George Oakes (Private) Ltd. vs State of Madras

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 27 November 1961

Coram: B.P. Sinha, J.L. Kapur, M. Hidayatullah, J.C. Shah, J.R. Mudholkar

George Oakes (Private) Ltd., Addison … versus State of Madras on 27 November 1961 was listed before the Supreme Court of India. The case was recorded with the same caption a second time in the court records for the same date. The judgment was authored by Justice M. Hidayatullah and the bench was composed of Justices B. P. Sinha, J. L. Kapur, M. Hidayatullah, J. C. Shah and J. R. Mudholkar. Justice M. Hidayatullah delivered the judgment of the Court.

The Court noted that five separate appeals, each arising from certificates granted by the High Court of Madras, had been grouped together for a single hearing. All five appeals concerned proceedings that had been instituted against the respective appellants under the Madras General Sales Tax Act, 1939. The appellants were three different companies engaged in the business of selling motor cars, motor‑car spare parts and other related goods. The first three appeals, numbered Civil Appeals Nos. 1 to 3 of 1961, were filed by Messrs. George Oakes (Private) Ltd. and challenged a portion of the sales tax that had been levied on them for the financial years 1950‑51, 1951‑52 and 1952‑53. The fourth and fifth appeals, numbered Civil Appeals Nos. 4 and 5 of 1961, were filed respectively by Messrs. Addison & Co. (Private) Ltd. and Messrs. Rane (Madras) Ltd., and each of those appeals similarly contested a part of the tax assessed for the year ending 31 March 1952. The Court observed that the central issue raised by all the appellants was common and centered on the interpretation of the definition of “turnover” and the calculation of tax liability under the statute.

The Court proceeded to set out the statutory framework that governed the dispute. Under the Madras General Sales Tax Act, 1939, the term “turnover” was defined, inter alia, as the aggregate amount for which goods were either bought by or sold by a dealer, irrespective of whether the consideration was received in cash, by deferred payment or by any other valuable consideration. Section 3(1)(a) and (b) of the Act provided that a dealer was required to pay, for each accounting year, a tax on his total turnover at the rate of three pies for every rupee of turnover. The Court further explained that the second sub‑section of Section 3 imposed an additional tax of six pies for every rupee on the turnover that related to certain specified classes of goods. For the purpose of reference, the Court reproduced the relevant portion of the statute:

“3. Levy of taxes on sales of goods.— (1) Subject to the provisions of this Act (a) every dealer shall pay for each year a tax on his total turnover for such year, and (b) the tax shall be calculated at the rate of three pies for every rupee in such turnover. (2) Subject as aforesaid, the sale of any of the goods mentioned below shall be subject to a tax at the rate specified in respect thereof, at such single point in the series of sales by successive dealers as may be prescribed; and the tax shall be paid by the dealer concerned on his turnover in each year relating to such goods and shall be in addition to the tax to which he is liable under Sub‑section (1) on his total turnover for the year: — Description of the goods Rate of tax for every rupee in the turnover relating to such goods. (1) Motor Vehicles including … motor cars, motor taxi‑cabs, motor cycles and cycle combinations, motor scooters, motorettes, motor chassis of motor vehicles. (2) Six pies.”

The Court then turned to the factual matrix concerning the three appellants whose businesses included sales of both the goods described in the second sub‑section of Section 3 and the goods covered by the first sub‑section. The Deputy Commercial Tax Officer had included in the assessment the amounts that were apparently subject to the additional six‑pie rate, thereby raising the question of whether those amounts formed part of the turnover on which the basic three‑pie tax should also have been computed. The Court indicated that this issue required a detailed examination of the statutory language, the legislative intent and the earlier judicial pronouncements, including the decision of the Madras High Court in Deputy Commissioner of Commercial Taxes v. M. Krishnaswami Mudaliar & Sons, which had considered the treatment of tax collected from consumers and its inclusion in the dealer’s turnover.

The Madras High Court pronounced that any amount a registered dealer collected from consumers as sales tax and subsequently paid to the Government could not be treated as part of the dealer’s turnover for the portion of the sale price of goods, and therefore such amounts were not subject to taxation a second time. In response to that decision, the Madras Legislature enacted the Madras General Sales Tax (Definition of Turnover and Validation of Assessments) Act, 1954, identified as Act 17 of 1954. Section 2 of this Act stipulated that for sales made by a dealer before 1 April 1954, any sum collected by the dealer as tax under the Madras General Sales Tax Act, 1939 (Madras Act IX of 1939), referred to as the principal Act, would be deemed to form part of the dealer’s turnover. The three appellants carried on a business that comprised sales of goods described in the second sub‑section of Section 3 of the Madras General Sales Tax Act, in addition to sales covered by the first sub‑section. The Deputy Commercial Tax Officer, acting under the statute, added the chargeable tax to the total turnover and then imposed tax on the turnover attributable to goods subject to the additional tax at a rate of nine pies per rupee, while taxing the remaining turnover at three pies per rupee. The traders challenged the inclusion of the tax in the aggregate turnover, appealed first to the Special Commercial Tax Officer and were rejected. On further appeal, the Sales Tax Appellate Tribunal held that although the tax could be incorporated into the total turnover, any tax on that included amount could be levied only at the rate of three pies per rupee, and the additional tax of six pies per rupee could not be imposed. The Tribunal’s order contained the observation that when sales tax collected is included in turnover, the appropriate rate is the minimum rate of three pies per rupee under Section 3(1) of the Act.

Subsequently, the State of Madras filed applications for revision before the High Court under Section 12(B)(1) of the Madras General Sales Tax Act. The High Court held that the tax could be assessed on the consolidated amount not merely at three pies per rupee of turnover but also at six pies per rupee for the portion of turnover relating to goods that attracted the additional tax. In reaching this conclusion, the Court followed its earlier judgment reported in State of Madras v. Bangalore Automobiles. The High Court also issued certificates of fitness, and the present appeals were filed against those orders. Earlier, the High Court had ruled in Sundarajan and Co. Ltd. v. State of Madras that the Madras General Sales Tax (Definition of Turnover and Validation of Assessments) Act, 1954 was duly enacted and complied with constitutional requirements. The decision affirmed the validity of the 1954 Act.

The Court noted that the decision in George Oakes (Private) Ltd. v. State of Madras had been approved by this Court recently, and although that issue was raised in the present appeals, it was not pressed during the hearing. The only question that now remained for determination was whether the additional tax could be incorporated into the turnover that related to the special goods, thereby causing the resultant amount to be taxed at a rate of six pies for every rupee. In the earlier appeals that culminated in the Court’s decision in the Messrs. George Oakes case, the appellants had argued that including the tax in the turnover would effectively constitute a tax on tax. They further contended that the statutory power to levy the tax extended only to the tax on the price actually paid by the purchaser for the goods, and that this price did not include tax that was paid separately. The Court pointed out that, with respect to the purchaser, the term “price” embraces the tax as well, and that jurisprudence in England and America on sales‑tax statutes likewise treats turnover as inclusive of the tax. The Court explained that this inclusion is grounded in the commercial reality that a dealer who collects sales tax does not remit it to the Government immediately; instead the dealer retains the tax temporarily as part of his working capital and turns it over in the ordinary course of his business before passing it on. Consequently, for the period that the tax remains in the dealer’s hands, it forms a component of the circulating capital and is therefore part of the turnover. The Court further observed that the amount paid by the purchaser should be understood as a composite sum, not as a separate sum for the article plus a distinct tax. Accordingly, when computing total turnover, it is appropriate to treat the tax as part of the turnover because “turnover” denotes the total amount of money that is turned over in the business. The Court reiterated that the Validating Act had previously been declared valid and constitutional. In the present appeals, the Court was required to determine the effect of the Validating Act on the additional tax, noting that there was no difficulty concerning the collection of the ordinary tax at three pies for every rupee of turnover.

The Court then examined the scheme of the Act, which prescribed a tax of three pies on every rupee of turnover for all classes of goods, except those that might be exempted. In addition, the Act imposed a further additional tax of six pies on every rupee of turnover that related to certain specified classes of goods. The Court observed that this additional tax was not levied on the aggregate turnover of the business as a whole, but rather on the turnover that, in each year, “relates to such goods.” The phrase “relating to such goods” indicates that, for the purpose of computing the additional tax, the turnover includes the total of all sale prices, which necessarily incorporate the ordinary tax of three pies that applies to the special goods. Consequently, the additional tax is calculated on that turnover figure. The Court further noted that, in determining the taxable turnover for the special goods, the amount of tax chargeable at six pies for every rupee must be taken into account. This leads to the practical result that, for goods subject only to the ordinary tax, the tax is calculated on the total amount received by the tradesman, including the three‑pie tax; for goods that attract the additional tax, the tax is calculated on the total amount received, which now includes the ordinary three‑pie tax plus the six‑pie additional tax, effectively making the turnover on which tax is assessed the sum of the price and the tax components. Thus, the tradesman pays three pies on every rupee of turnover for all goods and an extra six pies on every rupee of turnover that pertains to the specially listed goods. While the tax is effectively paid on the tax included in the price, the rates apply to different portions of turnover, and there is no additional six‑pie tax imposed on goods that are not covered by the special provision.

The taxable turnover that concerns the special goods must be measured by adding the amount of tax that is chargeable at six pies for each rupee of turnover. Consequently, for goods that bear only the basic tax of three pies per rupee, the tax must be calculated on the total amount received by the trader, which already includes that basic tax. For those goods also subject to the additional tax, the tax must be computed on the total amount received by the trader. That total amount now includes both the basic tax of three pies and the additional tax of six pies, resulting in a combined rate of nine pies per rupee. In this manner, the trader pays the basic tax of three pies on every rupee of turnover for all goods. He also pays an additional six pies on every rupee of turnover that relates to the specified classes of goods. Although the trader ultimately pays tax on the tax that is included in his selling price, the higher rate is applied only to the turnover that contains the special goods. Consequently, no additional tax of six pies is imposed on goods that are not covered by that provision of the Act. In our opinion, this construction coincided with the order issued by the Deputy Commercial Tax Officer. Consequently, the Court held that the High Court was correct in setting aside the order of the Sales Tax Appellate Tribunal and in restoring the order of the Deputy Commercial Tax Officer. Accordingly, the appeals were dismissed, but the Court declined to make any order as to costs in view of the circumstances of these cases.