Refund-based CST exemption scheme prevails over earlier collection-based disqualification under the revised KVAT framework.

A later exemption notification replacing a collection-based disqualification with a refund-based tax mechanism under the KVAT/CST framework could not be read as continuing the earlier ineligibility condition after 1.4.2005. Where an industrial unit collected output tax, set off input tax, paid net tax, and followed the procedure accepted by the Department, the earlier 1997 condition could not be mechanically applied to deny CST exemption or refund. The scheme was beneficial in nature and had to be construed liberally once the assessee was otherwise eligible. The denial of CST refund on the ground of tax collection was therefore not justified.

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Issues: Whether, after the KVAT regime commenced on 1.4.2005, an industrial unit that collected tax and paid the net tax could be denied CST exemption and refund merely by applying the ineligibility condition from the earlier 1997 notification.

Analysis: The notifications issued in 1997 under the KST Act and CST Act originally proceeded on a scheme where collection of tax by the unit attracted ineligibility for exemption. The later notifications dated 18.4.2005, however, introduced a different mechanism under the KVAT Act by requiring collection of output tax, deduction of input tax, payment of net tax, and refund of the net tax so paid. By virtue of Section 9(2) of the CST Act, the State procedure under the general sales tax law was applicable for CST administration as well, and the CST notification of 18.4.2005 was issued in partial modification of earlier notifications. In that setting, the earlier ineligibility condition could not be mechanically continued after 1.4.2005. The assessee had followed the procedure accepted by the Department and refund had in fact been granted for an earlier period, which supported the assessee's understanding. Since the exemption scheme was beneficial in nature, it had to receive a liberal construction once the assessee was otherwise eligible.

Conclusion: The denial of CST refund on the ground that the assessee had collected tax was not justified. The question of law was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: Where a later exemption notification substitutes the earlier collection-based ineligibility scheme with a refund-based tax mechanism, the earlier disqualification cannot be applied to deny exemption or refund under CST when the assessee is otherwise eligible and the State procedure governs CST administration.

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