K.M. Joseph, J.@mdashThe petitioner is a registered dealer under the Kerala Value Added Tax Act, 2003 (hereinafter referred to as, "the Act"). The petitioner opted to pay tax at the compounded rate u/s 8 of the Act for the assessment years 2005-06, 2006-07 and 2007-08. The complaint of the petitioner is directed against section 30(2) of the Act to the extent it excludes the dealers who pay compounded tax under clause (a) to clause (d) of section 8 of the Act from the facility to collect the tax under the Act from the awarders of the contract or the buyers. Accordingly, a declaration is sought that section 30 of the Act, to the extent it excludes the persons paying compounded tax under clause (a) to clause (d) of section 8 from the benefit of the provision enabling collection of tax amount from the buyers, is discriminatory and hence unconstitutional. Exhibits P1 to P3 are orders of assessments for the years already mentioned and a direction is sought not to recover any amount towards differential tax pursuant to exhibits P1 to P3 assessment orders by placing reliance on the provisions of section 30(2) of the Act. I heard learned senior counsel for the petitioner Sri Arshad Hydayathullah and learned Special Government Pleader Sri Vinod Chandran.
2. Sri Arshad Hydayathullah, learned senior counsel appearing for the petitioner, would contend that in view of substitution of section 30(2) the substituted provisions will hold sway from the commencement of the Act. The fact that it is provided that the substitution is with effect from April 1, 2008 would not entitle the respondents to contend that it is to have effect only from April 1, 2008 runs the argument of the petitioner. The date April 1, 2008 is mentioned only to indicate that substitution has come into play but its effect will be from the commencement of the Act itself, he contends. He further contends that if it is found that the substituted provisions will have only effect from April 1, 2008 the court would have to necessarily consider the constitutional validity of section 30(2) and hold the provisions of section 30(2) as unconstitutional being discriminatory. Expatiating the arguments he contended that the petitioner is one among the category of assessees declared eligible u/s 8 to opt to pay tax at compounded rate and the dealers in gold as also others allowed to compound constitute a single class. However, the impugned provision enabled the gold dealers alone to collect tax even though they were also allowed to compound. It is pointed out that there is no basis for the discrimination. It is contended that there is no plea or material produced to show how treating of the two similarly circumstanced categories can be justified. He would contend further that it is open to the court at any rate to hold that the petitioner should be given the relief and the provision is to be read down.
3. Sri Vinod Chandran, on the other hand, would contend that the substituted provision has only prospective operation and it has come into effect only from April 1, 2008 and it has no retroactive operation. He would contend that the petitioner has not pleaded or established a case of discrimination under article 14. He also would submit that there is no basis at all in the writ petition.
4. What is the effect of substitution of section 30(2) of the Act by the amending Act of 2008 ? Section 30 as it originally stood read as follows :
30. Collection of tax by dealers.--(1) A registered dealer may, subject to the provisions of sub-sections (2) and (3), collect tax (at the rates specified u/s 6), on the sale of any goods, from the person to whom he sells the goods and pay it over to Government in such manner as may be prescribed.
(2) Dealers registered under this Act, except those dealers paying presumptive tax under sub-section (5) of section 6 and those paying compounded tax under clause (a) to clause (d) of section 8 alone shall be eligible to collect any sum by way of or purporting to be by way of tax under this Act.
5. Subsequently, by amendment Act section 30(2) reads as follows :
(2) Dealers registered under this Act, except those dealers paying presumptive tax under sub-section (5) of section 6 and those paying (tax under clause (a) of section 8 by those undertaking works of Government of Kerala, Kerala Water Authority and Local Authorities, and under clause (b), clause (c) (ii) and clause (d) of section 8), alone shall be eligible to collect any sum by way of, or purporting to be by way of tax under this Act.
6. It is thus contended by the petitioner that the Legislature itself having realized the discrimination flowing from the provisions of the Act decided to consciously intervene and it resorted to the legislative device of substitution of the previously obtaining provisions with the provisions as are extant at present. It is pointed out that u/s 30(2), as it stands after substitution, the petitioner is also entitled to collect tax even if it has proceeded to opt for compounding. He would submit, in such circumstances when a provision is substituted it will have operation from the date of commencement of the Act and thus argue that this court has to give effect to the said principle and hold that amendment carried out by way of substitution in 2008 will have effect from the date on which the Act was commenced. In this regard learned senior counsel sought to draw considerable support from the decision in
16. The word ''substitute'' ordinarily would mean ''to put (one) in place of another''; or ''to replace''. In Black''s Law Dictionary, 5th Edition, at page 1281, the word ''substitute'' has been defined to mean ''to put in the place of another person or thing'', or ''to exchange''. In Collins English Dictionary, the word ''substitute'' has been defined to mean ''to serve or cause to serve in place of another person or thing'' ''to replace (an atom or group in a molecule) with (another atom or group)''; or ''a person or thing that serves in place of another, such as a player in a game who takes the place of an injured colleague''.
7. Reliance is placed by the learned senior counsel to the following paragraphs also (pages 385 and 386 in 5 RC) :
24. If the Central Government intended to extend the benefit to the members of the respondent-association only with prospective effect, it could have said so explicitly. Such a benefit could also have been extended by taking recourse to the proviso appended to sub clause (iv) of clause (2) of the notification dated April 7, 1997. It may, therefore, be safely concluded that by reason of the amended notification, the Central Government only intended to rectify a mistake and, thus, the same will have retrospective effect and retroactive operation.
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26. In
23. The text of section 2 of the Second Amendment Act provides for the word "up to" being substituted for the word "after". What is the meaning and effect of the expression employed therein--"shall be substituted" ?
24. The substitution of one text for the other pre-existing text is one of the known and well-recognized practices employed in legislative drafting. "Substitution" has to be distinguished from "supersession" or a mere repeal of an existing provision.
25. Substitution of a provision results in repeal of the earlier provision and its replacement by the new provision (see Principles of Statutory Interpretation, ibid., page 565). If any authority is needed in support of the proposition, it is to be found in
8. Senior counsel for the petitioner would accordingly contend that the Legislature intended to replace the earlier provision by the substituted provisions as it stands and thereby removes the anomaly and invidious discrimination which was prevalent and it should be accordingly interpreted as a provision having full effect from the date of the commencement of the Act. Learned Government Pleader on the other hand, referred me to the decision of the apex court in Bhagat Ram Sharma v. Union of India (1988) (Supp) SCC 30. That was a case where the member of the Punjab Legislative Assembly raised a claim for pension under the Legislative Act of 1977. Punjab State Public Service Commission (Conditions of Service) Regulations, 1958 conferred pensionary benefits only upon members drawn from the service of Central or State Government. The Regulation was amended in 1972 and a new regulation was substituted. The new regulation conferred pensionary benefits even upon those members who were not in Government service at the time of appointment. The question arose whether the provision as substituted came into effect from November 1, 1956 and entitling the petitioner to payment of pension with effect from the January 2, 1959 which was the date of superannuation of the writ petitioner. He had resigned the membership of the Assembly and became a member of the Public Service Commission in 1953 and he retired on January 2, 1959. It is necessary to refer to paragraphs 17, 18, 19 of the said judgment. Paragraphs 17, 18 and 19 read as under :
17. It is a matter of legislative practice to provide while enacting an amending law, that an existing provision shall be deleted and a new provision substituted. Such deletion has the effect of repeal of the existing provision. Such a law may also provide for the introduction of a new provision. There is no real distinction between ''repeal'' and an ''amendment''. In Sutherland''s Statutory Construction, third edition, volume 1 at page 477, the learned author makes the following statement of law :
The distinction between repeal and amendment as these terms are used by the courts, is arbitrary. Naturally the use of these terms by the court is based largely on how the Legislatures have developed and applied these terms in labeling their enactments. When a section is being added to an Act or a provision added to a section, the Legislatures commonly entitle the Act as an amendment... When a provision is withdrawn from a section, the Legislatures call the Act an amendment, particularly when a provision is added to replace the one withdrawn. However, when an entire Act or section is abrogated and no new section is added to replace it, Legislatures label the Act accomplishing this result a repeal. Thus as used by the Legislatures, amendment and repeal may differ in kind--addition as opposed to withdrawal or only in degree--abrogation of part of a section as opposed to abrogation of a whole section or Act; or more commonly, in both kind and degree--addition of a provision to a section to replace a provision being abrogated as opposed by abrogation of a whole section of an Act. This arbitrary distinction has been followed by the courts, and they have developed separate rules of construction for each. However, they have recognized that frequently an Act purporting to be an amendment has the same qualitative effect as a repeal--the abrogation of an existing statutory provision--and have therefore applied the term "implied repeal" and the rules of construction applicable to repeals to such amendments.
18. Amendment is, in fact, a wider term and it includes abrogation or deletion of a provision in an existing statute. If the amendment of an existing law is small, the Act professes to amend; if it is extensive, it repeals a law and re-enacts it. An amendment of substantive law is not retrospective unless expressly laid down or by necessary implication inferred.
19 For the sake of completeness, we wish to add that the mere use of the word ''substitution'' does not imply that regulation 8(3) must relate back to November 1, 1956, the appointed day. The problem usually arises in case of repeal by substitution. In the case of executive instructions, the bare issue of a fresh instrument on the same subject would replace a previous instrument. But in the case of a legislative enactment, there would be no repeal of an existing law unless the substituting Act or provision has been validly enacted with all the required formalities. In
Where an Act passed after 1850 repeals wholly or partially any former enactment and substitutes provisions for the enactment repealed, the repealed enactment remains in force until the substituted provisions come into operation.
And observed : (SCC page 651, para 18)
We do not think that the word substitution necessarily or always connotes two severable steps, that is to say, one of repeal and another of a fresh enactment even if it implies two steps. Indeed, the natural meaning of the word "substitution" is to indicate that the process cannot be split up into two pieces like this. If the process described as substitution fails, it is totally ineffective so as to leave intact what was sought to be displaced. That seems to us to be the ordinary and natural meaning of the words "shall be substituted".
9. It is therefore contended that the amendment Act of 2008 which substituted the erstwhile provisions contained in section 30(2) did not have retrospective operation and it is to have effect only from April 1, 2008. It is also necessary to notice the decision of the apex court in
3. On March 31, 1973, the date of the passing of the order of compulsory retirement, sub-rule (2) of rule 244 of the Rules provided as under :
244. (2) The Government, may, after giving at least three months'' previous notice in writing or by payment of three months'' pay and allowances in lieu of such notice require a Government servant to retire from the service on the date on which he completes 25 years of qualifying service or on any date thereafter.
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5. By notification dated September 2, 1975, sub-rule (2) of rule 244 of the Rules was substituted by the following provision :
244. (2) The Government, may, after giving at least three months'' previous notice in writing or by payment of three months'' pay and allowances in lieu of such notice require a Government servant to retire from the service on the date on which he completes 20 years of qualifying service or the date on which he attains the age of 50 years whichever is earlier, or on any date thereafter.
6. By a subsequent notification dated November 26, 1975, rule 244 of the Rules was substituted with effect from September 2, 1975. Sub-rule (2) of rule 244, thus substituted, read as follows :
244. (2)(i) The Government, may after giving at least three months'' previous notice in writing require a Government servant to retire from the service on the date on which he completes 20 years of qualifying service or the date on which he attains the age of 50 years whichever is earlier, or on any date thereafter :
Provided that such Government servant may be retired from service forthwith, and on such retirement the Government servant shall be entitled to claim three months'' pay and allowances in lieu of notice.
(ii) The Government may publish the order of such retirement in Rajasthan Rajpatra, and the Government servant shall be deemed to have retired on such publication, if he has not been served with the retirement order earlier.
8. The learned judges of the High Court have held that as a result of the substitution of sub-rule (2) of rule 244 by notifications dated September 2, 1975 and November 26, 1975, provisions of sub-rule (2) of rule 244, as applicable during the period from August 19, 1972 till September 1, 1975, stood substituted and, as a result, the said provisions ceased to exist and must be treated to have been obliterated and, therefore, rule 244(2), as it stood on August 19, 1972, was no longer available for supersession, amendment or substitution on March 11, 1976, since the same stood amended and substituted by new provisions contained in notifications dated September 2, 1975 and November 26, 1975. The High Court has placed reliance on the following passages from Craies on Statute Law and Sutherland on Statutory Construction :
"''When an Act of Parliament is repealed," said Lord Tenterden in Surtees v. Ellison (1829) 9 B&C 750; 109 ER 278, "it must be considered (except as to transactions past and closed) as if it had never existed. That is the general rule." Tindal C.J. stated the exception more widely. He said : "The effect of repealing a statute is to obliterate it as completely from the records of Parliament as if it had never been passed; and it must be considered as a law that never existed except for the purpose of those actions which were commenced, prosecuted and concluded whilst it was an existing law".'' (Craies on Statute Law, 7th Edition, pages 411 and 412)
Since an amendatory act alters, modifies, or adds to a prior statute, all courts hold that a repealed act cannot be amended, that is, no court will give effect to a repealed law because the Legislature attempted to amend it. (Sutherland on Statutory Construction, Volume I, para 1903, pages 328 and 329)
9. As pointed out by this court, the process of a substitution of statutory provision consists of two steps; first the old rule is made to cease to exist and, next, the new rule is brought into existence in its place. (See
The effect of the repeal of a statute where neither a saving clause nor a general saving statute exists to prescribe the governing rule for the effect of the repeal, is to destroy the effectiveness of the repealed act in future and to divest the right to proceed under the statute, which, except as to proceedings past and closed, is considered as if it had never existed. (volume I, para 2042, pages 522-523).
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12. This means that as a result of repeal of a statute the statute as repealed ceases to exist with effect from the date of such repeal but the repeal does not affect the previous operation of the law which has been repealed during the period it was operative prior to the date of such repeal. The effect of the amendments that were introduced in sub-rule (2) of rule 244 of the Rules vide notifications dated September 2, 1975 and November 26, 1975 whereby the said sub-rule was substituted with effect from September 2, 1975 is that sub-rule (2) which was introduced on August 19, 1972 ceased to exist with effect from September 2, 1975 but it was operative during the period from August 19, 1972 to September 1, 1975. It is settled law that a rule made in exercise of the power conferred by article 309 of the Constitution can have retroactive operation. Since sub-rule (2) of rule 244 of the Rules, as introduced in August 1972, was operative during the period from August 19, 1972 to September 1, 1975, it could be amended in exercise of the rule-making power under article 309 of the Constitution so as to operate during the period from August 19, 1972 to September 1, 1975. The notification dated March 11, 1976, by substituting sub-rule (2) of rule 244 of the Rules, repealed the said provision that was operative during the period from August 19, 1972 to September 1, 1975 and replaced it by another provision which was to be operative during the said period. The said notification cannot be held to be invalid on the basis that the said amendment sought to amend a provision which was not in existence. The Statement of Law in Sutherland on Statutory Construction, on which reliance was placed by the learned judges of the High Court, that a repealed law cannot be amended has no application in the present case.
10. I would think that there is no merit in the contention of the petitioner that substitution has retrospective operation and it has effect from the commencement of the Act. Section 30(2) provided for prohibition against collection of tax except in respect of two categories. In other words, it created a substantial right in respect of the assessees who were eligible to collect tax under the provision and it created a liability on the buyer from such assessees to pay the tax. Apart from creating a right in such assessees to collect tax, in the same way, the assessees against whom there was a prohibition against collection of tax were visited with the disability against collecting tax. This necessarily also would mean that the persons to whom they sold the goods had equal right to insist that they shall not be called upon to pay tax. Collection of tax by persons who were not entitled to collect tax u/s 30 is made liable to be visited with penal consequences under the Act. It is apposite in this context to refer to para 17 (para 16 in SCC) of the
17. By reason of the aforementioned amendment no substantive right has been taken away nor any penal consequence has been imposed. Only an obvious mistake was sought to be removed thereby.
11. Reference to paragraphs 27 and 28 (paragraphs 26 and 27 in SCC) is also important to undo the legal knot which is presented in this case. They read as follows :
27. We are not oblivious of the fact that in certain situations, the court having regard to the purport and object sought to be achieved by the Legislature may construe the word ''substitution'' as an ''amendment'' having a prospective effect but such a question does not arise in the instant case.
28. There is another aspect of the matter which may not be lost sight of. Where a statute is passed for the purpose of supplying an obvious omission in a former statute, the subsequent statute relates back to the time when the prior Act was passed. (See Attorney General v. Pougette (1816) 2 Price 381; 146 ER 130).
12. It is clear that mere substitution does not have the inexorable effect of retroactivity. It is crucial to notice that once Legislature has consciously taken the decision to give life to the provisions inserted by way of substitution only with effect from April 1, 2008, it is important to pose the question as to what would have been the effect when the Legislature has not used the words with effect from April 1, 2008. Section 3 of the Kerala Interpretation and General Clauses Act, 1125 reads as follows :
3. Coming into operation of enactments.--(1) Where any Act is not expressed to come into operation on a particular day, then it shall come into operation on the day on which the Act is first published in the Gazette after it receives the assent of the Rajpramukh, the Governor or the President, as the case may be.
Explanation.--This sub-section shall have effect--
(a) in relation to an Ordinance promulgated by the Governor, as if for the words ''after it receives the assent of the Rajpramukh, the Governor or the President, as the case may be'', the words ''after it is promulgated by the Governor'' were substituted; and
(b) in relation to a law made by the President or other authority in exercise of the power vested under sub-clause (a) of clause (1) of article 357 of the Constitution, as if for the words ''after it receives the assent of the Rajpramukh, the Governor or the President as the case may be'', the words ''after it is made by the President or other authority'' were substituted.
(2) Unless the contrary is expressed, an Act shall be construed as coming into operation immediately on the expiration of the day preceding its commencement.
13. I have already referred to the decision of the apex court in
14. In
15. The further question which arises is as regards the challenge to the validity of section 30(2). No doubt, the learned Government Pleader would point out the prayer in the writ petition and the admitted amendment to section 30(2) renders any consideration of the said question unnecessary. No doubt, since I have taken the view that section 30(2) has effect only from April 1, 2008 it may be necessary for me to consider whether the section as it stood prior to April 1, 2008 is discriminatory and unconstitutional.
16. According to the petitioner all assessees who opt to pay tax u/s 8 of the Act constitute one common class and it follows as a corollary that they should be treated equally. Consequently, the benefit which is made available to gold merchants, who were also allowed to pay tax at the compounded rate, should be allowed to the assessees who carry out works contracts runs the argument of the petitioner.
17. It is also contended that though a plea of discrimination is set up and the burden is discharged by the petitioner there is no answer in the counter-affidavit and there is no pleading or material to justify the discrimination.
18. The learned Government Pleader, on the other hand, points out that the petitioner has not pleaded how it constitutes part of the same class along with gold merchants. He also submitted that the pleadings in the counter-affidavit, as it stands, suffice and no case is made out for striking down the Saw as it stood prior to April 1, 2008.
19. It is necessary in this context to refer to the pleading of the petitioner as also the State. In the writ petition, the relevant pleadings are as follows :
This prohibition of collecting tax paid at the compounded rate from the buyers was not, however, made applicable to dealers in gold who were also given the option of paying tax at the compounded rate in lieu of the regular rate u/s 6 of the Act, 2003. Although this provision, which confines the prohibition of collection of tax paid at the compounded rate from buyers, is clearly discriminatory and hence unconstitutional.
20. The petitioner, however, feels that the provisions of section 30 of the KVAT Act, 2003, to the extent it discriminates between dealers in gold and other dealers like the petitioner, who have opted for payment of tax under the compounding scheme envisaged u/s 8 to the extent it prevents the latter category of dealers from collecting the tax paid at the compounded rate from the awarders of the contract is unconstitutional. In ground "A" it is further stated as follows :
Section 30(2) of the KVAT Act, 2003, to the extent it excludes those dealers paying compounded tax under clause (a) to clause (d) of section 8 of the KVAT Act, 2003 from the facility to collect the tax paid under the Act form the awarders of the contract or buyers, is ultra vires the KVAT Act, opposed to the scheme of the Act and, further, is discriminatory and hence violative of the fundamental rights of the petitioner under article 14 of the Constitution of India. The said provision is hence liable to be declared as unconstitutional.
22. In the counter-affidavit of the respondents it is, inter alia, stated as follows :
3. As per sub-section (2) of section 30 of the Act contractors, who opted for payment of tax u/s 8, are not entitled to collect tax. The Kerala Value Added Tax Act was passed by the State Legislature on February 27, 2003 and was amended by the Finance Act 2005 (Act 10 of 2005). As it originally stood section 8 of the KVAT Act permitted compounding to works contractors, mechanized crushing units, dealers of cooked food and beverages and dealers in lottery tickets as provided in sub-sections (a), (b), (c) and (d) of section 8 and section 30 prohibited collection of tax by dealers paying presumptive tax and those paying compounded tax u/s 8. By the Kerala Finance Act, 2005 amendments were made to sub-sections (a), (b), (c) and (d); with the dealers under clauses (a), (b) and (c) remaining substantially the same and the dealer under clause (d) being substituted as a dealer who transfers the right to use video cassettes and computer disc. The prohibition for collection of tax u/s 30(2) remained the same. It is also pertinent to note that with the introduction of the KVAT Act 2003, the compounding scheme for jewellery was withdrawn since the tax had been reduced to one per cent.
4. The KVAT Act, 2003, was amended again by the Kerala Value Added Tax (Amendment) Act, 2005 (Act 39 of 2005) wherein amendments were made in clauses (a), (b), (c) and (d) and inserting clause (e) by which a dealer being an importer or manufacturer of medicines and drugs not entitled to deferment of tax u/s 32 was included as per sub-section (e) and with the introduction of the said sub-section (e) necessary changes were made in section 30(2) and the words ''compounded tax u/s 8'' was substituted with ''compounded tax under clause (a) to clause (d) of section 8''.
5. In the Kerala Finance Act, 2006 (Act 22 of 2006) the tax rate for jewellery was raised from one per cent to four per cent and a compounding scheme was introduced by adding sub-clause (f) to section 8 wherein it was also provided that a dealer who opts for payment of tax may collect tax on the sales at the rate not exceeding the rate prescribed and that where such tax collected exceeds the compounded tax payable then the tax collected in excess shall be paid over to the Government in addition to the compounded tax. The prohibition u/s 30 underwent no change in the year 2008. By Kerala Finance Bill, 2008 it was proposed to permit all compounded works contractors other than metal crushing units and those undertaking works for Government of Kerala, KWA and local bodies, to collect-tax.
8. The grounds raised by the petitioner are untenable and unsustainable. It is respectfully submitted that there is nothing discriminatory in excluding the petitioner or other works contractors paying compounded tax from the facility to collect the tax paid. There is nothing making the provision unconstitutional nor can the same be said to be violative of the fundamental rights of the petitioner under article 14 of the Constitution of India. The petitioner is under no compulsion to opt for payment of tax under the compounded scheme as provided u/s 8 of the KVAT Act and the petitioner has done it voluntarily after being fully aware of the provisions u/s 30 of the Act prohibiting and preventing the petitioner from collecting tax paid at the compounded rate from its customers. The contention of the petitioner that they had not separately collected the tax and that the tax element is included in the composite cost of the individual apartment buildings is a deliberate falsehood. The petitioner has deliberately and with mala fide intentions acted against the provisions of the Act as has been revealed by the petitioner''s own ledger accounts.
23. In East India Tobacco Company v. State of Andhra Pradesh (1962) 13 STC 529, the apex court has considered whether the State could treat Virginia tobacco as forming a class by itself for the purpose of taxation. The Act exempted sales of country tobacco but taxed Virginia tobacco. The court proceeded to hold as follows (page 530 in 13 STC) :
Taxation laws must also pass the test of article 14. But in deciding whether a taxation law is discriminatory or not it is necessary to bear in mind that the State has a wide discretion in selecting the persons or objects it will tax, and that a statute is not open to attack on the ground that it taxes some persons or objects and not others. It is only when within the range of its selection, the law operates unequally, and that cannot be justified on the basis of any valid classification, that it would be violative of article 14.
If a State can validly pick and choose one commodity for taxation and that is not open to attack under article 14, the same result must follow when the State picks out one category of goods and subjects it to taxation.
It is for the person who assails a legislation as discriminatory to establish that it is not based on a valid classification and this burden is all the heavier when the legislation under attack is a taxing statute.
24. In
It is now well-settled that though taxing laws are not outside article 14, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy, the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment, what is looked into is not its phraseology, but the real effect of its provisions. A Legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of the Supreme Court have permitted the Legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. But, with all this latitude, certain irreducible desiderata of equality shall govern classification for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. The differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its Governmental power, has, of necessity, to make laws operating differently in relation to different groups or class of persons to attain certain ends and must, therefore, possess the power to distinguish and classify persons or things. It is also recognized that no precise or set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience. Classifications based on differences in the value of articles or the economic superiority of the persons of incidence are well-recognized. A reasonable classification is one which includes all who are similarly situated and none who are not. In order to ascertain whether persons are similarly placed, one must look beyond the classification and to the purposes of the law.
The basis of classification (in the Expenditure-tax Act, 1987) cannot be said to be arbitrary or unintelligible nor as being without a rational nexus with the object of the law. A hotel where a unit of residential accommodation is priced at over Rs. 400 per day per individual is, in the legislative wisdom, considered a class apart by virtue of the economic superiority of those who might enjoy its custom, comforts and services. This legislative assumption cannot be condemned as irrational. It is equally well-recognized that judicial veto is to be exercised only in cases that leave no room for reasonable doubt. Constitutionality is presumed.
25. In
26. In
27. No doubt, in
We think that the appeals are entitled to succeed. Item No. 95 mentions the rate of seven per cent (now eight per cent) as the tax to be levied at the point of first sale in the State. Item No. 135 provides a rate of 30 per cent in respect of arishtams and asavas at the point of first sale. We see no reason why arishtams and asavas should be treated differently from the general class of ayurvedic medicines covered by item No. 95. It is open to the Legislature, or the State Government if it is authorized in that behalf by the Legislature, to select different rates of tax for different commodities. But where the commodities belong to the same class or category, there must be a rational basis for discriminating between one commodity and another for the purpose of imposing tax. It is commonly known that considerations of economic policy constitute a basis for levying different rates of sales tax. For instance, the object may be to encourage a certain trade or industry in the context of the State policy for economic growth, and a lower rate would be considered justified in the case of such a commodity. There may be several such considerations bearing directly on the choice of the rate of sales tax, and so long as there is good reason for making the distinction from other commodities no complaint can be made. What the actual rate should be is not a matter for the courts to determine generally, but where a distinction is made between commodities falling in the same category a question arises at once before a court whether there is justification for the discrimination. In the present case, we are not satisfied that the reason behind the rate of 30 per cent on the turnover of arishtams and asavas constitutes good ground for taking those two preparations out from the general class of medicinal preparations to which a lower rate has been applied. In
So if these preparations are medicinal preparations but are also capable of being used as ordinary alcoholic beverages, they will fall under the (Central) Act and will be liable to duty under item No. 1 of the Schedule at the rate of Rs. 17.50 per gallon of the strength of London proof spirit. On a consideration of the material that has been placed before us, therefore, the only conclusion to which we can come is that these preparations are medicinal preparations according to the standard ayurvedic text-books referred to already, though they are also capable of being used as ordinary alcoholic beverages... They cannot however be taxed under the various Excise Acts in force in the concerned States in view of their being medicinal preparations which are governed by the Act.
We are of the opinion that similar considerations should apply to the appeals before us. The two preparations, arishtams and asavas, are medicinal preparations, and even though they contain a high alcohol content, so long as they continue to be identified as medicinal preparations they must be treated, for the purposes of the sales tax law, in like manner as medicinal preparations generally, including those containing a lower percentage of alcohol. On this ground alone the appellants are entitled to succeed.
28. In State of Assam v. Shri Naresh Chandra Ghose (2001) 121 STC 294 the apex court; distinguished the decision in
It is true that in the case of
29. It is also necessary to notice the decision of the apex court in
The principles of valid classification are that those grouped together in one class must possess a common characteristic which distinguishes them from those excluded from the group; and this characteristic or intelligible differentia must have a rational nexus with the object sought to be achieved by the enactment. The court must look beyond the ostensible classification and to the purpose of the law and apply the test of ''palpable arbitrariness'' in the context of the felt needs of the times and societal exigencies informed by experience to determine the reasonableness of the classification.
30. Further the court also held as follows :
There is distinction between the legislative intention and the purpose or object of the legislation. While the purpose or object of the legislation is to provide a remedy for the malady, the legislative intention relates to the meaning or exposition of the remedy as enacted. The court will be having larger material available for reliance when determining the purpose or object of the legislation as distinguished from the meaning of the enacted provision (paras 15, 16 and 18).
For determining the purpose or object of the legislation, it is permissible to look into the circumstances which prevailed at the time when that law was passed and which necessitated the passing of that law. For the limited purpose of appreciating the background and the antecedent factual matrix leading to the legislation, it is permissible to look into the Statement of Object and Reasons of the Bill which actuated the step to provide a remedy for the then existing malady.
Further, to sustain the presumption of constitutionality, consideration may be had even to matters of common knowledge; the history of the times; and every conceivable state of facts existing at the time of legislation which can be assumed. Even though for the purpose of construing the meaning of the enacted provision, it is not permissible to use these aids, yet it is permissible to look into the historical facts and surrounding circumstances for ascertaining the evil sought to be remedied.
31. It is in the backdrop of these principles that I must approach the question. It is indisputable that reference can be made to the history of the provision. They have been referred in the counter-affidavit which I have extracted. It is by the Kerala Value Added Tax (Amendment) Act, 2005 (Act 39 of 2005) that clause (e) was inserted in section 8. By the same, a dealer being importer or manufacturer of medicines or drugs not entitled to deferment of tax u/s 32, was included. By the Finance Act, 2006 the rate of tax of jewellery was raised from one per cent to four per cent. Clause (f) was added to section 8. It is necessary to notice that though persons falling in categories "a" to "f" are permitted to compound, the system of compounding is not really the same. That is to say, the rates at which different categories are permitted to compound vary from category to category. For instance, the works contractor is permitted to pay tax at the rate of two per cent of the whole contract amount. It is necessary to quote section 8(a) of the Act. It reads as under :
8. Payment of tax at compounded rates.--Notwithstanding anything contained in section 6,--
(a)(i). any works contractor not being a dealer registered under the provisions of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), or a dealer effecting first taxable sale in the State may, at his option, instead of paying tax in accordance with the provisions of the said section, but subject to payment of tax if any, payable under subsection (2) there of, pay tax at two per cent of the whole contract amount;
Provided that any works contractor who undertakes works of the Government Departments or Local Authorities or Kerala Water Authority shall not be liable to tax under sub-section (2) of section 6, if he pays compounded tax at the rate of three per cent on the whole contract amount;
Provided further that notwithstanding anything contained elsewhere in this Act, a works contractor who intends to pay tax at compounded rate in accordance with clause (a) in respect of all the works undertaken by him during a year, may instead of filing separate application for, compounding for individual works may, file a single option for payment of tax under the said clause before 30th April of the year to which the option relates subject to eligibility :
Provided also that the application for compounding in accordance with the above proviso for the year 2006-07 shall be filed before 30th day of November, 2006 :
Provided also that in the case of any work covered under the above provisos which remains unexecuted or part of which remains to be executed at the end of the year, the contractor shall continue to pay tax in respect of such works in accordance with the provisions of clause (a) of this section.
(ii) any works contractor, other than those undertaking electrical, refrigeration or air conditioning contracts or contracts relating to supply and installation of plant, machinery, rolling shutters, cranes, hoists, elevators (lifts), escalators, generators, generating sets, transformers, weighing machines, air conditioners and air coolers, deep freezers, laying of all kinds of tiles (except brick tiles), slabs and stones (including marble) and not falling under clause (i) above, may, at his option, instead of paying tax in accordance with the provisions of the said sections, pay tax at four per cent of the whole contract amount :
Provided that the provisions of this clause shall not apply to any works contract in which the transfer of material is in the form of goods.
Explanation I.--''First taxable sale'' for the purpose of this section shall have the same meaning as assigned to the term by the Explanation under sub-section (5) of section 6.
Explanation II.--For the purpose of this clause ''whole contract amount'' shall not include that portion of a contract which represents amount paid to sub-contractors for execution of works contract provided that the sub-contractor is a registered dealer liable to tax under sub-section (1) or sub-section (1A) of section 6, and the contractor claiming deduction in respect of such amount furnishes certificates in such form as may be prescribed.
Explanation III.--A composite contract of the construction of building shall not be treated as a contract of the nature specified under clause (ii) above which are made ineligible for payment of compounded tax under the said clause merely for the reason that the contract also involves work of the said categories.
(iii) any contractor who had opted for payment of tax in accordance with the provisions of sub-section (7) or sub-section (7A) of section 7 of the Kerala General Sales Tax Act, 1963 (15 of 1963), in respect of any works contract prior to the date of coming into force of this Act, part of which remains to be executed on such date, such contractor may continue to pay tax in respect of the transfer of goods involved in the unexecuted portion of such contracts, at the rate specified in subsection (7) or sub-section (7A) of the said Act.
32. As far as clause (b) is concerned it deals with dealer producing granite metals with the aid of mechanized crushing machine. Therein compounding is on the basis of the size of the machine. Clause (c) deals with dealer in cooked food and beverages other than dealer supplying cooked food or beverages to any airline service company- It also deals with any bar attached hotel, not being a star hotel of above three star or a club or a heritage hotel. It is based on turnover. Clause (d) relates to a dealer who transfers the right to use video cassette or compact disc. They are permitted to pay tax on the basis of main or branch shop at the amount of Rs. 1,000 per year in the case of Municipal Corporation or Municipality and at a lower rate in other places. Clause (e) deals with dealer who is an importer or manufacturer and who is not entitled to any deferment of tax u/s 32, of medicines and drugs falling under the Third Schedule tax and they may pay at the rate of four per cent of the maximum retail price of goods. As far as clause (f) is concerned it deals with dealers in ornaments or wares or articles of gold, silver or platinum. It was inserted by Act 22 of 2006 with effect from July 1, 2006. It is necessary to extract the provision as it stands.
(f)(i) any dealers in ornaments or wares or articles of gold, silver or platinum group metals may at his option, instead of paying tax in respect of such goods in accordance with the provisions of section 6, pay tax at 200 per cent of the highest tax payable by him as conceded in the return or accounts, either under this Act or under the Kerala General Sales Tax Act, 1963 (15 of 1963), for a period of twelve months during any of the three consecutive years preceding that to which such option relates.
(ii) A dealer who is not eligible for option under sub-clause (i) may at his option, instead of paying tax in accordance with the provisions of section 6, pay tax at four hundred per cent of the tax payable by him as conceded in the return or accounts, or tax paid by him under this Act, whichever is higher, for the previous year.
Explanation I.--Where during any such preceding year the dealer had not transacted business for any period in that financial year, the tax payable for the twelve months shall be calculated proportionately on the basis of the tax payable for the period during which such dealer had transacted business.
Explanation II.--A branch shall be treated as an independent place of business for the purpose of calculating the tax under this section.
(iii) Where a dealer who has opted to pay tax under clause (i) or (ii), had opened any new branch subsequent to 31st day of March, 2005, then the additional compounded tax payable with respect to any such branch shall be the average of the tax paid or payable by him in respect of his principal place of business and all branches, as if such new branch had not been opened :
Provided no additional tax is payable by a dealer covered by clause (ii) for the new branches opened during the year 2005-06.
(iv) Notwithstanding anything contained elsewhere where a dealer commences business during the period from first day of April, 2006 to 30th day of September, 2006 may at his option, instead of paying tax in respect of such goods in accordance with the provisions of section 6, pay tax at compounded rate per month from the commencement of the business at one hundred and fifty per cent of the average monthly tax paid or payable from the commencement of business to 30th day of September, 2006 under this Act :
Provided further that where a dealer had paid tax under clause (f) and opts for payment of tax under the clause for the succeeding year, the compounded tax payable for the succeeding year to which such option relates shall be at one hundred and fifteen per cent of the tax paid under this clause or tax payable as per returns or accounts whichever is higher for the preceding year :
Provided also that a dealer who opts for payment of tax under this clause may collect tax on the sales at the rate not exceeding the rate prescribed for the commodity under the Act, but where the tax so collected during the year is in excess of the compounded tax payable for the year under this clause, the tax collected in excess of the compounded tax shall be paid over to Government in addition to the compounded tax.
33. In the course of budget speech for 2005-06 (2005) 13 KTR 27 the Minister for Finance has stated as follows :
(xi) States have given compounding facilities to certain segments of trade in cases where normal assessment of tax liability would be cumbersome and rather impractical. In Kerala we have been allowing such a facility for works contracts, metal crushing, cooked food, jewellery, video cassette libraries and lotteries. The consensus at the national level is that in view of the wide divergence in local conditions in different States it may not be practical to insist on a uniform rate of tax or an upper limit of turnover in such cases of composition. I, therefore, propose to include provisions in the VAT Act to continue the composition scheme as it exists in the KGST Act. This will not be applicable to importers and those dealers who are first sellers within the State. The compounding scheme for jewellery will be withdrawn, as the rate of tax has been reduced to one per cent. The compounding provision for lotteries will be discontinued, as they have recently been banned in Kerala.
34. In the year 2006, during the course of the Budget Speech for 2006-07 (2006) 14 KTR 31 in the proposals regarding taxation, the Finance Minister has stated as follows :
223. The rate on gold jewellery had been reduced substantially last year. Unfortunately, dealers have not reciprocated by showing sufficient growth in turnover so that revenue has fallen substantially. I therefore propose to amend section 11 to deny input tax credit on purchase of bullion and section 12 to deny special rebate for purchase tax on old gold jewellery, as in the case of Schedule 1 items. Nevertheless they will be given an option to pay tax under a compounding system. The tax payable, if they compound, will be 115 per cent of the tax remitted in 2004-05.
35. The learned Government Pleader would refer to the aforesaid aspects in the budget speech and point out that when the rate of tax for gold items was reduced to one per cent with a view to increase the revenue and the system of compounding was withdrawn, it was expected that there would be increase in the revenue. Experience showed otherwise. On the one hand the rate of tax was increased in 2006 to four per cent and at the same time the system of compounding was introduced. The system of compounding comprehended paying tax at the rate of 115 per cent of the tax remitted in 2004-05. Subsequently, there have been changes in the provision and it is found in the present form as already referred and extracted in the course of this judgment. Thus, obviously, the object of these provisions is to augment collection of revenue. The problem of collection of revenue apparently could be dealt with commodity-wise. How best revenue could be raised in relation to a particular commodity is a matter which is best considered and dealt with by the law-giver as they would know the felt necessities of the time. Apparently, it is in this context that as a package to induce gold jewelers to avail of compounding scheme and therefore make it attractive Government thought it fit to offer compounding facility with the advantage of collecting tax as well.
36. It is crucial to note that the equality is a doctrine which is not doctrinaire. The realities of life cannot be irrelevant considerations when a court deals with the case based on breach of article 14. Undoubtedly, there is wide latitude available to the Legislature in the matter of classification. Further, it is trite that a person who challenges a law relating to tax on the score of there being violation of article 14 has to discharge a heavy burden. It is for him. to establish that he belongs to the same category as others in all respects and explain the absence of any possible justification that mark it out from the rest of the group. As 1 have already noticed the scheme of compounding is applicable in respect of the categories falling under clauses (a) to (f). The scheme of compounding in the sense of rate and the method of compounding are all different from one another. Despite the Legislature reducing rate of tax to one per cent in respect of gold items, collection of Revenue actually fell. The State is concerned with the collection of maximum revenue as it is with the revenue that is collected that it is able to discharge its various duties as a welfare State. Therefore the paramount interest lies in mopping up of maximum income from various legitimate source available to it. I have referred to the context. It is in this historical context apparently I must evaluate the challenge to the legislation. I would think that on the facts pleaded, the materials which are produced, the presumptions which are constitutionally attached to the provision in question, my duty to consider every fact possible in support of the legislation and the differences in the categories themselves falling in clauses (a) to (f) as is manifest in the compounding package which is availed of by them that the plea of discrimination is meritless. As held by the apex court from time to time in taxation statutes in particular the principle of equality can be said to be breached if a case of palpable arbitrariness is established. A legislation can be vetoed by a Constitutional court only if such result is wholly unavoidable. Judicial deference to the Legislature''s declaration of its value judgment is not constitutional anathema. On the other hand, it is one which squares with a long tradition of the judicial exposition of the true role of the court.
37. In the light of the above discussion, I feel that the petitioner has failed to establish any ground to grant any relief in its writ petition. The writ petition fails, and it is dismissed.
