RETIREMENT OF MR. JUSTICE G. KUMARA PILLAI

In the retirement of Mr. Justice Kumara Pillai, the judiciary of Kerala loses one of its distinguished and most popular Judges. Endowed with deep legal learning and high judicial qualities, he was discharging his duties conscientiously with independence and considerable credit unswayed by personalities and unaffected by public opinion. His judgment of men and matters was sound and shrewd. His talents and erudition are borne out by his numerous judgments on all branches of law without distinction. As a Judge he marked himself with independent and clear thinking and clarity of vision. His incisiveness of intellect helped him to grasp easily and quickly, any complicated case whether civil, criminal, or revenue. He was a fine gentleman in every sense of the term. He possessed in abundant measure affable and amiable manners, and a lovable nature. Always cheerful and serene he was by nature simple and sociable. In his personal manners he was most unassuming and he endeared himself to everyone with wdiom he came into contact by his dignity, nobility of bearing and lively conversation. He was zealous to maintain the dignity of the Bar and to promote its interests. His services, as Chairman of the Income-tax Appellate Tribunal, Member of Agricultural Income-tax Appellate Tribunal, Chairman of Parlia­mentary Election Tribunal and as Commission of Enquiry on many occasions, have been valuable and laudable to the appreciation of all. He carries with him the ..esteem, affection, respect and unstinted appreciation of the Bar and the public. We wish him all happiness, health and prosperity.

The Voice of the People is the Voice of God

Vox populi est vox Dei

M.S. Kurien, B.A., B.L., Advocate, Ernakulam

Kerala is focusing world attention today. And Judases have not been wanting even in the mass struggle for deliverance & liberation that is now going on against the Communist regime in Kerala. Even as the Iscoarriat, Pandits there are who ask: what is the meaning of this waste of energy? Like those who lamented and deplored the precious ointment is poured on the head of Christ, these few people tell us that all agitations against a lawfully elected ministry are mere creations of unhealthy conventions and undemocratic traditions. The people after the general election have become fundus officio, they seem to think. They are blissfully ignorant of the Tibetan tragedies. That the people . at last get a right to rebel and revolt, they ignore. How was the Magna Carta obtained? What was the history of Charles land James II? Are we not happy over the results of those agitations?

Every problem has a solution. The mere fact that a ministry has come into power democratically legally or constitutionally does not mean that it can run amok and continue autocratically and despotically murdering and butchering, shooting and firing. If the salt loses its taste, what is there left to give taste to it? There is no more to be done with it, hut throw it out of doors for men to tread it under foot.

Sovereignty always resides in the people, the people politically organized. The people of Kerala are now so organized in determinate form for the exercise of that sovereignty. All non-communist parties and an overwhelming majority of the people of Kerala have in clear terms declared from the housetops that they will no more put up with a Communist Government. The innocent blood of the victims of the Communist carnage in Ankamally, Pullu Vila, Vettu Kadu and Cheria Thurai is crying to heaven for vengeance. And so when the Totalitarian and their hirelings lisp and whisper about democracy and the constitution, everybody knows that it is a case of the Satan anathematizing sin, quoting the Gospel.

The ministry and the legislature, whether good, bad or indifferent, timid or bold, tragic or comic are only the servants and agents of the people. They, and not the ministers and legislators, are the masters and principals, “Believe me, no slave can be greater than his own master, no apostle greater than he by whom he was sent”. The people are always and everywhere primary and prior. A legis­lature is only secondary and incidental.

In addition to all these general principles universally applicable, ours is a centripetal Constitution, elastic and strong at the center, where a rotten limb has to be cut off and cast away at once. Under Articles 164 and 174, when the non-communist parties joined together in view of the common danger, the State Governor himself ought to have dismissed and dissolved the Communist ministry. It is a Government of the party by the party for the party that is in vogue to-day in Kerala. It is nothing but a Rule of the Rifle. All lovers of civil liberties and all who want to avoid concentration camps and liquidation, all that befell Hungary and Tibet, now appeal to the President of India to declare an emergency and assume to himself all powers conferred under Article 356 of the Constitution.

USUFRUCTUARY MORTGAGE IN MALABAR--WHETHER KANOM

By M. Velayudhan Nair, Advocate, Alathur

In two recent cases, Emunni Panikkar v. Krishna Panikkar (1958 Kerala Law Journal 805=1958 Kerala Law Times 756) and Janardhanan v. Kuppandi and another (1959 Kerala Law Journal 119 F.B.=1959 Kerala Law Times 118 F.B.) the Kerala High Court has taken the view that an usufructuary (possessory) mortgage is Kanom within the meaning of the Malabar Tenancy Act.

Section 3(14) of the Malabar Tenancy Act defines Kanom as follows:-

“Kanom means the transfer for consideration in money or in kind or in both by a landlord of an interest in specific immovable property to another [called Kanomdar] for the latter’s enjoyment, the incidents of which include

(a) Right in the transferee to hold the said property liable for the consideration paid by him or due to him which consideration is called ‘Kanartham’,

(b) The liability of the transferor to pay to the transferee interest on the Kanartham, and

(c) The payment of ‘Michavaram’ by the transferee”.

The suits in both the cases decided by the Kerala High Court were for redemption of usufructuary (possessory) mortgages. The mortgage in the first case Emunni Panikkar v. Krishna Panikkar was for a term of six years and under the provisions of the document, the mortgagee was to pay himself the interest on the mortgage debt and also pay the Government revenue from the income of the property and pay the balance of 106 paras of paddy as annual purappad to the mortgagor. The document contained also a provision for sale of the property for realization of the mortgage amount. His Lordship Mr.Justice Varadaraja Iyengar refers to the omission by the Amending Act 33 of 1951 of clauses 4 and 5 (relating to the Kanomdar’s right to enjoy the property for a period of 12 years and the liability to pay a renewal fee to the jenmi at the end of the period) from the definition of Kanom in the original Act 14 of 1930 and proceeding on the assumption that the mortgage in suit satisfies the definition of Kanom in Section 3(14) of the Amended Act, arrives at the conclusion that the transaction in the case amounts to a Kanom and the suit must therefore be stayed under Act I of 1957.

Clauses 4 and 5 to Section 3(14) which followed the present clauses (a), (b) and (c) and which were omitted by the Amending Act 1 of 1951 ran as follows: -

(4) The right of the transferee to enjoy the said property for twelve years or any ether period, and

(5) The liability of the transferee to pay a renewal fee to the transferor, if the transferee is permitted to enjoy the said property for a further period after the termination of the original period”.

Mr. Justice Varadaraja Iyengar seems to have assumed that as the definition of Kanom has been amended by Act 33 of 1951 by omitting clauses 4 and 5, leaving surviving only the three incidents mentioned in clauses (a),(b) and (c), a usufructuary mortgage would fall within the definition of Kanom in the Amended Act. This is evident from the Learned Judge’s observation in the Judgment that “it is not denied on respondent-plaintiff’s side that the definition in S. 3(14) is satisfied in this case”. 

The suit for redemption in the case before the Full Bench Janardhanan v. Kuppandi and another was decreed by the Munsif’s Court. In appeal the Subordinate Judge found that the Karipanayam sought to be redeemed was in substance only a renewal of a prior Kanon of the year 1906 and he held that the mortgage document Ex. B.1) represents Kanom demise and the suit was consequently dismissed. In Second Appeal, the learned Judges of the Pull Bench (Koshi, C.J., M.S. Menon and Varadaraja Ayyangar, JJ.) agreed with the conclusion reached by the Subordinate Judge that the mortgage document Ex. B.l represents Kanom demise and confirmed the decree and judgment of the lower appellate Court. The mortgage document in this Full Bench case was styled as a ‘Karipanayam’ & there was provision in the deed to pay purappad to the mortgagor at the rate of 110 paras of paddy a year by the mortgagee. The learned Judges seem to think that the mortgage document in that case (Ex. B.l) spells Kanom, but they do not indicate the reasons that induced them to take that view, notwithstanding that the words ‘Kanomdar’ and ‘Kanartham’ were not used in the document.

With great respect to the learned Judges, I submit, the view taken by them that an usufructuary mortgage will fall within the definition of Kanom in Section 3(14) of the Malabar Tenancy Act does not seem to be correct.

I respectfully submit that the omission of clauses 4 and 5 from the definition of Kanom in the original Act 14 of 1930 by the Amending Act of 1951 cannot have the effect of making this strange metamorphosis in the status of an usufructuary mortgage who was put in possession of the mortgaged properties only with the intention of securing the payment of money borrowed from him. It is difficult to see how the deleting of these two clauses from the definition, of Kanom in the original Act would have the effect of enlarging the rights of an usufructuary mortgagee & assimilating his status to that of a Kanom bar entitled to fixity of tenure and other benefits under the Tenancy Act-rights which he (the mortgagee) did not bargain for and which were totally absent from the minds of the parties at the time the mortgage transaction was entered into. The two decisions under notice have created a very anomalous situation-viz., there is no scope for an usufructuary (possessory) mortgage to operate as such in Malabar and other areas to which the Malabar Tenancy Act is applicable. All usufructuary mortgages hitherto executed and that may in future be executed will be treated as Kanom demises. This is the logical effect of the view expressed by the learned Judges in the two decided cases.

It is not suggested that because clauses 4 and 5 (relating to the 12 years period and to the liability to pay renewal fee, have been omitted from the definition of Kanom by the Amending Act, Kanom loses its essential character as a tenure in land and becomes an usufructuary mortgage. Notwithstanding the omission of these two clauses from the definition of Kanom by the Amending Act, Kanom retains its essential characteristics nad incidents, excepting the liability for the Kanarito pay renewal fee at the end of the 12 years period. A Kanom bar is entitled to fixity of tenure as provided in Section 21: he is not liable to be evicted before the expiry of the 12 years period and he is not liable to be evicted excepting at intervals of 12 years. Paradoxical as it may seem, although clause 4 relating to the 12 years period is taken away from the definition of Kanom by the Amending Act, the Kanomdar’s right to enjoy the property for a period of 12 years as an incident of the tenure has not been abrogated by the statute. That incident subsists. This is evident from the fact that the landlord’s right to evict for own cultivation, for construction of buildings, for residential purposes or for the extension of a temple, mosque or church as provided in clauses 4, 5 and 6 of Section 25 of the Amended Act can be exercised only after the expiry of the period of the Kanom, and also from the last proviso to Section 25 which was introduced by the Amending Act 33 of 1951. The said proviso reads as follows:-

“Provided also that no suit for eviction on one ground specified in clause 4 or clause 5 shall be instituted, except,

(a) In cases where the period of the lease has expired before the commencement of the, Malabar Tenancy (Amendment) Act 1951, within one year from the date of such commencement and in every twelfth year thereafter,

(b) In other cases within one year from the expiry of the period of the lease and in every twelfth year thereafter.”

As Mr. Justice Varadaraja Iyengar rightly observes in the decision in Emunni Panikkar v. Krishna Panikkar, no particular period need now be fixed in a Kanom demise, for no Kanom tenant can be evicted excepting at intervals of twelve years. As the Kanomdar’s right to enjoy the property for a period of 12 years and his non-liability for eviction excepting at intervals of 12 years are recognized and specifically provided for in S. 25 of the Act, clause 4 relating to the 12 years period in S.3(14) was probably considered otiose and this probably is the reason for deleting it from the definition of Kanom by the Amending Act.

Renewal and renewal fee were abolished by the Amending Act of 1951 and consistently with the repeal of the provisions contained in Act 14 of 1930 relating to renewal and renewal fee, clause 5 relating to renewal fee was deleted from the definition of Kanom by the Amending Act. It would have been absurd to retain that clause in the Act after the repeal of the provisions regarding renewal and renewal fee contained in the original Act. The abolition of renewal fee relieves the Kanomdar from a liability which the Legislature thought was unreasonable and oppressive. Its only effect is that from the date of the Amended Act, the Kanomdar has not to pay renewal fee, and non-payment of renewal fee will not avail as a ground for eviction. In other words, it only enlarges the right of the Kanomdar by enabling him to continue in possession even after the expiry of the term without paying renewal fee. It is difficult to see how, in the circumstances, the omission of clause 5 from the definition of Kanom would enlarge the rights of an usufructuary mortgagee and elevate him to the position of a Kanomdar.

If, on account of the omission of clauses 4 and 5 from the definition of Kanom by the Amending Act, Kanom does not become an usufructuary mortgage and notwithstanding the omission of those two clauses from the definition, Kanom retains its essential characteristics and incidents, excepting the liability for the Kanomdar to pay renewal fee the omission of which, as I have pointed out, only enlarges the rights of the Kanomdar, it is difficult to see how the terms and incidents of an usufructuary (possessory) mortgage governed by the Transfer of Property Act would satisfy the definition of Kanom in Section 3(14) of the Malabar Tenancy Act.

Usufructuary mortgage is defined in the Transfer of Property Act in these words:-

“Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee and authorize, him to retain such possession until payment of the mortgage money and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest or in payment of the mortgage money or partly in lieu of interest or partly in payment of the mortgage money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee”. (Section 58 (d).

The Transfer of Property Act specifies three classes of usufructuary mortgages, first, where, the rents and profits may be appropriated in lieu of interest; second, where they may be appropriated in lieu of principal; third, where they may be appropriated in lieu of principal and interest; the right to retain possession until the debt is paid being of the essence of an usufructuary mortgage as defined in the Act.

“An usufructuary mortgage,” remarks Dr. Rash Behari Ghose in his Tagore Law Lectures, “is a very common form of security in this country.” An usufructuary mortgage is executed as security for the payment of a debt and the right to retain possession created by the document is only accessory to the right to recover the mortgage debt. Mortgage is only a transfer of an interest in immovable property as security for repayment of a debt, while Kanom is a tenure inland. The difference in the purpose for which or the intention with which the two transactions--usufructuary mortgage and kanom-are entered into is clear from the wording in the definition of the terms mortgage, usufructuary mortgage and Kanom and must be kept in mind in order to appreciate the essential distinction between usufructuary mortgage and kanom. The distinction is real and not fanciful, and the connotation of the two terms is well understood in Malabar. In the definition of mortgage, the emphasis is on the intention to create a security in favour of the creditor for the amount borrowed. In the definition of Kanom (just as in the definition of lease in S.105 of the Transfer of Property Act) the emphasis is on the right to enjoy the property which is transferred. The true test to ascertain whether a transaction is a lease or a mortgage has been laid down by the Supreme Court in the recent decision in Ramadan Puri v. Banbey Behari Saran (1959) (1)Madras Law Journal 53-Supreme Court Reports) Says His Lordship Mr. Justice Subha Rao:-

“The only guiding rule that can be extracted from the cases on the subject (whether the transaction is a lease or a mortgage) in that Jthe intention of the parties must be looked into and “Once you get a debt with the security of land for its redemption (repayment), then the arrangement is a mortgage by whatever name it is called” (Ghose on Mortgage, 5th Edition, Vol.1 page 102).”

The suit in the case before the Supreme Court was to redeem a mortgage. Plaintiff claimed that the transaction was an usufructuary mortgage, but defendant contended it was a lease. His lordship after examining the terms of the document expresses the view that “under the document, there was a relationship of creditor and debtor between the parties and the property was given as security for payment of the amount advanced with interest “The gist of the document,” says His Lordship, ‘was not a letting of the premises, with a rent reserved, but a mortgage of the premises with a small portion of the income of it made payable to the plaintiff. There is therefore no scope for the argument in this case that the document is a lease and not a mortgage.’

The distinction between a mortgage and Kanom is well brought out by His Lordship Mr. Justice Krishna Pandalai in the case in Umerkutty v. Narayanan Chettiar (1929 A.I.R. Madras 777). That was a suit for specific performance of an agreement to grant a lease or a Kanom of a shop belonging to the defendant. The defendant contended that the bargain was for a Kanom, which is virtually a mortgage, and that the plaintiff lender cannot get specific performance of a contract to borrow. This contention was over-ruled by the learned Judge with these observations:-

“Where this contract substantially one of lending and borrowing as distinguishable from a contract for a well known tenure of land prevalent in a part of the Presidency and subject to well recognized incidents, the appellants’ argument would succeed. But if the contract was really not for lending money, but for a tenure in land, the fact that one of the incidents of the tenure is that the Kanom tenant advances money to the jenmi and that there are stipulations for the return of the sum or such portion of it as is left after setting off the arrears of rent at the termination of the tenure, is not, in my opinion, sufficient to make the contract one of borrowing To those conversant with the system of property holding in Malabar, including in that expression the whole of the Malayalam speaking country, it would come as a startling surprise to learn that a bargain for a Kanom was one for money and not for land.”

In the opinion of the learned Judge, a transaction of Kanom is one by which the Kanom tenant bargains for a substantial interest in the jenmi’s property for the purpose of occupation, cultivation and improvement.

In the following passage, His Lordship emphasizes the true nature of Kanom as tenure in land:-

‘In the States of Travancore and Cochin, the State has intervened by legislation to confer on the holders of this tenure rights of permanent occupancy which were imperiled by the development of the notions of mortgage and redemption and second mortgage introduced by modern courts interpreting western jurisprudence It is a matter of public knowledge that similar legislation is on foot in this Presidency (Reference is to the Malabar Tenancy Bill which became Act XIV of 1930) Lawyers are familiar with the early controversies as to whether Kanom is a lease or mortgage. The decisions on this topic which will be found set forth in Moore’s Malabar Law were that the Kanom is a lease or a combination of a lease and mortgage. The modern doctrine, the result partly of legal analysis and partly of consideration of convenience is that it is an anomalous mortgage. But to give it a legal label which really means that the so-called mortgage is subject to incidents in it by custom or by contract that do not fit in with any of the recognised forms of mortgage only emphasises that that description alone cannot be a guide in deciding whether the transaction is substantially one of borrowing and lending money or one by which the Kanom tenant bargains for a substantial interest in the jenmi’s property for the purpose of occupation, cultivation and improvement. I have no doubt that it is the latter”.

The true nature of Kanom, as distinguished from mortgage, which is a contract for borrowing or lending money is described as follows by His Lordship Mr.Justice Ramaswami in a case decided after the definition of Kanom in Act 14 of 1930 was amended by Act 33 of 1951 Mammikutty v. Cheria Chathu Kurup (1954(1) Madras Law Journal 439).

“Kanom is not really a contract for borrowing or lending money, but one for land. It is generally understood as an estate or tenure in land for the purpose of occupation, cultivation and improvement in which the Kanomdar has a substantial interest. The present definition steers clear of all difficulties by refraining from designating the transaction as a mortgage or as lease and by resting content with ti.e enumeration of its essential incidents”. 

That the legislature has treated Kanom, not as a mortgage, but as a tenure in land is clear from the definition of Kanom, and also from the definition of “tenant” and “landlord” in the Act (Section 3(27) and (19). ‘Tenant’ means any person who has paid or has agreed to pay rent or other consideration, for his being allowed by another, to enjoy the land of the latter and includes a Kanomdar. ‘Landlord’ means a person under whom a tenant holds and to whom he is liable to pay rent or michavaram and includes a jenmi.

The name by which the transaction is described in the document is of considerable significance in ascertaining the true intention of the parties and the real character of the transaction. In this context, one might usefully refer to the decision of His Lordship Mr. Justice Raghava Rao in the case in Raman Nambudiri v. Karthiayani Nangiar Amma (1951 (2) Madras Law Journal 527) - although the case was decided before the Amending Act of 1951 came into force. The dispute in that case related to the construction of a panaya-Kychit dated 25th May 1923. Plaintiff sued for redemption on the footing that the document evidenced an usufructuary mortgage. Defendant contended that the transaction was in the nature of a Kanom. Holding that the transaction was not a Kanom, but was only a possessory mortgage and reversing the judgment of the Subordinate Judge, the learned Judge made the following observations which are very apposite:-

“The name Panaya Kychit is, as Subba Rao, J. has observed in C.R.P. No.1253 of 1948, a very well known word in Malabar and where that word is used, there is no reason to suppose that a mortgage is not what was intended. If really the parties intended a Kanom, there was no difficulty in the way of their using that word. That the parties in the present case have not used that word, but have used altogether a different word is a point of considerable significance in my opinion which the lower appellate Court has altogether missed. It is argued by Mr. Sundara Iyer that the name is not all that matters, but that the substance of the transaction must be looked into. That is true, but where the substance of the transaction is not susceptible of easy definition on the provisions of the document, the significance to be attached to the name still remains, as I think”.

To suppose therefore, that an usufructuary mortgage satisfies the definition of Kanom in S.3(14) of the Malabar Tenancy Act is to miss altogether the essential distinction between mortgage and Kanom. It is unfortunate that not only was the essential distinction between usufructuary mortgage and Kanom not emphasized before the learned Judges, but a tacit admission also seems to have been made before Mr. Justice Varadaraja Iyengar in the case of Emunni Panikkar v. Krishna Panikhar, by plaintiff’s learned Counsel, wrongly, as I think, that the definition in Section 3(14) was satisfied in that case.

Sales Tax Cases and Art.286 of Constitution of India

(T.K. Kochuthommen, B.A., Barrister-at-law

United Motors Case

The framers of the Constitution wanted to devise a formula of restrictions on the State power of taxing sales or purchases involving inter-State elements, with a view to avoid multiple taxation. This they did by enacting Clause (1)(a) with the explanation and Clause (2) of Article 286.

Clause (1) (a) prohibits the taxation of all sales or purchases which take place outside the State.

There are several ingredients involved in a sale and it is always difficult to locate a particular sale. Before the Constitution came into effect, several States imposed eales-tax, basing their claim on any one of the ingredients being present in their States. This resulted in multiple taxation.

The problem of the Constitution makers was to find out what is an outside sale. The Explanation to Article 286(1) (a) was therefore introduced. It provides by means of a legal fiction that the sale has taken place inside the delivery State i.e., the State in which the goods were actually delivered for consumption, notwithstanding the property in such goods passed in another State.

The test of sufficient territorial nexus was thus replaced by a simpler and more easily workable test. If the goods were delivered for consumption in a particular State, then the sale or purchase shall be deemed to have taken place in that State and outside all other States. Even the title State i.e., the State in which the property in the goods passed cannot tax the sale of those goods. Multiple taxation of the same transaction by different States is now avoided.

The explanation deals only with inter-State sales or purchases, and not with purely local or domestic transaction. That these are subject to the taxing power of the State has never been questioned.

Article 286(1) (a) read with explanation prohibits taxation of sales oi purchases involving inter-State elements by all States except the delivery State. The Delivery State is left free to tax such sales or purchases, which power it derives not by virtue of the explanation, but under Article 246(3) read with entry 54 of List II.

The operation of Clause (2) of Article 286 stands excluded as a result ol the legal fiction enacted in the explanation. The Delivery State is free to impose tax on inter-State sales or purchases, in spite of Clause (2).

The effect of the explanation in regard to inter-State dealings is to invest what in truth, is an inter-State transaction, with an intra-State character relation to the delivery State, and Clause (2) therefore can have no application,

The explanation is merely designed to explain the meaning of the expression ‘Outside the State ‘in Clause (1) (a). Once the sale is located within the taxing State by means of the fictional test, the transaction loses its inter-State character and falls outside the purview of Clause (2). Such sale or purchase be­comes in the eye of the law a purely local transaction. When an inter-Statetransaction is turned into an intrastate transaction by the operation of the legal fiction, Clause [2] ceases to have any operation.

An inter-State sale becomes an intra-State transaction when it comes under the explanation. Article 286(2) imposes a ban only on taxation of inter-State sales. But explanation sales are intra-State sales as a result of the operation of the fiction. Therefore Clause (2) has no application.

Bengal Immunity Case

Explanation in Clause (1) (a) of Article 286 cannot be extended to clause (2) either as an exception or as a proviso thereto or read as curtailing the ambit of Clause (2). Clause (2) has independent operation. To this extent the United Motors case is overruled.

There are four separate and independent restrictions placed upon the legislative competency of the State to make a law with respect to matters in Entry 54 of List II. Constitution makers have considered different aspects of sale or purchase and placed check on the legislative powers of the States at different angles.

Thus in Clause (1) (a) the question of the ‘Situs’ of the sale or purchase engaged their attention, and they forged a fetter on the basis of such situs to cure the mischief of multiple taxation by the States on the basis of the nexus theory. The theory of territorial nexus is now replaced by the theory of situs.

In Clause (1) (b) sales or purchases are considered from the point of view of foreign trade, and placed a ban on the power of the State to tax foreign trade. This is with a view to encourage foreign trade.

In Clause (2) the sale is looked at in its inter-State character and a ban is imposed in the interest of the freedom of the internal trade.

In Clause (3) the sale is considered from the point of view of the character and quality of the goods. A restriction is placed on the power of the States to tax ‘declared goods’.

The explanation has created a legal fiction and this fiction is created onlyfor the purpose of Clause 1 (a). It only explains what an outside sale is. Explanation in Clause (1) (a) cannot be extended to Clause (2) either as an exception or as a proviso thereto or read as curtailing or limiting the ambit of Clause (2). Explanation cannot be read into Clause (2). It therefore follows that except in so far as Parliament may by law provide otherwise, no State law can impose any tax on sales or purchases when such sales or purchases take place in the course of inter-State trade or commerce and irrespective of whether such sales or purchases do or do not fall within the explanation.

The ‘situs’ of a sale or purchase is wholly irrelevant as regarded its inter-State character.

Even when the situs of a sale or purchase is in fact inside a State, with no essential ingredient taking place outside, nevertheless if it takes place in the course of inter-State trade or commerce, it will be hit by Clause (2). All that the Explanation does is to shift the ‘situs’ from point A in the stream of inter-State trade to point B also in the stream. It does not lift the sale or purchase out of the stream in those cases where they form part of the stream.

The shifting of “the ‘situs’ of a sale or purchase from its actual ‘situs’ under the general law to a fictional ‘situs’ under the Explanation takes the sale or purchase out of the taxing power of all States other than the State where the ‘situs’ is fictionally fixed. That is all that Clause (1) (a) and the Explanation do. Whether the delivery State will be entitled to tax such sale or purchase will depend on other provisions of the Constitution. The assignment of a fictional situs has no bearing on the inter-State character or the export and import character of a sale or purchase; they are entirely different topics.

The fixing of a ‘situs’ in a particular State either under the general law or under the fiction does not conclude the matter. It has yet to be ascertained whether that sale or purchase which by virtue of the Explanation has taken place in the Delivery State was made in the course of inter-State trade or commerce. For this purpose, the Explanation has no application. Cases may arise in which purchases or sales which are outside Clause (2) may yet fall within and be governed by the Explanation.

Until Parliament has lifted the ban under Clause (2) no State can impose or authorize the imposition of any tax on sales or purchases of goods when such sales or purchases take place in the course of inter-State trade or commerce. The majority decision in United Motors, in so far as it held that the Explanation sales are taxable by the delivery State in spite of the ban under Clause (2), is overruled by this decision. The taxing power of the State is subject to Clause (2).

Tata Iron & Steel Co. Ltd. vs. Bihar State

(1958 A.I.R. JUNE)

Nexus theory Is it applicable to Sales Tax?

This decision relates to the imposition of sales-tax on sales that took place prior to the Constitution.

The legality of the theory of territorial nexus was never questioned in a Court of law, but it was always applied to sales-tax legislation by various States until the introduction of the Constitution. The applicability of the nexus theory to sales-tax legislation has been recognised by the Supreme Court in United Motors Case-

The States, in exercise of the legislative power conferred on them by the Government of India Act, 1935, enacted sales-tax laws acting on the principle of territorial nexus. They picked out one or more of the ingredients constituting a sale and made them the basis of their sale-tax legislation. Such claims to taxing power led to multiple taxation of the same transaction by different Provinces and cumulating of the burden falling ultimately on the consuming public. It was to avoid this evil of multiple taxation that the Constitution makers enacted Article 286.

Since the enactment of Article 286, the only nexus that is recognized is the delivery nexus-in other words it is the delivery for consumption that gives the State the right to tax.

From the point of view of the economist and as an economictheory, sales-tax may be an indirect tax on the consumers, but legally it need not be so. Retrospective legislation in sales-tax is therefore perfectly valid.

Sundararamaier’s Case

It was to repair the mischief of multiple taxation that Article 286 was introduced. While retaining the power in the States under Entry 54 in List II, Article 286 imposed certain restrictions on that power. One of the restrictions is contained in Clause (1) (a) which prohibits a State from taxing outside sales. The Explanation under Article 286 is attached to this provision, and though the Explanation is positive in form, it is in substance negative in character. Its purpose is not to confer any fresh power of taxation on the State, but to restrict the power which it previously had under Entry 54.

But the purpose of a taxing statute like the Madras Act is to confer a power on the State to levy and collect tax. While the prohibition under the State statute is intended to prevent taxation of outside sales on the basis of the ‘nexus doctrine, the Explanation is intended to authorize taxation of sales falling within its purview, subject to other provision of the Constitution, such as Clause (2) of Article 286. The State law cannot invest another State with a power or divest it of a power; its mandate runs only within its own borders. The only purpose of the Explanation to S.22 in Madras Act is to authorize that State to impose a tax on sales falling within its purview. Thus, while in the context of Article 286(1) (a) the Explanation thereto is negative in character though positive in form, it cannot be so construed in its setting in S.22 of the Madras Act, where it must have a positive content. The Explanation operates to confer on the State a power to tax Explanation sales. The true scope of S.22 is that it does impose a tax on the Explanation sales, but the imposition, is to take effect only when Parliament lifts the ban under Article 286(2). Article 286(2) is in two parts, one a restriction on the power of the State, and the other a condition on which such restriction will cease to operate. There is no prohibition in Clause (2). It merely enacts that State laws imposing tax on inter-State sales can have no effect, until Parliament has lifted the ban. The words “No law of a State shall impose” mean only that no so much law shall be effective to impose a tax. S.22 therefore imposes a tax on Explanation sales, but it would be enforced only when Parliament so provides. Mathew v. T.C. Board of Revenue A.I.R 1957 T.C. 300 and Cochin Goal Co. Ltd. v. State of T.C. 1956-57 STC 731 are overruled in so far as they held that S.26 of the T.C. Act had not the effect of imposing, of its own force, a tax on Explanation sales.

There is a distinction between a legislation on a topic not within the competence of the legislature & a legislation within its competence but violative of Constitutional limitations. In the former case it is null and void, and a subsequent cession of that field to the legislature will not revive what was null and void. But in the latter case, though the law was “unenforceable by reason of those prohibitions, will become effective without re-enactment when once they are removed. A tax under S.26 of the T-C Act becomes enforceable when the ban under Clause (2) is lifted by the validating Act. The imposition was a valid imposition, though unenforceable at the time of imposition on account of the ban. When the ban is lifted what was once unenforceable becomes enforceable.

During the period between the United Motors case and the Bengal Immunity case, various States had imposed sales tax on Explanation sales basing their claim on the construction put on the Explanation by the majority decision in the United Motors case. But such imposition became unauthorized as a result of the decision in Bengal Immunity case. The purpose of the Validating Act was to enable those States to retain the money so collected. The effect was that it liberated the State laws from the fetter placed on them by Clause (2) and enabled them to operate on their own terms.

The States had the power to tax inter-State sales under Entry 54 subject only to Clause (2). The Validating Act rendered such law operative and pro­ceedings taken there under valid. The sixth Amendment of the Constitution proceeding on the view that the States had the power to tax inter-State sales under Entry 54, amended the Constitution, and vested the power in the Centre.