//
you're reading...
legal issues

APEX COURT NOT ACCEPTED HIGH COURT VIEW= whether definition of “tax arrears” contained in Section 87 (m)(ii)(b) is arbitrary, irrational or violative of the doctrine of equality enshrined under Article 14 of the Constitution and whether the petitioners are entitle to avail benefit under Scheme. = The High Court, vide its impugned Judgment and Order dated 25.07.2005, has declared that Section 87(m)(ii) (b) of Finance (No.2) Act, 1998 is violative of Article 14 of the Constitution of India insofar as it seeks to deny the benefit of the `Kar Vivad Samadhana Scheme, 1998 (hereinafter referred to as “the Scheme”) to those who were in arrears of duties etc., as on 31.03.1998 but to whom the notices were issued after 31.03.1998 and further, has struck down the expression “on or before the 31st day of March 1998” under Section 87(m)(ii)(b) of the Finance (No. 2) Act, 1998 as ultra vires of the Constitution of India and in particular, Article 14 of the Constitution on the ground that the said expression prescribes a cut-off date which arbitrarily excludes certain category of persons from availing the benefits under the Scheme. The High Court has further held that as per the definition of the `tax arrears’ in Section 87(m) 4

REPORTABLE
The Indian Constitution preamble

Image via Wikipedia



 IN THE SUPREME COURT OF INDIA

 CIVIL APPELLATE JURISDICTION

 CIVIL APPEAL NO. 2960 OF 2006

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

 versus

M/s Nitdip Textile Processors

Pvt. Ltd. and Another ..............Respondents

 WITH

 CIVIL APPEAL NO. 2961 OF 2006

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

 versus

M/s Nitdip Textile Processors

Pvt. Ltd. and Another ..............Respondents

 WITH 

 CIVIL APPEAL NO. 2962 OF 2006

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

 versus

M/s Rinkoo Processors

Pvt. Ltd. and Another ..............Respondents

 1

 WITH 

 CIVIL APPEAL NO. 2963 OF 2006

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

 versus

M/s Swiss Pharma 

Pvt. Ltd. and Another ..............Respondents

 WITH 

 CIVIL APPEAL NO. 2964 OF 2006

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

 versus

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

 WITH 

 CIVIL APPEAL NO. 3659 OF 2006

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

 versus

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

 WITH 

 2

 CIVIL APPEAL NO. 5616 OF 2006

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

 versus

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

 WITH 

 CIVIL APPEAL NO. 990 OF 2007

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

 versus

M/s Navdurga Calendaring 

Works Surat and Others ..............Respondents

 J U D G M E N T

H.L. Dattu, J.

1) The present batch of eight appeals arises out of the 

 common Judgment and Order dated 25.07.2005 passed by 

 the High Court of Gujarat at Ahmedabad in the Special Civil 

 Application No.735 of 1999 and connected applications filed 

 under Article 226 of the Constitution of India. Since these 

 3

 appeals involve common question of law, they are disposed 

 of by this common Judgment and Order. 

2) All the parties in these present appeals before us were 

 duly served but none appeared for the respondents except 

 one in Civil Appeal No. 5616 of 2006. 

3) The High Court, vide its impugned Judgment and 

 Order dated 25.07.2005, has declared that Section 87(m)(ii)

 (b) of Finance (No.2) Act, 1998 is violative of Article 14 of 

 the Constitution of India insofar as it seeks to deny the 

 benefit of the `Kar Vivad Samadhana Scheme, 1998 

 (hereinafter referred to as "the Scheme") to those who were 

 in arrears of duties etc., as on 31.03.1998 but to whom the 

 notices were issued after 31.03.1998 and further, has struck 

 down the expression "on or before the 31st day of March 

 1998" under Section 87(m)(ii)(b) of the Finance (No. 2) Act, 

 1998 as ultra vires of the Constitution of India and in 

 particular, Article 14 of the Constitution on the ground that 

 the said expression prescribes a cut-off date which arbitrarily 

 excludes certain category of persons from availing the 

 benefits under the Scheme. The High Court has further held 

 that as per the definition of the `tax arrears' in Section 87(m)

 4

(ii)(a) of the Act, the benefit of the Scheme was intended to 

be given to all persons against whom the amount of duties, 

cess, interest, fine or penalty were due and payable as on 

31.3.1998. Therefore, this cut-off date in Section 87(m)(ii)

(b) arbitrarily denies the benefit of the Scheme to those who 

were in arrears of tax as on 31.03.1998 but to whom notices 

were issued after 31.3.1998. This would result in 

unreasonable and arbitrary classification between the 

assessees merely on the basis of date of issuance of Demand 

Notices or Show Cause Notices which has no nexus with the 

purpose and object of the Scheme. In other words, the 

persons who were in arrears of tax on or before 31.03.1998 

were classified as those, to whom Demand Notices or Show 

Cause Notices have been issued on or before 31.03.1998 

and, those to whom such notices were issued after 

31.3.1998. The High Court observed that this classification 

has no relation with the purpose of the Scheme to provide a 

quick and voluntary settlement of tax dues. The High Court 

further observed that this artificial classification becomes 

more profound in view of the fact that the Scheme came into 

operation with effect from 1.9.1998 which contemplates 

filing of declaration by all persons on or after 1.9.1998 but 

 5

on or before 31.1.1999. The High Court further held that all 

persons who are in arrears of direct as well as indirect tax as 

on 31.3.1998 constitute one class, and any further 

classification among them on the basis of the date of 

issuance of Demand Notice or Show Cause Notice would be 

artificial and discriminatory. The High Court concluded by 

directing the Revenue to consider the claims of the 

respondents for grant of benefit under the Scheme, afresh, in 

terms of the Scheme. The relevant portions of the impugned 

judgment of the High Court is extracted below:

 "In the light of the above, we shall now consider 

 whether definition of "tax arrears" contained in 

 Section 87 (m)(ii)(b) is arbitrary, irrational or 

 violative of the doctrine of equality enshrined under 

 Article 14 of the Constitution and whether the 

 petitioners are entitle to avail benefit under 

 Scheme. A reading of the speech made by the 

 Finance Minister and the objects set out in 

 memorandum to Finance (No. 2) Bill, 1998 shows 

 that the Scheme was introduced with a view to 

 quick and voluntary settlement of tax dues 

 outstanding as on 31.3.1998 under various direct 

 and indirect tax enactments by offering waiver of a 

 part of the arrears of taxes and interest and 

 providing immunity against prosecution and 

 imposing of penalty. The definition of `tax arrear' 

 contained in Section 87 (m)(i) in the context of 

 direct tax enactment also shows that the legislation 

 was intended to give benefit of the scheme to the 

 assessee who were in arrears of tax on 31.3.1998. 

 The use of the words as on "31st day of March, 

 1998" in Section 87(m)(ii) also shows that even in 

 6

relation to indirect tax enactments, the benefit of 

the scheme was intended to be given to those 

against whom the amount of duties, cess, interest, 

fine or penalty were due or payable upto 31.3.1998. 

Viewed in this context it is quite illogical to exclude 

the persons like the petitioners from whom the 

amount of duties, cess, interest, fine, penalty, etc. 

were due as on 31.3.1998 but to whom Demand 

Notices were issued after 31.3.1998. In our opinion, 

the distinction made between those who were in 

arrears of indirect taxes as on 31.3.1998 only on 

the basis of the date of issuance of notice is wholly 

arbitrary and irrational. The classification sought 

to be made between those Demand Notices or Show 

Cause Notices may have been issued on or before 

31st day of March, 1998 and those to whom such 

notices were issued after 31.3.1998 is per se 

unreasonable and has no nexus with the purpose of 

the legislation, namely to provide a quick and 

voluntary settlement of tax dues outstanding as on 

31.3.1998.

The irrationality of the classification becomes more 

pronounced when the issue is examined in the 

backdrop of the fact that the scheme was made 

applicable with effect from 1.9.1998, and in terms 

of Sections 88 (amended) a declaration was 

required to be filed on or after first day of 

September, 1998 but on or before 31.1.1999. In our 

opinion, all persons who were in arrears of direct 

or indirect taxes as on 31.3.1998 constituted one 

class and no discrimination could have been made 

among them by introducing an artificial 

classification with reference to the date of Demand 

Notice or Show Cause Notice. All of them should 

have been treated equally and made eligible for 

availing benefit under the Scheme subject to 

compliance of conditions contained in other 

provisions of the Scheme."

 7

4) We will take Civil Appeal No. 2960 of 2006 as the 

 lead matter. The facts of the case, in brief, are hereunder: 

 The respondent is engaged in the manufacture of 

 textile fabrics. The team of Preventive Officers of the 

 Central Excise, Ahmedabad-I conducted a surprise 

 inspection of the premises of the factory on 5.9.1997. The 

 Revenue Officers examined the statutory Central Excise 

 Records and physically verified the stocks at various stages 

 of manufacturing in the presence of two independent 

 panchas and respondent no. 2, under the Panchnama dated 

 5.9.1997. The Revenue Officers found that the respondents 

 have cleared the Man Made Fabric admeasuring 38,726 l.m. 

 of `5,38,449/- without the payment of excise duty of 

 `84,290/-. In this regard, the Statement of respondent no. 2 

 was recorded on 5.9.1997 under Section 14 of the Central 

 Excise Act, 1944 (hereinafter referred to as "the Excise 

 Act"). The respondent no. 2, in his Statement has admitted 

 the processing of the said fabric in his factory, after 

 registering it in the lot register, and its subsequent 

 clandestine removal without payment of the excise duty. 

 Accordingly, a Show Cause Notice dated 06.01.1999 was 

 issued to the respondents demanding a duty of `84,290/- 

 8

under Section 11A of the Excise Act along with an equal 

amount of penalty under Section 11AC of the Excise Act, 

and further penalty under Rule 173 Q of the Central Excise 

Rules, 1944 [hereinafter referred to as "the Excise Rules"] 

and interest under Section 11AB of the Excise Act for non-

payment of excise duty on clandestine clearance of the said 

fabrics. Further, the Respondent no. 2 was also asked to 

show cause as to why penalty under Section 209 A of the 

Excise Rules should not be imposed on him for his active 

involvement in acquiring, possession, removal, concealing, 

selling and dealing of the excisable goods, which are liable 

to be confiscated under the Excise Act. In the meantime, the 

Scheme was introduced by the Hon'ble Finance Minister 

through the 1998 Budget, which was contained in the 

Finance (No.2) Act of 1998. The Scheme was made 

applicable to tax arrears outstanding as on 31.3.1998 under 

the direct as well as indirect tax enactments. Originally, the 

benefits of the Scheme could be availed by any eligible 

assessee by filing a declaration of his arrears under Section 

88 of the Act on or after 1.9.1998 and on or before 

31.12.1998. However, the period for declaration under the 

Scheme was extended upto 31.1.1999 by the Ordinance 

 9

dated 31.12.1998. However, the cut-off date prescribed by 

the Scheme under Section 87 (m) (ii) (a) and (b) of the Act 

for availing the benefits under the Scheme excluded the 

respondents from its ambit. Being aggrieved, the 

respondents filed a Special Civil Application before the High 

Court of Gujarat, inter-alia, seeking a writ to strike down the 

words "on or before the 31st day of March 1998" occurring 

in Section 87 (m) (ii) of the Finance Act, 1998. They had 

further prayed for issuance of an appropriate direction to the 

petitioner to give them benefit of the Scheme, 1998 in 

respect of tax arrears under tax enactments for which Show 

Cause Notices or Demand Notices were issued on or after 

31.03.1998. The High Court, vide its impugned judgment 

and order dated 25.7.2005, struck down the expression "on 

or before the 31st day of March, 1998" in Section 87 (m) (ii) 

(b) as being unconstitutional. The High Court further 

directed the competent authority to entertain and decide the 

declarations made by the assessees in terms of the Scheme. 

Aggrieved by the Judgment and Order, the Revenue is 

before us in this appeal.

 10

5) The Scheme was introduced by Finance (No.2) Act 

 and is contained in Chapter IV of the Act. The Scheme is 

 known as Kar Vivad Samadhana Scheme, 1998. It was in 

 force between 1.9.1998 and 31.1.1999. Briefly, the Scheme 

 permits the settlement of "tax arrear" as defined in Section 

 87(m) of the Act. It is necessary to extract the relevant 

 provisions of the Scheme:

 "Section 87 - Definitions. 

 In this Scheme, unless the context otherwise 

 requires,

 ***

 h) "direct tax enactment" means the Wealth-

 tax Act, 1957 or the Gift-tax Act, 1958 or the 

 Income-tax Act, 1961 or the Interest-tax Act, 

 1974 or the Expenditure-tax Act, 1987;

 (j) "indirect tax enactment" means the 

 Customs Act, 1962 or the Central Excise Act, 

 1944 or the Customs Tariff Act, 1975 or the 

 Central Excise Tariff Act, 1985 or the relevant 

 Act and includes the rules or regulations made 

 under such enactment;

 ***

 (m) "tax arrear" means,-

 (i) in relation to direct tax enactment, the 

 amount of tax, penalty or interest 

 determined on or before the 31st day of 

 March, 1998 under that enactment in 

 respect of an assessment year as 

 modified in consequence of giving effect 

 11

 to an appellate order but remaining 

 unpaid on the date of declaration;

 (ii) in relation to indirect tax enactment,-

 (a) the amount of duties (including 

 drawback of duty, credit of duty or any 

 amount representing duty), cesses, 

 interest, fine or penalty determined as 

 due or payable under that enactment as 

 on the 31st day of March, 1998 but 

 remaining unpaid as on the date of 

 making a declaration under section 88; 

 or

 (b) the amount of duties (including 

 drawback of duty, credit of duty or any 

 amount representing duty), cesses, 

 interest, fine or penalty which 

 constitutes the subject matter of a 

 Demand Notice or a show-cause notice 

 issued on or before the 31st day of 

 March, 1998 under that enactment but 

 remaining unpaid on the date of 

 making a declaration under section 88,

 but does not include any demand 

 relating to erroneous refund and where 

 a show-cause notice is issued to the 

 declarant in respect of seizure of goods 

 and demand of duties, the tax arrear 

 shall not include the duties on such 

 seized goods where such duties on the 

 seized goods have not been quantified.

Explanation.--Where a declarant has already 

paid either voluntarily or under protest, any 

amount of duties, cesses, interest, fine or 

penalty specified in this sub-clause, on or 

before the date of making a declaration by 

him under section 88 which includes any 

deposit made by him pending any appeal or in 

pursuance of a Court order in relation to such 

duties, cesses, interest, fine or penalty, such 

 12

 payment shall not be deemed to be the amount 

 unpaid for the purposes of determining tax 

 arrear under this sub-clause;

 Section 88 - Settlement of tax payable

 Subject to the provisions of this Scheme, 

 where any person makes, on or after the 1st 

 day of September, 1998 but on or before the 

 31st day of December, 1998, a declaration to 

 the designated authority in accordance with 

 the provisions of section 89 in respect of tax 

 arrear, then, not-withstanding anything 

 contained in any direct tax enactment or 

 indirect tax enactment or any other provision 

 of any law for the time being in force, the 

 amount payable under this Scheme by the 

 declarant shall be determined at the rates 

 specified hereunder, namely ..."

6) The Scheme, as contained in Chapter IV of the Act, is 

 a Code in itself and statutory in nature and character. While 

 implementing the scheme, liberal construction may be given 

 but it cannot be extended beyond conditions prescribed in 

 the statutory scheme. In Regional Director, ESI Corpn. v. 

 Ramanuja Match Industries, (1985) 1 SCC 218, this Court 

 observed:

 "10 ... We do not doubt that beneficial legislations 

 should have liberal construction with a view to 

 implementing the legislative intent but where such 

 beneficial legislation has a scheme of its own there 

 is no warrant for the Court to travel beyond the 

 scheme and extend the scope of the statute on the 

 13

 pretext of extending the statutory benefit to those 

 who are not covered by the scheme."

7) In Hemalatha Gargya v. Commissioner of Income 

 Tax, A.P., (2003) 9 SCC 510, this Court has held: 

 "10. Besides, the Scheme has conferred a benefit 

 on those who had not disclosed their income 

 earlier by affording them protection against the 

 possible legal consequences of such non-disclosure 

 under the provisions of the Income Tax Act. Where 

 the assessees seek to claim the benefit under the 

 statutory scheme they are bound to comply strictly 

 with the conditions under which the benefit is 

 granted. There is no scope for the application of 

 any equitable consideration when the statutory 

 provisions of the Scheme are stated in such plain 

 language."

8) In Union of India v. Charak Pharmaceuticals (India) 

 Ltd., (2003) 11 SCC 689, this Court has observed thus:

 "8. If benefit is sought under a scheme, like KVSS, 

 the party must fully comply with the provisions of 

 the Scheme. If all the requirements of the Scheme 

 are not met then on principles of equity, courts 

 cannot extend the benefit of that Scheme."

9) In Deepal Girishbhai Soni v. United India Insurance 

 Co. Ltd., (2004) 5 SCC 385, at page 404, this Court observed 

 as : 

 "53. Although the Act is a beneficial one and, thus, 

 deserves liberal construction with a view to 

 implementing the legislative intent but it is trite 

 that where such beneficial legislation has a scheme 

 14

 of its own and there is no vagueness or doubt 

 therein, the court would not travel beyond the same 

 and extend the scope of the statute on the pretext of 

 extending the statutory benefit to those who are not 

 covered thereby. (See Regional Director, ESI 

 Corpn. v. Ramanuja Match Industries)"

10) In Maruti Udyog Ltd. v. Ram Lal, (2005) 2 SCC 638, 

 this Court has observed: 

 "A beneficial statute, as is well known, may 

 receive liberal construction but the same cannot be 

 extended beyond the statutory scheme. (See 

 Deepal Girishbhai Soni v. United India Insurance 

 Co. Ltd.)"

11) In Pratap Singh v. State of Jharkhand, (2005) 3 SCC 

 551, this Court has held: 

 "93. We are not oblivious of the proposition that a 

 beneficent legislation should not be construed so 

 liberally so as to bring within its fore a person who 

 does not answer the statutory scheme. (See Deepal 

 Girishbhai Soni v. United India Insurance Co. 

 Ltd.)"

12) The object and purpose of the Scheme is to minimize 

 the litigation and to realize the arrears of tax by way of 

 Settlement in an expeditious manner. The object of the 

 Scheme can be gathered from the Speech of the Finance 

 Minister, whilst presenting the 1998-99 Budget:

 15

 "Litigation has been the bane of both direct 

 and indirect taxes. A lot of energy of the 

 Revenue Department is being frittered in 

 pursuing large number of litigations pending 

 at different levels for long periods of time. 

 Considerable revenue also gets locked up in 

 such disputes. Declogging the system will not 

 only incentivise honest taxpayers, it would 

 enable the Government to realize its 

 reasonable dues much earlier but coupled 

 with administrative measures, would also 

 make the system more user-friendly. I 

 therefore, propose to introduce a new scheme 

 called Samadhan. he scheme would apply to 

 both direct taxes and indirect taxes and offer 

 waiver of interest, penalty and immunity from 

 prosecution on payment of arrears of direct 

 tax at the current rates. In respect of indirect 

 tax, where in recent years the adjustment of 

 rates has been very sharp, an abatement of 50 

 per cent of the duty would be available 

 alongwith waiver of interest, penalty and 

 immunity from prosecution"

13) The Finance Minister, whilst replying to the debate 

 after incorporating amendments to the Finance (No. 2) Bill, 

 1998, made a Speech dated 17.7.1998. The relevant portion 

 of the Speech, which highlights the object or purpose of the 

 Scheme, is extracted below:

 "The Kar Vivad Samadhan Scheme has evoked a 

 positive response from a large number of 

 organizations and tax professionals. Hon'ble 

 Members of Parliament have also taken a keen 

 interest in the scheme. The lack of clarity in regard 

 to waiver of interest and penalty in relation to 

 settlement of tax arrears under the indirect tax 

 16

 enactments is being taken care of by rewording the 

 relevant clauses of the Finance Bill. I have also 

 carefully considered the suggestions emanating 

 from various quarters including the Standing 

 Committee on Finance to extend the scope of this 

 scheme so as to included tax disputes irrespective 

 of the fact whether the tax arrears are existing or 

 not. As you have seen from the scheme, it has two 

 connected limbs-"Kar" and "Vivad". Collection of 

 tax arrears is as important as settlement of 

 disputes. The scheme is not intended to settle 

 disputes when there is no corresponding gain to 

 the other party. The basic objective of the scheme 

 cannot be altered."

14) This Court, in plethora of cases, has discussed the 

 object and purpose of this Scheme. In Sushila Rani v. 

 Commissioner of Income Tax, (2002) 2 SCC 697, this Court 

 observed:

 "5. KVSS was introduced by the Central 

 Government with a view to collect revenues 

 through direct and indirect taxes by avoiding 

 litigation. In fact the Finance Minister while 

 explaining the object of KVSS stated as follows:

 "Litigation has been the bane of both direct 

 and indirect taxes. A lot of energy of the 

 Revenue Department is being frittered in 

 pursuing large number of litigations pending at 

 different levels for long periods of time. 

 Considerable revenue also gets locked up in 

 such disputes. Declogging the system will not 

 only incentivise honest taxpayers, it would 

 enable the Government to realize its 

 reasonable dues much earlier but coupled with 

 administrative measures, would also make the 

 system more user-friendly...."

 17

15) In Killick Nixon Ltd., Mumbai v. Deputy 

 Commissioner of Income Tax, Mumbai, (2003) 1 SCC 145, 

 this Court has held:

 "9. The scheme of KVSS is to cut short litigations 

 pertaining to taxes which were frittering away the 

 energy of the Revenue Department and to 

 encourage litigants to come forward and pay up a 

 reasonable amount of tax payable in accordance 

 with the Scheme after declaration thereunder."

16) In CIT v. Shatrusailya Digvijaysingh Jadeja, (2005) 7 

 SCC 294, this Court has observed:

 "11. The object of the Scheme was to make an offer 

 by the Government to settle tax arrears locked in 

 litigation at a substantial discount. It provided that 

 any tax arrears could be settled by declaring them 

 and paying the prescribed amount of tax arrears, 

 and it offered benefits and immunities from penalty 

 and prosecution. In several matters, the 

 Government found that a large number of cases 

 were pending at the recovery stage and, therefore, 

 the Government came out with the said Scheme 

 under which it was able to unlock the frozen assets 

 and recover the tax arrears.

 12. In our view, the Scheme was in substance a 

 recovery scheme though it was nomenclatured as a 

 "litigation settlement scheme" and was not similar 

 to the earlier Voluntary Disclosure Scheme. As 

 stated above, the said Scheme was a complete code 

 by itself. Its object was to put an end to all pending 

 matters in the form of appeals, references, revisions 

 and writ petitions under the IT Act/WT Act." 

 18

17) In Master Cables (P) Ltd. v. State of Kerala, (2007) 5 

 SCC 416, this Court has held: 

 "8. The Scheme was enacted with a view to achieve 

 the purposes mentioned therein viz. recovery of tax 

 arrears by way of settlement. It applies provided 

 the conditions precedent therefor are satisfied." 

18) Further, the object of the Scheme and its application to 

 Customs and Central Excise cases involving arrears of taxes 

 has been explained in detail by the Trade Notice No. 74/98 

 dated 17.8.1998 issued by the Commissioner of Central 

 Excise and Customs, Ahmedabad-I. The relevant portion of 

 the said Trade Notice has been extracted below:

 OFFICE OF THE COMMISSIONER OF CENTRAL 

 EXCISE & CUSTOMS: AHMEDABAD-1

 Trade Notice No.: 74/98

 Basic No.: 34/98

 Sub: Kar Vivad Samadhan Scheme-1998

 1. As a part of this year's Budget proposals, the 

 Finance Minister had announced amongst others a 

 scheme termed "Kar Vivad Samadhan Scheme" 

 essentially to provide quick and voluntary 

 settlement of tax dues. The basic aim of introducing 

 this scheme has been to bring down the pending 

 litigation/disputes between the Dept. and the 

 assessees- both on the direct tax side and indirect 

 tax side- as well as to speedily realize the arrears of 

 taxes (including fines, penalties & interest) 

 considered due from various parties which are 

 locked up in various disputes.

 19

2. Essentially, these disputed cases involving 

duties, cesses, fine, penalty and interest on Customs 

and Central Excise side are proposed to be settled - 

case by case - if the concerned party agrees to pay 

up in each case a particular amount (which may be 

termed settled amount) calculated as per provisions 

of the scheme, following the laid procedure. 

Whereas the department gets immediate revenue 

and it results in reduction in pending disputes which 

may be prolonged otherwise before final 

assessment, the party also gets significant benefit by 

way of reduced payments instead of the disputed 

liability and immunity from prosecution.

3...

3.1. The relevant extracts containing provisions of 

the Samadhan Scheme as incorporated in the 

enacted Finance (No. 2) Act, 98 (21 of 1998) are 

enclosed herewith. The salient features of the 

Samadhan Scheme in relation to Indirect Taxes are 

briefly discussed below:-

 4. APPLICABILITY OF THE SCHEME

A. CATEGORY OF CASES TO WHICH SCHEME 

APPLICABLE

4.1. The Scheme is limited to Customs or Central 

Excise cases involving arrears of taxes (including 

duties, cesses, fine, penalty of (sic.) interest) which 

were not paid up as on 31.3.98 and are still in 

arrear and in dispute as on date of declaration (as 

envisaged in section 98 (sic.) of the aforesaid Act). 

The dispute and the case may be still at the stage of 

Show Cause Notice or Demand Notice (other than 

those of erroneous refunds) when party come (sic.) 

forward and makes a declaration for claiming the 

benefits of the scheme, or the duties, fine, penalty or 

interest after the issue of show cause/ Demand 

Notice may have been determined, but the assessee 

is disputing the same in appellate forums/courts etc 

and the amounts due have not been paid up. 

......

 20

4.3. It is pertinent to note that when a party comes 

forward for taking the benefits of the Samadhan 

Scheme and makes suitable declaration as provided 

thereunder (discussed further later) there must be 

dispute pending between the party and the Dptt. 

(Section 98(ii)(c) of Finanace Act refers). In other 

words, if in any case, there is no Show Cause Notice 

pending nor the party is in dispute at the 

appellate/revision stage nor there is an admitted 

petition in the court of law where parties is 

contesting the stand of the Dptt., but certain arrears 

of revenue due in case, are pending payment, the 

benefits of the scheme will not be available in such 

case.

B. TYPES OF REVENUE ARREARS CASES 

COVERED BY THE SCHEME

4.4. The intention of the scheme is to cover almost 

all categories of cases involving revenue in arrears 

and in dispute on Customs and Central Excise side 

(with few exceptions mentioned specifically in 

section 95 of Finance Act). The cases covered may 

involved duty, cess, fine, penalty or interest - 

whether already determined as due or yet to be 

determined (in cases where show cause/Demand 

Notice is yet to be decided). The term duty has been 

elaborated to include credit of duty, drawback of 

duty or any amount representing as duty. In other 

words, the scheme would extend not only disorted 

(sic.) cases of duties leviable under customs or 

Central Excise Acts and relevant tariff Acts or 

various specified Act....

4.5. The nature of cases covered will vary 

depending upon contraventions/offence involved, 

but essentially it must involve quantified duty/cess 

and or penalty, fine or interest. Simple Show Cause 

Notices which do not quantify any amount of duty 

being demanded and which propose only penal 

action - like confiscation of ceased goods and or 

imposition of penalty for violation of statutory 

provisions/collusion/abetment etc. thus will not be 

covered by the scheme. However, whenever 

 21

 quantified amount of duties are demanded and 

 penal action also proposed for various violations 

 even at Show Cause Notice stage benefits under the 

 scheme for such Show Cause Notices can be 

 claimed.

19) In view of the aforementioned Trade Notice, it is clear 

 that the object of the Scheme with reference to indirect tax 

 arrears is to bring down the litigation and to realize the 

 arrears which are considered due and locked up in various 

 disputes. This Scheme is mutually beneficial as it benefits 

 the Revenue Department to realize the duties, cess, fine, 

 penalty or interest assessed but not paid in an expeditious 

 manner and offers assessee to pay disputed liability at 

 discounted rates and also afford immunity from prosecution. 

 It is a settled law that the Trade Notice, even if it is issued by 

 the Revenue Department of any one State, is binding on all 

 the other departments with equal force all over the country. 

 The Trade Notice guides the traders and business community 

 in relation to their business as how to regulate it in 

 accordance with the applicable laws or schemes. In Steel 

 Authority of India v. Collector of Customs, (2001) 9 SCC 

 198, this Court has held:

 22

 "3. Learned counsel for the Revenue submitted that 

 this trade notice had been issued only by the 

 Bombay Customs House. It is hardly to be supposed 

 that the Customs Authorities can take one stand in 

 one State and another stand in another State. The 

 trade notice issued by one Customs House must 

 bind all Customs Authorities and, if it is erroneous, 

 it should be withdrawn or amended, which in the 

 instant case, admittedly, has not been done."

20) In Purewal Associates Ltd. v. CCE, (1996) 10 SCC 

 752, this Court has held: 

 "10. We must take it that before issuing a trade 

 notice sufficient care is taken by the authorities 

 concerned as it guides the traders to regulate their 

 business accordingly. Hence whatever is the legal 

 effect of the trade notice as contended by the 

 learned Senior Counsel for the respondent, the last 

 portion of the above trade notice cannot be faulted 

 as it is in accordance with the views expressed by 

 this Court. Though a trade notice as such is not 

 binding on the Tribunal or the courts, it cannot be 

 ignored when the authorities take a different stand 

 for if it was erroneous, it would have been 

 withdrawn."

21) However, the Trade Notice, as such, is not binding on 

 the Courts but certainly binding on the assessee and can be 

 contested by the assessee. (see CCE v. Kores (India) Ltd., 

 (1997) 10 SCC 338; Union of India v. Pesticides 

 Manufacturing and Formulators Association of India, 

 23

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

 10 SCC 402 ) 

22) Shri. R.P. Bhatt, learned senior counsel, has appeared 

 for the Revenue and the respondents in civil appeal no. 5616 

 of 2006 are represented by Shri. Paras Kuhad, learned senior 

 counsel. 

23) Learned senior counsel Shri. R.P. Bhatt, submits that 

 an assessee can claim benefits under the Scheme only when 

 his tax arrears are determined and outstanding, or a Show 

 Cause Notice has been issued to him, prior to or on 

 31.3.1998 in terms of Section 87 (m) (ii) (a) and (b) of the 

 Act. He further submits that the determination of the arrears 

 can be arrived at by way of adjudication or by issuance of 

 the Show Cause Notice to the assessee. He submits that once 

 this condition is satisfied, then the assessee is required to 

 submit a declaration under Section 88 of the Act on or after 

 1.9.1998 and on or before 31.1.1999, provided that the 

 arrears are unpaid at the time of filing the declaration. He 

 further submits that the present Scheme is statutory in 

 character and its provision should be interpreted strictly and 

 24

those who do not fulfill the conditions of eligibility 

contained in the Scheme are not allowed to avail the benefit 

under the Scheme. In support of his contention, he has relied 

on the Judgment of this Court in Union of India v. Charak 

Pharmaceuticals (India) Ltd., (2003) 11 SCC 689. Learned 

senior counsel, relying on the, Speech of the Finance 

Minister dated 17.7.1998, [232 ITR 1998 (14)] asserts that 

the purpose or the basic object of the Scheme is the 

collection of tax and settlement of disputes and it is intended 

to be beneficial to both assessee as well as the Revenue. He 

further contends that the determination of arrears or issuance 

of Show Cause Notice before or on 31.3.1998 is a 

substantive requirement for eligibility under the Scheme and 

filing of declaration of unpaid arrears under Section 88 of 

the Act is the procedural formality for availing the benefits 

of the Scheme. Therefore, he submits that the extension of 

time to file declaration under the Scheme on or before 

31.1.1999 is just a procedural formality and in no manner 

discriminatory, so as to violate the mandate of Article 14 of 

the Constitution. Learned senior counsel, on the strength of 

Trade Notice dated 17.8.1998 and the observations made by 

this Court in the case of Charak Pharmaceuticals (supra), 

 25

further submits that, in cases of Central Excise and Customs, 

the Scheme is limited only to two categories of cases: firstly, 

the arrears of tax which are assessed as on 31.3.1998 and are 

still unpaid and in dispute on the date of filing of 

declaration; secondly, the arrears for which, the Show Cause 

Notice or Demand Notice has been issued by the Revenue as 

on 31.3.1998 and which are still unpaid and are in dispute on 

the date of filing of declaration. He submits that the said 

Trade Notice indicates that the concept of actual 

determination or assessment has been extended to the Show 

Cause Notice in order to grant the benefit of the Scheme to 

duty demanded in such Show Cause Notice. He submits that 

the Show Cause Notice is in the nature of tentative charge, 

which has been included in the ambit of the Scheme in order 

to realize the tax/duty dues but not yet paid. He submits that 

the Scheme contemplates the conferring of the benefits only 

on the quantified duty either determined by way of 

adjudication or demanded in a Show Cause Notice. Learned 

senior counsel contends that in the present case, the Show 

Cause Notice demanding the duty was issued to the 

respondents only on 6.1.1999 and, therefore, the duty was 

determined as quantified only on the issuance of the Show 

 26

Cause Notice. Hence, respondents are not eligible to avail 

the benefit under this Scheme. Learned senior counsel 

submits that the cut-off date of on or before 31.3.1998 

prescribed by Section 87 (m) (ii) (b) cannot be considered as 

discriminatory or unreasonable only on the basis that it 

creates two classes of assessees unless it appears on the face 

of it as capricious or malafide. The cut-off date of 31.3.1998 

in indirect tax enactments under the Scheme has been 

purposively chosen in order to maintain uniformity with 

direct tax enactments where assessment year ends on the 

said date. In support of his submission, learned senior 

counsel relies on Union of India v. M.V. Valliappan, (1999) 

6 SCC 259, Sudhir Kumar Consul v. Allahabad Bank, (2011) 

3 SCC 486 and Government of Andhra Pradesh v. N. 

Subbarayudu, (2008) 14 SCC 702. He further submits that 

the present Scheme extends the benefit of reduction of tax 

and does not deprive or withdraw any existing benefit to the 

assessees. He also submits that if certain section of assessees 

is excluded from its scope by virtue of cut-off date, they 

cannot challenge the entire Scheme merely on ground of 

their exclusion. 

 27

24) Per contra, Shri. Paras Kuhad, learned senior counsel, 

 submits that the Scheme became effective from 1.09.1998 

 and remained operative till 31.1.1999. However, the arrears 

 in question should relate to the period prior to or as on 

 31.3.1998 which is the essence of the Scheme or the 

 qualifying condition. He submits that Section 87 (f) defines 

 `disputed tax' as the total tax determined and payable, in 

 respect of an assessment year under any direct tax enactment 

 but which remains unpaid as on the date of making the 

 declaration under Section 88. In this regard, he submits that 

 the factum of arrears exists even on the date of filing of 

 declaration. He contends that the Finance Act uses the 

 expression `determination' instead of `assessment' in order 

 to include the cases of self assessment. He submits that in 

 the case of direct tax and payment of advance tax, the 

 process of determination arises before the assessment. He 

 further argues that the purpose of the Scheme is to reduce 

 litigation and recover revenue arrears in an expeditious 

 manner. The classification should be in order to attain these 

 objectives or purpose. The classification of assessees on the 

 basis of date of issuance of Show Cause Notice or Demand 

 Notice is unreasonable and has no nexus with the purpose of 

 28

the legislation. He further submits that all the assessees who 

are in arrears of tax on or before 31.3.1998 formed one class 

but further classification among them just on the basis of 

issuance of Show Cause Notice is arbitrary and 

unreasonable. The criterion of date of issuance of Show 

Cause Notice is per se unreasonable as based on fortuitous 

circumstances. It is neither objective nor uniformly 

applicable. He further submits that the High Court has 

correctly struck down the words "on or before the 31st day of 

March 1998" in Section 87 (m) (ii) (b) and, thereby, created 

a right in favour of assessee to claim benefit under the 

Scheme for all arrears of tax arising as on 31.3.1998. He 

further submits that by application of the doctrine of 

severability, the Scheme can operate as a valid one for all 

purposes. Learned senior counsel submits that the carving 

out of sub-group only on the basis of whether Show Cause 

Notice has been issued or not and the Scheme being made 

effective from prospective date would render the operation 

or availability of Scheme variable or uncertain, depending 

on case to case. He further submits that this has no relation 

with the purpose of the Scheme which is beneficial in nature. 

He further submits that the date of issuance of Show Cause 

 29

Notice is not controlled by the assessee. Therefore, it is 

fortuitous circumstance which is per se unreasonable. The 

objective of the doctrine of classification is that the unequal 

should not be treated equally in order to achieve equality. 

The basis for classification in terms of Article 14 should be 

intelligible criteria which should have nexus with the object 

of the legislation. He argues that the criterion of date of 

issuance of Show Cause Notice is just a fortuitous factor 

which is variable, uncertain, and fateful and cannot be 

considered as intelligible criteria for the purpose of Article 

14 of the Constitution. He submits, however, criterion for 

classification is the prerogative of the Parliament but it 

should be certain and not vacillating like date of issuance of 

Show Cause Notice. He further submits that the hardships 

arising out of normal cut-off criteria is acceptable and 

justified but when injustice arises out of operation of the 

provision which prescribe criteria which is variable for same 

class of persons for availing the benefit of the Scheme, is 

against the mandate of Article 14 of the Constitution. He 

relies on the decision of this Court in State of Jammu and 

Kashmir v. Triloki Naths Khosa, (1974) 1 SCC 19 in order to 

buttress his argument that the classification is a subsidiary 

 30

rule to the Fundamental Right of Equal Protection of Laws 

and should not be used in a manner to submerge and drown 

the principle of equality. Learned senior counsel contends 

that the purpose of the Scheme is to end the dispute qua 

assessee, who is in arrears of taxes and has not paid such 

arrears. He further submits that in case of Central Excise, the 

excise duty is determined on removal of goods but the actual 

payment is made later and also, in case of self assessment, 

the tax arrears are determined before the actual payment or 

possible dispute. He submits that as per Rule 173 F of the 

Excise Rules, the assessee is required to determine the duty 

payable by self assessment of the excisable goods before 

their removal from the factory. He further submits that the 

methodology of re-assessment under Section 11 A of the 

Excise Act, rate of product approved before hand under 

Section 173B and ad valorem for value of goods under 

Section 173C contemplates the determination of duty 

payable by the assessee. In this regard, he submits that the 

word `determined' has been used purposively and 

deliberately in the Scheme instead of `assessment'. He 

further argues that in view of the object of the Scheme to 

collect revenue, the Scheme envisages two elements: first, 

 31

 the determination of the amount of tax due and payable on or 

 before 31.3.1998 and, second, whether the tax so determined 

 is in arrears on date of declaration under Section 88. In other 

 words, he submits that the tax so determined on or before 

 31.3.1998 should be in arrears on the date of declaration 

 under Section 88. Learned senior counsel, in support of his 

 submissions, relies on the decision of this Court in 

 Government of India v. Dhanalakshmi Paper and Board 

 Mills, 1989 Supp. (1) SCC 596. 

25) Taxation is a mode of raising revenue for public 

 purposes. In exercise of the power to tax, the purpose 

 always is that a common burden shall be sustained by 

 common contributions, regulated by some fixed general 

 rules, and apportioned by the law according to some uniform 

 ratio of equality.

26) The word `duty' means an indirect tax imposed on the 

 importation or consumption of goods. `Customs' are duties 

 charged upon commodities on their being imported into or 

 exported from a country.

27) The expression `Direct Taxes' include those assessed 

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

 32

 who are to pay them, while indirect taxes are levied upon 

 commodities before they reach the consumer, and are paid 

 by those upon whom they ultimately fall, not as taxes, but as 

 part of the market price of the commodity. For the purpose 

 of the Scheme, indirect tax enactments are defined as 

 Customs Act, 1962, Central Excise Act, 1944 or the 

 Customs Tariff Act, 1985 and the Rules and Regulations 

 framed thereunder.

28) The Scheme defines the meaning of the expression 

 `Tax Arrears', in relation to indirect tax enactments. It would 

 mean the determined amount of duties, as due and payable 

 which would include drawback of duty, credit of duty or any 

 amount representing duty, cesses, interest, fine or penalty 

 determined. The legislation, by using its prerogative power, 

 has restricted the dues of duties quantified and payable as on 

 31st day of March, 1998 and remaining unpaid till a 

 particular event has taken place, as envisaged under the 

 Scheme. The date has relevance, which aspect we would 

 elaborate a little later. The definition is inclusive definition. 

 It also envisages instances where a Demand Notice or Show 

 Cause Notice issued under indirect tax enactment on or 

 33

before 31st day of March, 1998 but not complied with the 

demand made to be treated as tax arrears by legal fiction. 

Thus, legislation has carved out two categories of assessees 

viz. where tax arrears are quantified but not paid, and where 

Demand Notice or Show Cause Notice issued but not paid. 

In both the circumstances, legislature has taken cut off date 

as on 31st day of March 1998. It cannot be disputed that the 

legislation has the power to classify but the only question 

that requires to be considered is whether such classification 

is proper. It is now well settled by catena of decisions of this 

Court that a particular classification is proper if it is based on 

reason and not purely arbitrary, caprice or vindictive. On the 

other hand, while there must be a reason for the 

classification, the reason need not be good one, and it is 

immaterial that the Statute is unjust. The test is not wisdom 

but good faith in the classification. It is too late in the day to 

contend otherwise. It is time and again observed by this 

Court that the Legislature has a broad discretion in the 

matter of classification. In taxation, `there is a broader power 

of classification than in some other exercises of legislation'. 

When the wisdom of the legislation while making 

classification is questioned, the role of the Courts is very 

 34

 much limited. It is not reviewable by the Courts unless 

 palpably arbitrary. It is not the concern of the Courts 

 whether the classification is the wisest or the best that could 

 be made. However, a discriminatory tax cannot be sustained 

 if the classification is wholly illusory. 

29) Kar Vivad Samadhan Scheme is a step towards the 

 settlement of outstanding disputed tax liability. The Scheme 

 is a complete Code in itself and exhaustive of matter dealt 

 with therein. Therefore, the courts must construe the 

 provisions of the Scheme with reference to the language 

 used therein and ascertain what their true scope is by 

 applying the normal rule of construction. Keeping this 

 principle in view, let us consider the reasoning of the High 

 Court. 

30) The tests adopted to determine whether a 

 classification is reasonable or not are, that the classification 

 must be founded on an intelligible differentia which 

 distinguishes person or things that are grouped together from 

 others left out of the groups and that the differentia must 

 have a rational relation to the object sought to be achieved 

 by Statute in question. The Legislature in relation to `tax 

 35

arrears' has classified two groups of assessees. The first one 

being those assessees in whose cases duty is quantified and 

not paid as on the 31st day of March, 1998 and those 

assessees who are served with Demand or Show Cause 

Notice issued on or before the 31st day of March, 1998. The 

Scheme is not made applicable to such of those assessees 

whose duty dues are quantified but Demand Notice is not 

issued as on 31st day of March, 1998 intimating the 

assessee's dues payable. The same is the case of the 

assessees who are not issued with the Demand or Show 

Cause Notice as on 31.03.1998. The grievance of the 

assessee is that the date fixed is arbitrary and deprives the 

benefit for those assessees who are issued Demand Notice or 

Show Cause Notice after the cut off date namely 31st day of 

March, 1998. The Legislature, in its wisdom, has thought it 

fit to extend the benefit of the scheme to such of those 

assessees whose tax arrears are outstanding as on 

31.03.1998, or who are issued with the Demand or Show 

Cause Notice on or before 31st day of March, 1998, though 

the time to file declaration for claiming the benefit is 

extended till 31.01.1999. The classification made by the 

legislature appears to be reasonable for the reason that the 

 36

legislature has grouped two categories of assessees namely, 

the assessees whose dues are quantified but not paid and the 

assessees who are issued with the Demand and Show Cause 

Notice on or before a particular date, month and year. The 

Legislature has not extended this benefit to those persons 

who do not fall under this category or group. This position 

is made clear by Section 88 of the Scheme which provides 

for settlement or tax payable under the Scheme by filing 

declaration after 1st day of September, 1998 but on or before 

the 31st day of December, 1998 in accordance with Section 

89 of the Scheme, which date was extended upto 

31.01.1999. The distinction so made cannot be said to be 

arbitrary or illogical which has no nexus with the purpose of 

legislation. In determining whether classification is 

reasonable, regard must be had to the purpose for which 

legislation is designed. As we have seen, while 

understanding the Scheme of the legislation, the legislation 

is based on a reasonable basis which is firstly, the amount of 

duties, cesses, interest, fine or penalty must have been 

determined as on 31.03.1998 but not paid as on the date of 

declaration and secondly, the date of issuance of Demand or 

Show Cause Notice on or before 31.03.1998, which is not 

 37

 disputed but the duties remain unpaid on the date of filing of 

 declaration. Therefore, in our view, the Scheme 1998 does 

 not violate the equal protection clause where there is an 

 essential difference and a real basis for the classification 

 which is made. The mere fact that the line dividing the 

 classes is placed at one point rather than another will not 

 impair the validity of the classification. The concept of 

 Article 14 vis-a-vis fiscal legislation is explained by this 

 Court in several decisions. 

31) In Amalgamated Tea Estates Co. Ltd. v. State of 

 Kerala, (1974) 4 SCC 415, this Court has held:

 8. It may be pointed out that the Indian Income Tax 

 Act also makes a distinction between a domestic 

 company and a foreign company. But that 

 circumstance per se would not help the State of 

 Kerala. The impugned legislation, in order to get 

 the green light from Article 14, should satisfy the 

 classification test evolved by this Court in a catena 

 of cases. According to that test: (1) the 

 classification should be based on an intelligible 

 differentia and (2) the differentia should bear a 

 rational relation to the purpose of the legislation.

 9. The classification test is, however, not inflexible 

 and doctrinaire. It gives due regard to the complex 

 necessities and intricate problems of government. 

 Thus as revenue is the first necessity of the State 

 and as taxes are raised for various purposes and 

 by an adjustment of diverse elements, the Court 

 grants to the State greater choice of classification 

 38

 in the field of taxation than in other spheres. 

 According to Subba Rao, J.:

 "(T)he courts in view of the inherent 

 complexity of fiscal adjustment of diverse 

 elements, permit a larger discretion to the 

 Legislature in the matter of classification, 

 so long as it adheres to the fundamental 

 principles underlying the said doctrine. The 

 power of the Legislature to classify is of 

 wide range and flexibility so that it can 

 adjust its system of taxation in all proper 

 and reasonable ways." (Khandige Sham 

 Bhat v. Agricultural Income Tax Officer, 

 Kasargod; V. Venugopala Ravi Verma 

 Rajah v. Union of India.)

 10. Again, on a challenge to a statute on the 

 ground of Article 14, the Court would generally 

 raise a presumption in favour of its 

 constitutionality. Consequently, one who 

 challenges the statute bears the burden of 

 establishing that the statute is clearly violative of 

 Article 14. "The presumption is always in favour of 

 the constitutionality of an enactment and the 

 burden is upon him who attacks it to show that 

 there is a clear transgression of the constitutional 

 principle." (See Charanjit Lal v. Union of India.)

32) In Anant Mills Co. Ltd. v. State of Gujarat, (1975) 2 

 SCC 175, this Court has observed:

 "25. It is well-established that Article 14 forbids 

 class legislation but does not forbid classification. 

 Permissible classification must be founded on an 

 intelligible differentia which distinguishes persons 

 or things that are grouped together from others left 

 out of the group, and the differentia must have a 

 rational relation to the object sought to be 

 achieved by the statute in question. In permissible 

 39

 classification mathematical nicety and perfect 

 equality are not required. Similarity, not identity of 

 treatment, is enough. If there is equality and 

 uniformity within each group, the law will not be 

 condemned as discriminative, though due to some 

 fortuitous circumstances arising out of a peculiar 

 situation some included in a class get an 

 advantage over others, so long as they are not 

 singled out for special treatment. Taxation law is 

 not an exception to this doctrine. But, in the 

 application of the principles, the courts, in view of 

 the inherent complexity of fiscal adjustment of 

 diverse elements, permit a larger discretion to the 

 Legislature in the matter of classification so long 

 as it adheres to the fundamental principles 

 underlying the said doctrine. The power of the 

 Legislature to classify is of wide range and 

 flexibility so that it can adjust its system of taxation 

 in all proper and reasonable ways (see Ram 

 Krishna Dalmia v. Justice S.R. Tendolkar and 

 Khandige Sham Bhat v. Agricultural Income Tax 

 Officer, Kasaragod) Keeping the above principles 

 in view, we find no violation of Article 14 in 

 treating pending cases as a class different from 

 decided cases. It cannot be disputed that so far as 

 the pending cases covered by clause (i) are 

 concerned, they have been all treated alike."

33) In Jain Bros v. Union of India, (1969) 3 SCC 311, the 

 issue before this Court was whether the clause (g) of Section 

 297(2) of the Income Tax Act, 1961 is violative of Article 14 

 of the Constitution inasmuch as in the matter of imposition 

 of penalty, it discriminated between two sets of assessees 

 with reference to a particular date, namely, those whose 

 assessment had been completed before 1st day of April 1962 

 40

 and others whose assessment was completed on or after that 

 date. Whilst upholding the validity of the above provision, 

 this Court has observed:

 "Now the Act of 1961 came into force on first 

 April 1962. It repealed the prior Act of 1922. 

 Whenever a prior enactment is repealed and new 

 provisions are enacted the Legislature invariably 

 lays down under which enactment pending 

 proceedings shall be continued and concluded. 

 Section 6 of the General Clauses Act, 1897, deals 

 with the effect of repeal of an enactment and its 

 provisions apply unless a different intention 

 appears in the statute. It is for the Legislature to 

 decide from which date a particular law should 

 come into operation. It is not disputed that no 

 reason has been suggested why pending 

 proceedings cannot be treated by the Legislature 

 as a class for the purpose of Article 14. The date 

 first April, 1962, which has been selected by the 

 Legislature for the purpose of clauses (f) and (g) of 

 Section 297(2) cannot be characterised as 

 arbitrary or fanciful."

34) In Murthy Match Works v. CCE, (1974) 4 SCC 428, 

 this Court has observed: 

 "15. Certain principles which bear upon 

 classification may be mentioned here. It is true that 

 a State may classify persons and objects for the 

 purpose of legislation and pass laws for the 

 purpose of obtaining revenue or other objects. 

 Every differentiation is not a discrimination. But 

 classification can be sustained only it it is founded 

 on pertinent and real differences as distinguished 

 from irrelevant and artificial ones. The 

 constitutional standard by which the sufficiency of 

 41

the differentia which form a valid basis for 

classification may be measured, has been 

repeatedly stated by the Courts. If it rests on a 

difference which bears a fair and just relation to 

the object for which it is proposed, it is 

constitutional. To put it differently, the means must 

have nexus with the ends. Even so, a large latitude 

is allowed to the State for classification upon a 

reasonable basis and what is reasonable is a 

question of practical details and a variety of 

factors which the Court will be reluctant and 

perhaps ill-equipped to investigate. In this 

imperfect world perfection even in grouping is an 

ambition hardly ever accomplished. In this context, 

we have to remember the relationship between the 

legislative and judicial departments of Government 

in the determination of the validity of 

classification. Of course, in the last analysis 

Courts possess the power to pronounce on the 

constitutionality of the acts of the other branches 

whether a classification is based upon substantial 

differences or is arbitrary, fanciful and 

consequently illegal. At the same time, the question 

of classification is primarily for legislative 

judgment and ordinarily does not become a 

judicial question. A power to classify being 

extremely broad and based on diverse 

considerations of executive pragmatism, the 

Judicature cannot rush in where even the 

Legislature warily treads. All these operational 

restraints on judicial power must weigh more 

emphatically where the subject is taxation.

 ...

19. It is well-established that the modern state, in 

exercising its sovereign power of taxation, has to 

deal with complex factors relating to the objects to 

be taxed, the quantum to be levied, the conditions 

subject to which the levy has to be made, the social 

and economic policies which the tax is designed to 

subserve, and what not. In the famous words of 

Holmes, J. in Bain Peanut Co. v. Pinson2:

 42

 "We must remember that the machinery of 

 Government would not work if it were not 

 allowed a little play in its joints."

35) In R.K. Garg v. Union of India, (1981) 4 SCC 675, 

 this Court has held:

 7. Now while considering the constitutional 

 validity of a statute said to be violative of Article 

 14, it is necessary to bear in mind certain well 

 established principles which have been evolved by 

 the courts as rules of guidance in discharge of its 

 constitutional function of judicial review. The first 

 rule is that there is always a presumption in favour 

 of the constitutionality of a statute and the burden 

 is upon him who attacks it to show that there has 

 been a clear transgression of the constitutional 

 principles. This rule is based on the assumption, 

 judicially recognised and accepted, that the 

 legislature understands and correctly appreciates 

 the needs of its own people, its laws are directed to 

 problems made manifest by experience and its 

 discrimination are based on adequate grounds. 

 The presumption of constitutionality is indeed so 

 strong that in order to sustain it, the Court may 

 take into consideration matters of common 

 knowledge, matters of common report, the history 

 of the times and may assume every state of facts 

 which can be conceived existing at the time of 

 legislation.

 "8. Another rule of equal importance is that laws 

 relating to economic activities should be viewed 

 with greater latitude than laws touching civil rights 

 such as freedom of speech, religion etc. It has been 

 said by no less a person than Holmes, J., that the 

 legislature should be allowed some play in the 

 joints, because it has to deal with complex 

 problems which do not admit of solution through 

 any doctrinaire or strait-jacket formula and this is 

 43

 particularly true in case of legislation dealing with 

 economic matters, where, having regard to the 

 nature of the problems required to be dealt with, 

 greater play in the joints has to be allowed to the 

 legislature. The court should feel more inclined to 

 give judicial deference to legislative judgment in 

 the field of economic regulation than in other 

 areas where fundamental human rights are 

 involved." 

36) In Elel Hotels and Investments Ltd. v. Union of India, 

 (1989) 3 SCC 698, this Court has held:

 "20. It is now well settled that a very wide latitude 

 is available to the legislature in the matter of 

 classification of objects, persons and things for 

 purposes of taxation. It must need to be so, having 

 regard to the complexities involved in the 

 formulation of a taxation policy. Taxation is not 

 now a mere source of raising money to defray 

 expenses of Government. It is a recognised fiscal 

 tool to achieve fiscal and social objectives. The 

 differentia of classification presupposes and 

 proceeds on the premise that it distinguishes and 

 keeps apart as a distinct class hotels with higher 

 economic status reflected in one of the indicia of 

 such economic superiority."

37) In P.M. Ashwathanarayana Setty v. State of 

 Karnataka, (1989) Supp. (1) SCC 696, this Court has held:

 "... the State enjoys the widest latitude where 

 measures of economic regulation are concerned. 

 These measures for fiscal and economic regulation 

 involve an evaluation of diverse and quite often 

 conflicting economic criteria and adjustment and 

 balancing of various conflicting social and 

 44

 economic values and interests. It is for the State to 

 decide what economic and social policy it should 

 pursue and what discriminations advance those 

 social and economic policies."

38) In Kerala Hotel and Restaurant Assn. v. State of 

 Kerala, (1990) 2 SCC 502, this Court has observed:

 "24. The scope for classification permitted in 

 taxation is greater and unless the classification 

 made can be termed to be palpably arbitrary, it 

 must be left to the legislative wisdom to choose the 

 yardstick for classification, in the background of 

 the fiscal policy of the State...."

39) In Spences Hotel (P) Ltd. v. State of W.B., (1991) 2 

 SCC 154, this Court has observed: 

 "26. What then `equal protection of laws' means 

 as applied to taxation? Equal protection cannot be 

 said to be denied by a statute which operates alike 

 on all persons and property similarly situated, or 

 by proceedings for the assessment and collection of 

 taxes which follows the course usually pursued in 

 the State. It prohibits any person or class of 

 persons from being singled out as special subject 

 for discrimination and hostile legislation; but it 

 does not require equal rates of taxation on 

 different classes of property, nor does it prohibit 

 unequal taxation so long as the inequality is not 

 based upon arbitrary classification. Taxation will 

 not be discriminatory if, within the sphere of its 

 operation, it affects alike all persons similarly 

 situated. It, however, does not prohibit special 

 legislation, or legislation that is limited either in 

 the objects to which it is directed, or by the 

 territory within which it is to operate. In the words 

 45

of Cooley: It merely requires that all persons 

subjected to such legislation shall be treated alike, 

under like circumstances and conditions, both in 

the privileges conferred and in the liabilities 

imposed. The rule of equality requires no more 

than that the same means and methods be applied 

impartially to all the constituents of each class, so 

that the law shall operate equally and uniformly 

upon all persons in similar circumstances. Nor 

does this requirement preclude the classification of 

property, trades, profession and events for taxation 

-- subjecting one kind to one rate of taxation, and 

another to a different rate. "The rule of equality of 

taxation is not intended to prevent a State from 

adjusting its system of taxation in all proper and 

reasonable ways. It may, if it chooses, exempt 

certain classes of property from any taxation at all, 

may impose different specific taxes upon different 

trades and professions." "It cannot be said that it 

is intended to compel the State to adopt an iron 

rule of equal taxation." In the words of Cooley :21 

 "Absolute equality is impossible. Inequality of 

 taxes means substantial differences. Practical 

 equality is constitutional equality. There is no 

 imperative requirement that taxation shall be 

 absolutely equal. If there were, the operations 

 of government must come to a stop, from the 

 absolute impossibility of fulfilling it. The most 

 casual attention to the nature and operation of 

 taxes will put this beyond question. No 

 single tax can be apportioned so as to be 

 exactly just and any combination of taxes is 

 likely in individual cases to increase instead of 

 diminish the inequality."

27. "Perfect equality in taxation has been said time 

and again, to be impossible and unattainable. 

Approximation to it is all that can be had. Under 

any system of taxation, however, wisely and 

carefully framed, a disproportionate share of the 

public burdens would be thrown on certain kinds 

of property, because they are visible and tangible, 

while others are of a nature to elude vigilance. It is 

 46

 only where statutes are passed which impose taxes 

 on false and unjust principle, or operate to 

 produce gross inequality, so that they cannot be 

 deemed in any just sense proportional in their 

 effect on those who are to bear the public charges 

 that courts can interpose and arrest the course of 

 legislation by declaring such enactments void." 

 "Perfectly equal taxation", it has been said, "will 

 remain an unattainable good as long as laws and 

 government and man are imperfect." `Perfect 

 uniformity and perfect equality of taxation', in all 

 the aspects in which the human mind can view it, is 

 a baseless dream."

40) In Venkateshwara Theatre v. State of A.P., (1993) 3 

 SCC 677, this Court has held: 

 "21. Since in the present case we are dealing with 

 a taxation measure it is necessary to point out that 

 in the field of taxation the decisions of this Court 

 have permitted the legislature to exercise an 

 extremely wide discretion in classifying items for 

 tax purposes, so long as it refrains from clear and 

 hostile discrimination against particular persons 

 or classes."

41) In State of Kerala v. Aravind Ramakant Modawdakar, 

 (1999) 7 SCC 400, this Court has held:

 "Coming to the power of the State in legislating 

 taxation law, the court should bear in mind that the 

 State has a wide discretion in selecting the persons 

 or objects it will tax and thus a statute is not open 

 to attack on the ground that it taxes some persons 

 or objects and not others. It is also well settled that 

 a very wide latitude is available to the legislature 

 in the matter of classification of objects, persons 

 47

 and things for the purpose of taxation. While 

 considering the challenge and nature that is 

 involved in these cases, the courts will have to bear 

 in mind the principles laid down by this Court in 

 the case of Murthy Match Works v. CCE2 wherein 

 while considering different types of classifications, 

 this Court held: (AIR Headnote)

 "[T]hat a pertinent principle of differentiation, 

 which was visibly linked to productive process, 

 had been adopted in the broad classification of 

 power-users and manual manufacturers. It was 

 irrational to castigate this basis as unreal. The 

 failure however, to mini-classify between large 

 and small sections of manual match 

 manufacturers could not be challenged in a 

 court of law, that being a policy decision of 

 Government dependent on pragmatic wisdom 

 playing on imponderable forces at work. 

 Though refusal to make rational classification 

 where grossly dissimilar subjects are treated by 

 the law violates the mandate of Article 14, even 

 so, as the limited classification adopted in the 

 present case was based upon a relevant 

 differentia which had a nexus to the legislative 

 end of taxation, the Court could not strike 

 down the law on the score that there was room 

 for further classification."

42) In State of U.P. v. Kamla Palace, (2000) 1 SCC 557, 

 this Court has observed:

 11. Article 14 does not prohibit reasonable 

 classification of persons, objects and transactions 

 by the legislature for the purpose of attaining 

 specific ends. To satisfy the test of permissible 

 classification, it must not be "arbitrary, artificial 

 or evasive" but must be based on some real and 

 substantial distinction bearing a just and 

 48

reasonable relation to the object sought to be 

achieved by the legislature. (See Special Courts 

Bill, 1978, Re, seven-Judge Bench; R.K. Garg v. 

Union of India, five-Judge Bench.) It was further 

held in R.K. Garg case that laws relating to 

economic activities or those in the field of taxation 

enjoy a greater latitude than laws touching civil 

rights such as freedom of speech, religion etc. Such 

a legislation may not be struck down merely on 

account of crudities and inequities inasmuch as 

such legislations are designed to take care of 

complex situations and complex problems which 

do not admit of solutions through any doctrinaire 

approach or straitjacket formulae. Their Lordships 

quoted with approval the observations made by 

Frankfurter, J. in Morey v. Doud:

 "In the utilities, tax and economic regulation 

 cases, there are good reasons for judicial 

 self-restraint if not judicial deference to 

 legislative judgment. The legislature after all 

 has the affirmative responsibility. The courts 

 have only the power to destroy, not to 

 reconstruct. When these are added to the 

 complexity of economic regulation, the 

 uncertainty, the liability to error, the 

 bewildering conflict of the experts, and the 

 number of times the Judges have been 

 overruled by events -- self-limitation can be 

 seen to be the path to judicial wisdom and 

 institutional prestige and stability."

12. The legislature gaining wisdom from historical 

facts, existing situations, matters of common 

knowledge and practical problems and guided by 

considerations of policy must be given a free hand 

to devise classes -- whom to tax or not to tax, 

whom to exempt or not to exempt and whom to give 

incentives and lay down the rates of taxation, 

benefits or concessions. In the field of taxation if 

the test of Article 14 is satisfied by generality of 

provisions the courts would not substitute judicial 

wisdom for legislative wisdom.

 49

43) In Aashirwad Films v. Union of India, (2007) 6 SCC 

 624, this Court has held: 

 14. It has been accepted without dispute that 

 taxation laws must also pass the test of Article 14 

 of the Constitution of India. It has been laid down 

 in a large number of decisions of this Court that a 

 taxation statute for the reasons of functional 

 expediency and even otherwise, can pick and 

 choose to tax some. Importantly, there is a rider 

 operating on this wide power to tax and even 

 discriminate in taxation that the classification thus 

 chosen must be reasonable. The extent of 

 reasonability of any taxation statute lies in its 

 efficiency to achieve the object sought to be 

 achieved by the statute. Thus, the classification 

 must bear a nexus with the object sought to be 

 achieved. (See Moopil Nair v. State of Kerala, East 

 India Tobacco Co. v. State of A.P., N. Venugopala 

 Ravi Varma Rajah v. Union of India, Asstt. 

 Director of Inspection Investigation v. A.B. Shanthi 

 and Associated Cement Companies Ltd. v. Govt. of 

 A.P.)

44) In Jai Vijai Metal Udyog Private Limited, Industrial 

 Estate, Varanasi v. Commissioner, Trade Tax, Uttar 

 Pradesh, Lucknow, (2010) 6 SCC 705, this Court held: 

 19. Now, coming to the second issue, it is 

 trite that in view of the inherent complexity of 

 fiscal adjustment of diverse elements, a wider 

 discretion is given to the Revenue for the purpose 

 of taxation and ordinarily different interpretations 

 of a particular tariff entry by different authorities 

 as such cannot be assailed as violative of Article 

 50

 14 of the Constitution. Nonetheless, in our opinion, 

 two different interpretations of a particular entry 

 by the same authority on same set of facts, cannot 

 be immunised from the equality clause under 

 Article 14 of the Constitution. It would be a case of 

 operating law unequally, attracting Article 14 of 

 the Constitution.

45) To sum up, Article 14 does not prohibit reasonable 

 classification of persons, objects and transactions by the 

 Legislature for the purpose of attaining specific ends. To 

 satisfy the test of permissible classification, it must not be 

 "arbitrary, artificial or evasive" but must be based on some 

 real and substantial distinction bearing a just and reasonable 

 relation to the object sought to be achieved by the 

 Legislature. The taxation laws are no exception to the 

 application of this principle of equality enshrined in Article 

 14 of the Constitution of India. However, it is well settled 

 that the Legislature enjoys very wide latitude in the matter of 

 classification of objects, persons and things for the purpose 

 of taxation in view of inherent complexity of fiscal 

 adjustment of diverse elements. The power of the 

 Legislature to classify is of wide range and flexibility so that 

 it can adjust its system of taxation in all proper and 

 reasonable ways. Even so, large latitude is allowed to the 

 51

State for classification upon a reasonable basis and what is 

reasonable is a question of practical details and a variety of 

factors which the Court will be reluctant and perhaps ill-

equipped to investigate. It has been laid down in a large 

number of decisions of this Court that a taxation Statute, for 

the reasons of functional expediency and even otherwise, 

can pick and choose to tax some. A power to classify being 

extremely broad and based on diverse considerations of 

executive pragmatism, the Judicature cannot rush in where 

even the Legislature warily treads. All these operational 

restraints on judicial power must weigh more emphatically 

where the subject is taxation. Discrimination resulting from 

fortuitous circumstances arising out of particular situations, 

in which some of the tax payers find themselves, is not hit 

by Article 14 if the legislation, as such, is of general 

application and does not single them out for harsh treatment. 

Advantages or disadvantages to individual assesses are 

accidental and inevitable and are inherent in every taxing 

Statute as it has to draw a line somewhere and some cases 

necessarily fall on the other side of the line. The point is 

illustrated by two decisions of this Court. In Khandige Sham 

Bhat vs. Agricultural Income Tax Officer, Kasaragod and 

 52

Anr. (AIR 1963 SC 591). Travancore Cochin Agricultural 

Income Tax Act was extended to Malabar area on November 

01, 1956 after formation of the State of Kerala. Prior to that 

date, there was no agricultural income tax in that area. The 

challenge under Article 14 was that the income of the 

petitioner was from areca nut and pepper crops, which were 

harvested after November in every year while persons who 

grew certain other crops could harvest before November and 

thus escape the liability to pay tax. It was held that, that was 

only accidental and did not amount to violation of Article14. 

In Jain Bros. vs. Union of India (supra), Section 297(2)(g) of 

Income Tax Act, 1961 was challenged because under that 

Section proceedings completed prior to April, 1962 was to 

be dealt under the old Act and proceedings completed after 

the said date had to be dealt with under the Income Tax Act, 

1961 for the purpose of imposition of penalty. April 01, 

1962 was the date of commencement of Income Tax Act, 

1961. It was held that the crucial date for imposition of 

Penalty was the date of completion of assessment or the 

formation of satisfaction of authority that such act had been 

committed. It was also held that for the application and 

implementation of the new Act, it was necessary to fix a date 

 53

 and provide for continuation of pending proceedings. It was 

 also held that the mere possibility that some officer might 

 intentionally delay the disposal of a case could hardly be a 

 ground for striking down the provision as discriminatory.

46) In view of the above discussion, we cannot agree with 

 the findings and the conclusion reached by the High Court 

 for which, we have made reference earlier. We have also not 

 discussed in detail the individual issues raised by the learned 

 senior counsel for the respondent, since those were the issues 

 which were canvassed and accepted by the High Court. 

 Accordingly, the appeals are allowed. The impugned 

 common judgment and order is set aside. Costs are made 

 easy.

 ................................................J.

 [H.L. DATTU]

 ................................................J.

 [CHANDRAMAULI KR. PRASAD]

 New Delhi,

 November 03, 2011. 54

About advocatemmmohan

ADVOCATE

Discussion

Comments are closed.

Blog Stats

  • 2,865,328 hits

ADVOCATE MMMOHAN

archieves

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 1,903 other followers

Follow advocatemmmohan on WordPress.com