Konduri Buchirajalingam vs State Of Hyderabad and Ors
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: supreme-court
Case Number: Appeal (civil) 192 of 1955
Decision Date: 3 April, 1958
Coram: S.R. Das, T.L.V. Aiyy ar, S.K. Das, A.K. Sarkar, V. Bose
In this appeal, the Supreme Court considered a question that arose under the Hyderabad General Sales Tax Act of 1950. The appeal originated from a decision of a Full Bench of the High Court at Hyderabad dated 11 September 1953, which by a majority had dismissed a petition filed by the appellant seeking the issuance of certain writs. The appellant, Konduri Buchirajalingam, was a member and the Vice-President of the Warangal Subha Oil Mill Owners’ Association, an association of oil-mill owners established in Warangal, Hyderabad State. The members of this association, in the ordinary course of their business, purchased ground-nuts for the purpose of extracting oil and subsequently trading the oil.
The Hyderabad General Sales Tax Act had become operative on 1 May 1950. Under the provisions of that Act, the members of the Association who qualified as “dealers” were required to register themselves, and the Association’s members duly complied with the registration requirement. Shortly after the Act’s commencement, the Sales Tax Officer at Warangal verbally informed the Association’s members that they would be required to pay tax on the ground-nuts they purchased. Following this verbal notice, the Association entered into a series of written correspondences with the tax authorities. In those letters the Association asserted that its members should be authorized to collect from the sellers of ground-nuts—the actual growers, who are hereinafter referred to as the agriculturists—the tax that the members were required to pay. The Association requested that the Market Superintendent of Warangal assist its members in effecting such collection, citing the prevailing practice in Hyderabad.
The Market Superintendent replied that the members of the Association were not permitted to collect any tax from the agriculturists. Undeterred, the Association continued its correspondence with higher sales-tax officials, insisting that its members be allowed to collect the tax from the agriculturists and also asking that the requirement for the members to pay the tax themselves be suspended until the question of their right to collect the tax from the agriculturists could be finally resolved.
On 23 December 1950, the Commissioner of Sales Tax, Hyderabad, wrote to the Association. In that letter the Commissioner stated that a dealer did not have any right to collect the tax from an agriculturist. He further explained that the sale of agricultural produce by an agriculturist did not attract liability to tax under the Act, and consequently the members of the Association could not collect any tax from the agriculturists. The Commissioner’s communication formed the basis for the subsequent proceedings that led to the present appeal.
The Commissioner of Sales Tax, Hyderabad, wrote that the sale of agricultural produce by an agriculturist did not create a liability to tax under the Act, and therefore the members of the Association could not collect any tax from the agriculturists. He further explained that, according to rule 5(2) of the Rules made under the Act, the turnover on which tax was payable for sales of ground-nuts was the amount for which the goods were bought, and consequently the sellers of ground-nuts were not liable to pay any tax. He added that a dealer in ground-nuts was free to collect the tax he had paid on his purchases of ground-nuts from the person to whom he later sold the ground-nuts, and that when a dealer converted ground-nuts into oil, he was entitled to include the tax in the price of the oil sold by him.
The Association subsequently addressed the Finance Minister of the Government of Hyderabad on the same question on 9 January 1951. Before a reply could be received, the local tax authorities pressed the Association’s members to file their returns. The members complied, claiming a deduction of tax on ground-nuts purchased from the agriculturists. Assessments were made on these returns, but the claimed deductions were disallowed. Following the assessments, demands for payment of tax were issued to the members in accordance with the assessment orders. The assessees filed appeals against the assessment orders; however, those appeals had not been disposed of by the time the petition for the issue of writs, which now forms the basis of the present appeal, was filed.
On 5 June 1951 the Finance Minister replied to the Association’s representation, stating that sales tax on ground-nuts was to be collected on the total turnover of the purchaser, and therefore the turnover of the sellers of the commodity was exempt from tax. He further observed that dealers could not be exempted from payment of sales tax for the period during which permission to collect tax from agriculturists had been refused, because agriculturists could refuse to pay tax as they had no liability, and there was no evidence that they would agree to reduce the price by the amount of the tax if asked.
On 19 June 1951 the Sales Tax Officer issued fresh demands for payment of tax pursuant to the assessment orders. In this situation, the petitioner filed a petition on 5 July 1951 seeking a writ of certiorari to quash the orders contained in the letters dated 5 June 1951 and 19 June 1951, and a writ of prohibition to restrain the Government from further levying the tax. In the alternative, the petitioner requested a writ of mandamus directing the Government of Hyderabad to withdraw or cancel the orders contained in the letters of 23 December 1950 and 5 June 1951.
In this appeal the petitioner sought to have set aside the orders issued in the letters dated 23 December 1950 and 5 June 1951, and to have those orders cancelled. The respondents were identified as the State of Hyderabad, the Commissioner of Sales Tax, Hyderabad, the Sales Tax Officer of Warangal and the Sales Tax Officer of Kareemnagar. The respondents opposed the petition and, as recorded, the petition was dismissed on 11 September 1953; the present appeal therefore arose from that judgment. The central question for determination was whether, under the Hyderabad General Sales Tax Act, 1950, a dealer as defined in the statute, who purchased ground-nuts from an agriculturist, was liable to pay tax on that purchase, the petitioner having conceded that he was such a dealer. The appellant’s counsel first argued that a purchase from an agriculturist fell outside the Act and could not be taxed. He asserted that, in the lower court, the respondents had stated that a purchase from an agriculturist was outside the Act, but the record contained no evidence to support that claim. The Solicitor-General appearing for the respondents disagreed, denying that a purchase from an agriculturist lay outside the Act. The appellant’s counsel then turned to sections 3 and 4 of the Act, contending that those provisions demonstrated that a purchase from an agriculturist was outside the Act’s scope. Sections 3 and 4 are the tax-levying provisions which, according to the counsel, make every dealer and every casual trader whose turnover in the relevant periods exceeds a specified amount liable to pay tax on the portion of his turnover attributable to transactions in goods other than exempted goods; ground-nuts were not listed as exempt. The appeal did not involve any casual dealer, so that category need not be discussed further. The counsel’s position was that the tax imposed by sections 3 and 4 was essentially a tax on a dealer’s turnover attributable to certain transactions. He referred to the definition of “dealer” in the Act, which describes a dealer as a person engaged in the business of selling or supplying goods. He emphasized that an agriculturist, whose business consists of growing crops rather than selling or supplying them, was not a dealer. For the purposes of this appeal the Court assumed that an agriculturist was not a dealer, while noting that a producer might also engage in selling and thus become a dealer under the Act. The counsel further argued that sections 3 and 4 levied tax only on the transactions of a dealer, and therefore the transactions of an agriculturist were not taxable. He pointed out that a sale by an agriculturist involves two components: the sale by the agriculturist and the purchase by another person.
In the appeal, counsel for the appellant argued that because a sale made by an agriculturist was not subject to tax, both the sale by the agriculturist and the corresponding purchase by a dealer should be exempt, otherwise the agriculturist’s transaction would not be entirely exempt. He sought to support this contention by citing a proviso that had been added to the definition of “turnover” in the Hyderabad General Sales Tax (Amendment) Act, 1953. That amendment, however, was not in force during the period relevant to the appeal. The amended definition in section 2(m) read: “Turnover means the aggregate amount for which goods are either bought by or sold by a dealer … Provided that the proceeds of the sale by a person of agricultural produce grown by himself or grown on any land in which he has an interest … shall be excluded from his turnover.” Counsel maintained that the proviso merely clarified what was already implicit in the Act, namely that by excluding the sale of agricultural produce the provision reinforced the view that an agriculturist was not a dealer within the meaning of the statute. The Court considered this interpretation to be a misapprehension. It observed that the proviso left the principal part of the definition unchanged and merely stipulated that certain amounts were to be excluded from a person’s turnover. Since the core definition expressly referred to the turnover of a dealer and not of an agriculturist, the proviso could apply only to a person who was simultaneously a dealer and an agriculturist, excluding from his dealer turnover the proceeds of his own agricultural produce. Consequently, the Court deemed it unnecessary to discuss the proviso further, having already assumed that an agriculturist was not a dealer under the Act. Nonetheless, the Court could not accept the proposition that sections 3 and 4 failed to impose tax on a dealer’s purchase from an agriculturist. Those sections taxed “turnover,” that is, the aggregate amount for which goods are bought or sold, subject to the restriction that the taxable turnover must involve goods that are not exempt. This limitation meant only that the taxable transaction could not involve exempted goods; it did not eliminate tax on the purchase itself. The Court further noted that, under section 5, tax became payable at each stage of a series of sales by successive dealers, but the buyer and seller were not both taxed for the same sale. Where a dealer was taxed as the buyer, he would not be taxed again on a subsequent sale of the same goods.
According to rule 5(2) of the Rules made under the Act, when the commodity involved is ground-nuts, the turnover for a dealer is measured by the price at which the dealer purchased the ground-nuts. Consequently, the Act imposes the sales tax on either the seller or the buyer of a transaction, but never on both parties simultaneously. Rule 5(2) expressly provides that, in the case of ground-nut sales, the buyer—provided that the buyer is a registered dealer—must bear the tax liability. Thus, for ground-nuts, the tax is payable by the dealer on the turnover representing his purchases of those nuts. The person who sells the ground-nuts, whether he is an agriculturist or any other class of seller, is not liable to pay tax under the Act and the Rules. For purposes of the Act, an agriculturist is not classified as a dealer and therefore is deemed to have no taxable turnover. Because an agriculturist has no turnover, the question of whether his transactions are exempt from tax never arises under the statutory scheme. The counsel for the appellant then argued that, as a registered dealer, his client was empowered by section 11 of the Act and rule 10 of the Rules to collect the tax payable by him from the sellers of ground-nuts. He further maintained that, because the government had previously barred the dealer from collecting tax from agriculturist sellers, the government could not later demand tax from the dealer himself. Section 11 of the Act authorises a registered dealer to collect an amount as tax, subject to the conditions and restrictions laid down in the Rules. Rule 10 stipulates that the dealer must not collect tax at a rate exceeding the prescribed rates and that any amounts collected must be paid to the government. The appellant’s counsel therefore pointed out that nothing in the Rules bars a dealer from collecting tax from an agriculturist seller. The Court considered it sufficient to observe that section 11 permits a dealer to collect only a tax that is actually payable under the Act; where no tax liability exists, the dealer has no authority to collect anything. Under the Act, a dealer is the party liable to pay the sales tax, whereas an agriculturist, not being a dealer, bears no such liability. Accordingly, no tax can be demanded from the agriculturist, and a dealer cannot lawfully recover tax from him. The Court affirmed the respondents’ position that the appellant had no right to collect tax from an agriculturist, and consequently the appellant could raise no grievance on that ground. It was observed that, although sales tax is described as an indirect tax, the appellant cannot be required to pay it unless he is permitted to recover it by collecting the tax from his customers.
In this case, the Court observed that it had already ruled in Tata Iron and Steel Co. Ltd. v. The State of Bihar (1958 (9) STC 267) that a sales tax does not have to be classified as an indirect tax. The Court further stated that a tax may be characterized as a sales tax even when the primary liability for that tax is placed on a person without granting that person any authority to recover the tax amount from any other party. The Court expressed that it was unnecessary to examine whether the respondents were correct in informing the appellant that he could recover the tax he had paid by collecting it from the purchasers of the ground-nuts, or, if he processed the nuts into oil, by adding the tax amount to the price of the oil. The Court noted that the primary liability for the tax rested on the appellant, and that it made no material difference to the legal position whether the appellant succeeded in recouping the tax paid.
The Court then turned to the appellant’s final argument, which contended that ground-nuts had been declared an essential commodity by Parliament and therefore, under Article 286(3) of the Constitution, no tax could be levied on them. The Court quoted the provision, which had later been repealed, as follows: “No law made by the legislature of a State imposing, or authorising the imposition of, a tax on the sale or purchase of any such goods as have been declared by Parliament by law 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 noted that the Essential Supplies (Temporary Powers) Act (Act XXIV of 1946) had been extended to Hyderabad effective 17 August 1950 by a notification issued under Act LII of 1950, and that the Act was said to have declared ground-nuts an essential commodity. Consequently, it was argued that a sale of ground-nuts could not be taxed under the Hyderabad General Sales Tax Act because the declaration had neither been reserved for the President’s consideration nor received his assent. The Court found this contention unsustainable. It explained that the law contemplated by Article 286(3) must be a law of “Parliament” enacted after the Constitution came into force, whereas Act XXIV of 1946 was enacted before the Constitution was promulgated and therefore does not qualify as such a law. Although it was claimed that the Act was applied to Hyderabad by a Parliamentary law, namely Act LII of 1950, and thereby became a Parliamentary law as applied to Hyderabad, the Court was uncertain about the correctness of that argument and deemed a detailed discussion unnecessary. For the purposes of the present case, the Court assumed the argument to be correct, but noted that even on that assumption the appellant’s reliance on Article 286(3) could not succeed.
In examining whether the Essential Supplies (Temporary Powers) Act, 1946—identified as Act XXIV of 1946—qualified as a Parliamentary law that declared goods to be essential under clause 3 of Article 286 of the Constitution, the Court concluded that it did not. The Constitution speaks of a law of Parliament that makes a declaration of essential goods for the purpose specified in clause 3. An Act such as the Essential Supplies (Temporary Powers) Act, which declares certain goods to be essential for its own regulatory objectives, does not fall within the meaning of a law contemplated by that constitutional provision. The Court pointed to Section 3(1) of Act XXIV of 1946 to illustrate the purpose of the declaration, reproducing it in full: “Section 3(1) – The Central Government, so far as it appears to it to be necessary or expedient for maintaining or increasing supplies of any essential commodity, or for securing their equitable distribution and availability at fair prices, may by order provide for regulating or prohibiting the production, supply and distribution thereof, and trade and commerce therein.” The Court observed that the intention behind labeling goods as essential in this Act was not to exempt them from sales tax. Rather, the Act was unrelated to Article 286(3) and did not, in fact, declare any commodity to be essential for the life of the community. Consequently, the Court held that Act XXIV of 1946 could not be regarded as a law declaring any commodity essential for the community under the constitutional clause.
The Court further explained that any Parliamentary enactment contemplated by clause 3 must be passed pursuant to the powers granted by the Constitution and must expressly refer to that clause. Such an enactment was later introduced as the Essential Goods (Declaration and Regulation of Tax on Sale or Purchase) Act, LII of 1952, which came into force on 9 August 1952. The pre-amble of that Act expressly states that it is enacted “in pursuance of clause (3) of Article 286 of the Constitution” to declare certain goods essential for the life of the community, and its Section 3 mirrors the substantive provisions of the constitutional clause. Because this later Act, not the 1946 Act, satisfies the constitutional requirement, the Court concluded that it could not be argued that Article 286(3) barred the imposition of tax on a commodity merely because it had been declared essential by Act XXIV of 1946. Moreover, the appellant could not rely on the 1952 Act, as it was not in force at the time the disputed tax was levied. In light of these findings, the Court dismissed the appeal, ordered it to fail, and awarded costs. Justice Bose, expressing respectful disagreement, indicated his inability to accept the distinction drawn by the majority between an “essential commodity” under the 1946 Act and “goods essential for the life of the community” under Article 286(3).
The Court examined the distinction raised between an “essential commodity” under the Essential Supplies (Temporary Powers) Act, 1946 and the expression “goods essential for the life of the community” found in Article 286(3). It noted that the Hyderabad General Sales Tax Act had become operative in Hyderabad on 1 May 1950. On that date no Parliamentary statute had declared ground-nuts to be an “essential commodity” within the State of Hyderabad. Moreover, the Essential Supplies Act of 1946 did not apply to Hyderabad at that time; even if it had, Article 286(3) would not have been attracted because the provision concerned a law that was not made by Parliament. Accordingly, the Court agreed that the tax imposed on ground-nuts was not invalidated by Article 286(3) at that stage. The situation, however, changed on 17 August 1950 when Parliament extended the Essential Supplies (Temporary Powers) Act, 1946 to Hyderabad. From that date forward the Act operated as a Parliamentary enactment with respect to Hyderabad, and the declarations contained in the Act regarding essential commodities acquired the force of a Parliamentary declaration for that territory. The Court then turned to the substance of the Act. It observed that the statute was intended, for a limited period, to confer power to control the production, supply, distribution, trade and commerce of certain commodities. Section 3 of the Act authorised control over particular “essential commodities.” The Court asked what the term “essential” meant in that context and answered that Section 2 provided the guide. Section 2 listed essential commodities such as foodstuffs, cattle fodder, textiles, cotton, paper and similar items, while Section 3 dealt with the regulation of those items in greater detail and prescribed penalties for contravention of orders made under that section. The Court reasoned that the purpose of these provisions could only be to treat those commodities as essential for the life of the community. It rejected any suggestion that food and clothing might be excluded from that description, noting that they may serve other purposes but they are undeniably essential for community life. The Court expressed deep respect for the opposing view but refused to accept a narrow construction that would limit the meaning of “essential” to a subsidiary, non-essential purpose. Instead, the Court held that when Parliament declared a commodity to be essential, it intended the ordinary, primary purpose for which such a commodity is essential—namely, the sustenance of the community. The Court further observed that the absence of a need to control a commodity at a particular moment does not defeat its essential character; it merely indicates that regulation was not required at that specific time. The Court then indicated that the remaining issue to be considered was whether …
In this case, the Court examined whether the Essential Supplies (Temporary Powers) Act of 1946 fell within the ambit of Article 286(3) of the Constitution. Article 286(3) provides that no law made by a State legislature shall have effect unless it has been reserved for the President’s consideration and has received his assent. Counsel argued that the language of the provision limited its operation to statutes that could have been reserved at the time of their enactment. The Act under challenge had been brought into operation on 1 May 1950, and at that moment no question of presidential reservation could arise because the Parliamentary ban affecting Hyderabad had not yet been in force; that ban became effective only on 17 August 1950. The Court said it could not interpret Article 286(3) in the restricted manner suggested. The provision plainly states that a law shall have effect only if it has been reserved; the Act was not reserved, and the reason for its non-reservation was irrelevant. Consequently, the Court held that from the date of a Parliamentary declaration, any existing or future law that has not been reserved cannot take effect. To accept any other view would lead to an absurd result: a situation where a State could tax the sale and purchase of commodities at a time when regulation was not deemed necessary, yet later, in an emergency affecting the life of the community, Parliament would be barred from imposing a necessary ban merely because control was previously unnecessary. The Court preferred to apply the words of Article 286(3) without any subtle qualification. On that basis, the Court concluded that the appeal was successful in principle, but in line with the majority opinion, it dismissed the appeal and ordered costs.