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  • Sub-section (4) of s. 11
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  • Sub-section (4) of s. 11
Smart Summary

Factual and Procedural Background

This opinion, delivered by K.K. Desai, J., addresses a dispute about liability for arrears of sales-tax said to be due from a partnership firm, Messrs Govindsharan Ramsharan Mawawala. The petitioner was sought to be held liable for those arrears under sub-section (1) of section 26 of the relevant Sales Tax Act on the basis that he had acquired rights, title and interest in the partnership concern, including stock-in-trade, movables, goodwill and sub-tenancy rights.

The petitioner contended that he is not a "transferee" within the meaning of section 26(1). The respondents contended that he is a transferee and additionally urged that section 26(1) applies to a forced sale by the Collector in recovery proceedings. The court examined the scheme of the Act (including sections 2(6), 5, 11(4), 25 and 26) and the parties' rival constructions of section 26(1).

The opinion ends with the court quashing the order and notice directed against the petitioner. The record also notes the solicitors for the parties: B.P. Pandit for the petitioner and Little & Co. for the respondents.

Legal Issues Presented

  1. Whether the petitioner is a "transferee" within the meaning of sub-section (1) of section 26 of the Act and therefore jointly and severally liable for unpaid tax (including penalty) of the partnership firm.
  2. Whether the phrase in section 26(1) — "when the ownership of the business of a dealer liable to pay the tax is entirely transferred" — includes forced sales by the Collector in recovery proceedings (i.e., whether purchasers at such auction sales fall within section 26(1)).

Arguments of the Parties

Petitioner's Arguments

  • The petitioner contended that he is not a transferee within the meaning of sub-section (1) of section 26, and therefore cannot be held liable under that provision for the partnership firm's arrears.

Respondents' Arguments

  • The respondents argued that, having regard to the sale of the right, title and interest of the partnership concern, including stock-in-trade, movables, goodwill and sub-tenancy rights in favour of the petitioner, he must be held to fall within the phrase "when the ownership of the business of a dealer... is entirely transferred" in section 26(1).
  • The respondents further contended that section 26(1) covers forced sales by the Collector in recovery proceedings, asserting that the Collector in such sales functions as the statutory agent of the defaulting dealer and, by issuing a certificate of sale, effectively represents the dealer/original owner so that the original dealer should be treated as the transferor.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis proceeded by examining the scheme of the Act and the text of the relevant sections:

  1. The court first identified relevant statutory provisions and definitions: section 2(6) (definition of a dealer), section 5 (levy of sales-tax on every dealer with reference to turnover for each year ending March 31), and the registration and licensing regime in Chapter IV (registration and grant of licences/authorisations). The court noted that a dealer cannot carry on business unless he applies for registration and that section 11(4) authorises amendment of a certificate of registration after considering information under section 25.
  2. The court set out sections 25 and 26. Section 25 lists various dealings of a dealer with his business that must be notified (sale or other disposal of business or any part, discontinuance, change of place, opening new place, entering into partnership, partition of undivided Hindu family, etc.). Section 26 contains provisions on liability where ownership is transferred wholly or partly, dissolution of firm, partition, and liability on obtaining registration after such events.
  3. The court observed that section 26(2) uses clear and unambiguous language ("When a dealer liable to pay the tax transfers the ownership of a part of his business...") while section 26(1) is in passive tense and ambiguous because it does not reference "a dealer" in the same explicit grammatical form as subsection (2).
  4. The court concluded that provisions in section 26 are intended to refer to the same kinds of dealings with a business by a dealer as are mentioned in section 25. Since section 25 attempts to envisage all possibilities of changes of ownership and dealings with the business by a dealer, and does not refer to a sale of business by the Collector in recovery proceedings, the court read section 26 in light of that scheme.
  5. Addressing the respondents' contention that section 26(1) applies to forced sales by the Collector, the court scrutinised the language of section 26(1) which makes the transferor and transferee "jointly and severally" liable for unpaid tax. The court reasoned that in such a scheme the transferor remains liable and is the party from whom the transferee purchases, and that the transferee would typically be entitled to reimbursement from the transferor for payments made in discharging the transferor's liability.
  6. The court analysed the consequences of treating a Collector as the "transferor" in forced sales and found this construction unacceptable: (a) it would be contrary to law to treat the Collector as the statutory agent of the dealer such that the Collector's certificate of sale makes him the representative of the dealer; (b) the original owner remains liable as the assessee under section 5 but cannot be treated as the transferor when property is sold by the Collector in recovery proceedings; and (c) a purchaser at an auction sale in recovery proceedings does not buy property from the original dealer/owner in the contractual sense contemplated by section 26(1), and thus cannot obtain the reimbursement rights a transferee would have against the transferor.
  7. From these considerations the court concluded that the transfer referred to in section 26(1) must be a transfer effected between a dealer (as transferor) and his purchaser (as transferee), and does not include sales conducted by the Collector in recovery proceedings. The court emphasised that this construction is consistent with the scheme of the Act and with section 25 and subsections (2), (3) and (4) of section 26, whereas the respondents' construction would be contrary to that scheme.

Holding and Implications

HOLDING: The court quashed the order and notice against the petitioner.

Implications:

  • The direct effect is that the petitioner cannot be held liable under section 26(1) for the partnership firm's unpaid sales-tax on the basis of the purchase in question where that purchase arose from a sale by the Collector in recovery proceedings (the court held that section 26(1) does not extend to such forced sales by the Collector).
  • The court's decision rests on statutory construction of the relevant provisions (sections 25 and 26 read in the scheme of the Act). The opinion does not discuss or assert the creation of any broader legal precedent beyond the interpretation applied to the facts of this case; accordingly, no new wider rule beyond the direct effect on these parties is articulated in the reported portion of the judgment.

    Rambali Bhuleshwar v. Sales Tax Officer, Recovery I, Bombay

    K.K Desai, J.:— [His Lordship after stating the facts, proceeded.] In connection with the main contention as above raised by the petitioner reference will have to be made to the provisions of s. 26 of the Act. Before refering to that section having regard to the arguments advanced before me, it is necessary to look at the scheme of the Act.

    2. Under s. 2(6) a dealer is defined to mean any person who carries on business etc.

    3. Under s. 5 provision is made for levying sales-tax against every dealer with reference to turn-over of all sales and all purchases during each year expiring on March 31. It is obvious that for assessing and ascertaining tax on turn-over in a business for a particular assessment year and the liability to pay tax for that, year provision is made in Chap. IV for (i) registration of and (ii) grant of licences and authorizations, to a dealer. It is not permissible for a dealer who is liable to pay tax to carry on business unless he applies for registration. Sub-section (4) of s. 11 authorises the prescribed authority to amend any certificate of registration after considering information furnished under s. 25 or otherwise received.

    4. Sections 25 and 26 run as follows:—

    “25. If any dealer to whom the provisions of this Act apply—

    (a) sells or otherwise disposes of his business or any part of his business, or effects or comes to know of any other change in the ownership of the business, or

    (b) discontinues his business or changes his place of business or opens a new place of business, or

    (d) enters into partnership in regard to his business,

    5. He shall, within the prescribed time, inform the prescribed authority accordingly and where any such dealer dies, his legal representative or where any such dealer is a partnership firm and the partnership is dissolved, every person who was a partner thereof shall in like manner, inform the said authority.

    26. (1) When the ownership of the business of a dealer liable to pay the tax is entirely transferred, the transferor and the transferee shall jointly and severally be liable to pay any tax including penalty, if any, payable in respect of such business…and remaining unpaid at the time of the transfer; and the transferee shall also be liable to pay tax on the sales or purchases of goods effected by him with effect from the date of such transfer and shall within thirty days of the transfer apply for registration unless he already holds a certificate of registration.

    (2) When a dealer liable to pay the tax transfers the ownership of a part of his business the transferor shall be liable to pay the tax in respect of the stock of goods transferred along with that part of his business, which is not so transferred,…

    (3)(i) When a firm liable to pay the tax is dissolved, or

    (ii) where an undivided Hindu family liable to pay the tax is partitioned, such firm or family as the case may be shall be liable to pay the tax on the goods allotted to any partner or member thereof,…

    (4) When a dealer to whom a part of the business has been transferred or who has obtained the whole or part of the stock relating to the business of a partnership which has been discontinued or dissolved or an undivided Hindu family which is partitioned obtains a certificate of registration he shall be liable to pay the tax on the turn-over in respect of sales or purchases of goods made by him with effect from the date of such transfer or business discontinuance or dissolution of the partnership, or the partition of the family, as the case may be.”

    6. The petitioner in this case is sought to be held liable to pay arrears of sales-tax dues of the partnership firm of Messrs Govindsharan Ramsharan Mawawala. He is sought to be held liable under the provisions of sub-s. (1) of s. 26. As I have already indicated the contention of the petitioner is that he is not a transferee within the meaning of sub-s. (1). The contention of the respondents is that he is such a transferee. The rival contentions of the parties in this connection are based on contrary submissions as regards true construction and effect of sub-s. (1). It is apparent that the language in sub-s. (2) of s. 26 is clear and unambiguous when it provides:—“When a dealer liable to pay the tax transfers the ownership of a part of his business”. The language in sub-s. (1) is in passive tense and ambiguous. There is no reference made to a dealer in that sub-section in the same manner as in sub-s. (2). The respondents contend that having regard to the sale of the right, title and interest of the partnership concern and the stock-in-trade and moveables including good-will and sub-tenancy rights in favour of the petitioner he must he held to fall within the phrase “when the ownership of the business of a dealer… is entirely transferred” as contained in sub-s. (1). In connection with this argument, it is necessary to bear in mind that the charging provisions of the Act are contained in s. 5. Admittedly, therefore, the tax is levied against a “dealer”. In this case the liability to pay the tax was solely and exclusively of the partnership firm of Messrs Govindram Ramsharan Mawawala. The Legislature envisaged the possibility of transfer of business by a dealer in whole or in part and provided for payments of tax-liabilities upon transfers being effected. Accordingly, in s. 11(4) the prescribed authority is authorised from time to time to amend a certificate of registration issued to a dealer after considering the information furnished under s. 25. Under s. 25 all the dealings of a dealer with reference to his business are described. Reference is made to (i) a sale or other disposal of business or any part of business by a dealer, (ii) discontinuance of business and (iii) a dealer entering into partnership, as also (iv) a partition between the members of a joint family carrying on a business. It is significant that s. 25 attempts to envisage all possibilities of changes of ownership and dealings with his business by a dealer. It is, therefore, that reference is made in sub-s. (4) of s. 11 and s. 25 to changes to be made in the certificate of registration. It appears to me that the provisions in s. 26 are intended to include and refer only to the same kinds of dealings with a business by a dealer as are mentioned in s. 25. Obviously s. 25 does not refer to a sale of business by Collector in recovery proceedings.

    7. In connection with the arguments advanced on behalf of the respondents that sub-s. (1) of s. 26 refers to a forced sale by a Collector in recovery proceedings, it is necessary to notice the language of sub-s. (1) where it provides that upon a transfer “the transferor and the transferee shall jointly and severally be liable to pay any tax including penalty, if any, payable in respect of such business”. The liability for payment continues to be the obligation of the transferor inspite of transfer of business. The liability is joint as between the transferor and the transferee. In the matter of a sale by Collector having regard to this language of s. 26(1) a question must arise as to who is the transferor in the matter of such sales. It is clear that Collector as transferor was not intended to be liable to pay outstanding arrears of tax. Is it correct to hold as is argued on behalf of the respondents that in the matter of a sale by Collector in recovery proceedings the Collector is the statutory agent of the dealer who fails to discharge the sales-tax dues and that, accordingly, when the Collector issues a certificate of sale he represents the dealer and/or the original owner, and that the dealer is the transferor? It appears to me that such a construction would be very far fetched and contrary to law. In the matter of enforced sales the original owner or the original debtor or dealer is neither a seller nor a transferor. He would continue to be liable to pay all arrears of tax as assessee under the provisions of s. 5 and other provisions. However, it would be contrary to facts to hold that he is a transferor in the matter of change of ownership when property is sold by Collector in recovery proceedings.

    8. The question is whether effect can be given to the provisions as to the joint and several liability of transferor and transferee as provided in sub-s. (1) of s. 26 in the matter of a sale by Collector in recovery proceedings.

    9. If that is not possible the further question is as to whether sales in recovery proceedings are not covered by the provisions of sub-s. (1) of s. 26. It is clear to me that a purchaser at an auction sale in recovery proceedings does not purchase any property from the original dealer or owner. It is true that he would purchase the property of that original owner and/or dealer. He must, if the section is applicable to him, be liable to pay the arrears of tax not only alone but jointly with the transferor. That provision for joint liability is obviously made because the transferee discharges under s. 26(1) vicariously the liability of the original owner and dealer. Apparently transferee mentioned in sub-s. (1) would be entitled to be completely reimbursed by the transferor in respect of payments made in discharge of tax-liability of transferor. In the matter of a sale by Collector in recovery proceedings a transferee purchaser cannot be entitled to such a right against the transferor-Collector. Having regard to this position it is clear that the transfer as mentioned in sub-s. (1) does not include or refer to sales by the Collector in recovery proceedings. The transaction of change of ownership as mentioned in sub-s. (1) of s. 26 must be as between a dealer and his purchaser, a dealer being referred to as transferor and the purchaser having been referred to as transferee. This construction is consistent with the scheme of the Act and particularly the scheme in s. 25 as also in sub-ss. (2), (3) and (4) of s. 26. The construction as contended for on behalf of the respondents is entirely contrary to the scheme of the Act and the sections mentioned above.

    [The rest of the judgment is not material to this report.]

    Solicitor for the petitioner: B.P Pandit.

    Solicitors for the respondents: Little & Co.

    10. Order and notice quashed.

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    Comments

    Rambali Bhuleshwar v. Sales Tax Officer, Recovery I, Bombay
    (Sep 27, 1960)