Firm Of A. Gowrishankar vs Sales Tax Officer Secunderabad and Anr

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

Court: Supreme Court of India

Case Number: Appeal (civil) 256-60 of 1955

Decision Date: 3 April 1958

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

In this matter, the Supreme Court recorded that the Hyderabad General Sales Tax Act of 1950 became operative on 1 May 1950 and, as originally enacted, it did not impose tax on sales of coarse and medium cloth. The legislation was subsequently altered by Hyderabad Act XXVII of 1952, which came into force on 1 August 1952, and the amendment expressly brought sales of coarse and medium cloth within the tax scope of the principal Act. Following the amendment, the Sales Tax Officer of Secunderabad issued five provisional assessment orders during the months of October, November and December 1952, each order relating to one of the five appellants before the Court. Those orders imposed tax on the appellants’ sales, including the sales of coarse and medium cloth made on or after 1 August 1952, the date on which the amendment rendered such sales taxable.

The appellants contested the assessments by filing appeals with the higher Sales Tax Authorities pursuant to the provisions of the Act. While those appeals were pending, each appellant approached the High Court of Hyderabad seeking a writ of mandamus or another suitable writ directing the Sales Tax Officer to refrain from collecting tax on the sales of coarse and medium cloth. The appellants argued that the cloth varieties had been declared essential goods and, therefore, were exempt from taxation under Article 286(3) of the Constitution and Explanation (2) to section 2(k) of the Act, on the ground that neither the principal Act nor its amendment had been reserved for the President’s consideration nor had they obtained his assent. The High Court delivered its judgment on 30 September 1953, dismissing all five applications but granting certificates under Article 132 of the Constitution. The present appeals were brought before this Court under those certificates. The High Court had further directed that, because the point of law was common to all the appeals, only the material of one appeal needed to be printed for the record of all.

The issue that required determination before the Supreme Court was whether, in view of Article 286(3) of the Constitution and the relevant enactments, sales of coarse and medium cloth remained liable to tax under the principal Act as amended by Hyderabad Act XXVII of 1952. The Court set out to examine the constitutional and statutory provisions that purportedly exempted such goods from taxation and to assess the effect of the amendment on the taxability of those sales.

In this case the Court observed that Article 286(3) of the Constitution, together with certain other enactments to be mentioned later, declared the varieties of coarse and medium cloth to be essential goods. The Court noted that a farman issued by His Excellency the Nizam on 23 November 1949 directed that, when it was promulgated, the Constitution of India, 1950 would apply to the territories of Hyderabad. At the relevant time Hyderabad was classified as a Part B State under the Constitution. The first enactment relied upon by the appellants was the Essential Supplies (Temporary Powers) Act, XXIV of 1946, which declared cotton textiles to be essential goods and which was extended to the Hyderabad State on 17 August 1950. The effect of that declaration, the Court stated, was that under the provisions of Article 286(3) sales of coarse and medium cloth could not be subject to tax. The learned counsel for the appellants, however, expressed that he did not wish to press this point. The Court further referred to its earlier judgment in C.A. No. 192 of 1955 (reported as Konduri Buchirajalingam v. State of Hyderabad and Others 1958 (9) STC 397) and held that the argument was without substance.

The appellants then relied on Act LII of 1952, which declared coarse and medium cotton cloth to be goods essential for the life of the community. The Court explained that this Act had been passed expressly under the powers conferred on Parliament by Article 286(3). The appellants contended that, because Act LII of 1952 came into force on 9 August 1952, the principal Act could not thereafter impose any tax on the sales of coarse and medium cloth. The Court disagreed with that contention. It held that Article 286(3) provides that the law of a State shall not impose a tax on the sale or purchase of any goods which have been declared by Parliament, by law, to be essential for the life of the community, and therefore the provision envisages a law made by a State after the Parliament has declared the goods essential. Neither the principal Act nor its amendment by Act XXVII of 1952 was enacted after Act LII of 1952.

The Court then set out Section 3 of Act LII of 1952, which reads: “No law made after the commencement of this Act by the legislature of a State imposing, or authorising the imposition of, a tax on the sale or purchase of any goods declared by this Act to be essential for the life of the community shall have effect unless it has been reserved for the consideration of the President and has received his assent.” The Court explained that this provision clearly states that a law made by a State legislature after the commencement of Act LII of 1952 cannot impose a tax on the sale or purchase of commodities that the Parliamentary Act has declared essential. The Court observed that this language merely gives effect to the clear intention of Article 286(3). Consequently, a law made by a State legislature before the commencement of Act LII of 1952 was not affected by Article 286(3), and the principal Act and its amendment remained valid for imposing a tax on coarse and medium cloth.

In this case, the Court noted that a legislature which operated before the commencement of Act LII of 1952 was not governed by the restrictions of Article 286(3). The Court further observed that the principal Act and its amending Act were both enacted before that date and therefore were competent to impose a tax on coarse and medium cloth. It was pointed out that the Hyderabad Act XXVII of 1952, which authorised the principal Act to levy a tax on the sale of coarse and medium cloth, received assent only eight days before the enactment of Act LII of 1952, and that the amending Act appeared to have been hurriedly passed in order to avoid the operation of Act LII of 1952 while the Bill was still pending in Parliament. Submissions were made that the Hyderabad Act XXVII of 1952 was enacted solely for the purpose of circumventing the Parliamentary Act LII of 1952. The Court held that the record did not contain sufficient material to accept this allegation. Moreover, the Court stressed that the validity of a statute depends on the competence of the legislature that enacted it, and where that competence is not challenged, as it was not in the present proceedings, the statute must be regarded as a valid piece of legislation irrespective of the motive that may have inspired its passage. The Court clarified that it was not dealing with a law that fell outside the legislative competence but was merely disguised as such, and that different considerations would apply to such a scenario. Consequently, the Court was unable to declare that the Hyderabad Act XXVII of 1952 was invalid. The discussion then turned to the contention founded on Explanation (2) of section 2(k) of the principal Act, which reads: “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 provisions contained in Article 286 of the Constitution, shall not be deemed to be ‘sale’ within the meaning of this clause.” It was submitted that the purpose and effect of this explanation were to exempt all sales of goods declared essential by a Parliamentary enactment from liability to tax under the principal Act. The Court rejected this view, holding that the explanation merely states that a transfer of goods for which no tax can be imposed under Article 286(3) is not to be treated as a sale liable to tax under the principal Act. Article 286(3) only bars State legislatures, by a law enacted after a Parliamentary Act that declares certain goods essential for the community’s life, from taxing the sale of those goods. Accordingly, a transfer of goods that, under the explanation, is not classified as a “sale” within the meaning of the principal Act is a transfer that cannot be taxed by a State law passed after the Parliamentary Act that has declared those goods essential for the community’s life. The Parliamentary Act that declared the goods to be essential was Act LII of 1952.

The learned counsel for the applicants based his present argument on the provision that essential goods were declared under Act LII of 1952. It was observed that, after the enactment of Act LII of 1952, the Hyderabad Legislature had not passed any subsequent legislation that sought to impose tax on the sale of goods that had been declared essential by that Act. In view of this factual situation, the Court concluded that the transfers of coarse and medium cloth could not be said to fall outside the definition of “sale” contained in the principal Act. Accordingly, the Court held that those transfers were indeed sales within the meaning of the principal legislation, and therefore the appeals filed by the applicants could not succeed. The Court consequently dismissed the appeals and ordered that the costs be awarded against the appellants. Justice Bose, however, indicated that, for the reasons he had set out in his judgment in Civil Appeal No. 192 of 1955 (Konduri Buchirajalingam v. The State of Hyderabad and Others 1958 (9) STC 397) delivered on the same day, he would have allowed the appeals. Nevertheless, the final order of the Court, following the view of the majority, was to dismiss the appeals with costs.