1. Legislatures imposed surcharges or additional taxes calculated as a percentage of sales tax payable by dealers whose turnover exceeded statutory thresholds, challenging state legislative competence under Entry 54. (Para 1 , 2 , 6 , 7 , 8 , 10 , 13 , 16 )
Back
Next 
2026 Supreme(SC) 1330
SUPREME COURT OF INDIA
SURYA KANT, CJI, S.V.N. BHATTI, JOYMALYA BAGCHI, N.V. ANJARIA, ARUN PALLI, V. MOHANA, JJ.
Arjun Flour Mills – Appellant
Versus
The State of Odisha Finance Department Secretary & Ors. – Respondents
Civil Appeal No. 8763 of 1994 With Civil Appeal No. 8909 Of 1994, Civil Appeal No. 7485 Of 2001, Civil Appeal No. 98 Of 2003, Special Leave Petition (Civil) Nos. 22159-22180 Of 2002 Civil Appeal Nos. 831-850 Of 2003, Civil Appeal No. 851 Of 2003, Civil Appeal No. 99 Of 2003, Civil Appeal No. 100 Of 2003, Civil Appeal No. 5046 Of 2003, Civil Appeal No. 5637 Of 2008
Decided On : 04-11-2026
Important Points
A surcharge computed as a percentage of sales tax is an enhancement of the tax rate and remains a tax on the sale of goods under Entry 54 of List II; the mode of computation (measure) does not alter the nature of the tax.
Subject
Constitutional Law - Taxation
Act Referred
BIHAR FINANCE ACT: S.5(1)
CONSTITUTION OF INDIA: Art.266
ESSENTIAL COMMODITIES ACT: S.3(1), S.6
MADRAS PANCHAYATS ACT: S.115, S.116
MINES AND MINERALS DEVELOPMENT AND REGULATION ACT: S.9
ORISSA SALES TAX ACT: S.5(a)(1)
PUNJAB ACT: S.30(a)(a)
PUNJAB GENERAL SALES TAX ACT: S.5(1)(c), S.30(a)(a)
TAMIL NADU ACT: S.2(1)
Tamil Nadu Panchayats Amendment and Miscellaneous Provisions Act: S.115
CONSTITUTION OF INDIA: Art.266
ESSENTIAL COMMODITIES ACT: S.3(1), S.6
MADRAS PANCHAYATS ACT: S.115, S.116
MINES AND MINERALS DEVELOPMENT AND REGULATION ACT: S.9
ORISSA SALES TAX ACT: S.5(a)(1)
PUNJAB ACT: S.30(a)(a)
PUNJAB GENERAL SALES TAX ACT: S.5(1)(c), S.30(a)(a)
TAMIL NADU ACT: S.2(1)
Tamil Nadu Panchayats Amendment and Miscellaneous Provisions Act: S.115
Headnote
(A) Constitution of India - Article 246, Article 265, Article 266, Seventh Schedule - Entry 54 of List II - Legislative competence of State Legislatures to levy tax on sale or purchase of goods - Surcharge calculated as a percentage of total tax payable by a dealer rather than on turnover - Whether such levy constitutes a ‘tax on tax’ or a tax on income - Distinction between the subject of a tax and the measure of the tax - The subject is the taxable event determining the legislative entry, whereas the measure is the yardstick adopted to compute the quantum payable (Paras 22, 23) - A surcharge as an enhancement of the principal levy partakes of its character and draws validity from the same source (Para 24).
(B) Article 14 - Classification of dealers based on turnover for graded imposition - Valid if founded upon an intelligible differentia, as the larger dealer occupies a position of economic superiority, and making the tax heavier is an attempt to proportion payment to the capacity to pay (Para 34).
(C) Article 19(1)(f) and (g) - Right to carry on trade - A sales tax does not cease to be such merely because the dealer is precluded from passing the incidence of the tax to the purchaser; it is not an essential characteristic of sales tax that the seller must have the right to recoup it from any other party (Paras 32, 40).
Facts of the case:
Challenges were brought against state legislative provisions imposing surcharges on sales tax. These surcharges were calculated as a percentage of the total tax payable by dealers whose gross turnover exceeded a specified statutory threshold. The assessees contended that such levies were ‘taxes on tax’ or taxes on income, falling outside the competence of the State Legislature under Entry 54 of List II. One set of matters also involved a challenge to a cess where proceeds were credited directly to a social security fund, raising a question of whether such revenues must first form part of the Consolidated Fund of the State under Article 266.
Findings of Court:
The reference to the larger bench is rendered academic and infructuous. The court held that a surcharge computed as a percentage of sales tax is essentially an enhancement of the sales tax rate for a particular class of dealers. The mode of computation does not alter the character of the tax. The perceived conflict with previous decisions regarding cess on royalty was resolved as royalty has been authoritatively declared not to be a tax by a larger bench, thereby removing the premise of the 'tax on tax' argument in that specific context.
Issues: Whether the imposition of a surcharge, additional tax, or cess, calculated on the basis of a validly levied sales tax, is within the legislative competence of the State Legislature under Entry 54 of List II of the Seventh Schedule.
Ratio Decidendi: The legislative competence to tax the sale or purchase of goods includes the power to determine the rate and the mode of computation. A surcharge calculated as a percentage of the tax payable is, by arithmetic, a further percentage of the taxable turnover; thus, the subject remains the sale of goods. Such a levy is not a tax on income as it is linked to turnover and is payable regardless of whether the dealer earns a profit or suffers a loss.
Result: Reference answered as having been rendered infructuous.
(B) Article 14 - Classification of dealers based on turnover for graded imposition - Valid if founded upon an intelligible differentia, as the larger dealer occupies a position of economic superiority, and making the tax heavier is an attempt to proportion payment to the capacity to pay (Para 34).
(C) Article 19(1)(f) and (g) - Right to carry on trade - A sales tax does not cease to be such merely because the dealer is precluded from passing the incidence of the tax to the purchaser; it is not an essential characteristic of sales tax that the seller must have the right to recoup it from any other party (Paras 32, 40).
Facts of the case:
Challenges were brought against state legislative provisions imposing surcharges on sales tax. These surcharges were calculated as a percentage of the total tax payable by dealers whose gross turnover exceeded a specified statutory threshold. The assessees contended that such levies were ‘taxes on tax’ or taxes on income, falling outside the competence of the State Legislature under Entry 54 of List II. One set of matters also involved a challenge to a cess where proceeds were credited directly to a social security fund, raising a question of whether such revenues must first form part of the Consolidated Fund of the State under Article 266.
Findings of Court:
The reference to the larger bench is rendered academic and infructuous. The court held that a surcharge computed as a percentage of sales tax is essentially an enhancement of the sales tax rate for a particular class of dealers. The mode of computation does not alter the character of the tax. The perceived conflict with previous decisions regarding cess on royalty was resolved as royalty has been authoritatively declared not to be a tax by a larger bench, thereby removing the premise of the 'tax on tax' argument in that specific context.
Issues: Whether the imposition of a surcharge, additional tax, or cess, calculated on the basis of a validly levied sales tax, is within the legislative competence of the State Legislature under Entry 54 of List II of the Seventh Schedule.
Ratio Decidendi: The legislative competence to tax the sale or purchase of goods includes the power to determine the rate and the mode of computation. A surcharge calculated as a percentage of the tax payable is, by arithmetic, a further percentage of the taxable turnover; thus, the subject remains the sale of goods. Such a levy is not a tax on income as it is linked to turnover and is payable regardless of whether the dealer earns a profit or suffers a loss.
Result: Reference answered as having been rendered infructuous.
Legal Category Hierarchy
- constitutional law
- taxation law
- administrative law
Advocates appeared:
For the Appellant(s) : Mr. Shubhranshu Padhi, Adv. Mr. K. R. Sasiprabhu, AOR Mr. Vishnu Sharma A.S., Adv. Mr. Pranav Sethi, Adv. Mr. Jay Nirupam, Adv. Mr. Girish Kumar, Adv. Ms. Vidhatri Deoli, Adv. Mr. Varinder Kumar Sharma, AOR Mr. Shantanu Sharma Adv, Adv. Mr. Shantanu Sharma, Adv. Ms. Deeksha Gaur, Adv. Mr. Vivek Jain, A.A.G. Ms. Nupur Kumar, AOR Mr. Sandeep Bagmar, Adv. Mr. Suchitra Kumbhat, Adv. Mr. Rohit H Nair, Adv. Ms. Benila B M, Adv. Ms. Muskan Surana, Adv. Mr. Vinoo Bhagat, AOR Ms. Praveena Gautam, Adv. Mr. Tarun Gupta, AOR Mr. Hirday Virdi, Adv. Mr. Onkar Singh, Adv. Ms. Avni Singh, Adv. Ms. Ragini Sachdeva, Adv. Mr. R.K. Sachdeva, Adv. Mr. Raj Narayan Pal, Adv.
For the Respondent(s):Mr. Vivek Jain, A.A.G. Mr. Karan Sharma, AOR Mr. Ajit Pudussery, AOR Mr. Ashutosh Bamezai, Adv. Ms. Nupur Kumar, AOR Mr. Pitambar Acharya, Advocate General Mr. Ashok Panigrahi, Sr. Adv. Ms. Samapika Biswal, AOR Ms. Mehak Kumar, Adv. Mr. Prasenjeet Mohapatra, Adv. Mr. Devanshu Sharma, Adv. Mr. Piyush Negi, Adv. Ms. Shailja Singh, Adv. Ms. Sukanya Das, Adv. Mr. B. Krishna Prasad, AOR Mr. Raj Bahadur Yadav, AOR Mr. Narveer Yadav, Adv. Mr. Siddhartha Sati, Adv. Mr. R Venkataramani, Attorney General for India Mr. Tushar Mehta, Solicitor General Mr. Sudarshan Lamba, AOR Mr. Omar Ahmad, Adv. Mr. Pratibhanu Kharola, Adv. Mr. Aman Mehta, Adv. Mr. Tuhin Dey, Adv. Ms. Sonali Jain, Adv. Mr. Raman Yadav, Adv. Mr. Kartikay Aggarwal, Adv. Mr. Chitvan Singhal, Adv. Ms. Ameyvikrama Thanvi, Adv. Mr. Abhishek Kumar Pandey, Adv. Mr. Kanu Agarwal, Adv. Mr. Padmesh Mishra, Adv. Mr. Madhav Sinhal, Adv. Mr. Gaurang Bhushan, Adv. Mr. Sandeep Sudhakar Deshmukh, Adv. Mr. Rakesh K. Sharma, AOR Mr. Nishant Sharma, Adv. Ms. Adviteeya, Adv. Ms. D. Tejaswi Reddy, Adv. Ms. Prakhya Bahl, Adv. Mr. Shreyas Shanth Mahale, Adv. Mr. Kuldip Singh, AOR Mr. Binay Kumar, AOR Mr. Vivek Sharma, AOR Dr. Vijay Kumar Sharma, Adv. Ms. Aarthi Rajan, AOR Mr. S. Santanam Swaminadhan, Adv. Ms. Abhilasha Shrawat, Adv. Mr. B. Arvind Srevatsa, Adv. Mr. Kartik Malhotra, Adv. Mr. Aman Rawat, Adv. Ms. Manasigauri Agrawal, Adv.
For the Appellant(s) : Mr. Shubhranshu Padhi, Adv. Mr. K. R. Sasiprabhu, AOR Mr. Vishnu Sharma A.S., Adv. Mr. Pranav Sethi, Adv. Mr. Jay Nirupam, Adv. Mr. Girish Kumar, Adv. Ms. Vidhatri Deoli, Adv. Mr. Varinder Kumar Sharma, AOR Mr. Shantanu Sharma Adv, Adv. Mr. Shantanu Sharma, Adv. Ms. Deeksha Gaur, Adv. Mr. Vivek Jain, A.A.G. Ms. Nupur Kumar, AOR Mr. Sandeep Bagmar, Adv. Mr. Suchitra Kumbhat, Adv. Mr. Rohit H Nair, Adv. Ms. Benila B M, Adv. Ms. Muskan Surana, Adv. Mr. Vinoo Bhagat, AOR Ms. Praveena Gautam, Adv. Mr. Tarun Gupta, AOR Mr. Hirday Virdi, Adv. Mr. Onkar Singh, Adv. Ms. Avni Singh, Adv. Ms. Ragini Sachdeva, Adv. Mr. R.K. Sachdeva, Adv. Mr. Raj Narayan Pal, Adv.
For the Respondent(s):Mr. Vivek Jain, A.A.G. Mr. Karan Sharma, AOR Mr. Ajit Pudussery, AOR Mr. Ashutosh Bamezai, Adv. Ms. Nupur Kumar, AOR Mr. Pitambar Acharya, Advocate General Mr. Ashok Panigrahi, Sr. Adv. Ms. Samapika Biswal, AOR Ms. Mehak Kumar, Adv. Mr. Prasenjeet Mohapatra, Adv. Mr. Devanshu Sharma, Adv. Mr. Piyush Negi, Adv. Ms. Shailja Singh, Adv. Ms. Sukanya Das, Adv. Mr. B. Krishna Prasad, AOR Mr. Raj Bahadur Yadav, AOR Mr. Narveer Yadav, Adv. Mr. Siddhartha Sati, Adv. Mr. R Venkataramani, Attorney General for India Mr. Tushar Mehta, Solicitor General Mr. Sudarshan Lamba, AOR Mr. Omar Ahmad, Adv. Mr. Pratibhanu Kharola, Adv. Mr. Aman Mehta, Adv. Mr. Tuhin Dey, Adv. Ms. Sonali Jain, Adv. Mr. Raman Yadav, Adv. Mr. Kartikay Aggarwal, Adv. Mr. Chitvan Singhal, Adv. Ms. Ameyvikrama Thanvi, Adv. Mr. Abhishek Kumar Pandey, Adv. Mr. Kanu Agarwal, Adv. Mr. Padmesh Mishra, Adv. Mr. Madhav Sinhal, Adv. Mr. Gaurang Bhushan, Adv. Mr. Sandeep Sudhakar Deshmukh, Adv. Mr. Rakesh K. Sharma, AOR Mr. Nishant Sharma, Adv. Ms. Adviteeya, Adv. Ms. D. Tejaswi Reddy, Adv. Ms. Prakhya Bahl, Adv. Mr. Shreyas Shanth Mahale, Adv. Mr. Kuldip Singh, AOR Mr. Binay Kumar, AOR Mr. Vivek Sharma, AOR Dr. Vijay Kumar Sharma, Adv. Ms. Aarthi Rajan, AOR Mr. S. Santanam Swaminadhan, Adv. Ms. Abhilasha Shrawat, Adv. Mr. B. Arvind Srevatsa, Adv. Mr. Kartik Malhotra, Adv. Mr. Aman Rawat, Adv. Ms. Manasigauri Agrawal, Adv.
Table of Contents
2. Appellants contended the surcharge is an impermissible tax on tax or income beyond Entry 54; States asserted it is a valid enhancement of the sales tax rate. (Para 2 , 9 , 66 , 67 )
3. The levy is a valid enhancement of the sales tax rate, and the mode of computation based on existing tax does not change its character as a tax on sales. (Para 22 , 23 , 24 , 25 , 30 , 31 , 35 , 90 , 91 )
4. A surcharge computed as a percentage of sales tax is in substance an enhancement of the principal tax rate and falls within the State's legislative competence under Entry 54. (Para 35 , 87 , 94 )
5. The reference is dismissed as infructuous, affirming the binding nature of prior Constitution Bench decisions, while leaving secondary issues under specific acts open for regular bench disposal. (Para 102 , 103 )
6. Does a state legislative surcharge calculated as a percentage of sales tax payable fall within the scope of Entry 54 of List II?
Yes. A surcharge calculated as a percentage of sales tax payable by dealers is considered an enhancement of the sales tax rate and is a valid tax on the sale or purchase of goods within Entry 54, as the measure of tax does not alter its essential character. (Para 30 , 31 , 35 , 87 , 90 , 91 )
7. Does the inability of a dealer to pass on the surcharge to the consumer convert the sales tax into a tax on income?
No. The legislative power to tax sales is not conditional on the power of the dealer to pass the tax burden to the consumer. Prohibition of pass-through does not change the nature of the levy from a sales tax to an income tax because the liability remains tied to turnover, not profit. (Para 32 , 33 , 41 , 91 )
8. Is a legal reference to a larger bench required when the foundational doubt or conflict has been resolved by subsequent rulings?
No. A reference survives only as long as there is genuine doubt or conflict that a smaller bench cannot resolve. When a larger bench decision authoritatively settles the legal principle, the reference loses its purpose and should be returned as having been rendered academic. (Para 74 , 75 , 76 , 77 , 86 , 94 )
JUDGMENT :
SURYA KANT, CJI.
A. PROLOGUE
1. The present reference raises a question as to the legislative competence of a State Legislature, to levy a tax on the sale or purchase of goods under Entry 54 of List II of the Seventh Schedule to the Constitution on sales tax payable by a dealer rather than directly on his turnover.
2. The dichotomy in interpretation arises on account of competing claims wherein it is the contention of the assessees that such a levy could be construed as a ‘tax on tax’. It was urged that a levy measured by the quantum of tax already payable does not fall upon the ‘sale’ or ‘purchase of goods’, which alone is the subject of Entry 54 of List II, but is, in substance, a levy upon the ‘income’ or the ‘fiscal burden’ of the dealer, and therefore lies beyond the competence of the State Legislature. The States, on the other hand, maintain that such a surcharge is nothing more than an enhancement of the rate of sales tax for a class of dealers, and that the mode of its computation does not alter its essential character as a tax on sales.
3. This issue, over the course of nearly three decades, has travelled from a Two Judge Bench to a Constitution Bench, and thence to a Seven Judge Bench for consideration. However, it appears that the legal landscape against which the reference was made has since undergone a fundamental transformation.
4. In the years during which the reference remained pending, the legal landscape against which it was made has not stood still. Three developments, in particular, call for close examination. First, the decision of a Seven Judge Bench in India Cement Ltd. & Ors. v. State of Tamil Nadu & Ors., (1990) 1 SCC 12 which was perceived to have unsettled the law, has since been revisited by a Nine Judge Bench in Mineral Area Development Authority & Anr. v. Steel Authority of India & Anr., (2024) 10 SCC 1 Second, the question whether such a levy falls within the competence of the State Legislature was considered by a Constitution Bench in S. Kodar v. State of Kerala, (1974) 4 SCC 422 and the continued authority of that decision must be assessed in the light of these subsequent developments. Third, the sales tax regime under which the impugned levies were imposed has since given way to newer legislation, first the Value Added Tax enactments and thereafter the Goods and Services Tax Act, 2017. Each of these developments bears upon whether the reference continues to survive, and we shall examine them in the brief course of this judgment.
5. The narrower question which, therefore, falls for our consideration at the threshold is whether the reference continues to survive for adjudication by this Bench, or whether, in the light of these subsequent developments, it has been rendered academic. Since the answer to that question depends on a careful appreciation of the impugned levies, the constitutional framework, the decisions that gave rise to the reference, and the subsequent developments, we deem it appropriate to set out each of these in some detail before recording our conclusions.
B. THE IMPUGNED LEVIES
6. The matters before us arise out of three distinct sets of proceedings, which, though tagged together on account of a common question, are not identical in all respects. It would, therefore, be beneficial to notice each of them separately.
B.1. THE ORISSA SURCHARGE UNDER SECTION 5-A OF THE ORISSA SALES TAX ACT, 1947
7. The lead matter arises out of a challenge to Section 5-A of the Orissa Sales Tax Act, 1947 (Orissa Act), which was inserted by the Orissa Sales Tax (Amendment) Act, 1990, with effect from 01.07.1990. The provision required every dealer whose gross turnover exceeded Rs. 10 lakhs to pay, in addition to the tax payable under the Orissa Act, a surcharge of 10 per cent of the total tax payable.
8. To put it simply, the structure of the levy demonstrated that the charge under the Orissa Act continued to be upon the sale or purchase of goods, at the rates prescribed. However, for the class of
