1. The petitioner, New Saurashtra Vanaspati Company, Morvi, challenges under Articles 226 and 227 of the Constitution, the order dated 5/6th April 1968, holding the petitioner-firm to be a successor of the Commercial Sales Agency, hereinafter referred to as 'C.S.A.', and the notice of demand dated 10th April, 1968, issued to the petitioner-firm calling upon them to pay up the tax dues of the C.S.A. amounting to Rs. 5,23,381.49 P.
2. The short facts which have given rise to this petition are as under :
The Morvi Vegetable Products Limited, hereinafter referred to as 'the company', carried on the business of manufacturing hydrogenated vegetable oils and other allied products in its factory at Morvi up to 31st March, 1955. The company was marketing its vanaspati oil under 'Tulsi' and 'Ranjit' brand labels. The company thereafter invited offers for lease of its factory and gave its factory on lease to the Commercial Sales Agency, which was another distinct partnership firm, on 1st April 1955, for a period of one year with option to renew the same. Thereafter from time to time under new tenders, by fresh leases, the factory continued to remain with the said lessee, viz. C.S.A. The last lease was executed on 30th April 1963, for the period from 1st October, 1962, to 30th September, 1964. Under the said lease the factory was let out with machinery, plant and building and the lessee got the benefit of the trade marks and the Quota rights of the lessor-company. The C.S.A. came into financial difficulties and it closed the factory on 31st March, 1964, and retrenched its employees on 2nd May, 1964. Thereafter insolvency proceedings started against C.S.A. and the C.S.A. under the supervision of the Court Receiver sold some of its goods. It appears that a portion of the goods to the tune of Rs. 32,751 had been purchased by the petitioner-firm. The company by a notice dated 11th April. 1964, terminated the lease even before its term expired on 30th September, 1964, under the power vested in it under the lease. The C.S.A. in pursuance thereof surrendered possession of the factory to the lessor-company on 15th April 1964. The factory remained closed from 1st April 1964, to 1st November, 1964. The petitioner-firm is constituted by the partnership deed, dated 19th September, 1964. The lessor-company invited fresh tenders by public advertisements for letting its factory. The petitioner-firm's offer was accepted and a lease was executed in its favour, containing similar terms as the lease in favour of C.S.A., on 2nd November, 1964. The petitioner-firm started its production of hydrogenated oil on 2nd November, 1964, and it continued to carry on its business up to 31st October, 1966. The petitioner applied for registration on 13th October, 1964, but as the sales did not reach the requisite limit, the said application was filed. The petitioner-firm again applied on 20th October, 1964, and it was registered as a dealer on 17th December, 1964. The petitioner- firm finally on 1st November, 1966, have up possession of the factory to the lessor-company and from that date the lessor-company works that factory. By a notice, dated 22nd March. 1968, at annexure 'C', the respondent-Soles Tax Officer caned upon the petitioner firm to show cause why it should not be held to be the successor of the C.S.A. and be held liable for the tax due from the C.S.A. on the ground that the petitioner-firm had succeeded by taking over the business of the former dealer, viz. C.S.A., and, therefore, under section 19(4) the petitioner was liable for the sales tax dues of that dealer. The petitioner sent its reply on 23rd March, 1968, pointing out that it could not be held liable to pay tax as it could not be held to be a transferee of C.S.A. and as it bad got factory leased from the original lessor-compnay. By the impugned order the respondent-Sales Tax Officer, however, held the petitioner-firm's to be a successor in business of the original dealer, sin. C.S.A., and had accordingly issued a demand notice dated 10th April, 1968, calling upon them to make payment of the aforesaid tax due from the C.S.A. The petitioner- firm, therefore, challenges the said order in this petition. The respondent-Sales Tax Officer has filed his affidavit in support of his order. The petitioner-firm has filed a rejoinder.
3. At the hearing Mr. Kaji argued that the impugned order of the respondent is completely without jurisdiction and is patently erroneous in law, as it proceeds on a complete misconception of law and seeks to recover tax dues of the former dealer from the petitioner-firm in flagrant violation of section 19(4) of the Bombay Sales Tax Act, 1959, hereinafter referred to 29 'the Act'. Section 2(11) defines a dealer as a person carrying on business of buying or selling goods in the State. Section 2(19) says that a person includes a firm. The charging section 3 makes every dealer, whose turnover either of all sales or of purchases exceeds the prescribed limit, liable to pay tax under the Act. This charging section is further extended by the special provision enacted in section 19, which provides for liability to pay tax in certain special cases. Section 19(1) deals with those cases where the dealer dies. Section 19(4) runs as under :
'Where a dealer, liable to pay tax under this Act, transfers or otherwise disposes of his business in whole or in part or effects any change in the ownership thereof, in consequence of which he is succeeded in the business or part thereof by any other person, the dealer and the person succeeding shall jointly and severally be liable to pay the tax (including any penalty) due from the dealer under this Act or under any earlier law, up to the time of such transfer, disposal or change, whether such tax (including any penalty) has been assessed before such transfer, disposal or change but has remained unpaid, or is assessed thereafter.'
4. Section 19(4), therefore, makes the dealer and the person succeeding jointly and severally liable. This liability is to pay tax, including any penalty, which is due from the predecessor-dealer to whom such person succeeds. The said liability must be under the Act or under any earlier law and it must be for the period up to the time of such transfer, disposal or change in the partnership effected by the predecessor-dealer who is liable to pay tax. It is immaterial whether such tax including any penalty has been assessed before such transfer, disposal or change but has remained unpaid or is assessed thereafter. The material conditions which must be fulfilled for attracting section 19(4) are as follows :-
(1) The dealer liable to pay tax must have been succeeded in the business or part thereof by any other person;
(2) Such succession must be in consequence of a transfer, dispose) or change in the ownership of the business in whole or in part effected by such dealer.
5. When these two conditions are satisfied, the dealer and such succeeding person are made jointly and severally liable to pay tax, including penalty which is due from the predecessor-dealer. Thus, both the conditions must co-exist, viz., that the dealer liable to pay tax must have effected a transfer, disposal or change in the ownership in favour of such other person, and such other person must have succeeded to the whole or part of the business in consequence of such transfer, disposal or change in ownership. Unless both the conditions co-exist, section 19(4) cannot be attracted.
6. We must, therefore, first find out whether in the present case the dealer liable to pay tax, viz., C.S.A., had effected any transfer, disposal or change in the ownership of the business in favour of the petitioner-firm. Unless this first ingredient is fulfilled, there would be no question of the petitioner-firm succeeding in consequence of any of the acts of the predecessor-dealer by way of transfer, disposal or change in the ownership effected by that dealer. The facts in the present case are not in dispute. The petitioner has in terms averred in para that the company terminated the lease of C.S.A. on 11th April 1964, and called upon the C.S.A. to hand over possession of the factory. The C.S.A. accordingly handed over possession of the factory to the company on 15th April, 1964. The factory remained entirely idle from 1st April 1964, to 1st November, 1964, i.e. for a period of seven months. These averments are not denied in the affidavit of the Sales Tax Officer. In pare. 8 of his affidavit it is in terms admitted that Messrs C.S.A. having suffered a loss, their business was closed, and according to the petitioner their factory from 15th April 1964, was surrendered to the original owner, a, the company. Even the respondent in his order in terms relies on the facts that the lessee had surrendered the factory to the lessor and the factory owner had in the new season given the factory on a fresh lease and, therefore, the factory was continuously in operation and the business could be considered as having continued. Even subsequently the respondent has mentioned that the question in the present case is regarding the two lessees, when the business of one lessee was over at the same place and another lessee has started business. He, therefore, became successor because the place of the factory, the name of the business, trade marks, quota rights etc. are obtained by the new lessee. Thus, the respondent proceeded on a complete misconception of law as if section 19(4) enacted only one condition as to whether the same or similar business was carried on in the same premises by another person where the former dealer carried on his business. In order to attract section 19(4) it is not sufficient that the factory which was conducted by the former dealer continues to remain the same factory at the same place and even the employees might remain the same. What is material is that the original dealer who was liable to pay tax must have by his own act transferred, disposed of or changed the ownership in the whole or part of the business and in consequence thereof, the new dealer must have succeeded to the whole or part of the business. In the present case if we analyse the facts, it is obvious that the C.S.A. had only a leasehold interest under the lease, dated 30th April, 1963. Even before the term expired on 30th September, 1964, the lessor-company exercised its power under the lease to terminate the lease and served a notice on 11th April, 1964. In pursuance thereof the lessee, C.S.A., surrendered possession of the factory and all its rights and interest on 15th April, 1964. Therefore, from that date the lessee, C.S.A., had no interest whatsoever left in this leasehold property, viz., the factory or its trade marks or quota rights. The entire leasehold interest, inclusive of the trade marks and the quota rights, was surrendered to the lessor-company and it vested in the lessor-company and, therefore, from 15th April, 1964, at least, there was nothing left with C.S.A., which it could legally transfer. The petitioner-firm has not got any interest in the leasehold property, viz., the factory or the trade marks or quota rights by way of any transfer from the C.S.A. for it had no interest left whatsoever in this connection. We must incidentally point out at this stage that the learned Assistant Government Pleader had argued that as items of stock to the tune of Rs. 32,751 had been purchased by the petitioner-firm from the C.S.A., a part of the business had been transferred. He equates business with the stock-in-trade. Merely because some items and parts of machinery and 'Tulsi' and 'Ranjit' labels had been sold to the members of the public by inviting tenders and the petitioner-firm happened to purchase them, it could never be said that the petitioner-firm was a transferee of the whole or part of the business of running the factory, which right had already come to an end on 15th April, 1964, so far as the C.S.A. was concerned. In fact, the right to run its factory and to utilise its trade marks and quota rights was derived by the petitioner-firm by a lease-deed which was executed in its favour by the lessor-company on 2nd November, 1964. The business which the petitioner-firm started from 2nd November, 1964 on these premises was in consequence of the transfer of the leasehold rights made by the lessor-company, and it was not in consequence of any transfer from the C.S.A. The right to trade in these premises with the help of the same factory and its trade marks and quota rights was derived by the petitioner-firm not by any act of the C.S.A. which was liable to pay tax, but by the lease executed in its favour by the lessor-company on 2nd November, 1964. There was a complete hiatus for the period from 15th April, 1964, to 1st November, 1964. During that period the rights to this business of running this factory with its trade marks and quota rights remained vested in the company, which never continued any business. Therefore, so far as the company was concerned, even though it accepted surrender of the original leasehold interest from the C.S.A., it never carried on any such business during the relevant period before it transferred the leasehold rights to the petitioner-firm. Therefore, the company could not be considered as a successor as it succeeded to nothing. It was pure surrender of the leasehold rights to the original owner. Similarly, when the petitioner-firm took a fresh lease from the original lessor, it could never be said that it was succeeding to the business of running the present factory, in consequence of any transfer or disposal or change of ownership effected by the predecessor-lessee, viz., the C.S.A., because it had lost all its interest when it surrendered the leasehold interest delivering possession to the lessor from 15th April, 1964.
7. The learned Assistant Government Pleader, however, vehemently argued that when the lessee went out by surrendering possession to the company and the company created a fresh lease in favour of the petitioner firm, the effect of both these transactions together was that in substance and effect it was the petitioner-firm who succeeded to the business carried on in the same factory, in consequence of the transfer of the rights which were enjoyed by the original lessee. This argument of substance and effect can never be accepted when we construe the plain terms of section 19(4). Section 19(4) categorically requires that succession must be as a consequence of a transfer by the previous dealer and unless both the ingredients co-exist, this extended liability under section 19(4) would not be attracted.
8. The learned Assistant Government Pleader in this connection relied upon the decision of the Maharashtra High Court in Collector of Sales Tax v. Parimal Brothers ( 13 S.T.C. 647.), by the Division Bench consisting of Tambe and V. S. Desai, JJ. That decision interpreted section 26(1) of the earlier Act of 1953 which was in slightly different terms as under :
'26. (i) Where the ownership of the business of a dealer liable to pay tax is entirely transferred, the transferor and the transferee shall jointly and severally be liable to pay tax, including penalty, if any, payable in respect of such business and remaining unpaid at the time of the transfer.'
9. In that case the business was originally carried on by the firm of Shroff Parekh & Co. In December, 1952, Shroff Parekh & Co. transferred its business as a going concern to one Mrs. Kusum Mody, who in her turn transferred the business to the Sunways (India) Private Limited. On 2nd June, 1954, the Sunways (India) Private Limited transferred the business as a going concern to Messrs Parimal Brothers. On these facts at page 657 the Division Bench held that under section 26(1) the liability that is fastened on to the transferee of a business was the liability of the transferor in respect of the business transferred by him, and not the tax liability of the transferor in respect of the business transacted by himself. In view of the chain of transfers from one successor to another as a going concern of the same business, it was held that under section 26(1) the tax liability of Mrs. Mody was fastened on the Sunways (India) Private Limited on 26th November, 1953, and on 2nd June, 1954, when Sunways (India) Private Limited transferred the business to Parimal Brothers, the tax payable by the Sunways (India) Private Limited in respect of the business transferred by it, consisted of not only the tax liability of the period during which the Sunways (India) Private Ltd. itself conducted the business, but also the tax liability of Mrs. Mody acquired by the Sunways (India) Private Limited and that tax liability had been fastened on the respondent under sub-section (1) of section 26 of the Act. In the present case there is a complete hiatus after the C.S.A. surrendered its leasehold interest and have up possession of the factory to the lessor-company. Admittedly, the lessor-company has not conducted any business after it got possession till it executed the lease in favour of the petitioner-firm and, therefore, there was no question of the lessor-company being a successor, when the leasehold interest got retransferred to the original lessor-company. It was a fresh act of lease which created rights in favour of the petitioner firm. Therefore, merely because the petitioner-firm carried on its business at the same place in the same factory with the same trade marks or quota rights, it cannot be held that the petitioner-firm had succeeded to this business in consequence of any act whatever of the predecessor-dealer, viz., C.S.A., which had lost all interest in this factory after 15th April, 1964, when it surrendered its leasehold interest.
10. The learned Assistant Government Pleader relied on the decision in Commissioner of Income-tax v. K. H. Chambers, ( 55 I.T.R. 674; A.I.R. 1965 S.C. 970) where the Supreme Court has evolved a test to determine succession to the business of any person within the meaning of section 25(4) of the Income-tax Act, 1922. At page 973 their Lordships referred to the passage in Simon's Income Tax, Volume 2, 2nd Edition, at pages 137-138 to the effect that 'in order to constitute a succession there must be, broadly speaking, a taking over of the whole of the business concerned .................. But if a business is taken over as a whole, the fact that minor assets of the business are omitted from the transfer will not prevent there being a succession. The fact that the purchaser already has a similar business is not a material fact in establishing succession. The purchase of a business with a view to closing down would not appear to constitute succession. Other questions which have been used as tests are : (1) whether a similar trade has been carried on after the transfer; (2) whether goodwill or other intangible assets are included in the transfer; (3) whether staff is taken over; (4) the treatment on transfer of the stock and debts of the transferor; (5) whether there was an interval in the carrying on of the trade as a result of the transfer.' At page 974 their Lordships further pointed out that succession involved change of ownership; that is, the transferor went out and the transferee came in; it connoted that the whole business was transferred; it also implied that substantially the identity and the continuity of the business were preserved. Further proceeding at page 975 their Lordships pointed out that the tests of change of ownership, integrity, identity and continuity of a business had to be satisfied before it could be said that a person 'succeeded' to the business of another. We must keep in mind section 19(4) wherein the word 'business' is referred to along with even the part of the business. On the basis of this decision it was argued that the taxing authority bad applied these relevant tests to determine succession and when these settled principles were applied to find out identity and continuity of the business, the decision that the petitioner-firm was successor could not be attacked in these proceedings, as it would be a question of fact or at the most a mixed question of law and fact. This argument ignores the fact that what section 19(4) requires is that both the conditions must co-exist. The succession must be in consequence of any act of transfer, disposal or change in the ownership effected in the business in whole or in part by the predecessor-dealer liable to pay tax. Unless both the ingredients co-exist, section 19(47) would not be attracted in the case at all and the taxpayer would not be liable to pay tax. In the present case there was a complete hiatus and the business which was carried on by the petitioner-firm was as a result of the transfer effected in its favour of the leasehold rights along with the incidental rights, trade marks and quota rights by the lessor-company and it was not in consequence of any act of the predecessor-company liable to pay tax, i.e. C.S.A. Therefore, in the present case the taxing authority had proceeded on a complete misconception of law. The conclusion of the authority would not be warranted, if the authority had properly understood the relevant enactment. Such an order would disclose a patent error of law. In Provincial Transport Services v. State Industrial Court, (A.I.R. 1963 S.C. 114) it has been held by the Supreme Court at page 117 as under :
'It has often been pointed out by eminent Judges that when it appears to an appellate court that no person properly instructed in law and acting judicially could have reached the particular decision, the court may proceed on the assumption that misconception of law has been responsible for the wrong decision. The decision of the Assistant Labour Commissioner that no enquiry had been held by the management amounts therefore, in our opinion, to a clear error in law. The Industrial Court erred in thinking that it was bound by this decision of the Labour Commissioner and this error on its part was, in our opinion, an error so apparent on the face of the record and it was proper and reasonable for the High Court to correct that error.'
11. In the present case if the taxing authority had properly understood the relevant enactment, viz., section 19(4), which required the two conditions to co-exist, on the materials before it, it could never have come to the conclusion while acting judicially that the petitioner-firm was a successor, in consequence of the transfer or disposal or change of ownership effected by the predecessor-dealer liable to pay tax, viz., the C.S.A. The order of the taxing authority is, therefore, patently erroneous. The order could also be said to be completely lacking jurisdiction. The taxing authority could tax persons other than dealers by applying the extended provisions in section 19(4), only if the person concerned came within the scope of section 19(47). In the present case even though the two mandatory conditions required for attracting section 19(4) had not been fulfilled, in plain violation of section 19(4), the taxing authority proceeded to hold the petitioner-firm liable for sales tax dues of the predecessor-dealer, viz. C.S.A. This order of the taxing authority was, therefore, clearly without jurisdiction and ultra vires section 19(47) and in plain violation thereof. This is not a case where the taxing authority could be said to be exercising jurisdiction order the Act so that the taxpayer must be left to his ordinary remedy under the taxing statute. The case is clearly one of total lack of jurisdiction and also of a patent error of law and this Court would have the power and duty to interfere in such cases and grant relief to the citizen.
12. In the result this petition must be allowed. We, therefore, issue a writ of certiorari quashing the order of the respondent at annexure 'B' dated 5/6th April, 1968, and the consequent notice of demand dated 10th April, 1968, issued by him and we issue a writ of mandamus restraining the respondent from enforcing the said order and the said notice against the petitioner-firm. Rule accordingly made absolute with costs.
13. Petition allowed.