Bhagwati, J. -
(1.) This Reference raises a question of vires of Section 26(3) of the Bombay Sales Tax Act,1953. The section has been challenged as beyond the legislative competence of the State Legislature on the ground that it purports to tax a transaction which is not a sale, by treating it as a sale. In order to appreciate how the question arises, it is necessary to state briefly the facts giving rise to the Reference. The opponents were until 27th November 1956, a partnership firm, and the firm carried on business as a dealer in mill stores. The firm was registered as a dealer under the Act and held Registration Certificate No.10-C-198. Quarterly returns of turnover of its sales were filed by the firm from time to time as required by the Act and the Rules framed under the Act. on the death of one of the partners, the firm was dissolved on 27th November 1956, but the surviving partners continued to submit quarterly returns in the name of the firm until 31st March 1957, since certain goods indented by the firms before dissolution were received in March 1957 after dissolution. The goods of the firm which remained after paying off the debts and liabilities of the firm and taking accounts between the parties, were distributed in specie amongst the surviving partners and the representatives of the deceased partner and this fact was recorded in a Deed of Dissolution dated 27th July 1957. The Sales Tax Officer, Licence Circle, Ahmedabad, by an order dated 23rd April 1958, assessed the firm to sales tax for the period 1str April 1956 to 31st March 1957 and in such assessment included the goods of the firm valued at Rs.94,861/- which were distributed in specie amongst the partners on dissolution of the firm. This he did under Section 26(3) of the Act on the ground that the goods were allotted to the partners and were, therefore, liable to be taxed as if they were sold to the partners. Against the decision of the Sales Tax Officer, the firm preferred an appeal to the Assistant Collector of Sales Tax followed, but the appeal failed. A Revision Application to the Additional Collector of Sales Tax followed, but that was also rejected. the firm thereupon carried the matter in revision before the Tribunal. Two contentions were urged before the Tribunal in support of the Revision Application of which one turned on the interpretation of Section 26(3) and the other related to the vires of the Section. The Tribunal accepted the first contention and held that the allotment of the goods of the firm to the partners on dissolution was undoubtedly treated by the fiction of law created by the Section as a sale, but the fiction merely clothed the allotment with the characteristics of a sale simplicities and did not extend to make it a sale in the course of business. The Tribunal observed that only sales effected by a dealer in the course of business were liable to be included in the turnover of sales chargeable to tax and since the allotment of the goods of the firm amongst the partners though fictionally regarded as a sale was not a sale in the course of business, it was not includible in the turnover of sales and the machinery of assessment set out in Section 14 was, therefore, inapplicable to the assessment to tax on such allotment treated as a sale under Section 26(3). In this view of matter, the Tribunal did not think it necessary to consider the second contention which attacked the vires of Section 26(3). The Tribunal in the result allowed the Revision Application and set aside the assessment in so far as it assessed to tax the goods of the firm apportioned amongst the partners on dissolution. The State thereupon applied to the Tribunal for a reference under Section 34 and since questions of law admittedly arose out of its order, the Tribunal referred the following questions of law for the opinion of the Court: "1.Whether the goods allotted to any partner of a firm on the dissolution thereof are goods sold to such partner by the firm and can be included in the turnover of sales of the firm? 2. Whether the provisions of Section 14 of the Bombay Sales Tax Act 1953, are applicable to the assessment of the tax liable to be paid under Section 26 (3) of the Act?" It may be pointed out that though the State did in the first instance ask for a Reference of the first question, at the hearing of the Reference Applications the State did not press it and confined its application only to second question. The firm, however, insisted that the first question should also be referred since it arose out of the order of the Tribunal and the Tribunal accordingly referred both the questions to this Court.
(2.) We will first take up for consideration the second question which arose directly out of the contention which found favour with the Tribunal, for it can be disposed of in a few words. As a matter of fact Mr.K.H.Kaji, learned advocate appearing on behalf of the firm, found it difficult to sustain the order of the Tribunal on that ground and be fairly conceded that it was not possible to argue that the allotment of goods amongst the partners on the dissolution of a firm was under the fiction created by Section 26(3) a sale simpliciter and not a sale in the course of business and was, therefore, not liable to be included in the turnover of sales and the machinery of assessment set out in Section 14 was consequently not applicable to the assessment of tax on such allotment under Section 26(3). The argument was obviously unsustainable because it ignored the basic principle which requires that when a statute enacts that something shall be deemed to have been done which in fact and truth was not done, the Court is entitled and bound to ascertain for what purpose and between what persons the statutory fiction is to be resorted to and full effect must be given to the statutory fiction and it should be carried to its logical conclusion. Vide State of Bombay v. Pandurang, AIR 1953 SC 244. As observed by Lord Asquith of Bishopstone in East End Dwelling Co. Ltd v. Finsbury Borough Council, 1952 AC 109:
"If you are bidden to treat an imaginery state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it ... The statute says that you must imagine a certain state of affairs it does not say that having done so, you must cause or permit your imaginations to boggle when it comes to the inevitable corollaries of that state of affairs". The argument on which the Tribunal decided against the State seeks to do that which Lord Asquith of Bishopstone said that you should not do when a legal fiction is created. If section 26(3) creates a legal fiction requiring allotment of goods to a partner on dissolution of a firm to be treated as a sale to such partner for the purpose of taxation, full effect must be given that legal fiction and it must be carried to its logical conclusion and just as any actual sale effected by the firm would have been a sale in the course of business, so also the fictional sale must be regarded a sale must be regarded a sale in the course of business for the purpose of taxation. The distinction which the Tribunal made between a simpliciter and a sale in course of business was entirely unwarranted and in making such distinction the Tribunal failed to give full effect to the legal fiction created in Section 26(3). If Section 26(3) was a valid piece of legislation, it had clearly the effect of converting allotment of goods of the firm amongst the partners on dissolution into sale for all purpose of taxation and such allotment was liable to be included in the taxable turnover of the firm.
(3.) That takes us to the first question which was the question really debated before us. This question raised the point of vires of Section 26(3) in the following manner. The controversy between the parties was whether the goods allotted to a partner of a firm on dissolution could be said to be goods sold to such partner by the firm and were liable to be included in the turnover of sales of the form. The States insisted that such allotment constituted a sale of goods by the firm to the partner and were, therefore, includible in the turnover of sales of the firm and relied on Sec.26 (3) in support of this proposition. Now prima facie, having regard to Section 26 (3) it would appear that the question must be answered in favour of the State but, said Mr.K.H.Kaji, Section 26(3) was beyond the legislative competence of the State Legislature and was ultra vires and the State was, therefore, not entitled to rely on it for the purpose of upholding the validity of the assessment. He contended that the power of the Legislature to tax sales on goods was derived from Entry 54 in List II of the Seventh Schedule to the Constitution which at the time when Section 26(3) was enacted, was in the following terms, namely, "Taxes on the sale or purchase of goods other than newspapers" and the expression "sale of goods" in this Entry had the same meaning as sale of goods in the Indian Sale of Goods Act and the State Legislature was consequently not entitled to make any law levying tax on transactions which were not of the nature of sale of goods within the meaning of the Indian Sale of Goods Act. the argument was that the allotment of goods of the firm on dissolution amongst the partners was not a sale within the meaning of the Indian Sale of Goods Act and the State Legislature had, therefore, by enacting Section 26(3) purported to tax a transaction which was not a sale by fictionally treating it as a sale. This, contended Mr.K.H.Kaji, was not constitutionally permissible to the State Legislature and Section 26(3) was, therefore, ultra vires and could not be relied upon by the State for the purpose of taxing such allotment.;