THE STATE OF BOMBAY AND ANOTHER v. THE UNITED MOTORS (INDIA) LTD. AND OTHERS

Citation: [1953] 1 S.C.R. 1069; 1953 INSC 27

Court: Supreme Court of India

Bench: M. PATANJALI SASTRI , BIJAN KUMAR MUKHERJEA, VIVIAN BOSE, GHULAM HASAN, NATWARLAL HARILAL BHAGWATI

Judgment date: 1953-03-30

Case summary

1953 INSC 27. Supreme Court of India judgment dated 1953-03-30. THE STATE OF BOMBAY AND ANOTHER v. THE UNITED MOTORS (INDIA) LTD. AND OTHERS. Read the...

Judgment text

S. C. R. SUPREME COURT REPORTS 1069 THE STATE OF BOMBAY AND ANOTHER v. THE UNITED MOTORS (INDIA) LTD. AND OTHERS. UNION OF INDIA, I . STATE OF BIHAR, I I STATE OF MADRAS, ' STATE OF MYSORE, ' I STATE OF WEST BENGAL, )- Interveners. STATE OF UTTAR PRADESH, I STATE OF PUNJAB and I STATE OF TRAVANCORE-i COCHIN j [PATANJALI SASTRI c. J. , MUKHERJEA, VIVIAN BosE, GHULAM HASAN and BHAGWATI ,JJ. l Bombay Sales Tax Act (XXIV of 1952). ss. 2 (14), 5, 6, 7, 11 -Bombay Sales Tax Rules, 1952, l'I'. 5, 6-State law imposing sales tax-Validity-Powei· of States to levy tax on inter-State sales -Limitations-Rules-Whether form part of Act-Constitution of India, 1950, arts. 286 (Z) and (2), 14, 301, 304, 226 -ilieaning and scope of art. 286 (1) and art. 286 (2)-Application under art. 226 -D11ty of High Court to find whether fundamental rights have been infringed. The Legislature of Bombay passed an Act entitled the Bombay Sales Tax ,\ct, 1952, which imposed (by s.

5) a general tax on every dealer \Vhose turnover in resper;t of saJes within tho State of Bombay during the prescribed period exceeded Rs. 30,000 and (by s. 10) a special tax on every dealer whose turnover in respect of sales of special goods made within the State of Bombay exceeded Rs. 5,000 during the prescribed period. 'fhe term 'sale' was defined [in s. 2 (l4)] as meaning any transfer of property in goods for cash or deferred payment or other valuable consideration, and an Explanation to this definition provided th·;t the sale of auy goods which have actually been clelivered in the State of Bombay as a direct result of such sale for the purpose of consun1ption in the said State shall be deemed, for the purposes of the Act, to have taken place in the said State irrespective of the fact that the property in the goods has 1 hy reason of c;nch sn. le, passed in 1070 SUPREME coeRT REPORTS [1953] another fltate.

Rules 5 and 6 of the Bombay Sales Tax Rules, 1952, which were brought into force on the san~e day on which Bom- ss. 5 and 10 of the Bombay Sales Tax \ct came into force provid- Another ed for the deduction of the following sales in calculating the taxable turnover, ·viz. , sales which take place (a) in the course of the import o! the goods into, or the export of the goods out of, the territory of India, and (b) in the course of inter-State trade or commerce (being the two kinds of sales referred to cl. (l)(b) and cl. (2) respectively of art. 286 of the Constitution). Rule 5 (2) (i), however, required, as a conditon of the aforesaid deductions, tho,t the goods should be consigned by a railway, shipping or aircraft company or country boat registered for carrying cargo or public motor transport service or by registered post. In •n application under art.

2% of the Constitution challenging the validity of the Act and praying inter alia for a writ against the State of Bombay and the Collector of Sales Tax, Bombay, restraining them from enforcing the provisions of the Act, the High Court of Bombay held that the definition of 'sale' in the Act was so wide as to include the three categories of sale exempted by art. 286 of the Constitution from the imposition of tax by the States, and as the Act imposed a tax on all such sales, it was wholly void. On appeal Held, per (Pata;ija. li Sastri 0. J. , Nukherjea, Ghulam Rasan and Bhagwati JJ,-Bose J. dissenting)-that the Bombay Sales Tax Act (XXIV of 1952) was not nltra vires the State Legislature on the ground that it contravened art. 14 or art. 286 of the Constitution. Bui clause (i) of sub-rule (2) of Rule 5 of the Bombay Sales Tax Rules, 1952, was nltra vires in so far as it provided that in order that sales mentioned in clause (1) (b) and clause (2) of art.

286 of the Constitution may be exempt from tax, the goods shall be consigned only through a railway, shipping or aircraft company or country boat registered for carrying cargo or public motor transport service or by registered post. These provisions of Rule 5 (2) (i) were, however, severable from the other provisions of the Act and could be ignored. Per Bose J. -The Bomba)' Sales Tax Act, 1952, is wholly ultra vires. Per Patanjali Sastri O. J. , Mukherjea and Ghulain Hasan JJ. -Arbicle 286 (1) (a) of the Constitution read with the Explanation thereto and constrned in the light of art. 301 and art. 304 prohibits the taxation of sales or purchases invo! Ying inter. State elements by all States except the State in which the goods are delivered for the purpose of consu1nption therein. The latter State is left free to tax such sales or purchases and it derives this power not by virtue of the Explanation to art. 286 (1) but under art. 246 (3) read with entry 54 of List II.

The view that the Explanation does not dep1·ive the State in which the p1·operty in the goods passed, of its taxing power and that consequently both the State in which the property in the goods passes and t]je State • s. c. R. SUPREME COUR'l' REPOH'l'S 1071 in 'vhich the goods are delivered for constunption lHt\'e the pu\'·ler 1953 to tax, is not corl'flct. ") . " '1. 'hcState ofBu1n· (11 The expression for the purpose of consumption in ba" ,,,~ '· ti " · E 1 · ( ) . .. , ! r" 11 no i. cr that S late m the xp anat10n to cl. 1 of art. 286 must be un- '" derstood as having reference not merely to the individual importer J'lw u ·iei or purchaser but as contemplating distribution eventually to \lotors ;7 ~· 1 consumers ~n general within the State, and all buyers 'vit~in the itd. aud ,ih:;:! 0 Sta to of dehvery from out-of-State sellers, except those buy mg for re-export out of the State, would he liable to be taxecl by the State. (iii) Clause (:l) of art.

286 does not affect the power of the State in which deliyery of goods is made to tax inter-State sales or purchases of the kind mentioned in the Explanation to cl. (i). The effect of the Explanation is that such transactions are sayed from the ban imposed by art. 286 (2). (iv) The fact that sales which take plt1Ce (a) in the course of the import of the goods into, or export of the goods out of, tho territory ol India and (h) in the course of inter-State tracle or commerce, are not expressly exempted by the Born hay Sales Tax Act could not render the Act 1! ltra vires inasmuch as the Rules framed under the Act and brought into force simultaneously must be read as a part of the Act and Rules 5 and 6 of these Rules exempt •uch sales. Delhi Laws Act, In re ([1951] S. C. R. 747) referred to. (\') The fact that the Bombay flales Tax Act dues not ex-preHsly exclude from its operation the transactions mentioned in art. 286 (1) (a) of the Constitution, vi ..

, sales and purchases outside the State, l1oes not render the A. ct u,ltra vires inasmuch as) on a true construction of the Explanation to art. 286 (1) (a) sales or purchases in respect of goods delivered for consuinption outside Bombay are not lttxable under the Act, eyen if the goods are in Bombay and the sale is effected there. (vi) The provisions of the charging sections 5 and 10 of tbe Act fixing Rs. 30,000 and Rs. 5,000 as tbe minimum taxable turnover for general tax and special tax resPectively are not dis· criminatory and void under art. 14 rea1l with art. 13 of the Constitution aS snch classification is perfectly reasonable and no discrimination is involved in it.

(vii) Taxing statutes imposing tu,x on subjects divisihle in their nature which do not exclude in express ter1us subjects exempted by the Constitution, should not for that_~eason be dec-lal'ed wholly nltra vires and void, for, i:1 such (jases it is al\vays feasible to separate taxes levied on authorised subjects from those levied on exempted subjects and to exclude tbe latter in the assessment to tax. In such cases the statute itself should bo allowed to stand, the taxing authority being prevented by injunction from imposing the tax on subjects exempted by the Constitution. • > 1072 SUPREME COURT REPORTS [1953] 1963 Bowman v. Continental Co. (256 U. S. 642; 65 L. l! ld. 1130) relied on. Punjab Province v. Dattlat Singh tind Another ([1942] The State of Boin- F. C. R. 67) distinguished. Anothe,r (viii) A sale "in the course of inter-State trade" in art. vu. . 286 (2) of the Constitution includes a sale by a trader in one mted 0 · S Tl · · t (I a· ) otate to a consumer in another tate.

ie expression ;. s no con- ~n. otor8 11 ia aiul Others fined to sales between t"'O traders only. (ix) The expression "for such State 01· any part thereof" in art. 246 (3) of the Constitution cannot be taken to import into entry 54 of List II the restriction that the sale or purchase referred to must take place within the territory of that State. All that it means is that the laws which a State is empowered to make must be for the purposes of that State. (x) It is always desirable when relief under art. 226 is sought on allegations of infringement of fundamental rights, that the Court should satisfy itself that such allegations are well founded before proceeding further with the matter. Bose J. -(i) Article 286 (2) cannot be construed in the light of art. 304 (l) as the two articles deal with different matters. (ii) The basic idea underlying art. 286 is to prohibit taxation in the case of inter-State trade and commerce until the ban under cl.

(2) of the said article is lifted by Parliament, and always in the case of imports and exiiorts. When the ban is lifted, the l! lxplanation to cl. (l) of 286 comes into play to determine the situs of the sale. This Explanation does not govern cl. (2) of art. 286 and, as it can only apply to transactions which in truth and in fact take place in the course of inter-State trade and commerce, there is no need to call it in aid until the ban is removed. (iii) Explanation (2) to the definition of sale in s. 2 (14) of the Bombay Sales Tax Act, 1952, which embodies word for word the provisions of the l! lxp! anation to art. 286 (1) directly offends cl. (2) of the said article as the ban under cl. (2) has not been lifted by the Parliament.

(iv) Assuming that the Bombay Sales Tax Rules exclude all sales which are exempt from taxation under the Constitution, they cannot save the Act, for the Rules are made by a subordinate authority which is not the legislature and the validity of an Act of the legislature cannot be made to depend on what a subordinate authority choses to do or not to do. (v) The good portion of the Act cannot be separated from the bad in this case, even if the Explanation to s. 2 (14) is expunged and the whole Act is therefore ultra vires. Bllagwati J. -(i) Under the general law relating to sale of goods, a sale must be regarded as having "taken place" in the State in which the property in the goods sold bas passed to the 1953 purchaser and that State is entitled to tax the sale or purchase as having taken place inside the State. The Explanation to art. -- 0 286 (1) does not take away the right which the State in which TJ,, "'"'' /Bom· the property in the goods passed has to tax the sale or purchase bn!

f and Another but only deems such purchase or sale, by a legal fiction, to haYe v. taken place in the State in which the delivery of the goods bas The Unitcrl been made for consumption therein so as to enable the latter ,\lotvrs (India) State also, to tax the sale or purchase in question. The Explana· Lid. and Others tion only lifts the ban imposed by cl. (1) (a) on taxation of s>eles or purchases which take place outside the State, to the extent of the transactions mentioned in the Explanation to enable the delivery State also to tax them. (ii) Delivery of the goods for the purpose of consumption in the delivery State means delivery for the purpose of use by the consumers, and does not include delivery to a dealer purchasing the goods across the border for dealing with or disposing of the same in the ordinary course of trade, and the J<lxplanation to art.

286 (1) therefore only covers those cases where, as a direct result of the sale or purchase, goods are delivered for consumption in the delivery State by the consumer and the delivery State can tax only this limited class of transactions under the Explanation. (iii) The genernl provision enacted in arL 286 (2) against the imposition 'Of tax on the sale or purchase of goods in the course of inter-State trade 01· commerce should give way to the special provision which is enacted in the Explanation to art. 286 (1) {a) enabling the delivery State to tax such sale or purchase in the limited class of cases covered by the Explanation, the transactions covered by the Explanation lJeing thus lifted out of the category of transactions in the course of inter-State trade or commerce and assimilated to transactions of sale or purchase \vhich take place inside the State and thus invested with the character of an intra-State sale or purchase so far as the delivery State is concerned.

CIVIL APPELLATE J URISDIC'l'lON : Civil Appeal No. 204 of 1952. Appeal under article 132 (l) of the Constitution of India from the Judgment and Order dated 11th De-cember, 1952, of the High Court of Judicature at Bombay (Chagla C. J. and Dixit J. ) in Miscellaneous Application No. 289 of 1952. The material facts are stated in the judgment. 1vf. P. Arnin, Advocute·General of Bornbuy, (M .. ilf. Desai and G. N. Joshi, with him) for the appellants. N. ltf. Seervai and J. B. Dadachanji for the respondents. . , 1074 SUPREME COUR'r REPOR'fS [1953] Jvl. 0. Setalvad, Attorney-General for India, (Porus A. 1l1ehta, with him) for the Union of I1'idift. ~-~-- , . ,. . Another Lal Narain Sinha for the State of B1har. V. K. '! '. Chari, Advowte-General of Jl! Iadms, (A. Kuppuswami, with him) for the State of Madras. (Indra) . Othcro. A. R. Soinanatha Iyer, Advocate-Cleneral of 1l1ysore, (R. Ganapathy Iyer, with him) for the State of Mysore. B. Sen for the State of West Bengal. K. L.

1lfisro, Adrncate-General of Uttar Pradesh, K. B. Asthanrt, with him) for the State of Uttar Pradesh. S. JV]. Sikri, Advocate-Geneml of Punjab, (111. L. Sethi, with him) for the State of Punjab. 'l. '. N. Subrahmanya Iyer, Advocate-Cleneml of 'L'ravancore-Oochin State, (1vl. R. Krishnrt Pillrti, with him) for the State of Travancorc-Oochin. 1953. l\farch 30. The judgment of Patanjali Sastri 0. J. , Mukherjea and Ghulam Hasan JJ. was delivered by Patanjali Sastri 0. J. Vivian Bose and Bhagwati JJ. delivered separate judgments. PATANJALI S,1sTR1 C. ,J.

-This is an appeal from the judgment and order of the High Court of Judicature at Bombay <leclaring the Bombay Sales Tax Act, 1952, (Act XXIV of 1952), itltra vires the State Legislature and issuing a writ in the nature of mandamus against the State of Bombay and the Collector of Sales Tax, Bombay, appellants herein, directing them to forbear and desist from enforcing the provisions of the said Act against the respondents who are dealers in motor cars in Bombay. The Legislature of the State of Born bay enacted the Bombay Sales Tax Act, 1952, (hereinafter referred to as "the Act") and it was brought into force on October 9, 1952, hy notification issue\! under section 1 (3) of the Act, except sections 5, 9, 10 and 47 which came into operation on November 1, 1952, as notified under section 2 (3). On the same day the rules made by the State Government in exercise of the power conferred by section 45 of the Act also came into force.

• On November 3, 1952, the respondents 1 to 6, who 1953 are companies· incorporated unrlPr the Indian Com- Ti ---- 8 . ' 9 3 d I l\T h' w tateofBom-pames """ct, 1. l , an respom ent "'o. 7, a partners ip l>mi and Another firm, all of whom are carrying on business in Bombay · '" of buying and selling motor cars, presented a petition The Unitfd to the High Court under article 226 of the Constitution Motors (India) challenging the validity of the Act on the ground that Ltd. and Othm it is ultra vires the State Legislature, inasmuch as it J)afanjnli nu·1Jorted to tax sales ancl rmrchases of goods regard-l '--' . _, 8aNtti C,J, less of the rc8trictions imposed on r-ltate legislative power by article 28G of the Constitution. It was also alleged that the provisions of the Act \VC;re discriminatory in their effect and, therefore, void under article 14 read with article 13 of the Constitution.

The respondents accordingly prayed for the issue of a writ in the nature of mandamus against the appellants pre-venting them from enforcing the provisions of the Act against the respondents. A further ground of attack was added by amendment of the petition to the effect that the Act being wholly ultra vires and void, the provisions requiring dealers to apply for registration in some cases and to obtain a licence in some others as a condition of carrying on their business, infringed the fundamental rights of the respondents under article HJ (1) (g) of the Constitution.

In the affidavit filed in answer the appellants traversed the allegations in the petition and contended, inter alia, that the Act was a complete code and provided for special machinery for dealing with all questions arising under it, inclurling questions of con-stitutionality, and, therefore, thr petition was not maintainable, that the present case was not an appropriate one for the issue of a writ under article 226 as the validity of the imposition of a tax was questioned, that no assessment proeeedings having been initiated against the respondents and no demand notice having been iswed, ihe respondents had no cause of action, and that, properly construed, the Act and the Rules did not contravene ai·tiele 286 or any other provisions of the Constitution and did not infringe :my fundamental right of the respondents, The petition was heard by a Division Bench of the Bom. High et;urt co~sistin& o: Chagla _C. J: and D! x! t J. Another Chagla C. J. , \\ho delivered the Judgment, D1x1t J.

concurring, overruled the preliminary objection dis-tinguishing the decisions cited in support thereof by (Indw) pointing out that the principle that a (;()Hrt would Othm t · t" "t J d t 1 no issue a preroga 1ve wr1 w ien an a equa e a ter-native remedy was available could not apply where, as here, a party came to the court with an allegation tliat his fundamental rights had been infringed and sought relief under article 226. The learned Judges however thought, in view of the conclusion they had come to on the question of competency of the State Legislature to pass the Act, it was "not necessary to consider the challenge that has been made to the Act under articles 14 and 19" and expressed no opinion on the alleged infringement of the respondents' fundamental rights. On the merits, the learned . Judges held that the definition of "sale" in the Act was so wide as to include the three categories of sale exempted by article 286 .

from the imposition of sales tax by the Rtates, and, as the definition governed the charging sections 5 and 10, the Act must be taken to impose the tax:; on such sales also in contravention of article 286. The. Act must, therefore, be declared wholly void, it being impossible to sever any specific offending provision so as to save the rest of the Act, as "the defini. tion pervades the whole Act and the whole scheme of the Act is bound up with the definition of sale". The learned . Judges rejected the argument that the Act and the Rule(must be read together to see whether the State has made a law imposing a tax in contravention of article 286, remarking that "if the Act itself is bad, the rules, made under it cannot have any greater efficacy". Nor was the Government, which was authorised to make rules for earrying out the purpose of the Act, under an obligation to exclude the exempted sales.

The rules, too, did not exclude all the three categories of exempted sn,les but only two of them, anrl even stwh exrlnsion was hedged ,. 19 3 In view of the importance of the issues involved, " notice of_ the appeal was issued to the Advocates-The State of Bom. General oi States under Order XLI, Rule l, and many bay and Another of them intervened and appeared before us. The v. Attorney-General of India, to whom notice was also The United 0 sent, intervened on behalf of the Union of India. We ~~ " ~~·~ia) have thus had the assistance of a full argument deal- · ".. '. '. _ t ers. ing with all aspects of the case. Patanjali Sastri ~ 0 . J. The Advocate-General of Bombay, appearing on behalf of the appellants, took strong :exception to the manner in which the learned Judges below dis-posed of the objection to the maintainability of the petition.

He complained that, having entertained the petition on the ground that infringement of fundamental rights was alleged, and that the remedy ·under article 226 was, therefore, appropriate, the learned Judges issued a writ without finding that any. fundamental right had in fact been infringed. Learned counsel for the State of West Bengal also represented that parties in that State frequently got petitions under article 226 admitted by alleging violation of some fundamental right, and the court sometimes issued the writ asked for without insisting on the allegation being substantiated. We are of opinion that it is always desirable, when relief under article 226 is sought on allegations of infringement of fundamental. rights, that the court should satisfy itself that such allegations are well founded before proceeding further with the matter.

In the present case, however, the appellants can have no· grievance, as the respondents' allegation of infringement of their fundamental right under article 19 (1) (g) was based on their contention that the Act was ultra vires the State Legislature, and that contention having been accepted by the Court below, there would clearly be an unauthorised restriction on the respondents' right to carry on their trade, registration and licence being required only to facilitate collection of the tax imposed. As ! \fr. Seervai for the respondents rightly submitted, the fact that the Court below left the question undecided, though the point was concluded by the decision of this Court in . 'l! ohammad Yasin v. Tlze Town Area Committee, Jalalabad ('); which was 01n- . Another brought to the notice of the learned Judges, was not the fault of the respondents and gave no real cause for complaint. . . .

Before cons1dermg whether the appellant State has made a law imposing, or authorising the imposition of, a tax on sales or purchases of goods in disregard of constitutional restrictions on its legislative power in that behalf, it is necessary to aseert. ain the scope of such power and the nature and extent of the restrictions placed upon it by article 286. The power is conferred by article 246 (3) read with entry 54 of List II of the Seventh Schedule to the Constitution. The Legislature of any State has, under these provisions, the exclusive power to make laws "for such State or any part thereof" with respect to "taxes on the sale or purchase of goods other than newspapers". The expression "for such State or any part thereof" cannot, in our view, be taken to import into entry 54 the restriction that the saJe or purchase referred to must take place within the territory of that State.

All that it means is that the laws whieh a State is empowered to make must be for the purposes of that State. As pointed out by the Privy Council in the Wallace Bro-thers case (') in dealing with the competency of the Indian Legislature to impose tax on the income arising abroad to a non-resident foreign company, the constitutional validity of the relevant statutory provisions did not turn on the possession by the legislature of extra-territorial powers but on the existence of a sufficient territorial connection between the taxing State and what it seeks to tax. In the case of sales-tax it is not necessary that the sale or purchase should take place within the territorial limits of the State in the sense that all the ingredients of a sale like the agreement to sell, the passing of title, delivery of the goods, etc. , should have a territorial connection with the State.

Broadly speaking, local activities of buying or selling carried on in the State in relation to local goods would be a suffieient basis to sustain the taxing power of the State, provided of course, such Ir) [1952] S. C. R. 572. (2) [1948] S. C. R. r. • S. C. R. SUPRE~1E COUR'l' UE. PORTS 1079 1953 activities ulti1? ately resulted in a concluded sale or purchase to be taxed. '}_'he State of Boni-ln exercise of the legislative powor conferred upon bay "'"1 Another them in substantially similar terms by the Govern- v. ment of India Act, 1935, the Provincial Legislatures The United . £" il'. lotor;. : (India) enacted sa es-tax 1 l aws 1or their respective Provinces, Ltd. and Other. •. acting on the principle of territorial nexus referred to above; that is to say, they picked out one or more of Patanjat1. the ingredients constituting a sale and made them the 8a. •tri O. J. basis of their sales-tax legislation.

Assam and Bengal made among other things the actual existence of the goods in the Province at the time of the contract of sale the test of taxability. In Bihar the production or manufacture of the good~ in the Province was made an additional ground. A net of the widest range perhaps was laid in Central Provinces and Berar where it was sufficient if the goods were actually "found" in the Province at any time after the contract of sale or pure hase in respect thereof was made. Whether the territorial nexus put forward as the basis of the taxing power in each case would be sustiiined as sufficient was a matter of doubt not having been tested in a court of law. And such claims to taxing power led to multiple taxation of the same trnnsac-tion bv difforent Provinces and cumulation of the burdei; falling ultimately on the consuming public.

This situation posed to the Constitution makers the problem of restrieting the taxing power on sales or purchases involving inter-State elements, and alleviat-ing the tax burden on the consumer. At the same time they were evidently anxious to maintain the State power of imposing non-discriminatory taxes on goodH imported from other States, while upholding the economic unity of India by providing for the freedom of inter-State trade and commerce. In their attempt to harmonise and achieve these somewhat conflicting objectives they enacted articles 286, 301 aml 304. These articles read as follows : 286. (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of good8 where sueh sale or purchase takes place- (a) outside the State ; or 'heStateofBom- (b) in the course of the i~port oft! 1e go_ods iu~o, Another or export of the goods out of, the territory of India. Explanation.

-For the purposes of sub-clause (a), J a sale or 1mrchase shall be deemed to have ta ken · . . 1 Others place in the State m which the goods have actual y been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State.

(2) Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce : Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the thirty-first day of March, 1951. (3) So law made by the Legislature of a State imposing, or authorising the imposition of, a tax on the sale or purchase of any such goods as have been declared by Parliament by law to be essential for the life of the community shall have effect unless it has been reserved for the consideration of the President and has received his assent. 301.

Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. 304. Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law- (a) impose on goods imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not J&5J to discriminate ! Jetween goods so imported and goods Tl s· -. , '-' , w tate oJ 8 01n· so manufactured or produced ; and bay and Another (b) impose such reasonable restrictions on the v. . d f d ' t · h 'l'hc Unite4 free om o tra e, commerce or Ill ercourse wit or }J t (I d' J 0 within that State as may be required in th0 public ~t~. ;:d ;,. ;~. 0 interest: Provided that no Bill or amendment for the pur- Patan}ali 8astri O. J. poses of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President.

It will be seen that the principle of freedom of inter- 8tate trade and commerce declared in article 301 is expressly subordinated to the State power of taxing goods imported from sister States, provided only no discrin1ination is made in favour of similar goods of local origin. Thus the States in India have full power of imposing what in American State legislation is called the use tax, gross receipts tax, etc. not to speak of the familiar property tax, subject only to the condition that such tax is imposed on all goods of the same kind produGed or manufactured in the taxing State, although such taxation is undoubtedly calculated to fetter inter-State trade and commerce. In other words, the commercial unity of India is made to give way before the State-power of imposing "any" non-discriminatory tax on goods imported from sister States.

Having thus provided for the freedom of inter-State trade and commerce subject to the important qualifi-cation mentioned above, the authors of the Constitution had to devise a formula of restrictions to be imposed on the State-power of taxing sales or purchases involving inter-State elements which would avoid the doubts and difficulties arising out of the imposition of sales-tax on the same transaction by several Provincial Legislatures in the country before the commencement of the Constitution. This they did by enacting clause (1) (a) with the Explanation and clause (2) of article 286. Clause (1) (a) prohibits the taxation of all sales or purchases which take place oul8ide the State, but a localised sale is a troublesome coi;i. cept, for, a sale is a composite transaction involving as it does several om· ] h 11 c f Another e ements sue as agreement to se , trans1er o ownership, payment of the price, delivery of the goods and so forth, which may take place at different places.

(India) How, then, is it to be determined whether a particular Others. sale or purchase took place within or outside the State ? It is difficult to say that any one of the ingredients mentioned above is more essential to a sale or purchase than the others. To solve the difficulty an easily applicabie test for determining what is an outside sale had to be formulated, and that is what, in our opinion, the Explanation was intended to do. It provides by means of a legal fiction that the State in which the goods sold or purchased are actually delivered for consumption therein is the State in which the sale or purchase is to be considered to have taken place, notwithstanding the property in such goods passed in another State. Why an " outside " sale or purchase is explained by defining what is an inside sale, and why actual delivery and consumption in the State are made the determining factors in locating a sale or purchase will presently appear.

The test of sufficient territorial nexus was thus replaced by a simpler and more easily workable test: Are the goods actually delivered in the taxing State, as a direct result of a sale or purchase, for the purpose of consumption therein ? Then, such sale or purchase shall be deemed to have taken place in that State and outside all other States. The latter States are prohibited from taxing the sale or purchase; the former alone is left free to do so. Multiple taxation of the same transaction by different States is also thus avoided. It is, however, argued on behalf of Bombay that the Explanation does not say that the State of delivery is the only State in which the sale or purchase shall be deemed to have taken place. If that was the intention, it would have been easy to say so. On the other hand, the non-obstante clause in the Explanation is said to indicate that, apart from cases covered by the legal fiction, the passing of property in the goods is to determine the place of sale.

Thus, both the State of delivery • and the State in which the property in the goods sold 1953 passes are, it is'claimed, empowered to tax. We are --- 7 unable to accept this view. It is really not necessary 'he State of Boin- • · • . . bay and An. other m the context to use the word "only ·' m the way v. suggested, for, when the Explanation says that a sale The United or purchase shall be deemed to have taken place in Motors (l11dia) a particular State, it follows that it shall be deemed Ltd. and Others, lilso to have taken place outside the other States. Nor Patanjali can t. lie non-obstante clause be understood as implying Sast•i o. J. that, under the general law relating to the sale of goods, the paosing of the property in the goods is the determining factor in locating a sale or purchase.

Neither the Sale of Goods Act nor the common law relating to the sale of goods has anything to say as to what the situs of a sale is, though certain rules have heen la id down for ascertaining the intention of the contracting parties as to when or imder what conditions the property in the goods is to pass to the buyer. That question often raises ticklish problems for lawyers and courts, and to make the passing of title the determining factor in the location 0f a sale or purchase would be to replace old uncertainties and difficulties con-nected with the nexus basis with new ones. Nor would the hardship of multiple taxation be obviated if two States were still free to impose tax on the same transaction. In our opinion, the non-obstante clause was inserted in the Explanation simply with a view to make it clear beyond all possible doubt that it was immate-rial where the property in the goods passed, as it might otherwise be regarded as indicative of the place of sale.

It is also to bP noted in this connection that, on the construction suggested by the Advocate-General of Bombay, namely, that the Explanation was not intended to deprive the State in which the property in the goods passed of its taxing power, but only to exclude the sales or purchases of the kind described in the Explanation from the operation of clause (1) (a) which prohibits taxation of outside sales or purchases, the Explanation would operate, not as an explanation, but ris an exception or a proviso to that clause.

It may be that the description of a provjsion cannot be --JB decisive of its true meaning or interpretation which om- d d 1 d d h · b h Another must epen Ont le WOr S USC t erem, ut, W en two interpretations are sought to be put upon a provision, United that which fits the description which the legislature (India) has chosen to apply to it is, according to sound canons Othm of construction, to be adopted provided, of course, it is consistent with the language employed, in preference h to the one which attributes to t e provision a different effect from what it should have according to its description by the legislatnre.

It was then said that the formula of delivery for consumption within a State could only cover the com-paratively few cases of sales or purchases taking place directly between the consumers in the delivery State and dealers in other States, and inter-State sales or purchases between dealers in either State, which must be larger in number and volume, would still be outside the scope of the Explanation, which could not, therefore, have been intended to empower only one State, namely, the delivery State, to tax all inter-State sales or purchases. We see no force in this objection. It is to be noted that the Explanation does not say that the consumption should be by the purchaser himself. Nor do the words " as a direct result " have reference to consumption. They qualify "actual delivery".

The expression " for the purpose of consumption in that State" must, in our opinion, be understood as having reference not merely to the individual importer or purchaser but as contemplating distribution eventually to consumers in general within the State. Thus all. buyers within the State of delivery 1from out-of-State sellers, except those buying for 're-export out of the State, would be within the scope of the Explanation and liable to be taxed by the State on their inter-State transactions. It should be remem- I bered here that the Explanation deals only with inter- State sales or purchases and not with purely local or domestic transactions. That these are subject to the taxing power of the State has never been questioned. We are therefore of opinion that article 286 (1) (a) read with the Explanation prohibits taxation of sales • • or purchases involving inter-State elements by all I96J States except the State in which the goods are deli- --c th f • h . .

h The State of Bom- V~red 1or e purJ. >OSe o consumpt10n t erem m t e bay and Another wider sense explamed above. The latter State is left v. free to tax such sales or purchases, which power it The United derives not by virtue of the Explanation but under Mot<w• (India) article 246 (3) read with entry 54 of List II. Ltd. and Other•-. We will now consider the effect of article286(2) on Patanjali the taxability of inter-State sales or purchases of the Sastri a. J. kind envisaged by the Explanation to clause(l)(a). As both the Explanation and clause (2) deal only with inter-State transactions, it may appear at first blush that whatever taxing power the Explanation may have reserved to the State of delivery is nullified by clause (2), at any rate until Parliament chooses to lift the ban under the power reserved to it by the opening words of clause (2). As one way of avoiding this result it was suggested by the Advocate-General of Bombay that the expression "inter-State trade and.

commerce" in clause (2) may be construed as meaning dealings between a trader in one State and a trader in another, so that the clause would be applicable only to sales or purchases in the course of dealings between such traders. The ban under clause (2) could not, in that view, affect the taxability of a sale by a trader in one State to a consumer or user in another. We cannot agree with this restrictive interpretation of the expression " inter-State trade and commerce". The sale by a trader in one State to a user in another would be a sale "in the course of inter-State trade" according to the natural meaning of those words, and we can see no reason for importing the restriction that the transaction should be one between two traders only. This is, however, not to say that the ban under clause (2) extends to the taxing power which the delivery State is left free, under the Explanation, to exercise.

We are of opinion that the operation of clause (2) stands excluded as a result of the legal fiction enacted in the explanation, and the State in which the goods are actually delivered for consumption can impose tax on inter-State sales or purchases. The effect of the Explanation in regard to inter-State de,alings is, in our view, to invest what, in truth, is an inter-State transac- Bom- tion with an intra-State character in relation to the State Another d l" l (2) h £ h of e ivery, and c ause · can, t ereiore, ave no application. It is true that the legal fiction is to operate "for the purposes of sub-clause (a) of clause (1)", ! mt that means merely that the Explanation is designed to explain the meaning of the expres- "d h S ' · J (1) ( ) Wh sion "outs1 e t e , tate' m c. a use a . en once, d h . l fi .

however, it is etermined with t e aid of tie ctwnal test that a particular sale or purchase has taken place within the taxing State, it follows, as a corollary, that the transaction loses its inter-State character and falls outside the pm-view of clause (2), not because the definition in the Explanation is used for the purpose of clause (2), but because such sale or purchase becomes in the eye of the law a purely local transaction. It is sttid that even though all the essential ingredients of a sale took place within one State and the sale was, in that sense, a purely intra-State transaction, it might involve transport of the goods across the State-boundary, and that would be sufficient to bring it within the scope of clause (2). 'Ve find it difficult to appreciate this argument. As already stated, the Explanation envis-ages sales or purchases under which out-of-State goods are imported into the State.

That is the essential element which makes such a transaction inter-State in character, and if it is turned into an intra-State transaction by the operation of the legal fiction which blots out from view the inter-State element, it is not logical to say that the transaction, though now become local and domestic in the eye of the law, still rebiins its inter-State character. The statutory fiction completely masks the inter-State character oft. he sale or purchase which, as a collateral result of such making, falls outside the scope of clause (2). It is said that, on this view, clause (2) would become practically redundant, as clause (1) (a) read with the explanation as construed by us would itself preclude taxation by other States of inter-State sales m· purchases of the kind referred to in the explanation. · As 8. C. R. SUPREME UOURT REPORTS 1087 1953 we have already pointed out, the Explanation does not cover cases of inter-State sales or pmchases under 1'hc.

Stateof Bom-which the goods are imported into the State for re- bay and Anothn· export to other States and possibly other categories of v. sales or purchases which do not satisfy all the require- 1'he United rnents of the explanation. W'hether such transactions ~1;;",. ': ~;~ta) are sufficiently numerous for the Omstitution to take · "_"_ "'· note of is a matter of opinion and it cannot have much Patanjali bearing on the question of construction. Sastri GI On the other hand there are, in om judgment, cogent considerations which tend to support the view we have expressed above that clause (2) was not intemkd to affect the power of the delivery State to tax inter-State sales or purchases of the kind mentioned in the Explanation. As we ha1•c seem, in our Constitution the principle of freedom of inter-State trade and commerce is made to give way before the 8tate-powp1· of imposing non-discriminatory taxes on go<ids imported from othel' States.

Now, article 286(2) is but one phase of the protection aceorded to inter- State tmde anrl l'ommerce from the fettering power of State taxation. As ari. icle 286 deals with restrictions on the power of the St>itcs to impose tax on the sale or purchase of goodH, the Constitution makers evidently thought that it should contain also a specific provision safeguarding sales or purchases of an inter-State <'haracter a. gainst the taxing power of the 8tatl's. It is, howrver, reasonable to suppose that this parti-cnlar form of protection to inter-State trade and commerce provided in article 286(2) was not intended to have a wider operation than what is contemplated in Part XIII which declares the general principle of free· dom of inter-State connnerc:c and defines the measure of constitutional protection it should enjoy. 1f sueh protection is intended to give way before the State-power of taxing goods imported from sister 8tates, subjeet only to the condition against discrimination.

it is legitimate to suppose that the ban under article 286(2) should not operate so as to nullify that power. True, article 304 (a) deals with the restrictions as to imposition of tax on goods, while article 286 1088 SUPREME COUR;r REPORTS [1953] deals with the restrictions as to imposition of tax on sales or purchases of goods. Bu't this distinc- Bom· tion loses its practical importance in the case of ~-h- sales-tax . imposed by the delivery . State under t h e conditions mentioned in the Explanation, for, if we look behind tho labels at the substance of the matter, it becomes olear that a tax on sales or purchases imposed by the State in which the goods are delivered for con· h ]r d 1 ' d · sum ption, in t e sense a ·ea y exp ame , is, m economic effect practically indistinguishable from a tax on the consumption or use of the goods.

The words "in which the goods have actually been delivered" ensure that the goods have come into the State, and the expression " for the purpose of consumption in the State" shows that, though the tax is formally laid on sales, its incidence is aimed at the consumers in the State. Discussing the true nature of a duty of excise and a tax on the sale of goods, Gwyer C. J. observed 1 in the Central Provinces and Berar Sales Tax case ( ): "It is common ground that the Court is entitled to look at the real substance of the Act imposing it, at what it does and not merely at what it says, in order to ascertain the true nature of the tax. Since writers on political economy are agreed that taxes on the sale of commodities are simply taxes on the commodities themselves, it is possible to regard a tax on the retail sale of motor spirit and lubricants as a tax on those commodities".

Therefore, sales-tax, the incidence of which is really directed against the consumer, is, in substance, a tax on the goods imposed, no doubt, on the occasion of the sale as a taxable event. It will now be seen why the Explanation insists on actual delivery of the goods in the State and their consumption in the State, and why an " outside" sale or purchase is explained by defining what is an inside sale. The object clearly is to assimilate the conditions, under which the delivery State is left free to tax inter-State sales or purchases, to those under which a State is empowered to impose tax on goods imported into the State from other States under article 304 (a). If then, a non-discriminatory use or consumption tax imposed under (1) [1939) F. C. R. 18, 42.

article 304 on goods imported from other States does 196J not infringe the freedom of inter-State commerce tl ] l b t' J 301 't f l l' The State of Bom-ec ~rec y ar IC e , pan y o reason anc po ICY bay and Anoth6r reqmres that a tax on sales or purchases imposed by v. the State in which the goods are actually delivered for 1'he United consumption in the State should not be regarded as Motors (India) violative of the ban under article 286 (2), and that is Lrd. and Othm. what the statutory fiction enacted in the Explanation Patanjali was, in our judgment, designed to achieve by divesting Sastri o. J. the sale or purchase of the kind referred to in the Explanation of its inter-State eharacter in relation to the State of delivery. There is another important consideration which strongly supports the view we have indicated above, namely article 286 (2) does not affect the taxation of such sale or purchase by the State of delivery.

If both the exporting State and the delivery State were entitled, notwithstanding article 286(2), to tax the inter-State sale or purchase, as suggested by the Advocate-General of Bombay, it would mean that the transaction is subjected to double taxation as compared with a sale by a local dealer which pays only one tax. It is precisely this type of discriminatory lmrtlen which the principle of freedom of inter-State commerce seeks to avoid, for, it places inter-State tra<,l. e at a disadvantage in competition with local trade. On the other hand, if neither State could tax such sale or purchase as is referretl to in the explanation, until Parliament lifted the ban, as the Advocate-General of Madras was inclined to think, the result would be that consumers could get out-of-State goods more cheaply than local goods, and local dealers would suffer competitive disadvantage as compared with outside dealers.

Does the principle of freedom of inter-State commerce require that a State should foster such commerce to the detriment of domestic trade 'I It is one thing to avoid impeding inter-State commerce by imposing discriminatory burdens upon it which internal trade does not have to bear, but quite another to place local produc~s and local business at a disadvantage in competition with outside goods and dealers. It would be a curious perversion of the principle pf freedom of inter-State commerce to drive local custom across thf~ TheStateoJBmn·border to ontside dealers, and that, in our opinion, Another could not have been contemplated. United The view which we have expressed above avoids (India) either anomitly and would place local trade and inter- Othm. S d 1 c · n'h d l' "t t , tate tra e on an equa tootmg. . L e e 1very ,~ a e would tax both local and out-of-State goods equally c. J.

without discrimination against either and that, we think, is the only measure of protection which article 286 could reasonably be supposed to accord to inter- State sales or purchases, when it is constrned in the light of articles 301 and 304. The question next arises as to whether the Act contravenes all or any of the restrictio1rn imposed by article 286. It is the respondents' case that the sales and purchases made by them in Bomba. y, in the course of their business, include all the three categories excluded from the scope of State-taxation by article 286, and the Ad seeking to bring all of them within its scheme of taxation is bad. It is, therefore, necessary to make a brief smvey of the main provisions of the Act and of the rules made thereunder, in order to see whether the respondents' complaint is well-fonnded, and, if so, whethet· the whole or any part of the Act is to be declared unconstitutional and void.

The Act provides for levy of two kinds of taxes, nalled the "general tax" and the "special tax", by the two charging sections 5 and 10 respectively. "Dealer" is defined in section 2 (7) as a person who carries on the business of selling goods in the State of Bombay whether for commission, remuneration or otherwise and includes a State Government which carries on such business and any society, club or asso-ciation which sells goods to its members. The Expla- . nation (2) to this definition provides that the manager or agent of a dealer who resides outside the State of Bombay and carries ou the business of selling goods in the State of Bombay shall, in respect of such business, be deemed to be a dealer for the purpose of the Act. "Sale" is defined by section 2 (14) with all • • 3 its grammatim~l variations and cognate expressions as 195 meaning a. ny transfer of property in o·oodR for cash or Th - ~ 0 .

• e 8 tate o 18 uni· deferred payment or other valuable cons1derat1011 andb"'' and Another includes any supply by a society, a club, or an asso- · v. ciation to its members on payment of price or of fees 1•1oe United or subsrriptions but does not include a mortgage, Moto1w (India) hypothecation, diarge or pledge. The words "buy" LM. and Othm. and "purchase" are to be construed accordingly. l'a-;:,,,jaU There arr two Explanations attached to this definition 3,,, 11 ; o. J. of which tht· seeond, which is ohviouslv hasell on the Explanation to clause (1) (a) of articl~· 286, provides that the sale of any goods which have actually been delivered in the l:ltate of Bombay as a direct result of sueh sale for the purpose of consumption in the said ::-ltate, shall be deemed, for the purposes of this Act, to have taken place in the said State, irrespective of the fact that the property in the goods has, by reason of such sale, passed in another State.

"Turnover" is defined by section 2(21) as tho aggregate of the amount;; of sale price received and receivable by a dealer in l'espect of an~· sale of goods made 1luring a given period after deducting the nmount, if any, refunded by the dealer to a purchaser in respect of any goods purchased and returned by the purchaser within th1· prescribed period. Section 5 imposes the general tax on every dealer whose tmn-over in respect of sales within the Rtate of Bombay during any of the three consecutive years immediately preceding the first day of April, 1952, has exceeded Rs. 30,000 or whose turnover in respect of such sales exceeds the said. limit during the yc>ar commencing on the first day of April, 1952. The tax is to be levied on his taxable turnover in respect of sales of goods made on or after the appointed day, i. e. , 1st November, 1952, at the rate of 3 pies in the rupee (section 6).

By section 7 the taxable turnover is to he determined by first deducting from thP turnover of the dealer in respect of all his sales of goods during any period of his liability to pay the general tax, his turnover during that period, in respect of (a) sales of any goods declared from time to time as tax-free under section 8 and(b) "such other sales as may be prescribed. " No dealer liable to pay the general tax shall carry•on business as Bom- a dealer unless he ha. s ~pplied for r~gistrat. ion (section Anotl<er 9). A more or less s1m1lar scheme 1s provided for the levy of a special tax on the sale of certain special goods specified in Schedule IL By section IO every (India) dealer whose turnover in respect of sales of special and!! _thers. goods made within the State of Bombay has exceeded Rs.

5,000 during the year ended 31st March, 1952, or exceeds the said limit during the year commencing from 1st April, 1952, is charged with a special tax at the rate specified in Schedule II on his taxable turn· over in respect of the sales of special goods made on or after the appointed day, i. e. , 1st November, 1952. By section 11 the taxable turnover is to be determined by first deducting, from the turnover of the dealer in respect of his sales of special goods during any period of his liability, his turnover in respect of (a) sales of special goods purchased by him on or after the appointed day at a place in the State of Bombay from a dealer holding a licence under section 12 and (b) " such other sales as may be prescribed. " Every dealer liable. to pay the special tax is required to obtain a licence as a condition of his ca. rrying on his business (section 12). Then follow certain provisions for returns,. assessment, payment and recovery of tax.

Section 18 imposes a purchase tax at the rate of 3 pies in the rupee on the purchases of such goods as may be notified by the State Government from time to time which have been despatched or brought from any place in India outside the State of Bombay or are delivered as a direct result of a sale to a buyer in the State of Bombay for consumption therein, and also an additional tax if the goods are special goods. Section 21 (2) prohibits any person selling goods from collecting from the purchaser any amount by way of tax unless he is a. registered dealer or a licensed dealer and is liable to pay the tax under this Act in respect of such sale. Chapter VI contains provisions for production of accounts, supply of infor. mation and cancellation of registration or licence. Chapter VII deals with proceedings including appeals and revision and the determination of certain ques- 1953 tions of law by 'reference to the High Court.

Section 45 empowers the State Government to make rules "for The Stateaf Bom- . h f h' A . bay and Another carrymg out t e purposes o t 1s ct. " In particular, such rules may prescribe, among other things, "the The ;;,ited other sales, turnover in respect of which may be Motors (India) deducted from a dealer's turnover in computing his Ltd. and Othcro. taxable turnover as defined in section 7 and in section -- 11" [sub-section (2) (e)]. Patanjali Sastri C. J. In exercise of the powers conferred by this section, the State Government made and published rules called the Bombay Sales Tax Rules, 1952, which were brought into force on the same day on which the charging sections 5 and 10 of the Act were also brought into force, namely, :N"ovember 1, 1952.

Of these, Rules 5(1) and 6(1) are important, and they provide for the deduction of the following sales in calculating taxable turnover under section 7 (general tax) and section 11 (special tax): (i) sales which take place (a) in the course of the import of the goods into or export of the goods out of the territory of India or (b) in the course of inter-State trade or commerce. ·It is to be noted that these are the excluded categories of sales or purchases under article 286 ( 1) ( b) and (2) respectively. Rule . 5(2) (i) requires, as a condition of the aforesaid deductions, that the goods should be consigned by certain specified modes of transport. Clause (v) lays down a rule of presumption to be acted upon in the absence of evidence of actual consignment of the goods within three months of the sale, that the sale has not taken place in the course of export or of inter-State trade as the case may be. It is not necessary to refer to the provisions of the other rules.

Now, it will be seen from the provisions summarised above that the Act does not in terms exclude from its purview the sales or purchases taking place outside the State of Bombay while it does include, by Explanation (2) to the definition of "sale", the sales or purchases under which the delivery and consumption take place in Bombay which, by virtue of the Explanation to article 286(l)(a), are to be regarded as local sales or purchases. On the construction we have placed upon that Explanation, sales or purchases SiateofBom- effected in Bombay in respect of croods in Bombay but Anolhri· d l' d f' · · t . Od B b t e ivere or consumption ou s1 e om ay are no taxable in Bombay. :N"ow, the respondents complain that the latter category of sales or purchases thus held not to be taxable are not expressly excluded by the Act which, therefore, contravenes article 286 (l)(a).

No doubt, there is no provision in the Act excluding in express terms sales of the kind referred to above, but neither is there any provision purporting to impose tax on such sales or purchases. On the other hand, the two charging sections of the Act, section 5 and section 10, purport, in express terms, to impose the tax on all sales made "within the State of Bombay", and section 18, which lays the tax on purcha3es, is limited in its operation to purchases of goods delivered to a buyer in the State of Bombay for consumption therein, that is to say, to purchases which unquestion, ably are taxable by Bombay according to both parties. 'The charging sections cannot, therefore, be taken to cover the class of sales or pmchases whieh, on our construction of the Explanation, are to be regarded as taking place outside the State of Bombay. vVe see no force, therefore, in the argument that the Act contra, venes the provisions of article 286(l)(i.

) by purporting to charge sales or purchases excluded by that article from State-taxation. As regards the other two categories of sales or pnr, chases excluded by article 286 (1 )(b) and (2), it is true that the Act taken by itself does not provide for their exclusion. But, a,s pointed out akeady, rules 5 and 6, which deal respectively with deduction of certain sales in calculating the taxable turnover under sections 7 and 11 exclude these two categories in express terms, and these rules were brought into force simultaneously with the charging sections 5 and 10 on November 1, 1952. The position, thereforn, was that, on the date when the general tax and the special tax became leviable under the Act, sales or purch,ises of the kind described under article 286( 1) (b) and ( 2) stood in fact excluded from taxation, and the State of • S. C. R.

SUPREME COURT HEPORTS 1095 Bombav cannot be considered to have made a "law 195a imposiI~g 01' authorising the imposition of a tax" on -sales or purchases excluded under the aforesaid clausesbTheStadteoAif Btohm· , ' ~- M• of :irtrnle 286. The Act :ind the rnles havmg been v. hrought into operation simultaneously, there is no The United olwious reason why the rules framed in exercise of Motor• (India) the power delegated by the Legislature should not be Ltd. and Others, re"arded as part of the "law" made by the State. rsee -- 0 v l Patanjali observations at page 862 in the Delhi Laws Act Sastri a. J. case(1 )].

The position might be different if the rules ht~d come into operation sometime later than the charging sections of the Act, for, in that case, it is arguable that if the legislation, without excluding the two classes of siiles or purchases, was beyond the competence of the Legislature at tho date when it was passed, the exclusion subsequently effected by the rules cannot validate such legislation. But, as already stated, that is not the position here, :tnd the learned Judges below foll into an error by overlooking this crucial fact when they say "If the Legislature had no competence on the date the Jaw was passed, the rules subsequently framed 0a1111ot uonfer competence on the Legislature".

Even so, it was contended, the exclusion of the sales covered by clause (l)(b) and clause (2) of article 286 was hedged round with conditions and qualifications which neither the Legislature nor the rule-making authority was competent to impose on the exclusion and, therefore, such rules, even if read as part of the Act, could not cure the constitutional transgression. The conditions and qualifications complained of are mostly found to relate to mere matters of proof, e. g. , rule 5(2), Explanation (2), which insists on the production of a certificate from an appropriate authority, before a motor vehicle, despatched to a place outside the State of Bombay by road and driven by its own power, could be exempted as an article sold in the course of inter- State trade. ~o objection can reasonably be raised if the taxing authority insists on certain modes of prooi • being adduced before a claim to exclusion can be allowed. Objection was also taken to clause (i) of (1) (1951] s. c. R. 747.

sub-rule (2) of rule 5 as imposing an unauthorised limitation upon the exemption of sales and purchases Boni-allowed by rule 5(1), that is to say, while rule 5(l)(i) Another allows the deduction of the sales covered by clause (1) (b) and (2) of article 286 in calculating taxable turn- (India) over, sub-rule (2) (i) of the same rule provides that, in Othere. order to claim such deduction the goods shall be consigned only through a railway, shipping or aircraft company or country boat registered for carrying cargo d or public motor transport service or by registere post. It is said that there is no reason why sales of goods despatched by other modes of transport should not also be deducted from the taxable turnover, because article 286 (2) in exempting sales in the course of inter-State trade, makes no distinction between modes of transport by which the goods are despatched. This limitation, it was claimed, was beyond the competence of the rule-making authority.

The argument is not without force, and it must be held that rule 5(2)(i) is ultra vires the rule-making authority and therefore void. But it is clearly severable from rule 5(l)(i). The restriction regarding the mode of transport of the goods sold or purchased in. the course of inter-State trade, to which alone sub-rule (2)(i) relates, can be ignored and the exemption under rule 5(l)(i) may well be allowed to stand. Finally, Mr. Seervai attempted to make out that the provisions of the charging sections 5 and 10 fixing Rs. 30,000 and Rs. 5,000 as the minimum taxable turnover for general tax and special tax respectively were discriminatory and void under article 14 read with article 13 of the Constitution, and he gave us several tables of figures showing how the imposition of the tax actually works out in practice in hypo-thetical cases.

It is unnecessary to go into the details of these cases which have been worked out in figures, for it must be conceded that the general effect of fixing these minimum limits must neces>arily be to enable traders whose taxable turnover is below those limits to sell their goods at lower prices to their customers than dealers whose turnover exceeded • those limits, for the latter have to add the sales-tax W53 to the prices o'f their goods. But no discrimination is, -involved in this classification which is perfectly reason- The StateoJB. om· . . b . . d h h S bay and Another abl e wen h it 1s orne m mm t att e tate may not v. consider it administratively worthwhile to tax sales The United by small traders who have no organisational facilities Motors (India) · for collecting the tax from their buyers and turn it Ltd. and Others. over to the Government. Each State must, in imposing - Patanjali a tax of this nature, fix its own limits below which it sa,tri a. J.

does not consider it administratively feasible or worthwhile to impose the tax. It is idle to suggest that any discrimina. tion is involved in such classification. Apart from the considerations set forth above which tend to support the constitutional validity of the Act, it was broadly contended before us that taxing statutes imposing tax on subjects divisible in their nature which do not exclude in express terms subjects exempted by the Constitution, should not, for that reason, be declared wholly ultra vires and void, for, in such cases, it is always feasible to separate taxes levied on authorised subjects from those levied on exempted subjects and to exclude the latter in the assessment of the tax. In such cases, it is claimed, the statute itself should be allowed to stand, the taxing authority being prevented by injunction from imposing the tax on subjects exempted by the Constitution.

Our attention was called to certain American cases where this principle has been consistently followed: (see 1 Bowman v. Continental Compdny( ), where all the previous cases are collected). In the present case the tax is imposed, in ultimate analysis, on receipts from individual sales or purchases of goods effected during the accounting period, and it is therefore possible to separate at the assessment the receipts derived from exempted sales or purchases and allow the State to enforce the statute with respect to the constitutionally taxable subjects, it being assumed that the State intends naturally to keep what it could lawfully tax, even where it purports to authorize the taxation of what is constitutionally exempt. The principle, as it (r) · 256 i::. s. 642 ; 65 L. Ed. rr30. 1098 SUPREME COUR'l' REPORTS [i953J is tersely put in the American case, is that severability in such cases includes separability in· enforcement.

Honi- Another Our attention was drawn to the decision of the Pri\-y Council in Punjab Province v. Daulat Singh and Others(') as condemnatory of this principle. The case (lndia) . h ] 1 d' . . h ble Th . L d h' is owever, c e3,r y JStmgms a '. eir or s ips wrs. were dealing with a Provincial miactment providing for the avoidance of benami transactions as therein specified and tho question was whether it was ultra vires the Legisla tnre as contravening section 298( l) of the Government of India Act, 1935, which forbade the prohibition, inter alia, of disposition of property by an Indian subject on certain grounds which included "descent". It was found that in some cases the impugned enactment would operate as a prohibition on the ground of descent alone. The .

Federal Court(') by majority expressed the view that the Act could not, for that reason, be invalidated as a whole but that the circumstances in which its provisions would be inoperative must be limited to cases where the statute actually operated in contravention of the constitutional inhibition. Disagreeing with this view their Lordships made the following observations which were strongly relied on before us : " The majority of the Federal Court appell. r to have contemplated another form of severability, namely, by a classification of the particular cases on which the impugned Act may happen to operate, involving an inquiry into the circumstances of each individual case. There are no words in the Aet capable of being so construed, and such a course would in effect involve an amendment of the Act by the court, a course which is beyond tho competency of the court, as has long been well established.

" The subject of the constitutional prohibition w3,s single and indivisible, namely, disposition of property on grounds only of (among other things) descent and if, in its actual operation, the impugned statute was found to transgress the consti tu tiona] mandate, the whole Act had to be held void as the words used ! r) [1946] F. C. R. r. (2) [1942] F. C. R. 67. , • S. C. R. SUPREl\IE COURT REPORTS covered both what was constitutionally permissible 19. ;3 and what was'not. The same principle was applied -hy this court in the Cross Roads case(1). It was, TbheStadteoA'. f Bothem- . d d · · ay an no r m ee , applied also m Bowman's case(') with respect v. to the licence tax imposed generally on the entire 1'he Unitw business conducted includin" inter-State commerce Motors ! India) 0 as well as domestic business, but was not applied, as Ltd. and Others. stated above, with respect to excise tax which was Patanjali laid on every gallon of gasolene sold and was thus Sastri o. J.

divisible in its nature. It is a sound rule to extend severabi! ity to include separability in enforcement in such cases, and we are of opinion that the principle should be applied in dealing with taxing statutes in in this country, We accordingly set aside the declaration made by the court below and quash the writ issued by it except in regard to rule 5 (2) (i). An injunction shall, however, issue restraining the appellants from imposing or authorising the imposition of a tax on sales and purchases which are exempted from taxation by article 286 as interpreted above. Each party will hear its own costs throughout. BosE J. -I have had the advantage of reading the judgments of my Lord the Chief Justice and my learned brother Bhagwati. I regret I am unable to agree with either. The range of disagreement is not large but unfortunately it vitally affects the result. I agree with the construction which my Lord has placed upon entry No. 54 of List II.

I also agree that the object of the Explanation is to fix the locus of a sale or purchase by means of a fiction, hut with respect I cannot agree with my brother Bhagwati that the non-obstante clause enunciates the general law on this point. I know of no general law which fixes the situs of a sale, not even the Sale of Goods Act. What the gcnerallaw does is to determine the place where the property passes in the ttbsence of a special agreement, but the place where the property passes is not necessarily the place where the sale takes place, nor (I) [1950] S. C. R 59·1· M 256 U. S. 642 . • has that ever been regarded as the determining factor. What, in my opinion, happened was this. Boni. and Another Before the passing of the Constitution, different States (or Provinces as they then were) claimed the right to tax the samo transaction for a variety of reasons (India) which have been pointed out by my Lord the Chief Others. J t" Th 1 th t th · f t · us ICe.

e resu t was a e prwe o cer am commodities became inordinately high. Take, for ex. ample, the case of steel rails manufactured by the Tata Iron and Steel Works at Tatanagar and purchased by the Government of India for its railways. The Central Government found itself called upon to pay a sale or purchase tax to different States on a single transaction of purchase. I am not sure how many times over it. had to pay but on the notions then current it was open to Bihar to claim the right to tax because the goods were manufactured there, to Bengal because the transaction of sale took place at Calcutta where the head offices of the company were, to a third Province because the goods were delivered there and to a fourth because they were "found" there.

It hardly matters whether all or any of this would have stood scrutiny in a court of law because the fact remains that various States were actually taxing the one transaction of sale on the nexus theory and a real danger existed of more and more of them coming in to claim a share of the spoils. It seems to me that the Constitution makers considered this detrimental to the development and exercise of trade and commerce and so determined to put a stop to the practice but at the same time left Parliament a discretion to restore a part of the status quo . if and when it should think it safe and desirable to do so. The narrowing of the powers was accomplished by stating in article 286 that no State can impose a tax on a sale or purchase which takes place outsi'.

de the State, by stating that it cannot tax a sale or purchase in the course of import or export and by prohibiting taxes on sales and purchases which take place in the course of inter-State trade or commerce unless Parlia- μient chooses to lift the ban. Reading these together • in a simple and straightforward way it seems clear to me that the id. ea was to permit States to tax only Th 8 · h ]J · S I d h e w at I m1g t ca mtra-1 tate sa es an pure ases, at bay and any rate, to begin with. t · ] ] t t · ]' •t f ] The u m ega enac men s s1mp 101 Y o anguage Motors seldom evokes clarity of thought. So long as the ban Ltd. and imposed by clause (2) remains, there is no difficulty because when parts of a sale take place in different Bose States the transaction is inter-State and no tax can be imposed. On the other hand, when all the ingredients are intra. State clause (2) is not attracted. Complications only arise when the ban is lifted.

The Constitution makers had before them the existing practice of the States based on the nexus theory, and so it became necessary to define just where a sale takes place in order to carry out the main theme that only intra-State sales can be taxed. The difficulty is apparent when one begins to split sale into its component parts and analyse them. When this is done, a sale is found to consist of a number of ingredients which can be said to be essential in the the sense that if any one of them is missing there is no sale. The following are some of them: (1) the existence of goods which form the subject-matter of the sale, (2) the bargain or contract which, when executed, will result in the passing of the property in the goods for a price, (3) the payment, or promise of payment, of a price, (4) the passing of the title. V\'hen all take place in one State, there is no diffi. culty. The situs of the sale is the place in which all the ingredients are brought into being.

But when one or more ingredients take place in different States, what criterion is one to employ ? It is impossible to say that any of these ingredients is more essential than any other because the result is always the same the moment you take one away. There is then no sale. Therefore, one either has to adopt the ultra logical view and hold that the only State which can tax is the one in which all the ingredients take place and that no State can tax when a single ingredient takes place elsewhere, or resort to the ,old view and Bom- hold that every State in which any single ingredient Another takes place can tax. The only alternative to these extremes is to make an arbitrary selection or to introduce a fiction. The Constitution chose the (India) latter course and enacted the Explanation. Others. . I have deemed it proper to refer to the then existing practice regarding taxation because in construing a statute it is legitimate to take into account exist.

ting laws and the manner in which they were acted upon and enforced. [See Gwyer C. J. in In re The Central Provinces and Berar Act No. XIV of 1938(') and Croft v. Dunphy(')]. I think this rule is even more appropriate in the case of the Constitution because the Constitution itself continues in force all laws which were in existence at the date when it came into being except those which are inconsistent with itself. I am with respect unable to agree that article 286 (2) is to be interpreted in the light of article 304 (a). In my opinion, the two articles deal with different things. Article 286 is concerned with sales and purchases, while article 304 relates to goods imported from other States. The stress in the one case is on the transaction of sale or purchase ; in the other, on the goods themselves and on the act of import. Article 286 is related to Entry No. 54 of List II and to Entries 41 and 42 in List I.

Article 304(a) to Entries 26 and 27 of List II read with Entry 33 in List III and to Entries 51, 52 and 56 of List II. The distinction is, I think, clear when it is realised that (apart from the Explanation) a sale or a purchase can be taxed even though the goods are never actually delivered and even if they never reach the taxing State, for the right is to tax the sale or purchase and that is something quite independent of actual delivery. The goods might be destroyed by flood or fire before there is any chance of actual delivery. They might, as in the case of the steel rails purchased by the (1) [1939] F. C. R. 18 at 53. (2) [1933] A. C. 156 at 165. • Government of India, be delivered in a totally different 1968 State, but the "tax could still be levied if there was no - 80 Explanation to stop it. I find it difficult to see how bThe /SeadteoA'. f hm· 1 . Id . t "' . 1 'f ay an 110 " artic e1 2 86 (2) cou ever come m o euect1ve p ay 1 v.

article 304 is applied to sales and purchases which take The United place in the course of inter-State trade or commerce. Moror• (I>Zdia) I do not think·the change in language, "a tax on the Led. and Othm. sale or purchase of any goods" in the one case and a Bose J. tax on "goods imported from other States" was acci-dental, nor do I think we will be justified in ignoring the fact that the two are placed in different parts of the Constitution. I therefore prefer to hold that articles 286 and 304 deal with different things and to construe article 286 without reference to 304. In this I agree with my brother Bhagwati. Coming back to the Explanation, its object is, I think, to resolve the difficulty regarding the situs of a sale.

The Constitution having decided that the only State which can tax a sale or a purchase is the State in which the transaction takes place, and having before it the conflict of views regarding nexus and situs, resolved the problem by introducing the fiction em-bodied in the Explanation. The purpose of the Explanation is, in my view, to explain what is not outside the State and therefore what is inside. With respect I cannot agree that the Explanation is really an exception, and I do not think the non-obstante clause means that under the general law the place where the property passes was regarded as the place where the sale takes place, for that in itself would be a fiction. There is no such law. In my opinion, all it means is that there was a school of thought' which regarded that as the crucial element on the nexus view and that the Constitution has negatived that idea.

I am also unable to agree that the Explanation governs clause (2) of article 286, for it limits itself in express terms to sub-clause (a) of clause (1). It says that is an Explanation "for the purposes of sub-clause (a)". In view of that I do not feel justified in carrying it over to clause (2) and holding that it governs there as well. In my judgment, the only purpose of the • Explanation is to explain where the sitU§ of a sale is. Clause (2) has a different object. Its purpose is to Bom· h'b' t' 1 d

Source: Supreme Court eSCR. Dataset: Dattam Labs, CC BY 4.0. Text extracted automatically; compare with the source PDF for layout and accuracy.