State of Madras vs Gurviah Naidu and Co. Ltd

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

Court: Supreme Court of India

Case Number: Appeal (crl.) 107-110 of 1954

Decision Date: 28 October 1955

Coram: S. R. DAS, V. Bose, B. Jagannadhadas, S.J. Imam, N.C. Aiyar

The case is styled State of Madras versus Gurviah Naidu and Co. Ltd and was decided on the twenty‑eighth day of October, 1955. The judgment appears in the All India Reporter for the year 1956, volume one, page one hundred fifty‑eight. The appeal was heard by a bench consisting of the Acting Chief Justice S. R. Das together with Justices V. Bose, B. Jagannadhadas, S. J. Imam and N. C. Aiyar. The reference before the Supreme Court comprised Criminal Appeals numbered one hundred seven, one hundred eight, one hundred nine and one hundred ten of the year 1954. The judgment was delivered by Acting Chief Justice S. R. Das, who indicated that the decision would dispose of all four of the cited appeals.

The State of Madras had instituted the appeals after obtaining certificates under Article 134(1)(c) of the Constitution. These certificates were issued on the basis of a revision judgment dated the twelfth of February, 1954, pronounced by the High Court of Madras. That revision set aside an earlier order dated the twenty‑ninth of December, 1952, which had been made by the Additional First Class Magistrate II at Salem and which had resulted in the acquittal of the accused respondents. Consequently, the State sought to overturn the magistrate’s decision and to enforce liability for the tax assessments that had been earlier imposed.

The respondents were engaged in the business of buying hides and skins in Salem and subsequently exporting these articles to foreign buyers. Their commercial activity involved purchasing the skins in response to orders placed by overseas customers and then forwarding the goods out of India. The Madras General Sales Tax Act was applied to the respondents, and they were assessed sales tax on the value of the purchases made in furtherance of those export orders. The assessments were made at varying amounts corresponding to the respondents’ respective turnovers. Because the respondents failed to pay the full amount of the tax that had been assessed, the authorities instituted criminal complaints against them under Section 15(b) of the Madras General Sales Tax Act.

Before the magistrate, the respondents contended that the purchases for export were made in the course of export outside the territory of India and therefore could not be subjected to sales tax under Article 286(1)(b) of the Constitution. They argued that the assessments were illegal and that any failure to pay such illegal assessments could not constitute an offence. The prosecution, on the other hand, maintained that the purchases were not “in the course of export” as contemplated by Article 286(1)(b) and, irrespective of that question, argued that Section 16A of the Madras General Sales Tax Act expressly barred any challenge to the validity of the assessment in any criminal proceeding. The magistrate noted the prosecution’s view that the transactions did not fall within the constitutional export exemption, but without deciding that issue, the magistrate proceeded to address the second contention concerning Section 16A. Relying on two earlier decisions of the Madras High Court, the magistrate concluded that the provision of Section 16A prevented the respondents from questioning the assessment’s validity in the criminal trial and therefore upheld the prosecution’s position on that point.

The learned Magistrate found that the assessment of sales tax and the failure to pay that assessed tax had been proved, and on that basis he convicted the respondents under Section 15 (b) of the Madras General Sales Tax Act. He imposed fines of varying amounts on each respondent and ordered that simple imprisonment of fifteen days would be imposed if any respondent failed to pay the fine. In addition, the Magistrate directed that the balance of sales tax still due from each respondent should be recovered as if it were a fine.

Each respondent subsequently challenged the conviction by filing a revision petition before the High Court. The principal issue before the High Court was whether Section 16A of the Madras General Sales Tax Act was constitutionally valid. After a lengthy and detailed consideration of the arguments presented from all sides, the High Court concluded that Section 16A was ultra vires the Constitution, the provisions of the Criminal Procedure Code and the fundamental principles of criminal justice. The High Court, however, did not examine the question of whether the assessments themselves were valid under Article 286(1)(b) of the Constitution. The judges observed that the trial Magistrate had not recorded any finding on whether the transactions that gave rise to the sales‑tax assessments fell within the scope of Article 286(1)(b). Because the trial court had not conducted a proper enquiry, discussed the evidence on that point, or made a finding, the High Court said it could not reach a definitive conclusion on the effect of Article 286(1)(b). The High Court appeared to think that the respondents had not been allowed to raise the validity of the assessment on the basis of the article in their defence. Consequently, the High Court set aside the Magistrate’s conviction and sentences, but it did not remit the matter for a fresh trial on the Article 286(1)(b) issue.

Dissatisfied with the acquittal, the State of Madras filed appeals under a certificate granted by the High Court in accordance with Article 134(1)(c) of the Constitution. In the present appeal, the Court has examined the validity of the assessments on which the prosecutions were based and, having carefully reviewed the record, finds it unnecessary to express any opinion on the constitutionality of Section 16A at this stage. The Court is of the view that the grievance raised by the respondents before the High Court was not well founded. The prosecution, as noted, was for the non‑payment of the assessed sales tax.

In the tax prosecutions, the State called K. M. Narayan, the Deputy Commercial Tax Officer of Salem, as its first witness. During his direct examination, he testified that assessments had been made against the respondents and that the respondents had failed to pay the assessed tax. When cross‑examined, the counsel for the respondents clearly put the question to him that the skins in dispute had been bought for export to London. This point was raised once at the beginning of the cross‑examination and was reiterated twice later in the same line of questioning. The prosecution also proved the service of notice by examining Kandaswami, a peon in the office of the Assistant Commercial Tax Officer, as its second witness. The tenor of the cross‑examination indicated that the defence’s position was that the skins were purchased for export, and that the respondents were seeking relief under Article 286(1)(b) of the Constitution, which provides an exemption from sales tax for goods destined for export. The respondents, however, did not rely solely on this line of argument. They introduced substantive evidence in their defence by calling, in each case, the shipping agent who acted as an intermediary between them and the London buyers, and a clerk from their own business. The shipping agents testified that they served as both intermediaries and forwarding agents, that they received orders from the London buyers and then contacted the respective respondent, that after price negotiations the respondent dispatched the skins to the agent in Madras, and that the agent sorted the skins by size and quality, rejecting those unsuitable for export, before forwarding the acceptable skins to the London buyers. The clerks corroborated this narrative, explaining that when the shipping agents informed them of the types of skins required by the London buyers, and after price terms were settled with the agents, the respondents purchased the skins and handed them over to the agents and shipping agents for export. From the evidence on record, it was evident that the respondents’ objective was to obtain the exemption from sales tax guaranteed by Article 286(1)(b) and to challenge the legality of the assessments that formed the basis of the prosecutions. Consequently, it was inaccurate to state that the respondents had been prevented from presenting evidence or that the tribunal had failed to investigate this aspect of the case. The respondents’ evidence therefore required careful consideration to determine whether their defence was established on the facts presented. Unfortunately for the respondents, the material evidence consisted only of the allegation that, after securing orders from the London buyers, the respondents purchased the required skins and forwarded them to the agents for export.

In this case the Court observed that the respondents habitually purchased the specific kinds and quantities of skins that were necessary to carry out the export orders they had secured. The Court accepted that these purchases were indeed intended for export, but it stressed that the act of purchasing alone did not trigger the actual export and therefore could not be placed within the sales‑tax exemption provided by Article 286(1)(b) of the Constitution, as was held in the earlier decision of this Court in State of Travancore‑Cochin v. Bombay Co. Ltd., Alleppey – 1952 AIR (SC) 366. The Court further noted that the same principle was reaffirmed by the majority of a Constitution Bench of this Court in State of Travancore‑Cochin v. Shanmugha Vilas Cashew Nut Factory – 1953 AIR (SC) 333, where purchases made in the State by an exporter for the purpose of export were held not to fall within the ambit of Article 286(1)(b). Consequently the Court concluded that there was no basis for treating those purchases as exempt; they were to be included in the turnover and were properly liable to sales‑tax assessment. The Court added that even if, without passing a formal ruling, it were to assume that Section 16A did not bar the respondents from challenging the validity of the assessment, the factual material placed before the Court showed that, in light of the majority decisions quoted above, the respondents could not successfully argue that the purchases were exempt under Article 286(1)(b), that the assessments were therefore illegal, or that the failure to pay the tax did not constitute an offence. In the Court’s view the High Court had erred in finding that the prosecution had not proved its case and in acquitting the accused. The Court then turned to a submission raised by counsel for the respondents, who referred to the decision of this Court in State Govt. Madhya Pradesh v. Ramkrishna Ganpatrao Limsey – 1954 AIR (SC) 20. It was contended that the present appeals could not be maintained because the High Court lacked jurisdiction to issue certificates of fitness for appeal against an acquittal under Article 134 of the Constitution, since the Constitution contained no provision corresponding to Section 417 of the Criminal Procedure Code that gives the State a right of appeal against a High Court acquittal. The Court pointed out that the cited decision was delivered by a bench of three judges and not by a Constitution Bench, and that the appeal in that case had been granted by special leave of this Court. The remark about the absence of a constitutional equivalent to Section 417 CrPC was made to emphasise that this Court, when hearing a special‑leave application, should not interfere with a High Court’s order of acquittal merely to correct errors of fact or law. Without hearing further arguments on the scope of Article 134(1)(c), the Court declined to express an opinion, as a Constitution Bench, on whether the certificates issued by the High Court in the present matter were valid. The Court noted that assuming, without deciding, that the certificates were improperly given would be premature, especially in view of the clear majority rulings of this Court on Article 286(1)(b), which were not challenged before it.

In this matter, the Court observed that the evidence recorded in the proceedings was both clear and convincing. Accordingly, the Court expressed its readiness, if it should be deemed necessary, to regularise the pending appeals by granting special leave to appeal at this very stage. The Court then turned to the reasons that had been set out earlier in the judgment and, having considered those reasons, concluded that the appeals should be accepted. By accepting the appeals, the Court consequently set aside the order of acquittal that had been issued by the High Court. The Court further restored and confirmed the order of conviction that had been handed down by the trial Court, together with the sentences that had been imposed and the directions that had been granted by that Court. Although the basis for restoring the conviction, the sentences and the directions differed from the grounds previously discussed, the effect was to reinstate the trial Court’s original findings and orders in full.