2007 (10) TMI 573 - HC - VAT and Sales Tax

Compensatory tax - whether is not utilised for the purpose for which it is collected on the basis of quid pro quo? - whether the amount collected by the State Government under the provisions of section 3 of the Act and allocation of the same to various local bodies certainly is not in the ratio of the developmental works carried on for the betterment of neither the appellant nor the traders community? Held that - In view of the categorical findings and reasons recorded on proper appreciation of the materials produced by the State Government it is satisfied that the collection of entry tax is a compensatory tax which has been diverted to urban local bodies to provide various services and infrastructure facilities to traders community to carry on their business activities. Therefore the levy of entry tax by the State Government in addition to various compensatory taxes and cesses is in accordance with law. Accordingly answer the question in favour of respondents-State.

Issues Involved:
1. Constitutionality of the impugned levy under the Karnataka Tax on Entry of Goods Act, 1979 (KTEG Act).
2. Whether the impugned levy is compensatory in nature.
3. Compliance with Article 301 and Article 304(b) of the Constitution.
4. Utilization of the collected entry tax for the intended purposes.

Detailed Analysis:

1. Constitutionality of the Impugned Levy:
The appellant challenged the constitutional validity of Section 3 of the KTEG Act, arguing that it violates Article 301 of the Constitution. They contended that the tax is not compensatory and restricts the free flow of trade and commerce. The State Government countered by asserting that the levy was to compensate local bodies for the loss of revenue due to the abolition of octroi.

2. Compensatory Nature of the Levy:
The appellant argued that the tax is not compensatory as it does not provide measurable or quantifiable benefits to the taxpayers. They relied on the principle of equivalence, which requires that the value of the benefits should match the costs incurred in providing the services. The State, however, provided extensive data showing that the entry tax collected was used for urban development and infrastructure, thus benefiting the trading community.

3. Compliance with Article 301 and Article 304(b):
The appellant argued that the levy violates Article 301, which ensures free trade and commerce across India. They also contended that the tax required the President's sanction under Article 304(b). The State argued that the KTEG Act had received Presidential assent, satisfying the requirements of Article 304(b). The court referred to the Supreme Court's decisions in "State of Karnataka v. Hansa Corporation" and "Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan," which upheld the validity of compensatory taxes that facilitate trade.

4. Utilization of Collected Entry Tax:
The appellant claimed that the entry tax collected was not proportionate to the benefits provided. They highlighted that the State and local bodies' contributions to the development of certain areas were meager compared to the investments made by the appellant. The State provided detailed statements showing the allocation of funds to urban local bodies and the expenditure on public utilities and infrastructure, thus justifying the compensatory nature of the tax.

Conclusion:
The court concluded that the impugned levy under the KTEG Act is constitutional and compensatory in nature. It held that the levy does not violate Articles 301 or 304(b) of the Constitution, as the Act had received Presidential assent. The court found that the collected entry tax was appropriately utilized for urban development and infrastructure, benefiting the trading community. Consequently, the appeal and the writ petition were dismissed.

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