REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2960 OF 2006
Union of India and Ors. .............. Appellants
versus
M/s Nitdip Textile Processors
Pvt. Ltd. and Another ..............Respondents
WITH
CIVIL APPEAL NO. 2961 OF 2006
Union of India and Ors. .............. Appellants
versus
M/s Nitdip Textile Processors
Pvt. Ltd. and Another ..............Respondents
WITH
CIVIL APPEAL NO. 2962 OF 2006
Union of India and Ors. .............. Appellants
versus
M/s Rinkoo Processors
Pvt. Ltd. and Another ..............Respondents
1
WITH
CIVIL APPEAL NO. 2963 OF 2006
Union of India and Ors. .............. Appellants
versus
M/s Swiss Pharma
Pvt. Ltd. and Another ..............Respondents
WITH
CIVIL APPEAL NO. 2964 OF 2006
Union of India and Ors. .............. Appellants
versus
M/s New Age Industries and Another ..............Respondents
WITH
CIVIL APPEAL NO. 3659 OF 2006
Union of India and Ors. .............. Appellants
versus
M/s Aryan Finefab Ltd. and Others .............Respondents
WITH
2
CIVIL APPEAL NO. 5616 OF 2006
Union of India and Ors. .............. Appellants
versus
M/s Modern Denim Ltd. and Another ..............Respondents
WITH
CIVIL APPEAL NO. 990 OF 2007
Union of India and Ors. .............. Appellants
versus
M/s Navdurga Calendaring
Works Surat and Others ..............Respondents
J U D G M E N T
H.L. Dattu, J.
1) The present batch of eight appeals arises out of the
common Judgment and Order dated 25.07.2005 passed by
the High Court of Gujarat at Ahmedabad in the Special Civil
Application No.735 of 1999 and connected applications filed
under Article 226 of the Constitution of India. Since these
3
appeals involve common question of law, they are disposed
of by this common Judgment and Order.
2) All the parties in these present appeals before us were
duly served but none appeared for the respondents except
one in Civil Appeal No. 5616 of 2006.
3) The High Court, vide its impugned Judgment and
Order dated 25.07.2005, has declared that Section 87(m)(ii)
(b) of Finance (No.2) Act, 1998 is violative of Article 14 of
the Constitution of India insofar as it seeks to deny the
benefit of the `Kar Vivad Samadhana Scheme, 1998
(hereinafter referred to as “the Scheme”) to those who were
in arrears of duties etc., as on 31.03.1998 but to whom the
notices were issued after 31.03.1998 and further, has struck
down the expression “on or before the 31st day of March
1998” under Section 87(m)(ii)(b) of the Finance (No. 2) Act,
1998 as ultra vires of the Constitution of India and in
particular, Article 14 of the Constitution on the ground that
the said expression prescribes a cut-off date which arbitrarily
excludes certain category of persons from availing the
benefits under the Scheme. The High Court has further held
that as per the definition of the `tax arrears’ in Section 87(m)
4
(ii)(a) of the Act, the benefit of the Scheme was intended to
be given to all persons against whom the amount of duties,
cess, interest, fine or penalty were due and payable as on
31.3.1998. Therefore, this cut-off date in Section 87(m)(ii)
(b) arbitrarily denies the benefit of the Scheme to those who
were in arrears of tax as on 31.03.1998 but to whom notices
were issued after 31.3.1998. This would result in
unreasonable and arbitrary classification between the
assessees merely on the basis of date of issuance of Demand
Notices or Show Cause Notices which has no nexus with the
purpose and object of the Scheme. In other words, the
persons who were in arrears of tax on or before 31.03.1998
were classified as those, to whom Demand Notices or Show
Cause Notices have been issued on or before 31.03.1998
and, those to whom such notices were issued after
31.3.1998. The High Court observed that this classification
has no relation with the purpose of the Scheme to provide a
quick and voluntary settlement of tax dues. The High Court
further observed that this artificial classification becomes
more profound in view of the fact that the Scheme came into
operation with effect from 1.9.1998 which contemplates
filing of declaration by all persons on or after 1.9.1998 but
5
on or before 31.1.1999. The High Court further held that all
persons who are in arrears of direct as well as indirect tax as
on 31.3.1998 constitute one class, and any further
classification among them on the basis of the date of
issuance of Demand Notice or Show Cause Notice would be
artificial and discriminatory. The High Court concluded by
directing the Revenue to consider the claims of the
respondents for grant of benefit under the Scheme, afresh, in
terms of the Scheme. The relevant portions of the impugned
judgment of the High Court is extracted below:
“In the light of the above, we shall now consider
whether definition of “tax arrears” contained in
Section 87 (m)(ii)(b) is arbitrary, irrational or
violative of the doctrine of equality enshrined under
Article 14 of the Constitution and whether the
petitioners are entitle to avail benefit under
Scheme. A reading of the speech made by the
Finance Minister and the objects set out in
memorandum to Finance (No. 2) Bill, 1998 shows
that the Scheme was introduced with a view to
quick and voluntary settlement of tax dues
outstanding as on 31.3.1998 under various direct
and indirect tax enactments by offering waiver of a
part of the arrears of taxes and interest and
providing immunity against prosecution and
imposing of penalty. The definition of `tax arrear’
contained in Section 87 (m)(i) in the context of
direct tax enactment also shows that the legislation
was intended to give benefit of the scheme to the
assessee who were in arrears of tax on 31.3.1998.
The use of the words as on “31st day of March,
1998” in Section 87(m)(ii) also shows that even in
6
relation to indirect tax enactments, the benefit of
the scheme was intended to be given to those
against whom the amount of duties, cess, interest,
fine or penalty were due or payable upto 31.3.1998.
Viewed in this context it is quite illogical to exclude
the persons like the petitioners from whom the
amount of duties, cess, interest, fine, penalty, etc.
were due as on 31.3.1998 but to whom Demand
Notices were issued after 31.3.1998. In our opinion,
the distinction made between those who were in
arrears of indirect taxes as on 31.3.1998 only on
the basis of the date of issuance of notice is wholly
arbitrary and irrational. The classification sought
to be made between those Demand Notices or Show
Cause Notices may have been issued on or before
31st day of March, 1998 and those to whom such
notices were issued after 31.3.1998 is per se
unreasonable and has no nexus with the purpose of
the legislation, namely to provide a quick and
voluntary settlement of tax dues outstanding as on
31.3.1998.
The irrationality of the classification becomes more
pronounced when the issue is examined in the
backdrop of the fact that the scheme was made
applicable with effect from 1.9.1998, and in terms
of Sections 88 (amended) a declaration was
required to be filed on or after first day of
September, 1998 but on or before 31.1.1999. In our
opinion, all persons who were in arrears of direct
or indirect taxes as on 31.3.1998 constituted one
class and no discrimination could have been made
among them by introducing an artificial
classification with reference to the date of Demand
Notice or Show Cause Notice. All of them should
have been treated equally and made eligible for
availing benefit under the Scheme subject to
compliance of conditions contained in other
provisions of the Scheme.”
7
4) We will take Civil Appeal No. 2960 of 2006 as the
lead matter. The facts of the case, in brief, are hereunder:
The respondent is engaged in the manufacture of
textile fabrics. The team of Preventive Officers of the
Central Excise, Ahmedabad-I conducted a surprise
inspection of the premises of the factory on 5.9.1997. The
Revenue Officers examined the statutory Central Excise
Records and physically verified the stocks at various stages
of manufacturing in the presence of two independent
panchas and respondent no. 2, under the Panchnama dated
5.9.1997. The Revenue Officers found that the respondents
have cleared the Man Made Fabric admeasuring 38,726 l.m.
of `5,38,449/- without the payment of excise duty of
`84,290/-. In this regard, the Statement of respondent no. 2
was recorded on 5.9.1997 under Section 14 of the Central
Excise Act, 1944 (hereinafter referred to as “the Excise
Act”). The respondent no. 2, in his Statement has admitted
the processing of the said fabric in his factory, after
registering it in the lot register, and its subsequent
clandestine removal without payment of the excise duty.
Accordingly, a Show Cause Notice dated 06.01.1999 was
issued to the respondents demanding a duty of `84,290/-
8
under Section 11A of the Excise Act along with an equal
amount of penalty under Section 11AC of the Excise Act,
and further penalty under Rule 173 Q of the Central Excise
Rules, 1944 [hereinafter referred to as “the Excise Rules”]
and interest under Section 11AB of the Excise Act for non-
payment of excise duty on clandestine clearance of the said
fabrics. Further, the Respondent no. 2 was also asked to
show cause as to why penalty under Section 209 A of the
Excise Rules should not be imposed on him for his active
involvement in acquiring, possession, removal, concealing,
selling and dealing of the excisable goods, which are liable
to be confiscated under the Excise Act. In the meantime, the
Scheme was introduced by the Hon’ble Finance Minister
through the 1998 Budget, which was contained in the
Finance (No.2) Act of 1998. The Scheme was made
applicable to tax arrears outstanding as on 31.3.1998 under
the direct as well as indirect tax enactments. Originally, the
benefits of the Scheme could be availed by any eligible
assessee by filing a declaration of his arrears under Section
88 of the Act on or after 1.9.1998 and on or before
31.12.1998. However, the period for declaration under the
Scheme was extended upto 31.1.1999 by the Ordinance
9
dated 31.12.1998. However, the cut-off date prescribed by
the Scheme under Section 87 (m) (ii) (a) and (b) of the Act
for availing the benefits under the Scheme excluded the
respondents from its ambit. Being aggrieved, the
respondents filed a Special Civil Application before the High
Court of Gujarat, inter-alia, seeking a writ to strike down the
words “on or before the 31st day of March 1998” occurring
in Section 87 (m) (ii) of the Finance Act, 1998. They had
further prayed for issuance of an appropriate direction to the
petitioner to give them benefit of the Scheme, 1998 in
respect of tax arrears under tax enactments for which Show
Cause Notices or Demand Notices were issued on or after
31.03.1998. The High Court, vide its impugned judgment
and order dated 25.7.2005, struck down the expression “on
or before the 31st day of March, 1998” in Section 87 (m) (ii)
(b) as being unconstitutional. The High Court further
directed the competent authority to entertain and decide the
declarations made by the assessees in terms of the Scheme.
Aggrieved by the Judgment and Order, the Revenue is
before us in this appeal.
10
5) The Scheme was introduced by Finance (No.2) Act
and is contained in Chapter IV of the Act. The Scheme is
known as Kar Vivad Samadhana Scheme, 1998. It was in
force between 1.9.1998 and 31.1.1999. Briefly, the Scheme
permits the settlement of “tax arrear” as defined in Section
87(m) of the Act. It is necessary to extract the relevant
provisions of the Scheme:
“Section 87 – Definitions.
In this Scheme, unless the context otherwise
requires,
***
h) “direct tax enactment” means the Wealth-
tax Act, 1957 or the Gift-tax Act, 1958 or the
Income-tax Act, 1961 or the Interest-tax Act,
1974 or the Expenditure-tax Act, 1987;
(j) “indirect tax enactment” means the
Customs Act, 1962 or the Central Excise Act,
1944 or the Customs Tariff Act, 1975 or the
Central Excise Tariff Act, 1985 or the relevant
Act and includes the rules or regulations made
under such enactment;
***
(m) “tax arrear” means,-
(i) in relation to direct tax enactment, the
amount of tax, penalty or interest
determined on or before the 31st day of
March, 1998 under that enactment in
respect of an assessment year as
modified in consequence of giving effect
11
to an appellate order but remaining
unpaid on the date of declaration;
(ii) in relation to indirect tax enactment,-
(a) the amount of duties (including
drawback of duty, credit of duty or any
amount representing duty), cesses,
interest, fine or penalty determined as
due or payable under that enactment as
on the 31st day of March, 1998 but
remaining unpaid as on the date of
making a declaration under section 88;
or
(b) the amount of duties (including
drawback of duty, credit of duty or any
amount representing duty), cesses,
interest, fine or penalty which
constitutes the subject matter of a
Demand Notice or a show-cause notice
issued on or before the 31st day of
March, 1998 under that enactment but
remaining unpaid on the date of
making a declaration under section 88,
but does not include any demand
relating to erroneous refund and where
a show-cause notice is issued to the
declarant in respect of seizure of goods
and demand of duties, the tax arrear
shall not include the duties on such
seized goods where such duties on the
seized goods have not been quantified.
Explanation.–Where a declarant has already
paid either voluntarily or under protest, any
amount of duties, cesses, interest, fine or
penalty specified in this sub-clause, on or
before the date of making a declaration by
him under section 88 which includes any
deposit made by him pending any appeal or in
pursuance of a Court order in relation to such
duties, cesses, interest, fine or penalty, such
12
payment shall not be deemed to be the amount
unpaid for the purposes of determining tax
arrear under this sub-clause;
Section 88 – Settlement of tax payable
Subject to the provisions of this Scheme,
where any person makes, on or after the 1st
day of September, 1998 but on or before the
31st day of December, 1998, a declaration to
the designated authority in accordance with
the provisions of section 89 in respect of tax
arrear, then, not-withstanding anything
contained in any direct tax enactment or
indirect tax enactment or any other provision
of any law for the time being in force, the
amount payable under this Scheme by the
declarant shall be determined at the rates
specified hereunder, namely …”
6) The Scheme, as contained in Chapter IV of the Act, is
a Code in itself and statutory in nature and character. While
implementing the scheme, liberal construction may be given
but it cannot be extended beyond conditions prescribed in
the statutory scheme. In Regional Director, ESI Corpn. v.
Ramanuja Match Industries, (1985) 1 SCC 218, this Court
observed:
“10 … We do not doubt that beneficial legislations
should have liberal construction with a view to
implementing the legislative intent but where such
beneficial legislation has a scheme of its own there
is no warrant for the Court to travel beyond the
scheme and extend the scope of the statute on the
13
pretext of extending the statutory benefit to those
who are not covered by the scheme.”
7) In Hemalatha Gargya v. Commissioner of Income
Tax, A.P., (2003) 9 SCC 510, this Court has held:
“10. Besides, the Scheme has conferred a benefit
on those who had not disclosed their income
earlier by affording them protection against the
possible legal consequences of such non-disclosure
under the provisions of the Income Tax Act. Where
the assessees seek to claim the benefit under the
statutory scheme they are bound to comply strictly
with the conditions under which the benefit is
granted. There is no scope for the application of
any equitable consideration when the statutory
provisions of the Scheme are stated in such plain
language.”
8) In Union of India v. Charak Pharmaceuticals (India)
Ltd., (2003) 11 SCC 689, this Court has observed thus:
“8. If benefit is sought under a scheme, like KVSS,
the party must fully comply with the provisions of
the Scheme. If all the requirements of the Scheme
are not met then on principles of equity, courts
cannot extend the benefit of that Scheme.”
9) In Deepal Girishbhai Soni v. United India Insurance
Co. Ltd., (2004) 5 SCC 385, at page 404, this Court observed
as :
“53. Although the Act is a beneficial one and, thus,
deserves liberal construction with a view to
implementing the legislative intent but it is trite
that where such beneficial legislation has a scheme
14
of its own and there is no vagueness or doubt
therein, the court would not travel beyond the same
and extend the scope of the statute on the pretext of
extending the statutory benefit to those who are not
covered thereby. (See Regional Director, ESI
Corpn. v. Ramanuja Match Industries)”
10) In Maruti Udyog Ltd. v. Ram Lal, (2005) 2 SCC 638,
this Court has observed:
“A beneficial statute, as is well known, may
receive liberal construction but the same cannot be
extended beyond the statutory scheme. (See
Deepal Girishbhai Soni v. United India Insurance
Co. Ltd.)”
11) In Pratap Singh v. State of Jharkhand, (2005) 3 SCC
551, this Court has held:
“93. We are not oblivious of the proposition that a
beneficent legislation should not be construed so
liberally so as to bring within its fore a person who
does not answer the statutory scheme. (See Deepal
Girishbhai Soni v. United India Insurance Co.
Ltd.)”
12) The object and purpose of the Scheme is to minimize
the litigation and to realize the arrears of tax by way of
Settlement in an expeditious manner. The object of the
Scheme can be gathered from the Speech of the Finance
Minister, whilst presenting the 1998-99 Budget:
15
“Litigation has been the bane of both direct
and indirect taxes. A lot of energy of the
Revenue Department is being frittered in
pursuing large number of litigations pending
at different levels for long periods of time.
Considerable revenue also gets locked up in
such disputes. Declogging the system will not
only incentivise honest taxpayers, it would
enable the Government to realize its
reasonable dues much earlier but coupled
with administrative measures, would also
make the system more user-friendly. I
therefore, propose to introduce a new scheme
called Samadhan. he scheme would apply to
both direct taxes and indirect taxes and offer
waiver of interest, penalty and immunity from
prosecution on payment of arrears of direct
tax at the current rates. In respect of indirect
tax, where in recent years the adjustment of
rates has been very sharp, an abatement of 50
per cent of the duty would be available
alongwith waiver of interest, penalty and
immunity from prosecution”
13) The Finance Minister, whilst replying to the debate
after incorporating amendments to the Finance (No. 2) Bill,
1998, made a Speech dated 17.7.1998. The relevant portion
of the Speech, which highlights the object or purpose of the
Scheme, is extracted below:
“The Kar Vivad Samadhan Scheme has evoked a
positive response from a large number of
organizations and tax professionals. Hon’ble
Members of Parliament have also taken a keen
interest in the scheme. The lack of clarity in regard
to waiver of interest and penalty in relation to
settlement of tax arrears under the indirect tax
16
enactments is being taken care of by rewording the
relevant clauses of the Finance Bill. I have also
carefully considered the suggestions emanating
from various quarters including the Standing
Committee on Finance to extend the scope of this
scheme so as to included tax disputes irrespective
of the fact whether the tax arrears are existing or
not. As you have seen from the scheme, it has two
connected limbs-“Kar” and “Vivad”. Collection of
tax arrears is as important as settlement of
disputes. The scheme is not intended to settle
disputes when there is no corresponding gain to
the other party. The basic objective of the scheme
cannot be altered.”
14) This Court, in plethora of cases, has discussed the
object and purpose of this Scheme. In Sushila Rani v.
Commissioner of Income Tax, (2002) 2 SCC 697, this Court
observed:
“5. KVSS was introduced by the Central
Government with a view to collect revenues
through direct and indirect taxes by avoiding
litigation. In fact the Finance Minister while
explaining the object of KVSS stated as follows:
“Litigation has been the bane of both direct
and indirect taxes. A lot of energy of the
Revenue Department is being frittered in
pursuing large number of litigations pending at
different levels for long periods of time.
Considerable revenue also gets locked up in
such disputes. Declogging the system will not
only incentivise honest taxpayers, it would
enable the Government to realize its
reasonable dues much earlier but coupled with
administrative measures, would also make the
system more user-friendly….”
17
15) In Killick Nixon Ltd., Mumbai v. Deputy
Commissioner of Income Tax, Mumbai, (2003) 1 SCC 145,
this Court has held:
“9. The scheme of KVSS is to cut short litigations
pertaining to taxes which were frittering away the
energy of the Revenue Department and to
encourage litigants to come forward and pay up a
reasonable amount of tax payable in accordance
with the Scheme after declaration thereunder.”
16) In CIT v. Shatrusailya Digvijaysingh Jadeja, (2005) 7
SCC 294, this Court has observed:
“11. The object of the Scheme was to make an offer
by the Government to settle tax arrears locked in
litigation at a substantial discount. It provided that
any tax arrears could be settled by declaring them
and paying the prescribed amount of tax arrears,
and it offered benefits and immunities from penalty
and prosecution. In several matters, the
Government found that a large number of cases
were pending at the recovery stage and, therefore,
the Government came out with the said Scheme
under which it was able to unlock the frozen assets
and recover the tax arrears.
12. In our view, the Scheme was in substance a
recovery scheme though it was nomenclatured as a
“litigation settlement scheme” and was not similar
to the earlier Voluntary Disclosure Scheme. As
stated above, the said Scheme was a complete code
by itself. Its object was to put an end to all pending
matters in the form of appeals, references, revisions
and writ petitions under the IT Act/WT Act.”
18
17) In Master Cables (P) Ltd. v. State of Kerala, (2007) 5
SCC 416, this Court has held:
“8. The Scheme was enacted with a view to achieve
the purposes mentioned therein viz. recovery of tax
arrears by way of settlement. It applies provided
the conditions precedent therefor are satisfied.”
18) Further, the object of the Scheme and its application to
Customs and Central Excise cases involving arrears of taxes
has been explained in detail by the Trade Notice No. 74/98
dated 17.8.1998 issued by the Commissioner of Central
Excise and Customs, Ahmedabad-I. The relevant portion of
the said Trade Notice has been extracted below:
OFFICE OF THE COMMISSIONER OF CENTRAL
EXCISE & CUSTOMS: AHMEDABAD-1
Trade Notice No.: 74/98
Basic No.: 34/98
Sub: Kar Vivad Samadhan Scheme-1998
1. As a part of this year’s Budget proposals, the
Finance Minister had announced amongst others a
scheme termed “Kar Vivad Samadhan Scheme”
essentially to provide quick and voluntary
settlement of tax dues. The basic aim of introducing
this scheme has been to bring down the pending
litigation/disputes between the Dept. and the
assessees- both on the direct tax side and indirect
tax side- as well as to speedily realize the arrears of
taxes (including fines, penalties & interest)
considered due from various parties which are
locked up in various disputes.
19
2. Essentially, these disputed cases involving
duties, cesses, fine, penalty and interest on Customs
and Central Excise side are proposed to be settled –
case by case – if the concerned party agrees to pay
up in each case a particular amount (which may be
termed settled amount) calculated as per provisions
of the scheme, following the laid procedure.
Whereas the department gets immediate revenue
and it results in reduction in pending disputes which
may be prolonged otherwise before final
assessment, the party also gets significant benefit by
way of reduced payments instead of the disputed
liability and immunity from prosecution.
3…
3.1. The relevant extracts containing provisions of
the Samadhan Scheme as incorporated in the
enacted Finance (No. 2) Act, 98 (21 of 1998) are
enclosed herewith. The salient features of the
Samadhan Scheme in relation to Indirect Taxes are
briefly discussed below:-
4. APPLICABILITY OF THE SCHEME
A. CATEGORY OF CASES TO WHICH SCHEME
APPLICABLE
4.1. The Scheme is limited to Customs or Central
Excise cases involving arrears of taxes (including
duties, cesses, fine, penalty of (sic.) interest) which
were not paid up as on 31.3.98 and are still in
arrear and in dispute as on date of declaration (as
envisaged in section 98 (sic.) of the aforesaid Act).
The dispute and the case may be still at the stage of
Show Cause Notice or Demand Notice (other than
those of erroneous refunds) when party come (sic.)
forward and makes a declaration for claiming the
benefits of the scheme, or the duties, fine, penalty or
interest after the issue of show cause/ Demand
Notice may have been determined, but the assessee
is disputing the same in appellate forums/courts etc
and the amounts due have not been paid up.
……
20
4.3. It is pertinent to note that when a party comes
forward for taking the benefits of the Samadhan
Scheme and makes suitable declaration as provided
thereunder (discussed further later) there must be
dispute pending between the party and the Dptt.
(Section 98(ii)(c) of Finanace Act refers). In other
words, if in any case, there is no Show Cause Notice
pending nor the party is in dispute at the
appellate/revision stage nor there is an admitted
petition in the court of law where parties is
contesting the stand of the Dptt., but certain arrears
of revenue due in case, are pending payment, the
benefits of the scheme will not be available in such
case.
B. TYPES OF REVENUE ARREARS CASES
COVERED BY THE SCHEME
4.4. The intention of the scheme is to cover almost
all categories of cases involving revenue in arrears
and in dispute on Customs and Central Excise side
(with few exceptions mentioned specifically in
section 95 of Finance Act). The cases covered may
involved duty, cess, fine, penalty or interest –
whether already determined as due or yet to be
determined (in cases where show cause/Demand
Notice is yet to be decided). The term duty has been
elaborated to include credit of duty, drawback of
duty or any amount representing as duty. In other
words, the scheme would extend not only disorted
(sic.) cases of duties leviable under customs or
Central Excise Acts and relevant tariff Acts or
various specified Act….
4.5. The nature of cases covered will vary
depending upon contraventions/offence involved,
but essentially it must involve quantified duty/cess
and or penalty, fine or interest. Simple Show Cause
Notices which do not quantify any amount of duty
being demanded and which propose only penal
action – like confiscation of ceased goods and or
imposition of penalty for violation of statutory
provisions/collusion/abetment etc. thus will not be
covered by the scheme. However, whenever
21
quantified amount of duties are demanded and
penal action also proposed for various violations
even at Show Cause Notice stage benefits under the
scheme for such Show Cause Notices can be
claimed.
19) In view of the aforementioned Trade Notice, it is clear
that the object of the Scheme with reference to indirect tax
arrears is to bring down the litigation and to realize the
arrears which are considered due and locked up in various
disputes. This Scheme is mutually beneficial as it benefits
the Revenue Department to realize the duties, cess, fine,
penalty or interest assessed but not paid in an expeditious
manner and offers assessee to pay disputed liability at
discounted rates and also afford immunity from prosecution.
It is a settled law that the Trade Notice, even if it is issued by
the Revenue Department of any one State, is binding on all
the other departments with equal force all over the country.
The Trade Notice guides the traders and business community
in relation to their business as how to regulate it in
accordance with the applicable laws or schemes. In Steel
Authority of India v. Collector of Customs, (2001) 9 SCC
198, this Court has held:
22
“3. Learned counsel for the Revenue submitted that
this trade notice had been issued only by the
Bombay Customs House. It is hardly to be supposed
that the Customs Authorities can take one stand in
one State and another stand in another State. The
trade notice issued by one Customs House must
bind all Customs Authorities and, if it is erroneous,
it should be withdrawn or amended, which in the
instant case, admittedly, has not been done.”
20) In Purewal Associates Ltd. v. CCE, (1996) 10 SCC
752, this Court has held:
“10. We must take it that before issuing a trade
notice sufficient care is taken by the authorities
concerned as it guides the traders to regulate their
business accordingly. Hence whatever is the legal
effect of the trade notice as contended by the
learned Senior Counsel for the respondent, the last
portion of the above trade notice cannot be faulted
as it is in accordance with the views expressed by
this Court. Though a trade notice as such is not
binding on the Tribunal or the courts, it cannot be
ignored when the authorities take a different stand
for if it was erroneous, it would have been
withdrawn.”
21) However, the Trade Notice, as such, is not binding on
the Courts but certainly binding on the assessee and can be
contested by the assessee. (see CCE v. Kores (India) Ltd.,
(1997) 10 SCC 338; Union of India v. Pesticides
Manufacturing and Formulators Association of India,
23
(2002) 8 SCC 410; and CCE v. Jayant Dalal (P) Ltd., (1997)
10 SCC 402 )
22) Shri. R.P. Bhatt, learned senior counsel, has appeared
for the Revenue and the respondents in civil appeal no. 5616
of 2006 are represented by Shri. Paras Kuhad, learned senior
counsel.
23) Learned senior counsel Shri. R.P. Bhatt, submits that
an assessee can claim benefits under the Scheme only when
his tax arrears are determined and outstanding, or a Show
Cause Notice has been issued to him, prior to or on
31.3.1998 in terms of Section 87 (m) (ii) (a) and (b) of the
Act. He further submits that the determination of the arrears
can be arrived at by way of adjudication or by issuance of
the Show Cause Notice to the assessee. He submits that once
this condition is satisfied, then the assessee is required to
submit a declaration under Section 88 of the Act on or after
1.9.1998 and on or before 31.1.1999, provided that the
arrears are unpaid at the time of filing the declaration. He
further submits that the present Scheme is statutory in
character and its provision should be interpreted strictly and
24
those who do not fulfill the conditions of eligibility
contained in the Scheme are not allowed to avail the benefit
under the Scheme. In support of his contention, he has relied
on the Judgment of this Court in Union of India v. Charak
Pharmaceuticals (India) Ltd., (2003) 11 SCC 689. Learned
senior counsel, relying on the, Speech of the Finance
Minister dated 17.7.1998, [232 ITR 1998 (14)] asserts that
the purpose or the basic object of the Scheme is the
collection of tax and settlement of disputes and it is intended
to be beneficial to both assessee as well as the Revenue. He
further contends that the determination of arrears or issuance
of Show Cause Notice before or on 31.3.1998 is a
substantive requirement for eligibility under the Scheme and
filing of declaration of unpaid arrears under Section 88 of
the Act is the procedural formality for availing the benefits
of the Scheme. Therefore, he submits that the extension of
time to file declaration under the Scheme on or before
31.1.1999 is just a procedural formality and in no manner
discriminatory, so as to violate the mandate of Article 14 of
the Constitution. Learned senior counsel, on the strength of
Trade Notice dated 17.8.1998 and the observations made by
this Court in the case of Charak Pharmaceuticals (supra),
25
further submits that, in cases of Central Excise and Customs,
the Scheme is limited only to two categories of cases: firstly,
the arrears of tax which are assessed as on 31.3.1998 and are
still unpaid and in dispute on the date of filing of
declaration; secondly, the arrears for which, the Show Cause
Notice or Demand Notice has been issued by the Revenue as
on 31.3.1998 and which are still unpaid and are in dispute on
the date of filing of declaration. He submits that the said
Trade Notice indicates that the concept of actual
determination or assessment has been extended to the Show
Cause Notice in order to grant the benefit of the Scheme to
duty demanded in such Show Cause Notice. He submits that
the Show Cause Notice is in the nature of tentative charge,
which has been included in the ambit of the Scheme in order
to realize the tax/duty dues but not yet paid. He submits that
the Scheme contemplates the conferring of the benefits only
on the quantified duty either determined by way of
adjudication or demanded in a Show Cause Notice. Learned
senior counsel contends that in the present case, the Show
Cause Notice demanding the duty was issued to the
respondents only on 6.1.1999 and, therefore, the duty was
determined as quantified only on the issuance of the Show
26
Cause Notice. Hence, respondents are not eligible to avail
the benefit under this Scheme. Learned senior counsel
submits that the cut-off date of on or before 31.3.1998
prescribed by Section 87 (m) (ii) (b) cannot be considered as
discriminatory or unreasonable only on the basis that it
creates two classes of assessees unless it appears on the face
of it as capricious or malafide. The cut-off date of 31.3.1998
in indirect tax enactments under the Scheme has been
purposively chosen in order to maintain uniformity with
direct tax enactments where assessment year ends on the
said date. In support of his submission, learned senior
counsel relies on Union of India v. M.V. Valliappan, (1999)
6 SCC 259, Sudhir Kumar Consul v. Allahabad Bank, (2011)
3 SCC 486 and Government of Andhra Pradesh v. N.
Subbarayudu, (2008) 14 SCC 702. He further submits that
the present Scheme extends the benefit of reduction of tax
and does not deprive or withdraw any existing benefit to the
assessees. He also submits that if certain section of assessees
is excluded from its scope by virtue of cut-off date, they
cannot challenge the entire Scheme merely on ground of
their exclusion.
27
24) Per contra, Shri. Paras Kuhad, learned senior counsel,
submits that the Scheme became effective from 1.09.1998
and remained operative till 31.1.1999. However, the arrears
in question should relate to the period prior to or as on
31.3.1998 which is the essence of the Scheme or the
qualifying condition. He submits that Section 87 (f) defines
`disputed tax’ as the total tax determined and payable, in
respect of an assessment year under any direct tax enactment
but which remains unpaid as on the date of making the
declaration under Section 88. In this regard, he submits that
the factum of arrears exists even on the date of filing of
declaration. He contends that the Finance Act uses the
expression `determination’ instead of `assessment’ in order
to include the cases of self assessment. He submits that in
the case of direct tax and payment of advance tax, the
process of determination arises before the assessment. He
further argues that the purpose of the Scheme is to reduce
litigation and recover revenue arrears in an expeditious
manner. The classification should be in order to attain these
objectives or purpose. The classification of assessees on the
basis of date of issuance of Show Cause Notice or Demand
Notice is unreasonable and has no nexus with the purpose of
28
the legislation. He further submits that all the assessees who
are in arrears of tax on or before 31.3.1998 formed one class
but further classification among them just on the basis of
issuance of Show Cause Notice is arbitrary and
unreasonable. The criterion of date of issuance of Show
Cause Notice is per se unreasonable as based on fortuitous
circumstances. It is neither objective nor uniformly
applicable. He further submits that the High Court has
correctly struck down the words “on or before the 31st day of
March 1998” in Section 87 (m) (ii) (b) and, thereby, created
a right in favour of assessee to claim benefit under the
Scheme for all arrears of tax arising as on 31.3.1998. He
further submits that by application of the doctrine of
severability, the Scheme can operate as a valid one for all
purposes. Learned senior counsel submits that the carving
out of sub-group only on the basis of whether Show Cause
Notice has been issued or not and the Scheme being made
effective from prospective date would render the operation
or availability of Scheme variable or uncertain, depending
on case to case. He further submits that this has no relation
with the purpose of the Scheme which is beneficial in nature.
He further submits that the date of issuance of Show Cause
29
Notice is not controlled by the assessee. Therefore, it is
fortuitous circumstance which is per se unreasonable. The
objective of the doctrine of classification is that the unequal
should not be treated equally in order to achieve equality.
The basis for classification in terms of Article 14 should be
intelligible criteria which should have nexus with the object
of the legislation. He argues that the criterion of date of
issuance of Show Cause Notice is just a fortuitous factor
which is variable, uncertain, and fateful and cannot be
considered as intelligible criteria for the purpose of Article
14 of the Constitution. He submits, however, criterion for
classification is the prerogative of the Parliament but it
should be certain and not vacillating like date of issuance of
Show Cause Notice. He further submits that the hardships
arising out of normal cut-off criteria is acceptable and
justified but when injustice arises out of operation of the
provision which prescribe criteria which is variable for same
class of persons for availing the benefit of the Scheme, is
against the mandate of Article 14 of the Constitution. He
relies on the decision of this Court in State of Jammu and
Kashmir v. Triloki Naths Khosa, (1974) 1 SCC 19 in order to
buttress his argument that the classification is a subsidiary
30
rule to the Fundamental Right of Equal Protection of Laws
and should not be used in a manner to submerge and drown
the principle of equality. Learned senior counsel contends
that the purpose of the Scheme is to end the dispute qua
assessee, who is in arrears of taxes and has not paid such
arrears. He further submits that in case of Central Excise, the
excise duty is determined on removal of goods but the actual
payment is made later and also, in case of self assessment,
the tax arrears are determined before the actual payment or
possible dispute. He submits that as per Rule 173 F of the
Excise Rules, the assessee is required to determine the duty
payable by self assessment of the excisable goods before
their removal from the factory. He further submits that the
methodology of re-assessment under Section 11 A of the
Excise Act, rate of product approved before hand under
Section 173B and ad valorem for value of goods under
Section 173C contemplates the determination of duty
payable by the assessee. In this regard, he submits that the
word `determined’ has been used purposively and
deliberately in the Scheme instead of `assessment’. He
further argues that in view of the object of the Scheme to
collect revenue, the Scheme envisages two elements: first,
31
the determination of the amount of tax due and payable on or
before 31.3.1998 and, second, whether the tax so determined
is in arrears on date of declaration under Section 88. In other
words, he submits that the tax so determined on or before
31.3.1998 should be in arrears on the date of declaration
under Section 88. Learned senior counsel, in support of his
submissions, relies on the decision of this Court in
Government of India v. Dhanalakshmi Paper and Board
Mills, 1989 Supp. (1) SCC 596.
25) Taxation is a mode of raising revenue for public
purposes. In exercise of the power to tax, the purpose
always is that a common burden shall be sustained by
common contributions, regulated by some fixed general
rules, and apportioned by the law according to some uniform
ratio of equality.
26) The word `duty’ means an indirect tax imposed on the
importation or consumption of goods. `Customs’ are duties
charged upon commodities on their being imported into or
exported from a country.
27) The expression `Direct Taxes’ include those assessed
upon the property, person, business, income, etc., of those
32
who are to pay them, while indirect taxes are levied upon
commodities before they reach the consumer, and are paid
by those upon whom they ultimately fall, not as taxes, but as
part of the market price of the commodity. For the purpose
of the Scheme, indirect tax enactments are defined as
Customs Act, 1962, Central Excise Act, 1944 or the
Customs Tariff Act, 1985 and the Rules and Regulations
framed thereunder.
28) The Scheme defines the meaning of the expression
`Tax Arrears’, in relation to indirect tax enactments. It would
mean the determined amount of duties, as due and payable
which would include drawback of duty, credit of duty or any
amount representing duty, cesses, interest, fine or penalty
determined. The legislation, by using its prerogative power,
has restricted the dues of duties quantified and payable as on
31st day of March, 1998 and remaining unpaid till a
particular event has taken place, as envisaged under the
Scheme. The date has relevance, which aspect we would
elaborate a little later. The definition is inclusive definition.
It also envisages instances where a Demand Notice or Show
Cause Notice issued under indirect tax enactment on or
33
before 31st day of March, 1998 but not complied with the
demand made to be treated as tax arrears by legal fiction.
Thus, legislation has carved out two categories of assessees
viz. where tax arrears are quantified but not paid, and where
Demand Notice or Show Cause Notice issued but not paid.
In both the circumstances, legislature has taken cut off date
as on 31st day of March 1998. It cannot be disputed that the
legislation has the power to classify but the only question
that requires to be considered is whether such classification
is proper. It is now well settled by catena of decisions of this
Court that a particular classification is proper if it is based on
reason and not purely arbitrary, caprice or vindictive. On the
other hand, while there must be a reason for the
classification, the reason need not be good one, and it is
immaterial that the Statute is unjust. The test is not wisdom
but good faith in the classification. It is too late in the day to
contend otherwise. It is time and again observed by this
Court that the Legislature has a broad discretion in the
matter of classification. In taxation, `there is a broader power
of classification than in some other exercises of legislation’.
When the wisdom of the legislation while making
classification is questioned, the role of the Courts is very
34
much limited. It is not reviewable by the Courts unless
palpably arbitrary. It is not the concern of the Courts
whether the classification is the wisest or the best that could
be made. However, a discriminatory tax cannot be sustained
if the classification is wholly illusory.
29) Kar Vivad Samadhan Scheme is a step towards the
settlement of outstanding disputed tax liability. The Scheme
is a complete Code in itself and exhaustive of matter dealt
with therein. Therefore, the courts must construe the
provisions of the Scheme with reference to the language
used therein and ascertain what their true scope is by
applying the normal rule of construction. Keeping this
principle in view, let us consider the reasoning of the High
Court.
30) The tests adopted to determine whether a
classification is reasonable or not are, that the classification
must be founded on an intelligible differentia which
distinguishes person or things that are grouped together from
others left out of the groups and that the differentia must
have a rational relation to the object sought to be achieved
by Statute in question. The Legislature in relation to `tax
35
arrears’ has classified two groups of assessees. The first one
being those assessees in whose cases duty is quantified and
not paid as on the 31st day of March, 1998 and those
assessees who are served with Demand or Show Cause
Notice issued on or before the 31st day of March, 1998. The
Scheme is not made applicable to such of those assessees
whose duty dues are quantified but Demand Notice is not
issued as on 31st day of March, 1998 intimating the
assessee’s dues payable. The same is the case of the
assessees who are not issued with the Demand or Show
Cause Notice as on 31.03.1998. The grievance of the
assessee is that the date fixed is arbitrary and deprives the
benefit for those assessees who are issued Demand Notice or
Show Cause Notice after the cut off date namely 31st day of
March, 1998. The Legislature, in its wisdom, has thought it
fit to extend the benefit of the scheme to such of those
assessees whose tax arrears are outstanding as on
31.03.1998, or who are issued with the Demand or Show
Cause Notice on or before 31st day of March, 1998, though
the time to file declaration for claiming the benefit is
extended till 31.01.1999. The classification made by the
legislature appears to be reasonable for the reason that the
36
legislature has grouped two categories of assessees namely,
the assessees whose dues are quantified but not paid and the
assessees who are issued with the Demand and Show Cause
Notice on or before a particular date, month and year. The
Legislature has not extended this benefit to those persons
who do not fall under this category or group. This position
is made clear by Section 88 of the Scheme which provides
for settlement or tax payable under the Scheme by filing
declaration after 1st day of September, 1998 but on or before
the 31st day of December, 1998 in accordance with Section
89 of the Scheme, which date was extended upto
31.01.1999. The distinction so made cannot be said to be
arbitrary or illogical which has no nexus with the purpose of
legislation. In determining whether classification is
reasonable, regard must be had to the purpose for which
legislation is designed. As we have seen, while
understanding the Scheme of the legislation, the legislation
is based on a reasonable basis which is firstly, the amount of
duties, cesses, interest, fine or penalty must have been
determined as on 31.03.1998 but not paid as on the date of
declaration and secondly, the date of issuance of Demand or
Show Cause Notice on or before 31.03.1998, which is not
37
disputed but the duties remain unpaid on the date of filing of
declaration. Therefore, in our view, the Scheme 1998 does
not violate the equal protection clause where there is an
essential difference and a real basis for the classification
which is made. The mere fact that the line dividing the
classes is placed at one point rather than another will not
impair the validity of the classification. The concept of
Article 14 vis-a-vis fiscal legislation is explained by this
Court in several decisions.
31) In Amalgamated Tea Estates Co. Ltd. v. State of
Kerala, (1974) 4 SCC 415, this Court has held:
8. It may be pointed out that the Indian Income Tax
Act also makes a distinction between a domestic
company and a foreign company. But that
circumstance per se would not help the State of
Kerala. The impugned legislation, in order to get
the green light from Article 14, should satisfy the
classification test evolved by this Court in a catena
of cases. According to that test: (1) the
classification should be based on an intelligible
differentia and (2) the differentia should bear a
rational relation to the purpose of the legislation.
9. The classification test is, however, not inflexible
and doctrinaire. It gives due regard to the complex
necessities and intricate problems of government.
Thus as revenue is the first necessity of the State
and as taxes are raised for various purposes and
by an adjustment of diverse elements, the Court
grants to the State greater choice of classification
38
in the field of taxation than in other spheres.
According to Subba Rao, J.:
“(T)he courts in view of the inherent
complexity of fiscal adjustment of diverse
elements, permit a larger discretion to the
Legislature in the matter of classification,
so long as it adheres to the fundamental
principles underlying the said doctrine. The
power of the Legislature to classify is of
wide range and flexibility so that it can
adjust its system of taxation in all proper
and reasonable ways.” (Khandige Sham
Bhat v. Agricultural Income Tax Officer,
Kasargod; V. Venugopala Ravi Verma
Rajah v. Union of India.)
10. Again, on a challenge to a statute on the
ground of Article 14, the Court would generally
raise a presumption in favour of its
constitutionality. Consequently, one who
challenges the statute bears the burden of
establishing that the statute is clearly violative of
Article 14. “The presumption is always in favour of
the constitutionality of an enactment and the
burden is upon him who attacks it to show that
there is a clear transgression of the constitutional
principle.” (See Charanjit Lal v. Union of India.)
32) In Anant Mills Co. Ltd. v. State of Gujarat, (1975) 2
SCC 175, this Court has observed:
“25. It is well-established that Article 14 forbids
class legislation but does not forbid classification.
Permissible classification must be founded on an
intelligible differentia which distinguishes persons
or things that are grouped together from others left
out of the group, and the differentia must have a
rational relation to the object sought to be
achieved by the statute in question. In permissible
39
classification mathematical nicety and perfect
equality are not required. Similarity, not identity of
treatment, is enough. If there is equality and
uniformity within each group, the law will not be
condemned as discriminative, though due to some
fortuitous circumstances arising out of a peculiar
situation some included in a class get an
advantage over others, so long as they are not
singled out for special treatment. Taxation law is
not an exception to this doctrine. But, in the
application of the principles, the courts, in view of
the inherent complexity of fiscal adjustment of
diverse elements, permit a larger discretion to the
Legislature in the matter of classification so long
as it adheres to the fundamental principles
underlying the said doctrine. The power of the
Legislature to classify is of wide range and
flexibility so that it can adjust its system of taxation
in all proper and reasonable ways (see Ram
Krishna Dalmia v. Justice S.R. Tendolkar and
Khandige Sham Bhat v. Agricultural Income Tax
Officer, Kasaragod) Keeping the above principles
in view, we find no violation of Article 14 in
treating pending cases as a class different from
decided cases. It cannot be disputed that so far as
the pending cases covered by clause (i) are
concerned, they have been all treated alike.”
33) In Jain Bros v. Union of India, (1969) 3 SCC 311, the
issue before this Court was whether the clause (g) of Section
297(2) of the Income Tax Act, 1961 is violative of Article 14
of the Constitution inasmuch as in the matter of imposition
of penalty, it discriminated between two sets of assessees
with reference to a particular date, namely, those whose
assessment had been completed before 1st day of April 1962
40
and others whose assessment was completed on or after that
date. Whilst upholding the validity of the above provision,
this Court has observed:
“Now the Act of 1961 came into force on first
April 1962. It repealed the prior Act of 1922.
Whenever a prior enactment is repealed and new
provisions are enacted the Legislature invariably
lays down under which enactment pending
proceedings shall be continued and concluded.
Section 6 of the General Clauses Act, 1897, deals
with the effect of repeal of an enactment and its
provisions apply unless a different intention
appears in the statute. It is for the Legislature to
decide from which date a particular law should
come into operation. It is not disputed that no
reason has been suggested why pending
proceedings cannot be treated by the Legislature
as a class for the purpose of Article 14. The date
first April, 1962, which has been selected by the
Legislature for the purpose of clauses (f) and (g) of
Section 297(2) cannot be characterised as
arbitrary or fanciful.”
34) In Murthy Match Works v. CCE, (1974) 4 SCC 428,
this Court has observed:
“15. Certain principles which bear upon
classification may be mentioned here. It is true that
a State may classify persons and objects for the
purpose of legislation and pass laws for the
purpose of obtaining revenue or other objects.
Every differentiation is not a discrimination. But
classification can be sustained only it it is founded
on pertinent and real differences as distinguished
from irrelevant and artificial ones. The
constitutional standard by which the sufficiency of
41
the differentia which form a valid basis for
classification may be measured, has been
repeatedly stated by the Courts. If it rests on a
difference which bears a fair and just relation to
the object for which it is proposed, it is
constitutional. To put it differently, the means must
have nexus with the ends. Even so, a large latitude
is allowed to the State for classification upon a
reasonable basis and what is reasonable is a
question of practical details and a variety of
factors which the Court will be reluctant and
perhaps ill-equipped to investigate. In this
imperfect world perfection even in grouping is an
ambition hardly ever accomplished. In this context,
we have to remember the relationship between the
legislative and judicial departments of Government
in the determination of the validity of
classification. Of course, in the last analysis
Courts possess the power to pronounce on the
constitutionality of the acts of the other branches
whether a classification is based upon substantial
differences or is arbitrary, fanciful and
consequently illegal. At the same time, the question
of classification is primarily for legislative
judgment and ordinarily does not become a
judicial question. A power to classify being
extremely broad and based on diverse
considerations of executive pragmatism, the
Judicature cannot rush in where even the
Legislature warily treads. All these operational
restraints on judicial power must weigh more
emphatically where the subject is taxation.
…
19. It is well-established that the modern state, in
exercising its sovereign power of taxation, has to
deal with complex factors relating to the objects to
be taxed, the quantum to be levied, the conditions
subject to which the levy has to be made, the social
and economic policies which the tax is designed to
subserve, and what not. In the famous words of
Holmes, J. in Bain Peanut Co. v. Pinson2:
42
“We must remember that the machinery of
Government would not work if it were not
allowed a little play in its joints.”
35) In R.K. Garg v. Union of India, (1981) 4 SCC 675,
this Court has held:
7. Now while considering the constitutional
validity of a statute said to be violative of Article
14, it is necessary to bear in mind certain well
established principles which have been evolved by
the courts as rules of guidance in discharge of its
constitutional function of judicial review. The first
rule is that there is always a presumption in favour
of the constitutionality of a statute and the burden
is upon him who attacks it to show that there has
been a clear transgression of the constitutional
principles. This rule is based on the assumption,
judicially recognised and accepted, that the
legislature understands and correctly appreciates
the needs of its own people, its laws are directed to
problems made manifest by experience and its
discrimination are based on adequate grounds.
The presumption of constitutionality is indeed so
strong that in order to sustain it, the Court may
take into consideration matters of common
knowledge, matters of common report, the history
of the times and may assume every state of facts
which can be conceived existing at the time of
legislation.
“8. Another rule of equal importance is that laws
relating to economic activities should be viewed
with greater latitude than laws touching civil rights
such as freedom of speech, religion etc. It has been
said by no less a person than Holmes, J., that the
legislature should be allowed some play in the
joints, because it has to deal with complex
problems which do not admit of solution through
any doctrinaire or strait-jacket formula and this is
43
particularly true in case of legislation dealing with
economic matters, where, having regard to the
nature of the problems required to be dealt with,
greater play in the joints has to be allowed to the
legislature. The court should feel more inclined to
give judicial deference to legislative judgment in
the field of economic regulation than in other
areas where fundamental human rights are
involved.”
36) In Elel Hotels and Investments Ltd. v. Union of India,
(1989) 3 SCC 698, this Court has held:
“20. It is now well settled that a very wide latitude
is available to the legislature in the matter of
classification of objects, persons and things for
purposes of taxation. It must need to be so, having
regard to the complexities involved in the
formulation of a taxation policy. Taxation is not
now a mere source of raising money to defray
expenses of Government. It is a recognised fiscal
tool to achieve fiscal and social objectives. The
differentia of classification presupposes and
proceeds on the premise that it distinguishes and
keeps apart as a distinct class hotels with higher
economic status reflected in one of the indicia of
such economic superiority.”
37) In P.M. Ashwathanarayana Setty v. State of
Karnataka, (1989) Supp. (1) SCC 696, this Court has held:
“… the State enjoys the widest latitude where
measures of economic regulation are concerned.
These measures for fiscal and economic regulation
involve an evaluation of diverse and quite often
conflicting economic criteria and adjustment and
balancing of various conflicting social and
44
economic values and interests. It is for the State to
decide what economic and social policy it should
pursue and what discriminations advance those
social and economic policies.”
38) In Kerala Hotel and Restaurant Assn. v. State of
Kerala, (1990) 2 SCC 502, this Court has observed:
“24. The scope for classification permitted in
taxation is greater and unless the classification
made can be termed to be palpably arbitrary, it
must be left to the legislative wisdom to choose the
yardstick for classification, in the background of
the fiscal policy of the State….”
39) In Spences Hotel (P) Ltd. v. State of W.B., (1991) 2
SCC 154, this Court has observed:
“26. What then `equal protection of laws’ means
as applied to taxation? Equal protection cannot be
said to be denied by a statute which operates alike
on all persons and property similarly situated, or
by proceedings for the assessment and collection of
taxes which follows the course usually pursued in
the State. It prohibits any person or class of
persons from being singled out as special subject
for discrimination and hostile legislation; but it
does not require equal rates of taxation on
different classes of property, nor does it prohibit
unequal taxation so long as the inequality is not
based upon arbitrary classification. Taxation will
not be discriminatory if, within the sphere of its
operation, it affects alike all persons similarly
situated. It, however, does not prohibit special
legislation, or legislation that is limited either in
the objects to which it is directed, or by the
territory within which it is to operate. In the words
45
of Cooley: It merely requires that all persons
subjected to such legislation shall be treated alike,
under like circumstances and conditions, both in
the privileges conferred and in the liabilities
imposed. The rule of equality requires no more
than that the same means and methods be applied
impartially to all the constituents of each class, so
that the law shall operate equally and uniformly
upon all persons in similar circumstances. Nor
does this requirement preclude the classification of
property, trades, profession and events for taxation
— subjecting one kind to one rate of taxation, and
another to a different rate. “The rule of equality of
taxation is not intended to prevent a State from
adjusting its system of taxation in all proper and
reasonable ways. It may, if it chooses, exempt
certain classes of property from any taxation at all,
may impose different specific taxes upon different
trades and professions.” “It cannot be said that it
is intended to compel the State to adopt an iron
rule of equal taxation.” In the words of Cooley :21
“Absolute equality is impossible. Inequality of
taxes means substantial differences. Practical
equality is constitutional equality. There is no
imperative requirement that taxation shall be
absolutely equal. If there were, the operations
of government must come to a stop, from the
absolute impossibility of fulfilling it. The most
casual attention to the nature and operation of
taxes will put this beyond question. No
single tax can be apportioned so as to be
exactly just and any combination of taxes is
likely in individual cases to increase instead of
diminish the inequality.”
27. “Perfect equality in taxation has been said time
and again, to be impossible and unattainable.
Approximation to it is all that can be had. Under
any system of taxation, however, wisely and
carefully framed, a disproportionate share of the
public burdens would be thrown on certain kinds
of property, because they are visible and tangible,
while others are of a nature to elude vigilance. It is
46
only where statutes are passed which impose taxes
on false and unjust principle, or operate to
produce gross inequality, so that they cannot be
deemed in any just sense proportional in their
effect on those who are to bear the public charges
that courts can interpose and arrest the course of
legislation by declaring such enactments void.”
“Perfectly equal taxation”, it has been said, “will
remain an unattainable good as long as laws and
government and man are imperfect.” `Perfect
uniformity and perfect equality of taxation’, in all
the aspects in which the human mind can view it, is
a baseless dream.”
40) In Venkateshwara Theatre v. State of A.P., (1993) 3
SCC 677, this Court has held:
“21. Since in the present case we are dealing with
a taxation measure it is necessary to point out that
in the field of taxation the decisions of this Court
have permitted the legislature 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.”
41) In State of Kerala v. Aravind Ramakant Modawdakar,
(1999) 7 SCC 400, this Court has held:
“Coming to the power of the State in legislating
taxation law, the court should bear in mind that the
State has a wide discretion in selecting the persons
or objects it will tax and thus a statute is not open
to attack on the ground that it taxes some persons
or objects and not others. It is also well settled that
a very wide latitude is available to the legislature
in the matter of classification of objects, persons
47
and things for the purpose of taxation. While
considering the challenge and nature that is
involved in these cases, the courts will have to bear
in mind the principles laid down by this Court in
the case of Murthy Match Works v. CCE2 wherein
while considering different types of classifications,
this Court held: (AIR Headnote)
“[T]hat a pertinent principle of differentiation,
which was visibly linked to productive process,
had been adopted in the broad classification of
power-users and manual manufacturers. It was
irrational to castigate this basis as unreal. The
failure however, to mini-classify between large
and small sections of manual match
manufacturers could not be challenged in a
court of law, that being a policy decision of
Government dependent on pragmatic wisdom
playing on imponderable forces at work.
Though refusal to make rational classification
where grossly dissimilar subjects are treated by
the law violates the mandate of Article 14, even
so, as the limited classification adopted in the
present case was based upon a relevant
differentia which had a nexus to the legislative
end of taxation, the Court could not strike
down the law on the score that there was room
for further classification.”
42) In State of U.P. v. Kamla Palace, (2000) 1 SCC 557,
this Court has observed:
11. Article 14 does not prohibit reasonable
classification of persons, objects and transactions
by the legislature for the purpose of attaining
specific ends. To satisfy the test of permissible
classification, it must not be “arbitrary, artificial
or evasive” but must be based on some real and
substantial distinction bearing a just and
48
reasonable relation to the object sought to be
achieved by the legislature. (See Special Courts
Bill, 1978, Re, seven-Judge Bench; R.K. Garg v.
Union of India, five-Judge Bench.) It was further
held in R.K. Garg case that laws relating to
economic activities or those in the field of taxation
enjoy a greater latitude than laws touching civil
rights such as freedom of speech, religion etc. Such
a legislation may not be struck down merely on
account of crudities and inequities inasmuch as
such legislations are designed to take care of
complex situations and complex problems which
do not admit of solutions through any doctrinaire
approach or straitjacket formulae. Their Lordships
quoted with approval the observations made by
Frankfurter, J. in Morey v. Doud:
“In the utilities, tax and economic regulation
cases, there are good reasons for judicial
self-restraint if not judicial deference to
legislative judgment. The legislature after all
has the affirmative responsibility. The courts
have only the power to destroy, not to
reconstruct. When these are added to the
complexity of economic regulation, the
uncertainty, the liability to error, the
bewildering conflict of the experts, and the
number of times the Judges have been
overruled by events — self-limitation can be
seen to be the path to judicial wisdom and
institutional prestige and stability.”
12. The legislature gaining wisdom from historical
facts, existing situations, matters of common
knowledge and practical problems and guided by
considerations of policy must be given a free hand
to devise classes — whom to tax or not to tax,
whom to exempt or not to exempt and whom to give
incentives and lay down the rates of taxation,
benefits or concessions. In the field of taxation if
the test of Article 14 is satisfied by generality of
provisions the courts would not substitute judicial
wisdom for legislative wisdom.
49
43) In Aashirwad Films v. Union of India, (2007) 6 SCC
624, this Court has held:
14. It has been accepted without dispute that
taxation laws must also pass the test of Article 14
of the Constitution of India. It has been laid down
in a large number of decisions of this Court that a
taxation statute for the reasons of functional
expediency and even otherwise, can pick and
choose to tax some. Importantly, there is a rider
operating on this wide power to tax and even
discriminate in taxation that the classification thus
chosen must be reasonable. The extent of
reasonability of any taxation statute lies in its
efficiency to achieve the object sought to be
achieved by the statute. Thus, the classification
must bear a nexus with the object sought to be
achieved. (See Moopil Nair v. State of Kerala, East
India Tobacco Co. v. State of A.P., N. Venugopala
Ravi Varma Rajah v. Union of India, Asstt.
Director of Inspection Investigation v. A.B. Shanthi
and Associated Cement Companies Ltd. v. Govt. of
A.P.)
44) In Jai Vijai Metal Udyog Private Limited, Industrial
Estate, Varanasi v. Commissioner, Trade Tax, Uttar
Pradesh, Lucknow, (2010) 6 SCC 705, this Court held:
19. Now, coming to the second issue, it is
trite that in view of the inherent complexity of
fiscal adjustment of diverse elements, a wider
discretion is given to the Revenue for the purpose
of taxation and ordinarily different interpretations
of a particular tariff entry by different authorities
as such cannot be assailed as violative of Article
50
14 of the Constitution. Nonetheless, in our opinion,
two different interpretations of a particular entry
by the same authority on same set of facts, cannot
be immunised from the equality clause under
Article 14 of the Constitution. It would be a case of
operating law unequally, attracting Article 14 of
the Constitution.
45) To sum up, Article 14 does not prohibit reasonable
classification of persons, objects and transactions by the
Legislature for the purpose of attaining specific ends. To
satisfy the test of permissible classification, it must not be
“arbitrary, artificial or evasive” but must be based on some
real and substantial distinction bearing a just and reasonable
relation to the object sought to be achieved by the
Legislature. The taxation laws are no exception to the
application of this principle of equality enshrined in Article
14 of the Constitution of India. However, it is well settled
that the Legislature enjoys very wide latitude in the matter of
classification of objects, persons and things for the purpose
of taxation in view of inherent complexity of fiscal
adjustment of diverse elements. The power of the
Legislature to classify is of wide range and flexibility so that
it can adjust its system of taxation in all proper and
reasonable ways. Even so, large latitude is allowed to the
51
State for classification upon a reasonable basis and what is
reasonable is a question of practical details and a variety of
factors which the Court will be reluctant and perhaps ill-
equipped to investigate. It has been laid down in a large
number of decisions of this Court that a taxation Statute, for
the reasons of functional expediency and even otherwise,
can pick and choose to tax some. A power to classify being
extremely broad and based on diverse considerations of
executive pragmatism, the Judicature cannot rush in where
even the Legislature warily treads. All these operational
restraints on judicial power must weigh more emphatically
where the subject is taxation. Discrimination resulting from
fortuitous circumstances arising out of particular situations,
in which some of the tax payers find themselves, is not hit
by Article 14 if the legislation, as such, is of general
application and does not single them out for harsh treatment.
Advantages or disadvantages to individual assesses are
accidental and inevitable and are inherent in every taxing
Statute as it has to draw a line somewhere and some cases
necessarily fall on the other side of the line. The point is
illustrated by two decisions of this Court. In Khandige Sham
Bhat vs. Agricultural Income Tax Officer, Kasaragod and
52
Anr. (AIR 1963 SC 591). Travancore Cochin Agricultural
Income Tax Act was extended to Malabar area on November
01, 1956 after formation of the State of Kerala. Prior to that
date, there was no agricultural income tax in that area. The
challenge under Article 14 was that the income of the
petitioner was from areca nut and pepper crops, which were
harvested after November in every year while persons who
grew certain other crops could harvest before November and
thus escape the liability to pay tax. It was held that, that was
only accidental and did not amount to violation of Article14.
In Jain Bros. vs. Union of India (supra), Section 297(2)(g) of
Income Tax Act, 1961 was challenged because under that
Section proceedings completed prior to April, 1962 was to
be dealt under the old Act and proceedings completed after
the said date had to be dealt with under the Income Tax Act,
1961 for the purpose of imposition of penalty. April 01,
1962 was the date of commencement of Income Tax Act,
1961. It was held that the crucial date for imposition of
Penalty was the date of completion of assessment or the
formation of satisfaction of authority that such act had been
committed. It was also held that for the application and
implementation of the new Act, it was necessary to fix a date
53
and provide for continuation of pending proceedings. It was
also held that the mere possibility that some officer might
intentionally delay the disposal of a case could hardly be a
ground for striking down the provision as discriminatory.
46) In view of the above discussion, we cannot agree with
the findings and the conclusion reached by the High Court
for which, we have made reference earlier. We have also not
discussed in detail the individual issues raised by the learned
senior counsel for the respondent, since those were the issues
which were canvassed and accepted by the High Court.
Accordingly, the appeals are allowed. The impugned
common judgment and order is set aside. Costs are made
easy.
…………………………………………J.
[H.L. DATTU]
…………………………………………J.
[CHANDRAMAULI KR. PRASAD]
New Delhi,
November 03, 2011.
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