State of Mysore vs Yaddalam Lakshminarasimhaiah Setty

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 165 of 1964

Decision Date: 10 November 1964

Coram: J.C. Shah, S.M. Sikri, Subba Rao

In this case, the Supreme Court of India considered an appeal brought by the State of Mysore against Yaddalam Lakshminarasimhaiah Setty and his sons, arising from a dispute over the liability to pay tax on inter‑state sales of powerloom textiles. The judgment was delivered on 10 November 1964 by a bench that included Justice J.C. Shah, Justice S.M. Sikri and Justice Subba Rao. The petitioner, the State of Mysore, invoked provisions of the Central Sales Tax Act of 1956, specifically sections 6, 8(2) and 9, together with section 5(3)(a) of the Mysore Sales Tax Act of 1957. The respondent was a dealer operating in Mysore who dealt in powerloom textiles and whose turnover from inter‑state trade had been assessed and taxed by the Commercial Tax Officer under section 9 of the Central Sales Tax Act, as it stood before the amendment of 1958. The assessment was affirmed by the Deputy Commissioner of Commercial Taxes and by the Sales Tax Appellate Tribunal. On revision, the Mysore High Court held that the sales in question were not “first sales” within the State and, consequently, were not chargeable under the Mysore Sales Tax Act; therefore, no tax was payable under the Central Act. The State appealed to the Supreme Court, arguing that liability arose under section 6 of the Central Act, which imposes tax on inter‑state transactions. The majority, per Justices Subba Rao and Sikri, observed that although section 6 is the charging provision, the obligation to pay tax remains subject to the other provisions of the Act. Section 8(2) was interpreted to require that tax be calculated at the same rates and in the same manner as if the transaction had taken place within the appropriate State, while section 9 mandates that tax be levied in the same way as the tax on the sale or purchase of goods under the State’s general sales tax law, including assessment, payment and collection. The term “levied” was taken to mean “imposed”. Because section 5(3)(a) of the Mysore Sales Tax Act, read with Schedule H, confines the levy of tax on powerloom goods to the first or earliest dealer in the State, and because the respondent was neither the first nor the earliest dealer, the Court concluded that no tax could be levied on the disputed turnover. This interpretation avoided the inconsistency that would arise if the State collected tax on powerloom textiles at only one point while the Centre, through State authorities, collected the same tax at multiple points on behalf of the State. Justice J.C. Shah, dissenting, disagreed with the High Court’s view that sales other than the first sales were exempt from liability under the Central Act when the sales were made in the course of inter‑state trade or commerce. He argued that section 6 of the Central Act charges inter‑state transactions to tax, and that the function of section 8(2) is merely to prescribe the rate and method of calculation, not to incorporate the entirety of the State’s procedural and substantive tax law. He further held that sections 9(1) and 9(2) incorporate only the assessment, collection and enforcement machinery of the State statute, and that neither section 8(2) nor section 9 diminishes the comprehensive charge imposed by section 6 nor confers any exemptions provided by State law.

In this appeal the Court examined the effect of the Central Sales Tax Act on sales that occurred in the course of inter‑state trade. The Court observed that Section 6 of the Central Act imposes a liability to tax every inter‑state transaction, irrespective of any other considerations. The purpose of Section 8(2) was explained as merely to prescribe the rate of tax and the method by which the tax is to be calculated; it was not intended to incorporate the entire procedural and substantive body of State tax law. Further, Sections 9(1) and 9(2) were held to incorporate into the Central Act the machinery for assessment, collection and enforcement that is prescribed by the relevant State statute. Consequently, neither Section 8(2) nor Section 9 diminish the comprehensive charge created by Section 6, and neither of them create any exemption from tax that might be found in State law. The Court therefore concluded that the liability to pay tax under the Central Act arose on the basis of the inter‑state character of the sales, irrespective of any State‑provided exemption or the point at which the State would have levied tax. These observations were recorded in the judgment with reference to the authorities cited at pages 138 C‑D and 136 B‑E of the report.

The judgment concerned Civil Appeal No. 165 of 1964, which was filed by special leave against the order dated 22 January 1962 of the Mysore High Court in Civil Revision Petition No. 964 of 1961. The appellant was represented by counsel for the Solicitor‑General and other advocates, while the respondent was represented by counsel for the State. The opinion of Subba Rao and Sikri JJ was delivered by Sikri J, and a dissenting opinion was delivered by Shah J. The matter before the Court was an appeal against the Mysore High Court’s decision to accept the revision petition of the respondent, who was referred to in the judgment as the assessee. The factual matrix disclosed that the assessee was engaged in the business of dealing in power‑loom and hand‑loom textiles, both within the territory of Mysore State and in inter‑state trade. For the financial year 1957‑58 the Commercial Tax Officer in Bangalore had assessed and taxed the turnover arising from power‑loom textiles under Section 9 of the Central Sales Tax Act (LXXIV of 1956), as it stood before amendment by the Central Sales Tax (Second Amendment) Act, 1958 (XXX of 1958). This assessment was upheld by the Deputy Commissioner of Commercial Taxes and later affirmed by the Mysore Sales Tax Appellate Tribunal. On revision, the High Court held that the assessee’s turnover from the sale of power‑loom textiles in inter‑state trade should be taxed at the same rate and in exactly the same manner as if the sales had been intra‑state transactions. The High Court arrived at this conclusion on the basis that a proper construction of Section 8(2) of the Central Act required that any exemption granted by a State sales‑tax statute, or the point at which the State would levy tax, should also apply to assessments made under the Central Act. The assessee’s contention, summarised by the Court, was that he was not the first or earliest dealer in the chain of successive dealers for the disputed turnover; consequently, had the sales been intra‑state, no tax would have been levied on him. The Department, on the other hand, argued that under Section 6 of the Central Act the liability to tax arose because the sales were inter‑state, and that the point of taxation was unrelated to the method of tax calculation.

In response, the Court observed that the factual contention was correct, but under the Central Act the assessee remained liable to tax pursuant to section 6, and the stage at which turnover is taxed does not affect how the tax is calculated. The Court then set out the relevant provisions of the Central Act. Section 6 dealt with liability to tax on inter‑State sales and provided that, subject to the other provisions of the Act, every dealer became liable to pay tax under the Act on all sales he effected in the course of inter‑State trade or commerce from the date specified by a notification of the Central Government published in the Official Gazette, the notification being effective not earlier than thirty days after its issuance. Section 8 prescribed the rate of tax on sales in the course of inter‑State trade or commerce. Sub‑section (1) required that every dealer who, in inter‑State trade or commerce, sold to a registered dealer goods described in sub‑section (3) should pay a tax of one per cent of his turnover, subject to a proviso. The proviso stated that if, under the sales‑tax law of the appropriate State, the sale or purchase of any goods by a dealer was generally exempt from tax, or exempt only in specified cases or circumstances, or was taxed at a rate lower than the one per cent prescribed in sub‑section (1), then the tax payable under the Central Act on the turnover relating to such goods in inter‑State trade would be either nil or would be calculated at the lower rate, as applicable. Sub‑section (2) provided that where the transaction did not fall within sub‑section (1), the tax payable by any dealer on the sale of any goods in inter‑State trade or commerce would be calculated at the same rates and in the same manner as if the sale had taken place within the appropriate State. For the purpose of such calculation, the dealer would be deemed to be a dealer liable to pay tax under the sales‑tax law of the appropriate State, even though he might not actually be liable under that law. Section 9 dealt with levy and collection of tax. Sub‑section (1) directed that the tax payable by any dealer under the Act would be levied and collected in the appropriate State by the Government of India in the manner prescribed in sub‑section (2). Sub‑section (2) authorized the officials who were empowered to assess, collect and enforce payment of any tax under the general sales‑tax law of the appropriate State to, on behalf of the Government of India and subject to any rules made under the Act, assess, collect and enforce payment of any tax due under the Central Act in the same way as tax on sales or purchases under the State’s general sales‑tax law.

The Court explained that the assessment, payment and collection of the purchase of goods under the general sales tax law of the State may be carried out by the State authorities in exactly the same way as they would under that law. For this purpose the authorities may use any or all of the powers that the general sales tax law grants them, and every provision of that law—including those dealing with returns, appeals, reviews, revisions, references, penalties and the compounding of offences—will apply to the transaction. The Court then turned to the question of the revenue generated by the Central Act. It held that the proceeds of any tax levied and collected under this Act in a State, after deducting the cost of collection, shall be assigned to that State and retained by it for the financial year in which the tax is collected, except for the portion of the proceeds that represents revenue attributable to Union territories. Those Union‑territory proceeds, the Court observed, will be placed in the Consolidated Fund of India. Section 6 of the Central Act was identified as the charging provision. Subject to the remaining provisions of the Act, every dealer is liable to pay tax under the Act on every sale he makes. However, the Court noted that this liability is not absolute; it is subject to the operation of other provisions, and if any other provision removes the liability, the removal must be giving effect. Section 8 prescribes the rates of tax. The Court affirmed that clause 8(1) does not apply to the facts before it, but the proviso to that clause is significant because it permits a nil rate in certain circumstances. Consequently, even though Section 6 imposes liability, a dealer who falls within the proviso to 8(1) may escape tax liability. This shows that the Act does not require every inter‑State transaction to attract tax. Section 8(2) governs the method of calculation, mandating that tax be calculated at the same rates and in the same manner as if the sale had actually occurred inside the appropriate State. The phrase “in the manner” could be interpreted either as referring solely to rate calculation or as also covering the manner of levy. The Court resolved this ambiguity by referring to Section 9(1), which states that tax payable by any dealer under the Central Act shall be levied and collected in the appropriate State by the Government of India in the manner specified in subsection (2). Subsection 2 of Section 9 empowers the State authorities to assess, collect and enforce payment of any tax under the Central Act in the same way that tax on the sale or purchase of goods is assessed, paid and collected under the State’s general sales tax law. The Court clarified that the word “levy” means “impose.”

In this case, the Court examined section 5(3)(a) of the Mysore Sales Tax Act, 1957, which it referred to as the State Act. That provision required that tax be levied when any of the goods listed in column 2 of the Second Schedule were sold by the first or earliest dealer in the State who was liable to tax under the same section. The tax rate to be applied was the one specified in the corresponding entry of column 3 of the Schedule, and the tax was to be calculated on the dealer’s turnover of sales of those goods for each year. The Court then considered section 9(1) of the Central Act, which stated that tax under the Central Act should be levied in the same manner as tax on the sale or purchase of goods under the general sales‑tax law of the State is assessed, paid and collected. The Court held that the term “levied” in section 9(1) logically referred to the term “levied” used in section 5(3)(a) of the State Act. The Court found no reason for the Central Act to depart from the method of levy applicable to the specified goods, because those goods were taxed only at a single point under the State Act. If a radical departure had been intended, the Central Act would have expressly provided for it. The Court further noted that the Central Act was enacted to levy and collect sales tax on inter‑State sales so as to avoid confusion and jurisdictional conflict, and that the tax collected was for the benefit of the States. Accordingly, the Court accepted a construction that avoided the anomaly of the State collecting tax on power‑loom textiles at a single point while the Centre, through State authorities, collected the same tax at multiple points on behalf of the State. The Court observed that several High Courts had expressed divergent views on the proper construction of section 8(2), but none of those decisions relied on section 9 of the Central Act; therefore, it was unnecessary to refer to the cases cited before it. For the reasons stated, the Court concluded that, although for different reasons, the order of the High Court was correct. Consequently, the appeal was dismissed with costs. The Court also restated the High Court of Mysore’s finding that sales which were not “first sales” within Mysore were not taxable under the Mysore Sales Tax Act and therefore attracted no tax liability under the Central Sales Tax Act, 1956. For context, the Court briefly summarized the relevant provisions of the Central Sales Tax Act as then in force: section 6 imposed on every dealer, subject to other provisions, a liability to pay tax on all sales made by him in the course of inter‑State trade or commerce during any year; section 7 dealt with the registration of dealers; and section 8 concerned the rates of tax on inter‑State sales, with sub‑section (2) providing the applicable rates at that time.

The Court explained that the provision stated that the tax payable by any dealer in a case not covered by sub‑section (1) for a sale of goods made in the course of inter‑State trade or commerce must be calculated at the same rates and in the same manner as if the sale had actually occurred inside the appropriate State. For the purpose of such calculation, the dealer was to be deemed a dealer liable to pay tax under the sales tax law of the appropriate State, even though, in reality, he might not be liable under that State law. The Court then turned to Section 9, which dealt with the levy and collection of tax. Section 9(1) declared that the tax payable by any dealer under the Act would be levied and collected in the appropriate State by the Government of India in the manner prescribed in subsection (2). Subsection (2) provided that the authorities empowered to assess, collect and enforce payment of any tax under the general sales tax law of the appropriate State, acting on behalf of the Government of India and subject to any rules made under this Act, would assess, collect and enforce payment of the tax payable by a dealer under this Act in the same manner as tax on the sale or purchase of goods under the State’s general sales tax law is assessed, paid and collected. For that purpose, those authorities could exercise all or any of the powers they possessed under the State’s general sales tax law, and the provisions of that law—including those relating to returns, appeals, reviews, revisions, references, penalties and compounding of offences—would apply accordingly. The Court noted that the turnover of the respondents that was sought to be taxed arose from transactions involving the sale of handloom and powerloom cloth made by them in the course of inter‑State trade or commerce. Under the Mysore Sales Tax Act, 1957, such sales were liable to tax under Section 5(3)(a) read with Entry 7 in Schedule II of the Act, and tax was to be imposed at a single point on the sale by the first or the earliest of successive dealers in the State. It was accepted as common ground that the respondents were not the first or the earliest dealers in the State with respect to the transactions in question. The Court observed that Section 6 imposed a tax on sales in the course of inter‑State trade or commerce of every dealer, but the Act did not prescribe the rates at which the tax was to be levied, nor did it establish a mechanism for assessment, collection and enforcement of the tax liability on inter‑State sales of dealers. By virtue of Section 8(2), the tax payable by a dealer on sales that did not fall within sub‑section (1)—and the turnover in the present case did not relate to sales falling within sub‑section (1)—had to be calculated at the same rates and in the same manner as would have been calculated, if the sale had taken

In this case the Court explained that the provision concerning the placement of a transaction “inside the appropriate State” dealt only with the method of computing the tax, that is, the rate to be applied and the manner of calculation prescribed by State law. The provision did not confer any exemption from tax that might be provided under the State law. The Court observed that the phrase “in the same manner” appearing in Section 8(2) was not intended to merge the procedural and substantive rules of the State law relating to the imposition, levy and collection of tax with the mechanisms of the Central Sales Tax Act. The legislature had not expressed such an intention, nor could it be implied from the overall scheme of the Act.

The Court noted that Section 9(1) gave the appropriate State Government the authority to levy and collect tax according to the method laid down in sub‑section (2). By sub‑section (2) of Section 9, the legislature expressly required that the tax be assessed, collected and enforced under the general sales tax law of the relevant State, but on behalf of the Government of India. The Court described this legislative scheme as clear. Section 6 imposed a tax liability on inter‑State transactions. Section 8(2) merely prescribed the rate and the manner of calculating that tax; it was not meant to incorporate the entire procedural and substantive framework of the State’s sales tax law. Sub‑section (2) of Section 9, on the other hand, established the machinery for assessment, collection and enforcement of the tax liability.

The Court emphasized that neither Section 8(2) nor Section 9(2) reduced the comprehensive charge imposed by Section 6. While Section 9(1) directed that the tax payable by an inter‑State dealer be levied and collected in the manner prescribed by that sub‑section, that provision did not itself create a charge on turnover, because the turnover was already subject to tax under Section 6. The Court further explained that the relationship between the two sub‑sections of Section 9 demonstrated that the assessment, collection and enforcement mechanisms provided by the State’s sales tax statute were incorporated into the Central Sales Tax Act, but only to the extent expressly provided.

Consequently, the Court stated that it could not hold that sub‑sections (1) and (2) of Section 9 gave the authority assessing the tax the power to admit exemptions that were created by the State law for inter‑State sales taxable under the Central Sales Tax Act. The Court referred to several decisions of the Madras, Kerala and Andhra Pradesh High Courts, particularly S. Mariappa Nadar and others v. State of Madras, where the Madras High Court held that the tax levied under Section 8(2) applied to the turnover measured under the Central Sales Tax Act and not under the Madras General Sales Tax Act. In that view, the Court affirmed that the provision did not transform an inter‑State transaction into an intra‑State one, nor did it permit the assessee to remove inter‑State sales from the turnover for tax purposes.

The Court observed that Section 8(2) of the Central Sales Tax Act did not transform an inter‑State transaction into an intra‑State one. The statute did not contain any provision deeming the transaction to be situated within the State. Accordingly, the local sales tax law applied to the transaction only to the extent that it was expressly made applicable. By virtue of the language of Section 8, the assessee could not omit inter‑State sales from the computation of turnover. Moreover, the Court held that the expression “in the same manner” appearing in Section 9(3)—which had replaced the original sub‑section 2 of Section 9 by the Central Sales Tax (Second Amendment) Act, 1958—did not bring every incident of the local sales tax law into the assessment under the Central Sales Tax Act. That phrase merely indicated that the procedure for making an assessment, for collecting tax, and the provisions relating to the determination of turnover would be the same as those laid down in the local Sales Tax Act. In the earlier decision of M. Abbas and Company v. The State of Madras (1) the Madras High Court had ruled that, for the purpose of attracting liability under Section 8(2), the fact that the dealer might not be liable under the local sales tax law because the goods were subject only to a single point levy under that law was of no consequence.

The principle articulated in Mariappa’s case was subsequently applied by the Kerala High Court in Parvathi Mills (Private) Ltd v. The State of Kerala (8). In that case, excise duty paid to the Central Government by a dealer and collected from his customers could not be excluded from turnover by invoking rule 7(1) of the General Sales Tax Rules, 1950, which were framed under the local Sales Tax Act. The Court observed that the phrase “in the same manner” in Section 9(2) of the Central Sales Tax Act did not attract the application of the rule that would have permitted the exemption. Similarly, the Andhra Pradesh High Court, in Sri Surya Trading Firm and others v. The State of Andhra Pradesh (4), held that a dealer dealing in handloom cloth whose inter‑State sales fell within Section 8(2) of the Central Sales Tax Act, 1956, could not claim the benefit of the exemption granted to handloom cloth by a notification dated 13 December 1957, issued under Section 9(1) of the Andhra Pradesh General Sales Tax Act, 1957. The Court explained that the fiction created by Section 8(2) of the Central Sales Tax Act, 1956, served only the limited purpose of calculating the rate of tax, and the position of a dealer under Section 8(2) could not be equated with that of a dealer governed by the Andhra Pradesh General Sales Tax Act, 1957, for every purpose. The State of...

The Mysore High Court, hearing the case of State of Mysore and another versus Mysore Paper Mills Ltd, affirmed the legal principle established in Mariappa’s case and Parvathi Mills case. The Court observed that the phrase “in the same manner” inserted in Section 9(3), which had replaced the earlier Section 9(2) by the Central Sales Tax (Second Amendment) Act, 1958, did not require the application of every provision of the local sales‑tax law to the assessment under the Central Sales Tax Act. Instead, the expression was understood to mean that the procedure for making an assessment and for collecting tax was to be the same as that prescribed in the local Sales Tax Act. The Court cited the following authorities in support of this view: (1) (1962) 13 S.T.C. 433; (2) (1962) 13 S.T.C. 371; (3) (1962) 13 S.T.C. 927; (4) (1964) 15 S.T.C. 176; and (5) (1964) 15 S.T.C. 176. The judgment also included the reference Sup./65‑10. In the Court’s opinion, these decisions correctly interpreted the language of Section 8(2) and Section 9(2) of the Central Sales Tax Act as they existed prior to the 1958 amendment. Although the cited cases did not expressly address the interpretation of Section 9(1) of the Central Sales Tax Act, the Court held that, for the reasons already explained, the mechanisms introduced by Sub‑sections (1) and (2) of Section 9, drawn from the State statute, were confined to matters of assessment, collection, and enforcement of tax liability. The Court further concluded that the High Court had erred in treating sales other than the first sale as exempt from tax liability under the Central Sales Tax Act when those sales were part of inter‑State trade or commerce. Accordingly, the Court ordered that, in accordance with the majority opinion, the appeal be dismissed and costs awarded to the prevailing party.