1996 (2) TMI 430 - SC - VAT and Sales Tax

Whether the impugned tax has been established to be compensatory in nature or whether it can be called a regulatory measure. In case the impugned tax is not established to be compensatory-or as a measure of regulation-whether it is saved by virtue of the provision contained in article 304(b) read with article 255 of the Constitution? Whether the Bihar Legislature is deprived of its legislative competence to enact the impugned Act on account of the enactment of ADE Act and/or because the State of Bihar is getting a portion of the taxes levied and collected under the ADE Act? Whether the impugned enactment is outside the purview of entry 52 in List II of the Seventh Schedule to the Constitution and, therefore, beyond the legislative competence of the Bihar Legislature for the reason that it does not provide for the revenues raised thereunder to be passed on to the local authorities for being used for the purposes of the respective local areas? Whether the proviso to section 3(1) and section 6 are void for the reasons assigned by the High Court? Held that - Appeal allowed and the judgment of the High Court is set aside.

Issues Involved:
1. Compensatory or regulatory nature of the tax.
2. Validity under Article 304(b) and Article 255 of the Constitution.
3. Legislative competence of the Bihar Legislature in light of the ADE Act.
4. Scope of Entry 52 in List II of the Seventh Schedule.
5. Validity of proviso to Section 3(1) and Section 6 under Article 14.

Detailed Analysis:

Issue 1: Compensatory or Regulatory Nature of the Tax
The Supreme Court examined whether the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993, was compensatory or regulatory. Article 301 of the Constitution guarantees freedom of trade, commerce, and intercourse throughout India. However, regulatory measures or compensatory taxes for the use of trading facilities do not fall under the restrictions of Article 301. The Court noted that the Bihar Legislature enacted the tax to offset revenue losses from previous judicial decisions. The State argued that the tax would be used to provide trading facilities, thus making it compensatory. The Court held that the State had established a sufficient connection between the tax and the trading facilities provided, making the tax compensatory in nature.

Issue 2: Validity under Article 304(b) and Article 255 of the Constitution
If the tax was not compensatory or regulatory, its validity would depend on Article 304(b) read with Article 255, which allows for reasonable restrictions on trade in the public interest with the President's assent. The Court confirmed that the Act had received the President's assent, satisfying the requirement of prior consent. The Court also held that the tax constituted a reasonable restriction imposed in the public interest, as it was essential for raising funds for public welfare schemes and compensating for revenue losses.

Issue 3: Legislative Competence of the Bihar Legislature in Light of the ADE Act
The respondents argued that the ADE Act, which replaced State taxes on certain commodities, including tobacco, precluded the Bihar Legislature from imposing the entry tax. The Court disagreed, noting that the ADE Act was intended to replace sales taxes, not all forms of State taxes. The ADE Act did not affect the legislative competence of the State Legislature to levy entry tax under Entry 52 in List II of the Seventh Schedule. The Court held that the Bihar Legislature retained its power to levy the entry tax.

Issue 4: Scope of Entry 52 in List II of the Seventh Schedule
The respondents contended that the tax did not fall under Entry 52 because the revenues were not specifically allocated to local authorities. The Court clarified that Entry 52 empowers the State Legislature to levy taxes on the entry of goods into local areas for consumption, use, or sale. The entire State of Bihar was divided into local areas, and spending for the State's purposes was effectively spending for local areas. The Court held that the Act fell within the scope of Entry 52.

Issue 5: Validity of Proviso to Section 3(1) and Section 6 under Article 14
The High Court had declared the proviso to Section 3(1) and Section 6 void for conferring unguided and uncanalised power on the State Government, violating Article 14. The Supreme Court disagreed, noting that the proviso to Section 3(1) allowed the State Government to specify different tax rates for different goods, subject to a ceiling of five percent, which provided sufficient guidance. Similarly, Section 6, which allowed the State Government to grant exemptions, was a common feature in many taxing statutes and had been upheld in previous decisions. The Court held that these provisions did not violate Article 14.

Conclusion
The appeals by the State of Bihar were allowed, and the judgment of the High Court was set aside. The appeals by I.T.C. Limited and V.S.T. Industries were dismissed. No order as to costs.

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