Provincial Government of Madras vs J. S. Basappa

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 494-496 of 1962

Decision Date: 20 November, 1963

Coram: M. Hidayatullah, A.K. Sarkar, J.C. Shah

In the case titled Provincial Government of Madras versus J. S. Basappa, decided on 20 November 1963, the Supreme Court of India heard the matter before a bench comprising Justice M. Hidayatullah, Justice A. K. Sarkar and Justice J. C. Shah. The petition was filed by the Provincial Government of Madras and the respondent was J. S. Basappa, a merchant dealing in groundnut oil. The judgment was recorded on 20 November 1963 and is reported in 1964 AIR 1873 and 1964 SCR (5) 517, with additional citations appearing in later reports. The statutory framework concerned the jurisdiction of civil courts, the finality of assessment orders, the levy of tax without jurisdiction, the exclusion of civil‑court jurisdiction, composite turnover, the severability of transactions that are lawfully taxed from those that are not, and provisions of the Madras General Sales Tax Act, 1908 (sections 11 and 12). The respondent had instituted three separate suits asserting that ownership of certain goods remained with him until the goods were exported to points outside the province and until payment of price after export, and therefore sales tax was not chargeable on those transactions under the Madras General Sales Tax Act, 1933. The appellant argued that the sales in question were not inter‑provincial, that the suits could not be maintained in a civil court, that the respondent had not exhausted alternative remedies, and that the suits were barred by the limitation period prescribed in section 18 of the Act. Additionally, before the High Court the respondent raised a further ground based on the decision in M/s. Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax [1955] 2 SCR 483, contending that the entire assessment was invalid because it included an illegal levy that could not be severed from the lawful demand. The Court held that section 18 of the Sales Tax Act relates only to suits for damages and compensation arising from acts done under the Act, and consequently the limitation period in that section did not apply to the suits filed by the respondent. The Court further observed that the jurisdiction of civil courts is not automatically removed when a tribunal’s decision becomes final; the civil court retains the authority to examine the order against the fundamental provisions of the statute, and such jurisdiction persists unless the statute expressly or necessarily eliminates it. Applying this principle, the Court found that the civil court’s jurisdiction was not withdrawn because the taxation of “outside” sales fell wholly outside the taxing authority’s jurisdiction, as reflected in the decisions of Firm of Illuri Subhayya Chetty & Sons v. State of Andhra Pradesh [1964] 1 SCR 752 and Secretary of State represented by the Collector of South Arcot v. Mask & Co. 67 IA 222. Finally, the Court concluded that the entire assessment was void because, in the present circumstances, it was impossible to separate from the composite turnover the transactions that were validly taxed from those that were not, rendering the assessment unlawful in its entirety.

In this case the Court observed that the authority of tax officials was confined to matters of taxation and that the courts possessed no power to intervene within that limited field, citing the decisions of M/s Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax [1955] 2 S.C.R. 483 and Bennett & White (Calgary) Ltd. v. Municipal District of Sugar City [1951] A.C. 786. The matter before the Court comprised Civil Appeals Nos. 494‑496 of 1962, which were taken from the judgment and decrees dated 12 March 1957 issued by the Andhra Pradesh High Court in A.S. Nos. 566‑568 of 1961. Counsel for the appellants and counsel for the respondents presented their arguments, and the judgment was delivered on 20 November 1963 by Justice Hidayatullah. The appellant was the State of Andhra Pradesh, which had succeeded the Provincial Government of Madras, and the respondent was J.S. Basappa, a groundnut‑oil merchant residing in Kurnool who conducted sales of oil both within the Province of Madras and to locations outside the province.

These three appeals related to the levy of sales tax for the fiscal years 1944‑45, 1945‑46 and 1946‑47, and they originated from three separate suits that Basappa had instituted against the Provincial Government of Madras, now represented by the Government of Andhra Pradesh. Regarding the assessment for the year 1944‑45, Basappa had been assessed a sales‑tax liability of Rs 12,983‑2‑2. He contended that only Rs 1,594‑1‑5 of that amount corresponded to sales made within the Province, and that the balance of the sales had taken place outside the Province of Madras. Basappa further asserted that the title to the goods remained with him until the goods were exported to a point outside the province and until payment of the price was received after export. On that basis he argued that those transactions could not be counted in his turnover under the Madras General Sales‑Tax Act, 1939 (Act No. IX of 1939) and that the imposition of sales tax on those amounts was therefore erroneous.

To obtain redress, Basappa filed Original Suit No. 14 of 1950 (originally recorded as O.S. 40 of 1949) in the Court of the Subordinate Judge at Kurnool, seeking a refund of Rs 11,389‑0‑9. The Madras State Government, in its written statement, denied every allegation made by Basappa. It maintained that delivery of the goods occurred in Kurnool at the time the goods were booked, and that the goods were dispatched at the buyer’s risk, remaining under the buyer’s risk thereafter. The Government also contended that the notice required under section 80 of the Sales‑Tax Act had not been properly issued, and that the suit was therefore not in conformity with that notice and could not be maintained. Moreover, it argued that the orders issued under the Sales‑Tax Act were final pursuant to section 11(4) of that Act, and that Basappa had failed to exhaust the alternative remedies provided by the Sales‑Tax Act. Finally, the Government asserted that the suit was time‑ barred because it had not been filed within six months of the alleged act as mandated by section 18 of the Sales‑Tax Act, nor within one year as required by Article 16 of the Indian Limitation Act.

For the year 1945‑46 Basappa …

In the fiscal year 1945‑46 Basappa filed O.S. No. 44 of 1949 seeking a refund of Rs 8,356 on the same grounds, and for the year 1946‑47 he filed O.S. No. 23 of 1949 requesting a declaration that the levy of Rs 9,233‑6‑7 was illegal and without jurisdiction, and also seeking a permanent injunction to restrain the tax‑collecting authority from collecting the tax. In the latter suit, besides the defenses raised in the other proceedings, it was argued that the suit was incompetent because a revision application was pending before the Board of Revenue. The Subordinate Judge of Kurnool disposed of all three suits by a common judgment dated 22 February 1951. The judgment addressed three principal questions: first, whether the suits were not maintainable because (a) the civil court lacked jurisdiction and (b) the assessee had not exhausted other remedies; second, whether the suits were barred by limitation; and third, whether the sales concerned had taken place outside the Province of Madras rendering the tax illegal. The Subordinate Judge held that the Sales‑Tax Act contained no provision excluding the jurisdiction of the civil court and that the finality referred to in Section 11 of the Act related only to finality within the tax law, not to the civil court’s jurisdiction. Accordingly, the Judge concluded that Basappa was not required to exhaust other remedies before instituting a civil suit. Regarding limitation, the Judge found that O.S. No. 14 of 1950 and O.S. No. 44 of 1949 were time‑barred under Section 18 of the Sales‑Tax Act or Article 16 of the Limitation Act, whichever applied, and that Article 62 of the Limitation Act did not apply because Basappa had not pleaded a mistake in payment of the tax in those two suits. However, the Judge held that O.S. No. 23 of 1949 was filed within time. The Judge recorded that tax amounts of Rs 7,203‑12‑9 in O.S. No. 14 of 1950 and Rs 5,370‑7‑0 in O.S. No. 44 of 1949 had been wrongly levied because the corresponding sales occurred outside Madras Province. In O.S. No. 23 of 1949 the Judge found that sales valued at Rs 79,465 had also taken place outside the Province and that tax at the uniform rate of one per cent was not demandable. Accordingly, a declaration to that effect was granted and a permanent injunction restraining the State Government from recovering Rs 793‑10‑6 from Basappa was issued. The final orders dismissed O.S. No. 14 of 1950 and O.S. No. 44 of 1949 with costs, while O.S. No. 23 of 1949 was partially decreed with proportionate costs. Basappa appealed all three decisions, and the Government of Madras also filed appeals against the Subordinate Judge’s orders.

In the appeal filed by Basappa against the decree in O.S. No. 23 of 1949 for the sum of Rs 793‑10‑6, the Provincial Government of Madras raised an objection. In the High Court, the appellants made additional applications to introduce a further ground of defence, contending that the entire assessment was void because it comprised an illegal levy that could not be separated from the lawful demand. This additional ground was founded on the earlier decision of this Court in M/s Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax and others, reported in 1955 2 S.C.R. 483. The request to rely on that precedent was not contested, and the High Court granted permission to the appellant to raise the new ground.

The High Court then differed from the Subordinate Judge on the question of limitation. It held that neither section 18 of the Sales‑Tax Act nor article 16 of the Limitation Act applied to the suits, which were instead governed by article 62 of the Limitation Act. Accordingly, the High Court concluded that O.S. 14 of 1950 and O.S. 44 of 1949, which the Subordinate Judge had dismissed as time‑barred, were in fact not barred by limitation.

Addressing the principal issue, the High Court classified all the sales involved into four distinct categories: (1) where the plaintiff was both consignor and consignee; (2) where the plaintiff was consignor and the buyer was consignee; (3) where the buyer was both consignor and consignee; and (4) where a third party was shown as consignor and the plaintiff was consignee. The Subordinate Judge had previously held that sales tax was properly demandable for categories 2 and 3, but not for categories 1 and 4. The appellant did not challenge the second part of that decision before the High Court.

The High Court re‑examined categories 2 and 3 and affirmed that sales falling within those categories were duly assessable to sales tax because the transactions occurred within the Province of Madras. However, relying on the Ram Narain case, the High Court further held that the legal and illegal levies were so intermingled that the entire tax demand became illegal and void.

As a result, the High Court allowed the appeals filed by Basappa and dismissed the cross‑objection raised by the Provincial Government of Madras. The High Court certified those decisions, and the present appeals were subsequently filed.

Three questions were subsequently raised by counsel Mr A.V. Viswanatha Sastri: (1) whether the civil court possessed jurisdiction to try these suits; (2) whether the suits O.S. 14 of 1950 and O.S. 44 of 1949 were barred by time under section 18 of the Sales‑Tax Act; and (3) whether the High Court erred in holding that the assessments could not be separated and in declaring the whole assessments void. The first two questions were found to present no difficulty. Section 18 of the Act states: “No suit shall be instituted against the Government and no suit, prosecution or other proceeding shall be instituted against any Officer.”

Section 18 of the Sales‑Tax Act provides that no suit may be instituted against the Government, nor any suit, prosecution or other proceeding against any officer or servant of the State Government in respect of any act done or purported to be done under the Act, unless such suit, prosecution or proceeding is instituted within six months from the date of the act complained of. The provision is expressly intended to apply to actions for damages or compensation that arise from acts performed under the statutory scheme, and it uses the familiar language that protects authorities, including the Government, by indemnifying them for bona‑fide acts undertaken pursuant to powers conferred by the legislation. The six‑month limitation prescribed in this section therefore does not govern the type of suits that were filed by Basappa, whose proceedings did not fall within the class of actions contemplated by the section. Consequently, the argument based on Section 18 lacks any substantive foundation and, in any event, was not pressed before the High Court. In a similar vein, the first point raised against the State of Andhra Pradesh must also be rejected, a conclusion supported by a recent decision of this Court in Firm of Tlluri Subhayya Chetty Sow v. The State of Andhra Pradesh. That case concerned Section 18A of the Madras General Sales‑Tax Act, which was inserted by Section 10 of the Madras General Sales‑Tax Amendment Act, 1951, and became effective on 15 May 1951. Section 18A states that no suit or other proceeding, except as expressly provided in the Act, may be instituted in any Court to set aside or modify any assessment made under the Act. The appeals presently before us, however, cannot be decided on the basis of Section 18A because the suits were instituted in the Court of Subordinate Judge, Kurnool, and were finally decided by that judge before the amendment containing Section 18A came into force. Before the insertion of Section 18A, the statute contained no specific provision that removed the jurisdiction of civil courts, except for Section 11(4), which attached finality to orders passed on appeal. Under Section 11, appeals were expressly provided against orders of assessment, and Section 12 created a separate provision for revision. Sub‑section (4) of Section 11 further declares that “every order passed in appeal under this section shall, subject to the powers of revision conferred by Section 12, be final.” When the Legislature later enacted Section 18A, it introduced a detailed machinery for correcting assessments that did not exist earlier. Counsel for the respondent, Mr Sastri, argued that in determining whether the civil court’s jurisdiction is barred, the provisions of Sections 11 and 12 must be considered, because they afford adequate remedies and, in his view, “march with” the construction of Section 11(4). He submitted that the finality given to appellate orders, subject only to the limited revision power under Section 12, inevitably precludes a civil court from deciding the same question again. The Court, however, has previously observed in Chetty’s case that the exclusion of civil‑court jurisdiction is not to be presumed merely because a statute confers finality on appellate orders. Even where a provision grants finality, civil courts retain the power to intervene whenever fundamental provisions of the Act have not been complied with or where statutory tribunals fail to act in accordance with the essential principles of judicial procedure.

In this passage the Court explained that even when a statutory tribunal fails to follow the basic principles of judicial procedure, a civil court may still intervene. Justice Gajendragadkar, speaking for the Court, summarized the prevailing law. He stated that when the issue is whether the jurisdiction of civil courts to hear a suit is barred, a general presumption exists that ordinary civil courts must provide a remedy to a citizen who alleges that an amount has been illegally recovered from him. That presumption can be displaced only by a clear and unmistakable indication to the contrary. The Court further clarified that the jurisdiction of civil courts will not be presumed to be excluded simply because a special statute provides a particular remedy. Exclusion will be assumed only if the statute contains an express provision to that effect or if such exclusion is a necessary and inevitable implication of the statute. The mere existence of a special statute offering certain remedies does not, by itself, bar civil courts from hearing cases that fall within the matters covered by that statute. The Court then referred to the observations of Lord Thankerton in the case of Secretary of State represented by the Collector of South Arcot v. Mask & Co. (1). Lord Thankerton had observed that even when jurisdiction is expressly excluded, civil courts retain the power to examine cases where the provisions of the Act have not been complied with, or where the statutory tribunal has acted contrary to the fundamental principles of judicial procedure. The Court added that, although these observations are broad, they do not justify the assumption that a decision of a taxing authority made under the relevant taxing statute can be challenged on the ground that it is merely incorrect on the merits. A challenge on that basis would amount to claiming that the statute itself has not been complied with. The Court held that non‑compliance with the fundamental provisions of the statute, as identified by the Privy Council, renders the entire proceeding before the appropriate authority illegal and without jurisdiction. Likewise, if the appropriate authority acts in violation of the fundamental principles of judicial procedure, as noted in (1) 67 I.A. 222 at 236, the proceedings become illegal and void, and this defect may affect the validity of the order issued by that authority. Consequently, the Court held that the mere finality of a tribunal’s decision does not extinguish the jurisdiction of civil courts. The civil court retains the authority to review the order whenever there is non‑compliance with fundamental statutory provisions that would render the proceedings illegal and without jurisdiction, unless the statute explicitly or necessarily removes such jurisdiction.

In this case the Court explained that the presence of section 18A in the Act would be necessary to remove the jurisdiction of the civil court entirely; without such a provision the civil court’s jurisdiction is not taken away, especially where the actions of the taxing authorities are wholly beyond the law and not merely a mistake in exercising jurisdiction. Counsel for the respondent argued that the Act should be read as if section 18A were implicitly contained, contending that the legislature had added the section merely to make explicit what was already implied. The Court rejected that line of reasoning, holding that the implied‑read approach could not be adopted. The statute gave finality to assessment orders only for the purposes of the Act, subject to appeal and revision, and that finality did not validate an act that the Act itself did not authorize. For example, imposing a tax on a commodity that the statute either did not tax or expressly exempted could not be validated by the statutory finality. In the present matter the assessment of sales that had not occurred within the State was an act wholly outside the jurisdiction of the sales‑tax authorities; consequently, the civil court retained its jurisdiction over the dispute. The Court therefore held that the suits brought before it were competent to proceed. The remaining issue before the Court was whether the entire assessment had to be set aside or only the portion that fell outside the jurisdiction of the sales‑tax authorities. The Court recalled the four categories of transactions that had been classified earlier. Both the High Court and the lower court had found that categories 1 and 4 consisted of sales that took place outside the State and therefore could not be taxed by the authorities. It was noted that at the time the Sales‑Tax Act did not contain any provision establishing a nexus between the sale and the Province; such a provision was introduced only later. Relying on the decision in Ram Narain’s case, the High Court had held that the assessments as a whole must fail. In Ram Narain’s case a portion of the assessment was invalid under Article 286 of the Constitution, and the question was whether the entire assessment should fail. The Supreme Court observed that the necessity of striking down the whole assessment was obviated because the assessment was a single composite whole covering periods before and after the Constitution, and it was therefore invalid in its entirety. The Court further cited authority stating that when an assessment consists of a single undivided sum covering the totality of the assessable property, the inclusion of any items that are expressly exempted by law renders the whole assessment invalid in toto.

In this case the Court explained that when an assessment is divided into separate assessable items, a court may separate the items and remove one or more of them together with the amount attached to those items, while leaving the remaining portion of the assessment intact. However, the Court held that when an assessment consists of a single undivided sum that represents the totality of the property treated as assessable, and when one component of that sum – a component that is not merely trivial – is, in the Court’s view, not assessable and has been wrongly included, the proper procedure is barred and the whole assessment must be considered invalid. The Court cited authority for this proposition, referring to the reports (1) [1955] 2 S.C.R. 483 and (2) [1951] A.C., 786 at 816, which describe the assessment as bad in its entirety. The Court also relied on the decision in Montreal Light Heat & Power Consolidated v. City of Westmount (1926) S.C.R. (Can.) 515, particularly the judgment of Anglin C.J., where the court held that an assessment that is defective in part is infected throughout and must be treated as wholly invalid. The Court noted that the learned counsel for the respondent argued that the tax in question was levied at a uniform rate of one per cent and that all the returns and documents necessary to separate the improper portion from the proper portion were available. Accordingly, the counsel asserted that there was no need to set aside the entire assessment and that the cases cited by the petitioner were governed by a different rule: when an assessment is made for separate sums, only the portion that is illegal needs to be declared void. The Court explained that a clear distinction must be drawn between two classes of cases. A different approach is required only in situations where the assessment of many matters produces tax amounts that, although part of the overall assessment, are completely separate from each other. In such circumstances a court may declare the separate, dissected, and earmarked items illegal and remove them from the levy, without usurping the functions of the taxing authority. By contrast, where the tax is a composite levy and separating the lawful part from the unlawful part would require assessment proceedings, the civil court lacks jurisdiction. In the present matter the tax was a percentage of turnover, and the turnover itself was a mixed quantity. Therefore, it was not merely a question of cutting off distinct items, but of performing an assessment function that only the authorities empowered under the Sales‑Tax Act may undertake. The Court observed that cases involving assessment based on gross valuation, such as the Canadian case referred to by the Judicial Committee, are analogous to the present case involving a composite turnover. Just as in the Canadian case it was impossible to separate the valuation of movable property from that of immovable property within a single gross valuation roll, here it was likewise impossible to separate from the composite turnover those transactions that were validly taxed from those that were not, because such separation falls within the exclusive domain of tax officials.

The Court observed that the civil judiciary possessed no authority to intervene in matters that fell within the exclusive domain of the tax assessment officials. Accordingly, the Court affirmed that the High Court had correctly held that the entire assessment should be adjusted by removing the portion that was deemed illegal and therefore void. On the basis of that conclusion, the Court found that the appeals brought before it could not succeed. Consequently, the Court ordered that the appeals be dismissed and that the costs of the proceedings be awarded to a single party only. The dismissal of the appeals therefore constituted the final resolution of the matter.