Citation Codes

Equivalent Citations

citation codes

Case Number

Tax Case No. 609 of 1981

Judges

Mishra
Thanikkachalam, JJ.

Acts

section 4-A, section 12, section 12-A, section 14, section 15, sub-sections (1) and (2) of section 16, section 18, sub-section (2) of section 22, section 23 or section 27,
section 34 of the Tamil Nadu General Sales Tax Act.2.
Nadu General Sales Tax Act, 1959. Sales
Nadu General Sales Tax Act, 1959.

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Smart Summary

Judgment Summary — Mishra, J.

Factual and Procedural Background

The assessee/appellants are building-demolishing contractors who trade as dealers in teakwood, iron and other building materials. For the year 1974–75 they reported a total turnover of Rs. 4,60,924.13 and a nil taxable turnover under the Tamil Nadu General Sales Tax Act, 1959. The assessing officer, noting defects, determined the total and taxable turnover at Rs. 4,60,924.13 and Rs. 3,97,272.07 respectively by an order dated 23 February 1976.

The assessee appealed to the Appellate Assistant Commissioner (Commercial Taxes) II, Madras, disputing several items, including assessment on the second sales turnover of iron and steel scrap bought locally and sold as such. The Appellate Assistant Commissioner deleted a taxable turnover of Rs. 1,05,632 under section 34 of the Tamil Nadu General Sales Tax Act.

The Joint Commissioner (Commercial Taxes), Chepauk, Madras, held that the Appellate Assistant Commissioner's decision was prejudicial to the interests of the Revenue and treated the assessing officer's taxation of that amount as correct. The assessee appealed to this Court.

Legal Issues Presented

Whether the sale by the assessee of materials recovered from demolished buildings is a "second sale" (and therefore exempt from tax as a second sale) because the assessee purchased only the components or materials contained in the building in an earlier sale.
Whether the Joint Commissioner properly exercised the suo motu revisional power under section 34 of the Tamil Nadu General Sales Tax Act — in particular, whether that power was exercised without requisite findings and without affording the assessee an opportunity of being heard.
If a revisional interference is permitted in the interests of Revenue, what procedural safeguards (notably the opportunity to be heard) must the revisional authority follow before setting aside an appellate order?

Arguments of the Parties

Appellant's Arguments

The assessee contended that although buildings (immovable property) are not "goods" under the Act, in the sale to them the transaction was effectively a sale of the goods attached to the building (the components), and therefore the subsequent sale by the assessee of the resultant materials (scrap, timber, iron) was a second sale and entitled to exemption.
The assessee relied on record documents (auction conditions) indicating the sale was for demolition and removal, supporting the claim that the purchaser acquired the components only.

Revenue's / Joint Commissioner's Position

The Joint Commissioner treated buildings as immovable property which are not "goods" within the Act. Consequently, even if the purchaser demolished the building and sold the resulting materials, those sales by the purchaser are first sales of movable property and subject to tax.
The Joint Commissioner considered the Appellate Assistant Commissioner's deletion of turnover to be prejudicial to Revenue and therefore exercised revisional power under section 34 to reverse that deletion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
R.M. Basha v. The State of Tamil Nadu [1986] 62 STC 432 (Mad.)	Held that contracts for demolition and clearance could not necessarily be split into an initial sale of components (timber, iron, bricks) and a subsequent sale; where the agreement was for demolition and clearance, there may be no sale of the old materials by the original owner, and thus the later sale by the demolisher may not be a 'second sale'.	The Court considered R.M. Basha and noted that the Basha Bench found there was no sale by the first owner (LIC) of old iron scrap because the agreement was for demolition and clearance. The present Court used the Basha analysis to observe that the crucial question — whether there was a sale of components by the first seller — was not posed or answered by the Joint Commissioner in the instant case.
State of Madras v. Raman & Co. [1974] 33 STC 1 (Mad.)	Where condemned or defective structures/components are purchased at auction with the true intention and purpose of acquiring the old materials for dismantling and sale as scrap, the purchaser is a second seller when he later sells the resultant materials; key test is whether purchaser could have used the article other than by dismantling.	The Court held that the Joint Commissioner failed to appreciate this ratio. The Court explained that if the first sale was of the components (i.e., intention was to transfer property in components), then the rule in Raman & Co. applies and the later sale by the purchaser would be a second sale.
R.V.S. Textiles v. Commissioner of Commercial Taxes (T.C. No. 605 of 1981) — order dated 21 Jan 1991 (also cited as [1999] 116 STC 366)	Explains the scheme of the Act regarding appeals and the limited, non-routine nature of the suo motu revisional power under section 34: such power is to be used sparingly and not to defeat appeals or be exercised casually.	The Court relied on this authority to stress that the revisional power under section 34 should not be exercised routinely and that there was no finding by the Joint Commissioner that intervention was necessary to protect Revenue's interest; absence of such finding rendered the revisional action improper.
Avon Plastics v. The State of Tamil Nadu [1982] 49 STC 268	Stated that unless it is shown that the revisional discretion was wrongly exercised, the Board (or revisional authority) should not interfere with an Appellate Assistant Commissioner's order; interference can undermine the appellate process.	The Court cited Avon Plastics to support the view that suo motu interference is inappropriate unless the revisional discretion is shown to be wrongly exercised.
Dunlop India Ltd. v. State of Tamil Nadu (T.C. Nos. 622, 623 & 681 of 1981) — order dated 30 Jan 1991	Held that when disposing of suo motu revision and reversing an appellate order, the revisional authority must afford an opportunity to the assessee to demonstrate infirmities in the assessment order; otherwise, denial of a forum of appeal/revision would occur and be unjust.	The Court applied this procedural principle directly: because the Joint Commissioner did not afford the assessee an opportunity to be heard on whether the first sale was of components, the revisional order was vitiated and had to be quashed and the matter remitted for fresh hearing.

Court's Reasoning and Analysis

The Court proceeded by analyzing (i) the factual question whether the first sale was of the building or of the components contained in the building and (ii) the legal and procedural propriety of the Joint Commissioner's suo motu revisional action under section 34.

On the substantive question of characterising the sale, the Court observed that the Joint Commissioner had focused on the immovable nature of buildings and concluded that immovable property is not 'goods' under the Act, and therefore the dealer who demolished the building and sold the resultant materials was a first seller. The Court found this to be a misapplication of the ratio in State of Madras v. Raman & Co.: the fact that a sale involved immovable property does not automatically change the character of a later sale of components once those components have been detached and sold. The relevant inquiry is whether the purchaser in the first sale bought only the components (with the intention of dismantling and selling the materials) or whether the sale was of the building as such.

The Court compared the instant facts with R.M. Basha, noting that in Basha the court had held that where an agreement is for demolition and clearance there may be no sale by the first owner of the old materials, so that the later sale by the demolisher may not be a "second sale." The Court observed that the Joint Commissioner did not pose or answer the crucial question whether there had been a sale of components by the first seller. The record contained documents indicating the auction conditions required demolition and removal, which could support the assessee's contention that he purchased the materials and not the immovable property.

On the procedural question, the Court reviewed authorities on the scope and limits of suo motu revisional power under section 34 (R.V.S. Textiles, Avon Plastics and Dunlop India). It emphasized that the power is not to be exercised routinely but sparingly and only when failure to do so would prejudice Revenue. Importantly, where revision is exercised and there exist potential defects in the appellate order or in the original assessment, the revisional authority must afford the assessee an opportunity to be heard on the merits; otherwise there will be a denial of a forum to contest the assessment.

Applying these principles, the Court found no recorded finding by the Joint Commissioner that intervention was required to protect Revenue and, critically, the Joint Commissioner did not afford the assessee an opportunity to demonstrate that the first sale was of components (which, if shown, would make the later sale a second sale under Raman & Co.). Because the requisite procedural safeguard of a hearing was not provided, the Court concluded the revisional order was vitiated.

Holding and Implications

Core Ruling: The appeal is allowed. The order of the Joint Commissioner in Ref. No. M2/355/80 dated 19 February 1981 is quashed and the case is remitted to the Joint Commissioner for a fresh hearing.

Implications:

Direct effect on the parties: The Joint Commissioner's suo motu revision is quashed and the matter must be reheard by the Joint Commissioner, who is to afford the assessee an opportunity to be heard on whether the first sale was of components (in which event the rule in State of Madras v. Raman & Co. applies) or was a sale of the building as such (in which case R.M. Basha would be the applicable line of authority).
Procedural guidance: Revisional power under section 34 must be exercised sparingly and, where controversy on facts exists that could affect whether a sale is a first or second sale, the revisional authority must provide the affected party an opportunity to be heard before reversing an appellate order.
Precedential effect: The judgment applies and distinguishes existing authorities (Raman & Co. and R.M. Basha) to the facts; the Court did not claim to create a new rule but directed that established tests (intention of parties and whether the purchaser could use the article other than by dismantling) be applied after an opportunity for the assessee to be heard.
Costs: No costs were awarded.

Disposition: Appeal allowed; Joint Commissioner's order quashed; matter remitted for fresh hearing; no costs.

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Crescent Engineering Contractors v. State Of Tamil Nadu

The Judgment of the Court was delivered by

Mishra, J.:— The assessee/appellants herein, who are building demolishing contractors as dealers in teakwood, iron and other building materials, reported a total and taxable turnover of Rs. 4,60,924.13 and nil respectively for the year 1974-75 under the Tamil Nadu General Sales Tax Act, 1959. The assessing officer noticed certain defects and hence determined the total and taxable turnover at Rs. 4,60,924.13 and Rs. 3,97,272.07 respectively by his order dated February 23, 1976. The assessee preferred an appeal before the Appellate Assistant Commissioner (C.T) II, Madras and disputed several items including the item, viz., assessment made on the second sales turnover of iron and steel scrap bought locally and sold as such. The Appellate Assistant Commissioner deleted the turnover of Rs. 1,05,632 from the taxable turnover on that account exercising power however under section 34 of the Tamil Nadu General Sales Tax Act.

2. The Joint Commissioner (Commercial Taxes), Chepauk, Madras has held that the decision of the Appellate Assistant Commissioner was prejudicial to the interests of the Revenue and that the assessing officer had rightly taxed the said amount. The assessee has come up in appeal before us.

3. The assessee's case is that although buildings being immovable properties do not come within the definition of “goods” in the case of sale of the building to him, it was in fact the sale of the goods attached to the building and therefore the sale of the scraps thereof was a second sale entitled to exemption. In a recent judgment of this Court in R.M Basha v. The State Of Tamil Nadu [1986] 62 STC 432, it has been held that the contracts for demolition of superstructures and clearance of debris could not be split up as sale of timber, as a sale of old iron scrap and as a sale of bricks, etc. That was a case wherein the Life Insurance Corporation of India sold certain old structures to the assessee therein after demolition, for debris to be removed. The assessee after demolishing the superstructures, sold the old iron and timber materials. The court held that the assessee's liability to pay tax on the sale of old iron scrap materials could not be legally questioned. The Bench which decided the said case, failed to take notice of an earlier judgment of this Court in the case of State of Madras v. Raman & Co. [1974] 33 STC 1. That was a case in which the assessee, who was a dealer in scrap iron, purchased condemned railway coaches sold in auction by the Railway department and also components of Nissen huts sold by the Director of Supplies and Disposals. The assessee later dismantled the condemned railway coaches as also the Nissen huts and sold the resultant timber and iron materials in bulk. The court in that case found that the intention of the sellers and buyers in the circumstances of the first sale of the components of Nissen huts and condemned articles could be taken to be to sell or buy condemned articles only for the purpose of acquiring the property in the old materials contained in those condemned articles and therefore what the assessee purchased in the auction was scrap and when he sold the scrap later he was only a second seller. The court indicated that the only question which could be asked in such cases is, whether the purchaser of such condemned articles could have entertained any idea of putting those articles to any further use. If he could not use them except for dismantling and selling the resultant scrap, the intention of the sellers and buyers in such cases could easily be taken to be to sell Or buy condemned coaches and condemned Nissen huts only for the purpose of acquiring the property in the old materials contained in those condemned articles.

4. The Joint Commissioner however who decided the instant case was conscious of the judgment of this Court in [1974] 33 STC 1 (State of Madras v. Raman & Co.).

5. He has however commented,

“I have given careful consideration to the contention urged by the learned authorised representative. One vital point of difference should be noted in the application of the judgment reported in [1974] 33 STC 1 (Mad.) (State of Madras v. Raman & Co.) to this case. That case dealt with condemned railway coaches which are movable property and hence ‘goods’. But in this case what was purchased by the dealers were only buildings, which are immovable property and hence not ‘goods’. Whatever might have been the intention of the parties the fact remains that in this case what was purchased by the petitioners was only immovable property which is not liable to tax at the hands of the sellers because immovable property is not ‘goods’ as defined under the Tamil Nadu General Sales Tax Act, 1959. Sales tax is exigible only on sales or purchases of goods as defined in the said Act. It consequently follows that when the dealers demolished the building and sold the resultant materials they became the first sellers of those materials as movable property”

6. The Joint Commissioner evidently failed to appreciate the ratio of the judgment in the case of State of Madras v. Raman & Co. [1974] 33 STC 1 (Mad). The sale whether of movable or immovable property is a sale that there is no tax on the sale of a particular type of property because the property sold is not “goods” as defined under the Act will not change the character of the second sale of the components of that property for the purpose of tax. It shall be a second sale in the sense that if the sale of the components alone had been contemplated, the components when removed from their attachment were goods as indicated in the judgment of this Court in the case of State of Madras v. Raman & Co. [1974] 33 STC 1. In R.M Basha's case [1986] 62 STC 432 (Mad.) also, the court has posed the question whether there had been two sales involved in the assessee's purchasing the superstructures from the Life Insurance Corporation of India and selling the old iron scrap materials and timber materials, and whether there being an earlier sale by the Life Insurance Corporation of India, the second sale of the components thereof were liable to tax or not.

7. The court found that this contention was not acceptable because,

“The agreement between the assessee and the Life Insurance Corporation of India is for the demolition of the superstructures and for clearance of the debris for a stated consideration. Therefore, there is no sale of old iron materials as such by the Life Insurance Corporation of India to the assessee, so that the assessee's sale of old iron scrap materials can be termed as ‘second sales’. No doubt, it is true, that the authorities below have proceeded on the basis that there is a sale by the Life Insurance Corporation of India, of the old iron scrap materials, but since the Life Insurance Corporation of India is not a dealer, its sale cannot be taken to be the first taxable sale inside the State. But, on the materials, the authorities below are not right in proceeding on the basis that there has been a sale of old iron scrap materials from the Life Insurance Corporation of India, to the assessee.”

8. Unfortunately, the Joint Commissioner has not posed this question and answered. Our attention has been drawn to documents on the record showing that the auction was for demolition and removal of the building materials as per condition of sale. If that be so, there can be some sense in the assessee's contention that he had purchased the materials in the building and not any immovable property. It is not known whether the first seller, that is to say, the owner of the buildings was liable to tax in the event of his selling the components of the buildings or not.

9. In R.V.S Textiles v. Commissioner Of Commercial Taxes No. 605 of 1981—order dated January 21, 1991*), this Court has said,

“Coming to the main contention, we cannot but take notice of the scheme of the Act under which the assessment order has been made, subjected to two appeals, one before the Appellate Assistant Commissioner under section 31 of the Act in the case of an order passed by the appropriate authority under section 4-A, section 12, section 12-A, section 14, section 15, sub-sections (1) and (2) of section 16, section 18, sub-section (2) of section 22, section 23 or section 27, other than an order passed by an Assistant Commissioner (Assessment) and before the Deputy Commissioner in the case of an order passed by the Assistant Commissioner (Assessment) as in section 31-A and before the Appellate Tribunal under section 36 of the Act. Besides the appeals, certain special power has been given to the Deputy Commissioner akin to the power of revision under section 32 of the Act and a provision has been made for revision by the Deputy Commissioner in certain cases in section 33 of the Act. Similarly, some special powers are vested in the Joint Commissioner of Commercial Taxes by section 34 of the Act and he has been given the power of revision in certain cases. The power under section 34 of the Act which has been exercised by the Board in the instant case (which has now been made the power of Joint Commissioner of Commercial Taxes by Act 22 of 1982) was spelt out in the following words: …………”

10. After so referring to section 34, the court has said,

“This indicates that the power was conferred on the Board of Revenue (now it is conferred upon the Joint Commissioner of Commercial Taxes) to call for and examine on its own motion an order passed by one of the authorities referred to therein and after making such enquiries or causing such enquiries to be made to pass such order thereon as it thought fit. But this power was/is not intended to be exercised in a routine or casual manner but only on special occasions. Otherwise, there would/shall always be a chance of the suo motu power of revision being used to defeat the course of proceedings in appeal and in revision.”

11. In Avon Plastics v. The State Of Tamil Nadu [1982] 49 STC 268, this Court has said:

“Unless it is found in any particular case that this discretion was wrongly exercised, it would not be proper for the Board to interfere with the order of the Appellate Assistant Commissioner. Such interference is likely to simplify the appellate power.”

12. In T.C No. 605 of 1981 (R.V.S Textiles v. Commissioner of Commercial Taxes) [1999] 116 STC 366 supra this Court added,

“That indicates that the suo motu revisional power should be used sparingly and only when it is found that without such interference interest of Revenue will suffer.”

13. There is no such finding recorded by the Joint Commissioner in the instant case.

14. Proceeding however to examine whether in a case in which it is found that the interests of Revenue was likely to suffer, what may be the procedure that would be followed in exercise of suo motu revisional power, in Dunlop India Ltd. v. State of Tamil Nadu (T.C Nos. 622, 623 and 681 of 1981) (order dated January 30, 1991), a Bench of this Court said,

“In the instant case however we find ourselves faced with a case where the appellate order is interfered with, without any opportunity afforded to the assessee to demonstrate that the assessment order was vitiated. Conceding that on the facts of the instant case there were good reasons for the Joint Commissioner to exercise his power of revision and to reverse the order of the Appellate Assistant Commissioner, it is necessary to decide how while disposing of a suo motu revision the Joint Commissioner should act. Should he just set aside the appellate order without affording opportunity to the assessee, if there is any defect in the appellate order and some serious infirmities are also there in the original assessment order to demonstrate before the Joint Commissioner that there may be infirmities in the appellate order rendering the appellate order bad, yet the assessment order also was/is not sustainable. We are of the opinion that unless it is acknowledged as a part of the role of the revisional authority to afford opportunity to the assessee to raise his objections/contentions to show that the assessment order is bad, there shall be a complete denial of a forum of appeal or revision to the assessee to question the validity of the assessment order on facts and in law. Unless such an opportunity is afforded to the assessee, it would be unjust and unfair, to deny to the assessee such opportunity before the revisional authority, in the absence of a hearing on merits would be a case in which the assessing authority's order shall be final and conclusive.”

15. In the instant case, since the assessee was contending that he had purchased the components and not the building, it was necessary for the Joint Commissioner to examine whether there was any truth in what he alleged. If he succeeded in showing that he had purchased the components only and not the building as such, he could legitimately claim exemption as the sale of components by him constituted a second sale. Since no such opportunity was given to the assessee by the Joint Commissioner, we are of the opinion that the Joint Commissioner's order is vitiated and is accordingly fit to be quashed. The same is accordingly quashed. The case however has to be remitted back to the Joint Commissioner to afford to the assessee an opportunity of being heard on the question whether the intention in the first sale was to transfer the property right in the components of the building or irrespective of the components in the building itself. If it is found that the first sale was of the components only, the rule of law as stated in the judgment of this Court [1974] 33 STC 1 (State of Madras v. Raman & Co.) shall apply. Otherwise it will be a case covered by the law stated by this Court in the case reported in [1986] 62 STC 432 (Basha v. State of Tamil Nadu).

16. In the result, this appeal is allowed. The order of the Joint Commissioner in Ref. No. M2/355/80 dated February 19, 1981, is quashed. The case is remitted to the Joint Commissioner for a fresh hearing in the light of the observations made above. No costs.

17. Appeal allowed.

Crescent Engineering Contractors v. State Of Tamil Nadu

Judgment Summary — Mishra, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Revenue's / Joint Commissioner's Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Crescent Engineering Contractors v. State Of Tamil Nadu

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