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Sita Ram Bishambhar Dayal And Others v. State Of U.P .
Factual and Procedural Background
The appellants are registered dealers engaged in the business of Rab (a by-product of sugarcane). Pursuant to a State Government notification issued under Section 3-D(1) of the U.P. Sales Tax Act, 1948, purchase tax was levied on their first purchases of Rab. Challenging the tax, they filed writ petitions contending that Section 3-D(1) was unconstitutional. The Allahabad High Court rejected their challenge. The appellants then obtained certificates of fitness and filed the present appeals before the Supreme Court.
Legal Issues Presented
- Whether the delegation of power to the State Government under Section 3-D(1) to fix the rate of purchase tax (up to a specified maximum) constitutes an impermissible and excessive delegation of legislative power.
- Whether Section 3-D, particularly its Explanation deeming unlicensed purchasing agents to be the “first purchasers,” violates Article 14 of the Constitution by discriminating between registered dealers who buy through licensed agents and those who buy through unlicensed agents.
Arguments of the Parties
Appellants’ Arguments
- The power delegated by Section 3-D(1) is excessively wide because the State Government may impose tax on goods (other than food-grains) at any rate up to five paise per rupee, thereby surrendering an essential legislative function.
- The Explanation to Section 3-D treats purchases through licensed and unlicensed agents differently, resulting in hostile discrimination contrary to Article 14. There is no rational basis for making an unlicensed agent, rather than the registered dealer, liable for tax.
The opinion does not detail the respondent’s specific arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., AIR 1958 SC 560 | Legislature may delegate to the Executive details of taxation, including selection of goods and fixing rates, provided policy and limits are laid down. | Relied on to hold that delegating rate-fixing power under Section 3-D(1) is constitutionally permissible. |
| Devi Dass Gopal Krishnan v. State of Punjab, (1967) 3 SCR 557 | Delegation of power to fix sales or purchase-tax rates is valid if the legislature prescribes a reasonable upper limit. | Cited to reinforce that the five-paise-per-rupee ceiling in Section 3-D(1) constitutes an adequate legislative guideline. |
Court's Reasoning and Analysis
The Court began by recognising that taxation is fundamentally a legislative function but stressed that modern economic conditions necessitate flexible rate-setting. It observed that, so long as legislative policy and an upper limit are provided, delegation is valid. Section 3-D(1) satisfies this test by capping rates at two paise per rupee for food-grains and five paise for other goods.
Addressing the claim that five paise per rupee is “unreasonably high,” the Court found no evidentiary basis to deem the ceiling excessive, noting prevailing sales-tax practices across India.
On the Article 14 challenge, the Court held that taxation statutes may legitimately classify taxpayers to curb evasion. Licensed dealers, unlike unlicensed dealers, are statutorily obliged to maintain accounts and file returns, enabling effective enforcement. Treating an unlicensed agent as the “first purchaser” ensures tax recovery where statutory safeguards are absent. This classification is reasonable and bears a rational nexus to the object of preventing tax evasion, thus surviving Article 14 scrutiny.
Holding and Implications
The Supreme Court dismissed the appeals and upheld the constitutional validity of Section 3-D(1) of the U.P. Sales Tax Act, 1948.
Immediate Effect: The purchase tax assessed on the appellants remains payable, and Section 3-D(1) continues in force.
Broader Implications: The decision reinforces the permissible breadth of legislative delegation in fiscal matters and affirms that reasonable classifications aimed at preventing tax evasion withstand Article 14 scrutiny. No new legal principle was created, but existing doctrine on delegation and equality was reiterated.
K.S Hegde, J.— These are appeals by certificate. They raise a common question of law for decision. The only contention arising for decision in these appeals is as to the vires of Section 3-D(1) of the U.P Sales Tax Act, 1948 (to be hereinafter referred to as “the Act”). The validity of that section has been assailed on two different grounds viz.: (1) that the power delegated to the executive under Section 3-D(1) is excessive and as such bad in law and (2) Section 3-D infringes Article 14 of the Constitution inasmuch as it discriminates between the registered dealers who purchase through the agency of licensed dealers and the registered dealers who purchase through other dealers.
2. The appellants are dealers in Rab. In respect of their dealings in Rab, they have been levied purchase tax as per the notification issued by the Government under Section 3-D(1) of the Act. They are challenging the validity of the levy on the grounds mentioned above.
3. The High Court has repelled both the above contentions. The High Court has come to the conclusion that the power conferred on the State Government under Section 3-D is a valid power. It opined that the conferment of power on the executive to fix the rate of tax within the limits laid down in the section is not impermissible. Further, it held that the section is not hit by Article of the Constitution.
4. Before proceeding to consider the correctness of the contentions advanced on behalf of the appellants, it is necessary to read Section 3-D(1). It says:
“Except as provided in sub-section (2), there shall be levied and paid, for each assessment year or part thereof, a tax on the turnover, to be determined in such manner as may be prescribed, of first purchases made by a dealer or through a dealer, acting as a purchasing agent in respect of such goods or class of goods, and at such rates, not exceeding two paisa per rupee in the case of food-grains, including cereals and pulses, and five paisa per rupee in the case of other goods and with effect from such date, as may, from time to time, be notified by the State Government in this behalf.
Explanation. — In the case of a purchase made by a registered dealer through the agency of a licensed dealer, the registered dealer shall be deemed to be the first purchaser, and in every other case of a first purchase, made through the agency of a dealer, the dealer who is the agent shall be deemed to be the first purchaser.”
5. It is true that the power to fix the rate of a tax is a legislative power but if the Legislature lays down the legislative policy and provides the necessary guidelines, that power can be delegated to the executive. Though a tax is levied primarily for the purposes of gathering revenue, in selecting the objects to be taxed and in determining the rate of tax, various economic and social aspects such as the availability of the goods, administrative convenience, the extent of evasion, the impact of tax levied on the various sections of the society etc. have to be considered. In a modern society taxation is an instrument of planning. It can be used to achieve the economic and social goals of the State. For that reason the power to tax must be a flexible power. It must be capable of being modulated to meet the exigencies of the situation. In a Cabinet form of Government, the Executive is expected to reflect the views of the legislatures. In fact of most matters it gives the lead to the Legislature. However much one might deplore the “New Despotism” of the Executive, the very complexity of the modern society and the demand it makes on its Government have set on motion forces which have made it absolutely necessary for the Legislatures to entrust more and more powers to the executive. Text book doctrines evolved in the 19th century have become out of date. Present position as regards delegation of legislative power may not be ideal, but in the absence of any better alternative, there is no escape from it. The Legislatures have neither the time, nor the required detailed information nor even the mobility to deal in detail with the innumerable problems arising time and again. In certain matters they can only lay down the policy and guidelines in as clear a manner as possible.
6. In State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. AIR 1958 SC 560, 1959 SCR 379, 1958 SCJ 696 this Court observed:
“Now, the authorities are clear that it is not unconstitutional for the Legislature to leave it to the Executive to determine details relating to the working of taxation laws, such as the selection of persons on whom the tax is to be levied, the rate at which it is to be charged in respect of different classes of goods and the like.”
7. It was not contended before us that the power delegated to the Executive to select the goods on which the purchase tax is to be levied was an excessive delegation nor was it contended that the power granted to the Executive to determine the rate of tax by itself amounts to an excessive delegation. All that was said was that in empowering the Government to levy tax on goods other than foodgrains at a rate not exceeding five paise in a rupee, the Legislature parted with one of its essential legislative functions, as the power given to the Executive is an unduly wide one. We are unable to accede to this contention. Whether a power delegated by the Legislature to the Executive has exceeded the permissible limits in a given case depends on its facts and circumstances. That question does not admit of any general rule. It depends upon the nature of the power delegated and the purposes intended to be achieved. Taking into consideration the legislative practice in this country and the rate of tax levied or leviable under the various sales tax laws in force in this country, it cannot be said that the power delegated to the Executive is excessive. In Devi Dass Gopal Krishnan v. State of Punjab AIR 1967 SCJ 1895, (1967) 3 SCR 557 this Court ruled that it is open to the Legislature to delegate the power of fixing the rate of purchase tax or sales tax if the Legislature prescribes a reasonable upper limit.
8. We are unable to accept the contention of Mr Goyal, learned Counsel for the appellant, that the maximum rate fixed under Section 3-D is unreasonably high. At any rate there is no material before us on the basis of which we can come to that conclusion.
9. This takes us to the contention that Section 3-D is ultra vires Article 14 of the Constitution. The argument on this question proceeds thus: The explanation to Section 3-D provides that in the case of purchase made by a registered dealer through the agency of a licensed dealer, the registered dealer would be deemed to be the first purchaser whereas in every other case of a first purchase made through the agency of a dealer, the dealer who is the agent would be deemed to be the first purchaser. This difference according to Mr Goyal is discriminatory in character. He urged that there was no justification for making an agent liable to pay sales tax merely because he is an unlicensed agent. According to him there is no rational distinction between the purchases made through licensed dealers and those made through unlicensed dealers.
10. The power to levy tax includes within itself the power to provide against evasion of tax. A licensed dealer has to function according to the conditions of his licence. He is bound to maintain true and correct accounts of his day to day transactions of sales and purchase of goods notified in sub-section (1) of Section 3-D in an intelligible form and in such manner, if any, as may be prescribed and further he must furnish to the assessing authority the details of the aforesaid transactions together with the name and particulars of the purchaser and the number and date of the registration certificate filed by the purchaser under Section 8-A and such other information regarding the transactions as may, subject to rule, if any, in this behalf be required.
11. Hence whenever a purchase is made through a licensed agent, the authorities have the opportunity to know what purchases have been made and from whom those purchases were made but that would not be the case when purchases are made through dealers who are not licensed. They are not required by law to maintain any accounts or submit any returns. Hence if registered dealers are permitted to make purchases through dealers who are not licensed and those dealers themselves are not liable to be taxed then opportunity for evasion becomes larger. The rule of discrimination does not rule out classification. The power of classification under a fiscal law is larger than in the case of other laws. Hence there was nothing wrong in the Legislature making a classification between licensed dealers and dealers who are not licensed. Even when a dealer who is not licensed is liable to pay purchase tax, the ultimate burden falls on his principal. For these reasons, we do not see any basis for the contention that Section 3-D is violative of Article 14.
12. For the reasons mentioned above, these appeals fail and they are dismissed with costs — one set.
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