Hindustan Steel Ltd. Vs. State of
Orissa [1969] INSC 167 (4 August 1969)
04/08/1969 SHAH, J.C. (CJ) SHAH, J.C. (CJ)
RAMASWAMI, V.
GROVER, A.N.
CITATION: 1970 AIR 253 1970 SCR (1) 753 1969
SCC (2) 627
CITATOR INFO :
RF 1970 SC1782 (4) F 1980 SC 346 (5) R 1984
SC1194 (35) F 1985 SC1748 (5) RF 1989 SC 285 (9) R 1990 SC1579 (60)
ACT:
Orissa Sates Tax Act (Orissa 14 of 1947), ss.
2(c) and (g), 9 and 25(1)(a)--Penalty, when may be imposed--'Dealer'--Supply of
one's building material to building contractor at agreed price--Sale price
including storage charges--Transaction if constitutes sale under the
Act-Whether business in building material, can be inferred.
HEADNOTE:
Between the years 1954 and 1959 the
appellant-company was erecting its factory buildings and other ancillary
constructions through buildings contractors. The appellant arranged for the
manufacture of bricks and sold those bricks to the building contractors for the
purpose of the appellant's constructions. The appellant also supplied for the same
purpose steel, cement and other materials which it procured and stored. The
difference between the sale price and the appellant's cost price was a flat
percentage of the cost price varying with the material. The sale price was
agreed to be adjusted against the dues under the contract between the appellant
and the building contractors.
Treating the appellant as a dealer in the
building materials the sales tax authorities under the Orissa Sales Tax Act.
1947, directed the appellant to pay sales tax
for ten quarters ending with December 31, 1958, and a penalty. in addition to
the tax, for failure to register itself as a dealer. The Tribunal agreed on the
liability to pay tax, reduced the penalty, and the High Court, on reference,
confirmed the Tribunal's order.
In appeal to this Court on the questions: (1)
Whether the appellant sold building materials to the building contractors; (2)
Whether the imposition of penalty for failure to register as a 'dealer' was
justified; and (3) Whether the appellant was a 'dealer' in respect of the
building material supplied by it,
HELD: (1) The supply of building material
belonging to the appellant for 'an agreed price constituted a 'sale' as defined
in s. 2(g) of the Act as the definition stood at the relevant time. [756 E] (2)
Under ss. 9(1) and 25(1)(a) of the Act a penalty may be imposed for failure to
register as a dealer. But the discretion to impose a penalty must be exercised
judicially.
A penalty will ordinarily be imposed in cases
where the party acts deliberately in defiance of law, or is guilty of
contumacious or dishonest conduct, or acts in conscious disregard of its
obligation; but not, in cases where there is a technical o; venial breach of
the provisions of the Act or where the breach flows from a bona fide belief
that the offender is not liable to act in the manner prescribed by the statute.
[756 E-H] In the present case, those in charge of the affairs of the appellant,
in failing to. register it as a dealer, acted in the honest and genuine belief
that the company was not a dealer; and therefore, assuming the appellant to be
a 'dealer' no case for imposing penalty was made out. [757 A] (3) Under the
terms of the tender submitted by the building contractors and the schedule
annexed thereto, the appellant was to charge 754 certain rates for the
materials supplied by it. The excess percentage over the specified rate in the
case of building materials other than bricks was agreed to be paid by the
contractors as storage charges. There was nothing to show that the excess price
charged by the appellant to its contractors for bricks was also for storage
charges. But neither the Tribunal nor the High Court had referred to this
aspect of the sale price namely whether the excess price was for storage or for
profit with respect to any of the building materials. Therefore, merely because
the price charged to the contractors exceeded the price paid by the appellant
for procuring the building materials it cannot be inferred that the motive of
the appellant was to carry on business in building materials for profit. [761
B-E]
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 883 to 892 of 1966.
Appeals by special leave from the judgment
and order dated December 3, 1964 of the Orissa High Court in Special
Jurisdiction Cases Nos. 44 and 53 of 1963.
C.K. Daphtary and D.N. Mukherjee, for the
appellant (in all the appeals).
D. Narsaraju and R.N. Sachthey, for the
respondent (in all the appeals).
The Judgment of the Court was delivered by
Shah, Ag. C.J. M/s Hindustan Steel Ltd., a Company incorporated under the
Indian Companies Act, 1913 is a Government of India undertaking in the public
sector. The Company is registered as a dealer under the Orissa Sales Tax Act 14
of 1947, from the last quarter ending March 1959.
Between 1954 and 1959 Company was erecting
factory buildings for the steel plant, residential buildings for its employees
and ancillary works such as roads, water supply, drainage. Some constructions
were done departmentally and the rest through contractors. The Company supplied
to the contractors for use in construction, bricks, coal, cement, steel etc.
for consideration and adjusted the value of the goods supplied at the rates
specified in the tender.
In proceedings for assessment of tax under
the Orissa Sales Tax Act, 1947, the Sales Tax Officer held that the Company was
a dealer in building material, and had sold the material to contractors and was
on that account liable to pay tax at the appropriate rates under the Orissa
Sales Tax Act. The Sales Tax Officer directed the Company to pay tax due for
ten quarters ending December 31, 1958 and penalty in addition to the tax for
failure to register itself as a dealer. The Appellate Assistant Commissioner
confirmed the order of the Sales Tax Officer. In second appeal the Tribunal
agreed with the tax authorities and held that the Company was liable to pay tax
on its turnover from 755 bricks, cement and steel supplied to the contractors.
The Tribunal however substantially reduced the penalty imposed upon the
Company.
At the instance of the Company the Tribunal
referred six questions to the High Court of Orissa under s. 24(1) of the Orissa
Sales Tax Act, 1947. The questions were:
"A. Whether in the facts and
circumstances of the case Messrs. Hindustan Steel Ltd. can be held to be a
'dealer' within the meaning of s. 2(c) of the Orissa Sales Tax Act ? B. Whether
the sale of materials by the Company to different contractors working for the
company for which sales tax is sought to be assessed amounts to 'sale' within
the meaning of s. 2(g) of the Act ? C. Whether the accrual of some profit in
the absence of any motive to make such profit can make the assessee a 'dealer'
under the Act and whether in the circumstances of the case, the Tribunal was
justified in coming to a finding that there was profit making motive on the
part of the Company ? D. Whether in view of the definition contained in s. 2,
cl. (h) as it stood prior to the amendment of the provision by Act 18 of 1959,
the supplies of materials can be treated as 'sale price' in the hands of the
assessee ? E. Whether in the facts and circumstances of the case. the amount
received by the assessee in respect of tender forms can be said to be 'sale
price'? F. Whether the Tribunal is right in holding that penalties under s.
12(5) of the Act had been rightly levied and whether in view of the serious
dispute of liability it cannot be said that there was sufficient cause for not
applying for registration ?" The High Court answered the questions A, B,
C, D and F in the affirmative and question E in the negative.
In these appeals filed with special leave
substantially three matters fall to be determined:
1. Whether the Company sold building material
to the contractors during the quarters in question ? 756
2. Whether the Company was a dealer in
respect of building material within the meaning of the Orissa Sales. Tax Act ?
3. Whether imposition of penalties for
failure to register as a dealer was justified ? Solution of the first and third
matters does not present much difficulty. At the relevant time 'sale' was
defined by s. 2(g) of the Orissa Sales Tax Act as follows :-- "Sale'
means, with all its grammatical variations and cognate expressions, any
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:
....................................
The Company supplied building material to the
contractors at agreed rates. There was concurrence of the four elements which
constitute a sale--(1) the parties were competent to contract; (2) they had
mutually assented to the terms of contract; (3) absolute property in building
materials was agreed to be transferred to the contractors;
and (4) price was agreed to be adjusted
against the dues under the contract. No serious argument was advanced before us
that the supply of building material belonging to the Company for an agreed
price did not constitute a sale.
Under the Act penalty may be imposed for
failure to register as a dealer: s. 9(1) read with s. 25(1)(a) of the Act. But
the liability to pay penalty does not arise merely upon proof of default in
registering as a dealer. An order imposing penalty for failure to carry out a
statutory obligation is the result of a quasi-criminal proceeding, and penalty
will not ordinarily be imposed unless the party obliged either acted
deliberately in defiance of law or was guilty of conduct contumacious or
dishonest, or acted in conscious disregard of its obligation. Penalty will not
also be imposed merely because it is lawful to do so.
Whether penalty should be imposed for failure
to perform a statutory obligation is a matter of discretion of the authority to
be exercised judicially and on a consideration of all the relevant
circumstances. Even if a minimum penalty is prescribed, the authority competent
to impose the penalty will be justified in refusing to impose penalty, when
there is a technical or venial breach of the provisions of the Act or where the
breach flows from a bona fide belief that the offender is not liable to act in
the manner prescribed by the statute. Those in charge of the affairs of the
Company in failing to register the Company as a dealer acted in the honest and
757 genuine belief that the Company was not a dealer. Granting that they erred,
no case for imposing penalty was made out.
Liability to pay sales tax is imposed by s. 4
of the Act. Every dealer whose gross annual turn over exceeds Rs.
10,000/is liable to pay tax during the ten
quarters in question. The expression "dealer" was defined at the
relevant time as meaning:
"Dealer' means any person who executes
any contract or carries on the business of selling or supplying goods in Orissa
whether for commission, remuneration or otherwise and includes any firm or
Hindu Joint family, and any society, club or association which sells or
supplies goods to its members.
Explanation ......................" A
person to be a dealer within the meaning of the Act must carry on the business
of selling or supplying goods in Orissa. The expression "business" is
not defined in the Act. But as observed by this Court in State of Andhra
Pradesh v. Abdul Bakhi and Bros. (1) "The expression 'business' though
extensively used is a word of indefinite import, in taxing statutes. it is used
in the sense of an occupation, or profession which occupies the time, attention
and labour of a person, normally with the object of making profit. To regard an
activity as business there must be a course of dealings, either actually
continued or contemplated to be continued with a profit motive, and not for
sport or pleasure ." The sales tax authorities and the Tribunal have held
that the Company was carrying on business of selling or supplying materials to
the contractors and with that view the High Court agreed. The Company purchased
bricks manufactured by its own contractors and sold the bricks to the building
contractors at a flat 30% premium over the purchase price in the case of
"second class bricks" and 25% premium in the case of "First
class bricks". Steel, cement and other materials were initially supplied
at 3-1/2% premium over the purchase price paid by the Company. It was contended
on behalf of the Company that merely because the price charged to the
contractors exceeded the price paid by the Company for acquiring the materials,
motive of the Company to carry on business in building materials for profit,
cannot be inferred. The Company, it is true, maintained no separate accounts
relating to the expenditure incurred by it for (1) [1964] 7 S.C.R. 664.
758 overhead and other charges in respect of
those materials.
Before the sales-tax authorities counsel for
the Company also conceded that the Company had not maintained separate accounts
from which. it could be proved that the transactions of supply of bricks,
cement, steel and other commodities resulted in no profit. The High Court
observed:
"It is the Stores Department of the
company as a whole which deals with the purchase, storage and sale of all the
goods required both for acquisition and issue of materials to be used for the
construction and operation work of the Company ......... the.
Company had to construct not only the
buildings but also roads, railways, etc., acquire machinery and perform other
multifarious activities connected with the establishment of steel plants and
construction of the township. There is nothing in the statement to show that
the Company had at any time even contemplated the allocation of the total
expenditure incurred for the maintenance of its Stores Department between the
expenditure incurred in respect of the goods namely bricks, cement, steel etc.
and other goods. If such allocation was not even contemplated, it will be
unreasonable to say that when these goods were sold to the building contractors
at the prices mentioned above, the intention of the Company was merely to
utilise the difference in price to meet the overhead charges in respect of
these articles and that there was no profit making motive." It is unfortunate
that in submitting the statement of case the Tribunal stated no facts at all,
and merely submitted the question which was submitted by the Company and the
question which, in the view of the Tribunal, arose out of the order. Even in
the order deciding the appeal, the facts found on which the conclusion was
based were not clearly set out. The Tribunal observed that though the primary
object of the Company was to establish a steel plant, the Memorandum authorised
the Company to carry on "any trade or business" that it thought would
be conducive to its interest. Observed the Tribunal:
"Judged in this light one cannot find
anything wrong if in the initial stages when construction works were going on,
the Company thought it prudent that instead of keeping its employees idle and
bearing the cost of maintenance without any return, utilised them in some
subsidiary business which would promote the interest of the Company and bring
some return. With that end 759 in view the company could as well have brought
contractors to manufacture bricks in its lands, purchased the same from them,
purchased cement, coal and other materials from dealers, opened a stores
department and kept those materials so procured in its stores and thereafter
effected sales of the materials to outsiders including its contractors. The
Company knew that for speedy construction of its buildings and factory the
contractors would require these materials and so the Company would not lose if
it entered into such business. Rather that business would be in the interest of
the Company. If the Company had no idea to enter into any business. there was
no reason why it should have brought contractors to manufacture bricks,
purchased the entire stock from them, stocked the same and thereafter sell the
same to its building contractors." But in so observing a very important
piece of evidence appears to have been ignored by the Tribunal. Annexed to the
form of the tender submitted by the contractors there are certain "general
rules. and directions for the guidance of contractors." Paragraph8 slated:
"The memorandum of work tendered for,
and the schedule of materials to be supplied by the H.S. Ltd. and their issue
rates, shall be filled in and completed in the office of the Divisional Officer
before the tender form is issued. If a form is issued to an intending tenderer
without having been so filled in as completed he shall request the office to
have this done before he completes and delivers his tender." Then follow
the conditions of contract of which condition No. 10 is material; it states---
"If the specification or estimates of the work provides for the use of any
special description of materials to be supplied from the Engineer-in-Charge's
store, or if it is required that the contractor shall use certain stores to be
provided by the Engineer- in-Charge (such materials or stores, and the prices
to be charged there for as hereinafter mentioned being so far as practicable
for the convenience of the contractor, but not so as in any way to control the
meaning or effect of this contract specified in the schedule or memorandum
hereto annexed), the contractor shall be supplied with such materials and
stores as required from time to time to be used by him for the purpose of the
contract only, and the value of the full quantity of materials and stores so
760 supplied at the rates specified in the said schedule or memorandum may be
set off or deducted from any sums then due, or thereafter to become due to the
contractor under the contract, or otherwise or against or from the security
deposit. All materials supplied to the contractor shall remain the absolute
property of the Company, and shall not on any account be removed from the site
of the work, and shall at all times be open to inspection by the
Engineer-in-Charge. Any such materials unused and in perfectly good condition
at the time of the completion or determination of the contract shall be
returned to the Engineer-in- Charge's store, if by. a notice in writing under
his hand he shall so.
require;..............." Attached to the
tender form is the schedule which recites:
"Recovery of rates of materials to be
supplied by H.S.L., for the work of:
(1) Construction of brick masonry compound
wall around plant area. Northern section Length 2.4. miles.
(2) Construction of brick masonry compound
wall around plant area. Southern section Length 2.30 miles.
(3) Construction of brick masonry compound
wail around plant area. Marshalling yard section Length 4.15 miles ." It
is followed by a table which sets out the Serial No. of the articles to be
supplied, description of materials unit, rate and place of delivery.
It is clear from the terms of the tender and
the schedule annexed thereto that the Company was to charge certain rates for
the materials to be supplied by it. One of the contracts which has been
produced before this Court states under the head "Rate": Rs.
5.94+3-1/2% storage charges against "cement in bags," Rs. 800.00+3
1/2% storage charges against "structural steel and M.S. rods", and "Rs.
41.25 for 1000 bricks" against "first class bricks". Apparently
3-1/2% over the specified rate was agreed to be paid by the contractors as
storage charges in respect of cement and structural steel and M.S. rods. No. specific
percentage was set out in respect of the bricks and an inclusive price was made
chargeable.
Relying upon the terms of the schedule,
counsel for the Company contends that the contractors and the Company expressly
761 agreed that 3-1/2% over the agreed price of the goods was chargeable as
storage charges. It is common ground that the rate mentioned 'against cement
and structural steel is the price at which the goods were purchased 'by the
Company. If the Company was charging a fixed percentage on the price paid by it
for procuring such goods for storage and other incidental charges, it would be
difficult to resist the conclusion that the Company was not carrying" on
the business of selling cement and structural steel. There is of course no
statement in the schedule that the price charged by the Company in excess of the
price paid by the Company to its contractors for bricks was in respect of
storage charges.
But neither the Tribunal nor the High Court
has referred to this important piece of evidence and we are unable to decide
these appeals unless we have an additional statement of facts in the light of
the relevant evidence as to whether the excess charged over and above the price
which the Company paid for procuring cement and steel (expressly called storage
charge) and bricks was intended to be profit.
If the Company agreed to charge a fixed
percentage above the cost price, for storage, insurance and rental charges, it
may be reasonably inferred that the Company did not carry on business of
supplying materials as a part of- business activity with a view to making profit.
The Tribunal's statement of case is bald and
in recording its findings the Tribunal has ignored a very important piece of
evidence. To enable us to answer the questions referred, it is. necessary that
the Tribunal should be called upon to submit a supplementary statement of the
case on the questions whether the Company charged any profit apart from the
storage charges for supplying cement and structural steel, and whether the
difference between the price charged to the contractors and the price paid by
the Company to its suppliers for bricks was not m respect of storage and other
incidental charges. The Tribunal to submit the supplementary statement of case
to this Court, within three months from the date on which the papers reach the
Tribunal.
V.P.S, Directions given.
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