Taxation – Sales Tax – Madhya Pradesh Reorganisation Act, 2000 – ss.78, 79, 80, 85 and 86 – Bifurcation of erstwhile unified State of Madhya Pradesh into two States, namely, a reorganised State of Madhya Pradesh and the new State of Chhattisgarh in terms of the Madhya Pradesh Reorganisation Act – Effect of, on exemption or benefit of deferment of sales tax granted under Madhya Pradesh Commercial Tax Act, 1994 read with the applicable rules – Deeming provision envisaged in s.78 – Whether industrial units, which were granted exemption and were after bifurcation located in the reorganised State of Madhya Pradesh or the new State of Chhattisgarh, would continue to enjoy the benefit of exemption/deferment of tax in the other State while conducting inter-State transaction(s) from the State they are located to the new State of Chhattisgarh or the reorganised State of Madhya Pradesh, as the case may be – Held: No – The second part of s.78 incorporates a deeming fiction, the effect whereof, is that the laws enacted by State of Madhya Pradesh before the reorganisation would continue to apply to the areas forming part of the new State of Chhattisgarh and also the reorganised State of Madhya Pradesh, but within their territorial confines – The enactments or the laws in force in the unified State of Madhya Pradesh would continue to apply to the two States, not as one or the same enactment or law, but as two separate enactments or laws as applicable to two different States – On and from the appointed date of 1st November, 2000 any trade between the State of Chhattisgarh and the State of Madhya Pradesh and vice-versa would be inter-state trade and not intra-state trade – The deeming fiction and the provisions of the Reorganisation Act nowhere postulate that the trade would continue to remain intrastate trade and not inter-state trade between the two States – In fact, any deeming fiction to the said effect would have fallen afoul and would be contrary to Art. 286 of the Constitution as it stood before amendment on 16 th September, 2016 – Madhya Pradesh Commercial Tax Act, 1994 – Madhya Pradesh General Sales Tax Act, 1958 – s.12 – Central Sales Tax Act, 1956 – s.8(5) – Constitution of India – Art.286 (before amendment on 16-09-16) – Legal Fiction – Deeming provision.
Taxation – Inter-state Sales – Reorganisation of States – Creation of two new successor States from one State – Effect – Held: Creation of a new State can 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 Art.3 of the Constitution – Creation of the new political State must be given full legal effect – Constitution of India – Art.3. Re-organization of States – Theory of continuity of laws in new State after or post the reorganisation – Held: Principle of “clean state”, as it exists in the international law in relation to the state succession, which means that the successor state generally does not inherit the prior treaty obligations or rights of a predecessor state, is different from adjustment of territories which the Parliament undertakes and enforces u/Art. 3 – The reorganised states do not usually start as tabula rasa, rather they are successors of the preexisting erstwhile States – 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 – Madhya Pradesh Reorganisation Act, 2000 – ss. 78 and 79 – Bihar Reorganisation Act, 2000 – ss.84 and 85 – Doctrines /Principles – Theory of continuity of laws – Principle of “clean slate” – Constitution of India – Art.3.
Madhya Pradesh Reorganisation Act, 2000 – s.85 – Meaning and effect of the primacy given to provisions of the Reorganisation Act in terms of s.85 – Held: s.85 of the Reorganisation Act states that provisions of the said enactment shall have effect notwithstanding anything inconsistent contained in any other law – Therefore, provisions of the Reorganisation Act have been given primacy over any other law – However, this primacy is not meant to denude and over-ride the legal effect envisaged by the Constitution consequent to the creation of the successor State of Madhya Pradesh and the State of Chhattisgarh (from the erstwhile unified State of Madhya Pradesh) which would henceforth have separate government(s) comprising of different legislature and executive. Interpretation of Statutes – Pari materia provisions – Bihar Reorganisation Act, 2000 – ss.84 and 85 – Bifurcation of erstwhile unified State of Bihar into two States, namely, a reorganised State of Bihar and the new State of Jharkhand – Effect and interpretation of ss.84 and 85 of the Bihar Reorganisation Act which are analogous to ss.78 and 79 of the Madhya Pradesh Reorganisation Act – Held: The effect of ss.84 and 85 of the Bihar Reorganisation Act was to ensure continuity of laws enacted by the unified State of Bihar in the new State of Jharkhand which had been created by transfer of territories which earlier formed part of the State of Bihar – Legal fiction created by s.84 of the Bihar Reorganisation Act – The said fiction does not postulate and cannot be extended to imagine that for the purpose of sale transactions or even for other purposes, the new State did not have any political and constitutional existence as a separate state and that till a new law was enacted, the two States were to be treated as one political State as it was before the reorganisation – The sale transactions which were hitherto intrastate sales being within the unified State of Bihar, would become inter-state transactions once the two new States had come into existence – Madhya Pradesh Reorganisation Act, 2000 – ss.78 and
79. Legal Fiction – Deeming provision – Purpose and objective – Held: A deeming provision is operative for the purposes for which it is created and the Court should be careful not to extend this fiction beyond the legitimate field and the purposes for which the legislature had adopted the fiction – The purpose and objective for creating fiction must be kept in mind.
Words and Phrases – ‘Inter-state’ trade – Meaning – Difference between ‘intra-State’ and ‘inter-State’ sales – Held: As per Art. 286 of the Constitution, States are not competent to enact any legislation relating to taxation of ‘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 – Taxation – Sales Tax – Constitution of India, 1950 – Art. 286 (before amendment on 16-09-16).
Practice and Procedure – New Plea – Contention raised by private parties/ assessee for the first time in Supreme Court – The contention was not raised in the writ petition before the High Court or even in pleadings before the Supreme Court – Supreme Court declining to decide the contention and leaving it open to the private parties / assessee to raise the plea before the authorities in appropriate proceedings under the statute – Taxation – Sales Tax – Inter-State transaction.
Disposing of the appeals, the Court
HELD:1.1. It was submitted by the two States that with effect from the appointed day the new State of Chhattisgarh had come into existence and hence the trade inter-se or between the territories now forming part of the State of Chhattisgarh and the reorganised State of Madhya Pradesh would be in the nature of inter-state sales and not intra-state sales. They contended that the Sales Tax Act as earlier applicable to the unified State of Madhya Pradesh would be applicable in the reorganised State of Madhya Pradesh and the new State of Chhattisgarh but within the territorial confines and limits of the two States. Accordingly, it was contended by the two States that the units situated within the territorial limits/boundaries of the reorganised State of Madhya Pradesh and the new State of Chhattisgarh would continue to enjoy benefit of exemption in respect of intra-state trade within the particular state and not in respect of inter-state trade between the two states. The stand taken by the State of Madhya Pradesh and the State of Chhattisgarh is correct and merits acceptance on consideration of the case in the context of Sections 78, 79, 80,
85 and 86 of the Madhya Pradesh Reorganisation Act, 2000. [Paras 13 and 14][946-D-H]
1.2. Section 78 of the Madhya Pradesh Reorganisation Act consists 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 1 st 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. However, the second part of Section 78 incorporates a deeming fiction when it states that territorial references to such law in the State of Madhya Pradesh, i.e. the laws enacted by the legislature and executive of the State of Madhya Pradesh before bifurcation, shall until otherwise provided by the competent legislature or other competent authority be construed as meaning the territories within the existing state of Madhya Pradesh before the appointed day. The effect, thereof, is that the laws enacted by the State of Madhya Pradesh before the reorganisation would continue to apply to the areas forming part of the new State of Chhattisgarh and also the reorganised State of Madhya Pradesh, but within their territorial confines. The enactments or the laws in force in the unified State of Madhya Pradesh would continue to apply to the two States, not as one or the same enactment or law, but as two separate enactments or laws as applicable to two different States. [Para 14][947-A-F]
1.3. The deeming fiction incorporated for the purpose of second part of Section 78 of the Madhya Pradesh Reorganisation Act does not postulate and state that the territories which were earlier part of the State of Madhya Pradesh but now form part of the State of Chhattisgarh would continue to remain part of the reorganised State of Madhya Pradesh or should be treated as part and parcel of the other state. This is not what is postulated in Section 78. Deeming fiction in terms of Section 78 does not extend and include any such stipulation, either expressly or by necessary implication. Indeed, this is not even remotely visualised. A deeming provision is operative for the purposes for which it is created and the Court should be careful not to extend this fiction beyond the legitimate field and the purposes for which the legislature had adopted the fiction. The purpose and objective for creating fiction must be kept in mind. In the present enactment, the object and purpose of the deeming provision envisaged in Section 78 of the Reorganisation 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. [Para 15][947-G-H; 948-A-C]
1.4. Section 79 of the Madhya Pradesh 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. [Para 16][948-C-E]
1.5. Section 80 of the Madhya Pradesh Reorganisation Act relates to the construction or interpretation of the laws made by the State of Madhya Pradesh before the appointed date. It states that notwithstanding that no provision or insufficient provision has been made in terms of Section 79, the court, tribunal or authority interpreting such laws made by the unified State of Madhya Pradesh would construe the law in such a manner as to facilitate its application to the successor States of Madhya Pradesh and Chhattisgarh without effecting the substance. In other words, the court, tribunal or authority while interpreting the laws would go by the substance and with the objective and purpose of facilitating the application of laws in relation to the successor States of Madhya Pradesh and Chhattisgarh, notwithstanding the fact that the legislature or the competent authority in relation to the laws applicable to the States of Madhya Pradesh and Chhattisgarh have not passed any law before or within the expiration period of two years from the appointed date. [Para 17][948-F-G; 949-A]
1.6. Section 85 of the Madhya Pradesh Reorganisation Act states that the provisions of the said enactment shall have effect notwithstanding anything inconsistent contained in any other law. Therefore, the provisions of the Reorganisation Act have been given primacy over any other law. However, this primacy is not meant to denude and over-ride the legal effect envisaged by the Constitution consequent to the creation of the successor State of Madhya Pradesh and the State of Chhattisgarh which would henceforth have separate government(s) comprising of different legislature and executive. On and from the appointed date of 1st November,2000 any trade between the State of Chhattisgarh and the State of Madhya Pradesh and vice-versa would be inter-state trade and not intra-state trade. The deeming fiction and the provisions of the Reorganisation Act nowhere postulate that the trade would continue to remain intra-state trade and not interstate trade between the two States. In fact, any deeming fiction to the said effect would have fallen afoul and would be contrary to Article 286 of the Constitution as it stood before amendment on 16th September, 2016. [Para 18][949-B-D]
1.7. As per Article 286 of the Constitution [as it stood before amendment on 16th September, 2016], States are not competent to enact any legislation relating to the taxation of ‘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 would necessarily be at a fixed location, are inter-state sale or trade and not intra-state sale or trade. Thus, when there is a movement of goods between the two states without there being a transfer of title to the consignor or consignee, compliance would have to be made with the relevant laws applicable to such inter-state transactions. This position will hold good and equally apply in respect of the interstate sales between the new State of Chhattisgarh and the reorganised State of Madhya Pradesh and vice-versa. The movement of goods from one State to another is in the nature of inter-state sales. The fact that two separate States are formed after the bifurcation, which were once a single entity for the purpose of levying sales tax, would be of no consequence so as to disturb the legal and constitutional impact by which two separate States were created and the legal effect of Article 286 as regards the inter-State character of inter-State transactions. [Para 18][950-C-E]
1.8. Section 86 of the Madhya Pradesh Reorganisation Act states that in case any difficulty arises in giving effect to the provisions of the said Act, the President may, by an order, do anything as may be necessary and expedient for removing the difficulties. However, such order cannot be inconsistent with the provisions of the Reorganisation Act. Proviso states that no order shall be made after the expiry of three years from the appointed date. [Para 19][950-F-G]
2.1. The effect of Sections 84 and 85 of the Bihar Reorganisation Act, 2000 (which are analogous to ss.78 and 79 of the Madhya Pradesh Reorganisation Act, 2000) was to ensure continuity of laws enacted by the unified State of Bihar in the new State of Jharkhand which had been created by transfer of territories which earlier formed part of the State of Bihar. These sections incorporating a deeming fiction were to ensure that the new State of Jharkhand would continue to be governed by the pre-existing laws as, otherwise, there would be a disorderly and chaotic situation where the new State would not be governed by any law. This is the true effect of the legal fiction created by Section 84 of the Bihar Reorganisation Act, 2000, i.e., the reorganisation of the state would not affect the applicability of the existing laws in the state to all territories included within it before and even after the reorganisation. The said fiction does not postulate and cannot be extended to imagine that for the purpose of sale transactions or even for other purposes, the new state did not have any political and constitutional existence as a separate state and that till a new law was enacted, the two States were to be treated as one political State as it was before the reorganisation. The sale transactions which were hitherto intra-state sales being within the unified State of Bihar, would become inter-state transactions once the two new States had come into existence. The provisions do not stipulate that such transactions would continue to be treated as intra-state transactions notwithstanding creation of the new State. [Para 23][954-G-H; 955-A-D]
2.2. 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. The contrary observations and ratio recorded in paragraphs 29 and 30 in Swarn Rekha Cokes and Coals Pvt. Ltd. case are overruled in light of the legal position elucidated and explained above. [Para 24][955D-F] Commissioner of Commercial Taxes, Ranchi and Another v. Swarm Rekha Cokes and Coals Pvt. Ltd. (2004) 6 SCC 689 : [2004] 2 Suppl. SCR 633 – overruled.
M.P.V. Sundararamier & Co. v. State of Andhra Pradesh and Another AIR 1958 SC 468 : [1958] SCR 1422 – followed.
Ranjan Sinha and Another v. Ajay Kumar Vishwakarma and Others (2017) 14 SCC 774 : [2017] 7 SCR 194 and B. S. Goraya v. U.T. of Chandigarh (2007) 6 SCC
397 : [2007] 8 SCR 458 – relied on.
Sri Peera Mohammad B. S. Mahamood Saheb v. The
State of Andhra Pradesh 1960 (11) STC 456 – affirmed.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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