1984 (9) TMI 50 - SC - VAT and Sales Tax

Constitutional validity of the Mysore Sales Tax (Amendment) Act, 1969 Held that - We, accordingly, set aside the judgment and order of the High Court to the extent it upholds the validity of the impugned amendment with retrospective effect from 1st April, 1966, and to the extent it seeks to nullify the earlier judgment of the High Court. We declare that s. 2 of the impugned amendment to the extent that it imposes the higher levy of 45 per cent with retrospective effect from 1st April, 1966, and s. 3 of the impugned Act seeking to nullify the judgment and order of the High Court are invalid and unconstitutional. We, accordingly, allow the appeals to this extent

Summary

Issues Involved:
1. Constitutional validity of the Mysore Sales Tax (Amendment) Act, 1969.
2. Legality of retrospective imposition of a higher sales tax rate.
3. Validity of the State's action to nullify a High Court judgment through legislative amendment.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Mysore Sales Tax (Amendment) Act, 1969:
The primary question was whether the Mysore Sales Tax (Amendment) Act, 1969, was constitutionally valid. The appellants, excise contractors, challenged the State Government's practice of including excise duty, health cess, and education cess in the sale price of arrack for calculating sales tax. The High Court had previously ruled that such inclusion was invalid, and the State was directed to refund the excess tax collected. In response, the State enacted the Amendment Act to retrospectively increase the sales tax rate from 6.5% to 45% from April 1, 1966, to avoid refunding the excess tax collected.

2. Legality of Retrospective Imposition of a Higher Sales Tax Rate:
The appellants argued that the retrospective increase in the sales tax rate was arbitrary and unreasonable, as it was intended solely to circumvent the High Court's judgment. The Supreme Court noted that a Validating Act can be passed to rectify defects or lacunae in the law declared unconstitutional, but the amendment in question did not address the defect identified by the High Court. Instead, it merely increased the tax rate retrospectively without providing a legal basis for including excise duty and cesses in the sale price for tax purposes. The Court found this retrospective imposition to be arbitrary and unreasonable.

3. Validity of the State's Action to Nullify a High Court Judgment Through Legislative Amendment:
The Supreme Court held that the State's attempt to nullify the High Court's judgment through the Amendment Act was unconstitutional. The judgment had become final and binding, and the State's legislative action did not remedy the defect identified by the Court. Instead, it sought to retain the excess tax collected by increasing the tax rate retrospectively. The Court emphasized that while legislatures can pass laws with retrospective effect to validate taxes declared illegal, such validation must address the specific defect or lacuna. The Amendment Act failed to do so and was, therefore, invalid.

Conclusion:
The Supreme Court set aside the High Court's judgment to the extent that it upheld the validity of the Amendment Act with retrospective effect. The Court declared Sections 2 and 3 of the Amendment Act, which imposed the higher tax rate retrospectively and sought to nullify the High Court's judgment, as invalid and unconstitutional. The appeals were allowed in part, and the appellants were awarded costs.