Legal fiction in sales tax transition can support drawback, set-off and refund for transferred stock.

A transferee of business stock could rely on legal fictions under the earlier Bombay sales tax regime to claim transitional tax relief under rule 40(2) of the 1959 Rules. Rule 16(2) and rule 11AA treated the transferee as having purchased the stock and carried forward the transferor's reliefs, and the Court explained that a legal fiction must be given its full effect with necessary incidents. Because the later statute preserved continuity for transactions under the earlier law, the transferee was deemed to have paid the relevant tax on stock held at the commencement of the new Act, making drawback, set-off or refund maintainable.

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Issues: Whether the transferee of a business, by reason of the legal fictions created under the earlier sales tax rules, could be treated as having paid tax on stock transferred by the transferor so as to obtain drawback, set-off or refund under rule 40(2) of the Bombay Sales Tax Rules, 1959 in respect of goods in hand on 1 January 1960.

Analysis: Rule 16(2) of the Bombay Sales Tax (Exemptions, Set-off and Composition) Rules, 1954 deemed the transferee to have purchased the stock for the purpose of section 8 of the Bombay Sales Tax Act, 1953, and rule 11AA carried the transferee into the benefit of the transferor's reliefs under rules 11 and 11A. The effect of a legal fiction is to treat the imaginary state of affairs as real and to carry with it the necessary incidents of that state of affairs. The Court held that rule 11AA also created a fiction of purchase for the purpose of tax relief, and that the repeal of the 1953 Act did not destroy the benefit where the 1959 Act itself preserved continuity of earlier-law transactions and authorised set-off, drawback and refund in respect of taxes paid or leviable under the earlier law. Rule 40(2) was intended to grant relief on stock held at the commencement of the new Act, and the transferee could rely on the earlier fictional purchase and payment of tax because the transaction had to be viewed as one completed under the earlier law.

Conclusion: The transferee was entitled to be deemed to have paid the relevant tax for the purpose of rule 40(2), and the claim to drawback, set-off or refund was maintainable in favour of the assessee.

Ratio Decidendi: A legal fiction created for the purpose of allowing tax relief under an earlier sales tax regime survives for the purpose of corresponding transitional relief under the successor regime where the later statute preserves continuity and the relevant transaction is one completed under the earlier law.

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