TaxTMI 
TaxTMI 
1958 (4) TMI 42
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.... the State of Madras, (R.H. Dhebar, Advocate, with him), for the appellant. Gopal Singh, Advocate, for Interveners Nos. 6 and 7. B.P.L. Iyengar, Advocate, for Intervener No. 8. JUDGMENT Venkatarama Aiyar, J. This appeal arises out of proceedings for assessment of sales tax payable by the respondents for the year 1949-50, and it raises a question of considerable importance on the construction of Entry 48 in List II of Schedule VII to the Government of India Act, 1935, "Taxes on the sale of goods." The respondents are a private limited company registered under the provisions of the Indian Companies Act, doing business in the construction of buildings, roads and other works and in the sale of sanitary wares and other sundry goods. Before the Sales Tax Authorities, the disputes ranged over a number of items, but we are concerned in this appeal with only two of them. One is with reference to a sum of Rs. 29,51,528-7-4 representing the value of the materials used by the respondents in the execution of their works contracts, calculated in accordance with the statutory provisions applicable thereto, and the other relates to a sum of Rs. 1,98,929-0-3 b....
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....d to be the amount payable to the dealer for carrying out such contract less a sum not exceeding such percentage of the amount payable as may be fixed by the Board of Revenue, from time to time for different areas, representing the usual proportion in such areas of the cost of labour to the cost of materials used in carrying out such contract, subject to the following maximum percentages. . . . . . . . ", and then follows a scale varying with the nature of the contracts. It is on the authority of these provisions that the appellant seeks to include in the turnover of the respondents the sum of Rs. 29,51,528-7-4 being the value of the materials used in the construction works as determined under rule 4(3). The respondents contest this claim on the ground that the power of the Madras Legislature to impose a tax on sales under Entry 48 in List II in Schedule VII of the Government of India Act, does not extend to imposing a tax on the value of materials used in works, as there is no transaction of sale in respect of those goods, and that the provisions introduced by the Madras General Sales Tax (Amendment) Act, 1947, authorising the imposition of such tax are ultra vires. As regards ....
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.... question, therefore, that survives for our decision is as to whether the provisions introduced by the Madras General Sales Tax (Amendment) Act, (Madras XXV of 1947) and set out above are ultra vires the powers of the Provincial Legislature under Entry 48 in List II. As provisions similar to those in the Madras Act now under challenge are to be found in the Sales Tax Laws of other States, some of those States, Bihar, Punjab, Mysore, Kerala and Andhra Pradesh, applied for and obtained leave to intervene in this appeal, and we have heard learned counsel on their behalf. Some of the contractors who are interested in the decision of this question, Gurbax Singh, Messrs. Uttam Singh Duggal and United Engineering Company, were also granted leave to intervene, and learned counsel representing them have also addressed us on the points raised. The sole question for determination in this appeal is whether the provisions of the Madras General Sales Tax Act are ultra vires, in so far as they seek to impose a tax on the supply of materials in execution of works contract treating it as a sale of goods by the contractor, and the answer to it must depend on the meaning to be given to the words "....
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....es which have intervened is that the provisions of a Constitution which confer legislative powers should receive a liberal construction, and that, accordingly, the expression "sale of goods" in Entry 48 should be interpreted not in the narrow and technical sense in which it is used in the Indian Sale of Goods Act, 1930, but in a broad sense. We shall briefly refer to some of the authorities cited in support of this position. In British Coal Corpn. v. King [1935] A.C. 500, the question was whether section 17 of the Canadian Statute, 22 & 24, Geo. V, c. 53, which abolished the right of appeal to the Privy Council from any judgment or order of any Court in any criminal case, was intra vires its powers under the Constitution Act of 1867. In answering it in the affirmative, Viscount Sankey, L.C., observed:- "Indeed, in interpreting a constituent or organic statute such as the Act, that construction most beneficial to the widest possible amplitude of its powers must be adopted. This principle has been again clearly laid down by the Judicial Committee in Edwards v. A.G. for Canada [1930] A.C. 124, 136". In James v. Commonwealth of Australia [1936] A.C. 578, Lord Wright observe....
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....l Commissioner of Land Tax (N.S.W.) [1912] 15 C.L.R. 661, 666 and Broken Hill South Ltd. v. Commissioner of Taxation (N.S.W.) [1936-37] 56 C.L.R. 337, 379 in support of his contention. In Morgan (supra) the question was as to the validity of a law which had enacted that lands belonging to a company were deemed to be held by its shareholders as joint owners and imposed a land tax on them in respect of their share therein. In upholding the Act, Griffith, C.J., observed: "In my opinion, the Federal Parliament in selecting subjects of taxation is entitled to take things as it finds them in rerum natura, irrespective of any positive laws of the States prescribing rules to be observed with regard to the acquisition or devolution of formal title to property, or the institution of judicial proceedings with respect to it." In Broken Hill South Ltd. (supra) the observations relied on are the following:- "In any investigation of the constitutional powers of these great Dominion Legislatures, it is not proper that a Court should deny to such a legislature the right of solving taxation problems unfettered by a priori legal categories which often derive from the exercise of ....
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....t, both at law and in equity, and has a well defined legal signification, and has been said to mean, at all times, a contract between parties to give and pass rights of property for money, which the buyer pays or promises to pay to the seller for the thing bought or sold." It is added that the word "sale" as used by the authorities "is not a word of fixed and invariable meaning, but may be given a narrow or broad meaning, according to the context." In Williston on Sales, 1948 Edition, "sale of goods" is defined as "an agreement whereby the seller transfers the property in goods to the buyer for a consideration called the price" (page 2). At page 443, the learned author observes that "it has doubtless been generally said that the price must be payable in money", but expresses his opinion that it may be any personal property. In the Concise Oxford Dictionary, "sale" is defined as "exchange of a commodity for money or other valuable consideration, selling." It will be seen from the foregoing that there is practical unanimity of opinion as to the import of the word "sale" in its legal sense, there being only some difference of opinion in America as to whether price should be in m....
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....action is one of sale, and it would be a sale only when it has resulted in the passing of property in the goods to the purchaser. Vide Poppatlal Shah v. State of Madras [1953) S.C R. 677, 683 and State of Bombay v. United Motors (India) Ltd. [1953] S.C.R. 1069,1078. It has also been held in STO v. Budh Prakash Jai Prakash [1955] 1 S.C.R. 243., that the sale contemplated by Entry 48 of the Government of India Act was a transaction in which title to the goods passes and a mere executory agreement was not a sale within that Entry. We must accordingly hold that the expression "sale of goods" in Entry 48 cannot be construed in its popular sense, and that it must be interpreted in its legal sense. What its connotation in that sense is must now be ascertained. For a correct determination thereof, it is necessary to digress somewhat into the evolution of the law relating to sale of goods. The concept of sale, as it now obtains in our jurisprudence, has its roots in the Roman Law. Under that law, sale, emptio venditio, is an agreement by which one person agrees to transfer to another the exclusive possession (vacuam possessionem tradere) of something (merx) for consideration. In the earl....
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....efined "sale" as "the exchange of property for a price involving the transfer of ownership of the thing sold from the seller to the buyer". It was suggested that under this section it was sufficient to constitute a sale that there was a transfer of ownership in the thing for a price and that a bargain between the parties was not an essential element. But the scheme of the Contract Act is that it enacts in sections 1 to 75 provisions applicable in general to all contracts, and then deals separately with particular kinds of contract such as sale, guarantee, bailment, agency and partnership, and the scheme necessarily posits that all these transactions are based on agreements. We then come to the Indian Sale of Goods Act, 1930 (III of 1930), which repealed Chapter VII of the Contract Act relating to sale of goods, and section 4 thereof is practically in the same terms as section 1 of the English Act. Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money....
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....wing observations in Continental Illinois National Bank and Trust Co. of Chicago v. Chicago Rock Island & Pacific Railway Co. [1935] 294 U.S. 648: "Whether a clause in the Constitution is to be restricted by the rules of the English law as they existed when the Constitution was adopted depends upon the terms or the nature of the particular clause in question. Certainly, these rules have no such restrictive effect in respect of any constitutional grant of governmental power Waring v. Clarke [1847] 5 How. 441; 12 L. Ed. 226 though they do, at least in some instances, operate restrictively in respect of clauses of the Constitution which guarantee and safeguard the fundamental rights and liberties of the individual, the best examples of which, perhaps, are the Sixth and Seventh Amendments, which guarantee the right of trial by jury." It should, however, be stated that the law is stated in Weaver on Constitutional Law, 1946 Edition, page 77, and Crawford on Statutory Construction, page 258, in the same terms as in South Carolina (supra). But it is unnecessary to examine minutely the precise scope of this rule of interpretation in American law, as the law on the subject has b....
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....enerally understood to be Courts at the time when the Constitution Act was enacted, that labour Courts were then unknown, and that, therefore, the reference to Judges and Courts in section 96 could not be interpreted as comprehending a tribunal of the character of the Labour Relations Board. In Halsbury's Laws of England, Volume 11, para. 157, page 93, the position is thus summed up: "The existing state of English law in 1867 is relevant for consideration in determining the meaning of the terms used in conferring power and the extent of that power, e.g., as to customs legislation." Turning next to the question as to the weight to be attached to legislative practice in interpreting words in the Constitution, in Croft v. Dunphy [1933] A.C. 156, the question was as to the validity of certain provisions in a Canadian statute providing for the search of vessels beyond territorial waters. These provisions occurred in a Customs statute, and were intended to prevent evasion of its provisions by smugglers. In affirming the validity of these provisions, Lord Macmillan referred to the legislative practice relating to Customs, and observed: "When a power is conferred to legi....
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.... certainly valuable and might prove determinative unless there are good reasons for disregarding it, and in STO v. Budh Prakash Jai Prakash [1955] 1 S.C.R. 243, it was relied on for ascertaining the meaning and true scope of the very words which are now under consideration. There, in deciding that an agreement to sell is not a sale within Entry 48, this Court referred to the provisions of the English Sale of Goods Act, 1893, the Indian Contract Act, 1872, and the Indian Sale of Goods Act, 1930, for construing the word "sale" in that entry and observed:- "Thus, there having existed at the time of the enactment of the Government of India Act, 1935, a well-defined and well-established distinction between a sale and an agreement to sell it would be proper to interpret the expression 'sale of goods' in Entry 48 in the sense in which it was used in legislation both in England and India and to hold that it authorises the imposition of a tax only when there is a completed sale involving transfer of title." This decision, though not decisive of the present controversy, goes far to support the contention of the respondents that the words "sale of goods" in Entry 48 must b....
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....d not be left to fluctuate with the definition of "sale" in laws relating to sale of goods which might be in force for the time being. It was then said that in some of the entries, for example, Entries 31 and 49, List II, the word "sale" was used in a wider sense than in the Sale of Goods Act, 1930. Entry 31 is "Intoxicating liquors and narcotic drugs, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors, opium and other narcotic drugs. . . . ". The argument is that "sale" in the entry must be interpreted as including barter, as the policy of the law cannot be to prohibit transfers of liquor only when there is money consideration therefor. But this argument proceeds on a misapprehension of the principles on which the entries are drafted. The scheme of the drafting is that there is in the beginning of the entry words of general import, and they are followed by words having reference to particular aspects thereof. The operation of the general words, however, is not cut down by reason of the fact that there are sub-heads dealing with specific aspects. In Manikkasundara v. R. S. Nayudu([1946] F.C.R. 67, 84.) occur the following o....
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....nt of India Act was enacted, no law relating to sales tax either in England or in India. The first sales tax law to be enacted in India is the Madras General Sales Tax Act, 1939, and that was in exercise of the power conferred by Entry 48. In England, a purchase tax was introduced for the first time only by the Finance Act No. 2 of 1940. The position, therefore, is that Entry 48 introduces a topic of legislation with respect to which there was no legislative practice. In the absence of legislative practice with reference to sales tax in this country or in England, counsel for the appellant and the States sought support for their contention in the legislative practice of Australia and America relating to that topic. In 1930, the Commonwealth Sales Tax Act was enacted in Australia imposing a tax on retail sales. A question arose whether a contractor who supplied materials in execution of a works contract could be taxed as on a sale of the materials. In Sydney Hydraulic and General Engg. Co. v. Blackwood & Son 8 N.S.W.S.R. , the Supreme Court of New South Wales held that the agreement between the parties was one to do certain work and to supply certain materials and not an agreemen....
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....of the matters enumerated in Lists II and III, and though the entries therein are to be construed liberally and in their widest amplitude, the law must, nevertheless, be one with respect to those matters. A power to enact a law with respect to tax on sale of goods under Entry 48 must, to be intra vires, be one relating in fact to sale of goods, and, accordingly, the Provincial Legislature cannot, in the purported exercise of its power to tax sales, tax transactions which are not sales by merely enacting that they shall be deemed to be sales. The position in the American law appears to be the same as in Australia. In Blome Co. v. Ames [1937] 111 A.L.R. 940, the Supreme Court of Illinois held that a sales tax was leviable on the value of materials used by a contractor in the construction of a building or a fixture treating the transaction as one of sale of those materials. But this decision was overruled by a later decision of the same Court in Herlihy Mid-Continent Co. v. Nudelman [1937] 115 A.L.R. 485, wherein it was held that there was no transfer of title to the materials used in construction work as goods, and that the provisions of the Sales Tax Act had accordingly no applic....
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....f Mr. Justice Willes, shew that the theory of the judgment in an action of detinue is that it is a kind of involuntary sale of the plaintiff's goods to the defendant." He went on to state that such sale took place when the value of the goods is paid to the owner. In Great Western Railway Co. (supra), an Act of Parliament had provided for the dissolution of two companies under a scheme of amalgamation with a third company under which the shareholders were to be given in exchange for their shares in the dissolved companies, in the case of one company, stock in the third company in certain specified proportions, and in the other, discharge of debentures on shares already held by them in the third company. The question was whether a copy of the Act had to be stamped ad valorem as on conveyance on sale under the first schedule to the Stamp Act, 1891. The contention of the company was that there was no sale by the shareholders of their shares to it, and that the provision in question had accordingly no application. In rejecting this contention, Esher, M.R., observed: "Turning to the Stamp Act, the words used are 'a conveyance on sale'. Does that expression mean a ....
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.... English law, the taking over of the wagons and payment of compensation therefor must also be regarded as sale for purpose of income-tax. Lord Morton in agreeing with this contention observed:- ". . . . . . . . .the question whether it is a correct use of the English language to describe as a 'sale' a transaction from which the element of mutual assent is missing is no doubt an interesting one. I think, however, that this question loses its importance for the purpose of the decision of this appeal when it is realized that for the last 100 years transactions by which the property of A has been transferred to B, on payment of compensation to the owner but without the consent of the owner, have been referred to many times, in Acts of Parliament, in opinions delivered in this House, in judgments of the Court of Appeal and the High Court of Justice, and in textbooks as a 'sale'-generally as a 'compulsory sale'. . . . . . . . . . "The case of Newcastle Breweries Ltd. v. Inland Revenue Commissioners [1927] 96 L.J.K.B. 735, referred to later, affords a striking modern instance of the use of the word 'sale' as applied to compulsory taking of....
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....sented from the same point of view but more limited in its sweep is that urged by the learned Solicitor-General, the Advocate-General of Madras and the other counsel appearing for the States, that even in the view that an agreement between the parties was necessary to constitute a sale, that agreement need not relate to the goods as such, and that it would be sufficient if there is an agreement between the parties and in the carrying out of that agreement there is transfer of title in movables belonging to one person to another for consideration. It is argued that Entry 48 only requires that there should be a sale, and that means transfer of title in the goods, and that to attract the operation of that entry it is not necessary that there should also be an agreement to sell those goods. To hold that there should be an agreement to sell the goods as such is, it is contended, to add to the entry words which are not there. We are unable to agree with this contention. If the words "sale of goods" have to be interpreted in their legal sense, that sense can only be what it has in the law relating to sale of goods. The ratio of the rule of interpretation that words of legal import occu....
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....egarded as sale in the times to come. The decisions in Attorney-General v. Edison Telephone Co. of London [1880] L.R. 6 Q.B.D. 244, Toronto Corpn. v. Bell Telephone Co. of Canada [1905] A.C. 52, Regulation and Control of Radio Communication in Canada, In re [1932] A.C. 304 and King v. Brislan: Ex parte Williams [1935] 54 C.L.R. 262 were quoted as precedents for adopting such a construction. In Attorney-General (supra), the question was whether the Edison Telephone Company, London, had infringed the exclusive privilege of transmitting telegrams granted to the Postmaster-General under an Act of 1869 by installation of telephones. The decision turned on the construction of the definition of the word "telegraph" in the Acts of 1863 and 1869. It was contended for the company that telephones were unknown at the time when those Acts were passed and therefore could not fall within the definition of "telegraph". The Court negatived this contention on the ground that the language of the definition was wide enough to include telephones. Toronto Corpn. (supra) is a decision on section 92(10)(a) of the British North America Act, 1867, under which the Dominion Parliament had the exclusive compet....
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....ut whether those words are broad enough to include the new facts. Clearly, this principle has no application to the present case. Sales tax was not a subject which came into vogue after the Government of India Act, 1935. It was known to the framers of that statute and they made express provision for it under Entry 48. Then it becomes merely a question of interpreting the words, and on the principle, already stated, that words having known legal import should be construed in the sense which they had at the time of the enactment, the expression "sale of goods" must be construed in the sense which it has in the Sale of Goods Act. A contention was also urged on behalf of the respondents that even assuming that the expression "sale of goods" in Entry 48 could be construed as having the wider sense sought to be given to it by the appellant and that the provisions of the Madras General Sales Tax Act imposing a tax on construction contracts could be sustained as within that entry in that sense, the impugned provisions would still be bad under section 107 of the Government of India Act, and the decision in D. Sarkar & Bros. v. CTO A.1.R. 1957 Cal. 283.. was relied on in support of this c....
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....l Tax Officer; A.I.R. 1957 Cal. 283 on this point cannot be accepted as sound. It now remains to deal with the contention pressed on us by the States that even if the supply of materials under a building contract cannot be regarded as a sale under the Sale of Goods Act, that contract is nevertheless a composite agreement under which the contractor undertakes to supply materials, contribute labour and produce the construction, and that it is open to the State in execution of its tax laws to split up that agreement into its constituent parts, single out that which relates to the supply of materials and to impose a tax thereon treating it as a sale. It is said that this is a power ancillary to the exercise of the substantive power to tax sales, and reliance is placed on the observations in The United Provinces v. Atiqa Begum [1940] F.C.R. 110, 134 and Navinchandra Mafatlal [1955] 1 S.C.R. 829, 833, 836. The respondents contend that even if the agreement between the parties could be split up in the manner suggested for the appellant, the resultant will not be a sale in the sense of the Sale of Goods Act, as there is in a works contract neither an agreement to sell materials as such,....
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....ixed piecemeal and were made into an engine. The suit was for the recovery of a sum of Rs. 3,000 as price for "a main engine and other goods sold and delivered". The contention of the defendant was that there was no contract of sale, and that the action should have been one for work and labour and materials used in the course of that work and not for price of goods sold and delivered. In upholding this contention, Parke, B., observed:- "The engine was not contracted for to be delivered, or delivered, as an engine, in its complete state, and afterwards affixed to the free-hold; there was no sale of it, as an entire chattel, and delivery in that character; and therefore it could not be treated as an engine sold and delivered. Nor could the different parts of it which were used in the construction, and from time to time fixed to the freehold, and therefore became part of it, be deemed goods sold and delivered, for there was no contract for the sale of them as movable goods; the contract was in effect that the plaintiff was to select materials, make them into parts of an engine, carry them to a particular place, and put them together, and fix part to the soil, and so convert t....
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..... 355; 119 E.R. 669. In Woods v. Russell [1822] 5 B. & Al. 942; 106 E.R. 1436 the property of a rudder and some cordage which the builder had bought for the ship was held to have passed in property to the purchaser as an accessory of the vessel; but that decision was questioned by Lord Chief Justice Jervis, delivering the judgment of the Court in Wood v. Bell [1856] 6 E. & B. 355; 119 E.R. 669, who stated the real question to be 'what is the ship, not what is meant for the ship', and that only the things can pass with the ship 'which have been fitted to the ship and have once formed part of her, although afterwards removed for convenience'. I assent to that rule, which appears to me to be in accordance with the decision of the Court of Exchequer in Tripp v. Armitage [1839] 4 M. & W. 687; 150 E.R. 1597." In Reid v. Macbeth & Gray [1904] A.C. 223, the facts were that a firm of shipbuilders who had agreed to build a ship became bankrupt. At the date of the bankruptcy, there was lying at railway stations a quantity of iron and steel plates which were intended to be fixed in the ship. The dispute was between the assignee in bankruptcy and the shipowners as to the titl....
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.... was there any question of title to the goods passing as an accretion under the general law, because the buildings where they had to be erected belonged not to the defendants but to the Government, and therefore as between the parties to the contract, title could pass only under their contract. The contention that a building contract contains within it all the elements constituting a sale of the materials was sought to be established by reference to the form of the action, when the claim is in quantum meruit. It was argued that if a contractor is prevented by the other party to the contract from completing the construction he has, as observed by Lord Blackburn in Appleby v. Myres [1904] A.C. 223, a claim against that party, that the form of action in such a case is for work done and materials supplied, as appears from Bullen & Leake's Precedents of Pleadings, 10th Edition, at pages 285-286, and that that showed that the concept of sale of goods was latent in a building contract. The answer to this contention is that a claim for quantum meruit is a claim for damages for breach of contract, and that the value of the materials is a factor relevant only as furnishing a basis for as....
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....in those cases in which the building is not taken down by the builder during the continuance of any estate he may possess." The statement of the law was quoted with approval by the Privy Council in Beni Ram v. Kundan Lall [1899] 26 I.A. 58 and in Narayan Das Khettry v. Jatindranath [1927] L.R. 54 I.A. 218. But these decisions are concerned with rights of persons who, not being trespassers, bona fide put up constructions on lands belonging to others, and as to such persons the authorities lay down that the maxim recognised in English Law, quicquid plantatur solo, solo credit has no application, and that they have the right to remove the superstructures, and that the owner of the land should pay compensation if he elects to retain them. That exception does not apply to buildings which are constructed in execution of a works contract, and the law with reference to them is that the title to the same passes to the owner of the land as an accretion thereto. Accordingly, there can be no question of title to the materials passing as movables in favour of the other party to the contract. It may be, as was suggested by Mr. Sastri for the respondents, that when the thing to be produced und....