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Judgment
P.R. Gokulakrishnan, C.J.—This petition is a vivid illustration of an easily avoidable litigation. Has not the department adopted a course, which is basically unsupportable ? Has not an honest assessee been driven to file the present petition ? Would not a proper approach in the matter by the department have saved time and money of all concerned ? These are some of the questions that need to be examined in the above petition.
The basis of the petition is three show cause notices, all dated 25th February, 1970. The petitioner is a partnership firm carrying on business of sale, inter alia, of trucks and chassis mostly on hire-purchase basis at Rajkot. The petitioner is a registered dealer under the Bombay Sales Tax Act, 1959, being registered for selling cars, trucks, motor-cycles, spare parts etc. During the period from 1st January, 1960 to 31st December, 1962, the petitioner had entered into agreement with various parties on hire-purchase systems in respect of trucks chassis. Under this hire-purchase system, the partly usually agreed to pay the amount by certain instalments every month, the period ranging between 7 months to 24 months, depending on each individual case. As per this agreement, the hires, i.e., the parties, would become the owners of the truck on the exercise of the option to purchase after the payment of the last instalments. It is usual for the petitioner to prepare a bill for the total amount, mentioning the price as ex-warehouse delivery including the sales tax. The petitioner, for the purpose of accounting, used to credit the amount mentioned in the bill in its books of accounts. In crediting so, the petitioner used to credit certain amount in the sales tax account, being its estimated liability which would arise on such transactions when the sale is completed. Excepting this account and mentioning in the bill "including the sales tax", the petitioner states that he has not recovered any sales tax as such from the parties concerned. During the period from 1st January, 1960 to 31st December, 1960, the petitioner gave trucks on hire-purchase basis accounting to Rs. 13,09,831.63, which amount was wholly debited to the accounts of the respective parties; correspondingly, Rs. 11,88,004.93 were credited to the sales account and Rs. 1,18,800.30, were credited to the sales tax account and Rs. 3,026.40 were credited to finance commission account. Similarly, for the assessment period 1st January, 1961 to 31st December, 1961, the total amount debited in respect of transactions on hire-purchase basis was Rs. 11,68,427.11; and correspondingly, Rs. 10,76,134.52 were credited to the sales account and Rs. 92,292.59 were credited to the sales tax account. For the period for 1st January, 1962 to 31st December, 1962, the total amount in respect of such transactions amounting to Rs. 7,57,097.90 was debited to the account of the various parties Rs. 56,081.18 were credited to the sales tax account.
It is the case of the petitioner that during the period from 1st January, 1960 to 31st December, 1962, the petitioner went on paying to the sales tax department various amounts every quarter in respect of these transactions under the belief that the sale was complete when the agreement was entered into with the respective parties. In view of the Supreme Court judgment it is clear that in respect of various vehicles given by the petitioner on him-purchase basis in the years 1960, 1961 and 1962, the sales were held completed not in those very years but in subsequent years when the instalments were fully paid by the respective parties and option exercised as per the terms of the hire-purchase agreement. For the sales tax paid during the year 1960 to 1962, the petitioner brought to the notice of the respondent No. 1 that as the petitioner had paid large amount by way of sales tax every quarter during the relevant period, the petitioner would be entitled to the corresponding refunds as the sales tax payable on the completed transactions during these years was much less than the sales tax paid by the petitioner with the quarterly returns. It is the case of the petitioner that instead of finalising the assessment and taking the sales tax paid into consideration, the first respondent issued three notices, all dated 25th February, 1970, u/s 37 of the Bombay Sales Tax Act, 1959, stating that the petitioner had collected the following amounts by way of sales tax in violation of section 46 and, therefore, the petitioner should show cause as to why the said amounts should not be forfeited and why penalty should not be levied u/s 37(2) of the Sales Tax Act :
Rs. 1,18,800.30 for the period from 1-1-1960 to 31-12-1960;
Rs. 92,292.59 for the period from 1-1-1961 to 31-12-1961;
Rs. 56,081.36 for the period from 1-1-1962 to 31-12-1962.
All the notices were marked as exhibit C collectively in the special civil application. These notices, issued by the 1st respondent, are questioned by the petitioner on various grounds and the petitioner prayed for quashing and setting aside these impugned notices at annexure C collectively. No doubt, there is a prayer in the petition for declaring section 37 read with section 46 of the Bombay Sales Tax Act, 1959 as unconstitutional and ultra vires and also on the ground that these sections are beyond the legislative competence of the State Legislature and void.
A Bench of this High Court, by judgment dated 16th August, 1973, the following the decision reported in Special Civil Application No. 480 of 1970, dated 16th August, 1973, declared sections 46 and 37 of the Sales Tax Act as ultra vires the Constitution, since these were beyond the legislative power of the State Legislature. In view of this declaration, the Bench of this High Court quashed the notices exhibit C as illegal and void. The decision of this Court declaring sections 46 and 37 of the Sales Tax Act as ultra vires was taken by way of an appeal to the Supreme Court. [See R.S. Joshi, Sales Tax Officer, Gujarat and Others Vs. Ajit Mills Limited and Another, . The Supreme Court set aside the order of the High Court, after holding that these sections were intra vires the Constitution and remanded the case to the High Court for disposal afresh on other points raised in the special civil application. It is in these circumstances, the special civil application is taken up by us for final disposal.
Mr. Kaji, learned counsel appearing for the petitioner, admitted that in the bill prepared and the agreement entered into with the hirers, it is stated that the price mentioned therein includes sales tax. He further admitted that for accounting purposes, the petitioner has kept separate account, mentioning therein the sales tax amount he has collected from the parties concerned. The learned counsel, however, submits that these materials cannot in anyway make out that the petitioner has collected the sales tax. Before elaborating his submissions, Mr. Kaji made out four points as follows :
It cannot be construed that the petitioner has collected sales tax as per the bill and as such, the provisions of section 37 read with section 46 are not attracted;
Sections 37 and 46 are not applicable when there is collection on a transaction which is not a sale;
On the facts of this case, there cannot be double levy of tax and forfeiture in respect of the same transaction and, therefore, amount should be adjusted;
Levy of penalty is a matter of discretion and not a matter of automatic forfeiture.
To appreciate the contentions of Mr. Kaji, we can usefully extract the provisions of sections 37 and 46 of the Sales Tax Act as it stood originally. Section 37, on and from 1st January, 1960 to 11th August, 1962 read as follows :
"37. (1) If any person, -
(a) not being a dealer liable to pay tax under this Act, collects any sum by way of tax, or being a registered dealer collects any amount by way of tax in excess of the tax payable by him, or otherwise collects tax in contravention of the provisions of section 46, or.
(b) being a dealer liable to pay tax under this Act, or being a dealer who was required to do so by the Commissioner by a notice served on him fails is contravention of sub-section (1) of section 48 to keep a true account of the value of the goods purchased or sold by him, or fails when directed so to do under that section to keep any accounts or record in accordance with the direction,
he shall be liable to pay, in addition to any tax for which he may be liable, a penalty of an amount not exceeding two thousand rupees, or double the amount of tax which would have been payable had there been no such failure, whichever is less; and in addition, in the case of a contravention referred to in clause (a), any sum collected by the person by way of tax in contravention of section 46 shall be forfeited to the State Government.
(2) If the Commissioner in the course of any proceeding under this Act or otherwise, has reason to believe that any person has become liable to a penalty with or without forfeiture of any sum under sub-section (1), he shall serve on such person a notice in the prescribed form requiring him on a date and at a place specified in the notice to attend and show cause why a penalty with or without forfeiture of any sum as provided in sub-section (1) should not be imposed on him.
(3) The Commissioner shall thereupon hold an inquiry and shall make such order as he thinks fit.
(4) No prosecution for an offence under this Act shall be instituted in respect of the same facts on which a penalty has been imposed under this section."
Section 37, on and from 12th August, 1962 reads as follows :
"37. (1) If any, person, -
(a) not being a dealer liable to pay tax under this Act, collects any sum by way of tax, or being a registered dealers collects any amount by way of tax in excess of the tax payable by him, or otherwise collects tax in contravention of the provisions of section 46, or
(b) being a dealer liable to pay tax under this Act, or being a dealer who was required to do so by the Commissioner by a notice served on him fails in contravention of sub-section (1) of section 48 to keep a true account of the value of the goods purchased or sold by him, or fails when directed so to do under that section to keep any accounts or record in accordance with the direction,
he shall be liable to pay, in addition to any tax for which he may be liable, a penalty as follows :
(i) where there has been a contravention referred to in clause (a), a penalty of an amount not exceeding two thousand rupees;
(ii) where there has been a contravention of clause (b), a penalty of an amount not exceeding two thousand rupees or double the amount of tax which would have been payable had there been no such contravention, whichever is less; and in addition, in the case of a contravention referred to in clause (a), any sum collected by the person by way of tax in contravention of section 46 shall be forfeited to the State Government."
Section 46, on and from 1st January, 1960 reads as follows :
"46. (1) No person shall collect any sum by way of tax in respect of sales of any goods on which by virtue of section 5 no tax is payable.
(2) No person, who is not a registered dealer and liable to pay tax in respect of any sale or purchase, shall collect on the sales of any goods any sum by way of tax from any other person and no registered dealer shall collect any amount by way of tax in excess of the amount of tax payable by him under the provisions of this Act :
Provided that, this sub-section shall not apply where a person is required to collect such amount of the tax separately in order to comply with the conditions and restrictions imposed on him under the provisions of any law for the time being in force.
(3) Notwithstanding anything contained in sub-section (2), a dealer who has been permitted by the Commissioner to pay a lump sum payment u/s 40 shall not collect any sum by way of tax on the sales of goods if made during the period to which such lump sum payment applies."
Section 46, as it stood before Gujarat Amendment Act 25 of 1962 read as follows :
"46. (1) No person shall collect any sum by way of tax in respect of sales of any goods on which by virtue of section 5 no tax is payable.
(2) No person, who is not a registered dealer and liable to pay tax in respect of any sale or purchase, shall collect on the sale of any goods any sum by way of tax from any other person :
Provided that, this sub-section shall not apply where a person is required to collect such amount of the tax separately in order to comply with the conditions and restrictions imposed on him under the provisions of any law for the time being in force.
(3) Notwithstanding anything contained in sub-section (2), a dealer who has been permitted by the Commissioner to pay a lump sum payment u/s 40 shall not collect any sum by way of tax on the sales of goods if made during the period to which such lump sum payment applies."
Section 46, sub-sections (1) and (2) have been properly analysed in the decision reported in Ramkrishan Kulwantrai Vs. Commissioner of Sales Tax, . It reads as follows :
"Sub-sections (1) and (2) of section 46 of the Bombay Sales Tax Act, 1959, properly analysed contain three prohibitions :
(1) a prohibition against any person, whether a registered dealer or not, from collecting any sum by way of tax in respect of sales of tax-free goods;
(2) a prohibition against any person, who is not a registered dealer liable to pay tax, from collecting any sum by way of tax on the sale of any goods; and
(3) a prohibition against a registered dealer from collecting any amount by way of tax in excess of the amount of tax payable by him in respect of a transaction of sale or purchase.
The third prohibition would be violated when a registered dealer collects tax in respect of a transaction of sale of goods at a rate higher than the rate of tax, which attracts to the sales of the particular class of goods, for the dealer has then collected an amount by way of tax in excess of the amount of tax payable by him. Such prohibition would also be violated if in the case of a particular transaction of sale only sales tax is payable but the registered dealer collects amounts by way of sales tax as also general sales tax on such transaction of sale. It would also be violated where, by reason of certain exemptions, no tax is payable on a particular type of sale and the registered dealer collects amounts by way of tax on it."
In [1982] 50 STC 305 (Subhash Iron & Steel Rolling Industries v. State of Gujarat) a Bench of this High Court dealing with a resale by the party noticed that the assessee had incorporated in the bill the phrase "inclusive of sales tax". On the basis, the Sales Tax Officer in that case held that since the assessee''s sale bills were inclusive of tax, it had collected sale tax from its customers even though the assessee itself was not liable to pay tax on the transactions. Therefore, invoking sections 37(1) and 46(2) of the Act, the Sales Tax Officer forfeited the collection and imposed a penalty. The appellate authority, the Tribunal, confirmed the order of the Sales Tax Officer. The High Court, on the facts and circumstances of the case, held that it would not be correct to imply only one meaning to the phrase or term "inclusive of tax" in the assessee''s bill, but it admitted of a meaning that by introducing the phrase or term "inclusive of tax" it conveyed to its customers a sense that under no circumstances would the customers be required to pay the tax on the goods purchased by them. In that case also, the assessee has referred in its quarterly returns for the relevant period that it had deducted under rule 46A of the Bombay Act, the amount of tax which it had included in the total amount of sale price shown in the bills. So the question that arose in that case was as to whether there is anything to clearly show that the recovery of Rs. 27,104 by the assessee was a recovery of tax and not the recovery of price for the goods sold. Under the facts and circumstances of that case, the learned Judge held that it was not correct in levying upon the assessee the order of forfeiture of Rs. 27,104 u/s 37(1) read with section 40(2) of the Bombay Sales Tax Act, 1959 and that it also held that merely because the goods are sold under the bills containing the phrase or term "inclusive of tax" it does not mean that what the assessee collected was the tax and not the sale price of the goods sold to its customers. Citing the above said decision, Mr. Kaji contended that the phrase "inclusive of sales tax" added in the bill cannot be taken as amounting to collection of sales tax by the petitioner here. Drawing support from the very same decision, Mr. Kaji also pointed out that merely because a separate account is maintained showing the sales tax amount, it cannot be construed that the sale effected is inclusive of sales tax.
If the aforesaid amounts of Rs. 13,09,831.63 Rs. 11,68,427.11 and Rs. 7,57,097.90 were really inclusive of sales tax, then the said amounts would not have been wholly debited to the parties, as has been done. On the contrary, the said amounts less the component part, representing the sales tax and less the other component part, representing finance commission, would only have been debited. This has not been done is an admitted position. So, the only conclusion possible is that even though the price is stated to be in the bill as inclusive of sales tax, no sales tax has been recovered from the purchasers as the aforesaid entire amounts received have been debited to their accounts. On facts, therefore, it is not possible to say that sales tax has been recovered, despite the entries in the books of accounts as aforesaid and despite the other evidence produced in the shape of vouchers and challans along with the additional affidavit in reply of Mr. H. U. Kalyani, Sale Tax Officer No. 1, Division III, Rajkot, dated 14th March, 1988.
Mr. Kaji, next contended that the transaction is not a sale and as such, any amount collected cannot amount to collection of sales tax. It is a settled principle that the hire-purchase agreement in favour of the hirer cannot be termed as a sale.
In [1979] 44 STC 117 (Ramkrishan Kulwantrai v. Commissioner of Sales Tax), cited by Mr. Kaji, a Bench of the Bombay High Court had occasion to consider, apart from various other things, as to whether the department can forfeit the amount collected by dealers in respect of transactions which were not transactions of sale. In the above said decision, the department contended that even transactions which are not transactions of sale are included within the ambit of section 46. Repelling this contention, the Bombay High Court held that they are completely surprised at such an argument. According to the Bombay High Court, the very sentence begins by referring to the amounts collected from buyers and that there cannot be a buyer unless there is a seller and a contract of sale. It has been further held in the decision :
"Consequently, on a true and correct interpretation of section 46(2) of the Act, it is not correct in law to say that the latter part of section 46(2) is wide enough to take within its fold even transactions which do not amount to sales and in concluding that amounts collected by way of tax on such transactions are liable to be forfeited u/s 37(1)(a) of the Act. To construe section 46 as authorising a prohibition against collections of tax in respect of a transaction which is not a transaction of sale or purchase and thus as a complementary thereto as authorising the State Government u/s 37(1) to forfeit such account would be unconstitutional as being beyond the legislative competence of the State Legislature."
Mr. G. D. Bhatt, learned counsel appearing for the State, contended that the matter is at the stage of show cause notice and it is premature for the petitioner to approach this court. It is the say of Mr. G. D. Bhatt that the petitioner can as well give his explanation before the authority concerned for the show cause notice and convince the authority, instead of invoking the extraordinary jurisdiction of the High Court under articles 226 of the Constitution. Mr. G. D. Bhatt tried to distinguish the case reported in Subhash Iron and Steel Rolling Industries Vs. The State of Gujarat, , stating that on the facts and circumstances of this case, it is clear that the petitioner has collected sales tax. In support of his contention, Mr. G. D. Bhatt pointed out the receipts which says "inclusive of sales tax", the account books, wherein the sales tax have been credited, and also the references to sales tax amount in various vouchers. We have carefully considered all these contentions. Simply because there is a mention of sales tax collection, when especially there is no sales as such in this case, the authority concerned cannot term such collection as sales tax collection. The nomenclature as such for any collection made will not bring such collection under the category of collection of sales tax to attract the mischief u/s 37(1) read with section 46 of the Sales Tax Act. Further, as correctly contended by Mr. Kaji, in this hire-purchase agreement, it is in the last instalment that the sale tax, if any, are said to have been collected. Hence, there is no question of the petitioner collecting the sales tax in advance as contended by Mr. G. D. Bhatt.
From the discussions we have made above, it is clear that the sales tax is liable only in respect of the sale of certain property. Admittedly, the petitioner has entered into a hire-purchase agreement and apportioned certain amount as sales tax by mentioning in the bill "including sales tax". The hire-purchase agreement cannot be construed as a sale, and the sale comes in only on the payment of the last instalment and the purchaser exercising his option to purchase. In those circumstances, it is not correct to say that there is a sale in the transaction entered into by the petitioner and his hirers and that the amount mentioned as inclusive of sale tax is collection of sales tax. If it is not a sale in the eye of law, which requires the sale as a condition precedent for imposing the tax, there is no question of invoking section 37 or 46 of the Sales Tax Act. On this short ground also, we have to hold that the notices impugned which are at annexure C to the special civil application are without jurisdiction and the same have to be quashed. In view of this conclusion we have arrived at, it is unnecessary for us to answer the other contentions raised by Mr. Kaji.
The aforesaid discussion clearly shows that the said show cause notices are clearly misconceived. It does seem that in this particular case, the department has adopted a course which is basically unsupportable and an honest assessee has been unnecessarily penalised. If the department has correctly appreciated the situation, then undoubtedly the time and money of all concerned would have been saved.
Apart from the aforesaid, there is one more angle from which such departments should view the situation. The purpose of the notices is two-fold, namely, to treat the said sums which are shown as sales tax as amount collected by way of tax in contravention of section 46 and to forfeit them and the other purpose is to impose a penalty under sub-section (2) of section 37 of the said Act. Thus, on the one hand, the said amounts are sought to be forfeited and penalty levied and on the other hand, undoubtedly, on completion of the transactions on the basis of payment of last instalment, regular sales tax would be claimed from the same assessee. This would lead to travesty of justice on the face of it, simply because a proper approach has not been taken by the authorities concerned. As stated above, such an approach is impossible since there is no sale at all when mere instalments are paid in hire-purchases agreements.
It does not need much thought to appreciate that an honest assessed would be penalised merely because a wrong approach has been made by the authorities concerned. Normally, this Court would be slow in interfering at the stage of notices to show cause since parties can ventilate their grievances before the authorities in answer to show cause notices. In the present case, however, since the approach is basically improper, no useful purposes will be served by directing the assessee to appear before the authorities concerned and represent before them in answer to the said show cause notices.
We also like to sound a note of caution to the tax collecting authorities that before they enforce any forfeiture clause or impose penalty, they must be doubly sure as to how such action is legally permissible and as to whether they have the authority to do so. We would be happy, if in future, in matters such as this, a proper approach is undertaken by the authorities concerned and the approach that we have found in this case is not persisted in, to the end.
Mr. Kaji has submitted that, looking to the length of time that has passed in between the show cause notices and today, the authorities should be directed to complete the assessments in question at a very early date. We are confident that this aspect of the matter will be taken into consideration by the authorities concerned and they would not fail to complete the assessments as early as possible in the facts and circumstances of the case. We, therefore, do not consider it necessary to give any direction in the matter in this connection.
In view of all the aforesaid, the impugned show cause notices are hereby quashed and set aside and the respondents concerned are retrained from taking any further action pursuant to the impugned notices. Rule is made absolute accordingly with no order as to costs.
Rule made absolute.