1963 (11) TMI 73 - HC - VAT and Sales Tax

Court Strikes Down Section 26(3) of Sales Tax Act as Ultra Vires

State of Gujarat Versus Ramanlal Sankalchand and Co.

The court declared Section 26(3) of the Bombay Sales Tax Act, 1953, ultra vires as it attempted to tax a transaction not meeting the criteria of a sale ... - Issues Involved:1. Vires of Section 26(3) of the Bombay Sales Tax Act, 1953.2. Applicability of Section 14 of the Bombay Sales Tax Act, 1953, to the assessment of tax under Section 26(3).Issue-wise Detailed Analysis:1. Vires of Section 26(3) of the Bombay Sales Tax Act, 1953:The core issue was whether Section 26(3) of the Bombay Sales Tax Act, 1953, which treats the allotment of goods to partners on the dissolution of a firm as a sale for taxation purposes, was within the legislative competence of the State Legislature. The opponents, a partnership firm, were dissolved, and the Sales Tax Officer included the value of goods distributed among the partners in the firm's taxable turnover, treating it as a sale under Section 26(3). The firm challenged this, leading to the Tribunal ruling that such allotment, though fictionally treated as a sale, was not a sale in the course of business and thus not taxable. The State contended that Section 26(3) was valid and within the legislative competence under Entry 54, List II of the Seventh Schedule to the Constitution, which allows taxation on the sale or purchase of goods. The firm argued that the allotment of goods on dissolution was not a sale within the meaning of the Indian Sale of Goods Act and thus beyond the State Legislature's power to tax. The court examined the scope of Entry 54 and determined that the expression 'sale of goods' must be interpreted as per the Indian Sale of Goods Act, which requires an agreement to transfer property, actual transfer of property, and money consideration. The court found that the allotment of goods among partners lacked the essential element of money consideration and thus did not constitute a sale. Consequently, Section 26(3) was declared ultra vires as it sought to tax a non-sale transaction by fictionally treating it as a sale, which was beyond the legislative competence of the State Legislature.2. Applicability of Section 14 of the Bombay Sales Tax Act, 1953, to the assessment of tax under Section 26(3):This issue arose from the Tribunal's interpretation that the allotment of goods on dissolution, though fictionally treated as a sale, was not a sale in the course of business and thus not includible in the turnover of sales. The court noted that the Tribunal's distinction between a sale simpliciter and a sale in the course of business was unwarranted. The court emphasized that when a statute creates a legal fiction, full effect must be given to that fiction, and it must be carried to its logical conclusion. Thus, if Section 26(3) validly created a legal fiction treating the allotment of goods as a sale, it must be regarded as a sale in the course of business for taxation purposes. However, since Section 26(3) was declared ultra vires, the question of the applicability of Section 14 did not arise. The court concluded that the Tribunal's reasoning was unsustainable and that the legal fiction created by Section 26(3) should have been given full effect if it were valid.Conclusion:The court declared Section 26(3) of the Bombay Sales Tax Act, 1953, ultra vires the State Legislature as it sought to tax a transaction that was not a sale within the meaning of the Indian Sale of Goods Act by fictionally treating it as such. Consequently, the first question was answered in the negative, and the second question did not arise. The State was ordered to pay the costs of the reference fixed at Rs. 450.