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PETITIONER: THE COMMISSIONER OF SALES TAX, U.P.

       Vs.

RESPONDENT: BISHAMBER SINGH LAYAQ RAM

DATE OF JUDGMENT26/08/1980

BENCH: SEN, A.P. (J) BENCH: SEN, A.P. (J) BHAGWATI, P.N. VENKATARAMIAH, E.S. (J)

CITATION:  1980 AIR 2047            1981 SCR  (1) 548  1981 SCC  (2)  27

ACT:      U.P. Sales  Tax Act  1948, ss.  2(c)  Expln.  7(3)  and 11(4)-Kutcha  arhatiya  whether  a  dealer-Question  of  law neither  raised   before  the   appellate   nor   revisional authority-High Court  in reference-Whether  entitled  to  go into the question.      Words  &   Phrases-’arhatiya’-’pucca  arhatiya’-’kutcha arhatiya’-Meaning of-s.  2(2) Expln.  U.P.  Sales  Tax  Act, 1948.

HEADNOTE:      Section 2(c)  of the  U.P. Sales  Tax Act, 1948 defines "dealer" to  mean  any  person  or  association  of  persons carrying on the business of buying or selling goods in Uttar Pradesh whether  for commission,  remuneration or otherwise. By the  U.P. Sales  Tax (Amendment) Act, 1949 an Explanation was inserted  in this  section to  provide that  a factor, a broker, a commission agent or arhatiya, a del credere agent, an auctioneer,  or any  other mercantile  agent by  whatever name  called,   and  whether  of  the  same  description  as hereinbefore mentioned  or not,  who carries on the business of buying  or selling  goods on behalf of his principles, or through whom the goods are sold or purchased shall be deemed to be a dealer for the purposes of the Act.      The respondent  (assessee)  who  was  registered  as  a dealer under section 8A was carrying on business in jaggery, amchur, khandsari  etc. on  its own  account and  as  kutcha arhatiya. The  nature of  the business  carried  on  by  the assessee was  that cultivators  brought their produce to the assessee for  sale. The  goods were  weighed at his shop and then supplied  to the  pucca arhatiyas  or to other persons. Price of  the commodity  in full  or part  was paid  by  the assessee to the cultivators directly, and the price from the purchaser were  realised after  wards. During the assessment year 1967-68  the Sales  Tax Officer by his assessment order rejected the  account books  of the assessee on the basis of some discrepancy  found during  the four surveys carried out at the  shop and  made a best judgment assessment under sub- section (3) of section 7 of the Act, determining the taxable turnover of  purchases effected  by the assessee as a kutcha arhatiya at  Rs. 5.3  lacs  and  taxed  it.  On  appeal  the

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Assistant Commissioner  (Judicial), Sales  Tax  reduced  the taxable  turnover  of  purchase  by  Rs.  1.5  lacs.  Cross- revisions by the appellant as well as by the respondent were allowed by  the Additional  Judge (Revisions), Sales Tax who by his  order negatived the plea of the assessee that he was not a  dealer but  held from the material on record that the taxable turnover  of the  assessee could  not reasonably  be determined at  Rs. 3.8  lacs. The  orders of  the  Assistant Commissioner (Judicial) and Sales Tax officer were set aside and a  fresh best  judgment assessment  was directed  to  be made. 549      The High  Court upon  reference, as to the liability of the assessee  to tax   on the transactions effected by it as kutcha arhatiya  held that the assessee was not a dealer. It further held  that a person can be liable to tax as a dealer only if  he acts  as an  agent having  the authority to pass title in  the goods  sold, and that a kutcha arhatiya merely brought together  the seller and the purchaser and helped in settling the price and weighment of the goods etc.      In the  appeal to this Court it was contended on behalf of the  appellant, that  the High Court was wrong in holding that the  assessee was  not a  dealer within section 2(c) of the Act  and that  the High  Court had completely overlooked the Explanation  to section  2(c) which  was inserted by the U.P. Sales  Tax (Amendment) Act, 1959 particularly the words "through whom the goods are sold or purchased", and that the Sales Tax  Officer was not justified in making an assessment to the best of his judgment under section 7(3).      Allowing the appeal ^      HELD: 1(i)  The finding  arrived at  by the  High Court that the  assessee  as  a  kutcha  arhatiya  merely  brought together the seller and the buyer charging an additional sum by way  of commission  and, therefore, could not be regarded as a  dealer i.e. a person engaged in the business of buying and selling  goods, is contrary to the admitted facts of the case. [551 H]      (ii)  Explanation   to  s.   2(c)  brought  within  the definition of  ’dealer’  not  only  a  commission  agent,  a factor, a del credere agent or any other mercantile agent by whatever name  called, and  whether of  such description  or not, but  also  a  broker,  an  auctioneer  as  well  as  an arhatiya. [554 D]      (iii) The  definition of  ’dealer’ in  section 2(c)  is wide enough  to  include  selling  or  purchasing  agent  of whatever name  or description.  The term  ’arhatiya’ is wide enough to include kutcha arhatiya. [554 E]      (iv) The basic distinction between a kutcha and a pucca arhatiya is  that a  kutcha arhatiya  acts as  an  agent  on behalf of  his constituent  and never acts as a principal to him. A  pucca arhatiya  acts as  a principal  as regards his constituent and  not as  disinterested middleman  who brings principals together,  there being  no  privity  of  contract between the  constituent and  the third  party. On the other hand a  kutcha arhatiya  usually denotes a person who merely ’brings  together   the  buyer   and  seller’  charging  his commission, who  has no  dominion or  control over the goods unlike a pucca arhatiya who deals as a principal in relation to both  his constituent  and  to  the  third  party.  In  a commercial sense,  a kutcha  arhatiya acts  as an  agent  on behalf of his constituent. [552 G-553 B, F]      Bhagwandas Parasram  v. Burjorji  Ruttonji Bomanji,  LR (1917-18) 45  IA 29,  Shivnarayan Kabra  v. State of Madras. [1967] 1  SCR 138,  Sobhagmal Gianmal  v. Mukundchand Balia,

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L.R. (1926)  53 I.A.  241, Chowringhee Sales Bureau (P) Ltd. v. C.I.T. West Bengal, [1973] 2 SCR 618, referred to.      2(i) The High Court should have declined to go into the question of  the applicability of s. 7(3) of the Act. When a question of  law was  neither raised  before the Addl. Judge (Revisions) nor  considered by  him  nor  did  it  arise  on findings given by him, it will not be a question arising out of his order. [556 F]      (ii) The  question as  to whether the Sales Tax Officer was justified  in making  a best  judgment assessment  under section 7(3)  of the Act was not referred to the High Court. It was, therefore, not open to the High Court to go into the question. It  could not allow the new point to be raised for the first time in reference. [556 G] 550      (iii) The  High  Court  was  also  not  entitled  on  a reference under  section 11(4)  of the  Act to set aside the findings of  the Addl. Judge (Revisions) merely because on a reappraisal of the evidence it would have come to a contrary conclusion. It  was also not entitled to examine whether the explanation of  the assessee  in regard  to the deficiencies found in the account books should or should not be accepted. [556 H]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 717 of 1973.      Appeal by  Special Leave  from the  Judgement and Order dated 27-10-1972  of the  Allahabad High  Court in Sales Tax Ref. No. 857/71. S. Markandeya, for the Appellants. O. P. Verma, for the Respondent.      The Judgment of the Court was delivered by      SEN J.-This  is  an  appeal  from  a  judgment  of  the Allahabad High  Court dated October 27, 1972 which was given upon a  reference of  certain questions  of law  made to the High Court  by the  Additional Judge (Revisions), Sales Tax, Meerut in compliance with its directions under sub-s. (4) of s. 11  of the  U.P.  Sales  Tax  Act,  1948  calling  for  a statement of  the case.  The two  questions referred were as follows:      1.    Whether  there is  no material in support of best           judgment assessment ?      2.    Whether  on the facts and in the circumstances of           this case  the assessee  acted in  respect of  the           estimated purchase  turnover of  Rs. 3,80,000 as a           dealer so as to be liable to purchase tax ?      The Commissioner  of Sales Tax submitted that the first question should  be answered  in the negative and the second in the  affirmative. The High Court decided in favour of the assessee and  against the  Commissioner,  holding  that  the submission of  the assessee  was right and answered both the questions to the contrary. From this decision the appellant, the Commissioner of Sales Tax, has appealed.      The  reference   arose  out   of  assessment   for  the assessment year  1967-68 of Messrs Bishamber Singh Layaq Ram which carries on business in jaggery, amchur, khandsari etc. on its  own account  and  as  kuccha  arhatiya  in  jaggery, foodgrains etc. at Shahpur in the district of Muzaffarnagar, and is  registered as  a dealer  under s.  8-A  of  the  Act (hereinafter referred to as ’the assessee’).      The material facts may be stated as follows: During the assessment  year   in  question,   the  Sales  Tax  Officer, Muzaffarnagar by  his order dated December 27, 1968 rejected

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the account books of the 551 assessee on the basis of some discrepancies found during the four surveys  carried out  at  his  shop  and  made  a  best judgment assessment  under sub-s.  (3) of  s. 7  of the Act, determining the taxable turnover of purchases effected by it as a  kutcha arhatiya  at Rs.  5,30,000 and  the tax payable thereon at  Rs. 25,450. On appeal the Assistant Commissioner (Judicial), Sales  Tax, Muzaffarnagar  by  his  order  dated August 11, 1969 reduced the taxable turnover of purchases by Rs. 1,50,000 and the tax by Rs. 7,500.      There were  two cross-revisions  by the Commissioner of Sales Tax and by the assessee, both of which were allowed by the Additional  Judge (Revisions),  Sales Tax, Meerut who by his order  dated February 10, 1970 while negativing the plea of the assessee that he was not a dealer, however, felt that on the  material on  record, the  taxable  turnover  of  the assessee could not reasonably be determined at Rs. 3,80,000. He  accordingly  set  aside  the  orders  of  the  Assistant Commissioner (Judicial)  and of  the Sales  Tax Officer  and directed  that   there  should  be  a  fresh  best  judgment assessment.      Upon reference, the High Court on question No. 2, as to the  liability  of  the  assessee  to  tax  on  transactions effected by it as kutcha arhatiya held that the assessee was not a dealer, observing:           "If the  assessee is  a Kutcha Arhatiya then he is      not liable  to sales  tax. The change in the definition      of the  word ’dealer’  in 1961  upon  which  the  Judge      (Revisions) has relied does not change the situation. A      person can be liable to tax as a dealer only if he acts      as an  agent having  the authority to pass title in the      goods sold.  A kutcha  arhatiya merely  brings together      the seller  and the purchaser and helps in settling the      price and  weighing the  goods etc.  The fact  that  he      sometimes advances money to cultivators who bring their      produce for  sale or  sometimes pays  the  entire  sale      price to  the cultivator  from his  own pocket  is  not      inconsistent with his being a kutcha arhatiya."      It was  rightly contended on behalf of the Commissioner that the  High Court  was wrong in holding that the assessee was not  a dealer  within s.  2(c) of  the Act  and that the Sales Tax  Officer was not justified in making an assessment to the best of his judgment under s. 7(3). It is pointed out that the High Court has completely overlooked Explanation to s. 2(c)  of the Act which was inserted by the U.P. Sales Tax (Amendment) Act,  1959, particularly the words ’through whom the goods  are sold  or purchased’  appearing therein.  with regard to the applicability of s. 7(3), it is urged that the question was not referred. 552      The finding  arrived at  by the  High  Court  that  the assessee as  a kutcha  arhatiya merely  brought together the seller and  the buyer  charging an  additional sum by way of commission and,  therefore,  could  not  be  regarded  as  a dealer, i.e., a person engaged in the business of buying and selling goods,  is contrary  to the  admitted facts  of  the case. The  facts stated  in the agreed statement of the case clearly show  that the assessee is not a kutcha arhatiya, in the usual  sense of  the term,  but his business brings into existence the  relation of  vendor and purchaser. The nature of the  business carried  on by  the assessee  is  described thus:           "Cultivators bring  their produce  to the assessee      for sale.  The goods  are weighed  at his shop and then

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    supplied to  the pucca  arhatiyas or to other  persons.      Price of  the commodity  in full or part is paid by the      assessee to  the cultivators  directly. The  price from      the purchasers is readied afterwards. In any case it is      not the  responsibility of  the cultivators  to realise      the price  from the  purchasers. On the contrary, it is      the assessee  who is responsible for the payment of the      price to  the cultivators.  Some times  the cultivators      are also  paid advances and these are adjusted when the      price of the produce is paid to the cultivators."                                          (Emphasis supplied)      The decision  on the question whether the assessee is a dealer must  turn on  the construction  of  s.  2(c),  which insofar as material, reads:           "2(c) "dealer"  means any person or association of      persons carrying  on the  business of buying or selling      goods  in   Uttar  Pradesh,   whether  for  commission,      remuneration or otherwise,           Explanation: A  factor,  a  broker,  a  commission      agent or arhati, a del credere agent, an auctioneer, or      any other mercantile agent by whatever name called, and      whether  of   the  same   description  as  hereinbefore      mentioned or not, who carries on the business of buying      or selling  goods  on  behalf  of  his  principals,  or      through whom  the goods  are sold or purchased shall be      deemed to be a dealer for the purposes of this Act."      There can  be no  doubt that  a  pucca  arhatiya  comes within the  substantive part  of the  definition of ’dealer’ contained in  s. 2(c)  of the  Act, but  the question  still remains  whether   a  kutcha  arhatiya  is  covered  by  the definition, by reason of the Explanation thereto.      The basic  distinction between  a kutcha  and  a  pucca arhatiya is  that a  kutcha arhatiya  acts as  an  agent  on behalf of  his constituent  and never acts as a principal to him. The  person with  whom he  enters into a transaction on behalf of  his constituent  is either  brought into  contact with the constituent or at least the constituent is informed of 553 the fact  that the  transaction has been entered into on his behalf with  a particular person. But in the case of a pucca arhatiya, the  agent makes  himself liable upon the contract not only  to third  parties but  also to his constituent. He does not  inform his  constituent as to the third party with whom he has entered into a contract on his behalf.      Thus, a  pucca arhatiya  acts as a principal as regards his constituent  and not  as a  disinterested middleman  who brings about two principals together, there being no privity of contract between the constituent and the third party, and may substitute  his own  goods towards the contract made for the principal  and buy  the principals goods on his personal account. On the other hand a kutcha arhatiya usually denotes a person  who merely  ’brings together  the  buyer  and  the seller’ charging  his commission,  who has  no  dominion  or control over the goods, unlike a pucca arhatiya who deals as a principal  in relation  to both his constituent and to the third party.      The crucial  test is whether the agent has any personal interest of  his own  when he enters into the transaction or whether that  interest is  limited to  his commission agency charges and certain out of pocket expenses, and in the event of any  loss his  right to  be indemnified by the principal. This principle was applied in the case of pakki arhat by Sir Lawrence Jenkins C.J. in Bhagwandas Narotmdas v. Kanji Deoji and approved  of by  the Judicial  Committee  in  Bhagwandas

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Parasram v.  Burjorji Ruttonji  Bomanji and by this Court in Shivnarayan Kabra v. State of Madras. As to the incidents of pakkiarhat, Sir  Lawrence Jenkins in Bhagwandas Narotamdas’s case succinctly  states the legal position, in his own terse language:           "A pakka adatia is not, in the proper sense of the      word, an  agent  or  even  a  del  credere  agent.  The      relation between  him and his up-country constituent is      substantially one of principal and principal."      In a  commercial sense,  a kutcha  arhatiya acts  as an agent on  behalf of his constituent. The main characteristic of a  kutcha arhatiya  has been  described by  the  Judicial Committee in  Sobhagmal Gianmal  v. Mukundchand  Balia(4) in these terms:           "When a  katcha adatia  enters  into  transactions      under instructions from and on behalf of his up-country      constituent with  a third  party in  Bombay,  he  makes      privity of  contract between  the third  party and  the      constituent, so that each becomes liable 554      to the  other, but  also he renders himself responsible      on the contract to the third party."      Vivian  Bose   J.  in   Kalyanji  Kuwarji  v.  Tirkaram Sheolal(1) puts the matter thus:           "The test  to my mind is this: does the commission      agent when  he sells  have authority to sell in his own      name? Has he authority in his own right to pass a valid      title? If  he has then he is acting as a principal vis-      a-vis the  purchasers and  not merely  as an  agent and      therefore from  that point  or he  is a  debtor of  his      erstwhile principal  and not  merely an  agent. Whether      this is  so or not must of course depend upon the facts      in each particular case."      It is  plain, on  an examination  of the language as it stood at  the material time, from the definition of ’dealer’ in s. 2(c) that even a selling or purchasing agent is within that definition.  A person  to  be  a  ’dealer’  under  that definition must  be engaged  in the  business of  buying and selling goods  in  Uttar  Pradesh  whether  for  commission, remuneration or  otherwise. Explanation  to s.  2(c) brought within the  definition of  ’dealer’ not  only  a  commission agent, a factor, a del credere agent or any other mercantile agent  by   whatever  name   called,  and  whether  of  such description or not, but also a broker, an auctioneer as well as an arhatiya. The use of the words "through whom the goods are sold  or purchased"  in the  Explanation is significant, and  they  must  be  given  their  due  meaning.  Thus,  the definition of  ’dealer’ in s. 2(c) is wide enough to include a  selling   or  purchasing   agent  of   whatever  name  or description. The term ’arhatiya’ is wide enough to include a kutcha arhatiya.      If the  Explanation to  s. 2(c)  of the  Act  were  not there, perhaps  it could  be said  that a kutcha arhatiya is merely an  agent  who  helps  cultivators  who  bring  their produce to  the market for sale, to find buyers, assist them in weighment  and secure  to them  payment of price, but the assessee here  certainly does  not answer  that description. That  apart,  the  Explanation  clearly  brings  within  the definition of  ’dealer’ in s. 2(c) a kutcha arhatiya. It was not suggested  at any  time that  the Explanation  was ultra vires the  State Legislature being beyond the ambit of Entry 54 of  List II  of the  Seventh Schedule. The constitutional validity of  a similar  Explanation to s. 2(c) of the Bengal Finance (Sales  Tax) Act,  1941 which  brought an auctioneer within the  purview of  the definition  of ’dealer’  in that

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section. was  upheld by  this  Court  in  Chowringhee  Sales Bureau (P)  Ltd. v. C.I.T., West Bengal.(2) The whole object is to tax a transaction of sale in the 555 hands of  a person  who carries  on the  business of selling goods and  who has  the legal or customary authority to sell goods belonging to the principal.      It is  evident from  the statement of the case that the business carried on by the assessee was more or less similar to that  of a pucca arhatiya and it is a misnomer to call it a kutcha  arhatiya. It actually purchased the goods from the sellers, i.e.,  the cultivators,  and then  sold them in the market to  the other  buyers,  as  if  they  were  its  own, obviously at  a profit. It paid to the cultivators the price of the  goods it  purchased and received from the buyers the price  at   which  is   sold.  Selling   of  goods  was  not simultaneous with receiving them. These facts can lead to no other conclusion  except that  it bought and then sold goods and not  merely brought buyers into contact with sellers and arranged transactions  between them. In these circumstances, the High  Court should have held the assessee to be a dealer under s. 2(c) of the Act, read with the Explanation thereto.      There remains  the question  whether the High Court was justified in  holding that  there was  no basis for making a best judgment  assessment. The  Addl. Judge  (Revisions) had remanded the  case for  a reassessment  on the basis of best judgment, on his finding that there was no material whatever on record  to enable  him to come to a conclusion one way or the other,  on the  disputed question of fact, i.e., whether the best  judgment assessment of the taxable turnover at Rs. 3,80,000 could be sustained.      Though the  question of the applicability of s. 7(3) of the Act  was not, in terms, referred to the High Court under s. 11(4),  the Addl.  Judge (Revisions)  in stating the case mentioned that  the assessee  had contended  before him that his account books had been wrongly rejected.      The statement  of the  case sets out the details of the various surveys  made and  the nature  of  the  deficiencies found. The High Court treating the question referred to be a composite one,  embarked upon  an enquiry  as to whether the Sales  Tax  Authorities  were  justified  in  rejecting  the account books  and in  making the  best judgment  assessment under s.  7(3). It  has referred to the four surveys carried out on  August 11,  1967, December 13, 1967, January 7, 1968 and March  8, 1968.  In the  first survey held on August 11, 1967 it  was found  that the Nagal Bahi had not been written for eleven  days. The  High Court  observes that ’no adverse inference  could  be  drawn  on  this  account  because  the assessee’s  explanation   was  that   there  were   no  cash transactions for this period, and, therefore, the Nagal Bahi had not  been written’.  With regard  to the  second  survey carried out  on December  13, 1967  it was  discovered  that there was 556 a loose  parcha  containing  several  entries.  One  of  the entries of  Rs. 371.17  in the name of Sakh Chand Udit Mohan alone was entered in the account books. That too on December 13, 1967  after inspection  while the  payment was  actually made on  December 11, 1967, i.e., it was not contemporaneous with the  transaction. The  High Court observes that ’it has not been  found that  any other entry contained in the loose parcha had  not been  entered in  the account  books’,  With regard to  the third  survey carried  out on January 7, 1968 when twelve  bags of  wheat were  found in  stock, the stock register was  not shown  to the  surveying officer. The High

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Court has  again accepted  the explanation  of the  assessee saying that  ’there was  no duty  cast on  the  assessee  to produce the  stock register and it was not shown since there was no demand for it’. It observes that ’there is nothing in s. 13  or in  any other  provisions of  the Act or the rules framed thereunder  which requires  a dealer  to produce  his books of  accounts and other documents, before the surveying officer’. As  regards the  last survey held on March 8, 1968 the Mondhi  Bahi was  found to  be posted  upto February 29, 1968. Thus  there  were  no  entries  for  eight  days.  The explanation of the assessee was that it had not entered into any contract  during the  eight days  in question.  The High Court observes  that ’as  there was no material whatever for rejecting his  explanation, no  adverse inference  could  be drawn with  regard to  the veracity  of the  accounts, since Mondhi Bahi  is not  a necessary  account book’.  We are not inclined to  agree with  this line  of reasoning.  While  we refrain from  expressing any  opinion on the requirements of s. 13(2)  of the  Act, we  are satisfied that the finding of the High  Court that there was nothing wrong with the method of accounting adopted by the assessee cannot be upheld.      In our  opinion, the High Court should have declined to go into  the question of the applicability of s. 7(3) of the Act. When  a question  of law  was neither raised before the Addl. Judge  (Revisions) nor  considered by  him nor  did it arise on  the findings  given by  him,  it  will  not  be  a question arising out of his order.      The question  as to  whether the  Sales Tax officer was justified in making a best judgment assessment under s. 7(3) of the  Act was  not referred  to the  High Court.  It  was, therefore, not  open to  the  High  Court  to  go  into  the question. It  could not allow the new point to be raised for the first time in reference. Nor was the High Court entitled on a  reference under  s. 11(4)  of the Act to set aside the finding of  the Addl.  Judge (Revisions) merely because on a reappraisal of the evidence it would have come to a contrary conclusion. It  was also not entitled to examine whether the explanation of  the assessee  in regard  to the deficiencies found in the account books 557 should or  should not  be accepted. It may be that the Sales Tax Authorities  should have accepted the explanation of the assessee with  regard to  the aforesaid deficiencies, but it may as  well be  that there  are various  other deficiencies which the assessee will have still to explain.      For all  these reasons,  the judgment of the High Court is set  aside and that of the Addl. Judge (Revisions), Sales Tax  Meerut   remanding  the   case  for  a  fresh  judgment assessment under s. 7(3) of the Act is restored. There shall be no order as to costs. N.V.K.                                       Appeal allowed. 558