MADURA MILLS CO LTD Vs. STATE OF MADRAS

JUDGEMENT

(1.) THE petitioner, a spinning mill with its headquarters at Madurai, assessed to sales tax on its purchase turnover in cotton, applied under section 12-B of the Sales Tax Act to set aside the order of the Appellate Tribunal which confirmed the assessment on a turnover of (1) Rs. 3,54,152-9-9 in the assessment year 1949-50 (the transactions were between 26th January, 1950, and 31st March, 1950, T.R.C. No. 21 of 1957); (2) Rs. 4,51,24,252-7-3 in the assessment year 1952-53 (T.R.C. No. 22 of 1957); and (3) Rs. 6,70,57,555-5-3 in the assessment year 1951-52 (T.R.C. No. 23 of 1957). THE main ground on which the petitioner-assessee claimed that these items of its turnover were not assessable to sales tax is that same in all the three assessment years, and we find it convenient to dispose of all the three petitions together, even as the Tribunal disposed of the appeals, by a single judgment. THE petitioner-assessee was a dealer, and in the relevant assessment years the assessee obtained a licence in conformity with rule 5 of the Sales Tax Rules. THE Tribunal found that the turnover, the taxability of which was in issue was that of purchase of cotton from persons or firms resident outside the State of Madras, which the petitioner effected through its buying agent, Messrs Comorin Investment and Trading Co., Ltd. THE Tribunal recorded : "It is also clear ............. that Messrs Comorin Investment and Trading Co., was used as an agent by the appellants for effecting the purchases and they were paid a small commission by the appellants for the purpose. THEre is evidence to show that Messrs Comorin Investment and Trading Co., Ltd., clearly informed the foreign sellers about their capacity as the agents of the appellants for the purpose of setting the transactions. THE property in the goods passed directly from the seller to the appellants and the price was paid by the appellants to the sellers." THE Tribunal further found : "THEre is no doubt that the cotton was despatched by the seller to the buyer directly using either the railway or the steamer for conveyance." THE Tribunal sustained the claim of the department, that these transactions came within the scope of the Explanation to Article 286(1)(a) of the Constitution as the cotton was delivered to the assessee as purchaser for consumption within the State of Madras, and that, as the transactions had to be assessed to sales tax at the point of purchase by spinner, the assessee was liable to be taxed on the turnover. It should be convenient to refer to the transactions that fell within the scope of the Explanation to Article 286(1)(a) of the Constitution as "Explanation sales", a phrase coined for convenience of use even in the earlier decisions of this and other courts.

(2.) THE assessee did not challenge the stand taken by the department all through, that these were all explanation sales, that is, sales in the course of inter-State trade, which however came within the scope of the Explanation to Article 286(1)(a) of the Constitution. That, in the case of the explanation sales, where the delivery is within the State of Madras, that State has a right to tax the transactions to sales tax cannot be challenged. Section 22 of the Sales Tax Act provided the statutory basis for the levy of sales tax on such transactions, read with section 3 of the Act and the other relevant statutory provisions and rules. That was what was laid down in Mettur Industries Ltd. v. State of Madras ([1956] 7 S.T.C. 691) and that principle was approved of by the Supreme Court in Sundararama Iyer and Co. v. State of Andhra Pradesh ([1958] 9 S.T.C. 298). Section 22 of the Act came into play when, after the decision of the Supreme Court in Bengal Immunity Co. Ltd. v. State of Bihar ([1955] 6 S.T.C. 446), Parliament lifted the ban on the rights of the States to tax inter-State sales during the specified period by enacting the Sales Tax Laws Validation Act 7 of 1956.

(3.) NO doubt clause (c) restricts the exemption of transactions to sales by licensed dealers. In the case of cotton sold to a spinning mill and cotton sold to a dealer who exports the cotton outside the State, it should be remembered the seller is not made liable to tax at all, because under rule 4(2)(bb) it is the purchaser that has to pay the tax and not the seller. Where there was no tax liability at all, it may not be quite accurate to say that there was exemption from tax liability. So the cases of sales to a spinning mill and to an exporter would not be taxable in the hands of a seller, even if sub-clause (c) had not been enacted. Sub-clause (c) provided for an exemption, and confined that exemption to licensed dealers, obviously in conformity with rule 5 of the Sales Tax Rules. We have already pointed out that the rule-making authority had not the authority to confine the scope of section 5(ii) of the Act only to licensed dealers under a rule. Whether because of clause (c) of rule 4-A(iv) dealers other than licensed dealers would be liable to tax under rule 4(1) of the Turnover Rules does not arise for determination in this case. But, if it did arise, the position would be that rule 4 did not concern itself with prescribing a single point required by section 5(ii). Only two points were prescribed by rule 4-A(iv). It is the absence of a valid prescription that would make other transactions non-taxable. The exemption that clause (c) of rule 4-A(iv) purported to grant would therefore be really illusory. But that, in our opinion, is not enough to import the requirement that the transactions referred to in clauses (a) and (b) should be only between licensed dealers, and that conclusion we have reached on the express language employed in rule 4-A(iv). Therefore the fact that the assessee purchased the cotton in question from unlicensed dealers did not take these transactions outside the scope of the taxing provision, rule 4-A(iv) read with section 5(ii) and section 3 of the Act.