Dalmia Cement (Bharat) Limited vs Deputy Commercial Tax Officer, Lalgudi and Another

Swamikkannu, J.—These writ petitions have been filed to call for the records on the file of the first respondent, the Deputy Commercial Tax

Officer, Lalgudi, and for quashing the order in TNGST No. 115128/81-82 dated 12th May, 1983 and TNGST No. 115128/82-83 dated 14th

May, 1983 (April, May, June, July, August, September, October, November, December, 1982 and January and February, 1983).

It is, inter alia, stated in the affidavits accompanying these writ petitions, sworn to by the Chief Accountant of the petitioners-company Dalmia

Cement (Bharat) Limited thus :

The petitioners are manufacturers of cement which is taxable under serial No. 34 of the First Schedule to the Tamil Nadu General Sales Tax Act,

1959. The petitioners are the assessees on the file of the Deputy Commercial Tax Officer, Lalgudi, the first respondent herein, under the Tamil

Nadu General Sales Tax Act, 1959 and the Central Sales Tax Act, 1956. Cement manufactured and marketed by the petitioners is governed by

the provisions of the Cement Control Order, 1982. Prices are fixed under this order, which, inter alia, provides for a retention price admissible to

the producer on f.o.r. destination price applicable to the sale by the producer, and permits addition of elements, like packing charges, excise duty

as extra. The freight charges which form part of the f.o.r. destination price are not actually collected in respect of sales under the levy scheme, but

the buyers remit the freight element to the carriers whereupon freight is deducted from the f.o.r. destination price. The freight element is credited to

the Cement Regulation Account, if the receipt exceeds the retention price admissible to the producer. Shortfall is made good from the Cement

Regulation Account. The impact of the Cement Control Order, 1982 on the scheme of exclusion provided under rule 6(c) of the Tamil Nadu

General Sales Tax Rules, 1959 is a matter of continuous controversy. The respondents have been making assessments against the petitioners. The

petitioners marketed about 2,000 metric tonnes of cement, therefore the petitioners are unable to stake any risk by refraining from providing for

sales tax liability on freight and packing. Hence the petitioners duly informed the non-governmental buyers that they are compelled to provide for

sales tax on freight and packing charges and pending decision of the Supreme Court on Ramco Cement''s case [1982] 51 STC 171. Therefore the

petitioners have been with the consent of the parties, collecting sales tax deposit on packing charges/freight. In each of the invoice, the following

footnote is also added :

Security deposit towards possible levy of sales tax on packing charges and freight refundable in the event of the levy of sales tax on packing

charges and freight being ultimately held to be not justified.

The above passage has been extracted by the petitioners evidently following the ratio in [1960] 11 STC 734 (State of Mysore v. Mysore

Spinning and Manufacturing Co. Ltd.). The contingency deposit which is collected on refundable basis is also separately ledgerised in the parties''

accounts and these parties are treated as ""depositors"". Being a deposit, the sum is either refundable on the contingency occurring, or Ramco

Cement''s case [1982] 51 STC 171 being upheld by the Supreme Court. In the alternative, the deposit is being held to meet the sales tax

obligation. The deposit has not been expressly paid for being forthwith paid over to the first respondent. It will be a breach of the terms of the

collection of deposit, if the deposits were to be paid over to the first respondent especially when there is no subsisting liability on freight and

packing charges.

While so, by letter B1/246/82 dated 25th March, 1983, the petitioners were called upon to give particulars of the date of stoppage of collection

of sales tax on freight, the date of commencement of the collection of the security deposit on freight and packing charges with details of total

collection of security deposit. It was alleged that the Commissioner of Commercial Taxes had called for the particulars. These particulars were

furnished by the petitioners from time to time. In between, the first respondent in his B1/246/82 dated 31st March, 1983 even threatened the

petitioners with penalty proceedings for non-disclosure in the return. The first respondent issued quasi-judicial summons u/s 54 of the Act. The

displeasure of the first respondent was also expressed in his B1/246/82 dated 25th March, 1983. In his TNGST No. 115128/81-82 dated 22nd

April, 1983, the first respondent issued a show cause notice proposing to levy penalty u/s 22 of the Tamil Nadu General Sales Tax Act, 1959.

Simultaneously notices were issued proposing similar penalty in TNGST No. 115128/82-83 dated 26th April, 1983 for the months of April, 1982

to February, 1983. The petitioners filed detailed objections by DP : AC : ST : 4(2) dated 6th May, 1983. The petitioners challenged the

jurisdiction of the first respondent to invoke the penal provision. The petitioners pointed out that the said section was not attracted since the sum

collected as refundable deposit for a contingency cannot be styled as ""collection by way of sales tax"" for the purpose of section 22(1) of the Tamil

Nadu General Sales Tax Act, 1959. The petitioners further undertook to refund the deposit and even stop further collection if only the respondents

would give a letter or an assurance that the appeal before the Supreme Court against Ramco Cement''s case [1982] 51 STC 171 will be

withdrawn and that there will be no revision of assessments or reassessment subjecting the freight and packing charges to sales tax. The petitioners

also explained the total circumstances and requested the first respondent not cause prejudice by any arbitrary order and demand. The petitioners

also filed confirmatory letters from various parties explaining that the contingency deposit was willingly paid because of special circumstances.

However, by his impugned orders, the first respondent has raised demands u/s 22(2) of the Tamil Nadu General Sales Tax Act, 1959. The

petitioners have been served with notices each one of which is forming the subject-matter of the above writ petitions.

It is contended by Mr. K. Jayachandran, learned counsel for the petitioners, that the impugned orders of the first respondent are illegal, without

jurisdiction and violative of the provisions of the Constitution of India and are required to be quashed by the writ of certiorari. Learned counsel for

the petitioners submits that ""sales tax deposit on packing charges/freight"" realised by the petitioners on a clear understanding that the deposit is a

contingent one refundable to the depositors, will not constitute collection either by way of sales tax or purporting to be by way of tax, and that as

noticed by the first respondent each invoice contained a footnote as follows :

Security deposit towards possible levy of sales tax on packing charges and freight refundable in the event of the levy of sales tax on packing

charges and freight being ultimately held to be not justified.

According to the learned counsel for the petitioners, the petitioners have also issued circulars to the trade explaining the circumstances in which

they are forced to provide for the contingency of the Supreme Court taking an adverse view of the matter on the pending appeal in Ramco

Cement''s case [1982] 51 STC 171. It is submitted that this appeal is pending at the instance of the second respondent and the petitioners dealing

with thousands of parties over a period, cannot but protect themselves for the eventuality.

The amount is credited in a separate party account and held as deposits. The parties are treated as ""depositors"". It is also submitted that reliance

on section 22 of the Tamil Nadu General Sales Tax Act, 1959 by the first respondent, constitutes error on the face of the record. Sales tax deposit

on packing charges/freight cannot constitute sales tax collection. Being a deposit, it cannot constitute consideration for the sale of goods or

turnover under the Tamil Nadu General Sales Tax Act, 1959. Collection of deposit by the petitioners is to safeguard themselves for any eventual

liability, in view of the appeal preferred by the second respondent before the Supreme Court of India. Therefore the petitioners cannot be

penalised by the first respondent who is an agent or servant of the second respondent.

Learned counsel for the petitioners refers to the following passage in the State of Mysore v. Mysore Spinning and Manufacturing Co. Ltd. [1960]

11 STC 734 in support of his contention :

Where the assessee, a registered dealer, received certain amounts from its constituents merely by way of deposits on the express understanding or

undertaking that the moneys would be refunded to the constituents if the assessee was held not liable to include the relevant sales in its taxable

turnover, the assessee held the moneys as a mere custodian, and on the fulfilment of the condition became a trustee for the depositors. When once

the tax authorities determined that the proceeds of the sales were not within the taxable turnover of the assessee, the beneficial ownership became

vested in the depositors and the assessee ceased to have any right to continue to hold the moneys. The fact that the physical control of the moneys

passed from the ''depositors'' to the assessee did not render the receipt a ''collection'' by way of tax of any amount u/s 11(2) of the Mysore Sales

Tax Act, 1948.

The following observation in the same decision at pages 742 and 743 is also relied on by the learned counsel for the petitioners :

The construction on which the sales tax authorities proceeded was that the Act made no difference between one type of receipt and another, and

that any receipt of money by a dealer from the purchaser was a ''collection by way of tax'' within section 11(2) of the Act, provided it had some

relation to sales tax, and that it mattered not that the receipt was merely a deposit by the payer carried to suspense account, the amount being

received on the express undertaking and definite condition that the same would be refunded in the event of the dealer being held not liable to sales

tax on the transaction in regard to which the ''deposit'' was made. We are unable to agree in this construction of the expression ''collection''

occurring in section 11(2) of the Act. Where an amount is received merely by way of deposit, on the express understanding or undertaking as in

these cases, the company held the money as a mere custodian, and on the fulfilment of the condition became a trustee for the depositor. It is

sufficient to state that when once the tax authorities determined that the proceeds of the sales in question were not within the taxable turnover of the

company, the beneficial ownership became vested in the depositors and the company ceased to have any right to continue to hold the moneys. The

fact that the physical control of the moneys passed from the ''depositor'' to the ''dealer'' did not render the receipt a ''collection'' within section

11(2) of the Act.

We should not be understood as saying that collections by a dealer from a purchaser of amounts not lawfully demandable by him are not

''collections'' within section 11, merely because the purchaser could in law make a claim for refund and enforce that right in appropriate

proceedings. But such a case is far removed from the ones before us, where the payment by the purchaser was conditional and made on an

express contract that the sum would be refunded in the contingency of the dealer being held not to be assessable in respect of the relevant

turnover. On the facts of these appeals we are unable to hold that there has been any ''collection'' by way of tax of any amount u/s 11(2) of the

Mysore Sales Tax Act, 1948.

Learned counsel for the petitioners next argued that the amount received by the petitioners from the purchasers was only a deposit and not a

collection of any tax and in support of this argument, he relies on the decision reported in Ganguli & Sons (P.) Ltd. v. Secretary to Government

[1976] 37 STC 549. It is held in this decision that the amount received by the appellant from the purchaser was only a deposit and not a collection

of any tax and, therefore, the appellant was entitled to the exemption under the notification of the Pondicherry Government dated 21st November,

1967.

As against the case put forward by the petitioners, Mr. R. Lokapriya, learned Government Advocate for Taxes, submitted the following on

behalf of the respondents.

Cement manufactured and marketed by the petitioners is governed by the provisions of the Cement Control Order, 1982. The petitioners have

collected sales tax on ""freight charges"" as ""sales tax deposit on freight"" and ""packing charges"". No registered dealer shall make any collection by

way of tax or purporting to be by way of tax except in accordance with the provisions of the Tamil Nadu General Sales Tax Act, 1969 u/s 22(1)

of the Act. Therefore, the collection of tax on freight charges by the petitioners by way of ""sales tax deposit"" was a violation of section 22(1) of the

Act.

In the instant case before us, it is the definite case of the petitioners that they had duly informed the non-governmental buyers that they are

compelled to provide for sales tax on freight and packing charges pending decision of the Supreme Court on Ramco Cement''s case [1982] 51

STC 171 and that therefore they have been, with the consent of the parties, collecting ""sales tax deposit on packing charges/freight"". In case of the

invoice, the following footnote is also added :

Security deposit towards possible levy of sales tax on packing charges and freight refundable in the event of the levy of sales tax on packing

charges and freight being ultimately held to be not justified.

We find that the contingency deposit which is collected on refundable basis is separately ledgerised in the parties'' accounts and these parties

are treated as ""depositors"". Being a deposit, the sum is refundable in the event of Ramco Cement''s case [1982] 51 STC 171 is upheld by the

Supreme Court. In the alternative, the deposit is being held to meet the sales tax obligation. Thus we find that the sales tax deposit on packing

charges and freight was realised by the petitioners on the clear understanding that the deposit is a contingent one, refundable to the depositors. So

this collection of deposit cannot constitute a collection either by way of tax or purporting to be by way of tax since it is clearly stated in the footnote

of each and every invoice that these security deposits are towards possible levy of sales tax on packing charges and freight refundable in the event

of the levy of sales tax on packing charges and freight being ultimately held to be not justified. The petitioners have also issued circulars to the trade

explaining the circumstances in which they are forced to provide for the contingency of the Supreme Court taking an adverse view of the matter on

the pending appeal against the decision in Ramco Cement''s case [1982] 61 STC 171. The petitioners received the amounts only by way of

deposits on the express understanding or undertaking that the moneys would be refundable to the customers if the petitioners were held not liable

for the tax. The petitioners are holding the moneys as a mere custodian and on the fulfilment of the condition become a trustee for the depositors.

At this juncture, learned Government Advocate for Taxes, Mr. R. Lokapriya, invited the attention of this Court to the decision reported in

Abdul Quader and Co. v. Sales Tax Officer, Second Circle, Hyderabad [1964] 16 STC 403, which also lays down that any amount collected by

way of tax by any person otherwise than in accordance with the provisions of the Act, must be paid over to the Government and in default of such

payment, the said amount would be recovered from such person as if it were arrears of land revenue.

The said decision is also an authority for the proposition that 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 and that if the

money so collected is not due as a tax, then the State cannot by law make it recoverable simply because it has been wrongly collected by the

dealer.

As already stated, in the instant case before us, the money has been collected by way of deposit by the petitioners to meet the contingency if

the transactions between the petitioners and the customers are held to be liable for tax. In that event the petitioners are answerable for such

deposits that are made by the customers. Under these circumstances, the said collection of deposits by the petitioners cannot be held to be an

unauthorised one thereby attracting the liability provision u/s 22(1) of the Tamil Nadu General Sales Tax Act. Therefore penalty cannot be levied

on the collection of deposits by the petitioners under such circumstances. Therefore this Court holds that the collection of deposits by the

petitioners is legal and it does not contravene any of the provisions of the Tamil Nadu General Sales Tax Act, 1959, especially the provisions u/s

22(1) of the said Act. Therefore the proceedings of the first respondent taken u/s 22(1) of the Act are bad and, therefore, accordingly quashed.

In the result, these writ petitions are allowed. The impugned proceedings in each of the writ petitions are quashed. However, there is no order

as to costs.

Writ petitions allowed.