Collector Of Commercial Taxes Cuttack vs Bharat Sabai Grass Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Appeal (civil) 193 of 1956

Decision Date: 19 February, 1958

Coram: S.K. Das, A.K. Sarkar, S.R. Das, T.L.V. Aiyyar, V. Bose

In this appeal filed by special leave, the Collector of Commercial Taxes for Orissa acted as the appellant and the company Bharat Sabai Grass Ltd. was the respondent. The case was recorded as Civil Appeal No. 193 of 1956 and was decided on 19 February 1958 by a bench consisting of Chief Justice S.R. Das, Justice T.L.V. Aiyyur, Justice S.K. Das, Justice A.K. Sarkar and Justice V. Bose. The judgment was authored by Justice S.K. Das. At the commencement of the proceedings the respondents entered their appearance and filed a statement of their case; however, subsequently they withdrew their appearance. Consequently, at the final hearing of the appeal the learned Solicitor‑General appeared alone to support the appeal. The factual matrix of the dispute is confined to a narrow field. Bharat Sabai Grass Ltd. is a limited company incorporated under the Indian Companies Act, 1913, with its registered office in Calcutta. The company was engaged in the collection of bamboo and sabai grass in Orissa and sold the material to several paper‑manufacturing mills, namely the Orient Paper Mill located in Orissa, and the Titagarh Paper Mill and Bengal Paper Mill situated in Bengal. In June 1948 the Collector issued a notice under section 12(5) of the Orissa Sales Tax Act, XIV of 1947, to the respondents. The company replied that it did not sell any goods in Orissa. This reply gave rise to further correspondence between the assessing authority and the respondents. On 22 September 1948 the appellant informed the respondents that the sales of bamboo and sabai grass made to the various mills, whether in Orissa or Bengal, constituted sales within the meaning of the Act and therefore fell within the jurisdiction of the sales‑tax law. Subsequently, on 28 September 1948 the respondents were directed to file tax returns, to register under the Act, and to pay the tax due on their sales. The respondents failed to reply to this demand. Approximately a year later, in November 1949, another notice issued under section 12(5) required the respondents to file returns and to produce their books of account before the assessing authority at Sambalpur on or before 20 December 1949. The respondents again failed to submit any returns or produce any books. Accordingly, on 16 December 1949 the Sales Tax Officer at Sambalpur, who was the appropriate assessing authority, made a best‑of‑judgment assessment of the respondents’ liability for the period in question.

The Sales Tax Officer at Sambalpur made a best‑of‑judgment assessment against the respondents for eight consecutive quarters, beginning on 1 October 1947 and ending on 30 September 1949. The officer estimated the respondents’ total turnover for the period and divided it into two portions. The first portion covered the initial six quarters, during which the respondents conducted business in bamboo and sabai grass in Sambalpur, an area that had been part of Orissa since before the assessment. For these six quarters the officer fixed the gross turnover at Rs 15,000 per quarter. The second portion related to the final two quarters, when the respondents also carried on business in the former Orissa States of Bamra and Gangpur, which had been merged into Orissa under specific agreements. The Act became effective in Bamra and Gangpur on 1 April 1949; consequently, the officer estimated the gross turnover for each of those two quarters at Rs 30,000. Adding the two parts, the officer arrived at a total estimated gross turnover of Rs 1,50,000. After applying the usual deductions, the taxable turnover was calculated as Rs 1,47,000. On this amount the tax liability was fixed at Rs 3,215‑10‑0, and a penalty of Rs 500 was imposed under section 12(5) of the Act. The respondents appealed this assessment and penalty; the appeal was heard by the Assistant Collector of Sales Tax, Cuttack, and dismissed on 30 June 1950. Subsequent revision applications filed with the Collector of Sales Tax, Orissa, and with the Commissioner, Northern Division, Sambalpur, were also dismissed. The respondents then sought a reference to the High Court of Orissa under section 24 of the Act, but the Commissioner declined that request as well.

Following the refusal, the respondents approached the High Court of Orissa. By an order dated 29 July 1952, the High Court directed the Commissioner, Northern Division, Sambalpur, to present a case on the specific question of law: whether, in the facts of this case, an assessment based solely on a contract for sale within the State of Orissa and the export of goods from Orissa could be considered valid under the Orissa Sales Tax Act, 1947. In compliance with the High Court’s direction, a statement of the case was filed, framing the question as formulated. The High Court delivered its judgment on 15 November 1954, answering the question in the negative and holding that the assessment against the respondents was not lawful. The appellant then applied to the High Court for a certificate of fitness for appeal, which was refused. Consequently, the appellant approached this Court, obtained special leave to appeal, and now seeks a detailed explanation of why the learned judges of the High Court of Orissa believed that the particular question of law arose from the facts and warranted a reference.

The Act obtained the Governor‑General’s assent on 26 April 1947 and was published in the Orissa Gazette on 14 May 1947; its Section 1 became effective immediately, while the remaining provisions commenced on 1 August 1947. Subsequently, on 30 August 1947 a notification issued under Section 4(1) imposed a tax effective from 1 October 1947 on dealers whose turnover exceeded Rs 5,000 for the year ending 31 March 1947. It is noted that in June 1948 a notice was served on the respondents pursuant to Section 12(5) of the Act. Section 2(g) of the Act provides the definition of “sale”. The Court focused on the principal definition and the second proviso, which read as follows: “‘Sale’ means, with all its grammatical variations and cognate expressions, any transfer of property in goods for cash or deferred payment or other valuable consideration, including a transfer of property involved in the execution of contract but does not include a mortgage, hypothecation, charge or pledge: Provided further that notwithstanding anything to the contrary in the Indian Sale of Goods Act, 1930, the sale of any goods which are actually in Orissa at the time when, in respect thereof, the contract of sale as defined in Section 4 of that Act is made, shall wherever the said contract of sale is made, be deemed for the purpose of this Act to have taken place in Orissa.” In the order dated 29 July 1952 the High Court of Orissa set out the submission made on behalf of the assessee. The learned counsel argued that the assessment was illegal because it relied on the proposition that a mere contract for sale within the State of Orissa was sufficient to attract tax under the Orissa Sales Tax Act, the contract being deemed a sale by virtue of the second proviso to Section 2(g). The assessment was based on the Sales Tax Officer’s order of 16 December 1949 and the Collector’s letter of 22 September 1948, which, according to the Collector, treated the export of bamboo as a sale occurring in Orissa. The Court observed that the contention that a simple contract for sale could not, by itself, constitute a sale carried considerable weight. Taking the view that the second proviso effectively granted power to tax a transaction that was only an agreement to sell, the High Court considered whether that proviso was ultra vires the legislature, and framed the question for reference accordingly.

When the reference was finally heard, the judges who had been appointed to consider the matter turned to the Supreme Court’s earlier ruling in The Sales Tax Officer, Pilibhit v. Messrs Budh Prakash Jai Prakash (1955 (1) SCR 243; 1954 (5) STC 193). Relying on that precedent, they concluded that the assessment was unlawful because Entry 48 of List II of the Seventh Schedule of the Government of India Act, 1935, did not give a State Legislature the authority to levy a tax on a mere agreement to sell. The Solicitor‑General who represented the appellant submitted that the factual circumstances of the present case never actually raised the legal question framed by the High Court judges. He further contended that both the order directing the reference and the answer eventually provided by the High Court were based on a complete misunderstanding of the principles laid down in The Sales Tax Officer, Pilibhit case. Before addressing those submissions, it was necessary to set out the factual record that the Court had found. The Sales Tax Officer who made the assessment on 16 December 1949 proceeded on the premise that the transactions involved completed sales of bamboo and sabai grass within Orissa, distinguishing them from mere agreements to sell. The respondents, despite being afforded ample opportunity, failed to produce any account books or other documentary evidence that would demonstrate that those sales had taken place outside the State. No objection was raised before the Sales Tax Officer that the transactions in question were not “sales” but only “agreements to sell.” The same position was reiterated by the Assistant Collector of Sales Tax, who acted as the appellate authority; even when the respondents again argued that the sales did not occur in Orissa, the Assistant Collector rejected the contention, stating that there was no evidence to prove otherwise.

It is also a matter of record that the Orient Paper Mill, to which bamboo and sabai grass were sold, was located in Orissa; consequently, the sale to that mill was undeniably a sale within the State. The respondents attempted to rely on the fact that Orient Paper Mill was a registered dealer and claimed that they were entitled to an exemption under rule 27(2). However, the burden of establishing that a portion of their gross turnover consisted of sales of non‑taxable goods rested on the respondents, and until they produced such proof, the assessing authority was entitled to treat the entire turnover as taxable. Even before the Commissioner of the Northern Division at Sambalpur, the respondents asserted that the sales to the Bengal mills were not made in Orissa. This plea was similarly rejected on the ground that, although the respondents had been given an opportunity to furnish evidence, they failed to do so. In view of these facts, the Court observed that no issue was ever raised before any of the assessing authorities that a tax had been imposed on “mere agreements to sell,” nor was there any finding that the sales to the various mills in Bengal and Orissa did not involve a transfer of property in goods for cash or deferred payment. Accordingly, the Court concluded that, based on the factual record, the specific question formulated by the High Court with reference to the Budh Prakash Jai Prakash decision never actually arose for determination in the present case.

In this case the Court observed that the legal principle formulated by the High Court did not arise for decision in the present matter. No assessing authority had found that a tax was levied on “mere agreements to sell,” nor had any authority concluded that the sales of bamboo and sabai grass made by the respondents to various mills in Bengal and Orissa failed to involve a transfer of property in goods for cash or for deferred payment. The Court referred to the decision in Budh Prakash Jai Prakash 1955 (1) SCR 243; 1954 (5) STC 193), which dealt with the definition of “sale” under the Uttar Pradesh Sales Tax Act, XV of 1948. That definition included forward contracts, and the pivotal question there was whether the power to impose tax on the sale of goods under Entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935, extended to forward contracts. In that context the Court distinguished a “sale of goods” from an “agreement for a sale of goods,” and summarized the legal position as follows: “The position therefore is that the liability to be assessed to sales tax can arise only if there is a completed sale under which price is paid or is payable and not when there is only agreement to sell, which can only result in a claim for damages; the power conferred under Entry 48 to impose tax on the sale of goods can therefore be exercised only when there is a sale under which there is a transfer of property in the goods and not when there is a mere agreement to sell.” Applying that reasoning to the facts of the present case, the Court found that no issue arose regarding the imposition of tax on a mere agreement to sell. Unlike the definition in the Uttar Pradesh Sales Tax Act, the definition of “sale” in the Act under consideration did not aim to tax a mere agreement to sell, and the second proviso of that definition likewise did not impose tax on such an agreement. The second proviso merely fixed the situs of the sale in Orissa when the goods were actually in Orissa at the time the contract of sale was concluded, which is a different concept from taxing a mere agreement to sell. The Court noted that the assessment concerned a period before the Constitution came into force, and therefore the case did not involve the complex question of the effect of the second proviso on inter‑State transactions under Article 286 of the Constitution. Nonetheless, the proviso was relevant to the question of whether the doctrine of nexus applied to sales‑tax law. That issue had already been exhaustively examined by the Court in Tata Iron & Steel Co., Ltd. v. The State of Bihar (Civil Appeals Nos. 412 and 413 of 1955, reported at page 267 supra), which dealt with a similar proviso in the Bihar Act.

In the matter before it, the Court carefully examined the factual matrix and determined that the precedent established in Budh Prakash Jai Prakash (1955 SCR 243; 1954 (5) STC 193) was inapplicable to the present dispute. The Court observed that the earlier decision concerned a different factual situation, and consequently its legal principle could not be invoked here. Accordingly, the Court concluded that the judges of the Orissa High Court had erred in presuming that the principle articulated in that decision was attracted to the facts of this case. The Court further held that the reference made by the High Court was legally incompetent because the specific question of law framed by that Court did not arise from the facts of the present case, and thus it was unnecessary to entertain or answer such a question. Having reached this conclusion, the Court allowed the appeal and ordered that costs be awarded to the successful party, indicating that the error of the High Court warranted such an award. The Court also set aside the judgment and order dated 15 November 1954 issued by the High Court of Orissa, thereby vacating that order in its entirety and removing any legal effect it might have had. Thus, any remaining legal consequences of that earlier order were eliminated.