Supreme Court Upholds Validity Of Section 5A | Purchase Tax Can Apply Even If Sale Is Exempt | Provision Is A Distinct Charging Section
Kiran Raj
The Supreme Court of India, three Judge Bench comprising Chief Justice Sanjiv Khanna Justice Sanjay Kumar, Justice R.Mahadevan delivered a judgment addressing the scope and applicability of purchase tax under the Kerala General Sales Tax Act, 1963, and the Tamil Nadu General Sales Tax Act, 1959.
The Bench stated that dealers who purchase goods exempt from sales tax or from dealers who are exempt under notifications issued under the respective state laws are still liable to pay purchase tax under Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act if specific conditions are met. The Court clarified that these statutory provisions constitute distinct charging sections and should not be rendered nugatory by granting exemptions beyond their textual scope.
The matter arose from a series of appeals concerning the imposition of purchase tax on transactions where goods were purchased from exempt dealers or in exempt transactions. The primary legal question was whether such purchases qualify as transactions "liable to tax" within the meaning of Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act, thereby making the purchasing dealers liable to pay purchase tax.
The appellants contended that goods purchased under an exemption should not attract purchase tax liability. They argued that the exemption should extend to both sales and purchase tax, effectively excluding these transactions from the tax net. On the other hand, the respondent States argued that Sections 5A and 7A are independent charging provisions meant to cover precisely such situations, ensuring that tax is recovered at some point in the transaction chain.
The statutory framework was extensively analysed. Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act impose purchase tax when goods, though generally taxable, are purchased under circumstances where no sales tax is collected, and the goods are subsequently consumed in manufacturing, used otherwise than by sale, or dispatched outside the State other than by way of inter-State trade or commerce.
The appellants heavily relied on the precedent set by the Supreme Court in State of Kerala v. T.S. Govindarajulu Naidu (1993 Supp 3 SCC 656), which seemed to support the proposition that exemptions apply to both sales and purchase tax. However, the Bench clarified that the earlier judgement was delivered without fully considering the distinction between sales and purchase tax liability created by these statutory provisions.
The Court reaffirmed the principles laid down in the landmark judgment of State of Tamil Nadu v. M.K. Kandaswami (1975) 4 SCC 745. It observed, "Section 7A is at once a charging as well as a remedial provision. Its main object is to plug leakage and prevent evasion of tax." The Court further stated that "goods, the sale or purchase of which is liable to tax under the Act" refers to taxable goods and not to the particular transaction under consideration. Thus, even if a sale transaction is exempt, the goods retain their character as taxable goods.
Clarifying the interplay between taxable goods, taxable persons, and taxable events, the Court held that these are distinct concepts and must be applied accordingly to determine tax liability. The Court expressly rejected the interpretation that exemptions granted to the selling dealer automatically protect the purchasing dealer from purchase tax liability.
On the constitutional validity of such provisions, the Court reiterated that both Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act were enacted to prevent revenue leakage. The purchase tax liability arises not at the time of purchase alone but upon the subsequent usage of the goods in the manner specified under the respective Acts.
The Court also distinguished the present case from the judgement in Goodyear India Ltd. v. State of Haryana (1990) 2 SCC 71, noting that the Haryana Act's language and scheme differ significantly. The Bench endorsed the views expressed in Hotel Balaji v. State of A.P. (1993 Supp (4) SCC 536), wherein the constitutional validity and object of similar provisions in other states were upheld.
The Supreme Court issued the following directions:
- Question Nos. I and II, concerning whether the purchase of goods by the appellants from exempt dealers constitutes a purchase "liable to tax" under Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act, were answered in the affirmative in favour of the Revenue and against the appellant-assessees.
- Question No. III, relating to the constitutional validity of Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act, was answered in the negative, thereby upholding the constitutional validity of the said provisions.
- It was recorded that the reference is answered accordingly. All the appeals preferred by the appellant-assessees are dismissed. The judgments and orders of the High Court of Kerala and the High Court of Judicature at Madras stand upheld.
- The Court directed that the stay order(s) granted during the pendency of the proceedings shall stand vacated.
- All pending applications, if any, shall stand disposed of.
- There shall be no order as to costs.
Advocates Representing the Parties
For the Petitioners: Mr. C.N. Sreekumar, Senior Advocate; Ms. Anupama Kumar, Advocate; Mr. Debasis Jena, Advocate; Mr. Rahul Kulhare, Advocate; Mr. Prakash Ranjan Nayak, Advocate-on-Record; Mr. Ajay Aggarwal, Advocate; Mr. Rajan Narain, Advocate-on-Record; Ms. Mallika Joshi, Advocate; Mr. M. P. Vinod, Advocate-on-Record; Mr. V. Sridharan, Senior Advocate; Mr. Sahil Parghi, Advocate; Mr. Ayush Agarwal, Advocate; Ms. Charanya Lakshmikumaran, Advocate-on-Record; Ms. Neha Choudhary, Advocate; Ms. Nitum Jain, Advocate; Ms. Umang Motiyani, Advocate.
For the Respondents: Mr. G. Prakash, Advocate-on-Record; Mr. M. Yogesh Kanna, Advocate-on-Record; Mr. V. Girl, Senior Advocate; Mr. Pallav Shishodia, Senior Advocate; Mr. C. K. Sasi, Advocate-on-Record; Ms. Meena K Poulose, Advocate; Mr. Nihar Dharmadhikari, Advocate; Mr. K. Radhakrishnan, Senior Advocate; Mr. Sabarish Subramanian, Advocate-on-Record; Mr. C. Kranthi Kumar, Advocate; Mr. Vishnu Unnikrishnan, Advocate; Mr. Sarathraj B, Advocate; Mr. Danish Saifi, Advocate; Ms. Aswani Satheesh, Advocate.
Case Title: C.T. Kochouseph v. State of Kerala and Another Etc.
Neutral Citation: 2025 INSC 661
Case Number: Civil Appeal Nos. 941-945 of 2004 & Connected Appeals
Bench: Chief Justice Sanjiv Khanna, Justice Sanjay Kumar, Justice R.Mahadevan
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