SATYANARAYANA RAJU, J.

( 1 ) THE questions formulated for the decision of the Full Bench are: 1. Whether transactions falling within the definition of sale in the Madras General Sales Tax Act and not proved to be outside sales within the Explanation to Article 286 (1) (a) of the Constitution of India can be assessed to sales tax under the said Act? 2. Whether after the coming into force of the Constitution of India, the Slate is competent to legislate and levy tax on sales and purchases on the basis of the theory of nexus as embodied in the Explanation 2 to Sub-section (h) of Section 2 of the Madras General Sales Tax Act?

( 2 ) THESE questions involve the determination of the true meaning and scope of the provisions of Article 286 (1) of the Constitution. Having regard to the general terms of the reference it is not necessary to set out the facts in each of the above cases.

( 3 ) THE levy and collection of taxes on the sale of goods came into vogue when as a result of the world-wide economic depression which followed the First War, governments of the European countries were forced to seek new sources of revenue.

( 4 ) IN 1935 the Parliament of Great Britain enacted the Government of India Act, and for the first time in India, a unitary Government had been converted into a federal system and autonomous Provinces had been created. For the autonomous provinces to exist and thrive, adequate financial resources were necessary and for that purpose they had been given the powers of taxation mentioned in the provincial Legislative List. The mainstay of the Provincial Exchequers was till then land revenue and excise on liquor. It is a well-known fact that land revenue is an inelastic source, and Parliament was even then anticipating the decrease and ultimate extinction of excise revenue on account of the policy of prohibition. In order, therefore, to supplement their slender resources, Section 100 (3) of the Government of India act, read with Entry 48 of List II of the Seventh Schedule to that Act, gave them power to make laws with respect to "taxes on the sale of goods". For financing the nation building activities entrusted to them, the Provinces very soon began to exploit this new avenue of taxation. The Madras Legislature was the first in the field to undertake Sales Tax Legislation and enacted the madras General Sales Tax Act (No. IX of 1939) (hereinafter referred to as "the madras Act ). The Madras Act received the assent of the Governor on the 4th june, 1939, and was first published in the official Gazette on 13-6-1939.

( 5 ) THE preamble to the Act says that it is expedient to provide for the levy of a general tax on the sale of goods in the State of Madras. "sale" is defined in Section 2 (h), omitting what is not material, as meaning"every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration". Section 2 (i) defines "turnover" as the aggregate amount for which goods are either brought by or sold by a dealer whether for cash or for deferred payment or other valuable consideration. Section 3 is the charging section and provides that ; "every dealer shall pay for each year a tax on his total turnover for such year".

( 6 ) AN initial attempt to have the Madras Act declared ultra vires the powers of the provincial Legislature led to the decision of the Federal Court of India in province of Madras v. Boddu Paidanna and Sons, 1942-2 Mad LJ 327: (AIR 1942 FC 33 ). The Federal Court ruled that the power of the Provincial Legislatures to levy a tax on the sale of goods extended to sales of every kind, whether first sales or not, that the levy of the tax on the first turnover of the manufactured goods was not illegal and that the provisions of the Act enabling such a levy were not ultra vires. This view was affirmed by the Privy Council in Governor general in Council v. Province of Madras, AIR 1945 PC 98. After this initial attack on t

Click Here to Read the rest of this document