1955 (9) TMI 38 - SC - VAT and Sales Tax

Supreme Court clarifies tax ban exceptions, upholds invalidity of Sales Tax Act provision. Assessment orders set aside.

The Supreme Court clarified that the proviso to Article 286(2) does not save transactions covered by the Explanation to Article 286(1)(a) from the ban. It ... Whether that proviso to Article 286(2) also saves the transactions of sale or purchase covered by the Explanation to Article 286(1)(a) from the ban imposed therein? Held that:- The whole theory, therefore, of 'inside sales' falls to the ground and the only thing which we are left with is that these transactions were inter-State transactions in which as a direct result of such sales the goods were actually delivered for the purpose of consumption in the State of Uttar Pradesh. The Explanation to Article 286(1)(a) deter- mined the State of Uttar Pradesh to be the State in which the sales took place and which alone was entitled to tax these transactions, the State of Madhya Pradesh becoming an 'outside' State for the purpose. Apart from the ban imposed on the State of Madhya Pradesh under Article 286(1)(a) and the Explanation thereto, these transactions were also in the course of inter-State trade or commerce and were hit by the ban of Article 286(2). The President's order no doubt lifted that ban but was not competent to lift the ban under Article 286(1)(a) and the Explanation thereto with the result that in spite of that order the State of Madhya Pradesh was not in a position to impose a tax on these transactions during the post-Constitution period. The assessment of these transactions to tax for the post-Constitu- tion period, therefore, is invalid and cannot be sustained. Allow the petition, set aside the said order dated the 14th July, 1954, and the matter will go back to the Assessment Officer for re-assessment of the petitioners in accordance with law. Issues Involved:1. Interpretation of the proviso to Article 286(2) of the Constitution.2. Validity of Explanation II to section 2(g) of the Central Provinces and Berar Sales Tax Act, 1947.3. Whether the transactions of sale or purchase covered by the Explanation to Article 286(1)(a) are saved from the ban imposed therein.4. Assessment of sales tax for pre-Constitution and post-Constitution periods.5. Determination of whether transactions were intra-State or inter-State sales.Detailed Analysis:1. Interpretation of the Proviso to Article 286(2) of the Constitution:The core issue in these appeals is whether the proviso to Article 286(2) also saves transactions of sale or purchase covered by the Explanation to Article 286(1)(a) from the ban imposed therein. The Supreme Court held that the bans imposed by Article 286 on the taxing powers of the States are independent and separate, and each one has to be surmounted before a State Legislature can impose tax on transactions of sale or purchase of goods. The Court emphasized that the proviso to Article 286(2) is meant only to lift the ban under Article 286(2) and no other. The proviso cannot be extended to lift the ban imposed by Article 286(1)(a) and the Explanation thereto.2. Validity of Explanation II to Section 2(g) of the Central Provinces and Berar Sales Tax Act, 1947:The High Court had previously declared Explanation II to section 2(g) of the Central Provinces and Berar Sales Tax Act, 1947, invalid from its inception. The Supreme Court confirmed that the original Explanation remained in force until April 1, 1951, when it was amended. The appellants contended that this Explanation offended Article 286(1)(a) read with the Explanation to the same, and the State of Madhya Pradesh was not entitled to tax transactions where goods had been delivered for consumption outside the State.3. Whether Transactions of Sale or Purchase Covered by the Explanation to Article 286(1)(a) are Saved from the Ban Imposed Therein:The Supreme Court held that the transactions covered by the Explanation to Article 286(1)(a) were not saved from the ban by the President's order under the proviso to Article 286(2). The Court reasoned that the bans imposed by Article 286 are independent and must each be overcome. The President's order under the proviso to Article 286(2) could only lift the ban on inter-State trade or commerce and did not affect the ban under Article 286(1)(a).4. Assessment of Sales Tax for Pre-Constitution and Post-Constitution Periods:For the post-Constitution period, the Supreme Court allowed the appeal in Civil Appeal No. 137 of 1955, setting aside the order of assessment dated December 29, 1952. The Court held that the ban under Article 286(1)(a) read with the Explanation thereto could not be lifted by the President's order. For the pre-Constitution period, the Court noted that different considerations would apply, and the validity of the assessments would need to be canvassed based on various contentions of law and fact. The Court set aside the composite assessments for Civil Appeals Nos. 132 and 133 of 1955, and remanded the matters to the Assessment Officer for reassessment in accordance with law.5. Determination of Whether Transactions were Intra-State or Inter-State Sales:In Petition No. 567 of 1954, the Supreme Court examined the nature of the transactions and concluded that they were inter-State transactions where goods were delivered for consumption in another State. The Court rejected the contention that these were purely intra-State sales. The transactions were found to be inter-State sales, and the State of Uttar Pradesh, being the delivery State, was entitled to tax these transactions. The assessment of these transactions to tax by the State of Madhya Pradesh for the post-Constitution period was held invalid.Conclusion:The Supreme Court allowed the appeals and the petition, setting aside the orders of assessment and remanding the matters for reassessment in accordance with law. The Court emphasized the independent and separate nature of the bans imposed by Article 286 and clarified that the President's order under the proviso to Article 286(2) could not lift the ban imposed by Article 286(1)(a) and the Explanation thereto. The respondents were ordered to pay the costs of the appellants and petitioners.