Particulars	Details
Judgment Cause Title	C.T. Kochouseph v. State of Kerala and Another Etc.
Case Number	Civil Appeal No(s). 941-945 of 2004
Judgment Date	09 May 2025
Court	Supreme Court of India
Quorum	Sanjiv Khanna, CJI; Sanjay Kumar, J.; R. Mahadevan, J.
Author	Sanjiv Khanna, CJI
Citation	[2025] 6 S.C.R. 310 : 2025 INSC 661
Legal Provisions Involved	Section 5A, Kerala General Sales Tax Act, 1963; Section 7A, Tamil Nadu General Sales Tax Act, 1959; Article 246 and Entry 54, List II, Seventh Schedule, Constitution of India.
Judgments Overruled	None expressly overruled; misapplication in State of Kerala v. T.S. Govindarajulu Naidu (1993 Supp 3 SCC 656) distinguished.
Related Law Subjects	Constitutional Law, Taxation Law, Fiscal Federalism, Commercial Law.

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The dispute in C.T. Kochouseph v. State of Kerala and Another Etc. arose from the interpretation and constitutional validity of Section 5A of the Kerala General Sales Tax Act, 1963 and its corresponding Section 7A of the Tamil Nadu General Sales Tax Act, 1959. Both provisions create liability for a purchase tax on dealers in specific circumstances, particularly where sales transactions escape sales tax due to statutory exemptions or threshold limits. The appellants, including prominent dealers and industrialists, challenged the levy of such purchase tax on the ground that it was not a genuine sales tax but an indirect levy akin to excise duty, consignment tax, or inter-State levy, and therefore outside the legislative competence of State legislatures under Entry 54 of List II of the Seventh Schedule to the Constitution of India.

The background of this litigation is deeply rooted in the pre-VAT sales tax regime in India, where sales tax was levied at single points of sale, generally the “first sale.” This left gaps in the taxation framework, particularly when sellers enjoyed exemption either by government notifications or due to small-scale turnover thresholds. To prevent erosion of revenue and plug tax evasion, legislatures in Kerala and Tamil Nadu enacted purchase tax provisions, shifting the liability from sellers to purchasers in defined circumstances. However, dealers argued that this shifting of liability altered the very nature of the tax, violating constitutional limitations.

The controversy had been addressed earlier in State of Tamil Nadu v. M.K. Kandaswami (1975) 4 SCC 745, where the Supreme Court upheld Section 7A of the Tamil Nadu Act as a valid charging section. Later, in Hotel Balaji v. State of A.P. (1993 Supp 4 SCC 536), the Court reinforced this position, clarifying that purchase tax was neither excise duty nor consignment tax but a levy on the act of purchase of taxable goods. Despite these precedents, divergent High Court rulings, such as T.S. Govindarajulu Naidu v. State of Kerala (1993 Supp 3 SCC 656), created ambiguity by wrongly extending sales tax exemptions to purchase tax.

With the introduction of VAT in 2005 and GST in 2017, the relevance of these provisions diminished in practice, but large volumes of pending litigation under legacy laws required authoritative settlement. This judgment, authored by Chief Justice Sanjiv Khanna in May 2025, harmonised conflicting authorities, upheld the validity of the purchase tax provisions, and reaffirmed the doctrine that legislative competence under Entry 54, List II includes such levies. The Court held that purchase tax ensures revenue neutrality when sales tax is not collected, and does not amount to double taxation or extra-territorial taxation.

D) FACTS OF THE CASE

The appellants were dealers engaged in large-scale purchases of goods in Kerala and Tamil Nadu. Their transactions involved purchasing goods from sellers who were either fully exempt under notifications issued under the respective State Acts, or who were small dealers below the taxable turnover threshold. Since no sales tax was collected at the point of sale, state authorities sought to impose purchase tax on the appellants under Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act.

The appellants challenged these demands before the High Courts of Kerala and Madras. Their main contention was that purchases from exempted sellers should not be treated as “purchases liable to tax” under the Acts. They argued that if the seller is not liable, the buyer cannot be saddled with a fresh liability under the guise of purchase tax. The High Courts, however, upheld the validity of the provisions and confirmed the liability of the purchasers.

Aggrieved, the appellants approached the Supreme Court. They contended that the impugned provisions were unconstitutional as they imposed a tax not on the sale or purchase of goods simpliciter, but on post-purchase uses or dispatches, thereby transforming the levy into a consignment or excise tax. Further, it was argued that such a levy was beyond the competence of State legislatures, since consignment tax is covered under Entry 92B of List I and excise duties under Entry 84 of List I.

The appeals also questioned whether the purchase tax provisions resulted in double taxation, as goods could be taxed both at the stage of purchase and later when manufactured goods were sold. They relied on precedents such as Goodyear India Ltd. v. State of Haryana (1990) 2 SCC 71, which had raised concerns about the nature of such levies. The matter was heard together with several connected appeals to settle the law uniformly across states.

E) LEGAL ISSUES RAISED

i. Whether the purchase of goods by appellants from dealers exempted from sales tax under notifications or exemptions is a purchase “liable to tax” within the meaning of Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act?

ii. Whether the appellants, having purchased goods exempt from sales tax or from exempted dealers, were liable to pay purchase tax under the said provisions?

iii. Whether purchase tax imposed by Section 5A of the Kerala Act or Section 7A of the Tamil Nadu Act is, in substance, a tax in the nature of excise, consignment, or inter-State levy, and thereby ultra vires the Constitution and beyond the legislative competence of the State?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsel for the appellants argued that the very scheme of the Kerala and Tamil Nadu Acts indicated that sales tax was to be levied only at specified points of sale, usually the first sale. If the seller was exempted from tax, either by turnover or government notification, then such sales were not “liable to tax.” Consequently, the purchaser could not be subjected to purchase tax. To do so would contradict the statutory framework and amount to rewriting the provisions.

They further submitted that Sections 5A and 7A imposed tax not at the point of purchase itself but upon subsequent events such as consumption, dispatch outside the State, or non-sale use. This, according to the appellants, converted the levy into a tax on “use” or “consignment,” both of which are outside the competence of State legislatures. Reliance was placed on Goodyear India Ltd. v. State of Haryana (1990) 2 SCC 71, where the Court observed that liability under a similar provision arose not on purchase but on subsequent use, thereby rendering it akin to consignment tax.

Another plank of the appellants’ argument was that subjecting purchasers to tax where sellers were exempt effectively resulted in double taxation, since the same goods could be taxed twice — once as purchase tax and again when the manufactured goods were sold. They invoked Article 14 of the Constitution, claiming that the provisions were arbitrary as they imposed tax on purchasers differently depending on whether their sellers were exempt or not, thereby creating irrational classifications.

Finally, appellants contended that under Entry 54, List II, States could levy taxes only on sales or purchases simpliciter. They could not, under the guise of purchase tax, indirectly levy excise duties (Entry 84, List I) or consignment tax (Entry 92B, List I). Thus, Sections 5A and 7A were unconstitutional.

G) RESPONDENT’S ARGUMENTS

The State defended the provisions by arguing that the legislative intent was clear: to prevent leakage of revenue where sales escaped taxation at the seller’s end. Sections 5A and 7A were not ancillary or supplemental provisions but independent charging sections. They targeted purchases of goods that were otherwise “taxable goods” under the Acts, even if the immediate seller enjoyed exemption.

The State relied heavily on State of Tamil Nadu v. M.K. Kandaswami (1975) 4 SCC 745, where the Supreme Court upheld Section 7A of the Tamil Nadu Act as constitutionally valid. That decision clarified that the expression “goods, the sale or purchase of which is liable to tax” refers to the character of the goods, not to the tax liability of the particular transaction. Thus, even if a particular sale was exempt, the goods remained “taxable goods,” and their purchase could be subjected to purchase tax.

It was further argued that the levy was not an excise or consignment tax. Excise duty is imposed on the manufacture of goods, while consignment tax attaches to the act of dispatch outside the State. In contrast, purchase tax is levied on the act of purchase itself, albeit crystallising upon certain subsequent uses. This distinction was reinforced in Hotel Balaji v. State of A.P. (1993 Supp 4 SCC 536), which expressly disagreed with the reasoning in Goodyear India Ltd. The respondents also pointed out that there was no double taxation, since purchase tax applied only when sales tax was not levied on the seller.

Finally, the State asserted that legislative competence was squarely traceable to Entry 54, List II. The Constitution empowers States to tax sales and purchases within their territories, and purchase tax is an accepted mechanism to ensure such taxation. Thus, the appeals lacked merit.

H) RELATED LEGAL PROVISIONS

i. Section 5A, Kerala General Sales Tax Act, 1963 – Levy of purchase tax where goods are purchased without sales tax being payable, and consumed, disposed, or dispatched.

ii. Section 7A, Tamil Nadu General Sales Tax Act, 1959 – Similar provision creating purchase tax liability in specified circumstances.

iii. Article 246, Constitution of India – Distribution of legislative powers.

iv. Entry 54, List II, Seventh Schedule – Power of States to levy tax on sale or purchase of goods other than newspapers.

v. Entry 84, List I – Power of Union to levy excise duty.

vi. Entry 92B, List I – Power of Union to levy consignment tax.

I) JUDGMENT

The Supreme Court upheld the constitutional validity of Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act. The Court reasoned that both provisions are independent charging sections, intended to tax purchases of goods that are “taxable goods” under the Acts, but which escape sales tax due to exemptions at the seller’s end.

The Court distinguished between “taxable goods,” “taxable persons,” and “taxable events.” The phrase “goods, the sale or purchase of which is liable to tax” refers to the nature of the goods, not the liability of a particular seller. Therefore, even if the seller is exempt, the goods remain taxable, and purchase tax may be imposed on the purchaser.

The Court rejected the appellants’ contention that the levy was a consignment or excise duty. It held that the taxable event was the purchase of goods, not their consumption or dispatch. The fact that liability crystallised upon certain subsequent uses did not alter the essential character of the tax. Referring to Hotel Balaji and M.K. Kandaswami, the Court reaffirmed that purchase tax is a valid levy under Entry 54, List II.

It further clarified that there is no double taxation, as purchase tax applies only when sales tax is not levied. The legislative scheme is designed to prevent tax evasion and ensure revenue neutrality. Accordingly, the appeals were dismissed and the High Courts’ judgments upholding the provisions were confirmed.

a) RATIO DECIDENDI

The ratio decidendi of this case is that Sections 5A and 7A of the Kerala and Tamil Nadu Acts are independent charging provisions validly enacted under Entry 54 of List II, and levy purchase tax on the act of purchase of taxable goods in situations where sales tax is not collected at the seller’s end due to exemption. The taxable event remains the purchase itself, and the levy cannot be characterised as an excise or consignment tax. Exemption from sales tax for the seller does not immunise the purchaser from liability under these provisions.

b) OBITER DICTA

The Court observed obiter that the controversy had become largely academic after the introduction of VAT (2005) and GST (2017), which created comprehensive tax regimes subsuming purchase tax. Nonetheless, legacy disputes required settlement for fiscal certainty. The judgment thus serves as a precedent on legislative competence and the nature of fiscal levies, even though the provisions in question have ceased to operate prospectively. The Court also noted the importance of distinguishing between taxable goods, taxable persons, and taxable events to avoid interpretative errors that conflate exemptions with non-taxability.

c) GUIDELINES

The Court laid down certain guiding principles:

i. Purchase tax is constitutionally valid under Entry 54, List II, and is distinct from excise or consignment tax.

ii. The phrase “goods, the sale or purchase of which is liable to tax” refers to the category of goods, not to whether a particular sale is taxed.

iii. Exemption granted to sellers under notifications or small dealer turnover limits does not extend to purchasers for purposes of purchase tax.

iv. Purchase tax is levied only when sales tax is not payable, preventing double taxation.

v. Legislative competence must be determined by the pith and substance of the levy, not by incidental consequences of its operation.

J) CONCLUSION & COMMENTS

This judgment conclusively settles a long-standing controversy in sales tax law. By reaffirming the validity of purchase tax provisions, the Court has reinforced the principle that States enjoy wide latitude in designing tax regimes under Entry 54, List II. The reasoning emphasises that purchase tax is not a disguised excise or consignment tax but a mechanism to ensure that taxable goods do not escape the tax net due to exemptions for sellers.

The Court’s analytical distinction between taxable goods, taxable person, and taxable event is particularly significant, as it clarifies interpretative ambiguities that had led to conflicting rulings in the past. The overruling of erroneous High Court interpretations underscores the importance of consistent doctrinal application in fiscal law.

Although rendered in 2025, long after the subsuming of sales tax into VAT and GST, the judgment has enduring importance for legacy disputes, retrospective assessments, and constitutional jurisprudence on fiscal federalism. It demonstrates the judiciary’s role in harmonising tax law interpretation while balancing state fiscal autonomy with constitutional limitations.

K) REFERENCES

Important Cases Referred

i. State of Tamil Nadu v. M.K. Kandaswami, (1975) 4 SCC 745.
ii. Hotel Balaji v. State of A.P., (1993 Supp 4 SCC 536).
iii. Goodyear India Ltd. v. State of Haryana, (1990) 2 SCC 71.
iv. Devi Dass Gopal Krishan Pvt. Ltd. v. State of Punjab, (1994 Supp 2 SCC 59).
v. State of Kerala v. T.S. Govindarajulu Naidu, (1993 Supp 3 SCC 656).
vi. Malabar Fruit Products Co. v. STO, Palai, (1972) 30 STC 537 (Ker).
vii. Yusuf Shabeer v. State of Kerala, (1973) 32 STC 359 (Ker).

Important Statutes Referred

i. Kerala General Sales Tax Act, 1963 – Section 5, Section 5A.
ii. Tamil Nadu General Sales Tax Act, 1959 – Section 3, Section 7A, Section 17.
iii. Constitution of India – Article 246; Entry 54, List II; Entry 84, List I; Entry 92B, List I.