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Issues: (i) Whether a second seller who merely recoups from his purchaser the sales tax already borne by him at the first-sale stage can be said to have collected tax by way of tax so as to attract penalty under section 22(2) of the Tamil Nadu General Sales Tax Act, 1959. (ii) Whether section 22(2) is beyond the legislative competence of the State Legislature or violates article 19(1)(f) of the Constitution of India.
Issue (i): Whether a second seller who merely recoups from his purchaser the sales tax already borne by him at the first-sale stage can be said to have collected tax by way of tax so as to attract penalty under section 22(2) of the Tamil Nadu General Sales Tax Act, 1959.
Analysis: Section 22(2) penalises collection of tax, or collection of an amount purporting to be by way of tax, in contravention of section 22(1) and rule 24(16)(ii) of the Tamil Nadu General Sales Tax Rules, 1959. The transactions in question were second sales of single-point taxable goods, and the dealers did not collect sales tax on their own second sales; they only recouped amounts corresponding to the tax already collected from them at the first-sale stage. Such recoupment does not change the character of the amount into a collection of tax on an untaxable transaction. The statutory scheme distinguishes single-point levy from cumulative multi-point taxation, and the burden of a single-point tax may pass along successive transactions without becoming an unlawful tax collection. If any excess was recovered beyond the tax borne at the first sale, the excess was not shown with certainty to attract penalty for the whole amount.
Conclusion: Mere recoupment of first-sale tax by a second seller does not amount to collection of tax by way of tax within section 22(2), and penalty is not leviable on that basis.
Issue (ii): Whether section 22(2) is beyond the legislative competence of the State Legislature or violates article 19(1)(f) of the Constitution of India.
Analysis: Penalty provisions intended to secure compliance with tax law are incidental and ancillary to the taxing power under entry 54 of List II of the Seventh Schedule to the Constitution of India. The provision operates as an enforcement measure for the sales tax law and is not outside fiscal competence. The restriction created by the penalty for unauthorised collection of tax was also held not to infringe article 19(1)(f). The amendment replacing forfeiture with a penalty was treated as constitutionally permissible, and the provision was sustained on the basis that tax enforcement may validly include penal consequences for unlawful collections.
Conclusion: Section 22(2) is within the legislative competence of the State Legislature and does not violate article 19(1)(f) of the Constitution of India.
Final Conclusion: The penalties imposed on the assessees were set aside, while the constitutional challenge to section 22(2) failed.
Ratio Decidendi: A penalty for unauthorised collection of sales tax cannot be imposed where a dealer merely recovers from his purchaser the tax already borne at an earlier taxable stage, and a penal provision enacted as an enforcement measure is constitutionally valid as incidental and ancillary to the taxing power.
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