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TMI Blog1981 (3) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: "41. Exemption.-(1) Subject to such conditions as it may impose, the State Government may, if it is necessary so to do in the public interest, by notification in the official Gazette, exempt any specified class of sales or purchases from payment of the whole or any part of any tax payable under the provisions of this Act and such exemption shall take effect from the date of the publication of the notification in the official Gazette or such other date as may be mentioned therein. (2) Where any specified class of sales or purchases is exempt from the payment of tax under sub-section (1) and if there be a breach of any of the conditions subject to which such exemption was granted, the seller or purchaser responsible for such breach shall be liable to pay tax on such sales or purchases as if no such exemption had been granted-notwithstanding that he may not be liable to pay tax under section 3. (3) If the Commissioner has reason to believe that any person is liable to pay tax under sub-section (2), the Commissioner shall, after giving him a reasonable opportunity of being heard, assess the amount of tax so due. " In pursuance of the power conferred by sub-section (1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner Act, 1944. shall be liable to be cancelled." During the year 1968 the respondents were a textile mill manufacturing cotton fabrics. They were at all material times and still are registered as a dealer under the Act and have been certified by the Commissioner of Sales Tax as manufacturers of cotton fabrics for the purposes of the said entry 39. During the period 1st January, 1968, to 31st December, 1968, the respondents purchased dyes and chemicals against declarations in form T given by them to their vendors. Out of the dyes and chemicals so purchased the respondents resold dyes and chemicals of the aggregate value of Rs. 4,33,317 instead of using them in the manufacture of cotton textiles for sale. In their returns for the year 1968 the respondents showed these sales as being casual sales and claimed exemption from payment of any tax thereon. By his assessment order the Sales Tax Officer rejected the respondents' contention that these were casual sales, and levied general sales tax at 3 per cent on the sale price received by them in respect of these sales. The Sales Tax Officer also held that in reselling this quantity of dyes and chemicals the respondents had committed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore unenforceable. The Tribunal accordingly allowed the second appeal filed by the respondents as also by the three other appellants whose appeals were heard along with them. There were other contentions raised before the Tribunal which, in view of its above finding, the Tribunal considered it unnecessary to decide. It is against this judgment and order of the Tribunal that the present reference has been made at the instance of the Commissioner of Sales Tax. At the hearing of this reference Mr. Jetly, the learned counsel for the department, submitted that the Tribunal's basic approach to section 41 of the Act was wrong in law inasmuch as the said section was not a charging section but merely provided a remedy to the revenue to recover the amount of tax which it would have otherwise got had a seller or purchaser not claimed exemption from payment of tax by giving a declaration or certificate. Mr. Jetly further contended that it was in consonance with logic and justice that the amount of such tax should be recovered from the party in breach, in the present case the respondents, and not from their sellers who would be innocent parties and would thus be wrongly mulcted by rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable under this Act" (that is, the Act). Under clause (33) the expression "taxable goods" means "goods other than those on the sale or purchase of which no tax is payable under section 5". A State's power to levy a tax on the sale or purchase of goods is derived from entry 54 in List II of the Seventh Schedule to the Constitution of India. By virtue of that entry, read with the provisions of article 246(3), it would be open to a State Legislature to tax every sale or purchase of goods taking place within that State. This, however, would be not only a harassment to people making casual sales or to petty dealers, but the expenditure on the assessment and collection of tax in respect of such transactions would far exceed any revenue which a State Government would get by taxing these transactions. Another factor which for the purposes of fiscal legislations a State Government would have to bear in mind would be that the economic incidence of a sales tax or a purchase tax would fall upon the ultimate consumer and that the goods which are manufactured or produced in the State would have to stand competition with goods manufactured or produced in other States. For these reasons, thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom an unregistered dealer by a manufacturer or by a person who transfers them to his outside-State branch. Now, in order to prevent levy of tax under the Act at each point where there is a chain of sales of the same goods from person to person, a system for issuing licences, authorizations, recognitions or permits has been devised in the Act and conditions have been prescribed subject to which a registered dealer would become entitled to obtain these documents. The advantage resulting from registration is that for the purposes of quantification and collection of tax the tax under the Act is to be paid on the taxable turnover of sales or purchases and not as and when a taxable sale is made, though the liability to pay the tax would arise as and when a taxable sale or a taxable purchase takes place; a sale or purchase being only two sides of the same transaction, for from the point of view of a seller the transaction would be a sale, while from the point of view of a purchaser the transaction would be a purchase. Sections 7 to 10 also provide for the categories of turnover which are to be deducted from the turnover of a dealer for arriving at his taxable turnover for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a breach of a certificate given by a dealer under section 11 or 12 of the Act. Now, these certificates only have relevance and applicability to the particular categories of transactions mentioned in sections 7 to 10 of the Act, by reason of which certificates these transactions became exempt from payment of tax. Section 14 does not refer to a breach of any of the conditions, other than those under sections 11 and 12, which might entitle a dealer to an exemption. In other words, section 14 does not apply when transactions of sale are exempted by the State Government by notifications issued under sub-section (1) of section 41 subject to certain conditions and when a breach of these conditions takes place. As originally enacted, section 41 consisted only of the present sub-section (1), without the concluding portion of it which deals with the date from which a notified exemption takes effect. Realising very soon that where exemptions are given under section 41 subject to conditions such conditions can be contravened but there was no power to recover tax which would otherwise have been payable, section 41 was amended with effect from 15th July, 1962, by section 17 of the Bombay Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax, purchase tax or retail sales tax". These are the taxes which are levied by sections 7 to 10 and 13 to 15 of the Act. Thus, the exemption which the State Government can give to a specified class of sales or purchases is from the payment of whole or part of the taxes which have been levied under Chapter II of the Act. When considering this class of exemptions it should be borne in mind that but for the notification issued by the State Government, the particular class of sales or purchases would have been exigible to tax under the relevant sections of Chapter II. Since the power of the State Government under section 41(1) is not just to exempt from payment of tax, in whole or in part, a specified class of sales or purchases but also to impose conditions subject to which such exemption would be available, sub-section (2) provides for a case where any such condition has been contravened. It provides that for breach of any of the conditions subject to which an exemption was granted. "the seller or purchaser responsible for such breach shall be liable to pay tax on such sales or purchases as if no such exemption had been granted-notwithstanding that he may not be liable to pay tax und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an individual transaction. It is not as if there is a particular charge of tax levied upon the person committing the breach. He is only being asked to make good what the exchequer has lost by reason of his wrongful act. It is not the shifting of the tax liability of the person who would be liable to pay that tax under the relevant section of Chapter II. It is only making good the loss which the revenue has suffered. It is pertinent to note that his liability is to pay tax on such sales or purchases as if no exemption has been granted. This takes us immediately back to the definition of the word "tax" in clause (32) of section 2 of the Act. Sub-section (2) of the said section 41 merely substitutes the person in breach for the party who would have otherwise paid the tax and who is the innocent party and who, from the justice of the case, cannot be made to suffer for the default of another. In support of his submission that section 41(2) of the Act was a charging section, Mr. Patel, the learned counsel for the respondents, relied upon the following observations of a Division Bench of this High Court in Daulatram Rameshwarlal v. B.K. Wadeyar[1957] 8 S.T.C. 617 at 631-632. That was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, then the proper canon of construction requires that the person in this context must be read to mean a registered dealer. The whole object of obtaining a certificate from the appellant is to see that the goods are despatched by them or by a registered dealer and if that is the object, it is difficult to accept the contention that although the representation made by the assessees has not been carried out, by reason of the use of the expression 'a person', the assessees are entitled to escape the purchase tax levied under section 10(b)." (The emphasis* has been supplied by us.) We fail to see in what manner this decision supports the contention of the respondents. The question whether section 10 of the 1953 Act was a charging section or not was not before the court. Further, the language of section 10 *Here italicised. was fundamentally different from the language which section 41(2) of the Act uses. What the said section 10 did was to make a particular transaction liable to payment of purchase tax when by an act on the part of the purchaser sales tax had not become payable. What the said section 41(2) does is to compel the person in default to make good the amount of tax which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 41(2). It is the rate at which tax would have been paid by the person liable to pay it in the case of a transaction of sale or purchase but for the wrongful act of the person in default. That rate will undoubtedly have to be worked out by referring both to the goods which are the subject-matter of the particular transaction of sale or purchase and the entry in the schedule in which they fall and the nature of the particular transaction involved. Merely because the quantum of tax has to be worked out, it does not mean that the rate of tax has not been prescribed or it cannot be ascertained or determined. While considering this aspect of the case one must bear in mind the fundamental distinction between the Income-tax Act and a Sales Tax Act. The Income-tax Act is a tax on income. Its rates vary depending upon the quantum of income which become taxable. It is a tax levied on slab system. Sales tax is not a fiscal measure of this type. Under a sales tax statute each transaction is exigible to tax subject to exemptions and deductions prescribed. The rate of tax for each transaction is provided for in the schedules, and it is this rate which will become attracted. The Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he territory of India or in the course of inter-State trade or commerce and has sold them to the registered dealer giving a declaration in form T in contravention of the certificate in form 14, or (7) by a registered dealer who holds only a recognition and has purchased goods against form 15 for use in the manufacture of goods for sale but sells to the dealer giving a declaration in form T in contravention of his certificate in form 15. Mr. Patel has pointed out that in each of these cases the tax liability of the selling dealer varies, and has submitted that it is impossible for the person contravening a declaration in form T to work out what his own tax liability would be. Mr. Patel has further stated that it is impossible without very elaborate investigation, to determine the nature of the purchases made by the selling dealer and the particular documents under the Sales Tax Act held by him. These arguments do not bear scrutiny when closely examined. It must be remembered that for entry 39 to be attracted the sale has to be by one registered dealer to another registered dealer who is a manufacturer of goods specified in the said entry. Under section 48(1) of the Act every dealer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealer has also to enter in the bill or cash memorandum the full name and style of business of the buyer, his address and the number of the certificate of registration held by him. Thus, the bill or cash memorandum issued by the selling dealer to a purchaser who issues a declaration in form T would give all relevant information as to whether the selling dealer held a licence or authorisation or recognition or permit or not. Bearing this in mind, we will now turn to the seven hypothetical instances mentioned by Mr. Patel, the learned counsel for the respondents, in the course of his arguments and see whether there is any difficulty in ascertaining the rate of tax which had become exempted by reason of the declaration in form T given by the purchasing dealer. In the first case where a registered dealer who does not hold any other document under the Act sells goods which he has purchased from an importer or an unregistered dealer or a manufacturer, he would be liable to pay on the sale price of these goods sales tax at the rate of 5 per cent and general sales tax at the rate of 3 per cent. When the sale is to a dealer who gives a declaration in form T, to which sale we will hereinaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the mechanism of the tax structure under the Act (and we are sure the department is familiar with it) that the tax which the purchasing dealer who has contravened the declaration in form T is liable to pay is 1/4 per cent retail sales tax. Mr. Patel, however, submitted that though in the cases of instances 1 to 5 it may be possible to determine the amount of tax payable, it would not be possible to do so with respect to instances 6 and 7, these being the instances where an authorized dealer who purchases goods from a registered dealer against form 14 makes an entry 39 sale in contravention of the certificate in form 14 and the instance of a dealer holding a recognition purchasing goods against a certificate in form 15 making an entry 39 sale in contravention of that certificate. Admittedly, in these cases he would be liable to pay, if it were an ordinary sale, 3 per cent general sales tax and 1/4 per cent retail sales tax, but if he were to make an entry 39 sale, he would not have to pay any tax at all. Mr. Patel contended that where such a sale had taken place, the purchasing dealer would not know whether his liability, if he contravened his declaration in form T, would be only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a declaration in form T. This can happen in several types of cases, and these cases are to be dealt with on a common sense basis. It is to deal with such types of cases which arise under different circumstances that for certain types of cases the Tribunal has evolved a formula known as "ratio formula" which has been approved by this Court in Commissioner of Sales Tax v. Berar Oil Industries[1975] 36 S.T.C. 473. Such a problem arising in the case of a violation of a condition under an entry 39 sale has to be approached from a business point of view. Where goods in stock are purchased for use in the manufacture of goods for sale, a businessman would normally use in the manufacture of goods that stock which he has first purchased. Thus, the stock which has first come in should be or would be taken to be the stock first used in the manufacture of goods. This is a principle which applies in all cases of blended stock. This is a rule of convenience, and in the case of running accounts it is known as the rule in Clayton's case(2). The full title of that case is Devaynes v. Noble; Clayton's case[1816] 1 Mer. 572 at 608; 35 E.R. 767 at 793. In that case Sir William Grant, M.R., said: "It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le or unworkable with respect to a particular entry or entries. We may also observe that in fact the Tribunal was not concerned with any entry in the notification other than entry 39, and should have confined itself to considering whether it was possible to work out the purchasing dealer's tax liability with respect to that entry alone. It was lastly argued by Mr. Patel, the learned counsel for the respondents, that supposing a purchasing dealer's books of account or records did not furnish the requisite information, the taxing authorities would not be able to estimate that dealer's tax liability under section 41(2) of the Act. According to Mr. Patel, there was no power in the taxing authorities in assessing the tax liability arising by reason of the provisions of section 41(2) to make a best judgment assessment. The mode of determining the tax liability to which a dealer becomes liable by virtue of the provisions of section 41(2) is set out in section 41(3). Under sub-section (3) if the Commissioner of Sales Tax has reason to believe that any person is liable to pay tax under sub-section (2), the Commissioner 1is to assess the amount of tax so due, after giving to that person a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the assessing authority had made a best judgment assessment, which was challenged on the above ground. Repelling the argument the Supreme Court observed: "What is true of the assessment must also be true of reassessment because reassessment is nothing but a fresh assessment. When reassessment is made under section 19, the former assessment is completely reopened and in its place fresh assessment is made. While reassessing a dealer, the assessing authority does not merely assess him on the escaped turnover but it assesses him on his total estimated turnover. While making reassessment under section 19, if the assessing authority has no power to. make best judgment assessment, all that the assessee need do to escape reassessment is to refuse to file a return or refuse to produce his account books. If the contention taken on behalf of the assessee is correct, the assessee can escape his liability to be reassessed by adopting an obstructive attitute. It is difficult to conceive that such could be the position in law." Before we answer the question, we must observe that as pointed out above the Tribunal in deciding the second appeal out of which the present reference arises has tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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