PATNAIK & COMPANY

STATE OF ORISSA

January 19, 1965

[P. B. GAJENDRAGADKAR, C. J., M. HIDAYATULLAH, J.C. SHAH, B

S. M. SIICRI AND R. S. BACHAWA'f, JJ.J

Orissa Sales Tax Act, ( 14 of 1941)-Contract to build bus bodies •n chassis supplied by purchaser-If a contract for sale or for work.

The appellant claimed to deduct from its gross turnover, amounts received from the State Government for buildiog bus bodies, on the chassia supplied by the Government under a contract.

C Under the contract, the bus bodies were to be put on the chassis and the body consisted not only of things actually fixed .on the chassis but movable things like seat cushions and other !biogs which though fixed coold be easily detached, like roof-lamps etc. The chassis wi1h the bus body was to be delivered at the destination named within the stipulated tiine. If some work was not satisfactorily done the Government was entitled to seize the unfinished vehicle, get the work done by another D agency and recover the difference in cost from the appellant. While the appellant was required to protect the chassis by iosurance, there was no provision regardiog iosurance of bus bodies. The contract also provided that the process of manufacture was to be supervised on behalf of the Government, and that the work should be done with due deligence. There was also a provision for payment of damages until the defects detected on inspection were rectified.

The Sales Tax Officer refused to allow the deduction. On appeal, the E claim was allowed by the Collector, whose order was affirmed by the Sales Tax Tribunal, on appeal by the Department. On a reference to the High Court, the question, as to whether the amounts were not chargeable to sales tax, was answered against the appellant.

In the appeal to the Supreme Court, on the question as to whether the contract was one for execution of work or for performance of service, or whether it was a contract for sale of goods.

F HELD : (Per Gajendragadkar C.J., Hidayatullah, Sikri and Bachawat, JJ) : The contract as a whole was a contract for the sale of goods and the amounts were therefore chargeable to sales tax. [792 G] The answer to the question depended on the construction of the agreement regarding the building of bus bodies. On the terms of the contract the property in the bus body did not pass on its being placed or constructed on the chassis but when the whole 'l"'hicle iocluding the G bus body was delivered. The provision regarding insurance showed that till delivery was made, the bus bodies remained the property of the appellant and unlike the case of a contract a construct a building, where the property does not pass in the materials as movables the bus body never lost its character as movable property and the property in it passed to Government as movable property. It is not the law, that whenever a contract provides for the fixing of a chattel to another chattel there is no sale of goods; and, a contract for the sale of goods to be manu- H factured does not cease to be a contract for sale of goods, merel} because the process of manufacture is supervised by the purchaser. [785 C-D;

788 F; 790 A-B; 791 A, D; 792 A] .

PATNAIK & CO. V. STATE (Sikri, /.) 783

A Gannon Dunkerley', Care, [1959) S.C.R. 379 and Carl Still v. State of Bihar, [1962) 2 S.C.R. 81, distinguished.

Anglo-Egyptian Navigation Co. v. Rennie, (1875) L.R. 10 C.P. 271, explained.

Per Shah, J. (dissenting) : The contract was one for work and not a contract for sale, because, the contract was not that the parties agreed that tho "bus body" constructed by the appellants should be sold to the B State. The contract was one in which the appellants agreed to construct "bus bodies" on the chassis supplied to them as liailees, and such a contract being one for work, the consideration paid was not taxable under the Sales Tax Act.

The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing work or rendering service no poperty in the thing produced C as a whole notwithstanding that a part or even the whole of the materials used by him may have been his property. In the case of a contract for sale the thing produced as a whole has individual existence as the sole property of the party who produced it, at some time before delivery, and the property therein passes only under the contract relating thereto to the

other party for price. Mere transfer of property in goods used in the performance of a contract is not sufficient : to constitute a sale there must be- D llll agreement express or implied relating to sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold.

Ultimately the true effect of an accretion made pursuant to a contract has to be judged, not by any artificial rule that the accretion may be presumed to have become by virtue of affixing to a chattel, part of that chattel, but from the intention of the parties to the contract. [793 D; 794

A.C; 797 H; 798 A, CJ

In the instant case, imposition of the obligation to cJ.rry out the work with due diligence. the liability to pay damages and the right of the Government representative to supervise the production and to take away the unfinished vehicles and get them completed by some other agency are all indicative of the contract being one for work. [795 D-E, G; 796 D-E]

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 179 to 181of1964.

Appeals by special leave from the judgment and order dated August 21, 1962, of the Orissa High Court in 0.J.C. No. 28 of 1961.

A. V. Viswanatha Sastri and R. Gopalakrishnan, for the appellants (in all the appeals).

M. C. Setalvad, R. Ganapathy Iyer and R. N. Sachthey for the respondent (in all the appeals).

The Judgment of P. B. GAJENDRAGADKAR C.J., M. HIDAYAT- ULLAH, s. M. SIKRI and R. s. BACHAWAT JJ. was delivered by

S!KRI J.

SHAH J. delivered a dissenting Opinion.

Sikri, J. These three appeals by special leave are directed against the judgment of t!u: Orissa High Court in three references made by the Orisa Sales Tax Tribunal under s. 24(1) of the

'"784 SUl'lll!MB COUllT Rl!PORTS

[1965] 2 S.C.R.

Orissa Sales Tax Act, 1947, in respect of assessments for three quarters ending June 30, 1957, September 30, 1957 and Decem ··:ber 31, 1957. All these appeals raise a co=on. question of law .and it would be sufficient if facts relating to the assessment for the quarter ending June 30, 1957 alone are given, For the quarter ending June 30, 1957, the appellant, M/s Patnaik & Co., claimed to deduct from their gross turnover receipts totalling Rs. 11,268.45 received from the State Government of :Orissa for building bodies on the chassis supplied by the Govern- . .ment, during the quarter. The Sales Tax Officer refused to deduct this amount. On appeal, this claim was allowed by the Collector

of Sales Tax, purporting to follow an earlier decision of the Orissa .. c .Sales Tax Tribunal. The Department appealed against tills order to the Sales Tax Tribunal which, by its order dated June 2, 1961, .affirmed the order of the Collector. The Tribunal, in brief, held . that it was impossible to spell out a distinct and separate contract to sell any materials or chattels to the customers in the work of construction of the bodies on the chassis. On the application of the Department, the Sales Tax Tribunal referred to the High ·, court the following question : "Whether in the facts and circumstances of the case, the Tribunal is right in holding that the amounts received by the opposite party on the construction of bodies on chassis supplied by its customers under written contracts are not chargeable to the Orissa Sales Tax."

"The High Court, in a short order, folowing its decision in The

Comn; iissioner of Sales Tax Orissa v. Patnaik &: Co.(1} answered the question in the affirmative, i.e., against the appellant. In that case, the High Court had construed a similar contract and had come to the conclusion that "the contract, therefore, as contemplated between the parties, is that the assessee was to deliver a specific goods, namely, a finished bus body built under the specifications prescribed by the Government for a fixed price.

It cannot, therefore. escape from the position that the transaction was one for sale of some goods within the meaning of the Act." It further observed that "what exactly is the distinguishing feature of a sale from a works contract has been elaborately discussed in a case decided by this very Bench in S.J.C. No. 7 of 1959 (M/s.

Thakur Das Mulcharid v. The Commissioner of Sales Tax} .on 6th July 1961 .where it was held that a norm.il contract to make a ch::ttel ru_id deliver it whe11 made includes a contract of sale, but

(1) S.J.C. No. 77 of 1959-Judgment delivered in the Orissa Hi&h Court on July 26, 1961.

G -

PATNAIK & CO. v. STATE (Sikri, J.) 785

A it may not be always so.

The test would be whether the thirtg to be delivered has any individual existence before delivery as the wk property of the party who is to deliver it". The High Court

distinguished Gannon Dunkerley's(') case on the ground that as far as the terms of the contract between the parties were concerned, they clearly contemplated a case of sale of goods liable to sales B tax under the Act, and it was not a works contract, as contended

by the party.

As stated above, the appellant having obtained special leave, the appeal is now before us.

Mr. Viswanatha Sastri, the learned counsel for the appellant, has addressed an elaborate argument to us and contended that the C present case is not distinguishable from the decision of this Court in Gannon Dunkerley's(') case. He has cited a number of authorities in support of his contention, but it will not be necessary to rmew all these authorities as we feel that the answer to the question referred must depend on the construction of the agreement regarding the building of bus bodies. As laid down by this Court D in Chandra Bhan Gossain v. The State of Orissa( 2), "was it the intention of the parties in making the contract that a chattel should be produced and transferred as a chattel for a consideration."

'lbe agreement was entered into on April 20, 1957, between the appellant, called in the agreement "the Body Builders" and the State of Oriss, a. The State had accepted the quotations and decided to place orders for construction of 4 (four) numbers of Bus Bodies on the Chassis nam, ely 4 (four) numbers of 190" Wheel Base F.F.C. Dodge/Fargo Chassis supplied by the Governor. The

relevant clauses are as below :

"l. (a) That the Body Builders shall be responsible for the safe custody of the chassis as described in Schedule 'A' from the date of the receipt of the Chassis from the Governor (Supplier) till their delivery to the Governor and shall insure their premises against fire, theft, damage and riot at their cost, so that these chassis are covered by insurance against such risks.

(b) That while the works are in course of construction and until the Bus with Bodies built are taken over by the Governor, the Body Builder shall be responsible for the cb, assis and materials supplied to them an4 shall inde- H mnify the Governor for any loss or damage to the 11aid material.

(I) [19'9) S.C.R. 379.

(2) 14 S.T.C. 766.

7116 SUPUMB COUllT REPORTS

(1965] 2 S.C.R.

{c) The completed Bus Bodies covered by this contract shall be delivered to the Governor on or before the 28th May 1957 for two and 20th June 1957 for the remaining two buses.

2. That the passenger Bus Bodies shall be constructed on the chassis in the most substantial and workmanlike wanner, both as regards materials and otherwise in every respect in strict accordance with the specifications mentioned in Schedule 'B'.

3 .. That if any additional work is considered necessary by the Transport Controller, Orissa (hereinafter called the 'Controller') for which no rate is specified in the contract, the Body Builder will immediately inform the Controller, in writing the rate which they intend to charge for such additional work. If the Controller does not agree to the rates the Body Builder will not be under any obligation to carry out such additional work.'

Provided that the Body Builder will not be entitled to any payment for any additional work unless they have received an order in writing from the Controller to that effect.

4. That the Body Builder will give a guarantee regarding the durability of the Body for a period of two years from the date of delivery to the Governor and if any imperfection or defective material became apparent within the guaranteed period the Body Builder shall rectify the defects at their own expenses.

5. That the time allowed for carrying out the work as entered in the contract _shall be strictly observed by the Body Builder and shall be reckoned from the date of supply of Chassis to them. The work shall throughout the stipulated period of the contract be carried on with all due diligence time being deemed to be of the essence of the contract and the Body Builder shall be liable to pay to the Governor as linquidated damages an amount equal to 50% on the amount of the estimated cost of the whole work as shown in the contract for every day that the work remains unfinished after the date fixed and the Governor may deduct such sum or sums from any money dueJo the Body Builders under these presents or may recover it otherwise.

PATNAIK & CO. v. STATE (Sikri, /.)

Provided that the work will not be considered as finished until the defects detected on inspection as provided by clause 6, are rectified, to the satisfaction of the Controller.

6. That all works under or in course of execution or executed in pursuance of this contract shall at all times be open to inspection by the Controller or officers authorised by him in this behalf and they shall have the right to stop by a written order any work which in the opinion of the Controller, is deemed to have been executed with unsound, imperfect, unskilful or bad workmanship or with materials of inferior quality. The Body Builder on receipt of such written order, shall dismantle or replace such defective work or material at their own cost. In the event of failure to comply with the order within 7 days from the date of receipt of the order, the Controller shall be free to get the balance of the work done by any other agency and recover the difference in cost from the Body Builder.

Provided that for this purpose the Controller shall be at liberty to enter upon the premises of the Body Builder and take delivery of the unfinished bodies.

7. That the Body Builder shall be paid 50% of the cost of body building at the time of delivery and the rest one month thereafter.

8. That the Body Builder will deliver the vehicles complete with bodies at the destination or the destinations

to be named by the Controller at their own cost and risk -- and shall be entitled to recover from the Governor the actual cost of transport by road or rail, transit insurance charges if any and other necessary incidental charges."

Schedule 'B' gives the various specifications for construction of G composite bus bodies. Clause 9 of the Schedule provides the

specifications of seat cushions for the upper class and lower class seats. Clause 11 provides for the fixing of two roof lamps and its necessary switches. Clause 14 provides for the fixing of luggage carrier on the top of the roof and an iron ladder up to luggage carll rier at the rear. Various miscellaneous fittings are required to be fitted by clause 16, e.g., hand operated driver's traffic signal, nickel plated conductor's bell, wind screen wipers for the wind screen, tool box, box for First Aid equipment, etc.

SUPREME COURT REPORTS

(1965] 2 S.C.R.

Then, looking at the contract as a whole, what wa.~ the real A intention of the parties ? It will be noticed that the bus bodies are throughout the contract spoken of as a unit or as a composite thing to be put on the chassi~, and this composite body consists not only of things actually fixed on the chassis but movable things like seat cushions, and other things though fixed but which can be very easily detached, e.g., roof lamps, wind screen wipers, luggage B carrier, tool box, box for First Aid equipment, etc.

The next point to be noticed is that under the contract the property in the bus body does not pass to the Government till the chassis with the bus body is delivered at the destination or destinations to be named by the Controller except in the case contemplated in C clause 6 of the agreement. That clause provides that if some wort is not satisfactorily done and the Body Builder on receipt of a written order does not dismantle or replace such defective work or material at his own cost within seven days, the Controller would be entitled to get the balance of the work done by another agency and recover the difference in cost from the Body Builder. The D Controller is entitled for this purpose to take delivery of the unfinished body. But even in this case the property in the unfinished body would not pass to the Government till the unfinished body is seized.

Suppose a fire were to take place on the premises of the appel- E !ant and before delivery the bus bodies were destroyed or spoilt.

On whom would the loss fall ? There can only be one answer to this question and that is that the loss would fall on the appellant.

Clause 1 of the agreement provides for insurance of the chassis but there is no provision regarding insurance of bus bodies. Therefore, it follows that till delivery is made, the bus bodies remain the F property of the appellant. It could, if it chose to do so, replace parts or whole of the body at any time before delivery. It seems to us that this is an important indication of the intention of the parties. If the property passes at delivery, what does the property pass in ? Is it movable property or immovable. property ? It will •ot be denied that the property passes in mova.ble property. Then G was this the very goods contracted for ? Here again the answer is plainly in the affirmative.

Mr. Sastri draws our attention to the following passage in Benjamin On Sales (8th Edition), p. 167:

"Where a contract is made to furnish a machine. or movable thing of any kind and before the property in it passes, to fix it to land or to another chattel, it is not a

PATNAII: a: CO. v. STATJ! (Sikri, /.) 78&

A contract for the sale of goods. In such contracts the intention is plainly not to make a sale of movables as such, but to improve the lan4 or other chattel, as the case may be. The consideration to be paid to the workman is not for a transfer of chattel, but for work and labour done and materials furnished."

He says that here the bus body is being fitted to a chassis, i.e., another chattel, and if this passage lays down the law correctlyand according to him it does-the present contract is not a contract for the sale of goods.

The only. case cited in the footnote relating to fixing of a C chattel to another chattle is Anglo-Egyptian Navigation Co. v.

Rennie('). That case would be relevant if the question in this case was whether property in the materials used in the construction of the body passed to the Government plank by plank, or nail by nail. The answer would be in the negative, according to the above decision. But we are not concerned with this question here. The D facts in that case may be conveniently taken from the headnote.

The defendants contracted with the plaintiff to make and supply new boilers and certain new machinery for a steamship of the plaintiffs and to alter the engines of such steamship with corµpound surface condensing engines according to a specification.

The E specification contained elaborate provisions as to the fitting and fixing of new boilers and machinery on board the ship and the adaptation of the old machinery to the new. The boilers and other

new machinery contracted for were completed, and ready to be fixed on board, and one instalment of £ 2000 had been paid under the contract, when the ship was lost by perils of the sea. A second r instalment of £ 2000 was subsequently paid. The plaintiffs claimed delivery of the boilers and other machinery completed under the contract, and this being refused, brought an action for the detention of the same, or to recover back the £ 4000 paid by them to the defendants. It was fient that the contract was an entire and indivisible contract for work to be done upon the plaintiffs' ship G for a certain price, from further performance of which both parties

were released by the loss of the ship; that the property in the articles manufactured was not intended to pass until. they were fixed on board the ship; and that consequently the plaintiffs

were t entitled to tlie boilers and machinery, nor could they recovet the £4000 .already paid as upon a failure of considera- H tion. Here the question was whether according to the contract, the property in each portion certified by-the inspector as properly

(1875] L.R. 10 C.P. 271.

790 SUPRJ!MB COtlllT llBPOllTS [196S] 2 S.C.Jl.

done passed to the plaintiffs as and when his certificate was given.

A This question was answered in the negative. This case is no authority for the proposition that whenever a contract provides for the fixing of a chattel to another chattel, there is no sale of goods.

A few simple illustrations will show that this cannot be the Jaw. A wants new motor tyres. He goes to a dealer and asks that these may be supplied fitted on the car. Is there a sale of motor iyres B or not ? It is not an easy operation to fix new tyres; it needs an expert hand. But it will not be denied that it was in essence a contract for sale of goods. Take another illustration. A wants a luggage carrier to be fixed to his car. The carrier which B has needs to be altered a little. The contract is that he will alter it C and fix it Jo the car. Has there been a sale of the luggage carrier or not ? The answer obviously is 'yes'.

Mr. Sastri further relies on a passage in Gannon Dunker- ./ey's(') case, at pp. 413-414 :-

"It is of the essence of this concept that both the agreement and the sale should relate to the same subject-matter. Where the goods delivered under the contract are not the goods contracted for, the purchaser has got a right to reject them, or to accept them and claim damages for breach of warranty. Under the law, therefore, there cannot be an agreement relating to one kind of p_roperty and a sale as regards another. We are accordingly of opinion that on the true interpretation of the

expression "sale of goods" there must be an agreement between the parties for the sale of the very goods in which eventually property passess. In a building contract, the agreement between th~ parties is that the contractor should construct a building according to the specifications contained in the agreement, and in consideration therefor receive payment as provided therein, and as will presently be sthcre is in such an agreement neither a contract to sell the materials used in the construction, nor does property pass therein as movables.

It is therefore impossible to maintain that there is implicit in a building contract a sale of materials as understood in law."

We are, however, unable to appreciate how this passage assiits

the appellant. In this case both the agreement and sale relate to H one kind of property, namely, the bus body. The case of a con-

(1) (1959] S.C.R. 379.

PATNAIK & CO. V. STATE (Shah, !.) 791

A tract to construct a building is quite different and, as held by this Court, the property there does not pass in the materials as movables; but under this contract the bus body never loses its character as movable property, and the property in the bus body passes to the Government as movable property. The following extract from the judgment in Dunkerley's case brings out the fact that the B title in a case of building contract passes to the owner as an accretion thereto :

"That exception does not apply to buildings which are constructed in execution of a works contract, and the law with reference to them is that the title to the same C passes to the owner of the land as an accretion thereto.

Accordingly, there can be no question of title to the materials passing as movables in favour of the other party to the contract."

As we have already said, it is clear on the terms of the contract 0 in this case that the property in the bus body does not pass on its being placed or constructed on the chassis but when the whole vehicle including the bus body is delivered.

Mr. Sastri then relied on the decision of this Court in Carl Still v. Th~ State of Bihar('). That case does not apply to the facts of this case because this Court came to the conclusion on a con- E struction of the agreement in that case that the contract there was entire and indivisible for the construction of specified works including buildings for a lumpsum and not a contract of sale of materials as such.

Mr. Sastri then says that clause 3 is inconsistent with an agree- F ment for sale of goods. .This clause provides for additional work to be done for which no rate is specified in the contract. The clause, according to us, merely provides for extra payment if the Controller decided to order some additional things to be placed in the body. This is a neutral clause equally applicable to a contract for sale of goods or a contract for work and labour.

G Mr. Sastri then points to clauses 5 and 6 and submits that these are totally inconsistent with an agreement for the sale of goods.

But we are unable to assent to this. Clause 5 provides for a time schedule and ensures that the delivery of the bus body shall take place within the stipulated time.

Clause 6 is designed to avoid R disputes in the future as to the quality of the material used and ensures that proper material is used. A contract for the sale f

(1) [1962) 2 S.C.R. 81.

IASup/65__.

SUPRJ!ID OOUllT ll!PORTS

(1965] 2 S.C.L

goods to be manufactured does not cease to be a contract for sale A of goods merely because the process of manufacture is supervised by the purchaser.

For example, if in a contract for the manufacture and sale of military aircraft, a great deal of supervision ia insisted upon by the purchaser, the contract would not become a contract for works and Jabour.

B We may now notice some of the Indian cases in which a simi~ Jar point arose. In Commissioner of Sales Tax, U.P. v. Haji Abdul Majid('), the Allahabad High Court ilrrived at the conclusion that in the circumstances of the case the transaction was a contract for the sale of bqs bodies and not a contract for work and Jabour. Desai, C C.J., rightly pointed out at p. 443 that "since it makes no difference whether an article is a ready-made article or is prepared according to the eutomer's specification, it should also make no difference whether the assessee prepares it separately from the thing and then fixes it on it or does the preparation and the fixation simultaneously in one operation." D In Jiwan Singh v. State of Punjab(') the High Court of Punjab also held that a contract by a firm for fitting and building motor bodies with its own materials on the chassis supplied bj 'customers is a contract for the sale of goods.

In Kai/ash Engineering Co. v. The State of Gujarat("), it was E held that the contract in that case for building, erecting and furnishing of third class timber coach bodies on broad gauge underframes to be supplied by the Railway administration was not a contract for the sale of goods. The same conclusion was reached in Kays Construction Company v. The Judge (Appeals) Sales Tax, Allahabad(') . We do not propose to say whether these cases were F correctly dedded on the facts for, as we have said in the beginning, in each case it is a question of intention of the parties.

To conclude, we have come to the finding th.at the contract as a whole is a contract for the sale of goods.

Agreeing with the High Court, we hold that the answer to the question referred is G against the appellant.

The appeal accordingly fails and is dismissed with costs.

In the 9ther two appeals relating to assessments for the quarters ending September 30, 1957 and December 31, 1957, the agreements are similar and these also fail and are dismissed with costs. There will be one set of hearing fee in all the three appeals.

(I) 148.T.C. 435.

(3) 1' S.T.C. 574.

(2) 14 S.T.C. 951.

(4) 13 S.T.C. 302.

PATNAIK & CO. V. STATE (Shah, /,) 793

SllllJa J. Whether a contract is one for execution of work or for performance of service, or is a contract for sale of goods must depend upon the intention of the parties gathered from the terms of the contract viewed in the light of surrounding circumstances.

If the contract is one for work or for performance of service, the mere circumstance that the party doing the work or performing B the service uses goods or materials belonging to him in the execution of the contract will not be of any importance in determining whether the contract is one for sale of goods.

It is common ground that under the scheme of the Sales Tax Acts enacted by State Legislatures, if in its true nature the contract is one for per- C formance of service or for work, consideration paid is not taxable, for the States have authority under the Constitution by Sch. VII to legislate on the topics of tax on sale or purchase of goods (other than newspapers) and have no power to tax remuneration received under contracts for work or service.

The primary difference between a contract for work or service and a contract for sale of D goods is that in the former there is in the person performing work or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole of the materials used by him may have been his property. In the case of a contract for sale, there is in the first instance a chattel which belongs exclusively to a party and under the contract property therein E passes for money consideration. As observed in Halsbury's Laws of England (Third Edition) Vol. 34, pp. 6-7, Para 3 :

"A contract of sale of goods must be distinguished from a contract for work and labour. The distinction is often a fine one. A contract of sale is a contract whose main object is the transfer "of the property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour.

The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusiv~. although such matters may be taken into considei; ation in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel."

SUPRBMJ! COURT REPORTS

To constitute a sale there must therefore be an agreement and in A pedormance of the agreement property belonging to one party must stand transferred to the other party for money consideration. Mere transfer of property in goods used in the performance of a contract is, however, not sufficient : to constitute a sale there must be an agreement-express or implied-relating to sale of goods and completion of the agreement by passing of title in the B very goods contracted to be sold.

It is of the essence of the transaction that the agreement and sale should relate to the same subject-matter, i.e., the goods agreed to be sold and in which the property is transferred.

To determine the liability of the appellants to pay tax under the . Orissa Sales Tax Act on the consideration received by them under the terms of the contract, the true intention of the parties must be determined. The agreement which is the subject-matter

of the dispute between the parties is executed on behalf of the Governor of Orissa and the appellants, for constructing "bus D bodies" on the chassis supplied by the Governor of Orissa. In the second paragraph of the preamble it is recited that the Governor had accepted the quotation and had decided to place orders for construction of "bus bodies" on the chassis supplied by the Governor at the rates specified therein. The third paragraph recites that the appellants had agreed to construct "bus bodies" E at the rate quoted and on the terms and conditions recited thin.

The agreement then proceeds to set out the conditions of the contract. By the first condition the appellants are made responsible for safe custody of the chassis from the date of receipt thereof from the Governor till delivery and are bound to insure their premises including the chassis against fire, theft, damage and F riot at their own cost. By that condition the appellants are made "responsible for the chassis and materials supplied" to them and have undertaken to indemnify the Governor for any loss or damage to the said material. The clause also provides that the completed "bus bodies" shall be delivered to the Governor on or before the dates specified in the agreement. By cl. 2 it is stipulated G that the "bus bodies" shall be constructed in the most substantial and workmanlike manner, both as regards materials and otherwise in every respect in strict accordance with the specifications in Sch. 'B' of the agreement.

Clause 3 provides for payment for additional work as may be directed by the Transport Controller H under an order in writing to that effect. By cl. 4 it is provided that the appellants shall guarantee the durability of the body for two years from the date of delivery and if any imperfection or

PATNAIK & CO. v. STATE (Shah, /,)

79 S

A defective material becomes apparent within the period of guarantee the appellants shall rectify the defects at their own cost.

These four clauses do not indicate any clear intention as to the nature of the contract : they are consistent with the contract being one for sale of "bus bodies" belonging to the appellants as B well as to a contract for building bus bodies on chassis supplied.

Liability imposed by the contract requiring the appellants to indemnify the Governor for loss or damage to the chassis supplied and liability to carry out the work in the most substantial and workmanlike manner and to guarantee durability of the bodies are consistent with the contract being one of sale or of work • and C service.

Clause 3 also does not indicate any definite intention.

H the contract is one for sale of a "bus body", the agreement.to pay extra payment for additional work to be done thereon is' not also indicative of any definite intention. But by els. 5 & 6 of the contract a definite intention that the contract is one for work and D not sale is, in my judgment, indicated. By the fifth clause it is, inter alia, provided that the work shall throughout the stipulated period of the confract be carried out with all due diligence, time being deemed to be of the essence of the contract, and that the appellants shall be liable to pay ro the Governor as liquidated damages an amount equal to 50% of the estimated cost of the E whole work as shown in the contract f(!r every day that the work remains unfinished after the date fixed. In a contract for sale of goods such a covenant is unusual. If a party to a contract fails to carry out his part within the period . specified, unless the other party waives the breach the contract may be deemed to be broken.

The other party is ordinarily not concerned with the method or F manner of producing the chattel agreed to be sold, if the specifications relating thereto are otherwise complied with. Imposition of an obligation to carry out the work with due diligence is indicative of the contract being one for work. This inference is strengthened by the proviso to cl. 5 which imposes liability upon the appellants to pay damages until the defects detected on inspection are recti- G fied.

By the first part of cl. 6, all work under or in the course of execution or executed in pursuance of the contract shall at all times be open to inspection by the Controller or officers authorised by him in that behalf and that they shall have the right to stop by a written order any work which in the opinion of the Controller has been executed with unsound, imperfect, unskilful or bad work- H manship or with materials of inferior quality. The appellants on receipt of a written order are obliged to dismantle or replace such defective work or material at their own cost. If the appellants.

796 SUPllBMll COUKT llBPORTS

(1965) 2 S.C.R.

fail to comply with the order within seven days from the date of A receipt of the order, the Controller is free to get the work remaining to be done by any other agency and is entitled to recover the difference in cost from the appellants, and for this purpose the Controller is at liberty to enter upon the premises of the appellants and take. delivery of the unfinished vehicles. It is clear from the terms of cl. 6 that throughout the process of construction the B appellants are under the supervision of the Controller, and it is -0pen to the Controller to stop any work which is in progress and to call upon the appellants to rectify the work by dismantling or replacing the defective work. If the appellants fail to carry out the order of the Controller it is open to the Controller to take possession of the unfinished work and get the same done through C any other agency and to recover the difference in cost from the appellants.

The Controller is also given liberty to enter upon the premises of the appellants and to take over the unfinished vehicles.

A party agreeing to purchase goods of certain specifications or -description is entitled to insist that the specifications or the des- D

ciption shall be strictly carried out, but he has ordinarily no right to supervise the production of the goods. . Again the right which is conferred upon the Controller to take away the unfinished vehicles and to get them completed by some other agency is wholly inconsistent with the contract being one for purchasing an

article belonging to the appellants.

What one may ask would :r. be the authority of the Controller under a contract of sale to take away unfinished vehicles from the person who owns them, have the work completed by another person and then to claim the right to recover the difference in cost ? Paragraph 7 deals with the right to recover the consideration agreed to be paid to the appellants and the time at which it is to be paid.

Paragraph 8 F deals with the place at wh.ich the completed vehicles with bodies built thereon are to be delivered and till the date of the delivery the risk is with the appellants. Paragi!aph 9 deals with the settlement of any dispute which may arise ; between the parties on any question relating to the meaning of the specifications and drawings or as to the quality of the workmanship or materials used in tht: G work. Paragraph 10 deals with the jurisdiction of courts in the event of a dispute between {be-parties. Paragraphs 7 to 10 are in their content neutral and may be consitent with the agreement being either one for sale or for work or service.

Schedule 'B' consists of/, the specifications for construction of B the composite bodies. They set , oiri the designs and the specifica- • tions of the underframe and floor, frame-work, roof, penelling; 11ide .

I . . .

PATNAIK & CO. V. STATE (Shah, /.) 797

A windows, doors, seats, driver's can, roof lamps, grab rails, window

guard rails, wind screens, luggage carriers, finish and miscellaneous fittings.

It is true that the specifications contemplated that the appellants had to supply certain goods which are not fixed to the "bus bodies". There are also provisions for supply of additional

equipment such as wind screen wipers, Jocking arrangements, B boxes for first aid equipment and complaint book. It is not, however, the case of the parties that the contract is a composite contract. It is part of a single contract that the "bus body" to be constructed has to conform to the specifications and in the manufacture of the completed bus body the equipment set out under the head 'miscellaneous fittings' and elsewhere has to be provided. c An elaborate argument was advanced before us by counsel for the State of Orissa suggesting that the "bus bodies" are separately built and are thereafter fixed to the chassis supplied by the State.

The argument, however, does not appear to be correct in view of els. 3, 4, 5, 6, 7, 8 & 9 of the specifications. Again the right D which is conferred by cl. 6 of the main agreement which enables

the Controller to take possession of the unfinished vehicles indicates that the bodies were to be built on the chassis supplied and they were not to be independently constructed.

But this has, in my view, no decisive bearing. The parties may contract that on the chassis supplied by the State a body shall be built. If the I: true intention of the parties is that a body is a chattel belonging to the builder and the property therein is to pass under a contract against price, it would be a contract for sale of the body notwithstanding the fact that it is built on the chassis.

Another question to which counsel devoted considerable argu- F ment was whether the maxim 'quicquid fixatur solo, solo cedif which is a rule of the common Jaw of England is applicable under the Indian system to accretions to movables. Under the English common law a house which is constructed being embedded in the land becomes an accretion to the land and (subject to a mass of exceptions in favour of tenants and in favour of trade fixtures) G belongs to the person to whom the land belongs. But that rule has not been accepted in India : Thakoor Chunder Poramanick v.

Ram Dhonde Bhuttacharji(') and Narayan Das Khettry v. latindra Nath Roy Chowdhury('). It is unnecessary to advert to the contention whether the rule applies to accretions to movables, for ultimately the true effect of an accretion made pursuant to a con- H tract has to be judged, not by any artificial rule that the accretion may be presumed to have become by virtue of affixing to a chattel

(I) 6 Suth Weekly Reports 228

(2) L. R. S4 I. A. 218

.;. .;,

SUPREME

COURT

REPORTS

part of that chattel, but from the intention of the parties to the A JI contract. In each case the Court must ascertain what the inten - tion of the parties was when property in goods belonging to one person and affixed to the property of another person, passed to that other person. Whether pursuant to a contract, any moveables fixed to another moveable the property passes immediately to the person to whom the primary property belongs must depend upon B the intention of the parties.

One strong test to ascertain whether a given contract is for work or for sale of goods is to ascertain whether the thing produced as a whole had individual existence as the sole property of the party who produced it at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price. If the thing has no individual existence as the sole property of the party producing it, the contract will be one for work or for service.

Under condition 6 of the contract unfinished goods may be taken possession of by the Controller and appropriated to himself notwitltstanding the objections which the appellants may have to that course. If the chassis and the body were destroyed before delivery, as stipulated loss of the body would undoubtedly

fall upon the appellants, for by cl. 1 of the agreement the appel- E !ants, are bound to indemnify the State of Orissa for any loss that may be suffered by the State. But this covenant is not decisive of the true nature of the contract.

A bailee of goods under a works contract may undertake a more onerous liability than what is prescribed by s. 151 of the Contract Act : see s. 15 2 Contract Act. Undoubtedly before delivery of a complete chassis with ''bus F body" under the terms of the contract the appellants have no right to claim the consideration agreed to be paid to them. If, because of the loss of the chassis and the "bus body" constructed by the appellants, the appellants are unable to deliver the vehicle, the liability to indemnify the State for loss of the chassis arises by express terms of the contract and their claim for recovery of the G value of the materials used or the consideration agreed to be paid would fail, because they have failed to carry out their part of the contract.

It is unnecessary to refer to the large number of authorities to which our attention was invited by counseL The question must H be decided on a true interpretation of the terms of the contract in the light of surrounding circumstances. If, on a review of all

PATNAIIC It CO. V. STATE (Shah, /.) 799

A the terms of the contract, it appears that the intention of the

es was that the appellants were to sell "bus bodies" to the State of Orissa the contract would clearly be one for sale , and consideration paid would be taxable under the Orissa Sales Tait Act. If, however, the contract is one for securing a certain result namely the building of a body on the chassis supplied by the State B with the materials belonging to the appellants, the contract would be one for work done and not liable to sales tax.

In my view the present contract is one for work and not a contract for sale, because the contract is not that the parties agreed that the "bus body" constructed by the appe!Jants shall be C sold to the 'State of Orissa.

The contract is one in which the appellants agreed to construct "bus bodies" on the chasis supplied to them as bailees and such a contract being one for work, the consideration paid is not taxable under the Orissa Sales Tax Act.

D In my view, therefore, the appeal should be allowed.

ORDER. BY COURT

In accordance with the opinion of the majority, these appeals are dismissed with costs. One hearing fee.

PATNAIK & COMPANY

STATE OF ORISSA

January 19, 1965

P. B. GAJENDRAGADKAR

M. HIDAYATULLAH, J

C. SHAH

Orissa Sales Tax Act

Supreme Court

Gajendragadkar

Hidayatullah

Sikri

Bachawat

[1962) 2 S.C.R. 81

Shah

Orissa High Court

A. V. Viswanatha Sastri

R. Gopalakrishnan

M. C. Setalvad

R. Ganapathy Iyer

R. N. Sachthey

M. HIDAYAT- ULLAH

s. M. SIKRI

R. s. BACHAWAT

S!KRI

SHAH

s. 24(1)

Orissa Sales Tax Act, 1947

Patnaik & Co.

Orissa

Sales Tax Tribunal

June 2, 1961

Gannon Dunkerley

Viswanatha Sastri

April 20, 1957

State of Oriss

clause 6

Clause 9

Clause 11

Clause 14

clause 16

clause 6

Clause 1

Sastri

Gannon Dunker- ./ey

Dunkerley

clause 3

Clause 5

Clause 6

[1962) 2 S.C.R. 81

Allahabad High Court

Jabour. Desai

High Court of Punjab

September 30, 1957

December 31, 1957

SllllJa

Orissa Sales Tax Act

cl. 2

Clause 3

cl. 4

Clause 3

cl. 5

cl. 6

cl. 6

State of Orissa

cl. 6

England

India

cl. 1

State of Orissa

s. 151

s. 15


RAJA SOAP FACTORY AND OTHERS

S. P. SHANTIIARAl AND OTHERS

January 20, 1965

[K.N. WANCHOO, M. HIDAYATULLAH, J.C. SHAH

AND S.M. S!KRI, JJ.J

High Court of Mysore Act, 1962 (Mysore Act S of 1962)-Trade and Werchandise Marks Act, 1958 (Act 43 of 1958), 105-Code of Civil Procedure, 1908 (Act 5 of 1908), ss. 24, 151-High Court-- Passing off Action, institulion--Entertainability-Ezercise of original jurisdiction-Jurisdiction, Meaning of.

The respondents instituted a passing .cff action in the High Coun <>f Mysore for a declaration that they were exclusive own.ers of a certain trade mark and for a permanent injunction restraining the appellants from passing off their goods as that of respondents.

By s. 105 of , the Trade and Merchandire Mark Act such an action may be instituted in

any court not inferior to a District Court having jurisdiction to try the suit, It appears that on the day the suit was instituted the District Court was closed and there was no Judge functioning in the District Court who was on duty and competent to exercise the powers of the District Court.

The High Court entertained the plaint and granted temporary injunctioa.

In appeal by special leave : HELD : ( i) The High Court of Mysore is by its constitution primarily a court exercising appellate jurisdiction; it is competent to exercise original jurisdiction only in those matters in respect of which by special Acts it has been specifically invested with jurisdiction.

It would be competent to exercise original jurisdiction under s. 105 of the Act if it was invested with ordinary original jurisdiction of a District Coun and not otherwise. [802 D-F] As a Court of appeal it undoubtedly stands at the apex within the State, but on that account it does not stand invested with original jurisdiction in matters not expressly declared within its cognizance. [802 HJ

(ii) Power under s. 24 of the Code of Civil Procedure to try and dispose of a proceeding after transfer from a court lawfully seized of it does not involve a power to entertain a proceeding which is not otherwise within the cognizance of the High Court. [803 C-D]

(iii) Section 151 of the Code of Civil Procedure preserves the inherent powers of the Court, but it does not authorise the High Court to invest itself with jurisdiction where the jurisdiction is not conferred by law. [803 D-E]

(iv) By "jurisdiction" is meant the extent of the power which i1 conferred upon the court by its constitution to try a proceeding : ill exercise cannot be enlarged because an extraordinary situation "requires,.

the court to exercise it. [803 H-804 A]

CIVIL APPELLATE JURISDICION: Civil Appeal No. 771 of 1964.

Appeal by special leave from the judgment and order dated May 29, 1964, of the Mysore High Court in Civil Petition No. 90 of 1964.

S. S. Khanduja and Ganpat Rai, for the appellants.

B. R. L. Iyengar, S. K. Mehta and K. L. Mehta, for respondents Nos. 1 to 7.

The Judgment of the Court was delivered by

Slulh J.

On May 5, 1964 the respondents-hereinafter called 'the plaintiffs'-instituted in the High Court of Mysore an action in the nature of a passing off action against the appellants-hereinafter called 'the defendants'-for a declaration that they "are exclusive owners of the trade mark consisting of the letters R.S.F.

C and No. 806", for a permanent injunction restraining the defendants from passing off their washing soap as the goods of the plaintiffs and for incidental reliefs.

By s. 105 of the Trade and Merchandise Marks Act 43 of 1958 a passing off action whether the trade mark is registered or D unregistered may be instituted in any court not inferior to a District Court having jurisdiction to try the suit. It appears that on May 5, 1964 the District Court of Mysore, within the territorial limits of which the cause of action was alleged to have arisen, was closed for the summer vacation, and it is common ground that on that day E there was no Judge functioning in the District Court who was on duty and competent to exercise the powers of the District Court.

At the request of the plaintiffs the High Court entertained the plaint and also an application for interim injunction restraining "the defendants their agents or servants from using the trade mark R.S.F. on washing soap manufactured by them and from selling r washing soap bearing the said offending mark pending disposal of the case." By order dated May 29, 1964 the High Court granted the temporary injunction in terms of the prayer in the application.

In this appeal with special leave, counsel for the defendants argues that the High Court had no jurisdiction to entertain the G action instituted by the plaintiffs and had no power to make an order issuing a temporary injunction. The action, as framed, could properly be instituted in the District Court. The expression "District Court" has by virtue of s. 2(e) of Act 43 of 1958 the meaning assigned to that expression in the Code of Civil Procedure,

1908. Section 2(4) of the Code defines a "district" as meaning the ff local limits of the jurisdiction of a principal civil court-called the District Court-and includes the local limits of the ordinary original civil jurisdiction of a High Court. If therefore a High Court is

802 SUPllBMB COURT REPORTS

[1965) 2 S.C.R.

possessed of ordinary original civil jurisdiction, it would, when A exercising that jurisdiction be included, for the purpose of Act 43 of 1958, in the expression "District Court".

Exercise of jurisdiction by the High Court of Mysore is governed by Mysore Act 5 of 1962. The Act is purely a regulatory Act enacted for regulating the business and exercise of the powers of B the High Court in relation to the administration of justice : it does not purport to confer upon the High Court any jurisdiction original or appellate. It is true that by s. 12 of the Mysore High Court Act 1 of 1884 enacted by the Maharaja of Mysore to amend the constitution of the High Court of Mysore, and to provide for the administration of justice by that Court, the Government of Mysore C was authorised by notification to invest the High Court with ordinary original civil jurisdiction of a District Court in all suits of a civil nature exercisable within such local limits as the Government may from time to time declare and appoint in that behalf. But s. 12 of the Mysore Act 1 of 1884 has been repealed by s. 14 of Mysore Act 5 of 1962.

The High Court of Mysore is by its constitution primarily a court exercising appellate jurisdiction : it is competent to exerc:ise original jurisdiction only in those matters in respect of which by special Acts it has been specifically invested with jurisdiction. The High Court is competent to exercise original jurisdiction under E s. 105 of the Trade and Merchandise Marks Act 43 of 1958 if it is invested with the ordinary original civil jurisdiction of a District Court, and not otherwise, and the High Court of Mysore not being invested by any statute or under its constitution with that jurisdiction was incompetent to entertain a passing off action.

But it was urged that in a State the High Court is at the a:PeX of the hierarchy of civil courts and has all the powers which the subordinate courts may exercise, and it is competent to entertain

all actions as a court of original jurisdiction which may lie in any court in the State. For this exalted claim, there is no warrant in our jurisprudence.

Jurisdiction of a Court means the extent of the G authority of a Court to administer justice prescribed with reference to the subject-matter, pecuniary value and local limits.

Barring cases in which jurisdiction is expressly conferred upon it by special statutes, e.g. the Companies Act; the Banking Companies Act, the High Court of Mysore exercises appellate jurisdiction alone. As a Court of Appeal it undoubtedly stands at the apex within the H State, but on that account it does not stand invested with original jurisdiction in matters not expressly declared within its cognizance.

A Section 24 of the Code of Civil Procedure on which counsel for the plaintiffs relied lends no assistance to his argument. Among the powers conferred upon a High Court by s. 24 Code of Civil Procedure, there is enumerated the power to withdraw any suit, appeal or other proceeding in any Court subordinate to it, and to try or dispose of the same : [s. 24(1) (b) (i)]. But jurisdiction to try a B suit, appeal or proceeding by a High Court under the power reserved by s. 24(1) (b) (i) arises only if the suit, appeal or proceeding is properly instituted in a court subordinate to the High Court, and the suit, appeal or proceeding is in exercise of the power of the High Court transferred to it. Exercise of this jurisdiction is conditioned by the lawful institution of the proceeding in a sub- C ordinate court of competent jurisdiction, and transfer thereof to the High Court. Power to try and dispose of a proceeding after transfer from a court lawfully seized of it does not involve a power to entertain a proceeding which is not otherwise within the cognizance of the High Court.

D Section 151 of the Code of Civil Procedure preserves the inherent power of the Court as may be necessary for the ends of justice or to prevent abuse of the process of the Court. That power may be exercised where there is a proceeding lawfully before the High Court : it does not however authorise the High Court to invest itself with jurisdiction where it is not conferred by law.

Reliance was sought to be placed upon the summary of a judgment dated June 6, 1962 in a case decided by N arayana Pai, J : Kaverappa v. Narayanaswamy, which is found printed under the heading "Short Notes of Recent Decision" in the Mysore Law Journal (1962) at p. 1. The learned Judge is reported to have F observed that s. 24 of the Code of Civil Procedure "read along with s. 151 which preserves to the High Court all inherent powers to make such orders as may be necessary for ends of justice necessarily implies that whenever an extraordinary situation so requires, a High Court may confer original jurisdiction upon itself to do or protect ends of justice". It does not appear that the judgment is G reported in any series of reports-authorised or unauthorised-, and we have not been supplied with a copy of the original judgment. But if the learned Judge, as reported in the summary of the judgment, was of the opinion that the High Court is competent to assume to itself jurisdiction which it does not otherwise possess, ll merely because an "extraordinary situation" has arisen, with respect to the learned Judge, we are unable to approve of that view. By "j111'is9iction" is meant the extent of the power which is conferred

upon the Court by its constitution to tty a proceeding; its exerci!e

804 SUPllBMB C:OtmT llBPOR.TS [196S] 2 S.c.L

cannot be enlarged because what the learned Judge calls an extra- A ordinary situation "requires" the Court to exercise it

The appeal must therefore be allowed. Temporary injunction granted by the High Court is .vacated and the plaint is ordered to be returned for presentation to the proper Court.

As before the High Court, no objection was raised about the maintainability of B the suit or the application for injunction, we direct the parties to bear their own costs.

Appeal allowed.

RAJA SOAP FACTORY AND OTHERS

S. P. SHANTIIARAl AND OTHERS

January 20, 1965

K.N. WANCHOO

M. HIDAYATULLAH, J

C. SHAH

High Court of Mysore Act, 1962

Trade and Werchandise Marks Act, 1958

Code of Civil Procedure, 1908

ss. 24, 151

High Court-- Passing off Act

s. 105

High Court of Mysore

s. 105

s. 24

the Code of Civil Procedure

Section 151

the Code of Civil Procedure

Mysore High Court

Ganpat Rai

B. R. L. Iyengar

S. K. Mehta

K. L. Mehta

Slulh

s. 105

May 5, 1964

District Court of Mysore

May 29, 1964

s. 2(e)

Code of Civil Procedure

Section 2(4)

s. 12

Mysore

Government of Mysore

s. 12

s. 14

s. 105

Companies Act

Companies Act

Section 24

the Code of Civil Procedure

s. 24

Code of Civil Procedure

s. 24(1)

s. 24(1)

Section 151

the Code of Civil Procedure

June 6, 1962

N arayana Pai

s. 24

the Code of Civil Procedure

s. 151


STATE OF RAJASTHAN AND OTHERS

GHASILAL

January 21, 1965

[K. N. WANCHOO, M. HIDAYATULLAH, J.C. S~.

J. R. MUDHOLKAR AND S. M. SIKRI JJ.]

Ra; asthan Sales Tax Act, 1955, ss. 7(2), 16(1)(b) and Raiasthan Sale~ Tax Rules, r. 31-Scope of.

On a petition of the assessee challenging the validity of Rajasthan Sales Tax Rules, the High Court passed an interim order that the assessee C would keep proper accounts and file the prescribed returns, but that he should not be assessed till further orders.

While the petition was pending an ordinance was promulgated validating the rules, and the assessee withdrew the petition.

The sales tax officer sent a show cause

notic~ and the assessee filed the return ao<I deposited tai.

The Sales Tax Officer assessed tax and imposed a penalty under s. 16(1)(b) of the Act and justified and imposition on the ground that the High Court

D did not say that the assessee was allowed to withhold the tax, but that on the contrary the order of the High Court showed that the assessee should have filed returns in time and according to s. 7(2) of the Act the Treasury challan of the deposit should have accompanied them. TM ruisessee's appeal to the Deputy Commissioner of Sales Tax (Appeals) was dismissed.

The Sales-tax Officer, for a subsequent period, imposed another penalty on the same grounds.

The assessee filed two writ petitions in the High Court which were allowed. In appeal E HELD: (i) There had been no breach of s. 16(l)(b) of the Act,

and consequently the orders imposing the penalties could not be sustained. [809 H] Till the tax payable was ascertained by the assessing authority under s. 10, or by the assessee under s. 7(2), no tax could be said to be due withins. 16(1)(b) of the Act, for, till then there was only a liability to be assessed to tax. [810 B.(;]

Rule 31 of the Rajasthao Sales Tax Rules comes into the picture only when an assessment has been completed. [81 () D]

(ii) Section 7(2) of the Act could not be attracted till the assessee filed the returns. [810 F] CML APPELLATE JURISDICTION: Civil Appeals Nos. 408-409 of 1964.

Appeal by special leave from the judgment and order dated.

February 5, 1963 of the Rajasthan High Court in D.B. Civil Writ Petitions Nos. 172 and 111 of 1961.

G. C. Kasliwal, Advocate-General, for the State of Ra; asthan, K. K. Jain and R. N. Sachthey, for the appellant.

R. K. Garg, S. C. Agarwala, D. P. Singh and M. K. Rtul'Ur murthi, for the respondent.

I I

SUPREME COURT REPORTS

[ 1965( 2 S.C.R.

The Judgment of the Court was delivered by

Sikri, J. These two appeals by special leave are directed against the judgment of the Rajasthan High Court allowing Civil Writ Petitions Nos. 111 and 172 of 1961, and quashing orders

of the Sales Tax authorities imposing penalties on the respondent, Ghasilal, for delay in payment of tax due. The High Court came B to the conclusion that the penalties had been imposed in violation of Art. 20(1) of the Constitution, but it is not necessary to deal with this question because we are inclined to accept the contention raised by the learned counsel for the respondent, Mr. Garg, that the penalties have been imposed in violation of the relevant statutory provisions.

C The relevant facts are these. On March 28, 1955, Rajasthan Sales Tax Rules (hereinafter referred to as the Rules) were published in the Rajasthan 'Gazette.

The Rajasthan Sales Tax Act (hereinafter referred to as the Act) came into force on April 1,

1955. The respondent filed Civil Writ Petition, No. 11 of 1958, D in the High Court challenging the making of assessments on the turnover of the respondent for the year 1955-56 on the ground that the said Rules were invalid. On January 9, 1958, the High Coµrt passed an interim order that 'the petitioner will keep proper accounts and file the prescribed returns but he shall not be assessed till further orders'. While the petition was pending in the High E Court, an Ordinance (No. 5 of 1959) was promulgated on November 6, 19 5 9, validating the Rules.

Thereupon the respondent withdrew Writ Petition No. 11of1958. On December 17, 1959 the Rajasthan Sales Tax Validation Act (Rajasthan Act 43 of

1959) replaced the Ordinance. It is common ground that the effect of the said Ordinance and the said Act was to validate the F Rules, even if any defect existed in the making of the Rules. We may mention that according to the appellant, the said Ordinance and the said Validating Act were enacted out of abundant caution.

On December 4, 1959, the Sales Tax Officer, Kotah City Circle, sent a show cause notice to the respondent in the following words: G "Your writ No. 11 has been dismissed by the Hon'ble High Court on 23rd November,.1959. You are, therefore, requested to deposit the tax due upto date within a week, ailing which necessary action according to law will be taken."

This notice was served on the respondent tlle same day. The respondent filed a return for the 4th quarter ending October 22, 1957,

STATE v. OHASILAL (Sikri, /.) 807

A and Rs. 11,898.31 was deposited as tax. It appears that on January 8, 1960, March 5, 1960 and March 19, 1960, he deposited Rs. 28,607 as tax in respect of the four quarters of the accounting period October 23, 1957 to November 10, 1958. It is not clear from the record whether he filed returns on these dates. On April 25, 1960, the Sales Tax Officer made an assessment in res- B pect of the accounting period November 3, 1956-to October 22, 1957, and proceeded to impose a penalty of Rs. 400 under s. 16(l)(b) of the Rajasthan Sales Tax Act. He justified the imposition of penalty thus :

"The assessee has not deposited tax of the quarters on the due date, the tax deposited for 4th quarter is very late, i.e . ., after two years the assessee was given a notice and in reply to which he referred the stay order of the Hon'ble High Court granted to him in a writ petition filed challenging the validity of sales tax rules made under the Act, the stay order of the Hon'ble High Court does not say that the assessee is allowed to withhold the tax on the contrary, it directs that the petitioner

(assessee) will keep proper accounts and file prescribed returns but shall not be assessed.

This clearly shows that the assessee should have filed returns in time and according to section 7(2) the Treasury challan of the deposit should have accompanied them. This amounts to contravention of the mandatory provisions, the writ was dismissed on 23-4-58 sic (23-11-59), even the amount was not deposited till 17-12-59.

This shows that the assessee withheld the tax intentionally."

The respondent appealed to Deputy Commissioner Sales Tax (Appeals), Kotah, who dismissed the appeal, holding that the stay order of the High Court did not jutify the respondent in not filing the return and depositing the tax in accordance with s. 7(2) of the Rajasthan Sales Tax Act.

G On December 6, 1960, the Sales Tax Officer assessed the respondent in respect of the accounting period October 23, 1957 to November 10, 1958, and imposed a penalty of Rs. 1,000 for not depositing the tax in time on the same grounds.

The respondent then filed a petition (No. 111 of 1961) under Art. 226 of the Constitution, on April 3, 1961, challenging the imposition H of penalty in respect of the period November 3, 1956 to October

22, 1957, and on April 4, 1961, he filed a petition (No. 172 of

1961) challenging the imposition of penalty in respect of the IASup.65-S

808 SUPRBMB COUllT lU!PORTS

(1965] 2 S.C.R. , .accounting period October 23, 1957 to November 10, 1958. As A we have said before, the High Court allowed the petitions.

The learned Advocate-General has raised a number of points before us and particularly invited us to hold that the High Court was in error in holding that there has been contravention of Art.

.20(1) of the Constitution, and that the Rules as originally pub-· B lished on March 28, 1955, suffered from no procedural defect in the matter of their promulgation and duly came into force on April l, 1955. But we express no opinion one way or the other on these points as the appeals can be disposed of on a narrow point of the construction of the Act.

The relevant provisions qf the Act read thus :

"s. 7(1) Every dealer liable to pay tax shall furnish returns of his turnover for the prescribed periods in the prescribed form, in the prescribed manner and within the prescribed time, to the assessing authority.

Provided that the assessing authority may extend the date for the submission of such returns by any dealer or class of dealers by a period not exceeding fifteen days in the aggregate.

(2) Every such return shall be accompanied by a Treasury receipt or teceipt of any bank authorised to receive money on behalf of the State Government showing the deposit of the full amount of tax due on the basis of return in the Government Treasury or bank concerned.

(3) H any dealer discovers any omission, error, or wrong statement in any returns furnished by him under sub-section (1), he may furnish a revised return in the prescribed manner before the time prescribed for the submission of the next return but not later.

(4) Every deposit of tax made under sub-secon (2) shall be deemed to be provisional subject to necessary adjustments in pursuance of the final assessment of tax made for any year under section 10.

S. 16(1)-Il any personc

(a) has without reasonable cause failed to get him- H self registered as required by sub-section (1) of section 6 within the time prescribed; or

'STATB v. OHASILAL (Sikri, /.) 809

A {b) has without reasonable cause failed to pay the -

tax due within the time allowed; or

(c) has without reasonable cause failed to furnish the return of his turnover, or failed to furnish it within the time allowed; or

the assessing authority may direct that such person shall pay by way of penalty, in the case referred to in clause (a) in addition to the fee payable by him, a sum not exceeding Rs. 50 and in case referred to in clause (b ), in addition to the amount payable by him, a sum not exceeding ltal:f of that amount, and that in cases referred to in clauses (c) and (d), in addition to the tax payable by him, a sum not exceeding half the amount of tax determined; in the case referred to in clause (e), in addition to the tax payable by him a sum not exceeding double the amount of tax, if any which would have been avoided if taxable turnover as returned by sucli person had been accepted as correct turnover, and in the cases referred to in clauses (f), (ff) and (g), a sum not exceeding Rs. 100." Mr. Garg contends that there was no breach of s. 16(l)(b) of the Act. No tax was due till the respondent filed returns under s. 7(1) of the Act Section 7(2), which requires a deposit of the full amount due on the basis of the return was compiled with when the respondent filed the returns, on December 18, 1959, and in January to March, 1960. There cannot be non-compliance F of s. 7(2) unless a return is filed without depositing the tax due on the basis of the return, and as no return was filed earlier than pecember 18,-1959, there had been no violation of the requirements of s. 7(2). He further contends that no tax is due till assessment is made under s. 10 of the Act G The learned Advocate-General, on the other hand, urges that .,. tax becomes due because of the charging sections of the Act, i.e., s. 3 with s. 5. He further contends that a show cause notice had been given on December 4, 1959, and as there was delay in complying with the notice, there was breach of s. 16(1)(b) of the Act.

H In our opinion, there has been no breach of s. 16(1)(b) of the Act, and consequently, the orders imposing the penalties cannot be sustained. According to the terms of s. 16(l)(b), there must

810 SUPIU!MB OOUllT RBPOllTS

(1965) 2 S.C.ll.

be a tax due and there must be a failure to pay the tax due within A the time allowed.

There was some discussion before us as to the meaning of the words 'time allowed', but we need not decide in this case whether the words 'time allowed' connote time allowed by an assessing authority or time allowed by a provision in the Rules or the Act, or all these things, as we are of th'e view that no tax was due within the terms of s. 16(1)(b) of the Act.

Sec- B lion 3, the charging section, read withs. 5, makes tax payable, i.e., creates a liability to pay the tax. That is the normal function of a charging section in a taxing statute. But till the tax payable is ascertained by the assessing authority under s. • 10, or by the assessee under s; 7 (2), no tax can be said to be due within C s. 16(1)(b) of the Act, for till then there is only a liability to be assessed to tax.

The contention of the learned Advocate-General that the show cause notice dated December 4, 1959, makes tax due is without any substance. He was not able to point to any rule or provision of the Act, under which the show cause notice was D issued. It may be that the assessing authority had in mind r. 31, but that rule comes into the picture only when an assessment has been completed.

The last contention of the learned Advocate-General is that the stay order passed by the High Court required the respondent E to submit returns. This, according to him, implied that he had to submit returns in accordance with law, including s. 7(2). As he had failed to submit returns and deposit the tax in accordance with the directions of the High Court, there was a breach of s. 16(1 )(b ).

We are unable to read the stay order as implying that the respondent was obliged to deposit tax for the stay order then would be :r of no utility to the assessee. Apart from that, the respondent did not file returns till December 1959, and January-March 1960, and s. 7 (2) could not be attracted till then.

We may mention that we are not concerned with the question whether there has been any breach of s. 16(1)(c).

In the result, the appeals fail and are dismissed with costs.

One set of hearing fee.

Appeals dismissed.

STATE OF RAJASTHAN AND OTHERS

GHASILAL

January 21, 1965

K. N. WANCHOO

M. HIDAYATULLAH, J

R. MUDHOLKAR

S. M. SIKRI JJ.

Sales Tax Act, 1955

ss. 7(2), 16(1)(b)

s. 16(1)(b)

s. 7(2)

s. 16(l)(b)

s. 10

s. 7(2)

Section 7(2)

Rajasthan High Court

K. K. Jain

R. N. Sachthey

R. K. Garg

S. C. Agarwala

D. P. Singh

M. K. Rtul'Ur murthi

Sikri

Ghasilal

Art. 20(1)

Garg

March 28, 1955

Rajasthan Sales Tax Rules

April 1,

1955

January 9, 1958

November 6, 19 5 9

December 17, 1959

Ordinance and the said Validating Act

December 4, 1959

Kotah City Circle

23rd November,.1959.

January 8, 1960

October 22, 1957

s. 16(l)(b)

section 7(2)

s. 7(2)

December 6, 1960

Art. 226

S

808

April l, 1955

s. 7(1)

section 10

S. 16(1)

section 6

s. 16(l)(b)

s. 7(1)

Section 7(2)

December 18, 1959

s. 7(2)

pecember 18,-1959,

s. 7(2)

s. 10

s. 3

s. 5

s. 16(1)(b)

s. 16(1)(b)

s. 16(l)(b)

s. 16(1)(b)

s. 16(1)(b)

s. 7(2)

s. 16(1 )(b )

s. 7

s. 16(1)(c)