CASE NO.: Appeal (civil) 1784 of 2007 PETITIONER: M/s Binani Industries Ltd., Kerala RESPONDENT: Assistant Commissioner of Commercial Taxes, VI Circle, Bangalore and Ors DATE OF JUDGMENT: 04/04/2007 BENCH: Dr. ARIJIT PASAYAT & S.H. KAPADIA JUDGMENT:
J U D G M E N T
CIVIL APPEAL NOS. 1784 OF 2007
(Arising out of SLP (C) Nos. 157-158 of 2006)
WITH
(Civil Appeal Nos. 1785 /2007 @ SLP ) Nos. 1035-39/2006
Civil Appeal Nos. 1786 /2007@ SLP ) Nos. 1219-38/2006
Civil Appeal Nos. 1787 /2007@ SLP ) Nos. 1462-63/2006
Civil Appeal Nos. 1788 /2007@ SLP ) Nos. 1482-1501/2006
Civil Appeal Nos. 1789 /2007@ SLP ) Nos. 1506-09/2006
Civil Appeal Nos. 1790 /2007@ SLP ) No. 6197/2006
Civil Appeal Nos. 1791 /2007@ SLP ) Nos. 6733/2006
Civil Appeal Nos. 1792 /2007@ SLP ) Nos. 6884/2006
Civil Appeal Nos. 1793 /2007@ SLP ) Nos. 9232/2006
Civil Appeal Nos. 1794 /2007@ SLP ) Nos. 8862/2006
Civil Appeal No. 1369 of 2006
Civil Appeal No. 1370 of 2006
Dr. ARIJIT PASAYAT, J.
Leave granted in special leave petitions.
Challenge in these appeals is to the legality of the
judgment rendered by a Division Bench of the Karnataka High
Court holding that the Circular dated 23.10.1999 (Circular
No.31/1999-2000) is valid and Circular No.5/1996-97 dated
12.4.1996 was inoperative.
Background facts in a nutshell are as follows:
Appellants are dealers registered under the Karnataka
Sales Tax Act, 1957 (in short the ‘Act’). Their business
activities inter-alia include business of leasing machinery,
equipment and motor vehicles.
Section 5-C of the Act deals with levy of tax on transfer of
the right to use the goods which is treated as a transfer for the
purpose of levy of sales tax within the State.
Originally the levy was on “taxable turnover”. An
amendment was brought in 1992 to the said provision
substituting the expression “total turnover” for “taxable
turnover”. The same was questioned by several assessees. A
Division Bench of the High Court by its judgment in Shetty
Leasing India Pvt. Ltd. vs. Union of India and Ors. (1996 (100)
STC 533) struck down the provision. On 1.4.1986, Section 5-C
was again amended with retrospective effect restoring the
original position i.e. substituting the expression “taxable
turnover” for “total turnover”. On 12.4.1996, a Circular was
issued in terms of Section 3-A of the Act providing that the
goods which have suffered tax under Section 5 of the Act
cannot be again taxed in terms of Section 5-C. In other words,
where the goods have suffered tax on the actual sale cannot
attract levy of tax again. The circular, as noted above, was
issued under Section 3-A of the Act read with Rule 6(4) of the
Karnataka Sales Tax Rules, 1957 (in short the ‘Rules’).
Subsequently, on 23.10.1999 another Circular was issued
stating that the earlier Circular did not reflect the actual
position in law and, therefore, there was no bar on the
transaction being taxed in terms of Sections 5 and 5-C. On
1.4.2000 Section 5-C was amended by insertion of a proviso
which in essence re-iterated the view expressed in the Circular
dated 12.4.1996.
Keeping in view the directions contained in the Circular
of 23.10.1999 re-assessment proceedings were initiated
and/or action in terms of Section 21 for revision was initiated.
Both these actions related to completed assessments.
A learned Single Judge while dealing with challenge to
Circular dated 23.10.1999 held that the Circular of 12.4.1996
did not indicate the correct position in law and, therefore,
there was no bar in the Circular dated 23.10.1999 clarifying
the position and indicating the correct position. However, it
was held that the revenue was bound by the incorrect
Circular. Therefore, for the assessment years 1996-97 to
1999-2000 till the date of the subsequent Circular, no action
could be taken against the assessees. But the position prior to
that i.e. from 1.4.1986 till 31.3.1996 the assessees were not
entitled to any relief. This view was taken primarily on the
ground that even incorrect circular binds the revenue. The
Division Bench held the incorrect circular does not bind the
revenue and that the law declared by this Court has a binding
effect.
Learned counsel for the appellants submitted that both
the orders of the learned Single Judge and the judgment of the
Division Bench do not take into effect of the proviso which is
in essence a legislative declaration of a clarificatory nature.
The proviso in terms recognizes the correctness of the Circular
dated 12.4.1996. In any event, there could not have been any
re-opening of the assessment because of mere change in
opinion of the Commissioner. When two opinions were
expressed in the two circulars it is nothing but a change in the
opinion and it is impermissible for the revenue to re-open the
complete assessment on the basis of the subsequent Circular.
The fact that the proviso was by way of a clarification is
clear from the fact that at the first instance only 12 days after
Section 5-C was amended, the Circular was issued. In
essence, the principle of contemporaneous expression applies
to the facts of the case. The Circular dated 23.10.1999 is in
essence review of the earlier Circular which is impermissible in
law. The Circular itself states that those are “revised
instructions” and, therefore, cannot have any retrospective
force and in any event cannot permit re-opening of complete
assessment either by way of re-assessment proceedings or by
exercise of revisional powers.
In response, learned counsel for the revenue submitted
that the true nature of the proviso has been kept in view. The
High Court’s conclusions are irreversible. There is no question
of proviso being clarificatory in nature. According to him, the
proviso can be applicable with effect from the date of
introduction because that would determine the taxable event
for the assessment year in question and the subsequent
period.
It is stated that the Circular was not binding on the
assessing authorities and they could take their independent
view.
At this juncture, it would be necessary to take note of
Sections 5-C, 12-A and 21. They read as follows:
“5-C. Levy of tax on the transfer of the right
to use any goods: Notwithstanding anything
contained in sub-section (1) or sub-section (3)
of Section 5, but subject to sub-sections (5)
and (6) of the said Section, every dealer shall
pay for each year a tax under this Act on his
(taxable turnover in respect of the transfer of
the right to use any goods mentioned in
column (2) of the Seventh Schedule for any
purpose (whether or not for a specified period)
at the rates specified in the corresponding
entries in column (3) of the said Schedule.
Provided that no tax shall be levied under
this section if the goods in respect of which the
right to use is transferred, have been subjected
to tax under section 5.
12-A. Assessment of escaped turnover: -(1)
If the assessing authority has reason to believe
that the whole or any part of the turnover of a
dealer in respect of any period has escaped
assessment to tax or has been under-assessed
or has been assessed at a rate lower than the
rate at which it is assessable under this Act or
any deductions or exemptions have been
wrongly allowed in respect thereof, the
assessing authority may, notwithstanding the
fact that the whole or part of such escaped
turnover was already before the said authority
at the time of the original assessment or re-
assessment but subject to the provisions of
sub-section (2), at any time within a period of
eight years from the expiry of the year to which
the tax relates, proceed to assess or re-assess
to the best of its judgment the tax payable by
the dealer in respect of such turnover after
issuing a notice to the dealer and after making
such enquiry as it may consider necessary.
(1-A) In making an assessment under sub-
section (1) the assessing authority may, if it is
satisfied that the escape from assessment is
due to wilful non-disclosure of assessable
turnover by the dealer, direct the dealer to pay,
in addition to the tax assessed under sub
section (1), a penalty not exceeding (an amount
equivalent to the tax due) the tax so assessed:
Provided that no penalty under this sub-
section shall be imposed unless the dealer
affected has had a reasonable opportunity of
showing cause against such imposition.
(2) In computing the period of limitation for
assessment of the escaped turnover under this
Section, the time during which an assessment
has been deferred on account of any stay order
granted by any Court or other authority in any
case, or by reason of the fact that an appeal or
other proceeding is pending before the
Appellate Tribunal or the High Court or the
Supreme Court, shall be excluded:
Provided that nothing contained in this
Section limiting the time within which any
action may be taken or any order, assessment
or re-assessment may be made, shall apply to
an assessment or re-assessment made on the
assessee or any person in consequence of, or
to give effect to, any finding, direction or order
made under Sections 20, 21, 22, 22A, 23 or 24
or any judgment, or order made by the
Supreme Court, the High Court, or any other
Court.
21. Revisional powers of Joint
Commissioners.:
(1) The Deputy Commissioner may of his own
motion call for and examine the record of any
order passed or proceeding recorded under the
provisions of this Act by an Commercial Tax
Officer subordinate to him for the purpose of
satisfying himself as to the legality or propriety
of such order or as to the regularity of such
proceeding in so far as it is prejudicial to the
interests of the revenue and may pass such
order with respect thereto as he thinks fit.
(2) the Joint Commissioner may of his own
motion call for and examine the record of any
order passed or proceeding recorded under the
provisions of this Act by any officer not above
the rank of a Deputy Commissioner, for the
purpose of satisfying himself as to the legality
or propriety of such order or as to the
regularity of such proceeding in so far as it is
prejudicial to the interests of the revenue and
pass such order with respect there to as he
thinks fit.
(3) In relation to an order of assessment
passed under this Act, the power under sub–
sections (1) and (2) shall be exercisable only
within a period of four years from the date on
which the order was passed.
(4) No order shall be passed under sub-section
(1) or sub-section (2) enhancing any
assessment, unless an opportunity has been
given to the assessee to show cause against
the proposed enhancement.
(5) The power under this Section shall not be
exercisable in respect of matters subjected to
appeal under Section 20.
(6) Every order passed in revision under this
Section shall subject to the provisions of
Sections 22 to 24 and 25-A be final.
Explanation: For the purposes of this section,
‘record’ shall include all records relating to any
proceedings under this Act available at the
time of examination by the Joint
Commissioner.”
A copy of the Budget speech introducing the amendment
was placed on record by learned counsel for the parties. The
Finance Minister’s speech shows that the proviso was
intended to provide additional benefit or relief. The proviso
appears to have been introduced as a clarificatory measure.
There is no mention as to the date after which benefit can be
granted in respect of the goods which have suffered tax.
Therefore, the assessment period concerned as sought to be
introduced by the revenue has no foundation. The proviso
clearly states that once the goods have suffered the tax they
would not be subject to tax again. As observed by this Court in
Zile Singh v. State of Haryana and Ors. (2004 (8) SCC 1) for
the purpose of determining that the proviso is clarificatory or
not, the date when it is introduced is relevant. Paras 11 to 21
of the judgment are relevant and they read as follows:
11. According to the appellant, the disqualification
imposed by Section 13-A(l)(c) of the First
Amendment remained in operation only for a period
of one year and would have in ordinary course
ceased to operate on the expiry of the period of one
year from 5-4-1994. The citizens were justified in
arranging their affairs including the enlargement of
their families keeping in view the provision of law as
it stood. However, the Second Amendment Act
effective from 4-10-1994 made a difference. On that
day, the legislature specifically provided that a
person having more than two children on or after
the expiry of one year shall stand disqualified. This
period of one year, in the submission of the
appellant, should be calculated from 4-10-1994 and
not 5-4-1994 and if that be done the birth of the
child on 13-8-1995 would not attract the
disqualification.
12. This plea of the appellant raises a few
interesting questions, such as, the nature of the
amendment i.e. whether it is at all retrospective in
operation, and if not, whether the provision as
amended by the Second Amendment applies to the
appellant.
13. It is a cardinal principle of construction that
every statute is prima facie prospective unless it is
expressly or by necessary implication made to have
a retrospective operation. But the rule in general is
applicable where the object of the statute is to affect
vested rights or to impose new burdens or to impair
existing obligations. Unless there are words in the
statute sufficient to show the intention of the
legislature to affect existing rights, it is deemed to
be prospective only – “nova constitutio futuris
formani imponere debet non praeteritis” a new
law ought to regulate what is to follow, not the past.
(See Principles of Statutory Interpretation by Justice
G.P. Singh, 9th Edn., 2004 at p. 438.) It is not
necessary that an express provision be made to
make a statute retrospective and the presumption
against retrospectivity may be rebutted by
necessary implication especially in a case where the
new law is made to cure an acknowledged evil for
the benefit of the community as a whole (ibid., p.
440).
14. The presumption against retrospective operation
is not applicable to declaratory statutes. In
determining, therefore, the nature of the Act, regard
must be had to the substance rather than to the
form. If a new Act is “to explain” an earlier Act, it
would be without object unless construed
retrospectively. An explanatory Act is generally
passed to supply an obvious omission or to clear up
doubts as to the meaning of the previous Act. It is
well settled that if a statute is curative or merely
declaratory of the previous law retrospective
operation is generally intended…. An amending Act
may be purely declaratory to clear a meaning of a
provision of the principal Act which was already
implicit. A clarificatory amendment of this nature
will have retrospective effect (ibid., pp. 468-69).
15. Though retrospectivity is not to be presumed
and rather there is presumption against
retrospectivity, according to Craies (Statute Law,
7th Edn.), it is open for the legislature to enact laws
having retrospective operation. This can be achieved
by express enactment or by necessary implication
from the language employed. If it is a necessary
implication from the language employed that the
legislature intended a particular section to have a
retrospective operation, the courts will give it such
an operation. In the absence of a retrospective
operation having been expressly given, the courts
may be called upon to construe the provisions and
answer the question whether the legislature had
sufficiently expressed that intention giving the
statute retrospectivity. Four factors are suggested
as relevant: (i) general scope and purview of the
statute; (ii) the remedy sought to be applied; (iii) the
former state of the law; and (iv) what it was the
legislature contemplated. (p. 388) The rule against
retrospectivity does not extend to protect from the
effect of a repeal, a privilege which did not amount
to accrued right. (p. 392)
16. Where a statute is passed for the purpose of
supplying an obvious omission in a former statute
or to “explain a former statute, the subsequent
statute has relation back to the time when the prior
Act was passed. The rule against retrospectivity is
inapplicable to such legislations as are explanatory
and declaratory in nature. A classic illustration is
the case of Attorney General v. Pougett (Price at p.
392). By a Customs Act of 1873 (53 Geo. 3, c. 33) a
duty was imposed upon hides of 9s 4d, but the Act
omitted to state that it was to be 9s 4d per cwt., and
to remedy this omission another Customs Act (53
Geo. 3, c. 105) was passed later in the same year.
Between the passing of these two Acts some hides
were exported, and it was contended that they were
not liable to pay the duty of 9s 4d per cwt., but
Thomson, C.B., in giving judgment for the Attorney
General, said: (ER p. 134)
“The duty in this instance was, in fact,
imposed by the first Act; but the gross
mistake of the omission of the weight, for
which the sum expressed was to have
been payable. occasioned the amendment
made by the subsequent Act: but that
had reference to the former statute as
soon as it passed, and they must be
taken together as if they were one and the
same Act:” (Price at p. 392)
17. Maxwell states in his work on Interpretation of
Statutes (12th Edn.) that the rule against
retrospective operation is a presumption only, and
as such it “may be overcome, not only by express
words in the Act but also by circumstances
sufficiently strong to displace it” (p. 225), if the
dominant intention of the legislature can be clearly
and doubtlessly spelt out, the inhibition contained
in the rule against perpetuity becomes of doubtful
applicability as the “inhibition of the rule” is a
matter of degree which would “vary secundum
materiam” (p. 226). Sometimes, where the sense of
the statute demands it or where there has been an
obvious mistake in drafting, a court will be prepared
to substitute another word or phrase for that which
actually appears in the text of the Act (p. 231).
18. In a recent decision of this Court in National
Agricultural Coop. Marketing Federation of India
Ltd. v. Union of India (2003 (5) SCC 23) it has been
held:
“that there is no fixed formula for the
expression of legislative intent to give
retrospectivity to an enactment. Every
legislation whether prospective or
retrospective has to he subjected to the
question of legislative competence. The
retrospectivity is liable to be decided on a
few touchstones such as: (i) the words
used must expressly provide or clearly
imply retrospective operation; (ii) the
retrospectivity must be reasonable and
not excessive or harsh, otherwise it runs
the risk of being struck down as
unconstitutional: (iii) where the
legislation is introduced to overcome a
judicial decision, the power cannot be
used to subvert the decision without
removing the statutory basis of the
decision. There is no fixed formula for the
expression of legislative intent to give
retrospectivity to an enactment. A
validating clause coupled with a
substantive statutory change is only one
of the methods to leave actions
unsustainable under the un-amended
statute, undisturbed. Consequently, the
absence of a validating clause would not
by itself affect the retrospective operation
of the statutory provision, if such
retrospectivity is otherwise apparent”.
19. The Constitution Bench in Shyam Sunder v.
Ram Kumar (2001 (8) SCC 24) has held: (SCC p.
49, para 39)-
“Ordinarily when an enactment declares
the previous law, it requires to be given
retroactive effect. The function of a
declaratory statute is to supply an
omission or to explain a previous
statute and when such an Act is passed,
it comes into effect when the previous
enactment was passed. The legislative
power to enact law includes the power
to declare what was the previous law
and when such a declaratory Act is
passed, invariably it has been held to be
retrospective. Mere absence of use of the
word ‘declaration’ in an Act explaining
what was the law before may not appear
to be a declaratory Act but if the court
finds an Act as declaratory or
explanatory, it has to be construed as
retrospective.” (p. 2487).
20. In Bengal Immunity Co. Ltd. v. State of Bihar
(1955 (2 SCR 603), Heydon case was cited with
approval. Their Lordships have said: (SCR pp. 632-
33)
“It is a sound rule of construction of a
statute firmly established in England as
far back as 1584 when Heydon case was
decided that-
‘.for the sure and true
interpretation of all statutes in
general (be they penal or
beneficial, restrictive or enlarging
of the common law) four things
are to be discerned and
considered-
1st. What was the common law
before the making of the Act.
2nd. What was the mischief and
defect for which the common law did
not provide.
3rd. What remedy Parliament hath
resolved and appointed to cure the
disease of the Commonwealth, and
4th. The true reason of the remedy;
and then the office of all the judges
is always to make such construction
as shall suppress the mischief, and
advance the remedy, and to
suppress subtle inventions and
evasions for continuance of the
mischief, and pro privato commodo
and to add force and life to the cure
and remedy, according to the true
intent of the makers of the Act, pro
bono publico’.”
21. In Allied Motors (P) Ltd. v. CIT (1997 (3) SCC
472) certain unintended consequences flowed from
a provision enacted by Parliament. There was an
obvious omission. In order to cure the defect, a
proviso was sought to be introduced through an
amendment. The Court held that literal
construction was liable to be avoided if it defeated
the manifest object and purpose of the Act. The rule
of reasonable interpretation should apply.
“A proviso which is inserted to remedy
unintended consequences and to make
the provision workable, a proviso which
supplies an obvious omission in the
section and is required to be read into the
section to give the section a reasonable
interpretation, requires to be treated as
retrospective in operation so that a
reasonable interpretation can be given to
the section as a whole.” (SCC pp. 479-80,
para 13)
The Budget Speech speaks of the goods “already been
subjected to tax under the Act” and does not even by
implication state that in order to be entitled to the benefit the
goods ought to have been taxed after a particular date. It is
purely on the event of goods having suffered tax once or in
other words the taxable event having taken place once.
The normal function of a proviso is to except something
out of the enactment or to qualify something enacted therein
which but for the proviso would be within the purview of the
enactment. As was stated in Mullins v. Treasurer of Survey
[1880 (5) QBD 170, (referred to in Shah Bhojraj Kuverji Oil
Mills and Ginning Factory v. Subhash Chandra Yograj Sinha
(AIR 1961 SC 1596) and Calcutta Tramways Co. Ltd. v.
Corporation of Calcutta (AIR 1965 SC 1728); when one finds a
proviso to a section the natural presumption is that, but for
the proviso, the enacting part of the section would have
included the subject matter of the proviso. The proper function
of a proviso is to except and to deal with a case which would
otherwise fall within the general language of the main
enactment and its effect is confined to that case. It is a
qualification of the preceding enactment which is expressed in
terms too general to be quite accurate. As a general rule, a
proviso is added to an enactment to qualify or create an
exception to what is in the enactment and ordinarily, a proviso
is not interpreted as stating a general rule. “If the language of
the enacting part of the statute does not contain the
provisions which are said to occur in it you cannot derive
these provisions by implication from a proviso.” Said Lord
Watson in West Derby Union v. Metropolitan Life Assurance
Co. (1897 AC 647)(HL). Normally, a proviso does not travel
beyond the provision to which it is a proviso. It carves out an
exception to the main provision to which it has been enacted
as a proviso and to no other. (See A.N. Sehgal and Ors. v. Raje
Ram Sheoram and Ors. (AIR 1991 SC 1406), Tribhovandas
Haribhai Tamboli v. Gujarat Revenue Tribunal and Ors. (AIR
1991 SC 1538) and Kerala State Housing Board and Ors. v.
Ramapriya Hotels (P)Ltd. and Ors. (1994 (5) SCC 672).
“This word (proviso) hath divers operations. Sometime it
worketh a qualification or limitation; sometime a condition;
and sometime a covenant” (Coke upon Littleton 18th Edition,
146)
“If in a deed an earlier clause is followed by a later clause
which destroys altogether the obligation created by the earlier
clause, the later clause is to be rejected as repugnant, and the
earlier clause prevails….But if the later clause does not
destroy but only qualifies the earlier, then the two are to be
read together and effect is to be given to the intention of the
parties as disclosed by the deed as a whole” (Per Lord
Wrenbury in Forbes v. Git [1922] 1 A.C. 256).
A statutory proviso “is something engrafted on a
preceding enactment” (R. v. Taunton, St James, 9 B. & C.
836).
“The ordinary and proper function of a proviso coming
after a general enactment is to limit that general enactment in
certain instances” (per Lord Esher in Re Barker, 25 Q.B.D.
285).
A proviso to a section cannot be used to import into the
enacting part something which is not there, but where the
enacting part is susceptible to several possible meanings it
may be controlled by the proviso (See Jennings v. Kelly [1940]
A.C. 206).
The above position was highlighted in Ali M.K. & Ors. v.
State of Kerala and Ors. (2003 (11) SCC 632) and Union of
India v. Sanjay Kumar Jain (2004 (6) SCC 708)
The stand of the revenue does not appear to be very
consistent. Though in the counter affidavit before the High
Court it was stated that the Circular is not binding on the
authorities, it is conceded by learned counsel for the State
Government that it is in fact binding on the department
officials. The Circulars read as follows:
“COMMISSIONER OF COMMERCIAL TAXES
CIRCULAR No. 5/96-97 dated 12.4.1996
Sub: Salient features of the Amendments effective
from 1.4.1996- reg.
Ref:- 1. Govt. Notification No. DPAL 15 LGN 96,
Dated 21.3.1996 published in Karnataka Gazatte
Extraordinary Part IV Section 2B, dated 21.3.1996.
2. Govt. Notifications No. FD35 CSL 96 (1 to 25)
dated 30.03.96
3. Govt. Notifications No. FD 85 CET 96 (1 to 3)
dated 30.03.96.
4. Govt. Notifications No. FD 4 CRC 96 dated
30.03.96
As per the Karnataka Taxation laws (Second
Amendment) Act, 1996, amendments are effected to
provisions of the below mentioned Acts;
i) Karnataka Tax on Luxuries Act, 1979.
ii) Karnataka Tax on Professions, Trades,
Callings and Employments Act, 1976.
iii) Karnataka Entertainments Tax Act, 1958.
iv) Karnataka Agricultural Income Tax Act,
1957.
v) Karnataka Sales Tax Act, 1957.
2. Salient features of the amendments are explained
hereunder for guidance and compliance. (Specific
mention is made about the amendments which are
introduced with retrospective effect and in all other
cases, the amendments take prospective effect, i.e.,
w.e.f. 1.4.1996):
xx xx xx xx
Amendment of Section 5-C- Levy of tax on the
transfer of the right to use any goods.
16. Section 5-C in force prior to this amendment
prescribed ‘total turnover” as the basis for levy of
tax. The High Court of Karnataka in the judgment
rendered in the case of M/s Shetty Leasing (India)
Ltd. Vs. Union of India 100 STC 533, had struck
down Section 5-C as beyond the competence of
State Legislature. The amendment now introduced
substitutes the whole of Section 5-C with
retrospective effect from 01.4.86 so as to overcome
the aforesaid judgment. The newly substituted
section prescribes ”taxable turnover’ as the basis for
levy of tax. Assessments, if any, completed
adopting the basis of ‘taxable turnover’ for levy of
tax, stand automatically validated by the validation
Clause at Section 7 of the Amendment Act. In all
such cases, it would be in order for the assessing
authorities to pursue action for realization of the
taxes levied by issuance of simple notices, without
going in for rectifications, re-assessments or
revisions.
17. Computation of taxable turnover for the
purposes of Section 5-C now substituted, would
have to be in accordance with the provisions of Rule
6(4) of KST Rules, 1957. Accordingly, among other
things, where goods e.g. motor vehicles, machinery,
etc. specified in Second Schedule are purchased
from registered dealers in Karnataka and are given
on lease, such lease involving transfer of the right to
use the KST suffered goods would be eligible for
exemption in terms of clause (i) of sub rule (4) of
Rule 6.
18. All the 15 categories of goods specified in the
Seventh Schedule are made liable to tax at the
uniform rate of 4%”.
“No. RFD. CR.53/97-98
Office of the Commissioner of
Commercial Taxes in Karnataka,
Bangalore 560 009
dated 23.10.1999
COMMISSIONER OF COMMERCIAL TAXES
CIRCULAR No. 31/99-2000
Sub: KST Act, 1957 Amendment of Section 5-C
by Karnataka Taxation Laws (Amendment Act 1996)
– certain instructions -reg.
Ref: Commissioner of Commercial Taxes Circular
No. 5 of 1996-97 dated April 1996.
In Commissioner of Commercial Taxes Circular
No. 5 of 1996-97, dated 12 April, 1996, while
explaining the salient features of the amendments
effected to the provisions of Karnataka Sales Tax
Act, 1957 by Karnataka Taxation laws (Second
Amendment) Act, 1996 at paras 16 and 17, the
position of law relating to Section 5-C of the
Karnataka Sales Tax Act, 1957 as amended by the
said Amendment Act was stated to be as follows:
“16. Section 5-C in force prior to this
amendment prescribed “total turnover” as
the basis for levy of tax. The Hon’ble High
Court of Karnataka in the judgment
rendered in the case of M/s Shetty
Leasing (India) Ltd. Vs. Union of India
100 STC 533 had struck down Section 5-
C as beyond the competence of State
legislature. The amendment now
introduced substitutes the whole of
Section 5-C with retrospective effect from
01.4.1986 so as to overcome the
aforesaid judgment. The newly
substituted section prescribes ‘taxable
turnover’ as the basis for levy of tax.
Assessments, if any, completed adopting
the basis of ‘taxable turnover’ for levy of
tax, stand automatically validated by the
validation clause at section 7 of the
Amendment Act. In all such cases, it
would be in order for the assessing
authorities to pursue action for
realization of the taxes levied by issuance
of simple notices, without going in for
rectification, re-assessments or revisions.
17. Computation of taxable turnover for
the purpose of Section 5-C now
substituted, would have to be in
accordance with the provisions of Rule
6(4) of Karnataka Sales Tax, 1957.
Accordingly, among other things, where
goods e.g. motor vehicles, machinery etc.,
specified in second schedule are
purchased from registered dealers in
Karnataka and are given on lease, such
lease involving transfer of the right to use
the KST suffered goods would be eligible
for exemption in terms of clause (i) of
sub-rule (4) of Rule 6.”
2. On a review of the said circular, it is noticed that
the position or law explained therein in respect of
section 5-C does not state the correct position of law
for the following reasons:
(i) There is a distinction between a
contract of sale as defined in section 4 of
the Sale of Goods Act, 1930 and a
transfer of the right to use goods for any
purposes. While in a transaction of ‘sale’
as defined under Sale of Goods Act, there
is transfer of ownership in goods and in a
transaction involving transfer of the right
to use goods, there is no such transfer of
ownership in goods. Consequent to
insertion of clause 29-A (d) to Article 366
of the Constitution of India by 46th
Amendment to the Constitution,
Karnataka Sales Tax Act, 1957 was
amended w.e.f. 01.4.1996 to treat the
transfer of the right to use goods as
deemed sale for the purposes of levy of
tax on such transaction.
(ii) Section 5-C of the Karnataka Sales
Tax Act, 1957 is an independent charging
section. Section 5-C contemplates levy of
tax on taxable turnover in respect of
transfer of the right to use any goods
specified in Seventh Schedule of the Act
for any purposes (whether or not for
specified period). There is nothing in
Section 5-C to indicate that the goods
which are subject to tax on their transfer
of the right to use (lease) cannot be
subject to tax under section 5-C when
right to use such goods are again
transferred after the expiry of the
specified period for which it was hired
earlier. Therefore, the levy under the said
provision is multipoint in nature. The
very goods when leased out more than
once, such transaction attract levy every
time they are leased out.
(iii) As the Section 5-C starts with non-
obstante clause namely “notwithstanding
anything contained in sub section 91 or
sub-section (3) of Section 5”, the goods,
in respect of which right to use goods is
transferred, even though have been
subjected to tax under the said sub-
sections of Section 5, they shall be liable
to tax under Section 5-C. In other words,
the goods which have suffered tax under
Section 5 are not excluded from the
purview of Section 5-C when right to use
of such goods are transferred.
In view of the above, the following revised
instructions are issued:
(i) Section 5-C was substituted
retrospectively w.e.f. 01.4.1986 by
amending Karnataka Taxation Laws
(Second Amendment) Act, 1996. The
newly substituted section 5-C provides
for levy of tax on the ‘taxable turnover’ in
respect of transfer of the right to use any
goods specified in seventh schedule to the
Act for any purposes (whether or not for
specified period).
(ii) The tax under section 5-C shall be
levied on taxable turnover in respect of
transfer of right to use any goods
specified in the schedule notwithstanding
that such goods have already been
subjected to tax under any of the
provisions of the Act including section 5-
C.
(iii) In determining the taxable turnover
for the purposes of section 5-C the
amounts for which the goods whose right
to use in transferred has been purchased
from another registered dealer liable to
pay tax under sub-section 91 or sub-
section (3) of Section 5, shall not be
deducted from the total turnover
determined.
(iv) Assessments, if any completed before
01.4.1996 adopting the basis of ‘taxable
turnover’ for levy of tax stand
automatically validated by the validation
clause at section 7 of the Amendment
Act.
(v) Assessments if any completed by
allowing the deductions of the amounts
relatable to goods purchased from
another registered dealer liable to tax,
such assessments shall be referred to the
concerned Joint -Commissioner of
Commercial Taxes (Admn.), immediately
for initiating action section 21 to revise
the assessment order in accordance with
these instructions.
(vi) Where any order passed under
Section 21 or appeal order under Section
20 is contrary to instructions issued in
this circular, such orders shall be
referred to the Commissioner immediately
for initiating action under section 22-A.
Sd/-
(V. MADHU)
Commissioner of Commercial Taxes”.
A bare reading of the Circular dated 23.10.1999 shows
that it was a review of the earlier Circular and that the
Commissioner was of the view that the position of law
explained in the earlier Circular did not state the correct
position in law and, therefore, the revised instructions were
issued. There was a direction to the concerned Joint
Commissioner to immediately initiate action under Section 21
to revise the assessment orders. It was further stated that if
any order passed under Section 21 or appeal order under
Section 20 was contrary to the instructions issued, the same
were to be referred to him for initiating action under Section
22-A of the Act. This leaves no manner of doubt that the
subordinate officers had no option but to comply with the
directions given.
The notices issued under Section 12-A of the Act
initiating the assessment proceedings clearly show that they
were on the basis of the instructions issued.
As observed by this Court in Commissioner of Trade Tax,
U.P. and Anr. v. Kajaria Ceramics Ltd. (2005 (11) SCC 149)
there are various Circulars, some are binding and some are
not binding. Though strong reliance was placed by learned
counsel for the revenue on Addl. Commissioner (Legal) and
Anr. v. Jyoti Traders and Anr. (1999 (2) SCC 77) a close
reading of the decision shows that it does not support the
stand of the revenue and on the contrary support the stand of
the appellants.
Particular reference may be made to paragraphs 22 and
25 which read as follows:
“22. In Ahmedabad Manufacturing & Calico Printing
Co. Ltd. v. S.G. Mehta, ITO (AIR 1963 SC 1436) in
its assessment to income tax for the year 1952-53,
the appellant, a company had been granted under
the provisions of the finance Act, 1952, a rebate on
a portion of its profits of the previous year, that is,
1951 which it had not distributed as dividends to
its shareholders. In the next assessment year 1953-
54, the appellant used a part of the aforesaid
undistributed profits for declaring dividends. As the
law then stood, nothing could be done by the
Revenue Authorities to withdraw the rebate earlier
granted on the ground of the profits being utilized in
declaring dividends in a later year. From 1.4.1956,
however, there was a change in the law as sub-
section (10) of section 35 of the Income Tax Act,
1922 was brought into force then. By an order made
on 27-3-1958, under the sub-section, the aforesaid
rebate was withdrawn and the appellant was called
upon to refund it. The appellant then applied to the
High Court at Bombay for a writ to quash the order
of 27-3-1958 on the ground that sub-section (10)
was not applicable to the facts of this case. That
application was dismissed by the High Court. The
appeal in the Supreme Court was against this
decision of the High Court at Bombay dismissing
the application. Now sub-section (10) of Section 35
of the Income Tax Act was enacted by the Finance
Act of 1956. That sub-section, insofar as it is
necessary to state for the purpose of this case,
provided that where in any of the Assessment Years
1948-49 to 1955-56, a rebate of income tax was
allowed to a company under the Finance Act
prevailing in that year on a part of its total income
“and subsequently the amount on which
the rebate of income tax was allowed as
aforesaid is availed of by the company,
wholly or partly, for declaring dividends
in any year … the Income Tax Officer
shall re-compute the tax payable by the
company by reducing the rebate
originally allowed”.
The sub-section in substance permits a rebate duly
allowed in any year before it came into force to be
withdrawn if “subsequently” the amount on which
the rebate was allowed “is availed of'” for declaring
dividends in any year. The appellant contended that
the sub-section did not apply unless the amount on
which the rebate was granted was availed of for
declaring dividends after the sub-section had come
into force, that is, after 1-4-1956 and, therefore, it
did not apply to the present case. It was said that if
it were not so, the sub-section would be given a
retrospective operation and the rule was that it was
to be presumed that a statute dealing with
substantive rights was not to have operation. This
Court, per majority (3:2), held that sub-section (10)
of Section 35 was intended to have a retrospective
operation and was applicable to the present case.
Sarkar, J. who was in majority, in his concurring
judgment, observed as under:
“There is no dispute that by sub-section
(10) the legislature intended to penalise a
case where subsequent to its enactment,
the amount on which rebate had been
granted was utilised in declaration of
dividends. Now is there any reason to
think that the legislature did not want to
impose the penalty also on those who had
earlier utilised the amount in declaration
of dividends? There was no special merit
in these latter cases. And I also think
that they formed the majority of the
cases. The grant of rebate having been
stopped after March 31, 1956, there was
no occasion to provide for cases of such
grant thereafter. All these circumstances
lead me to the view that the intention of
the legislature was to penalise the cases
of utilisation of amounts on which rebate
had been granted in payment of
dividends which had happened before the
sub-section came into force. The remedy
which the sub-section provided would
largely fail in any other view. The general
scope and purview of the sub-section and
a consideration of the evil which it was
intended to remedy lead me to the
opinion that the intention of the
legislature clearly was that the sub-
section should apply to the facts that we
have in this case”.
25. The two decisions in the cases of Ahmedabad
Manufacturing & Calico Printing Co. Ltd. and
Biswanath Jhunjhunwalla are more closer to the
issue involved in the present case before us. They
laid down that it is the language of the provision
that matters and when the meaning is clear, it has
to be given full effect. In both these cases, this
Court held that the proviso which amended the
existing provision gave it retrospectivity. When the
provision of law is explicit, it has to operate fully
and there could not be any limits to its operation.
This Court in Biswanath Jhunjhunwalla case said
that if the language expressly so states or clearly
implies, retrospectivity must be given to the
provision. Under Section 34 of the Income Tax Act,
1922, it is the service of the notice which is the sine
qua non, an indispensable requisite, for the
initiation of assessment or reassessment
proceedings where income had escaped assessment.
That is not so in the present case. Under sub-
section (1) of Section 21 of the Act before its
amendment, the assessing authority may, after
issuing notice to the dealer and making such
inquiry as it may consider necessary, assess or
reassess the dealer according to law. Sub-section (2)
provided that except as otherwise provided in this
section, no order for any assessment year shall be
made after the expiry of 4 years from the end of
such year. However, after the amendment, a proviso
was added to sub-section (2) under which the
Commissioner of Sales Tax authorises the assessing
authority to make assessment or reassessment
before the expiration of 8 years from the end of such
year notwithstanding that such assessment or
reassessment may involve a change of opinion. The
proviso came into force w.e.f. 19-2-1991. We do not
think that sub-section (2) and the proviso added to
it leave anyone in doubt that as on the date when
the proviso came into force, the Commissioner of
Sales Tax could authorise making of assessment or
reassessment before the expiration of 8 years from
the end of that particular assessment year. It is
immaterial if a period for assessment or
reassessment under sub-section (2) of Section 21
before the addition of the said proviso had expired.
Here, it is the completion of assessment or
reassessment under Section 21 which is to be done
before the expiration of 8 years of that particular
assessment year. Read as it is, these provisions
would mean that the assessment for the year 1985-
86 could be reopened up to 31-3-1994.
Authorisation by the Commissioner of Sales Tax
and completion of assessment or reassessment
under sub-section (1) of Section 21 have to be
completed within 8 years of the particular
assessment year. Notice to the assessee follows the
authorisation by the Commissioner of Sales Tax, its
service on the assessee is not a condition precedent
to reopen the assessment. It is not disputed that a
fiscal statute can have retrospective operation. If we
accept the interpretation given by the respondents,
the proviso added to sub section (2) of Section 21 of
the Act becomes redundant. Commencement of the
Act can be different than the operation of the Act
though sometimes, both may be the same. The
proviso now added to sub-section (2) of Section 21
of the Act does not put any embargo on the
Commissioner of Sales Tax not to reopen the
assessment if the period, as prescribed earlier, had
expired before the proviso came into operation. One
has to see the language of the provision. If it is
clear, it has to be given its full effect. To reassure
oneself, one may go into the intention of the
legislature in enacting such provision. The date of
commencement of the proviso to Section 21(2) of the
Act does not control its retrospective operation.
Earlier the assessment/reassessment could have
been completed within four years of that particular
assessment year and now by the amendment
adding the proviso to Section 21 (2) of the Act it is
eight years. The only safeguard being that it is after
the satisfaction of the Commissioner of Sales Tax.
The proviso is operative from 19-2-1991 and a bare
reading of the proviso shows that the operation of
this proviso relates and encompasses back to the
previous eight assessment years. We need not refer
to the provisions of the Income Tax Act to interpret
the proviso to Section 21(2) the language of which is
clear and unambiguous and so is the intention of
the legislature. We are, thus, of the view that the
High Court was not right in quashing the sanction
given by the Commissioner of Sales Tax and notices
issued by the assessing authority in pursuance
thereof.”
The issues can be looked at from a different angle.
Undisputedly, the 1996 Circular was binding on the revenue
authorities as is spelt out in the case of 12.4.1996 and
23.10.1999 Circulars. The assessments were completed on the
basis of 12th April, 1996 Circular. Merely because the
Commissioner changes his view/opinion and according to him
it was review of the earlier decision that cannot have any effect
on any assessment which has been completed on the basis of
the 1996 Circular.
That being so, the question of re-opening the assessment
by mere change of opinion is entirely impermissible.
Though these aspects need not be taken note of in view of
the conclusion that the proviso was clarificatory in nature and
operated with effect from the date Section 5-C was amended
i.e. 1.4.1986 yet this is an additional factor to set aside the
High Court’s judgment.
It is stated by a long line of decisions that reopening of
assessment is not permissible by mere change of the opinion
in the assessing officer. Here it has not been disputed that the
Circular dated 23.10.1999 was on account of change of
opinion of the Commissioner that too while reviewing the
earlier Circular. It could not be brought to our notice as to
which provision permitted the review.
Learned counsel for the State submitted that the power is
inherent because the authority can correct his own mistaken
impression about the interpretation. Prima facie, the plea is
without substance and can not be accepted. That question is
of academic interest in view of what has been stated above.
The judgments of the learned Single Judge as affirmed by the
Division Bench are indefensible, need to be set aside which we
direct. The appeals are allowed. Costs made easy.