State of Madhya Pradesh vs Abdeali

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 373 of 1961

Decision Date: 24 August, 1962

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

In this matter, the Supreme Court of India considered a dispute titled State of Madhya Pradesh versus Abdeali, decided on 24 August 1962. The bench comprised Justices S.K. Das, J.L. Kapur, A.K. Sarkar, M. Hidayatullah, and Raghubar Dayal. The petitioner was the State of Madhya Pradesh and the respondent was Abdeali, a dealer in imported hand‑made shoes and chappals. The dispute arose under the Madhya Bharat Sales Tax Act, 1950 (M.B. 30 of 1950), specifically section 4(3), and involved a notification made under section 5 of that Act. The notification exempted hand‑made shoes and chappals whose sale price did not exceed rupees twelve and eight annas per pair, provided the sale was made by the manufacturer or a member of the manufacturer’s family. The Sales Tax Officer rejected the respondent’s claim for exemption and assessed tax on the respondent’s total turnover. The respondent challenged the assessment by filing a petition under article 226 of the Constitution in the Madhya Bharat High Court. The High Court allowed the petition, holding that the exemption applied to sales of hand‑made shoes and chappals irrespective of whether they were made inside or outside the State, and that any other interpretation would conflict with article 304(a) of the Constitution. On appeal, the Supreme Court examined the language of the notification. The Court held that the notification imposed three essential conditions for exemption: (i) the footwear must be hand‑made and not produced by power‑driven machinery; (ii) the price per pair must not exceed rupees twelve and eight annas; and (iii) the sale must be effected by the manufacturer or by a family member. The Court observed that the phrase “in case of sale” refers to the taxable event occurring within the State, not to sales made outside the State. Consequently, the notification relates only to sales that would, but for the exemption, fall within item 32 of Schedule 3 of the notification. The Court rejected the High Court’s interpretation because it would remove one of the stipulated conditions. Further, the Court affirmed that the exemption was intended to protect small manufacturers of low‑value hand‑made footwear who could not compete with large‑scale manufacturers using machines. This classification, aimed at supporting small producers, was held to be a valid exercise of legislative power. The Court cited precedents such as Orient Weaving Mills (P) Ltd. v. Union of India, 1962 Supp. 3 S.C.R. 481 and British India Corporation Ltd. v. Collector of Central Excise, Allahabad, 1963 3 S.C.R. 642, to support its view that the exemption did not create discrimination between footwear manufactured in the State and footwear imported from outside, and therefore did not violate article 304(a).

By Article 304(a) of the Constitution, the decision in M/s Ram Narain Sons Ltd v. Assistant Commissioner of Sales Tax (1955 2 S.C.R. 483) was held to be inapplicable. The matter before the Supreme Court arose as Civil Appeal No 373 of 1961, filed by special leave against the judgment and order dated 14 December 1959 delivered by the Madhya Pradesh High Court in Miscellaneous Petition No 274 of 1958. Counsel for the appellants consisted of B. Sen and I. N. Shroff, while the respondents were represented by W. S. Barlingay and A. G. Ratnapakhi. The appeal was heard on 24 August 1962, and the judgment was delivered by Justice S.K. Das. This appeal challenged the High Court’s decision to set aside a sales‑tax assessment that had been made against the respondent for the assessment year 1956‑57. The appellants in this case were the State of Madhya Pradesh, the Commissioner of Sales Tax, Madhya Pradesh, and the Sales Tax Officer of Circle No 2, Indore. The Court first outlined the factual backdrop that led to the assessment and the grounds on which the High Court had annulled it.

The respondent was engaged in the business of importing and selling a variety of footwear within Madhya Pradesh, operating under the trade name Munwar Shoe Company, Indore. In the assessment year 1956‑57, the total taxable turnover from the sale of his goods was calculated to be just over Rs 60,000. Accordingly, the respondent was assessed sales tax on this turnover pursuant to Item 32 of Schedule 3 of the notification dated 24 October 1953, a notification that had been issued under Section 5 of the Madhya Bharat Sales Tax Act, 1950 (Act 30 of 1950), hereinafter referred to as “the Act.” Under the Act, Section 3 constitutes the charging provision that imposes the tax, while Section 4(3) empowers the Government to grant exemptions through notifications concerning the sale of any goods or class of goods. Section 5 fixes the tax rate and stipulates that the tax payable by a dealer shall be a single point tax, thereby permitting the State Government to specify both the goods and the point of sale at which tax becomes payable. Item 32 of Schedule 3 read as follows: “All leather goods – sale by importer and all shoes, chappals (footwear) etc.,” thereby making all leather goods and all shoes, chappals, and related articles liable to tax at the point of sale by the importer or manufacturer. However, an exemption concerning certain footwear sales was later granted by a notification issued under Section 4(3) of the Act. The Court then turned to the relevant exemption notifications, beginning with the first one dated 27 May 1955, which stated: “In exercise of the powers conferred by section 4(3) of Madhya Bharat …” (the full text of the notification continued beyond the excerpt). These statutory provisions and the subsequent notifications formed the basis of the argument regarding the applicability of the tax assessment and the High Court’s decision to set it aside.

In the Madhya Bharat Sales Tax Act, Samvat 2007, the Rajpramukh issued a notification that exempted from the payment of sales tax all shoes whose selling price did not exceed rupees ten per pair, as well as country shoes that were prepared by the manufacturer himself without the use of power at any stage, provided that such footwear was sold by the manufacturer himself or by any member of his family. This notification was later replaced by a subsequent notification dated 28 January 1956. The later notification stated that, in exercise of the powers conferred by section 4, sub‑section (3) of the Madhya Bharat Sales Tax Act, Samvat 2007, the Rajpramukh, in supersession of notification No. 59(c)(t) P.R. 412‑54 dated 27 May 1955, exempted from the payment of sales tax, when the sale was by the manufacturer or any member of his family, the sale of all shoes, chappals, country shoes and other footwear that were hand‑made, not manufactured on a power‑driven machine, and whose sale price did not exceed rupees twelve and eight annas per pair.

The respondent argued before the Sales Tax Officer that he should not be required to pay any sales tax on the sale of hand‑made shoes, chappals and other types of footwear whose price per pair did not exceed rupees twelve and eight annas, asserting that such footwear fell within the exemption created by the notification of 28 January 1956. The Sales Tax Officer rejected this contention. In an order dated 25 March 1958, the officer observed that the condition stipulated in the notification requiring the sale to be made by the manufacturer or a member of his family was not satisfied, because the respondent was an importer and dealer of footwear rather than the manufacturer or a family member of the manufacturer. Consequently, the officer concluded that the respondent could not claim the exemption and therefore assessed sales tax on the respondent’s total turnover.

Following the assessment, the respondent filed a petition before the High Court of Madhya Pradesh under article 226 of the Constitution. In that petition, the respondent maintained that the notification of 28 January 1956 exempted from tax all sales of footwear that met two conditions: first, that the footwear was hand‑made and not produced on a power‑driven machine; and second, that the sale price did not exceed rupees twelve and eight annas per pair. The respondent further contended that if the exemption were limited to sales by a manufacturer or a member of his family and not extended to sales by an importer, the notification would be discriminatory and would violate article 304(a) of the Constitution. On these grounds, the respondent prayed that the assessment order dated 25 March 1958 be set aside and that the Sales Tax Officer be directed to exempt from tax the respondent’s sales that fell within the scope of the exemption granted by the notification of 28 January 1956.

The appellants replied to the writ petition stating that the notification dated 28 January 1956 did not discriminate between footwear made in Madhya Pradesh and footwear imported from elsewhere. They said that the conditions prescribed in the notification applied equally to both types of goods regardless of their origin. One of those conditions required that the sale eligible for exemption be made by the manufacturer or a member of the manufacturer's family. The High Court accepted the respondent’s petition and held that the respondent’s claim regarding hand‑made shoes, chappals and other footwear purchased directly from a manufacturer outside the State and imported for sale was proper. The Court explained that the notification exempts from sales tax the sale of hand‑made chappals, shoes, footwear and country shoes where the price does not exceed Rs 12 8/‑. It further stated that the exemption applies only when the sale is made by the manufacturer or any member of his family. The Court observed that the wording of the notification is not clear but it must be read in harmony with Article 301 of the Constitution. Accordingly, the exemption was held to apply to hand‑made footwear irrespective of whether it was produced within or outside the State, provided the other conditions were satisfied. The High Court therefore set aside the assessment dated 25 March 1958 and directed the Sales Tax Officer to make a fresh assessment in accordance with its decision. On behalf of the appellants, it was submitted before this Court that the High Court’s interpretation of the 28 January 1956 notification was incorrect. This Court found the submission convincing and therefore accepted that the High Court’s view was erroneous and could not be sustained. The notification, as observed by the Court, clearly imposes three distinct conditions that must be satisfied for an exemption to apply. First, the shoes, chappals, country shoes or other footwear must be hand‑made and not produced by a power‑driven machine. Second, the sale price of each article must be such that it does not exceed Rs 12 1/8‑ per pair. Third, the sale must be effected by the manufacturer himself or by any member of his family as stipulated in the notification. When the notification uses the phrase “in case of sale,” it refers to the sale that is subject to tax within the State. In other words, it points to the taxable event in the State as defined in Section 3 of the notification dated 24 October 1953. That earlier notification makes clear that the tax is a single‑point tax and that the taxable event is the sale occurring in the State.

In this case, the Court explained that the exemption notification of 28 January 1956 referred only to a sale made by the importer or the manufacturer within the State, and therefore the phrase “in case of sale” could not be understood as referring to a sale that occurred outside the State. The Court held that the High Court was wrong when it said that it made no difference whether the manufacturer sold directly to the purchaser inside the State or sold to an importer outside the State who later sold the shoes to the purchaser inside the State. The Court noted that when a manufacturer sells shoes to an importer outside the State and the importer subsequently sells the shoes inside the State, there are in fact two separate sales – one taking place outside the State and one taking place within the State. The sale that occurs outside the State is not taxable under the Sales Tax Act, and the 28 January 1956 notification makes no reference to such an outside‑State sale. Consequently, when the notification speaks of “sale by the manufacturer or a member of his family”, it is referring only to those sales that would be taxable under item 32 of Schedule 3 of the earlier notification dated 24 October 1953. The Court further observed that if the High Court’s interpretation were adopted, it would effectively erase one of the three conditions laid down in the 1956 notification – namely, that the taxable event must be a sale made by the manufacturer or a family member. The Court rejected that possibility, insisting that all three conditions must be satisfied before the exemption can be claimed and that none of the conditions may be displaced by construction. On the question of whether the notification violated Article 304(a) of the Constitution, counsel for the appellants raised a broader issue, arguing that Article 304(a) deals only with taxes on goods themselves, such as excise or counter‑vailing duties, and does not contemplate a tax on the transaction of sale. The Court, however, found it unnecessary to address that larger issue because counsel for the appellants had also made alternative submissions. The first alternative submission was that, assuming Article 304(a) does encompass sales‑tax legislation, the notification did not contravene that provision because its three conditions applied equally to footwear manufactured in the State and to footwear imported from other States. The second alternative submission was that, if the notification were found to be invalid for breaching Article 304(a), the consequence would be…

The Court observed that, if the notification dated 28 January 1956 were declared void, such a declaration would not affect the validity of the earlier notification dated 24 October 1953 issued under section 5 of the Act. The 1953 notification, according to the Court, imposed liability to tax on all leather goods and on all footwear at the point of sale within the State, whether the seller was an importer or a manufacturer. Counsel for the appellant argued that the respondent, being an importer who sells footwear in the State, would consequently be liable to pay tax on every pair of footwear he sells and would have no right to claim any exemption should the exemption notification be held to be invalid. In that circumstance, the assessment would remain identical to the assessment made by the Sales Tax Officer in the order dated 25 March 1958. Counsel further submitted that, on this basis as well, the High Court’s order setting aside the assessment was erroneous. The Court then stated that it would now turn to consider these alternative submissions advanced by counsel for the appellant.

The Court held that the notification of 28 January 1956 does not create any discrimination between footwear manufactured or produced in the State of Madhya Pradesh and footwear imported from other States, a discrimination that would be prohibited by article 304(a) of the Constitution. The Court reiterated that the exemption granted by that notification is conditioned upon the satisfaction of three stipulated criteria, and that each of those criteria applies equally to footwear made within the State and to footwear brought in from outside the State. The Court explained that the purpose of the exemption is to protect and benefit small manufacturers who produce handmade shoes of low value and who may be unable to compete with large‑scale, machine‑made footwear producers. The Court noted that such classifications in favor of small manufacturers have been repeatedly upheld by this Court, referring to the decisions in Orient Weaving Mills (P) Ltd. v. The Union of India (1962) Suppl. 3 S·C·R 481 and The British India Corporation Ltd. v. The Collector of Central Excise, Allahabad (1969) 3 S·C·R 642. The Court observed that counsel for the respondent initially supported the High Court’s interpretation of the notification, a point already addressed earlier in the judgment. Counsel then contended that discrimination arose because a small manufacturer located outside the State would have to travel into the State and sell his handmade shoes there to obtain the exemption, whereas a small manufacturer residing within the State would not need to travel. Counsel argued that this requirement amounted to discrimination prohibited by article 304(a). The Court rejected this argument, describing it as an argument based on inconvenience rather than on substantive discrimination. The Court clarified that the exemption itself does not differentiate between footwear produced in the State and footwear imported from elsewhere, and that even a small manufacturer situated within the State must satisfy the same conditions as a small manufacturer from outside the State in order to claim the exemption.

In order to obtain the tax exemption, a manufacturer must satisfy the conditions specified in the notification; consequently, the manufacturer himself or a member of his family must actually sell the hand‑made shoes before the exemption can be claimed. The same requirement applies to a small manufacturer located outside the State who wishes to enjoy the exemption. Because the exemption is conditioned on sales made within the State, Art 304(a) of the Constitution is not triggered by the fact that the outside manufacturer may have to travel to bring the goods into the State, and therefore a complaint under that article cannot be maintained on the ground of having to travel. It is pertinent to observe that the exemption is limited to sales occurring in the State, which explains why a small manufacturer situated outside the State cannot claim any benefit of the exemption with respect to sales made outside the State, since such sales are not subject to tax under the Act.

The respondent’s counsel also raised the issue of the omission of the word “himself” in the later notification dated 28 January 1956, a word that had appeared in the earlier notification of 27 May 1955 in connection with the term “manufacturer”. He argued that this omission might extend the benefit of the later notification to a servant or an agent of the manufacturer. The Court held that this point is not relevant to the present appeal because the respondent is neither a servant nor an agent of any manufacturer; he is merely an importer, and the omission of “himself” does not affect his position. The Court further accepted the alternative argument of the appellants that if the notification of 28 January 1956 were declared invalid, the respondent would obtain no advantage from it.

The Court observed that striking down the 1956 exemption notification would not impair the validity of the earlier notification dated 24 October 1953, particularly item 32 of Schedule 3 contained therein. The respondent contended that both notifications should be read together and that, if the exemption were removed, the 1953 notification issued under Section 5 of the Act should also be set aside. The Court disagreed, noting that the 1953 notification determines the point of sale at which the tax is levyable, while the rate of tax is fixed by Section 5 of the Act. There is no logical reason to link the 1953 notification with the 1956 notification, which was issued under Section 4(3) of the Act.

Finally, the Court referred to the principle articulated in M/s Ram Narain Sons of Ltd. v. Assistant Commissioner of Sales Tax, which states that when an assessment consists of a single undivided sum representing the total assessable property, the wrongful inclusion of certain exempt items renders the entire assessment invalid. The Court found that this principle does not apply in the present matter because there is no wrongful inclusion of any exempt item in the assessment; the respondent has been correctly assessed on his total turnover. Consequently, the only circumstance in which the assessment could be challenged is if the respondent were entitled to the exemption, which depends on the correctness of the High Court’s interpretation of the 28 January 1956 notification. Since that interpretation is not accepted, the appeal is allowed, the High Court’s judgment and order dated 14 December 1949 are set aside, and the writ petition is dismissed, with costs awarded to the appellants throughout.

In this case the Court observed that the principle that an assessment becomes entirely invalid when a provision of law expressly exempts certain items from taxation does not apply, because the assessment does not contain any erroneous inclusion of items in the tax demand. The Court explained that, if the exemption were to be removed, the respondent would have been correctly assessed on his entire turnover, and therefore the assessment would stand. Consequently, the respondent could only contend that the assessment is defective and should be set aside if he is genuinely entitled to the exemption that he claims. The Court further clarified that the respondent may rely on the exemption only if the interpretation advanced by the High Court regarding the notification dated 28 January 1956 is accepted as correct. The Court added that, should that interpretation prove to be incorrect, the present appeal must succeed even if the notification is rendered invalid by virtue of the provisions of Article 304(a) of the Constitution. For these reasons, the Court allowed the appeal, set aside the judgment and order of the High Court dated 14 December 1949, and dismissed the writ petition that had been filed. The Court also ordered that the appellants be awarded their costs for the entire proceedings. In sum, the appeal was allowed and the earlier order was vacated.