1989 (12) TMI 318 - SC - VAT and Sales Tax

EXEMPTION SAME RATE OF TAX ON GOODS WHETHER MANUFACTURED IN THE STATE OR BROUGHT FROM OUTSIDE THE STATE EXEMPTION GIVEN TO SPECIFIC GOODS MANUFACTURED IN THE STATE FOR LIMITED PERIOD AND SUBJECT TO CONDITIONS

Summary

Issues Involved:
1. Constitutional validity of certain notifications issued under the Uttar Pradesh Sales Tax Act, 1948, and the Central Sales Tax Act, 1956.
2. Whether the impugned notifications violate Articles 14, 19(1)(g), and Part XIII (Articles 301-305) of the Constitution of India.
3. The impact of these notifications on the economic unity of India and inter-State trade.
4. The power of States to grant tax exemptions and incentives for economic development.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Notifications:
The petitioners challenged the constitutional validity of Notification No. ST-II-7558/X-9(208)-1981 U.P. Act XV-48-Order-85 dated 26th December, 1985, and Notification No. ST-II/8202/X-9(208)-1981 issued by the Uttar Pradesh Government under sections 4-A of the U.P. Sales Tax Act, 1948, and 8(5) of the Central Sales Tax Act, 1956. The petitioners argued that these notifications exempted new manufacturing units in U.P. from paying sales tax, thereby discriminating against manufacturers and dealers from other States who were liable to pay sales tax, thus making their goods costlier.

2. Violation of Constitutional Articles:
The petitioners contended that the notifications violated Articles 14 and 19(1)(g) of the Constitution by creating gross discrimination and crippling their business. They also argued that the notifications violated Articles 301 to 305 of Part XIII of the Constitution, which enshrines the principle of economic unity and free trade across India. Article 301 guarantees freedom of trade, commerce, and intercourse throughout India, while Articles 302-305 provide conditions under which restrictions can be imposed.

3. Impact on Economic Unity and Inter-State Trade:
The Court examined whether the impugned notifications directly and immediately restricted the free flow of trade and commerce. It was noted that taxes may sometimes amount to restrictions, but only those taxes that directly and immediately restrict trade fall within the purview of Article 301. The Court referred to previous judgments, including Atiabari Tea Co. Ltd. v. State of Assam and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, to highlight that regulatory measures or compensatory taxes do not come within the restrictions contemplated under Article 301.

4. Power of States to Grant Exemptions and Incentives:
The Court recognized that the Constitution of India envisages a federal structure where States have plenary powers to legislate and grant exemptions to boost economic development. The power to grant exemptions is inherent in all taxing statutes. The Court emphasized that economic unity and development of States are vital for achieving the constitutional goal of economic equality. The Court held that the impugned notifications, which provided tax exemptions to new manufacturing units for a limited period, were based on cogent and intelligible reasons for economic encouragement and growth and did not violate the constitutional provisions.

Conclusion:
The Court dismissed the writ petitions, holding that the impugned notifications did not violate Articles 14, 19(1)(g), or Part XIII of the Constitution. The Court emphasized that the States' power to grant exemptions for economic development is essential for achieving economic equality and unity in India. The Court also allowed the intervention applications and considered the submissions made by the intervenors, but no order as to costs was made.