Union of India and
Ors. Vs. M/s Nitdip Textile Processors Pvt. Ltd. and Another
Union of India and
Ors. Vs. M/s Nitdip Textile Processors Pvt. Ltd. and Another
Union of India and
Ors. Vs. M/s Rinkoo Processors Pvt. Ltd. and Another
Union of India and
Ors. Vs. M/s Swiss Pharma Pvt. Ltd. and Another
Union of India and
Ors. Vs. M/s New Age Industries and Another
Union of India and Ors.
Vs. M/s Aryan Finefab Ltd. and Others
Union of India and
Ors. Vs. M/s Modern Denim Ltd. and Another
Union of India and Ors.
Vs. M/s Navdurga Calendaring Works Surat and Others
J U D G M E N T
H.L. Dattu, J.
present batch of eight appeals arises out of the common Judgment and Order dated
25.07.2005 passed by the High Court of Gujarat at Ahmedabad in the Special
Civil Application No.735 of 1999 and connected applications filed under Article
226 of the Constitution of India. Since these appeals involve common question
of law, they are disposed of by this common Judgment and Order.
the parties in these present appeals before us were duly served but none appeared
for the respondents except one in Civil Appeal No. 5616 of 2006.
High Court, vide its impugned Judgment and Order dated 25.07.2005, has declared
that Section 87(m)(ii) (b) of Finance (No.2) Act, 1998 is violative of Article
14 of the Constitution of India insofar as it seeks to deny the benefit of the `Kar
Vivad Samadhana Scheme, 1998 (hereinafter referred to as "the
Scheme") to those who were in arrears of duties etc., as on 31.03.1998 but
to whom the notices were issued after 31.03.1998 and further, has struck down the
expression "on or before the 31st day of March 1998" under Section
87(m)(ii)(b) of the Finance (No. 2) Act, 1998 as ultra vires of the Constitution
of India and in particular, Article 14 of the Constitution on the ground that the
said expression prescribes a cut-off date which arbitrarily excludes certain category
of persons from availing the benefits under the Scheme.
The High Court has
further held that as per the definition of the `tax arrears' in Section 87(m) (ii)(a)
of the Act, the benefit of the Scheme was intended to be given to all persons
against whom the amount of duties, cess, interest, fine or penalty were due and
payable as on 31.3.1998. Therefore, this cut-off date in Section 87(m)(ii)(b)
arbitrarily denies the benefit of the Scheme to those who were in arrears of
tax as on 31.03.1998 but to whom notices were issued after 31.3.1998. This would
result in unreasonable and arbitrary classification between the assessees
merely on the basis of date of issuance of Demand Notices or Show Cause Notices
which has no nexus with the purpose and object of the Scheme.
In other words, the
persons who were in arrears of tax on or before 31.03.1998 were classified as
those, to whom Demand Notices or Show Cause Notices have been issued on or before
31.03.1998 and, those to whom such notices were issued after 31.3.1998. The
High Court observed that this classification has no relation with the purpose
of the Scheme to provide a quick and voluntary settlement of tax dues. The High
Court further observed that this artificial classification becomes more
profound in view of the fact that the Scheme came into operation with effect from
1.9.1998 which contemplates filing of declaration by all persons on or after
1.9.1998 but 5on or before 31.1.1999.
The High Court
further held that all persons who are in arrears of direct as well as indirect
tax as on 31.3.1998 constitute one class, and any further classification among them
on the basis of the date of issuance of Demand Notice or Show Cause Notice
would be artificial and discriminatory. The High Court concluded by directing the
Revenue to consider the claims of the respondents for grant of benefit under
the Scheme, afresh, in terms of the Scheme. The relevant portions of the
impugned judgment of the High Court is extracted below: "In the light of the
above, we shall now consider whether definition of "tax arrears" contained
in Section 87 (m)(ii)(b) is arbitrary, irrational or violative of the doctrine
of equality enshrined under Article 14 of the Constitution and whether the petitioners
are entitle to avail benefit under Scheme.
A reading of the speech
made by the Finance Minister and the objects set out in memorandum to Finance
(No. 2) Bill, 1998 shows that the Scheme was introduced with a view to quick and
voluntary settlement of tax dues outstanding as on 31.3.1998 under various direct
and indirect tax enactments by offering waiver of a part of the arrears of taxes
and interest and providing immunity against prosecution and imposing of
penalty. The definition of `tax arrear' contained in Section 87 (m)(i) in the context
of direct tax enactment also shows that the legislation was intended to give benefit
of the scheme to the assessee who were in arrears of tax on 31.3.1998.
The use of the words as
on "31st day of March, 1998" in Section 87(m)(ii) also shows that
even in 6relation to indirect tax enactments, the benefit of the scheme was intended
to be given to those against whom the amount of duties, cess, interest, fine or
penalty were due or payable upto 31.3.1998. Viewed in this context it is quite
illogical to exclude the persons like the petitioners from whom the amount of duties,
cess, interest, fine, penalty, etc. were due as on 31.3.1998 but to whom Demand
Notices were issued after 31.3.1998.
In our opinion, the distinction
made between those who were in arrears of indirect taxes as on 31.3.1998 only on
the basis of the date of issuance of notice is wholly arbitrary and irrational.
The classification sought to be made between those Demand Notices or Show Cause
Notices may have been issued on or before 31st day of March, 1998 and those to whom
such notices were issued after 31.3.1998 is per se unreasonable and has no
nexus with the purpose of the legislation, namely to provide a quick and voluntary
settlement of tax dues outstanding as on 31.3.1998.
The irrationality of
the classification becomes more pronounced when the issue is examined in the backdrop
of the fact that the scheme was made applicable with effect from 1.9.1998, and
in terms of Sections 88 (amended) a declaration was required to be filed on or after
first day of September, 1998 but on or before 31.1.1999. In our opinion, all
persons who were in arrears of direct or indirect taxes as on 31.3.1998 constituted
one class and no discrimination could have been made among them by introducing an
artificial classification with reference to the date of Demand Notice or Show Cause
Notice. All of them should have been treated equally and made eligible for availing
benefit under the Scheme subject to compliance of conditions contained in other
provisions of the Scheme."
will take Civil Appeal No. 2960 of 2006 as the lead matter. The facts of the
case, in brief, are hereunder: The respondent is engaged in the manufacture of textile
fabrics. The team of Preventive Officers of the Central Excise, Ahmedabad-I conducted
a surprise inspection of the premises of the factory on 5.9.1997. The Revenue Officers
examined the statutory Central Excise Records and physically verified the
stocks at various stages of manufacturing in the presence of two independent panchas
and respondent no. 2, under the Panchnama dated 5.9.1997.
The Revenue Officers
found that the respondents have cleared the Man Made Fabric admeasuring 38,726
l.m. of `5,38,449/- without the payment of excise duty of `84,290/-. In this
regard, the Statement of respondent no. 2 was recorded on 5.9.1997 under Section
14 of the Central Excise Act, 1944 (hereinafter referred to as "the Excise
Act"). The respondent no. 2, in his Statement has admitted the processing of
the said fabric in his factory, after registering it in the lot register, and its
subsequent clandestine removal without payment of the excise duty.
Accordingly, a Show Cause
Notice dated 06.01.1999 was issued to the respondents demanding a duty of `84,290/-
8under Section 11A of the Excise Act along with an equal amount of penalty under
Section 11AC of the Excise Act, and further penalty under Rule 173 Q of the
Central Excise Rules, 1944 [hereinafter referred to as "the Excise Rules"]
and interest under Section 11AB of the Excise Act for non-payment of excise
duty on clandestine clearance of the said fabrics. Further, the Respondent no. 2
was also asked to show cause as to why penalty under Section 209 A of the
Excise Rules should not be imposed on him for his active involvement in acquiring,
possession, removal, concealing, selling and dealing of the excisable goods,
which are liable to be confiscated under the Excise Act. In the meantime, the
Scheme was introduced by the Hon'ble Finance Minister through the 1998 Budget, which
was contained in the Finance (No.2) Act of 1998.
The Scheme was made
applicable to tax arrears outstanding as on 31.3.1998 under the direct as well
as indirect tax enactments. Originally, the benefits of the Scheme could be availed
by any eligible assessee by filing a declaration of his arrears under Section
88 of the Act on or after 1.9.1998 and on or before 31.12.1998. However, the
period for declaration under the Scheme was extended upto 31.1.1999 by the Ordinance
However, the cut-off
date prescribed by the Scheme under Section 87 (m) (ii) (a) and (b) of the Act
for availing the benefits under the Scheme excluded the respondents from its ambit.
Being aggrieved, the respondents filed a Special Civil Application before the
High Court of Gujarat, inter-alia, seeking a writ to strike down the words
"on or before the 31st day of March 1998" occurring in Section 87 (m)
(ii) of the Finance Act, 1998.
They had further
prayed for issuance of an appropriate direction to the petitioner to give them benefit
of the Scheme, 1998 in respect of tax arrears under tax enactments for which
Show Cause Notices or Demand Notices were issued on or after 31.03.1998. The High
Court, vide its impugned judgment and order dated 25.7.2005, struck down the
expression "on or before the 31st day of March, 1998" in Section 87
(m) (ii) (b) as being unconstitutional. The High Court further directed the
competent authority to entertain and decide the declarations made by the
assessees in terms of the Scheme. Aggrieved by the Judgment and Order, the Revenue
is before us in this appeal.
Scheme was introduced by Finance (No.2) Act and is contained in Chapter IV of the
Act. The Scheme is known as Kar Vivad Samadhana Scheme, 1998. It was in force
between 1.9.1998 and 31.1.1999. Briefly, the Scheme permits the settlement of
"tax arrear" as defined in Section 87(m) of the Act. It is necessary to
extract the relevant provisions of the Scheme: "Section 87 - Definitions.
In this Scheme, unless
the context otherwise requires, *** h) "direct tax enactment" means the
Wealth- tax Act, 1957 or the Gift-tax Act, 1958 or the Income-tax Act, 1961 or the
Interest-tax Act, 1974 or the Expenditure-tax Act, 1987; (j) "indirect tax
enactment" means the Customs Act, 1962 or the Central Excise Act, 1944 or the
Customs Tariff Act, 1975 or the Central Excise Tariff Act, 1985 or the relevant
Act and includes the rules or regulations made under such enactment; *** (m)
"tax arrear" means,-
(i) in relation to
direct tax enactment, the amount of tax, penalty or interest determined on or
before the 31st day of March, 1998 under that enactment in respect of an assessment
year as modified in consequence of giving effect 11 to an appellate order but remaining
unpaid on the date of declaration; (ii) in relation to indirect tax enactment,-
(a) the amount of duties
(including drawback of duty, credit of duty or any amount representing duty), cesses,
interest, fine or penalty determined as due or payable under that enactment as on
the 31st day of March, 1998 but remaining unpaid as on the date of making a
declaration under section 88; or
(b) the amount of duties
(including drawback of duty, credit of duty or any amount representing duty), cesses,
interest, fine or penalty which constitutes the subject matter of a Demand
Notice or a show-cause notice issued on or before the 31st day of March, 1998
under that enactment but remaining unpaid on the date of making a declaration
under section 88, but does not include any demand relating to erroneous refund
and where a show-cause notice is issued to the declarant in respect of seizure
of goods and demand of duties, the tax arrear shall not include the duties on such
seized goods where such duties on the seized goods have not been quantified.
Explanation.-Where a declarant
has already paid either voluntarily or under protest, any amount of duties, cesses,
interest, fine or penalty specified in this sub-clause, on or before the date of
making a declaration by him under section 88 which includes any deposit made by
him pending any appeal or in pursuance of a Court order in relation to such duties,
cesses, interest, fine or penalty, such 12 payment shall not be deemed to be
the amount unpaid for the purposes of determining tax arrear under this
sub-clause; Section 88 –
Settlement of tax
payable Subject to the provisions of this Scheme, where any person makes, on or
after the 1st day of September, 1998 but on or before the 31st day of December,
1998, a declaration to the designated authority in accordance with the provisions
of section 89 in respect of tax arrear, then, not-withstanding anything contained
in any direct tax enactment or indirect tax enactment or any other provision of
any law for the time being in force, the amount payable under this Scheme by the
declarant shall be determined at the rates specified hereunder, namely
Scheme, as contained in Chapter IV of the Act, is a Code in itself and
statutory in nature and character. While implementing the scheme, liberal
construction may be given but it cannot be extended beyond conditions prescribed
in the statutory scheme. In Regional Director, ESI Corpn. v. Ramanuja Match
Industries, (1985) 1 SCC 218, this Court observed: "10 ... We do not doubt
that beneficial legislations should have liberal construction with a view to implementing
the legislative intent but where such beneficial legislation has a scheme of
its own there is no warrant for the Court to travel beyond the scheme and
extend the scope of the statute on the pretext of extending the statutory benefit
to those who are not covered by the scheme."
Hemalatha Gargya v. Commissioner of Income Tax, A.P., (2003) 9 SCC 510, this
Court has held: "10. Besides, the Scheme has conferred a benefit on those who
had not disclosed their income earlier by affording them protection against the
possible legal consequences of such non-disclosure under the provisions of the
Income Tax Act. Where the assessees seek to claim the benefit under the statutory
scheme they are bound to comply strictly with the conditions under which the benefit
is granted. There is no scope for the application of any equitable consideration
when the statutory provisions of the Scheme are stated in such plain language."
Union of India v. Charak Pharmaceuticals (India) Ltd., (2003) 11 SCC 689, this
Court has observed thus: "8. If benefit is sought under a scheme, like
KVSS, the party must fully comply with the provisions of the Scheme. If all the
requirements of the Scheme are not met then on principles of equity, courts cannot
extend the benefit of that Scheme."
Deepal Girishbhai Soni v. United India Insurance Co. Ltd., (2004) 5 SCC 385, at
page 404, this Court observed as : "53. Although the Act is a beneficial
one and, thus, deserves liberal construction with a view to implementing the legislative
intent but it is trite that where such beneficial legislation has a scheme of its
own and there is no vagueness or doubt therein, the court would not travel
beyond the same and extend the scope of the statute on the pretext of extending
the statutory benefit to those who are not covered thereby. (See Regional Director,
ESI Corpn. v. Ramanuja Match Industries)"
Maruti Udyog Ltd. v. Ram Lal, (2005) 2 SCC 638, this Court has observed: "A
beneficial statute, as is well known, may receive liberal construction but the
same cannot be extended beyond the statutory scheme. (See Deepal Girishbhai
Soni v. United India Insurance Co. Ltd.)"
Pratap Singh v. State of Jharkhand, (2005) 3 SCC 551, this Court has held: "93.
We are not oblivious of the proposition that a beneficent legislation should not
be construed so liberally so as to bring within its fore a person who does not
answer the statutory scheme. (See Deepal Girishbhai Soni v. United India Insurance
object and purpose of the Scheme is to minimize the litigation and to realize the
arrears of tax by way of Settlement in an expeditious manner. The object of the
Scheme can be gathered from the Speech of the Finance Minister, whilst
presenting the 1998-99 Budget: "Litigation has been the bane of both
direct and indirect taxes. A lot of energy of the Revenue Department is being frittered
in pursuing large number of litigations pending at different levels for long periods
Considerable revenue also
gets locked up in such disputes. Declogging the system will not only incentivise
honest taxpayers, it would enable the Government to realize its reasonable dues
much earlier but coupled with administrative measures, would also make the system
more user-friendly. I therefore, propose to introduce a new scheme called Samadhan.
he scheme would apply to both direct taxes and indirect taxes and offer waiver
of interest, penalty and immunity from prosecution on payment of arrears of direct
tax at the current rates. In respect of indirect tax, where in recent years the
adjustment of rates has been very sharp, an abatement of 50 per cent of the duty
would be available alongwith waiver of interest, penalty and immunity from
Finance Minister, whilst replying to the debate after incorporating amendments
to the Finance (No. 2) Bill, 1998, made a Speech dated 17.7.1998. The relevant
portion of the Speech, which highlights the object or purpose of the Scheme, is
extracted below: "The Kar Vivad Samadhan Scheme has evoked a positive response
from a large number of organizations and tax professionals.
Hon'ble Members of Parliament
have also taken a keen interest in the scheme. The lack of clarity in regard to
waiver of interest and penalty in relation to settlement of tax arrears under the
indirect tax 16 enactments is being taken care of by rewording the relevant clauses
of the Finance Bill. I have also carefully considered the suggestions emanating
from various quarters including the Standing Committee on Finance to extend the
scope of this scheme so as to included tax disputes irrespective of the fact
whether the tax arrears are existing or not.
As you have seen from
the scheme, it has two connected limbs-"Kar" and "Vivad".
Collection of tax arrears is as important as settlement of disputes. The scheme
is not intended to settle disputes when there is no corresponding gain to the
other party. The basic objective of the scheme cannot be altered."
Court, in plethora of cases, has discussed the object and purpose of this Scheme.
In Sushila Rani v. Commissioner of Income Tax, (2002) 2 SCC 697, this Court observed:
"5. KVSS was introduced by the Central Government with a view to collect revenues
through direct and indirect taxes by avoiding litigation. In fact the Finance Minister
while explaining the object of KVSS stated as follows: "Litigation has
been the bane of both direct and indirect taxes.
A lot of energy of the
Revenue Department is being frittered in pursuing large number of litigations
pending at different levels for long periods of time. Considerable revenue also
gets locked up in such disputes. Declogging the system will not only incentivise
honest taxpayers, it would enable the Government to realize its reasonable dues
much earlier but coupled with administrative measures, would also make the system
Killick Nixon Ltd., Mumbai v. Deputy Commissioner of Income Tax, Mumbai, (2003)
1 SCC 145, this Court has held: "9. The scheme of KVSS is to cut short
litigations pertaining to taxes which were frittering away the energy of the Revenue
Department and to encourage litigants to come forward and pay up a reasonable amount
of tax payable in accordance with the Scheme after declaration
CIT v. Shatrusailya Digvijaysingh Jadeja, (2005) 7 SCC 294, this Court has
observed: "11. The object of the Scheme was to make an offer by the Government
to settle tax arrears locked in litigation at a substantial discount. It
provided that any tax arrears could be settled by declaring them and paying the
prescribed amount of tax arrears, and it offered benefits and immunities from
penalty and prosecution.
In several matters, the
Government found that a large number of cases were pending at the recovery
stage and, therefore, the Government came out with the said Scheme under which
it was able to unlock the frozen assets and recover the tax arrears. 12. In our
view, the Scheme was in substance a recovery scheme though it was nomenclatured
as a "litigation settlement scheme" and was not similar to the earlier
Voluntary Disclosure Scheme.
As stated above, the
said Scheme was a complete code by itself. Its object was to put an end to all
pending matters in the form of appeals, references, revisions and writ
petitions under the IT Act/WT Act."
Master Cables (P) Ltd. v. State of Kerala, (2007) 5 SCC 416, this Court has
held: "8. The Scheme was enacted with a view to achieve the purposes
mentioned therein viz. recovery of tax arrears by way of settlement. It applies
provided the conditions precedent therefor are satisfied."
the object of the Scheme and its application to Customs and Central Excise
cases involving arrears of taxes has been explained in detail by the Trade
Notice No. 74/98 dated 17.8.1998 issued by the Commissioner of Central Excise
and Customs, Ahmedabad-I. The relevant portion of the said Trade Notice has
been extracted below: OFFICE OF THE COMMISSIONER OF CENTRAL EXCISE &
CUSTOMS: AHMEDABAD-1 Trade Notice No.: 74/98 Basic No.: 34/98 Sub: Kar Vivad
Samadhan Scheme-1998 1.
As a part of this year's
Budget proposals, the Finance Minister had announced amongst others a scheme termed
"Kar Vivad Samadhan Scheme" essentially to provide quick and voluntary
settlement of tax dues. The basic aim of introducing this scheme has been to bring
down the pending litigation/disputes between the Dept. and the assessees- both on
the direct tax side and indirect tax side- as well as to speedily realize the
arrears of taxes (including fines, penalties & interest) considered due from
various parties which are locked up in various disputes. 192.
Essentially, these disputed
cases involving duties, cesses, fine, penalty and interest on Customs and
Central Excise side are proposed to be settled - case by case - if the
concerned party agrees to pay up in each case a particular amount (which may be
termed settled amount) calculated as per provisions of the scheme, following the
laid procedure. Whereas the department gets immediate revenue and it results in
reduction in pending disputes which may be prolonged otherwise before final assessment,
the party also gets significant benefit by way of reduced payments instead of the
disputed liability and immunity from prosecution.3...3.1.
The relevant extracts
containing provisions of the Samadhan Scheme as incorporated in the enacted Finance
(No. 2) Act, 98 (21 of 1998) are enclosed herewith. The salient features of the
Samadhan Scheme in relation to Indirect Taxes are briefly discussed below:- 4.
APPLICABILITY OF THE SCHEMEA. CATEGORY OF CASES TO WHICH SCHEME APPLICABLE4.1. The
Scheme is limited to Customs or Central Excise cases involving arrears of taxes
(including duties, cesses, fine, penalty of (sic.) interest) which were not paid
up as on 31.3.98 and are still in arrear and in dispute as on date of
declaration (as envisaged in section 98 (sic.) of the aforesaid Act).
The dispute and the
case may be still at the stage of Show Cause Notice or Demand Notice (other than
those of erroneous refunds) when party come (sic.) forward and makes a declaration
for claiming the benefits of the scheme, or the duties, fine, penalty or interest
after the issue of show cause/ Demand Notice may have been determined, but the
assessee is disputing the same in appellate forums/courts etc and the amounts
due have not been paid up. ...... 204.3.
It is pertinent to
note that when a party comes forward for taking the benefits of the Samadhan Scheme
and makes suitable declaration as provided thereunder (discussed further later)
there must be dispute pending between the party and the Dptt. (Section 98(ii)(c)
of Finanace Act refers). In other words, if in any case, there is no Show Cause
Notice pending nor the party is in dispute at the appellate/revision stage nor there
is an admitted petition in the court of law where parties is contesting the
stand of the Dptt., but certain arrears of revenue due in case, are pending payment,
the benefits of the scheme will not be available in such case.
B. TYPES OF REVENUE ARREARS
CASES COVERED BY THE SCHEME4.4. The intention of the scheme is to cover almost all
categories of cases involving revenue in arrears and in dispute on Customs and
Central Excise side (with few exceptions mentioned specifically in section 95
of Finance Act). The cases covered may involved duty, cess, fine, penalty or interest
- whether already determined as due or yet to be determined (in cases where show
cause/Demand Notice is yet to be decided). The term duty has been elaborated to
include credit of duty, drawback of duty or any amount representing as duty.
In other words, the scheme
would extend not only disorted (sic.) cases of duties leviable under customs or
Central Excise Acts and relevant tariff Acts or various specified Act....4.5. The
nature of cases covered will vary depending upon contraventions/offence involved,
but essentially it must involve quantified duty/cess and or penalty, fine or
interest. Simple Show Cause Notices which do not quantify any amount of duty being
demanded and which propose only penal action - like confiscation of ceased goods
and or imposition of penalty for violation of statutory provisions/collusion/abetment
etc. thus will not be covered by the scheme. However, whenever 21 quantified amount
of duties are demanded and penal action also proposed for various violations even
at Show Cause Notice stage benefits under the scheme for such Show Cause Notices
can be claimed.
view of the aforementioned Trade Notice, it is clear that the object of the
Scheme with reference to indirect tax arrears is to bring down the litigation and
to realize the arrears which are considered due and locked up in various disputes.
This Scheme is mutually beneficial as it benefits the Revenue Department to realize
the duties, cess, fine, penalty or interest assessed but not paid in an expeditious
manner and offers assessee to pay disputed liability at discounted rates and
also afford immunity from prosecution.
It is a settled law
that the Trade Notice, even if it is issued by the Revenue Department of any
one State, is binding on all the other departments with equal force all over
the country. The Trade Notice guides the traders and business community in relation
to their business as how to regulate it in accordance with the applicable laws or
schemes. In Steel Authority of India v. Collector of Customs, (2001) 9 SCC 198,
this Court has held: "3.
Learned counsel for
the Revenue submitted that this trade notice had been issued only by the Bombay
Customs House. It is hardly to be supposed that the Customs Authorities can
take one stand in one State and another stand in another State. The trade notice
issued by one Customs House must bind all Customs Authorities and, if it is
erroneous, it should be withdrawn or amended, which in the instant case,
admittedly, has not been done."
Purewal Associates Ltd. v. CCE, (1996) 10 SCC 752, this Court has held: "10.
We must take it that before issuing a trade notice sufficient care is taken by the
authorities concerned as it guides the traders to regulate their business accordingly.
Hence whatever is the legal effect of the trade notice as contended by the learned
Senior Counsel for the respondent, the last portion of the above trade notice
cannot be faulted as it is in accordance with the views expressed by this Court.
Though a trade notice as such is not binding on the Tribunal or the courts, it
cannot be ignored when the authorities take a different stand for if it was erroneous,
it would have been withdrawn."
the Trade Notice, as such, is not binding on the Courts but certainly binding
on the assessee and can be contested by the assessee. (see CCE v. Kores (India)
Ltd., (1997) 10 SCC 338; Union of India v. Pesticides Manufacturing and Formulators
Association of India, (2002) 8 SCC 410; and CCE v. Jayant Dalal (P) Ltd., (1997)
10 SCC 402 )
R.P. Bhatt, learned senior counsel, has appeared for the Revenue and the
respondents in civil appeal no. 5616 of 2006 are represented by Shri. Paras
Kuhad, learned senior counsel.
senior counsel Shri. R.P. Bhatt, submits that an assessee can claim benefits
under the Scheme only when his tax arrears are determined and outstanding, or a
Show Cause Notice has been issued to him, prior to or on 31.3.1998 in terms of
Section 87 (m) (ii) (a) and (b) of the Act. He further submits that the
determination of the arrears can be arrived at by way of adjudication or by
issuance of the Show Cause Notice to the assessee.
He submits that once this
condition is satisfied, then the assessee is required to submit a declaration
under Section 88 of the Act on or after 1.9.1998 and on or before 31.1.1999, provided
that the arrears are unpaid at the time of filing the declaration. He further submits
that the present Scheme is statutory in character and its provision should be
interpreted strictly and those who do not fulfill the conditions of eligibility
contained in the Scheme are not allowed to avail the benefit under the Scheme.
In support of his contention, he has relied on the Judgment of this Court in Union
of India v. Charak Pharmaceuticals (India) Ltd., (2003) 11 SCC 689.
Learned senior counsel,
relying on the, Speech of the Finance Minister dated 17.7.1998, [232 ITR 1998 (14)]
asserts that the purpose or the basic object of the Scheme is the collection of
tax and settlement of disputes and it is intended to be beneficial to both
assessee as well as the Revenue. He further contends that the determination of
arrears or issuance of Show Cause Notice before or on 31.3.1998 is a
substantive requirement for eligibility under the Scheme and filing of declaration
of unpaid arrears under Section 88 of the Act is the procedural formality for
availing the benefits of the Scheme.
Therefore, he submits
that the extension of time to file declaration under the Scheme on or before
31.1.1999 is just a procedural formality and in no manner discriminatory, so as
to violate the mandate of Article 14 of the Constitution. Learned senior
counsel, on the strength of Trade Notice dated 17.8.1998 and the observations
made by this Court in the case of Charak Pharmaceuticals (supra), further
submits that, in cases of Central Excise and Customs, the Scheme is limited
only to two categories of cases: firstly, the arrears of tax which are assessed
as on 31.3.1998 and are still unpaid and in dispute on the date of filing of
declaration; secondly, the arrears for which, the Show Cause Notice or Demand
Notice has been issued by the Revenue as on 31.3.1998 and which are still
unpaid and are in dispute on the date of filing of declaration.
He submits that the said
Trade Notice indicates that the concept of actual determination or assessment
has been extended to the Show Cause Notice in order to grant the benefit of the
Scheme to duty demanded in such Show Cause Notice. He submits that the Show
Cause Notice is in the nature of tentative charge, which has been included in
the ambit of the Scheme in order to realize the tax/duty dues but not yet paid.
He submits that the Scheme contemplates the conferring of the benefits only on the
quantified duty either determined by way of adjudication or demanded in a Show
Learned senior counsel
contends that in the present case, the Show Cause Notice demanding the duty was
issued to the respondents only on 6.1.1999 and, therefore, the duty was
determined as quantified only on the issuance of the Show 26Cause Notice. Hence,
respondents are not eligible to avail the benefit under this Scheme. Learned senior
counsel submits that the cut-off date of on or before 31.3.1998 prescribed by
Section 87 (m) (ii) (b) cannot be considered as discriminatory or unreasonable only
on the basis that it creates two classes of assessees unless it appears on the
face of it as capricious or malafide.
The cut-off date of
31.3.1998 in indirect tax enactments under the Scheme has been purposively chosen
in order to maintain uniformity with direct tax enactments where assessment year
ends on the said date. In support of his submission, learned senior counsel
relies on Union of India v. M.V. Valliappan, (1999) 6 SCC 259, Sudhir Kumar
Consul v. Allahabad Bank, (2011) 3 SCC 486 and Government of Andhra Pradesh v. N.
Subbarayudu, (2008) 14 SCC 702.
He further submits that
the present Scheme extends the benefit of reduction of tax and does not deprive
or withdraw any existing benefit to the assessees. He also submits that if
certain section of assessees is excluded from its scope by virtue of cut-off date,
they cannot challenge the entire Scheme merely on ground of their exclusion.
contra, Shri. Paras Kuhad, learned senior counsel, submits that the Scheme became
effective from 1.09.1998 and remained operative till 31.1.1999. However, the
arrears in question should relate to the period prior to or as on 31.3.1998 which
is the essence of the Scheme or the qualifying condition. He submits that
Section 87 (f) defines `disputed tax' as the total tax determined and payable, in
respect of an assessment year under any direct tax enactment but which remains unpaid
as on the date of making the declaration under Section 88.
In this regard, he
submits that the factum of arrears exists even on the date of filing of declaration.
He contends that the Finance Act uses the expression `determination' instead of
`assessment' in order to include the cases of self assessment.
He submits that in the
case of direct tax and payment of advance tax, the process of determination arises
before the assessment. He further argues that the purpose of the Scheme is to reduce
litigation and recover revenue arrears in an expeditious manner. The
classification should be in order to attain these objectives or purpose. The
classification of assessees on the basis of date of issuance of Show Cause
Notice or Demand Notice is unreasonable and has no nexus with the purpose of 28the
He further submits
that all the assessees who are in arrears of tax on or before 31.3.1998 formed
one class but further classification among them just on the basis of issuance of
Show Cause Notice is arbitrary and unreasonable. The criterion of date of issuance
of Show Cause Notice is per se unreasonable as based on fortuitous
circumstances. It is neither objective nor uniformly applicable. He further submits
that the High Court has correctly struck down the words "on or before the
31st day of March 1998" in Section 87 (m) (ii) (b) and, thereby, created a
right in favour of assessee to claim benefit under the Scheme for all arrears of
tax arising as on 31.3.1998. He further submits that by application of the doctrine
of severability, the Scheme can operate as a valid one for all purposes.
Learned senior counsel
submits that the carving out of sub-group only on the basis of whether Show
Cause Notice has been issued or not and the Scheme being made effective from prospective
date would render the operation or availability of Scheme variable or uncertain,
depending on case to case. He further submits that this has no relation with
the purpose of the Scheme which is beneficial in nature. He further submits
that the date of issuance of Show Cause 29Notice is not controlled by the assessee.
Therefore, it is fortuitous circumstance which is per se unreasonable.
The objective of the
doctrine of classification is that the unequal should not be treated equally in
order to achieve equality. The basis for classification in terms of Article 14
should be intelligible criteria which should have nexus with the object of the legislation.
He argues that the criterion of date of issuance of Show Cause Notice is just a
fortuitous factor which is variable, uncertain, and fateful and cannot be
considered as intelligible criteria for the purpose of Article 14 of the Constitution.
He submits, however, criterion for classification is the prerogative of the Parliament
but it should be certain and not vacillating like date of issuance of Show Cause
He further submits that
the hardships arising out of normal cut-off criteria is acceptable and
justified but when injustice arises out of operation of the provision which
prescribe criteria which is variable for same class of persons for availing the
benefit of the Scheme, is against the mandate of Article 14 of the Constitution.
He relies on the decision of this Court in State of Jammu and Kashmir v.
Triloki Naths Khosa, (1974) 1 SCC 19 in order to buttress his argument that the
classification is a subsidiary rule to the Fundamental Right of Equal Protection
of Laws and should not be used in a manner to submerge and drown the principle of
Learned senior counsel
contends that the purpose of the Scheme is to end the dispute qua assessee, who
is in arrears of taxes and has not paid such arrears. He further submits that
in case of Central Excise, the excise duty is determined on removal of goods
but the actual payment is made later and also, in case of self assessment, the
tax arrears are determined before the actual payment or possible dispute. He submits
that as per Rule 173 F of the Excise Rules, the assessee is required to
determine the duty payable by self assessment of the excisable goods before
their removal from the factory.
He further submits that
the methodology of re-assessment under Section 11 A of the Excise Act, rate of product
approved before hand under Section 173B and ad valorem for value of goods under
Section 173C contemplates the determination of duty payable by the assessee. In
this regard, he submits that the word `determined' has been used purposively and
deliberately in the Scheme instead of `assessment'.
He further argues that
in view of the object of the Scheme to collect revenue, the Scheme envisages two
elements: first, 31 the determination of the amount of tax due and payable on
or before 31.3.1998 and, second, whether the tax so determined is in arrears on
date of declaration under Section 88. In other words, he submits that the tax so
determined on or before 31.3.1998 should be in arrears on the date of declaration
under Section 88. Learned senior counsel, in support of his submissions, relies
on the decision of this Court in Government of India v. Dhanalakshmi Paper and Board
Mills, 1989 Supp. (1) SCC 596.
is a mode of raising revenue for public purposes. In exercise of the power to tax,
the purpose always is that a common burden shall be sustained by common contributions,
regulated by some fixed general rules, and apportioned by the law according to
some uniform ratio of equality.
word `duty' means an indirect tax imposed on the importation or consumption of
goods. `Customs' are duties charged upon commodities on their being imported into
or exported from a country.
expression `Direct Taxes' include those assessed upon the property, person, business,
income, etc., of those who are to pay them, while indirect taxes are levied upon
commodities before they reach the consumer, and are paid by those upon whom
they ultimately fall, not as taxes, but as part of the market price of the
commodity. For the purpose of the Scheme, indirect tax enactments are defined as
Customs Act, 1962, Central Excise Act, 1944 or the Customs Tariff Act, 1985 and
the Rules and Regulations framed thereunder.
Scheme defines the meaning of the expression `Tax Arrears', in relation to
indirect tax enactments. It would mean the determined amount of duties, as due
and payable which would include drawback of duty, credit of duty or any amount representing
duty, cesses, interest, fine or penalty determined. The legislation, by using
its prerogative power, has restricted the dues of duties quantified and payable
as on 31st day of March, 1998 and remaining unpaid till a particular event has taken
place, as envisaged under the Scheme.
The date has relevance,
which aspect we would elaborate a little later. The definition is inclusive
definition. It also envisages instances where a Demand Notice or Show Cause Notice
issued under indirect tax enactment on or before 31st day of March, 1998 but not
complied with the demand made to be treated as tax arrears by legal fiction.
Thus, legislation has carved out two categories of assessees viz. where tax
arrears are quantified but not paid, and where Demand Notice or Show Cause
Notice issued but not paid.
In both the
circumstances, legislature has taken cut off date as on 31st day of March 1998.
It cannot be disputed that the legislation has the power to classify but the only
question that requires to be considered is whether such classification is
proper. It is now well settled by catena of decisions of this Court that a
particular classification is proper if it is based on reason and not purely
arbitrary, caprice or vindictive. On the other hand, while there must be a reason
for the classification, the reason need not be good one, and it is immaterial that
the Statute is unjust. The test is not wisdom but good faith in the
It is too late in the
day to contend otherwise. It is time and again observed by this Court that the Legislature
has a broad discretion in the matter of classification. In taxation, `there is
a broader power of classification than in some other exercises of legislation'.
When the wisdom of the legislation while making classification is questioned, the
role of the Courts is very 34 much limited. It is not reviewable by the Courts unless
palpably arbitrary. It is not the concern of the Courts whether the
classification is the wisest or the best that could be made. However, a
discriminatory tax cannot be sustained if the classification is wholly
Vivad Samadhan Scheme is a step towards the settlement of outstanding disputed
tax liability. The Scheme is a complete Code in itself and exhaustive of matter
dealt with therein. Therefore, the courts must construe the provisions of the Scheme
with reference to the language used therein and ascertain what their true scope
is by applying the normal rule of construction. Keeping this principle in view,
let us consider the reasoning of the High Court.
tests adopted to determine whether a classification is reasonable or not are,
that the classification must be founded on an intelligible differentia which distinguishes
person or things that are grouped together from others left out of the groups and
that the differentia must have a rational relation to the object sought to be
achieved by Statute in question. The Legislature in relation to `tax 35arrears'
has classified two groups of assessees.
The first one being
those assessees in whose cases duty is quantified and not paid as on the 31st day
of March, 1998 and those assessees who are served with Demand or Show Cause
Notice issued on or before the 31st day of March, 1998. The Scheme is not made applicable
to such of those assessees whose duty dues are quantified but Demand Notice is not
issued as on 31st day of March, 1998 intimating the assessee's dues payable. The
same is the case of the assessees who are not issued with the Demand or Show
Cause Notice as on 31.03.1998.
The grievance of the
assessee is that the date fixed is arbitrary and deprives the benefit for those
assessees who are issued Demand Notice or Show Cause Notice after the cut off
date namely 31st day of March, 1998. The Legislature, in its wisdom, has
thought it fit to extend the benefit of the scheme to such of those assessees whose
tax arrears are outstanding as on 31.03.1998, or who are issued with the Demand
or Show Cause Notice on or before 31st day of March, 1998, though the time to file
declaration for claiming the benefit is extended till 31.01.1999.
The classification made
by the legislature appears to be reasonable for the reason that the legislature
has grouped two categories of assessees namely, the assessees whose dues are
quantified but not paid and the assessees who are issued with the Demand and
Show Cause Notice on or before a particular date, month and year. The
Legislature has not extended this benefit to those persons who do not fall
under this category or group.
This position is made
clear by Section 88 of the Scheme which provides for settlement or tax payable under
the Scheme by filing declaration after 1st day of September, 1998 but on or
before the 31st day of December, 1998 in accordance with Section 89 of the Scheme,
which date was extended upto 31.01.1999. The distinction so made cannot be said
to be arbitrary or illogical which has no nexus with the purpose of
legislation. In determining whether classification is reasonable, regard must be
had to the purpose for which legislation is designed.
As we have seen, while
understanding the Scheme of the legislation, the legislation is based on a
reasonable basis which is firstly, the amount of duties, cesses, interest, fine
or penalty must have been determined as on 31.03.1998 but not paid as on the
date of declaration and secondly, the date of issuance of Demand or Show Cause Notice
on or before 31.03.1998, which is not 37 disputed but the duties remain unpaid
on the date of filing of declaration.
Therefore, in our
view, the Scheme 1998 does not violate the equal protection clause where there is
an essential difference and a real basis for the classification which is made. The
mere fact that the line dividing the classes is placed at one point rather than
another will not impair the validity of the classification. The concept of Article
14 vis-a-vis fiscal legislation is explained by this Court in several
Amalgamated Tea Estates Co. Ltd. v. State of Kerala, (1974) 4 SCC 415, this
Court has held: 8. It may be pointed out that the Indian Income Tax Act also makes
a distinction between a domestic company and a foreign company. But that circumstance
per se would not help the State of Kerala. The impugned legislation, in order to
get the green light from Article 14, should satisfy the classification test
evolved by this Court in a catena of cases.
According to that test:
(1) the classification should be based on an intelligible differentia and (2) the
differentia should bear a rational relation to the purpose of the legislation. 9.
The classification test is, however, not inflexible and doctrinaire. It gives
due regard to the complex necessities and intricate problems of government. Thus
as revenue is the first necessity of the State and as taxes are raised for various
purposes and by an adjustment of diverse elements, the Court grants to the
State greater choice of classification 38 in the field of taxation than in other
According to Subba
Rao, J.: "(T)he courts in view of the inherent complexity of fiscal adjustment
of diverse elements, permit a larger discretion to the Legislature in the matter
of classification, so long as it adheres to the fundamental principles
underlying the said doctrine. The power of the Legislature to classify is of wide
range and flexibility so that it can adjust its system of taxation in all proper
and reasonable ways." (Khandige Sham Bhat v. Agricultural Income Tax Officer,
Kasargod; V. Venugopala Ravi Verma Rajah v. Union of India.)
10. Again, on a challenge
to a statute on the ground of Article 14, the Court would generally raise a presumption
in favour of its constitutionality. Consequently, one who challenges the statute
bears the burden of establishing that the statute is clearly violative of Article
14. "The presumption is always in favour of the constitutionality of an enactment
and the burden is upon him who attacks it to show that there is a clear
transgression of the constitutional principle." (See Charanjit Lal v.
Union of India.)
Anant Mills Co. Ltd. v. State of Gujarat, (1975) 2 SCC 175, this Court has
observed: "25. It is well-established that Article 14 forbids class
legislation but does not forbid classification. Permissible classification must
be founded on an intelligible differentia which distinguishes persons or things
that are grouped together from others left out of the group, and the differentia
must have a rational relation to the object sought to be achieved by the
statute in question. In permissible classification mathematical nicety and perfect
equality are not required. Similarity, not identity of treatment, is enough.
If there is equality and
uniformity within each group, the law will not be condemned as discriminative, though
due to some fortuitous circumstances arising out of a peculiar situation some included
in a class get an advantage over others, so long as they are not singled out for
special treatment. Taxation law is not an exception to this doctrine. But, in the
application of the principles, the courts, in view of the inherent complexity of
fiscal adjustment of diverse elements, permit a larger discretion to the Legislature
in the matter of classification so long as it adheres to the fundamental principles
underlying the said doctrine.
The power of the Legislature
to classify is of wide range and flexibility so that it can adjust its system
of taxation in all proper and reasonable ways (see Ram Krishna Dalmia v. Justice
S.R. Tendolkar and Khandige Sham Bhat v. Agricultural Income Tax Officer,
Kasaragod) Keeping the above principles in view, we find no violation of Article
14 in treating pending cases as a class different from decided cases. It cannot
be disputed that so far as the pending cases covered by clause (i) are concerned,
they have been all treated alike."
Jain Bros v. Union of India, (1969) 3 SCC 311, the issue before this Court was
whether the clause (g) of Section 297(2) of the Income Tax Act, 1961 is violative
of Article 14 of the Constitution inasmuch as in the matter of imposition of penalty,
it discriminated between two sets of assessees with reference to a particular date,
namely, those whose assessment had been completed before 1st day of April 1962 40
and others whose assessment was completed on or after that date.
Whilst upholding the validity
of the above provision, this Court has observed: "Now the Act of 1961 came
into force on first April 1962. It repealed the prior Act of 1922. Whenever a prior
enactment is repealed and new provisions are enacted the Legislature invariably
lays down under which enactment pending proceedings shall be continued and concluded.
Section 6 of the General Clauses Act, 1897, deals with the effect of repeal of an
enactment and its provisions apply unless a different intention appears in the statute.
It is for the Legislature
to decide from which date a particular law should come into operation. It is not
disputed that no reason has been suggested why pending proceedings cannot be treated
by the Legislature as a class for the purpose of Article 14. The date first April,
1962, which has been selected by the Legislature for the purpose of clauses (f)
and (g) of Section 297(2) cannot be characterised as arbitrary or fanciful."
Murthy Match Works v. CCE, (1974) 4 SCC 428, this Court has observed: "15.
Certain principles which bear upon classification may be mentioned here. It is
true that a State may classify persons and objects for the purpose of legislation
and pass laws for the purpose of obtaining revenue or other objects. Every differentiation
is not a discrimination. But classification can be sustained only it is founded
on pertinent and real differences as distinguished from irrelevant and artificial
standard by which the sufficiency of the differentia which form a valid basis for
classification may be measured, has been repeatedly stated by the Courts. If it
rests on a difference which bears a fair and just relation to the object for which
it is proposed, it is constitutional. To put it differently, the means must have
nexus with the ends. Even so, a large latitude is allowed to the State for classification
upon a reasonable basis and what is reasonable is a question of practical details
and a variety of factors which the Court will be reluctant and perhaps ill-equipped
In this imperfect
world perfection even in grouping is an ambition hardly ever accomplished. In
this context, we have to remember the relationship between the legislative and
judicial departments of Government in the determination of the validity of classification.
Of course, in the last analysis Courts possess the power to pronounce on the constitutionality
of the acts of the other branches whether a classification is based upon
substantial differences or is arbitrary, fanciful and consequently illegal. At
the same time, the question of classification is primarily for legislative judgment
and ordinarily does not become a judicial question.
A power to classify being
extremely broad and based on diverse considerations of executive pragmatism, the
Judicature cannot rush in where even the Legislature warily treads. All these operational
restraints on judicial power must weigh more emphatically where the subject is taxation.
well-established that the modern state, in exercising its sovereign power of taxation,
has to deal with complex factors relating to the objects to be taxed, the
quantum to be levied, the conditions subject to which the levy has to be made,
the social and economic policies which the tax is designed to subserve, and what
not. In the famous words of Holmes, J. in Bain Peanut Co. v. Pinson2: "We must
remember that the machinery of Government would not work if it were not allowed
a little play in its joints."
R.K. Garg v. Union of India, (1981) 4 SCC 675, this Court has held: 7. Now while
considering the constitutional validity of a statute said to be violative of
Article 14, it is necessary to bear in mind certain well established principles
which have been evolved by the courts as rules of guidance in discharge of its constitutional
function of judicial review. The first rule is that there is always a
presumption in favour of the constitutionality of a statute and the burden is
upon him who attacks it to show that there has been a clear transgression of the
This rule is based on
the assumption, judicially recognised and accepted, that the legislature understands
and correctly appreciates the needs of its own people, its laws are directed to
problems made manifest by experience and its discrimination are based on adequate
grounds. The presumption of constitutionality is indeed so strong that in order
to sustain it, the Court may take into consideration matters of common knowledge,
matters of common report, the history of the times and may assume every state of
facts which can be conceived existing at the time of legislation.
"8. Another rule
of equal importance is that laws relating to economic activities should be viewed
with greater latitude than laws touching civil rights such as freedom of
speech, religion etc. It has been said by no less a person than Holmes, J.,
that the legislature should be allowed some play in the joints, because it has to
deal with complex problems which do not admit of solution through any
doctrinaire or strait-jacket formula and this is particularly true in case of
legislation dealing with economic matters, where, having regard to the nature of
the problems required to be dealt with, greater play in the joints has to be
allowed to the legislature. The court should feel more inclined to give judicial
deference to legislative judgment in the field of economic regulation than in other
areas where fundamental human rights are involved."
Elel Hotels and Investments Ltd. v. Union of India, (1989) 3 SCC 698, this
Court has held: "20. It is now well settled that a very wide latitude is available
to the legislature in the matter of classification of objects, persons and things
for purposes of taxation. It must need to be so, having regard to the complexities
involved in the formulation of a taxation policy.
Taxation is not now a
mere source of raising money to defray expenses of Government. It is a recognised
fiscal tool to achieve fiscal and social objectives. The differentia of classification
presupposes and proceeds on the premise that it distinguishes and keeps apart as
a distinct class hotels with higher economic status reflected in one of the indicia
of such economic superiority."
P.M. Ashwathanarayana Setty v. State of Karnataka, (1989) Supp. (1) SCC 696,
this Court has held: "... the State enjoys the widest latitude where measures
of economic regulation are concerned. These measures for fiscal and economic
regulation involve an evaluation of diverse and quite often conflicting economic
criteria and adjustment and balancing of various conflicting social and economic
values and interests. It is for the State to decide what economic and social policy
it should pursue and what discriminations advance those social and economic
Kerala Hotel and Restaurant Assn. v. State of Kerala, (1990) 2 SCC 502, this
Court has observed: "24. The scope for classification permitted in taxation
is greater and unless the classification made can be termed to be palpably arbitrary,
it must be left to the legislative wisdom to choose the yardstick for classification,
in the background of the fiscal policy of the State...."
Spences Hotel (P) Ltd. v. State of W.B., (1991) 2 SCC 154, this Court has observed:
"26. What then `equal protection of laws' means as applied to taxation?
Equal protection cannot be said to be denied by a statute which operates alike on
all persons and property similarly situated, or by proceedings for the
assessment and collection of taxes which follows the course usually pursued in the
State. It prohibits any person or class of persons from being singled out as
special subject for discrimination and hostile legislation; but it does not require
equal rates of taxation on different classes of property, nor does it prohibit unequal
taxation so long as the inequality is not based upon arbitrary classification.
Taxation will not be discriminatory
if, within the sphere of its operation, it affects alike all persons similarly situated.
It, however, does not prohibit special legislation, or legislation that is limited
either in the objects to which it is directed, or by the territory within which
it is to operate. In the words of Cooley: It merely requires that all persons subjected
to such legislation shall be treated alike, under like circumstances and conditions,
both in the privileges conferred and in the liabilities imposed. The rule of equality
requires no more than that the same means and methods be applied impartially to
all the constituents of each class, so that the law shall operate equally and uniformly
upon all persons in similar circumstances.
Nor does this
requirement preclude the classification of property, trades, profession and
events for taxation -- subjecting one kind to one rate of taxation, and another
to a different rate. "The rule of equality of taxation is not intended to prevent
a State from adjusting its system of taxation in all proper and reasonable ways.
It may, if it chooses, exempt certain classes of property from any taxation at
all, may impose different specific taxes upon different trades and
professions." "It cannot be said that it is intended to compel the State
to adopt an iron rule of equal taxation." In the words of Cooley :21 "Absolute
equality is impossible.
Inequality of taxes means
substantial differences. Practical equality is constitutional equality. There is
no imperative requirement that taxation shall be absolutely equal. If there
were, the operations of government must come to a stop, from the absolute impossibility
of fulfilling it. The most casual attention to the nature and operation of taxes
will put this beyond question. No single tax can be apportioned so as to be exactly
just and any combination of taxes is likely in individual cases to increase
instead of diminish the inequality."27. "Perfect equality in taxation
has been said time and again, to be impossible and unattainable.
Approximation to it
is all that can be had. Under any system of taxation, however, wisely and carefully
framed, a disproportionate share of the public burdens would be thrown on certain
kinds of property, because they are visible and tangible, while others are of a
nature to elude vigilance. It is 46 only where statutes are passed which impose
taxes on false and unjust principle, or operate to produce gross inequality, so
that they cannot be deemed in any just sense proportional in their effect on
those who are to bear the public charges that courts can interpose and arrest
the course of legislation by declaring such enactments void."
taxation", it has been said, "will remain an unattainable good as
long as laws and government and man are imperfect." `Perfect uniformity
and perfect equality of taxation', in all the aspects in which the human mind
can view it, is a baseless dream."
Venkateshwara Theatre v. State of A.P., (1993) 3 SCC 677, this Court has held: "21.
Since in the present case we are dealing with a taxation measure it is
necessary to point out that in the field of taxation the decisions of this
Court have permitted the legislature to exercise an extremely wide discretion in
classifying items for tax purposes, so long as it refrains from clear and hostile
discrimination against particular persons or classes."
State of Kerala v. Aravind Ramakant Modawdakar, (1999) 7 SCC 400, this Court
has held: "Coming to the power of the State in legislating taxation law,
the court should bear in mind that the State has a wide discretion in selecting
the persons or objects it will tax and thus a statute is not open to attack on
the ground that it taxes some persons or objects and not others. It is also
well settled that a very wide latitude is available to the legislature in the matter
of classification of objects, persons and things for the purpose of taxation.
While considering the
challenge and nature that is involved in these cases, the courts will have to
bear in mind the principles laid down by this Court in the case of Murthy Match
Works v. CCE2 wherein while considering different types of classifications, this
Court held: (AIR Headnote) "[T]hat a pertinent principle of
differentiation, which was visibly linked to productive process, had been
adopted in the broad classification of power-users and manual manufacturers. It
was irrational to castigate this basis as unreal.
The failure however,
to mini-classify between large and small sections of manual match manufacturers
could not be challenged in a court of law, that being a policy decision of Government
dependent on pragmatic wisdom playing on imponderable forces at work. Though refusal
to make rational classification where grossly dissimilar subjects are treated
by the law violates the mandate of Article 14, even so, as the limited
classification adopted in the present case was based upon a relevant differentia
which had a nexus to the legislative end of taxation, the Court could not strike
down the law on the score that there was room for further classification."
State of U.P. v. Kamla Palace, (2000) 1 SCC 557, this Court has observed: 11. Article
14 does not prohibit reasonable classification of persons, objects and transactions
by the legislature for the purpose of attaining specific ends. To satisfy the test
of permissible classification, it must not be "arbitrary, artificial or evasive"
but must be based on some real and substantial distinction bearing a just and 48reasonable
relation to the object sought to be achieved by the legislature. (See Special Courts
Bill, 1978, Re, seven-Judge Bench; R.K. Garg v. Union of India, five-Judge Bench.)
It was further held in
R.K. Garg case that laws relating to economic activities or those in the field
of taxation enjoy a greater latitude than laws touching civil rights such as
freedom of speech, religion etc. Such a legislation may not be struck down merely
on account of crudities and inequities inasmuch as such legislations are designed
to take care of complex situations and complex problems which do not admit of
solutions through any doctrinaire approach or straitjacket formulae. Their
Lordships quoted with approval the observations made by Frankfurter, J. in
Morey v. Doud: "In the utilities, tax and economic regulation cases, there
are good reasons for judicial self-restraint if not judicial deference to legislative
judgment. The legislature after all has the affirmative responsibility.
The courts have only the
power to destroy, not to reconstruct. When these are added to the complexity of
economic regulation, the uncertainty, the liability to error, the bewildering conflict
of the experts, and the number of times the Judges have been overruled by events
-- self-limitation can be seen to be the path to judicial wisdom and institutional
prestige and stability."
12. The legislature
gaining wisdom from historical facts, existing situations, matters of common knowledge
and practical problems and guided by considerations of policy must be given a
free hand to devise classes - whom to tax or not to tax, whom to exempt or not
to exempt and whom to give incentives and lay down the rates of taxation, benefits
or concessions. In the field of taxation if the test of Article 14 is satisfied
by generality of provisions the courts would not substitute judicial wisdom for
Aashirwad Films v. Union of India, (2007) 6 SCC 624, this Court has held: 14. It
has been accepted without dispute that taxation laws must also pass the test of
Article 14 of the Constitution of India. It has been laid down in a large
number of decisions of this Court that a taxation statute for the reasons of functional
expediency and even otherwise, can pick and choose to tax some. Importantly, there
is a rider operating on this wide power to tax and even discriminate in
taxation that the classification thus chosen must be reasonable.
The extent of reasonability
of any taxation statute lies in its efficiency to achieve the object sought to be
achieved by the statute. Thus, the classification must bear a nexus with the object
sought to be achieved. (See Moopil Nair v. State of Kerala, East India Tobacco
Co. v. State of A.P., N. Venugopala Ravi Varma Rajah v. Union of India, Asstt. Director
of Inspection Investigation v. A.B. Shanthi and Associated Cement Companies
Ltd. v. Govt. of A.P.)
Jai Vijai Metal Udyog Private Limited, Industrial Estate, Varanasi v. Commissioner,
Trade Tax, Uttar Pradesh, Lucknow, (2010) 6 SCC 705, this Court held: 19. Now,
coming to the second issue, it is trite that in view of the inherent complexity
of fiscal adjustment of diverse elements, a wider discretion is given to the
Revenue for the purpose of taxation and ordinarily different interpretations of
a particular tariff entry by different authorities as such cannot be assailed as
violative of Article 50 14 of the Constitution.
Nonetheless, in our
opinion, two different interpretations of a particular entry by the same
authority on same set of facts, cannot be immunised from the equality clause under
Article 14 of the Constitution. It would be a case of operating law unequally, attracting
Article 14 of the Constitution.
sum up, Article 14 does not prohibit reasonable classification of persons, objects
and transactions by the Legislature for the purpose of attaining specific ends.
To satisfy the test of permissible classification, it must not be "arbitrary,
artificial or evasive" but must be based on some real and substantial
distinction bearing a just and reasonable relation to the object sought to be achieved
by the Legislature.
The taxation laws are
no exception to the application of this principle of equality enshrined in
Article 14 of the Constitution of India. However, it is well settled that the
Legislature enjoys very wide latitude in the matter of classification of
objects, persons and things for the purpose of taxation in view of inherent complexity
of fiscal adjustment of diverse elements. The power of the Legislature to
classify is of wide range and flexibility so that it can adjust its system of taxation
in all proper and reasonable ways. Even so, large latitude is allowed to the 51State
for classification upon a reasonable basis and what is reasonable is a question
of practical details and a variety of factors which the Court will be reluctant
and perhaps ill-equipped to investigate.
It has been laid down
in a large number of decisions of this Court that a taxation Statute, for the reasons
of functional expediency and even otherwise, can pick and choose to tax some. A
power to classify being extremely broad and based on diverse considerations of
executive pragmatism, the Judicature cannot rush in where even the Legislature warily
treads. All these operational restraints on judicial power must weigh more emphatically
where the subject is taxation. Discrimination resulting from fortuitous
circumstances arising out of particular situations, in which some of the tax
payers find themselves, is not hit by Article 14 if the legislation, as such, is
of general application and does not single them out for harsh treatment.
Advantages or disadvantages
to individual assesses are accidental and inevitable and are inherent in every taxing
Statute as it has to draw a line somewhere and some cases necessarily fall on the
other side of the line. The point is illustrated by two decisions of this
Court. In Khandige Sham Bhat vs. Agricultural Income Tax Officer, Kasaragod and
52Anr. (AIR 1963 SC 591). Travancore Cochin Agricultural Income Tax Act was
extended to Malabar area on November 01, 1956 after formation of the State of
Kerala. Prior to that date, there was no agricultural income tax in that area.
The challenge under Article
14 was that the income of the petitioner was from areca nut and pepper crops,
which were harvested after November in every year while persons who grew
certain other crops could harvest before November and thus escape the liability
to pay tax. It was held that, that was only accidental and did not amount to
violation of Article14. In Jain Bros. vs. Union of India (supra), Section
297(2)(g) of Income Tax Act, 1961 was challenged because under that Section proceedings
completed prior to April, 1962 was to be dealt under the old Act and
proceedings completed after the said date had to be dealt with under the Income
Tax Act, 1961 for the purpose of imposition of penalty. April 01, 1962 was the date
of commencement of Income Tax Act, 1961.
It was held that the crucial
date for imposition of Penalty was the date of completion of assessment or the
formation of satisfaction of authority that such act had been committed. It was
also held that for the application and implementation of the new Act, it was
necessary to fix a date 53 and provide for continuation of pending proceedings.
It was also held that the mere possibility that some officer might intentionally
delay the disposal of a case could hardly be a ground for striking down the
provision as discriminatory.
view of the above discussion, we cannot agree with the findings and the conclusion
reached by the High Court for which, we have made reference earlier. We have
also not discussed in detail the individual issues raised by the learned senior
counsel for the respondent, since those were the issues which were canvassed and
accepted by the High Court. Accordingly, the appeals are allowed. The impugned common
judgment and order is set aside. Costs are made easy.
[CHANDRAMAULI KR. PRASAD]