CHHITTER MAL NARAIN DAS versus COMMISSIONER OF SALES TAX

CHHITTER MAL NARAIN DAS

COMMISSIONER OF SALES TAX

July 21, 1970

(J.C. SHAH AND K. S. HEGDE, JJ.]

U.P. Sales-tax Act 1948 S. 2(/1)-Supply of whrnt tu Regional Food Controller uncler U.P. Wheat Procurenient (Levy) Order-If lt1.1:ablc.

The, asscssees who were dealers in food-grains supplied to the Regional Food Controller diverse quantities of wheat in compliance with the pro-visions of the U.P. Wheat Procurement (Levy) Order. 1959. The Sales-tax Otliccr levied tax under the U.P. Sales-tax Act on the aggregate ol the price of wheat supplied by the assessees, rejec.ting the assessccs' conten-tion that the wheat supplied was not sold to the Controller. In appeal, the Assistant Commissioner (Judicial) Saleo Tax held the supply was not taxable since there was no "sale" within the U.P. Sales-tax Act. This order was confirmed by the Additional Judge (Revision) Sales-Tax. On reference, the High Court answered the question against the asscssces. Allowing the assessees' appeal by special leave, this Court.

HELD : The supply, pursuant to cl. 3 of the U.P. Wheat Procurement (Levy) Order, 1959 and acceptance: thereof, does not result in contract of sale.

Clnusc 3 of the order sets up machinery lo compulsory acquisition by the Stutc Government of stocks of wheat belonging to the Jiccn.>cd dealer" The Order contains bald injunction to supply wheat of the specified quantity day after day, and enacts that in default of complincc thl! dealer is liable to be punished; it does not envisage any consensual ;.ir-rangcment. To ensure that the dealer carries out his obligation his pre-mises are liable to be searched and his property sequestered. The order docs not require the State Government to enter into even an informal contract. . Sale of goods predicates contract of sale bctwcon . persons competent to contract for price paid or promised : tr•nsaction in which un obligation to supply goods is imposed, and which does not involve an obligation to ente1r into ·a cor1tract. cannot be called 'snle', even if the person supplying goods is declared entitled to the value of MOOd,, which is determined or determinable in the manner prescribed. Assuming that between the licensed dealer and the1 Controller. there may be some ar-rangement about the place and manner of delivery of wh«•t. and the payment of "controlled price," the operation of cl. 3 does not on that account become contractual. [675 H-676 DJ

Con1111issfo11er of Sak~s Tax, U.P. Lucknow v. Rain Bi/a\· Rain Gop<il, [1969] All. L.J. 424; State of Madras v. Gannon Dunkerley and Co,, (Madras) Ltd; [195~] S.C.R. 379 M/.,.New India Su;iar Mi/fr Ltd. v. Commissioner of Sale.1· Tax, Bihar, [1963] Suppl. 2 S.C.R. 459; l11dia11 Steel & Wire Products Ltd., v. State of Madras, [1968] I S.C.R. 479; And/Ira Sugars Ltd. & Anr. v. State of Andh•ra Prade.1'1 & Ors. [19681 J S.C.R. 705; State of Raiasthan & nr. v. M Is. Karan Chand Thappar & Bros. Ltd., [1969] 1 S.C.R. 861. Kirkness (Inspector of Taxes) v. John flud.<on & Co. Ltd., [1955] A.C. 696 reiferred to.

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2483

and 2484 of 1969.

Appeals by special leave from the judgment and order dated April 11, 1969 of the Allahabad High Court in Sales Tax Refer-ences Nos. 580 and 581 of 1966.

J. P. Goyal and Sobhagmal Jain, for the appeUants (in both the appeals).

C. B. Agarwala and 0. P. Rana, .for the respondent (in both the appeals).

The Judgment of the Court was delivered by

Shah, .J.-The appellants who are dealers in food-grains sup-plied to the Regional Food Controller diverse quantities of wheat in compliance with the provisions of the U.P. Wheat Procurement (Levy) Order, 1959. The Sales Tax Officer levied tax under the U.P. Sales Tax Act on the aggregate of the price of wheat by the appellants, rejecting the contention raised by the appellants that the wheat supplied was not sold by them to the Controller. In appeal the Assistant Commissioner (Judicial) Sales Tax.held that the turnover resulting from supplies of wheat was not taxable since there was no "sale" within the meaning of the U.P. Sales Tax Act, 1948. The order was confirmed by the .Additional Judge (Revi-sions) Sales Tax.

The Additional Judge (Revisions) Sales Tax referred the following questions to the High Court of Allahabad for opinion :

(I) Whether the sales made to the Regional Food Controller under the U.P. Wheat Procurement (Levy) Order, 1959, are sales within the mean-ing of "sale" under' s. 2(h) of the U.P. Sales Tax Act?

(2J Whether in the circumstances of the case, the assessees are liable to pay sales tax on the sales made to the Regional Food Controller under the provisions of the U. P. Wheat Procurement (Levy) Order, 1959 ?"

The questions raised were defective in form. The word "sales" when it first occurs in Question No. (l) should be "supplies". The expression "sales made" in Question No. (2) should be "on the price for wheat supplied". We modify the questions accordingly.

The High Court of Allahabad, following their earlier judgment in Commi.~sioner of Sales Tax, U.P. Lucknow v. Ram Bi/as

Ram Gopal( [1]) answered the two questions bn the affirmative. The appellants have appealed to this Court with special leave.

The expression "sale" is defined in s. 2(h) of the U.P. Sales Tax Act, 1948 as meaning any transfer of property in goods for cash, deferred paym~nt or other valuable consideration, but not includ-ing mortgage, hypothecation, charge or pledg~. Power of the· Provincial Legislature by virtue 04' Entry 48 List II of the Government of India Act, 1935, was restricted. The Legislature was competent to legislate for levy ol tax only on transactions which were "sales" within the meaning of the Indian Sale of Goods Act, 1930: State of Madras v. Gannon Dunkerley and Cu. (Madras) Ltd.(') M/s. Ne1v India Sugar Mills Ltd. v. Commis-sioner of Sales Tax, Bihar("). It was observed in M/ s. New India Sugar Mills' case(") :"In popular parlance ·sale' means transfer of pro-perty from one person to another in consideration of price paid or promised or other valuable consideration. But that is not tho meaning of ·sale' in the Sale of Goods Act, 1930. Section 4 of the Sale of Gcods Act.provides by its first sub-section that contract of sale of goods is contract where the seller agrees to transfer the property in goods to the buyer for price. "Price" hy cl. (10) of s. 2 means the money consideration for sale of goods, and "where under contract of sale property in the goods is trnnsfcrred fro111 the seller to the buyer, the con-truct is called sale. but where the transfer of the pro-perty in the goods is to take place at future time or subject to some condition thereafter to be fulfilled, the con.tract is called an agreement to sell" [sub-section (3) s. 4 ]. It is manifest that under the Sule of Goods Act transaction is culled sale only where for money conside-ration property in goods is transferred under contract of sale. Section 4, of the Sale of Goods Act was bor-rowed almost verbatim from s. 1 of the English Sale of Goods Act 56 & 57 Viet. c. 71. As observed by Benjamin in the 8th Edn. of his work on 'Sale', "to con-stitute vulid sale there must be concurrence of the following elements viz. (I) parties competent to contract; (2) mutual assent; (3) thing, the absolute or general property in which is transferred from the seller to the buyer; and ( 4) price in money paid or promised''.

It was also observed that the expression "sale of goods" in the Constitution must be understood in the same sense in which it is (I) (1969) All L.J. 424. (2) [1959] S.C.R. 379. (3) [196}] Suppl. 2 S.C.R. 4\9.

l3Sup. T;'iO-i~

used in the Sale of Goods Act, J 930. The U.P. Legislature could therefore legislate for levy of sales-ta)( on transaction which amounted to sale within the meaning of the Sule of Goods Act, 1930, and not on any other transaction which was deei11ed by fic-tion to be sale.

It is necessary then to determine whether the stocks of wheat supplied by the appellants iri compliance with lhe provisions of the U.P. Wheat Procurement (Levy) Order, 1959 to the Regional Food Controller were sold to that Officer within the meaning of the definition of- the word 'sale' in s. 2(hJ of the U.P. Sales Tax Act, 1948. The relevant provisions of the U.P. Wheat Procure-ment (Levy) Order, J 959, may first be read. The preamble to the · Order states :

"Whereas the State Government is of the opinion that it is necessary aad expedient so to do for maintain-ing the supplies of wheat and for securing its equitable distribution and availability at fair prices :

Now, THEREFORE, in exercise of the powers con-ferred by clauses (e), <f), (h), (i) and (j) of sub-section (2) of section 3 of the Essential Commodities Act, 1955 (10 of 1955); . the Govennor of the State of Uttar Pradesh is pleased to make the following order . . . . " '

Clause 3 provides :

"(I) Every Licensed dealer shall sell to the State Government at the controlled prices :

(a) Fifty (50%) per cent of wheat he\\,! in stock by him at the commencement of this Order; and

(b) Fifty (50% ). per cent of wheat procured or pur-chased by him every day beginning with the date of commencement of this Order and until such time as the State Government otherwise directs.

(2) The wheat required to be sold to the State Government under sub-clause ( l) shall be delivered by the licensed dealer to the Controller or to such other person as may be authorised by the Controller to take delivery on his behalf."

Clause 4 confers po~ers of ~n!I)', search, seizure upon Enforce-ment Officers : insofar as it is material it provides :

"(l) Any Enforcement Officer may, with v}ew. to securing compliance with this Order or to sausfymg himself that this order has been complied with :

(i) enter with such assistance as may be necessary any premises where he has reason to believe that wheat is procured, purchased or stocked;

(ii) ask of any person all necessary questions;

(iii) examine any books or documents;

(iv) search any premises, vehicles, vessels and air-craft and seize wheat in respect of which he has reasons to believe that contravention of the order has· been, is being, or is about to be com-mitted and thereafter take or authorise the taking of all measures necessary for securing the pro-duction of stocks so seized in court and for their sale custody, pending such production.

By cl. 3 of the Order every licensed dealer is directed to "sell" to the State Government 50% of the wheat held in stock by him on the date of the commencement of the Order at the "controlled prices". Again out of the stock of wheat procured or purchased. by him every day beginning with the date of commencement of the Order he is directed to "sell" 50% of that stock. The Order en-joins the licensed dealer to deliver the quantities specified in sub-E cl. (1) of cl. 3 either to the Controller or to such other person a> may be authorised by the Controller to take delivery on his behalf. To ensure that the licensed dealer carries out his obligation the Enforcement Officers may enter any premises where they have reason to believe that wheat is procured, purchased or stocked, and may make necessary enquiries, examine any books or docu-ments and search any premises, vehicles, vessels and ait-craft and p seize wheat in respect of which they have reason to believe that contravention of the Order has been, is being, or is about to be, committed.

Obligation to deliver wheat of the quantity specified arises out of the statute. The Order takes no account of the volition of the licensed dealers and until the State Government directs otherwise, of the Controller or the authorised officer. The Order imposes 'an obligation upon the licensed dealer who is defined in cl. 2(d) as m~aning person holding valid licence under the U;P. Food· grains Dealers Licensing Order, 1959, to deliver the quantities of wheat specified in the Order. The State Government is directed by the Order to pay for the wheat supplied at the controlled rate. The source of the obligations to deliver the specified quantities of wheat and to pay for them is not in any contract, but in the statu-tory order. In our judgment cl. 3 sets up machinery for compul-

sory acquisition by the State Government of stocks of wheat be-longing to the licensed dealers. The Order, it is true, makes no provision in respect of the place and munncr of supply of wheat and payment of the controlled price. It contains bald injunction to supply wheat of the specified quantity day after day, and enacts that in de.fault of compliance the dealer is liable to be punished; it does not envisage any consensual arrangement. lt does not re-quire the State Government to enter into even an informal con-tract. sale predicates contract of sale of goods between per-sons competent to contract for price p~iid or promised: trans-action in which an obligation to supply goods is imposed, and which does 110t involve an obligation to enter into contract, can-11ot be called ·sale', even if the person supplying goods is declared ¢ntitled to the value of goods, which is determined or determinable 'in the manner prescribed. Assuming that between the licensed dealer and the Controller, there may be some arrangements about the place and manner of delivery of wheat, and the payment of "controlled price .. , the operation of cl. 3 does not on that account become contractual.. The High Court relied upon the following observations in Ram Bi/as Ram Gopal's case(') :

"Analysing clause 3 o( the Levy Order it is clear that licensed dealer is obliged to sell to the State Govern-ment fifty per cent of the wheat held in stock by him at the commencement of the Order, and thereafter fifty per cent of. the wheat daily procured or purdrnsed by him beginning with the dutc of com111enccment of the Order until such time as the Stute Government otherwise directs. The price at which the wheat is sold is the nmxi-mum price fixed in the Wheat (Uttar l'rndes.b) Price Control Order, l 959 us notified by the ·Government of India. · Delivery of the wheat has to be given by the dealer ·to the Regional Food Controller or person authorised by him in that behalf. The dealer has no option but to sell the specified percentage of wheat to the State Government. The State Government has also no option but to purchase fifty per cent of the wheat held in stock by the dealer at the commencement of the Levy Order. As regards the wheat procured or purchased daily by the dealer thereafter, it is open to the State Government to say that from any particular date it will not purchase any or all of the specified percentage of wheat. Therefore, as regards that wheat the Levy· Order leaves it open to one of the parties. namely the State Government to decide when it will stop purchasing wheat from the dealer. That in substance is clause 3 of

(1961) AIL L.J. 424

the Levy Order and it embodies the total sum of obliga-t10ns imposed on the dealer and the State Government. AH other details of_ the transaction are left open to nego-tiation. It leaves Jt open to the parties to negotiate in respect of the time and the mode of payment of the price, the time and mode of delivery of wheat, and other conditions of the contract.··

Clause 3 of the Order compels the licemed dealer to deliver to the Controller or his authorised agent every duy 50% of the wheat procured or purchased by him. There is no scope for negotiations there. Assuming that the Controiler may designate the place of delivery and the place of payment of price at the controlled rate, <1nd the licensed dealer acquiesces therein, or even when in respect ?f those two matters there is some comensual arrangement, in our judgment, supply of wheat oursuant to cl. 3 of the Order and ac-ceptance thereof do not result in contract of sale. The High Court observed that :

" whatever compulsive or coercive force is used to bring about transaction under clause 3 of the Levy Order, it must be traced to legislation. It cannot be attributed to the State Government as party to the transaction. This, then, is clear. There is nothing in the Levy Order which can be accused of vitiating the free consent of the parties as defined under Sec. 14 of the Indian Contract Act, when entering into the contract of. sale."

But these observations assume contract of sale which the Order does not contemplate. If there be contract, the restrictions im-posed by statute mqy not vitiate the consent. But the contract cannot be assumed.

We may refer to certain decisions of this Court on which reli-ance was placed at the Bar. In Mis. New India Sugar Mills' case(1) under the Sugar and Sugar Products Control Order. 1946. scheme was devised for equitable distribution of sugar. T~e consuming States intimated to the Sugar Controller of India their requirements of sugar and the factory owners sent statements of stocks of sugar held by them. The Controller made allot~ents. to various States and addressed orders to the factory owners dtrectmg them to supply sugar to the States in question in accordance with the despatch instructions from th_e State Go~ernments: U_nder the allotment orders. M/s. New India Sugar M1ils Ltd., m B1har ?es-patched stocks of sugar to the State of Madras. The State of Bihar treated the transaction as a. sale and levied tax thereon under the

(I) [t963] Supp. 2 S.C.R. 459.

Bihar. Sales Tax Act, 1947. The tax payer contended that the supplies of. sugar, pursuant to the directions of the Controller, did not result m sales, and that no tax • ' was exiaible on such transac-0 llons. majority of the Court observed that despatches of sugar pursuant to the directions of the Controller were not made in pur-suance of any contract of sale. There was no offer by the tax payer to the State of Madras, and no acceptance by the latter; the tax payer was under the Control Order compelled to carry out the directions of the Controller and it had no volition in the matter. Intimation by the State of its requirements of sugar to the Con-troller or communication of the allotment order to the assessee did not amount to an offer. ·Nor did the mere comoliance with des-patch instructions issued by the Controller, which- the assessee had not the option to refuse to comply with, amount to acceptance -0f an offer or to making of an offer. contract of sale of goods postulates voluntary arrangement regarding goods between the contracting parties. It was held that in the cas-e before the .Court there was no such voluntary ,arrangement.

In two later decisions of this Court the true character of trans-actions in which supplies of commodities were made pursuant to Control Orders was examined. In Indian Steel & Wire Products Ltd. v. State of Madras(') the tax-payer supplied certain steel pro-ducts to various persons in the State of Madras pursuant to the directions given by the Steel Controller exercising powers under the Iron and Steel (Control of Production and Distributi,m) Order, 1941. The authorities of the State of Madras assessed the turn-over of the tax-payer resulting from those transactions to sales tax under the Madras General Sales Tax Act. The tax-payer contend-ed that the transactions of supply did not result in sales and were · on that account not exposed to sales-tax, because steel products were supplied pursuant to the directions of the Iron and Steel Con-troller made under cl. 1 OB of the Order there being no mutual assent between the parties to the transaction. This Court held that the supplies were made pursual)t to the directions issued under cl. 5 .>f the Order and not pursuant to the directions issued under cl. l OB of the Order. It was observed that the Orders were in resoect of 11oods not yet manufactured, whereas under cl. 1 OB directions could be 11iven only in respect of goods already in stock, and since cl. 5 did not require the Controller to regulate or control every facet of transaction between producer and the person to whom the tax-payer supnlied iron and steel oroducts the transactions were consensual. Clause 5 of the Order read as follows :

"No producer or stock-holder shall ·dispose of or agree to dispose of or export or agree ·to export from · . British India any iron or steel. except in accordance with

(1) fl96R] l S.C.R. 419.

the conditions contained or incorporated in general or special written order of the Controller."

Clause 1 OB provided :

"The Controller may, by written order require any person holding stock of iron and steel, acquired by him otherwise than in accordance with the provisions of clause 4 to sell the whole or any part of the stock to such person or dass of persons and on such terms and condi-tions as may be specified in the Order."

Comparing the tenhs of cl. 5 with the terms of cl. 10, the Court observed that liberty of contract in large measure was reserved to the producer or stockholder and to the purchaser in the matter of disposal of iron & steel. The obligation imposed by cl. 5 was, it wa~ said, not to dispose of or agree to dispose of or export or agree to export any iron or steel except in accordance with the conditions contained or incorporated in the order of the Controller and that since there was liberty of contract between the parties but subject to restrictions, the transaction could be regarded as sale. It wa~ observed at p. 489 :"But under clause 5 he can authorise producer or stockholder to dispose of any iron or steel whether the. same is in stock or not in accordance with the conditions ·Contain,ed or incorporated in special or general written order issued by him. In the instant case. as can be gathered from the correspondence already referred to, the order issued by the Controller could be complied with only after manufacturing the required material. Hence, the order issued by the Controller could not have been issued under clause lOR."

The Court then observed :

". , .... the area within which the.re can be bargain-ing between prospecti've buyer and an intending seller of steel products, is greatly reduced. Both of them have to conform to the requirements of the order and to com-ply with the terms and conditions contained in the order of the Controller. Therefore they could negotiate only in respect of matters not controlled b'y the order or pres-cribed by the Controller."

The Court also observed :

"It would be incorrect to contend that, because law imposes some restrictions on freedom to contract, there is no contract at all. So long as mutual assem is not completely excluded in any dealing, in law it is con-trac1. On the facts of this case for the reasons already

mel'tioned, it is not possible to accept the contention of the learned counsel for the appellant that nothing was left to be decided by mutual assent."

The Court in that case distinguished the case in M /s. New India Sugar Mills' case(') and expressly reserved their opinion on the question whether supplies of goods pursuant to the directions issued under cl. I OB of the Order- may be regarded as sales. The decision in Indian Steel & Wire Products Ltd.'s case(') does not justify the view that even if the liberty of contract in relation to the fundamentals of the transaction is completely excluded transac-tion of supply of goods pursuant to directions issued under Con-trol Order may be regarded as sale.

ln Andhra Sugars Ltd. & Anr. v. Stare of ndhra Pradesh & Ors.(") again, in the view of the Court liberty of contract between parties to transactions relating to supply of sugarcane was not ruled out. Under the Andhra Pradesh Sugarcane (Regulation of Supply and .Purchase) Act, 1961; the occupier of sugar factory had to buy sugarcane from cane-growers in conformity. with the directions of the Cane Commissioner. Under s. 21 of the Act the State Government had power to tax purchases of sugarcane for use, consumption or sale in sugar factory. Certain owners of sugar factories contended that "s. 21 was invalid." They contend-ed that they were compelled by law to buy cane from the cane-growers, and since purchases made by them were not under a.~rce­ments, the price paid for sugarcane could not be taxed under statute enacted in exercise of the power in Entry 54 List II of the Seventh Schedule to the Constitution. This Court held that under 1 · Act 45 of 1961 and the rules framed thereunder, the cane-grower in the factory zone was free to make or not to make an offer of sale of cane to the. occupier of the factory: if the cane-grower made an offer, the occupier of the factory was bound to accept it. and the agreement resulting therefrom was recorded in writin!i and was signed by the parties. The consent of the occupier of the factory was f~ee as defined in s. 14 of the Indian Contract Act. The com-pulsion of Jaw is it was said not coercion as defined in s. 15 of the Act. The agreements were enforceable by law and were regarded as contracts ·of sale as defined in s. 4 of the Indian Sale of Goods Act.

In later decision of this Court, Stale of Ra;asthan & Anr. v. M/s. Karam Chand Thappar & Bros. Vd.,(') the assessee who had acquired monopoly rights to supply coal in Ra,iasthan and sold coal to the State of Rajasthan. The Sales Tax Officer sought to

(]) [1968] l S.C.R. 479.

(1) [196'] Snon. 2 S.C.R. 459.

(4) [1969] l S.C.R. 861,

(J) ' [1968) 1 S.C.R. 705.

tax the turnover from supplies of coal made to the State of Rajas-than. It was held by this Court that the colliery Control Order super-imposed upon the agreement between the parties the rate fixed by the Control Order and by reason of such super-imposition of the rate fixed by the Control Order the mutual assent of the parties and the voluntary character of the transactions were not affected. The decision of this Court in M Is. New India Sugar Mills' case(') was distinguished on the ground that there was in the case then in hand mutual assent between the parties. to the transaction of supply of coal.

The decision of the House of Lords in Kirkness (lmpector r;' Taxes) v. John Hudson & Co. Ud.!') ;, ir.<'ruc1ivc. In that case liability to pay incnrn•c-::1x on the diffcrcn~e between the compen-sation received for requisition of certain wagons by the Minister of Transport was in issue. majority of the House held that there was no sale of the wagons and no income-tax was payable. Viscount Simonds observed :

". . . the taxpayers' wagons were not sold. and it would be grave misuse of language to say that they were sold. To say of man who has had his pro-perty taken from him against his will and been awarded compensaton in the settlement of which he has had no voice, to say of such man that he has sold his property appears to me to be as far from the truth as to say of man who has been deprived of his property without compensation that he has given it awav. Alike in the ordinary use of language and in its legal concept, sale connotes the mutual assent of two parties. So far as the ordinary use of language is concerned, it is difficult to avoid being dogmatic but. for my part, I can only echo what 3ingleton. L.J .. said in his admirably clear judg-ment-11954) 1 All E. R. at page 32) :

"What would any one accustomed to the use of the words 'sale' or 'sold' answer ? It seems to me that every one must say 'the taxpayer did not sell'."" On the date of the commencement of the U.P. Wheat Procure-ment (Levy) Order. upon the licensed dealer was imposed liabi-lity to deliver half the quantity of wheat on hand, and he had also to supply to the State Government 50% of the quantity of wheat procured or purchased by him everv dav beginning with the date of commencement of the Order. If he failed to carrv out the obligation he was liahle to be penalized. To ~nsure ihat he car-ried out his obligation his premises were liable tn be searched and

(I) [1961] Supp. 2 S.C.R. 459 (2f il9~~] .-\.C. 696.

The order ignored the volition of the

his property sequestered. dealer.

We are unable to hold that there was any contract between the assessec and the State pursuant to which the goods were sold with-in the meaning of the U.P. Sales Tax Act.

The appeals are allowed. The order passe,d by the High C.:ourt is set aside. The answer to the two (!Uestions as reframed by us will be in the negative. The appellants will be entitled to their costs in this Court and in the High Court. One hearing fee.

Appeals ailowed.