1983 (5) TMI 214 - SC - VAT / Sales Tax

Validity of surcharge under s.5(1) and s.5(3) upheld; surcharge non-confiscatory, cannot be passed to buyers; s.26 limits reach under Art.246/286

SC upheld the constitutional validity of s.5(1) and s.5(3) of the Bihar Finance Act, 1981, sustaining a surcharge on dealers with gross turnover over Rs.5 ... Levy of surcharge as a species of sales tax - Pith and substance doctrine - Federal supremacy and reconciliation of entries in Schedule VII - Non obstante clause of section 6 of the Essential Commodities Act - Repugnancy under article 254 limited to Concurrent List - Classification by capacity to pay and non-arbitrariness under article 14 - Reasonableness of restriction on trade under article 19(1)(g) - Justiciability of Presidential assent and Governor's reservation under article 200-201 - Use of gross turnover (including inter-state/outside sales) for classification purposesLevy of surcharge as a species of sales tax - Pith and substance doctrine - Constitutional validity of sub-section (1) of section 5 of the Bihar Finance Act, 1981 (levy of surcharge on dealers whose gross turnover exceeds Rs. 5 lakhs). - HELD THAT: - The surcharge is in substance an additional rate of tax on sales and therefore falls within the competence of the State under entry 54, List II. Applying the pith and substance doctrine, the impugned provision is a law with respect to taxation of sale/purchase of goods and incidental provisions, and incidental effects on other fields do not strip the Act of validity. The State may classify dealers by gross turnover to identify those with capacity to bear additional burden; such a fiscal selection is within legislative domain.Sub-section (1) of section 5 is constitutionally valid as a State law relatable to entry 54 of List II.Pith and substance doctrine - Non obstante clause of section 6 of the Essential Commodities Act - Repugnancy under article 254 limited to Concurrent List - Federal supremacy and reconciliation of entries in Schedule VII - Whether sub-section (3) of section 5 (prohibiting dealers liable to surcharge from collecting it from purchasers) is void because of conflict or repugnancy with the Drugs (Price Control) Order, 1979 made under the Essential Commodities Act (entry 33, List III) and section 6 of that Act. - HELD THAT: - The Court held that the question is governed by pith and substance and the distribution of legislative fields; entry 54 (taxation) and entry 33 (price control) operate in distinct fields. Repugnancy under article 254 arises only where both Union and State laws relate to a matter in the Concurrent List; overlapping between List II and Lists I or III is resolved by examining competence under article 246. The appellants (manufacturers of formulations) are governed by paragraph 24 of the Control Order (prices to wholesaler/retailer inclusive of local taxes), so there is no direct conflict with sub-section (3). Even if paragraph 21 applied to some sellers, sub-section (3) merely prevents passing on the surcharge (it cuts into dealer profits) and does not make simultaneous obedience impossible; hence there is no irreconcilable conflict invoking the non obstante in section 6.Sub-section (3) is not void for repugnancy with the Drugs (Price Control) Order or for want of competence; there is no irreconcilable conflict requiring displacement under section 6 of the Essential Commodities Act.Classification by capacity to pay and non-arbitrariness under article 14 - Use of gross turnover (including inter-state/outside sales) for classification purposes - Whether sub-section (3) of section 5 (and the surcharge scheme generally) violates article 14 by treating unlike dealers alike or is arbitrary/confiscatory. - HELD THAT: - The Court upheld the classification of dealers by gross turnover as rationally connected to the fiscal objective of proportioning tax to capacity to pay; uniform surcharge rate on the defined class is not discriminatory. No factual material was produced to show the surcharge imposes a disproportionate or confiscatory burden. The legislative choice to adopt gross turnover (as defined) for classifying dealers is a permissible fiscal measure directed at economic capacity.The provisions do not infringe article 14; the classification and surcharge are rational and not arbitrary or confiscatory.Reasonableness of restriction on trade under article 19(1)(g) - Levy of surcharge as a species of sales tax - Whether sub-section (3) of section 5 constitutes an unreasonable restriction on the freedom to carry on business under article 19(1)(g). - HELD THAT: - Preventing a dealer from collecting the surcharge does not transform the levy into an income tax nor does it remove the State's competence to tax sales. The prohibition merely affects incidence (it reduces dealer profit) and is a legislative policy choice within the permissible ambit of regulation of business; precedents recognise that inability to pass on an indirect tax does not render it invalid. No persuasive evidence showed the restriction was unreasonable.Sub-section (3) does not unreasonably restrict trade under article 19(1)(g) and is constitutionally sustainable.Justiciability of Presidential assent and Governor's reservation under article 200-201 - Use of gross turnover (including inter-state/outside sales) for classification purposes - Whether the courts may inquire into the Governor's reservation of the Bill to the President or into the President's assent, and whether the definition of gross turnover (including inter-state/outside sales) may be used for classifying dealers for surcharge. - HELD THAT: - The Court held that the Governor's decision to reserve a Bill under article 200 and the President's assent are not justiciable; courts will not question the subjective exercise of those constitutional functions. On gross turnover, Fernandez and other precedents permit the State to include inter-state or outside-State transactions in returns or for classification purposes while not taxing such transactions; using the defined gross turnover to identify dealers with economic superiority for surcharge classification is permissible so long as such transactions are not taxed.Assent and reservation are not subject to judicial inquiry; using gross turnover (including inter-state/outside sales) for classification to fix surcharge liability is constitutionally valid.Final Conclusion: All challenges to the Bihar Finance Act, 1981 provisions in issue were rejected: the levy of surcharge and the prohibition on collecting it from purchasers are within State competence as taxes on sale, there is no repugnancy with the Drugs (Price Control) Order or displacement by section 6 of the Essential Commodities Act, the scheme does not violate articles 14 or 19(1)(g), the Governor's reservation and Presidential assent are not justiciable, and the method of using gross turnover for classification is permissible; the appeals and connected petitions are dismissed. Issues Involved:1. Constitutional validity of sub-section (1) and sub-section (3) of section 5 of the Bihar Finance Act, 1981.2. Conflict between the Bihar Finance Act, 1981, and the Drugs (Price Control) Order, 1979.3. Alleged discrimination under Article 14 of the Constitution.4. Alleged unreasonable restriction under Article 19(1)(g) of the Constitution.5. Legislative competence of the State Legislature under Entry 54 of List II of the Seventh Schedule.6. Justiciability of the President's assent.7. Computation of gross turnover for the purpose of levying surcharge.Detailed Analysis:1. Constitutional Validity of Sub-section (1) and Sub-section (3) of Section 5 of the Bihar Finance Act, 1981:The Supreme Court upheld the constitutional validity of sub-section (1) of section 5 of the Bihar Finance Act, 1981, which provides for the levy of a surcharge on every dealer whose gross turnover during a year exceeds Rs. 5 lakhs. The Court also upheld sub-section (3) of section 5, which prohibits such dealers from collecting the surcharge amount from purchasers. The Court referenced the decision in S. Kodar v. State of Kerala [1974] 34 STC 73 (SC), which upheld similar provisions under the Tamil Nadu Additional Sales Tax Act, 1970.2. Conflict Between the Bihar Finance Act, 1981, and the Drugs (Price Control) Order, 1979:The Court examined whether there was a conflict between sub-section (3) of section 5 of the Bihar Finance Act and paragraph 21 of the Drugs (Price Control) Order, 1979. The Court held that there was no irreconcilable conflict between the two laws. It was noted that the Essential Commodities Act and the Bihar Finance Act operate in different fields. The former regulates the price of essential commodities, while the latter levies a surcharge on sales tax. The Court concluded that both laws could be obeyed simultaneously without conflict.3. Alleged Discrimination Under Article 14 of the Constitution:The appellants argued that sub-section (3) of section 5 of the Act was discriminatory as it treated unequals as equals by imposing the same surcharge on all dealers with a gross turnover exceeding Rs. 5 lakhs, regardless of whether they dealt in essential commodities with controlled prices or not. The Court rejected this argument, stating that the surcharge is a general tax that falls uniformly on a certain class of dealers based on their capacity to bear the additional burden. The Court emphasized that the classification was reasonable and not arbitrary.4. Alleged Unreasonable Restriction Under Article 19(1)(g) of the Constitution:The appellants contended that sub-section (3) of section 5 of the Act imposed an unreasonable restriction on their right to carry on business, as guaranteed under Article 19(1)(g) of the Constitution. The Court dismissed this contention, noting that the surcharge did not affect the competence of the State Legislature to impose a tax on sales. The Court reiterated that the power to levy a sales tax includes the power to determine whether the tax should be passed on to the consumer or borne by the dealer.5. Legislative Competence of the State Legislature Under Entry 54 of List II of the Seventh Schedule:The Court affirmed that the State Legislature was competent to enact sub-section (1) and sub-section (3) of section 5 of the Act under Entry 54 of List II of the Seventh Schedule. The Court held that the surcharge was a tax on the sale or purchase of goods and fell within the legislative competence of the State Legislature. The Court rejected the argument that the provisions were ultra vires the State Legislature.6. Justiciability of the President's Assent:The appellants argued that the President's assent to the Bill was justiciable and that the Bill should not have been reserved for the President's consideration. The Court rejected this argument, stating that the Governor's decision to reserve the Bill for the President's assent under Article 200 of the Constitution was not subject to judicial review. The Court held that the assent of the President was not justiciable.7. Computation of Gross Turnover for the Purpose of Levying Surcharge:The appellants contended that it was impermissible to include transactions representing sales in the course of inter-State trade, outside the State, and in the course of import/export in the computation of gross turnover for levying the surcharge. The Court rejected this contention, stating that the definition of 'gross turnover' in section 2(j) of the Act was adopted to classify dealers and identify those liable to pay the surcharge. The Court emphasized that the surcharge was levied on the tax payable by the dealer and not on the gross turnover itself.Conclusion:The Supreme Court dismissed the appeals, upholding the constitutional validity of sub-section (1) and sub-section (3) of section 5 of the Bihar Finance Act, 1981. The Court found no conflict between the Bihar Finance Act and the Drugs (Price Control) Order, 1979, and rejected the arguments of discrimination and unreasonable restriction under Articles 14 and 19(1)(g) of the Constitution. The Court affirmed the legislative competence of the State Legislature and held that the President's assent was not justiciable. The computation of gross turnover for the purpose of levying the surcharge was also upheld.