Secretary to Government & Ors Vs. M/S Peekay Re-Rolling Mills (P) Ltd  Insc 353 (3
S. H. Kapadia & P. K. Balasubramanyan
with Civil Appeal Nos. 8032-8033/04 and 8034/04 KAPADIA, J.
Civil Appeal Nos. 8031/04 and 8032-8033/04 Being aggrieved by the common
judgment dated 22.8.2003 delivered by the Division Bench of the Kerala High
Court in W.A. Nos. 991 and 1316 of 2003, the State has come to this Court by
way of the present civil appeals.
Facts giving rise to these civil appeals are as follows.
Peekay Re-Rolling Mills (P) Ltd., respondent herein, was registered as an
industrial unit on 6.9.1991. They claim to have set up an industrial unit in
the State on account of tax exemption given to industrial units from payment of
sales tax for the fixed period commencing from the date of commercial
production. Tax exemption was in fact granted under Section 10 of the Kerala
General Sales Tax Act, 1963 ("1963 Act") vide notification dated
4.11.1993. Under that notification, tax exemption was admissible to medium
scale units for seven years from the commencement of commercial production. In
the present case, the respondent commenced the said production on 31.3.1995. In
between, on account of acute power shortage in the State, the Government issued
an Order inter alia stating that certain industries included in the negative
list would not be eligible for State Investment Subsidy and certain other
assistance. One of the items in the negative list, being item no. 7, was
"power intensive units", whose total power requirement exceeded 2500
KVA and where the cost of power exceeded 25% of the cost of production. By
clauses 2 and 4 of the said G.O., all units in the negative list provisionally
registered on or after 31.12.1993 were denied State Investment Subsidy. By
clause 3 of the said G.O., expansion/ modernization/ diversification of
existing units in the negative list was also disqualified from tax exemption
from the Government except in cases where an application was made by the unit
on or before 31.12.1993.
Subsequent to the commencement of commercial production on 31.3.1995 and
prior to March, 1996, additional investment was made by the respondent for the
construction of building, installation of plant and machinery, electrification
etc. This expansion was undertaken for the purpose of downline integration to
enable the respondent to manufacture steel ingots, an input in the manufacture
of iron rods and bars. After starting commercial production, the respondent
made an application for tax exemption on 20.6.1997. The Director of Industries
issued eligibility certificate and based on the said certificate, the
Commissioner of Taxes granted exemption on 19.12.1997 on the initial investment
to the respondent to the tune of Rs. 2.66 crores (approx.) for seven years from
31.3.1995 to 30.3.2002. During the pendency of the exemption application before
the Director of Industries, additional capital investment of Rs. 5 crores
(approx.) was made. This led to the increase in the contract load and,
therefore, an application was made on 24.9.1997 by the respondent claiming tax
exemption on the basis of additional capital investment. This application dated
24.9.1997 was rejected by the competent authority on the ground that the
respondent was a power intensive unit having a load factor of more than 2500
KVA. Reliance was placed on G.O. dated 26/27.11.1993 in that regard. This order
led to litigation.
Without going into unnecessary details, suffice it so state that both, the
Government and the Director of Industries, proceeded to reject the claim for
tax exemption by placing reliance on the above G.O. dated 26/27.11.1993. This
led to the filing of O.P. Nos. 32947 and 32807 of 2000 by the respondent herein
in the High Court. To complete the chronology of events, on 19.4.1994 the
Government issued a clarification to the G.O. dated 26/27.11.1993. By the said
G.O., it was clarified that tax exemption would continue to be available to all
industries which were provisionally registered before 31.12.1993 and only those
industries in the negative list which stood registered on or after 31.12.1993
alone would be ineligible for financial assistance/ tax exemption from the
Government. Therefore, in the said O.P. Nos. 32947 and 32807 of 2000 one of the
grounds taken by the respondent was that the Government as well as the Director
of Industries had erred in denying tax exemption to the respondent without
considering the clarificatory G.O. dated 19.4.1994. In the said writ petitions,
the order passed by the Director of Industries dated 21.10.2000 holding that
the respondent was not entitled to tax exemption in respect of the additional
capital investments was questioned. This order was passed by the Director of
Industries based on an inter departmental letter dated 5.7.2000 addressed by
the Principal Secretary to the Director of Industries, which the Department has
termed as "clarification". Before the High Court, it was also
contended by the respondent that eligibility for tax exemption had to be
decided only with reference to statutory notification under Section 10(1) of
the said 1963 Act and not with reference to the general executive orders which
do not have statutory flavour and that by the said G.O. dated 26/27.11.1993 it
was not open to the State Government to withdraw the benefit of tax exemption
granted vide notification dated 4.11.1993.
By judgment dated 10.4.2003, the learned Single Judge held that G.O. dated
26/27.11.1993 was a comprehensive Notification dealing with various subjects.
It was further held that even under Section 10(3) of the said 1963 Act,
specific power was given to the Government to cancel or modify any notification
under Section 10(1) of that Act and, therefore, the effect of the said G.O.
dated 26/27.11.1993 was to modify/ amend Notification dated 4.11.1993. The learned
Single Judge further held that when the Government had statutory power to issue
such a notification, any G.O. issued without reference to the provisions of the
statute should be deemed to be issued in exercise of such power. In the
circumstances, the contention advanced on behalf of the respondent to the
effect, that G.O.
dated 26/27.11.1993 cannot cause an amendment/ modification to the statutory
notification dated 4.11.1993 under Section 10(1) of the said 1963 Act, stood
rejected. In the petition, one of the contentions raised by the respondent was
that the respondent's unit was not a Power Intensive Unit because its expenses
on account of the cost of power was less than 25% of the cost of its total
production. In this connection, respondent placed reliance on clause 7 of G.O.
dated 26/27.11.1993. This argument was rejected by the learned Single Judge
holding that the issue can be decided on interpretation of clause 7 with
reference to the connnected load and not with reference to the cost of production
attributable to power charges. The learned Single Judge interpreted the word
'and' in clause 7 and read it as disjunctively. On that basis, the learned
Single Judge held that though the word 'and' was used in clause 7, the two
conditions, namely, the contract load above 2500 KVA and the cost of power at
more than 25% of the cost of production, cannot be read conjunctively and that
they have to be read disjunctively. In other words, the learned Single Judge
has read the word 'and' as 'or'. The learned Single Judge also rejected the
contention raised by the respondent that the respondent was entitled to
exemption since its unit stood registered before 31.12.1993. This argument was
rejected on the ground that under clause 3 of G.O. dated 26/27.11.1993, expansion
of existing unit in the areas included in the negative list was not entitled to
tax exemption unless application was made on or before 31.12.1993. According to
the learned Single Judge, the respondent was granted tax exemption on initial
investments for the full period of seven years from 31.3.1995 to 30.3.2002.
This, according to the learned Single Judge, was in view of the clarificatory
G.O. dated 19.4.1994. According to the learned Single Judge, the respondent's
unit was not in the negative list on 26.11.1993. It came under the negative
list only by virtue of additional investments made by the respondent after
1.7.1995 and, therefore, it was not a case of existing industry in the negative
list making additional investments and claiming tax exemption thereon.
According to the learned Single Judge, it was a case where by making additional
investments, the respondent had brought its unit into the negative list. For
the aforestated reasons, O. P. Nos.
32807 and 32947 of 2000 were dismissed.
Aggrieved by the said judgment, the respondent herein carried the matter in
writ appeals to the Division Bench. By the impugned judgment, it has been held
that, G.O. dated 26/27.11.1993 was a general Notification withdrawing grant of
subsidy and as against the said G.O., the exemption Notification dated
4.11.1993 was a specific Notification issued under Section 10(1) of the said
1963 Act and, therefore, the specific Notification would override the general
G.O./ Notification dated 26/27.11.1993. Accordingly, the writ appeals were
allowed, hence, these civil appeals.
We are of the view that the State Government had the authority under Article
162 of the Constitution to issue G.O.
dated 26/27.11.1993 withdrawing the tax exemption on account of acute power
shortage in the State. However, for the reasons mentioned hereinbelow, we are
not examining the larger question of principle, namely, applicability of
specific Notification under Section 10(1) of the 1963 Act vis-`-vis
comprehensive Notification dated 26/27.11.1993 issued by the Ministry of
Industries withdrawing all tax exemptions including those under Section 10(1)
of the 1963 Act.
We are proceeding on the basis that the comprehensive G.O. dated
26/27.11.1993 issued by the State Government on account of acute power shortage
is applicable to the facts of the present case. It is undisputed that on
4.11.1993 the State Government had issued a statutory Notification under
Section 10(1) inter alia granting exemption to medium scale units from payment
of sales tax for seven years. Similarly, the State had given concessions under
Electricity Act. It had promised subsidies. All these exemptions/ concessions
were withdrawn by G.O. dated 26/27.11.1993 by the Ministry of Industries on
account of acute power shortage. We do not find any infirmity in the issuance
of the said G.O. dated 26/27.11.1993.
The question still remains as to the scope of the clarificatory G.O. dated
19.4.1994. This question has not been examined by the Division Bench. According
to the appellants, the said clarificatory G.O. was not applicable to units
which made additional investments after 26.11.1993. However, this aspect has
not been examined by the Division Bench. The Division Bench has also not
examined clause 3 of G.O. No.
169/95/ID dated 1.11.1995, which reads as follows:
"3. Investments in generators shall be eligible for the purpose of Tax
Exemption Additional investment for balancing equipment and lines of backward
or forward integration shall qualify only as additional investment for the
purpose of tax exemption. Additional investment for purposes of determining tax
exemption eligibility will mean those investments necessary to the running of
the unit which however do not; qualify independently as
expansion/diversification/ modernization, units shall consequently be entitled
only to increase in the monetary limit for tax exemption already enjoyed
without extension in the period. Tax Exemption for additional investments may
be given during the period the unit is enjoying its initial Tax Exemption or when
the unit is enjoying tax exemption on account of expansion/ diversification/
The Director of Industries, in his order dated 21.10.2000 while rejecting
the respondent's claim for tax exemption has relied upon an inter departmental
letter dated 5.7.2000. The effect of this letter has also not been considered
by the Division Bench, whether the letter is an amendment or a clarification.
Similarly, the Division Bench has failed to consider clause 7 of G.O. dated
26/27.11.1993. We reproduce hereinbelow clause 7:
"7. Power intensive units based on electro thermal/ electro chemical
processors or units where total power requirement exceeds 2500 KVA of contract
load and where cost of power is more than 25% of cost of production of the
items manufactured except where the units generate their power requirements in
excess of 2500 KVA of contract load by own captive power." (emphasis
supplied) As stated above, according to the appellants, the word 'and' in the
above quoted clause should be read as 'or' whereas, according to the
respondent, clause 7 defines power intensive units to mean units whose total
power requirement exceeds 2500 KVA of contract load and where the cost of power
is more than 25% of cost of production of the items manufactured by the units.
As stated above, the learned Single Judge has accepted the contention advanced
on behalf of the appellants herein. However, this is an important aspect.
The said clause 7 refers to the Load Factor and to the cost of power as
percentage of cost of production. According to the appellants, the Cost Factor
has no nexus with the object sought to be achieved, namely, lowering of
According to the appellants, under clause 7 both the cost and the load
factors were required to be taken into account so that in cases where the limit
of 2500 KVA is not exceeded, investment is not discouraged. According to the
appellants, if both the conditions were to be satisfied for making a unit power
intensive unit then, in the present case, the said G.O.
dated 26/27.11.1993 would not apply since during the relevant period the
respondent's unit did not incur expenses on account of cost of power exceeding
25% of the total cost of production. In the present case, the Division Bench
has failed to consider the following aspects in the matter of interpretation of
clause 7 of the said G.O. dated 26/27.11.1993. The reason for issuance of the
said G.O. was to curb excess electricity consumption and not to curb additional
investments. The underlying reason for issuance of the said G.O. was to
restrict power consumption and not to restrict expansion of units in terms of
This is the basic argument advanced on behalf of the respondent in support
of their contention that the word 'and' in clause 7 should be read
conjunctively. On the other hand, it is argued on behalf of the appellants that
the word 'and' in the said clause should be read as 'or' since the reason for
issuance of the said G.O. was to curb excess electricity consumption either by
way of exceeding the prescribed ceiling of 2500 KVA or by way of additional
investments (capital expenditure for additional facility). These aspects have
not been considered by the Division Bench though it had been considered in
favour of the appellants by the learned Single Judge.
For the above reasons, we hold that the State Government was entitled to
issue comprehensive G.O. dated 26/27.11.1993 on account of acute power shortage
in the State. We further hold that the comprehensive G.O. applies across the
board to all units which became power intensive units. To that extent, we find
merit in the civil appeals filed by the State. However, since the Division
Bench of the High Court has not examined the points referred to above, to that
extent alone, we remit the matter to the Division Bench for its consideration.
Subject to above, the civil appeals filed by the State stand allowed. There
is no order as to costs.
Civil Appeal No. 8034/04 [Sales Tax Officer & Ors. v. Premium Ferro
Alloys Ltd.] Although, the dates of events are different, the matter is similar
on the question of withdrawal of tax exemption to the case just decided vide
Civil Appeal Nos. 8031/04 and 8032- 8033/04 concerning Secretary to Government
& Ors. v.
M/s Peekay Re-rolling Mills (P) Ltd..
One of the points which arises for determination in the present case is
whether Premium Ferro Alloys Ltd. is entitled to claim tax exemption on
additional investments made after 24.11.1998. It is urged on behalf of the said
company (respondent herein) that G.O. No. 169/98/ID dated 24.11.1998 by which
the State Government modified the negative list by including all types of steel
re-rolling mills, units manufacturing iron ingots, operated prospectively. In
this connection reliance was placed on clause 3 of the said G.O.
We do not find any merit in the above contention. We quote hereinbelow
clause 2 and clause 3 of the said G.O.
"2 The Director of Industries & Commerce has in his letter read
above proposed some modifications to the negative list. The Government have
examined the proposal of the Director of Industries & Commerce and decided
to amend the G.O. read above by including the following industries also in the
1. Metal Crushers including Granite Manufacturing Units.
2. All types of steel Re-Rolling Mills, Units Manufacturing iron ingots.
3. Ferro Silicon
4. Calcium Carbide
5. Cement Manufacturing
6. Potassium Chlorate
3. This order will be effective from the date of order and will be
applicable to all units taking provisional registration or IEM/SIA as the case
may be from the date of this order. All the conditions stipulated in the G.O.
read above and subsequent amendments/ clarifications issued thereon will be
applicable to this order also."
Reading the above two clauses, it is clear that the G.O.
dated 26/27.11.1993 got modified by G.O. dated 24.11.1998.
Therefore, if the said G.O. dated 26/27.11.1993 is found to be applicable
then the G.O. dated 24.11.1998 which is modification of the earlier G.O. dated
26/27.11.1993 would apply as a clarificatory G.O.. We may reiterate that in our
judgment in Civil Appeal Nos. 8031/04 and 8032-8033/04 the question of
interpretation of clause 7 of G.O. dated 26/27.11.1993 has been remitted to the
High Court. However, as far as retrospectivity of G.O. dated 24.11.1998 is
concerned, we are of the view that the said G.O. is clarificatory. Therefore,
there is no merit in the contention raised on behalf of Premium Ferro Alloys
Ltd. that the said G.O. dated 24.11.1998 is prospective and not retrospective.
However, the issues, which we have remitted to the Division Bench in the
earlier matters (Civil Appeal Nos.
8031/04 and 8032-8033/04), also arise in the present case.
In the circumstances, we remit this case also to the Division Bench.
Accordingly, we request the Division Bench of the High Court to tag W.A. No.
1477 of 2003 with W.A. Nos.
991, 1316 and 1561 of 2003 and decide the appeals accordingly.
Subject to above, the appeal is allowed with no order as to costs.