1998 (1) TMI 433 - SC - VAT and Sales Tax

Whether the purchases of the closing stock of goods as on 31st March, held by agents outside the State, could be brought to tax as having attained the quality of last purchase before that date under Explanation to section 2(xxvi) and section 8(b) of the Act? Held that - Appeal dismissed. As no doubt in our mind that, by the amendment in the Explanation, the Legislature has altered the legal position prior to amendment that purchases of closing stock or goods on 31st March, held by agents outside the State, would not be brought to tax having not attained the quality of last purchase before that date. Therefore no merit in the contentions of learned counsel for the appellant.

Issues Involved:
1. Taxability of closing stock of goods held by agents outside the State as of 31st March.
2. Interpretation of Explanation to section 2(xxvi) and section 8(b) of the Kerala General Sales Tax Act.
3. Impact of the amendment to Explanation to section 2(xxvi) by Act No. 6 of 1988.

Detailed Analysis:

1. Taxability of Closing Stock of Goods Held by Agents Outside the State as of 31st March:
The appellant argued that the closing stock of goods held by agents outside the State as of 31st March should not be taxed as having attained the quality of the last purchase. The Sales Tax Officer, however, disallowed this contention and included the closing stock in the tax assessment, leading to a demand for Rs. 1,79,400 and a surcharge of Rs. 11,953. The High Court of Kerala dismissed the appellant's writ petition and writ appeal, leading to the present appeal.

2. Interpretation of Explanation to Section 2(xxvi) and Section 8(b) of the Kerala General Sales Tax Act:
The appellant's counsel argued that the amendment to the Explanation to section 2(xxvi) did not achieve the desired result of taxing the closing stock held outside the State. The Supreme Court noted the legal position prior to the amendment, as established in State of Madras v. T. Narayanaswami Naidu [1968] 21 STC 1, where it was held that a dealer was not liable to pay sales tax on purchases until they acquired the quality of being the last purchases inside the State. The Explanation to section 2(xxvi) was introduced to ensure that the revenue due to the State did not escape assessment, by including the purchase value of closing stock in the total turnover for subsequent years until the goods were sold or acquired the character of the last purchase.

3. Impact of the Amendment to Explanation to Section 2(xxvi) by Act No. 6 of 1988:
The amendment to the Explanation to section 2(xxvi) by Act No. 6 of 1988, which added the words "but subject to the provision of section 8," aimed to address the loss of revenue due to goods being held outside the State. Section 8(b) deems the series of purchases to conclude at the stage of the sale or purchase immediately before the export of goods. The Supreme Court interpreted this to mean that, upon export, the goods attain the stage of the last purchase and are liable to tax, regardless of whether they are still held by agents outside the State.

The Court concluded that the amendment effectively altered the legal position, making the purchases of closing stock held by agents outside the State taxable as the last purchase. The appeal was dismissed with costs, affirming the taxability of the closing stock held outside the State.

Conclusion:
The Supreme Court upheld the tax assessment on the closing stock of goods held by agents outside the State as of 31st March, interpreting the amended Explanation to section 2(xxvi) and section 8(b) to mean that such goods attain the quality of the last purchase upon export and are thus taxable. The appeal was dismissed with costs.

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