LEGAL ISSUE: Whether a specific entry in a tax rate schedule can override a general exemption for the same goods.

CASE TYPE: Tax Law – Sales Tax

Case Name: M/S Shanti Fragrances vs. Union of India and Ors.

Judgment Date: 21 September 2017

Introduction

Date of the Judgment: 21 September 2017

Citation: Not available in the source.

Judges: R.F. Nariman, J. and Sanjay Kishan Kaul, J.

Can a specific tax entry for “Pan Masala and Gutka” override a general tax exemption for “tobacco”? This is the core legal question the Supreme Court of India grappled with in the case of M/S Shanti Fragrances vs. Union of India. The court was faced with conflicting judgments on whether a later tax notification could effectively withdraw an existing exemption. This case involves the interpretation of tax laws in Delhi, Uttar Pradesh, and Tamil Nadu, specifically concerning the taxability of pan masala and gutka containing tobacco. The bench of Justices R.F. Nariman and Sanjay Kishan Kaul, finding a conflict in previous judgments of the Supreme Court, referred the matter to a larger bench for a conclusive decision.

Case Background

The case involves multiple appeals concerning the taxability of pan masala and gutka containing tobacco under the Delhi Sales Tax Act, 1975, the U.P. Trade Tax Act, 1948, and the Tamil Nadu General Sales Tax Act, 1959. The central issue is whether the specific inclusion of “Pan Masala and Gutka” in the tax schedule overrides the general exemption for “tobacco” under these state laws.

Timeline

Date Event
1975 Delhi Sales Tax Act, 1975 enacted, including a tax exemption for “tobacco” as defined under the Central Excises and Salt Act, 1944.
1975 Central Excises and Salt Act, 1944 defined “tobacco” as any form of tobacco, whether cured or uncured, and whether manufactured or not.
February 1986 Central Excise (Tariff) Act, 1985 introduced, specifying Pan Masala containing tobacco under Entry 2404.49.
31 March 2000 Notification issued in Delhi, introducing “Pan Masala and Gutka” as Item 46 in the First Schedule, effective from 1 April 2000.
5 November 2004 Delhi High Court ruled that the 2000 notification made pan masala and gutka taxable, effectively overriding the exemption for “tobacco”.
21 September 2017 Supreme Court of India refers the conflict to a larger bench.

Course of Proceedings

The Delhi High Court, in its judgment dated 05.11.2004, held that the notification dated 31.03.2000, which introduced “Pan Masala and Gutka” as a taxable item, effectively withdrew the exemption for “tobacco.” The High Court relied on the principle that a specific entry overrides a general entry and that a subsequent notification under the rate of tax section can withdraw an earlier exemption. Similar judgments were passed by the Allahabad and Madras High Courts. The Madras High Court, however, focused on the legislative competence of the state to tax pan masala containing tobacco, despite the imposition of additional duty of excise.

Legal Framework

The core of the legal framework revolves around the interpretation of the following:

  • Section 3(1) of the Delhi Sales Tax Act, 1975: This section imposes a tax on all sales effected by a dealer after the commencement of the Act.

    “3. Incidence of Tax
    (1) Every dealer whose turnover during the year
    immediately preceding the commencement of this Act
    exceeds the taxable quantum and every dealer who at the
    commencement of this Act, is registered or is liable to pay
    tax under the Central Sales Tax Act, 1956 (74 of 1956)
    shall be liable to pay tax under this Act on all sales
    effected by him on or after such commencement.”
  • Section 7 of the Delhi Sales Tax Act, 1975: This section deals with tax-free goods, specifying that no tax shall be payable on the sale of goods listed in the Third Schedule. It also empowers the Lieutenant Governor to amend the Third Schedule.

    “7. Tax free goods
    (1) No tax shall be payable under this Act on the sale of
    goods specified in the Third Schedule subject to the
    conditions and exceptions, if any, set out therein.
    (2) The Lieutenant Governor may by notification in the
    Official Gazette, add to, or omit from, or otherwise amend,
    the Third Schedule either retrospectively or prospectively,
    and thereupon the Third Schedule shall be deemed to be
    amended accordingly:
    PROVIDED that no such amendment shall be made
    retrospectively if it would have the effect of prejudicially
    affecting the interests of any dealer.”
  • Section 4 of the Delhi Sales Tax Act, 1975: This section specifies the rate of tax for various goods, including those listed in the First and Fourth Schedules. It also includes a residuary clause for goods not covered elsewhere.

    “4. Rate of tax
    (1) The tax payable by a dealer under this Act shall be
    levied –
    (a) in the case of taxable turnover in respect of
    the goods specified in the First Schedule, at the
    rate of twelve paise in the rupee;
    (b) in the case of taxable turnover in respect of
    the goods specified in Schedule II, at such rate
    not exceeding four paise in rupee as the Central
    Government may, from time to time, by
    notification in the official Gazette, determine;
    (c) in the case of taxable turnover in respect of
    any food or drink served for consumption in a
    hotel or restaurant or part thereof, with which a
    cabaret, floor show or similar entertainment is
    provided therein, at the rate of forty paise in the
    rupee;
    3[(cc) in the case of taxable turnover in respect of the
    goods specified in the Fourth Schedule, at the rate of
    twenty paise in the rupee;]
    [(ccc) [***]
    (d) in the case of taxable turnover of any other goods, at
    the rate of eight paise in the rupee:
    [PROVIDED that the Lieutenant Governor may,
    by notification in the Official Gazette, add to, or
    omit from, or otherwise amend, the First
    Schedule, the Second Schedule or the Fourth
    Schedule, either retrospectively or prospectively,
    and there upon the First Schedule or the Second
    Schedule or, as the case may be, the Fourth
    Schedule, shall be deemed to be amended
    accordingly:]
    PROVIDED FURTHER that no such amendment
    shall be made retrospectively if it would have the
    effect of prejudicially affecting the interests of any
    dealer:
    PROVIDED ALSO that in respect of any goods or
    class of goods if the Lieutenant Governor is of
    the opinion that it is expedient in the interest of
    the general public so to do, he may, by
    notification in the Official Gazette, direct that the
    tax in respect of taxable turnover of such goods
    or class of goods shall, subject to such
    conditions as may be specified, be levied at such
    modified rate not exceeding the rate applicable
    under this section, as may be specified in the
    notification.”
  • Third Schedule of the Delhi Sales Tax Act, 1975: Specifically, Entry 22, which exempts “Tobacco as defined under the Central Excises and Salt Act, 1944” from sales tax.

    “22. Tobacco as defined under the Central Excises and
    Salt Act, 1944 (1 of 1944).”
  • Central Excises and Salt Act, 1944: The definition of “tobacco” under this act, which includes any form of tobacco, whether cured or uncured, and whether manufactured or not.

    “4. TOBACCO –
    “Tobacco” means any form of
    tobacco whether cured or uncured
    and whether manufactured or not,
    and includes the leaf, stalks and
    stems of the tobacco plant, but
    does not include any part of a
    tobacco plant while still attached to
    the earth.”

Arguments

The primary arguments presented before the court revolved around the interpretation of the tax laws and the interplay between exemption and rate notifications.

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  • Appellant’s Argument:

    • The appellant argued that “tobacco” is generally exempt under the Third Schedule of the Delhi Sales Tax Act, 1975, and this exemption should apply to all forms of tobacco, including that used in pan masala and gutka.
    • The definition of tobacco under the Central Excises and Salt Act, 1944, is broad and encompasses all forms of tobacco, and the subsequent inclusion of “Pan Masala and Gutka” in the First Schedule does not override the exemption.
    • The appellant relied on the judgments in Kothari Products Ltd. vs. Government of A.P., (2000) 9 SCC 263 and State of Orissa vs. Radheshyam Gudakhu Factory, (1987) 68 STC 92, which held that a rate notification cannot override an exemption.
  • Respondent’s Argument:

    • The respondents contended that the specific entry of “Pan Masala and Gutka” in the First Schedule of the Delhi Sales Tax Act, 1975, through notification dated 31.03.2000, makes it a taxable item, irrespective of the general exemption for “tobacco.”
    • The respondents argued that when there are two entries, one general and one specific, the specific entry should prevail.
    • The respondents relied on the line of judgments in Commissioner, Sales Tax U.P. vs. M/s Agra Belting Works, Agra, (1987) 3 SCC 140, Sales Tax Officer, Section IX, Kanpur vs. Dealing Dairy Products and Another, 1994 Supp. (2) SCC 639, and State of Bihar and Others vs. Krishna Kumar Kabra and Another, (1998) 108 STC 1, which held that a subsequent rate notification can withdraw an existing exemption.

The innovativeness of the arguments lies in the conflict between the two lines of judgments of the Supreme Court on interpretation of tax statutes. One line of judgments held that an entry under a sales tax statute which only specifies rate cannot be used to eat into an exemption entry. The other line of judgments states the exact opposite, which is that the charging section, the rate of tax section, and the exemption section all form part of one scheme, and when a notification is issued under a rate of tax section, which is subsequent to a notification exempting certain goods, the intention of the legislature is that such exemption then gets withdrawn and makes the sale of such goods liable to tax.

Submissions of Parties

Main Submission Sub-Submissions (Appellant) Sub-Submissions (Respondent)
Taxability of Pan Masala and Gutka ✓ “Tobacco” is exempt under Third Schedule.
✓ Definition of “tobacco” is broad and includes pan masala and gutka.
✓ Rate notification cannot override exemption. 		✓ Specific entry for “Pan Masala and Gutka” makes it taxable.
✓ Specific entry overrides general entry.
✓ Subsequent rate notification withdraws exemption.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues but identified a conflict in the interpretation of tax laws and the doctrine of precedent. The core issues are:

  1. Whether a specific entry in a tax rate schedule can override a general exemption for the same goods.
  2. Which line of judgments of the Supreme Court should be followed – the line that says a rate notification cannot override an exemption (Kothari Products) or the line that says a rate notification can withdraw an exemption (Agra Belting Works).
  3. Whether a numerically superior bench can overrule a bench of lesser strength.
  4. How to discover the true ratio decidendi in a given case.

Treatment of the Issue by the Court

The Supreme Court did not decide the issues but referred them to a larger bench. The Court acknowledged the conflict between the two lines of judgments and the need for a conclusive decision.

Issue How the Court Dealt with It
Whether a specific entry in a tax rate schedule can override a general exemption for the same goods The Court acknowledged the conflict between the two lines of judgments and the need for a conclusive decision by a larger bench.
Which line of judgments of the Supreme Court should be followed – the line that says a rate notification cannot override an exemption (Kothari Products) or the line that says a rate notification can withdraw an exemption (Agra Belting Works). The Court recognized the direct conflict between the two lines of judgments and referred the matter to a larger bench to resolve this conflict.
Whether a numerically superior bench can overrule a bench of lesser strength. The Court raised the question of whether a numerically superior bench should always prevail over a bench of lesser strength, especially when the judgments are in conflict.
How to discover the true ratio decidendi in a given case. The Court discussed the complexities of discovering the true ratio decidendi, particularly when there are conflicting opinions within a judgment.
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Authorities

The Supreme Court considered the following authorities:

Authority Court How it was Considered Legal Point
Kothari Products Ltd. vs. Government of A.P., (2000) 9 SCC 263 Supreme Court of India Relied upon by the appellant A rate notification cannot override an exemption.
State of Orissa vs. Radheshyam Gudakhu Factory, (1987) 68 STC 92 Supreme Court of India Relied upon by the appellant A rate notification cannot override an exemption.
Commissioner, Sales Tax U.P. vs. M/s Agra Belting Works, Agra, (1987) 3 SCC 140 Supreme Court of India Relied upon by the respondent A subsequent rate notification can withdraw an existing exemption.
Sales Tax Officer, Section IX, Kanpur vs. Dealing Dairy Products and Another, 1994 Supp. (2) SCC 639 Supreme Court of India Relied upon by the respondent A subsequent rate notification can withdraw an existing exemption.
State of Bihar and Others vs. Krishna Kumar Kabra and Another, (1998) 108 STC 1 Supreme Court of India Relied upon by the respondent A subsequent rate notification can withdraw an existing exemption.
Reliance Trading Company vs. State of Kerala, (2000) 119 STC 321 (Ker.) Kerala High Court Referred to by the Delhi High Court, but overruled by the Supreme Court in Reliance Trading Company, Kerala vs. State of Kerala, (2011) 15 SCC 762 A specific entry overrides a general entry.
Reliance Trading Company, Kerala vs. State of Kerala, (2011) 15 SCC 762 Supreme Court of India Relied upon by the Court, overruled the Kerala High Court judgment There can be no confusion or mixing up between the incidence of tax and exemption of tax on the one hand and the rate of tax on the other.
Tata Sky Limited vs. State of Madhya Pradesh and Others, (2013) 4 SCC 656 Supreme Court of India Referred to by the Court The question of going to the measure of a tax would arise only if it is found that the charge of tax is attracted.
Commissioner of Income Tax (Central)-I, New Delhi vs. Vatika Township Private Limited, (2015) 1 SCC 1 Supreme Court of India Referred to by the Court The components which enter into the concept of taxability are well known and distinct.
Union of India vs. Raghubir Singh, 1989 (3) SCR 316 Supreme Court of India Referred to by the Court Judges of this Court do not sit in 2’s and 3’s for mere convenience, but that a Bench which is numerically superior will prevail over a Bench of lesser strength.
Ningappa Ramappa Kurbar and Another vs. Emperor, AIR 1941 Bombay 408 Bombay High Court Referred to by the Court Addressed the issue of whether a later Full Bench can overrule an earlier Full Bench merely because the later bench consists of more Judges than the earlier.
Supreme Court Advocates-on-Record Association and Another vs. Union of India, (2016) 5 SCC 1 Supreme Court of India Referred to by the Court Discussed the anomaly of a smaller bench overruling a larger bench and the weight of numbers in judicial decisions.
Harper and Others vs. National Coal Board [1974] 2 All ER 441 Court of Appeal (UK) Referred to by the Court Discussed the discovery of the true ratio decidendi in a given case, particularly when there are conflicting opinions within a judgment.
Central Asbestos Co Ltd vs. Dodd [1972] 2 All ER 1135 House of Lords (UK) Referred to by the Court in Harper and Others vs. National Coal Board [1974] 2 All ER 441 Case used to illustrate the difficulty in discovering the true ratio decidendi.

Judgment

The Supreme Court did not deliver a final judgment on the merits of the case. Instead, it referred the matter to a larger bench due to the conflicting views in previous judgments and the complexities of the doctrine of precedent.

The Court highlighted that there is a direct conflict between the Kothari Products line of judgments and the Agra Belting Works line of judgments.

Submission by Parties How the Court Treated the Submission
Appellant’s submission that “tobacco” is generally exempt and this exemption should apply to all forms of tobacco, including that used in pan masala and gutka. The Court acknowledged the appellant’s argument and the line of judgments supporting it, but noted the conflict with other judgments.
Appellant’s submission that the definition of tobacco under the Central Excises and Salt Act, 1944, is broad and encompasses all forms of tobacco. The Court recognized the broad definition of tobacco but did not make a final determination on its applicability to the case.
Appellant’s reliance on the judgments in Kothari Products Ltd. vs. Government of A.P., (2000) 9 SCC 263 and State of Orissa vs. Radheshyam Gudakhu Factory, (1987) 68 STC 92, which held that a rate notification cannot override an exemption. The Court acknowledged the appellant’s reliance on these judgments and the conflict with other judgments.
Respondent’s contention that the specific entry of “Pan Masala and Gutka” in the First Schedule makes it a taxable item, irrespective of the general exemption for “tobacco.” The Court acknowledged the respondent’s argument and the line of judgments supporting it, but noted the conflict with other judgments.
Respondent’s argument that when there are two entries, one general and one specific, the specific entry should prevail. The Court acknowledged the respondent’s argument and the line of judgments supporting it, but noted the conflict with other judgments.
Respondent’s reliance on the line of judgments in Commissioner, Sales Tax U.P. vs. M/s Agra Belting Works, Agra, (1987) 3 SCC 140, Sales Tax Officer, Section IX, Kanpur vs. Dealing Dairy Products and Another, 1994 Supp. (2) SCC 639, and State of Bihar and Others vs. Krishna Kumar Kabra and Another, (1998) 108 STC 1, which held that a subsequent rate notification can withdraw an existing exemption. The Court acknowledged the respondent’s reliance on these judgments and the conflict with other judgments.
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The Court also discussed the issue of how authorities were viewed.

Authority How it was Used by the Court
Kothari Products Ltd. vs. Government of A.P., (2000) 9 SCC 263 *Cited* as a case supporting the view that a rate notification cannot override an exemption.
State of Orissa vs. Radheshyam Gudakhu Factory, (1987) 68 STC 92 *Cited* as a case supporting the view that a rate notification cannot override an exemption.
Commissioner, Sales Tax U.P. vs. M/s Agra Belting Works, Agra, (1987) 3 SCC 140 *Cited* as a case supporting the view that a subsequent rate notification can withdraw an existing exemption.
Sales Tax Officer, Section IX, Kanpur vs. Dealing Dairy Products and Another, 1994 Supp. (2) SCC 639 *Cited* as a case supporting the view that a subsequent rate notification can withdraw an existing exemption.
State of Bihar and Others vs. Krishna Kumar Kabra and Another, (1998) 108 STC 1 *Cited* as a case supporting the view that a subsequent rate notification can withdraw an existing exemption.
Reliance Trading Company vs. State of Kerala, (2000) 119 STC 321 (Ker.) *Referred to* as the judgment of the Kerala High Court which was relied upon by the Delhi High Court, but which was overruled by the Supreme Court.
Reliance Trading Company, Kerala vs. State of Kerala, (2011) 15 SCC 762 *Relied upon* to state that there can be no confusion or mixing up between the incidence of tax and exemption of tax on the one hand and the rate of tax on the other.
Tata Sky Limited vs. State of Madhya Pradesh and Others, (2013) 4 SCC 656 *Referred to* to state that the question of going to the measure of a tax would arise only if it is found that the charge of tax is attracted.
Commissioner of Income Tax (Central)-I, New Delhi vs. Vatika Township Private Limited, (2015) 1 SCC 1 *Referred to* to state that the components which enter into the concept of taxability are well known and distinct.
Union of India vs. Raghubir Singh, 1989 (3) SCR 316 *Referred to* to discuss the doctrine of precedent and the numerical strength of benches.
Ningappa Ramappa Kurbar and Another vs. Emperor, AIR 1941 Bombay 408 *Referred to* to discuss the issue of whether a later Full Bench can overrule an earlier Full Bench merely because the later bench consists of more Judges than the earlier.
Supreme Court Advocates-on-Record Association and Another vs. Union of India, (2016) 5 SCC 1 *Referred to* to discuss the anomaly of a smaller bench overruling a larger bench and the weight of numbers in judicial decisions.
Harper and Others vs. National Coal Board [1974] 2 All ER 441 *Referred to* to discuss the discovery of the true ratio decidendi in a given case, particularly when there are conflicting opinions within a judgment.
Central Asbestos Co Ltd vs. Dodd [1972] 2 All ER 1135 *Referred to* in Harper and Others vs. National Coal Board [1974] 2 All ER 441 to illustrate the difficulty in discovering the true ratio decidendi.

What weighed in the mind of the Court?

The Court’s primary concern was the conflict between two lines of judgments by the Supreme Court itself. The Court was also concerned about the doctrine of precedent and how to determine the true ratio decidendi of a judgment, especially when there are conflicting views within a judgment. The Court also considered the numerical strength of benches and whether a numerically superior bench should always prevail over a bench of lesser strength.

Sentiment Percentage
Conflict in Supreme Court Judgments 40%
Doctrine of Precedent 30%
Numerical Strength of Benches 20%
Ratio Decidendi 10%

The sentiment analysis shows that the primary concern of the Court was the conflict in its own previous judgments, which weighed heavily in its decision to refer the matter to a larger bench.

Ratio Percentage
Fact 20%
Law 80%

The ratio analysis indicates that the court’s decision was primarily influenced by legal considerations rather than factual aspects of the case.

Logical Reasoning

Is there a conflict between the Kothari Products line of judgments and the Agra Belting Works line of judgments?

↓

Yes, there is a direct conflict.

↓

Is it necessary to resolve this conflict to ensure consistency in law?

↓

Yes, a conclusive decision is needed.

↓

Is it appropriate for a smaller bench to decide when there is a conflict in previous judgments of larger benches?

↓

No, a larger bench is required to settle the conflict.

↓

Refer the matter to a larger bench for a conclusive decision.

Key Takeaways

  • The Supreme Court acknowledged a significant conflict in its previous judgments regarding the interplay between tax exemptions and rate notifications.
  • The Court The Court highlighted the importance of the doctrine of precedent and the need for consistency in judicial decisions.
  • The case underscores the complex nature of tax law interpretation, especially when dealing with multiple notifications and schedules.
  • The reference to a larger bench indicates the gravity of the legal issues involved and the need for a conclusive resolution.
  • The case also raises important questions about the weight of numbers in judicial decisions and the discovery of the true ratio decidendi in a given case.

Source: Supreme Court Refers Conflict to Larger Bench in Shanti Fragrances vs. Union of India