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TMI Blog1963 (8) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed the Company to sales tax under the Travancore-Cochin General Sales Tax Act, 1125 M.E. for the assessment year 1952-53 in respect of works contracts . The Company filed a revision petition before the 1st respondent, but it was rejected. Likewise the 2nd respondent assessed the Company to sales tax by his orders dated 7-1-1960, 4-1-1960 and 31-3-1960 for the assessment years 1956-57, 1957-58 and 1958-59 in respect of works contracts . The appellant filed four petitions in the High Court of Kerala under Arts. 226 and 227 of the Constitution for quashing the said orders of assessment. The main contention advanced on behalf of the appellant-Company before the High Court was that, after the Constitution came into force the relevant Sales Tax Acts imposing sales tax on works contracts were unconstitutional and, therefore, void. The High Court rejected the contention and dismissed the petitions with costs. Hence the appeals. 3. Before adverting to the rival contentions it would be convenient at the outset to give briefly the historical background of the sales tax legislation in Kerala. 4. Originally, Travancore and Cochin were two separate sovereign States ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came into force and the new State of Kerala was formed thereunder. The newly formed Kerala State comprised the area covered by the Travancore-Cochin State, excepting a small part thereof, and the district of Malabar in the Madras State. Thereafter, the Kerala Legislature passed the Travancore-Cochin General Sales Tax (Amendment) Act, 1957 (12 of 1957) amending the Act and extending its provisions to the whole State of Kerala. The new Act practically contained the provisions of the earlier Act. The said Act came into force on October 1, 1957. By the provisions of Act 12 of 1957, among other things, the tax on electric goods was enhanced from 3 n.p. to 4 n.p. in the rupee and in regard to cement, this item was freshly added and charged to sales tax at 5 n.p. in the rupee. The State of Kerala does not admit that either there was any enhancement of tax in the case of electrical goods or that any tax was imposed in regard to cement involved in a works contract. Further, the sales tax leviable under the Act was enhanced by the Kerala Surcharge on Taxes Act, 1957 (11 of 1957) and again by the Kerala Surcharge on Taxes Act, 1960. We are not concerned with the latter Act as no assessment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of the said arguments. We shall refer to his arguments in the course of the judgment at appropriate places. It may be mentioned at this stage that the learned Advocate-General conceded that the assessment orders for the years 1956-57, 1957-58 and 1958-59 made under the Travancore-Cochin General Sales Tax (Amendment) Act, 1957 (12 of 1957) and the Kerala Surcharge on Taxes Act (11 of 1957) were bad, but prayed that the State might be given liberty to assess the appellant de novo for the said years under the Act. 8. The main contention of learned counsel for the appellant centers on the provisions of Arts. 277 and 278 of the Constitution. Under Art. 277, any taxes that were being lawfully levied by the Government of any State before the Constitution could be continued to be levied thereafter, notwithstanding that the said taxes were mentioned in the Union List, till Parliament made a law to the contrary. Article 278 enables the Government of India and a State Government specified in Part B of the First Schedule to the Constitution to enter into an agreement with respect to levy and collection of any tax leviable by the Government of India in such State and for the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would continue to have the power to levy the tax in respect of works contracts till Parliament made appropriate law, it did not incur any loss in respect of the said tax and, therefore, no valid agreement could be entered into between the State Government and the Union in respect thereof. To state it differently, Art. 278 does not come into play unless the Government of India acquires the power to levy a particular tax saved by Art. 277 by Parliament making an appropriate law; for, it is said with some force, there cannot be an agreement to recoup any loss of revenue when there is no such loss. But this question is covered by a decision of this Court in Union of India (UOI) v. Maharaja Krishnagarh Mills Ltd. [1961]3SCR524 . There, the question for determination was whether the Union of India (UOI) was entitled to levy and recover arrears of excise duty on cotton cloth for the period April 1, 1949 to March 31, 1950, payable by the respondent, a cloth mill in the State of Rajasthan, under the Rajasthan Excise duties Ordinance, 1949. By reason of art. 277 of the Constitution, the State of Rajasthan became entitled to recover the said duty notwithstanding the fact that it was trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary, the power of the State of Rajasthan to levy such a duty, but that is only a saving provision in terms subject to the provisions of Art. 278. 13. This Court, therefore, held that after the coming into force of the Constitution excise duty in question in that case was leviable only by the Government of India, though there was a saving provision in favour of the State of Rajasthan till Parliament made an appropriate law; on that reasoning it held that the agreement under Art. 278 could be made in respect of such a levy notwithstanding the temporary reservation made in favour of the State. The only difference between that case that case and the present one is that at the time the agreement was entered into between the Union and the State, Parliament had not made the appropriate law depriving the State of its power to levy taxes in respect of works contracts . But that cannot make any difference in principle, for, even the earlier decision related only to the validity of the agreement in respect of arrears leviable by the State before the appropriate law was made. The effect of the provisions in Art. 278 is that to the extent covered by an agreement the power of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces Enquiry Committee with some modifications and that the Union of India (UOI) agreed to recoup the State for the loss caused to it by reason of the federal financial integration in the manner described thereunder. It was not a piecemeal agreement confined to a few items, but a comprehensive one to fill up the entire revenue-gap caused to the State by reason of some of its sources of revenue having been taken away by the Union or otherwise lost to it. A perusal of the main recommendations made by the Indian States Finance Enquiry Committee and incorporated in the agreement also indicates the completeness of the agreement. The Committee was asked to examine and report, inter alia, whether, and if so, the extent to which, the process of so integrating Federal Finance in the Indian States and Union with that of the rest of India should be gradual and the manner in which it should be brought about. One of the general principles followed by the Committee was that federal financial integration in States involved not merely the taking over of all their federal revenues by the Central, but also the assumption of all expenditure in States upon Departments and Services of a federal cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ederal financial integrator. ₹ 230 lakhs per annum to 31st March 1955. 17. The agreement, read with the Report, makes the following position clear : The loss arising to the State on account of the federal financial integration in the State was ascertained and a provision was made for subsidizing the State by filling up the said revenue-gap. The agreement ex facie appears to be a comprehensive one. It takes into consideration the entire loss caused to the State by reason of some of its sources of revenue being transferred under the Constitution to the Union. It would be unreasonable to construe the agreement as to exclude from its operation certain taxes which the State was authorized to levy for a temporary period. As we have said, that saving was subject to an agreement and, as by the agreement effective adjustments were made to meet the loss which the State would have incurred but for the agreement, there was no longer any necessity for the continuance of the saving and, it ceased to have any force thereafter between the parties to the agreement. We are not called upon in this case to decide whether the said power revived after the expiry of ten from the commencem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 395 but subject to the other provisions of this Constitution, all the law in force in the territory of India Immediately before the commencement of this Constitution shall continue of force therein until altered or repealed or amended by a competent Legislature or other competent authority. * * * Explanation I. - That expression law in force in this article shall include a laws passed or made by a Legislature or other competent authority in the territory of India before the commencement of this constitution and not previously repealed, notwithstanding that it or parts of it may not be then in operation either at all or in particular areas. 20. The object of this article is to maintain the continuity of the pre existing laws after the Constitution came into force till they were repealed, altered or amended by a competent authority. Without the aid of such an article there would be utter confusion in the field of law. The assumption underlying the article is that the State laws may or may not be within the legislative competence of the appropriate authority under the Constitution. The article would become ineffective and purposeless if it was held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency. An article of the Constitution by its express terms may come into conflict with a pre-Constitution law wholly or in part; the said article or articles may also, by necessary implication, come into direct conflict with the pre-existing law. It may also be that the combined operation of a series of articles may bring about a situation making the existence of the pre-existing law incongruous in that situation. Whatever it may be, the inconsistency must be spelled out from the other provisions of the Constitution and cannot be built up on the supposed political philosophy underlying the Constitution. These observations are necessitated by the reliance of Mr. Nambiar on two decisions of the Supreme Court of the United States of America. In Chicago, Rock Island and Pacific Railway Company v. Willian McGlinn (1884) 29 L. ed. 270, the facts, briefly were : An Act of Kansas purported to cede to the United States exclusive jurisdiction over the Fort Leavenworth Military Reservation. In considering the question whether the previous laws continued after the said cession, the Supreme Court of the United States of America made a distinction between laws of political char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Constitution came into force the States were levying and collecting certain taxes which, under the Constitution, were allotted to the Union. The immediate exercise of the Union power of taxation in respect of such taxes would dislocate the finances of the State and introduce difficulties in the administration. To avoid this, Art. 277 saved the existing taxes levied by the States, though they have been transferred to the Union List by the Constitution, till Parliament made appropriate law. But the Constitution was also applicable to Part B States. They had plenary powers of taxation. Their relationship with the paramount power different from State to State. Further, most of the States were in a state of financial instability and required substantial help from the Union to bring them up to the standard of Part A States. There would be a serious dislocation in the administration of the said States by a sudden withdrawal of the federal sources of revenues. The provisions of Part XII of the Constitution with the saving embodied in Art. 277, may have met the situation obtaining in Part A States, but they were inadequate for Part B States. Therefore, a special provision under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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