Case BriefsSupreme Court

Supreme Court: When the bench of AM Khanwilkar and Ajay Rastogi, JJ was called upon to decide whether the condition of ‘use in the same form in which such goods are purchased’ under Rule 6(4)(m)(i) of the KST Rules expands the scope of charging section i.e. Section 5B under KST Act, 1957, it held,

“there is no variance between Rules 6(4)(m)(i) read with Explanation III and Section 5B of the KST Act, 1957.”

The Court said,

“We are clear, in our view, that Section 5B of the KST Act and Rule 6(4)(m)(i) of the KST Rules operate in different spheres. Section 5B is a charging provision for levy of sales tax whereas Rule 6(4)(m)(i) is a provision for deduction from tax. Under Section 5B, tax can be levied on transfer of property in the goods whether as goods or in some other form whereas Rule 6(4)(m)(i) provides for  a deduction in respect of the goods which have already suffered tax and which are used in the same form.”

It was explained that Section 5B of the KST Act is a charging provision which empowers the State to levy tax on the transfer of property in goods involved in works contract. At the same time Rule 6(4)(m)(i) read with Explanation III to Rule 6(4) of the KST Rules clarifies that the same goods can be taxed only once and cannot be made subject matter of multiple incidence of tax and the goods which have suffered   taxation undergoes transformation into a different commodity altogether and is then used in the execution of a works contract, the same being a different commercial commodity is liable to be taxed.

The Court explained that Rule 6(4)(m)(i) purports to grant benefit to the assessee by allowing deductions for the value of goods which have already suffered taxation and which goods substantially retain their original identity while being used in the execution of a works contract.  Explanation III to Rule 6(4) clarifies it further by categorically providing that in case the goods are transformed into a different commodity which then is used in the execution of works contract, then the benefit of deduction cannot be availed.

The Court also referred to a recent verdict in Achal Industries v. State of Karnataka, 2019 SCC OnLine SC 428 and said that it is trite law that tax provisions granting exemptions/concessions are required to be strictly construed.

[Craft Interiors v. Joint Commissioner of Commercial Taxes (Intelligence), 2019 SCC OnLine SC 815, decided on 02.07.2019]

Also read:

SC explains meaning of “total turnover” under the Karnataka Sales Tax Act

Case BriefsSupreme Court

Supreme Court: While examining the applicability of the turnover tax as defined under Section 6 B(1) of the Karnataka Sales Tax Act, 1957, the bench of AM Khanwilkar and Ajay Rastogi, JJ held:

“the expression ‘total turnover’ which has been incorporated as referred to under Section 6­B(1) is for the purpose of identification of the dealers and for prescribing different rates/slabs. The first proviso to Section 6­B(1) provides an exhaustive list of deductions which are to be made in computation of such turnover with a further stipulation as referred to in second proviso that except for the manner provided for in Section 6­B(1), no other deduction shall be made from the total turnover of a dealer.”

The Court said that the expression “total turnover” and “turnover” which has been used under Section 6­B has the same meaning as defined under Section 2(1)(u­2) and 2(v) of the Act. Under Section 6­B, reference is made on ‘total turnover’ and not the ‘turnover’ as defined under Section 2(v) of the KST Act and taking note of the exemption provided under first proviso clause(iii), exclusion has been made in reference to use of sale or purchase of goods in the course of inter­state trade or commerce.

It was contended before the Court that the ‘total turnover’ in Section 6­B(1) is to be read as ‘taxable turnover’ and the determination of the rate of the turnover tax is to be ascertained on the ‘taxable turnover’. The Court held that this submission was unsustainable and deserved outright rejection.

It said:

“the expression ‘total turnover’ has been referred to for the purpose of identification/classification of dealers for prescribing various rates/slabs of tax leviable to the dealer and read with first and second proviso to Section 6­B(1), this makes the intention of the legislature clear and unambiguous   that except the deductions provided under the first proviso to Section 6­B(1) nothing else can be deducted from the total turnover as defined under Section 2(u­2) for the purpose of levy of turnover tax under Section 6­B of the Act.”

[Achal Industries v. State of Karnataka, 2019 SCC OnLine SC 428, decided on 28.03.2019]

Case BriefsHigh Courts

High Court of Bombay: In a case where the petitioners were charged against unanticipated dues on a property by the Sales Tax authorities long after they had purchased the property, the division bench of B. P. Colabawalla and S.C. Dharmadhikari, JJ., held that even though the property was bought on an “as is where is basis” by the petitioners, they, having no knowledge (either actual or constructive) of the dues of the sales tax authorities before they purchased the said property, the sale tax authorities cannot recover their dues from the petitioners by enforcing their charge against the said property.

The petitioners purchased the said property pursuant to a sale conducted by the Nationalized Banks under the provisions of the SARFAESI Act, 2002. Petitioners contented that the Sales Tax Authorities cannot enforce their alleged charge on the said property purchased by the Petitioners as the alleged Sales Tax dues of the Defaulter Company were never disclosed to the Petitioners, and if at all the Sales Tax have any charge, it would have to be recovered from the sale proceeds which lie in the hands of the secured creditors i.e. the banks who had sold the mortgaged property. The Respondents submitted that once the sales tax dues were in arrears and they were always payable, then it is a charge on the properties of the dealer or any other person within the meaning of Section 38C of Bombay Sales Tax Act, 1969. This would enable the Sales Tax Department to go after the properties of the Defaulter Company and recover the sales tax dues. It was submitted that the sale being on ‘as is where is basis’ position, the Petitioners ought to have made their own inquiry to ascertain whether there were any encumbrances on the said property. Not having done so, the petitioners cannot contend that the claim of the Sales Tax Authorities cannot be enforced against the said property. Relying upon the Section 100 of the Transfer of Property Act,1882, which states that a ‘charge’ may not be enforced against a transferee if she/he has had no notice of the same, unless by law, the requirement of such notice has been waived, the Court rejected the aforesaid contention of the Respondents.

The Court noticed that the petitioner had merely purchased the said property which originally belonging to the Defaulter Company and which was mortgaged with the Respondents. Since, the Defaulter Company did not pay its dues to the Respondents, they, exercising their rights under the provisions of the SARFAESI Act, sought to enforce their security interest and sell the secured asset (the said property) to the Petitioners. Hence, the Court observed that the Petitioners can by no stretch of the imagination be termed as a successor of the business of the Defaulter Company to enable the Sales Tax Authorities to recover their dues from the Petitioners by enforcing their alleged charge against the said property purchased by the Petitioners under the provisions of the SARFAESI Act. However, it was clarified that its order and direction does not mean that the Sales Tax Authorities cannot proceed against the Defaulter Company.  [Sonoma Management Partners Pvt. Ltd. v. Bank of Maharashtra, 2016 SCC OnLine Bom 9649, decided on 22.11.2016 ]