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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8192 OF 2003

VIKRAM CEMENT & ANR. .....APPELLANT(S)

VERSUS

STATE OF MADHYA PRADESH & ORS. .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

The  bare  minimum  facts  which  are  required  to  be  

mentioned  to  decide  this  appeal  are  recapitulated,  in  brief,  

hereinbelow:

2) The appellant  Nos. 1 and 2 are the units of  Grasim Industries  

Limited,  which carries  on manufacture  and sale  of  cement.   It  

requires raw material in the form of coal, gypsum and bauxite.  On  

the aforesaid raw materials, the appellants had been paying entry  

tax for entry of these goods in the territory of the State of Madhya  

Pradesh under M.P. Sthaniya Kshetra Me Mal Ke Pravesh Par  

Kar Adhiniyam, 1976 (hereinafter called the 'Entry Tax Act').  In  

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the  year  1997,  the  entry  tax  on  the  aforesaid  items  of  raw  

materials payable under the Act was at the following rates:

COAL – 2.5% GYPSUM – 2% BAUXITE – 10%    

 In the year 1999, respondent No.1 – State issued Notification No.  

A-3-80-98-ST-V  (49)  dated  4.5.1999.   By  this  Notification  it  

reduced the rate of entry tax, namely, coal, gypsum and bauxite  

by making the entry tax payable at  the rate of  1% only.   This  

Notification remained in  force for  a  limited period,  that  is  from  

1.5.1997 to 30.09.1997.  The rate of entry tax prior to 1.5.1997  

and after 30.09.1997 remained the same, namely, 2.5%, 2% and  

10% for coal, gypsum and bauxite respectively.

3) We are concerned here with the aforesaid period when entry tax  

payable was @ 1% only.  However, while reducing the entry tax to  

1%,  in  the  same  very  Notification  an  Explanation  was  also  

appended stating that the amount which is already paid by the  

dealer at the higher rate shall not be refunded.  This Explanation  

is worded in the following terms:

“Explanation – The amount shall not be refunded in  any case on the basis that the dealer had paid the  tax at a higher rate.”

As the Notification was issued only in May 1999 and it realted to  

the past period, i.e. 1.5.1997 to 30.09.1997 and the entry tax is  

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payable at the point of entry of the goods into the State, as and  

when the appellants were bringing the aforesaid raw material into  

the State of Madhya Pradesh, they had been paying the entry tax.  

During the period 1.5.1997 to 30.09.1997, they had paid the entry  

tax at the rate which was prevalent at that time, though reduced to  

1%  vide  the  Notification  dated  4.5.1999.   In  this  manner,  

according to the appellants, though they had paid the entry tax at  

the higher rate, which was now reduced to 1% vide the aforesaid  

Notification, they became entitled to get the refund of the excess  

amount paid, but were still deprived of that refund because of the  

aforesaid Explanation.

4) Naturally, being aggrieved by the said Explanation, the appellants  

challenged the validity of the Explanation by filing writ petiion in  

the  High  Court  of  Madhya  Pradesh.   The  challenge  was  led  

primarily on two counts: (i) in the first instance, it was pleaded that  

this Explanation was arbitrary and discriminatory being violative of  

Article 14 of the Constitution inasmuch as the classification which  

has carved out because of the said explanation had the effect of  

treating the appellants and others who had paid tax at a higher  

rate, differently from those who had not paid the tax at all  and  

were defaulted.  It was argued that such a classification was not  

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based on any intelligible differentia and had no nexus with any  

objective  sought  to  be  achieved.   A number  of  judgments  in  

support of this contention were cited in the High Court. (ii) The  

second argument raised was that it amounted to exaction of tax at  

a higher rate, namely, at the rate of 2.5%, 2% and 10% for coal,  

gypsum and bauxite respectively, though the rate fixed ultimately  

for the period in question by the Notification dated 4.5.1999 was  

1%.  Therefore, such an 'Explanation' in the Notification was in  

the teeth of Article 265 of the Constitution and per se illegal.

5) The High Court, though took note of the aforesaid arguments, did  

not  deal  with  these  arguments  in  the  manner  in  which  these  

submissions  were  made  and  dismissed  the  writ  petition  vide  

impugned  judgment  dated  11.9.2002  only  on  the  ground  that  

identical issue had been considered by its own Division Bench  

earlier  in the case of  Century Textiles and Industries Ltd.  v.  

State of Madhya Pradesh & Ors.1 To be fair to the High Court,  

we would also mention that the High Court has referred to another  

judgment of this Court in  Indian Oil Corporation  v.  Municipal  

Corporation,  Jullundhar2 and  having  relied  upon  the  

observations in the said case to the effect that where the octroi  

duty had already been collected, there was no question of any  1 Writ Petition No. 2917 of 2000 2 (1993) 1 SCC 333

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equity in favour of the Indian Oil Corporation to claim the refund  

thereof.

6) Learned counsel appearing for the appellants has placed before  

us the same arguments which were advanced before the High  

Court  with  the plea that  the High Court  did not  even consider  

those arguments appropriately.  He submitted that it was a clear  

case of discrimination qua the appellants who had faithfully paid  

the  tax  and,  therefore,  the  provisions  of  Article  14  of  the  

Constitution will squarely attract in the facts of the present case.  

The learned counsel for the State, on the other hand, referred to  

the reasoning given by the High Court in the impugned judgment  

in support of his submissions while countering the arguments by  

the learned counsel for the appellants.

7) After giving our thoughful consideration to the issue involved, we  

are of the view that there is force in the submission of the learned  

counsel  for  the  appellants.   The  Explanation  attached  to  

Notification dated 4.5.1999, or for that mater the Notification dated  

5.7.1999, which states that the amount shall not be refunded in  

any case on the basis that dealer had filed the tax at a higher  

rate, results in invidious discrimination towards those who have  

paid the tax at a higher rate, like the appellants, when compared  

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with that category of the persons who were defaulters and have  

now been allowed to pay the tax at the rate of 1% for the relevant  

period.  The consequence is that it carves out two categories of  

tax payers who are made to pay the tax at different rates, even  

though they are identically situated.  There is no basis for creating  

these two classes and there is no rationale behind it which would  

have  any  causal  connection  with  the  objective  sought  to  be  

achieved.  It would be pertinent to mention that on repeated query  

made by this Court to the learned counsel for the respondents, he  

could not explain or show from any material on record as to what  

led the authorities to provide such an Explanation.  Therefore, it  

becomes  apparent  that  there  is  no  objective  behind  such  an  

Explanation appended to the Notification dated 4.5.1999 which is  

sought  to  be  achieved,  except  that  the  Government,  after  

collecting the tax from those who had paid at a higher rate, did not  

intend to refund the same.  This can hardly  be countenanced,  

more so when it results in discrimination between the two groups,  

though identically situated.

8) The  law  on  the  scope  and  meaning  of  Article  14  of  the  

Constitution  has  now been well  articulated.   We may gainfully  

refer  to  the  case  of  D.S.  Nakara  &  Ors.  v.  Union  of  India3,  

3 (1983) 1 SCC 305

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wherein this Court observed as under:

“10.  The scope, content and meaning of Article 14  of the Constitution has been the subject-matter of  intensive examination by this Court in a catena of  decisions.  It would, therefore, be merely adding to  the length of this judgment to recapitulate all those  decisions  and  it  is  better  to  avoid  that  exercise  save and except referring to the latest decision on  the subject in Maneka Gandhi v. Union of India4,  from  which  the  following  observation  may  be  extracted:

“...what is the content and reach of the great  equalising principle enunciated in this Article?  There can be no doubt  that  it  is  a founding  faith of the Constitution.  It is indeed the pillar  on which rests securely the foundation of our  democratic  republic.   And,  therefore,  it  must  not  be  subjected  to  a  narrow,  pedantic  or  lexicographic  approach.   No attempt  should  be made to truncate its all  embracing scope  and meaning for, to do so would be to violate  its activist magnitude.  Equality is a dynamic  concept  with  many  aspects  and dimensions  and it cannot be imprisoned within traditional  and  doctrinaire  limits....Article  14  strikes  at  arbitrariness  in  State  action  and  ensure  fairness  and  equality  of  treatment.   The  principle of reasonableness, which legally as  well as philosophically, is an essential element  of  equality  or  non-arbitrariness  pervades  Article 14 like a brooding omnipresence.”

11.   The  decisions  clearly  lay  down that  though  Article 14 forbids class legislation, it does not forbid  reasonable  classification  for  the  purpose  of  legislation.  In order, however, to pass the test of  permissible  classification,  two conditions must  be  fulfilled,  viz.  (i)  that  the  classification  must  be  founded  on  an  intelligible  differentia  which  distinguishes  persons  or  things  that  are  grouped  together from those that are left out of the group;  and (ii)  that  that  differentia  must  have a rational  relation to the objects sought to be achieved by the  

4 (1978) 1 SCC 248

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statute in question [See  Shri Ram Krishna Dalmia  v.  Shri  Justice  S.R.  Tendolkar  &  Ors.5].   The  classification may be founded on differential basis  according  to  objects  sought  to  be  achieved  but  what  is  implicit  in  it  is  that  there  ought  to  be  a  nexus, i.e. casual connection between the basis of  classification  and  object  of  the  statute  under  consideration.   It  is  equally  well  settled  by  the  decisions  of  this  Court  that  Article  14  condemns  discrimination  not  only  by  a  substantive  law  but  also by a law of procedure.

(emphasis supplied)”

9) In Re.: Special Courts Bill, 19786, this Court undertook a survey  

of  plethora  of  decisions  touching  upon  the  'Equality' doctrine  

enshrined in Article 14 of the Constitution and culled out certain  

principles.   In principle No.3,  the Court  highlighted that  though  

classification was permissible  and it  was not  for  the Courts  to  

insist  on  delusive  exactness  or  apply  doctrinaire  tests  for  

determining the validity of classification in any given case, but, at  

the same time, classification would be treated as justified only if it  

is  not  palpably  arbitrary.   It  was  also  emphasized  that  the  

underlined purpose in Article 14 of the Constitution was to treat all  

persons similarly circumstanced alike, both in privileges conferred  

and  liabilities  imposed.   Following  was  the  emphatic  message  

given by the Court:

“(4)...It  only  means  that  all  persons  similarly  circumstanced  shall  be  treated  alike  both  in  privileges conferred and liabilities imposed.  Equal  

5 1959 SCR 279, 296 6 (1979) 1 SCC 380

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laws would have to be applied to all  in the same  situation,  and  there  should  be  no  discrimination  between one person and another if as regards the  subject  matter  of  the  legislation  their  position  is  substantially the same.

(emphasis supplied)”

Another  principle  which  was  restated  was  that  the  

classification must not be arbitrary but must be rational, that is to  

say, it must not only be based on some qualities or characteristics  

which are to be found in all persons grouped together and not in  

others  who are  left  out,  but  those  qualities  and characteristics  

must have reasonable relation to the object of the legislation.

10) Article 14 eschews arbitrariness in any form.  This principle was  

eloquently  explained in  EP. Royappa  v.  State of  Tamil  Nadu7  

holding that the basic principle which informs both Articles 14 and  

15 is equality and inhibition against discrimination.  We would like  

to quote the following passage from that judgment as well, which  

is as under:

“From  a  positivistic  point  of  view,  equality  is  antithetic  to  arbitrariness.   In  fact,  equality  and  arbitrariness  are  sworn  enemies;  one belongs  to  the rule of law in a republic while the other, to the  whim and caprice of an absolute monarch.  Where  an act is arbitrary it is implicit in it that it is unequal  both according to political  logic and constitutional  law and is, therefore, violative of Article 14, and if it  affects any matter relating to public employment, it  is  also violative of  Article  14.   Article  14  and 16  strike at  arbitrariness  in  State  action and ensure  fairness and equality of treatment.”

7 (1974) 2 SCR 348

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On the application of the aforesaid principles to the facts of the  

present case, the irresistible conclusion is that the Explanation is  

highly discriminatory in nature.

11) The matter can be looked into from another angle as well, which  

will yield the same results.

12) We have to keep in mind that vide Notification dated 4.5.1999, it   

is the rate of entry tax on the aforesaid raw materials which is  

reduced  to  1%.   The  effect  of  that  would  be  that  any  person  

bringing raw materials, viz. coal, gypsum and bauxite, within the  

State of Madhya Pradesh was liable to pay the entry tax only at  

the rate of 1%.  Once this aspect is kept in mind, the legal effect  

thereof has to be that  all  the persons including the appellants,  

who had already paid the tax, were supposed to pay the tax at the  

rate of 1% only.  Therefore, if they had paid the tax at a higher  

rate,  they were entitled to the refund of  excess amount  of  tax  

paid.  No reasons are coming forth in the counter affidavit filed by  

the State either in the High Court or in this Court or in any other  

form  as  to  why  there  was  a  necessity  of  adding  such  an  

Explanation  for  not  refunding  the  excess  amount  paid  by  the  

dealer in excess of 1% which was the entry tax legally payable for  

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this period.  Once we consider the matter from this angle, it also  

becomes clear that as the entry tax payable was at the rate of 1%  

only, asking any person to pay at a higher rate would be clearly  

violative of Article 265 of the Constitution.

13) Article 265 of the Constitution has to be read along with Article 14  

in the given context.  This co-relation between the two provisions  

is beautifully brought out in Kunnathat Thathunni Moopil Nair v.  

State of Kerala & Anr.8 as under:

“10.  The most important question that rarises for  consideration in these cases, in view of the stand  taken by the State of Kerala, is whether Art. 265 of  the Constitution is a complete answer to the atack  against  the  constitutionality  of  the  Act.   It  is,  therefore,  necessary  to  consider  the  scope  and  effect  of  that  Article.   Article  265  imposes  a  limitation on the taxing power of the State in so far  as it provides that the State shall not levy or collect  a tax, except by authority of law, that is to say, a tax  cannot be levied or collected by a mere executive  fiat.  It  has to be done by authority of law, which  must mean valid law.  In order that the law may be  valid, the tax proposed to be levied must be within  the  legislative  competence  of  the  Legislature  imposing  a  tax  and  authorising  the  collection  thereof and, secondly, the tax must be subject to  the  conditions  laid  sown  in  Art.  13  of  the  Constitution.  One of such conditions envisaged by  Art. 13(2) is that the Legislature shall not make any  law  which  takes  away  or  abridges  the  equality  clause  in  Art.14,  which  enjoins  the  State  not  to  deny to any person equality before the law or the  equal  protection  of  the  laws  of  the  country.   It  cannot  be  disputed  that  if  the  Act  infringes  the  provisions of Art.14 of the Constitution, it must be  struck down as unconstitutional.  For the purpose  

8 (1961) 3 SCR 77

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of  these  cases,  we  shall  assume  that  the  State  Legislature  had  the  necessary  competence  to  enact the law, though the petitioners have seriously  challenged such a competence.  The guarantee of  equal protection of the laws must extend even to  taxing  statutes.   It  has  not  been  contended  otherwise.   It  does  not  mean  that  every  person  should be taxed equally.  But it does not mean that  if property of the same character has to be taxed,  the taxation must be by the same standard, so that  the  burden  of  taxation,  may  fall  equally  on  all  persons holding that kind and extent of property.  If  the taxation, generally speaking, imposes a similar  burden  on  everyone  with  reference  to  that  particular kind and extent of property, on the same  basis  of  taxation,  the  law  shall  not  be  open  to  attack on the ground of inequality, even though the  result of the taxation may be that the total burden  on different persons may be unequal.  Hence, if the  Legislature has classified persons or properties into  different  categories,  which  are  subjected  to  different rates of taxation with reference to income  or property, such a classification would not be open  to the attack of inequality on the ground that the  total burden resulting from such a classification is  unequal.  Similarly, different kinds of property may  be subjected to different rates of taxation, but so  long  as  there  is  a  rational  basis  for  the  classification, Art. 14 will not be in the way of such  a  classification  resulting  in  unequal  burdens  on  different  classes  of  properties.   But  if  the  same  class of property similarly situated is subjected to  an incidence of taxation, which results in inequality,  the  law  may  be  struck  down  as  creating  an  inequality  amongst  holders  of  the  same  kind  of  property.  It must, therefore, be held that a taxing  statute  is  not  wholly  immune from attack  on  the  ground that it  infringes the equality clause in Art.  14, though the Courts are not concerned with the  policy  underlying  a  taxing  statute  or  whether  a  particular  tax  could  not  have been imposed in  a  different way or in way that the Court might think  more just and equitable.  The Act has, therefore, to  be examined with reference to the attack based on  Art. 14 of the Constitution.”

14) At this stage, we would like to refer to another judgment of this  

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Court which is quite proximate to the situation at hand, namely,  

Corporation Bank v.  Saraswati Abharansala & Anr.9 That was  

case where rate of Sales Tax was reduced from 1% to 0.5% vide  

SRO  No.  1075/99  dated  27.12.1999,  which  was  given  

retrospective effect from 1.4.1999.  The respondent in that case,  

who had paid  the  sales  tax  @ 1% for  the  period  6.4.1999 to  

10.12.1999, claimed refund of the excess tax paid, i.e. over and  

above  0.5%.   This  request  was  rejected  by  the  Assistant  

Commissioner,  Sales Tax.   The assessee filed the writ  petition  

challenging the order of the Assistant Commissioner, which was  

dismissed by the Single Judge of the High Court.  However, the  

assessee's intra-court appeal was allowed by the Division Bench  

directing the authorities to refund the excess amount collected.  

The said decision of the Division Bench was upheld by this Court  

in the aforesaid judgment holding that non-refund would not only  

offend equality clause contained in Article 14 of the Constitution, it  

would also be in the teeth of Article 265 of the Constitution which  

mandates  that  no  tax  shall  be  levied  or  collected,  except  by  

authority of law.  Following passages from the said judgment are  

worth a quote:

“20.  Article  265  of  the  Constitution  of  India  mandates that no tax shall  be levied or collected  except by authority of law.

9 (2009) 1 SCC 540

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21.   In terms of  the said provision,  therefore,  all  acts relating to the imposition of tax providing, inter  alia, for the point at which the tax is to be collected,  the rate of tax as also its recovery must be carried  out strictly in accordance with law.

22.   If  the  substantive  provision  of  a  statute  provides  for  refund,  the  State  ordinarily  by  a  subordinate  legislation  could  not  have  laid  down  that  the  tax  paid  even by  mistake  would  not  be  refunded.  If a tax has been paid in excess of the  tax specified, save and except the cases involving  the  principle  of  'unjust  enrichment',  excess  tax  realized must be refunded.  The State, furthermore,  is  bound to  act  reasonably  having  regard  to  the  equality  clause  contained  in  Article  14  of  the  Constitution of India.

23.   It  is  not  even a case where the doctrine of  unjust enrichment has any application as it is not  the case of  the respondent/Setate that  the buyer  has passed on the excess amount of tax collected  by it to the purchasers.

24.  In view of the admitted fact that tax had been  collected and paid for the period 6th April, 1999 and  10th December,  1999  @  1%  of  the  price  which  having been reduced from 1st April, 1999 to 0.5%,  the State,  in  our  opinion,  is  bound to  refund the  excess amount deposited with it.”

15) It is possible, as was sought to be argued by the learned counsel  

for the State, that while adding this Explanation the Government  

had kept in mind the principle of unjust enrichment.  Presumably  

because  of  this  reason,  the  High  Court  also  referred  to  the  

judgment  in  the  case  of  Indian  Oil  Corporation  (supra).  

However,  on  such  a  presumption  alone,  there  cannot  be  any  

justification for  adding the Explanation of  the nature mentioned  

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above.  In order to determine as to whether a particular dealer is  

in fact entitled to refund or not, the Government can go into the  

issue of  unjust  enrichment while considering his application for  

refund.  That would depend on the facts of each case.  It cannot  

be presumed that  the burden was positively  passed on to  the  

buyers by these dealers and, therefore, they are not entitled to  

refund.

16) For  all  the  aforesaid  reasons,  we  are  of  the  opinion  that  the  

impugned Explanations in  the Notifications dated 4.5.1999 and  

5.7.1999 are unconstitutional.  We, accordingly, allow the appeal  

and quash the said Explanations.

No costs.

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI; MARCH 17, 2015

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