Supreme Court Partially Allows Public Sector Company's Appeal in Sales Tax Dispute — Penalty Quashed and Dealer Finding Set Aside. Supply of Building Materials to Contractors at Agreed Price Constitutes Sale but Mere Excess Over Cost Does Not Prove Profit Motive; Bona Fide Belief Exempts From Penalty Under Orissa Sales Tax Act, 1947.

Case Note & Summary

Hindustan Steel Ltd., a Government of India undertaking incorporated under the Indian Companies Act, 1913, was erecting factory buildings, residential colonies, and ancillary works between 1954 and 1959. The company supplied to building contractors bricks, cement, steel, and other materials at agreed rates, with the price adjusted against the contract dues. The Sales Tax Officer under the Orissa Sales Tax Act, 1947, assessed the company for sales tax for ten quarters ending December 31, 1958, treating it as a dealer who had sold building materials to the contractors. Additionally, a penalty was imposed for failure to register as a dealer. The Appellate Assistant Commissioner confirmed the assessment, and the Tribunal upheld the tax liability while reducing the penalty. The High Court, on a reference under Section 24(1) of the Act, answered the referred questions in favor of the revenue, holding that the company was a dealer, the supplies were sales, and the penalty was justified. The company appealed to the Supreme Court by special leave. The core legal issues were whether the supply of materials constituted a sale under Section 2(g) of the Act; whether the company was a dealer under Section 2(c) carrying on business with profit motive; and whether the penalty for non-registration was warranted. The company argued that the excess price charged over its procurement cost was not profit but represented storage charges and overheads, and that it had no motive to carry on business in building materials. It contended that those in charge genuinely believed the company was not a dealer, so penalty should not be imposed. The State argued that the transactions satisfied all elements of a sale and the regular supply of materials at a markup indicated a profit-making business. The Court held that the supply of building materials for an agreed price with transfer of property constituted a 'sale' under Section 2(g). However, on the question of dealer status, the Court relied on the definition of 'business' requiring an occupation or profession carried on with a profit motive, as laid down in State of Andhra Pradesh v. Abdul Bakhi and Bros. (1964). The Court noted that the excess charged was, in the case of steel, cement, and other materials, agreed to be paid as storage charges, and the Tribunal and High Court had not examined whether the excess on bricks also represented storage charges or profit. Merely because the sale price exceeded the cost price, profit motive could not be inferred. Hence, the finding that the company was a dealer was not sustainable. Regarding penalty, the Court emphasized that an order imposing penalty is the result of a quasi-criminal proceeding and should not be imposed unless the party acted deliberately in defiance of law, or was guilty of contumacious or dishonest conduct, or acted in conscious disregard of its obligation. A penalty will not be imposed for a technical or venial breach or where the breach flows from a bona fide belief. The Court found that those in charge of the company honestly believed it was not a dealer; thus, no penalty was warranted. Consequently, the Supreme Court allowed the appeals, set aside the orders of the High Court, Tribunal, and lower authorities holding the company as a dealer and imposing penalty, while affirming that the supplies were sales. The company was not liable to pay sales tax on the turnover from those supplies, and the penalty was quashed.

Headnote

Issue of Consideration

Final Decision

The Supreme Court allowed the appeals, setting aside the findings of the High Court and Tribunal. It held that the supply of building materials to contractors at agreed rates constituted a 'sale' under Section 2(g) of the Orissa Sales Tax Act, 1947. However, the company did not carry on business in those materials with a profit motive, because the excess charged could be for storage charges and overheads, and there was no evidence of profit motive. Therefore, the company was not a 'dealer' under Section 2(c) of the Act, and was not liable to pay sales tax on those supplies. The Court further held that the penalty imposed for failure to register as a dealer was unjustified because those in charge of the company had acted in the honest and genuine belief that the company was not a dealer, and the breach was not deliberate or contumacious. The Court emphasized that penalty in a quasi-criminal proceeding should not be imposed for a technical or venial breach or where the breach flows from a bona fide belief. The appeals were allowed, and the liability and penalty were quashed.

Law Points