1. T. C. No. 139 of 1958: The petitioner is a firm of partnership carrying on business in the purchase and sale of cotton and cotton seeds at Tiruppur in the State of Madras. For the assessment year 1955-56, the firm was assessed under the Madras General Sales-tax Act on a gross turnover of Rs. 19,40,317-14-0. The firm sold cotton in the relevant year to Messrs. Sitaram Spinning and Weaving Mills at Tiruchur in Kerala State for a value of Rs. 6,05,377-0-9. The Deputy Commercial-tax Officer, Tiruppur, held that the firm was liable to pay tax at the purchase value of such cotton sold and estimated the purchase value by deducting 2 per cent from the sale value, the two percent representing roughly the gross profit earned by the firm. The assessable amount came to Rs. 5,93,269-8-1.

The head office of the firm was at Tiruppur and the firm had a branch office at Kunnathur. The Kunnathur branch sold cotton to Sitaram Spinning and Weaving Mills at Tiruchur and in regard to such sale the taxable turnover, namely, the purchase value of the cotton was determined at Rs. 77,483-1-5. The total taxable turnover in respect of the sale by the firm to the mills in the Kerala State was therefore determined in the sum of Rupees 6,70,752-9-6. The assessee preferred an appeal to the Commercial-tax Officer and challenged the levy of tax on this turnover. The contention urged was that the sales covered by the turnover were effected in this State, and that the assessee was not the last purchaser in the Madras State within the meaning of Rule 4-A of the Turnover and Assessment Rules and that the last purchaser was only the Sitaram Mills at Tiruchur. The appellate authority did not accept this plea and dismissed the appeal. There was a further appeal to the Tribunal by the assessee which also ended in a dismissal. This tax revision petition has been preferred against the decision of the Tribunal.

2. T. C. No. 140 of 1958: The petitioner in this case is also a firm dealing in purchase and sale of cotton and cotton seeds at Tiruppur in the State of Madras. For the assessment year 1955-55 the firm was assessed under the Madras General Sales-tax Act and the turnover included the purchase value of cotton sold to Sitaram Mills at Tiruchur in Kerala State. This turnover was a sum of Rs. 5,73,988-1-7. The assessee objected to the levy of tax on this turnover on the ground that the sales effected were within the State, and that the assessee was not the last purchaser under Rule 4-A of the Turnover and Assessment Rules. The Deputy Commercial Tax Officer negatived this contention and the appeal of the assessee to the Commercial Tax Officer, and then to the Sales-tax Appellate Tribunal failed. Hence this revision has been preferred.

3. These petitions were heard together in the first Instance by a Division Bench to which one of us was a party. The learned Judges held that there was no specific finding by the Tribunal on the question whether the concerned sales were inter-State sales and 'explanation sales', and whether these sales must be deemed to have taken place outside the State of Madras. The matter was therefore remitted to the Tribunal, for recording a finding and the direction given by the Bench was in these terms:

"We direct the Tribunal to submit a finding on the question whether the sales in question in these two years were inter-State sales and "explanation sales" which tell within the scope of Article 286(1)(a) of the Constitution, or whether they were intra-State sales, sales effected and completed by delivery within the State of Madras. Both the Department and the assessee may be allowed an opportunity to place further evidence before the finding is submitted. The finding is to be submitted within six weeks from the date of the receipt of the records by the Tribunal."

4. The Tribunal went into the matter afresh and a finding has been submitted. In both the cases the Tribunal has recorded the finding that the sales in question were Inter-State sales and 'explanation sales'. There was of course no dispute at any time that the Sitaram Mills at Tiruchur purchased the cotton only for consumption. "The delivery-cum-consumption State" is therefore the Kerala State.

5. After the return of the finding the petitions have been argued-before us. The question raised is whether, though the sales were really inter-State sales and deliveries were effected as a direct result of such sales for the purpose of consumption in the Kerala State, the sales between 14-1955 and 6-9-1955 being covered by the Sales-tax Laws Validation Act, 1956, Central Act VII of 1956, hereinafter referred to as the Validation Act, it would by its operation render the Sitaram Spinning and Weaving Mills as the last purchaser liable to be taxed under the Act and avoid assessments being made upon the petitioners in these cases.

6. It will now be convenient to refer to the Turnover and Assessment Rules. Rule 4(2) provides that cotton should be taxed in respect of the gross turnover of a dealer determined at the value for which the goods are bought. Rule 4-A reads,

"Subject to the provisions of Section 5(iv) in the case of cotton (including kapas), the tax under Section 3(1) shall be levied from the dealer who is the last purchaser in the State not exempt from taxation under Section 3(3) on the amount for which it is bought by him. Provided that the burden of proving that a transaction is not liable to taxation under this clause shall be on the dealer."

7. The short question in these cases Is whether the petitioners are the last purchasers in the State. The burden of proving that they are not the last purchasers has been placed by the statute upon them. They attempt to discharge the burden by proving that the last purchasers are the Sitaram Spinning and Weaving Mills at Tiruchur. Now the problem that is presented to us is this: Is a purchaser in an inter-State sale transaction which is not taxable by the Madras State, being an "Explanation sale", (the goods having been actually delivered for purposes of consumption to another State) a purchaser in the Madras State: The words "purchaser in the State" (Rule 4-A (iv)) should be understood as describing a buyer in a transaction which is within the ambit of the Act, subject to the provisions of the Constitution.

8. We shall now refer to the provisions of the Constitution and the history of events that lead to the Validation Act.

9. Article 286 of the Constitution, before its amendment in 1956, stated thus:

(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods when such sale or purchase takes place.-

(a) outside the State; or (b) in the course of the import of the goods into, or export of the goods out of, the territory of India. Explanation: For the purposes of Sub-clause (a), a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State.

2. Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the Imposition of, a tax on the sale or purchase of any good where such sale or purchase takes place in the course of inter-State trade or commerce;

Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the 3lst day of March 1951."

The Supreme Court held in State of Bombay v. United Motors (India) Ltd., , that the sales covered by the Explanation to Article 286(1), though in the course of inter-State trade were liable to be taxed by the State in which the goods were delivered for consumption. The view taken was that the delivery for consumption rendered the safes intra-State.

10. But this view did not hold the field for a long time as the Supreme Court in the decision in Bengal Immunity Co. Ltd. v. State of Bihar, held by a majority that the sales falling within the Explanation were really inter-State sales in character and could not be taxed under any State law unless Parliament lifted the ban imposed under Article 286(2). The subsequent view of the Supreme Court as expressed by the majority in the Bengal immunity Co.'s case, , is that the Explanation to Article 286(1)(a) did not have any operation upon the application of the ban imposed under Article 286(2). Then came the Validation Act, Central Act VII of 1956. The relevant provision is section 2, which is as follows:

"Notwithstanding any judgment, decree or order of any court, no law of a State imposing, or authorising the imposition of, a tax on the sale or purchase of any goods where such sale or purchase took place in the course of inter-State trade or commerce during the period between the 1st day of April 1951 and 6th day of September 1955, shall be deemed to be Invalid or ever to have been invalid merely by reason of the fact that such sale or purchase took place in the course of inter-State trade or commerce; and all such taxes levied or collected or purporting to have been levied or collected during the aforesaid period shall be deemed always to have been validly levied or collected in accordance with law.

Explanation: In this section 'law of a State' in relation to a State specified in Part C of the First Schedule to the Constitution, means any law made by the Legislative Assembly, if any, of the State or extended to that State by a Notification issued under Section 2 of the Part C State (Laws) Act, 1950."

11. The Constitutional validity of this Act was questioned but the Supreme Court in Sundara Ramiar and Co. v. State of Andhra Pradesh, upheld its validity. The Scope and effect of this Validating Act is thus set out by the Supreme Court in Sundara Ramier's case,

section 2 of the impugned act which is the only substantive enactment therein makes no mention of any validation. It only provides that no law of a State imposing tax on sales shall be deemed to be invalid merely because such sales are in the course of inter-State trade or commerce. The effect of this provision is merely to liberate the Stats laws from the fetter placed on them by Article 286(2) and; to enable such taws to operate on their own terms. The true scope of the impugned Act is, to adopt the language of this court in the decisions in the United Motors case, and the Bengal Immunity Co. case, , that it lifts the ban imposed on the States against taxing inter-State sales and not that it validates or ratifies any such law.

12. Mr. Swaminathan, learned counsel for the petitioners, submits that the Validation Act removed the constitutional fetters on the State's power to legislate on inter-State sales, in general, and that therefore the transactions between 1st April 1955 and 6th September 1955 (the period covered by the Validation Act) were taxable under the General Sales-tax Act of Madras. He relied on the decision of the Supreme Court in Ashok Leyland v. State of Madras, that case the assessee was a company with its factory in the State of Madras, manufacturing and assembling and selling motor vehicles, spare parts and other accessories. The assesses disputed the liability to tax in respect of the sales turnover of the value of vehicles driven away by the non-residential dealer's own drivers to the place of business of the non-residential dealers outside the State of Madras. This Court held that as the sales were completed and delivery was effected within the Madras State, the sales were liable to tax. On appeal, the Supreme Court held that the assessee was in any event liable to tax inasmuch as after the removal of the fetter of Article 286(2) of the Constitution by the Validation Act the Madras Act of 1939 operating on its own terms made the transactions of sale liable to tax. The contention urged on behalf of the assessee before the Supreme Court that the Madras Act does not operate on sales of an inter-State character other than "explanation sales" was rejected by the Supreme Court. At page 387 (of STC): (at p. 1438 of AIR) S. K. Das J. observed thus:

"To repeat what we have said earlier: after the removal of the fetter of Article 286(2), the Act operating on its own terms make the transactions in question liable to tax, and new Section 22 makes no difference to this position."

13. The effect of the decision of the Supreme Court in Ashok Leyland's case, is to hold that the provisions of the Validation Act and Section 22 of the Madras General Sales-tax Act, introduced by Madras Act 1 of 1957, merely resulted in the Parliament lifting the ban under Article 286(2) on State's power to legislate and to empower the State to tax on inter-State sales subject to Article 286(1) of the Constitution and subject to the power of the State to enact a law if it had territorial nexus with the transaction.

14. Two contentions are raised by learned counsel for the petitioners. The first is that the Validation Act has retrospectively enlarged the State's power to tax inter-State sales or purchase and that such sale or purchase between 26th January 1950 and 6th September 1955 can no longer, be shielded by Article 286 of the Constitution after Sales-tan law of the Madras State, and that therefore an "explanation" sale in which the delivery State is not the Madras State can be taxed by this State. The second is that a purchaser in an inter-State transaction is as much a purchaser as a purchaser in an inter-State sale and the inter-State element of the transaction cannot take away that character from him.

cannot have the effect of treating all inter-State sales as intra-State sales as that would amount to abrogation of Article 286 of the Constitution altogether. The Constitution prohibits a State from taxing sales outside the State. The Explanation to Article 286(1) is the dictionary that defines an inside sales permitting State levy. The State where actual delivery of goods takes place for the purpose of consumption is deemed to be the locus where the sale takes place. That this is the true position was laid down by the Supreme Court in the United Motors case, . The following passage of that judgment may be quoted:

"It provides by means of a legal fiction that the State in which the goods sold or purchased are actually delivered for consumption therein is the State in which the sale or purchase is to be considered to have taken place, notwithstanding the property in such goods passing in another State. ... An outside sale or purchase is explained by defining what is an inside sale. .... the test of sufficient territorial nexus was thus replaced by a simpler and more easily workable test: Are the goods actually delivered in the taxing State, as a direct result of a sale or purchase, for the purpose of consumption therein. Then, such sale or purchase shall be deemed to have taken place in that State and outside all other States. The latter States are prohibited from taxing the sale or purchase; the former alone is left free to do so. Multiple taxation of the same transactions by different States is also thus avoided."

16. This observation is not in any way dissented from by the judgment of the Supreme Court in Bengal immunity Co. case, . With regard to "explanation sales", the State in which actual delivery is effected for purpose of consumption can levy tax on the sale provided the Parliament lifts the ban under Article 286(2). But with regard to what may be called "non-explanation sales" that is sales which do not fall within the explanation to Article 286(1) of the Constitution, the mere lifting of the ban under Article 286(2) by the Parliament will not enable a State to levy a tax in respect of a sale which may yet be a sale outside the State territory.

17. We may now refer to another decision of the Supreme Court in India Copper Corporation Ltd. v. State of Bihar, 1961-12 STC 56: (AIR 1961 SC 347). Rajagopala Aiyangar J. delivering the judgment of the majority summed up the legal position thus at page 62 (of STC):(at p. 351 of AIR).

"When the terms of the Explanation were satisfied such sales were by a fiction deemed to be "inside" the State for delivery-cum-consumption and therefore 'outside' all other States. In such cases, therefore, only the State "inside" which the sale is deemed to take place by virtue of the explanation, is exempt from the ban imposed by Article 286(1)(a). All other States would be subject to that ban in regard to such sales".

18. At page 64 (of STC): (at p. 352 of AIR),

"Where the terms and the Explanation are satisfied, the sale transaction will, by a legal fiction, created by it, be deemed to take place 'inside' the State of delivery and therefore 'outside' the State in which the property passes. The conclusion reached therefore is that where the property in the goods passes within a State as a direct result of the sale, the sale transaction is not outside the State for the purpose of Article 286(1)(a), unless the explanation operates. We need also add that the power of the State to impose the tax might not be available unless the transaction in question is unaffected by the other bans imposes under Sub-clause (1) (b), (2) and (3) of Article 286."

19. In Tobacco Manufactures (India) Ltd. v. Commissioner of Sales-tax, , the Supreme Court re-affirmed the same view. Rajagopala Aiyangar J. observed thus at page 97 (of STC): (at p. 407 of AIR) after ''referring to the passage from the United Motors case, already extracted above, "If there is a sale falling within the terms of the "explanation" it is 'inside' the State of delivery-cum-consumption and that State alone can levy the tax. Such a sale is outside all other States, which are prohibited from taxing such a sale by reason of any territorial nexus, however close or cogent. The passage extracted, however, does not deal with cases where the sale in question does not satisfy the requirements of the Explanation leading to the fixation of the fictional situs of the sale determining the State by which the tax might be levied."

20. The position that emerges as a result to the elucidation of the law by the Supreme Court can be summed up thus. The Constitution has imposed a ban on the State's power to tax transactions of inter-state sale or purchase. This ban can however be lifted or removed by Parliament. But even if the ban is removed no State can tax an inter-State sale which takes place outside its territorial limits. What is an 'outside sale' is defined by the Constitution by the Explanation to Article 286(1) which states what should be deemed to be an "inside sale". The irresistible inference is that an "inside sale" falling within the terms of the explanation can be taxed if the Parliament lifts the ban under Article 286(2). If the terms of the explanation do not cover a particular inter-State sale then the question whether the sale is an "outside sale" qua the taxing State has to be determined by finding out the place where the property in the goods passes. In respect of an inter-State sale not falling within the Explanation to Article 286(1)(a) on the lifting of the ban by the Parliament under Article 286(2) the State wherein the property in the goods passes may levy tax if the words of taxing section of the enactment were wide enough to cover such a transaction.

21. We do not think that the Ashok Leyland case, relied upon by the learned counsel for the petitioners can at all help him to press his contentions. In that case the deliveries of motor vehicles were inside the Madras State and the inter-State sales were not "explanation sales" falling within Article 286(1)(a). The real question that arose for consideration in that case is thus set out by S.K. Das J. at page 385 (of STC): (at p. 1437 of AIR), "What we have to see is that the fetter under Article 286(2) having been removed, does the Act operating on its own terms affect the transactions in question even though they be in the course of inter-State trade? If it does, the assessment is no longer liable to challenge on the ground of the ban imposed by Article 286(2)."

22. In the present case the finding of the Tribunal is that all the transactions are inter-State sales and "explanation sales". We accept that finding. It follows that the sales were outside the Madras State as they were inside the Kerala State, that State being the "delivery-cum-consumption" State.

23. We therefore overrule the first contention urged on behalf of the petitioner.