brought back under section 8, which was an Impossible position to maintain 'the Commissioner of Sales Tax then made an application before the Appellate Tribunal under section 17 (1) of the Act for a reference to be made to this Court, which has resulted in this reference. 3. The question raised on behalf of the Department before the Appellate Tribunal and before us is that for purposes of exemption granted by section 8 (2) of the Act, the entire turnover of exempted as well as unexempted goods had to be taken into account, that in other words if the total turnover of the entire goods manufactured by the assessee exceeded Rs. 60,000, then notwithstanding the exemption, sales-tax could be levied on sales of all unexempted goods, included in the total turnover. In support of the contention, it was urged on behalf of the Department that as paragraph 2 of the notification did not make a distinction between exempted and non-exempted articles, it intended to include the entire sales of goods manufactured or produced by the assessee and that assessment of sales-tax could be made, if the turnover exceeded Rs. 60,000 but it was conceded that sales-tax could not actually be imposed on sales of exempted articles. The Sales Tax Officer by adding together the turnover of handloom cloth and cloth produced on powerlooms, obviously, tried to import the principle underlying certain sections of the Income-tax Act, including sections 4 (3), 14 and 16 of the Act, whereby certain classes of income were included in the assessee's total income, although they were exempted from the levy of income-tax. 4. For the purposes of the decision of this case, sections 3, 7 and 8 of the Sales-tax Act are only relevant. Section 3 (1) provides (1) There shall be levied and collected a tax on the value of :- (a) all goods produced or manufactured in the Provinces of Pakistan or the Capital of the Federation, payable by the manufacturer or producer ; (b) all goods imported into the Provinces or the Capital of the Federation, payable by the importer ; (c) all goods sold by a licensed wholesaler, payable by the licensed 'wholesaler ; (d) such goods c classes of goods as the Central Government may, by notification in the official Gazette, specify in this behalf which are exported from the Provinces or the Capital of the Federation, payable by the exporter. Then follows Chapter IV, which provides for exemptions. Section 7 (1) provides that the Central Government may, by notification in the official Gazette, exempt any goods or class of goods from the tax payable under the Act, and may also by notification as aforesaid make a reduction in the rate of tax leviable in respect of any goods or class of goods, and sub section (2) subject to such conditions as may be specified in the notification. It was under subsection (1) of section 7 of the Act that the Central Government exempted altogether, under the notification referred to above, cloth woven on handlooms in the Provinces and Capital of the Federation from payment of sales- tax. Section 8 of the Act may be reproduced as it is relevant for the purposes of interpreting the Notification No. 10, dated the 27th of June 1951, made under its subsection (2): - "Manufacturers' Licences.-(1) Every manufacturer or producer shall take out an annual licence in such form and subject to such conditions as the Central Government may prescribe, for which the fee payable shall be rupees five. (2) The Central Government may grant any class of manu facturer or producer exemption from the payment of the tax on goods manufactured or produced by him and no person who is a member of a class so exempted shall be given a licence. (3) Any exemption granted under subsection (2) may be withdrawn by the Central Government at any time, and upon its withdrawal the provisions of subsection (1) shall apply to all members of the class in respect of which the exemption has been withdrawn." Notification No. 10, dated the 27th of June 1951, as amended by Notification No. 4-S. T., dated the 15th of March 1954, is as follows: - "In exercise of the powers conferred by subsection (2) of section 8 of the Sales-tax Act, 1951 (III of 1951), the Central Government is pleased to grant the following classes of manufacturers or producers exemption from the payment of the tax on goods manufactured or produced by them- (1) A manufacturer or producer carrying on a cottage industry and making a turnover not exceeding rupees twenty-five thousand a year . . . . . (2) Other classes of manufacturers or producers whose turn over does not exceed rupees sixty thousand a year. (3) . . . . . . . . . . (4) . . . . . . . . . . For the purposes of the exemption in this Notification `turn over' means the gross takings from the sale of the goods manufactured or, in the case of a cottage industry where goods are not sold taut are used by the manufacturer or producer, the gross takings which he would have made had he sold the goods." 5. The above notification exempts manufacturers or producers (other than those carrying on a cottage industry and making a turnover not exceeding rupees twenty-five thousand a year) whose turnover does not exceed rupees sixty thousand a year. The exemption is again from tax payable on the goods manufactured or produced. The question that falls for determi nation is whether in the notification the "turnover" is intended to include sales of exempted goods or only unexempted goods. Section 3 of the Act provides for sales-tax to be levied and collected on the value of the goods, produced or manufactured, imported or sold by licensed wholesalers (and of export of such goods as are notified by the Central Government). The tax under the Act is levied and collected on the value of the goods, and if goods are exempted from sales-tax under section 7 (1) of the Act it follows that they cease to be chargeable to sales-tax', are excluded from the operation of section 3 of the Act and cannot be considered for charging purposes. Subsection (2) of section 8, under which the notification has been issued, also provides for exemption to a class of manufactures or producers from tax on goods produced, and this is an additional exemption, which operates in favour of a class of manufacturers and producers, When the Central Government exempted a manufacturer or pro ducer, whose turnover of goods does not exceed rupees sixty thousand a year, it obviously provided for exemption in respect of goods which were chargeable to sales-tax. The reason is that the exemption must relate to goods which are chargeable to tax for otherwise the necessity for granting an exemption In respect of the goods does not arise. 6. The contention on behalf of the Department that the sales of exempted goods could be included In calculating the assess ability to sales-tax in case of a manufacturer or producer is based on the view of the notification that sales beyond sixty thousand, of exempted and unexempted goods, are rendered taxable by it. In raising this contention it has been ignored that subsection (2) of section 8 is intended to create an exemption, and that the notification issued under it is also intended likewise to create an exemption. If certain goods have been exempted from sales-tax, they cannot be considered for the pur poses of assessability. The notification under subsection (2) o. section 8 is intended to grant further exemption to a producer) or manufacturer whose turnover of unexempted goods does not exceed rupees sixty thousand a year. A contrary interpretation leads to anomalous results and has the effect of denying the exemption which has been granted under subsection (1) of section 7, which could not have been the intention of the notification. Supposing a person produces exempted goods of the value of rupees seventy thousand. Is he liable to pay sales-tax on it? 'The answer obviously is in the negative. If sales-tax cannot be charged on it, it follows that these goods are not to be consider ed for the purposes of turnover in relation to the notification which does not create a liability. The Department has treated the notification as creating a liability where sales of manufac tured goods exceed rupees sixty thousand, but this interpretation is clearly wrong. If it intended to create a liability, although it clearly did not, then the notification goes beyond the scope of the Act, and is in excess of the powers conferred by the Act. On no recognised principles of construction such interpretation can be put on it. The provisions of Income-tax Act cannot be imported into the Sales Tax Act with a view to create liability in relation to the extent of the value of production of goods, as those provisions have not been incorporated in the Sales Tax Act. 7. For the reasons given above, we are clearly of the opinion that the value of the sales of goods exempted under section 7 (1) of the Act cannot be taken into consideration for determining the "turnover", and for defeating the exemption granted by Notification No. 10 issued under subsection (2) of section 8 of the Act. Our answer, therefore, to the question referred to us is in the affirmative. The assessee shall have the costs of this reference. Reference answered in affirmative.