1990 (3) TMI 315 - SC - VAT and Sales Tax

Whether tax imposed under sub-sections (2) (2A) and (5) of section 8 of the Central Sales Tax Act on inter-State sales do not amount to law giving or authorising the giving of any preference to one State over the other on the ground of varying rates of tax prevailing in different States? Held that - Appeal allowed. The provision which is impugned in this case is ultra vires and accordingly set aside the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. So long the rates applicable are in accordance with the section 8 no discrimination would arise and none of the provisions of Part XIII of the Constitution could be said to have been offended. But the case on hand is not one arising out of the Central Act. The tax was levied under the State Act in respect of steel semis. The State Act exempted steel semis which have been manufactured out of iron scrap which have suffered tax but not the other categories where the scrap had not suffered tax at that stage.

Summary

Issues Involved:
1. Constitutional validity of Section 5(4) of the Karnataka Sales Tax Act.
2. Alleged discrimination under Article 304(a) of the Constitution.
3. Interpretation and application of Explanation II to the Fourth Schedule of the Act.
4. Validity of the show cause notice issued under Section 22-A of the Act.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 5(4) of the Karnataka Sales Tax Act:
The appellant, a registered dealer under the Karnataka Sales Tax Act, challenged the constitutional validity of Section 5(4) of the Act. The provision imposes a tax on the sale or purchase of declared goods at the rate and point specified in the Fourth Schedule. The appellant argued that this section, in conjunction with item 2 of the Fourth Schedule and Explanation II, was violative of Article 304(a) of the Constitution. The Court examined this contention in light of previous judgments and the specific wording of the Act.

2. Alleged Discrimination under Article 304(a) of the Constitution:
The appellant contended that Section 5(4) discriminated against goods manufactured from imported raw materials compared to those from locally sourced materials, thus violating Article 304(a). The Court referred to the precedent set in Firm A.T.B. Mehtab Majid and Co. v. State of Madras, where similar discriminatory taxation was deemed unconstitutional. The Court found that the Karnataka Act's provision resulted in hostile discrimination, as it taxed finished goods made from imported raw materials but exempted those made from local materials.

3. Interpretation and Application of Explanation II to the Fourth Schedule of the Act:
Explanation II to the Fourth Schedule, added retrospectively from October 1, 1957, to March 31, 1978, exempts certain manufactured goods from tax if the raw materials had already suffered tax. The appellant's sale of ingots made from locally purchased scrap was exempt, whereas those made from imported scrap were taxed. The Court held that this differential treatment based on the source of raw materials constituted discrimination, aligning with the principles established in previous cases like A.T.B. Mehtab Majid and Co.

4. Validity of the Show Cause Notice Issued under Section 22-A of the Act:
The Commissioner of Commercial Taxes initiated proceedings under Section 22-A to revise the Deputy Commissioner's order, alleging failure to verify whether the inputs had suffered taxes. The appellant sought to quash the show cause notice and challenged the constitutional validity of the relevant provisions. The High Court initially upheld the validity of Explanation II but left other questions open for the appellant to exhaust remedies before tax authorities. The Supreme Court, however, found the impugned provision ultra vires, rendering the show cause notice invalid.

Conclusion:
The Supreme Court held that the provision in question was ultra vires and set aside the High Court's judgment, allowing the appellant's writ petition. The appeal was allowed with no order as to costs.