A. V. Fernandez vs The State Of Kerala
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeal No. 232 of 1955
Decision Date: 2 April 1957
Coram: Natwarlal H. Bhagwati, B. Jagannadhadas, Syed Jaffer Imam, P. Govinda Menon, J.L. Kapur
The case titled A. V. Fernandez versus The State of Kerala was decided on the second day of April in the year 1957 by the Supreme Court of India. The judgment was authored by Justice Natwarlal H. Bhagwati, who sat on the bench together with Justices B. Jagannadhadas, Syed Jaffer Imam, P. Govinda Menon and J. L. Kapur. The petitioner in the proceedings was A. V. Fernandez and the respondent was the State of Kerala. The citation for this decision appears in the 1957 All India Reports at page 657 and in the 1957 Supreme Court Reporter at page 837.
The factual backdrop of the dispute concerned the commercial activities of the appellant, who was engaged in the purchase of copra, the manufacture of coconut oil and the associated cake, and the subsequent sale of both oil and cake to customers located within the State of Travancore‑Cochin, as well as the sale of oil to customers situated outside that State. Under the provisions of the Travancore‑Cochin General Sales Tax Act of 1125, together with the rules made under that Act, the appellant was, prior to the commencement of the Constitution of India, permitted to include in his gross turnover the total consideration received for oil sold irrespective of whether the sale was made inside or outside the State, and was also permitted to deduct from that gross turnover the entire purchase price of the copra he had bought. In the year 1951 the legislature amended the Act by inserting section 26, which provided, inter alia, that notwithstanding any other provision of the Act, a tax on the sale or purchase of any goods would not be imposed after the thirty‑first day of March 1951 where such sale or purchase occurred in the course of inter‑State trade.
For the assessment year 1951‑1952 the Sales Tax Officer determined the appellant’s tax liability on the basis of a net assessable turnover. The Officer’s calculation took the full value of the copra purchased by the appellant, added to it the values of oil and cake that were sold within the State, and then allowed a deduction only for the portion of the copra value that corresponded to the oil sold inside the State. The appellant argued that, in computing his net turnover, he should be allowed to include the total value of oil sold both within and outside the State and to deduct from that total the entire purchase price of the copra. He further contended that the overriding provision contained in section 26 of the Act entitled him to have the value of oil sold outside the State excluded from the assessable turnover.
The Court examined the provisions of the Act and the effect of the non‑obstante clause in section 26. It held that the calculation made by the Sales Tax Officer was correct. The Court explained that the clause in section 26 was intended to remove transactions that were part of inter‑State trade from the scope of the Act, thereby excluding such transactions from both the computation of gross turnover and from the net turnover on which sales tax could be assessed. Consequently, the value of oil sold to customers outside the State was to be omitted from the assessable turnover, and the deduction allowed by the Officer was consistent with the statutory scheme. The judgment therefore affirmed the assessment made by the Sales Tax Officer.
In this case, the Court described the procedural background and factual matrix before addressing the substantive tax issue. The appeal, numbered Civil Appeal No 232 of 1955, was filed under Article 132(1) of the Constitution of India against a judgment and order dated 24 November 1954 of the former Travancore‑Cochin High Court, which had dismissed Original Petition No 53 of 1954. The petition, originally filed under Article 226, sought to set aside an order of the Sales Tax Officer, 2nd Circle, Quilon, which had levied sales tax on the appellant’s net assessable turnover of Rs 7,54,144‑8‑4 for the financial year 1951‑52 (the period from 1 April 1951 to 31 March 1952). The appellant, a registered manufacturer of coconut oil and cake, possessed a registration certificate in Form VI pursuant to sub‑rule (i) of rule 20 of the Travancore‑Cochin General Sales Tax Rules, 1950. The appellant’s commercial activities consisted of purchasing copra, processing it in oil mills to produce coconut oil and cake, and selling the products both within the State of Travancore‑Cochin and, in the case of oil, to buyers outside the State. During the year in question, the appellant purchased copra valued at Rs 7,16,048‑1‑4. From this raw material, he manufactured oil and cake, selling oil partly intra‑state and partly inter‑state, while the cake was sold wholly within the State. The total value realized from oil sales amounted to Rs 6,76,719‑0‑11, of which Rs 3,67,816‑10‑1 represented sales outside the State. The cake sold inside the State fetched Rs 67,155‑155. Consequently, the appellant’s total gross turnover for the year was Rs 14,59,923‑1‑8. The appellant argued that, under rule 7(1)(k) read with rule 20, he was entitled to deduct the entire purchase price of the copra from the gross turnover, arriving at a net turnover of Rs 7,43,875‑0‑4. Further, he contended that the proceeds from inter‑state oil sales, amounting to Rs 3,67,816‑10‑1, should be excluded because such sales could not be taxed under Article 286 of the Constitution. After making this second deduction, the appellant claimed a net assessable turnover of only Rs 3,76,058‑6‑3. The Sales Tax Officer, however, disagreed with the appellant’s calculations and fixed the net assessable turnover at Rs 7,54,144‑8‑4. In arriving at this figure, the Officer retained the copra purchase price of Rs 7,16,048‑1‑4, but added Rs 3,08,902‑6‑10 and Rs 67,155‑15‑5, representing respectively the values of the oil sold intra‑state and the cake sold intra‑state, while excluding the inter‑state oil sales value of Rs 3,67,816‑10‑1 from his computation. The Officer also added Rs 3,385‑0‑3 for gum sold by the appellant and deducted Rs 6,130‑15‑6, which was sales tax already collected, thereby arriving at the net assessable turnover of Rs 7,54,144‑8‑4 on which the tax was imposed.
In computing the taxable turnover, the officer first removed the value of the oil that was sold in inter‑State trade, which amounted to Rs 3,67,816‑10‑1, from the total. After excluding that inter‑State oil sale price, he allowed a deduction only for the portion of the copra that corresponded to the oil sold within the State, fixing that amount at Rs 3,35,216‑0‑0. This was in contrast to the appellant’s claim, which sought to deduct a larger sum of Rs 7,16,048‑1‑4 for the purchase price of the copra. In addition to the copra deduction, the officer added a further amount of Rs 3,385‑0‑3 representing the price of gum that the appellant had sold, and he also permitted a deduction of Rs 6,130‑15‑6 for the sales tax that the appellant had collected. By aggregating these figures, the officer arrived at a net assessable turnover of Rs 7,54,144‑8‑4 and accordingly assessed the appellant for sales tax on that amount. Dissatisfied with this assessment, the appellant filed an appeal before the Assistant Sales Tax Commissioner, cited as S.T.A. No. 1480 of 1953‑54. The Commissioner dismissed the appeal by an order dated 10 May 1954. The appellant then submitted a further petition to the Government seeking relief, but that petition was also rejected. Consequently, the appellant instituted a petition in the High Court of Travancore‑Cochin, recorded as O.P. No. 53 of 1954, which led to the proceedings described above. The outcome of this appeal depends upon the interpretation of the relevant provisions of the Travancore‑Cochin General Sales Tax Act, 1125 (Act XI of 1125 M.E.) and the Travancore‑Cochin General Sales Tax Rules, 1950 made thereunder, which are set out for convenience. The preamble to the Act states that it was enacted to provide for the levy of a general tax on the sale of goods in the United State of Travancore and Cochin. Section 2(j) defines “sale” as follows: “Sale” with all its grammatical variations and cognate expressions means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration. Explanation (2) adds that, notwithstanding anything contrary in the Sale of Goods Act then in force, the sale or purchase of any goods shall be deemed, for the purpose of the Act, to have taken place in the United State wherever the contract of sale or purchase might have been made. Section 2(k) defines “turnover” as “the aggregate amount for which goods are either bought by or sold by a dealer, whether for cash or for deferred payment or other valuable consideration, provided that the proceeds of the sale by a person of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover.” An explanatory note was added to this definition, but it is not material for the present purpose. Section 3 is the charging provision and it provides for the levy of taxes on sales of goods in the following terms: (1) Subject to the provisions of this Act; (a) every dealer shall pay for each year a tax on his total turnover for such year; and (b) …
In this case the statute specified that the tax on a dealer’s turnover would be calculated at a rate of three pies for every Indian rupee of turnover. The law further provided that a dealer whose total turnover in any year was less than ten thousand Indian rupees would not be liable to pay any tax for that year under either sub‑section (1) or sub‑section (2). For the purpose of this section and all other provisions of the Act, turnover was to be determined in accordance with rules that might be prescribed by the appropriate authority. The statute also stated that the taxes imposed under sub‑sections (1) and (2) were to be assessed, levied and collected in the manner and in such instalments, if any, as might be prescribed. A proviso clarified two important points: first, with respect to the same transaction of sale, either the buyer or the seller – but not both – as determined by the prescribed rules, would be taxed; second, if a dealer had already been taxed in respect of the purchase of any goods in accordance with the rule stated in the first part of the proviso, that dealer would not be taxed again in respect of any subsequent sale of the same goods by him. Section 4 of the Act declared that the provisions of the charging section would not apply to the sale of electrical energy and would not apply to any goods other than arrack and foreign liquor on which duty was or might be levied under the Travancore or Cochin Abkari Act or the Travancore or Cochin Opium Act. Section 24 conferred on the Government the power to make rules necessary to give effect to the purposes of the Act. The Act, as originally enacted, had received the assent of the Rajpramukh on 5 January 1950. After the commencement of the Constitution, the Act was amended by the Travancore‑Cochin General Sales Tax (Amendment) Act, 1951, by adding section 26, which provided that, notwithstanding anything contained in the Act, a tax on the sale or purchase of goods would not be imposed where such sale or purchase took place outside the State of Travancore‑Cochin, or where it occurred in the course of importing the goods into, or exporting the goods out of, the territory of India. Moreover, after 31 March 1951 a tax on the sale or purchase of any goods would not be imposed where such sale or purchase was part of inter‑State trade or commerce, except to the extent that Parliament might otherwise provide by law. The explanation to clause (1) of Article 286 of the Constitution of India was made applicable for interpreting sub‑clause (i) of clause (a) of sub‑section (1). The Travancore‑Cochin General Sales Tax Rules, 1950, which were framed by the Government under the rule‑making powers conferred by sub‑sections 4 and 5 of section 3 read with section 24 of the Act, laid down, among other matters, the provisions concerning the determination of the total turnover of a dealer liable to be taxed, and Rule 4 specifically dealt with the method of ascertaining that turnover.
The Court explained that Rule 4 of the Travancore‑Cochin General Sales Tax Rules, 1950 defined the gross turnover of a dealer. Sub‑rule (1) stated that, except as provided in sub‑rule (2), the gross turnover of a dealer for the purposes of the rules was the amount for which the goods were sold by him. Sub‑rule (2) dealt with certain specified commodities and provided that, for those commodities, the gross turnover was the amount for which the goods were bought by the dealer. The commodities listed were: (a) coconut, copra, ground‑nut and its kernel; and (b) cashew and its kernel.
Rule 7 stipulated that any tax imposed under section 3 or section 5 of the Act, or under any notification made under section 6, was to be levied on the net turnover of a dealer. The rule further directed that, in arriving at the net turnover, the amounts specified in clauses (a) through (k) were, subject to the conditions laid down in each clause, to be deducted from the gross turnover. Clause (k) was identified as being material to the present dispute. Clause (k) provided that all amounts which a registered manufacturer of coconut and/or ground‑nut oil and cake could deduct from his gross turnover under Rule 20, were to be allowed as deductions, subject to the conditions specified in that rule.
Rule 20, as it applied to the instant case, contained two relevant provisions. First, it allowed any dealer who manufactured coconut or ground‑nut oil and cake from coconut, copra, ground‑nut or kernel that he had purchased to apply to the assessing authority having jurisdiction over the area in which he carried on business for registration as a manufacturer. Upon approval, the dealer would be issued a certificate in Form VI. Second, every such registered manufacturer was entitled to a deduction under clause (k) of sub‑rule (i) of Rule 7 equal to the value of the coconut, copra, ground‑nut or kernel that he had purchased and converted into oil and cake, provided that the revenue from the sale of the oil was included in his turnover.
The Court noted that no other rule needed to be considered for the purpose of the appeal. The principal controversy between the parties concerned the method of computing the net turnover. The appellant argued that, in computing his net turnover, he could include the total value of oil sold by him, namely Rs 6,76,719‑0‑11, irrespective of whether the sales occurred inside or outside the State, and then deduct the total value of copra purchased by him, namely Rs 7,16,048‑1‑4. He contended that the resulting figure represented the net assessable turnover on which the Sales Tax Authorities could levy tax, assuming that the law stood as it did before the amendment of the Act by the Travancore‑Cochin General Sales Tax (Amendment) Act, 1951.
The appellant further submitted that section 26, added to the Act by the 1951 amendment, prohibited the levy of a tax on the sale or purchase of goods where such sale or purchase took place in the course of inter‑State trade or commerce. He maintained that this provision was overriding and entitled him to deduct the value of oil sold outside the State, amounting to Rs 3,67,816‑10‑1, from the assessable turnover calculated above. Consequently, he claimed the right to deduct the entire purchase price of copra, i.e., Rs 7,16,048‑1‑4, rather than only the portion of the purchase price that could be allocated to oil sold within the State.
The Sales Tax Authorities, on the other hand, argued that the appellant was not entitled to include his sales of oil made outside the State in his turnover calculation, nor was he permitted to deduct from his gross turnover the purchase price of copra that corresponded to oil sold to persons outside the State. They asserted that the whole amount of those out‑of‑State oil sales, together with the purchase price of copra that could be allocated to them, should be lifted from the computations.
In this matter, the appellant asserted that the provision which forbids the levy of tax on any sale or purchase that occurs in the course of inter‑State trade or commerce operates as an overriding rule, permitting him to subtract from his assessable turnover the value of oil that he sold outside the State, namely Rs 3,67,816‑10‑1, and thereby to compute his net turnover on the basis of the remaining amounts. He maintained that, after making this deduction, the gross turnover of Rs 6,76,719‑0‑11 should be reduced by the entire purchase price of the copra used to manufacture the oil, which he claimed to be Rs 7,16,048‑1‑4, irrespective of how much of that copra was allocated to oil sold within the State. Consequently, the appellant sought to deduct the whole purchase price of the copra from his gross turnover, rather than only the portion of the copra cost that can be attributed to oil sold inside the State.
The Sales Tax Authorities, on the other hand, contended that the appellant had no right to include his sales of oil made outside the State in the computation of turnover, and that he could not deduct from his gross turnover the portion of the copra purchase price that relates to oil sold to customers beyond the State’s boundaries. Relying upon the non‑obstante clause in section 26, they argued that the entire amount of oil sold outside the State, together with the corresponding copra cost, must be excluded from the calculation of net turnover. The clause they cited states: “Notwithstanding anything contained in this Act, a tax on the sale or purchase of goods shall not be imposed under this Act where such sale or purchase takes place in the course of inter‑State trade or commerce.” The authorities therefore proposed to lift the whole of the inter‑State sales and the associated copra expense from the net‑turnover computation.
The question before the Court was which method of computing net turnover ought to be applied, given the language of the Act and the rules made thereunder. The definition of “sale” found in section 2(j) is sufficiently broad to encompass the appellant’s sales of oil, whether those sales are effected inside the State or outside it. Likewise, the definition of “turnover” in section 2(k) makes no differentiation between intra‑State and inter‑State sales; it describes turnover as the aggregate amount for which goods are either bought or sold by a dealer, thereby covering both categories of sales. Under section 3, sub‑section (4), turnover is to be determined in accordance with the prescribed rules.
Rule 4, framed by the Government under its rule‑making authority, stipulates that the gross turnover of a dealer for the purposes of the rules shall be the amount for which the goods are sold by him. This rule, too, does not distinguish between sales made inside the State and those made outside it. Having therefore mandated the inclusion of all sales in the gross turnover, Rule 7 provides that the tax or taxes under section 3 (the charging provision) shall be levied on the net turnover of a dealer. The net turnover is to be computed after deducting from the gross turnover the amounts specified in the relevant clauses of the rules.
The Court observed that the gross turnover of a dealer is reduced by various amounts listed in clauses (a) to (k) of the rule, and that clause (k) specifically allows a registered manufacturer of coconut or groundnut oil and cake to deduct from his gross turnover the amounts mentioned in rule 20, provided that the conditions set out in that rule are fulfilled. The deduction authorized by rule 20 is available to any dealer who manufactures coconut or groundnut oil and cake from coconut, copra, groundnut, or kernel that he has purchased, and the dealer may subtract the value of the raw material—coconut, copra, groundnut or kernel—that he has bought and turned into oil and cake, on the condition that the revenue obtained from the sale of the oil is included in his turnover. The Court noted that the provisions make no distinction between sales made inside the State and those made outside the State. Reading the provisions prima facie, the Court said that a manufacturer of coconut or groundnut oil and cake appears entitled to count the total value of the oil he sells—whether the sale occurs inside the State or outside it—as part of his gross turnover, and he may then deduct from that gross turnover the entire value of the copra he purchased and processed into oil and cake, regardless of where the finished product is sold. Under rule 20, sub‑rule (2), the only requirement is that the amount for which the oil is sold be included in the turnover; thereafter, rule 7(1)(k) permits the dealer to deduct the full price of the copra purchased and converted into oil and cake, again without regard to the location of the subsequent sale. The Court stated that this was the exact position that existed before the insertion of section 26 into the Act by the Travancore‑Cochin General Sales Tax (Amendment) Act, 1951, and that the effect of that amendment on the other provisions and the accompanying rules needed to be examined.
The Court then turned to the impact of section 26 and considered the High Court’s decision against the appellant. The High Court had held that the definitions contained in sections (2)(j) and (k) of the Act applied only when there was no “anything repugnant in the subject or context,” and after reviewing the relevant provisions of the Act and the rules, the High Court concluded that those definitions were plainly inapplicable for specific reasons. The Court quoted the High Court’s reasoning, which emphasized that the legislative intent was to tax copra at the point of purchase while exempting the sales tax on oil extracted by a registered manufacturer from that copra, to the extent of the copra’s value used in the manufacturing process. The purpose, as explained, was to prevent a situation where the manufacturer would be liable to pay both a purchase tax on copra and a sales tax on the oil derived from it, thereby avoiding double taxation by the State. The Court noted that this interpretation was central to determining the proper application of the concession granted under the statute.
The Court observed that the statutory provision concerned the tax imposed on copra together with the sales tax levied on oil under the Travancore‑Cochin General Sales Tax Act, 1125. In other words, the purpose of the provision was to prevent a situation of double taxation by the State, namely a tax at the point where copra was purchased and another tax at the point where oil derived from that copra was sold. The Court explained that it would be untenable to invoke the definition contained in the Act and to assert that a concession could be granted to a registered manufacturer in cases where only one of the two taxes, and not both, could be collected from him under the provisions of the Act. In response to this reasoning, counsel for the appellant argued that, in matters of fiscal legislation, the relevant consideration is not the spirit of the statute but its literal wording; if a particular tax cannot be brought within the clear terms of the law, the subject cannot be subjected to liability for that tax. The Court noted that this line of argument was reinforced by the observations of Lord Russell of Killowen in Inland Revenue Commissioners v. Duke of Westminster, where he stated: “I confess that I view with disfavour the doctrine that in taxation cases the subject is to be taxed if, according to a Court’s view of the substance of the transaction, the case falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case.” The Court further quoted Lord Cairns in Partington v. The Attorney General, who observed that the principle of all fiscal legislation is that a person who comes within the letter of the law must be taxed, however great the hardship may appear to the judicial mind, and that if the Crown, seeking to recover a tax, cannot bring the person within the letter of the law, the person is free, even if the case might appear to fall within the spirit of the law. The passage was later approved by the Privy Council in Bank of Chettinad v. Income Tax Commissioner, and the Privy Council also rejected the suggestion that, in revenue matters, the “substance of the matter” could be distinguished from the strict legal position, a view echoed in F. L. Smidth & Co. v. F. Greenwood. The Court affirmed that, when construing fiscal statutes and determining tax liability, the strict literal wording of the law must be the guide, not merely the spirit or perceived substance of the statute. Accordingly, if the Revenue can demonstrate that the case falls squarely within the provisions of the law, the subject may be taxed; conversely, if the case lies outside the literal four corners of the statute, no tax can be imposed by inference, analogy, or by probing the legislature’s intent.
It was held that a tax cannot be imposed by drawing inferences, by analogy, or by attempting to infer the legislature’s intention or the substance of the matter. The proper approach requires a strict examination of the actual provisions of the Sales Tax Act and the rules made under it before any conclusion can be reached that the appellant was liable to the assessment asserted by the Sales Tax Authorities. It was observed at the outset that the majority of the Sales Tax statutes enacted by the various provincial legislatures were passed before the Constitution came into force. Among those statutes were the Bihar Sales Tax Act of 1947, the Bengal Finance (Sales Tax) Act of 1941, the Madhya Pradesh Sales Tax Act of 1947, the Madras Sales Tax Act of 1939, the Mysore Sales Tax Act of 1948, the Orissa Sales Tax Act of 1947, the East Punjab General Sales Tax Act of 1948, and the Uttar Pradesh Sales Tax Act. All of these statutes imposed sales tax on a more or less uniform basis, covering not only sales that actually occurred within the territory of the State but also sales in which, according to the nexus theory, any essential element of the sale was found to have taken place within the territory. The Assam Sales Tax Act of 1947 and the Hyderabad General Sales Tax Act of 1950 followed the same pattern.
When the Constitution was inaugurated on 26 January 1950, Article 286(2) imposed restrictions on the power of State legislatures to enact laws that imposed or authorized tax on the sale or purchase of goods in certain specified cases. Consequently, after that date no State could levy a tax on the sale or purchase of goods falling within the categories listed in that article. The earlier Sales Tax Acts therefore had to be brought into conformity with the constitutional provision. To achieve this objective the State legislatures employed several legislative devices. The most common device was to add a clause, such as section 26 of the Travancore‑Cochin General Sales Tax Act, 1125, which incorporated the terms of Article 286 into the statute and included a non‑obstante clause stating: “Notwithstanding anything contained in this Act the tax on the sales or purchase of goods shall not be imposed under this Act where …” and then reproduced the provisions of Article 286. A different approach was taken in the Assam and Hyderabad statutes. The Assam Sales Tax Act, 1947, introduced an amendment to its charging provision, namely section 3, and later section 3(1‑A) was inserted by the Assam Sales Tax (Amendment) Act, 1947 (Assam Act IV of 1951). The Hyderabad General Sales Tax Act, 1950, similarly incorporated a provision in its definition of sale in section 2(k) and later revised the explanatory clause through an amendment made the same year.
The Court observed that section 3(1‑A) had been inserted by section 3 of the Assam Sales Tax (Amendment) Act, 1947 (Assam Act IV of 1951) and that the inserted provision read as follows: “Nothing in sub‑section (1) shall, except in cases covered by the first proviso to sub‑section (12) of section 2 of this Act, be deemed to render any dealer liable to tax on the sale of goods—where such sale takes place: (1) outside the State of Assam; (2) in the course of the import of the goods into, or export of the goods out of, the territory of India; or (3) in the course of inter‑State trade or commerce except in so far as Parliament may by law otherwise provide.” The Court further noted that the Hyderabad General Sales Tax Act, 1950 contained a comparable provision in the definition of “sale” set out in section 2(k) of that Act. The Explanation (2) that replaced the original Explanation (2) by section 2 of the Hyderabad General Sales Tax (Amendment) Act, 1950 (Hyderabad Act XXXII of 1950) was quoted as follows: Explanation (2)—“Notwithstanding anything to the contrary in any other law for the time being in force, a transfer of goods in respect of which no tax can be imposed by reason of the provision contained in Article 286 of the Constitution, shall not be deemed to be ‘sale’ within the meaning of this clause.” The Court also referred to an additional measure adopted in rule 5 of the Bombay Sales Tax Rules, 1952, which were promulgated under the Bombay Sales Tax Act, 1952 (Bombay Act XXIV of 1952). That rule authorised the deduction of certain sales that fell within Article 286 of the Constitution when computing the taxable turnover of a dealer. The Court declared that it was not required to express an opinion on whether the method of incorporating the provisions of Article 286—whether by placing them in the charging section as in the Assam Sales Tax Act, 1947, by embedding them in the definition of “sale” as in the Hyderabad General Sales Tax Act, 1950, or by providing a rule for the calculation of taxable turnover as in the Bombay Sales Tax Rules, 1952—effectively removed the sales described in Article 286 from the operation of the respective Sales Tax Acts, thereby excluding them from the net turnover on which sales tax could be levied. In the case presently before the Court, as in the majority of the Sales Tax Acts previously discussed, the incorporation of the provisions of Article 286 of the Constitution was achieved by adding a non‑obstante clause at the end of each relevant Sales Tax Act. The Court pointed out that the definition of “sale” was left unchanged, the charging provision was not amended, and the rules for computing net turnover remained the same, without any deduction for sales that fell within Article 286.
The Court observed that the sales which fell within the categories specified in Article 286 of the Constitution were incorporated into the statute, and consequently the Sales Tax Authorities based their position on the non‑obstante provision that had been inserted into the Act by adding section 26 through the Travancore‑Cochin General Sales Tax (Amendment) Act, 1951. The Court then examined the effect of this non‑obstante provision. Referring to the decision in Aswani Kumar Ghosh v. Arabinda Bose, the Court quoted the earlier observation that “It should first be ascertained what the enacting part of the section provides on a fair construction of the words used according to their natural and ordinary meaning, and the non‑obstante clause is to be understood as operating to set aside as no longer valid anything contained in relevant existing laws which is inconsistent with the new enactment.” Applying the same reasoning, the Court held that section 26, with respect to transactions falling within the categories mentioned in Article 286, nullified and rendered ineffective the provisions of the Act that dealt with the imposition of tax on the sale or purchase of such goods. In particular, the charging section, rule 20(2) and other incidental provisions were deemed to be set at nought.
The Court further explained that for sales that fell within the ambit of Article 286 and consequently under section 26, those sales were taken out of the scope of the Act, and none of the provisions that would otherwise have applied could be given effect. Because the Act and its rules did not apply to those sales, their value could not be included in the dealer’s turnover, and therefore rules 7(1)(k) and 20(2) were not applicable. The amount realized from the sale of oil in inter‑State trade could not lawfully be counted as part of the dealer’s turnover; consequently, no deduction under rule 7(1)(k) for the value of coconut, copra, groundnut or kernel purchased and processed into oil and cake could arise. The argument that a distinction existed between including the oil’s value in turnover for assessment purposes and levying tax on that value was addressed. It was contended that inclusion for assessment was separate from the tax liability prohibited by section 26, allowing the oil’s value to be counted in turnover, the cost of the raw material to be deducted, and the resulting net turnover to be assessed, after which the oil’s value would be excluded under section 26, thereby creating a split between assessable and taxable turnover. The Court noted that this position relied on the observations in Messrs Chatturam Horilram Ltd. v. Commissioner of Income‑Tax, Bihar and Orissa, quoting the Federal Court’s remarks in Chatturam v. C.I.T., Bihar.
In this case, the Court explained that the concept of turnover used for assessment purposes was separate from the liability for tax, which alone was prohibited by section 26 of the Act. Accordingly, the value of the oil could be correctly included in the dealer’s turnover. From that turnover, the dealer was permitted to deduct the value of the copra that he had purchased and converted into the oil. After making this deduction, the remaining amount represented the net turnover for assessment purposes. The value of the oil that was sold in inter‑State trade or commerce could then be further subtracted from this net turnover because section 26 of the Act operated to exclude such sales from tax liability. In effect, this created a distinction between the amount of turnover that was assessable and the amount of turnover that was subject to tax. The respondent relied on the observations of this Court in the case of Messrs Chatturam Horilram Ltd. v. Commissioner of Income‑Tax, Bihar and Orissa, quoting the Federal Court and Lord Dunedin in Whitney v. Commissioners of Inland Revenue. The quoted passage explained that the imposition of a tax proceeds in three stages: first, the declaration of liability, which identifies the person and the property that are liable; second, the assessment, which determines the exact sum that the liable person must pay; and third, the methods of recovery if the tax is not voluntarily paid. The Court noted that the appellant had overlooked the fact that these three stages begin with a declaration of liability. If the statute creates a liability to tax, then the assessment provisions apply to that liability. Conversely, where the statute imposes no liability to tax, there can be no assessment of such a liability. Consequently, any sales or purchases for which the statute imposes no tax liability cannot be counted in the calculation of turnover for assessment purposes, and the precise amount the dealer owes must be determined without reference to those transactions. The Court further observed that the statute draws a clear line between provisions that grant exemptions, refunds, or rebates of tax and provisions that state a non‑liability or non‑imposition of tax. In the first category, if the exemptions or refunds did not exist, the sales or purchases would be included in the dealer’s gross turnover because they would be prima facie liable to tax; the dealer’s entitlement would then be limited to a deduction from the gross turnover to arrive at the net turnover on which tax could be imposed.
In this case, the Court explained that when a transaction is exempt from tax, the net turnover on which tax can be imposed does not include such transaction. By contrast, where a transaction is merely subject to exemption, refund or rebate, the dealer must first include it in gross turnover because it is prima facie taxable, and then deduct the exemption. The Court noted that where the Legislature declares a transaction to be completely exempt, it cannot enact a law imposing tax on it, and consequently the transaction does not fall within the ambit of the Act. The Court cited authority (1) [1926] A.C. 37, stating that if there is no liability to tax, no tax can be levied and the transaction is excluded from both gross and net turnover calculations. Applying this principle, the Court held that section 26 of the Act deals with transactions that are non‑liable to tax, and therefore those transactions are removed from the scope of the Act. Accordingly, the Court opined that the non‑obstante provision in section 26 effectively takes such transactions out of the Act’s purview, so the dealer is neither required nor entitled to include them in the turnover on which tax is chargeable. This view is not altered by the statutory requirements that dealers register and file sales‑tax returns. Although the Constitution, under article 286, bars the imposition of sales tax on these transactions, the Legislature may nevertheless require them to be listed in the dealer’s turnover for registration and return‑filing purposes. Such inclusion, however, does not affect their non‑liability to tax under article 286 and the corresponding provision in the Act. Consequently, the Court affirmed the High Court’s conclusion, agreed that the Sales Tax Authorities’ computation of net turnover was correct, and ordered that the appeal be dismissed with costs.