1975 (7) TMI 123 - SC - VAT and Sales Tax

Supreme Court clarifies scope of tax law, aims to prevent evasion, overturns High Court decision

The State of Tamil Nadu Versus MK Kandaswami and Others

The Supreme Court clarified the interpretation and scope of Section 7-A of the Madras General Sales Tax Act, 1959. It held that the section applies to ... Whether, in the facts and circumstances of the case, the applicant was a dealer during the assessment period under the Act and the imposition of purchase tax on him under section 7 of the Act was in order? Held that:- Allow these appeals, set aside the judgment of the High Court as section 7-A itself is a charging section. It creates a liability against a dealer on his purchase turnover with regard to goods, the sale or purchase of which though generally liable to tax under the Act have not, due to the circumstances of particular sales, suffered tax under section 3, 4 or 5, and which after the purchase, have been dealt by him in any of the modes indicated in clauses (a), (b) and (c) of section 7-A(1). Issues Involved:1. Interpretation and scope of Section 7-A of the Madras General Sales Tax Act, 1959.2. Validity of the pre-assessment proceedings and assessments under Section 7-A.3. Applicability of Section 7-A to various types of purchases and their subsequent use or disposal.Detailed Analysis:1. Interpretation and Scope of Section 7-A of the Madras General Sales Tax Act, 1959:The appeals raised a question regarding the interpretation and scope of Section 7-A of the Madras General Sales Tax Act, 1959. Section 7-A(1) stipulates that every dealer who purchases goods in circumstances where no tax is payable under Sections 3, 4, or 5, and either consumes such goods in manufacturing, disposes of them otherwise, or dispatches them outside the state, shall pay tax on the turnover of such purchases.The court analyzed the ingredients of Section 7-A(1), emphasizing that the section can be invoked if the following conditions are cumulatively satisfied:- The purchaser is a dealer.- The purchase is made in the course of business.- The purchase is from a registered dealer or any other person.- The goods are taxable under the Act.- The purchase is made in circumstances where no tax is payable under Sections 3, 4, or 5.- The dealer consumes, disposes, or dispatches the goods as specified in the section.The court rejected the High Court's interpretation that the phrases 'goods, the sale or purchase of which is liable to tax under this Act' and 'purchases in circumstances in which no tax is payable under section 3, 4 or 5' are contradictory. The court clarified that these phrases are not mutually exclusive and can coexist harmoniously.2. Validity of the Pre-Assessment Proceedings and Assessments under Section 7-A:The High Court had quashed the pre-assessment proceedings and assessments, reasoning that Section 7-A did not clearly define the circumstances under which tax liability would arise, thus failing to achieve its purpose of checking tax evasion.The Supreme Court disagreed, stating that Section 7-A is both a charging and remedial provision designed to plug tax evasion. The court emphasized that the section should be interpreted to preserve its workability and efficacy, rather than rendering it otiose or sterile.3. Applicability of Section 7-A to Various Types of Purchases and Their Subsequent Use or Disposal:The court examined the applicability of Section 7-A to different cases involving the purchase of arecanuts, gingerly seeds, turmeric, grams, castor seeds, and butter. The court noted that these goods are generally taxable under the Act, but the sales were not taxed due to specific circumstances, such as purchases from agriculturists or householders.The court held that if the purchased goods were consumed in manufacturing, disposed of otherwise, or dispatched outside the state, Section 7-A would be applicable. For instance:- Arecanuts, turmeric, and grams transported outside the state for consignment sales would attract tax under Section 7-A.- Gingerly seeds and castor seeds crushed into oil, and butter converted into ghee, would also attract tax under Section 7-A.The court emphasized that Section 7-A is intended to tax goods that would otherwise escape taxation due to the circumstances of their purchase.Conclusion:The Supreme Court allowed the appeals, set aside the High Court's judgment, and dismissed the writ petitions. The cases were remanded to the taxing authority for further proceedings in accordance with the clarified interpretation of Section 7-A. Each party was ordered to bear their own costs.