State of Assam vs Remesh Chandra Dey and Others
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeal No. 167 of 1960
Decision Date: 14 April 1961
Coram: M. Hidayatullah, S.K. Das, J.L. Kapur, J.C. Shah
In this matter the State of Assam filed a petition against Remesh Chandra Dey and others. The judgment was delivered on 14 April 1961 by a bench consisting of Justice M. Hidayatullah, Justice S. K. Das, Justice J. L. Kapur and Justice J. C. Shah. The case is reported as 1962 AIR 107 and in the Supreme Court Reporter as 1962 SCR (1) 986. The dispute concerned the Assam Sales Tax Act of 1947, as amended by Assam Act 4 of 1951. Section 3(1)A(iii) of the Act and Section 15, together with Rule 80 of the Assam Sales Tax Rules, provided for an exclusion from the calculation of a registered dealer’s net turnover of sales made to another registered dealer when the goods were purchased for resale. Originally the exclusion applied to any resale, but the 1951 amendment inserted the words “in the State” after “resale”, thereby limiting the exclusion to sales of goods intended to be resold within Assam. The petitioners, who were registered dealers dealing primarily in tea bought in Assam and sold either within Assam or in Calcutta, challenged the validity of this amendment. They argued that by limiting the exclusion to intra‑State resale the amendment permitted the levy of tax on inter‑State sales, which they claimed violated Article 286(2) of the Constitution of India.
The Court held that a transaction in which a dealer purchases goods in Assam for the purpose of reselling them to dealers outside the State does not constitute a single inter‑State sale. Instead the two steps are separate: the initial purchase is an intra‑State sale, and a subsequent sale to an out‑of‑State dealer is a distinct inter‑State transaction. Consequently the tax imposed on the first, intra‑State sale does not infringe Article 286(2). The Court referred to the earlier decision in Endupuri Narasimham v. State of Orissa, [1962] 1 SCR 314, to support this view. Moreover, the Court found that Section 15 of the Assam Sales Tax Act and the Rule 80 framed under it were not beyond the constitutional limitation of Article 286(2). The purpose of Section 15 was to avoid the imposition of tax at multiple points in the same commercial chain. The 1951 amendment and the rule did not create a situation where the same inter‑State trade would be taxed twice, because the sales covered by the exclusion were expressly saved from tax by the operation of Article 286(2) and by Section 3(1)A(iii) of the Act. Accordingly, the amendment and the rule were held to be constitutionally valid.
In this case, the Court observed that when transactions fell outside the charging section, it was unnecessary to reenact the prohibition contained in section 15, because that provision functioned merely as a procedural mechanism and would be curtailed by the limitations imposed by the charging section together with the constitutional provisions. The matter came before a civil appellate jurisdiction in the form of Civil Appeal No. 167 of 1960. The appeal originated from a judgment and order dated 16 July 1956 delivered by the High Court of Assam at Gauhati under Civil Rule No. 128 of 1954. Counsel A. V. Viswanatha Sastri and Naunit Lal appeared on behalf of the appellant, while the respondents did not make an appearance. The judgment of the Court was pronounced on 14 April 1961 by Justice Hidayatullah. The State of Assam had filed the appeal against the decision of the Assam High Court dated 16 July 1956. That decision had held that section 15 of the Assam Sales Tax Act, 1947, and Rule 80 framed under that Act were ultra vires as they violated Article 286(2) of the Constitution. The High Court had also issued a certificate under Article 132(1) of the Constitution.
The respondent, R. C. Dey, was a wholesale dealer in tea who had been engaged in the trade since 1949. He had registered as a dealer under the Assam Sales Tax Act on 14 January 1950. His commercial activity primarily involved purchasing tea in Assam and selling it either within Assam or in Calcutta. For tea destined for Calcutta, Dey would consign the tea to himself after purchase in Assam; the consignment would then be approved by prospective purchasers, and the title documents would be endorsed upon receipt of payment. In 1951, the Assam Sales Tax Act was amended by the Assam Sales Tax (Amendment) Act, 1951 (Act 4 of 1951). Prior to this amendment, section 15 provided that, for the purpose of computing a registered dealer’s net turnover for tax purposes, any sale made to another registered dealer of goods that were listed in the buyer’s certificate of registration and were bought for resale should be excluded from the gross turnover. The 1951 amendment inserted the words “in the State” after “resale,” thereby limiting the exclusion to goods intended for resale within the State alone. Following the amendment of the statute, the Rules were also amended, and Rule 80 was introduced. Rule 80 stipulated that a dealer seeking to deduct from his gross turnover the amount of sales on the basis of the entitlement under clause (b) of sub‑section (1) of section 15 must, upon demand, produce the relevant cash memo or bill (according as the sale is on cash or credit) and a truthful written declaration by the purchasing dealer—or by a duly authorised responsible person—affirming that the goods in question were purchased for use in manufacturing goods for sale in the State, for execution of a contract in the State, or for resale in the State, and that those goods were specified in the purchaser’s certificate of registration.
In the rule that governs deductions from gross turnover, the goods to be excluded must be listed in the dealer’s certificate of registration. The rule further requires that the purchaser furnish a written declaration in a prescribed form. The declaration must state that the purchaser has bought the goods for use in manufacturing goods for sale within the State, for execution of a contract within the State, or for resale within the State, and must also affirm that those goods are specified in the purchaser’s certificate of registration, which bears a particular number. R. C. Dey, a registered dealer, filed a petition under Article 226 of the Constitution challenging both the amendment to Section 15 and the accompanying rule. He argued that the amendment and the rule violated Article 286(2) and Part XIII of the Constitution, rendering them ultra vires. He also contended that the amendment and the rule infringed Article 19(1)(g). During the proceedings before the High Court, the argument based on Article 19 and Part XIII was abandoned, and there was no attempt by Dey to revive that point, so the Court did not need to consider those submissions. The High Court, however, upheld Dey’s claim that the amendment and the rule were inconsistent with Article 286(2). Two separate judgments were delivered by the learned Chief Justice and by Justice Ram Labhaya. Both judges agreed that the amended Section 15 and the rule were ultra vires Article 286(2), although they arrived at that conclusion through different reasoning. The Chief Justice held that the amendment and the rule effectively imposed tax on sales that occur in the course of inter‑State trade or commerce, and therefore they were illegal. Justice Ram Labhaya, on the other hand, distinguished between the sale made to Dey and the subsequent sale he made in Calcutta, treating them as separate transactions. He concluded that the first sale was not a transaction in inter‑State trade or commerce and was thus subject to tax, while the second sale was taxable in a different context. Justice Labhaya also observed that, although Section 3 of the Act— the charging provision—excludes inter‑State sales from the scope of the statute, that provision functions only as a “pious declaration” because its effect is not incorporated into the operative provision, namely Section 15, which defines the machinery for computing tax. According to his analysis, the tax liability under the Act is based on the net turnover of a registered dealer. The machinery provision explains how to compute net turnover by allowing certain deductions from gross turnover. Under the original formulation, any goods sold for resale were excluded from gross turnover. The amendment, however, limited the exclusion to goods intended for resale within the State only. Consequently, sales of goods that are not destined for resale within the State remain part of gross turnover, and therefore the net turnover includes such sales, resulting in taxation of sales that occur in the course of inter‑State trade or commerce. In short, the amendment and the rule, by restricting the exemption to intra‑State resale, cause the tax to extend to inter‑State transactions.
While the learned Chief Justice held that the amendment and the Rule directly affected inter‑State trade or commerce, Ram Labhaya J. expressed the view that their effect was only indirect because sales occurring outside the State were not excluded from the calculation of gross turnover. The Court indicated that these two points would be examined separately.
With respect to the Chief Justice’s conclusion, the matter had already been considered by this Court in another decision, namely Endupuri Narasimham & Son v. State of Orissa and others. In that case, a similar question arose under the Orissa Sales Tax Act, 1947, and the Court observed that only sales which directly affect inter‑State trade or commerce and form an integral part of such trade are exempted under Article 286(2). The Court also referred to all its earlier authorities that had discussed the issue from the perspective of Article 286(1), noting that the same line of reasoning applied to Article 286(2). The judgment quoted a passage from that decision, stating: “The argument on behalf of the petitioner is that, as the goods were purchased for the purpose of being sold to dealers outside the State, and they were, in fact, so sold, the purchases were in the course of inter‑State trade, and the levy of tax thereon was within the prohibition enacted by Article 286(2). We do not agree with this contention. The transactions of sales which have been taxed were wholly inside the State of Orissa. They were sales by persons in the State of Orissa to persons within the State of Orissa of goods which were in Orissa. The fact that the purchaser sold those very goods to dealers outside the State is not relevant, as those sales are distinct and separate from the sales on which the taxes in question have been imposed. The present levy is not on the sales by the petitioner to persons outside the State, but on the purchases by him inside the State. The former sales are in the course of inter‑State trade, and are not taxable under Article 286(2), but the latter are purely intrastate sales, and tax imposed thereon does not offend Article 286(2).”
The Court noted that the observations made in the Orissa case are fully applicable to the present appeal, requiring only the substitution of “Assam” for “Orissa”. Accordingly, the Court concluded that the point raised by the Chief Justice must be decided against the respondent. The remaining issue for consideration was the reasoning set out by Ram Labhaya J. in his concurring judgment. The Court then turned to the amendment of Section 3 of the Act, effected by Act 4 of 1951, which introduced sub‑section (1)A. That sub‑section reads: “(1)A. Nothing in sub‑section (1) shall, except in cases covered …”.
In this case, the Court explained that sub‑section (1)A of section 3 of the Act, which created a liability to tax, was introduced by Act 4 of 1951 and reads as follows: “(1)A. Nothing in sub‑section (1) shall, except in cases covered by the first proviso to sub‑section (12) of section 2 of this Act, be deemed to render any dealer liable to tax on the sale of goods where such sale takes place—(i) outside the State of Assam; (ii) in the course of the import of the goods into, or export of the goods out of, the territory of India; or (iii) in the course of inter‑State trade or commerce except in so far as Parliament may by law otherwise provide.” The Court observed that this sub‑section merely restated in the statute the prohibition already embodied in Article 286 of the Constitution. The first two clauses of sub‑section (1)A echo the bar on taxation of sales occurring outside the State of Assam and on imports or exports, which correspond to the prohibition in Article 286(1). The third clause mirrors the prohibition in Article 286(2) concerning inter‑State trade or commerce, unless Parliament provides otherwise. The first proviso to section 2(12), referenced in sub‑section (1)A, enacts the explanatory provision to clause (1) of Article 286. Accordingly, the Court found that the operation of the charging provision excludes from tax liability those sales of a particular character that fall within the constitutional ban. This statutory saving thereby renders such transactions immune from taxation, and no further amendment to the machinery provision was required. Section 15, the Court noted, provides an additional exemption for sales where goods, although sold to a registered dealer, are intended for resale within the State. The purpose of this exemption is to prevent the imposition of sales tax at more than one point in the chain of distribution. Without it, tax could be levied both when the first registered dealer sold to the second registered dealer and again when the second dealer subsequently sold the goods. To avoid multiple taxation on the same goods within the State, the legislation stipulates that tax shall be payable only on the final sale, provided the preceding sales were between registered dealers, involved goods listed in the latter dealer’s registration certificate, and the goods were destined for resale in the State. The Court emphasized that because the charging provision already excluded taxation of sales occurring in inter‑State trade or commerce, it was unnecessary to duplicate the same exemption in the machinery provision. It would be erroneous to assume that the omission of an explicit repetition of the exemption in section 15 means that a dealer’s turnover must necessarily include sales made in inter‑State trade or commerce. Even if a dealer’s net turnover were calculated to include such sales, the dealer could rely on sub‑section (1)A of section 3 to assert that those transactions are not taxable, as they fall within the prohibition of Article 286(2) as well as the specific clause (iii) of sub‑section (1)A.
In this case, the Court observed that any transaction which had already been excluded from tax liability by the Constitution and by the relevant statute could not subsequently become taxable, because the net turnover of a dealer had to be computed in a prescribed manner. The Court explained that, after determining that net turnover, the sales covered by Article 286(2) of the Constitution and by section 3(1) A of the Act had to be deducted from that turnover. In the Court’s view, the prohibition contained in Article 286(2), which was reiterated by section 3(1) A, required that all sales falling within those provisions be omitted from the calculation of net turnover.
The Court noted that counsel had drawn attention to sub‑section (2) of section 3, which states that every dealer to whom sub‑section (1) does not apply shall be liable to tax under the Act, and that sub‑section (2) made no reference to sub‑section (1) A. While it was correct that sub‑section (2) does not mention sub‑section (1) A, the Court held that such an omission did not render sub‑section (1) A ineffective. Sub‑section (1) A possessed its own operative force and had to be given effect together with the other sub‑sections of section 3. Moreover, sub‑section (1) A received additional support from Article 286, and under the hierarchy of law the Constitution must prevail over any conflicting statutory language.
Consequently, the Court concluded that both Article 286 and sub‑section (1) A of section 3 were intended to shield from taxation all sales made in the course of inter‑State trade or commerce. There was therefore no necessity to search the Act further for a duplicate exemption. Upon applying this reasoning, the Court determined that the appeal should be allowed. The decision of the High Court that was under appeal was set aside, and the petition was ordered to be dismissed with costs awarded both in this Court and in the High Court. The appeal was thus allowed.