Bharat Sugar Mills Ltd. and Ors vs State of Bihar and Anr

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

Court: Supreme Court of India

Case Number: Appeal (civil) 338-340 of 1958

Decision Date: 27 September, 1960

Coram: S.K. Das, M. Hidayatullah, K.C. Das Gupta, J.C. Shah, N.R. Ayyangar

In this matter the Supreme Court of India heard an appeal titled Bharat Sugar Mills Ltd. and others versus State of Bihar and another, decided on 27 September 1960. The appeal was recorded as civil appeal numbers 791 and 792 of 1957 and appeal number 3 of 1960, and it bore the citation 1961 AIR 1183. The parties were identified as the petitioner, Bharat Sugar Mills Ltd. with its associates, and the respondent, the State of Bihar together with an additional party. The case was assigned the appeal numbers 338‑340 of 1958. The bench that decided the case consisted of Justices S. K. Das, M. Hidayatullah, K. C. Das Gupta, J. C. Shah, and N. R. Ayyangar. Justice J. C. Shah authored the judgment, which examined six separate appeals concerning the same legal issue.

The central question before the Court was whether section 2(g) of the Bihar Sales Tax Act, 1947, as amended by the Bihar Sales Tax (Amendment) Act, 1949, was constitutionally valid. To understand the appellants’ challenge, the Court first set out the relevant statutory framework governing sales that the State of Bihar sought to tax. Under entry 48 of List II of the Government of India Act, 1935, the Bihar Legislature enacted the Bihar Sales Tax Act, 1947 (Act XIX of 1947), which commenced operation on 1 July 1947 and was later amended by the Bihar Sales Tax (Amendment) Act, 1949 (Act VI of 1949). Section 4(1) of the amended Act, which served as the charging provision, stipulated that, subject to sections 5, 6, 7, and 8, any dealer whose turnover in the year preceding the commencement exceeded Rs 10,000 on sales made both inside and outside Bihar would be liable to pay tax on sales occurring in Bihar from the date of commencement. Section 2(g) defined the term “sale” to include any transfer of property in goods for cash, deferred payment, or other valuable consideration, including transfers involved in contract execution, but expressly excluded a mortgage, charge, or pledge. The definition further provided, notwithstanding any contrary provisions of the Indian Sale of Goods Act, 1930, that a sale of goods situated in Bihar at the time the contract was made, or goods produced or manufactured in Bihar by the producer, would be deemed to have taken place in Bihar regardless of where delivery or the contract was executed.

The Court explained that, for the purposes of the Bihar Sales Tax Act, a transaction is deemed to have taken place in Bihar when the sale is deemed to have taken place in Bihar. The definition of “sale” unquestionably involves the transfer of property in goods for consideration. However, even when such a transfer occurs, the rules governing sale of goods under the Sale of Goods Act apply outside the taxable territory. For purposes of the Bihar Sales Tax Act, the situs of the sale is to be regarded as Bihar if, at the time the contract of sale is executed, the goods were physically present in Bihar or if the goods had been produced or manufactured in Bihar by the producer or manufacturer. The Court then turned to the question of legislative competence. The competence of the State Legislature to enact section 2(g) as amended by Bihar Act VI of 1949, in exercise of authority under entry 48 in List II of the Seventh Schedule of the Government of India Act, 1935, had been challenged in Tata Iron & Steel Co. Ltd. v. State of Bihar, 1958 SCR 1355; 1958 (9) STC 267. Chief Justice Das, addressing the legislative competence of the Bihar State Legislature, observed at pages 1367‑68 that both before and after the amendment of section 2(g) the principal part of the definition continued to mean the transfer of property in goods. He noted that the second proviso did not expand the definition of “sale”; rather, it merely located the “sale” in certain circumstances enumerated in that proviso within Bihar. The basis of liability under section 4(1) remained unchanged, that is, the liability to pay tax on a “sale.” The presence of the goods in Bihar at the time of the contract, or the production or manufacture of goods in Bihar, did not by itself create a “sale” nor did it automatically attract tax. The taxable event continued to be the sale that resulted in the transfer of ownership from seller to buyer. No tax liability arose until a concluded sale, understood as the transfer of title, occurred. Only when the property passed and the “sale” was effected did the liability to pay sales tax under the 1947 Act arise. There was therefore no enlargement of the meaning of “sale”; the proviso merely introduced a legal fiction based on the stated facts and deemed the “sale” to have taken place in Bihar. Those facts did not themselves constitute a sale but were used to locate the situs of the sale in Bihar. Consequently, the Court held that the provisions of section 4(1) read with section 2(g), second proviso, were well within the legislative competence of the Province of Bihar. The learned Chief Justice, in considering whether the presence of goods in Bihar created a real and pertinent nexus for taxation, observed at page 1377 that it was unnecessary to prescribe a rigid test for the sufficiency of nexus in this case.

For the purpose of deciding whether a State may levy a tax on a sale, it is enough to recognise that the goods involved must play a material role, because the transfer of ownership passes through the goods themselves. The Court observed that it is not necessary to formulate a rigid test for determining the adequacy of the connection between the State and the transaction. In the present matter, the Court considered two situations that create a sufficient nexus. In the first situation, the goods are physically present in the State at the time the parties conclude the agreement for sale. When the seller, with the buyer’s consent, appropriates the goods and delivers them to the buyer or to the buyer’s agent, the ownership generally passes within that State. Even if the ownership later moves to a location outside the State, the sale remains linked to those very goods that were situated in the State when the agreement was made. In the second situation, the goods that will ultimately convey title outside the State are either produced or manufactured inside the State. The sale, regardless of where the contract is executed, is carried out by the same person who produced or manufactured the goods in the State. Consequently, the seller receives the sale price for goods that were either in the State at the moment the essential agreement was formed or that were fabricated there. These factual circumstances provide a solid basis for the State to impose its tax, because they demonstrate a clear relationship between the State and the sale.

The Court then referred to the factual matrix set out in Tata Iron and Steel Co.’s case, reported as 1958 SCR 1355; 1958 (9) STC 267. In that case, the process of dealing between the manufacturer and the purchaser was described in detail. The prospective purchaser first applied to the Iron and Steel Controller in Calcutta for a permit. The Controller then forwarded the request to the Chief Sales Officer of the assessee, who was operating in Calcutta. The Chief Sales Officer issued a “works order” and sent it to the Jamshedpur plant, specifying the complete technical specifications of the required goods. Upon receipt of the works order, the Jamshedpur factory began a rolling or manufacturing programme to produce the goods. After manufacturing was completed, the Jamshedpur factory issued an invoice to the Controller of Accounts, who prepared forwarding notes. Based on these forwarding notes, railway receipts were generated. The goods were loaded onto wagons at Jamshedpur and dispatched to various railway stations; however, the consignee shown on the railway receipt was the assessee itself, and the assessee also paid the freight charges. The railway receipts were sent either to the assessee’s branch offices or to its bankers. Once the purchaser paid the consideration, the railway receipt was delivered to the purchaser. These facts were admitted by the parties and were not contested. The Court used this factual scenario to illustrate how the presence, manufacture, and subsequent movement of goods can establish the necessary nexus for taxation even when the goods are not physically present in the State at the moment the initial requisition is made.

In the matter concerning the State of Bihar, the Court noted that the goods alleged to have been sold at Calcutta did not exist at the time the Iron and Steel Controller issued the requisition. The Court further observed that the issuance of the requisition by the Controller and the subsequent manufacture of the goods by the company in response to that requisition did not give rise to a contract between the company and the purchaser, and consequently the location of the sale had to be determined by applying the second part of the second proviso to the definition of “sale” contained in section 2(g). The Court added that, even if one were to assume that the requisition and the consequent manufacturing of the goods did create a contract, the proper determination of the situs of the sale would still depend on the plain language employed by the Legislature in the second part of the second proviso to that definition. By a majority decision in Tata Iron & Steel Co.’s case 1958 SCR 1355; 1958 (9) STC 267, this Court held that the provisions of section 4(1) read with section 2(g), second proviso, of the Bihar Sales Tax Act, as amended by the Bihar Sales Tax (Amendment) Act, VI of 1949, fell within the legislative competence of the Province of Bihar. The reasoning was that the amendment did not broaden the meaning of the term “sale” to include a contract of sale; rather, it delineated certain circumstances in which a sale completed outside Bihar would be deemed to have taken place within Bihar. The Court emphasized that “the goods must necessarily play an important part,” and that the circumstances described in the proviso—namely, the presence of the goods in Bihar at the date of the agreement of sale or their production or manufacture there—constitute a sufficient nexus between the taxing Province and the sale, irrespective of where the sale actually occurs. In view of that judgment, the present appeals could not reopen the question of the Bihar Legislature’s competence to enact section 2(g) as amended by Bihar Act VI of 1949. Accordingly, the Court held that although, at the moment the property in the goods passed, the goods were not physically within the State of Bihar, they were nevertheless liable to sales tax under the law then in force if the goods had been produced or manufactured in Bihar by the producer or manufacturer. The Court also observed that the vires of section 2(g) were to be assessed in light of the provisions of the Government of India Act, 1935, as decided in Tata Iron & Steel Co.’s case, and that the Court was not called upon to determine legislative competence under Article 286 of the Constitution. The same principle, the Court indicated, applies to all the appeals before it.

In determining the constitutional validity of the provision, the Court held that the question of legislative competence must be examined in the context of the Government of India Act, 1935, rather than the Constitution. Having addressed that preliminary principle, the Court turned to the factual matrix underlying the six appeals, which could be grouped into four categories. The first of these is Civil Appeal No. 338 of 1958, filed by Bharat Sugar Mills Ltd., a public limited company whose registered office was situated in Calcutta and whose sugar‑manufacturing plant operated at Sidhwalia in the Saran district of Bihar. The company was recorded as a “dealer” under the Bihar Sales Tax Act. For the assessment year 1949‑50, covering the period from 1 April 1949 to 31 March 1950, the Superintendent of Sales Tax in Chapra calculated the appellant’s gross turnover at Rs 82,79,207‑4‑6 and the taxable turnover at Rs 66,33,155‑8‑3. In arriving at the taxable turnover, the Sales Tax Officer had included Rs 16,33,959‑5‑3 representing the value of goods dispatched for sale to the appellant’s head office in Calcutta, as well as Rs 7,25,965‑11‑6 representing goods delivered after 25 January 1950 to other states for consumption there. The appellant challenged this assessment by filing an appeal before the Deputy Commissioner of Sales Tax. The appellate authority modified the assessment by withdrawing the Rs 16,33,959‑5‑3 amount from the taxable turnover, reasoning that the mere movement of goods between branches of a dealer did not constitute a sale within the meaning of the statute.

Subsequently, the appellant lodged a revision application with the Bihar Board of Revenue, contesting the liability to pay tax on the Rs 7,25,965‑11‑6 portion representing sales made outside Bihar after 26 January 1950. The Board, while affirming the appellant’s claim that this amount should not be included in the taxable turnover, took suo motu jurisdiction to revisit the Deputy Commissioner’s order concerning the Rs 16,33,959‑5‑3 value of goods sent to Calcutta. The Board concluded that those goods were liable to tax under section 2(g) of the Bihar Sales Tax Act, even though the sales occurred beyond the taxable territory. Consequently, the Board remanded the matter, directing the authorities to ascertain the actual sales realised between 1 April 1949 and 25 January 1950, specifically those arising from dispatches made outside Bihar during that interval, irrespective of any prior contractual arrangements, and to incorporate the determined sum into the turnover for sales‑tax assessment. Following this directive, the appellant then obtained an order

In this matter, the Patna High Court ordered the Board of Revenue to refer a specific question to the Supreme Court under section 25(3) of the Bihar Sales Tax Act. The Board framed the reference as follows: whether the second proviso of section 2(g) of the Bihar Sales Tax Act, as it existed before its amendment by Bihar Act VII of 1951, was constitutionally valid, and whether the assessment of sales tax imposed on the assessee for the period from 1 April 1949 to 25 January 1950 was legally valid under the circumstances of the case. The High Court held that the question was already decided in its earlier judgment in Messrs Tata Iron & Steel Co., Ltd. v. The State of Bihar, reported in 1956 (7) STC 158 and 1956 AIR (Pat) 92, and consequently answered the reference against the appellant and in favour of the State of Bihar. Dissatisfied with that decision, the appellant filed an appeal to this Court under special leave pursuant to Article 136 of the Constitution. While that appeal was pending, the judgment of the Tata Iron & Steel case itself was also placed before this Court on special leave. This Court, after careful consideration, essentially affirmed the reasoning of the Patna High Court, holding that section 2(g) of the Bihar Sales Tax Act, as it stood at the relevant time, was constitutionally sound and that the assessee had been properly taxed for the period 1 April 1949 to 25 January 1950, as reflected in the cited authorities Tata Iron & Steel Co., Ltd. v. The State of Bihar, 1958 SCR 1355 and 1958 (9) STC 267. Accordingly, in light of this judgment, the High Court’s decision was upheld and the present appeal was dismissed with costs. The underlying civil appeals, numbered 339 and 340 of 1958, involved the Tata Iron & Steel Co., Ltd., a manufacturer of iron and steel headquartered in Bombay with a production plant at Jamshedpur in the State of Bihar and a principal sales office in Calcutta, West Bengal. The company also maintained branch sales offices and stockyards across various states. Because iron and steel are regulated commodities, sales are conducted according to instructions from the Iron and Steel Controller. When the Controller issues a requisition for supply, the company manufactures the required goods according to a rolling programme set by the Controller; at the time of requisition the goods do not yet exist. The finished products are then dispatched to the locations of the purchasers for whom the requisition was made. The company is registered as a “dealer” under the Bihar Sales Tax Act and, for the period 1 April 1949 to 31 March 1950, filed a sales‑tax return before the Sales Tax Officer at Singhbhoom Circle, Jamshedpur, reporting a gross turnover of Rs 25,68,51‑124‑1‑6.

The appellant filed a return under the Bihar Sales Tax Act before the Sales Tax Officer of the Singhbhoom Circle at Jamshedpur, showing a gross turnover of Rs 25,68,51‑124‑1‑6. The appellant sought to exclude from this gross turnover a sum of Rs 13,35,51,870‑12‑0, arguing that the goods in question, although manufactured at Jamshedpur, were delivered to and consumed outside the State of Bihar. The appellant further maintained that title to the goods passed outside Bihar, that the entire sale transaction—including the contractual sale and the actual delivery—occurred outside the State, and therefore the turnover should not be taken into account for Bihar sales tax. In addition, the appellant claimed a deduction of Rs 56,48,434 from the gross turnover, representing railway freight charges that had been collected from purchasers. The basis for this claim was that the price of the raw materials the appellant supplied was fixed by the Iron and Steel Controller, and the appellant was permitted to add freight charges to that price. The Sales Tax Officer rejected both the exclusion of the Rs 13,35,51,870‑12‑0 and the freight deduction, and the Deputy Commissioner of Sales Tax, Bihar, upheld the officer’s order. Exercising its revisional jurisdiction, the Board of Revenue amended the assessment order and directed that sales tax could not be imposed on goods dispatched outside Bihar on or after 26 January 1950. The appellant then filed an appeal against the Board’s order, seeking special leave under Article 136 of the Constitution. The appellant also secured an order from the High Court directing the Board of Revenue to refer seven specific questions to the High Court under section 25 of the Bihar Sales Tax Act. These questions primarily concerned the constitutional validity of section 2(g) of the Bihar Sales Tax Act as amended by Bihar Act VI of 1949, and the appellant’s liability to pay sales tax on “the railway freight collected with the prices” of the materials sold.

The High Court, in addressing the first six questions, held that it was bound by its earlier judgment in Tata Iron & Steel Co., Ltd. v. The State of Bihar, 1956 (7) STC 158; 1956 AIR (Pat) 92, regarding the validity of section 2(g) and the taxability of goods manufactured in Bihar but sold outside the State. Accepting the appellant’s argument that the railway freight collected should not form part of the taxable turnover, the High Court directed that, should the appellant satisfactorily demonstrate to the taxing authorities the exact amount expended on freight and the amount actually collected, that amount could be deducted from the calculated turnover. However, the High Court rejected the appellant’s plea that section 2(g) was ultra vires and that the appellant should not be liable to tax for sales effected outside Bihar solely because the goods were manufactured in Bihar. The High Court’s order therefore upheld the provision of section 2(g) and affirmed the appellant’s liability to tax, except to the extent allowed for the freight deduction, a point that the appellant subsequently challenged.

In this matter, the appellant filed two appeals before the Supreme Court, each seeking special leave under Article 136 of the Constitution. One appeal challenged the order of the High Court, while the other contested the order of the Board of Revenue. Both appeals presented the same legal issue that had already been resolved in the earlier decision of Tata Iron & Steel Co., Ltd. v. State of Bihar, reported in 1958 SCR 1355 and 1958 (9) STC 267. The Court recognized that it was bound by the precedent set in that case and therefore concluded that the present appeals could not succeed. Accordingly, the Court dismissed the appeals, ordered the payment of costs, and stipulated the imposition of a single hearing fee.

The appellant in the separate civil appeal numbered 3 of 1960 was C. & E. Morton (India) Ltd. The company conducted a confectionery manufacturing operation at Marhowrah in the Saran district of Bihar, while its registered office was located in Calcutta. After production, the goods were dispatched to Calcutta for sale to consumers. The firm was registered as a dealer under the Bihar Sales Tax Act. For the assessment year 1949‑50, covering the period from 1 April 1949 to 31 March 1950, the Superintendent of Sales Tax in Chapra determined the taxable turnover to be Rs 30,60,737‑11‑9. This assessment incorporated Rs 10,66,537‑8‑0 representing the value of goods sent to the head office in Calcutta, and Rs 3,72,777‑10‑0 representing goods delivered outside Bihar after 26 January 1950.

The appellant contested this assessment by filing an appeal to the Deputy Commissioner of Sales Tax in Patna. The Deputy Commissioner excluded from the taxable turnover the amount of Rs 10,66,577‑8‑0, holding that a mere transfer of goods from one branch of the same dealer did not qualify as a sale under the definition in the statute. He also directed that the appellant’s claim for exemption of the Rs 3,72,777‑10‑0, which corresponded to goods sold outside Bihar after 26 January 1950, be examined in light of the Supreme Court’s decision in State of Bombay v. United Motors (India) Ltd., reported in 1953 SCR 1069 and 1953 (4) STC 133.

Subsequently, the State of Bihar filed a revision application before the Board of Revenue. The Board held that the amount of Rs 10,66,577‑8‑0, being the price of goods transferred for sale from the manufacturing centre to Calcutta, was liable to be included in the taxable turnover. The High Court then directed the Board of Revenue to state a case concerning the question raised by the assessment order. In response, the Board referred a reference on the constitutional validity of section 2(g) of the Bihar Sales Tax Act and on whether the appellant was obligated to pay sales tax on transactions occurring between 1 April 1949 and 25 January 1950. At the hearing of that reference, the High Court, following its earlier judgment, addressed the matter.

In the matter of Tata Iron & Steel Co., Ltd. v. State of Bihar, the reference that had been decided against the appellant was reported in the 1956 law reports. An appeal against that order was filed with special leave under Article 136 of the Constitution. The order that had been passed by the Patna High Court in the Tata Iron case had subsequently been affirmed by the Supreme Court in the 1958 judgment. Because the Supreme Court upheld the High Court’s decision, the appeal that had been presented under Article 136 was required to fail, and the Court ordered that the appeal be dismissed and that costs be awarded against the appellant.

The second set of proceedings comprised Civil Appeals numbered 791 and 792 of 1957, filed by M/s Debijhora Tea Co., Ltd. This company was a limited‑liability corporation whose registered office was located at Jalpaiguri in the State of West Bengal, and it engaged in the production, manufacture and export of tea. The company owned a tea garden situated in the district of Purnea, State of Bihar, and it was entered as a dealer under the Bihar Sales Tax Act of 1947. For the assessment year that extended from 1 April 1949 to 31 March 1950, the Assistant Superintendent of Sales Tax for the Kishunganj Circle estimated the appellant’s taxable turnover at Rs 4,68,853 and directed the company to pay sales tax on that amount. The appellant challenged the assessment before the Commissioner of Sales Tax, but the Commissioner dismissed the appeal. The appellant then filed a revision application before the Board of Revenue, which limited the question of tax liability to the period from 1 April 1949 to 25 January 1950. The Patna High Court ordered the Board of Revenue to refer two questions under section 25(3) of the Bihar Sales Tax Act. The questions concerned the constitutional validity of section 2(g) of the Bihar Sales Tax Act, as amended by Act VI of 1949, and the liability of the appellant to pay sales tax on sales of commodities made outside the State of Bihar. In addition, the appellant had been assessed for the period from 1 October 1948 to 31 March 1949 on a taxable turnover of Rs 2,95,680, together with a tax liability and a penalty. That assessment was also appealed before the Additional Commissioner, whose dismissal was confirmed by the Board of Revenue in revision. Acting on the High Court’s direction, the Board again referred the same two questions for opinion with respect to the period from 1 April 1949 to 25 January 1950. At the hearing of that reference, the High Court, following the earlier Tata Iron judgment, held that sales of commodities manufactured in Bihar were liable to tax even when those sales were effected in Calcutta, and it concluded that section 2(g) as amended by Bihar Act VI of 1949 was not ultra vires.

The Court observed that the sales of commodities manufactured in Bihar were liable to tax even though the transactions were effected in Calcutta, and it held that section 2(g) as amended by Bihar Act VI of 1949 was not beyond the legislative competence. The appellants filed two separate appeals against the order passed by the High Court, seeking special leave to appeal under Article 136 of the Constitution. The High Court, in its adjudication, adhered to its earlier decision on the same point of law, and this Court subsequently confirmed that earlier decision, expressly referring to the precedent set in Tata Iron & Steel Co., Ltd. v. The State of Bihar 1958 SCR 1355; 1958 (9) STC 267. The Court explained that the reasons articulated in the cited judgment were applicable to the present appeals, and consequently concluded that the two appeals could not succeed. Accordingly, the Court dismissed both appeals, ordered the appellants to bear the costs of the proceedings, and directed the payment of a single hearing fee.