1991 (4) TMI 376 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Legislative competence of the State Legislature to impose tax under Section 3-AAAA of the U.P. Sales Tax Act, 1948.
2. Constitutionality of Section 3-AAAA in light of Articles 14, 19(1)(g), 286, and 301 of the Constitution of India.
3. Validity of the tax assessments and recovery proceedings based on Section 3-AAAA.

Issue-wise Detailed Analysis:

1. Legislative Competence of the State Legislature:
The primary issue is whether Section 3-AAAA of the U.P. Sales Tax Act, 1948, in pith and substance, imposes a tax on the consignment of goods, which would be beyond the legislative competence of the State Legislature. Section 3-AAAA states that if goods liable to tax at the point of sale to the consumer are sold to a dealer, and the purchasing dealer does not resell such goods within the State or in the course of inter-State trade or commerce in the same form and condition, the purchasing dealer shall be liable to pay tax on such purchases.

The petitioners argued that the taxable event is not the purchase but the utilization of the goods within the State for manufacturing other goods and their subsequent despatch outside the State. This implies that the tax is on consumption, consignment, or export of the goods, which would be beyond the State Legislature's competence.

The court analyzed whether the impugned legislation is a tax on the consignment of goods by a manufacturer to his branches outside the State. If so, it would be beyond the legislative competence of the State Legislature, as this field is reserved for Parliament under Entry 92-B of List I of the Seventh Schedule to the Constitution. The court referred to the Supreme Court judgment in Goodyear India Ltd. v. State of Haryana, which held that the taxable event under similar provisions was not the purchase of goods but their despatch outside the State, making the tax beyond the State's legislative competence.

2. Constitutionality of Section 3-AAAA:
The constitutionality of Section 3-AAAA was also challenged on the grounds of violation of Articles 14, 19(1)(g), 286, and 301 of the Constitution of India. The petitioners contended that the provision was enacted with retrospective effect from April 1, 1974, and imposed an unreasonable restriction on their right to carry on business, thus violating Article 19(1)(g). They also argued that the provision hampered the free flow of trade and commerce, violating Article 301.

The State argued that the taxable event is the purchase of goods under the circumstances set out in Section 3-AAAA, and the incidence of the tax remains at the point of sale to the consumer. The liability to pay the tax shifts to the point at which all conditions under the provision are fulfilled. The State contended that the provision does not violate any constitutional provisions and is within the legislative competence of the State Legislature.

3. Validity of Tax Assessments and Recovery Proceedings:
The petitioners were assessed to tax under Section 3-AAAA for the turnover of purchases of raw hides, which were converted into dressed hides and exported. They argued that their turnovers were being illegally subjected to purchase tax based on a circular issued by the Commissioner, which ignored the explanation to Section 3-AAAA.

The court concluded that the purchase of goods simpliciter by the purchasing dealer does not constitute the taxable event. The incidence of tax takes place at a later point when the dealer does some act that renders the sale of the goods within the State or in the course of inter-State trade an impossibility. The court held that the impugned tax is sought to be levied on matters beyond the legislative competence of the State Legislature, as it taxes events and activities subsequent to the purchase, which do not fall within the legislative powers of the State.

Conclusion:
The court declared Section 3-AAAA of the U.P. Sales Tax Act, as amended by U.P. Act No. 12 of 1979, null and void for being beyond the legislative competence of the State Legislature. The assessment orders and recovery proceedings based on this provision were also quashed. The petitions were allowed, and the petitioners were entitled to their costs.