The State Of Orissa And Another vs M/S. Chakobhai Ghelabhai And Company

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 710 of 1957

Decision Date: 20 September 1960

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

The State of Orissa and another instituted proceedings against M/s Chakobhai Ghelabhai and Company, and the Supreme Court of India delivered its judgment on 20 September 1960. The bench that heard the matter consisted of S.K. Das, M. Hidayatullah, K.C. Das Gupta, J.C. Shah and N. Rajagopala Ayyangar, and the case was reported as 1961 AIR 284 and 1961 SCR (1) 719. The respondent firm was headquartered in Madhya Pradesh but, during the years 1948 to 1951, it collected bidi leaves from certain forest areas in Orissa and dispatched the leaves to destinations outside the State of Orissa. The firm never obtained registration as a dealer under the Orissa Sales Tax Act, 1947, nor did it file a return despite a notice issued to it. Consequently, the assessing authority required the firm to show cause why a penalty should not be imposed under section 12(5) of the Act. The assessing authority then proceeded, to the best of its judgment, to assess sales tax for each of the twelve quarters, the first quarter ending on 30 June 1948 and the last quarter ending on 31 March 1951, and it imposed a penalty of Rs 500 for each quarter.

The respondent appealed the assessment and penalty orders to the Assistant Collector of Sales Tax, but the appeal was dismissed. A revision petition was filed before the Collector of Commercial Taxes, who rejected it on the ground that it was filed out of time. One of the grounds raised before the appellate authority was that the respondent was not a dealer in Orissa because the sales of bidi leaves were not effected in Orissa. However, at the hearing of the appeal, the respondent’s pleader admitted that the sales were completed in Orissa. The respondent then moved the High Court by way of a writ petition. The High Court set aside the assessment and penalty orders on three main grounds: first, that the assessment orders were defective because the second proviso to section 2(g) of the Act, which defined “sale”, had been repealed by the Adaptation of Laws Order, 1950; second, that the levy of fees on the memorandum of appeal and on the revision application on a graded scale, as prescribed by rule 59 in conjunction with section 29(2)(s) of the Act, amounted to imposing a tax beyond the legislative competence of the State; and third, that the notice issued under section 12(5) of the Act was not lawful because separate notices had not been issued for each quarter, contrary to the statutory requirements.

In this appeal, the Court considered the judgment of the Orissa High Court dated 5 September 1955 in O. J. C. No. 92 of 1954. The appellants were the State of Orissa and the Collector of Commercial Taxes, Orissa. The respondent was a partnership firm, Messrs Chakobhai Ghelabhai and Company, which dealt in bidi leaves. The firm’s headquarters were located in Bagbehera, Madhya Pradesh, and between 1948 and 1951 it collected bidi leaves from forest areas in Orissa, bundled them, stored them in its godowns within the State, and subsequently sold and dispatched the leaves to destinations outside Orissa. The firm had not obtained registration as a dealer under the Orissa Sales Tax Act, 1947. On 21 July 1950, the Assistant Sales Tax Officer, Patna Circle, issued a notice under section 12(5) of the Act requiring the firm to submit a return in Form IV showing the turnover for each quarter beginning October 1947 through 30 June 1950, and to show cause why a penalty should not be imposed. The firm replied that it carried on no selling business in Orissa and therefore claimed no liability to register or to pay sales tax. The firm subsequently participated minimally in the assessment proceedings, appearing only on 30 June 1951 through one partner who testified that the accounts were kept at Bagbehera and that the dispatches of bidi leaves from Orissa were mixed with other consignments, rendering him unable to give a precise account of the Orissa business, though it was admitted that the leaves were indeed collected, processed and stored in Orissa. The High Court, on a writ petition, set aside the assessment and penalty orders on three grounds: (i) the assessment orders were invalid because the second proviso to section 2(g) of the Act defining “sale” had been repealed by the Adaptation of Laws Order, 1950; (ii) the levy of fees on the memorandum of appeal and the revision application under rule 59 read with section 29(2)(s) amounted to the imposition of a tax beyond the State’s competence; and (iii) the notice issued under section 12(5) was not compliant with law because separate notices were not issued for each quarter. The Court held that the question of where a sale was completed depended on factual circumstances and was not a pure legal question; consequently, the admission made by the respondent’s pleader that the sales were completed in Orissa was binding and brought the sales within section 2(g), rendering the sales liable to tax and making it unnecessary to consider the repealed second proviso. The Court further observed that the sales‑tax authorities, although exercising quasi‑judicial functions, were not courts in the strict sense. It held that the fees levied under rule 59 together with section 29(2)(s) were not taxes but charges for services rendered by a governmental agency, and that section 29(2)(s) was not invalid on grounds of legislative incompetence, with rule 59 staying within the limits of that provision, citing the precedent Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt. Finally, the Court concluded that a single notice issued under section 12(5) for several quarters was not contrary to law because the section contemplates a period that may consist of more than one quarter. The appeal was thus dismissed, affirming the validity of the assessment and the imposition of fees and penalties.

In the present matter the Assistant Sales Tax Officer, Patna Circle, issued a notice requiring the respondent to submit a return in Form No IV that would separately disclose the turnover for each quarter beginning October 1947 and ending on 30 June 1950, and further directed the respondent to explain why a penalty under section 12(5) of the Orissa Sales Tax Act, 1947 should not be imposed. The respondent replied that it carried on no selling business within Orissa and therefore argued that it fell outside the definition of a dealer under the Act and was not liable to register or to pay sales tax. After this reply the respondent participated in none of the subsequent assessment proceedings and made no appearance before the assessing authority, except on 30 June 1951 when one of its partners, Narvaram Popatbhai, appeared before the authority. The partner stated that the accounts were maintained at Bagbehera, that the dispatches of bidi leaves from Orissa were intermingled with other dispatches, and consequently he could not furnish a correct account of the business carried on in Orissa. Nonetheless, it was admitted that the bidi leaves were collected in Orissa, processed and manufactured for sale, stored in godowns located in Orissa, and thereafter sold and dispatched to various customers outside the State. The assessing authority therefore held that the transfer of property in the bidi leaves was completed in Orissa and that the respondent had willfully failed to obtain registration and to file a return of its turnover. Acting on this premise the authority proceeded to assess the tax, estimating a taxable turnover of Rs 61,250 for each of the twelve quarters, the first quarter ending on 30 June 1948 and the last quarter ending on 31 March 1951, and imposed a penalty of Rs 500 for each quarter. The assessment orders were issued on two occasions—on 4 July 1951 for four quarters and on 29 August 1951 for the remaining eight quarters. The respondent appealed these orders to the Assistant Collector of Sales Tax, Sambalpur. One ground raised before the appellate authority was that the respondent was not a dealer in Orissa because the sales of bidi leaves were not effected within the State. During the hearing this contention was withdrawn, and the respondent’s pleader conceded that the sales were completed in Orissa. The appeal was therefore decided on two remaining grounds: that the turnover fixed by the assessing authority was excessive and that the penalty imposed under section 12(5) should not have been levied. Both of these arguments were rejected by the appellate authority. Subsequently the respondent filed a revision petition; however, the revision was dismissed as it had been filed out of time by the Collector of Commercial Taxes, Orissa. The respondent then proceeded to approach the High Court of Orissa by filing a writ petition asserting, among other points, that it was not a dealer within Orissa.

In its writ petition the respondent raised five distinct points. First, it claimed that it was not a dealer in Orissa. Second, it argued that the sales made during the post‑Constitution period fell within the meaning of the Explanation to Article 286(1)(a) as then applicable and therefore could not be taxed by Orissa. Third, it contended that the notice issued under section 12(5) of the Sales Tax Act was defective on several grounds. Fourth, it asserted that the fees levied under rule 59 of the Orissa Sales Tax Rules, 1947, on its memorandum of appeal and revision application had no legal justification. Fifth, it maintained that both the assessment and the penalty imposed under section 12(5) were illegal. On the basis of these contentions the respondent sought a writ to set aside the assessment proceedings and the demand notices, and also requested an order directing the refund of the fees that had been paid.

The High Court entertained the petition and, by its judgment and order dated 5 September 1955, set aside the assessment orders, ordered the refund of the fees, and directed the respondent to file a return of its transactions under section 11 for the period for which a notice under section 11(1) of the Act had been served. In support of its orders the High Court recorded three specific findings. First, it held that the assessment orders were invalid because the second proviso to section 2(g) of the Act, which defined “Sale”, had been repealed by the Adaptation of Laws Order, 1950. Second, it found that the imposition of fees on a graded scale amounted to a tax that was unwarranted and exceeded the rule‑making authority of the State Government. Third, it concluded that the notice issued under section 12(5) of the Act was not issued in accordance with law.

The appellants challenged all three findings, contending that the High Court had erred in each respect. The Court examined the first finding concerning the validity of the assessment orders. It observed that the respondent had unequivocally admitted, as recorded by the appellate authority, that the sales of bidi leaves were completed in Orissa. Consequently, the Court regarded it unnecessary to analyse the effect of the repeal of the second proviso to section 2(g) or to consider the saving clause contained in paragraph 20 of the Adaptation of Laws Order, 1950. Section 2(g) of the Act defined “sale” as follows: “sale means, with all its grammatical variations and cognate expressions, any transfer of property in goods for cash or deferred payment or other valuable consideration, including a transfer of property in goods involved in the execution of contract but does not include a mortgage, hypothecation, charge or pledge.” The Court held that the respondent’s admission placed the sale of bidi leaves squarely within the ambit of section 2(g), and because the sales were completed in Orissa, they were liable to tax under the Act. Therefore, the High Court’s reliance on the repeal of the second proviso was unnecessary and its finding that the assessment orders were bad on that ground was erroneous.

Because the sales of the bidi leaves were completed in Orissa, the parties were liable to tax under the Act. Consequently, it was unnecessary for the Court to examine the second proviso to section 2(g) of the Act once the respondent’s admission was on record. Counsel for the respondent argued that the admission made by the respondent’s pleader concerned a question of law and therefore was not binding on the respondent. The Court disagreed with that submission. It held that the determination of the place where a sale is completed depends on the factual circumstances and is not a pure question of law. Moreover, the Court noted that after the admission was entered, the respondent never repudiated it nor challenged its correctness at any later stage. Even the writ petition did not assert that the admission was erroneous; on the contrary, the order of the appellate authority containing the admission was annexed to the writ petition. The Court observed that paragraph 13(a) of the writ petition raised a contention regarding sales made in the post‑Constitution period and referred to the Explanation to Article 286(1)(a) as it then stood. However, the petition failed to make the necessary averments required to invoke that Explanation, and it did not state that the goods were dispatched out of Orissa for consumption in the destination state. In effect, no factual basis was laid to distinguish between pre‑Constitution and post‑Constitution sales, and for all such sales the admission that they were completed in Orissa remained unchallenged. Accordingly, the Court concluded that the High Court was clearly wrong in its initial finding that the assessment orders were unconstitutional.

The Court further held that the High Court was also incorrect in its view on the legality of the fees imposed on the memorandum of appeal and the application for revision. Section 29 of the Act confers on the State Government the power to make rules, subject to prior publication, for carrying out the purposes of the Act. Section 29(2) expressly authorises the State Government to prescribe, among other matters, the procedure and fees incidental to the disposal of appeals and applications for revision and review under section 23. Rule 59 of the Orissa Sales Tax Rules, 1947, which is directly relevant, provides that, subject to the provisions of rule 60, certain fees are payable. Specifically, clause (ii) of Rule 59 states that a fee of five per cent of the amount in dispute, calculated on the assessment, penalty or both, shall be payable on a memorandum of appeal, with a minimum of one rupee and a maximum of one hundred rupees. Clause (iv) stipulates a fee of one rupee on an application for revision. The Court identified the first issue as whether the power conferred by section 29(2) to prescribe fees for appeals and applications for revision fell within the legislative competence of the Provincial Legislature.

In this case, the Court considered whether the provision that allowed the State Government to make a rule prescribing fees for appeals and applications for revision fell within the legislative competence of the Provincial Legislature. The Court observed that the Act in question had been enacted in 1947 and that the source of the Legislature’s power derived from the Government of India Act, 1935. Under Item 48 of List II (Provincial Legislative List) in the Seventh Schedule of that Act, the Legislature was authorised to legislate on “Taxes on the sale of goods,” and under Item 54 it was authorised to impose “Fees in respect of any of the matters in this list, but not including fees taken in any court.” The latter item also related, inter alia, to the “constitution and organisation of all courts except the Federal Court, and fees taken therein.” The High Court had held that the assessing authorities, including the Assistant Collector of Sales Tax and the Collector of Commercial Taxes, Orissa, were not courts in the strict sense of the term, although they performed quasi‑judicial functions under the Act. The Court agreed with that assessment, but it noted that the High Court’s conclusion did not automatically render the fees imposed under Rule 59, read with Section 29(2)(s), illegal. Items 48 and 54 gave the Provincial Legislature the power to enact laws concerning taxes on the sale of goods and the fees associated with those taxes. Even with respect to court‑fees, the Provincial Legislature possessed authority under Item 1. Consequently, the Court found that Section 29(2)(s) could not be declared invalid on the ground of legislative incompetence, and that Rule 59 did not exceed the scope of Section 29(2)(s). The Court explained that the fees imposed were not taxes; they fell within the phrase “other matters (including fees) incidental to the disposal of appeals and applications for revision, etc.” The Court rejected the High Court’s interpretation that the word “incidental” referred only to matters of a casual nature. It observed that the procedure for disposing of an appeal necessarily includes the filing of the appeal upon payment of a proper fee. The distinction between a tax and a fee had previously been examined by this Court in The Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, and the Court found no need to repeat that discussion. The Court held that the fees prescribed by Rule 59 were charges for services rendered by a governmental agency; while fees are often uniform, they may take various forms, and a single definition cannot be applied universally. Finally, the Court addressed the High Court’s finding that the notice issued under Section 12(5) was not in accordance with law. The Court disagreed, noting that the notice had been issued on Form VI, a combined form intended for the purposes of Sections 11 and 12. A foot‑note attached to the form instructed the assessing authority to strike out any unnecessary words. While the High Court pointed out that this instruction had not been followed, the Court concluded that the failure to strike out those words did not render the notice invalid.

The High Court observed that the requirement to delete superfluous words from the notice had not been fulfilled. The Court, however, could not concur with the High Court’s view that this omission rendered the notice legally defective. The respondent replied to the notice and asserted that it was not a dealer in Orissa. The respondent nevertheless clearly understood that the notice was issued under section 12(5) of the Act, because the wording of the notice expressly required the respondent to show cause why a penalty should not be imposed pursuant to that provision. Section 12(5) as it stood at the relevant time was in these terms: “S. 12(5). If upon information which has come into his possession, the Collector is satisfied that any dealer has been liable to pay tax under this Act in respect of any period and has nevertheless wilfully failed to apply for registration, the Collector shall, after giving the dealer a reasonable opportunity of being heard, assess, to the best of his judgment, the (1) [1954] S.C.R. 1005. amount of tax, if any, due from the dealer in respect of such period and all subsequent periods and the Collector may direct that the dealer shall pay, by way of penalty, in addition to the amount so assessed, a sum not exceeding one and a half times that amount.”

It was contended before this Court that a single notice had been issued covering several quarters and that separate assessments had been made for each quarter – four quarters on 4 July 1951 and eight quarters on 29 August 1951 – and that such practice was illegal. The Court could not accept that contention. Section 12(5) refers to “a period,” and that period may comprise more than one quarter. The applicable return must be filed in Form IV, which, read with rule 20 of the Orissa Sales Tax Rules, 1947, obliges the assessee to disclose turnover for each quarter; consequently, the assessment must be based on the taxable turnover of each quarter. Moreover, it was argued that no notice under section 12(5) had been issued for the last three quarters, and therefore the assessment orders for those quarters should be declared void. The appellate authority, however, pointed out that for the last three quarters the assessing officer, after issuing assessment orders for the first five quarters, had directed the respondent to produce its accounts, but DO accounts were produced. Section 12(5) empowers the assessing authority to make a best‑judgment assessment for “all subsequent periods” after affording the dealer a reasonable hearing. Such an opportunity was indeed provided in the present case even for the last three quarters, and the Court could not hold those assessments to be defective. For these reasons, the Court allowed the appeal, set aside the High Court judgment and order dated 5 September 1955, and dismissed the writ petition.

In this case the Court first examined the petition that had been filed by the respondent. After reviewing the material placed before it and hearing the submissions of the parties, the Court reached the decision that the appeal brought by the appellants must be allowed. Accordingly the Court issued an order that the appellants were to receive the costs that had been incurred in the proceedings before the High Court and also the costs that were incurred in the present proceedings before this Court. The direction on costs was made in favour of the appellants, which meant that the respondent would be required to bear the expense of the litigation in both the lower court and the appellate court. The Court noted that awarding costs to the party that succeeds on appeal is a normal practice intended to compensate that party for the financial burden of the dispute. Consequently the Court set aside the earlier orders passed by the High Court and entered a judgment granting the appeal. The final order therefore reflected that the appellants had succeeded in their challenge and were entitled to recover their legal expenses from the respondent for the whole course of the litigation, covering the proceedings in the High Court as well as those in this Court.