Report No. 61

Summary of The Principal Points Discussed In This Chapter

3.73. We now propose to summarise the points which we have discussed in this Chapter at some length. We are conscious that this process will inevitably involve repetition, but, having regard to the fact that the problem with which this Chapter deals is vexed and complex, we think it necessary even at the risk of repetition to summarise our conclusions in order to make our view clear beyond any doubt.

(1) Before the Constitution was adopted and while the Government of India Act, 1935 was in operation, there was no specific bar on the power of the Provinces to impose a tax on all transaction in respect of commodities so long as the transactions took place within their territorial limits. That being so, the provinces had the power to impose a tax on the sale or purchase of goods in the course of import or export.

(2) When the Constitution was adopted, Article 286(1) put some restrictions as to the imposition of tax on the sale or purchase of goods as specified therein. Article 286(1)(b) exempts from tax the sale or purchase of goods into or export of goods out of the territory of India. The clause 'in the course of is capable of a wider or a narrower interpretation.

(3) This clause came to be considered by the Supreme Court in the first Travancore case. That case was concerned with an export sale and, as such, even within the narrow meaning of the expression 'in the course of export', it was clearly exempt from being taxed. That, in fact, was the unanimous decision of the Court.

Having held that the export sale was exempt from tax under Article 286(1)(b), the Court proceeded to explain the meaning of the expression 'in the course of export'. While doing so, it used the word 'occasion' and observed, inter alia, that a sale, which itself occasions export, would be within the protection of Article 286(1)(b). This observation, we think, was intended to cover only export sales of the kind with which the Court was dealing in that case and exclude all other sales. But, it must be conceded, that the word 'occasion' used in the judgment was capable of a wider as well as a narrower interpretation.

(4) In the second Travancore case, the question which the Court had, incidentally, to consider was whether the word 'occasion' used in the earlier judgment was intended to be interpreted in its wider Or narrower sense. Patanjali Sastri, C.J., who spoke for the majority of the Court, clearly and explicitly stated that the word 'occasion' used in the earlier judgment, which was unanimous, was intended to be interpreted in the narrower sense and so the judgment expressly stated that the first sale after import and the last purchase before export did not fall within the protection of Article 286(1)(b).

S.R. Das, J., however, who was a party to the earlier judgment, had presumably understood the word 'occasion' in its wider sense and so, in his minority judgment, he expressed his view to that effect and added that the first purchase after import and the last sale before export fell under Article 286(1)(b).

(5) It was in view of this disvergence of judicial opinion about the interpretation of the words 'in the course of import or export' that Article 286(2) was inserted in the Constitution. By this article, Parliament was empowered to make a law formulating principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1) and this includes clause 286(1)(b) in which the relevant words in the course of occur.

(6) Having thus empowered Parliament to formulate principles for the interpretation of Article 286(1), the Union Government referred the matter to the Law Commission for its opinion. In its majority report, the Law Commission used the word 'occasion' in suggesting the principles which should be followed in enacting the law under Article 286(2), and though there is reason to believe that the majority view was in favour of the narrower construction placed on the relevant words in Article 286(1)(b) by the unanimous judgment in the first Travancore case, as explained by the majority judgment in the second Travancore case, the Report, in terms, did not make this position clear and was content to use the word 'occasion' without any Explanation that it was used in the narrower sense.

(7) The relevant portion of the text of section 5 similarly used the word 'occasion' without any Explanation showing that the intention of Parliament in using the word was to adopt the narrower view propounded by Patanjali Sastri, J. in the second Travancore case. The result was that the ambiguity flowing from the use of the word 'occasion', which has a wider as well as a narrower meaning, remained and, as already explained by us, a wider view was accepted by the Court in Khosla's case,

(8) We are clearly of the view that the relevant words which were used in Article 286(1)(b) by the Constitution were not intended to affect the pre-existing right of the States to tax the first purchase after import and the last sale before export and that the framers of the Constitution, therefore, must be presumed to have used those words in their narrower sense. That, in fact, was the judicial interpretation of the word in the two Travancore cases.

As we have just pointed out, when the Law Commission in its majority report, used the word 'occasion', presumably, it used that word in the narrower sense; it did not expressly say so. In the absence of any express statement to that effect in the report, in the text of section 5, which bodily lifted the word 'occasion' from the Report and inserted in section 5, the Legislature did not add any Explanation to indicate that the word 'occasion' was used in the narrower sense and that substantially is responsible for the decision in the Khosla's case which placed a broader interpretation on the word 'occasion' and thereby, for the first time, unduly restricted the pre-existing right of the States to tax the first purchase after import and the last sale before export.

(9) After the Supreme Court rendered its decision in Khosla's case, the Union Government referred to the Law Commission for its opinion the question whether the decision in Khosla's case was consistent with its earlier decisions in the Travancore cases. This reference was presumably made because the States complained that the decisions in Khosla's case unduly restricted their power to tax the first purchase after import and the last sale before export.

The majority1 of the Law Commission, in its 30th Report, expressed the view that Khosla's case was consistent with the two Travancore cases. Confining ourselves to the specific question which was referred to that Commission, we wish to state that this view of the majority was not correct, if due regard is had to the exposition of the law in the majority judgment in the second Travancore case. On the specific question referred to the Commission, therefore, the minority view in the 30th Report was correct. We do not, however, wish to express any opinion with reference to the other observations made in the minority report.

(10) In this connection, it may not be irrelevant to point out that the reference to the Commission made after the Supreme Court rendered its decision in Khosla's case was somewhat inappropriately worded. After the passing of the Central Sales Tax Act, 1956, it was section 5 of the Act which was in operation and in that case, the decisions in the Travancore cases which dealt not with section 5, but with Article 286(1)(b), though relevant, were technically not binding. In our view, the query addressed to the Commission should have been whether the Supreme Court had correctly interpreted section 5 in Khosla's case when it held that the sale by Khosla to the Railways fell within the protection of section 5. We have thought it necessary to make this incidental observation in order to clarify the true legal position at the time when the reference was made.

(11) After a careful study of the relevant constitutional judicial and legislative history, we have come to the unanimous conclusion that the undue restriction which after the judgement in Khosla's case began to operate on the power of the States to tax the two categories of transaction in question should be removed. For that purpose, we are recommending the acceptance of two propositions whilst our colleague, Mr. Sen Verma, is recommending more detailed propositions. The object of both the recommendations is, however, one and the same.

(12) Since this interpretation unduly restricts the power of the States and was not intended by Parliament, the suggestion now is that the law should be brought in line with what was decided in the two Travancore cases, so far as sales or purchases in the course of import and purchases in the course of export are concerned. Hence, an amendment on the lines recommended2 is required.

1. 30ht Report.

2. Para. 3.68, supra.