The Supreme Court has upheld an amendment brought by the Karnataka Act No. 5 of 2001 retrospectively withdrawing the sales tax exemption from imported sugar. However, the Apex Court made it clear that no penalty should be imposed or recovered from the assessees in respect of transactions effected prior to the said Act.

The appeals before the Apex Court raised the 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 Division Bench of Justice Aravind Kumar and Justice Prasanna B. Varale stated, “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.”

“No penalty shall be imposed or recovered from the assessees in respect of transactions effected prior to Karnataka Act No. 5 of 2001”, it added.

Senior Advocate S.K. Bagaria represented the Appellant while Additional Advocate General Muhammad Ali Khan represented the Respondent.

Factual Background

The appellant, Asia Sugar & Chemical Co., was engaged in the business of sugar trade 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. 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 was that they proceeded on the footing that sugar, including imported sugar, was exempted under the Fifth Schedule and acting on such understanding, they did not charge or collect sales tax from their purchasers.

The original assessments were completed by granting an exemption on imported sugar. The position, 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. 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.

A separate entry was introduced in respect of sugar imported from outside the country. The consequence of the amendment was that the 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. 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.

The assessees approached the Karnataka High Court challenging the constitutional validity of the retrospective insertion of the words “produced or manufactured in India” and the consequential reassessment orders. The Single Judge struck down the retrospective operation of the amendment as violative of Article 19(1)(g) of the Constitution. The State preferred writ appeals. The Division Bench of the High Court 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 thus came to be questioned before the Apex Court.

Reasoning

The Bench made it clear 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. It was further held by the Bench that the inserting of the words “produced or manufactured in India” after the word “Sugar” with retrospective deeming effect in the Karnataka Act No. 5 of 2001 was within the legislative competence of the State and constitutionally valid.

“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”, it stated.

The Bench was thus of the view that the Single Judge was not correct in striking down the retrospective operation of the amendment in its entirety. As per the Bench, 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.

The Bench further went on to clarify that the reassessment proceedings may continue for the determination of principal tax liability in accordance with law, but no penalty should 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”, it added.

Coming to the grievance of the assesses that in respect of inter-State sales, tax was imposed at 10% ignoring Section 8(2) of the Central Sales Tax Act, 1956, the Bench stated that 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 prescribed by the Central Sales Tax Act as applicable for the relevant period ”, it added.

Holding that no penalty should be imposed or recovered from the assessees in respect of transactions effected prior to Karnataka Act No. 5 of 2001, the Bench concluded the matter by asking the assessing authority to 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.

Cause Title: Asia Sugar & Chemical Co., Devangere v. The State of Karnataka & Ors. (Neutral Citation: 2026 INSC 693)

Appearance

Appellant: Senior Advocate S.K. Bagaria, AOR Kiran Kumar Patra, Advocates Preetish Sahu, Abhilasa Pathak, AOR M/S. Parekh & Co., Advocates E.R. Kumar, Pratyusha Priyadarshini, Dilpreet Singh Dardi

Respondent: Additional Advocate General Muhammad Ali Khan, AOR Sanchit Garga, Advocates Omar Hoda, Kunal Rana, Advocate Shashwat Jaiswal, AOR Patil Rekha Chandra Gouda

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Justice Aravind KumarJustice Prasanna B. Varale

Tulip Kanth

Assistant Editor

Tulip Kanth is an Assistant Editor at Verdictum having over 5 years of experience in the field of legal journalism and editing. She extensively covers judgments of the Supreme Court, High Courts as well as Tribunals. She has previously worked with a legal publishing website where she oversaw the work of other editors and has also created updates on notifications of different Government Ministries. She holds an English Honours Degree from SGTB Khalsa College, Delhi University and has completed her LLB course with specialisation in Corporate Law from Amity University.