Holding

Under the amended explanation to Section 2(xxvi) and Section 8(b), goods exported and held outside the State are deemed to acquire the quality of last purchase at the time of export and are liable to tax.

Summary

The appellant, a dealer in arecanuts, maintained stock with agents outside Kerala and paid sales tax on purchases based on sales effected by those agents. For the 1987‑88 assessment, the Sales Tax Officer disallowed the appellant’s claim that the closing stock held abroad should be excluded from tax, issuing a demand. The issue before the Supreme Court was whether, after the 1988 amendment (Act No. 6) that made the explanation to Section 2(xxvi) subject to Section 8, the closing stock exported and held with agents outside the State attains the quality of “last purchase” and thus becomes taxable. The Court examined the language of Section 8(b) and the objects of the amendment, holding that goods exported are deemed to have the last‑purchase character at the point of export, irrespective of their continued possession by agents outside the State. Consequently, such stock is liable to sales tax. The appeal was dismissed with costs.

Issues considered

Whether closing stock of goods held by agents outside Kerala is deemed to have attained the quality of last purchase under the amended explanation to Section 2(xxvi) and Section 8(b) of the Kerala General Sales Tax Act.
Whether such stock is therefore liable to sales tax.

Legislation cited

Kerala General Sales Tax Act, 1963s. 2(xxvi), s. 5, s. 5-A, s. 8(b)

Subjects

sales taxlast purchaseclosing stockexportKerala General Sales Tax ActSection 8(b)explanation to Section 2(xxvi)tax liabilityagentsarecanut

Judgment

K.V. ABDUL KADER, PROPRIETOR A
--\" KEVEESUPARITRADERS
v.
STATE OF KERALA AND ORS.
-~
JANUARY 29, 1998
y· B
[S.P. BHARUCHA AND V.N. KHARE, JJ.]

Sales Tax:

Kera/a General Sales Tax Act, 1963-Explanation to Section 2 (xxvi), c
Sections 8 (b), 5 and 5-A-Sales Tax-Last Purchase-By amending Act No.6
of 1988, explanation to Section 2 (xxvi) made subject to the provisions of
Section 8(b)-Ejfect of-Held, goods exported by assessee to agents outside
the State and part remaining thereof at the end of the financial year deemed
to attain the quality of last purchase by virtue of Section 8(b) and exigible
--{
to lax.
D
. (7'

Interpretation of Statutes-External aid-Statement of Objects And
Reasons could be relied upon.

The legal position prior to the amendment of 1988 was that a dealer
E
was not liable to pay sales tax on purchases of goods until the goods acquired
the quality of last purchase inside the State. The explanation to Section 2
(xxvi) of the Kerala General Sales Tax Act was added by Act No. 21of1978
to give effect to the said judgment. The Division Bench of the Kera la High
Court in the case of Deputy Commissioner of Sales Tax (Law), Board of
Revenue (Taxes), Trivandrum v. Keveyam & Co. and Others, (1986) 63 STC, F
--< 387, held that closing stock of an assessee whether inside or outside the
"' State was not exigible to tax. As a result of the said decision the Government
was losing huge amount of revenue and inorder to overcome the situation,
Act No.6of1988 was introduced where by explanation to S. 2 (xxvi) was made
subject to the provisions of Section 8 of the Act.
G
.. ·~- The appellant, dealer in arecanuts has agents outside the State as well.
He paid sales tax by working out the purchase value on the sales effected
by the agent and the tax on the remaining stock was paid as and when the
stock was sold. For the period 1987-88 the Sales Tax Officer disallowed the
appellant's claim that the closing stock valued at Rs. 38,91,289.52 pending H
411
412 SUPREME COURT REPORTS [1998) l S.C.R.

A with the agents outside the State be excluded from taxation and vide order
dated November 30, 1989, sent a demand of Rs. 1,79,400.00 and surcharge 1''--
of Rs. 11,953.00. The order of assessment was challenged before the High
Court and was dismissed. The writ appeal was also dismissed. Hence this
appeal.

B The legal position prior to the amendment of 1988 was that a dealer
was not liable to pay sales tax on purchases of goods until the goods acquired
the quality of last purchase inside the State. The explanation to Section 2
(xxvi) of the Kerala General Sales Tax Act was added by Act No. 21 of 1978
to give effect to the said judgment. The Division Bench of the Kera la High
C Court in the case of Deputy Commissioner of Sales Tax (law), Board of
Revenue (Taxes), Trivandrwn v. Keveyam & Co. and Others, (1986) 63 STC,
387, held that closing stock of an assessee whether insi~e or outside the
State was not exigible to tax. As a result of the said decision the Government
was losing huge amount of revenue and in order to overcome the situation,
Act No.6of1988 was introduced whereby explanation to S. 2 (xxvi) was made
D subject to the provisions of Section 8 of the Act.
The contention raised by the appellant was that though the amendment
to explanation to Section 2(xxvi) makes it subject to the provisions of Section
8, the language in the said section is not sufficient to impute when the goods
held by an assessee outside the State attained t'he quality of last purchase.
E Therefore, the said amendment has not achieved the intended object.
Dismissing the Appeal, this Court

HELD : I.I. The question whether a particular purchase is the last
purchase or not has to be decided in terms of Section 8(b) of the Kerala
General Sales Tax Act. After the amendment explanation to S.2(xxvi) is made
F subject to the provisions of S.8 and as a result of which, as soon as the goods
are exported it attains the stage of last purchase and is liable to tax-
irrespective of the fact that such goods are sHll held by agents outside the
..,...
State. Thus the legal position that emerged after the amendment is that, all
the purchases of the closing stock of goods exported outside the State and
G held by agents are deemed to attain the quality of last purchase and exigible
to tax. (415-C] ··

The State of Madras v. T.Narayanaswami Naidu and Another, (1968)
21 STC l and Deputy Commissioner of Sales Tax (Law), Board of Revenue
Tax is, Trivandrum v. Keveyam and Co. and others, (1986) 63 STC 387,
H referred to.
KEVEE SUP ARI v. STATE [V.N. KHARE, J.] 413
1.2. Having regard to the phraseology and the statement of objects and A
--\- reasons of the amending Act No. 6 of 1988, it is fairly clear that the
amendment in Explanation to Section 2 (xxvi) was made with a view to alter
the legal position that closing stock held outside the State will not acquire
the character of last purchase till it is sold. Prior to the. passing of the
amendment Act No.6 of 1988, the non-obstante clause occurring in the B
explanation to Section 2 (xxvi) did not permit the application of Section 8(b)
of the Act, where the goods were exported outside the State, but after the
amendment the width of non-obstante clause in the explanation was narrowed
down as the Explanation to Section 2(xxvi) has become subject to Section 8.
[418-B-CI

1.3. The faction created in Section 8(b) is that, purchase of goods C
exported out of the State is deemed to have been effected when the sale or
purchase immediately preceding the export was made. (418-D]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2214 of
1993.
D
From the Judgment and Order dated 26.6.93 of the Kerala High Court
in W.A. No. 701of1990.

Ms. C.N. Sreekumar for the Appellant.

G. Prakash for the Respondent. E

The Judgment of the Court was delivered by

V. N. KHARE, J, This Civil Appeal is directed against the Judgment
dated 26th June, 1992 passed by the High Court of Kerala.
F
~\
... According to the appellant, it purchases arecanuts locally and after
processing them dispatches the same to agents in the North Indian States for
sale on consignment who effect sales according to the market trends and
render accounts, sales statements to the appellant. Drafts or cheques for sale
proceeds less expenses and commission are also sent simultaneously and the G
appellant has been paying sales tax for each month by working .out the
purchase value involved in the sales effected by the agents monthly. It is also
stated that at the close of each financial year sometimes certain stocks of
goods remain with the agents and the appellant pays sales tax on the purchase
value of such stock in subsequent year as and when the stock is sold and ·
the accounts of sales in respect thereof are received from the agents as the H
414 SUPREME COURT REPORTS [1998] I S.C.R. ~
A stock acquires the quality of last purchase only when the goods are sold:

The final sales tax assessment of the appellant for the year 1987-88 was
completed by an order dated November 30, 1989. While passing the assessment
o~der the sales Tax Officer disallowed the contention of the appellant that
closing stock valued at Rs. 38,911289, ~pending with the agents outside the
B State is liable to be excluded. Consequently, the appellant was sent a demand
for Rs. 1,79,400.00 and surcharge of Rs. 11,953.00. Aggrieved, the appellant
challenged the said order of assessment by means of a Writ Petition before
the High Court of Kerala, but the same was dismissed and a Writ Appeal
against the said decision at the Learned Single Judge preferred before the
C Division Bench of the High Court also came to be dismissed by the judgment
under appeal.

In this appeal the question that arises for consideration is, whether the
purchases of the closing stock of goods as on 3 lst March, held by agents
outside the State, could be brought to tax as having attained the quality of
D last purcha~es before that date under explanation to Section 2 (XXVI) and·
Section B(b) of the Act.

Before we deal with the argument of learned counsel for the appellant,
it is necessary to notice the legal position prior to introduction of Explanation
to Section 2(XXVI) of the Act in respect of tax liability of an assessee on the
E purchases of closing stock of goods on 1 lst March, held by the agents
outside the State. In The State of Madras v. T. Narayanaswami Naidu and
another (21 STC I), this Court was of the view that, under Section 4 of the
Madras General Sales Tax Act, a dealer was not liable to pay sales tax. All
Purchases of goods until the purchases acquired the quality of being the last
F purchases inside the State. In other words, when the assessee filed a return
and declared the stock in hand, the stock in hand could not be .said to have
been acquired by last purchase, because the assessee might still during the
next assessment year sell it or he might himself consume it or the goods might
be destroyed. This Court was further of the .view that the assessee would be
entitled to claim before the assessing authorities that the character of acquisition
G of the stock in hand was undermined; in the light of subsequent events it
might or might not become the last purchase inside the State, and, therefore,
the assessee was entitled to claim deduction in respect of the value of the
stock as being purchases other than last purchases of goods. •

It is clear that, in order to give effect to the aforesaid judgment and
H
I
416 SUPREME COURT REPORTS [1998] l S.C.R.

A 2(xxvi) "total turnover" means the aggregate turnover in all goods of
-f~
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 inter state trade or commerce or
in the course of expmt of the goods out of the territory of India or
in the course of import of the goods into the territory of India :
B x
Explanation :-Notwithstanding anything contained in any other
~--
provision of this Act, but subject<to. the provisions of section 8 in the
case of goods which are taxable at the point of last purchase in the
State by a dealer liable to tax under section 5 and which are held as
c closing stock on the last day. At any financial year, the amount for
which such goods were purchased by the dealer shall be deemed also
· to be part of his total turnover for the subsequent year or each of the
subsequent years until such goods are wither sold by him in the State
or such purchase acquires the character of last purchases in the State
in the hands of such dealer and in case such purchases acquires the '
D character of last purchase in the State in the hands of such dealer, the r
turnover in respect of such purchases shall be liable to tax in the year
in which the purchase acquires the character of last purchase;
"'
xxx xxx xxx

E 8. Stage of levy of taxes in respect of imported and exported goods : •~
Where in the case of any goods tax is leviable at one point in a series of sales
or purchases, such series shall,

(a) In the case of goods impOited into the State either from outside the
territory of India or from any other State of India, be deemed to commence
F at the Stage of the sale or purchase effected immediately after the import of )-
,_
such goods;

(b) In the case of goods exported out of the state to any place outside
the territory of India or to any other State in India, be deemed to conclude
G at the stage of the sale or purchase effected immediately before the export of
such goods".
~r
Learned counsel for the appellant urged that the purchases could not
be brought to tax despite the amendment in Explanation. In other words, the
argument is that the amendment by Act no. 6 of 1988 has not achieved the
desired result of bringing to tax the closing stock of goods held outside the
r
H ~
KE VEE SUP ARI v. STA TE [V.N. KHARE, J.] 417
state as on 31st March. It is also urged that though the amendment made to A
Jr Explanation to Section 2 (xxvi) is subject to the provisions of Section B, that
Section on its language is not sufficient to impute the time of attaining of
quality of last purchase on the purchase of goods held as a closing stock
outside the State by the assessee or his agents and, therefore, the amendment
to Explanation to Section 2(xxvi) making itself subject to Section 8, has not
B
"'" achieved the intended object.
It does not appear to us that there is any difference between the two
arguments or learned counsel for the appellant. We, therefore, proceed to deal
with the arguments together. We have already noticed that the unamended
Explanation to Section 2(xxvi) was introduced with a view to give affect to the
decision oftbis Court in Narayanaswamy Naidu (supra) and further to secure c
the interest of revenue by making closing stock within the reach and knowledge
of the department by treating the goods exported outside the State as part
of the total turn over in subsequent year, till the goods attain the quality of
last purchase of goods. The non-obstante clause· used in the unamended
Explanation to Section 2(xxvi) whittled down the provisions of Section 8 of
..., -{ D
the Act, and, therefore, the provisions of Section 8 could not be applied for
the purpose of levy of tax on the goods exported outside the State till they
atiairied the quality of last purchase of goods. Subsequently, it was felt that
the existing provisions of Explanation to Section 2(xxvi) has not achieved the
desired result. The Legislature therefore amended the Explanation to Section
2(xxvi) by introducing therein the words" but subject to the provisions of E
Section 8" by Act No. 6 of l 988. The Statement of Objects and Reasons of
Act No. 6 of l 988 are these :
"In the case of goods taxable at the point of last purchase in the State
there are chances that the dealers may open branches at direct purchases
from producers to avoid turnover tax. Moreover the existing intermediary F
~ dealers may change themselves as agents of the last purchasers to avoid
-"
turnover tax. The commodities in respect of which this could happen are
rubber, tea, pepper, arecaunut and dried ginger. Government decided to amend
the Act suitable so as to extend the liability to pay turnover tax to the taxable
point also in respect of these items.
G
According to clause (b) of section 8 of the Kerala General Sales Tax Act,
.•. r· 1963 the point of levy of purchase tax will conclude where the goods are
exported outside the State .. The .Kerala High Court in its decision reported in
(1986) 63 STC 387 has held that the closing stock of goods held outside the
State will not acquire the character of last purcha~e till it is sold. Under the
' f cover of this decision, many dealers claim that their stock of goods held H
418 SUPREME COURT REPORTS [ 1998] 1 S.C.R.

A outside the State will not acquire the character of last purchases until the ~
goods are sold and as such they are not liable to pay tax on such goods. As
a result, Government is losing huge amount to tax. to overcome this situation
Government decided to amend the Act suitably."

Having regard to the phraseology and the objects of the amending Act
B extracted above,, it is fairly clear that the amendment in Explanation to Section ·x:
2(xxvi) was made with a view to alter the legal position that closing stock held
outside the State will not acquire the character of last purchase till it is sold.
Prior to passing of the amendment Act, non-obstante clause occurring in the
Explanation to section 2(xxvi) did not permit the application of Section 8 (b)
C of the Act, where the goods were exported outside the State, but after the
amendment the width of non-obstante clause in the Explanation was narrowed
down as the Explanation to Section 2(xxvi) has become subject to Section 8.
What Section 8(b) lays down is that, in the case of goods on which tax is
leviable only at one point in a series of sales or purchases and such goods
are exported out of the State to any place outside the territory of India or, to
D any other State in India, the series of purchase shall be deemed to conclude
at the stage of the sale or purchase effected immediately before the export of
such goods. The faction created in Section 8(b) is th~t, purchase of goods
exported out of the State is deemed to have been effected when the sale or
purchase immediately preceding the export was made. The question whether
a particular purchase is the last purchase or not has to be decided in terms
E of Section 8(b) of the Act. On this interpretation, as soon as the goods are
exported it attains the stage of last purchase and is liable to tax irrespective
of the fact that such goods are still held by agents outside the State. Thus,
the legal position that emerged after the amendment is that, all the purchases
of the closing stock of goods exported outside the State and held by agents
p are deemed to attain the quality of last purchase and exigible to tax. We have,
therefore, no doubt in our mind that, by the amendment in the Explanation,
the Legislature has altered the legal position prior to amendment that purchases
of closing stock or goods on 31st March, held by agents outside the State,
would not be brought to tax having not attained the quality of last purchase
before that date. We, therefore, do not find any merit in the contentions of
G learned counsel for the appellant.

For the foregoing reasons, the appeal fails and is hereby dismissed with
costs.

S.H. Appeal dismissed.