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Judgment
Mack, J.—These are second appeals by the State of Madras against concurrent decrees in two suits filed by K.R.C.S. Balakrishna Chetty
and Company for a declaration that the levy of Rs. 37,039-6-5 and Rs. 3,140, as sales tax for the years 1943-44 and 1944-45, respectively was
illegal and for a consequential injunction. The learned Subordinate Judge of Salem, Sri K.N. Rajagopala Sastri, decreed both suits in full with
costs. His judgments were confirmed by the learned District Judge of Salem. The assessment was made in the first instance by the Deputy
Commercial Tax Officer in 1945. Appeals were dismissed by the Commercial Tax Officer and in revision the Board of Revenue declined to
interfere. The assessment orders, exhibits A-6 and A-8, show a turnover of sales of cotton yarn to the extent of sixty-six lakhs in 1942-4.3, and
Rs. 3,64,000 in 1943-44.
The Respondent admittedly obtained licences u/s 5 of the Madras General Sales Tax Act (IX of 1939), which exempted from taxation u/s 3,
sale of bullion and specie of cotton yarn and of any cloth woven on handlooms ""subject to such restrictions and conditions as may be prescribed,
including conditions as to licences and licence fees"". It is the interpretation of this clause and in particular the meaning of the simple words ""subject
to"" which is briefly the point of law for determination in these appeals.
The licence exhibit A-1 to the Respondents as dealers in cotton yarn issued on 31st March 1941, and renewed for the following years was
subject to the provisions of the Madras General Sales Tax Act, 1939 and the rules made thereunder"" and to two further following specified
conditions which admittedly have not been violated and need not be detailed. The other relevant facts are that on a surprise inspection the
Commercial Tax authorities on 20th September 1944, discovered two separate sets of accounts in the shop of the Respondents, one set intended
for the assimilation of the department showing the figures for sales as lawful transactions at controlled prices and the other showing actual black-
market prices that is considerably in excess of the price of yarn controlled under other orders. It is also not disputed that in returns made by the
Respondent firm under Rule 11 or 13 of the Rules framed u/s 3 of the General Sales Tax Act, the Respondents disclosed only the figures for
dealings in cotton yarn according to the set of accounts in which the real transactions including black-market profits were omitted. Balakrishna
Chetty was, on the footing of this discovery of a thoroughly dishonest malpractice, prosecuted and sentenced to six months'' imprisonment in due
course for an offence in breach of the yarn control orders. That prosecution was pending at the time the Deputy Commercial Tax Officer made the
present assessment, the view taken by him being simply this, that as the Respondent failed to comply with the restrictions and conditions prescribed
under the Sales Tax Act, they had lost their light to exemption from sales tax u/s 5 of the Act.
The Subordinate Judge in a judgment of great length, much of which we are unable even to understand, appears to have complicated in a most
extraordinary manner a very simple issue. The view that he took appears to boil down to this, that although the Act imposed on the dealer a duty
to maintain true and proper accounts and to submit true returns, the only penalty to which the Act subjected him for failure to do so, apart from
prosecution and punishment by a Magistrate, was the liability to have his licence cancelled under Rule 8 of the Madras General Sales Tax Rules
which may be here reproduced:
Every licence granted or renewed under these rules shall be liable to cancellation by the licensing authority, in the event of a breach of any of the
provisions of the Act, or of the rules made thereunder or of the conditions of the licence.
There was no formal order passed by the Deputy Commercial Tax Officer cancelling the licence. In addition to prosecuting the Respondent, he
proceeded to assess him to sales tax u/s 3 of the Act for these two years up to the date of the discovery of the double set of accounts on the short
and simple ground that u/s 5 he had lost his right to exemption of sales tax owing to breach of the conditions and restrictions prescribed by the Act.
That there was breach of the conditions and restrictions imposed by the Act subject to which the licence was granted can admit of no doubt
whatsoever. In fact the learned Subordinate Judge, while it would appear, fully alive to this fact, took what appears to us to be an astonishing view
that, as long as the Respondents were in possession of a licence, no matter to what extent they violated conditions and restrictions imposed by the
Act, the Sales Tax authorities had no power whatsoever to collect sales tax on the ground that the licensee had lost his right to exemption, and that
further more the powers of the Sales Tax authorities were circumscribed and restricted only to cancellation of the licence or to prosecution. The
learned District Judge in expressing his agreement with this view posed and answered the following question.
The important point is assuming that there is a contravention, what is the consequence? This is immediately answered by Rule 8 previously quoted,
and the licence becomes liable to cancellation forthwith by the Deputy Commercial Tax Officer. That implies, necessarily, that the statutory
exemption u/s 5 ceases, and that all further sales in respect of the exempted commodity (cotton yarn) became per se assessable to sales tax in
respect of the turnover.
He then took the view that the sales prior to cancellation of the licence, as we understand the judgment of the Court below, were fully protected by
the Respondents'' ability to flourish a licence, the conditions of which they have grossly violated.
It would appear that in view probably of this decision by the Subordinate Judge, Section 6(a) of the Sales Tax Act was enacted by an
Amending Act XXV of 1947, which laid down in specific terms that if any restrictions or conditions prescribed u/s 5 were contravened, the sales
of the dealer with effect from the commencement of the year in which such contravention or non-observance took place may be assessed to tax u/s
The learned District Judge, in dealing with this amendment made the unwarranted observation that the administrative authorities themselves
appear to have subsequently realised that even if the licence be cancelled the previous turnover may not be assessable to sales tax and rectified this
defect by the amended Section 6(a). The point of law that we are called upon to decide has no relation to Section 6(a), which was obviously
enacted, in our opinion, quite unnecessarily to counter what appears to us an extraordinary judicial view in the judgments of the Courts below. We
have to consider whether u/s 5 of the Act the Sales Tax authorities legally made these assessments in the circumstances and to examine the
correctness of the judgments of the Courts below.
As it appears to us, Rule 5 is couched in the simplest language and completely free from any ambiguity or difficulty which sometimes arises out
of ill-considered drafting. The two simple words ""subject to"" as regards the meaning of which there has been much argument before us and also in
the Courts below, have, as it appears to us, a clear and simple meaning for which it is difficult to find a substitute in two words. The words ""subject
to"" have also been judicially interpreted in Simon Reuben Vs. Haji Shaikh Mahomed Shustary, , by a Bench of the Bombay High Court as
introducing into a document a condition or proviso. Sri N.R. Raghavachari, who has appeared for the Respondents before us and also argued their
case before the learned District Judge, is the author of a recent commentary on the Sales Tax Act. He has argued before us that the words ""subject
to"" can only mean ""liable to"". One of the several meanings of the word ""subject"" in the Concise Oxford Dictionary and indeed in all dictionaries is
of course ""liable"", but all dictionaries give the first meaning of the words ""subject to"" as ""conditional upon"". The Universal Dictionary of the English
Language edited by Cecil Wyld gives in fact only one definition of the words ""subject to"" and that is ""conditional upon some other action or event
or briefly ""conditional upon"". Sri Raghavachari has argued that the words ""liable to"" can be easily substituted for the words ""subject to"" and that the
section can only mean that the licensee is only, therefore, ""liable"", as we understand his argument, to other penalties for breach of conditions and
restrictions which may be prescribed, but in no event to disgorge sales tax for such breach so long as he was in possession of an uncancelled
licence. The words ""liable to"" if substituted for ""subject to"" not only invest the section with no meaning or sense but would also be thoroughly bad
English, most difficult for a Court to interpret. It is noteworthy that in a long commentary, which Sri Raghavachari, has committed himself to under
Rule 5, he has nowhere even adverted to the meaning of the words ""subject to"". In our opinion, the words are so clear that they do not need any
commentary. The correct interpretation of Section 5 of this Act to the drafting of which we cannot take the slightest exception, is that it merely
grants exemption of tax, subject to certain conditions and restrictions, or in other words, on condition that they are observed and if there is breach,
the exemption is lost and sales tax can at the discretion of the taxation authorities be levied.
It has been strenuously argued before us by Sri Raghavachari that an enactment imposing a burden requires strict construction in favour of the
subject, and if two interpretations are possible, that which gives relief to the subject should be adopted. This would be so in the case of a fiscal
obligation laid on the subject, provided the alternative interpretation is reasonable and does not make nonsense of the statutory provision. But this
rule cannot possibly apply to an exemption from any such obligation granted on specific conditions. In re Nirabai (1904) ILR 29 Bom. 203 (F.B.),
a Full Bench of the Bombay High Court made this perfectly clear when it laid down that an enactment imposing a burden requires a strict
construction in favour of the subject but an exemption must be strictly construed in favour of the State. In a recent Andhra case, Heranand Ram-
Sook Firm v. Province of Madras (now Andhra) (1954) 2 M.L.J. 37 (Andhra High Court) , Subba Rao, C.J., held that the Plaintiffs, who were
commission agents within the meaning of Section 8 of the Sales Tax Act, were not exempt from payment of tax because they had failed to comply
with the condition of their licence, and further more that there was no justification for a distinction between material and non-material conditions in
the provisions of Section 8.
The position of law that we are called upon to decide is so simple that we really feel we would not be justified in labouring too much over it. But
we wish to make some comments on the very lengthy judgment of the learned Subordinate Judge which appears to us based on warped reasoning
in several directions. Among many unintelligible observations in paragraph 17 one is this:
The only condition and restriction prescribed by the rules before a dealer may claim exemption u/s 5 are that he should have a licence covering the
relevant period and that he should do business in the place specified in the licence.
Then he went on to say:
I do not read the phrase ''subject to the provisions of the Madras General Sales Tax Act, 1939 and the rules made thereunder'' as importing any
condition which can affect the life, duration or validity of the licence.
Then in his criticism of the scope of Section 5, which according to him did not empower any sales tax to be levied before the cancellation of the
licence, he said this:
Nothing could have been easier than to say that the exemption u/s 5 could be available only to dealers who abide by such conditions and
restrictions as may be prescribed and who also performed their duties honestly and faithfully under the Act or that might be imposed upon them by
the other provisions of the Act or the rules framed thereunder.
But this is what is laid down by Section 5 in clearer, simple and unmistakable language regrettably however beyond the comprehension of the
learned Judge who fails to see that Section 5 merely gives exemption from sales tax only if certain specific conditions stipulated in the licence are
complied with. The learned Subordinate Judge concluded paragraph 17 with this very remarkable sentence which appears to us mere high-
sounding phraseology devoid of any meaning in the context ''of the Act:
But on a true construction of the Act and the rules a licence does not carry within itself any germ of self destruction in the event of an infraction of
any other provision of the Act or of the rules framed thereunder.
The Subordinate Judge then proceeded in paragraph 18 to make the following remarkable observations:
The Act was not intended to put down black-marketing operations. It was not even a moral enactment intended to instill commercial probity into
the dealers who might come within its ambit. What the Tax Officers did in this case was to find that the Plaintiffs were wicked men who made illicit
profits by trading in cotton yarn in black-market, a matter with which they had no concern whatever in the exercise of their duties under the
Madras General Sales Tax Act, and then they proceeded to punish the Plaintiffs by levying tax on what was admittedly turnover in cotton yarn by
an impossible construction of the Act and the rules made thereunder.
The object of Section 5 was, so far as yarn was concerned, to exempt it from sales tax in order that it might reach the handloom weavers at as
cheap a rate as possible, and, therefore, the Act made specific provisions for controlling such sales which would be free from sales tax only, if
merchants dealing in yarn strictly obeyed the restrictions imposed upon them. In the present case, the Sales Tax authorities discovered a merchant
keeping two sets of accounts in flagrant and blatant dishonest contravention of the restriction imposed upon him u/s 5 and whatever other penalty
the respondent had exposed himself to, either under the Sales Tax Act or under the Yarn Control Order, there can be no question that the Sales
Tax Authorities were perfectly entitled to collect all the sales tax, exemption from which had been clearly forfeited. We must really express our
astonishment at the views expressed in his judgment by the learned Subordinate Judge who has, as it appears to us, made of perfectly good law,
contained in Section 5 of the General Sales Tax Act, some sort of a predatory animal. The interpretation he has given to the section would open
out an avenue for unscrupulous and dishonest black marketing operations from the full consequence of which the learned Subordinate Judge would
give a licensee protection by his interpretation of Section 5, so long as the licence he had so grossly abused was not formally cancelled. There is far
too much legal ingenuity concentrated now-a-days on devastating attacks on sections of law and in fact, sometimes, on whole legislative
enactments in an attempt to explode them altogether as being ultra vires or to render particular sections of law, as in the present case, not only
meaningless but a positive menace to real justice and to public welfare and commercial morality. We must express our surprise that this
extraordinary judgment of the Subordinate Judge has received confirmation by the learned District Judge.
The two appeals are allowed and the suits will be dismissed with costs throughout.
Krishnaswami Nayudu, J.
These second appeals are coming up before us on a reference to a Bench by the learned Chief Justice. I had the advantage of perusing the
judgment just now delivered by my learned brother with which I am in complete agreement, and I wish to add the following in support.
The Respondents claimed to be entitled to the exemption from taxation u/s 5 of the Madras General Sales Tax Act, 1939, as they were
holders of a licence for the sale of cotton yarn for the two assessment years 1943-44 and 1944-45. The Deputy Commercial Tax Officer, whose
order was eventually confirmed in appeal by the Commercial Tax Officer and in revision by the Board of Revenue, was of the opinion, that, in view
of the contravention of Section 13 of the Madras General Sales Tax Act, the Respondents-firm were not eligible to the exemption from tax
contemplated u/s 5. It is this view of the department that has been dissented from by both the Courts below.
Section 13 provides that:
Every dealer and every person licensed u/s 8 shall keep and maintain a true and correct account* showing the value of the goods sold and bought
by him; and in case the accounts maintained in the ordinary course, do not show the same in an intelligible form, he shall maintain a true and correct
account in such form as may be prescribed in this behalf.
The fact that the Respondents were maintaining two sets of accounts, one showing the figures of sales in accordance with the controlled'' prices
and another showing the actual prices obtained by the Respondents--which has been correctly termed as black-market prices--has been
established, and it is beyond the realm of dispute.
The short question, therefore, that arises is whether, notwithstanding the contravention of the liability to keep and maintain true and correct
accounts u/s 13 by a dealer in cotton and cotton yarn to whom a licence has been granted and whose licence has been in force, he is still entitled to
the exemption from tax provided u/s 5 of the Act. The Act makes it obligatory on every dealer, irrespective of the commodity in which he is
trading, to maintain true and correct accounts u/s 13. It was argued that a dealer to whom a licence has been granted for trading in cotton and
cotton yarn and who becomes entitled thereby to an exemption from taxation u/s 5, could not come within the category of dealers referred to in
Section 13 for the reason that while apart from the dealer every person licensed u/s 8 is mentioned in Section 13, but persons licensed under
Sections 5 and 6 have not been mentioned, and that, therefore, the obligation u/s 13 to maintain true and correct accounts does not attach itself to
a dealer to whom a licence is granted either u/s 5 or Section 6. This is obviously a wrong interpretation of Section 13. The need for the inclusion of
every person licensed u/s 8 along with dealers generally was on account of the fact that Section 8 deals with the licensing of persons other than
dealers, such as persons who for an agreed commission or brokerage buys or sells on behalf of known principals, and, therefore, it was necessary
to include that person alone, who could, not come under the definition of ""dealer"" in the Act. There is, therefore, no scope for the contention that
once a dealer obtains a licence u/s 5 or 6, he ceases to be a dealer and is absolved from the obligation to maintain true and correct accounts as
required u/s 13 of the Act. Once it is held that a licensee of cotton or cotton yarn is a dealer within the meaning of the definition in the Act, the
obligation to maintain true and correct accounts u/s 13 naturally attaches to him as well. But still the further question remains whether by his failure
to maintain true and correct accounts as required u/s 13, a licensee of cotton and cotton yarn, whose licence continues in force and not cancelled,
could forfeit his right to the exemption from taxation granted u/s 5 of the Act.
The view taken by the lower Courts is that the Deputy Commercial Tax Officer having been empowered under Rule 8 of the Madras General
Sales Tax Rules of 1939, to cancel the licence in the event of the provisions of the Act, or of the rules made thereunder, or of the conditions of the
licence, the only manner in which the exemption granted u/s 5 could be taken away is by exercising the power to cancel licence for breach of any
of the provisions of this Act--in this case, Section 13 of the Act--and that so long as that power of cancellation has not been exercised, it is not
open to deny the licensee exemption for taxation. It may be noted that this argument proceeds on the assumption that there has been a
contravention of the provisions of the Act by failure to maintain true and proper accounts.
Section 5 says:
Subject to such restrictions and conditions as may be prescribed, including conditions as to licences and licence fees the sale of bullion and specie
of cotton, of a cotton yarn, and of any cloth woven, on handlooms and sold by persons dealing exclusively in such cloth shall be exempt from
taxation u/s 3.
Section 3 of the Act provides that every dealer whose turnover exceeds a certain figure is liable to sales tax. The exceptions to the rule are found in
Sections 4 to 8. Section 4 deals with the exemption of certain categories of goods like electrical energy, motor spirit, manufactured tobacco and
other goods subject to the Madras Sales of Motor Spirit Taxation Act, 1939, Madras Tobacco (Taxation of Sales and Licensing) Act, 1939, the
Madras Abkari Act, 1886 and the Opium Act, 1878, from the operation of Section 3 of the Act, which fixes the ability for taxation. In so far as
the commodities dealt with u/s 4 are concerned, there is a total exemption, but in the succeeding sections, including Section 5, the exemption is not
absolute but qualified, dependent upon the fulfilment of certain conditions. The right to claim exemption u/s 5 is subject to such restrictions and
conditions as may be prescribed, including conditions as to licences and licence fees. The word ""prescribed"" is defined in Section 2(f) as meaning
prescribed by rules made under the Act. Rule 5 of the Madras General Sales Tax Rules of 1939, requires every person, who deals in cotton or
cotton yarn other than handspun yarn, if he desires to avail himself of the exemption provided u/s 5, to submit an application for a licence in
accordance with the provisions of Section 5 and such a licence may be renewed from time to time for which application for renewal has to be
made. A licensing fee subject to a maximum sum of Rs. 1,000 is payable. A licence once granted can be cancelled by the licensing authority on
grounds mentioned in Rule 8 already referred to. So the first requirement to claim an exemption for a dealer in cotton or cotton yarn and the other
goods specified in Section 5 is to obtain a licence. The licence granted in the present case is issued in form No. 3 in the forms appended to the
Sales Tax Act Rules. Exhibit A-1 is the licence for the period from 1941 to 1942, which has been renewed from time to time. The licence is as
follows:
Messrs. K.R.C. Balakrishna Chetty and Sons & Co. having paid a licence fee of Rs. (in words) is hereby licensed as a dealer in cotton yarn for
the year ending 31st March 1942 at Gugai, Tiruchirappalli Road (place of business) subject to the provisions of the Madras General Sales Tax
Act, 1939 and the rules made thereunder and to the following conditions:
(1) Licensees who do not submit returns under Rule 11 or 13 of the Madras General Sales (Turnover and Assessment) Rules, 1939, shall submit
to the undersigned on or before the 20th day of June in every year, a return in Form VII. showing the turnover of all the business done by them for
the preceding year.
(2) No correction in this licence shall be valid unless ordered and attested by the undersigned.
The licence expressly makes it clear that it is subject to the provisions of the Madras General Sales Tax Act, 1939, and the rules made thereunder,
and in addition to the two conditions expressly mentioned in the licence. The licence is, therefore, subject to the observance of Section 13 of the
Madras General Sales Tax Act, one of the provisions of the Act among others, and, therefore, one of the conditions subject to which the licence is
granted is that the licensee shall maintain true and correct accounts showing the value of the goods sold and bought by him as required u/s 13. I am
in agreement with my learned brother that the correct judicial interpretation of the words ""subject to"" is ""conditional upon"" and the introduction of
the words ""subject to"" in a document or in a statutory provision amounts to a condition or a proviso. The restrictions and conditions that may be
prescribed and the conditions as to licence and licence fees have to be observed before the dealer could claim exemption from taxation. The
learned Subordinate Judge, whose judgment was confirmed by the learned District Judge, while correctly referring to the definition of the word
prescribed"" in the Act, as meaning the rules framed under the Act, had fallen into an obvious error in imagining that the only condition and
restriction prescribed by the rules before a dealer could claim exemption u/s 5 is that he should have a licence covering the relevant period and that
he should do business in the place specified in the licence. Rule 5 requires that every dealer trading in the prescribed commodities desiring to claim
exemption u/s 5 shall apply and obtain a licence in form No. 1, which licence empowers the dealer to do the business in accordance with the
licence. The licence is, therefore, a part of the rules having been issued in pursuance of the rules and in the form specified therein, and as such it is
erroneous to assume that the rule only requires the dealer to obtain a licence and possess it and it is not incumbent upon him to carry on the
business in accordance with the conditions of the licence. The licence and its conditions do form an integral part of the rules, especially Rule 5,
which requires the dealer to obtain a licence to claim the benefit of the exemption. The proper meaning, therefore, that should be given to the
qualifying phrase ""subject to such restrictions and conditions as may be prescribed including conditions as to licences and licence fees"" would be
that the dealer should in the first instance obtain a licence and carry on the business in accordance with the conditions of the licence and would also
be liable to observe such other restrictions and conditions as may be prescribed in the rules. The failure to observe, or the contravention of any of
the rules or any of the conditions of the licence would deprive him of the benefit of the section. It, therefore, follows that the observance of the
provisions of the Madras General Sales Tax Act being a condition subject to which the licence was issued and Section 13 being a provision of that
Act, which has been found to have been violated by the Respondents, they have lost the exemption to which they would otherwise have become
entitled to, if they had scrupulously observed and complied with the several provisions of the Act and the rules made thereunder, apart from the
two express conditions specified in the licence. The vesting of a power in the authority to cancel the licence under Rule 8 and the failure to
exercispower could not absolve the licensee from conducting himself in the carrying on of the business in accordance with the terms of the licence,
including the observance of the provisions of the Sales Tax Act. Rule 8 relating to cancellation of licence is an independent enabling provision the
exercise or non-exercise of the power of cancellation having nothing to do with the conditions under which the licensee could claim exemption
under Sectione that 5 . The judgments of the lower Court are, in my view, the result of a misapprehension and consequent confusion about the
scope of Rule 8. I am surprised that the learned District Judge should have foiled to examine the judgment of the Subordinate Judge in its proper
perspective and should have simply endorsed it by assuming its correctness.
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* Section as it stood before Amendment Act Madras Act XXV of 1947.