Turnover-based exemption under Tamil Nadu VAT can trigger purchase tax, while penalty needs prior notice to stand.

A turnover-based exemption under Entry 68 of Part B of the Fourth Schedule to the Tamil Nadu Value Added Tax Act, 2006 was treated as a conditional exemption, because it depends on the selling dealer's turnover rather than on the goods in isolation. Purchases made when goods are despatched outside the State otherwise than by way of sale were therefore within the expression "in circumstances in which no tax is payable" in Section 12, and purchase tax was upheld. Input tax credit on such purchase tax remains subject to Section 19 and is not expanded by Section 12(2). Penalty, however, could not be sustained where the show cause notice did not propose it, as that violated natural justice.

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Issues: (i) Whether exemption on the basis of turnover under Entry 68 of Part B of the Fourth Schedule to the Tamil Nadu Value Added Tax Act, 2006 is a conditional exemption attracting purchase tax under Section 12 of the Tamil Nadu Value Added Tax Act, 2006 when the goods are despatched outside the State otherwise than by way of sale; (ii) whether penalty could be sustained where the show cause notice did not propose penalty.

Issue (i): Whether exemption on the basis of turnover under Entry 68 of Part B of the Fourth Schedule to the Tamil Nadu Value Added Tax Act, 2006 is a conditional exemption attracting purchase tax under Section 12 of the Tamil Nadu Value Added Tax Act, 2006 when the goods are despatched outside the State otherwise than by way of sale.

Analysis: The exemption in Entry 68 is linked not to the goods in the abstract, but to the turnover of the selling dealer, and therefore operates as a conditional exemption. The expression "in circumstances in which no tax is payable" in Section 12 of the Tamil Nadu Value Added Tax Act, 2006 was held to take within its sweep purchases enjoying such conditional exemption. The earlier Division Bench decisions on purchase tax under the predecessor sales tax regime were treated as governing the same expression in Section 12. The Court also held that the exemption device, whether by notification or by Schedule entry, does not alter the character of the exemption for this purpose. Input tax credit on purchase tax, though available in principle, remains subject to Section 19 of the Tamil Nadu Value Added Tax Act, 2006 and is not enlarged by the non obstante clause in Section 12(2).

Conclusion: The levy of purchase tax under Section 12 was upheld and the challenge to the assessment on that ground failed.

Issue (ii): Whether penalty could be sustained where the show cause notice did not propose penalty.

Analysis: Penalty proceedings require prior notice so that the assessee may meet the proposed civil consequence. Where the assessment order imposed penalty without any corresponding proposal in the show cause notice, the defect was treated as a violation of natural justice.

Conclusion: The penalty component was unsustainable in the cases where no penalty was proposed in the show cause notice and was set aside.

Final Conclusion: The common challenge to the purchase tax levy failed, but the penalty imposed without prior notice was interfered with in the specified cases, and the writ petitions were disposed of accordingly.

Ratio Decidendi: A turnover-based exemption under the State sales tax/value added tax schedule is a conditional exemption, and purchases made under such exemption fall within "circumstances in which no tax is payable" for the purpose of purchase tax; penalty cannot be sustained unless it is first proposed in the show cause notice.

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