Kailash Nath and Anr vs State Of U.P. and Ors

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

Court: Supreme Court of India

Case Number: Writ Petition (civil) 94 of 1956

Decision Date: 22 February 1957

Coram: N.H. Bhagwati, B. Jagannadhadas, S.J. Imam, P.G. Menon, J.L. Kapur

In the writ petition numbered 94 of 1956, filed under Article 32 of the Constitution, Kailash Nath and another were the petitioners against the State of Uttar Pradesh and other respondents. The case was listed for decision on 22 February 1957 before a bench consisting of Justices N.H. Bhagwati, B. Jagannadhadas, S.J. Imam, P.G. Menon and J.L. Kapur of the Supreme Court of India. The judgment was authored by Justice Govinda Menon. The petition sought to determine whether the State of Uttar Pradesh had levied sales tax without legal authority on the second petitioner, a firm engaged in manufacturing cotton cloth and yarn intended for export, in contravention of the Uttar Pradesh Sales Tax Act (U.P. Act XV of 1948). The first petitioner, Mr Nath, acted as director of Messrs Cawnpore Textiles Limited, a public limited company with its registered office in Kanpur; the second petitioner was the company itself, whose business involved producing cotton cloth and yarn for both domestic sale and overseas export. In the ordinary course of its operations, the company sold quantities of cloth to buyers described as “indentors.” These indentors, after receiving the cloth, dyed and hand‑printed it and then exported the finished articles abroad.

Under the Uttar Pradesh Sales Tax Act, the company qualified as a “dealer” as defined in section 2(c). Section 3 of the Act required every dealer, subject to the Act’s provisions, to pay tax on the turnover for each assessment year in the manner prescribed. Section 4 authorized the State Government either to exempt certain transactions entirely from the tax or to permit a rebate of part of the tax liability. Exercising this power, the Uttar Pradesh Government issued Notification No. ST‑6499‑X‑902(20)48 on 3 December 1949, declaring that, effective from 1 December 1949, the provisions of section 3 would not apply to sales of cotton cloth or yarn manufactured in Uttar Pradesh on or after that date when such goods were intended for export outside India, provided that the actual export was proved by furnishing appropriate evidence. The notification was made pursuant to the statutory authority granted to the government and therefore possessed the same force as if the exemption were incorporated directly into the parent Act. The central issue for determination, therefore, was whether the petitioners could rely upon this exemption and, accordingly, whether the imposition of sales tax on the exported cloth was legally untenable.

In the opinion of the Court, the imposition of sales tax on the petitioners’ transactions was unlawful. During the assessment years 1952‑53, 1953‑54 and 1954‑55 the petitioners supplied quantities of cotton cloth to their customers, who subsequently printed the cloth using hand‑made apparatus and exported the finished hand‑printed material abroad. These customers were identified as indentors who placed manufacturing orders with the petitioners. The usual commercial practice of an indentor began with the receipt of an order to supply hand‑printed cloth to overseas merchants. The indentor then applied to the Chief Controller of Export and Import, Ministry of Commerce, Government of India, seeking an export licence. Upon grant, the licence authorised the indentor to export cotton piece‑goods to be manufactured by a specific textile mill named in the licence. The licence also specified the mill or mills where the cotton cloth was to be produced and provided detailed descriptions of the cloth. A copy of the licence was transmitted to the indentor and another copy was forwarded to the designated textile mill. The mill, after receiving the order from the indentor, manufactured the cloth intended for export under the terms of the licence and delivered the required quantity to the indentor. Upon delivery, the indentor paid the applicable excise duty to the Central Government and removed the goods to his place of business, where the cloth was hand‑printed and subsequently exported. The exemption from sales tax mentioned in the 1949 notification was intended to apply to this category of cloth, which was manufactured for export under a licence already granted by the Central Government. The petitioners asserted that for the three years of 1953, 1954 and 1955 they had been assessed for tax on amounts that should have been exempt pursuant to the notification. Samples of the export licence and the communication to the manufacturers were presented before the Court, and counsel for the State Government raised no objection to their authenticity. The licence stipulated that it was valid only for export by the named consignor to the specific ultimate consignee indicated therein, and that any breakdown in the licensed transaction or any unauthorized change of consignee could result in the goods being detained while in transit. When the Sales Tax Officer attempted to assess the petitioners for the three years in question, including the quantity of cloth sold to the indentors for hand‑printing and overseas export, he rejected the petitioners’ reliance on the exemption and issued final assessment orders for each year. Regarding the years 1952‑53 and 1954‑55, the Sales Tax Officer concluded that he had not found evidence that the quantities sold to the indentors had actually been exported, and therefore the exemption could not be availed.

In this case, the Court observed that, as a matter of fact, the quantities of cloth sold to the indentors for the years 1952‑53 and 1954‑55 had actually been exported, and consequently the exemption clauses could not be invoked. The Court was informed that appeals against the assessments for those two years were pending before the Judge of Appeals, Sales Tax. Regarding the year 1953‑54, the Court noted that an appeal had also been filed. In the proceedings concerning that year, the Sales Tax Appellate Judge, after determining that cloth had indeed been exported, concluded that the exported material was not the same cloth that had been sold by the petitioners because, after purchase by the indentors, the cloth had been prepared and processed, resulting in an article different from the original. Accordingly, the appellate judge held that the exemption clause would not apply, since it could be invoked only where the cloth was exported in exactly the same condition, without any change, transformation or alteration.

The affidavit filed on behalf of the State Government contained a paragraph stating that the exemption from tax had been denied on the legal ground that sales of this character, even if the processed cloth was ultimately exported, were not covered by the exemption; the affidavit further asserted that the fact of actual export of the processed cloth had not been examined, and that even if the exemption were permissible for such sales, it would be necessary to establish as a fact that the cloth sold by the petitioner had actually been exported out of India. The Court could not accept this contention in its entirety because the order of the Appellate Sales Tax Judge for the year 1953‑54 was based on a finding that cloth had indeed been exported for that year. Consequently, the Court decided to limit its discussion to the validity of the assessment for the year 1953‑54, since for the other two years the very fact of export remained in dispute.

The Court emphasized that a question concerning the violation of a fundamental right may be decided by this Court under Article 32 only when the relevant facts are admitted or proved. When facts are contested, the matter must be investigated and resolved through proper legal proceedings. Therefore, restricting its enquiry to the legality of the tax levy for 1953‑54, the Court posed the question of whether the State possessed any authority to impose the tax under those circumstances. The Court explained that when a tax is levied without legal authority on any trade or business, the aggrieved citizen may approach this Court for a writ under Article 32, because his right to carry on trade is infringed, bringing Article 19(1)(g) into play. The State Government had objected that the imposition of an illegal tax would not entitle the citizen to invoke Article 32, insisting that the remedy should be sought under ordinary law or Article 226. The Court found that objection to be without merit, given the legal principles involved.

In this matter, the Court explained that a citizen cannot invoke Article 32 of the Constitution to claim exemption from a tax; instead, the citizen must seek relief through the ordinary legal remedies or approach the High Court under Article 226, because the entitlement to be exempted from tax does not constitute a fundamental right falling within the scope of Article 32. The Court rejected the State’s contention that the absence of a fundamental right precludes the use of Article 32, observing that this line of argument lacks merit in light of the precedent set by Bengal Immunity Company Limited v. State of Bihar & Others (1955 (2) SCR 603, 618; 1955 (6) STC 446). In that case, a Full Bench examining the Bihar Sales Tax Act, 1947, expressly held that it could not agree with the view that the Act was constitutionally valid merely because the right sought was not a fundamental one. The Court noted that the High Court had apparently failed to appreciate that the principal grievance of the appellant company, as articulated in its petition, was that the statute’s provision imposing tax on a non‑resident dealer for an inter‑State sale or purchase of goods exceeded the Constitution’s authority and was therefore wholly illegal. The judgment further listed several statutory provisions—such as compulsory registration of dealers under section 10, filing of returns under section 12, attendance and production of evidence under section 13, and powers to produce, inspect, seize books of account or documents and to search premises under section 17, together with penalties prescribed in section 26—that collectively impose restrictions on the fundamental right guaranteed by Article 19(1)(g) to carry on any business. The Court asserted that if the Act is indeed ultra‑vires and consequently void, these burdensome conditions cannot be justified as reasonable restrictions within clause (6) of Article 19, citing the earlier decision in Mohammed Yasin v. Town Area Committee, Jalalabad (1952 3 SCR 572). The same reasoning had been reiterated in The State of Bombay v. United Motors (India) Ltd. (1953 4 SCR 1069, 1077; 1953 (4) STC 133) and more recently in Himmatlal Harilal Mehta v. State of Madhya Pradesh (1954 5 SCR 1122, 1127; 1954 (5) STC 115). The Court also referred to a newer authority, Bidi Supply Co. v. Union of India and Others (1956 SCR 267, 277), underscoring the need to determine whether the interpretation given by the Sales Tax Authorities to the exemption clause concerning the quantity of cloth sold in 1953‑54 to the indentors is legally sound. The State advanced the argument that the cloth sold was not specifically manufactured for export, relying on an observation made by the Sales Tax Officer.

It was recorded that the appellant had conceded before the Sales Tax Officer that the quantity of cloth destined for export had been taken from the stock of cloth already manufactured by the manufacturers, and that no new manufacture had been carried out in conformity with the directions specified in the licence. The State argued that, on that factual basis, the exemption provided under the relevant notification could not be claimed. In the Court’s view, however, the existence of an initial manufacture expressly for the purpose of export was not a condition precedent for the operation of the exemption clause. The exemption could be satisfied even where the cloth sold for export was drawn from existing manufactured stock, provided that the sale itself met the statutory requirements. The essential element, according to the judgment, was the sale of cotton cloth or yarn that had been produced on or after 1 December 1949 and that was intended for export. The exemption became applicable when such a sale occurred on or after that prescribed date and was undertaken for the specific purpose of export. Thus, the emphasis lay on the timing and purpose of the sale rather than on the timing of the manufacture for a particular purpose. The Court identified three conditions that had to be fulfilled to attract the exemption under the notification: first, the cloth must have been manufactured within Uttar Pradesh; second, the sale must have taken place on or after 1 December 1949 with a clear intention to export; and third, the cloth so sold must actually have been exported. On the basis of the facts admitted or established, the Court found that a sale had indeed occurred and that the exported cloth corresponded to the cloth sold. The contention advanced by the State was that the exported article was not the same as the sold article, relying on the wording “such cloth.” Mr. Mathur, counsel for the State, argued that when the cloth sold by the petitioners was printed, coloured or dyed, it underwent a transformation that rendered it a different material, and therefore the exported item could not be considered the same cloth. He further asserted that the process of printing and dyeing altered the cloth’s incidents, appearance and colour, effectively metamorphosing it into a distinct article. The Court rejected this argument as untenable. It held that the Legislative use of the word “such” did not demand that the identical article in bulk and quantity be exported, nor did any change in appearance constitute a material alteration that would defeat the exemption. Mr. Mathur relied on the earlier decision in State of Travancore‑Cochin v. Shanmugha Vilas Cashew‑Nut Factory (1954 SCR 53; 1953 (4) STC 205), where the Court had ruled that processed cashew nuts exported were not the same as the nuts purchased, and consequently the exemption under Article 286 did not apply. The present Court distinguished that case, observing that there was a substantial difference between processed cashew nuts and printed cloth, and that the reasoning in the cashew‑nut case could not be extended to the present facts. Accordingly, the Court concluded that the expression “such cloth or yarn” referred to cloth or yarn that had been manufactured in Uttar Pradesh, irrespective of subsequent printing or dyeing, and that the exemption therefore applied.

The Court observed that the matter of alteration through printing and the addition of designs to the cloth was irrelevant to the question before it. It held that the cloth which was exported was the very same article that had been sold by the petitioners, the only distinction being that the colour of the fabric had been changed as a result of the printing and processing operations. Accepting this view, the Court concluded that the exemption provision mentioned in the statute would apply to the exported material, because the material remained identical to the one sold. Consequently, if the exemption provision is applicable, the imposition of sales tax on that material would have been made without legal authority. The Court therefore found that the sales‑tax assessment imposed for the financial year 1953‑54 was contrary to law. In light of this finding, the Court ordered that the contested levy of sales tax be set aside and declared null and void. The decision reinforced the principle that a change in aesthetic attributes such as colour does not create a new commodity for tax purposes. Accordingly, the Court affirmed that the statutory language was intended to exempt articles that are materially the same, irrespective of superficial modifications. The order also reflected the Court’s view that taxation powers must be exercised strictly within the limits prescribed by the legislature. Finally, the Court directed that each of the parties to the proceeding should bear its own costs incurred in this suit.