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State Of Orissa v. Orissa Cement Ltd. And Others
Factual and Procedural Background
The assessees filed a writ petition before the Orissa High Court challenging the constitutional validity of Sections 9-B(3) and 14-A of the Orissa Sales Tax Act, 1947. They contended that the State Legislature, while empowered under Entry 54 of List II (Seventh Schedule) to levy sales tax, lacked competence to enact provisions that (i) compel traders to hand over amounts wrongfully collected as “tax” and (ii) require the State to refund such amounts to the persons from whom they were collected. Relying on its earlier decision in Rameswar Prasad v. STO (1973 32 STC 332) and two Supreme Court precedents (R. Abdul Quader v. STO, AIR 1964 SC 922; Ashoka Marketing Ltd. v. State of Bihar, 1970 1 SCC 354), the High Court allowed the writ petition. The State (implicitly) appealed to the Supreme Court. While the appeal was pending, a Constitution Bench in R.S. Joshi, STO v. Ajit Mills Ltd. (1977 4 SCC 98) upheld analogous provisions of the Maharashtra Sales Tax Act. In light of that ruling, the present appeal was heard and decided by the Supreme Court.
Legal Issues Presented
- Whether Sections 9-B(3) and 14-A of the Orissa Sales Tax Act—requiring traders to forfeit to the State amounts unlawfully collected as tax and obligating the State to refund those amounts to purchasers—fall within the State Legislature’s incidental and ancillary powers under Entry 54, List II of the Constitution.
- Whether the absence of an express statutory prohibition or penalty at the material time affects the validity of the forfeiture provision.
Arguments of the Parties
Assessee's Arguments
- Entry 54 authorises only the imposition of a tax on sales or purchases; compelling traders to surrender wrongly collected amounts and prescribing a refund mechanism exceeds the legislative field.
- At the relevant time there was “no prohibition and no penalty” in the statute; therefore, the forfeiture of collections could not be justified as an incident of taxing power.
The opinion does not contain a detailed account of the State’s legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| R.S. Joshi, STO v. Ajit Mills Ltd. (1977 4 SCC 98) | Provisions compelling traders to remit illegal collections and imposing forfeiture/penalty are within incidental powers under Entry 54. | Formed the controlling authority; the Court followed this decision to uphold the Orissa provisions and allow the appeal. |
| Rameswar Prasad v. STO (1973 32 STC 332) | Orissa High Court ruling holding similar provisions ultra vires. | The Supreme Court overruled this precedent by setting aside the High Court judgment that relied on it. |
| R. Abdul Quader v. STO (AIR 1964 SC 922) | Earlier view suggesting that mere forfeiture without penalty was beyond Entry 54. | Distinguished; the Constitution Bench in R.S. Joshi limited its ratio, noting absence of a penalty clause in that case. |
| Ashoka Marketing Ltd. v. State of Bihar (1970 1 SCC 354) | Held that similar forfeiture provisions were beyond legislative competence. | Explicitly dissented from by the Constitution Bench in R.S. Joshi; consequently not followed in the instant case. |
Court's Reasoning and Analysis
The Supreme Court observed that the “crux” of the dispute—identical to that resolved by the Constitution Bench in R.S. Joshi—concerned the legislative competence to enact forfeiture and refund provisions. The Court reasoned as follows:
- The Constitution Bench had affirmed that directing traders to “cough up” amounts illegally collected as tax and to forfeit them to the State squarely falls within the ancillary and incidental powers accompanying the taxing power under Entry 54.
- Even if a statute did not expressly provide a refund mechanism, forfeiture alone would still be valid; the Orissa Act goes further by mandating refunds, fortifying its constitutional standing.
- The assessees’ contention that no explicit prohibition or penalty existed was rejected. The Court held that the obligation to surrender wrongful collections itself implies a statutory prohibition against such collections, thereby satisfying the requirement noted in earlier case law.
- Accordingly, the High Court’s reliance on Rameswar Prasad, Abdul Quader, and Ashoka Marketing was misplaced after the definitive clarification provided in R.S. Joshi.
Holding and Implications
APPEAL ALLOWED; High Court judgment set aside; writ petition dismissed.
Immediate Effect: Sections 9-B(3) and 14-A of the Orissa Sales Tax Act are upheld as constitutionally valid. Traders must forfeit to the State any amounts wrongly collected as sales tax, and the State must refund such sums to the affected purchasers. Broader Implications: The decision reinforces the authority of States to include forfeiture-and-refund mechanisms in sales-tax legislation as an incident of their taxing power, consistent with the Constitution Bench ruling in R.S. Joshi. No new doctrine is articulated, but the judgment consolidates existing precedent across jurisdictions.
V.D Tulzapurkar, J.— Having regard to the decision of the Constitution Bench of this Court in R.S Joshi, STO, Gujarat v. Ajit Mills Ltd., Ahmedabad (1977) 4 SCC 98, (1978) 1 SCR 338 this appeal will have to be allowed.
2. Before the High Court the provisions of Section 9-B(3) and Section 14-A of the Orissa Sales Tax Act, 1947 (Orissa Act 14 of 1947) were challenged on the ground of lack of legislative competence by the assessee by way of a writ petition. The contention was while Entry 54 of List II of the Seventh Schedule enables legislation imposing levy of tax on sale or purchase of goods, a provision that if a person (trader) realised any amount by way of tax when not exigible or realised any amount by way of tax in excess of the tax at the prescribed rate should make over to the State by way of penalty such collections and a further provision that a refund of such amount shall be made by the State to the person or persons from whom such collections were made provided a claim of such refund was made within the prescribed period of limitation did not fall within ancillary or incidental legislative powers to the State Legislature and hence would be beyond the Entry. Following its own earlier decision in Rameswar Prasad v. STO (1973) 32 STC 332 the High Court allowed the writ petition. It may be stated that in Rameswar Prasad case (1973) 32 STC 332 the High Court had followed two decisions of this Court one in R. Abdul Quader v. STO AIR 1964 SC 922, (1964) 6 SCR 867, (1964) 15 STC 403 and the other in Ashoka Marketing Ltd. v. State of Bihar (1970) 1 SCC 354, (1970) 26 STC 254. Both these decisions were reconsidered by the Constitution Bench in R.S Joshi case (1977) 4 SCC 98, (1978) 1 SCR 338 and the provisions of the Maharashtra Sales Tax Act as applied to Gujarat State [similar to the provisions contained in Section 9-B(3) and Section 14-A of the Orissa Act] have been upheld. The view in Ashoka Marketing Ltd. case (1970) 1 SCC 354, (1970) 26 STC 254 has been expressly dissented from.
3. The crux of the question raised in all these decisions was whether a provision directing the trader to ‘cough up’ collections wrongly made by him from the purchasers otherwise than in accordance with the provisions of the Act and to make over the same to the Government as also the further provisions obliging the State to refund the amounts so collected to the person or persons from whom these had been collected would fall within the incidental and ancillary powers of the State Legislature while enacting a taxing statute under Entry 54 of List II of the Seventh Schedule and the final decision of the Constitution Bench has answered the question in the affirmative upholding the validity of such provisions. While doing so the Constitution Bench disagreed with the view taken in Ashoka Marketing Ltd. case (1970) 1 SCC 354, (1970) 26 STC 254. As regards Abdul Quader case AIR 1964 SC 922, (1964) 6 SCR 867, (1964) 15 STC 403 this Court felt that the crucial ratio of the decision was to be found in the following significant observation made in that judgment: “it (the law) does not provide for a penalty for collecting the amount wrongly by way of tax from purchasers which may have been justified as a penalty for the purpose of carrying out the objects of the taxing legislation” and the Constitution Bench observed that this significant observation demarcated the constitutional watershed between merely laying hands upon collections by way of tax by traders although they were not exigible from traders and the policing by penalising, including forfeiting illegal exactions, the working of a taxing statute and inhibiting injury to the public and since the Maharashtra Act as applicable to the State of Gujarat contained a prohibition against collecting such amounts from purchasers, a penalty and forfeiture the impugned provisions were valid inasmuch as these properly fell within ancillary and incidental powers — ancillary and incidental to the power to levy a tax under Entry 54 List II.
4. At p. 360 of the Report Krishna Iyer, J., has gone to the length of observing thus:
“In strict legality, once the money is forfeited to the State, there is no obligation to make it over to the purchaser, but in the welfare orientation of our State and certain constitutional emanations we leave unexplored, such an obligation should be voluntarily undertaken.”
In other words, even in the absence of provision being made in the enactment for refunding or returning the amount so wrongly collected by the trader to the person or persons from whom such collection has been made, the provision for forfeiture of such collections to the State was upheld as falling within the ancillary or incidental power under Entry 54 List II of the Seventh Schedule.
5. In the instant case, before us there is not merely a provision for making over such collections by the trader to the State but also a provision for refunding it by the State to the persons from whom such collections have been made. The impugned provisions will have, therefore, to be upheld as falling within the doctrine of ancillary or incidental legislative powers.
6. Counsel for the assessees made in vain attempt to urge that at the material time (prior to the enactment of Amendments) there was no prohibition and no penalty contained in the enactment so as to make the provision for forfeiture valid. After going through the relevant provisions of Section 9-B(3) and Section 25-AA it is not possible to accept this contention. The very fact that the provision requires trader to “cough up” by making over such illegal collections to the State implies a prohibition that such collections should not and ought not to be made. The raison d'etre of such provision suggests an implied prohibition.
7. In our view the question raised before us squarely falls within the ratio of the decision of this Court in R.S Joshi case (1977) 4 SCC 98, (1978) 1 SCR 338 the appeal is allowed. The impugned judgment and order of the High Court is set aside and the writ petition is dismissed. There will be no order as to costs.
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