IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2765  OF 2009 (Arising out of S.L.P.(C) No.1471/2008)

M/s. Varkisons Engineers ...Appellant(s)

Versus

State of Kerala & Anr. ...Respondent(s)

O R D E R

Leave granted.

Appellant-M/s.  Varkisons  Engineers  is  a  partnership  firm  having  its  

crushing unit at Kadiyiruppu, Kolenchery, Ernakulam District.  It is a registered  

dealer under the Kerala General Sales Tax Act, 1963 (for short, the KGST Act) as  

well as the Central Sales Tax Act, 1956.   

In lieu of payment of tax under Section 5(1) of the KGST Act for the  

Assessment Year 2001-2002, appellant opted to pay turnover tax under Section 7  

which provides for payment of tax at the compounded rate.  In short, the appellant  

opted for an alternate method of taxation provided for by Section 7 of the KGST  

Act.   

To complete chronology of events, it may be stated, that the appellant had  

applied for permission for payment of tax under Section 7 read with Rule 30 of the  

Kerala General Sales Tax Rules.  That application was made on 9th April, 2001 for  

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the Financial Year commencing from 1.4.2001 to 31.3.2002.  Vide Order dated 9th  

April, 2001, the assessing authority granted permission to the appellant to pay tax  

under  Section  7.   That  permission  was  granted  for  the  full  Financial  Year  

commending from 1.4.2001 to 31.3.2002. The demand for payment of tax under  

Section 7 read with Rule 30 was accordingly quantified.  At this stage, it also may  

be noted that under the scheme of Section 7 read with Rule 30, once the dealer opts  

for  the  alternate  method of  taxation,  the  dealer  has  to  pay the  tax in monthly  

instalments.  In short, in the present case, the entire exercise stood concluded on 9th  

April, 2001.  On 9th January, 2003, notice under Section 43 of the KGST Act came  

to be issued by the S.T.O., inter alia, seeking to rectify the permission/order dated  

9th April, 2001 and seeking enhanced rate per machine with effect from 23rd July,  

2001 by the Finance Act, 2001 (Act 7 of 2001).  It may be noted that by Finance  

Act,  2001, the rate per machine stood enhanced from Rs.30,000/-  to Rs.90,000/-  

from 23rd July, 2001 and not from 1st April, 2001 which, as stated above, was the  

first date of the Assessment Year 2001-2002.  This notice under Section 43 came to  

be challenged by the appellant herein by filing Original Petition No.1501/2003.

When the matter came for hearing before the learned Single Judge, an  

order of reference was made as the point involved was of public importance.  The  

purpose  of  the  reference  made  by  the  learned  Single  Judge  was  whether  the  

amended provisions of Kerala Finance Act, 2001, which came into effect from 23rd  

July,  2001,  was applicable  for  the  Assessment Year  2001-2002 as  there  was no  

provision under the Act for making the assessment of the compounded tax under  

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Section 7(1)(b), either for part of the year or the fraction of the year.   

This reference was disposed of by the Division Bench by a very cryptic  

reasoning, which is reproduced hereinbelow:

“Merely because there is no provision in the amendment  brought  in for  making an assessment of  compounded tax coming  under  this  clause  for  fraction  or  part  of  the  year,  the  petitioner  cannot claim that it is entitled to pay tax at the rates applicable on  the beginning of the assessment year in question, i.e. 1.4.2001, nor  can it be said that the amendment would be operative from the next  assessment year only.  A retrospective law in the legal sense, is the  one  which  takes  away  or  impairs  vested  rights  acquired  under  existing laws, or creates a new obligation and imposes a new duty or  attaches a new disability, in respect of transactions or considerations  already passed.  Accordingly, we hold that the amendment made in  clause (b) of sub-section (1) of Section 7 of the Kerala General Sales  Tax is applicable for the assessment year 2001-2002.”

The main argument of the dealer before us was that the alternate method  

of  taxation  is  very  similar  to  the  taxation  under  the  Income  Tax  Act.   The  

argument of the dealer was that once the method of taxation proceeds on the basis  

that unit of assessment was the full assessment year commencing from 1st April,  

then,  the law prevailent on the first  day of  the assessment year should prevail.  

That,  there  cannot  be  bifurcation  of  the  assessment  year,  particularly  in  the  

absence  of  the  amendment  to  the  machinery  provision  in  the  Act.   That,  the  

Division Bench was required to consider in that context whether in the absence of  

machinery of computation, was it open to levy the tax at a different rate in the  

middle of the assessment year, that is, from 23rd July, 2001.   

On the other hand, Mr.Iyer, learned senior counsel, submitted that it is  

always open to the Legislature to amend the law retrospectively.  Mr.Iyer further  

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contended that the word 'assessment' is an ambiguous term.  Under certain Acts,  

the word 'assessment'  could  cover all  the  three  stages,  viz.,  accrual  of  liability,  

computation of liability and its recovery whereas in certain other enactments, mere  

payment of fixed quantum of tax could also come within the meaning of the word  

'assessment'.  According to the learned senior counsel, although the word used is  

'assessment' in the 1963 Act, strictly it covers recovery of tax at the rate fixed by  

the Legislature and,  therefore, it is always open to the Legislature to introduce  

vide the Finance Act in the midst of the assessment year the revised rate of tax in  

Section 7(1)(b)(i).

We have broadly indicated the arguments advanced in this case on both  

sides.  Our attention has also been invited to some of the important judgments of  

this Court in the case of State of Kerala & Anr. Vs. Builders Association of India &  

Ors. ([1997] 2 SCC 183), M/s. Mycon Construction Ltd. Vs. State of Karnataka &  

Anr. (AIR 2002 SC 2089), Mathuram Agrawal Vs. State of M.P. ([1999] 8 SCC 667),   

The Karimtharuvi Tea Estate Ltd. Vs. The State of Kerala, (AIR 1966 SC 1385) and   

State of Kerala Vs. Alex George & Anr. ([2005] 1 SCC 209).  We may usefully quote  

para 8 to  para 14 of  the judgment in the case  of  Karimtharuvi  Tea Estate  Ltd.  

(supra), which read as under:

“(8) Now, it is well-settled that the Income-tax Act, as it  stands amended on the first day of April of any financial year must apply  to the assessments of that year.  Any amendments in the Act which come  into force after the first day of April of a financial year, would not apply  to the assessment for that year, even if the assessment is actually made  after the amendments come into force.

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(9) In Scindia Steam Navigation Co. Ltd. v. Commr. of Income-tax,  (1954) 26 ITR 686: (AIR 1955 Bom 230), a Division Bench of the Bombay  High Court, consisting of Chagla, C.J., and Tendolkar, J., considered the  question as to the effect of an amendment which came into force after the  commencement of financial year.  The facts in that case were these.  The  assessee's ship was lost as a result of enemy action.  The Government  paid  the  assessee  in  1944  a  certain  amount  as  compensation  which  exceeded the original cost of the ship.  The Income-tax Officer included  the difference between the original cost and the written down value of the  ship in the total income of the assessee for the assessment year 1946-47.  The Tribunal upheld that decision and referred the question, whether the  sum representing the difference between the original cost and the written  down  value  was  properly  included  in  the  assessee's  total  income  computed for the assessment year 1946-47.  It was argued that the fourth  proviso to S.10(2)(vii) of the Income-tax Act (inserted by the Amendment  Act of 1946 with effect from May 4, 1946) under which the inclusion of  the amount was justified by the department, had no application to the  case.

(10) The learned Judges held that as it was the Finance Act of 1946  that imposed the tax for the assessment year 1946-47, the total income  had to be computed in accordance with the provisions of the Income-tax  Act  as  on  April  1,  1946;  that  as  the  amendments  made  by  the  Amendment  Act  of  1946  with  effect  from  May  4,  1946  were  not  retrospective, they could not be taken into consideration merely because  the assessee was assessed after that date; and that the assessee was not  liable to pay tax on the sum because the fourth proviso to S.10(2)(vii) of  the Income-tax Act under which it was sought to be taxed was not in  force in respect of the assessment year 1946-47.

(11) This  Court  affirmed this  decision in  Commr. of  Income-tax,  Bombay v. Scindia Steam Navigation Co.Ltd., (1962) 1 SCR 788: (1961)  42 ITR 589: (AIR 1961 SC 1633), where it was stated at p.816 (of SCR):  (at p.1646 of AIR), as follows:

“On the merits, the appellant had very little to say.  He  sought  to  contend that the proviso though it  came into force on  May 5, 1946, was really intended to operate from April 1, 1946, and  he  referred  us  to  certain  other  enactments  as  supporting  that  inference.  But we are construing the proviso.  In terms, it is not  retrospective, and we cannot import into its construction matters  which are ad extra legis, and thereby alter its true effect.”

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In Commr. of Sales Tax, Uttar Pradesh v. Modi Sugar Mills Ltd., (1961)  2 SCR 189: (AIR 1961 SC 1047), this Court held by a Majority at p. 199  (of SCR): (at p. 1051 of AIR), as follows:

“A legal fiction must be limited to the purposes for which it has  been created and cannot be extended beyond its  legitimate field.  The turnover of the previous year is fictionally made the turnover  of the year of assessment; it is not the actual or the real turnover of  the year of assessment.  By the imposition of a different tariff in the  course of the year, the incidence of tax liability may competently be  altered by the Legislature, but for effectuating that alteration, the  Legislature must devise machinery for enforcing it against the tax  payer and if the Legislature has failed to do so, the Court cannot  resort to a fiction which is not prescribed by the Legislature and  seek to effectuate that alteration by devising machinery not found  in the statute.”

(12) In the instant case, there is no escape from the conclusion that  the  Surcharge  Act  not  being  retrospective  by  express  intendment,  or  necessary implication, it cannot be made applicable from April 1, 1957,  as the Act came into force from September 1, of that year.

(13) The High Court  has,  however, relied upon a decision of  this  Court in I.-T. Commr. vs. I.S. Lines, AIR 1953 SC 439, where it was held  as follows:

“It will be observed that we are here concerned with two  datum lines: (1) the 1st of April, 1940, when the Act came into force,  and (2) the 1st of April  1939, which is the date mentioned in the  amended proviso.   The first  question to be answered is  whether  these  dates  are  to  apply  to  the  accounting  year  or  the  year  of  assessment.  They must be held to apply to the assessment year,  because in income-tax matters the law to be applied is the law in  force  in  the  assessment  year  unless  otherwise  stated  or  implied.  The first datum line, therefore, affected only the assessment year of  1940-41, because the amendment did not come into force till the 1st  of  April  1040.   That  means  that  the  old  law  applied  to  every  assessment year up to and including the assessment year 1939-40.”

This decision is authority for the proposition that though the subject of  the charge is the income of the previous year, the law to be applied is that  in force in the assessment year, unless otherwise stated or implied.  The  facts of the said decision are different and distinguishable and the High  

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Court was clearly in error in applying that decision to the facts of the  present case.

(14) The  Surcharge  Act  having  come into  force  on  September 1,  1957, and the said Act not being retrospective in operation, it could not  be  regarded  as  law  in  force  at  the  commencement  of  the  year  of  assessment 1957-58.  Since the Surcharge Act was not the law in force on  April 1, 1957, no surcharge could be levied under the said Act against the  appellant in the assessment year 1957-58.”

It may be noted that the above-quoted paragraphs are not only confined to Income  

Tax Act, they also deal with legal fictions prevalent under Sales Tax Laws.   

On reading the above quoted observations in the judgment of this Court,  

the point which required the decision upfront was whether imposition of a different  

tariff in the middle of the assessment year could be given effect to in the absence of  

a proper machinery for computing the tax liability.  In this connection, the Court  

was required to consider the scheme of the entire Act particularly the difference  

between Sections 5 and 7 of the 1963 Act.  It may be stated that Section 5 which  

deals with normal assessment refers to tax on the turnover whereas Section 7(7)  

refers to payment of tax on the amount of contract.  The Court was also required to  

consider whether Section 43 could be invoked by Department in cases following  

under alternate mode of taxation u/s 7 of 1963 Act.

In  the  circumstances,  we  set  aside  the  impugned  judgment  dated  4th  

October,  2007 and  we  restore  Original  Petition  No.1501/2003  to  the  file  of  the  

Kerala  High  Court  for  de  novo consideration  in  accordance  with  law  and  in  

accordance with the directions given hereinabove.   

We make it  clear that any observations made hereinabove are only in  

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support of the order passed today remitting the case to the Division Bench.  We  

express no opinion on the merits of the case.  All contentions are expressly kept  

open.

Civil Appeal stands disposed of accordingly.

                                       ..................J.               (S.H. KAPADIA)  

                                ..................J.

             (HARJIT SINGH BEDI) New Delhi, April 23, 2009.

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