Sumit Nema

Office & Residence

(Jabalpur)

Advocate
Madhya Pradesh High Court

Indore Branch
Office
303, Princess
Valley,

Asha,

email:
advocatenema@gmail.com

1029, Gol Bazar,

Phone: (0761)2404937

JABALPUR (M.P)
482002

Next

to
Hotel
Princes
Palace,
South Tukoganj,
INDORE 452001

Cell: 9713163667
Fax No. (0761) 2403036

CONSTITUTIONAL ASPECTS OF NEW PROVISION (SECTION 9B) OF

M.P.VAT ACT AND EXPLANTION TO SECTION 57 OF VAT ACT.

Q 1: Whether section 9B of MP VAT Act, 2002 as introduced w.e.f.1/4/2011

ultra vires ?
Answer :Substitution of long title- significance thereof
The MP VAT Act 2002 is now An act to levy ---- tax on sale and purchase of goods
&
----

tax on buildings

Thus the intention is to tax goods as per Entry 54 of list II of seventh schedule of the
Constitution& tax buildings as per Entry 49 of list II of seventh schedule of the
Constitution.
Legislative competence as per Article 246 of the Constitution of India
State Govt. has the power to levy tax on sale and purchase of goods under Entry 54
of List II of Seventh Schedule & has power to levy tax on land and buildings under
Entry 49 of list II of seventh Schedule.
Thus the argument that goods do not cover immovable property would not be
sufficient to challenge section 9B since the state is not levying tax on goods u/s 9B
but is taxing building for which it has separate power under Entry 49 .

IMPORTANT CONSTITUTIONAL PROVISIONS

Article 366(28) defines taxation to include the imposition of any tax
or impost whether general or local or special and tax shall be construed

accordingly. A tax is a compulsory exaction of money by a public authority

for public purposes enforceable by law and is not payment for services
rendered . Part XII of the Constitution deals with finance, property, contracts
and suits and consists of Articles 264 to 291. It consists of various provisions
dealing with imposition of tax, distribution of tax between the Union and the
States, the levy of surcharge, tax on professions, trades and callings. It also
grants exemption from Union taxation.
The most important article is Article 265 which reads thus: Taxes not
to be imposed save by authority of law. No tax shall be levied or collected
except by authority of law.
This simple article has been the foundation for several writs
challenging various provisions of taxing statutes, rules and notifications. The
Article does not lay down any guidelines or parameters within which tax has
to be levied. All that is necessary is that the imposition, levy and collection of
tax must be authorized by law. The three basic requirements of a valid tax
statute are as follows:
(i) the law should be within the legislative competence of the legislature
being covered by the legislative entries in the Seventh Schedule of the
Constitution;
(ii) the law should not be prohibited by any particular provision of the
Constitution such as for example Articles 276(2), 286 etc.;
(iii) the law or the relevant portion thereof should not be invalid under Article
13 for repugnancy to those freedoms which are guaranteed by Part III
of the Constitution which are relevant to the subject matter of the law.
[Chhotabhai Jethabhai Patel and Co. vs. Union of India AIR 1962 SC
1006, 1020; State of Rajasthan vs. Sajanlal Panjawat AIR 1975 SC 706,
725-726; State of Punjab vs. Naranjan Dass Doomra Rice & General
Mills AIR 1998 SC 537; Raja Jagannath Baksh Singh vs. State of Uttar
Pradesh AIR 1962 SC 1563.].
The three Legislative Lists in Schedule VII set out the fields of
legislation that are available to the Union , the States and to both (the
Concurrent List). The power of the Union to levy tax is enumerated in Entries
82 to 92B.
Three entries Entry 82 [Income Tax], Entry 83 [Customs Duty] and
Entry 84 [Excise Duty] permit the levy of three Central taxes that generate
almost the entire tax revenue of the Union . In ListII, the fields of taxation
start with Entry 46 [Agriculture Income Tax] and continue till Entry 63. Entry
66 also refer to levy of fees but excludes court fees. Amongst the important
State taxes are agriculture income tax, sales tax, motor vehicles tax and
luxury tax.
List III is the Concurrent List. Significantly, it contains no entry
permitting levy of tax. However, it refers to stamp duty or fees collected by
means of judicial stamps.
VIRES OF TAX LAWS

The vires of any tax law can be challenged in the same manner as any
other statute. On an overall examination of the case laws, any taxing statute
can be challenged only on two grounds:(i) lack of legislative competence,
(ii) violation of fundamental rights.
A law which is completely arbitrary will be struck down as being
violative of Article 14 Raja Jagannath Baksh Singh vs. State of U.P. AIR 1962
SC 1563.
SPECIFIC PRINCIPLES APPLICABLE TO TAX LAWS
(i) Tax laws and fundamental rights: In most cases, a taxing statute is
challenged either on the ground that it violates the right to equality
under Article 14 or it is violative of the fundamental rights to carry on
business under Article 19. But a larger discretion is permitted in
matters of classification. Sri Srinivasa Theatre vs. Government of Tamil
Nadu AIR 1992 SC 999; K. Sham Bhat vs. Agricultural ITO AIR 1963 SC
591.
(ii) The levy, quantum of tax applicable, conditions and manner of recovery
are all matters within the competence of the legislature. Unless the
taxing statute is plainly discriminatory or provides no procedural
machinery for assessment and levy, the Court would not be justified in
striking down the impugned statute as unconstitutional. Rai
Ramkrishna vs. State of Bihar AIR 1963 SC 1667.
(iii) A law will not be struck down merely because other entities or objects
could have been taxed but have not been taxed by the
legislature. Venugopala Ravi Varma Rajah vs. Union of India AIR 1969
SC 1094.
(iv) The taxing statute must satisfy the test of reasonable classification this
implies that all those who are similarly situated must be included. It is
also necessary to look beyond the classification and the purposes of
the
law.Federation
of
Hotel
and
Restaurant
Association
vs. Union of India AIR 1990 SC 1637.
(v) The Supreme Court has also laid down the test of palpable arbitrariness.
It is not possible to lay down any precise formula or test or precise
scientific principles of exclusion or inclusion that can be applied. The
test can only be one of palpable arbitrariness applied in the context of
felt needs of the times and societal exigencies informed by
experience. [Federation of Hotel and Restaurant Association vs. Union
of India AIR 1990 SC 1637]
(vi) In a taxing statute, mathematical precision is not possible; nor is
completely logical or symmetrical classification. The legislature can
choose objects of taxation and impose different rates of duty or grant
exemption for different classes of commodities in different ways and
methods. It is only necessary that such difference of classification is

rational. [Venugopala Ravi Verma Rajah vs. Union of India AIR 1969 SC
1094, 1098; Hoechst Pharmaceuticals Ltd. vs. State of Bihar AIR 1983
SC 1019]. Thus, it is not necessary for the Government to tax
everything in order to be able to tax something. The Supreme Court
has upheld, for example, levy of duty only onvirginia tobacco and not
on country tobacco; the levy of sales tax only on hides and not on
other commodities.[V.M. Syed Mohammad & Co. vs. State of Andhra
Pradesh AIR 1954 SC 314; E.I. Tobacco Co. Ltd. vs. State of A.P. AIR
1962 SC 1733; see also Vrajlal Manilal & Co. vs. State of M.P. 1986
Supp. SCC 201].
(vii) Absence of classification: Ironically, the failure to make a
classification may itself lead to inequality. Thus, when a flat rate of tax
of Rs. 2/- per acre was levied on all lands in Kerala, it was struck down
as violative of Article 14. The flat rate of tax failed to take into account
the income earning potential of the land which was taxed; fertile farm
land suffered the same rate of tax as dry and wasteland. [K.T. Moopil
Nair vs. State of Kerala AIR 1961 SC 552]. Similarly, a flat rate of tax
based on the area of a building without any reference to the nature of
the building, locality, type of structure, rents received and other
relevant circumstances was violative of Article 14. [State of Kerala vs.
Haji K. Haji K. Kutty Naha AIR 1969 SC 378; see also New Manek
Chowk Spinning & Weaving Mills Co. Ltd. vs. Municipal Corporation,
Ahmedabad AIR 1967 SC 1801].
(viii) A high rate of tax will not be violative of the fundamental right to carry
on business under Article 19(1)(g) unless the assessee can show that
the increase resulted in destroying his right to carry on business.
[Express Hotels P. Ltd. vs. State of Gujarat AIR 1989 SC
1949; Federation of Hotels and Restaurant Association of India vs.
Union of India AIR 1990 SC 1637]
(ix) Tax laws Levy, assessment and recovery: The power to make a law
with respect to tax includes the power to provide for all incidental and
ancillary matters relating to levy, assessment, collection and recovery
of tax.[Meenakshi vs. State of Karnataka AIR 1983 SC 1283; Khazan
Chand vs. State of Jammu & Kashmir AIR 1984 SC 762; Hiralal Ratanlal
vs. Sales Tax Officer AIR 1973 SC 1034]
(x) Article 265 makes a distinction between levy and collection. The term
levy is wider than assessment, the latter generally applies to
procedure adopted in fixing the liability to pay a particular tax. Levy
includes imposition of tax as well as the assessment. Power to levy tax
includes all subsidiary powers. [Khyerbhari Tea Co. Ltd. vs. State
of Assam AIR 1964 SC 925]
(xi) Taxation not by subordinate legislation: As a general rule, the tax
laws must be passed by the legislature. Imposition of tax by executive
notification or bye laws is not permissible unless there has been a very
specific power delegated to the executive to do so. [Bimalchandra

Banerjee vs. State of Madhya Pradesh AIR 1971 SC 517, 520;

Ahmedabad Urban Development Authority vs. Sharadkumar
Jayantikumar Pasawalla AIR 1992 SC 2038; Narinder Chand Hem Raj
vs. Lt. Governor, Himachal Pradesh AIR 1971 SC 2399, 2401]
At the same time Parliament/State Legislature can delegate the power
to fix the rate of tax and provide for the procedure for the collection of the
same.
TAX LAWS AND THE COMMERCE CLAUSE
As stated above, Article 304 prohibits the imposition of discriminatory
tax. If a taxing statute imposes a higher rate of tax on goods imported from
other States, it would be violative of Article 304. At the same time, minor
variation in tax will not be a ground to strike down a particular levy. The court
will look into the effect of a local law. For example, sales tax levied on hides
and skins imported from other States was held to be discriminatory and
unconstitutional. [A.T.B. Mehtab Majid & Co. vs. State of Madras AIR 1963 SC
928, 931]. Similarly, exemption granted only to local manufacturers of edible
oil for a ten year period was held to be discriminatory and violative of
Articles 301 and 304. [Shree Mahavir Oil Mills vs. State of Jammu &
Kashmir (1996) 11 SCC 39, 54]
CONCLUSION TO QUESTION NO.1
An examination of the case laws over the last fifty-four years shows
that the courts have been reluctant in striking down tax laws as being
unconstitutional. As repeatedly held, the courts usually lean in favour of the
constitutionality of tax laws. In rare cases, where the law is struck down,
Parliament retrospectively amends the law. Thus section 9B of MP VAT Act
2002 in all likelihood would survive the test of constitutionality.
Q2. Whether rule 9A of MP VAT Rules 2006 as inserted w.e.f.1-4-2011 can
be challenged as ultra vires and hence unconstitutional ?
Answer :
The rule basically prescribes the mode of calculation of value of land to be
deducted. However rule 9A(2) appears to be irrational, arbitrary and violative of
Article 14. It suffers from an apparent discrimination between two similarly situated
persons i.e. builders- one who has purchased the property and would get deduction
of only 150% of the purchase price and one who works on land agreement and who
would get deduction of market value. Determination of maximum of 150% is also
arbitrary and has no logical reason. Likewise appreciation of 1% per month is also
arbitrary and irrational. The said rule can be challenged on the basis of following
judicial matrix :-

A law which is completely arbitrary will be struck down as being

violative of Article 14 Raja Jagannath Baksh Singh vs. State
of U.P. AIR 1962 SC 1563.
The taxing statute must satisfy the test of reasonable classification
this implies that all those who are similarly situated must be included.
It is also necessary to look beyond the classification and the purposes
of the law. Federation of Hotel and Restaurant Association
vs. Union of India AIR 1990 SC 1637.
The Supreme Court has also laid down the test of palpable
arbitrariness. It is not possible to lay down any precise formula or test
or precise scientific principles of exclusion or inclusion that can be
applied. The test can only be one of palpable arbitrariness applied in
the context of felt needs of the times and societal exigencies informed
by experience. [Federation of Hotel and Restaurant Association vs.
Union of India AIR 1990 SC 1637]
Conclusion to question no.2
The said rule in my opinion is arbitrary, irrational and discriminatory
and thus can be challenged as being ultra vires Article 14 of the
Constitution.
Q3 : Importance of explanation to section 57 :Explanation added in sec 57(8) reads as under :"Where the explanation submitted lead to the conclusion that there
is no possibility of sale of goods within the State of M.P. or there
was no attempt to evade tax in respect of the goods, it shall be
deemed that no violation of the provisions of sub-section (2) has
taken place".
Thus if a transporter is able to prove
a) That there is no possibility of sale of goods within the state of m.p.
Or b) there was no attempt to evade tax in respect of the goods
Then penalty can be avoided.
It should be noted that the two explanations are distinct and not conjoint
since they are separated by OR. Thus any of the two circumstance would
suffice.
Applicability to pending proceedings :-

Explanation is a part of the main section and hence, it cannot be read in

isolation. The idea of inserting it is, if anything is not clear in the main
section, it shall be made clear by Explanation. It should be remembered that
for the purpose of taking any action or interpretation, the main section will
be the foundation and the Explanation will be a subordinate part. It helps in
harmonizing and clearing up any ambiguity in the main section.
Hon'ble Supreme Court in the case of CAg I.T. V Plantation Corporation of
Kerala Ltd. while explaining purpose of insertion of the Explanation held as
under:

"So long as there is no ambiguity in the statutory language resort to

any interpretative process to unfold the legislative intent becomes
impermissible. An Explanation is intended to either explain the
meaning of certain phases and expressions contained in a statutory
provision or depending upon its language it might supply or take away
something from the content of a provision and at times even, by way
of abundant caution, to clear any mental cobwebs surrounding the
meaning of a statutory provision spun by interpretative process to
make the position beyond controversy or doubt. "
Hon'ble Delhi High Court in the case of CIT v/s Orissa Cement Ltd., 254 ITR
24 (Del) while explaining the scope of an "Explanation" to a statutory
provision observed as under:
"The object of an Explanation to a statutory provision is: (a) to explain.
the meaning and intendment of the Act itself; (b) where there is any
obscurity or vagueness in the main enactment, to clarify the same so
as to make it consistent with the dominant object which it seems to
subserve; (c) to provide an additional support to the dominant object of
the Act in order to make it meaningful and purposeful; (d) An
Explanation cannot in any way interfere with or change the enactment
or any part thereof; but where some gap is left which is relevant for the
purpose, the Explanation, in order to suppress the mischief and
advance the object of the Act, can help or assist the court in
interpreting the true purpose and intendment of the enactment, and
the right with which any person under a statute has been clothed It
cannot set at naught the working of an Act by becoming a hindrance in
the interpretation of the same. "

As noted by the Supreme Court in Commissioner of Income Tax, Bombay and

Ors. v. Podar Cement Pvt. Ltd. and Ors. (1997 (5) SCC 482) the
circumstances under which the

amendment was brought in existence and the consequences of the

amendment will have
to be taken care of while deciding the issue as to whether the amendment
was
clarificatory or substantive in nature and, whether it will have retrospective
effect or it
was not so.
In Principles of Statutory Interpretation, 11th Edn. 2008, Justice G.P. Singh
has stated
the position regarding retrospective operation of statutes as follows:
"The presumption against retrospective operation is not applicable
to declaratory
statutes. As stated in Craies and approved by the Supreme Court:
For modern
purposes a declaratory Act may be defined as an Act to remove
doubts existing as
to the common law, or the meaning or effect of any statute. Such
Acts are usually
held to be retrospective. The usual reason for passing a declaratory
Act is to set
aside what Parliament deems to have been a judicial error, whether
in the
statement of the common law or in the interpretation of statutes.
Usually, if not
invariably, such an Act contains a preamble, and also the word
`declared' as well
as the word 'enacted'. But the use of the words `it is declared' is not
conclusive
that the Act is declaratory for these words may, at times, be used to
introduce new
rules of law and the Act in the latter case will only be amending the
law and will
not necessarily be retrospective. In determining, therefore, the
nature of the Act,
regard must be had to the substance rather than to the Corm. If a
new Act is 'to
explain' an earlier Act, it would be without object unless construed
retrospective.
An explanatory Act is generally passed to supply an obvious
omission or to clear
up doubts as to the meaning of the previous Act. It is well settled
that if a statute
is curative or merely declaratory of the previous law retrospective
operation is

generally intended. The language `shall be deemed always to have

meant' or 'shall
be deemed never to have included'' is declaratory, and is in plain
terms
retrospective. In the absence of clear words indicating that the
amending Act is
declaratory, it would not be so construed when the amended
provision was clear
and unambiguous. An amending Act may be purely clarificatory to
clear a
meaning of a provision of the principal Act which was already
implicit. A
clarificatory amendment of this nature will have retrospective effect
and,
therefore, if the principal Act was existing law when the constitution
came into
force, the amending Act also will be part of the existing law."
In Zile Singh v. State of Haryana and Ors. (2004 (8) SCC 1), it was observed
as
follows:
It is a cardinal principle of construction that every statute is prima
facie
prospective unless it is expressly or by necessary implication made
to have a
retrospective operation. But the rule in general is applicable where
the object of
the statute is to affect vested rights or to impose new burdens or to
impair existing
obligations. Unless there are words in the statute sufficient to show
the intention
of the legislature to affect existing rights, it is deemed to be
prospective only -"nova constitutio futuris formam imponere debet non praeteritis" -a new law
ought to regulate what is to follow, not the past. (See Principles of
Statutory
Interpretation by Justice G.P. Singh, 9th Edn., 2004 at p. 438.) It is
not necessary
that an express provision be made to make a statute retrospective
and the
presumption against retrospectivity may be rebutted by necessary
implication
especially in a case where the new law is made to cure an
acknowledged evil for

the benefit of the community as a whole (ibid., p. 440).

The presumption against retrospective operation is not applicable
to
declaratory statutes.... In determining, therefore, the nature of the
Act, regard must
be had to the substance rather than to the form. If a new Act is "to
explain" an
earlier Act, it would be without object unless construed
retrospectively. An
explanatory Act is generally passed to supply an obvious omission
or to clear up
doubts as to the meaning of the previous Act. It is well settled that
if a statute is
curative or merely declaratory of the previous law retrospective
operation is
generally intended.... An amending Act may be purely declaratory to
clear a
meaning of a provision of the principal Act which was already
implicit. A
clarificatory amendment of this nature will have retrospective
effect.
Though retrospectivity is not to be presumed and rather there is
presumption
against retrospectivity, according to Craies (Statute Law, 7th Edn.),
it is open for
the legislature to enact laws having retrospective operation. This
can be achieved
by express enactment or by necessary implication from the
language employed. If
it is a necessary implication from the language employed that the
legislature
intended a particular section to have a retrospective operation, the
courts will give
it such an operation. In the absence of a retrospective operation
having been
expressly given, the courts may be called upon to construe the
provisions and
answer the question whether the legislature had sufficiently
expressed that
intention giving the statute retrospectivity. Four factors are
suggested as relevant:
(i) general scope and purview of the statute; (ii) the remedy sought
to be applied;
(iii) the former state of the law; and (iv) what it was the legislature
contemplated.

The rule against retrospectivity does not extend to protect from the
effect
of a repeal, a privilege which did not amount to accrued right.
(p.392)"
Above being the position, the inevitable conclusion is that Explanation
Section
57(8) is clarificatory and not substantive and will apply retrospectively.

SUMIT NEMA
C.A., LL.B.

to