Case: South India Corporation Private Limited Vs. Secretary, Board of Revenue Trivandrum &amp; Another

2. The undisputed facts may briefly be stated. The appellant is a private limited company incorporated under the Indian Companies Act. The principal office of the Company is at Mattancherry. It carries on business in iron, hardware, electrical goods, timber, coir, engineering contracts etc. In the course of its business, the Company acted as engineering contractor for the State and Central Government departments and also for private parties. On March 17, 1959, the Sales Tax Officer, special Circle, Ernakulam assessed the Company to sales tax under the Travancore-Cochin General Sales Tax Act, 1125 M.E. for the assessment year 1952-53 in respect of "works contracts". The Company filed a revision petition before the 1st respondent, but it was rejected. Likewise the 2nd respondent assessed the Company to sales tax by his orders dated 7-1-1960, 4-1-1960 and 31-3-1960 for the assessment years 1956-57, 1957-58 and 1958-59 in respect of "works contracts". The appellant filed four petitions in the High Court of Kerala under Arts. 226 and 227 of the Constitution for quashing the said orders of assessment. The main contention advanced on behalf of the appellant-Company before the High Court was that, after the Constitution came into force the relevant Sales Tax Acts imposing sales tax on "works contracts" were unconstitutional and, therefore, void. The High Court rejected the contention and dismissed the petitions with costs. Hence the appeals.Before adverting to the rival contentions it would be convenient at the outset to give briefly the historical background of the sales tax legislation in Kerala.3. Originally, Travancore and Cochin were two separate sovereign States having plenary powers of taxation. In the Cochin State, the Cochin General Sales Tax Act 15 of 1121 M.E. and in the Travancore State, the Travancore General Sales Tax Act 18 of 1124 M.E. imposed tax on "works contracts". As a result of the merger of the two Stages, the United State of Travancore-Cochin was formed with a common Legislature. The said Legislature enacted the Travancore-Cochin General Sales Tax Act 11 of 1125 M.E. (1950), hereinafter called the Act. The said Legislature also had plenary powers of taxation and, therefore, it validly imposed sales tax on "works contracts". The Act was published in the Gazette on January 17, 1950, but s. 1(3) thereof provided that it would come into force on such date as the Government might, by notification in the Gazette, appoint. The requisite notification was issued by the Government in May 30, 1950. Rules were framed under powers conferred by s. 24 of the Act prescribing the mode, inter alia for ascertaining the amounts for which goods were sold in relation to "works contracts". Rules 4(3) providedthe purposes of sub-rule (1), the amount for which goods are sold by a dealer shall, in relation to a works contract, be deemed to be the amount payable to the dealer for carrying out such contract less a sum not exceeding such percentage of the amount payable as may be fixed by the Board of Revenue from time to time for different areas, representing the usual proportion in such areas of the cost of labour to the cost of materials used in carrying out such contract, subject to the following maximum percentages :-But, it is stated that the Board of Revenue did not fix the percentage for deduction from the amount payable to the dealer for carrying out a works contract. This fact was not denied in the High Court, but before us an application is made to produce the Travancore-Cochin Gazette to establish that such a percentage was fixed. The Rules also were notified on May 30, 1950. The earlier Acts of Travancore and Cochin were repealed from May 30, 1950. Till May 30, 1950, sales tax was levied on works contracts in Travancore and Cochin areas under the respective Acts and the rules framed thereunder. As from the said date the said Acts were repealed, thereafter the said tax was imposed under the Act and the rules framed thereunder. On November 1, 1956, the States Reorganization Act of 1956 came into force and the new State of Kerala was formed thereunder. The newly formed Kerala State comprised the area covered by the Travancore-Cochin State, excepting a small part thereof, and the district of Malabar in the Madras State. Thereafter, the Kerala Legislature passed the Travancore-Cochin General Sales Tax (Amendment) Act, 1957 (12 of 1957) amending the Act and extending its provisions to the whole State of Kerala. The new Act practically contained the provisions of the earlier Act. The said Act came into force on October 1, 1957. By the provisions of Act 12 of 1957, among other things, the tax on electric goods was enhanced from 3 n.p. to 4 n.p. in the rupee and in regard to cement, this item was freshly added and charged to sales tax at 5 n.p. in the rupee. The State of Kerala does not admit that either there was any enhancement of tax in the case of electrical goods or that any tax was imposed in regard to cement involved in a works contract. Further, the sales tax leviable under the Act was enhanced by the Kerala Surcharge on Taxes Act, 1957 (11 of 1957) and again by the Kerala Surcharge on Taxes Act, 1960. We are not concerned with the latter Act as no assessment was made under that Act in respect of any of the transactions in question.The factual position may, therefore, be stated thus : The assessment for the year 1952-53 was made only under the Travancore-Cochin General Sales Tax Act (11 of 1125 M.E.) and, therefore, the subsequent alleged enhancement of the tax does not affect the assessment of that year. Assessments for the years 1956-57, 1957-58 and 1958-59 were made under the Travancore-Cochin General Sales Tax (Amendment) Act, 1957 (12 of 1957) and, therefore, the provisions, if any, enhancing the rate under the Act would affect the said assessments. The enhancements made under the Kerala Act 11 of 1957 would not govern the assessment year 1956-57, but only the assessment years 1957-58 and 1958-59."

Court's reasoning:
But this question is covered by a decision of this Court in Union of India v. Maharaja Krishnagarh Mills Ltd. ([1961] 3 S.C.R. 524.). There, the question for determination was whether the Union of India was entitled to levy and recover arrears of excise duty on cotton cloth for the period April 1, 1949 to March 31, 1950, payable by the respondent, a cloth mill in the State of Rajasthan, under the Rajasthan Excise duties Ordinance, 1949. By reason of art. 277 of the Constitution, the State of Rajasthan became entitled to recover the said duty notwithstanding the fact that it was transferred to the Union List. The provision to the contrary contemplated by Art. 277 of the Constitution was made by Finance Act XXV of 1950 s. 11 whereof extended the Central Excise and Salt Act, 1944, along with other Acts, to the whole to India except the State of Jammu and Kashmir. That section had effect only from April 1, 1950 and did not apply to arrears of duty of excise in regard to the earlier period. The Union pleaded that an agreement envisaged by Art. 278 was entered into on February 25, 1950 which conceded to the Centre the right to levy and collect the arrears of duty in question. The question now raised before us, namely, whether there can be a valid agreement under Art. 278 of the Constitution in respect of taxes leviable by the State and leviable by the Government of India till an appropriate law is made by Parliament arose for consideration in that case. The learned Chief Justice, speaking for the Court came to the following conclusion, at p. 535 :"Thus, the combined operation of Arts. 277 and 278 read with the agreement vests the power of levy and collection of the duty in the Union of India.This Court, therefore, held that after the coming into force of the Constitution excise duty in question in that case was leviable only by the Government of India, though there was a saving provision in favour of the State of Rajasthan till Parliament made an appropriate law; on that reasoning it held that the agreement under Art. 278 could be made in respect of such a levy notwithstanding the temporary reservation made in favour of the State. The only difference between that case that case and the present one is that at the time the agreement was entered into between the Union and the State, Parliament had not made the appropriate law depriving the State of its power to levy taxes in respect of "works contracts". But that cannot make any difference in principle, for, even the earlier decision related only to the validity of the agreement in respect of arrears leviable by the State before the appropriate law was made. The effect of the provisions in Art. 278 is that to the extent covered by an agreement the power of the State Government to continue to levy taxes under Art. 277 is superseded.The next question is whether there was any such agreement whereunder the State agreed to give up its right to levy the said tax as a part of the agreement entered into by it with the Union. This leads us to consider the terms of the agreement dated February 25, 1950, entered into between the President of India and the Rajpramukh of the State ofIt will be seen from the said agreement that it incorporated the recommendations made by the Indian States Finances Enquiry Committee with some modifications and that 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. A perusal of the main recommendations made by the Indian States Finance Enquiry Committee and incorporated in the agreement also indicates the completeness of the agreement. The Committee was asked to examine and report, inter alia, whether, and if so, the extent to which, the process of so integrating Federal Finance in the Indian States and Union with that of the rest of India should be gradual and the manner in which it should be brought about. One of the general principles followed by the Committee was that federal financial integration in States involved not merely the taking over of all their "federal" revenues by the Central, but also the assumption of all expenditure in States upon Departments and Services of a "federal" character. In Ch. II of Part II, which dealt with "Specific matter concerning "Federal" revenues and "Federal" service departments, it was stated that with effect from the prescribed date, the Centre will take over all "federal" sources of Revenue and all "federal" items of expenditure in States, together with the administration of the Departments concerned, and that the Centre must also take over all the current outstandings, liabilities claims, etc. and all productive and unproductive Capital assets connected with these departments. Dealing with the States rights, it observed :"With effect from the prescribed date, all rights and immunities enjoyed or claimed by the States, whether expressly or by usage, and whether relating to federal revenues and taxes generally present or future, or to specific matters such as Railways, Customs, Posts and Telegraphs, Opium, Salt, etc. will terminate and must be extinguished. Thereafter, their constitutional position in respect of these matters should be the same as that of provinces under the new Constitution ofagreement, 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 subsidizing 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 authorized to levy for a temporary period. As we have said, 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. We are not called upon in this case to decide whether the said power revived after the expiry of ten from the commencement of the Constitution, for all the impugned assessments fall within the said period. Nor do we find any force in the contention that as Art. 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 came into life again. An obvious fallacy underlies this ingenious argument. The validity of an agreement depends upon the existence of power at the time it was entered into. Its duration will be limited by its terms or by the conditions imposed on the power itself. Article 278 conferred a power upon the Union and the B State to enter into an agreement which could continue in force for a period not exceeding ten years from the commencement of the Constitution. The agreement in question fell squarely within the scope of the power. That agreement, therefore, would have its full force unless the Constitution (Seventh Amendment) Act, 1956, in terms avoided it. The said amendment was only prospective in operation and it could not have affected the validity of the agreement. We, therefore, hold that the impugned assessment orders were not validly made by the sales tax authorities in exercise of the power saved under Art. 277 of the Constitution.Learned Advocate-General for the State of Kerala raises an interesting point, namely, that the impugned law, i.e., the Travancore-Cochin General Sales Tax Act of 1125 M.E. continued in force after the Constitution under the express provisions of Art. 372 therefore till the said law was altered, repealed or amended by the competent authority and, therefore, even if there was an agreement between the Union and the State as aforesaid it could not affect the power of the State to impose the tax under the said law.It is not necessary to consider in detail the said decisions, as they either assume the said legal position or sustain it, but do not go further. They held that a law made by a competent authority before the Constitution continues to be in force after the Constitution till it is altered or modified or repealed by the appropriate authority, even though it is beyond the legislative competence of the said authority under the Constitution. We give our full assent to the view and hold that a pre-Constitution law made by a competent authority, though it has lost its legislative competency under the Constitution, shall continue in force provided the law does not contravene the "other provision" of the372 is a general provision and Art. 277 is a special provision. It is settled law that a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where the special provision does not apply. The earlier discussion makes it abundantly clear that the Constitution gives a separate treatment to the subject of finance, and Art. 277 saves the existing taxes etc. levied by States if the conditions mentioned therein are complied with. While Art. 372 saves all pre-Constitution valid laws, Art. 277 is confined only of taxes, duties, cesses, or fees lawfully levied immediately before the Constitution. Therefore, Art. 372 cannot be construed in such a very as to enlarge the scope of the saving of taxes, duties cesses or fees. To state it differently, Art. 372 must be read subject to Art. 277. We have already held that an agreement can be entered into between the Union and the States in terms of Art. 278 abrogating or modifying the power preserved to the States under Art. 277.16. That apart, even if Art. 372 continues the pre-Constitution laws of taxation, that provision is expressly made subject to the other provisions of the Constitution. The expression "subject to" conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject. Further Art. 278 opens out with a non-obstante clause. The phrase "notwithstanding anything in the Constitution" is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of Art. 278. While Art. 372 is subject to Art. 278, Art. 278 operates in its own sphere in spite of Art. 372. The result is that Art. 278 overrides Art. 372; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under Art. 372, the Union and the State Government can enter into an agreement in terms of Art. 278 in respect of Part B States depriving the State law of its efficacy. In one view Art. 277 excludes the operation of Art. 372, and in the other view, an agreement in terms of Art. 278 overrides Art. 372. In either view, the result is the same, namely, that at any rate during the period covered by the agreement the States ceased to have any power to impose the tax in respect of "works contracts".In this view we need not express our opinion on the other contentions raised by Mr. Nambiar.