REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2960 OF 2006

Union of India and Ors.            ………….. Appellants

versus

M/s Nitdip Textile Processors Pvt. Ltd. and Another                                      …………..Respondents

WITH

CIVIL APPEAL NO. 2961 OF 2006

Union of India and Ors.            ………….. Appellants

versus

M/s Nitdip Textile Processors Pvt. Ltd. and Another                                      …………..Respondents

WITH  

CIVIL APPEAL NO. 2962 OF 2006

Union of India and Ors.            ………….. Appellants

versus

M/s Rinkoo Processors Pvt. Ltd. and Another                                      …………..Respondents

1

WITH  

CIVIL APPEAL NO. 2963 OF 2006

Union of India and Ors.            ………….. Appellants

versus

M/s Swiss Pharma  Pvt. Ltd. and Another                                      …………..Respondents

WITH  

CIVIL APPEAL NO. 2964 OF 2006

Union of India and Ors.            ………….. Appellants

versus

M/s New Age Industries and Another                 …………..Respondents

WITH  

CIVIL APPEAL NO. 3659 OF 2006

Union of India and Ors.            ………….. Appellants

versus

M/s Aryan Finefab Ltd. and Others .....……..Respondents

WITH  

2

CIVIL APPEAL NO. 5616 OF 2006

Union of India and Ors.            ………….. Appellants

versus

M/s Modern Denim Ltd. and Another               …………..Respondents

WITH  

CIVIL APPEAL NO. 990 OF 2007

Union of India and Ors.            ………….. Appellants

versus

M/s Navdurga Calendaring  Works Surat and Others                                      …………..Respondents

J U D G M E N T

H.L. Dattu, J.

1) The 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  

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appeals involve common question of law, they are disposed  

of by this common Judgment and Order.  

2) All 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.  

3) The  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)

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(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  

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on 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   

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relation 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.”

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4) We 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/-  

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under 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  

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dated 31.12.1998.  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.

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5) The 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   

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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   

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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 …”

6) The 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   

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pretext of extending the statutory benefit to those   who are not covered by the scheme.”

7) In  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.”

8) In  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.”

9) In  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   

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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)”

10) In 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.)”

11) In 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  Co.   Ltd.)”

12) The 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:

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 “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  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 prosecution”

13) The 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   

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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.”

14) This  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 more user-friendly….”

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15) In  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 thereunder.”

16) In 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.”  

18

17) In 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.”  

18) Further, 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.

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2.   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 SCHEME

A. CATEGORY OF CASES TO WHICH SCHEME  APPLICABLE

4.1. 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.  

……

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4.3.  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 SCHEME

4.4. 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.

19) In 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:

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“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.”

20) In  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.”

21) However, 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,  

23

(2002) 8 SCC 410; and CCE v. Jayant Dalal (P) Ltd., (1997)  

10 SCC 402 )  

22) Shri. 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.  

23) Learned 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  

24

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),  

25

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 Cause Notice.  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  

26

Cause 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.  

27

24) Per 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  

28

the legislation. 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  

29

Notice  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 Notice. 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  

30

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  equality.  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.   

25) Taxation  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.

26) The 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.

27) The expression ‘Direct Taxes’ include those assessed  

upon the property, person, business, income, etc., of those  

32

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.

28) The 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  

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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 classification. 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  

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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 illusory.   

29) Kar  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.    

30) The  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  

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arrears’ 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  

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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  

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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 decisions.   

31) In  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  spheres.   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.)

32) In  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   

39

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.”

33) In 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  

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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.”

34) In  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 it is founded   on pertinent and real differences as distinguished   from  irrelevant  and  artificial  ones.  The   constitutional standard by which the sufficiency of   

41

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  to  investigate.  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.

…

19. It is 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:

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“We must remember that the machinery of   Government  would  not  work  if  it  were  not   allowed a little play in its joints.”

35) In   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  constitutional   principles.  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   

43

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.”  

36) In 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.”

37) In  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  

44

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 policies.”

38) In  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....”

39) In  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   

45

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.”   “Perfectly equal 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.”

40) In  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.”

41) In 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   

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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.”

42) In 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   

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reasonable  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 legislative wisdom.

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43) In 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.)

44) In  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   

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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.

45) To 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  

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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 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   

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Anr.  (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  

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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.

46) In 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.

........................……………………J.                                                                                  [H.L. DATTU]

.....…..............……..………………J.                                                  [CHANDRAMAULI  KR. PRASAD]

New Delhi, November 03, 2011.

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