2026-VIL-107-SC
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VAT Supreme Court Cases

Sales Tax – ‘Tax on Tax’, Levy of surcharge on sales tax - Survival of a reference to a larger Bench after subsequent developments in law - The reference arose from a perceived conflict between two earlier decisions on the legislative competence of a State Legislature, under Entry 54 of List II, to levy a surcharge or cess computed on the basis of sales tax payable by a dealer, and was enlarged to consider a Constitution Bench decision on the same subject - While the reference remained pending, a Nine Judge Bench held that royalty is not a tax and overruled the earlier Seven Judge Bench decision to that extent, and the sales tax regime under which the impugned levies were imposed was replaced first by VAT legislation and then by the GST regime - Whether, in view of the developments subsequent to the orders making the reference, the question referred continues to survive for adjudication - HELD - The continued survival of a reference depends upon the continued existence of the doubt which occasioned it, and where the doubt has been authoritatively dispelled by a subsequent decision of a Bench of greater strength, by a legislative or constitutional amendment, or otherwise, the reference ceases to serve its purpose - The law declared by a Bench of larger strength binds a Bench of lesser or co-equal strength, and a larger Bench is a scarce institutional resource which should not be occupied in restating settled law. The conflict was more apparent than real, as the earlier Seven Judge Bench decision concerned a cess on royalty in a field covered by a Central enactment, and it did not hold that every levy computed on another levy is beyond legislative competence. Its premise that royalty is a tax was overruled by the Nine Judge Bench, so no decision of equal or greater strength conflicts with the Constitution Bench decision, which continues to hold the field - Entry 54 of List II in its earlier form no longer exists, and the question referred is of no prospective significance. The questions regarding the validity of the surcharge on units otherwise exempt from sales tax and the crediting of cess proceeds to a Social Security Fund without first forming part of the Consolidated Fund of the State were never the subject of the reference and are left open - The reference is answered as rendered infructuous, the competence of the State Legislatures to levy the impugned surcharges is governed by the Constitution Bench decision. The matters are directed to be listed before regular Benches for disposal on merits – Ordered accordingly - Legislative competence of State Legislature to levy surcharge computed as a percentage of sales tax payable - Entry 54 of List II - The Appellants challenged surcharges imposed on dealers whose turnover exceeded a prescribed threshold, computed as a fixed percentage of the sales tax payable, contending that the levy is a tax on tax which no entry in List II authorises or, in substance, a levy on the income or fiscal burden of the dealer, while the Respondents contended that the surcharge is an enhancement of the rate of sales tax for a class of dealers - Whether a surcharge computed as a percentage of the tax payable and not of turnover falls within the legislative competence of the State Legislature under Entry 54 of List II - HELD - The Constitution Bench decision in S. Kodar squarely holds that an additional tax or surcharge computed as a percentage of the sales tax payable is an enhancement of the rate of sales tax and a tax on the sale or purchase of goods, and that the fact that its quantum is determined with reference to the sales tax imposed does not alter its character. A sales tax is itself computed as a percentage of taxable turnover, so a surcharge on that tax is by simple arithmetic a further percentage of the same taxable turnover, and the measure of a tax does not determine its character - The levy is not a tax on income because it is payable even where the dealer has made no profit or has suffered a loss so long as turnover exceeds the threshold, and it escalates with turnover and not with income. The binding force of the proposition rests on the Constitution Bench decision, in which competence was squarely raised and decided, and not on the concession recorded in the later Three Judge Bench decision. No feature of the impugned surcharges distinguishes them from the levy upheld in that decision - The pending curative petition and the subsequent amendment to the mining statute do not affect these findings. In a concurring opinion, it is held that the Constitution Bench decision was correctly decided, continues to be good law and needs no reconsideration - The question referred stands answered by the Constitution Bench decision, which continues to hold the field.
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