M/S ACHAL INDUSTRIES versus STATE OF KARNATAKA on 28 March 2019

1. The present appeals have been preferred against the impugnedjudgment dated 17[th] April, 2007 passed by the High Court of Karnatakadisposing of the Sales Tax Revision Petition examining the applicabilityof the turnover tax as defined under Section 6-B(1) by the KarnatakaSales Tax Act, 1957(hereinafter being referred to as “KST Act”).

2. The brief facts of the case which may be relevant for thepresent purpose are that the appellant is a manufacturer and registereddealer of the cashew kernels cashew shell oil, etc. Assessments weremade for the years 1990-91 to 1999-2000 by the respective assessingauthorities under Section 12(3) of the Act. Against the assessment ordersof the assessing authorities, appeals/revision petitions were preferredbefore the appellate/revisional authority and the contention advanced bythe learned counsel for the appellant was that levy of tax under Section6-B of the Act, on the total turnover is a misconstruction of the provisionand it has to be on the “taxable turnover” which may be in conformitywith Article 286 of the Constitution of India but that was neither acceptedby the assessing authority nor at the appellate/revisional stage againstwhich the present appeals have been preferred impugning theassessments made for the years 1990-91 to 1999-2000 in the instantappeals.

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A3. The main thrust of the submission of Mr. Mohit Chaudhary,learned counsel for the appellant is that Courts below have manifestlyerred in appreciating that the ‘total turnover’ as defined under Section6-B(1) for the purpose of levy turnover tax can in no event include the‘turnover’ with reference to which the State has no power to levy taxunder the constitutional scheme and the submission proceeds that theBlevy of tax under Section 6-B can be on the ‘taxable turnover’ alone.Though the first limb of the Section has adopted the word ‘total turnover’but it is only for the limited purpose of identifying the dealers and furthersubmits that the ‘turnover’ which is not liable to tax under the provisionsof the Act, cannot be included in the calculation of ‘total turnover’ forCthe purpose of assessment of turnover tax and that is according to himthe basic error which has been committed in interpreting Section 6-B(1)of the KST Act.

4. Learned counsel submits that the interpretation which has beenadvanced by the respondent State if taken at its face value, would amountDto permitting the State to indirectly levy turnover tax on part of a dealer’stotal turnover which is non exigible to intra sales tax and indeed wouldbe beyond the legislative competence of the State.

5. Learned counsel further submits that although the constitutionalvalidity of the provision has been upheld but still open to the Court toEread down the provision in a manner that it do not offend the Constitutionalscheme. The concept of ‘total turnover’ has been incorporated underSection 6-B(1) for the purpose of identification of the dealers and forprescribing rate/slabs and the actual levy is intended only on intra-stateturnover by reason of the proviso, it may be within the competence ofthe State Legislature. In support of submission, learned counsel hasFplaced reliance on the decision of this Court in Indra DasVs. State ofAssam2011(3) SCC 380 and Rakesh Kumar PaulVs. State of Assam2017(15) SCC 67.

6. Per contra, Mr. Devadatt Kamat, learned AAG appearing forthe respondent State submits that the issue in the instant appeals standsGconclusively answered by this Court inM/s. Hoechst PharmaceuticalsLtd. and OthersVs. State of Bihar and Others1983 (4) SCC 45 andfurther submits that once the constitutional validity of Section 6-B hasbeen upheld by the jurisdictional High Court in the series of decisions,wherein the challenge to Section 6-B(1) offending Article 14 and 19(1)(g)

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of the Constitution of India regarding the classification of dealers beingrepelled and it was held that the inclusion of inter-state export and importturnover is only for the purpose of identifying dealers and not for levyingtax, that was within the competence of the State Legislature. This Courthas explained in M/s. Hoechst Pharmaceuticals Ltd. and OthersVs.State of Bihar and Others(supra) to reiterate the principle of economicsuperiority for the purpose of levying turnover tax.

7. Learned counsel for the respondent State further submits thatin the instant case, the appellant filed returns for the assessment years inquestion claiming certain deductions. When such returns were assessedby the assessing authorities, it was noticed that as far as the determinationof the rate at which ‘turnover tax’ was to be levied, the dealer has madeincorrect deductions and in turn has furnished returns at a lower rate.Upon assessment, the assessing authority determined the actual slabapplicable to the assessee for each assessment year and levied theturnover tax accordingly and it is in conformity with Section 6-B(1) ofthe KST Act.

8. Before we proceed to examine the question raised any further,it will be relevant to note the pre-amendment (1[st] April, 2000) of theKST Act, as under:- “2. Definitions. – (1) In this Act, unless the contextotherwise requires, —

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“(u)”tax” means a tax leviable under the provisions of this Act; [(u-1) “taxable turnover” means the turnover on which a dealershall be liable to pay tax as determined after making such deductionsfrom his total turnover and in such manner as may be prescribed,but shall not include the turnover of purchase or sale in the courseof inter-State trade or commerce or in the course of export of thegoods out of the territory of India or in the course of import of thegoods into the territory of India; (u-2) “total turnover” means the aggregate turnover in all goodsof a dealer at all places of business in the State, whether or notthe whole or any portion of such turnover is liable to tax, includingthe turnover of purchase or sale in the course of inter-State trade A

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or commerce or in the course of export of the goods out of theterritory of India or in the course of import of the goods into theterritory of India;]

(v) “turnover” means the aggregate amount for which goodsare bought or sold, or supplied or distributed [or delivered orotherwise disposed of in any of the ways referred to in clause (t)]by a dealer, either directly or through another, on his own accountor on account of others, whether for cash or for deferred paymentor other valuable consideration; B

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[6-B. Levy of Turnover Tax.- [(1) [Every registered dealerand every dealer who is liable to get himself registered under sub-sections (1) and (2) of Section 10] whose total turnover in a yearis not less than [ten lakh] rupees whether or not the whole or anyportion of such turnover is liable to tax under any other provisionsof this Act, shall be liable to pay tax,- C

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(i) at the rate of one and a quarter per cent of his total turnover,if his total turnover is not less than ten lakh rupees but is lessthan two hundred lakh rupees in a year; or

(ii) at the rate of one and three-fourths per cent of his total turnover,if his total turnover is not less than two hundred lakh rupees[but is less than five hundred lakh rupees in a year; or]

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(iii) at the rate of [two and three fourth per cent] of his totalturnover, if his total turnover is not less than five hundred lakhrupees in a year]:

Provided that no tax under this sub-section shall bepayable on that part of such turnover which relates to,- F

(i) sale or purchase of goods specified in the Fifth Schedule;

(ii) sale or purchase of good specified in the Fourth Schedule;

(iii) sale or purchase of goods in the course of inter-State trade orGcommerce; ….

Provided further that save as otherwise provided in this sub-section, no other deduction shall be made from the totalturnover of a dealer for the purposes of this Section.”

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9. The expression “total turnover” + “turnover” which has beenused under Section 6-B has the same meaning as defined under Section2(1)(u-2) and 2(v) of the Act. It may be further noticed that underSection 6-B, reference is made on ‘total turnover’ and not the ‘turnover’as defined under Section 2(v) of the KST Act and taking note of theexemption provided under first proviso clause(iii), exclusion has beenmade in reference to use of sale or purchase of goods in the course ofinter-state trade or commerce. It clearly indicates that the expression‘total turnover’ which has been incorporated as referred to under Section6-B(1) is for the purpose of identification of the dealers and for prescribingdifferent rates/slabs. The first proviso to Section 6-B(1) provides anexhaustive list of deductions which are to be made in computation ofsuch turnover with a further stipulation as referred to in second provisothat except for the manner provided for in Section 6-B(1), no otherdeduction shall be made from the total turnover of a dealer.

10. This Court, in M/s. Hoechst Pharmaceuticals Ltd. andOthers case(supra), while examining the pari meteria provision of sub-Section (1) of Section 5 of the Bihar Finance Act which provides forlevy of surcharge on gross turnover in relation to the tax payable inreference to Article 286 of the Constitution of India read with Entry 54under List II of Seventh Schedule into consideration held as under:-

90. The decision in Fernandez case [AIR 1957 SC 657] istherefore clearly an authority for the proposition that the StateLegislature notwithstanding Article 286 of the Constitution whilemaking a law under Entry 54 of List II of the Seventh Schedulecan, for purposes of the registration of a dealer and submission ofreturns of sales tax, include the transactions covered by Article286 of the Constitution. That being so, the constitutional validityof sub-section (1) of Section 5 of the Act which provides for theclassification of dealers whose gross turnover during a yearexceeds Rs 5 lakhs for the purpose of levy of surcharge, in additionto the tax payable by him, is not assailable. So long as sales in thecourse of inter-State trade and commerce or sales outside theState and sales in the course of import into, or export out of theterritory of India are not taxed, there is nothing to prevent theState Legislature while making a law for the levy of a surchargeunder Entry 54 of List II of the Seventh Schedule to take intoaccount the total turnover of the dealer within the State and AB

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Aprovide, as has been done by sub-section (1) of Section 5 of theAct, that if the gross turnover of such dealer exceeds Rs 5 lakhsin a year, he shall, in addition to the tax, also pay a surcharge atsuch rate not exceeding 10 per centum of the tax as may beprovided. The liability to pay a surcharge is not on the grossturnover including the transactions covered by Article 286 but isBonly on inside sales and the surcharge is sought to be levied ondealers who have a position of economic superiority. The definitionof gross turnover in Section 2(j) of the Act is adopted not for thepurpose of bringing to surcharge inter-state sales or outside salesor sales in the course of import into, or export of goods out of theCterritory of India, but is only for the purpose of classifying dealerswithin the State and to identify the class of dealers liable to paysuch surcharge. The underlying object is to classify dealers intothose who are economically superior and those who are not. Thatis to say, the imposition of surcharge is on those who have thecapacity to bear the burden of additional tax. There is sufficientDterritorial nexus between the persons sought to be charged andthe State seeking to tax them. Sufficiency of territorial nexusinvolves a consideration of two elements viz.: (a) the connectionmust be real and not illusory, and (b) the liability sought to beimposed must be pertinent to that territorial connection: State ofEBombay v. R.M.D. Chamarbaugwala [AIR 1957 SC 699], TataIron & Steel Co. Ltd. v. State of Bihar [(1958) SCR 1355] andInternational Tourist Corporation v. State of Haryana [(1981)2 SCC 318]. The gross turnover of a dealer is taken into accountin sub-section (1) of Section 5 of the Act for the purpose ofidentifying the class of dealers liable to pay a surcharge not on theFgross turnover but on the tax payable by them.

11. This Court also noticed the economic superiority principle forthe purpose of levy of turnover tax while holding that the interpretationof statute would not depend upon contingency. It is trite law which theCourt would ordinary take recourse to golden rule of strict interpretationGwhile interpreting taxing statutes. In construing penal statutes and taxationstatutes, the Court has to apply strict rule of interpretation and this iswhat has been considered by this Court in Commissioner ofCustoms(Import), MumbaiVs. Dilip Kumar and Company andOthers2018(9) SCC 1 in para 24 and 34 as under:- H

“24. In construing penal statutes and taxation statutes, the Courthas to apply strict rule of interpretation. The penal statute whichtends to deprive a person of right to life and liberty has to be givenstrict interpretation or else many innocents might become victimsof discretionary decision-making. Insofar as taxation statutes areconcerned, Article 265 of the Constitution prohibits the State fromextracting tax from the citizens without authority of law. It isaxiomatic that taxation statute has to be interpreted strictly becausethe State cannot at their whims and fancies burden the citizenswithout authority of law. In other words, when the competentLegislature mandates taxing certain persons/certain objects incertain circumstances, it cannot be expanded/interpreted to includethose, which were not intended by the legislature.

34. The passages extracted above, were quoted with approval bythis Court in at least two decisions being CIT v. Kasturi andSons Ltd. (1999) 3 SCC 346 and State of W.B. v. KesoramIndustries Ltd. (2004) 10 SCC 201 (hereinafter referred to as“Kesoram Industries case”, for brevity). In the later decision, aBench of five Judges, after citing the above passage from JusticeG.P. Singh’s treatise, summed up the following principles applicableto the interpretation of a taxing statute:

“(i) In interpreting a taxing statute, equitable considerations areentirely out of place. A taxing statute cannot be interpreted onany presumption or assumption. A taxing statute has to beinterpreted in the light of what is clearly expressed; it cannot implyanything which is not expressed; it cannot import provisions in thestatute so as to supply any deficiency; (ii) Before taxing any person,it must be shown that he falls within the ambit of the chargingsection by clear words used in the section; and (iii) If the wordsare ambiguous and open to two interpretations, the benefit ofinterpretation is given to the subject and there is nothing unjust ina taxpayer escaping if the letter of the law fails to catch him onaccount of the legislature’s failure to express itself clearly.”

12. In the instant scheme of the Act of which reference has beenmade in detail, the expression ‘total turnover’ has been referred to forthe purpose of identification/classification of dealers for prescribingvarious rates/slabs of tax leviable to the dealer and read with first and A

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Asecond proviso to Section 6-B(1), this makes the intention of thelegislature clear and unambiguous that except the deductions providedunder the first proviso to Section 6-B(1) nothing else can be deductedfrom the total turnover as defined under Section 2(u-2) for the purposeof levy of turnover tax under Section 6-B of the Act.

13. The submission of learned counsel for the appellant that the‘total turnover’ in Section 6-B(1) is to be read as ‘taxable turnover’ andthe determination of the rate of the turnover tax is to be ascertained onthe ‘taxable turnover’ on the face of it is unsustainable and deservesoutright rejection.

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14. The judgments on which learned counsel has placed relianceinIndra DasVs. State of Assam(supra) is in context of the fundamentalrights in reference to the provisions of Terrorists & Disruptive Activities(Prevention) Act, 1987, and it was observed that the endeavour of thecourt should be to try to sustain the validity of the statute by reading itdown as possible.

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15. The judgment inSubramanian Swamy and othersVs. Rajuthrough Member, Juvenile Justice Board and Another2014(8) SCC390 was in reference to a challenge to the validity of the JuvenileJustice(Care and Protection of Children) Act, 2000. Though the validitywas repelled by this Court, the doctrine of ‘reading down’ was discussed.EIt was held to be inapplicable in the facts of the said case.

16. InRakesh Kumar Paul Vs. State of Assam(supra), this Courthas examined the interpretation of Section 167(2) of the Code of CriminalProcedure, 1973 which has a reference to the liberty of a citizen. Eitherof the cases referred to may not have any remote relevance to theFquestion which has come up before us for consideration.

17. Consequently, in our considered view, the appeals are withoutsubstance and the same are dismissed accordingly. No costs.

18. Pending application(s), if any, stand disposed of.

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Appeals dismissed.

Devika Gujral

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