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CASE DETAILS AT A GLANCE
Case Title: Arjun Flour Mills v. The State of Odisha Finance Department Secretary & Ors. (with connected Civil Appeals & Special Leave Petitions)
Court Name: Supreme Court of India (7-Judge Constitution Bench)
Coram / Judges: Surya Kant, CJI., S.V.N. Bhatti, J., Joymalya Bagchi, J., N.V. Anjaria, J., Arun Palli, J., V. Mohana, J., and K.V. Viswanathan, J. (Concurring)
Case Number: Civil Appeal No. 8763 of 1994 (Lead Matter) with C.A. Nos. 8909/1994, 7485/2001, 98/2003, SLP (C) Nos. 22159-22180/2002, C.A. Nos. 831-850/2003, 851/2003, 99/2003, 100/2003, 5046/2003, and 5637/2008
Neutral Citation: 2026 INSC 1192
Order / Judgment Date: 04.11.2026 (November 4, 2026)

1. Executive Summary & Historical Significance of the 7-Judge Bench Verdict

In one of the most consequential pronouncements on Indian fiscal federalism and constitutional taxation powers, a unanimous Seven-Judge Constitution Bench of the Supreme Court of India, led by Chief Justice of India Surya Kant, alongside a concurring opinion authored by Justice K.V. Viswanathan, has conclusively brought to rest a three-decade-old constitutional dispute that has traversed through Two-Judge, Three-Judge, and Five-Judge Benches since 1998.

Delivering judgment in Arjun Flour Mills v. State of Odisha & Ors. (Civil Appeal No. 8763 of 1994) along with a substantial batch of appeals from Odisha and Punjab, the 7-Judge Bench held that the landmark 1974 Constitution Bench decision in S. Kodar v. State of Kerala [(1974) 4 SCC 422 / (1975) 1 SCR 121] was correctly decided, remains unimpeachable law, and requires no reconsideration. Consequently, the reference to the Seven-Judge Bench was answered as having been rendered academic and infructuous.

The central question referred for determination was whether a State Legislature, acting under Entry 54 of List II (State List) of the Seventh Schedule to the Constitution of India, possesses the legislative competence to levy an additional sales tax, surcharge, or cess calculated as a fixed percentage of the sales tax payable by a dealer rather than directly upon the gross turnover, or whether such an impost amounts to an impermissible tax on tax or a disguised, ultra vires tax on the dealer income.

The Apex Court authoritatively settled that an additional tax or surcharge calculated as a percentage of the principal sales tax is, in substance and economic reality, nothing but an enhancement of the rate of sales tax on turnover. The mode of its arithmetical calculation does not alter the fundamental taxable event, which remains the sale or purchase of goods within the State under Entry 54 of List II.

2. Statutory Provisions Under Challenge: The Odisha and Punjab Enactments

The batch of proceedings brought before the Seven-Judge Bench encompassed three distinct legislative enactments spanning two States:

A. Section 5-A of the Orissa Sales Tax Act, 1947

Section 5-A was inserted into the Orissa Sales Tax Act, 1947 by the Orissa Sales Tax (Amendment) Act, 1990 (Orissa Act No. 11 of 1990), with effect from July 1, 1990. The provision mandated that every registered dealer whose gross turnover during any financial year exceeded Rs. 10 Lakhs was liable to pay, in addition to the regular sales tax payable under the Act, a surcharge at the rate of 10 percent of the total tax payable. Crucially, Section 5-A(3) contained a statutory non-obstante clause prohibiting the dealer from collecting or passing on the burden of this surcharge to the purchasing consumer.

B. Sections 5(1-C) and 30-AA of the Punjab General Sales Tax Act, 1948

By the Punjab General Sales Tax (Amendment) Act, 2002, the State Legislature of Punjab introduced Section 5(1-C), which levied a surcharge at the rate of 10 percent calculated on the sales tax payable by a dealer on taxable turnover. Alongside this, Section 30-AA provided an extraordinary feature: industrial units that had been granted complete sales tax exemption by way of industrial incentives under Section 30-A were nevertheless mandated to pay the surcharge levied under Section 5(1-C).

C. The Punjab Social Security Act, 2000

Under the Punjab Social Security Act, 2000 (as amended by Punjab Act No. 18 of 2000), the State of Punjab imposed a social security cess calculated as a percentage of the sales tax payable by dealers, with the proceeds earmarked directly for the Punjab Social Security Fund. The Punjab and Haryana High Court had struck down this enactment on the constitutional ground that under Article 266 of the Constitution, all State revenues must first be credited to the Consolidated Fund of the State before being appropriated.

3. The Precedential Matrix: S. Kodar, Hoechst, and India Cement

To appreciate how the reference reached a Seven-Judge Bench, the judgment traced the constitutional evolution across three pivotal precedents:

A. S. Kodar v. State of Kerala (1974) 4 SCC 422 (5-Judge Bench)

In 1974, a five-Judge Constitution Bench speaking through Justice K.K. Mathew upheld the constitutional validity of the Tamil Nadu Additional Sales Tax Act, 1970. Under Section 2(1) of that Act, dealers whose annual turnover exceeded Rs. 10 Lakhs were subjected to an additional tax of 5 percent of the tax payable, accompanied by Section 2(2) which strictly prohibited dealers from passing on the additional levy to buyers.

The Constitution Bench in S. Kodar laid down three bedrock legal principles:

• Legislative Competence under Entry 54 List II: Additional sales tax is in truth a tax on the aggregate sales effected by a dealer during a year. The fact that its quantum is determined with reference to the sales tax already assessed does not alter its essential character as a tax on the sale of goods.
• Pass-Through Is Not an Essential Element of Sales Tax: Under Indian constitutional law, the legal incidence of a sales tax falls squarely upon the dealer. While sales tax legislations usually allow the dealer to pass the tax on to the buyer, the right of pass-through is not an indispensable constitutional hallmark of a sales tax. A tax does not transform into an income tax merely because the dealer must bear the burden out of profits.
• Turnover-Based Graded Classification Is Constitutional: A graded tax scale where larger dealers pay higher rates does not violate Article 14. Economic capacity to pay corresponds with business volume, and progressive taxation serves social justice in an egalitarian State.

B. Hoechst Pharmaceuticals Ltd. v. State of Bihar (1983) 4 SCC 45 (3-Judge Bench)

Nearly a decade later, a Three-Judge Bench of the Supreme Court reaffirmed S. Kodar in upholding Section 5(1) and Section 5(3) of the Bihar Finance Act, 1981, which imposed a 10 percent surcharge on sales tax payable by dealers having turnover exceeding Rs. 5 Lakhs, with an express prohibition against passing on the surcharge. The Court held that a surcharge is nothing but an enhanced rate of tax to raise revenue for general purposes, and repelled the plea that price-control orders issued under the Essential Commodities Act, 1955 eclipsed State taxing power under Entry 54 of List II.

C. India Cement Ltd. v. State of Tamil Nadu (1990) 1 SCC 12 (7-Judge Bench)

In 1989, a Seven-Judge Bench in India Cement examined the validity of a local cess and cess surcharge levied under Sections 115 and 116 of the Madras Panchayats Act, 1958 upon royalty payable by mining lessees under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act). The Court struck down the cess, holding that the Central MMDR Act fully occupied the field under Entry 54 of List I, denuding the State Legislature of power under Entry 23 and Entry 50 of List II. In paragraph 34 of the judgment, Sabyasachi Mukharji, J. made the observation: royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State legislature.

4. The Genesis and 28-Year Journey of the Reference

The present controversy arose when the challenge to Section 5-A of the Orissa Sales Tax Act came before a Two-Judge Bench (S.P. Bharucha and V.N. Khare, JJ.) on August 13, 1998. Learned counsel for the assessees argued that while Hoechst Pharmaceuticals had upheld a surcharge on sales tax, that decision had proceeded partly upon a concession. They asserted that paragraph 20 of the Seven-Judge Bench decision in India Cement had adopted an antithetical view by declaring that a cess on royalty was an impermissible tax on royalty. Perceiving a conflict between Hoechst (3 Judges) and India Cement (7 Judges), the Two-Judge Bench referred the matter to a larger Bench.

On October 6, 1999, a Five-Judge Constitution Bench observed that the issue was directly governed by the Constitution Bench ruling in S. Kodar. Because a five-Judge Bench cannot overrule or doubt another five-Judge Bench under the doctrine of precedent, the Constitution Bench referred the matter to a Seven-Judge Bench. The reference remained pending for decades while Indian indirect tax jurisprudence underwent historic transformations.

5. Subsequent Legal Developments Dispelling the Doubts

The Seven-Judge Bench underscored that during the pendency of the reference, three decisive developments completely reshaped the constitutional landscape:

A. The Correction in Kesoram Industries (2004)

In State of West Bengal v. Kesoram Industries Ltd. [(2004) 10 SCC 201], a Five-Judge Constitution Bench examined the observation in India Cement that royalty is a tax. Chief Justice R.C. Lahoti, speaking for the majority, concluded that the phrase was an inadvertent typographical error, and that the Seven-Judge Bench intended to state that a cess on royalty is a tax. Kesoram narrowed India Cement to the occupied field under Section 9 of the MMDR Act.

B. The Decisive 9-Judge Bench Verdict in MADA v. SAIL (2024)

The definitive constitutional clarification occurred when a Nine-Judge Constitution Bench delivered its landmark judgment in Mineral Area Development Authority & Anr. v. Steel Authority of India & Anr. [(2024) 10 SCC 1]. The Nine-Judge Bench explicitly overruled the observation in India Cement that royalty is a tax, holding with finality:

Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. Accordingly, we conclude that the observation in India Cement to the effect that royalty is a tax is incorrect.

The 9-Judge Bench in MADA also reaffirmed the established doctrine on the measure of a tax, expressly citing S. Kodar to emphasize that the measure adopted by a Legislature to quantify liability does not determine the true nature of the tax, provided there is a reasonable nexus with the taxable event.

Chief Justice Surya Kant pointed out that once the Nine-Judge Bench in MADA removed the premise that royalty is a tax, the entire foundation upon which the assessees argued that India Cement prohibited a tax on tax collapsed. Royalty being contractual consideration, the cess in India Cement was never a tax on a tax at all.

C. The Altered Constitutional Landscape under the 101st Amendment (GST)

With the enactment of the Constitution (One Hundred and First Amendment) Act, 2016, Parliament inserted Article 246A (conferring concurrent power over Goods and Services Tax) and substituted Entry 54 of List II. Entry 54 no longer confers a plenary power on States to tax sales of general goods; it is now restricted exclusively to six commodities (petroleum crude, high-speed diesel, petrol, natural gas, aviation turbine fuel, and alcoholic liquor for human consumption). Furthermore, both Odisha and Punjab had replaced their legacy sales tax enactments with Value Added Tax (VAT) statutes in 2004 and 2005, and later with GST. Hence, the question referred had ceased to carry prospective constitutional significance.

6. Core Jurisprudential Analysis: Subject Matter vs. Measure of Tax

In the analytical core of the judgment, Chief Justice Surya Kant and Justice K.V. Viswanathan dismantled the assessees core argument that calculating a surcharge on tax payable constitutes a tax on tax or an income tax:

A. The Sharp Separation Between Subject and Measure

Relying upon Union of India v. Bombay Tyre International Ltd. [(1984) 1 SCC 467] and Federation of Hotel & Restaurant Association of India v. Union of India [(1989) 3 SCC 634], the Court reiterated that in constitutional law, the taxable subject (the taxable event creating liability) must never be conflated with the measure of the tax (the arithmetical yardstick used to quantify the liability). The Legislature enjoys wide latitude in choosing the measure.

B. The Pure Arithmetical Route

The Court illustrated the flaw in the assessees submission through simple mathematics: Sales tax is computed as a percentage of taxable turnover. A surcharge computed as a percentage of that sales tax is mathematically nothing more than an additional percentage of the exact same turnover. For example, a 10 percent surcharge upon a 10 percent sales tax is simply an additional levy of 1 percent on the turnover. The subject of the levy remains the sale or purchase of goods under Entry 54 of List II; only the arithmetical route to compute it differs.

C. Why Surcharge Cannot Be Characterized as an Income Tax

The argument that the surcharge is a tax on the dealer income was rejected as structurally fallacious. Sales tax and its surcharge escalate strictly with sales turnover, not with profits. A dealer who suffers massive business losses in a financial year remains fully liable to pay both the sales tax and the surcharge so long as gross turnover crosses the statutory threshold. A levy payable irrespective of the existence of income, and bearing zero relation to net profit, cannot under any legal reasoning be termed a tax on income.

7. Framework Governing Larger Bench References: The Dawoodi Bohra Principles

The judgment also provides authoritative guidance on the institutional discipline governing references under Article 145(3) and Article 141 of the Constitution, reaffirming Central Board of Dawoodi Bohra Community v. State of Maharashtra [(2005) 2 SCC 673]:

• Tethered to Real Doubt: A reference to a larger Bench is not an independent proceeding; it is an intermediate step in adjudicating an actual lis. Its survival depends entirely upon the continued existence of a genuine conflict in the law.
• Subsequent Resolution: Where the doubt that prompted the reference is subsequently resolved by a decision of an even larger Bench (here, the 9-Judge Bench in MADA), the law stands declared, and a Seven-Judge Bench cannot be expected to waste scarce judicial time restating settled law.
• Scarcity of Seven-Judge Benches: Seven-Judge Benches are scarce institutional resources that must not be expended on moot or settled questions when urgent constitutional questions await determination.

8. Concurring Opinion of Justice K.V. Viswanathan

Justice K.V. Viswanathan delivered a comprehensive concurring judgment, conducting an exhaustive paragraph-by-paragraph analysis of S. Kodar, Hoechst, India Cement, Kesoram, and MADA. Justice Viswanathan highlighted that:

• In S. Kodar, Justice K.K. Mathew articulated the constitutional principles with chilling clarity and characteristic brevity.
• There never was any genuine conflict between Hoechst and S. Kodar; both stood in total harmony.
• India Cement dealt with an entirely different field of law: mining leases, Entry 54 of List I, and Entries 23, 49, and 50 of List II. It did not touch upon sales tax or Entry 54 of List II. The assumption that India Cement laid down a universal ban on calculating an increment based on an existing tax was completely mistaken.
• In fact, paragraph 50 of India Cement explicitly endorsed the principle from M/s Guruswamy & Co. v. State of Mysore [1967 (1) SCR 548] that a cess levied as an increment to an existing tax must be judged by the validity of the principal tax. Because sales tax is valid under Entry 54 of List II, an increment or surcharge upon it is undeniably valid.

9. Final Directions and Treatment of Residual Questions

The Seven-Judge Bench summarized its conclusions and issued the following operative directions:

1. Reference Rendered Infructuous: The reference is answered as having been rendered academic and infructuous. The legislative competence of State Legislatures to levy the impugned sales tax surcharges is governed and upheld by the law declared in S. Kodar v. State of Kerala.
2. Residual Questions Left Open: The Court expressly refrained from deciding:
   • The validity of Section 30-AA of the Punjab Act (whether an industrial unit enjoying statutory sales tax exemption can be compelled to pay surcharge).
   • The validity of the Punjab Social Security Cess under Article 266 of the Constitution (whether cess proceeds can be credited directly to a dedicated fund without first entering the Consolidated Fund of the State).
3. Remittal to Regular Benches: All individual appeals and special leave petitions are remitted to appropriate regular Division Benches of the Supreme Court for determination on their individual merits, assessments, and consequential reliefs in accordance with the law declared in S. Kodar.
4. Segregation of Punjab Social Security Act Matters: The appeals concerning the Punjab Social Security Act, 2000 (C.A. No. 7485/2001, SLP (C) Nos. 22159-22180/2002, C.A. No. 5046/2003, and C.A. No. 5637/2008) are delinked and directed to be heard separately by a Division Bench.

10. Strategic Implications for Commercial Taxpayers and Litigants

This landmark ruling delivers immense clarity to commercial enterprises, tax practitioners, and State revenues:

• Settlement of Past Sales Tax Liabilities: State revenue authorities across Odisha, Punjab, and other States can proceed with resolving pending assessment proceedings for legacy sales tax periods without constitutional uncertainty regarding surcharge competence.
• Affirmation of Progressive Indirect Taxation: The principle that State Legislatures may legitimately impose heavier fiscal burdens upon high-turnover dealers without permitting pass-through to consumers stands doubly reinforced.
• Clarity on Constitutional References: The judgment sets a decisive procedural precedent preventing unnecessary constitutional references when binding larger-bench decisions have already settled the foundational legal principles.

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