J. Moosa & Sons v. Commercial Tax Officer, First Circle, Hyderabad, And Another

P. Jaganmohan Reddy, C.J:— The petitioner in both the petitions is a firm carrying on business of auctioneers. They auction at their auction hall articles which are entrusted to them by various persons, and in accordance with their directions. The Commercial Tax Officer issued a notice to the petitioner on 6th December, 1965, proposing to assess the firm as a dealer. Against this, a Writ Petition No. 1951 of 1965 for the issue of a writ of prohibition, challenging the jurisdiction of the authority to assess the petitioner, was filed. It was admitted on 14th December, 1965, and interim stay was granted. The said stay order was also, according to the petitioner, communicated to the 1st respondent on 15th December, 1965, but none the less the order of assessment purporting to have been passed on 13th December, 1965, was served on the petitioner on 18th December, 1965. The petitioner then had to file W.P No. 1989 of 1965 to quash that order. It has also filed another writ petition, because the 1st respondent commenced proceedings for 1965-66. Inasmuch as Writ Petition No. 1951 of 1965 for the issue of a writ of prohibition had become infructuous, we dismissed it.

2. In these two writ petitions, the questions that arise for consideration, are whether the petitioner is a dealer within the meaning of the Andhra Pradesh General Sales Tax Act (hereinafter called as the A.P.G.S.T Act), and whether the firm is liable to-be assessed having regard to the fact that none of the principals, i.e, the owners who had entrusted the articles to the auctioneer have a taxable turnover. It is contended by Sri Anantha Babu, firstly that the Legislatures have power to tax only transactions which amount to sales as defined in the Sale of Goods Act, and have no power to extend their jurisdiction by artificial definition of “sale” or by laying down legal fictions. The power to tax a sale, according to him, comprehends the power to tax either party to the transaction, i.e, the seller and the buyer, and even as the law posits the existence, as a condition precedent to the levy of tax, of an intimate nexus between the transaction and the State, which seeks to tax the transaction, so also it is essential that there should be an adequate nexus between the transaction and the person made liable to pay the tax levied on the transaction. Only the seller and the buyer fulfil the requirement. The Legislature cannot collect tax from persons who are not buyers or sellers. Inasmuch as the relationship between the auctioneer and the successful bidder is not that of a seller and buyer and the transaction is not a contract of sale, no tax can be collected from the auctioneer under section 5 or section 11 of the A.P.G.S.T Act. Secondly, even assuming that the Legislature has power to tax agents, the provisions of the A.P.G.S.T Act on a proper construction, authorise taxation only of agents who buy and sell, i.e, agents in whom the dominion in the goods is vested. Auctioneers and brokers are not persons in whom the dominion in goods vests and, therefore, they do not come within the ambit of the A.P.G.S.T Act. Thirdly, it is contended that under section 11, the liability of agents to pay tax is co-extensive with that of the principal. So, where the principal is not liable to pay tax, the agent is immune from taxation in respect of such principal's transactions. The Commercial Tax Authorities must therefore give an opportunity to the auctioneer to show what is the taxable turnover of each of the principals and whether that turnover attracts tax. If not, it is contended, the auctioneer is not liable to pay tax. At any rate, the learned Advocate contends, this order must be quashed as the petitioner was not given an opportunity to adduce any evidence, and his application for time was summarily rejected on some flimsy grounds. Lastly, it is contended that the auctioneers dispose of second-hand goods belonging to various principals. As such, there is no tax liability because the principals who are merely selling off old articles are not carrying on any business of buying or selling. The principals of the petitioner are not dealers and they do not buy or sell in the course of trade or business, and consequently, the agent is not liable to pay tax.

3. On behalf of the Government, on the other hand, it is contended that since the auctioneer has dominion over the goods and has the power to transfer the goods to the highest bidder when he knocks down the bargain, a transaction of sale takes place and sales tax is exigible. On the question whether the sale by the petitioner at the auction of goods of any one of the principals, does not attract sales tax in view of the fact that the principal did not have a taxable turnover, and whether having regard to the nature of the goods sold at the auction, the auctioneer is a dealer, it is contended that these are all matters which have to be determined on the facts of each case, and therefore, this Court is not the proper forum to investigate these matters.

4. The questions raised before us can only be determined on an appreciation of the true scope and nature of the functions and transactions of an auctioneer vis-a-vis the provisions of the Sales Tax Act. The word “dealer” is defined in section 2(1)(e) of the A.P.G.S.T Act as meaning “any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash, or for deferred payment, or for commission, remuneration or other valuable consideration, and includes………….. (iv) a commission agent, a broker, a del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of buying, selling, supplying or distributing goods on behalf of any principal………” Explanations I and II are not relevant and have therefore been omitted. “Sale” is defined in section 2(1)(n) thus:

“‘Sale’ with all its grammatical variations and cognate expressions means every transfer of the property in goods by one person to another in the course of trade or business for cash, or for deferred payment, or for any other valuable consideration……………..”

5. It is obvious that under the Act, sales tax is a tax on the transaction of sale, which is collected from the parties to the transaction. But the parties from whom the tax can be recovered are specified in the definition of “dealer”. It says that sales tax can be recovered not only from a principal who carries on the business of buying, selling, supplying or distributing goods but also from a commission agent, a broker, auctioneer etc., who carries on the business of buying, selling, supplying or distributing goods on behalf of a principal. Where, therefore, a principal who carries on the business of buying, selling, supplying or distributing goods, carries on the business through an agent who carries on this business on behalf of the principal, the agent will also be a dealer from whom tax can be collected. If the principal is not a dealer, then the agent who carries on the transaction on his behalf cannot be a dealer, within the meaning of section 2(1)(e). In Irri Veera Raju v. Commercial Tax Officer [1967] 20 S.T.C 501., a Bench of this Court to which one of us (the Chief Justice) was a party, while referring to the observations of the Supreme Court in State of Mysore v. Hussain Kunhi & Co. [1967] 13 S.T.C 215. laid down the basis of the liability of an agent, at page 509, in these words:

“It will be observed from the above passage that the reason why an agent is being assessed in the case of an agent is that he is only a convenient representative for assessment, levy and collection of the tax of a non-resident principal who is not within the jurisdiction. It is, therefore, evident that the underlying basis for attaching liability to an agent under the scheme of taxation, whether he is agent of a resident or non-resident principal, is that it is a convenient mode of collection of tax.”

6. While this is so, Sri Anantha Babu relies on a decision of the Calcutta High Court in Chowringhee Sales Bureau Ltd. v. State of West Bengal. In that case, D.N Sinha, J., observed at page 553:

“Where an auctioneer is selling specific chattel and/or goods for an unknown or a disclosed principal and where the buyer knows that the auctioneer is not the owner, the auctioneer cannot be considered as the seller and there is no contract of sale between him and the buyer. In such a case, the auctioneer is not even a party to the sale. Therefore, in such a transaction the auctioneer cannot be made liable to payment of sales tax and the extension of the definition of the word ‘dealer’ in Explanation 2 of section 2(c) of the Bengal Finance (Sales Tax) Act, so as to include an auctioneer is ultra vires and must be declared as void.”

7. It was further held that since the power to tax is only on the sale of goods as defined in the Indian Sale of Goods Act, any attempt to tax something which is not a sale of goods according to that Act would be beyond the powers of the State Legislature.

8. In our view, the functions and duties of an auctioneer in any transaction have to be kept in mind before it can be determined that he is a dealer. An auctioneer sells the goods of another in different ways depending upon the contract which he has with the principal. It may be that the goods are sold or purchased subject to the confirmation of the seller, in which case the contract of sale is between the seller and the purchaser, the auctioneer merely bringing them together. On the other hand, it may be that the seller entrusts his goods to the auctioneer to sell them to the highest bidder, in which case the auctioneer is entrusted with the dominion over the goods and has power to transfer the property in the goods for consideration. The seller is entitled only to the price, while the auctioneer has certain rights under the implied contract he has with his buyer. It may also be that an auctioneer may sell property of his own as principal in which case he is the seller, and when selling goods belonging to a third party he is the agent of the vendor only. The implied authority of the auctioneer is a general authority to sell, in the way usual and customary amongst auctioneers, but it is subject to express instructions of the owner enlarging or limiting it. Where a reserve has been fixed by the vendor there is no implied authority to sell without reserve. As soon as the property has been knocked down, the auctioneer's authority is at an end. He cannot rescind the contract nor introduce into it any stipulations as to title. Further, where an auctioneer sells for an undisclosed principal, he is personally liable on the contract, but where the auctioneer discloses the fact that he is selling as an agent, but does not name his principal, he is personally liable on the contract, unless a contrary intention appears, the presumption being that the purchaser is only (sic) willing to contract with the unknown man if the auctioneer makes himself personally liable. Such a presumption, however, does not arise in the case of sale of specific chattels which, the purchaser knows, is not the property of the auctioneer. Bowstead on Agency (3rd Edn., page 238) summed up the principles thus:—

“Where an auctioneer sells property by auction, the nature and extent of his contract with the purchasers depend upon the conditions of sale, the nature of the subject-matter and the other surrounding circumstances. Where an auctioneer sells a specific chattel by auction, he is not liable upon the contract of sale, nor does he impliedly warrant the title of his principal, although the name of the principal has not been disclosed to the buyer, in which case, he impliedly warrants that he has authority to sell and that he knows of no defect in the title of his principal, and he undertakes to deliver the chattel in exchange for the price (for which he may sue) but his contract with the buyer is independent of the contract of sale, which he makes on behalf of the seller and to which he is not a party.”

9. From what has been stated as to the nature of the du lies, functions and liabilities of an auctioneer, it is clear that every transaction or series of transactions are governed by the facts and circumstances of each case arising out of the contract between the purchaser and the auctioneer or the implied authority vested in him. Where goods or articles of third parties, whose names are not disclosed, are sold by auction, on the representation that the property in the goods will pass on payment of the price by the highest bidder in whose favour the sale is knocked down, it is implied that the dominion over that property has been entrusted by the third party to the auctioneer and that the same should be transferred on payment of the price by the highest bidder. As observed by Rama-krishnan, J., delivering the judgment of a Bench of the Madras High Court in Zackria Sons Private Limited v. State Of Madras, it is unnecessary to consider, as was done by D.N Sinha, J., in Chowringhee Sales Bureau Ltd. v. State of West Bengal, whether Explanation (2) to section 2(g) of the Madras General Sales Tax Act, 1959, itself was ultra vires the State Legislature in so far as it includes auctioneers, if we bear in mind the principle that the liability to tax is attracted only to the person who carries on the business of buying, selling, supplying or distributing goods which condition has to pre-exist before any of the various categories of persons referred to in sub-clause (g) of section 2, which includes auctioneers, can be made liable to tax as dealers. (See also Deputy Commissioner of Commercial Taxes v. Dayanand Corporation [1968] 21 S.T.C 346.). In other words, it is always a question of fact in each particular case as to whether these conditions exist.

10. In a recent case in Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer [1968] 21 S.T.C 312., their Lordships of the Supreme Court had occasion to observe that the question as to whether the transactions in any given case are sales or contracts of agency is a mixed question of fact and law and must be investigated with reference to the material which the dealer might be able to place before the appropriate authority, and that the question is not one which can properly be determined in an application for a writ under Article 226 of the Constitution. Dealing with Explanation III to section 2(1)(n) of the A.P.G.S.T Act, added by the Amendment Act 26 of 1961, Ramaswami, J., said at page 315:

“In our opinion, the real object of the Explanation is to prevent the misuse by the assessee of the relationship of principal and agent for the purpose of evading tax. The first situation contemplated by the Legislature is that covered by clause 2(i) of Explanation III where the agent has sold the goods at one rate and passed on the sale proceeds to its principal at another rate. The second situation is Where the agent has purchased the goods at one rate and has passed them on to The principal at another rate. The third situation is where the agent has not accounted to his principal for the entire collections or deductions made by him in the sales or purchases effected by him on behalf of his principal, and the fourth is where it appears that the agent has acted for a fictitious or nonexistent principal. It was contended on behalf of the appellant that the State Legislature was not competent to convert by a legal fiction a mere entrustment of goods for sale into a sale and to impose a tax thereon. In our opinion, there is no warrant for this argument. The real effect of the third Explanation is to impose the tax only when there was a transfer of title to the goods and not where there is a mere contract of agency. The Explanation says in effect that where there is in reality a transfer of property by the principal to the agent and by the agent in his turn to the buyer, there are two transactions of sale.”

11. Again at page 316, it was observed:

“As a matter of law, there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds. The true relationship of the parties in each case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the legal relationship.”

12. This enunciation of the law, generally relating to the liability of an agent, his powers to transfer the dominion of the goods etc. is reflected in each specific type of agency such as the one implied in the employment of an auctioneer for the sale or purchase of goods. (See also Radhakrishna Rao v. The Province of Madras).

13. The question, therefore, whether the petitioner in this case is a person who carries on the business of selling, buying, supplying or distributing goods, is a question of fact, and we are in entire agreement with the learned Government Pleader that this question has to be determined by the Sales Tax Authorities. But that question, in our view, could not have been determined by those authorities, as no opportunity was given to the petitioner by the Commercial Tax Officer to raise any of the pleas raised by him before us. The petitioner had asked for time to furnish the statements, but though the Commercial Tax Officer called for his objections, when objections were raised and time was asked for, he rejected the petition on the flimsy ground that stamp of Re. 1 was not affixed on it. The learned Government Pleader could neither sustain nor support this unwarranted rejection of affording an opportunity to the petitioner and could not contest the prayer for setting aside the order of assessment. Sri Anantha Babu also contends that the principles laid down by the Bench of this Court, to which one of us, the Chief Justice, was a party, in Irri Veera Raju's case already referred to, that the words “on behalf of any principal” occurring in the definition of “dealer” in section 2(1)(e)(iv) of the A.P.G.S.T Act indicate that the agent is a dealer in respect of each of the principals, that he is deemed to be as many dealers as there are principals and that therefore the total turnover of the petitioners in respect of several principals could not be computed for assessing them, when in fact the turnover of each one of the principals was below the non-taxable limit, i.e Rs. 10,000, should also have to be kept in view by the Commercial Tax Officer when determining the liability of the petitioner in respect of the auctions held by him. There is no doubt that that principle, which flows from the provisions of section 11, does apply to the case of auctioneers also if they satisfy the conditions already adverted to. At page 506 it was observed:

“The agent is only liable in every case in which his principal would be otherwise liable to pay such tax or penalty in respect of that transaction. It will be observed that the co-relation is between the agent and the principal, that is, that the transaction in respect of which the principal is held liable can be assessed, and the tax levied and collected in the hands of his agent. The necessary condition of the tax liability is that the principal should be liable under the Act and the principal is liable only if the transaction is one which is not less than Rs. 10,000. If the liability of an agent directly arises as a consequence of the liability of his principal, then there would be no force in the contention that the total transactions of the agent in respect of the several principals would make him liable to tax on his total turnover of these several principals under section 5, when in fact in respect of the transactions of each of the principals, he is not liable under section 11.”

14. In other words, if the turnover of each of the principals is less than Rs. 10,000 the agent would not be liable as a dealer, because his liability is co-extensive with that of the principal. It will be open to the auctioneer to show that he is not liable or at any rate that he has no taxable turnover for each of the transactions for which he would have been otherwise liable as a dealer.

15. The last question also, namely, whether the principal himself is a dealer or not, because he does not carry on the business of buying, selling or supplying goods within the definition of dealer, is also a matter which will have to be gone into and determined if and when raised before the Commercial Tax Officer.

16. Several decisions have been cited before us dealing with commission agents or brokers, but we find it unnecessary to deal with that aspect of the matter, as that question does not arise.

17. Before parting with this case, we have seriously considered whether, having regard to what transpired in this case, we should issue a notice of contempt to the Commercial Tax Officer, because after the interim order staying all further proceedings was passed on the 15th December, 1965, and the same, according to the Court local tapal book, was delivered in the Commercial Tax Officer's office on 16th December, 1965, the order of assessment was served on the petitioner on 18th December, 1965. If the order of assessment was served after the stay order was received, it would amount to contempt of court apart from also showing that the attitude of the Commercial Tax Officer is such as to give the impression that he would not brook even legal interference with the purported arbitrary exercise of his power. The learned Government Pleader however tells us that the stay order was actually seen by the Commercial Tax Officer on 17th, by which time the assessment order had been despatched. While there may be room to entertain doubts that the Commercial Tax Officer did not know of the service of the assessment order after he had knowledge of the stay order, we think it will be sufficient if we sound a note of warning that if the stratagem of ante-dating the orders after the order of stay or injunction was received, is adopted by over-zealous authorities or even of serving the order when all proceedings are stayed, it would expose them to contempt proceedings and involve them in serious consequences. In the result, the Writ Petition No. 1989 of 1965 is allowed and the order of the Commercial Tax Officer is quashed, with a direction that the petitioner be given an opportunity to raise the several pleas raised before us and to adduce material or evidence in support of its several contentions, and when raised, the same be determined in accordance with the principles set out in this judgment. The respondents will pay the costs of the petitioner. Advocate's fee Rs. 100. W.P No. 1975 of 1966 is dismissed without costs.

18. C.M.P Nos. 11391 and 11392 of 1967:— Ordered.

19. Ordered accordingly.