STATE OF MADRAS Vs. N K NATARAJA MUDALIAR

JUDGEMENT

(1.) In a proceeding for assessment of tax for 1963-64 under the Central Sales-tax Act, 1956, the Deputy Commercial Tax Officer rejected the contention of the assessee that a part of the turnover of his business in matches arose out of intra-State sale transactions at the assessee's depot at Ongole (in the State of Andhra Pradesh) to which depot the goods were despatched by him from his place of business in the State of Madras. The Deputy Commercial Tax Officer held that the goods were moved from "the godown stock" of the assessee in execution of contracts of sale with merchants outside the State of Madras, and on that account the turnover from sales was liable to tax under the Central Sales-tax Act. The assessee moved the High Court of Madras under Art. 226 of the Constitution seeking a writ of certiorari quashing the order of assessment, on the grounds, that the provisions of the Central Sales-tax Act which permitted levy of tax at varying rates in different States were invalid, and that the transactions brought to tax were not in truth inter-State transactions. The High Court did not determine the nature of the transactions, but held that sub-ss. (2), (2-A) and (5) of S. 8 of the Central Sales-tax Act, 1956, in operation at the relevant time imposed or authorised the imposition of varying rates of tax in different States on similar inter-State transactions, and the resultant inequality in the burden of tax affected and impeded inter-State trade, commerce and intercourse, and thereby offended Arts. 301 and 303 (1) of the Constitution. The High Court rejected the plea of the assessee that S. 9 (3) of the Act was ultra vires. The State has appealed to this Court with certificate granted by the High Court against the order declaring sub-ss. (2), (2-A) and (5) of S. 8 of the Central Sales-tax Act, 1956, invalid.

(2.) A brief review of the developments in the law relating to imposition of tax on transactions of sale and its inter-relation with the constitutional provisions leading to the enactment of the Central Sales-tax Act, 1956, will facilitate appreciation of the competing views put forward before us at the Bar. The Government of India Act, 1935, by List II entry 48 of the Seventh Schedule conferred power exclusively upon the Provinces to legislate on the subject of "taxes on the sale of goods and on advertisement". In exercise of that power the Provincial Legislatures enacted sales-tax laws for their respective Provinces acting on the principal of "territorial nexus, and picked out one or more ingredients constituting a sale and made it or them the basis of imposing liability for tax. This exercise of taxing power by the Provinces led to multiple taxation of the same transaction by many provinces, the burden of tax falling ultimately on the consuming public.

(3.) In order to remove this burden imposed upon the consumers, Art 286 was incorporated in the Constitution inter alia for the regulation of inter-State sales transactions. This Court in State of Bombay vs. United Motors (India) Ltd., (1953) SCR 1069 held that under the Bombay Sales-tax Act 24 of 1952 sales effected in Bombay in respect of goods exported from the State were not taxable by the State of Bombay, but the importing State was competent to levy tax on transactions of sale in the course of inter-State trade or commerce on persons who were resident outside its territory, provided that the goods were delivered in the importing State for the purpose of consumption therein. This decision made the dealer carrying on business in the exporting State amenable to the sales tax law of the importing State. The question was reconsidered by this Court in Bengal Immunity Co. Ltd. vs. State of Bihar, (1952) 2 SCR 603 . The Court held that the sales or purchases made by an assessee which actually took place in the course of inter-State trade or commerce could not be taxed by any State until by law it was otherwise provided by Parliament. The Judgment in Bengal Immunity Co's case, (supra) removed, by making inter-State sales immune from taxation, the difficulties till then experienced by the trading community, but the importing States which had imposed tax on inter-State sales by non-resident dealers, relying on the principal of the judgment in United Motors case, (1953) SCR 1069 were faced with innumerable claims for restitution of the tax realized. The President then promulgated Ordinance No. III of 1956 which was later replaced by the "Sales Tax Laws Validation Act VII of 1956" with the object of restoring for the period specified in the Act the decision in United Motors case (1953) SCR 1069.