SC upholds states’ power to levy additional sales tax, says case has become academic

A seven-judge Constitution bench headed by the CJI unanimously held that the legal question referred to it nearly 27 years ago no longer required adjudication.

The Supreme Court on Wednesday held that a 1974 Constitution Bench ruling upholding states' power to impose additional sales tax or surcharge calculated as a percentage of the existing sales tax continues to hold the field, saying a reference on the issue had become academic.

A seven-judge Constitution bench headed by Chief Justice of India Surya Kant unanimously held that the legal question referred to it nearly 27 years ago no longer required adjudication, as the statutory provisions under challenge had since been replaced or amended and the Goods and Services Tax law had come into force.

"The question referred to is of no practical significance and now academic. Consequently, the question referred to does not survive for adjudication by a seven-judge Bench, and the reference has to be answered accordingly," the CJI, who wrote the judgment on behalf of himself and five other judges, said.

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The bench also comprised Justices K V Viswanathan, S V N Bhatti, Joymalya Bagchi, N V Anjaria, Arun Palli and V Mohana.

Justice Viswanathan wrote a separate concurring verdict.

While declining to undertake a fresh adjudication on the reference, the court clarified that the five-judge Constitution Bench ruling in S Kodar vs State of Kerala continued to hold the field.

The earlier judgment had upheld additional sales tax, rejecting the argument that such a levy amounted to a tax on the income of dealers.

"We have clarified that the case clearly held that an additional tax or surcharge computed as a percentage of the sales tax payable is an enhancement of the rate of sales tax and a tax on the sale or purchase of goods within Entry 54 of List II, as it then stood. That decision continues to hold the field," the CJI said.

The court further held that the question of the legislative competence of state legislatures to impose the surcharge would be governed by the law laid down in S Kodar.

The detailed judgment is awaited.

The reference arose from a challenge to Section 5A of the Orissa Sales Tax Act, 1947, which provided for additional tax at the rate of 10 per cent on dealers with an annual turnover between ₹10 lakh and ₹1 crore, and 15 per cent on dealers whose turnover exceeded ₹1 crore.

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The appellants questioned whether the state legislature was competent to impose such a levy under Entry 54 of List II of the Seventh Schedule to the Constitution, which empowered states to tax the sale or purchase of goods, or whether it effectively amounted to a tax on income, a subject falling within Parliament's domain under Entry 82 of List I.

The controversy stemmed from differing interpretations in earlier Supreme Court decisions. In S Kodar vs State of Kerala, a five-judge bench had upheld additional sales tax, ruling that a levy calculated with reference to the sales tax payable was an enhancement of the sales tax rate and not a tax on the dealer's income.

During the hearing on September 22, Solicitor General Tushar Mehta submitted that the controversy had largely become academic following the introduction of the GST regime in 2017, with relatively few disputes remaining pending.