M/S. SOUTHERN MOTORS versus STATE OF KARNATAKA AND OTHERS
[2017] 2 S.C.R. 434, Supreme Court of India, 2017
Outcome: Appeal(s) allowed (Granted)
Segment: Issues
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[2017] 2 S.C.R. 434 
M/S. SOUTHERN MOTORS 
v. 
STATE OF KARNATAKA AND OTHERS 
(Civil Appeal Nos. 10955-10971 of2016 Etc.) 
JANUARY 18, 2017 
[DIPAK MISRA AND AMITAVA ROY, JJ.] 
Karnataka Value Added Tax Act, 2003: s.2(34) - Post sale 
discoums - Determination of taxable turnover - Issue of credit notes 
to the customers granting discounts - Assessee retaining only the 
net amount that is, the amount shown in the invoice less the sum of 
discount disclosed in credit note - Claim for deduction towards 
discount accorded by credit notes from the total turnover to quantify 
the taxable turnover - Held: A plain reading of s.3(2){c) reveal 
that all amounts allowed as discount qualify for deduction from the 
total turnover to ascertain the taxable turnover - A trade discount 
conceptually is a pre sale concurrence, the quantification whereof 
depends on many factors in commerce - Such trade discounts ought 
not to be disallowed only if they are not payable at the time of each 
invoice or deducted from the invoice price -
The overall review of 
the scheme of the Act and the Rules and the underlying objectives 
in particular of ss.29 and 30 of the Act and r.3 of the Rules shows 
that the requirement of reference of the discount in the tax invoice 
or bill of sale to qualify it for deduction has to be construed in 
relation to the transaction resulting in the final sale/purchase price 
and not limited to the original sale sans the trade discount -
However, the
transactions allowing discount have to be proved on 
the basis of contemporaneous records and the final sale price after 
deducting the trade discount must mandatorily be reflected in the 
accounts as stipulated under r.3(2J(c) of the Rules - Karnataka 
Value Added Tax Rules, 2005 - r. 3(2){c) and its proviso. 
Interpretation of statutes: Literal interpretation - Held: 
Though words in a statute must be extended their ordinary meanings, 
but if the literal construction thereof results in anomaly or absurdity, 
the courts must seek to find out the underlying intention of the 
legislature and in the said pursuit, can within permissible limits strain 
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MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
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the language so as to avoid such unintended mischief -
Karnataka 
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Value Added T(J)( Rules, 2005 - r.3(2)(c) and its proviso. 
Allowing the appeals, the Court 
HELD: 1. The Karnataka Value Added Tax Act, 2003 is a 
legislation, as its pream hie suggests, to provide for further levy 
of tax on the purchase or sale of goods in the State of Karnataka. 
Under Section 29, it is incumbent on a registered dealer effecting 
a sale of taxable goods or goods exempted from tax along with 
any taxable goods in excess of the prescribed value, to issue at 
the time of sale, a tax invoice marked as original for the sale and 
containing the particulars prescribed. Thereunder, a registered 
dealer in the eventualities mentioned therein has to issue a bill 
of sale containing such particulars as may be prescribed. Section 
30 mandates that where such a tax invoice has been issued for 
any sale of goods and within six months from the date of such 
sale, the amount shown as tax charged in that tax invoice is found 
to exceed the tax payable in respect of the sale effected, or is not 
payable on account of goods sold being returned within the 
prescribed period, the registered dealer· effecting the sale, would 
issue forthwith to the purchaser, a credit note contai&ing the 
particulars as prescribed. The Section further stipulates that when 
a tax invoice has been issued for sale of any goods and the tax 
payable in respect of the
sale exceeds the amount shown as tax 
charged in such tax invoice, the registered dealer making the 
sale would issue to the purchaser, a debit note containing the 
particulars as prescribed. It is further ordained that any registered 
dealer who receives or issues credit notes or debit note~, would 
declare them in his return to be furnished for the tax period in 
which the credit note is received or debit note is issued and claim 
reduction in tax or pay tax due thereon. [Paras 11, 13] [444-C-D; 
447-B-E) 
2. A plain reading of section 3(2)(c) would reveal that all 
amounts allowed as discount would qualify for deduction from 
the total turnover to ascertain the taxable turnover and thus the 
extent of exigibility under this statute. The first proviso 
prescribes that a discount to be eligible for deduction has to be 
one which is allowed in accordance with the regular practice of 
the dealer or is in accordance with the terms of any contract or 
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SUPREME COURT REPORTS 
[2017] 2 S.C.R. 
agreement entered into in a particular case and the tax invoice 
or bill of sale issued in respect of the sales relating to such 
discount shows the amount allowed as discount. The second 
proviso enjoins further, that the accounts should show that the 
purchaser had paid only the sum originally charged less the 
discount. [Para 15] [448-B-D] 
3. Section 30 dilates on the contingencies witnessing 
reduction or enhancement of tax liability subsequent to the sale/ 
purchase of goods. The tax liability would be contingent on the 
sale/purchase price in the eventual sale/purchase price, to he 
essentially reflected in th.e return of the assessee. Section 30 
axiomatically thus deals only with the incidence of tax and not 
the spectrum of situations or eventualities bearing on the tax 
liability. Rule 3(2), in particular lists the array of deductions 
conditioned on variety of situations as scheduled therein to 
ascertain the taxable turnover. Allowance of discount is one of 
the several other permissible deductions contingent on the 
melange of determinants referred to therein. These deductions, 
however contribute to the reduction of the total turnover to 
quantify the taxable turnover and thus the tax liability. Neither 
an assessee is liable to pay tax in excess of what is due in law nor 
is the revenue authorized to exact the same. Any interpretation 
of Rule 3(2)(c) though an integrant of a fiscal statute
has to be in 
accord with this fundamental mandatory postulation. [Para 26] 
[454-D-G] 
4. It is a matter of common experience that in the present 
contemporary competitive market, trade discounts not only are 
dependent on variable factors but also might be strategically not 
disclosable at the time of the original sale/purchase so as to be 
coevally reflected in the tax invoice or the bill of sale as the case 
may be. The actual quantification of the trade discount, depending 
on the nature of the trade and the related stipulations in any 
contract with regard thereto, may be deferred till the happening 
of a contemplated event, so much so that the benefit thereof is 
extended at a point of time subsequent to that of the original 
sale/purchase. That by itself, subject to proof of such regular 
trade practice and the contract/agreement entered into between 
the parties, would not render the trade discount otherwise legal
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
437 
OTHERS 
and acceptable, either non est or fictitious for evading tax liability. 
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[Para 27] [454-G-H; 455-A-B] 
5. Sections 29, 30 and Rule 3 are the constituents of a 
same scheme to determine the taxable turnover and thus the 
extent of exigibility. Whereas Sections 29 and 30 deal with the 
issuance of tax invoice and bill of sale, to start with and th·ereafter 
credit and debit notes to be in accord with the tax actually payable, 
Rule 3 in a way espouses the exercise of ascertaining the taxable 
turnover by enumerating the permissible deductions from the 
total turnover. There is no repugnance or conflict amongst these 
three provisions so much so that Rule 3(2)(c) stands out in 
isolation and is incompatible with either the scheme of the Act or 
Sections 29 and 30 to be precise. The interplay of the::e three 
provisions is directed to ensure correct computation of the 
taxable turnover for an accurate computation of the tax iiability. 
These provisions therefore for all practical purposes complement 
each other and are by no means militative in orientation or impact. 
Perceptionally, if taxable turnover is to be comprised of sale/ 
purchase price, it is beyond one's comprehension as to why the 
trade discount should be disallowed, subject to the proof thereof, 
only because it was effectuated subsequent to the original sale 
but evidenced by contemporaneous documents and reflected in 
the relevant accounts. [Para
28] [455-E-H; 456-A] 
6. Though words in a statute must be extended their 
ordinary meaning, but if the literal construction thereof results 
in anomaly or absurdity, the courts must seek to find out the 
underlying intention of the legislature and in the said pursuit, 
can within permissible limits strain the language so as to avoid 
such unintended mischief. [Para 34] [463-F-G] 
K.P. Varghese v. Income Tax Officer, Ernakulam and 
Anr. [1982] 1 SCR 629 : AIR 1981 SC 1922; 
Commissioner of Income Tax, Bangalore v. J.H Got/a 
Yadagiri [1985] 2 Suppl. SCR 711 : AIR 1985 SC 
1698; State of Jharkhand and others v. Tata Steel Ltd. 
and Ors. (2016) 11 SCC 147; Hansraj Gordhandas 1'. 
RH Dave, Assistant Collector of Central Excise & 
Customs, Surat and others [1969] (2) SCR 252; 
Mis Doypack Systems Pvt. Ltd. v. Union of India and 
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Ors. [1988] 2 SCR 962 : (1988) 2 SCC 299 - relied 
on. 
Seaford Court Estates Ltd. v. Asker [1949] 2 All ER 
155 - referred to. 
7. It would be incomprehensible that the legislature, while 
occasioning the amendment to the first proviso to Rule 3(2)(c) 
of the Rules, was either ignorant or unaware of the prevalent 
practice of offering trade discount in the contemporary commercial 
dispensations. This is more so, as trade discount continu~d to 
be an accepted item of deduction. In such a premise, the intention 
of the legislature could not have been to deny the benefit of 
deduction of trade discount by insisting on the reflection of such 
trade discount in the text invoice or the bill of sale at the point of 
the sale as the only device to guard against possible avoidance of 
tax under the cloak thereof. Axiomatically, therefore the 
interpretation to be extended to the proviso involved has to be 
essentially in accord with the legislative intention to su.stain 
realistically the benefit of trade discount as envisaged. To !nsist 
on the quantification of trade discount for deduction at the time 
of sale itself, by incorporating the same in the tax invoice/bill of 
sale, would be to demand the impossible for all practical purposes 
and thus would be ill-logical, irrational and absurd. [Para 36] [464-
C-G] 
8. The overall review of the scheme of the Act and the 
Rules and the underlying objectives in particular of
Sectiohs 29 
and 30 of the Act and Rule 3 of the Rules shows that the 
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requirement of reference of the discount in the tax invoice or bill 
of sale to qualify it for deduction has to be construed in. relation 
to the transaction resulting in the final sale/purchase. price and 
not limited to the original sale sans the trade discount. However, 
the transactions allowing discount have to be proved on the basis 
of contemporaneous records and the final sale price after 
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deducting the trade discount must mandatorily be reflected in 
the accounts as stipulated under Rule 3(2)(c) of the Rules. The 
sale/purchase price has to be adjudged on a combined 
consideration of the tax invoice or bill of sale as the case may be 
along with the accounts reflecting the trade discount and the actual 
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price paid. The first proviso has thus to be so read down to be in
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
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consonance with the true iutendmeut of the legislature and to 
achieve as well the avowed objective of correct determination of 
the taxable turnover. [Para 37] [465-C-F] 
State of Karnataka v. Mis Kitchen Appliances India 
Ltd. 2011 (71) Karnataka Law Journal 234; Mis 
Southern Motors v. State ~f Karna/aka and Ors. 
2017(1) SCALE 604; Deputy Commissioner of Sales 
Tax (Law) Board of Revenue (Taxes), Ernakulam v. 
Mis. Advani Oor/ikon (P) Ltd. [19SO] 1 SCR 931 : 
(19SO) 1 SCC 360; IFB Industries Ltd. v. State of 
Kerala [2012] 4 SCR S02 : (2012) 4 SCC 61S; 
Commissioner of Central Excise, Madras v. Mis. 
Addison & Co. Ltd. (2016) 10 SCC 56; A. V. Fernandez 
v. The State of Kera/a [1957] SCR S37; Jayam & Co. 
v. Assistant Commissioner and Another (2016) S 
SCALE 70; Union of India and others v. Bombay Tyres 
International (P) Ltd. (2005) 3 SCC 7S7; Union of 
India and others v. Bombay Tyre International Ltd. and 
others [19S4] 1 SCR 347 : (19S4) 1 SCC 467 -
referred to. 
Inland Revenue Commissioner v. Duke of Westminister 
(1936) AC 1 24 ; Partington v. Attorney General 
(1S69) 4 HL 100, 122 - referred to, 
Case Law Reference 
2011 (71) Kar Law Journal 234 
referred to 
Para4 
2017(1) SCALE 604 
referred to 
Para4 
[19SO] 1 SCR 931 
referred to 
Paras 
[2012] 4 SCR S02 
referred to 
Paras 
(2016) 10 sec 56 
referred to 
Paras 
(2005) 3 sec 1s1 
referred to 
Paras 
[1957] SCR S37 
referred to 
Para9 
[2012] 4 SCR S02
referred to 
Para 9 
(2016) 8 SCALE 70 
referred to 
Para9 
(1936) AC 1 24 
referred to 
Para 17 
(2005) 3 sec 787 
referred to 
Para 23 
[1984] 1 SCR 347 
referred to 
Para 25 
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[1982] 1 SCR 629 
relied on 
Para 29 
[1985] 2 Suppl. SCR 711 
relied on 
Para30 
(2016) 11 sec 147 
relied on 
Para 31 
[1969] 2 SCR 252 
relied on 
Para 31 
[1988] 2 SCR 962 
relied on 
Para 32 
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 
10955-10971 of2016. 
From the Judgment and Order dated 03.04.2013 of the High 
Court of Karnataka at Bangalore in Writ Appeal Nos. 5769-5785 of 
2012 (T-RES) 
WITH 
C. A. Nos. 10972-10978 of2016. 
Dhruv Mehta, K. N. Bhat, Sr. Ad vs., Shanth Kumar V. Mahale, 
G. K. Y. Murthy, Jamal, Pathak, Rajesh Mahale, Tarun Gulati, S!Jarsh 
Bhargava, Shashi Mathews, Kishore Kunal, Rony 0. John, Vinayak 
Mathur, Ms. Rachna Yadav, Y. N. Raghupathy, ParikshitP.Angadi,Advs. 
for the appearing parties. 
The Judgment of the Court was delivered by 
AMITAVA ROY, J. 1. The instant adjudicative pursuit is to 
disinter the statutory intendment lodged in Rule 3(2)(c) in particular of 
the Karnataka Value Added Tax Rules, 2005 (for short, hereinafter to 
be referred to as "the Rules") so as to facilitate the determinati9n of 
taxable turnover as defined in Section 2(34) of the Karnataka Value 
Added Tax Act, 2003 (for short, hereinafter to be referred to as "the 
Act") in interface with Section 30 of the Act and Rule 31 of the Rules. 
2. We have heard Mr. Dhruv Mehta, learned senior counsel for· 
the appellant in Civil Appeal Nos. 10955-10971 of2016, Mr. Tarun Gulati, 
learned counsel for the
appellant in Civil Appeal Nos. l 0972- I 0978 of 
2016 and Mr. K.N. Bhat, learned senior counsel for the respondent-
State. 
3. The foundational facts, albeit not in dispute present the required 
preface. The appellant is a dealer in the motor vehicles and registered 
under the Act. Its version is that during the years in question i.e. 2007-
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
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2008 and 2008-2009, it raised tax invoices on the purchasers :\5 per the 
policy of manufacturers of vehicles to maintain uniformity in the price 
thereof. After the sales were completed, credit notes were issued to the 
customers granting discounts, in order to meet the competition in the 
market and for allied reasons. Consequentially, it received/retained only 
the net amount, that is the amount shown in the invoice less the sum of 
discount disclosed in the credit note. Accordingly, the net amount, so 
received was reflected in his books of account and returns w.ere filed 
under Income Tax Act, 1961 et al. 
4. The Assistant Commissioner of Commercial Taxes, (Audit-
1.6), VAT Division No.1-1, Gandhi Nagar, Bangalore i.e. the respondent 
No.3, as the Assessing Authority by his reassessment orders dated 
21.06.2010 allowed deductions claimed by the appellant towards discount 
accorded by the credit notes from the total tumoverto quantify the taxable 
turnover. Subsequent thereto, in the face of the decision of !he High 
Court in State of Karna/aka vs. Mis Kitclte11 Appliances llldia Ltd., 
2011 (71) Karnataka Law Journal 234, recognizing only discounts 
mentioned in the tax invoices as eligible for deduction from the total 
turnover in tenns of Rule 3(2)(c) of the Rules, the Assessing Authority 
passed the rectification orders dated 2 I .05.2012 under Section 4 I ( 1) of 
the Act, disallowing the
deduction of post sale discounts earlier awarded 
by the corresponding credit notes. The appellant having unsuc~essfully 
challenged these rectification orders before the High Court, in both the 
tiers, has invoked this Court's jurisdiction under Article 136 of the 
Constitution of India for redress. The above facts pertain to the Civil 
AppealNos.10955-10971 of2016. 
5. The Civil Appeal 10971-10978 of2016, with Samsung India 
Electronics Ltd. as the appellant, also present the same debate. The 
appellant, the assessee is as well a registered dealer under the Act and 
engaged in the business of electronic goods and l.T. products. Though 
the assessment for the tax period April, 2006 to October, 2006 was 
concluded by the Deputy Commissioner of Commercial Taxes (Audit-
4) LDU, Bangalore on 29.01.2007, the Assessing Authority disallowed 
the claim of deduction towards discounts on the ground that the same 
were not revealed at the time of issuance of tax invoices, though credit 
notes were issued at the end of the month concerned. The apptals filed 
by the appellant- assessee before the Commissioner of Commercial Taxes 
(Appeals), DV0--1 & Ill, Bangalore though came to be dismissed, it 
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succeeded before the jurisdictional Tribunal, whereafter the Revenue 
took the challenge to the High Court. By the decision impugned herein, 
the High Court relying on its earlier decision in Mis Southern Motors 
vs. State of Karnataka and Ors. rendered in Writ Appeal Nos. ·5769-
5785 of 2012 reiterated its view that once the sale invoice was issued 
and the sale price was collected along with the tax, the aggregate of 
such sales constituted the total turnover and the tax was payable c,n the 
taxable turnover. It took note of the deductions permissible under Rule 
3(2) of the Rules to determine the taxable turnover and held that though 
the amounts allowed as discount did constitute permissible deduction to 
compute the eventual taxable turnover, such discount was to be 
necessarily reflected in the sale invoice to qualify for such deduction. It 
thus concluded that by issuing a credit note after receiving the amounts 
even before the filing of the returns, it could not be construed th'.lt the 
discounts were not includible in the turnover. The claim of deduction of 
the discount extended through credit notes after the completion of the 
sale but not divulged in the tax invoice was negated. As the above 
rendition was founded on the verdict under scrutiny in the previous batch 
·of appeals where Mis Southern Motors figures as the appellant, and 
the issue seeking adjudication is common, all these appeals
with the 
aforenoted marginal factual variations have been analogously hea.rd. 
6. As the dissension stems from contrasting interpretations of 
the underlying purport of Rule 3(2)(c) of the Rules in the context of the 
scheme of the Act as a whole and Section 30 thereof and Rule 31 of the 
Rules in particular, further reference to the factual details would be 
inessential. 
7. The emphatic insistence on behalf of the appellant is that the 
combined reading of Section 30 and Rule 31 demonstrates in clear ierms 
that the assesses are entitled to claim deduction of the discount allowed 
to their customers by credit notes, from the total turnover to quantify 
their taxable turnover. The learned counsel have urged that as some 
discounts, especially those linked to targets to be achieved in a particular 
period are not comprehendable at the time of sale, these logically cannot 
be reflected in the tax invoices. They have maintained that such discounts 
actualize through credit notes at the end of the prescribed period for 
which the target is fixed and are thus governed by Section 30 of the Act 
and Rule 31 of the Rules. They have asserted that in no view of the 
matter, Rule 3(2)(c) can be conceded a primacy to curtail or abr0gate
M/S. SOU.THERN MOTORS v. STATE OF KARNATAKA AND 
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Section 30 or Rule 3 I of the Rules, lest the latter provisions are rendered 
otiose. Such an explication would also be extinctive of the c0ncept of 
the well ingrained concept of turnover/trade discount which is indefensible. 
8. Referring to the definition of "total turnover" and "taxable 
turnover" as defined in Sections 2(36) and 2(34) of the Act, it has been 
urged that as the discount allowed by the credit notes is not payable to 
the assessee by the customers and does not form a part of the sale 
consideration, it is not exigible under the Act. According to the learned 
counsel, it is no longer res integra that trade discount is not a constituent 
of the sale price and therefore not taxable. It has been insistently pleaded 
that a post sale discount through credit notes is revenue neutral in terms 
of Section 30(3) of the Act, as a consequence whereof the selling and 
the purchasing dealers accordingly remodel their returns and pay tax as 
due. 'In endorsement of the above contentions, the following decisions 
have been relied upon: 
1. Deputy Commissioner of Sales Tax (Law) Board of 
· Revenue (Taxes), Ernakulam vs. Mis. Advani Oorlikon (P) 
Ltd.(1980) 1 sec 360, 
2. IFB Industries Ltd. vs. State ofKerala (2012) 4 SCC 618, 
3. Commissioner of Central Excise, Madras vs. Mis. Addiso11 
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& co. Ltd. (2016) 1 o sec 56, 
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4. Unio11 of I11dia a11d others vs. Bombay Tyres
International 
(P) Ltd. (2005) 3 sec 787. 
9. In refutation, the the learned counsel forthe respondents, has 
argued that a discount to qualify for deduction to compute the total and 
eventual taxable turnover, as contemplated in Rule 3(2)(c) of the Rules 
has to be essentially reflected in the tax invoice or the bill of sale issued 
in respect of the sales. According to them, Section 30 and Rule 3 l deal 
with a situation where after a tax invoice is issued, it transpires that the 
tax charged has either exceeded or has fallen short of the tax payable 
for which a credit/debit note, as the case may be, would be issued. As 
these two provisions do not regulate the computation of a taxable turnover, 
there is no correlation thereof with Rule 3(2)(c) of the Rules which has 
been assigned an independent role to determine the tax liability. In absence 
of any specific provision .in the parent statute granting tax exemption 
based on deduction founded on post sale trade discount, Section 30 and 
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Rule 31 are ofno avail to the assesses, he urged. It is maintained that in 
any view of the matter, a taxing statute has to be construed strictly and 
any exemption is permissible only ifthe legislation permits the same. 
Reliance in buttressal of the above has been placed on the decisions of 
this Court in A. V. Fernandez vs. The State of Kera/a 1957 SCR 837, 
lFB bu/ustries Ltd. vs. State of Kera/a (2012) 4 SCC 618 and Jayam 
& Co. vs. Assistant Commissioner and Another (2016) 8 SCALE 70. 
10. As the gravamen of the discord has its roots in the interplay 
of Sections 29 and 30 of the Act with Rule 3(2)(c) in particular, apposite 
it would be to refer to the same as well as the accompanying provisions 
as are construed indispensable. 
11. The Act is a legislation, as its preamble suggests to provide 
for further levy of tax on the purchase or sale of goods in the State of 
Karnataka. It defines amongst others "dealer" "tax invoice" "taxable 
turnover" "total turnover" and "turnover" as contained in Sections 2( 12), 
2(32), 2(34), 2(35), 2(36). For immediate reference the relevant excerpts 
of these expressions are set out hereunder: 
"2(12) 'Dealer' means any person who carries on the business 
of buying, selling, supplying or distributing goods, direcay or 
otherwise, whether for cash or for deferred payment, or for 
commission, remuneration or other valuable consideration, and 
includes-......... 
2(32)
'Tax invoice' means a document specified under Section 
29 listing goods sold with price, quantity and other information as 
prescribed; 
2(34) 'Taxable turnover' means the turnover on which a dealer 
shall be liable to pay tax as determined after making such 
deductions from his total turnover and in such manner as may 
be prescribed, but shall not include the turnover of purchase or 
sale in the course of interstate trade or commerce or in the course 
of export of the goods out of the territory of India or in the course 
ofimport of the goods into the territory of India and the value of 
goods transferred or dispatched outside the State otherwise than 
by way of sale. 
2(35) 'Total turnover' means the aggregate turnover in all
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
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goods of a dealer at all places of business in the State, whether 
ornot the whole or any portion of such turnover is liable to tax, 
including the turnover of purchase or sale in the course of 
interstate trade or commerce or in the course of export of the 
goods out of the territory oflndia or in the course of import of 
the goods into the territory of India and the value of goods 
transferred or despatched outside the State otherwise than by 
way of sale. 
2(36) 'Turnover' means the aggregate amount for which goods 
are sold or distributed or delivered or otherwise disposed of in 
any of the ways referred to in clause (29) by a dealer, either 
directly or through another, on his own account or on account of 
others, whether for cash or for deferred payment or other 
valuable consideration, and includes the aggregate amount for 
which goods are purchased from a person not registered under 
the Act and the value of goods transferred or despatched outside 
the State otherwise than by way of sale, and subject to such 
conditions and restrictions as may be prescribed the amount for 
which goods are sold shall include any sums charged for anything 
done by the dealer in respect of the goods sold at the time of or 
before the delivery thereof. 
Explanation.- The value of the goods transferred or despatched 
outside the State otherwise than by way of sale, shall be the 
amount for which the goods are
ordinarily sold by the dealer or 
the prevailing market price of such goods where the dealer does 
not ordinarily sell the goods." 
12. Section 3 is the charging provision and the modes of fixation 
of rate and measure of tax exigible under the statute are enumerated in 
Section 4. Having regard to the exigency of the adjudication, appropriate 
it would be to extract Sections 29 and 30 of the Act as hereunJer: 
"29. Tax invoices and bills of sale 
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(1) A registered dealer effecting a sale of taxable goods or exempt 
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goods along with any taxable goods, in excess of the prescribed 
value, shall issue at the time of the sale, a tax invoice marked as 
original for the sale, containing the particulars prescribed, and 
shall retain a copy thereof. 
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(2) A tax invoice marked as original shall not be issued to any 
registered dealer in cir9umstances other than those specified in 
sub-section(!), and in a case ofloss of the original, a duplicate 
may be issued where such registered dealer so requests. 
(3) A registered dealer,-
(a) selling non-taxable goods; or· 
(b) opting to pay tax by way of composition under section 15 
and selling any goods; or 
(c) permitted to pay tax under section 16 and selling any 
goods, 
in excess of the prescribed value, shall issue a bill of sale 
containing such particulars as may be prescribed. 
(4) Notwithstanding anything contained in sub-section (I) or (3) 
or sub-section (1) of Section 7, a registered dealer executing 
civil works contracts shall issue a tax invoice or bill of sale at 
such time and containing such particulars as may be prescribed 
30. Credit and Debit Notes 
(1) Where a tax invoice has been issued for any sale of goods 
and within six months from the date of such sale the amount 
shown as tax charged in that tax invoice is found to exceed the 
tax payable in respect of the sale effected, or is not payable on 
account of goods sold being returned within the prescribed period, 
the registered dealer effecting the sale shall issue forthwith to 
the purchaser a credit note containing particulars as prescribed. 
· (2) Where a tax invoice has been issued for sale of any goods 
and the tax payable in respect
of the sale exceeds the amount 
shown as tax charged in such tax invoice, the registered dealer 
making the sale, shall issue to the purchaser a debit note containing 
particulars as prescribed. 
(3) Any registered dealer who receives or issues, credit notes or 
debit notes shall declare them in his return to be furnished for 
the tax period in which the credit note is received or debit note is 
issued and claim reduction in tax or pay tax due thereon. 
(4) Any document issued by the registered dealer as required
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
under any other law containing particulars of credit note or debit 
note as prescribed shall be deemed to be a credit or debit note 
. for the purpose of this Section" 
13. Under Section 29, it is incumbent on a registered dealer 
effecting a sale of taxable goods or goods exempted from tax along with 
any taxable goods in excess of the prescribed value, to issue at the time 
of sale, a tax invoice marked as original for the sale and containing the 
particulars prescribed. Thereunder a registered dealer in the eventualities 
mentioned therein has to issue a bill of sale containing such particulars 
as may be prescribed. Section 30 mandates that where such a tax invoice 
has been issued for any sale of goods and withing six .months from the 
date of such sale, the amount shown as tax charged in that tax invoice is 
found to exceed the tax payable in respect of the sale effected, or is not 
payable on account of goods sold being returned within the prescribed 
·period, the registered dealer effecting the sale, would issue forthwith to 
the purchaser, a credit note containing the particulars as prescribed. The 
Section further stipulates that when a tax invoice has been issued for 
· sale of any goods and the tax payable in respect of the sale exceeds the 
amount shown as tax charged in such tax invoice, the registered dealer 
making the sale would issue to the purchaser, a debit note containing the
particulars as prescribed. It is further ordained that any registered dealer 
who receives or issues credit notes or debit notes would declare them in 
his return to be furnished for the tax period in which the credit note is 
received or debit note is issued and claim reduction in tax or pay tax due 
thereon. Noticeably, the period of six months for the issuance of the 
credit note on the eventuality of excess tax being paid is not a factor for 
the contingency requiring issuance of a debit note. 
14. Be that as it may, Rule 3 of the Rules framed under Section 
88 of the Act, is lodged under Part Ildwelling on "Turnover, Registration 
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and Payment Of Security". This provision in particular deals with the 
determination of total and taxable turnover and predicates that the taxable 
turnover would be determined. by allowing the deductions from the total 
turnover as listed in sub-rule (2) thereof. Rule 3(2)(c) of the Rules;. 
G 
indispensable for the present adjudication is quoted hereunder for ready · 
reference: 
"3(2)(c): All.amounts allowed as discount: 
PROVIDED that ~uch discount is allowed in accorda11ce with 
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the regular practice of the dealer or is in accordance with the 
terms of any contract or agreement entered into in a particular 
case and the tax invoice or bill of sale issued in respect of the 
sales relating to such discount shows the amount allowed as 
discount. 
PROVIDED FURTHER that the accounts show that the 
purchaser has paid only the sum originally charged less discount." 
15. Aplain reading of this quote would reveal that all am;iunts 
allowed as discount would qualify for deduction from the total turnover 
to ascertain the taxable turnover and thus the extent of exigibility under 
this statute. The first proviso which occupies the center stage of the 
debate prescribes that a discount to be eligible for deduction has to be 
one which is allowed in accordance with the regular practice of the 
dealer or is in accordance with the terms of any contract or agreement 
entered into in a particular case and the tax invoice or bi 11 of sale i~sued 
in respect of the sales relating to such discount shows the amount allowed 
as discount. The second proviso enjoins further, that the accounts should 
show that the purchaser had paid only the sum originally charged less 
the discount. Whereas the Revenue insists in view of the first proviso in 
particular, that a discount to be entitled for deduction to quantify the 
taxable turnover should essentially·be mentioned in the tax invoice or bill 
of sale issued
in respect of the sales and further the purchaser has to 
reflect in his accounts that he had paid only the sum originally charged 
less the discount, the appellants contend that having regard to the uniform 
canons regulating the trade practice, a trade discount though in 
comprehension at the time of original sale is not always precisely 
quantifiable at that point of time and is contingent on variable factors to 
be computed only on the happening of a future event(s). In any case, 
however as the discount eventually sanctioned is tangible and actu~l, the 
literal interpretation sought to be given to the contents of first proviso to 
Rule 3(2)(c) is expressly illogical and if accepted would lead to absurd 
results rendering this provision redundant and unworkable. 
16. Before embarking on analysis of the competing assertions, 
expedient it would be to advert to the citations addressed at the Bar. 
17. In A. V. Fermmdis (supra), a Constitution Bench of this Court 
while dwelling on the interpretation of the relevant provisions of the 
United State of Travancore and Cochin General Sales Tax Act, 1125
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
and the Travancore Cochin General Sales Tax Rules, 1950 framed 
thereunder ruled that in elucidating a fiscal statute, it is not the spirit 
thereof but the letter of law that has to be looked into and that if a 
particular tax cannot be brought within the letter of the law, the subject 
could not be made liable for the same. That the emphasis has to be to 
the strict letter of law and not merely on the spirit of the statute or the 
substance of law was highlighted. In this context, the observations of 
Lord Russel of Killowen in Inland Revenue Commissioner vs. Duke 
of Westminister ( 1936) AC l 24 was extracted : 
"I confess that I view with disfavour the doctrine that in taxation 
cases the subject is to be taxed if in accordance with ? Court's 
view of what it considers the substance of the transaction. the 
Court thinks that the case falls within the contemplatior. or spirit 
of the statute. The subject is not taxable by inference or by 
analogy, but only by the plain words ofa statute applicable to the 
facts and circumstances of his case" 
18. The following passage as well from Partington vs. Attorney 
Genera/(1869)4 HL 100, 122 was quoted with approval. 
"As I understand the principle of all fiscal legislation it is this: jf 
the person sought to be taxed, comes within the letter of the law 
he must be taxed, however great the hardship may appear to 
the judicial mind to be. On the other hand,
ifthe Crown, seeking 
to recover the tax, cannot bring the subject within the letter of 
the law, the subject is free, however apparently within the spirit 
of the law the case might otherwise appear to be.". 
19. In the textual facts, in essence, the claim of the aµpellant-
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assessee to avoid deduction of an amount arising out of sales effected 
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beyond the State concerned was negated as the same were not taxable 
in terms of Section 26 of the Travancore-Cochin General Sales Tax 
Amendment Act, 1951 in clear terms. Drawing a distinction between 
the provisions contained in a statute with regard to the exemptions, refund 
or rebate on one hand and non liability of tax ornon imposition of tax on 
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the other, it was enunciated that in the former, the sales or p:irchases 
would have to be included in the gross turnover of the dealer because 
those were prima facie liable to tax and the dealer was only entitled to 
deductions from the gross turnover so as to arrive at the net turnover on 
which the tax could be imposed. In the latter case, the sales or the 
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purchases were exempted from taxation altogether. It was thus ruled 
that as the sales beyond the State, were not liable to tax, those were 
liable to be excluded from the calculation of the gross turnover as well 
as the net turnover on which the sales tax could be levied or imposed. 
The attempt on the part of the appellant-assessee to include the turnover 
of the sales beyond the State in the gross turnover and thereafter to 
seek a deduction thereof was thus disapproved. 
20. The distinction between "trade discount" and "cash disc.:iunt" 
was elaborated upon by this Court in Mis. Advani Oorlikon (P) Ltd. 
(supra), in re, the question whether for the purpose of computing the 
turnover assessed to sales tax therein, under the Central Sales Tax Act 
1956, the sale price of goods was to be determined by including the· 
amount paid by way of trade discount. The facts as unfolded evinced 
that the assessee was a private limited company, carrying on business 
as sole selling agent for certain brand of welding electrodes and f0r the 
goods supplied to the retailers, it charged them the catalogue price less 
the trade discount. The concerned Revenue Authority, for the asses:sment 
year in question, refused to allow the deduction and sans thereof, 
computed the taxable turnover, being of the view that the trade discount 
was not excludable from the catalogue price. It was contended on behalf 
of the Revenue that in view of
the definition of"sale price" in Section 
2(h) of the Central Sales Tax Act which permitted the deduction of 
E . sums alleged as cash discount only, the deduction by way of trade discount 
was not contemplated or permissible. 
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21. This Court referred to the definition of"sale price" in Section 
2(h) of the Act and noted that it was defined to be the amount payable to 
a dealer as a consideration for the sale of any goods, less any sum 
allowed as cash discount, according to the practice normally prevailing 
in the trade. While observing that cash discount conceptually was 
distinctly different from a trade discount which was a deduction from 
the catalogue price of goods allowable by whole-sellers to retailers 
engaged in the trade, it was exposited that under the Central Sales Tax 
Act, the sale price which enters into the computation of the turnover is 
the consideration for which the goods are sold by the assessee. It was 
held that in a case where trade discount was allowed on the catalogue 
price, the sale price would be the amount determined after deductir.g the 
trade discount. It was ruled that it was immaterial that the definition of 
"sale price" under Section 2(h) of the Act did not expressly provide for
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKAAND 
.OTHERS [AMITAVA ROY, J.] 
the deduction of trade discount from the sale price. It also held a view 
that having regard to the nature of a trade discount, there is only ·one 
sale price between the dealer and the retailer and that is the price payable 
by the retailer calculated as the difference between the catalogue price 
and the trade discount. Significantly it was propounded that, in such a 
situation, there was only one contract between the parties that is the 
contract that the goods wou Id be so Id by the dealer to the retai !er at the 
aforesaid sale price and that there was no question of two successive · 
agreements between the parties, one providing for the sale oftae goods 
at the catalogue price and the other providing for an allowance by way 
of trade discount. While recognizing that the sale priCe remained the 
stipulated price in the contract betweeri the parties, this Court concluded 
that the sale price which enters into the computation of the assessee's 
turnover for the purpose of assessment under the Sales Tax Act would 
be determined after deducting the trade discount from the catalogue 
price. 
22. The decision in Jayam and Company (supra) cited by the 
Revenue was to underline the postulation that whenever concession is 
given by a statute, notification etc., the conditions thereof are to be strictly 
complied with in order to avail the same. Section 19(20) of the Tamil 
Nadu Value Added TaxAct,2006,
which in clear terms, denied the benefit 
of Input Tax Credit, where any registered dealer sold goods at a price 
lesser than the price at which the same had been purchased, was adverted 
. 
. 
to consolidate this. proposition. Noticeably, this provision of the statute 
involved, which fell for scrutiny, did by unequivocal mandate deny the 
availment of the .income tax credit, in case tbe registered dealer/assessee 
had sold goods at a price lesser than the price at which the same had 
been purchased by him. 
23. In IFB Industries Ltd. (supra), this Court was seized with 
the query as to how far deductions were allowable under Rule 9 (a) of 
the Kerala· General Sales Tax Rules, 1963 for trade discounts. The 
jurisdictional High Court returned the finding that .unless the discount 
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was shown in the invoice evidencing the sale, it would not qualify for 
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such deduction and further any discount that was given by means of 
credit note issued subsequent to the sale, in reality was an incentive and 
not a trade discount eligible for exemption under Rule 9 (a) of the Rules. 
The appellant was a manufacturer of home appliances having a scheme 
of trade discount for its dealers under which the latter on achieving a 
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pre set sale target would earn certain discount on the price for which 
they had purchased the articles from it. As the discount was subject to 
achieving the sale target, the dealer would naturally be qualified for it in 
the later part of the Financial years/assessment period i.e. long after 
the sales had taken place. It was noted that for the sales taking place 
between the appellant and its dealer after the sale target was achieved, 
the dealer would get the articles on the discounted price but for the sales 
that had taken place before the sale target was achieved, the 
manufacturer would issue credit notes in favour of the dealer. Under 
the statute involved, in the computation of the turnover as defined, amongst 
others, any cash or other discount on the price allowed in respect ofany 
sale and any amount refunded in respect of articles returned by the 
customers, was deductible. Rule 9 (a) provided that in determining the 
taxable turnover, all amounts allowed as discount, provided such discount 
was accorded in accordance with the regular practice would stand 
deducted, ifthe accounts show that the purchaser had paid only the sum 
originally charged less the discount. Rule 9(a) therefore did stipulate, as 
the conditions precedent for deduction of any amount allowed as discount, 
two prescriptions i.e. the discount had been given in accordance with 
the regular practice in trade and that the
accounts maintained by·the 
purchaser would disclose that it had paid only the sum originally charged 
less the discount. This Court thus expounded that in absence of any 
prescript ofreference of such discount availed in the sale invoices, the 
negation of the benefit of deduction of the trade discount in the 
quantification of the taxable turnover was erroneous. It was held, that 
there was nothing in Rule 9 (a) to read it in a restrictive manner to mean 
that the discount in order to eligible for exemption thereunder must be 
reflected in the invoice itself. While dilating on the notion of "trade 
discount" to be a deduction from the catalogue price of goods allowed 
by wholesalers to the retailers engaged in the trade to enable the latter 
to sell the goods at the catalogue price and yet make a reasonable margin 
of profit after taking into account his business expense, the following 
observations of this Court in Union of India "nd ot//ers vs. Bombay 
Tyres Intern"tional (P) Ltd. (2005) 3 SCC 787, describing "trade 
discount" and countenancing its deductibility from the sale price were 
alluded to: 
"(1) Trade discounts - Discounts allowed in the trade (by 
whatever name such discount is described) should be allowed to
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
be deducted from the sale price having regard to the 11ature of 
the goods, if established under agreements or under terms of 
sale or by established practice, the allowance and the nature of 
the discount being known at or prior to the removal of the goods. 
Such trade discounts shall not be disallowed only because 
they are not payable at the time of each invoice or deducted 
from the invoice price." 
(emphasis supplied) 
24. This rendering presumably had been cited on behalf of the 
respondents in order to underscore that the appellant's claim therein for 
the deduction of the trade discount had been approved as both the 
prerequisites stipulated by Rule 9(a) had been complied with. This is to 
reinforce the plea that the appellant in the case in hand thus by analogy 
ofreasonings can avail the benefit of deduction of trade discount only if 
the same is reflected in the tax invoice as statutorily prescribed by Rule 
3(2)( c) of the Rules. 
25. This Court in MlsAtltlison anti Co. Ltd. (supra) was chiefly 
seized with the issue of refund of excise duty under Section l IB of the 
Central Excise Act, 1944. The respondent, a manufacturer of cutting 
tools, filed a refund claim which, on being eventually allowed after 
persuading through the different tiers, culminated in a reference before 
the High Court of Madras which was also answered in favour of the 
respondent/assessee. It was held by the High
Court that the refund 
towards deduction of turnover discount could not be denied on the ground 
that there was no evidence to show who was the ultimate consumer of 
the product and as to whether the ultimate consumer had borne the 
burden of duty. The word "buyer" used in Section l 2B of the Act, as 
construed by the High Court did not refer to the ultimate consumer and 
was confined only to the person who bought the goods from the 
manufacturer. This Court accepted the postulation in Union of India 
and others vs. Bombay Tyre International Ltd. and others (1984) 1 
SCC 467 and Bombay Tyres Intenwtional (P) Ltd. (supra) to the 
extent that discounts allowed in the trade should be permitted to be 
deducted from the sale price having regard to the nature of the goods, if 
it established under agreements or in terms of sale or by established 
practice and that such trade discounts ought not to be disallowed only 
because those were not payable at the time of each invoice or deducted 
from the invoice price, but declined the relief of refund to the respondent 
on the consideration that the burden of duty had meanwhile been passed 
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on to the ultimate buyer. It was explicated that the.word "buyer" appearing 
in Clause (e) to the proviso of Section l IB(2) of the Central Excise Act.· 
could n0t be restricted to the first buyer from the manufacturer. The 
prevalence of trade discounts was recognized so much so that deductions 
on the basis thereof were also approved so as to determine the eventual 
tax liability. 
26. The parties noticeably are not in issue over the prevalence· 
of trade discount contemplated in regular practice and that whe_rever 
warranted, the dealing parties in accord !_herewith do enter into a contract 
or agreement to apply the same for reduction of the sale/purchase price. 
Understandably, the taxable turnover is the summation of the actual sale/ 
purchase price exigible to tax under the Act and the Rules. Depe~ding 
on the eventualities as comprehended in Section 30, credit and debit 
notes are issued, as.a consequence whereof, the tax liability is reduced 
or enhanced correspondingly and. the same is determined on the basis of 
the declarations made by the assessees in their returns. That there is an 
inseverable co-relation between the taxable tum over and the tax payable 
need not be over emphasized. Noticeably, Section 30 dilates on the 
contingencies witnessing reduction or enhancement of tax liability 
subsequent to the sale/purchase of goods. The tax liability, to reiterate 
would be contingent on the
sale/purchase price in the eventual sale/ 
purchase price, to be essentially reflected in the return of the assessee: 
Section 30 axiomatically thus deals only with the incidence of tax and 
not the spectrum of situations or eventualities bearing on the tax liability. 
Rule 3(2), in particular lists the array of deductions conditioned on variety 
of situations as scheduled therein to ascertain the taxable turnover. 
Allowance of discount is one of the several other permissible deductions 
contingent on the melange of determinants referred to therein. These 
deductions, however contribute to the reduction of the total turnover to 
quantify the taxable turnover and thus the tax liability. It is too trite to 
state that neither an assessee is 1 iable to pay tax in excess of what is due 
in law nor is the revenue authorized to exact the same. Any interpre1ation 
of Rule 3(2)(c) though an integrant of a fiscal statute has to be in accord, 
in our estimate unite this fundamental mandatory postulation .. 
2 7. It is a matter of common experience that in the present 
contemporary competitive market, trade discounts not only are dependent 
on variable factors but also might be strategically not disclosable at the 
time of the original sale/purchase so as to be coevally reflected !n the
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
tax invoice or the bill of sale as the case may be. The actual quantification 
of the trade discount, depending on the nature of the trade and tt>e related 
stipulations in any contract with regard thereto, may be deferred ti II the 
happening of a contemplated event, so much so that the benefit thereof 
is extended at a point of time subsequent to that of the· original sale/ 
purchase. That by itself, subject to proof of such regular trade practice 
and the contract/agreement entered into between the parties, would not 
render the trade discount otherwise legal and acceptable, either 11011 est 
or fictitious for evading tax liability .. In the above factual pre111ise, the 
interpretation as sought to be provided by the Revenue would evidently 
reduce Section 3(2)( c) to a dead letter, ineffective and unworkable and 
would.defeat the objective of permitting deductions from the total turnover 
on account of trade discount. 
28. A trade discount conceptually is a pre sale concurrence, the 
quantification whereof depends on many many foe.tors in commerce 
regulating the scale of sale/purchase depending, amongst others on 
goodwill, quality, marketable skills, discounts, etc. contributing to the 
ultimate performance to qualify for such discounts. Such trade discounts, 
to reiterate, have already been recognized by this Court with the emphatic 
riderthat the same ought not to be disallowed only as they are
not payable 
at the time of each invoice or deducted from the invoice price. In our 
comprehension, Sections 29, 30 and Rule 3 are· the constituents of a 
same scheme to determine the taxable turnover and thus the extent of 
exigibility. Whereas Sections 29 and 30, to repeat, deal with the issuance 
of tax invoice and bill of sale to start with and thereafter credit and debit 
notes to be in accord with the tax actually payable, Rule 3 in a way 
espouses the exercise of ascertaining the taxable turnover by enumerating 
the permissible deductions from the total turnover. We are thus of the 
considered view that there is no repugnance or conflict amongst these 
three provisions so much so that Rule 3(2)(c) stands out in isolation and 
is incompatible with either the scheme of the Act or Sections 29 and 30 
to be pr~cise. The interplay of these three provisions is directed to ensure 
correct computation of the taxable turnover for an accurate computation 
of the tax liability. These provisions therefore for all practical purposes 
complement each other and are by no means militative in orientation or 
impact. Perceptionally, if taxable turnover is to be comprisea of sale/ 
purchase price, it is beyond one's comprehension as to why the trade 
discount should be disallowed,subject to the proof thereof, only because 
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A 
it was effectuated subsequent to the original sale but evidenced by 
contemporaneous documents and reflected in the relevant accounts. 
29. This Court in K.P. Varghese vs. J11come Tax Officer, 
Ernakulam a11dA11r. AIR 1981 SC 1922, while interpreting Section 52 
of the Income Tax Act 1961 favoured an interpretation in departure 
B 
from a strict literal reading thereof. For ready reference, Section 52, as 
interpreted, is extracted herein below. 
"Section 52 (I) Where the person who acquires a capital asset 
from an assessee is directly or indirectly connected with the 
assessee and the Income-tax Officer has reason to beliew that 
c 
the transfer was effected with the object of avoidance or 
reduction of the liability of the assessee under Section 45, the 
full value of the consideration for the transfer shall, with the 
previous approval of the Inspecting Assistant Commissioner, be 
taken to be the fair market value of the capital asset on the date 
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of the transfer. 
(2) without prejudice to the provisions of Sub-section ( 1 ), if in 
the opinion of the Income-tax Officer the fair market value of a 
capital asset transferred by an assessee as on the date of the 
transfer exceeds the full value of the consideration declared by 
the asses see in respect of the transfer of such capital assets by 
an amount of not less than fifteen per cent of the value declared, 
the full value of the consideration for such
capital asset shall, 
with the previous approval of the Inspecting Assistant 
Commissioner, be taken to be its fair market value on the date of 
its transfer." 
It was proclaimed thus: 
"5. Now on these provisions the question arises what is the true 
interpretation of Section 52, Sub-section (2). The argument of 
the Revenue was and this argument found favour with the majority 
Judges of the Full Bench that on a plain natural construction of 
the language of Section 52. Sub-section (2). the only condition 
for attracting the applicability of that provision is that the fair 
market value of the capital asset transferred by the assessee as 
on the date of the transfer exceeds the full value of the 
consideration declared by the assessee in respect of the transfer 
by an amount of not less than 15% of the value so dec!ared.
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
Once the Income-tax Officer is satisfied that this condition 
exists, he can proceed to invoke the provision in Section 52 Sub-
section (2) and take the fair market value of the capital asset 
transferred by the assessee as on the date of the transfer as 
representing the full value of the consideration for the transfer 
of the capital asset and compute the capital gains on that basis. 
No more is necessary to be proved, contended the Revenue. To 
introduce any further condition such as understatement of 
consideration in respect of the transfer would be to read into the 
statutory provision something which is not there: indeed it would 
amount to rewriting the section. This argument was based on a 
strictly literal reading of Section 52 Sub-section (2) but we do 
not think such a construction can be accepted. It ignores several 
vital considerations which must always be borne in mind when 
we are interpreting a statutory provision. The task of 
interpretation of a statutory enactment is not a mechanical task. 
It is more than a mere reading of mathematical formulae because 
few words possess the precision of mathematical symbols. It is 
an attempt to discover the intent of the legislature from the 
language used by it and it must always be remembered that 
language is at best an imperfect instrument for the expression of 
human thought and as pointed out by Lord Denning, it would be 
idle to expect
every statutory provision to be "drafted with divine 
prescience and perfect clarity." We can do no better than repeat 
the famous words of Judge Learned Hand when he said: 
" .... it is irue that the words used, even in their literal sense, 
are the primary and ordinarily the most reliable, source of 
interpreting the meaning of any writing: be it a statute, a 
contract or anything else. But it is one of the surest indexes 
of a mature and developed jurisprudence not to make a 
fortress out of the dictionary; but to remember that statutes 
always have some purpose or object to accomplish, whose 
sympathetic and imaginative discovery is the surest guide to 
their meaning" 
We must not adopt a strictly literal interpretation of Section 52 
Sub-section (2) but we must construe its language having regard 
to the object and purpose which the legislature had in view in 
enacting that provision and in the context of the setting in which 
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it occurs. We cannot ignore the context and the collocation of 
the provisions in which Section 52 Sub-section (2) appears, 
because, as pointed out by Judge Learned Hand in most felicitous 
language:' 
" ..... the meaning of a sentence may be more than that of the 
separate words as a melody is more than the notes, and no 
degree of particularity can ever obviate recourse to the setting 
in which all appear, and whic.h all collectively create" 
Keeping these observations in mind we may now approach 
the construction of Section 52 Sub-section (2). 
6. The primary objection against the literal construction of Section 
52 Sub-section (2) is that it leads to manifestly unreasonable and 
absurd consequences. It is true that the consequences of a 
suggested construction cannot alter the meaning of a statutory 
provision but they can certainly help to fix its meaning. It is a 
well recognised rule of construction that a statutory provision 
must .be so construed, if possible that absurdity and mischief 
.may be avoided. There are many situations where the 
. construction suggested on behalf of the Revenue would leaq to 
a wholly unreasonable result which could never have been 
intended by the legislature. Take, for example, a case where A 
agrees to sell his property to B for a certain price and before the 
sale is completed pursuant to the agreement and it is quite well-
known that sometimes the competition of
the sale may take place 
even a couple of years after the date of the agreement-the market 
price shoots up with the result that the market price prevailing 
on the date of the sale exceeds the agreed price at which the 
property is sold by more than 15% of such agreed price. This is 
not at all an uncommon case in an economy of rising prices and 
in fact we would find in a large number of cases where the sale 
is completed more than a year or two after the date of the 
agreement that the market price prevailing on the date of the 
sale is very much more than the price at which the property is 
sold under the agreement. Can it be contended with any degree 
of fairness and justice that in such cases, where there is clearly 
no understatement of consideration in respect of the transfer 
and the transaction is perfectly honest and bonafide and, in fact, 
in fulfillment of a contractual obligation, the assessee. who has
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
sold the property should be liable to pay tax on capital gains 
which have not accrued or arisen to him. It would indeed be 
most harsh and inequitable to tax the assessee on income which 
has neither arisen to him nor is received by him, merely because 
he has carried out the contractual obligation under-taken by him. 
It is difficult to conceive of any rational reason why the legislature 
should have thought it fit to impose liability to tax on an assessee 
who is bound by law to carry out his contractual obligation to sell 
the property at the agreed price and honestly carries .out such 
contractual obligation. It would indeed be strange if obedience 
to the law should attract the levy of tax on income which has 
neither arisen to the assessee nor has been received by him. If 
we may take another illustration, let us consider a case where A 
sells his property to B with a stipulation that after some-time 
which may be a couple of years or more, he shall resell the 
property to A for the same price could it be contended in such a 
case that when B transfers the property to A for the same price 
at which he originally purchased it, he should be liable to pay tax 
on the basis as ifhe has received the market value of the property 
as on the date of resale, if, in the meanwhile, the market price 
has shot up and exceeds the agreed price by more than 15%. 
Many other similar situations can be
contemplated where it would 
be absurd and unreasonable to apply Section 52 Sub-section (2) 
according to its strict literal construction. We must therefore 
eschew literalness in the interpretation of Section 52 Sub-section 
(2) and t1:yto arrive at an interpretation which avoids this absurdity 
and mischiefand makes the provision rational and sensible, unless 
of course. our hands are tied and we cannot find any escape 
from the tyranny of the literal interpretation. It is now a well 
settled rule of construction that where the plain literal 
interpretation of a statutory provision produces a manifestly 
absurd and unjust result which could never have been intended 
by the legislature, the court may modify the language used by 
the legislature or even 'do some violence' to it, so as to achieve 
the obvious intention of the legislature and produce a rational 
construction, Vide: Luke v. Inland Revenue Commissioner [1963] 
AC 557. The Court may also in such a case read into the statutory 
provision a condition which. though not expressed, is implicit as 
constituting the basic assumption underlying the statutory 
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provision. We think that, having regard to this well recognised 
rule of interpretation, a fair and reasonable construction of Section 
52 Sub-section (2) would be to read into it a condition that it 
would apply only where the consideration for the transfer is 
under-stated or in other words, the assessee has actually received 
a larger consideration for the transfer than what is declared in 
the instrument of transfer and it would have no application in 
case of a bonafide transaction where the full value of the 
consideration for the transfer is correctly declared by the 
assessee. There are several important considerations which 
incline us to accept this construction of Section 52 Sub-section 
(2J." 
30. In Commissioner of Income Tax, Bangalore Vs. J.H. 
Got/a Yadagiri AIR 1985 SC 1698 this Court propounded that though 
equity and taxation are often.strangers, attempts should be made that 
these do not remain always so and if a construction results in equity 
rather than injustice, then such construction should be preferred to the 
literal construction. 
31. In a recent rendition in State of J/10rkl10nd and others vs. 
Tata Steel Ltd. and Ors. (2016) 11 SCC 147, this Court while exploring 
the underlying intent of a notification pertaining to the period of repayment 
by the respondents-assessee, which had earlier availed the benefit of 
deferment of payment of tax under the Jharkhand Value Added Tax
Act, 2005 did exhaustively dwell on the golden rule of interpretation 
based on literal and plain meaning of the words/expressions used in a 
statute and with approval placed reliance on an earlier decision of this 
Court in Hansmj Gordhandas vs. H.H. Dave, Assistant Collector of 
Central Excise & Customs, Surat and others ( 1969) 2 SCR 252, in 
which it was propounded thus: 
"It was contended on behalf of the respondent that the object 
of granting exemption was to encourage the formation of 
cooperative societies which not only produced cotton fabrics 
but which also consisted of members, not only owning but having 
actually operated not more than four power-looms during the 
three years immediately preceding their havingjoined the society. 
The policy was that instead of each such member operating his 
looms on his own, he should combine with others by forming a
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKAAND 
OTHERS [AMITAVA ROY, J.] 
society which, through the cooperative effort should produce 
. cloth. The intention was that the goods produced for which 
exemption could be claimed must be goods produced on its own 
behalf by the society. We are unable to accept the contention 
put forward on behalf of the respondents as correct. On a true 
construction. of the l<mguage of the notifications, dated July 31, 
1959 and April 30, 1960 it is clear that all that is required for 
claiming exemption is that the cotton fabrics must be produced 
on power-looms owned by .the cooperative society. The.re is 
no further requirement under the two notifications that the cotton 
fabrics must be produced. by the Co-operative Society on the 
power-looms "for itself'. It is well established that in a taxing 
statute there is no room for any intendment but regard must be 
hacj to the clear meaning of the words. The entire matter is 
governed wholly by the language of the notification. If the tax-
payer is within the plain .terms of the exemption it cannot be 
denied its benefit by calling in aid any supposed intention of 
the exempting authority. If such intention can be gathered 
from the construction of the words of the notification or by 
necessary implication therefrom, the matter is different. but that 
is not the case here." 
[Underlining is ours] 
32. In the same vein, the following passage from Mis Doypack 
Systems Pvt. Ltd. vs. Union of India
and Ors. ( 1988) 2 SCC 299 was 
adverted to: 
"58. The words in the statute must, prima facie, be given their 
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F 
and manifest and without doubt, that construction oughtto prevail 
unle.ss there are some strong and obvious reasons to the contrary. 
Nothing has been shown to warrant that literal construction 
should not be given effect to. See Chandavarkar S.R. Rao v. 
Ashalata (1986) 4 SCC 447 approving 44 Halsbury's Laws of 
England, 4th Edn., para 856 at page 552, Nokes v. Doncaster 
G 
Amalgamated Collieries Limited 1940 AC 1014. It must be 
emphasised that interpretation must be in consonance with the 
Directive Principles of State Policy in Article 39 (b) and (c) of 
the Constitution. 
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59. It has to be reiterated that the object of.interpretation of a 
statute is to discover the intention of the Parliament as expressed 
in the Act. The dominant purpose in construing a statute is to 
ascertain the intention of the legislature as expressed in the 
statute, considering it as a whole and in its context. That intention, 
and therefore the meaning of the statute, is primarily to be 
sought in the words used in the statute itself, which must, if 
they are plain and unambiguous, be applied as they stand .... " 
33. The following excerpts from Tata Steel Ltd. (supra), being 
of formidable significance are also extracted as hereunder. 
24. In this regard, reference to Maluuleo Prasad Bais (Dead) 
vs. Income- Tax Officer 'A' Ward, Gorakhpur and another 
(1991) 4 SCC 560 would be absolutely seemly. In the said case, 
it has been held that an interpretation which will result in an 
anomaly or absurdity should be avoided and where literal 
construction creates an anomaly, absurdity and discrimination, 
statute should be liberally construed even slightly straining the 
language so as to avoid the meaningless anomaly. Emphasis 
has been laid on the principle that if an interpretation leads to 
absurdity, it is the duty of the court to avoid the same. 
25. In Oxford University Press v. Commissioner of Income 
Tax (2001) 3 SCC 359, Mahapatra, J. has opined that 
interpretation should serve the intent and
purpose of the 
statutory provision. Jn that context, the learned Judge has 
referred to the authority in State of T.N. v. Kodaikana/ Motor 
Union (P) Ltd. ( 1986) 3 SCC 91 wherein this Court after 
referring to K.P. Varghese v. ITO[ ( 1981) 4 SCC 173 and Luke 
v. IRC(1964) 54 ITR 692 has observed:-
"The courts must always seek to find out the intention of the 
legislature. Though the courts must find out the intention of the 
statute from the language used, but language more often than 
not is an imperfect instrument of expression of human thought. 
As Lord Denning said it would be idle to expect every statutory 
provision to be drafted with divine prescience and perfect clarity. 
As Judge Learned Hand said, we must not make a fortress out 
of dictionary but remember that statutes must have some purpose 
or object, whose imaginative discovery is judicial craftsmanship.
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
We need not always cling to literalness and should seek to 
endeavour to avoid an unjust or absurd result. We should not 
make a mockery oflegislation. To make sense out of an unhappily 
worded provision, where the purpose is apparent to the judicial 
eye 'some' violence to language is permissible." 
26. Sabharwal, J. (as His Lordship then was) has observed thus:-
" ... It is well-recognised rule of construction that a statutory 
provision must be so construed, if possible, that absurdity and 
mischief may be avoided. It was held that construction suggested 
on behalf of the Revenue would lead to a wholly unreasonable 
result which could never have been intended by the legislature. 
It was said that the literalness in the interpretation of Section 
52(2) must be eschewed and the court should try to arrive at 
an interpretation which avoids the absurdity and the mischief 
and makes the provision rational, sensible, unless of course, the 
hands of the court are tied and it cannot find any escape from 
the tyranny of literal interpretation. It is said that it is now 
well-settled rule of construction that where the plain literal 
interpretation of a statutory provision produces a manifestly 
absurd and unjust result which could never have been intended 
by the legislature, the court may modify the language used by 
the legislature or even "do some violence" to it, so as to achieve 
the obvious intention
of the legislature and produce a 
rational construction. In such a case the court may read into 
the statutory provision a condition which, though not expressed, 
is implicit in construing the basic assumption underlying the 
statutory provision .... " 
34. As would be overwhelmingly pellucid from hereinabove, 
though words in a statute must, to start with, be extended their ordinary 
meanings, but if the literal construction thereof results in anomaly or 
absurdity, the courts must seek to find out the underlying intention of the 
legislature and in the said pursuit, can within permissible limits strain the 
language so as to avoid such unintended mischief. 
35. In Seaford Court Estmes Ltd. vs. Asker [1949] 2 All ER 
155 hallowed by time, outlining the duty of the Court to iron out the 
creases, it was enunciated, that whenever a statute comes up for 
consideration, it must be remembered that it is not within human powers 
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to foresee the manifold sets of facts which may arise and even if it 
were, it. is not possible to provide for them in terms free from all ambiguity, 
the caveat being that the English language is not an instrument of 
mathematical precision. It was held that in an eventuality where a Judge, 
believing himself to be fettered by the supposed rule that he must look to 
the language and nothing else, laments that the draftsmen have not 
provided for this or that or have been guilty of some or other aml)iguity, 
he ought to set to work on the constructive task of finding the intention 
of the Parliament and that he must do this not only from the language of 
the statute, but also from a consideration of the social conditions which 
gave rise to it and of the mischief which it was passed to remedy and 
then he must supplement the written word so as to give "force and life" 
to the intention of the legislature. 
36. It would, in any case be incomprehensible that the legislature, 
while occasioning the amendment to the first proviso to Rule 3(2)(c) of 
the Rules, was either ignorant or unaware of the prevalent practice of 
offering trade discount in the contemporary commercial dispensations. 
This is more so, as trade discount continued to be an accepted item of 
deduction. In such a premise, the intention of the legislature could not 
have been to deny the benefit of deduction of trade discount by obdurately
insisting on the reflection of such trade discount in the text invoice or the 
bill of sale at the point of the sale as t.he only device to guard against 
possible avoidance of tax under the clo11k thereof. Axiomatically, therefor 
the interp~etation to be extended to the proviso involved has to be 
essentially in accord with the legislative intention to sustain realistically 
the benefit of trade discount as envisaged. Any exposition to probabilise 
exaction of the levy in excess of the due, being impermissible cannot be 
thus a conceivable entailment of any law on imperative impost. To insist 
on the quantification of trade discount for deduction at the time of sale 
itself, by incorporating the same in the tax invoice/bill of sale, would be 
to demand the impossible for all practical purposes and thus would be ill-
logical, irrational .. and absurd. To reiterate, trade discount though an 
admitted phenomenon in commerce, the computation thereof may depend 
on various.factors singular to the parties as well as by way of uniform 
norms in business not necessarily enforceable or implementable at the 
time of the original sale. To deny the benefit of deduction only on the 
ground of omission to reflect the trade discount though actually granted 
in future, in the tax invoice/bill of sale at the time of the original transaction
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 
OTHERS [AMITAVA ROY, J.] 
would be to ignore the contemporaneous actuality and be unrealistic, 
unfair, unjust and deprivatory. This may herald as well the possible 
unauthorised taxation even in the face of cotaneous accounts kept in 
ordinary course of business, attesting the grant of such trade discount 
and adjustment thereof against the price. While, devious manipulations 
in trade discount to avoid.tax in a given fact situation is not an impossibility, 
such avoidance can be effectively prevented by insisting on the proof of 
such discount, if granted. The interpretation to th~ contrary, as sought to 
be assigned by the Revenue to the first proviso to Rule 3 (2)(c) of the 
Rules, when tested on the measure of the judicial postulations adumbrated 
hereinabove, thus does not commend for acceptance. 
37. On an overall review of the scheme of the Act and the Rules 
and the underlying objectives in particularofSections 29 and 30 of the 
Act and Rule 3 of the Rules, we are of the considered opinion that the 
requirement ofreference of the discount in the tax invoice or bill of sale 
to qualify it for deduction has to be construed in relation to the transaction 
resulting in the final sale/purchase price and not limited to the original 
sale sans the trade discount. However, the transactions allowing discm~nt 
have to be proved on the basis of contemporaneous records and the 
final sale price after deducting the trade discount
must mandatorily be 
reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. 
The sale/purchase price has to be adjudged on a combined consideration 
of the tax invoice or bill of sale as the case may be along with the 
accounts reflecting the trade discount and the actual price paid. The 
first proviso has thus to be so read down, as above, to be in consonance 
with the true intendment of the legislature and to achieve as well the 
avowed objective of correct determination of the taxable turnover. The 
contrary interpretation accorded by the High Court being in defiance of 
logic and the established axioms of interpretation of statutes is thus 
unacceptable and is negated. The appeals are thus allowed in the above 
terms. No costs. 
Devika Gujral 
Appeals .allowed. 
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