Case: State of Mysore and Another Vs. Mysore Spinning and Manufacturing Company, Limited and Another

Rajagopala Ayyangar, J.Civil Appeals 75 and 76 of 1957 have been filed by the State of Mysore and the Sales Tax Officer, Bangalore, while in Civil Appeals 355 and 356 of 1957 the Commissioner of Sales Tax in Mysore, Bangalore, is the appellant. Both the sets of appeals have been filed on certificates granted by the High Court of Mysore under Article 133(1)(c) of the Constitution. The question of law involved in all these appeals is as regards the proper construction of section 11 of the Mysore Sales Tax Act, 1948 (hereinafter referred to as the Act).Civil Appeals 75 and 76 of 1957 arise out of a common judgment and order of the High Court of Mysore dated September 29, 1955, in Writ Petition No. 39 of 1954 and Civil Petition No. 111 of 1954 relating to the Mysore Spinning and Manufacturing Co., Ltd., Bangalore, and the Minerva Mills Ltd., Bangalore, respectively and these are the respondents in the respective appeals before us. The two companies are under common management. The Minerva Mills Ltd. - the appellants in Civil Appeal No. 76 of 1957 - deal inter alia in cotton yarn and cotton cloth. For the quarter ending December 31, 1951, the Sales Tax Officer, II Circle, Bangalore, assessed the company for sales tax on their turnover. There was no dispute about the turnover or the assessment, but the company who held a licence under section 5 of the Mysore Sales Tax Act for dealing in yarn, cloth etc. manufactured in their mills, were in doubt as to whether their licence would or would not cover their sales of waste cotton and dust. If the licence that the company held did not cover these sales, the sales would have been liable, by reason of the provision in rule 2(e) of the Schedule to the Act, read with section 5(ii) of the Act, to tax at an enhanced rate of Rs. 1-9-0 instead of Re. 0-8-0 for every Rs. 100 of their turnover. As the company did not wish to take any risk in the matter, they provisionally collected what they termed "deposits" from their purchasers, of sums representing the difference in the tax between the two rates, on the distinct understanding and condition that the excess amount collected would be refunded to the purchasers immediately it became clear that the sales of these items were covered by their licence. The total amount received by the company in this manner amounted, in the relevant quarter, to Rs. 130-15-5. The Sales Tax Officer, who dealt with the assessment of the company for the quarter, held that the licence which it held for dealing in cotton cloth and yarn did cover these sales of cotton-waste and dust, with the result that tax at the higher rate was not payable on the turnover represented by these sales. But he nevertheless held that the amount of Rs. 130-15-5 collected by the dealer in the circumstances narrated, was payable to the Government under section 11(2) of the Mysore Sales Tax Act, notwithstanding that the dealings in respect of which the amount was received were not liable to tax at that rate under the appropriate charging sections of the Sales Tax Act. Against the order of the Sales Tax Officer the company preferred an appeal to the Deputy Commissioner which was dismissed on the same reasoning and similarly a revision to the Commissioner of Sales Tax, but the latter officer referred on July 19, 1951, the question of law raised by the company to the High Court for determination by it under section 16 of the Act. The question referred was :"Whether the sum of Rs. 130-15-5 collected by the petitioner company in the quarter ended December 1951 in its bills under the head deposit at 3 pies per rupee on the above to cover sales tax subject to refund, if any, as stated in the revision petition in the circumstances set out therein attracts the provisions of section 11 of Mysore Sales Tax Act and therefore the petitioner company was liable to pay the said amount to the Government. If not whether the petitioner company is entitled to refund of the said amount of Rs. 130-15-5 already paid by it under protest."Before this reference came on for hearing, the Mysore Spinning and Manufacturing Co., which is the respondent in Civil Appeal No. 75 of 1957, filed Writ Petition No. 39 of 1954 in the High Court for the issue of an appropriate writ or direction under Article 226 of the Constitution preventing the respondents - the State of Mysore and the Sales Tax Officer, Bangalore - from collecting from them a sum of Rs. 12, 775-13-2 as amounts payable to Government under section 11(2) of the Act. The matters set out in the affidavit in support of this petition were not controverted. They were that all the sales in respect of which the sums totalling Rs. 12, 775-13-2 were collected were in the course of inter-State trade, which had been effected during 1952-53, that various interpretations had been put by several Governments and sales tax departments on the scope of Article 286(2) of the Constitution, that when the Commissioner of Sales Tax was addressed by the company to ascertain whether the sales being covered by Article 286(2) were therefore not liable to sales tax, they had been told that it was a matter which was for the Supreme Court to decide, and in this state of uncertainty the company collected by way of abundant caution amounts from purchasers as "tax contingency deposits" - to be refunded in the event of the sales being held not liable to tax.The Sales Tax Officer had by his notice of December 9, 1953, demanded the payment of this "contingency deposit" totalling Rs. 12, 775-13-2 on inter-State trade" on the basis of section 11(2) of the Act. The company challenged the legality of this demand in their petition to the High Court and prayed for the issue of directions to quash the said demand.The High Court heard these two proceedings together and by a common judgment delivered on September 29, 1955, answered the question referred in Civil Petition No. 111 of 1954, in favour of the assessee and in Writ Petition No. 39 of 1954, directed the writ to issue as prayed for by the petitioner therein. In doing so learned Judges followed the decision of the Madras High Court in Tata Iron & Steel Co. Ltd. v. The State of Madras (1954 5 S.T.C. 382), in which it had been held that on a proper construction of section 8-B(2) of the Madras Sales Tax Act, which was word for word the same as section 11(2) of the Mysore Act, the collections which a dealer was under that provision bound to repay to Government, were confined to those in respect of transactions which were the subject of charge to sales tax under the Act, and at the rates prescribed thereby. As admittedly in both the proceedings before them, the sale transactions in question were either not liable to tax or to tax at the rate collected under the relevant charging provisions of the Act, the claim of the tax authorities to payment over was negatived. The State of Mysore and the Sales Tax Officer applied to the High Court for the issue of certificates to enable appeals to be filed in this Court and the same having been granted under Article 133 the appeals are now before us.Before dealing with the contentions raised in the appeals, it would be convenient to set out briefly the facts in Civil Appeals 355 and 356 of 1957. The Cement Marketing Co. of India Private Ltd., is the appellant in both the appeals, which arise out of a common order of the High Court of Mysore in two connected references under section 16 of the Mysore Sales Tax Act.Civil Appeal 356 of 1957 is against the order in Civil Petition 223 of 1953, the facts giving rise to it being as follows :During the year 1948-49, the company acted as agents for the sale of cement manufactured by the Mysore Iron and Steel Works, Bhadravati. The sales were effected to purchasers outside the State of Mysore. The total turnover of these sales for the year came to Rs. 4, 28, 005-5-10. It was common ground that in respect of this turnover the company was not liable to sales tax, as the sales took place outside the State. The company, however, being in doubt as to whether or not it would be liable to pay sales tax on these transactions had collected by way of deposit from their purchasers a total sum of Rs. 13, 703-4-6 on the specific understanding and undertaking that the sums deposited would be refunded to the constituents if it was ultimately held that no sales tax was payable under the Mysore Sales Tax Act in respect of the turnover of the assessee-company in regard to these sales. At the time of the assessment of the company to sales tax, these facts were brought to the notice of the assessing officer. By an assessment order dated March 22, 1951, the Sales Tax Officer accepted the figures of turnover in respect of these sales submitted by the assessee and he held that under the provisions of the Mysore Sales Tax Act this turnover was not liable to tax, but at the same time he held that the assessee-company were liable to pay over to the Mysore Government the sum of Rs. 13, 703-4-6 which had been received by them by way of "deposit" from their constituents, by reason of the provisions contained in section 11(2) of the Act read with rule 11(7)(ii) of the rules and this demand was complied with by the company under protest. The company preferred a revision petition to the Deputy Commissioner of Sales Tax, Bangalore, who upheld the order of the Sales Tax Officer and similarly the Commissioner of Sales Tax by his order dated March 15, 1953. This latter officer, in compliance with the request of the company referred by order dated November 1953 the questions arising out of this demand to the High Court for determination under section 16(1) of the Act. Two questions were referred :"(1) Whether the amounts collected by a dealer from his customers provisionally for payment of sales tax pending decision of the question of the liability on sales tax for any sales made by the dealer and subject to a distinct understanding to repay the sales tax fall within the provisions of section 11(2) of the Act or rule 11(7)(ii) of the Mysore Sales Tax Rules.(2) Could the Sales Tax Authorities claim any amounts collected provisionally by an assessee from his customers when they themselves ruled that such tax is not due under the Act".While this reference - Civil Petition 223 of 1953 - was pending decision, another reference relating to the same company, for the accounting period 1950-51 - Civil Petition 124 of 1954 - was made to the High Court. The relevant facts in this later reference were nearly similar, except that the sales related to cement manufactured by the Associated Cement Co. at its factory at Mathukarai in Coimbatore district of the Madras State. The questions referred to the High Court in Civil Petition 124 of 1954 from which Civil Appeal 355 of 1957 has been brought ran :"(1) Whether in view of the decision that the sales of Nilgiri brand cement by the petitioner during the period 1st April, 1950, to 31st March, 1951, are not liable to sales tax under the Mysore Sales Tax Act, 1948, the petitioners were nevertheless liable to pay to the Government a sum of Rs. 6, 585-2-0 collected by them from their constituents conditionally and on the express undertaking that such amounts would be refunded to their constituents in the event of Sales Tax Authorities holding that the sales were not liable to the tax, and(2) Whether they are not entitled to a refund of the said sum of money deposited by them".These two references were heard together and the High Court by its judgment and order dated November 10, 1956, held that on the construction of section 11(2) of the Act and the relevant rules, the sum could not be claimed by the Government and answered the reference in favour of the assessee-company, following their previous decision in the case of the Mysore Spinning and Manufacturing Co. and another. Certificates under Article 133(1)(c) having been granted, Civil Appeals 355 and 356 have been filed.All these four appeals have been heard together before us as the points arising in them, except for small details and immaterial particulars, are nearly identical.Section 11 of the Mysore Sales Tax Act on the construction of which the decision of the appeals turns runs in the following terms :"11. (1) No person who is not a registered dealer shall collect any amount by way of tax under this Act; nor shall a registered dealer make any such collection except in accordance with such conditions and restrictions, if any, as may be prescribed.(2) Every person who collects any amount by way of tax under this Act, shall pay over to the Government within such time and in such manner as may be prescribed, such collections as are in excess of the tax paid by him for the period during which the collections were made or, in case he has not paid any amount for the period in question, he shall pay over to Government all the amounts so collected by him; and in default of such payment, the amounts may be recovered as if they were arrears of land revenue."The rules make it compulsory for every dealer whose annual turnover is over Rs. 7, 500 to get himself registered. One of the privileges of a registered dealer is the right to pass on the tax to the purchaser at the time of the sale, with an obligation added, to pay the collection to the Government. The provision in the rules relevant to this topic is to be found in rules 11(7) to (9) which read :"11. (7) A registered dealer may collect amounts by way of tax or taxes under the Act subject for the following conditions :-(i) He shall not collect any amount or amounts by way of tax or taxes under the Act at a rate or rates exceeding the rate or rates specified in section 3 or 5 notified under section 6(1).(ii) He shall pay in full the amount or amounts collected by him by way of tax or taxes to the Government on or before the 31st July of the year succeeding that in which such collection is made.11. (8) The assessing authority may call for and examine the accounts of the registered dealer for the purpose of satisfying himself that the dealer has paid in full the amount or amounts collected by him by way of tax or taxes, as required by condition (ii) in sub-rule (7) :Provided that this power shall be exercised before the end of the year next succeeding that in which the collections were made.11. (9) If the assessing authority is satisfied that any amount or amounts collected by the dealer by way of tax or taxes have not been paid by him to the Government in any year as required by condition (ii) in sub-rule (7), the assessing authority shall issue a notice to the dealer in Form IX-2 specifying therein the total sum so withheld by the dealer and the dealer shall pay such sum at the time and in the manner specified therein."The construction which the High Court adopted of the section and of the rules may be thus expressed :Section 11(1), though couched in the negative, in effect, authorises a registered dealer to collect amounts "by way of tax" in accordance with such conditions and restrictions as may be prescribed, and the conditions prescribed are to be found in sub-rules (7) to (9) of rule 11. What he is authorized to collect under the Act "by way of tax" would be sums payable on sale-transactions which are within the charging section, the proceeds of which sales would have to be included in the turnover of the dealer. Therefore the expression "by way of tax under this Act" in section 11(1), could only mean amounts lawfully leviable and levied under the Act. In other words, section 11(1) cannot be read as authorising registered dealers to collect under the guise of tax any sums, in respect of sale-transactions which are not charged with tax under the Act. If that be the proper construction to be adopted of the expression "by way of tax under this Act" when it occurs in sub-section (1) of section 11, the normal rule of interpretation would be that when the same phraseology is employed in sub-section (2), it ought, in the absence of any clear indication to the contrary, to bear the same interpretation. On this basis the reference to "amounts collected by way of tax under this Act" in section 11(2) could only mean sums collected in respect of sale-transactions on which a charge of sales tax is constitutionally leviable and is factually imposed by the Act.The above was the construction which was adopted by the High Court of Madras in Tata Iron & Steel Co. Ltd. v. The State of Madras (1954 5 S.T.C. 382). It was on the basis of this decision that the High Court of Mysore decided the three references and writ petition now under appeal.The question raised in these appeals is whether this interpretation of section 11(2) of the Act is correct. The learned Additional Solicitor-General who appeared for the appellants, urged that the construction put by the Madras High Court upon the second sub-section was erroneous and that the reference therein to "the excess of the tax paid by him" necessarily implied that the collection spoken of as "by way of tax under this Act" was intended to include amounts beyond what the dealer making the collection was bound to pay as sales tax on his sale-transactions. In other words, the submission was that irrespective of the meaning to be attached to the words "by way of tax under this Act" in section 11(1), these words when they occur in sub-section (2) ought to receive a wider meaning, as including not merely the collections of tax on a transaction brought to charge by the Act, by having to be included in the taxable turnover of the dealer, but also any sums collected in the guise or under the name of sales tax - and that it was only such a construction, that would in conceivable cases leave an "excess" over the tax liability of the dealer, and give full scope to the words of rule 11(7)(ii) - "he shall pay in full the amount or amounts collected by him by way of tax or taxes to the Government .........".The appeal originally came on before a Division Bench of this Court when the arguments just now summarised were urged and it was then submitted on behalf of the respondents, that if section 11(2) were construed in the manner contended by the learned counsel for the appellants, the direction to pay over to the Government, money belonging to the dealer which could not lawfully be and was not in fact charged to tax under the Act would violate the fundamental rights guaranteed by Articles 19(1)(f) and 31 of the Constitution. By reason of this contention being raised the appeals were directed to be posted before a Constitution Bench and that is how these appeals come to be heard by us.After arguments as regards the proper interpretation of the words "by way of tax under this Act" occurring in sub-sections (1) and (2) of section 11 had been advanced by the learned counsel on either side on the lines above indicated, it was realised that on the facts of all these cases, there was no "collection" at all, whether "by way of tax" or otherwise, so as to bring the amounts received and held by the respondents within the scope of section 11. We have already set out the questions referred, which would clearly indicate that the amounts were received by the Cement Marketing Co. and by the Mysore Spinning and Manufacturing Co. and the Minerva Mills Ltd. only as "a deposit" to cover a possible contingency of these companies being held liable to pay the tax. That this was the real nature of the transaction was never in dispute. Indeed even the Commissioner of Sales Tax in making the reference in the three cases made it clear that the amounts were received by the companies on the definite understanding and condition that they were to be held only "as deposits" to be refunded when the company in question was held not liable to include the relevant sales in its taxable turnover. The construction on which the Sales Tax Authorities proceeded was that the Act made no difference between one type of receipt and another, and that any receipt of money by a dealer from the purchaser was a "collection by way of tax" within section 11(2) of the Act, provided it had some relation to sales tax, and that it mattered not that the receipt was merely a deposit by the payer carried to suspense account, the amount being received on the express undertaking and definite condition that the same would be refunded in the event of the dealer being held not liable to sales tax on the transaction in regard to which the "deposit" was made. We are unable to agree in this construction of the expression "collection" occurring in section 11(2) of the Act. Where an amount is received merely by way of deposit, on the express understanding or undertaking as in these cases, the company held the money as a mere custodian, and on the fulfilment of the condition became a trustee for the depositor. It is sufficient to state that when once the tax authorities determined that the proceeds of the sales in question were not within the taxable turnover of the company, the beneficial ownership became vested in the depositors and the company ceased to have any right to continue to hold the moneys. The fact that the physical control of the moneys passed from the "depositor" to the "dealer" did not render the receipt a "collection" within section 11(2) of the Act.We should not be understood as saying that collections by a dealer from a purchaser of amounts not lawfully demandable by him are not "collections" within section 11, merely because the purchaser could in law make a claim for refund and enforce that right in appropriate proceedings. But such a case is far removed from the ones before us, where the payment by the purchaser was conditional and made on an express contract that the sum would be refunded in the contingency of the dealer being held not to be assessable in respect of the relevant turnover. On the facts of these appeals we are unable to hold that there has been any "collection" by way of tax of any amount under section 11(2) of the Mysore Sales Tax Act, 1948.So far we have been dealing with the facts of the cases in which "references" were made to the Court. In Civil Appeal 75 of 1957 which is against the order of the High Court in Writ Petition No. 39 of 1954 there was no "reference". Facts exactly similar to those in the other cases and the circumstances under which deposits were obtained and retained by the company were set out in the affidavit in support of the petition. The State filed no counter-affidavit challenging the correctness of the assertions made in the petition and the High Court proceeded on the basis that there was no difference on the facts between the cases covered in the references and those in the writ petition. We consider, therefore, that the facts in Civil Appeal 75 of 1957 are not substantially different.In view of this conclusion, we consider it proper not to embark on an investigation of the proper construction of section 11(1) and (2) of the Act and the sustainability of the rival contentions urged before us on this matter. Nor do we consider it necessary or proper to deal with the soundness or otherwise of the constitutional objections which have been put forward to the demand by the State, to amounts "collected by way of tax" if that were to include collections in respect of sale-transactions not charged to tax under the Act. We consider it desirable to reserve the determination of these questions to an occasion when they properly arise and have necessarily to be decided.

Decision reasoning: 0[ds]After arguments as regards the proper interpretation of the words "by way of tax under this Act" occurring in sub-sections (1) and (2) of section 11 had been advanced by the learned counsel on either side on the lines above indicated, it was realised that on the facts of all these cases, there was no "collection" at all, whether "by way of tax" or otherwise, so as to bring the amounts received and held by the respondents within the scope of section 11. We have already set out the questions referred, which would clearly indicate that the amounts were received by the Cement Marketing Co. and by the Mysore Spinning and Manufacturing Co. and the Minerva Mills Ltd. only as "a deposit" to cover a possible contingency of these companies being held liable to pay the tax. That this was the real nature of the transaction was never in dispute. Indeed even the Commissioner of Sales Tax in making the reference in the three cases made it clear that the amounts were received by the companies on the definite understanding and condition that they were to be held only "as deposits" to be refunded when the company in question was held not liable to include the relevant sales in its taxable turnover. The construction on which the Sales Tax Authorities proceeded was that the Act made no difference between one type of receipt and another, and that any receipt of money by a dealer from the purchaser was a "collection by way of tax" within section 11(2) of the Act, provided it had some relation to sales tax, and that it mattered not that the receipt was merely a deposit by the payer carried to suspense account, the amount being received on the express undertaking and definite condition that the same would be refunded in the event of the dealer being held not liable to sales tax on the transaction in regard to which the "deposit" was made. We are unable to agree in this construction of the expression "collection" occurring in section 11(2) of the Act. Where an amount is received merely by way of deposit, on the express understanding or undertaking as in these cases, the company held the money as a mere custodian, and on the fulfilment of the condition became a trustee for the depositor. It is sufficient to state that when once the tax authorities determined that the proceeds of the sales in question were not within the taxable turnover of the company, the beneficial ownership became vested in the depositors and the company ceased to have any right to continue to hold the moneys. The fact that the physical control of the moneys passed from the "depositor" to the "dealer" did not render the receipt a "collection" within section 11(2) of the Act.We should not be understood as saying that collections by a dealer from a purchaser of amounts not lawfully demandable by him are not "collections" within section 11, merely because the purchaser could in law make a claim for refund and enforce that right in appropriate proceedings. But such a case is far removed from the ones before us, where the payment by the purchaser was conditional and made on an express contract that the sum would be refunded in the contingency of the dealer being held not to be assessable in respect of the relevant turnover. On the facts of these appeals we are unable to hold that there has been any "collection" by way of tax of any amount under section 11(2) of the Mysore Sales Tax Act, 1948.So far we have been dealing with the facts of the cases in which "references" were made to the Court. In Civil Appeal 75 of 1957 which is against the order of the High Court in Writ Petition No. 39 of 1954 there was no "reference". Facts exactly similar to those in the other cases and the circumstances under which deposits were obtained and retained by the company were set out in the affidavit in support of the petition. The State filed no counter-affidavit challenging the correctness of the assertions made in the petition and the High Court proceeded on the basis that there was no difference on the facts between the cases covered in the references and those in the writ petition. We consider, therefore, that the facts in Civil Appeal 75 of 1957 are not substantially different.In view of this conclusion, we consider it proper not to embark on an investigation of the proper construction of section 11(1) and (2) of the Act and the sustainability of the rival contentions urged before us on this matter. Nor do we consider it necessary or proper to deal with the soundness or otherwise of the constitutional objections which have been put forward to the demand by the State, to amounts "collected by way of tax" if that were to include collections in respect of sale-transactions not charged to tax under the Act. We consider it desirable to reserve the determination of these questions to an occasion when they properly arise and have necessarily to be decided.