Liability of a transferee to pay sales tax not paid by the transferor.

This appeal under the Letters Patent is filed against the judgment of Ganapatia Pillai, J., in W.P.No. 104 of 1959. The facts necessary for disposal of this appeal are succinctly the following:

One Purushotham Raju conducted a business known as the All India Trading Company, and he was sole proprietor. He was assessed to sales tax, in respect of his turnover for 1948-49 and 1549-50, the dates of assessment being 20th March, 1950 and 30th March, 1951. The assessee paid some amounts towards the sales tax thus determined, but there remained substantial arrears for 1948-49 (Rs. 3,836-4-0) and for 1949-50 (Rs. 1,218-1-9). The Department took coercive steps including prosecution, to collect the arrears from the aforesaid assessee, but the proceedings were not pursued after the criminal proceedings were dropped on 10th December, 1955. Thereafter on 5th October, 1956, the assessee transferred his business for a consideration of Rs. 25,000 by a registered instrument to one Sukraj Peerajee, the petitioner in the Writ Petition as well as the appellant before us. By a notice dated 17th April, 1957, the Deputy Commercial Tax Officer, Park Town, Madras, called upon the petitioner to pay the arrears. The petitioner denied his liability, but his contentions were over-ruled and his appeals to the Commercial Tax Officer as well as the Board of Revenue were dismissed. For the purpose of imposing the liability on the petitioner, the Sales Tax Department relied upon rule 21-A of the Rules framed under the Madras General Sales Tax Act, 1939, which is in the following terms:

“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.”

This rule was issued by the State Government in Government Order No. 477, revenue, dated 2nd March, 1945.

Ganapatia Pillai, J., who heard the writ petition, dismissed it. It was urged by the petitioner before him that the liability to pay sales tax is imposed by the Act on the individual who carried on the business and this liability could not be enforced against another, unless there was privity or devolution of interest. When Rule 21-A sought to shift this liability to the transferee of the dealer who effected the sales, it involved a contravention of the statute and must therefore be struck down us ultra vires to that extent. Ganapatia Pillai, J., held:

“What is taxed under the Act is really the transaction of sale and that is the subject-matter of the tax. But who is the person that is called upon to pay the tax may vary in individual instances.”

He also observed that it might not be correct to say that in every instance of payment of sales tax, the incidence of the taxation fell only upon the trader who was responsible for the transaction of sale and not upon the successor of that trader. The learned Judge further observed:

“apart from the question whether section 19 (2) (c) of the Act IX of 1939 would cover a case of collection of tax already levied from the purchaser of the business I would, though with some hesitation, hold that section 19 (1) of the Act, would give power to the State Government to make the rule in question, as the collection of the tax already lawfully levied under the Act, is one of the purposes of the Act, and the Govern