Rule 21-A of the Madras General Sales Tax Rules, 1939, was ultra vires of the rule-making power of the State Government under the Madras General Sales Tax Act, 1939.

Headnote:
SALES TAX - Liability of transferee of business for arrears of sales-tax due from transferor - Rule 21-A of Madras General Sales Tax Rules, 1939 - Validity - Madras General Sales Tax Act (9 of 1939), Ss. 3(1), 10(1), 19(1), 19(2)(c) - Madras General Clauses Act (1 of 1891), S. 5(1).
Fact of the Case:

The respondent purchased a business from one Purushottam Raju, who owed arrears of sales tax for the years 1948-49 and 1949-50. The Sales Tax authorities attempted to recover the arrears from the respondent, who denied liability. The Deputy Commercial Tax Officer, the Commercial Tax Officer, and the Board of Revenue all ruled against the respondent. The respondent then filed a petition in the Madras High Court under Article 226 of the Constitution for a writ of certiorari to quash the orders of the lower authorities. The Single Judge dismissed the petition, but the Division Bench reversed the judgment, holding that Rule 21-A of the Sales Tax Rules was illegal and ultra vires and that the respondent was not liable to pay the sales tax due from his predecessor-in-title.
Finding of the Court:

The Supreme Court held that Rule 21-A of the Madras General Sales Tax Rules, 1939, was ultra vires of the rule-making power of the State Government under the Madras General Sales Tax Act, 1939. The Court found that the rule was not authorized by Section 19(1) or Section 19(2)(c) of the Act, and that it could not be supported by the language of Section 10(1) of the Act. The Court also held that the registered instrument by which the business was transferred to the respondent did not create a liability inter se between the State Government and the transferee.
Issues: 1. Whether Rule 21-A of the Madras General Sales Tax Rules, 1939, was intra vires of the power of the State Government under Section 19(1) and (2) of the Madras General Sales Tax Act, 1939? 2. Whether the registered instrument dated October 5, 1956, created a liability inter se between the State Government and the transferee?
Ratio Decidendi: 1. The Court held that Rule 21-A was beyond the rule-making power of the State Government either under Section 19(1) or Section 19(2)(c) of the Act. The Court found that the word "assessment" in Section 19(2)(c) did not include the power of recovering tax assessed from a person other than the assessee. 2. The Court held that the registered instrument did not create a liability inter se between the State Government and the transferee, as the State Government was not a party to the instrument.
Final Decision: The Supreme Court dismissed the appeal, holding that the judgment of the Division Bench of the High Court was correct.

Judgement

RAMASWAMI, J.:- The question of law involved in this appeal is whether the purchaser of business carried on by a dealer as defined in the Madras General Sales Tax Act, 1939 (Madras Act No. IX of 1939), hereinafter called the Act , can be made liable for arrears of sales-tax due from the dealer in respect of transactions of sale which took place before the transfer of the business under Rule 21-A of the Rules framed in exercise of the powers conferred on the State Government by Section 19 of the Act.

2. The respondent purchased, by a registered instrument dated October 5, 1966, the business carried on by one Purushottam Raju under the name-All India Trading Company. Purushottam Raju was the sole proprietor of the business and had been assessed to sales tax in respect of his turnover for the years 1948-49 and 1949-50. The assessee paid some amounts towards sales tax thus determined, but there remained some arrears of sales-tax i. e., Rs. 3836-4-0 for 1948-49 and Rs. 1218-1-9 for 1949-50. The Sales-tax authorities attempted to recover the arrears of tax from the respondent as the purchaser of the business. The respondent denied liability to pay sales-tax but his contention was overruled by the Deputy Commercial Tax Officer. The respondent appealed to the Commercial Tax Officer as well as to the Board of Revenue, but the appeals were dismissed. The respondent thereafter moved the Madras High Court under Article 226 of the Constitution for the issue of a writ in the nature of certiorari to quash the orders of the Commercial Tax Officer and the Board of Revenue. Ganapatia Pillai, G. who heard the petition dismissed it. The respondent took the matter in appeal under the Letters Patent. The Division Bench consisting of S. Ramachandra Iyer, C. J. and Ramakrishnan, G. reversed the judgment of the Single Judge, holding that Rule 21-A of the Sales Tax Rules was illegal and ultra vires and the respondent was not liable to pay the sales-tax due from his predecessor-in-title, Purushottam Raju.

3. This appeal is brought, by special leave, from the judgment of the Division Bench of the Madras High Court dated September 13, 1963 in Writ Appeal No. 10 of 1962

4. Rule 21-A was framed by the State Government under the rule-making power granted to it under Section 19 (1) and (2) of the Act. Rule 21-A reads as follows :

"When the ownership of the business of a dealer liable to pay the tax under the Act is entirely transferred, any tax payable in respect of such business and remaining unpaid at the time of the transfer shall be recoverable from the transferor or the transferee as if they were the dealers liable to pay such tax, provided that the recovery from the transferee of the arrears of taxes due prior to the date of the transfer shall be only to the extent of the value of the business he obtained by transfer. The transferee shall also be liable to pay tax under the Act on the sales of goods effected by him with effect from the date of such transfer and shall within thirty days of the transfer apply for registration or licence, as the case may be, unless he already holds a certificate of registration or licence, as the case may be."

Sections 19 (1) and 19 (2) (c) are to the following effect:

"19. (1) The State Government may make rules to carry out the purposes of this Act.

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

...................................................

5. The first question to be considered in this appeal is whether Rule 21-A is intra vires of the power of the State Government under Section 19 (1) and (2) of the Act. Section 3 (1) of the Act is the charging Section. It imposes a liability to pay sales tax on every dealer for each year, and the tax is to be calculated on his total turnover for that year. Section 2 (b) of the Act defines a "dealer" as

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1967 Supreme(SC) 142

Rule 21-A of the Madras General Sales Tax Rules, 1939, was ultra vires of the rule-making power of the State Government under the Madras General Sales Tax Act, 1939.

Cases Referred (3)