In a significant ruling, the Supreme Court addressed the legal implications of the State of Madhya Pradesh v. State of Chhattisgarh case concerning the sales tax exemption post state bifurcation. The judgment delves into the intricacies of tax laws and the continuity of benefits for industrial units in the reorganised states. A crucial case shaping the legal landscape for inter-state transactions and tax exemptions.
Facts
- Industrial units in Madhya Pradesh were granted exemption from tax under a policy for units with fixed assets above Rs. 100 crores.
- The exemption period was for 11 years from the date of commencement of commercial production or when the exempted tax reached the value of capital investment.
- After bifurcation, the industrial units were situated in either the reorganised State of Madhya Pradesh or the new State of Chhattisgarh.
- The issue was whether these units could still enjoy tax benefits while engaging in inter-state transactions to the other state.
- The Reorganisation Act defined terms like ‘existing State of Madhya Pradesh’, ‘transferred territory’, and ‘successor State’.
- The Act outlined the formation of the State of Chhattisgarh and the territorial divisions of Madhya Pradesh post-bifurcation.
- Provisions regarding the territorial extent, adaptation of laws, and interpretation of laws post-reorganisation were discussed in the Act.
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Issue
- Dispose of appeals related to the legal effect of bifurcation of the State of Madhya Pradesh
- Issues relate to exemption or benefit of deferment of sales tax granted under the Madhya Pradesh Commercial Tax Act, 1994
- Question to be answered is the impact of the bifurcation on the sales tax exemption or deferment
Arguments
- The petitioners contend that the proposed levy of tax by the State of Andhra on the sale of yarn to dealers in Andhra is illegal.
- They argue that under the Madras Act and Rules, tax on successive sales of yarn can only be imposed at one point.
- It is argued that since the Government of Madras has already levied tax on the sale within its state, a second levy by Andhra is unauthorized.
- The petitioners claim that the threatened assessment proceedings by Andhra are incompetent due to this illegal double taxation.
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Analysis
- Proviso states that no order shall be made after the expiry of three years from the appointed date.
- The provision of the Act shall have effect notwithstanding anything inconsistent with it in any other law.
- The appropriate Government can make adaptations and modifications of the law for the States of Bihar or Jharkhand before the expiration of two years from the appointed day.
- The expression ‘law’ includes any enactment, ordinance, regulation, order, notification, etc., in force immediately before the appointed day in the whole or any part of the erstwhile State of Madhya Pradesh.
- Any law of a State imposing a tax on inter-State trade is subject to restrictions specified by Parliament.
- Section 84 clarifies that the Act does not change the territories to which any law in force before the appointed day extended or applied.
- Section 85 allows adaptations and modifications of laws made before the appointed day for Bihar or Jharkhand by the appropriate Government.
- Actions taken under the laws specified in the Schedule shall continue in force in the State of Chhattisgarh.
- Entry 26 in the First Schedule to the Constitution includes the State of Chhattisgarh after the appointed day.
- No deeming fiction contrary to Article 286 can be applied without amendment.
- Article 286 restricts the imposition of tax on sales or purchases of goods outside the State or during import or export.
- Section 78 of the Reorganisation Act consists of two parts.
- The first part does not create a deeming fiction but states the obvious.
- It postulates that any law in force before the division of Bihar into two states will continue to operate in the territories that formed the erstwhile State of Bihar.
- The second part of Section 78 incorporates a deeming fiction, stating that territorial references in laws to the State of Bihar shall mean all territories in Bihar until amended by the new State.
- The laws in force before the appointed date continue to apply to the successor/reorganised State of Madhya Pradesh as it existed before bifurcation.
- The legal fiction ensures continuity in application of laws post reorganisation without affecting their substance.
- The principle of ‘clean slate’ in international law does not apply in reorganisation under Article 3 of the Constitution.
- The creation of new states necessitates legal continuity and adaptations by the competent authorities.
- The notification under the Reorganisation Act holds legal force in the territories forming part of the undivided State of Bihar until amended.
- The Parliament’s power under Article 3 allows for alterations, mergers, or divisions of states.
- Imaginary State of Affairs must be treated as real with all its inevitable consequences postulated by the legal fiction created by the Act.
- Section 84 of the Bihar Reorganisation Act, 2000 ensures continuity of laws in the new State of Jharkhand created post reorganisation.
- The legal fiction created by Section 84 aims to avoid disorderly and chaotic situation in the new State.
- The fiction does not imply that the new state did not have separate political and constitutional existence.
- The new state’s governance is based on pre-existing laws until new laws are enacted.
- The sale transactions transform from intra-state to inter-state post reorganisation.
- The authorities will not comment on the contention regarding inter-state transactions, leaving it to be raised by private parties/assessee in appropriate proceedings under the statute.
- The authorities will examine if the inter-state transactions were eligible for benefits and whether the private parties/assessee met the requirements to claim such benefits.
- No opinion has been expressed on the contention.
- In cases where private parties/assees succeeded before the High Court, the authorities should exclude the time period as the ratio in Swarn Rekha Cokes and Coals Pvt. Ltd. is being overruled.
- In instances where adjudication orders were passed and appeals were not filed by private parties/assees due to writ petitions, the exclusion of time period should apply.
Decision
- The appeals by the State of Madhya Pradesh and the State of Chhattisgarh are allowed.
- The appeals by the private parties/assessee are dismissed.
- Private parties/assessee can challenge adjudication orders following the law.
- They can file an application under Section 14 of the Limitation Act, 1963, or other relevant state enactments for exclusion of pending proceedings time.
Case Title: THE STATE OF MADHYA PRADESH Vs. LAFARGE DEALERS ASSOCIATION
Case Number: C.A. No.-005302-005302 / 2019
