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PETITIONER: DEPUTY COMMERCIAL TAX OFFICER & ANR.

       Vs.

RESPONDENT: SHA SUKHRAJ PEERAJEE

DATE OF JUDGMENT: 17/04/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. SIKRI, S.M.

CITATION:  1968 AIR   67            1967 SCR  (3) 661

ACT: Madras  General Sales Tax Act IX of 1939-s.  19(1),  (2)(c)- Whether purchaser of business of ’dealer’ liable for arrears of  sales-tax  due from dealer prior to amending  Act  1  of 1959.

HEADNOTE: By  a  registered  instrument dated  October  5,  1956,  the respondent purchased the business carried on by a dealer  as defined in the Madras General Sales Tax Act IX of 1939.  The dealer  had  been assessed to sales tax in  respect  of  his turnover  for the years 1948-49 and 1949-50 and had  paid  a part  of the sales tax determined as due from him  with  the balance   amount  remaining  in  arrears.   The  sales   tax authorities  attempted  to  recover  the  arrears  from  the respondent as the purchaser of the business and although  he denied liability, his contention was overruled by the Deputy Commercial Tax Officer.  His appeal to the Board of  Revenue was  also dismissed and he thereafter filed a Writ  Petition under  Art. 226 of the Constitution, challenging the  orders of  the  C.T.O. and the Board.  A Single Bench of  the  High Court  dismissed the appeal but a Division Bench  allowed  a Letters  Patent Appeal holding that Rule 21-A of  the  Sales Tax  Rules  under  which  the  arrears  were  sought  to  be recovered  from the respondent, was illegal and ultra  vires the Act. In  the appeal to the Supreme Court it was contended,  Inter alia,  on  behalf of the department (i) that Rule  21-A  was valid having been made in exercise of the rule making  power granted  to the State Government under ss. 19(1)  and  19(2) (c)  of  the  Act  whereby  it  could  make  rules  for  the assessment  to  tax under the Act of businesses  which  were discontinued  or  the ownership of which had  changed;  (ii) that  further  more  under s. 10, the whole  of  the  amount outstanding  on the date of the default was charged  on  the property of the person liable to pay the tax; therefore,  in the present case, the business-which was transferred to  the respondent was charged with the payment of sales tax and  it was open to the sales tax authorities to proceed against the assets of the business for realising the amount of sales tax due;-and  (iii)  that  upon  a  true  construction  of   the

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registered instrument dated October 5, 1956, the  respondent undertook  to pay all liabilities like sales tax imposed  in regard to the business. HELD:     dismissing the appeal: (i)  Rule 21-A was beyond the rule making power of the State Government  either  under s. 19(1) or s.  19(2)(c)  and  was therefore ultra vires the Act. [666 E-F] Although by the amending Act 1 of 1959, an express provision was  inserted  by which the transferee of the  business  was made  liable  for  the arrears of sales  tax  due  from  the transferor,  there was no Such provision in the  Act  during the period covered by the present case. [664 D] it is manifest that the person who purchases a business as a ’dealer’ can be assessed to sales tax onlY in respect of his turnover  and under the scheme of the charging provision  of the Act, the purchaser of the busi- 662 ness has nothing to do with the sales effected by the seller of  the  business,  The turnover in respect  of  such  sales remains.  therefore, the turnover of the transferor and  not of the transferee. [664 C] Although  s.  19(2)(c) deals with the assessment to  tax  of businesses which are discontinued or the ownership of  which has changed, in the context and background of other sections of the Act, the word "assessment" used in para 19(2)(c) does not  include  the. power of recovering tax assessed  from  a person other than the assessee. [664 F-G; 665 B-C] Badridas  Daga v. C.I.T., [1949] I.T.R. 209, 211;  Chatturam v.   C.I.7.  Bihar.  [1947]  F.C.R.  116;  and  Whitney   v. Commissioners of Inland Revenue, [1926] A.C. 37, relied on. (ii) S.  10  of the Act as amended and sought to  be  relied upon  had not come into force until October 8, 1956; in  the present case the registered instrument by which the business was transferred to the respondent was dated October 5,  1956 and  the amended section therefore had no Application.  [666 F] (iii)     It was not open to the State Government to rely on the  instrument inter vivos between the transferor  and  the transferee  and  to contend that there was  any  contractual obligation  between the transferee and the State  Government who was not a party to the instrument. [667 BC]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 696 of 1966. Appeal  by special leave from the judgment and  order  dated September  13, 1963 of the Madras High Court in Writ  Appeal No. IO of 1962. P.   Ram Reddy and A. V. Rangam, for the appellant. R.   Ganapathy Iyer, for the respondent. The Judgment of the Court was delivered by Ramaswami, J. The question of law involved in this appeal is whether the purchaser of business carried on by a dealer  as defined  in the Madras General Sales Tax Act,  1939  (Madras Act  No. IX of 1939), hereinafter called the ’Act’,  can  be made liable for arrears of sales-tax due from the dealer  in respect of transactions of sale which took place before the, transfer of the business under Rule 21-A of the Rules framed in exercise of the powers conferred on the State  Government by s. 19 of the Act. The  respondent purchased, by a registered instrument  dated October 5, 1956, the business carried on by one  Purushottam Raju under the name-All India Trading Company.   Purushottam Raju  was the sole proprietor of the business and  had  been

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assessed  to  sales-tax in respect of his turnover  for  the years  1948-49 and 1949-50.  The assessee paid some  amounts towards  sales-tax thus determined, but there remained  some arrears of sales-tax i.e., Rs. 3836-4-0 for 1948-49 and  Rs. 1218-1-9  for 1949-50.  The Sales-tax authorities  attempted to  recover  the arrears of tax from the respondent  as  the purchaser of the business.  The respondent 6 63 denied  liability  to pay sales-tax but his  contention  was over-ruled  by  the  Deputy  Commercial  Tax  Officer.   The respondent appealed to the Commercial Tax Officer as well as to  the  Board of Revenue, but the appeals  were  dismissed. The respondent thereafter moved the Madras High Court  under Art. 226 of the Constitution for the issue of a writ in  the nature of certiorari to quash the orders of the   Commercial Tax Officer and the Board of Revenue.  Ganapatia Pillai,  J. who  heard the petition dismissed it.  The  respondent  took the matter in appeal under the Letters Patent.  The Division Bench   consisting   of  S.  Ramachandra  Iyer,   C.J.   and Ramakrishnan, J. reversed the judgment of the Single  Judge, holding  that Rule 21-A of the Sales-Tax Rules  was  illegal and ultra vires and the respondent was not liable to pay the sales-tax  due  from his predecessor  in-title,  Purushottam Raju. This appeal is brought, by special leave, from the  judgment of  the  Division  Bench  of the  Madras  High  Court  dated September 13, 1963 in Writ Appeal No. 10 of 1962. Rule 21-A was framed by the State Government under the rule- making  power  granted to it under s. 19(1) and (2)  of  the Act.  Rule 21 -A reads as follows :               "When  the  ownership  of the  business  of  a               dealer liable to pay the tax under the Act  is               entirely  transferred,  any  tax  payable   in               respect of such business and remaining  unpaid               at   the  time  of  the  transfer   shall   be               recoverable   from  the  transferor   or   the               transferee as if they were the dealers  liable               to  pay such tax, provided that  the  recovery               from  the transferee of the arrears  of  taxes               due prior to the date of the transfer shall be               only  to  the  extent  of  the  value  of  the               business he obtained by transfer.  The  trans-               feree  shall also be liable to pay  tax  under               the Act on the sales of goods effected by  him               with effect from the date of such transfer and               shall within thirty days of the transfer apply               for  registration or licence, as the case  may               be,  unless he already holds a certificate  of               registration or licence, as the case may be."               Section  19 ( 1 ) and 1 9 (2) (c) are  to  the               following effect               "19.  (1) The State Government may make  rules               to carry out the purposes of this Act.               (2)   In  particular and without prejudice  to               the  generality of the foregoing  power,  such               rules may provide for-               (c)   the assessment to tax under this Act  of               businesses  which  are  discontinued  or   the               ownership of which has changed;" 664 The  first  question  to be considered  in  this  appeal  is whether  Rule 21-A is intra vires of the power of the  State Government under ss. 19(1) and (2) of the Act.  Section 3(1) of the Act is the charging section.  It imposes a  liability to pay sales-tax on every dealer for each year, and the  tax

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is  to  be calculated on his total turnover for  that  year. Section 2(b) of the Act defines a "dealer" as "a person  who carries  on the business of buying, selling . . . .  goods". The word "turnover" is defined in s. 2(i) of the Act to mean "the  aggregate amount for which goods are either bought  or sold  by a dealer, whether for cash or for deferred  payment or other valuable consideration. . . .". It is manifest that a  person  who  purchases a business as a  ’dealer’  can  be assessed  to sales-tax only in respect of his  turnover  and under  the scheme of the charging provision of the  Act  the purchaser  of the business has nothing to do with the  sales effected  by  the seller of the business.  The  turnover  in respect of such sales remains therefore the turnover of  the transferor  and not of the transferee.  By the amending  Act of 1959 (Act 1 of 1959) an express provision was inserted by which the transferee of the business was made liable for the arrears of sales-tax due from the transferor.  But there  is no  such provision in the Act for the period with  which  we are concerned in the present case.  The question is  whether the  State  Government has authority under  its  rule-making power  under s. 19 of the Act to create a legal  fiction  by which  the transferee of the business is constituted as  the dealer  liable to pay the tax in respect of the turnover  of the  transferor.  On behalf of the appellants Mr. Ram  Reddy suggested that the State Government has power under s. 19(1) and 19(2) (c) of the Act to frame the impugned rule.  We are unable to accept this argument as correct.  Section 19(1) of the Act empowers the State Government to make rules to carry out  the  purposes  of the Act, but the  section  cannot  be utilised  to enlarge the scope of s. 10  regarding  recovery and  payment  of  tax from some other person  other  than  a "dealer"  under  the Act.  We also consider that  the  State Government has no authority under s. 19(2)(c) of the Act  to enact the rule.  Section 19(2)(c) deals with the  assessment to tax of businesses which are discontinued or the ownership of which has changed.  It is true that the word "assessment" in  the scheme of sales-tax and income-tax legislation is  a term of varying import.  The word is used sometimes to  mean the  computation of income, sometimes the  determination  of the amount of tax payable, and sometimes the whole procedure laid  down in the Income-tax Act for imposing  liability  on the tax-payer.  As the Judicial Committee, however, said  in Badridas   Daga  v.  C.I.T  (1),  the  words  ’assess’   and ’assessment’  refer  primarily  to the  computation  of  the amount.  of  income.  In Chatturam v. C.I.T.  Bihar(1),  the Federal Court pointed out, relying upon the decision of  the House of Lords in (1) [1949] I.T. R. 209, 21 1. (2) [1947] F.C.R. 116, 665 Whitney  v.  Commissioners of Inland  Revenue("),  that  the liability  to  tax  does not depend  upon  assessment.   The liability  is  definitely  created by ss. 3  and  4  of  the Income-tax  Act  which  are the charging  sections  and  the assessment  order under s. 23 only quantifies the  liability which has already been definitely and finally created by the charging sections and the provision in regard to  assessment relates only to the machinery of taxation.  In our  opinion, the   principle   of   these  decisions   applies   to   the interpretation of the Act in the present case.  We  consider that, in the context and background of other sections of the Act,  the  word ’assessment’ used in s.  19(2)(c)  does  not include  the power of recovering tax assessed from a  person other than the assessee.  It follows therefore that Rule 21- A  is beyond the rule-making power of the  State  Government

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either  under  s. 19(1) or s. 19(2)(c) of the Act.   It  was then  submitted  by  Mr. Ram Reddy that  Rule  21-A  may  be supported  by  the  language of s. 10(1) of  the  Act  which states               "10.  Payment and recovery of tax.-(1) The tax               assessed under this Act shall be paid in  such               manner  and in such instalments, if  any,  and               within  such time, as may be specified in  the               notice  of  assessment, not  being  less  than               fifteen  days from the date of service of  the               notice.    If  default  is  made   in   paying               according  to  the notice of  assessment,  the               whole of the amount outstanding on the date of               default shall become immediately due and shall               be a charge on the properties of the person or               persons liable to pay the tax under this Act." It  was contended that under this section the whole  of  the amount outstanding on the date of default is charged on  the property  of  the  person liable to pay  the  tax.   In  the present  case,  the business which was  transferred  to  the respondent  was hence charged with the payment of  sales-tax and it was open to sales-tax authorities to proceed  against the  assets  of  the business for realising  the  amount  of sales-tax  due.  In our opinion, there is  no  justification for this argument.  Section 10 of the Act as it stood before the Madras General Sales-tax (3rd amendment) Act, 1956  (Act No. XV of 1956) read as follows               "The tax assessed under this Act shall be paid               in  such  manner and in such  instalments,  if               any, and within such time, as may be specified               in  the notice of assessment, not  being  less               than fifteen days from the date of service  of               the  notice.  In default of such payment,  the               whole of the amount then remaining due may  be               recovered  as  if it were an  arrear  of  land               revenue." This  section  was  amended by s. 8 of  the  Madras  General Sales-tax (3rd amendment) Act, 1956 which reads as follows (1)  [1926] A.C. 37. 666               "Substitution of new section for section 10 in               Madras  Act IX of 1939.-For section 10 of  the               principal Act, the following section shall  be               substituted, namely               "10.  Payment and recovery of tax.-(1) The tax               assessed under this Act shall be paid in  such               manner  and in such instalments, if  any,  and               within  such time, as may be specified in  the               notice  of  assessment, not  being  less  than               fifteen  days from the date of service of  the               notice.    If  default  is  made   in   paying               according  to  the notice of  assessment,  the               whole of the amount outstanding on the date of               default shall become immediately due and shall               be a charge on the properties of the person or               persons  liable  to  pay the  tax  under  this               Act................ The  3rd  Amendment  Act, 1956 received the  assent  of  the President  on  October 1, 1956 but it was published  in  the Madras Gazette on October 8. 1956.  Section 5 of the  Madras General  Clauses Act (Madras Act No. 1 of 1891) provides  as follows               "5.  (1) Where any Act to which  this  Chapter               applies   is  not  expressed  to   come   into               operation, on a particular day, then, it shall

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             come  into operation on the day on  which               the assent thereto of the Governor, the Gover-               nor-General or the President, as the case  may               require,  is first published in  the  Official               Gazette." In  the present case, the Act is not expressed to come  into operation on any particular date, but as it was published in the  Madras  Gazette on October 8, 1956, the Act  came  into operation on that date and not before.  In the present case, the   registered  instrument  by  which  the  business   was transferred  to the respondent is dated October 5, 1956  and the   amending  Act  has  therefore  no   application.    We accordingly  reject the argument of the appellants  on  this aspect of the case and hold that Rule 21-A is ultra vires of the  rule-making  power of the State Government  under  the, Act. It  was next argued on behalf of the appellants that upon  a true construction of the registered instrument dated October 5,  1956  the respondent undertook to pay not only  Sch.   I liabilities  but  also  other  liabilities  like   sales-tax imposed  in  regard  to  the  business.   It  was,  however, disputed  by Mr. Ganapathy Iyer on behalf of the  respondent that there was any undertaking on the part of the respondent to discharge the liabilities in regard to arrears of  sales- tax.   But  even  on  the  assumption  that  the  respondent undertook  to  pay  the  arrears of  sales-tax  due  by  the transferor, it does not follow 66 7 that there is a liability created inter se between the State Government  on the one hand and the transferee on the  other hand.   To put it differently, it is not open to  the  State Government to rely on the instrument inter vivos between the transferor  and the transferee and to contend that there  is any  contractual obligation between the transferee  and  the State  Government who is not a party to the instrument.   We accordingly  reject the argument of the appellants  on  this aspect of the case also. For these reasons we hold that the judgment of the  Division Bench of the High Court dated September 13, 1963 is  correct and this appeal must be dismissed with costs. R.K.P.S. Appeal dismissed. 668