1997 (3) TMI 516 - SC - VAT and Sales Tax

Whether the considerations alone can be regarded as sufficient to make the impugned notifications immune from the challenge of hostile discrimination? Held that - Appeal allowed. The justification advanced by the State of Rajasthan that as a result of the impugned notifications the State revenue had increased and thus they were beneficial to the State revenue, is not valid as the said notifications had the effect of creating a preference to cement manufactured and sold in Rajasthan and disadvantage for the sale of cement manufactured and sold in Gujarat and thus had the direct and immediate adverse effect on the free flow of trade. The said notifications, by dispensing with the requirement of furnishing declaration in C form, had the effect of facilitating evasion of payment of tax and were, therefore, also violative of the scheme of the constitutional provisions contained in Chapter XIII. Therefore, hold that the impugned notifications were void and, therefore, they are hereby quashed.

Summary

Issues Involved:
1. Legality of the notifications under Section 8(5) of the CST Act.
2. Violation of Articles 301 and 303 of the Constitution.

Issue-wise Detailed Analysis:

1. Legality of the Notifications under Section 8(5) of the CST Act:
The appellants, manufacturers of cement in Gujarat, challenged the notifications issued by the State of Rajasthan under Section 8(5) of the CST Act, which reduced the sales tax on inter-State sales of cement. The appellants contended that these notifications were not issued in "public interest," a condition precedent for the exercise of power under Section 8(5) of the CST Act. They argued that the notifications removed essential safeguards to prevent tax evasion by dispensing with the requirement of furnishing declaration in form C. The High Court dismissed the petitions, holding that the appellants failed to establish that the notifications impeded the free flow of inter-State trade and commerce. The Supreme Court, however, found that the State of Rajasthan failed to justify how the exercise of power was in public interest and how it effectively checked or prevented evasion of tax. The notifications were declared bad on this ground alone.

2. Violation of Articles 301 and 303 of the Constitution:
The appellants argued that the notifications violated Articles 301 and 303 of the Constitution by giving preference to goods manufactured and sold in Rajasthan and discriminating against goods manufactured and sold in Gujarat. They presented facts and figures showing increased despatches of cement from Rajasthan to Gujarat, which the High Court dismissed as not credible. The Supreme Court held that the High Court erred in brushing aside the material provided by the appellants. The Court emphasized that the differentiation in tax rates could not be justified solely on the grounds of increased revenue for the State. The notifications had the effect of creating a preference for cement manufactured in Rajasthan, thus impeding the free flow of trade and commerce, and were therefore violative of Articles 301 and 303. The Court also noted that dispensing with the requirement of furnishing declaration in C form facilitated tax evasion, further violating the constitutional provisions.

Conclusion:
The Supreme Court quashed the impugned notifications, holding them void for not being in public interest and for violating Articles 301 and 303 of the Constitution. The appeals were allowed without any order as to costs.