Messrs Ashok Leyland Ltd vs The State Of Madras

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 446 of 1958

Decision Date: 28 March 1961

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

In this case the Supreme Court of India heard a petition filed by Messrs Ashok Leyland Ltd against the State of Madras, the judgment being delivered on 28 March 1961. The bench comprised Justice S. K. Das, Justice J. L. Kapur, Justice M. Hidayatullah and Justice J. C. Shah. The case is reported in the 1961 All India Reports at page 1433 and in the 1962 Supreme Court Reports (First Series) at page 607, with subsequent citations in later reports. The dispute concerned the operation of the Madras General Sales Tax Act of 1939, the Sales Tax Laws Validation Act of 1956 and the provisions of Article 286 of the Constitution of India relating to inter‑State sales. The appellant, Messrs Ashok Leyland Ltd, operated a manufacturing facility in the State of Madras where it produced, assembled and sold motor vehicles, spare parts and accessories. For the assessment year 1952‑53 the sales‑tax authority computed the appellant’s taxable turnover by excluding the value of vehicles and related goods that were sold outside the State of Madras. On revision the authority increased the taxable turnover by adding a sum that represented certain transactions with dealers located outside Madras, reasoning that those sales were made within the State and therefore fell within the scope of the Madras General Sales Tax Act, 1939. The appellant contested this inclusion, asserting that the sales were part of inter‑State trade and commerce and thus exempt under Article 286(2) of the Constitution. While the matter was pending before the Supreme Court, Parliament enacted the Sales Tax Laws Validation Act, 1956. The central question before the Court was whether, even if the transactions were inter‑State in character, they were covered by the Validation Act and consequently the assessment could be sustained. The appellant advanced two specific arguments: first, that the Validation Act was intended to apply only where a State law expressly imposed a tax on the sale or purchase of goods in the course of inter‑State trade; second, that the amendment introduced by Section 22 of the Madras General Sales Tax Act, 1939 (by Madras Act 1 of 1957) applied retrospectively from 26 January 1950 and referred only to sales where goods were delivered for consumption within the State, thereby excluding inter‑State sales from the Act’s reach. The Court examined these submissions and the operative provisions of the Validation Act to determine the proper scope of the assessment.

The Court explained that the purpose of the Sales Tax Laws Validation Act, 1956 was to free the tax statutes of the State of Madras from the restriction imposed by Article 286(2) of the Constitution of India and to permit those statutes to function according to their own terms. Accordingly, the transactions that were the subject of the present dispute fell within the charge of section 608 of the Madras General Sales Tax Act, 1939. The Court held that the statute did not have to state expressly that it was levying tax on sales made in the course of inter‑State trade. In support of that view the Court referred to the decision in M. P. V. Sundararamier & Co. v. The State of Andhra Pradesh and Another, reported in [1958] S.C.R. 1422. The Court also observed that the transactions satisfied the definition of “sale” found in section 2(h) of the Madras General Sales Tax Act, 1939, and that the authority to tax granted to the State by the charging provision, section 3, remained intact despite the insertion of section 22, because sub‑section (2) of that provision insulated the taxing power. The judgment was delivered in the civil appellate jurisdiction of the Supreme Court in Civil Appeal No. 446 of 1958, an appeal against the order dated 18 April 1956 of the High Court of Judicature at Madras in Tax Revision Case No. 93 of 1955. The Attorney‑General of India, M. C. Setalvad, together with counsel S. Swaminathan and K. L. Mehta, appeared for the appellants. For the respondent, the Advocate‑General of Madras, V. K. T. Chari, was assisted by counsel M. M. Ismail and T. M. Sen. The intervenor, Tata Loco & Engineering Co. Ltd., Bombay, was represented by N. A. Palkhivala, J. B. Dadachanji, S. N. Andley, Rameshwar Nath and P. L. Vohra. The judgment was delivered on 28 March 1961 by Justice S. K. Dab, who noted that the appeal arose on a certificate granted by the Madras High Court. The appellant in this matter was the firm Messrs. Ashok Leyland Ltd., Ennore, which the Court referred to for brevity as the assessee, while the State of Madras, represented through the Commercial Tax Officer of Saidapet, was the respondent.

The assessee was described as a manufacturing concern located at Ennore in the State of Madras. At that factory the firm produced, assembled and sold motor vehicles together with spare parts and accessories, and it operated an extensive organisational network that extended across several other States. To illustrate the factual backdrop that gave rise to the dispute, the Court outlined the distribution system employed by the firm. The firm sold its motor vehicles, spare parts and accessories at a uniform price to consumers nationwide by appointing distributors, hereinafter called dealers, each of whom was granted a specific territorial jurisdiction that could lie either within or outside the State of Madras. Each dealer received the exclusive right to sell the firm’s products within the territory allotted to him. Where a dealer’s territory lay outside the State of Madras, the distribution agreement required the dealer to receive the products by consignment, transported by rail, steamer or road. The agreement expressly prohibited the dealer from canvassing or selling the products beyond the territory assigned to him, and it provided that any breach of this undertaking would entitle the assessee to terminate the agreement immediately and to call for the return of any unsold goods remaining at the time of termination.

The agreement between the company and each dealer provided that the dealer must not sell or solicit sales of the company’s products outside the territory assigned to him. If a dealer breached this promise, the company could immediately terminate the agreement. Upon termination, the company reserved the right to require the dealer to return all or any of the unsold products that remained on the date of termination. The company’s case was that many motor vehicles and accessories were consigned to dealers in other states by rail or steamer, and because of the shortage of such transport facilities, some vehicles were also moved by road. For the assessment year 1952‑53 the company’s total turnover from all sales was recorded as Rs 1,43,67,007. The Deputy Commercial Tax Officer of Madras calculated the taxable turnover by subtracting Rs 1,12,21,707, which represented the value of vehicles, spare parts and other items sold outside Madras and consigned by rail, steamer or road. The remaining amount of Rs 31,45,299 was declared the net assessable turnover of the company, and a tax of Rs 1,45,655‑13‑3 was levied on that figure. The company paid the assessed tax without dispute.

Subsequently, the Commercial Tax Officer of Madras, invoking the revision powers granted under section 12 of the Madras General Sales Tax Act, 1939, required the company to produce its books of account so that the officer could verify the legality and propriety of the assessment. After examining the company’s accounts and other records, the officer issued a notice proposing to revise the assessment by adding Rs 42,98,068 to the taxable turnover. The officer’s reasoning was that the delivery of motor vehicles and related goods covered by that amount had been made within the State of Madras and therefore should be subject to tax under the Act. The company objected to this revision, arguing that the Rs 42 lakhs in question arose from inter‑State trade and commerce and were therefore outside the scope of the sales tax. The officer overruled the objection, allowing only a very small reduction. The company appealed the officer’s decision to the Sales Tax Appellate Tribunal, contending that the officer lacked jurisdiction to revise the assessment and that the inclusion of the Rs 42 lakhs contravened Article 286 of the Constitution. While the Tribunal dismissed the jurisdictional argument, it examined the merits and held that the sum of Rs 12,48,403, which represented the value of vehicles driven away on the company’s own motive power by its drivers to the premises of non‑resident dealers, was not liable to sales tax.

The Court observed that the motive power supplied by the assessee’s own drivers to the business premises of the non‑resident dealers was not liable to sales tax. The assessee subsequently filed a revision before the High Court of Madras under section 12B(1) of the Sales Tax Act, reiterating its claim that the sales in question were made in the course of inter‑State trade and commerce and therefore fell outside the charge of sales tax pursuant to article 286(2) of the Constitution. In the proceedings before the High Court, the assessee limited its challenge to tax liability to four specific items. The first item comprised a sum of approximately Rs 1,43,072, which represented the value of vehicles delivered ex‑factory to the dealers’ drivers; those vehicles were driven away by the drivers after being temporarily registered in the name of the dealer outside the State of Madras. The second item involved a sum of about Rs 28,01,357, denoting the value of vehicles transferred to the dealers’ drivers and subsequently driven away under the dealers’ trade numbers, also outside the State of Madras. The third item consisted of roughly Rs 7,866, reflecting the value of spare parts and other accessories that were delivered together with the automobiles. The fourth item was the value of spare parts consigned to the dealers, amounting to Rs 15,000; these parts were sent to the dealers outside Madras by rail or steamer. The High Court rejected the assessee’s contention with respect to the first three items, holding that those transactions were not covered by the prohibition contained in article 286(2) of the Constitution. However, the Court altered the Tribunal’s order regarding the fourth item, concluding that the consignment of spare parts fell within the scope of article 286(2). After this judgment, the assessee obtained the required certificate under article 133 of the Constitution and moved the High Court for further relief. When the learned Attorney‑General appearing for the assessee opened the appeal, he argued that the High Court erred in deciding that the transactions relating to items one, two and three were outside the constitutional ban, and he maintained that those transactions were in fact within the ban. The Court then directed the counsel to consider the Sales Tax Laws Validation Act, 1956—referred to as the Validation Act—and to determine whether the transactions were protected by that Act, an issue that the High Court had not examined. The remaining argument before the Court focused on whether the assessment of the three items was covered by the Validation Act, and the Attorney‑General conceded that if the Validation Act applied, no further question would remain, rendering it unnecessary to decide the precise scope and effect of article 286(2) of the Constitution in this appeal.

In this case, the Court noted that an intervener, Tata Locomotive & Engineering Co. Ltd., Bombay, had asked the Court to decide on the merits whether the transactions under consideration fell within the ban of Article 286(2) of the Constitution, because such a decision would assist a pending case involving the intervener. The Court stated that it could not grant relief to the intervener, because the intervenor had no right to demand a decision on a question that would not need to be addressed if the Validation Act applied; it was conceded that the application of the Validation Act would determine the whole appeal. Consequently, the Court rejected the intervener’s plea. The Court then turned to the principal issue raised in the appeal, namely whether the Validation Act applied to the transactions. It quoted Section 2 of the Validation Act, which provides that, notwithstanding any judgment, decree or order of any court, no law of a State imposing or authorising the imposition of a tax on the sale or purchase of any goods where such sale or purchase took place in the course of inter‑state trade or commerce between 1 April 1951 and 6 September 1955 shall be deemed invalid, and that all taxes levied or collected during that period shall be deemed to have been validly levied or collected. The Court observed that the transactions in the present appeal occurred within the period specified in the Validation Act, namely between 1 April 1951 and 31 March 1952, a fact that was not contested. It further noted that the wording of Section 2 was broad and inclusive, covering the sale or purchase of any goods where such sale or purchase occurred in the course of inter‑state trade or commerce within the stated period. In effect, the section declared that, regardless of any court order, a State law imposing a tax on such transactions could not be held invalid merely because the transactions were inter‑state. Finally, the Court recorded that the learned Attorney‑General had put forward two arguments to support his claim that the Validation Act did not apply to the present transactions. The first argument, as mentioned, was that…

The Attorney‑General contended that the Validation Act could operate only where a State law expressly imposes a tax on the sale or purchase of goods in the course of inter‑State trade or commerce. He drew particular attention to the words “where such sale or purchase took place in the course of inter‑State trade or commerce” that appear in section 2 of the Act, and from that phrase he inferred that a State law must expressly state that it is taxing transactions that occur in inter‑State trade. His second submission relied on section 22 of the Act, which had been inserted by the Madras Act I of 1957. He argued that, because of this provision, the Act does not levy any tax on the transactions that are the subject of this appeal; rather, it only taxes transactions that are generally described as “Explanation sales” within the meaning of the Explanation to Article 286(1)(a) of the Constitution, such sales having been the subject of the Court’s decision in M. P. V. Sundararamier & Co. v. The State of Andhra‑Pradesh & Another (1958 J.S.S.C.R. 1422). The Court indicated that it would address these two arguments in succession. It observed that the first argument does not accurately reflect the true scope and effect of section 2 of the Validation Act. To appreciate the purpose of the Validation Act, it is useful to recall the circumstances that led to its enactment. The true meaning and scope of the Explanation to Article 286(1) of the Constitution had earlier been examined by this Court in The State of Bombay and Another v. United Motors (India) Ltd. and Others, where the majority held that although sales falling within the Explanation were, in fact, inter‑State in character, they were treated as intrastate sales by the fictional device created by the Explanation and therefore could be taxed by the State in which the goods were delivered for consumption. Subsequently, in The Bengal Immunity Company Limited v. The State of Bihar and Others, the Court again, by a majority, held that sales covered by the Explanation, being inter‑State in nature, could not be taxed under Article 286(2) unless Parliament removed the constitutional bar; the Court further clarified that the Explanation to Article 286(1)(a) operated only on that clause and did not restrict the operation of Article 286(2), and that the earlier United Motors decision had not correctly applied the law. The Bengal Immunity judgment was delivered on 6 September 1955. The Sales Tax Validation Ordinance No III of 1956 was issued on 30 January 1956 and was later superseded by the Validation Act. The constitutionality of the Validation Act was challenged before this Court, and in M. P. V. Sundararamier’s case the Court upheld its validity, even though the sales involved in that case were Explanation sales. The Validation Act, being a piece of legislation enacted by Parliament, removes the prohibition imposed by Article 286(2).

Clause (2) of Article 286, as it stood before the Constitution (Sixth Amendment) Act, 1956, provided that “Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter‑State trade or commerce.” In the case of M. P. V. Sundraramier (3) this Court observed, citing earlier authorities (1) [1953] S.C.R. 1069, (2) [1955] 2 S.C.R. 603 and (3) [1958] S.C. 1422, that Section 2 of the impugned Act, being the only substantive provision in that legislation, made no reference to any validation. The provision merely stated that no law of a State imposing tax on sales shall be deemed invalid merely because such sales are in the course of inter‑State trade or commerce. The Court explained that the effect of this clause was simply to free State laws from the restriction imposed by Article 286(2) and to allow those laws to operate on their own terms. Using the language adopted in the United Motors case (1) and The Bengal Immunity Company’s case (2), the Court held that the true purpose of the impugned Act was to remove the ban that prevented States from taxing inter‑State sales, rather than to validate or ratify any particular law.

It was evident that the legislation of 1939, enacted long before the Constitution came into force, could not have expressly declared that it taxed sales occurring in the course of inter‑State trade. The Court therefore needed to determine whether, once the restriction of Article 286(2) was lifted, the Act, operating on its own terms, could still affect the transactions under consideration even though those transactions were inter‑State in nature. If the Act could indeed impose tax on such transactions, the assessment could no longer be challenged on the ground of the ban created by Article 286(2). This issue led to the second argument presented by the learned Attorney‑General. The argument required a close examination of the statutory definitions of “sale” and “turnover” coupled with Section 3, the charging provision, to conclude that the Act, as applied on its own terms, rendered the transactions in this appeal liable to sales tax.

Explanation (2) to the definition of “sale” was quoted by the Court as follows: “The sale or purchase of any goods shall be deemed, for the purposes of this Act, to have taken place in this State, wherever the contract of sale or purchase might have been made—(a) if the goods were actually in this State at the time when the contract of sale or purchase in respect thereof was made, or (b) in the case the contract was for the sale or purchase of future goods by description, then, if the goods are actually produced in this State at any time after the contract of sale or purchase in respect thereof was made.” The Court noted the citations (1) [1953] S.C.R. 1069 and (2) [1955] 2 S.C.R. 603 in the quoted passage. The Court concluded that there could be no doubt that this Explanation brought the transactions within the definition of “sale” under the Act.

In this case, the Court observed that the Explanation to the definition of ‘sale’ unquestionably brought the transactions under consideration within that definition under the Act. The next question was whether section 22 of the Act altered that position. The Court held that section 22 made no difference. A brief history of the provision was then set out. Section 22, as it existed before the amending Act of 1957, had been inserted by the Adaptation of Laws (Fourth Amendment) Order, 1952, made by the President under article 372(2) of the Constitution. At that time the section was almost a verbatim reproduction of article 286(1) and (2) of the Constitution. The effect of that version of the section had been considered in the case of M. P. V. Sundararamier (1) and it was held that the provision contained a positive content and that the Explanation, when read with section 22 as then framed, authorised the State of Madras to levy a tax on sales falling within its scope. Subsequently the Validation Act of 1956 removed the ban imposed by article 286(2). In 1957 a new section 22 was inserted in the Act with retrospective effect from 26 January 1950, and the old provision was repealed. The new provision read: “Section 22. Sale or purchase deemed to have taken place inside the State in certain cases—(1) Any sale or purchase which took place on or before the 6th day of September, 1955, shall be deemed to have taken place inside the State if the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in the State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State, and shall be subject to tax under this Act accordingly. (2) The provisions of this section shall not affect the liability to tax of any sale or purchase under any other provision of this Act.” The learned Attorney‑General argued that, because the new section operated retrospectively from 26 January 1950 and spoke of goods delivered for consumption in the State of Madras, it dealt only with Explanation sales and therefore did not apply to sales of an inter‑State character other than those covered by the Explanation. The Court was unable to accept that argument. First, sub‑section (2) of the new section 22 expressly states that the provision does not affect the liability to tax of any sale or purchase under any other provision of the Act. Second, after Parliament had lifted the ban imposed by article 286(2), it was unnecessary to repeat the provisions of that article in the Act; consequently the old section 22, which merely reproduced article 286(2), became obsolete. Thus the new section 22 did not subtract from the power to tax conferred on the State by the charging provision.

The Court examined the statutory provisions, focusing on section 3 read together with the definition of “sale” contained in section 2(h). It reiterated that, following the elimination of the restriction imposed by Article 286 (2), the Act, on its own terms, classifies the transactions under consideration as taxable. The Court further observed that the newly enacted section 22 does not alter this classification or create any exemption for the transactions in question. Consequently, the arguments put forward on behalf of the assessee were found to be untenable and were rejected. In the Court’s view, the Validation Act remains applicable to the facts of the case. Accordingly, the assessment made on the contested transactions cannot be set aside on the basis advanced by the assessee. The appeal was therefore dismissed in its entirety. In addition, the Court ordered that the costs of the proceedings be awarded against the appellant. The final order thus confirmed the dismissal of the appeal with costs.