M/S. George Oakes (P.) Ltd vs State Of Madras

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 280 and 281 of 1960

Decision Date: 28 April 1961

Coram: S.K. Das, J.L. Kapur, M. Hidayatullah, J.C. Shah

The petition in this matter was filed by M/s. George Oakes (P.) Ltd. against the State of Madras. The Supreme Court of India delivered its judgment on the 28th of April, 1961. The judgment was authored by Justice S.K. Das, who was joined by Justices J.L. Kapur, M. Hidayatullah and J.C. Shah. The case is reported in the All India Reporter at page 1037 of the 1962 volume and also in the Supreme Court Reporter, second series, volume 2, page 570. The citator information records several subsequent citations, including F 1962 SC 1352 (paragraphs 5 and 6), R 1966 SC 1738 (paragraph 10), RF 1967 SC 1895 (paragraph 24), RF 1971 SC 2216 (paragraph 11), RF 1975 SC 198 (paragraph 13), D 1975 SC 1801 (paragraph 2), D 1977 SC 1459 (paragraph 17), RF 1977 SC 2279 (paragraph 27), R 1978 SC 1496 (paragraph 8), RF 1981 SC 440 (paragraphs 13 and 14), RF 1986 SC 649 (paragraphs 35 and 39), and F 1987 SC 611 (paragraphs 5 and 9). The statutes relied upon by the Court included provisions relating to sales tax and turnover, specifically the question of whether amounts collected by a seller as tax should be deemed part of the seller’s turnover. The constitutional provisions examined were Entry 54 of List II of the Seventh Schedule of the Constitution of India, which is analogous to Entry 48 of List I of the Government of India Act 1935, as well as the Madras General Sales Tax Act 1939 (Act IX of 1939) sections 2(i), 2(h) and 8B, and the Madras General Sales (Definition of Turnover and Validation of Assessments) Act 1954 (Act XVII of 1954) sections 2 and 3, together with the relevant Turnover and Assessment Rules, particularly rules 4, 5, 6 and 11.

The factual controversy centred on the inclusion by the sales‑tax authorities of certain sums collected by the petitioners as sales tax in the calculation of their turnover. The petitioners challenged the constitutional validity of the Madras General Sales (Definition of Turnover and Validation of Assessments) Act 1954 on the ground that the State Legislature had exceeded its legislative competence under Entry 54 of List II of the Constitution by deeming the tax collected from buyers to form part of the seller’s turnover. The Court held that Entry 54 of List II of the Seventh Schedule is to be interpreted in the same way as Entry 48 of List I of the Government of India Act 1935, which defines a sale as a transaction in which title to goods passes from seller to buyer and rejects a mere executory agreement as a sale. Accordingly, the same meaning must be given to Entry 54. The Court referred to earlier decisions, namely State of Madras v. Gannon Dunkerly & Co., Ltd. [1959] S.C.R. 379 and Sales Tax Officer v. M/s. Budh Prakash Jai Prakash [1955] 1 S.C.R. 243. Under sections 2(i) and 2(h) of the Madras General Sales Tax Act 1939, “turnover” is defined as the aggregate amount for which goods are sold, whether the payment is made in cash, by deferred payment, or by any other valuable consideration. When a sale attracts purchase tax that the seller passes on to the consumer, the amount payable by the buyer includes the tax, and the total amount, tax included, falls within the definition of turnover. Therefore, the Court concluded that the impugned Act was constitutionally valid, as the legislature was competent to deem the tax collected to form part of the turnover for the period during which the Act operated.

The Court observed that when a tax is added to the price, the tax becomes an integral part of the consideration to which the buyer is bound. The principles laid down in Papreka Ltd. v. Board of Trade, [1944] 1 All E.R. 372 and Love v. Norman Wright (Builders) Ltd., [1944] 1 All E.R. 618 were applied. The Court also referred to the decisions in Asoka Marketing Co. Ltd. v. The State of Bihar, [1959] I.O. S.T.C. 110 and Tata Iron and Steel Co. v. The State of Bihar, [1958] S.C.R. 1355. Although section 8B of the Madras General Sales Tax Act, 1939 and the Turnover and Assessment Rules separately identified amounts collected as tax for the purpose of remitting them to the Government, neither the statute nor the rules drew a fixed distinction between the sale price and the tax, and section 2 of the impugned Act likewise did not maintain such a separation. Assuming, for argument’s sake, that a distinction existed, the Legislature possessed the authority under entry 54 of List II of the Constitution to deem the tax as part of turnover, thereby removing the distinction for the period during which the impugned Act was in force. Consequently, the Court held the impugned Act to be valid. The decision in Deputy Commissioner of Commercial Taxes v. M. Krishnaswami Mudaliar, [1954] 5 S.T.C. 88 was found not applicable, while Sri Sundararajan & Co. v. The State of Madras, [1956] 7 S.T.C. 105 was approved. The Court also cited the cases of Government of Andhra v. East India Commercial Co., Ltd., [1957] 8 S.T.C. 114 and Bengal Immunity Co., Ltd. v. State of Bihar, [1955] 2 S.C.R. 603.

The judgment concerned civil appeals numbered 280 and 281 of 1960, filed against the order of the Madras High Court dated 20 April 1956 in tax revision cases numbered 101 and 102 of 1956. Counsel for the appellant were B. Ganapathy Iyer and G. Gopalakrishnan; counsel for the respondent were M. M. Ismail and T. M. Sen. Additional counsel appeared for several interveners: D. V. Sastri and T. M. Sen for Intervener 1; Naunit Lal for Intervener 2; the Advocate‑General of Punjab and D. Gupta for Intervener 3; the Advocate‑General of Punjab together with N. S. Bindra and D. Gupta for Intervener 4; and the Advocate‑General of Rajasthan, G. C. Kasliwal, with S. K. Kapur and D. Gupta for Intervener 5. The judgment was delivered on 28 April 1961 by Justice S. K. Das. The appeals arose from certificates granted by the Madras High Court and were consolidated by orders dated 22 March 1957. They originated from the High Court’s dismissal of two petitions filed by the appellants under section 12‑B of the Madras General Sales Tax Act (Madras Act IX of 1939), the principal legislation, in the circumstances where Messrs. George Oakes (Private) Limited, dealers in Ford motor cars, spare parts and accessories, had submitted returns for the financial years 1951‑52 and 1952‑53 and claimed exemption from tax on certain amounts.

The appellants asserted that the sales on which tax had been assessed were inter‑State transactions and therefore exempt from levy under Article 286 of the Constitution as it stood at the relevant time. The Deputy Commercial Tax Officer of Madras rejected this claim of exemption and, in addition, added to the appellants’ turnover certain sums that the appellants had collected as tax. For the financial year 1951‑52 the officer added (a) Rs 8,000 to the net turnover, which was to be assessed at the rate of three pies per rupee, and (b) Rs 4,30,000 to the turnover, which was to be assessed at the rate of nine pies per rupee. For the financial year 1952‑53 the amounts added were (a) approximately Rs 30,132 and (b) approximately Rs 2,92,257. Dissatisfied with the orders of the Deputy Commercial Tax Officer, the appellants filed two separate appeals before the Special Commercial Tax Officer, Appeals, Madras City. Both of those appeals were dismissed. Consequently, the appellants brought the matter before the Sales Tax Appellate Tribunal by filing two appeals. By the time the appeals reached the Tribunal, the Madras Legislature had enacted the Madras General Sales (Definition of Turnover and Validation of Assessments) Act, 1954 (Madras Act No. XVII of 1954). The Court refers to this legislation as the impugned Act because the only remaining issue in the present proceedings is the constitutional validity of that Act.

The Tribunal rejected the appellants’ contention that certain transactions in the years in question were inter‑State sales exempt from tax, and it declined to consider the separate question of the impugned Act’s constitutionality. (For the record, the Tribunal observed that when sales tax is included in the turnover, the appropriate assessment is at the minimum rate of three pies per rupee under section 3(1) of the principal Act.) After the Tribunal’s decision, the appellants filed two revision petitions before the High Court under section 12‑B of the principal Act. The High Court dismissed those revisions on preliminary grounds. In its orders dated 20 April 1956, the High Court held that the issue of whether any of the transactions were inter‑State sales had already been resolved by an earlier judgment of this Court in Ashok Leyland Ltd. v. State of Madras, Civil Appeal No. 446 of 1958, delivered on 28 March 1961, which affirmed the operation of the Sales Tax Laws (Validation) Act, 1956 and held that it was unnecessary to examine the true character of the alleged inter‑State sales. Counsel for the appellants conceded that the Ashok Leyland decision governs the present appeals, thereby eliminating the first question. Regarding the second question, however, the High Court had inadvertently omitted any discussion in its 20 April 1956 order. When the omission was brought to the Court’s attention, the High Court issued a further order on 30 July 1956 stating that the second question was also settled by its earlier decision in Sri Sundararajan and Co., Ltd. v. State of Madras, where the validity of the impugned Act was affirmed.

When the Court examined these appeals together with the appeal of Ashok Leyland Ltd. v. The State of Madras, Civil Appeal No. 446 of 1958, it observed that the various High Courts had expressed differing views on the second issue that arose in the present proceedings. The Court identified the central point for its consideration as the question of whether the Act that was being challenged had been validly enacted under entry 54 of the State List in the Seventh Schedule to the Constitution. This issue concerned legislative competence and was of relevance to every State in the Union. The State of Madras was already a respondent in the matters, and consequently the Court ordered that notices be issued to the Advocates‑General of all other States so that they could present their positions. In response to those notices, the Advocates‑General of Andhra Pradesh, Assam, West Bengal, Gujarat, Maharashtra, Punjab and Rajasthan appeared before the Court. All of these officials uniformly endorsed the submission of the State of Madras that the impugned Act was constitutionally valid, and several of them also put forward additional arguments in support of that position.

The Court then set out the two principal strands of argument that it had to resolve. The first line of argument, advanced on behalf of the appellants, contended that several provisions of the principal Act, as well as section 2 of the impugned Act, drew a distinction between the sale price of goods and the amount that a dealer collected as tax. According to the appellants, because of that distinction, the impugned Act effectively imposed a tax on the sales‑tax itself. They argued that such a tax did not fall within the scope of entry 54 of List II, which at the relevant time read “Taxes on the sale or purchase of goods other than newspapers.” The opposing line of argument, put forward by the State of Madras and supported by the other States, maintained that the purpose of the impugned Act was to broaden the definition of “turnover” so that the amount collected by way of tax would be deemed to form part of a dealer’s turnover. This, they asserted, could be validly enacted by a State Legislature under entry 54 of the State List. The Court noted that these were the core positions, but also recognized that each side relied on a number of subsidiary points that bolstered its main contentions, and that it would be inappropriate to disregard those ancillary arguments.

Having identified the main points of dispute, the Court turned to the specific provisions of the principal Act and of the impugned Act that were relevant to the issues under consideration. Section 3 of the principal Act, which serves as the charging provision, obliges every dealer to pay, subject to the conditions laid down in the Act, an annual tax calculated as a specified percentage of his total turnover for that year. The definition of “turnover” is given in section 2(i). That definition, the Court noted, essentially states that turnover means the aggregate amount for which goods are either bought or sold by a dealer, whether the consideration is paid in cash, deferred, or by any other valuable means. The Court indicated that this definition, together with the definition of “sale” in section 2(h), formed the basis for determining whether the inclusion of tax amounts within turnover, as prescribed by the impugned Act, was within the legislative competence granted by entry 54 of the State List.

The statute defines “turnover” as the aggregate amount for which goods are bought or sold by a dealer, whether the payment is made in cash, by deferred payment or by any other valuable consideration. The term “sale” is defined in section 2(h) as every transfer of property in goods by one person to another in the course of trade or business for cash, deferred payment or other valuable consideration; only the portion of that definition necessary for the present discussion is reproduced. It is important to note that the tax imposed by the principal Act is a tax on total turnover, and turnover is understood to mean the aggregate amount for which goods are bought or sold by a dealer. Consequently, the Court must consider whether the State Legislature exceeded its legislative competence when, by the impugned Act, it deemed the amounts collected by a dealer as tax to be part of that dealer’s turnover. Section 8B of the principal Act addresses this issue. Sub‑section (1) provides that no person who is not a registered dealer may collect any amount by way of tax, and that a registered dealer may collect tax only in accordance with any conditions or restrictions prescribed. Sub‑section (2) further provides that every person who has collected or who collects any amount by way of tax must pay that amount over to the State Government. Section 15 of the principal Act prescribes penalties for contravention of various provisions of the Act, including the provisions of section 8B. In the earlier decision of The Deputy Commissioner of Commercial Taxes, Coimbatore Division v. M. Krighnaswami Mudaliar & Sons, the Madras High Court held that the amount a registered dealer collects from the consumer as sales tax and subsequently pays to the Government should not be included in the dealer’s turnover as part of the sale price of the goods, and therefore should not be taxed again. That judgment was delivered on 7 January 1954. In July 1954 the impugned Act was enacted, containing sections 2 and 3, which are relevant to the present controversy. Section 2 declares that for sales made by a dealer before 1 April 1954, the amounts collected by the dealer as tax under the Madras General Sales Tax Act, 1939 (referred to as the principal Act) shall be deemed to form part of the dealer’s turnover. Section 3 validates certain assessments and collections, stating that all assessments, collections, orders, actions taken by any officer exercising or purportedly exercising jurisdiction or power conferred by the principal Act, and all judgments, decrees or orders pronounced by any tribunal or court in that jurisdiction, which are based on the premise that the amounts collected by a dealer as tax before 1 April 1954 formed part of the dealer’s turnover, shall be deemed to have been validly made, passed, taken or pronounced, as the case may be.

Section 2 of the impugned Act declares that any amount which a dealer collected as tax under the principal Act before 1 April 1954 is to be deemed part of that dealer’s turnover and, consequently, any assessment, order, judgment or decree based on such amounts is declared to have been validly made, passed, taken or pronounced. The provision further stipulates that any finding recorded by an officer, tribunal or court to the contrary, and any order, judgment or decree that is based on such a contrary finding—except where the order concerns merely the costs of the proceeding—shall be void and of no effect. Sub‑section (2) of the same section adds that no act or omission by any person shall be punishable as an offence if, in the absence of this Act, it would not have been punishable. The same sub‑section also clarifies that nothing in sub‑section (1) may be read as authorising any officer, while assessing a dealer under the authority of the principal Act, to include in the dealer’s turnover amounts collected after 1 April 1954 as tax under the principal Act. The citation for this provision is given as [1954] 5 S.T.C. 88.

After the enactment of the impugned Act, its validity was challenged before the Madras High Court in the case of Sri Sundararajan and Co., Ltd. v. The State of Madras. The High Court upheld the Act, observing that the earlier decision in Krishnaswami Mudaliar’s case did not hold that the State Legislature was powerless to deem tax collected by a registered dealer under s. 8B as part of assessable turnover; rather, the earlier decision stated that the principal Act, as it stood at the relevant time, simply did not treat such amounts as part of assessable turnover. The High Court therefore concluded that, in substance, the impugned Act validated all assessments that had been made before 1 April 1954. Moreover, the Court explained that even when a registered dealer collected tax under s. 8B, the payment made by the purchaser was made at the time of the sale and, in relation to the dealer, effectively formed part of the price paid for the goods. A similar interpretation was adopted by the Patna High Court in Ashoka Marketing Company Ltd. v. The State of Bihar, concerning the Bihar Sales Tax (Definition of Turnover and Validation of Assessments) Act, 1958. The present Court is now called upon to consider whether that view is correct. The relevant legislative entry, as noted earlier, is entry 54 of List II of the Constitution, which deals with “Taxes on the sale or purchase of goods other than newspapers.” A comparable entry, numbered 48, appears in List 11 of Schedule VII to the Government of India Act, 1935, and is phrased “Taxes on the sale of goods.” The scope and effect of that entry were examined in the subsequent discussion, cited as [1956] 7 S.T.C. 105, [1954] 5 S.T.C. 88, and [1959] 10 S.T.C. 110.

In the case of State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd. (1), after examining a number of decisions that dealt with the same issue, the Court held that the phrase “sale of goods” possesses a well‑recognised legal meaning in the general law of contract and in the legislative practice that deals with that subject. The Court said that this expression must be understood in exactly the same way as it is defined in the Sale of Goods Act, 1930. Consequently, the Court explained that the sales contemplated by entry 48 of the Government of India Act, 1935 are those transactions in which the legal title to the goods passes from the seller to the buyer. In the later decision of The Sales Tax Officer, Pilibhit v. Messrs. Budh Prakash Jai Prakash (2), the Court further clarified that a mere executory agreement does not constitute a “sale” within the meaning of that entry. The Court then expressed the view that the same interpretation should be given to entry 54 of List II of the Seventh Schedule to the Constitution. Having adopted that meaning, the Court posed the question whether, with that interpretation, the statute that is being challenged – the impugned Act – can be said to be a valid piece of legislation enacted by a constitutionally competent legislature.

The counsel appearing for the appellants did not argue that the State Legislature could never pass a law that treats the amount collected as tax as part of the dealer’s turnover. Instead, he said that it was unnecessary to raise such a broad proposition in the present case. He argued that the principal Act, by reason of sections 8B and 15, and the impugned Act, by reason of section 2, draw a distinction between what he described as the “sale price” and the amount that the dealer collects in the form of tax. According to his submission, the validity of the impugned Act must be examined on the basis of that distinction, and, when that distinction is accepted, the effect of the impugned Act is to impose what the counsel labelled “a tax on tax,” which he claimed does not fall within the scope of the relevant legislative entry. He further contended that, because the tax collected is separate from the sale price and consequently from turnover, the amount collected as tax is not essentially connected with the transaction of sale; therefore the imposition of a “tax on tax” has no necessary connection with the sale as it is understood in the general law of sale of goods. The Court was unable to accept this line of reasoning. It observed first that neither the principal Act nor the impugned Act is based on an immutable distinction between sale price and tax as the counsel suggested. The principal Act contains no separate definition of “sale price,” and the definitions of “sale” and “turnover” that have already been considered do not reveal such a distinction. On the contrary, …

The Court explained that the term “turnover” denotes the total amount for which goods are bought or sold, regardless of whether the payment is made in cash, by deferred payment, or by any other valuable consideration. When a sale is subject to purchase tax and that tax is passed on to the consumer, the amount that the buyer actually pays for the goods includes the tax. Consequently, the aggregate sum paid by the buyer falls within the definition of turnover. The Court cited the decision in Paprika Ltd. and Another v. Board of Trade, where Lawrence, J. observed that whenever a sale attracts purchase tax, the tax influences the price that the seller, who is responsible for the tax, demands, but the tax remains part of the price that the buyer must pay even if the price is expressed as a sum plus purchase tax. The same principle was reaffirmed in Love v. Norman Wright (Builders) Ltd., where Goddard, L.J. held that whenever an article is taxed—whether by purchase tax, customs duty, or excise duty—the tax becomes part of the price that the buyer ordinarily has to pay. He noted that the price of an ounce of tobacco is determined by the rate of tax, yet a sale involves a single consideration composed of cost, profit, and tax. Accordingly, if a seller chooses to include tax in the quoted price, the buyer’s acceptance of that price does not obligate the buyer to dissect the components or determine whether tax has been included. The Court found these observations relevant to the present statutes and concluded that there is no provision indicating that tax collected by a dealer cannot be regarded as part of the sale price. For the purchaser, the entire amount demanded by the seller—price inclusive of tax—constitutes the consideration for the sale, and therefore the whole amount should be treated as part of the turnover.

The Court then addressed the argument raised by counsel for the appellants that Section 8‑B of the principal Act and the Turnover and Assessment Rules made under Section 19 create a distinction between the tax amount collected and the purchase price. The Court acknowledged that Section 8‑B specifically mentions the amount collected as tax. It noted that sub‑section (1) of that provision is merely enabling, allowing a registered dealer to pass the tax on to the buyer, whereas sub‑section (2) imposes a duty on the registered dealer to remit the tax amount to the government. Nonetheless, the Court emphasized that the statutory language does not preclude the tax component from being part of the overall sale price, and therefore the total sum paid by the buyer—including tax—remains the consideration for the transaction and should be included in the calculation of turnover.

The Court explained that the amount a dealer collects and remits to the Government is governed by the Turnover and Assessment Rules, and it summarized the relevant position by citing the judgment in Krishnaswamy Mudaliar’s case. According to that judgment, Rule 4 defines a dealer’s gross turnover for the purposes of the rules as the total amount for which the dealer sells goods. Rule 5 then provides for certain deductions and specifies how the taxable amount is to be calculated. The purpose of these rules is to determine the net turnover on which tax is to be levied under the charging provision. Consequently, the charging provision requires tax to be paid on the turnover that has been assessed in accordance with the rules. Rule 11 further mandates that each dealer must file, each year, a return under Rule 6 to the assessing authority using Form A. In that return the dealer must disclose the actual gross and net turnover for the preceding year and also the amounts of tax actually collected during that year. Form A contains columns 1 to 10 which relate to the gross turnover and the permissible deductions; column 10 must show the net turnover liable to tax, while column 11 must indicate the amount actually collected as tax or taxes under section 8‑B.

After setting out the rule‑based framework, the Court turned to the question whether those provisions create a distinction, within the scheme of the two Acts, that the tax collected cannot be counted as part of a dealer’s turnover. The Court asked whether, if the impugned statute treats the tax collected as part of turnover by a deeming provision, that provision must be struck down as beyond the legislative competence of the State legislature. The Court emphasized that the Krishnaswamy Mudaliar case did not raise any issue of legislative competence; the decision in that case was based solely on the construction of section 8‑B and the Turnover and Assessment Rules. The Court further observed that the distinction drawn in Krishnaswamy Mudaliar, whether correct or not, concerned only a matter of statutory interpretation and therefore was not material to the question of the State’s legislative authority.

To illustrate the approach to a similar statutory provision, the Court referred to the decision in The Tata Iron & Steel Co., Ltd. v. The State of Bihar. In that case, the Court considered a provision in the Bihar Sales Tax Act, 1947 that resembled section 8‑B of the principal Act. Chief Justice Das, delivering the majority opinion, observed that the amendment to the 1947 Act allowed a registered dealer to collect sales tax from the purchaser, but this did not eliminate the dealer’s primary liability to pay the sales tax to the Government. Moreover, the dealer was not obliged to collect the tax from the purchaser; the dealer could, for competitive reasons, choose not to collect the tax. This observation underscored that the mere ability of a dealer to pass on tax to the buyer does not alter the fundamental nature of the tax, which remains a liability of the seller under the statute.

The Court observed that a seller might find it advantageous to continue selling his goods and to keep his existing customers even if doing so required sacrificing the amount of sales tax payable. This observation makes clear that the sales tax does not have to be passed on to the purchasers, and that circumstance does not change the essential character of the tax, which by the explicit terms of the statute is imposed on the seller. The buyer, therefore, has no obligation to pay the sales tax in addition to the agreed sale price unless the contract specifically provides otherwise. The Court cited Love v. Norman Wright (Builders) Ltd., L. R. [1944] 1 K. B. 484, to illustrate that when the seller shifts the tax burden onto the buyer and the buyer consents to pay the tax in addition to the price, the tax effectively becomes part of the total consideration, and the distinction between tax and price loses its significance for the purpose of legislative competence. The Court further noted that this situation is not different under the Turnover and Assessment Rules. Although column 11 of Form A requires the amount collected as tax under section 8‑B to be shown separately, this requirement does not create an immutable distinction that would affect the core question of legislative competence. The Court explained that the true effect of section 8‑B and the Turnover and Assessment Rules is threefold: first, a registered dealer is enabled to pass on the tax; second, an unregistered dealer cannot pass on the tax; and third, the tax amount must be shown separately because it has to be remitted to the Government. This does not mean that the legislature, acting under entry 54 of List I, is incompetent to enact a provision that treats the tax paid by the purchaser to the dealer, together with the sale price, as part of the dealer’s turnover. Nor does it mean that, in law, the tax imposed by the Government becomes a tax on the buyer, rendering the dealer merely a collecting agency and requiring the tax to remain outside the sale price. The Court then considered another aspect of the question. Assuming that, under the scheme of the principal Act, a distinction is drawn between the amount collected as tax and the sale price exclusive of tax, the Court examined whether the impugned Act continues that distinction. Counsel for the appellants referred to section 2 of the impugned Act, which contains the expression “collected by him by way of tax under the Madras General Sales Tax Act, 1939.” It was argued that this expression must be read in conjunction with the provisions of the principal Act, and that, when read so, section 2 maintains and continues the distinction created by the principal Act. The Court, however, found itself unable to agree with that submission.

The Court noted that the parties could not reach consensus on the meaning of the phrase “collected by him by way of tax etc.”. It observed that this phrase merely described the amounts that were collected, and that the crucial operative provision of section 2 declared that such collected amounts were to be deemed part of the dealer’s turnover. Consequently, the Court explained that section 2 expressly stipulated that the tax was to be treated as forming part of the turnover, thereby eliminating any distinction between “tax” and “turnover” for the limited period during which the impugned Act was in force. The Court held that asserting the continuation of any distinction under the impugned Act would contradict the plain language of section 2. This issue had previously been addressed in The Government of Andhra v. East India Commercial Co. Ltd., where the Andhra High Court examined a related matter from a different angle, focusing on an amendment made by the Andhra Pradesh Legislature to the definition of “turnover” in the principal Act. Under that amendment, section 2 of the amending Act redefined “turn‑over” to mean the total amount shown in the bill of sale—or, where no bill existed, the total amount charged—as consideration for the sale or purchase of goods, including any sums charged by the dealer for work done in respect of the goods at the time of or before delivery, and any other sums charged by the dealer irrespective of description, name, or purpose. Section 4 of the amending Act reiterated sections 8‑B and 8‑C of the principal Act. In discussing the effect of these amendments, the Andhra High Court observed that the ultimate economic burden of sales tax rested on the consumer or final purchaser, who paid the tax as part of the price, i.e., as consideration for the purchase. The statutory liability for payment of the sales tax, however, was imposed on the dealer based on his total turnover, regardless of whether the tax was actually collected from purchasers. The Court further explained that dealers typically incorporated the tax into the price charged to pass the burden onto purchasers, so that, from the dealer’s viewpoint, the tax amount collected at the time of sale formed part of the price paid by the purchaser. The High Court later endorsed this reasoning by referring to the decision in Sri Sundararajan and Co., Ltd. v. The State of Madras, where the validity of the impugned Act was questioned. In that case, the Court reiterated that section 2 merely enacted that the amount collected by way of tax was to be deemed part of turnover for a limited period, and that it was not necessary to pursue further argument on the matter.

In the judgment, the Court cited authorities that established the well‑settled principle concerning the legal effect of the term “deemed” when it appears in a statute. The central issue, according to the Court, was whether the legislature possessed the competence to enact Section 2 of the impugned Act, which incorporated a deeming provision. The Court observed that, if the validity of Section 2 were to be affirmed, there would be little difficulty in upholding Section 3, because that provision merely gave effect to the legal fiction created by Section 2. The Court further explained that the label assigned by the legislature to a payment made by a purchaser to a seller—who qualifies as a dealer under the Act—did not determine the question of legislative competence. Although Section 8B described the payment as an amount collected “by way of tax,” the statutory liability to remit the sales tax rested on the dealer. The Court clarified that the tax was not imposed on each individual sale transaction; rather, it was levied on the dealer’s total turnover, which was to be computed in accordance with the provisions of the principal Act and its Rules. Nevertheless, the Court reiterated the long‑standing principle that, regardless of the form of the statutory provision, the ultimate economic burden of the tax fell on the consumer, the purchaser. This principle had been restated in Bengal Immunity Co. Ltd. v. State of Bihar. The Court noted that even when a registered dealer collected the amount as tax under the authority of Section 8B, the payment was effectively made by the purchaser at the time of the sale and, in relation to the dealer, formed part of the price the purchaser owed for the goods. The Court concluded that a tax imposed on such a payment fell within the scope of Entry 54 of List I, Schedule VII of the Constitution, read with Article 246(3).

The Court expressed the view that the observations just described accurately reflected the true effect of Section 2 of the impugned Act, and that Section 3 was merely a consequential provision. Counsel for the States of Maharashtra and Punjab drew the Court’s attention to certain American decisions—such as Lash’s Products Company v. United States and Pure Oil Company v. State of Alabama—showing that treating tax as part of the sale price when the tax is passed on to the buyer was a recognized principle. The Court considered it unnecessary to examine those foreign authorities because the validity of the impugned Act had to be determined on its own terms, within the context of the principal Act’s provisions. Upon reading the impugned Act in light of the principal Act, the Court found it clear that the legislation could not be declared invalid on the ground of legislative incompetence. Under the definition of turnover, the aggregate amount for which goods are bought or sold was taxable, and this aggregate amount includes the

In the present case the Court observed that the tax was treated as part of the price that the buyer actually paid. The amount that included the tax was deposited into the common cash box of the dealer and remained there until the dealer discharged the tax liability. The Court explained that this money was available to the dealer for use in his ordinary business operations until such time as he transferred it to the Government. The Court further noted, citing the decision reported in (1) [1955] 2 S.C.R. 603, that the dealer could circulate the same amount repeatedly in his turnover before finally remitting it to the Government. Consequently the Court held that there was nothing unusual or anomalous in the statutory scheme that treated the tax as part of the total sum on which the dealer was required to pay tax. The Court remarked that this concept of turnover, which includes tax, was not a new invention; it had been recognised in the jurisprudence of England and the United States. Therefore the Court found no reason to conclude that the Indian legislatures, in defining “turnover” to include tax, were venturing into uncharted or unheard‑of territory. The sole issue presented before the Court was the validity of the impugned Act. Having decided that the Act was valid and that the appellants could not succeed on their challenge, the Court dismissed the appeals and ordered the appellants to bear costs, including a hearing fee. The appeals were consequently dismissed.