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CASE NO.: Appeal (civil)  1366-74 of 2001

PETITIONER: M/s Widia (India) Ltd. & Others                                  

RESPONDENT: Vs. The State of Karnataka & Others                                  

DATE OF JUDGMENT: 21/08/2003

BENCH: M.B. SHAH & AR. LAKSHMANAN.

JUDGMENT: J U D G M E N T

WITH

CA Nos.1375-82, 2511-14, 2771, 3279, 3760-62, 4761-64, 5595,  7535 of 2001, CA Nos. 645-47, 1911, 2183-84, 2552, 2730,  4148-49, 5095, 5853-54, 8098-8100 of 2002.

Shah, J.

The levy of entry tax on goods by the State of Karnataka has  chequered history and the State had to face various litigations on this  score.  The constitutional validity of Karnataka Tax on Entry of  Goods into Local Areas for Consumption, Use or Sale Therein Act,  1979 (hereinafter referred to as ’the Act’) and the notifications issued  by the State Government in exercise of its powers conferred by  Section 3 of the said Act were challenged before the High Court by  filing writ petitions under Article 226 of the Constitution.  The Act  and the notifications issued thereunder were declared unconstitutional  and mandamus was issued directing the State Government and its  officers to forebear from enforcing the provisions of the Act.  Against  that judgment and order, the State Government preferred appeal  before this Court.  This Court in State of Karnataka and another v.  M/s Hansa Corporation [(1980) 4 SCC 697] set aside the order  passed by the High Court striking down the Act.  

The Court negatived the contention that Section 3 of the Act  was vague.  The Court also held that it was settled law that if the tax is  compensatory in character, it would be immune from challenge under  Article 301 of Constitution of India; if on the other hand, the tax is not  shown to be compensatory in character, it would be necessary for the  party seeking to sustain the validity of the tax law to show that the  requirements of Article 304 have been satisfied.  The Court also held  that the levy of tax by the notification at the relevant time was not  discriminatory in character as envisaged by Article 304(a) and it does  not impose restrictions.  The Court further held that the restrictions  imposed are reasonable and in public interest and the Act  subsequently having received the assent of the President, proviso to  Article 304(b) is complied with and, therefore, the Act was saved by  Article 304 and could not be struck down on the ground of its being  violative of Article 301.

The title of the aforesaid Act was amended in 1992 and it was  named as ’The Karnataka Tax on Entry of Goods Act, 1979’.  Section  3 of the Act empowers the State Government to levy tax by issuing

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notification on the entry of any goods specified in the Schedule into a  local area for consumption, use or sale therein.  At present, Sub- section (1) of Section 3 reads as under:â\200\224         "3.     Levy of Tax.â\200\224(1)         There shall be levied  and collected a tax on entry of any goods specified in the  First Schedule into a local area for consumption, use or  sale therein, at such rates not exceeding five per cent of  the value of the goods as may be specified  "retrospectively or prospectively" by the State  Government by Notification, and different dates and  different rates may be specified in respect of different  goods or different classes of goods or different local  areas."

        The controversy in these appeals centers round the addition of  the word ’retrospectively’.  Section 3 was amended by amending Act  No.8 of 1993, namely, the Karnataka Tax on Entry of Goods (Second  Amendment) Act, 1992, whereby for the words "by the State  Government, by notification from time to time", the words  "retrospectively or prospectively by the State Government by  notification and different dates" were substituted.  The amending Act  was passed by the State legislature after obtaining the assent of the  Governor on 11th February, 1993 but the assent of the President was  not obtained and that is the only surviving challenge in these appeals.   

Thereafter, Karnataka Act No.45 of 1994, namely, the  Karnataka Tax on Entry of Goods (Amendment) Act, 1994 was  enacted after obtaining the assent of the President on 19.10.1994.   Again, the said Act was amended by Karnataka Act No.3 of 1995,  namely, the Karnataka Tax on Entry of Goods (Amendment) Act,  1992 after obtaining the assent of the President on 6.9.1994.

       The Government of Karnataka in exercise of its power under  Section 3(1) of the Act brought out notification dated 30.3.1994,  which came into effect on Ist April, 1994, levying tax on the entry of  goods brought into a local area from any place outside the State for  consumption and use therein, at the rate of taxes as specified against  the goods stipulated in the table appended thereto.  

       Several assessees filed writ petitions challenging the said  notification.  Pending writ petitions, Government of Karnataka in  exercise of its power under Section 3(1) of the Act read with Section  21 of the Mysore General Clauses Act, 1899, by issuing Notification  No.FD-109-CET-97(8) dated 31st March, 1997, amended the  notification dated March 30, 1994 by substituting for the words "from  any place outside the State for consumption or use", the words "where  such entry is for consumption or use of such goods and where such  goods have not suffered tax under the Karnataka Sales Tax Act, 1957"  with effect from Ist April, 1994.

The said notification was also challenged by filing interlocutory  applications in pending writ petitions.  Thereafter, the Division Bench  of the High Court, by its judgment dated 4th August, 1997 in Avinyl  Polymers Pvt. Ltd. etc. v. The State of Karnataka and others [(1998)  109 STC 26] quashed both the notifications, namely, notification  dated 30th March, 1994 and notification dated 31st March, 1997.  The  High Court arrived at the conclusion that the levy of tax on entry of  goods was compensatory in nature and not restrictive requiring any  previous sanction or assent of the President of India and, therefore, the  said Act cannot be held to be illegal for want of President’s assent.   However, the Court arrived at the conclusion that the notifications  were discriminatory for the reasons recorded therein and it was also  held that the authority exceeded its powers conferred under Section  3(1) of the Act and, therefore, the said notifications were ultra vires.

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The said judgment and order was challenged before this Court  and the Court finally passed the following order:â\200\224 "C.A. No.3958 of 1998 and Nos.1819-1848 of  2000 be delinked and listed separately.

Leave granted in S.L.P. (C) No.134 of 1998.

Counsel for the parties agree that the appeals filed  by the State of Karnataka have become infructuous.   These appeals arise out of judgment of the Karnataka  High Court before whom the respondents had challenged  the notification dated March 30, 1994 and the  amendment made on March 31, 1997 pertaining to entry  tax.  The said notification was quashed but while  quashing the same the High Court had accepted the  contention of the State of Karnataka that the entry tax  was compensatory in nature.

We are now informed that the aforesaid  notifications on March 30, 1994 and March 31, 1997  have been superseded by notification dated January 7,  1998 and notification on September 23, 1998, which are  retrospective in character. The later notifications are  subject-matter of challenge before the Karnataka High  Court.  As far as the State of Karnataka is concerned, it is  not seeking to realise any tax under the earlier  notification dated March, 30, 1994 and March 31, 1997.   This being so, the appeals filed by the State of Karnataka  have become academic and nothing more survives.

As far as the appeals filed by the respondents are  concerned, the same relate to the finding of the High  Court to the effect that the entry tax was compensatory in  nature.  Learned Advocate-General agrees that without  going into the merits this finding may be set aside and the  High Court will be at liberty to go into this question  afresh while deciding the writ petition which have been  filed challenging the subsequent notifications.

Ordered accordingly.  The High Court while  deciding the fresh writ petitions will not be bound by its  earlier decision.  The appeals are disposed of.  No order  as to costs."   

As this Court had declined to stay the operation of the judgment  rendered by the Division Bench of the High Court in Avinyl  Polymers’s case, the Government of Karnataka issued notification  dated January 7, 1998 which provided rate of tax on entry of goods  into a local area for consumption, use or sale therein.  The notification  was brought in consonance with the judgment rendered by the High  Court and it remained in force from January 7, 1998 to March 31,  1998.  On March 31, 1998, another notification was issued providing  levy of tax on entry of goods into local area for consumption, use or  sale therein.  This notification was prospective in operation.

Thereafter, on 23rd September, 1998, Government of Karnataka  brought out another notification, which was effective for the period  from April 1, 1994 up to January 6, 1998 by prescribing different rates  of taxes for goods enumerated in the table appended to the notification  purporting to levy tax on entry of goods brought into a local area from  outside for consumption, use or sale therein.

Again, various writ petitions were filed before the High Court

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challenging the said notifications, which were dismissed by the Single  Judge by holding as under:â\200\224 1.      The provisions of Section 3(1) of the Act are not  ultra vires of the Constitution of India on the  ground that no guidelines for prescribing rate of  tax has been given and the provisions are  compensatory in nature and does not require the  assent of the President of India.

2.      Notifications dated 31.3.1998 and 7.1.1998 are  valid piece of legislation.

3.      Notification dated 23.9.1998 has not been issued  under Section 4B of the Act, but has been issued  under Section 3(1) and as such retrospective effect  could have been given.

4.      Notification dated 23.9.1998 cannot be considered  to be invalid on the ground that it was not in force  on the date of issue and was made applicable for  past transactions only.

5.      Notification dated 23.9.1998 is a valid piece of  legislation.  It is however declared that tax shall  not be levied or collected for the period from  1.4.1994 to 6.1.1998 for entry of goods in local  area when the goods are brought from other areas  of the State of Karnataka and also when the goods  have been imported from outside the State of  Karnataka and are meant for sale.

6.      Entry 2-A by Notification dated 9.11.1998  prescribing rate of tax at 8% from 1.4.1995 is ultra  vires the power of Section 3(1) of the Act.

7.      In cases where assessments were already framed,  the assessees would be free to file appeals within  four weeks and where notice alone has been  issued, they may submit objections within the  aforesaid period.

The State had not preferred any appeal against the aforesaid  judgment and order.  

However, the appellants (dealers) filed appeals before the  Division Bench of the High Court.  The High Court, by judgment and  order dated 18th October, 2000, dismissed the Writ Appeal Nos.1717- 21, 8191-93 of 1999 and other appeals involving similar question.  

Those judgments and orders are challenged by filing these  appeals.  

For the levy of entry tax, the High Court held that:â\200\224

17.     The State of Karnataka came into being on  1.11.1956 pursuant to the reorganizations of the  State of India.  Municipal laws prevailing in  different areas of the new State provided for  imposition of tax called octroi.  With effect from  1.4.1965 uniform taxation on various items under

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the Municipalities Act was brought into force.

18.     Considerable debate is going on in the country  regarding the justification of charging the octroi by  the municipal committees.  The octroi was being  criticized as Archaic and Obnoxious impeding the  free flow of trade creating bottlenecks.  State of  Karnataka was the first State to abolish octroi with  effect from 1.4.1979.  In order to compensate the  loss, Karnataka Tax on Entry of Goods into Local  Areas for Consumption, Use or Sale therein Act,  1979 was passed.  The Act was enacted under the  legislative powers derived from Article 246 of the  Constitution of India read with Entry 52 List II of  the 7th Schedule of the Constitution.  It received  the assent of the President of India on 27.5.1979.   Originally the tax was levied on three items,  namely textiles, tobacco and its products and  sugar.  Subsequently, there has been changes and  the position as now stands is that tax could be  levied on any items specified in the first schedule  from items 1 to 103.  Item No.103 is a residuary  clause and confers power on the State Government  to levy tax on:

"Goods other than those specified in any  entries in this schedule, but excluding those  specified in the second schedule."

Further, in the High Court, the appellants did not challenge (a)  the notification levying the tax w.e.f. 7th January, 1998 (paragraph  12); and (b) the nature of the tax being compensatory or regulatory  (paragraph 20).

Instead, it was contended that Act No.8 of 1993 which  introduces the words "retrospectively or prospectively by the State  Government by notification on different dates" is neither reasonable  nor in public interest and in any event if the said restriction could be  said to be reasonable and in public interest, the same is  unconstitutional and void as assent of the President was not obtained  before enacting the same.   

Dealing with this contention, the High Court relied upon its  earlier decision in Avinyl Polymers’s case (supra) as well as the  decision rendered by this Court in Venkata Rao Esajirao Limbekar  and others v. The State of Bombay and others [(1969) 2 SCC 81],  wherein the Court held thus:â\200\224 "â\200¦ We would, however, like to observe that, as  noticed before, when Hyderabad Amending Act III of  1954 was enacted the assent of the President was duly  obtained.  Similarly when Bombay Act XXXII of 1958  which was meant for amending Hyderabad Act XXI of  1950 was enacted the assent of the President had been  given.  If the assent of the President had been accorded to  the amending Acts, it would be difficult to hold that the  President had never assented to the parent Act, namely,  Hyderabad Act XXI of 1950.  Even if such assent had not  been accorded earlier it must be taken to have been  granted when amending Act III of 1954 was assented to."

       The Court, thereafter, arrived at the conclusion that the assent

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of President of India would be deemed to have been given to the Act 8  of 1993 when assent to the subsequent Acts No.45 of 1994 and 3 of  1993 was given.

SUBMISSIONS:â\200\224

In these appeals, challenge is confined to the notification dated  23rd September, 1998, which was issued by the State Government in  exercise of powers conferred by sub-section (1) of Section 3 of the  Act providing that w.e.f. Ist Day of April, 1994 and up to 6th day of  January, 1998 tax shall be levied and collected on the entry of goods,  specified in Column (2) of the table, into a local area for consumption  or use or sale therein at the rate specified.

The learned counsel for the appellants submitted that for levy of  tax on the entry of goods on the basis of notification dated 7th January,  1998 which empowers the authority to collect tax prospectively, the  appellants have no grievance.  However, the notification dated 23rd  September, 1998 empowering the authority to levy and collect tax  from 1st April, 1994 up to 6th January, 1998 without prior sanction of  the President is illegal and void and requires to be set aside.  Further,  there was no notification levying tax on entry of goods for a period  from 1.4.1994 to 6.1.1998 as the previous notifications were held to  be illegal and void.  It is submitted that the notification dated 23rd  September, 1998 is in pith and substance validating notification. It is  also submitted that for the hiatus period from 4.8.1997 to 6.1.1998,  there was no notification levying the entry tax.  Such power could not  be exercised by the delegated authority, namely, the State  Government. Hence, the notification dated 23rd September, 1998  cannot be justified.

It is also submitted that the State cannot justify the validity of  amending Act No.8 of 1993 on the ground that since the subsequent  amendments have received the President’s assent, the impugned  amendment is deemed to have received the President’s assent, as it is  against the law laid down by this Court in Kaiser-I-Hind Pvt. Ltd.  and Anr. v. National Textile Corporation (Maharashtra North) Ltd.  and Ors. [(2002) 8 SCC 182] and Gram Panchayat of Village  Jamalpur v. Malwinder Singh and others [(1985) 3 SCC 661].  It is  contended that there was no proposal before the President to provide  for levy of tax on entry of goods with retrospective effect when assent  was given to Act No.45 of 1994.

Lastly, it is contended that most of the appellants in the appeals  fall within the limit of industrial area as declared under Section 3 of  the Karnataka Industrial Areas Development Act, 1966.  Hence, they  would not be covered by the definition provided under Section  2(A)(5) of the Act, which defines ’local area’ to mean:â\200\224 " ’Local Area’ means an area within the limits of a  city under the Karnataka Municipal Corporation Act,  1976 (Karnataka Act 14 of 1977) a municipality under  the Karnataka Municipality Act, 1964 (Karnataka Act 22  of 1964) a notified area committee, a town board, a  sanitary board or a cantonment Board constituted or  continued under any law for the time being in force and a  Mandal under the Karnataka Zila Parishads, Taluk  Panchayat Samithis, Mandal Panchayat and Nyaya  Panchayats Act, 1983 (Karnataka Act 20 of 1985) and  Panchayat Area under the Karnataka Panchayat Raj Act,  1993 (Karnataka Act 14 of 1993)."

The learned counsel for the respondents justified the impugned   judgment for the reasons recorded therein.  It is their submission that

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retrospective effect is given after removing the defects pointed out by  the High Court in Avinyl Polymers’s case (supra) and to validate the  levy of entry tax.

FINDINGS:â\200\224

Before dealing with the rival contentions, we would first refer  to Articles 301 and 304 which are as under:â\200\224 "301.   Freedom of trade, commerce and intercourse.â\200\224  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.â\200\224 Notwithstanding anything  in article 301 or article 303, the Legislature of a State  may by lawâ\200\224

(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 the 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."

Article 301 provides for free trade, commerce and intercourse  throughout the territory of India.  To this, two fold exceptions are  carved out in Article 304 by providing that:â\200\224 (1)     State may by law levy tax on the goods imported  from other States.  However, such levy should be  similar to the tax levied on similar goods  manufactured or produced in the State so as not to  discriminate between the goods imported and  goods manufactured or produced in the State.   

Hence, levy of tax normally by the State  legislature per se would not be, in any way,  violative of Article 301.

(2)     Further, Article 304(b) empowers the State  legislature to impose reasonable restrictions on  freedom of trade, commerce or intercourse with or  within the State as may be required in the public  interest.  

For such restrictions to be valid, the State  must obtain previous sanction of the President  before introduction of the bill in the legislature of  State.

On this aspect, it would be worthwhile to refer to the decision  in Rattan Lal & Co. v. Assessing Authority (1969) 2 SCR 544]  wherein the Court held that where the general rate applicable to the

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goods locally made and on those imported from other States is the  same nothing more normally and generally is to be shown by the State  to dispel the argument of discrimination under Article 304(a), even  though the resultant tax amount on imported goods may be different.  The aforesaid decision was referred to and relied upon in Video  Electronics Pvt. Ltd. and another v. State of Punjab and another  [(1990) 3 SCC 87].  In that case, the Court also referred to the  decision in Kalyani Stores v. State of Orissa [(1966) 1 SCR 865]  wherein it was observed that the restriction on the freedom of trade,  commerce and intercourse throughout the territory of India declared  by Article 301 cannot be justified unless it falls within Article 304.   Exercise of power under Article 304(a) can be effective only if the tax  or duty on goods imported from other States and the tax or duty  imposed on similar goods manufactured or produced in that State is  such that there is no discrimination.  The Court also referred to the  observations of Hidayatullah, J. that Article 304(a) imposes no ban  but lifts the ban imposed by Articles 301 and 303 subject to one  condition.  That article is enabling and prospective.  The Court (in  para 22) further held:â\200\224 "â\200¦ It is manifest that free flow of trade between  two States does not necessarily or generally depend upon  the rate of tax alone.  Many factors including the cost of  goods play an important role in the movement of goods  from one State to another.  Hence the mere fact that  there is a difference in the rate of tax on goods locally  manufactured and those imported would not amount to  hampering of trade between the two States within the  meaning of Article 301 of the Constitution.  As is  manifest, Article 304 is an exception of Article 301 of the  Constitution.  The need of taking resort to the exception  will arise only if the tax impugned is hit by Articles 301  and 303 of the Constitution.  If it is not then Article 304  of the Constitution will not come into picture at allâ\200¦"

In V. Guruviah Naidu & Sons v. State of Tamil Nadu [(1977)  1 SCC 234], this Court held that Article 304(a) does not prevent levy  of tax on goods; what it prohibits 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 discrimination against imported goods by  imposing tax on such goods at a rate higher than that borne by local  goods since the difference between the two rates would constitute a  tariff wall or fiscal barrier and thus impede the free flow of inter-State  trade and commerce.  The Court also held that it is for the petitioner  challenging levy of tax to establish that such tax is discriminatory.

Further, for the tax to become a prohibited tax it has to be a  direct tax the effect of which is to hinder the movement part of trade.   So long as a tax remains compensatory it cannot operate as a  hindrance. {Re: Sharma Transport v. Government of A.P. and others  [(2002) 2 SCC 188]}

In these appeals, no contention is raised to the effect that levy  of tax on goods by the impugned notification discriminates between  the goods imported from other States and similar goods manufactured  or produced within the State.  Hence, it would be difficult to accept  the contention that the sanction of the President was required to be  obtained before amending and enacting Act No.8 of 1993 whereby for  the words "by the State Government, by notification from time to  time", the words "retrospectively or prospectively by the State  Government by notification and different dates" were substituted.   Addition of words ’retrospectively or prospectively’ in Section 3(1)  would not make the Section restrictive which can be hit by Article 301  of the Constitution nor the said part of the legislation could be held to

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be discriminatory.  To clarify the situation, it can be stated that a  subsequent notification issued in exercise of the powers conferred  under the said Section may in some case amount to restriction to free  trade and commerce but simplicitor addition of the words  ’retrospectively or prospectively’ would not require sanction of the  President as contemplated under Article 304 (b).  Hence, the  contention that amending Act No.8 of 1993, by which the words  ’retrospectively or prospectively’ are added, requires sanction of the  President, is without any substance.

Further, once it is conceded that imposition of tax was  compensatory or regulatory in nature, there is no question of obtaining  the assent of the President under Article 304(b) of the Constitution.   For the Act in question, this question is dealt with and made clear by this court  in M/s. Hansa Corporation (supra) and thereafter in repeated  judgments including State of Himachal Pradesh and others v. Yash  Pal Garg (Dead) By LRs and others [JT 2003 (4) SC 413] wherein it  is held that so long as the tax remains compensatory or regulatory, it  cannot operate as hindrance.  The Court also held:â\200\224 (a)     A demand for tax from the traders in common with  others is not a restriction on the right to carry on  trade, commerce and intercourse.

(b)     Such tax would not come within the purview of the  restrictions contemplated under Article 301 unless  it is established that in reality, it hampers or  burdens the trade and commerce.

(c)     So long as the tax remains compensatory or  regulatory, it cannot operate as a hindrance.

(d)     If a State tax law accords identical treatment in the  matter of levy and collection of tax on the goods  manufactured within the State and identical goods  imported from outside the State, Article 304(a)  would be complied with.  There is an underlying  assumption in Article 304(a) that such a tax when  levied within the constraints of Article 304(a)  would not be violative of Article 301 and State  legislature has the power to levy such tax.

In view of this settled law, once it is held that the tax levied by  the State Government was compensatory in nature, there is no  question of obtaining sanction of the President under proviso to  Article 304. In this view of the matter, the decision rendered by this  Court in Kaiser-I-Hind Pvt. Ltd.’s case (supra) has no bearing in the  present case.

It is true that normally tax would not be levied with  retrospective effect but at the same time to validate the tax which was  levied, after removing the defects pointed out by the previous  decision, the State Government could exercise its powers under  Section 3(1) of the Act and it cannot be said that it has acted beyond  its jurisdiction.  Therefore, it cannot be held that notification dated  23rd September, 1998 empowering the authority to levy and collect tax  w.e.f. 1.4.1994 to 6.1.1998 is, in any way, illegal or erroneous.  The  defects pointed out in Avinyl Polymers’s case (supra) are removed  and, therefore, it cannot be said that the notification dated 23.9.1998  is, in any way, illegal.  In a situation like present one where  notifications levying tax were held to be illegal, for validating such  levy, the State Government has issued the aforesaid notification.  It is  not pointed out that the said notification is discriminatory between the  goods imported from other States and similarly goods manufactured  or produced within the State.

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Last contention only requires to be narrated for being rejected,  as it cannot be disputed that the ’industrial area’ is either within the  area of Municipal Corporation or within the area of municipal limits  or Panchayat limits.  The establishment of industrial areas is for  limited purpose and Section 3 of the Karnataka Industrial Areas  Development Act, 1966 specifically provides that the State  Government may by notification declare any area to be an industrial  area for the purposes of the said Act.  But, it is nowhere provided that  the said area would cease to be part and parcel of either municipal  corporation or the area of municipality or panchayat. Therefore, the  High Court rightly rejected this contention.

In the result, the appeals are dismissed. In each appeal,  appellants to pay costs of Rs.10,000/-.

SLP (C) Nos. 112-13 of 2002, SLP (C) __________ @ CC Nos.  3488-90 of 2003 and SLP (C ) No.8223-24 of 2003.

       Special Leave Petitions ______ @ CC Nos.3488-90 of 2003 are  dismissed on the ground of delay.

       For the foregoing reasons, Special Leave Petitions are also  dismissed.