CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 883 to 892 of 1966.
Appeals by special leave from the judgment and order dated December 3, 1964 of the Orissa High Court in Special Jurisdiction Cases Nos. 44 and 53 of 1963.
C.K. Daphtary and D.N. Mukherjee, for the appellant (in all the appeals).
D. Narsaraju and R.N. Sachthey, for the respondent (in all the appeals).
The Judgment of the Court was delivered by
Shah, Ag. C.J. M/s Hindustan Steel Ltd., a Company incorporated under the Indian Companies Act, 1913 is a Government of India undertaking in the public sector. The Company is registered as a dealer under the Orissa Sales Tax Act 14 of 1947, from the last quarter ending March 1959.
Between 1954 and 1959 Company was erecting factory buildings for the steel plant, residential buildings for its employees and ancillary works such as roads, water supply, drainage. Some constructions were done departmentally and the rest through contractors. The Company supplied to the contractors for use in construction, bricks, coal, cement, steel etc. for consideration and adjusted the value of the goods supplied at the rates specified in the tender.
In proceedings for assessment of tax under the Orissa Sales Tax Act, 1947, the Sales Tax Officer held that the Company was a dealer in building material, and had sold the material to contractors and was on that account liable to pay tax at the appropriate rates under the Orissa Sales Tax Act. The Sales Tax Officer directed the Company to pay tax due for ten quarters ending December 31, 1958 and penalty in addition to the tax for failure to register itself as a dealer. The Appellate Assistant Commissioner confirmed the order of the Sales Tax Officer. In second appeal the Tribunal agreed with the tax authorities and held that the Company was liable to pay tax on its turnover from bricks, cement and steel supplied to the contractors. The Tribunal however substantially reduced the penalty imposed upon the Company.
At the instance of the Company the Tribunal referred six questions to the High Court of Orissa under s. 24(1) of the Orissa Sales Tax Act, 1947. The questions were:
"A. Whether in the facts and circumstances
of the case Messrs. Hindustan Steel
Ltd. can be held to be a ’dealer’ within the
meaning of s. 2(c) of the Orissa Sales Tax Act
B. Whether the sale of materials by the
Company to different contractors working for
the company for which sales tax is sought to
be assessed amounts to ’sale’ within the
meaning of s. 2(g) of the Act ?
C. Whether the accrual of some profit in
the absence of any motive to make such profit
can make the assessee a ’dealer’ under the
Act and whether in the circumstances of the
case, the Tribunal was justified in coming to
a finding that there was profit making motive
on the part of the Company ?
D. Whether in view of the definition
contained in s. 2, cl. (h) as it stood prior
to the amendment of the provision by Act 18 of
1959, the supplies of materials can be
treated as ’sale price’ in the hands of the
assessee ?
E. Whether in the facts and
circumstances of the case. the amount
received by the assessee in respect of
tender forms can be said to be ’sale price’?
F. Whether the Tribunal is right in
holding that penalties under s. 12(5) of the
Act had been:rightly levied and whether in
view of the serious dispute of liability it
cannot be said that there was sufficient cause
for not applying for registration ?" The High Court answered the questions A, B, C, D and F in the affirmative and question E in the negative.
In these appeals filed with special leave substantially three matters fall to be determined:
1. Whether the Company sold building
material to the contractors during the
quarters in question ?
2. Whether the Company was a dealer in
respect of building material within the
meaning of the Orissa Sales. Tax Act ?
3. Whether imposition of penalties for
failure to register as a dealer was justified
? Solution of the first and third matters does not present much difficulty. At the relevant time ’sale’ was defined by s. 2(g) of the Orissa Sales Tax Act as follows :--
"Sale’ means, with all its grammatical
variations and cognate expressions, any
transfer of property in goods for cash or
deferred payment or other valuable
consideration, including a transfer of
property in goods involved in the execution of
contract, but does not include a mortgage
hypothecation charge or pledge:
The Company supplied building material to the contractors at agreed rates. There was concurrence of the four elements which constitute a sale--(1) the parties were competent to contract; (2) they had mutually assented to the terms of contract; (3) absolute property in building materials was agreed to be transferred to the contractors; and (4) price was agreed to be adjusted against the dues under the contract. No serious argument was advanced before us that the supply of building material belonging to the Company for an agreed price did not constitute a sale.
Under the Act penalty may be imposed for failure to register as a dealer: s. 9(1) read with s. 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasicriminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the Company in failing to register the Company as a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out.
Liability to pay sales tax is imposed by s. 4 of the Act. Every dealer whose gross annual turn over exceeds Rs. 10,000/is liable to pay tax during the ten quarters in question. The expression "dealer" was defined at the relevant time as meaning:
"Dealer’ means any person who executes any contract or carries on the business of selling or supplying goods in Orissa whether for commission, remuneration or otherwise and includes any firm or Hindu Joint family, and any society, club or association which sells or supplies goods to its members.
A person to be a dealer within the meaning of the Act must carry on the business of selling or supplying goods in Orissa. The expression "business" is not defined in the Act. But as observed by this Court in State of Andhra Pradesh v. Abdul Bakhi and Bros. (1)
"The expression ’business’ though
extensively used is a word of indefinite
import, in taxing statutes. it is used in the
sense of an occupation, or profession which
occupies the time, attention and labour of a
person, normally with the object of making
profit. To regard an activity as business
there must be a course of dealings,
either actually continued or contemplated to
be continued with a profit motive, and not
for sport or pleasure ." The sales tax authorities and the Tribunal have held that the Company was carrying on business of selling or supplying materials to the contractors and with that view the High Court agreed. The Company purchased bricks manufactured by its own contractors and sold the bricks to the building contractors at a flat 30% premium over the purchase price in the case of "second class bricks" and 25% premium in the case of "First class bricks". Steel, cement and other materials were initially supplied at 3-1/2% premium over the purchase price paid by the Company. It was contended on behalf of the Company that merely because the price charged to the contractors exceeded the price paid by the Company for acquiring the materials, motive of the Company to carry on business in building materials for profit, cannot be inferred. The Company, it is true, maintained no separate accounts relating to the expenditure incurred by it for (1) [1964] 7 S.C.R. 664. overhead and other charges in respect of those materials. Before the sales-tax authorities counsel for the Company also conceded that the Company had not maintained separate accounts from which. it could be proved that the transactions of supply of bricks, cement, steel and other commodities resulted in no profit. The High Court observed:
"It is the Stores Department of the
company as a whole which deals with the
purchase, storage and sale of all the goods
required both for acquisition and issue of
materials to be used for the construction and
operation work of the Company ......... the.
Company had to construct not only the
buildings but also roads, railways, etc.,
acquire machinery and perform other
multifarious activities connected with the
establishment of steel plants and construction
of the township. There is nothing in the
statement to show that the Company had at any
time even contemplated the allocation of the
total expenditure incurred for the maintenance
of its Stores Department between the
expenditure incurred in respect of the goods
namely bricks, cement, steel etc. and other
goods. If such allocation was not even
contemplated, it will be unreasonable to say
that when these goods were sold to the
building contractors at the prices mentioned
above, the intention of the Company was merely
to utilise the difference in price to meet
the overhead charges in respect of these
articles and that there was no profit making
motive."
It is unfortunate that in submitting the statement of case the Tribunal stated no facts at all, and merely submitted the question which was submitted by the Company and the question which, in the view of the Tribunal, arose out of the order. Even in the order deciding the appeal, the facts found on which the conclusion was based were not clearly set out. The Tribunal observed that though the primary object of the Company was to establish a steel plant, the Memorandum authorised the Company to carry on "any trade or business" that it thought would be conducive to its interest. Observed the Tribunal:
"Judged in this light one cannot find
anything wrong if in the initial stages when
construction works were going on, the
Company thought it prudent that instead of
keeping its employees idle and bearing the
cost of maintenance without any return,
utilised them in some subsidiary business
which would promote the interest of the
Company and bring some return. With that end
in view the company could as well have brought
contractors to manufacture bricks in its
lands, purchased the same from them, purchased
cement, coal and other materials from
dealers, opened a stores department and kept
those materials so procured in its stores and
thereafter effected sales of the materials to
outsiders including its contractors. The
Company knew that for speedy construction
of its buildings and factory the contractors
would require these materials and so the
Company would not lose if it entered into
such business. Rather that business would be
in the interest of the Company. If the
Company had no idea to enter into any
business. there was no reason why it should
have brought contractors to manufacture
bricks, purchased the entire stock from them,
stocked the same and thereafter sell the same
to its building contractors." But in so observing a very important piece of evidence appears to have been ignored by the Tribunal. Annexed to the form of the tender submitted by the contractors there are certain "general rules. and directions for the guidance of contractors." Paragraph8 slated:
"The memorandum of work tendered for, and
the schedule of materials to be supplied by
the H.S. Ltd. and their issue rates, shall be
filled in and completed in the office of the
Divisional Officer before the tender form is
issued. If a form is issued to an intending
tenderer without having been so filled in as
completed he shall request the office to have
this done before he completes and delivers his
tender." Then follow the conditions of contract of which condition No. 10 is material; it states---
"If the specification or estimates of the
work provides for the use of any special
description of materials to be supplied from
the Engineer-in-Charge’s store, or if it is
required that the contractor shall use
certain stores to be provided by the Engineer-
in-Charge (such materials or stores, and the
prices to be charged therefor as hereinafter
mentioned being so far as practicable for the
convenience of the contractor, but not so as
in any way to control the meaning or effect of
this contract specified in the schedule or
memorandum hereto annexed), the contractor
shall be supplied with such materials and
stores as required from time to time to be
used by him for the purpose of the contract
only, and the value of the full quantity of
materials and stores so
supplied at the rates specified in the said
schedule or memorandum may be set off or
deducted from any sums then due, or thereafter
to become due to the contractor under the
contract, or otherwise or against or from the
security deposit. All materials supplied to
the contractor shall remain the absolute
property of the Company, and shall not on any
account be removed from the site of the work,
and shall at all times be open to inspection
by the Engineer-in-Charge. Any such materials
unused and in perfectly good condition at the
time of the completion or determination of the
contract shall be returned to the Engineer-in-
Charge’s store, if by. a notice in writing
under his hand he shall so. Attached to the tender form is the schedule which recites:
"Recovery of rates of materials to be supplied by H.S.L., for the work of:
(1) Construction of brick masonry compound wall around plant area. Northern section Length 2.4. miles.
(2) Construction of brick masonry compound wall around plant area. Southern section Length 2.30 miles.
(3) Construction of brick masonry compound wail around plant area. Marshalling yard section Length 4.15 miles ."
It is followed by a table which sets out the Serial No. of the articles to be supplied, description of materials unit, rate and place of delivery.
It is clear from the terms of the tender and the schedule annexed thereto that the Company was to charge certain rates for the materials to be supplied by it. One of the contracts which has been produced before this Court states under the head "Rate": Rs. 5.94+3-1/2% storage charges against "cement in bags," Rs. 800.00+3 1/2% storage charges against "structural steel and M.S. rods", and "Rs. 41.25 for 1000 bricks" against "first class bricks". Apparently 3-1/2% over the specified rate was agreed to be paid by the contractors as storage charges in respect of cement and structural steel and M.S. rods. No. specific percentage was set out in respect of the bricks and an inclusive price was made chargeable.
Relying upon the terms of the schedule, counsel for the Company contends that the contractors and the Company expressly agreed that 3-1/2% over the agreed price of the goods was chargeable as storage charges. It is common ground that the rate mentioned ’against cement and structural steel is the price at which the goods were purchased ’by the Company. If the Company was charging a fixed percentage on the price paid by it for procuring such goods for storage and other incidental charges, it would be difficult to resist the conclusion that the Company was not carrying" on the business o.f selling cement and structural steel. There is of course no statement in the schedule that the price charged by the Company in excess of the price paid by the Company to its contractors for bricks was in respect of storage charges.
But neither the Tribunal nor the High Court has referred to this important piece of evidence and we are unable to decide these appeals unless we have an additional statement of facts in the light of the relevant evidence as to whether the excess charged over and above the price which the Company paid for procuring cement and steel (expressly called storage charge) and bricks was intended to be profit. If the Company agreed to charge a fixed percentage above the cost price, for storage, insurance and rental charges, it may be reasonably inferred that the Company did not carry on business of supplying materials as a part of- business activity with a view to making profit.
The Tribunal’s statement of case is bald and in recording its findings the Tribunal has ignored a very important piece of evidence. To enable us to answer the questions referred, it is. necessary that the Tribunal should be called upon to submit a supplementary statement of the case on the questions whether the Company charged any profit apart from the storage charges for supplying cement and structural steel, and whether the difference between the price charged to the contractors and the price paid by the Company to its suppliers for bricks was not m respect of storage and other incidental charges. The Tribunal to submit the supplementary statement of case to this Court, within three months from the date on which the papers reach the Tribunal. V.P.S, Directions given.