CHAPTER-2

CONSTITUTIONAL
FOUNDATION
 CHAPTER-2

CONSTITUTIONAL FOUNDATION

The laws usually serve the needs of human societies. Such laws after initial
proclamation are under continuous review for law makers want to optimize the benefits
on account of their implementation. In fact, a heuristic process of refining the laws,
including tax laws is in progress. The laws conceptualized and enacted may prove
inadequate in realizing the objectives or may prove oppressive encountering resistance
inviting corrections in either situation. So the law making is a continuous process
involving making, tuning, and correcting.

In ancient and medieval India the kingdoms depended mainly on land revenue, tolls,
tributes and plundering. Chanakya’s Arthasastra, of course, speaks of commercial
taxes14. During the reign of Allauddin Khilji sales tax was one of the market taxes. But

the sales tax according to the accepted Anglo-Saxon legal tradition owes its origin to
Government of India Act 1935 hereinafter referred to as G.I. Act ’35. The provinces
could levy sales tax under entry 48 of list II in Seventh Schedule which read as follows:

Entry 48 “taxes on the sale of goods and on advertisements”.

The Province of Madras under the stewardship of Late Sri C.Rajagopalachary

introduced sales tax by enacting Madras General Sales Tax Act, 1939. Many other
Provinces followed suit and so did the many native States.
“sale of goods”

14.Kautilya also known as Chanukya wrote ‘ Artha Shasthra' around 400B.C.He speaks of
‘sulkaydwarabahirikadeyaYvartani’ and ‘prakriya’ which are almost equivalents of modem octroi .gate
tolls, road cess, and royalty respectively.

13
 The entry 48 used the expression ‘sale of goods’. It was a loaded expression.
The expression “sale” itself had acquired complex legal meaning. It was always
considered an aggregate of multiple elements like, offer, bargain, acceptance,
consideration which again could have been immediate payment or deferred payment
delivery of the goods and passing of the title. Every element was crucial though
completed sale happened only with transfer of ownership in the goods from the transferor
to the transferee. Since sale consists of many elements it is very likely that each of these
could have occurred in different provinces. In other words though there was one sale its
multiple elements might have occurred in different provinces. As long as sale was
complete, different provinces, notwithstanding the fact that only one or a few elements of
sale had happened in each of them levied tax on the sale. Thus a lone sale transaction
was subjected to tax by many provinces picking up one of the elements of sale which had
nexus to its territory.

1. Doctrine of nexus:
The doctrine of territorial nexus means that the person, event or an activity sought
to be taxed must have territorial nexus with the State seeking to tax. The State could levy
tax on a subject if the latter had territorial nexus with the State. The nexus only implied
that the connection must be real and not illusory and the liability sought to be imposed
must be pertinent to that connection. As long as nexus was real the enormity of tax
burden sought to be imposed was irrelevant.

This “doctrine of nexus” was subsequently endorsed by the Supreme Court in State of
Bombay Vs. R.M.D. Chamar Baugwala15 The courts were applying “Nexus theory” in
the area of income tax16 The Courts held that the doctrine of nexus was applicable with

equal vigor to the sales tax.

15 AIR 1957 SC 699,711

16 Wallace Brothers Vs. C.I.T., Bombay (1948) 75 1A 86; Governor General Vs. Raleigh Investment Co.
Ltd., (1944) FCR 229; A.H.Wadia Vs.C.l.T. Bombay (1948) FCR 121; Vakkan Vs. Madras (’53 A.M. 86
See Chaturvedi Central Sales Tax Laws, Vol. 1, 7th edition pages 131 to 133, see Late Sri H.M. Seervai’s
Constitutional Law of India, Vol. 3, 4th Edition, pages 2321.

14
 The provinces, on the basis of nexus theory levied tax on the sale of goods. Where
the various ingredients of a sale had happened in different States, notwithstanding the fact
that there was one sale transaction multiple provinces levied sales tax on the very same
transaction. In Poppatlal Shah Vs. State of Madras17, the Supreme Court laid down that a
province could not make any law which could be binding beyond its limits but it could
levy tax on a transaction of sale concluding outside that province provided such sale
transaction had territorial nexus with that province.

2. Economic and commercial chaos

The ‘sale’ being looked upon as an aggregate of many ingredients and the legal
possibility for any one such ingredient to bring forth territorial nexus resulted in many
provinces levying tax on one and the same sale transaction. It was an economic and
commercial chaos in the country. The metaphorical description given by Bose. J. in his
dissent in Tata Iron & Steel Co. Ltd., Vs. State of Bihar18 is reproduced below as it is

very telling.

“The States may tax the sale but may not disintegrate it and, under the
guise of taxing the sale in truth and in fact, tax its various elements one its head,
and one its tail, one its entrails and one its limbs by a legislative fiction that deems
that the whole is within its claws simply because, after tearing it apart it finds a
hand or a foot or a heart or a liver still quivering in its grasp. Nexus, of course,
there must be but nexus of the entire entity that is called a sale, wherever it is
deemed to be situated”.

The trade and industry resented the state of affairs. The multiple and convergent
levies by the different provinces resulted in rising prices. But the judicial endorsement of

.Poppatlal Shah Vs State of Madras (1953) 4 STC 188. 192 (SC)

,8. (1958) 9 STC 267,286-287 (SC)

15
the nexus theory in the area of sales tax and the provinces’ power to levy the same made
each province open its administrative extension counters in other provinces.

There were judges like Justice Bose who were dissenting from the majority. They
could visualize the confusion that would be wreaked by the judicial endorsement of
doctrine of nexus in the area of sales tax on the national economy. But majority missed it
and in Poppatlal Shah Vs. Madras19 the Supreme Court by a unanimous judgment

applied the doctrine of territorial nexus to sales tax.

3. under the Constitution:

The Constitution makers heavily depended on their experiences under G.I.Act’35.

They also looked to American, and Australian Constitutions besides other federal
Constitutions for guidance. They had a clear vision for future India. They strongly
believed in evolving India into a ‘common market’ with goods and services moving
freely through out the country. They were also aware of the federal compulsions and
regional imbalances and understood the need to provide enough resources to the States.
They distributed the powers of taxation between the Union and the States. They also
imposed restrictions on the power of the States either to levy tax on goods or to impede
the freedom of trade. They also had to steer clear of the difficulties engendered by the
G.I.Acf 35 but they were not wholly successful in that.

The taxes can be levied either by the Union Parliament or by the State
Legislatures. The Constitution provides for an elaborate scheme of distribution of these
powers between the Union and the States. The Article 246 empowers exclusively the
Union Parliament to make laws on any subjects enumerated in List-I in the Seventh
Schedule. The State Legislatures have exclusive power to make laws on the subjects
enumerated in List-II of the Seventh Schedule. Both the Union Parliament and the State
Legislatures have power to make laws on any subject enumerated in the List-Ill of the

,9.( 1953) SCR 677

16
Seventh Schedule. The List-I is called ‘Union list’; the List-II is called ‘State List’ and
the List-Ill is called Concurrent List. The Article 254 provides for any possible conflict
between the Union law and the State law with regard to any subject in the concurrent list
emphasizing Parliamentary supremacy20. To ward off any confusion with regard to

powers of taxation the Constitution makers were extremely careful not to mention any
powers of taxation in the concurrent list but enumerated them in the Union or the State
list21. The Article 248 vests the Union Parliament with residuary powers of legislation in

20 .Article 254 makes it very clear that if there is any repugnancy between the Union legislation and the
State legislation made on a subject in the concurrent list the latter is void to the extent of repugnancy. Of
course, the States can make laws inconsistent with the already existing Union laws or pre-constitutional
laws and such laws shall prevail in the State provided they had been reserved for the consideration of the
President and received his assent. The Parliament of course, is not prevented from making laws inconsistent
with the State law.
21 The Union Parliament has exclusive power to levy the following taxes or duties enumerated in the
Union list:
1) entry 82: Taxes on income other than agricultural income.
2) entry 83: Duties of customs including export duties.
3) entry 84: Duties of Excise on tobacco and other goods manufactured or produced in India except

a) alcoholic liquors for human consumption,

b) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal
and toilet preparations containing alcohol or any substance included in sub-
paragraph (b) of the entry.
4) entry 85: Corporation tax.
5) entry 86: Taxes on the capital value of the assets, exclusive of agricultural land of individuals and
companies; taxes on the capital of companies.
6) entry 87: Estate duty in respect of property other than agricultural land.
7) entry 88: Duties in respect of succession to property other than agricultural land.
8) entry 89: Terminal Taxes on goods or passengers, carried by railway, sea or air, taxes on railway
fares and freights.
9) entry 90: Taxes other than stamp duties on transaction in stock exchanges and future markets.
10) entry 91: Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of
lading, letter of credit, policies of insurance, transfer of shares, debentures, proxies and
receipts.
11) entry 92: Taxes on sale or purchase of news papers and on advertisements published therein.
12) entry 92-A: Taxes on sale or purchase of goods other than news papers, where such sale or
purchase takes place in the course of inter-State trade or commerce.

17
 13) entry 92-B: Taxes on the consignment of goods whether consignment is to the person making it or
to any other person, where such consignment takes place in the course of inter-State
trade or commerce.
14) entry 97: Any other matter not enumerated in List-11 or List-Ill including any tax not mentioned
in either of those lists.

The Legislatures of the States have exclusive power to levy the following taxes and duties
enumerated in the “State List”.

1) entry 45: Land revenue, including assessment and collection of revenue, the maintenance of land
records, survey for revenue purposes and records of rights, and alienation of revenues.
2) entry 46: Taxes on Agricultural income.
3) entry 47: Duties in respect of succession to agricultural land.
4) entry 48: Estate duty in respect of agricultural land.
5) entry 49: Taxes on land and buildings.
6) entry 50: Taxes on mineral rights subject to any limitations imposed by Parliament by law
relating to mineral development.
7) entry 51: Duties of excise on the following goods manufactured or produced in the State and
countervailing duties at the same or lower rates on similar goods manufactured or
produced elsewhere in India.
a) alcoholic liquors for human consumption;
b) Opium, Indian hemp and other narcotic drugs and narcotics, but not including
medical and toilet preparations containing alcohol or any substance included in
sub-paragraph (b) of this entry.
8) entry 52: Taxes on entry of goods into a local area for consumption use or sale therein.
9) entry 53: Taxes on the consumption or sale of electricity.
10) entry 54: Taxes on the sale or purchase of goods other than news papers, subject to the provisions
of entry 92-A of List-I.
11) entry 55: Taxes on advertisements other than advertisement
published in the news papers and advertisements
broadcast by radio or television.
12) entry 56: Taxes on goods and passengers carried by road or inland
waterways.
13) entry 57: Taxes on vehicles whether mechanically propelled or not, suitable for use on roads,
including tramcars subject to the provisions of entry 35 of List-111.
14) entry 58: Taxes on animals and boats.
15) entry 59: Tolls.

18
respect of any matter not enumerated in the Concurrent List or State List. Such power
includes the power to levy tax not mentioned in either of these lists.

The peculiar feature of our Constitution is that it draws distinction between the
power to levy taxes, the power to collect the taxes and the power to appropriate the taxes.
Thus levy, collection and appropriation are treated differently. As noted earlier the
power to levy taxes is divided between the Union and the States through the Union and
the State Lists. The Union Parliament is vested with wide powers of taxation and the
subjects assigned to it are very elastic. In comparison the powers of the State
Legislatures are narrow and the subjects are inelastic. Considering the very limited tax-
yield to the States in spite of exercise of all powers to levy different taxes the
Constitution comes out with a solution. Under Article 268 stamp duties and duties of
excise on medical and toilet preparations mentioned in the Union List, though levied by
the Union are collected and appropriated by the States. Under Article 269 succession and
estate duties in respect of non-agricultural lands, terminal taxes, taxes on railway
fares and freights, taxes other than stamp duties on transactions in stock exchanges and
future markets, taxes on the sale or purchase of news papers and on advertisements
published in them, taxes on inter-State sale or purchase of goods, taxes on inter-State
consignments shall be levied and collected by the Union but so far as they relate to the
States shall be assigned to the States. Under Article 270 taxes on income other than
agricultural income shall be levied and collected by the Union and distributed between
P'7

the Union and States in the manner recommended by the Finance Commission ‘ . Under

16) entry 60: Taxes on professions, trades, callings and employments.

17) entry 61: Capitation taxes.
18) entry 62:Taxes on Luxuries, including taxes on entertainments, amusements, betting and
gambling.

" . Finance Commission: The President of India constitutes Finance Commission every five years under
Article 280. The Commission makes recommendations to the President with regard to divisible ratio of the
net proceeds of taxes between the Union and the States and the respective shares of the States for
distribution. It also recommends principles which should govern the grants-in-aid by the Union to the
States. It shall also be the duty of the Finance Commission to make recommendations on any other matter
referred to it by the President of India.

19
Article 272 Union duties of excise, other than such duties of exercise on medicinal and
toilet preparations as are mentioned in the Union list levied and collected by the Union
may be distributed between the Union and the States provided the Parliament by law, so
provides.

The financial relation between the Union and the States is increasingly
under strain. The rise of regional parties and ushering in of coalition politics has
contributed to growing demand from the States for greater financial powers. Kelkar
Committee23 which went into direct-indirect tax reforms, among others suggested Value

Added Tax (VAT) at the State Level. Such a State VAT should replace disparate taxes
like Sales Tax, purchase tax, entry tax, luxury tax, turnover tax, special additional tax etc.
now being levied by the States. The Committee also felt that any loss though unlikely on
account of the introduction of VAT in the States must be made good by the States by
subjecting specific services to tax. Further the contribution of service sector to the
G.D.P. is quite substantial and has high potential to grow further. The States are looking
ahead for complete overhaul of the present resource distribution structure. In fact,
Comprehensive Goods and Services Tax (GST) uniting all the indirect taxes levied by the
Union and the States is the ultimate aim. Though it appears Utopianistic the compulsions
of globalization may expedite the process.

Our expectations notwithstanding, we may have to contend with the present

Constitutional realities. The Constitution, as discussed above, provides for a very rigid
distribution of powers to levy various taxes between the Union and the States. They must
stick to their demarcated fields and cases ensue when either of them crosses the fence.

4. Nexus theory rolled back:

The Constitutional makers had to roll back the doctrine of nexus theory from the area of
sales tax. They therefore, introduced Article 286 which originally read as follows:

23 .Kelkar Committee: Under the Chairmanship of Vijay L Kelkar a committee was formed by the Ministry
of Finance and Company Affairs. The Committee submitted its report in November,2002.

20
 “286 (1) No law of a State shall impose, or authorize the imposition of a tax on
the sale or purchase of goods where such sale or purchase takes place.....

(a) outside the State; or

(b) in the course of import of the goods into, or export of the goods out of, the
territory of India.

Explanation: - For the purposes of sub-clause (a), a sale or purchase shall be deemed
to have taken place in the State in which the goods have actually been delivered as a
direct result of such sale or purchase for the purpose of consumption in that State,
notwithstanding the fact that under the general law relating to sale of goods the
property in the goods has by reason of such sale or purchase passed in another State.

(2) Except in so far as Parliament may by law otherwise provide, no law of a State
shall impose, or authorize the imposition of, a tax on the sale or purchase of any
goods where such sale or purchase takes place in the course of inter-State trade or

commerce.

Provided that the President may by order direct that any tax on the sale or
purchase of goods which was being lawfully levied by the Government of any State
immediately before the commencement of this Constitution shall, notwithstanding
that the imposition of such tax is contrary to the provisions of this clause, continued
to be levied until the thirty-first day of March, 1951.

(3) No law made by the Legislature of a State imposing , or authorizing the

imposition of, a tax on the sale or purchase of any such goods as have been declared
by Parliament by law to be essential for the life of the community, shall have effect
unless it has been reserved for the consideration of the President and has received his
assent”.

21
 The constitution makers through Article 286 imposed the following restrictions on
the powers of the State Legislature to levy tax on sale or purchase of goods to prevent
one and the same sale being taxed by many States on the basis of nexus theory.

i) The States were prohibited from levying tax on the sale or purchase of goods
happening outside the State,
ii) The States were prohibited from levying tax on sale or purchase of goods
happening in the course of the import into or export out of India,
iii) The States were prohibited from levying tax on the sale or purchase of goods
happening in the course of inter-State trade and commerce. But the
Parliament by law could relax the prohibition,
iv) The Parliament was vested with the power to declare by law any goods to be
essential for the life of the community. On sale or purchase of such goods the
laws made by the Legislature of the State imposing or authorizing the
imposition of tax shall not have effect unless they had been reserved for the
consideration and obtained the assent of the President.
Even before it could be felt that the mischief wreaked by nexus theory was
completely cured by Article 286 the problem of “explanation-sales” was
knocking at the doors. This problem was the result of drafting inadequacy
in Article 286 and the interpretation placed by the Supreme Court on the
said Article in State of Bombay Vs. The United Motors (India) Limited24.

In the United Motors case the Supreme Court held that the explanation to
Article 286 (1) was an exception to the bar contained in Article 286 (2). In other words
Article 286 (2) was read subject to explanation to Article 286 (1). In this case the
respondents carrying business in Bombay of buying and selling motor cars had
questioned the validity of the Bombay Sales Tax Act, 1952 on the ground that it was ultra
vires the State Legislature in as much as it purported to levy tax on sales and purchases of

24
.(1953)4 STC 133 (SC)
25
. ibid

22
goods regardless of the restrictions imposed on the State Legislative power by Article
286 of the Constitution. It was also alleged that the provisions of the Act were
discriminatory in their effect and therefore void under Article 14 read with Article 13 of
the Constitution. The Act was declared void by the Division Bench of the Bombay High
court. The State of Bombay filed an appeal before the Supreme Court. The Supreme
Court upheld the validity of the Bombay Sales Tax Act and the Rules except the Rule 5
(2) (1) on the ground that the explanation to Article 286 (1) was an exception to the bar
contained in Article 286 (2).

The effect of the above decision was that the State Legislature could not levy tax
on sales or purchases of goods when such sale or purchase takes place in the course of
inter-State trade and commerce unless as a result of sale or purchase the goods are
actually delivered for consumption in that State. The decision of the Supreme Court had
a severe impact on trade and commerce. Inter-State trade was inevitable and in all such
cases the States had to see where the actual delivery as different from constructive
delivery of the goods had happened; further they had to see whether such actual delivery
was for consumption within the State. Further it was the delivery-State and not the
dispatch-State that was empowered to levy tax. This decision had the effect of
converting part of the sales tax into ‘destination-based taxation’ while the rest of it
remained 'origin-based’. As a result of this decision the delivery-States began to exercise
jurisdiction over the dealers in other States. This created difficulties for the trade and
industry. The dealers, besides obtaining registration in the home State had to obtain
registrations in all the States to which they were sending the goods. Imagine the plight of
the dealers obliged to produce their books of accounts before the assessing authorities in
different States for scrutiny and assessment! A dealer though operating in one State had
to file returns and conform to the provisions of the sales tax laws of Bombay, Madras,
Kerala and other distant States.

23
5. Impact of the decision in Bengal Immunity’s case:

The Supreme Court by a majority of 4 to 1 decided the United Motors’s case26.

The parties had advanced arguments at length lasting for twelve working days and after
eight States had intervened because of the importance of the questions of law involved.
According to Article 141 the law declared by the Supreme Court is binding on all courts.
Therefore all the subsequent cases ought to have been disposed of according to the
decision in United Motors Case27. But the Supreme Court in disposing of the preliminary
objection held that the words of Article 14128 “binding on all Courts in India”, though

wide enough to include the Supreme Court do not include the Supreme Court itself and
that it is not bound by its own judgments. By placing such an interpretation on Article
141 the Supreme Court entertained the appeal in Bengal Immunity Co. Ltd., Vs. Bihar
though it was covered by its earlier decision in United Motors Case30 . The case wad
heard by a larger bench of 7 judges. By a majority of 4 to 3 the Supreme Court overruled
its earlier decision in United Motor’s case31 . The Supreme Court held that the purpose of

explanation to Article 286 (1) was merely to explain what an outside sale referred to sub­
clause (a) of clause (1) is and it neither confers nor enlarges the powers of taxation
conferred on the States. The explanation to Article 286 (1) can not be read as an
exception to Article 286(2). In this case the company in Calcutta accepted the orders
placed on it and then sent medicinal goods to Bihar. The State of Bihar sought to tax
the company’s sales to Bihar dealers as “explanation sales” but the company objected to
it. The Supreme Court gave its judgment on 6th September, 1955. It overruled its earlier
judgment in United Motor’s case32 and held that the sales by Calcutta company to Bihar

dealers amounted to inter-State, sales which could not be taxed by any State, not even by
the delivery-State (also called the State of consumption), because of the bar imposed by

26 .(1953) 4STC 133 (SC)

27 .ibid
.Article 141 - Law declared by Supreme Court to be binding on all courts -The law declared by the
Supreme Court shall be binding on all courts within the territory of India.
29 (1955) 6 STC 446 (SC)
30 .ibid
31 .ibid
52

24
Article 286 on the powers of the State Legislatures to levy tax on sale or purchase in the
course of inter-State trade and commerce.

The decision of the Supreme Court in Bengal Immunity Co. Ltd. vs. Bihar33 had

the effect of creating serious economic crisis in the States. Many States had levied and
collected taxes on “explanation sales” and such levy and collection was also upheld by
the Apex Court in United Motor’s case. With the sudden U turn given to the law in
Bengal Immunity Co. Ltd. vs. Bihar34 the States had to refund the taxes collected on the

explanation sales. Further the States had laid their budgets and plans on the expected tax
yields on explanation sales. The decision had upset the apple-carts of the States. So the
President promulgated Sales Tax Laws Validation Ordinance, 1956 (Number 3 of 1956)
on 30th January, 1956 and it was replaced by the Sales Tax Validation Act, 1956 (Act 7 of

1956) which validated the State Laws which provided for levy of tax on inter-State sales
falling within explanation to Article 286 (1) during the period between 1st day of April,
1951 and 6th day of September, 1955 (the day on which the Supreme Court pronounced
its judgment in Bengal Immunity Co. Ltd. Vs. Bihar35.

Another result of the decision of the Supreme Court in Bengal Immunity Co. Ltd.
Case36 was that all inter-State sales became immune from State taxation. A privileged

position was acquired by inter-State trade and commerce to the detriment of the local
trade. The local taxes could be avoided by making purchases from other States. There
was urgent necessity to restore equilibrium between inter-State trade and intra-State
trade. Further the Taxation Enquiry Commission which was appointed by the
Government of India “to conduct a comprehensive enquiry into taxation “had submitted
its report. The Commission felt that sales tax must continue to be a State tax; all sales
must be distinguished into inter-State sales and intra-State sales and while Union should
regulate the levy of tax on inter-State sales, the States should be left free to levy tax on
inter-State sales. The Commission recommended that the Union should regulate the

.14
ibid
35
. ibid
36
.ibid
ibid

25
inter-State sales through the State Governments and the revenue realized should devolve

upon the concerned States.

The decisions of the Supreme Court in United Motor’s case37 and Bengal
Immunity case38 expedited the need for Constitutional amendment along the lines

recommended by the Taxation Enquiry Commission.

The Constitution (Sixth Amendment) Act was passed in 1956. The Amending
Act effected following changes:

i)A new entry 92-A was inserted in the Union List which read as under:

“92-A - Taxes on the sale or purchase of goods other than news papers
where such sale or purchase takes place in the course of inter-State

trade or commerce”.
ii)The entry 54 in the State list was substituted and the States’ power of taxation was
circumscribed. The entry as it existed before the amendment is juxtaposed beside the

substituted entry.

Before Amendment After Amendment

54 Taxes on the sale Taxes on the sale or

or purchase of goods purchase of goods other than
other than news papers. news papers subject to the
provisions of Entry 92-A of List-I.

iii) The taxes realizable under entry 92-A of List-I in the Seventh Schedule was
included in Article 269 as sub-clause (g) of clause (1) rendering it as one of the taxes
levied and collected by the Union but assigned to the State. A new clause (3) was
inserted in Article 269 empowering the Parliament to formulate principles to determine

17 ibid
ibid

26
 when a sale or purchase of goods takes place in the course of inter-State trade and

commerce.

iv) The Article 286 was reframed. The clause (1) of the Article barred the Legislature of
a State from imposing or authorizing the imposition of a tax on the sale or purchase of
goods where such sale or purchase takes place outside the State, or in the course of
import of goods into, or export of goods out of the territory of India. The clause (2)
empowered the Parliament to formulate principles to determine when the sale or purchase
takes place out side the State or in the course of export or import. The clause (3) of the
Article empowered the Parliament to declare any goods to be of special importance in
inter-State trade and commerce and specify restrictions and conditions in regard to the
system of levy, rates and other incidents of the tax subject to which the States can levy
tax.
i

The Union Parliament, immediately after Constitution (Sixth Amendment) Act,

1956 enacted the Central Sales Tax Act, hereinafter referred to as CST Act in the year
1956 fulfilling the Constitutional mandate. The CST Act lays down the tests to
determine when a sale or purchase takes place in the course of inter-State trade and
commerce; or in the course of import into or export out of the territory of India; or
outside the State. The CST Act provides for the levy of tax on inter-State sales but
extends limited exception to second and subsequent sales by transfer of documents of
title to the goods while the goods are in transit.

The CST Act provides for levy of tax on inter-State sales but not on inter-State
purchases. It treats sales of certain goods to registered dealers and any goods to the
governments, either Central or State differently from sales to persons other than
registered dealers. While the sales of certain goods to registered dealers and any goods to
the governments are liable to concessional rate of tax of 4 per cent on production of ‘C’
or ‘D’ declaration forms the sales to other than registered dealers are taxable at ten per
cent or State rate of tax whichever is higher. The CST Act declares certain goods to be of

27
special importance in inter-State trade and commerce and prescribes restrictions subject
to which the States can levy tax on them.

The sales tax law, though still evolving, acquired the important determinatives
inevitable in a federal polity after through judicial review. The sale of goods falls into
two broad categories intra-State and inter-State. When the inter-State course ends and
when the intra-State course begins is not without disputation. Many divergent decisions
are given by various High Courts. The trade and industry suffered after the decision of
the Supreme Court in the United Motor’s case39 and the States panicked after Bengal
Immunity decision40 . The Sales Tax Validation Act, 1956 (Act 7 of 1956) intended in

effect to render the judgment of the Supreme Court effective from the date of its
pronouncement, that is, 6th September, 1955 in turn contributed to considerable litigation.

The adjudication by the Constitutional Courts that is the jurisdictional High Court or the
Supreme Court on any fundamental issue in the area of taxation between the State and the
subject is bound to send down a powerful pulse which may have devastating effect
against which the State alone can grab a defense while the subject is always at the mercy
of the State or the Court itself.

6. Freedom of trade as a restraint:

The pre-Constitutional experience, which was rather very bitter, weighed with the
Constitution makers to prescribe in the Constitution more elaborate restrictions on the
States’ power to levy tax on the sale or purchase of goods. Further, in any federal polity
special provisions are inevitable to ensure free movement of goods among others through
out the territory of the federation41. Such provisions may either be in the affirmative

protecting the economic unity of the Union or be in the negative prohibiting States from

39 ibid
40 ibid
41 Section 92 of Common Wealth of Australia Act, 1901 and the commerce clause in the United
States Constitution.

28
creating fiscal barriers along the State borders. The Indian Constitution strives to protect

the economic unity of the country both affirmatively and negatively.

(a) The section 297 of the Government of India Act, 1935 hereafter referred
to as G.I. Act, 35 anticipated Part XIII of the Constitution. It assured free
inter-provincial trade within British India.42

The provinces could not stop the movement of the goods either into or out of their
territory. Further they were prevented from erecting fiscal barriers through
discriminatory taxation.

The Part XIII of the Constitution with the caption “Trade, Commerce And
Intercourse within The Territory of India” is a successor to Section 297 of the G.I.Acf 35.
This part consists of Articles from 301 to 307 43. The Article 307 empowers the

42The Section 297 of the G.I. Act 35 was as follows:

“Sec.297(l) “No Provincial Legislature or Government shall -

(a) by virtue of the entry in the Provincial Legislative list relating to trade and commerce within
the Province, or the entry in that list relating to the production, supply and distribution of
commodities have power to pass any law or take any executive action, prohibiting or
restricting the entry into, or export from, the province of goods or any class or description; or
(b) by virtue of anything in this Act have power to impose any tax, cess, toll or due
which, as between goods manufactured or produced in the province and similar goods not so manufactured
or produced, discriminates in favour of the former, or which, in the case of goods manufactured or
produced outside the Province, discriminates between goods manufactured or produced in one locality and
similar goods manufactured or produced in another locality. Any law passed in contravention of this
section shall, to the extent of the contravention, be invalid.”
43 The Articles 301 to 305 read as follows:

Article 301: Freedom of trade, commerce and intercourse - Subject to other provisions of this
Part, trade, commerce and intercourse throughout the territory of India shall be free.
Article 302: Power of Parliament to impose restrictions on trade, commerce and intercourse -
Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse
between one State and another or within any part of the territory of India as may be required in the
public interest.

29
Article 303: Restrictions on the legislative powers of the Union and of the States with regard to
trade and commerce -

(1) Notwithstanding anything in Article 302, neither, Parliament nor the Legislature of a State
shall have power to make any law giving, or authorising the giving of, any preference to one State
over another, or making, or authorizing the making of, any discrimination between one State and
another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh
Schedule,

(2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorizing the
giving of, any preference or making, or authorizing the making of. any discrimination if it is
declared by such law that it is necessary to do so for the purpose of dealing with a situation arising
from scarcity of goods in any part of the territory of India.

Article 304: Restrictions on trade, commerce and intercourse among States - Notwithstanding
anything in Article 301 or Article 303, the Legislature of a State may by law -
(a) impose on goods imported from other States (or the Union territories)
any tax to which similar goods manufactured or produced in that State
are subject, so, however, as not to discriminate between goods so
imported and goods so manufactured or produced; and
(b) impose such reasonable restrictions on the freedom of trade, commerce
or intercourse with or within that State as may be required in the public
interest:
Provided that no Bill or amendment for the purposes of clause (b) shall
be introduced or moved in the Legislature of a State without the
previous sanction of the President:

Article 305: Saving of existing laws and laws providing for State monopolies - Nothing in
Articles 301 and 303 shall affect the provisions of any existing law except in so
far as the President may by order otherwise direct; and nothing in Article 301
shall affect the operation of any law made before the commencement of the
Constitution (Fourth Amendment) Act, 1955, in so far as it relates to, or prevent
Parliament or the Legislature of a State from making any law relating to, any
such matter as is referred to in sub-clause (ii) of clause (6) of Article 19.

30
Parliament to constitute an authority to over see inter-State trade and commerce and to
carry out the purposes of part XIII of the Constitution. Of course, no such authority is
constituted.

Late Sri H.M. Seervai in his Constitutional Law of India expresses his opinion
that the Articles 301 to 306 of the Constitution curtailed the freedom of trade secured by
Section 297 of the G.I. Act, 3 5 44.

7. Awkward drafting:

The Part XIII of the Constitution is not properly drafted. Avoidable confusion is
created by qualifying the exceptions to the general rule with exceptions. The Article 301
specifically states that the freedom of trade and commerce guaranteed is subject only to
other provisions contained in Part XIII. But a few standard text book writers feel that
such freedom is also subject to Art. 19 (5) which contemplates restrictions in the interest
of the protection of Scheduled Tribes 45. According to Article 302 the Union Parliament

may by law impose restrictions on inter-State trade and commerce in public interest. But
according to Article 303 even in exercise of this power conferred by Article 302 the
Parliament can not make any law favoring or discriminating against a State while making
laws under entries relating to trade and commerce in any of the lists in the Seventh
Schedule. The Article 303, by way of abundant caution prohibits even State Legislatures
from making any laws under entries relating to trade and commerce in any of the lists in
the Seventh Schedule favoring or discriminating against any State. The clause (2) of
Article 303, by way of exception to exception empowers the Parliament to make laws
favoring or discriminating against any State provided it is declared by such law that it is
intended to meet a situation arising out of scarcity of goods in any part of the State.

The Article 306 which extended power to certain States in Part B of the First Schedule to impose
restrictions on Trade and Commerce was repealed by the Constitution (Seventh Amendment) Act
1956,
44 Constitutional Law of India by Late Sri H.M. Seervai, Fourth Edition, pages 2590-2591

45 See page 2592 of Volume III of Late H.M.Seervai’s Constitutional Law of India, Fourth Edition.

31
8. Discriminatory taxation prohibited:

The Article 304 (a) prohibits “discriminatory taxation” by the States. The State
Legislature can impose tax on any goods imported from other States or Union Territories
if same tax is being levied on similar goods manufactured or produced in that State.
According to clause (b) of Article 304 a State Legislature can by law impose reasonable
restrictions on freedom of trade with or within that State provided the bill had been
introduced with the previous sanction of the President.
The Supreme Court had to interpret Part XIII of the Constitution in Atiabari Tea
Co. Ltd. vs. State of Assam46. The appellants challenged the validity of the Assam

Taxation (On goods carried by roads and inland waterways) Act, 1954 on the ground that
it violated Article 301 and was not saved by Article 304 (b). By a majority of 4 to 1 the
Supreme Court upheld the challenge. The Court held that compensatory and regulatory
taxes can be raised only by conforming to Article 304(b). This decision had an adverse
impact on the powers of the State Legislature to levy tax. But the decision in Atiabari
Tea Co., case 47 was virtually overruled in Automobile (Transport) Rajasthan Ltd. vs.
State of Rajasthan48. The Supreme Court by a majority held that regulatory and

compensatory taxes are not hit by Article 304 (b). It further held that taxation simplicitier
is not a restriction on freedom of trade.

9. Freedom guaranteed under Art.301 is not absolute:

In State of Bihar Vs. Harihar Prasad Debuka 49 the Supreme Court held that

freedom to carry on any occupation, trade or business guaranteed to a citizen under

Article 19 (1) (g) is subject to reasonable restrictions. The freedom guaranteed under
Article 301 is not absolute freedom. The State is empowered to prescribe declaration

46 (1961) 1 SCR 809

47 (1961) 1 SCR 809
48 (1963) 1 SCR 491
49 (1989) 73 STC 353 (SC)

32
forms to be carried by the transporters for the transport of goods through the State of
Bihar as the declarations were intended to curb, evasion of taxes. The Supreme Court
further held that measures impeding freedom of trade may be legislative or executive and
may be fiscal or non-fiscal. He who assails any measure as being a restriction must prove
that it directly impedes free trade and commerce.

To sum up the Article 301 guarantees freedom of trade, commerce and

intercourse through out the territory of India. Though the Union Parliament can by law
impose restrictions in the public interest it can not favor or discriminate against any State
while acting in exercise of the powers derived under entries relating to trade and
commerce, unless it is to meet a scarcity situation in any part of the territory. The States
can not show tax-advantage to local goods by levying higher taxes against goods coming
from other parts of the country. The States with the previous sanction of the President
can introduce a bill and pass law imposing reasonable restriction on freedom of trade
with or within the State.

10. Article 14 and the tax laws:

The Preamble50 to our Constitution leaves nobody in doubt about our Constitutional
Objectives. The national endeavor is to secure to all its citizens justice, liberty, and
equality and to promote fraternity among all Indians and national integration. The right
to equality is a fundamental right. The Articles 14 to 16 subsume within them the right to
equality and right against discrimination. While the Article 14 guarantees to all persons
general equality the Articles 15 and 16 assure equality in particular aspects to all citizens.
The Article 14 reads as follows:

50 Preamble
WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN
SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:
JUSTICE, social, economic and political:
LIBERTY of thought, expression, belief, faith and worship;
EQUALITY of status and of opportunity; and to promote among them all FRATERNITY assuring the
dignity of the individual and the unity and integrity of the Nation;
IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day ofNovember, 1949, do HEREBY ADOPT,
ENACT AND GIVE TO OURSELVES THIS CONSTITUTION

33
 “Article 14: Equality before Law - The State shall not deny to any person
equality before the law or the equal protection of the laws within the territory of
India”

The Article 14 guarantees equality both in its positive and negative aspects. It
upholds rule of law by non-discrimination implying the absence of any special privilege
in favor of any individual and equal subjection of all individuals to the ordinary law. In
its positive connotation it implies equality of treatment in equal circumstances. It does
not mean unequals must be treated alike and protection of the same laws for all. It is here
the doctrine of classification comes in and gives a practical dimension to the guarantee of
the equal protection of the laws. Considering the social, cultural and economic
inequalities in the country the law must invariably separate the persons similarly situated
from those who are not. The State must show finesse not only in law making but also in
the classification of its subjects to be governed by the laws. Such classification to pass
the validity test must satisfy two conditions, namely:
i) classification must be founded on an intelligible differentia which
distinguishes persons or things grouped together from others left out of the
group;and
ii) the differentia must have a rational relation to the object sought to be achieved
by the statute in question.

The early practice of the courts suggests that the content of the Article 14 came to be
identified with the doctrine of classification and it also embodies a guarantee against
arbitrariness. The Indian Courts adopted the doctrine of classification laid down by
the U.S. Supreme Court. The doctrine of classification appears deceptively simple.
In Sri Ramakrishna Dalmia Vs. Shri Justice S.R. Tendolkar 51 the Scope of Article 14

is explained and it can be summarized as follows:

51 (1959) SCR 279, 296-298

34
 i) Both substantive and procedural laws must conform to the equality
provisions.
ii) Article 14 prohibits class legislation and not laws based on classification,
iii) The classification, to be valid, must be based on intelligible differentia and
the differentia must have rational nexus to the object sought to be achieved
by the statute.
iv) The differentia adopted and the object sought to be achieved are different.
So, the object itself can not be the basis of the classification.
v) The classification need not be mathematically precise.
vi) A class may consist of one individual because of the special circumstances
peculiar to the individual.
vii) There is always a presumption in favor of the Constitutional validity of an
enactment and the burden is on the one who alleges unconstitutionality to
prove the same.
viii) It must always be presumed that the discrimination made by a Legislature is
based on adequate grounds.
ix) If on the face of it or from the surrounding circumstances if it appears that
law is not based on any classification the courts can not carry the
presumption of constitutionality to the extent of always holding that there
must be some undisclosed and unknown reasons for subjecting certain
individuals or corporations to hostile or discriminatory legislation.:

The tax laws make an impact on the important aspect of national life.
There are historical instances when resentful taxes were levied on certain
communities. Aurangazeb, the Mohal Emperor levied Zaziaya on Hindus. So even
the tax laws must filter through the equality provisions in the Constitution. But Sri
H.M.Seervai in his Constitutional Law of India, Volume I, Fourth Edition 52 writes
how at one time the decision in Ramjilal Vs. I.T.O., Mohindargarh 53 was
mistakenly taken to mean that the tax laws were not subject to fundamental rights as

52 at page 479 in para 9.72

53 (1951) SCR 127

35
 they were passed under Article 265. He further says that such a view was incorrect
as the case had merely decided that Article 31 (1) did not apply to taxation as
express provision was made by Article 265 for the levy of taxes. In that case, he
says, the Court had in fact considered and repelled the challenge under Article 14
on merits. But it is now fairly well settled that even tax laws are subject to
fundamental rights. 54

The courts have appreciated the complexities involved in deciding the policy matters
leading to tax enactments. They acknowledged that the decision making process calls for
the knowledge of economic, social and geographical status of the subjects and will
always be a culmination of an intense debate possible only in legislatures. The courts
have stated that the Legislatures enjoy maximum latitude to pick and choose the subjects,
objects and activities by a process of classification for the levy of tax. The Supreme
Court in East India Tobacco Co. vs. A.P.55 observed as follows:

“A state does not have to tax every thing in order to tax something. It is
allowed to pick and choose districts, objects, persons, methods and even rates for
taxation if it does so reasonably ........ The U.S. Supreme Court has been
practical and has permitted very wide latitude in classification for taxation”.

The courts very rarely strike down the tax legislations as being violative of Article
14. The Madras High Court 56 observed that the Article 14 does not require fanatical

approach to the problem of equality before the law. It further observed that where
differentiation is based on a fair and objective hypothesis it has to be sustained. The

54 a)Budhan Choudhry Vs. State of Bihar AIR 1955 SC 191

b) S.C. Prashar Vs.Vasant sen AIR 1963 SC 1356

c) Sangu Chakra Hotels (P) Ltd., Vs. State of T.N. (1985) 60 STC 125 (Mad)
d) East India Hotels Ltd. Vs. St. of Jammu & Kashmir (1982) 49 STC 1 (J&K),
e) Khadi ke Sham Sham Bhat Vs. Agricultural Income Tax Officer (1963) 48 ITR
21 (SC)
55 .(1963) 1 S.C.R. 404-The classification between “Virginia” and “Country” tobacco was upheld.
56 National Fire Works Factory Vs. DCTO (1973) 31 STC 132 (Madras)

36
Madras High Court upheld the concessional rate of tax extended to handmade safety
matches, but not to coloured matches. The Supreme Court in Hiralal Rattanlal Vs. Sales
Tax Officer 57 observed that the primary purpose of the levy of all taxes is to raise funds
for public good. Which person should be taxed, what transaction should be taxed or what
goods should be taxed, depends upon social, economic and administrative consideration.
It is for the Legislature to decide what economic or social policy it should pursue or what
administrative consideration it should bear in mind. The Courts have upheld the
classification between the purchases from registered and the purchases from unregistered
dealers for the purposes of Section 6-A of the Andhra Pradesh General Sales Tax Act,
1957; small industrial units belonging to Women and Harijans and those belonging to
others59; holding companies and others60.

The Courts are also not reluctant to strike down legislation if they are arbitrary
discriminatory or confiscatory in nature. In Rai Rama Krishna Vs. Bihar 61 the Supreme
Court observed as follows:

“.......................... and in dealing with the contention ..................that the taxing

statute contravenes Article 19, Courts would naturally be circumspect and
cautious. Where for instance it appears that the taxing statute is plainly
discriminatory, or provides no procedural machinery for assessment and levy of
the tax, or that it is confiscatory, courts would be justified in striking down the
impugned statute as unconstitutional. In such cases, the character of the material
provisions of the impugned statute is such that the court would feel justified in
taking the view that, in substance, the taxing statue is a cloak adopted by the

57 (1973) 31 STC 178 (SC) - The Supreme Court, in this case upheld the classification of
pulses into processed or split pulses and unprocessed or unsplit pulses for the purpose
of taxation.
58 Hindustan Milk Foods Manufacturers Ltd. Vs. State of A.P. and Another (1982) 51
STC 1 (AP)

59 Well worth Plastics and Chemicals and Others Vs. State of Kerala and Others (1984) 57
STC 360 (Kerala)

60 C.N. Spencer Vs. l.T.O. (1957) Madras

61 (1963) A.SC. 1667, 1673

37
 legislature for achieving its confiscatory purposes,. This is illustrated by .....
Kunnathat Thakthunni Moopil Nair Vs. Kerala62 where a taxing statute was

struck down because it suffered from several fatal infirmities. On the other hand
........ (in) Jagannath Baksh Singh Vs. U.P.63 ............. a challenge to the taxing

statute on the ground that its provisions were unreasonable was rejected and it
was observed that unless the infirmities in the impugned statute were of such a
serious nature as to justify its description as a colourable exercise of legislative
power, the Court would uphold a taxing statute”.

A Taxing statute cannot be sustained if it is confiscatory in character and effect.

Each case, of course, depends upon its own facts64. A taxing statute can be referred to as
confiscatory or expropriatory only if it offends Article 19(1) (f) or Article 31 (1) 65 and
perhaps also Article 14 and not on the ground that it is harsh or excessive66. A provision

relating to imposition of interest on the belated payment of taxes will not make it
confiscatory even where a dealer may be resorting to credit sales67. In Rai Ramakrishna
and Others Vs. State of Bihar 68, the Supreme Court held that, the recovery of tax was a

matter of mere machinery for the proper collection of duty. It upheld an Act which
covered a period of 10 years retrospectively, making it impossible for the tax payer to
pass on the burden. The challenge of being confiscatory because of its retrospectivity
was repelled.

(1961) 3 SCR 77
63 (1963) 1 SCR 220
64 Hoechst Pharamaceuticals Ltd. Vs. State of Bihar (1982) 51 STC 66, 71 (Patna)
65 Article 31 - Compulsory acquisition of property - Repealed by the Constitution
(forty - fourth Amendment Act, 1978 Section 6 (w.e.f. 20-6-1979).

66 Chhota Bai Vs. Union of India AIR 1962 SC 1006

Hari Krishna Bhargava Vs. Union of India AIR 1966 SC 619 (para7).

67 Bir Sain Anand Vs. State of J & K and Others (1983) 54 STC 354,358 ( J&K).

58 AIR 1963 SC 1667 (pr 17)

38
11. Excessive delegation contravenes Art. 14:

A taxing statute is bad and violative of Article 14 if it involves excessive

delegation. A Legislature can not divest itself and delegate the essential function to the
delegatee. The Legislature should lay down the “guide lines” subject to which delegatee
can exercise the taxing powers by choosing the objects and rates of taxes. In B. Shama
Rao Vs. Union Territory of Pondichery69 the Supreme Court was dealing with an instance
of adoption of a specific Act and the Supreme Court found that the Pondichery
Legislature had made a total surrender of its legislative function in favour of the Madras
Legislature, their adoption of Madras General Sales Tax Act, 1959 by the Pondichery
Legislature, was bad.

The trend, however, seems to uphold the delegation of exempting power even if
there is some guidance in the Legislation and to wait till it is exercised. As and when it is
exercised contrary to the policy the resultant action would be struck-down by the Courts.
In F.N.Balsara Vs. Bombay70 the sections 52, 53 and 139 ( C ) of the Bombay
Prohibition Act, 1948 were under attack. The Section 52 of the Act empowered the
Government to grant licenses in cases other than those specifically provided for under the
Act; the section 53 empowered the Government inter alia, to vary or substitute any of the
conditions of the license laid down in the Act; and the Section 139 ( C ) empowered the
Government to exempt any person or institution from the observance of all or any of the
provisions of the Act or any rule, or regulation or order made there under. The Bombay
High Court held the above sections in valid as they amounted to delegation of Legislative
power. The Supreme Court reversed the judgment of the Bombay High Court holding
that the Legislature can not foresee all the contingencies and provide for them. The
Supreme Court acknowledged the necessity to delegate discretionary power.

69 (1967) 20 STC215 (SC)

70 (1951) SCR 682

39
 In Rajkumar vs. State of Rajasthan 71 the appellants supplied boxes and furniture

to various Central Government Offices in Rajasthan. While they had to pay more than
four percent as sales tax under the General Sales Tax Act their competitors supplying
from outside the State of Rajasthan could pay only four percent under the CST Act, 1956.
This was challenged as violative of Article 14. The Rajasthan High Court held that the
traders of other States selling goods in Rajasthan formed a different class of persons from
the traders of Rajasthan selling goods in Rajasthan and it was reasonable classification
and permissible under Article 14.

The courts have not taken narrow pedantic view of the doctrine of equality in
Article 14. The Courts have shown particular deference to the judgment of the
Legislatures. In tax matters the Court have always endorsed the wisdom and judgment of
the Legislatures. In Bharat General & Textile Industries Ltd. Vs. State of Maharashtra
the Supreme Court upheld a notification issued by the State Government extending tax-
exemption to new industrial units set up in backward areas for a specified period to the
exclusion of other industries in the same area and manufacturing similar goods. In
Agarwal Industries Ltd. Vs. State of A.P. 73 the High Court of Andhra Pradesh repelled

the petitioners attack under Article 14. The petitioners contended that while M/s.
Tungabhadra Industries Ltd was granted sales tax deferment they were denied that
facility and it amounted to hostile discrimination. The A.P. High Court held that while
the former was a sick company and so declared by the Board for Industrial Finance and
Reconstruction (BIFR) the petitioners were not a sick company and so the governmental
action was not in violation of Article 14.

71 (1996) 102 STC 417 (Rajasthan)

72 (1989) 72 STC 354 (SC)
73 (1994) 19 APSTJ 184 (APHC)

40
12. Courts’ confidence misplaced:

The deference of the Courts seems to have been taken for granted by the State.
The Central Government issued Bearer Bonds Ordinance and it was replaced by Special
Bearer Bonds (Immunity and Exemption) Act, 1981. It was intended to unearth black
money. The ‘scheme’ placed premium on tax evasion and conferred undeserved
advantages on tax evaders. One M. Garg, a senior advocate filed a writ petition under
Article 32 in the Supreme Court contending that Bearer Bonds Ordinance and the Act
replacing the former were void as they violated Article 14. The Supreme Court in R.K.
Garg Vs. Union of India 74 by majority of 4 to 1 upheld the validity of the enactment.
The majority held that the impugned Act is based on the classification between those
who have and those who do not have black money which constitutes intelligible
differentia and the differentia has nexus with the object of the law, namely to unearth
black money for productive purposes. All honest tax payers are outraged by this
judgment of the Supreme Court. The Supreme Court had at all times come down heavily
on tax evasion. In Balaji Vs. I.T.O. 75 the Supreme Court upheld under Article 14 a
provision which treated the income derived by a partnership consisting of a man, his wife
and his minor children as the man’s income on the ground that such a provision
prevented splitting of income and evasion of tax there by. But unfortunately in Bearer
Bonds Case 76 the Supreme Court disappointed the honest tax payers. Since then a few
States have come out with amnesty schemes or waiver schemes. The Government of
Andhra Pradesh issued a notification 77 under the Andhra Pradesh General Sales Tax Act,

1957 waiving outstanding dues of purchase tax levied on rural development cess
component of the purchase value of paddy. The State also issued a notification waiving

(1981) ASC 2138

S.K.ll.L I B R A R Y
75 (1962)2 SCR 983
Acc. No....!.?.?^.?.....
76 (1981) A.SC 2138 Call.No..................... -1
77 G.O.Ms.No.682 Revenue (CT.II) Dept., dated 3-9-2004 which gave retrospective effect to
G.O.Ms.No.951, Revenue (CT.II) Department, dated 10-9-2003 from 30-10-1995.

78 G.O.Ms.No.683 Revenue (CT.II) Dept., dated 3-9-2004 which gave retrospective effect to
G.O.Ms.No.950, Revenue (CT.II) Department, dated 10-9-2003 from 30-10-1995.

41
outstanding dues of rural development cess levied over and above the minimum support
price fixed by the Government. Both the above notifications issued on 3-9-2004 waived
the outstanding dues from 30-10-1995 to 9-9-2003. The above notifications in effect
resort to classification of dealers into law compliant tax payers and law defying tax
defaulters and favor the defaulters. The honest tax payers who had abided by the law and
had paid the taxes during 30-10-1995 to 9-9-2003 feel cheated. Both the notifications
violate Article 14 of the Constitution though no body chose to challenge them.

42