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PETITIONER: STATE OF KERALA

       Vs.

RESPONDENT: SOUTH INDIA CORPORATION(P) LTD.

DATE OF JUDGMENT29/03/1971

BENCH: MITTER, G.K. BENCH: MITTER, G.K. SIKRI, S.M. (CJ) HEGDE, K.S. GROVER, A.N. REDDY, P. JAGANMOHAN

CITATION:  1971 AIR 1930            1971 SCR  236

ACT: Constitution  of India, 1950, Arts. 277 and  278-Repeal  and reenactment  of  tax laws: if affects  continuity  of  levy- Agreement  under Art. 278 by which State agrees  with  Union not to impose tax-If breaks continuity of levy.

HEADNOTE: The  State,  of Travancore and Cochin, before  26th  January 1950,  had  plenary  powers of  legislation  and  under  the Travancore  General  Sales  Tax Act, 1948,  and  the  Cochin General Sales Tax Act, 1945, as amended in 1948, they levied sales-tax on works contracts.  As a result of the merger  of the  two states into a Part B State under the  Constitution, the  Travancore  Cochin  General Sales Tax  Act,  1950,  was enacted, and, after the State of Kerala came into  existence in  1956, the Act was called the Kerala General  Sales  ’Fax Act, and its operation was extended the whole of the  State. That  Act  enabled  the imposition of  sales  tax  on  works contracts,  but,  on February, 25, 1950,  an  agreement  was entered into between the Raj Pramukh and the Union of India, under  Art. 278 of the Constitution, under which, the  State had  no  power  to  impose sales-tax  in  respect  of  works contracts.  That agreement, was to enure for ten years. For  the period 26th January 1960 to 31st March,  1960,  the State levied sales tax on works contracts.  On the  question whether the levy was saved by Art. 277 of the Constitution. HELD  : Under Art. 277, any taxes which, immediately  before the  commencement of the Constitution, were  being  lawfully levied  by a State, may, notwithstanding that the taxes  are mentioned in the Union list in the Constitution continue  to be  levied by the State until provision to the  contrary  is made  by  Parliament.   The impost  of  sales-tax  on  works contracts is, under the Constitution, beyond the  competence of  the  States but would be within that  of  Parliament  by virtue of item 97, List I, VII Schedule and Art. 248 of  the Constitution.  Therefore, sales-tax on works contracts which were  being lawfully levied by the States of Travancore  and Cochin  before 26th January 1950, could under Art.  277,  be continued  to  be levied.  The fact that  former  Acts  were repealed and re-enacted would not take the case out of  Art.

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277, because, all that the Article requires is a  continuity in the levy of taxes without any change in their  character. But  this essential condition of continuity in the levy  for the validity of the imposition of the tax was broken in  the present case, by the agreement under Art. 278.  Articles 277 and  278 were engrafted in the Constitution with the  object of  maintaining financial stability of the new States.   The agreement shows that there was liberal financial  assistance to  make  up  for the loss of revenue which  the  State  was deriving  from the sales-tax on works contracts.  Since  the agreement  broke the continuity of the levy of sales-tax  on works  contracts,  and  there was nothing  in  Art.  277  to resuscitate it when the agreement came to an end in 1960, no sales-tax on works contracts was leviable by the State after 26th January 1960. [240A-B, E-A; 241A; 243AF] South  India  Corporation  (P) Ltd. v.  Secretary  Board  of Revenue, Trivandrum, [1964] 4 S.C.R. 280, referred to. 237

JUDGMENT: Civil Appellate Jurisdiction : Civil Appeals Nos. 175 to 178 of 1969. Appeals  from  the judgements and orders dated  February  6, 1968  and  September 5, 1967 of the Kerala High  Court  Writ Appeal  No. 243 of 1967, T.R.C. Nos. 22 and 23 of  1966  and Original Petition No. 1046 of 1966. M.   C. Chaghla and A. G. Puddissery, for the appellants (in all theappeals.) S.   T. Desai A. S. Nambiar and K. R. Nambiar, for the res- pondent (in all the appeals). The Judgment of the Court was delivered by Mitter,  J,--All  these  four  appeals  are  by  certificate granted  by the High Court of Kerala.  Three of  them  arise out  of a common judgement in T.R.C. Nos. 22 and 23 of  1966 and  Original Petition No. 1046 of 1966.  Appeal No. 175  of 1969  is  from the judgment in Writ Appeal No. 243  of  1967 arising out of original Petition No. 1723 of 1965. The respondent, a private limited company having its princi- pal  place  of business at Mattancherry  originally  in  the State of Cochin but now in the State of Kerala, was assessed by  the State tax Officer, Special Circle, Mattancherry,  to sales-tax  for  the years 1960-61 and 1961-62  on  turnovers which included "works contracts" executed by the respondent. Before  the taxing authorities the contention raised by  the respondent  was that the turnover on these  contracts  could not  be subject to sales tax.  Tax Revision Cases 22 and  23 of  1966  were filed in the High Court under s.  41  of  the Kerala General Sales Tax Act, 1963 to revise the decision of the Tribunal.  These were heard by the High Court along with the  Original Petition No. 1046 of 1966.  Civil  Appeal  No. 175  of 1969 relates to the assessment for the year  1959-60 by  which  a turnover of Rs. 6,09,954.98 relating  to  works contracts  was  included.  The Tribunal upheld the  levy  of sales  tax  on works contracts relating to the  period  26th January  1960 to March 31, 1960 and remanded the case.   The respondent thereupon filed O. P. No. 1723 of 1965.  A single Judge of the High Court quashed the impugned order and  this was  confirmed in Writ Appeal No. 243 of 1967.   The  State, the Kerala Sales-tax Appellate Tribunal and the   Inspecting Assistant Commissioner of Agricultural Income-tax and Sales- tax, Ernakulam have come up in appeals to this Court and the common respondent is the company. 238

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The  Central question in all these appeals is,  whether  the provisions  of  the  General  Sales  Tax  Act  XI  of   1125 (corresponding  to  Christian era 1950) imposing  a  tax  on works  contracts  were enforceable in the  State  of  Kerala subsequent  to  January 26, 1960.  The  history  behind  the present  law  of  sales tax on this point in  the  State  of Kerala  is as follows.  The territory of the said  State  is composed  inter alia of major parts of the erstwhile  States of  Travancore  and  Cochin which  were  separate  sovereign States  having plenary powers of taxation.  Under the  Sales Tax  Act  of  both these States tax was  exigible  on  works contracts.   The Cochin Act was known as the Cochin  General Sales Tax Act XV of 1121 (Christian era 1945) as amended  by Act V of 1124 (Christian era, 1948 AD).  The Travancore  Act was  known as the Travancore General Sales Tax Act XVIII  of 1124 (corresponding to 1948).  As a result of the merger  of the two States, the State of Travancore-Cochin with a common legislature   emerged   as  a,  part  B  State   under   the Constitution  of  India as originally in  force.   The  said legislature enacted the Travancore Cochin General Sales  Tax Act XI of .1125 (corresponding to 1949 A.D.) imposing  sales tax on works contracts.  The Act was published in the  local gazette on January, 17, 1950 but under the provisions of  S. 1(3) thereof it came into force on May 30, 1950 i.e.,  after the date-of the promulgation of the Constitution.  The  last mentioned Act repealed the acts of the Travancore and Cochin States   but  enacted  identical  provisions   of   taxation regarding  works contracts.  The State of Kerala  came  into existence  as a result of the States Re-organisation Act  as from  1st November 1956.  The Kerala Legislature passed  the Travancore  Cochin  General Sales Tax  Amendment  Act,  1957 amending  the name of the Travancore Cochin Act XI  of  1125 and  extending  its operation to the whole of the  State  of Kerala.   This Act came into force on October 1, 1957.   The said  Legislature also passed the Kerala Surcharge on  Taxes Act,  1957 (12 of 1957) for levy Surcharge on various  taxes including  those  on sales or purchase of goods  etc.   This came  into force on 1st September, 1957.  The General  Sales Tax  Act  (XI of 1125) was replaced by  the  Kerala  General Sales Tax Act (XV of 1963) which came into force on April 1, 1963.  There was no provision in this Act for imposition  of tax on works contracts. Even  before the litigations giving rise to the present  set of appeals, the respondent had challenged the imposition  of sales tax on works contracts for the assessment years  1952- 53 as also for the years 1956-57 and 1957-58 before the High Court  of  Kerala  under  Art.  226  and  Art.  227  of  the Constitution.   The High Court’s decision in favour  of  the taxing authorities was upset in appeal to this Court in  the year 1964, in South India Corporation 239 (P)Ltd.  v.  Secretary  Board of  Revenue,  Trivandrum  (1). Although   the  appellant  in  that  case   raised   various contentions  before this Court to negative its liability  to sales  tax on works contracts, this Court held  that  during the period covered by the agreement (which was to enure  for ten years) dated February 25, 1950 entered into between  the Raj Pramukh of Travancore and the Union of India under  Art. 278  of  the Constitution the State had no power  to  impose sales  tax  in  respect of works  contracts  but  the  Court expressed  no  opinion  as  to whether  such  tax  would  be leviable after the expiry of the period of the agreement  as this point was not involved in the appeal. In  the  instant  cases the points urged on  behalf  of  the assessee before the High Court were:

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             (i)That  the  levy  of  the  tax  on  works               contracts under the provisions of the  General               Sales  Tax Act XI of 1125 for the period  26th               January  1960 to 30th March 1963 is not  saved               by Art. 277 of the Constitution; and               (ii)  the levy is violative of Art. 14 of  the               Constitution. Two  learned Judges of the High Court Bench  constituted  to hear the first three matters came to the conclusion that the right  to levy tax did not survive after the period  covered by  the  agreement  dated 25th February,  1950.   The  third learned  Judge  took a different view.  But  all  the  three Judges were agreed that the levy if otherwise justified  was not violative of Art. 14 of the Constitution. There  can be no doubt-and indeed there was no  suggestion-- that after the Constitution came into force it was not  open to the States to levy sales tax on works contracts under any Entry   in   List  II  of  the  Seventh  Schedule   to   the Constitution.   In The State of Madras v. Ganon Dunkerley  & Co.  (Madras) Ltd. (2) it was held that Entry 48 in List  II in  Schedule VIII of the Government of India Act,  1935  did not extend to imposing a tax on the value of materials  used in  construction  works, and that the  provision  introduced into  the Madras General Sales Tax Act 1939 by the  Amending Act of 1947 authorising the imposition of such tax was ultra vires.  Any such imposition under Entry 54 of List II of the Seventh  Schedule  to the Constitution would meet  the  same fate.  At the same time it must be noted that in Mithan  Lal v.  The State of Delhi and another (3) this Court held  that Parliament  was competent to impose a tax on the  supply  of materials  in building contracts and to impose it under  the name of sales tax, as was done by Part C States (Laws)  Act, 1950 by virtue of which the (1) [1964] 4 S. C. R. 280          (2) [1959] S. C. R. 379 (3)  [1959] S. C. R. 445] 240 Chief Commissioner of Delhi issued a notification  extending the operation of the Bengal Finance (Sales Tax) Act, 1941 to Delhi.  However, as the States of Travancore and Cochin  had plenary  powers of legislation they could levy tax on  works contracts  describing  the same as sales tax.  The  levy  of such  taxes after the 26th January 1950 would depend on  the construction of the relevant provisions of the  Constitution as  applicable  to  the said territories.   Apart  from  the provisions of Arts 277 and 278 (which now Stands repealed by the  Constitution  (Seventh  Amendment)  Act,  1956)   their validity  would have to be determined under Art. 372 of  the Constitution.  This Court has held in a number of cases that "a  pre-Constitution  law  made by  a  competent  authority, though  it  has lost its legislative  competency  under  the Constitution, shall continue in force, provided the law does not contravene the ’other provisions’ of the  Constitution". It  would be enough to refer to the above dictum based on  a catena of decisions mentioned in the South India Corporation (P) Ltd. case (supra) at pp. 294-295. Art. 372 is a# general provision meant to secure the  conti- nuance  of existing laws in force in the territory of  India on  the  advent  of  the  Constitution.   Art.  277  however engrafted  a  special  provision for saving  the  impost  of certain taxes, duties, cesses etc. which were being lawfully levied therefore in the following terms :-               "Any  taxes,  duties, cesses  or  fees  which,               immediately  before the commencement  of  this               Constitution,  were being lawfully  levied  by               the   Government  of  any  State  or  by   any

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             municipality or other local authority or  body               for  the purposes of the State,  municipality,               district    or   other   local    area    may,               notwithstanding  that  those  taxes,   duties,               cesses  or  fees are mentioned  in  the  Union               List, continue to be levied and to be  applied               to  the same purposes until provision  to  the               contrary is made by Parliament by Jaw." The impost of sales tax on works contracts though beyond the competence of the States would be within that of Parliament by virtue of item 97 of List I of Seventh Schedule and  Art. 248 of the Constitution.  It would therefore follow that  if there  was no other law touching this point, sales taxes  on works  contracts  which were being lawfully  levied  by  the Governments  of the States of Travancore and Cochin  before, 26th  January  1950 would continue to be levied  and  to  be applied to the same purposes until provision to the contrary was made by Parliament by law.  The fact that the Sales  Tax Acts  of  the former States of Travancore  and  Cochin  were repealed  but  identical provisions were  reenacted  in  the later Acts would not take the case out of Art. 277.  All 241 that  the  said article requires is that there should  be  a continuity in the levy of taxes and so long as the character of the taxes did not change they would be saved by the  said article. We have however also to take note of Art. 278 which has  now disappeared from the Constitution but held the field in 1950 when  an agreement was entered into in terms thereof by  and between  the  President  of India and  the  Raj  Pramukh  of Travancore.  Art. 278 run as follows               "(1)   Notwithstanding   anything   in    this               Constitution,  the  Government of  India  may,               subject to the provisions of clause (2), enter               into  an  agreement with the Government  of  a               State  specified  in  Part  B  of  the   First               Schedule with respect to--               (a)   the  levy and collection of any  tax  or               duty  leviable by the Government of  India  in               such  State  and for the distribution  of  the               proceeds thereof otherwise than in  accordance               with the provisions of this Chapter;               (b)   the grant of any financial assistance by               the  Government  of  India to  such  State  in               consequence  of the loss of any revenue  which               that State used to derive from any tax or duty               leviable   under  this  Constitution  by   the               Government of India or from any other sources;               (c)   the   contribution  by  such  State   in               respect of any payment made by the  Government               of  India under clause (1) of Article 291  and               when  an  agreement is so  entered  into,  the               provisions  of this Chapter shall in  relation               to such State have effect subject to the terms               of such agreement.               (2)   An  agreement entered into under  clause               (1)  shall continue in force for a period  not               exceeding  ten years from the commencement  of               this Constitution:               Provided  that the President may at  any  time               after  the expiration of five years from  such               commencement  terminate  or  modify  any  such               agreement if after consideration of the report               of   the  Finance  Commission  he  thinks   it               necessary to do so."

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The  decision of this Court in The South  India  Corporation (P) Ltd. (supra) elucidates the purpose of Art. 278 and  the object  with which the President of India entered  into  the agreement  with  the  Raj Pramukh of  Travancore.   For  our present purpose it will 16-1 S.C. India/71 242 suffice to quote a portion of the said Judgement.  According to that judgment the agreement               "Incorporated the recommendations made by  the               Indian States Finances Enquiry Committee  with               some  modifications  and the  Union  of  India               agreed to recoup the State for the loss caused               to  it  by  reason of  the  federal  financial               integration    in   the    manner    described               thereunder.  It was not a piecemeal  agreement               confined  to a few items, but a  comprehensive               one  to fill up the entire revenue-gap  caused               to the State by reason of some of its  sources               of revenue having been taken away by the Union               or otherwise lost to it."               Further (see p. 292):               "The  agreement, read with the  Report,  makes               the following position clear: The loss arising               to  the  State  on  account  of  the   federal               financial   integration  in  the   State   was               ascertained  and  a  provision  was  made  for               subsidising  the State by filling up the  said               revenue-gap.   The agreement ex facie  appears               to  be  a comprehensive one.   It  takes  into               consideration  the entire loss caused  to  the               State  by  reason of some of  its  sources  of               revenue    being   transferred    under    the               Constitution  to  the  Union.   It  would   be               unreasonable  to construe the agreement as  to               exclude from its operation certain taxes which               the  State  was  authorised  to  levy  for   a               temporary  period............ that saving  was               subject  to  an  agreement  and,  as  by   the               agreement  effective adjustments were made  to               meet  the  loss  which the  State  would  have               incurred  but for the agreement, there was  no               longer  any necessity for the  continuance  of               the  saving  and it ceased to have  any  force               thereafter   between   the  parties   to   the               agreement." The Court also opined that it was not called upon to  decide whether the said power revived after the expiry of ten years from  the  commencement  of the Constitution,  for  all  the impugned assessments fell within the said period.  The Court observed  that  there was no force in  the  contention  that because  Art. 278 was omitted by the  Constitution  (Seventh Amendment) Act, 1956, the agreement entered into in exercise of  a  power  thereunder automatically came to  an  end  and thereafter the power of the State to levy the tax would come into life again. It  was  enough for the Court in that case to say  that  the agreement would have its full force unless the  Constitution (Seventh Amendment) Act, 1956 in terms avoided it and in the result it held that the impugned assessment orders were  not validly made 243 by the sales tax authorities in exercise of the power  saved by Art. 277 of the Constitution. The  question directly arises before us as to  whether  Art.

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277  would still have effect in regard to the power to  levy taxes  falling  within its scope after the said came  to  an end.  The answer must clearly be  agreement of 25th February 1950 in the negative because the essential condition for the validity of the imposition is the continuity of the levy and once  there  is  a break in its operation it  ceases  to  be effective  and  it cannot matter that no  provision  to  the contrary as envisaged by Art. 277 Was made by Parliament.    It is clear that Art. 277 and particularly Art. 278  were engrafted  in the Constitution with the immediate object  of maintaining  the financial viability of the new  States  for such  time as the Parliament thought proper.  So far as  the State  of  Kerala  was  concerned  the  need  for  financial assistance was met by the agreement between the President of India  and  the Raj Pramukh of Travancore.   That  agreement itself  shows  that there was liberal assistance  for  the first five years which was to be tapered off in another five years’  time.  It would not be wrong to observe that it  was contemplated that after ten years the State of Kerala  would be  able  to find its own feet and do  without  any  special assistance from the Centre.  One of the objects of the  said agreement was to recoup the State of KeraLa for the loss  of revenue which that State used to derive from inter alia, the sales tax on works contracts being a tax which was  leviable under  the  Constitution by the Government of  India  alone. The  agreement  came  to  an end in 1960  and  with  it  the financial   assistance  rendered  in  terms  thereof.    The agreement  broke  the continuity of the levy of Wes  tax  on works  contracts  and  there  is  nothing  in  Art.  277  to resuscitate it. In the result we must hold that sales tax on works contracts was  not  leviable  by the State of Kerala  after  the  26th January  1960 under the Kerala General Sales Tax Act  XI  of 1125  The  appeals  therefore fail and  are  dismissed  with costs.  There will be one set of hearing fee.     V.P.S      Appeals dismissed. 244