The State Of Madras And Another vs M/S. M. A. Noor Mohammed And Co

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

Court: supreme-court

Case Number: Civil Appeal No. 38 of 1959

Decision Date: 12 August 1960

Coram: J.L. Kapur, Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.N. Wanchoo

In this case the Supreme Court of India rendered its judgment on 12 August 1960 concerning the appeal titled The State of Madras and Another versus M/s M A Noor Mohammed and Co. The opinion was authored by Justice J L Kapur and the bench consisted of Justices J L Kapur, Bhuvneshwar P Sinha, P B Gajendragadkar and K N Wanchoo. The petitioners were the State of Madras and another, while the respondent was the partnership firm M/s M A Noor Mohammed and Co. The judgment is reported in the All India Reporter as 1960 AIR 1254 and is indexed in the citator as RF 1967 SC1537 (4). The matter involved the provisions of the Madras General Sales Tax Act, 1939 and the associated Madras General Sales Tax (Turnover and Assessment) Rules, 1939, particularly rule 16(5). The issues raised concerned the sale of hides and skins, exemption from multiple taxation, the status of unlicensed dealers, and whether a single‑point taxation claim could be sustained against the background of the statutory and regulatory framework.

The respondent, a firm engaged in the tannery business, had historically obtained licences under the Madras General Sales Tax Act, 1939 but failed to renew its licence for the assessment year 952‑1953. Consequently the firm was assessed sales tax on the sale value of tanned hides and skins for that year. The firm challenged the assessment by filing a petition under Article 226 of the Constitution of India in the High Court, arguing that section 5(vi) of the Act permitted liability for sales tax on hides and skins only at a single point and that rule 16(5) of the 1939 Rules, which restricted this mode of taxation to licensed dealers, was ultra vires because it contravened section 5(vi). The firm also contended that section 6A was inapplicable to a dealer without a licence. The Court held that section 3 of the Act envisages multipoint taxation on a dealer’s total turnover, but section 5 creates an exception for specified goods by allowing single‑point taxation subject to licence conditions. If those conditions are not met, section 6A mandates that tax be levied under section 3 as if section 5 did not apply. Accordingly, rule 16(5) was not ultra vires. The Court relied on earlier decisions, including V M Syed Mohammed & Co. v. State of Madras, State of Andhra and State of Mysore cases, to affirm its reasoning. The judgment forms part of Civil Appeal No 38 of 1959, an appeal by special leave from the Madras High Court order dated 2 April 1956.

The order dated 2 April 1956, issued by the Madras High Court in Writ Petition No. 313 of 1954, was contested before the Supreme Court. Counsel R. Ganapathy Iyer and T. M. Sen appeared for the appellants, while the Solicitor‑General of India, C. K. Daphtary, together with S. Venkatakrishnan, represented the respondents. Counsel A. V. Viswanatha Sastri and S. Venkatakrishnan also appeared for Intervener No. 1, identified as the Ambur Tanners Association, and counsel R. Gopalakrishnan represented Interveners Nos. 2 and 3, namely R. Chennappa and P. Abdul Wahab. The judgment was delivered on 12 August 1960 by Justice Kapur.

This proceeding was an appeal by special leave from the judgment and order of the Madras High Court that had permitted a petition filed under Article 226 of the Constitution. The central issue was whether the assessment of sales tax made by the second appellant, the Deputy Commercial Sales Tax Officer of Saidapet, was lawful under the Madras General Sales Tax Act, 1939 (the Act). The respondent was a partnership firm engaged in a tannery business at Chromepet, near Madras. During the assessment year 1952‑53 the firm had previously obtained licences in accordance with the Act, but it failed to renew its licence for that year. When the tax authorities required it to submit a return, the firm neither complied nor raised any objection to the notice served on 28 February 1954. Consequently, the authorities assessed sales tax of Rs 10,584 on a declared turnover of Rs 6,77,374‑4‑4. The firm challenged the assessment by filing a petition under Article 226, arguing that the assessment order was illegal and lacked legal authority. The Madras High Court accepted this contention, set aside the assessment, and awarded costs to the petitioner, thereby concluding that a firm not holding a licence under the Act could not be liable for sales tax on its dealings in hides and skins.

Against that decision, the appellants obtained special leave to approach this Court. In the proceedings before the High Court, the respondent contended that, pursuant to section 5, clause (vi) of the Act, liability for sales tax on hides and skins could arise only at a single point of taxation and that any rule restricting this single‑point taxation to licensed dealers was ultra vires. The respondent relied on the Supreme Court’s ruling in V. M. Syed Mohammed & Co. v. State of Madras, which had declared rule 16(5) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939 to be void and inoperative. Accepting that interpretation, the respondent argued that the State of Madras had formally deleted clause (5) of rule 16 by issuing Government Order 450, Revenue, dated 26 February 1954—two days before the disputed assessment order was made. The respondent further asserted that rule 16(5) was the sole provision that imposed a multiple tax on sales of hides and skins by unlicensed dealers, and that, in the absence of that rule, any tax levied after its repeal was illegal and lacked any statutory authority.

The Court observed that imposing the sales tax after the repeal of the rule was illegal and that the tax lacked any legal authority. It was further argued that, within the taxation framework established by the Act, hides and skins were excluded from the direct operation of section 3(1), which constituted the general charging provision, because of their significance in the international market. Consequently, hides and skins were afforded special protection through the single‑point taxation mechanism set out in section 5(vi). The argument therefore posited that, for sales of hides and skins, the general provision of section 3(1) did not apply and that a distinct taxation rule was created by section 5(vi) of the Act. The High Court held that, in relation to hides and skins, “the charge levied by section 3 is subject to the provisions of section 5, and for licensed dealers in hides and skins the charging provision is rule 16 of the Turnover and Assessment Rules.” The High Court further held that rule 16(5) of the Turnover and Assessment Rules, which limited the benefit of single‑point taxation to licensed dealers, was ultra vires because it contradicted section 5(vi) of the Act. The Court also found that section 6A was not applicable to a dealer who had not obtained a licence for dealing in hides and skins. Moreover, the Court reasoned that if rule 16(5) was ultra vires for contravening section 5(vi), then rule 5 of the Madras General Sales Tax Rules, which required the procurement of a licence in order to enjoy the benefit of single‑point taxation, would likewise be ultra vires. Accordingly, on a true construction of sections 3(1) and 5(vi), the Court concluded that rule 5 of the Sales Tax Rules and rule 16(5) of the Turnover and Assessment Rules were ultra vires, and that section 6A was inapplicable to any person who had not taken out a licence. As a result, the Court set aside the assessment order issued against the respondent firm. To resolve the appeal, the Court noted that it was necessary to refer to and consider the relevant provisions of the Act and the two sets of Rules made thereunder. The relevant statutory extracts were then quoted, beginning with section 3(1), which provided that, subject to the Act, every dealer shall pay an annual tax on total turnover, that dealers whose turnover is less than ten thousand rupees are exempt, that turnover shall be determined as prescribed, and that taxes under sub‑sections (1) and (2) shall be assessed, levied and collected in the manner and instalments prescribed, followed by the text of section 5, which includes clause (vi) concerning the single‑point taxation of hides and skins.

The statute authorized the imposition of restrictions and conditions that might be prescribed, and these could include requirements relating to licences and licence fees. Under clause (vi) it was provided that the sale of hides and skins, whether tanned or untanned, would be liable to tax under section 3, subsection (1), only at a single point in the chain of sales by successive dealers, the specific point being determined by the regulations. Section 6A further stated that if a dealer violated any restriction or condition prescribed under section 5 or any notification issued under section 6, or failed to obtain or renew a licence when such a licence was required, the dealer’s sales would, from the beginning of the year in which the breach occurred, be assessable to tax under section 3 as though the provisions of section 5 or the relevant notification did not apply to those sales, even though the licence, if any, might still be in force during that year. The Madras General Sales Tax (Turnover and Assessment) Rules then defined turnover: Rule 4(1) prescribed that, except as provided in sub‑rule (2), a dealer’s gross turnover for the purposes of the rules would be the amount for which the dealer sold goods; sub‑rule (2) specified that for certain listed goods the turnover would instead be the amount for which the dealer purchased the goods. Among the goods listed were untanned hides and skins purchased by a licensed tanner in the State and untanned hides and skins exported from the State by a licensed dealer in hides or skins. Rule 15(1) clarified that Rules 6 to 13 would not apply to licensed tanners and other licensed dealers in hides or skins with respect to their dealings in those articles, although the provisions of the present rule and the following rule would still apply. Rule 16(1) provided that for hides and skins the tax payable under section 3(1) would be levied according to the provisions of that rule. Rule 16(2) further mandated that no tax should be levied on the sale of untanned hides or skins by a licensed dealer except at the stage when such hides or skins are sold either to a tanner in the State or for export outside the State. In the first situation, the tax would be collected from the tanner on the amount he paid for the hides or skins; in the second situation, the tax would be collected from the last dealer in the chain who was not exempt under section 3(3) and who purchased the goods in the State, based on the purchase price.

The Court explained that where hides or skins are exported from the State, the tax is to be imposed on the dealer who was the last dealer not exempt under section three of the Act, provided that this dealer purchased the goods within the State and the tax is calculated on the amount he paid for them. The provision further clarified that sales of hides or skins by dealers other than those who are licensed under the specific hides‑and‑skins regulations are, subject to the provisions of section three, liable to tax each time a sale occurs. Rule five, paragraph one, of the Sales Tax Rules requires that every person who deals in hides or skins—whether as a tanner or in any other capacity—must, if he wishes to claim the exemption conferred by sections five and eight or to obtain the concession of single‑point taxation under section six, submit an application in Form 1 for a licence for each place of business. The application must be addressed to the authority named in sub‑rule two and must reach that authority no later than the fifteenth day of October, nineteen thirty‑nine. This licence requirement forms part of the overall scheme of taxation established by the Act.

The Court then set out the structure of that scheme. Section three is identified as the general charging provision, under which tax is levied according to the turnover of a dealer, except that any dealer whose turnover is below ten thousand rupees is exempt from sales tax. Section three envisions a multipoint taxation system in which tax is applied at each stage of a dealer’s total turnover. However, the Act makes an exception for certain specified goods listed in section five, where a single‑point taxation method applies, subject to prescribed restrictions and conditions. Sub‑section six of section five explicitly provides that sales of hides and skins are to be taxed under section three, sub‑section one, at a single point in the chain of sales made by successive dealers. The language of section five makes clear that this exemption is conditional upon compliance with various restrictions, including the requirement to obtain a licence as laid down in the rules. Rule five of the Sales Tax Rules, which has already been quoted, stipulates that a dealer who wishes to benefit from the exemption in sections five and eight, or to take advantage of the single‑point taxation concession, must secure the appropriate licence. If a dealer fails to meet the conditions and restrictions imposed by section five together with the rules, section six‑A of the Act dictates the consequences. Section six‑A states that when a condition prescribed or notified—such as the obtaining or renewal of a licence—is breached, the tax must be levied under section three as if the provisions of section five did not apply to the transaction. Consequently, the Court concluded that the imposition of sales tax on hides and skins at a single point is expressly contingent upon the dealer’s adherence to the licence requirement, and any deviation from that requirement results in the tax being charged under the general multipoint scheme of section three.

The Court observed that the contention that Rule 16(5) of the Turnover and Assessment Rules conflicted with Section 5(vi) of the Act, a view accepted by the High Court, found no support in the language of the statutory provision. Section 5(vi) is a concessional clause that permits the sales of hides and skins to be taxed at a single point, but, as its introductory wording makes clear, this concession is subject to the restrictions and conditions laid down in the Rules, one such condition being the requirement to obtain a licence. Consequently, Rule 16(5) merely underscores the consequences of failing to observe the conditions that Sections 5(vi) and 6‑A expressly prescribe. The Court therefore found no inconsistency between the Rule and the relevant provisions of the Act. It was nevertheless submitted that, on appeal from a Madras High Court judgment, this Court had held Rule 16(5) to be ultra vires the Act. That submission was based on the earlier Madras High Court decision in V. M. Syed Mohammed & Company v. State of Madras, reported at (1952) 3 S.T.C. 367, which was subsequently affirmed by this Court in V. M. Syed Mohammed & Company v. State of Andhra, reported at [1954] S.C.R. 1117. The present Court considered that contention to be unfounded. In the earlier proceedings before the Madras High Court, it had been argued that the Rules failed to give effect to the policy underlying the Act, namely to keep the price of hides and skins competitive in the world market. Counsel had pointed out that hides and skins were highly demanded in foreign markets, that their export constituted a major component of the State of Madras’s foreign trade, and that the State enjoyed a natural advantage in tanning because of the abundant supply of “Avaram bark,” which was especially suitable for the purpose. Further argument asserted that untanned hides and skins were either obtained locally or imported from other States and were subsequently tanned within the State or exported for tanning abroad; therefore the taxation scheme was intended to impose tax at the single point when the articles were tanned in the State or exported for tanning. Under that scheme, multiple taxation would contravene Section 5(vi) of the Act. The Government did not dispute this view, and consequently the High Court held that Rule 16(5) of the Turnover and Assessment Rules was ultra vires. However, the Court noted that the issue of ultra vires was not truly relevant to the present dispute, as observed by Justice Venkatarama Ayyar at page 394, who remarked that the petitioners’ real concern was that sales by unlicensed dealers to unlicensed tanners or unlicensed dealers could give rise to multiple taxation, thereby violating Section 5(vi). He further observed that the Government did not contest the proposition that Rule 16(5) was repugnant to Section 5(vi), and therefore it must be considered accordingly.

In the earlier proceedings the High Court declared rule 16(5) of the Turnover and Assessment Rules to be ultra vires. However, the Court noted that this declaration could not provide any relief to the petitioners because every petitioner was a licensed tanner and therefore none of them suffered any injury from the operation of rule 16(5). The petitioners’ counsel expressly admitted this point. The matter was subsequently appealed to the Supreme Court, where Justice S R Das, speaking at page 1121, observed that the counsel for the petitioners argued that rule 16(5) plainly contravened section 5(vi) of the Act. He further stated that the High Court had held the sub‑rule to be ultra vires and that even the Advocate General of Madras, appearing before the High Court, had not contested the view that rule 16(5) was repugnant to section 5(vi). Justice Das added that the effect of the sub‑rule was limited to unlicensed dealers, and that the appellants, who were unquestionably licensed dealers, were not subject to its operation. The judgment of the High Court therefore did not place the alleged repugnancy of the rule in controversy, nor did it require the Court to express an opinion on the merits of that contention. The Solicitor‑General then submitted that the appellants, in a counter‑affidavit filed in the High Court, had acknowledged that rule 16(5) of the Turnover and Assessment Rules was ultra vires. The Court considered that this admission would not advance the case because, on a proper construction of the statutory provisions, the argument of repugnancy could not be sustained. The Court observed that the Andhra Pradesh High Court had correctly refused to accept the view that rule 16(5) exceeded the authority of the rule‑making body, as reflected in the decision of Syed Mohamed & Company v. State of Andhra. The Mysore High Court, in State of Mysore v. Sarvatula & Co., adopted the same reasoning. An examination of the relevant sections of the Act and the subordinate rules showed that the charging provision is contained in section 3(1) and that the general principle is to levy tax at several points on the total turnover of a dealer. Nevertheless, for the sale of certain specifically listed articles the statute provides for a single‑point levy, subject to the licensing conditions enumerated in section 5 and embodied in the rules. Accordingly, rule 16(5) does not exceed the power of the rule‑making authority. Subsequently, the appellants argued that the differing treatment—single‑point taxation for licensed dealers and tanners versus multiple‑point taxation for unlicensed dealers—offended Article 14 of the Constitution. The Court declined to consider this argument because it had not been raised before the High Court and was introduced for the first time in the present appeal. In the Court’s opinion, the High Court’s determination that rule 16(5) was ultra vires and that section 6‑A of the Act was inapplicable was erroneous, and therefore the appeal had to be allowed.

The Court, after reviewing the material placed before it, held that the appeal filed by the appellants should be allowed. Accordingly the Court set aside the judgment and order that had been rendered by the High Court in the earlier stage of the litigation. With the setting aside of that judgment the petition that had been pursued by the respondent was dismissed with no further relief granted. The Court further directed that the respondent bear the costs of the appellants incurred both in the present proceeding before this Court and in the proceedings that had taken place in the subordinate courts. Consequently the order of the appellate Court reflected that the appeal was allowed and that the High Court decision was vacated, the respondent’s petition was dismissed, and the costs were awarded against the respondent. The final judgment was reported with the citation (1) [1957] 9 S.T.C. 593. The dismissal of the respondent’s petition meant that none of the relief that the respondent had sought in the earlier proceedings would be granted by either the High Court or this Court. By ordering the respondent to pay the costs, the Court ensured that the financial burden of the litigation would rest upon the party who had unsuccessfully pursued the petition.