K. R. C. S. Balakrishna Chetty and Sons and Co vs The State Of Madras

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

Court: supreme-court

Case Number: Civil Appeals Nos. 490 and 491 of 1958

Decision Date: 29 November 1960

Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah

In the matter titled K. R. C. S. Balakrishna Chetty & Sons & Co. v. The State of Madras, the Supreme Court of India delivered its judgment on 29 November 1960. The opinion was authored by Justice J. L. Kapur and the bench was composed of Justice J. L. Kapur, Justice M. Hidayatullah and Justice J. C. Shah. The case is reported in the 1961 volume of the All India Reporter at page 1152 and also appears in the 1961 Second Series of the Supreme Court Reports at volume 2, page 736, with the citation reference RF 1988 SC 6 (17). The essential question before the Court concerned the claim of exemption from sales tax by a licensee under the Madras General Sales Tax Act, 1939, specifically whether such exemption was conditional upon the observance of the conditions and restrictions prescribed in the legislation.

The appellants, who were merchants dealing in cotton yarn, had obtained a licence pursuant to section 5 of the Madras General Sales Tax Act, 1939 (Act IX of 1939). Section 5 provided that dealers in cotton yarn were exempt from payment of sales tax under section 3 of the Act, subject to such restrictions and conditions as might be prescribed, including conditions relating to licences and licence fees. Section 13 imposed upon every licence holder the duty to keep and maintain true and correct accounts of the value of the goods sold and received. Rule 5 of the General Sales Tax Rules required any person seeking exemption under section 5 to apply for a licence using Form 1, thereby making the licence subject to the provisions of the Act and the rules made thereunder. During a surprise inspection the authorities discovered that the appellants were maintaining two separate sets of accounts: one set was used for filing returns, while the other set revealed transactions that were concealed from tax authorities, indicating black‑market activity. The appellants were consequently refused exemption and were assessed tax. They appealed, asking whether the exemption could still be claimed despite the breach of the statutory conditions. The Court held that the answer must be negative. On a proper construction of section 5, the Court found that the phrase “subject to” unequivocally meant “conditional upon” and that the exemption from assessment was clearly dependent on the licence holder’s compliance with the conditions and restrictions imposed by the Act, whether those conditions were contained in the rules or in the licence itself. It was therefore incorrect to assert that a licence holder remained exempt from assessment merely by holding the licence, regardless of any violation of the law, and that the only penalty for such a breach would be cancellation of the licence or criminal prosecution. The appeals, numbered Civil Appeals Nos. 490 and 491 of 1958, were filed against the judgment and decree dated 18 February 1955 of the Madras High Court in Second Appeals Nos. 2038 and 2039 of 1950. Counsel for the appellant presented the case, while counsel for the respondent represented the State of Madras. The Court affirmed the lower courts’ finding that the exemption could not be claimed when the statutory conditions were not observed.

The judgment was pronounced by Kapur, J. The appellants, who were merchants dealing in cotton yarn, filed two suits seeking a declaration that the State of Madras could not levy sales tax on them and also prayed for an injunction. Both suits were decided in favour of the appellants by the Subordinate Judge of Salem, and those decrees were affirmed on appeal by the District Judge of Salem. The State of Madras then appealed the decrees to the Madras High Court. By a judgment dated 18 February 1955, the High Court set aside both decrees in a common order. The appellants obtained a certificate from that Court and consequently filed the present appeals. The appellants had obtained a licence under section 5 of the Madras General Sales Tax Act, 1939 (the “Act”). That licence exempted them from assessment under section 3 of the Act on the sale of cotton yarn and on hand‑loom cloth, subject to such restrictions and conditions as might be prescribed, including conditions relating to licences and licence fees. The licence was originally issued on 31 March 1941 and was periodically renewed for the subsequent years. On 20 September 1944 the Commercial Tax Authorities conducted a surprise inspection of the appellants’ premises and discovered that the firm was keeping two separate sets of accounts. One set of books had been used to prepare the returns filed with the Department, while the other set revealed transactions that amounted to black‑market activity. As a result of the latter books, the proprietor, Balakrishna Chetty, was prosecuted and sentenced to six months’ imprisonment for an offence connected with a breach of the Cotton Yarn Control Order. During the pendency of those criminal proceedings, the Deputy Commercial Tax Officer made assessments for the financial years 1943‑44 and 1944‑45, the tax demanded being Rs 37,039 for the former year and Rs 3,140 for the latter.

The appellants unsuccessfully appealed both assessments and also failed to obtain relief on the subsequent revisions. On 24 August 1945 they instituted a suit for a declaration and injunction against the first assessment, contending that the assessment was contrary to the Act. A similar suit was filed on 2 September 1946 in respect of the second assessment. The present appeals arise out of those suits. The core dispute between the parties revolves around the meaning of the expression “subject to” in section 5 of the Act. The High Court held that a correct interpretation of the Act and the rules made thereunder required strict observance of the licence conditions for the exemption under section 5 to be effective. Accordingly, because the appellants had breached those conditions, the High Court concluded that they were liable to pay tax for both years despite holding a licence issued under section 5. For the purpose of this appeal, it is convenient to refer to the relevant provisions of the Act, beginning with section 2(b), which defines “dealer” as any person who carries on the business of buying or selling goods.

The Act defines the expression “dealer” in section 2(b) as any person who carries on the business of buying or selling goods. Section 2(f) explains that the word “prescribed” means prescribed by rules made under this Act. Section 3(1) provides that, subject to the provisions of the Act, every dealer shall pay a tax each year in accordance with the scale that is specified: paragraph (a) contains a detailed scale, and paragraph (b) states that if the dealer’s turnover exceeds twenty thousand rupees, one‑half of one per cent shall be payable on the amount exceeding that figure. Section 5 declares that, subject to such restrictions and conditions as may be prescribed, including the conditions relating to licences and licence fees, the sale of bullion and specie, of cotton, of cotton yarn and of any cloth woven on handlooms and sold by persons dealing exclusively in such cloth shall be exempt from taxation under section 3. Section 13 obliges every dealer and every person licensed under section 8 to keep and maintain a true and correct account showing the value of the goods sold and paid by them; and if the accounts kept in the ordinary course of business do not show the same in an intelligible form, the dealer shall maintain a true and correct account in such form as may be prescribed for that purpose.

The rules that are relevant to this appeal are quoted as follows. Rule 5(1) provides that every person who (a) … (b) deals with cotton and/or cotton yarn, (c) … (d) … (e) … shall, if he desires to avail himself of the exemption provided in sections 5 and 8 or of the concession of single‑point taxation provided in section 6, submit an application in Form‑I for a licence. The relevant portion of Form III reads: “Form III Cotton Licence to a dealer in Cotton yarn cloth woven on handlooms See rule 6(5). Licence No. … dated … having paid a licence fee of Rs. … (in words) hereby licensed as a dealer in Cotton/Cotton yarn Cotton woven on handlooms for the year ending at … (place of business) subject to the provisions of the Madras General Sales Tax Act, 1939, and the rules made thereunder and to the following conditions:” Rule 8 states that every licence granted or renewed under these rules shall be liable to cancellation by the Deputy Commercial Tax Officer in the event of a breach of any of the provisions of the Act, or of the Rules made thereunder, or of the conditions of the licence. The appellants argued that as long as they possessed a licence, it was immaterial whether they committed any infraction of the law; they contended that they were not liable to any assessment of sales‑tax under the provisions of the Act and that the only penalty they faced was the possible cancellation of the licence and/or the criminal penalty they had already suffered. In other words, they maintained that the mere existence of a licence, notwithstanding breaches of its terms and conditions, was sufficient to secure exemption under the Act. The Court found this contention to be wholly untenable.

The Court observed that Section 3 of the Act dealt with the imposition of tax, while Section 5 provided an exemption from tax; however, Section 5 also declared that the privilege of holding a licence was subject to restrictions and conditions prescribed under the provisions of the Act and the rules made thereunder, as indicated by the introductory words “subject to such restrictions and conditions as may be prescribed.” The Court then referred to provision B. 13, which imposed an important condition on every dealer and every licensed person to keep true and correct accounts showing the value of the goods sold and the amounts received. Next, the Court noted Rule 5 of the General Sales Tax Rules, which required any person who wished to avail himself of the exemption in Section 5 to submit an application in Form I for a licence. The licence form itself demonstrated that the licence was issued subject to the provisions of the Act and the rules made thereunder, and that the licencee was required to file returns as mandated and to keep true accounts under Section 13. From these provisions the Court concluded that the grant of a licence was conditioned upon the licencee observing the prescribed conditions, and that the licence operated only within the framework of the Act and its rules. The appellants contended that the phrase “subject to” should be understood merely as “liable to the rules and the provisions” of the Act, arguing that otherwise Section 5 would become inelegant and meaningless. The Court rejected that contention and held that a proper interpretation gave the words “subject to” the meaning of “conditional upon.” Accordingly, the exemption provided by a licence was conditional upon compliance with the conditions and restrictions imposed by the Act, its rules, or the licence itself; a licencee was exempt from assessment only while he conformed to the conditions of the licence, not automatically regardless of compliance. The Court further observed that the appellants had been found to have contravened both the Act and the Rules, and therefore they had not satisfied the conditions required for the exemption. In view of this finding, the Court affirmed that the appellants were not exempt from assessment under the Act. Consequently, the Court dismissed the appeals, ordered the appellants to pay costs, and recorded that the appeals were dismissed.