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TMI Blog1995 (12) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are heard together and they are decided by this common judgment. 4.. We may also point out that the appellants, who have preferred writ petitions, apart from challenging the constitutionality of the aforesaid provisions, have also challenged the assessment order. In some of the writ petitions, notices issued for assessment are challenged and in others the assessment orders, in addition to challenging the validity of section 12-A of the Act and rule 18-C of the Rules, are challenged. 5.. The contentions advanced by Mr. C. Natarajan, learned counsel for the petitioners, are as follows: 1.. The State under entry 54, List II, can legislate only the tax on the price at which goods are contracted to be sold. The measure of the liability can be the consensual price. The State is not competent to levy sales tax on a fair price or market price disregarding the actual price charged. 2.. That as per section 2(n) sale is the transfer of property in goods for cash or deferred payment, and similarly as per section 2(r) turnover is the amount for which goods are sold. Section 3(2) is the charging section. As per this section sales tax is payable by a dealer on the "turnover in each ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained in section 12-A of the Act, that the norms mentioned therein are only illustrative and they cannot be considered to be exhaustive one. 8.. In support of their respective contentions, learned counsel appearing for the petitioners and appellants, and the learned Advocate-General for the State, have relied upon certain decisions. We will advert to them at the appropriate stage, in the course of this judgment. 9.. Re. section 12-A of the Act. Entry 54, List II of Seventh Schedule of the Constitution reads thus: "Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I." 10.. Entry 92-A, List I of Seventh Schedule of the Constitution reads thus: "Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce." It may be pointed out that entry 54 of List II and entry 92-A of List I came to be inserted by the Constitution Sixth Amendment Act, 1956. Entry 92-A of List I of Seventh Schedule, deals with taxes on the sale or purchase of goods, but it confines to the sale or purchase of goods taking place in the course of interState trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as follows: "Statement of Objects and Reasons The Government set up the Tamil Nadu Sales Tax Committee in 1977 to comprehensively examine the procedures in regard to assessment, collection and appeal in the matter of sales tax law with a view to suggest changes which would subserve the triple objectives of reducing hardship to the assessees, improving collections and eliminating corruption. The Committee has made certain recommendations with regard to among others, refund of tax in respect of sales return, the procedure adopted at check-posts, imposition and reduction of penalty, etc., to mitigate the hardship experienced by dealers. The Committee has also agreed with certain recommendations of the Officer on Special Duty for Rationalisation and Simplification of Commercial Taxes Acts and Rules with regard to levy of penalty, detention of goods at check-posts, etc. The Government have examined the above recommendations and have decided to amend suitably the Tamil Nadu General Sales Tax Act, 1959 (Tamil Nadu Act 1 of 1959). 2.. The Government have also decided to amend items 86 and 120 of the First Schedule to the Act so that hosiery goods made out of staple fibre yarn are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Legislature for inserting a new provision as contained in section 12-A of the Act. It is also relevant to notice at this stage that before passing the Tamil Nadu General Sales Tax (Second Amendment) Act, 1979 (Act 47 of 1979) the State Government had appointed the Tamil Nadu Sales Tax Committee, in 1979. The said Committee went into several matters, made indepth study and also noticed the fraud committed in invoicing with a view to evade payment of tax on sales and purchases. It recommended thus: "14.2 Under Invoicing frauds. 14.. 2.1. Another method of evading a sizable portion of the tax is by the manufacturer of the product subject to single point sales tax making sales to a closely related person or closely held company or subsidiary or an associated concern at prices much lower than the market price. These are called sole distributors or sole agents or given some other suitable nomenclature. Sales tax at the first point will be levied on the invoice value when the manufacturer makes the sale at a "low" price. These intermediaries by whatever name called become the second sellers and sell the goods at a price very much higher than the first sale invoice price. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in section 12-A of the Act, to the extent it enables the assessing authorities to determine the price of goods sold or purchased, falls outside the competence of the State Legislature and therefore, it is bad in law. 17.. No doubt in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353 (SC), it has been specifically stated thus: "We are unable to agree with this contention. If the words 'sale of goods' have to be interpreted in their legal sense, that sense can only be what it has in the law relating to sale of goods. The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense, and that, accordingly, the Legislature must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law. It has been already stated that, both under the common law and the statute law relating to sale of goods in England and in India, to constitute a transaction of sale there should be an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessing authorities to determine whether the price mentioned therein is bona fide and can be accepted as representing true and real concessional price as reflected in the accounts when compared with the price that prevailed in the market at that time. Therefore, it is not possible to hold that the provisions contained in section 12-A of the Act impinge upon the legislative power of the Parliament as contained in entry 92-A of List I of Seventh Schedule, thereby travelling beyond the scope of the power conferred upon the State Legislature under entry 54 of List II of Seventh Schedule. Therefore, it is not possible to hold that the power to determine, as conferred by section 12-A of the Act on the assessing authority, as to whether the price stated in the return relating to sale or purchase of such goods is true and represents the real market price or not, would amount to effecting the deemed sale or interfering with the sale or purchase transaction. In effect the entire exercise under section 12-A of the Act is to determine whether there is an attempt on the part of the dealer to evade the payment of sales tax. This exercise is undertaken when a doubt is entertained about the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence at the time when sub-section (2) came to be enacted-since on the construction canvassed on behalf of the revenue, the effect of sub-section (2) would be to penalise the assessee for transferring his capital asset for a consideration lesser by 15 per cent or more than the fair market value and that would constitute unreasonable restriction on the fundamental right of the assessee to dispose of his capital asset at the price of his choice. The court must obviously prefer a construction which renders the statutory provision constitutionally valid rather than that which makes it void. We must, therefore, hold that sub-section (2) of section 52 can be invoked only where the consideration for the transfer has been understated by the assessee or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such an under-statement or concealment is on the revenue. This burden may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration received by him and there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und the date of transaction of sale and purchase as shown in the accounts. Necessarily, it follows that such prevailing market price cannot be of any other assessment year. It must be of the same assessment year and at the same time, it must have a proximity to the date of sale and purchase transactions as entered in the accounts of sales and purchase. It is only in such cases, the section gives power to the assessing authorities till the expiry of five years from the assessment year to which the return relates. Thereafter, the assessing authority has to give an opportunity to the dealer and hold an inquiry as he may consider necessary and decide. Sub-section (2) of section 12-A also lays down the procedure to be followed in such cases, viz., the procedure of best judgment assessment as contained in sub-sections (2) to (5) of section 16 of the Act. In addition to this, rule 18-C of the Rules also prescribes certain guidelines for the purpose of determining as to whether the price of sale or purchase of goods as entered in the accounts is really a consensual price. The contention is that the provision enables the authorities to re-determine the consensual price of the sale or purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Andhra Pradesh General Sales Tax Act, 1957 as amended by the Andhra Pradesh General Sales Tax (Amendment) Act (18 of 1985). The said section reads as follows: "Section 14-B: Assessment of sales shown in accounts at low prices.(1) If the assessing authority is satisfied that a dealer has, with a view to evade the payment of tax, shown in his account sales or purchase of any goods at prices which are abnormally low compared to the prevailing market prices of such goods, it may, at any time within a period of four years from the date on which any order of assessment was served on the dealer, assess or reassess the dealer to the best of the judgment on the turnover of such sales or purchases after making such enquiry as may be necessary and after giving the dealer a reasonable opportunity to show cause against such assessment. (2) The provisions of section 14 including penalty shall apply to assessment and reassessment of escaped turnover under this section." No doubt, substantially, section 14-B of the Andhra Pradesh Act is similar to section 12-A of the Act, but the learned Judges proceeded on the basis that the said section was vague and therefore, did not contain any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Tax Act. They contained a procedure to compute the turnover of the assessee for the purpose of assessment under the provisions of the Sales Tax Act. Hence, we are of the view that section 12-A of the Act cannot be held to be either unreasonable or suffering from the vagueness, nor it would lead to any arbitrary exercise of the power. Similarly, it cannot be held that it lies beyond the power of the State Legislature as incorporated in article 246(3) read with entry 54, List II of the Act. 24.. Rule 18-C: Rule 18-C reads thus: In making an assessment under section 12-A, the assessing authority shall take into account such of the following factors as may be relevant to the determination of the prevailing market price of the goods, namely: (i) the prices charged by other dealers at the relevant stage of sale of similar goods during the relevant period; (ii) the difference between the price charged by the dealer on his sale and the price charged by the second and subsequent dealers on the sale of the same goods; (iii) the difference between the price paid by a dealer towards the purchase of the goods from the earlier seller and the price charged for the resale of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken note of, for the purpose of determining whether the consensual price mentioned in the accounts relating to sale or purchase transaction was a real one or was only intended to evade payment of tax. By determining the real consensual price, the assessing authority or the statute or the rules providing a procedure for best judgment assessment will not be making a fresh contract of sale between the parties to the transaction. It will be only providing for determination of the real consensual price with a view to determine the actual and real turnover. Clauses (i) to (iv) of rule 18-C prescribes the factors to be taken note of while determining the real consensual price and not the market price as contended by learned counsel for the petitioners and the appellants. The four factors mentioned therein are the well-known factors for the purpose of determining the real consensual price. By following the same, the assessing authority can come to the real consensual price of sale or purchase of goods. We have already pointed out that before embarking upon such an exercise, the authority must be satisfied about the bona fide nature of the returns and for the purpose of determining whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt difference is mentioned in clause (iv) only to provide a guiding factor for the purpose of determining whether the return submitted is bona fide or not and whether the said return represents the real consensual price. It is rather a limitation on the power of the assessing authority than causing prejudice to the dealer. If the difference is less than 15 per cent, it will not be possible for the assessing authority in the normal course to invoke the provisions contained in section 12-A of the Act. In addition to this, in certain cases, even if the difference is 15 per cent or more, it would depend upon the relationship of the parties to the transactions. 26.. The questions similar to the one before us arose before the Supreme Court in K.P. Varghese v. Income-tax Officer, Ernakulam [1981] 131 ITR 597 wherein the validity of the provisions........... contained in sub-section (2) of section 52 of the Income-tax Act, 1961 was considered. While dealing with the question of determination of the bona fide nature of the transaction, the Supreme Court observed thus: "But the question then arises, why has Parliament introduced the first condition as a pre-requisite for the applicabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee. It is, therefore, clear that sub-section (2) cannot be invoked by the revenue unless there is understatement of the consideration in respect of the transfer and the burden of showing that there is such understatement is on the revenue. Once it is established by the revenue that the consideration for the transfer has been understated or, to put it differently, the consideration actually received by the assessee is more than what is declared or disclosed by him, sub-section (2) is immediately attracted, subject of course to the fulfilment of the condition of 15 per cent or more difference, and the revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the assessee. That would in most cases be difficult, if not impossible, to show and hence sub-section (2) relieves the revenue of all burden of proof regarding the extent of understatement or concealment and provides a statutory measure of the consideration received in respect of the transfer. It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as gift could not be intended to be charged also as capital gains. Moreover, if sub-section (2) is literally construed as applying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in an amount being taxed which has neither accrued to the assessee nor been received by him and which from no view-points can be rationally considered as capital gains or any other type of income. It is a well-settled rule of interpretation that the court should as far as possible avoid that construction which attributes irrationality to the Legislature. Besides, under entry 82 in List I of the Seventh Schedule to the Constitution, which deals with 'Taxes on income other than agricultural income' and under which the Incometax Act, 1961, has been enacted, Parliament cannot choose to tax as income an item which in no rational sense can be regarded as a citizen's income or even receipt. Sub-section (2) would, therefore, on the construction of the revenue, go outside the legislative power of Parliament and it would not be possible to justify it even as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the notices issued for assessment and such of those who have challenged the orders of assessment, are given time till January 15, 1996 to file objections to the show cause notices or to prefer appeals against the orders of assessments, as the case may be. In such an event, the assessing authorities and the appellate authorities shall consider the objection and the appeals, without going into the question of limitation. The assessments shall be finalised and the appeals shall be decided in the light of the observations made and the interpretation placed in this judgment on section 12-A of the Act and rule 18-C of the Rules. However, we make no order as to costs. The W.M.Ps. are also disposed of. 28.. We any also point out that while determining the real consensual price, when compared with the prevailing market price, the price at which similar goods are sold by the retailers and the price at which the goods are sold by wholesalers, cannot be the comparable price for the purpose of determining the real consensual price of the wholesaler. Similarly, the price at which the wholesaler has sold the goods shall not also be the prevailing market price for the purpose of determining ..... X X X X Extracts X X X X X X X X Extracts X X X X
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