State of Orissa vs M.A. Tulloch and Co

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 507-508 of 1963

Decision Date: 21 April 1964

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

In this case the Supreme Court recorded that the State of Orissa filed a petition against M.A. Tulloch and Co., the judgment being delivered on 21 April 1964. The bench comprised S.M. Sikri, J.C. Shah and K. Subbarao. The dispute involved the Orissa Sales Tax Act, 1947, specifically section 5(2)(a)(ii) and rule 27(2) of the 1947 Sales Tax Rules, as amended by the Orissa Sales Tax (Amendment) Act, 1957. The respondent‑dealer had obtained assessment orders from the Sales Tax Officer that permitted deductions of two amounts claimed under the cited provision for goods sold to a registered dealer. Dissatisfied, the dealer appealed those assessments before the Assistant Collector of Sales Tax, relying on grounds that the Court considered irrelevant, and also filed revisions of the assessments. While the revisions were pending, the legislature amended the Act, converting pending revisions into appeals before the Sales Tax Tribunal and enabling the Government to file cross‑objections. Consequently the State filed cross‑objections, contending that the dealer had failed to produce a declaration required by rule 27(2) of the Sales Tax Rules. The Tribunal accepted the State’s objection and ordered fresh assessments. On a statement of the case the High Court held that the assessing officer had not erred in allowing the deductions, and the State obtained special leave to appeal. The Supreme Court held that section 5(2)(a)(ii) itself does not deprive a selling dealer of the right to claim a deduction; only when the contingency in the proviso occurs does the price of the goods become part of the buyer’s taxable turnover. The Court further observed that production of a declaration under rule 27(2) is not an absolute requirement for the selling dealer to claim the exemption; the dealer may rely on other evidence to demonstrate that the transaction falls within the scope of the provision. The rule must be read as directory and must be substantially complied with, but the Sales‑Tax Officer may be satisfied that the buyer’s registration certificate contains the requisite statement, and if doubts remain the dealer must remove those doubts. However, if the officer is satisfied by other facts on record, the dealer need not produce the specific declaration prescribed by rule 27(2) before the deduction is allowed.

In the case cited as Co. (1961) 12 S.T.C. 25, the Court recorded the facts of the present appeals. The civil appeals, numbered 507 and 508 of 1963, were brought by special leave from a judgment and order dated 4 November 1950 issued by the Orissa High Court in Special Jurisdiction Cases numbered 38 and 39 of 1958. Counsel for the appellant, identified as R. Ganapathy Iyer and R. N. Sachthey, represented the State of Orissa in both appeals, while counsel identified as B. Sen and S. N. Mukherjee appeared for the respondents, the dealers, in both matters. The judgment was delivered on 21 April 1964 by Justice Sikri.

The respondent, referred to in the judgment as the dealer, had filed a sales‑tax return for the quarter ending 30 June 1951 under the Orissa Sales Tax Act, Orissa Act XIV of 1947. In that return the dealer claimed a deduction of rupees two‑lakh‑forty‑thousand under section 5(2)(a)(ii) for goods sold to a registered dealer identified as M/s Lal and Co. Ltd., bearing the registration number BA 1335. For the subsequent quarter ending 30 September 1951 the dealer claimed a further deduction of rupees fifteen‑thousand‑six‑hundred‑seventy‑seven and one‑third. Two assessment orders issued under section 12(2) of the Act by the Sales Tax Officer of the Cuttack III circle, Jaipur, Orissa, permitted the deductions of rupees two‑lakh‑forty‑thousand and rupees fifteen‑thousand‑six‑hundred‑seventy‑seven and one‑third respectively, applying section 5(2)(a)(ii). Dissatisfied with those assessments, the dealer appealed to the Assistant Collector of Sales Tax, alleging grounds that the record shows were not material to the assessment. The dealer subsequently filed revision petitions against the Assistant Collector’s decision. While those revisions were pending, the legislature enacted the Orissa Sales Tax (Amendment) Act, Orissa Act XX of 1957, which altered the procedural position by treating revisions as appeals to the Sales Tax Tribunal and by authorising the State Government to file cross‑objections.

Pursuant to the amendment, the State of Orissa lodged a memorandum of cross‑objection challenging the deductions of rupees two‑lakh‑forty‑thousand and rupees fifteen‑thousand‑six‑hundred‑seventy‑seven and one‑third on the basis that the dealer had failed to produce a declaration required by rule 27(2) of the Orissa Sales Tax Rules, 1947, a failure apparent from the check‑sheet kept on record. The Sales Tax Tribunal upheld the State’s objection and ordered fresh assessments to be made. Although the dealer raised additional questions before the Tribunal, those issues did not affect the matters on appeal and therefore were omitted from the present record. The Tribunal framed a question for the High Court, asking whether the assessing officer had erred in allowing the deductions of rupees two‑lakh‑forty‑thousand for the quarter ending 30 June 1951 and rupees fifteen‑thousand‑six‑hundred‑seventy‑seven and one‑third for the quarter ending 30 September 1951 from the dealer’s gross turnover. The High Court, relying on its earlier decision in Member, Sales‑Tax Tribunal, Orissa v. Messrs S. Lal and Co. Limited, answered the question in the affirmative, confirming that the deductions were permissible. Having obtained special leave to appeal, the State of Orissa now sought the Supreme Court’s review, contending, through counsel Ganapathy Iyer, that rule 27(2) had not been complied with and therefore the Sales Tax Officer had been wrong in allowing the deductions.

In this case the Court observed that the Sales Tax Officer had acted incorrectly in allowing the deduction, as reported in the decision cited as (1) (1961) 12 S.T.C. 25. The resolution of the question referred to by the Tribunal required a correct construction of section 5(2)(a)(ii) of the Act together with rule 27(2). The Court reproduced the relevant statutory language, stating that section 5(2)(a)(ii) provided that sales to a registered dealer of goods which were identified in the purchasing dealer’s certificate of registration as being intended for resale in Orissa, and also sales to a registered dealer of containers or other packing materials, were permissible. The provision added that if such goods were employed by the registered dealer for purposes other than those specified in his certificate of registration, the price of those goods had to be included in his taxable turnover.

The Court then set out the text of rule 27(2), which governed claims for deduction of turnover under the sub‑clause (ii) of clause (a) of sub‑section (2) of section 5. The rule required that a dealer who wished to deduct from his gross turnover the amount of a sale, on the basis that he was entitled to such a deduction under the cited sub‑clause, must produce either the relevant cash receipt or the bill, depending on whether the transaction was a cash sale or a credit sale. In addition, the dealer had to obtain a true written declaration from the purchasing dealer, or from a responsible person authorized in writing by that dealer, confirming that the goods concerned were specified in the purchasing dealer’s certificate of registration as being required for resale by him or for performance of a contract. The rule further provided that no dealer whose certificate of registration had not been renewed for the year in which the purchase was made could make such a declaration, and that a selling dealer could not claim any deduction of sales made to such a dealer.

From the plain terms of section 5(2)(a)(ii) the Court concluded that a selling dealer was entitled to a deduction in respect of sales to a registered dealer of goods, provided that those goods were listed in the purchasing dealer’s certificate of registration as intended for resale in Orissa. The section imposed no additional condition beyond this requirement. The proviso attached to the section dealt only with the situation where the purchasing dealer used the goods for purposes other than those specified in his certificate, directing that in such an event the price of the goods used must be included in the buying dealer’s turnover. Consequently, the Court held that the section itself did not disallow a deduction for the selling dealer, but that the price of the goods would be added to the taxable turnover of the buying dealer if the circumstance described in the proviso arose.

Mr Ganapathy Iyer argued that, irrespective of the section’s wording, the rule‑making authority possessed the power to frame rules in order to give effect to the purposes of the Act, and that rule 27(2) was fashioned to ensure that a buying dealer’s certificate of registration actually mentioned that the goods were intended for resale. He maintained that compliance with rule 27(2) was essential for a selling dealer to obtain the deduction.

The appellant argued that the goods must be shown to be intended for resale by the buying dealer and that, for this purpose, the appellant had selected a single exclusive method of proving the fact before a Sales Tax Officer. The appellant further maintained that no other method of establishing that the goods were intended for resale should be permitted. According to the appellant, Rule 27 (2) was mandatory and, if the rule were breached, the selling dealer would not be entitled to claim a deduction. Counsel for the respondent, however, contended that Rule 27 (2) was merely directory. The counsel pointed out that the word “shall” in the rule should be interpreted as “may” in the relevant context. The counsel also argued that, even if the selling dealer produced the original registration certificate of the buying dealer before the Sales Tax Officer, the appellant’s suggestion that this would be insufficient could never have been the intended result. The Court expressed the view that Rule 27 (2) had to be read in harmony with the provision of the Act and could be reconciled by treating the rule as directory, while still requiring substantial compliance in every case. The Court explained that it was the responsibility of the Sales Tax Officer to be satisfied that the buying dealer’s registration certificate actually contained the required statement that the goods were intended for resale. If the Officer harboured any doubts, the selling dealer was required to remove those doubts. Conversely, if the Officer was satisfied on the basis of other evidence on record, the selling dealer was not required to produce a declaration in the specific form prescribed by Rule 27 (2) before being allowed a deduction. The Court concluded that the High Court had reached the correct conclusion. The High Court was right in holding that the production of a declaration under Rule 27 (2) was not an absolute requirement for a selling dealer seeking the exemption. A dealer could claim the exemption by presenting other evidence that brought the transaction within the scope of section 5 (2)(a)(ii) of the Act. In the present case, the Sales Tax Officer was satisfied by a simple statement of the dealer, and no evidence was shown that the registration certificate of the buying dealer, M/s S. Lal & Co., lacked the statement that the goods were intended for resale by him in Orissa. Consequently, the appeals failed and were dismissed with costs, along with one set of hearing fees.