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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.