TaxTMI 
TaxTMI 
1990 (11) TMI 350
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....ted sticks, were in the First Schedule of the Kerala General Sales Tax Act, 1963 (hereinafter called 'the Act). They were treated as items which are chargeable at the general rate of 5 per cent. Prior to September 16, 1980, there was exemption of sales tax for agarbathis. By virtue of the Finance Act of 1984, with effect from April 1, 1984, entry BOB was introduced in the First Schedule and the entry reads as follows: Rate "80B Raw bathis At the point of first sale in the State by 10 per cent" a dealer who is liable to tax under section 5. The Finance Act of 1984 did not include agarbathis and scented sticks as specific items in the First Schedule, nor were they introduced in entry 80B. By virtue of Act 18 of 1987 entry 80B became entry 155, and it continued to be only raw bathis and the rate of tax continued to be at 10 per cent. The amended First Schedule came into force with effect from July 1, 1987. By Act 18 of 1987 also agarbathis were not included in the First Schedule. By G.O. Rt. No. 344/82/TD dated May 28,1982, a clarification was issued in exercise of the powers under section 59A and agarbathis were sought to be taxed as a specific item covered by the First ....
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....e Ordinance was promulgated, the Sales Tax Department took vigorous and active steps to reopen and revise the assessments already made in all cases where turnover of agarbathis was involved. 4.. Some of these original petitions are filed while the Ordinance was in force, and before the Act came into existence, while some were filed after the Act came into force. In those original petitions which were filed while the Ordinance alone was in force petitions have been filed to amend the prayers in the original petitions. As a result of the ordinance and the subsequent Act 3 of 1990 the State tries to tax the turnover on agarbathis under entry 155 and levy tax at 10 per cent while earlier, agarbathis were a general rate item for which tax is to be paid at five per cent. The crucial question is whether the retrospective operation sought to be given by the Ordinance and the Act with effect from April 1, 1984, for the amendment of entry 155 is valid, and whether the State has the right to collect tax for sales effected prior to August 29, 1989, at 10 per cent. 5.. As the pleadings are almost similar, I shall briefly set out the pleadings in Original Petition No. 9375 of 1989, and as ....
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....m April 1, 1984. Subsequently that entry became entry 155 of the present First Schedule by reason of Act 18 of 1987. Entry 155 of the First Schedule has been amended to include agarbathis and other scented sticks by promulgation of Ordinance 7 of 1989, and the amendment was given retrospective effect with effect from April 1, 1984. The Ordinance was replaced by Act 3 of 1990. The combined effect of the Ordinance and the Act and the amendment made is that agarbathis are taxable at the point of first sale at the rate of 10 per cent with effect from April 1, 1984. Originally raw bathis, agarbathis and scented sticks were not specifically included in the First Schedule. By G.O. Rt. No. 344/82/TD dated May 28, 1982, a clarification was issued to the effect that agarbathis are taxable under entry 80 of the First Schedule. This Court dealt with the effect of that clarification in Deputy Commissioner of Sales Tax v. K.A. Latheef [1988] 69 STC 29 and came to the conclusion that agarbathis are not taxable under entry 80. The court never considered whether the agarbathis can be taxed under entry 80B, which has been in the statute book with effect from April 1, 1984. As a result of the decisio....
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....ginal petition No. 10378 of 1989. Shri Narasimhan contends that prior to promulgation of Ordinance 7 of 1989, agarbathis are an item on which sales tax is exigible at five per cent. Transactions have taken place on that basis. Tax was collected from the buyers at 5 per cent and the same has been paid to the Sales Tax Department. If 10 per cent tax is collected by reason of the amendment of entry 155 with retrospective effect from April 1, 1984, the dealers in agarbathis will be compelled to pay money from out of their pockets, there is no possibility of passing on the additional tax burden to the buyer. Such an imposition of tax with retrospective effect is most unreasonable and arbitrary. Legislature is competent to enact a law imposing taxes prospectively. But it is not entitled to give retrospective effect to such legislation, especially for a long period of five years and four months. Shri Narasimhan submitted that though in the original petitions he has raised the question of legislative competence, he is not now questioning the legislation on the ground of want of legislative competence, and that he is only attacking the impost on the ground of retrospectivity which amounts t....
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....f the High Courts and Supreme Court. He mainly relies upon Empire Industries Limited v. Union of India [1987] 64 STC 42 (SC); (1985) 3 SCC 314, Malabar Fruit Products Company v. Sales Tax Officer [1972] 30 STC 537, Yusuf Shabeer v. State of Kerala [1973] 32 STC 359; which are both decisions of this Court, Ujagar Prints v. Union of India [1989] 74 STC 401 (SC), Federation of Hotel & Restaurant Association of India v. Union of India [1989] 74 STC 102 (SC), Government of Andhra Pradesh v. Hindustan Machine Tools Ltd. AIR 1975 SC 2037; (1975) 2 SCC 274, Utkal Contractors & Joinery (P) Ltd. v. State of Orissa AIR 1987 SC 2310 and Misrilal Jain v. State of Orissa AIR 1977 SC 1686; (1977) 3 SCC 212. Shri Anil Babu contends that the opportunity of the dealer passing on the tax burden to the buyer is not a determining factor for upholding the validity of a taxation statute. He contends that the decision reported in Shri Krishna Enterprises v. State of Andhra Pradesh [1990] 76 STC 67 (SC) has no application to the facts of the present case. It is clearly distinguishable. 11.. The points that arise for consideration in all these original petitions are: (1) Whether the amendments to entr....
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....nding provision as in the Forty-sixth amendment. The Supreme Court observed in such a situation as follows: "As the law stands, the petitioners before us are to satisfy the designated authority that no tax had been collected before the Forty-sixth amendment or for the matter of that prior to the amendment of the State legislation. We find from the record that no such opportunity was extended to the petitioners when tax was levied." To remedy the situation, the Supreme Court set aside the assessments and required the assessing officer to give opportunity to the petitioner to satisfy him that no tax was collected until September 13, 1985. Subsequently, a review petition was filed before the Supreme Court stating that the latest amendment of the State Sales Tax Act was not considered at the time of decision, and by virtue of the latest amendment, the demand raised should have been sustained. Dealing with such a situation, the Supreme Court observed as follows: "This is on account of the fact that after the Forty-sixth amendment of the Constitution, State legislation was necessary to give effect to liability of sales tax and the Andhra Pradesh Act was a prospective l....
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....gs which were taken on the basis of any enactment declared by court of law to be invalid. The object of the amendment is to widen the definition of business so as to include for the first time transactions which without the amendment fell outside the concept of business hitherto understood and judicially determined. The amendment for all intents and purposes seeks to impose sales tax for the first time on transactions which till the amendment fell outside the purview of the Act. In my view, the effect of retrospective operation of such an amendment would be to impose an unexpected liability in respect of transactions which when took place were not subject to any charge or liability under the Act. Under the Act, a dealer will be saddled with a liability to pay sales tax with respect to transactions which will now constitute business as defined by the amendment. He might have entered into such transactions several years back, and at the time when these transactions took place such sales were not taxable. As a result of the retrospective operation of the amendment, he is now to be treated as a dealer liable to pay tax in respect of such transactions of sales". (Emphasis* supplied) ....
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....n amendment, those goods have become taxable under the entry for the first time. That may not be the only or the necessary inference." Then dealing with the scope of the entry prior to the amendment and the entry after "televisions" were included in the entry, the court observed as follows: 'The meaning given to the expression 'television' shows that the accent is upon reproduction of actual or recorded scene at a distance on a screen, etc., by radio transmission usually with appropriate sounds. The accent is upon the reproduction of the scene and sound is treated as merely an accompaniment. Be that as it may, in common parlance or commercial parlance, one would not ordinarily refer to the television set as a wireless set, though it may be possible by an involved process of reasoning to include the television set also within the meaning of wireless reception instrument and apparatus. Since we have to understand these entries in the common or in the commercial parlance we are inclined to hold that television sets or parts and accessories thereof were not taxable under entry 3 of the First Schedule to the Act prior to 1st September, 1976." 16.. In the present original petiti....
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....late with retrospective operation. In support of this argument, he relied upon the decision in Hotel Elite v. State of Kerala [1988] 69 STC 119 (Ker). In this decision the court was dealing with a case of cooked food being served in two star hotels and above, and the amending Act brought the Act into force with retrospective effect from July 1, 1987, while in fact the Act was first published on August 19, 1987. The learned Judges observed: "The competence of the State Legislature to impose sales tax on these items is not in question in view of the Forty-sixth Amendment of the Constitution introducing clause (29A) to article 366 whereby the scope of entry 54 of List II of the Seventh Schedule to the Constitution is rendered wide enough to cover cooked food and beverages served in hotels and restaurants." *Reported as Travancore Chemical & Manufacturing Ltd. v. State of Kerala [1991] 81 STC 313 (Ker) The amendments to the Kerala General Sales Tax Act introduced by the Finance Act 18 of 1987 are challenged as violative of article 14 of the Constitution. Its retrospective effect from July 1, 1987 is also challenged on the same ground. Dealing with the arguments relating....
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....reverse or set aside any judicial decision." This decision did not deal with instances where retrospective operation would impose an unreasonable and heavy or unexpected burden. It only tried to rectify the mistake that arose due to the defect in the earlier enactment, which was not upheld by the High Court. Mohd. Rashid Ahmad v. State of U.P. (1979) 1 SCC 596 is a case of an enactment giving power to the State Government to make rules with retrospective effect. Dealing with such a situation, and discussing the scope of "deeming" and "validation", the court observed as follows; in paragraph 25 at page 606: "25. It was legitimately within the powers of the State Government to give to the amended rule a retrospective effect. As a result of the amendment, the original clause (iii) was substituted by a new clause (iii) by which the date for passing an order of absorption by the State Government was shifted to August 31, 1967, which again introduced another legal fiction. It provided that if there was a failure on the part of the State Government to pass an order of absorption by August 31, 1967, the officer or servant concerned shall be deemed to be finally absorbed. This legal f....
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....lers are enabled to pass on the tax to the purchasers, those affected by section 5A, like the petitioner, were not in a position to collect this new levy during the period 1st April, 1970 to 15th May, 1970, for which period the section has been made retrospective, for the reason that there was no such levy then. It is urged that the result of retrospectivity of section 5A is that the petitioner has to pay very large amounts out of the capital investment in the business. In short, the argument is that the retrospectivity of a levy may operate as an unreasonable burden which is likely to make the carrying on of business of the dealer impossible and this is an unreasonable restriction on the right to carry on business." 18.. It should be remembered that the retrospective operation was confined only to one month and 15 days. Dealing with such a situation His Lordship observed: "that a taxation statute has also to satisfy the test of reasonableness. Taxing statutes are not beyond the purview of the constitutional limitations imposed by articles 14 and 19 of the Constitution or the test of reasonableness prescribed by article 304(b). Taxing statutes should not be confiscatory, and ....
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....a consumer may have to buy goods. But it is a direct tax on the sale or purchase and it can be imposed either on the seller or purchaser. The tax does not become invalid because in given circumstances it cannot be passed on. It is possible to conceive of circumstances where a tax can infringe article 19(1)(g) of the Constitution." (Emphasis* supplied) Then the court observed that they had not seen any case where the imposition of a tax has infringed article 19(1)(g) and that no material has been placed before them to show that in that case the imposition of the tax has infringed article 19(1)(g) of the Constitution. 19.. It is clear from these two decisions that even while dealing with a case of retrospective effect for a very short period of six weeks, the courts were conscious of the fact that reasonableness of the burden should be considered and if it amounts to confiscatory, it offends the Constitution. Judged in the light of these principles, we find that imposing tax with retrospective effect for five years and four months would certainly have the effect of imposing an unreasonable and unexpected burden and in many cases such an imposition of tax, which cannot be passed....
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....egislation are well-settled. (See Krishnamurthy & Co. v. State of Madras [1973] 31 STC 190 (SC); [1973] 2 SCR 54). Such legislation per se is not unreasonable. There is no particular feature of this legislation which can be said to create any unreasonable restriction upon the petitioners." Then referring to the history as to how the various amendments created difficulty, etc., the court observed that this is an instance of retroactive curing of a defect which arose due to the defects in the drafting of the legislation. In such circumstances, giving retrospective operation to the amendment introduced, cannot be considered as imposing unreasonable restriction. 20A. The court after referring to the passage in Harvard Law Review, volume 73, observed in paragraph 52 (at page 67 of STC) as follows: "The impugned legislation does not act harshly nor there is any scope for arbitrariness or discrimination." Then the court went on to observe in paragraph 53 (at page 67 of STC) as follows: "53. .... A tax-payer subject is entitled only to such benefit as is granted by the legislature. Taxation under the Act is the rule and benefit and exemption, the exception. And....
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....den with retrospective effect for a long period of five years and four months. The present taxation is not in the nature of a validation of a taxing statute struck down by courts. The protection available to the Acts considered in these two decisions is not available to the present Ordinance 7 of 1989 and Act 3 of 1990. 22.. The Government Pleader relied upon Government of A.P. v. Hindustan Machine Tools Ltd. AIR 1975 SC 2037; (1975) 2 SCC 274. In this decision the State had to amend the definition of "house" with retrospective effect to get over a decision of the High Court. When a factory was built in the outskirts of the Hyderabad City, a huge township was built along with the factory. The question arose whether the factory and the huge township constructed as a colony are taxable by the Gram Panchayat or not. In view of the earlier decision of the High Court, amendment was brought with retrospective effect. In such a situation an argument was raised that the amending Act giving retrospective effect amounts to encroaching upon the judicial function. The court observes in paragraph 10 at page 278 as follows: "... The power of the Legislature to pass a law postulates the pow....
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....are not outside article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy, the legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law, are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment, what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory." The Court further observed in paragraph 24 as follows: "It is also contended: '.................. Several of the hotels belonging to members of petitioner associations have entered into long-term contracts for supply of food and beverages and for providing accommodation. The execution of such contracts would become onerous and even impossible in view of the levy of the present expenditure tax. There is no provision in the Act or any separate legislation whereby hotels can pas....
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....he question of reasonableness of the retrospective effect, it found that it did not actually operate as an unreasonable burden. It also held that on facts retrospectivity for the short period has not amounted to making the businessmen suffer heavily nor has it rendered the tax into one of a confiscatory character. The Division Bench approved the decision, and held that there may be instances where the retrospectivity may impose unreasonable burden and where the retrospective imposition of the tax may infringe article 19(1)(g) of the Constitution. On facts they found that there was neither unreasonable burden, nor infringement of the right under article 19(1)(g). The two decisions are based mostly on the test of reasonableness and on the basis of the short period for which the retrospectivity is given. The third set of cases are all cases where to get over the judgment of the High Court or the Supreme Court, Acts have been passed with retrospective operation and in such cases, on the basis of the principle that validating enactments are given a more liberal interpretation, retrospective operation has been upheld. There is absolutely no decision relied upon by the Government Pleader ....
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.... liable to be quashed. I hold on point No. 3 that as per the well-accepted and settled principles governing the validity of taxing statutes, Ordinance 7 of 1989 and Act 3 of 1990 can only have prospective operation, and giving them retrospective operation is not valid. 28.. I shall now briefly refer to each original petition and record my findings. (1) O.P. No. 9375 of 1989: In this case there are nine petitioners, who are all dealers in agarbathis. Exhibit P1 is the notice given to the first petitioner. It is claimed that similar notices were issued to the other petitioners. In the case of all the petitioners, they have paid tax at 5 per cent on the turnover of agarbathis. The department is now claiming to tax them at 10 per cent and it proposes to reopen the assessment and demand the other 5 per cent. Exhibit PI and similar notices issued to petitioners 2 to 9 are not valid. They are liable to be quashed. In the result Original Petition No. 9375 of 1989 is allowed. Exhibit P1 notice is quashed and similar notices issued to petitioners 2 to 9 shall stand cancelled. (2) O.P. No. 10385 of 1989: This original petition is filed by four petitioners. Exhibit P1 notice given to ....
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....per cent on the sales turnover of agarbathis amounting to As. 4,76,825.18. Exhibit P1 order which seeks to levy tax at 10 per cent shall stand quashed. The original petition is allowed. (8) O.P. No. 10378 of 1989: Here the solitary petitioner challenges exhibit P1 assessment order, and exhibit P2 demand notice. He has already paid at the rate of 5 per cent and now under exhibits P1 and P2 another amount of Rs. 21,866.50 is sought to be collected. Exhibit P2 demand notice is hereby quashed. The original petition is allowed. (9) O.P. No. 1059 of 1990: In this petition the petitioner prays for only quashing exhibit P2 which relates to the demand for sales tax at 10 per cent based upon the monthly returns for June, 1989 to October, 1989. In view of the findings recorded by me, for the months of June and July the petitioner is only liable to pay tax on the turnover of agarbathis at 5 per cent. The department is not entitled to demand sales tax at 10 per cent for these two months. For the month of August, up to August 28, 1989, the turnover should be taxed at the rate of 5 per cent only. For the turnover effected on 29th, 30th and 31st August, 1989, the Ordinance would be....