# HINDUSTAN STEEL LTD v. STATE OF ORISSA August 4, l!J69

- **Citation:** [1970] 1 S.C.R. 753
- **Court:** Supreme Court of India
- **Decided:** 1970
- **Bench:** J. C. Shah, Acting C.J, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/hindustan-steel-ltd-v-state-of-orissa-august-4-l-j69-4690
- **Pages:** 9

## Headnote

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Orissa Sales Tax Act (Orissa 14 of 1947), ss. 2(c) and (g), 9 and
25(1) (a)-Per.aliy, when may be imposed-'Dea/er'-Supply of one's
building material to bJJilding contractor at agreed price-Sale price including storoge chargits-Transaction if constitutes sale under
the
ActWhether business in building material, can be inferred.
Between the y~ars 1954 and 1959 the appellant-company was erecting
its factory buildings ,.end other ancillary constructions through buildings
contractors. The appellant arranged for the manufacture of bricks and
sold those bricks to the building contractors for the purpose of the appellant's constructions.
The appellant also supplied for the same purpose
steel, cement and other materials which it procured and stored.
The
difference between the sale price and the appellant's cost price was a flat
percentage of the co.st price varying with the material. The ::ale price was
agreed to be adjusted against the dues under the contract between the
appe11ant and the building contractors. Treating the appellant as a dealer
in the building materials the sa]es· tax authorities under the Orissa Sales
Tax Act, 1947, directed the appellant to pay sales tax for ten quarters
ending with December 31, '!958, and a penalty, in addition to the tax, for
failure to register itself as a dealer. The Tribunal agreed on the liability
to pay tax, reduced the penalty, and the High
Court, on reference,
confirmed the Tribunal's order.
In appeal to this Court on the questions : (1) Whether the appellant
sold building materials to the building contractors; (2) Whether the imposition of penalty for failure to register as a 'dealelr' was justified; and
(3) Whether the appellant was a 'dealer' in respect of the building material supplied by it,
HELD : ( 1) The supply of building material belonging to the appellant for an ajll'ee,d, price constituted a 'sale' as defined in s. 2(g) of the
Act as the definition. stood at the relevant time. [756 EJ
(2) Under ss. 9(1) and 25(1)(al of the Act a penalty may be imposed for failure to register as a dealer.
But the discretion to impose a
penalty must be exercised judicially.
A penalty will ordinarily be imposed in cases where the party acts de1iberately in defiance of law. or is
guilty of contumacious or dishonest conduct, or· acts in conscious disregard of its obligation; but not, in cases where there is a technical 01
venial breach of the i:tovisions of the Act or where the breach flows from
a bona fide belief tbt! the offender is not liable to act in the manner pres·
cribed by the otaQJte. (756 E-H]
In the present case, those in charge of the affairs of the appellant, in
failing to register it as a dealer, acted in the honest and genuine belief that
the company was not a dealet; and therefore, assuming the appellant to be
a 'dealer' no case for imposing penalty was made out. [757 A]
(3) Undel: the terms of the tender submitted by the building contractors and the schedule annexed thereto, the appellant was to charge
754
S~PREME COURT REPORTS
[1970] l SC.R.
certain rates for the materials supplied by it. ·rhc excess pcrcenta~c over
the specific:J rate in the c:1sc of building materials other th;1n hricks was
agreed to be paid by the c-.Jn!ractdrs ac; stor.1g.c chargc.'i. "Ibcrc was nothing
to show th.-it the cxczss price charged by 1he appellant to it.; con1ractors
for bricks v.·as also for storage charges.
But nci~h:!r the Trihun:il 11or thl.!
High Court haJ referred to this aspect of the sale price nan1cly v.hl!ther
the excess price v.·as for storage or for profit v.·ith respect to an~· of th.=
building materials.
Therefore, merely because the price charg~d to the
contractors cxc!cded
t~! price paid by the appellant for procuring the
building materials it cannot be inferred that the tnotive of t/i(! uppcl/ant
was to carry on business in building nJaterials for profir. (761 B-El
CIVIL APPELLATE Jt;RJSDICTJOI': Civil Appeals Nos. 883 to
892 of 1966.
A
u
Appeals by special leave from th

## Text

•
A
HINDUSTAN STEEL LTD.
v.
STATE OF ORISSA
August 4, l!J69
753
B
[J. C. SHAH, ACTING C.J., V. RAMASWAMI AND A. N. GROVER, JJ.J
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Orissa Sales Tax Act (Orissa 14 of 1947), ss. 2(c) and (g), 9 and
25(1) (a)-Per.aliy, when may be imposed-'Dea/er'-Supply of one's
building material to bJJilding contractor at agreed price-Sale price including storoge chargits-Transaction if constitutes sale under
the
ActWhether business in building material, can be inferred.
Between the y~ars 1954 and 1959 the appellant-company was erecting
its factory buildings ,.end other ancillary constructions through buildings
contractors. The appellant arranged for the manufacture of bricks and
sold those bricks to the building contractors for the purpose of the appellant's constructions.
The appellant also supplied for the same purpose
steel, cement and other materials which it procured and stored.
The
difference between the sale price and the appellant's cost price was a flat
percentage of the co.st price varying with the material. The ::ale price was
agreed to be adjusted against the dues under the contract between the
appe11ant and the building contractors. Treating the appellant as a dealer
in the building materials the sa]es· tax authorities under the Orissa Sales
Tax Act, 1947, directed the appellant to pay sales tax for ten quarters
ending with December 31, '!958, and a penalty, in addition to the tax, for
failure to register itself as a dealer. The Tribunal agreed on the liability
to pay tax, reduced the penalty, and the High
Court, on reference,
confirmed the Tribunal's order.
In appeal to this Court on the questions : (1) Whether the appellant
sold building materials to the building contractors; (2) Whether the imposition of penalty for failure to register as a 'dealelr' was justified; and
(3) Whether the appellant was a 'dealer' in respect of the building material supplied by it,
HELD : ( 1) The supply of building material belonging to the appellant for an ajll'ee,d, price constituted a 'sale' as defined in s. 2(g) of the
Act as the definition. stood at the relevant time. [756 EJ
(2) Under ss. 9(1) and 25(1)(al of the Act a penalty may be imposed for failure to register as a dealer.
But the discretion to impose a
penalty must be exercised judicially.
A penalty will ordinarily be imposed in cases where the party acts de1iberately in defiance of law. or is
guilty of contumacious or dishonest conduct, or· acts in conscious disregard of its obligation; but not, in cases where there is a technical 01
venial breach of the i:tovisions of the Act or where the breach flows from
a bona fide belief tbt! the offender is not liable to act in the manner pres·
cribed by the otaQJte. (756 E-H]
In the present case, those in charge of the affairs of the appellant, in
failing to register it as a dealer, acted in the honest and genuine belief that
the company was not a dealet; and therefore, assuming the appellant to be
a 'dealer' no case for imposing penalty was made out. [757 A]
(3) Undel: the terms of the tender submitted by the building contractors and the schedule annexed thereto, the appellant was to charge
754
S~PREME COURT REPORTS
[1970] l SC.R.
certain rates for the materials supplied by it. ·rhc excess pcrcenta~c over
the specific:J rate in the c:1sc of building materials other th;1n hricks was
agreed to be paid by the c-.Jn!ractdrs ac; stor.1g.c chargc.'i. "Ibcrc was nothing
to show th.-it the cxczss price charged by 1he appellant to it.; con1ractors
for bricks v.·as also for storage charges.
But nci~h:!r the Trihun:il 11or thl.!
High Court haJ referred to this aspect of the sale price nan1cly v.hl!ther
the excess price v.·as for storage or for profit v.·ith respect to an~· of th.=
building materials.
Therefore, merely because the price charg~d to the
contractors cxc!cded
t~! price paid by the appellant for procuring the
building materials it cannot be inferred that the tnotive of t/i(! uppcl/ant
was to carry on business in building nJaterials for profir. (761 B-El
CIVIL APPELLATE Jt;RJSDICTJOI': Civil Appeals Nos. 883 to
892 of 1966.
A
u
Appeals by special leave from the judgment and order dated
C
December 3. 1964 of the Orissa High Coun in Special Jurisdiction
Case~ Nos. 44 and 53 of 1963.
C. K. Daphtary and D. N. M11kherjee, .for the appellant (ln all
the appeals).
D. Narsaraj11 and R. N. Sachthey, for the rcspondqnt (in all
the appeals).
The Judgment of the Court was delivered ty
Shah, Ag. C.J.
M/s Hindustan Steel Ltd., a Company incorporated under the Indian Companies Act, 1913 is a Government
of India undertaking in the public sector.
The Company
is
registered as a dealer under the Orissa Sales Tax Act 14 of 194 7,
from the last quarter ending March 1959.
Between 1954 and 1959 Company
was
erecting
factory
buildings for the steel plant. residential buildings for its employees
and ancillary works such as roads, water supply, drainage. Some
constructions were done departmentally and the
rest through
contractors.
The Company supplied to the contractors for use i.n
construction, bricks, coal, cement, steel etc. for consideration and
adjusted the value of the goods supplied at the rates specified in
the tender.
In proceedings for assessment of tax under the Orissa Sales
Tax Act, 1947, the Sales Tax Officer held that the Company was
a dealer in building material, and had sold the material to contractors and was on that account liable to pay tax at the appro.
priate rates under the Orissa Sales Tax Act. The Sales Tax
Officer directed the Company to pay tax due for ten
quarters
ending December 31, 1958 and penalty in addition to the tax for
failure to register itself as a dealer.
The
Appellate
Assistant
Commissioner confinncd the order of the Sales Tax Officer.
In
second appeal the Tribunal agreed with the tax authorities and
held that the Company was Jiai.ile to pay tax on its turnover from
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HINDUSTAN STEEL V. ORISSA (Shah, Ag. C.J.)
755
A
bricks, cement and steel supplied to the contractors. The Tribunal however substantially reduced the penalty imposed upon the
Company.
At the instance of the Company the Tribunal referred six
questions to the High Court of Orissa under s. 24 ( 1) of the
B
Orissa Sales Tax Act, 194 7.
The questions were :
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"A. Whether in the facts and circumstances of the
case Messrs. Hindustan Steel Ltd. can be held
to be a 'dealer' within the meaning of s. 2 ( c)
of the 'Orissa Sales Tax Act ?
B. Whether the sale of materials by the Company
to different contractors w.orking for the
company for which sales tax is sought to be assessed
amounts to 'sale' within the meaning of s. 2 ( g)
of the Act?
C. Whether the accrual of some profit in the absence
of any motive to make such profit can make the
assessee a 'dealer' under the Act and whether
in the circumstances of the case, the Tribunal
was justified in coming to a finding that there
was profit making motive on the part of the
Company?
D. Whether in view of the definition contained in
s. 2, cl. (h) as it stood prior to the amendment
of the provision by Act 18 of 1959, the supplies
of materials can be treated as 'sale price' in the
hands of the assessee ?
E. Whether in the facts and circumstances of the
case, the amount received by the assessee in
respect of tender forms can be said to be 'sale
price'?
F. Whether the Tribunal is right in holc!ing that
penalties under s. 12 ( 5) of the Act had been
rightly levied and whether in view of the serious
dispute of liability it cannot be said that there
was sufficient cause for not applying for registration ?u
The. High Court answered the questions A, B, C, D and F in the
affirmative and questi!)n E in the negative.
Jn these appeals filed with special leave substantiaily three
matters fall to be determined;
1. Whether the Company sold ,building material to
the contractors during the quarters in questiop ?
756
SUPREME COURT REPORTS
[ 1970] I S.C.R.
2. Whether the Company was a dealer in respect of
building material within the meaning of the Orissa
Sales Tax Act ?
'3. Whether imposition of penalties for
failure
to
register as a dea1er was justified ?
Sofotion of the first and third matters does
not present much
difficulty.
At the relevant time 'sale' was defined by s. 2(g) of
the Orissa Sales Tax Act as follows :-
·
" 'Sale' means, with all its grammatical variations
and cognate expressions, any transfer of property
in
goods for ca>h or deferred payment or other valuable
consideration, including a transfer of property in goods
involved in the execution of contract, but does not include a mortgage hypothecation charge or pledge :
"
The Company supplied building material to the contractors
at agreed rates.
There was concurrence of the four
elements
which constitute a salc---(1) the parties were competent to
contract; (2) they had mutually assented :o the terms of contract: (3)
absolute property in building materials was agreed to be transforrd
to the contractors; and ( 4) price was agreed
to be
adjusted
against the dues under the contract.
No serious argument was
advanced before us that the supply of building material belonging
to the Company for an agreed price did not con>titute a sale.
Under the Act penalty may be imposed for failure to register
as a dealer : s. 9 (I) read with s. 25 (I) (a) of the Act.
But the
liability to pay penalty docs not arise merely
upon proof of
default in registering as a dealer.
An order imposing penalty for
failure to carry out a statutory obli~ation is the result of a quasicriminal proceeding, and penalty will not ordinarily be imposed
unless the party obliged either acted deliberately in defiancr of
law or was guilty of conduct contumacious or dishonest, or acted
in conscious disregard of its obligation.
Penalty will not also be
imposed merely because it is lawful to do so.
Whether penalty
should be imposed for failure to perform a statutory obligation
is a matter of discretion of the authority to be exercised judicially
and on a consideration of all the relevant circumstances.
Even
if a minimum penalty is prescribed, the authority competent
to
impose the ocnalty will be justified in refusin<? to impose penalty.
when there is a technical or venial breach of the provisions of the
Act or where the breach Hows from a bona fide belief that the
ofhnder is not liable to act in the manner prescribed by the
statute.
Those in charge of the affairs of the Company in failinμ
to register the Company as a dealer acted in
the honest and
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HINDUSTAN STEEL V. ORISSA (Shah, Ag. C.J.)
7 57
genuine belief that the Company was not a dealer.
Granting that
they erred, no case for imposing penalty was made out.
Liability to pay sales tax is imposed by s. 4 of the Act.
Every dealer whose gross annual turn over exceeds Rs. 10,000/-
is liable to pay tax during the ten quarters in. questiC'n. . The
expression "dealer" was defined at the relevant ttme as meamng :
" 'Dealer' means any person who executes any contract or carries on the business of selling or supplying
goods in Orissa whether for commission, remuneration
or otherwise and includes any firm or Hindu Joint family,
and any society, club or association which sells or supplies goods to its members.
Explanation
"
A person to be a dealer within the meaning of the Act must
carry on the business of selling or supplying goods in Orissa. The
expression "busii:iess" is not defined in the Act.
But as observed
by this Court in State of Andhra Pradesh v. Abdul Bakhi and
Bros.(')
"The. expression 'business' though extensively used
is a word o.f indefinite import, in taxing statutes it is
used in the sense of an occupation, or profession which.
occupies the time, attention and labour of a person, nor-
. mally with !he object of making profit.
To regard an
activity as business there must be a course of dealings,
either actual!'y continued or contemplated to be continued with a profit motive, and not for
sport or
pleasure."
The sales tax authorities and the Tribunal have held that the
Company was carrying on business of selling or supplying materials to the contractors and with that view the High Court agreed.
The Company purchased bricks manufactured by its own contractors and sold the bricks to the building contractors at a flat
30% premium over the purchase price in the case of "second
class bricks" and 25 % premium in the case
of "First
class
bricks".
Steel, cement and other materials. were initially supplied at 3t% premium over the purchase price paid by the Company. It was contended on behalf of the Company that merely
because the price charged to the contractors exceeded the price
paid by the Company for acquiring the materials, motive of the
Company to carry on business in building materials for profit,
cannot be inferred.
The Company, it is true, maintained no
separate accounts relating to the expenditure incurred by it for
(I) [1964] 7S.C.R. 664.
758
SUPREME COURT REPORTS
[ 19i0] l S.C.R.
overhead and other charges in respect of those materials. Before
A
the sales-tax authorities counsel for the Company also conceded
that the Company had not maintained separate accounts
from
which it could be proved that the transactions of supply of bricks,
cement, steel and other commodities resulted in no profit.
The
High Court observed :
"It is the Stores Department of the company as a
whole which deals with the purthasc, storage and sale of
all the goods required both for acquisition and issue of
materials to be used for the construction and operation
work of the Company. . ....... the Company had to
construct not only the buildings but also roads, railways, etc., acquire
machinery
and
perform
other
multifarious activities connected with the establishment
of steel plants and construction of the township. There
;s nothing in the statement to show that the Company
had al any time even contemplated the allocation of the
total expenditure incurrecl for the maintenance of
its
Stores Department between the expenditure incurred in
respect of the goods namely bricks. cement, steel etc.
and other goods.
If such allocation was
not
even
contemplated. it will be unreasonable to say that when
these ~oods were sold to the building contractors al
the prices mentioned above. the intention of the Company was merely to utilise the difference in price
to
meet the overhead charges in respect of these articles
and that there was no profit making motive."
Jt is unfortunate that in submitting the statement of case the
Tribunal stated no facts at all. and merely submitted the question which was submitt~d by the Company
and
the
question
which. in the view of the Tribunal. arose out of the order. Even
in the order deciding the appeal, the facts found on which the
conclmion, was based were not clearly set out.
The Tribunal
obsen·ed that though the primary object of the Company was to •
establi<h a steel plant, the Memorandum authorised the Company to carry on "any trade or business" that it thought would
be conducive to its interest.
Observed the Tribunal :
"Judged in this light one cannot find anything wrong
if in the initial stages when construction works were
going on. the Company thought it prudent that instead
of keeping its employees idle and bearing the coot of
maintenance without any return. utilised them in some
subsidiary business which would promote the
interest
of the Company and bring some return.
With that end
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HINDUSTAN STEEL V. ORISSA (Shah, Ag. C.J.)
759•
in view the company could as well have brought contractors to manufacture bricks in its lands, purchased the
same from them, purchased cement, coal and other
materials from dealers, opened a stores department and
kept those materials so procured in its stores and thereafter effected sales of the materials to outsiders including its contractors.
The Company knew
thai for
speedy constroction of its buildings and factory the contractors would .require these materials and so the Company would not Jose if it entered into such business.
Rather that business would be in the interest of the
Company.
If the Company had no idea to enter into
any business, there was no reason why it should have
brought contractors to manufacture bricks, purchased .
the entire stock from them, stocked the same and thereafter selrthe same to its building contractors."
But in so observing a very important piece of evidence appears to·
have been ignored by the Tribunal.
Annexed to the form of the,
tender submitted by the contractors there are certain "general
rules and directions for the guidance of contractors." Paragraph8 stated :
"The memorandum of work tendered for, and the
schedule of materials to be supplied by the H. S. Ltd.
and their issue rates, shall be filled in and completed in
the office of the Divisional
Officer before the tender
form is issued. If a form is issued to an intending
tenderer without having been so filled in as completed
he shall reque;t the office to have this done before he
completes and delivers his tender."
Then follow the conditions of contract of which condition No. 1 Cl'
is material; it states---
•
"If the specification or estimates of the work provides for the Use of any special description of materials
to be supplied from the Engineer-in-Charge's store, or
if it is required that the contractor .shall use certain
stores to be provided by the Engineer-in-Charge (such·
materials or stores, and the prices to be charged therefor as hereinafter mentioned being so far a> practicable
for the convenience of the contractor, but not so as in
any way to control the meaning or effect of this contract
specified in
the
schedule or memorandum hereto
annexed), the contractor shall be supplied with such
materials and stores as required from time to time to be·
used by him for the purpose of the contract only, and
the value of the full quantity of materials and stores so·
760
SUPREME COURT REPORTS
(1970] I S.C.R.
supplied at the rates specified in the said schedule or
memorandum may be set off or deducted from any sums
then due, or thereafter to become due to the contractor
under the contract, or otherwise or against or from the
security deposit.
All materials supplied to
the
contractor shall remain the absolute property of the Company, and shall not on any account be removed
from
the site of the work. and shall at all times be open to
inspection by the Engineer-in-Chuge.
Any such materials unused and in perfectly good condition at the time
of the completion or determination of the contract shall
be returned to the Enginecr-in-Charge's store, if by a
notice in writing under his hand he shall
so
require;
"
Attached to the tender form is the schedule which recites :
"Recovery of rates of materials to be supplied by
H.S.L .. for the work of:
A
B
c
(I) Construction of hrick masonry car.100~nd ""all
D
around plant area.
Northern section Length
2.4. miles.
<2) Construction of brick masonry compound wall
around nlant area.
Southern
section
Length
2.30 miles.
(3) Construction of brick masonrv compound wall
around plant area.
Marshalling yard section
Length 4.15 miles."
it is followed by a table which sets out the Serial No. of the
articles to be supplied. description of materials unit.
rate
and
E
place of delivery.
F
It is clear from the terms of the tender and the schedule annexed thereto that the Company was to charge certain rates for the
materials to be supplied by it.
One of the contracts which has
been pro:luced before this Court states under the head "Rate" :
R,. 5.94...:...310(.
storag~ charges
against
"cement
in
bags,"
Rs. 800.00-'-3!'/;, storage charges against "structural steel
and
G
M.S. rods ... and "Rs. 41.25 for 1000 bricks" against "ficst class
bricks".
:\nparently 3!o/r over the specified rate was agreed to
be paid by the contractors as storage charges in respect .of cement
and structural steel and M. S. rods.
No specific percentage was
set out in respect of the bricks and an inclusive price was made
chargeable.
H
Relying upon the terms of the schedule. counsel for the Company contends that the contractors and the Company expressly
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HJNDUS'J;'AN STEEL v. ORISSA (Shah, Ag. C./.)
761
agreed that 3!91> over the agreed price of the goods was chargeable
as storage charges. · It is common ground that the rate mentioned
against cement and structural steel is the price at which the goods
were purchased by the Company. If the Company was charging
a fixed percentage on the price paid by it for procuring such
goods for storage and other incidental charges, it would be difficult to resist. the conclusion that the Company was not carrying
on the business ol. selling cement and structural steel. There is of
course no statement in the schedule that the price charged by the
Company in excess of the price paid by the Compapy to its
c.ontracrors for bricks was in resp.ect of storage charges.
But neither the Tribunal nor the High Court has referred to
this important piece of evidence and we are unable to decide
these appeals unless we have an additional statement of facts in
the light of the relevant evidence as to whether the excess charged
over and above the price which the Company paid for procuring
cement and steel (expressly called storage charge) and bricks was
intcnded~o be profit. If the Company agreed to charge a fixed percentage above the cost price, for storage, insurance and rental
charges, it may be reasonably inferred that the Company did not
carry on bu.siness of supplying materials as a part of business
activity with a view to making profit.
The Tribunal's statement of case is bald and in recording its
findings the Tribunal has ignored a very important piece of evidenc.e.
To enable us to answer the questions referred, it is. necessary that the Tribunal should be called upon to submit a supplementary statement of the case on the questions whether the Company charged any profit apart from
the storage
charges for
supplying cement and structural steel, and whether the difference
between the price charged to the contractors and the price paid
by the Company to its suppliers for bricks was riot in respect of
storage and other incidental charges.
The Tribunal to submit
the supplementary statement of case to this Court. within three
months from the date on which the papers reach the Tribunal.
V.P.S.
Directions given.