This judgment does not decide the validity of Section 30-AA of the Punjab General Sales Tax Act, 1948, or whether cess proceeds under the Punjab Social Security Act, 2000 could bypass the Consolidated Fund of the State: both questions are expressly left open. It also does not decide any individual assessment, levy period, or consequential relief in the tagged appeals, which go to regular Benches.
- Case
- Arjun Flour Mills v. State of Odisha Finance Department Secretary & Ors.
- Court
- Supreme Court of India
- Decision
- Citation
- 2026 INSC 1192
- Bench
- Surya Kant, CJI; K.V. Viswanathan; S.V.N. Bhatti; Joymalya Bagchi; N.V. Anjaria; Arun Palli; V. Mohana
- Judgment by
- Surya Kant, CJI
- Case numbers
- C.A. 8763/1994; C.A. 8909/1994; C.A. 7485/2001; C.A. 98/2003; SLP(C) 22159-22180/2002; C.A. 831-850/2003; C.A. 851/2003; C.A. 99/2003; C.A. 100/2003; C.A. 5046/2003; C.A. 5637/2008
- Outcome
- Reference answered as having been rendered infructuous. The question of State Legislatures' competence to levy the impugned surcharges is governed by the law declared in S. Kodar. Section 30-AA and Punjab Social Security Act questions left open; lead and connected matters to be listed before regular Benches after directions from the Chief Justice of India.
The reference is answered as infructuous
A seven-judge Constitution Bench of the Supreme Court has answered the long-pending reference on States' power to levy an additional tax or surcharge computed on the sales tax payable by a dealer as having been rendered infructuous. The Court directed that the question of the State Legislatures' competence to levy the impugned surcharges shall be governed by the law declared by the five-judge Constitution Bench in S. Kodar v. State of Kerala.
The main opinion, authored by Chief Justice Surya Kant, gives two reasons for not adjudicating the reference with a larger Bench. First, the referred question is fully answered by S. Kodar, which continues to hold the field, so there is no subsisting conflict in the Court's decisions requiring resolution by seven judges. Second, the constitutional entry and the State enactments under which the levies were imposed have since been substituted and replaced, first by Value Added Tax legislation and then by the Goods and Services Tax regime, leaving the question of no prospective significance.
The Court was careful to preserve the individual appeals. It recorded that assessees continue to have a stake in past assessment periods, and that their rights must be determined by regular Benches in accordance with the law as declared, not by a larger Bench constituted to resolve a conflict which no longer exists. The Registry was directed to list the lead and connected matters before the appropriate regular Bench or Benches after directions from the Chief Justice of India on the administrative side.
Three sets of levies, one common question
The reference asked whether a State Legislature could levy a tax on the sale or purchase of goods under Entry 54 of List II of the Seventh Schedule where the levy was computed on the sales tax payable by a dealer rather than directly on the dealer's turnover. The assessees argued that such a levy was in substance a tax on a tax, falling on the dealer's income or fiscal burden rather than on a sale or purchase of goods. The States maintained that the surcharge was nothing more than an enhancement of the rate of sales tax for a class of dealers, and that the mode of computation did not change its essential character.
The lead matter challenged Section 5-A of the Orissa Sales Tax Act, 1947, inserted with effect from 1 July 1990. It required every dealer whose gross turnover exceeded Rs 10 lakhs to pay, in addition to the tax payable under the Act, a surcharge of 10 per cent of the total tax payable. The Court noted that the surcharge attached only to a dealer already liable to pay sales tax and rose or fell in direct proportion to the tax payable, which in turn rose or fell with taxable turnover.
The second set of matters concerned Sections 5(1-C) and 30-AA of the Punjab General Sales Tax Act, 1948, and the third set concerned the Punjab Social Security Act, 2000, under which a cess was credited to the Punjab Social Security Fund. The Punjab and Haryana High Court had upheld the Punjab surcharge provisions but struck down the direct crediting of the cess, and both sets of challenges reached the Supreme Court as part of the tagged batch.
Why S. Kodar already answers the question
The Court's central finding is that 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 within Entry 54 of List II as it then stood. The Orissa surcharge and the surcharge under Section 5(1-C) of the Punjab Act, like the additional tax in S. Kodar, are imposed on a class of dealers defined by reference to the volume of their turnover and computed as a fixed percentage of the sales tax payable, and no circumstance was pointed out taking them outside that decision's ratio.
The perceived conflict that had prompted the reference did not survive scrutiny. The Court held that India Cement concerned a cess on royalty in a field covered by the Mines and Minerals (Development and Regulation) Act, and did not hold that a levy computed as a percentage of another tax is for that reason beyond legislative competence. Its premise that royalty is a tax has since been overruled by a nine-judge Bench in Mineral Area Development Authority, so there is no subsisting decision in conflict with S. Kodar.
Justice K.V. Viswanathan, in a separate concurring opinion, reached the same destination by a detailed re-examination of S. Kodar and Hoechst Pharmaceuticals. He held that S. Kodar has been correctly decided, continues to be good law, and needs no reconsideration, and that there is no conflict between S. Kodar and Hoechst. He directed that the Orissa and Punjab sales-tax appeals be placed before the Chief Justice for assignment to an appropriate Bench to be decided in accordance with S. Kodar, while the Punjab Social Security Act matters be segregated for assignment to an appropriate Division Bench.
Two Punjab questions expressly left open
The judgment deliberately leaves two questions untouched because they were never the subject matter of the reference and are not answered by S. Kodar. The first arises under Section 30-AA of the Punjab Act, which requires industrial units otherwise exempted from sales tax under Section 30-A to pay the surcharge nonetheless. That raises distinct questions, including whether a surcharge defined as a percentage of tax payable can be levied where, by reason of exemption, no tax is payable at all, and whether such a levy remains an increment to sales tax or becomes an independent levy.
The second arises under the Punjab Social Security Act, 2000. Article 266(1) of the Constitution provides that all revenues received by a State Government form the Consolidated Fund of the State, and Article 266(3) provides that no money from that Fund may be appropriated except in accordance with law and for constitutional purposes. Whether the High Court was right that cess proceeds could not be credited directly to the Punjab Social Security Fund without first forming part of the Consolidated Fund is, the Court said, a question of the constitutional scheme governing public finance, wholly independent of legislative competence under Entry 54.
The Court refrained from expressing any opinion on either question, and directed that both, along with any other question peculiar to the individual matters, including assessments, levy periods, and consequential reliefs, are left open to be decided by the appropriate regular Bench on their own merits.
A reference overtaken by constitutional change
The judgment traces how the reference travelled from a two-judge Bench to a Constitution Bench and then to a seven-judge Bench over nearly three decades, while the legal landscape changed beneath it. During that period, the seven-judge decision in India Cement was revisited by a nine-judge Bench, the competence question was considered by the Constitution Bench in S. Kodar, and the sales-tax regime itself gave way first to Value Added Tax enactments and then to the Goods and Services Tax Act, 2017.
For the residuary goods that continue to be taxed under the substituted Entry 54 of List II, the Court held that if the question ever arises, it stands governed by S. Kodar. The reference was enlarged by an order dated 6 October 1999 on account of the need to consider S. Kodar, and the Court's conclusion is that the enlarged reference, too, is answered by that decision rather than requiring fresh adjudication.
BANTHRY ANALYSISFor law students: when a larger Bench declines to decide
This judgment is a useful study in judicial economy at the highest level. A reference to a larger Bench is a device for resolving a conflict between decisions of coordinate strength; where the Court finds that the supposed conflict was never real, because the earlier decision addressed a different entry, a different subject matter, and a different legal principle, the larger Bench may properly return the question unanswered on its merits and point to the decision that already governs.
Note also the distinction the Court draws between answering a reference and deciding appeals. Declaring a reference infructuous is not a decision that every levy in the batch is valid: the individual appeals survive, past-period liabilities remain live, and two genuinely distinct questions are parked for regular Benches. For examination answers, keep those three layers separate: the referred question, the governing precedent, and the left-open questions.
READING PROMPTSQuestions for a closer reading
- Why did the Bench hold that the reference did not survive for adjudication by a seven-judge Bench, even though it had been pending for nearly three decades?
- What did S. Kodar decide about an additional tax computed as a percentage of the sales tax payable, and why does that decision continue to govern the competence question?
- Which two Punjab questions did the Court expressly leave open, and why are they distinct from the referred question?
