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TMI Blog1975 (7) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... , a vend fee at the rate of ₹ 1.10 per litre. The levy of vend fee was in addition to sales tax. The Synthetics Chemical company challenged the validity of the vend fee, inter alia, on the ground that U. P. Legislature had no legislative competence to impose excise duty on denatured spirit, which was alcohol unfit for human consumption. A Division Bench of this Court in Synthetics and Chemicals Limited v. State of U. P. and another, 1973 A. L. J. 732 sustained this contention and held that the State Legislature could, under Entry 40 of List 2, impose duties of excise only on intoxicating liquors fit for human consumption. The power to impose excise duty on all other goods was within the exclusive jurisdiction of Parliament under Entry 45 of List 1 of Government of India Act, 1935 (which corresponds to Entry 84 of List 1 of the Constitution). It was also held that even if denatured spirit be treated as an intoxicating liquor, it not being fit for human consumption, was outside the taxing power of the State Legislature. The levy of excise duty in the shape of vend fee was illegal. 2. On 12th June, 1973 the Governor of this State issued Ordinance No. 6 of 1973. This Ordinance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cutive exercises was that alcohol ceased to be taxable under the U. P. Sales Tax Act, 1948 ; but its first sale became taxable under the U.P Sales of Motor Spirit, Diesel Oil and Alcohol Taxation Act, 1939 at the rate of forty paise per litre. The tax was payable by the dealer who effected the first sale in this State. The U. P.-Sales of Motor Spirit and Diesel Oil Taxation (Amendment) Act 12 of 1974 repealed and enacted Ordinance No. 9 of 1974 on 24.6.74. 6. On 21st May, 1974, the Synthetics and Chemical Company field writ petition No. 2958 of 1974 in this Court. It challenged the validity of the imposition of sales tax under the Ordinance. Shri V. P. Misra, learned counsel appearing for the petitioner, submitted :- (1) Alcohol as defined by the Taxation Act does not in law include denatured spirit. Sale of denatured spirit was hence not liable to tax under that Act. (2) In law the levy was excise duty and not sales tax, and was as such incompetent. (3) The Ordinance violated Article 14 of the Constitution. (4) The levy was confiscatory. 6 (a). The case was argued on 26th August, 1974 and subsequent dates. The judgment was reserved on 30th August, 1974. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of 1948 by Sections 21 and 22 introducing amendments made by Ordinance No. 14 of 1974. The validity of this Act was challenged by the petitioner on the same grounds as were raised in respect of the Ordinance. In view of these legislative changes the writ petitions were heard again on 9th April, 1975 onwards. The questions of law. 9. Mr. S. C. Khare, learned counsel appearing for the petitioner company submitted :- (1) In law the levy is an excise duty, and is outside the legislative competence of the State Legislature. (2) The Amending Ordinance and the Act violate the guarantee of equality under Article 14 of the Constitution. (3) Alcohol being a controlled industry under the Industries (Development and Regulation) Act of 1951, could not in law be subjected to tax by the State Legislature. (4) The impost being confiscatory, is a colourable exercise of power of taxation and is void. (5) The levy violates Articles 301 and 304 (b) of the Constitution. 10. The incidence of sales tax under the Taxation Act, 1939 as amended, is on the dealer who effects the first sale. The Act does not authorise the selling dealer to pass on the sales tax to the purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... List was as follows : Taxes on the sale of goods and on advertisements. Section 100 has been enacted as Article 246 of the Constitution. Entry 45 of List 1 and Entry 40 of List 2 correspond in material respects, with Entry 84 of List 1 and Entry 54 of List 2 of the 7th Schedule to the Constitution. Entry 40 of List 2 is the same as Entry 51 of List 2 of the Constitution. 12. The constitutional validity of the C. P. and Berar Sales of Motor Spirit and Lubricants Taxation Act. 1938 came up for consideration before the Federal Court in In re C. P. Motor Spirit Act, AIR 1939 FC 1. That Act levied on every retail dealer a tax on the retail sales of motor spirits or lubricant at the rate of five per cent on the value of such sales. 'Retail dealer' was defined as any person who, sells or keeps for sale motor spirit or lubricant for the purpose of consumption by the person by whom or on whose behalf it is or may be purchased. The Federal Court held that normally the term 'excise duty' covered all kinds of levies commencing from the manufacture or production of the goods to their transport, sale or even consumption; but in view of Entry (40) of List 2 the powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r production. The manufacturer or producer cannot of course sell his commodity unless he has first manufactured or produced it ; but he is liable, if at all, to sales tax because he sells and not because he manufactures or produces ; and he would be free from liability if he chose to give away everything which came from his factory. The Court held that the power of the Provincial Legislature to levy a tax on the sale of goods extends to sales of every kind, whether first sale or not. The Federal Court specifically dissented from the view which had held the field in Australia, for instance, in Commonwealth Oil Refineries Ltd. v. South Australia, (1926) 38 CLR 408 ; Matthews v. The Chicory Marketing Board, (1938) 60 CLR 2683, that tax on first sales was excise duty. 14. This decision of the Federal Court was affirmed by the Privy Council in Governor-General in Council v. Province of Madras, AIR 1945 PC 98 Lord Simonds speaking for the Board observed that the tax imposed by the Madras Act was not a duty of excise in the cloak of a tax on sales. Lacking the characteristic features of a duty of excise such as uniformity of incidence and discrimination in subject matter, it was in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the production or manufacture of goods. 18. The vital and material aspect is to find whether the levy is on the event of manufacture or production or on the act of sale. The nature of the levy would depend upon an answer to this crucial question. The other indicia or characteristics like the actual stage or the method of the collection of the levy, according to the Supreme Court in Shinde Brother's case (paragraph 28) is no decisive but may throw some light in cases of doubt. 19. In view of the Federal Court decision in 1939 F. C. 1, it cannot be doubted or disputed that the U. P. Sale of Motor Spirit, Diesel Oil Taxation Act, 1939, which levied tax on retail sales, did not impose an excise duty. The fact that the State Legislature introduced alcohol including denatured spirit in this Act would evidence an intention to impose sales tax on it. The Federal Court decision in the subsequent case (1942 F. C. 33) settled that imposition of tax on first sales, will per se be a tax on sales within the legislative competence of the State and will not for that reason alone be a duty of excise. Hence the fact that the Amending Ordinance No. 9 of 1974 changed the taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t sale of a commodity after its manufacture or production in the State. 22. There is nothing in these provisions which creates or fastens the liability of the impost on the event of manufacture or production of these commodities. The fact that the selling dealer may himself have produced or manufactured these commodities is a fortuitous circumstance, Take the case of manufacturer who may himself consume or destroy or give away his goods. He will not be liable to tax on such goods under the amended Act. He becomes liable only if he sells the commodity, irrespective of the source of his acquisition of the goods being manufacture or import from outside the State. The liability is qua seller and not qua manufacturer or producer. 23. It was argued that uniformity of incidence is an indicia of excise duty. In Sindhe Brother's case, AIR 1967 SC 1512, Sikri, J. holding that the Duty for a licence was not excise duty held :- Fifthly, the duty is not uniform in incidence because the amount collected has not relation to the quantity or quality of product but has only relation to what the petitioner thought he could recoup by the sale of the excisable articles. In the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spirit cannot pass on to his purchaser the levy of sales tax because the price at which he can sell is fixed by Ethyl Alcohol (Price Control) Order, 1971 issued under Section 18-G of the Industries (Development and Regulation) Act, 1951. The price fixed under this Order does not permit the inclusion of sales tax payable by the seller. So the levy is not sates tax. 27 (a) The feature that a levy can be passed on to the consumer is as common in a duty of excise as in sales tax. In R.C. Jall v. Union of India, AIR 1962 SC 28l, the Supreme Court referring to an excise duty held that it is an indirect duty which the manufacturer or producer passed on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer. On the other hand there are several decisions which hold that though generally sales tax legislation permits the dealer to pass on the sales tax to the purchaser ; but it is not an essential characteristic of sales tax. 27 (b). In J. K. Jute Mills Co. v. State of U. P., (1961) 12 STC 429 at 438 = AIR 1961 SC 1534 the Supreme Court said that although it was true that sales tax was, according to accepted notions, intended to be passed on to the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x on the basis of volume of the goods sold is within legislative competence. 29. To conclude : The levy in the present case cannot, in law, be characterised as a duty of excise. It is a tax on sales of goods, falling within the competence of the State Legislature. Point 2 : Article 14 : 30. Learned counsel next submitted that the impugned Ordinance and the Act suffer from the vice of discrimination in violation of Article 14 of the Constitution, from more than one points of view. It was argued that from the commencement of the U. P. Sales Tax Act in 1948 till 1974, when the impugned Ordinance was passed, alcohol was covered by the U.P. Sales Tax Act. The Ordinance took it out of the ambit of the U. P. Sales Tax Act and made this commodity taxable under the Taxation Act of 1939 without any rational basis. This was discriminatory. We are unable to sustain this submission. Both Acts provided for tax on sales. If the Legislature felt that it could more conveniently enforce the levy and administer the collection and prevent the evasion of sales tax on alcohol under the Taxation Act of 1939 through the Excise Department, that by itself provides a rational basis for the change. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment Industries which Parliament declares to be expedient in the public interest. Entries 82 to 92-A of List I confer power on Parliament with regard to taxation on a variety of objects and subjects. But there is no entry conferring power to levy tax on industries covered by Entry 52. On the other hand Entry 54 of List II expressly confers power on State Legislature in respect of tax on the sale or purchase of goods. 33 (a). The question is whether Entry 52 of List I which relates to control and regulation of declared industry by the Union will include power to levy taxes on such industries ? In Sundaramarier v. State of Andhra Pradesh, AIR 19i8 SC 468 (Para 55) it was held that under the scheme of the entries in the lists, taxation is regarded as a distinct matter and is separately set out. This question came up for consideration again before the Supreme Court in M/s. R.M.D.C. {Mysore) Private Ltd. v. State of Mysore, AIR 1962 SC 594. The two houses of the Mysore Legislature passed a resolution under Article 252 (1) of the Constitution that it is desirable that the control and regulation of Prize Competitions and all other matters ancillary thereto, would be regulated in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a taxing statute is colourable would not and cannot normally be raised merely on the finding that the tax imposed by it is unreasonably high or heavy, because the reasonableness of the extent of the levy is always a matter within the competence of the Legislature. Such a conclusion can be reached where in passing the Act, the Legislature has merely adopted a device and cloak to confiscate the property of the citizen taxed. If, however, such a conclusion is reached on the consideration of all relevant facts, that is a separate and independent ground for striking down the Act. 34 (a). His Lordships referred to the Supreme Court's decision in K. T. Moopil Nair v. State of Kerala, AIR 1961 SC 552. In that case, the court had ocasion to consider the confiscatory character of the operative provisions. On making calculations it was found that the petitioner, who challenged the validity of the Travancore-Cochin Land Tax Act, 1955 in that case was making an income of ₹ 3,100/- per year out of his forest and his liability for taxation in respect of the forest land amounted to ₹ 54,000/-. It was also found that if the owner did not pay the tax, his lands were liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of the Bill on banking business. It was found that till the Bill was passed the tax on all banks doing business in the province amounted to $ 72,200 per annum. On this another tax was 'imposed increasing the sum realised by S 140,000/- per annum. The additional tax proposed by Bill No. 1 amounted to $ 2,081,925 in each per year. The Privy Council held- Their Lordships do not disagree with the Chief Justice and Devis, J. that the facts are sufficient 'to show that such a rate of taxation must be prohibitive'. In coming to this conclusion it seems to their Lordships that the learned Judges were justified in considering that the magnitude of the tax proposed for Alberta was such that if it were applied by each of the other provinces, it would have the effect of preventing banks from carrying on their business, (emphasis supplied) (here in italics). The Privy Council went on to hold :- It was rightly contended on behalf of the appellant that the Supreme Court and the Board have no concern with the wisdom of the Legislature whose Bill is attacked ; and it was urged that it would be a dangerous precedent to allow the views of members of the Court as to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be recovered as an arrear of land revenue and shall be recoverable in addition to and not in substitution for any other penalty incurred under the Act. Section 5 provides for registration of dealers. The registration certificate is renewable annually. Section 6 provides that no person shall carry on business as a dealer in any district without holding a registration certificate under Section 5. Under Section 8 the prescribed authority can suspend or cancel the registration certificate if, inter alia, any tax payable under Section 3 is not duly paid by the holder of such certificate. Under Section 12 any person who evades or attempts to evade the payment of any tax payable by him is punishable with line which may extend to two thousand rupees So evasion or an attempt to evade the payment of tax is an offence. Under Section 10 (b) of the Act the State Government may empower any officer of any Department in its control to seize and remove or detain, inter alia, motor spirit or diesel oil or alcohol and any container thereof in the possession of a dealer who is carrying on business in contravention of Section 6 or has committed any offence under the provisions of the Act or of the ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have knowledge of the maximum sale price fixed under it and of the fact that the selling dealer cannot charge from his purchaser the sales tax that he may be liable to pay to the State Government. The impugned Act of 1975 or the Ordinance of 1974 also do not anywhere authorise the selling dealer to pass on to the purchaser the sales tax payable by him. 41. It is thus evident that the selling dealer gets a maximum of 35 or 36 paise per litre on sale of Alcohol and has to pay from his own pocket a tax of 40 paise per litre. It does not require much imagination to see that the imposition of this tax is, under circumstances, so prohibitive as to compel any practical businessman to immediately close down his business of selling alcohol ; because otherwise even if it be imagined that he manufactures or produces or obtains alcohol absolutely free of cost, yet he will have to pay more as sales tax than he could possibly recover as the sale price. He will always run the business at loss. He will never be able to pay the sales tax fully from the sale proceeds, much less from his income. He will have to utilize the capital of his business to pay this levy. In a short time the capital wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not violative of Article 301. 44. Learned counsel placed reliance on State of Madras v. Nataraja Mudaliar, AIR 1969 SC 147. That case dealt with the Central Sales Tax Act. It was held that tax under the Sales Tax Act on inter-State sales is in its essence a tax hampering movement of trade or commerce, since by the notification in Section 3 of the Act a sale or purchase of goods is deemed to take place in the course of inter-State trade or commerce, if it (a) occasions the movement of goods from one State to another ; or (b) is affected by a transfer of documents of title to the goods during their movement from one State to another. This case is not applicable to a State sales tax which is not levied on inter-State sales. The case of sales tax imposed by the States will be covered by the decision of the Supreme Court in Andhra Sugars Limited. 45. The decision of the Supreme Court in Firm A, T. B. Majid Co. v. State of Madras, (1963) 14 STC 355 is also distinguishable. There it was held that sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offened Article 301 of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is whether the Legislature would have enacted the valid part if it had known that the rest of the statute was invalid. The amendments to the Taxation Act of 1939 being unconstitutional, the amendments introduced in the U. P. Sales Tax Act excluding alcohol from its purview will fall with It as forming part of the same integrated legislative policy and on the ground that the Legislature would not have excluded alcohol from the U. P. Sales Tax Act of 1948 if it had known that it could not validly tax It in the form it has done under the Taxation Act of 1939. 47 (b). In the result the writ petition succeeds and is allowed with costs. The U. P. Ordinances Nos. 9 and 14 of 1974 and U. P. Act No. 12 of 1974 and Chapter III of the U. P. Taxation and Land Revenue Laws Act of 1975 in so far as they refer to alcohol are quashed. Sections 21 (2) and 22 of the aforesaid Act No. 8 of 1975 as also the notification dated 29th April, 1974, issued under Section 4 of U. P. Sales Tax Act, 1948, in so far as they relate to alcohol are quashed. The respondents are directed to forthwith refund to the petitioner company the amounts if any paid or recovered from it in pursuance of the unconstitution ..... X X X X Extracts X X X X X X X X Extracts X X X X
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