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Hotel & Bar (FL 3) Association of Tamil Nadu (Hobat) Versus The Secretary To Government Commercial Taxes Department, The Special Commissioner & Commissioner of Commercial Taxes

2015 (5) TMI 138 - MADRAS HIGH COURT

Levy of VAT on third point of sale of liquor of foreign origin in the State at the rate of 14.5% - Constitutional validity - Whether the Amendment Act No.25 of 2012 Entry 2 of Second Schedule and Explanation No.1 of the Tamil Nadu Value Added Tax Act, 2006 is violative of Articles 14 and 19(1)(g) of the Constitution of India - Held that:- When a challenge is made to an enactment on the ground of Article 14 being violated, it must be demonstrated that there is an element of negation of equality. .....

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is a valid discrimination. A classification without reference to the object sought to be achieved would be hit by Article 14. Such a classification should not be arbitrary, artificial or evasive

While dealing with the classification qua the constitutional validity of a statute, a Court of law is required to deal with the facts which made the legislation in classifying a group. However, when the object of the classification itself is discriminatory, then there is no need to go into the .....

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een put into challenge. The impugned Explanation 1 to the amended Entry 2 of the Second Schedule speaks only about the turnover as such. The classification made is perfectly in order. The petitioners, who are clubs and hotels, cannot be compared with the retail outlets of TASMAC. The customers of the TASMAC and the petitioners form two distinct and different categories based upon their respective socio-economic status. The petitioners are not prevented from doing their business. Therefore, there .....

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hallenge. Therefore, we are of the view that the petitioners cannot seek protection under Article 19(1)(g) of the Constitution of India. - Decided against assessee. - W. P. Nos. 22072, 23427, 23428 of 2012 - Dated:- 31-3-2015 - Sanjay Kishan Kaul, CJ And M. M. Sundresh,JJ. For the Petitioner : Mr. C Harishankar, Sr. Counsel for Mr. A Thiyagarajan, Mr.Vijaya Narayanan, SC, Mr. K Soundararajan, Mr. B Ravi Mr. P Chandrasekar, Mr. T Bashyam, Mr. V Elangovan, Mr. K Rajasekaran, Mr. C Prakasam, Mr. Vi .....

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NR Jayapradap, GA, Mr S T S Moorthy, Government Advocate, Mr. S Muthuraj W. P. Nos. 22072, 23427, 23428 of 2012, 217, 2064, 2065, 3095 to 3097, 5680, 9799 to 9803, 10338 of 2013, 100 to 105, 130 to 135, 745, 1112, 1113, 1403 to 1405, 1418, 1933, 2883, 2968, 5718, 5896, 10626 to 10630, 10891, 17190, 18968 to 19011, 22151 22230 to 22249, 25767 to 25769, 26681, 27025, 27780 to 27782, 30312 to 30314, 33424, 33425, 34507 to 34509, 25043 to 25062 of 2014, 245, 1194, 1584, 1936, 2061 and 4082 of 2015, .....

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Sundresh,J. The constitutionality of the Amendment Act No.25 of 2012 Entry 2 of Second Schedule and Explanation No.1 of the Tamil Nadu Value Added Tax Act, 2006, (hereinafter referred to as ''the Act'') on the touch stone of Articles 14 and 19(1)(g) of the Constitution of India, is challenged before us. Acknowledging the commonality of the issues, we deem it appropriate to dispose of the writ petitions by a single order. Factual Matrix:- 2. The petitioners are hotels and clubs ho .....

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8% tax. Hitherto, the sale by the petitioners to their customers was not subjected to any levy of tax. Similarly, for the liquor manufactured within the State, the distiller pays tax at 58% at the point of first sale to TASMAC. Tax at 58% is paid by TASMAC after deducting the tax suffered turnover at the second point of sale to the petitioner. For the third point of sale from the petitioners to their customers, there was no tax. Taking note of this anomaly between a sale of foreign liquor and In .....

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by levying sales tax at the third point of sale in the State at the rate of 14.5% seeking to augment more revenue and to avoid loss. 3. The Statement of Objects and Reasons leading to the amendment is recapitulated hereunder: ''In the Budget Speech for the year 2012-2013, certain tax concessions have been announced to benefit consumers. Further, to implement welfare and developmental programmes more vigorously, certain measures were announced for further revenue mobilization. To give ef .....

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State other than foreign liquors falling under item 3 At the point of second sale in the State 14.5 per cent 2. Alcoholic liquors of all kinds for human consumption, other than liquors falling under items and 3 At the point of third sale in the State 14.5 per cent 5. The working mechanism as per the impugned amendment is provided hereunder for better appreciation: ''Price Structure Per case (12 Bottles - 9 litres) (Per Bottle 750ml.) (Golden Grape Ordinary Brandy) Distilleries to TASMAC .....

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g Price - 2480.02 Value Added (2480.02 - 1111.64) - 1368.38 Sales Tax @ 38% 519.98 Selling price of TASMAC (Per Case) - 3000.00 (2480.02 + 519.98) Per Bottle - 3000.00 = 250.00'' 6. Aggrieved over the aforesaid levy of tax on the sales effected by the petitioners to their customers at 14.5%, these writ petitions have been filed before us. 7. From the arguments made on behalf of the petitioners, it appears that the petitioners are not aggrieved with the levy or the point of levy but qua t .....

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ve to be declared as unconstitutional, as it places fetters on the right of the petitioners to carry on their own business. Therefore, Articles 14 and 19(1)(g) of the Constitution of India are violated. It also discriminates between the similarly placed dealers. The respondents ought to have exercised power under Section 80 of the Tamil Nadu Value Added Tax Act, 2006 by framing rules instead of amending the Second Schedule. It would amount to double taxation. The classification is artificial, as .....

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3. Orissa State (Prevention & Control of Pollution) Board Vs. Orient Paper Mills, ((2003) 10 SCC 421); 4. J.K.Industries Limited Vs. Union of India, ((2007) 13 SCC 673) .'' Submissions of respondents:- 9. Learned Special Government Pleader appearing for the respondents submitted that the petitioners, being the FL 2 and FL 3 licensees, form a different and separate category. Article 19(1)(g) is not available to the petitioners while trading in liquor. The petitioners, having purchased .....

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. The customers of the TASMAC and the customers of the petitioners are totally different. The impugned amendment has been introduced to augment more revenue to carry out welfare measures. The petitioners having availed a set-off at the second point of sale cannot complain that there is no set-off at the third point also. They are catering to the elite clienthle, which forms a separate class by itself. The TASMAC is neither a club nor a hotel having FL license. The petitioners' right to carry .....

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ey cannot challenge the mode of levy at the third point of sale. There is no prohibition in law under Section 3(5) read with Section 80 of the Act in making the amendment to the Second Schedule. In fact, Section 3(5) enables the amendment to the Second Schedule. In support of the said submissions, the following judgments have been relied upon: 1. Jayam & Co Vs. Assistant Commissioner (CT) ((2013) 65 VST 260 (Mad) ); 2. USA Agencies and others VS. CTO, ((2013) 66 VST 75 (Mad)) ; 3. Kadiyala C .....

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The State of Hyderabad and others, ((1958) 9 STC 397 (SC)); 10. S.Kodar Vs. State of Kerala, (AIR 1974 SC 2272 (SC)); 11. Ganga Sugar Corporation VS. State of U.P. ((AIR 1980 SC 286 (SC)); Provisions of the Act:- 10. Section 2(15) defines a - dealer'' as under:- ''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 v .....

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, or through whom the goods are brought, sold, supplied or distributed; (iv) every local branch of a firm or company situated outside the State; (v) a person engaged in the business of transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration; (vi) a person engaged in the business of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (vii) a person engag .....

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ether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration.'' A perusal of the above provision would show that it is very exhaustive in nature. There is no difficulty in holding that both the petitioners and the TASMAC would come under the said definition. However, the said Section merely defines a ''dealer'' and it cannot be said that notwithstanding the other provisions, all the dealers are to be treated alike. .....

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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.'' and Section 2(41) defines ''turnover'' as under: ''turnover'' means the aggregate amount for which goods are brought or sold, or delivered or supplied or otherwise disposed of in any of the ways referred to in clause (33), by a dealer either directly or through another, on his own account or on ac .....

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about three types of turnovers. One cannot say that the other substantive provisions will have to be made applicable only to the taxable turnover alone, to the exclusion of others. 12. Coming to Section 3, it is a charging provision, which deals with ''levy of taxes on sale of goods''. Now, we are primarily concerned with Section 3(5). Section 3(5) empowers the Second Schedule qua the tax payable on the sale or purchase of goods specified therein. This is at the point and at the .....

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s important is that Section 80 is meant to give effect to the substantive provisions of the Act by framing rules. 14. Coming to Section 86, it empowers the 1st respondent to amend the Schedules. Under Section 86(1), the respondent by a notification can alter, add or cancel any of the Schedules. This provision deals with the amendment of the Schedules alone. The specific language used in Section 86 includes 'add to' to the Schedule in addition to alteration or cancellation. As the constit .....

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l oil, kerosene, Molasses, sugar, Sugarcane, etc. It also specifies the point of levy and rate of tax. A perusal of the Second Schedule would show that based upon the basic price, rate of tax has been fixed even beyond 100%. This Second Schedule has to be read in consonance with Section 3(5) of the Act. In other words, the Second Schedule exists, being empowered by section 3(5) of the Act. As the power is available to the 1st respondent under Section 86 to amend the Second Schedule, there is no .....

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e faulted with. A useful reference can be had to the decision of the Supreme Court in Orissa State (Prevention & Control of Pollution) Board Vs. Orient Paper Mills, ((2003) 10 SCC 421), wherein, it has been held as follows:- ''20. We feel that so far the point relating to the meaning of the word "may" used under Section 19 of the Act is concerned it is not relevant for resolving the controversy we are concerned with. Once the manner is prescribed under the rules undoubtedly .....

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tion published in the official gazette. The part of the provision "in such manner as may be prescribed" would spring into operation only after such manner is prescribed by framing the rules under Section 54 (2)(k) of the Act. This view as indicated earlier, is amply supported by the decision of this Court referred to above in the case of T. Cagee (AIR 1961 SC 276) which is a decision by a Constitution Bench of this Court. It has been followed in a subsequent decision of this Court repo .....

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673, PARA 6) ".....Where a statute confers powers on an authority to do certain acts or exercise power in respect of certain matters, subject to rules, the exercise of power conferred by the statute does not depend on the existence of rules unless the statute expressly provides for the same. In other words framing of the rules is not condition precedent to the exercise of the power expressly and unconditionally conferred by the statute. The expression "subject to the rules" only m .....

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). Reliance was also placed on U.P. State Electricity Board vs. City Board, Mussoorie (1985) 2 SCC 16)). 21. In view of the discussion held above, in our view it would not be correct to say that simply because the rules have not been framed prescribing the manner it would render the Act inoperative. The area was notified as air pollution control area by the State Government as authorized and provided by virtue of the powers conferred under Section 19 of the Act. ...... '' Object of the a .....

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d as arbitrary. Though the statement of objects and reasons cannot be the sole basis for construing a provision, it can very well be taken note of for understanding the background and to decipher the real intention behind it. In this regard, it is apposite to refer the following passages of a decision of the Supreme Court in State of Tamil Nadu Vs. K.Shyam Sunder, ((2011) 8 SCC 737), wherein it was held as under: ''66. The Statement of Objects and Reasons appended to the Bill is not admi .....

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he purpose of deciphering the objects and purport of the Act, the court can look to the Statement of Objects and Reasons thereof". (Vide: Kavalappara Kottarathil Kochuni @ Moopil Nayar v. The States of Madras and Kerala & Ors., (AIR 1960 SC 1080); and Tata Power Company Ltd. v. Reliance Energy Ltd. & Ors.,((2009) 16 SCC 659). 67. In A. Manjula Bhashini & Ors. ((2009) 8 SCC 431), this Court held as under: "The proposition which can be culled out from the aforementioned judgm .....

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t sought to be achieved by enactment of the particular Act or for judging reasonableness of the classification made by such Act." 68. Thus, in view of the above, the Statement of Objects and Reasons of any enactment spells out the core reason for which the enactment is brought and it can be looked into for appreciating the true intent of the legislature or to find out the object sought to be achieved by enactment of the particular Act or even for judging the reasonableness of the classifica .....

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erpretation, which serves the legislative object and intent leading to a purposive construction, is required to be made by the Court. We do not wish to multiply the judicial precedents in this regard except quoting a decision of the Supreme Court rendered in Census Commissioner Vs. R.Krishnamurthy, ((2014) 8 MLJ 241 (SC)). A fruitful recapitulation of the following paragraphs of the said judgment would suffice: "22. At this juncture, we may refer to certain authorities about the justificati .....

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he same. 23. In Narmada Bachao Andolan v. Union of India, AIR 2000 SC 3751 , (2000) 10 SCC 664 = LNIND 2000 SC 1361 it has been held thus: ''It is now well-settled that the courts, in the exercise of their jurisdiction, will not transgress into the field of policy decision. Whether to have an infrastructural project or not and what is the type of project to be undertaken and how it has to be executed, are part of policy making process and the Courts are ill equipped to adjudicate on a po .....

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ent political theories or economic policies. ..... This Court has the power to strike down a law on the ground of want of authority, but the Court will not sit in appeal over the policy of the Parliament in enacting a law.'' 25. In Premium Granites v. State of Tamil Nadu, AIR 1994 SC 2233 = (1994) 2 SCC 691 = LNIND 1994 SC 1219 = (1994) 2 MLJ 55 (SC) while dealing with the power of the courts in interfering with the policy decision, the Court has held that it is not the domain of the cou .....

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right. 26. In M.P.Oil Extraction and Another Vs. State of M.P. and Others, AIR 1998 SC 145 = (1997) 7 SCC 592 = LNIND 1997 SC 909, a two-Judge Bench opined that:- ''The executive authority of the State must be held to be within its competence to frame policy for the administration of the State. Unless the policy framed is absolutely capricious and, not being informed by any reason whatsoever, can be clearly held to be arbitrary and founded on mere ipse dixit of the executive functionarie .....

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SCC 117 = LNIND 1998 SC 245 the Court ruled thus: ''The Court cannot strike down a policy decision taken by the Government merely because it feels that another decision would have been fairer or more scientific or logical or wiser. The wisdom and advisability of the policies are ordinarily not amenable to judicial review unless the policies are contrary to statutory or constitutional provision or abitrary or irrational or an abuse of power. (See Ram Singh Vijay Pal Singh v. State of U.P .....

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not informed by reasons or totally arbitrary and founded ipse dixit offending the basic requirement of Article 14 of the Constitution. In certain matters, as often said, there can be opinions and opinions but the Court is not expected to sit as an appellate authority as an opinion.'' Judicial Review:- 18. There is always a presumption in favour of the constitutionality of an enactment with the onus to prove it otherwise on the person who laid a challenge. There can only be two challenge .....

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pearing for private respondents 5 to 9, the discussion proceeds on the basis that the compensation in India qua challenge to the constitutional validity of a provision of an enactment is similar to the United States of America, and apart from the two aspects referred to aforesaid, there is no third ground available. It is in this context, it has been observed that no enactment can be struck down by just saying that it is arbitrary or unreasonable, and the endeavour should not be to somehow or th .....

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he Constitution Bench of the Supreme Court in R.Gandhi, President, Madras Bar Association ((2010) 11 SCC 1). 39. The presumption in favour of constitutionality and the burden being on the person who attacks it to show that there has been transgression of the constitutional principles is thus founded on the number of judicial pronouncements discussed above as well as in Greater Bombay Co-op. Bank Ltd. Case ((2007) 6 SCC 236) as the Courts would be justified in giving a liberal interpretation in o .....

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1941 F.C. 47). 40. The challenge laid by the petitioner based on the plea of arbitrariness and unreasonableness on the touchstone of Articles 14 and 19 of the Constitution of India, on the first blush, appeared to be attractive over the possibilities of how the provision may be used, but once the touchstone of constitutional validity in terms of the aforesaid principle is applied, it is difficult to accept the contention of the learned counsel for the petitioner. 41. The legislative wisdom cann .....

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benefits to a group of persons. A differentiation must distinguish a group of persons or things identified as such from the things left out. While dealing with the classification, an accurate one is not possible. Revenue and economic considerations in taxing statute are permissible classifications. An objective must be a just one. It is a sine qua non for classification. A valid classification is a valid discrimination. A classification without reference to the object sought to be achieved would .....

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e to the legislature in its exercise of classification. In other words, what is reasonable is a question of practical approach. While testing the policy underlying the statute, the intended object is to be ascertained. 21. A legislation can be challenged on the ground of legislative arbitrariness. Such an arbitrariness as found by the Court should be palpable and apparent. It should rather be seen on the face of it. It cannot be done on the basis of hardship caused to a party, but on a total unr .....

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9) 10 SCC 446) and Subramanian Swamy Vs. C.B.I. ((2014) 8 SCC 682). 22. We would deem it appropriate to recapitulate the following passages of a decision of the Supreme Court in State of Tamil Nadu and others Vs. K.Shyam Sunder and others, ((2011) 8 SCC 737): ''50. In Ajay Hasia v. Khalid Mujib Sehravardi, ((1981) 1 SCC 722), this Court held that Article 14 strikes at arbitrariness because an action that is arbitrary, must necessarily involve negation of equality. Whenever therefore, the .....

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'arbitrarily'' means, act done in an unreasonable manner, as fixed or done capriciously or at pleasure without adequate determining principle, not founded in the nature of things, non-rational, not done or acting according to reason or judgment, depending on the will alone. 52. In Bombay Dyeing & Mfg. Co. Ltd., (3) v. Bombay Environmental Action Group, ((2006) 3 SCC 434), this Court held that: (SCC p. 511, para 205) ''205. Arbitrariness on the part of the legislature so a .....

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be questioned as arbitrary and ultra vires under Article 14. However, to declare an Act ultra vires under Article 14, the Court must be satisfied in respect of substantive unreasonableness in the statute itself.'' Article 19(1)(g): 23. A right under Article 19(1)(g) is subject to Article 19(6). When it comes to trading in liquor, such a right becomes a qualified one. Once it is known that liquor as a beverage is dangerous and injurious to health, the fundamental right to trade therein ev .....

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rying on such trade, particularly in view of the provisions of Article 47, though apparently attractive, is fallacious. The State's power to regulate and to restrict the business in potable liquor impliedly includes the power to carry on such trade to the exclusion of others. Prohibition is not the only way to restrict and regulate the consumption of intoxicating liquor. The abuse of drinking intoxicants can be prevented also by limiting and controlling its production, supply and consumption .....

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e 19(6) of the Constitution. 56. The contention further that till prohibition is introduced, a citizen has a fundamental right to carry on trade or business in potable liquor has also no merit. All that the citizen can claim in such a situation is an equal right to carry on trade or business in potable liquor as against the other citizens. He cannot claim equal right to carry on the business against the State when the State reserves to itself the exclusive right to carry on such trade or busines .....

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The failure of measures permitted by law does not detract from the power of the State to introduce such measures and implement them as best as they can. ....... 60. We may now summarise the law on the subject as culled from the aforesaid decisions. (a) The rights protected by Article 19(1) are not absolute but qualified. The qualifications are stated in clauses (2) to (6) of Article 19. The fundamental rights guaranteed in Article 19(1)(a) to (g) are, therefore, to be read along with the said q .....

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nd is condemned by all civilised societies. It does not entitle citizens to carry on trade or business in activities which are immoral and criminal and in articles or goods which are obnoxious and injurious to health, safety and welfare of the general public, i.e., res extra commercium, (outside commerce). There cannot be business in crime. (c) Potable liquor as a beverage is an intoxicating and depressant drink which is dangerous and injurious to health and is, therefore, an article which is re .....

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intoxicating drinks which obviously include liquor, except for medicinal purposes. Article 47 is one of the directive principles which is fundamental in the governance of the country. The State has, therefore, the power to completely prohibit the manufacture, sale, possession, distribution and consumption of potable liquor as a beverage, both because it is inherently a dangerous article of consumption and also because of the directive principle contained in Article 47, except when it is used an .....

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aving FL 2 and FL 3 licence. On the contrary, the petitioners buy the liquor from the TASMAC. Insofar as sale of foreign liquor is concerned, it stands on a different footing in which 58% of tax is levied on sale. The illustration given earlier would show that the petitioners are the beneficiaries of the earlier sale. They cannot expect the said benefit to be extended to the third point as well. TASMAC has involved in only second sale as against the petitioners third sale. The petitioners made c .....

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to the coffers of the State meant to be used for welfare measures. The fact that the petitioners are selling at a higher price is not in dispute. 25. The goods that are specified in the Second Schedule are not vatable. A combined reading of Section 3(5) of the Act and the Second Schedule would make the said position very clear. Section 3(5) of the Act has not been put into challenge. The impugned Explanation 1 to the amended Entry 2 of the Second Schedule speaks only about the turnover as such. .....

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