Retrospective tax levy on hotel food and drinks rejected for pre-2002 years; unamended law allowed only the lower rate.

For assessment years before 1 April 2002, food and drinks sold in hotels and restaurants under the unamended section 3D of the Tamil Nadu General Sales Tax Act, 1959 were taxable at a flat 2% rate. The provision, as it stood until 31 March 2002, did not distinguish between branded and unbranded items, and that distinction was introduced only by the amendment effective from 1 April 2002. The later clarification could not be applied retrospectively to years 1998-99 to 2001-02, so the proposed 16% levy was unsupported. The assessment therefore had to proceed at 2%.

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Issues: Whether, for the assessment years prior to 1 April 2002, sale of food and drinks in hotels and restaurants could be taxed at 16% as branded items, or only at 2% under the unamended section 3D of the Tamil Nadu General Sales Tax Act, 1959.

Analysis: The unamended section 3D, as it stood till 31 March 2002, imposed tax on food and drinks sold in hotels and restaurants at a flat rate of 2% and did not distinguish between branded and unbranded items. The distinction between branded and unbranded food items was introduced only by the amendment effective from 1 April 2002. For assessment years 1998-99, 1999-2000, 2000-01 and 2001-02, the amended provision could not be applied retrospectively. The proposed levy of 16% based on the later clarification was therefore unsupported.

Conclusion: The higher rate of tax at 16% was not applicable for the relevant assessment years, and the assessment had to proceed under section 3D at 2%.

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