M/s. Nand Lal Raj Kishan vs Commissioner of Sales Tax, Delhi

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

Court: Supreme Court of India

Case Number: Petition No. 77 of 1958

Decision Date: 14 March 1961

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

In this case the Supreme Court of India heard a petition filed by M/s Nand Lal Raj Kishan against the Commissioner of Sales Tax, Delhi and another respondent. The petition was decided on 14 March 1961. The judgment was authored by Justice J.L. Kapur, who was joined by Justices S.K. Das, M. Hidayatullah and J.C. Shah. The matter was listed as petition number 77 of 1958 and was instituted under article 32 of the Constitution of India for the enforcement of fundamental rights. The citation of the decision appears in the All India Reporter as 1962 AIR 562, in the Supreme Court Reports as 1961 SCR Supplement (3) 707 and in various citators as D 1966 SC 1686, RF 1981 SC 991, RF 1987 SC 1059, among others. The legislation under consideration was the Sales Tax Act, specifically section 8A of the Bengal Finance (Sales Tax) (Delhi Amendment) Act, 1956 (Act 17 of 1956), which authorised the Commissioner of Sales Tax to require a security from dealers for the payment of tax.

The headnote of the report set out the questions that were raised by the petitioners. They challenged the validity of section 8A on three grounds: first, that the provision conferred an undefined, unlimited and unrestricted power on the Commissioner; second, that it failed to fix any ceiling on the amount of security that could be demanded; and third, that the provision did not require an enquiry before a demand for security was made and did not afford the person against whom the order was proposed any opportunity to be heard. The Court held that section 8A did not bestow any unlimited or unrestricted authority on the Commissioner. The power to demand security was conditioned on the Commissioner being satisfied that such a demand was necessary for the proper realisation of tax revenue. The Court observed that the power to levy tax inherently includes the power to impose reasonable safeguards for its collection, and that requiring security is neither arbitrary nor an unreasonable restriction. The Court relied on the decision in Durga Prasad Khaita v. Commercial Tax Officer, 1957 8 STC 105, which it approved, while distinguishing the earlier case of Dwarka Prasad Laxmi Narain v. State of Uttar Pradesh, 1954 SCR 803. It also referred to the judgments of Virendra v. State of Punjab, 1958 SCR 308 and Kishan Chand Arora v. Commissioner of Police, Calcutta, 1961 3 SCR 135. The Court explained that the Commissioner’s power to fix the amount of security was not unlimited because any such order was subject to revision and scrutiny by the Chief Commissioner. In the present case the petitioners had been given a chance to submit their defence in writing, and they had actually filed an explanation. Consequently, the Court found no breach of the principles of natural justice. It further held that a second opportunity for an oral hearing was not compulsory.

The original jurisdiction of the petition was under article 32, and the petitioners were represented by counsel for the petitioners, while the respondents were represented by the Solicitor‑General of India and two other counsel. The judgment, delivered in 1961, concluded that the statutory provision under review was valid and that the demand for security complied with constitutional requirements of fairness and reasonableness.

The judgment was delivered by Justice S K DAS on March 14. The matter before the Court was a writ petition filed under article 32 of the Constitution. The petitioners, Messrs Nand Lal Raj Kishan, operated as commission agents in Delhi and were subject to the liability of sales tax pursuant to the Bengal Finance (Sales Tax) Act, 1941, as it applied in Delhi. They submitted sales‑tax returns covering the four quarters of the financial year 1954‑55 and, relying on section 5(2)(a)(ii) of that Act, claimed an exemption for sales of certain goods made to registered dealers. The Sales Tax Officer, by an order dated 11 April 1956, rejected the petitioners’ claim of exemption, primarily on the basis that the sales were allegedly made to “those registered dealers whose activities had gone underground.” Following that order, the Officer issued a demand notice requiring the petitioners to pay a sum of Rs 1,11,890‑11‑0 as sales tax. The petitioners consequently filed an appeal before the Assistant Commissioner of Sales Tax, Delhi. The Assistant Commissioner set aside the Sales Tax Officer’s order and remitted the matter for a fresh decision, directing that the decision be made in view of several judgments rendered by the Chief Commissioner of Delhi in analogous cases. In the interim, the Bengal Finance (Sales Tax) Act, 1941, was amended by the Bengal Finance (Sales Tax) (Delhi Amendment) Act, 1956, which was Act No 17 of 1956 and became operative on 27 October 1956. The amendment introduced a new provision, section 8A, which provided that the Commissioner could, if he deemed it necessary for the proper realisation of tax, impose a requirement, recorded in writing, that a dealer furnish security up to a specified amount and in a manner approved by the Commissioner as a condition for the issue or continuation of a registration certificate. On 17 May 1957, the petitioners applied for the issuance of a fresh registration certificate, stating that their original certificate had been lost in transit, and they also sought to have additional items such as cigarettes, bidis and various types of glass included in the certificate. The Sales Tax Officer conducted inquiries and observed that the petitioners had frequently changed the location of their business and that the sales they alleged to have made to certain registered dealers were not genuine, because those dealers could not be located at the addresses supplied. After the officer prepared a report of his findings, it was sent to the Commissioner of Sales Tax, Delhi, who instructed the officer to issue a notice to the petitioners. Accordingly, on 13 July 1957 a notice was served on the petitioners, calling upon them to show cause why they should not be required to furnish a security of Rs 10,000 in accordance with the provisions of section 8A.

On July 13, 1957, a notice was issued to the petitioners requiring them to show cause why they should not be required to furnish a security of ten thousand rupees pursuant to the provisions of section 8A. The petitioners subsequently appeared before the Sales Tax Officer and declared that they were unwilling to deposit any amount as security. In addition, they submitted a written explanation in which they objected to the demand for security. The Sales Tax Officer then referred the matter to the Commissioner of Sales Tax, who examined both the petitioners’ written explanation and the report prepared by the Sales Tax Officer. After consideration, the Commissioner articulated his findings, stating that, in view of the dealer’s reputation in the market – specifically that, as a commission agent, he had been engaged in selling goods to other commission agents, that all sales had been effected to unscrupulous registered dealers, that there were frequent changes in the name and place of business without providing specific details, that information regarding such changes had been submitted late, and that returns for the year 1956‑57 had not been filed within the prescribed time – it appeared necessary to demand security under section 8A of the Bengal Finance (Sales Tax) Act, 1941, as applicable in Delhi. Consequently, on 27 November 1957, the Commissioner issued an order directing the petitioners to furnish security either in cash or by furnishing two personal sureties for a sum of five thousand rupees, to be provided on or before 15 December 1957. Dissatisfied with this order, the petitioners filed a revision in the office of the Chief Commissioner of Delhi. The Chief Commissioner heard the petitioners’ counsel and, by an order dated 15 April 1958, dismissed the revision application. Thereafter, the petitioners instituted a writ petition in the Punjab High Court, which was summarily dismissed. In the present writ petition, the petitioners challenged the Commissioner’s order dated 27 November 1957 on the basis that section 8A of the Act, under which the order was made, was constitutionally invalid. They advanced three grounds of challenge: first, that section 8A confers an undefined, unlimited and unrestricted power upon the Commissioner of Sales Tax; second, that the section does not prescribe any limit on the amount of security that may be demanded; and third, that the section imposes an unreasonable restriction on the petitioners’ right to carry on their business because it provides no provision for an enquiry before a demand for security is made, nor does it afford an opportunity for the affected person to be heard before such an order is passed. The Court found that these grounds lacked substance. It held that section 8A does not grant unlimited or unrestricted authority to the Commissioner; rather, the provision states, inter alia, that the Commissioner may impose, for reasons recorded in writing as a condition of the issue of a registration certificate to

Section 8A authorises the Commissioner of Sales Tax to require a dealer, at the time of granting a registration certificate or when the certificate is continued, to furnish security in an amount and in a manner that the Commissioner approves, for the payment of any tax that the dealer may be or become liable to pay under the Act. However, this authority is conditioned on the requirement that the Commissioner must be satisfied that such a demand for security is necessary for the proper realisation of the tax imposed by the Act. In effect, the Commissioner may compel security only when, in his judgment, it is essential to secure the collection of the tax due. The power therefore cannot be described as unlimited or unrestricted.

The petitioners’ counsel cited the precedent of Messrs Duarka Prasad Laxmi Narain v State of Uttar Pradesh (1954) S.C.R. 803, in which clause 4(3) of the Uttar Pradesh Coal Control Order 1953 gave the licensing authority an absolute discretion to grant, refuse, renew, suspend, revoke, cancel or modify any licence. The Supreme Court had observed that the provision offered no standards or guidance to the licensing officer and thus vested an unregulated will in a single individual to decide the fate of licences. The Court distinguished that situation from the present case, noting that Section 8A itself provides a guiding principle by mandating that the Commissioner may act only when it is necessary for proper tax realisation. Consequently, the earlier judgment does not apply.

The Court also referred to a later decision, Virendra v State of Punjab, where it was noted that in Dwarka Prasad’s case the impugned provision lacked any principles or guidance for the exercise of power, rendering the Dwarka Prasad ratio inapplicable where the statute itself sets conditions on the power. The same reasoning was reaffirmed in Kishan Chand Arora v Commissioner of Police, Calcutta.

Further, Section 7(4a)(i) of the Bengal Finance (Sales Tax) Act 1941 empowers the Commissioner to demand reasonable security for the proper payment of tax payable under the Act. The Calcutta High Court considered this provision in Durga Prasad Khaitan v Commercial Tax Officer (1937) 8 S.T.C. 105 and held that the provision did not confer an unfettered or arbitrary authority on the Commissioner. The Supreme Court approved this view, stating that the power to levy a tax necessarily includes the power to impose reasonable safeguards to ensure its collection, and that requiring security for the proper payment of tax is neither arbitrary nor an unreasonable restriction. As to the

In this case the Court addressed the contention that there is no limit to the amount which can be demanded as security. It pointed out that any amount demanded must bear a relation to the tax liability for which the person may be or become liable under the Act. The amount must be calibrated according to the nature of the business, its turnover and the amount of tax payable by the person concerned. Furthermore, the order of the Commissioner issued under section 8A is subject to revision by the Chief Commissioner (1) [1958] S.C.R. 308, 321, (3) [1961] 3 S.C.R. 135. (2) [1954] S.C.R. 803. (4) [1937] 8 S.T.C. 105, and if an arbitrary or unreasonable amount is demanded the order will be scrutinised by the Chief Commissioner. The Court held that even with respect to the quantum of security the Commissioner’s power is not unlimited or unrestricted. Turning to the final contention, the petitioners argued that the section provides no enquiry or opportunity to be heard. This point had been taken before the Chief Commissioner, who correctly observed that principles of natural justice apply and that a person against whom an order is proposed must be given an opportunity to state his defence. In the present matter such an opportunity was indeed afforded to the petitioners. A notice was issued to them by the Sales Tax Officer; they appeared before the Officer, submitted a written explanation and also made oral submissions. The Commissioner, before deciding, had before him the Officer’s report, the written explanation filed by the petitioners in reply to the notice, and the oral statements they made. The petitioners contended that no oral hearing was given by the Commissioner of Sales Tax and that the order was passed without hearing them. The Court noted that when the petitioners were heard by the Chief Commissioner in support of their revision application they made no grievance that the Commissioner of Sales Tax had denied them a fresh oral hearing. Accordingly the Court did not consider a second opportunity, as suggested by the petitioners, to be necessary or obligatory. The petitioners had already been allowed to say what they had to say against the demand for security; they raised objections which were considered by the Commissioner, who nevertheless concluded that it was necessary to require security for the proper realisation of the tax levied or leviable under the Act. The Court agreed with the Chief Commissioner that there was no violation of the principles of natural justice in the present case.

The Court observed that the case did not involve any breach of the principles of natural justice. After examining the material and the arguments set out in the preceding discussion, the Court determined that the petition did not present a valid cause of action. Accordingly, the Court concluded that the petition lacked any substantive merit. On that basis, the Court ordered that the petition be dismissed in its entirety. In addition, the Court directed that the costs of the proceedings be awarded against the petitioners, reflecting the finding that their claim was without foundation. The dismissal of the petition therefore sealed the final outcome of the appeal, leaving the petitioners without any relief and burdening them with the expense of the litigation.