M/S. Anwarkhan Mahboob Co vs The State Of Bombay (Now Maharashtra)

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

Court: Supreme Court of India

Case Number: Petition No. 125 of 1959

Decision Date: 20 September, 1960

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

In this case the Supreme Court of India rendered its judgment on 20 September 1960. The bench comprised Justice K.C. Das Gupta, Justice S.K. Das, Justice M. Hidayatullah, Justice J.C. Shah and Justice N. Rajagopala Ayyangar. The petitioner was M/s Anwarkhan Mahboob Co., a company engaged in the manufacture of bidis and having its head office at Jabalpur in the State of Madhya Pradesh. The respondent was the State of Bombay (now Maharashtra) together with other parties. The case is reported as 1961 AIR 213 and 1961 SCR (1) 709, with subsequent citations in later reports.

The petitioner purchased tobacco in the State of Bombay. The Sales Tax Officer of that State assessed the petitioner to a purchase tax under the Bombay Sales Tax Act, 1953. The assessment amounted to a liability of Rs 710. The petitioner challenged this assessment, contending that the transactions and purchases occurred “outside the State of Bombay” within the meaning of Article 286(1)(a) of the Constitution read with its Explanation, that the Bombay Sales Tax Act, 1953, did not empower the levy of any purchase tax on the transactions in question, and that the transactions formed part of inter‑State trade and commerce. After the petitioner’s appeal to the Assistant Collector of Sales Tax was dismissed, the petitioner filed the present petition for writs of mandamus and certiorari before this Court.

In its submissions the petitioner argued that the Bombay Sales Tax Act, 1953, did not authorize a tax on the purchase of bidi‑tobacco because such tobacco was not listed in column 4 of Schedule B of the Act. The petitioner further submitted that although the tobacco was delivered within the State of Bombay as a direct result of the purchase, it was intended to be shipped to Madhya Pradesh for conversion into bidis. The only operation performed on the tobacco in Bombay was the removal of stem and dust, a process which, the petitioner claimed, did not amount to “consumption” of tobacco as contemplated by the Explanation to Article 286, nor did it convert the tobacco into a “commercially different” article.

The respondents, in a counter‑affidavit, asserted that the raw tobacco was converted in Bombay into bidi pattis before being sent outside the State, that the resulting articles were commercially different from the original tobacco, and that their market values differed. The petitioner did not dispute these averments. The Court held that the words “all goods other than those specified from time to time in Schedule A and in the preceding entries” in entry 80 of Schedule B of the Bombay Sales Tax Act, 1953, functioned as a specification of goods for the purposes of section 10 of the Act. Since bidi‑tobacco purchased by the petitioner was not included in Schedule A or any earlier entry of Schedule B, purchase tax at the rate prescribed against entry 80 was leviable under section 10. Moreover, the Court observed that whenever a commodity is dealt with so as to change it into another commercial commodity, the original commodity is deemed to have been consumed.

In this case the petitioner argued that the tobacco it bought from cultivators was delivered to its head office in Bombay and was then turned into an article that was “commercially different” from the raw tobacco. The respondents, in their counter‑affidavit, claimed that the raw tobacco was processed into bidi pattis before being sent out of Bombay State and that both the raw tobacco and the bidi pattis were commercially different articles with different market values. The petitioner did not contest these statements. The Court held that the expression “all goods other than those specified from time to time in Schedule A and in the preceding entries” appearing in entry 80 of Schedule B of the Bombay Sales Tax Act, 1953, constituted a specification of goods for the purposes of section 10 of that Act. Because the bidi tobacco purchased by the petitioner was not listed in Schedule A or in any of the earlier entries of Schedule B, the purchase tax specified for entry 80 was applicable under section 10. The Court further observed that when a commodity is transformed into another commercial commodity, the original commodity is considered to have been consumed within the meaning of the Explanation to Article 286 of the Constitution. The Court followed the decision in State of Travancore‑Cochin v. Shanmugha Vilas Cashew Nut Factory, [1954] S.C.R. 53. Accordingly, the delivery of tobacco in Bombay for its conversion into bidi pattis, which were a commercially different article, amounted to delivery for the purpose of consumption. The purchase therefore fell within the scope of Article 286(i)(a) of the Constitution and was deemed to have taken place inside Bombay State.

The petition was filed in the original jurisdiction as Petition No. 125 of 1959 under Article 32 of the Constitution, seeking enforcement of fundamental rights. The petitioners were represented by counsel for the petitioner, while counsel for the respondents represented the State of Bombay, the Collector of Sales Tax, the Sales Tax Officer in Baroda, and the Assistant Collector of Sales Tax, Northern Division, Range III, Baroda. The judgment was delivered on 20 September 1960 by Justice Gupta. The petitioner, a partnership firm engaged in manufacturing bidis with its head office in Jabalpur, Madhya Pradesh, claimed that its rights under Articles 19(1)(f) and (g) were infringed by the unlawful levy of a purchase tax on certain tobacco purchases made in Bombay. The Court noted that the Sales Tax Officer in Baroda had issued an assessment levying purchase tax under section 14, sub‑section (6), of the Bombay Sales Tax Act, 1953, for the period from 1 April 1954 to 29 September 1955. The petitioner contended that the assessment was illegal because the transactions constituted purchases “outside the State of Bombay” within the meaning of Article 286(1)(a) together with its Explanation, and because the transactions occurred in the course of inter‑State trade and commerce as defined by Article 286(2). The petitioner further argued that the Bombay Sales Tax Act, 1953, did not empower the authorities to impose, levy or collect any purchase tax on the transactions in question.

The Sales Tax Officer had issued an assessment order on 18 October 1955 that imposed a purchase tax on the petitioner under the Bombay Sales Tax Act, 1953. The petitioner challenged that order by filing an appeal with the Assistant Collector of Sales Tax. The Assistant Collector set aside only the penalty that the Sales Tax Officer had imposed under section 16(4), but he upheld the assessment itself and therefore dismissed the petitioner’s appeal against the tax liability. The Assistant Collector recorded his decision on 26 November 1957. Subsequently, on 4 August 1958, the petitioner filed the present petition. In that petition the petitioner sought a writ of mandamus, or any other appropriate order, directing the State of Bombay, the Collector of Sales Tax, the Sales Tax Officer at Baroda, and the Assistant Collector of Sales Tax, Northern Division, Range III, Baroda, not to enforce any provisions of the Bombay Sales Tax Act against it in respect of the transactions that were the subject of the assessment. The petitioner also prayed for a writ of certiorari to set aside the assessment proceedings, to invalidate both the original assessment order of the Sales Tax Officer and the appellate order of the Assistant Collector, and to obtain a declaration that the Act did not empower the State to impose, levy or collect a purchase tax on the transactions in question.

The petitioner's primary argument was that the Bombay Sales Tax Act, 1953, did not empower the State to levy a purchase tax on the purchase of bidi‑tobacco. The petitioner relied on the wording of section 10(1), which provides that a purchase tax shall be levied on the turnover of purchases of goods “specified in column 1 of Schedule B at the rates, if any, specified against such goods in column 4 of the said schedule.” The petitioner contended that bidi‑tobacco, which it had purchased, was not listed among the goods whose rates appear in column 4 of Schedule B. An examination of Schedule B shows that it contains eighty entries in its first column. For each entry, column 2 records the rate of sales tax applicable under section 8 of the Act, column 3 records the rate of general sales tax under section 9, and column 4—the last column—records the rate of purchase tax, if any. Entries 1 through 79 each name a specific article. Entry 80, as it existed prior to its amendment in 1957, read: “All goods other than those specified from time to time in Schedule A and in the preceding entries.” An amendment introduced by the Bombay Act 71 of 1958 later inserted the words “and sec. 7A” after the reference to “Schedule A.” The legal issue for determination, therefore, was whether the phrase “all goods other than those specified from time to time in Schedule A and in the preceding entries” constitutes a valid specification of goods for the purposes of section 10, and consequently whether bidi‑tobacco, which is not listed in Schedule A nor in any of the preceding specific entries, falls within the scope of the purchase tax provision.

The Court examined the petitioner's argument that, for the purpose of section 10, only a description that enumerated particular goods could constitute a specification, and that a broad wording such as “all goods other than those specified from time to time in Schedule A and in the preceding entries” could not be regarded as a specification. The Court rejected this contention. It acknowledged that a list of particular goods certainly satisfied the requirement of specification under section 10 as well as under sections 8 and 9 of the Act. However, the Court found no reason to hold that the general description in entry 80 of Schedule B failed to meet the definition of a specification. Consequently, the Court concluded that entry 80 was a valid specification of goods within the meaning of section 10. Because the bidi‑tobacco purchased by the petitioner did not fall within Schedule A or any of the earlier entries of Schedule B, the Court held that purchase tax under section 10 was applicable to those purchases at the rate prescribed for entry 80.

Having resolved the question of tax liability, the Court turned to the petitioner's principal claim that the purchases had taken place outside the State of Bombay. The petition, in paragraph 11, asserted that the purchases should be deemed to have occurred in the State of Madhya Pradesh, the location where the tobacco was ultimately delivered for consumption. During the hearing, it was not contested that the tobacco had been delivered to the company's Ranoli branch, which lay within the State of Bombay and was the entity that made the purchase. The Court observed that the subsequent dispatch from the Ranoli branch to the company's head office in Jabalpur did not constitute a delivery that resulted directly from the sale. The petitioner argued, however, that although delivery occurred in Bombay, it was not intended for consumption within Bombay, and therefore the Explanation to Article 286(1)(a) should not apply. The sales tax authorities had proceeded on the basis that, as a direct consequence of the purchase, the goods were delivered in the State of Bombay for the purpose of consumption there. The Court stated that unless this view was proven incorrect, the purchase must be deemed to have taken place within Bombay, rendering unnecessary any broader inquiry into whether Bombay could tax the transaction if the Explanation were inapplicable. The petitioner's definitive position was that the tobacco was delivered in Bombay as a direct result of the purchase. The Court also noted the ancillary issue raised concerning whether that delivery was intended for consumption in Bombay. The petitioner contended that, after delivery, the tobacco was meant to be sent to Madhya Pradesh for further processing.

The petitioner explained that after buying raw tobacco in Bombay, the only operation performed on it within the state was the removal of stems and dust. The petitioner argued that this removal of waste material does not constitute consumption of tobacco. Furthermore, the petitioner asserted that once the waste was removed, the remaining tobacco dispatched to the head office was not a commercially different article from the tobacco originally purchased from the cultivators. In the respondents’ counter‑affidavit it was stated that the petitioners, after purchasing raw tobacco from cultivators in Bombay, processed the raw tobacco into bidi pattis for immediate use in bidi manufacture, and that the market value of raw tobacco and of bidi pattis differed, indicating that the two were commercially distinct articles. No further affidavit was filed by the petitioner to contest the respondents’ claim that the raw tobacco was converted into bidi pattis before being sent out of Bombay and that the market values of raw tobacco and bidi pattis were different. During the hearing, the petitioner’s counsel conceded that any person could go to the market and purchase the article known as raw tobacco or “Akho Bhuko,” and could also purchase the article known as “bidi patti.” This admission was held to be sufficient proof that raw tobacco and bidi patti are distinct commercial articles. These facts form the background for determining whether the tobacco was delivered in Bombay for consumption within that State.

In answering that question, the Court found it unnecessary and unwise to attempt an exhaustive definition of the word “consumption” as used in the explanation to Article 286 of the Constitution. The Court observed that the ordinary understanding of consumption is the act of eating, drinking, or smoking. People are said to consume bread, fish, meat, or vegetables when they eat them; they consume tea, coffee, water, or wine when they drink them; and they consume cigars, cigarettes, or bidis when they smoke them. Economists describe the production of wealth as the creation of “utilities,” while consumption is the act of taking advantage of commodities and services, that is, their utilization. For each commodity there is usually a final act of consumption, although some commodities may have more than one final form of consumption. For example, grapes may be finally consumed by eating them as fruit or by drinking wine made from them. The Court therefore concluded that the existence of a generally accepted final act of consumption for a commodity does not preclude the presence of intermediate acts of consumption that occur as the commodity passes through various stages of production before reaching its final form.

Consumption, in certain circumstances, may extend over a long period of time. Examples of such prolonged consumption include books, pieces of furniture and paintings, which are used gradually rather than being exhausted in a single act. Moreover, it is possible that after one consumer has performed a portion of the final act of consumption, another individual—such as an heir, a successor‑in‑interest, a transferee, or even a person who has obtained possession by wrongful means—may perform the remaining portion of that final act. Nevertheless, the existence of an ordinarily recognised final act of consumption for each commodity should not cause us to overlook the fact that, in order to arrive at the stage where the final act occurs, the commodity typically passes through several stages of production, and each of those intermediate stages involves one or more intermediate acts of consumption.

To illustrate, consider cotton. The ultimate or final act of consumption of cotton can be described as the use of the cloth produced from it as a wearing apparel. Yet before cotton becomes a garment, it undergoes a series of transformations, each carried out by a different producer who adds utility to the material received. First, the raw cotton is ginned; the ginned cotton is then spun into yarn by a spinner; the spun yarn is woven into cloth by a weaver; and finally the woven cloth is fashioned into a garment by a tailor. At each of these steps a distinct utility is created, and the product of one step is consumed in the next step. Accordingly, it is accurate to speak of raw cotton being consumed in the ginning process, of ginned cotton being consumed in the spinning process, of spun yarn being consumed in the weaving process, and of woven cloth being consumed in the making of a garment. The finished garment is ultimately consumed by men, women and children when they wear it as clothing.

Since the Constitution‑makers did not limit the term “consumption” to refer only to the final act, it is appropriate to understand the word as encompassing any stage that is ordinarily described as consumption of the particular commodity. Returning to the cotton example, when raw cotton is delivered to State A for ginning, that delivery constitutes consumption in State A. When ginned cotton is delivered to State B for spinning, the delivery represents consumption in State B. When yarn is delivered to State C for weaving, the delivery is consumption in State C. When woven cloth is delivered to State D for tailoring into a garment, that delivery is consumption in State D. Finally, when the completed garment is delivered to State E for sale as clothing, that delivery is consumption in State E. Except at the ultimate stage where the finished article is used as clothing, each stage of production creates a commercial commodity that differs from the one received by the producer, and that transformation itself is a form of consumption within the meaning of the Explanation to Article 286.

The Court observed that, except at the final stage where the finished commodity is used as clothing, each stage of production creates a commercial commodity that is different from the one originally received by the producer. The transformation of a commodity into another commercial commodity by means of processing was therefore treated as consumption within the meaning of the Explanation to Article 286, because it does not involve the creation of a new distinct commodity for further use; rather, the original commodity is used up in the process of conversion. At one point in the argument, counsel for the petitioner, Mr Pathak, appeared to maintain that a commodity could be said to be consumed only after its substance had been destroyed. The Court noted that such a contention did not advance the discussion, since it required a definition of “destruction of the substance.” The Court acknowledged that one could argue that when a commodity is converted into a commercially different commodity its former identity is destroyed, thereby satisfying the test suggested by counsel. However, the Court found it unnecessary to engage in a detailed analysis of what constitutes “destruction.” Even without deciding whether destruction occurs, the Court held that whenever a commodity is dealt with in a manner that changes it into another commercial commodity, this constitutes consumption of the original commodity under the Explanation to Article 286. The Court referred to the earlier observation of Das, J., in State of Travancore‑Cochin v. Shanmugha Vilas Cashew Nut Factory (1954) SCR 53 at page 113, where the purchase involved raw cashew nuts. Das, J. explained that after the respondents received the raw nuts, they processed them to obtain cashew‑nut oil and edible kernels, and thus the raw nuts were consumed in the sense explained in the Article. Das, J. had previously expressed the view that using a commodity to create a different commercial article amounts to consumption within the meaning of the Explanation to Article 286(1)(a). The Court noted that it was not aware of any authority holding that such use of a commodity did not amount to consumption. Consequently, on the facts of the present case, the Court concluded that when tobacco was delivered in the State of Bombay for the purpose of converting it into a commercially different article, namely bidi patti, the delivery was for the purpose of consumption. Accordingly, the purchases in this case fell within the meaning of the Explanation to Article 286(1)(a) and were held to have taken place inside the State of Bombay.

There remained an objection that the transactions in question had been carried out in the course of inter‑State trade or commerce within the meaning of Article 286(2) of the Constitution, and that, if that were so, the imposition of tax would have been prohibited by the constitutional provision. The Court noted that even assuming the transactions were indeed part of inter‑State trade, the prohibition contained in Article 286(2) had been removed for the entire period up to 6 September 1955 by the Sales Tax Laws Validation Act. Consequently, the tax levied for the interval from 7 September 1955 to 29 September 1955 would have been unlawful only if the transactions were truly inter‑State in character. However, counsel for the petitioner informed the Court that the petitioner did not wish to obtain a decision on that particular question and would not, in the present proceedings, press the objection based on Article 286(2). Because the petitioner chose not to pursue that issue, the Court found it unnecessary to determine whether the transactions fell within the scope of inter‑State trade or commerce as defined by Article 286(2). As the petitioner had also failed to demonstrate any violation of a fundamental right, the petition was dismissed and costs were awarded against the petitioner. The petition was therefore dismissed with costs.