Supreme Court of India
M/S. SOUTHERN MOTORSversusSTATE OF KARNATAKA AND OTHERS
- Citation
- 2017 INSC 55
- Decided
- 18 January 2017
- Disposal
- Appeal(s) allowed
- Bench
- DIPAK MISRA
Holding
All amounts allowed as discount, including those granted via post‑sale credit notes, are deductible from total turnover under Rule 3(2)(c) provided they are regular practice, reflected in the accounts and the final sale price is recorded, irrespective of their presence on the original tax invoice.
Summary
M/S Southern Motors, a registered dealer under the Karnataka Value Added Tax Act, 2003, issued tax invoices for vehicle sales and later granted post‑sale discounts through credit notes, retaining only the net amount. The Assessing Authority disallowed deduction of these discounts from total turnover, insisting that a discount must be shown in the original tax invoice to qualify under Rule 3(2)(c) of the Karnataka VAT Rules. The Supreme Court examined the language of the rule, its provisos, and the scheme of Sections 29, 30 of the Act, holding that any discount allowed in accordance with regular trade practice and reflected in the accounts may be deducted, even if recorded after the invoice. The Court rejected the literal requirement of invoice‑reference as absurd and read down the proviso to give effect to legislative intent. Consequently, the appeals were allowed and the deduction of post‑sale discounts was affirmed.
Issues considered
- The scope of deduction of discounts under Rule 3(2)(c) of the Karnataka VAT Rules.
- Whether a discount must be shown in the original tax invoice to qualify for deduction.
- Interpretation of the first and second provisos to Rule 3(2)(c) in light of the Act's scheme.
- The interplay between Sections 29, 30 of the Karnataka VAT Act and Rule 3(2)(c).
- The nature of trade discount as a pre‑sale concession and its tax treatment.
Legislation cited
- Central Excise Act, 1944s. 12B
- Central Sales Tax Act, 1956s. 2(h)
- Income Tax Act, 1961s. 52
- Karnataka Value Added Tax Act, 2003s. 2(12), s. 2(32), s. 2(34), s. 2(35), s. 2(36), s. 29, s. 30
- Karnataka Value Added Tax Rules, 2005s. Rule 31, s. Rule 3(2)(c), s. Rule 3(2)(c) proviso
Subjects
trade discounttaxable turnoverKarnataka VATcredit notestatutory interpretationRule 3(2)(c)post‑sale discountVAT deductionliteral interpretationpurposive construction
Judgment
[2017] 2 S.C.R. 434
A M/S. SOUTHERN MOTORS
v.
STATE OF KARNATAKA AND OTHERS
(Civil Appeal Nos. 10955-10971 of2016 Etc.)
B
JANUARY 18, 2017
[DIPAK MISRA AND AMITAVA ROY, JJ.]
Karnataka Value Added Tax Act, 2003: s.2(34) - Post sale
discoums - Determination of taxable turnover - Issue of credit notes
c to the customers granting discounts - Assessee retaining only the
net amount that is, the amount shown in the invoice less the sum of
discount disclosed in credit note - Claim for deduction towards
discount accorded by credit notes from the total turnover to quantify
the taxable turnover - Held: A plain reading of s.3(2){c) reveal
D that all amounts allowed as discount qualify for deduction from the
total turnover to ascertain the taxable turnover - A trade discount
conceptually is a pre sale concurrence, the quantification whereof
depends on many factors in commerce - Such trade discounts ought
not to be disallowed only if they are not payable at the time of each
invoice or deducted from the invoice price - The overall review of
E the scheme of the Act and the Rules and the underlying objectives
in particular of ss.29 and 30 of the Act and r.3 of the Rules shows
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
F 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 r.3(2J(c) of the Rules - Karnataka
Value Added Tax Rules, 2005 - r. 3(2){c) and its proviso.
G
Interpretation of statutes: Literal interpretation - Held:
Though words in a statute must 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
H
434
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 435
OTHERS
the language so as to avoid such unintended mischief - Karnataka A
Value Added T(J)( Rules, 2005 - r.3(2)(c) and its proviso.
Allowing the appeals, the Court
HELD: 1. The Karnataka Value Added Tax Act, 2003 is a
legislation, as its pream hie suggests, to provide for further levy
B
of tax on the purchase or sale of goods in the State of Karnataka.
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 c
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 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 D
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 credit note contai&ing the
particulars as prescribed. The Section further stipulates that when
a tax invoice has been issued for sale of any goods and the tax E
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 note~, would
declare them in his return to be furnished for the tax period in F
which the credit note is received or debit note is issued and claim
reduction in tax or pay tax due thereon. [Paras 11, 13] [444-C-D;
447-B-E)
2. A plain reading of section 3(2)(c) would reveal that all
amounts allowed as discount would qualify for deduction from G
the total turnover to ascertain the taxable turnover and thus the
extent of exigibility under this statute. The first proviso
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 H
436 SUPREME COURT REPORTS [2017] 2 S.C.R.
A 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. The second
proviso enjoins further, that the accounts should show that the
purchaser had paid only the sum originally charged less the
discount. [Para 15] [448-B-D]
B
3. Section 30 dilates on the contingencies witnessing
reduction or enhancement of tax liability subsequent to the sale/
purchase of goods. The tax liability would be contingent on the
sale/purchase price in the eventual sale/purchase price, to he
essentially reflected in th.e return of the assessee. Section 30
c 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
D 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. 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
E
of Rule 3(2)(c) though an integrant of a fiscal statute has to be in
accord with this fundamental mandatory postulation. [Para 26]
[454-D-G]
4. It is a matter of common experience that in the present
contemporary competitive market, trade discounts not only are
F 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
may be. The actual quantification of the trade discount, depending
on the nature of the trade and the related stipulations in any
G 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
H
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 437
OTHERS
and acceptable, either non est or fictitious for evading tax liability. A
[Para 27] [454-G-H; 455-A-B]
5. 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 deal with the
issuance of tax invoice and bill of sale, to start with and th·ereafter B
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. 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 c
Sections 29 and 30 to be precise. The interplay of the::e three
provisions is directed to ensure correct computation of the
taxable turnover for an accurate computation of the tax iiability.
These provisions therefore for all practical purposes complement
each other and are by no means militative in orientation or impact. D
Perceptionally, if taxable turnover is to 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. [Para 28] [455-E-H; 456-A] E
6. Though words in a statute must be extended their
ordinary meaning, 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 F
such unintended mischief. [Para 34] [463-F-G]
K.P. Varghese v. Income Tax Officer, Ernakulam and
Anr. [1982] 1 SCR 629 : AIR 1981 SC 1922;
Commissioner of Income Tax, Bangalore v. J.H Got/a
Yadagiri [1985] 2 Suppl. SCR 711 : AIR 1985 SC G
1698; State of Jharkhand and others v. Tata Steel Ltd.
and Ors. (2016) 11 SCC 147; Hansraj Gordhandas 1'.
RH Dave, Assistant Collector of Central Excise &
Customs, Surat and others [1969] (2) SCR 252;
Mis Doypack Systems Pvt. Ltd. v. Union of India and H
438 SUPREME COURT REPORTS (2017] 2 S.C.R.
A Ors. [1988] 2 SCR 962 : (1988) 2 SCC 299 - relied
on.
Seaford Court Estates Ltd. v. Asker [1949] 2 All ER
155 - referred to.
7. It would be incomprehensible that the legislature, while
B 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 continu~d to
be an accepted item of deduction. In such a premise, the intention
c of the legislature could not have been to deny the benefit of
deduction of trade discount by 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, therefore the
interpretation to be extended to the proviso involved has to be
D essentially in accord with the legislative intention to su.stain
realistically the benefit of trade discount as envisaged. To !nsist
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 impossible for all practical purposes
E and thus would be ill-logical, irrational and absurd. [Para 36] [464-
C-G]
8. The overall review of the scheme of the Act and the
Rules and the underlying objectives in particular of Sectiohs 29
and 30 of the Act and Rule 3 of the Rules shows that the
F 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
G 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
H price paid. The first proviso has thus to be so read down to be in
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 439
OTHERS
consonance with the true iutendmeut of the legislature and to A
achieve as well the avowed objective of correct determination of
the taxable turnover. [Para 37] [465-C-F]
State of Karnataka v. Mis Kitchen Appliances India
Ltd. 2011 (71) Karnataka Law Journal 234; Mis
Southern Motors v. State ~f Karna/aka and Ors. B
2017(1) SCALE 604; Deputy Commissioner of Sales
Tax (Law) Board of Revenue (Taxes), Ernakulam v.
Mis. Advani Oor/ikon (P) Ltd. [19SO] 1 SCR 931 :
(19SO) 1 SCC 360; IFB Industries Ltd. v. State of
Kerala [2012] 4 SCR S02 : (2012) 4 SCC 61S;
Commissioner of Central Excise, Madras v. Mis. c
Addison & Co. Ltd. (2016) 10 SCC 56; A. V. Fernandez
v. The State of Kera/a [1957] SCR S37; Jayam & Co.
v. Assistant Commissioner and Another (2016) S
SCALE 70; Union of India and others v. Bombay Tyres
International (P) Ltd. (2005) 3 SCC 7S7; Union of D
India and others v. Bombay Tyre International Ltd. and
others [19S4] 1 SCR 347 : (19S4) 1 SCC 467 -
referred to.
Inland Revenue Commissioner v. Duke of Westminister
(1936) AC 1 24 ; Partington v. Attorney General
E
(1S69) 4 HL 100, 122 - referred to,
Case Law Reference
2011 (71) Kar Law Journal 234 referred to Para4
2017(1) SCALE 604 referred to Para4
[19SO] 1 SCR 931 referred to Paras F
[2012] 4 SCR S02 referred to Paras
(2016) 10 sec 56 referred to Paras
(2005) 3 sec 1s1 referred to Paras
[1957] SCR S37 referred to Para9
G
[2012] 4 SCR S02 referred to Para 9
(2016) 8 SCALE 70 referred to Para9
(1936) AC 1 24 referred to Para 17
(2005) 3 sec 787 referred to Para 23
[1984] 1 SCR 347 referred to Para 25 H
440 SUPREME COURT REPORTS [2017] 2 S.C.R.
A [1982] 1 SCR 629 relied on Para 29
[1985] 2 Suppl. SCR 711 relied on Para30
(2016) 11 sec 147 relied on Para 31
[1969] 2 SCR 252 relied on Para 31
B [1988] 2 SCR 962 relied on Para 32
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
10955-10971 of2016.
From the Judgment and Order dated 03.04.2013 of the High
Court of Karnataka at Bangalore in Writ Appeal Nos. 5769-5785 of
c 2012 (T-RES)
WITH
C. A. Nos. 10972-10978 of2016.
Dhruv Mehta, K. N. Bhat, Sr. Ad vs., Shanth Kumar V. Mahale,
D G. K. Y. Murthy, Jamal, Pathak, Rajesh Mahale, Tarun Gulati, S!Jarsh
Bhargava, Shashi Mathews, Kishore Kunal, Rony 0. John, Vinayak
Mathur, Ms. Rachna Yadav, Y. N. Raghupathy, ParikshitP.Angadi,Advs.
for the appearing parties.
The Judgment of the Court was delivered by
E
AMITAVA ROY, J. 1. 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 determinati9n of
taxable turnover as defined in Section 2(34) of the Karnataka Value
F Added Tax Act, 2003 (for short, hereinafter to be referred to as "the
Act") in interface with Section 30 of the Act and Rule 31 of the Rules.
2. We have heard Mr. Dhruv Mehta, learned senior counsel for·
the appellant in Civil Appeal Nos. 10955-10971 of2016, Mr. Tarun Gulati,
learned counsel for the appellant in Civil Appeal Nos. l 0972- I 0978 of
G 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-
H
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 441
OTHERS [AMITAVA ROY, J.]
2008 and 2008-2009, it raised tax invoices on the purchasers :\5 per the A
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
B
discount disclosed in the credit note. Accordingly, the net amount, so
received was reflected in his books of account and returns w.ere filed
under Income Tax Act, 1961 et al.
4. The Assistant Commissioner of Commercial Taxes, (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
c
21.06.2010 allowed deductions claimed by the appellant towards discount
accorded by the credit notes from the total tumoverto quantify the taxable
turnover. Subsequent thereto, in the face of the decision of !he High
Court in State of Karna/aka vs. Mis Kitclte11 Appliances llldia Ltd.,
2011 (71) Karnataka Law Journal 234, recognizing only discounts D
mentioned in the tax invoices as eligible for deduction from the total
turnover in tenns of Rule 3(2)(c) of the Rules, the Assessing Authority
passed the rectification orders dated 2 I .05.2012 under Section 4 I ( 1) of
the Act, disallowing the deduction of post sale discounts earlier awarded
by the corresponding credit notes. The appellant having unsuc~essfully
challenged these rectification orders before the High Court, in both the E
tiers, has invoked this Court's jurisdiction under Article 136 of the
Constitution of India for redress. The above facts pertain to the Civil
AppealNos.10955-10971 of2016.
5. The Civil Appeal 10971-10978 of2016, with Samsung India
Electronics Ltd. as the appellant, also present the same debate. The F
appellant, the assessee is as well a registered dealer under the Act and
engaged in the business of electronic goods and l.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 G
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 apptals filed
by the appellant- assessee before the Commissioner of Commercial Taxes
(Appeals), DV0--1 & Ill, Bangalore though came to be dismissed, it
H
442 SUPREME COURT REPORTS [2017] 2 S.C.R.
A 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 Mis 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
B
such sales constituted the total turnover and the tax was payable c,n the
taxable turnover. It took note of the deductions 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
c 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 th'.lt 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
D
rendition was founded on the verdict under scrutiny in the previous batch
·of appeals where Mis 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 hea.rd.
6. As the dissension stems from contrasting interpretations of
E
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.
7. The emphatic insistence on behalf of the appellant is that the
F combined reading of Section 30 and Rule 31 demonstrates in clear ierms
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
G 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 abr0gate
H
M/S. SOU.THERN MOTORS v. STATE OF KARNATAKA AND 443
OTHERS [AMITAVA ROY, J.]
Section 30 or Rule 3 I of the Rules, lest the latter provisions are rendered A
otiose. Such an explication would also be extinctive of the c0ncept of
the well ingrained concept ofturnover/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 been
urged that as the discount allowed by the credit notes is not payable to B
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
c
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. Mis. Advani Oorlikon (P) D
Ltd.(1980) 1 sec 360,
2. IFB Industries Ltd. vs. State ofKerala (2012) 4 SCC 618,
3. Commissioner of Central Excise, Madras vs. Mis. Addiso11
& co. Ltd. (2016) 1osec 56, E
4. Unio11 of I11dia a11d others vs. Bombay Tyres International
(P) Ltd. (2005) 3 sec 787.
9. In refutation, the the learned counsel forthe 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 F
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 3 l 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
G
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
H
444 SUPREME COURT REPORTS [2017] 2 S.C.R.
A Rule 31 are ofno 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 ifthe legislation permits the same.
Reliance in buttressal of the above has been placed on the decisions of
this Court in A. V. Fernandez vs. The State of Kera/a 1957 SCR 837,
lFB bu/ustries Ltd. vs. State of Kera/a (2012) 4 SCC 618 and Jayam
B
& 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.
c
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
D 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, direcay or
otherwise, whether for cash or for deferred payment, or for
commission, remuneration or other valuable consideration, and
E includes-.........
2(32) 'Tax invoice' means a document specified under Section
29 listing goods sold with price, quantity and other information as
prescribed;
2(34) 'Taxable turnover' means the turnover on which a dealer
F
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
G ofimport 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
H
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 445
OTHERS [AMITAVA ROY, J.]
goods of a dealer at all places of business in the State, whether A
ornot 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 oflndia or in the course of import of
the goods into the territory of India and the value of goods
B
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 c
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 D
conditions and restrictions as may be prescribed the amount for
which 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 E
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 F
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 hereunJer:
"29. Tax invoices and bills of sale
(1) A registered dealer effecting a sale of taxable goods or exempt G
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.
H
446 SUPREME COURT REPORTS [2017] 2 S.C.R.
A (2) A tax invoice marked as original shall not be issued to any
registered dealer in cir9umstances other than those specified in
sub-section(!), and in a case ofloss of the original, a duplicate
may be issued where such registered dealer so requests.
(3) A registered dealer,-
B (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
c 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 (I) or (3)
or sub-section (1) of Section 7, a registered dealer executing
D 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
E 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.
F · (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.
G (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
H
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 447
OTHERS [AMITAVA ROY, J.]
under any other law containing particulars of credit note or debit A
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 B
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 c
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 credit note containing the particulars as prescribed. The
Section further stipulates that when a tax invoice has been issued for D
· 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 E
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 F
88 of the Act, is lodged under Part Ildwelling 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 listed in sub-rule (2) thereof. Rule 3(2)(c) of the Rules;. G
indispensable for the present adjudication is quoted hereunder for ready ·
reference:
"3(2)(c): All.amounts allowed as discount:
PROVIDED that ~uch discount is allowed in accorda11ce with
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448 SUPREME COURT REPORTS [2017] 2 S.C.R.
A 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.
B PROVIDED FURTHER that the accounts show that the
purchaser has paid only the sum originally charged less discount."
15. Aplain reading of this quote would reveal that all am;iunts
allowed as discount would qualify for deduction from the total turnover
to ascertain the taxable turnover and thus the extent of exigibility under
c 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 bi 11 of sale i~sued
in respect of the sales relating to such discount shows the amount allowed
D 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
E 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
F be computed only on the happening of a future event(s). In any case,
however as the discount eventually sanctioned is tangible and actu~l, 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.
G 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. Fermmdis (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
H
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 449
OTHERS [AMITAVA ROY, J.]
and the Travancore Cochin General Sales Tax Rules, 1950 framed A
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
B
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 l 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 ? Court's
view of what it considers the substance of the transaction. the c
Court thinks that the case falls within the contemplatior. or spirit
of the statute. The subject is not taxable by inference or by
analogy, but only by the plain words ofa statute applicable to the
facts and circumstances of his case"
18. The following passage as well from Partington vs. Attorney D
Genera/(1869)4 HL 100, 122 was quoted with approval.
"As I understand the principle of all fiscal legislation it is this: jf
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, ifthe Crown, seeking E
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 aµpellant-
assessee to avoid deduction of an amount arising out of sales effected F
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 rebate on one hand and non liability of tax ornon imposition of tax on G
the other, it was enunciated that in the former, the sales or p:irchases
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
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450 SUPREME COURT REPORTS [2017] 2 S.C.R.
A 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
B
seek a deduction thereof was thus disapproved.
20. The distinction between "trade discount" and "cash disc.:iunt"
was elaborated upon by this Court in Mis. 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
c 1956, the sale price of goods 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 f0r the
goods supplied to the retailers, it charged them the catalogue price less
D the trade discount. The concerned Revenue Authority, for the asses:sment
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
E . 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
F 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 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
G 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 deductir.g 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
H
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKAAND 451
.OTHERS [AMITAVA ROY, J.]
the deduction of trade discount from the sale price. It also held a view A
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
B
contract that the goods wou Id be so Id by the dealer to the retai !er at the
aforesaid sale price and that there was no question of two successive ·
agreements between the parties, one providing for the sale oftae 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 betweeri the parties, this Court concluded c
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 D
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 TaxAct,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 E
. .
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 tbe registered dealer/assessee
had sold goods at a price lesser than the price at which the same had
been purchased by him. F
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 ·G
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
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452 SUPREME COURT REPORTS [2017] 2 S.C.R.
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,
B
the dealer would get the articles on the discounted 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 ofany
c 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, ifthe accounts show that the purchaser had paid only the sum
originally charged less the discount. Rule 9(a) therefore did stipulate, as
D
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
E prescript ofreference of such discount availed in the sale invoices, the
negation of the benefit of deduction of the trade discount in the
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
F
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 "nd ot//ers vs. Bombay
G Tyres Intern"tional (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
H
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 453
OTHERS [AMITAVA ROY, J.]
be deducted from the sale price having regard to the 11ature of A
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
B
from the invoice price." (emphasis supplied)
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
c
ofreasonings 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 MlsAtltlison anti Co. Ltd. (supra) was chiefly
seized with the issue of refund of excise duty under Section l IB of the D
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 E
towards deduction of turnover discount could not be denied on the ground
that there was no evidence to show who was the ultimate consumer of
the product and as to whether the ultimate consumer had borne the
burden of duty. The word "buyer" used in Section l 2B 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 F
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 Intenwtional (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 G
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
H
454 SUPREME COURT REPORTS [2017] 2 S.C.R.
A on to the ultimate buyer. It was explicated that the.word "buyer" appearing
in Clause (e) to the proviso of Section l IB(2) of the Central Excise Act.·
could n0 t be restricted to the first buyer from the manufacturer. The
prevalence of trade discounts was recognized so much so that deductions
on the basis thereof were also approved so as to determine the eventual
tax liability.
B
26. The parties noticeably are not in issue over the prevalence·
of trade discount contemplated in regular practice and that whe_rever
warranted, the dealing parties in accord !_herewith 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/
c purchase price exigible to tax under the Act and the Rules. Depe~ding
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
D inseverable co-relation between the taxable tum 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 reflected in the return of the assessee:
E 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
F 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 1iable to pay tax in excess of what is due
in law nor is the revenue authorized to exact the same. Any interpre1ation
of Rule 3(2)(c) though an integrant of a fiscal statute has to be in accord,
G in our estimate unite this fundamental mandatory postulation ..
2 7. 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 !n the
H
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 455
OTHERS [AMITAVA ROY, J.]
tax invoice or the bill of sale as the case may be. The actual quantification A
of the trade discount, depending on the nature of the trade and tt>e related
stipulations in any contract with regard thereto, may be deferred ti II 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
B
and the contract/agreement entered into between the parties, would not
render the trade discount otherwise legal and acceptable, either 11011 est
or fictitious for evading tax liability.. In the above factual pre111ise, 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 c
on account of trade discount.
28. Atrade discount conceptually is a pre sale concurrence, the
quantification whereof depends on many many foe.tors in commerce
regulating the scale of sale/purchase depending, amongst others on
goodwill, quality, marketable skills, discounts, etc. contributing to the D
ultimate performance to qualify for such discounts. Such trade discounts,
to reiterate, have already been recognized by this Court with the emphatic
riderthat 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
E
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 F
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 pr~cise. 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 G
complement each other and are by no means militative in orientation or
impact. Perceptionally, if taxable turnover is to be comprisea 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
H
456 SUPREME COURT REPORTS [2017] 2 S.C.R.
A 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. J11come Tax Officer,
Ernakulam a11dA11r. AIR 1981 SC 1922, while interpreting Section 52
of the Income Tax Act 1961 favoured an interpretation in departure
B from a strict literal reading thereof. For ready reference, Section 52, as
interpreted, is extracted herein below.
"Section 52 (I) 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 beliew that
c 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.
D
(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 the date of the
transfer exceeds the full value of the consideration declared by
the asses see in respect of the transfer of such capital assets by
E 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."
F 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
G 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 dec!ared.
H
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 457
OTHERS [AMITAVA ROY, J.]
Once the Income-tax Officer is satisfied that this condition A
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.
B
No more is necessary to be proved, contended the Revenue. To
introduce any further condition such as understatement of
consideration in 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 c
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
D
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 E
prescience and perfect clarity." We can do no better than repeat
the famous words of Judge Learned Hand when he said:
" .... it is irue 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 F
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" G
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
H
458 SUPREME COURT REPORTS [2017] 2 S.C.R.
A 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
B 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 whic.h all collectively create"
Keeping these observations in mind we may now approach
the construction of Section 52 Sub-section (2).
c 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
D 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 leaq to
a wholly unreasonable result which could never have been
intended by the legislature. Take, for example, a case where A
E 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
F 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
G 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
H
MIS. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 459
OTHERS [AMITAVA ROY, J.]
sold the property should be liable to pay tax on capital gains A
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
B
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 been received by him. If c
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
D
at which he originally purchased it, he should be liable to pay tax
on the basis as ifhe 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) E
according to its strict literal construction. We must therefore
eschew literalness in the interpretation of Section 52 Sub-section
(2) and t1:yto arrive at an interpretation which avoids this absurdity
and mischiefand makes the provision rational and sensible, unless
of course. our hands are tied and we cannot find any escape
F
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 G
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
H
460 SUPREME COURT REPORTS [2017] 2 S.C.R.
A provision. We think that, having regard to this well recognised
rule of interpretation, a fair and 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
B
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
c (2J."
30. In Commissioner of Income Tax, Bangalore Vs. J.H.
Got/a 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
D rather than injustice, then such construction should be preferred to the
literal construction.
31. In a recent rendition in State of J/10rkl10nd 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
E 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 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 Hansmj Gordhandas vs. H.H. Dave, Assistant Collector of
F 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
G 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 havingjoined 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
H
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKAAND 461
OTHERS [AMITAVA ROY, J.]
society which, through the cooperative effort should produce A
. 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 l<mguage of the notifications, dated July 31,
B
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. The.re 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 c
statute there is no room for any intendment but regard must be
hacj 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
D
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]
E
32. In the same vein, the following passage from Mis 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 F
and manifest and without doubt, that construction oughtto prevail
unle.ss 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 G
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.
H
462 SUPREME COURT REPORTS [2017] 2 S.C.R.
A 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. 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
B
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.
c 24. In this regard, reference to Maluuleo 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,
D 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
E Tax (2001) 3 SCC 359, Mahapatra, J. has opined that
interpretation should serve the intent and purpose of the
statutory provision. Jn that context, the learned Judge has
referred to the authority in State of T.N. v. Kodaikana/ Motor
Union (P) Ltd. ( 1986) 3 SCC 91 wherein this Court after
F referring to K.P. Varghese v. ITO[ ( 1981) 4 SCC 173 and Luke
v. IRC(1964) 54 ITR 692 has observed:-
"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.
G
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.
H
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 463
OTHERS [AMITAVA ROY, J.]
We need not always cling to literalness and should seek to A
endeavour to avoid an unjust or absurd result. We should not
make a mockery oflegislation. 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:- B
" ... 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. c
It was said that the literalness in the interpretation of 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 D
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 E
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 .... "
F
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. G
35. In Seaford Court Estmes 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
H
464 SUPREME COURT RBPORTS [2017] 2 S.C.R.
A 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
B
provided for this or that or have been guilty of some or other aml)iguity,
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
c then he must supplement the written word so as to give "force and life"
to the intention of the legislature.
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
D 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 t.he only device to guard against
E
possible avoidance of tax under the clo11k thereof. Axiomatically, therefor
the interp~etation 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
F 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 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
G 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
H
M/S. SOUTHERN MOTORS v. STATE OF KARNATAKA AND 465
OTHERS [AMITAVA ROY, J.]
would be to ignore the contemporaneous actuality and be unrealistic, A
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,
B
such avoidance can be effectively prevented by insisting on the proof of
such discount, if granted. The interpretation to th~ contrary, as sought to
be assigned by the Revenue to the first proviso to Rule 3 (2)(c) of the
Rules, when 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 c
and the underlying objectives in particularofSections 29 and 30 of the
Act and Rule 3 of the Rules, we are of the considered opinion that the
requirement ofreference 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 D
sale sans the trade discount. However, the transactions allowing discm~nt
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 E
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 the taxable turnover. The
contrary interpretation accorded by the High Court being in defiance of F
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.
Devika Gujral Appeals .allowed.
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