TaxTMI 
TaxTMI 
2026 (7) TMI 833
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....r" under the Karnataka Sales Tax Act, 1957, and the legal effect of a subsequent legislative amendment by which such exemption was confined to sugar "produced or manufactured in India" with retrospective effect. The controversy is not merely whether a fiscal enactment can operate retrospectively. The larger issue is whether a commodity which stood exempted under the statutory entry as it then read, and which was so treated by the taxing authority itself, can thereafter be retrospectively excluded from the exemption and subjected to tax for past periods, together with the incidents of penalty and interest. 3. The appeals arise out of the common judgment dated 26.11.2007 passed by the Division Bench of the High Court of Karnataka, whereby the appeals preferred by the State were allowed, the orders passed by the Single Judge were set aside, and the retrospective amendment made to the exemption entry relating to "sugar" was upheld. The Single Judge had earlier struck down the retrospective operation of the amendment on the ground that it imposed an unreasonable burden on dealers who had not collected tax during the relevant assessment periods. 4. Since the statutory amendment, th....
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....period 1994 to 1996. The appellant in the connected appeal, M/s Indian Sugar and General Export Import Corporation Ltd., was registered under the KST Act and the Central Sales Tax Act, 1956, and was also dealing in imported sugar. 13. During the relevant assessment periods, the assessees imported sugar from outside the country and sold the same either within the State of Karnataka or in the course of inter-State trade. Their case is that they proceeded on the footing that sugar, including imported sugar, was exempt under the Fifth Schedule and that, acting on such understanding, they did not charge or collect sales tax from their purchasers. 14. This aspect is not a matter of mere equity. It has a direct bearing on the nature of the burden now sought to be imposed. Sales tax, in its ordinary commercial operation, is collected by the dealer from the purchaser and is thereafter paid to the State. Where the commodity is treated as exempt, the dealer does not collect tax. If, years later, the law is retrospectively amended and the dealer is called upon to pay tax for past transactions, the burden is not passed on in the ordinary manner. It rests upon the dealer himself. 15. Th....
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....word 'Sugar', the words and brackets 'produced or manufactured in India' shall be and shall be deemed always to have been inserted." 20. Simultaneously, a separate entry was introduced in respect of sugar imported from outside the country. The consequence of the amendment was that exemption came to be confined to sugar produced or manufactured in India. Imported sugar, which had earlier been treated as falling within the exempted commodity "sugar", was retrospectively excluded from the exemption. 21. Pursuant to the amendment, reassessment proceedings were initiated. Notices were issued under Section 9(2) of the Central Sales Tax Act, 1956 read with Section 12-A of the KST Act. The basis of reassessment was that by virtue of the retrospective amendment, imported sugar was not entitled to the exemption earlier granted. 22. In the case of Asia Sugar & Chemical Co., notice dated 16.01.2003 was issued proposing reassessment for the period 03.12.1994 to 31.03.1995. The notice recorded that exemption had earlier been allowed on sales of sugar in the course of inter-State trade and on stock transfers outside the State aggregating to Rs.9,02,52,932. Reassessment order was thereaft....
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....ct, 1957 was for the limited purpose of identifying the commodity. It was not an incorporation of the entire excise scheme. According to learned Senior Counsel, the State seeks to convert a description of goods into a condition of origin, which the text of the entry does not permit. 30. It was further submitted that this understanding was not confined to the assessees. The Department itself granted exemption in the original assessments. The reassessment notice in the case of Asia Sugar & Chemical Co. records that exemption was allowed in reliance on State of Kerala and Another v. State Trading Corporation of India Ltd. (supra) 31. Learned Senior Counsel submitted that Karnataka Act No. 5 of 2001 was not clarificatory. It introduced, for the first time, a source-based distinction by inserting the words "produced or manufactured in India". The amendment, therefore, was a substantive withdrawal of exemption. 32. It was further submitted that though retrospective fiscal legislation is not unknown to law, the retrospective operation in the present case is unconstitutional to the extent it imposes a burden on completed transactions. The assessees had not collected tax. The asses....
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....h law. Such grievance, however, cannot affect the validity of the amendment. III. QUESTIONS FOR CONSIDERATION 40. On the rival submissions and the statutory scheme noticed above, the following questions arise for consideration: i. Whether imported sugar was covered by the exemption entry relating to "sugar" in the Fifth Schedule to the Karnataka Sales Tax Act, 1957 prior to Karnataka Act No. 5 of 2001? ii. Whether Karnataka Act No. 5 of 2001, inserting the words "produced or manufactured in India" with retrospective effect, is within the legislative competence of the State and constitutionally valid? iii. Whether the retrospective operation of the amendment can be enforced without qualification against dealers who had acted under the earlier exemption regime, whose assessments had been completed, and who had not collected tax from purchasers? iv. What consequential relief should follow in respect of reassessment, penalty, interest, and computation under the Central Sales Tax Act, 1956? IV. GOVERNING PRINCIPLES 41. Since the questions raised lie at the intersection of statutory interpretation, exemption, legislative validation and cons....
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.... overrule a judgment merely by saying so. It must remove the basis of the judgment by enacting a valid law. 47. In P. Kannadasan and Others v. State of Tamil Nadu and Others (1996) 5 SCC 670, the same principle was reiterated. A Legislature may change the law retrospectively and thereby alter the legal foundation on which a judgment rests. It cannot, however, exercise judicial power by merely declaring a judgment to be incorrect. 48. The third principle concerns exemption as a matter of fiscal policy. In Kasinka Trading and Another v. Union of India and Another (1995) 1 SCC 274, this Court held that an exemption granted in public interest can be withdrawn in public interest. In Shrijee Sales Corporation and Another v. Union of India (1997) 3 SCC 398, this Court reiterated that public interest may justify withdrawal of an exemption and that no assessee can insist on continuation of a concession contrary to policy. 49. The fourth principle is equally important. Retrospectivity, though permissible, is not immune from constitutional scrutiny. In Empire Industries Limited and Others v. Union of India and Others (1985) 3 SCC 314, this Court upheld retrospective fiscal legislatio....
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....ctment, or it may merely borrow a description for identifying the commodity. The answer depends upon the text, context and purpose of incorporation. In the present case, the exemption entry did not refer to liability to additional duties of excise. It referred to "sugar as described" in the First Schedule to the Additional Duties of Excise Act. The expression "as described" is significant. It identifies the goods. It does not, without more, import an origin-based limitation. 57. The Kerala High Court in State Trading Corporation of India Ltd. v. Assistant Commissioner (Assessment-I), Special Circle, Trivandrum (supra), dealt with the very nature of this argument. The relevant entry in the Kerala statute exempted sugar by referring to the definition in the Central Excise law. The contention advanced by the State was that the excise description applied only to sugar produced in India. Repelling the contention, the High Court held that the definition of "sugar" had been borrowed for the purpose of the sales tax exemption only to identify what sugar is. 58. The Kerala High Court observed, in substance, that it would not be justified, in the absence of legislative indication, to g....
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....eld that imported sugar was covered by the exemption before 2001, the amendment cannot be characterized as a mere explanation of an existing legal position. It altered the legal position. It withdrew the exemption from imported sugar retrospectively. 66. However, this conclusion does not by itself invalidate the amendment. The State Legislature, at the relevant time, had legislative competence under Entry 54 of List II to levy tax on sale or purchase of goods. The power to levy tax includes the power to grant exemption. The power to grant exemption includes the power to withdraw or restrict exemption. 67. The law in Kasinka Trading and Another v. Union of India and Another (supra), and Shrijee Sales Corporation and Another v. Union of India (supra), makes it clear that exemption is a matter of fiscal policy. A concession granted by the State does not create an indefeasible right that it shall continue. Public interest and revenue considerations may justify withdrawal. 68. Nor can the amendment be invalidated merely because the withdrawal has been made retrospective. In Rai Ramkrishna and Others Etc. v. State of Bihar (supra), this Court recognized that retrospective taxati....
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.... in the classical sense explained in Shri Prithvi Cotton Mills Ltd. and Another v. Broach Borough Municipality and Others (supra), removes the defect on account of which the levy failed and validates what could otherwise have been lawfully levied. Here, the Legislature has certainly altered the law retrospectively. It had the competence to do so. But the Court must still examine whether the incidents attached to such retrospective levy, namely penalty and interest for the past period, can follow in the same manner as they would in an ordinary case of default. 77. In R.C. Tobacco (P) Ltd. and Another v. Union of India and Another (supra), this Court upheld retrospective withdrawal of exemption, but the judgment itself recognizes that reasonableness of retrospective operation has to be considered with reference to the facts. In Empire Industries Limited and Others v. Union of India and Others (supra) retrospective fiscal legislation was upheld, but not on the footing that retrospective operation can never be examined under constitutional standards. 78. In D. Cawasji & Co. v. State of Mysore (supra), this Court cautioned that retrospective taxation may become unreasonable where ....
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.... period. Interest, if otherwise leviable under the statute, shall run only from the date of lawful demand raised pursuant to reassessment after giving effect to this judgment and not from the date of the original transaction or the original assessment period. VIII. CENTRAL SALES TAX ASPECT 85. The assessees have raised a specific grievance that, in respect of inter-State sales, tax was imposed at 10% ignoring Section 8(2) of the Central Sales Tax Act, 1956. This is a matter of rate and computation. 86. The validity of the retrospective amendment under the KST Act does not dispense with compliance with the Central Sales Tax Act. If tax is to be levied on inter-State sales, the assessing authority must apply the rate and conditions prescribed by the Central Sales Tax Act as applicable for the relevant period. 87. We do not consider it appropriate to finally compute the liability in these appeals. The assessing authority shall recompute the liability, if any, in respect of inter-State sales strictly in accordance with the Central Sales Tax Act, 1956, including Section 8(2), wherever applicable, after affording an opportunity of hearing to the assessees. IX. CONCLUSIO....