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CASE NO.: Appeal (civil)  1784 of 2007

PETITIONER: M/s Binani Industries Ltd., Kerala

RESPONDENT: Assistant Commissioner of Commercial Taxes, VI Circle, Bangalore and Ors

DATE OF JUDGMENT: 04/04/2007

BENCH: Dr. ARIJIT PASAYAT & S.H. KAPADIA

JUDGMENT: J U D G M E N T CIVIL APPEAL NOS.        1784                 OF 2007 (Arising out of SLP (C) Nos. 157-158 of  2006) WITH          (Civil Appeal Nos. 1785     /2007 @ SLP ) Nos. 1035-39/2006           Civil Appeal Nos.  1786     /2007@ SLP ) Nos. 1219-38/2006         Civil Appeal Nos.  1787     /2007@ SLP ) Nos. 1462-63/2006         Civil Appeal Nos.  1788     /2007@ SLP ) Nos. 1482-1501/2006         Civil Appeal Nos.  1789     /2007@ SLP ) Nos. 1506-09/2006         Civil Appeal Nos.  1790     /2007@ SLP ) No. 6197/2006         Civil Appeal Nos.  1791     /2007@ SLP ) Nos. 6733/2006         Civil Appeal Nos.  1792     /2007@ SLP ) Nos. 6884/2006         Civil Appeal Nos.  1793     /2007@ SLP ) Nos. 9232/2006         Civil Appeal Nos.  1794     /2007@ SLP ) Nos. 8862/2006         Civil Appeal No. 1369 of 2006         Civil Appeal No. 1370 of 2006

Dr. ARIJIT PASAYAT, J.

       Leave granted in special leave petitions.  

       Challenge in these appeals is to the legality of the  judgment rendered by a Division Bench of the Karnataka High  Court holding that the Circular dated 23.10.1999 (Circular  No.31/1999-2000)  is valid and Circular No.5/1996-97 dated  12.4.1996 was inoperative.  

       Background facts in a nutshell are as follows:

       Appellants are dealers registered under the Karnataka  Sales Tax Act, 1957 (in short the ’Act’). Their business  activities inter-alia include business of leasing machinery,  equipment and motor vehicles.  

       Section 5-C of the Act deals with levy of tax on transfer of  the right to use the goods which is treated as a transfer for the  purpose of levy of sales tax within the State.          Originally the levy was on "taxable turnover". An  amendment was brought in 1992 to the said provision   substituting the expression "total turnover" for "taxable  turnover". The same was questioned by several assessees. A  Division Bench of the High Court by its judgment in Shetty  Leasing India Pvt. Ltd. vs. Union of India and Ors. (1996 (100)  STC 533) struck down the provision. On 1.4.1986, Section 5-C  was again amended with retrospective effect restoring the  original position i.e. substituting the expression "taxable  turnover" for "total turnover". On 12.4.1996, a Circular was  issued in terms of Section 3-A of the Act providing that the  goods which have suffered tax under Section 5 of the Act

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cannot be again taxed in terms of Section 5-C. In other words,  where the goods have suffered tax on the actual sale cannot  attract levy of tax again. The circular,  as noted above, was  issued under Section 3-A of the Act read with Rule 6(4) of the  Karnataka Sales Tax Rules, 1957 (in short the ’Rules’).  Subsequently, on 23.10.1999 another Circular was issued  stating that the earlier Circular did not reflect the actual  position in law and, therefore, there was no bar on the  transaction being taxed in terms of Sections 5 and 5-C.  On  1.4.2000 Section 5-C was amended by insertion of a proviso  which in essence re-iterated the view expressed in the Circular   dated 12.4.1996.  

       Keeping in view the directions contained in the Circular  of 23.10.1999 re-assessment proceedings were initiated  and/or action in terms of Section 21 for revision was initiated.  Both these actions related to completed assessments.  

       A learned Single Judge while dealing with challenge to  Circular dated 23.10.1999 held that the Circular of 12.4.1996  did not  indicate the correct position in law and, therefore,  there was no bar in the Circular dated 23.10.1999 clarifying  the position and indicating the correct position. However, it  was held that the revenue was bound by the incorrect  Circular. Therefore, for the assessment years 1996-97 to  1999-2000 till the date of the subsequent Circular, no action  could be taken against the assessees. But the position prior to  that i.e. from 1.4.1986 till 31.3.1996 the assessees were not  entitled to any relief. This view was taken primarily on the  ground that even incorrect circular binds the revenue. The  Division Bench held the incorrect circular does not bind the  revenue and that the law declared by this Court has a binding  effect.  

       Learned counsel for the appellants submitted that both  the orders of the learned Single Judge and the judgment of the  Division Bench do not take into effect of the proviso which is  in essence a legislative declaration of a clarificatory nature.  The proviso in terms recognizes the correctness of the Circular  dated 12.4.1996. In any event, there could not have been any  re-opening of the assessment because of mere change in  opinion of the Commissioner. When two opinions were  expressed in the two circulars it is nothing but a change in the  opinion and it is impermissible for the revenue to re-open the  complete assessment on the basis of the subsequent Circular.  

       The fact that the proviso was by way of a clarification is  clear from the fact that at the first instance only 12 days after  Section 5-C was amended, the Circular was issued. In  essence, the principle of contemporaneous expression applies  to the facts of the case.  The Circular dated 23.10.1999 is in  essence review of the earlier Circular which is impermissible in  law. The Circular itself states that those are "revised  instructions" and, therefore, cannot have any retrospective  force  and in any event cannot permit re-opening of complete  assessment either by way of re-assessment proceedings or by  exercise of revisional powers.  

       In response, learned counsel for the revenue submitted  that the true nature of the proviso has been kept in view. The  High Court’s conclusions are irreversible. There is no question  of proviso being clarificatory in nature. According to him, the  proviso can be applicable with effect from the date of  introduction because that would determine the taxable event  for the assessment year in question and the subsequent

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period.          It is stated that the Circular was not binding on the  assessing authorities and they could take their independent  view.  

       At this juncture, it would be necessary to take note of  Sections 5-C, 12-A and 21. They read as follows:

"5-C. Levy of tax on the transfer of the right  to use any goods: Notwithstanding anything  contained in sub-section (1) or sub-section (3)  of Section 5, but subject to sub-sections (5)  and (6) of the said Section, every dealer shall  pay for each year a tax under this Act on his  (taxable turnover in respect of the transfer of  the right to use any goods mentioned in  column (2) of the Seventh Schedule for any  purpose (whether or not for a specified period)  at the rates specified in the corresponding  entries in column (3) of the said Schedule.

Provided that no tax shall be levied under  this section if the goods in respect of which the  right to use is transferred, have been subjected  to tax under section 5.           12-A. Assessment of escaped turnover: -(1)  If the assessing authority has reason to believe  that the whole or any part of the turnover of a  dealer in respect of any period has escaped  assessment to tax or has been under-assessed  or has been assessed at a rate lower than the  rate at which it is assessable under this Act or  any deductions or exemptions have been  wrongly allowed in respect thereof, the  assessing authority may, notwithstanding the  fact that the whole or part of such escaped  turnover was already before the said authority  at the time of the original assessment or  re- assessment but subject to the provisions of  sub-section (2), at any time within a period of  eight years from the expiry of the year to which  the tax relates, proceed to assess or re-assess  to the best of its judgment the tax payable by  the dealer in respect of such turnover after  issuing a notice to the dealer and after making  such enquiry as it may consider necessary.

(1-A) In making an assessment under sub- section (1) the assessing authority may, if it is  satisfied that the escape from assessment is  due to wilful non-disclosure of assessable  turnover by the dealer, direct the dealer to pay,  in addition to the tax assessed under sub  section (1), a penalty not exceeding (an amount  equivalent to the tax due) the tax so assessed:

Provided that no penalty under this sub- section shall be imposed unless the dealer  affected has had a reasonable opportunity of  showing cause against such imposition.

(2) In computing the period of limitation for  assessment of the escaped turnover under this  Section, the time during which an assessment

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has been deferred on account of any stay order  granted by any Court or other authority in any  case, or by reason of the fact that an appeal or  other proceeding is pending before the  Appellate Tribunal or the High Court or the  Supreme Court, shall be excluded:

Provided that nothing contained in this  Section limiting the time within which any  action may be taken or any order, assessment  or re-assessment may be made, shall apply to  an assessment or re-assessment made on the  assessee or any person in consequence of, or  to give effect to, any finding, direction or order  made under Sections 20, 21, 22, 22A, 23 or 24  or any judgment, or order made by the  Supreme Court,  the High Court, or any other  Court.

21. Revisional powers of Joint  Commissioners.:

(1) The Deputy Commissioner may of his own  motion call for and examine the record of any  order passed or proceeding recorded under the  provisions of this Act by an Commercial Tax  Officer subordinate to him for the purpose of  satisfying himself as to the legality or propriety  of such order or as to the regularity of such  proceeding in so far as it is prejudicial to the  interests of the revenue and may pass such  order with respect thereto as he thinks fit.

(2) the Joint Commissioner may of his own  motion call for and examine the record of any  order passed or proceeding recorded under the  provisions of this Act by any officer not above  the rank of a Deputy Commissioner, for the  purpose of satisfying himself as to the legality  or propriety of such order or as to the  regularity of such proceeding in so far as it is  prejudicial to the interests of the revenue and  pass such order with respect there to as he  thinks fit.

(3) In relation to an order of assessment  passed under this Act, the power under sub-- sections (1) and (2) shall be exercisable only  within a period of four years from the date on  which the order was passed.

(4) No order shall be passed under sub-section  (1) or sub-section (2) enhancing any  assessment, unless an opportunity has been  given to the assessee to show cause against  the proposed enhancement.

(5)     The power under this Section shall not be  exercisable in respect of matters subjected to  appeal under Section 20.

(6) Every order passed in revision under this  Section shall subject to the provisions of  Sections 22 to 24 and 25-A be final.

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Explanation: For the purposes of this section,  ’record’ shall include all records relating to any  proceedings under this Act available at the  time of examination by the Joint  Commissioner."   

       A copy of the Budget speech introducing the amendment  was placed on record by learned counsel for the parties. The  Finance Minister’s speech shows that the proviso was  intended to provide additional benefit or relief. The proviso  appears to have been introduced as a clarificatory measure.  There is no mention as to the date after which benefit can be  granted in respect of the goods which have suffered tax.  Therefore, the assessment period concerned as sought to be  introduced by the revenue has no foundation. The proviso  clearly states that once the goods have suffered the tax they  would not be subject to tax again. As observed by this Court in  Zile Singh v. State of Haryana and Ors. (2004 (8) SCC 1) for  the purpose of determining that the proviso is clarificatory or  not, the date when it is introduced is relevant. Paras 11 to 21  of the judgment are relevant and they read as follows:   11. According to the appellant, the disqualification  imposed by Section 13-A(l)(c) of the First  Amendment remained in operation only for a period  of one year and would have in ordinary course  ceased to operate on the  expiry of the period of one  year from 5-4-1994. The citizens were justified in  arranging their affairs including the enlargement of  their families keeping in view the provision of law as  it stood. However, the Second Amendment Act  effective from 4-10-1994 made a difference. On that  day, the legislature specifically provided that a  person having more than two children on or after  the expiry of one year shall stand disqualified. This  period of one year, in the  submission of the  appellant, should be calculated from 4-10-1994 and  not 5-4-1994 and if that be done the birth of the  child on 13-8-1995 would not attract the  disqualification.

12. This plea of the appellant raises a few  interesting questions, such as, the nature of the  amendment i.e. whether it is at all retrospective in  operation, and if not, whether the provision as  amended by the Second Amendment applies to the  appellant.

13. It is a cardinal principle of construction that  every statute is prima facie prospective unless it is  expressly or by necessary implication made to have  a retrospective operation. But the rule in general is  applicable where the object of the statute is to affect  vested rights or to impose new burdens or to impair  existing obligations. Unless there are words in the  statute sufficient to show the intention of the  legislature to affect existing rights, it is deemed to  be prospective only - "nova constitutio futuris  formani imponere debet non praeteritis" \027 a new  law ought to regulate what is to follow, not the past.  (See Principles of Statutory Interpretation by Justice  G.P. Singh, 9th Edn., 2004 at p. 438.) It is not  necessary that an express provision be made to  make a statute retrospective and the presumption

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against retrospectivity may be rebutted by  necessary implication especially in a case where the  new law is made to cure an acknowledged evil for  the benefit of the community as a whole (ibid., p.  440).

14. The presumption against retrospective operation  is not applicable to declaratory statutes\005\005. In  determining, therefore, the nature of the Act, regard  must be had to the substance rather than to the  form. If a new Act is "to explain" an earlier Act, it  would be without object unless construed   retrospectively. An explanatory Act is generally  passed to supply an obvious omission or to clear up  doubts as to the meaning of the previous Act. It is  well settled that if a statute is curative or merely  declaratory of the previous law retrospective  operation is generally intended.... An amending Act  may be purely declaratory to clear a meaning of a  provision of the principal Act which was already  implicit. A clarificatory amendment of this nature  will  have retrospective effect (ibid., pp. 468-69).

15. Though retrospectivity is not to be presumed  and rather there is presumption against  retrospectivity, according to Craies (Statute Law,  7th Edn.), it is open for the legislature to enact laws  having retrospective operation. This can be achieved  by express enactment or by necessary implication  from the language employed. If it is a necessary  implication from  the language employed that the  legislature intended a particular section to have a  retrospective operation, the courts will give it such  an operation. In the absence of a retrospective  operation having been expressly given, the courts  may be called upon to construe the provisions and  answer the question whether the legislature had  sufficiently expressed that intention giving the  statute retrospectivity. Four factors are suggested  as relevant: (i) general scope and purview of the  statute; (ii) the remedy sought to be applied; (iii) the  former state of the law; and (iv) what it was the  legislature contemplated. (p. 388) The rule against  retrospectivity does not extend to protect from the  effect of a repeal, a privilege which did not amount  to accrued right. (p. 392)

16. Where a statute is passed for the purpose of  supplying an obvious omission in a former statute  or to "explain a former statute, the subsequent  statute has relation back to the time when the prior  Act was passed. The rule against retrospectivity is  inapplicable to such legislations as are explanatory  and declaratory in nature. A classic illustration is  the case of Attorney General v. Pougett (Price at p.  392). By a Customs Act of 1873 (53 Geo. 3, c. 33) a  duty was imposed upon hides of 9s 4d, but the Act  omitted to state that it was to be 9s 4d per cwt., and  to remedy this omission another Customs Act (53  Geo. 3, c. 105) was passed later in the same year.  Between the passing of these two Acts some hides  were exported, and it was contended that they were  not liable to pay the duty of 9s 4d per cwt., but  Thomson, C.B., in giving judgment for the Attorney  General, said: (ER p. 134)

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"The duty in this instance was, in fact,  imposed by the first Act; but the gross  mistake of the omission of the weight, for  which the sum expressed was to have  been payable. occasioned the amendment  made by the subsequent Act: but that  had reference to the former statute as  soon as it passed, and they must be  taken together as if they were one and the  same Act:" (Price at p. 392)

17. Maxwell states in his work on Interpretation of  Statutes (12th Edn.) that the rule against  retrospective operation is a presumption only, and  as such it "may be overcome, not only by express  words in the Act but also by circumstances  sufficiently strong to displace it" (p. 225), if the  dominant intention of the legislature can be clearly  and doubtlessly spelt out, the inhibition contained  in the rule against perpetuity becomes of doubtful  applicability as the "inhibition of the rule" is a  matter of degree which would "vary secundum  materiam" (p. 226). Sometimes, where the sense of  the statute demands it or where there has been an  obvious mistake in drafting, a court will be prepared  to substitute another word or phrase for that which  actually appears in the text of the Act (p. 231).  

18. In a recent decision of this Court in National  Agricultural Coop. Marketing Federation of India  Ltd. v. Union of India (2003 (5) SCC 23)  it has been  held:

"that there is no fixed formula for the  expression of legislative intent to give  retrospectivity to an enactment. Every  legislation whether prospective or  retrospective has to he subjected to the  question of legislative competence. The  retrospectivity is liable to be decided on a  few touchstones such as: (i) the words  used must expressly provide or clearly  imply retrospective operation; (ii) the  retrospectivity must be reasonable and  not excessive or harsh, otherwise it runs  the risk of being struck down as  unconstitutional: (iii) where the  legislation is introduced to overcome a  judicial decision, the power cannot be  used to subvert the decision without  removing the statutory basis of the  decision. There is no fixed formula for the  expression of legislative intent to give  retrospectivity to an enactment. A  validating clause coupled with a  substantive statutory change is only one  of the methods to leave actions  unsustainable under the un-amended  statute, undisturbed. Consequently, the  absence of a validating clause would not  by itself affect the retrospective operation  of the statutory provision, if such  retrospectivity is otherwise apparent".

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19. The Constitution Bench in Shyam Sunder v.  Ram Kumar (2001 (8) SCC 24)  has held: (SCC p.  49, para 39)-

"Ordinarily when an enactment declares  the previous law, it requires to be given  retroactive effect. The function of a  declaratory statute is to supply an  omission or to explain a previous  statute and when such an Act is passed,  it comes into effect when the previous  enactment was passed. The legislative  power to enact law includes the power  to declare what was the previous law  and when such a declaratory Act is  passed, invariably it has been held to be  retrospective. Mere absence of use of the  word ’declaration’ in an Act explaining  what was the law before may not appear  to be a declaratory Act but if the court  finds an Act as declaratory or  explanatory, it has to be construed as  retrospective." (p. 2487).

20. In Bengal Immunity Co. Ltd. v. State of Bihar  (1955 (2 SCR 603), Heydon case was cited with  approval. Their Lordships have said: (SCR pp. 632- 33)

"It is a sound rule of construction of a  statute firmly established in England as  far back as 1584 when Heydon case was  decided that-  

’\005\005.for the sure and true  interpretation of all statutes in  general (be they penal or  beneficial, restrictive or enlarging  of the common law) four things  are to be discerned and  considered-

1st. What was the common law  before the making of the Act.

2nd. What was the mischief and  defect for which the common law did  not provide.

3rd. What remedy Parliament hath  resolved and appointed to cure the  disease of the Commonwealth, and

4th. The true reason of the remedy;  and then the office of all the judges  is always to make such construction  as shall suppress the mischief, and  advance the remedy, and to  suppress subtle inventions and  evasions for continuance of the  mischief, and pro privato commodo  and to add force and life to the cure  and remedy, according to the true  intent of the makers of the Act, pro  bono publico’."

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21. In Allied Motors (P) Ltd. v. CIT (1997 (3) SCC  472) certain unintended consequences flowed from  a provision enacted by Parliament. There was an  obvious omission. In order to cure the defect, a  proviso was sought to be introduced  through an  amendment. The Court held that literal  construction was liable to be avoided if it defeated  the manifest object and purpose of the Act. The rule  of reasonable interpretation should apply. "A proviso which is inserted to remedy  unintended consequences and to make  the provision workable, a proviso which  supplies an obvious omission in the  section and is required to be read into the  section to give the section a reasonable  interpretation, requires to be treated as  retrospective in operation so that a  reasonable interpretation can be given to  the section as a whole." (SCC pp. 479-80,  para 13)

       The Budget Speech speaks of the goods "already been  subjected to tax under the Act" and does not even by  implication state that in order to be entitled to the benefit the  goods ought to have been taxed after a particular date. It is  purely on the event of goods having suffered tax once or in  other words the taxable event having taken place once.  

The normal function of a proviso is to except something  out of the enactment or to qualify something enacted therein  which but for the proviso would be within the purview of the  enactment. As was stated in Mullins v. Treasurer of Survey  [1880 (5) QBD 170, (referred to in Shah Bhojraj Kuverji Oil  Mills and Ginning Factory v. Subhash Chandra Yograj Sinha  (AIR 1961 SC 1596) and Calcutta Tramways Co. Ltd. v.  Corporation of Calcutta (AIR 1965 SC 1728); when one finds a  proviso to a section the natural presumption is that, but for  the proviso, the enacting part of the section would have  included the subject matter of the proviso. The proper function  of a proviso is to except and to deal with a case which would  otherwise fall within the general language of the main  enactment and its effect is confined to that case. It is a  qualification of the preceding enactment which is expressed in  terms too general to be quite accurate. As a general rule, a  proviso is added to an enactment to qualify or create an  exception to what is in the enactment and ordinarily, a proviso  is not interpreted as stating a general rule. "If the language of  the enacting part of the statute does not contain the  provisions which are said to occur in it you cannot derive  these provisions by implication from a proviso." Said Lord  Watson in West Derby Union v. Metropolitan Life Assurance  Co. (1897 AC 647)(HL). Normally, a proviso does not travel  beyond the provision to which it is a proviso. It carves out an  exception to the main provision to which it has been enacted  as a proviso and to no other. (See A.N. Sehgal and Ors. v. Raje  Ram Sheoram and Ors. (AIR 1991 SC 1406), Tribhovandas  Haribhai Tamboli v. Gujarat Revenue Tribunal and Ors. (AIR  1991 SC 1538) and Kerala State Housing Board and Ors. v.  Ramapriya Hotels (P)Ltd. and Ors. (1994 (5) SCC 672).

"This word (proviso) hath divers operations.  Sometime it  worketh a qualification or limitation; sometime a condition;  and sometime a covenant" (Coke upon Littleton 18th Edition,  146)

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         "If in a deed an earlier clause is followed by a later clause  which destroys altogether the obligation created by the earlier  clause, the later clause is to be rejected as repugnant, and the  earlier clause prevails....But if the later clause does not  destroy but only qualifies the earlier, then the two are to be  read together and effect is to be given to the intention of the  parties as disclosed by the deed as a whole" (Per Lord  Wrenbury in Forbes v. Git [1922] 1 A.C. 256).

       A statutory proviso "is something engrafted on a  preceding enactment" (R. v. Taunton, St James, 9 B. & C.  836).

       "The ordinary and proper function of a proviso coming  after a general enactment is to limit that general enactment in  certain instances" (per Lord Esher in Re Barker, 25 Q.B.D.  285).

       A proviso to a section cannot be used to import into the  enacting part something which is not there, but where the  enacting part is susceptible to several possible meanings it  may be controlled by the proviso (See Jennings v. Kelly [1940]  A.C. 206).          The above position was highlighted in Ali M.K. & Ors. v.  State of Kerala and Ors. (2003 (11) SCC 632) and Union of  India v. Sanjay Kumar Jain (2004 (6) SCC 708)   

       The stand of the revenue does not appear to be very  consistent. Though in the counter affidavit before the High  Court it was stated that the Circular is not binding on the  authorities, it is conceded by learned counsel for the State  Government that it is in fact binding on the department  officials.  The Circulars read as follows:

"COMMISSIONER OF COMMERCIAL TAXES CIRCULAR No. 5/96-97 dated 12.4.1996

Sub: Salient features of the Amendments effective  from 1.4.1996- reg.

Ref:- 1.        Govt. Notification No. DPAL 15 LGN 96, Dated 21.3.1996 published in Karnataka Gazatte Extraordinary Part IV Section 2B, dated 21.3.1996.

2. Govt. Notifications No. FD35 CSL 96 (1 to 25)  dated 30.03.96

3. Govt. Notifications No. FD 85 CET 96 (1 to 3)  dated 30.03.96.

4. Govt. Notifications No. FD 4 CRC 96 dated  30.03.96

As per the Karnataka Taxation laws (Second  Amendment) Act, 1996, amendments are effected to  provisions of the below mentioned Acts;

i) Karnataka Tax on Luxuries Act, 1979. ii) Karnataka Tax on Professions, Trades,  Callings and Employments Act, 1976. iii) Karnataka Entertainments Tax Act, 1958. iv) Karnataka Agricultural Income Tax Act,  1957.

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v) Karnataka Sales Tax Act, 1957. 2. Salient features of the amendments are explained  hereunder for guidance and compliance.  (Specific  mention is made about the amendments which are  introduced with retrospective effect and in all other  cases, the amendments take prospective effect, i.e.,  w.e.f. 1.4.1996):

               xx              xx              xx              xx

Amendment of Section 5-C- Levy of tax on the  transfer of the right to use any goods.

16. Section 5-C in force prior to this amendment  prescribed ’total turnover" as the basis for levy of  tax. The High Court of Karnataka in the judgment  rendered in the case of M/s Shetty Leasing (India)  Ltd. Vs. Union of India 100 STC 533, had struck  down Section 5-C as beyond the competence of  State Legislature. The amendment now introduced  substitutes the whole of Section 5-C with  retrospective effect from 01.4.86 so as to overcome  the aforesaid judgment. The newly substituted  section prescribes ’’taxable turnover’ as the basis for  levy of tax.  Assessments, if any, completed  adopting the basis of ’taxable turnover’ for levy of  tax, stand automatically validated by the validation  Clause at Section 7 of the Amendment Act. In all  such cases, it would be in order for the assessing  authorities to pursue action for realization of the  taxes levied by issuance of simple notices, without  going in for rectifications, re-assessments or  revisions.

17. Computation of taxable turnover for the  purposes of Section 5-C now substituted, would  have to be in accordance with the provisions of Rule  6(4) of KST Rules, 1957. Accordingly, among other  things, where goods e.g. motor vehicles, machinery,  etc. specified in Second Schedule are purchased  from registered dealers in Karnataka and are given  on lease, such lease involving transfer of the right to  use the KST suffered goods would be eligible for  exemption in terms of clause (i) of sub rule (4) of  Rule 6.

18. All the 15 categories of goods specified in the  Seventh Schedule are made liable to tax at the  uniform rate of 4%".                  

"No. RFD. CR.53/97-98                                         Office of the Commissioner of Commercial Taxes in Karnataka, Bangalore \027 560 009 dated 23.10.1999

COMMISSIONER OF COMMERCIAL TAXES CIRCULAR No. 31/99-2000

Sub: KST Act, 1957 \027 Amendment of Section 5-C  by Karnataka Taxation Laws (Amendment Act 1996)  - certain instructions -reg.

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Ref: Commissioner of Commercial Taxes Circular  No. 5 of 1996-97 dated April 1996.

In Commissioner of Commercial Taxes Circular  No. 5 of 1996-97, dated 12 April, 1996, while  explaining the salient features of the amendments  effected to the provisions of Karnataka Sales Tax  Act, 1957 by Karnataka Taxation laws (Second  Amendment) Act, 1996 at paras 16 and 17, the  position of law relating to Section 5-C of the  Karnataka Sales Tax Act, 1957 as amended by the  said Amendment Act was stated to be as follows:

"16. Section 5-C in force prior to this  amendment prescribed "total turnover" as  the basis for levy of tax. The Hon’ble High  Court of Karnataka in the judgment  rendered in the case of M/s Shetty  Leasing (India) Ltd. Vs. Union of India  100 STC 533 had struck down Section 5- C as beyond the competence of State  legislature. The amendment now  introduced substitutes the whole of  Section 5-C with retrospective effect from  01.4.1986 so as to overcome the  aforesaid judgment. The newly  substituted section prescribes ’taxable  turnover’ as the basis for levy of tax.  Assessments, if any, completed adopting  the basis of ’taxable turnover’ for levy of  tax, stand automatically validated by the  validation clause at section 7 of the  Amendment Act. In all such cases, it  would be in order for the assessing  authorities to pursue action for  realization of the taxes levied by issuance  of simple notices, without going in for  rectification, re-assessments or revisions.

17. Computation of taxable turnover for  the purpose of Section 5-C now  substituted, would have to be in  accordance with the provisions of Rule  6(4) of Karnataka Sales Tax, 1957.  Accordingly, among other things, where  goods e.g. motor vehicles, machinery etc.,  specified in second schedule are  purchased from registered dealers in  Karnataka and are given on lease, such  lease involving transfer of the right to use  the KST suffered goods would be eligible  for exemption in terms of clause (i) of  sub-rule (4) of Rule 6."

2. On a review of the said circular, it is noticed that  the position or law explained therein in respect of  section 5-C does not state the correct position of law  for the following reasons:

(i)     There is a distinction between a  contract of sale as defined in section 4 of  the Sale of Goods Act, 1930 and a  transfer of the right to use goods for any  purposes. While in a transaction of ’sale’  as defined under Sale of Goods Act, there

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is transfer of ownership in goods and in a  transaction involving transfer of the right  to use goods, there is no such transfer of  ownership in goods. Consequent to  insertion of clause 29-A (d) to Article 366  of the Constitution of India by 46th  Amendment to the Constitution,  Karnataka Sales Tax Act, 1957 was  amended w.e.f. 01.4.1996 to treat the  transfer of the right to use goods as  deemed sale for the purposes of levy of  tax on such transaction.

(ii)     Section 5-C of the Karnataka Sales  Tax Act, 1957 is an independent charging  section. Section 5-C contemplates levy of  tax on taxable turnover in respect of  transfer of the right to use any goods  specified in Seventh Schedule of the Act  for any purposes (whether or not for  specified period). There is nothing in  Section 5-C to indicate that the goods  which are subject to tax on their transfer  of the right to use (lease) cannot be  subject to tax under section 5-C when  right to use such goods are again  transferred after the expiry of the  specified period for which it was hired  earlier. Therefore, the levy under the said  provision is multipoint in nature. The  very goods when leased out more than  once, such transaction attract levy every  time they are leased out.

(iii)    As the Section 5-C starts with non- obstante clause namely "notwithstanding  anything contained in sub section 91 or  sub-section (3) of Section 5", the goods,  in respect of which right to use goods is  transferred, even though have been  subjected to tax under the said sub- sections of Section  5, they shall be liable  to tax under Section 5-C. In other words,  the goods which have suffered tax under  Section 5 are not excluded from the  purview of Section 5-C when right to use  of such goods are transferred.

In view of the above, the following revised  instructions are issued: (i) Section 5-C was substituted  retrospectively w.e.f. 01.4.1986 by  amending Karnataka Taxation Laws  (Second Amendment) Act, 1996. The  newly substituted section 5-C provides  for levy of tax on the ’taxable turnover’ in  respect of transfer of the right to use any  goods specified in seventh schedule to the  Act for any purposes (whether or not for  specified period).

(ii) The tax under section 5-C shall be  levied on taxable turnover in respect of  transfer of right to use any goods

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specified in the schedule notwithstanding  that such goods have already been  subjected to tax under any of the  provisions of the Act including section 5- C.

(iii)   In determining the taxable turnover  for the purposes of section 5-C the  amounts for which the goods whose right  to use in transferred has been purchased  from another registered dealer liable to  pay tax under sub-section 91 or sub- section (3) of Section 5, shall not be  deducted from the total turnover  determined.

(iv) Assessments, if any completed before  01.4.1996 adopting the basis of ’taxable  turnover’ for levy of tax stand  automatically validated by the validation  clause at section 7 of the Amendment  Act.

(v) Assessments if any completed by  allowing the deductions of the amounts  relatable to goods purchased from  another registered dealer liable to tax,  such assessments shall be referred to the  concerned Joint -Commissioner of  Commercial Taxes (Admn.),  immediately  for initiating action section 21 to revise  the assessment order in accordance with  these instructions.

(vi) Where any order passed under  Section 21 or appeal order under Section  20 is contrary to instructions issued in  this circular, such orders shall be  referred to the Commissioner immediately  for initiating action under section 22-A.

                                                       Sd/-                                                 (V. MADHU)  Commissioner of Commercial Taxes".

       A bare reading of the Circular dated 23.10.1999 shows  that it was a review of the earlier Circular and that the  Commissioner was of the view that the position of law  explained in the earlier Circular did not state the correct  position in law and, therefore, the revised instructions were  issued. There was a direction to the concerned Joint  Commissioner to immediately initiate action under Section 21  to revise the assessment orders. It was further stated that if  any order passed under Section 21 or appeal order under  Section 20 was contrary to the instructions issued, the same  were to be referred to him for initiating action under Section  22-A of the Act. This leaves no manner of doubt that the  subordinate officers had no option but to comply with the  directions given.  

       The notices issued under Section 12-A of the Act  initiating the assessment proceedings clearly show that they  were on the basis of the instructions issued.

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       As observed by this Court in Commissioner of Trade Tax,  U.P. and Anr. v. Kajaria Ceramics Ltd. (2005 (11) SCC 149)  there are various Circulars, some are binding and some are  not binding. Though strong reliance was placed by learned  counsel for the revenue on Addl. Commissioner (Legal) and  Anr. v. Jyoti Traders and Anr. (1999 (2) SCC 77) a close  reading of the decision shows that it does not support the  stand of the revenue and on the contrary support the stand of  the appellants.  

       Particular reference may be made to paragraphs 22 and  25 which read as follows:

"22. In Ahmedabad Manufacturing & Calico Printing  Co. Ltd. v. S.G. Mehta, ITO (AIR 1963 SC 1436) in  its assessment to income tax for the year 1952-53,  the appellant, a company had been granted under  the provisions of the finance Act, 1952, a rebate on  a portion of its profits of the previous year, that is,  1951 which it had not distributed as dividends to  its shareholders. In the next assessment year 1953- 54, the appellant used a part of the aforesaid  undistributed profits for declaring dividends. As the  law then stood, nothing could be done by the  Revenue Authorities to withdraw the rebate earlier  granted on the ground of the profits being utilized in  declaring dividends in a later year. From 1.4.1956,  however, there was a change in the law as sub- section (10) of section 35 of the Income Tax Act,  1922 was brought into force then. By an order made  on 27-3-1958, under the sub-section, the aforesaid  rebate was withdrawn and the appellant was called  upon to refund it. The appellant then applied to the  High Court at Bombay for a writ to quash the order  of 27-3-1958 on the ground that sub-section (10)  was not applicable to the facts of this case. That  application was dismissed by the High Court. The  appeal in the Supreme Court was against this  decision of the High Court at Bombay dismissing  the application. Now sub-section (10) of Section 35  of the Income Tax Act was enacted by the Finance  Act of 1956. That sub-section, insofar as it is  necessary to state for the purpose of this case,  provided that where in any of the Assessment Years  1948-49 to 1955-56, a rebate of income tax was  allowed to a company under the Finance Act  prevailing in that year on a part of its total income

"and subsequently the amount on which  the rebate of income tax was allowed as  aforesaid is availed of by the company,  wholly or partly, for declaring dividends  in any year ... the Income Tax Officer  shall re-compute the tax payable by the  company by reducing the rebate  originally allowed".

The sub-section in substance permits a rebate duly  allowed in any year before it came into force to be  withdrawn if "subsequently" the amount on which  the rebate was allowed "is availed of’" for declaring  dividends in any year. The appellant contended that  the sub-section did not apply unless the amount on  which the rebate was granted was availed of for  declaring dividends after the sub-section had come

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into force, that is, after 1-4-1956 and, therefore, it  did not apply to the present case. It was said that if  it were not so, the sub-section would be given a  retrospective operation and the rule was that it was  to be presumed that a statute dealing with  substantive rights was not to have operation. This  Court, per majority (3:2), held that sub-section (10)  of Section 35 was intended to have a retrospective  operation and was applicable to the present case.  Sarkar, J. who was in majority, in his concurring  judgment, observed as under:

"There is no dispute that by sub-section  (10) the legislature intended to penalise a  case where subsequent to its enactment,  the amount on which rebate had been  granted was utilised in declaration of  dividends. Now is there any reason to  think that the legislature did not want to  impose the penalty also on those who had  earlier utilised the amount in declaration  of dividends? There was no special merit  in these    latter cases. And I also think  that they formed the majority of the  cases. The grant of rebate having been  stopped after March 31, 1956, there was  no occasion to provide for cases of such  grant thereafter. All these circumstances  lead me to the view that the intention of  the legislature was to penalise the cases  of utilisation of amounts on which rebate  had been granted in payment of  dividends which had happened before the  sub-section came into force. The remedy  which the sub-section provided would  largely fail in any other view. The general  scope and purview of the sub-section and  a consideration of the evil which it was  intended to remedy lead me to the  opinion that the intention of the  legislature clearly was that the sub- section should apply to the facts that we  have in this case".  

25. The two decisions in the cases of Ahmedabad  Manufacturing & Calico Printing Co. Ltd. and  Biswanath Jhunjhunwalla are more closer to the  issue involved in the present case before us. They  laid down that it is the language of the provision  that matters and when the meaning is clear, it has  to be given full effect. In both these cases, this  Court held that the proviso which amended the  existing provision gave it retrospectivity. When the  provision of law is explicit, it has to operate fully  and there could not be any limits to its operation.  This Court in Biswanath Jhunjhunwalla case said  that if the language expressly so states or clearly  implies, retrospectivity must be given to the  provision. Under Section 34 of the Income Tax Act,  1922, it is the service of the notice which is the sine  qua non, an indispensable requisite, for the  initiation of assessment or reassessment  proceedings where income had escaped assessment.  That is not so in the present case. Under sub- section (1) of Section 21 of the Act before its

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amendment, the assessing authority may, after  issuing notice to the dealer and making such  inquiry as it may consider necessary, assess or  reassess the dealer according to law. Sub-section (2)  provided that except as otherwise provided in this  section, no order for any assessment year shall be  made after the expiry of 4 years from the end of  such year. However, after the amendment, a proviso  was added to sub-section (2) under which the  Commissioner of Sales Tax authorises the assessing  authority to make assessment or reassessment  before the expiration of 8 years from the end of such  year notwithstanding that such assessment or  reassessment may involve a change of opinion. The  proviso came into force w.e.f. 19-2-1991. We do not  think that sub-section (2) and the proviso added to  it leave anyone in doubt that as on the date when  the proviso came into force, the Commissioner of  Sales Tax could authorise making of assessment or  reassessment before the expiration of 8 years from  the end of that particular assessment year. It is  immaterial if a period for assessment or  reassessment under sub-section (2) of Section 21  before the addition of the said proviso had expired.  Here, it is the completion of assessment or  reassessment under Section 21 which is to be done  before the expiration of 8 years of that particular  assessment year. Read as it is, these provisions  would mean that the assessment for the year 1985- 86 could be reopened up to 31-3-1994.  Authorisation by the Commissioner of Sales Tax  and completion of assessment or reassessment  under sub-section (1) of Section 21 have to be  completed within 8 years of the particular  assessment year. Notice to the assessee follows the  authorisation by the Commissioner of Sales Tax, its  service on the assessee is not a condition precedent  to reopen the assessment. It is not disputed that a  fiscal statute can have retrospective operation. If we  accept the interpretation given by the respondents,  the proviso added to sub section (2) of Section 21 of  the Act becomes redundant. Commencement of the  Act can be different than the operation of the Act  though sometimes, both may be the same. The  proviso now added to sub-section (2) of Section 21  of the Act does not put any embargo on the  Commissioner of Sales Tax not to reopen the  assessment if the period, as prescribed earlier, had  expired  before the proviso came into operation. One  has to see the language of the provision. If it is  clear, it has to be given its full effect. To reassure  oneself, one may go into the intention of the  legislature in enacting such provision. The date of  commencement of the proviso to Section 21(2) of the  Act does not control its retrospective operation.  Earlier the assessment/reassessment could have  been completed within four years of that particular  assessment year  and now by the amendment  adding the proviso to Section 21 (2) of the Act it is  eight years. The only safeguard being that it is after  the satisfaction of the Commissioner of Sales Tax.  The proviso is operative from 19-2-1991 and a bare  reading of the proviso shows that the operation of  this proviso relates and encompasses back to the  previous eight assessment years. We need not refer

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to the provisions of the Income Tax Act to interpret  the proviso to Section 21(2) the language of which is  clear and unambiguous and so is the intention of  the legislature. We are, thus, of the view that the  High Court was not right in quashing the sanction  given by the Commissioner of Sales Tax and notices  issued by the assessing authority in pursuance  thereof."

       The issues can be looked at from a different angle.  Undisputedly, the 1996 Circular was binding on the revenue  authorities as is spelt out in the case of 12.4.1996 and  23.10.1999 Circulars. The assessments were completed on the  basis of 12th April, 1996 Circular.  Merely because the  Commissioner changes his view/opinion and according to him  it was review of the earlier decision that cannot have any effect  on any assessment which has been completed on the basis of  the 1996 Circular.  

       That being so, the question of re-opening the assessment  by mere change of opinion is entirely impermissible.   

Though these aspects need not be taken note of in view of  the conclusion that the proviso was clarificatory in nature and  operated with effect from the date Section 5-C was amended  i.e. 1.4.1986 yet this is an additional factor to set aside the  High Court’s judgment.  

       It is stated by a long line of decisions that reopening of  assessment is not permissible by mere change of the opinion  in the assessing officer.  Here it has not been disputed that the  Circular dated 23.10.1999 was on account of change of  opinion of the Commissioner that too while reviewing the  earlier Circular. It could not be brought to our notice as to  which provision permitted the review.  

       Learned counsel for the State submitted that the power is  inherent because the authority can correct his own mistaken  impression about the interpretation. Prima facie, the plea is  without substance and can not be accepted. That question is  of academic interest in view of what has been stated above.  The judgments of the learned Single Judge as affirmed by the  Division Bench are indefensible, need to be set aside which we  direct. The appeals are allowed. Costs made easy.