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PETITIONER: K. R. C. S. BALAKRISHNA CHETTY & SONS & CO.

       Vs.

RESPONDENT: THE STATE OF MADRAS

DATE OF JUDGMENT: 29/11/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR 1152            1961 SCR  (2) 736  CITATOR INFO :  RF         1988 SC   6  (17)

ACT: Sales-Tax--Claim  of exemption by  licensee--If  conditional upon  observance  of  conditions  and   restrictions--Madras General Sales Tax Act, 1939 (Mad.  IX of 1939), s. 5.

HEADNOTE: The appellants, who were dealers in Cotton yarn, obtained  a license under the Madras General Sales Tax Act, 1939 (IX  of 1939).  Section 5 of that Act exempted such dealers from pay- ment  of  sales tax under s. 3 of the Act  subject  to  such restrictions   and  conditions  as  might   be   prescribed, including  the conditions as to licenses and  license  fees. Section 13 required a licensee to keep and maintain true and correct accounts of the value of the goods sold and paid  by him.   Rule 5 of the General Sales Tax Rules  provided  that any  person  seeking exemption under S. 5 of  the  Act  must apply  for license in Form 1 which made the license  subject to the provisions of the Act and the rules made  thereunder. The appellants on surprise inspection were found to maintain two separate sets of accounts, on the basis of one of  which they submitted their returns and the other 737 showed   black-market   activities.    The   question    for determination  in the appeal was whether the appellants  who had  been refused exemption and were assessed to tax,  could claim exemption under the Act. Held, that the question must be answered in the negative. Section  5 of the Madras General Sales Tax Act,  1939,  pro- perly construed, leaves no manner of doubt that an exemption from  assessment thereunder is clearly conditional upon  the observance   by   the  assessee  of   the   conditions   and restrictions  imposed by the Act, either in the rules or  in the  license itself, and the words ’subject to’ used by  the section means "conditional upon". It  was  not correct to say that licensee  was  exempt  from assessment  so long as he held the  license  notwithstanding any  breach  of the provision of the law and that  the  only penalty he could be subjected to was the cancellation of his license or criminal prosecution.

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 490 and 491 of 1958. Appeals  from  the judgment and decree  dated  February  18, 1955,  of the Madras High Court in Second Appeals Nos.  2038 and 2039 of 1950. N.  R.  Raghavachariar,  M. R. Krishnaswami  and  T.  V.  R. Tatachari, for the appellant. R. Ganapathi Iyer and D. Gupta, for the respondent. 1960.  November 29.  The Judgment of the Court was delivered by KAPUR,  J.-Two  suits were brought by the appellants  for  a declaration  against the levy of sales tax by the  State  of Madras  and  an injunction was also prayed  for.   Both  the suits were decreed by the Subordinate Judge of Salem and the decrees  were confirmed on appeal by the District  Judge  of Salem.   Two  appeals were taken to the High  Court  by  the State  of  Madras against those decrees and  by  a  judgment dated  February  18, 1955, the decrees were set aside  by  a common judgment.  Against these decrees the appellants  have brought these appeals by a certificate of that Court. The  appellants are merchants dealing in cotton yarn.   They obtained  a license under s. 5 of the Madras  General  Sales Tax  Act  (Act IX of 1939), hereinafter referred to  as  the ’Act’.  This license exempted 738 them  from assessment to sales tax under s. 3 of the Act  on the  sale of cotton yarn and on handloom cloth  "subject  to such  restrictions  and  conditions  as  may  be  prescribed including  conditions as to license and license fees".   The license was issued on March 31,1941, and was renewed for the following years.  On September 20, 1944, the Commercial  Tax Authorities  made a surprise inspection of the  premises  of the appellants and discovered that they were maintaining two separate  sets of account on the basis of one of  which  the appellants  submitted  their  returns  to  the   Department. Because  the other set of account books showed  black-market activities of the firm Balakrishna Chetty was prosecuted and sentenced  to  six  months’  imprisonment  for  an   offence connected  with the breach of Cot. ton Yarn  Control  Order. During   the  pendency  of  those  proceedings  the   Deputy Commercial Tax Officer made assessments for the years. 1943- 44  and 1944-45, the tax for the former was Rs.  37,039  and for  the  latter Rs. 3,140.  The  appellants  unsuccessfully appealed against these assessments and their revisions  also failed.   On August 24, 1945, the appellants brought a  suit for  a  declaration and injunction in regard  to  the  first assessment alleging that the assessment was against the Act. On  September 2, 1946, a similar suit was brought in  regard to the second assessment.  It is out of these suits that the present appeal has arisen. The  controversy  between  the  parties  centres  round  the interpretation of the words "subject to" in s. 5 of the Act. The High Court has held that on a true interpretation of the provisions  of  the Act and the rules made  thereunder,  the observance  of conditions of the license was  necessary  for the  availability  of  exemption under s.  5;  that  as  the appellants had contravened those conditions they were liable to  pay tax for both the years notwithstanding  the  license which had been issued to them under s. 5 of the Act. it  will  be  convenient  at this  stage  to  refer  to  the provisions of the Act which are relevant for the purpose  of

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this appeal. S.  2(b)  "  dealer" means any person  who  carries  on  the business of buying or selling goods;" 739 S. 2(f) " "prescribed" means prescribed by rules made  under this Act;". S. 3(1) "Subject to the provisions of this Act, every dealer shall  pay in each year a tax in accordance with  the  scale specified below:- (a)................................. (b) if his turnover ex-                  One half of  I  per ceeds twenty                             cent of such turn- thousand rupees.                         over". S. 5 "Subject to such restrictions and conditions as may  be prescribed,  including  the conditions as  to  licenses  and license fees, the sale of bullion and specie, of cotton,  of cotton yarn and of any cloth woven on handlooms and sold  by persons  dealing exclusively in such cloth shall  be  exempt from taxation under Section 3". S. 13 "Every dealer and every person licensed under  section 8 shall keep and maintain a true and correct account showing the  value of the goods sold and paid by them; 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  following  rules are relevant for the purpose  of  this appeal and we quote the relevant portions: R. 5 "(1) Every person who- (a).......................... (b) deals with cotton and/or cotton yarn, (c)............................. (d)............................. (e)   shall if he desires to avail himself of the  exemption provided in sections 5 and 8 or of the concession of  single point taxation provided in section 6, submit an  application in Form-I for a licence and the relevant portion of Form III is as follows:                              "Form III                           Cotton Licence to a dealer in    Cotton yarn                           cloth woven on handlooms 740                      See rule 6(5).    Licence No.                dated  having paid a licence fee of Rs. (in words) hereby  licensed  as a dealer in Cotton/Cotton  yarn  Cotton woven  on  handlooms  for  the year  ending  at   (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:". R.  8  "Every licence granted or renewed under  these  rules shall be liable to cancellation by the Deputy Commercial Tax Officer 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." The  contention raised on behalf of the appellants was  that as  long as they held the licence it was immaterial if  they were guilty of any infraction of the law and that they  were not  liable  to  any  assessment  of  sales-tax  under   the provisions of the Act and the only penalty they incurred was to  have  their licence cancelled and/or be  liable  to  the penalty  which  under  the criminal  law  they  had  already suffered.  The contention comes to this that in spite of the breaches of the terms and conditions of the licence,  having

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a licence was sufficient for the purpose of exemption  under the  Act.   This  contention,  in  our  opinion,  is  wholly untenable.  Section 3 is the charging section and s. 5 gives exemption  from taxation but that section clearly makes  the holding of a licence subject to restrictions and  conditions prescribed  under  the provisions of the Act and  the  rules made  thereunder because the opening words of  that  section are  "subject to such restrictions and conditions as may  be prescribed." Under B. 13 an important condition imposed under the Act  is the keeping by the dealer and every person licensed of  true and correct accounts showing the value of the goods sold and paid  by him.  Next there is r. 5 of the General  Sales  Tax Rules which provided 741 that if any person desired to avail himself of the exemption provided in s. 5, he had to submit an application in Form  I for  a  licence and the Form of the licence shows  that  the licence  was  subject to the provisions of the Act  and  the rules made thereunder which required the licensee to  submit returns as required and also to keep true accounts under  s. 13.   This shows that the giving of the licence was  subject to certain conditions being observed by the licensee and the licence itself was issued subject to the Act and the  rules. But it was contended that the words "subject to" do not mean "conditional  upon"  but  "liable  to  the  rules  and   the provisions" of the Act.  So -construed s. 5 will become  not only   inelegant  but  wholly  meaningless.   On  a   proper interpretation  of  the  section  it  only  means  that  the exemption   under  the  licence  is  conditional  upon   the observance  of  the  conditions  prescribed  and  upon   the restrictions which are imposed by and under the Act  whether in the rules or in the licence itself ; that is, a  licensee is  exempt  from assessment as long as he  conforms  to  the conditions  of  the licence and not that he is  entitled  to exemption  whether the conditions upon which the licence  is given  are fulfilled or not.  The use of the words  "subject to"  has reference to effectuating the intention of the  law and  the  correct meaning, in our opinion,  is  "conditional upon". The  appellants  have  been found to  have  contravened  the provisions of the Act as well as the rules and therefore  it cannot  be said that they have observed the conditions  upon which the exemption under the licence is available.  In that view  of the matter, it was rightly held that they were  not exempt  from  assessment  under the Act.   The  appeals  are therefore dismissed with costs.                                   Appeals dismissed. 94 742