Concessional sales tax on industrial raw materials survives product exemption, and penalty needs proven misuse of declaration forms.

The proviso to section 5(3) of the Kerala General Sales Tax Act, 1963 does not withdraw the concessional rate for industrial raw materials merely because the finished products are exempt under a notification; exemption from turnover tax is not the same as no tax liability under the Act, so the concession remains available. Differential tax and penalty also cannot be sustained unless the raw materials purchased at concession are shown to have been diverted from the declared use. As no misuse of the declaration form was established, the additional tax demand and penalty were held unsustainable.

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Issues: (i) Whether the proviso to section 5(3) of the Kerala General Sales Tax Act, 1963 excludes the concessional rate merely because the assessee enjoys a sales tax exemption on finished products under a notification. (ii) Whether penalty and differential tax could be levied on the footing that the declaration form was misused and the assessee was disentitled to the concessional rate.

Issue (i): Whether the proviso to section 5(3) of the Kerala General Sales Tax Act, 1963 excludes the concessional rate merely because the assessee enjoys a sales tax exemption on finished products under a notification.

Analysis: Section 5(3) grants a concessional rate on industrial raw materials used for producing finished products in the State. The proviso applies only where no tax is payable on the finished products in the situations contemplated by the provision, and the limited exemption granted by a notification does not amount to absence of tax liability under the Act. The prior decisions relied upon apply the same construction and hold that exemption from payment of tax on turnover does not by itself attract the proviso.

Conclusion: The proviso did not deprive the assessee of the concessional rate merely because the finished products were covered by an exemption notification.

Issue (ii): Whether penalty and differential tax could be levied on the footing that the declaration form was misused and the assessee was disentitled to the concessional rate.

Analysis: Differential tax under section 5(3) can be levied only when the raw materials purchased at the concessional rate were not used for the declared purpose. On the facts found, there was no case that the raw materials were diverted from the intended use. In the absence of such misuse, the basis for penalty and the additional tax demand failed.

Conclusion: The penalty and differential tax were unsustainable.

Final Conclusion: The assessee was entitled to the concessional rate of tax, and the orders imposing penalty and differential tax were set aside.

Ratio Decidendi: An exemption from tax on finished products under a notification does not, by itself, amount to no liability to tax under the Act so as to attract the proviso to section 5(3); differential tax and penalty cannot be imposed unless the concessional declaration is shown to have been misused by non-use of the raw materials for the declared purpose.

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