Sales tax competence on deemed sale fails where partnership dissolution distributes assets without money consideration.

Section 26(3) of the Bombay Sales Tax Act, 1953 deemed allotment of a dissolved firm's goods to partners as a sale, but the Gujarat HC noted that Entry 54 in List II extends only to taxation of real sales or purchases of goods. Because a sale requires transfer of property for money consideration, distribution of assets in specie on dissolution, even with adjustment of partners' rights, is not a sale. The court further held that a statutory fiction cannot be expanded beyond the Legislature's competence to tax a non-sale transaction. The provision was therefore ultra vires to that extent, and sales tax could not be fastened on the dissolved firm's distribution of assets as a deemed sale.

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Issues: Whether section 26(3) of the Bombay Sales Tax Act, 1953, which deemed allotment of a dissolved firm's goods to partners to be a sale, was within the legislative competence conferred by Entry 54 in List II of the Seventh Schedule to the Constitution of India.

Analysis: Entry 54 authorises taxation on sales or purchases of goods, and the expression "sale of goods" bears the meaning it has in the Sale of Goods Act. For a transaction to amount to a sale, there must be transfer of property for money consideration. On dissolution of a firm, allotment of the residue of assets in specie among partners lacks money consideration, even though there is mutual adjustment of rights and interests. The statutory fiction in section 26(3) could not be confined to the purpose of taxation in the manner suggested by the revenue, because a fiction must be carried to its logical conclusion only within the field where the Legislature is competent to operate. Ancillary or incidental power cannot be used to bring within tax a transaction which is not a sale at all.

Conclusion: Section 26(3) was ultra vires to the extent that it sought to tax distribution of a dissolved firm's goods among partners as a deemed sale, and the answer to the reference was in the negative in favour of the assessee.

Final Conclusion: The challenged provision could not constitutionally fasten sales tax on a non-sale transaction by deeming it to be a sale, so the assessment failed insofar as it rested on that fiction.

Ratio Decidendi: The Legislature competent to tax sales cannot, by legal fiction or ancillary power, treat a transaction that lacks the essential elements of a sale as a taxable sale.

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