A. V. Thomas and Co. Ltd vs Deputy Commissioner of Agricultural Income Tax

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 628 of 1961

Decision Date: 30 November 1962

Coram: J.L. Kapur, S.K. Das, A.K. Sarkar, M. Hidayatullah, Raghubar Dayal

In the matter titled A. V. Thomas and Co. Ltd. versus Deputy Commissioner of Agricultural Income Tax, the Supreme Court of India delivered its judgment on 30 November 1962. The judgment was authored by Justice J. L. Kapur and the bench was composed of Justices J. L. Kapur, S. K. Das, A. K. Sarkar, M. Hidayatullah, and Raghubar Dayal. The petitioner was A. V. Thomas and Co. Ltd., while the respondent was the Deputy Commissioner of Agricultural Income Tax. The case is reported in the 1964 All India Reporter at page 569 and in the 1963 Supplement to the Supreme Court Reports, part two, at page 608. The statutory provision under consideration was the Sales Tax Act applicable to goods stored in Travancore‑Cochin, specifically dealing with sales by auction conducted in Madras, delivery of the goods in Travancore, and consumption that occurred neither in Madras nor in Travancore, raising the question of whether such sales were taxable in Travancore. The constitutional reference involved Article 286(1) of the Constitution of India.

The headnote of the judgment explained that the sales of tea were effected through an auction held at Fort Cochin, which lay within Madras State. The payment for the tea was made in Fort Cochin, and delivery orders were also issued for the goods that were physically located on Willingdon Island in Travancore‑Cochin State. From Willingdon Island the tea was shipped to various other Indian states and to foreign countries for consumption. Travancore‑Cochin therefore sought to impose a sales tax on these transactions. The Court held that ownership of the goods transferred at the moment the auction contract was accepted, which was when the hammer fell at Fort Cochin. Under Article 286(1) the relevant factor for determining whether a sale was “inside” or “outside” a State was the passing of property within that State. The Court noted that an explanatory provision limited the tax‑levying authority to the State in which the property passed, but that explanation did not apply here because there was no delivery directly resulting from the sale for consumption in any particular State. The decision relied upon the authority of Indian Copper Corporation Ltd. v. State of Bihar, reported in the 1961 Second Supreme Court Reporter at page 276.

The substantive judgment concerned Civil Appeal No. 628 of 1961, which arose from the order dated 24 February 1960 of the Kerala High Court in Tax Revision Case No. 22 of 1957. The appellant was the assessee company, A. V. Thomas and Co. Ltd., and the respondent was the Deputy Commissioner of Agricultural Income Tax and Sales Tax. The assessment period in issue was the financial year 1952‑53, during which the company reported a turnover of Rs 3,77,644 and was levied a tax of Rs 5,900 + 11/‑. Counsel for the appellant included G. B. Pai, J. B. Dadachanji, O. C. Mathur, and Ravinder Narain, while the Advocate General of the State of Kerala, V. P. Gopalan Nambiar, and Sardar Bahadur appeared for the respondent. Additional interveners represented Outcherloney Valley Estates (1938) Ltd., with counsel A. V. Viswanatha Sastri, and other parties were also listed, reflecting the complex procedural history that led to the Supreme Court’s consideration of the taxability of the tea sales.

The Court noted that the company seeking to intervene argued that the State of Kerala had imposed sales tax on a comparable transaction, that the Kerala High Court had upheld the taxability of that transaction based on the very judgment now under appeal, and that the intervening party had obtained special leave to appeal that judgment with the records slated for printing; on those bases the Court allowed the company to intervene in the present appeal. The assessment in question had been made on 30 March 1955 under rule 33(1) of the Travancore‑Cochin General Sales Tax Act because the sale of tea had escaped assessment. An appeal against that assessment was dismissed, after which a further appeal was brought before the Sales Tax Appellate Tribunal, which by its order dated 12 August 1957 held that the constitutional prohibition in article 286(1)(a) concerning sales outside the State applied to the sale of “full lots” and consequently remanded the matter to the Sales Tax Officer. Against that order a revision petition was filed in the High Court, which held that the Tribunal’s view on the applicability of article 286(1)(a) was erroneous and therefore the tea sales were liable to tax under the Act. The present appeal before this Court is filed on a certificate of the High Court challenging that judgment and order. The Court then explained the factual sequence of the tea transactions: the tea was stored in godowns on Willingdon Island, which lay within the State of Travancore‑Cochin; samples of the tea were taken to Fort Cochin, then part of the State of Madras; using those samples the tea was sold by public auction in lots, some purchasers buying entire lots and others buying portions; the purchase price was paid at Fort Cochin and delivery orders were issued to the buyers, addressed to the godown keepers at Willingdon Island, where the actual delivery of the tea took place. After delivery, the tea was dispatched from Willingdon Island either to other parts of India or for export. The taxability of those sales depended on whether the sale could be deemed to have occurred at Willingdon Island, within Travancore‑Cochin and thus subject to the Act, or whether they were “outside sales” and consequently exempt under article 286(1)(a). The assessee contended that the sales were effected at Fort Cochin, outside the territory of Travancore‑Cochin, and therefore fell within the constitutional ban on taxation of sales occurring outside the State, as articulated in article 286(1)(a) and its contemporaneous explanation.

In this matter the Court set out the language of Article 286(1) of the Constitution, which expressly declares that no law of a State may impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place (a) outside the State, or (b) …​. The Explanation annexed to sub‑clause (a) was then quoted, explaining that for the purpose of that sub‑clause a sale or purchase shall be deemed to have occurred in the State into which the goods are actually delivered as a direct result of the transaction for consumption in that State, even though under the general law governing the sale of goods the property in the goods may, by reason of the sale, have passed in another State. The Court then turned to the provisions of the Sale of Goods Act relating to auction sales, noting that the title in the goods passes and the sale becomes complete at the moment the hammer falls. The relevant excerpt from section 64 of the Sale of Goods Act was recited, which provides that in an auction each lot placed for sale is prima facie the subject of a separate contract of sale, and that the sale is deemed complete when the auctioneer announces its completion by the fall of the hammer or by any customary method, with the understanding that until such announcement any bidder may retract his bid. The Court further explained the meaning of “specific goods” under section 2(14) of the Sale of Goods Act, describing them as goods that are identified and agreed upon at the time the contract is made. Consequently, the Court held that when the hammer falls the offer is accepted and, where the goods are specific, the title passes to the buyer. Applying this principle to the present facts, the Court observed that as soon as the hammer fell the title in the goods passed to the buyer because the goods were specific, having been auctioned in full lots, and that this event occurred at Fort Cochin, which lay within the State of Madras. The Court distinguished this situation from that of unascertained goods, stating that with unascertained goods the title does not pass to the buyer until the goods are identified. For this reason the Sales Tax Appellate Tribunal had drawn a distinction between goods sold in full lots and those sold in portions. Regarding full‑lot sales, the Tribunal held that title passed at the fall of the hammer, whereas for portions of lots the title did not pass at that moment; therefore the Tribunal concluded that the sale of full lots was deemed to have taken place outside the State of Travancore‑Cochin, while the sale of portions of lots was deemed to have taken place inside that State. Following that finding, the Tribunal remitted the matter to the Sales Tax Officer for determination of the appropriate tax amount. The High Court, on revision, held that the words “outside the State” in Article 286(1)(a) do not refer to a transfer of ownership as defined by the Sale of Goods Act, but that the lex situs of the transaction determines its taxability, and that the correct position was that the

In this case, the Court observed that ownership of goods passed according to the law of the place where the goods were situated. Consequently, it held that the sale occurred in the State of Travancore‑Cochin and that nothing in the Explanation to Art. 286 (1) (a) contradicted this conclusion. The Court noted that the title to the goods had unequivocally passed at Fort Cochin, that the purchase price had been paid at that location, and that the buyer had received from the auctioneer delivery notes directing the godown keepers at Willingdon Island to hand over the goods; the only physical delivery of the goods actually took place at Willingdon Island. In these facts, the Court framed the issue of whether the transaction should be characterised as an “outside” sale or an “inside” sale, terms that have been used in various judgments to denote sales occurring outside or within a State respectively. The Court recited that the Explanation to Art. 286 (1) (a), set out earlier, defines what constitutes a sale outside the State. According to that Explanation, a legal fiction is created between two States: one State where the goods are delivered for consumption and another State where title to the goods passes, with the former being treated as the situs of the taxable event to the exclusion of the latter. The Court explained that where the Explanation applies, the question of situs is resolved, but in the present case the difficulty persisted because the Explanation did not operate in a manner that would prevent rival States from claiming tax on the same taxable event when the States of delivery for consumption and of title passage are different. The Court then referred to similar circumstances in Indian Copper Corporation Ltd. v. State of Bihar, where a majority held that the opening words of Art. 286 (1) and the non‑obstante clause, together with the Explanation referring to the general law of sale of goods, indicated that the “passing of property within the State” was the decisive factor for deciding whether a sale was “inside” or “outside” the State and thereby which State could levy tax. The Court quoted the observation at page 286: “The conclusion reached therefore is that where the property in the goods passed within a State as a direct result of the sale, the sale transaction is not outside the State for the purpose of Art. 286 (1) (a) unless the Explanation operates.” The Court noted that the majority decision in Indian Copper Corporation Ltd. v. State of Bihar thus resolved the point in favour of the appellant. Finally, the Court recorded that the Sales Tax Appellate Tribunal, on the facts of the present case, had found that…

In the matter before the Court, it was established that for sales of tea packaged in full lots the legal title to the goods transferred at Fort Cochin. The Court noted that this view had not been contested in any earlier decision before this Court. Relying on the majority judgment in Indian Copper Corporation Ltd. v. State of Bihar, the Court concluded that the only jurisdiction entitled to impose a tax on such transactions was the State of Madras, because the passage of property occurred within that State. Consequently, with respect to the former State of Travancore‑Cochin, the transaction had to be treated as an outside sale. Applying that principle to the present facts, the Court held that the sale could not be characterized as an inside sale for Travancore‑Cochin, since the title passed at Fort Cochin, which lies within the State of Madras. The Court further observed that the payment for the tea and the corresponding delivery order were both effected at Fort Cochin, even though the physical hand‑over of the tea took place on Willingdon Island, which is situated in Travancore‑Cochin. The Court explained that the fictitious construction created by the Explanation to Article 286(1)(a) was inapplicable, as there was no delivery made as a direct consequence of the sale for the purpose of consumption in any specific State. The Court then turned to the question of those tea consignments that were subsequently exported from India from Willingdon Island. It was held that the same reasoning applied to those exports; the title to the goods still passed at Fort Cochin, and the goods were shipped from Willingdon Island for consumption outside Travancore‑Cochin. Therefore, those exports also constituted outside sales with respect to Travancore‑Cochin. On this basis, the Court found that the judgment of the High Court of Kerala was erroneous. The appeal was consequently allowed, the order of the High Court was set aside, and the appellant was awarded costs for both the proceedings before this Court and those before the High Court. The appeal was thus allowed.