M. Ayyaswami Nadar vs The State of Madras

Ramakrishnan, J.—This revision case is directed against the order of the Sales Tax Appellate Tribunal in T.A. No. 753 of 1959. The

petitioner, who is the assessee, was assessed for the year 1956-57 originally on a turnover of Rs. 7,30,000 and odd. Subsequently, the Sales Tax

Authorities recovered the regularly kept account books of a broker in sugar by name N. Krishnaswami. The broker''s accounts showed that a

turnover of Rs. 5,07,600 in sugar, referable to the assessee, had been effected through the broker. Thereupon, relying on the provisions with

regard to the assessment of escaped turnover, the Joint Commercial Tax Officer revised the assessment and fixed the net turnover of the assessee

at Rs. 12,38,000 and odd. The assessee appealed to the Appellate Assistant Commissioner disputing the turnover of Rs. 5,07,600 representing

the addition in the revised assessment, but that appeal was dismissed. The further appeal to the Sales Tax Appellate Tribunal by the assessee was

also dismissed. Now the assessee has come before us in revision.

Learned counsel appearing for the assessee contended that there was no sufficient justification for the department to hold that the turnover

mentioned in the broker''s accounts was the turnover of the assessee. Further, it was urged that the assessee had not been given reasonable

opportunity to cross-examine the sellers and buyers who were referred to in the accounts of the broker and who were connected with the disputed

turnover. It was also urged by the learned Counsel that in any event the quantum of turnover fixed even on the basis of the broker''s accounts was

excessive.

Taking up the first point, the broker''s accounts refer to the assessee by name as Ayyaswami Nadar or A. Nadar. The broker is now dead and

during the earlier stage of the assessment proceedings, he was examined in the presence of the assessee, and he had deposed that Ayyaswami

Nadar or A. Nadar mentioned in his accounts referred to the assessee. The broker''s accounts showed that the assessee had purchased 2106

bags of sugar from local dealers; he had also sold 400 bags in one transaction and 2930 bags, in several transactions which related to imported

sugar. In the year of assessment, sugar was assessable at 3 pies in the the rupee and in the case of imported sugar, on the first sales in the State an

additional levy of I anna in the rupee was also leviable, making out a rate of I anna and 3 pies in the rupee for first sales of sugar in the State. This

additional levy was imposed in the case of the imported sugar. A rate of Rs. 100 per bag was adopted as sale price for the purpose. In this way

the additional turnover of Rs. 12,38,588-14-6 was determined.

No doubt, the broker Krishnaswami died and was not available at the subsequent stages of the case. But there is his statement recorded at the

enquiry held by the assessing authority and that statement was made available to the assessee who was given opportunity to cross-examine the

broker. It was urged that the broker Krishnaswami had no personal knowledge of the turnover transactions, that for making entries in his accounts,

he had relied on information given to him by a clerk, and that this clerk had not been examined in support of the relevant entries. But

Krishnaswami''s accounts have been maintained in the regular course of business, and he has had brokerage transactions with several other dealers

besides the assessee. Many of the entries in the broker''s accounts are traceable in the regular accounts of the assessment. The authorities were,

therefore, justified in holding that the accounts of the broker were regularly kept, and that the entries therein mentioning the name Ayyaswami

Nadar relate to the transactions of the assessee.

So far as the extra levy on first sales of imported sugar is concerned, the department placed reliance on the entries in the broker''s accounts for

holding that they related to imported sugar. The entries mention places like Sitanagar, Anakapalli and so on or use the word "" Nizam"", indicating

that the sugar had been imported from localities in the State of Andhra Pradesh, outside Madras State. Learned counsel for the assessee-petitioner

urged that this description shown against the entries may well refer to the quality of the sugar, but would not be conclusive to show that the sugar

was imported, and that the assessee was the first seller in the State. We are not convinced that the quality of the sugar is described in the market

by the place of its manufacture. In the case of jaggery, special varieties are known in the market by reference to the place of manufacture, for

example, Srivilliputtur jaggery. But there is nothing to substantiate the contention that sugar is distinguished for the purpose of quality, by reference

to the place of manufacture. There is, therefore, reasonable basis for the view taken by the department that the entries in the broker''s accounts like

Nizam "" or ""Anakapalli "" and so on are really indicative of the fact that they relate to sales of imported sugar. The learned Counsel for the

petitioner also referred to some letters and affidavits of persons whose names are described by initials in the accounts of the broker and who have

denied such transactions with the assessee. But it is possible that these dealers might have also suppressed the transactions. Therefore, their

affidavits will not serve to discredit the broker''s regularly kept accounts. The assessee also contended that some of the entries in the broker''s

accounts might refer to transactions which had not fructified, and that mere payment of brokerage would not suffice to prove that there was a sale.

But it was for the assessee, in such circumstances, to produce his accounts to substantiate his plea, but he had not done this. Another argument that

was urged by the learned Counsel for the petitioner, is that the fixation of the sale price of sugar at Rs. 100 per bag is excessive; but the Tribunal

has referred to the fact that the purchase price as recorded in the assessee''s accounts has ranged from Rs. 87 to Rs. 100-8-0 and, therefore,

fixation of the sale price at Rs. 100 per bag as an average appears to be reasonable. In regard to the transactions for which the assessee has been

assessed to extra sales tax u/s 3(2), on the ground that he was the first dealer in the State, not exempt from assessment u/s 3(3), we have already

referred to the evidence provided by the entries in the broker''s accounts regarding the origin of the goods, as having come from outside the

Madras State and these entries imply not so much a description of the goods by quality, as description of the goods by their place of origin, i.e.,

whether they came from outside the State. The onus is on the assessee to prove that the sales were not the first sales made in the State, under the

second proviso to Section 3(2) of the Madras General Sales Tax Act, 1939. This onus he has failed to discharge. We are, therefore, satisfied that

the order of the Tribunal in regard to the determination of the escaped turnover and the levy of assessment thereon is correct.

Learned counsel for the petitioner urged that the rule providing for the levy of additional sales tax on the first sale of imported sugar amounted to

an unfair restriction of the freedom of inter-State trade and is, therefore, ultra vires. Article 301 of Part XIII of the Indian Constitution. Section 3(2)

of the Madras General Sales Tax Act, 1939, (the Act) is in the following terms :--

(2) On the first sale of any of the goods mentioned below by a dealer who is not exempt from taxation under the next succeeding Sub-section,

the dealer shall pay a tax at the rate specified as applicable thereto; and the tax shall be paid by the dealer on his turnover in each year relating to

such goods and shall be in addition to the tax to which he is liable under Sub-section (1) on his total turnover for the year :

Provided that, in the case of goods imported into the State of Madras either from outside the territory of India or from any other State in India, the

tax shall be levied on the first sale effected in the State of Madras by a dealer who is residing in the State of Madras and who is not exempt from

taxation under the next succeeding sub-section, after the import of the said goods into the State of Madras.

The effect of this section is that in the case of locally manufactured sugar, the manufacturer who effects the first sale will be liable to pay the

additional tax, but in the case of sugar manufactured outside and imported into the Madras State, the first dealer after import in Madras State, who

has a turnover exceeding Rs. 10,000 will pay the additional levy. The argument of the learned Counsel is that the imported goods would have

already suffered tax in the State of their manufacture, according to the sales tax law in force in that State, that the subsequent levy of sales tax on

their sales after import in Madras State will amount to double taxation which the locally manufactured goods are not subject to, and that in this

sense, the proviso to Section 3(2) of the Act will offend Article 301 of the Constitution as it amounts to an unfair restriction on the freedom of

inter-State trade and commerce.

Article 301 of our Constitution which is found in Part XIII, guarantees freedom of trade, commerce and intercourse throughout the territory of

India, but this guarantee is subject to the other provisions in that Part. One of the provisions thus to be taken into account is Article 304 of the

Constitution, which states:

Notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law--

(a) impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are

subject, so however, as not to discriminate between goods so imported and goods so manufactured or produced ; and

(b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public

interest.

The scope of this article was considered in Firm A.T.B. Mehtab Majid and Co. v. State of Madras [1963] 14 S.T.C. 355, by the Supreme

Court. It was a case which arose out of the provision for levy of tax at a single point on hides and skins, in Rule 16 of the Madras General Sales

Tax (Turnover and Assessment) Rules, 1939. Rule 16(2) of those rules provided that in the case of hides or skins, which had been tanned outside

the State, the tax should be levied from the dealer who, in the State, was the first dealer in such hides or skins not exempt from taxation u/s 3(3). In

the case of tanned hides or skins which had been tanned within the State, the tax should be levied from the first dealer in such hides or skins not

exempt from taxation u/s 3(3); but if he proved that the tax had already been levied on the same tanned hides and skins when they were in the

untanned condition, he would be exempt. The result was that in the case of tanned hides and skins which were tanned in Madras State the levy

was on the purchase price of the same goods in the untanned condition, whereas in the case of hides and skins tanned outside the State the levy

was on the sale price. It is familiar knowledge that great disparity exists between the price of raw untanned hides and skins and the price of tanned

ones. The Supreme Court struck down Rule 16(2) as being discriminatory and opposed to Article 304 of the Constitution. They made the

following observations:

It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they

are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to

be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating

between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Article 301 and will be valid only

if it comes within the terms of Article 304(a).

Article 304(a) enables the Legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on

goods from other States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or

produced in that State and the goods which are imported from other States. This means that if the effect of the sales tax on tanned hides or skins

imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to Sub-rule (2) of Rule 16 of the Rules,

then the tax is discriminatory and unconstitutional and must be struck down.

Our attention was also drawn to a recent decision of the Supreme Court in State of Madhya Pradesh v. Bhailal Bhai [1964] 15 S.T.C. 450.

That decision far from supporting the contention of the petitioner is in favour of the department. In that case the Madhya Bharat Government

exercising powers under Madhya Bharat Sales Tax Act of 1950 issued a notification that tobacco leaves, manufactured tobacco for eating and

smoking, and tobacco used for beedi manufacture were liable to levy of sales tax at a certain rate at the point of sale by the importer in Madhya

Bharat. The validity of this notification was challenged as unconstitutional and infringing Article 301 of the Constitution and not saved by the

provision in Article 304(a). This objection was upheld by the High Court and this judgment was affirmed by the Supreme Court on appeal by the

State of Madhya Pradesh. The Supreme Court held that the tax payable at the point of sale by the importer in the State of Madhya Bharat directly

impeded the freedom of trade and commerce guaranteed under Article 301 of the Constitution. On behalf of the State the argument was advanced

that the notification came within the limits of Article 304(a) on the ground that the notification did not make any discrimination or distinction

between a sale by an importer of the imported tobacco and the sale by a dealer of the tobacco locally manufactured and produced in the State. It

was also urged that the intention of the Government in issuing the notification was to apply alike the Rule to sales of imported tobacco as well as

sales of tobacco manufactured and produced in the State, but that the authority had excluded the latter from levy of sales tax on a mistaken

interpretation of the law. The Supreme Court did not accept this argument either with regard to the factual position or with regard to the

interpretation of the notification in question. The following observations of the Supreme Court in repelling the argument of the State would show

that the Supreme Court would have upheld the validity of the notification if it made no discrimination between sales of imported tobacco and sales

of the other category:

An attempt was made on behalf of the State before the High Court and also before us to construe the notification mentioned above to mean that

not only the tobacco imported from other States but also similar goods manufactured or produced in Madhya Bharat were subject to this tax and

at the same rate. It was argued that a dealer in these goods who was an importer and so sold goods imported by him into Madhya Bharat would

also be selling goods not so imported but manufactured and produced in the State. We are prepared to agree that that may well be so. What we

are unable to see however is that in respect of sales of such other goods this person would be liable to any tax under the notifications. We are

informed that in fact where importers dealt with in goods other than imported goods the sales of such other goods were in fact excluded from tax.

The learned Advocate-General of Madhya Pradesh who appeared before us in support of these appeals suggested that that was done by the State

Sales Tax Authority on a mistaken interpretation of the law. We do not think so. In our opinion, the only reasonable interpretation of the

notification as it stands, viz., that tax on tobacco leaves, manufactured tobacco and tobacco used for bidi manufacturing would be payable at the

point of sale by the importer, is that only the sale of goods which the importer had imported would be liable to tax and not sale of any other goods

by him. If the intention had been as suggested by the learned Advocate-General that though the tax is payable at the point of sale by an importer

the sale by the same person of goods manufactured or produced in Madhya Bharat would also be liable to tax, the word ''importer'' would not

have been used in column (3) but the word ''dealer'' would have been used and the point of sale would have been indicated by some other words

as the ''first sale in Madhya Bharat'' or ''the sale to the retailer in Madhya Bharat'' as the rule-making authority chose.

From this it is clear that the imposition of additional levy on the first sale of an importer is valid as clearly coming under Article 304(a) and does

not suffer from any vice of discrimination. We may also observe that if the argument of learned Counsel for the petitioner is accepted the first sales

of imported sugar will be exempt from the additional levy resulting in obvious discrimination against first sales of locally manufactured sugar. We

see no warrant why first sales of imported sugar should be entitled to any such discriminatory treatment.

In a recent unreported case, A. Hajee Abdul Shukoor or and Co. v. The State of Madras Since reported at [1964] 15 S.T.C. 719 (W.P.

Nos. 201 to 203 of 1963) before the Supreme Court the Madras General Sales Tax (Special Provisions) Act, 1963 (Act 11 of 1963), came up

for consideration. Sub-section (1) of Section 2 of the Act provides that during the period commencing from 1st April, 1955, and ending on 31st

March, 1958, in respect of sale of dressed hides and skins, which were not subjected to tax in their raw stage, the dealer shall be assessed at the

rate of two per cent, on the purchased price in the untanned condition in the hands of the dealer, who is the first dealer in the State in hides and

skins, not exempt from taxation u/s 3(3) of the Act. During the same period, the rate of tax on the sale of raw hides and skins was 3 pies in the

rupee. The difference between 2 per cent, and 3 pies in the rupee worked out to less than 1/2 nay a paisa per rupee. In the view of the Supreme

Court even this differential levy was discriminatory and on that account, the rule in question was struck down as ultra vires.

As pointed out by the Supreme Court in Firm A.T.B. Mehtab Majid and Co. v. State of Madras [1963] 14 S.T.C. 355, provisions in the

Sales Tax Law of a State which have the effect of discrimination between the goods of one State and those of another, may affect the free flow of

trade and in that sense offend Article 301 of the Constitution; such laws can be validated only if they come under the saving provision of Article

304(a) of the Constitution. We are not concerned in this case with Article 304(b) which deals with restrictions on the freedom of inter-State trade,

imposed in the public interest. Such a question of public interest does not arise here. To attract the saving provision in Article 304(a) of the

Constitution, the history of the goods anterior to their import to the State is irrelevant. Article 304(1) takes up the goods only after their import into

the State is over, and after they had become part of the mass of the goods of the State. It provides the safeguard, that such goods for the purpose

of taxation shall be dealt with in the same manner, as goods produced in the State itself. Article 304(a) has no concern with the position of a dealer

who may have to sell goods which during their passage through several States might have had to pay sales tax successively, and which therefore

might have enhanced their price to the particular dealer. Article 304(a) deals with the goods only after they have entered a particular State and

saves such goods from discriminatory taxation at the hands of that State; as long as the State taxation laws do not make a distinction between

imported goods and goods manufactured in that State, such laws will be intra vires. We are satisfied in the light of the principles set out above, that

the single point levy of sales tax on sugar as well as the additional levy on first sales are within the safeguards provided in Article 304(a) of the

Constitution and are therefore intra vires the State Legislature.

Learned counsel for the petitioner also referred to Saghir Ahmed v. State of U. P. (1954) 2 M.L.J. 622, where a question was posed before

the Supreme Court in the following form :

What is said is, that Article 301 provides safeguards for carrying on trade as a whole as distinguished from the rights of an individual to carry it on.

In other words, this Article is concerned with the passage of commodities or persons either within or outside the State frontiers but not directly

with individuals carrying on the commerce or trade. The right of individuals, it is said, is dealt with under Article 19(1)(g) of the Constitution and the

two articles have been framed in order to secure two different objects.

The question is not quite free from difficulty and in view of the fact that we have declared the Act (U. P. Road Transport Act) to be

unconstitutional on the two grounds mentioned above, we do not consider it necessary to record our decision on this point.

That decision did not go into the scope of Article 304 of the Constitution. The question posed as stated above, but which was left unanswered

by the Supreme Court, was about the relative position of the fundamental rights of an individual guaranteed under Article 19 of the Constitution on

the one hand and the freedom of trade guaranteed under Article 301 of the Constitution on the other, and whether the two could be inter-linked. It

was that question that was left open. It is unnecessary to refer to that decision for the present case, where the point in issue is quite different.

There was also a final argument that sugar came in for single point levy as well as an additional levy by an amendment to Section 3(2) of the

Act of 1939 after the Constitution came into force, that this additional levy on sugar was discriminatory and that the protection available to taxes

lawfully levied before the Constitution came into force under Article 277 of the Constitution will not apply to the additional levy on sugar.

Here again, we cannot agree that the levy of additional tax on sugar at a single point as defined in Section 3(2) , involves an unfair

discrimination between goods similarly placed. The single point levy including the additional levy falls alike on all sugar in the State either at the

point of first sale after production or at the point of first sale after import and from this point of view, there is no question of any discriminatory

treatment of sugar as a commodity selected for sales tax levy at a single point.

We, therefore, overrule the contentions of the petitioner and dismiss the revision case.

There will be no order as to costs.