1. This is an appeal by special leave against the order of the AndhraPradesh High Court. The appellant filed a writ petition in the High Courtquestioning the validity of s. 11(2) of the Hyderabad General Sales Tax Act,No. XIV of 1950, (hereinafter referred to as the Act). The material facts onwhich the petition was based were these. The appellant acted as agent in thethen State of Hyderabad to both resident and non-resident principals in regardto sale of betel leaves. Under the Act betel leaves were taxable at thepurchase point from May 1, 1953, by virtue of a notification in that behalf. Weare here concerned with the assessment period from May 1, 1953 to March 31,1954, covered by the assessment year 1953-54. The appellant collected sales taxfrom the purchasers in connection with the sales made by it on the basis thatthe incident of the tax lay on the sellers and assured the purchasers thatafter paying the tax to the appellant, there would be no further liability onthem. After realising the tax, however, the appellant did not pay the amountrealised to the Government but kept it in the suspense account of itsprincipals, namely, the purchasers. When the accounts were scrutinized by theSales Tax Department, this was discovered and thereupon the appellant wascalled upon to pay the amounts realised to the Government. The appellanthowever objected to the payment on the ground that it was the seller and therelevant notification for the relevant period imposed tax at the purchasepoint, i.e. on the purchaser. This objection was over-ruled and the appellantwas directed to pay the amount to Government.
2. The main contention raised on behalf of the appellant in the High Courtwas that s. 11(2) of the Act, which authorised the Government to recover fromany person, who had collected or collects, after May 1, 1950, any amount by wayof tax otherwise than in accordance with the provisions of the Act, as arrearsof land revenue, was beyond the legislative competence of the Statelegislature. The argument was that the Act was passed under Entry 54 of List IIof the Seventh Schedule to the Constitution, which enables the Statelegislature to enact a law taxing transactions of sale or purchase of goods.The entry therefore vests power in the State legislature to make a law fortaxing sales and purchases of goods and for making all necessary incidentalprovisions in that behalf for the levy and collection of sales or purchase tax.But it was urged that entry did not empower the State legislature to enact alaw by which a dealer who may have collected a tax without authority isrequired to hand over the amount to Government, as any collection without theauthority of law would not be a tax levied under the law and it would thereforenot be open to the State to collect under the authority of a law enacted underEntry 54 of List II any such amount as it was not a tax on sale or purchase ofgoods. The High Court held s. 11(2) good as an ancillary provision with regardto the collection of sales or purchase tax and therefore incidental to the taxingpower under Entry 54 of List II. Further the High Court took the view thatassuming that Entry 54 of List II could not sustain s. 11(2), it could besustained under Entry 26 of List II. Consequently the writ petition wasdismissed. The High Court having refused a certificate to appeal to this Court,the appellant obtained special leave and that is how the matter has come upbefore us.
3. It is necessary to read s. 11 of the Act in order to appreciate the pointurged on behalf of the appellant. Section 11 is in these terms :-
'11(1) No person who is notregistered as a dealer shall collect any amount by way of tax under this Actnor shall a registered dealer make any such collection before the 1st day ofMay, 1950, except in accordance with such conditions and restrictions, if any,as may be prescribed :
Provided that Government mayexempt persons who are not registered dealers from the provisions of thissub-section until such date, not being later than the 1st day of June, 1950, asGovernment may direct.
(2) Notwithstanding to thecontrary contained in any order of an officer or tribunal or judgment, decreeor order of a Court, every person who has collected or collects on or before1st May, 1950, any amount by way of tax otherwise than in accordance with theprovisions of this Act shall pay over to the Government within such time and insuch manner as may be prescribed the amount so collected by him, and in defaultof such payment the said amount shall be recovered from him as if it werearrears of land revenue.'
4. It will be seen that s. 11(1) forbids an unregistered dealer fromcollecting any amount by way of tax under the Act. That provision however doesnot apply in the present case, for the appellant is admittedly a registereddealer. Further s. 11(1) lays down that a registered dealer shall not make anysuch collection before May 1, 1950, except in accordance with such conditionsand restrictions, if any, as may be prescribed. This provision again does notapply, for we are not concerned here with any collection made by the appellantbefore May 1, 1950. The prohibition therefore of s. 11(1) did not apply to theappellant. Then comes s. 11(2). It applies to collections made after May 1,1950 by any person whether a registered dealer or otherwise and lays down thatany amount collected by way of tax otherwise than in accordance with theprovisions of the Act shall be paid over to the Government and in default ofsuch payment, the said amount shall be recovered from such person as if it werearrears of land revenue. It is clear from the words 'otherwise than inaccordance with the provisions of this Act' that though the amount mayhave been collected by way of tax it was not exigible as tax under the Act.Section 11(2) thus provides that amounts collected by way of tax though notexigible as tax under the Act shall be paid over to Government, and if not paidover they shall be recovered from such person as if they were arrears of landrevenue. Clearly therefore s. 11(2) as it stands provides for recovery of anamount collected by way of tax as arrears of land revenue though the amount wasnot due as tax under the Act.
5. The first question therefore that falls for consideration is whether itwas open to the State legislature under its powers under Entry 54 of List II tomake a provision to the effect that money collected by way of tax, even thoughit is not due as a tax under the Act, shall be made over to Government. Now itis clear that the sums so collected by way of tax are not in fact tax exigibleunder the Act. So it cannot be said that the State legislature was directlylegislating for the imposition of sales or purchase tax under Entry 54 of ListII when it made such a provision, for on the face of the provision, the amount,though collected by way of tax, was not exigible as tax under the law. Theprovision however is attempted to be justified on the ground that though it maynot be open to a State legislature to make provision for the recovery of anamount which is not a tax under Entry 54 of List II in a law made for thatpurpose, it would still be open to the legislature to provide for paying overall the amounts collected by way of tax by persons, even though they really arenot exigible as tax, as part of the incidental and ancillary power to makeprovision for the levy and collection of such tax. Now there is no dispute thatthe heads of legislation in the various Lists in the Seventh Schedule should beinterpreted widely so as to take in all matters which are of a characterincidental to the topics mentioned therein. Even so, there is a limit to suchincidental or ancillary power flowing from the legislative entries in thevarious Lists in the Seventh Schedule. These incidental and ancillary powershave to be exercised in aid of the main topic of legislation. Which in thepresent case, is a tax on sale or purchase of goods. All powers necessary forthe levy and collection of the tax concerned and for seeing that the tax is notevaded are comprised within the ambit of the legislative entry as ancillary orincidental. But where the legislation under the relevant entry proceeds on thebasis that the amount concerned is not a tax exigible under the law made underthat entry, but even so lays down that though it is not exigible under the law,it shall be paid over to Government, merely because some dealers by mistake orotherwise have collected it as tax, it is difficult to see how such provisioncan be ancillary or incidental to the collection of tax legitimately due undera law made under the relevant taxing entry. We do not think that the ambit ofancillary or incidental power goes to the extent of permitting the legislatureto provide that though the amount collected - may be wrongly - by way of tax isnot exigible under the law as made under the relevant taxing entry, it shallstill be paid over to Government, as if it were a tax. The legislature cannotunder Entry 54 of List II make a provision to the effect that even though acertain amount collected is not a tax on the sale or purchase of goods as laiddown by the law, it will still be collected as if it was such a tax. This iswhat s. 11(2) has provided. Such a provision cannot in our opinion be treatedas coming within incidental or ancillary powers which the legislature has gotunder the relevant taxing entry to ensure that the tax is levied and collectedand that its evasion becomes impossible. We are therefore of opinion that theprovision contained in s. 11(2) cannot be made under Entry 54 of List II andcannot be justified even as an incidental or ancillary provision permittedunder that entry.
6. An attempt was made to justify the provision as provided for a penalty.But as we read s. 11(2) we cannot find anything in it to justify that it is apenalty for breach of any prohibition in the Act. Penalties imposed undertaxing statutes are generally with respect to attempts at evasion of taxes orto default in the payment of taxes properly levied (see Sections 28 and 46 of theIndian Income Tax Act, 1922). The Act also provides for penalties, for examples. 19 and s. 20. The latter section makes certain acts or omissions of anassessee offences punishable by a magistrate subject to composition under s.21. Section 11(2) in our opinion has nothing to do with penalties and cannot bejustified as a penalty on the dealer. Actually s. 20 makes provision in clause(b) for penalty in case of breach of s. 11(1) and makes the person committing abreach of that provision liable, on conviction by a Magistrate of the firstclass, to a fine. We are therefore of opinion that s. 11(2) cannot be justifiedunder Entry 54 of List II either as a provision for levying the tax or as anincidental or ancillary provision relating to the collection of tax. In thisconnection we may refer to clause (c) of s. 20, which provides that any personwho fails 'to pay the amounts specified in sub-section (2) of s. 11 withinthe prescribed time' shall on a conviction by a Magistrate be liable tofine. It is remarkable that this provision makes the person punishable for hisfailure to pay the amount which is not authorised as a tax at all under thelaw, to Government. It does not provide for a penalty collecting the amountwrongly by way of tax from purchasers which may have been justified as apenalty for the purpose of carrying out the objects of the taxing legislation.If a dealer has collected anything from a purchaser which is not authorised bythe taxing law, that is a matter between him and the purchaser, and thepurchaser may be entitled to recover the amount from the dealer. But unless themoney so collected is due as a tax, the State can not by law make itrecoverable simply because it has been wrongly collected by the dealer. Thiscannot be done directly for it is not a tax at all within the meaning of Entry54 of List II, nor can the State legislature under the guise of incidental orancillary power do indirectly what it cannot do directly. We are therefore ofopinion that s. 11(2) is not within the competence of the State legislatureunder Entry 54 of List II.
7. The respondent in this connection relies on the decision of this Court inThe Orient Paper Mills Limited v. The State of Orissa : 1SCR549 .That case in our opinion has no application to the facts of the present case.In that case the dealer had been assessed to tax and had paid the tax. Later inview of the judgment of this Court in State of Bombay v. The United Motors(India) Limited : 4SCR1069 the amounts paid in respect of goodsdespatched for consumption outside the State were held to be not taxable. Thedealer then applied for refund of tax, which was held to be not exigible. Therefund was refused and the dealer went to the High Court by a writ petitionclaiming that it was entitled to refund under s. 14 of the Orissa Sales Tax Act(which was the law under consideration in that case). The High Court allowedthe petition in part and there were appeals to this Court both by the dealerand the State. In the meantime, the Orissa legislature amended the law, byintroducing s. 14A, in the principal Act, which provided that refund could beclaimed only by a person from whom the dealer had actually realised the amountas tax. That provision was challenged in this Court but was upheld on theground that it came within the incidental power arising out of Entry 54 of ListII. That matter dealt with a question of refund and it cannot be doubted thatrefund of the tax collected is always a matter covered by incidental andancillary powers relating to the levy and collection of tax. We are not dealingwith a case of refund in the present case. What s. 11(2) provides is thatsomething collected by way of tax, though it is not really due as a tax underthe law enacted under Entry 54 of List II must be paid to the Government. Thissituation in our opinion is entirely different from the situation in the OrientPaper Mills Limited's case : 1SCR549 .
8. The respondent further relies on a decision of the Madras High Court inIndian Aluminium Co. v. The State of Madras (1962) 13 S.T.C. 967. Thatdecision was with respect to s. 8-B of the Madras General Sales Tax Act of 1939as amended by Madras Act 1 of 1957. Though the words in s. 8-B(2) were notexactly the same as the words in s. 11(2), with which we are concerned here,the provision in substance was to the same effect as s. 11(2). In view of whatwe have said above, that decision must be held to be incorrect.
9. Lastly, we come to the contention of the respondent that s. 11(2) iswithin the legislative competence of the State legislature in view of Entry 26of List II. That entry deals with 'trade and commerce within the Statesubject to the provisions of entry 33 of List III'. It is well settledthat taxing entries in the legislative Lists I and II of the Seventh Scheduleare entirely separate from other entries. Entry 26 of List II deals with tradeand commerce and has nothing to do with taxing or recovering amounts realisedwrongly as tax. It is said that s. 11(2) regulates trade and commerce and theState legislature therefore was competent under Entry 26 of List II to enactit. We have not been able to understand what such a provision has to do withthe regulation of trade and commerce; it can only be justified as a provisionancillary to a taxing statute. If it cannot be so justified - as we hold thatit cannot - we are unable to uphold it as regulating trade and commerce underEntry 26 of List II. There is in our opinion no element of regulation of tradeand commerce in a provision like s. 11(2).
10. We are therefore of opinion that the State legislature was incompetentto enact a provision like s. 11(2). We may also add that the provisioncontained in s. 20(c), being consequential to s. 11(2) will fall along with it.In consequence it was not open to the Sales Tax Officer to ask the appellant tomake over what he had collected from the purchasers wrongly as sales tax. It isnot disputed, as appears from the final assessment order of the Sales TaxOfficer, that the appellant was not liable to pay the amount as sales tax forthe relevant period. We therefore allow the appeal and quash the assessmentorder dated September 27, 1956 insofar as it is based on s. 11(2). Theappellant will get his costs in this Court as well as in the High Court.
11. Appeal allowed.