1976 (11) TMI 178 - SC - VAT and Sales Tax

Supreme Court: Lease Deed Transaction Equals Sale of Goods, Forest Dept. Liable for Sales Tax

State of Madhya Pradesh and Others Versus Orient Paper Mills Ltd.

State of Madhya Pradesh and Others Versus Orient Paper Mills Ltd. - [1977] 40 STC 603 (SC), 1977 AIR 687, 1977 (2) SCR 149, 1977 (2) SCC 77 Issues Involved:1. Whether the transaction is a sale of goods and thus subject to sales tax.2. Whether sales tax is payable under the terms of the lease deed dated August 4, 1956.3. Whether the State Government or its forest department qualifies as a dealer under the sales tax law.4. Whether sales tax, if payable, can be recovered as arrears of land revenue.Issue-wise Detailed Analysis:1. Whether the transaction is a sale of goods and thus subject to sales tax:The core issue in this case is whether the transaction under the lease deed constitutes a sale of goods. The High Court had ruled that the transaction was not a sale of goods, and therefore, no sales tax was payable. However, the Supreme Court scrutinized the lease deed and found that despite its description as a lease, the deed essentially allowed the respondent to cut and remove bamboo and salai wood for a fixed price. The Court noted that the possession of the land was not transferred, and the rights extended only to the specified timber. The Court concluded that the transaction was indeed a sale of goods under the Madhya Pradesh General Sales Tax Act (M.G.S.T. Act) and the Sale of Goods Act. Therefore, the tax was exigible from the forest department, which could then recover it from the respondent under section 64A of the Sale of Goods Act.2. Whether sales tax is payable under the terms of the lease deed dated August 4, 1956:The High Court had held that no sales tax was payable under the terms of the lease deed. However, the Supreme Court's finding that the transaction constituted a sale of goods rendered this point moot. The Court emphasized that the lease deed's terms, such as the payment of royalty and the right to cut and remove timber, indicated a sale of goods rather than a mere lease. Consequently, the sales tax was payable under the terms of the lease deed as it involved the sale of timber.3. Whether the State Government or its forest department qualifies as a dealer under the sales tax law:The High Court had ruled that the State Government and its forest department were not dealers under the sales tax law. However, subsequent to the High Court's judgment, the Madhya Pradesh General Sales Tax Act was amended by the M.P.G.S.T. (Amendment and Validation) Act 13 of 1971, which redefined the term 'dealer' to include the forest department. The Supreme Court noted that this legislative amendment effectively nullified the High Court's finding on this point. Therefore, the forest department was deemed to be a dealer, and the levy of sales tax from it was legal.4. Whether sales tax, if payable, can be recovered as arrears of land revenue:The High Court had held that even if sales tax was payable, it could not be recovered as arrears of land revenue. The Supreme Court did not find it necessary to delve deeply into this issue, as the primary question was whether the transaction constituted a sale of goods. However, the Court acknowledged the respondent's right to challenge the quantification of the tax and remanded the case for consideration of the quantum of tax. The Court also noted that the respondent should be given an opportunity to establish that the sum claimed was higher than what was legally tenable, especially considering the varying tax rates over the years.Conclusion:The appeal was allowed, and the case was remanded for further consideration of the quantum of tax. The Supreme Court's decision clarified that the transaction was a sale of goods, the forest department qualified as a dealer under the amended M.G.S.T. Act, and the sales tax was payable. The respondent was granted the opportunity to challenge the quantification of the tax, and the case was sent back to the High Court for disposal in light of these directions.