R. Abdul Quader And Co vs Sales Tax Officer, Hyderabad

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

Court: supreme-court

Case Number: Civil Appeal No. 760 of 1962

Decision Date: 21 February 1964

Coram: K.N. Wanchoo, P.B. Gajendragadkar, K.C. Das Gupta, J.C. Shah, N. Rajagopala Ayyangar

In the case titled R. Abdul Quader And Co versus Sales Tax Officer, Hyderabad, decided on 21 February 1964, the Supreme Court of India issued its judgment under the authorship of K N Wanchoo, with the bench comprising K N Wanchoo, P B Gajendragadkar, K C Das Gupta, J C Shah, and N Rajagopala Ayyangar. The petitioner was R Abdul Quader And Co and the respondent was the Sales Tax Officer of Hyderabad. The judgment was reported in 1964 AIR 922 and 1964 SCR (6) 867, and it has been cited in several subsequent decisions, including R 1968 SC 445, R 1971 SC 946, F 1973 SC 1333, RF 1975 SC 198, F 1975 SC 1991, RF 1977 SC 2279, D 1985 SC 218, RF 1986 SC 178, O 1987 SC 27, and it concerned the Sales Tax‑Tax Collected otherwise than In accordance with the Act provision enabling the Government to recover such tax collected, a matter not within the competence of the State Legislature under the Constitution of India, Schedule VII, Entry 26 and Entry 54 of List II, as applied to the Hyderabad General Sales Tax Act, 1950 (XIV of 1950), section 11.

The factual background recorded that the appellant collected sales tax from purchasers of betel leaves in connection with its sales but failed to remit the amount to the Government. The Government subsequently directed the appellant to pay the collected amount, prompting the appellant to file a writ petition in the High Court. The petition challenged the validity of section 11(2) of the Hyderabad General Sales Tax Act, 1950, contending that the provision authorised the Government to recover tax that had been collected without legal authority, an action that the appellant argued exceeded the competence of the State Legislature because the amount, although collected as tax, was not a tax levied under law and therefore could not be recovered under Entry 54 of List II, which pertains to tax on the sale or purchase of goods.

The High Court held that section 11(2) was valid as an ancillary provision relating to the collection of sales or purchase tax and was therefore incidental to the power conferred by Entry 54, List II. The Court further observed that, even if the provision could not be justified under that entry, it could be sustained under Entry 26, List II, and consequently dismissed the writ petition. The present appeal arose by way of special leave granted by the Supreme Court.

The Supreme Court’s holding stated that (i) it could not be said that the State Legislature was directly legislating for the imposition of sales or purchase tax under Entry 54, List II when it enacted the provisions of section 11(2), because on their face the amount, though collected by way of tax, was not exigible as tax under the law; and (ii) it recognised that the argument concerning the scope of legislation under the various heads in the Seventh Schedule, while allowing a wide interpretation to include matters incidental to the main topic, does not permit the legislature to deem an amount collected erroneously as tax to be payable to the Government as if it were a valid tax, thereby concluding that section 11(2) could not be justified under Entry 54, List II as an incidental or ancillary provision.

In this case, the Court explained that the headings of the various lists in the Seventh Schedule must be interpreted broadly enough to include all matters that are incidental to the subject mentioned in the heading. However, the Court also emphasized that such incidental or ancillary powers have a limit. They must be exercised only to assist the main purpose of the legislation, which in the present matter was the levy of a tax on the sale or purchase of goods. The Court held that the scope of ancillary powers does not extend to allowing the legislature to provide that, although an amount was collected in the form of a tax, the amount could be deemed not payable as a tax under the law, yet still be required to be remitted to the Government as if it were a tax. Consequently, the provision contained in section 11(2) of the Hyderabad General Sales Tax Act could not be said to fall within Entry 54, List II, and it could not be justified as an ancillary provision permitted under that entry. The Court further observed that section 11(2) could not be justified as a measure for addressing any breach of the Act. The Court also rejected the argument that Entry 26, List II, which deals with trade and commerce, could support the provision, stating that Entry 26 has no connection with the taxation or recovery of amounts that were wrongly collected as tax. Because section 11(2) does not regulate trade or commerce, it could not be justified under Entry 26. In addition, the Court found that section 20(c) was invalid because it was merely a consequence of section 11(2). The Court distinguished the decision in Orient Papers Mills Ltd. v. State of Orissa, [1962] 1 S.C.R. 549, referred to State of Bombay v. United Motors (India) Ltd., [1953] S.C.R. 1069, and noted that Indian Aluminium Co. v. State of Madras, (1962) XIII Sales Tax Cases 967, had been wrongly decided. The judgment was delivered in the Civil Appellate Jurisdiction under Civil Appeal No. 760 of 1962, which arose by special leave from the Andhra Pradesh High Court’s order dated 16 July 1959 in Writ Petition No. 1123 of 1956. The appellant’s counsel appeared for the appellant, while counsel for the respondent appeared for the State. The judgment dated 21 February 1964 was authored by Justice Wanchoo. The appeal concerned the validity of section 11(2) of the Hyderabad General Sales Tax Act, No. XIV of 1950. The material facts were that the appellant, acting as an agent in the former State of Hyderabad, facilitated sales of betel leaves for both resident and non‑resident principals. Under a notification effective 1 May 1953, betel leaves became taxable at the point of purchase. The assessment period in question spanned from 1 May 1953 to 31 March 1954, corresponding to the 1953‑54 assessment year. During this period, the appellant collected sales tax from purchasers, believing that the tax liability lay with the sellers, and assured buyers that once the tax was paid to the appellant, no further liability would remain. However, after collecting the tax, the appellant retained the amounts in a suspense account for its principals instead of remitting them to the Government. When the Sales Tax Department examined the accounts, it discovered this practice and ordered the appellant to pay the amounts to the Government. The appellant objected, arguing that the applicable notification imposed tax at the purchase point, i.e., on the purchaser. This objection was rejected, and the appellant was directed to remit the collected tax to the Government. The principal contention before the High Court was that section 11(2) of the Act authorized the Government to recover from any person who had collected or was collecting such tax, thereby rendering the provision unconstitutional. The Court’s analysis ultimately led to the conclusion that the provision could not be sustained under the constitutional entries concerned.

In this case the appellant collected sales tax from purchasers on the basis that the liability for the tax rested on the sellers, and the appellant assured the buyers that once they paid the tax to the appellant no further tax liability would attach to them. After the tax was collected, the appellant did not remit the amount to the Government; instead it retained the sums in a suspense account belonging to its principals, that is, the purchasers. During a scrutiny of the accounts by the Sales Tax Department the retention was discovered, and the department subsequently demanded that the appellant pay the amounts it had collected to the Government. The appellant objected to this demand, contending that it was acting as a seller and that the notification applicable to the period imposed the tax at the point of purchase, i.e., on the purchaser. The objection was rejected and the appellant was ordered to remit the collected sums to the Government. The principal argument advanced on behalf of the appellant before the High Court concerned section 11(2) of the Act. That provision authorises the Government to recover from any person who has collected or who collects, after 1 May 1950, any amount as tax in a manner not prescribed by the Act, treating such recovery as arrears of land revenue. The appellant asserted that this power exceeded the legislative competence of the State legislature. The appellant argued that the Act was enacted under Entry 54 of List I of the Seventh Schedule to the Constitution, which permits a State to tax transactions involving the sale or purchase of goods and to make any incidental provisions necessary for the levy and collection of such tax. The appellant maintained that although Entry 54 empowers the State to impose a tax on sales or purchases, it does not empower the State to compel a dealer who has collected tax without legal authority to surrender the amount to the Government, because such a collection does not constitute a tax imposed by law and therefore cannot be recovered under a law enacted under Entry 54. The High Court held that section 11(2) was a valid ancillary provision related to the collection of sales or purchase tax and therefore fell within the incidental powers attached to the taxing authority conferred by Entry 54 of List I. The Court further observed that, even assuming that Entry 54 could not support section 11(2), the provision could be sustained under Entry 26 of List II, which deals with taxes on lands and buildings. Accordingly, the High Court dismissed the writ petition. The High Court declined to issue a certificate of fitness for appeal, but the appellant obtained special leave to appeal, bringing the matter before this Court. The Court noted that it is necessary to read section 11 of the Act in order to

In this case the Court noted the argument presented on behalf of the appellant and examined the language of Section 11 of the Act. Section 11 reads as follows: “(1) No person who is not registered as a dealer shall collect any amount by way of tax under this Act nor shall a registered dealer make any such collection before the first day of May 1950, except in accordance with such conditions and restrictions, if any, as may be prescribed, provided that Government may exempt persons who are not registered dealers from the provisions of this sub‑section until such date, not being later than the first day of June 1950, as Government may direct.” Sub‑section (2) states: “Notwithstanding to the contrary contained in any order of an officer or tribunal or judgment, decree or order of a Court, every person who has collected or collects on or before 1 May 1950 any amount by way of tax otherwise than in accordance with the provisions of this Act shall pay over to the Government within such time and in such manner as may be prescribed the amount so collected by him, and in default of such payment the said amount shall be recovered from him as if it were arrears of land revenue.” The Court observed that sub‑section (1) forbids an unregistered dealer from collecting any tax‑like amount under the Act. Because the appellant is undeniably a registered dealer, this prohibition does not affect him. Moreover, sub‑section (1) also bars a registered dealer from collecting before 1 May 1950 except under prescribed conditions, a situation that does not arise here since the alleged collection was not made before that date. Consequently the Court concluded that the restriction in sub‑section (1) was inapplicable to the appellant.

The Court then turned to sub‑section (2), which applies to collections made after 1 May 1950 by any person, whether a registered dealer or not, and requires that any amount collected by way of tax “otherwise than in accordance with the provisions of the Act” be paid over to the Government, with failure to do so resulting in recovery as if the amount were arrears of land revenue. The phrase “otherwise than in accordance with the provisions of this Act” indicates that, although the amount may have been collected under the label of tax, it was not legally enforceable as tax under the Act. Accordingly, sub‑section (2) mandates that such improperly collected amounts be surrendered to the Government and, if not surrendered, be recovered as arrears of land revenue. The Court affirmed that the wording of sub‑section (2) expressly provides for the recovery of an amount taken as tax even when that amount is not due as tax, treating it instead as a revenue arrear.

The initial issue that the Court examined was whether the State legislature, exercising the authority granted by Entry 54 of List II, could enact a rule obliging that money collected in the name of tax, even when such money was not actually due as tax under the statute, must be turned over to the Government. The Court first observed that the amounts in question, although called tax collections, were not in fact tax‑exigible under the Act. Consequently, it could not be said that the legislature was directly imposing a sales or purchase tax within the scope of Entry 54 when it inserted the provision, because on its face the provision dealt with an amount that, while collected as tax, was not legally defined as tax liability.

The provision was then defended on the proposition that, although a State legislature might not be permitted to create a rule for recovering an amount that is not a tax under Entry 54, it could still be authorized to require that all sums gathered by way of tax be paid to the Government, even if those sums were not truly tax‑exigible, on the basis of its incidental and ancillary powers to make provisions for the levy and collection of the tax. The Court noted that there is no dispute that the legislative heads in the various Lists of the Seventh Schedule are to be given a broad interpretation so as to encompass matters that are incidental to the subjects enumerated therein. Nevertheless, the Court emphasized that such incidental or ancillary powers are not without limits. They must be exercised in assistance of the principal purpose of the legislation, which in the present case is the imposition of a tax on the sale or purchase of goods.

The Court explained that all powers necessary for the proper assessment, collection, and prevention of evasion of the tax fall within the ambit of the entry as ancillary or incidental powers. However, when legislation under the relevant entry proceeds on the premise that the amount at issue is not a tax liability under the law made under that entry, yet still mandates that the amount be paid to the Government simply because some dealers, either mistakenly or otherwise, collected it as tax, the Court found it difficult to regard such a provision as ancillary or incidental to the legitimate collection of tax. Accordingly, the Court held that the scope of ancillary or incidental power does not extend to allowing the legislature to stipulate that, although the amount collected may have been erroneously taken as tax and is not a tax liability under the law, it must nevertheless be paid over to the Government.

In this case the Court observed that the legislature, acting under Entry 54 of List II, could not enact a rule stating that an amount which the law does not define as a tax on the sale or purchase of goods should nevertheless be paid to the Government as if it were a tax. The Court noted that this is precisely the effect of section 11 (2) of the statute, and it held that such a provision could not be characterised as falling within the incidental or ancillary powers that the legislature possesses under the relevant taxing entry to ensure that a legitimate tax is levied, collected and that evasion is prevented. Accordingly, the Court was of the view that the provision contained in section 11 (2) could not be made under Entry 54 of List II and could not be justified even as an incidental or ancillary measure permitted by that entry. An argument was advanced that the provision might be justified as a penalty. However, after reading section 11 (2), the Court could find no language that would support the view that it operates as a penalty for any breach of the Act. The Court pointed out that penalties imposed under taxing statutes are generally related to attempts at evasion of taxes or to defaults in payment of taxes properly levied, referring to sections 28 and 46 of the Indian Income Tax Act, 1922. The Court also noted that the present Act provides for penalties in sections 19 and 20, the latter making certain acts or omissions of an assessee punishable by a magistrate, subject to composition under section 21. The Court reiterated that section 11 (2) has nothing to do with penalties and cannot be justified as a penalty on the dealer. In fact, section 20 makes provision in clause (b) for a penalty in case of breach of section 11 (1), rendering the person committing such a breach liable, on conviction by a first‑class magistrate, to a fine. The Court therefore concluded that section 11 (2) could not be justified under Entry 54 of List II either as a provision for levying a tax or as an incidental or ancillary provision relating to tax collection. In this connection the Court referred to clause (c) of section 20, which provides that any person who fails to pay the amounts specified in sub‑section (2) of section 11 within the prescribed time shall, on conviction by a magistrate, be liable to a fine. The Court found it remarkable that this provision punishes a person for failing to pay an amount that the law does not authorise as a tax, and it does not constitute a penalty for the collection of an amount wrongly taken as tax from purchasers for the purpose of advancing the objects of the taxing legislation. If a dealer has collected anything from a purchaser which is

In the present matter the Court observed that when a dealer collects money from a purchaser without authority under the taxing law, the dispute is confined to the parties involved, and the purchaser may have a claim to recover the amount from the dealer. However, the Court emphasized that unless the collected sum is actually due as a tax, the State does not possess the legal power to make that amount recoverable simply because the dealer collected it wrongly. The Court explained that such a power cannot be exercised directly, because the amount in question does not qualify as a tax within the meaning of Entry 54 of List II, and the State legislature cannot achieve indirectly, by invoking incidental or ancillary authority, what it is prohibited from doing directly. Consequently, the Court held that section 11(2) of the Act does not fall within the competence of the State legislature under Entry 54 of List II. The respondent relied upon the decision of this Court in The Orient Paper Mills Limited v. The State of Orissa, but the Court found that precedent inapplicable to the present facts.

The Court detailed the factual background of the Orient Paper Mills case, noting that the dealer there had been assessed for tax, had paid the tax, and later, following the judgment in State of Bombay v. The United Motors (India) Limited, the amounts paid for goods dispatched outside the State were held not to be taxable. The dealer consequently applied for a refund of the tax, which the Court subsequently held to be non‑exigible. After the refund claim was denied, the dealer filed a writ petition in the High Court seeking a refund under section 14 of the Orissa Sales Tax Act. The High Court allowed the petition in part, leading to appeals by both the dealer and the State to this Court. While the appeal was pending, the Orissa legislature amended the statute by inserting section 14A, restricting refunds to persons who had actually realised the amount as tax. This amendment was challenged before this Court but was upheld on the ground that it fell within the incidental power derived from Entry 54 of List II. The Court clarified that the Orient Paper Mills case dealt with a refund issue, which naturally lies within the scope of incidental and ancillary powers relating to tax levy and collection. In contrast, the present case does not involve a refund; rather, section 11(2) mandates that an amount collected as tax, even though it is not truly payable as tax under the law made under Entry 54 of List II, must be remitted to the Government. The Court concluded that this situation is fundamentally different from the refund scenario in the Orient Paper Mills case. Finally, the Court noted that the respondent also cited a decision of the Madras High Court in Indian Aluminium Co. v. The State of Madras, but the Court found that citation irrelevant in light of the foregoing analysis.

The earlier decision of the Madras High Court, cited as The State of Madras (2), concerned section 8‑B of the Madras General Sales Tax Act of 1939, as amended by Madras Act 1 of 1957. Although the wording of section 8‑B(2) was not identical to the wording of section 11(2) that is presently under consideration, the substantive effect of the two provisions was essentially the same. Consequently, in light of the observations made earlier in this judgment, the Court concluded that the earlier Madras decision must be regarded as erroneous. The respondent further argued that section 11(2) fell within the legislative competence of the State legislature because of Entry 26 of List II, which deals with trade and commerce within the State subject to the provisions of Entry 33 of List III. It is well settled that taxing entries in Lists I and II of the Seventh Schedule are distinct and separate from other entries. Entry 26 of List II concerns trade and commerce and does not relate to the power to tax or to recover amounts incorrectly taken as tax. The respondent contended that section 11(2) merely regulated trade and commerce, and therefore the State legislature was competent to enact it under Entry 26. The Court could not discern any connection between the provision and the regulation of trade and commerce, and regarded it as only an ancillary measure to a taxing statute. Because the provision could not be justified as a regulation of trade and commerce, the Court held that it could not be upheld on that basis. The Court therefore concluded that the State legislature was incompetent to enact section 11(2). The Court also noted that section 20(c), being a consequence of section 11(2), must fall with it and be similarly invalid. Accordingly, it was not permissible for the Sales Tax Officer to require the appellant to surrender amounts that had been collected from purchasers as sales tax erroneously. The final assessment order of the Sales Tax Officer did not dispute that the appellant was not liable to pay sales tax for the relevant period. Consequently, the Court allowed the appeal, set aside the assessment order dated September 27, 1956 insofar as it was based on section II(2), and ordered that the appellant receive costs in both this Court and the High Court. The appeal was therefore allowed.