Mahadayal Premchandra vs Commercial Tax Officer Calcutta and Anr

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 344 of 1957

Decision Date: 15/04/1958

Coram: S.R. Das (CJI), N.H. Bhagwati, S.K. Das, J.L. Kapur, V. Bose

The appeal, identified as Civil Appeal No. 344 of 1957, was filed under special leave against the order dated 15 January 1955 issued by the Commercial Tax Officer, Calcutta, in case No. 283 of 1952‑53. The order had assessed the appellant, Mahadayal Premchandra, to sales‑tax on transactions valued at Rs 6,21,369‑10‑3 and had levied tax at the rate of nine pies in the rupee, amounting to Rs 27,816, pursuant to the Bengal Finance (Sales‑tax) Act, 1941 (referred to as “the Act”). The judgment was delivered on 15 April 1958 by Justice Bhagwati, sitting with Justices S.K. Das, J.L. Kapur, V. Bose, and Chief Justice S.R. Das.

The appellant conducted a dual business: firstly, as a dealer engaged in the wholesale and retail trade of woollen and cotton fabrics and related products; secondly, as a commission agent for woollen and cotton fabrics. In the latter capacity, the appellant acted as an agent or representative of the British India Corporation Ltd., proprietor of the Kanpur Woollen Mills, for the territories comprising West Bengal, Assam, and parts of Bihar and Orissa, according to an agreement dated 2 June 1952, which was supplemented by a letter dated 7 July 1952 addressed to the appellant by the principals. The appellant was duly registered as a “dealer” under the provisions of the Act in West Bengal, and the registration certificate bore the number O.S. 1/1630A.

On or about 15 December 1952, the appellant submitted its sales‑tax return in the prescribed form to the first respondent for the return period ending on the Dewali day of the year 2009 Sambat, which corresponded to 17 October 1952, i.e., the fiscal year 1951‑52. The return indicated a gross turnover of Rs 1,25,24,883‑14‑3. After allowing the permissible exemptions and deductions, the taxable turnover was calculated as Rs 2,42,480‑10‑3. Accordingly, the appellant paid sales‑tax at the rate of nine pies in the rupee, as mandated by section 5(1) of the Act, amounting to Rs 11,366‑5, which was duly remitted.

During the examination of the books of account and purchase vouchers of M/s Khubiram Dhansiram, an unregistered dealer in Calcutta, the Assistant Commissioner (C.S.) observed that the unregistered dealer had purchased woollen goods worth Rs 59,530‑13 between 20 November 1952 and 18 December 1952 from the British India Corporation Ltd., Kanpur Woollen Mills Branch. The invoices, copies of which were attached, were drawn by the British India Corporation Ltd. for the Kanpur Woollen Mills and indicated that the goods had been dispatched from Kanpur to M/s Khubiram Dhansiram. The order numbers quoted in the invoices matched the orders placed by the appellant, who acted as the sole agent of the Kanpur Woollen Mills in West Bengal. The Assistant Commissioner concluded that, under Explanation 2 of section 2(g) of the Act, the sales made by the Kanpur Woollen Mills from Kanpur should be deemed to have taken place in West Bengal. Further, relying on Explanation 3 of section 2(c) of the Act, the Assistant Commissioner deemed the appellant to be the dealer in West Bengal for those sales and consequently held the appellant liable to pay the tax on that basis.

During the period from 20 November 1952 to 18 December 1952, the unregistered dealer M/s Khubiram Dhansiram purchased woollen goods worth Rs 59,530‑13 from M/s British India Corporation Ltd., Kanpur Woollen Mills Branch. The invoices for these purchases, copies of which were attached to the records, were drawn by British India Corporation Ltd. on behalf of Kanpur Woollen Mills at Kanpur, and the goods were reported to have been dispatched from Kanpur to M/s Khubiram Dhansiram. The order numbers shown in the invoices corresponded to orders that had been placed with Kanpur Woollen Mills by the sole agents of the mills in West Bengal, namely the appellants in this case. The Assistant Commissioner (Central Section) held that, relying on Explanation 2 of section 2(g) of the Sales Tax Act, the sales made by Kanpur Woollen Mills at Kanpur should be deemed to have taken place in West Bengal. Furthermore, applying Explanation 3 of section 2(c) of the same Act, the Assistant Commissioner concluded that the appellants ought to be regarded as the dealer in West Bengal for those sales and consequently were liable to pay the tax on that basis.

Acting on this view, the Assistant Commissioner sent a letter dated 21 January 1953 to the first respondent, requesting verification of whether the appellants had recorded the aforementioned transactions in their books of account and had discharged the tax liability arising therefrom. In response, on 3 February 1953, the first respondent issued a notice under sections 11 and 14(1) of the Act, indicating that he was not satisfied that the return filed by the appellants for the year ending 17 October 1952 was correct and complete. The notice directed the appellants to produce their books of account for inspection.

The representatives of the appellants appeared before the first respondent on the day of the notice and, on 16 February 1953, the appellants submitted a detailed statement concerning their agency transactions with Kanpur Woollen Mills. That statement disclosed that the appellants, acting as the mills’ selling agents, engaged in three distinct categories of transactions. First, they booked orders on behalf of the mills, subject to the mills’ acceptance, and were entitled to commission on the value of invoices that were issued in the name of the actual purchaser; the invoices and related documents were sent directly to the purchasers by the mills through their bankers. Second, orders were placed directly by parties residing in the territories where the appellants operated as agents, and the mills supplied the goods directly to those parties; the appellants again earned commission on these sales. Third, the goods were ordered and invoiced in the appellants’ own name, and the appellants dealt with the goods as dealers, either in wholesale or retail, earning commission on the invoice value. For the first two categories, the appellants’ involvement was limited to the receipt of commission, and consequently they made no entries for the value of those goods in their books of account.

The Court observed that for the third class of transactions the appellants recorded the invoice amount in their books by debiting a goods account, and they credited the proceeds of sale at the time the goods were actually sold by the appellants. The appellants argued that only in respect of these third‑category transactions they could be described as a “dealer” within the meaning of the term defined in the Act, and therefore they claimed liability to pay sales tax solely for those sales. A letter dated 6 March 1953, which the first respondent endorsed, stated: “Copy forwarded to A.C. (Central Section) for information with reference to his memo. No. 385/3R‑40/52 dated 21st January 1953 and soliciting further instructions in the matter.” After completing the examination of the books of account presented by the appellants, the first respondent entered a note in the Order‑Sheet on 26 May 1953 requesting that additional details be sent to the Assistant Commissioner (C.S.) for his opinion. The entry recorded that the dealer had appeared with books of account on 21 January 1953 and that the entries consisted only of commissions received from Messrs. Kanpur Woollen Mills, Kanpur, for goods supplied to the dealer’s customers in West Bengal. The entry further explained that the dealer acted as a commission agent for the Kanpur Mills throughout the state, obtaining commissions on all sales effected by the Mills within the territory assigned to the dealer. It noted that the dealer generally secured orders from parties, forwarded them to the Kanpur Mills, which then supplied the goods directly to the respective parties, and that a percentage of commission on the value of the goods supplied was credited to the dealer. The entry acknowledged that because the goods were delivered in West Bengal they satisfied the explanation to clause (1) of Article 286 of the Constitution, and therefore the sale was deemed to have taken place in West Bengal. However, it also concluded that the seller in such circumstances was clearly the Kanpur Mills, not the dealer, and that the contractual relationship existed between the Kanpur Mills, as the disclosed principal, and the purchaser. Consequently, the memorandum submitted by the first respondent to the Assistant Commissioner (C.S.) argued that the dealer incurred no liability under the B.P. (S.T.) Act of 1941 for the goods supplied directly from Kanpur.

When the Assistant Commissioner (C.S.) considered the matter on 29 August 1953, he recorded that the first respondent should not have addressed him directly. He expressed the opinion that the appellants were accountable for all sales in which the goods were delivered in West Bengal, noting that the appellants functioned as commission agents who received commissions on every sale made in West Bengal by the Kanpur Woollen Mills. In his view, because the appellants acted as commission agents of the Kanpur Mills, they were liable for the transactions in question. He consequently ordered the first respondent to take the necessary steps in accordance with this opinion.

The officer concluded that because the goods were delivered in West Bengal, the appellants functioned as commission agents who received a commission on every sale made in West Bengal by the Kanpur Woollen Mills, Kanpur, and that, as commission agents of the Kanpur Mills, they were liable for the transactions. Accordingly, he directed the first respondent to take the necessary steps. The first respondent recorded in the order sheet on 2 September 1953 that appropriate action was being undertaken. He further ordered the appellants to appear before him with their books of account for further scrutiny, and he required them to produce their agency contract with Kanpur Mills together with a list of the dealers in Calcutta who had received goods directly from Kanpur.

On 21 November 1952, the representatives of the appellants submitted a detailed statement to the first respondent clarifying the entire factual position. They asserted that the appellants acted as agents of M/s Lalimli Mills of Kanpur and that they earned a commission, paid once a year, on all sales effected by the Mills in the State of West Bengal. According to the statement, the customers placed orders directly with the Mills; the Mills then executed those orders and consigned the goods directly to the customers, recording the customers as the consignees. The customers subsequently negotiated bills through banks, cleared the goods from the carriers and sold the goods at their discretion. The Mills kept a separate personal account for the appellants in which the yearly commission was credited. The Mills never debited the appellants for the value of the goods, and the appellants never credited the Mills for the value of the goods nor debited any goods account on their side. At no point in the chain of transactions was ownership of the goods transferred to or acquired by the appellants, and no party could transfer goods that it did not possess. Moreover, the accounts of the Mills’ customers showed no entries indicating any transactions with the appellants in West Bengal.

Consequently, the appellants submitted that they could not be deemed, either in law or in fact, to be the dealers for those sales in West Bengal, and therefore they should not be held liable to pay sales tax on those sales. They further pointed out that the maximum commission they earned was 2.4 percent, which was lower than the applicable sales tax rate of approximately 4.2 percent; they argued that it could never have been the legislative intention to require them to pay a tax rate higher than the commission they received. On 19 June 1954, the appellants filed an additional statement with the first respondent. In that statement they reiterated that at no stage did the appellants have physical possession or control over the goods in question, and they referred the officer to several sales‑tax cases supporting their position. They again emphasized that throughout the period they had acted solely as commission agents, receiving a 2.4 percent commission on the transactions they facilitated.

In the dispute, the appellant acted as a commission agent for its principals on one side and various customers on the other. The tax authority then sought to impose a tax rate of 4.2 percent on the total value of the transactions, which effectively required the appellant to add an extra 1.8 percent out of its own pocket to the commission it earned; the appellant argued that such a requirement could not have been the intention of the law. On 12 August 1954 the first respondent entered a note stating that, based on the material before him, he was uncertain whether the appellant could be treated as the sole agent of M/s Kanpur Woollen Mills within the meaning of Explanation 3 to section 2(c) of the Act. He therefore asked the Assistant Commissioner (C.S.) to reconsider the question in light of the facts and to give his “valued opinion”. On 23 September 1954 the Assistant Commissioner (C.S.) replied that his predecessor had already advised the first respondent on the matter and that, if the appellant were dissatisfied, it could file a regular revision or an appeal before the competent authority as provided by law. The first respondent recorded on 30 September 1954 that he had reviewed the notes and that appropriate action was being taken. Ultimately, on 15 January 1955, the first respondent issued an assessment order imposing sales tax on the contested transactions, basing his decision on the following reasoning: after inspecting the appellant’s books of account, he concluded that the appellant was a commission agent of Cawnpore Woollen Mills for sales made in the State of West Bengal and that, although the principal was located in Cawnpore, the commission agent was nonetheless accountable for all sales occurring in West Bengal. The appellant had denied liability in letters dated 21 November 1953 and 19 June 1954, which the first respondent found “not at all satisfactory”. Consequently, the first respondent held the appellant liable for all such sales made by M/s Cawnpore Woollen Mills in West Bengal. The appellant’s statement of sales showed that transactions amounting to Rs 6,21,369‑10‑3 had not been entered in the books of account; the first respondent therefore added this amount to the gross total (G.T.) and to Balance A, resulting in a final G.T. assessment of Rs 13,146,255‑8‑4. The appellant subsequently obtained special leave to appeal the assessment under Article 136 of the Constitution. From the detailed narrative of the assessment, it is evident that the first respondent did not exercise independent judgment; despite his own doubts, he sought and followed the instructions of the Assistant Commissioner (C.S.) and consequently levied sales tax on the disputed transactions. The order dated 15 January 1955 reflects this reliance on the Assistant Commissioner’s guidance rather than an independent determination.

In this case the Court observed that the first respondent had merely reiterated the opinion of the Assistant Commissioner (C.S.) and had not formed any independent conviction of his own. The only comment he offered regarding the various grounds raised in the letters dated 21 November 1953 and 19 June 1954 was that, to him, those grounds were “not at all satisfactory.” The Court regarded such a response as an unsatisfactory manner of addressing the matter. It noted that, had the Assistant Commissioner (C.S.) himself dealt with the assessment, he could have set out in the assessment order his reasons for doing so, and those reasons would have been open to scrutiny in any further proceedings, whether by way of appeal or otherwise. Instead, the Assistant Commissioner (C.S.) delegated the assessment work to the first respondent, thereby imposing on the first respondent the duty to issue the assessment order with his own reasons. The file of the assessee shows that, although the first respondent was satisfied from the material placed before him by the appellants and their representative that the appellants were not liable to pay sales‑tax on the disputed transactions, he nevertheless first sought instructions and then obtained the “valued opinion” of his superior, the Assistant Commissioner (C.S.). The latter expressed the view that the appellants were liable for those transactions. This entire process was carried out behind the backs of the appellants, who were denied any opportunity to meet the point of view advanced by the Assistant Commissioner (C.S.). The first respondent simply followed the instructions and advice of the Assistant Commissioner (C.S.) without exercising his own judgment. The Court expressed surprise at the manner in which the first respondent handled the assessment, emphasizing that he had not exercised independent judgment but had faithfully acted on the instructions conveyed to him by the Assistant Commissioner (C.S.) without giving the appellants a chance to address the points raised against them. The Court held that the whole procedure contravened the principles of natural justice, was unfair, and was calculated to undermine public confidence in the impartial and fair administration of the sales‑tax Department. While the Court stated that, on this ground alone, it would have set aside the assessment order and remanded the matter to the first respondent for proper consideration in accordance with law, it noted that the matter was old and a remand would cause unnecessary harassment to the appellants. Consequently, the Court chose to decide the appeal on its merits. The determination of the appeal required the construction of the terms “dealer” and “turnover” as defined in section 2 of the Act, the relevant portions of which were then set out for consideration.

In section 2(c) of the Act the term “dealer” is defined as a person who carries on the business of selling goods in the State of West Bengal and the definition expressly includes the Government. Explanation 2 adds that a factor, broker, commission agent, del credere agent, auctioneer or any other mercantile agent, irrespective of the name by which such a person is called and whether the description matches those already mentioned, is deemed to be a dealer if that person carries on the business of selling goods and, in the ordinary course of business, possesses authority to sell goods belonging to principals. Explanation 3 further provides that the manager or an agent situated in West Bengal of a dealer who resides outside West Bengal and who carries on the business of selling goods in West Bengal shall, for the purpose of that business, be treated as a dealer. The definition of “turnover” follows as the aggregate of the sale‑prices or portions thereof receivable, or if a dealer so elects actually received, by the dealer during the relevant period after deducting any amounts refunded by the dealer for goods returned by purchasers within that period. It is relevant to notice that under section 4 of the Act every dealer whose gross turnover in the year immediately preceding the commencement of the Act exceeded the taxable quantum was liable to pay tax on all sales effected after the date of notification, and that under section 5 the tax payable by a dealer was levied at the rate specified on his taxable turnover. Consequently, unless the sales are effected by the dealer and the sale proceeds are received by that dealer, such sales cannot be included in his taxable turnover and the dealer would not be liable to pay sales tax thereon. In the present case the assessment order itself states that the sales in question were made by the Kanpur Woollen Mills, Kanpur, which were the principal dealers with respect to those sales. The appellants were nonetheless sought to be held liable for sales tax on the basis of the broadened definition of “dealer” found in Explanation 3 to section 2(c). The first question, therefore, is whether the appellants fall within the statutory definition of dealer. Explanation 2 is inapplicable because, although the appellants acted as commission agents for the Mills, they did not possess, in the ordinary course of business, the authority to sell goods belonging to the principal. Clause 14 of the agreement dated 2 June 1952 expressly provided that the selling agents were under no circumstances to make or purport to make, nor to hold themselves out as empowered to make, any contract for the purchase or supply of goods manufactured by the Mills. Explanation 3 was consequently relied upon, but it also does not apply to the appellants because they were not agents in West Bengal of a dealer residing outside West Bengal who carried on the business of selling goods in West Bengal.

The Court observed that, although the appellants unquestionably acted as agents for the Mills that were located outside West Bengal, they could not be said to have engaged in the business of selling goods within West Bengal. The Mills possessed no office in West Bengal and had not established, either through the appellants or by any other means, a business for selling the goods in question in that state. The only activity undertaken in relation to West Bengal was that the appellants, functioning as commission agents for the Mills, solicited orders from customers in West Bengal and transmitted those orders to the Mills, which then accepted and fulfilled them. Consequently, the contractual relationship was directly between the customers and the Mills, and this relationship depended upon the Mills’ acceptance of the orders at their premises in Kanpur. Even though several orders placed by the appellants were accepted by the Mills in Kanpur, it could not be concluded that the Mills were conducting a sales business in West Bengal. The actual business, if any, involved the sale of goods in Kanpur and their subsequent dispatch to West Bengal for consumption there. Accordingly, these transactions did not fall within the scope of Explanation 3 to section 2(c) of the Act, and the appellants could not be regarded as a “dealer” as defined by that explanation. The position adopted by the first respondent, albeit under the direction of the Assistant Commissioner (C.S.), was therefore untenable. A further difficulty for the first respondent was the impossibility of including the sale price of the goods delivered by the Mills to the West Bengal customers in the appellants’ gross turnover. The goods were supplied directly by the Mills to the customers, whether the orders originated from the appellants or were placed by the customers themselves. All invoices were issued in the names of the customers, and the relevant documents were negotiated between the Mills and the customers through banks. The customers obtained those documents from the banks upon payment of the drafts, and the Mills received the sale proceeds from the banks. At no point did the appellants handle the goods or receive any sale price for them, and under those circumstances the sale price could not be counted in the appellants’ gross turnover. If this was indeed the factual situation, the appellants were not liable to sales tax on the disputed transactions, even if, hypothetically, they might fall within the expanded definition of “dealer” under Explanation 3 to section 2(c), a contention the Court had already rejected.

Having examined the material before it, the Court concluded that, with respect to the transactions that were the subject of dispute and that together amounted to a total value of Rs 6,21,369‑10‑3, the appellants could not be held liable to pay any sales tax on those transactions. The Court found that the first respondent, acting as the assessing authority, had committed an error in law by charging sales tax on the amounts involved. Accordingly, the Court held that the assessment dated 15 January 1955 was fundamentally unsound and must be set aside. The appeal was therefore allowed. The Court further ordered that the sales‑tax sum of Rs 27,816, which had been demanded by the first respondent from the appellants, should be refunded if it had already been paid, thereby removing any tax burden that had been improperly imposed. In addition, the Court directed that the first respondent must reimburse the appellants for the costs incurred in pursuing this appeal and also for the expenses that the appellants had borne while defending the proceedings before the first respondent. The judgment makes clear that no liability for sales tax attaches to the appellants for the disputed transactions, that the assessment was in error, and that the entire tax demand is extinguished, with the appellants being restored to the position they would have occupied had the improper assessment never been made.