Mis. Chowringhee Sales Bureau (P) Ltd. v. C.I.T. West Bengal

KHANNA, J .-This appeal by special leave is directed against the judgment of Calcutta High Court whereby that court answered the following question referred to it under section 66 ( 1) of the Indian Income Tax Act, 1922 in the negative and against the assessee appellant :

"Whether on the facts and in the circumstances of· the case the sum of Rs. 32,986 had been validly exclud-ed from the assessee's business income for the relevant assessment year ?"

The matter relates to the assessment year 1960-61 for which the r.;tevant previous year ended on March 31, 1960. The appellant assessee is a private Jirnited company dealing in furni-ture. 1t also acts as an auctioneer. In respect of the saks effect-ed by the appellant as auctioneer, it realised during the year in question, in addition to the commission, Rs. 32,986 as sates tax. This amount was credited separately in the books under the sales tax collection account. The total balance standing to the credit of this account since 1946 up to the end of the relevant previous year stood at Rs. 2,71,698. This sum was neither paid over to the exchequer nor was it refunded to the persons from whom it had been collected. In the earlier years these collections were not added to the appellant's income. For the year in question, however, the Income Tax Officer held that the said sum was in reality a portion of the sale price itself because the sales tax was not the liability of the purchasers of the goods but was the liabi-lity oI the sellers of the goods only. The owners of the goods who sent them to the appellant for being auctioned haj received only their sale price less the amount charged by the appellant as sales tax from the purchasers. The Income Tax Officer held that the sum of Rs. 32.986 was a part of the appellant's income of the same nature as was the commission received by it on the auction sales. The said sum was accordingly added to the appellant's income.

The appellant preferred appeal to the Appellate Assistant Commissioner who took note of the fact that the appe!lanJ had not treated the amount as part of its income. The Appellate Assistant Commissioner referred to a decision of a single judge of the Calcutta High Court in a writ petition filed by the appellant against the State of West Bengal. The decision in that case is reported in (1961) 12 S.T.C. 535. It was held by the High Court that where an auctioneer is selling specific chattel or goods for an unknown or a disclosed principal and where the buyer knows that the auctioneer is not the owner, the auctioneer cannot be considered as the seller and there is no contract of sale between him and the buyer. In such a case the auctioneer, according to the High Court, is not even a party to the sale and cannot be made liable for payment of sales tax. The definition of the word "deale(' in Explanation 2 of section 2 ( c) of the Bengal Finance (Sales Tax) Act, 1941 (hereinafter referred to as the Bengal Act) was held to be ultra vires in so far as it included an auctioneer.

As an appeal was pending against the above decision of the learned single judge in the Calcutta High Court, the Appellate Assistant Commissioner observed that it was only when the matter I1 was finally decided by the High Court or when 1he assessee itself treated the said sales tax receipt as income that the said sum could be included in the assessee's total income and only in the year in which that event came to pass. The amount of Rs. 32,986 was accordingly excluded from the assessee's income.

On further appeal the decision of the Appellate Assista~t Commissioner was affirmed by the Income Tax Appellate Tn-bunal. The question reproduced above was thereafter referred 11 to the High Court. The High Court, as already stated, answered

the question against the assessee appellant.

When the appeal came up for hearing before us on September 21, 1972 Dr. Pal on behalf of the appellant assailed the correct-ness of the answer g\ven by the High Court and in this connection relied upon the dictum laid down in the appellant's case reported in (1961) 12 S.T.C. 535. As against that the learned Additional Solicitor General on behalf of the respondent questioned the correctness of that decision. As the said decision related to the vires of the provjsions of section 2( c) of the Bengal Act we directed that notite be issued to the State of West Bengal as well as its Advocate General. Arguments.have thereafter been address· ed before us by Mr. Sen on behalf of the appellant and the Addi-tional Solicitor General on behalf of the respondent. Mr. Mukhoty on behalf of the State of West Bengal has adopted the arguments of the Additional Solicitor General.

Before dealing with other matters, it would be convenient to examine the correctness of the view taken by the Calcutta High Court that the definition of the word "dealer' in Explanation 2 of section 2(c) of the Bengal Act was ultra vires in so far as it in-cluded an auclioneer. The Bengal Act was enacted by the Bengal Legislature in 1941 in pursuance of the powers conferred by en-try 48 of List II of &:hedule VII of the Government of India Act. 1935. The said entry relates to "taxes on the sale of goods and OJJ. adverti~ements". The entry in so far as it relates to taxes on f' sale of goods corresponds to entry 54 in List II of the Seventh

Schedule of the Constitution. The words "sale of goods" in entry 48 in List II of Schedule VII of the Government of India Act, 1935 were the subject matter of judicial interpretation by this Court in the case of The State of Madra.v v. Gan11on Dunkerley & Co. (Madras) Ltd.('). It was held that those words cannot be construed in the popular sense but must be ·interpreted in the legal sense and should be given the same meaning which they had in the Sale of Goods Act. 1930. In arriving at this conclusion the Court acted on the principle that words having known legal imoort should be cnnstrued in the sense which thev had at the time of the. enactment. Another dictum which was laid down in 11 that case was that "a oower to enact a law with respect to tax on

sale of J?OQds nnder entry 48 must. to be intra vireI, be one re-lating in fact to sale of goods and, accordingly. the Provincial Legislature cannot, in the purport~d exercise to tax sales, tax transactions wluch are not sales by merely enacting that they shall be deemed to be sales." This Court in that case dealt with a building contract which was one, entire and indivisible, and observed that in the case of such a contract there is no sale of goods and it is not within the competence of the Provincial Legis-lature under entry 48 to impose a tax on the a supply of the material used in such a contract by treating it as sale.

The view taken by this Court in the Gannon Dunker/ey's Case (supra) that the word "sale" in entry 48 of List· II of Schedule VII of the Government ot India Act and entry 54 of List II of the Seventh Schedule of the Constitution has the same meaning as that given in the Sale of Goods Act, 1930 was reiterated by this Court in K. L. Johar and Co. v. Deputy Commercial Tax Officer( 1') while dealing with a contract of hire purchase,

It cannot be disputed that sale by an auction is a sale as contemplated by the Sale of Goods Act, 1930 ( 3 of 1930). Sec-tion 4 of that Act provides, inter alia, that a co!ltract of sale of goods is a contract whereby the seller transfers or agrees to trans-fer the property in the goods to the. buyer for a price. Where under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is called sale. Futther, according to section 64 of that Act, in the case of sale by 'auction where the goods are put up for sale in lots, each lot is prima facie deemed to ·be the subject of a separate contract of sale. The Calcutta High Court in holding the definition of the word "dealer" in Explanation 2 of section 2 ( c) of the Bengal Act to be ultra vires in the appellant's case reported in (1961) 12 S.T.C, 535 observed:

Entry 48 authorises the imposition of tax either on a seller or a purchase or both. If, however, the Legis-lature purports to levy a tax upon a person who is nei-ther a seller nor a purchaser, the legislation must be declared ultra vires, because it treats an operation as a sale of goods which, according to the Sale of Goods Act, does not amount to such a sale,''

We find ourselves unable to agree with the above observa-tions. An auction sale in view of the provisions of section 4 read with section 64 of the Sale of Goods Act would have to be consi-dered to be a sale for the purpose of the Sale of Goods Act. There is nothing in entry 48 which restricts the power of the legislature in the matter of the imposition of the sales tax to the levy of su~h tax on the owner of the goods on whose behalf they are sold or (if11965] 16 S.T.C. 2ll the purchaser only. Where transaction is one of sale of goods as known to Jaw, the power of the legislature to impose a tax thereon, in our view, is plenary and unrestricted subject only to any limitation which might have been imposed by the Government of India Act or the Constitution (See J. K. Jute Mills Co. Ltd, v. The State of Uttar Pradesh(1). In view of tht: wide amplitude of the power of the State or Provincial Legislature to imposo tax on transactions of sale of goods, it would, m our opinion, be im-permissible to read a restriction in entry 48 on .the power of .the State Legislature as would prevent the said Legislature from 1m· posing tax on an auctioneer who carries on the business of selling goods and who has in the customary course of business, authority to sell goods belonging to the principal. What is sought to be taxed is the transaction of the sale of goods. If there is a close and direct connection between the transaction of sale and the person made liable for the payment of sales tax, the statutory provision providing for such levy of sales tax would not offend entry 48. It cannot be disputed that there is a close and direct connection between an auctioneer and the transaction of auction sale. As such, the definition of the word "dealer" in Explanation 2 of section 2 ( c) of the Bengal Act cannot be deemed to be ultra vires the power of the Provincial or State Legislature on the ground that the legislature puf(JOrts to levy tax on a person who is neither a seller nor a purchaser. It was, in our opinion, within the competence of the Provincial Legislature to include within the definition of the word "dealer" an auctioneer who carries on the business of selling goods and who has in the customary course of business authority to sell goods belonging to the principal.

We may also observe that a Division Bench of the Madras High Court in the case of Zackria Sons Private Limited v. State of Madr~(2) has dissent~ from the view taken by the Calcutta High Court m the appellants case against the State of West Bengal.

. ~t is apparent from the or~er of the Appellate Assistant Com-miss1gner and 1has not been disputed before us in the present case !hat mthe-:cash me~os issued by the appellant to tbe purchasers m the auction sales 1t was the appellant who was shown as the ~eller. The amount realised by the appellant from the purchasers mcluded sales tax. The appellant, however, did not pay the amount of sales tax to the. actual owner· of the goods auctioned because the statutory liability for. the oayment of that sales tax wa.<: t~at of the appel 1~nt. The appellant company did not also deposit t~e amount realt~~d by it as sales tax in the State exchequer becau~e !t. took the, position that the statutory provision creating that hab!hty uoon 1t was not valid. As the amount of sales tax was rec~~ved ~Y}he-apoellant in its.character as an auctioneer, the

(l) (1'9iil) 12 S. T. C. 429. .;(2) (1965) 16 S. T. C. 136. 5-L499Sup.CI/73

624 SllPREME COURT B.El'OllTS [1973] 2 s.c.a. .amount, in our view, should"be held to form part of its trading or business receipt. The appellant would, of course, be entitled to claim deduction of the amount as and when it pays it to the State Government.

The fact that the appellant credited the amount received as sales tax under the head "sales tax collection account" would not in our opinion, make any material difference. It is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisiv'e. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt. We may in this context refer to the case of Punjab Distilling Industries Ltd. v. Commissioner of In-come Tax; Simla(1). In that case certain amounts received by the assessee were described as security deposits. This Court found that those amounts were an integral part of the commercial trans-action of the sale of liquor and were the assessee's trading receipt. In dealing with the contention that those amounts were entered in a separate ledger termed "empty bottles return security deposit account", this Court observed :

"So the amount which was called security deposit was actually a part of the consideration for the sal·e and therefore part of the price of what was sold. Nor does it make any difference that the price of the bottles was en-tered in the general trading account while the so-called deposit was entered in a separate ledger termed "empty bottles return deposit account" for, what was a consi-deration for the sale cannot cease to be so by being written up in the books in a particular manner."

We, therefore, agree with the High Court in so far as it has answered the question referred to it in the negative and against the appellant. The appeal con~equently fails and is dismissed with costs.