1953 (3) TMI 16 - SC - VAT and Sales Tax

Whether the Bombay Sales Tax Act, 1952, and the rules made thereunder except Rule 5(2)(i) do not contravene the provisions of Article Articles 301 or 304 or 286? Held that - The delivery State would tax both local and out-of-State dealers equally without discrimination against either and that, we think, is the only measure of protection which Article 286 could reasonably be supposed to accord to inter-State sales or purchases, when it is construed in the light of Articles 301 and 304. In the present case the tax is imposed, in ultimate analysis, on receipts from individual sales or purchases of goods effected during the accounting period, and it is therefore possible to separate at the assessment the receipts derived from exempted sales or purchases and allow the State to enforce the statute with respect to the constitutionally taxable subjects, it being assumed that the State intends naturally to keep what it could lawfully tax, even where it purports to authorize the taxation of what is constitutionally exempt. The principle, as it is tersely put in the American case, is that severability in such cases includes separability in enforcement. We accordingly set aside the declaration made by the Court below and quash the writ issued by it except in regard to Rule 5(2)(i). An injunction shall, however, issue restraining the appellants from imposing or authorising the imposition of a tax on sales and purchases which are exempted from taxation by Article 286 as interpreted above. Appeal allowed.

Summary

Issues Involved:
1. Legislative power of State to impose sales tax.
2. Interpretation of Article 286(1)(a) and the Explanation.
3. Scope and effect of Article 286(2).
4. Validity of the Bombay Sales Tax Act, 1952.
5. Severability of unconstitutional provisions.
6. Discrimination under Articles 14 and 19 of the Constitution.

Detailed Analysis:

1. Legislative Power of State to Impose Sales Tax:
Per Majority Judgment:
- The State Legislature, under Article 246(3) read with Entry 54 of List II of the Seventh Schedule, has the exclusive power to make laws with respect to taxes on the sale or purchase of goods.
- The phrase "for such State or any part thereof" means that the laws must be for the purpose of that State, and it is not necessary that the sale or purchase should take place entirely within the territorial limits of the State.

Per BOSE, J.:
- Agreed with the majority on the interpretation of Entry 54 of List II, emphasizing that the object of the Explanation is to fix the situs of a sale or purchase by means of a fiction.

2. Interpretation of Article 286(1)(a) and the Explanation:
Per Majority Judgment:
- The Explanation to Article 286(1) provides that the State where goods are delivered for consumption is deemed to be the State where the sale or purchase took place, regardless of where the property in goods passed.
- The non-obstante clause in the Explanation clarifies that the passing of property is immaterial for determining the location of the sale or purchase.
- The expression "for the purpose of consumption in that State" includes distribution to consumers within the State, not just the individual importer or purchaser.

Per BOSE, J.:
- Disagreed with the majority's interpretation. Emphasized that the Explanation is limited to fixing the locus of a sale or purchase by means of a fiction and does not apply to clause (2) of Article 286.
- The term "consumption" should be understood in its economic sense, meaning the use of goods for the purchaser's own purposes.

Per BHAGWATI, J.:
- The Explanation creates a legal fiction to deem certain sales or purchases as taking place inside the delivery State, enabling it to tax such transactions.
- The Explanation covers only those transactions where goods are delivered for consumption by the consumer, not for resale by dealers.

3. Scope and Effect of Article 286(2):
Per Majority Judgment:
- The operation of clause (2) of Article 286 is excluded by the legal fiction in the Explanation, allowing the delivery State to tax inter-State sales or purchases.
- The Explanation divests inter-State transactions of their inter-State character in relation to the State of delivery.

Per BOSE, J.:
- Clause (2) prohibits taxation on inter-State trade or commerce unless the ban is lifted by Parliament. The Explanation does not apply to clause (2).
- The inter-State character of the transaction ends when the goods reach the first consumer in the taxing State.

Per BHAGWATI, J.:
- The general provision in Article 286(2) should give way to the special provision in the Explanation, allowing the delivery State to tax such transactions.
- The Explanation lifts transactions covered by it out of the category of inter-State trade or commerce, assimilating them to intra-State transactions for the delivery State.

4. Validity of the Bombay Sales Tax Act, 1952:
Per Majority Judgment:
- The Act did not contravene Article 286(1)(a) as it only imposed tax on sales within the State of Bombay.
- The Act and the Rules excluded sales or purchases described under Article 286(1)(b) and (2), thus not ultra vires the Bombay Legislature.

Per BOSE, J.:
- The Act was ultra vires the Constitution as it imposed tax on inter-State sales or purchases, violating Article 286(2).
- Rules cannot save an Act if they were brought into effect after the Act or if they amend the Act.

5. Severability of Unconstitutional Provisions:
Per Majority Judgment:
- Rule 5(2)(i) was ultra vires but severable from Rule 5(1)(i), allowing the exemption to stand.
- The Act can be enforced with respect to constitutionally taxable subjects, excluding exempted sales or purchases.

Per BOSE, J.:
- The Act cannot be saved by severing the unconstitutional provisions as it fundamentally violates the Constitution.

6. Discrimination under Articles 14 and 19 of the Constitution:
Per Majority Judgment:
- The minimum taxable turnover limits fixed by Sections 5 and 10 were not discriminatory and did not violate Article 14.
- The tax was imposed on receipts from individual sales or purchases, allowing separation of taxable and exempted transactions.

Per BOSE, J.:
- Did not specifically address this issue in detail, focusing on the ultra vires nature of the Act.

Conclusion:
The Supreme Court, by majority, held that the Bombay Sales Tax Act, 1952, was not ultra vires the Constitution, except for Rule 5(2)(i), which was severable. The judgment emphasized the power of the delivery State to tax inter-State transactions under the Explanation to Article 286(1)(a) and the need to reconcile this with Article 286(2). The dissenting opinion by BOSE, J., argued that the Act was unconstitutional as it violated the ban on inter-State taxation under Article 286(2).