Southern Motors Vs State of Karnataka .

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[REPORTABLE] IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS.10955-10971 OF 2016

(ARISING OUT OF SPECIAL LEAVE PETITION (C) Nos.28309-28325/2013)

M/S. SOUTHERN MOTORS .…APPELLANT

Versus

STATE OF KARNATAKA AND OTHERS ...RESPONDENT

WITH

Civil Appeal Nos. 10972-10978 of 2016

(Arising out of SLP (C) Nos. 27752-27758 of 2014)

J U D G M E N T

AMITAVA ROY, J.

The instant adjudicative pursuit is to disinter the statutory

intendment lodged in Rule 3(2)(c) in particular of the Karnataka

Value Added Tax Rules, 2005 (for short, hereinafter to be

referred to as “the Rules”) so as to facilitate the determination of

taxable turnover as defined in Section 2(34) of the Karnataka

Value Added Tax Act, 2003 (for short, hereinafter to be referred

to as “the Act”) in interface with Section 30 of the Act and Rule

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31 of the Rules.

2. We have heard Mr. Dhruv Mehta, learned senior counsel

for the appellant in Civil Appeal Nos. 10955-10971 of 2016, Mr.

Tarun Gulati, learned counsel for the appellant in Civil Appeal

Nos. 10972-10978 of 2016 and Mr. K.N. Bhat, learned senior

counsel for the respondent-State.

3. The foundational facts, albeit not in dispute present the

required preface. The appellant is a dealer in the motor vehicles

and registered under the Act. Its version is that during the years

in question i.e. 2007-2008 and 2008-2009, it raised tax invoices

on the purchasers as per the policy of manufacturers of vehicles

to maintain uniformity in the price thereof. After the sales were

completed, credit notes were issued to the customers granting

discounts, in order to meet the competition in the market and for

allied reasons. Consequentially, it received/retained only the net

amount, that is the amount shown in the invoice less the sum of

discount disclosed in the credit note. Accordingly, the net

amount, so received was reflected in his books of account and

returns were filed under Income Tax Act, 1961 et al.

4. The Assistant Commissioner of Commercial Taxes,

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(Audit-1.6), VAT Division No.1-1, Gandhi Nagar, Bangalore i.e.

the respondent No.3, as the Assessing Authority by his

reassessment orders dated 21.06.2010 allowed deductions

claimed by the appellant towards discount accorded by the credit

notes from the total turnover to quantify the taxable turnover.

Subsequent thereto, in the face of the decision of the High Court

in State of Karnataka vs. M/s Kitchen Appliances India

Ltd., 2011 (71) Karnataka Law Journal 234, recognizing only

discounts mentioned in the tax invoices as eligible for deduction

from the total turnover in terms of Rule 3(2)(c) of the Rules, the

Assessing Authority passed the rectification orders dated

21.05.2012 under Section 41(1) of the Act, disallowing the

deduction of post sale discounts earlier awarded by the

corresponding credit notes. The appellant having unsuccessfully

challenged these rectification orders before the High Court, in

both the tiers, has invoked this Court's jurisdiction under

Article 136 of the Constitution of India for redress. The above

facts pertain to the Civil Appeal Nos. 10955-10971 of 2016.

5. The Civil Appeal 10971-10978 of 2016, with Samsung

India Electronics Ltd. as the appellant, also present the same

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debate. The appellant, the assessee is as well a registered dealer

under the Act and engaged in the business of electronic goods

and I.T. products. Though the assessment for the tax period

April, 2006 to October, 2006 was concluded by the Deputy

Commissioner of Commercial Taxes (Audit-4) LDU, Bangalore on

29.01.2007, the Assessing Authority disallowed the claim of

deduction towards discounts on the ground that the same were

not revealed at the time of issuance of tax invoices, though credit

notes were issued at the end of the month concerned. The

appeals filed by the appellant- assessee before the Commissioner

of Commercial Taxes (Appeals), DVO–I & III, Bangalore though

came to be dismissed, it succeeded before the jurisdictional

Tribunal, whereafter the Revenue took the challenge to the High

Court. By the decision impugned herein, the High Court relying

on its earlier decision in M/s Southern Motors vs. State of

Karnataka and Ors. rendered in Writ Appeal Nos. 5769-5785 of

2012 reiterated its view that once the sale invoice was issued and

the sale price was collected along with the tax, the aggregate of

such sales constituted the total turnover and the tax was

payable on the taxable turnover. It took note of the deductions

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permissible under Rule 3(2) of the Rules to determine the taxable

turnover and held that though the amounts allowed as discount

did constitute permissible deduction to compute the eventual

taxable turnover, such discount was to be necessarily reflected in

the sale invoice to qualify for such deduction. It thus concluded

that by issuing a credit note after receiving the amounts even

before the filing of the returns, it could not be construed that the

discounts were not includible in the turnover. The claim of

deduction of the discount extended through credit notes after the

completion of the sale but not divulged in the tax invoice was

negated. As the above rendition was founded on the verdict

under scrutiny in the previous batch of appeals where M/s

Southern Motors figures as the appellant, and the issue seeking

adjudication is common, all these appeals with the aforenoted

marginal factual variations have been analogously heard.

6. As the dissension stems from contrasting interpretations of

the underlying purport of Rule 3(2)(c) of the Rules in the context

of the scheme of the Act as a whole and Section 30 thereof and

Rule 31 of the Rules in particular, further reference to the

factual details would be inessential.

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7. The emphatic insistence on behalf of the appellant is that

the combined reading of Section 30 and Rule 31 demonstrates in

clear terms that the assesses are entitled to claim deduction of

the discount allowed to their customers by credit notes, from the

total turnover to quantify their taxable turnover. The learned

counsel have urged that as some discounts, especially those

linked to targets to be achieved in a particular period are not

comprehendable at the time of sale, these logically cannot be

reflected in the tax invoices. They have maintained that such

discounts actualize through credit notes at the end of the

prescribed period for which the target is fixed and are thus

governed by Section 30 of the Act and Rule 31 of the Rules. They

have asserted that in no view of the matter, Rule 3(2)(c) can be

conceded a primacy to curtail or abrogate Section 30 or Rule 31

of the Rules, lest the latter provisions are rendered otiose. Such

an explication would also be extinctive of the concept of the well

ingrained concept of turnover/trade discount which is

indefensible.

8. Referring to the definition of “total turnover” and “taxable

turnover” as defined in Sections 2(36) and 2(34) of the Act, it has

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been urged that as the discount allowed by the credit notes is not

payable to the assessee by the customers and does not form a

part of the sale consideration, it is not exigible under the Act.

According to the learned counsel, it is no longer res integra that

trade discount is not a constituent of the sale price and therefore

not taxable. It has been insistently pleaded that a post sale

discount through credit notes is revenue neutral in terms of

Section 30(3) of the Act, as a consequence whereof the selling

and the purchasing dealers accordingly remodel their returns

and pay tax as due. In endorsement of the above contentions,

the following decisions have been relied upon:

1. Deputy Commissioner of Sales Tax (Law) Board

of Revenue (Taxes), Ernakulam vs. M/s. Advani

Oorlikon (P) Ltd.(1980) 1 SCC 360,

2. IFB Industries Ltd. vs. State of Kerala (2012) 4

SCC 618,

3.Commissioner of Central Excise, Madras vs. M/s.

Addison & Co. Ltd. (2016) 10 SCC 56,

4.Union of India and others vs. Bombay Tyres

International (P) Ltd. (2005) 3 SCC 787.

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9. In refutation, the the learned counsel for the respondents,

has argued that a discount to qualify for deduction to compute

the total and eventual taxable turnover, as contemplated in Rule

3(2)(c) of the Rules has to be essentially reflected in the tax

invoice or the bill of sale issued in respect of the sales.

According to them, Section 30 and Rule 31 deal with a situation

where after a tax invoice is issued, it transpires that the tax

charged has either exceeded or has fallen short of the tax

payable for which a credit/debit note, as the case may be, would

be issued. As these two provisions do not regulate the

computation of a taxable turnover, there is no correlation thereof

with Rule 3(2)(c) of the Rules which has been assigned an

independent role to determine the tax liability. In absence of any

specific provision in the parent statute granting tax exemption

based on deduction founded on post sale trade discount, Section

30 and Rule 31 are of no avail to the assesses, he urged. It is

maintained that in any view of the matter, a taxing statute has to

be construed strictly and any exemption is permissible only if the

legislation permits the same. Reliance in buttressal of the above

has been placed on the decisions of this Court in A.V.

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Fernandez vs. The State of Kerala 1957 SCR 837, IFB

Industries Ltd. vs. State of Kerala (2012) 4 SCC 618 and

Jayam & Co. vs. Assistant Commissioner and Another (2016)

8 SCALE 70.

10. As the gravamen of the discord has its roots in the

interplay of Sections 29 and 30 of the Act with Rule 3(2)(c) in

particular, apposite it would be to refer to the same as well as

the accompanying provisions as are construed indispensable.

11. The Act is a legislation, as its preamble suggests to provide

for further levy of tax on the purchase or sale of goods in the

State of Karnataka. It defines amongst others “dealer” “tax

invoice” “taxable turnover” “total turnover” and “turnover” as

contained in Sections 2(12), 2(32), 2(34), 2(35), 2(36). For

immediate reference the relevant excerpts of these expressions

are set out hereunder:

“2(12) ‘Dealer’ means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes-.........

2(32) ‘Tax invoice’ means a document specified under Section 29 listing goods sold with price, quantity and other information as prescribed;

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2(34) ‘Taxable turnover’ means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but shall not include the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goods transferred or dispatched outside the State otherwise than by way of sale.

2(35) ‘Total turnover’ means the aggregate turnover in all goods of a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax, including the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goods transferred or despatched outside the State otherwise than by way of sale.

2(36) ‘Turnover’ means the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, and includes the aggregate amount for which goods are purchased from a person not registered under the Act and the value of goods transferred or despatched outside the State otherwise than by way of sale, and subject to such conditions and restrictions as may be prescribed the amount for which

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goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof.

Explanation.- The value of the goods transferred or despatched outside the State otherwise than by way of sale, shall be the amount for which the goods are ordinarily sold by the dealer or the prevailing market price of such goods where the dealer does not ordinarily sell the goods.”

12. Section 3 is the charging provision and the modes of

fixation of rate and measure of tax exigible under the statute are

enumerated in Section 4. Having regard to the exigency of the

adjudication, appropriate it would be to extract Sections 29 and

30 of the Act as hereunder:

“29. Tax invoices and bills of sale

(1) A registered dealer effecting a sale of taxable goods or exempt goods along with any taxable goods, in excess of the prescribed value, shall issue at the time of the sale, a tax invoice marked as original for the sale, containing the particulars prescribed, and shall retain a copy thereof.

(2) A tax invoice marked as original shall not be issued to any registered dealer in circumstances other than those specified in sub-section (1), and in a case of loss of the original, a duplicate may be issued where such registered dealer so requests.

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(3) A registered dealer,-

(a) selling non-taxable goods; or

(b) opting to pay tax by way of composition under section 15 and selling any goods; or

(c) permitted to pay tax under section 16 and selling any goods,

in excess of the prescribed value, shall issue a bill of sale containing such particulars as may be prescribed.

(4) Notwithstanding anything contained in sub-section (1) or (3) or sub-section (1) of Section 7, a registered dealer executing civil works contracts shall issue a tax invoice or bill of sale at such time and containing such particulars as may be prescribed

30. Credit and Debit Notes

(1) Where a tax invoice has been issued for any sale of goods and within six months from the date of such sale the amount shown as tax charged in that tax invoice is found to exceed the tax payable in respect of the sale effected, or is not payable on account of goods sold being returned within the prescribed period, the registered dealer effecting the sale shall issue forthwith to the purchaser a credit note containing particulars as prescribed.

(2) Where a tax invoice has been issued for sale of any goods and the tax payable in respect of the sale exceeds the amount shown as tax charged in such tax invoice, the registered dealer making the sale, shall issue to the purchaser a debit note containing particulars as prescribed.

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(3) Any registered dealer who receives or issues, credit notes or debit notes shall declare them in his return to be furnished for the tax period in which the credit note is received or debit note is issued and claim reduction in tax or pay tax due thereon. (4) Any document issued by the registered dealer as required under any other law containing particulars of credit note or debit note as prescribed shall be deemed to be a credit or debit note for the purpose of this Section”

13. Under Section 29, it is incumbent on a registered dealer

effecting a sale of taxable goods or goods exempted from tax

along with any taxable goods in excess of the prescribed value, to

issue at the time of sale, a tax invoice marked as original for the

sale and containing the particulars prescribed. Thereunder a

registered dealer in the eventualities mentioned therein has to

issue a bill of sale containing such particulars as may be

prescribed. Section 30 mandates that where such a tax invoice

has been issued for any sale of goods and withing six months

from the date of such sale, the amount shown as tax charged in

that tax invoice is found to exceed the tax payable in respect of

the sale effected, or is not payable on account of goods sold being

returned within the prescribed period, the registered dealer

effecting the sale, would issue forthwith to the purchaser, a

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credit note containing the particulars as prescribed. The Section

further stipulates that when a tax invoice has been issued for

sale of any goods and the tax payable in respect of the sale

exceeds the amount shown as tax charged in such tax invoice,

the registered dealer making the sale would issue to the

purchaser, a debit note containing the particulars as prescribed.

It is further ordained that any registered dealer who receives or

issues credit notes or debit notes would declare them in his

return to be furnished for the tax period in which the credit note

is received or debit note is issued and claim reduction in tax or

pay tax due thereon. Noticeably, the period of six months for the

issuance of the credit note on the eventuality of excess tax being

paid is not a factor for the contingency requiring issuance of a

debit note.

14. Be that as it may, Rule 3 of the Rules framed under

Section 88 of the Act, is lodged under Part II dwelling on

“Turnover, Registration and Payment Of Security”. This provision

in particular deals with the determination of total and taxable

turnover and predicates that the taxable turnover would be

determined by allowing the deductions from the total turnover as

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listed in sub-rule (2) thereof. Rule 3(2)(c) of the Rules,

indispensable for the present adjudication is quoted hereunder

for ready reference:

“3(2)(c): All amounts allowed as discount:

PROVIDED that such discount is allowed in accordance with the regular practice of the dealer or is in accordance with the terms of any contract or agreement entered into in a particular case and the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as discount.

PROVIDED FURTHER that the accounts show that the purchaser has paid only the sum originally charged less discount.”

15. A plain reading of this quote would reveal that all amounts

allowed as discount would qualify for deduction from the total

turnover to ascertain the taxable turnover and thus the extent of

exigibility under this statute. The first proviso which occupies the

center stage of the debate prescribes that a discount to be eligible

for deduction has to be one which is allowed in accordance with

the regular practice of the dealer or is in accordance with the

terms of any contract or agreement entered into in a particular

case and the tax invoice or bill of sale issued in respect of the

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sales relating to such discount shows the amount allowed as

discount. The second proviso enjoins further, that the accounts

should show that the purchaser had paid only the sum originally

charged less the discount. Whereas the Revenue insists in view of

the first proviso in particular, that a discount to be entitled for

deduction to quantify the taxable turnover should essentially be

mentioned in the tax invoice or bill of sale issued in respect of the

sales and further the purchaser has to reflect in his accounts

that he had paid only the sum originally charged less the

discount, the appellants contend that having regard to the

uniform canons regulating the trade practice, a trade discount

though in comprehension at the time of original sale is not

always precisely quantifiable at that point of time and is

contingent on variable factors to be computed only on the

happening of a future event(s). In any case, however as the

discount eventually sanctioned is tangible and actual, the literal

interpretation sought to be given to the contents of first proviso

to Rule 3(2)(c) is expressly illogical and if accepted would lead to

absurd results rendering this provision redundant and

unworkable.

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16. Before embarking on analysis of the competing assertions,

expedient it would be to advert to the citations addressed at the

Bar.

17. In A.V. Fernandis (supra), a Constitution Bench of this

Court while dwelling on the interpretation of the relevant

provisions of the United State of Travancore and Cochin General

Sales Tax Act, 1125 and the Travancore Cochin General Sales

Tax Rules, 1950 framed thereunder ruled that in elucidating a

fiscal statute, it is not the spirit thereof but the letter of law that

has to be looked into and that if a particular tax cannot be

brought within the letter of the law, the subject could not be

made liable for the same. That the emphasis has to be to the

strict letter of law and not merely on the spirit of the statute or

the substance of law was highlighted. In this context, the

observations of Lord Russel of Killowen in Inland Revenue

Commissioner vs. Duke of Westminister (1936) AC 1 24 was

extracted :

“I confess that I view with disfavour the doctrine that in taxation cases the subject is to be taxed if in accordance with a Court's view of what it considers the substance of the transaction, the Court thinks that the case falls within the

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contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case”

18. The following passage as well from Partington vs.

Attorney General (1869)4 HL 100, 122 was quoted with

approval.

“As I understand the principle of all fiscal legislation it is this: if the person sought to be taxed, comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”.

19. In the textual facts, in essence, the claim of the

appellant-assessee to avoid deduction of an amount arising out

of sales effected beyond the State concerned was negated as the

same were not taxable in terms of Section 26 of the

Travancore-Cochin General Sales Tax Amendment Act, 1951 in

clear terms. Drawing a distinction between the provisions

contained in a statute with regard to the exemptions, refund or

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rebate on one hand and non liability of tax or non imposition of

tax on the other, it was enunciated that in the former, the sales

or purchases would have to be included in the gross turnover of

the dealer because those were prima facie liable to tax and the

dealer was only entitled to deductions from the gross turnover so

as to arrive at the net turnover on which the tax could be

imposed. In the latter case, the sales or the purchases were

exempted from taxation altogether. It was thus ruled that as the

sales beyond the State, were not liable to tax, those were liable to

be excluded from the calculation of the gross turnover as well as

the net turnover on which the sales tax could be levied or

imposed. The attempt on the part of the appellant-assessee to

include the turnover of the sales beyond the State in the gross

turnover and thereafter to seek a deduction thereof was thus

disapproved.

20. The distinction between “trade discount” and “cash

discount” was elaborated upon by this Court in M/s. Advani

Oorlikon (P) Ltd. (supra), in re, the question whether for the

purpose of computing the turnover assessed to sales tax therein,

under the Central Sales Tax Act 1956, the sale price of goods

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was to be determined by including the amount paid by way of

trade discount. The facts as unfolded evinced that the assessee

was a private limited company, carrying on business as sole

selling agent for certain brand of welding electrodes and for the

goods supplied to the retailers, it charged them the catalogue

price less the trade discount. The concerned Revenue Authority,

for the assessment year in question, refused to allow the

deduction and sans thereof, computed the taxable turnover,

being of the view that the trade discount was not excludable from

the catalogue price. It was contended on behalf of the Revenue

that in view of the definition of “sale price” in Section 2(h) of the

Central Sales Tax Act which permitted the deduction of sums

alleged as cash discount only, the deduction by way of trade

discount was not contemplated or permissible.

21. This Court referred to the definition of “sale price” in

Section 2(h) of the Act and noted that it was defined to be the

amount payable to a dealer as a consideration for the sale of any

goods, less any sum allowed as cash discount, according to the

practice normally prevailing in the trade. While observing that

cash discount conceptually was distinctly different from a trade

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discount which was a deduction from the catalogue price of

goods allowable by whole-sellers to retailers engaged in the trade,

it was exposited that under the Central Sales Tax Act, the sale

price which enters into the computation of the turnover is the

consideration for which the goods are sold by the assessee. It

was held that in a case where trade discount was allowed on the

catalogue price, the sale price would be the amount determined

after deducting the trade discount. It was ruled that it was

immaterial that the definition of “sale price” under Section 2(h) of

the Act did not expressly provide for the deduction of trade

discount from the sale price. It also held a view that having

regard to the nature of a trade discount, there is only one sale

price between the dealer and the retailer and that is the price

payable by the retailer calculated as the difference between the

catalogue price and the trade discount. Significantly it was

propounded that, in such a situation, there was only one

contract between the parties that is the contract that the goods

would be sold by the dealer to the retailer at the aforesaid sale

price and that there was no question of two successive

agreements between the parties, one providing for the sale of the

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goods at the catalogue price and the other providing for an

allowance by way of trade discount. While recognizing that the

sale price remained the stipulated price in the contract between

the parties, this Court concluded that the sale price which enters

into the computation of the assessee's turnover for the purpose

of assessment under the Sales Tax Act would be determined after

deducting the trade discount from the catalogue price.

22. The decision in Jayam and Company (supra) cited by the

Revenue was to underline the postulation that whenever

concession is given by a statute, notification etc., the conditions

thereof are to be strictly complied with in order to avail the

same. Section 19(20) of the Tamil Nadu Value Added Tax Act,

2006, which in clear terms, denied the benefit of Input Tax

Credit, where any registered dealer sold goods at a price lesser

than the price at which the same had been purchased, was

adverted to consolidate this proposition. Noticeably, this

provision of the statute involved, which fell for scrutiny, did by

unequivocal mandate deny the availment of the income tax

credit, in case the registered dealer/assessee had sold goods at a

price lesser than the price at which the same had been

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purchased by him.

23. In IFB Industries Ltd. (supra), this Court was seized with

the query as to how far deductions were allowable under Rule 9

(a) of the Kerala General Sales Tax Rules, 1963 for trade

discounts. The jurisdictional High Court returned the finding

that unless the discount was shown in the invoice evidencing the

sale, it would not qualify for such deduction and further any

discount that was given by means of credit note issued

subsequent to the sale, in reality was an incentive and not a

trade discount eligible for exemption under Rule 9 (a) of the

Rules. The appellant was a manufacturer of home appliances

having a scheme of trade discount for its dealers under which

the latter on achieving a pre set sale target would earn certain

discount on the price for which they had purchased the articles

from it. As the discount was subject to achieving the sale target,

the dealer would naturally be qualified for it in the later part of

the Financial years/assessment period i.e. long after the sales

had taken place. It was noted that for the sales taking place

between the appellant and its dealer after the sale target was

achieved, the dealer would get the articles on the discounted

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price but for the sales that had taken place before the sale target

was achieved, the manufacturer would issue credit notes in

favour of the dealer. Under the statute involved, in the

computation of the turnover as defined, amongst others, any

cash or other discount on the price allowed in respect of any sale

and any amount refunded in respect of articles returned by the

customers, was deductible. Rule 9 (a) provided that in

determining the taxable turnover, all amounts allowed as

discount, provided such discount was accorded in accordance

with the regular practice would stand deducted, if the accounts

show that the purchaser had paid only the sum originally

charged less the discount. Rule 9(a) therefore did stipulate, as

the conditions precedent for deduction of any amount allowed as

discount, two prescriptions i.e. the discount had been given in

accordance with the regular practice in trade and that the

accounts maintained by the purchaser would disclose that it had

paid only the sum originally charged less the discount. This

Court thus expounded that in absence of any prescript of

reference of such discount availed in the sale invoices, the

negation of the benefit of deduction of the trade discount in the

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quantification of the taxable turnover was erroneous. It was held,

that there was nothing in Rule 9 (a) to read it in a restrictive

manner to mean that the discount in order to eligible for

exemption thereunder must be reflected in the invoice itself.

While dilating on the notion of “trade discount” to be a deduction

from the catalogue price of goods allowed by wholesalers to the

retailers engaged in the trade to enable the latter to sell the

goods at the catalogue price and yet make a reasonable margin

of profit after taking into account his business expense, the

following observations of this Court in Union of India and

others vs. Bombay Tyres International (P) Ltd. (2005) 3 SCC

787, describing “trade discount” and countenancing its

deductibility from the sale price were alluded to:

“(1) Trade discounts – Discounts allowed in the trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such trade discounts shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price.” (emphasis supplied)

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24. This rendering presumably had been cited on behalf of the

respondents in order to underscore that the appellant's claim

therein for the deduction of the trade discount had been

approved as both the prerequisites stipulated by Rule 9(a) had

been complied with. This is to reinforce the plea that the

appellant in the case in hand thus by analogy of reasonings can

avail the benefit of deduction of trade discount only if the same is

reflected in the tax invoice as statutorily prescribed by Rule 3(2)

(c) of the Rules.

25. This Court in M/s Addison and Co. Ltd. (supra) was

chiefly seized with the issue of refund of excise duty under

Section 11B of the Central Excise Act, 1944. The respondent, a

manufacturer of cutting tools, filed a refund claim which, on

being eventually allowed after persuading through the different

tiers, culminated in a reference before the High Court of Madras

which was also answered in favour of the respondent/assessee.

It was held by the High Court that the refund towards deduction

of turnover discount could not be denied on the ground that

there was no evidence to show who was the ultimate consumer

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of the product and as to whether the ultimate consumer had

borne the burden of duty. The word “buyer” used in Section 12B

of the Act, as construed by the High Court did not refer to the

ultimate consumer and was confined only to the person who

bought the goods from the manufacturer. This Court accepted

the postulation in Union of India and others vs. Bombay Tyre

International Ltd. and others (1984) 1 SCC 467 and

Bombay Tyres International (P) Ltd. (supra) to the extent that

discounts allowed in the trade should be permitted to be

deducted from the sale price having regard to the nature of the

goods, if it established under agreements or in terms of sale or

by established practice and that such trade discounts ought not

to be disallowed only because those were not payable at the time

of each invoice or deducted from the invoice price, but declined

the relief of refund to the respondent on the consideration that

the burden of duty had meanwhile been passed on to the

ultimate buyer. It was explicated that the word “buyer”

appearing in Clause (e) to the proviso of Section 11B(2) of the

Central Excise Act could not be restricted to the first buyer from

the manufacturer. The prevalence of trade discounts was

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recognized so much so that deductions on the basis thereof were

also approved so as to determine the eventual tax liability.

26. The parties noticeably are not in issue over the prevalence

of trade discount contemplated in regular practice and that

wherever warranted, the dealing parties in accord therewith do

enter into a contract or agreement to apply the same for

reduction of the sale/purchase price. Understandably, the

taxable turnover is the summation of the actual sale/purchase

price exigible to tax under the Act and the Rules. Depending on

the eventualities as comprehended in Section 30, credit and

debit notes are issued, as a consequence whereof, the tax

liability is reduced or enhanced correspondingly and the same is

determined on the basis of the declarations made by the

assessees in their returns. That there is an inseverable

co-relation between the taxable turn over and the tax payable

need not be over emphasized. Noticeably, Section 30 dilates on

the contingencies witnessing reduction or enhancement of tax

liability subsequent to the sale/purchase of goods. The tax

liability, to reiterate would be contingent on the sale/purchase

price in the eventual sale/purchase price, to be essentially

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reflected in the return of the assessee. Section 30 axiomatically

thus deals only with the incidence of tax and not the spectrum of

situations or eventualities bearing on the tax liability. Rule 3(2),

in particular lists the array of deductions conditioned on variety

of situations as scheduled therein to ascertain the taxable

turnover. Allowance of discount is one of the several other

permissible deductions contingent on the melange of

determinants referred to therein. These deductions, however

contribute to the reduction of the total turnover to quantify the

taxable turnover and thus the tax liability. It is too trite to state

that neither an assessee is liable to pay tax in excess of what is

due in law nor is the revenue authorized to exact the same. Any

interpretation of Rule 3(2)(c) though an integrant of a fiscal

statute has to be in accord, in our estimate unite this

fundamental mandatory postulation.

27. It is a matter of common experience that in the present

contemporary competitive market, trade discounts not only are

dependent on variable factors but also might be strategically not

disclosable at the time of the original sale/purchase so as to be

coevally reflected in the tax invoice or the bill of sale as the case

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may be. The actual quantification of the trade discount,

depending on the nature of the trade and the related stipulations

in any contract with regard thereto, may be deferred till the

happening of a contemplated event, so much so that the benefit

thereof is extended at a point of time subsequent to that of the

original sale/purchase. That by itself, subject to proof of such

regular trade practice and the contract/agreement entered into

between the parties, would not render the trade discount

otherwise legal and acceptable, either non est or fictitious for

evading tax liability. In the above factual premise, the

interpretation as sought to be provided by the Revenue would

evidently reduce Section 3(2)(c) to a dead letter, ineffective and

unworkable and would defeat the objective of permitting

deductions from the total turnover on account of trade discount.

28. A trade discount conceptually is a pre sale concurrence,

the quantification whereof depends on many many factors in

commerce regulating the scale of sale/purchase depending,

amongst others on goodwill, quality, marketable skills,

discounts, etc. contributing to the ultimate performance to

qualify for such discounts. Such trade discounts, to reiterate,

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have already been recognized by this Court with the emphatic

rider that the same ought not to be disallowed only as they are

not payable at the time of each invoice or deducted from the

invoice price. In our comprehension, Sections 29, 30 and Rule 3

are the constituents of a same scheme to determine the taxable

turnover and thus the extent of exigibility. Whereas Sections 29

and 30, to repeat, deal with the issuance of tax invoice and bill

of sale to start with and thereafter credit and debit notes to be in

accord with the tax actually payable, Rule 3 in a way espouses

the exercise of ascertaining the taxable turnover by enumerating

the permissible deductions from the total turnover. We are thus

of the considered view that there is no repugnance or conflict

amongst these three provisions so much so that Rule 3(2)(c)

stands out in isolation and is incompatible with either the

scheme of the Act or Sections 29 and 30 to be precise. The

interplay of these three provisions is directed to ensure correct

computation of the taxable turnover for an accurate computation

of the tax liability. These provisions therefore for all practical

purposes complement each other and are by no means militative

in orientation or impact. Perceptionally, if taxable turnover is to

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be comprised of sale/purchase price, it is beyond one's

comprehension as to why the trade discount should be

disallowed, subject to the proof thereof, only because it was

effectuated subsequent to the original sale but evidenced by

contemporaneous documents and reflected in the relevant

accounts.

29. This Court in K.P. Varghese vs. Income Tax Officer,

Ernakulam and Anr. AIR 1981 SC 1922, while interpreting

Section 52 of the Income Tax Act 1961 favoured an interpretation

in departure from a strict literal reading thereof. For ready

reference, Section 52, as interpreted, is extracted hereinbelow.

“Section 52 (1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer.

(2) without prejudice to the provisions of Sub-section (1), if in the opinion of the Income-tax Officer the fair market value of a capital asset transferred by an assessee as on

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the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital assets by an amount of not less than fifteen per cent of the value declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer.”

It was proclaimed thus:

“5. Now on these provisions the question arises what is the true interpretation of Section 52, Sub-section (2). The argument of the Revenue was and this argument found favour with the majority Judges of the Full Bench that on a plain natural construction of the language of Section 52, Sub-section (2), the only condition for attracting the applicability of that provision is that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared. Once the Income-tax Officer is satisfied that this condition exists, he can proceed to invoke the provision in Section 52 Sub-section (2) and take the fair market value of the capital asset transferred by the assessee as on the date of the transfer as representing the full value of the consideration for the transfer of the capital asset and compute the capital gains on that basis. No more is necessary to be proved, contended the Revenue. To introduce any further condition such as understatement of consideration in

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respect of the transfer would be to read into the statutory provision something which is not there: indeed it would amount to rewriting the section. This argument was based on a strictly literal reading of Section 52 Sub-section (2) but we do not think such a construction can be accepted. It ignores several vital considerations which must always be borne in mind when we are interpreting a statutory provision. The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and as pointed out by Lord Denning, it would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity." We can do no better than repeat the famous words of Judge Learned Hand when he said:

“….it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable, source of interpreting the meaning of any writing: be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning”

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We must not adopt a strictly literal interpretation of Section 52 Sub-section (2) but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which Section 52 Sub-section (2) appears, because, as pointed out by Judge Learned Hand in most felicitous language:-

“….the meaning of a sentence may be more than that of the separate words as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create”

Keeping these observations in mind we may now approach the construction of Section 52 Sub-section (2).

6. The primary objection against the literal construction of Section 52 Sub-section (2) is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but they can certainly help to fix its meaning. It is a well recognised rule of construction that a statutory provision must be so construed, if possible that absurdity and mischief may be avoided. There are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature. Take, for

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example, a case where A agrees to sell his property to B for a certain price and before the sale is completed pursuant to the agreement and it is quite well-known that sometimes the competition of the sale may take place even a couple of years after the date of the agreement-the market price shoots up with the result that the market price prevailing on the date of the sale exceeds the agreed price at which the property is sold by more than 15% of such agreed price. This is not at all an uncommon case in an economy of rising prices and in fact we would find in a large number of cases where the sale is completed more than a year or two after the date of the agreement that the market price prevailing on the date of the sale is very much more than the price at which the property is sold under the agreement. Can it be contended with any degree of fairness and justice that in such cases, where there is clearly no understatement of consideration in respect of the transfer and the transaction is perfectly honest and bonafide and, in fact, in fulfillment of a contractual obligation, the assessee who has sold the property should be liable to pay tax on capital gains which have not accrued or arisen to him. It would indeed be most harsh and inequitable to tax the assessee on income which has neither arisen to him nor is received by him, merely because he has carried out the contractual obligation under-taken by him. It is difficult to conceive of any rational reason why the legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carries out such contractual obligation. It would indeed be strange if obedience to the law should attract the levy of tax on income which has neither arisen to the assessee nor has

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been received by him. If we may take another illustration, let us consider a case where A sells his property to B with a stipulation that after some-time which may be a couple of years or more, he shall resell the property to A for the same price could it be contended in such a case that when B transfers the property to A for the same price at which he originally purchased it, he should be liable to pay tax on the basis as if he has received the market value of the property as on the date of resale, if, in the meanwhile, the market price has shot up and exceeds the agreed price by more than 15%. Many other similar situations can be contemplated where it would be absurd and unreasonable to apply Section 52 Sub-section (2) according to its strict literal construction. We must therefore eschew literalness in the interpretation of Section 52 Sub-section (2) and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a well settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even 'do some violence' to it, so as to achieve the obvious intention of the legislature and produce a rational construction, Vide: Luke v. Inland Revenue Commissioner [1963] AC 557. The Court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision. We think that, having regard to this well recognised rule of interpretation, a fair and

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reasonable construction of Section 52 Sub-section (2) would be to read into it a condition that it would apply only where the consideration for the transfer is under-stated or in other words, the assessee has actually received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in case of a bonafide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. There are several important considerations which incline us to accept this construction of Section 52 Sub-section (2).”

30. In Commissioner of Income Tax, Bangalore Vs. J.H.

Gotla Yadagiri AIR 1985 SC 1698 this Court propounded that

though equity and taxation are often strangers, attempts should

be made that these do not remain always so and if a

construction results in equity rather than injustice, then such

construction should be preferred to the literal construction.

31. In a recent rendition in State of Jharkhand and others

vs. Tata Steel Ltd. and Ors. (2016) 11 SCC 147, this Court

while exploring the underlying intent of a notification pertaining

to the period of repayment by the respondents-assessee, which

had earlier availed the benefit of deferment of payment of tax

under the Jharkhand Value Added Tax Act, 2005 did

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exhaustively dwell on the golden rule of interpretation based on

literal and plain meaning of the words/expressions used in a

statute and with approval placed reliance on an earlier decision

of this Court in Hansraj Gordhandas vs. H.H. Dave, Assistant

Collector of Central Excise & Customs, Surat and others

(1969) 2 SCR 252, in which it was propounded thus:

“It was contended on behalf of the respondent that the object of granting exemption was to encourage the formation of cooperative societies which not only produced cotton fabrics but which also consisted of members, not only owning but having actually operated not more than four power-looms during the three years immediately preceding their having joined the society. The policy was that instead of each such member operating his looms on his own, he should combine with others by forming a society which, through the cooperative effort should produce cloth. The intention was that the goods produced for which exemption could be claimed must be goods produced on its own behalf by the society. We are unable to accept the contention put forward on behalf of the respondents as correct. On a true construction of the language of the notifications, dated July 31, 1959 and April 30, 1960 it is clear that all that is required for claiming exemption is that the cotton fabrics must be produced on power-looms owned by the cooperative society. There is no further requirement under the two notifications that the cotton fabrics must be produced by the Co-operative Society on the power-looms “for itself”. It is well established that in a taxing statute there is no

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room for any intendment but regard must be had to the clear meaning of the words. The entire matter is governed wholly by the language of the notification. If the tax-payer is within the plain terms of the exemption it cannot be denied its benefit by calling in aid any supposed intention of the exempting authority. If such intention can be gathered from the construction of the words of the notification or by necessary implication therefrom, the matter is different, but that is not the case here.” [Underlining is ours]

32. In the same vein, the following passage from M/s Doypack

Systems Pvt. Ltd. vs. Union of India and Ors. (1988) 2 SCC

299 was adverted to:

“58. The words in the statute must, prima facie, be given their ordinary meanings. Where the grammatical construction is clear and manifest and without doubt, that construction ought to prevail unless there are some strong and obvious reasons to the contrary. Nothing has been shown to warrant that literal construction should not be given effect to. See Chandavarkar S.R. Rao v. Ashalata (1986) 4 SCC 447 approving 44 Halsbury’s Laws of England, 4th Edn., para 856 at page 552, Nokes v. Doncaster Amalgamated Collieries Limited 1940 AC 1014. It must be emphasised that interpretation must be in consonance with the Directive Principles of State Policy in Article 39 (b) and (c) of the Constitution.

59. It has to be reiterated that the object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act.

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The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context. That intention, and therefore the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand. …”

33. The following excerpts from Tata Steel Ltd. (supra), being

of formidable significance are also extracted as hereunder.

24. In this regard, reference to Mahadeo Prasad Bais (Dead) vs. Income- Tax Officer ‘A’ Ward, Gorakhpur and another (1991) 4 SCC 560 would be absolutely seemly. In the said case, it has been held that an interpretation which will result in an anomaly or absurdity should be avoided and where literal construction creates an anomaly, absurdity and discrimination, statute should be liberally construed even slightly straining the language so as to avoid the meaningless anomaly. Emphasis has been laid on the principle that if an interpretation leads to absurdity, it is the duty of the court to avoid the same.

25. In Oxford University Press v. Commissioner of Income Tax (2001) 3 SCC 359, Mohapatra, J. has opined that interpretation should serve the intent and purpose of the statutory provision. In that context, the learned Judge has referred to the authority in State of T.N. v. Kodaikanal Motor Union (P) Ltd. (1986) 3 SCC 91 wherein this Court after referring to K.P. Varghese v. ITO[ (1981) 4 SCC 173 and Luke v. IRC (1964) 54 ITR 692 has observed:-

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“The courts must always seek to find out the intention of the legislature. Though the courts must find out the intention of the statute from the language used, but language more often than not is an imperfect instrument of expression of human thought. As Lord Denning said it would be idle to expect every statutory provision to be drafted with divine prescience and perfect clarity. As Judge Learned Hand said, we must not make a fortress out of dictionary but remember that statutes must have some purpose or object, whose imaginative discovery is judicial craftsmanship. We need not always cling to literalness and should seek to endeavour to avoid an unjust or absurd result. We should not make a mockery of legislation. To make sense out of an unhappily worded provision, where the purpose is apparent to the judicial eye ‘some’ violence to language is permissible.”

26. Sabharwal, J. (as His Lordship then was) has observed thus:-

“… It is well-recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. It was held that construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature. It was said that the literalness in the interpretation of

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Section 52(2) must be eschewed and the court should try to arrive at an interpretation which avoids the absurdity and the mischief and makes the provision rational, sensible, unless of course, the hands of the court are tied and it cannot find any escape from the tyranny of literal interpretation. It is said that it is now well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even “do some violence” to it, so as to achieve the obvious intention of the legislature and produce a rational construction. In such a case the court may read into the statutory provision a condition which, though not expressed, is implicit in construing the basic assumption underlying the statutory provision. …”

34. As would be overwhelmingly pellucid from hereinabove,

though words in a statute must, to start with, be extended their

ordinary meanings, but if the literal construction thereof results

in anomaly or absurdity, the courts must seek to find out the

underlying intention of the legislature and in the said pursuit,

can within permissible limits strain the language so as to avoid

such unintended mischief.

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35. In Seaford Court Estates Ltd. vs. Asker [1949] 2 All ER

155 hallowed by time, outlining the duty of the Court to iron out

the creases, it was enunciated, that whenever a statute comes

up for consideration, it must be remembered that it is not within

human powers to foresee the manifold sets of facts which may

arise and even if it were, it is not possible to provide for them in

terms free from all ambiguity, the caveat being that the English

language is not an instrument of mathematical precision. It was

held that in an eventuality where a Judge, believing himself to be

fettered by the supposed rule that he must look to the language

and nothing else, laments that the draftsmen have not provided

for this or that or have been guilty of some or other ambiguity,

he ought to set to work on the constructive task of finding the

intention of the Parliament and that he must do this not only

from the language of the statute, but also from a consideration of

the social conditions which gave rise to it and of the mischief

which it was passed to remedy and then he must supplement the

written word so as to give “force and life” to the intention of the

legislature.

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36. It would, in any case be incomprehensible that the

legislature, while occasioning the amendment to the first proviso

to Rule 3(2)(c) of the Rules, was either ignorant or unaware of

the prevalent practice of offering trade discount in the

contemporary commercial dispensations. This is more so, as

trade discount continued to be an accepted item of deduction. In

such a premise, the intention of the legislature could not have

been to deny the benefit of deduction of trade discount by

obdurately insisting on the reflection of such trade discount in

the text invoice or the bill of sale at the point of the sale as the

only device to guard against possible avoidance of tax under the

cloak thereof. Axiomatically, therefor the interpretation to be

extended to the proviso involved has to be essentially in accord

with the legislative intention to sustain realistically the benefit of

trade discount as envisaged. Any exposition to probabilise

exaction of the levy in excess of the due, being impermissible

cannot be thus a conceivable entailment of any law on

imperative impost. To insist on the quantification of trade

discount for deduction at the time of sale itself, by incorporating

the same in the tax invoice/bill of sale, would be to demand the

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impossible for all practical purposes and thus would be

ill-logical, irrational and absurd. To reiterate, trade discount

though an admitted phenomenon in commerce, the computation

thereof may depend on various factors singular to the parties as

well as by way of uniform norms in business not necessarily

enforceable or implementable at the time of the original sale. To

deny the benefit of deduction only on the ground of omission to

reflect the trade discount though actually granted in future, in

the tax invoice/bill of sale at the time of the original transaction

would be to ignore the contemporaneous actuality and be

unrealistic, unfair, unjust and deprivatory. This may herald as

well the possible unauthorised taxation even in the face of

cotaneous accounts kept in ordinary course of business,

attesting the grant of such trade discount and adjustment

thereof against the price. While, devious manipulations in trade

discount to avoid tax in a given fact situation is not an

impossibility, such avoidance can be effectively prevented by

insisting on the proof of such discount, if granted. The

interpretation to the contrary, as sought to be assigned by the

Revenue to the first proviso to Rule 3 (2)(c) of the Rules, when

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tested on the measure of the judicial postulations adumbrated

hereinabove, thus does not commend for acceptance.

37. On an overall review of the scheme of the Act and the

Rules and the underlying objectives in particular of Sections 29

and 30 of the Act and Rule 3 of the Rules, we are of the

considered opinion that the requirement of reference of the

discount in the tax invoice or bill of sale to qualify it for

deduction has to be construed in relation to the transaction

resulting in the final sale/purchase price and not limited to the

original sale sans the trade discount. However, the transactions

allowing discount have to be proved on the basis of

contemporaneous records and the final sale price after deducting

the trade discount must mandatorily be reflected in the accounts

as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase

price has to be adjudged on a combined consideration of the tax

invoice or bill of sale as the case may be along with the accounts

reflecting the trade discount and the actual price paid. The first

proviso has thus to be so read down, as above, to be in

consonance with the true intendment of the legislature and to

achieve as well the avowed objective of correct determination of

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the taxable turnover. The contrary interpretation accorded by the

High Court being in defiance of logic and the established axioms

of interpretation of statutes is thus unacceptable and is negated.

The appeals are thus allowed in the above terms. No costs.

….....…....................................J. (DIPAK MISRA)

.…...........................................J. (AMITAVA ROY)

NEW DELHI; JANUARY 18, 2017

SOUTHERN MOTORS Vs STATE OF KARNATAKA .

SOUTHERN MOTORS Vs STATE OF KARNATAKA .