Supreme Court Upholds Purchase Tax on Goods Exempted from Sales Tax: C.T. Kochouseph vs. State of Kerala (2025)

Introduction

Date of the Judgment: May 09, 2025

Citation: 2025 INSC 661

Judges: Sanjiv Khanna, CJI, Sanjay Kumar, J., R. Mahadevan, J.

When is a tax exemption not really an exemption? This question arises when goods that are exempt from sales tax are then subjected to a purchase tax. The Supreme Court of India recently addressed this issue in a batch of cases concerning the Kerala and Tamil Nadu General Sales Tax Acts. The core issue was whether a purchase tax could be levied on goods that were exempt from sales tax, potentially impacting businesses that rely on these exemptions. The bench comprised Chief Justice Sanjiv Khanna, Justice Sanjay Kumar, and Justice R. Mahadevan, delivering a unanimous judgment.

Case Background

The appeals arose from cases involving Section 5A of the Kerala General Sales Tax Act, 1963, and Section 7A of the Tamil Nadu General Sales Tax Act, 1959. These sections concern the levy of purchase tax. The central question was whether the purchase of goods from dealers exempt from sales tax under notifications issued under these Acts is a purchase “which is liable to tax” under the meaning of the specified sections.

Timeline:

Legal Framework

The Supreme Court examined several key sections of both the Tamil Nadu General Sales Tax Act, 1959, and the Kerala General Sales Tax Act, 1963.

• Section 3, Tamil Nadu Act: This is the charging provision that imposes tax liability on dealers whose total turnover exceeds a specified limit. It states:
  
  “Every dealer (other than the dealer, casual trader or agent of a non – resident dealer) whose total turnover for a year [exceeds three lakhs of rupees] and every casual trader or agent of a non -resident dealer, whatever be his turnover for the year, shall pay a tax for each year in accordance with the provisions of this act.”
• Section 2(r), Tamil Nadu Act: Defines ‘turnover’ as the aggregate amount for which goods are bought or sold.
• Section 8, Tamil Nadu Act: Provides exemptions from tax for goods specified in the Third Schedule.
• Section 17, Tamil Nadu Act: Empowers the State Government to issue notifications for exemptions or reductions in tax rates.
• Section 7A, Tamil Nadu Act: Introduced by Act 1 of 1959, this section imposes a purchase tax under specific circumstances. It applies when a dealer purchases goods that are liable to tax but no tax is payable under Sections 3, 4, or 5.
• Section 5, Kerala Act: The charging section in the Kerala Act, similar to Section 3 of the Tamil Nadu Act.
• Section 5A, Kerala Act: This section is pari materia (similar in subject matter) to Section 7A of the Tamil Nadu Act, providing for the levy of purchase tax under specified conditions.

Arguments

The appellant-assessees (C.T. Kochouseph) argued that Section 7A of the Tamil Nadu Act and Section 5A of the Kerala Act should not apply when tax is exempt at the hands of the seller. They contended that if sales of vegetable oil were exempt up to a particular turnover under Section 17 of the Tamil Nadu Act, then purchase tax should also be exempt.

The respondents (State of Kerala) argued that the exemption granted under Section 17 of the Tamil Nadu Act was only for sales tax and did not extend to purchase tax. They maintained that Sections 5A and 7A impose purchase tax specifically when the seller is exempt from paying sales tax.

Issues Framed by the Supreme Court

1. Whether the purchase of goods by the appellants from dealers who were exempted from payment of tax by virtue of notifications or exemptions issued under the Kerala Act or the Tamil Nadu Act, is a purchase “which is liable to tax” within the meaning of Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act?
2. Whether the appellant-assessee who had purchased goods, that were exempt from payment of sales tax or from the dealers who were exempt from payment of sales tax, are liable to pay purchase tax under Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act?
3. Whether the purchase tax, as imposed by Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act, is a tax in the nature of manufacture or consignment tax or an inter-state levy, and therefore ultra vires the Constitution and beyond the legislative powers of the state legislature?

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The Supreme Court relied on several key cases and legal provisions to reach its decision. These authorities were crucial in interpreting the scope and applicability of purchase tax under the Kerala and Tamil Nadu General Sales Tax Acts.

• State of Tamil Nadu v. M.K.Kandaswami and Others, (1975) 4 SCC 745 (Supreme Court of India): Interpreted Section 7A of the Madras General Sales Tax Act, 1959, outlining the conditions for levy of purchase tax.
• Malabar Fruit Products Company, Bharananganam Kottayam and Others v. Sales Tax Officer, Palai and Others, (1972) 30 STC 537 (Ker) (Kerala High Court): Upheld the constitutional validity of Section 5A of the Kerala Act.
• Yusuf Shabeer and Others v. State of Kerala and Others, (1973) 32 STC 359 (Ker) (Kerala High Court): Affirmed the decision in Malabar Fruit Products, further clarifying the scope of Section 5A.
• State of Kerala v. T.S.Govindarajulu Naidu, 1993 Supp 3 SCC 656 (Supreme Court of India): This case was noted but distinguished for misapplying the ratio in M.K. Kandaswami.
• Goodyear India Ltd. and Others v. State of Haryana and Another, (1990) 2 SCC 71 (Supreme Court of India): Examined provisions of the Haryana General Sales Tax Act, 1973, and the scope of Section 13-AA of the Bombay Sales Tax Act, 1959. The court’s interpretation was later disagreed with in Hotel Balaji.
• Hotel Balaji and Others v. State of A.P. and Others, 1993 Supp (4) SCC 536 (Supreme Court of India): Disagreed with the ratio in Goodyear, providing a detailed analysis of purchase tax levy.
• Mukerian Papers Ltd. v. State of Punjab, (1991) 2 SCC 580 (Supreme Court of India): Followed the ratio of Goodyear, interpreting Section 4B of the Punjab General Sales Tax Act, 1948.
• Devi Dass Gopal Krishan Pvt. Ltd. and Others v. State of Punjab and Others, (1994) Supp 2 SCC 59 (Supreme Court of India): Affirmed the reasoning in Hotel Balaji, holding that the decision in Goodyear did not lay down the correct law.
• Peekay Re-Rolling Mills (P) Ltd. v. Assistant Commissioner and Another, (2007) 4 SCC 30 (Supreme Court of India): This case was distinguished as it pertained to declared goods under Section 14 of the Central Sales Tax Act, 1956.
• Bhawani Cotton Mills Ltd. v. State of Punjab and Another, (1967) 20 STC 290 (Supreme Court of India): Examined the levy of purchase tax on declared goods, noting that tax should not be levied at more than one stage.
• Casio India Company Private Limited v. State of Haryana, (2016) 6 SCC 209 (Supreme Court of India): This case was distinguished as it dealt with the issue of payment of tax under the Central Act.

Judgment

How each authority was viewed by the Court:

• M.K. Kandaswami (supra): The Court agreed with the reasoning in M.K. Kandaswami [CITATION] distinguishing ‘taxability’/‘liability’ and ‘payability’ as two different concepts in tax.
• Hotel Balaji (supra): The constitutional validity has been explained in Hotel Balaji (supra) [CITATION]
• Devi Dass (supra): The constitutional validity has been explained in Devi Dass (supra) [CITATION]

What weighed in the mind of the Court?:

The Supreme Court’s decision in C.T. Kochouseph vs. State of Kerala was influenced by several key considerations. The Court emphasized the importance of maintaining the State’s revenue, especially in situations where sales tax exemptions could lead to revenue loss. It also focused on the legislative intent behind Sections 5A and 7A of the Kerala and Tamil Nadu Acts, which were designed to prevent tax evasion and plug revenue leakages. The Court prioritized a construction of the law that preserves its workability and efficacy, aligning with established canons of interpretation.

Fact: Percentage of the consideration of the factual aspects of the case.

Law: Percentage of legal considerations.

Logical Reasoning

ISSUE 1: Is purchase from exempted dealers “liable to tax”?

⬇

Dealer purchases goods from an exempt seller ➔ No sales tax paid

⬇

Sections 5A/7A impose purchase tax when seller is exempt

⬇

Purchase is “liable to tax” under Sections 5A/7A

ISSUE 2: Is appellant-assessee liable to pay purchase tax?

⬇

Goods purchased from exempt dealer ➔ No sales tax paid

⬇

Sections 5A/7A conditions met (e.g., goods used in manufacture)

⬇

Appellant-assessee is liable to pay purchase tax

ISSUE 3: Is purchase tax a manufacture, consignment, or inter-state levy?

⬇

Purchase tax levied on purchase, not manufacture/consignment

⬇

Levy is within State’s legislative competence

⬇

Purchase tax is not ultra vires or beyond state legislature’s powers

Key Takeaways

• Purchase tax can be levied even if the seller is exempt from sales tax.
• Exemptions from sales tax do not automatically imply exemptions from purchase tax.
• The State Legislature has the power to decide whether or not to levy purchase tax.

Development of Law

The ratio decidendi of the case is that Sections 5A and 7A of the Kerala and Tamil Nadu Acts impose purchase tax specifically when the seller is granted exemption from payment of sales tax. This clarifies that exemption from sales tax at the time of sale is a pre-condition for attracting Sections 5A and 7A respectively.

Conclusion

The Supreme Court upheld the constitutional validity of Section 5A of the Kerala General Sales Tax Act and Section 7A of the Tamil Nadu General Sales Tax Act, ruling that purchase tax can be levied on goods even if the seller is exempt from sales tax. The Court dismissed the appeals, reinforcing the State’s power to levy purchase tax to prevent revenue loss.