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Commissioner of Sales Tax Vs. Mafatlal Fine Spinning and Weaving Company Limited - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtMumbai High Court
Decided On
Case NumberSales Tax Reference No. 45 of 1978
Judge
Reported in[1981]48STC316(Bom)
ActsBombay Sales Tax Act, 1959 - Sections 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 22, 23, 24, 25, 36(1), 41, 41(1), 41(2), 41(3), 47, 48(1), 48(2), 51 and 61(1)
AppellantCommissioner of Sales Tax
RespondentMafatlal Fine Spinning and Weaving Company Limited
Excerpt:
sales tax - penal provision - section 41 (1) of bombay sales tax act, 1959 - section 14 does not apply when sale transactions are exempted by state government by notifications issued under section 41 (1) - section 41 (2) is not charging provision even after amendment - it is more in nature of penal provision - it provides remedy to state government for recovery of tax which it could not collect on account of wrongful act on part of seller or purchaser. - - the tribunal held that as it was not possible to quantify precisely the amount of tax which would become payable by reason of the provisions of section 41(2), the section was unworkable and therefore unenforceable. he is only being asked to make good what the exchequer has lost by reason of his wrongful act. it is only making good.....madon, j.1. at the instance of the commissioner of sales tax the maharashtra sales tax tribunal has stated this case under section 61(1) of the bombay sales tax act, 1959 (hereinafter for the sake of brevity referred to as 'the act'), and has referred the following question of law to this court for its determination :'whether, on a true and proper interpretation of section 41(2) read with the notification issued under section 41(1) of the bombay sales tax act, 1959, the tribunal was correct in law in coming to the conclusion that a precise quantification of the tax is not possible thereunder and, therefore, that provision was unenforceable ?'2. in order to appreciate the rival contentions it will be convenient to set out first the relevant statutory provisions and then the facts which.....
Judgment:

Madon, J.

1. At the instance of the Commissioner of Sales Tax the Maharashtra Sales Tax Tribunal has stated this case under section 61(1) of the Bombay Sales Tax Act, 1959 (hereinafter for the sake of brevity referred to as 'the Act'), and has referred the following question of law to this Court for its determination :

'Whether, on a true and proper interpretation of section 41(2) read with the notification issued under section 41(1) of the Bombay Sales Tax Act, 1959, the Tribunal was correct in law in coming to the conclusion that a precise quantification of the tax is not possible thereunder and, therefore, that provision was unenforceable ?'

2. In order to appreciate the rival contentions it will be convenient to set out first the relevant statutory provisions and then the facts which have given rise to this reference. Section 41 of the Act provides as follows :

'41. Exemption. - (1) Subject to such conditions as it may impose, the State Government may, if it is necessary so to do in the public interest, by notification in the official Gazette, exempt any specified class of sales or purchases from payment of the whole or any part of any tax payable under the provisions of this Act and such exemption shall take effect from the date of the publication of the notification in the official Gazette or such other date as may be mentioned therein.

(2) Where any specified class of sales or purchases is exempt from the payment of tax under sub-section (1) and if there be a breach of any of the conditions subject to which such exemption was granted, the seller or purchaser responsible for such breach shall be liable to pay tax on such sales or purchases as if no such exemption had been granted - notwithstanding that he may not be liable to pay tax under section 3.

(3) If the Commissioner has reason to believe that any person is liable to pay tax under sub-section (2), the Commissioner shall, after giving him a reasonable opportunity of being heard, assess the amount of tax so due.'

3. In pursuance of the power conferred by sub-section (1) of section 41 the State of Maharashtra has issued Notification No. STA. 1059-(iii)-G-1 in the Finance Department dated 28th December, 1959, containing several entries. Some of the entries in this notification have been amended from time to time, and further entries have been inserted in the said notification. The entry with which we are concerned in the present reference is entry 39 in the said notification. The said entry 39, as it stood at the relevant time, provided as follows :

---------------------------------------------------------------------- 'Serial Classes of sales or Exemption Conditions. No. purchases. whether of whole or part of tax. ---------------------------------------------------------------------- 1 2 3 4 ---------------------------------------------------------------------- (39) Sales of (1) machinery and Whole of (1) If the its component parts and general manufacturer accessories and (2) dyes and sales tax furnishes to chemicals, by a registered and retail the selling dealer to any other registered sales tax. dealer a dealer who manufactures any of declaration in the goods specified below and form T appended is so certified for the hereto purpose by the Commissioner :- declaring inter alia (a) Cotton fabrics as defined that the in the First Schedule to the goods are Central Excises and Salt Act, required for 1944. use by him in the manufacture (b) Handloom fabrics of all of varieties (excluding pile any of the carpets, braids, borders, laces goods and trimmings) to be sold at a specified in items price not exceeding six rupees (a) to (g) in per metre. column 2, for sale. (c) Rayon or artificial silk (2) If the fabrics as defined in the First manufacturer Schedule to the Central Excises fails to use Salt Act, 1944. the goods in accordance (d) Silk fabrics as defined in with the the First Schedule to the Central terms of the Excises and Salt Act, 1944. declaration furnished by (e) Woollen fabrics as defined in him or contravenes the First Schedule to the Central any Excises and Salt Act, 1944. provisions of the Act or (f) Sugar as defined in the First the Rules made Schedule to the Central Excises thereunder, and Salt Act, 1944. the certificate issued by (g) Tobacco as defined in the the Commissioner First Schedule to the Central shall be liable Excises and Salt Act, 1944. to be cancelled.'

4. During the year 1968 the respondents were a textile mill manufacturing cotton fabrics. They were at all material times and still are registered as a dealer under the Act and have been certified by the Commissioner of Sales Tax as manufacturers of cotton fabrics for the purposes of the said entry 39. During the period 1st January, 1968, to 31st December, 1968, the respondents purchased dyes and chemicals against declarations in form T given by them to their vendors. Out of the dyes and chemicals so purchased the respondents resold dyes and chemicals of the aggregate value of Rs. 4,33,317 instead of using them in the manufacture of cotton textiles for sale. In their returns for the year 1968 the respondents showed these sales as being casual sales and claimed exemption from payment of any tax thereon. By his assessment order the Sales Tax Officer rejected the respondents' contention that these were casual sales, and levied general Sales tax at 3 per cent on the sale price received by them in respect of these sales. The Sales Tax Officer also held that in reselling this quantity of dyes and chemicals the respondents had committed a breach of the condition subject to which the exemption from tax had been granted by the State Government on the transactions of sale by the respondents' vendors to the respondents and that by reason of such breach the tax which thus came to be exempted, namely, 3 per cent general sales tax, should be recovered from the respondents, and he thereupon levied upon them 3 per cent tax under sub-section (2) of the said section 41. Before the Sales Tax Officer the respondents had contended that they had not contravened the declarations given by them as the quantity of dyes and chemicals which they had resold was surplus and unserviceable. This contention was negatived by the Sales Tax Officer. The respondents went in appeal to the Assistant Commissioner of Sales Tax. The Assistant Commissioner upheld the respondents' contention that the sales of dyes and chemicals in question were casual sales made by the respondents, and he accordingly held that these sales were not liable to tax. So far as the levy of 3 per cent tax upon the respondents in respect of purchases of the quantity of dyes and chemicals so resold was concerned, the Assistant Commissioner rejected the respondents' contention that they had not committed any contravention, observing that the respondents' argument in that behalf would have force if the question of levy of any penalty for the contravention of the declarations given by them arose. It was also contended before the Assistant Commissioner that no tax could be imposed upon the respondents because sub-section (2) of section 41 of the Act did not prescribe any rate of tax. This contention was also negatived by the Assistant Commissioner. The respondents then went in second appeal to the Tribunal. This appeal was heard by the Tribunal along with three other appeals. The Tribunal held that section 41 was a charging section. It further held that it was not possible to quantify or determine the amount of tax which would have to be paid by a seller or purchaser who commits a breach of the condition upon which an exemption was granted by the State Government under section 41(1). To illustrate this, the Tribunal referred to some of the entries in the said notification. The Tribunal held that as it was not possible to quantify precisely the amount of tax which would become payable by reason of the provisions of section 41(2), the section was unworkable and therefore unenforceable. The Tribunal accordingly allowed the second appeal filed by the respondents as also by the three other appellants whose appeals were heard along with them. There were other contentions raised before the Tribunal which, in view of its above finding, the Tribunal considered it unnecessary to decide. It is against this judgment and order of the Tribunal that the present reference has been made at the instance of the Commissioner of Sales Tax.

5. At the hearing of this reference Mr. Jetly, the learned counsel for the department, submitted that the Tribunal's basic approach to section 41 of the Act was wrong in law inasmuch as the said section was not a charging section but merely provided a remedy to the revenue to recover the amount of tax which it would have otherwise got had a seller or purchaser not claimed exemption from payment of tax by giving a declaration or certificate. Mr. Jetly further contended that it was in consonance with logic and justice that the amount of such tax should be recovered from the party in breach, in the present case the respondents, and not from their sellers who would be innocent parties and would thus be wrongly mulcted by reason of the breach committed by the respondents; because, had the respondents not given them the declarations in form T, these sellers would have recovered from the respondents the amount of tax which they would have had to pay to the Government, and which amount of tax they had not recovered from the respondents by reason of the declarations given by the respondents and, therefore, if they had to be taxed, the amount of tax would go out of their own pocket. Mr. Patel, the learned counsel for the respondents, on the other hand, submitted that under the scheme of the Act sales tax or general sales tax or retail sales tax was leviable upon the turnover of a seller and purchase tax upon the turnover of a purchaser, while what section 41(2) sought to do was to tax the respondents not in respect of their turnover of sales or purchases but in respect of the turnover of sales of their sellers. Mr. Patel further submitted that the liability to pay sales tax or general sales tax or retail sales tax would be that of the seller, and by section 41(2) what was purported to be done was to shift the seller's liability to the purchaser and that it did this even where a purchaser may not be liable to pay tax under section 3 of the Act by reason of his turnover not having exceeded in any year the limits prescribed by the said section 3. Mr. Patel further submitted by referring to various entries that the amount of tax which the respondents would be called upon to pay as having been wrongly exempted would purely depend upon the dealer from whom they had purchased the goods in question as also upon the dealer from whom the respondents' vendors had purchased the goods and that depending upon whether one or the other of these dealers was a registered dealer (that is, a dealer registered under section 22 of the Act) or an unregistered dealer, or held a licence or an authorization, the rate of tax would vary. In Mr. Patel's submission it would be impossible for any person to determine his liability under section 41(2), particularly in the case of goods such as dyes and chemicals which are of the type which would become blended or mixed up with stocks bought at different times.

6. We will now examine these rival contentions. Clause (32) of section 2 of the Act, which is the interpretation clause, defines 'tax' as meaning 'a sales tax, general sales tax, purchase tax or retail sales tax payable under this Act' (that is, the Act). Under clause (33) the expression 'taxable goods' means 'goods other than those on the sale or purchase of which no tax is payable under section 5'. A State's power to levy a tax on the sale or purchase of goods is derived from entry 54 in List II of the Seventh Schedule to the Constitution of India. By virtue of that entry, read with the provisions of article 246(3), it would be open to a State Legislature to tax every sale or purchase of goods taking place within that State. This, however, would be not only a harassment to people making casual sales or to petty dealers, but the expenditure on the assessment and collection of tax in respect of such transactions would far exceed any revenue which a State Government would get by taxing these transactions. Another factor which for the purposes of fiscal legislations a State Government would have to bear in mind would be that the economic incidence of a sales tax or a purchase tax would fall upon the ultimate consumer and that the goods which are manufactured or produced in the State would have to stand competition with goods manufactured or produced in other States. For these reasons, though the State Legislature would be entitled to tax every single transaction of sale or purchase taking place in the State, it has chosen not to do so. Thus, bearing various economic factors in mind, under the Act only those persons who carry on the business of buying or selling goods and who are thereby defined as dealers under the Act alone are liable to pay tax. Further, it is not every dealer who is liable to pay tax on his sales or purchases. It is only a dealer whose turnover in a particular year exceeds the limit prescribed by section 3 which is applicable to him who becomes liable to pay tax as also becomes liable to get himself registered as a dealer. Once a dealer is registered under the Act, his liability to pay tax continues until his registration certificate is cancelled, irrespective of whether his turnover during the periods when his registration certificate continues in force exceeds or does not exceed the prescribed limit. This chargeability to tax is provided for by sections 3 and 6 of the Act. Under section 3 every dealer whose turnover either of all sales or all purchases made during a relevant period has exceeded or exceeds the relevant limit specified in that section becomes liable to pay tax under the Act on his turnover of sales and on his turnover of purchases until his liability ceases upon his registration certificate being cancelled. Under section 6 every dealer who thus becomes liable to pay tax under the Act is liable to pay tax or taxes leviable in accordance with the provisions of Chapter II which bears the heading 'Incidence and levy of tax' and consists of sections 3 to 19. Section 7 provides for a single point levy of sales tax or general sales tax on goods set out in Schedule B to the Act, which are known as declared goods. Section 8 provides for the levy of sales tax on goods set out in Schedule C to the Act. Generally speaking, sales tax is levied at the first point. Section 9 provides for the levy of general sales tax on goods mentioned in Schedule D to the Act. General sales tax is usually levied at the last point. Section 10 provides for the levy of a sales tax, general sales tax as also a retail sales tax on goods specified in Schedule E to the Act, and in some of the cases two or all three out of these three taxes are leviable at the same point. Section 13 provides for payment of purchase tax when purchases are made from an unregistered dealer by a manufacturer or by a person who transfers them to his outside-State branch. Now, in order to prevent levy of tax under the Act at each point where there is a chain of sales of the same goods from person to person, a system for issuing licences, authorizations, recognitions or permits has been devised in the Act and conditions have been prescribed subject to which a registered dealer would become entitled to obtain these documents. The advantage resulting from registration is that for the purposes of quantification and collection of tax the tax under the Act is to be paid on the taxable turnover of sales or purchases and not as and when a taxable sale is made, though the liability to pay the tax would arise as and when a taxable sale or a taxable purchase takes place; a sale or purchase being only two sides of the same transaction, for from the point of view of a seller the transaction would be a sale, while from the point of view of a purchaser the transaction would be a purchase. Sections 7 to 10 also provide for the categories of turnover which are to be deducted from the turnover of a dealer for arriving at his taxable turnover for the purpose of levy of sales tax or general sales tax or retail sales tax. Exemption from payment of tax in respect of certain categories of sales is available when a selling dealer, in the circumstances specified in the relevant section, sells goods to a recognised dealer, that is, one who holds a recognition (namely, a recognition granted under section 25 of the Act), or to an authorized dealer, that is, one who holds an authorization (namely, an authorization granted under section 24 of the Act), or to a licensed dealer (namely, a registered dealer holding a licence granted under section 23 of the Act), or to a commission agent who holds a permit on such purchaser furnishing to the seller a declaration or a certificate in a particular form specifying the particular purpose for which the goods are being purchased. When such certificates or declarations are given, the sale is not liable to be taxed, which would otherwise have been liable to tax, had the certificate or declaration not been given. The Act also authorizes sellers who are registered dealers and are liable to pay the tax to recoup from their purchasers the amount of tax they would have to pay to the Government on their transactions of sale. Thus, when a certificate or declaration is given and the sale becomes exempt thereby from payment of tax, the seller does not recover any amount by way of tax from his purchaser, because he is, by reason of the furnishing of the certificate or declaration, not liable to pay any tax to the Government. It is obvious that when a purchaser furnishes a certificate or a declaration stating that he requires the goods for a particular purpose or that he will use the goods in a particular manner, the seller, after the transaction of sale is completed, can have no control over what the buyer does with the goods and cannot ensure that he will comply with the declaration which he has made. If, therefore, when a buyer contravenes a declaration made by him in any of the certificates issued by him, under section 14 he becomes liable to pay by way of purchase tax the amount of tax which his vendor would have had to pay on his sale, depending upon whether such tax would be sales tax or general sales tax or retail sales tax, or in the case of goods falling under Schedule E to the Act a combination of two or more of these taxes. It is, however, pertinent to note that section 14 applies only to a breach of a certificate given by a dealer under section 11 or 12 of the Act. Now, these certificates only have relevance and applicability to the particular categories of transactions mentioned in sections 7 to 10 of the Act, by reason of which certificates these transactions became exempt from payment of tax. Section 14 does not refer to a breach of any of the conditions, other than those under sections 11 and 12, which might entitle a dealer to an exemption. In other words, section 14 does not apply when transactions of sale are exempted by the State Government by notifications issued under sub-section (1) of section 41 subject to certain conditions and when a breach of these conditions takes place. As originally enacted, section 41 consisted only of the present sub-section (1), without the concluding portion of it which deals with the date from which a notified exemption takes effect. Realising very soon that where exemptions are under section 41 subject to conditions such conditions can be contravened but there was no power to recover tax which would otherwise have been payable, section 41 was amended with effect from 15th July, 1962, by section 17 of the Bombay Sales Tax (Amendment) Act, 1962 (Mah. 21 of 1962), by renumbering the original section as sub-section (1) and by inserting therein the present sub-sections (2) and (3). The amending section 17 was clause 17 of Legislative Bill No. 14 of 1962, which when enacted became the Bombay Sales Tax (Amendment) Act, 1962. The Statement of Objects and Reasons to the said Bill expresses the objects and reasons for these amendments to section 41 as follows :

'It provides for levy of tax where a breach of the conditions subject to which an exemption under section 41 is granted, is committed.'

7. Though the Statement of Objects and Reasons appended to a legislative Bill cannot afford an aid to the construction of the statute in the sense that it cannot be used to determine the true meaning and effect of the substantive provisions of the statute, the Statement of Objects and Reasons can none the less be looked at for the limited purpose of understanding the background and antecedent state of affairs leading up to the legislation (see State of West Bengal v. Union of India) : [1964]1SCR371 . The Statement of Objects and Reasons can also be looked for ascertaining the conditions prevailing at the time which actuated the sponsor of the bill to introduce it and the extent and urgency of the evil which he sought to remedy (see State of West Bengal v. Subodh Gopal Bose) : [1954]1SCR587 .

8. From what is mentioned above, it will be clear that section 41 of the Act was amended in 1962 by the insertion therein of sub-sections (2) and (3) to supply the lacuna which had been left in the Act at the time when it was originally enacted and to provide for collection of tax when there was a breach of a condition subject to which an exemption under section 41 was granted.

9. The question which now falls for consideration, however, is whether by the above amendments to section 41 the said section has become a charging section. The answer to this question must depend upon the language of section 41 as also its setting in the Act. It will be convenient at this stage to analyse the provisions of section 41. Sub-section (1) gives to the State Government the power to exempt 'any specified class of sales or purchases from payment of the whole or any part of any tax payable under the provisions of this Act'. As mentioned earlier, the word 'tax' has been defined to mean 'sales tax, general sales tax, purchase tax or retail sales tax'. These are the taxes which are levied by sections 7 to 10 and 13 to 15 of the Act. Thus, the exemption which the State Government can give to a specified class of sales or purchases is from the payment of whole or part of the taxes which have been levied under Chapter II of the Act. When considering this class of exemptions it should be borne in mind that but for the notification issued by the State Government, the particular class of sales or purchases would have been exigible to tax under the relevant sections of Chapter II. Since the power of the State Government under section 41(1) is not just to exempt from payment of tax, in whole or in part, a specified class of sales or purchases but also to impose conditions subject to which such exemption would be available, sub-section (2) provides for a case where any such condition has been contravened. It provides that for breach of any of the conditions subject to which an exemption was granted 'the seller or purchaser responsible for such breach shall be liable to pay tax on such sales or purchases as if no such exemption had been granted-notwithstanding that he may not be liable to pay tax under section 3'. Thus, what this sub-section provides is that the person who is responsible for the breach would be liable to pay tax on the sale or purchase which came to be exempted by the declaration that the conditions imposed for obtaining exemption could be complied with. It should be here borne in mind that in the phrase which has been quoted above the word 'seller' does not go with the word 'sales' nor the word 'purchaser' with the word 'purchases'. Depending upon who has committed the breach - whether the seller or purchaser, the person committing the breach will become liable to pay tax on the particular transaction in respect of which the exemption has been granted, whether such transaction is a sale or a purchase. The question that arises is what is the tax which such person becomes liable to pay. The tax which such person becomes liable to pay is the tax on the particular sale or purchase in respect of which exemption was granted as if 'no such exemption had been granted'. In order, therefore, to determine what is the tax liability of such a person one has to ascertain the particular tax from the payment of which that particular sale or purchase was exempted, and that would be the tax which the person in breach would become liable to pay. By the express terms of the sub-section the liability to pay such tax is fastened upon the person committing the breach, irrespective of whether he is the seller or purchaser and irrespective of the fact whether ordinarily such tax would have been payable by the seller or purchaser. What the sub-section seeks to do is to ensure that the amount of tax which would have been payable by a seller in the case of sales tax, general sales tax or retail sales tax or the amount of tax which would have been payable by a purchaser, namely, purchase tax, would be payable by the person committing the breach. The concept of taxable turnover is wholly foreign to the scheme of section 41. As pointed out earlier, for the purposes of assessment and quantification of tax the sales and purchases of a particular class made during an assessment period are aggregated into a turnover, from which the turnover of certain specific types of sales or purchases specified in the relevant sections have to be excluded to arrive at the taxable turnover, but under, section 41(2) what is taxed is not the turnover of any particular dealer. What is taxed is an individual transaction. It is not as if there is a particular charge of tax levied upon the person committing the breach. He is only being asked to make good what the exchequer has lost by reason of his wrongful act. It is not the shifting of the tax liability of the person who would be liable to pay that tax under the relevant section of Chapter II. It is only making good the loss which the revenue has suffered. It is pertinent to note that his liability is to pay tax on such sales or purchases as if no exemption has been granted. This takes us immediately back to the definition of the word 'tax' in clause (32) of section 2 of the Act. Sub-section (2) of the said section 41 merely substitutes the person in breach for the party who would have otherwise paid the tax and who is the innocent party and who, from the justice of the case, cannot be made to suffer for the default of another. In support of his submission that section 41(2) of the Act was a charging section, Mr. Patel, the learned counsel for the respondents, relied upon the following observations of a Division Bench of this High Court in Daulatram Rameshwarlal v. B. K. Wadeyar [1957] 8 S.T.C. 617. That was a case under the old Bombay Sales Tax Act, 1953. Under clause (b) of section 8 of that Act sales of goods to a dealer who held an authorization and furnished to the selling dealer a certificate in the prescribed form declaring inter alia that the goods sold to him were intended for being despatched by him, or by a registered dealer to whom he sold the goods, to an address outside the State of Bombay were to be deducted from the turnover of the selling dealer in order to arrive at his taxable turnover for the purpose of levy of sales tax. Under clause (b) of section 10 of the said Act where such a certificate had been furnished and the purchasing dealer did not show to the satisfaction of the Collector of Sales Tax that the goods had been despatched by him, or by a person to whom he had sold the goods, to an address outside the State of Bombay within the period specified in such certificate, the purchase tax on the turnover of purchases of goods specified in column 1 of Schedule B of the said Act was to be levied. In the Daulatram Rameshwarlal's case ([1957] 8 S.T.C. 617. purchase tax under section 10 of the said Act was levied upon the purchasing dealer who had furnished a certificate under clause (b) of the said section 8 and had contravened the terms of that certificate. A defence taken was that the word 'person' in clause (b) of the said section 10 meant both a registered and an unregistered dealer and that though the assessee had sold the goods to an unregistered dealer, he had thereby not contravened the terms of the certificate. While referring to clause (b) of the said section 10, the Division Bench described it as a charging section and then proceeded to observe as follows :

'Now, it is true that as we are dealing with a taxing statute and section 10(b) is the charging section, it must be strictly construed and Mr. Bhatt's contention is that here again the expression used is the despatch of the goods by 'a person' and not by a registered dealer, and inasmuch as that condition has been satisfied, the appellants are not liable to purchase tax. In our opinion, we cannot ignore or overlook the preamble to section 10(b) and if we cannot ignore or overlook that preamble, then we must construe the expression 'a person' in the light of this preamble, and if we have to construe the expression 'a person' in the light of the certificate which the appellants were bound to furnish, then the proper canon of construction requires that the person in this context must be read to mean a registered dealer. The whole object of obtaining a certificate from the appellant is to see that the goods are despatched by them or by a registered dealer and if that is the object, it is difficult to accept the contention that although the representation made by the assessees has not been carried out, by reason of the use of the expression 'a person', the assessees are entitled to escape the purchase tax levied under section 10(b).'

10. We fail to see in what manner this decision supports the contention of the respondents. The question whether section 10 of the 1953 Act was a charging section or not was not before the court. Further, the language of section 10 was fundamentally different from the language which section 41(2) of the Act uses. What the said section 10 did was to make a particular transaction liable to payment of purchase tax when by an act on the part of the purchaser sales tax had not become payable. What the said section 41(2) does is to compel the person in default to make good the amount of tax which the State has lost by reason of his default. It is also pertinent to note that in construing clause (b) of the said section 10 the Division Bench laid emphasis upon the object underlying that section in order to repel the argument that the expression 'person' also included an unregistered dealer.

11. The next authority relied upon by Mr. Patel, the learned counsel for the respondents, was yet another decision of a Division Bench of this High Court, namely, Pokhardas Meghraj v. State of Bombay [1957] 8 S.T.C. 758. This again was a case under the 1953 Act. Certain provisions of rule 5(1)(i)(b) of the Bombay Sales Tax Rules, 1952, were earlier declared ultra vires by the Bombay High Court. Under that rule on the contravention of a particular certificate the purchase price of the goods payable by the purchasing dealer was to be included in the taxable turnover of that dealer. The judgment of the High Court invalidating the said rule was delivered before the insertion of a new validating section, namely, section 51, in the said Act. The court held that section 51 did not have the effect of validating the particular rule which had been declared void by the High Court. We again do not see the relevance which this authority has to the question which we have to decide. As mentioned earlier, the scheme and the phraseology of section 41(2) is wholly different from the scheme and phraseology of the statutory provisions with which these two decisions had to deal. In our opinion, section 41(2) of the Act is not a charging section. It is more in the nature of a penal section, and provides a remedy to the State Government for the recovery of tax which it, but for the wrongful act on the part of the seller or the purchaser, as the case may be, would have otherwise got.

12. Assuming for the sake of argument that section 41(2) of the Act is a charging section, we fail to see what difference it would make to the decision of the question before us. The argument advanced on behalf of the respondents was that a charging section should specify the rate of tax which it levies and that section 41(2) does not prescribe any such rate and accordingly the tax liability of a person in default cannot be ascertained. We are unable to accept this contention. Assuming section 41(2) is a charging section, the rate at which the person in default becomes liable to pay tax has been specified in section 41(2). It is the rate at which tax would have been paid by the person liable to pay it in the case of a transaction of sale or purchase but for the wrongful act of the person in default. That rate will undoubtedly have to be worked out by referring both to the goods which are the subject-matter of the particular transaction of sale or purchase and the entry in the schedule in which they fall and the nature of the particular transaction involved. Merely because the quantum of tax has to be worked out, it does not mean that the rate of tax has not been prescribed or it cannot be ascertained or determined. While considering this aspect of the case one must bear in mind the fundamental distinction between the Income-tax Act and a Sales Tax Act. The Income-tax Act is a tax on income. Its rates vary depending upon the quantum of income which become taxable. It is a tax levied on slab system. Sales tax is not a fiscal measure of this type. Under a sales tax statute each transaction is exigible to tax subject to exemptions and deductions prescribed. The rate of tax for each transaction is provided for in the schedules, and it is this rate which will become attracted. The Tribunal, however, has in a sweeping statement held that the rate of tax cannot be quantified or determined in respect of goods falling under any of the relevant schedules, namely, Schedules B, C, D and E, with respect to any breach of the conditions under section 41(2). The classes of sales or purchases which have been exempted from time to time under section 41(1) relate to goods which may fall under any one of these four schedules. The goods with which we are concerned in the present reference fall under the residuary entry, namely, entry 22, in Schedule E to the Act. Now, the tax under Schedules B, C and D is a single point levy, and no difficulty can arise in determining the amount of the tax which has been exempted by reason of a notification under section 41(1). Mr. Patel with his usual fairness has conceded this position, but in his submission the difficulty arises when goods fall under Schedule E. Mr. Patel pointed out to us various types of sales which can take place in which a declaration in form T can be given and where the rate of tax would vary depending upon who the selling dealer was and from whom he purchased the goods. The Tribunal has also referred to certain entries in different schedules as presenting a difficulty in working out the amount of tax. When a little common sense is applied and the matter looked at analytically, no such difficulty appears. The first instance which Mr. Patel gave was that of the very entry 39 in the said notification, namely, the entry with which we are concerned. According to Mr. Patel, (1) the sale may be by a registered dealer who sells goods which he has purchased from an importer, unregistered dealer or a manufacturer, or (2) by a registered dealer who also holds a licence and has purchased the goods from an importer, unregistered dealer or a manufacturer, or (3) by a registered dealer who is a licensed dealer and who has purchased the goods from a registered dealer against form 16, namely, who has purchased them for resale, or (4) by a registered dealer who also holds a licence but has purchased them from a registered dealer, or (5) by a registered dealer who has purchased goods from another registered dealer, or (6) by a registered dealer who holds only an authorization and has purchased goods from another registered dealer against form 14 for the purpose of reselling them in the course of export of goods out of the territory of India or in the course of inter-State trade or commerce and has sold them to the registered dealer giving a declaration in form T in contravention of the certificate in form 14, or (7) by a registered dealer who holds only a recognition and has purchased goods against form 15 for use in the manufacture of goods for sale but sells to the dealer giving a declaration in form T in contravention of his certificate in form 15. Mr. Patel has pointed out that in each of these cases the tax liability of the selling dealer varies, and has submitted that it is impossible for the person contravening a declaration in form T to work out what his own tax liability would be. Mr. Patel has further stated that it is impossible, without very elaborate investigation, to determine the nature of the purchases made by the selling dealer and the particular documents under the Sales Tax Act held by him. These arguments do not bear scrutiny when closely examined. It must be remembered that for entry 39 to be attracted the sale has to be by one registered dealer to another registered dealer who is a manufacturer of goods specified in the said entry. Under section 48(1) of the Act every dealer liable to pay tax under the Act is to keep a true account of the value of the goods purchased or sold by him. Further, section 48(2) confers power upon the Commissioner of Sales Tax when he considers that the accounts kept by a dealer are not sufficiently clear or intelligible to enable him to determine whether or not a dealer is liable to tax during any period, or are so kept as not to enable a proper scrutiny of the returns or the statements furnished to require such dealer to keep such accounts, including records of sales or purchases, in such form or manner as he in his opinion considers necessary for the purpose of proper assessment. Under section 47 if a registered dealer sells goods to another registered dealer, or a registered dealer whose turnover of sales has exceeded sixty thousand rupees in the previous year, sells in the current year any goods exceeding three rupees in value in any one transaction to any other person, he is bound to issue to the purchaser a bill or cash memorandum serially numbered, signed and dated by him or his servant, manager or agent, and showing therein such other particulars as may be prescribed by the Bombay Sales Tax Rules, 1959 (hereinafter for the sake of brevity referred to as 'the Rules'). The dealer issuing such bill or cash memorandum is to keep a counterfoil or duplicate thereof duly signed and dated, and has to preserve it for a period of not less than three years from the date of sale. The other particulars which have to be shown in such bill or cash memorandum are prescribed by rule 53 of the Rules. Under that rule a bill or cash memorandum has also to state the full name and style of the business of the dealer issuing it, the address of his place of business, the numbers of his certificate of registration and of his licence, authorization, recognition or permit (if any), and the goods sold and the sale price thereof. Further, where such bill or cash memorandum is issued in respect of a sale by a registered dealer to another registered dealer, the bill or cash memorandum has to contain a certificate certifying that the selling dealer's registration is in force on the date on which the sale of the goods specified in the bill or cash memorandum was made and that such transaction of sale had been effected by him in the regular course of his business. Further, where the sale price is Rs. 500 or more, the selling dealer has also to enter in the bill or cash memorandum the full name and style of business of the buyer, his address and the number of the certificate of registration held by him. Thus, the bill or cash memorandum issued by the selling dealer to a purchaser who issues a declaration in form T would give all relevant information as to whether the selling dealer held a licence or authorization or recognition or permit or not.

13. Bearing this in mind, we will now turn to the seven hypothetical instances mentioned by Mr. Patel, the learned counsel for the respondents, in the course of his arguments and see whether there is any difficulty in ascertaining the rate of tax which had become exempted by reason of the declaration in form T given by the purchasing dealer. In the first case where a registered dealer who does not hold any other document under the Act sells goods which he has purchased from an importer or an unregistered dealer or a manufacturer, he would be liable to pay on the sale price of these goods sales tax at the rate of 5 per cent and general sales tax at the rate of 3 per cent. When the sale is to a dealer who gives a declaration in form T, to which sale we will hereinafter for the sake of convenience refer to as 'an entry 39 sale', all that the registered dealer would be charged in respect of such sale would be 5 per cent sales tax. The bill or cash memorandum issued by the selling dealer would show that he has charged to the purchasing dealer only 5 per cent sales tax and that the selling dealer holds only registration certificate and does not hold any other document and, therefore, it would be apparent at a glance that the amount of tax which was exempted was 3 per cent general sales tax. The same would be the position in the second instance given by Mr. Patel, because there again the bill or cash memorandum would show that the selling dealer was a licensed dealer and that he had charged 5 per cent by way of sales tax and that, therefore, the tax exempted was 3 per cent general sales tax. In the third case where a registered dealer holds a licence and has purchased goods against form 16 for resale, if he made an ordinary sale he would only be liable to pay 3 per cent by way of general sales tax which normally he would recover from his purchaser. If it was an entry 39 sale, then the whole of general sales tax would be exempted, and the bill or cash memorandum would not show any amount as having been charged to the purchasing dealer, and it would thus become apparent that the amount of tax which was exempted was 3 per cent general sales tax. The same again would be the case in the fourth instance, namely, when a registered dealer who also holds a licence has resold the goods which had been purchased by him from a registered dealer but without giving a certificate in form 16. The fifth instance is that of a registered dealer who does not hold any document and who resells goods purchased by him from another registered dealer. If he makes an ordinary resale, he would be liable to pay 1/4 per cent retail sales tax. If he makes an entry 39 sale, no tax at all is payable by him. Now, here again there can be no difficulty in ascertaining the amount of tax which has been exempted, because had the selling dealer purchased goods from an unregistered dealer or from an importer of goods or from a manufacturer, he would have charged to the purchasing dealer 5 per cent sales tax. Since the bill or cash memorandum would not show any such charge as having been made against the purchasing dealer, it would be obvious to anyone familiar with the mechanism of the tax structure under the Act (and we are sure the department is familiar with it) that the tax which the purchasing dealer who has contravened the declaration in form T is liable to pay is 1/4 per cent retail sales tax. Mr. Patel, however, submitted that though in the cases of instances 1 to 5 it may be possible to determine the amount of tax payable, it would not be possible to do so with respect to instances 6 and 7, these being the instances where an authorized dealer who purchases goods from a registered dealer against form 14 makes an entry 39 sale in contravention of the certificate in form 14 and the instance of a dealer holding a recognition purchasing goods-against a certificate in form 15 making an entry 39 sale in contravention of that certificate. Admittedly, in these cases he would be liable to pay, if it were an ordinary sale, 3 per cent general sales tax and 1/4 per cent retail sales tax, but if he were to make an entry 39 sale, he would not have to pay any tax at all. Mr. Patel contended that where such a sale had taken place, the purchasing dealer would not know whether his liability, if he contravened his declaration in form T, would be only for 3 per cent general sales tax or for 3 per cent general sales tax plus 1/4 per cent retail sales tax. In our opinion, in such a case if it can be ascertained that in fact the goods, which are the subject-matter of an entry 39 sale, had been so sold in contravention of a certificate in form 14 or 15 given by the selling dealer, the dealer who contravenes the declaration in form T would be liable to pay both 3 per cent general sales tax and 1/4 per cent retail sales tax. Mr. Patel urged that there cannot be such anomalous result, because in such an event the purchasing dealer would be penalized for the default of his seller. There is a fallacy in this argument. The purchasing dealer is not being penalized for the default of his seller. He is being penalized for his own default in contravening the declaration in form T, and if instead of one person who contravenes his declaration, there happened to be two for the same transaction, the party ultimately responsible cannot complain that others besides himself also do not pay any regard or heed to declarations given by them. If, however, it cannot be detected that the goods which formed the subject-matter of an entry 39 sale were resold in contravention of any such certificate, then the ordinary incidence of 3 per cent general sales tax would be attracted to such a sale.

14. It was next submitted by Mr. Patel that it was difficult to ascertain the exact character of a selling dealer, namely, whether he is a registered dealer pure and simple, or whether he also in addition holds a licence or authorization or recognition or permit, in the case of certain types of goods where it is not possible to link the goods used in contravention of the declaration in form T with a particular purchase made by such dealer. Mr. Patel submitted that in the very case before us, where the subject-matter of the transactions was dyes and chemicals, it is not possible to make out which dyes and chemicals bought from a particular dealer were resold by the respondents and which part of that stock was used in the manufacture of cotton fabrics for sale. He said that where there is a blended stock, it becomes impossible to determine the liability of the purchasing dealer. We are not able to accept this argument. The inability to link a resale with a purchase made is not something which arises with respect to a resale made in contravention of a declaration in form T. This can happen in several types of cases, and these cases are to be dealt with on a common sense basis. It is to deal with such types of cases which arise under different circumstances that for certain types of cases the Tribunal has evolved a formula known as 'ratio formula' which has been approved by this Court in Commissioner of Sales Tax v. Berar Oil Industries [1975] 36 S.T.C. 473. Such a problem arising in the case of a violation of a condition under an entry 39 sale has to be approached from a business point of view. Where goods in stock are purchased for use in the manufacture of goods for sale, a businessman would normally use in the manufacture of goods that stock which he has first purchased. Thus, the stock which has first come in should be or would be taken to be the stock first used in the manufacture of goods. This is a principle which applies in all cases of blended stock. This is a rule of convenience, and in the case of running accounts it is known as the rule in Clayton's case (1816) 1 Mer. 572; 35 E.R. 767. The full title of that case is Devaynes v. Noble; Clayton's case (1816) 1 Mer. 572; 35 E.R. 767. In that case Sir William Grant, M. R., said : 'It is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account that is discharged, or reduced, by the first item on the credit side.'

15. Same should be the position with respect to a stock register. A manufacturer of the type of goods described in entry 39 would naturally have a stock register, and if the stock is of such a nature that one is not able to link the particular quantity resold by the manufacturer instead of being used by him in the manufacture of goods for sale, one must set-off the quantities withdrawn from the stock against the quantities brought into the stock chronologically in order time. This principle is also recognised by the sales tax legislation, though in another context. Rule 46 of the Rules prescribes certain conditions in respect of adjustment of drawback, set-off, etc., in certain circumstances. Sub-rule (2) of rule 46 provides as follows :

'(2) Where the claimant dealer is unable to identify the goods purchased with the goods resold, or with the goods used in the manufacture of goods sold or in the packing of goods manufactured and sold, it shall be presumed that the goods so purchased have been resold or used in the manufacture of goods for sale or in the packing thereof in the chronological order in which they were acquired whether before or after appointed day.'

16. Turning now to the various entries referred to by the Tribunal, we have together with the counsel worked out the various permutations and combinations which arise in these entries, and we find that in each of these entries it is quite possible to work out the tax liability. It is unnecessary to set out this working in detail. In fact, we find that the Tribunal has not analysed the different situations that can arise under each of these entries. Some of the entries, which have been referred to by the Tribunal as being incapable of enabling any precise quantification of tax, relate to goods which are covered by Schedules B, C and D to the Act in respect of which admittedly there is no difficulty in working out the quantification. Assuming the Tribunal felt in respect of any particular entry or entries that a precise quantification in respect thereof was not possible, it erred in holding therefrom that the whole of section 41(2) of the Act was unenforceable or unworkable. At the highest, it could have said that it was unenforceable or unworkable with respect to a particular entry or entries. We may also observe that in fact the Tribunal was not concerned with any entry in the notification other than entry 39, and should have confined itself to considering whether it was possible to work out the purchasing dealer's tax liability with respect to that entry alone.

17. It was lastly argued by Mr. Patel, the learned counsel for the respondents, that supposing a purchasing dealer's books of account or records did not furnish the requisite information, the taxing authorities would not be able to estimate that dealer's tax liability under section 41(2) of the Act. According to Mr. Patel, there was no power in the taxing authorities in assessing the tax liability arising by reason of the provisions of section 41(2) to make a best judgment assessment. The mode of determining the tax liability to which a dealer becomes liable by virtue of the provisions of section 41(2) is set out in section 41(3). Under sub-section (3) if the Commissioner of Sales Tax has reason to believe that any person is liable to pay tax under sub-section (2), the Commissioner is to assess the amount of tax so due, after giving to that person a reasonable opportunity of being heard. In Mr. Patel's submission, 'assess' cannot mean assess to the best of his judgment and it can, therefore, only be a regular assessment. This is an argument of the same type which was advanced before the Division Bench of this Court in the case of Daulatram Rameshwarlal v. B. K. Wadeyar [1957] 8 S.T.C. 617, already referred to earlier, with respect to the expression 'person' appearing in clause (b) of section 10 of the 1953 Act, which argument was rejected on the ground that to accept it would be to frustrate the very object underlying that statutory provision. The object underlying sub-sections (2) and (3) of section 41 is to make the person in default pay the amount of tax, which would not have been exempted but for the act in giving a certificate or declaration. That this is a default on his part and is treated as a default on his part is made clear also by the provisions of section 36(1) which enables the taxing authorities to impose a penalty in addition to the amount of tax due inter alia for contravention of a certificate given by a person under any notification issued under section 41(1). If such a dealer, after service of a notice upon him, does not co-operate by producing his books of account, the taxing authorities would certainly be able to assess his tax liability in the best way they can with the materials at their disposal - whether one calls such assessment assessment to the best of the taxing authorities' judgment or best judgment assessment or by any other nomenclature, and it would still be assessment. To construe otherwise would be to leave it to the sweet will and pleasure of a person committing a default to see whether he is taxed or not taxed. The very scheme of section 41 shows that it was intended to include in sub-section (3) all the powers of an assessing authority, including a power to make an assessment according to the best judgment of the taxing authority. In this connection, we may usefully refer to a decision of the Supreme Court in Commissioner of Sales Tax, Madhya Pradesh v. H. M. Esufali H. M. Abdulali : [1973]90ITR271(SC) . That was a case of reassessment under the Madhya Pradesh General Sales Tax Act, 1958. Section 19(1) of the said Act, which conferred the power to reassess and to bring to tax escaped turnover, did not contain a power to make a best judgment assessment. In that case the assessing authority had made a best judgment assessment, which was challenged on the above ground. Repelling the argument the Supreme Court observed :

'What is true of the assessment must also be true of reassessment because reassessment is nothing but a fresh assessment. When reassessment is made under section 19, the former assessment is completely reopened and in its place fresh assessment is made. While reassessing a dealer, the assessing authority does not merely assess him on the escaped turnover but it assesses him on his total estimated turnover. While making reassessment under section 19, if the assessing authority has no power to make best judgment assessment, all that the assessee need do to escape reassessment is to refuse to file a return or refuse to produce his account books. If the contention taken on behalf of the assessee is correct, the assessee can escape his liability to be reassessed by adopting an obstructive attitute. It is difficult to conceive that such could be the position in law.'

18. Before we answer the question, we must observe that as pointed out above the Tribunal in deciding the second appeal out of which the present reference arises has travelled far beyond the ambit of what it was required to do. The question which has been referred to us is also too wide and does not really arise out of the actual controversy between the parties. Accordingly, we reframe the question as follows :

'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the liability of a purchaser who contravenes the terms of a declaration in form T to entry 39 of Notification No. STA. 1059-(iii)-G-1 dated 28th December, 1959, issued under sub-section (1) of section 41 of the Bombay Sales Tax Act, 1959, read with sub-section (2) of the said section 41, cannot be quantified with precision ?'

19. For the reasons set out above, we answer the question as reframed by us in the negative, that is, in favour of the department and against the assessees.

20. The respondents will pay to the applicant the costs of this reference fixed at Rs. 300.

21. Reference answered in the negative.


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