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CASE NO.: Appeal (civil)  8031 of 2004

PETITIONER: Secretary to Government & Ors

RESPONDENT: M/s Peekay Re-Rolling Mills (P) Ltd

DATE OF JUDGMENT: 03/04/2007

BENCH: S. H. Kapadia & P. K. Balasubramanyan

JUDGMENT: J U D G M E N T

with Civil Appeal Nos. 8032-8033/04 and 8034/04

KAPADIA, J.

Civil Appeal Nos. 8031/04 and 8032-8033/04

                Being aggrieved by the common judgment dated  22.8.2003 delivered by the Division Bench of the Kerala High  Court in W.A. Nos. 991 and 1316 of 2003, the State has come  to this Court by way of the present civil appeals.

Facts giving rise to these civil appeals are as follows.         Peekay Re-Rolling Mills (P) Ltd., respondent herein, was  registered as an industrial unit on 6.9.1991. They claim to  have set up an industrial unit in the State on account of tax  exemption given to industrial units from payment of sales tax  for the fixed period commencing from the date of commercial  production. Tax exemption was in fact granted under Section  10 of the Kerala General Sales Tax Act, 1963 ("1963 Act") vide  notification dated 4.11.1993. Under that notification, tax  exemption was admissible to medium scale units for seven  years from the commencement of commercial production. In  the present case, the respondent commenced the said  production on 31.3.1995. In between, on account of acute  power shortage in the State, the Government issued an Order  inter alia stating that certain industries included in the  negative list would not be eligible for State Investment Subsidy  and certain other assistance. One of the items in the negative  list, being item  no. 7, was "power intensive units", whose total  power requirement exceeded 2500 KVA and where the cost of  power exceeded 25% of the cost of production. By clauses 2  and 4 of the said G.O., all units in the negative list  provisionally registered on or after 31.12.1993 were denied  State Investment Subsidy. By clause 3 of the said G.O.,  expansion/ modernization/ diversification of existing units in  the negative list was also disqualified from tax exemption from  the Government except in cases where an application was   made by the unit  on or before 31.12.1993.

Subsequent to the commencement of commercial  production on 31.3.1995 and prior to March, 1996, additional  investment was made by the respondent for the construction  of building, installation of plant and machinery, electrification  etc. This expansion was undertaken for the purpose of

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downline integration to enable the respondent to manufacture  steel ingots, an input in the manufacture of iron rods and  bars. After starting commercial production, the respondent  made an application for tax exemption on 20.6.1997. The  Director of Industries issued eligibility certificate and based on  the said certificate, the Commissioner of Taxes granted  exemption on 19.12.1997 on the initial investment to the  respondent to the tune of Rs. 2.66 crores (approx.) for seven  years from 31.3.1995 to 30.3.2002. During the pendency of  the exemption application before the Director of Industries,  additional capital investment of Rs. 5 crores (approx.) was  made. This led to the increase in the contract load and,  therefore, an application was made on 24.9.1997 by the  respondent claiming tax exemption on the basis of additional  capital investment. This application dated 24.9.1997 was  rejected by the competent authority on the ground that the  respondent was a power intensive unit having a load factor of  more than 2500 KVA. Reliance was placed on G.O. dated  26/27.11.1993 in that regard. This order led to litigation.  Without going into unnecessary details, suffice it so state that  both, the Government and the Director of Industries,  proceeded to reject the claim for tax exemption by placing  reliance on the above G.O. dated 26/27.11.1993. This led to  the filing of O.P. Nos. 32947 and 32807 of 2000 by the  respondent herein in the High Court. To complete the  chronology of events, on 19.4.1994 the Government issued a  clarification to the G.O. dated 26/27.11.1993. By the said  G.O., it was clarified that tax exemption would continue to be  available to all industries which were provisionally registered  before 31.12.1993 and only those industries in the negative  list which stood registered on or after 31.12.1993 alone would  be ineligible for financial assistance/ tax exemption from the  Government. Therefore, in the said O.P. Nos. 32947 and  32807 of 2000 one of the grounds taken by the respondent  was that the Government as well as the Director of Industries  had erred in denying tax exemption to the respondent without  considering the clarificatory G.O. dated 19.4.1994. In the said  writ petitions, the order passed by the Director of Industries  dated 21.10.2000 holding that the respondent was not entitled  to tax exemption in respect of the additional capital  investments was questioned. This order was passed by the  Director of Industries based on an inter departmental letter  dated 5.7.2000 addressed by the Principal Secretary to the  Director of Industries, which the Department has termed as  "clarification". Before the High Court, it was also contended by  the respondent that eligibility for tax exemption had to be  decided only with reference to statutory notification under  Section 10(1) of the said 1963 Act and not with reference to  the general executive orders which do not have statutory  flavour and that by the said G.O. dated 26/27.11.1993 it was  not open to the State Government to withdraw the benefit of  tax exemption granted vide notification dated 4.11.1993.

       By judgment dated 10.4.2003, the learned Single Judge  held that G.O. dated 26/27.11.1993 was a comprehensive  Notification dealing with various subjects. It was further held  that even under Section 10(3) of the said 1963 Act, specific  power was given to the Government to cancel or modify any  notification under Section 10(1) of that Act and, therefore, the  effect of the said G.O. dated 26/27.11.1993 was to modify/  amend Notification dated 4.11.1993. The learned Single Judge  further held that when the Government had statutory power to  issue such a notification, any G.O. issued without reference to  the provisions of the statute should be deemed to be issued in  exercise of such power. In the circumstances, the contention

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advanced on behalf of the respondent to the effect, that G.O.  dated 26/27.11.1993 cannot cause an amendment/  modification to the statutory notification dated 4.11.1993  under Section 10(1) of the said 1963 Act, stood rejected. In the  petition, one of the contentions raised by the respondent was  that the respondent’s unit was not a Power Intensive Unit  because its expenses on account of the cost of power was less  than 25% of the cost of its total production. In this connection,  respondent placed reliance on clause 7 of G.O. dated  26/27.11.1993. This argument was rejected by the learned  Single Judge holding that the issue can be decided on  interpretation of clause 7 with reference to the connnected  load and not with reference to the cost of production  attributable to power charges. The learned Single Judge  interpreted the word ’and’ in clause 7 and read it as  disjunctively. On that basis, the learned Single Judge held  that though the word ’and’ was used in clause 7, the two  conditions, namely, the contract load above 2500 KVA and the  cost of power at more than 25% of the cost of production,  cannot be read conjunctively and that they have to be read  disjunctively. In other words, the learned Single Judge has  read the word ’and’ as ’or’. The learned Single Judge also  rejected the contention raised by the respondent that the  respondent was entitled to exemption since its unit stood  registered before 31.12.1993. This argument was rejected on  the ground that under clause 3 of G.O. dated 26/27.11.1993,  expansion of existing unit in the areas included in the negative  list was not entitled to tax exemption unless application was  made on or before 31.12.1993. According to the learned Single  Judge, the respondent was granted tax exemption on initial  investments for the full period of seven years from 31.3.1995  to 30.3.2002. This, according to the learned Single Judge, was  in view of the clarificatory G.O. dated 19.4.1994. According to  the learned Single Judge, the respondent’s unit was not in the  negative list on 26.11.1993. It came under the negative list  only by virtue of additional investments made by the  respondent after 1.7.1995 and, therefore, it was not a case of  existing industry in the negative list making additional  investments and claiming tax exemption thereon. According to  the learned Single Judge, it was a case where by making  additional investments, the respondent had brought its unit  into the negative list. For the aforestated reasons, O. P. Nos.  32807 and 32947 of 2000 were dismissed.

       Aggrieved by the said judgment, the respondent herein  carried the matter in writ appeals to the Division Bench. By  the impugned judgment, it has been held that, G.O. dated  26/27.11.1993 was a general Notification withdrawing grant of  subsidy and as against the said G.O., the exemption  Notification dated 4.11.1993 was a specific Notification issued  under Section 10(1) of the said 1963 Act and, therefore, the  specific Notification would override the general G.O./  Notification dated 26/27.11.1993. Accordingly, the writ  appeals were allowed, hence, these civil appeals.

       We are of the view that the State Government had the  authority under Article 162 of the Constitution to issue G.O.  dated 26/27.11.1993 withdrawing the tax exemption on  account of acute power shortage in the State. However, for the  reasons mentioned hereinbelow, we are not examining the  larger question of principle, namely, applicability of specific  Notification under Section 10(1) of the 1963 Act vis-‘-vis  comprehensive Notification dated 26/27.11.1993 issued by  the Ministry of Industries withdrawing all tax exemptions  including those under Section 10(1) of the 1963 Act.

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We are proceeding on the basis that the comprehensive  G.O. dated 26/27.11.1993 issued by the State Government on  account of acute power shortage is applicable to the facts of  the present case. It is undisputed that on 4.11.1993 the State  Government had issued a statutory Notification under Section  10(1) inter alia granting exemption to medium scale units from  payment of sales tax for seven years. Similarly, the State had  given concessions under Electricity Act. It had promised  subsidies. All these exemptions/ concessions were withdrawn  by G.O. dated 26/27.11.1993 by the Ministry of Industries on  account of acute power shortage. We do not find any infirmity  in the issuance of the said G.O. dated 26/27.11.1993.  The question still remains as to the scope of the  clarificatory G.O. dated 19.4.1994. This question has not been  examined by the Division Bench. According to the appellants,  the said clarificatory G.O. was not applicable to units which  made additional investments after 26.11.1993. However, this  aspect has not been examined by the Division Bench. The  Division Bench has also not examined clause 3 of G.O. No.  169/95/ID dated 1.11.1995, which reads as follows: "3.     Investments in generators shall be  eligible for the purpose of Tax Exemption  Additional investment for balancing equipment  and lines of backward or forward integration  shall qualify only as additional investment for  the purpose of tax exemption. Additional  investment for purposes of determining tax  exemption eligibility will mean those  investments necessary to the running of the  unit which however do not; qualify  independently as expansion/diversification/  modernization, units shall consequently be  entitled only to increase in the monetary limit  for tax exemption already enjoyed without  extension in the period. Tax Exemption for  additional investments may be given during  the period the unit is enjoying its initial Tax  Exemption or when the unit is enjoying tax  exemption on account of expansion/  diversification/ modernisation."

The Director of Industries, in his order dated 21.10.2000  while rejecting the respondent’s claim for tax exemption has  relied upon an inter departmental letter dated 5.7.2000. The  effect of this letter has also not been considered by the  Division Bench, whether the letter is an amendment or a  clarification.  

Similarly, the Division Bench has failed to consider  clause 7 of G.O. dated 26/27.11.1993. We reproduce  hereinbelow clause 7:

"7.     Power intensive units based on electro  thermal/ electro chemical processors or units  where total power requirement exceeds 2500  KVA of contract load and where cost of power  is more than 25% of cost of production of the  items manufactured except where the units  generate their power requirements in excess of  2500 KVA of contract load by own captive  power."                              (emphasis supplied)

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       As stated above, according to the appellants, the word  ’and’ in the above quoted clause should be read as ’or’  whereas, according to the respondent, clause 7 defines power  intensive units to mean units whose total power requirement  exceeds 2500 KVA of contract load and where the cost of  power is more than 25% of cost of production of the items  manufactured by the units. As stated above, the learned  Single Judge has accepted the contention advanced on behalf  of the appellants herein. However, this is an important aspect.  The said clause 7 refers to the Load Factor and to the cost of  power as percentage of cost of production. According to the  appellants, the Cost Factor has no nexus with the object  sought to be achieved, namely, lowering of consumption.  According to the appellants, under clause 7 both the cost and  the load factors were required to be taken into account so that  in cases where the limit of 2500 KVA is not exceeded,  investment is not discouraged. According to the appellants, if  both the conditions were to be satisfied for making a unit  power intensive unit then, in the present case, the said G.O.  dated 26/27.11.1993 would not apply since during the  relevant period the respondent’s unit did not incur expenses  on account of cost of power exceeding 25% of the total cost of  production. In the present case, the Division Bench has failed  to consider the following aspects in the matter of  interpretation of clause 7 of the said G.O. dated  26/27.11.1993. The reason for issuance of the said G.O. was  to curb excess electricity consumption and not to curb  additional investments. The underlying reason for issuance of  the said G.O. was to restrict power consumption and not to  restrict expansion of units in terms of additional investments.  This is the basic argument advanced on behalf of the  respondent in support of their contention that the word ’and’  in clause 7 should be read conjunctively. On the other hand, it  is argued on behalf of the appellants that the word ’and’ in the  said clause should be read as ’or’ since the reason for issuance  of the said G.O. was to curb excess electricity consumption  either by way of exceeding the prescribed ceiling of 2500 KVA  or by way of additional investments (capital expenditure for  additional facility). These aspects have not been considered by  the Division Bench though it had been considered in favour of  the appellants by the learned Single Judge.

       For the above reasons, we hold that the State  Government was entitled to issue comprehensive G.O. dated  26/27.11.1993 on account of acute power shortage in the  State. We further hold that the comprehensive G.O. applies  across the board to all units which became power intensive  units. To that extent, we find merit in the civil appeals filed by  the State. However, since the Division Bench of the High Court  has not examined the points referred to above, to that extent  alone, we remit the matter to the Division Bench for its  consideration.

       Subject to above, the civil appeals filed by the State stand  allowed. There is no order as to costs.

Civil Appeal No. 8034/04 [Sales Tax Officer & Ors.  v.  Premium Ferro Alloys Ltd.]

       Although, the dates of events are different, the matter is  similar on the question of withdrawal of tax exemption to the  case just decided vide Civil Appeal Nos. 8031/04 and 8032- 8033/04 concerning Secretary to Government & Ors.  v.   M/s Peekay Re-rolling Mills (P) Ltd.. One of the points which arises for determination in the

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present case is whether Premium Ferro Alloys Ltd. is entitled  to claim tax exemption on additional investments made after  24.11.1998. It is urged on behalf of the said company  (respondent herein) that G.O. No. 169/98/ID dated  24.11.1998 by which the State Government modified the  negative list by including all types of steel re-rolling mills,  units manufacturing iron ingots, operated prospectively. In  this connection reliance was placed on clause 3 of the said  G.O.

We do not find any merit in the above contention. We  quote hereinbelow clause 2 and clause 3 of the said G.O.  dated 24.11.1998. "2      The Director of Industries & Commerce  has in his letter read above proposed some  modifications to the negative list. The  Government have examined the proposal of the  Director of Industries & Commerce and  decided to amend the G.O. read above by  including the following industries also in the  negative list.

1.      Metal Crushers including Granite  Manufacturing Units. 2.      All types of steel Re-Rolling Mills,  Units Manufacturing iron ingots. 3.      Ferro Silicon 4.      Calcium Carbide 5.      Cement Manufacturing 6.      Potassium Chlorate   

3.      This order will be effective from the date  of order and will be applicable to all units  taking provisional registration or IEM/SIA as  the case may be from the date of this order. All  the conditions stipulated in the G.O. read  above and subsequent amendments/  clarifications issued thereon will be applicable  to this order also."                  Reading the above two clauses, it is clear that the G.O.  dated 26/27.11.1993 got modified by G.O. dated 24.11.1998.  Therefore, if the said G.O. dated 26/27.11.1993 is found to be  applicable then the G.O. dated 24.11.1998 which is  modification of the earlier G.O. dated 26/27.11.1993 would  apply as a clarificatory G.O.. We may reiterate that in our  judgment in Civil Appeal Nos. 8031/04 and 8032-8033/04 the  question of interpretation of clause 7 of G.O. dated  26/27.11.1993 has been remitted to the High Court. However,  as far as retrospectivity of G.O. dated 24.11.1998 is  concerned, we are of the view that the said G.O. is  clarificatory. Therefore, there is no merit in the contention  raised on behalf of Premium Ferro Alloys Ltd. that the said  G.O. dated 24.11.1998 is prospective and not retrospective.

However, the issues, which we have remitted to the   Division Bench in the earlier matters (Civil Appeal Nos.  8031/04 and 8032-8033/04), also arise in the present case.  

In the circumstances, we remit this case also to the  Division Bench. Accordingly, we request the Division Bench of  the High Court to tag W.A. No. 1477 of 2003 with W.A. Nos.  991, 1316 and 1561 of 2003 and decide the appeals  accordingly.

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Subject to above, the appeal is allowed with no order as  to costs.