Case Note & Summary
The appellants, a firm of building contractors registered as dealers under the Madhya Pradesh General Sales Tax Act, 1958, purchased taxable building materials during two accounting periods in 1961 and used them in their construction business. They did not file returns, and the Sales Tax Officer served notices under s.18(5) of the Act requiring them to show cause why best judgment assessment should not be made. The notices allowed less than the ordinary 15 days prescribed by rule 33 of the Madhya Pradesh General Sales Tax Rules, 1959. The Officer assessed the sales turnover as nil and levied purchase tax under s.7 on the purchase price of materials consumed, along with a penalty. Appeals to the Assistant Commissioner and the Board of Revenue were dismissed. The Board referred two questions to the High Court: (1) whether the notice was invalid and the assessment consequently bad, and (2) whether the appellants were dealers and the levy of purchase tax was in order. The High Court held against the appellants, affirming the validity of the notice and the tax. On further appeal by special leave, the Supreme Court considered the same questions. The appellants contended that non-compliance with rule 33 rendered the notice void and the assessment invalid, relying on two Income-tax Act decisions which had held similar notice periods mandatory. They further argued that they were not dealers because they did not carry on the business of buying goods and that purchase tax under s.7 was not attracted as the goods were not consumed in the manufacture of other goods for sale. The Court, speaking through Shah, J., held that rule 33 of the M.P. Rules is directory and not mandatory. Unlike the mandatory provisions in the Income-tax Act cases cited, the rule used the word “ordinarily” and expressly required prejudice to be shown to set aside the proceedings. As the appellants had not even suggested they were prejudiced by the short notice, the assessment was not vitiated. On the second issue, the Court interpreted s.2(d) and the inclusive definition of “dealer”, which includes any person who carries on the business of buying. Following its earlier decision in State of A.P. v. H. Abdul Bakshi and Bros., it held that buying goods for consumption in a commercial activity with a profit motive constitutes carrying on the business of buying, even if the goods are not resold. The appellants’ purchases of building materials for their construction business were thus in the course of business. Regarding s.7, the Court held that the expression “consumes such goods … or otherwise” covers any consumption other than in the manufacture of goods for sale. The use of building materials in construction by a contractor for profit fell within “consumes … otherwise”, and therefore the purchase price was taxable. The appeals were dismissed, and the High Court’s answers were affirmed.
Headnote
A) Taxation - Sales Tax - Rule 33 of Madhya Pradesh General Sales Tax Rules, 1959 - Directory Nature - Rule 33 providing a notice period of ordinarily 15 days is directory and not mandatory - Non-compliance does not vitiate proceedings under s.18(5) unless the assessee shows prejudice - Held that as no prejudice was alleged, the notices and assessments were valid. B) Sales Tax - Dealer - Section 2(d) of Madhya Pradesh General Sales Tax Act, 1958 - Definition of 'dealer' - A person who carries on the business of buying goods with a profit motive is a dealer even if the goods are not resold but consumed in the course of business - Registration as dealer and purchase of taxable building materials for use in construction for profit make the person a dealer - Held that the building contractors were dealers. C) Sales Tax - Purchase Tax - Section 7 of Madhya Pradesh General Sales Tax Act, 1958 - Scope of 'consumes otherwise' - Where a dealer purchases taxable goods and no sales tax is payable, and the goods are consumed otherwise than in manufacture of goods for sale, purchase tax is leviable - Use of building materials in execution of construction contracts for profit falls within 'consumes otherwise' - Held that purchase price of materials was taxable under s.7.
Issue of Consideration
Whether a notice under rule 33 giving less than 15 days vitiates a best judgment assessment under s.18(5); whether building contractors who purchase materials for use in construction are 'dealers' under s.2(d); and whether purchase tax can be levied under s.7 on materials consumed in construction.
Final Decision
The Supreme Court dismissed the appeals, holding: (1) Rule 33 is directory, not mandatory, and the assessment is not vitiated in the absence of prejudice. (2) The appellants, who bought building materials in the course of their construction business with a profit motive, were dealers under section 2(d). (3) Under section 7, purchase tax is payable when a dealer purchases taxable goods, no sales tax is payable on the sale price, and the goods are consumed otherwise—which includes use in construction. The High Court’s answers were affirmed.
Law Points
- Legal points not extracted
- Rule 33 directory
- not mandatory
- no prejudice
- no invalidity
- person carrying on business of buying goods is dealer even if not reselling
- purchase for consumption in construction business with profit motive constitutes dealing
- purchase tax under s.7 applies when dealer buys taxable goods and consumes them otherwise than in manufacture for sale
