1985 (3) TMI 226 - SC - VAT and Sales Tax

Supreme Court clarifies tax rules on bamboo and trees, ruling out double taxation

State of Orissa and Others Versus Mangalji Mulji Khara and Others & Titaghur Paper Mills Co. Ltd. and another

The Supreme Court upheld the constitutionality and validity of the impugned provisions related to purchase tax on bamboos and standing trees. It clarified ... Whether the property in the trees which were the subject- matter of the timber contracts passed to the respondent-firm while the trees were still standing or after they were severed? Held that:- Appeal allowed. Entries Nos. 2 and 17 in the Schedule to Notification No. 67181-C.T.A. 135/77-F (S.R.O. No. 901/77) dated December 29, 1977 levying purchase tax at the rate of ten per cent on the purchase of bamboos agreed to be severed and standing trees agreed to be severed, are not ultra vires either entry 54 in List II in the Seventh Schedule to the Constitution of India or the Orissa Sales Tax Act, 1947 but are constitutional and valid. Under the impugned provisions the taxable event is not an agreement to sever standing trees or bamboos but the purchase of standing trees or bamboos agreed to be severed. The absence in the impuged provisions of the words 'before sale or under the contract of sale' is immaterial for the impugned provisions read as a whole clearly show that the severance of standing trees or bamboos has to be under the contract of sale and before the purchase thereof has been completed and not before sale of such trees or bamboos. The subject-matter of the impugned provisions is goods and the tax that is levied thereunder is on a completed purchase of goods. When under section 3-B of the Orissa Sales Tax Act, 1947 any goods are declared to be liable to tax on the turnover of purchases, such goods automatically cease to be liable to sales tax by reason of the proviso to that section. The word 'supersession' in the notifications dated December 29, 1977 is used in the same sense as the words 'repeal and replacement' and, therefore, does not have the effect of wiping out the tax liability under the previous notifications. The timber contracts are not works contracts but are agreements to sell standing timber. Under the timber contracts the property in the trees which were the subject-matter of the contracts passed to the respondent-firm, Messrs. M.M. Khara, only in the trees which were felled, that is, in timber, after all the conditions of the contract had been complied with and after such timber was examined and checked and removed from the contract area. The impugned provisions, therefore, did not apply to the transactions covered by the timber contracts. Timber and sized or dressed logs are one and the same commercial commodity. Beams, rafters and planks would also be timber. As the sales of dressed or sized logs by the respondent firm have already been assessed to sales tax, the sales to the first respondent firm of timber by the State Government from which logs were made by the respondent firm cannot be made liable to sales tax as it would amount to levying tax at two points in the same series of sales by successive dealers, assuming without deciding that the retrospectively substituted definition of 'dealer' in clause (c) of section 2 of the Orissa Sales Tax Act, 1947 is valid. During the period June 1, 1977 to December 31, 1977 the sales of logs by the respondent firm would be liable to tax at the rate of ten per cent. The bamboo contract is not a lease of the contract areas to the respondent company, the Titaghur Paper Mills Limited.The bamboo contract is also not a grant of an easement to the respondent company. The bamboo contract is a grant of a profit a prendre which in Indian law is a benefit to arise out of land and thus creates an interest in immovable property. Being a benefit to arise out of land, any attempt on the part of the State Government to tax the amounts payable under the bamboo contract would be not only ultra vires the Orissa Act but also unconstitutional as being beyond the State's taxing power under entry 54 in List II in the Seventh Schedule to the Constitution of India. Thus the judgment of the High Court in so far as it holds the impugned provisions to be unconstitutional and ultra vires the Orissa Sales Tax Act, 1947 requires to be reversed. Though the High Court did not give these consequential reliefs in view of its findings that the impugned provisions were invalid, it becomes necessary for us to do so in order to do complete justice between the parties as we are entitled to do under article 142 of the Constitution of India. Issues Involved:1. Constitutionality and validity of the impugned provisions.2. Interpretation of the taxable event under the impugned provisions.3. Effect of the absence of the words 'before sale or under the contract of sale' in the impugned provisions.4. Determination of the subject-matter of the impugned provisions.5. Double taxation under the Orissa Sales Tax Act.6. Effect of 'supersession' in notifications dated December 29, 1977.7. Nature of timber contracts and their applicability under the impugned provisions.8. Meaning and classification of 'timber' and 'logs' in commercial parlance.9. Exigibility of sales tax on transactions covered by timber contracts.10. Nature of the bamboo contract and its classification as a profit a prendre.11. Validity of the case of Firm Chhotabhai Jethabhai Patel & Co. v. State of Madhya Pradesh.12. Validity of the case of State of Madhya Pradesh v. Orient Paper Mills Ltd.13. Interpretation of the bamboo contract as a works contract.Issue-Wise Detailed Analysis:1. Constitutionality and Validity of the Impugned Provisions:The impugned provisions, namely, Notification S.R.O. No. 372/77 dated May 23, 1977, Notification S.R.O. No. 373/77 dated May 23, 1977, Entries Nos. 2 and 17 in the Schedule to Notification No. 67178-C.T.A. 135/77 (Pt.)-F (S.R.O. No. 900/77) dated December 29, 1977, and Entries Nos. 2 and 17 in the Schedule to Notification No. 67181-C.T.A. 135/77-F (S.R.O. No. 901/77) dated December 29, 1977, levying purchase tax at the rate of ten per cent on the purchase of bamboos agreed to be severed and standing trees agreed to be severed, are constitutional and valid. They do not violate entry 54 in List II in the Seventh Schedule to the Constitution of India or the Orissa Sales Tax Act, 1947.2. Interpretation of the Taxable Event Under the Impugned Provisions:The taxable event is not an agreement to sever standing trees or bamboos but the purchase of standing trees or bamboos agreed to be severed. The provisions apply to a completed purchase of goods.3. Effect of the Absence of the Words 'Before Sale or Under the Contract of Sale':The absence of these words is immaterial as the impugned provisions read as a whole clearly show that the severance of standing trees or bamboos has to be under the contract of sale and before the purchase thereof has been completed and not before the sale of such trees or bamboos.4. Determination of the Subject-Matter of the Impugned Provisions:The subject-matter of the impugned provisions is goods, and the tax levied is on a completed purchase of goods. The provisions do not create a new class of goods not known to law.5. Double Taxation Under the Orissa Sales Tax Act:The High Court's holding that the impugned provisions amounted to double taxation was incorrect. The Orissa Act expressly forbids taxing the same goods at more than one point in the same series of sales or purchases by successive dealers.6. Effect of 'Supersession' in Notifications Dated December 29, 1977:The word 'supersession' is used in the same sense as 'repeal and replacement' and does not wipe out the tax liability under the previous notifications. The previous notifications were repealed and replaced, not nullified.7. Nature of Timber Contracts and Their Applicability Under the Impugned Provisions:The timber contracts are not works contracts but agreements to sell standing timber. The property in the trees passes to the respondent firm only after the trees are felled and removed from the contract area. The impugned provisions do not apply to these transactions.8. Meaning and Classification of 'Timber' and 'Logs' in Commercial Parlance:Timber and sized or dressed logs are the same commercial commodity. Beams, rafters, and planks are also classified as timber.9. Exigibility of Sales Tax on Transactions Covered by Timber Contracts:As the sales of dressed or sized logs by the respondent firm have already been assessed to sales tax, the sales to the first respondent firm of timber by the State Government from which logs were made by the respondent firm cannot be made liable to sales tax again.10. Nature of the Bamboo Contract and Its Classification as a Profit a Prendre:The bamboo contract is not a lease of the contract areas to the respondent company. It is a grant of a profit a prendre, which is an interest in immovable property. Any attempt to tax the amounts payable under the bamboo contract would be ultra vires the Orissa Act and unconstitutional.11. Validity of the Case of Firm Chhotabhai Jethabhai Patel & Co. v. State of Madhya Pradesh:The case is not good law and has been overruled by decisions of larger Benches of this Court.12. Validity of the Case of State of Madhya Pradesh v. Orient Paper Mills Ltd.:The case is also not good law as the decision was given per incuriam and laid down principles of interpretation which are wrong in law.13. Interpretation of the Bamboo Contract as a Works Contract:The bamboo contract is not a works contract. The timber contracts are agreements to sell standing timber, and the bamboo contract is a grant of a profit a prendre, not a works contract.Conclusions:The Supreme Court reversed the High Court's judgment declaring the impugned provisions unconstitutional. The notice dated August 18, 1977, issued against the respondent company was quashed, and the assessment order against the respondent firm was modified to delete the item of purchase tax on the amounts paid under the timber contracts. Each party was directed to bear its own costs.