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Informist, Monday, Jul. 13, 2026

 

NEW DELHI – The Supreme Court Monday said that the government can exclude a commodity from tax exemption retrospectively. However, no penalty can be imposed on the companies or dealers who did not collect tax because the statute, judicial understanding, and the tax department's own assessment had earlier treated the commodity as exempt, the court said. The apex court upheld the Karnataka government's move to remove the exemption granted to all types of sugar and include only sugar produced or manufactured in India for tax benefits.

 

The apex court held that tax reassessment proceedings may continue only against dealers to determine the principal tax liability in accordance with the law. However, no penalty should be imposed on or recovered from the assessee in respect of transactions effected prior to the amendments made by the state government, it said. Interest, if otherwise leviable under the statute, should 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, it said. If any amount has been recovered towards penalty or interest contrary to the directions, it should be adjusted against lawful principal tax dues or be refunded, the court said. 

 

Inserting the words "sugar produced or manufactured in India" with retrospective effect in the notification is within the legislative competence of the state and is constitutionally valid, the top court held. The amendment is not merely clarificatory, the court said. It substantively restricts an exemption which was earlier available to imported sugar, it said. However, such retrospective restriction is not unconstitutional per se, it added.

 

The apex court was hearing a plea by Asia Sugar & Chemical Co., which imported sugar and sold it either within Karnataka or outside. The petitioner said that they proceeded on the footing that sugar, including imported sugar, was exempt, and, acting on that understanding, they did not charge or collect sales tax from their purchasers. In 2001, the Karnataka government amended the notification to limit the tax exemption only to sugar produced or manufactured in India. 

 

Challenging the constitutional validity of the retrospective amendment and the consequential reassessment orders, the company moved the Karnataka High Court's single-judge bench, which struck down the government amendments. However, the single-judge bench's order was set aside by the division bench, and the company moved the apex court against it.

 

Reported by Surya Tripathi

Edited by Saji George Titus

 

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