Asia Sugar And Chemical Co., Devangere vs The State Of Karnataka

Court
Supreme Court

2026 INSC 693
REPORTABLE

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 48 OF 2009

ASIA SUGAR & CHEMICAL CO.,
DEVANGERE ... APPELLANT(S)

VERSUS

THE STATE OF KARNATAKA
& ORS. ... RESPONDENT(S)
WITH
CIVIL APPEAL NO. OF 2026
ARISING OUT OF SLP(C) NO. 25469 OF 2009

M/S INDIAN SUGAR AND GENERAL
EXPORTS IMPORT CORPORATION
LTD. ... APPELLANT(S)

VERSUS

STATE OF KARNATAKA AND
OTHERS ... RESPONDENT(S)

J U D G M E N T
ARAVIND KUMAR J.
Signature Not Verified
Digitally signed by
1. Leave granted in SLP(C) No. 25469 of 2009.
RASHI GUPTA
Date: 2026.07.13
17:23:24 IST
Reason:
Civil Appeal No. 48 of 2009 Page 1 of 32


2. These appeals raise a question concerning the true scope of
an exemption granted to “sugar” under the Karnataka Sales
Tax Act, 1957, and the legal effect of a subsequent
legislative amendment by which such exemption was
confined to sugar “produced or manufactured in India” with
retrospective effect. The controversy is not merely whether
a fiscal enactment can operate retrospectively. The larger
issue is whether a commodity which stood exempted under
the statutory entry as it then read, and which was so treated
by the taxing authority itself, can thereafter be
retrospectively excluded from the exemption and subjected
to tax for past periods, together with the incidents of penalty
and interest.
3. The appeals arise out of the common judgment dated
26.11.2007 passed by the Division Bench of the High Court
of Karnataka, whereby the appeals preferred by the State
were allowed, the orders passed by the Single Judge were
set aside, and the retrospective amendment made to the
exemption entry relating to “sugar” was upheld. The Single
Judge had earlier struck down the retrospective operation of
the amendment on the ground that it imposed an
unreasonable burden on dealers who had not collected tax
during the relevant assessment periods.
Civil Appeal No. 48 of 2009 Page 2 of 32


4. Since the statutory amendment, the relevant facts, the
question of interpretation, and the constitutional challenge
are common, both appeals are disposed of by this common
judgment.
I. FACTUAL BACKGROUND
5. The Karnataka Sales Tax Act, 1957, hereinafter referred to
as “the KST Act”, was enacted to provide for levy of tax on
sale or purchase of goods in the State of Karnataka. Section
8 of the KST Act provided for exemption from tax in respect
of goods specified in the Fifth Schedule. The provision, as
relevant for the present controversy, reads as follows:
“8. Exemption of tax.
No tax shall be payable under this Act on the sale of
goods specified in the Fifth Schedule subject to the
conditions and exceptions, if any, set out therein.”
6. Sugar found place in the Fifth Schedule as an exempted
commodity. The history of the entry assumes significance,
for the answer to the present dispute turns largely upon the
manner in which the Legislature described the commodity
before Karnataka Act No. 5 of 2001 came into force.
7. Entry 31-B, as originally inserted in the Fifth Schedule,
exempted:
Civil Appeal No. 48 of 2009 Page 3 of 32


“Sugar other than sugar candy, confectionery and
the like.”
8. With effect from 01.04.1986, the entry was amended to read:
“Sugar including sugar candy but excluding
confectionery and the like.”
9. With effect from 01.04.1992, the entry was further amended
to read:
“Sugar as described from time to time in Column 3
of the First Schedule to the Additional Duties of
Excise (Goods of Special Importance) Act, 1957, but
excluding confectionery and the like.”
10. With effect from 01.04.1998, the entry stood renumbered as
Entry 51 and continued, in substance, as:
“Sugar as described from time to time in Column 3
of the First Schedule to the Additional Duties of
Excise (Goods of Special Importance) Act, 1957.”
11. It is thus clear that prior to the amendment brought about in
2001, the exemption entry used the expression “sugar”. It
did not use the words “sugar produced in India”, “sugar
manufactured in India”, “indigenous sugar”, or any
equivalent expression which could, on its own terms,
restrict the exemption by reference to the place of
production or manufacture.
Civil Appeal No. 48 of 2009 Page 4 of 32


12. The appellant in Civil Appeal No. 48 of 2009, Asia Sugar &
Chemical Co., was engaged in the business of trade in sugar
and had imported substantial quantities of sugar during the
period 1994 to 1996. The appellant in the connected appeal,
M/s Indian Sugar and General Export Import Corporation
Ltd., was registered under the KST Act and the Central
Sales Tax Act, 1956, and was also dealing in imported
sugar.
13. During the relevant assessment periods, the assessees
imported sugar from outside the country and sold the same
either within the State of Karnataka or in the course of inter-
State trade. Their case is that they proceeded on the footing
that sugar, including imported sugar, was exempt under the
Fifth Schedule and that, acting on such understanding, they
did not charge or collect sales tax from their purchasers.
14. This aspect is not a matter of mere equity. It has a direct
bearing on the nature of the burden now sought to be
imposed. Sales tax, in its ordinary commercial operation, is
collected by the dealer from the purchaser and is thereafter
paid to the State. Where the commodity is treated as exempt,
the dealer does not collect tax. If, years later, the law is
retrospectively amended and the dealer is called upon to pay
tax for past transactions, the burden is not passed on in the
ordinary manner. It rests upon the dealer himself.
Civil Appeal No. 48 of 2009 Page 5 of 32


15. The original assessments were completed by granting
exemption on imported sugar. In the case of Asia Sugar &
Chemical Co., the reassessment notice itself records that
exemption had earlier been allowed on transactions of
imported sugar by treating the goods as falling under Entry
31-B of the Fifth Schedule and by relying upon the
judgment of this Court in State of Kerala and Another v.
1
State Trading Corporation of India Ltd.
16. The relevance of the said decision may be noticed at this
stage. In State Trading Corporation of India Ltd. v.
Assistant Commissioner (Assessment-I), Special Circle,
2
Trivandrum , the Kerala High Court considered whether
imported sugar was exempt from sales tax where the
exemption entry adopted the definition of sugar from the
Central Excise law. The argument on behalf of the State of
Kerala was that the description of sugar in the excise entry
was confined to sugar produced in India. The Kerala High
Court rejected the said argument. It held that the definition
had been borrowed for the limited purpose of identifying the
commodity and not for incorporating a territorial limitation.
17. The Kerala High Court reasoned that the phraseology in the
excise statute could not be bodily lifted so as to add words

1
(1999) 9 SCC 102
2
(1986) 61 STC 190 (Ker)
Civil Appeal No. 48 of 2009 Page 6 of 32


such as “in India” after the word “factory” in the definition
of sugar, when the sales tax statute itself did not so provide.
The Court observed, in substance, that the expression had
been borrowed only to define what sugar is for the purpose
of the sales tax exemption. The decision was affirmed by
this Court in State of Kerala and Another v. State Trading
Corporation of India Ltd. (supra)
18. The position, therefore, prior to 2001, was that the
exemption entry in Karnataka contained no origin-based
limitation, and the prevailing judicial understanding in
relation to similarly worded exemption provisions was that
imported sugar was not excluded merely because it was
imported.
19. Thereafter, Karnataka Act No. 5 of 2001 came to be
enacted. The relevant amendment inserted the words
“produced or manufactured in India” after the word
“Sugar”. The amendment was given retrospective operation
through a deeming clause. The material part reads thus:
“In the Karnataka Sales Tax Act, 1957, in the
entries relating to Serial No. 51 as it exists from the
first day of April, 1998, after the word ‘Sugar’, the
words and brackets ‘produced or manufactured in
India’ shall be and shall be deemed always to have
been inserted.”
Civil Appeal No. 48 of 2009 Page 7 of 32


20. Simultaneously, a separate entry was introduced in respect
of sugar imported from outside the country. The
consequence of the amendment was that exemption came to
be confined to sugar produced or manufactured in India.
Imported sugar, which had earlier been treated as falling
within the exempted commodity “sugar”, was
retrospectively excluded from the exemption.
21. Pursuant to the amendment, reassessment proceedings were
initiated. Notices were issued under Section 9(2) of the
Central Sales Tax Act, 1956 read with Section 12-A of the
KST Act. The basis of reassessment was that by virtue of
the retrospective amendment, imported sugar was not
entitled to the exemption earlier granted.
22. In the case of Asia Sugar & Chemical Co., notice dated
16.01.2003 was issued proposing reassessment for the
period 03.12.1994 to 31.03.1995. The notice recorded that
exemption had earlier been allowed on sales of sugar in the
course of inter-State trade and on stock transfers outside the
State aggregating to Rs.9,02,52,932. Reassessment order
was thereafter passed imposing tax of Rs.90,25,293 for the
period 03.12.1994 to 31.03.1995. Similar proceedings were
initiated for the subsequent period.
23. In the case of M/s Indian Sugar and General Export Import
Corporation Ltd., the authority imposed tax on sale of
Civil Appeal No. 48 of 2009 Page 8 of 32


imported sugar at 4% for assessment years 1994-95 and
1995-96 under the KST Act. The assessee further contended
that on inter-State sales, tax was imposed at 10%, ignoring
Section 8(2) of the Central Sales Tax Act, 1956.
24. The assessees approached the High Court of Karnataka
challenging the constitutional validity of the retrospective
insertion of the words “produced or manufactured in India”
and the consequential reassessment orders.
25. The Single Judge of the High Court, by common order dated
26.05.2003, struck down the retrospective operation of the
amendment as violative of Article 19(1)(g) of the
Constitution. The Single Judge reasoned that the
amendment imposed an unexpected and unreasonable
burden on dealers who had acted under the exemption
regime and had not collected tax from their purchasers. The
reassessment and revision orders were accordingly set
aside.
26. The State preferred writ appeals. The Division Bench of the
High Court, by common judgment dated 26.11.2007,
allowed the appeals, set aside the orders of the Single Judge,
upheld the retrospective amendment, and restored the
reassessment proceedings. The correctness of the said
judgment is now before us.
Civil Appeal No. 48 of 2009 Page 9 of 32


II. SUBMISSIONS
A. SUBMISSIONS ON BEHALF OF THE ASSESSEES
27. Learned Senior Counsel appearing for the assessees
submitted that the entire case must be tested on the language
of the exemption entry as it stood prior to the amendment of
2001. It was urged that the entry exempted “sugar”
simpliciter. Neither Entry 31-B nor the later renumbered
Entry 51 contained any words restricting exemption to sugar
produced or manufactured in India.
28. Learned Senior Counsel submitted that the Legislature
amended the entry on more than one occasion, including in
1986 and 1992. On neither occasion did it restrict exemption
to domestic sugar. It was urged that when the Legislature
consciously used the expression “sugar” and did not add any
words of limitation, the Court cannot supply such words by
implication.
29. It was further submitted that the reference to the Additional
Duties of Excise (Goods of Special Importance) Act, 1957
was for the limited purpose of identifying the commodity. It
was not an incorporation of the entire excise scheme.
According to learned Senior Counsel, the State seeks to
convert a description of goods into a condition of origin,
which the text of the entry does not permit.
Civil Appeal No. 48 of 2009 Page 10 of 32


30. It was further submitted that this understanding was not
confined to the assessees. The Department itself granted
exemption in the original assessments. The reassessment
notice in the case of Asia Sugar & Chemical Co. records that
exemption was allowed in reliance on State of Kerala and
Another v. State Trading Corporation of India Ltd. (supra)
31. Learned Senior Counsel submitted that Karnataka Act No.
5 of 2001 was not clarificatory. It introduced, for the first
time, a source-based distinction by inserting the words
“produced or manufactured in India”. The amendment,
therefore, was a substantive withdrawal of exemption.
32. It was further submitted that though retrospective fiscal
legislation is not unknown to law, the retrospective
operation in the present case is unconstitutional to the extent
it imposes a burden on completed transactions. The
assessees had not collected tax. The assessments had been
completed. The transactions had attained finality. To
compel payment years later would convert what is
ordinarily an indirect tax into a direct burden on the dealer.
33. Learned Senior Counsel submitted that the Single Judge
correctly appreciated the factual and constitutional
dimension of the case. According to him, the Division
Bench confined itself to legislative competence and failed
Civil Appeal No. 48 of 2009 Page 11 of 32


to examine the manner in which the retrospective levy
operated upon the assessees.
34. On the Central Sales Tax aspect, it was submitted that the
authorities had applied the rate of 10% on inter-State sales
without proper regard to Section 8(2) of the Central Sales
Tax Act, 1956. It was urged that the reassessment orders, in
any event, require interference on this ground.
B. SUBMISSIONS ON BEHALF OF THE STATE
35. Learned counsel appearing for the State submitted that the
Legislature was competent to amend the KST Act and to
withdraw or restrict an exemption. It was urged that
exemption is a matter of fiscal policy and no dealer can
claim a vested right that an exemption must continue either
prospectively or retrospectively.
36. It was submitted that the exemption entry relating to sugar
had always to be understood in the context of the Additional
Duties of Excise regime. The exemption, according to the
State, was intended for sugar produced or manufactured in
India and not for imported sugar which did not stand on the
same footing for the purposes of additional duties of excise.
37. Learned counsel further submitted that the Legislature,
having noticed the unintended consequence of the earlier
wording, inserted the words “produced or manufactured in
Civil Appeal No. 48 of 2009 Page 12 of 32


India” with a deeming clause. Once the Legislature has
expressly declared that the words shall be deemed always to
have been inserted, the Court must give full effect to the
legal fiction.
38. It was further submitted that retrospective fiscal legislation
is valid if the Legislature has competence. According to the
State, hardship to an assessee is not a ground to strike down
a taxing statute. The Division Bench, it was urged, correctly
restored the reassessment proceedings.
39. With regard to computation under the Central Sales Tax
Act, it was submitted that if any limited arithmetical or rate-
related grievance survives, the same may be examined by
the assessing authority in accordance with law. Such
grievance, however, cannot affect the validity of the
amendment.
III. QUESTIONS FOR CONSIDERATION
40. On the rival submissions and the statutory scheme noticed
above, the following questions arise for consideration:
i. Whether imported sugar was covered by the exemption
entry relating to “sugar” in the Fifth Schedule to the
Karnataka Sales Tax Act, 1957 prior to Karnataka Act
No. 5 of 2001?
Civil Appeal No. 48 of 2009 Page 13 of 32


ii. Whether Karnataka Act No. 5 of 2001, inserting the
words “produced or manufactured in India” with
retrospective effect, is within the legislative
competence of the State and constitutionally valid?
iii. Whether the retrospective operation of the amendment
can be enforced without qualification against dealers
who had acted under the earlier exemption regime,
whose assessments had been completed, and who had
not collected tax from purchasers?
iv. What consequential relief should follow in respect of
reassessment, penalty, interest, and computation under
the Central Sales Tax Act, 1956?
IV. GOVERNING PRINCIPLES
41. Since the questions raised lie at the intersection of statutory
interpretation, exemption, legislative validation and
constitutional limits on retrospective taxation, it would be
apposite to first notice the governing principles.
42. A taxing statute has to be construed on the strength of its
own language. In Govind Saran Ganga Saran v.
3
Commissioner of Sales Tax , this Court emphasized that
the components of a tax must be clear. The subject of tax,
the person liable, the rate and the measure must all be

3
1985 Supp SCC 205
Civil Appeal No. 48 of 2009 Page 14 of 32


ascertainable. If any of these elements is uncertain, the levy
cannot be sustained by intendment.
4
43. In Mathuram Agrawal v. State of Madhya Pradesh , this
Court reiterated that in a taxing statute one has to look
merely at what is clearly said. There is no room for
intendment. Nothing is to be read in and nothing is to be
implied. The Court is not entitled to fill gaps in a charging
or taxing provision on considerations of supposed
legislative policy.
44. The same discipline applies while construing an exemption
entry. It is no doubt true that a person claiming exemption
must bring himself within the exemption. But where the
entry describes a commodity in clear terms, the Court
cannot curtail that description by adding words which the
Legislature did not employ. Strict construction does not
mean strained construction. It means construction according
to the text.
45. The second set of principles concerns retrospective fiscal
legislation. In Rai Ramkrishna and Others Etc. v. State of
5
Bihar , this Court held that a taxing statute is not
unconstitutional merely because it operates retrospectively.
The power of the Legislature to enact retrospective fiscal

4
(1999) 8 SCC 667
5
AIR 1963 SC 1667
Civil Appeal No. 48 of 2009 Page 15 of 32


laws is well recognized. In Epari Chinna Krishna Moorthy
6
v. State of Orissa and Others , and M/s. Hiralal Rattanlal
7
Etc. Etc. v. State of U.P. and Another Etc. Etc., this Court
upheld retrospective sales tax legislation and validation
laws, subject to legislative competence and constitutional
limitations.
46. The leading authority on validation laws is Shri Prithvi
Cotton Mills Ltd. and Another v. Broach Borough
8
Municipality and Others . The principle stated therein is
that where a tax has been invalidly imposed for want of
power or on account of some defect, the Legislature may
remove the defect and validate the levy retrospectively,
provided it has competence to do so. The Court explained
that the Legislature does not overrule a judgment merely by
saying so. It must remove the basis of the judgment by
enacting a valid law.
47. In P. Kannadasan and Others v. State of Tamil Nadu and
9
Others , the same principle was reiterated. A Legislature
may change the law retrospectively and thereby alter the
legal foundation on which a judgment rests. It cannot,

6
AIR 1964 SC 1581
7
(1973) 1 SCC 216
8
(1969) 2 SCC 283
9
(1996) 5 SCC 670
Civil Appeal No. 48 of 2009 Page 16 of 32


however, exercise judicial power by merely declaring a
judgment to be incorrect.
48. The third principle concerns exemption as a matter of fiscal
policy. In Kasinka Trading and Another v. Union of India
10
and Another , this Court held that an exemption granted in
public interest can be withdrawn in public interest.
In Shrijee Sales Corporation and Another v. Union of
11
India , this Court reiterated that public interest may justify
withdrawal of an exemption and that no assessee can insist
on continuation of a concession contrary to policy.
49. The fourth principle is equally important. Retrospectivity,
though permissible, is not immune from constitutional
scrutiny. In Empire Industries Limited and Others v.
12
Union of India and Others , this Court upheld
retrospective fiscal legislation, but made it clear that the
question in such cases is whether the retrospective operation
is unreasonable. In R.C. Tobacco (P) Ltd. and Another v.
13
Union of India and Another , this Court upheld
retrospective withdrawal of an exemption, but observed that
the unreasonableness of retrospectivity must be founded on
the facts of the particular case.

10
(1995) 1 SCC 274
11
(1997) 3 SCC 398
12
(1985) 3 SCC 314
13
(2005) 7 SCC 725
Civil Appeal No. 48 of 2009 Page 17 of 32


14
50. In D. Cawasji & Co. v. State of Mysore , this Court was
concerned with a retrospective amendment imposing a
heavy burden after a long lapse of time. The decision is not
an authority for the proposition that retrospective fiscal
legislation is per se invalid. It is an authority for the more
measured proposition that the duration, purpose and impact
of retrospectivity are relevant in testing constitutional
reasonableness.
51. In Commissioner of Income Tax (Central)-I, New Delhi v.
15
Vatika Township Private Limited , this Court restated the
general principle that legislation which imposes a new
burden or attaches a new disability is ordinarily presumed
to be prospective unless the language clearly indicates
otherwise. Where the language is clear, the presumption
yields. However, clarity of language answers only the
interpretive question. It does not altogether exclude
constitutional scrutiny where the burden imposed is said to
be unreasonable.
52. It is with these principles in mind that the questions arising
in the present appeals must be answered.

14
1984 Supp SCC 490
15
(2015) 1 SCC 1
Civil Appeal No. 48 of 2009 Page 18 of 32


V. ISSUE NO. I: WHETHER IMPORTED SUGAR WAS
COVERED BY THE PRE-2001 EXEMPTION ENTRY
53. The first issue is one of interpretation of the exemption entry
as it stood before Karnataka Act No. 5 of 2001. The entry
exempted “sugar”. After 01.04.1992, it described sugar by
reference to Column 3 of the First Schedule to the
Additional Duties of Excise (Goods of Special Importance)
Act, 1957. The question is whether such reference excluded
imported sugar.
54. The contention of the State is that the reference to the
Additional Duties of Excise Act necessarily confines the
entry to sugar produced or manufactured in India. The
contention of the assessees is that the reference was only to
identify the commodity.
55. The submission of the assessees merits acceptance.
56. A statutory entry may incorporate a definition from another
enactment for different purposes. It may incorporate the
entire scheme of the other enactment, or it may merely
borrow a description for identifying the commodity. The
answer depends upon the text, context and purpose of
incorporation. In the present case, the exemption entry did
not refer to liability to additional duties of excise. It referred
to “sugar as described” in the First Schedule to the
Additional Duties of Excise Act. The expression “as
Civil Appeal No. 48 of 2009 Page 19 of 32


described” is significant. It identifies the goods. It does not,
without more, import an origin-based limitation.
57. The Kerala High Court in State Trading Corporation of
India Ltd. v. Assistant Commissioner (Assessment-I),
Special Circle, Trivandrum (supra) , dealt with the very
nature of this argument. The relevant entry in the Kerala
statute exempted sugar by referring to the definition in the
Central Excise law. The contention advanced by the State
was that the excise description applied only to sugar
produced in India. Repelling the contention, the High Court
held that the definition of “sugar” had been borrowed for the
purpose of the sales tax exemption only to identify what
sugar is.
58. The Kerala High Court observed, in substance, that it would
not be justified, in the absence of legislative indication, to
give a strained interpretation to the definition of sugar by
adding the words “in India” after the word “factory”. It
further observed that the object of incorporation was only to
define sugar for the purpose of the sales tax exemption and
not to apply the provisions of the Excise Act to the Sales
Tax Act.
59. The said view was affirmed by this Court in State of Kerala
and Another v. State Trading Corporation of India Ltd.
(supra). The said decision, though arising under the Kerala
Civil Appeal No. 48 of 2009 Page 20 of 32


statute, is of considerable persuasive value because the
nature of the commodity description and the argument of
origin-based exclusion were substantially similar.
60.
The conduct of the Karnataka Department itself is consistent
with this understanding. The original assessments granted
exemption on imported sugar. The reassessment notice
issued to Asia Sugar & Chemical Co. expressly records that
exemption had earlier been allowed on the basis of Entry
31-B and the judgment in State of Kerala and Another v.
State Trading Corporation of India Ltd. (supra)
61. The State’s contention that imported sugar did not bear
additional duties of excise in the same manner as domestic
sugar may furnish a reason why the Legislature later chose
to amend the entry. But such reason cannot be used to
rewrite the earlier entry. If the exemption was intended to
be confined to domestic sugar, the Legislature could have
said so. It eventually did so in 2001. That later amendment
is the best indication that words of limitation were
introduced only thereafter.
62. To accept the State’s argument would be to read into the
pre-2001 entry words which were not there. It would
amount to saying that “sugar” meant “sugar produced or
manufactured in India” even before the Legislature inserted
Civil Appeal No. 48 of 2009 Page 21 of 32


those very words. Such an approach would offend the
settled rule of strict construction in taxing statutes.
63. We therefore hold that prior to Karnataka Act No. 5 of 2001,
imported sugar was covered by the exemption entry relating
to sugar in the Fifth Schedule to the KST Act.
VI. ISSUE NO. II: VALIDITY OF KARNATAKA ACT NO.
5 OF 2001
64. The next question is whether Karnataka Act No. 5 of 2001,
which inserted the words “produced or manufactured in
India” with retrospective effect, is constitutionally valid.
65. At the outset, it must be stated that the amendment is not
merely clarificatory. Once it is held that imported sugar was
covered by the exemption before 2001, the amendment
cannot be characterized as a mere explanation of an existing
legal position. It altered the legal position. It withdrew the
exemption from imported sugar retrospectively.
66. However, this conclusion does not by itself invalidate the
amendment. The State Legislature, at the relevant time, had
legislative competence under Entry 54 of List II to levy tax
on sale or purchase of goods. The power to levy tax includes
the power to grant exemption. The power to grant
exemption includes the power to withdraw or restrict
exemption.
Civil Appeal No. 48 of 2009 Page 22 of 32


67. The law in Kasinka Trading and Another v. Union of India
and Another (supra) , and Shrijee Sales Corporation and
Another v. Union of India (supra) , makes it clear that
exemption is a matter of fiscal policy. A concession granted
by the State does not create an indefeasible right that it shall
continue. Public interest and revenue considerations may
justify withdrawal.
68. Nor can the amendment be invalidated merely because the
withdrawal has been made retrospective. In Rai
Ramkrishna and Others Etc. v. State of Bihar (supra) , this
Court recognized that retrospective taxation is within
legislative power, subject to constitutional restraints.
In Epari Chinna Krishna Moorthy v. State of Orissa and
Others (supra) , and M/s. Hiralal Rattanlal Etc. Etc. v. State
of U.P. and Another Etc. Etc. (supra) , retrospective
validation of sales tax legislation was upheld. In P.
Kannadasan and Others v. State of Tamil Nadu and

Others (supra) , this Court again recognized the power of the
Legislature to retrospectively alter the law, provided it acts
within its legislative field.
69. The amendment in the present case uses clear language. The
words “produced or manufactured in India” are inserted
with a declaration that they shall be deemed always to have
Civil Appeal No. 48 of 2009 Page 23 of 32


been inserted. The intention to give retrospective effect is
therefore manifest.
70. The contention that the amendment is beyond legislative
competence is accordingly rejected. The contention that
retrospectivity by itself renders the law unconstitutional is
also rejected.
71. We hold that Karnataka Act No. 5 of 2001 is within
legislative competence and is constitutionally valid.
VII. ISSUE NO. III: WHETHER THE RETROSPECTIVE
LEVY CAN BE ENFORCED WITHOUT
QUALIFICATION
72. The more difficult question is not whether the law is valid,
but how far its retrospective consequences can be enforced
against the assessees.
73. The State contends that once the amendment is valid, all
reassessments must stand in full. The assessees contend that
the retrospective levy must fail altogether. Neither extreme,
in our view, does complete justice to the legal position.
74. Five facts must be kept in the forefront:
First , prior to the amendment of 2001, imported sugar was
covered by the exemption entry.
Civil Appeal No. 48 of 2009 Page 24 of 32


Secondly , the Department itself completed the original
assessments by granting exemption.
Thirdly , the assessees did not collect tax from purchasers.
Fourthly , the transactions related to assessment years long
prior to the amendment.
Fifthly , reassessment was initiated only because of the
retrospective amendment.
75. These facts distinguish the present case from a simple case
of validation of a defective levy. This is not a case where a
levy always existed and a procedural defect alone was
cured. This is a case where an exemption earlier available
and acted upon has been retrospectively withdrawn.
76. The distinction is important. A validating law, in the
classical sense explained in Shri Prithvi Cotton Mills Ltd.
and Another v. Broach Borough Municipality and Others
(supra) , removes the defect on account of which the levy
failed and validates what could otherwise have been
lawfully levied. Here, the Legislature has certainly altered
the law retrospectively. It had the competence to do so. But
the Court must still examine whether the incidents attached
to such retrospective levy, namely penalty and interest for
Civil Appeal No. 48 of 2009 Page 25 of 32


the past period, can follow in the same manner as they
would in an ordinary case of default.
77. In R.C. Tobacco (P) Ltd. and Another v. Union of India
and Another (supra) , this Court upheld retrospective
withdrawal of exemption, but the judgment itself recognizes
that reasonableness of retrospective operation has to be
considered with reference to the facts. In Empire Industries
Limited and Others v. Union of India and Others (supra)
retrospective fiscal legislation was upheld, but not on the
footing that retrospective operation can never be examined
under constitutional standards.
78. In D. Cawasji & Co. v. State of Mysore (supra), this Court
cautioned that retrospective taxation may become
unreasonable where it imposes an oppressive burden after a
long lapse of time. That decision turned on its own facts and
does not control the present case in favour of striking down
the law. Yet, it indicates that retrospectivity is not merely a
matter of legislative draftsmanship. Its effect on past
transactions remains relevant.
79. It is here that the nature of sales tax becomes material. A
dealer who sells goods ordinarily collects sales tax from the
purchaser when the law requires him to do so. If the goods
are exempt, he does not collect tax. Where the assessment
is completed by granting exemption, the dealer has no
Civil Appeal No. 48 of 2009 Page 26 of 32


reason to retain or reserve any amount towards tax. Years
later, when the law is amended retrospectively, he cannot go
back to purchasers and recover the tax.
80.
The validity of the principal tax liability is one thing. The
imposition of penalty is another. Penalty presupposes
culpability, default, deliberate breach or at least failure to
comply with an existing obligation. It would be contrary to
the basic notions of fairness to impose penalty on a dealer
who did not collect tax because the statute, the judicial
understanding and the Department’s own assessment
treated the commodity as exempt.
81. Interest also cannot be treated mechanically. Interest in
fiscal law is often compensatory. It compensates the State
for deprivation of money which ought to have been paid.
But where the liability itself is created retrospectively by a
subsequent amendment, and where the assessee could not
have collected tax at the time of sale, the levy of interest
from the date of the original transaction would, in substance,
operate punitively.
82. The proper balance, therefore, is to uphold the validity of
the amendment and permit determination of principal tax
liability, but to prevent retrospective operation from
assuming a punitive character.
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83. Such an approach gives full effect to legislative will while
preserving constitutional fairness. It does not rewrite the
amendment. It merely ensures that consequences which
presuppose default are not imposed on persons who acted in
accordance with the law as it stood and as it was applied by
the Department.
84. We therefore hold that the reassessment proceedings may
continue for determination of principal tax liability in
accordance with law. However, no penalty shall be imposed
or recovered for the pre-amendment period. Interest, if
otherwise leviable under the statute, shall run only from the
date of lawful demand raised pursuant to reassessment after
giving effect to this judgment and not from the date of the
original transaction or the original assessment period.
VIII. CENTRAL SALES TAX ASPECT
85. The assessees have raised a specific grievance that, in
respect of inter-State sales, tax was imposed at 10%
ignoring Section 8(2) of the Central Sales Tax Act, 1956.
This is a matter of rate and computation.
86. The validity of the retrospective amendment under the KST
Act does not dispense with compliance with the Central
Sales Tax Act. If tax is to be levied on inter-State sales, the
assessing authority must apply the rate and conditions
Civil Appeal No. 48 of 2009 Page 28 of 32


prescribed by the Central Sales Tax Act as applicable for the
relevant period.
87. We do not consider it appropriate to finally compute the
liability in these appeals. The assessing authority shall
recompute the liability, if any, in respect of inter-State sales
strictly in accordance with the Central Sales Tax Act, 1956,
including Section 8(2), wherever applicable, after affording
an opportunity of hearing to the assessees.
IX. CONCLUSIONS
88. The conclusions reached by us are summarized as follows:
i. Prior to Karnataka Act No. 5 of 2001, imported sugar
was covered by the exemption entry relating to “sugar”
in the Fifth Schedule to the Karnataka Sales Tax Act,
1957.
ii. Karnataka Act No. 5 of 2001, inserting the words
“produced or manufactured in India” after the word
“Sugar” with retrospective deeming effect, is within
the legislative competence of the State and is
constitutionally valid.
iii. The amendment is not merely clarificatory. It
substantively restricts an exemption which was earlier
available to imported sugar. However, such
retrospective restriction is not unconstitutional per se.
Civil Appeal No. 48 of 2009 Page 29 of 32


iv. The Single Judge was not correct in striking down the
retrospective operation of the amendment in its
entirety.
v. The Division Bench was correct in upholding the
validity of the amendment, but erred in restoring the
reassessment proceedings without protecting the
assessees from penal and oppressive consequences
arising solely from retrospectivity.
vi. The State is entitled to determine and recover the
principal tax liability, if any, upon lawful reassessment
and recomputation.
vii. No penalty shall be imposed or recovered in respect of
transactions effected prior to Karnataka Act No. 5 of
2001.
viii. Interest, if otherwise leviable under the statute, shall be
computed only from the date of lawful demand
pursuant to reassessment after giving effect to this
judgment.
ix. Any reassessment relating to inter-State sales shall be
recomputed strictly in accordance with the Central
Sales Tax Act, 1956, including Section 8(2), wherever
applicable.

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X. OPERATIVE ORDER
89.
In view of the foregoing discussion, the appeals are allowed
in part.
90. The common judgment dated 26.11.2007 passed by the
Division Bench of the High Court of Karnataka is affirmed
insofar as it upholds the validity of Karnataka Act No. 5 of
2001 and reverses the declaration of invalidity made by the
Single Judge.
91. The said judgment is modified in the following terms:
a. The reassessment proceedings may continue only for
determination of principal tax liability in accordance
with law.
b. No penalty shall be imposed or recovered from the
assessees in respect of transactions effected prior to
Karnataka Act No. 5 of 2001.
c. Interest, if otherwise leviable under the statute, shall
be computed only from the date of lawful demand
pursuant to reassessment and not from the date of the
original transaction or the original assessment
period.
d. The assessing authority shall recompute the liability,
including liability in respect of inter-State sales,
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strictly in accordance with the Central Sales Tax Act,
1956, including Section 8(2), wherever applicable.
e. If any amount has been recovered towards penalty or
interest contrary to the above directions, the same
shall be adjusted against lawful principal tax dues so
determined, and if no such dues remain, the amounts
collected and retained in excess of tax determined
shall be refunded to the assessee/es in accordance
with law.
92. The assessing authority shall complete the consequential
exercise after affording reasonable opportunity of hearing to
the assessees.
93. The appeals stand disposed of in the aforesaid terms.
94. There shall be no order as to costs.


…...........................................J.
[ARAVIND KUMAR]



….............................................J.
[PRASANNA B. VARALE]

NEW DELHI;
th
JULY 13 , 2026.
Civil Appeal No. 48 of 2009 Page 32 of 32