V. Guruviah Naidu and Brothers vs The State of Madras and Another

Rajagopala Ayyangar, J.—The petitioner is a dealer in hides and skins who has been assessed to sales tax under the Madras General Sales

Tax Act and he has filed these two petitions for the issue of writs of certiorari and mandamus, certiorari to quash the order of assessment and

mandamus to direct the taxing authorities to forbear from enforcing the provisions of the Act for the reason that the assessment proceedings are

ultra vires and, therefore, illegal.

V. Guruviah Naidu and Brothers, the petitioners, carry on business as tanners and dealers in hides and skins in Coimbatore. To enable them to

deal in those goods they got themselves registered as licensed dealer from the commencement of the Madras General Sales Tax Act right up to the

end of the financial year 1951-52, They did not choose to take out licence from and after 1st April, 1952. Taking out of such licences was not

obligatory under the relevant provisions of the Madras General Sales Tax Rules, 1939, until they were amended recently and it is the validity of

these amendments that is in controversy in these petitions Before the amendment Rule 5 of the Madras General Sales Tax Rules provided ""that

every person who deals in. hides or skins whether tanned or untanned... shall if he desires to avail himself of the exemption provided in sections 5

and 8 or of the concession of taxation only at a single point or of taxation at the rate specified in Section 5 submit an application in Form 1 for a

licence in respect of each of his places of business to the authority specified in Sub-rule (2)...."" Rule 16(2) of the Madras General Sales Tax

(Turnover and Assessment) Rules, 1939, which fixed the single point at which tax in respect of hides and skins could be levied enacted ""no tax

shall be levied on the sale of untanned hides or skins by a licensed dealer in hides or skins except at the stage at which such hides or skins are sold

to a tanner in the State or are sold for export outside the State.

It is unnecessary to refer to the other sub-clauses of Rule 16 but is sufficient to say that this Court held in Noor Mohammed and Co. v. State of

Madras [1956] 7 S.T.C. 729 that under Rule 16(2) an unlicensed dealer in untanned hides and skins was not liable to pay tax on his sale turnover

under the provisions of the Madras General Sales Tax Act, 1939.

The result of this decision was that unlicensed dealers in hides and skins escaped sales tax altogether which was, of course, not the intention of

either the Act or the framers of the rules. The State Government took steps to remedy this state of affairs. In the first place Rule 5 of the General

Sales Tax Rules was amended by a notification published in June, 1955, so as to render taking out of a licence

compulsory. After the amendment, Rule 5(1) read ""every person who deals in hides and/or skins whether as a tanner or... shall in case the turnover

in any year in any of the said goods is not less than Rs.7,500 submit an application in Form I for a licence in respect of each of his places of

business to the authority specified in Sub-rule (2)....

This amendment delinked the taking out of a licence with a right to claim the benefit of single point taxation u/s 5, a matter which had been

commented upon in some of the decisions of this Court.

Rule 16 of the Turnover and Assessment Rules which by reason of the use of the expression ""licensed dealer"" had led to the result reached in

Noor Mohammed''s case 1956 7 S.T.C. 729 also underwent change. By a notification G.O. No. 2733, Revenue dated 3rd September, 1955,

Rule 16 was amended and after the amendment it read :--

Rule 16. (1) In the case of untanned hides and/or skins the tax u/s 3(1) shall be levied from the dealer who is the last purchaser in the State not

exempt from taxation u/s 3(3) on the amount for which they are bought by him.

(2) (i) In the case of hides or skins which have been tanned outside the State the tax u/s 3(1) shall be levied from the dealer who in the State is the

first dealer in such hides or skins not exempt from taxation u/s 3(3) on the amount for which they are sold by him.

(ii) In the case of tanned hides or skins which have been tanned within the State, the tax u/s 3(1) shall be levied from a person who is the first

dealer in such hides or skins not exempt from taxation u/s 3(3) on the amount for which they are sold by him:

Provided that, if he proves that the tax has already been levied under Sub-rule (1) on the untanned hides and skins out of which the tanned hides

and skins had been produced, he shall not be so liable.

(iii) The burden of proving that a transaction is not liable to taxation under this rule shall be on the dealer.

In terms, these rules were made retrospective and to have effect as and from 1st April, 1955. The Deputy Commercial Tax Officer,

Coimbatore, issued a notice to the petitioner on 23rd November, 1955, requiring the latter to submit returns as required by the amended rules.

The notices went on to state that if the petitioner failed to submit his return he would be assessed to tax on ""best judgment basis"". Further notices

were served on the petitioner and a demand was also made for the payment of tax as provisionally assessed as provided for by the rules. Of

course at the end of the year if the turnover was more or less the tax paid or payable would be adjusted on this basis under Rule 15 (6) of the

Turnover and Assessment Rules. The petitioners thereupon moved this Court for the issue of rules nisi in these two petitions and such rules having

been issued further proceedings have stood stayed with the result that the final amount of tax payable by the petitioners has not yet been

determined.

The main contention strenuously urged by Mr. Venkatasubramania Iyer, learned counsel for the petitioners, was that the retrospective

amendment of Rule 16 was ultra vires as beyond the rule-making power conferred on the State Government by the provisions of the Madras

General Sales Tax Act. Mr. Venkatasubramania Iyer addressed a very interesting and, if I may be pardoned for saying so, an over-subtle

argument based on the meaning of the expression ""prescribed"" employed in the relevant provisions. The etymological or dictionary meaning of the

expression ""prescribed"" was ""to write first"" derived from the words, ""pre"" before and ""scribe"" to write. The argument was that by the use of this

expression in the crucial provisions of the enactment, to which I shall immediately advert, the Legislature had expressly contra-indicated the making

of a retrospective rule.

Section 5 (vi) to give effect to which Rule 16 has been framed enacts:--

Subject to such restrictions and conditions as may be prescribed, including conditions as to licences and licence fees :

(vi) the sale of hides and skins, whether tanned or untanned shall be liable to tax u/s 3, Sub-section (1), only at such single point in the series of

sales by successive dealers as may be prescribed.

Similar expressions were used in the other relevant provisions, for instance Section 3(4), which ran :

For the purpose of this section and the other provisions of this Act, turnover shall be determined in accordance with such rules as may be

prescribed.

Again Sub-section (5) of the same section enacted:

The taxes under Sub-sections (1) and (2) shall be assessed, levied and collected in such manner and in such instalments, if any, as may be

prescribed.

Learned counsel contended that ""prescribed"" indicated that the ""prescription"" could operate only for the future and that there was thus a

compelling etymology which ought to be sufficient to force the Court to the view that retrospective rule ""prescribing"" the points at which tax should

be levied was prohibited.

Learned counsel did not dispute that as general proposition the Legislature might by specific enactment retrospectively impose a, tax. He did

not even contest the proposition that rules made under statutes might, if so expressed, validly be made to operate with retrospective effect. These

are not really concessions by counsel but are established law and therefore the argument addressed to me has to be judged in the light of these

principles. Learned counsel might be right in the etymological connotation of the expression ""prescribed"". But the use of the word ""prescribe"" as the

normal expression for conferring a power to make a rule is too well known to require detailed explanation. For instance, in this very Act, Section 2

(f) defines the word ""prescribed"" thus : ""prescribed"" means prescribed ""by rules made under this Act"" and when one turns to Section 19 where

power is expressly conferred on the State Government to make rules under the Act, it is specifically enacted :--

(2) In particular and without prejudice to the generality of the foregoing power, such rules may provide for

(a) all matters expressly required or allowed by this Act to be prescribed.

The reference to prescription here, if read in the light of the definition in Section 2(f) can only mean ""by rules made under the Act."" I am,

therefore, clearly of the opinion that ""prescription"" in the Act merely means ""by rules made under the Act"" and is wholly unconcerned with the

content of the rule in relation to the time from which it shall operate which is determined by other considerations. I, therefore, reject the argument

that the use of the word ""prescribed"" in Section 5(vi) imposed a restriction on the rule-making authority and confined its power to fixing a single

point only for the future.

Further even if counsel were right in his submission that Section 5 (vi) did not authorise the rule-making authority to prescribe a tax-point with

retrospective effect, this is of no avail to the petitioners, because of the action taken by the State Government by enacting appropriate legislation in

that behalf to put the matter beyond the possibility of any such objection.

The Governor of Madras promulgated an Ordinance, (Ordinance 1 of 1957) published in the Fort St. George Gazette, dated 22nd March,

1957. Section 7 of this Ordinance enacted :--

Validation of certain assessments and levy of licence fees for the year 1955-56--Tax may be assessed or collected and licence fees levied or

collected for the year 1955-56 notwithstanding the retrospective operation of the amendments to the Madras General Sales Tax Rules, 1939, and

the Madras General Sales Tax (Turnover and Assessment) Rules, 1939, and all assessments made, taxes collected and licence fees levied for the

year 1955-56 shall be deemed to have been made, collected or levied as the case may be, as if those rules as amended were in force at all

relevant times.

This was followed by a proviso which is not relevant to the present "" context and which is, therefore, omitted.

This was repealed and enacted by Madras Act 1 of 1957 and its Section 9 replaced Section 7 extracted above and in the same terms. If the

attack on the validity of the amendment of the rule was based upon any ground other than its non-conformity to the limits of the rule-making

power, for instance, if the objection had been that the rule was beyond the legislative competence of the State Legislature or was unconstitutional

and that objection was sustained the validation by the Legislature would not have served to impart legality to the rule. As, however, the objection

to the validity of the rule in the present case was confined to its disconformity to the provisions of the Act, the express confirmation of the rules and

the validation of the assessments render the rule legal and in force at the relevant period.

I might pause here to mention that Mr. Venkatasubramania Iyer confined his attack on the invalidity of the rule, to the tax liability before 3rd

September, 1955, in other words only to the period as to which the rule was made retrospective by specific provision therefor. In these

circumstances I hold that the objection raised by the learned counsel even if it has any force has to be repelled after the enactment of Section 9 of

the Madras Act 1 of 1957.

Learned counsel, however, urged that the provisions of Act 1 of 1957 were obnoxious to Article 14 of the Constitution. This objection was

formulated in these terms :--The Madras General Sales Tax Act still holds the field. Under it there must be ""a prescription of a single point"" before

tax liability is attracted in respect of dealings in hides and skins. There was factually no such prescription between the period, from 1st April, 1955,

to 3rd September, 1955, in respect of sales by unlicensed dealers. The rules framed and notified on 3rd September, 1955, however, made an

inroad into this state of affairs and laid a tax on such sales by prescribing a point at which tax could be levied even in regard to licensed dealers.

From and after 3rd September, 1955, tax is levied only at prescribed stages or at prescribed points in successive transactions of the commodity.

In regard, however, to the period, from 1st April, 1955, till 3rd September, 1955, notwithstanding that there was no point prescribed, tax liability

was made to emerge in the case of unlicensed dealers by reason of the rule having retrospective operation which the Act has confirmed. The effect,

therefore, of Section 9 in the light of the provisions of the Madras General Sales Tax

Act was that whereas from and after 3rd September, 1955, all unprescribed points in sales, or ""unprescribed sales"" were exempt from tax,

during the period from 1st April, 1955, to 3rd September, 1955, dealings by unlicensed dealers which were not ""prescribed sales"" by antecedent

rules were brought within the range of taxation under Rule 16. This is an unreasonable discrimination against unlicensed dealers. This argument was

also urged in a slightly different form by saying that Section 9 of the Act afforded an exceptional or discriminatory treatment to sales for a period of

one year from April, 1955, till the end of March, 1956.

I am clearly of the opinion that this argument of the learned counsel is not well-founded. The situation which faced the State Government was

this :--Most of the dealers in this State, over ninety per cent, had registered themselves under the Act and had taken out licences as dealers and

were paying the tax levied under the Act when their transactions were brought within the points prescribed by Rule 16 of the Turnover and

Assessment Rules. Such registration of the licensees was a very essential machinery for the purpose of tracing transactions in hides and skins which

were liable to tax only at a single pre-determined point. A few dealers, however, had failed to take out licences which rather upset the general

scheme of the administration of the tax. Apart from this dislocation of the proper administration of the tax system, this small minority of dealers not

merely did not pay licence fees but on the strength of the decisions of this Court had obtained practically exemption from tax liability. Licensed

dealers had complained that this acted unequally on them and rendered them to tax liability from which those who deliberately failed to take out

licences escaped (this not being compulsory under the provisions of Rule 5 as it then stood) and was illegal as being unfairly discriminatory against

them. This contention was rejected by the Sales Tax Tribunal and this Court affirmed that decision. The net result of this was that while licensed

dealers paid both licence fees as well as sales tax on their transactions, unlicensed dealers did neither. It was this state of affairs that was brought to

an end by the amendment of the rules effected in 1955 which was followed by Section 9 of the Madras Act 1 of 1957. Viewed in the light of this

antecedent history I am unable to appreciate the complaint that unlicensed dealers were unjustly discriminated against by Section 9. The

competence of the State Legislature to enact taxing legislations with retrospective effect is not disputed. If so, a provision which, in terms, rendered

unlicensed dealers in hides and skins liable to tax for periods from and after 1st April, 1955, on the same footing as licensed dealers could in no

wise be termed a violation of Article 14 of the Constitution. On the other hand, it would be an enactment designed to effect equality between all

dealers in that commodity, licensed and unlicensed. Such an enactment, therefore, far from being unequal or discriminatory would be one

calculated to remove inequality in the operation of the relevant fiscal system. The learned Advocate-General who appeared for the respondents

pointed out that Rule 16 of the Turnover and Assessment Rules as it stood before the recent amendment, contained an undesigned lacuna of which

unlicensed dealers had taken advantage of and he urged that no person had any vested or fundamental right to the continuance of a lacuna and that

such a person could not with any justice complain that any right of his was violated when that gap was closed. I consider this submission apposite

and well-founded. I have, therefore, no hesitation in repelling the constitutional objection to the validity of Section 9 of Act 1 of 1957. These were

the only objections which were urged by the learned counsel for the petitioner in regard to the validation by Act 1 of 1957 of the retrospective

operation of Rule 16.

In regard to the prospective operation of the same rule the first contention which learned counsel urged was that the rule as now framed

violated the basic principles of Section 5(vi), namely, fixation of a single point at which tax liability emerged with the consequence that it was ultra

vires of the Act as it stands. That Rule 16 as amended imposed tax at multiple points in a series of sales of that commodity was sought to be made

as follows:--

Rule 16(1) imposed tax at purchase point in the case of untanned hides and skins while Sub-rule (2) (ii) levied tax at certain sale points in

respect of the same hides and skins when they got tanned. Learned counsel argued that unless raw hides and skins were treated as a commodity

different from tanned skins and hides (and learned counsel denied that they could be so treated) rules 16 (1) and 16(2) would both apply to the

same commodity at different stages with the result that there would be a plurality of tax points prescribed. In my judgment there is no substance in

this objection. It is not necessary to decide whether on the scheme of the enactment and the rules thereunder, raw hides and skins are a different

commodity from tanned hides and skins. I shall assume that they are the same commodity and test the correctness of the argument that the rules

now impugned prescribe multiple points for the taxation of the same commodity. I shall start with untanned hides and skins. There are two modes

in which untanned hides and skins might be found within the

State :--(i) They might originate in the State, that is, they might be obtained from sheep and cattle within the State or (2) they might be imported

from outside the State as untanned hides and skins. Untanned hides and skins thus obtained from either of these sources might be dealt with in one

of two modes : (a) they might be tanned within the State or (b) they might get exported after successive transactions of sale as untanned hides and

skins. Rule 16 (1) is the provision applicable to untanned hides and skins. In the four cases mentioned above which would be entire number of

possible permutation and combination, the tax point is at the stage of the last purchase, that is, the last purchase before tanning or the last purchase

before export. If tax has been paid at this point the question next to be determined is whether these hides and skins are or could be subject to tax

at any subsequent stage under these rules. After this purchase point the two alternative contingencies that might happen to the goods are--(a) they

get tanned within the State or (b) they are exported from the State. In the latter case obviously there could be no further tax levy under the Sales

Tax Act. In the case where goods are tanned the tanner who bought raw hides or skins has paid the tax and has converted the commodity in his

hands into ""tanned hides or skins"" which I shall next proceed to consider.

Just as in the case of untanned hides and skins the commodity in its tanned or dressed stage might originate in this State, or may be imported

from outside the State in its finished condition. The tax point in the case of dealings in tanned hides and skins is prescribed by Rule 16 (2) (i) & (ii).

Where the tanned goods are imported from outside, the case is governed by Sub-rule (i) under which the first sale after the import is the point

prescribed, the tax falling upon the first seller. The buyer in this transaction and all subsequent dealers in the goods are not taxed on their

transactions and hence the requirement of a single point is satisfied. In the case of hides and skins tanned within the State, whatever be the source

from which the goods in their raw condition were obtained, either locally or from outside the State, Rule 16 (2) (ii) prescribes the first sale after

tanning, as the point at which tax is levied. In this case it would be seen that the goods have borne tax at the stage of the purchase by the tanner

and, therefore, there would be a multiple point taxation if Rule 16 (2) (ii) operated without qualification but it is not so. Its operation is controlled

by its proviso under which in the case of such dealers who might be termed ""tanner-dealers"" the amount of tax paid by them at the purchase point

is allowed as a deduction in the computation of their liability under Rule 16 (2) (ii). The effect of the proviso, therefore, is as if to efface the tax on

the purchase point, in respect of those hides and skins tanned by such dealers and to substitute for it, a tax on the first sale point.

In the above discussion I have omitted from consideration the complication introduced by reference to the dealer exempted from tax u/s 3 (3)

of the Act, in shifting the tax point either higher or lower down, because this is wholly irrelevant for considering the principle on which the rules are

based. In my judgment Rule 16 as framed satisfies the requirements of Section 5 (vi) of the Act regarding the prescription of a single point for the

levy of tax on hides and skins, whether tanned or untanned.

The second objection raised by the learned counsel was that by reason of the retrospective operation of Rule 16, by virtue of Section 9 of the

Madras Act 1 of 1957, the petitioner had been deprived of two advantages which he would have enjoyed if the rules had operated prospectively.

It was urged that dealers like the petitioners were unable to take advantage of the proviso to Rule 16 (2) (ii) under which they could obtain rebate

on the purchase tax paid by them when they purchased goods which they tanned. I am unable to appreciate this contention because the petitioner

is a tanner and if he had purchased goods locally and had paid tax at that point surely he would be able to establish both the fact of his purchase as

well as the payment of the tax and if he did so he would certainly be entitled to claim the rebate allowed by the proviso, and if he had paid no tax

then, he can have no complaint.

The other advantage which the learned counsel contended the petitioner had been unjustly deprived of, by the retrospective operation of the

rule, was that if the provision had operated prospectively he could have passed on the tax to purchasers from him. Under Rule 16(4) as it stood

before the amendment in September, 1955, tax was levied at sale point on dealers in hides and skins, the turnover being computed on the basis of

the amount realised at the sales. It was the same rule that was re-enacted by Rule 16 (2) (ii). Therefore, those who had taken out licenses and who

were being assessed to tax under the rules as they originally stood would have availed themselves of the benefit of Rule 5 (1) of the Turnover and

Assessment Rules under which the sellers could collect tax from their purchasers. It was because the petitioner did not get himself licensed and did

not pay any tax then that there was no occasion for him to pass on the tax to purchasers from him. In these circumstances I do not see any injustice

or hardship created or caused to the petitioner. This apart, I am unable to see how the absence of this advantage to pass on the tax would

invalidate the rule with which we are now concerned. Nor can it be said that the right to pass on the tax is an essential requirement of a tax on the

sale of goods for a tax might be levied at the stage of the last purchase before consumption. I might add that a tax at purchase point which is legal

does not enable this facility to be enjoyed by the taxpayer.

Though in the affidavit in support of the petition some point was made of the assessment being on the basis of ""best judgment"" of the assessing

authority Mr. Venkatasubramania Iyer, learned counsel for the petitioner, did not press this point in view of the fact that the assessment complained

of in the petition was only provisional and was liable to adjustment on the basis of the turnover of the assessee computed at the end of the year.

The result therefore is that there are no merits in these petitions which fail and are dismissed. The rules nisi will be discharged. The respondents

are entitled to their costs which is ordered in W. P. No. 625 of 1956. Counsel''s fee Rs. 250.