1. Agent collected sales tax from purchasers but failed to remit it to Government; dispute over recovery of non-exigible tax under Section 11(2), Hyderabad General Sales Tax Act. (Para 1 )
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1964 Supreme(SC) 51
SUPREME COURT OF INDIA
21st February, 1964
P.B. GAJENDRAGADKAR C.J.I., K.N. WANCHOO, K.C. DAS GUPTA, J.C. SHAH AND N. RAJGOPALA AYYANGAR, JJ.
R. Abdul Quader and Co., Appellant
Versus
Sales Tax Officer, 2nd circle, Hyderabad, Respondent.
Civil Appeal No. 760 of 1962.
Advocates appeared
Mr. K. R. Chaudhuri, Advocate, for Appellant; Mr. A. Ranganadham Chetty, Senior Advocate, (Mr. B. R. G. K. Achar, Advocate, with him), for Respondent.
Advocates:
A.RANGANADHAM CHETTY, B.R.G.K.Achar, K.R.CHAUDHARY
A.RANGANADHAM CHETTY, B.R.G.K.Achar, K.R.CHAUDHARY
A State legislature cannot, under its power to tax sales or purchases, enact a provision requiring the remittance of amounts collected as tax if those amounts are not actually exigible as tax under the law, as such a provision is not ancillary or incidental to the taxing power.
Headnote:(A) Hyderabad General Sales Tax Act, 1940 - Section 11(2) and Section 20(c) - Constitution of India - List II, Entry 54 and Entry 26 - Legislative competence of State legislature - Recovery of amount collected by way of tax but not exigible as tax under the Act - Whether a provision requiring the payment to Government of an amount collected as tax, though not due as tax under the law, is ancillary or incidental to the taxing power - Held, the ambit of ancillary or incidental power does not extend to permitting the legislature to provide that an amount wrongly collected as tax, which is not exigible under the law, shall still be paid over to Government as if it were a tax. Such a provision cannot be treated as coming within incidental or ancillary powers to ensure that tax is levied and collected. (Paras 4 and 5)
(B) Trade and Commerce - Entry 26 of List II - Scope - Taxing entries in the legislative Lists are entirely separate from other entries - A provision for recovering amounts realised wrongly as tax does not regulate trade and commerce and cannot be sustained under Entry 26. (Para 8)
Facts of the case:
An agent collected sales tax from purchasers on the basis that the incidence of tax lay on the sellers, despite a notification imposing tax at the purchase point. The agent did not remit the collected amount to the Government. The Government sought to recover the amount under a provision of the State Sales Tax Act which required any person who collected tax otherwise than in accordance with the Act to pay such amount to the Government, failing which it would be recovered as arrears of land revenue.
Findings of Court:
The provision requiring the payment of amounts collected as tax, even when not exigible as tax under the law, is beyond the legislative competence of the State legislature. It cannot be justified as an ancillary power under the taxing entry, nor as a penalty, nor as a regulation of trade and commerce.
Issues: Whether a provision authorizing the recovery of amounts collected by way of tax, which are not actually exigible as tax under the law, falls within the legislative competence of the State legislature under Entry 54 (tax on sale or purchase of goods) or Entry 26 (trade and commerce) of List II of the Seventh Schedule to the Constitution.
Ratio Decidendi: Incidental and ancillary powers must be exercised in aid of the main topic of legislation. Where legislation provides that an amount not exigible as tax shall be paid to the Government merely because it was wrongly collected, it is not ancillary to the collection of tax legitimately due. The State cannot do indirectly under the guise of ancillary power what it cannot do directly.
Result: Appeal allowed.
Legal Category Hierarchy
Table of Contents
2. Whether Section 11(2) of the Act, permitting recovery of amounts collected as tax but not exigible as such, falls within legislative competence under Entry 54 or 26, List II. (Para 2 )
3. Ancillary powers under taxing entries cannot authorize recovery of amounts not exigible as tax; such provisions do not regulate trade and commerce nor constitute valid penalties. (Para 4 , 5 , 8 )
4. State legislatures cannot, under incidental powers of a taxing entry, enact provisions to recover amounts collected as tax which are not actually exigible as tax under the law. (Para 4 )
5. Appeal allowed; Section 11(2) held beyond legislative competence and assessment order quashed. (Para 9 )
6. Can a state legislature recover amounts collected as tax that are not actually due as tax under the law?
No. Such a provision cannot be justified as an incidental or ancillary power under a taxing entry, as the amount is not exigible as tax under the law. (Para 4 )
7. Does the power to regulate trade and commerce under Entry 26, List II extend to recovering amounts wrongly collected as tax?
No. Recovering amounts wrongly realized as tax does not constitute the regulation of trade and commerce and cannot be justified under Entry 26 of List II. (Para 8 )
8. Can the recovery of non-exigible tax be justified as a penalty under a taxing statute?
No. A provision requiring the payment of amounts not authorized as tax to the Government is not a penalty for tax evasion or default in payment of properly levied taxes. (Para 5 )
9. How does the power to regulate tax refunds differ from the power to recover non-exigible tax?
The power to regulate refunds of tax actually collected is a valid exercise of incidental and ancillary powers relating to the levy and collection of tax, unlike recovering non-exigible amounts. (Para 6 )
Judgment
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. II (2) of the Hyderabad General Sales Tax Act, No. XIV of 1940, (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 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 incidence 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 principles, namely, 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.
2. 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 the provisions of the Act, as arrears of land revenue, was beyond the legislative competence of the State legislature. The argument was that the Act was passed under Entry 54 of List II of the Seventh Schedule to the Constitution, which enables the State legislature to enact a law taxing transactions of the sale or purchase of goods. The entry therefore vested power in the State legislature to make a law for taxing sales and purchases 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 of tax and therefore incidental to the taxing power under Entry 54 of List II. Further the High Court took the view that assuming that Entry 54 of List II could not sustain Ss. 11 (2), it could be sustained under Entry 26 of List II. 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 before us.
3. It is necessary to read S. 11of the Act in order to appreciate the point urged on behalf of the appellant. Section 11 is in these terms:-
"11. (1) No person who is not registered as a dealer shall 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 ar
