Holding

Exemption does not negate the liability to tax, and imposing purchase tax under Section 5A on declared goods already liable to tax violates the single‑stage tax condition of Section 15 of the Central Sales Tax Act.

Summary

Peeka Y Re‑rolling Mills (P) Ltd., a registered dealer under the Kerala General Sales Tax Act, 1963, purchased steel ingots that were exempt from tax under a notification issued under Section 10 of the State Act. The State assessed purchase tax under Section 5A on the same ingots, arguing that no tax had been collected at the first sale. The appellant contended that, under Article 286(3) of the Constitution and Section 15 of the Central Sales Tax Act, 1957, declared goods can be taxed only at a single point and that an exemption does not extinguish the original liability. The Supreme Court held that exemption operates only after a valid levy and does not remove the liability to tax; therefore, imposing purchase tax under Section 5A would constitute a second‑stage tax in violation of the single‑stage rule. Consequently, the High Court’s judgment was set aside and the appeals were allowed.

Issues considered

Whether tax levied under Section 5A of the Kerala General Sales Tax Act on goods already liable to tax under Section 5 but exempted amounts to a second‑stage tax violating Section 15 of the Central Sales Tax Act.
Whether an exemption under Section 10 of the Kerala General Sales Tax Act affects the liability to tax under Section 5.
Whether the term ‘levy’ includes collection, and if absence of collection negates the existence of a levy.

Legislation cited

Constitution of Indias. Article 265, s. Article 277, s. Article 286(3)
Kerala General Sales Tax Act, 1963s. 10, s. 5, s. 5A

Subjects

sales taxpurchase taxsingle‑stage taxexemptionlevy vs collectiondeclared goodsCentral Sales Tax ActKerala General Sales Tax ActArticle 286Article 265

Judgment

-+-

-!" MIS. PEEKA Y RE-ROLLING MILLS (P) LTD. A
v.
THE ASSISTANT COMMISS!ONER AND ANR.

MARCH 20, 2007

[ASHOK BHAN AND DAL VEER BHANDARI, JJ.] B
...
-~
Kera/a General Sales Tax Act, 1963: Sections 5, 5A and 10.

Sales tax-Single-stage tax-AYs 1995-96 to 1999-2000- Declared
goods-Levy on sale or purchase of goods-Exemption notification-Levy c
and collection-Distinction between-Assessee, a registered dealer under
the State Act, carried on the business of steel re-rolling mills-The raw
material used by the assessee in the production of bars and rods was steel
ingots, which the assessee either manufactured or purchased from other
manufacturers from within or outside the State- Purchase of steel ingots D
effected by the assessee within the State were from manufacturing units,
... which were exempt from the payment of saies tax by virtue of an exemption
notification issued under Section JO of the State Act-For the AY 1994-95,
the assessee was assessed to nil taxable turnover-For the AY 1995-96, the
assessee was assessed to a certain taxable turnover-Subsequently, the
assessee received show cause notices for the AYs 1994-95 to 1999-2000 E
wherein it was stated that the assessee had purchased ingots from dealers
within the State who were exempted from payment of tax and the goods were
liable to tax under the State Act-It was further stated in the show cause
notices that since the supply of such ingots did not suffer any tax at the time
). of sale due to the exemption notification, therefore, the assessee was liable
F
to pay purchase tax under Section 5A with interest under Section 22(3) of
the State Act-The High Court rejected the assessee's contention that in view
of the provisions of Article 286(3) of the Constitution of India read with
Section 15 of the Central Sales Tax Act, it was impermissible to levy purchase
tax under Section 5A of the State Act-Correctness of-Held: By virtue of
Section I 5 of the Central Sales Act, declared goods once made liable to tax G
cannot be made to suffer an additional tax liability-Exemption can only
operate when there has been a valid levy for, if there was no levy at all, there
-I·~
would be nothing to exempt-Exemption does negate a levy oftax altogether-
Despite an exemption, the liability to tax remains unaffected, only the
185 H
__.___
I
I

186 SUPREME COURT REPORTS [2007] 4 S.C.R.

A subsequent requirement of payment of tax to fulfill the liability is done away "-· "'
with-Collection and levy are distinct and that collection is not an essential
facet of levy-Thus, the liability to tax or taxability under Section 5 of the
State Act remains unaffected by an exemption under Section JO of the State ·
Act-Hence, purchase tax cannot be levied on the assessee for the same
would violate the condition of single-stage tax under Section 15 of the
B Central Sales Tax Act-High Court judgment set aside-Central Sales Tax
Act, 1957, S. 15-Constitution of India, 1950, Arts. 277 and 2'86(3).

The appellant was a registered dealer under the Kerala General Sales .......
Tax Act, 1963 and it carried on the business of steel re-rolling mills. The
raw material used by the appellant in the production of bars and rods was
c steel ingots, which the appellant either manufactured or purchased from other
manufacturers from within or outside the State. Purchase of steel ingots
effected by the appellant within the State were from manufacturing units,
which were exempt from the payment of sales tax by virtue of an exemption
notification issued under Section 10 of the State Act.
D ,.
For the assessment year 1994-9S, the appellant submitted a return of
turnover and was assessed to tax declaring the taxable turnover at nil. For -'-·
the assessment year 199S-96 also, the appellant's assessment was completed ~

determining the taxable turnover at a certain amount. Subsequently, the
appellant received show cause notices for the AYs 1994-9S to 1999-2000
E wherein it was stated that the appellant had purchased ingots from dealers
within the State who were exempted from payment of tax and the goods were r-
liable to tax under the State Act. It was further stated in the show cause
notices that since the supply of such ingots did not suffer any tax at the time i
~-
of sale due to the exemption notification, therefore, the appellant was liable to
F pay purchase tax under Section SA with interest under Section 22(3) of the ..{
State Act. c

Being aggrieved, the appellant challenged the show cause notices before
the High Court The Division Bench of the High Court rejected the appellant's
contention that in view of the provisions of Article 286(3) of the Constitution I

~
G of India read with Section lS of the Central Sales Tax Act, 19S7, it was
impermissible to levy purchase tax under Section.SA of the State Act. ~
The following questions arose before the Court:- 1.-)- )::::

1. Whether the tax sought to be levied under Section SA of the Kera la
~

H General Sales Tax Act, 1963 on the same goods that are taxable under Section
'
-f
PEEKA Y RE-ROLLING MILLS {P) LTD. 1·. THE ASSISTANT COMMNR. 187

5 of the State Act, but exempted, would amount to tax at a second stage and, A
therefore, violate Section 15 of the Central Sales Tax Act, 1957?

2. Whether liability to pay tax under Section 5 of the State Act on these
goods remains unaffected by an exemption under Section 10 of the State Act?

Allowing the appeal, the Court B
HELD: 1. Article 286(3) of the Constitution of India places restriction
""1
on the power of every State to impose or authorize the imposition of tax on
sale or purchase of declared goods. Article 286 and Section 14/15 of the
Central Sales Tax Act, 1957 are solely concerned with the declared
commodities. This Court is concerned with the taxation of goods which, under c
Section 14 of the Central Act, have been declared to be of special importance
in inter-state trade or commerce. In case turnover of such goods is subjected
to tax under the sales tax laws, Section 15 prescribes the maximum rate at
which such tax shall be levied and the same could not be levied at more than
one stage. The two conditions have been imposed in order to ensure that inter-
D
state trade or commerce in such goods is not subjected to heavy taxation within
,_ the State occasioned by excessive rate of tax or by multipoint taxation. If either
• of the two conditions is not satisfied, the imposition of sales tax will not be
valid. [Para 20] (196-F-G(

Shanmuga Traders v. State ofT.N., [1998] 5 SCC 349, Bhawani Cotton E
Mills Ltd v. State ofPunjab, [1967] 3 SCR 577, Assistant Collector ofCentml
Excise v. National Tobacco Co. of India Ltd., [1972] 2 SCC 560, Somaiya
Organics (India) Ltd v. State of UP,, (2001] 5 SCC 560, Pine Chemicals Ltd
v. Assessing Authority, (1992] 2 SCC 683 and Associated Cement Companies
Ltd v. State of Bihar, (2004] 7 SCC 642, relied on.
~
F
Town Municipal Committee v. Ramachandra Vasudeo, (1964] 6 SCR
947, referred to.

2.1. It is clear that by virtue of Section 15 of the Central Act, declared
goods once made liable to tax cannot be made to suffer an additional tax liability.
In the present case, the goods have already been made liable to tax under G
Section S of the Kerala General Sales Tax Act, 1963 and exempted by a
notification under Section 10; and the same goods are sought to be taxed under
-+·> Section SA in the hands of the purchaser. [Para 23) (197-D]

2.2. Whether the second levy made under Section SA of the State Act
H
-+-
188 SUPREME COURT REPORTS [2007] 4 S.C.R.

A violates Section lS of the Central Act has to be examined. In other words, it
needs to be found out whether not collecting the tax amount pursuant to the
exemption necessarily implies that there was never any levy to begin with, as
has been contended by the respondent. For if this is indeed the position, then
there would be no infirmity with the levy of tax made under Section SA of the
State Act in respect of the declared goods, since the exemption would negate
B the levy and consequent liability to pay tax. However, ifthe exemption does not
affect the liability to tax and operates subsequent to the levy, as the appellant
has contended, then the tax under Section SA of the State Act would fall foul
of the conditions of Section lS of the Central Act. (Para 24) (197-E-GJ

C 3. The Division Bench erroneously distinguished Shanmuga 's case from
the present circumstances. There is no substantial difference between
Shanmuga 's case and the present one. Both cases involve the condition of a
single stage tax fixed at the point of first sale, which was exempted and the
subsequent sale being taxed. The distinction sought to be brought in by the
impugned judgment is that Shanmuga 's case involved the "point of first sale"
D and not the "point of first taxable sale". It is true that the Second Schedule of
the State Act fixes the point of tax at "the point of first sale in the state by a
dealer who is liable to tax under Section S". However, the addition of the words
'liable to tax under Section S' does not make any difference because exemption
does not negate the liability to tax, which continues regardless. The only other
E difference is that in Shanmuga 's case, it was a circular which clarified that
the subsequent sale would be taxed, whereas the present case does not involve
any such clarification by way of a circular, but a direct claim for tax under
Section SA of the State Act. This difference is insignificant as well.
Shanmuga 's case has made it clear that exemption at the point of first sale
does not affect the liability to tax and any subsequent levy on the goods would
F fall foul of the conditions of the Central Act. This position is equally true
whether the subsequent levy is by way of a circular or directly under Section
SA of the State Act - since both are required to comply with the conditions of
the Central Act. The reasoning of this Court in the Shanmuga 's case is equally
applicable to the present facts. (Para 29) (200-E-H; 201-A)

G Shanmuga Traders v. State ofT.N., (1998) S SCC 349 and State ofTamil
Nadu v. M.K. Kandaswami, (197S) 4 SCC 74S, relied on.

Vasu General Traders v. State of T.N., (1987) 66 STC 3S8 and In Re: ,,,...
Royal Steel Traders, (1992) 1 MTCR 580, referred to.

H
PEEKA Y RE-ROLLING MILLS (P) LTD. v. THE ASS! ST ANT COMMNR. 189
.r.
4.1. The arguments raised by the respondelit have two aspects. They A
contend that since the goods in question were exempt from tax at the first
sale, no liability to tax attached on the seller. Additionally, it is also argued
that since there was no collection of tax, there could be no 'levy' of tax. In
both cases, the obvious implication that the respondent seeks to establish is
that at the point of first sale, the seller was not liable to tax and, therefore, if
a subsequent tax were to be levied on these goods, as Section SA of the State B
.... Act seeks to do, there is no violation of Section 15 of the Central Act.
(Para 34) (202-C-D)

4.2. The first aspect of the argument of the respondent is with respect
to the impact of exemption upon the liability to tax. Exemption can only operate
when there has been a valid levy for, ifthere was no levy at all, there would be
c
nothing to exempt. (Para 35) (202-E]

4.3. Exemption does negate a levy of tax altogether. Despite an exemption,
the liability to tax remains unaffected, only the subsequent requirement of
payment of tax to fulfill the liability is done away with. (Para 39] (204-A-BI D
,_
Pine Chemicals Ltd. v. Assessing Authority, (1992) 2 SCC 683 and
,..
Associated Cement Companies Ltd v. State of Bihar (2004) 7 SCC 642, relied
on.

- 5.1. Levy and collection are not synonymous and that collection of the
tax is not a necessary facet of a "levy". (Para 42) (204-G-Hl
E

5.2. It is evident that collection and levy are distinct and that collection
is not an essential facet of levy. It is true that collection of a tax may sometimes
).
be indicative of a lawful levy of tax, but it does not logically follow that the
~,
absence of collection means an absence of liability. The reliance on the Town F
Municipal Committee's case by the Division Bench which involved an
interpretation of "continued to be levied" and "to be applied to the same
purposes" in Article 277 of the Constitution was misplaced. While that case
did hold that in the circumstances before them 'levy' was intended to include
'collection', the logic or ratio of that case cannot be extended so far to say
that every 'levy' must include collection and without such collection no levy
G
can be said to have been made. (Para 451 (206-D-EI
"-!'·)
Assistant Collector of Central Excise v. National Tobacco Co. of India
Ltd., (1972) 2 SCC 560, Somaiya Organics (India) Ltd. v. State of U.P., (2001)
5 SCC 560 and Collector of Central Excise v. Vazir Sultan Tobacco Company H
+-
'

190 SUPREME COURT REPORTS [2007) 4 S.C.R.

A Limited, [199613 sec 434, relied on.
Town Municipal Committee v. Ramachandra Vasudeo, [19641 6 SCR
947, referred to.

6. Thus, the liability to tax or taxability under Section 5 of the State
B Act remains unaffected by an exemption under Section 10 of the State Act.
Consequently, the respondent cannot validly shift the burden of tax to the
purchaser under Section SA of the State Act for the same would violate the
lo-
condition of single-stage tax under Section 15 of the Central Act. -;-
[Para 46] [206-F-Gj

c CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2653 of2006.

From the Final Judgment and Order dated 7.4.2006 of the High Court of
Kerala at Emakulam in W.A. No. 434 of2000.

WITH
D Civil Appeal Nos. 2654 and 4406 of2006.
~-
Joseph Vellapally, E.M.S. Anam, Fazlin Anam and C.P. Mohammed Niyaz
for the Appellant.

K.N. Bhat, G. Prakash and Beena Prakash for the Respondents.
E ...
The Judgment of the Court was delivered by

BHAN, J. I.Civil Appeal Nos. 2653 and 2654 of2006 are directed against
the impugned final judgment dated 7.4.2006 ofKerala High Court at Emakulam
in ,Writ Appeal No. 434 of 2000 and Writ Appeal No. 433 of 2000 by which
_.{
F the Division Bench dismissed the writ appeals thereby upholding the order
of the Single Judge, rejected the challenge to the two show cause notices
issued to the appellant. Civil Appeal No. 4406 is arising out of judgment dated
7.7.2006 of the Kerala High Court in Sales Tax Revision No. 9 of2006 by which
the Division Bench dismissed the Revision relying upon the judgment of the
Division Bench in Writ Appeal No. 434 of 2000 of the same High Court.
G
2. We propose to dispose of these appeals by a common order, as the
point involved in all these appeals is the same.
--\-
3. Facts are taken from Civil Appeal No. 2653 of2006.

H FACTS
PEEKAY RE-ROLLING MILLS (P} LTD.'" THE ASSISTANT COMMNR. [BHAN, J.] 191

4. The appellant is a company registered under the Companies Act, A
having its Registered Office at Kozhkkode. It is a registered dealer under the
Kerala General Sales Tax Act, 1963 (for short 'the State Act'). It carried on
the business of steel re-rolling mills at Nallalam, Kozhikode. The raw material
used by the appellant in the production of bars and rods, is steel ingots,
which the appellant either manufactures or purchases from other manufacturers
from within or outside the State. Purchase of steel ingots effected by the
B
appellant within the State are from manufacturing units, which are exempt from
....
the payment of sales tax on the sale of such ingots by virtue of an exemption
notification issued under Section 10 of the State Act.

S. For the Assessment Year 1994-9S, appellant submitted a return of
turnover and was assessed to tax declaring the taxable turnover at nil, by an
c
order dated l S.1.1998 by the assessing officer. In respect of the assessment
year l 99S-96 also, the appellant's assessment was completed determining the
taxable turnover at Rs. 2 l,8S,SSO/- vide order dated lS.1.1998. While this was
so, the appellant received a show cause notice dated 11.1.2000 for the
assessment year l 994-9S and another notice dated 12 .1.2000 on the same date D
.. >-
for the assessment years 1996-97 to 1999-2000. In the first show cause notice
relating to the assessment year l 994-9S, the assessing officer stated that the
appellant had purchased ingots from dealers within the State who were·
exempted from payment of tax and consumed the same in the manufacture of
bars and rods during the year 1994-9S. The notice further stated that the
E
ingots purchased were goods liable to tax under the State Act and since the
supply of such ingots did not suffer any tax at the time of sale due to the
exemption notification under Section 10(1) of the State Act, purchase turnover
of the ingots during the year and consumed in the manufacture by the
appellant attracted liability to tax under Section SA of the State Act. The
notice alleged that the purchase turnover of the ingots had escaped assessment F
under Section SA of the State Act and accordingly proposed to determine the
turnover liable to tax and assess the same at 4%. It was stated that on the
request of the appellant, a hearing would be given to the appellant before
completing the assessment as proposed.

6. Notice relating to 1996-97 to 1999-2000 was worded differently. The G
said notice stated that the appellant had purchased ingots, scraps, mosrolls,
etc. from units within the State claiming tax exemption and consumed the same
-i-~
in the manufacture of bars and rods during this period. It was further stated
that since the goods had not suffered tax under Section SA of the State Act,
they were liable to pay purchase tax under Section SA and called upon the H
192 SUPREME COURT REPORTS (2007] 4 S.C.R.

A appellant to remit tax with interest under Section 22 (3) within 10 days of the
receipt of notice failing which an action would be taken to recover th~ tax.

7. The appellant being aggrieved filed the two separate writ petitions
challenging the two show cause notices issued to him. Learned Single Judge
dismissed the writ petitions in limine by observing that the case involved
B disputed questions of fact which could not be· decided in a writ petition .under
Article 226 of the Constitution and relegated the petitioner to avail of the
remedies provided under the State Act. It was held that the writ petition was
not the appropriate remedy and the appellant was accordingly directed to
avail of the remedies provided under the State Act. Learned Single Judge
C directed the appellant to file objections to the notices before the assessing
officer who shall consider the same while framing the assessment. Assessing
Authority was directed to complete the assessment in accordance with law
after affording due opportunity to the appellant.

8. Aggrieved by the above order of the learned Single Judge, the
D appellant preferred two separate writ appeals. The Division Bench dismissed
the writ appeals by a common order and held that the learned Single Judge
was in error in directing the appellant to avail the remedies provided under
the State Act. The Division Bench, however, rejected the main contention of
the appellant that in view of the provisions of Article 286(3) of the Constitution
of India read with Section 15 of the Central Sales Tax Act (for short 'the
E Central Act'), it was impermissible to levy purchase tax under Section 5A of
the State Act. In support of this contention, it was submitted by the counsel
for the appellant that the iron ingots being declared goods could be subjected
to tax under Section 5 read with Second Schedule of the State Act in the
hands of the seller only; that the declared goods like the one involved in the
present case coulc;l be subjected to lery only at one point and that point had
F been specified by the Statute as being 'first sale'. That goods could not be
subjected to purchase tax in the hands of the purchaser under Section 5A of
the State Act. The Division Bench of the High Court relying upon a judgment
of this Court rejected these contentions and held that the expression "levy"
includes collection of tax as well and not mere imposition. It was held that
G in the absence of collection of tax, there is no levy and since, the goods were
exempted from payment of Sales Tax, the goods could be subjected to levy
of purchase tax under Section 5A of the State Act. That the levy did not mean
imposition only, the same included the collection of tax as well. Where there
is no collection, there is no levy and accordingly, the goods which are not
subjected to levy of tax at the point of sale could be subjected to levy of
H purchase tax under Section 5A.
-+
PEEKAYRE-ROLLINGMILLS(P)LTD.r. THEASSISTANTCOMMNR.[BHAN_ I] 193
.r 9. Learned counsel for the appellant has contented before us that goods A
being declared goods, under Section 14 of the Central Act are subjected to
limits placed by Section I 5 of the Central Act, namely:

(I) the tax payable on the sale or purchase of iron and steel under
the law of a State shall not exceed 4% and
B
(2) such tax shall not be levied at more than one stage.

10. It follows that if, iron and steel are subjected to a single point levy
of tax at the first point of sale, then there is no question of a second levy
or charge at any subsequent point of sale or purchase.

I I. According to him, iron and steel which are the goods in question c
... _
were made liable to sales tax at the stage of first sale at 4% under Section
5(1) read with Second Schedule of the State Act. That in view,.ofSection 5(1)
read with Second Schedule of the State Act, the burden of tax could not be
shifted to the purchaser as the State Government had already notified that the
tax would be at the point of first sale and the rate of tax wou Id be 4%. That
the High Court erred· in assuming that the word "levied" in Section I 5(a) of
D
~ the Central Act is used in the sense of imposed and collection. According
~- to him, the word levy could cover both imposition and non-collection of tax
imposed will not cease to be a levy of tax.

12. It was further contended that the High Court erred in distinguishing
E
the judgment of this Court in Shanmuga Traders & Ors. v. State of T.N. and
Ors., [I 998] 5 SCC 349, and that of the Constitution Bench judgment in
Bhawani Cotton Mills Ltd v. State of Punjab, [1967] 3 SCR 577. According
to him, the reliance placed by the High Court in Town Municipal Committee,
Amravati v. Ramchandra Vasudeo Chimote, [I 964] 6 SCR 947, is unwarranted
as in the said case this Court was interpreting the expression "continued to F
-,,
be levied" and "to be levied to the same purposes" in Article 277 of the
Constitution of India.

13. A strong reliance was placed by him on the decisions of this Court
in Assistant Collector of Central Excise, Calcutta Division v. National
Tobacco Co. of India Ltd., [1972] 2 SCC 560, Somaiya Organics (India) Ltd. G
v. State ofU.P., [2001] 5 SCC 519, Pine Chemicals Ltd v. Assessing Authority,
[1'992] 2 SCC 683 and Associated Cement Companies Ltd. v. State of Bihar,
[2004] 7 sec 642.
~

.. 14. As against this, learned counsel appearing for the respondent
contended that Section 5A was introduced in the State Act with effect from H
194 SUPREME COURT REPORTS (2007] 4 S.C.R.

A 1.4.1970 which is an independent charging as well as a remedial section. The
_ main object of Section 5A. of the State Act is to plug leakage and prevent
. evasion of tax. According to him, it created a liability against the dealer on
his pu.rchase turnover, with regard to goods, the sale or purchase of which
though generally liable to tax under the State Act has not due to circumstances
B of particular sales, suffer tax and which after the purchase, have been dealt
by him in any of the modes indicated in clauses (a) (b) and (c). It was
conceded that in the case of declared goods, the conditions imposed by
. Section 15 of the Central Act have to be complied with and the levy could
not be at more than one stage but Section 5A of the State Act operates by
its own force in cases where taxable goods did not suffer tax under Section
C 5 and purchaser does not use the goods in any of the three modes specified
in clauses 'a to c '. That the purchase tax in the State of Kerala is capable
of being levied only where no sales tax is levied on the taxable goods, thus
only a single point levy or one stage levy takes place, i.e., either sales 'tax or
purchase tax and not both. According to him, in view of the provisions of
the State Act, the expression levy would include collection or payment as well
'D and not mere authorization of levy.
15. Counsels for the parties have been heard at length.

16. Section 5 and Second Schedule of Section 5 of the State Act, a~ it
stood at the relevant time, read as under:
E
"S.5-Levy of tax on sale or purchase of goods-{!) Every dealer
(other than a casual trader or agent of a non-resident dealer) whose
total turnover for a year is not less than (two lakh rupees) and every
casual trader or agent of a non-resident dealer, whatever be his total
turnover for the year, shall pay tax on his taxable turnover for that
F year,-

(i) in the case of goods specified in the First or Second Schedule,
at the rates and only at the points specified against such goods
in the said Schedules;
G (ii) xxxxxxxxxxxxx
(iii) xxxxxxxxxxxxx
(iv) XXXXXXXXXXXXX''

17. Second Schedule of Section 5 of the State Act, as it stood at the
H
( .

-fl·

PEEKA Y RE-ROLLING MILLS (P) LTD. v. THE ASSISTANT COMMNR. [BHAN, J.] 195
relevant time, reads as under: A
"SECOND SCHEDULE

DECLARED GOODS IN RESPECT OF WHICH A SINGLE POINT TAX
ONLY IS LEVIABLE UNDER SUB-SECTION (1) OR SUB-SECTION (2)
OF SECTION 5 B
SL. Description of Goods Point of levy Rate of Tax
No. per cent
(1) (2) (3) (4)
I. Oil seeds as defined in At the point of first
Sec.14 of the Central Sales
Tax Act, 1956 (Central Act
sale in the State by a
dealer who is liable to
c
74 of 1956), other than tax under Section 5 4
groundnut, coconut and copra

2. (i) Coal including coke in all its
forms but excluding charcoal -do- 4
(ii) Iron and steel that is to say -do- 4 D
xx xxxx xx xx
,...
18. Section 5A of the State Act, as it stood at the relevant time, reads as
under: -

"5A. Levy of purchase tax: E
(I) Every dealer who, in the course of his business, purchases from
a registered dealer or from any other person any goods, the sale or
purchase of which is liable to tax under this Act, in circumstances in
which no tax is payable under Sub-section (1), (3), (4) or (5) of Section
5 and either, F
(a) consumes such goods in the manufacture of other goods for
sale or otherwise; or
(b) uses or disposes of such goods in any manner other than by
way of sale in the State; or
G
(c) despatches them to any place outside the State except as a
direct result of ~ale or purchase in the course of inter-State trade
-r-··.,
or commerce; shall, whatever be the quantum of the turnover
relating to such purchase for a year, pay tax on the taxable
turnover relating to such purchase for the year at the rates H
196 SUPREME COURT REPORTS [2007] 4 S.C.R.

A mentioned in Section 5." :;i.,

19. Section 15 of the Central Act, as it stood at the relevant time, reads
as under: -

"I 5. Restrictions and conditions in regard to tax on sale or purchase
of declared goods within a State - Every sales tax law of a State shall,
B
in so far as it imposes or authorises the imposition of a tax on the sale
or purchase of declared goods, be subject to the following restrictions
and conditions namely:-

(a) the tax payable under that law in respect of any sale or
c purchase of such goods inside the State shall not exceed four per
cent of the sale or purchase price thereof;
(b) xxxxxxxxxxxxx

(c) XXXXXXXXXXXXX
(ca) XXXXXXXXXXXXX
D
(d) XXXXXXXXXXXXX"

(These provisions have been modified later on or have been done away
with as of now.)

E DISCUSSION

20. Article 286(3) of the Constitution of India places restriction on the
power of every State to impose or authorize the imposition of tax on sale or
purchase of declared goods. Article 286 and Section 14115 of the Central Act
are solely concerned with the declared commodities. We are concerned with
F the taxation of goods which under Section 14 of the Central Act have been
declared to be of special importance in inter-state trade or commerce. In case
turnover of such goods is subjected to tax under the sales tax laws, Section
15 prescribes the maximum rate at which such tax shall be levied and the same
could not be levied at more than one stage. The two conditions have been
G imposed in order to ensure that inter-state trade or commerce in such goods
is not subjected to heavy taxation within the State occasioned by excessive
rate of tax or by multipoint taxation. If either of the two conditions are not
satisfied, the imposition of sales tax will not be valid.

21. Section 5 of the State Act provides that in the case of goods
H specified in the First and Second Schedule, the tax could be at the rates and
(

--}--

PEEKAY RE-ROLLING MILLS (P) LTD. v. THE ASSISTANT COMMNR. [BHAN, J.] 197

.-- points specified against such goods in the said Schedules which in the A
present case is at the point of first sale in the State by a dealer. The liability
to tax and the rate of tax under Section S is prescribed at 4%. As far as this
section is concerned, the conditions specified under Section lS ofthe·Central
Act are prima facie complied with. Further, under Section 10 of the State Act
the State Government granted certain exemptions by way of S.R.0.No.1729/
B
93, within the purview of which the goods in the present case fall.

22. The controversy in the instant case arises when a tax is sought to
* be levied under section SA of the State Act on the same goods that are
taxable under section S, but exempted. The essential question that we are
required to adjudicate upon is whether the tax sought to be levied under c
section SA on these goods, would amount to tax at a second stage and
therefore violate Section l S of the Central Act.

23. It is clear that by virtue of Section l S of the Central Act, declared
goods once made liable to tax cannot be made to suffer an additional tax
liability. In the present case, the goods have already been made liable to tax D
under Section S of the State Act and exempted by a notification under Section
IO; and the same goods are sought to be taxed under Section SA in the hands
)...
of the purchaser.

24. What we are required to examine is the impact of this exemption to E
ascertain whether the second levy made under Section SA of the State Act
violates Section l S of the Central Act. In other words, we need to find out
whether not.collecting the tax amount pursuant to the exemption necessarily
implies that there was never any levy to begin with, as has been contended
by the respondent. For if this is indeed the position, then there would be no
infirmity with the levy of tax made under Section SA of the State Act in F
respect of the declared goods, since the exemption would negate the levy and
-.,
the consequent liability to pay tax. However, ifthe exemption does not affect
the liability to tax and operates subsequent to the levy, as the counsel for the
appellant has contended, then the tax under Section SA of the Sate Act would
fall foul of the conditions of Section lS of the Central Act. G
2S. It is an accepted position before us today that Section Sand Section
SA of the State Act are independent sections and this is acknowledged by
-r. both parties, in the light of the observations made in State of Tamil Nadu v.
MK. Kandaswami, [197S] 4 SCC 74S. This case involved the interpretatjon
and validity of Section 7A of the Madras General Sales Tax Act, l 9S9 which H
\

+
198 SUPREME COURT REPORTS (2007] 4 S.C.R.

A is in pari materia to Section 5A of the Kerala General Sales Tax Act, 1963.
Although this case did not deal with declared goods under Section 14 of the
Central Act and the resulting applicability of the condition of single-stage
levy under Section 15 of the Central Act, it did make certain observations
relevant to the present discussion. The Court observed that:

B "In our opinion, the Kerala High Court has correctly construed Section
5A of the Kerala Act which is in pari materia with the impugned
Section 7A of the Madras Act. "Goods the sales or purchase of which
is liable to tax under this Act in Section 7A(l )" means 'taxable goods',
that is, the kind of goods, the sale of which by a particular person or
c dealer may not be taxable in the hands of seller but the purchase of
the same by a dealer in the course of his business may subsequently
become taxable. We have pointed out and it needs to be emphasised
again that Section 7A itself is a charging section. It creates a . ,.
liability against a dealer on his purchase turnover with regard to
goods; the sale or purchase of which though generally liable to tax
D under the Act, have not due to the circumstances ofparticular sales,
suffered tax.

[Emphasis supplied]

26. The Court also analyzed the Section and indicated the conditions
E necessary for the applicability of the Section and reaffirmed its validity. It has
been contended that since these conditions are fulfilled, the levy under
section 5A of the State Act is valid. However, while these observations are
relevant for the understanding of the section and its validity, this case has
no real bearing on the present one since it never involved a question of tax
F on declared goods under Section 14 of the Central Act and the conditions
laid down in this regard, specifically that of a single point levy. Satisfying the
conditions laid down in Kandaswami's case (supra) therefore does not validate
the present levy, which is on declared goods under Section 14 of the Central
Act.
G 27. The impugned judgment of the Division Bench has distinguished
the case of Shanmuga Traders (supra). The Shanmuga's case (supra)·involved
the sale of iron and steel by the Tamil Nadu Electricity Board and later made
exempt from tax under the State Act pursuant to an exemption notification.
These goods were declared goods under Section 14 of the Central Act and
H therefore could only be subject to a single-stage levy. However, by a circular
r

-fc-

PEEKAY RE-ROLLING MILLS (P) LTD. v. THE ASSISTANT COMMNR. [BHAN,J.] 199
issued by the Commissioner of Commercial Taxes, the person who purchased A
from the Board and sold the metal was made liable to tax, on the ground that
· "he was effectively the first seller liable for tax". The circular placed reliance
on two Madras High Court judgments, Vasu General Traders v. State ofT.N.,
[1987] 66 STC 358; in which the goods involved were not declared goods.
Vasu's case (supra) was followed by the Madras High Court in the case of B
Royal Steel Traders, Madras (1992) I MTCR 580, wherein the goods involved
were declared goods under Section 14 of the Central Act. The circular under
challenged was issued in supersession of the earlier circulars in view of the
fact that the Madras High Court in Royal Traders case (supra) had held that
declared goods could also be subjected to tax at a later stage because no tax
had been paid on it. The High Court accepted the submission of State and C
upheld the validity of the circular. This Court, however, did not accept the
reasoning of the Madras High Court and set aside the Judgment. Overturning
the judgment, it was held that the circular was bad in Jaw because ifthere was
a condition of a single stage levy, and there was an exemption, then, no
subsequent sales could be taxed. The Court observed as follows:

Para 12
.•
,...
" ... The goods with which we are concerned being declared goods,
they can only be taxed at a single point, that is, only one sale in the
State can be subjected to tax. It is for the State to determine whether
the single point should be the point of first sale in the State or the E
la!.. sale in the State or any intermediate sale in the State. If the single
~~~~~~~~~~~~~~~~
exempts the first sale from payment of tax, either by a general provision
or a specific provision applicable to a class of seller, the particular
f
1 ) seller or the goods sold may not be subjected to tax at either that E
point of first sale or any subsequent sale in the State.

Para 13

The Second Schedule of the State Act specifies the single point; it
is "the point of first sale in the State". The first sale in the State was G
: the sale by the said Board to the appellants/petitioners. Th~t sale was
exempt from tax by reason of the notification dated 1-12-1982
aforementioned. The iron and steel sold by the said Board to the
appellants/petitioners was, therefore, not liable to tax either at the
point of first sale or any subsequent sale in the State.
H
\
•·
1
\

-+--
200 SUPREME COURT REPORTS [2007) 4 S.C.R.

A Para 14

There is no warrant for the emphasis that would appear to have been
"placed by the Madras High Court on the pprase "taxable sale". The .-
State Act does not fix the single point of the levy at the first taxable
sale; it fixes it at "the point of first sale". The impugned circular
B cannot validly s~ift the point oflevy from the first sale to a subsequent
sale and it is, therefore, bad in law.
- [Emphasis supplied]

28. The Division Bench however in the present impugned judgment
distinguished the Shanmuga 's case (supra) by observing:
c . ~

"We find that the observations made by the Supreme Court in
Shanmugha Trader's case supra, in paragraph 12, came to be made in
;
the facts of the case. The single point of levy was at the point of first
sale and not at the point of first taxable sale. The impugned Circular,
the Court held, could not validly shift the point of levy from the first
D sale to a subsequent sale." r
I
29. We are of the opinion that the Division Bench erroneously
distinguished the Shanmuga 's case (supra) from the present circumstances.
We find that there is no substantial difference between Shanmuga's case
E (supra) and the present one. Both cases involve the condition of a single
stage tax fixed at the point of first sale, which was exempted and the subsequent
sale being taxed. The distinction sought to be brought in by the impugned
judgment is that Shanmuga 's case involved the "point of first sale" and not
·the "point of first taxable sale". It is true that the Second Schedule of the state
Act fixes the point of tax at "the point of first sale in the state by a dealer
F who is liable to tax under Section 5". However, the addition of the words
'liable to tax under Section 5' does not make any difference because in our
opinion exemption does not negate the liability to tax, which as we shall
presently discuss, continues regardless. The only other difference is that in
Shanmuga 's case (supra), it was a circular which clarified that the subsequent
sale would be taxed, whereas the present case does not involve any such
G clarification by way of a circular, but a direct claim for tax under Section 5A
of the State Act. In our opinion, this difference is insignificant as well.
Shanmuga 's case (supra) has made it clear that exemption at the point of first
sale does not affect the liability to tax and any subsequent levy on the goods
would fall foul of the conditions of the Central Act. This position is equally '.•
· H true whether the subsequent levy is by way of a circular or directly under
PEEKA Y RE-ROLLING MILLS (P) LTD. v. THE ASSISTANT COMMNR [BHAN,J] 201

Section SA of the State Act since both are required to comply with the A
conditions of the Central Act. With this view of the matter, we find that the
reasoning of this court in the Shanmuga 's case (supra) is equally applicable
to the present facts.

30. It might be pertinent to mention here that the decision taken by the
Division Bench in the impugned judgment is in conformity with the minority B
decision in the Bhawani Cotton Mills case (supra). In his dissenting judgment,
Sikri J. observed as follows:

".In my opinion the Punjab Act does in effect comply with the
requirements of s.15 of the Central Sales Tax Act because it is possible
to find out the stage at which purchase tax becomes leviable on goods C
mentioned in Schedule C. This stage is the first purchase by a dealer,
which is not exempted from taxation or which is not deductible from
the taxable turnover of a dealer under s. 5(2) of the Punjab Act.."

31. However, the majority decision took a different, much stricter view D
of the matter, which is the law of the land today. The majority in Bhawani
Cotton Mills (supra) was of the opinion that the Act in question did not
... identify the specific stage for the levy on declared goods and that it was
possible for the goods to be taxed at more than one stage, which was contrary
to the condition in the Central Act. The Court observed as follows:
E
"Pausing here for a minute, it may be stated that the attack, regarding
the validity of some of the provisions of the Act, by the appellant,
is rested on s.15(a) of the Central Act, on the ground that such a levy
of purchase tax, regarding cotton, is neither definite nor ascertainable
in the Act and that, as the provisions now stand, there is a possibility
) of the tax being levied at more than one stage. The essence of a one- F
stage taxation consists of fixation of a single point or stage, either by
the State Act or the rules framed thereunderUnder those circumstances,
there is always a possibility, or even a certainty, of more persons than
one having paid tax or being made liable to pay tax in, respect of the
same goods at different stages.
G1
xxxx xxxx xx xx xx xx
If a person is not liable for payment of tax at all, at any time, the
collection of a tax from him, with a possible contingency of refund at
a later stage, will not make the original levy valid; because, if particular
H
202 SUPREME COURT REPORTS [2007] 4 S.C.R.

A sales or purchase are exempt from taxation altogether, they can never
be taken into account, at any stage, for the purpose of calculating or
arriving at the taxable turnover and for levying tax."

32. Thus, the Court finally concluded that the conditions of Section 15
of the Central Act had not been complied with.
B
33. The view taken in Shanmuga's case (supra) as well as the majority
decision in Bhawani Cotton Mills (supra) is reiterated in a number of other ,..~

cases, which make it clear that exemption operates after the levy and does not -'I-
negate the liability to tax.

c 34. The arguments raised by the respondent before us have two aspects.
They contend that since the goods in question were exempt from tax at the
first sale, no liability to tax attached·on the seller. Additionally, they also argue
that since there was no collection of tax, there could be no 'levy' of tax. In
both cases, the obvious implication that the respondent seeks to establish is
that at the point of first sale, the seller was not liable to tax and therefore if
D
a subsequent tax were to be levied on these goods, as Section 5A of the State
Act seeks to do, there is no violation of Section 15 of the Central Act. ...,,_

IMPACT OF EXEMPTION ON THE LIABILITY TO TAX

35. The first aspect of the argument of the respondent is with respect
E
to the impact of exemption upon the liability to tax. In our opinion, exemption
can only operate when there has been a valid levy, for if there was no levy
at all, there would be nothing to exempt.

36. In this regard two cases decided by this Court are relevant. The first
F is the Pine Chemicals case (supra), which involved questions of sales tax and -<
exemption under the Jammu and Kashmir General Sales Tax Act, 1962. While ,-
examining certain exemption orders made by the government, the Court
observed as follows:

"Under Section 4(1) of Jammu & Kashmir General Sales Tax Act the
G goods are taxable only once, that is it could be taxed only at one point
of sale. We have already held that the Government Orders 159 and 414
'\
are exemption orders and exempt the sale by appellants of their
manufactured products. The exemption would not arise unless the .-:Y
goods are taxable at the point of their sale. Thus the effect of
exempting their sale is that the said goods manufactured by them
H
PEEKA Y RE-ROLLING MILLS (P) LTD. v. THE ASSISTANT COMMNR. [BHAN, J.j 203
could not be taxed at the second or subsequent sales also as that A
would offend Section 4(1) which provides for single point levy. Jn
cases where there are no exemption orders and the state fixed the
second or subsequent sale as point of taxation the first or prior or
subsequent sales are not exempted sales but are not taxable sales."

[Emphasis supplied] B

- 37. Thus the Court was of the opinion that when certain goods were
subjected to the single-stage tax condition, and the stage identified for the
levy was exempted, subsequent sales could not be taxed by the authorities
despite the exemption.
cl
38. This position has been reaffirmed in Associated Cement (supra). In
Associated Cement (supra) the Court was faced with an argument very similar
to the one made before us today. The case involved an exemption notification
issued by the State Government reduced the liability to tax under the Bihar
Finances Act, 1981 to the extent of tax paid under an earlier Ordinance in
respect of entry of goods. The appellant claimed that it was entitled to adjust D
the entry tax paid under the Entry Tax Act while computing the tax payable
under the Bihar Finances Act. The respondent however argued that such
adjustment could not be made since the same was exempted, which meant that
there was no liability to tax. The Court rejected the argument of the respondent,
holding as follows: E
"Crucial question, therefore, is whether the appellant had any
"liability" under the Act. The question of exemption arises only
when there is a liability. Exigibility to tax is not the same as liability
to pay tax. The former depends on charge created by the Statute and
latter on computation in accordance with the provisions of the Statute F
and rules framed thereunder if any. It is to be noted that liability to
pay tax chargeable under Section 3 of the Act is different from
quantification of tax payable on assessment. Liability to pay tax and
actual payment oftax are conceptually different. But for the exemption
the dealer would be required to pay tax in terms of Section 3. Jn
other words, exemption presupposes a liability. Unless there is G
liability question of exemption does not arise. Liability arises in term
of Section 3 and tax becomes payable at the rate as provided in
Section 12. Section 11 deals with the point of levy and rate and
concessional rate."

[Emphasis supplied] H
i

204 SUPREME COURT REPORTS (2007] 4 S.C.R.

A 39. A reading of the above judgments make it amply clear that exemption o\_
does negate a levy of tax altogether. Despite an exemption, the liability to tax
remains unaffected, only the subsequent requirement of payment of tax to
fulfill the liability is done away with.

DISTINCTION BETWEEN LEVY AND COLLECTION
B
40. The second aspect of the argument is that an absence of collection
means an absence of levy or liability. This question has already been examined
in certain earlier cases, and this Court has consistently maintained a distinction
-
·""I-
between levy and collection.
c 41. In National Tobacco case (supra), this Court was faced with certain
questions relating to the refund of excise duty on the manufacture of cigarettes.
In this context, the Court examined the scope of the term 'levy' and made the
following observations:

D "The term "levy" appears to us to be wider in its import than the
term "assessment". It may include both "imposition" of a tax as well
as assessment. The term "imposition" is generally used for the levy
of a tax or duty by legislative provision indicating the subject ma~er
of the tax and the rates at which it has to be taxed. The term
"assessment", on the other hand, is generally used in this country for
E
the actual procedure adopted in fixing the liability to pay a tax on
account of particular goods or property or whatever may be the object
of the tax in a particular case and determining its amount. The Division
Bench appeared to equate "levy" with an "assessment" as well as
with the collection of a tax when it held that "when the payment of
F tax is enforced, there is a levy". We think that, although the
connotation of the term "levy" seems wider than that of "assessment", .~
which it includes, yet, it does not seem to us to extend to "collection".
Article 265 of the Constitution makes a distinction between "levy"
and "collection". "
G [Emphasis supplied]

42. The Court made it very clear that levy and collection are not
synonymous and that collection of the tax is not a necessary facet of a 'levy'. ·"'

43. Referring to the above case, the Court made similar observations in
H
PEEKA Y RE-ROLLING MILLS (P) LTD. v. THE ASSISTANTCOMMNR. [BHAN,J.] 205
the case of Somaiya Organics (supra). It observed: A
"The words used in Article 265 are "levy" and "collect". In taxing
statute the words "levy" and "collect" are not synonymous terms,
(refer to Assistant Collector of Central Excise. Calcutta Division v.
National Tobacco Co. of India Ltd. at page 572, while "levy" would
mean the assessment or charging or imposing tax, "collect" in Article B
265 would mean the physical realisation of the tax which is levied or
imposed. Collection of tax is normally a stage subsequent to the levy
of the same."

44. The distinction between levy and collection has also been
emphasized in Collector of Central Excise, Hyderabad v. Vazir Sultan Tobacco C
Company Limted, Hyderabad [1996] 3 SCC 434. The crux of this case involved
the levy of a special excise duty, the liability for which did not exist on the
date of manufacture and only on the date of removal of goods. The excise
duty however was normally collected on the date of removal, and it was
contended that since the liability to pay the special duty existed on the date D
f
of collection of duty, the same must be paid as well. Rejecting this argument,
. -•
the Court held that the stage of removal was identified for collection of duty
only for administrative convenience, and that this did not affect the nature
of the levy, which was on the manufacture of goods. In this context, the Court
distinguished levy and collection. It observed:
E
" ... Once the levy is not there at the time when the goods are
manufactured or produced in India, it cannot be levied at the stage
of removal of the said goods. The idea of collection at the stage of
removal is devised for the sake of convenience. It is not as if the levy
is at the stage of removal; it is only the collection that is done at
the stage of removal. Admittedly, the special excise duty is an F
independent duty of excise separate and distinct from the duties of
excise levied by the Central Excises and Salt Act, 1944. This levy came
into effect only on and from March l, 1978 which means that the
goods produced prior to that date were not subject to such levy. If
that is so, the levy cannot attach nor can it be realised because such G
goods are removed on or after March 1, 1978. The provisions of the
Central Excise Act and the Rules, in our opinion, do not say otherwise.

1 xxxx xxxx xxxx xxxx
... The levy is and remains upon the manufacture or production alone. H
206 SUPREME COURT REPORTS (2007] 4 S.C.R.
.A
A Only the collection part of it is shifted to the stage of removal. Once
this is so, the fact that the provisions of the Central Excise Act are
applied in the matter of levy and collection· of special excise duty
cannot and does not mean that wherever the·Central Excise:duty is
payable, the special excise duty is also payable automatically. That is
so as an ordinary rule. But insofar as the goods manufactured or
B produced prior to March 1,1978 are concerned; the said rule·cannot
apply for the reason that there was no levy of special excise duty on
such goods at the stage and at the time of their manufacture/production.
The removal of goods is not the taxable event. Taxable·event is the
-
manufacture or production of goods. "
c [Emphasis supplied]

45. In the light of the above two cases, it is evident.that collection and
levy are distinct and that collection is not an essential facet oflevy. It is true.
that collection of a tax may some times be indicative of a lawful levy of tax,
D but in our opinion it does not logically follow that absence of collection
means an absence of liability. We are also of the opinion that.the.reliance on
the Town Municipal Committee (supra) by the Division Bench which involved
an interpretation of "continued to be levied" and."to be applied-to the:same
purposes" in Article.277'ofthe Constitution was misP.laced .. While:that case
did hold that in the circumstances before them.'levy' was intended.to include.
E 'collection', in our opinion the logic or ratio of that case cannot be.extended
so far as to say that every 'levy' must include collection· and without such
collection no levy can be said-to have been made.

CONCLUSION

F 46. Thus, after an examination ofthe·relevant case law, we find that the
liability to tax or taxability under Section 5 of the State.Act.remains unaffected
by an exemption under Section l 0 of the, State: Act. Consequently, the
respondent cannot validly shift the burden of tax to the purchaser under
Section 5A of the State Act for the same would. violate the condition of
G single-stage tax under Section 15 of the Central Act..

47. for the reasons stated above, these appeals are allowed. There will
be no orders as to costs.

v.s.s. Appeals allowed.

H