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TMI Blog2010 (12) TMI 1097X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005 ( VAT Rules ). The impugned rule was introduced by an amendment issued under section 78(1) of the VAT Act by a Government notification vide G.O. Ms. No. 2201, Revenue (CT-II), dated December 29, 2005. The effect of this rule is that all the petitioners, who are VAT dealers and availing of inputtax credit (I.T.C.) in respect of coal, naphtha or natural gas under section 13(1) of the VAT Act, have now been denied I.T.C. retrospectively with effect from April 1, 2005. This is the grievance and grudge that forced the peti tioners to approach this court. Background facts We may notice the relevant facts and allegations from Writ Petition No. 5080 of 2006. M/s. Vishnu Cement Limited, a manufacturer of cement, is a registered dealer under the VAT Act. Limestone, coal, iron ore and gypsum are their main raw materials. In quantitative terms, coal constitutes 13 per cent of the raw material and on clinker production 19 per cent. Under the provisions of the VAT Act, the tax paid on intra-State purchase of raw materials is given credit against the output tax payable on cement. The rate of VAT on coal is four per cent and 12.5 per cent on cement on which I.T.C. is allowed in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under rule 20(2) of the VAT Rules. The petitioner was claiming set-off while paying output tax on manufactured cement, but the Government amended rule 20(2)(h) of the VAT Rules with effect from April 1, 2005. The same is sustainable and does not suffer from any constitutional vice. The Legislature has widest discretion to pick and choose any commodity for the purpose of taxation. If the power is now granted to the rule-making body, the same is sustainable. Section 5B(1)(b) of the APGST Act, which is similar to section 13(4) of the VAT Act, was upheld by this court in Chatla Narasaiah Ramaiah v. State of A.P. [2006] 146 STC 407; [2005] 41 APSTJ 45. When the Legislature specifically conferred retrospective rule-making power, it is of no consequence even if the tax is passed on to the customer as the primary liability to pay VAT is on the dealer. But for the I.T.C. allowed earlier, the petitioner would have paid the entire output tax due. The assessment was taken up, and after issuing the notice and considering the explanation, the impugned demand was raised. Issues for consideration The senior counsel, S. Ravi, and M/s. A.K. Jaiswal, S. Dwarakanath, Bhaskar Reddy Vemireddy, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue, however, remained elusive for many reasons. The levy was either at the point of first purchase/sale or at the point of last purchase/sale or at every point of sale. The tax paid at the point of first sale, or every point of purchase, became part of the purchase price determining the subsequent sale price. This left a cascading effect. Due to unplugged holes in the tax collection mechanism, if once there is a tax evasion, it had a negative impact on the collection as the tax once escaped caused permanent loss to the State. Thirdly, with as many as 16 to 20 rate categories introduced to fulfil a variety of objectives, the sales tax became complicated. Fourthly, many tax rate categories and multi-point levy lead to unsatisfactory tax compliance. Lastly, sales taxes which accounted for 60 per cent of the State revenue over the years remained stagnated. Initiatives for tax reforms began between 1980s and 1990s. Tax Review Committee (TRC) 1991 of Government of India recommended reform of direct taxes (income-tax) and indirect taxes (excise and customs). The State level tax reforms, however, took off only in late 1990s necessitated by increasing budget pressures and demands for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of inter-State sales, will be introduced in two years, when the Central sales tax in its present form will be phased out. In the meantime, an information system on inter-State trade will be built up. The Central Government has agreed to compensate the States for any loss of revenue at rates of 100 per cent in the first year, 75 per cent in the second year, and 50 per cent in the third year. The loss will be calculated by estimating the difference between the projected sales tax revenue using 2004-05 as the base and the actual revenue collected. The projected revenues will be estimated by applying the average of the best three years growth rates during the last five years. Tax incentives given to new industries by different States could be continued so long as it does not break the VAT chain. Many States propose to convert tax holidays into deferment of the tax. All dealers with annual turnover above Rs. 5,00,000 are required to register for the VAT. However, the States may levy a simple turnover tax not exceeding two per cent on those dealers with turnover up to Rs. 5 million. Such dealers, paying the turnover tax, do not have to keep detailed accounts of their tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peaks of offences and penalties under the Act. Section 78 of the VAT Act empowers the Government to make Rules and section 79 of the VAT Act enables the Government to alter, add to or cancel any of the six Schedules appended to the Act. As per section 2(10) of the VAT Act, dealer means any person who carries on the business of buying, selling, supplying or distributing goods or delivering goods on hire-purchase or in any system of payment. Every such dealer other than a casual dealer, as defined in section 2(7) of the VAT Act, shall be liable to be registered as a VAT dealer if his estimated taxable turnover is more than Rs. 40 lakhs. Every dealer whose turnover exceeds Rs. 5 lakhs, but is not registered as a VAT dealer, shall be registered as a turnover tax dealer (ToT). The charging section 4 of the VAT Act obliges a VAT dealer to pay tax on every sale of goods at the rates specified in the Schedules. The liability under section 4 of the VAT Act is subject to section 13, and the rates specified in the Schedules. VAT payable shall be calculated in accordance with the formula prescribed ( prescribed means prescribed by VAT Rules made under the Act (section 2(24)) (section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 4, 11 and 12 of the VAT Act, the VAT payable shall be calculated by applying the rate of tax specified in the applicable Schedule, and shall be calculated in accord ance with the formula prescribed. Rule 19 of the VAT Rules contains the formula. In simpler terms, the tax payable by the VAT dealer shall be X-Y where X is the total of the VAT payable in respect of all taxable sales made by a VAT dealer and Y is the total I.T.C. which the VAT dealer is eligible to claim as set-off. The relevant dual provisions, namely, sections 9 and 13 of VAT Act read as under: 9. Input tax credit for dealers for goods in Schedule VI. Every dealer, who is liable to pay tax on the sale of goods specified in Schedule VI, shall be eligible for input tax credit subject to the conditions in section 13 of the Act and in the manner prescribed. . . . 13. Credit for input tax. (1) Subject to the conditions if any, prescribed, an input tax credit shall be allowed to the VAT dealer for the tax charged in respect of all purchases of taxable goods, made by that dealer during the tax period, if such goods are for use in the busi ness of the VAT dealer. No input tax credit shall be allowed in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 per cent of the related input tax. (8) Where goods purchased by a VAT dealer are partly for his business use and partly for other than his business use, the amount of the input tax credit shall be limited to the extent of input tax that relates to the goods used in his business. (9) A turnover tax dealer or a casual trader shall not be entitled to claim input tax credit. (10) Any dealer covered by Explanations III and IV of clause (10) of section 2 shall not be eligible for input tax credit against or relatable to sale of un-serviceable goods or scrap, surplus, old, obsolete or discarded material or waste products whether by auction or other wise. (11) Any VAT dealer who purchases any taxable goods from a dealer covered under sub-section (10) above, shall be eligible for input tax credit, on production of documentary evidence that tax has been charged. (emphasis1 supplied) The conspectus of above two provisions is as follows: A VAT dealer can avail of I.T.C. in respect of all purchases of taxable goods only if such goods are used in his business. But no such credit will be allowed in respect of goods, specified in the Sixth Schedule subject to special rates of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Input tax credit. (1) . . . (2) The following shall be the items not eligible for input tax credit as specified in sub-section (4) of section 13, (a) all automobiles including commercial vehicles/two wheelers/ three wheelers required to be registered under the Motor Vehicles Act, 1988 and including tyres and tubes, spare parts and accessories for the repair and maintenance thereof; unless the dealer is in the business of dealing in these goods; (b) fuels used for automobiles or used for captive power generation or used in power plants; (c) air conditioning units other than used in plant and labora tory, restaurants or eating establishments, unless the dealer is in the business of dealing in these goods; (d) any goods purchased and used for personal consumption; (e) any goods purchased and provided free of charge as gifts otherwise than by way of business practice; (f) any goods purchased and accounted for in the business but utilized for the purpose of providing facilities to employees including any residential accommodation; (g) crude oil used for conversion or refining into petroleum products; (h) Natural gas, naptha and coal unless the dealer is in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be prescribed by the rule-making authority. To that extent the position is not denied. In exercise of the powers conferred under section 78 of the VAT Act, by rule 20(2) of the VAT Rules, purchases of goods in respect of which I.T.C. cannot be claimed have been prescribed. As of now seventeen (17) items/goods are mentioned in rule 20(2) of the VAT Rules. It is submitted that section 13(4) of the VAT Act enables I.T.C. to be denied only on the goods which are exempt from tax or if they are included in the Sixth Schedule in respect of which I.T.C. cannot be claimed by reason of section 13(1) of the VAT Act. They would, therefore, urge that section 13(1) read with section 13(4) of the VAT Act cannot be construed as conferring power on the Government to deny I.T.C. on all the goods. According to them I.T.C. can be denied only in respect of those goods which are exempt from tax or attracts special rates of tax provided under the Sixth Schedule. Per contra, the Special Counsel for Commercial Taxes submits that the court has to give a plain meaning to section 13(1) and section 13(4) of the VAT Act. Doing so, it does not warrant any interpre tation as suggested by the petitioners. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used . Relying upon this passage Lord Upjohn said: Fiscal measures are not built upon any theory of taxation . The above passage was quoted with approval in Commissioner of Income-tax v. Kasturi Sons Ltd. [1999] 237 ITR 24 (SC); [1999] 3 SCC 346; AIR 1999 SC 1275. In State of West Bengal v. Kesoram Industries Ltd. [2004] 266 ITR 721 (SC); [2004] 10 SCC 201 (para 106), citing the same, the apex court summed up the following settled principles of interpretation (i) in interpreting a taxing statute, equitable considerations are entirely out of place. Taxing statutes cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed; it can not import provisions in the statute so as to supply any deficiency; (ii) Before taxing any person it must be shown that he falls within the ambit of the charging section by clear words used in the section; and (iii) If the words are ambiguous and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit-motive may be easily discernible in some transactions: in others it would have to be inferred from a review of the circumstances attendant upon the transaction. . . Therefore, on a true construction of section 13(4) of the VAT Act, it has to be held that the Government can prescribe any or all purchases of such taxable goods in respect of which I.T.C. shall not be allowed. Whether or not those taxable goods are included in the First Schedule (exempted from tax) or Second Schedule (zero rated transactions) or Sixth Schedule (special rate tax category), does not make any difference. All the goods which are subject-matter of sale or purchase attract tax and VAT under sections 4(1) and 4(3) of the VAT Act and, therefore, necessarily no such distinction can be made while interpreting section 13(4) of the VAT Act. It is altogether different matter if the rule-making authority to begin with, decided to prescribe such goods which may incidentally find place in First Schedule or Second Schedule or Sixth Schedule. The same may not preclude the Government from prescribing other goods on which there is no output tax. If the submission of the petitioners is accepted, one would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exclude the unrestricted application of the principles of sections 5 and 10 of the Limitation Act is manifestly clear. These provisions of the Limitation Act, which the Legislature did not, after due application of mind, incorporate in the Sales Tax Act, cannot be imported into it by analogy. An enactment being the will of the Legislature, the paramount rule of interpretation, which overrides all others, is that a statute is to be expounded according to the intent of them that made it . The will of the Legislature is the supreme law of the land and demands perfect obedience see Maxwell on Interpretation of Statutes, 11th Edition pages 1, 2 and 251. Judicial power is never exercised , said Marshall, C.J. of the United States, for the purpose of giving effect to the will of the judges; always for the purpose of giving effect to the will of the Legislature; or in other words, to the will of the law . If the Legislature wilfully omits to incorporate something of an analogous law in a subsequent statute, or even if there is a casus omissus in a statute, the language of which is otherwise plain and unambiguous, the court is not competent to supply the omission by engrafting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Ram Co. v. Kasi Naicker [2003] 11 SCC 699; AIR 2003 SC 4156 and observed as under: It is well-settled principle of interpretation that a statute is to be interpreted on its plain reading; in the absence of any doubt or dif ficulty arising out of such reading of a statute defeating or frustrating the object and purpose of an enactment, it must be read and under stood by its plain reading. . . At any rate, in the guise of purposive interpretation, the courts cannot re-write a statute. A purposive inter pretation may permit a reading of the provision consistent with the purpose and object of the Act but the courts cannot legislate and enact the provision either creating or taking away substantial rights by stretching or straining a piece of legislation. (emphasis1 supplied) As rightly contended by the Government the goods included in the negative list do not support any contention that the power conferred is to prescribe the purchases of only non-taxable goods. The items/goods which are found in rule 20(2)(a) to (q) are included either in Fourth or Fifth or Sixth Schedules. First Schedule and Second Schedule are either exempted goods or zero rated goods whereas the Third Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer to grant exemp tion without norms and policy for guidance; (v) power to give retrospective effect to Legislature; (vi) power to adopt the laws which may be passed in future; (vii) power to oust the court s jurisdiction; and (viii) power to define and prescribe punishment for offences. In relation to the taxing legislation the learned author after referring to various Supreme Court decisions enumerated the following well-settled principles of delegated legislation. (1) The power to impose a tax is essentially a legislative function. Under article 265 of the Constitution no tax can be levied or collected save by authority of law, and here law means law enacted by the competent Legislature and not made by the executive authority. Therefore, the Legislature cannot delegate the essential legisla tive function of imposition of tax to executive authority; (2) Subject to the above limitation, a power can be conferred on the Government to exempt a particular commodity from the levy of tax. Similarly, the power may also be delegated to bring certain commodities under the levy of tax; (3) The power to fix the rate of tax is a legislative function, but if the legislative policy has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n once rules are made, they get incorporated into the main statute whereafter they have to be read and interpreted as if they are made by the Legislature itself (State of Uttar Pradesh v. Babu Ram Upadhya AIR 1961 SC 751 and State of Tamil Nadu v. Hind Stone [1981] 2 SCC 205; AIR 1981 SC 711). It is argued that section 13(4) of the VAT Act does not give any guidance, it confers absolutely unchannelled power and suffers from the defect of excessive delegation. Two questions spring up, namely, is there any guidance provided under section 13(4) and/or is there any excess delegation of the legislative power. In Pandit Banarsi Das Bhanot v. State of Madhya Pradesh [1958] 9 STC 388 (SC); AIR 1958 SC 909, the Constitution Bench of the Supreme Court was concerned with the validity of the provisions of the Central Provinces and Berar Sales Tax Act, 1947. It was urged that the notification issued by the Government under section 6(2), empowering amendment of the Schedule, suffers from unconstitutional delegation of legislative authority. The Bench unanimously held that executive authority can be authorised to modify either existing or future laws but it cannot modify essential featur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e should be given and to what extent and whether guidance has been given in a particular case at all depends on a consideration of the provisions of the particular Act with which the court has to deal including its preamble. Further it appears to us that the nature of the body to which delegation is made is also a factor to be taken into consideration in under section 13(4) of the VAT Act, it is not possible to hold that the Legislature did not give any guidance, and has conferred unguided power. In every case of delegated legislation, especially in respect of a taxing statute, mere absence of explicit guiding principles at one place cannot compel inference of Constitutionally impermissible excess delegation. It is well-settled that when the Legislature retains prior control to modify or annul the Rules, they are not vulnerable to the defect of excessive dele gation. In Birla Cotton AIR 1968 SC 1232, the Supreme Court considered this aspect and laid down the law as under: What form the guidance should take is again a matter which can not be stated in general terms. It will depend upon the circumstances of each statute under consideration; in some cases guidance in broad gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atute which it administers, it is confronted with two questions. First, always, is the question whether congress has directly spoken to the precise question at issue. If the intent of congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of congress. If, however, the court determines congress has not directly addressed the precise ques tion at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency s answer is based on a permissible construction of the statute. If congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deplore the new despotism of the executive, the very complexity of the modern society and the demand it makes on its Government have set in motion forces which have made it absolutely necessary for the Legislatures to entrust more and more powers to the executive. Text book doctrines evolved in the 19th century have become out of date. Present position as regards delegation of legislative power may not be ideal, but in the absence of any better alternative, there is no escape from it. The Legislatures have neither the time, nor the required detailed information nor even the mobility to deal in detail with the innumerable problems arising time and again. In certain matters they can only lay down the policy and guidelines in as clear a manner as possible. In Hira Lal Rattan Lal v. Sales Tax Officer [1973] 31 STC 178; [1973] 1 SCC 216; AIR 1973 SC 1034, the question was posed and answered thus (at pages 189 and 190 in 31 STC): It is true that the Legislature cannot delegate its legislative func tions to any other body. But subject to that qualification, it is permissible for the Legislature to delegate the power to select the persons on whom the tax is to be levied or the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asses see would necessarily depend upon diverse factors such as the impact of the relief on the industry as a whole, the response of the industry to the grant of the relief, the adequacy or inadequacy of the relief granted in promoting the growth of new industrial undertakings, the state of the economy prevailing at the time, whether it is buoyant or depressed and administrative convenience. These are factors which may change from time to time and, hence, in the very nature of things, the working out of the mode of computation of the capital employed for the purpose of determining the quantum of the relief must necessarily be left to the Central Board of Revenue which would be best in a position to consider what should be the quantum of the relief necessary to be given by way of tax incentive in order to promote setting up of new industrial undertakings and hotels and for that purpose, what amount of the capital employed should form the basis for computation of such relief. (emphasis 1supplied) In J.K. Industries Ltd. v. Union of India [2008] 297 ITR 176 (SC); [2007] 13 SCC 673, the question before the apex court was whether Accounting Standard 22 (AS 22) insofar as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly when proper guidance is provided to the delegate. Such guidance has to be deduced from the provision empowering the rule-making or from different provisions of the statute; (iii) it is not unconstitutional for the Legislature to delegate the determination of details relating to working of tax laws. The details can be with regard to enumeration of goods, transactions in which sales/purchase tax should be imposed, taxable events whether single point or multi-point and the grant or denial of relief in the computation of income, etc.; and (iv) while determining the working details of tax laws, it is always open to the delegated authority to consider market conditions, state of the economy prevailing at that time, economic consequences, administrative convenience and the impact of levy on the society and State exchequer. Whether section 13(4) of the VAT Act is devoid of broad legislative guidelines? We are afraid; the answer must be in the negative. It is not uncommon that the Legislature while conferring power to make rules indi cates the subjects illustratively for the purpose of making rules specifically and for making rules, to carry out the purpose of the Act . Enacting his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule. On a plain reading, it is clear that prior legislative control on the rulemaking authority is retained by the Legislature. VAT Rules so laid before the legislative assembly for a period of 14 days can be modified or annulled and they shall be enforced only subject to such modification or annulment. Therefore section 13(4) of the VAT Act does not suffer from excessive delegation. This point is decided accordingly against the petitioners. Constitutional validity of rule 20(2)(h) of VAT Rules We will consider this under two broad headings, namely, (i) Vires of rule 20(2)(h) of the VAT Rules; and (ii) Infringement of article 14 of the Constitution. (i) Vires of rule 20(2)(h) Delegation is a constituent element of legislative power. But, a zealous delegate cannot overstep the power donated nor ignore statutory essentials in making rules as it would offend plenary legislation. The legislative power to delegate to fill is wide, subject to limitation, namely, it cannot be the delegate in control of the power delegation is valid only when it is competin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the objects and purposes of the Act. It is not for the court to examine the merits or demer its of such a policy because its scrutiny has to be limited to the question as to whether the impugned regulations fall within the scope of the donated power to the delegate. Precedents are galore on the point that delegated legislation must comply with statutory essentials. In Indian Express Newspapers (Bombay) Private Ltd. v. Union of India [1985] 1 SCC 641; AIR 1986 SC 515, it was held that subordinate legislation does not carry the same degree of immu nity which is enjoyed by a statute and that it can be questioned on any of the grounds on which plenary legislation may be questioned. In addition it may also be questioned on the ground that it does not conform to the statute under which it is made as well as on the ground that it is manifestly arbi trary and unreasonable. It is also settled that the expression, for carrying out the purpose of the Act is not construed as to bring something in the statute which has been excluded by the Act itself (see Kunj Behari Lal Butail v. State of H. P. [2000] 3 SCC 40; AIR 2000 SC 1069, Kerala Samsthana Chethu Thozhilali Union v. State of Kerala [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the law of the State or local legislation and are, therefore, better known to the State Government or District Collectors and would be available to be added to the maximum selling price declared by the Central Government or by the State Government subject to delegation of power by the Central Government. The defi nition of declared price cannot be so read as empowering the State Government, the Director or the District Collectors to prescribe by themselves and levy on the kerosene, any charges, rates, duties and taxes in purported exercise of power under the Control Order. In other words, the charges, rates, duties and taxes must be pre-existing or orig inating from a lawful source other than the provisions of the Kerosene Order and can only be quantified by the State Government or District Collector so as to be prescribed for being added to the declared max imum selling price. The term charges must be read ejusdem generis taking colour from the succeeding terms rates, duties and taxes. The term prescribed should be given a broad and extended meaning to include any item as the Government may deem fit and proper in the negative list. If it is construed as permitting the Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. State of U.P. [1991] 1 SCC 212; AIR 1991 SC 537 in which the meaning and true import of arbitrar iness was considered as follows: The meaning and true import of arbitrariness is more easily vis ualised than precisely stated or defined. The question, whether an impugned act is arbitrary or not, is ultimately to be answered on the facts and in the circumstances of a given case. An obvious test to apply is to see whether there is any discernible principle emerging from the impugned act and if so, does it satisfy the test of reasona bleness. Where a mode is prescribed for doing an act and there is no impediment in following that procedure, performance of the act otherwise and in a manner which does not disclose any discernible principle which is reasonable, may itself attract the vice of arbitrari ness. Every State action must be informed by reason and it follows that an act uninformed by reason, is arbitrary. Rule of law contem plates governance by laws and not by humour, whims or caprices of the men to whom the governance is entrusted for the time being. It is trite that be you ever so high, the laws are above you . This is what men in power must remember, always. Kumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of usage. A month thereafter the Commissioner again sent a D.O. letter dated October 22, 2005 to the Special Chief Secretary (Revenue) requesting for early convening of the GoM meeting. In the agenda for the said meeting dealing with the aspect of the inclusion of coal, naphtha and natural gas in the negative list, the Commissioner clearly mentioned that these items attract rate of tax at 12.5 per cent and the amount of tax paid will have to be given back in the form of I.T.C. to the purchasing dealers. This results in huge loss of revenue and hence proposal was muted for inclusion of these commodities in the negative list. The proposal was approved by the GoM in its meeting held on November 14, 2005. To our mind the involvement of huge revenue was the reason for amending rule 20(2)(h) of the VAT Rules. Is it not sufficient enough to dispel the argument that it is manifestly arbitrary and irrational? In Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. [1969] 2 SCC 55; AIR 1970 SC 169, the Constitution Bench of the Supreme Court considered the constitutional validity of the Madras Urban Land Tax Act, 1966. The appeal arose out of the Full Bench de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 913). We have referred to the events preceding the impugned amended rule. There is no denial that as per section 4(3) of the VAT Act, naphtha and nat ural gas stand included in the Fifth Schedule to the VAT Act, which are taxable at the standard rate of 12.5 per cent. This indicates that all the deal ers who are engaged in the manufacture of various products like cement, fertilizers, etc., buy these goods paying VAT at 12.5 per cent except coal (which attracts VAT of four per cent). If they are allowed to claim I.T.C., virtually there would not be any VAT on the purchase of these goods. Resultantly there would be huge loss of revenue to the Government. Fifth Schedule is incorporated in the VAT Act to deal with such of those goods attracting VAT at 12.5 per cent and, if I.T.C. is allowed even in respect of such goods, it would make them zero rates goods. Before we part with this aspect, we may quote the passage from an unreported judgment in MAKS Casting Private Limited v. Government of Andhra Pradesh1 (W.P. No. 12804 of 2009 and batch, dated September 16, 2010) which upheld the validity of rule 67 of the VAT Rules. Dealing with the question of reasonableness, the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. classified purchases of goods into two categories. First, where naphtha, natural gas and coal are used by non-traders who use the goods for manufacturing, and the second category are those trader-dealers who only deal in these goods for their business. This, as urged by the petitioners, is vitiated and hit by article 14. There cannot be any dispute that a dealer who is in the business of dealing in these goods is entitled to claim I.T.C. But manufacturers like the petitioners cannot claim I.T.C. For the purpose of I.T.C., the Legislature resorted to classification of goods which are eligible for claiming i.t.c, and the goods which are not eligible for I.T.C. Even among them, the goods used by a non-trader in the business of manu facturing are not eligible whereas a trader who is dealing in non-manu facturing business is eligible to claim I.T.C. The petitioners point out that section 13(4) of the VAT Act empowers to prescribe purchase of such taxable goods which is not entitled for I.T.C. As the manufacturers as well as dealers have purchased these goods by paying VAT there cannot be dis crimination between the two categories. The point is whether classification of dealers into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s interfere and strike down the offending part when it is the case of over-inclusion. But, ordinarily, the courts seldom touch cases of under-inclusion; the principle being that the Legislature is free to recognise the degree of harm, and that it may confine benefits or burdens to those classes of cases where the need seem to be the clearest. If the court comes to conclusion that, by reason of under-inclusion, eligible class is left out, no direction can be given to include that category. We are well supported by precedents on this. In Sakhawant Ali v. State of Orissa AIR 1955 SC 166; [1955] 1 SCR 1004, section 16(1)(ix) of the Orissa Municipalities Act disqualified the advocate for the municipality from contesting election to a seat in the municipality. This provision was upheld by the apex court holding: The simple answer to this contention is that legislation enacted for the achievement of a particular object or purpose need not be all embracing. It is for the Legislature to determine what categories it would embrace within the scope of legislation and merely because certain categories which would stand on the same footing as those which are covered by the legislation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 14 . It was also held that the distinction between Virginia tobacco and country tobacco was also taken as crucial in holding that the classification is not obnoxious to article 14 of the Constitution. The relevant observations are as follows (page 533 in 13 STC): It is not in dispute that taxation laws must also pass the test of article 14. That has been laid down recently by this court in Kunnathat Thathunni Moopil Nair v. State of Kerala AIR 1961 SC 552. But in deciding whether a taxation law is discriminatory or not it is neces sary to bear in mind that the State has a wide discretion in selecting the persons or objects it will tax, and that a statute is not open to attack on the ground that it taxes some persons or objects and not others. It is only when within the range of its selection, the law oper ates unequally, and that cannot be justified on the basis of any valid classification, that it would be violative of article 14. The following statement of the law in Willis on Constitutional Law , page 587, would correctly represent the position with reference to taxing statutes under our Constitution: A State does not have to tax everything in order to tax something. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to appease the hunger and quench the thirst of the consumer. Validity of a classification under our Constitution does not require such a blurred perception. (emphasis1 supplied) Traders and non-traders do not stand on the same footing when it comes to use of the goods referred to in the impugned rule. Out of the 53 cases before us, in 49 cases coal is used as a raw material and it is not sold as such. The traders in coal again sell the entire quantity with little or no value addition whereas non-traders sell the products like cement, fertiliz ers, etc., with considerable value addition. As seen from the precedents the purpose or the use to which goods are put to can be basis for a valid classification. As we already noticed supra, the object of denying I.T.C. on these goods is to increase the Revenue. Thus the twin tests of classification, namely, nexus test and rationality test are satisfied. We have, therefore, no manner of doubt in rejecting the submission that the impugned rule is discriminatory. As it is a case of under-inclusion we cannot give direction to include the petitioners and the likes in the exempted category. The alternative submission that all the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the absence of consumption of the original goods, the petitioners are not liable to pay the tax. The appeal by the State (as reported in Asst. Commissioner v. Nandanam Construction Company [1999] 115 STC 427 (SC); [1999] 8 SCC 69; AIR 1999 SC 3496), however, was accepted by a Constitution Bench of the Supreme Court observing that the intention of the Legislature is to bring to purchase tax in either event of consumption of goods in the manufacture of goods for sale or consumption of goods in any other manner and that once the goods are utilised in the construction of buildings, the goods ceased to exist or cease to be available in that form for such sale or purchase so as to attract the tax and, therefore, the correct meaning to be attributed to the said provision would be that tax will be attracted when such goods are consumed in the manufacture of other goods or are consumed otherwise. After perusing the decision of this court as well as the decision of the Supreme Court, we are not able to countenance the petitioners plea that they are dealers in the sense in which the term is used in rule 20(2)(h) of the VAT Rules. As is pointed out by the Act itself there is a clear di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt lacks power to take away the vested right. The submission was accepted by the Supreme Court observ ing thus: As pointed out by us that when on the strength of VAT Rules available, certain acts have been done by the parties concerned, inci dents following thereto must take place in accordance with the Scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that the right, which had accrued to a party such as the avail ability of a scheme, is affected and, in particular, it loses sight of the fact that the provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned. Therefore, the Scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier Scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier Scheme necessarily that the taxes have to be adjusted and payment made complete. Any manner or mode of application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Retrospective withdrawal of the benefit of set-off only for a particular period should be justified on some tangible and rational ground, when challenged on the ground of unconstitutionality. Unfortunately, the State could not succeed in doing so. . . (emphasis1 supplied) The petitioners all along for a period of nine months availed of I.T.C., on the coal, naphtha and natural gas. In the absence of any denial, a reason able inference can be drawn that, while working out their production and marketing costs, the tax credit availed of by them was a factor. All the goods manufactured have been sold and there is no opportunity now for the petitioners to collect the increased cost by reason of non-availability of I.T.C. We have perused the files produced before us. No reasons whatso ever are forthcoming as to why the Government sought to amend the rule retrospectively. In the absence of any such reasons, much less strong rea sons, we have no hesitation to hold that giving retrospectivity to the impugned rule would certainly be inequitable and arbitrary. To that limited extent, we are persuaded to accept the petitioners plea. Validity of the impugned assessment orders In al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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