Sumit Nema
Office & Residence
(Jabalpur)
Advocate
Madhya Pradesh High Court
‘Asha’,
email: [email protected]
Phone: (0761)2404937
1029, Gol Bazar,
JABALPUR (M.P) 482002
Indore Branch Office
303, Princess Valley,
Next to Hotel Princes
Palace,
South Tukoganj,
INDORE – 452001
Cell: 9713163667
Fax No. (0761) 2403036
CONSTITUTIONAL ASPECTS OF NEW PROVISION (SECTION 9B) OF M.P.VAT ACT AND EXPLANTION TO SECTION 57 OF VAT ACT. Q 1: Whether section 9B of MP VAT Act, 2002 as introduced w.e.f.1/4/2011 ultra vires ? Answer :‐ Substitution of long title‐ significance thereof The MP VAT Act 2002 is now “ An act to levy ‐‐‐‐ tax on sale and purchase of goods & ‐‐‐‐ tax on buildings” Thus the intention is to tax goods as per Entry 54 of list II of seventh schedule of the Constitution& tax buildings as per Entry 49 of list II of seventh schedule of the Constitution. Legislative competence as per Article 246 of the Constitution of India State Govt. has the power to levy tax on sale and purchase of goods under Entry 54 of List II of Seventh Schedule & has power to levy tax on land and buildings under Entry 49 of list II of seventh Schedule. Thus the argument that goods do not cover immovable property would not be sufficient to challenge section 9B since the state is not levying tax on goods u/s 9B but is taxing building for which it has separate power under Entry 49 . IMPORTANT CONSTITUTIONAL PROVISIONS Article 366(28) defines “taxation” to include the imposition of any tax or impost whether general or local or special and “tax” shall be construed accordingly. A tax is a compulsory exaction of money by a public authority for public purposes enforceable by law and is not payment ‘for services rendered’ . Part XII of the Constitution deals with finance, property, contracts and suits and consists of Articles 264 to 291. It consists of various provisions dealing with imposition of tax, distribution of tax between the Union and the States, the levy of surcharge, tax on professions, trades and callings. It also grants exemption from Union taxation. The most important article is Article 265 which reads thus: “Taxes not to be imposed save by authority of law. — No tax shall be levied or collected except by authority of law.” This simple article has been the foundation for several writs challenging various provisions of taxing statutes, rules and notifications. The Article does not lay down any guidelines or parameters within which tax has to be levied. All that is necessary is that the imposition, levy and collection of tax must be authorized by law. The three basic requirements of a valid tax statute are as follows:– (i) the law should be within the legislative competence of the legislature being covered by the legislative entries in the Seventh Schedule of the Constitution; (ii) the law should not be prohibited by any particular provision of the Constitution such as for example Articles 276(2), 286 etc.; (iii) the law or the relevant portion thereof should not be invalid under Article 13 for repugnancy to those freedoms which are guaranteed by Part III of the Constitution which are relevant to the subject matter of the law. [Chhotabhai Jethabhai Patel and Co. vs. Union of India AIR 1962 SC 1006, 1020; State of Rajasthan vs. Sajanlal Panjawat AIR 1975 SC 706, 725‐726; State of Punjab vs. Naranjan Dass Doomra Rice & General Mills AIR 1998 SC 537; Raja Jagannath Baksh Singh vs. State of Uttar Pradesh AIR 1962 SC 1563.]. The three Legislative Lists in Schedule VII set out the fields of legislation that are available to the Union , the States and to both (the Concurrent List). The power of the Union to levy tax is enumerated in Entries 82 to 92B. Three entries – Entry 82 [Income Tax], Entry 83 [Customs Duty] and Entry 84 [Excise Duty] – permit the levy of three Central taxes that generate almost the entire tax revenue of the Union . In List–II, the fields of taxation start with Entry 46 [Agriculture Income Tax] and continue till Entry 63. Entry 66 also refer to levy of fees but excludes court fees. Amongst the important State taxes are agriculture income tax, sales tax, motor vehicles tax and luxury tax. List III is the Concurrent List. Significantly, it contains no entry permitting levy of tax. However, it refers to stamp duty or fees collected by means of judicial stamps. VIRES OF TAX LAWS The vires of any tax law can be challenged in the same manner as any other statute. On an overall examination of the case laws, any taxing statute can be challenged only on two grounds:‐ (i) lack of legislative competence, (ii) violation of fundamental rights. A law which is completely arbitrary will be struck down as being violative of Article 14 –
Raja Jagannath Baksh Singh vs. State of U.P. AIR 1962 SC 1563. SPECIFIC PRINCIPLES APPLICABLE TO TAX LAWS (i) Tax laws and fundamental rights: In most cases, a taxing statute is challenged either on the ground that it violates the right to equality under Article 14 or it is violative of the fundamental rights to carry on business under Article 19. But a larger discretion is permitted in matters of classification. Sri Srinivasa Theatre vs. Government of Tamil Nadu AIR 1992 SC 999; K. Sham Bhat vs. Agricultural ITO AIR 1963 SC 591. (ii) The levy, quantum of tax applicable, conditions and manner of recovery are all matters within the competence of the legislature. Unless the taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy, the Court would not be justified in striking down the impugned statute as unconstitutional. Rai Ramkrishna vs. State of Bihar AIR 1963 SC 1667. (iii) A law will not be struck down merely because other entities or objects could have been taxed but have not been taxed by the legislature. Venugopala Ravi Varma Rajah vs. Union of India AIR 1969 SC 1094. (iv) The taxing statute must satisfy the test of reasonable classification – this implies that all those who are similarly situated must be included. It is also necessary to look beyond the classification and the purposes of the law.Federation of Hotel and Restaurant Association vs. Union of India AIR 1990 SC 1637. (v) The Supreme Court has also laid down the test of palpable arbitrariness. It is not possible to lay down any precise formula or test or precise scientific principles of exclusion or inclusion that can be applied. The test can only be one of palpable arbitrariness applied in the context of felt needs of the times and societal exigencies informed by experience. [Federation of Hotel and Restaurant Association vs. Union of India AIR 1990 SC 1637] (vi) In a taxing statute, mathematical precision is not possible; nor is completely logical or symmetrical classification. The legislature can choose objects of taxation and impose different rates of duty or grant exemption for different classes of commodities in different ways and methods. It is only necessary that such difference of classification is rational. [Venugopala Ravi Verma Rajah vs. Union of India AIR 1969 SC 1094, 1098; Hoechst Pharmaceuticals Ltd. vs. State of Bihar AIR 1983 SC 1019]. Thus, it is not necessary for the Government to tax everything in order to be able to tax something. The Supreme Court has upheld, for example, levy of duty only onvirginia tobacco and not on country tobacco; the levy of sales tax only on hides and not on other commodities.[V.M. Syed Mohammad & Co. vs. State of Andhra Pradesh AIR 1954 SC 314; E.I. Tobacco Co. Ltd. vs. State of A.P. AIR 1962 SC 1733; see also Vrajlal Manilal & Co. vs. State of M.P. 1986 Supp. SCC 201]. (vii) Absence of classification: Ironically, the failure to make a classification may itself lead to inequality. Thus, when a flat rate of tax of Rs. 2/‐ per acre was levied on all lands in Kerala, it was struck down as violative of Article 14. The flat rate of tax failed to take into account the income earning potential of the land which was taxed; fertile farm land suffered the same rate of tax as dry and wasteland. [K.T. Moopil Nair vs. State of Kerala AIR 1961 SC 552]. Similarly, a flat rate of tax based on the area of a building without any reference to the nature of the building, locality, type of structure, rents received and other relevant circumstances was violative of Article 14. [State of Kerala vs. Haji K. Haji K. Kutty Naha AIR 1969 SC 378; see also New Manek Chowk Spinning & Weaving Mills Co. Ltd. vs. Municipal Corporation, Ahmedabad AIR 1967 SC 1801]. (viii) A high rate of tax will not be violative of the fundamental right to carry on business under Article 19(1)(g) unless the assessee can show that the increase resulted in destroying his right to carry on business. [Express Hotels P. Ltd. vs. State of Gujarat AIR 1989 SC 1949; Federation of Hotels and Restaurant Association of India vs. Union of India AIR 1990 SC 1637] (ix) Tax laws – Levy, assessment and recovery: The power to make a law with respect to tax includes the power to provide for all incidental and ancillary matters relating to levy, assessment, collection and recovery of tax.[Meenakshi vs. State of Karnataka AIR 1983 SC 1283; Khazan Chand vs. State of Jammu & Kashmir AIR 1984 SC 762; Hiralal Ratanlal vs. Sales Tax Officer AIR 1973 SC 1034] (x) Article 265 makes a distinction between levy and collection. The term “levy” is wider than “assessment”, the latter generally applies to procedure adopted in fixing the liability to pay a particular tax. “Levy” includes imposition of tax as well as the assessment. Power to levy tax includes all subsidiary powers. [Khyerbhari Tea Co. Ltd. vs. State of Assam AIR 1964 SC 925] (xi) Taxation not by subordinate legislation: As a general rule, the tax laws must be passed by the legislature. Imposition of tax by executive notification or bye laws is not permissible unless there has been a very specific power delegated to the executive to do so. [Bimalchandra Banerjee vs. State of Madhya Pradesh AIR 1971 SC 517, 520; Ahmedabad Urban Development Authority vs. Sharadkumar Jayantikumar Pasawalla AIR 1992 SC 2038; Narinder Chand Hem Raj vs. Lt. Governor, Himachal Pradesh AIR 1971 SC 2399, 2401] At the same time Parliament/State Legislature can delegate the power to fix the rate of tax and provide for the procedure for the collection of the same. TAX LAWS AND THE COMMERCE CLAUSE As stated above, Article 304 prohibits the imposition of discriminatory tax. If a taxing statute imposes a higher rate of tax on goods imported from other States, it would be violative of Article 304. At the same time, minor variation in tax will not be a ground to strike down a particular levy. The court will look into the effect of a local law. For example, sales tax levied on hides and skins imported from other States was held to be discriminatory and unconstitutional. [A.T.B. Mehtab Majid & Co. vs. State of Madras AIR 1963 SC 928, 931]. Similarly, exemption granted only to local manufacturers of edible oil for a ten year period was held to be discriminatory and violative of Articles 301 and 304. [Shree Mahavir Oil Mills vs. State of Jammu & Kashmir (1996) 11 SCC 39, 54] CONCLUSION TO QUESTION NO.1 An examination of the case laws over the last fifty‐four years shows that the courts have been reluctant in striking down tax laws as being unconstitutional. As repeatedly held, the courts usually lean in favour of the constitutionality of tax laws. In rare cases, where the law is struck down, Parliament retrospectively amends the law. Thus section 9B of MP VAT Act 2002 in all likelihood would survive the test of constitutionality. Q2. Whether rule 9A of MP VAT Rules 2006 as inserted w.e.f.1‐4‐2011 can be challenged as ultra vires and hence unconstitutional ? Answer : The rule basically prescribes the mode of calculation of value of land to be deducted. However rule 9A(2) appears to be irrational, arbitrary and violative of Article 14. It suffers from an apparent discrimination between two similarly situated persons i.e. builders‐ one who has purchased the property and would get deduction of only 150% of the purchase price and one who works on land agreement and who would get deduction of market value. Determination of maximum of 150% is also arbitrary and has no logical reason. Likewise appreciation of 1% per month is also arbitrary and irrational. The said rule can be challenged on the basis of following judicial matrix :‐ A law which is completely arbitrary will be struck down as being violative of Article 14 –
Raja Jagannath Baksh Singh vs. State of U.P. AIR 1962 SC 1563. The taxing statute must satisfy the test of reasonable classification – this implies that all those who are similarly situated must be included. It is also necessary to look beyond the classification and the purposes of the law. Federation of Hotel and Restaurant Association vs. Union of India AIR 1990 SC 1637. The Supreme Court has also laid down the test of palpable arbitrariness. It is not possible to lay down any precise formula or test or precise scientific principles of exclusion or inclusion that can be applied. The test can only be one of palpable arbitrariness applied in the context of felt needs of the times and societal exigencies informed by experience. [Federation of Hotel and Restaurant Association vs. Union of India AIR 1990 SC 1637] Conclusion to question no.2 The said rule in my opinion is arbitrary, irrational and discriminatory and thus can be challenged as being ultra vires Article 14 of the Constitution. Q3 : Importance of explanation to section 57 :‐ Explanation added in sec 57(8) reads as under :‐ "Where the explanation submitted lead to the conclusion that there is no possibility of sale of goods within the State of M.P. or there was no attempt to evade tax in respect of the goods, it shall be deemed that no violation of the provisions of sub‐section (2) has taken place". Thus if a transporter is able to prove a) That there is no possibility of sale of goods within the state of m.p. Or b) there was no attempt to evade tax in respect of the goods Then penalty can be avoided. It should be noted that the two explanations are distinct and not conjoint since they are separated by OR. Thus any of the two circumstance would suffice. Applicability to pending proceedings :‐ Explanation is a part of the main section and hence, it cannot be read in isolation. The idea of inserting it is, if anything is not clear in the main section, it shall be made clear by Explanation. It should be remembered that for the purpose of taking any action or interpretation, the main section will be the foundation and the Explanation will be a subordinate part. It helps in harmonizing and clearing up any ambiguity in the main section. Hon'ble Supreme Court in the case of CAg I.T. V Plantation Corporation of Kerala Ltd. while explaining purpose of insertion of the Explanation held as under: "So long as there is no ambiguity in the statutory language resort to any interpretative process to unfold the legislative intent becomes impermissible. An Explanation is intended to either explain the meaning of certain phases and expressions contained in a statutory provision or depending upon its language it might supply or take away something from the content of a provision and at times even, by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt. " Hon'ble Delhi High Court in the case of CIT v/s Orissa Cement Ltd., 254 ITR 24 (Del) while explaining the scope of an "Explanation" to a statutory provision observed as under: "The object of an Explanation to a statutory provision is: (a) to explain. the meaning and intendment of the Act itself; (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve; (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful; (d) An Explanation cannot in any way interfere with or change the enactment or any part thereof; but where some gap is left which is relevant for the purpose, the Explanation, in order to suppress the mischief and advance the object of the Act, can help or assist the court in interpreting the true purpose and intendment of the enactment, and the right with which any person under a statute has been clothed It cannot set at naught the working of an Act by becoming a hindrance in the interpretation of the same. " As noted by the Supreme Court in Commissioner of Income Tax, Bombay and Ors. v. Podar Cement Pvt. Ltd. and Ors. (1997 (5) SCC 482) the circumstances under which the amendment was brought in existence and the consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment was clarificatory or substantive in nature and, whether it will have retrospective effect or it was not so. In Principles of Statutory Interpretation, 11th Edn. 2008, Justice G.P. Singh has stated the position regarding retrospective operation of statutes as follows: "The presumption against retrospective operation is not applicable to declaratory statutes. As stated in Craies and approved by the Supreme Court: For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word `declared' as well as the word 'enacted'. But the use of the words `it is declared' is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the Corm. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language `shall be deemed always to have meant' or 'shall be deemed never to have included'' is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the constitution came into force, the amending Act also will be part of the existing law." In Zile Singh v. State of Haryana and Ors. (2004 (8) SCC 1), it was observed as follows: “ It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the legislature to affect existing rights, it is deemed to be prospective only ‐‐ "nova constitutio futuris formam imponere debet non praeteritis" ‐‐ a new law ought to regulate what is to follow, not the past. (See Principles of Statutory Interpretation by Justice G.P. Singh, 9th Edn., 2004 at p. 438.) It is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole (ibid., p. 440). The presumption against retrospective operation is not applicable to declaratory statutes.... In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is "to explain" an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended.... An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect. Though retrospectivity is not to be presumed and rather there is presumption against retrospectivity, according to Craies (Statute Law, 7th Edn.), it is open for the legislature to enact laws having retrospective operation. This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant: (i) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv) what it was the legislature contemplated. The rule against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right. (p.392)" Above being the position, the inevitable conclusion is that Explanation to Section 57(8) is clarificatory and not substantive and will apply retrospectively. SUMIT NEMA C.A., LL.B.