# FOOD CORPORATION OF INDIA v. STATE OF KERALA JANUARY 6 AND 28, 1997

- **Citation:** [1997] 1 S.C.R. 24
- **Court:** Supreme Court of India
- **Decided:** 1997
- **Case number:** CiVil Appeal Nos. 675-78 of 1975
- **Bench:** Am. Ahmadi, Sujata V. Manohar, K. Venkataswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/food-corporation-of-india-v-state-of-kerala-january-6-and-28-1997-15201
- **Pages:** 31

## Headnote

Sales Tax: U.P. Sales Tax Act, 1948:
C
Sales Ta:t~Sale-<:ompuls01y or Statut01y--Purchase of food
grains-By Food C01poration of lndia-Pursua11t to levy orders issued under
S. 3 of Essential Commodities Act-Held : amounted to sale as there was
scope for co11sensual agreement in the pa1ties to the procurement transactio11s-He11ce, withi11 the pwview of E11t1y 54 List II of Schedule VII and
liable to sales/purchase tax levied by States-Essential Commodities Act,
D 1955, S. 3--Constitutio11 of 111dia, 1950, Sch. VII List II Ent1y 54.
E
F
Sales Tfil~Section 3D(I) Explanation II-Held : intra vires Enlly
54-<:011stitution of b;dia 1950, Sch VII List II Entl)' 54.
Section 3D(l)-Sales Ta:t~Sale-First sale-Provision in statute--
Treated paiticular sale or purchase as first sale for pwpose of sales tax within
competence of State Legislature-Held : Valid-Constitution of India, A1ts.
245 & 246 and Sch. VII List II Ent1y 54.
Constitution of India, 1950 : AJticle 14.
Sales Tfil~Taxing Statutes-Proviso to S. 3-F of U.P. Sales Tax Act
subjected dealers whose tumover exceeded the limit mentioned therein to an
additional tfil~nly a si11gle dealer in the entire State fell withi11 that
clas.1~Held : Classification of dealers on basis of gross tumover was
valid--t:ontention that proviso was arbitrary and discriminato1y as only one
G dealer was affected thereby, rejected-{}.?. Sales Tax Act, 1948, S. 3-F.
Essential Commodities Act, 1955 : Section 3.
Sales Ta.i~Sale-Compulso1y or Statut01y--Dist1ibutio11 of fe1tilizers to
State Govemments/nominees by Food Co1poratio11 of India under Fe1tilizer
H (Co11trol) Orde1~High Cowt 1ightly held sale exigible to sales ta:t~Fenilizer
24
\.
F.C.L v. STATE
25
(Control) Orde1; 1957.
Sale Tax-Twnove1-Food grains-Purchase of-By Food C01poration
of India pursuant to le~y orders under S. 3 of E.C. Act-Gunny bags used as
packing matelials-includibility of-In taxable tumover of said C01poration-Questio11 left open.
U.P. IVishi Utpadan Mandi Adhiniyam, 1964:
Awicultural Produce-CompulsiNy procurement of 1ice under lery orders under E..C. Act-Demand of market fee-Held : amounted to
sale-Hence, demand of market fee was valid.
Words and Phrases :
"Sale''-Meaning of-In the context of S.17(iii)(b) of the U.P. Klishi
Utpadan Mandi Adhiniyam, 1964.
A
B
c
The appellant-Corporation purchased food grains from the State D
Governments for the purpose of maintaining the national pool of food
grains. The Sales Tax Department of the State sought to levy purchase tax
upon the appellant on the point it made purchases from the State vide
Explanation II added to Section 3-D(l) of the U.P. Sales Tax Act, 1948. An
additional surcharge of five per cent was also payable by the appellant E
since its turnover was more than Rs. 10 crores vide Section 3F of the U.P.
Sale Tax Act, 1948. The appellant filed a writ petition before the High
Court challenging the aforesaid levies. The High Court dismissed the writ
petition. Hence this appeal.
On behalf of the appellant it was contended that the levy procureF
ment of food grains issued under Section 3 of the Essential Commodities
Act, 1955 by the State Government, being a compulsory acquisition, were
not 'sales' within the meaning of Entry 54 of List II of Schedule VII to the
Constitution ol' India and were not taxable under the U.P. Sales Act, 1948;
that the transactions entered into in exercise of the power under the levy
orders between the millers and the dealers on the one hand and the State G
on the other hand and thereafter between the States and the appellant and
then between the appellant and the States was one composite process
which owed its origin to the arrangements arrived at between the State
Governments and the Central Government under which the States were
required to contribute to the Central Pool which in turn passed on to the H
26
SUPREME COURT REPORTS
[1997] 1 S.C.R.
A deficit States through the agency of the appellant; that there was, therefore,
no area where the parties could have

## Text

_Characters 0–39,852 of 71,524. This is a partial read: ask again with offset=39852 for what follows._

A
FOOD CORPORATION OF INDIA
v.
STATE OF KERALA
JANUARY 6 AND 28, 1997
B
(AM. AHMADI, CJ., SUJATA V. MANOHAR AND K.
VENKATASWAMI, JJ.]
Sales Tax: U.P. Sales Tax Act, 1948:
C
Sales Ta:t~Sale-<:ompuls01y or Statut01y--Purchase of food
grains-By Food C01poration of lndia-Pursua11t to levy orders issued under
S. 3 of Essential Commodities Act-Held : amounted to sale as there was
scope for co11sensual agreement in the pa1ties to the procurement transactio11s-He11ce, withi11 the pwview of E11t1y 54 List II of Schedule VII and
liable to sales/purchase tax levied by States-Essential Commodities Act,
D 1955, S. 3--Constitutio11 of 111dia, 1950, Sch. VII List II Ent1y 54.
E
F
Sales Tfil~Section 3D(I) Explanation II-Held : intra vires Enlly
54-<:011stitution of b;dia 1950, Sch VII List II Entl)' 54.
Section 3D(l)-Sales Ta:t~Sale-First sale-Provision in statute--
Treated paiticular sale or purchase as first sale for pwpose of sales tax within
competence of State Legislature-Held : Valid-Constitution of India, A1ts.
245 & 246 and Sch. VII List II Ent1y 54.
Constitution of India, 1950 : AJticle 14.
Sales Tfil~Taxing Statutes-Proviso to S. 3-F of U.P. Sales Tax Act
subjected dealers whose tumover exceeded the limit mentioned therein to an
additional tfil~nly a si11gle dealer in the entire State fell withi11 that
clas.1~Held : Classification of dealers on basis of gross tumover was
valid--t:ontention that proviso was arbitrary and discriminato1y as only one
G dealer was affected thereby, rejected-{}.?. Sales Tax Act, 1948, S. 3-F.
Essential Commodities Act, 1955 : Section 3.
Sales Ta.i~Sale-Compulso1y or Statut01y--Dist1ibutio11 of fe1tilizers to
State Govemments/nominees by Food Co1poratio11 of India under Fe1tilizer
H (Co11trol) Orde1~High Cowt 1ightly held sale exigible to sales ta:t~Fenilizer
24
\.
F.C.L v. STATE
25
(Control) Orde1; 1957.
Sale Tax-Twnove1-Food grains-Purchase of-By Food C01poration
of India pursuant to le~y orders under S. 3 of E.C. Act-Gunny bags used as
packing matelials-includibility of-In taxable tumover of said C01poration-Questio11 left open.
U.P. IVishi Utpadan Mandi Adhiniyam, 1964:
Awicultural Produce-CompulsiNy procurement of 1ice under lery orders under E..C. Act-Demand of market fee-Held : amounted to
sale-Hence, demand of market fee was valid.
Words and Phrases :
"Sale''-Meaning of-In the context of S.17(iii)(b) of the U.P. Klishi
Utpadan Mandi Adhiniyam, 1964.
A
B
c
The appellant-Corporation purchased food grains from the State D
Governments for the purpose of maintaining the national pool of food
grains. The Sales Tax Department of the State sought to levy purchase tax
upon the appellant on the point it made purchases from the State vide
Explanation II added to Section 3-D(l) of the U.P. Sales Tax Act, 1948. An
additional surcharge of five per cent was also payable by the appellant E
since its turnover was more than Rs. 10 crores vide Section 3F of the U.P.
Sale Tax Act, 1948. The appellant filed a writ petition before the High
Court challenging the aforesaid levies. The High Court dismissed the writ
petition. Hence this appeal.
On behalf of the appellant it was contended that the levy procureF
ment of food grains issued under Section 3 of the Essential Commodities
Act, 1955 by the State Government, being a compulsory acquisition, were
not 'sales' within the meaning of Entry 54 of List II of Schedule VII to the
Constitution ol' India and were not taxable under the U.P. Sales Act, 1948;
that the transactions entered into in exercise of the power under the levy
orders between the millers and the dealers on the one hand and the State G
on the other hand and thereafter between the States and the appellant and
then between the appellant and the States was one composite process
which owed its origin to the arrangements arrived at between the State
Governments and the Central Government under which the States were
required to contribute to the Central Pool which in turn passed on to the H
26
SUPREME COURT REPORTS
[1997] 1 S.C.R.
A deficit States through the agency of the appellant; that there was, therefore,
no area where the parties could have any volition; that the Explanation II
added to Section 3-D(l) of the U.P. Sales Tax Act was ultra vires Entry
54 as the same assumed, by a fiction oflaw, the existence of sale, even when
there was none; that Section 3F of the U.P. Sales Tax Act which levied a
B
surcharge of5% on dealers whose turnover in food grains exceeded Rs. 10
crores was ~rbitrary and discriminatory and hit by Article 14 as there was
no other dealer in food grains in the State whose annual turnover exceeded
Rs. 10 Crores; that the distribution of fertilizers to State Governments/their nominees did not amount to sale and was not subject to sales
tax; that the gunny bags used as packing materials were not includible in
C the taxable turnover of the appellant; and that the demand of market fee
under the U.P. Krishi Mandi Adhiniyam, 1964 was not valid.
Dismissing the appeal, this Court
HELD : 1.1. The facts of the case show that the Food Corporation
D of India (FCI) had reserved the right to accept or reject the offer of the
State. This negatives the contention that the transaction in question was
one single integrated process and there was no break in the same. [ 49-B] :
1.2. On facts and in the light of the observation of the Full Bench of
E the Allahabad High Court in Ram Bilas Ram Gopal's case, some area of
consensual arrangement and some field for volition was left untouched by
the legislation in all disputed transactions. The disputed transactions were
sales, may be, under the compulsion of a statute. Nevertheless, they were
sales exigible to tax. Whenever coercive force was used to bring about the
transactions, the same must be traced to legislation and not to the State
F
Government as a party to such transactions. [ 49-C]
CST v. Ram Bilas Ram Gopal, AIR (1970) All 518, referred to.
13. The levy procurement is a sale/purchase and, therefore, falls
G within the purview of Entry 54 of List II of Seventh Schedule to the
Constitution. The State3 w1!re competent to levy sales/purchase tax on such
transactions. In the light of the rulings of this Court it cannot be held that
there was no area left for consensual agreement in the parties to the
procurement transactions. [ 49-D-E]
H
CSTv. Ram Bi/as.Ram GopaJ, AIR (1970) All 518, approved.
f "\
.<
F.C.I. v. STATE
27
Jagjit Distilleries and Allied Industries v. State, (1971) 24 STC 709 A
(P&H), overruled.
Chitter Mal Narain Das v. CST, [1970] 3 SCC 809, held no longer
good law.
Vishnu Agencies (P) Ltd. v. CTO, [1978] 1 SCC 520; Satar Jung Sugar B
Mills Ltd. v. State of Mysore & Ors., [1972] 2 SCR 228; State of Punjab & Ors.
v. Dewan's Modem Breweries Ltd., 43, STC 454; Coffee Board v. Commissioner of Commercipl Taxes, [1988] 3 SCC 262 and Oil and Natural Gas
Commission v. State of Bihar, [1977] 1 SCR 34, relied on.
New India Sugar Mills India Ltd. v. CST, Bihar, [1963] Suppl. 2 SCR C
459; State of Kerala v. Bhavani Tea Produce Co. Ltd., AIR (1966) SC 677;
fndian Steel & Wire Products Ltd. v. State of Madras, AIR (1968) SC 478;
Andhra Sugars Ltd. v. State of A.P., AIR (1968) SC 599; State of Rajasthan v •.
Karam Chand Thappar & Bros. (Coal Sales) Ltd., AIR (1969) SC 343 and
State of Madras v. Gannon Dankerley & Co., AIR (1958) SC 560, referred to. D
. 2. The appellant's contention that the newly added Explanation II to
Section 3-D(l) of the U.P. Sales Tax Act, 1948 was ultra vires Entry 54 List
II· of the Seventh Schedule to the Constitution is without substance as in
the instant case, the transactions in question are all sales and exigible to
··tax under the State Sales Tax Act. [SO-A, 49-H]
3.1. It is open to the State Legislature to shape a point at which tax
is levied anil it may be equally permissible to the legislature to treat a
parti:ular sale or purchase as the first sale or purchase for the purpose of
sales tax. [50-E]
32. It is weff settled that it is within the competency of the State
Legislature to classify the dealers and to impose surcharge upon those who
were placed in one category taking into consideration their economic superiority. [51-H]
E
F
G
Hoechst Phamiaceuticals Ltd. v. State of Bihar, AIR (1983) SC 1019,
relied on.
4.1. The Food Corporation of India have distributed fertilizers to
the State Governments .their nominees under the .Fertilizer (Control)
Order, 1957. The High Court rightly held that the activity of distribution H
28
SUPREME COURT REPORTS
[1997] 1 S.C.R.
A of fertilizers amounted to sale exigible to sales tax. [52-E, 53-B]
4.2. The Food Corporation oflndia had used gunny bags as packing
materials in the course of purchase of food grains pursuant to orders under
Section 3 of the Essential Commodities Act, 1955. The question whether
such gunny bags were includible in the taxable turnover of the said CorB porationn has to be left open to be decided by the Assessing Officer while
finalising the assessment in the light of this judgment. [53-E-F]
4.3. The compulsory procurement of rice under the levy orders
issued under the Essential Commodities Act, 1955 nonetheless amounted
C to sale. Hence demand of market fee under the U.P. Krishi Utpadan
Mandi Adhiniyam, 1964 is valid. [52-C]
CIVIL APPELLATE JURISDICTION : CiVil Appeal Nos. 675-78
of 1975 Etc. Etc.
D
From the Judgment and Order dated 10.4.74 of the Kerala High
Court in T.R.C. Nos. 53, 54, 69-70 of 1973.
•
D.D:' Thakur, B.D. Agarwal, A.S. Nambiar, Dr. A.M. Singhvi, H.L.
Aggarwal, U.N. Bachawat, A.N. Jayaram, H.N. Salve, O.P. Rana, A.K.
-~
E Verma, P.D. Tyagi for M/s. JBD & Co., G.I. Gopalkrishna'n, Y. Prabhakara
Rao, N.N. Bhatt, Sunil Ambwani, Prashant Kumar, M.T. George, Sunil
Gupta, Ms. Nisha Bagchi, Ms. Indu Malhotra, G.K. Bansal, Sanjay Bansal,
A. Misra, Mukul Mudgal, R.B. Misra, Sudhanshu, N.M. Sakharadande, K.
Ram Kumar, C. Balasubramaniam, Pradeep Misra, Vishwajit Singh, Ms.
Niti Dikshit, T. Mahipal, lrshad Ahmed for the appearing parties.
F
G
H
The Judgment of the Court was delivered by
VENKATASWAMI, J. Leave granted in all the special leave peti·
tioris.
•
In all these cases, common questions of law arise and arguments were
also addressed on that footing and consequently, they are disposed of by
this common judgment. The principal common question of law that arises
for consideration can be broadly stated as follows :
"Whether the Food Corporation of India (hereinafter called
j
j
~-
.A
FC.I. v. STATE [VENKATASWAMI,J.]
29
"the FCI") is liable to pay sales/purchase tax to the States while A
purchasing foodgrains or in distributing fertilizers pursuant to
orders issued under section 3 of the Essential Colflmodities Act,
1955?"
There is a difference of opinion among the High Courts on this
question. A Division Bench of the Allahabad High Court (Lucknow Bench) B
has taken the view that the FCI is liable to pay purchase tax in the light of
the p~ovisions of the U.P. Sales Tax Act, 1948 (hereinafter called "the
Act"). A Division Bench of the Punjab and Haryana High Court, however,
has taken a view that the FCI is not liable to pay tax, on the purchase of
foodgrains. We may at once state here that the Lucknow Bench of the C
Allahabad High Court in taking the view that the FCI is liable to pay tax
after elaborately dealing with the case law up to the date of the judgment
has come to a conclusion that the decision of this Court in M/s. Chitter Mal
Narain Das v. Commissioner of Sales Tax, [1970) 3 SCC 809 in view of
subsequent decisions of larger benches of this Court does not ~old good.
The Division Bench of the Punjab and Haryana High Court however, has D
taken exactly the opposite view holding that the decision of this Court in·
Chitter Mal's case holds good notwithstanding subsequent decisions of this
Court and on that basis 'held that the FCI was not liable to pay tax. The
Andhra Pradesh and Kerala High Courts while dealing with the liability of
the FCI to pay tax on the distribution of fertilizers have taken the view that
the FCI is liable to pay tax. It is under this background, arguments were E
advanced before .us supporting and opposing the view taken by this Court
in Chitter Mal's case. · ·"
Undoubtedly this Court in Chitter Mal's case positively has taken a
view that there was no sale within the meaning of the definition of the word p
'sale' under Section 2(h) of the U.P. Sales Tax Act, 1948, when the stocks
of wheat supplied by the appellants (in that case dealers in foodgrains) in
compliance with the provisions of U.P. Wheat Procurement (Levy) Order,
1959 to the Regional Food Controller. Armed with ~hat decision of this
Court, Mr. Thakur, learned Senior Counsel addressed elaborate arguments
distinguishing the subsequent decisions of larger benches of this Court G
projecting a 'liberal interpretation' of the definition of 'sale' occuring in
various State statutes and tried to persuade us to hold that the ratio laid
down by this Court in Chitter Mal's case holds the field. On the other hand,
learned Senior Counsel, appearing for the States, placing reliance on the
subsequent decisions of larger benches of this Court tried to persuade us H
30
SUPREME COURT REPORTS
[1997] 1 S.C.R.
A to hold that the ratio laid down by this Court in Chitter Mal's case is no
~.
B
longer good law.
As an illustrative of the cases, we would like to refer to the facts in
the common judgment of the Lucknow Bench of the Allahabad High Court
in W.P. 2077/1986 (corresponding to C.A. No. 2532/1987) and then apply
the same to other cases.
The facts as noticed by the High Court in the common judgment are
given below in brief.
C
The Food Corporation of India is a 'Corporation' incorporated
under the Food Corporation Act. 1964 (Central Act No. 37 of 1964). As
one of its functions it maintains a national pool of foodgrains. The different
States have to make their contributions to this pool. The States issued
different orders under the Essential Commodities Act known by different
names as Levy Orders, Procurement Orders or Requisition Orders, for
D purchasing part of the produce or stocks of the foodgrains in question from
farmers or millers. The procurement is made through different agencies.
On obtaining the required quantity of the foodgrains, it is purchased by
the Food Corporation of India from the State Governments for the purpose
of maintaining the national pool of foodgrains. The Sales Tax Department
E of U.P. sought to levy purchase tax upon the Food Corporation of India
on the point it makes purchases from the State of U.P. The Food Corporation of India denied its liability to pay the said tax.
Although the purchase made by the FCI from the State is a second
sale or purchase in view of Explanation II to Section 3-D(i) of the U.P.
. ...
F
Sales Tax Act, it is deemed to be the first purchase. The Explanation II
was added with retrospective effect by the U.P. Act No. 23 of 1976. It is
specifically in respect of purchase of foodgrains in pursuance of orders
made under Section 3 of the Essential Commodities Act. The Explanation
II reads as follows :
G
H
"Explanation II :
For the purpose of this sub-section, in relation to purchases of
foodgrains in pursuance of any orders made under Section 3 of
the Essential Commodities Act, 1955 including any purchase in
excess of the levy share, the purchase first made by a dealer from
....
F.C.I. v. STATE [VENKATASWAMI, J.]
31
the State Government or its purchasing agent shall be the first A
.purchase of such foodgrains and the tax shall accordingly be levied
at the point on such dealer."
An additional tax was also payable at the rate of five per cent over
the turnover by the dealer whose yearly turnover exceeded rupees ten
ciores as provided under Section 3-F of the U.P. Sales Tax Act, which now B
stands omitted by the U.P. Act No. 4 of 1982 with effect from 7th September, 1981. Section 3-F as it existed was as follows :
"3-F. Every dealer liable to pay tax under this Act, the aggregate
of whose total turnover of purchases of goods notified under C
sub-section (1) of section.3-D, the turnover of sales liable to tax
under sub-section (2) of section 3-D and the total turnover of sales
of all other goods in any assessment year exceeds rupees two lakhs,
shall, in addition to the said tax, pay for that assessment year an
additional tax at the rate of one per cent, of his turnover liable to
tax:
Provided that in case of foodgrains, the rate of additional tax
payable by any dealer, the aggregate of whose turnover or turnover
of purchases or both, as the case may be, liable to tax, exceeds
rupees ten crores in an assessment year shall be five percent."
Since the turnover of the FCI has been more than ten crores, it was
also required to pay additional tax for the period Section 3- F remained in
operation.
D
E
The appellant has challenged the validity of. Explanation II to Section
3-D(i) of the U.P. Sales Tax Act as well as that of Section 3-F of the Act F
on the ground that the said provisions are discriminatory, arbitrary and
unreasonable.
In addressing the arguments challenging the view taken by the Lucknow Bench of the Allahabad High Court, Mr. Thakur, learned Senior G
Counsel placed before us the following six propositions for our decision :
1. That levy procurement of foodgrains pursuant to levy orders
issued under Section 3 of Essential Commodities Act by the
Government of Uttar Pradesh are not "sales" within the meaning
of Entry 54. List II of Seventh Schedule to the Constitution of H
32
SUPREME COURT REPORTS
[1997) 1 S.C.R.
A
India. The legislation authorizing such imposition, proceedings and
recovery of Sales Tax is wholly ultra vires the said Entry 54 of
Constitutiol). of India. Le\iy procurement in effect is compulsory
acquisition by State in exercise of powers of the State under
"Eminent Domain".
B
c
D
E
F
G
2. That Explanation II added to Section 3D(i) of the U.P. Sales
Tax Act by Act No. 23 of 1976 is ultra vires the Entry No. 54 since
it assumed, by fiction of law, the existence of sale, even when there
is none, by the State of U.P. and its nominees in favour of Food
Corporation of India and thereafter declare that fictional sale to
be the first sale for the purpose of levy of sales tax.
3. That Food Corporation of India for the procurement from 1968
to 1976 had been bearing the burden of Sales Tax on the first
purchase made by the Regional Food Controller by reimbursing
the same to them. The Tax being single point tax, the same could
not be levied twice. Explanation II retrospectively levies sales tax
more than one point. It is impermissibie under the provisions of
U.P. Sales Tax Act.
4. That Section 3(F) which levied surcharge of 5% on dealers
whose turnover in foodgrains exceeding Rs. 10 crores was arbitrary
and discriminatory and hit by Article 14, particularly when the
same was made effective retrospectiveJy from 1st April, 1975.
5. That the 46th Constitutional Amendment which came into force
from 2nd February 1983 was made retrospective only in a limited
sphere and not covering the legislation affecting the appellants.
6. That the interest calculated by the respondents is not payable
and, therefore, in any case the respondents have no right to recover
the same.
From the judgment of the High Court, we do not find any discussion
on the proposition No. 6. We, therefore, presume no such plea was taken
or if taken no such plea was argued before the High Court. Therefore, we
do not propose to deal with that proposition. Regarding proposition No.
5, this was not seriously pursued by either side warranting any decision on
H that.
y
..
.
.
F.C.I. v. STATE [VENKATASW AMI, J.]
33
The principal argument appears to be that levy procurement did not A
amount to a sale and, therefore, the same was not taxable under the U.P. Sales
Tax Act, 1948. To put it differently the argument was that the levy procurement is a compulsory acquisition and therefore, falls outside the purview of
Entry 54 of List II of 7th Schedule to the Constitution of Inrlia. Consequently,
the levy procurement is not at all taxable under the U.P. Sales Tax Act. After B
referring to relevant provisions in the Essential C~m~odities Act, 1955 and
•·
the levy control orders, it was pointed out that the persons holding stocks of
foodgrair{s are required compulsorily by force of the statutory orders to part
with the foodgrains in favour of the State Government or its nominee and such
procurement constitutes clearly a case of compulsory acquisition rather than C
a sale as popularly understood. Elaborating this aspect, it was submitted that
there was absolutely no contract between the seller and buyer and failure to
comply with the procurement orders will result in the prosecution and ultimate
punishment at the hands of the law enforcing agency apart from the power to
enter upon the premises, search, seize the foodgrains and confiscate the same. D
Under those circumstances, it was contended that the transactions of levy
procurement cannot be treated as a sale within the purview of Entry 54 List
._.,,_
II of the Seventh Schedule. In the case of millers, they have to part with a
specified portion of rice, milled from the paddy given by farmers though the
millers have no right or title over the paddy, they cannot resist the procureE
ment pursuant to the levy order. In the absence of any volition on the part of
the miller, no sale could be attracted to such transaction. It is also contended
•
that there is no consensus in levy procurement. After referring to the decision
of this Court in Mis. New India Sugar Mills India Ltd. v. Commissioner of
Sales Tax, Bihar, AIR (1963) SC 1207 and Chitter Mal's case (supra) the F
learned Senior Counsel submitted that the cases subsequent to these two
decisions taking differeht view are all under regulatory orders and as such
distinguishable and the ratio laid down therein will have no application to the
procurement under Levy Orders which amounts to compulsory acquisition.
According to the learned counsel, there is nothing left to be decided for the G
parties and everything is determined in the levy orders. Even the place of
delivery of. the foodgrains is fixed by the control orders. Even if there is any
small matter left to the discretion of the parties, the same being unimportant,
insignificant and peripheral, cannot be said to be determinative of the existence of the consensus. According to the learned Senior Counsel, it is the H
34
SUPREME COURT REPORTS
[1997) 1 S.C.R.
A consensus, which is vital aspect for determining the character of the
transaction. The levy orders leave no option to the seller but to sell
compulsorily to the State Government or its nominee. There is no discretion left to the parties in regard to price or any other matter and, therefore,
no area is left out for the parties to operate unlike matters coming under
B regulatory orders. According to the learned Senior Counsel, Chitter Mal's
case has rightly laid down the law when it held that the levy procurement
is a compulsory acquisition and not a sale. After referring to the transactions under n,gulatory orders and transactions under levy control orders,
the learned Senior Counsel has summarised his submissions on the first
C proposition as follows :
D
E
F
G
H
"That the transactions of levy procurement are a class by themself
and are wholly distinguishable from the cases where the sale and
purchase is regulated by statutory authorities in exercise of the
powers available to them under respective legislations. Whereas in
the case of levy orders, there is absolutely no area left for consensual agreement in the case of regulatory orders, only . statutory
controls were imposed for identification of a class of people who
would be eligible either to sell or to purchase goods in keeping
with the welfare policy of the State. Those are not the cases in
which the failure to part with the goods results in the commission
of an offence which is punishable nor does the failure give corresponding right to the authorities to seize and confiscate the
goods and impose penalties as prescribed under the control order.
Therefore, it cannot be contended that a compulsory acquisition
of foodgrains by Government in exercise of its sovereign powers
should constitute a sale so as to attract the liability under the Sales
Tax Act. The transactions entered into in exercise of the power
under the levy order between the millers and the dealers on the
one hand and the State on the other hand, and thereafter between
the States and the Corporation i.e. FCI and then between the
Corporation and the State was one composite process which owed
its origin to the arrangements arrived at between the State Governments and Central Government under which the States were required to contribute to t11e Central Pool which in turn passes on
to the deficit States through the agency of the Corporation. As
such, the. process was an integrated process and was not at all
)
_,
F.C.I. v. STATE [VENKATASW AMI, J.]
35
bifurcable or divisible into one or other transaction. Totality of the A
facts clearly established that it was not a case where there were
any sale of foodgrains. It was a case of compulsory taking over of
a particular percentage of foodgrains from licenced dealers and
millers on payment of an amount of compensation which too was
fixed by the Central Government and not by the State Government B
although the same is notified by the State Government. Not only
centres at which the foodgrains were deliverable, were prescribed
by the State Government, the payment of compensation was also
pre-determined by the orders themselves. Centres for each area
were also fixed. There was, therefore, no area where the parties
could have any volition."
C
Learned Senior Counsel appearing for the States in support of the
common judgment under appeal and other judgments submitted that the
transactions under levy orders are definitely 'sales' and there was no
compulsory acquisition of property as contended by the learned Senior D
Counsel for the appellants. According to them, there is an area of consensual arrangement between the parties and the element of volition is not
completely excluded under the levy orders. It is their further submission
that the decision in Chitter Mal's case stands practically overruled and,
therefore, it is no more good law in view of latter decisions of larger
benches of this Court. Though an argument referring to 46th Amendment E
of the Constitution was faintly raised, it was not pursued seriously. To
support the contention, reliance was placed on the following judgments :
M/s. Vishnu Agencies (Pvt.) Ltd. v. Commercial Tax Officer and
Others, [1978] 1 SCC 520; Satar Jung Sugar Mills Ltd. Etc. v. State
of Mysore and Others, (1972] 2 SCR 228; State of Punjab and Others
v. Dewan's Modern Breweries Ltd., 43 (STC) 454; Coffee Board,
Karnataka, Bangalore v. Commissioner of Commercial Taxes, Karnataka and Others, [1988] 3 SCC 262; Oil and Natural Gas Commission v. State of Bihar and Others, [1977] 1 SCR 34.
F
G
To substantiate the argument that there was an element of volition
though minimal between the parties in the transactions under consideration, reliance was placed on the observations of the full Bench of the
Allahabad High Court in Commissioner of Sales Tax v. Ram Bilas Ram
Gopa~ AIR (1970) Allahabad 518. Though those observations did not find H
36
SUPREME COURT REPORTS
[1997] 1 S.C.R.
A
approv~l by the Bench which decided Chitter Mal's case, the same found
approval by the later larger Bench which decided Vishnu Agencies case.
We shall refer to the relevant portions of the above-said full Bench passage
at the apropriate place. In addition to that, reliance also was placed on
certain portions in the pleadings (to which also we shall make reference at
B the appropriate place) to the effect that the FCI has not always accepted
the foodgrains procured under levy orders and there were occasions when
the FCI rejected certain stocks on the ground that they were not upto the
quality prescribed. This also, according to the learned Sr. Counsel negatives the contention of the learned Sr. Counsel for the appellants that the
entire transaction was single integrated process. The learned Sr. Counsel
C submitted that the Lucknow Bench of the Allahabad High Court was fully
justified in holding that the transactions are exigible to tax under the State
·Sales Tax Act and also in holding that the judgment of this Court in Chitter
Mal's case stands practically overruled.
D
We will first deal with this principal point as the other points depend
upon the answer to this principal point.
,E
F
We prefer to take up the decision in Chitter Mal's case for consideration. As pointed out already in Chitter Mal's case, the issue was whether
the supplies made to the Regional Food Controller under the U.P. Wheat
Procurement (Levy) Order, 1959 are sales within the meaning of 'sale'
under Section 2(h) of the U.P. Sales Tax Act and, if so, are the assessees
liable to pay sales tax on the price for wheat supplied to the Regional
Food Controller. We must at once, point out that the Food Corporation
of India was not a party in that case. The assessee in that case was a dealer
in foodgrains who supplied wheat to the Regional Food Controller, a
nominee of the U.P. Government for procuring wheat under the Levy
Order. The learned Judges, it is apparent from the judgment, were very
much influenced by the view expressed in New India Sugar Mills case
(supra) in arriving at a decision that those supplies were not sales and,
consequently, not exigible to tax. It is pertinent to point out that in the
G Chitter Mal's case itself, the learned Judges have noticed that certain
amount of volition was left between the parties. However, it was felt that
that volition was not sufficient to make the transaction contractual. While
referring to a full bench judgement of the Allahabad High Court in
Commissioner of Sales Tax v. Ram Bilas Ram Gopal, AIR (1970) AlH lahabad 518, this Court in Chitter Mal's case has observed in paras 8 and
•
9 as follows :
'\
"
F.C.I. v. STATE [VENKATASWAMI, J.]
37
"8. The High Court relied upon the following observations in Ram
Bilas Ram Gopal's case, 1969 All L.J. 424: AIR 1970 All 518 :
A
"Analysing Clause 3 of the Levy Order it is clear that a licensed B
dealer is obliged to sell to the State Government fifty per cent, of the
wheat held in stock by him at the commencement of the Order, and
thereafter fifty per cent, of the wheat daily procured or purchased
by him beginning with the date of commencement of the Order until
such time as the State Government otherwise directs. The price at
which the wheat is sold is the maximum price fixed in the Wheat C
(Uttar Pradesh) Price Control Order, 1959, as notified by the Government of India. Delivery of the wheat has to be given by the dealer to
the Regional Food Controller or a person authorised by him in that
behalf. The dealer has no option but to sell the specified percentage
of wheat to the State Government. The State Government has also D
no option but to purchase fifty per cent, of the wheat held in stock
by the dealer at the commencement of the Levy Order. As regards
the wheat procured or purchased daily by the dealer thereafter, it is
open to the State Government to say that from any particular date it
will not purchase any or all the specified percentage of wheat.
Therefore, as regards that wheat the Levy Order leaves it open to E
one of the parties, namely, the State Govermnent to decide when it
will stop purchasing wheat from the dealer. That in substance is
Clause 3 of the LeV)' Order and it embodies the total sum of
obligations imposed on the dealer and the State Government. All
other details of the transaction are left open to negotiation. It leaves p
it open to the parties to negotiate in respect of the time and mode
of payment of the price, the Time and mode of delivery of wheat,
and other conditions of the contract."
)
Clause 3 of the Order compels1 the licensed dealer to deliver
to the Controller or his authorised agent every day 50 per cent, of G
the wheat procured or purchased by him. There is no scope for
negotiations there. Assuming that the Controller may designate the
place of delivery and the place of payment of price at the controlled rate, and the licensed dealer acquiesces therein, or even when
in respect of those two matters there is some consensual arrangement, H
38
A
B
c
D
E
F
G
H
SUPREME COURT REPORTS
(1997] 1 S.C.R.
in our judgment, supply of wheat pursuant to Clause 3 of the Order
and acceptance thereof do not result in a contract of sale. The High
Court observed that :
" ....... whatever compulsive or coercive force is used to bring about
a transaction under Clause 3 of the Levy Order, it must be traced .
to legislation. It cannot be attributed to the State Government as
a party to the transaction. This, then, is clear. There is nothing in •
the Levy Order which can be accused of vitiating the free consent
of the parties as defined under Section 14 of the Indian Contract
Act, when entering into the contract of sale." .
But these observations assume a contract of sale which the
Order does not contemplate. If there be a contract, the restrictions
imposed by statute may not vitiate the consent. But the contract
cannot be assumed.
9. We may refer to certain decisions of this Court on which
reliance was placed at the Bar. In M/s. New India Sugar Mill's case,
[1963] Suppl. 2 SCR 459 : AIR (1963) SC 1207 under the Sugar
and Sugar Products Control Order, 1946, a scheme was devised
for equitable distribution of sugar. The consuming States intimated
to the Sugar Controller of India their requirements of sugar and
the factory owners sent statements of stocks of sugar held by them.
The Controller made allotments to various States and addressed
orders to the factory owners directing them to supply sugar to the
States in question in accordance with the despatch instructions
from the State Governments. Under the allotment orders, M/s.
New India Sugar Mills Ltd. in Bihar, despatched stocks of sugar
to the State of Madras. The State of Bihar treated the transaction
as a sale and levied tax thereon under the Bihar Sales Tax Act,
1947. The tax-payer contended that the supplies of sugar, pursuant
to the directions of the Controller, did not result in sales and that
no tax was exigible on such transactions. A majority of the Court
observed that despatches of sugar pursuant to the directions of the
Controller were not made in pursuance of any contract of sale.
There was no offer by the tax-payer to the State of Madras, and
no acceptance by the latter; the tax payer was under the Control
Order compelled to carry out the directions of the Controller and
.l...
F.C.I. v. STATE[VENKATASWAMI,J.)
39
)...
it had no volition in the matter. Intimation by the State of its A
requirements of _sugar to the Controller or communication of the
allotment order to the assessee did not amount to an offer. Nor
did the mere compliance with despatch instructions issued by the
Controller, which the assessee had not the option to refuse to
comply with, amount to acceptance of an offer or to making of an B
offer. A contract of sale of goods postulates a voluntary arrange-
...
ment regarding goods between the contracting parties. It was held
that in the case before the Court there was no such voluntary
l
arrangement."
'
The above judgment came up for consideration inter alia in Vishnu c
Agencies case. That decision was given by a bench of seven learned Judges.
The learned Judges in the first place did not approve the ratio laid down
in New India Sugar Mill's case and further did not approve the view taken
in the Chitter Mal's case disagreeing with the observations of Allahabad full
bench case. The learned Judges observed as follows :
D
r
"We would, however, like to clarify that though compulsory
acquisition of property would exclude the element of mutual as~ent
'
which is vital to a sale, the learned Judges were, with respect, not
right in holding in Chitter Mal that even if in respect of the place
of delivery and· the place of payment of price, there could be a E
consensual arrangement, the transaction will not amount to a sale
(p. 677) (SCC p.314). The true position in law is as stated above,
namely, that so long as mutual assent, express or implied is not
...
totally excluded the transaction will amount to a sale. The ultimate
decision in Chitter Mal can be justified only on the view that Clause F
3 of the Wheat Procurement Order envisages compulsory acquisition of wheat by the State Government frcm the licensed dealer.
Viewed from this angle, we cannot endorse the Court's criticism
of the Full Bench decision of Allahabad High Court in Commissioner, Sales Tax, U.P. v. Ram Bilas Ram Gopal which held while
G
construing Clause 3 that so long as there was freedom to bargain
,J...
in some areas the transaction could amount to a sale though
effected under compulsion of a statute. Looking at the scheme of
the U.P. Wheat Procurement Order, particularly Clause 3 thereof,
this Court in Chitter Mal seems to have concluded that the transaction was in truth and substance, in the nature of compulsory , H
.,
40
SUPREME COURT REPORTS
(1997) 1 S.C.R.
,....
'
A
acquisition. with no real freedom to bargain in any area, Shah, J.
expressed the Court's interpretation of Clause 3 in no uncertain
terms by saying that "it did not envisage any consensual arrangement".
B
We may also usefully extract a passage from the separate but concurring judgment of Beg C.J. as he then was. The same reads as follow :
"It is true that a considerable part of the field over which what
are called 'sales' take place under either regulatory orders or levy
orders passed or directions given under statutory provisions is
c
restricted and controlled by these orders and directions. If, what
is called a "sale" is, in substance, mere obedience to a specific
order, in which the so-called "price" is only a compensation for the
compulsory passing of property in goods to which an order relates,
at an amount fixed by the authority making the order, the individual
D
transaction may not be a "sale" although the compensation is
determined on some generally fixed principle and called "price".
This was for example, the position in New India Sugar Mills v.
Commissioner of Sales Tax, Bihar. That was a case of delivery
according to an order given by the Government which could
amount to a compulsory levy by an executive order although there
E
was no legislative '1evy order" involved in that case. On the other
hand, in Commissioner, Sales Tax, U.P. v. Ram Bilas Ram Gopal
the Order under consideration was actually called a levy order, but
the case was distinguishable from New India Sugar Mills v. Com-
:<-
missioner of Sales Tax, Bihar (supra) on facts. It was held in the
F
case of Ram Bilas (supra) that the core of what is required for a
"sale" was not destroyed by the so-called "levy" order which was
legislative. It is true that passages from the judgment of Pathak, J.
in the case Ram Bilas Ram Gopal-(supra) were cited and specifi-
· cally disapproved by a bench of this Court in Chitter Mal Narain
G
Das v. Commissioner of Sales Tax. But, perhaps the view of this
Court in Chitter Mal Narain Das (supra) goes too far in this
respect. It is not really the nomenclature of the order involved, but
A
the substance of the transaction under consideration which matters
in such cases.'
(
H
In Dewan's Breweries case (supra), the question for consideration was
/
>
F.C.I. v. STATE[VENKATASWAMI,J.]
41
whether the, supplies of Indian made foreign liquor by distilleries and' A
brewery company from its wholesale depots to permit holders on the
permit issued by the Excise and Taxation Officer are sales and liable to
sales tax under the Punjab General Sales Tax Act, 1948.