Gordhandas Lalji vs B. Banerjee and Ors

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

Court: Supreme Court of India

Case Number: Appeal (civil) 300 of 1956

Decision Date: 7 April 1958

Coram: S.K. Das, P.B. Gajendragadkar, S.R. Das, T.L.V. Aiyyar, V. Bose

In this case the Court explained that the appellant, Gordhandas Lalji, had filed a petition in the High Court at Calcutta invoking Article 226 of the Constitution in order to have set aside an assessment order issued by the respondents. The assessment demanded payment of Rs 23,905‑11‑0 for the fiscal year 1949‑50 under the Bengal Finance (Sales Tax) Act, 1941, hereinafter referred to as the Act. The High Court judge, Justice D N Sinha, who heard the petition, dismissed it after rejecting every contention raised by the appellant. The appellant then appealed that decision, but the appeal was dismissed by Chief Justice Chakravartti and Justice Lahiri. The appellant subsequently obtained special leave to appeal to this Court against that dismissal.

The appellant was a dealer registered under the Act. In compliance with the statutory requirements, he lodged his sales return for the year 1949‑50, showing a total turnover of Rs 24,21,023‑3‑3. Nevertheless, the appellant asserted that his taxable turnover for that period was nil. He argued that sales amounting to Rs 1,79,733‑0‑0 had been made to other registered dealers and therefore were exempt from tax under section 5(2)(a)(ii) of the Act. With respect to the remaining sales of goods valued at Rs 22,41,490‑3‑3, the appellant claimed exemption on the ground that those goods had been dispatched by him, or on his behalf, to a location outside West Bengal, which he said rendered them exempt under section 5(2)(a)(v) of the Act.

To support the latter claim of exemption, the appellant explained that in the ordinary course of his business, and on the advice of Shah Narottamdas Harjivandas & Co. together with two other prominent tea exporters and merchants based in Bombay, he acted as an agent for those principals at the tea auctions in Calcutta. He purchased various quantities of tea on their behalf for the purpose of exporting the teas directly to foreign markets. All of the teas acquired carried export quota rights. After purchase, the teas were blended and repackaged according to the instructions of the principals. The appellant then, following the same advice, applied for and obtained the necessary export licences from the Joint Controller of the Indian Tea Licensing Committee; those licences were issued in the names of the principals.

Subsequently, in the normal course of his business, the appellant placed the teas onto ships through clearing or shipping agents, and the consignments were bound for overseas destinations. The Commercial Tax Officer allowed

In this case, the appellant explained that the teas were shipped from Calcutta to destinations outside India as part of foreign trade. Under the instructions of the Bombay principals, bills of lading for the teas valued at Rs 5,74,422‑7‑3 were drawn naming the principals as consignors; the consignees were sometimes the principals themselves and at other times foreign parties. The appellant asserted that all acts and services were performed by him in the ordinary course of business as an agent of the principals in respect of those teas. He further stated that the total purchase cost of the teas amounted to Rs 4,37,656‑0‑9 and that the handling expenses from purchase through shipment, together with his commission of 1½ per cent, summed to Rs 1,36,766‑6‑6, thereby producing the total value of Rs 5,74,422‑7‑3. It was on the basis of this amount that the appellant sought exemption under section 5(2)(a)(v) of the Act. The Commercial Tax Officer granted the exemption claimed under section 5(2)(a)(ii) in its entirety but rejected the claim under section 5(2)(a)(v), disallowing it to the extent of Rs 5,74,422‑7‑3 because the bills of lading recorded the three Bombay parties, not the appellant, as consignors. Consequently, the appellant’s taxable turnover was fixed at Rs 5,09,988‑0‑0 and he was assessed a tax of Rs 23,905‑11‑0, against which a demand notice was issued. The appellant appealed this assessment before the Assistant Commissioner; however, the appellate authority upheld the Commercial Tax Officer’s view and dismissed the appeal, holding that the consignor named in the bills of lading, being a legal document of dispatch, must be treated as the dispatcher. The appellate authority also concluded that the sales giving rise to the exports were made by the Bombay parties, precluding the appellant from invoking protection under Article 286(1)(b) of the Constitution.

The appellant challenged the appellate order by filing a petition in the Calcutta High Court. The presiding judge rejected the petition on two principal grounds. First, the judge observed that the appellant’s return formed the basis of the assessment proceedings and that the return had not been filed on an agency basis; therefore, the appellant’s contention that he acted merely as an agent for his Bombay principals concerning the transactions could not succeed. Second, the judge found that the sale of the goods by the appellant to the Bombay parties was completed at the point the goods were appropriated to the contract and the price realized, and that the subsequent shipment to foreign ports was a post‑sale event, not part of the sale itself. On these findings, the appellant’s claim for exemption under section 5(2)(a)(v) of the Act and under Article 286(1)(b) of the Constitution was denied. The appellant appealed this decision, but the appellate bench, comprising senior judges, was not persuaded by the appellant’s arguments and dismissed the appeal, concluding that the appellant’s claim of agency had not been convincingly established and that the exemption sought was unfounded.

In the earlier proceedings the Court observed that the sale to the Bombay parties was completed at the moment the goods were appropriated to the contract for which a bill of lading was issued and the price was received; consequently the subsequent shipment of those goods to foreign ports was not part of the original sale but a post‑sale event. On the basis of those findings the Court rejected the appellant’s claim for exemption under section 5(2)(a)(v) of the Act and also rejected his reliance on Article 286(1)(b) of the Constitution. The appellant challenged that order by filing an appeal before the Chief Justice Chakravartti and Justice Lahiri. Both judges heard the appeal and were not persuaded by the arguments presented on behalf of the appellant, and accordingly they dismissed the appeal. The appellate judges noted that the appellant’s contention that he was merely an agent had not been vigorously argued before them, and they held that the plea for exemption under Article 286(1)(b) was untenable because the sales in which the appellant was interested were deemed complete the moment the goods were appropriated to his contracts with the Bombay parties. Any later consignments of those goods by the Bombay parties, whether to themselves outside India or to other parties, were considered irrelevant to the appellant. The appellant subsequently obtained special leave to bring the present appeal before this Court, contesting the earlier appellate order.

The appellant, through counsel Shri Veda Vyas, raised the first point that the High Court had erred in dismissing his claim that, when he purchased the teas at the public auction in Calcutta, he acted solely as an agent for his principals in Bombay. He argued that because the appellant bought the teas not as a dealer for his own account but as an agent on behalf of the Bombay principals, the transactions should not form part of his taxable turnover under the Act. In the Court’s view, that argument lacks substance. It is material that the appellant has obtained a dealer’s certificate under the Act, which makes him a registered dealer. Moreover, the tax return on which assessment was based was filed by the appellant in Form III, expressly on the premise that he was a dealer. By examining the character of the appellant solely through that return, it is evident that he represented himself as a dealer in respect of the transactions and not as an agent. It is therefore difficult to comprehend why the appellant would have recorded these transactions in his return if he had purchased the teas merely as an agent for his Bombay principals. Section 2(i) of the Act defines “turnover” as, in relation to any period, the aggregate of the sale prices or portions of sale prices receivable, or, if a dealer so elects, actually received by the dealer during that period after permissible deductions. Consequently, unless the appellant had purchased the teas as a dealer, he would not have been required to disclose those transactions in his return, and their inclusion supports the view that he acted as a dealer rather than solely as an agent.

The Court explained that the expression “sale prices or parts of sale prices receivable, or, if a dealer so elects, actually received by the dealer during such period after making the permissible deductions” is the definition of turnover in section 2(i) of the Act. It further noted that a “dealer” under section 2(c) is defined as “a person who carries on the business of selling goods in West Bengal”. From these definitions, the Court inferred that if the appellant had not purchased the tea in question as a dealer, he would not have been required to disclose those transactions in his sales‑tax return. The inclusion of the tea transactions in the appellant’s return therefore indicated that he regarded himself as a dealer within the meaning of the statute, and this fact was wholly inconsistent with his claim that he acted merely as an agent for the Bombay principals.

The appellant also contended that, even assuming he was a dealer, he was entitled to exemption under section 5(2)(a)(v) of the Act, which permits a deduction for sales of goods shown, to the satisfaction of the Commissioner, to have been dispatched by or on behalf of the dealer to a location outside West Bengal. The Court observed that this exemption applies only where the dealer himself, or a person acting on his behalf, dispatches the goods outside the state. In the present case, the Court found that the title to the tea had passed to the Bombay merchants well before the goods left West Bengal. Once the appellant purchased the tea, the goods were immediately appropriated to his contract with the Bombay parties, causing the ownership to transfer to those parties. Consequently, the subsequent dispatch of the tea outside West Bengal was carried out on behalf of the Bombay merchants, not the appellant. Shri Veda Vyas argued that this factual finding amounted to a new case made against the appellant by the lower courts. The Court rejected that argument, emphasizing that the appellant’s sole contention before the Sales Tax Authorities was that he acted as an agent, not as a dealer. He never raised an alternative theory that, even if he were a dealer, the title would not pass to the Bombay merchants until after the goods left West Bengal. That alternative argument was introduced only during the writ petition before Sinha, J., who was compelled to examine when the goods were appropriated to the Bombay contract. Accordingly, the Court held that the finding of fact regarding the transfer of title was proper and not a newly created point of law.

In this case, the Court observed that the objection raised by Shri Veda Vyas to the finding was without merit. The Court explained that the finding concerned a question of fact, and ordinarily an appellant is not permitted to contest factual findings in an appeal under Article 136 of the Constitution. Nevertheless, the Court examined the substance of the finding and concluded that it was entirely correct. The Court noted that when one party unconditionally appropriates the goods to the contract with the consent of the other party, ownership passes from the seller to the buyer. Shri Veda Vyas, however, argued that title did not transfer to the buyer until the goods were handed over to the carrier, relying on the appellant’s conduct. The Court described the appellant’s handling of the goods: the items were stored in the appellant’s godown, unpacked, blended, repacked and properly marked before shipment, and the appellant charged the Bombay parties for all those operations, effectively including the charges in the price recoverable from them. While the Court acknowledged that, on its face, such conduct could seem to support the appellant’s contention, it turned to the correspondence exchanged between the appellant and the Bombay parties. The Court found that the letters unequivocally demonstrated that ownership had passed to the Bombay parties well before the goods left Calcutta. In every communication, the Bombay parties referred to the goods as their own and issued detailed instructions that could be complied with only if title had already vested in them. For example, a letter dated 30 May 1950 from Rajnikant & Co. specified how the goods should be blended, instructed the appellant to “blend from our stock and ship for Kuwait” and required the shipment to be made in the Bombay parties’ name. Similarly, a letter dated 13 February 1950 asked the appellant to blend tea “out of our stock according to the list sent with the letter and ship as already directed,” again insisting that the shipment bear the Bombay party’s name. Instructions on packing were given on 7 January 1950, directing the appellant to use a single gunny, cross‑wire it and apply clean markings. An earlier letter dated 15 November 1949 directed the appellant to “make two blends out of our purchased stock according to the attached blend list and ship after packing and marking as directed in the list.” These consistent references and precise directions confirmed that the Bombay parties regarded the goods as theirs and that ownership had transferred to them prior to dispatch.

The appellant agreed to follow the directions because he intended to do a favour for his customer. Because the title to the tea had already passed to the Bombay party, the appellant was entitled to claim payment for the services he performed, namely the blending and packing of the tea. He was also permitted to receive the commission that had been agreed between the parties. It is well known that sellers often agree to provide such ancillary services in order to cultivate goodwill among their customers. Consequently, it would be mistaken to place undue importance on the fact that the appellant listed the ancillary and subsidiary charges in his invoice and formally incorporated those charges into the overall price. The Court noted that payment of the price is not in every case a condition precedent to the transfer of ownership. After reviewing the record, the Court was satisfied that the High Court’s finding on the question of appropriation could not be effectively challenged by the appellant. The Court observed that, if the appellant had appropriated the goods to the contract with the consent and knowledge of the Bombay merchant, the title to the goods had clearly passed in favour of the Bombay party.

It was further pointed out that the tea dispatched by the appellant was not the same batch that he had originally purchased; the tea had been blended in accordance with the Bombay party’s instructions. This fact indicated that the sale of the tea to the Bombay party had taken place before the blending of several tea varieties, which was carried out because the title to the tea was already vested in the Bombay party. In view of this, Section 5(2)(a)(v) of the Act was held to be wholly inapplicable. The appellant then invoked Article 286(1)(b) of the Constitution, arguing that the transaction occurred during the export of the goods from India and therefore should not be subject to tax. The Court, relying on its earlier decisions, stated that the appellant could not claim the protection of this constitutional provision because the title to the goods had transferred to the Bombay party well before the goods were handed over to the carrier. The Court clarified that the tax liability arose on the sales made by the appellant to the Bombay party, not on the subsequent sales made by the Bombay party to foreign buyers. When the appellant sold the tea to the Bombay parties, whose place of business was in Bombay, his interest in the goods ceased.

In this matter, the Court observed that once the appellant had transferred the goods to the Bombay party, any subsequent events affecting the goods were outside the appellant’s control. The Court emphasized that there was no contractual relationship, or privity, between the appellant and the foreign merchants who eventually received the exported goods. Consequently, the Court reasoned that the finding concerning the appropriation of the goods, which removed the applicability of section 5(2)(a)(v) of the Act to the appellant’s sale, also precluded the operation of Article 286(1)(b) of the Constitution to the same transaction. The Court then turned to the jurisprudence on Article 286(1)(b), noting that its scope and effect had been examined in two landmark decisions commonly referred to as the two Travancore cases. In the first case, The State of Travancore‑Cochin and Others v. The Bombay Co. Ltd. (1952 SCR 1112; 1952 (3) STC 434), the Court held that any sale or purchase which itself gave rise to the export or import of goods, whether the goods moved out of or into India, fell within the constitutional exemption provided by Article 286(1)(b). The judgment of Chief Justice Patanjali Sastri, C.J., was cited to illustrate that the arguments presented before the Court concerning the proper construction of Article 286(1)(b) were wide‑ranging, with as many as four distinct approaches being advanced. The Court described the first approach as excessively narrow and the fourth as excessively broad, ultimately concluding that the three appeals under consideration were governed by the provisions of Article 286(1)(b). The learned Chief Justice observed that “a sale by export involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of goods to a common carrier for transport out to the country by land or sea. Such a sale cannot be dissociated from the export without which it cannot be effectuated and the sale and resultant export form parts of a single transaction.” The phrase “a series of integrated activities” was later clarified by the same Chief Justice in the subsequent Travancore decision, The State of Travancore‑Cochin and Others v. Shanmuga Vilas Cashew‑Nut Factory and Others (1954 SCR 53; 1953 (4) STC 205). In that judgment, he explained that the term “integrated activities” was intended to convey that a sale which occasioned export could not be separated from the export itself; the two steps together constituted a single, inseparable transaction. Accordingly, the Chief Justice summed up the principles derived from the majority opinion as follows: (1) Sales that result in export and purchases that result in import are covered by the exemption under Article 286(1)(b), a position that had been affirmed in the earlier decision.

The Court noted that the earlier judgment had laid down three propositions: firstly, that sales made for export and purchases made for import fell within the exemption granted by Article 286(1)(b); secondly, that purchases made within the State by an exporter for the purpose of export, as well as sales made within the State by an importer after the goods had passed the customs barrier, were not covered by the exemption; and thirdly, that sales within the State by either the exporter or the importer through the transfer of shipping documents while the goods remained beyond the customs barrier qualified for the exemption, provided that the State’s power of taxation extended to such transactions. The Court then observed that the same issue had recently been examined by this Court in The State of Mysore v. The Mysore Spinning and Manufacturing Co., Ltd., and the Minerva Mills Ltd. (Civil Appeals Nos. 66 to 73 of 1957 – Judgment delivered on February 11, 1958; Since reported in 1958 (9) STC 188). It held that the Mysore decision unquestionably applied to the present case, a point to which Shri Veda Vyas could not seriously object. Although Shri Veda Vyas attempted to argue that certain aspects of the question had escaped the Court’s notice in the Mysore case, the Court was not persuaded by that argument. Relying on the two Travancore decisions and, in particular, on the recent Mysore judgment, the Court concluded that it was impossible to accept the appellant’s contention that the sale effected by the appellant could invoke the protection of Article 286(1)(b) of the Constitution. Shri Veda Vyas also cited the Bombay High Court decision in M/s. Daulatram Rameshwarlal v. B. K. Wadeyar 1957 (8) STC 617; 1958 AIR (Bom) 120, as well as the Madras High Court decision in Gandhi Sons, Ltd. v. The State of Madras 1955 (6) STC 694, but the Court found that these authorities did not support the appellant’s position. In Daulatram Rameshwarlal, the Bombay High Court had held that the exporter obtained delivery of the goods by way of title documents after the goods had crossed the customs barrier, making it impossible to suggest any use of the goods other than export; the appropriation in that case was conditional upon payment on presentation of bills of lading, demonstrating the seller’s intention to retain disposal power until payment was received. The facts of the present case, however, were entirely different. Likewise, in Gandhi Sons, Ltd., the Madras High Court had held that title to the property did not pass to the buyers until the relevant bills of lading were presented or, at the very least, until the goods were loaded on the vessel at Cochin harbour, a factual situation again distinct from the present case. Consequently, the Court was not inclined to examine the correctness of the conclusions in those decisions, but simply concluded that, even if those decisions were correct, they did not bolster the appellant’s claim.

In the decision of the Madras High Court reported in STC 694, the court held that the title to the goods did not pass to the purchasers until the relevant bills of lading were presented to them, or at the very least until the goods had been loaded onto the vessel at Cochin harbour. The present case involved facts that were substantially different from those considered by the Madras High Court. The Court therefore stated that it would not pass judgment on the correctness of the conclusions reached by the learned judges in those earlier decisions. For the purposes of the present appeal, it was sufficient to observe that, even assuming those decisions were correctly decided, they did not provide any support for the appellant’s argument. Consequently, the appeal was dismissed and costs were awarded against the appellant. Before concluding, the Court referred to a point raised by Chief Justice Chakravartti in the judgment that was under appeal. The Chief Justice had observed that the appellant had not fully utilised the remedies available under the relevant Act; specifically, the appellant had lodged an appeal against the original order of the Commercial Tax Officer but had failed to file a revision application against the subsequent appellate order. The Chief Justice remarked that a case where only an alternative remedy exists differs fundamentally from a case where the alternative remedy has been invoked but not pursued to its full extent. He further indicated that, had the competence of the writ application been contested in the original court on that technical ground, he might have given the matter greater consideration. The present Court, however, chose not to express any opinion on that observation. The appellant had also filed Civil Appeal No 665 of 1957, challenging an assessment made by the Commercial Tax Officer of Calcutta for the fiscal year 1950‑51, which assessed sales tax of Rs 27,194‑4‑9. The appellant sought to invalidate this assessment on the same grounds that had been raised in Civil Appeal No 300 of 1956. Relying on the decision in Civil Appeal No 300 of 1956, the Court held that Civil Appeal No 665 of 1957 must also fail. A request was made by Shri Veda Vyas that the appeal be remitted to the appellate authority under the Act with directions that the merits of the appellant’s contentions be considered by that authority. The Court declined to adopt that course, reasoning that the appellant had not pursued the remedy provided by the Act within the prescribed time and therefore there was no justification for extending special indulgence by referring the matter back to the appellate authority.

The Court observed that counsel had proposed that the matter be remitted to the appellate authority under the Act, with a direction that the substantive arguments raised by the appellant should be considered by that authority. However, the Court stated that it was not prepared to adopt this proposal. In light of this consideration, the Court concluded that the appeal could not be upheld. Accordingly, the Court ordered that the appeal be dismissed in its entirety. In addition, the Court directed that the appellant be required to pay the costs of the proceedings, thereby allocating the expense of the litigation to the party whose application had been refused. The dismissal with costs reflected the Court’s view that the appellant had not pursued the remedy provided by the statutory scheme within the prescribed time, and therefore no special indulgence was warranted. The decision thus terminated the appellant’s challenge and affirmed the assessment that had been previously upheld.