1963 (8) TMI 30 - SC - VAT / Sales Tax

Union and State taxation agreements under Article 278 can override state tax laws and invalidate works contract assessments

South India Corporation (P.) Ltd. Versus Secretary, Board of Revenue, Trivandrum and Another

The SC held that Article 278 of the Constitution overrides Article 372, allowing the Union and State Governments to enter agreements regarding taxation in ... Constitutionality of the Travancore-Cochin General Sales Tax Act - imposing sales tax in respect of 'works contracts' - Non-fixation of the percentage by the Board of Revenue under Rule 4(3) - non-obstante clause - Whether there can be a valid agreement under Article 278 of the Constitution in respect of taxes leviable by the State and not leviable by the Government of India till an appropriate law is made by Parliament? Held that:- The earlier discussion makes it abundantly clear that the Constitution gives a separate treatment to the subject of finance, and Article 277 saves the existing taxes etc. levied by States, if the conditions mentioned therein are complied with. While Article 372 saves all pre-Constitution valid laws, Article 277 is confined only to taxes, duties, cesses or fees lawfully levied immediately before the Constitution. Therefore, Article 372 cannot be construed in such a way as to enlarge the scope of the saving of taxes, duties, cesses or fees. To state it differently, Article 372 must be read subject to Article 277. We have already held that an agreement can be entered into between the Union and the States in terms of Article 278 abrogating or modifying the power preserved to the States under Article 277. That apart, even if Article 372 continues the pre-Constitution laws of taxation, that provision is expressly made subject to the other provisions of the Constitution. The expression 'subject to' conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject. Further Article 278 opens out with a non-obstante clause. The phrase 'notwithstanding anything in the Constitution' is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of Article 278. While Article 372 is subject to Article 278, Article 278 operates in its own sphere in spite of Article 372. The result is that Article 278 overrides Article 372; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under Article 372, the Union and the State Governments can enter into an agreement in terms of Article 278 in respect of Part B States depriving the State law of its efficacy. In one view Article 277 excludes the operation of Article 372, and in the other view, an agreement in terms of Article 278 overrides Article 372. In either view, the result is the same, namely, that at any rate during the period covered by the agreement the States ceased to have any power to impose the tax in respect of 'works contracts' In the result, the said orders of assessment are set aside and the appeals are allowed with costs here and in the High Court. Appeals allowed. Issues Involved:1. Constitutionality of the Travancore-Cochin General Sales Tax Act, 1125 M.E.2. Applicability of Article 277 of the Constitution.3. Validity of the agreement under Article 278 of the Constitution.4. Discrimination under Article 14 of the Constitution.5. Non-fixation of the percentage by the Board of Revenue under Rule 4(3).Detailed Analysis:1. Constitutionality of the Travancore-Cochin General Sales Tax Act, 1125 M.E.The appellant contended that the Travancore-Cochin Act of 1125 would not continue in force under Article 372 of the Constitution as its provisions were inconsistent with the structure of the Constitution and Part XII thereof. The court noted that Article 372 maintains the continuity of pre-existing laws after the Constitution came into force until they are repealed, altered, or amended by a competent authority. The court held that pre-Constitution laws made by a competent authority, though they may have lost legislative competency under the Constitution, shall continue in force provided they do not contravene other provisions of the Constitution.2. Applicability of Article 277 of the ConstitutionThe appellant argued that Article 277, which allows for the continuation of taxes lawfully levied before the Constitution, could not be relied upon since the Travancore-Cochin General Sales Tax Act came into force after the Constitution. The court noted that Article 277 saves the levy of a tax that was lawfully levied by a State immediately before the commencement of the Constitution until Parliament makes a law to the contrary. However, since the Act was brought into force on May 30, 1950, after the Constitution commenced, the tax under the Act would not be saved by Article 277.3. Validity of the agreement under Article 278 of the ConstitutionThe appellant contended that an agreement dated February 25, 1950, between the President of India and the Rajpramukh of Travancore-Cochin under Article 278 prevented the State from levying the tax. The court held that Article 278 enables the Union and a Part B State to enter into an agreement regarding the levy and collection of taxes. The agreement in question was comprehensive and aimed at filling the revenue-gap caused by federal financial integration. The court concluded that the agreement under Article 278 superseded the power saved under Article 277, rendering the impugned assessments invalid.4. Discrimination under Article 14 of the ConstitutionThe appellant argued that the Act offended Article 14 as it was not applied to areas other than those covered by the Travancore-Cochin States, making it discriminatory. The court did not delve into this contention in detail, as the primary focus was on the validity of the tax under Articles 277 and 278.5. Non-fixation of the percentage by the Board of Revenue under Rule 4(3)The appellant contended that the non-fixation of the percentage by the Board of Revenue under Rule 4(3) rendered the assessment for the year 1952-53 illegal. The court noted that the Board of Revenue did not fix the percentage for deduction from the amount payable to the dealer for carrying out a works contract, which was not denied in the High Court. This non-fixation contributed to the illegality of the assessment.Conclusion:The Supreme Court set aside the orders of assessment and allowed the appeals with costs, concluding that the impugned assessments were not validly made by the Sales Tax Authorities in exercise of the power saved under Article 277 of the Constitution. The court held that the agreement under Article 278 superseded the power to levy the tax, and the non-fixation of the percentage by the Board of Revenue further invalidated the assessments.