# [1961] 2 S.C.R. 736

- **Citation:** [1961] 2 S.C.R. 736
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Case number:** criminal prosecution. CIVIL.APPELLATE JURISDICTION: Civil Appeals Nos. 490 and 491 of 1958
- **Bench:** J. L. Kapur, M. Hidayatullah, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1961-2-s-c-r-736-2031
- **Pages:** 6

## Headnote

Sales Tax -
Claim of exemption. by licensee-If conditional
upon observance of conditions and restrictions-Ma4J'as General
Sales Tax Act, I939 (Mad. IX of z939), s. 5.
The appellants, who were dealers in Cotton yarn, obtained
a license under the Madras General Sales Tax Act, 1939 (IX of
1939). Section 5 of that Act exempted such dealers from payment of sales tax under s. 3 of the Act subject to such restrictions and conditions as might be prescribed, including the conditions as to licenses and license fees. Section 13 required a licensee to keep and maintain true and correct accounts of the value
of the goods sold and paid by him. Rule 5 of the General
Sales Tax Rules provided that any person seeking exemption
under s. 5 of the Act must apply for license in Form 1 which
made the license subject to the provisions of the Act and the
rules made thereunder. The appellants on surprise inspection
were found to maintain two separate sets of accounts, on the
basis of one of which they submitted their returns and the other
2 S.C.R. SUPREME COURT REPORTS
737
showed black-market activities. The question for determination
in the -appeal was whether the appellants who had been refused
exemption an·d were assessed to tax, could claim exemption
under the Act.
Held, that the question must be answered in the negative.
Section 5 of the Madras General Sales Tax Act, 1939, properJ.y construed, leaves no manner of doubt that an exemption
from assessment thereunder is clearly conditional upon the
observance by the assessee of the conditions and restrictions
imposed by the Act, either in the rules or in the license itself,
and the words 'subject to' used by the section means "conditional upon".
It was not correct to say that licensee was exempt from
assessment so long as he held the license notwithstanding any
breach of the provision of the law and that the only penalty he
could be subjected to was the cancellation of his license or criminal prosecution.
CIVIL.APPELLATE JURISDICTION: Civil Appeals Nos.
490 and 491 of 1958.
Appeals from the judgment and decree dated February 18, 1955, of the Madras High Court in Second
Appeals Nos. 2038 and 2039 of 1950.
N. R. Raghavachariar, M. R. Krishnaswami and
T. V. R. Tatachari, for the appellant.
R. Garw,pathi Iyer and D. Gupta, for the respondent.
1960.
November 29.
The Judgment of the Court
was delivered by
K. R. C. S.
Balakrishna
Chctty & Sons
& Co.
v.
J'lie State of
Madras
KAPUR, J.-Two suits were brought by the appelKapur J.
lants for a declaration against the levy of sales tax by
the State of Madras and an injunction was also prayed
for.
Both the suits were decreed by the Subordinate
Judge of Salem and the decrees were confirmed on
appeal by the District Judge of Salem. Two appeals
were taken to the High Court by the State of Madras
against those decrees and by a judgment dated February 18, 1955, the decrees were set aside by a common
judgment. Against these decrees the appellants have
brought these appeals by a -certificate of that Court.
The appellants are merchants dealing in cotton
yarn. They obtained a license under s. 5 of the
Madras Genera.I Sales Tax Act (Act IX of 1939), hereinafter referred to as the 'Act'. This license exempted
_, ... ·
I960
K. R.C.S.
Balakriskna
Chelty & Sons
& Co.
v.
The State of
1.J adras
Kapur ].
738
SUPREME COURT REPORTS
[1961]
them from assessment to sales tax under s. 3 of the
Act on the sale of cotton yarn and on handloom cloth
"subject to such restrictions and conditions as may be
prescribed including conditions as to license and license fees". The license was issued on March 31, 1941,
and was renewed for the following years. On September 20, 1944, the Commercial Tax Authorities ma(ie a
surprise inspection of the premises of the appellants
and discovered that they were maintaining two separate sets of account on the basis of one of which
the appellants submitted their returns to the Department. Because the other set of account books showed
black-market activities of t

## Text

736
SUPREME COURT REPORTS
[1961]
'96°
supply of jockeys of efficiency and skill failed the
Th
C -. .
business of the respondent would no longer be possie
ommissioner b
.
of Income-tax
le. Thus the money was spent for the preservation
West Bengal' of the respondent's business.
v.
As to the third point there is no substance in the
Royal Calcutta submission that the expenditure was in the nature of
Turf Club
a capital expense because no asset of enduring nature
Kapur J.
was being created by this expense.
In our opinion the High Court has rightly held that
the expenditure claimed was one which was wholly
and exclusively laid out for the purpose of the respondent's business. It was to prevent the threatened
extinction of the business of the respondent. In the
result this appeal is dismissed with costs.
November ag.
Appeal dismissed.
K. R. C. S. BALAKRISHNA CHETTY
& SONS & CO.
v.
THE STATE OF MADRAS
(J. L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.)
Sales Tax -
Claim of exemption. by licensee-If conditional
upon observance of conditions and restrictions-Ma4J'as General
Sales Tax Act, I939 (Mad. IX of z939), s. 5.
The appellants, who were dealers in Cotton yarn, obtained
a license under the Madras General Sales Tax Act, 1939 (IX of
1939). Section 5 of that Act exempted such dealers from payment of sales tax under s. 3 of the Act subject to such restrictions and conditions as might be prescribed, including the conditions as to licenses and license fees. Section 13 required a licensee to keep and maintain true and correct accounts of the value
of the goods sold and paid by him. Rule 5 of the General
Sales Tax Rules provided that any person seeking exemption
under s. 5 of the Act must apply for license in Form 1 which
made the license subject to the provisions of the Act and the
rules made thereunder. The appellants on surprise inspection
were found to maintain two separate sets of accounts, on the
basis of one of which they submitted their returns and the other
2 S.C.R. SUPREME COURT REPORTS
737
showed black-market activities. The question for determination
in the -appeal was whether the appellants who had been refused
exemption an·d were assessed to tax, could claim exemption
under the Act.
Held, that the question must be answered in the negative.
Section 5 of the Madras General Sales Tax Act, 1939, properJ.y construed, leaves no manner of doubt that an exemption
from assessment thereunder is clearly conditional upon the
observance by the assessee of the conditions and restrictions
imposed by the Act, either in the rules or in the license itself,
and the words 'subject to' used by the section means "conditional upon".
It was not correct to say that licensee was exempt from
assessment so long as he held the license notwithstanding any
breach of the provision of the law and that the only penalty he
could be subjected to was the cancellation of his license or criminal prosecution.
CIVIL.APPELLATE JURISDICTION: Civil Appeals Nos.
490 and 491 of 1958.
Appeals from the judgment and decree dated February 18, 1955, of the Madras High Court in Second
Appeals Nos. 2038 and 2039 of 1950.
N. R. Raghavachariar, M. R. Krishnaswami and
T. V. R. Tatachari, for the appellant.
R. Garw,pathi Iyer and D. Gupta, for the respondent.
1960.
November 29.
The Judgment of the Court
was delivered by
K. R. C. S.
Balakrishna
Chctty & Sons
& Co.
v.
J'lie State of
Madras
KAPUR, J.-Two suits were brought by the appelKapur J.
lants for a declaration against the levy of sales tax by
the State of Madras and an injunction was also prayed
for.
Both the suits were decreed by the Subordinate
Judge of Salem and the decrees were confirmed on
appeal by the District Judge of Salem. Two appeals
were taken to the High Court by the State of Madras
against those decrees and by a judgment dated February 18, 1955, the decrees were set aside by a common
judgment. Against these decrees the appellants have
brought these appeals by a -certificate of that Court.
The appellants are merchants dealing in cotton
yarn. They obtained a license under s. 5 of the
Madras Genera.I Sales Tax Act (Act IX of 1939), hereinafter referred to as the 'Act'. This license exempted
_, ... ·
I960
K. R.C.S.
Balakriskna
Chelty & Sons
& Co.
v.
The State of
1.J adras
Kapur ].
738
SUPREME COURT REPORTS
[1961]
them from assessment to sales tax under s. 3 of the
Act on the sale of cotton yarn and on handloom cloth
"subject to such restrictions and conditions as may be
prescribed including conditions as to license and license fees". The license was issued on March 31, 1941,
and was renewed for the following years. On September 20, 1944, the Commercial Tax Authorities ma(ie a
surprise inspection of the premises of the appellants
and discovered that they were maintaining two separate sets of account on the basis of one of which
the appellants submitted their returns to the Department. Because the other set of account books showed
black-market activities of the firm Balakrishna Chetty
was prosecuted and sentenced to six months' imprisonment for an offence connected with the breach of Cotton Yarn Control Order. During the pendency of those
proceedings the Deputy Commercial Tax Officer made
assessments for the years.1943-44 and 1944-45, the tax
for the former was Rs. 37,039 and for the latter Rs.
3,140. The appellants unsuccessfully appealed against
these assessments and their revisions also failed. On
August 24, 1945, the appellants brought a suit for a
declaration and injunction in regard to the first assessment alleging that the assessment was against the
Act. On September 2, 1946, a similar suit was brought
in regard to the second assessment. It is out of these
suits that the present appeal has arisen.
The controversy between the parties centres round
the interpretation of the words "subject to" ins. 5 of
the Act.
The High Court has held that on a true
interpretation of the provisions of the Act and the
rules made thereunder, the observance of conditions of
the license was necessary for the availability of
exemption under s. 5; that as the appellants had contravened those conditions they were liable to pay tax for
both the years notwithstanding the license which had
been issued to them under s. 5 of the Act.
It will be convenient at this stage to refer to the
provisions of the ,Act which are relevant for the purpose of this appeal.
S. 2(b) " "dealer" means any person who carries
on the business of buying or selling goods;"
2 S.C.R. SUPREME COURT REPORTS
739
S. 2(f) ""prescribed" means prescribed by rules
made under this Act;".
S. 3(1) "Subject to the provisions of this Act,
every dealer shall pay in each year a tax in accordance with the scale specified below:-
( a) ............................................................. .
(b) if his turnover exOne half of 1 per
ceeds twenty
cent of such turn.
thousand rupees.
over".
S. 5 "Subject to such restrictions and .conditions
as may be prescribed, including the conditions as to
licenses and license fees, the sale of bullion and specie,
of cotton, of cotton yarn and of any cloth woven on
handlooms and sold by persons dealing exclusively in
such cloth shall be exempt from taxation under Section 3".
S. 13 "Every dealer and every person licensed
under section 8 shall keep and maintain a. true and
correct account showing the value of the goods sold
and paid by them; and in case the accounts maintained in the ordinary course, do not show the same in an
intelligible form, he shall maintain a true and correct
account in such form as may be prescribed in this
behalf:".
The following rules are relevant for the purpose of this
appeal and we quote the relev.ant portions:
R. 5 "(l) Every person whq-
(a) •.•...•••...........•...•...........•.........•..•.. , .......•.
(b) deals with cotton and/or cotton yarn,
(c) ....••••... ·••·•••···· ··•·•··· •.. -... , ......••..••.............
( d) •....................•........•.•.•.••.....••.................
(e) ........................ ,shall if he desires to avail
himself of the exemption provided in sections 5 and 8
or of the concession of single po!nt taxation provided
in section 6, submit an application in Form-I for a
licence ................... "
and the relevant portion of Form III is as follows:
"Form III
{
Cotton
Licence to a dealer in Cotton yarn
cloth woven on handlooms
K. R.C. S.
Balakrishna
Chetly & Sons
& Co.
v.
The Stale of
Madras
Kapur ].
I960
K.R.C. S.
Balahrishna
Chetty & Sons
& Co.
v.
Th~ State of
Madras
Kapu1 ].
740
SUPREME COURT REPORTS
See rule 6(5).
Licence No.
dated
having paid a licence fee of Rs.
(in words)
[1961]
hereby licensed as a dealer in Cotton/Cotton yarn
Cotton woven on handlooms for the year ending
at
(place of business) subject to the provisions of the Madras General Sales Tax Act, 1939,
and the rules made thereunder and to the following conditions:".
R. 8 "Every licence granted or renewed under
these rules shall be liable to cancellation by the
Deputy Commercial Tax Officer in the event of a.
breach of any of the provisions of the Act, or of the
Rules made thereunder or of the conditions of the
licence."
The contention raised on behalf of· the appellants
was that as long as they held the licence it was immaterial if they were guilty of any infraction of the
law and that they were not liable to any assessment
of sales-tax under the provisions of the Act and the
only penalty they incurred was to have their licence
cancelled and/or be liable to· the penalty which under
the criminal law they had already suffered. The contention comes to this that in spite of the breaches of
the terms and conditions of the licence, having a
licence was sufficient for the purpose of exemption
under the Act.
This contention, in our opinion, is
wholly untenable. Section 3 is the charging section
and s. 5 gives exemption from taxation but that section clearly makes the holding of a licence subject to
restrictions and conditions prescribed under the provisions of the Act and the rules made thereunder because the opening words of that section are "subject
to such restrictions and conditions as may be prescribed."
Under s. 13 an important condition imposed under
the Act is the keeping by the dealer and every person
licensed of true and correct accounts showing the
value of the goods solQ. and paid by him. Next there
is r. 5 of the General Sales Tax Rules which provided
2 S.C.R. SUPREME COURT REPORTS
741
that if any person desired to avail himself of the exemption provided in s. 5, he had to submit an application in Form I for a licence and the Form of the
licence shows that the licence was subject to the provisions of the Act and the rules made thereunder
which required the licensee to submit retun1s as required and also to keep true accounts under s. 13. This
shows that the giving of the licence was subject to
certain conditions being observed by the licensee and
the licence itself was issued subject to the Act and the
rules. But it was contended that the words "subject
to" do not mean "conditional upon" but "liable to the
rules and the provisions" of the Act. So construed
s. 5 will become not only inelegant but wholly meaningless. On a proper interpretation of the section it
only means that the exemption under the licence is
conditional upon the observance of the conditions
prescribed and upon the restrictions which are imposed by and under the. Act whether in the rules or in
the licence itself; that is, a licensee is exempt from
assessment as long as he conforms to the conditions
of the licence and not that he is entitled to exemption
whether the conditions upon which the licence is
given are fulfilled or not. The use of the words "subject to" has reference to effectuating tke intention of
the law and the correct meaning, in our opinion, is
"conditional upon".
The appellants have been found to have contravened the provisions of the Act as well as the rules and
therefore it cannot be said that they have observed
the conditions upon which the exemption under the
licence is available. In that view of the matter, it was
rightly held that they were not exempt from assessment under the Act. The appeals are therefore dismissed with costs.
Appeals dismissed.
!(. R. C. S.
Balakrishna
Chetty & Sons
& Co.
v.
The Stale of
Madras
Kapur ].