S. Ravindra Bhat, J
1. Since common questions of law relating to the interpretation of “local area†occurring under Entry 52 of List II of the Seventh Schedule to the
Constitution are involved, this Court by its order dated 26.03.2015 referred the issue for the decision of a larger bench. The reference order took note
of a previous Constitution Bench ruling in Diamond Sugar Mills Ltd. & Anr. v. State of Uttar Pradesh & Anr. (1961) 3 SCR 242 where the court held
that a “local area†would be an area which is administered by a local body such as a municipality, a district Board, a local board, a Panchayat or
the like and that factory premises are not covered by the aforesaid expression. The court also took note of the Constitution (Seventy-fourth)
Amendment Act, 1992 which introduced Article 243-Q relating to the constitution and administration of municipal bodies and held that having regard to
these developments, the issues which need adjudication in the present appeals have to be considered by a larger bench. Hence, the appeals are listed
before this Bench.
2. For a proper determination of the issues involved, it would be necessary first to notice Entry 52 of List II which authorises State Legislatures to levy
entry tax:
“taxes on the entry of goods into a local area for consumption, use or sale thereinâ€. [This entry was omitted by the Constitution (One Hundred
and First) Amendment Act, 2016.]
3. The term “local area†has not been defined in the Constitution; however, by Article 367, provisions of the General Clauses Act, 1897, subject to
adaptations or modifications made under Article 372 shall apply for interpretation of the Constitution. The General Clauses Act, 1897 does not per se
define a local area, however, it does define a “local authorityâ€, by Section 2(31) in the following terms:
“(31) “local authority†shall mean a municipal committee, district board, body of port Commissioners or other authority legally
entitled to, or entrusted by the Government with, the control or management of a municipal or local fund.â€
4. The State of Orissa enacted the Orissa Entry Tax Act, 1999 (hereafter, “the Orissa Actâ€) which defined the local area so as to include
industrial townships among other areas including areas within the industrial township constituted under Section 4 of the Orissa Municipal Act, 1950
(hereafter “the 1950 Actâ€), thereby subjecting goods entering into such areas, to entry tax. [By Section 3, a levy and collection of tax on the entry
of scheduled goods into local area for consumption, use or sale was imposed.].
(f) “Local area†means the areas within the limits of any â€
(i) Municipality constituted under the Orissa Municipal Act,1950 (Orissa Act 23 of 1950);
(ii) Grama Panchayat constituted under the Orissa Grama Panchayats Act, 1964 (Orissa Act 1 of 1965);
(iii) Other local authority by whatever name called, constituted or continued in any law for the time being in force, and includes the area
within an industrial township constituted under Section 4 of the Orissa Municipal Act, 1950 (Orissa Act 23 of 1950).
The 1950 Act, by Section 4 provides that the State Government can constitute
(a) a notified area council for every “transitional†area; (b) a municipal council for every smaller urban area; and (c) a municipal corporation for
every larger urban area. The proviso to Section 4(1), however, indicates that no such council or corporation:
“shall be constituted in any urban area or part thereof which the Governor may, having regard to the size of the area under Municipal
services being provided or proposed to be provided by an industrial establishment in that area and such other factors as he may deem fit,
by notification, specified to be an industrial township.â€
5. Two of the appellants before this Court i.e., M/s. OCL India Ltd. and Steel Authority of India Ltd. (hereafter, “SAILâ€) impugned the Orissa
Act especially the levy of entry tax. SAIL contended that imposition of entry tax violates Article 301 of the Constitution. It relied upon the five judge
Bench decision in Jindal Stainless Ltd. & Anr. V. State of Haryana & Ors (2006) 7 SCC 241. This Court had held that whenever a law is impugned
as violative of Article 301, the court has to consider whether the enactment facially or patently indicates quantifiable data based on which
compensatory taxes sought to be levied. The basis of SAIL’s writ petition before the High Court was that the levy of entry tax on capital goods
and raw-materials imported into India and raw-materials used in the factories or in work was unconstitutional. The High Court by its impugned
judgment dismissed SAIL’s writ petition holding that the Orissa entry tax did not violate any constitutional prohibition and was in conformity with
Article 304(a) of the Constitution. SAIL relied on notification dated 15.04.1995 as modified on 07.03.1996 and 17.11.2014. It contended that the effect
of these was to exclude the areas in its industrial area, which were part of the Rourkela Municipality; consequently, they ceased to be a “local
area†under the Orissa Act.
6. OCL challenged the levy imposed upon it contending that by virtue of certain notifications dated 23.12.1998, the industrial townships set up by it
were excluded from the local limits of the Rajgangpur Municipality It, therefore, argued that the inclusion of its industrial township as a local area by
virtue of the definition of that term in the Orissa Act was unconstitutional. OCL contended that having regard to the agreement (hereafter
Agreement"") [Agreement for transfer of assets and liabilities etc. entered into between Rajgangpur Municipality and OCL India Ltd, Rajgangpur
dated 26-03-1999.] which it had entered into with the Municipal Council, in regard to the provision of services and the nature of services provided, its
industrial township could not be characterised as a local area. It also relied upon Article 243-Q of the Constitution and contended that any enactment
by the Parliament or the State Government had to conform to the amended Constitution, especially provisions of Article 243-Q, the object of which
was to exclude from within the purview of municipalities and municipal bodies, industrial establishments. Therefore, the imposed or levy of entry tax
was void. The Writ Petitions of both OCL and SAIL were rejected by the Orissa High Court. [By two separate Judgments dated 28.03.2003 in OJC
No. 14424/1999 (which is the subject matter of C.A. No. 2348/2004) and dated 18.02.2008 in W.P. 3019/2007 (which is the subject matter of SLP
No. 15179 / 2008).]
7. This batch also comprises of two appeals [Civil Appeal No 4649-50 of 2012 and Civil Appeal No 289 /2012] preferred by Hindustan Aluminium
Company Ltd. (hereafter, “HINDALCOâ€). Both appeals are directed against the common judgment rendered by the Allahabad High Court dated
23.12.2011, which had negatived the contentions urged by it [along lines similar to those advanced by OCL and SAIL, before the Orissa High Court].
The Allahabad High Court by its elaborate reasoning in the impugned judgment noticed not only the provisions of the U.P. enactments but also took
note of the definition of local area and referred to the other cognate statutes such as Uttar Pradesh Municipalities Act, 1916; The Uttar Pradesh
Kshetrra Panchayats And Zila Panchayats Adhiniyam, 1961; United Provinces Panchayat Raj Act, 1947 and U.P. Industrial Area Development Act,
1976 (hereafter, “the UPIAD Actâ€).
HINDALCO, in its petitions had relied on notifications dated 07.04.2000 which declared its industrial area, in Renukoot Sonebhadra, as an
“industrial township†under the UPIAD Act.
8. It was held by the Allahabad High Court that the inclusion of industrial townships within the definition of the local area for the purposes of entry tax
did not exceed any constitutional limit and also did not violate Article 243-Q of Constitution.
A Submission of Parties
(i) Appellants’ contentions
9. It was argued by Mr Braj K Mishra, learned counsel for OCL, that no octroi was being levied or leviable in its notified industrial township and
therefore, it is not covered by the definition of “local area†under Entry 52 of List II of the Seventh Schedule to the Constitution. Consequently,
the levy of entry tax on entry of goods into such industrial township for use, sale or consumption therein must be declared unconstitutional on the
ground of incompetency of the State Legislature to levy the same.
10. It was also submitted by the counsel that interpretation of Entry 52 in List II (of the Seventh Schedule to the Constitution) declared in Diamond
Sugar Mills (supra) is applicable, even after introduction of Article 243-Q, under Part IX-A of the Constitution. The purpose of introducing that
provision was to strengthen functioning of local bodies because they were unable to perform effectively as vibrant units of self-government. The
proviso to the article allows the Governor to exclude an area industrial establishment in which an industrial township may be set up and in which
certain municipal services may be provided by such establishment. Counsel submitted that such industrial establishment cannot be equated with an
area administered by local authority i.e., local self-government such as a municipal or town area. Therefore, its exclusion, by the proviso to Article
243-Q meant that it could not be considered as a local area, under any law, made by any state. The levy of entry tax, into such areas covered by
industrial establishments, lawfully declared as such, therefore, had to fail.
11. OCL’s counsel also relied on the ruling of this Court in Union of India v RC Jain (1981) 2 SCC 308 and Housing Board of Haryana v Haryana
Housing Board Employees’ Union (1996) 1 SCC 95 and urged that OCL does not possess attributes and features or any power or functions of a
‘local authority’ like Municipal Committees, District Boards, Gram Panchayats, and Panchayat Samitis. Thus, its ‘Industrial Township’
cannot be construed to fall within the expression “Local Area†used in the Seventh Schedule to the Constitution. Reliance was also placed on
Diamond Sugar Mills Limited (supra) to argue that though the interpretation of the term ‘local area’ was given in respect of factory premises,
the interpretation must not be limited only to a case of factory premises. This Court in Diamond Sugar Mills (supra) held that:
“15. The etymological meaning of the word “local†is “relating to†or “pertaining toâ€a place. It may be first observed that
whether or not the whole of the State can be a “local areaâ€, for the purpose of Entry 52, it is clear that to be a “local area†for this
purpose must be an area within the State.
xxxxxx xxxxxx xxxxxx
28. The premises of a factory is therefore not a “local areaâ€.
12. OCL relied on the Agreement between OCL and the Municipality to state that OCL’s premises are excluded from the Rajgangpur Municipal
area after its declaration as an Industrial Township. Further, Clause 5 of the minutes of discussions [No 249/Res Re: formation of committee for
settlement of assets and liabilities etc. between OCL India Ltd. and Rajgangpur Municipality] dated 01-02-1999 between the State Government,
Rajgangpur Municipality, and OCL declares that goods procured by OCL will not be liable for octroi. Learned counsel submitted that once the OCL is
exempted from payment of octroi, the State Government cannot impose entry tax on goods procured by it since octroi duty is basically the predecessor
of entry tax.
13. Counsel for SAIL, Mr. S.K. Bagaria, relied on the dicta in Diamond Sugar Mills (supra) and also placed reliance on New Okhla Industrial
Development Authority v Commissioner of Income Tax (2018] 9 SCC 351 (hereafter, “NOIDAâ€) to contend that Article 243-Q of the
Constitution of India does not contemplate constitution of an industrial establishment as a municipality and thus merely because OCL was providing
municipal services in its area, it cannot be said that OCL is a municipality. The court noted in NOIDA (supra) that:
“31. …exemption from constituting Municipality does not lead to mean that the industrial establishment which is providing municipal
services to an industrial township is same as Municipality as defined in Article 243P€…..
Learned counsel also asserted that exemption given to OCL from payment of octroi was made after taking into account that the amount of Rs. 2
crores deposited by it would be enough to set off the loss of octroi and that the municipality was compensated for even the potential future loss of
revenue.
14. Mr Bagaria, learned senior, relied on Diamond Sugar Mills (supra) to urge that meaning of the term ‘local area’ as expounded in that
decision must be applied in the present case to declare SAIL’s industrial area as not a ‘local area’ within the meaning of Entry 52 of List II.
It was further argued that merely because SAIL provided municipal services within its industrial township area, does not make its area a
‘municipality’ or ‘local authority’. Furthermore, no powers, authority and responsibilities of municipalities under Article 243-W were
endowed upon SAIL by the State Government to enable it to function as an institution of self-government and neither has SAIL been authorized to
levy, collect and appropriate any taxes or duties or tolls or fee. The exclusion of industrial establishments, was also in the light of proviso to Article
243-Q. It was submitted that by Article 243-Q in every State, a Nagar Panchayat for transitional areas (areas in transition from a rural area to an
urban area); a Municipal Council for a smaller urban area; and a Municipal Corporation for a larger urban area, has to be constituted. However,
proviso to Article 243-Q exempts this requirement, in relation to declared industrial areas:
Article 243W - Powers, authority and responsibilities of Municipalities, etc.
Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow--
(a) the Municipalities with such powers and authority as may be necessary to enable them to function as in - stitutions of self-government
and such law may contain provisions for the devolution of powers and responsi - bilities upon Municipalities, subject to such conditions as
may be specified therein, with respect toâ€
(i) the preparation of plans for economic development and social justice;
(ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters
listed in the Twelfth Schedule;
(b) the Committees with such powers and authority as may be necessary to enable them to carry out the re-sponsibilities conferred upon
them including those in relation to the matters listed in the Twelfth Schedule.
“Provided that a Municipality under this clause may not be constituted in such urban area or part thereof as the Governor may, having
regard to the size of the area and the municipal services being provided or proposed to be provided by an industrial establishment in that
area and such other factors as he may deem fit, by public notification, specify to be an industrial township.â€
15. It was submitted that in the present cases, notifications under the above provisions were issued, which meant that areas falling within industrial
townships, were neither local areas, nor were they part of municipalities. Relying extensively on Diamond Sugar Mills (supra), it was argued that the
definition of “local area†was conclusively declared by the Constitution Bench, in that decision, to be an area “administered by a local body like
a Municipal District Board, a local Board, a Union Board a Panchayat or the like. The premises of a factory is therefore, not a ‘local area’â€. It
was urged that since the state law, by proviso to Section 4 (1) [i.e., Orissa Municipal Act, 1950] excluded from its operation, industrial establishments,
the declaration of law in Diamond Sugar Mills (supra) bound the state, which could not then, include industrial establishments as local areas.
16. It was argued by Mr Bagaria that by including the area of industrial township in the definition of local area in Section 2(f) of the Orissa Act, the
State Legislature went beyond its legislative competence under Article 246 read with Entry 52 of List II as there is no entry in Seventh Schedule
under which impugned legislation could have been made. Counsel also placed reliance on ITC Ltd v Agriculture Produce Market Committee (2002) 9
SCC 232 and argued that the scope of a constitutional taxation power cannot be determined with reference to a Parliamentary enactment. Otherwise,
it would result in Parliament enacting and/or amending an enactment, thereby controlling the ambit and scope of the constitutional provision which
should not be sustained.
Article 246 - Subject-matter of laws made by Parliament and by the Legislatures of States
(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with re-spect to any of the matters
enumerated in List 1 in the Seventh Schedule (in this Constitution referred to as the ""Union List"").
(2) Notwithstanding anything in clause (3), Parliament and subject to clause (1), the Legislature of any State 1[**] also, have power to
make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the
Concurrent List"").
(3) Subject to clauses (1) and (2), the Legislature of any State 1[***] has exclusive power to make laws for such State or any part thereof
with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the 'State List').
(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included 2[in a State]
notwithstanding that such matter is a matter enumerated in the State List.
17. Learned senior counsel submitted, furthermore, that levy of retrospective tax upon entry of goods, into industrial areas, was arbitrary, given that
the original definition did not impose any tax, on goods which entered into those areas or local limits.
18. Learned counsel appearing on behalf of HINDALCO adopted the submissions made on behalf of OCL and SAIL. Learned counsel additionally
argued that the UP Entry Tax Act of 2007, to the extent it was retrospective, has to be struck down, as it is unfair and arbitrary.
(ii) Respondents’ contentions
19. Mr. Rakesh Dwivedi, learned senior Advocate appearing on behalf of the State of Orissa had submitted that the notifications cover not only the
factory premises but also the other areas consisting of factory premises, residential colonies, other areas including roads, sewage, several common
amenities, play fields, open spaces, and other associated facilities and thus claiming that only the factory premise of OCL constitute industrial township
should not be accepted.
20. Reliance was placed on the contents of the impugned notification to submit that the industrial township was open to public use and the concerned
Rajanagar Municipality has right of using several amenities available including the drainage and sewage facilities to establish that the Industrial
Township was open to public use just like any other Industrial Township in the country.
21. Further, it was submitted that it was mutually agreed between the parties that OCL shall pay Rs. 2 crores in four instalments by 31st March 1999
as a compensation for loss of revenue that would have otherwise accrued to the Municipality owing to OCL being declared an industrial township. It
cannot be said that octroi was not payable by OCL ipso facto on declaration of Industrial Township, but the mentioned amount was merely a
compensation for loss on account of revenue from octroi. Further, octroi was not payable only by the OCL and other industrial townships were still
liable to pay octroi.
22. It was further submitted that the judgment of this Court in Diamond Sugar Mills (supra) is not applicable, as the court, in that case, confined the
meaning of the expression “local area†to areas where octroi was being levied and which were administered by a local body. It was also argued
that this Court in Diamond Sugar Mills (supra) did not consider the question of whether entire state can be declared a “local area†which is
contemplated under the present 1950 Act. Furthermore, the mere exclusion of an industrial estate or area does not render it immune from entry tax,
and there can be no dispute that it is a local area.
23. Counsel for the State of UP also submitted that the entire State is conglomerate of local areas and thus the distinction between ‘local area’
and ‘state’ has disappeared for all practical purposes. It was further contended that entry tax is levied by State and not by the ‘local
authority’ and the levy was not restricted only to urban local area but each local area inside the state.
24. It was further argued that levy imposed is compensatory in character and cannot be considered to offend Article 301 of the Constitution. Local
areas cannot be treated as insulated pockets within a State and the facilities provided by the State are availed by local areas and they form essential
part of intra-state trade. The interest of a local area is the interest of the state and the State cannot neglect the interests of local areas. Also, it need
not be established that every amount collected from the levy must be spent on trading facilities and only some connection between trading facilities
provided and taxes levied needs to be established. The fact that OCL provides compensation for making the municipal services available inside the
limits of industrial township cannot be considered to be relevant as they are already receiving other benefits in the form of other taxation reliefs.
Article 301 - Freedom of trade, commerce and intercourse:
Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.
25. It was further submitted that the Article 243-Q of the Constitution was inserted much after the judgment in Diamond Sugar Mills (supra). The idea
behind that provision is a recent phenomenon and does not find any correspondence history of India before the advent of the Constitution. The concept
had evolved on account of the emergence of large industries where employees also occupied spaces which are similar to virtual townships with
municipal services being provided by industrial establishments.
26. The counsel sought to distinguish the present case from NOIDA (supra) by arguing that while in latter, the court held that an industrial township
cannot be equated with a municipality defined under Article 243-(P)(e) as industrial township is specified on account of non-constitution of
municipality, nevertheless the court did not decide an important question that whether an industrial township constituted under proviso to Article 243-Q
read with provisions of the UPIAD Act is an administrative unit obligated to provide all municipal services envisaged by the municipal enactments in
the area of the industrial township and therefore its area would be a local area.
Article 243P - Definitions
… (e) 'Municipality' means an institution of self-government constituted under Article 243Q ;
27. The learned senior advocate appearing for the respondents also sought to distinguish this case from Diamond Sugar Mills (supra) to argue that the
latter involved a single factory premise while the former involved an industrial township which is constitutionally enacted as proviso to Article 243-
Q(1) of the Constitution. Here, the industrial township is charged with rendering municipal services under a public notification and thus, the Industrial
Township is administering the rendering of services like municipal services and the fact that industrial township is providing the services free of cost
would not change the constitutional status.
28. It was lastly submitted by the senior counsel that Entry 52 must be interpreted in light of Part IX-A and Article 243 to the Constitution. Rendering
municipal services is a precondition for specification of industrial area, and OCL is likely to retain substantial nexus with the erstwhile or adjacent
municipalities for certain defined purposes, namely, registration of birth and death, planning, policing purposes, etc. It was further argued that industrial
area is not excluded from the states’ territories and remain subject to state’s authority and legislative powers. Their inclusion as “local
area†for the levy and collection of entry tax, is therefore not violative of any provision of the Constitution of India.
B. Analysis and Conclusions
29. From the facts narrated and the arguments of parties, it is quite evident that the narrow issue requiring determination in these appeals is whether
the exclusion of an industrial area or areas from the limits of municipal councils or municipalities under the state laws in exercise of statutory power or
by virtue of a declaration under proviso to Article 243-Q, would result in that area ceasing to be a “local area†within Entry 52 of List II and
consequently precluding State from levying and collecting entry tax from those areas.
30. The Constitution Bench ruling in Diamond Sugar Mills Ltd. (supra), which was heavily relied upon by the appellants, was rendered in the context
of pointed authorization by the state enactment - U.P. Sugarcane (Regulations of State and Purchase) Act, 1953 in Section 20 and the U.P.
Sugarcane Cess Act, 1956 in Section 3 to State to collect entry tax “into the premises of a factoryâ€. The challenge in that judgment was on the
ground that the levy was invalid as it was beyond the legislative competence of the State â€" the argument being that the factory premises could not
be characterised as a “local areaâ€. This Court analysed Entry 52, by first considering the historical context in which it was enacted (for which it
traced the previous legislation i.e., Entry 49 of List II of the Seventh Schedule to the Government of India Act, 1935). The court previously held that
etymologically “local†is “relating to†or “pertaining to†a place.
31. Keeping these in mind, and also after considering the entry in Encyclopaedia Britannica relating “local area†for the purpose of collection of
octroi as an indirect or consumption tax levied by political units, this Court concluded that under the Government of India Act, 1919 imposed a levy on
import of goods into an area administered by local body i.e., a local government authority could be levied. This Court then concluded in Diamond Sugar
Mills (supra) that:
22. “It was with the knowledge of the previous history of the legislation that the Constitution-makers set about their task in preparing the lists in the
seventh schedule. There can bring title doubt therefore that in using the words “tax on the entry of goods into a local area for consumption, use or
sale thereinâ€, they wanted to express by the words “local area†primarily area in respect of which an octroi was leviable under item 7 of the
schedule tax rules, 1920- that is, the area administered by a local authority such as a municipality, a district Board, a local Board or a Union Board,
“a Panchayat†or somebody constituted under the law for the governance of the local affairs of any part of the State. Whether the entire area of
the State, as an area administered by the State Government, was also intended to be included in the phrase “local areaâ€, we need not consider in
the present case.â€
32. The next decision of note is Shaktikumar M. Sancheti & Anr. V. State of Maharashtra & Ors. (1995) 1 SCC 351, where the challenge was to
levy under the Maharashtra Tax on Entry of Motor Vehicles into Local Areas Act, 1987. It was contended that the incidence of tax was on purchase
value of motor vehicles and therefore the tax was really a purchase tax and further that a local area has a connotation of its own as being understood
or administered by local authority and tax on entry of vehicle into a state as whole was invalid. This court, after noticing the previous decision in
Diamond Sugar Mills (supra), held that the question as to whether the entire area of a state was a local area had been left undecided in that decision.
The court then noticed that “local area†had been used in several provisions of the Constitution, namely Articles 3(b), 12, 245(1), 246, 277, 321,
323-A, and 371-D. The court upheld the decision of the High Court that the taxable event is not the entry of a vehicle in any area of the state in a
local area. The court also cited the previous holding in State of Karnataka v. Hansa Corporation. [(1981) 1 SCR 823]
33. In Saij Gram Panchayat v. State of Gujarat & Ors. (1999) 2 SCC 366, the panchayat sought for quashing of certain notifications and a State
Government resolution under which, in exercise of its power under Section 16 of the Gujarat Industrial Development Act, 1962, the Kalol industrial
area was notified as a municipal area under Section 264A of the Gujarat Municipalities Act, 1963. Another notification excluded that area from the
Saij Gram Panchayat under Section 9(2) of the Gujarat Panchayats Act, 1961. The contentions urged was that the notification and the resolution were
contrary to Parts IX and IX-A of the Constitution of India. This Court repelled the argument stating that the Gujarat Industrial Development Act, 1962
operates in a different sphere from Parts IX and IX-A of the Constitution as well as the Gujarat Panchayats Act, 1961 under the Gujarat
Municipalities Act, 1962. The later enactments dealt with local self-government whereas the Gujarat Industrial Development Act, 1962 operates for
orderly establishment and organization of industries in the State. It was further noticed that the industrial areas had been notified long back in 1972.
34. This Court repelled the argument with respect to the violation of Article 243-Q. It was noticed that Article 243-Q constitutes three types of
municipalities i.e. nagar panchayat, a municipal council and a municipal corporation. It noted that by virtue of the proviso, and having regard to the size
of the area, the nature of the municipal services provided or proposed to be provided by an industrial establishment, and other relevant factors â€" the
Governor could by prior notifications specified that area to be an industrial township.
35. It was therefore concluded that if an area under provisions of the Gujarat Industrial Development Act, 1962, is equated with the industrial township
under Article 243-Q, then there would be no breach of that provision. The Court then concluded as follows:
20. “Explaining the purpose behind Section 16 the High Court has rightly held that having regard to the power conferred upon the
Gujarat Industrial Development Corporation in the matter of provision of amenities and common facilities in industrial estates and
industrial areas, on levy of certain charges upon those who set up industries therein, an industrial area would ordinarily be a self-sufficient
township in itself which provides its own amenities and recovers charges therefor. A local authority having jurisdiction over such area will
have to perform very few of its statutory or discretionary duties in respect of such area. Yet it may levy and collect taxes from those who set
up industries in the area. It is to avoid this virtual dual control and administration which might impede the growth and development of
industries that provision has, presumably, been made in Section 16 for constituting an industrial area into a notified area and thereby
converting it into a separate administrative unit. As we have stated earlier, creation of such a separate administrative unit is not contrary to
the scheme of Parts IX and IXA of the Constitution when Article 243Q provides for the creation of such a separate administrative unit in the
form of an industrial township. It has also been pointed out by the respondents that neither Article 243N nor 243ZF invalidates any
Industrial Development Act.â€
36. In two judgments i.e., MGR Industries Association & Anr. V. State of Uttar Pradesh & Ors (2017) 3 SCC 494 and NOIDA (supra), this Court
had occasion to consider the question of applicability of Article 243-Q. In MGR Industries (supra), specifically the provisions of the U.P. Industrial
Area Development Act, 1976 particularly, Section 12A was also considered. In MGR Industries (supra) the argument urged was that the appellant
was an association of industrial areas which were declared as industrial areas under the U.P. enactment but in respect of which no notification had
been issued under Article 243-Q, the levy of taxes by Panchayats was questioned. The court noticed Section 12A of the U.P. Industrial Areas
Development Act, 1976, which reads as follows:
“12-A. No panchayat for industrial township --- Notwithstanding anything contained to the contrary in any Uttar Pradesh Act, where an industrial
development area or any part thereof is specified to be an industrial township under the proviso to clause (1) of Article 243-Q of the Constitution, such
industrial development area or part thereof, if included in a Panchayat area, shall, with effect from the date of notification made under the said proviso,
stand excluded from such Panchayat area and no Panchayat shall be constituted for such industrial development area or part thereof under the United
Provinces Panchayat Raj Act, 1947 or the Uttar Pradesh Kshettra Panchayats and Zila Panchayats Adhiniyam, 1961, as the case may be, and any
Panchayat constituted for such industrial development area or part thereof before the date of such notification, shall cease to exist.â€
37. The court also noted that a joint reading of Section 12A with Article 243-Q clarified that unless a notification under proviso to Article 243-Q(1)
was issued, industrial development areas were not per se excluded from the ambit of panchayats. The court noted crucially that “the exclusion of
industrial development area from panchayats has serious consequences since the person residing within the industrial development are immediately
deprived of facilities and benefits extended to them by from their respective panchayats. The deprivation of said benefits has to be a conscious
decision in accordance with condition as contained in Article 243Q.â€
38. In NOIDA (supra), the issue was with respect of whether, the appellant authority, also constituted under the UPIAD Act could claim the benefit
of exemption under Section 10 (20) of the Income Tax Act, 1961 as a “local authorityâ€. The appellant had relied upon on a notification (dated
24.12.2011) issued by Governor under proviso to Article 243-Q(1). The argument made was since the industrial area i.e. NOIDA was excluded from
the requirement of provisions of Part IX of the Constitution, it ceased to be a municipal area and therefore was itself a local authority. This Court
rejected the argument and observed, â€" after noticing the Statement of Object and Reasons to the Constitution (Seventy-fourth) Amendment Act,
1992 and the memorandum, moved by the Minister on the floor of Parliament by piloting the Amendment Bill, that:
“28. The constitutional provisions as contained in Part IXA delineate that the Constitution itself provided for constitution of Municipalities, duration
of Municipalities, powers of Authorities and responsibilities of the Municipalities. The Municipalities are created as vibrant democratic units of self-
government. The duration of Municipality was provided for five years contemplating regular election for electing representatives to represent the
Municipality. The special features of the Municipality as was contemplated by the constitutional provisions contained in Part IXA cannot be said to be
present in Authority as delineated by statutory scheme of Act, 1976. It is true that various municipal functions are also being performed by the
Authority as per Act, 1976 but the mere facts that certain municipal functions were also performed by the authority it cannot acquire the essential
features of the Municipality which are contemplated by Part IXA of the Constitution. The main thrust of the argument of the learned counsel for the
appellant that the High Court having not adverted to the notification dated 24.12.2001 issued under proviso to Article 243Q (1) the judgments relied on
by the High Court for dismissing the writ petition is not sustainable. We thus have to focus on proviso to Article 243Q(1). For the purpose and object
of the industrial township referred to therein whether industrial township mentioned therein can be equated with Municipality as defined under Article
243P€. Article 243P (e) provides that the “Municipality means an institution of self-government constituted under Article 243Q. Whether the
appellant is an institution of self-government constituted under Article 243Q is the main question to be answered? Sub-clause (1) of Article 243Q
provides that there shall be constituted in every State- a Nagar Panchayat, a Municipal Council and a Municipal Corporation, in accordance with the
provisions of this Part. The proviso to sub-clause (1) provides that:
“Provided that a municipality under this clause may not be constituted in such urban area or part thereof as the Governor may, having regard to the
size of the area and the municipal services being provided or proposed to be provided for an industrial establishment in that area and such other factors
as may he may deem fit, by public notification, specify to be an industrial township.â€.
29. Thus, proviso does not contemplate constitution of an industrial establishment as a Municipality rather clarifies an exception where Municipality
under clause (1) of Article 243Q may not be constituted in an urban area. The proviso is an exception to the constitution of Municipality as
contemplated by sub-clause (1) of Article 243Q. No other interpretation of the proviso conforms to the constitution scheme.â€
39. It is immediately clear that in all the decisions, which the appellants relied upon, (save Diamond Sugar Mills (supra) and Shaktikumar M. Sancheti
(supra)) the question which had arisen for consideration was whether after the exclusion of an industrial area, either under the provisions of some
state law, or in terms of Article 243-Q, such an industrial area was part of a municipality, or a panchayat. In Saij Gram Panchayat (supra), the court
rejected the argument that exclusion of an area, which was previously declared as an industrial area, from a panchayat, by virtue of a notification, was
contrary to the Gujarat Panchayats Act, 1961 or Article 243-Q of the Constitution of India. Likewise, in MGR Industries (supra), the court held that
without a notification under proviso to Article 243-Q, mere declaration of an area as an industrial area or township, did not result in the exclusion of
that area, from the coverage of a panchayat. In NOIDA (supra), the question which arose for decision was whether the NOIDA was a local
authority for claiming income tax exemption status, under Section 10 (20) of the Income Tax Act, 1961. This Court held that the exclusion of an area
from the limits of a municipality ipso facto did not result in its eligibility to seek tax exempt status, under that act. This Court’s observations about
the effect of Article 243-Q are significant.
40. The view expressed in Diamond Sugar Mills (supra), was that a local area, is an area, falling within a “local authority such as a municipality, a
district Board, a local Board or a Union Board, a Panchayat or somebody constituted under the law for the governance of the local affairs of any part
of the State.†That articulation was relevant because the levy of tax involved in that decision imposed a duty on the entry of goods into factory
premises. The court, in that context, held as it did, that entry tax can be imposed in relation to a local area, and the incidence is the point of entry.
41. In the present case, two or more sets of law, operate within the two states. The first set of statutes are the enactments, that impose the levy,
which is entry tax. The incidence is entry into a local area. A “local area†is defined as including industrial establishments, or estates. The second
set of laws that are involved, are the concerned municipalities laws, such as the Orissa Act of 1950- which by proviso to Section 4 (1) excludes
industrial areas, from the rigours and requirements of the municipalities’ enactments. In the U.P. Entry Tax law, “local area†has been
defined expansively, to cover all areas, including industrial establishment areas. By the UP Municipalities Act, 1916, a municipality and a municipal
area have been defined as follows:
‘(9) “Municipality†means an institution of self Government referred to in clause (e) of Article 243P of the Constitution.
(9A) ""Municipal area†means the territorial area of a municipality.
42. The decision of this Court, in Kishansing Tomar v. Municipal Corporation of the City of Ahmedabad & Ors 2006 (8) SCC 352, noticed the object
and purpose of Constitution (seventy-fourth) Amendment Act, 1992. The court stated that:
“12. It may be noted that Part IX-A was inserted in the Constitution by virtue of the Constitution (Seventy-fourth) Amendment Act, 1992. The
object of introducing these provisions was that in many States the local bodies were not working properly and the timely elections were not being held
and the nominated bodies were continuing for long periods. Elections had been irregular and many times unnecessarily delayed or postponed and the
elected bodies had been superseded or suspended without adequate justification at the whims and fancies of the State authorities. These views were
expressed by the then Minister of State for Urban Development while introducing the Constitution Amendment Bill before Parliament and thus the
new provisions were added in the Constitution with a view to restore the rightful place in political governance for local bodies. It was considered
necessary to provide a constitutional status to such bodies and to ensure regular and fair conduct of elections. In the Statement of Objects and
Reasons in the Constitution Amendment Bill relating to urban local bodies, it was stated:[…]â€
43. The provisions in Part IX-A of the Constitution provide for constitution of municipalities, their duration, powers and responsibilities of authorities of
the municipalities. Municipalities were conceived as vibrant democratic units of self-governance. Their term or duration was provided to be for five
years; regular elections, to elect representatives of municipalities was contemplated. The special features of the municipalities contemplated by the
provisions contained in Part IX-A, however need not be present in other bodies created by law, such as Boards, etc. Such statutory bodies, like
industrial estates may perform some municipal functions. However, that some municipal functions are performed by such bodies ipso facto does not
result in their acquiring the features of municipalities which are contemplated by Part IX-A of the Constitution.
44. The burden of the appellants’ song, so to say, is that when a notification is issued, excluding industrial areas or estates from municipal areas,
they cease to be local areas, and cannot be treated as such for the purpose of levy of entry tax. As noticed earlier, all the judgments, dealing with
provisions of Part IX-A of the Constitution were not rendered in the context of applicability or imposition of entry tax, or whether such areas excluded
by virtue of notifications under proviso to Article 243-Q(1) ceased to be local areas. To this Court, it is plain that the introduction of Part IX-A by the
74th Amendment to the Constitution was with the intention of strengthening units of local self-government, and ensuring that they were subjected to
minimum democratic standards. The proviso to Article 243-Q(1), therefore, has to be read in context, that industrial areas and estates, administered in
terms of some legal regime, where some municipal services were provided, could be exempt from the requirements spelt out in Part IX-A of the
Constitution. These provisions spell out the elements of democratic governance, such as representation of different sections of society, regularity of
elections, a three-tier structure of local government, reservation, mechanism for deciding election disputes, and elected bodies which were tasked with
decision making in regard to various heads or subject matter, that concerned people at village, taluk and District levels.
45. The focus of provisions of Part IX-A of the Constitution inserted through the 74th Amendment was on local self-governance and all provisions
concerning it. It had no relevance to the issue of State taxation. Furthermore, the exercise of power by the Governor to exclude from the limits of a
municipal area, industrial estates or large areas that were predominantly industrialised areas is upon the condition that such areas provided a minimum
modicum of municipal services. The pattern of State enactments â€" which emerges from a reading of various decisions of this Court is that every
State has a set of municipal or local self-governance laws, such as those dealing with municipalities, cantonments, panchayats, gram panchayats, etc.,
on the one hand, and those that deal with industrial areas â€" as for instance, the UPIAD Act, Gujarat Industrial Development Act, 1962 etc. on the
other. The latter enactments prescribe the kind of services (analogous to the municipal services provided by the municipalities) that every industrial
area has to provide. Given these circumstances, the exemption from application of municipality laws or such enactments in relation to industrial areas
â€" as also the exemption from the application of Part-IX A by virtue of proviso to Article 243-Q(1) is to exclude the application of certain
requirements, such as election etc. As far as the nature of services provided in industrial areas are concerned, those are relevant factors taken into
account by the State or Governor while issuing exemptions under municipal laws or proviso to Article 243Q (1). These, however, do not in any manner
impact or undermine the fact that such industrial areas or estates are equally “local areasâ€. Diamond Sugar Mills (supra) itself acknowledged that
the word “local†means relating to or “pertaining to a placeâ€. This Court also very pertinently held that a local area is one which is
administered by municipal law, district board or a local board, union board, a panchayat or some body constituted by the Government for the
governance of local affairs of any part of the State. The application of state laws regarding industrial areas, therefore, squarely falls within the
expression “description of a body constituted for the purposes of local affairs of the State†since no one denies that industrial areas are also part
of the State. The record in the present case indicates that the areas excluded from the municipality in OCL’s case comprise of several villages.
The material on record placed by SAIL also acknowledge that not less than 24,000 houses exist in its industrial area. Likewise in the case of
HINDALCO as also SAIL indicate that the industrial estates or area cover large areas. If one keeps these facts in mind, there can be no doubt that
such areas would fall within the description “local areasâ€.
46. Reliance placed upon Diamond Sugar Mills (supra) by the appellants in this case is misplaced because in that decision, the Court had to deal with a
different set of facts. The levy on sugarcane imposed by the State of U.P. was on the incidence of entry into factory premises. The Court, therefore,
correctly concluded that factory premises per se could not constitute a local area. The subsequent decision in Shakti Kumar Sancheti (supra)
explained that entry into the State with the ultimate destination within the State, constituted a taxable event the moment the goods, i.e. the vehicles
reached within the limits of municipality of its ultimate destination. In Sahaj Gram Panchayat (supra), the argument that the industrial areas could not
be excluded in exercise of the powers under Article 243-(Q)(1) was repelled. MGR Industries (supra) is an important judgment because the Court
held that the mere exclusion of an industrial area under a local enactment was insufficient for it to be removed from the coverage of Panchayat’s
jurisdiction in the absence of a notification under Article 243-Q (1). The judgment in NOIDA (supra) explained the intent and purport of the provision
of Part IX-A of the Constitution. None of these, in the opinion of the Court, can be of any assistance to the appellants, who contend that industrial
areas or industrial estates can be treated as local areas the moment they are excluded from the limits of municipality or whenever they are excluded
by virtue of exercise of power under proviso to Article 243-Q (1) of the Constitution.
47. It is also a cardinal rule of interpretation that words of a taxing statute should be read in their ordinary, natural, and grammatical meaning. Further,
in construing the words in a constitutional enactment that confers legislative power, a liberal construction should be placed upon the words so that they
may have effect in their widest amplitude. [Navinchandra Mafatlal v Commissioner of Income Tax, 1955 (1) SCR 829]
48. The object of the levy, i.e., entry tax, is the regulation of entry of goods in a regular area for consumption, i.e., manufacture, use or sale. There is
no dispute that entry of goods into an industrial area or estate is for their use for manufacturing or for processing or for the purposes of their delivery
as their ultimate point of destination, i.e. for the purpose of their “consumption, use or sale†within that area. It could even be that the goods enter
within the industrial area or estate, as the ultimate point of destination for their use. In any case, the levy would be attracted because the incidence is
the entry into the local area.
49. The Court is of the opinion that the argument â€" made by counsel that the levy could not be retrospective, in the facts of this case, is insubstantial.
The earlier effort to tax the assessee by demand led to petitions which quashed them â€" where the legal regime was that some compensatory
element had to be disclosed. With the object of curing this defect, the fresh law was enacted by the State of U.P., with retrospective effect which on
the application of principles enunciated by this Court, in Sri Prithvi Cotton Mills v. Baroda Borough Municipality & Ors. 1970 (1) SCR 388, is valid.
50. In view of the foregoing discussions, this Court finds no reason to interfere with the decision of the Orissa and Allahabad High Courts. The special
leave petition and appeals are consequently dismissed as unmerited without any order on costs.
