Case: State of Kerala &amp; Others Vs. M/s. South India Corporation Private Limited

respect to-(a) the levy and collection of any lax or duty leviable by the Government of India in such State and for the distribution of the proceeds thereof otherwise than in accordance with the provisions of this Chapter,(b) the grant of any financial assistance by the Government of India to such State in consequence of the loss of any revenue which that State used to derive from any tax or duty leviable under this Constitution by the Government of India or from any other sources;(c) the contribution by such State in respect of any payment made by the Government of India under Clause (1) of Article 291, and, when an agreement is so entered into, the provisions of this Chapter shall in relation to such State have effect subject to the terms of such agreement.(2) An agreement entered into under Clause (1) shall continue in force for a period not exceeding ten years from the commencement of this Constitution:Provided that the President may at any time after the expiration of five years from such commencement terminate or modify any such agreement if after consideration of the report of the Finance Commission he thinks it necessary to do so."10. The decision of this Court in The South India Corporation (P) Ltd., (1964) 4 SCR 280 = (AIR 1964 SC 207 ) (supra) elucidates the purpose of Article 278 and the object with which the President of India entered into the agreement with the Raj Pramukh of Travancore. For our present purpose it will suffice to quote a portion of the said judgment. According to that judgment the agreement."incorporated the recommendations made by the Indian States Finances Enquiry Committee with some modifications and the Union of India agreed to recoup the State for the loss caused to it by reason of the federal financial integration in the manner described thereunder. It was not a piecemeal agreement confined to a few items, but a comprehensive one to fill up the entire revenue-gap caused to the State by reason of some of its sources of revenue having been taken away by the Union or otherwise lost to it."Further (see p. 392) (of SCR) = (at 213 of AIR):"The agreement, read with the Report, makes the following position clear: The loss arising to the State on account of the federal financial integration in the State was ascertained and a provision was made for subsidising the State by filling up the said revenue-gap. The agreement ex facie appears to be a comprehensive one. It takes into consideration the entire loss caused to the State by reason of some of its sources of revenue being transferred under the Constitution to the Union. It would be unreasonable to construe the agreement as to exclude from its operation certain taxes which the State was authorised to levy for a temporary period ..................... that saving was subject to an agreement and, as by the agreement effective adjustments were made to meet the loss which the State would have incurred but for the agreement, there was no longer any necessity for the continuance of the saving and it ceased to have any force thereafter between the parties to the agreement."11. The Court also opined that it was not called upon to decide whether the said power revived after the expiry of ten years from the commencement of the Constitution, for all the impugned assessments fell within the said period. The Court observed that there was no force in the contention that because Article 278 was omitted by the Constitution (Seventh Amendment) Act, 1956, the agreement entered into in exercise of a power thereunder automatically came to an end and thereafter the power of the State to levy the tax would come into life again.12. It was enough for the Court in that case to say that the agreement would have its full force unless the Constitution (Seventh Amendment) Act, 1956 in terms avoided it and in the result it held that the impugned assessment orders were not validly made by the sales tax authorities in exercise of the power saved by Article 277 of the Constitution.13. The question directly arises before us as to whether Article 277 would still have effect in regard to the power to levy taxes falling within its scope after the said agreement of 25th February 1950 came to an end. The answer must clearly be in the negative because the essential condition for the validity of the imposition is the continuity of the levy and once there is a break in its operation it ceases to be effective and it cannot matter that no provision to the contrary as envisaged by Article 277 was made by Parliament.14. It is clear that Article 277 and particularly Article 278 were engrafted in the Constitution with the immediate object of maintaining the financial viability of the new States for such time as the Parliament thought proper. So far as the State of Kerala was concerned the need for financial assistance was met by the agreement between the President of India and the Raj Pramukh of Travancore. That agreement itself shows that there was liberal assistance for the first five years which was to be tapered off in another five years time. It would not be wrong to observe that it was contemplated that after ten years the State of Kerala would be able to find its own feet and do without any special assistance from the Centre. One of the objects of the said agreement was to recoup the State of Kerala for the loss of revenue which that State used to derive from inter alia, the sales tax on works contracts being a tax which was leviable under the Constitution by the Government of India alone. The agreement came to an end in 1960 and with it the financial assistance rendered in terms thereof. The agreement broke the continuity of the levy of sales tax on works contracts and there is nothing in Article 277 to resuscitate it.15.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]8. The impost of sales tax on works contracts though beyond the competence of the States would be within that of Parliament by virtue of item 97 of List I of Seventh Schedule and Article 248 of the Constitution. It would therefore follow that if there was no other law touching this point, sales tax on works contracts which were being lawfully levied by the Governments of the States of Travancore and Cochin before 25th January, 1950 would continue to be levied and to be applied to the same purposes until provision to the contrary was made by Parliament by Law. The fact that the Sales Tax Acts of the former States of Travancore and Cochin were repealed but identical provisions were re-enacted in the later Acts would not take the case out of Article 277. All that the said article requires is that there should be a continuity in the levy of taxes and so long as the character of the taxes did not change they would be saved by the saidanswer must clearly be in the negative because the essential condition for the validity of the imposition is the continuity of the levy and once there is a break in its operation it ceases to be effective and it cannot matter that no provision to the contrary as envisaged by Article 277 was made by Parliament.It is clear that Article 277 and particularly Article 278 were engrafted in the Constitution with the immediate object of maintaining the financial viability of the new States for such time as the Parliament thought proper. So far as the State of Kerala was concerned the need for financial assistance was met by the agreement between the President of India and the Raj Pramukh of Travancore. That agreement itself shows that there was liberal assistance for the first five years which was to be tapered off in another five years time. It would not be wrong to observe that it was contemplated that after ten years the State of Kerala would be able to find its own feet and do without any special assistance from the Centre. One of the objects of the said agreement was to recoup the State of Kerala for the loss of revenue which that State used to derive from inter alia, the sales tax on works contracts being a tax which was leviable under the Constitution by the Government of India alone. The agreement came to an end in 1960 and with it the financial assistance rendered in terms thereof. The agreement broke the continuity of the levy of sales tax on works contracts and there is nothing in Article 277 to resuscitate it.