1954 (5) TMI 17 - SC - VAT and Sales Tax

Whether the power to impose a tax on the sale of goods under Entry 48 includes a power to impose a tax on forward contracts? Held that - The power conferred under Entry 48 to impose a tax on the sale of goods can therefore be exercised only when there is a sale under which there is a transfer of property in the goods, and not when there is a mere agreement to sell. The State Legislature cannot, by enlarging the definition of sale as including forward contracts, arrogate to itself a power which is not conferred upon it by the Constitution Act, and the definition of sale in Section 2(h) of Act XV of 1948 must, to that extent, be declared ultra vires. For the same reason, Explanation III to Section 2(h) which provides that forward contracts shall be deemed to have been completed on the date originally agreed upon delivery , and Section 3B which enacts that, Notwithstanding anything contained in Section 3, the turnover of any dealer in respect of transactions of forward contracts, in which goods are not actually delivered, shall be taxed at a rate not exceeding rupees two per unit as may be prescribed , must also be held to be ultra vires. Appeal dismissed.

Summary

Issues:
1. Whether the power to impose a tax on the sale of goods includes the power to impose a tax on forward contracts.
2. Whether the definition of "sale" in the U.P. Sales Tax Act, which includes forward contracts, is ultra vires the powers of the Provincial Legislature.
3. Whether the levy of sales tax can only be imposed when there is a completed sale involving the transfer of title.

Detailed Analysis:
The judgment pertains to an appeal by the Sales Tax Officer against a High Court decision quashing assessment orders and proceedings related to the taxation of forward contracts under the U.P. Sales Tax Act. The respondent, a firm engaged in forward contracts, contested the legality of the tax imposition on such contracts, arguing that it exceeded the Provincial Legislature's powers. The High Court agreed and issued writs of certiorari and prohibition against the assessment orders and proceedings. The central issue revolved around whether the power to tax the sale of goods extends to taxing forward contracts, as defined in the Act.

The Court examined the definition of "sale" under the U.P. Sales Tax Act, which encompassed forward contracts but excluded certain transactions like mortgages or pledges. The interpretation of this definition was crucial in determining the legislative authority to tax forward contracts. The legal analysis delved into the distinction between a sale and an agreement to sell, emphasizing that a sale involves the actual transfer of property in goods, while an agreement to sell does not result in such a transfer until specific conditions are met. This distinction was underscored by references to relevant sections of the Indian Sale of Goods Act and the English Sale of Goods Act.

Further, the judgment highlighted the nature of the sales tax levy, which is based on the turnover of the assessee and is essentially a tax on the price of goods. The Court emphasized that the seller's right to recover the price of goods is contingent on a completed sale where the property in the goods is transferred to the buyer. In cases of breach of an agreement to sell, the remedy is damages, not the price of goods. The judgment cited legal precedents and statutory provisions to reinforce the principle that sales tax can only be levied upon completed sales involving the transfer of title.

Consequently, the Court held that the State Legislature cannot expand the definition of "sale" to include forward contracts beyond the constitutional mandate. The definition in the Act, along with related provisions deeming forward contracts as completed and taxing them, was deemed ultra vires. The decision of the High Court to quash the assessment orders and uphold the prohibition on taxing forward contracts was affirmed, leading to the dismissal of the appeal with costs.