Judgment Summary: Exceptions to Exemptions in Sales Tax Statutes

On September 19th, 2022 the 5-Judge Constitution Bench led by Justice Indira Banerjee held that the decision to refer this case to a Constitution Bench was incorrect. They overturned the smaller Bench’s Judgment which held that there was a conflict between two Supreme Court cases to decide if ‘Pan Masala & Gutka’ was exempted from State sales tax as a ‘Tobacco’ product. The Constitution Bench held that there was no conflict between the two cases. The case was sent back to a regular 3-Judge Bench for a decision on the taxation of ‘Pan Masala & Gutka’. Justice Banerjee authored the unanimous decision.

The Bench was originally meant to decide if sales tax can be imposed on certain goods (Pan Masala & Gutka) when the broad heading they are included under (Tobacco) is exempted from sales tax.

Instead, the Bench provided a definitive answer to a different question. They held that when deciding the precedential value of a Judgment, it is only important to consider the number of Judges on the Bench and not the number of Judges in the majority. For example, a Judgment delivered by a 7-Judge Bench where there is a 4:3 majority has more value than a unanimous Judgment from a 5-Judge Bench despite there being more Judges in the majority. Justice Hemant Gupta wrote a short concurring opinion agreeing with Justice Banerjee on this issue.

How Did the Case Reach the Constitution Bench?

The Delhi Sales Tax Act, 1975 (DST Act) exempt all the goods mentioned in the Third Schedule of the Act from sales tax. ‘Tobacco’ products are included in this Schedule. However, on January 31st, 2000 the Delhi Lieutenant Governor issued a notification which included ‘Pan Masala & Gutka’ in the First Schedule of the DST Act. Goods included in this Schedule are taxable.

A Delhi-based company called ‘Shanti Fragrances’ challenged the notification at the Delhi High Court in 2004. They argued that a 3-Judge Bench at the SC in Kothari Products Ltd. v Govt. of Andhra Pradesh (2000) unanimously held that ‘Gutka’ is a Tobacco product. As a Tobacco product, they stated that it was already subject to sales tax under a Central legislation, the Additional Duties of Excise Act, 1957 (ADE Act), so it cannot be taxed under a State legislation as well. Shanti Fragrances also argued that the Lieutenant Governor must first issue a notification withdrawing ‘Pan Masala & Gutka’ from the Third Schedule before issuing a separate notification to make it taxable.

The Union government hinged their arguments on a 3-Judge Bench SC decision too. They referred to Central Sales Tax v Agra Belting Works (1987). This case dealt with the withdrawal of tax exemption provided to ‘tarpaulins’ under the U.P. Sales Tax Act, 1948 while ‘cotton fabrics of all kinds’ were still exempted from sales tax. The 2:1 majority in this case held that there was no requirement for an initial notification withdrawing a tax exemption for a good before imposing sales tax on it.

In November 2004, the Delhi High Court decided the case in favour of the Union and held that ‘Pan Masala & Gutka’ could be subjected to sales tax. Shanti Fragrances challenged this decision at the SC in March 2005. In September 2017, a 2-Judge Bench comprising Justices R.F. Nariman and S.K. Kaul stated that the Judgments in Kothari Products and Agra Belting Works were in direct conflict and referred the case to a Constitution Bench. They also referred the issue of deciding whether the decision Kothari Products should have more value, as a unanimous decision, than Agra Belting Works where Justice B.C. Ray dissented.

The Constitution Bench heard arguments for one day on September 13th, 2022.

There is No ‘Direct Conflict’ Between Cases

The Bench unanimously decided that Kothari Products and Agra Belting Works dealt with two separate issues. The issue in Kothari Products was if States can impose sales tax on goods which were already taxed under the First Schedule of the Central ADE Act. On the other hand, Agra Belting Works answered the question of whether sales tax could be imposed on specific goods when the broad heading they were included under was exempted from sales tax.

The Bench held that the reference Judgment sending the case to a Constitution Bench was ‘incompetent’ and referred it back to a regular 3-Judge Bench.

Number of Judges in Majority Does Not Matter

The Bench agreed with Justice R. Bhat’s concurring Judgment in the Maratha Reservations case. Justice Bhat stated that a unanimous decision in one case cannot be used as a reason to doubt the legitimacy of a Judgment in another case which has a narrow majority. According to him, the bench strength (number of judges on the bench) should be the only consideration. Departing from this principle would result in large-scale uncertainty on the value of past Judgments. Justice Banerjee noted that Justice L.N. Rao agreed with Justice Bhat and there were no dissenting opinions on this point.

Justice Hemant Gupta wrote a concurring opinion, agreeing with Justice Banerjee and adding to her argument. He referred to Article 145(5) to argue that the Constitution of India recognises the binding nature of the majority opinion, but adds that would not prevent a judge from dissenting.

Further, Justice Gupta referred to and agreed with the dissenting opinions delivered Justices P.N. Bhagwati and N.M. Miabhoy in State of Gujarat v Gordhandas Keshavji Gandhi (1962) at the Gujarat HC.

Justice Miabhoy said a Judgement of a larger bench has value because the decision was made as a result of the discussion and deliberation between this larger number of judges, not the number of judges in the majority.

Justice Bhagwati said this is an ‘anomaly’ where the majority decision by a larger bench hold more sway than a unanimous decision from a smaller bench, even if more judges are in agreement in the smaller bench. However, this anomaly must be accepted, or else multiple smaller benches holding the same view can overrule a larger bench decision simply by having numerical superiority.