Messrs Mohanlal Hargovind Das, Bidi Merchants vs The State of Madhya Pradesh and Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Petition No. 67 of 1955

Decision Date: 20 September 1955

Coram: Natwarlal H. Bhagwati, B. Jagannadhadas, Syed Jaffer Imam

In this case the Supreme Court recorded that the petitioners were a partnership of bidi manufacturers operating out of Jabalpur in the State of Madhya Pradesh. They were registered as “dealers” under the Central Provinces and Berar Sales Tax Act, 1947 and carried on a large‑scale business of producing and selling bidis. To obtain the raw material for their product they imported tobacco from the State of Bombay. In Bombay the tobacco was blended with various indigenous tobaccos through an elaborate process and the finished tobacco was then shipped into Madhya Pradesh. Once the tobacco arrived in Madhya Pradesh the petitioners rolled it into bidis, which they subsequently exported chiefly to the State of Uttar Pradesh and to other states. Dealers in Uttar Pradesh purchased the bidis and resold them to further dealers and to consumers in those states. The sales‑tax authorities of Madhya Pradesh, invoking the threat of criminal prosecution, demanded that the petitioners file a statement of return showing the total purchases of tobacco that had been brought into Madhya Pradesh from outside the state, so that a purchase tax could be assessed and levied on those transactions. The petitioners challenged this demand, contending that the tax demand violated Article 286(2) of the Constitution because the transactions involved inter‑State trade. The petitioners also argued that both they and the Bombay sellers were registered dealers under the Central Provinces and Berar Sales Tax Rules, 1947, and therefore the sales were purely internal to Madhya Pradesh. The Court examined the substance of the transactions rather than their formal label and held that the movement of the finished tobacco from Bombay to Madhya Pradesh clearly constituted inter‑State trade in goods. Consequently, the imposition of the purchase tax by Madhya Pradesh was beyond its authority and contravened the ban on taxes on inter‑State trade prescribed by Article 286(2). The petition was filed in original jurisdiction as Petition No. 67 of 1955 under Article 32 of the Constitution for the enforcement of fundamental rights. Counsel for the State, including the Attorney‑General of India and the Solicitor‑General of India, appeared for the respondents, while counsel for the petitioners represented the bidi merchants.

The Court observed that the contention that the petitioners were registered dealers under the Central Provinces and Berar Sales Tax Rules, 1947, and that the Bombay dealers who supplied tobacco to them were likewise registered as “dealers” for the purpose of the Central Provinces and Berar Sales Tax Act, 1947, did not establish that the transactions were purely internal sales within Madhya Pradesh. The Court emphasized that the substance of the transactions, not their formal label, must be examined. Since the disputed transactions involved the movement of goods across state boundaries, they constituted sales of goods in the course of inter‑State trade or commerce. Consequently, the transactions fell within the prohibition of Article 286(2) of the Constitution, which bars a State from imposing a tax on inter‑State trade. The Court therefore rejected the argument that the transactions were internal merely because both parties were registered dealers in Madhya Pradesh.

In this case, the petitioners were a firm engaged in the large‑scale manufacture and sale of bidis, with their head office located in Jabalpur, Madhya Pradesh. They were registered as “dealer” under the Central Provinces and Berar Sales Tax Act, 1947. In the ordinary course of their business, they imported substantial quantities of tobacco from Bombay, where the tobacco was blended with various indigenous varieties by local vendors through an elaborate process. After the finished tobacco was brought into Madhya Pradesh, the petitioners rolled it into bidis, which were subsequently exported to several other States, primarily Uttar Pradesh. Dealers in Uttar Pradesh and other States who purchased the bidis from the petitioners further sold them to additional dealers and consumers within those States. The Sales Tax authorities of Madhya Pradesh, threatening criminal prosecution, demanded that the petitioners file a statement of return showing the total purchases of tobacco made outside Madhya Pradesh but delivered within the State, for the purpose of assessing and levying a purchase tax on those transactions. The petitioners submitted, under protest, two returns dated 11 September 1954 and 3 December 1954, covering the periods 3 May 1954 to 29 July 1954 and 30 July 1954 to 26 October 1954 respectively, while reserving the right to contest the validity of the assessment and the levy of the tax. The tax authorities further insisted that the petitioners deposit the alleged purchase tax, which the petitioners disputed. The petition was filed under Article 32 of the Constitution, seeking a writ of mandamus or any appropriate order to restrain the State of Madhya Pradesh and its Commissioner of Sales Tax from enforcing the disputed tax, together with consequential relief.

The petitioners claimed that the amount demanded by the Sales Tax authorities amounted to thousands of rupees in each quarter of the year. Consequently, they instituted a petition under article 32 of the Constitution, seeking a writ of mandamus or any other appropriate direction or order that would restrain the State of Madhya Pradesh and its Commissioner of Sales Tax from enforcing the provisions of the Act against them, and they also asked for consequential reliefs. In their petition the petitioners asserted that the tax imposed on the sale or purchase of tobacco that was rolled into bidis and subsequently exported out of Madhya Pradesh violated article 286(1)(a) of the Constitution. They further contended that the tobacco they purchased for the purpose of making bidis for export was never intended to serve as raw material for bidis meant for consumption within Madhya Pradesh, and that section 4(6) of the Act did not apply to such tobacco. Accordingly, they argued that no liability to pay the alleged tax arose. The petitioners also maintained, to the best of their knowledge, that the tobacco had not been notified by the State Government in the Gazette for the purposes of section 12(A) of the Act, and therefore the Sales Tax authorities were not empowered, under the Act, to levy any tax on them. Additionally, the petitioners submitted that the transactions in question formed part of inter‑State commerce, that the State of Madhya Pradesh lacked authority to impose or authorize such a tax, and that the actions of the State authorities contravened article 286(2) of the Constitution. In response, the State filed a counter‑statement denying all of the petitioners’ contentions. The State argued that by purchasing tobacco, which was entered in the petitioners’ registration certificate as raw material for the manufacture of bidis destined for actual delivery in Madhya Pradesh for consumption in that State, the petitioners thereby rendered themselves liable to the tax even though they later exported the bidis to other States, invoking section 4(6) of the Act. The State admitted that the petitioners had imported large quantities of tobacco from the State of Bombay, but asserted that after arrival at the petitioners’ bidi factories the tobacco was cleaned, sieved and blended. The State further pointed out that not only the petitioners but also the Bombay dealers supplying tobacco to them were registered as “dealers” under the Central Provinces and Berar Sales Tax Act, 1947. The petitioners held registration certificate No. LDG/53, which they obtained pursuant to Rule 8 of the Central Provinces and Berar Sales Tax Rules, 1947. When purchasing the tobacco in question, the petitioners made the declarations required by Rule 26(II), stating that they had bought the goods from Shri Shah Chhaganlal Ugarchand Nipani, a dealer bearing the relevant registration certificate.

The petitioners declared that they had purchased tobacco from two registered dealers, namely Shri Shah Chhaganlal Ugarchand Nipani, holder of registration certificate number BMY/93/MP, and Shri Maniklal Chunanlal Baroda, holder of registration certificate number BMY/341MP, on the various dates specified in the returns. The declared purpose of these purchases was to use the tobacco as raw material in the manufacture of goods that would be sold by actual delivery within Madhya Pradesh for consumption in that State.

In the sales‑tax return filed by the petitioners for the quarter commencing on 3 May 1954 and ending on 29 July 1954, the petitioners recorded a purchase price of Rs 16,47,567‑3‑3. This amount represented the value of the tobacco that they had declared to be goods listed in the registration certificates, intended for use as raw material in manufacturing goods for sale by actual delivery in Madhya Pradesh, but which, according to the return, had been utilized for a purpose other than that stated.

When the petitioners filed the return for the subsequent quarter, covering the period from 27 July 1954 to 26 October 1954, they left the corresponding field blank. In doing so, they asserted that the Sales Tax authorities were not entitled to levy any purchase tax on them in respect of the same transaction.

The learned Attorney‑General, appearing on behalf of the petitioners, advanced several points. First, he argued that the transactions were part of inter‑State commerce and therefore fell within the prohibition of Article 286(2); consequently, the State of Madhya Pradesh possessed no authority to impose, nor to authorize the imposition of, tax on those transactions. Second, he contended that, irrespective of the first argument, the goods were delivered for consumption in the State of Uttar Pradesh and thus were not subject to tax levied by Madhya Pradesh. Third, he asserted that Section 4(6) of the Central Provinces and Berar Sales Tax Act was invalid because it contravened the provisions of Article 286(1)(a). Finally, he maintained that even if the preceding contentions were rejected, a proper construction of Section 4(6) showed that it did not apply to the facts of the present case. He further urged that if the Court accepted his initial contention—that the transactions indeed occurred in the course of inter‑State commerce—there would be no need to consider the remaining arguments.

The Court found the Attorney‑General’s first contention persuasive. The respondents had, in their return, admitted that the petitioners had imported large quantities of tobacco from the State of Bombay. The Bombay suppliers processed the tobacco in their warehouses located within Bombay and supplied the finished product to the petitioners in Madhya Pradesh. By importing this finished tobacco into Madhya Pradesh from suppliers who were conducting business in Bombay, the petitioners necessarily caused the movement of the goods across state borders. Consequently, the transactions entered into by the petitioners with these Bombay suppliers resulted in the finished tobacco moving from the State of Bombay to the State of Madhya Pradesh, establishing that the transactions were indeed part of inter‑State trade or commerce.

The Court observed that the transactions under consideration involved the movement of finished tobacco from the State of Bombay to the State of Madhya Pradesh and therefore fell within the course of inter‑State trade or commerce. The learned Advocate‑General of Madhya Pradesh responded that the two individuals named, Shri Shah Chhaganial Ugarchand Nipani and Shri Maniklal Chunanlal Baroda, were themselves dealers who possessed registration certificates numbered BMY/93/MP and BMY/341‑MP, respectively, issued under the Central Provinces and Berar Sales Tax Act, 1947. On the basis of that registration, the Advocate‑General submitted that the transactions were between two registered dealers located in Madhya Pradesh and consequently constituted purely internal sales of the goods. According to that argument, if the sales were internal, they could not be characterized as transactions in the course of inter‑State trade or commerce and therefore would not be liable to the prohibition imposed by article 286(2). The Court held that this submission suffered from an over‑simplification of the factual situation. While it was undisputed that the dealers who supplied the finished tobacco to the petitioners were indeed registered dealers under the 1947 Act, the Court noted that registration alone did not transform transactions that were otherwise inter‑State in nature into intra‑State transactions or internal purchases. The Court emphasized that the true nature of the transactions, rather than their outward form, must be examined. Under section 2(c) of the Act, a person who carries on the business of selling or supplying goods in Madhya Pradesh and who falls within the definition of “dealer” is required, under the threat of a penalty prescribed in section 24, to register as a dealer and to obtain a registration certificate in accordance with section 8(1). The Court explained that merely obtaining such registration to avoid the penalty did not imply that every transaction entered into with other dealers in Madhya Pradesh was automatically an intra‑State transaction, especially when the transactions involved the actual movement of goods across a state border and were clearly sales of goods in the course of inter‑State trade or commerce. Having been taken through the relevant provisions of the Act by the learned Attorney‑General, the Court reaffirmed its view that the transactions the Madhya Pradesh sales‑tax authorities sought to tax were indeed transactions in the course of inter‑State trade or commerce. The Court further observed that engaging habitually in the sale or supply of goods in Madhya Pradesh would amount to carrying on a business of selling or supplying goods in that State, and that even an outside merchant who performed such activities could be said to be carrying on business in Madhya Pradesh and would fall within the definition of “dealer” under section 2(c). Finally, the Court noted that section 8, which deals with the registration of dealers, requires a dealer to be liable to pay tax under the Act before he is obliged to register, and that registration does not by itself create a liability to tax for every transaction entered into by the dealer.

The Act stipulates that a person may not conduct business as a dealer unless he has been duly registered and possesses a valid registration certificate. Consequently, the liability to pay tax under the Act is presumed to arise only when a person becomes liable to pay such tax; until that point, registration as a dealer is not mandatory. Nevertheless, the fact that a dealer is registered does not automatically create a tax liability for every transaction he undertakes. Whenever a question arises regarding the dealer’s liability to pay tax, that liability must be examined in light of the provisions of section 27‑A of the Act, which incorporates the constitutional limitations placed on State legislatures by article 286(1)(a) and article 286(2) of the Constitution. Accordingly, a dealer who has obtained registration under section 8(1) may claim exemption from tax liability for sales or purchases made in the course of inter‑State trade or commerce after 31 March 1951, unless Parliament has enacted a law providing otherwise. In the present case, no such parliamentary provision existed, and all the transactions in question occurred after the specified date. Therefore, the constitutional ban under article 286(2) was operative, and because the transactions were inter‑State in nature, both Shri Chhaganlal Ugarchand Nipani and Shri Maniklal Chunanlal Baroda, as well as the petitioners, were exempt from liability to pay sales tax or purchase tax on those transactions. No tax liability could thus be imposed under the Act for transactions that took place in the course of inter‑State trade or commerce.

The State of Madhya Pradesh argued that the petitioners, at the time of purchasing the finished tobacco, had signed declarations stating that the goods were being bought as raw material for manufacturing products intended for sale and consumption within Madhya Pradesh, and that, pursuant to section 4(6) of the Act, they should therefore be liable for purchase tax on the purchase price if the goods were used for any purpose other than that declared. While the State may enforce sanctions for any deviation from the terms of such declarations, the Court was of the firm opinion that the State is barred from imposing any tax on purchases or sales that occur in the course of inter‑State trade or commerce. Because the underlying transactions were inter‑State, the constitutional prohibition precluded the State from levying tax, and the question of liability under section 4(6) could not arise. Consequently, the petitioners could not be held liable for tax on the basis of their declarations, and the State’s power to enforce the Act in this regard was restrained.

The Court observed that the liability of the petitioners, which was claimed to arise from the declarations they had made, could not survive because at the outset neither Shri Shah Chhaganlal Ugar‑chand Nipani nor Shri Maniklal Chunanlal Baroda had been subject to any tax liability for the transactions in question, and consequently no tax liability could be transferred to the petitioners by virtue of those declarations. Accordingly, because there was no underlying basis for any such liability, the declarations alone were incapable of creating a new liability; therefore the petitioners could not be held liable to tax under section 4(6) of the Act, since the very foundation of the liability sought to be imposed had disappeared. As a result, the Court ordered that the respondents be restrained from invoking or enforcing any provision of the Central Provinces and Berar Sales Tax Act, 1947, against the petitioners with respect to the transactions that were the subject of this petition. This restraint expressly prohibited the imposition of tax on the purchase price of the goods that had been acquired pursuant to the declarations made under Rule 26, even though those goods were identified in the registration certificate as intended for use as raw material in the manufacture of goods for sale, to be actually delivered in Madhya Pradesh for consumption in that State, and even if the goods were subsequently employed for any other purpose under the provisions of section 4(6) of the Act. Finally, the Court directed that the respondents be ordered to pay the costs incurred by the petitioners in pursuing this petition.