Case: State Of Madhya Pradesh &amp; Ors Vs. Orient Paper Mills Ltd

1. The State of Madhya Pradesh, blessed with abundant forest wealth, whose exploitation, for reasons best known to that Government, was left in part to the private sector, viz., the respondent, Orient Paper Mills, which is the appellant in this appeal by certificate.transaction itself was dressed up as a lease deed executed by the then State of Vindhya Pradesh on August 4, 1956, in favour of Orient Paper Mills, the respondent herein. At that time no sales tax could be levied under the law from the forest department of the appellant-State or the respondent-mills. However, on April 1, 1959, the M.P. General Sales Tax Act, 1958 (hereinafter referred to acronymically as M.G.S.T. Act), came into force. On the footing that the forest department was a dealer it got itself registered as such, under the sales tax law, on November 3, 1962. The respondent, of course, is a registered dealer under the same law. Subsequently, the Chief Conservator of Forests, representing the appellant, demanded of the respondent that it pay sales tax on the timber extracted under the lease deed, whereupon the claim was repudiated by the respondent. In consequence, the appellant proceeded to levy the sum representing the sales tax on the value of the timer cut and removed as per the terms of the contract, resorting to revenue recovery proceedings authorised by section 82 of the Indian Forest Act. Thereupon the respondent moved the High Court for the issuance of a writ under article 226 of the Constitution of India against the State to forbear from collecting sales tax illegally.

Reasoning:
From no dealer, no sales tax to no sale, no sales tax is the shift in the epicentre of the argument caused by an amendment to the sales tax statute legislated after and on account of the very judgment under appeal. Suffice it to say for the present, no sale, no sales tax is a legal truism.It may be mentioned right here that the respondent before us is not directly liable to pay sales tax, even assuming that the lease deed involves sale of goods. The forest department of the Government is admittedly a registered dealer for the relevant period, and it is claimed by the appellant-State that it was liable qua dealer to pay tax on sales of timber, and by virtue of section 64A of the Sale of Goods Act such sums, which became leviable only after the agreement was entered into in 1956, could be recovered from the purchaser-respondent. It is virtually admitted in this appeal, as stated earlier, that both parties are registered dealers under the relevant Sales Tax Act. Nor is it in dispute that if the appellant-forest department were liable to pay sales tax for the sales of timber which were alleged to have taken place, the respondent, in turn, would be liable to make good that sum in view of the plain provision in section 64A of the Sale of Goods Act. But to attract that provision there has to be sale of goods.3. The time is set true for stating the decisive statutory changes which occurred after the High Court ruled against the State, calculated to undo the disability discovered by that pronouncement. This development deserves attention as the sole point on which the State lost in the High Court, viz., that the forest department is not doing business, ceases to have relevance today on account of the amendment to the Madhya Pradesh General Sales Tax Act by the M.P.G.S.T. (Amendment and Validation) Act 13 of 1971. The definition of dealer and other related provisions were touched up and redefined in such manner that the finding on point No. (3) formulated by the High Court was effectively nullified. Indeed, the legislation is a sequel to the decision and has squarely undone the impediment in the way of the State collecting sales tax from the respondent. So long as that law holds good the States claim cannot be bowled out. Of course, Shri B. Sen, for the respondent, desired to challenge the vires of the amending Act, but the Presidential Proclamation during the Emergency, suspending the operation of article 14, handcuffs the respondent from seeking to strike down this legislation. When the Presidential Proclamation sterilising article 14 lapses, then it may be time enough to assail this law. So far as this appeal is concerned, article 14 is under eclipse and the ground of challenge unavailable. The amendatory provisions must therefore be held impregnable, on this score, and we proceed on that footing. Its post-Emergency validity will be decided, if attacked, at that time, since we leave that aspect untouched. To abbreviate the discussion, thanks to Act 13 of 1971, the forest department of the State shall be deemed to be dealer. If it is a dealer, the levy of sales tax from it is legal and the controversy on this score is silenced.Point No. (2) hinges on the result of point No. (1) and deserves no separate discussion.Section 64A of the Sale of Goods Act enables the seller, under certain circumstances, to recover, as sale price, any sales tax which the vendor has had to pay. So, if in the present case, the forest department of the State is liable to pay sales tax on the bamboo and salai wood cut and removed by the respondent, the claim to recover it from the buyer is good under the said section 64A.No doubt, the deed styles itself a lease.Sales tax is payable by a dealer. The forest department, by force of the statutory amendment, is admittedly a dealer. Such tax is computed on the turnover as defined in section 2(t) of the M.G.S.T. Act,true import of the document may be gathered from its terms, not from rulings on other documents. There is a serious limitation on the service of case-law in this area. It depends firstly on the actual issue in each case and the angles of vision adopted and, secondly, on the clauses, purposes and surrounding circumstances of each transaction.Royalty has a slight feudal flavour with a tell-tale demise relish, if we may say so, while price is a mercantile concept smacking of commercial relations.By the deed, the forest lands of the lessor are hereby demised. There are frequent references to the leased area. The period of the lease is stated to be a long 20 years, later substituted by 30 years. There is also reference to discharge of lease, royalties, compensation and other monies, suggestive of a demise rather than of a sale.There is also provision for renewal of the lease deed which savours, again, of a transaction of real property since renewals cannot obtain for sales.6. The face value of these features tends to fix the transaction as a lease but, lift the veil and feel the reality behindOf course, if in essence there is a sale of goods covered by the deed, we have to locate the taxing event which occurs when the title to the goods is transferred. The description of the document as a lease deed, the reference to royalty, the right to construction of buildings, etc., cannot hamper a contrary conclusion if there are luminous characteristics of a sale of goods, in what is but a lease deed in name.We are considerably impressed with this analysis. The upshot of the whole transactions is that, for a price fixed, bamboos and salai wood are permitted to be removed from the forest of the appellant by the respondent. For the exercise of the right under this contract, certain necessary licences are conceded. It is made perfectly plain that the possession of the land quo land is not given, and there is a foolproof provision that the rights of the lessees shall extend only to bamboos and salai woods within the leased area and nothing herein shall in any way be deemed to authorise the lessees to interfere with the working of the forest area ..... of other contractors of the said forest lands. Can there be a lease without exclusive possession of the lands ? Can there be a lease to A of lands when the only right is to cut certain species of timber above a certain height and according to stipulated conditions ? Can there be a lease of lands where similar right to cut timber from the same land co-exist in other contractors ? There are more circumstances than these; but we need not be exhaustive, especially when we agree with the conclusion reached by the High Court.We are satisfied that despite its description, the deed confers in truth and substance a right to cut and carry timber of specified species. Till the trees are cut, they remain the property of the owner, namely, the appellant. Once the trees are severed, the property passes. Royalty is a feudalistic euphemism for the price of the timber. We may also observe that the question before us is not so much as to what nomenclature would aptly describe the deed but as to whether the deed results in sale of trees they are cut. The answer to that question, as would appear from the above, has to be in the affirmative.7. Shri Sen relied heavily upon Raja Bahadur Kamakshya Narain Singh [[1943] 11 I.T.R. 513 (P.C.)]. That was a case under the income-tax law. The assessee there received large payments by way of royalty under various mining leases. The leases purported to be for 999 years and related to the coal-mining rights set out in the schedule to the leases. The lessees were to pay a sum by way of salami or premium and an annual sum as royalty computed at a certain rate per ton on the amount of coal raised and coke manufactured. It was contended on behalf of the assessee that the sums received as salami and royalty did not constitute income but were capital receipts, representing the price of the minerals removed. There was also a provision for minimum royalty which was pressed into service by the party. The Judicial Committee held that the royalty payable under the lease was not the price of the actual coal extracted but represented compensation which the lessees paid to the lessor for that species of occupation which the contract allowed and it was therefore income from other source within the meaning of the relevant Income-tax Act. We must point that the legal setting in which a question is considered colours the ratio of the case. The Judicial Committee was considering an issue arising under the Income-tax Act and, interpreting the clauses of a deed with particular terms, to ascertain whether the payments made thereunder fell within the meaning of income understood in its broadest connotation in England and in India. Construing, as we do, a special statute and a differently worded deed and the signification of the words used therein, we are unable to draw any legitimate instructional inferences from a decision contextually different, concerned with a different branch of law; and dealing with different issues although with seeming resemblance in superficial respects.Another decision which, perhaps, has some helpful reasoning, is by this Court in Badri Prasad [[1969] 2 S.C.R. 380]. We need not discuss the details of that case expect to point out that it has been recognised, in that ruling, that trees which are to be severed before sale or under the contract of sale are goods for the purposes of the Sale of Goods Act. On the facts of that case, property in the cut timber could pass to the plaintiff under the contract at the earliest when the trees were felled but before that happened the trees had vested in the State under an agrarian reform measure. The crutches of case-law are not always necessary in court8. While direct light on the legal situation present before us is not available from Badri Prasad [[1969] 2 S.C.R. 380] or Kamakshya Narain Singh [[1943] 11 I.T.R. 513 (P.C.)], there is not the slightest doubt that going by the definition of sale of goods under section 2(7) of the Sale of Goods Act and of section 2(g) of the M.G.S.T. Act, standing timber is movable property if under the contract of sale they are to be severed. But the severance must take place when the timber still vests in the contracting party.clear that there is sale of bamboo and salai wood under the contract and, in the contemplation of the parties they are to be cut and severed, pursuant to the contract itself. It follows that the finding of the High Court on this point is correct.10. The appeal deserves to be allowed on account of the statutory amendment. The Madhya Pradesh Legislature had taken great care and responded with prompt attention to deal with a situation where considerable revenue would be lost to it on account of inadequate expression of its intendment in the M.G.S.T. Act. A diligent and considered amendment has fulfilled the legislative purpose. Had the State lost the appeal before us on another point, that is, as to whether royalty was price for sale of goods, the whole amendatory effort would have been an exercise in futility or a legislative brutum fulmen. In view of our finding that there is a sale of goods under the contract, the State is entitled toWe regard this a reasonable request and, indeed, Shri Shroff, for the State has very rightly agreed with this prayer of the respondent. For one thing, the amending Bill whereby the liability was being de novo fastened was enacted into law after the judgment of the High Court. Read with section 82 of the Indian Forest Act, the amount was being recovered as if it were land revenue. This process deprived the respondent of his right to challenge the quantification of the tax. It is fair - and the State agrees to be fair - that the respondent should be enabled to prove his case that the sum claimed was much higher than could be legitimately recovered.Thus the arithmetics of the case had also to be gone into before the actual sum due from the forest department to the sales tax department was fixed. More could not be exacted from the respondentShri Shroff took up a point that when the forest department made a demand on the respondent and required him to furnish a declaration necessary to reduce the rate of tax, the latter ignored the request. This, according to him, had an impact on the eventual liability. We do not propose to investigate this aspect at the present stage but leave it to be raised by the State before the High Court.