State Of Kerala vs Shri M. Appukutty

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 621 of 1961

Decision Date: 11 October 1962

Coram: J.L. Kapur, J.C. Shah

In the case titled State of Kerala versus Shri M. Appukutty, decided on 11 October 1962, the Supreme Court of India delivered its judgment under the authorship of Justice J. L. Kapur, with Justice J. C. Shah also sitting on the bench. The petitioner in the proceedings was the State of Kerala and the respondent was Shri M. Appukutty. The judgment was recorded with the citation 1963 AIR 796 and also appears in the 1963 Supplement to the Supreme Court Reports (1) at page 563, together with the citator reference D 1976 SC1545 (18). The statutory framework involved the Madras General Sales Tax Act of 1939, specifically sections 9(1), 9(2), 12(2), 19(1), 19(2)(f), and the accompanying Madras General Sales Tax Rules, namely rules 17(1), 17A(1A), and 17(3A). The headnote of the reported decision set out the factual and procedural background: the Deputy Commercial Tax Officer had initially imposed sales tax on the respondent for a particular assessment year under the Act, and the respondent’s appeal against that assessment order was dismissed. Subsequently, the Deputy Commissioner of Commercial Taxes issued a notice proposing to determine the escaped turnover for the same period, and on the basis of that notice he revised the turnover figure. After the respondent’s appeal before the Sales Tax Appellate Tribunal was also dismissed, a revision petition was filed before the High Court of Kerala. The High Court allowed the revision on the ground that the Deputy Commissioner’s notice was issued without jurisdiction. The State of Kerala then obtained special leave to appeal to the Supreme Court, raising two principal questions: whether the notice was indeed issued without jurisdiction and whether the rules under which the notice was issued exceeded the powers granted by the Act. The Supreme Court held that the power of the Deputy Commissioner to assess escaped turnover under rule 17(3A), which is framed under section 19 of the Act, does not arise from the revisional jurisdiction contemplated in section 12(2) of the Act; consequently, the Deputy Commissioner was not limited to the evidence already on record. The Court further observed that section 9 deals with the initial determination of a dealer’s turnover and does not concern escaped turnover, while rule 17 creates a distinct and independent jurisdiction for determining and taxing escaped turnovers. Accordingly, there was no conflict between section 12(2) and rules 17(1), 17A, and 17(3A). The Court therefore concluded that the notice was not issued without jurisdiction and that rule 17(1) was not ultra vires the substantive provisions of the Act. In reaching this conclusion, the Court followed the precedent set in King Emperor v. Sibnath Banerji (1945) L. R. 72 I. A. 241 and distinguished the authority of State of Madras v. Louis Dreyfus & Co. Ltd. (1955) 6 S. T. C. 318. The formal judgment recorded the civil appellate jurisdiction of Civil Appeal No. 621 of 1961, noted that the appeal was taken by special leave from the Kerala High Court’s order dated 25 September 1958 in Tax Revision Case No. 11 of 1957, identified the counsel appearing for the appellant and respondent, and was delivered on 11 October 1962.

KAPUR, J. began by stating that the present appeal was filed by special leave against the judgment and order of the Kerala High Court. In this appeal the appellant is the State of Kerala and the respondent is the assessee whose tax liability is in dispute. The matter originates from proceedings instituted under the Madras General Sales Tax Act of 1939, identified as Madras Act No. IX of 1939, together with the rules framed under section 19 of that Act. For the sake of brevity, the judgment refers to the former legislation as “the Act” and to the latter instrument as “the rules.” The geographic area involved is Kozhikode, which was originally a part of the State of Madras but was transferred to the State of Kerala by the States Reorganisation Act. Despite the change of territorial jurisdiction, the Madras General Sales Tax Act continued to be applicable to the area. The specific turnover that is the subject of the dispute relates to the assessment year 1952‑53.

According to the record, on 27 March 1954 the Deputy Commercial Tax Officer stationed at Kozhikode issued an order imposing sales tax on the assessee on the basis of a net turnover calculated at Rs 12,56,178‑14‑0. The assessee appealed that order, but the appeal was dismissed by the Commercial Tax Officer. Subsequently, on 15 March 1956 the Deputy Commissioner of Commercial Taxes served a notice on the assessee proposing to determine the escaped turnover for the same assessment period. Following that notice, on 31 March 1956 the Deputy Commissioner issued an order fixing a revised turnover. The assessee contested this revision by filing an appeal before the Sales Tax Appellate Tribunal at Trivandrum; the Tribunal dismissed the appeal on 23 March 1957. The assessee then pursued a revisionary petition before the Kerala High Court. By its judgment dated 25 September 1958, the High Court set aside the Deputy Commissioner’s order, holding that the notice issued by the Deputy Commissioner of Commercial Taxes was issued without jurisdiction, and consequently the Tribunal’s order was erroneous.

The High Court also encountered another issue, namely whether the rule on the basis of which the Deputy Commissioner acted was ultra vires the Act. That question was not decided because the Court resolved the primary jurisdictional issue first. Dissatisfied with the High Court’s decision, the State of Kerala obtained special leave to appeal to this Court. In the appeal before us, two principal contentions were raised. The State of Kerala, as appellant, contended that the notice issued by the Deputy Commissioner was issued within jurisdiction and that the High Court’s view to the contrary was mistaken. The assessee, as respondent, argued that even if the notice was within jurisdiction, the rule under which the notice was issued exceeded the powers granted by the substantive provisions of the Act and was therefore ultra vires.

To address these contentions, the Court found it necessary to examine certain relevant provisions of the Act and the accompanying rules. The procedure to be followed and the assessment powers of the assessing authority are set out in section 9 of the Act. The Court therefore quoted the first two sub‑sections of that section, which provide: “9 (1) Every dealer whose turnover is ten thousand rupees or more …” The analysis of these provisions, together with the applicable rules, formed the basis for determining whether the Deputy Commissioner acted with authority and whether the rule employed was within the limits of the Act.

Section 9 of the Act required that any dealer whose turnover in a year reached ten thousand rupees or more submit a return or returns relating to that turnover in the manner and within the period prescribed by the law. Sub‑section 2(a) provided that if the assessing authority was satisfied that a return filed under sub‑section 1 was correct and complete, the authority would assess the dealer on the basis of that return. Sub‑section 2(b) stipulated that where a dealer failed to file a return before the prescribed date, or where the return filed appeared to the assessing authority to be incorrect or incomplete, the assessing authority was empowered to assess the dealer according to the best of his judgment. The judgment noted that Section 11 dealt with appeals and Section 12 dealt with the power of the sales‑tax authorities to pass revision orders. One of the contentions raised as ultra‑vires relied on sub‑section 2 of Section 12 of the Act, which reads as follows: “S. 12 (1) The Commercial Tax Officer may (i) … (ii) … (2) The Deputy Commissioner may – (i) suo motu or (ii) in respect of an order passed or proceeding recorded by the Commercial Tax Officer under sub‑section (1) or any other provision of this Act and against which no appeal has been preferred to the Appellate Tribunal under s. 12A, on application, call for and examine the record of any order passed or proceeding recorded under the provisions of this Act by any Officer subordinate to him, for the purpose of satisfying himself as to the legality or propriety of such order, or as to the regularity of such proceeding and may pass such order with respect thereto as he thinks fit.” Section 12‑A provided for appeals to the Appellate Tribunal and Section 12‑B provided for revision by the High Court.

Section 19 conferred on the Government the power to make rules for carrying out the purposes of the Act, and the relevant provisions were Section 19(1) and Section 19(2)(f). Section 19(1) stated: “The State Government may make rules to carry out the purposes of this Act.” Section 19(2) added, without prejudice to the generality of the foregoing power, that such rules could specifically provide for “the assessment to tax under this Act of any turnover which has escaped assessment and the period within which such assessment may be made, not exceeding three years.” Exercising the rule‑making authority under Section 19, the government framed several rules, and the appeal concerned Rules 17(1), 17(1A) and 17(3A). Rule 17(1) read: “If for any reason the whole or any part of the turnover of business of a dealer or licensee has escaped assessment to the tax in any year or if the licence fee has escaped levy in any year, the assessing authority or licensing authority, as the case may be, (subject to the provisions) in sub‑rule (1‑A) may, at any time within three years next succeeding that which the tax or licence fee relates, determine to the best of his judgment the turnover which has …” The judgment proceeded to consider the effect of these provisions on the scope of the Deputy Commissioner’s authority and the validity of the notice issued under the said rules.

Rule 17(1) provides that if, for any reason, the whole or any part of a dealer’s or licencee’s turnover has escaped assessment to tax in any year, or if the licence fee has escaped levy in any year, the assessing authority or licensing authority may, after issuing a notice to the dealer or licencee and after making such enquiries as it considers necessary, determine the escaped turnover and assess the tax payable on that turnover or levy the licence fee. Rule 17(1A) states that where, in respect of the turnover referred to in sub‑rule 1, an order has already been passed under section 11 or section 12, the assessing authority must prepare a report and forward it to the appropriate appellate or revising authority. That authority, after granting the dealer a reasonable opportunity to be heard, may pass such orders as it deems fit. Rule 17(3A) further provides that the powers conferred by sub‑rules 1 and 3 on the assessing authority or licensing authority may also be exercised by the appellate authority under section II or, as the case may be, by the revising authority under section 12, provided that the exercise of those powers occurs within three years succeeding the year to which the tax or licence fee relates and that the dealer concerned is given a reasonable opportunity to be heard before any order is passed under this sub‑rule.

The Court first addressed the question of jurisdiction raised by the appellant. The tribunal had held that the powers granted to the Deputy Commissioner of Commercial Taxes under section 12(2) and under rule 17(3A) are separate and that action taken under rule 17(3A) was within jurisdiction. The High Court reversed that finding. Section 12(2) authorises the Deputy Commissioner to act suo motu or on an application to call for and examine the record of proceedings of any subordinate officer, for the purpose of satisfying himself as to the legality or propriety of that officer’s order, and to pass such order as he thinks fit. The respondent argued, and the High Court accepted, that this provision contains the totality of the Deputy Commissioner’s powers and that the power to assess escaped turnover is merely incidental to the revisional power. According to that view, the power to assess escaped turnover could be exercised only when revisional jurisdiction under section 12(2) is invoked, the record is sent for suo motu or on application, and the legality of the subordinate officer’s order is scrutinised. Consequently, the Deputy Commissioner would not be acting in the absence of any substantive proceeding when exercising revisional powers to assess escaped turnover.

However, the Court observed that the power to assess escaped turnover does not arise from the revisional jurisdiction conferred by section 12(2). When exercising revisional jurisdiction, the Deputy Commissioner is limited to examining the record to determine whether the assessment order was made according to law. By contrast, rule 17 confers a separate power to assess escaped turnover, a power that may ordinarily be exercised on matters outside the record of assessment proceedings before the Deputy Commercial Tax Officer. The Court noted that, although the substantive provisions of the Act do not expressly deal with the power and procedure for assessing escaped turnover, the legislature intended that such matters be addressed through statutory rules framed under section 19, and rule 17 was framed pursuant to that authority.

In this matter the Court observed that the Legislature, when it created the procedure for assessing escaped turnover, delegated the detailed regulation of that procedure to rules that could be made under section 19 of the Act. Accordingly, Rule 17 was framed pursuant to that provision. On its face, the first sub‑rule of Rule 17 and sub‑rule 3A fall within the ambit of section 19(2)(f). The Court further noted that, as explained by the Privy Council in King‑Emperor v. Sibnath Banerji, the power to make rules is vested in subsection (1) of the relevant section, while subsection (2) merely provides an illustrative illustration and the rules referred to in subsection (2) are nevertheless authorised and made under subsection (1). The language of subsection (2) does not limit the broader authority conferred by subsection (1), as evidenced by the phrase “without prejudice to the generality of the foregoing power” that opens subsection (2). The Court compared this wording to similar language in subsection (2) of section 2 of the Defence of India Act, which the Privy Council had considered. Subsection 1 of section 19 expressly states that the State Government may make rules to give effect to the purposes of the Act, whose long title declares it to be an Act for the levy of a general tax on the sale of goods in the State of Madras. On this basis, the Court held that Rule 17 and its various clauses, having been made under section 19, do not exceed the rule‑making power that the State Government possesses under that section.

The Court then turned to the substance of Rule 17. The first sub‑rule provides that the assessing authority, subject to sub‑rule IA, may at any time within three years after the year to which the tax relates, determine the turnover that escaped assessment and assess the tax payable on that turnover. This clause therefore embodies the power of the assessing authority. Sub‑rule IA deals with situations where an order has already been passed by an appellate authority under section 11 or by a revising authority under section 12; in such cases the assessing authority must submit a report to the appropriate appellate or revising authority, which may, after affording the dealer a reasonable opportunity to be heard, pass such orders as it deems appropriate. A third scenario arises where no appeal or revision has been made under sections 11 or 12, and consequently there is no order from an appellate or revising authority as contemplated in section 12(2). In those circumstances, the appellate or revising authority, as the case may be, possesses, under sub‑rule 3A, the same power that the assessing authority holds under sub‑rule 1 of Rule 17. Applying this framework to the facts before it, the Court noted that after an appeal was made to the Commercial Tax Officer, no further proceeding occurred. Accordingly, the Deputy Commissioner, who functions as the revising authority, acted under sub‑rule 3A of Rule 17, issued a notice within the scope of that sub‑rule, and proceeded to determine the escaped turnover.

The Court had previously held that Rule 17 is a valid rule made under section 19 of the Act. By its plain meaning, sub‑rule 3A of Rule 17 gives the revising authority the power to issue the notice that was issued, and consequently the Court found the High Court’s judgment to be erroneous to the extent that it said the notice was issued without jurisdiction. Because the notice was within jurisdiction, the order that was challenged was not incorrect.

The respondent contended that Rule 17 exceeds the powers granted by the Act. He argued that the power to assess is given to the assessing authority under sections 9(1) and 9(2), and that the assessing authority is defined in section 2(a‑2) as any person authorised by the State to make an assessment under the Act. Therefore, he claimed, only an “assessing authority” could assess escaped turnover, and a revising authority could not, because it has not been authorised by the State Government.

The Court responded that section 2B authorises the State Government to appoint as many Deputy Commissioners of Commercial Taxes as it considers necessary for performing the functions conferred on them by the Act, and that these officers may exercise their functions within the local limits assigned by the State Government. Rule 17 confers on the Deputy Commissioners the power to determine and tax escaped turnover both when revisions have been made to them (sub‑rule IA) and when no revision has been made (sub‑rule 3A). Consequently, sections 9(1) and 9(2) do not bar the Deputy Commissioners from exercising this power.

Moreover, section 9 deals with the determination of a dealer’s turnover in the first instance and does not address escaped turnover. It cannot be said that Rule 17 conflicts with section 12(2), which concerns a different situation: the power of a Deputy Commissioner to call for records suo motu or on an application and to decide whether an order made by a subordinate officer is lawful or proper. Rule 17 therefore creates a separate and independent jurisdiction for determining and taxing escaped turnover, and its provisions do not conflict with those of section 12(2).

The respondent also argued that sub‑rule 3A is limited to cases where a revision filed under section 12(2) is pending. The Court found that the language of the rule does not support this limitation. While the Court noted a judgment of the Madras High Court in State of Madras v. Louis Dreyfus and Co. Ltd., it observed that the case did not consider sub‑rule 3A, which came into force later. Accordingly, the Court concluded that the High Court’s order was erroneous and should be set aside.

In reviewing the matter, the Court observed that the earlier decision cited by the parties does not address Rule 3A, because that rule was enacted only after the decision was rendered. Consequently, the earlier judgment cannot be applied to interpret the provisions of Rule 3A. The Court further expressed the view that the order issued by the High Court in the present proceedings was fundamentally erroneous. Accordingly, the Court held that the High Court order must be set aside. The appeal filed by the petitioner was therefore allowed, and the Court ordered that the costs of the proceedings be awarded to the petitioner. The final disposition of the case was that the appeal was allowed. The Court therefore concluded that reliance on the earlier authority could not sustain the respondent’s argument that the High Court order was lawful. By annulling the High Court judgment, the Court restored the legal position it deemed proper under the relevant provisions. The award of costs to the petitioner was made in accordance with the usual practice of allocating expenses to the party whose case was unsuccessful. No further relief was granted. The Court cited the Madras High Court decision in State of Madras v. Louis Dreyfus & Co. Ltd. as reference, the citation being (1) (1955) 6 S.T.C. 318,328,