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PETITIONER: R.   ABDUL QUADER AND CO.

       Vs.

RESPONDENT: SALES TAX OFFICER, HYDERABAD

DATE OF JUDGMENT: 21/02/1964

BENCH: WANCHOO, K.N. BENCH: WANCHOO, K.N. GAJENDRAGADKAR, P.B. GUPTA, K.C. DAS SHAH, J.C. AYYANGAR, N. RAJAGOPALA

CITATION:  1964 AIR  922            1964 SCR  (6) 867  CITATOR INFO :  R          1968 SC 445  (7)  R          1971 SC 946  (5,6,7,9)  F          1973 SC1333  (1,4)  RF         1975 SC 198  (10)  F          1975 SC1991  (9)  RF         1977 SC2279  (57)  D          1985 SC 218  (16,19)  RF         1986 SC 178  (2)  O          1987 SC  27  (3)

ACT: Sales  Tax-Tax Collected otherwise than In  accordance  with the  Act-Provision enabling the Government to  recover  such tax   collected-Not   within   the   competence   of   State Legislature--Constitution  of India, Schedule VII, Entry  26 and 54 of List II-Hyderabad General Sales Tax Act, 1950 (XIV of 1950), s. 11. 868

HEADNOTE: The  appellant  collected sales tax from the  purchasers  of betel  leaves in connection with the sales made by it.   But it did not pay the amount collected to the Government.   The Government directed the appellant   to pay the amount to the Government  and  it thereupon filed a writ petition  in  the High  Court  questioning  the validity of s.  11(2)  of  the Hyderabad General Sales Tax Act 1950. The  main contention of the appellant before the High  Court was that s. 11(2) of the Act which authorises the Government to recover a tax collected without the authority of law  was beyond the competence of the State Legislature because a tax collected  without the authority of law would not be  a  tax levied  under the law and it would therefore not be open  to the  State to collect under the authority of a  law  enacted under  the  Entry 54 of List II of the VII Schedule  to  the Constitution any such amount as it was not a tax on sale  or purchase  of goods.  The High Court held that a.  11(2)  was good-as an ancillary provision with regard to the collection of  sales  or purchase tax and therefore incidental  to  the

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power  under  Entry 54, List II.  The High Court  also  held that  even if s. 11(2) cannot be justified under that  entry it  could  be justified under Entry 26, List II and  in  the result the writ petition was dismissed.  The present  appeal is by way of special leave granted by this Court. Held:     (i)  It cannot be said that the State  Legislature was  directly  legislating for the imposition  of  sales  or purchase  tax  under  Entry 54, list II  when  it  made  the provisions of a. 11(2) for on the face of the provisions the amount,  though collected by way of tax was not exigible  as tax under the law. (ii) It is true that the heads of legislation in the various lists  in the Seventh Schedule should be interpreted  widely so  as  to  take in all matters which  are  of  a  character incidental to the topic mentioned therein.  Even so there is a limit to such incidental or ancillary powers These have to be exercised in aid of the than topic of legislation,  which in  the present case is a tax on sale or purchase of  goods. The  ambit of ancillary or incidental powers does not so  to the  extent  of permitting the legislature to  provide  that though  the amount collected, may be wrongly, by way of  tax is  not  exigible under the law as made under  the  relevant taxing  entry,  it shall still be paid over to  the  Govern- ment as if it were a tax.  Therefore the provision contained in  a.  11(2)  cannot be made under Entry 54,  List  II  and cannot  be justified as incidental or  ancillary  provisions permitted under that Entry. (iii) Section 11(2) cannot be justified as providing for a for the   breach    of any provision of the Act. (iv) Entry     26, List II deals with trade and commerce and has nothing    to do     with  taxing or  recovering  amount realised  wrongly as tax. There is no element of  regulation of  trade  and  commerce in a provision like  s.  11(2)  and therefore  that section cannot be justified under Entry  26. List II.  869 (v)  The  provision  in s. 20(c) is also invalid  as  it  is merely consequential to s. 11(2). The  Orient Papers Mills Ltd. v. State of Orissa,  [1962]  1 S.C.R. 549, distinguished. State of Bombay v. United Motors (India) Ltd., [1953] S.C.R. 1069, referred to. Indian  Aluminium Co. v. State of Madras, (1962) XIII  Sales Tax Cases 967. held to be wrongly decided.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 760 of 1962. Appeal  by special leave from the judgment and  order  dated July  16,  1959  of the Andhra Pradesh High  Court  in  Writ Petition No. 1123 of 1956. K.   R. Chaudhuri, for the appellant. A.   Ranganadham Chetty and B. R. G. K. Achar, for the respondent. February 21, 1964.  The Judgment of the Court was  delivered by WANCHOO  j.-This is an appeal by special leave  against  the order of the Andhra Pradesh High Court.  The appellant filed a  writ petition in the High Court questioning the  validity of s. 11 (2) of the Hyderabad General Sales Tax Act, No. XIV of 1950, (hereinafter referred to as the Act).  The material facts  on  which  the petition was based  were  these.   The appellant  acted as agent in the then State of Hyderabad  to both resident and non-resident principals in regard to  sale

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of betel leaves.  Under the Act betel leaves were taxable at the  purchase  point  from  May 1,  1953,  by  virtue  of  a notification in that behalf.  We are here concerned with the assessment  period  from  May 1, 1953  to  March  31,  1954, covered  by  the  assessment year  1953-54.   The  appellant collected  sales tax from the purchasers in connection  with the  sales made by it on the basis that the incident of  the tax lay on the sellers and assured the purchasers that after paying  the tax to the appellant, there would be no  further liability  on them.  After realising the tax,  however,  the appellant did not pay the amount realised to the  Government but  kept  it  in the suspense account  of  its  principals, namely, 870 the  purchasers.  When the accounts were scrutinized by  the Sales Tax Department, this was discovered and thereupon  the appellant was called upon to pay the amounts realised to the Government.   The appellant however objected to the  payment on  the  ground  that it was the  seller  and  the  relevant notification  for  the relevant period imposed  tax  at  the purchase  point, i.e. on the purchaser.  This objection  was over-ruled and the appellant was directed to pay the  amount to Government. The main contention raised on behalf of the appellant in the High  Court was that s. 11 (2) of the Act, which  authorised the Government to recover from any person, who had collected or  collects,  after May 1, 1950, any amount by way  of  tax otherwise  than  in accordance with *.he provisions  of  the Act, as arrears of land revenue, was beyond the  legislative competance of the State legislature.  The argument was  that the Act was passed under Entry 54 of List 11 of the  Seventh Schedule  to  the  Constitution,  which  enables  the  State legislature  to enact a law taxing transactions of  sale  or purchase  of goods.  The entry therefore vests power in  the State  legislature to make a law for taxing sales  and  pur- chases  of  goods and for making  all  necessary  incidental provisions  in  that behalf for the levy and  collection  of sales or purchase tax.  But it was urged that that entry did not empower the State legislature to enact a law by which  a dealer  who  may have collected a tax without  authority  is required  to  hand  over the amount to  Government,  as  any collection  without the authority of law would not be a  tax levied  under the law and it would therefore not be open  to the  State to collect under the authority of a  law  enacted under  Entry 54 of List II any such amount as it was  not  a tax on sale or purchase of goods.  The High Court held s. 11 (2)  good  as  an ancillary provision  with  regard  to  the collection of sales or purchase tax and therefore incidental to the taxing power under Entry 54 of List 11.  Further  the High Court took the view that assuming that Entry 54 of List II could not sustain s. 11 (2), it could be sustained  under Entry  26  of  List H. Consequently the  writ  petition  was dismissed.   The High Court having refused a certificate  to appeal  to this Court, the appellant obtained special  leave and that is how the matter has come up be-fore us.  871 It is necessary to read s. II of the Act in order to  appre- ciate  the point urged on behalf of the appellant.   Section 11 is in these terms:- 1  1 (1) No person who is not registered as a  dealer  &hall collect any amount by way of tax under this Act nor shall  a registered  dealer make any such collection before  the  1st day of May, 1950, except in accordance with such  conditions and restrictions, if any, as may be prescribed Provided that Government may exempt persons who are not registered dealers

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from the provisions of this sub-section until such date, not being  later than the 1st day of June, 1950,  as  Government may direct. (2)  Notwithstanding to the contrary contained in any order of an officer or tribunal or judgment, decree or order of a Court, every person who has collected or collects on or before  1st  May, 1950, any amount by way of  tax  otherwise than in accordance with the provisions of this Act shall pay over  to the Government within such time and in such  manner as may be prescribed the amount so collected by him. and  in default  of such payment the said amount shall be  recovered from him as if it were arrears of land revenue." It  will  be  seen that s. 11 (1)  forbids  an  unregistered dealer  from collecting any amount by way of tax  under  the Act.   That provision however does not apply in the  present case,  for the appellant is admittedly a registered  dealer. Further  s. II (1) lays down that a registered dealer  shall not  make any such collection before May 1, 1950, except  in accordance with such conditions and restrictions, if any, as may be prescribed.  This provision again does not apply, for we  are not concerned here with any collection made  by  the appellant before May 1, 1950.  The prohibition therefore  of s. 11 (1) did not apply to the appellant.  Then comes s.  11 (2).   It applies to collections made after May 1,  1950  by any person whether a registered dealer or otherwise and lays down that any amount collected by way of tax otherwise  than in  accordance with the provisions of the Act shall be  paid over to 872 the  Government  and in default of such  payment,  the  said amount  shall  be recovered from such person as if  it  were arrears of land revenue.  It is clear from the words "other- wise  than  in accordance with the provisions of  this  Act" that though the amount may have been collected by way of tax it  was not exigible as tax under the Act.  Section  11  (2) thus  provides that amounts collected by way of  tax  though not  exigible  as tax under the Act shall be  paid  over  to Government,  and  if not paid over they shall  be  recovered from  such person as if they were arrears of  land  revenue. Clearly  therefore  s,  11 (2) as  it  stands  provides  for recovery of an amount collected by way of tax as arrears  of land revenue though the amount was not due as tax under  the Act. The first question therefore that falls for consideration is whether  it  was  open to the State  legislature  under  its powers under Entry 54 of List II to make a provision to  the effect that money collected by way of tax, even though it is not  due  as  a tax under the Act, shall  be  made  over  to Government.   Now it is clear that the sums so collected  by way  of tax are not in fact tax exigible under the Act.   So it  cannot be said that the State legislature  was  directly legislating  for  the imposition of sales  or  purchase  tax under Entry 54 of List II when it made such a provision, for on  the face of the provision, the amount, though  collected by  way of tax. was not exigible as tax under the law.   The provision however is attempted to be justified on the ground that  though  it may not be open to a State  legislature  to make provision for the recovery of an amount which is not  a tax  under  Entry  54  of List 11 in a  law  made  for  that purpose,  it  would  still be open  to  the  legislature  to provide for paying over all the amounts collected by way  of tax by persons, even though they really are not exigible  as tax,  as part of the incidental and ancillary power to  make provision  for  the levy and collection of  such  tax.   Now there  is  no dispute that the heads of legislation  in  the

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various Lists in the Seventh Schedule should be  interpreted widely so as to take in all matters which are of a character incidental to the topics mentioned therein.  Even so,  there is  a  limit to such incidental or ancillary  power  flowing from  the  legislative entries in the various Lists  in  the Seventh  Schedule.   These incidental and  ancillary  powers have   to  be  exercised  in  aid  of  the  main  topic   of legislation,  873 which  in the present case, is a tax on sale or purchase  of goods.  All powers necessary for the levy and collection  of the tax concerned and for seeing that the tax is not  evaded are  comprised within the ambit of the legislative entry  as ancillary  or incidental.  But where the  legislation  under the  relevant  entry proceeds on the basis that  the  amount concerned  is  not a tax exigible under the law  made  under that  entry,  but even so lays down that though  it  is  not exigible under the law, it shall be paid over to Government, merely  because  some dealers by mistake or  otherwise  have collected  it  as  tax,  it is difficult  to  see  how  such provision  can be ancillary or incidental to the  collection of tax legitimately due under a law made under the  relevant taxing  entry.  We do not think that the ambit of  ancillary or  incidental  power goes to the extent of  permitting  the legislature  to provide that though the amount  collectedmay be  wrongly-by way of tax is not exigible under the  law  as made  under  the relevant taxing entry, it  shall  still  be -)aid over to Government, as if it were a tax.  The legisla- turd  cannot under Entry 54 of List II make a  provision  to the  effect that even though a certain amount  collected  is not  a tax on the sale or purchase of goods as laid down  by the law, it will still be collected as if it was such a tax. This  is  what  s. 11 (2) has provided.   Such  a  provision cannot in our opinion be treated as coming within incidental or ancillary powers which the legislature has got under  the relevant  taxing entry to ensure that the tax is levied  and collected  and that its evasion becomes impossible.  We  are therefore of opinion that the provision contained in s. 1  1 (2)  cannot be made under Entry 54 of List 11 and cannot  be justified  even  as  an incidental  or  ancillary  provision permitted under that entry. An  attempt was made to justify the provision  as  providing for  a  penalty.  But as we read s. 11 (2)  we  cannot  find anything in it to justify that it is a penalty for breach of any prohibition in the Act.  Penalties imposed under  taxing statutes  are generally with respect to attempts at  evasion of  taxes  or to default in the payment  of  taxes  properly levied  (see  ss. 28 and 46 of the Indian  Income  Tax  Act. 1922).  The Act also provides for penalties, for example  s. 19  and  s. 20.  The latter section makes  certain  acts  or omissions of an 874 assessee offences punishable by a magistrate subject to  com position  under  s. 21.  Section 11 (2) in our  opinion  has nothing  to do with penalties and cannot be justified  as  a penalty  on the dealer.  Actually s. 20 makes  provision  in cl. (b) for penalty in case of breach of s. II (1) and makes the person committing a breach of that provision liable,  on conviction  by a Magistrate of the first class, to  a  fine. We  are  therefore  of  opinion that s.  11  (2)  cannot  be justified  under Entry 54 of List II either as  a  provision for  levying  the  tax  or as  an  incidental  or  ancillary provision  relating  to  the collection  of  tax.   In  this connection we may refer to cl. (c) of s. 20, which  provides that  any person who fails "to pay the amounts specified  in

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sub-section  (2) of section 11 within the  prescribed  time" shall on a conviction by a Magistrate be liable to fine.  It is  remarkable that this provision makes the person  punish- able  for  his  failure  to pay  the  amount  which  is  not authorised as a tax at all under the law, to Government.  It does not provide for a penalty collecting the amount wrongly by way of tax from purchasers which may have been  justified as a penalty for the purpose of carrying out the objects  of the taxing legislation.  If a dealer has collected  anything from a purchaser which is not authorised by the taxing  law, that  is  a matter between him and the  purchaser,  and  the purchaser  may  be entitled to recover the amount  from  the dealer.  But unless the money so collected is due as a  tax, the  State cannot by law make it recoverable simply  because it has been wrongly collected by the dealer.  This cannot be done directly for it is not a tax at all within the  meaning of Entry 54 of ,List II, nor can the State legislature under the  guise  of incidental or ancillary power  do  indirectly what  it  cannot do directly.  We are therefore  of  opinion that  s.11  (2) is not within the competence  of  the  State legislature under Entry 54 of List II. The respondent in this connection relies on the decision  of this Court in The Orient Paper Mills Limited v. The State of Orissa(").   That case in our opinion has no application  to the facts of the present case.  In that case the dealer  had been assessed to tax and had paid the tax.  Later in view of the judgment of this Court in State of Bombay v. The  United Motors (India) Limited(2) the amounts paid in (1) [1962] 1 S. C. R. 549.    (2) [1953] S. C. R. 1069.  875 respect  of  goods despatched for  consumption  outside  the State were held -to be not taxable.  The dealer then applied for  refund of tax, which was held to be not exigible.   The refund was refused and and the dealer went to the High Court by  a writ petition claiming that it was entitled to  refund under  s. 14 of the Orissa Sales Tax Act (which was the  law under  consideration in that case).  The High Court  allowed the  petition in part and there were appeals to  this  Court both  by  the dealer and the State.  In  the  meantime,  the Orissa  legislature amended the law, by introducing s.  14A, in  the principal Act, which provided that refund  could  be claimed  only by a person from whom the dealer had  actually realised  the amount as tax.  That provision was  challenged in  this  Court but was upheld on the ground  that  it  came within the incidental power arising out of Entry 54 of  List 11.   That  matter dealt with a question of  refund  and  it cannot be doubted that refund of the tax collected is always a matter covered by incidental and ancillary powers relating to the levy and collection of tax.  We are not dealing  with a  case  of  refund in the present case.   What  s.  II  (2) provides  is that something collected by way of tax,  though it  is not really due as a tax under the law  enacted  under Entry  54 of List II must be paid to the  Government.   This situation  in  our opinion is entirely  different  from  the situation in the Orient Paper Mills Limited’s case("). The  respondent further relies on a decision of  the  Madras High  Court  in  Indian  Aluminium  Co.  v.  The  State   of Madras(2).  That decision was with respect to s. 8-B of  the Madras  General Sales Tax Act of 1939 as amended  by  Madras Act  1  of 1957.  Though the words in s. 8-B  (2)  were  not exactly  the same as the words in s. 11 (2), with  which  we are  concerned here, the provision in substance was  to  the same  effect  as s. 11 (2).  In view of what  we  have  said above, that decision must be held to be incorrect. Lastly, we come to the contention of the respondent that  s.

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11  (2)  is within the legislative competence of  the  State legislature  in  view of Entry 26 of List  11.   That  entry deals  with "trade and commerce within the State subject  to the provisions of entry 33 of List III".  It is well settled that (1) [1962] 1 S.C.R. 549. (2) [1962] XIII S.T.C. 967. 876 taxing  entries  in the legislative Lists I and  II  of  the Seventh  Schedule are entirely separate from other  entries. Entry  26 of List 11 deals with trade and commerce  and  has nothing  to  do with taxing or recovering  amounts  realised wrongly  as tax.  It is said that s. 11 (2) regulates  trade and  commerce  and  the  State  legislature  therefore   was competent  under Entry 26 of List II to enact it.   We  have not been able to understand what such a provision has to  do with  the regulation of trade and commerce; it can  only  be justified as a provision ancillary to a taxing statute.   If it  cannot be so justified-as we hold that it cannot-we  are unable  to uphold it as regulating trade and commerce  under Entry  26 of List II, There is in our opinion no element  of regulation  of trade and commerce in a provision like s,  11 (2). We  are therefore of opinion that the State legislature  was Incompetent  to  enact a provision like s. 11 (2).   We  may also  add  that the provision contained in s.  20(c),  being consequential  to  s. 11 (2) will fall along  with  it.   In consequence it was not open to the Sales Tax Officer to  ask the  appellant to make over what he had collected  from  the purchasers  ,wrongly as sales tax.  It is not  disputed,  as appears  from  the final assessment order of the  Sales  Tax Officer, that the appellant was not liable to pay the amount as  sales tax for the relevant period.  We  therefore  allow the  appeal and quash the assessment order  dated  September 27, 1956 insofar as it is based on s. II (2).  The appellant will  get  his costs in this Court as well as  in  the  High Court. Appeal allowed.