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CASE NO.: Appeal (civil)  9687 of 2003

PETITIONER: M/s Rapti Commission Agency

RESPONDENT: State of U.P. & Ors.

DATE OF JUDGMENT: 02/08/2006

BENCH: ARIJIT PASASYAT & S.H. KAPADIA

JUDGMENT: J U D G M E N T

ARIJIT PASAYAT, J.  

       Challenge in this Appeal is to the judgment rendered by a  Division Bench of the Allahabad High Court repelling the  challenge to constitutional validity of Section  8-E of the Uttar  Pradesh Trade Tax Act, 1948 (in short the ’Act’). By the  impugned judgment several writ petitions involving identical  challenge were disposed of. Aforesaid Section 8-E of the Act  was inserted by Section 7 of the U.P. Act No. 11 of 2001.   

A brief reference to the factual aspects would suffice.

       Appellant filed the writ petition, inter alia, with following  stands:-           Appellant is an agent of principals situated outside the  State of Uttar Pradesh, who for the sake of convenience are  described as ’Ex-U.P. Principals’. Appellant purchased Mentha  Oil for and on behalf of Ex-U.P. Principals and dispatched  them to the said principals on the basis of agreements entered  into.  One consignment of Mentha Oil was detained by the  Trade Tax officer, Mobile Squad, Jhansi and the driver was  informed by a notice that the detention was made because the  appellant had not deducted the tax from the  sellers/agriculturists and had not deposited the same in terms  of Section 8-E of the Act.  Appellant sent a reply on 11.7.2001  stating that the purchase of Mentha Oil was for and on behalf  of Ex-U.P. Principals from the agriculturists and all the  documents accompanying the consignment clearly established  this fact.  When the authority insisted on deposit of the tax in  terms of Section 8-E of the Act the Writ Petition was filed.  Because similar detentions were made in case of others, writ  petitions were filed challenging constitutional validity of  Section 8-E of the Act.  The primary challenge was that the  seller was not a "dealer" as defined in the Act i.e. Section 2(c).   Reference was made to proviso to the provision in this regard.  Further the transactions in question being inter-state in  character the State Government did not have legislative  competence to provide for deduction of tax in respect of such  transactions. The respondents-State and its functionaries who  were respondents in the writ petition supported the  constitutional validity of the impugned provision.   

The High Court basically came to the conclusion that the  language of a statutory provision can be narrowed down if that

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is necessary to sustain the constitutional validity. Accordingly  it was held that the language of Section 8-E of the Act shall be  narrowed down so as to make it applicable only the intra-State  sales/purchases and held the provision to be valid. It was  further held that even though the agriculturists/farmers who  sell their produces to the appellant cannot be treated as  "dealer" in view of proviso to Section 2(c), yet appellant had a  liability to pay purchase tax on the purchases made in view of  Section 3(1) of the Act.  Though the High Court held that the  trade tax authority concerned may decide in respect of each  transaction on the facts of each case whether it is an intra- State sale or purchase or not, that according to the High Court  did not affect validity of Section 8-E.  

       Questioning correctness of the judgment of the High  Court learned counsel for the appellant submitted the High  Court clearly missed to notice the basic issues involved. The  transactions being undisputedly inter-State transactions, the  State legislature had no competence to provide for deduction  of tax at the time of making purchase. Strong reliance was  placed on the decisions of this Court in Steel Authority of  India Ltd.  v.  State of Orissa and others [2000 (3) SCC 200]  and Nathpa Jhakri Joint Venture v. State of H.P. and Others  [2000 (3) SCC 319] with reference to the decisions of this  Court in M/s Bhawani Cotton Mills Ltd. v. State of Punjab and  Anr. (AIR 1967 SC 1616).  It was submitted that when a  person has ultimately no liability to pay tax, he cannot be  compelled to go through the procedure provided under the  statute for the purpose of assessment and determination of tax  liability, if any.  It was pointed out that the notice issued itself  accepted the position that the transaction was an inter-State  one.                  In response, learned counsel for the respondent-State  submitted that the High Court has rightly upheld the  constitutional validity of Section 8-E of the Act.  According to  him, the High Court should have dismissed the writ petition  on the preliminary ground that alternative remedy was  available.            Coming to the plea of alternative remedy, we find that  such a plea does not appear to have been raised by the  respondent as there is no discussion in the High Court’s  judgment in this regard. Further, the constitutional validity of  Section 8-E issue could not have been decided by the  statutory authorities.  Be that as it may, we find that the High  Court has thoroughly confused the issues. The decisions of  this Court in Steel Authority of India’s case (supra) and M/s  Nathpa Jhakri’s case (supra) related to legislative competence  in the matter of deduction of tax under a state statute in  respect of an inter-state transaction. The High Court  commented upon the correctness of the judgments observing  that several larger Benches decisions were not considered. To  say the least the High Court’s approach is inappropriate. The  decisions in Steel Authority’s case (supra) and M/s Nathpa  Jhakri’s case (supra) related to issues on which there appears  to be no contrary view taken by any larger Bench. The High  Court could not have sat in judgment over the correctness of  the judgments of this Court.  The High Court appears to have  proceeded on the basis that this Court should have read down  the provisions under consideration to uphold them. What is  the basic fallacy in this approach is illuminatingly analysed in  Minerva Mills Ltd. and Ors. v. Union of India and Ors. (1980  (3) SCC 625).  In paragraphs 64 and 65, the concept of reading  down was succinctly stated as follows:

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"64.            xxx              xxx                    xxx              The principle of reading down the provisions of  a law for the purpose of saving it from a  constitutional challenge is well-known. But we  find it impossible to accept the contention of  the learned Counsel in this behalf because, to  do so will involve a gross distortion of the  principle of reading down, depriving that  doctrine of its only or true rationale when  words of width are used inadvertently. The  device of reading down is not to be resorted to  in order to save the susceptibilities of the law  makers, nor indeed to imagine a law of one’s  liking to have been passed. One must at least  take the Parliament at its word when,  especially, it undertakes a constitutional  amendment.

65.             xxx                     xxx                     xxx If the Parliament has manifested a clear  intention to exercise an unlimited power, it is  impermissible to read down the amplitude of  that power so as to make it limited. The  principle of reading clown cannot be invoked  or applied in opposition to the clear intention  of the legislature. We suppose that in the  history of the constitutional law, no  constitutional amendment has ever been read  down to mean the exact opposite of what it  says and intends. In fact, to accept the  argument that we should read down Article  31C, so as to make it conform to the ratio of  the majority decision in Kesavananda Bharati  is to destroy the avowed purpose of Article 31C  as indicated by the very heading "Saving of  certain laws" under which Articles 31A, 31B  and 31C are grouped. Since the amendment to’  Article 31C was unquestionably made with a  view to empowering the legislatures to pass  laws of a particular description even if those  laws violate the discipline of Articles 14 and  19, it seems to us Impossible to hold that we  should still save Article 31C from the challenge  of unconstitutionality by reading into that  Article words which destroy the rationale-of  that Article and an intendment which is  plainly contrary to its proclaimed purpose."

There is no, and can be none, quarrel to the proposition  that if on one construction a given statute will become ultra  vires the powers of the Legislature whereas on another  construction, which may be open, the statute remains effective  and operative, the Court will prefer the latter, on the ground  that the Legislature is presumed not to have intended an  excess of its jurisdiction. But as observed by Holmes J. in  Northern Securities Company v. United States 193 US 197,  the rule requires that "the statute must be construed in such  a way as not merely to save its constitutionality but so far as it  is consistent with fair interpretation, not to raise grave doubts  on that score".   

The rule does not apply when the offending words have  only one meaning e.g. when the restricted meaning makes  them useless or redundant (See  M.P. Cement Manufacturers’

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Association v. State of M.P. and Ors.  (2004 (2) SCC 249).

In other words, the rule applies only where two views are  possible as to the meaning of the statutory language. In  neither Steel Authority’s case (supra) nor M/s Nathpa Jhakri’s  case (supra) that was the position.  The basic issue related to  power to provide for any deduction of tax in respect of inter- state transactions.  There was no issue relating to intra-state  transactions.  Therefore, the question of any reading down was  of no relevance.        

In Steel Authority of India’s case (supra) it was inter alia  observed as follows:

8. By virtue of Entry 54 of List II of the  Seventh Schedule read with Article 246 of the  Constitution of India, the States are  empowered to levy taxes on the sale or  purchase of goods, other than newspapers.  The Forty-sixth Amendment to the  Constitution introduced, inter alia, Clause  (29A) (b) in Article 366 of the Constitution; as a  result, tax on the purchase or sale of goods  included a tax "on the transfer of property in  goods (whether as goods or in some other form)  involved in the execution of a works contract".  Article 286(1) of the Constitution states that no  law of a State shall impose, or authorise the  imposition of a tax on the sale or purchase of  goods where such sale or purchase takes place  outside the State or in the course of the import  of goods into, or export of goods out of the  territory of India. Article 286(2) authorises  Parliament by law to formulate principles for  determining when a sale or purchase of goods  takes place in any of the ways mentioned in  sub-Article (1). Acting upon this power,  Parliament has set out in Sections 3, 4 and 5  of the Central Sales Tax Act, 1956 principles  for determining when a sale or purchase of  goods can be said to take place in the course of  inter-State, trade or commerce, when a sale or  purchase of goods can be said to take place  outside the State and when a sale or purchase  of goods can be said to take place in the course  of import or export. In Gannon Dunkerley and  Co. and Ors. v. State of Rajasthan and Ors.,  1993 (1) SCC 364, this Court has held that it  is necessary to exclude from the value of a  works contract the value of goods which are  not taxable by a State in view of Sections 3, 4  and 5 of the Central Sales Tax Act, 1956. The  value of goods involved in the execution of a  works contract has to be determined after  making these exclusions from the value of the  works contract. 13.     There can be no doubt, upon a plain  interpretation of Section 13AA, that it is  enacted for the purposes of deduction at  source of the State sales tax that is payable by  a contractor on the value of a works contract.  For the purposes of the deduction neither the  owner nor the Commissioner who issues to the  contractor a certificate under Section 13AA(5)  is entitled to take into account the fact that the

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works contract involves transfer of property in  goods consequent upon of an inter-State sale,  an outside sale or a sale in the course of  import. The owner is required by Section  13AA(1) to deposit towards the contractor’s  liability to State sales tax four per cent of such  amount as he credits or pays to the contractor,  regardless of the fact that the value of the  works contract includes the value of inter- State sales, outside sales or sales in the course  of import. There is, in our view, therefore, no  doubt that the provisions of Section 13AA are  beyond the powers of the State legislature for  the State legislature may make no law levying  sales tax on inter-State sales, outside sales or  sales in the course of import."

In M/s Nathpa Jhakri’s case (supra) the view expressed  in Steel Authority of India’s case (supra) was reiterated.

The High Court also observed that it was reading down  and narrowing down the language of the provision to sustain  the constitutional validity of the same. It was observed that  the language of Section 8-E can be narrowed down so as to  make it applicable only to intra-state sales/purchases. The  appellant in fact raised the dispute on the factual aspects  contending that the transaction was one of inter-state  character.  Its emphasis was on the validity of the provision  vis-‘-vis inter-state transactions.  There was no necessity of  any reading down as there was no dispute in the case at hand  relating to intra-state sales.  The question of appellant having  liability to pay purchase tax was also not a relevant factor for  determination of the basic question regarding validity of  Section 8-E.  The nature of a transaction cannot be decided on  the basis of the provisions of a taxation statute. It has to be  factually examined.  The High Court instead of focussing on  the factual aspects dealt with issues not relevant, and that too  giving clearly indefensible interpretations. The factual aspects  should have been asked to be dealt with by the authorities.   By directing the authorities to do it after laying down the law,  which as noted down was not the correct position in law,  would really serve no purpose.  On the facts of the case, there  is no need to decide the question relating to validity of Section  8-E of the Act except stating that the provision is subject to  what has been stated in Steel Authority’s case (supra)  and  M/s Nathpa Jhakri’s case (supra), for which the factual  determination has to be done by the authorities. Therefore, we  allow the appeal subject to the following directions:

(1)     The reply filed by the appellant on 11.7.2001 shall be  dealt with by the respondent no. 3 in accordance with law.   The said authority shall decide as to the nature of the  transaction i.e. whether it is of intra- state or inter-state  character.  If it is of inter-State character, the decisions in  Steel Authority’s case (supra) and Nathpa Jhakri case (supra)  shall apply.  Section 8-E, therefore, cannot be held applicable  to inter-State transactions. (2)     The question whether the appellant has any liability to  pay purchase tax shall not be dealt with in the proceedings  relating to which the notice was issued on 8.7.2001 and the  reply was filed on 11.7.2001.   (3)     It will be for the appellant to establish that the  transaction in question was of inter-State character.   (4)     The appellants shall be given opportunity to file further  reply and place such materials as according to it are relevant

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before the concerned authority within four weeks from today. (5)     Considering the reply and further reply and materials to  be placed for consideration by the appellant, the concerned  trade tax authority shall decide the issue in accordance with  law.   

Before we part with the case, it would be appropriate to  remind the legislatures of what was stated in Bhawani Cotton  Mill’s case (supra) that if a person is not liable for payment of  tax at all, at any time, the collection of a tax from him, with a  possible contingency of refund at a later stage, will not make  the original levy valid, because if sales or purchases are  exempt from taxation altogether, they can never be taken into  account, at any stage, for the purpose of calculating or  arriving at the taxable turnover and for levying tax.  The view  was reiterated in Steel Authority’s case (supra) and Nathpa  Jhakri case (supra). In the latter case, it was noted, echoing  the view in Bhawani Cotton Mill’s case (supra) that it is no  solace to say that such a person can get refund after  completion of assessment.  If the principles indicated in these  cases are followed, large number of unnecessary litigations  can be avoided.                 The appeal is allowed to the aforesaid extent without any  order as to costs.