Case Note & Summary
These appeals arose from the Madras High Court's decision striking down Section 2(1) of Madras Act 37 of 1964 as violative of Article 286 of the Constitution. The State of Tamil Nadu, through the Appellate Assistant Commissioner, challenged the High Court's ruling; the respondents were dealers in hides and skins, including L.M.S. Sadak Tamby & Co. The provision in question dealt with the levy of tax on the sale of dressed hides and skins. Earlier, Rule 16 of the Madras General Sales Tax Rules had been struck down by the Supreme Court in Firm A.T.B. Mehtab Majid & Co. v. State of Madras because it imposed a heavier tax on dealers who purchased raw hides and skins from outside the State and sold the tanned products, compared to those who purchased raw hides locally. Subsequently, the Madras Legislature enacted Madras Act 11 of 1963, Section 2(1), but this was also struck down in A. Hajee Abdul Shakoor & Co. v. State of Madras because it provided a uniform rate of two per cent for the entire period from 1 April 1955 to 31 March 1959, creating discrimination for the period 1 April 1955 to 31 March 1957 when the local rate was one and nine-sixteenth per cent. To overcome this, Section 2(1) of Madras Act 37 of 1964 was enacted. It levied tax on the first seller of dressed hides and skins at one and nine-sixteenth per cent for 1955-1957 and at two per cent for 1957-1959, calculated on the amount for which the hides and skins were last purchased in untanned condition, without any distinction between purchases inside or outside the State. The core legal issue was whether this provision contravened Article 286 by effectively taxing imported raw hides and skins or discriminating against dealers on the basis of the origin of purchase. The State argued that the taxable event was the first sale of tanned hides and skins, not the purchase of raw hides and skins, and that the purchase price was only used to quantify the tax. The respondents, reflecting the High Court's view, contended that if the sale price were taxed with a rebate, there would be no objection, implying the existing method was constitutionally infirm. However, the respondents' advocates could not explain how such a rebate system could be implemented. The Supreme Court held that what was taxed was not the purchase of raw hides and skins, whether inside or outside the State, but the first sale of tanned hides and skins. The amount for which raw hides and skins were last purchased was used only for quantification of the tax. There was no discrimination because sellers of tanned hides and skins were taxed at the same rate and on the same basis regardless of where the raw hides and skins were purchased. The tax was not leviable on raw hides and skins imported from another State; those would be subject to the Central Sales Tax Act. The amount was merely the measure of tax. The Court also rejected the High Court's suggestion of taxing sale price with a rebate for conversion cost, noting that conversion costs vary from tanner to tanner and are not as easily ascertainable as purchase or sale prices. Accordingly, the appeals were allowed with costs. The Supreme Court set aside the High Court's judgment and upheld the validity of Section 2(1) of Madras Act 37 of 1964. Special leave in SLP No. 1974 of 1970 was granted and that appeal was also allowed.
Headnote
A) Constitutional Law - Article 286 - Tax on Sale vs Purchase of Goods - Constitution of India, Article 286; Madras Act 37 of 1964, Section 2(1) - The impugned provision levied tax on the first sale of dressed hides and skins and not on the purchase of raw hides and skins, whether purchased inside or outside the State. The amount for which raw hides and skins were last purchased in untanned condition was used only to quantify the tax. Held that the tax did not contravene Article 286 as it was not a tax on imported raw hides and skins. B) Sales Tax - Measure of Tax - Quantification Based on Purchase Price - Madras Act 37 of 1964, Section 2(1) - The State could have levied tax on the sale price of tanned hides and skins, but chose to levy on the basis of the purchase price of raw hides and skins, which meant a lesser tax. The purchase price served merely as the measure for computing tax liability and did not transform the levy into a tax on purchase. Held that use of purchase price as measure is valid. C) Sales Tax - Non-Discrimination - Equality Between Dealers - Madras Act 37 of 1964, Section 2(1) - The section made no distinction between raw hides and skins purchased inside the State and outside the State. Sellers of tanned hides and skins were taxed at the same rate and on the same basis regardless of origin, so there was no discrimination. Held that the High Court erred in holding the provision invalid on ground of discrimination.
Issue of Consideration
Whether Section 2(1) of Madras Act 37 of 1964, which levied tax on the first sale of dressed hides and skins calculated on the amount for which raw hides and skins were last purchased in untanned condition, contravened Article 286 of the Constitution by taxing imported raw hides and skins or discriminating between dealers based on origin of purchase.
Final Decision
The appeals were allowed with costs. The Supreme Court set aside the Madras High Court's judgment and upheld the validity of Section 2(1) of Madras Act 37 of 1964. Special leave in SLP No. 1974 of 1970 was granted and that appeal was also allowed.
Law Points
- Tax on sale of dressed hides and skins
- not on purchase of raw hides and skins
- purchase price used only for quantification
- no discrimination between locally purchased and out-of-State raw hides
- Article 286 not violated
- State may choose lower measure of tax
