TaxTMI 
TaxTMI 
2019 (7) TMI 479
X X X X Extracts X X X X
X X X X Extracts X X X X
....HANNA JUDGMENT SANJIV KHANNA, J. Leave granted in all the special leave petitions. 2. This judgment would dispose of the afore-captioned appeals which relate to the legal effect of bifurcation of the State of Madhya Pradesh into the successor State of Madhya Pradesh and the State of Chhattisgarh by the Madhya Pradesh Reorganisation Act, 2000 ("Reorganisation Act", for short) on exemption or benefit of deferment of sales tax granted under the Madhya Pradesh Commercial Tax Act, 1994 read with the applicable rules. The question to be answered is whether the industrial unit in the reorganised State of Madhya Pradesh and under the new State of Chhattisgarh would continue to avail the benefit of such exemption or deferment even after the bifurcation in both the states, irrespective of the location of the industrial unit which would be in one of the two states. 3. Civil Appeal Nos. 460, 461, 7073 of 2005 and 2343 of 2007 arise from the judgments of the Division Bench of the Madhya Pradesh High Court, Jabalpur Bench, upholding judgment of the learned Single Judge dismissing the Writ Petition by the manufacturer/dealer of cement inter-alia recording that on enforcement of the Reor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....attract investors and increase industrial output in the State, had vide notification dated 19th February, 1991 formulated a policy for grant of sales tax exemption to industrial units having fixed assets above Rs. 100 crores. Quantum of exemption from tax was to be equal to the capital investment in the fixed assets and the duration or period was 11 years from the date of commencement of commercial production or the date on which quantum of exempted tax reached the limit equivalent to the value of capital investment in the fixed assets. It is an undisputed position that private parties/assessee to the present appeals being entitled to the benefit/exemption were issued a certificate of eligibility for exemption from tax by the Directorate of Industries in the unified State of Madhya Pradesh. 7. The industrial units belonging to the private parties/assessee situated in the unified State of Madhya Pradesh after the bifurcation in terms of the Reorganisation Act would necessarily fall in the area/boundary forming a part either of the reorganised State of Madhya Pradesh or the new State of Chhattisgarh. As noticed above, the precise issue before us is whether these industrial units, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Amendment of the First Schedule to the Constitution.- On and from the appointed day, in the First Schedule to the Constitution, under the heading "I. THE STATES", - (a) in the paragraph relating to the territories of the State of Madhya Pradesh, after the words, brackets and figures, "the Rajasthan and Madhya Pradesh (Transfer of Territories) Act, 1959 (47 of 1959)", the following shall be added, namely: - "but excluding the territories specified in section 3 of the Madhya Pradesh Reorganisation Act, 2000."; (b) after entry 25, the following entry shall be inserted, namely: - "26. Chhattisgarh: The territories specified in section 3 of the Madhya Pradesh Reorganisation Act, 2000." Sections 78, 79, 80, 85 & 86 of the Reorganisation Act PART X LEGAL AND MISCALLANEOUS PROVISIONS 78. Territorial extent of laws.- The provisions of Part II of this Act shall not be deemed to have effected any change in the territories to which any law in force immediately before the appointed day extends or applies, and territorial references in any such law to the State of Madhya Pradesh shall, until otherwise provided by a competent Legislature or other competent authority be con....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the erstwhile State of Madhya Pradesh was bifurcated and divided into the reorganised State of Madhya Pradesh and the new State of Chhattisgarh. The political map of the country underwent a change. The reorganised State of Civil Appeal arising out of SLP (C) No. 23592 of 2014 & Ors. Page 9 of 38 Madhya Pradesh and the new State of Chhattisgarh were described as "successor State" vide clause (j) to Section 2 of the Reorganisation Act. The transferred territories, which were to form part of the State of Chhattisgarh, were demarcated and specified in Section 3 of the Reorganisation Act. As per Section 4, the reorganised State of Madhya Pradesh was to comprise of the existing territories other than those specified in Section 3 i.e., the territories which shall now form part of the State of Chhattisgarh. The expression "law" as defined in clause (f) to Section 2 of the Reorganisation Act included any enactment, ordinance, regulation, order, notification, etc., in force immediately before the appointed day in the whole or any part of the erstwhile or unified State of Madhya Pradesh. The law by definition would include delegated legislation and also the exemption notification issued unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....altered, repealed or amended by a competent legislature or other competent authority. The language in these sections is clear and unambiguous. These sections provide that the laws which were applicable to the undivided State of Bihar would continue to apply to the new States created by the Act. The laws that operated continue to operate notwithstanding the bifurcation of the erstwhile State of Bihar and creation of the new State of Jharkhand. They continue in force until and unless altered, repealed or amended. It is not disputed before us and indeed it cannot be disputed in view of the wide definition given to "law" in Section 2(f) of the Act that the notification issued under Section 7(3)(b) of the Bihar Finance Act, 1981 is law within the meaning of Sections 84 and 85 of the Act. Thus, the notification published in the Bihar Gazette on 22-12-1995 bearing SO No. 478 continues to operate in the State of Jharkhand till such time as it is altered, repealed or amended. By virtue of Section 84, the territorial references in any such law (which includes the notification in question), to the State of Bihar shall be construed as meaning the territories within the existing State of Bihar ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....jab Reorganisation Act was noticed as also the definition of law under Section 2(g) of that Act. Section 2(g) of that Act did not define law as widely as it has been defined under Section 2(f) of the Act. This Court agreed with the High Court that the impugned administrative orders in question were not law within the meaning of Section 2(g) of that Act and hence, were not saved by Section 88. However, this Court held that when there is no change of sovereignty and it is merely an adjustment of territories by reorganisation of a particular State, the administrative orders made by the Government of the erstwhile State continue to be in force and effective and binding on the successor States until and unless they are modified, changed or repudiated by the Governments of the successor States. This Court observed that no other view is possible to be taken as that will merely bring about chaos in the administration of the new States. Their Lordships found no principle in support of the stand that administrative orders made by the Government of the erstwhile State automatically lapsed and were rendered ineffective on the coming into existence of the new successor States. Their Lordships f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anchi in Civil Appeal No. 3765 of 2003 is that the statutory notification issued by the erstwhile State of Bihar envisaged only intra-State sale transactions and not inter-State sale transactions. With the coming into existence of two States, incentive by way of exemption from payment of sales tax cannot be claimed in respect of transactions which can now be categorised as inter-State sale transactions. The submission overlooks the provisions of Sections 84 and 85 of the Act, which create a legal fiction. It is well settled that in interpreting a provision creating a legal fiction, the court must ascertain the purpose for which the fiction is created and having done so, to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction. When the law requires that an imaginary state of affairs should be treated as real, then unless prohibited from doing so, one must also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. As Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council, All ER at p. 589 obser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r-State sale transactions. 30. We have carefully considered the decisions relied upon by Shri Rakesh Dwivedi in Rattan Lal & Co. v. Assessing Authority, State of Mysore v. P.B. Hussain Kunhi & Co. and CST v. Minerva Minerals and we find that none of those decisions in any manner advances the case of the State. The decisions in those cases depended on the interpretation of the provisions of the Acts concerned which were not at all similar to the provisions with which we are concerned in the instant appeals. In Civil Appeal No. 2450 of 2003, the High Court of Patna on a similar ground has rejected the claim of the appellants. It noticed the earlier decision of the High Court, but distinguished the same on the ground that in the case in hand, the industrial unit was situated in the State of Jharkhand while the benefit was being claimed in the State of Bihar. In view of our earlier findings, this would not be a relevant consideration for rejecting the writ petition. Moreover, if this principle were to be upheld, it would result in arbitrary results inasmuch as the entrepreneurs whose industrial units operate in the State of Bihar will get the benefit of exemption from payment of sal....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... State of Chhattisgarh, are hereby extended to and shall be in force in the State of Chhattisgarh until repealed or amended. Subject to the modifications that in all the laws for the words "Madhya Pradesh" wherever they occur the word "Chhattisgarh" shall be substituted. 3. Anything done or any action taken (including any appointment, notification, notice, order, rule, form, regulation, certificate or licence) in exercise of the powers conferred by order under the laws specified in the Schedule shall continue to be in force in the State of Chhattisgarh." The Schedule to the said Notification, it was highlighted, included the Sales Tax Act and the rules framed thereunder. Accordingly, the Adaptation of Laws Order states that subject to the modification in the form of substitution of the word "Madhya Pradesh" with the word "Chhattisgarh", "the law" would continue to apply and had remained in force and would be effective for the balance period of 11 years or till the quantum of exemption was reached. Further, Section 80 of the Reorganisation Act empowers the court, tribunal or authority to enforce "the law" for the purpose of facilitating its application to the reorganised State ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the stand taken by the State of Madhya Pradesh and the State of Chhattisgarh is correct and merits acceptance. We have already reproduced the aforesaid provisions and partly interpreted them in paragraphs 9 and 10 and would now proceed to interpret Sections 78 and 79 of the Reorganisation Act. Section 78 of the Reorganisation Act consist of two parts. The first part states that the provisions of the Reorganisation Act shall not be deemed to have affected any change in the territories to which any law in force immediately before the appointed date extends or applies. In other words, the law in force before the appointed date, which in the present case is 1st November, 2000, would continue to apply to the successor or reorganised State of Madhya Pradesh as it existed before bifurcation. This is natural and normal as the laws enacted by the legislature and the executive of the State of Madhya Pradesh would obviously apply to the territories forming part of it after its reorganisation/division. As a result of bifurcation some areas that were earlier part of the State of Madhya Pradesh would now form part of the new State of Chhattisgarh, albeit this would not matter and affect appl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nisation Act is limited and restricted to the enforcement of enactment/laws as they existed in the unified State of Madhya Pradesh to the new State of Chhattisgarh, and nothing more and beyond. 16. Section 79 of the Reorganisation Act states that the appropriate Government of the reorganised State of Madhya Pradesh and the new State of Chhattisgarh may, before the expiration of two years from the appointed date, by an order, as may be necessary or expedient, make such adaptations or modifications in the earlier laws enacted in the unified State of Madhya Pradesh by way of repeal or amendment. Thereupon, every law shall have effect subject to the adaptations or modifications made, until further repealed, modified or amended by the competent legislature or other competent authority. Explanation to the said section states that 'appropriate Government' in respect of any law means the Central Government in respect of matters enumerated in the Union List and in respect of any law in its application to a state, the State Government. 17. Section 80 relates to the construction or interpretation of the laws made by the State of Madhya Pradesh before the appointed date. It states that not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1). (3) Any law of a State shall, in so far as it imposes, or authorises the imposition of, (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter- State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29-A) of Article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify." As per the said Article, states are not competent to enact any legislation relating to the taxation of 'inter-state sales', an expression which, in the context of the Constitution, has been subject matter of several decisions explaining the difference between 'intra-state' and 'inter-state' sales. The expression 'inter- state' trade has specific legal connotation and meaning. It refers to transfer or movement of goods from one state to another. Such transactions, notwithstanding that the situs of sale....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... subject to its competency amends or repeals the existing and applicable laws. It was held: "36. At the cost of repetition, we may mention that under Article 3 of the Constitution, Parliament can alter, amend, amalgamate, form new States, diminish or increase area of a State. The principle of "clean slate" as applicable in international law is not applicable when reorganisation takes place under Article 3 of the Constitution. The reorganised States do not usually start as tabula rasa, rather they are successors of a pre-existing erstwhile States. Under BROA, Jharkhand was carved out of Bihar and the other separate States came into existence on 15-11-2000. If the laws in force were to lapse on the date the division was effected, a chaotic situation would have emerged inasmuch as the newly created State would be rendered a State without laws. To avoid such situation, provisions like Sections 84 and 85 of BROA have been enacted to maintain continuity, and at the same time authorising the States to make such modifications and adaptations as are considered necessary by mere issuance of orders within two years, and thereafter by legislation." This decision had referred to several ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to be created without any laws as on the date of its creation. To overcome this interregnum and vacuum, the Reorganisation Act(s) uniformly contain provisions which create a legal fiction to the extent that the reorganisation of the State would not affect the applicability of laws to all the territories included within it before and even after the reorganisation. However, this is subject to another dictum/rule that the existing laws as earlier applicable to the territories would be applicable to the new state until the new state provides for adaptation or modification of the law by way of repeal or amendment. The time period provided for such adaptations and modifications is generally two years from the appointed day, i.e. the day by which the Central Government in the Official Gazette provides for the creation of the two states by transfer of territories from one state to another. 21. The Constitutional Bench judgment in M.P.V. Sundararamier & Co. v. State of Andhra Pradesh and Another AIR 1958 SC 468, had examined and rejected several contentions of the dealers carrying on business in the city of Madras for restraining the State of Andhra from imposing sales tax on sales effect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....date it should be deemed to be a part of the State of Madras. We do not agree with this interpretation. In our opinion, S. 53 merely provides that the laws in existence in the territories which were constituted into the State of Andhra should continue to operate as before. In fact, by an Adaptation Order issued on November 12, 1953, even the name of Andhra was substituted for Madras in the Madras General Sales Tax Act. There is no substance in this contention." 22. In the context of the above provisions of the Reorganisation Act, we would now reproduce relevant portion of the judgment of the Division Bench of High Court of Andhra Pradesh in Sri Peera Mohammad Mahamood Saheb v. The State of Andhra Pradesh (supra), which had also dealt with the situation pursuant to bifurcation of the State of Madras into the reorganised State of Madras and the new State of Andhra. Referring to identical provisions, it was held that Section 3 of the Andhra State Act, 1953 states that the territories enumerated would, from the appointed date i.e. 1st October, 1953, cease to be the territories of the State of Madras and would be the territories of the new State of Andhra. Further, the laws in force i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isions do not stipulate that such transactions would continue to be treated as intra-state transactions notwithstanding creation of the new State. 24. With respect to reasoning given in paragraph 30 in Swarn Rekha Cokes and Coals Pvt. Ltd. (supra), we would acknowledge that creation of a new State was an unforeseen event and could give rise to unusual situations, but this cannot be a ground and reason to treat inter-state sales between the two successor states as intra-state sales. This would be contrary to the Constitution and even the Statute i.e. the Reorganisation Act. Whenever a new State is created, there would be difficulties and, issues would arise but these have to be dealt within the parameters of the constitutional provisions and the law and not by negating the mandate of the Parliament which has created the new state in terms of Article 3 of the Constitution. Creation of the new political State must be given full legal effect. We would, therefore, respectfully overrule the contrary observations and ratio recorded in paragraphs 29 and 30 in Swarn Rekha Cokes and Coals Pvt. Ltd. (supra) in light of the legal position elucidated and explained above. 25. In the end, we ....