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TMI Blog1963 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... 25th June, 1958, and seized some of his books which have been described by the departmental authorities as "sale bill book, lorry intimation book and railway receipt books". The business turnovers as disclosed by these books were as follows: Rs. 1953-54 1,72,43820 1954-55 ... 2,02,3481-10 1955-56 1,84,77323 1956-57 1,62,83033 1957-58 1,48,922-150 When called upon to explain as to why he did not submit a return and disclose the above turnovers to the department as assessable turnovers, the assessee contended that he was merely acting as the purchasing agent of Anantharamiah of Bangalore who was a non-resident dealer of carpets and druggets at Bangalore, that he sold the wool to him at Bangalore where delivery was effected for the purpose of consumption in the Mysore State, and that, therefore, the transactions were in the nature of inter-State sales coming within the ban of Article 286 of the Constitution. The assessee filed statements of account in respect of his dealings with the Bangalore merchant. The assessing authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason why the appellate authority should have held that the transaction effected through railway would be inter-State sales, but not the others. In respect of the year 1954-55 the dealings of the assessee were classified as follows: Rs. 1. Sales to Bangalore dealer as per bills 2,02,348-1-10 2. By rail from Ambur and Vaniyambadi to Vellore consignees Sheik Imam Sons and R. Ramaswamy 35,400-0-00 3. By rail from Chittoor to Vellore and Bangalore consignees M. Anantharamiah and Sheik Imam 16,400-0-00 4. Sales as per lorry despatch advices but not covered by bills and included in (1) above 1,27,200-0-00 Total 3,81,348-1-10 4. The item in dispute between the department and the assessee in respect of this particular year was only a turnover of Rs. 1,27,200 which the assessee claimed was exempt from taxation on the ground that it was in respect of inter-State transactions but which the State did not accept for alleged want of proof of actual delivery at Bangalore. Dealing with the contention of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 respectively for the two years should not have been cancelled by the Tribunal. The main point that arises for decision in these petitions is whether the sales of wool by the assessee to the Bangalore dealer covered by numerous transactions are in fact and in truth inter-State sales, and, if so, whether they are liable to be assessed under the Madras Sales Tax Act, in view of the Sales Tax Laws Validation Act of 1956. The State contends that the Validation Act read along with its interpretation by the Supreme Court in the Ashok Leyland case[1955] 6 S.T.C. 446. clearly makes the transactions subject to the sales tax. The point urged by the assessee is that these sales are, what may be called "Explanation sales", that is, sales falling within the Explanation to Article 286(1)(a) of the Constitution as it stood before the Sixth Amendment, that therefore, they were "outside" sales so far as the Madras State is concerned, that the constitutional ban which is absolute could not and was not lifted by the Validation Act, and that the decision of the Supreme Court in the Ashok Leyland case[1961] 12 S.T.C. 379. is not authority for the proposition that all interState sales, even including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee was the same, that is, the delivery of the goods at Bangalore, irrespective of the fact whether the mode of delivery was (1)[1961] 12 S.T.C. 379. through railway or by lorry. We do not find any justification for introducing a distinction between the deliveries effected through lorries and those effected through railway. We, therefore, proceed to deal with the case on the footing that all sales effected by the assessee to the Bangalore merchant were really inter-State sales, in respect of which the goods were delivered for the purpose of consumption outside the Madras State. It will be convenient, even at the outset, to refer to the constitutional provision, Article 286, as it stood before the Sixth Amendment. It reads: "(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place- (a) outside the State; or (b) in the course of the import of the goods into, or export of the goods out of, the territory of India. Explanation.-For the purposes of sub-clause (a), a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or purchase, for the purpose of consumption therein, then such sale or purchase shall be deemed to have taken place in that State and outside all other States. The latter States are prohibited from taxing such sales or purchases; the former alone is left free to do so, and the power is derived not by virtue of the Explanation but under Article 246(3) read with Entry 54 of List II. The effect of this decision was to hold that sales falling within the Explanation to Article 286(1)(a) were really not inter-State transactions, but intra-State transactions, and that, notwithstanding the prohibition in Article 286(2), there was no ban on the delivery-cumconsumption State to tax the goods which reached that State, no doubt as a result of inter-State transactions. According to the Supreme Court in the United Motors case(2), the "Explanation" sales would be liable to sales tax, if only the provisions of the State tax law were sufficiently wide to bring them to tax. It will be useful to quote the following passage from the United Motors case(2) to point out the essence of the view taken regarding the scope and operation of the Explanation to Article 286(1)(a) and Article 286(2): "We ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State to another as a result of the contract of sale. What was, however, held by the majority of their Lordships of the Supreme Court in Bengal Immunity case(1) was that the Explanation created only a limited fiction and should not be read as transforming inter-State sales as intra-State or domestic or local sales. It was pointed out that the Explanation, being only a legal fiction, should be restricted in its use and application for the limited purpose for which it was created and should not be extended to cover a wider field. The Explanation is neither an exception nor a proviso to Article 286, clause (2), which should be construed without the inhibition of the Explanation. It was held that the fetters placed on the taxing powers of the State are that no law of a State shall impose or authorise the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place (a) outside the State, or (b) in the course of import or export, or (c) except in so far as Parliament otherwise provides, in the course of inter-State trade or commerce, and (d) that no law made by the Legislature of a State imposing or authorising the imposition of a tax on the sale or purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) "-defines a sale which should be deemed to have taken place in the taxing State. Perhaps the framers of the Constitution thought that the words in clause (a) "outside the State" would prove to be a bone of contention between the taxing State and the subject in the absence of any clear indication as to what is meant by that expression. Obviously the idea was that, if "inside State" can be postulated, all other States would fall within the expression "outside State". "Inside State" is, according to the Explanation, the State in which the goods have actually been delivered as a direct result of a sale or purchase for the purpose of consumption in that State. The scope of Article 286(2) is no doubt general to some extent; as it provides that no law of a State shall impose or authorise the imposition of a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce except in so far as Parliament may by law otherwise provide. Article 286(1)(a) read with the Explanation takes in and covers inter-State sale or purchase. The ban imposed on the State to tax sale or purchase taking place outside the taxing State is absolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution period (26th January, 1950 to 31st March, 1950) it was not liable to pay any sales tax in respect of sales to buyers, under which though the property in the goods passed within the State, delivery of the goods was effected outside the State of Bihar for consumption, on the ground that such sales were exempted from tax by Article 286(1)(a) of the Constitution, as it originally stood. The company was, however, assessed by the department and it filed a writ petition in the High Court of Patna to quash the order of assessment. In formulating the law applicable, the learned Judges of the Patna High Court drew a distinction between sales as a direct result of which the goods were delivered in a State outside the State of Bihar and consumed in that State and those cases in which the goods delivered were not consumed in the State of first destination, but were re-exported from the State of first destination to other States. They held that the first category of sales were covered by the Explanation to Article 286(1) of the Constitution and were "inside" the State of first delivery and consequently "outside" the State of Bihar within the meaning of the Article and therefore exempt from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with regard to the first category of transactions and not with regard to the second category. The assessees next moved the High Court of Patna by way of a petition under Article 226 of the Constitution. The High Court held that the order of the Board was ambiguous, that the transactions in the second category were not exempt from tax liability, and that the assessees, in a writ of mandamus, could not insist on a manifestly wrong order being enforced. The assessees, therefore, preferred an appeal to the Supreme Court. The Supreme Court held that the Board did not, by its order, intend to decide the point regarding the tax liability of the second category of transactions, but left it to the officer to decide for himself the relief to which the assessees were entitled on that officer's interpretation of the judgment in the United Motors case[1953] 4 S.T.C. 133., that the judgment in the United Motors case(1) only dealt with the Explanation sales and did not deal with sales which did not satisfy the requirements of the Explanation, that the first category of transactions would be exempt from the levy of sales tax under the Bihar Act by reason of their being "inside" sales within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods when such sales or purchases took place in the course of inter-State trade or commerce notwithstanding that the goods under such sales were actually delivered in that State for consumption there." This, in our opinion, has a considerable bearing on the point now in issue. Before we refer to the Ashok Leyland case[1961] 12 S.T.C. 379., which has really given the handle to the State in the present case to advance the contention that the business turnover of the assessee is subject to taxation, we would like to make a few observations regarding the purpose underlying Article 286 of the Constitution as it stood before the amendment. The back ground of Article 286 of the Constitution throws a clear perspective on its object and purpose, and the language employed, felicitous or not, does not obscure its true intendment. The object was to maintain freedom of inter-State trade or commerce pari passu with the State's power to tax goods imported from sister States without discriminating them from local goods, that is, goods produced or manufactured in the taxing State. A free flow of inter-State trade or commerce is necessary to strengthen the economic unity of India. It cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interState trade or commerce; and all such taxes levied or collected or purporting to have been levied or collected during the aforesaid period shall be deemed always to have been validly levied or collected in accordance with law." The date of 1st April, 1951, was apparently chosen as between 26th January, 1950, the commencement of the Constitution and 31st March, 1951, the President exercised his powers under the proviso to clause (2) of Article 286. That enabled the President to promulgate an order directing that any tax on the sale or purchase of goods, which was being lawfully levied by the Government of any State immediately before the commencement of the Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of the Constitution, continue to be levied until 31st of March, 1951. 6th September, 1955, is the date of the decision of the Supreme Court in the Bengal Immunity case[1955] 6 S.T.C. 446. Prior to this Act there was an Ordinance, the Sales Tax Laws Validation Ordinance No. III of 1956, which was in terms similar to the provisions in the Act. Constitutionality of the Validation Act was challenged before the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of its manufactured products consisted of the appointment of a distributor called dealer with a definite territorial jurisdiction both inside and outside the State of Madras. Every such dealer had the monopoly right of selling the products of the firm within the territory allotted to him. If the territory of the dealer is outside the State of Madras, the agreement between the dealer and the assessee provided for the delivery of the products by consignment, by rail or steamer or road transport. The case set up by the assessee was that a substantial number of motor vehicles and accessories thereof were consigned to the dealers in other States either by rail or steamer, but due to want of such transport facilities, a number of vehicles were also transported by road. In the year relevant to the assessment year 1952-53, the assessee contended that a sum of Rs. 42 lakhs was not liable to be included in his turnover, as that amount represented the transactions in the course of inter-State trade or commerce. The Commercial Tax Officer overruled the objection except to a very small extent. The assessee preferred an appeal to the Sales Tax Appellate Tribunal, Madras, and again objected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 939) inserted by Madras Act 1 of 1957, the Act imposed no tax on transactions under consideration in the appeal, and that it merely imposed a tax on transactions which were generally known as Explanation sales. Dealing with this contention, his Lordship S.K. Das, J., delivering the judgment of the Bench, observed thus at page 387: "The argument of the learned Attorney-General is that the new section which operates retrospectively from January 26, 1950, talks of sales in which the goods are delivered for consumption in the State of Madras; in other words, of Explanation sales only; therefore, the Act does not operate on sales of an inter-State character other than Explanation sales. We are unable to agree. First of all, sub-section (2) of new section 22 makes it quite clear that the section does not affect the liability to tax of any sale or purchase under any other provision of the Act. Secondly, after Parliament had lifted the ban imposed by Article 286(2), it was unnecessary to repeat the provisions of that article in the Act and old section 22 in so far as it repeated Article 286(2) became otiose. Therefore, new section 22 has not the effect of subtracting something from the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was in the chain of inter-State trade or commerce unless the ban is lifted by the Parliament. It seems to us that the Validation Act only provided for lifting of the ban to the extent to which the Parliament was permitted to do so under the clear terms of the Constitution. We are unable to agree with the contention that Article 286(2) completely overrides Article 286(1) leading to the result that provided the Parliament exercises its power, sale or purchase in the course of inter-State trade or commerce could be indiscriminately taxed by all the States. We do not think that such a construction of the constitutional provision is warranted by its phraseology. There was no necessity on the part of the framers of the Constitution to define an "inside" sale with a view to ascertain what is an "outside" sale, if the ban could be removed by reason of the operation of Article 286(2). If the plain intendment of the Constitution was merely to indicate a ban in regard to all sales or purchases in the course of inter-State trade or commerce, subject to its removability at the instance of the Parliament, less cumbrous language would have been used. Article 286(1) would have stated that no la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rliament lifts the ban under Article 286(2). If the terms of the Explanation do not cover a particular inter-State sale then the question whether the sale is an 'outside sale' qua the taxing State has to be determined by finding out the place where the property in the goods passes. In respect of an inter-State sale not falling within the Explanation to Article 286(1)(a) on the lifting of the ban by the Parliament under Article 286(2) the State wherein the property in the goods passes may levy tax if the words of the taxing section of the enactment are wide enough to cover such a transaction. We do not think that the Ashok Leyland case(1) relied upon by the learned counsel for the petitioners can at all help him to press his contentions." We see no reason to differ from the view which we have already taken in that case and we say so after hearing the strenuous contention urged now before us on behalf of the State. In the view we have expressed that all the sales by the assessee to the Bangalore carpet dealer were really non-Explanation sales with reference to the Madras State, and were sales outside the State of Madras, we do not think that the State can justify the assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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