Citation Codes

Equivalent Citations

citation codes

Case Number

Miscellaneous Civil Case No. 85 of 1966

Attorney(S)

K.K.Dubey
H.S.Shrivastava

Judges

Bishambhar Dayal, C.J
R.J Bhave, J.

Acts

Section 44(1) of the M. P. General Sales Tax Act, 1958.
MADHYA PRADESH GENERAL SALES TAX ACT 1958
M.P. General Sales Tax Act, 1958.
Section 2(g) of the local Act.
Indian Companies Act
Section 2(d)

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Smart Summary

Structured Summary of the Court's Opinion (Bhave, J.)

Factual and Procedural Background

This is a reference under Section 44(1) of the M. P. General Sales Tax Act, 1958, concerning the Madhya Pradesh State Co-operative Marketing Society, Jabalpur (the society), a registered dealer under the Act. The assessment period in dispute was 1 July 1959 to 30 June 1960. The reference raised three questions concerning (1) whether sales of cotton by auction under the cotton pool scheme (amounting to Rs. 2,76,416 at the Burhanpur branch) were sales by the society liable to tax; (2) whether oil-engines and centrifugal pumps sold by the society were "agricultural machinery"; and (3) whether such engines and pumps sold to agriculturists for bona fide agricultural purposes were agricultural machinery for the purposes of item 44 of Part II of Schedule II.

Procedurally, the Assistant Commissioner rejected the society's contentions and treated the cotton transactions as taxable sales and denied agricultural-machinery status to the engines/pumps; the Tribunal confirmed those findings but referred the specific questions as questions of law to this Court for decision.

Legal Issues Presented

Under the facts and circumstances, is the sale of cotton by auction under the cotton pool scheme a sale by the society liable to tax under the M.P. General Sales Tax Act, 1958?
Are the oil-engines and centrifugal pumps sold by the society agricultural machinery?
Are those oil-engines and centrifugal pumps sold to agriculturists for bona fide agricultural purposes agricultural machinery for the purposes of item 44 of Part II of Schedule II appended to the Act?

Arguments of the Parties

Appellant's (Society's) Arguments

The society acted merely as an auctioneer or commission agent and not as a dealer; hence sales of cotton under the cotton pool scheme should not be included in the society's turnover for taxation.
Possession and control of pooled cotton remained with agricultural associations rather than with the marketing society; prices offered at auctions required approval by the agricultural associations or by the owner of the cotton.
As to oil-engines and centrifugal pumps, these should be regarded as agricultural machinery and therefore taxable under Part VI of Schedule II (or otherwise excluded from item 44), rather than being taxable under item 44 of Part II.

Respondent's (Tax Authority's) Position / Findings

The Assistant Commissioner found that the marketing society exercised complete domination and control and full authority to sell pooled cotton, including authority to sell in any manner and to any person it deemed fit to obtain a fair price.
Evidence included sale bills made by the marketing society in the names of purchasers, remittance of sale proceeds into the society's accounts, and the showing of these transactions in the society's trial balance/profit-and-loss accounts — facts that, in the tax authority's view, demonstrated that the transactions were sales by the society liable to tax.
The Tribunal confirmed the Assistant Commissioner's findings and added that even if the society were acting as a commission agent or auctioneer, it would still be liable to be regarded as a dealer and taxed under Section 4 of the Act for sales effected in Madhya Pradesh.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Chowringhee Sales Bureau Ltd. v. State of West Bengal [1961] 12 S.T.C. 535 (Calcutta High Court)	Held that an auctioneer, whose business is to bring seller and buyer together and who acts merely to secure bids, cannot be included within the definition of "dealer" because the auctioneer does not effect the sale.	The Court distinguished this case: it found the marketing society was not merely an intermediary under the cotton pool scheme and therefore Chowringhee was not applicable to the present facts.
Zackria Sons Private Ltd. v. State of Madras [1965] 16 S.T.C. 136 (Madras High Court)	Where an auctioneer functions only to secure the most advantageous bid for the principal and the principal (or principal's agent) accepts the bid, the auctioneer does not fall within the definition of "dealer".	The Court held this authority did not assist the assessee because, under the cotton pool scheme, the responsibility for effecting the sale lay with the marketing society and disposal by auction was only one of several prescribed modes.
Agrawal Brothers v. Commissioner of Sales Tax [1965] 16 S.T.C. 860 (Division Bench)	Established a test that machinery (a tractor in that case) is not an "agricultural machinery" merely because it can be used on farms; it must be shown that in general parlance it is known as agricultural machinery and that its principal and primary use is for agriculture.	The Court invoked this test when considering whether oil-engines and centrifugal pumps qualify as agricultural machinery and relied on the principle that general commercial recognition is necessary.
Pashabhai Patel and Co. (P.) Ltd. v. Collector of Sales Tax [1964] 15 S.T.C. 32	Emphasised that, although the entry does not say "machinery used for the purposes of agriculture", the claimant must establish that the machinery conforms to the description of agricultural machinery as understood in the commercial world.	The Court cited this principle to stress the burden on the society to prove commercial recognition of the engines/pumps as agricultural machinery; the society failed to do so.
Delta Engineering Co. v. Commissioner of Sales Tax [1963] 14 S.T.C. 515	Held that a centrifugal water pump was not an agricultural machinery.	The Court relied on this authority in concluding that the centrifugal pumps and related oil-engines were not agricultural machinery for the purposes of Schedule II.
Madhya Pradesh State Co-operative Marketing Society Ltd., Jabalpur v. Commissioner of Sales Tax, M.P. M.C.C. No. 221 of 1967 (9 Oct 1968)	Previous determination that oil-engines are not agricultural machinery assessable under entry 1 of Part VI of Schedule II.	The Court cited this earlier decision as consistent with the present conclusion that oil-engines are not agricultural machinery.

Court's Reasoning and Analysis

The Court proceeded by analysing the cotton pool scheme rules (annexure 'D') and the factual findings recorded by the Assistant Commissioner. Key elements of the Court's reasoning were:

The scheme designates the marketing society as the central organisation authorised to appoint agricultural associations as sub-agents, to act where suitable associations are not found, and to make arrangements (including advances) for such sub-agents. This regulatory architecture indicates that agricultural associations function as agents of the marketing society in the cotton pool scheme rather than as independent owners or controllers of the cotton pooled.
The scheme prescribes modes of sale (public auction, invitation of tenders, and, if necessary, negotiations by the marketing society, including outside the State). The rules provide that decisions by associations about sales and tenders are subject to approval by the marketing society or its authorised person, showing the society's supervisory and controlling role.
Factually, the Assistant Commissioner found that sale bills were made by the marketing society in the names of purchasers, purchasers remitted proceeds into the society's accounts, and these transactions were reflected in the society's trial balance/profit-and-loss accounts. Taken together with the scheme's rules, these facts left "no doubt" in the Court's view that the society was not acting merely as an auctioneer but was itself interested in and responsible for effecting sales.
Even if ownership of pooled cotton did not vest in the marketing society, the Court relied on the statutory definition of "dealer" (Section 2(d)) which treats as a dealer a person who carries on the business of buying, selling or supplying goods or of doing so for commission. The society's role under the scheme was to carry on the business of selling pooled cotton; hence it fits within the statutory definition.
The Court considered authorities relied upon by the society (Calcutta and Madras High Court auctioneer cases) but distinguished them because in those cases the auctioneer genuinely only brought buyer and seller together and the ultimate responsibility to accept bids or conclude contracts remained with the owner/principal. By contrast, under the cotton pool scheme the marketing society exercised control and was authorised to effect sales by multiple modes.
On oil-engines and centrifugal pumps, the Tribunal had found these items were sold to agriculturists and also to other persons for non-agricultural uses (a finding not disputed). The Court applied prior decisions (Agrawal Brothers; Pashabhai Patel; Delta Engineering and the society's earlier MCC decision) to articulate and apply the legal test: it is insufficient that machinery can be used for agriculture; the claimant must establish that in commercial parlance the machinery is known as "agricultural machinery" and that its principal/primary use is agricultural. The society did not prove that the engines/pumps were so recognised in the commercial world.
Consequently, oil-engines and centrifugal pumps were not agricultural machinery. The Court also analysed the framing of question (3), noting the taxability under item 44 depends on the character of the goods and not on the purchaser's identity; even bona fide agricultural purchases do not convert otherwise taxable machinery into exempt agricultural machinery if the machinery does not meet the descriptive test.

Holding and Implications

Answers: Question (1) — Affirmative; Question (2) — Negative; Question (3) — Negative. The reference is disposed of.

Direct consequences and practical implications:

The Court held that the sales of cotton under the cotton pool scheme by the Madhya Pradesh State Co-operative Marketing Society, Jabalpur were sales by the society and consequently liable to tax under the M.P. General Sales Tax Act, 1958.
Oil-engines and centrifugal pumps sold by the society were not agricultural machinery for the purposes of the relevant entries in Schedule II and therefore are taxable under item 44 of Part II of Schedule II (subject to the statutory scheme and existing rates/provisions).
The taxability of those items depends on the character of the goods (their commercial description and principal use), not on the status of the purchaser; sales to agriculturists for bona fide agricultural purposes do not convert otherwise taxable machinery into exempt agricultural machinery where the goods do not meet the descriptive test.
The applicant society was ordered to pay the costs of the Commissioner of Sales Tax, M.P., and a hearing fee of Rs. 100.

The opinion does not state that a new legal principle or binding precedent was being created; it resolves the referred questions on the facts and prior authorities relied upon.

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The Madhya Pradesh State Co-Operative Marketing Society, Jabalpur v. The Commissioner Of Sales Tax, M.P, Indore

Bhave, J.

1. This is a reference under Section 44(1) of the M. P. General Sales Tax Act, 1958. The questions referred for our decision are:

(1) Under the facts and the circumstances of the case, is the sale of cotton by auction under the cotton pool scheme a sale by the society liable to tax under the scheme of the M. P. General Sales Tax Act, 1958?

(2) Are the oil-engines and centrifugal pumps sold by the society agricultural machinery?

(3) Are such of the oil-engines and centrifugal pumps as have been sold to agriculturists for bona fide agricultural purposes, agricultural machinery for the purposes of item 44 of Part II of Schedule II appended to the M.P. General Sales Tax Act, 1958?

2. The society-The Madhya Pradesh State Co-operative Marketing Society, Jabalpur-is a registered dealer under the Madhya Pradesh General Sales Tax Act, 1958. The assessment in question is for the period from 1st July, 1959 to 30th June, 1960. The only items regarding which the abovesaid questions are framed are:

(i) Sales to the extent of Rs. 2,76,416.00 on account of transactions under the cotton pool scheme at the Burhanpur branch of the society, and

(ii) Sales of the centrifugal oil-engines and pumping sets.

As to the transactions under the cotton pool scheme, the submission of the assessee was that the society acted merely as an auctioneer and not as a dealer; hence the sales of cotton should not have been included in the turnover of the assessee. As to the oil-engines, the submission was that they, being agricultural machineries, were taxable under Part VI of Schedule II and not under item No. 44 of Part II of the Second Schedule. Both these contentions were negatived by the Tribunal. The Tribunal, however, referred the abovesaid questions as in the opinion of the Tribunal, questions of law were involved.

3. While rejecting the contentions of the assessee, the Assistant Commissioner held-

The society had complete domination and control and full authority to sell the cotton pooled in any manner they liked and to any person they deemed fit for the purpose of obtaining a fair price. The sale bills were made by the marketing society in the name of the purchasers and the purchasers in their own turn remitted the sale proceeds to the accounts of the marketing society. The society also showed these transactions of sales and purchases in their trial balance of profit and loss accounts. These transactions are, therefore, nothing but sales liable to be taxed at the hands , of the appellants.

This finding was confirmed by the Tribunal. The Tribunal further added-

As stated above, even if the society is acting as a commission agent or an auctioneer, it is liable to be regarded as a dealer and would be liable to be taxed under Section 4 of the Act for sales or supplies of goods effected in Madhya Pradesh.

4. Shri Shrivastava, learned counsel for the assessee, however, urged that the finding of the Assistant Commissioner that the society had complete domination and control and full authority in selling the cotton in the pool, is not justified from the facts on record. He urged that the possession and control over the cotton, which was pooled, remained with the agricultural associations and not with the marketing society. He also urged that the price offered at the auctions held by the marketing society was to be approved by the agricultural associations or by the owner of the cotton himself. In these circumstances, Shri Shrivastava urged that it cannot be held that the marketing society really effected the sales and it should have been held that it only acted as an auctioneer. There is no basis for this contention.

5. From annexure 'D', which contains the rules framed by the Director of Agriculture for regulating the execution of the cotton pool scheme, it appears that the marketing society is to work as the central organisation for the cotton pool scheme. It is the marketing society which is authorised to appoint as its sub-agents agricultural associations in the cotton zone, as are considered competent by it, to handle this business. In places where suitable agricultural associations arc not found, the marketing society will be free to appoint neighbouring agricultural associations as its sub-agents or may do the business on its own account. From this, it is clear that the agricultural associations act merely as agents of the central organisation, namely, the marketing society and they have no independent domination over the cotton pooled. They held the cotton on behalf of the marketing society. The rules further provide that the marketing society has to make necessary arrangements for making advances to agricultural associations working as its sub-agents. This also shows that the agricultural associations have no independent function of their own, so far as this particular business is concerned. As to the mode of sale, the rules provide that every association shall sell cotton in the form of raw cotton by public auction at which prominent mill-owners as well as traders shall be invited. In case the public auction does not bring in a reasonable price, the associations will invite tenders from purchasers. These tenders are to be opened by the secretary of the associations in the presence of the managing committee of the associations and a decision is to be taken whether cotton should be sold and if so, to whom. This decision shall be subject to the approval of the marketing society or of such person authorised by it in this behalf. This again shows that the agricultural associations act under the guidance and supervision of the marketing society. In case, both the methods, referred to above, prove, futile in bringing reasonable price, the marketing society is free to enter into negotiations with the mill-owners and traders even outside the State for the sale of the cotton. If these rules are considered along with the facts found by the Assistant Commissioner, that the sale bills were made by the marketing society in the names of the purchasers, and the purchasers in their own turn remitted the sale proceeds to the accounts of the marketing society and that the society also showed these transactions of sales and purchases in their trial balances of profit and loss accounts, no doubt is left that the marketing society was not acting merely as an auctioneer, but under the scheme and the rules, it was itself interested in the working of selling the cotton which was pooled.

6. Even if it is assumed that the ownership of the cotton did not vest in the marketing society, the society will have to be treated as a "dealer" as defined in Section 2(d) under which, a person, who carries on the business of buying, selling or supplying for commission goods, is also treated as a "dealer". From the scheme, it is clear that the marketing society is to carry on the business of selling the cotton which has been pooled under the scheme. The conclusion is, therefore, inevitable that the taxing authorities were right in holding that the assessee-society did not act as a mere auctioneer.

7. The decision of the Calcutta High Court in Chowringhee Sales Bureau Ltd. v. State of West Bengal [1961] 12 S.T.C. 535 relied on by the assessee is not of any help to it. In that case, the assessee was a company incorporated under the Indian Companies Act and carried on the business of an auctioneer. The business of the assessee in that case was that of bringing the seller and buyer together for effecting the sale against a certain rate or percentage of remuneration. In that case, it was held that an auctioneer cannot be included in the definition of the dealer as he could not be held to be a person who effected the sales. The business of the auctioneer being to bring the buyer and seller together, though temporarily, the domination of the goods may remain with him and the stroke of his hammer may conclude the contract. We have already found that under the scheme, the marketing society does not act merely as an intermediary between the purchaser and the seller of the cotton but it is interested in the dealing or effecting the sale of cotton brought in the pool. The Calcutta case is, therefore, not applicable to the facts of the present case.

8. Similar is the decision of the Madras High Court in Zackria Sons Private Ltd. v. State of Madras [1965] 16 S.T.C. 136. In that case, it was held that where an auctioneer functioned only as an agent to secure the most advantageous bid for the principal in the auction and thereafter it was the principal's agent who accepted the offer of the highest bidder and completed the contract, the auctioneer would not fall within the definition of dealer in Section 2(g) of the local Act. In this case, again, the responsibility of effecting the sale was not that of the auctioneer. The bid was to be accepted by the owner of the property. This case also does not assist the assessee. It may also be noted that under the scheme, disposal of cotton by auction is one of the modes prescribed. The cotton can also be sold by the society by inviting tenders as well as by entering into negotiations with others. It cannot, therefore, be said that the society acted as an auctioneer simpliciter. For the aforesaid reasons, it must be held that the marketing society comes within the definition of a "dealer" and the taxing authorities were right in holding that the said transactions were taxable under the M.P. General Sales Tax Act, 1958. Therefore, the answer to the first question must be given in the affirmative.

9. As to the second question, the Tribunal found that the centrifugal engines and pumping sets were sold by the marketing society not only to the agriculturists but to other persons as well for the purposes other than agriculture. This finding is not disputed before us. It has been held by a Division Bench of this court: in Agrawal Brothers v. Commissioner of Sales Tax [1965] 16 S.T.C. 860, that a tractor, though it could be used on the farms could not be treated as an "agricultural machinery", as it could also be used as haulage in factories, at air-fields etc. The test laid down in that case was that it was not enough to prove that the particular machinery could be used for purposes of "agriculture" also, but the proof was required that in general parlance it was known as an "agricultural machinery". In Pashabhai Patel and Co. (P.) Ltd. v. Collector of Sales Tax [1964] 15 S.T.C. 32, it was observed:

It is true that the entry does not say 'machinery used for the purposes of agriculture' and, therefore, actual use of the machinery for agricultural purpose need not be established, but then the person claiming that a particular machinery is an agricultural machinery must establish as a fact that the machinery conforms to the description of agricultural machinery. In other words, the dealer must establish that in the commercial world that particular type of machinery' is understood as agricultural machinery.

In that case, the emphasis was that the assessee must prove that the principal and primary use of the machinery was for agriculture. In Delta Engineering Co. v. Commissioner of Sales Tax' [1963] 14 S.T.C. 515, it was held that a centrifugal water pump was not an agricultural machinery. On the basis of these decisions, it was held in Madhya Pradesh State Co-operative Marketing Society Ltd., Jabalpur v. The Commissioner of Sales Tax, M.P. M.C.C. No. 221 of 1967 decided on the 9th October, 1968 that-

The oil-engines are not agricultural machinery assessable under entry 1 of Part VI of Schedule II of the Act.

In the present case also, the marketing society has also not proved that the oil-engines and pumps disposed of by it were known in the commercial world as the "agricultural machinery". The finding of the Tribunal is otherwise. The second question must, therefore, be answered in the negative.

10. Once it is held that the oil-engines and centrifugal pumps sold by the society were not agricultural machinery and they are taxable under item 44 of Part II of Schedule II, their taxability under item 44 docs not cease only because some such engines and centrifugal pumps were purchased by the agriculturists. The taxability does not depend on the person who purchases them, but it depends on the character of the goods sold. The third question is ill-conceived. Item 44 deals with all machineries or machines worked by electricity, diesel or petrol and spare parts and accessories thereof, excepting agricultural machinery and implements and parts thereof. The question framed is not correctly worded. The question should have been

"whether the oil-engines and centrifugal pumps purchased by agriculturists for bona fide agricultural purposes come within the exceptions of item 44"

and the answer to that question would be also in the negative.

11. In the result, our answer to question No. (1) is in the affirmative and the answers to questions Nos. (2) and (3) are in the negative. The reference is disposed of accordingly. The applicant, M.P. State Co-operative Marketing Society, Jabalpur, shall pay the costs of the Commissioner of Sales Tax, M.P. Hearing fee Rs. 100.

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