M/S New India Sugar Mills Ltd. Vs.
Commissioner of Sales Tax, Bihar  INSC 334 (26 November 1962)
CITATION: 1963 AIR 1207 1963 SCR Supl. (2)
CITATOR INFO :
R 1965 SC 913 (10,18) R 1965 SC1396 (5) RF
1966 SC 563 (5) D 1968 SC 478 (2,13) RF 1968 SC 599 (8) R 1968 SC 838 (4) D
1969 SC 343 (4,8,11) RF 1970 SC2000 (5,9,10,12) RF 1971 SC2089 (10) RF 1972 SC
87 (24,28,31) F 1973 SC 668 (2) O 1978 SC 449 (3,7,9,14,37,39,40,41,43,47,52 F 1979
SC1158 (3) R 1988 SC1487 (48) O 1989 SC1371 (15)
Sales Tax-Sugar Control-Allotment by
Controller Supply of Sugar under allotment order-If amounts to sale Bihar Sales
Tax Act 1947 (Bihar 19 of 1947), s. 2 (g)-Sugar and Sugar Products Control
Order 1946-Sale of Goods Act, 1930 (3 of 1930), s. 4-Government of India Act,
1935 (26. Geo. 5 Ch. 2), Seventh Schedule, List II; Entry 48.
Under the Sugar and Sugar Products Control
Order, 1946, the consuming States intimated to the Sugar Controller of India
their requirements of sugar and the factory owners sent statements of stocks of
sugar held by them. The Controller made allotments to various States and
addressed orders to the factory owners directing them to supply sugar to the
States in question in accordance with the despatch instructions from the State
Governments. Under such allotment orders, the assesses, a sugar factory in
Bihar, despatched sugar to the State of Madras. The State of Bihar treated
these transactions as sales and levied sales tax thereon, under the Bihar Sales
Act, 1947. The assesses contended that the despatches of the sugar pursuant to
the directions of the Controller did not amount to sales and that no sales tax
was exigible on such transactions.
Held (per Kapur and Shah, JJ. Hidayatullah,
J., dissenting), that the transactions did not amount to sales and were not
liable to sales tax. Under Entry 48, List II of Government of India Act, 1935,
the Provincial Legislature had no power to levy sales taxes on a transaction which
was not of the nature of a sale of goods, as understood in the Sale of Goods
act. To constitute a sale of goods, .
property in the goods must be transferred
from the seller to the buyer under a contract of sale. A contract of sale
between the seller and the buyer is a prerequisite to a sale. Despatches of
sugar under the directions of the Controller were not the result of any such
contract of sale.
There was no offer by the assesses to the
State of Madras and no acceptance by the latter; the assessee was, under the
Control Order, compelled to carry out the directions of the Controller and it
had no volition in the matter. Intimation by the State 460 of its requirement
of sugar to the controller or communication of the allotment order to the
assesses did not amount to an offer. Nor did the mere compliance with despatch
instructions issued by the Controller, which the assessee could not decline to
carry out, amount to acceptance of an offer or to making of an offer. A
contract of sale postulates exercise of volition on the part of the contracting
State of Madraa v. Gannon Dunkerky & Co.,
 S. C. R.
379; relied on.
The Tata Iron & Steel Co. Ltd. v. The
State of Bihar,  S. C. R. 1355, explained.
Per Hidayatullah, J.-In these transactions
there was a sale of sugar for a price and sales tax was payable in respect
thereof. Though consent is necessary for a sale, it may be express or implied,
and it cannot be said that unless the offer and acceptance are in an elementary
direct form there can be no taxable sale. The controller permitted the assesses
to supply sugar of a Stated quality and quantity to the State of Madras;
thereafter the two parties agreed to "sell" and "purchase"
the sugar. So long as the parties trade under controls at fixed price they must
be deemed to have agreed to such a price; there wasan implied contract with an
implied offer and an implied acceptance. The same is the position with respect
to the quality and quantity fixed by the Controller. when the State , after receiving
the permit, sent instructions to the assesses to despatch sugar and the
assesses despatched it a contract emerged and consent must be implied on both
sides though not expressed antecedently to the permit.
State, ofMadras v. Gannon Dunkerky Co., 
S.C.R. 379 and The Tata Iron and SPA Co. Ltd. v. The State of Bihar,  S.
C. R. 1355, explained.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 237 of 1961.
Appeal by special leave from the judgment and
order dated September 30, 1958, of the Patna High Court in M.J.C. No. 5 of
S.T. Desai and B. P. Maheshwari, for the
S. P. Varma, for the respondent.
461 1962. November 26. The judgment of Kapur
and Shah, JJ., was delivered by Shah, J. Hidayatullah, J., delivered a separate
SHAH, J.-M/S. New India Sugar Mills Ltd. hereinafter
called 'the assessees' own a factory at Hasanpur in the State of Bihar. During
the assessment period April 1, 1947, to March 31, 1948, the assessees who were
registered as dealers under the relevant Sales Tax Acts despatched sugar valued
at Rs. 6, 89,482/to the authorised agents of the State of Madras in compliance
with the directions issued by the Controller exercising powers under the Sugar
and Sugar Products Control-Order, 1946. The Sales Tax Officer, Darbhanga
rejected the plea of the assessees that despatches of sugar to the Province of
Madras in compliance with the instructions of the Controller were not liable to
be included in the taxable turnover, and ordered the assessees to pay sales tax
on a taxable turnover of Rs. 27,62,226/.
The order of assessment was confirmed by the
Deputy Commissioner, but the Board of Revenue exercising jurisdiction in
revision set aside the order, in so far as it related to the inclusion into the
taxable turnover the value of sugar despatched to the Province of Madras. The
Board of Revenue observed that the "'Controller passed orders in exercise
of statutory powers, which, as a result of mere compliance, could not create a
contract in law," and there was no evidence justifying the view that there
could "'possibly be any contract between the assessees and some dealers in
Madras or between the assessees" and the Sugar Controller.
The Board of Revenue under the direction of
the High Court of judicature at Patna submitted under s. 25(3) of the Bihar
Sales Tax Act, 1947, the following question for the opinion of the High Court :
"Whether in the facts and circumstances
of the case, the disposal of sugar to the Province of Madras is liable to be
taxed." 462 The High Court answered the question in the affirmative
observing that the sugar despatched by the assessees to different Provinces
including the Province of Madras under orders of the Controller was liable to
be taxed under the provisions of the Bihar Sales Tax Act, 1947. With special
leave the assessees have appealed to this Court against the judgment of the
The only question arising in the appeal is
whether there was a sale by the assessees of sugar despatched by them to the
Provincial Government of Madras in compliance with the directions issued by the
Controller in exercise of authority under the Sugar and Sugar Products Control
Order, promulgated on February 18, 1946, by the Central Government under powers
conferred by sub-rule (2) of r. 81 of the Defence of India Rules. The material
clauses of the Order concerning sugar are these. By cl. 3 of the Order
producers of sugar were prohibited from disposing of or agreeing to dispose of
or making delivery of any sugar except to or through a recognised dealer or
persons specially authorised in that behalf by the Controller to acquire sugar
on behalf of the Central Government or of a Provincial Government or of an
Indian State. Clause 5 enjoined upon every producer or dealer duty to comply
with such directions regarding production, sales, stocks or distribution of
sugar as may from time to time be issued by the Controller. By cl. 6 the
Controller was authorised to fix the price at which sugar may be sold or
delivered, and upon fixation of the price all persons were prohibited from
selling or purchasing or agreeing to sell or purchase sugar at a price higher
than the fixed price. By sub-clause (1) of cl. 7 the Controller was authorised,
inter alia, to allot quotas of sugar for any specified province, or area or market
and to issue directions to any producer or dealer to supply sugar to such
provinces, areas or markets or such persons or organisations, in such 463
quantities, of such types or grades, at such time, at such prices and in such
manner as may be specified by the Controller, an sub-clause (2) provided that
every producer shall, notwithstanding any existing agreement with any other
person give priority to, and comply with directions issued to him under
subclause (1). Clause 11 provided that against a person contravening the
provisions of the Order without prejudice to any other punishment to which he
may be liable, an order of forfeiture of any stocks of sugar in respect of
which the Court trying the offence was satisfied that the offence was committed
may be passed. By sub-rule (4) of Rule 81 of the Defence of India Rules, 1939,
contravention of orders made under the Rule was liable to be punished with
imprisonment for a term which may extend to three years or with fine or with
The course of dealings between the assessees
and the State of Madras to which sugar was, under the directions of the
Controller.. supplied by the assessees is stated by the High Court as follows :"The
admitted course of dealing between the s was that the Government of various consuming
States used to intimate to the Sugar Controller of India from time to time
their requirement of sugar, and similarly the factory owners used to send to
the Sugar Controller of India statements of stock of sugar held by them. On a
consideration of the requisitions received from the various State Governments
and also the statements of stock received from the various factories, the Sugar
Controller used to make allotments.
The allotment order was addressed by the
Sugar Controller to the factory owner, directing him to supply sugar to the
State Government in question in accordance with the despatch instructions
received from the competent officer of the State Government.
A copy 464 of the allotment order was
simultaneously sent to the State Government concerned, on receipt of which the
competent authority of the State Government sent to the factory concerned
detailed instructions about the destinations to which the sugar was to be
despatched as also the quantities of sugar to be despatched to each it is
admitted that it also laid down the procedure of payment, and the direction was
that the draft should be sent to the State Bank and it should be drawn on Parry
and Company or any other party which had been appointed as stockist importer on
behalf of the Madras Government." The assessees contend that sugar
despatched pursuant to the directions of the Controller was not sold by them to
the Government of Madras, and sales-tax was therefore not exigible in respect
of those dispatches under the relevant Sales Tax Acts of the province of Bihar.
The assessment period in respect of which the dispute is raised is one
year-April 1, 1947, to March 31, 1948-for the first three months the relevant
law imposing liability to pay tax was Bihar Act 6 of 1944 and from July 1,
1947, to March 31, 1948, liability to pay tax had to be determined under Bihar
Act 19 of 1947. It is common ground that the scheme of the two Acts for levy of
tax was similar and the definition of "sale" on which primarily the
dispute centred under the two Acts was identical. We will therefore refer in
dealing with this appeal as if the liability arose under Act XIX of 1947.
The expression "sale" as defined
under s. 2(g) of the Bihar Sales Tax Act, at the material time stood as follows
:"Sale means, with all its grammatical variations and cognate expressions
any transfer of property in goods for cash or deferred payment 465 or other
valuable consideration, including a transfer of property in goods involved in
the execution of contract but does not include a mortgage, hypothecation,
charge or pledge :
Provided that a transfer of goods on hire
purchase or other installment system of payment shall, notwithstanding the fact
that the seller retains a title to any goods as security for payment of the
price, be deemed to be a sale :
Provided further that notwithstanding
anything to the contrary in the Indian Sale of Goods Act, 1930 (111 of 1930),
the sale of any goods which are actually in Bihar at the time when, in respect
thereof, the contract of sale as defined in section 4 of that Act is made,
shall, wherever the said contract of sale is made, lie deemed for the purpose
of this Act to have been made in Bihar." Apparently in the first paragraph
of the definition a transaction (other than a transaction expressly specified)
in which there is a transfer of property in goods for valuable consideration,
was included as a sale within the meaning of the Act. By the first proviso
transfer of goods on hire purchase or other instalment system of payment are to
be deemed sales. The second proviso (which has since been repeated) dealt with
the situs of the sale and was not in truth a part of the definition of sale.
What constituted a sale, the second proviso did not purport to say : it merely
fixed for the purpose of the Bihar Sales Tax Act the place of sale in the
circumstances mentioned therein.
Tax is leviable under the Bihar Sales Tax Act
on the gross turnover (exceeding a prescribed Minimum) on sales "which
have taken place in 466 Bihar". Counsel for the assessees says that the
value of sugar despatched in compliance with the directions of the Controller
is not liable to be included in the taxable turnover, for there was no sale of
sugar, despatched by the assessees, and that in any event the sale did not take
place in Bihar. In elaborating his submission counsel says :
Under the Government of India Act, 1935 the
Provincial Legislature had power to legislate for levy of tax on " sale of
goods" under Entry 48 of List II of the Seventh Schedule; that the
expression "'sale of goods" in the Entry was used not in the popular
but in the narrow and technical sense in which it is used in the Indian Sale of
Goods Act, 1930; that power under the entry could be exercised for taxing only
those transactions in which by mutual assent between parties competent to
contract property in goods was transferred absolutely from one person to
another, in consideration of price paid or promised, and the transactions in
which there was no mutual assent as a result of negotiations express or implied
are not sales within the meaning of the Sale of Goods Act and therefore not
sales within the meaning of the Bihar Sales Tax Act. Counsel alternatively
submits that even if the despatches resulted in sales, as the sales did not
take place in Bihar, the same were not liable to be taxed under the Bihar Sales
In popular parlance 'sale' means transfer of
property from one person to another in consideration of price paid or promised
or other valuable consideration. But that is not the meaning of 'sale' in the Sale
of Goods Act, 1930.
Section 4 of the Sale of Goods Act provides
by its first sub-section that a contract of sale of goods is a contract where
the seller agrees to transfer the property in goods to the buyer for a price.
"Price" by cl. (10) of s. 2 means the money consideration for sale
goods, and "'where Under a contract of sale property in the goods is
transferred from the seller to the buyer, 467 the contract is called a sale,
but where the transfer of the property in the goods is to take place at a
future time or subject to some condition thereafter to be fulled, the contract
is called an agreement to sell" (sub-section (3) s. 4). It is manifest
that under the Sales of Goods Act a transaction is called sale only where for
money consideration property in goods is transferred under a contract of sale.
Section 4 of the Sale of Goods Act was borrowed almost verbatim from s. 1 of
the English Sale of Goods Act 56 & 57 Vict. c. 71. As observed by Benjamin
in the 8th Edn. of his work on 'sale', "to constitute a valid sale there
must be a concurrence of the following elements viz. (1) Parties competent to
contract; (2) mutual assent;
(3) a thing, the absolute or general property
in which is transferred from the seller to the buyer; and (4) a price in money
paid or promised".
The Provincial Legislature by Entry 43 List
II of the Seventh Schedule of the Government of India Act 1935 was invested
with power to legislate in respect of "' Taxes on sale of goods". The
expression "'sale of goods" was not defined in the Government of
India Act, but it is now settled law that the expression has to be understood
in the sense in which it is used in the Sale of Goods Act, 1930.
In the State of Madras v. Gannon Dunkerley
& Co. (1) this Court in considering whether s. 2 (1) Explanation I (i), of
the Madras General Sales Tax Act IX of 1939 as amended by the Madras General
Sales Tax Amendment Act XXV of 1947 was intra vires the Provincial Legislature,
has decided that the expression 'sale of goods' in entry 48, List 11, is used
not in the Popular but in the restricted sense of the Sale of Goods Act, 1931.
The primary question which fell to be determined in that case was whether in a
"building contract which was one, entire and indivisible" there was
sale of goods of the building materials used in the execution, liable to be
taxed under the Madras General Sales Tax Act (1)  S.C.R. 379.
468 which by s. 2 (c) defined "goods' as
meaning all kinds of movable property (except certain kinds which arc not
material in this case) and included all materials, commodities and articles
including those to be used in the construction, fitting out, improvement or
repair of immovable property, and by s. 2 (h) defined the expression
"sale' as meaning every transfer of property in goods by one person to
another in the course of trade or business for cash or for deferred payment or
other valuable consideration and includes also a transfer of property in goods
involved in the execution of a works contract. Power of the Provincial
Legislature of Madras to legislate in respect of a levy of tax on the value of
goods used in the execution of a works contract was challenged by a firm of
building contractors, and this Court held that the power under Entry 48, List
11, Seventh Schedule, did not include power to legislate for levying tax on the
value of goods used "'in the course of a building contract which was one,
entire and indivisible". The Court held that the expression "'sale of
goods" in Entry 48 List II was used not in the popular sense but in the
strictly limited sense in which it was defined in the Sale of Goods Act and
that the Madras Provincial Legislature had no power to legislate under the
power derived under ]Entry 48 in List II for taxing transactions other than
those of sales strictly so called under the Sale of Goods Act. It was observed
"the expression " sale of goods' in Entry 48 is a nomen juris, its
essential ingredients being an agreement to sell movables for a price and
property passing therein pursuant to that agreement. In a building contract
which is, as in the present case, one, entire and indivisible and that is its
norm, there is no sale of goods, and it is not within the competence of the
Provincial Legislature under Entry 48 to impose a tax on the supply of the
materials used in such a contract treating it as a sale." In Gannon
Dunkerley & Company's case (1) the Court was (1) (1959) S.C.R. S79, 469
concerned to adjudicate upon the validity of the provisions enacted in acts of
Provincial Legislatures imposing liability to pay sales tax-on the value of
goods used in the execution of building contracts, and the judgment of the
Court proceeded on the ground that power conferred by Entry 48 List II was
restricted to enacting legislation imposing tax liability in respect of sale of
goods as understood in the Sale of Goods Act, 1.930, and that the Provincial
Legislature under the Government of India Act, 1935 had no power to tax a
transaction which was not a sale of goods, as understood in the Sale of Goods
Act. The ratio decidendi of that decision must govern this case. According to
S.4 of the Sale of Goods Act to constitute a sale of goods, property in goods
must be transferred from the seller to the buyer under ;a contract of sale. A
contract of sale between the parties is therefore a prerequisite to a sale. The
transactions of despatches of sugar by the assessees pursuant to the directions
of the Controller were not the result of any such contract of sale.
It is common ground that the Province of
Madras intimated its requirements of sugar to the Controller, and the
Controller called upon the manufacturing units to supply the whole or part of
the requirement to the Province. In calling upon the manufacturing units to
supply sugar, the Controller did not act as an agent of the State to purchase
goods : he acted in exercise of his statutory authority.
There was manifestly no offer to purchase
sugar by the Province, and no acceptance of any offer by the manufacturer.
The manufacturer was under the control Order
left no volition : he could not decline to carry out the order; if he did so
lie was liable to be punished for breach of the order and his goods were liable
to be forfeited. The Government of the Province and the manufacturer had no
opportunity to negotiate, and sugar was despatched pursuant to the direction of
the Controller and not in acceptance of any offer by the Government.
470 The High Court observed "as soon as
an application for allotment is made, there is an implication of an offer to
purchase the quantity of sugar at the price fixed by the Controller from the
producer to whom the allotment order is to be made by the Controller. It is
also clear that if the allotment order is communicated by the Controller to the
assessee and the latter appropriates the sugar' in accordance with the
allotment order and in accordance with the despatch instructions of the
competent officer appointed by the Madras Government, there is in the eye of
law an acceptance of the offer by the assessee and a contract is immediately
brought into existence between the parties". We are with respect unable to
hold that this view is correct.
The Provincial Government of Madras gave
intimation of its requirements of sugar to the Controller and applied for
allotment of sugar : thereby the Government was not making any offer to
purchase sugar. Evidently the offer could not be made to the Controller because
the Controller was not a manufacturer of sugar or his agent. The communication
of the allotment order to the assessees was again not of any offer made by the
State which it was open to the asscssecs to accept or decline. Mere compliance
with the dispatch instructions issued by the Controller, which in law the
assessees could not decline to carry out, did not amount to acceptance of an
offer. A contract of sale postulates exercise of volition on the part of the
and there was in Complying With the orders
passed by the Controller no such exercise of volition by the assessees.
By the Indian Contract Act 9 of 1872 a
proposal or an offer is defined as signification by one person to another of
his willingness to do or to abstain from doing anything, with a view to
obtaining the assent of that other to such act or abstinence. When the person
to whom the proposal is made or signified assents thereto, the proposal is said
to be accepted. The person making the proposal is called the 471 promisor and the
person accepting the. proposal is called the promisee, and every promise or
every set of promises, forming the consideration for each other is an
These provisions of the Contract Act are by
s. 2 (15) of the Sale of Goods Act, incorporated therein. There was on the part
of the Province of Madras no signification to the assessees of their
willingness to do or to abstain from doing anything, with a view to obtaining
the assent of the assessees to such act or abstinence, and the Controller did
not invite any signification of assent of the assesses to the intimation
received by them. He did not negotiate a sale of sugar : he in exercise of his
statutory authority, ordered the assesses to supply sugar to the Government of
Madras. We are unable to hold that from the intimation of order of the
Controller, and compliance therewith by the assessees any sale of goods
resulted in favour of the State of Madras.
Mr. Varma appearing for the State of Bihar
contended that even if there was no offer and no acceptance when intimation was
sent by the Government of Madras to the Controller, and the Controller directed
the assessees to deliver specified quantities of sugar, still by the conduct of
the assessees in despatching sugar to Madras in pursuance of the directions of
the Controller and acceptance of price by them, a contract of sale resulted.
But the action on the part of the assessees in despatching the goods. was not
voluntary : they were compelled to send the goods. They could not be deemed by
despatching sugar to have made any offer to supply goods and in the absence of
any offer, no contract resulted by the acceptance of goods by the Provincial
Government. To infer a contract from the compulsory delivery of sugar and
acceptance thereof would be to ignore the true position of the parties, and the
circumstances in which goods were delivered. Mr. Varma contended that in any
event the 472 Legislature had by the definition included in the expression
"sale of' goods' all transfers of property in goods for consideration and
the transactions which are sought to be taxed by the State of Bihar fell within
Counsel submitted that a literal meaning
should be given to the words of the Act without any pre-disposition as to what
the expression 'sale' means under the Sale of Goods Act.
But if the Bihar Legislature had under the
Government of India Act, 1935 no power to legislate in respect of taxation of
Transactions other than those of sale of goods as understood in the Sale of
Goods Act, a transaction to be liable to pay sales-tax, had to conform to the
requirements of the Sale of Goods Act, 1930. Attributing a literal meaning to
the words used would amount to imputing to the Legislature an intention
deliberately to transgress the restrictions imposed by the Constitution Act
upon the Provincial Legislative authority. It is a recognised rule of
interpretation of statutes that the expressions used therein should ordinarily
be understood in a sense in which they best harmonise with the object of the
statute, and which effectuate the object of the Legislature. If an expression
is susceptible of a narrow or technical meaning, as well as a popular meaning,
the Court would be justified in assuming that the Legislature used the
expression in the sense which would carry out its object and reject that which
renders the exercise of its power invalid. If the narrow and technical concept
of sale is discarded and it be assumed that the Legislature sought to use the
expression sale in a wide sense as including transactions in which property was
transferred for consideration from one person to another without any previous
contract of sale, it would be attributing to the Legislature an intention to
enact legislation beyond its competence. In interpreting a statute the Court
cannot ignore its aim and object. It is manifest that the Bihar Legislature
intended to erect machinery within the frame-work of the Act for 473 levying
sales tax on transactions of sale and the power of the Legislature being
restricted to imposing tax on sales in the limited sense, it could not be
presumed to have deliberately legislated outside its competence. In the
definition of the expression "sale' in s. 2 (g) of the Bihar Sales Tax Act
it must be regarded as implicit that the transaction was to have all the
elements which constitute a sale within the meaning of the Sale of Goods Act.
Use of the expression "including a transfer of property in goods involved
in the execution of the contract" in the first paragraph of the definition
also does not justify the inference that the transfers of property in goods
under the earlier part of the definition were not to be the result of a
contract of sale, If any such intention was attributed to the Legislature, the
legislation may, for the reasons already stated, be beyond the competence of
The non-obstante clause in the second proviso
is in truth in the nature of an explanation to the charging section : it merely
fixes the situs of sale. If there is no sale the second proviso will have no
Mr. Varma finally contended that in the Tata
Iron & Steel Co. Ltd. v. The State of Bihar(1) by implication it was
decided that the definition of 'sale' in s. 2(g) of the Bihar Sales Tax Act
included transactions in which good-, were supplied in compliance with
directions which left no volition to the manufacturers, But this argument is
not borne out by what was actually decided in that case. The Tata Iron &
Steel Company Ltd., which carried on the business of manufacturing iron and
steel in its factory at Jamshedpur in Bihar was assessed to sales tax under the
Bihar Sales Tax Act, 1947. Tile company sent its goods from its factory to
different Provinces and Indian States by rail, the railway receipts being
obtained by the company in its own name as consignor and consignee. The Branch
Offices of the company or its Bankers at the destination handed (1) 
474 over the railway receipts to the
purchasers against payment of the price. The Sales Tax Officer of the State of
Bihar included in the gross turnover of the Company the value of goods
manufactured in Bihar but delivered and consumed outside the State of Bihar in
the manner already stated.
The contention of the company that the goods
delivered were not liable to be included in the taxable turnover was negatived
by the taxing authorities and the High Court of Patna. The matter was then
carried in appeal to this Court, and it was held that the provisions of s. 4(1)
read with s.
2.(g) proviso 2 of the Bihar Sales Tax Act
was within the legislative competence of the Province of Bihar. It was pointed
out that the second proviso to the definition of sale in s. 2(g) of the Act did
not extend the meaning of sale so as to include therein a contract of sale:
what it actually did was to lay down certain circumstances in which a sale,
although completed elsewhere, was to be deemed to have taken place in Bihar. Those
circumstances did not constitute a sale, but only located the situts of such
The Court in that case was not called upon to
consider whether a transaction to be a sale must be preceded by a contract of
sale : the Court was merely considering the vires of the second proviso to s.
2(g) of the Bihar Sales Tax Act. Das, C. J., in delivering the judgment of the
majority of the Court observed "the basis of liability under s. 4(1)
remained as before, namely, to pay tax on 'sale'.
The fact of the goods being in Bihar at the
time of the contract of sale or the production or manufacture of goods in Bihar
did not by itself constitute a 'sale' and did not by itself attract the tax.
The taxable event still remained the 'sale' resulting in the transfer of ownership
in the thing sold from the seller to the buyer. No tax liability actually
accrued until there was a concluded sale in the sense of transfer of title. It
was only when the property passed and the 'sale' took place that the liability
for paying the sales tax under the 1947 Act arose. There 475 was no enlargement
of the meaning of 'sale' but the proviso only raised a fiction on the strength
of the facts mentioned therein and deemed the sale' to have taken place in
Those facts did not by themselves constitute
a 'sale' but those facts were used for locating the situs of the sale in Bihar.
It follows, therefore, that the provisions of s. 4(1) read with s. 2(g), second
proviso, were well within the legislative competency of the Legislature of the
Province of Bihar". In Tata Iron & Steel Company Ltd's case (1),the
question as to the true content of the expression "sale' in the Bihar
Sales 'Fax Act did not fall to be determined, and the principle of the case can
have no application in deciding the present case.
It would be fruitless to enter upon a
detailed discussion of the two decisions of the House of Lords cited at the Bar
The Commissioner of In lan Revenue v. New
Castle Breweries Ltd (2 ) and Kirkness (Inspector of Taxes) v. John Hudson
& Company Ltd. (3). It may be sufficient to observe that in the first of
these cases goods belonging to the assessee were taken over by order of the
Admiralty, acting under the relevant regulations, and in compliance with the
order of a Compensation Court, the assessee was paid an amount exceeding pound
5000/being the difference between the amount originally paid and the amount
settled as due under the order of the Compensation Court. House of Lords held
that the transaction under which the Administrative took over the goods was a
sale in the business, and although no doubt it affected the circulating capital
of the assessee it was none the less proper to be brought into the profit and
loss account arising from the assessee's trade for the purpose of computation of
liability to pay Excess Profits duty. In Kirkness (Inspector of Taxes) v. John
Hudson's case (3) it was held by the House of Lords that the vesting of a
company's railway wagons in the Transport Commission under s. 29 of the,
Transport Act, 1947, with compensation fixed in (1) ( 1958) S.C.R. 1355. (2)
[1927) 12 T.C. 927.
(3)  A.C. 696.
476 the form of transport stock under the
relevant sections of that Act did not constitute a sale for the purpose of s.
17 of the Income-tax Act, 1945 so as to render the company liable to a
balancing charge under that section. The cases turned upon the meaning of or
sale' for the purposes of the Excess Profits Tax legislation and the Income-tax
Act, 1945 (8 & 9 Geo. 6, c. 32) and observations made therein have little
relevance in determining the limits of the legislative power of the Provincial
legislature under the Government of India Act, 1935, and the interpretation of
statutes enacted in exercise of that power.
The second contention raised by counsel for
the assessees requires no elaborate consideration. If it be assumed that the
intimation of the requirement by the State of Madras to the Controller amounted
to an offer, delivery of sugar by the assessee pursuant to such an order would
constitute a sale within the meaning of s. 2(g) of the Bihar Sales Tax Act, by
the second proviso which has been held intra vires by this Court in Tata. Iron
& Steel Company Ltd.'s case (1) the assessees would be liable to pay sales
tax, for it is not in dispute that at the time when the orders were received
from the Controller the goods were within the State of Bihar and the condition
prescribed by s. 2(g) second proviso for locating the situs of the sale is
But the intimation by the Province of Madras
of its requirements did not amount to an offer, and the supply of goods
pursuant thereto could not amount to a sale;
consequently liability to pay sales tax under
the Bihar Sales Tax Act on the amounts received by the assessees from the
Government of Madras for sugar supplied did not arise.
HIDAYATULLAH J.-I regret my inability to
agree that Gannon Dunkerley's case (2) can be (1)  S.C.R. 1355 (2) 
477 extended to cover the facts here. I would
confirm the decision of the High Court and dismiss these appeals for the
reasons proceed to give. These reasons are applicable to all the appeals in
This case is concerned with the levy of sales
tax under the Bihar Sales Tax Act 1944 (VI of 1944) for a period of three
months-April 1, 1947, to June 30,. 1947, and another of the nine months
following, under the Bihar Sales Tax Act, 1947 (XIX of 1947). The assessee
companies in all these appeals run sugar mills and are admittedly dealers under
these Acts and the commodity on the sale of which tax was sought to be levied
was sugar. . The disputed tax relates to supplies of sugar made by the assessee
companies under the orders of the Sugar Controller of India to certain
Provincial Governments in the relevant periods. There is only one contention of
the assessee companies in these appeals and it is that in the circumstances of
the case there was no "sale' of sugar, regard being had to the decision of
this Court in Gannon Dunkerley's case (1) and the amounts received from the
Provincial Governments should not be included in the taxable turnover.
I have already mentioned that the assessment
period in this case is one whole year-April 1., 1947 to March 31, 1948, and
that it is divided into two parts of three months and nine months respectively
governed by the Acts. There was however no difference in the mode of dealing in
this case in the two periods. In the other cases the assessment periods were
different but there was no other difference. The transactions were stereotyped
being under the Sugar and Sugar Products Order,, 1946, which was passed by the
Government of India on February 18.. 1946, in the exercise of powers conferred
by sub-rule (2) of Rule 81 of the Defence of India Rules. The mode, which has
been accepted by the (1) (1959) S.C.R. 379.
478 parties, as correctly summarised was as
follows:-"The admitted course of dealing between the parties was that the
Governments of various consuming States used to intimate to the Sugar
Controller of India from time to time their requirement of Sugar, and similarly.
the factory owners used to send to the Sugar Controller of India statements of
stock of sugar held by them. On a consideration of the requisitions received
from the various State Governments and also the statements of stock received
from the various factories, the Sugar Controller used to make allotments. The
allotment order was addressed by the Sugar Controller to the factory owner,
directing him to supply sugar to the State Government in question in accordance
with the despatch instructions received from the competent office of the State
Government. A copy of the allotment order was simultaneously sent to the State
Government concerned, on receipt of which the competent authority of the State
Government sent to the factory concerned detailed instructions about the
destinations to which the sugar was to be despatched as also the quantities of
sugar to be despatched to each place. In the case of the Madras Government it
is admitted that it also laid down the procedure of payment, and the direction
was that the draft should be sent to the State Bank and it should be drawn on
Party and Company or any other party which had been appointed as stockist
importer on behalf of the Madras Government. It should be added that in this,
case the assessee was called upon to produce nessary documents relating to the
transactions in question, but the assessee (lid not produce the documents. The
assessee, however, admitted 479 that general arrangement between the parties
was the one set out in this paragraph." Two typical documents in this
connection may be read and they are the permit by the Controller and the
despatch order sent by the Provincial Government. They were not produced in
this case but can be seen in the record of C. A. No. 633 of 1961 at pages 15,
16. First the permit :
No. 78 p (1)/46/7132 Office of the Sugar
Controller for India GOVERNMENT OF INDIA Department of Food.
Dated Simla, the 12-11-56 ORDER In exercise
of the power conferred by clause 7 of the Sugar and Sugar Products Control
1.Shashi Kiran, Assistant Sugar Controller
for India, having been duly authorised in this regard under clause 2 of the
said order by the Sugar Controller for India hereby direct you to supply 1200
tons/maunds of Sugar by 31-1-47 to Bengal in accordance with the despatching
instructions of the Director of Civil Supplies Bengal, Calcutta.
2.A permit No. 1988 to enable you to despatch
sugar in compliance with this order is attached.
(Sd.) Shashi Kiran, Asstt. Sugar Controller
480 To the Motilal Padampat Sugar Mills Co.
Ltd., Majhawlia, District Champaran.
And now the despatch order :EXPRESS STATE
MOTIPAT MAJHOWALIA UNDERSTAND SUGAR CONTROLLER ISSUED PERMIT FOR 600 TONS SUGAR
THIS PROVINCE FULLSTOP DESPATCH IMMEDIATELY 300 TONS MANGALORE DRAFTS ON ME THROUGH
CENTRAL BANK CALICUT 300 TONS COIMBATORE DRAFTS OF ME THROUGH CENTRAL BANK
MADRAS FULLSTOP SEND RAIL RECEIPTS FOR EACH WAGON LOAD OR 100 BAGS LOAD WAGONS
FULL CAPACITY FULLSTOP BOOK AT RAILWAY RISK IF NO SPECIAL RATES IN FORCE.
PRICES T.R.L. Narsinmhan, Assistant
Post copy in confirmation to Motilal Padampat
Sugar Mills Ltd. Majhowlia, Cliamparan District.
Forwarded/By Order, (Sd.) Illegible, Supdt.
Board of Revenue, (Civil Supplies) Chepauk, Madras.
481 These documents between them disclose
that free trading in sugar was not possible. All Provinces intimated their
requirements to the Controller who was kept informed by the Mills about the
supplies available. The price was controlled and the Controller directed the supply
of a certain quantity from a particular Mill to an indenting Province. After
giving his permit and sending a copy of this permit to each party, the
Controller passed out of the.
Picture and the Mill supplying aid the
Province receiving the supply (I am avoiding the words seller & buyer since
that is the point to decide) arranged the rest of the affair including the
issue of despatch instructions regarding the quantity and the quality to be
sent to different areas and the payment of price.
The question is whether there was a 'sale' in
the circumstances and the price should be included in the turnover for purposes
of Sales tax under the Bihar Sales Tax Act for the time being in force. The
definition of sale in the two Bihar Acts at all material times was :"2(g)
"'sale" means, with all its grammatical variations and cognate
expressions, and transfer of property in goods for cash or deferred payment or
other valuable consideration, including a transfer of property in goods
involved in the execution of contract but does not include a mortgage,
hypothecation, charge or pledge;
Provided that a transfer of goods on
hire-purchase other installment system of payment shall, notwithstanding the
fact that the seller retains a title to any goods as security for payment of
the price, be deemed to be a sale :
Provided further that notwithstanding
anything to the contrary in the Indian Sales of Goods Act, 1930 the sale of any
good which 482 are actually in, Bihar at the time when, in respect thereof, the
contract of sale as defined in section 4 of that Act is made, shall wherever
the said contract of sale is made, be deemed for the purposes of this Act to
have taken place in Bihar." In the present case, we arc required only to
decide whether, regard being had to the decisions of this Court expounding the
ambit of entry No. 48 of ,List II Seventh Schedule of the Government of India
Act 1936, the tax could not be demanded as there was no sale of sugar at all.
The entry in question is "48. Taxes on the sale of goods and on advertisement."
"Goods" was defined in section 311 as follows "Goods"
include all materials, commodities and articles." The white Paper had the
entry "taxes on the sale of commodities and on the turnover". It was
altered to "'taxes on the sale of goods" and as pointed out by Gwyer,
C. J., In re The Central Province & Berar Act No-. XIV of 1938, (1) it is
idle to speculate what the reason was. The expression "'sale of
commodities" would not have taken the mind to the Sale of Goods Act as the
redrafted entry does.
There is no provision in the whole of the
Government of India Act 1935 which expressly seeks to limit the meaning of the
plain words "taxes on the sale of goods" which include all materials,
commodities and articles. Such a limitation could of course arise from a
competing entry in List No. 1.
Otherwise the entry conferred powers as large
and plenary as those of any sovereign legislature. The ambit of (1) (1939)
483 the entry, prior to the inauguration of
the Constitution, was the subject of three leading decisions by the Federal
Court, in one of which there was also an appeal to the Privy Council. The first
case was In re The Central Provinces and Berar Act No. XIV of 1938, (1) a
reference under section 213 of the Constituting of 1936. In that case the
imposition of sales tax on retail sales of motor spirit and lubricants was
questioned on the ground that though described as tax on the sale of motor
spirit etc., the tax was, in effect, a duty of excise under entry 45 of List I
and there being an overlap between the two entries that in List I must prevail.
Legislative practice in respect of Excise
Duty was invoked but as sales-tax legislation did not exist in India before
1938 there was no legislative practice to consider on the meaning of the
express "tax on sale of goods". The Government of India claimed that
the entry 48 List II must be limited to a direct tax like a turnover tax which
is not identifiable in the price. Taxes on retail sales, it was argued,, being
indirect and identifiable in the price, were more of the nature of an excise
duty and the pith and substance of the Act being this the impugned Act was bad.
The main argument on behalf of the provinces,
which was accepted, was that the Constitution Act must not be construed in any
narrow and pedantic sense. Gwyer, C.J., expressed himself forcefully on this
point in the following words:-, " I conceive that a broad and liberal
spirit should inspire those whose duty it is to interpret
it................." The essence of the argument on the part of the
Provinces was that if only a turnover tax (which was a species of salestax) was
meant why was a wider expression used in the entry ? It was, therefore,
contended that the entry should not be truncated and the (1)  F.C.R. 18.
484 plain words of the entry should be given
their normal and ordinary meaning. The contention of the Provinces prevailed.
Though the learned judges pointed out that the words were "taxes on the
sale of goods" and not "sales tax" simpliciter, thereby
excluding taxes on services which in some systems are regarded also as
sales-tax, the words were wide enough to include more than a mere turnover tax.
It was held that the power included a power to levy a tax or duty on the retail
sale of goods and this did not impinge upon the power of the Legislative
Assembly to make laws "with respect to" duties of excise.
In the next case the Province of Madras v.
Boddu Paidanna & Sons (1). Government of India reversed its stand and
contended that the power of the Provincial Legislatures did not extend to
levying sales-tax on first sales but only after the goods were released by the
producer or manufacturer. The argument of the Government of India was not accepted
and it was declared that the power of a Provincial Legislature to levy a tax on
the sale of goods extended to sales of every kind and at all stages between a
producer or manufacturer and a consumer. The Central Government had filed a
suit and the third case before the Federal Court was an appeal from that
decision. The Federal Court followed its own decision in Boddu Paidanna's Case.
(1) The Central Government appealed to the judicial Committee and the judgment
is to be found in Governor-General in Council v. Province of Madras. (2) The
Judicial Committee examined in detail the provisions of the Madras General
Sales Tax Act 1938 to emphasize its essential character and observed that"
Its real nature, its "pith and substance," is that it imposes a tax
on the sale of goods. No other succinct description could be given of it (1)
 F.C.R. 90.
(2)  F.C.R. 179 P.C.
485 except that it is a "tax on the sale
of 'goods.' It is, in fact, a tax which according to the ordinary canons of
interpretation appears to fall precisely within entry No. 48 of the Provincial
Legislative List." In repelling the contention that first sales were not
included in the entry their Lordships observed that it did violence to the
plain languages and implied the addition of the words "other than first
sale of goods manufactured or produced in India." The judicial Committee
expressed itself in complete agreement with the two decisions of the Federal
The ambit of the entry was thus settled to be
that it included all "sales of goods' though not 'services' from the first
sale by the producer or manufacturer to the last sale to the consumer and that
the tax could be collected on wholesale or retail sales as well as on the
turnover. It was however pointed out that the expressions "sales-tax"
and "taxes on the sale of goods" were not the same, the first
including sales other than those of goods. No definition of what is
"'sale" was attempted in these cases either with or without reference
to the Sale of Goods Act.
Thus it was firmly established that the entry
""taxes on the sale of goods" authorised the making of laws for
the imposition of tax on all transactions of sale of goods from the
manufacturer or producer to consumer. It also could be imposed on the turnover
which meant the sum total of prices for which taxable goods were sold in a
The definition of "goods" was
enlarged to include "commodities, materials and articles." The word
"commodities" indicated "articles of trade", the word ire
materials" indicated "matter from which things are made", (the
use of the word being the same as in the expression 'raw materials') and by
"articles" was meant "any particular thing. " in this way
it was 486 clearly indicated that articles sold by way of a trade or otherwise
were equally within the expression (goods' and also finished articles and raw
materials from which finished articles are made.
The entry was framed in 1935 in the form with
which we are concerned. Previously it read in the white paper "taxes on
sale of commodities and turnover." The reframed entry was wider in one
respect (it included materials and articles in the sense explained) and
apparently narrower in another (by omitting turnover') than the original entry.
There was no occasion to expound the meaning of 'goods' in the two Federal
Court decisions but the decisions laid down that 'turnover' was included even
though not expressly mentioned.
I have already said above that prior to 1938
a tax on the sale of goods was not imposed in India. It is claimed that in
ancient times sales-tax was levied in India but we do not have to delve into
these matters. The tax, as it is known today, is of comparatively modem growth
though economists have traced it to Ptolemies, Greeks and Romans. Findlay
Shirras and other writers give us the history of the tax.
It was imposed in a recognisable form in
Spain in 1342 and was known as the skabala. This notorious tax continued for
five hundred years. In France it was also imposed in the fourteenth century but
was soon given up. We are not concerned with these ancient progenitors of the
They could not have influenced the selection
of the tax or its form. The modem tax was the result of the First World War.
Germany imposed in 1916 a turnover tax called 'die Umatzsteuer' and that is the
form in which the tax is collected there. France followed a year later but with
a transaction tax which was known as 'L'impot sur le chiffre d'affaires'. Soon
other countries followed as it was almost as productive as Customs and
487 By the time the Government of India Act
1935 was passed, no less than thirty countries had imposed this tax in
different forms. India, however, was not one of them.
The period in India following the First World
War opened with the Government of India Act with its Devolution Rules and the
allocation of taxes by', the Scheduled-tax Rules, to the Provinces framed in
1920. The latter Rules contained only octroi and taxes on markets and trades,
professions and callings which resembled very distantly, the modem salestax.,
Indeed, sales-tax was first visualized in the Report, of the Taxation Enquiry
Committee 1924-25) but only as a modification of the octroi through the
intermediate steps of taxing markets and slaughterhouses. It was hoped that
price competition would stop inclusion of the tax in the price. It would have
been a vain attempt to convert an indirect tax into a direct one. The Committee
visulised it as a composition tax from traders but it was realised that the
'tax would soon get converted into a tax, on sales of goods, or, of services
like those of a doctor or goldsmith and that it would be difficult to separate
services from goods in case where the two were combined. It was also recognised
that turnover taxes imposed on persons in respect of raw materials and finished
goods tended to be cumulative, but taxes imposed at one point did not have that
vicious tendency: The difficulty of entrepot trade in octroi, where goods bore
the tax whether or not consumed, sold or used was avoided because the tax under
retail sales-tax scheme was payable only when the goods were actually sold and
being ad valorem bore lightly on cheap goods. The suggestions were(1) A turnover
tax on retail merchants;
(2) registration of such dealers;
(3) collection of taxes quarterly;
488 (4) licensing of and charging of fees
from petty traders and hawkers whose. turnovers were uncertain as no accounts
were maintained by them.
Sales-tax particularly that imposed on goods
assumed by 1935 different forms in different countries. Its incidence was
sometimes the turnover, sometimes wholesale and sometimes the retail sale. In
Canada and Australia it was a producers' or manufacturers' tax almost of the
nature of excise. In France the excise and sales-tax were interchangeable, the
former being a replacement tax on the turnover of the manufacturer. In Germany
the tax included both goods and services, in France services were excluded
unless there was a commercial element' In England, it took the form of a
purchase tax. France also devised a simpler method by imposing a for fait a
lump sum which represented, so to speak, a quit tax. In Belgium it was
collected by stamps from both the seller and the buyer according to their
respective invoices. In America the position was unique.
It can be stated from a passage from
Beuhler's Public Finance (3rd Edn.) page 410"'A sale tax is an excise in
so far as it is imposed upon domestic transaction of commodities, and it may
also have some of the aspects of customs duties because national sales taxes
commonly fall upon importing and sometimes upon exporting. The popular name for
American excises is sales taxes.
Not all excises are imposed upon sales or the
privilege of selling, however, for they may be placed upon the purchase or use
of commodities, including services." The varieties this elastic tax took
in that country is illustrated from the following passage from the same author"
'Here, again, there is no standard usage, for selected sales taxes are often
called sales taxes, 489 limited sales taxes, selective sales taxes, and special
sales taxes, while general sales taxes may be called sales taxes, turnover
taxes, manufacturers' sales-taxes, retails sales-taxes and gross receipts or
gross income-taxes." It was in the background of these laws of foreign
countries and the recommendations of the Taxation Inquiry Committee that the
entry in the Government of India Act 1935 was framed. Taxes on the sale of
goods being a kind of commodity taxes had to be demarcated from other commodity
taxes like excise, octroi, terminal tax, market dues etc.
The difficulty was solved by viewing the
goods as the subject of taxation in different stages. These stages were
production, movement sale and consumption. Taxes on production of goods which
were excise proper were given to the centre with certain exceptions (Entry 45
list I and Entry 40 of list II), taxes on sale of goods were given to the
Provinces (Entry 48 List II), while taxes on movement of goods were
divided-those carried by railway and air being allotted to the centre as
terminal taxes (Entry 58 List 1) and those carried by inland waterways being
allotted to the Provinces (Entry 52 List II). Taxes on the entry of goods in a
local area for consumption, use or sale (octrois) were allotted to the
Provinces (Entry 49 List II). This was the demacation of commodity taxes in
addition to local taxes for local purposes.
The two cases of the Federal Court to which
detailed reference has been made above outlined the scope of competing entries
relating to duties of excise and taxes on the sale of goods. It was pointed out
that though there was an overlap the taxes were different. In the recent case
of The Automobile Transport (Rajasthan) Ltd. v. The state of Rajasthan (1). I
have given the history of the distribution of the heads of revenue on the eve
of the Government of India Act 1935 and have there (1)  1 S.C.R. 491, 490
pointed out that the attempt was to give adequate resources to the Provinces'
to enable Provincial Governments to undertake nation-building activities. It
was there pointed out by me that experts at that time were in favour of
alloting an elastic tax like sales-tax to the Provinces as the main source of
revenue and abolish altogether the category of deficit Provinces and the
subventions. It was expected that land revenue would have to be reduced and
income-tax could not be increased beyond a point. The only tax that was new and
fell imperceptibly upon consumers was the sales-tax and it was allotted to the
Provinces. It was expected to be a very productive tax, an expectation which
has been amply fulfilled. In 1954-55, this tax alone yielded about 60 crores
and it has been even more productive since.
The inroads upon the tax were many but they
were resisted in the pre-Constitution period by the Provinces both in Courts
and in administration. Indeed, appeals were made in cases before the Federal
Court, not to cut down unduly the ambit of the natural words and Mr. justice
jayakar mentioned them in his judgment with sympathy. I feel that what he said
will bear repetition here:
"A powerful appeal was made to us by the
Advocates-General of the Provinces that, consistently with its terminology, we
should so interpret entry No.41 (List II) as to give it a content sufficiently
extensive for the growing needs of the Provinces. It was argued that the
provincial autonomy granted by the new scheme of government would be unmeaning
and empty, unless it was fortified by adequate sources of revenue. Whatever
value such an appeal may have in a judicial decision, I personally appreciate
it, and I feel no doubt that the interpretation that I am placing on 491 entry
No. 48 (list II) is sufficiently practical to leave an adequate source of
revenue in the hands of the Provinces without making inroads on Central
preserves. I may add here that the several authors I have been able to consult
on this point agree in their opinion that, since the War, a tax on the sale of
goods has proved to be both productive and practicable in many countries, under
circumstances not very different from those prevailing in the Provinces of
,India. The yield naturally varies with the scope and rates of the tax,
business conditions and administrative efficiency, but it is stated that the
tax itself has become a major source of revenue in a number of countries,
yielding more than the income-tax in a few instances, and nearly as much as
other sources of revenue in others." In re The Central Provinces &
Berar Act No. XIV of 1938 (1).
The two cases of the Federal Court having
established the area of operation of entry No. 48 List II in relation to the
competing entry relating to excise, the Provinces attempted to extend the tax
to cover all situations. This was done by incorporating definitions of 'sale'
which in some respects were inconsistent with the definition in the Indian Sale
of Goods Act. The Taxation Enquiry Commission (1953-54) gave in its report an
analyses of how these definitions ran and I find it convenient to quote from
the report (page 10, para 24 Vol. III) :"In Madras, Mysore,
Travancore-Cochin and Hyderabad, sale means transfer of property in the course
of trade or business. By implecation, all other sales are excluded.
Casual sales by individuals, sales of food by
hotles attached educational institutions, sales of old furniture, for example,
by firms not dealing (1) F.C.R. 19 at p. 119.
492 in furniture and so on are, therefore,
not liable for the tax in these States. The States of Bengal and Delhi define
sale as transfer of property in goods for money consideration, which
accordingly excludes transfers for other consideration like exchange or barter.
According to the Acts of certain States, the Sale is deemed to have taken place
in the territory of the State, if at the time when the contract of sale or
purchase was made, the goods were actually in those States. In certain States,
the transfer of property in goods supplied in the execution of a contract is
also included in the definition of sale." The definitions led to a variety
of decisions on the meaning of the word "sale" which were likely to
bewilder the common man. The Taxation In Commission summed up the situation in
the following words :""The layman who asks : "What is a
sale" would not have to go without an answer, he would find plenty of
replies in the reported judgments of courts of law; and he would not be a
layman if, piecing them together, he was able to say when, where and how a sale
because a sale which a sales tax may tax." From the earliest times the
extension of the word "sale" was in three recognisable directions. Firstly,
the definition by a fiction took in transactions of sale in which the goods
were produced in the Provinces or were in the Province at the time the contract
of sale took place, no matter where the contract could, in law, be said to have
taken place. In other words, by a fiction incorporated in the definition of
sale' the situs of sale could be established in the Province. Secondly, forward
transactions in which the passing of property was postponed to a future date,
if at all it took place, were included in the definition of "'sale".
Thirdly, 493 materials in a works contract, where the bargain was for a
finished thing, were treated as the subject matter of sale.
Laws in which transactions of sale were
sought to be taxed on the ground that goods were in the province or some part
of the component elements of a contract of sale took place in the Province were
generally upheld by the High Courts.
In these cases the doctrine of nexus was
extended to sales tax legislation following the analogy of the decision of the
Privy Council in Wallace Brothers etc. & Co. v. Commissioner of Income-tax,
Bombay. (1) The cases recognised the sovereignty of Provincial Legislatures
which were erected by the British Parliament in its own image and which within
the jurisdiction conferred by a legislative entry enjoyed powers as large and
ample as those of the British Parliament. It was generally held that in the
Plenitude of that power it was open to the Provincial Legislatures to tax
transactions of sale in which there was a sufficient nexus between the Province
and the taxable event namely the sale, and that the Provincial law could by a
function bring the whole transaction into the Province for purposes of tax.
The Supreme Court also took substantially the
same view in the State of Bombay v. The United Motors Ltd., (2); Bengal
Immunity Co. Ltd. v. State of Bihar (3); Tata Iron and Steel Co. Ltd. v. State
of Bihar (4) and Commissioner of Sales-tax v. Husenali (5).
The meaning of the world "sale' in the
Entry was laid down in several cases but I shall refer to only one of them. In
Poppatlal v. State of Madras, (6) Venkatarama Ayyar, J., (Rajamannar, C. J.
concurring) observed as follows :
"'The word "sale' has both a legal
and a popular sense.
In the legal sense it imports (1)  F.C.R.
I P.C. (2) (1953] S.C.R. 1069.
(3)  2 S.C.R. 603.
(5)  Supp. 2 S.C.R. 702.
(4)  S.C.R. 1355.
(6) A.I.R. (1953) Mad. 91.
494 passing of property in the goods.In its
popular sense it signifies the transactionswhich results in the passing of
property. To alawyer the legal sense would appear to be thecorrect one to be
given to the word in' the Sales Tax Act. That is the conception which is
familiarised in the provisions of Sale of Goods Act. If one leaves out of
account sales tax legislation which is of comparatively recent origin,
questions relating to sale of goods usually come up before the Courts only in
connection with disputes between the sellers and purchasers. If the goods
perish, onwhom is the loss to fall? If the purchaser becomes insolvent before
payment of price can the goods be claimed by the trustee in bankruptcy? For
deciding these and similar questions it is necessary to determine at what point
of time the property in goods passed to the purchaser. Sometimes when the point
for determination is as to jurisdiction of Courts to entertain suits based on
contract, it may be material to consider where property in the goods passed,
that being part of the cause of action. These being the questions which are
accustomed to be debated in connection with sale of goods, it is natural that a
lawyer should, as a matter of first impression approach the question of sale
under the Sales Tax Act with the same concept of a sale. 'But if the matter is
further considered it will be seen that considerations which arise under the
Sales Tax Act are altogether different from those which arise under the Sale of
The object of the Sales Tax Act is to impose
a tax on all sales and it is a tax imposed on the occasion of sale............
So far as the Government is concerned, it would be 495 immaterial at which
point of time property in the goods actually passed from the seller to the
Of course, there must be a completed sale
before tax can be levied and there would be a completed sale when property
passes. That is the scope of the definition of 'sale' in section 2 (h). But
when once there is a completed sale, the question when property passed in the
goods would be a matter of no concern or consequence for purposes of the Sales
Tax Act. The Government is interested only in collecting tax due in respect of
the sale and the only fact about which it has to satisfy itself is whether the
sale took place within the Province of Madras. In this context the popular
meaning of the word is the more natural and there is good reason for adopting
it......... Our conclusion accordingly is that the word 'sale' in the Madras
General Sales Tax Act must be understood in a popular sense and sales tax can
be levied under the Act if the transaction substantially takes place within
this Province,, notwithstanding that the property in the goods does not pass
within the State." Against the decision of the High Court of Madras an
appeal was filed in this Court and the .judgment of this Court is reported in
 S.C.R. 677. The appeal was allowed. On the question of territorial nexus
this Court agreed with the Madras High Court but on the question of the meaning
of the word "sale' it expressed itself differently. In an earlier case
(State of Travancore Cochin v. The Bombay Co. Ltd.
(1)), this Court had reserved the question
whether the word 'sale' had the same meaning as in the law relating to the sale
of goods or a wider meaning. In Poppatlal Shah's case (2) the Supreme Court,
referred to the decision of the Madras High Court that the word was used in a
popular sense and without any expression of (1)  S.C.R. 1112.
(2) A.I.R. (1953) Mad. 91.
496 disapproval held that there was no
indication of the popular meaning of sale in the definition in the Madras
General Sales Tax Act where unmistakably stress was laid 'on the clement of
transfer of property in a sale and no other.' The Bench held that, the presence
of goods within the province at the time of the contract would have made the
sale, if subsequently completed, a sale within the province by reason of the
Explanation added by Act XXV of 1947 but as the Explanation was not in
operation during the relevant period the assessment of sale tax was held to be
illegal and unwarranted by the law as it then stood.
It would appear from this that this Court
took the view that the word 'sale' in the entry "Taxes on the sale of goods"
was used in a sense wider than that commonly accepted in the law relating to
sale of goods, and the judgment of Venkatarama Ayyar, J., in the Madras High
Court on this part was not questioned. Then came a decision of the Allahabad
High Court from which an appeal was brought to this Court.
The judgment of this Court is reported in the
Sales Tax Officer, Pilibhit v. Messrs Budh Prakash Jai Prakash (1).
The definition of the word " sale' in
the U.P. Sales Tax Act (XV of 1948) included 'forward contracts', and this part
of the definition was declared ultra vires entry 48 in List I of the Government
of India Act 1935 and Explanation III to section 2 (h) of that Act which
provided that forward contract "'shall be deemed to have been completed on
the date originally agreed upon for delivery and also section 3B taxing
turnover of dealers in respect of transactions of forward contracts were also
declared ultra vires.
Venkatarama Ayyar, J., speaking for this
Court held that under the statute law of England and also of India there was a
well-recognised distinction between "sales" and "'agreement to
sell" though they were grouped under the generic name of "contract of
sale." The distinction, it was pointed out, lay in the transfer of
property which, if simultaneous (1)  1 S.C.R. 243.
497 with agreement, made for a sale, but if
in the future, operated only for an agreement to sell. In the latter case
property could only pass as required by section 23 of the Sale of Goods Act.
Relying on the observation of Benjamin on Sale that" In order to
constitute a sale there must be (1) An agreement to sell, by which alone the
property does not pass; and (2) an actual sale, by which the property passes,"
the learned judge observed that though the definition of a contract of sale
included a mere agreement to sell as well as an actual sale, there was a
distinction between the two which led to different remedies and entry No. 48
when it spoke of "sale' meant a completed sale involving transfer of
title. The question whether the legislature in the exercise of its sovereign
powers for purposes of taxing the event of sale could treat a sale as complete
when there was a final agreement for purchase and sale even though price was
not paid was apparently not mooted before this Court. Emphasis was laid on the
definition of 'turnover' as "the aggregate of the proceeds of sale by a
dealer' and it was pointed out that there could be no aggregate of prices unless
the stage had been reached when the seller could recover the price under the
contract, it being well-settled in the law under the sale of goods that
"an action for price is maintainable only when there is a sale involving
transfer of the property in the goods to the purchaser" and that
"where there is only an agreement to sell, then the remedy of the seller
is to sue for damages for breach of contract and not for the price of the
goods". The exceptional circumstance when under an agreement between the
parties the price is payable on a day certain irrespective of delivery was
considered not material for the purpose of the discussion.
498 In these cases by the application of the
legislative practice relating to sale of goods the meaning of the expression
"taxes on sale of goods" was determined and future contracts in which
delivery and payment of price were deferred were held to be outside the purview
of the Entry.
There can hardly be any doubt that the entry
is concerned with a completed sale because it is only a sale' which can be
taxed and not anything which is short of a sale and if a transaction which is
sought to be taxed is merely in the region of an agreement de future there is
no taxable event.
The opinion that if there be a completed sale
then the law dealing with taxation would be indifferent whether price was paid
or not. expressed by Venkatarama Ayyar,J., in Poppatlal Shah's case(1) of the
Madras High Court was not accepted.
Then came the third batch of cases. This
batch was concerned with the taxing of materials which were supplied and used
as part of building or repair operations, like bricks, timber and fittings in
buildings girders, beams, rails etc. in bridges, spare parts in repair of motor
vehicles etc. Two distinct views were held by the High Courts. The Madras High
Court in sub nom Gannon Dunkerley & Co, v. State of Madras (2 ) held that
such transactions did not involve a sale of goods and there could be no tax. A
contrary view was expressed in Pandit Banarsi das v. State of Madhya Pradesh
(s) where it was held that such contract-, involved both labour as well as
materials and in as much as materials were goods and property in them passed,
it wag within the competence of the Provincial legislatures to separate the
sale of goods from the composite and entire transactions and to tax them. It
was pointed out that legislative practice in relation to the Sale of Goods Act
was not conclusive, and though it could not be doubted that a limited
legislature could not create a power for itself which did not flow from an
entry, the entry itself must be given the widest amplitude (1) A.I.R. (1953)
Mad 91. (2) (1954) 5 S.T.C. 216.
(3) (1955) 6 S.T.C. 93.
499 possible and its scope should not be cut
down by anything not found in the Constitution Act 1935. It was, therefore,
concluded :-"The text being explicit, the text is conclusive alike in what
it directs and what it prohibits. The necessary conditions for the impost,
however, were that there should be a sale of goods. The selection of the
taxable event and the severance of transactions of sale from other transactions
in which they might be embedded was a necessary part of the power. The
legislature could not say that a contract of service amounted to a sale of
services (goods) but it could tax a genuine transaction of sale of goods
whatever form it took." x x x x x "'If a building contract was not
split up into its component parts, that is to say, material and labour, in
legislative practice relating to the ordinary regulation of sale of goods there
is no warrant for holding that it could not be, so split up even for purposes
of taxation." Some High Courts accepted the decision in Gannon Dunkerley's
case and some others the decision in Pandit Banarsidas's case.(1), In all these
cases there were appeals to this Court. All these appeals were heard together.
The leading Judgment was delivered in Gannon Dunkerley's case. The Madras view
was accepted and the view expressed in Pandit Banarsidas's case (1) was not
accepted. It is contended for the appellants that this view of the Supreme
Court controls the present case and it is, therefore, necessary to follow the
reasoning in some detail. Before I do so I shall refer to a case of the House of
Lords which influenced in no small measure the decision of this Court. 'that
case is Kirkness v. John Hudson & Co. Ltd. (2).
( 1) (1955) 6 S.T.C. 93.
(2) (1955) A.C. 696.
500 Under section 29 of the Transport Act
1947 (10 & 11 Geo.
C.49) the company's railway wagons were
vested on January 1, 1948, in the British Transport Commission. These wagons
were already under requisition to the Ministry of Transport under the powers
contained in Regulation 53 of the Defence (General) Regulations, 1939. Later the
company received compensation. This amount was higher than the written down
value. A balancing charge of pound, 29,021 was made under section 17 of the
Income-tax Act, 1945 (8 & 9 Geo. 6 C. 32) in an assessment under clause I
of schedule D to the Incometax Act, 1918. The company appealed against the
balancing charge and succeeded. Section 17 (1) of the Income-tax Act 1945
(which in its purport resembled section 10 (2) (vii) of the Indian Income-tax
Act (1922) ordained that a balancing charge or allowance should be made if
certain events occured, one such event being "(a) the machinery or plant
is sold, whether still in use or not". The question was whether there was
such a " sale' justifying a balancing charge. It was contended for the Revenue
that the word sale had a wider meaning than a contract and a conveyance of property
and that in its legal meaning it did not involve a contract at a but just the
transfer of the property in or ownership of something from A to B for a money
price, whether voluntary or affected by operation of law or compulsory.
Passages were cited from Benjamin on sale (2nd Edn. p. 1), Halsbury's Laws of
England (2nd Edn. vol. xxi p.5), Blackstones Commentaries 19th Edn. (1836) vol.
446, and Chalmer's Sale of Goods(11th Edn. p.
161) to show that a bargain only shows a mutual assent but it is the transfer
of property which is the actual sale. Analogy of Lands Clauses Consolidation
Act 1845, Stamp Act and other Acts was invoked and later Finance Acts were also
called in aid where such compulsory transactions were described as sale or
purchase. The House of' Lords by a majority of 501 4 to 1 overruled these
contentions. It was held that the vesting of the wagons in the Transport
Commission by operation of section 29 of the Transport Act and the payment of
compensation in the shape of transport stock did not constitute a sale and the
analogy of compulsory acquisition of land did not apply, since the procedure
there was entirely different. The word 'sale' in s. 17 of the Income tax Act
1945, it was held, imported a consensual relation and the meaning of the
section being plain, it was not possible to go to later Acts to construe the
section. I shall quote a few passages from the speeches to show how this
conclusion was reached so as to be able to show how the same reasoning was used
in connection with the building contracts.
Viscount Simonds pointed out that what was to
be construed were the two words 'is sold' in section 17 (1) (a) of the
Income-tax Act 1945, that there was nothing in the Act to give a special colour
or meaning to the words and that analogous transactions could net help to
decide that should be the meaning. Agreeing with Singleton L. J. where he
said-"what would anyone accustomed to the use of the words 'sale' or 'sold'
answer ? It seems to me that everyone must say "Hudsons did not
sell," Viscount Simonds went on to say :"When Benjamin said in the
passage quoted by Singleton and Birkett. JJ., from his wellknown book on sale,
2nd. ed.p.1, that by the common law a sale of personal property was usually
termed a 'bargain and sale of goods' he was by the use of the word 'bargain'
perhaps unconsciously emphasizing that the consensual relation which the word
'bargain' imports is a necessary element in the concept. In this there is
nothing new, the same principle is exhibited in the Roman Law, for the opening
words of Title 23 of the third book of the 502 Institutes of Justinian "De
Emptione et venditione" are "emptio et venditio contrahitur
simulatque de pretio convenerit........ sometimes the contract for sale is
itself the sale, as so often in the sale of goods : sometimes, and particularly
in the sale of land, it is regarded as a part of the sale as, for example, when
it is said by a modern writer that "the first step in the sale of land is
the contract for sale (see Cheshire, Modern Real Property 7th Ed.p.631). But it
is immaterial whether the contract is regarded as the sale itself., or as a
part of it, or a step in, the sale or as a prelude to the sale : there is for the
present purpose no substance in any such distinction. The core of it is that
the consensual relation is connoted by the simple word 'sale' ".
Lord Reid also emphasised the consensual
relation in "sale' as its vital element and observed :" 'Sale' is, in
my opinion, a nomen juris, it is the name of a particular consensual contract.
The law with regard to sale of chattels or corporeal movables is now embodied
in the Sale of Goods Act, 1893. By section I (1) "A contract of sale of
Goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for money consideration, called the price,"
and by section 1 (3) : "where under a contract of sale the property in the
goods is transferred from the seller to the buyer the contract is called a
sale; but where the transfer of the property in the goods is to take place at a
future time or subject to some condition thereafter to be fulfilled the
contract is called an agreement to sell." As a contract of sale, as
distinct from an agreement . to sell and unlike other contracts, operates by
itself and without delivery to transfer the property in the thing sold, the 503
word '-sale" connotes both a contract and a conveyance or transfer of
property." Lord Reid agreed "that sale' is a word which has become
capable in an appropriate context of having a meaning wider than its ordinary
and correct meaning. But it is only permissible to give to a word some meaning
other than its ordinary meaning if the context so requires". Lord Tucker
in agreeing observed :"I feel that the answers must be that the word is
unambiguous and denotes a transfer of property in the chattel in question by
one person to another for a price in money as the result of a contract express
or implied. This is in substance the definition of "sale" given in
the second edition of Benjamin on sale, but for present purposes it is
sufficient to emphasize that natural assent is an essential element in the
transaction. It is no doubt true that the contract or agreement to sell may
precede the formal instrument or act of delivery under which the property
passes but to describe a transfer of property in a chattel which takes place
without the consent of transferor and transfer as a sale would seem to me a
misuse of language.
By express enactment or by necessary
implication from the context any word may be given a meaning different from or
wider than that which it ordinarily bears, and this may apply to the word
"sale" where it appears in a context relating to the process of
compulsory acquisition of land..........." I do not find it necessary to
quote from the minority view of Lord Morton of Henryton but he did point out
that the word 'sale' for 100 years was being used in connection with
transactions by which the property of A had been transferred to B, on payment
of compensation to the owner but without 504 the consent of the owner and said
of the question posed by Singleton L. J. that if it were put to ten persons
unconnected with the company, five of them might say "No, the wagons were
taken over under the Transport Act" and the other five might
say,""Yes", adding, possibly, "'but it was a compulsory
sale" or "'because they had to do it".
I have paused long over this case but only
because the line of reasoning of this case has been closely followed in Gannon
Dunkerley's case. The decision of the Court of Appeal, later approved by the
House of Lords, had also influenced in a large measure the decision of the
Madras High Court earlier in the same case.
In Gannon Dunkerley's case Venkatarama Aiyar,
J., posed the question thus :"The sole question for determination in this
appeal is whether the provisions of the Madras General Sales Tax Act are ultra
vires, in so far as they seek to impose a tax on the supply of materials in
execution of works contract, treating it as a sale of goods by the contractor
and the answer to it must depend on the meaning to be given to the words
"'sale of goods" in Entry 48 in List II of Sch. VII of the Government
of India Act, 1935." His Lordship accepted that building materials were
'goods' in view of the definition and narrowed the inquiry to whether there was
"a sale of those materials within the meaning of that word in Entry
48." The learned judge then pointed out that in interpreting a Constitution
a liberal spirit should inspire courts and the widest amplitude must be given
to the legislative entries and they should not be cut down by resort to
legislative practice and that subjects of taxation in particular should be 505
taken in rerum natura irrespective of previous laws on the subject. The learned
judge next asked the question in what sense the words 'sale of goods' were
used, "Whether popular or legal, and what its connotation is either in the
one sense or the other." After noticing meanings of "sale" as
given by divars authors, it was laid down that it meant transfer of property in
a thing from one person to another for a money price. It was next pointed out
that in popular sense a sale ",is said to take place when the bargain is
settled between the parties, though property in the goods may not pass at that
stage" and the Observations of Sankey, J., (later Viscount Sankey L. C..,
in Nevile Reid & Co. Ltd. v. C. 1. R. (1) that the words 'sale' in the
British Finance Act, 1918, should not be construed in the light of the Sale of
Goods Act, 1893 but in a commercial and business sense were rejected as obiter
and opposed to the decisions of this Court in Poppatlal Shah's Case and Budh
Prakash's Case. (3) where "'executory agreements" were not held to be
sales within the Entry. It was observed-"'We must accordingly hole that
the expression "sale of goods' in Entry 48 cannot be construed in its
popular sense and that it must be interpreted in its legal sense. What its
connotation in that sense is must now be ascertained. For a correct
determination it is necessary to digress somewhat into the evolution of the law
relating to sale of goods".
The learned judge next referred to Roman Law
of emptio venditio and pointed out that the consideration of sale could not be
anything but only money or something valuable and that it was so recorded in
the Institutes of Justinian Title XXIII and that Emptio Venditio was a
consensual contract. The learned judge next referred to Benjamin on sale and
observed that according to that learned author to Constitute a valid sale there
must be a concurrence (1) (1927) 12 Tax. Cas. 545.
(2) A.r.R. (1953) Mad. 93.
(3) (1955) 1 S.C.R. 243.
506 of the following elements vis:"(1)Parties
competent to contract(2) mutual assent; (3) a thing, the absolute or general
property in which is transferred from the seller to the buyer; and (4) a price
in money paid or promised." (Vide 8th edn. p. 2) "In 1893 the Sale of
Goods Act, 56 & 57 Vict. c. 71 codified the law on the subject., and s. 1
of the Act which embodied the rules of the common law runs as follows :
1 .-(1) "A contract of sale of goods is
a contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a money consideration, called the price. There may be a
contract of sale between one part owner and another.
(2)A contract of sale may be absolute or
(3)Where under a contract of sale the
property in the goods is transferred from the seller to the buyer the contract
is called a sale; but where the transfer of the property in the goods is to
take place at a future time or subject to some condition thereafter to be
fulfilled the contract is called an agreement to sell.
(4)An agreement to sell becomes a sale when
the time elapses or the condition are fulfilled subject to which the property
in the goods is to transferred." It was then pointed out that in section
77 of the Indian Contract Act 1872 sale was defined as "the exchange of
property for a price involving the 507 transfer of ownership of the thing sold
from seller to buyer". It was then held that in view of the scheme of the Indian
Contract Act sections 1-75 a bargain was an essential element and that even
after the Indian Sale of Goods Act the position had not changed. It was next
pointed out that ,Thus, if merely title to the goods passed but not as a result
of any contract between the parties, express or implied, there is no sale. So
also if the consideration for transfer was not money but other valuable
consideration, it may then be exchange or barter but not sale. And if under the
contract of sale, title to the goods has not passed, then there is an agreement
to sell and not a completed sale". The State in the case urged four points
to resist the conclusion that the words "'sale of goods" in Entry 48
must be interpreted in the sense which they bear in the Indian Sale of Goods
Act 1930. These contentions were examined seriatum and rejected and it was
concluded thus :""To sum up, the expression "sale of goods"
in Entry48 is a nomen juris, its essential ingredients being an agreement to
sell movables for a price and property passing therein pursuant to that
agreement. In a building contract which is, as in the present case, one entire
and indivisible-and that is its norm, there is no sale of goods, and it is not
within the competence of the Provincial Legislature under Entry 48 to impose a
tax on the supply of the materials used in such a contract treating it as a
sale ." In so far as building contracts were concerned two reasons why
there could not be a sale of goods were mentioned. The first was that there was
no agreement express or implied to sell 'goods'. It was observed :"...............
We are concerned here with a building contract, and in the case of such a 508
contract, the theory that it can be broken up into its component parts and as
regards one of them it can be said that there is a sale must fail both on the
grounds that there is no agreement to sell materials as such, and that property
in them does not pass as movables." The second reason was that the
property in the building materials does not pass in the materials regarded as
'goods' but as part of immovable property. It was observed :"When the work
to be executed is, as in the present case, a house, the construction imbedded
on the land becomes an accretion to it on the principle quicquid Plantatur
solo, solo credit and it vests in the other party not as a result of the
contract but as the owner of the land." I shall refer to two other cases which
were decided with Gannon Dunkerley's case. In Pandit Banarasi Das v. State of
Madhya Pradesh (1) it was observed at page 437.
"It should be made clear, however, in
accordance with what we have already stated, that the prohibition against
imposition of tax is only in respect of contracts which are single and
indivisible and not of contracts which are a combination of distinct contracts
for sale of materials and for work, and that nothing that we have said in this
judgment shall bar the sales tax authorities from deciding whether a particular
contract falls within one category or the other and imposing a tax on the
agreement of sale of materials, where the contract belongs to the latter
category." In Mithanlal v. State of Delhi (2) from a composite transaction
involving work and materials, the (1)  S.C.R. 427.
(2)  B.C.R. 445.
509 materials were held liable to sales tax
under a law made by Parliament for a Part C State. This was held to fall within
the residuary powers of Parliament without any specific reference to any
particular entry or entries in Legislative Lists. I shall now proceed to
discuss the facts of the.
present case in relation to the decisions on
Entry 48 of List 11, Seventh Schedule of the Government of India Act 1935.
Before considering the facts of this case in
the light of the Sugar and Sugar Products Order 1946, I shall summarise what I
have said so far. Sales tax is a tax which may be laid on goods or services. It
assumes numerous shapes and forms. It is a modern tax being the product of the
First World War. The concept of 'sale' is of course much older and even the
English Sale of Goods Act 1893 on which our own statute is based, was prior to
the first imposition of tax in modern times. In India, the tax was first levied
in 1937 under laws made under entry No. 48 which read-"'Taxes on the sale
of goods". It was introduced as the main source of revenue to the
Provinces under a scheme of Provincial Autonomy. Being a commodity tax it came
into competition with other commodity taxes like excise but it was held that
the entry comprised, wholesale, retail and turnover taxes from the stage of
manufacture or production to consumption.
Later textual interpretation based on
statutes relating to sale of goods and books on the subject of sale, pointed
out intrinsic limitations. One such limitation was that the term "sale'
was used in the limited sense it bears in that part of the law of contract
which is now incorporated in the Sale of Goods Act. As a result of this
fundamental consideration forward contracts' were held to be outside the scope
of the Entry. The sale, it was held, had to be a completed sale with passing of
property before the tax could become payable. A further limitation was pointed
out in certain cases relating to building 510 contracts in which it was held
that though property in materials passed, it did so without an agreement,
express or implied, in that behalf, and only when the materials ceased to be
goods and became immovable property. It was held that the supremacy of the
Provincial Legislatures did not extend to levying a tax on sales in these
circumstances by modifying the definition of sale. It was however held that if
the parties agreed to divide a works contract into labour plus materials, the
tax might be leviable. It was also held that a tax on building materials was
leviable by the legislature having power to levy a tax not expressly mentioned.
It was, however, held that if the taxing Province had the goods at the time of
the contract or there was other substantial connection with the contract by
reason of some element having taken place there, the Legislature could validly
make a law which treated the whole transaction as having taken place in the
The argument in this case is that the tax can
only be placed upon a transaction of sale which is the result of mutual assent
between the buyer and seller and observations in Gannon Dunkerley's case where
stress is laid upon the consensual aspect of " sale' are relied upon. It
is true that consent makes a contract of sale because sale is one of the four
consensual contracts recognised from early times.
"Consensu fiunt obligationes in
emptionibus venditionibus" and "Ideo autem isti modis Consensu
dicimus obligationes contrahi". But consent may be express or implied and
it cannot be said that unless the offer and acceptance are there in an
elementary form there can be no taxable sale.
The observations in Gannon Dvnkerley's case
were made in connection with materials utilised in the construction of
buildings, roads, bridges etc. It was there pointed out that there must at
least be an agreement between the parties, express or implied, in respect of
some 'goods' as 'goods' and the levy of the tax on building 511 materials was
struck down because "there is no agreement to sell materials as such, and
that property in them does not pass as movables." The commodity with which
we are concerned is sugar and it is delivered as sugar. Thus one part of the
reasoning from Gannon Dunkerley's Case which rested on the passing of property
in building materials as a part of realty does not apply. It is also quite
clear that the tax is being demanded after the sugar has changed hands or
expressing it in legal phrase when property in it has passed. It is argued that
by reason of the Control Order there was no bargaining. It is pointed out that
the control of sugar operated to fix ex-factory price, to determine who should
be the supplier and who should receive the supply, to fix the quantity, quality
and the time of delivery. The question which we are deciding is not a question
arising under the Sale of Goods Act but under a taxing entry in a Constitution.
The entry described a source of revenue to the Provinces. The Provincial
Legislature made its laws taxing sales of commodities like sugar. In a period
of emergency the Federal Government imposed certain controls to regulate prices
and supplies. This control involved a permit system under which every Province
had to indent its requirements to the Controller and every sugar mill had to
inform the Controller of the existing and future stocks.
What the Controller did was to permit a
particular mill to supply sugar of a stated quality and quantity to a named
Province. The mill then had to send the sugar on pain of prosecution and
forfeiture and receive price according to the fixed rates. Bargaining, it is
said, was not possible but bargaining in the sense of offer and acceptance may
be express or implied. That after the permit was obtained the two parties
agreed to 'sell' and purchase' sugar admits of no doubt.
I shall now analyse the whole transaction and
see how the element of compulsion and control affect 512 the existence of a
sale. First there is the fixation of price by the Controller. Can it be said
that there is no sale because the price is fixed by a third person and not by
the buyer and seller. This is the old controversy between Labeo and Proculus
that if price is fixed by a third person a contract of sale results or not.
Labeo with whom Cassius agreed, held that there was not, while Proculus was of
the contrary opinion :
"Pretium autem certum esse debet. nam
alioquin si its inter nos convenerit, ut quanti Titius rem aestemasuerit, tanti
sit empta, Labeo negavit ullam uim hoc negotium habere, cuius opinionem Cassius
probat. Ofilius et earn emptionem et uenditionem cuius opinionem Proculus
secutus est." (Gaius III, 140).
This was solved by justinian holding that
there was :
"Sed nostra decisio its hoc
constituit." (Inst. III, 23, 1) I do not think the modem law is any
different. So. long as the parties trade under controls at fixed rice and
accept these as any other law of the realm because they must, the contract is
at the fixed price both sides having or deemed to have agreed to such a price.
Consent under the law of contract need not be express it can be implied. There
are cases in which a sale takes place by the operation of law rather than by
mutual agreement express or implied. See Benjamin on Sale (8th Edn. p. 91). The
present is just another example of an implied contract with an implied offer
and implied acceptance by the parties. What I have said about price applies
also 10 quantity and quality. The entry in No. 48 of List II Seventh Schedule
dealt with sale of goods in all its forms. We have seen above how numerous are
these forms. The entry was expressed in six simple words but was meant to
include a power to 513 tax sale of goods an all: its forms. It, was apt meant
to operate only in those elementary cases where there is offer by A and an
acceptance by B with the price as consideration.
The concept of taxes on sale of goods is more
complicated and the, relations of people do not always take elementary forms. When
the, Province after receiving the permit telegraphed instructions to despatch
sugar and the mill despatched it, a contract emerged and consent must, be in on
both side's though not expressed antecedent the permit. The indent of the
Province was the offer to purchase sugar of such and such quality and quantity.
The mills by quoting their stocks offered to sell sugar. The controller ,
brought the seller and purchaser together and gave them his permission with
respect to a particular quantity and quality. There was thus an implied
contract of sale in the words of the Digest (XII, 1, IX, 4) "'Si cui
libera universorum negotiorum administration a domino permissa fuerit, isque ex
hic negotiis rem vendiderit et tradiderit facit cam accipient is." No
doubt, there is compulsion in both selling, and buying, perhaps more for the
mills than for the Provinces. But a compelled sale is nevertheless a sale as
was held by the House of Lords in New Castle Breweries v. inland Revenue
Commissioner (1927) 96 L. J.K.B. 735. The case in Kitkness V. John Hudson &
Co. Ltd, was different because the section there interpreted required a 'sale'
and there was no sale express or implied when the wagons were taken away and
compensation was paid in the shape of transport stock.
There a sale in its ordinary forms wag,
obviously meant though it was recognise that ,sale' in other context has other
It was argued that there must be mutuality.
That one party must be free to offer and must offer and the other side must be
free to accept and must 514 accept 'the offer before a sale tan be said to
arise. But sales often take place without volition of a party. A sick man is
given medicines under the orders of his doctor and pays for them to the chemist
with tax oil the price. He does not even know the names of the medicines. Did
he make an offer to the chemist from his sick bed ? The affairs of the world
are very complicated and sales are not always in their elementary forms. Due to
short supply or mal distribution of goods, controls have to be imposed.
There are permits, price controls, rationing
and shops which are licensed. can it be said that there is no sale because
mutuality is on one account or another? It was not said in 'the Tata Iron and
Steel case (1) which was a case of control, that there was no sale. The entry
should be interpreted in a liberal spirit and not cut down by narrow technical
considerations. The entry in other words should not be shorn of all its content
to leave a mere husk of legislative power. For the purposes of legislation such
as on sales tax it is only necessary to see whether there is , a sale express
or implied.' Such a sale was not found in ""forward contracts"
and in respect of materials used in building contracts. But the same cannot be
said of all situations. I for one would not curtail the entry any further. The
entry has its meaning and within its meaning there is a plenary power. If a
sale express or implied is found to exist then the tax must follow. I am of the
opinion that in these transactions there was a sale of sugar for a price and
the tax was payable. I would, therefore, dismiss these appeals with costs.
BY COURT: Having regard to the judgment of
the mojority, all these appeals(Nos. 237 and 633-636 of 1961) would be allowed
with costs-one hearing fee.
(1)  S.C.R. 1355.