Bhopal Sugar Industries Ltd. vs D.B. Dube

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

Court: Supreme Court of India

Case Number: Petition No. 85 of 1961

Decision Date: 21 December 1962

Coram: J.C. Shah, Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.N. Wanchoo, K.C. Das Gupta

In this case the petition was brought by Bhopal Sugar Industries Ltd., a public limited company incorporated under the Indian Companies Act, 1913, and by another shareholder‑director of that company, against D. B. Dube, who was the Sales Tax Officer for the Bhopal region. The petition was filed under article 32 of the Constitution of India for the enforcement of fundamental rights and was decided by a five‑judge bench of the Supreme Court on 21 December 1962. The bench comprised Justice J. C. Shah, Chief Justice Bhuvneshwar P. Sinha, Justice P. B. Gajendragadkar, Justice K. N. Wanchoo, and Justice K. C. Das Gupta. The citation of the decision is 1964 AIR 1037, and it has been reported in subsequent citators as R 1968 SC 838 (4) and F 1985 SC 1293 (45). The statutory provision that formed the subject of the dispute was the Madhya Pradesh Sales of Motor Spirit and Lubricants Taxation Act, 1957 (M.P. 4 of 1958), particularly sections 2(1) and 3, which impose a tax on the sale of petroleum products.

The first petitioner, Bhopal Sugar Industries Ltd., was described as a manufacturer of sugar that also engaged in the sale of motor spirit, high‑speed diesel oil and lubricants, and that operated a petroleum pump in the state of Madhya Pradesh. Between 1 April 1959 and 31 March 1960 the company used for its own motor vehicles 8,908 gallons of motor spirit, 40,719 gallons of high‑speed diesel oil and lubricants, amounting to a value of Rs 2,453‑47. In the assessment proceedings concerning the sale of motor spirit and diesel oil, the Sales Tax Officer sought to assess the company on the basis of the petroleum and oil that the company had consumed for its own vehicles out of the stock it held. The petitioners challenged that portion of the assessment, contending that section 2(1) of the Act defined “retail sale” in a manner that extended tax liability to the owner’s own consumption of the goods, a construction that, they argued, exceeded the legislative competence of the Madhya Pradesh Legislature under entry 54 of list II in the Seventh Schedule of the Government of India Act, 1935, and infringed the fundamental rights guaranteed by article 19(1)(f) and (g) of the Constitution.

The Court examined the nature of a taxable “sale” under the statute. It held that for a transaction to qualify as a sale within the meaning of the entry, four essential elements must be present: (1) the parties must be competent to contract; (2) there must be a mutual assent between them; (3) a thing—meaning the absolute or general property—must be transferred from seller to buyer; and (4) a price in money must be paid or promised. Relying on the decision in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., [1959] S.C.R. 379, the Court observed that any arrangement lacking these four characteristics could not be regarded as a sale within the State’s competence to tax. The Court further concluded that by expanding the ordinary concept of sale to include the owner’s consumption of goods, section 2(1) attempted to create a tax on consumption that was not a “sale” within the meaning of entry 54 of list II. Consequently, the order issued by the Sales Tax Officer, which was founded on an ultra vires provision, was held unconstitutional and could not be sustained. The assessment of the petitioner on the basis of its own consumption of petroleum and diesel oil was therefore invalidated.

In 1961 a petition was filed under Article 32 of the Constitution of India seeking enforcement of fundamental rights. Counsel for the petitioners were S.T. Desai, J., B. Dadachanji, O.C. Mathur and Ravinder Narain. Counsel for the respondents were B. Sen, K.L. Hathi and I.N. Shroff. The judgment was delivered on 21 December 1962 by Justice Shah. The first petitioner, Bhopal Sugar Industries Ltd., is a public limited company incorporated under the Indian Companies Act 1913. The second petitioner is a shareholder and a director of that company. The company manufactures sugar, owns a fleet of motor trucks and other motor vehicles, and also engages in the business of selling motor spirit, high‑speed diesel oil and lubricants. It maintains a petroleum pump at Shores in the State of Madhya Pradesh. During the period from 1 April 1959 to 31 March 1960 the company used for its own vehicles 8,908 gallons of petroleum, 40,719 gallons of high‑speed diesel oil and lubricants, the total value of which was Rs 2,453‑47 nP. The first respondent, who is the assessing authority under the Madhya Pradesh Sales of Motor Spirit and Lubricants Taxation Act 4 of 1958, assessed the company to pay sales tax on the motor‑spirit and lubricants that the company consumed from its own stock, holding that such consumption amounted to a sale within the meaning of the Act.

Through the petition filed under Article 32 the company claims that the definition of “retail sale” in section 2(1) of the Act, which makes consumption by the owner of motor‑spirit liable to tax by virtue of section 3, exceeds the competence of the State legislature and is therefore void. The petition further contends that the order of the first respondent imposing tax liability on the company infringes the company’s fundamental rights under Article 19(1)(f) and (g) of the Constitution. Section 2(k) of the Madhya Pradesh Sales of Motor Spirit and Lubricants Taxation Act defines a “retail dealer” as any person who, on commission or otherwise, sells or keeps for sale motor spirit or lubricant for the purpose of consumption by the person by whom or on whose behalf it is or may be purchased. Section 2(1) defines “retail sale” as a sale by a retail dealer of motor spirit or lubricant to a person for the purpose of consumption by that person or on his behalf, and expressly includes the consumption by a retail dealer himself or on his own behalf of motor spirit or lubricants sold to him for retail sale. The definition is followed by an explanatory note that is not material for the present appeal. Section 3 is the charging provision, stating that, subject to the other provisions of the Act, tax shall be levied on all retail sales of motor spirit and lubricants effected after the commencement of the Act.

According to Section 3 of the Act, tax is to be levied at the rates specified in the table that forms part of that provision. The Company is registered under Section 4 of the Act as a retail dealer. Section 2(1) expressly states that consumption by a retail dealer of motor spirit or lubricants that have been sold to him for retail sale, whether for his own use or on his own behalf, is to be regarded as part of the definition of “retail sale.” By inserting this provision, the Legislature sought to broaden the ordinary concept of a sale and to bring within taxability the retailer’s own consumption of motor spirit and lubricants that were sold to him for retail sale; consequently, under Section 3 such consumption is treated as a taxable sale. However, this Court previously held in The State of Vadras v. Gannon Dunkerley & Co. (Madras) Ltd. (1) that the expression “sale of goods” appearing in Entry 48, List II, Schedule VII of the Government of India Act, 1935 carries the same meaning as the term used in the Indian Sale of Goods Act, 1930. The Court explained that for a transaction involving the sale of goods to be subject to tax, it must satisfy four essential elements: (i) the parties must be competent to contract; (ii) there must be a mutual assent; (iii) there must be a thing, meaning the absolute or general property in which ownership is transferred from seller to buyer; and (iv) there must be a price in money that is paid or promised. A transaction that does not meet this traditional concept of sale cannot be treated as one over which the State Legislature is authorised to impose a tax liability. The Court observed at the relevant page: “A power to enact a law with respect to tax on sale of goods under Entry 48 must, to be intra vires, be one relating in fact to sale of goods, and accordingly, the Provincial Legislature cannot, in the purported exercise of its power to tax sales, tax transactions which are not sales by merely enacting that they shall be deemed to be sales.” In the case of Gannon Dunkerley & Company, the Court was called upon to examine whether a building contract, which is an entire and indivisible undertaking, contains a sale of goods. The Court held that the Provincial Legislature was not competent, under Entry 48, List II, Schedule VII of the Government of India Act, 1935, to levy tax on the supply of materials used in such a contract by treating the supply as a sale. The decision was not based on any special characteristic of a building contract; rather, it rested on the broader principle that the expression “sale of goods” within the relevant legislative entry has the same meaning as that in the Indian Sale of Goods Act, 1930. Accordingly, the State Legislature possessed no authority to enact legislation imposing tax under Entry 48 of List II in respect of transactions that are not strictly sales of goods.

In the earlier decision, the Court observed that a building contract is not a transaction in which the contractor sells the materials used to construct the building; consequently the State did not possess the authority to enact legislation that imposed tax on the supply of those materials by treating them as a sale. Because of that observation, the Court held that the definition of “sale” contained in the Madras General Sales Tax Act IX of 1939 was, to the extent that it extended to such situations, invalid. The question that arose in Gannon Dunkerley & Company’s case was whether section 2(b)(ii) of the Madras General Sales Tax Act, 1939, as amended by Act XXV of 1947, could be upheld when it attempted to bring goods that formed part of a works contract within the ambit of tax, a question that required reference to the competence of the Provincial Legislature under Entry 48 of List II in the Seventh Schedule of the Government of India Act, 1935. Under the Constitution, the power to tax the sale of goods is now conferred on the States by Entry 54 of List I in Schedule VII. Since the scheme of legislative division established by the Constitution has not been altered, the principle articulated in the Gannon Dunkerley judgment was applied to determine the validity of the provisions of the Madhya Pradesh Act 4 of 1958. The Court explained that when an owner consumes goods in which he deals, such consumption does not constitute a “sale” within the meaning of the Sale of Goods Act, and therefore it does not fall within the definition of “sale of goods” under Entry 54, List I, Schedule VII of the Constitution. Accordingly, the State’s power to levy tax on the sale of goods is limited to transactions that satisfy the definition of sale contained in the Indian Sale of Goods Act, 1930; any expanded definition that includes the consumption by a retail dealer of motor spirit or lubricants sold to him for retail sale exceeds the State’s competence. The Court further held that the clause inserted in section 2(1) – “and includes the consumption by a retail dealer himself or on his behalf of motor spirit or lubricant sold to him for retail sale” – is ultra‑vires the State Legislature because it lacks authority under Entry 54, List I, Schedule VII, and that clause is severable from the remainder of the definition, rendering that specific provision void. The Sales Tax Officer, relying solely on the definition in section 2(1), attempted to impose a tax liability on motor spirit and lubricants consumed by the company for its own vehicles. He recorded his view that the definition clarified both retail sale and self‑consumption, stating that “Since the retail sale has been clearly defined and consumption by self has been included in the retail sale; I do not agree with the contention of the dealer’s counsel that the goods consumed for the vehicles of the dealer are not liable to tax under section 3 and taxed on the goods consumed by the dealer, as above.” The Court concluded that an order based on a portion of the statute that is ultra‑vires cannot be sustained.

In the present case the Sales Tax Officer had relied on a provision of the statute that the Court identified as ultra‑vires, and consequently the order that was issued on the basis of that provision could not be sustained. The State of Madhya Pradesh, through its counsel, argued that the company under consideration did not actually own the motor spirit and lubricants it dealt with; rather, the company acted merely as a commission agent for the sale of goods supplied to it by Caltex (India) Ltd. According to this submission, when the company consumed such goods for its own purposes, the consumption amounted to a sale within the meaning of the first part of the definition of “retail sale” contained in section 2(1) of the Act.

However, the Sales Tax Officer had not addressed the issue by applying the first part of the definition of “retail sale”. Instead, the officer expressly based his decision on the second part of the definition. Because the officer’s decision rested on a portion of the statute that the Court found to be beyond the legislative competence of the State, the Court held that it was not required to express any opinion on the substantive question of whether the company was liable to pay sales tax on the motor‑spirit and lubricants it consumed for its own motor‑vehicles during the period in question.

The Court further observed that, if the Sales Tax Officer possessed the competence to initiate a proceeding aimed at bringing the consumption of goods by the company for its own vehicles within the tax net, he could do so by relying on the first part of the definition of “retail sale” in section 2(1), provided that the terms of the agreement between the company and its principal and the surrounding circumstances justified such an approach. In view of the foregoing analysis, the petition was allowed. Accordingly, a writ was issued declaring that the assessment order dated 26 December 1960, insofar as it imposed tax on motor spirit and lubricants consumed by the company’s vehicles, was invalid. The respondents were ordered to pay the costs of the petition to the company, and the petition was granted.