Case: State Of Madras Vs. A.Habibur Rehman Sons (With Connected Appeals)

2. The respondent who was a Beedi manufacturer in Gudiyattam, Madras State was assessed to sales tax on a taxable turnover of Rs. 1,73,502-11-10 for the assessment year 1955-56 by the Deputy Commercial Tax officer. Against this order of assessment dated February 15, 1957 the respondent appealed to the Appellate Assistant Commissioner of Commercial Taxes, Salem disputing the inclusion of a sum of Rs. 1,11,299 and odd on the ground that the said amount represented either second purchases or purchase made outside the State of Madras. Pending the appeal the Madras General Sales Tax Act, 1959 was passed and the earlier Act of 1939 was repealed and by force of the provisions in the 1959 Act the appeal was finally disposed of by the Appellate Assistant Commissioner of Commercial Taxes, Salem. By his order dated July 2, 1960, the Appellate Assistant Commissioner held that the excise duty paid by the respondent could not form part of his purchase turnover but in purported exercise of his powers under the new Act enhanced the assessment of the turnover by including a sum of Rs. 1,15,406-14-9 as inter-State purchases from April 1, 1955 to September 5, 1955. The respondent took the matter in further appeal to the Sales Tax Appellate Tribunal. The appellant also filed petitions before the Tribunal for enhancement of the assessment by Rs. 3,66,213-12-0 on the ground that the amount represented sales of manufactured beedies to non-resident buyers during the period May 12, 1955 to September 5, 1955 and that the goods in question were within the territory of the State at the time the contract of sale in respect thereof was made. It was contended on behalf of the appellant that the sales were taxable by virtue of Explanation (2) to Sec.2 (h) of the Madras General Sales Tax Act, 1939 in view of the lifting of the ban on the levy of tax on inter-State sales by the Sales Tax Validation Act, 1956 (Central Act 7 of 1956), hereinafter called the Validation Act, and that it was wrongly excluded from the taxable turnover by the taxing authorities. By its order dated July 13, 1962, the Appellate Tribunal allowed the petition for enhancement and rejected the contention of the respondent that the sales were agency sales through Commission Agents. As regards the alleged second purchases or outside purchases of raw tobacco, the Appellate Tribunal remanded the case to the Appellate Assistant Commissioner. Against the order of the Appellate Tribunal the respondent filed a petition in the High Court of Madras under Section 38 of the Madras General Sales Tax Act, 1959. By its order dated September 23, 1963 the High Court held: (1) that the inclusion of the inter-State purchases from April 1, 1955 to September 5, 1955 of Rs. 1,15406-14-9 was bad as the Appellate Assistant Commissioner had no jurisdiction to include that turnover; (2) that the turnover of Rs. 3,66,213-12-0 included by the Appellate Tribunal could not be brought to tax as the beedies, which were the subject of the relevant sales, were delivered outside the State for purposes of consumption and as the sales therefore constituted Explanation sales under Article 286 (1) of the Constitution as it stood prior to the Sixth Amendment and consequently the Madras State had no jurisdiction to tax the said sales. Being aggrieved by that part of the decision of the Madras High Court on the question of taxability of the said transactions of inter-State sales effected prior to September 6, 1955, the State of Madras has brought the present appeal.

Reasoning: In our opinion the argument put forward on behalf of the appellant is not warranted. The decision of this Court in Ashok Leylands case, 1962 (1) SCR 607  : (AIR 1961 SC 1433  ) has no bearing on the question presented for determination in this case. The reason is that in that case the deliveries of motor vehicles were inside the Madras State and the inter-State sales in question were not "Explanation sales" falling within Article 286 (1) (a). It is a well settled proposition that the operative provisions of the several parts of Article 288, namely Clause (1) (a) Clause (1) (b), C1. (2) and Clause (3), are intended to deal with different topics and one cannot be projected or read into another and therefore the Explanation in Clause (1) (a) cannot legitemately be extended to Clause (2) either as an exception or as a proviso thereto or read as curtailing or limiting the ambit of Cl. (2).In other words, the legislative authority of the States to impose taxes on sales end purchases was restricted by four limitations- in respect of sales or purchases outside the State, in respect of sales or purchases in the course of imports into or exports out of India, in respect of sales or purchases which take place in the course of inter-State trade or commerce and in respect of sales and purchases of goods declared by Parliament to be essential for the life of the community. These limitations overlap to some extent, but the legislative power of the State to tax sale or purchase transactions may be exercised only if it is not hit by any of the limitations.The restrictions imposed by Article 286 are cumulative. It follows therefore that even if the ban under Article 286 (2) is lifted by Parliament by the enactment of the Validation Act, the Madras State cannot still tax inter-State sales or purchases which take place outside its territorial limits because of the ban under Article 286 (l) (a) of the Constitution. What is an "outside sale" is defined by the Constitution by the explanation to Article 286 (1) which states what should be deemed to be an inside sale. As provided by the Explanation to Article 286 (1), a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of the sale notwithstanding the fact that under the general law relating to sale of goods the property in the goods has, by reason of such sale or purchase, passed to another State. The result therefore is that if the terms of the Explanation are satisfied such sales are by a fiction deemed to be inside the State of delivery-cum-consumption and therefore outside all other States. In such cases therefore only the State inside which the sale is deemed to take place by virtue of the Explanation is exempt from the ban imposed by Article 286 (1) (a); All other States would be subject to that ban in respect of such sales7. The legal position therefore is that the Validation Act merely lifted the ban under Article 286 (2) of the Constitution on the States power to legislate but the ban imposed by Article 286 (1) (a) of the Constitution was still effective and could not be removed by legislation of Parliament.In other words, even if the ban under Article 286 (2) is removed by the Validation Act, no State can tax an inter-State sale or purchase which takes place outside its territorial limits. What is an "outside sale" is defined by the Constitution as Explanation to Article 286 (1) which states what should be deemed to be an inside sale". It is well settled that by Article 286 (1) (as it stood before the Sixth Amendment) sales as a direct result of which goods were delivered in a State for consumption in such State i. e., the sales falling within the Explanation to Article 286 (1) were fictionally to be regarded as inside that State for the purpose of Cl. (1) (a) and so within the taxing power of the State in which such delivery took place and being outside all other States exempt from sales-tax by those other States. As we have already said, the Validation Act has lifted the ban under Article 286 (2) alone but did not remove the ban under Article 286 (1) which continued to apply without being affected by the Validation Act. Therefore, even if a sale fell within the Explanation under S. 2 (h) of the Madras General Sales-tax Act, 1939 it was beyond the competence of the Madras State to tax if the assessee had delivered the goods outside the State for consumption therein. It follows therefore in the present case that the goods sold and delivered outside the State during the period from April, 1955 to September, 1955 were not liable to tax under the Madras General Sales-tax Act, 1939 and the taxing authorities had no jurisdiction to include Rs. 3,66,213-l2-0 in the turnover of the respondentIn our opinion there is considerable force in the argument put forward on behalf of the appellant. But we do not wish to express any concluded opinion on this point in the present case. It appears that the appellant did not raise any objection before the High Court when the affidavits were taken into evidence. Having preferred no objection before the High Court it is not now open to the appellant to say that the High Court acted illegally in taking those affidavits in evidence. It was submitted for the respondent that the transactions themselves took place in 1955, nearly 12 years back and ordinarily accounts of dealings would not be retained beyond five years. Counsel for the respondent referred in this connection to a rule framed under the Madras General Sales-tax Act. In these circumstances it was hardly worth-while for the High Court to remand the case for a fresh investigation. We therefore reject the argument of the appellant on this aspect of the caseThis question has been the subject-matter of consideration in Civil Appeal No. 495 of 1966, and for the reasons given in that case, we hold that the Madras State had no authority to levy sales-tax on such transactions of sale and the High Court was right in holding that the constitutional bar under Article 286 (1) (a) was not lifted by the Validation ActIt, however, appears that the appellant did not object to the production of the affidavit in the High Court. It must be taken that the objection was waived and it is not now open to the appellant to argue that the High Court had no power to take the affidavit into evidence. We accordingly reject the argument of the appellant on this pointThe High Court has, however, taken the view that the transactions took place in 1955-56 and ordinarily accounts of dealings would not be retained by the assessee beyond five years. The High Court has observed that apart from this the transactions were very large in number, about 4,000 and odd and most of them were for a comparatively small value. Some of the invoices referred in the assessment order show that they were for small amounts in regard to articles like paint, aluminium tar and other articles. In these circumstances the High Court came to the conclusion that the goods were delivered to places outside the Madras State for the purpose of consumption in the delivery States.The High Court added that it was hardly worthwhile in these circumstances to direct a remand of the case to the Appellate Tribunal for a fresh enquiry. It is manifest that the finding of the High Court on this point is a finding on a question of fact and as there is proper material to support the finding of the High Court it is not possible to accept the contention of the appellant that the finding is in any way defective in law. We accordingly reject the argument of the appellant on this point.