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CASE NO.:

Appeal (civil) 2653 of 2006

PETITIONER:

M/s. Peekay Re-rolling Mills (P) Ltd

RESPONDENT:

The Assistant Commissioner & Anr

DATE OF JUDGMENT: 20/03/2007

BENCH:

ASHOK BHAN & DALVEER BHANDARI

JUDGMENT:

J U D G M E N T

With

CIVIL APPEAL NOS. 2654 & 4406 of 2006

BHAN, J.

Civil Appeal Nos. 2653 and 2654 of 2006 are

directed against the impugned final judgment dated

7.4.2006 of Kerala High Court at Ernakulam in Writ

Appeal No. 434 of 2000 and Writ Appeal No. 433 of

2000 by which 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 of 2006 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.

We propose to dispose of these appeals by a

common order, as the point involved in all these

appeals is the same.

Facts are taken from Civil Appeal No. 2653 of

2006.

FACTS

The appellant is a company registered under the

Companies Act, 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 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.

For the Assessment Year 1994-95, appellant

submitted a return of turnover and was assessed to

tax declaring the taxable turnover at nil, by an order

dated 15.1.1998 by the assessing officer. In respect of

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the assessment year 1995-96 also, the appellant's

assessment was completed determining the taxable

turnover at Rs. 21,85,550/- vide order dated

15.1.1998. While this was so, the appellant received a

show cause notice dated 11.1.2000 for the assessment

year 1994-95 and another notice dated 12.1.2000 on

the same date for the assessment years 1996-97 to

1999-2000. In the first show cause notice relating to

the assessment year 1994-95, 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

1994-95. The notice further stated that the 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 5A of the State

Act. The notice alleged that the purchase turnover of

the ingots had escaped assessment under Section 5A

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.

Notice relating to 1996-97 to 1999-2000 was

worded differently. The said notice stated that the

appellant had purchased ingots, scraps, mosrolls, etc.

from units within the State claiming tax exemption

and consumed the same in the manufacture of bars

and rods during this period. It was further stated that

since the goods had not suffered tax under Section 5A

of the State Act, they were liable to pay purchase tax

under Section 5A and called upon the 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 the tax.

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 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 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.

Aggrieved by the above order of the learned Single

Judge, the 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

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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 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 could be subjected to levy

only at one point and that point had 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

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 purchase tax under Section 5A.

Learned counsel for the appellant has contented

before us that goods being declared goods, under

Section 14 of the Central Act are subjected to limits

placed by Section 15 of the Central Act, namely:

(1) the tax payable on the sale or purchase of

iron and steel under the law of a State

shall not exceed 4% and

(2) such tax shall not be levied at more than

one stage.

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.

According to him, iron and steel which are the

goods in question 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 of

Section 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 would be 4%. That the High Court

erred in assuming that the word "levied" in Section

15(a) of 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.

It was further contended that the High Court

erred in distinguishing the judgment of this Court in

Shanmuga Traders & Ors. v. State of T.N. and Ors.,

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(1998) 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, (1964) 6 SCR 947 is unwarranted as in the

said case this Court was interpreting the expression

"continued to be levied" and "to be levied to the same

purposes" in Article 277 of the Constitution of India.

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. v. State of U.P., (2001) 5 SCC 519, Pine

Chemicals Ltd. v. Assessing Authority, (1992) 2 SCC

683 and Associated Cement Companies Ltd. v. State of

Bihar, (2004) 7 SCC 642.

As against this, learned counsel appearing for the

respondent contended that Section 5A was introduced

in the State Act with effect from 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

purchase 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 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 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 and not mere authorization of levy.

Counsels for the parties have been heard at

length.

Section 5 and Second Schedule of Section 5 of the

State Act, as it stood at the relevant time, read as

under:

"S.5-Levy of tax on sale or purchase of

goods \026(1) 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

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turnover for that 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;

(ii) XXXXXXXXXXXXX

(iii) XXXXXXXXXXXXX

(iv) XXXXXXXXXXXXX"

Second Schedule of Section 5 of the State Act, as it

stood at the relevant time, reads as under:

"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

SL. Description of Goods Point of levy Rate of Tax

No. per cent

(1) (2) (3) (4)

1. Oil seeds as defined in At the point of

Sec.14 of the Central first sale in the

Sales Tax Act, 1956 State by a dealer

(Central Act 74 of who is liable to

1956), other than tax under

groundnut, coconut Section 5 4

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

xx xxxx xx xx

Section 5A of the State Act, as it stood at the

relevant time, reads as under: -

"5A. Levy of purchase tax:

(1) 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-sections (1), (3), (4) or (5) of

Section 5 and either,

(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

(c) despatches them to any

place outside the State except

as a direct result of sale or

purchase in the course of inter-

State trade or commerce; shall,

whatever be the quantum of the

turnover relating to such

purchase for a year, pay tax on

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the taxable turnover relating to

such purchase for the year at

the rates mentioned in Section

5."

Section 15 of the Central Act, as it stood at the

relevant time, reads as under: -

"15. 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, 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

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) XXXXXXXXXXXXX"

(These provisions have been modified later on or have

been done away with as of now.)

DISCUSSION

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 14/15 of the

Central Act are solely concerned with the declared

commodities. We are concerned with 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 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.

Section 5 of the State Act provides that in the case

of goods specified in the First and Second Schedule,

the tax could be at the rates and points specified

against such goods in the said Schedules which in the

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 5 is prescribed at 4%. As far as this section is

concerned, the conditions specified under Section 15

of the Central Act are prima facie complied with.

Further, under Section 10 of the State Act the State

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Government granted certain exemptions by way of

S.R.O.No.1729/93, within the purview of which the

goods in the present case fall.

The controversy in the instant case arises when a

tax is sought to be levied under section 5A of the State

Act on the same goods that are taxable under section

5, but exempted. The essential question that we are

required to adjudicate upon is whether the tax sought

to be levied under section 5A on these goods, would

amount to tax at a second stage and therefore violate

Section 15 of the Central Act.

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 Section 5 of the State Act and

exempted by a notification under Section 10; and the

same goods are sought to be taxed under Section 5A in

the hands of the purchaser.

What we are required to examine is the impact of

this exemption to ascertain whether the second levy

made under Section 5A of the State Act violates

Section 15 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 5A of the State Act in

respect of the declared goods, since the exemption

would negate the levy and the consequent liability to

pay tax. However, if the 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 5A of the Sate Act would fall foul of

the conditions of Section 15 of the Central Act.

It is an accepted position before us today that

Section 5 and Section 5A of the State Act are

independent sections and this is acknowledged by

both parties, in the light of the observations made in

State of Tamil Nadu v. M.K. Kandaswami, (1975) 4

SCC 745. This case involved the interpretation and

validity of Section 7A of the Madras General Sales Tax

Act, 1959 which 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:

"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(1)" means 'taxable goods',

that is, the kind of goods, the sale of

which by a particular person or dealer

may not be taxable in the hands of seller

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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 under the Act, have not due

to the circumstances of particular sales,

suffered tax\005.

[Emphasis supplied]

The Court also analyzed the Section and indicated

the conditions 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 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.

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

therefore could only be subject to a single-stage levy.

However, by a circular issued by the Commissioner of

Commercial Taxes, the person who purchased 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 of T.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

Royal Steel Traders, Madras [(1992) 1 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 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 law

because if there 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:

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Para 12

"\005.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 last sale in the State or any

intermediate sale in the State. If the

single point is fixed by the State at, say,

the point of first sale and the State

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 seller or the goods

sold may not be subjected to tax at

either that 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 the sale by the said Board

to the appellants/petitioners. That 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.

Para 14

There is no warrant for the emphasis

that would appear to have been "placed

by the Madras High Court on the phrase

"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 cannot

validly shift the point of levy from the

first sale to a subsequent sale and it is,

therefore, bad in law.

[Emphasis supplied]

The Division Bench however in the present

impugned judgment distinguished the Shanmuga's

case (supra) by observing:

"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

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point of levy from the first sale to a

subsequent sale."

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 (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 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 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 true whether the subsequent

levy is by way of a circular or directly under Section 5A

of the State Act \026 since both are required to comply

with the 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.

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 decision in

the Bhawani Cotton Mills case (supra). In his

dissenting judgment, Sikri J. observed as follows:

"\005.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 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\005.."

However, the majority decision took a different,

much stricter view 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

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as follows:

"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.l5(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\005.The essence of a one-

stage taxation consists of fixation of a

single point or stage, either by the State

Act or the rules framed

thereunder\005Under 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.

XXXX XXXX XXXX XXXX

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 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."

Thus, the Court finally concluded that the

conditions of Section 15 of the Central Act had not

been complied with.

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 negate the liability to tax.

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 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

The first aspect of the argument of the respondent

is with respect to the impact of exemption upon the

liability to tax. In our opinion, exemption can only

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operate when there has been a valid levy, for if there

was no levy at all, there would be nothing to exempt.

In this regard two cases decided by this Court are

relevant. The first 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 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 goods are

taxable at the point of their sale. Thus

the effect of exempting their sale is that

the said goods manufactured by them

could not be taxed at the second or

subsequent sales also as that would

offend Section 4(1) which provides for

single point levy. In 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\005."

[Emphasis supplied]

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.

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 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:

"Crucial question, therefore, is whether

the appellant had any "liability" under

the Act\005. 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 and rules

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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 of tax are conceptually

different. But for the exemption the

dealer would be required to pay tax in

terms of Section 3. In other words,

exemption presupposes a liability.

Unless there is 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]

A reading of the above judgments make it amply

clear that 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.

DISTINCTION BETWEEN LEVY AND COLLECTION

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 between levy and collection.

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:

"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 matter 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 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 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

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"collection". Article 265 of the

Constitution makes a distinction

between "levy" and "collection"\005."

[Emphasis supplied]

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'.

Referring to the above case, the Court made similar

observations in the case of Somaiya Organics (supra).

It observed:

"\005.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 vs. National Tobacco Co. of

India Ltd. at page 572, while "levy" would

mean the assessment or charging or

imposing tax, "collect" in Article 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\005."

The distinction between levy and collection has also

been emphasized in Collector of Central Excise,

Hyderabad v. Vazir Sultan Tobacco 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 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:

"\005.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 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 1, 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

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it be realised because such 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.

XXXX XXXX XXXX XXXX

\005.The levy is and remains upon the

manufacture or production alone. 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 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."

[Emphasis supplied]

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 of levy. It is true that collection

of a tax may some times be indicative of a lawful levy

of tax, 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 of the Constitution was

misplaced. While that case did hold that in the

circumstances before them 'levy' was intended to

include '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

Thus, after an examination of the 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 10 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

single-stage tax under Section 15 of the Central Act.

For the reasons stated above, these appeals are

allowed. There will be no orders as to costs.