MIS. KANTHI ENTERPRISES & ORS.

STATE OF KARNATAKA & ORS.

SEPTEMBER 10, 2002.

[SYED SHAH MOHAMMED QUADRI AND RUMA PAL, JJ.]

Karnataka Sales Tax Act, 1957-Section 5(1A)-levy of tax on sale or purchase of goods-Explanation to first proviso of sub-section (1 A) to section

5 inserted later with retrospective operation-Dealers challenging C retrospectivity of explanation since they could not pass burden of tax on consumers-Dismissal by Single Judge and Division Bench of High Court- Validity of retrospective operation-On appeal, held explanation to first proviso cannot be treated as imposing new burden of tax with retrospective effect merely clarification-Further retrospectivity which really affects the dealer is only of 6 months, thus even if they could not pass burden of tax on customer D during that period, the retrospectivity cannot be unreasonable or arbitrary.

A Circular issued on June 19, 1988 by the Sales Tax Commissioner provided that the tax component forming part of the turnover will not qualify for deduction under the first proviso to section 5(1-A) of the Karnataka Sales Tax Act, 1957. The validity of the Circular was E challenged. High Court quashed the Circular holding that for the purpose of the first proviso to section 5(1-A) of the Act, sales tax paid will also form part of the turnover. Thereafter explanation to the first proviso to sub-section (1-A) of section 5 of the Act was inserted on March 5, 1996. It was given retrospective operation from April I, 1988. Appellants filed writ F petitions challenging the retrospective operation as they could not pass the burden of tax on consumers. Both the Single Judge and Division Bench of High Court dismissed the petitions. Hence the present appeals.

Appellants contended that this retrospective operation might be declared as unreasonable and arbitrary as they could not pass the burden G of tax on to consumers and that they be relieved of the burden of tax imposed on them on account of retrospectivity.

Respondents contended that merely because the explanation is given retrospective effect, it cannot be held illegal much less unconstitutional,

209 H

A and that even when a liability by imposing burden of a tax is created for the first time retrospectively, the legislation cannot be faulted and the legislature has only clarified the existing liability having regard to the pronouncement of High Court.

B Dismissing the appeals, the Court

HELD: t. First proviso to sub-section (1-A) of section 5 of the Karnataka Sales Tax Act, 1957 deals with any point of sale other than the first point of sale and the last point of sale, that is intermediary points of sale. For purposes of such a sale it lays down the mode for determining C taxable turnover which has to be arrived at by deducting the turnover of such goods on which tax has been levied under this sub-section at the immediately preceding point of sale This means "the turnover" therein which qualified for deduction is not the price of goods impregnated with tax component but excluding it. Inasmuch as at the point of the first sale, it is the price of the goods on which tax will be levied and that will form D the turnover of the seller; at the next point (intermediary point) of sale such turnover will have two elements, the first being the price of the goods to the purchaser and the second is the tax which he would pay. But at the immediately preceding point of sale turnover of such goods on which tax has been levied under sub section (IA) could only mean the price of the goods because it is on that amount the tax has been levied. That is what E the Commissioner stated in his Circular. However, High Court did not accept the same as correct. It is for this reason the explanation was inserted to bring out the true intention of the legislature in calculating "total turnover" mentioned in the proviso. It is merely declaratory of the meaning of the proviso and cannot be treated as imposing a new burden p of tax on the appellants with retrospective effect. 1214-B-H]

2. Sales tax is an indirect tax, the burden of payment of tax is on the dealer. The Karnataka Sales Tax Act, 1957 permits a registered dealer to pass on the burden of tax to the consumer duly ensuring that in the guise of tax no more than the actual amount of tax payable under the Act G should be collected from the ultimate consumer, however no unregistered dealer can pass on the burden of tax to the consumer. In the instant case, even if it be true that appellants could not collect the tax for which they are now made liable, because of an erroneous interpretation of the said proviso by the High Court, the Court cannot relieve the appellants of the H burden of tax legally payable by them. 1215-B, C, F, GI

MIS. KANTHI ENTERPRISES r. STATE 211

3. It is a settled position that legislature can impose tax A retrospectively though it cannot be arbitrary and unreasonable. At first sight it appears that the explanation which was inserted on March 5, 1996 retrospectively with effect from April I, 1988, casts burden of paying tax for about eight years on the appellants. But on a closer scrutiny it becomes clear that till August 18, 1995 the date of pronouncement of the High Court B judgment appellants could have and in fact did collect the tax. The explanation was inserted on March 5, 1996 so, in effect, the retrospectivity which really affects them, is only for about six months. Even if they have not passed on burden of tax to the consumers during that period, the effect cannot be said to be so unreasonable, arbitrary and harsh as to invalidate the Explanation. Such occasional hiccups are not unusual incidents of C business. In any event neither on principle nor on authority can such a relief be granted to appellants. However, having regard to the facts and circumstances of the case, appellants are permitted to pay sales tax levied/ leviable during the period August 18, 1995 to March 5, 1996 in six equal instalments commencing from October 1, 2002. If any of the appellants D fails to pay any instalment within two weeks of the same becoming due, it would be open to the authority concerned to collect the amount of tax due in lump sum in accordance with law. !215-G, H; 216-A-D]

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 7450- 7451 of 1999.

From the Judgment and Order dated 2.9.1999 of the High Court of Karnataka in WA 2000-2002/97 and WP 25737/97, WP25743/97, WP25760/ 97, WP25762/97, WP 26678/97, WP33101/97, WP33104/97 and WP 23114/ 98.

WITH

C.A. Nos. 7552-57/1999, C.A. Nos. 640-643/2000, C.A. Nos. 943-944/ 2000.C.A. No.1116/2000, C.A. Nos. 1034/2000, C.A. Nos. 2547-2548/2000, C.A. Nos. 2158-2165/2000, CA. No. 2166/2000, C.A. Nos. 2374-2382/2000, C.A. Nos. 3013-3020/2000 and CA. No. 5684/2000.

A.K. Ganguli, Joseph Vellapaly and T.L.V. Iyer, S.Ravindra Bhat, Madhu Sudan Naik, Naveen R. Nath, Ms. Lalit Mohini Bhat, Ms.Hetu Arora, N.D.B. Raju, Ms. Bharathi Raju. G. Prabhakar, Rajesh Mahale, R.C. Kohli, R.V. Prasad, Praveen Kumar, N. Ganpathy, Sanjay R. Hegde, Pavan Kumar

and Satya Mitra for the appearing parties.

A The Judgment of the Court was delivered by

SYED SHAH MOHAMMED QUADRI, J. These appeals are from the common judgment and order of Division Bench of the High Court of Karnataka at Bangalore in a batch of writ appeals and writ petitions dated September 2, 1999 and judgments and orders passed, following the same, in B various writ petitions.

In writ petitions filled under Article 226 of the Constitution, the appellants challenged the validity of retrospective operation of the Explanation to the first proviso to sub-section (1-4) of Section 5 of the Karnataka Sales Tax Act, 1957 (for short, the Act) which was inserted by Act No. I of 1996 C on March 5, 1996 with effect from April I, 1988. The sub-section was omitted by Act No. 5 of 2000, w.e.f. April 1, 2000. During the short period it was on the statute book, it gave rise a series of litigation including the present appeals. The challenge against retrospective operation of the impugned Explanation was unsuccessful before the learned single judge of the High D Court as well as the Division Bench of the High Court. Hence these appeals.

Mr. Joseph Vellapaly, the learned senior counsel appearing for the appellants, contended that on account of retrospective operation of the said Explanation, the appellants were put to huge economic loss and great hardship because they could not pass the burden of tax on consumers for the past E years, therefore, the retrospectivity might be declared as unreasonable and arbitrary. ·

Mr. A.K. Ganguli, the learned senior counsel, while adopting the argument of Mr. Vellapally pleaded that this Court could relieve the appellants of the burden of tax imposed on them on account of retrospectivity of the F Explanation by virtue of Sections 18, I SA and 29 of the Act the appellants could not have collected the tax from the consumers between August 18,

1995 and March 5, 1996 except on pain of penalty and prosecution.

Mr. T.L.V. Iyer, the learned senior counsel appearing for the State, G argued that after the clarificatory circular. issued by the Commissioner on June 19, 1988, was quashed by a learned single Judge of the Karnataka High Court on August 18, 1995 , the legislature inserted the said Explanation on March 5, 1996 clarifying the first proviso taking note of the judgment of the High Court, merely because the Explanation is given retrospective effect, submits the learned counsel, it cannot be held illegal much less H unconstitutional. Even when a liability by imposing burden of a tax is created

MIS. KANTHI ENTERPRISES" STATE [SYED SHAH MOHAMMED QUADRL J.) 213

for the first time retrospectively the legislation cannot be faulted; in the A instant case the legislature has only clarified the existing liability having regard to the pronouncement of the High Court. There is, therefore, no valid reason to assail the impugned legislation.

To appreciate the contentions of the learned senior counsel it would be useful to refer to the background in which the Explanation to the first proviso B to sub-section (I-A) came to be inserted. By Act No.15of1988 sub-section (I-A) was inserted in Section 5 of the Act w.e.f. April I, 1988 which was as under:

"5. Levy of tax on sale or purchase of goodsc xxx xxx xxx

(I)

(I-A) Notwithstanding anything contained in sub-section (I), every dealer shall pay for each year tax on his taxable turnover of sales at D every point of sale (other than the last sale in the State) relating to all kinds of alcoholic liquors for human consumption (other than toddy, arrack, {fenny, beer and wine} at the rate of {fifty }percent of such turnover:

Provided that at any point of sale other than first point of sale and E the last point of sale, the taxable turnover shall be arrived at by deducting the turnover of such goods on which tax has been levied under this sub-section at the immediately preceding point of sale.

In regard to computation of taxable turnover, referred to in the aforementioned proviso, the Commissioner of Commercial Taxes (for short, the F Commissioner)' issued a circular on June 19, 1988 which provided that the tax component forming a part of the turnover will not qualify for deduction under the first proviso to Section 5 (I-A) of the Act. The validity of that circular (along with some other notification with which we are not concerned here) was assailed in the first round of the litigation in the High Court. By order dated August 18, 1995, a learned single judge of the High Court quashed G the circular holding that for the purpose of the first proviso to Section 5 (I- . A) of the Act, sales tax paid will also form part of the turnover envisaged therein, to clarify the true intention of the legislature of the Kamataka State, the following Explanation to the first proviso to sub -section (I-A) of Section 5 of the Act was inserted by Act No. I of 1996 on March 5. 1996, which is H

A re-produced hereunder:

"Explanation: for the purpose of this proviso "turnover of such goods on which tax has been levied" means taxable and shall not include tax".

B It was given retrospective operation from April l, 1988 as on that date sub-section (I-A) was inserted in Section 5 of the Act. A perusal of the said proviso would show that it deals with any point of sale other than the first point of sale and the last point of.sale; in other words it deals with intermediary points of sale. For purposes of such a sale the proviso lays down the mode C for determining taxable turnover which has to be arrived at by deducting the turnover of such goods on which tax has been levied under this sub-section at the immediately preceding point of sale. Having perused the definitions of taxable turnover and turnover in clauses (u-1) and (v}, respectively, of Section 2 (1) of the Act, we are of the view that the words, in italic, mean that "the turnover" therein which qualifies for deduction is not the price of goods D impregnated with tax component but excluding it. To put it precisely, it means, the turnover without the tax component" Inasmuch as at the point of the first sale, it is the price of the goods on which tax will be levied and that will form the turnover of the seller, at the next point (intermediary point) of sale such turnover, it is obvious, will have two elements, the first being the E price of the goods to the purchaser and the second is the tax which he would pay. But at the immediately preceding point of sale turnover of such goods on which tax has been levied under subsection (I-A) could only mean the price of the goods because it is on that component the tax has been levied.

The following example may be helpful in understanding the import of the proviso. Suppose at the point of first sale the price of the goods is Rs. 100 F and the sales tax levied on it is Rs. 50, so the turnover impregnated with tax component is Rs. 150 and the turnover without the tax is Rs. I 00 At the point of second sale, the intermediary sale, the immediately preceding point of sale would be the first sale and in terms of the proviso the total turnover of the goods has to be arrived at by deducting that part of the turnover of the goods G on which tax has been levied and that would be Rs. JOO because it is on that amount tax of Rs. 50 was levied. That is what the Commissioner in his circular stated, That was, however, not accepted as correct by the learned single judge of the High Court. It is for this reason the said explanation was inserted to bring out the true intention of the legislature in calculating "total turnover" mentioned in the proviso. It is merely declaratory of the meaning H of the proviso and cannot be treated as imposing a new burden of tax on the

MIS. KANTHI ENTERPRISES v. STATE [SYED SHAH MOHAMMED QUADRI. J .] 215

appellants with retrospective effect.

It is not possible to accede to the second contention of the learned senior counsel for the appellants that as insertion of the Explanation wrks harshly and causes great hardship to the appellants , it is unreasonable and so they have to be given relief, insofar as they could not pass the burden of tax on the ultimate consumer.

It would be well to bear in mind that sales tax is an indirect tax, the burden of payment of tax is on the dealer. The Act does not require but permits a dealer to pass on the burden of tax to the consumer; ensuring that in the guise of tax no more than the actual amount of tax payable under the Act should be collected from the ultimate consumer. To check misuse of this C liberty the legislature has taken care to provide by Section 18 of the Act that a person who is not a registered dealer but is liable to pay tax shall not collect any amount by ways of tax or purporting to be by way of tax under the Act nor shall a registered dealer collect any amount by way of tax or purporting to be by way of tax at a rate or rates exceeding the rate or rates at which he D is liable to pay tax under the provisions of the Act. The prohibition in the above terms is reinforced by incorporating Section 18 A and providing penalty for collection of any amount in contravention of Section 18. Further, Section 29, which enumerates offences and penalties, includes in clause (g) of subsection (2), collection of any amount by way of turnover tax or purporting to be by way of turnover tax in contravention of subsection (3) of Section E

18. Such an offence is punishable with simple imprisonment which may extend to twelve months or with a fine which shall not be less than five thousand rupees but which may extend to twenty-five thousand rupees or with both and when the offence is a continuing one, with a daily fine not. exceeding two hundred rupees during the period of continuance of the offence. F The summary of the provisions, referred to above shows that no unregisterd dealer can pass on the burden of tax to the consumer and a regitered dealer cannot collect any tax more than what he would be liable to pay.

Even if it be true that they could not collect the tax which they are now made liable, because of an erroneous interpretation of the said proviso by the G High Court, the Court cannot relieve the appellants of the burden of tax legally payable by them.

It is a settled position that the legislature can impose tax retrospectively though it cannot be arbitrary and unreasonable. At first sight it appears that the Explanation which was inserted on March 5, 1996 retrospectively with H

A effect from April I, 1998, casts burden of paying tax fro about eight years on the appellants. But on a closer scrutiny it becomes clear that till August

18, 1995 9 date of pronouncement of High Court judgment) they could have and in fact collected the tax. The Explanation was inserted on March 5, 1996 so, in effect. the retrospectively which really affects them, is only for about six months. Even if they have not passed on burden of tax to the customers B during that period the effect cannot be said to be so unreasonable , arbitrary and harsh as to invalidate the Explanation, such occasional hiccups are not unsual incidents of business. In any event neither on principle nor on authority can such a relief be granted to the appellants.

C However, having regard to the facts and circumstances of the case we pennit the appellants to pay sales tax levied/ leviable during the period August 18, 1995 to March 5, 1996 in six equal instalments, to be paid in each month commencing from October I, 2002. If any of the appellants fails to pay any instalment within two weeks of the same becoming due, it would be open to the concerned authority to collect the amount of tax due, in lump sum, in D accordance with law.

Subject to the above observations the appeals are dismissed with no order as to costs.

N.J.

Appeals dismissed.