M/S. William Jacks and Co. Ltd vs The State Of Bihar

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

Court: supreme-court

Case Number: Civil Appeal Nos. 112 to 113 of 1962

Decision Date: 21 November 1962

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

In this case the petitioner, M/S. William Jacks & Co. Ltd, challenged the imposition of sales tax by the State of Bihar and the judgment was delivered on 21 November 1962 by a bench comprising A.K. Sarkar, S.K. Das, J.L. Kapur, M. Hidayatullah and Raghubar Dayal. The decision is reported in 1964 AIR 584 and 1963 SCR Supl. (2) 352. The dispute arose from a series of transactions that the appellant had carried out between 26 January 1950 and 30 September 1951, during which it sold various goods from Calcutta to buyers located in Bihar. These sales were made in the course of inter‑state trade and involved articles that fell within the description of “species” mentioned in the explanation to clause (1) of article 286 of the Constitution. According to the interpretation of that provision given by this Court in Bengal Immunity Co. Ltd. v. State of Bihar, such sales could not be taxed by a State law. Nevertheless, before the Bengal Immunity decision, the State of Bihar had imposed tax on the appellant’s sales under the Bihar Sales Tax Act, 1947, relying on earlier authorities that had since been overruled. The appellant objected to the tax. When the question was referred to the High Court, the respondent State sought to justify the levy on two separate grounds. First, it argued that the sales made between 26 January 1950 and 31 March 1951 could be taxed under clause (2) of the Sales Tax Continuance Order, 1950, which was issued under the proviso to article 286(2) of the Constitution. Second, it contended that the sales made between 1 April 1951 and 30 September 1951 could be taxed under the Sales Tax Validation Act, 1956. The High Court accepted the respondent’s arguments. On appeal to this Court, the appellant did not contest the High Court’s ruling concerning the sales that occurred from 1 April 1951 to 30 September 1951. The Supreme Court held that the Sales Tax Continuance Order of 1950 authorised only the continuation, after the commencement of the Constitution and up to 31 March 1951, of any tax on the sale or purchase of goods that had been lawfully levied by a State government immediately before the Constitution came into force.

The Court observed that despite the prohibition contained in clause (2) of article 286 of the Constitution, the tax imposed on the appellant’s sales made between 26 January 1950 and 31 March 1951 could not be said to fall within the category of taxes that were lawfully levied by any Bihar law immediately before the Constitution came into force. Consequently, the respondent’s argument that the definition of “sale” in the Bihar Sales Tax Act encompassed those particular transactions and that therefore the tax was collectible from a date earlier than 26 January 1950 was rejected as untenable. The Court further examined section 33 of the Act in conjunction with its own decision in M P V Sundararamier & Co. v. State of Andhra Pradesh, noting that even if the constitutional bar imposed by clause (2) of article 286 had been removed, section 33 could not be used to justify taxation of the disputed sales because that provision was introduced by the Adaptation of Laws (Third Amendment) Order, 1951, and became operative only on 26 January 1950. Hence, it could not be characterized as a law that levied a tax immediately prior to the commencement of the Constitution, and the earlier case did not alter the position in the present dispute.

The judgment concerned civil appeals numbered 112 and 113 of 1962, arising from the order of the Patna High Court dated 21 September 1959 in civil miscellaneous case 593 of 1957. Counsel for the appellant and counsel for the respondent were instructed, and the judgment was delivered on 21 November 1962 by Justice Sarkar. The appellant was identified as a company engaged in the manufacture and sale of various types of machinery, with its main place of business situated in Calcutta, West Bengal. Between 26 January 1950 and 30 September 1951 the company sold a range of machinery to different purchasers located in the State of Bihar, and on the basis of those sales it was assessed under the Bihar Sales Tax Act, 1947. While the appeals originated from those assessments, the Court noted that the real controversy had narrowed considerably from the original broader issue. For clarity, the Court described the sale procedure: the price for the goods was payable in Calcutta, ownership passed to the buyer as soon as the appellant placed the goods on a railway carriage at Calcutta, and it was no longer disputed that the actual physical delivery of the goods occurred in Bihar where they were intended for consumption. Both parties accepted that the transactions constituted inter‑State trade and fell within the explanation of article 286(1) of the Constitution as it stood before the Sixth Amendment of 1956.

In this judgment the Court limited its discussion to Article 286 as it existed before its amendment. The appellant had argued before the Superintendent of Sales Tax in Patna, who acted as the assessing authority, that the transactions involved were inter‑State sales and therefore could not be taxed by the Bihar Sales Tax Act on the basis of clause (2) of Article 286, even though the sales fell within the explanation to clause (1) of that article. The appellant maintained that any attempt by the Bihar Act to levy tax on such sales was void. The Superintendent rejected this contention. He relied on the decision of Bengal Immunity Company Ltd. v. State of Bihar (1), which held that sales falling within the explanation to clause (1)(a) of Article 286 could be taxed by the legislature of the State where the goods were actually delivered for consumption, despite the prohibition contained in clause (2). Consequently, the Superintendent concluded that the Bihar Act could validly impose tax on the appellant’s sales, even though those sales were inter‑State in nature. The appellant appealed this finding to the Deputy Commissioner of Sales Tax, Bihar. By the time the appeal was heard, the Supreme Court had delivered a judgment in State of Bombay v. United Motors (1). That judgment affirmed the view expressed in the Patna case, stating that clause (2) of Article 286 does not curtail the power of the State in which the goods are delivered for consumption to tax inter‑State sales or purchases, and that the effect of the explanation was to place the transactions described therein outside the ban imposed by clause (2). Relying on that precedent, the Deputy Commissioner dismissed the appellant’s appeal. The appellant then filed a revision application before the Board of Revenue, Bihar, which likewise failed. However, before the Board issued its decision, the Supreme Court had decided an appeal from the Patna case, holding that the United Motors decision (1) had been incorrectly decided. The Court clarified that, until Parliament enacted a law under Article 286(2) to the contrary, a State could not impose or authorize any tax on sales or purchases of goods that occurred in the course of inter‑State trade, even when the goods were actually delivered within that State for consumption, as explained in Bengal Immunity Company Ltd. v. State of Bihar (2). The learned member of the Board of Revenue apparently overlooked this later Supreme Court ruling; had he been aware of it, he would not have based his decision on the United Motors case. Following this, the appellant moved the Board under Section 25 of the Bihar Act, seeking to refer two questions to the High Court for determination, and the reference was accordingly made.

A reference was consequently made, and the relevant citations are recorded as (1) [1933] S.C.R. 1069 and (2) [1955] 2 S.C.R. 603. The present appeal challenges the judgment rendered by the High Court on that reference. There are two separate appeals before this Court, each arising from distinct assessment orders that pertained to different time periods. The High Court considered both references together and delivered a single judgment addressing both matters. Because the questions framed in each reference were identical in wording, the Court did not restrict its analysis to the specific period applicable to each individual case. As previously noted, two questions had been referred to the High Court, but the appellant has not contested the High Court’s answer to the second question before this Court. Consequently, the present appeals are limited to the first question only, which is set out as follows: “Whether the sales by the petitioner of goods that were actually delivered in Bihar as a direct result of such sales for consumption in Bihar during the period from 26 January 1950 to 30 September 1951 were sales that took place in the course of inter‑State trade or commerce within the meaning of Article 286(2) of the Constitution of India, as it stood before the Constitution (Sixth Amendment) Act, 1956, and therefore were not liable to Bihar Sales Tax, or whether, in view of the subsequent enactment of the Sales Tax Laws Validation Act, 1956 (Act VII of 1956), such sales became liable to Bihar Sales Tax for any part of that period, for example from 1 April 1951 to 30 September 1951.”

The High Court responded to this question with the following reasoning: “Regarding the first question, it is clear that for the period from 26 January 1950 to 31 March 1951, the assessment is governed by the Sales Tax Continuance Order, 1950, promulgated by the President, and the assessment of tax for that period cannot be challenged on the ground that it violates Article 286(2) of the Constitution. For the second period, namely from 1 April 1951 to 30 September 1951, the assessment falls under the provisions of the Sales Tax Laws Validation Act, 1956, and the imposition of sales tax for that period is likewise legally valid.”

The issue before this Court is whether the High Court was correct in holding that the assessment covering the period from 26 January 1950 to 31 March 1951 is protected by the Sales Tax Continuance Order, 1950. There is no longer any dispute that the Sales Tax Laws Validation Act, 1956 validates the collection of tax on sales made during the interval from 1 April 1951 to 30 September 1951. In light of this Court’s earlier judgment in the Bengal Immunity Company case (1), the question of whether the appellant’s sales could be subject to Bihar sales tax is no longer open, and the present controversy therefore turns upon the applicability of the Sales Tax Continuance Order, 1950 to the earlier assessment period.

In this appeal the court observed that the earlier question concerning the applicability of the Bihar sales‑tax law had been resolved by the decision in the Bengal Immunity Company case, which held that the statutory provision under which the appellant’s sales might have been taxed was no longer open for enforcement. Consequently the dispute turned to the validity of the Sales Tax Continuance Order, 1950. The appellant submitted that the Continuance Order had been issued pursuant to the power conferred by the proviso to clause 2 of Article 286 of the Constitution. The proviso, as quoted by the appellant, states: “Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the thirty‑first day of March 1951.” The appellant further reproduced clause 2 of the Sales Tax Continuance Order, 1950, which reads: “Any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of the Constitution of India shall, until the thirty‑first day of March 1951, continue to be levied notwithstanding that the imposition of such tax is contrary to the provisions of clause (2) of Article 286 of the said Constitution.” It was recalled that clause (2) of Article 286 prohibited a State law from imposing a tax on a sale that formed part of inter‑State trade. Accordingly, for a tax to be continued under the 1950 Order, it must have been a tax that was being lawfully levied by a State Government at the moment immediately preceding 26 January 1950. The appellant argued that, at that point in time, neither the Bihar Sales Tax Act nor any other statute imposed a tax on the category of sales that formed the subject of the present dispute. In the absence of any such enactment, the appellant contended, there could be no question of a “lawfully levied” tax existing for the Order to preserve, and therefore the Order could not validly continue a non‑existent levy. Counsel for the appellant further drew the court’s attention to the definition of “sale” contained in the Bihar Act as it stood at the relevant period. That definition was quoted as follows: “‘sale’ means, with all its grammatical variations and cognate expressions, any transfer of property in goods for cash or deferred payment or other valuable consideration, including a transfer of property in goods involved in the execution of contract but does not include a mortgage, hypothecation, charge or pledge: Provided that a transfer of goods on hire‑purchase or other instalment system of payment shall, notwithstanding the fact that the seller retains a title to any goods as security for payment of the price, be deemed to be a sale: Provided further that notwithstanding anything to the contrary in the Indian Sale of Goods Act, 1930 (III of 1930), the sale of any goods (i) which are actually in Bihar at the time when, in respect thereof, the contract of sale as defined in section 4 of that Act is made, or (ii) which are produced or manufactured in Bihar by the producer or manufacturer thereof, shall, wherever the delivery or contract of sale is made, be deemed for the purposes of this Act to have taken place in Bihar: Provided further that the sale of goods in respect of a forward contract, whether goods under such contract are actually delivered or not, shall be deemed to have taken place on the date originally agreed upon for delivery.” The appellant maintained that the transactions in question did not satisfy any of the criteria set out in this definition, nor did they fall within the subsequent proviso concerning forward contracts, and consequently were not subject to tax under the Bihar Act. This line of reasoning formed the basis of the appellant’s contention that the Sales Tax Continuance Order, 1950, could not be invoked to uphold a tax demand on the disputed sales.

The statute defined a “sale” to include any transfer of property in goods for cash, deferred payment or other valuable consideration, and expressly treated a security for payment of the price as a sale. It further provided that, notwithstanding any contrary provision in the Indian Sale of Goods Act, 1930, any sale of goods that were physically present in Bihar at the time the contract of sale—defined in section 4 of that Act—was made, or any sale of goods that were produced or manufactured in Bihar by the producer or manufacturer, would be deemed, for the purposes of the Bihar Act, to have taken place in Bihar regardless of where the delivery or contract was actually executed. An additional proviso stated that a sale of goods under a forward contract would be considered to have occurred on the originally agreed delivery date, even if the goods were never delivered.

The Court observed that the transactions under dispute did not satisfy any part of this definition, nor did they fall within the forward‑contract proviso. Consequently, those transactions were not subject to tax under the Bihar Act. The Court then turned to section 33 of the Act, which reads: “Notwithstanding anything contained in this Act, (a) a tax on the sale or purchase of goods shall not be imposed under this Act—(i) where such sale or purchase takes place outside the State of Bihar; and (2) the explanation to clause (1) of Article 286 of the Constitution shall apply for the interpretation of sub‑clause (i) of clause (a) of sub‑section (1).”

The Court noted that in M. P. I., Sundararamier & Co. v. The State of Andhra Pradesh (1) [1958] S.C.R. 1422, it had been held that a provision of this kind did impose a tax on the class of sales covered by the explanation to Article 286(1)(a), but that such imposition was conditional upon the removal of the constitutional ban described in Article 286(2) by an act of Parliament. The Court found no basis for the respondent State to claim any benefit from section 33. That provision had been inserted into the Bihar Act by the Adaptation of Laws (Third Amendment) Order, 1951, and was given effect from 26 January 1950.

The Court reasoned that even if the constitutional ban were later lifted, section 33 could only tax the “explanation” sales of the type involved in the present case after its commencement date of 26 January 1950. Because the provision came into force after the Constitution had begun to operate, it could not have imposed a tax on any sales that occurred immediately before that date, and therefore could not have been continued under the Sales Tax Continuance Order, 1950. As a result, the Court concluded that the sales in question were not taxed by the Bihar Sales Tax Act 1917 prior to the coming into force of the Constitution. Moreover, no argument was advanced that the Government of Bihar had levied tax on these sales before 26 January 1950.

No tax was imposed in 1950 under any other provision. Consequently, the Court found that the High Court had erred in concluding that the tax levied on the appellant’s sales during the period from 26 January 1950 to 31 March 1951 fell within the scope of the Sales Tax Continuance Order, 1950. The judgment of the High Court on that point was therefore set aside, and the pending question previously framed by the Court was answered in the negative. In the view of this Court, the sales in question were not liable to any tax.

The Court considered that the wording of the question might give the impression that it was being asked to decide whether the transactions qualified as “sales” within the meaning of Article 286(2) of the Constitution. However, as earlier observations indicated, that was not the real issue to be decided. The lower courts had already determined that the transactions constituted inter‑State trade in which the goods were actually delivered in Bihar for consumption, and that determination had not been challenged before this Court.

Accordingly, the appeal was allowed. No order regarding costs was made because the appellant had abandoned its challenge to one of the two questions referred to this Court, and because it had not, in the High Court, contested the applicability of the Sales Tax Continuance Order, 1950, to the sales on the basis on which it relied in this proceeding. The appeal was thus allowed.