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Constitutional validity of grant of rebate of tax by the State Government by issuing a notification in exercise of its powers under Section 5 of Uttar Pradesh Trade Tax Act, 1948 (“the Act”, for short) = STATE OF U.P & ORS. APPELLANT(S) VERSUS JAIPRAKASH ASSOCIATES LTD RESPONDENT(S)= judis.nic.in/supremecourt/filename=40887

Constitutional validity of grant of  rebate  of  tax  by  the State Government by issuing a notification in exercise of its powers  under Section 5 of Uttar Pradesh Trade Tax  Act,  1948  (“the  Act”,  for  short)=

 

whether grant of  rebate  of  tax  by  the

State Government by issuing a notification in exercise of its powers  under

Section 5 of Uttar Pradesh Trade Tax  Act,  1948  (“the  Act”,  for  short)

discriminates between the goods imported from neighbouring States and goods

manufactured and produced in the  State  of  Uttar  Pradesh  and  therefore

contravenes the Constitutional Provisions viz.; articles 301 and 304(a)  of

the Constitution of India. =

 

we hold  ‘rebate  of  tax’

granted by the State Government to cement manufacturing units using fly-ash

as raw material in a unit established in the districts of  State  of  Uttar

Pradesh alone is violative of the provisions contained in articles 301  and

304(a)  of  the  Constitution  of  India.   

We  further  declare  that  the

notification would also apply to respondent(s)- cement manufacturing units.

 

 

 

54.         With these observations and directions, all the  civil  appeals

are disposed of. There shall be no order as to costs.

REPORTABLE

 

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3026 OF 2004
STATE OF U.P & ORS. APPELLANT(S)
VERSUS
JAIPRAKASH ASSOCIATES LTD RESPONDENT(S)
WITH

Civil Appeal No. 3025 of 2004

STATE OF U.P & ANR. APPELLANT(S)
VERSUS
JAIPRAKASH ASSOCIATES LTD. & ANR. RESPONDENT(S)
WITH

Civil Appeal No. 5567 of 2004
STATE OF U.P & ORS. APPELLANT(S)
VERSUS
DIAMOND CEMENTS RESPONDENT(S)

 
WITH

Civil Appeal No. 7190 of 2004
STATE OF U.P & ANR. APPELLANT(S)
VERSUS
CENTURY TEXTILE & INDUSTRIES LTD.
& ORS. RESPONDENT(S)

WITH

Civil Appeal No. 333 of 2006

STATE OF U.P & ORS. APPELLANT(S)
VERSUS
MAIHER CEMENT & ORS. RESPONDENT(S)

WITH

Civil Appeal No. of 2013
(arising out of SLP (C) No. 11305 of 2013)
STATE OF U.P & ORS. APPELLANT(S)
VERSUS
M/s U. P. ASBESTOS LTD. RESPONDENT(S)
AND
Civil Appeal Nos. of 2013
(arising out of SLP (C) Nos. 6815-6816 of 2005)

STATE OF U.P & ORS. APPELLANT(S)
VERSUS
BIRLA CORPORATION LTD. & ORS. RESPONDENT(S)
J U D G M E N T

H.L. Dattu, J.

 

1. Leave granted.

2. The substantial question of law that requires to be considered
and decided in these appeals is, whether grant of rebate of tax by the
State Government by issuing a notification in exercise of its powers under
Section 5 of Uttar Pradesh Trade Tax Act, 1948 (“the Act”, for short)
discriminates between the goods imported from neighbouring States and goods
manufactured and produced in the State of Uttar Pradesh and therefore
contravenes the Constitutional Provisions viz.; articles 301 and 304(a) of
the Constitution of India.
3. The lead case is Civil Appeal No. 3026 of 2004. The appellants
are public limited companies, manufacturing cement in their manufacturing
units in Rewa district situate in the State of Madhya Pradesh after
procuring fly-ash from the thermal power stations in the State of Uttar
Pradesh and thereafter selling the manufactured product viz. Cement in the
districts of State of Uttar Pradesh.

4. The fly-ash is produced from coal combustion and normally
dispersed into the atmosphere which contains toxic chemicals that can cause
environmental pollution and hazards. Therefore for utilization of fly-ash
and to control pollution, cement projects were set up to make use of the
fly-ash generated from the power plants.
5. To encourage manufacturers using fly-ash in manufacturing of
their products, the Government of Uttar Pradesh in exercise of its powers
under Section 5 of the Act, had issued notification dated 18.06.1997,
granting “rebate of tax” to the dealers in the State of Uttar Pradesh
excluding all other dealers manufacturing cement outside the State of Uttar
Pradesh using fly-ash purchased in the State of Uttar Pradesh. Annexure
appended to the notification provided for name of the districts and the
period for which the rebate will be allowed. The notification prior to its
rescinding only specified the percentage of rebate of tax to be granted
depending on the content of fly-ash used by the dealers in the
manufacturing of cement.

6. On a finding by the Government of Uttar Pradesh on a later date
that the notification is vaguely worded, has rescinded the earlier
notification dated 18.06.1997, and has issued fresh notification dated
27.02.1998, in exercise of its powers under Section 5 of the Act. Apart
from others the notification provides certain conditions which requires to
be fulfilled if the manufacturing units intend to take benefit of the
notification. The condition No. 1 of the notification specifies that to
avail the benefit of rebate, the goods should be manufactured in a unit
established in the State of Uttar Pradesh and secondly, such goods shall be
manufactured using fly-ash purchased from the thermal power stations
situated in the State of Uttar Pradesh. The notification specifically
enlists the areas in Uttar Pradesh districts alone for the purpose of the
grant of rebate of tax by the Government and therefore restricted the
benefit of rebate only to the units manufacturing and producing cement
using fly-ash in Uttar Pradesh. The notifications require to be extracted.
They are as follows:
“[S. No. 1263]
Notification No. T.T.-2-1885/XI-9(226)94-U.P. Act-15-48-Order-97,
dated 18-6-1997
[Published in U.P. Gazette, dated 18.06.1997]
In exercise of the power under section 5 of the Uttar Pradesh
Trade Tax Act, 1948 (U.P. Act No. XV of 1948) the Governor is
pleased:-
a) to declare the goods having fly-ash contents of 10 per cent of more by
weight to be notified goods for the purposes of this section;
b) to grant a rebate of tax of twenty five percent on goods having fly-
ash contents between ten to thirty per cent by weight and a rebate of
tax of fifty per cent on the goods having fly-ash contents exceeding
thirty percent by weight on the tax levied under the Act in the
district mentioned in column-2 Annexure given below for the period
mentioned in column-3 of the said Annexure:-

 

|ANNEXURE |
| | | |
|Serial |Name of District |Period for |
|Number | |which the |
| | |rebate of tax |
| | |will be allowed|
|1 |2 |3 |
|1. |Banda, Hamipur, Jalaun, Mahoba,|Twelve Years |
| |Jhansi, Lalitpur and Shahuji | |
| |Nagar | |
|2. |Almora, Chamoli, Dehradun, |Twelve Years |
| |Fatehpur, Jaunpur, Kanpur | |
| |(Dehat), Nanital, Fauri | |
| |Garhwal, Pithoragarh, | |
| |Sultanpur, Champawat, Tehri | |
| |Garhwal, Udham Singh Nagar, | |
| |Uttar Kashi and Growth Centre. | |
|3. |(i) The Districts of Azamgarh, |Ten Years |
| |Ambedkar-Nagar, Bahraich, | |
| |Ballia, Barabanki, Deoria, | |
| |Etah, Etawah, Faizabad, | |
| |Farrukhabad, Ghazipur, Gonda, | |
| |Hardoi, Mainpuri, Mathura, Mau,| |
| |Moradabad, Padrauna, Pillibhit,| |
| |Pratapgarh, Raibareili, Rampur,| |
| |Shahjahanpur, Sidharth Nagar, | |
| |Sitapur, Unnao, Kaushambi, | |
| |Jyotibaphule Nagar, Mahamaya | |
| |Nagar and Shravasti | |
| |(ii) The area of Allahabad |Ten Years |
| |District in South of the river | |
| |Jamuna and confluent Ganga | |
| |(Excluding the area included | |
| |under Municipal Corporation | |
| |Allahabad) | |
| | |Ten Years |
| |(iii) The Taj Trapezium Area | |
| | |Ten Years |
| |(IV) Greater Noida Industrial | |
| |Development area | |
| |The Districts of Agra | |
| |(excluding Taj Trapezium area),| |
| |Aligarh (excluding Tax | |
| |Trapezium Area), Allahabad | |
| |(excluding the area in south of| |
| |rivers Jamuna and confluent | |
| |Ganga but including the area | |
| |included under Municipal | |
| |Corporation Allahabad), | |
| |Bareilly, Bhadohl, Bijnor, | |
| |Firozabad (excluding Taj | |
| |Trapezium area), Ghaziabad | |
| |(excluding Greater NOIDA | |
| |Industrial Development Area), | |
| |Gorakhpur, Haridwar, Kanpur | |
| |(Nagar), Lakhimpur Kheri, | |
| |Lucknow, Maharajganj, Meerut, | |
| |Muzaffarnagar, Saharanpur, | |
| |Varanasi, Gautam Budh Nagar, | |
| |Chandauli, Mirzapur and | |
| |Sonbhadra. | |

7. The second notification, dated 27.02.1998 issued by the
Government of Uttar Pradesh is extracted and reads as under:-

“[S. No. 1289]
Notification No. T.T.-2-592/XI-9(226)94-U.P. Act-15-48
Order-98, dated 27-2-1998
Whereas, the State Government is satisfied that it is expedient
in the public interest so to do:
Now, therefore, in exercise of the powers under section 5 of the
Uttar Pradesh Trade Tax Act, 1948 (U.P. Act No. XV of 1948), read with
Section 21 of the Uttar Pradesh General Clauses Act, 1904 (U.P. Act
No. 1 of 1904), the Governor, with effect from March 1, 1998 is
pleased:-
a) to rescind the Notification No. T.T.-2-1885/XI-9(226)94-U.P. Act-
15-48 Order-97, dated June 18, 1997;
b) to grant a rebate of tax of twenty five percent on goods having
fly-ash contents between ten to thirty per cent by weight and a
rebate of tax of fifty per cent on the goods having fly-ash
contents exceeding thirty percent by weight on the tax levied
under the Act in the districts mentioned in column-2 Annexure
given below for the period mentioned in column-3 of the said
Annexure subject to the following condition:-

 
CONDITIONS
i) Such goods shall be manufactured in a unit established in the area
mentioned in column-2 of the Annexure;
ii) Such goods shall be manufactured using fly-ash, purchase or
received from the thermal power stations situated in Uttar
Pradesh;
iii) the dealer claiming rebate of tax under this notification shall
keep records in which following information will be shown:

 
a) date;
b) name of thermal power stations from which fly-ash is
purchased or received;
c) weight of fly-ash;
d) name of manufactured goods;
e) weight of manufactured goods
f) weight of fly-ash used in manufacturing of such goods
g) weight of other goods used in manufacture of such goods;

 

iv) the total weight of manufactured goods and percentage of fly-ash
used, should be mentioned on goods of packing of such goods as far
as possible.

 
|ANNEXURE (Supra) |
Explanation:- The verification of percentage of fly-ash used by fly-
ash based industries shall be made on the basis of
Government orders issued in this behalf from time to
time.”

8. To complete the narration, it is apropos to state that the
aforesaid notification is rescinded by the State Government with effect
from 14.10.2004 by issuing notification dated 14.10.2004.

9. The cement industries situated in the neighbouring States
aggrieved by the notification of the Government of Uttar Pradesh, dated
27.02.1998 had approached the High Court by filing Writ Petitions. In that
they had sought for quashing of the notification, dated 27.02.1998 insofar
as Condition No. 1 (as extracted above) of the notification and other
consequential reliefs.

10. The High Court has come to a finding on two broad issues;
firstly, whether Condition No. 1 of the notification i.e. the grant of
rebate of tax on the sale of cement in the Districts of Uttar Pradesh alone
contravenes articles 301 and 304(a) of the Constitution of India. On the
aforesaid issue, the Court has concluded that the grant of rebate of tax by
the State Government discriminated between the imported goods and the goods
manufactured in Uttar Pradesh restricting the free movement of goods from
one State to the other and therefore impinges articles 301 and 304(a) of
the Constitution of India.
11. The Second question that is considered and decided by the High
Court, is, whether doctrine of severability will apply and therefore if
Condition No. 1 in the notification violates articles 301 and 304(a) of the
Constitution of India; should the notification be struck down in its
entirety or merely the impinging condition in the notification. The High
Court has relied on the decision of this Court in Loharn Steel Industries
v. State of Andhra Pradesh, (1997) 2 SCC 37, and has come to the conclusion
that if certain conditions in the notification violate freedom of trade and
commerce, then that portion of the notification restricting rebate of tax
to the districts in State of Uttar Pradesh alone is severable. Therefore,
the High Court for the reasons stated above has declared the Condition No.1
of the notification as illegal, arbitrary and discriminatory, accordingly
has quashed the Condition No.1 of the notification and also granted
consequential relief in the form of rebate to the respondents-herein and
further has directed that deposits made by the respondents in excess of
what was payable was to be refunded with an interest of 10% per annum.

 
12. Being aggrieved, the Revenue calls in question the correctness
or otherwise of the common judgment and order passed by the High Court in a
batch of Writ Petitions dated 29.01.2004.

13. Shri Sunil Gupta, learned senior counsel appearing for the
appellants contended that the notification issued by the Government
provides for grant of rebate to an industry which manufactures cement by
using fly-ash as a raw material. The rebate is granted by the Government to
encourage industries in removing and re-using fly-ash. Since the
notification only provides for rebate, it would not fall within the meaning
ascribed to ‘any tax’ under article 304(a) of the Constitution and would
therefore does not contravene the Constitutional Provisions. In aid of his
submission, the counsel would heavily rely on the decision of this Court in
the case of Video Electronics Pvt. Ltd. v. State of Punjab, (1990) 3 SCC
87. The learned counsel would further argue that rebate and imposition/
exemption are two different concepts. Exemption is an antithesis of
‘imposition’ and it belongs to the realm of imposition of tax and therefore
exemption simpliciter without reason is barred by article 304(a) of the
Constitution of India. Rebate, on the other hand, is repayment or refund of
an amount and therefore it may not be a subsidy but it is in the form of an
incentive or a grant. He further would point out that imposition of tax is
different from collection or repayment of tax. In other words, he would
submit that there are two different stages:- one would be the imposition
and levy of taxes and the other is collection and repayment of taxes.
Rebate of tax as such is a repayment of taxes and is certainly not a part
of levy or imposition of taxes. He would further submit that for rebate of
tax as against non-imposition or exemption at point of tax being common,
Part XIII of the Constitution will not apply.
14. In the second limb of the argument, the learned counsel would
submit that there are two crutches in the notification, if one of them is
taken away the other cannot function independently. Therefore, he would
submit that because the respondents have not challenged Clause(2) and have
only challenged Clause(1) of the notification, then while granting relief
if one of the condition is declared invalid then both the clauses of the
notification are to be struck down.

15. Thirdly, the learned counsel would contend that the State of
Uttar Pradesh has no territorial jurisdiction over the industrial units
situate outside the State of Uttar Pradesh and therefore, the notification
also inherently does not and cannot give the Uttar Pradesh Authorities any
extra territorial jurisdiction. Therefore, it is nigh impossible for the
accessing authorities to effectively enforce machinery and procedural
provisions. This aspect of the matter is not taken note of is the
submission of the learned counsel. Finally concludes, that, rebate is
outside the scope of Part XIII and article 304(a) of the Constitution of
India, and Section 5 of the Act is a beneficial legislation passed in
public interest by the State Government and therefore a liberal approach
requires to be adopted by this Court.
16. Per Contra, Shri Dhruv Agarwal, learned senior counsel would
contend, that, by reason of the notification all the sales of the Cement in
Uttar Pradesh manufactured by cement industries using fly ash for such
manufacture outside the State of Uttar Pradesh are subjected to levy of
sales tax at the rate of 12.5 per cent, whereas the sales of the cement
manufactured by cement industries in Uttar Pradesh are granted rebate of
tax from such levy and thus the cement industries outside the State of
Uttar Pradesh are clearly discriminated against. It is submitted that this
discrimination violates the provisions of articles 301 and 304(a) of the
Constitution of India. It is further contended that article 304(a) of the
Constitution speaks of imposition of tax and rebate of tax is nothing but a
facet of imposition of tax and therefore the provision of article 304(a) of
the Constitution is attracted. He would further contend that article
304(a) of the Constitution is not meant to be blanket legislation and that
grant of incentives and subsidies for backward areas given under the
provisions of the Act are different from rebate of tax given under the
notification. He would rely on Shree Mahavir Oils and another v. State of
Jammu and Kashmir, (1996) 11 SCC 39, and would submit that the aforesaid
case clarified the observations made in the Video Electronics case (Supra),
wherein it is observed that exemption without reasons is discriminatory and
would directly hit by article 304(a) of the Constitution of India. He would
further point out that rebate of tax would have the same effects of an
exemption because it would mean refunding the full amount of tax collected.
Therefore, rebate is nothing but a concessional rate of tax.

17. The learned counsel, would further argue on the point of
severability that while severing, the scope of the provision is enlarged
and therefore if the invalid portion of the notification viz. Condition
No.1 of the notification can be severed from the valid portion of the
notification without changing the object of the notification, then relying
on the principles of D.S. Nakara v. Union of India, 1983 2 SCR 165, the
doctrine of severability should be made applicable. Lastly it is submitted
that the constitutional validity of a taxing provision cannot be tested on
the touch stone of inability in enforcing machinery provision.

18. Shri Ashok H. Desai, learned senior counsel would argue that
the primary question for consideration is whether the rebate of tax
introduced by the Government of Uttar Pradesh creates a trade barrier/
fiscal barrier or in other words the Government has further insulated
itself by creating tariff walls, therefore, impinging article 301 and
article 304(a) of the Constitution of India. He would therefore make an
effort to show the legislative history and scope of article 304(a) read
with article 301 of the Constitution of India. To date back to the
historical genesis of the aforesaid articles, he would submit that they
were introduced to remove the trade blocks/ barrier that existed between
princely States prior to independence but subsequently to foster economic
development in the whole of India and to preserve its unity, such economic
barriers were restricted which were discriminatory in nature. He would
further submit that to understand whether any such tax introduced by the
Government is discriminatory or not, the effect and the result of such tax
imposed is to be seen. If the overall result or such effect restricts the
free movement of goods between the States then it would violate articles
301 and 304(a) of the Constitution of India.

19. He further submits that it is undoubtedly true that it is the
prerogative of the State Government to encourage the backward areas in its
State by way of incentives but in the instant case the State of Uttar
Pradesh does not segregate between backward and developed districts in the
State but have rather extended the rebate of tax to even the industrially
advanced districts in the State of Uttar Pradesh and further the rebate of
tax is in the nature of exemption/ concessional rate of tax and the overall
effect of such rebate is that it altogether exempts the dealer
manufacturing and producing cement by using fly-ash in Uttar Pradesh from
the payment of tax and therefore rebate qualifies as any such ‘tax’ imposed
under article 304(a) of the Constitution that would give a discriminatory
treatment to two different goods, one originating within the State and the
other as the out-of–State goods.
20. The learned counsel would further contend that the concept of
rebate of tax is within the realm of taxation and whether it is exemption
or repayment by way of a rebate of tax, the only test is, one has to be
mindful of its impact as to whether it is a trade barrier thereby impinging
article 304(a) of the Constitution of India. He would further point his
finger to Section 5 of the Act and submit that Section 5 of the Act is
couched in a manner so as to reflect that it is a rebate of tax. Therefore,
the intention of the framers of article 304(a) of the Constitution cannot
be overlooked which was only to restrict trade barrier irrespective of
their nomenclature used to shield such levy or imposition of tax. It is
therefore, he would submit that it is not the words used but the impact on
the manufacturer(s). Article 304(a) of the Constitution is therefore a
constitutional limitation in itself that prevents a State from
discriminating between the goods so imported and the goods so manufactured
or produced by the dealers within the State unless the State in public
interest impose reasonable restriction under article 304(b) of the
Constitution after obtaining Presidential assent. Shri Desai, would
therefore submits that the amendment in the notification brought by the
Government further does not satisfy the requirements of the aforesaid
articles by not obtaining Presidential assent if the legislation is made in
public interest.
21. There are three broad issues for our consideration:
• firstly, whether the grant of rebate of tax is hit by
constitutional limitation on the State legislature under article
304(a) read with article 301 of the Constitution of India, as
and when it discriminates between the imported goods and the
goods manufactured and produced outside the State.
• the second issue that arises is, whether the grant of rebate,
directly or indirectly restrict the free flow of trade, commerce
and intercourse among States by assuming the effects of an
exemption/ concession which is nothing but a concept within the
scope of taxation.
• The third issue is, can only the first condition of the
notification be severed if it is found to be violative of
article 304(a) of the Constitution of India without striking
down the whole of the notification.
22. Before dealing with the respective contentions raised before
us, we shall set out the relevant Provisions of the Act. The dictionary
clause defines ‘dealer’, ‘manufacturer’, ‘tax’ ‘trade tax’ etc. The
definitions are therefore extracted and it reads as under:

“(bb) “Trade Tax” means a tax payable under this Act on sales or
purchases of goods, as the case may be;
(c) “dealer” means any person who carries on in Uttar Pradesh
(whether regularly or otherwise) the business of buying, selling,
supplying or distributing goods directly or indirectly, for cash or
deferred payment or for commission, remuneration or other valuable
consideration and includes –
(i) a local authority, body, corporate, company, any co-
operative society or other society, club, firm, Hindu undivided
family or other association of persons which carries on such
business;
(ii) a factor, broker, arhati, commission agent, del credere
agent, or any other mercantile agent, by whatever name called
and whether of the same description as herein before mentioned
or not, who carries on the business of buying, selling,
supplying or distributing goods belonging to any principal,
whether disclosed or not;
(iii) an auctioneer who carries on the business of selling
or auctioning goods belonging to any principal, whether
disclosed or not, and whether the offer of the intending
purchaser is accepted by him or by the principal or nominee of
the principal;
(iv) a Government which, whether in the course of business or
otherwise, buys, sells, supplies or distributes goods, directly
or otherwise, for cash or for deferred payment or for
commission, remuneration or other valuable consideration;
(v) every person who acts within the State as an agent of a
dealer residing outside the State, and buys, sells, supplies or
distributes goods in the State or acts on behalf of such dealer
as-
(a) a mercantile agent as defined in Sale of Goods Act,
1930; or
(b) an agent for handling of goods or documents of title
relating to goods; or
(c) an agent for the collection or the payment of the sale
price of goods or as a guarantor for such collection or such
payment;
(vi) a firm or a company or other body corporate, the
principal office or headquarters whereof is outside the
State, having a branch or office in the State, in respect of
purchases or sales, supplies or distribution of goods
through such branch or office;
[(vii) every person who carries on the business of transfer
of property in goods (whether as goods or in some other
form) involved in the execution of a works contract;

 
(viii) every person who carries on the business of
transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred
payment or other valuable consideration;
[(n) “tax” includes an additional tax and the composition money
accepted under Section 7-D];
[(e-1) “manufacture” means producing making , mining, collecting,
extracting, altering, ornamenting , finishing, or otherwise
processing, treating or adapting any goods; but does not include such
manufactures or manufacturing processes as may be prescribed;]

[(ee) ‘Manufacturer’ in relation to any goods means the dealer who
makes the first sale of such goods in the State after their
manufacture and includes:–
(i) a dealer who sells bicycles in completely knocked down form;
(ii) a dealer who makes purchases from any other dealer not
liable to tax on his sale under the Act other than sales
exempted under Sections 4, 4-A and 4-AAA.]
[(h) ‘Sale’, with its grammatical variations and cognate expressions,
means any transfer of property in goods (otherwise than by way of a
mortgage, hypothecation, charge or pledge) for cash or deferred
payment or other valuable consideration, and includes—

 

 
(i) a transfer, otherwise than in pursuance of a contract of
property in any goods for cash, deferred payment or other
valuable consideration;
(ii) a transfer of property in goods (whether as goods, or in
some other form) involved in the execution of a works contract;
(iii) the delivery of goods on hire purchase or any system of
payment by instalments;
(iv) a transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred
payment or other valuable consideration;
(v) the supply of goods by any unincorporated association or
body of persons to a member thereof for cash, deferred payment
or other valuable consideration; and
(vi) the supply, by way of or as part of any service or in any
other manner whatsoever, of goods, being food or any other
article for human consumption or any drink (whether or not
intoxicating) where such supply or service is for cash or
deferred payment or other valuable consideration;]”
23. Section 3 of the Act is the charging provision. Section 3-A
provides for the rate of tax payable by a dealer under the Act. Section 4
of the Act provides for grant of general exemption for the purposes of the
Act. Section 4-A of the Act provides for grant of exemption from trade tax
when the State Government is of the opinion that it is necessary so to do
for increasing the production of any goods or for promoting the development
of any industry in the State. Section 4–AA provides for concession in the
rate of tax to certain industrial units not exceeding twenty-five per cent
on the sale of goods manufactured by such industrial unit which provides
employment to the persons belonging to the scheduled caste and scheduled
tribe, and other backward classes. Section 4AAA authorizes the State
Government to grant special concession to certain industrial undertakings
in special situations and circumstances. Section 5 of the Act authorizes
the State Government to grant rebate of tax on certain purchases or sales
if it is satisfied that it is in the public interest so to do by issuing a
notification allow a rebate up to the full amount of tax on the sale or
purchase of any goods or the sale or purchase of such goods by such person
or class of persons as may be specified in the notification. Section 5 is
relevant for the purpose of this case and therefore the same is extracted:
“Sec. 5 – Rebate of tax on certain purchases or sale:

1. Where the State Government is satisfied that it is expedient
in the public interest so to do, it may by notification, and
subject to such conditions and restrictions as may be specified
therein, allow a rebate up to the full amount to ;
a) the sale or purchase of any goods,
b) the sale or purchase of such goods by such person or class
or persons as may be specified in the said notification.
2. The rebate under sub-Section (1) may be allowed with
effect from a date prior to the notification.

 

 

24. Section 5 of the Act is in three parts. Firstly, it authorizes
the State Government that if it is satisfied that grant of rebate of tax is
expedient in the public interest it may do so by issuing the notification
and secondly, that the notification may allow a rebate up to the full
amount of tax levied on a specified point of sale or purchase of any goods
or the sale or purchase of such goods by such person or class of persons.
Lastly, the notification may also impose such conditions or restriction for
availing the benefit under the notification.
25. In exercise of such power, as we have already noticed, the
State Government has issued notification dated 27.02.1998 reducing the tax
liability of the dealers by twenty five per cent on goods having fly-ash
contents between 10 to 30 per cent weight and has reduced the tax liability
of the dealer by fifty per cent on goods having fly-ash contents
exceeding thirty per cent by weight. Further, the notification states that
such reduction is available in the districts mentioned in the column 2 and
for the period mentioned in the column 3 of the annexure to the
notification. A tax rebate/ tax cut is a reduction in taxes. The
immediate effect of such rebate or tax cut decreases the real revenue of
the Government and an increase in the real income of those whose tax rate
has been lowered.
26. To appreciate the first issue before us, it is necessary to
extract articles 301 and 304 of the Constitution of India. The said
articles are as under:-

“301. Freedom of trade, commerce and intercourse.—Subject to the
other provisions of this Part, trade, commerce and intercourse
throughout the territory of India shall be free.
304. Restrictions on trade, commerce and intercourse among States —
Notwithstanding anything in article 301 or article 303, the
Legislature of a State may by law—
(a) impose on goods imported from other States or the Union
territories any tax to which similar goods manufactured or
produced in that State are subject, so, however, as not to
discriminate between goods so imported and goods so manufactured
or produced; and
(b) impose such reasonable restrictions on the freedom of
trade, commerce or intercourse with or within that State as may
be required in the public interest:
Provided that no Bill or amendment for the purposes of clause
(b) shall be introduced or moved in the Legislature of a State
without the previous sanction of the President.”

 

 
27. Article 304(a) of the Constitution is an exception to article
301 of the Constitution of India. Article 304(a) does not prevent levy of
tax on goods; what is prohibited is such levy of tax on goods as would
result in discrimination between goods imported from other States and
similar goods manufactured or produced within the State. The object is to
prevent imported goods being discriminated against by imposing a higher tax
thereon than on local goods. What article 304(a) demands is that the rate
of taxation on local as well as imported goods must be the same. This is
designed to discourage States from creating State barriers or fiscal
barriers at the boundaries. Article 304(a) of the Constitution empowers the
State to levy tax, with an intent that Part XIII of the Constitution does
not affect the power of taxation given under Part XII of the Constitution.
It is to preserve and protect the broad object of article 301 of the
Constitution, article 304(a) only limits the power of the State legislature
from imposing such taxes that would discriminate between imported goods and
domestic goods and restrict free movement of goods between States. The
broad issue whether article 304(a) is an exception to article 301 of the
Constitution of India is discussed in the case of Atiabari Tea Co. Ltd. v.
The State of Assam and Ors; AIR (1961) SC 232; it was about the
Constitutionality of the Assam Taxation (on goods carried by Roads or
Inland Waterways) Act, 1954 (Act XIII of 1954) which was challenged by the
appellants from whom tax was demanded under the Act for carriage of tea in
chests, from Sibsagar district in Assam and from Jalpaiguri in West
Bengal, to Calcutta over the waterways of State of Assam. The
constitutional objection against the Act was that it was covered by the
inhibition implied by the freedom enunciated in article 301 and that it
could be saved from being struck down only if it satisfied the condition
prescribed in article 304(b).
28. In the majority judgment, Gajendragadkar, J., as he then was,
accepted the appellant’s contention that article 301 embraced freedom from
all kinds of impediments and burdens on commerce including those imposed by
tax laws; and a tax law also, in order to survive, must, satisfy the
conditions laid down in clause (b) of article 304. As the learned Judge
pointed out, there was ample evidence in the text of Part XIII itself to
show that it dealt with impediments caused by taxation as well as in other
ways. Article 304(a) saved certain taxes on goods from the operation of
articles 301 and 303, implying thereby that in the absence of the provision
in article 304(a) those laws would be hit by article 301 or 303 of the
Constitution of India. Justice Hidayatullah, in the Atiabari Case
dissented and observed: “Article 304(a) imposes no ban but lifts the ban
imposed by articles 301 and 303 subject to one condition.” This observation
led to controversy and the use of the word ‘ban’ was understood as giving
enormous power to the State to legislate overlooking the economic unity of
the nation which was prioritized in article 301 of the Constitution of
India. Therefore, in the case of State of Kerala v. Abdul Kadir; it was
further clarified that only on a finding that the tax offended article 301
the question whether it was saved by article 304(a) arose.
29. Again, article 304(a) of the Constitution admits two exception
in favour of the State legislature to the rule that trade, commerce, and
intercourse throughout the territory of India shall be free. Clause(b) to
article 304(a) is an exception which enables a State legislature to impose
such “reasonable restrictions” on the freedom of trade, commerce and
intercourse as may be required in the “public interest”. But no bill or
amendment for the purpose of clause(b) shall be introduced or moved in the
legislature of a State without the previous sanction of the President.
30. The Principle of ‘non- Discriminatory tax’ as provided in
article 304(a) of the Constitution of India is a sine-qua–non to free
movement of goods between nations/States in several jurisdictions and also
in international trade and policy. Discrimination as explained under World
Trade Organization (“WTO”, for short) jurisprudence is spoken of in terms
of effect and intention behind such discrimination. Intent is referred to
as ‘aim’ or ‘motive’ or ‘purpose’ of such discrimination and the other
factor commonly associated with discrimination is ‘effect’ that is whether
a measure has a discriminatory effect (also known as the disparate impact)
against imports (as explained in the famous case of Japan v. Alcohol, panel
report). WTO members are free to choose any system of taxation they deem
appropriate provided that they do not impose on foreign products taxes in
excess of those imposed on like products. The effect of tax should not be
such that two like goods are given discriminatory treatment.
31. At the same time, it cannot be doubted that rising of
protective walls may be justified in international trade. The Government
can and has been providing such protectionist measures all these years to
encourage the growth and establishment of industries in the country and to
protect them from competition from foreign manufacturers. But unlike the
international trade policies and the commerce clause in United States
Constitution, our Constitution provides for regulating inter-State trade
and commerce. The Parliament can take all protective measures under article
302 of the Constitution of India as may be required in public interest. But
there are certain obvious differences between the powers conferred to the
Parliament under article 302 and State legislature under article 304(a) of
the Constitution. The powers given to the State legislature are not
unrestricted and are bound to function within limitations stipulated under
article 304(a) of the Constitution of India. The powers even under article
304(b) are to be exercised sparingly and after fulfilling all the
conditions of article 304 of the Constitution of India. The power conferred
under article 304(a) although an exception to article 301 of the
Constitution, but is not a blanket power intended to be conferred to the
State legislature.

32. To decide the issue at hand, it is pertinent to discuss,
whether rebate of tax has the same effects of concessional rate of tax.

33. Article 304(a) ensures only equal rate of tax for incoming
goods. So if such goods are taxed at a higher rate or where they are taxed
at any rate when indigenous goods enjoy concessional rate of tax, article
304(a) is attracted. They are simple cases of hostile discrimination.
Therefore, whether a particular tax is discriminatory within the meaning of
this clause, the effect of the tax on the flow of goods from outside the
taxing State has to be taken into consideration and, if the overall effects
of rebate of tax is such that they fall within the meaning concessional
rate of tax. A detailed discussion on the effects and scope of rebate is
done in the following paragraphs under the head Issue 2 in the judgment.

ISSUE 2

34. To answer the second issue we need to discuss the concept of
‘rebate of tax’ and its overall impact on the trade, commerce and
intercourse in the context of the case pleaded by the parties.

 

35. ‘Rebate’ as defined in the New International Websters’ pocket
dictionary and Bloomsbury Concise English Dictionary is “discount”, to
allow as a deduction from a gross amount. It is a discount repaid to the
payer. Rebate as defined in corpus Juris Secundum, Vol. 52 C.J Pg. 1189 is
as under:-
“ The etymological or dictionary meaning of the term includes any
discount or deduction from a stipulated payment, charge, or rate not
taken as in advance of payment, but handed back to the payer after he
has paid the stipulated sum, even when such discount or deduction is
equally applied to all from whom such payment is demandable”
36. The concept of rebate of tax in the instant case is akin to
concessional/ reduced rate of tax. Rebate is though ex-hypothesi in the
nature of subsidy and other incentives given by the Government but
conceptually rebate of tax and incentives are different and it needs to be
explained in reference to the purpose and nature of such rebate of tax
introduced by the legislature. The legislation in respect of a rebate has
taken different forms, one of them is a partial rebate in the tax, where
the deduction is given partially on the gross amount and the other is the
power reserved for the Government to permit rebate in respect of any goods
to the full amount of the tax levied at any point in the series of sales of
such goods. A dealer who is entitled to a rebate under any notification
will collect the tax from the consumers at the point of purchase and then
have to pay the full amount of sales tax due on his turnover in that
quarter; and claim rebate in terms of the notification in accordance with
the provision in the rules. However, the claim for rebate need not
necessarily be handed back to the payer after he has paid the stipulated
sum, it can also be paid in advance of payment. It is nothing but a
remission or a payment back or it is sometimes spoken of as a discount or a
drawback. It cannot be disputed that it is the discretion of the State
Government, through its legislature, to grant rebate to the full amount of
sales tax, unless its power of taxation is limited by Constitutional
provisions. In the facts of the present case, the legislature authorizes
the State Government under Section 5 of the Act to issue notification in
the public interest to grant rebate up to the full amount of the tax levied
on any specific point in the series of sales/ purchase of such goods. Such
rebate is only extended to the districts in State of Uttar Pradesh. The
Government of Uttar Pradesh has the power to refund or discount to the full
amount of rate of sales tax levied on a dealer, provided the power to
discount does not overall has effects of a weapon of taxation that would
discriminate between the goods imported and manufactured in Uttar Pradesh
as laid down in article 304(a) of the Constitution.

37. The discrimination through a weapon of taxation is explained in
the case of Shree Mahavir Oil Mills (supra). The case pertains to
unconditional and total exemption from tax on edible oil granted to in-
State manufacturers by the State Government. Such an exemption was held
discriminatory and violative of articles 301 and 304(a) of the Constitution
of India. This case further clarifies the position in Video Electronics
case (supra). The Court observed that States are certainly free to impose
tax on subjects which fall under List II of the Seventh Schedule of the
Constitution, but power shall not be exercised to bring about
discrimination between the imported goods and the similar goods
manufactured in that State and concluded that total exemption granted in
favour of small-scale industries in Jammu and Kashmir producing edible oil
is not sustainable in law. It clarified the exception carved out by the
three judges bench in the case of Video Electronics Ltd. v. State of
Punjab; 1989 SCR Supp.(2) 731, where it explained that notification issued
by two States (Punjab and Haryana) in that case exempting new units,
established in new areas specified the exemption to be provided to a
special class to whom exemption was provided for a specific period on
specific conditions and was not extended to all producers of goods and
therefore did not offend the freedom guaranteed under articles 301 and 304
of the Constitution. Similarly in the case of Punjab notification, it was
held that since the exemption is for certain specific goods and also
because an overwhelmingly large number of local manufacturers of similar
goods are subject to a sales tax; it cannot be said that the local
manufacturers were favored against the outside manufacturers and further
the exemption was granted for a limited period of five years. The above
case also laid down that while judging whether a particular exemption
granted by the State offends articles 301 and 304, it is necessary to take
into account the economic backwardness of a State and the need for
concessions and subsidies to such new industries for their development.
Therefore, this case clarified that the limited exception created in the
said judgment, if extended to all will rob the salutary principle
underlying Part XIII of the Constitution and further it is not possible to
go on extending the limited exception. It is with this observation, this
Court in the above case, held the exemption to be violating article 304(a)
read with article 301 of the Constitution of India.

 

38. Article 304(a) is a provision that deals with taxation. It
places goods imported from sister States on a par with similar goods
manufactured or produced within the State in regard to State taxation in
the allocated field. The object of article 304(a) was to limit the power
of taxation by States so as to prevent discrimination against imported
goods by imposing taxes on such goods as a higher rate than is borne by
indigenous goods. The tax referred to in article 304(a) is a ‘tax on
goods’. The word “tax” and “taxation” as said by Justice Weaver of the Iowa
Supreme Court in the case of State v. Chicago & N. W. R. Co., 128 Wis 449,
108 N. W. is referred to as all sorts of exaction which swell the public
funds. Taxation in its broadest and most general sense, includes every
charge or burden imposed by the sovereign power upon persons, property or
property right, for the use and support of the Government and to enable it
to discharge its appropriate functions, and in that broad definition there
is included a proportionate levy upon persons or property and various other
methods or devices by which revenue is extracted from persons and
property. The term ‘tax’ is to be read in all-embracing and sweeping
sense. Such methods or device used by the Government from time to time are
not ordinarily open to serious questions but their scope and application
vary according to the nature of the subject under discussion and the
circumstances under which they are used. ‘Rebate of tax’ in the instant
case is such a device or weapon of taxation used by the Government from
time to time which is though not in question in all situations but their
validity is tested in the touchstone of article 304(a) of the Constitution
in the circumstance under which they are used. If the rebate of tax by way
of repayment to the full amount of tax levied qualifies within the same
meaning as that of exemption, then such discount would a fortori mean
discrimination on the rate of tax by repaying by way of a rebate to one
class of local dealers the whole amount of sales tax paid and on the other
hand the outside dealers are taxed higher in absence of the benefit of
rebate. This situation squarely falls within the meaning of
‘discrimination’ as contemplated under article 304(a) of the Constitution
of India.

 
39. It is for the aforesaid reasons, it is pertinent to analyze the
nature and scope of concessional/ reduced rate of tax/ exemption by drawing
inspiration from their understanding in other jurisdictions and under what
circumstance could a rebate be termed a hindrance to or as interfering with
the freedom of trade, commerce or intercourse. In appreciating the effects
of an exemption parallel to a rebate of tax, we may refer to the
observation made in Congressional Budget and Fiscal Operations, 2 U.S.C.A.§
622 ,  where exemptions is understood to have been in the category known as
“tax expenditures” because the revenues lost by such exemptions are
similar to direct expenditures made by the government, the only difference
being that they are made through the tax system and not the legislative
appropriations process. These tax expenditure programmes are sometimes
defined as “subsidies provided through the taxation systems,” but the
broadest definition includes all categories of “deductions, credits,
exclusions, exemptions, preferential tax rates and tax deferrals.” Justice
Wayne in the case of Jefferson Branch Bank v. Skelly; 66 U.S. 436 while
explaining the power of legislature where not forbidden by Constitution
explained, that the legislature has the power to exempt from taxation
according to its views of public policy provided no constitutional
provisions are violated. The United States Constitution under the Equality
and uniformity clause mandates that where the Constitution requires
taxation to be equal and uniform, it is held in most States that the
legislature must tax all such persons or property and cannot grant any
exemptions unless the power to exempt is expressly conferred by the
Constitution. In some states, however, the contrary is held but even in
such states it is held that exemptions are not valid unless including all
property and persons of the same class whether such person as subject to
such exemption is inside the State or situated outside the State.
40. Exemption as we normally understand has two-fold impact. First,
exemptions/ concessional rate of tax affect consumer choice by impacting
relative pricing and, thus, materially altering the economic balance.  It
is because consumption will tend to shift towards untaxed items, the prices
of those items and the items used to produce them will increase while the
prices of taxed items will decrease relatively.  Second, such exemptions
unfairly burden some businesses either within the same industry or in other
competing industries.

 
41. Rebate is another such device used by the Government which when
given on the rate of tax to the full amount of tax levied, it gives
favourable treatment to one class of dealers situated within the state
barring the dealers similarly placed outside the State manufacturing goods
using the same raw material. The grant of such rebate has the colour of
exemption/ concessional rate of tax along with the same deleterious effects
of an exemption.
42. Therefore, the test to be applied to determine whether rebate
is within the realm of tax defined in article 304(a) of the Constitution of
India so as to say that it discriminates between the two class of goods:
locally manufactured goods and the imported goods when both the class of
dealers meet the conditions required to qualify for the grant of rebate
i.e. the use of fly-ash, is the overall effect or impact of such rebate on
the manufacturer. This issue is no longer res-integra and is discussed in
several cases including in the case of Firm A.T.B Mehta Masjid & Co v.
State of Madras and Anr., AIR 1963 SC 928, where the question for
consideration was whether Rule 16 of the Madras General Sale Tax Rules,
1939 subjected tanned hides and skins outside the State, and sold within
the State to a higher rate of tax than the tax imposed on hides or skins
tanned and sold within the state and therefore violating article 304(a) of
the Constitution. This Court observed that to determine whether the rule
was discriminatory, the effect of this rule is to be seen. The result
therefore is that the sale of hides or skins which had been purchased in
the State and then tanned within the State is not subject to any further
tax. Hides and skins tanned within the State are mostly those which had
been purchased in their raw condition in the State and therefore on which
tax had already been levied on the price paid by the purchaser at the time
of their sale in the raw condition. If the quantum of tax had been the
same, there might have been no case for grievance by the dealer of the
tanned hides and skins which had been tanned outside the State. The
grievance arises on account of the amount of tax levied being different on
account of the existence of a substantial disparity in the price of the raw
hides or skins and of those hides or skins after they had been tanned,
though the rate is the same under Section 3(1)(b) of the Act. If the dealer
has purchased the raw hide or skin in the State, he does not pay on the
sale price of the tanned hides or skins, he pays on the purchase price
only. If the dealer purchases raw hides or skins from outside the State and
tans them within the State, he will be liable to pay sales-tax on the sale
price of the tanned hides or skins. He too will have to pay more for tax
even though the hides and skins are tanned within the State, merely on
account of his having imported the hides and skins from outside.
Therefore, the Court held that this rule on this ground alone is
discriminatory of article 304(a) of the Constitution of India.
43. The above principle was re-iterated in the case of W.B. Hosiery
Association and others v. State of Bihar; (1988) 4 SCC 134 and in the case
of H. Anraj v Government of Tamil Nadu; (1986) 1 SCC 414; wherein the
effect of an exemption was discussed. The issue before the Court was that
the locally manufactured goods within the State were exempted but those
manufactured in other States and imported into the State were subjected to
a high rate of tax. The hosiery manufacturers and dealers in the State of
West Bengal in their prayer in the writ petition asked for a direction
asking the respondents to forbear from levying or imposing or collecting
any sales tax on the sale of hosiery goods imported into Bihar from other
States. The State Government by a notification exempted dealers from sales
tax of hosiery goods manufactured and produced in the State of Bihar
whereas levied sales tax on the dealers outside the State. This Court
opined that from the commercial or normal point of view, such a
discriminatory levy of sales tax would have an effect that would be bound
to affect the free flow of hosiery goods from outside State into the State
of Bihar and would therefore violate article 301 read with article 304(a)
of the Constitution of India.

 
44. The above decision is also followed in the case of Western
Electronics and Another v. State of Gujarat and others, 1988 2 SCC 568; and
in the case of Loharn Steel Industries v. State of Andhra Pradesh; (1997)
2 SCC 37 wherein the impact of exemption on the manufacturer was such that
the manufactures outside Andhra Pradesh had to pay a higher rate of tax as
compared to the manufacturers in Andhra Pradesh because of the entire tax
exemption granted to the all re-rolled steel products sold in the Andhra
Pradesh and manufactured out of tax paid raw-material purchased in the
State of Andhra Pradesh. Therefore, the notification in this case was
considered to be violating article 304(a) of the Constitution of India.

45. This Court in the case of State of U.P. and another v. Laxmi
Paper Mart and others, AIR 1997 SC 950 has explained that exempting the
exercise books made from paper purchases within Uttar Pradesh produced
within the State and the levying of the tax on the exercise books produced
outside Uttar Pradesh and sold in Uttar Pradesh at the rate of 5% is
discriminatory and offends clause(a) of article 304 of the Constitution of
India. Again in Lakshman v. State of Madhya Pradesh; 1983 SCR 3124, the
petitioner was nomad grazier belonging to Gujarat who wandered from place
to place with his cattle. State of Madhya Pradesh did not like this and
imposed a higher duty for out-of-State cattle owners. The levy was found
invalid by the Court.
46. Rebate, therefore, as it is defined in the case of Estate of
Bernard H. Stauffer, Bonnie H. Stauffer, Executrix, v. Commissioner of
Internal Revenue, 48 U.S. T.C. 277, means abatement, discount, credit,
refund, or any other kind of repayment. Rebates have been normally used as
justifiable incentives given by the Government to stimulate small
industries or newly established industries. But to understand Rebate of tax
as rebate per se would be a misnomer. Rebate of tax is the rebate on rate
of tax and is essentially the arithmetic of rate. The term ‘rate’ is often
used in the sense of standard or measure. It is the tax imposed at a
certain measure or standard on the total turnover of the goods. Rate, in
other words is the relation between the taxable turnover and the tax
charged. Rebate of tax or exemption is distinguished from non-imposition or
non-liability in the case of A.V. Fernandez v. The State of Kerala; AIR
1957 SC 657 wherein the Court held that in rebate of tax, the sales or
purchases would have to be included in the gross turnover of the dealer
because they are prima facie liable to tax and the only thing which dealer
is entitled to in respect thereof is the deduction from the gross turnover
in order to arrive at the net turnover on which the tax can be imposed. On
the other hand, in the case of non-imposition or non-liablity, the sales or
purchases are exempted from taxation altogether. The Legislature cannot
enact a law imposing or authorizing the imposition of a tax thereupon as
they are not liable to any such imposition of tax. If they are thus not
liable to tax, no tax can be levied or imposed on them and they do not come
within the purview of the Act at all. The very fact of their non-liability
to tax is sufficient to exclude them from the calculation of the gross
turnover as well as the net turnover on which sales tax can be levied or
imposed.
47. The exemption or rebate of tax is therefore within the purview
of taxation. In the instant case, if the grant of rebate of tax by the
State Government under Section 5 of the Act is to the full amount of tax
levied, then for the dealers manufacturing cement using fly-ash outside the
State of Uttar Pradesh but selling it in Uttar Pradesh, though the State
Government contends that the rate of tax is same for the dealers inside
Uttar Pradesh and outside Uttar Pradesh, but the overall effect is that
there is no tax levied on the net turnover after deductions being made from
the gross turnover but, on the other hand, the dealers manufacturing or
producing cement using fly-ash outside Uttar Pradesh are taxed at the rate
of 12.5%. Therefore, it can be said that the rebate of tax is in the nature
of exemption and the instant case can be decided on the basis of catena of
decisions of this Court where blanket exemption without reasons are said to
be discriminatory and violating article 304(a) of the Constitution of
India.

ISSUE 3:-

48. To decide the third issue, the concept of severability needs to
be noticed. Doctrine of severability provides that if an enactment cannot
be saved by construing it consistent with its constitutionality, it may be
seen whether it can be partly saved. The doctrine of severability was
considered in the case of RMD Chamarbaugwala v. Union Of India, AIR 1957 SC
628; in which it was observed that “when a statute is in part void, it will
be enforced as against the rest, if that is severable from what is
invalid”. The Court also observed seven propositions of severability, out
of which, one of them provided that if the valid and the invalid portions
are distinct and separate that after striking out what is in-valid, what
remains is in itself a complete code independent of the rest, then it will
be upheld notwithstanding that the rest has become unenforceable. The
principles of severability was also discussed in the case of A. K. Gopalan
v. State of Madras, AIR 1950 SC 27, wherein the Court observed that what we
have to see is, whether the omission of the impugned portions of the Act
will “change the nature or the structure or the object of the legislation”.
In the facts of the present case, striking down Clause (1) of the
notification alone does not change the object of the legislation. It is a
notification passed in public interest and therefore even if Clause (1) of
the notification is expunged, leaving behind the rest of the notification
intact, the purpose of the Government to grant rebate to provide incentive
to the manufacturing units using fly-ash is not lost.
49. This doctrine was also enunciated in the case of D.S. Nakara
(supra). The question that arose was whether, for the purpose of
application of the liberalized pension rules, the Government of India could
stipulate March 31, 1979 as the date for dividing Government employees into
two classes: one class who had retired before March 31, 1979 who would not
be entitled to the benefits of the liberalized pension rules and the other
class who retired after March 31, 1979 who would be entitled to such
benefits. One of the questions that came up for consideration is whether a
specified date could be severed if it is found to be wholly irrelevant and
arbitrary. This Court observed that, if the event is certain but its
occurrence at a point of time is considered wholly irrelevant and arbitrary
and having an undesirable effect of dividing homogeneous class and of
introducing the discrimination, the same can be easily severed and set
aside. The Court further opined that while examining a case under article
14 of the Constitution, the approach is removal of arbitrariness and if
that can be brought about by severing the mischievous portion the Court
ought to remove the discriminatory part retaining the beneficial portion.
The Court therefore concluded that severance never limits the scope of
legislation but rather enlarges it.
50. In the light of the observation made by this Court, we are of
the opinion that the condition No. 1 is discriminatory and violates article
304(a) of the Constitution of India and therefore needs to be severed from
the rest of the notification which can operate independently without
altering the purpose and the object of the notification.
51. The learned counsel, Shri Gupta, would argue that since the
assessing authorities would not be in a position to verify the claim for
grant of rebate of tax by manufacturers of cement using fly-ash outside the
State of Uttar Pradesh, the benefit under the notification cannot be
extended to them. We do not agree. The explanation appended to the
notification authorises the assessing authorities to verify the claim that
may be made by the manufacturers including the fact whether an assessee(s)
satisfy the conditions prescribed in the notification. If they do not fall
within the parameters of the notification the assessing authority can
always reject the claim of the manufacturers.
52. Further we may also refer to the submission of Shri Dhruv
Agarwal, who would rely on the observations of this Court in the case of
G.B. Prabharkar Rao v. State of Andhra Pradesh, 1985 Supp. SCC 432;
wherein the age limit of retirement was first raised and then reduced
which created an administrative chaos and therefore merely because it
created an administrative chaos the provision reducing the age could not
have been declared invalid. On the basis of the aforesaid submission, he
would submit that the machinery provisions cannot be used to test the
constitutional validity of a statute because the liability is always
created through substantive provisions. We agree with the submission made
by, Shri Dhruv, and are of the opinion that issue of territoriality should
not be a factor to determine the constitutional validity of the
notification.

 
53. In view of the aforesaid discussion, we hold ‘rebate of tax’
granted by the State Government to cement manufacturing units using fly-ash
as raw material in a unit established in the districts of State of Uttar
Pradesh alone is violative of the provisions contained in articles 301 and
304(a) of the Constitution of India. We further declare that the
notification would also apply to respondent(s)- cement manufacturing units.

 

54. With these observations and directions, all the civil appeals
are disposed of. There shall be no order as to costs.

Ordered accordingly.

 

 
……………………..J.
(H. L. DATTU)
……………………..J.
(SUDHANSU JYOTI MUKHOPADHAYA)
NEW DELHI;
OCTOBER 18, 2013.

 

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