REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S)._10560-10564_OF 2018 [ARISING OUT OF S.L.P. (C) NOS. 9320-9324 OF 2015]

M/S. TVS MOTOR COMPANY LTD. .....APPELLANT(S)

VERSUS

THE  STATE  OF  TAMIL  NADU  AND OTHERS

.....RESPONDENT(S)

WITH

CIVIL APPEAL NO. _10566__OF 2018 [ARISING OUT OF SLP(C) NO. 9325 OF 2015]

CIVIL APPEAL NO. _10567_OF 2018 [ARISING OUT OF SLP(C) NO. 10579 OF 2015]

CIVIL APPEAL NO. _10565_OF 2018 [ARISING OUT OF SLP(C) NO. 9326 OF 2015]

CIVIL APPEAL NO.  10568_OF 2018 [ARISING OUT OF SLP(C) NO. 25434 OF 2015]

CIVIL APPEAL NO.  10576__OF 2018 [@ SLP(C) NO.  28105   OF 2018]

[@SLP(C)…..CC NO. 14354 OF 2016]

AND

CIVIL APPEAL NO. _10569_OF 2018 [@SLP(C) NO. 2905 OF 2018]

J U D G M E N T

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A.K.SIKRI, J.

Leave granted.

2. This group of eleven appeals was heard together and is being

disposed of  by  this  common judgment  as  identical  issues  are

involved in all these appeals.

3. At  the outset,  the  issues  involved  in  the present  appeals  are:

whether Section 19(5)(c) of the Tamil Nadu Value Added Tax Act,

2006, Act No. 32/2006 (hereinafter referred to as “TNVAT Act”)

and  Rule  10(9)(a)  of  the  Tamil  Nadu Value  Added Tax  Rules,

2007 (hereinafter referred to as “Rules”) are ultra vires of Articles

14, 19(1)(g), 256 and 301 of the Constitution of India as also the

Central Sales Tax Act (hereinafter referred to as “CST Act”) and

whether Notice dated August 16, 2018 of the Revenue is liable to

be quashed?

4. The instant  appeals  have been preferred against  the common

impugned judgment of the High Court  of Judicature at  Madras

dated  October  29,  2014 (hereinafter  referred  to  as “Impugned

Judgment  I”)  in  the  writ  petitions  which  were  filed  by  the

appellants  and  the  impugned  judgment  dated  17th November,

2017  of  the  High  Court  of  Judicature  at  Madras  (hereinafter

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referred  to  as  “Impugned  Judgment  II”)  in  W.P.  No.  29393  of

2017.

5. The brief facts leading to the cases are as follows:

6. All the appellants herein are the Assessees under the TNVAT Act

and are duly registered on the file of their respective Jurisdictional

Commercial Officers.

7. On  January  17,  2005,  a  White  Paper  was  released  by  the

Committee of Finance Ministers (hereinafter referred to as “White

Paper”), making it clear that Input Tax Credit (hereinafter “ITC”)

would be available to set-off against tax liability on all intra-state

and  inter-state  sales.  Paragraph  2.3  of  the  same  states  as

follows:

“Coverage of Set-Off / Input Tax Credit  2.3  This  input  tax  credit  will  be  given  for  both manufacturers and traders for purchase of inputs/supplies meant  for  both sale within the State as well  as to other States, irrespective of when these will be utilised/sold. This also reduces immediate tax liability.

Even for stock transfer/consignment sale of goods out of the State, input tax paid in excess of 4% will be eligible for tax credit.”

8. Thereafter, on December 15, 2006, the TNVAT Act was enacted

under List II, Entry 54 of the Constitution of India and notified in

the Official  Gazette after  receiving assent  of  the Governor (on

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December 14, 2006), to consolidate and amend the law relating

to the levy of tax on the sale or purchase of goods in the State of

Tamil Nadu. Section 19(5)(c) of the same read as follows:

“No input tax credit  shall  be allowed on the purchase of goods sold as such or used in the manufacture of other goods  and  sold  in  the  course  of  inter-State  trade  or commerce falling under sub-section (2) of section 8 of the Central Sales Tax Act, 1956. (Central Act 74 of 1956).”

9. Thereafter, on January 01, 2007, the Government of Tamil Nadu,

in exercise of its powers under Section 80(1) of the TNVAT Act,

notified  the  Rules  vide  Notification  No.  SROA-(ai1)/2007

G.O.M.S.No. 1. Rule 10(9)(a) of the same states as follows:

“Input tax credit on inter-state sales shall be allowed only if Form C prescribed in the Central Sales Tax (Registration and Turnover) Rules, 1957 is filed.”

10. After  the  Assessment  was  completed  for  the  appellants  for

Assessment Year 2007-08, they received Show Cause Notices

from the Revenue in and around 2013, proposing to reverse the

ITC claimed made by them on the ground that they had not filed

the  Declaration  Form  C  for  the  purpose  of  availing  the

concessional rate of tax. The appellants paid the differential tax

arising out of the Assessment order for 2007-08 as well as the

amount relating to proportionate ITC under process.

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11. Consequently,  on  16th August,  2013,  the  Revenue  issued

Impugned Notice in TIN 33450460109/2007-08 proposing to deny

the ITC credit availed against the transactions for which Form C

were not filled, and reversing credit on inter-State sales without

Forms C in terms of the impugned Section 19(1)(c).

12. Aggrieved  by  the  same,  the  appellants,  who  were  Assessees

under  the  TNVAT Act,  preferred  writ  petitions  challenging  the

constitutional vires of 19(5)(c) of the TNVAT Act and Rule 10(9)(a)

of  the  Rules  contending  that  the  same  had  been  enacted  in

violation of Articles 14, 19(1)(g), 246 and 301 of the Constitution

of India. It was urged by the appellants that Respondent No. 1 —

State  had  enacted  the  Act  under  Entry  54  of  List  II  of  the

Constitution of  India in  terms of  consensus amongst States to

bring about a nation-wide uniform taxation structure/scheme for

VAT and for  the promotion of  inter-State trade, commerce and

industrialization, with its primary object to reduce the cascading

effect of tax imposed at successive stages, either at the stage of

usage as raw material or at the time of reselling of the article so

produced. They further urged that while the White Paper provided

for  set-off  of  the  ITC  even  against  inter-State  sales,  Section

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19(5)(c)  of  the Tamil  Nadu Act  sought  to  negate the object  of

promoting inter-State trade and commerce.  

13. It was urged by the appellants that  Respondent No. 1 — State,

having  committed  and  consented  before  the  Empowered

Committee of State Finance Ministers, vide the aforementioned

White Paper, towards administration of VAT allowing ITC set-off

against  tax  liability  on  intra-State  sales  or  inter-State  sales,

sought to deviate on the issue in terms of Section 19(5)(c) of the

TNVAT Act, by not entitling a dealer who effected inter-state sales

under Section 8(2) of the Central Sales Tax Act to ITC of the tax

paid by him on local purchases.

14. The Respondents/Revenue, on the other hand, contended that

the Taxation Laws (Amendment) Act, 2007 (Act No. 16/2007) has

amended the Central Sales Tax Act with effect from 01.04.2008

and  prior  to  that,  in  cases  of  inter-State  sales  falling  under

Section 8(2) of the same in cases of declared goods, the rate of

tax was to be calculated at twice the rate applicable to the sale or

purchase of such goods inside the appropriate State and in case

of  non-declared  goods,  the  rate  of  tax  applicable  was  to  be

calculated at  10% or at the rate applicable to the purchase of

goods inside the appropriate State, whichever was higher.

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15. The appellants had also urged that  the impugned Section and

Rule were ‘colourable legislation’,  as they seek to override the

supremacy of Entry 92A of List I of the Seventh Schedule of the

Constitution of India.

16. The Respondents had refuted this argument by contending that

as per the impugned provision, ITC was permissible if the inter-

State sales were made under Section 8(1) of the CST Act after

duly filing the Form C declaration. The same was not permissible

in  accordance with  Rule  10(9)(a)  if  the  inter-State  sales  were

made under Section 8(2) of the CST Act.  

17. It  was  also  the  case  of  the  respondents  that  the  impugned

provisions  were  in  tune  with  the  recommendations  of  the

Empowered Committee of State Finance Ministers. They further

threw light upon the fact that the CST Act provided for multiple

rates of tax, being different for sales made to registered dealers

and sales made to non-registered dealers.

18. The  High  Court  of  Judicature,  vide  the  Impugned  Judgment-I

dated October 29, 2014, has dismissed the writ petitions thereby

upholding  the  constitutional  vires  of  Section  19(5)(c)  of  the

TNVAT Act and Rule 10(9)(a) of the Rules.  At the same time, it

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has allowed the assessees/appellants to submit their responses

to the Show Cause Notices and/or challenge the orders passed

negativing their request for ITC, in accordance with the TNVAT

Act and Rules framed thereunder.

19. The Impugned Judgment-II dated November 17, 2017 arose out

of Writ Petition No. 29393 of 2017, challenging the constitutional

vires of Section 19(5)(c) of the TNVAT Act and Rule 10(9)(a) of

the Rules, where the High Court of Judicature at Madras, while

relying on its previous decision dated 29.10.2014 in Impugned

Judgment-I,  observed  that  the  same  issue  had  arisen  in  the

Impugned Judgment-I  and the vires of the TNVAT Act and the

Rules had been upheld therein and accordingly,  dismissed the

Writ Petition No. 29393/2017.

20. Correctness of these judgments is the subject matter of instant

appeals.

21. Before adverting to the respective submissions which were made

by the counsel for  the appellants as well  as learned Advocate

General who appeared on behalf of the respondents, it would be

apposite to scan through the impugned judgment dated October

29,  2014  to  understand  the  rationale  and  reasoning  which  is

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given by the High Court in arriving at its conclusions on the issues

raised.

22. The High Court formulated following two questions which arose

for consideration   

“(1) Whether Section 19(5)(c)  of  TNVAT Act,  2006 and Rule  10(9)(a)  of  TNVAT Rules,  2007  are  ultra  vires  the provision of CST Act, 1956?

(2) Whether  the  impugned  provisions  are  violation  of Articles 14, 19(1)(9) and 301 of the Constitution of India?”

23. Thereafter, it took note of the relevant provisions of the CST Act,

TNVAT  Act  as  well  as  Rules  and  also  Article  301  of  the

Constitution.   We  deem  it  proper  to  reproduce  the  relevant

portions of these Acts and Rules at this stage itself.

“Central Sales Tax Act, 1956  

S.  3.  When is a sale or purchase of  goods said to take place in the course of inter-State trade or commerce.-

-  A sale or  purchase of  goods shall  be deemed to take place in the course of inter-State trade or commerce if the sale or purchase-

(a) occasions the movement of goods from one   State to another; or

(b) is effected by a transfer of documents of title to      the  goods  during  their  movement  from one   

State to another.

Explanation 1.- Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall,  for  the  purposes  of  clause  (b),  be  deemed  to

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commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.

Explanation 2.- Where the movement of goods commences and terminates in the same State it shall not be deemed to be a movement  of  goods  from one State  to  another  by reason  merely  of  the  fact  that  in  the  course  of  such movement the goods pass through the territory of any other State.

xx xx xx

S. 6. Liability to tax on inter-State sales.- (1) Subject to the other provisions contained in this  Act  every dealer  shall, with effect from such date as the Central Government may, by notification  in  the Official  Gazette,  appoint,  not  being earlier than thirty days from the date of such notification, be liable to pay tax under this Act on all sales [of goods other than  electrical  energy)  effected  by  him in  the  course  of inter-State trade or commerce during any year on and from the date so notified.

[Provided that a deal shall not be liable to pay tax under this Act on any sale of good which, in accordance with the provisions of sub-section (3) of Section 5 is a sale in the course of export of those goods out of the territory of India]

[(1A) A dealer shall be liable to pay tax under this Act on a sale of any goods effected by him in the course of inter- State trade or commerce notwithstanding that no tax would have been leviable (whether on the seller or the purchaser) under the sales tax law of the appropriate State if that sale had taken place inside that State.]

(2) Notwithstanding anything contained in sub-section (1) or  sub-section  (1A),  where  a  sale  of  any  goods  in  the course  of  inter-State  trade  or  commerce  has  either occasioned the movement of such goods from one State to another or has been effected toy a transfer of documents of title to such goods during their movement from one State to another,  any  subsequent  sale  during  such  movement effected by a transfer of documents of title to such goods- (a) to the Government or (b) to a registered dealer other than the Government if  the goods are of  the description referred to in sub-section (3) of section or shall be exempt from tax under this Act:

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Provided that  no such subsequent  sale shall  be exempt from tax under this subsection unless the dealer effecting the  sale  furnishes  to  the  prescribed  authority  in  the prescribed manner and within the prescribed time or within such further time as that authority may, for sufficient cause, permit:--

(a)  a  certificate  duly  filled  and  signed  by  the  registered dealer from whom the goods were purchased containing the  prescribed  particulars  in  a  prescribed  form obtained from the prescribed authority; and

(b) if the subsequent sale is made to a registered dealer, a declaration  referred  to  in  clause  (a)  sub-section  (4)  of section 8:

Provided further that it shall not be necessary to furnish the declaration  referred  to  in  clause  (b)  of  the  preceding proviso in respect of a subsequent sale of goods if,--

(a) the sale or purchase of such goods is, under the sales tax law of the appropriate State exempt from tax generally or is subject to tax generally at a rate which is lower than three per cent, or such reduced rate as may be notified by the  Central  Government,  by  notification  in  the  Official Gazette, under sub-section (1) of section 8 (whether called a tax or fee or by any other name); and……….

xx xx xx

S. 8. Rates of  tax  on sales  in  the course of  inter-State trade or commerce— (1) Every dealer, who in the course of  inter-State  trade  or  commence,  sells  to  a  registered dealer other than the Government goods of the description referred to  in  sub-section (3),  shall  be liable  to pay tax under  this  Act,  which  shall  be  three  per  cent,  of  his turnover or at the rate applicable to the sale or purchase of such goods inside the appropriate State under the Sales Tax law of that State whichever is lower:

Provided that the Central Government may, by notification in the Official Gazette, reduce the rate of tax under this sub-section.

(2) The tax payable by any dealer on his turnover in so far as the turnover or any part thereof relates to the sale of goods  in  the  course  of  inter-State  trade  or  service  not

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falling  within  sub-section  (1),  shall  be  at  the  rate applicable to the sale or purchase of such goods inside the appropriate State under the sales tax law of that State;

Explanation.--For  the  purposes  of  this  sub-section,  a dealer shall  be deemed to be a dealer liable to pay tax under  the  sales  tax  law  of  the  appropriate  State, notwithstanding that he, in fact, may not be so liable under that law.

S.9.  Levy and collection of tax and penalties.—

xx xx xx

(2) Subject to the other provisions of this Act and the rules made  thereunder,  the  authorities  for  the  time  being empowered  to  assess,  re-assess,  collect  and  enforce payment of any tax under the general sales tax law of the appropriate  State shall,  on behalf  of  the Government  of India,  assess re-assess,  collect  and enforce payment  of

tax, including any 3

[interest or penalty, payable by a dealer under this Act as if the tax or interest or penalty payable by such a dealer under this Act is a tax or

 interest or penalty

payable under the general sales tax law of the State; and for this purpose they may exercise all or any of the powers they have under the general sales tax law of the State; and the provisions of such law, including provisions relating to returns, provisional assessment, advance payment of tax, registration of the transferee of any business, imposition of the tax liability  of  a person carrying on business on the transferee of, or successor to, such business, transfer of liability of any firm of Hindu undivided family to pay tax in the event of the dissolution of such firm or partition of such family, recovery of tax from third parties, appeals, reviews, revisions,  references,refunds,  rebated,

penalties,] 5 [charging or payment of interest, compounding

of  offences  and treatment  of  documents  furnished by a dealer as confidential, shall apply accordingly:—

Provided that  if  in any State or  part  thereof  there is  no general  sales  tax  law in  force,  the  Central  Government may,  be  rules  made  in  this  behalf  make  necessary provision for all or any of the matter specified in this sub- section.

xx xx xx

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Tamil Nadu Value Added Tax Act, 2006

S. 2 – Definitions:

(23) "input"  means  any  goods  including  capital  goods purchased by a dealer in the course of his business;

(32) "reversal  of  tax credit"  means reversal  of  input tax credit already claimed and availed under this Act;

xx xx xx

S. 19.  Input  tax  credit.—  (1)  There  shall  be  input  tax credit  of  the amount  of

 [tax  paid]  under  this  Act,  by the

registered dealer to the seller on his purchases of taxable goods specified in the First Schedule :

(2) Input tax credit shall be allowed for the purchase of goods made within the State from a registered dealer and which are for the purpose of —

(i) re-sale by him within the State; or

(ii) use as input in manufacturing or processing of goods in the State; or

(iii)  use  as  containers,  labels  and  other  materials  for packing of goods in the State; or

(iv)  use  as  capital  goods  in  the  manufacture  of  taxable goods.

(v)  sale  in  the  course  of  inter-State  trade or  commerce falling under sub-sections (1) and (2) of section 8 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956).

(vi) Agency transactions by the principal within the State in the manner as may be prescribed.

(5) …….

(c) No input tax credit shall be allowed on the purchase of goods sold as such or used in the manufacture of other good  and  sold  in  the  course  of  inter-State  trade  or commerce failing under sub-section (2) of Section 3 of the Central Rules Act, 1956 (Central Act 74 of 1956).

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Tamil Nadu Value Added Tax Rule, 2007

10. Input tax credit.—(1) The input tax credit that can be deducted from the input tax payable  month or year shall be  calculated  by  using  the  formula  (A +  B)  -  (C  +  D) Where,

A =  Input  tax  credit  carried  forward  from  the  previous month or year  

B = Input tax credit accrued during the month or year  

C = Input tax credit reversed during the month or year  

D = Input tax credit refunded during the month or year

(2) Every registered dealer who claims input tax credit under  sub-section  (1)  of  section  19  shall,  produce  the original tax invoice, in support of his claim of the input tax credit, containing the following details, namely:

(a) A consecutive serial number;  

(b) The date on which the invoice is issued;  

(c)  The  name,  address  and  the  Taxpayer  Identification Number of the seller;

(d)  The  name,  address  and  the  Taxpayer  Identification Number of the buyer;

(e) The description of the goods;  

(f) The quantity or volume of the goods;  

(g) The value of the goods;  

(h) The rate and amount of tax charged; and  

(i) The total value of the goods.

(9)(a)  Input tax credit on inter-state sales shall be allowed only  if  lots  ‘C’  prescribed  in  the  Central  Sales  Tax (Registration and turnover) Rules, 1957 is filed.”

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24. After  taking  note  of  the  aforesaid  provisions,  the  High  Court

proceeded to discuss question no.  (1).   It  pointed out that the

definition of “dealer” under Section 2(b) of the CST Act means the

assessee under the said Act and he is solely liable to pay tax

under the CST Act whether or not he is allowed by the law or

contract  to  pass  on  or  actually  passes  on  the  liability  of  his

customers.  The onus of proof that a person sought to be treated

as a dealer is one who comes within the said definition is on the

assessing authority.

25. The definition of “sale” under Section 2(g) of the CST Act means

that a sale inside a State as well as an inter-State sale arising in

that State, has situs in that State in case of sale inside a State, it

is taxable under the State law (TNVAT Act) and inter-State sale is

liable to tax in the same State under the CST Act.   Section 3 of

the CST Act speaks about when a sale or purchase of goods said

to  have  taken  place  in  the  course  of  inter-State  trade  or

commerce.  Section 6 of the CST Act speaks about liability to tax

on inter-State sales and it is a charging Section. Section 8 of the

CST Act speaks about rates of tax on sales in the course of inter-

State trade or commerce and as per sub-section(1) of Section 8 if

sale is effected by a dealer to a registered dealer goods of the

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description referred to in sub-section(3), it shall be liable to pay

tax under this Act which shall be 3% of the turnover or at the rate

applicable  to  the  sale  or  purchase  of  such  goods  inside  the

appropriate  State  under  the  Sales  Tax  law  of  that  State,

whichever is lower. Section 8(2) says that if the sale of goods is in

the course of inter-State trade or commerce not falling within sub-

section(1) the tax payable shall be at the rate applicable to the

sale  or  purchase  of  such  goods  inside  the  appropriate  State

under the sales tax law of that State and as per explanation to

Section 8(2), for the purpose of this sub-section, a dealer shall be

deemed to be a dealer liable to pay tax under the sales tax law of

the appropriate State, notwithstanding that he, in fact, may not be

so liable under that law.

26. The  High  Court  also  noticed  that  the  vires  of  the  aforesaid

provisions was  tested by the Constitution Bench of this Court in

State of Madras vs. N.K. Nataraja Mudaliar1. The Constitution

Bench upheld the provisions of Section 2(b) of the CST Act and

repelled the challenge predicated on Articles 301 and 303(1) of

the Constitution of India.  This position is reiterated in  State of

Tamil Nadu and Another vs. Sitalakshi Mills Ltd. and Others2.

1 AIR 1969 SC 147 (CB) = 1968 SCR (3) 829 2 (1974) 33 STC 200 (SC) = 1974 AIR 1505 = (1974) 4 SCC 408 Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015]  a/w connected matters            Page 16 of 46

27. Discussing the provisions of Section 8(1) and (2) of the CST Act,

the High Court  pointed out  that  Section 8(1)  gives preferential

treatment to sale by a dealer to a registered dealer. Vires of this

provision  has  also  been  upheld  in  Gwalior  Rayon  Silk

Manufacturing (Wvg.) Co., Ltd. vs. Assistant Commissioner

of Sales Tax and others3.

28. Discussing  ratio  of  the  aforesaid  judgments,  the  High  Court

pointed out that this Court noted the proposition that the aforesaid

provision was to check the evasion of tax on inter-State sales and

to  prevent  discrimination  between  the  rates  in  one  State  and

those in other States, the Parliament thought fit to enact Section

8(2)(b) of the CST Act and further held that the object of the law

apparently is to deter inter-State sales to unregistered dealers as

such  inter-State  sales  would  facilitate  evasion  of  tax  and  the

fixation of the rate of local sales tax is essentially a matter for the

State legislatures and the Parliament does not have any control

in the matter. It has been further held in the said decision that it is

in public interest to see that in the guise of freedom of trade, they

do not evade the payment of tax and it is an effective safeguard

against the evasion of tax.

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29. Based on the aforesaid discussion, the High Court has answered

question No. 1 against the appellants in the following manner:

“It is the specific stand of the official respondents/State Government  in  para  14  of  the  counter  affidavit  that where sales are made to registered dealers on filing of Form ‘C’ declaration the entire  transaction goes into the mainstream and thereby automatically comes into the net  of taxation in the purchasing State wherever applicable  and  if  sales  are  made  to  other  than registered dealers, it is option of the purchasing dealer concerned to disclose it or not and there is, therefore, possibility of such transactions being wrapped up and disappearing into oblivion without even surfacing again for the purpose of levy of tax otherwise legally due on such  transactions.   Therefore,  the  contention  put forward by the respective learned counsel appearing for  the writ  petitioners that  such provision aggravate the  Central  Sales  Tax  rate  or  liability  under  Section 8(2)  of  CST  Act  by  TNVAT  is  unsustainable  and therefore,  question  no.  1  is  answered  in  negative against the writ petitioners.”   

30. While  entertaining  question   no.  (2),  namely,  whether  the

impugned provisions are violative of Articles 14, 19(1)(g) and 301

of the Constitution, the High Court pointed out that on this aspect,

argument of the assessees was that the words ‘rate applicable’

employed in Section 8(2) of the CST Act has to necessarily take

into account the effective rate after  considering the deductions

made under Section 3(3) of the TNVAT Act. It was argued that

Section 19(5)(c) of the TNVAT Act, which denied ITC on purchase

of goods sold or used in the manufacture of other goods and falls

within Section 8(2) of the CST is per se discriminatory. The High

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Court   took note of  the scheme of  TNVAT Act  and found that

though Section 3(2)  stipulated many taxable transactions,  only

few such transactions are carved out to give benefit of ITC.  After

discussing certain judgments of this Court and other High Courts,

the High Court has observed that the legal position was that right

to claim ITC is not a vested right or an indefeasible right.  It is a

benefit  conferred  under  the  Act  in  certain  contingencies  and

subject  to  conditions  prescribed  in  the  statutory  scheme.

Therefore,  it  is  open  to  the  State  Legislature  to  provide  for

conditions  and  restrictions  while  extending  the  concession.

Likewise, it was also necessary for any assessee to claim input

credit to fulfill those conditions.  Thus, the provision made in the

statute  that  unregistered dealers  in  other  States  would  not  be

entitled to ITC was justified.  The High Court noted that specific

stand  of  the  State  Government  was  that  in  respect  of  such

unregistered dealers in other states, the State of Tamil Nadu had

no mechanism to  prevent  evasion  of  tax  and  loss  of  revenue

caused by trade with such unregistered dealers in the State of

Tamil  Nadu.   This  kind of  evasion,  in  the opinion of  the High

Court, was not violative of the constitutional provisions contained

in Articles 14, 19(1)(g) and 301.   

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31. Mr.  Giri,  learned  senior  counsel  appearing  in  some  of  these

appeals  pressed into service the same arguments  which were

advanced before the High Court and attempted to find fault with

the approach of the High Court.  His  submission was that once

the tax was paid at an intermediary  stage, the dealers could not

be denied benefit of claiming credit thereof and Section 19(5)(c)

of  TNVAT  Act  went  contrary  to  the  visions  of  CST  Act  and,

therefore, was ultra vires.  He referred to the following judgments

of  this  Court  in  support  and,  in particular,  following portions in

those judgments.        

(i) Messrs Govind Saran Ganga Saran vs.  Commissioner

of Sales Tax and Others4:

“6. The components which enter into the concept of a tax  are  well  known.  The  first  is  the  character  of  the imposition  known  by  its  nature  which  prescribes  the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the  legislative  scheme  defining  any  of  those components of the levy will be fatal to its validity.

(ii) Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd.:

“70. We think that Parliament fixed the rate of tax on inter- State sales of the description specified in Section 8(2)(b) of

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the  Act  at  the  rate  fixed  by  the  appropriate  State Legislature in respect of intra-State sales with a purpose, namely, to check evasion of tax on inter-State sales and to prevent discrimination between residents in one State and those in other States. Parliament thought that unless the rate fixed by the States from time to time is adopted as the rate of tax for inter-State sales of the kind specified in the sub-clause, there will be evasion of tax in inter-State sales as well as discrimination. We have already pointed out in our judgment in Civil Appeals No. 2547-2549 of 1969 and 105-106 of 1970 the objectives which Parliament wanted to achieve by adopting the rate of tax in the appropriate State for taxing the local sales. And for attaining these objectives Parliament could not have fixed the rate otherwise than by incorporating the rate to be fixed from time to time by the appropriate State Legislature in respect  of  local  sales.  It may  be  noted  that  in  so  far  as  inter-State  sales  are concerned, the Central Sales Tax Act, by Section 9(2) has adopted the law of the appropriate State as regards the procedure  for  levy  and  collection  of  the  tax  as  also  for imposition of penalties.

71. There can be no doubt that Parliament can repeal the provisions of Section 8(2)(b) adopting the higher rate of tax fixed  by  the  appropriate  State  Legislature  in  respect  of intra-State  sales.  If  Parliament  can repeal  the  provision, there can be no objection on the score that Parliament has abdicated its legislative function. It retains its control over the fixation of the rate intact.  In other words, so long as Parliament  can  repeal  the  provisions  of  Section  8(2)(b) adopting  the  higher  rate  of  tax  fixed  by  the  State Legislatures, it has not abdicated its legislative function. As already stated, this point has been expressly decided by the Privy Council in Cobb & Co. Ltd. v.Kropp.”

32. Mr. S.K. Bagaria, learned senior counsel appearing in the Civil

Appeal arising out of SLP(Civil) No. 9326 of 2015, submitted that

the appellant/dealer in this case was making supplies only to the

Government and, therefore, there was no reason to nurture any

apprehension  that  there  would  be  evasion  of  tax.  He  also

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submitted that this dealer had sales in Tamil Nadu and Karnataka

wherein  it  was  stated  that  the  appellant  had effected  sales to

Karnataka State Government covered under Section 8(2) of the

CST Act.  However, the appellant was not entitled to ITC as per

Section 18(5)(c) of the TNVAT Act but had not declared reversal

of  ITC.   Hence,  the  reversal  of  ITC  was  proposed  and  the

appellant was called upon to file objections, if any, thereto.  In its

reply to the said show cause notice the appellant pointed out that

the VAT laws were introduced by different states from the year

2005.  Tamil Nadu enacted TNVAT Act from January 01, 2007.

While so, by the Taxation Laws (Amendment) Act, 2007, the sales

to Government departments against ‘D’ form was abolished and

such sales to Government departments fell under Section 8(2) of

the CST Act.  Therefore, when VAT Act was introduced, sales to

Government departments fell under Section 8(1) of the CST Act

and only sales to unregistered dealers or non-dealers fell under

Section 8(2) of the Act.  Therefore, the effect was that sales to

Government  departments  outside  the  State  would  fall  under

Section 8(2) of the CST Act.  It was also submitted that retention

of provision such as Section 19(5)(c) of the VAT Act to completely

deny the ITC in respect of sales to Central and State Government

departments outside the State was causing unintended hardship.

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Mr. Bagaria also submitted that the two reasons which were given

by the respondents before the High Court to deny ITC were:

(i) Where sales are made to a registered dealer  on filing of

Form  ‘C’  declaration,  the  entire  transaction  goes  into  the

mainstream and thereby automatically comes to the net  of  the

transaction in the purchasing State,  where applicable.   On the

other hand, if sales are made to other than the registered dealers,

it is the option of the purchasing dealer concerned to disclose it or

not  to  disclose  it.  Therefore,  there  was  a  possibility  of  such

transaction  being  wrapped  up  and  disappearing  into  oblivion

without  even  surfacing  again  for  the  purpose  of  levy  of  tax

otherwise legally due.

(ii) As regards unregistered dealers in other States, the State of

Tamil Nadu has no mechanism to prevent evasion of tax and loss

of  revenue  caused  by  trade  with  such  unregistered  dealers

outside its territory.

33. Submission  of  Mr.  Bagaria  was that  both  these  reasons  were

inapplicable in the case of the appellant where the sales were to

the  Government  of  Karnataka.   Referring  to  Section  19(4)  of

TNVAT Act, Mr. Bagaria argued that situations mentioned therein

were those where the Tamil Nadu Government was not getting

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any tax.  Likewise, as per Section 4 of the CST Act situs of such

sales would be Tamil Nadu, even when goods go out of the State.

In such an eventuality,  State gets its  share of  tax by virtue of

Article 269 of the Constitution.  

34. He also referred to the insertion of sub-clause (v) to sub-section

(2) of Section 19 which provision now enables getting of ITC in

those cases also where sale in the course of inter-State trade or

commerce falls under Section 8(1) and (2) of the CST Act.  In this

scenario,  according to him, Section 19(5)(c)  would apply when

there  were  inter-State  sales  at  the  time  of  incorporation.   In

support  of  this  submission,  he  referred  to  the  following  two

judgments:  

(i) Bolani Ores Ltd. vs. State of Orissa5

“29.   The  question  then  remains  as  to  whether  these vehicles  though  registrable  under  the  Act  are  motor vehicles for the purpose of the Taxation Act. It has already been pointed out that before the amendment vehicles used solely upon the premises of the owner, though they may be mechanically  propelled  vehicles  adapted  for  use  upon roads were excluded from the definition of ‘motor vehicle’. If this definition which excludes them is the one which is incorporated  by  reference  under  Section  2(c)  of  the Taxation  Act,  then  no  tax  is  leviable  on  these  vehicles under  the  Taxation  Act.  Shri  Tarkunde  for  the  State  of Orissa  contends  that  the  definition  of  ‘motor  vehicle’  in Section  2(c)  of  the  Taxation  Act  is  not  a  definition  by incorporation  but  only  a  definition  by  reference,  and  as such  the  meaning  of  ‘motor  vehicle’  for  the  purpose  of Section  2(c)  of  the  Taxation  Act  would  be  the  same as defined from time to time under Section 2(18) of the Act. In

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ascertaining the intention of the legislature in adopting the method  of  merely  referring  to  the  definition  of  ‘motor vehicle’ under the Act for the purpose of the Taxation Act, we have to keep in mind its purpose and intendment as also that of the Motor Vehicles Act. We have already stated what these purposes are and having regard to them the registration of a motor vehicle does not automatically make it liable for taxation under the Taxation Act. The Taxation Act is a regulatory measure imposing compensatory taxes for the purpose of raising revenue to meet the expenditure for making roads, maintaining them and for facilitating the movement  and  regulation  of  traffic.  The  validity  of  the taxing  power  under  Entry  57  List  II  of  the  Seventh Schedule read with Article 301 of the Constitution depends upon the regulatory and compensatory nature of the taxes. It is not the purpose of the Taxation Act to levy taxes on vehicles which do not use the roads or in any way form part of  flow  of  traffic  on  the  roads  which  is  required  to  be regulated. The regulations under the Motor Vehicles Act for registration and prohibition of certain categories of vehicles being driven by persons who have no driving licence, even though  those  vehicles  are  not  plying  on  the  roads,  are designed to ensure the safety of  passengers and goods etc. etc. and for that purpose it is enacted to keep control and check on the vehicles. Legislative power under Entry 35  of  List  III  (Concurrent  List)  does  not  bar  such  a provision. But Entry 57 of List II is subject to the limitations referred  to  above,  namely,  that  the  power  of  taxation thereunder cannot exceed the compensatory nature which must have some nexus with the vehicles using the roads viz.  public  roads.  If  the  vehicles  do  not  use  the  roads, notwithstanding that they are registered under the Act, they cannot  be  taxed.  This  very  concept  is  embodied  in  the provisions  of  Section  7  of  the  Taxation  Act  as  also  the relevant  sections  in  the  Taxation  Acts  of  other  States, namely, that where a motor vehicle is not using the roads and  it  is  declared  that  it  will  not  use  the  roads  for  any quarter or quarters of a year or for any particular year or years, no tax is leviable thereon and if any tax has been paid for any quarter during which it is not proposed to use the motor vehicle on the road, the tax for that quarter is refundable. If this be the purpose and object of the Taxation Act, when the motor vehicle is defined under Section 2(c) of the Taxation Act as having the same meaning as in the Motor  Vehicles  Act,  1939,  then  the  intention  of  the Legislature  could  not  have  been  anything  but  to incorporate only the definition in the Motor Vehicles Act as

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then  existing,  namely,  in  1943,  as  if  that  definition  was bodily written into Section 2(c) of the Taxation Act. If the subsequent Orissa Motor Vehicles Taxation (Amendment) Act,  1943,  incorporating  the  definition  of  ‘motor  vehicle’ referred to the definition of ‘motor vehicle’ under the Act as then existing, the effect of this legislative method would, in our view, amount to an incorporation by reference of the provisions of Section 2(18) of the Act in Section 2(c) of the Taxation Act. Any subsequent amendment in the Act or a total repeal of the Act under a fresh legislation on that topic would not affect the definition of ‘motor vehicle’ in Section 2(c)  of  the  Taxation  Act.  This  is  a  well-accepted interpretation  both  in  this  country  as  well  as  in  England which has to a large extent influenced our law. This view is further  reinforced  by  the  use  of  the  word  ‘has’  in  the expression  “has  the  same  meaning  as  in  the  Motor Vehicles  Act,  1939”  in  Section  2(c)  of  the  Taxation  Act, which would perhaps further justify the assumption that the Legislature had intended to incorporate the definition under the Act as it then existed and not as it may exist from time to time. This method of drafting which adopts incorporation by reference to another Act whatever may have been its historical justification in England in this country does not exhibit  an  activists  draftsmanship  which  would  have adopted the method of providing its own definition. Where two Acts are complimentary or interconnected, legislation by  reference  may  be  an  easier  method  because  a definition given in the one Act may be made to do as the definition in the other Act both of which being enacted by the same Legislature. At any rate, Lord Esher, M.R. dealing with  legislation  by  incorporation,  in In  re.  Wood's Estate [(1886) 31 Ch D 607] said at p. 615:

“If  a  subsequent  Act  brings  into  itself  by  reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into  the  new Act  just  as  if  they  had  been  actually written  in  it  with  the  pen,  or  printed  in  it,  and,  the moment you have these clauses in the later Act, you have no occasion to refer to the former Act at all.”

The observations in Clarke v. Bradlaugh [(1881) 8 QBD 63 607] are also to the same effect. Brett, L.J. in that case had said at p. 69:

“… there is a rule of construction that, where a statute is incorporated by reference into a second statute, the

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repeal of the first statute by a third statute does not affect the second.”

30. In Secretary of State for India in Council v. Hindusthan Cooperative  Insurance  Society  Ltd. [AIR  1931  PC 149  : 132  IC  748  :  LR  58  IA  259]  the  Privy  Council  was considering a case where the incorporation effected in the statute viz. the Calcutta Improvement Trust Act, 1911 — referred to by their Lordships as the “Local Act” — was in express  terms and in  the  form illustrated  by  54  and 55 Vict., Ch. 19. The “Local Act” in dealing with the acquisition of land for the purposes designated by it, made provision for the acquisition under the Land Acquisition Act, and the provisions of  the Land Acquisition Act  were subjected to numerous  modifications  which  were  set  out  in  the Schedule, so that in effect the “Local Act” was held to be the enactment of a Special Law for the acquisition of land for the special purpose. It was in the context of these and several other provisions which pointed to the absorption of certain of the provisions of the Land Acquisition Act into the “Local  Act”  with  vital  modifications  that  Privy  Council observed at p. 266:

“But Their  Lordships  think  that  there are other  and perhaps more cogent objections to this contention of the Secretary  of  State,  and their  Lordships  are not prepared  to  hold  that  the  sub-section  in  question, which was not enacted till 1921, can be regarded as incorporated in the Local Act of 1911. It was not part of the Land Acquisition Act when the Local Act was passed,  nor  in  adopting the provisions of  the Land Acquisition Act is there anything to suggest that the Bengal  Legislature  intended  to  bind  themselves  to any future additions which might be made to that Act. It  is  at  least  conceivable that  new provisions might have been added to the Land Acquisition Act which would  be  wholly  unsuitable  to  the  local  code.  Nor again, does Act 19 of 1921 contain any provision that the amendments enacted by it are to be treated as in any  way  retrospective,  or  are  to  be  regarded  as affecting  any  other  enactment  than  the  Land Acquisition Act itself. Their Lordships regard the Local Act as doing nothing more than incorporating certain provisions from an existing Act, and for convenience of drafting doing so by reference to that Act, instead of setting out for itself at length the provisions which it was desired to adopt.”

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It was further observed at p. 267:

“In  this  country  it  is  accepted  that  where  a  statute  is incorporated  by  reference  into  a  second  statute,  the repeal of the first statute does not affect the second: see the cases collected in Craies on Statute Law, 3rd Edn. pp. 349-50. This doctrine finds expression in a common-form section  which  regularly  appears  in  the  amending  and repealing Acts which are passed from time to time in India …. The independent existence of the two Acts is therefore recognized;  despite  the death of  the parent  Act,  its  off- spring survives in the incorporating Act. Though no such saving clause appears in the General Clauses Act, their Lordships think that the principle involved is as applicable in India as it is in this country.

It seems to be no less logical to hold that where certain provisions from an existing Act  have been incorporated into a subsequent Act, no addition to the former Act, which is not expressly made applicable to the subsequent Act, can be deemed to be incorporated in it, at all events if it is possible  for  the  subsequent  Act  to  function  effectually without the addition.”

This Court in the Collector of Customs, Madras v. Nathella Sampathu Chetty  [AIR 1962 SC 316 : (1962) 3 SCR 786, 830-833 : (1962) 1 Cr LJ 364] considered the Privy Council decision in the  Hindustan Cooperative Insurance Society Ltd.  and  distinguished  that  case  and  held  the  principle inapplicable to the facts of that case.

31.  In State of Bihar v. S.K. Roy [AIR 1966 SC 1995 : 1966 Supp  SCR  259  :  (1966)  2  LLJ  759]  this  Court  was considering the definition of “employer” in Section 2(e) of the Coal Mines Provident Fund and Bonus Schemes Act, 1948,  where  that  expression  was  defined  to  mean  “the owner of a coal mine as defined in clause (g) of Section 3 of the Indian Mines Act, 1923”. The Indian Mines Act, 1923, had been repealed and substituted by the Mines Act, 1952 (Act 35 of  1952).  In the latter  Act the word “owner” had been defined in clause (1) of Section 2. The question was whether by virtue of Section 8 of the General Clauses Act, the  definition  of  the  word  “employer”  in  clause  (e)  of Section 2 of  the Coal  Mines Provident  Fund and Bonus Schemes Act  should  be construed with  reference to  the definition of the word, “owner” in clause (1) of Section 2 of Act  35  of  1952,  which  repealed  the  earlier  Act  and  re-

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enacted it. It may be mentioned that according to Section 2(1)  of  Act  35 of  1952 the word “owner”,  when used in relation  to  a  mine,  means  “any  person  who  is  the immediate proprietor or lessee or occupier of the mine or of any part thereof and in the case of a mine the business whereof is being carried on by a liquidator or receiver, such liquidator  or  receiver….”  The  expression  “coal  mine”  is separately defined in clause (b) of Section 2 of the Coal Mines  Provident  Fund  and  Bonus  Schemes  Act,  1948. Ramaswami, J. speaking for the Court observed at p. 261:

“As a matter of construction it must be held that all works, machinery, tramways and sidings, whether above or below ground, in or adjacent to a coal mine will come within the scope and ambit of the definition only when they belong to the  coal  mine.  In  other  words,  the  word  or  occurring before  the  expression  ‘belonging to  a  coal  mine’ in  the main definition has to be read to mean ‘and’.”

This case, as well as the decision in New Central Jute Mills Co. Ltd. v. Assistant Collector of Central Excise, Allahabad [(1970) 2 SCC 820 : (1971) 2 SCR 92] are distinguishable on  the  facts  and  legislation  which  this  Court  was considering. In the  New Central Jute Mills Co. Ltd. case, the Privy Council decision in the  Hindusthan Cooperative Insurance  Society  Ltd.  case  was  referred  to  and distinguished.  It  is,  however,  contended  by  the  learned Solicitor  General  that  both in  Nathella  Sampathu Chetty case as well as the  New Central Jute Mills Co. Ltd. case this Court was considering the effects of the two Acts which were made by Parliament by Central legislation and it is, therefore, not strictly a case of incorporation because the Central Legislature is deemed to have, while making the latter enactment, kept in view the provisions of the former Act. In our view this may not be conclusive.

32. In Ram Sarup v. Munshi [AIR 1963 SC 553 : (1963) 3 SCR 858] a judgment of the Bench of five Judges of this Court held that the repeal of the Punjab Alienation of Land Act, 1900, had no effect on the continued operation of the Punjab  Pre-emption  Act,  1913,  and  that  the  expression “agricultural land” in the later Act had to be read as if the definition  of  the  Alienation  of  Land Act  had  been  bodily transposed  into  it.  After  referring  to  the  observations  of Brett,  L.J.  in Clarke  case,  Rajagopala  Ayyangar,  J. speaking for the Court observed at pp. 868-69:

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“Where the provisions of an Act are incorporated by reference in a later Act the repeal of the earlier Act has,  in  general,  no  effect  upon the  construction  or effect  of  the  Act  in  which  its  provisions have been incorporated.

* * *

In  the  circumstances,  therefore,  the  repeal  of  the Punjab Alienation of Land Act of 1900 has no effect on  the  continued  operation  of  the  Pre-emption  Act and the expression ‘agricultural land’ in the later Act has to be read as if the definition in the Alienation of Land Act had been bodily transposed into it.”

The  above  decision  of  this  Court  is  more  in  point  and supports  our  conclusion.  In  our  view,  the  intention  of Parliament  for  modifying  the  Motor  Vehicles  Act  has  no relevance  in  determining  the  intention  of  the  Orissa Legislature  in  enacting  the  Taxation  Act.  Apart  from this aspect of the power of taxation, as we have said earlier, is not in the Concurrent List III but in List II and construed as a taxation measure we cannot  extend the ambit  of  it  by mere implication. As we said it is possible for both the Acts to co-exist even after the definition of ‘motor vehicle’ in the Act  has  been  amended.  It  is,  therefore,  clear  that  the definition  of  ‘motor  vehicle’  as  existing  prior  to  1956 Amendment  would  alone  be  applicable  as  being incorporated in the Taxation Act.”

The principle laid down in  Mahindra and Mahindra Ltd.

Vs. Union of India and Another6 is to the same effect.

35. His second submission was that Section 19(5)(c) and Rule 10(9)

(c) were violative of Article 14 of the Constitution as there was no

rational  nexus  with  the  objective  sought  to  be  achieved.   He

reiterated that when the purpose behind such a provision is only

6 (1979) 2 SCC 529 Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015]  a/w connected matters            Page 30 of 46

to check evasion,  and there was no such apprehension in the

case of sales to State Government, benefit of ITC could not be

denied wherever dealers were making sales to the Government.

He further argued that when benefit of ITC is given even when

sales are made outside the State but to a registered dealer, then

why it  should  not  be accorded on sales that  are  made to the

Government  as  well  as  by  treating  the  sales  to  outside  State

Government at par with the sales to the registered dealers.  It

was sought to be justified on the ground that insofar as the State

Government  is  concerned, though it  is  treated as a dealer,  no

registration  is  required  since  the  State  Governments  are  not

obliged to get themselves registered under the TNVAT Act.  The

only problem was that because of this the State Government is

not in a position to give ‘C’ form.  ITC to the appellant was denied

only for not furnishing ‘C’ form.  For this proposition, apart from

relying upon the celebrated judgment in the case of D.S. Nakara

and Others vs. Union of India7, Mr. Bagaria also relied upon the

judgment of this Court in  Union of India and Others  vs. N.S.

Rathnam and Sons8 in the following manner:

“12.  The judgment of this Court in  Kasinka Trading case [(1995) 1 SCC 274] , no doubt, lays down the principle that there is wide discretion available to the Government in the matter  of  granting,  curtailing,  withholding,  modifying  or

7 (1983) 1 SCC 305 8 (2015) 10 SCC 681 Civil Appeal Nos.__/2018 [@SLP(C) Nos. 9320-9324 of 2015]  a/w connected matters            Page 31 of 46

repealing the exemptions granted by earlier notifications. It is also correct that the Government is not bound to grant exemption to anyone to which it so desires. When the duty is  payable  under  the  provisions  of  the  Act,  grant  of exemption from payment of the said duty to particular class of persons or products, etc. is entirely within the discretion of the Government. This discretion rests on various factors which are to be considered by the Government as these are  policy  decisions.  In  the  present  case,  however,  the issue  is  not  of  granting  or  not  granting  the  exemption. When  the  exemption  is  granted  to  a  particular  class  of persons, then the benefit thereof is to be extended to all similarly situated persons. The notification has to apply to the entire class and the Government  cannot create sub- classification  thereby  excluding  one  sub-category,  even when both the sub-categories are of same genus. If that is done,  it  would  be  considered  as  violating  the  equality clause  enshrined  in  Article  14  of  the  Constitution. Therefore,  judicial  review  of  such  notifications  is permissible in order to undertake the scrutiny as to whether the notification results in invidious discrimination between two  persons  though  they  belong  to  the  same  class. In Aashirwad Films v. Union of India [(2007) 6 SCC 624] , this aspect has been articulated in the following manner: (SCC pp. 628-29, paras 9-12)

“9.  The State undoubtedly enjoys greater latitude in the matter of a taxing statute. It may impose a tax on a class of people, whereas it may not do so in respect of the other class.

10. A taxing statute, however, as is well known, is not beyond the pale of challenge under Article 14 of the Constitution of India.

11. In Chhotabhai  Jethabhai  Patel  & Co. v. Union of India [AIR  1962  SC  1006],  it  was  stated:  (AIR  p. 1021, para 37)

‘37.  But it does not follow that every other article of Part  III  is  inapplicable  to  tax  laws.  Leaving  aside Article 31(2)  that  the provisions of  a tax  law within legislative  competence  could  be  impugned  as offending Article 14 is exemplified by such decisions of  this  Court  as Suraj  Mall  Mohta  &  Co. v. A.V. Visvanatha Sastri [AIR 1954 SC 545 : (1955) 1 SCR 448]  and Shree  Meenakshi  Mills  Ltd. v. A.V.

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Visvanatha Sastri [AIR 1955 SC 13 : (1955) 1 SCR 787] . In K.T. Moopil Nair v. State of Kerala [AIR 1961 SC 552] the Kerala Land Tax Act was struck down as unconstitutional as violating the freedom guaranteed by Article 14. It  also goes without saying that if  the imposition of the tax was discriminatory as contrary to Article 15, the levy would be invalid.’

12.  A  taxing  statute,  however,  enjoys  a  greater latitude.  An  inference  in  regard  to  contravention  of Article  14  would,  however,  ordinarily  be  drawn if  it seeks  to  impose on  the  same class  of  persons  or occupations  similarly  situated  or  an  instance  of taxation which leads to inequality.  The taxing event under the Andhra Pradesh State  Entertainment  Tax Act  is  on  the  entertainment  of  a  person.  Rate  of entertainment tax is determined on the basis of the amount collected from the visitor of a cinema theatre in terms of the entry fee charged from a viewer by the owner thereof.”

xx xx  xx

14. What follows from the above is that in order to pass the test  of  permissible  classification  two  conditions  must  be fulfilled, namely, (i) that the classification must be founded on an intelligible differential which distinguishes persons or things that are grouped together from others left out of the group;  and (ii)  that,  that  differential  must have a rational relation to the object sought to be achieved by the statute in question. If the Government fails to support its action of classification on the touchstone of the principle whether the classification is reasonable having an intelligible differentia and  a  rational  basis  germane  to  the  purpose,  the classification has to be held as arbitrary and discriminatory. In Sube Singh v. State of Haryana[(2001) 7 SCC 545] , this aspect is highlighted by the Court in the following manner: (SCC p. 548, para 10)

“10. In the counter and the note of submission filed on behalf of the appellants it is averred, inter alia, that the  Land  Acquisition  Collector  on  considering  the objections filed by the appellants had recommended to  the  State  Government  for  exclusion  of  the properties of Appellants 1 and 3 to 6 and the State Government  had  not  accepted  such recommendations  only  on  the  ground  that  the

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constructions made by the appellants were of ‘B’ or ‘C’ class and could not be easily amalgamated into the developed colony which was proposed to be built. There  is  no  averment  in  the  pleadings  of  the respondents  stating  the  basis  of  classification  of structures as ‘A’, ‘B’ and ‘C’ class, nor is it stated how the  amalgamation  of  all  ‘A’  class  structures  was feasible and possible while those of ‘B’ and ‘C’ class structures was not possible. It is not the case of the State Government and also not argued before us that there  is  no  policy  decision  of  the  Government  for excluding  the  lands  having  structures  thereon  from acquisition under the Act. Indeed, as noted earlier, in these cases the State Government has accepted the request  of  some  landowners  for  exclusion  of  their properties on this very ground. It remains to be seen whether  the  purported  classification  of  existing structures into ‘A’,  ‘B’ and ‘C’ class is a reasonable classification  having  an  intelligible  differentia  and  a rational  basis  germane to the purpose.  If  the State Government  fails  to  support  its  action  on  the touchstone of the above principle, then this decision has to be held as arbitrary and discriminatory.  It  is relevant to note here that the acquisition of the lands is for the purpose of planned development of the area which  includes  both  residential  and  commercial purposes. That being the purpose of acquisition, it is difficult to accept the case of the State Government that certain types of structures which according to its own classification are of ‘A’ class can be allowed to remain while other structures situated in close vicinity and  being  used  for  same  purposes  (residential  or commercial)  should  be  demolished.  At  the  cost  of repetition, it may be stated here that no material was placed before us to show the basis of classification of the existing structures on the lands proposed to be acquired.  This  assumes  importance  in  view  of  the specific contention raised on behalf of the appellants that  they  have  pucca  structures  with  RC  roofing, mosaic flooring, etc. No attempt was also made from the  side  of  the  State  Government  to  place  any architectural  plan  of  different  types  of  structures proposed to be constructed on the land notified for acquisition  in  support  of  its  contention  that  the structures which exist on the lands of the appellants could not be amalgamated into the plan.”

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36. The  learned  Advocate  General,  in  reply  to  the  aforesaid

arguments,  submitted  that  the  High  Court  had  repelled  these

contentions in its well reasoned judgment by referring to the law

laid down in various judgments of this Court.  He also submitted

that a recent judgment pronounced by this Court in the case of

Jayam  and  Company  vs.  Assistant  Commissioner  and

Another9 fully covers the case against the appellants. Specifically

refuting the argument  that  Section 19(5)(c)  of  the Act  will  only

apply  when  there  were  inter-State  sales  at  the  time  of

incorporation,  he  submitted  that  Section  19(5)(c)  as  well  as

Section 8(2) remain unchanged as there were no amendments

therein.   Only  Section  8(1)  was  amended  vide  Taxation  Laws

(Amendment) Act, 2007.  The purpose thereof was reflected in the

objects and reasons thereto as follows:-

“2.  CST being an origin-based tax is inconsistent with VAT (which is a destination-based tax).  Moreover, CST results in cascading of tax (i.e. tax on tax), since it is not rebatable against VAT.  In view of these factors, there has been a consensus that  the CST should be phased out.   This  is also a pre-requisite for introduction of an integrated Goods and Services Tax (GST), which the Government purposes to introduce by 1st April, 2010.  The issue of phasing out of the  CST has  been deliberated  upon for  over  a  decade. The  Empowered  Committee  of  State  Finance  Ministers (EC),  constituted by the Government  of  India,  has been making efforts in this direction since July,  2000.  Finally, after a series of meetings, a consensus has been arrived at between  the  Central  Government  and  the  State

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Governments on the roadmap for phasing out of the CST as also on the package of compensation to the States for revenue loss on this account.

3. Accordingly, it is proposed to phase out the CST in 4 steps, i.e., reducing the CST rate from 4% to 3% w.e.f. 1st

April, 2007, from 3% to 2% w.e.f. 1st April, 2008, from 2% to 1% w.e.f.1st April, 2009 and eventually abolishing the tax on 31st March, 2010.   An integrated national  Goods and Services Tax (GST) is proposed to be introduced w.e.f. 1st

April, 2010.  The agreed package for compensation to the States for revenue loss on account of phasing out of the CST shall  consist  of  non-monetary measures as well  as monetary measured.

4. The implementation of the above proposals requires the  amendment  of  the  CST  Act  as  also  the  Additional Duties  of  Excise  (Goods  of  Special  Importance)  Act, 1957…….”

37. Insofar as argument of the appellant predicated on Article 14 is

concerned,  reply  of  the  learned Advocate  General  was  that  a

reading  of  Section  8(1)  of  the  CST  Act  would  show  that

classification is  contained in  the Central  Act  itself  which treats

sale to a registered dealer outside the State in one category and

sale  to  an unregistered dealer  outside the State  in  a  different

category.  This provision contained in Section 8(1) of the CST Act

never underwent any change.  Therefore, those sales which were

made to unregistered dealers outside the State were constituted

a different class and, thus, provisions contained in Section 19(5)

(c) to deny ITC on such sales was perfectly justified based on

reasonable classification.  

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38. After considering the respective submissions and going through

the case law that is presented before this Court, it would be apt to

remark at the outset that most of the contentions of the appellants

stand  answered by the  judgment  of  this  Court  in  Jayam and

Company.  That case also pertains to the TNVAT Act.  The issue

was as to whether sub-section (20) of Section 19 of the TNVAT

Act, which was brought into this statute by Amendment Act 22 of

2013,  could be given retrospective effect.   Sub-section (20)  of

Section 19 reads as under:

“S.  19(20)  Notwithstanding  anything  contained  in  this section, where any registered dealer has sold goods at a price lesser than the price of the goods purchased by him, the  amount  of  the  input  tax  credit  over  and  above  the output tax of those goods shall be reversed.”   

39. Thus,  this  case  also  concerned  the  same  provision,  namely,

Section 19 of the TNVAT Act, though the issue raised was not the

same  which  has  arisen  for  consideration  in  these  appeals.

However,  while  answering  the  aforesaid  question,  the  ITC

scheme contained in Section 19 of the TNVAT Act was gone into

and discussed at length.  After reproducing Section 19, attributes

of this provision were taken note of in the following manner:

“11.  From sub-section (10) onwards, provisions are made to follow the procedure and fulfill the requisite conditions for availing ITC.  For the purposes of this particular issue, sub- section (10) is the material provision. This provision, which is couched in negative terms, categorically stipulates that such ITC would be admissible to the registered dealer and

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he would not be entitled to claim this credit 'until the dealer receives  an  original  tax  invoice  duly  filled,  signed  and issued by a registered dealer from where the goods are purchased.......'.   Further, such original tax invoice should evidence the amount of input tax.  So much so, even if the original  tax  invoice  is  lost,  the  obligation  cast  on  the registered dealer is to obtain duplicate or carbon copy of such tax invoice from the selling dealer and only then input tax is allowed.

From the aforesaid scheme of Section 19 following significant aspects emerge:-

(a)   ITC  is  a  form  of  concession  provided  by  the Legislature.  It  is  not admissible to all  kinds of  sales and certain specified sales are specifically excluded.

(b)  Concession of ITC is available on certain conditions mentioned in this Section.   

(c)  One of the most important condition is that in order to enable the dealer to claim ITC it has to produce original tax invoice, completed in all respect, evidencing the amount of input tax.

12.  It is a trite law that whenever concession is given by statute or notification etc. the conditions thereof are to be strictly  complied  with  in  order  to  avail  such  concession. Thus, it is not the right of the 'dealers' to get the benefit of ITC but its a concession granted by virtue of Section 19. As a fortiorari, conditions specified in Section 10 must be fulfilled.  In that hue, we find that Section 10 makes original tax  invoice  relevant  for  the  purpose  of  claiming  tax. Therefore,  under  the  scheme  of  the  VAT  Act,  it  is  not permissible  for  the  dealers  to  argue  that  the  price  as indicated in the tax invoice should not have been taken into consideration but the net purchase price after discount is to be the basis.  If we were dealing with any other aspect do hors the issue of ITC as per the Section 19 of the VAT Act, possibly  the  arguments  of  Mr.  Bagaria  would  have assumed some relevance.  But, keeping in view the scope of the issue, such a plea is not admissible having regard to the plain language of sections of the VAT Act, read along with other provisions of the said Act as referred to above.

13.   For  the  same  reasons  given  above,  challenge  to constitutional validity of sub-section (20) of Section 19 of

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VAT Act  has  to  fail.   When a  concession  is  given  by  a statute, the Legislature has power to make the provision stating the form and manner in which such concession is to be allowed.  Sub-section (20) seeks to achieve that.  There was no right, inherent or otherwise, vested with dealers to claim the benefit of ITC but for Section 19 of the VAT Act. That  apart,  we  find  that  there  were  valid  and  cogent reasons for inserting Section 19(20). Main purport was to protect  the  Revenue  against  clandestine  transactions resulting in evasion of tax.  High Court has discussed this aspect  in  detail  and  our  task would  be accomplished in reproducing  those  paras  as  we  are  concurring  with  the discussion:

“64.  Let us now point out the background/reasons for inserting Section 19(20) by Amendment Act 22 of  2010,  by  referring  to  the  Chart,  the  sample instance is detailed in the Chart in paragraph (34). Let us recapitulate the entries in the Chart.  Based on  the  sale  price,  i.e.,  Rs.  36,780/-  in  the  tax invoice, an amount of Input Tax Credit, i.e., Input Tax Credit  of  Rs. 4m597.50 was available to the petitioner when he re-sells goods.  Based on the Credit Note, the same goods are re-sold within  the State at a lesser price than what was purchased, i.e.,  Rs.  33,777.78  (taking  into  account  discount price,  there is a profit  margin for the dealer) and thereby the output tax payable to the Government is reduced, leaving excess Input Tax Credit at the hands of the dealer.  The said excess credit in the hands of the dealer might be adjusted to their other liabilities or might claim refund of the said excess Input Tax Credit.   Taking excess Input Tax Credit and later in the guise of credit note giving discount and reducing the price of the goods which reduces the Output tax payable to the Government dwindles State revenue.

65. Learned Advocate General  contended that seller  and  buyer  coalition  is  issuing  purchase invoice at an escalated price thereby taking benefit of excess Input Tax  Credit and later in the guise of credit  notes giving discount,  reduced the price of the same goods and  thereby reducing the output tax payable to the Government creates a dent of the  State  revenue.  Learned  Advocate  General further  submitted  that  excess  Input  Tax  Credit available  in  the  hands  of  the  dealer  is  being

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adjusted  to  their  other  liabilities  and  the  dealer might  also  make  a  claim  of  refund  of  Input  Tax Credit as per Section 19(18) of the Act which were ultimately  resulted  in  creating  dent  on  the  State revenue.

66. To contend as to how the so called discount and reduction of sale price caused revenue loss to the  Government,  the  learned  Advocate  General has drawn our attention to the illustration stated in paragraph  (6)  of  the  counter  which  reads  as under:-

“ Purchase price of 10  Washing Macines ... Rs. 1,00,000/-

Tax paid on purchase at 12.5%   (ITC allowed) ... Rs.    12,500/- Sale price after discount ... Rs.     75,000/- tax payable on sales at 12.5% ... Rs.       9,375/- Excess ITC available   (Difference between ITC and  Output Tax) ... Rs.        3,125/-

Rs. 12,500 - Rs.9,375 Excess ITC Adjusted ... Rs. 3,125/-”

67. As  rightly  contended  by  the  learned Advocate General, the "Input Tax Credit" adjusted in the above illustration comes to Rs. 3,125/-  in a single transaction and that it would run to several lakhs and crores for a year for a single dealer.  The excess Input Tax Credit earned by the petitioners is being adjusted  against the outstanding tax due or carried  forward  to  next  year  or  refunded.  If  this trend is allowed to continue, the concept of VAT that meant for payment of tax on every value addition gets defeated.

68. In order to protect  the revenue and with a vie to curb the clandestine transactions resulting in evasion  of  tax,  in  respect  of  second  and subsequent  sales,  Section  19(20)was  introduced, where any dealer has sold goods at a price lesser than the price of the goods purchased by him, the amount  of  "Input  Tax Credit"  over and above the output tax of those goods, shall be reversed.

69. Constitutional  Validity  of  fiscal  legislation:- When  there  is  a  challenge  to  the  constitutional

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validity  of  the  provisions  of  a  Statute,  Court exercising  power  of  judicial  review  must  be conscious of the limitation of judicial  review must be  conscious  of  the  limitation  of  judicial intervention, particularly, in matters relating to the legitimacy  of  the  economic  or  fiscal  legislation. While enacting fiscal legislation, the Legislature is entitled to a great deal of latitude.  The Court would interfere  only  where  a  clear  infraction  of  a constitutional provision is established.  The burden is  on  the  person,  who  attacks  the  constitutional validity  of  a  statute,  to  establish  clear transgression of constitutional principle. Observing that the law relating to economic activities should be viewed with greater latitude than laws touching civil  rights  such  as  freedom  of  speech,  religion, etc., in R.K. Garg vs. Union of India [(1981) 4 SCC 675, this Court held as under:

xx xx xx"   

40. In another judgment in ALD Automotive Pvt. Ltd. & Anr. v. The

Commercial Tax Officer & Ors.  (SLP (Civil) Nos.36112-36113

of  2013)  pronounced in  today’s  date,  the scheme of  this  very

provision is discussed again in detail to the same effect.

41. It is very clear from the aforesaid discussion that this Court held

that ITC is a form of concession which is provided by the Act; it

cannot be claimed as a matter of right but only in terms of the

provisions of the statute; therefore, the conditions mentioned in

the aforesaid Section had to be fulfilled by the dealer; and sub-

section (20) of Section 19 was constitutionally valid.  It was also

noted, in the process, that there were valid and cogent reasons

for inserting that provision and the main purpose was to protect

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the Revenue against clandestine transaction resulting in invasion

of tax.

42. The reasoning given in that judgment while upholding sub-section

(20) of Section 19 shall equally apply while examining the validity

of  Section  19(5)(c)  thereof.   The  High  Court  has  noted  the

specific stand taken by the State Government to the fact that in

respect of unregistered dealer in other States, the State of Tamil

Nadu has no mechanism to prevent invasion of tax and loss of

revenue cost by trade with such unregistered dealers in the State

of Tamil Nadu.  Therefore, the provision was aimed at achieving a

specific  and  justified  purpose  and  could  not  be  treated  as

discriminatory.   

43. It is stated at the cost of repetition that Section 19 of TNVAT Act

deals with ITC.  It incorporates provision for grant of ITC under

certain circumstances and, at the same time, also lays down the

conditions in which such ITC would be admissible.  It is in this

context  sub-section (5) of  Section 19 is to be analysed.  Sub-

section (5) stipulates certain contingencies where such ITC would

not be admissible.  There is no quarrel about clauses (a) and (b).

We are only concerned with clause (c) of this sub-section which

provides that ITC would not be allowed on the purchase of goods

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sold as such or used in the manufacture of other goods and sold

in the course of inter-State trade or commerce falling under sub-

section (2) of Section 8 of the Central Sales Tax Act.  To put it

tersely, sale by a dealer who is registered in the State of Tamil

Nadu which is effected outside the State of Tamil Nadu will qualify

for ITC only when the said sale is made to a registered dealer.  If

it is to an unregistered dealer, it would not be admissible.  This

classification is based on intelligible differentia having a proper

rationale.  Insofar sales to unregistered dealers are concerned,

that too situated outside the State of Tamil Nadu, the State would

not have any mechanism to find out the genuineness of these

sales.   In  essence,  the State is  putting the condition that  ITC

would be admissible when Form ‘C’ is given, which can be given

only  in  those  cases  where  sale  is  to  a  registered  dealer.

Prescribing such a condition in order to ensure that there is no

evasion, has a rationale purpose and objective.  Consideration of

this aspect in the context of the very nature of the ITC scheme,

which  is  a  concession  and  not  a  right,  would  lead  us  to  the

conclusion that it  was open to the Legislature to make such a

provision.   

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44. In view of the aforesaid discussion, we do not find any merit in the

contentions raised by Mr. Giri.  The judgments cited by him would

have no application either.   

45. One  argument  of  Mr.  Bagaria,  however,  needs  little  deeper

consideration.  He has argued that the appellant represented in

his case is making sales only to the State of Karnataka.  In such

a case, there cannot be any apprehension about evasion of tax.

46. Section  2(15)  defines  the  term  ‘dealer’  and  includes  State

Government as well by means of Explanation II which reads as

under:

“Explanation  II:  The  Central  Government  or  any  State Government  which,  whether  or  not  in  the  course  of business, buy, sell,  supply or distribute goods, directly or otherwise,  for  cash,  or  for  deferred  payment,  or  for commission, remuneration or other valuable consideration, shall  be deemed to be a dealer for the purposes of  this Act.”

47. Thus,  wherever  the State  Government  buys,  sells,  supplies  or

distribute  goods,  it  shall  be  deemed  to  be  the  dealer  for  the

purposes of TNVAT Act.  At the same time, TNVAT Act does not

require  registration  by  the  State  Government  inasmuch  as

Section  38  which  deals  with  registration  of  dealers  explicitly

provides, under sub-section (8) thereof, that this provision shall

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not apply to any State Government or Central Government.  A

conjoint reading of the aforesaid two provisions would show that

when a sale is made to the State of Karnataka, it is made to a

dealer but that dealer is under no obligation to get itself registered

under  the  TNVAT Act.   Because  of  this  exemption,  no  State

Government does that and since it is not a registered dealer, it

would not be in a position to issue any Form C.  But for that, the

genuineness of  sales made to a State Government cannot  be

doubted.  This situation puts those dealers who are making sales

to the State Government in disadvantageous position, even when

it is clear that there is no possibility of tax evasion as there cannot

be  any  such  apprehension  in  case  of  sales  to  the  State

Government.  We may point out here that benefit of ITC is given

whenever sale is made to a dealer outside State of Tamil Nadu

and the said dealer is a registered dealer.  

48. Having  regard  to  the  above,  we  are  of  the  opinion  that  the

provisions of Section 19(5)(c) are to be read down by construing

that those dealers who are making sales exclusively to the other

State  Governments  (i.e.  outside the State  of  Tamil  Nadu),  the

said  States  would  be  deemed  as  registered  dealers  for  the

purposes  of  availing  benefits  of  ITC.   Otherwise,  in  such  a

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situation,  it  would  be  difficult  to  hold  that  test  of  reasonable

classification  is  met  in  this  limited  context.   It  becomes

unnecessary to deal with other contentions of Mr. Bagaria.

49. Result  of  the  aforesaid  discussion  would  be  to  uphold  the

judgment of the High Court with one rider, namely, that in those

cases where a dealer makes sales exclusively to the other State

Government(s), benefit of ITC would be allowed without insisting

on the furnishing of  Form ‘C’.   However,  in  order  to  avail  this

benefit, a certificate from said the State Government to whom the

supplies are made would be obtained by the dealer claiming ITC

and submitted to the VAT authorities.   

50. As a consequence, we allow Civil Appeal arising out of SLP(Civil)

No. 9326 of 2015 to the extent indicated above and other appeals

are dismissed with cost.   

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

.............................................J. (ASHOK BHUSHAN)

NEW DELHI; OCTOBER 12, 2018

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