2010 (6) TMI 738 - HC - VAT and Sales Tax

Whether the notification, annexure D, is ex abundanti cautela the consistent policy of the State, for over few decades exempting un-manufactured tobacco (including tobacco used for the manufacture of beedies) from tax under the KVAT Act? Held that - The petitions are allowed. The Notification No. FD.167. CSL.2007 dated May 15, 2007, annexure D, issued under sub-section (1) of section 5 of the KVAT Act, 2003, is declared to be ex abundanti cautela effective from April 1, 2007. The notice initiating action for reassessment of tax on sale of beedies followed by the orders of the authorities, the appellate authority and the order of the KVAT in the second appeals are quashed. As a consequence, the State is directed to forthwith refund all the monies paid by the petitioners pursuant to the notice of reassessment

Summary

Issues Involved:
1. Validity of the notification dated May 15, 2007, regarding tax exemption on beedies.
2. Retrospective effect of the tax exemption notification.
3. Discrimination in tax treatment between beedies and cigarettes.
4. Legality of reassessment orders and penalties imposed on the petitioners.

Issue-wise Detailed Analysis:

1. Validity of the Notification Dated May 15, 2007, Regarding Tax Exemption on Beedies:
The core question was whether the notification dated May 15, 2007, was consistent with the State's longstanding policy of exempting un-manufactured tobacco, including tobacco used for the manufacture of beedies, from tax under the KVAT Act. The court noted that the State of Karnataka had historically exempted beedies from sales tax due to their production through cottage industries, which provided livelihood to economically weaker sections. The notification was issued following the recommendations of the Empowered Committee of Finance Ministers, which suggested not taxing un-manufactured tobacco and beedies. The court found that the omission of these goods from the First Schedule to the KVAT Act by the Amendment Act 6 of 2007, followed by the subsequent notification dated May 15, 2007, was not a withdrawal of the exemption but a clarification.

2. Retrospective Effect of the Tax Exemption Notification:
The court held that the notification dated May 15, 2007, should be considered clarificatory and thus effective from April 1, 2007. The court relied on the Supreme Court's decision in W.P. I.L. Ltd. v. Commissioner of Central Excise, which stated that a clarificatory notification takes effect retrospectively as it merely clarifies the existing position. Therefore, no duty could be demanded for the 45-day period between April 1, 2007, and May 15, 2007.

3. Discrimination in Tax Treatment Between Beedies and Cigarettes:
The court found that the State's action of exempting cigarettes from VAT for one month due to transition stock considerations, while not extending the same benefit to beedies, constituted invidious discrimination. The court emphasized that similar circumstances should warrant similar treatment, applying the principle that "what sauce is good for the goose, must be good for the gander too."

4. Legality of Reassessment Orders and Penalties Imposed on the Petitioners:
The reassessment orders and penalties imposed on the petitioners for the period from April 1, 2007, to May 14, 2007, were challenged. The court observed that the authorities, including the Karnataka Appellate Tribunal, had acknowledged that levying tax for the short period was not in public interest but had directed the petitioners to seek relief from higher judicial forums. The court found these orders to be illegal, perverse, and unsustainable. Consequently, the court quashed the reassessment notices and orders, directing the State to refund all monies paid by the petitioners pursuant to the reassessment.

Conclusion:
The petitions were allowed, and the notification dated May 15, 2007, was declared effective from April 1, 2007. The reassessment notices and subsequent orders were quashed, and the State was directed to refund the monies paid by the petitioners.