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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • For the Appellant: N. Sudhakaran
Judges
  • Balakrishna Menon
  • Varghese Kalliath, JJ.
Acts
  • S. 2 of the Tamil Nadu Additional Sales-tax (Amendment) Act, 1976. S. 2
  • SECTION 1 TAMIL NADU ADDITIONAL SALES TAX ACT 1970
  • 10 lakhs. Sub-section (2) of S. 2 of the Tamil Nadu Act
  • S. 5(1) of the Bihar Finance Act, 1981
  • 25 lakhs. Clause (i) of sub-section (2A)
  • Kerala Finance Act 18/1987
  • Finance Act 18/1987.10.
  • Sales Tax Act.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • For the Appellant: N. Sudhakaran
Judges
  • Balakrishna Menon
  • Varghese Kalliath, JJ.
Acts
  • S. 2 of the Tamil Nadu Additional Sales-tax (Amendment) Act, 1976. S. 2
  • SECTION 1 TAMIL NADU ADDITIONAL SALES TAX ACT 1970
  • 10 lakhs. Sub-section (2) of S. 2 of the Tamil Nadu Act
  • S. 5(1) of the Bihar Finance Act, 1981
  • 25 lakhs. Clause (i) of sub-section (2A)
  • Kerala Finance Act 18/1987
  • Finance Act 18/1987.10.
  • Sales Tax Act.
See more information ...
Smart Summary

Structured Summary of the Opinion (Balakrishna Menon, J.)

Factual and Procedural Background

The petitions were filed by dealers registered under Section 13 of the Kerala General Sales Tax Act (the Act). They challenged sub-section (2A) of Section 5 of the Act, as introduced by the Kerala Finance Act 18/1987. Clause (i) of sub-section (2A) (omitting the proviso) requires every dealer whose total turnover in a year exceeds Rs. 25 lakhs to pay a turnover tax at the rate of half per cent on the turnover of goods falling under the First or Fifth Schedule to the Act.

The court set out statutory definitions (notably "turnover" in S.2(xxvii) and "dealer" in S.2(viii)), other provisions of S.5 (levy of tax on sale or purchase) and S.5A (purchase tax), and noted that the liability under the Act is on a dealer's annual taxable turnover. The principal challenge was that the State Legislature lacked competence under Entry 54, List II, Seventh Schedule, to enact the impugned turnover tax, particularly because the classification of dealers for levy used "total turnover" which petitioners argued could include turnover covered by Article 286 of the Constitution.

The learned Advocate General appeared for the respondents and took notice on their behalf. The court heard the arguments and considered relevant Supreme Court precedents before delivering judgment.

Legal Issues Presented

  1. Whether sub-section (2A)(i) of Section 5 of the Kerala General Sales Tax Act (as introduced by Kerala Finance Act 18/1987) is within the legislative competence of the State under Entry 54 of List II of the Seventh Schedule to the Constitution, insofar as it imposes a turnover tax by classifying dealers based on total turnover (exceeding Rs. 25 lakhs).
  2. Whether a classification of dealers for the purpose of imposing an additional levy may appropriately take into account total or gross turnover (including turnover covered by Article 286) for identification of the class, while imposing the levy only on the taxable turnover.
  3. Whether the impugned turnover tax is violative of fundamental rights under Article 19(1)(f) and (g) or of Article 300A of the Constitution (as contended by the petitioners).

Arguments of the Parties

Petitioners' Arguments

  • The State Legislature is not competent under Entry 54, List II to pass legislation imposing a tax on turnover in the manner done by sub-section (2A)(i) of Section 5.
  • Because the class of dealers liable to the turnover tax is determined with reference to "total turnover", that concept may bring into account turnover covered by Article 286 (inter-State/outside sales). Classifying a dealer on that basis for levy purposes is, according to the petitioners' counsel, beyond State legislative competence.
  • The levy is alleged to infringe entrenched rights, specifically Article 19(1)(f) and (g), and possibly Article 300A (these contentions were pressed during argument).
  • Counsel (Sri Rama Shenai) relied on certain older authorities (listed in the opinion) in support of these contentions.

Respondents' / Advocate General's Arguments

  • The turnover tax (additional levy) is in substance a tax connected to sales of goods and can be legitimately linked to a dealer's taxable turnover where the dealer's total turnover exceeds the threshold (Rs. 25 lakhs).
  • Supreme Court precedents establish that the State may classify dealers on the basis of total or gross turnover (even if that definition includes sales covered by Article 286) for the limited purpose of identifying the class of dealers who will bear an additional levy, so long as the actual incidence of the levy is confined to taxable (inside-State) turnover.
  • The impugned provision is therefore within legislative competence and is not inherently violative of Articles 19(1)(f) or (g) or of Article 300A.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
S. Kodar v. State of Kerala ((1974) 4 SCC 422 : AIR 1974 SC 2272) Held that an additional tax linked to turnover (or tax payable) is in substance a tax on sale of goods and within Entry 54; an enhancement tied to turnover thresholds does not alter character of sales tax; inability to pass on the tax does not invalidate the levy; not violative of Art.19(1)(f)/(g) unless confiscatory. The court relied on this authority to support that an additional levy (here called turnover tax) can be regarded as a tax on sales and is within State competence; it rejected the petitioners' contention that linkage to turnover places the provision outside Entry 54.
Hoechst Pharmaceuticals Ltd. v. State of Bihar ((1983) 4 SCC 45 : AIR 1983 SC 1019) Upheld a surcharge on dealers whose gross turnover exceeds a threshold; it is permissible to take into account gross turnover (including elements covered by Article 286) for classification; the surcharge is actually levied only on inside sales and classification aims to identify economically superior dealers. The court applied this principle to hold that classifying dealers by total turnover (even though definition may include Article 286 turnover) is permissible for identifying those who should bear an additional levy, provided the levy's incidence is confined to taxable turnover.
K.M. Mohamad Abdul Khader Firm v. State of Tamil Nadu (1984 Supp SCC 563 : AIR 1985 SC 12) Confirmed that an additional sales tax linked to taxable turnover (with thresholds and varying rates) is within State competence; changing the mode of computation (linking the rate to turnover rather than to tax assessed) does not affect constitutional validity. The court relied on this authority to affirm that the turnover tax may be linked to taxable turnover of dealers whose total turnover exceeds the statutory threshold, reinforcing that the impugned provision is within Entry 54 competence.
AIR 1939 FC. 1 Referred to by petitioners' counsel during argument (as an authority relied upon). The court stated this decision (as cited by counsel) had no relevance for the decision in the present case.
AIR 1942 FC 33 Referred to by petitioners' counsel during argument (as an authority relied upon). The court stated this decision (as cited by counsel) had no relevance for the decision in the present case.
AIR 1931 PC 248 Referred to by petitioners' counsel during argument (as an authority relied upon). The court stated this decision (as cited by counsel) had no relevance for the decision in the present case.
1963 SC 1760 Referred to by petitioners' counsel during argument (as an authority relied upon). The court stated this decision (as cited by counsel) had no relevance for the decision in the present case.

Court's Reasoning and Analysis

The court began by setting out the statutory framework: the definitions of "turnover" and "dealer", the levy provisions in Section 5 (tax on sale or purchase) and Section 5A (purchase tax), and the fact that liability under the Act is measured on annual taxable turnover.

The core legal objection was that the State lacked competence under Entry 54 to impose the impugned turnover tax because the class of dealers was defined by reference to "total turnover", which (petitioners contended) could include sales covered by Article 286 and thus involve matters beyond State power.

The court examined Supreme Court authorities (Kodar, Hoechst Pharmaceutical, and K.M. Mohamad Abdul Khader Firm). Those decisions established these controlling propositions, which the court applied to the facts before it:

  • An additional levy framed as an extra tax tied to a dealer's turnover or tax payable is in substance a tax on sales of goods and falls within the legislative competence under Entry 54, List II. (Kodar)
  • It is permissible for a State to adopt a broad definition of "gross" or "total" turnover (even including elements covered by Article 286) for the limited purpose of classifying dealers into categories (for example, to identify economically stronger dealers) so long as the actual levy is made only on inside-State (taxable) turnover. The classification is a device to identify the class of dealers who will be subject to the additional levy; it does not effectuate taxation of inter-State or outside sales. (Hoechst)
  • A change in the mode of computation — for example, linking the rate of additional levy to taxable turnover rather than to the amount of tax assessed — does not alter the nature of the levy and does not render it constitutionally invalid. (K.M. Mohamad Abdul Khader Firm)

Applying these principles, the court observed that sub-section (2A)(i) imposes turnover tax only on taxable turnover (i.e., turnover in respect of goods that are within the First or Fifth Schedule) even though the threshold for liability is determined with reference to total turnover. Because the actual tax is levied only on taxable (inside-State) turnover, and because the classification by total turnover is a permissible method to identify the class of dealers who should bear an additional levy, the State's enactment fell within the constitutional power under Entry 54.

The court also considered and rejected the petitioners' contentions under Article 19(1)(f) and (g) and Article 300A, applying the same line of Supreme Court authority which had previously negatived similar contentions where the levy was not shown to be confiscatory. The authorities cited by petitioners' counsel (including AIR 1939 FC 1; AIR 1942 FC 33; AIR 1931 PC 248; and 1963 SC 1760) were held by the court to be not relevant to the present decision.

Holding and Implications

Holding: The original petitions challenging sub-section (2A)(i) of Section 5 of the Kerala General Sales Tax Act (as inserted by Kerala Finance Act 18/1987) are dismissed.

Implications:

  • The direct legal effect is that the challenge to the turnover tax provision failed and the provision remains operative; the turnover tax, as framed, stands upheld by this court.
  • The petitions were dismissed without any order as to costs (the court expressly so ordered).
  • The opinion does not state that it creates any new precedent; rather, it resolves the petitions by applying existing Supreme Court authorities to the scheme of the impugned provision.

Disposition recorded in the opinion: "These original petitions are accordingly dismissed, in the circumstances without any order as to costs."

Show full summary ...

    Das Agencies v. State Of Kerala

    Balakrishna Menon, J.:— Heard also the learned Advocate General who took notice on behalf of the respondents.

    2. The petitioners in both the original petitions are dealers registered under S. 13 of the Kerala General Sales Tax Act, hereinafter referred to as the Act. They challenge sub-section (2A) of S. 5 of the Act introduced by the Kerala Finance Act 18/1987. Subject to the exceptions mentioned in the proviso clause (i) of sub-section (2A) imposes what is called a turnover tax at the rate of half per centum on the turnover of goods coming under the First or Fifth Schedule to the Act of every dealer whose total turnover in a year exceeds Rs. 25 lakhs. Clause (i) of sub-section (2A) omitting the proviso is extracted below:

    ‘Notwithstanding anything contained in this Act or the rules made thereunder, every dealer whose total turnover in a year exceeds rupees twenty-five lakhs shall pay turnover tax at the rate of half per centum on the turnover of goods coming under the First or Fifth Schedule to this Act.”

    3. S. 2(xxvii) of the Act defines “turnover” to mean “the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer……”. S. 2(viii) defines ‘dealer’ to mean any person who carries on the business of buying, selling, supplying or distributing goods ……”. S. 5 of the Act provides for the levy of tax on sale or purchase of goods and under sub-s. (1) every dealer whose total turnover for a year is not less than one lakh rupees is required to pay tax on bis taxable turnover for that year as specified in the schedules attached to the Act. The liability for payment of tax under the Act is on the annual taxable turnover of every dealer mentioned in S. 5. S. 5A provides for the levy of purchase tax on every dealer who, in the course of bis business, purchases goods liable to tax under the Act in circumstances in which no tax is payable under S. 5. Sub-s. (3) makes it clear that the purchase tax is also made payable on the annual turnover of the purchasing dealer.

    4. The principal challenge against sub-s. (2A)(i) of S. 5 of the Act introduced by the Kerala Finance Act 18/1987 is based on the contention that the State Legislature is not competent to pass a legislation imposing a tax on turnover under entry 54 of List II of the Seventh Schedule to the Constitution. It is clear from sub-s. (2A)(i) itself that the turnover tax is payable only on the taxable turnover even though the class of dealers liable to pay such tax is reckoned with reference to the total turnover exceeding Rs. 25 lakhs. It is therefore contended that even turnover covered by Article 286 of the Constitution would fall under the concept of the total turnover and to classify a dealer based on the turnover covered by Article 286 for the purpose of levy, according to the counsel for the petitioners, is beyond the legislative competence of the State Legislature.

    5. These questions raised in these original petitions are covered by the decisions of the Supreme Court in S. Kodar v. State Of Kerala ((1974) 4 SCC 422 : AIR 1974 SC. 2272), Hoechst Pharmaceuticals Ltd. v. State of Bihar ((1983) 4 SCC 45 : AIR 1983 SC 1019) and K.M Mohamad Abdul Khader Firm v. State of Tamil Nadu (1984 Supp SCC 563 : AIR 1985 SC 12).

    6. Kodar's case related to the validity of S. 2(1) of the Tamil Nadu Additional Sales Tax Act. 1970 as per which an additional tax at the rate of 5 per cent on the tax payable by a dealer is imposed on all dealers whose total turnover for a year exceeds Rs. 10 lakhs. Sub-section (2) of S. 2 of the Tamil Nadu Act expressly provided that no dealer referred to in subsection (1) shall be entitled to collect the additional tax from the customers and under sub-section (3) any dealer who collects the additional tax payable under sub-section (1) is liable to punishment with fine extending to Rs. 1000/-. The question of legislative competency under entry 54 of List II of the Seventh Schedule to the Constitution is considered and it is held that the additional tax levied under the Tamil Nadu Act is really a tax on the sale of goods and the fact that the quantum of the additional tax is determined with reference to the sales-tax imposed would not alter its character. It is further held that the additional tax is in reality a tax on the aggregate of sales effected by a dealer during a year and is in substance and effect an enhancement in the rate of sales-tax when the turnover of a dealer exceeds Rs. 10 lakhs a year. The mere fact that the dealer is not able to pass on the tax to the customer is not a ground to invalidate thc legislation as the primary liability for payment of tax is on the dealer himself. A contention that it is an extra burden on the dealer and is violative of Art. 19(1)(f) and (g) of the Constitution was also negatived for the following reason stated at page 2275:

    “15. As we said, the additional tax is a tax upon sales of goods and not upon the income of a dealer and so long as it is not made out that the tax is confiscatory, it is not possible to accept the contention that because the dealer is disabled from passing on the incidence of tax to the purchaser, the provisions of the Act impose an unreasonable restriction upon the fundamental rights of the appellants under Art. 19(1)(g) or 19(1)(f).”

    7. The Hoechst Pharmaceuticals’ case (supra) related to the validity of S. 5(1) of the Bihar Finance Act, 1981 providing for the levy of a surcharge on every dealer whose gross turnover during a year exceeds R. 5 lakbs in addition to ihe tax payable by him at such rate not exceeding ten per centum of the total amount of tax. Sub-(3) of S. 5 prohibits the dealer from col lecting the amount of surcharge payable by him from his customers. The contention that the legislation imposing the surcharge on every dealer whose gross turnover exceeds Rs. 5 lakhs is not within the competence of the State Legislature under entry 54 of List II of the Seventh Schedule to the Consti tution was negatived by the Supreme Court. It was also held that there is nothing wrong in taking into consideration the gross turnover including the turnover covered by Art. 286 of the Constitution for the ourpose of identifying dealers liable to pay surcharge under the Act. The Supreme Court accordingly held that so long as sales in the course of inter-State trade and commerce or sales outside the State and sales in the course of import into or export out of, the territory of India are not taxed, there is nothing to prevent the State Legislature while making a law for the levy of surcharge under Entry 54 of List II of the Seventh Schedule to take into account the total turnover of the dealer within the State and provide that if the gross turnover exceeds Rs. S lakhs in a year, be shall, in addition to the tax, also pay a surcharge at such rate not exceeding 10 per centum of the tax as may be provided for. It is stated at page 1050:

    “The liability to Day a surcharge is not on the gross turnover including the transactions covered by Article 286 but is only on inside sales and the surcharge is sought to be levied on dealers who have a position of economic superiority. The definition of gross turnover in S. 2(j) of the Act is adopted not for the purpose of bringing to surcharge inter-State sales or outside sale or sales in the course of import into, or export of goods out of the territory of India, but is only for the purpose of classifying dealers within the State and to identify the class of dealers liable to pay such surcharge. The underlying object is to classify dealers into those who are economically superior and those who are not.”

    8. In Mohd. Abdul Khader Firm's case (suora) the Supreme Court was concerned with the validity of S. 2 of the Tamil Nadu Additional Sales-tax (Amendment) Act, 1976. S. 2 provided for an additional sales-tax at the rates specified therein on the taxable turnover of the respective dealers whose turnover exceeds Rs. 3 lakhs, Rs. S lakhs, Rs. 7 lakhs and Rs. 10 lakbs at 0.4 percent, 0.5 percent, 0.6 percent and 0.7 percent of the taxable turnover. Following the decisioo in Kodar's case ((1974) 4 SCC 422 : AIR 1974 SC 2272) the Supreme Court upheld the levy as within the legislative competence of the State Legislature under Entry 54 of List IT of the Seventh Schedule. The contention that the levy is confiscatory and violative of Art. 19(I)(f) and (g) of the Constitution was also negatived for the same reason as was stated in Kodar's case. The Supreme Court in Mohd, Abdul Khader Firm's case was dealing with an additional levy on the turnover and not a mere addition on the tax assessed and in a case where the section itself had prohibited the dealer from passing on the liability to the customers. The Supreme Court held that merely for the reason that the levy is geared to the turnover, it can not be said that the legislation is outside the scope of entry 54 of List II. It is a different mode of computation of the additional tax by linking the rate to the turnover instead of to the tax assessed under the Sales Tax Act. It is stated at page 15:

    “The nature and identity of the additional sales tax imposed by the 1970 Act have not been in any way altered by the impugned Act. As already pointed out what has been done by the impugned Act is only to provide for a different mode of computation of the additional sales tax by linking the rate of levy to the taxable turnover instead of to the amount of tax assessed under the Act of 1959. The constitutional validity of the levy of additional tax is not in any manner affected by the said change brought about in the mode of levy and computation as a result of the amendments effected by the impugned Act.”

    9. This decision of the Supreme Court is an authority for the proposition urged by the learned Advocate General that the additional levy (in the present case called the turnover tax) can well be linked with the taxable turnover of the dealer whose total surnover exceeds Rs. 25 lakhs. It is not disputed that the goods coming under the First or the Fifth Schedule to the Act are taxable and the turnover relating to those goods is taxable turnover on which alone the levy is imposed by sub-section (2A)(i) of S. 5 of the Act read with its proviso introduced by the Finance Act 18/1987.

    10. The above discussion disposes also of ‘he contention that the levy is opposed to Art. 19(1)(g) and Art. 300A of the Constitution. The decisions in AIR 1939 FC. 1, AIR 1942 FC 33, AIR 1931 PC 248 and 1963 SC 1760 referred to by Sri. Rama Shenai during the course of his arguments have no relevance for decision of this case.

    11. These original petitions are accordingly dismissed, in the circumstances without any order as to costs.

    M.MDismissed.

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    Comments

    Das Agencies v. State Of Kerala
    (Nov 17, 1987)