Sanjay Alloys Private Limited, Bangalore vs State of Karnataka

V. Gopala Gowda, J.-The correctness of the dated 11-5-2006 passed in S.T.A. No. 924 of 2004 on the file of the Karnataka Appellate Tribunal, Bangalore dismissing the appeal and upholding the appeal order bearing No. KST.AP.160/2003-04, dated 31-12-2003 passed by the Joint Commissioner of Commercial Taxes (Appeals), Bangalore City Division-IV, Bangalore, partly allowing the appeal and modifying the assessment order dated 30-3-2000 passed by the Additional Deputy Commissioner of Commercial Taxes (Assessments-43), Bangalore for the assessment year 1992-93 is questioned in this appeal urging various legal contentions and prayed to set aside the order impugned in this revision petition.

The petitioner is a registered dealer under the provisions of both Karnataka Sales Tax and Central Sales Tax engaged in manufacture and sale of MS Ingots and CTD Bars. The petitioner is having a manufacturing Unit at No. 2, Kadugondana Halli, Bangalore and other unit at Kuppam Road, Palamneer, Chittur District, Andhra Pradesh. During the year ending 31-3-1993 the appellant filed annual return by declaring total and taxable sales at Rs. 5,02,75,119.35 and Rs. 4,65,57,394.63 respectively. It is further stated that in response to the notice issued by the Assessing Officer, the petitioner submitted various books such as General Ledger, Cash Book, Purchase Register, Sales Register, Form ''F''. On perusal of the same, the Assessing Officer passed assessment order on 30-3-2000 raising a demand of Rs. 10,39,706/- plus Rs. 50,000/- and also initiated penalty proceedings against the petitioner. Aggrieved by the same, the petitioner filed an appeal before the Joint Commissioner of Commercial Taxes in KST.AP.No. 160/03-04 contending that the turnover in respect of M/s. Mysore Steels, Bangalore was not the turnover of the petitioner and inclusion of the same in the turnover of the petitioner was bad in law and also stated that the Assessing Officer erred in disallowing the deduction towards discount of Rs. 1,00,750/- and Rs. 4,030/-. The said appeal came to be partly allowed on 31-12-2003.

Aggrieved by the said order, the petitioner filed appeal before the Appellate Tribunal, which also came to be dismissed. Against the said order, the petitioner is before this Court by filing this petition contending that the said order of the Appellate Tribunal is clearly wrong and unsustainable in law for the reason that the Tribunal has erred in rejecting the claim of the petitioner and sustaining the addition of Rs. 1,41,84,678/- of the turnover of Mysore Steels, Bangalore. Further, it is stated by the petitioner-Tribunal has erred in not considering the submission of the petitioner that M/s. Mysore Steels, Bangalore, who has accounted the sales made to the Palamaneer Branch of the petitioner will be liable to pay the tax and it will not be the turnover of the appellant so as to tax in the hands of the petitioner. Further, it is stated by the petitioner that the Tribunal has not considered the submission made by the learned Counsel on behalf of the petitioner as per Section 11 of the Karnataka Sales Tax Act, 1957, that any failure to pay tax by the agent the responsibility to discharge that tax would not be on the principal. In the instant case, it was the liability of M/s. Mysore Steels to discharge the tax liability as they had issued Form ''F'' for having received such goods and also rendered accounts to the branch of the petitioner. The petitioner''s Counsel Mr. Chythanya submits that the provision of Section 11 of the Act have been wrongly applied to the case on hand to sustain the addition in the computation in respect of taxable turnover of M/s. Mysore Steels, Bangalore.

It is further contended by him that Section 11 was substituted by the Karnataka Sales Tax (Second Amendment) Act, 1983 (Act No. 23 of 1983), which provision has come into force on 18-11-1983, to which there was statement of objects and reasons behind the amendment which read as follows.-

"Under the existing provisions of the Bill, agent is taxed as qua agent and not as a dealer. The agent''s liability is, therefore, co-extensive with that of his principal and if the principal cannot be taxed in respect of a transaction his agent also cannot be taxed. It is proposed to modify the applicability of law of agency to the assessments under the Bill by providing that the turnover effected by the agents, who is also a dealer under the Bill, shall be deemed to be his own turnover for the purpose of levying tax".

Thus, Section 11 of the Karnataka Sales Tax Act, 1957 is an independent provision creating a charge in clear and unequivocal terms on the agent, irrespective of whether the principal is liable to tax or not. In this connection, the learned Counsel for the petitioner has relied upon the judgment of Supreme Court in the case of Union of India and Another v Azadi Bachao Andolan and Another, (2003)263 ITR 706 (SC), wherein the Apex Court has held that liability to taxation is not the same as payment of tax, while ''liability to tax'' is a legal situation; payment of tax is a physical fact. Placing reliance upon this judgment the learned Counsel for the petitioner submitted that the said proviso clearly provides a burden on the principal to prove that the agent is liable to tax. It is not necessary for the principal to prove that the agent has actually paid the tax. It may be noted that the words ''liable to tax'' don''t mean actual payment of tax.

Further, the learned Counsel for the petitioner has placed reliance upon another judgment of Supreme Court in the case of Associated Cement Companies Limited v State of Bihar and Others, 2005(58) Kar. L.J. 230 (SC), wherein the Supreme Court has held at para 20, which reads thus:

"The word ''liable'' in the concise Oxford Dictionary means "legally bound, subject to a tax or penalty, under an obligation". In Black''s Law Dictionary (Sixth Edition) the word "liable" means "bound or obliged in law or equity, reasonable, chargeable, answerable, compellable to make satisfaction, compensation or restitution.... Obligated, accountable for or chargeable with". The above position was noted in Zunjarrao Bhikaji Nagarkar v Union of India, (1999)7 SCC 409: 1999 SCC (L and S) 1299".

Strong reliance has been placed upon the said decision with reference to the change of word ''paid'' which was existing earlier under Section 11 as amended by Act No. 23 of 1983 which was existing prior to the amendment to the KST Act. Therefore, the intention of the Legislature in inserting the word in place of word ''paid'' substituting with ''liable to''. Therefore, the learned Counsel has submitted that the Assessing Authority and the Appellate Authorities have committed an error in law in following the decision of this Court in the Tata Oil Mills Company Limited v Assistant Commissioner of Commercial Taxes (Assessment I), Bangalore City Division, Bangalore and Another, (1986)62 STC 369 (Kar.), wherein this Court has held after Amendment to Act No. 23 of 1983 that Section 11 no doubt provides that if an agent has paid the tax, the principal shall not be taxed in respect of the same transaction. But, the burden of proving that the tax in respect of the transaction has been paid by the agent shall be on such principal, which is factually incorrect.

The learned Additional Government Advocate has sought to justify the impugned judgment placing strong reliance upon the decision in the Tata Oil Mills case contending that the Appellate Authority, after extracting the proviso to Section 11 by Act No. 23 of 1983 and also the statement of objects and reasons behind the amendment is extracted in the said case and considered the same and observed stating that, the liability is co-extensive with payment of tax upon the principal that to the principal though in favour of an agent goods are dispatched against Form ''F''. Therefore, the liability upon the agent for payment of (sic) sales tax upon the principal. Therefore, she has submitted that the assessment order passed by the Assessing Authority is legal and valid, which is rightly affirmed by the Appellate Authority. Therefore, the impugned judgment is not vitiated either on account of erroneous reasoning or error in law.

After hearing the learned Counsel for the parties, we have very carefully examined the legal contentions urged on behalf of the parties with a view to find out whether the impugned judgment passed by the Appellate Authority warrants our interference in exercise of our revisional jurisdiction. Our answer to the said question is in favour of the revision petitioner for the following reasons.

It is necessary for us to extract the proviso to Section 11 which was prior to amendment by Act No. 23 of 1983, which reads thus:

"11. Agents liable to pay tax.-(1) Notwithstanding anything contained in any law for the time being in force including this Act, every person who for an agreed commission or brokerage buys or sells on behalf of any principal who is a resident of the State of Karnataka shall, subject to the provisions of sub-section (5) of Section 5 or Section 6-B be assessed to tax or taxes under this Act at the rate or rates leviable thereunder in respect of such purchase or sale notwithstanding that such principal is not a dealer or that the turnover of sale or purchase relating to such principal is less than the minimum specified in sub-section (5) of Section 5 or Section 6-B:

Provided that the principal, shall not be assessed to tax on his turnover in respect of which, the agent is liable to tax or taxes under sub-section (1) and the burden of proving that the turnover has been effected through an agent liable to tax under the said sub-section, shall be on such principal".

The deletion of the word ''paid'' and substitution of word ''liable'' by way of amendment to the above provisions is certainly with the avowed object of non-payment of tax by the principal, which was earlier cast on an agent. The reliance placed upon the Tata Oil Mills case by the Assessing Authority and Appellate Authorities is not correct for the reason that the learned Judge in the said case while considering the amended provision of Section 11 has extracted at para 9 and also extracted the statement of objects and reasons which read thus:

"Under the existing provisions of the Bill, agent is taxed as qua agent and not as a dealer. The agent''s liability is, therefore, co-extensive with that of his principal and if the principal cannot be taxed in respect of a transaction his agent also cannot be taxed. It is proposed to modify the applicability of law of agency to the assessments under the Bill by providing that the turnover effected by the agent, who is also a dealer under the Bill, shall be deemed to be his own turnover for the purpose of levying tax".

The objects and reasons for amendment to the Section 11 regarding deletion of the word "paid" in its place added "liable" deletion of the word was interpreted contrary to the intention and object of changing the word ''paid'' and substituted with the word ''liable'' and burden is on the principal to show that agent is liable to pay tax. Therefore, the learned Single Judge in his judgment in the said case (Tata Oil Mills case) has stated that there is no change in the proviso which was prior to amendment and later substituted which is not factually correct. Therefore, reliance placed upon the said judgment by the learned Additional Government Advocate in justification of the impugned judgment is misplaced. Further, the reliance placed by the learned Counsel Mr. Chaithanya upon the judgment in the case of K.P. Varghese v Income-tax Officer, Ernakulam and Another, (1981)131 ITR 597 (SC), regarding interpretation of statute the observation made therein is with all fours supports the contentions urged by the learned Counsel for the petitioner. The relevant portion from the above case is extracted hereunder:

"A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction".

Applying the said decision to the fact situation we have to hold that the decision in Tata Oil Mills case is not correct position of law as it has been erroneously held that there is no change in proviso by Act No. 23 of 1983, which is factually not correct. So placing reliance upon the statement of objects contained in the Bill which was passed by the State Legislature in holding that proviso is only clarificatory (amendment) in nature by the aforesaid Act i.e., Act No. 23 of 1983 is not correct.

Therefore, we are of the view that proviso to sub-section (1) of Section 11 is entirely different from what was existing prior to its amendment by Act No. 23 of 1983. Therefore, the tax liability is co-extensive as that of agent and upon the principal is not legally correct. From perusal of the proviso, the only fact which was required to be proved by the principal is that the burden is upon him to show that the turnover has been effected therefore, the agent is liable to tax under the said sub-section. The moment that it is shown that the agent is liable to pay the tax then, neither there is liability nor any payment to be made by the principal towards the turnover tax to the revenue.

The very fact that the goods were despatched by the petitioner against Form ''F'' issued under sub-rule (5) of Rule 12 of Central Sales Tax (Registration and Turnover) Rules, 1957 by the Revenue, which clearly establishes the fact that the goods were dispatched to it is agent in Karnataka State for the local sale. As he is the registered dealer under the KST, therefore, he was liable to pay tax to the department is established in this case. Therefore, the Assessing Authority and the Appellate Authorities have wrongly interpreted the proviso to Section 11 of the KST Act holding that liability of payment of sales tax in respect of sale of steel ingots is upon the principal is both factually and legally not correct. The reliance placed upon the decisions of the Apex Court referred to supra with all fours applicable in favour of the petitioner. Therefore, the impugned order is liable to be set aside and the sales tax revision petition is required to be allowed. Further, the order passed by the learned Single Judge in Tata Oil Mills case is bad in law and is liable to be set aside.

Accordingly, the sales tax revision petition is allowed.