Case: Tirumala Venkateswara Timber Andbamboo Firm Vs. Commercial Tax Officer, Rajahmundry

1. The appellant is a partnership firm carrying on business in bamboos, timber and firewood at Gokavaram in the State of Andhra Pradesh. The firm had been registered as a dealer under the Andhra Pradesh General Sales Tax Act (No. VI of 1957), hereinafter referred to as the Act. For the assessment year 1962-63, the appellant submitted a return showing a gross turnover of Rs 13,89,130-70 P. and claimed exemption on a turnover of Rupees 13,68,174.39 P which according to the appellant represented the amount of sales effected by its commission agents and sales of firewood. By a notice dated November 28, 1963, the Commercial Tax Officer, Rajahmundry called upon the appellant to show cause as to why it should not be assessed for the year 1962-63 on a turnover of Rupees 13,89,130.70 P. at 2 per cent. Eleven items were comprised in the notice. Item No. 1, relating to a turnover of Rs. 96,527.10 P. was under the firewood account. It was alleged by the appellant that it paid the single point tax at 2 per cent to the Forest Department on the amounts for which the forest goods were taken in auction. As regards items 2 to 11, the appellant claimed exemption on the ground that its agents, Messrs. Kusuma Arjayya and Batlanki Veera Venkayya, Rajahmundry, paid the tax. The case of the appellant was that it sent goods for sale to its commission agents and under the contract of agency the common agents were empowered to pay sales-tax and had paid the same directly to the Sales Tax Department. In accordance with the usual commercial practice the commission agents collected Dharmam on the sales conducted by them and appropriated those collections for charitable purposes. The commission agents furnished accounts to the appellant but in these accounts the amounts co1lected towards sales-tax and Dharmam were not specifically shown as. It was understood between the parties that the amounts collected towards sales tax would be remitted to the Sales Tax Department and the amounts collected towards Dharmam would be credited to the charity account of the commission agents and suitably utilised by them. Aggrieved by the assessment notice of the respondent disallowing its claim for exemption the appellant-firm filed a writ petition No. 1404 of 1963 dated December 7, 1963 before the High Court of Andhra Pradesh under Art. 226 of the Constitution praying for the grant of a writ in the nature of certiorari calling for the records relating to sales-tax assessments of the appellant for the year 1962-63 and quashing the notice dated November 28, 1963 issued by the respondent. By its judgment dated April 16, 1964 the High Court dismissed the writ petition. This appeal is brought by a certificate granted by the High Court.

Reasoning: 3. In our opinion the real object of the Explanation is to prevent the misuse by the assessee of the relationship of principal and agent for the purpose of evading tax. The first situation contemplated by the legislature is that covered by Cl. 2 (i) of Explanation III where the agent has sold the goods at one rate and passed on the sale proceeds to its principal at another rate. The second situation is where the agent has purchased the goods at one rate and has passed them on to the principal at another rate. The third situation is where the agent has not accounted to his principal for the entire collections or deductions made by him in the sales or purchases effected by him on behalf of his principal, and the fourth is where it appears that the agent has acted for a fictitious or non existentour opinion, there is no warrant for this argument. The real effect of the third Explanation is to impose the tax only when there was a transfer of title to the goods and not where there is a mere contract of agency. The Explanation says in effect that where there is in reality a transfer of property by the principal to the agent and by the agent in his turn to the buyer, there are two transactions of sale. In our opinion, the phrase "when the goods are transferred" in cls. (1) and (2) of Explanation III on a proper construction means "when title to the goods is transferred" and so construed it is impossible to say that the Explanation enlarges the scope of the mainis a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement.In other words, it is necessary for constituting a sale that there should be an agreement between the parties for the purpose of transferring title in the goods, that the agreement must be supported by money consideration and that as a result of the transaction the title to the property must actually pass in the goods.As we have already pointed out, the third Explanation to S. 2 (1) (n) of the Act must be interpreted to mean that where there is in reality a transfer of property in the goods by the principal to the agent and by the agent in his turn to the buyer, there are two transactions of sale. It is therefore impossible to accept the contention put forward on behalf of the appellant that the Explanation has converted what, in fact, is not a sale into a sale for the purpose of assessment toa matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principa1 who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds. The true relationship of the parties in each case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the legalquestion is not one which can properly be determined in an application for a writ under Art. 226 of theour opinion, there is no substance in this argument as the classification is based upon an intelligible differentia and it has a rational relationship with the object sought to be achieved by the statute counsel for the appellant is therefore unable to make good his submission on this aspect of the case.