1986 (4) TMI 303 - SC - VAT and Sales Tax

Whether taxing the sales and purchases of tendu leaves at a higher rate than in the neighbouring States violates article 301 by impeding the free trade and commerce in tendu leaves throughout the territory of India? Held that - Appeal dismissed. There was no material before the High Court and no material before us to show that the impugned increase in the rate of tax on the sales and purchases of tendu leaves has put an end to that trade or has caused that trade to decline nor was there any material before the High Court or before us to show that by reason of the increase in the rate of tax on the sales and purchases of tendu leaves, the trade in bidis manufactured in the State of Madhya Pradesh has stopped or has decreased. Far from this happening, on the contrary, all factors point to the opposite conclusion. Tendu leaves are a major natural produce of the State of Madhya Pradesh and had the impugned increase in the rate of tax on the sales and purchases of tendu leaves the effect of putting an end to the trade in tendu leaves or bidis or of causing a decline in that trade, the revenue of the State would have suffered and the State would have once again made the sales and purchases of tendu leaves exigible to a lower or concessional rate of tax.

Issues Involved:

1. Validity of the amendment to sub-section (1) of section 8 of the Madhya Pradesh General Sales Tax Act, 1958.
2. Whether the State Government or its departments qualify as "dealers" under the Act.
3. Constitutionality of the amendments under Articles 14, 286(3), 301, and 304 of the Constitution.

Issue-wise Detailed Analysis:

1. Validity of the Amendment to Sub-section (1) of Section 8:

The appellants challenged the amendment made in sub-section (1) of section 8 of the Madhya Pradesh General Sales Tax Act, 1958, which treated tendu leaves differently from other raw materials. The amendment increased the tax rate on tendu leaves to seven percent, removing them from the category of raw materials that enjoyed a concessional tax rate. The court held that tendu leaves ceased to be considered raw material for the purposes of section 8 from April 15, 1968, and thus became taxable at the higher rate specified in the residuary entry of Schedule II.

2. Whether the State Government or its Departments Qualify as "Dealers":

The appellants argued that the State Government or its departments, including the Forest Department, could not be considered "dealers" as they did not carry on the business of buying, selling, supplying, or distributing goods. The court rejected this argument, stating that the 1971 amendment to clause (d) of section 2 of the Act introduced Explanation II, which deemed the Central or State Government or any of their departments or offices to be dealers for the purposes of the Act, irrespective of whether they carried on such business. This legal fiction created by the explanation was intended to safeguard the State's revenue.

3. Constitutionality of the Amendments:

Article 14:

The appellants contended that the amendment discriminated against tendu leaves by taxing them at a higher rate compared to other raw materials. The court held that tendu leaves form a separate class of commercial commodity, distinct from other raw materials, and can be taxed differently. The court also noted that the Madhya Pradesh Tendu Patta (Vyapar Viniyaman) Adhiniyam, 1964, which created a State monopoly in the trade of tendu leaves, provided a reasonable basis for treating tendu leaves differently from other raw materials.

Article 286(3):

The appellants argued that the amendment violated Article 286(3), which subjects State laws imposing taxes on goods of special importance in inter-State trade or commerce to restrictions specified by Parliament. The court found this challenge untenable, noting that tendu leaves are not declared by Parliament to be of special importance in inter-State trade or commerce. The relevant provision in the Central Sales Tax Act, 1956, lists "tobacco" and "bidis" but not tendu leaves.

Articles 301 and 304:

The appellants claimed that the higher tax rate on tendu leaves impeded free trade and commerce, violating Articles 301 and 304. The court held that an increase in the tax rate does not per se impede free trade and commerce. There was no evidence that the higher tax rate had put an end to or caused a decline in the trade of tendu leaves or bidis. The court also noted that the State's revenue would have suffered if the trade had declined, but in fact, the State had increased the tax rate further, indicating no adverse impact on trade.

Article 19(1)(g):

The validity of the amendment was also challenged under Article 19(1)(g), which guarantees the right to practice any profession or to carry on any occupation, trade, or business. The court dismissed this challenge, finding no evidence that the increased tax rate imposed an unreasonable restriction on the right to trade in tendu leaves or bidis.

Conclusion:

The appeal was dismissed with costs, and the court upheld the validity of the amendments to the Madhya Pradesh General Sales Tax Act, 1958, under the challenged constitutional provisions.

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