Holding

Goods sold within a local area for the purpose of being taken out of that area are not liable to tax under Entry 52, and no refund of such tax is ordered to avoid unjust enrichment.

Summary

The Entry Tax Officer of Karnataka challenged the Karnataka Tax on Entry of Goods into Local Area for Consumption, Use or Sale therein Act, 1979, contending that the tax applied to goods sold within a local area even when the seller intended to take them out of the area. The Karnataka High Court held that Section 3 of the Act, which implements Entry 52 of List II, taxes only sales intended for consumption, use or sale within the local area and ordered a refund of tax collected in excess. The Supreme Court affirmed the High Court's interpretation that no levy is permissible where goods are sold for the purpose of being taken out of the area, but reversed the refund order, holding that refund would result in unjust enrichment of dealers who have passed the tax on to consumers. The Court relied on earlier decisions interpreting "sale therein" and on the principle that octroi-like taxes are disfavoured. Consequently, the appeal by the Revenue was allowed in part and the High Court's refund direction was set aside.

Issues considered

Whether Entry 52 of List II, as enacted by the Karnataka Tax on Entry of Goods Act, 1979, imposes tax on goods sold within a local area for the purpose of being taken out of that area.
Whether a refund of tax paid in excess of legal liability is warranted where dealers have passed the tax burden onto consumers.

Legislation cited

Constitution of Indias. Entry 52, List II, Seventh Schedule
Karnataka Tax on Entry of Goods into Local Area for Consumption, Use or Sale therein Act, 1979s. 3

Subjects

Entry taxEntry 52Karnataka Actsale thereinoctroitax refundunjust enrichmentconsumptionuselocal area

Judgment

I

-~
THE ENTRY TAX OFFICER, BANGALORE ETC. ETC. A
~
v.
j
MIS CHANDANMAL CHAMPALAL AND CO.

APRIL 18, 1994

[B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.) B

r .J • Constitution of India-Entry 52 in List II of Seventh Schedule/Kw-
I
nataka Tax on Entry of Goods into local weas for consumption, use or sale
therein Act, 1979-Section 3-Words 'sale therein'--Meaning and scope-Tax
on entry of goods into a local wea-Where goods we sold with in d local c
wea for purpose of being taken out of that area and we actually taken out-No
lery permissible under entry 52-0rder of refund of amount paid in excess of
legal liability-Held bad as it would amount to unjust enrichment of dealers
~
who have passed on burden to pwchasers/consumers.
.'
, The controversy·in the instant case was with reference to the scope D
and ambit of the Karnataka Tax on Entry of Goods into local area
consumption, use or sale lilereln Act, 1979. It was submitted that when
""'- Entry 52 speaks of a tax on the entry of goods into a local area for
1
consumption, use or sale therein, the words 'sale therein' must be given
their due and natural meaning and should not be restricted to the sale for E
i the purpose of consumption or use of the goods sold within the limits of
I
the concerned local area.
1 '
The High Court held that the levy created by Section 3 of the
Karnataka Act is confined to entry of goods for consumption, use or sale
within the particular local area. It held that where the goods brought F
~ ~ within the local areas are not intended for use or consumption within that
' area but are meant to be and are taken out of the area for use of
consumption elsewhere, no levy is permissible under the said Act. The
court directed-refund of amount which may be found to have been paid in
excess of the liability, to the respondents. This appeal by Revenue has been G
filed challenging the said order.

Allowing the appeal, this Court
-~
HELD : 1.1. Where the goods are sold within a local area for the
purpose of being taken out of that local area and are actually taken out, H
545
546 SUPREME COURT REPORTS [1994] 3 S.C.R.

A no levy is permissible under Entry 52. Octroi or any impost in the nature
of that impost has always been looked upon with certain amount of
disfavour. Acceptance of the State's contention in this case would ultimate-
ly result in driving up the price of these goods to the consumer. It would
become another sales tax in effect. In the circumstances, the decision of
the Karnataka High Court on the meaning of the words 'sale therein' in
B Section 3. of the Karnataka Act, is affirmed. [549-B-D]

Burma Shell Oil Storage & Distributing Co. India Ltd. v. The Belgaum
' I
Borough Municipality, [1963) Supp. 2 SCR 216; Hiralal Ihakorlal Dalal .v.
Broach Municipality & Ors., AIR (1963) SC 1446 and Municipal Council v.
C Parekh Automobiles Ltd., [1990) 1 SCC 367, relied on.

1.2. In the instant case, the order of the Karnataka High Court in
so far as it directed refund of the amount, which may be found to have
been paid in excess of the legal .liability, is not justified. Any such direction
would amount to unjust enrichment of the respondents who are merely
D dealers and have passed on the burden to the purchasers/consumers. It is
not alleged and I or established that they have not passed on the duty to
the purchasers/consumers. The normal presumption is that they have done
so. In the absence of any such allegation and proof, the direction of refund • -4io
is not called for. [549-D-E, 550-C)
E
State of MP v. Vyankat Lal, AIR (1985) SC 901; Amamath Om
Prakash v. State of Punjab, AIR (1985) SC 218 and Indian Oil Corporation
v. Muncipal Corporation, Jullundhar, [1993) 1 SCC 333, relied on.

CIVIL APPELLATE JURISD!Cf!ON : Civil appeal Nos. 4263-64
F of 1992 etc. etc.

From the Judgment and Order dated 1.2.91 of the Karnataka High • 1
Court in W.P. Nos. 2505 and 2506 of 1991.

G R.N. Narasimhamurthy, B.V. Acharya, M.Veerappa and K.H. Nobin
Singh for the Appellants.·

Barish N. Salve, Ashok Kr. Sharma, Narender Kaushik, B.P. Gandhi,
Mukul Mudgal, V. Balachandran and S. Aravindh for the Respondents.

H The Judgment of the Court was delivered by
E.T.O. v. CHANDANMAL CO .• [JEEVAN REDDY.].] 547

8.P. JEEVAN REDDY, J. Leave granted in the S.L.P. A

2. Entry 52 in List-II of the Seventh Schedule to the Constitution,
says Sri Narsimha Murthy, should not be confined to an impost , formerly
known as 'octroi'. He submits that since it is a legislative entry, it must be
liberally construed and full effect must be given to the words used therein.
He says that when Entry 52 speaks of a taic on the entry of goods into a
B

.
1
local area for consumption, use or sale therein, the words sale therein'
, must be given their due and natural meaning and should not be restricted
to a sale for the purpose of consumption or use of the goods sold within
the limits of the concerned local area. The submission is urged with
reference to the scope and ambit of the Karnataka Tax on Entry of Goods c
into local areas for consumption, use or sale therein Act, 1979.

3. The High Court of Karnataka has held following decisions of this
Court in Burma Shell Oil Storage & Distributing Co. India Ltd. v. The
Belgaum Borough Municipality, (1963] 2 S.C.R. 216, Hirata/ Thakorlal Dalal D
v. Broach Municipality & Ors;, AIR (1963) S.C. 1446 and Municipal Council
v. Parekh Automobiles Ltd., (1990] 1 S.C.C. 367 that the levy created by

- Section 3 of the Karnataka Act on the sales effected within a local area is
confined only to those sales of goods which are meant for consumption or
use within such local area. In other words, it held that where the goods
sold are not intended for use of consumption within the local area but are E
meant to be and are taken out of the area for use or consumption
elsewhere, no levy is permissible under the said Act. It is this view Sri
Murthy disputes. He submits that Burma Shell, Hirata/ Thakorla/ and
Parekh Automobiles dealt with case where the levy was by the
municipality/local authority, no doubt under an enactment of the State F
Legislature. In those cases, he says, there may be justification for taking a
restrictive view and for construing the levy imposed by the municipality as
one in the nature of octroi but where the levy is created by the State
Legislature and the assessment and collection ·is also by the State Govern-
ment, there is no reason to re:-;trict the word 'sale' occurring in Section 3
of the Karnataka Act to sale of goods intended for use or consumption G
within the given local area. It is true, says the counsel, that the levy is at
the stage of entry of goods into a local area but the levy is not by the local
authority. The Karnataka Act, he says, bears no resemblance or similarity
to a levy in the nature of octroi imposed by the local authorities and,
therefore, it should not be subjected to the limitations applicable to a levy H
548 SUPREME COURT REPORTS [1994] 3 S.C.R.

A by the local authorities.

4. On the other hand, it is contended by Sri Harish Salve, learned
counsel for the respondents that all the submissions now raised by Sri
Murthy are concluded against him by the several decisions of this Court.
He points out that Hiralal Thakor/al first came up before a three-Judge
B Bench comprising K.K. Mathew, Krishna Iyer and A.C. Gupta, JJ. and the
matter was referred to a Constitution Bench precisely to resolve and decide
the true meaning and scope of the words 'sale therein' occurring in Entry
'>2. Para 3 of the order of reference reads thus:
.'
"3. The short point is whether a person who brings goods into a
c taxable territory and sells it there for being taken outside the
territory for consumption or use is liable to pay octroi. We have
been taken, by council on both sides, through the judgment of this
Court and while we are inclined to the view that the thrust of the
judgment is in favour of limiting taxability to such sales within the
D territory as are intended to be consumed or used in part or in
whole within the territory there are observations which strike a

E
different note. A plain reading of the words used impose no
qualification of the expression "sale therein" but the judicial con-
struction based on the history of octroi has also been an input in
the interpretative exercise in Bunna Shell. Be that as it may, we
-
feel that there are blurred areas of sale within the territory which
may attract a tax under Entry 52 left uncertain by the decision of
this Court. We, therefore, regard this case as requiring further
clarification particularly because the point is of some substance
and affects muncipal finances and the business community in the
F whole country."

5. It is in pursuance of the said reference that the matter came up
before the Constitution Bench which re-affirmed the law laid down in
Burma Shell. The very same question has again been raised in Parekh
G Automobiles, but once again the three-Judge Bench affirmed the principle
of Bunna Shall and Hirala/ Thakor/a/. Sri Salve submits that at this distance 'r
of time the matter should not be allowed to be re-agitated.

6. While we cannot deny the force and substance in the submissions
urged by Sri Narasimha Murthy. We do not find it possible to give effect
H to it in the light of the decisions referred to by Sri Salve. It is true that
E.T.O. v. CHANDANMAL CO .. [JEEVAN REDDY. J.] 549

Bunna Shell, Hiralal 7hakorlal and Parekh Auton1obiles were concerned A.
with State enactments which empowered the Municipalities to levy the
impost, all the sale a close reading of the said decisions does indicate that
they have read the words 'sale therein' occurring in Entry 52 of List-II as
meaning 'a sale of goods within a local area for consumption or use therein'
- though as a matter of fact, in a given case, the goods may be taken out
and consumed there. The decisions clearly say that where the goods are
B
sold within a local area for the purpose of being taken out of that local
area and are actually taken out, no levy is permissible under entry 52. It is
not possible to distinguish the said decisions on the grounds suggested by
Sri Murhty. There is yet another reason. Octroi or any impost in the nature
of that impost has always been looked upon with certain amount of C
disfavour. Acceptance of the State's contention in this case would ultimate-
ly result in driving up the price of these goods to the consumer. It would
become another sales tax in effect. In the circumstances, we are inclined
to - indeed we have no option but to - affirm the decision of the Karnataka
High Court on the meaning of the words 'sale therein' in Section 3 of the D
Karnataka Act. At the same time, we find it not possible to agree with the
Karnataka High Court insofar as it directed refund of the amount, which
may be found to have been paid in excess of the legal liability, to the
respondents. Any such direction would amount to unjust enrichment of the
respondents who are merely dealers and have passed on the burden to the
purchasers/consllmers. The dealers themselves have not suffered any loss. E
They merely passed on the liability. In such cases, this Court has been
refusing to refund the tax See State of Madhya Pradesh v. Vyankat Lal,
A.I.R. (1985) S.C. 901 and Amamath Om Prakash v. State of Punjab, AlR
(1985) s:c. 218.
F
+ 7. An ·identical question was considered by a Division Bench of this
• Court compromising J.S. Verma and AS. Anand, JJ. in Indian Oil Cor-
poration v. Municipal Cotporation, Jullandhar, [1993] 1 S.C.C. 3J3 with
respect to entry tax itself. After holding that the levy of duty was not
justified in law, the Bench dealt with the question of refund in para 23 in
the following words : G

"23. Before parting with the appeal, we would however, like to take

- note of the submission made on behalf of the Municipal Corpora-
tion with regard to the question of refund of the octroi duty,
already deposited by the appellant. The question of refund, in our H
550 SUPREME COURT REPORTS 1199413 S.C.R.

A opinion, does not arise. The JOC has collected the octroi duty from
its dealers and agents, who have in turn passed on the burden to
the consumer. Thus, having collected the octroi duty, there is no
equity in favour of the IOC to claim a refund of the same. Learned
counsel for the appellant also conceded that the question of
refund, in the facts and circumstances of the case, does not arise
B and we, therefore, hold that the appellant shall not be entitled to
any refund of the octroi duty already derosited by the appellant
with the Municipal Corporation."

8. We are in respectful agreement with the above principle. In this
C case also, it is not brought to our notice that the respondents have alleged
and/or established that they have not passed on the duly to the pur-
chasers/consumers. The normal presumption is that they have done so. If
they say otherwise, it is for them to allege and establish the same. In the
absence of any such allegation and proof, the direction of refund is not
called for.
D
The ·appeals are accordingly allowed to the extent indicated above.
The directions of the High Court "to re-do the orders in accordance with
the law and in the light of this order" and the further direction to the
authorities "to refund the amount to which each of the petitioners is
entitled within three months" as well as the directions to the said effect in
E the several orders under appeal are set aside. There shall be no order as
to costs.

A.G. Appeal allowed.

•