New Delhi: The Supreme Court has upheld the constitutional validity of a Karnataka amendment that retrospectively withdrew sales tax exemption on imported sugar, while significantly softening its impact by ruling that no penalty can be imposed on dealers for the pre-amendment period and that interest can run only from the date of a fresh demand.
A bench of Justice Aravind Kumar and Justice Prasanna B. Varale was dealing with appeals filed by Asia Sugar & Chemical Co. and M/s Indian Sugar and General Export Import Corporation Ltd., both of which had imported sugar during 1994-96 and claimed exemption under the Fifth Schedule to the Karnataka Sales Tax Act, 1957.
The court explained that the dispute centred on “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.”
Tracing the legislative history, the court noted that Entry 31-B, later renumbered Entry 51, exempted “sugar” without any words restricting the benefit to sugar produced or manufactured in India, even after the entry was amended in 1986 and 1992 to align its description with the Additional Duties of Excise (Goods of Special Importance) Act, 1957.
The appellants had been granted exemption on imported sugar in their original assessments, with the reassessment notice issued to Asia Sugar & Chemical Co. itself recording that exemption had earlier been allowed by relying on the judgment in State of Kerala v. State Trading Corporation of India Ltd.
Karnataka Act No. 5 of 2001 subsequently inserted the words “produced or manufactured in India” after “Sugar” in the exemption entry, with a deeming clause stating that the words “shall be and shall be deemed always to have been inserted.” This retrospective amendment led to reassessment notices confining the exemption to domestic sugar and bringing imported sugar to tax for years already assessed. While the Single Judge of the Karnataka High Court struck down the retrospective operation as violative of Article 19(1)(g), the Division Bench reversed this finding and restored the reassessment proceedings in full.
Examining whether imported sugar fell within the pre-2001 entry, the Supreme Court held that the reference to the Additional Duties of Excise Act was made only “to identify the commodity” and not to import a territorial limitation. It observed that “if the exemption was intended to be confined to domestic sugar, the Legislature could have said so. It eventually did so in 2001. That later amendment is the best indication that words of limitation were introduced only thereafter.” Accordingly, the court concluded that imported sugar was covered by the exemption entry relating to sugar prior to Karnataka Act No. 5 of 2001.
On the validity of the amendment itself, the court held that the State Legislature possessed competence under Entry 54 of List II to tax the sale or purchase of goods, and that this power necessarily included the power to grant, restrict or withdraw an exemption. Relying on its earlier rulings recognising the State's authority to alter fiscal concessions and to enact retrospective tax legislation, the bench rejected the contention that retrospectivity by itself rendered Karnataka Act No. 5 of 2001 unconstitutional, holding it to be “within legislative competence and constitutionally valid.”
However, the court declined to allow the retrospective levy to operate without qualification against the assessees. It reasoned that sales tax is ordinarily collected by a dealer from the purchaser at the time of sale, and where a transaction was treated as exempt and duly assessed as such, the dealer had no occasion to collect or retain any amount towards tax.
The court stated that “years later, when the law is amended retrospectively, he cannot go back to purchasers and recover the tax,” and that imposing penalty in such circumstances “would be contrary to the basic notions of fairness” since penalty presupposes default or culpability that did not exist when the Department's own assessments treated the goods as exempt. On interest, the court held that charging it from the date of the original transaction would, “in substance, operate punitively,” and confined its levy to the period following a lawful demand raised after reassessment.
The court also directed that any reassessment concerning inter-State sales be recomputed strictly in accordance with the Central Sales Tax Act, 1956, including Section 8(2), noting the assessees' grievance that tax had been charged at 10 per cent on such sales without regard to that provision.
Allowing the appeals in part, the court affirmed the Division Bench's judgment insofar as it upheld the validity of the retrospective amendment, but modified it to confine reassessment to determination of principal tax liability, to exclude penalty for the pre-amendment period, to restrict interest to the period after a fresh demand, and to direct recomputation of inter-State sales liability in line with the Central Sales Tax Act.
Any amount already recovered as penalty or interest contrary to these directions was ordered to be adjusted against lawful tax dues, with any excess to be refunded. The assessing authority was directed to complete this exercise after giving the assessees a reasonable opportunity of hearing.
Case Title: Asia Sugar & Chemical Co. v. State of Karnataka & Ors., with M/s Indian Sugar and General Export Import Corporation Ltd. v. State of Karnataka and Others
