Calcutta High Court
The Century Spinning Mfg. Co. And Ors. vs State Of West Bengal And Ors. on 24 February, 1988
Equivalent citations: [1989]73STC277(CAL)
JUDGMENT D.S. Tewatia, C.J.
1. These matters, viz., Appeals Nos. 271/80, 291/80, 319/80, 321/80, 320/80, 322/80, /80, 270/80, 272/80, 277/80, 278/80, 274/80, 273/80, 276/80, 275/80, 279/80, 280/80, 282/80, 281/80, 286/80, 284/80, 283/80, 285/80, 287/80, 288/80, 289/80, 292/80, 294/80, 293/80, 290/80, 295/80, 280/80, /80, /80, 330/80, /80, /80, /80, /80, /80, on the Original Side and Appeals Nos. F.M.A.T. Nos. 2941 to 2943 of 1980, 2305 of 1980, 2361 to 2363 of 1980, 2308 of 1980, 80 of 1982, 2623 to 2625 of 1980, 992 of 1986, 2722 and 2723 of 1980, 1064 of 1987, 820 to 824 of 1987, 2721 of 1980, 81 of 1982, 3501 of 1981, 779 of 1981, 2362 of 1984, 2363 of 1984, 3714 of 1984, 3185 of 1984, 2312 of 1980, 1226 of 1981, 231 of 1984 and 68 of 1984 on the Appellate Side and Writ Petition No. C.R. 6682 (W) of 1982 referred to the larger Bench by the learned single Judge involve common question of law and, therefore, are being decided by a common judgment.
2. The propositions of law that fall for consideration pertain to the validity of the provisions of Section 6B of the Bengal Finance (Sales Tax) Act, 1941 (hereinafter referred to as "the said Act of 1941") and the provisions of Section 4AAA of the West Bengal Sales Tax Act, 1954 (hereinafter referred to as "the Act of 1954") which were incorporated in the said Acts respectively by the Bengal Finance (Sales Tax) Amendment Act, 1979 (hereinafter referred to as "the 1979 Amendment").
3. Learned counsel appearing for the appellants and the writ petitioners have broadly canvassed the proposition of law that herein are indicated below:
1. That the West Bengal State Legislature was incompetent to enact the 1979 Amendment which provided for the imposition of "turnover tax" inasmuch as the turnover tax is not a tax on sales but is a tax on income of a dealer which subject does not come within the ambit of entry 54 of List II of the Seventh Schedule to the Constitution of India.
2. That the provisions of Section 6B(4) prohibiting a dealer from realising from its purchasers the turnover tax payable by him come in direct conflict with the provisions of Section 64A of the Sale of Goods Act, 1930 which is a Central legislation and since the 1979 Amendment had not received the assent of the President the same is invalid by virtue of the provisions of article 254 of the Constitution of India.
3. That since the expression "gross turnover" refers to the aggregate of turnover of taxable sales as also of non-taxable sale, so the provision of Section 6B runs counter to the provisions of entry 92A and article 286 of the Constitution of India as also Section 27 of the Act.
4. That the 1979 Amendment imposes unreasonable restriction on the fundamental right of the dealers to carry on trade and is thus ultra vires the provision of article 19(1)(g) of the Constitution of India.
5. That the 1979 Amendment in its operation and working results in invidious and hostile discrimination against some of the dealers whose gross turnover exceeds the prescribed limit although their taxable turnover, obtained after excluding their turnover of sales envisaged to be excluded from the gross turnover by the provisions of Section 6B(2), happens to be much less than that of another dealer whose gross turnover had not exceeded the prescribed limit.
6. That the provisions of 1979 Amendment violate the provisions of article 301 of the Constitution of India and is thus invalid.
7. That the provision of Section 6B envisages imposition of turnover tax only on a dealer who effects sales of goods that are covered by both the Acts, viz., 1941 and 1954 and not those who deal in goods which are covered by one of the Acts only.
8. That the turnover tax is multi-point tax which the legislature is not competent to enact.
9. That the provision of Section 6B(1)(c) providing for the continuity of liability to pay tax for three years, even though the gross turnover had fallen below the prescribed gross turnover, is unreasonable and arbitrary as in its working it would tend to treat equal as inequal in the matter of payment of turnover tax and is thus ultra vires the provision of article 14 of the Constitution of India.
4. Except the contentions Nos. 7, 8 and 9, all the other contentions had been canvassed before the learned single Judge. He repelled all excepting the contention No. 3. While sustaining the contention No. 3 the learned single Judge held that for the purpose of calculation of gross turnover within the meaning of the provisions of Section 6B(1)(a) or (b) "non-taxable sales" or "non-leviable sales" are to be excluded.
5. Learned counsel appearing for the dealers have argued as if the matter is totally res integra. It deserves high-lighting that excepting the proposition Nos. 7, 8 and 9 rest of the contentions are squarely covered against the dealers, i.e., the appellants and the writ petitioners herein, by the binding judgment of the Supreme Court. When such being the position, or task is cut out, i.e., we have merely to mention the given contention and identify the relevant decision of the Supreme Court which covers it besides taking notice of the argument advanced on behalf of the dealers seeking to distinguish the given judgment. However, before embarking upon the said task, it is desirable to inform ourselves of all the relevant statutory provisions that bear upon the discussion that would follow. At this stage, it may be observed that since the provisions of Section 6B of the Act of 1941 and the provisions of Section 4AAA of the Act of 1954 are identical, so the reference shall be made only to the provision of Section 6B alone.
6. First the relevant provisions of the Bengal Finance (Sales Tax) Act, 1941 which are in the following terms :
6B. (1) Notwithstanding anything contained elsewhere in this Act,-
(a) every dealer, whose aggregate of the gross turnover under this Act and the gross turnover under the West Bengal Sales Tax Act, 1954 (West Ben. Act IV of 1954) during the last year ending on or before the 31st day of March, 1979, exceeds rupees fifty lakhs, shall, in addition to the tax payable by him under Section 5 and Section 6C, if any, be liable to pay from the 1st day of April, 1979, a turnover tax at the rate specified in Sub-section (3) of such part of his turnover as specified in Sub-section (2);
(b) every dealer, other than those referred to in Clause (a), whose aggregate of the gross turnover under this Act and the gross turnover under the West Bengal Sales Tax Act, 1954 during any year ending on or after the 1st day of April, 1979, exceeds rupees fifty lakhs shall, in addition to the tax payable by him under Section 5 and Section 6C, if any, be liable to pay from the first day of the year immediately following such year a turnover tax at the rate specified in Sub-section (3) of such part of his turnover as specified in Sub-section (2);
(c) every dealer who has become liable to pay the turnover tax under Clause (a) or Clause (b) shall continue to be so liable until the expiry of three consecutive years during each of which the aggregate of his gross turnover under this Act and the gross turnover under the West Bengal Sales Tax Act, 1954 does not exceed rupees fifty lakhs and on the expiry of such three years his liability to pay the turnover tax shall cease.
(2) The turnover tax shall be levied on that part of the gross turnover of a dealer during any period which remains after deducting therefrom his turnover during that period on-
(a) sales of goods referred to in Section 14 of the Central Sales Tax Act, 1956 (74 of 1956);
(b) sales of electrical energy and newspapers ;
(c) sales of 'motor spirit' as defined in Clause (b) of Section 2 of the West Bengal Motor Spirit Sales Tax Act, 1974 (West Ben. Act XI of 1974);
(d) sales of goods declared tax-free under Section 6;
(e) sales of goods which are generally exempt from tax under Sub-clause (vi) of Clause (a) of Sub-section (2) of Section 5 ;
(f) sales referred to in Sub-clause (v) of Clause (a) of Sub-section (2) of Section 5 of goods, other than those specified in Clauses (a), (b), (c), (d) and (e);
(g) such other sales as may be prescribed.
(3) The turnover tax shall be levied at the rate of-
(a) one per centum of such part of the turnover as specified in Sub-section (2), if the aggregate of the gross turnover under this Act and the gross turnover under the West Bengal Sales Tax Act, 1954 (West Ben. Act IV of 1954), of the dealer liable to pay such tax exceeds rupees one crore during the year in respect of which or part of which the turnover tax is levied;
(b) one-half of one per centum of such part of the turnover as specified in Sub-section (2), if the provisions of Clause (a) do not apply:
Provided that the tax payable by a dealer under Clause (a) shall not exceed a sum equivalent to the aggregate of one-half of the tax payable by him in accordance with the said clause and ten per centum of the amount by which his aforesaid gross turnover exceeds rupees one crore.
(4) No dealer shall realise from his purchaser the turnover tax payable by him under this section.
Section 27 : (1) Notwithstanding anything contained in this Act,-
(a) a tax on sale or purchase of goods shall not be imposed under this Act,
(i) where such sale or purchase takes place outside the State of West Bengal;
(ii) where such sale or purchase takes place in the course of import of the goods into, or export of the goods out of, the territory of India;
(b) a tax on the sale or purchase of any goods shall not, after the 31st day of March, 1951, be imposed where such sale or purchase takes place in the course of inter-State trade or commerce.
7. The relevant provisions of Section 64A of the Sale of Goods Act are in the following terms:
64A. (1) Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in Sub-section (2) being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods without stipulation as to the payment of tax where tax was not chargeable at the time of the making of the contract, or for the sale or purchase of such goods tax-paid where tax was chargeable at that time,-
(a) if such imposition or increase so takes effect that the tax or increased tax, as the case may be, or any part of such tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such tax or increase of tax and he shall be entitled to be paid and to sue for and recover such addition; and
(b) if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer may deduct so much from the contract price as will be equivalent to the decrease of tax or remitted tax and he shall not be liable to pay, or be sued for, or in respect of, such deduction.
(2) The provisions of Sub-section (1) apply to the following taxes, namely:-
(a) any duty of customs or excise on goods ;
(b) any tax on the sale or purchase of goods.
The relevant provisions of the Constitution of India which require to be mentioned are in the following terms :
Article 14. The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.
Article 19. (1) All citizens shall have the right-
* * *
(g) to practice any profession, or to carry on any occupation, trade or business.
Article 264. (1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of Clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void.
(2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that State :
Provided that nothing in this clause shall prevent Parliament from enacting at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the Legislature of the State.
Article 286. (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place-
(a) outside the State; or
(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.
(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in Clause (1).
(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of, a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidence, of the tax as Parliament may by law specify.
Article 301 : Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.
8. Entry 54 of List II of the 7th Schedule :
Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I.
9. Entry 92-A of List I of the Schedule :
Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce.
10. As to the first contention, it may be observed that in substance what has been canvassed on behalf of the appellants and the writ petitioners is that the "turnover tax" is not a tax on sales. So the primary question that has to be answered is as to whether it is so or not. In this regard we may, with respect, approvingly recall what the learned single Judge had to say in the context of Section 5(1) of the Act which is the main provision and which provides for the imposition of sales tax.
The definition clause itself makes it clear that it is tax on sale. It is to be noticed that the main provision for taxation of sales tax is also on such basis. Under section 5 of the said Act, the tax payable shall be levied on its taxable turnover at the rates specified. The main provision of the Act is an imposition of tax on the basis of a turnover and this is also the same in respect of section 6B. No contention is being raised that the main provision of the Act for imposition of tax under Section 4 read with Section 5 does not amount to sales tax. Provision for imposition of tax, i.e., on turnover in the parent Act is the same as in Section 6B(1) also. Accordingly, in my opinion, this is also a tax on sale. It is merely an additional tax and not a tax on income.
11. Relevant portion of Section 5(1) reads as under :
5. Levy of tax on sales or purchases of goods.-(1) Every dealer (other than a casual trader and an agent of a non-resident dealer) whose total turnover for a year is not less than Rs. 10,000 and every casual trader or agent of a non-resident dealer, whatever be his turnover for the year, shall pay a tax for each year, at the rate of two naye paise on every rupee of his turnover:
Provided that if and to the extent to which, such turnover relates to articles of food or drink or both sold in a hotel, boarding-house, restaurant, shall or any other place, the tax shall be calculated at the rate of three naye paise in the rupee, if the total turnover relating to those articles is not less than Rs. 25,000.
12. Perusal of the aforesaid provision of Section 6 would indicate that it envisages sales tax at the given rate on the taxable turnover of a dealer whose gross turnover exceeded the prescribed limit. Validity of this provision has not been challenged. If the provision of Section 5 is held to be providing for the imposition of tax on sales and is therefore within the legislative competence of the West Bengal Legislature, then we see no reason as to why the identical provision of Section 6B providing for the imposition of turnover tax cannot be considered to be a provision which provides for the imposition of a tax on sales and thus falling strictly within the purview of entry 54 of List II of Seventh Schedule of the Constitution of India.
13. Learned counsel appearing for the dealers, however, argued that whereas the sales tax is a tax on sales and is leviable at the time of sale, the turnover tax is a tax in relation to sales tax and comes in for levying at the end of the year if the gross turnover of the dealers had exceeded the prescribed limit and is thus not a tax on sales and that, in fact, it is a tax on income. Learned counsel sought support for the above submission from the following observation of the Supreme Court in State of Madhya Pradesh v. Shyama Charan Shukla reported in [1972] 29 STC 215:
It is a part of the general scheme of all sales tax laws that taxes become due the moment a dealer makes either purchases or sales which are subject to taxation and the obligation to pay the tax arises. Although the tax liability which comes into existence cannot be enforced till the quantification is effected by assessment proceedings the liability for payment of tax is independent of the assessment: [see Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax, Central, Calcutta (Civil Appeal No. 1899 of 1967 decided on August 17, 1971) since reported at [1971] 28 STC 672 (SC)].
14. There is no dispute with the proposition of law enunciated by their Lordships in regard to the occurring of liability to pay sales tax. But this statement of law, in no manner supports the contention advanced on behalf of the dealers. If their contention is accepted in regard to the turnover tax, then the position regarding the tax envisaged by the main taxing provision of Section 5, too would not be any different. For in that case too the prescribed gross turnover rendering a dealer liable to pay sales tax is not reached at the time of very first sale transaction and therefore the dealer would not know as to whether on the said transaction of sale, he would be liable to pay tax or not. This aspect is relevant to his ability to pass on the incidence of tax to the buyer and this aspect, it may be observed, is not relevant in determining whether the given levy is a sales tax or not. A sales tax remains a sales tax even when the dealer is not able to pass on the same to the buyer, which can happen, either when he is specifically prohibited for recouping himself as is envisaged by Section 6B(4) or it may arise from an amendment of taxing Act, making the imposition of tax or additional tax to take effect from a back date, [see in this regard AIR 1958 SC 756 (Konduri Buchirajalingam v. State of Hyderabad)].
15. In our opinion, in the ultimate analysis, turnover tax is a tax on sales and not on income. What constitutes the gross annual turnover of a dealer is the sale proceeds of individual sale transactions effected during the accounting period and, therefore, the turnover tax which is imposable on taxable turnover of a dealer is a tax on each sale transaction of a dealer and is, therefore, pure and simple sales tax and nothing else. It would be a misnomer to call it a tax on income. The above view receives support from the following observation of the Federal Court in The Province of Madras v. Boddu Paidanna & Sons reported in [1942] 1 STC 104, made while repelling the contention that the tax imposed on a dealer's turnover is not in reality a tax on sales :
A tax on a dealer's turnover is, in effect, a tax on his purchases or sales as the case may be. Whether the legislature makes him pay a tax on each transaction or whether it makes him pay a lump sum when the sales for a particular period have been ascertained, the result is the same - a tax on his purchases or sales. The whole includes the part. And the very title given to the Act implies that it is a tax on sales.
16. Once it is held that "turnover tax" is a tax on sales imposed in addition to the tax on sales envisaged by the main taxing provision of Section 5 then the argument questioning the legislative competence of the State Legislature on the ground that the subject-matter does not fall within entry 64 of List II, would be of no avail.
17. It was, however, next urged as to where was the necessity of enacting a separate provision providing for imposition of additional tax in the form of a turnover tax, when the demand for additional revenue could have been satisfied by enhancing the rate of sales tax, by amending the main taxing provision of the statute, which provides for the imposition of sales tax ? For one thing, it is for the legislature to work out and give effect to its legislative policy in regard to the raising of the revenue for the State and prescribe the modalities thereof and for another, the legislature while enacting the tax laws has to bear in mind the directive principles of the State policy, enshrined in the Constitution and the need to spread the tax burden in a manner that it falls on the shoulders which can bear it and do so in a manner that it tends to achieve in some measure the concept of socio economic equality.
18. Now coming to the judicial precedents which squarely cover the proposition Nos. 1 and 2 against the dealers, the pride of place has to be accorded to S. Kodar v. State of Kerala AIR 1974 SC 2272 ratio whereof has been reiterated by their Lordships in Hoechst Pharmaceuticals Ltd. v. State of Bihar AIR 1983 SC 1019 and K.M. Mohamed Abdul Khader Firm v. State of Tamil Nadu AIR 1985 SC 12.
19. However before noticing the relevant Supreme Court decisions, notice be first taken on an Andhra Pradesh High Court judgment in A.S. Ratnachandra Rao & Co. v. State of Andhra Pradesh reported in [1969] 24 STC 133 which had been expressly approved by their Lordships in Kodar's case AIR 1974 SC 2272. In that case similar contention had been urged before the court in regard to the constitutional validity of the provision imposing additional tax. Ramachandra Rao, J., who delivered the opinion for the Bench repelled all such contentions including the contention that the turnover tax was not sales tax with the following observations with which we entirely agree.
The legislative power to make laws for imposing taxes on sale or purchase of goods is conferred by entry 92-A of List I and entry 54 of List II of the Seventh Schedule of the Constitution, The word 'sale' in the said entries is used in the sense in which it occurs in Section 4 of the Sale of Goods Act. It is not disputed that what are taxable under Section 5 of the Act are the transactions of sales or purchases and that Section 5 has been validly enacted in exercise of the power under entry 54 of List II of the Seventh Schedule of the Constitution. But what is contended for the petitioners is that the unit of taxation fixed under Section 5-A is different from that prescribed under Section 5. We have therefore to see whether on the plain language of the provisions of Section 5-A, the nature of the tax that is sought to be levied under Section 5-A is in any way different from that leviable under Section 5 of the Act, for it is not disputed before us that what is taxable under Section 5 is the transaction or event of sale.
Under Section 5 it is prescribed that every dealer whose total turnover for a year is not less than Rs. 10,000 and every non-resident dealer whatever be his turnover for the year, shall pay a tax for each year at the rate of 0.02 naye paise (now 0.03 paise) on every rupee of his turnover. The 'turnover' as defined in Section 2(s) is only the total amount set out in the bill of sale (or if there is no bill of sale, the total amount charged) as the consideration for the sale or purchase of goods. The tax is therefore levied on the total amount of consideration in respect of each sale. But an exemption is granted in respect of a dealer, whose total turnover is less than Rs. 10,000 per year. The taxable event under Section 5 is only the sale transaction under Section 5. Section 6-A similarly provides for an additional tax at the rate of one-fourth naya paisa (now paisa) on every rupee of the turnover of a dealer liable to be taxed under Section 5 provided the total turnover is rupees three lakhs or more. What is taxed under Section 6-A is also the event or transaction of sale but a higher rate by way of an additional tax of one-fourth naya paisa (now paisa) on every rupee of the turnover is prescribed in respect of dealers having a total turnover of rupees three lakhs or more. The mere fact that the additional tax of one-fourth naya paisa is provided in an independent section of the Act, does not make it any the less a tax on the sale transaction. Just as dealers having a total turnover of less than Rs. 10,000 are exempt from paying any sales tax, dealers having a total turnover of less than rupees three lakhs are exempt from paying the additional tax leviable under Section 5-A. An argument has been raised upon the language of the marginal notes of the two Sections 5 and 6-A. It is contended that the marginal note of Section 5 is 'levy of tax on sales or purchases of goods', while the marginal note for Section 5-A is levy of additional tax on turnover'. It is submitted that the taxable event is the sale or purchase of goods under Section 5 while that under Section 5-A it is the turnover. It is an established principle of interpretation of statutes that when the words used in the sections of the Act are clear and unambiguous the marginal notes cannot control the construction of the section. Even otherwise we are not persuaded that the marginal note of the two sections, Sections 5 and 5-A, are in any way materially different. As already mentioned the 'turnover' as defined in the Act is the total amount of consideration for the sale or purchase of goods. Therefore the levy, even according to the marginal note, under Section 5-A refers only to the levy of additional tax on the sale or purchase of goods. The plain language of the section does not therefore support the contention of the learned counsel that the unit of taxation under Section 5-A is not the transaction of sale and that it falls outside entry 54 of List II of the Seventh Schedule of the Constitution.
20. In the case of S. Kodar v. State of Kerala AIR 1974 SC 2272, while posing a challenge to the validity of the Tamil Nadu Additional Sales Tax Act, 1970, it was contended that Legislature of Tamil Nadu had no power to enact the Act as the tax imposed by the Act was a tax on the income of the dealer and that the imposition of such a tax is outside the scope of entry 54 of List II. Secondly, it was contended that the provision in the Act in so far as it prohibited a dealer from collecting the tax from the purchaser is an unreasonable restriction upon his fundamental right to carry on trade under article 19(1)(g) and their right to hold property under article 19(1)(f). It was also contended that the provisions of the Act were violative of the fundamental right under article 14 in that they imposed different rates of tax, on the sale of same goods according to the turnover of the dealer. Their Lordships repelled their contentions with the following observation :
As regards the contention that the State Legislature has no power to pass the measure, we are of the view that the additional tax is really a tax on the sale of goods. The object of the Act, as is clear from its provisions, is to increase the tax on the sale or purchase of goods imposed by the Tamil Nadu General Sales Tax Act, 1959 and the fact that the quantum of the additional tax is determined with reference to the sales tax imposed would not alter its character. It may be noted that the additional tax is to be imposed only if the turnover of a dealer exceeds Rs. 10 lakhs. It is in reality a tax on the aggregate of sales effected by a dealer during a year. The additional tax, therefore, is an enhancement in the rate of the sales tax when the turnover of a dealer exceeds Rs. 10 lakhs a year and it is a tax on the aggregate of the sales effected by the dealer during the year. The decision in Ernakulam Radio Company v. State of Kerala [1966] 18 STC 445 at 449, which was affirmed by a Division Bench of the Kerala High Court in Kilikar v. Sales Tax Officer [1968] 21 STC 252 took that view. The same view was taken by the Andhra Pradesh High Court in A.S. Ramachandra Rao v. State of Andhra Pradesh [1969] 24 STC 133. This is the correct view. Entry 54 in List II authorises the State Legislature to impose a tax on the sale or purchase of goods. So, the contention of the appellants that the additional sales tax is not a tax on sales but on the income of the dealer is without any basis.
As regards the second contention that the provisions of the Act are violative of the fundamental rights of the appellants under article 19(1)(f) and 19(1)(g), as the tax is upon the sale of goods and is not shown to be confiscatory, it cannot be said that the provisions of the Act impose any unreasonable restrictions upon the appellants right to carry on trade. It is, no doubt, true that every tax imposes some restriction upon the right to carry on a business; but it would not follow that the imposition of the tax in question is an unreasonable restriction upon the appellants' fundamental right to carry on trade. Generally speaking, the amount or rate of a tax is a matter exclusively within the legislative judgment and as long as a tax retains its avowed character and does not confiscate property to the State under the guise of a tax, its reasonableness is outside the judicial ken.
But it was contended that as the dealer is prohibited from passing on the incidence of tax to the purchaser, the additional tax, unlike sales tax, is a tax on income of the dealer which he must pay whether he makes any profit or not and is, therefore, an unreasonable restriction on his fundamental rights under article 19(1)(g).
The legal incidence of a tax on sale of goods under the Tamil Nadu General Sales Tax Act, 1959, falls squarely on the dealer. It may be that he can add the tax to the price of the goods sold and thus pass it on to the purchaser. But it is not necessary that the dealer should be enabled to pass on the incidence of the tax on sale to the purchaser in order that it might be a tax on sales of goods.
In J.K. Jute Mills Co. v. State of U.P. [1962] 2 SCR 1 at 13, this court said, although it is true that sales tax is, according to accepted notions, intended to be passed on to the buyer and provisions authorising and regulating the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation, it is not an essential characteristic of a sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers.
21. In Konduri Buchirajalingam v. State of Hyderabad [1958] 9 STC 397 (SC); this court said :
It is then said that the sales tax is essentially an indirect tax and therefore it cannot be demanded of the appellant without allowing him to recoup himself by collecting the amount of the tax from the persons with whom he deals. This court has already decided in the case of Tata Iron and Steel Co. Limited v. State of Bihar [1958] 9 STC 267 (SC), that in law a sales tax need not be an indirect tax and that a tax can be a sales tax though the primary liability for it is put upon a person without giving him any power to recoup the amount of the tax payable, from any other party.
As we said, the additional tax is a tax upon sales of goods and not upon the income of a dealer and so long as it is not made out that the tax is confiscatory, it is not possible to accept the contention that because the dealer is disabled from passing on the incidence of tax to the purchaser, the provisions of the Act impose an unreasonable restriction upon the fundamental rights of the appellants under article 19(1)(g) or 19(1)(f).
The last contention, namely, that the provisions of the Act impose different rates of tax upon different dealers depending upon their turnover which in effect means that the rate of tax on the sale of goods would vary with the volume of the turnover of a dealer and are, therefore, violative of article 14 is also without any basis. Classification of dealers on the basis of their respective turnovers for the purpose of graded imposition so long as it is based on differential criteria relevant to the legislative object to be achieved is not unconstitutional. A classification depending upon the quantum of the turnover for the purpose of exemption from tax has been upheld in several decided cases. By parity of reasoning, it can be said that a legislative classification making the burden of the tax heavier in proportion to the increase in turnover would be reasonable. The basis is that just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one. The flat rate is thought to be less efficient than the graded one as an instrument of social justice. The large dealer occupies a position of economic superiority by reason of his greater volume of business. And, to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality. The economic wisdom of a tax is within the exclusive province of the legislature. The only question for the court to consider is whether there is rationality in the belief of the legislature that capacity to pay the tax increases, by and large, with an increase of receipts.
'Certain it is that merchants have faith in such a correspondence and act upon that faith.... If experience did not teach that economic advantage goes along with larger sales, there would be an end to the hot pursuit for wide and wider markets...In brief, there is a relation of correspondence between capacity to pay and the amount of business done. Exceptions, of course, there are. The law builds upon the probables and shapes the measure of the tax accordingly.... At the very least, an increase of gross sales carries with it an increase of opportunity for profit, which supplies a rational basis for division into classes, at all events when coupled with evidence of a high degree of probability that the opportunity will be fruitful.' (Stewart Dry Goods Co. v. Lewis, 294 US 550; see the dissenting judgment of Cardozo, J., Brandeis, J. and Stone, J.) The reasoning of the minority in that case appeals to us as more in consonance with social justice in an egalitarian State than that of the majority.
As we said, a large dealer occupies a position of economic superiority by reason of his volume of business and to make the tax heavier on him, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus arrive in the end at a more genuine equality. The capacity of a dealer, in particular circumstances, to pay tax is not an irrelevant factor in fixing the rate of tax and one index of capacity is the quantum of turnover. The argument that while a dealer beyond certain limit is obliged to pay higher tax, when others bear a less tax and it is consequently discriminatory, really misses the point, namely, that the former kind of dealers are in a position of economic superiority by reason of their volume of business and form a class by themselves. They cannot be treated as on a par with comparatively small dealers. An attempt to proportion the payment to capacity to pay and thus bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on the sale or purchase of goods. The object of a tax is not only to raise revenue but also to regulate the economic life of the society.
22. In Hoechst Pharmaceuticals Ltd. v. State of Bihar reported in AIR 1983 SC 1019, facts were that Sub-section (1) of Section 5 of the Bihar Finance Act provided for the levy of surcharge on every dealer whose gross turnover during a year exceeded Rs. 5 lakhs in addition to the tax payable by him, at such rate as not exceeding 10 per centum of the total amount of the tax. Sub-section (3) of Section 5 prohibited such dealer from collecting the amount of surcharge payable by him from the purchasers. It was contended before their Lordships that the field of price fixation of essential commodities in general and drugs and formulations in particular was an occupied field by virtue of various control orders issued by the Central Government from time to time under Sub-section (1) of Section 3 of the Essential Commodities Act, 1955 which allowed the manufacturer or producer of goods to pass on the tax liability to the consumer and therefore the State Legislature of Bihar had no legislative competence to enact Sub-section (3) of Section 5 of the Act which interdicts that no dealer liable to pay a surcharge, in addition to the tax payable by him, shall be entitled to collect the amount of surcharge and thereby trenches upon a field occupied by a law made by Parliament. Alternatively the submission was that if Sub-section (3) of Section 5 of the Act were to cover all sales including sales of essential commodities whose prices were fixed by the Central Government by various control orders issued under the Essential Commodities Act, then there would be repugnancy between the State law and the various control orders which according to Section 6 of the Essential Commodities Act must prevail. Yet another submission put forward before their Lordships was that Sub-section (1) of Section 5 of the Act was ultra vires the State Legislature, inasmuch as the liability to pay surcharge is on a dealer whose gross turnover during a year exceeded Rs. 5 lakhs or more, i.e., inclusive of transactions relating to sale or purchase of goods which had taken place in the course of inter-State trade or commerce or outside the State or in the course of import into, or export of goods outside the territory of India. The submission was that such transactions were covered by article 286 of the Constitution and therefore, were outside the purview of the Act and thus they could not be taken into consideration for computation of the gross turnover as defined in Section 2(j) of the Act for the purpose of bearing the incidence of surcharge under Sub-section (1) of Section 5 of the Act. Their Lordships repelled each contention and reiterated the view taken in Kodar's case AIR 1974 SC 2272. In this regard the following observations are relevant:
10. In Kodar's case [1975] 1 SCR 121, this court upheld the constitutional validity of the Tamil Nadu Additional Sales Tax Act, 1970, which imposes additional sales tax at 5 per cent on a dealer whose annual gross turnover exceeds Rs. 10 lakhs. The charging provision in Sub-section (1) of Section 2 of that Act is in terms similar to Sub-section (1) of Section 5 of the Act and provides that the tax payable by a dealer whose turnover for a year exceeds Rs. 10 lakhs shall be increased by an additional tax at 5 per cent of the tax payable by him. Sub-section (2) of that Act is in pari materia with Sub-section (3) of Section 5 of the Act and provides that no dealer referred to in Sub-section (1) shall be entitled to collect the additional tax payable by him. The court laid down that: (1) The additional tax levied under Sub-section (1) of Section 2 of that Act was in reality a tax on the aggregate of sales effected by a dealer during a year and, therefore, the additional tax was really a tax on the sale of goods and not a tax on the income of a dealer and, therefore, falls within the scope of entry 54 of List II of the Seventh Schedule. (2) Generally speaking, the amount or rate of tax is a matter exclusively within the legislative judgment and so long as a tax retains its avowed character and does not confiscate property to the State under the guise of a tax, its reasonableness cannot be questioned by the court. The imposition of additional tax on a dealer whose annual turnover exceeds Rs. 10 lakhs is not an unreasonable restriction on the fundamental rights guaranteed under article 19(1)(g) or (f) as the tax is upon the sale of goods and was not shown to be confiscatory. (3) It is not an essential characteristic of a sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the legislature to impose a tax on sales conditional on its making a provision for seller to collect the tax from the purchasers. Merely because Sub-section (2) of Section 2 of that Act prevented a dealer from passing on the incidence of additional tax to the purchaser, it cannot be said that the Act imposes an unreasonable restriction upon the fundamental rights under article 19(1)(g) or (f). The Act was not violative of article 14 of the Constitution as classification of dealers on the basis of their turnover for the purpose of levy of additional tax was based on the capacity of dealers who occupy a position of economic superiority by reason of their greater volume of business, i.e., on capacity to pay and such classification for purposes of the levy was not unreasonable.
28. It cannot be doubted that a surcharge partakes of the nature of a sales tax and therefore it was within the competence of the State Legislature to enact Sub-section (1) of Section 5 of the Act for the purpose of levying surcharge on certain class of dealers in addition to the tax payable by them. When the State Legislature had competence to levy tax on sale or purchase of goods under entry 54, it was equally competent to select the class of dealers on whom the charge will fall. If that be so, the State Legislature could undoubtedly have enacted Sub-section (3) of Section 5 of the Act prohibiting the dealers liable to pay a surcharge under Sub-section (1) thereof from recovering the same from the purchaser. It is fairly conceded that Sub-section (3) of Section 5 of the Act is also relatable to entry 54. The contention however is that there is conflict between paragraph 21 of the Control Order which allows a manufacturer or producer of drugs to pass on the liability to pay sales tax and Sub-Section (3) of Section 5 of the Act which prohibits such manufacturers or producers from recovering the surcharge and, therefore, it is constitutionally void. It is said that the courts should try to adopt the rule of harmonious construction and give effect to paragraph 21 of the Control Order as the impact of Sub-section (3) of Section 5 of the Act is on fixation of price of drugs under the Drugs (Price Control) Order and, therefore, by reason of Section 6 of the Essential Commodities Act, paragraph 21 of the Control Order which provides for the passing on of tax liability must prevail. The sxibmission rests on a construction of article 246(3) of the Constitution and it is said that the power of the State Legislature to enact a law with respect to any subject in List II is subject to the power of Parliament to legislate with respect to matters enumerated in Lists I and III.
36. The principal point in controversy is : Whether there is repugnancy between Sub-Section (3) of Section 5 of the Act and paragraph 21 of the Control Order and therefore Sub-section (3) of Section 5 must yield to that extent. The submission is that if Parliament chooses to occupy the field and there is price fixation of an essential commodity with liberty to pass on the burden of tax to the consumer by a law made by Parliament under entry 33 of List III of the Seventh Schedule, then it is not competent for the State Legislature to enact a provision like Sub-section (3) of Section 5 of the Act while enacting a law under 'entry 64 of List II prohibiting the passing on of liability of tax to the purchaser.
72. We are unable to appreciate the contention that Sub-section (3) of Section 5 of the Act being a State law must be struck down as ultra vires as the field of fixation of price of essential commodities is an occupied field covered by a Central legislation. It is axiomatic that the power of the State Legislature to make a law with respect to the levy and imposition of a tax on sale or purchase of goods relatable to entry 54 of List II of the Seventh Schedule and to make ancillary provisions in that behalf, is plenary and is not subjected to the power of Parliament to make a law under entry 33 of List III. There is no warrant for projecting the power of Parliament to make a law under entry 33 of List III into the State's power of taxation under entry 54 of List II. Otherwise, entry 54 will have to be read as: 'Taxes on the sale or purchase of goods other than essential commodities et cetera.' When one entry is made 'subject to' another entry, all that it means is that out of the scope of the former entry, a field of legislation covered by the latter entry has been reserved to be specially dealt with by the appropriate legislature. Entry 54 of List II of the Seventh Schedule is only subject to entry 92-A of List I and there can be no further curtailment of the State's power of taxation. It is a well-established rule of construction that the entries in the three lists must be read in a broad and liberal sense and must be given the widest scope which their meaning is fairly capable of because they set up a machinery of Government.
78. It is lamentable that there is no factual foundation laid to support the contention that the levy of surcharge under Sub-section (1) of Section 5 of the Act imposes a disproportionate burden on a certain class of dealers such as manufacturers or producers of drugs and pharmaceuticals or dealers engaged in the business of distribution and sale of motor-trucks, etc., to support the assertion that Sub-section (3) of Section 5 of the Act which prohibits such persons from passing on the liability to pay surcharge is arbitrary or irrational, or that it treats 'unequals as equals' and thus infringes article 14 of the Constitution or is confiscatory in nature.
83. It was a startling proposition advanced by learned counsel for the appellants that the court was wrong in Kodar's case AIR 1974 SC 2272 in justifying on the basis of economic superiority the burden of additional sales tax on a certain class of dealers. It was held by the court relying upon the dissenting opinion of Cardozo, J., in Stewart Dry Goods Co. v. Lewis (1935) 294 US 550, that a gross sales tax graduated at increasing rates with the volume of sales on a certain class of dealers does not offend against article 14 of the Constitution. The contention that ability to pay is not a relevant criterion for upholding the validity of Sub-section (3) of Section 5 of the Act cannot be accepted. To say the least, there is no basis for this submission. It is beyond the scope of this judgment to enter into intricacies of public finance, viz., objectives and criteria of a tax, problems of shifting, etc. Nor is it necessary for us to enter into a discussion of the so-called benefit principle, or the alternative approach of ability to pay. There is probably widespread agreement now that taxes that fall on the 'better-off' rather than the 'worse-off' and are progressive rather than proportional, are to be preferred. The concept of 'ability-to-pay' implies both equal treatment of people with equal ability, however measured and a progressive rate structure. The 'ability-to-pay' doctrine has strong affinities to egalitarian social philosophy; both support measures designed to reduce inequalities of wealth and income.
84. On question of economic regulations and related matters, the court must defer to the legislative judgment. When the power to tax exists, the extent of the burden is a matter for the discretion of the lawmakers. It is not the function of the court to consider the propriety or justness of the tax, or enter upon the realm of legislative policy. If the evident intent and general operation of the tax legislation is to adjust the burden with a fair and reasonable degree of equality, the constitutional requirement is satisfied. The equality clause in article 14 does not take from the State a power to classify a class of persons who must bear the heavier burden of tax. The classification having some reasonable basis does not offend against that clause merely because it is not made with mathematical nicety or because in practice it results in some inequalities.
85. In Kodar's case AIR 1974 SC 2272 the constitutional validity of a similar levy was upheld on the capacity to pay. It was observed (at page 77 of STC and page 2276 of AIR):
'The large dealer occupies a position of economic superiority by reason of his greater volume of his business. And, to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality.' The economic wisdom of a tax is within the exclusive province of the legislature. The only question for the court to consider is whether there is rationality in the belief of the legislature that capacity to pay the tax increases by and large with an increase of receipts. The view taken by the court in Kodar's case AIR 1974 SC 2272, is in consonance with social justice in an egalitarian State and, therefore, the contention based on article 14 of the Constitution must fail.
86. The contention that Sub-section (3) Section 6 of the Act imposes an unreasonable restriction upon the freedom of trade guaranteed under article 19(1)(g) of the Constitution proceeds on the basis that sales tax being essentially an indirect tax, it was not competent for the legislature to make a provision prohibiting the dealer from collecting the amount of surcharge cannot prevail. It is urged that the surcharge does not retain its avowed character as sales tax but in its true nature and character is virtually a tax on income, by reason of the limitation contained in Sub-section (3) of Section 5 of the Act. We are not impressed with the argument. Merely because a dealer falling within the class defined under Sub-section (1) of Section 5 of the Act is prevented from collecting the surcharge recovered from him, does not affect the competence of the State Legislature to make a provision like Sub-section (3) of Section 5 of the Act nor does it become a tax on his income. It is no doubt true that a sales tax is, according to the accepted notions, intended to be passed on to the buyer and the provisions authorising and regulating the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation. But it is not an essential characteristic of sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers. Whether a law should be enacted, imposing a sales tax, or validating the imposition of sales tax, when the seller is not in a position to pass it on to the consumer, is a matter of policy and does not affect the competence of the legislature : see Tata Iron & Steel Co. Ltd. v. State of Bihar [1958] SCR 1355, J.K. Jute Mills Co. Ltd. v. State of Uttar Pradesh [1962] 2 SCR 1 and S. Kodar v. State of Kerala [1975] 1 SCR 121. The contention based on article 19(1)(g) cannot therefore be sustained.
23. In K.M. Mohamed Abdul Khader Firm v. State of Tamil Nadu reported in AIR 1985 SC 12 constitutional validity of the provision of Section 2 of the Tamil Nadu Additional Sales Tax (Amendment) Act, 1976 was under challenge. That section provided forlevying additional tax on the basis of taxable turnover. If the taxable turnover exceeded Rs. three lakhs but did not exceed Rs. 5 lakhs, rate of tax was fixed at 0.4 per cent of the taxable turnover. Where the taxable turnover exceeded five lakhs of rupees but did not exceed seven lakhs of rupees the rate was 0.5 per cent. Where the taxable turnover exceeded seven lakhs of rupees but did not exceed ten lakhs of rupees the rate was 0.6 per cent and where the taxable turnover exceeded ten lakhs of rupees the rate fixed was 0.7 per cent.
24. It was contended before their Lordships in this case that since the State Legislature had already provided for the levy of a tax on sales by the Act of 1959 and had also enacted a further statute authorising the levy and collection of a surcharge which is in truth and substance the imposition of an additional sales tax, it could not legally go on legislating further enactments providing again for levy of additional sales tax. It was argued that on that basis the provisions of the impugned Act, 1976 were ultra vires and devoid of legislative competence. This contention was repelled by observing that the impugned enactment had merely amended the 1970 Act. It had not introduced a new tax what it had done was only to amend the 1970 Act by providing for a different method of computation of the additional tax leviable under that Act. The validity of the 1970 Act had been upheld by a Constitution Bench in S. Kodar v. State of Kerala [1975] 1 SCR 121 and there was no longer any scope for the petitioners to contend that the State Legislature had no competence to provide for the levy of additional sales tax.
25. It was then contended before their Lordships that the prescription of different rates of additional sales tax depending upon the quantum of turnover of the different assessees was totally repugnant to the concept of levy of tax on sales and it was urged that there was a clear violation of article 14 of the Constitution as dissimilar treatment was meted out to persons similarly situated. It was also argued before their Lordships that the levy in its present form was really a tax on gross income and not a tax on sales and hence it was ultra vires the State Legislature as it had no competence to levy a tax on income other than agricultural income. Another submission was that the levy of additional sales tax under the impugned Act was confiscatory in nature as it imposed unreasonable restrictions on the petitioners' right to carry on business and offends article 19 of the Constitution, particularly in view of the prohibition contained in Sub-section (2) of Section 2 against collection of additional tax from the consumers. Lastly it was contended before their Lordships that the levy of additional tax under the impugned Act offended article 301 of the Constitution since the imposition of the additional liability would seriously affect the business of the petitioners and on account of their inability to bear the heavy burden their right to carry on freely, trade, commerce and intercourse within the territory of India would be adversely affected. Their Lordships repelled all the above contentions and reiterated the view expressed in Kodar's case [1975] 1 SCR 121.
26. In this regard their Lordships' following observations are instructive :
We are spared the necessity of dealing with any of the aforesaid points in depth because everyone of them is fully covered by the pronouncement of a Constitution Bench of this court in S. Kodar v. State of Kerala AIR 1974 SC 2272 afore-cited.
The contention that the additional sales tax levied under the Tamil Nadu Additional Sales Tax Act, 1970, was not a tax on sales but was in reality a tax on the income of the dealers was rejected by the Constitution Bench which observed thus (page 76 of [1974] 34 STC and para 9 of AIR 1974 SC 2272) :
'As regards the contention that the State Legislature has no power to pass the measure, we are of the view that the additional tax is really a tax on the sale of goods. The object of the Act, as is clear from its provisions, is to increase the tax on the sale or purchase of goods imposed by the Tamil Nadu General Sales Tax Act, 1959 and the fact that the quantum of the additional tax is determined with reference to the sales tax imposed would not alter its character. It may be noted that the additional tax is to be imposed only if the turnover of a dealer exceeds Rs. 10 lakhs. It is in reality a tax on the aggregate of sales effected by a dealer during a year. The additional tax, therefore, is an enhancement in the rate of the sales tax when the turnover of a dealer exceeds Rs. 10 lakhs a year and it is a tax on the aggregate of the sales effected by the dealer during the year. The decision in Ernakulam Radio Company v. State of Kerala [1966] 18 STC 445 at 449 which was affirmed by a Division Bench of the Kerala High Court in Kilikar v. Sales Tax Officer [1968] 21 STC 252 took that view. The same view was taken by the Andhra Pradesh High Court in A.S. Ramachandra Rao v. State of Andhra Pradesh [1969] 24 STC 133. This is the correct view. Entry 54 in List II authorises the State Legislature to impose a tax on the sale or purchase of goods. So, the contention of the appellants that the additional sales tax is not a tax on sales but on the income of the dealer is without any basis.'
27. Dealing with the contention that since the provisions of the Act imposed different rates of tax on different dealers depending upon their turnover there was a violation of article 14 of the Constitution, Mathew J., who spoke for the court observed (page 77 of [1974] 34 STC and paras 16-17 of AIR 1974 SC 2272):
'The last contention, namely, that the provisions of the Act impose different rates of tax upon different dealers depending upon their turnover which in effect means that the rate of tax on the sale of goods would vary with the volume of the turnover of a dealer and are, therefore, violative of article 14 is also without any basis. Classification of dealers on the basis of their respective turnovers for the purpose of graded imposition so long as it is based on differential criteria relevant to the legislative object to be achieved is not unconstitutional. A classification depending upon the quantum of the turnover for the purpose of exemption from tax has been upheld in several decided cases. By parity of reasoning, it can be said that a legislative classification making the burden of the tax heavier in proportion to the increase in turnover would be reasonable. The basis is that just as in taxes uppon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one. The flat rate is thought to be less efficient than the graded one as an instrument of social justice. The large dealer occupies a position of economic superiority by reason of his greater volume of his business. And, to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality. The economic wisdom of a tax is within the exclusive province of the legislature. The only question for the court to consider is whether there is rationality in the belief of the legislature that capacity to pay the tax increases, by and large, with an increase of receipts.
Certain it is that merchants 1ave faith in such a correspondence and act upon that faith.... If experience did not teach that economic advantage goes along with larger sales, there would be an end to the hot pursuit for wide and wider markets...In brief, there is a relation of correspondence between capacity to pay and the amount of business done. Exceptions, of course, there are. The law builds upon the probables and shapes the measure of the tax accordingly.... At the very least, an increase of gross sales carries with it an increase of opportunity for profit, which supplies a rational basis for division into classes, at all events when coupled with evidence of a high degree of probability that the opportunity will be fruitful." [Stewart Dry Goods Company v. Lewis (1935) 294 US 550; see the dissenting judgment of Justice Cardozo, Justice Brandeis and Justice Stone.] The reasoning of the minority in that case appeals to us as more in consonance with social justice in an egalitarian State than that of the majority.
As we said, a large dealer occupies a position of economic superiority by reason of his volume of business and to make the tax heavier on him, both absolutely and relatively, is not arbitrary discrimination but an attempt to proportion the payment to capacity to pay and thus arrive in the end at a more genuine equality. The capacity of a dealer, in particular circumstances, to pay tax is not an irrelevant factor in fixing the rate of tax and one index of capacity is the quantum of turnover. The argument that while a dealer beyond certain limit is obliged to pay higher tax, when others bear a less tax and it is consequently discriminatory, really misses the point, namely, that the former kind of dealers are in a position of economic superiority by reason of their volume of business and form a class by themselves. They cannot be treated as on a par with comparatively small dealers. An attempt to proportion the payment to capacity to pay and thus bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on the sale or purchase of goods. The object of a tax is not only to raise revenue but also to regulate the economic life of the society.' The same principles have been recently reiterated by a three Judge Bench of this court in the case of Hoechst Pharmaceuticals Ltd. v. State of Bihar (1983) 4 SCC 45. In the light of the aforesaid pronouncements, it is manifest that the contentions put forward by the petitioners that the impugned enactment is devoid of legislative competence inasmuch as it imposes not a tax on sales but a tax on income, that the adoption of a slab system for determining tax liability is alien to the concept of sales tax and that the levy of additional tax under the impugned enactment violates articles 14 and 19 of the Constitution are all totally devoid of merit. We do not also see any substance in the plea raised in the writ petitions that the provisions of the impugned Act are violative of article 301 of the Constitution.
28. The contention that the sales tax is an indirect tax as the dealer is always entitled and statutorily enabled to pass on the incidence of tax to the purchasers and that the legislature is not competent to impose sales tax in the form of direct tax and, therefore, the provision of Section 6B(4) which prohibits the dealer from passing on the tax burden to the purchaser is confiscatory and unreasonable and thus ultra vires the provision of article 19(1)(g) and 19(1)(f) has been repeatedly rejected by the Supreme Court. Latest reiteration of their view can be gathered from the following observation from Abdul Khader's case AIR 1985 SC 12 :
The further plea that the levy of additional tax was confiscatory in nature and the prohibition against passing on the burden to the consumers was an unreasonable restriction was also negatived by this court by stating (page 17 of STC and paras 10 to 15 of AIR 1974 SC 2272):
'As regards the second contention that the provisions of the Act are violative of the fundamental rights of the appellants under article 19(1)(f) and 19(1)(g), as the tax is upon the sale of goods and is not shown to be confiscatory, it cannot be said that the provisions of the Act impose any unreasonable restrictions upon the appellants' right to carry on trade. It is, no doubt, true that every tax imposes some restriction upon the right to carry on a business; but it would not follow that the imposition of the tax in question is an unreasonable restriction upon the appellants' fundamental right to carry on trade. Generally speaking, the amount or rate of a tax is a matter exclusively within the legislative judgment and as long as a tax retains its avowed character and does not confiscate property to the State under the guise of a tax, its reasonableness is outside the judicial ken.
But it was contended that as the dealer is prohibited from passing on the incidence of tax to the purchaser, the additional tax, unlike sales tax, is a tax on income of the dealer which he must pay whether he makes any profit or not and is, therefore, an unreasonable restriction on his fundamental rights under article 19(1)(g).
The legal incidence of a tax on sale of goods under the Tamil Nadu General Sales Tax Act, 1959, falls squarely on the dealer. It may be that he can add the tax to the price of the goods sold and thus pass it on to the purchaser. But it is not necessary that the dealer should be enabled to pass on the incidence of the tax on sale to the purchaser in order that it might be a tax on sales of goods.
In J.K. Jute Mills Co. Ltd. v. State of U.P. [1962] 2 SCR 1 at 13 this court said, although it is true that sales tax is, according to accepted notions, intended to be passed on to the buyer and provisions authorising and regulating the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation, it is not an essential characteristic of a sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers.
29. In Konduri Buchirajalingam v. State of Hyderabad AIR 1958 SC 756 this court said (page 403 of STC and para 9 of AIR):
It is then said that the sales tax is essentially an indirect tax and, therefore, it cannot be demanded of the appellant without allowing him to recoup himself by collecting the amount of the tax from the persons with whom he deals. This court has already decided in the case of Tata Iron and Steel Co. Limited v. State of Bihar AIR 1958 SC 452 that in law a sales tax need not be an indirect tax and that a tax can be a sales tax though the primary liability for it is put upon a person without giving him any power to recoup the amount of the tax payable, from any other party.
As we said, the additional tax is a tax upon sales of goods and not upon the income of a dealer and so long as it is not made out that the tax is confiscatory, it is not possible to accept the contention that because the dealer is disabled from passing on the incidence of tax to the purchaser, the provisions of the Act impose an unreasonable restriction upon the fundamental rights of the appellants under article 19(1)(g) or 19(1)(f).
30. Learned counsel appearing for the dealers, however, sought to argue in the context of the validity of the provisions of Section 6B(4) that for one thing their Lordships in Tata Iron and Steel Co. Limited [1958] SCR 1355 and Kodar's case [1975] 1 SCR 121 did not examine the legislative competency to enact the given provision, after taking notice of the provision of Section 64A of the Sale of Goods Act and for another the impugned provisions in these cases did not provide for levy of turnover tax as the given provisions in those cases provided for the imposition of additional tax linking the same with annual sales tax payable by the dealer and not with his annual taxable turnover as had been done by the West Bengal Legislature by enacting the 1979 Amendment.
31. So far as the High Court and the court below are concerned on whom the decision of the Supreme Court is binding, it may be observed that the ratio of the Supreme Court judgment cannot be explained away by urging that their Lordships had not taken notice of the argument which is sought to be advanced before the High Court. What is more their Lordships in an earlier case in Khazan Chand v. State of Jammu and Kashmir [1984] 56 STC 214 (SC) had taken notice of the provisions of Section 64A of the Sale of Goods Act. In this regard reference can be made to the following observations of their Lordships:
We do not find Section 64A of the Sale of Goods Act to have any relevance to the point before us. That section is subject to a different intention appearing from the terms of the contract and gives a right to the seller to add the amount of customs or excise duty or sales tax or purchase tax to the price of goods where such duty or tax is imposed for the first time after the contract of sale is made, where the contract does not contain any stipulation as to payment of duty or tax, or in case the goods are sold duty paid or tax paid, where the rate of such duty or tax is increased, to add the extra duty or tax to the contract price. That section also gives a corresponding right to the buyer to deduct so much from the contract price as will be equivalent to the decrease of duty or tax or remitted duty or tax where any decrease or remittance in duty or tax takes place after the making of the contract of sale. Section 64A thus provides for the rights and liabilities inter se of a seller and buyer of goods, where any customs or excise duty or any sales tax or purchase tax is imposed or its rate increased or decreased, or such duty or tax remitted in whole or in part after the making of the contract of sale. This section does not deal with the liability of the seller to pay sales tax to the Government.
In any case, even if for the sake of argument, it is assumed that the provision of Section 6B(4) runs counter to the provision of Section 64A of the Sale of Goods Act, i.e., to some extent the statutory provisions of Section 6B encroaches upon the field occupied by Section 64A of the Sale of Goods Act, an Act which had been enacted by the Central Legislature, then to the provision of Section 6B(4) cannot be held to be invalid on account of lack of legislative competence on the part of the legislature in view of the provisions of article 254 of the Constitution of India. Because article 254 of the Constitution of India provides for a contingency, where on a given subject both the State Legislature and the Central Legislature are competent to enact legislation and they happen to enact statutes which are incompatible with each other. The provisions of article 254 do not cover a case where the State legislation is on a subject on which the State Legislature alone can enact a legislation and the legislation so enacted by the State Legislature, in some measure, encroaches upon the legislative field exclusively reserved for the Central Legislature or where it can enact concurrently with the State Legislature. In such a situation, what has to be seen is as to whether the State legislation in "pith and substance" is covered by the subject-matter of List II of the Seventh Schedule. If it is found to be so, then, even if, any provision of the said statute runs counter to any of the Central legislation, the given provisions of the State legislation shall be held to be constitutionally valid, if without enacting the said provision the legislative purpose could not have been achieved. In this regard we rely on the following observation of the Supreme Court in the case of Kerala State Electricity Board v. Indian Aluminium Co. reported in AIR 1976 SC 1031:
Having discussed the question of the legislative field it might be necessary to discuss the question as to what happens if it should be held that the matter under consideration in these cases falls within the Concurrent List, that is entry 38 in List III as contended in the alternative by some of the respondents. As already mentioned the question will arise only if it should be held that the Kerala State Act falls under entry 38 as contended by Mr. B. Sen. If the impugned legislation falls under List III then the question of repugnancy of that legislation with the existing law or the law made by Parliament, as the case may be, will have to be considered. Both the 1910 Act as well as the 1948 Act are existing law as contemplated under article 372 of the Constitution. An existing law continues to be valid even though the legislative power with respect to the subject-matter of the existing law might be in a different list under the Constitution from the list under which it would have fallen under the Government of India Act, 1935. But after the Constitution came into force an existing law could be amended or repealed only by the legislature which would be competent to enact that law if it were to be newly enacted. In that sense both the 1910 Act and the 1948 Act could be amended or repealed by the Parliament and also by the State Legislature if it obtains the Presidential assent to an Act amending or repealing the 1910 Act or 1948 Act (leaving aside for the moment the question whether they fall wholly or partly under entries 43 and 44 of List I of the Seventh Schedule to the Constitution), That the question of repugnancy can arise only with reference to a legislation falling under the Concurrent List is now well-settled. In A.S. Krishna v. State of Madras [1957] SCR 399 after referring to Section 107 of the Government of India Act, 1935, which is in terms similar to Clause (1) of article 254. This court observed :
'For this section to apply, two conditions must be fulfilled : (1) The provisions of the provincial law and those of the Central legislation must both be in respect of a matter which is enumerated in the Concurrent List and (2) they must be repugnant to each other. It is only when both these requirements are satisfied that the provincial law will, to the extent of the repugnancy, become void.' To the similar effect is the decision in P.N. Kaul v. State of J and K [1959] Supp 2 SCR 270. The whole question of repugnancy is elaborately discussed in J and K State v. M.S. Farooqi [1972] 3 SCR 881
32. As to the argument that in Kodar's case [1975] 1 SCR 121 and the cases which had been approvedly quoted in that case, the tax was not a "turnover tax" but "additional tax", it may be observed that the tax on turnover is in fact an additional tax on sales. As regards the linkage with the turnover, it may be mentioned that in Abdul Khader's case AIR 1985 SC 12 the impugned provisions linked the additional tax with the taxable turnover of a dealer and their Lordships upheld the validity of such a provision.
33. Learned counsel for the dealers then argued that not to recover turnover tax from the purchasers is not incidental to legislation for levying sales tax as observed by the Supreme Court in Ashoka Marketing Ltd. v. State of Bihar [1970] 26 STC 254 and hence Section 6B(4) is beyond the legislative competence as it does not come under entry 54 of List II of the Seventh Schedule of the Constitution. Yet another contention advanced on behalf of the dealers is that by putting an embargo on the passing of the turnover tax burden to buyers the State Legislature had encouraged the dealers to become dishonest as they cannot remain without passing on the said burden to the buyers in one form or the other. Hence the provision of Section 6B(4) is violative of article 51A of the Constitution of India.
34. As regards the first contention it may be observed that the provisions in the Sales Tax Act prohibiting the dealer from passing the burden of the additional tax on to the purchaser have been upheld in a number of judgments of the Appex Court already noticed and therefore one cannot but hold that the West Bengal State Legislature did not lack the legislative competency in enacting such a provision.
35. As for the decision cited by the learned counsel, it may be observed that, that was a case in which the State Legislature had enacted a law authorising the State Government to call upon a dealer to pay to the Government, the amount which he had collected from the purchasers of goods under a sale to recoup himself for payment of tax, which he was not liable to pay in respect of that transaction. It was in regard to such a law that their Lordships in Ashoka Marketing Ltd. v. State of Bihar reported in [1970] 26 STC 254 (SC) had observed that the State Legislature was incompetent to enact such a law.
36. As regards the contention that Section 6B(4) violated article 51A of the Constitution of India, it may be observed that it is an argument of desperation and has no merit whatsoever.
37. In regard to the submission that the provisions of Section 6B(1)(a) and/or (b) are ultra vires the provisions of articles 14 and 19(1)(g), it may be observed that their Lordships set their face against such a contention in Kodar's case [1975] 1 SCR 121. They reiterated the above view in Hoechst's case AIR 1983 SC 1019 and in Abdul Khader's case AIR 1985 SC 12 as would be clear from the already extracted observation from these judgments.
38. Learned counsel appearing for the dealers, however, argued that their Lordships in Hoechst's case AIR 1983 SC 1019 while dealing with the question of unreasonableness of the impugned provisions were handicapped by lack of data and in this regard highlighted the following observations of their Lordships:
78. It is lamentable that there is no factual foundation laid to support the contention that the levy of surcharge under Sub-section (1) of Section 5 of the Act imposes a disproportionate burden on a certain class of dealers such as manufacturers or producers of drugs and pharmaceuticals or dealers engaged in the business of distribution and sale of motor-trucks, etc., to support the assertion that Sub-section (3) of Section 5 of the Act which prohibits such persons from passing on the liability to pay surcharge is arbitrary or irrational, or that it treats 'unequals as equals' and thus infringes article 14 of the Constitution or is confiscatory in nature.
39. Learned counsel canvassed that such is not the position in the present case and referred us to the following data from some of the appeals before us in order to show that the provision of Section 6B is confiscatory in nature and thus highly unreasonable and, therefore, ultra vires the provisions of article 19(1)(g) of the Constitution.
List of appellants showing that in their cases
The tax is confiscating
Paper Book
Part I & II, Vol. I
(1) 1977-78 Appeal No. 284 of 1980
Tolasaria Trading Co. Pvt. Ltd. Net profit
Turnover Rs. 91,22,380 (p. 55-57) Rs. 33,933
T. Tax-Rs. 45,612 (P66)
(2) 1978-79 Appeal No. 278 of 1980
Champalal Tholia
M/s. Prem Chand Padam Chand Total income
Turnover Rs. 1,23,67,956 (p. 83- Rs. 64,222
85) TOT-Rs. 1,23,679 (p. 89)
(3) 1976-77 Appeal No. 285 of 1980
M/s. Santosh Kumar Ramesh Kumar Loss
Turnover Rs. 1,26,05,030 Rs. 13,910
(p. 163-165) Tax Rs. 97,677 (p. 203)
(4) 1977-78 Appeal No. 276 of 1980
M/s. Kanhaijalal Madhogoria Profit
Rs. 1,17,10,904 Rs. 28,224
TOT-Rs. 76,092 (p. 210-212) (p. 220)
(5) 1976-77 Appeal No. 283 of 1980
M/s. Arun Trading Co. Income
Turnover-Rs. 1,23,87,396 Rs. 50,600
(p. 319-321) (p. 333)
Tax Rs. 1,07,294
Part II/Vol. II
(6) Appeal No. 294 of 1980
M/s. Ramesh Chand Ratilal & Co. Income
Rs. 1,31,90,054 (p.4) Rs. 1,03,726
TOT-Rs. 1,04,264 (P. 13)
Part II & Vol. III
(7) 1977-78 Appeal No. 281 of 1980
M/s. Jadunath Pal Income
Rs. 1,21,38,384 (p.85-89) Rs. 86,490
TOT-Rs. 1,00,000 (p. 93-94)
(8) 1977-78 Appeal No. 277 of 1980
Mahabir Prasad Agarwalla
M/s. Tarachand Shiv Kumar
Turnover Rs. 75,97,711 (p. 1-3) Rs. 8,025
Tax Rs. 26,400 (p. 25)
(9) 1978-79 Appeal No. 286 of 1980
Jaharlal Madhogharia
M/s. Kishanlal Sajjan Kumar Income
Turnover Rs. 99,88,344 Rs. 6,182
Tax Rs. 30,000 (p. 44-46) (p. 56)
(10) Appeal No. 292 of 1980
M/s. Sur Iron & Steel Co. Ltd.
Only dealer in 1954 Goods
(p. 84-89)
(11) 1977-78 Appeal No. 287 of 1980
Mohonlal Rajgharia Income
Rs. 2,27,07,553 Rs. 1,87,923
Tax Rs. 2,22,168 (p. 210)
(p. 204)
Part II & Vol. IV
(12) 1978-79 Appeal No. 290 of 1980
M/s. Soor Neogi Coomer & Co. Ltd.
(Only dealer in 1941 Act)
Turnover Rs. 2,62,06,888 Income
Tax Rs. 2,54,464 Rs. 1,26,446
(P. 1-4) (p.5)
(13) 1978-79 Appeal No. 273 of 1980
Lalit Kumar Kothari
(L.K. Enterprise)
Turnover Rs. 1,29,09,773 Income
Tax Rs. 1,26,586 Rs. 42,809
(p. 68-71)
(14) 1979-80 Appeal No. 291 of 1980
Associated Pigments Ltd. Loss
(1954 Act dealer) Rs. 35,086
Turnover Rs. 1,74,65,525 (p. 406-408)
Tax Rs. 42,584 (p. 399-401)
40. It is no doubt true that their Lordships did say what had been quoted above but their Lordships were nevertheless of the view that the burden which worked out one naya paise per rupee could not be considered to be unreasonable on a dealer whose gross turnover was of an order of above Rs. 3 lakhs in Kodar's case [1975] 1 SCR 121 and Rs. 10 lakhs in the other case. The tax in the present case also works out to be not more than one naya paise per rupee. If a tax of this magnitude was considered to be reasonable by their Lordships in the case of a dealer whose gross turnover only exceeded Rs. 3 lakhs or Rs. 10 lakhs then surely such a tax burden cannot be considered to be unreasonable in the case of a dealer whose gross turnover exceeded Rs. 50 lakhs.
41. As to the appeals in which the dealers had mentioned the data showing that he would have to dip his fingers in the capital kitty in order to pay the additional tax in order to demonstrate that turnover tax is really confiscatory in nature, it may be observed that the High Court is not in a position to go into the data furnished in these appeals. That would be for the sales tax authorities to judge the correctness of the said data, after giving due opportunity to the dealer. What is more the following observations of their Lordships in Khazan Chand v. State of Jammu and Kashmir reported in [1984] 56 STC 214 (SC) appear to show that they were not impressed by such an argument.
It is clear from the above statutory provisions that the liability to pay sales tax is that of the dealer and not of the person who purchases goods from him and for the purposes of sales tax, it is immaterial whether the price of goods has been paid to the dealer or is payable to him. The fact that a dealer has sold goods on credit is, therefore, wholly immaterial. The Act imposes the liability to pay sales tax on dealers. This liability is irrespective of the fact whether he has made profit or loss in his business and whether he has received the sale price or not.
42. As to the contention No. 7 it may be observed that it carries no weight. A mere reading of the provisions in question would show that the legislature had correctly expressed its intention to bring within the net of "turnover tax" all the dealers whose gross annual turnover exceeded the prescribed limit whether the said gross turnover was comprised of sale transactions of goods wholly covered only by one Act or both the Acts. The provision of Section 6B does not lend itself to a construction canvassed on behalf of the dealers that a dealer who solely deals in goods that where covered only by one Act then he was not liable to pay the turnover tax even though his gross turnover were to exceed the prescribed limit.
43. So far as the contention No. 8 is concerned it may be observed that the learned counsel was not able to back up his contention either by any constitutional provision or judicial precedents directly in point. Learned counsel however made a reference to Alladi Venkateswarlu v. Government of Andhra Pradesh [1978] 41 STC 394 (SC). Their Lordships in that case, it may be observed, did not hold that the legislature was not competent to levy a multi-point sales tax. In that case their Lordships merely said that the legislature had not intended the given tax to be multi-point tax. The ratio of this case is not attracted to the present case.
44. The contention No. 6 that the provisions of Section 6B are violative of articles 301 and 304 is merely mentioned to be rejected. A taxing provision which is held to be reasonable can by no stretch of imagination be considered to be violative of article 301 of the Constitution of India and, therefore, it does not have to satisfy the requirement of article 304.
45. In regard to the last contention, i.e., contention No. 9, it may be observed that it deserve highlighting that such a provision exists in sales tax law virtually of every State. The learned counsel for the dealers were unable to cite a single precedent in support of the said contention. The provision of Section 6B(1)(c) enacts pragmatic taxation policy. It was however emphasised on behalf of the dealers that a dealer who having once crossed the prescribed limit of "gross turnover" was required to pay a tax for the next two years even though his gross turnover had consistently fallen below the requisite gross turnover for the said two years. But another dealer who had never crossed the prescribed limit of gross turnover, but had same turnover as that of the former dealer for the said two years was spared of payment of the turnover tax and in this manner, canvassed the dealer's counsel, the former dealer stood discriminated against and therefore the said provision was ultra vires the provision of article 14 of the Constitution of India. We find no merit in this contention. Dealers whose gross turnover for any year happens to cross the prescribed limit constitute a class distinct from the dealers whose gross turnover had not ever exceeded the prescribed limit of gross turnover. The two dealers constitute two different classes and, therefore, the question of equals being treated as unequals does not arise.
46. Now coming to the contention No. 3 which had prevailed with the learned Judge and the cross-objection of the State Government challenging the said portion of the decision of the learned single Judge in regard to the includibility in gross turnover, of the turnover pertaining to "nontaxable sales" for the purpose of judging the liability of a dealer to pay turnover tax, it may be observed that the learned Judge in arriving at his conclusion in that regard based himself on the Supreme Court decision in A.V. Fernandez v. State of Kerala reported in [1957] 8 STC 561 and the Full Bench of Allahabad High Court in Commissioner of Sales Tax, U.P. v. Allied Chemicals, Kanpur [1969] 23 STC 165.
47. So far as the Fernandez's case [1957] 8 STC 561 (SC) is concerned, it deserve highlighting that the Supreme Court in a later decision in Hoechst's case AIR 1983 SC 1019 has explained the ratio of Fernandez's case [1957] 8 STC 561 (SC) in the following words while holding that for the purpose of judging the capacity of a dealer on the basis of his gross turnover, the turnover of non-taxable sales could be included in the gross turnover :
90. There still remains the contention that for the purpose of levying surcharge it is impermissible to take into account the method of computation of gross turnover, the turnover representing sales in the course of inter-State trade and outside the State and sales in the course of export out of India. It is urged that the non obstante clause in Section 7 of the Act has the effect of taking these transactions out of the purview of the Act with the result that a dealer is not required nor is he entitled to include them in the calculations of his turnover liable to tax thereunder. The submission is that Sub-section (1) of Section 5 of the Act is ultra vires the State Legislature in so far as for purposes of levying the charge, the incidence of liability of a dealer to pay such surcharge depends on his gross turnover as defined in Section 2(j) of the Act. In support of the contention, reliance was placed on the following passage in the judgment of this court in A.V. Fernandez v. State of Kerala [1957] SCR 837 at pp. 852-53:
'There is a broad distinction between the provisions contained in the statute in regard to the exemptions of tax or refund or rebate of tax on the one hand and in regard to the non-liability to tax or non-imposition of tax on the other. In the former case, but for the provisions as regards the exemptions or refund or rebate of tax, the sales or purchases would have to be included in the gross turnover of the dealer because they are prima facie liable to tax and the only thing which the dealer is entitled to in respect thereof is the deduction from the gross turnover in order to arrive at the net turnover on which the tax can be imposed. In the latter case, the sales or purchases are exempted from taxation altogether. The legislature cannot enact a law imposing or authorising the imposition of a tax thereupon and they are not liable to any such imposition of tax. If they are thus not liable to tax, no tax can be levied or imposed on them and they do not come within the purview of the Act at all. The very fact of their non-liability to tax is sufficient to exclude them from the calculation of the gross turnover as well as the net turnover on which sales tax can be levied or imposed.' The submission appears to proceed on a misapprehension of the principles laid down in Fernandez's case [1957] SCR 837.
91. To understand the ratio deducible in Fernandez's case [1957] SCR 837, a few facts have to be stated. The business of the assessee in that case consisted in the purchase of copra, manufacture of coconut oil and cake therefrom and sale of oil and cake to parties inside the State and sale of oil to parties outside the State. In 1951, the Travancore-Cochin General Sales Tax Act, 1125, was amended by addition of Section 26, which incorporated the ban of article 286 of the Constitution and was in pan materia with Section 7 of the Act. For the year 1951-52 the Sales Tax Officer assessed the assessee to sales tax on a net assessable turnover by taking the value of the whole of the copra purchased by him, adding thereto the respective values of the oil and cake sold inside the State and deducting only the value of the copra relatable to the oil sold inside the State. It was contended by the assessee that in the calculation of the net turnover, he was entitled to include the total value of the oil sold by him, both inside and outside the State and deduct therefrom the total value of the copra purchased by him and further, under the overriding provision of Section 26 of the Act, he was entitled to have the value of the oil sold outside the State deducted. The main controversy between the parties centred round the method of computation of the net turnover. The contention advanced by the assessee was rejected by the High Court, which limited the deduction to purchase of copra relatable to the sales inside the State. In affirming that decision, this court observed that so far as sales of coconut oil outside the State were concerned, they were, as it were, by reason of Section 26 of the Act read in conjunction with article 286, taken out of the purview of the Act and that they had the effect of setting at naught and obliterating in regard thereto the provisions contained in the Act relating to the imposition of tax on the sale or purchase of such goods and in particular the provision contained in the charging section, Section 3 and the provisions contained in Rule 20(2) and other provisions which were incidental to the process of levying such tax. The aforementioned passage relied upon cannot be read out of context in which it appears and if so read, it is hardly of any assistance to the appellants.
92. In the penultimate paragraph in Fernandez's case [1957] SCR 837, the court after laying down that the non obstante clause in Section 26 had the effect of taking sales in the course of inter-State trade and outside the State out of the purview of the Act with the result that the dealer was not required nor entitled to include them in computation of the turnover liable to tax thereunder, observed :
'This position is not at all affected by the provisions with regard to registration and submissions of returns of the sales tax by the dealers under the Act. The legislature, in spite of its disability in the matter of the imposition of sales tax by virtue of the provisions of article 286 of the Constitution, may for the purposes of the registration of a dealer and submission of the returns of sales tax include these transactions in the dealer's turnover. Such inclusion, however, for the purposes aforesaid would not affect the non-liability of these transactions to levy or imposition of sales tax by virtue of the provisions of article 286 of the Constitution and the corresponding provision enacted in the Act, as above.'
93. The decision in Fernandez's case [1957] SCR 837 is therefore clearly an authority for the proposition that the State Legislature notwithstanding article 286 of the Constitution while making a law under entry 54 of List II of the Seventh Schedule can, for purposes of the registration of a dealer and submission of returns of sales tax, include the transactions covered by article 286 of the Constitution. That being so, the constitutional validity of Sub-section (1) of Section 5 of the Act which provides for the classification of dealers whose gross turnover during a year exceeds Rs. 5 lakhs for the purpose of levy of surcharge, in addition to the tax payable by him, is not assailable. So long as sales in the course of inter-State trade and commerce or sales outside the State and sales in the course of import into, or export out of the territory of India are not taxed, there is nothing to prevent the State Legislature while making a law for the levy of a surcharge under entry 54 of List II of the Seventh Schedule to take into account the total turnover of the dealer within the State and provide, as has been done by Sub-section (1) of Section 5 of the Act, that if the gross turnover of such dealer exceeds rupees 5 lakhs in a year, he shall, in addition to the tax, also pay a surcharge at such rate not exceeding 10 per centum of the tax as may be provided. The liability to pay a surcharge is not on the gross turnover including the transactions covered by article 286 but is only on inside sales and the surcharge is sought to be levied on dealers who have a position of economic superiority. The definition of 'gross turnover' in Section 2(j) of the Act is adopted not for the purpose of bringing to surcharge inter-State sales or outside sales or sales in the course of import into, or export of goods out of the territory of India, but is only for the purpose of classifying dealers within the State and to identify the class of dealers liable to pay such surcharge. The underlying object is to classify dealers into those who are economically superior and those who are not. That is to say, the imposition of surcharge is on those who have the capacity to bear the burden of additional tax. There is sufficient territorial nexus between the persons sought to be charged and the State seeking to tax them. Sufficiency of territorial nexus involves a consideration of two elements, viz,: (a) the connection must be real and not illusory and (b) the liability sought to be imposed must be pertinent to that territorial connection: State of Bombay v. R.M.D. Chamarbaugwala [1957] SCR 874 Tata Iron and Steel Co. Ltd. v. State of Bihar [1968] SCR 1355 and International Tourist Corporation v. State of Haryana [1981] 2 SCR 364. The gross turnover of a dealer is taken into account in Sub-section (1) of Section 5 of the Act for the purpose of identifying the class of dealers liable to pay a surcharge not on the gross turnover but on the tax payable by them.
48. The learned counsel for the dealers, however, contended that the High Court when faced with decisions of the Supreme Court taking contrary view on the same point and one of such decisions is rendered by a Bench larger than the one which had decided the other case then the High Court has no choice but to follow the decision of the larger Bench. There is no dispute with this proposition, but this holds good only where a Bench with lesser strength had not taken notice of or was not aware of the decision of the larger Bench. But when such a Bench is not only aware of the decision of the larger Bench but in fact explains or distinguishes or identifies the correct ratio of that judgment then the High Court and the court below have no choice but to follow the latter decision though rendered by a Bench of lesser strength than the one opposed to it. So far as Allied Chemicals case [1969] 23 STC 165 (All.) [FB] is concerned, it may be observed that it had followed the ratio of Fernandez's case [1957] SCR 837 and therefore, it cannot be considered to have perceived the ratio of Fernandez's case [1957] SCR 837 correctly. Because the true ratio of that case is what their Lordships' in Hoechst's case AIR 1983 SC 1019 have identified.
49. In view of the above discussion, we hold that there is no merit in the appeals and in the writ petitions filed by the dealers and, therefore, their appeals and writ petitions are dismissed with costs and the crossobjection filed by the State are allowed with costs which is assessed to be Rs. 2,000 per appeal and is directed to be paid to the respondent-State by bank drafts within two months from today. The judgments under appeal are modified to the extent indicated.
50. All interim orders made in these appeals are vacated and the amounts of securities furnished and/or deposits made by the respective appellants, will be payable to the sales tax authorities, subject to final adjustment thereof, as against the taxes payable by the respective appellants and the sales tax authorities shall deal with those matters in the light of our judgment in accordance with law.
51. The appeals, writ petitions and the cross-objections stand disposed of accordingly.
Baboo Lall Jain, J.
52. I agree.