Commissioner Of Sales Tax, U.P vs Bijli Cotton Mills, Hathras

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 546 of 1962

Decision Date: 20 March 1964

Coram: J.C. Shah, P.B. Gajendragadkar, K.N. Wanchoo, N. Rajagopala Ayyangar, S.M. Sikri

In the case titled Commissioner of Sales Tax, Uttar Pradesh v. Bijli Cotton Mills, Hathras, decided on 20 March 1964, the Supreme Court of India heard arguments before a bench comprising Justice J. C. Shah, Chief Justice P. B. Gajendragadkar, Justice K. N. Wanchoo, Justice N. Rajagopala Ayyangar and Justice S. M. Sikri. The petitioner was the Commissioner of Sales Tax for the State of Uttar Pradesh and the respondent was Bijli Cotton Mills, a manufacturing concern situated in Hathras. The judgment was reported in the 1964 All India Reporter (AIR) at page 1594 and in the 1964 Supreme Court Reporter (SCR) volume 7 at page 383, with later citations appearing in 1966 SC 1113 and 1977 SC 513. The operative legislation was the Uttar Pradesh Sales Tax Act, 1948 (U.P. Act 15 of 1948), specifically sections 3A, 7 and the subsequently amended section 31. According to the headnote, the respondent produced cotton yarn and was registered as a dealer under the 1948 Act, which had become effective on 1 April 1948, prescribing a uniform sales‑tax rate of three pies per rupee on all sales of cotton yarn. Under section 3A, the Government of Uttar Pradesh issued a notification, effective from 9 June 1948, that the tax rate on cotton yarn would increase to six pies per rupee. In the present proceedings, the assessee had exercised the option provided in section 7 of the Act to have its tax liability assessed on the basis of the turnover of the preceding year. The Sales Tax Officer, relying on the 9 June 1948 notification, held that for the assessment year the three‑pie rate would apply for the first sixty‑nine days and that the six‑pie rate would apply for the remainder of the year. This determination was affirmed by the Judge of the Sales Tax Revision Court, who subsequently referred the matter to the High Court for clarification. The High Court, invoking its earlier decision in Modi Food Products Ltd., ruled that the three‑pie rate should continue to apply to the assessment for the year 1948‑49 because the assessee had elected assessment on the prior‑year turnover under section 7. After the High Court’s decision, the Uttar Pradesh Legislature enacted Act III of 1963, inserting section 31 which provided that sales‑tax became exigible from an assessee who had opted for assessment on the previous year’s turnover as if the altered rates had been in force during that earlier year; the amendment was expressly given retroactive effect and was made applicable to assessments that were pending or already closed. The central question placed before the Supreme Court was whether the amendment introduced by section 31 of Act III of 1963 should be applied to the assessment already under consideration. The Court held that the law incorporated in section 31 by the 1963 Amending Act did indeed apply to the present case, confirming that the retrospective operation of the amendment governed the assessment despite the earlier High Court pronouncement.

In this case the Court noted that its opinion on the question must be given in light of the amending Act, which by express enactment was already in force at the time the liability arose. Section 31, introduced by Act III of 1963, is to be regarded as having been operative at all material times, thereby superseding the earlier law that this Court had declared in the Modi Sugar Mills Ltd. decision. Consequently, the Court affirmed that it was not applying any statute to the issue before the High Court that was not in force on the date of the transaction that formed the basis of the reference, namely the decision in Modi Food Products Ltd. v. Commissioner of Sales‑tax, U.P., A.I.R. 1956 All 35, and Commissioner of Sales‑tax, U.P. v. Modi Sugar Mills Ltd., [1961] 2 S.C.R. 189.

The Court further explained that when a question is referred to a High Court and, in the interval, the law is amended with retroactive effect, the High Court is duty‑bound to apply the amended provision as if it had always applied. By acknowledging the substituted statute, the High Court gives effect to the legislative intent and merely fulfills what must be regarded as implicitly required by the reference, provided that the reference is framed broadly enough to permit an enquiry in the light of the amended law and does not demand investigation of fresh facts. The Court distinguished the present situation from the decisions in M/s Chatturam Horilram Ltd. v. Commissioner of Income‑tax, Bihar and Orissa, [1955] 2 S.C.R. 290 and M/s Rampur Distillery Chemical Works Ltd. v. Commissioner of Income‑tax, U.P., I.T. Reference No. 362/58 dated 17‑1‑64, which did not involve a similar retroactive amendment.

The judgment concerned Civil Appeal No. 546 of 1962, which was taken by special leave from the judgment and decree dated 17 December 1958 of the Allahabad High Court in Miscellaneous Case No. 152 of 1952. Counsel for the appellant and counsel for the respondent were instructed, and the matter was decided on 20 March 1964. The opinion was delivered by Justice Shah. The respondent, Bijli Cotton Mills, was identified as a manufacturer of cotton yarn and was registered as a dealer under the Uttar Pradesh Sales Tax Act (Act 15 of 1948). That Act, which commenced on 1 April 1948, imposed sales tax on the sale of various commodities, including cotton yarn, at a uniform rate of three pies per rupee. By virtue of Act 25 of 1948, section 3‑A was inserted into Act 15 of 1948, granting the Provincial Government authority to issue a notification specifying that the proceeds of sale of any goods or class of goods would be excluded from a dealer’s turnover except at a single point in the series of sales as designated by the State Government. Section 7, as amended by Act 25, further related to these provisions.

Section 7 of the 1948 Act allowed a dealer to file his return either on the basis of the turnover recorded in the preceding year or on the basis of the turnover of the current year. The respondent, Bijli Cotton Mills, elected to be assessed on the turnover of the previous year, which ended on 31 March 1948. Exercising the authority granted by section 3‑A, the Government of Uttar Pradesh issued a notification that, with effect from 9 June 1948, the proceeds of the goods listed in column 2 of the accompanying schedule—including cotton yarn—were to be excluded from the turnover of any dealer except at a single point in the chain of successive sales, as the State Government might specify. The same notification further stated that, with effect from 9 June 1949, the tax rate applicable to the turnover of those goods would be the rate set out in the schedule.

Consequently, the sale of cotton yarn became taxable at one specific point: if the yarn was imported from outside Uttar Pradesh, tax was due at the point of import; if the yarn was manufactured within Uttar Pradesh, tax was due at the point of sale by the manufacturer. The schedule fixed the rate of tax on cotton yarn, from the date of the notification, at six pies per rupee. The Sales‑Tax Officer in Hathras, when assessing the respondent for the assessment year 1948‑49, held that because of the notification, the rate of three pies per rupee applicable to cotton yarn applied for the first 69 days of the assessment year, after which the six‑pie rate applied for the remainder of the year. The officer therefore applied the three‑pie rate to the assessable turnover for the initial 69 days and the six‑pie rate to the turnover for the rest of the year, notwithstanding the respondent’s election under section 7 to be assessed on the basis of the previous‑year turnover.

The Judge (Appeals) of the Sales‑Tax Court at Meerut modified the officer’s order and directed that the tax be assessed on the respondent’s turnover at a uniform rate of three pies per rupee. This modification was subsequently reversed by the Judge (Revisions) of the Sales‑Tax Court of Uttar Pradesh, who reinstated the officer’s original order. At the behest of the respondent, the Judge (Revisions) then referred the matter to the High Court of Judicature at Allahabad, posing the question whether assessors who had elected to be assessed on the previous‑year turnover were liable to pay tax in the assessment year 1948‑49 according to the rates that were in force during that year. Relying on its earlier judgment in Modi Food Products Ltd. v. Commissioner of Sales Tax, Uttar Pradesh, the High Court answered that all sales of the assessee during the previous year, which corresponded with the calendar year 1947, must be taxed at the flat rate of three pies per rupee when the assessment for the year 1948‑49 was made.

The High Court had held that all sales of the assessee during the previous year, which corresponded with the calendar year 1947, must be taxed at the flat rate of three pies per rupee when the assessment for the assessment year 1948‑49 was made. The Commissioner of Sales Tax, Uttar Pradesh, obtained special leave and appealed to this Court against that High Court order. The Court observed that the Allahabad High Court’s judgment in the Modi Food Products Ltd. case had been affirmed by this Court in Commissioner of Sales Tax, U.P. v. Modi Sugar Mills Ltd. Subsequently, the Legislature of Uttar Pradesh enacted validating legislation by Act III of 1963. That Act, by way of section 7 of the Amending Act, inserted a new section 31 after section 30 of the Principal Act, deemed to have taken effect from 1 April 1948. Section 31(1) provides that where any dealer, in accordance with the provisions of section 7 as they existed before amendment by section 7 of U.P. Act XIX of 1956, elected to be assessed on the basis of his turnover of the previous year, he shall be assessed at whatever rates are prevailing during the year for which the assessment is made. Moreover, if the tax rates on any goods or class of goods are altered during that assessment year, the dealer shall be liable to pay tax at the altered rates, as if those altered rates had been in force during the previous year, proportionately for the same number of days that they are in force during the assessment year. Section 31(2) declares that notwithstanding any judgment, decree or order of any court, all assessments, orders, actions, proceedings, directions, jurisdictions exercised or taxes levied or collected by any officer or authority purporting to act under subsection (1) of section 7, as it stood before its amendment by section 7 of U.P. Act XIX of 1956, shall be deemed good and valid in law as if such measures had been made, taken, issued, exercised, levied or collected in accordance with the amended provisions of the Act as amended by the Uttar Pradesh Bikri Kar (Sanshodhan) Adhiniyam, 1962, and as if that amendment had been in force on all material dates. An explanation clarifies that, for the purpose of this section, the term “previous year” shall retain the meaning assigned to it in sub‑clause (ii) of clause (j) of section 2 of the Act as it stood before its amendment by section 2 of the U.P. Act XIX of 1956. Consequently, section 31 makes sales‑tax exigible from an assessee who has opted to pay tax on the turnover of the previous year, treating the altered rates as if they were applicable during that previous year.

In this case, the Court explained that the turnover for the previous year must be divided so that the newly applicable tax rate is applied proportionately for the same number of days that were in force in the assessment year. The amendment to the statute was made retroactive, and it applies to both pending and already closed assessments as if the validating Act had been in force on the relevant material dates. The Court referred to the decision in Modi Sugar Mills Ltd. (1) [1961] 2 S.C.R. 189, where it was held that when an assessee elected to file his return on the basis of the previous year’s turnover under s. 7 of Act 15 of 1948 as amended by Act 25 of 1948, the assessee was liable to be taxed at the rate that was in force on the first day of the assessment year, because the liability arose on that date and any later increase of the rate by a notification under s. 3‑A did not alter that liability. The Court observed that this earlier view has been superseded by later legislation that operates retrospectively. Accordingly, the tax liability on the previous year’s turnover, which is treated as a fictional turnover of the assessment year, must be calculated on the basis that the rates applicable in the assessment year are projected onto that fictional turnover. Representing the respondent company, Mr. Kapur argued that when the Judge (Revisions) Sales Tax posed a question, the Supreme Court was bound to answer it according to the law that was in force on the date the reference was made, and not according to any amendment that was enacted later. Counsel further contended that because the High Court exercises an advisory jurisdiction, this Court, in hearing the appeal against the High Court’s order, can also give advice only on the question that was referred and only based on the law applicable at the time of the reference. Counsel added that if the amended law were taken into account, the Court would, in substance, be answering a different question from the one originally referred by the Judge (Revisions) Sales Tax. The Court rejected this contention as having no merit. The question referred to the High Court concerned the liability of the respondent company for the assessment year 1948‑49. Two opposing views had been presented before the Judge (Revisions) Sales Tax. The Sales Tax Department argued that the rates applicable to the fictional turnover for the assessment year should be those that prevailed in 1948‑49 and that, for assessment purposes, those rates should be applied to the turnover in the same proportion as if the option to use the previous year’s turnover had not been exercised. The assessee, on the other hand, contended that having opted to use the previous year’s turnover, the rates applicable

The assessee contended that the rates applicable to the turnover should become fixed on the first day of the assessment year and that any alteration of those rates after the start of the year should not affect the assessment. In the decision of Modi Sugar (1) [1961] 2 S.C.R. 189, the Court had accepted the same contention presented by the assessee. However, after that decision the Legislature amended the sales‑tax statute. The amendment expressly declares that, notwithstanding any option exercised by the assessee, the tax must be calculated on the basis of the rates that were in force for the year 1948‑49, as if those rates were projected onto the turnover of the preceding year. This legislative declaration is incorporated in section 31 by means of Amending Act III of 1963, and the amendment is deemed to have been operative at all material times, thereby superseding the rule previously applied by the Court. Consequently, in answering the question that had been referred by the Judge (Revisions) Sales Tax, the Court was required to apply the law that the Legislature had expressly enacted and that was in force at the time when the liability arose. The Court therefore was not applying any provision that was unavailable on the date of the transaction that formed the subject‑matter of the reference. The observation made by Jagannadhadas J. in Messrs Chatturam Horilram Ltd. v. Commissioner of Income‑tax, Bihar and Orissa (2), which was cited by counsel for the respondent company, states that the High Court’s jurisdiction was limited to the specific question referred to it by the Income‑Tax Appellate Tribunal and that it was doubtful whether the Court could consider subsequent legislation and answer a different question. That remark does not, however, introduce a different rule. In the case of Messrs Chatturam Horilram Ltd., a prior income‑tax assessment of the assessee had failed because the Indian Finance Act of 1939 was not applicable in the Chota Nagpur area where the assessee conducted business during the relevant assessment year. Subsequently, Bihar Regulation IV of 1942 was promulgated by the Governor of Bihar with the assent of the Governor‑General, thereby giving retrospective effect to the Indian Finance Act of 1939 in Chota Nagpur from 30 March 1939. Following that, on 8 February 1944, the Income‑tax Officer issued a fresh notice under section 34 of the Indian Income‑tax Act, 1922, which resulted in the assessment of the appellant to income‑tax and raised the question of whether that notice had been properly issued.

In the matter before the Court, the central issue to be determined was whether the notice previously issued under section 34 of the Act had been properly made. The argument advanced by the respondent was that when the High Court had answered an earlier reference that rejected the Revenue’s claim to assess the assessee, Bihar Regulation IV of 1942 had already been enacted, and that, had the High Court applied that Regulation, the outcome would have been different. In addressing that argument, the Court observed that it was doubtful whether the High Court possessed jurisdiction to consider legislation that was enacted after the reference and to answer a question other than the one that had actually been posed. The doubt, therefore, related to the Court’s power to decide a question different from the one referred, and not to the power or duty of the High Court to apply, to the question referred, the law that had been enacted with retroactive effect. To support his contention, counsel relied upon the observation of Chief Justice Desai in M/s Rampur Distillery Chemical Works Ltd. v. The Commissioner of Income‑tax, U.P., which was quoted as follows: “The argument was that though the High Court has to answer the question referred to it with reference to the law in force in 1957 (when the Tribunal disposed of the appeal), what that law was has to be discovered today with reference to the law existing today. What was the law in 1957 on the basis of which the Tribunal disposed of the appeal has certainly to be decided by this court today but what has to be decided is the law existing in 1957 and not deemed to exist in 1957 by virtue of an amendment in the law made in 1962.” In that case, the High Court had held that the amendment made by the 1962 amending statute, which came into force after the reference was made by the Income‑tax Tribunal, did not have retrospective operation, and that the question referred by the Tribunal had to be answered by the High Court in light of the law applicable at the date of the transaction. The observation relied upon therefore had to be read in the context of the High Court’s finding concerning the character of the amending legislation. Consequently, that observation did not support the contention that, even where the relevant statute had been amended with retroactive operation so as to apply to the transaction forming the subject‑matter of the reference, the High Court or this Court was bound to ignore the amended law when recording its opinion on the question referred. If counsel’s contention were correct, the answer given by the High Court or by this Court would have no value in cases where, by retroactive amendment of the law, the old law had been superseded and replaced by a new statutory provision.

The Court explained that when an earlier statutory provision is replaced by a new statutory provision, the Tribunal that is called upon to resolve a tax dispute must apply the law that governs the specific transaction that gave rise to the dispute. In ordinary circumstances that governing law is the law that was in force on the date on which the transaction under consideration actually occurred. Consequently, if the law that the Tribunal intends to apply is subsequently amended in a manner that makes the amended law applicable to the same transaction, the Tribunal is bound to decide the matter according to the amended law. In the same way, when a question is referred by the Tribunal to the High Court and, in the interval, the legislative enactment is amended with retroactive effect, the High Court is under an obligation to apply the newly amended law, provided that the amended provision is relevant to the transaction in question. By acknowledging the substituted provision, the High Court is giving effect to the intention of the legislature and is doing no more than what is necessarily implied in the reference made by the Tribunal, on the condition that the reference is framed broadly enough to permit an enquiry based on the amended law and that such an enquiry does not require the investigation of fresh facts that were not examined before.

The Court further noted that if the reference is not framed so as to invite the High Court to consider the question in light of the amended statute, or if answering the question would require the examination of facts that have not been previously investigated, the High Court is entitled to refuse to answer the reference. The mere fact that, at the time the Tribunal rendered its decision, the relevant law was unknown or could not have been brought to its attention does not normally preclude the application of the appropriate law to the issue raised before the High Court. There is nothing inherently extraordinary about a reference made under the Income‑Tax Act or the Sales Tax Acts that would limit the High Court to applying a law that has since been superseded, nor would it compel the Court to decline the application of a law that, by explicit legislative direction, must govern the particular transaction that forms the subject of the reference. On the basis of this reasoning, the Court held that the appeal was to be allowed and that the question raised by the Judge (Revisions) Sales Tax should be answered in the affirmative. In light of the circumstances of the case, each party was ordered to bear its own costs in both this Court and the High Court. The appeal was thereby allowed.