Sales tax fiction upheld where substance shows real transfer of property and rational classification prevents tax evasion.

Explanation III to section 2(1)(n) of the Andhra Pradesh General Sales Tax Act was construed as applying only where, in substance, property in goods passes from principal to agent and then to purchaser, so that two sales exist in fact and in law. The legal fiction was held not to extend the constitutional concept of sale beyond transfer of property in goods, and the provision was upheld as within legislative competence. The classification between agents who fully account for collections and those who do not was found to rest on an intelligible differentia and a rational nexus with preventing tax evasion, so it was not violative of Article 14. The challenge therefore failed.

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Issues: (i) Whether Explanation III to section 2(1)(n) of the Andhra Pradesh General Sales Tax Act, 1957 was ultra vires the legislative competence of the State Legislature. (ii) Whether the classification made by Explanation III offended Article 14 of the Constitution of India.

Issue (i): Whether Explanation III to section 2(1)(n) of the Andhra Pradesh General Sales Tax Act, 1957 was ultra vires the legislative competence of the State Legislature.

Analysis: The provision was construed as operating only where, in substance, title to goods passes from principal to agent and from agent to purchaser, thereby creating two sales in fact and in law. A legal fiction cannot enlarge the constitutional concept of sale beyond the transfer of property in goods. The issue whether a particular arrangement is a genuine agency or a sale depends on the terms and substance of the transaction and requires factual examination, which is not ordinarily suitable for determination in writ proceedings.

Conclusion: Explanation III was held to be within legislative competence and not ultra vires on the ground of impermissible expansion of the concept of sale.

Issue (ii): Whether the classification made by Explanation III offended Article 14 of the Constitution of India.

Analysis: The classification between agents who fully account for collections and those who do not was treated as based on an intelligible differentia, and the distinction was found to bear a rational relation to the object of preventing tax evasion through misuse of the principal-agent relationship.

Conclusion: The classification was upheld as valid and not violative of Article 14 of the Constitution of India.

Final Conclusion: The challenge to the assessment notice failed, and the legal validity of the impugned explanation was sustained, leaving the assessee without relief.

Ratio Decidendi: A sales tax provision that deems transactions to be sales only where property in goods actually passes, and that differentiates on a rational basis to prevent tax evasion, is constitutionally valid; the true nature of the transaction must be determined by its substance and terms, not by labels used by the parties.

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