State Of Andhra Pradesh vs Kolla Sreerama Murthy

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

Court: supreme-court

Case Number: Civil Appeal Nos. 368 and 369 of 1961

Decision Date: 2 April 1962

Coram: N. Rajagopala Ayyangar, Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.N. Wanchoo

In this case the Supreme Court of India rendered its judgment on 2 April 1962. The opinion was authored by Justice N. Rajagopala Ayyangar and the bench comprised Justices N. Rajagopala Ayyangar, Bhuvneshwar P. Sinha, P. B. Gajendragadkar and K. N. Wanchoo. The parties were the State of Andhra Pradesh as petitioner and Kolla Sreerama Murthy as respondent. The decision was reported in 1962 AIR 1585 and 1963 SCR (1) 184, with subsequent citations appearing in R 1973 SC2061 (12) D, D 1975 SC1996 (5) D and D 1978 SC 389 (22, 46). The statutory provision at issue was section 3 of the Madras General Sales Tax Act, 1939 (Mad. IX of 1939), which dealt with the liability to pay sales tax on delivery orders, endorsement of such orders and the passage of property in goods upon delivery by the final endorsee.

The factual background recorded that the respondent was a dealer in gunny bags. He entered into a written contract on a printed form to purchase gunny bags from a mill. After receiving part of the purchase price, the mill issued delivery orders directing the delivery of the bags in accordance with the contract. Rather than taking delivery himself, the respondent endorsed the delivery orders. These endorsed orders subsequently passed through several parties before reaching a final holder, who presented the orders to the mill and obtained delivery of the gunny bags. At the time the contract was executed, the goods had not been appropriated to the contract; consequently, no sale had been completed and only an agreement of sale existed. The Sales Tax Officer nonetheless assessed the respondent and collected sales tax on the transactions. The central question presented to the Court was whether the transactions constituted “sales of goods” within the meaning of section 3 of the Madras Sales Tax Act, 1939, thereby attracting tax, or whether they were merely transfers of delivery orders. The Court also considered the effect of the passage of property in the goods to the ultimate endorsee of the delivery order. In reaching its conclusion, the Court held that the principle laid down in Butterworth v. Kingway Motors Ltd., which underpinned the decision in Bayyana Bhimayya v. State of Andhra Pradesh, applied equally to the present facts. The Court accordingly applied the rulings in Bayyana Bhimayya v. Government of Andhra Pradesh (1961 3 SCR 267) and Butterworth v. Kingway Motors Ltd. (1954 2 All E.R. 694).

Procedurally, the matter arose as Civil Appeals No. 368 and 369 of 1961, each appealing the judgment and decree dated 27 June 1957 of the Andhra Pradesh High Court in Special Appeals Nos. 194 and 195 of 1954. Counsel for the appellants were K. N. Rajgopal Sastri and P. D. Menon, while counsel for the respondents were A. V. Viswanatha Satstri and T. Satyanarayana. The judgment of the Court was delivered by Justice Ayyangar on 2 April 1962, and the two appeals were before the Court by virtue of certificates of fitness granted by the High Court of Andhra Pradesh under Article 133 (1)(c) of the Constitution.

The High Court of Andhra Pradesh had granted certificates of fitness under Article 133 (1) (c) of the Constitution, enabling the present appeals. The State of Andhra Pradesh acted as appellant in both appeals, while Kolla Sreerama Murthy, a dealer in gunnies, was the respondent in each case. The matter before the Court concerned the respondent’s liability to pay sales tax on certain transactions that would be described later. Civil Appeal No. 368 of 1961 originated from original suit No. 268 of 1951 pending in the District Munsif’s Court at Rajahmundry, filed by the respondent seeking to set aside an assessment and obtain a refund of Rs 2,941 7/‑, which comprised part of the amount assessed and collected as sales tax for the assessment year 1947‑48. Civil Appeal No. 369 of 1961 stemmed from a similar suit wherein the respondent prayed for identical relief for the assessment year 1946‑47, the refund sought being Rs 1,631 12/‑. The respondent’s contention in both suits was that the transactions whose turnover had been included in the assessment did not constitute “sales of goods” within the Madras General Sales Tax Act 1939 (Mad. IX of 1939), and therefore the assessment, tax collection, and recovery were illegal and beyond jurisdiction. Both suits were decreed by the District Munsif, affirmed by the Subordinate Judge of Rajahmundry on appeal by the State, and again affirmed by the High Court of Andhra Pradesh on further appeal by the State. The present appeals were therefore filed against those two judgments and decrees. It was undisputed that the respondent qualified as a “dealer” under the Madras Sales Tax Act, which defined a dealer as a person carrying on the business of buying or selling goods, and that the disputed transactions were undertaken in the course of his business. Section 3 of the Act, the charging provision, required every dealer to pay tax each year on his total turnover for that year. “Turnover” was defined as the aggregate amount for which goods were bought, sold, supplied or distributed by a dealer, directly or through another, on his own account or on behalf of others, whether for cash, deferred payment or other valuable consideration, with an exclusion for proceeds from sales of agricultural or horticultural produce grown by the dealer or on land in which he had any interest. Clauses (c) and (h) of Section 2 defined “goods” as all movable property except actionable claims, stocks, shares and securities, and included materials, commodities, articles, and items used in construction, fitting, improvement or repair of immovable or movable property, as well as crops, grass and things attached to land that were to be severed before sale. “Sale” and its variants were defined as any transfer of property in goods by one person to another in the course of trade or business for cash, deferred payment or other valuable consideration, including transfers involved in execution of works contracts, but expressly excluded mortgages, hypothecations, charges or pledges. The sole issue between the parties was whether the specific transactions admitted by the respondent qualified as “sales of goods” within the Act, thereby making the turnover from those transactions subject to tax.

The Court explained that the term “goods” under the Act also covered any improvement or repair of immovable property, the fitting out, improvement or repair of movable property, as well as all growing crops, grass and anything attached to or forming part of the land that was agreed to be severed before sale or under the contract of sale. The Court further defined “sale” and its various grammatical forms to mean every transfer of property in goods by one person to another in the course of trade or business for cash, for deferred payment or for any other valuable consideration. This definition also included a transfer of property in goods that formed part of the execution of a works contract, but expressly excluded a mortgage, hypothecation, charge or pledge. The only issue in dispute between the parties, therefore, was whether the transactions, which the respondent openly admitted having entered into, qualified as “sales of goods” within the meaning of the Madras General Sales Tax Act (Act IX of 1939) and consequently whether the turnover arising from those sales could be brought within the charge of tax under the Act. The Court proceeded to describe the nature of those transactions, which the learned Judges of the High Court had held did not amount to a “sale of goods” by the respondent and therefore did not attract tax under the charging provision in respect of the turnover represented by such transactions. The respondent, as earlier noted, was a dealer in gunny bags. The gunny bags he dealt in were manufactured in two mills identified as Chittivalsa Mills and Nellimerla Mills, both located at Chittivalsa in Visakhapatnam District. The respondent’s purchases from these mills were effected on the basis of written contracts that were printed. For clarity, the Court set out the relevant terms of a typical sample contract, since it was common ground that every contract the respondent entered into with the mills followed this form. These contracts were concluded through brokers acting on behalf of the respondent, who sent him “bought‑notes” outlining the terms on which the purchases were made. One such bought‑note, exhibited as Exhibit Al in O.S. 268 of 1951, was treated as representative. It recorded the respondent’s purchase of thirty thousand bags from Chittivalsa Mills, specifying the description of the goods, the manner in which they were packed, and that delivery was to be made within three months. The contract required the buyer to pay a deposit of fifteen rupees per bale within twenty‑four hours of receiving the contract, a condition which the respondent complied with. Having received this part of the purchase price, the mills issued delivery orders directing delivery of the goods in accordance with the contract. These delivery orders were handed to the buyer after he honoured a hundi for the value of the goods; in this case the buyer was the respondent. It was a common practice under these arrangements.

It was established that by the time the delivery orders were issued there existed in the mill’s godown goods that matched the contract description and were of a quantity sufficient to satisfy the term of the contract, and that these goods were situated at the place from which delivery was to be made under the contract. The buyer himself could have gone to the mill and taken delivery of the goods, but he chose not to do so; this failure to take delivery himself created the legal dispute that is the subject of the present appeals. Instead of taking delivery, the respondent, a practice that appears to have been followed by others as well, simply endorsed the delivery orders, and the endorsed orders passed through several hands before the final holder presented the delivery order to the mill and obtained the delivery of the bales from the mill. At each endorsement the price of the bales covered by the quantity specified in the delivery order was collected by the successive endorsers, and in a rising market the amount collected would typically include a profit for each endorser. The case before the lower courts and before this Court was argued on the basis of this pattern of dealing. The learned trial judge and the appellate courts, including the learned judges of the High Court, concluded that on the facts there was no “sale of goods” by the respondent because the transaction for the respondent consisted only of the endorsement of the delivery order issued by the mill, and the fact that the ultimate endorsers of the delivery order obtained delivery of the goods from the mill was held to be irrelevant for determining whether a completed sale had been effected by the respondent through the transfer of the delivery order coupled with the delivery of the goods to the endorsee. In other words, the argument upheld by the lower courts was that the respondent’s transactions were merely sales or transfers of delivery orders and not a “sale of goods” within the meaning of section three of the Act, and therefore the respondent could not be charged under that provision. The correctness of this conclusion is what is contested in these appeals. It is unnecessary to set out in detail the argument that was accepted by the lower courts, especially in view of the judgment of this Court in Bayyana Bhimayya versus Government of Andhra Pradesh (1), where the points raised in favour of the respondent were considered and rejected. The correctness of that decision was not disputed before us. While dealing with the transaction involving the successive endorsements of the delivery orders issued to the purchaser by the mill, this Court observed that, as to the third parties, they had purchased the goods by paying an additional price, and that, in law and in fact, the transaction must be regarded as a fresh sale between the appellants and the third parties.

In this case, the Court explained that a delivery order constitutes a document of title to goods under section 2(4) of the Sale of Goods Act, and that the holder of such a document is entitled both to receive the goods and to transfer the right to another person by endorsement or delivery. The Court observed that when the mills delivered the goods to the third parties, two distinct deliveries occurred at the same moment in time. The first delivery was from the mills to the appellants, represented by the appellants’ agents, and the second delivery was from the appellants to the third parties, who purchased the goods from the appellants. Although these two deliveries may have been simultaneous, the Court held that they were separate facts and separate legal transactions. Consequently, if a dispute arose concerning the goods delivered under the delivery order from the mills to the third parties, the appropriate remedy would be an action brought by the appellants, while the third parties could sue the appellants for breach of contract but not the mills. The Court further stated that because there were two distinct sales, tax liability arose at both stages, a conclusion that had been correctly identified by the tax authorities and the High Court.

The Court then turned to the question of when property in the goods passed. It observed that at the date of the respondent’s purchase contract, the goods were not yet appropriated to that contract, so no completed sale had occurred because ownership had not transferred; only an agreement to sell existed. Whether the goods existed on the date of the agreement was immaterial, because a delivery order had already been issued, indicating that the goods were existing and could be appropriated. If the respondent had presented the delivery order at the mill’s godown, ownership would have passed to him at that moment. However, the respondent chose not to take delivery himself; instead, he endorsed the delivery order, enabling his endorsee to take delivery. The endorsee, or any subsequent endorsee, received the goods, and at that point the goods became appropriated to the contract and ownership passed to the endorsee. One view, which was accepted by the lower courts, argued that because no goods had been appropriated to the respondent’s contract before the endorsements, the successive endorsements were not “sales of goods” but merely transfers of the delivery order as a piece of paper that allowed the endorsee to approach the mills and obtain the goods. The Court noted that accepting this view would remove the respondent entirely from the chain of transactions, effectively treating the ultimate endorsee as the purchaser directly from the mills.

The Court observed that if the respondent were regarded merely as the purchaser from the mills, then the respondent would not have actually bought the goods nor effected any sale of goods. Under that view only a single transaction – the sale by the mills to the ultimate endorsee of the delivery order – would exist. The Court referred to the decision in Davvana’s case, where it held that this interpretation of the legal effect of endorsing delivery orders was erroneous. The Court noted that, without an appropriation of the goods to a contract of sale, a contract cannot be completed and the property in the goods cannot pass to the purchaser; consequently, no sale can be said to have occurred. Nevertheless, the issue that required clarification was the consequence of the property in the goods passing to the ultimate endorsee of the delivery order.

To illuminate this point, the Court considered the earlier authority of Butterworty v. Kingsway Motors Ltd. In that case a hirer of a motor‑car under a hire‑purchase agreement had failed to make the required instalments, so his title had not yet vested and the legal ownership remained with the seller. The hirer nonetheless transferred the vehicle, or the rights he possessed in it, to other persons. The final transferee paid the balance of the purchase price to the owner and thereby acquired a good title to the motor‑car. The Court was asked to determine the effect of this acquisition of title by the ultimate transferee on the legal position of the intermediate parties. Pearson J. explained that “the various purported sales all took place at times when Bowmaker, Ltd. were still the owners of the car, so that all the purported sellers in this rather long chain had no title to it at the times when the purported sales were made. But on or about July 25, 1952 Miss Rudolph acquired a good title from Bowmaker, Ltd., or, at any rate, made payment to Bowmaker, Ltd. which extinguished their title and induced them to relinquish any claim which they had to the car. I think that the right view is that Miss Rudolph acquired the title as between her and Bowmaker, Ltd. but I further hold on authority that the title so acquired went to feed the previously defective titles of the subsequent buyers and ensured to their benefit….” The Court concluded that this principle formed the basis of its decision in Bayyana’s case and that it should be applied to the facts presently before it. Counsel for the respondent attempted to rely on the penultimate paragraph of the judgment in Bayyana’s case, where the Court, while considering the judgments under appeal, observed that “the facts were different, and the Division Bench itself in dealing with the case, distinguished the judgment under appeal, observing that there was no scope for the application of the principles laid down in” the earlier authority.

The court observed that the earlier judgment had stated that the property in the goods did not pass from the mills to the assessee and that there was no agreement for a future sale of goods between the assessee and any third party. The court was unable to interpret that passage as a decision affirming the high court’s distinction of the earlier decision. It noted that, in Bayyana’s case, besides the purchase contract for the gunny bags, there was an additional agreement that the mills would deliver the goods to the purchaser’s nominees. However, the court held that this extra agreement did not affect the underlying principle, because the undisputed evidence showed that the parties understood the mills would honor the endorsement of the delivery order and would deliver the contracted goods to the endorsee who presented it.

The respondent’s counsel suggested that, in the present matter, there was no proof that the goods described in the contract had been delivered to the ultimate endorsee, and therefore the appellant had failed to establish a “sale of goods” at any stage. The court acknowledged that, if indeed the goods had not been delivered to the final holder of the delivery order, the appellant’s case would collapse. Nevertheless, the court found no factual basis for the respondent’s submission. The claim of nondelivery had never been made by the respondent at any point in the proceedings, from the original plaint filed in the district munsif court through the statement of case presented before the supreme court. Moreover, all lower courts had proceeded on the assumption that delivery to the last endorsee of the delivery order had taken place, even though they concluded that such delivery did not amount to a sale by the respondent capable of attracting liability under section three of the Act. Accordingly, the court rejected the respondent’s argument without hesitation. Before concluding, the court turned to a procedural matter: the original suit under section 268 of 1951 was filed on 25 July 1951, and the related plaint in O.S. 309 of 1951 was filed on 6 September 1951. Earlier, on 15 May 1951, the Madras General Sales Tax Act, 1939 had been amended by Madras Act VI of 1951, which introduced section 18A, stating that no suit or other proceeding could be instituted to set aside or modify any assessment made under the Act, except as expressly provided. No party had raised a defence based on this bar before any court, including the high court, nor in the appeal or in the appellant’s original statement of case. At the beginning of 1962, however, the appellant sought leave from the court to raise additional grounds, and upon receiving that leave, it raised the point that the suit should have been dismissed as barred by the newly cited provision.

Having obtained permission to raise additional grounds, the appellant proceeded, on the basis of that permission, to assert that the suit ought to have been dismissed by the lower courts as non‑maintainable because it was barred by the provision of section 18A that had been previously described. In response to this freshly raised plea, the respondent advanced two distinct objections. The first objection contended that, when section 18A is properly construed—particularly when read together with the other amendment introduced by Act VI of 1951, under which section 18A was incorporated into the principal Act—the provision does not operate retrospectively; it may be invoked only with respect to assessments that were completed after the date on which the new section came into force. The second objection, offered in the alternative, argued that if section 18A were to prohibit suits even in cases involving illegal assessments that had already been completed and had become final, then the provision would be unconstitutional because it would infringe the rights guaranteed by Article 19(1)(f) and Article 19(1)(g). Although counsel for both sides were heard on these points, the Court deemed it unnecessary to make a formal pronouncement on either of the respondent’s contentions, since the ultimate decision on the appeals was already determined on their merits. Consequently, the Court concluded that the appeals succeeded, ordered that they be allowed, and directed that costs be awarded. The hearing fee was set at one, and the appeals were allowed.