Through Mr. Harish Malhotra, Senior Advocate v. Through Mr. H.L. Taneja with Mr. J.R

ThroughMr. H.L. Tanejawith Mr. J.R. Goel, Advocatesfor R-1 & 2. + 3. Writ Petition (C) No. 8313/2002 SAREESANSAR ThroughMr. HarishMalhotra,SeniorAdvocatewith Mr. Nitin Aggarwal,Advocate. versus GOVT.OFNCTOFDELHI Respondent ThroughMr.J.R.Goel, Advocatesfor R-1 &2. fe< WP(C) 3750/2000 page no 1 of 25 '.I '(y.: r / i' y \ •f; lh:i •i 'iV' •' A. j . < i'"' + 4. Writ Petition (C) No. 6206/2002 <rvi| SAREESANSAR .. petitioner ThroughMr. HarishMalhotra,SeniorAdvocatewith Mr. Nitin Aggarwal, Advocate. versus Union of India &Ors ThroughMr. J.R. Goel, Advocatesfor R-1 & 2. Respondents + 5. Writ Petition (C) No. 6209/2002 MEHRA SAREE ThroughMr. HarishMalhotra,SeniorAdvocatewith .. Petitioner Mr. Nitin Aggarwal, Advocate. versus Union of India & Ors ThroughMr. H.L. Tanejawith Mr. J.R. Goel, Advocates for R-1 & 2. Respondents CORAM HON'BLEMR. JUSTICEVIKRAMAJITSEN HON'BLEDR. JUSTICfeS. MURALIDHAR

1. WhetherReportersoflocalpapersmay be allowed to see the judgment?

2. To be referredto the Reporteror not? 3. Whetherthejudgmentshouldbe reportedin Digest?^ ; Dr. S. Muralidhar. J.

1. These five writ petitionsfiled by an associationof silk and textiles WP(C) 3750/2000 page no 2 of 25 •... •V/ ^ j ^ ^ ^ . I -'I i g; 1^ traders in Delhi and its members challengethe constitutionalvalidityof the following notifications: (i) NotificationNo. F.4 (i)/99-Fin(g)dated 31.3.1999issued by the Lt. Governor of the National Capital Territoryof Delhi (GNCTD),FinanceGeneralDepartmentspecifyingthe rate of local sales tax payable under the Delhi Sales Tax Act, 1975, as amendedby Delhi Sales Tax (Amendment)Act, 1997, as 3 paise in a rupee in respectof silk fabric. (ii) Notification Nos. F.4(52)/99/Fin(G)/(I) and (II) dated 15.1.2000 issued by the Sales Tax Department, GNCTD, includingsilk fabrics in the First Scheduleto the Delhi Sales Tax Act 1975 and levyingsales tax @12 paise in the mpee on silk fabricsand garmentsmade of silk thereof. (iii) Notification No.F.4(75)/99-Fin(G)/2095dated 31.3.2000 issued under Section4(1) of the Delhi Sales Tax Act, 1975, as amended by the Delhi Sales Tax (Amendment) Act,' 1997 read with the Delhi Sales Tax (Amendment) Ordinance, 2000 deleting 'silk fabrics' from the First Scheduleand introducingit at SerialNo.62 in the Second Scheduleto the DelhiSales Tax Act, 1975 thus levyingsales tax @4 paisein the rupee on silk fabrics. In short, the challengeis to the levy of local sales tax in Delhi on silk fabricsfor the period 1.4.1999till 31.3.2001. The CSTAct

2. Abriefrecountingof the backgroundfacts leading to the filing of the writ petitions may be useful to understandthe issues that arise for I 7^' •y . . deterrmnation.In 1957, the Central Sales Tax Act ('CST Act') was WP(C)3750/2000 _ page no 3 of 25 enacted by the Parliamentpursuantto the legislativepower traceableto Article286 (3) of the Constitutionof Indiawhich reads as under: "286(3)Any law of aState shall, in so far as it imposes, or authorizesthe impositionof, - (a) a law on the sale or purchase of goods declaredby Parliamentby law to be of special importancein inter- State trade or commerce;or (b) a tax on the sale or purchaseof goods, being atax of the naturereferredto in sub-clause(b), sub-clause(c) or sub-clause(d) of clause(29A) of article366, be subjectto such restrictionsand conditionsin regardto the systemof levy, rates and other incidentsof the tax as Parliamentmay by law specify."

3. The CST Act received the assent of the Presidenton 24.12.1956. Section14 of the CST Act declaresthat the goods listedin that provision "are of special importancein inter-statetrade or commerce".These are referredto as 'declaredgoods'.In respectof such 'declaredgoods' there ' I is arestrictionprovidedin Section15 CST Act on the powerofthe States to levy local sales tax on the intra-saleof such goods i.e., when they are i sold within the State. Section 13 stipulatesthat the rate of local sales tax on such declaredgoods shall not exceed4% of the sale or purchaseprice of such goods. Section 14 as it originallystood specifiedcoal, Cotton, oil seedsetc. as declaredgoods. 'Silkfabrics' was introducedinto Section14 WP(C) 3750/2000 page no 4 of 25 ' 4 •fc' Is: •i' fii" t'-'' i3 p fe. a> I I • .. r \\'r I: ?}-.;• r-T . '••i' •! I .. J' r\ •. ' ,• '.I , • .: ^ h v: as entry (xi) by the FinanceAct 1961. The definitionof 'silkfabrics' was, by reference,the same as its definitionin item 20 of the FirstScheduleto 1 the CentralExcisesand Salt act, 1944 (CE Act).

4. Since the Statesstood to lose revenueby the virtueof the provisionsof Section15 CST Act insofaras the sales ofdeclaredgoods withinthe State were concerned,the Parliamentdecided to compensatethe States to the extentof loss of such revenueby enactingthe AdditionalDuties ofExcise (Goods ofSpecialImportance)Act, 1957 (ADE Act). The ADE Act

5. The Statementof Objects and Reasons (SOR) of the ADE Act read as under: "The object of this legislationis to impose additional duties of excise in replacementof the sales tax levied by the Union and the Stateson sugar, tobaccoand mill made textilesand to distributethe net proceeds of these taxes, except the proceeds attributableto Union Territories,to the States.The distributionof the proceedsof the additionalduties broadlyfollowedthe patternrecommendedby the Second Finance Commission. Provision has been made that the States which levy a tax on the sale or purchase of these commodities after V April, 1958 do not participate in the distribution of the net proceeds. Provision is made in the'Act for including these goods in the category of goods declared to be of specialimportantin inter-statetrade or commerceso that following the imposition of unifomi duties of excise on them, the rates of sales tax, if levied by the State are subjectfrom T' April, 1958 to the restrictionsin Section15 of the CentralSales Tax Act, 1956." WP(C) 3750/2000 page no 5 of 25 nP n} h''" ' '•I' .V •V r >1 'I, i: Mi., ir' '.L fef'' ) ••••,. '! -r i/? '-'i iVJ'i 0'" Y'b- , A iv» Vt • i n r.%'

6. S. 3 (1) ofthe ADE Act, which is the chargingsection,statesthat there shall be levied and collected an additional duty of excise on goods describedin Column 3 of the First Scheduleof the ADE Act at the rate specifiedin Column4thereof.Thesedescriptionsof goods correspondto the CE Act. When the CST Act was amended in 1961 to include 'silk fabrics'as entry (xi) in Section14, asimultaneousamendmentwas made to the ADE Act by including'silkfabrics'in the definitionclause2(c), S. 3(1) and the FirstScheduleof the ADE Act. By Act No.7 of 1986further changes were made to the First Schedule to bring it in line with the Central Excise Tariff Act 1985. As of today, Column 3 of the First - . '• Scheduleto the ADE Act has an entryconcerning'WovenFabricsof Silk « or Silk Waste' and the rate of duty specifiedin Column4is 'Nil'. -k

7. S.4 ADE Act states that "During each financial year, there shall be paid out of the ConsolidatedFund of India to the States in accordance with the Second Schedule such sums, representing a part of the net proceedsof the additionaldutiesleviedand collectedduringthat financial year, as are specifiedin that Schedule."Clause 4 ofthe SecondSchedule to the ADE Act sets out, in a table appended thereto, the precise percentage,of the distributionamong the States the ADE collected in respect of 'Fabrics' describedin Column 3 of the pirst Scheduleto the t WP(C)3750/2000 page no 6 of 25 i'-'f '• !• yrs/i;. ••^ it'- I !V''• "rr^i • «' ! • fe - Pv •3' ADE Act. The proviso to Clause 4 stipulatesthat if any State levies and collectslocal sales tax on the goods specifiedunder S. 3 (I) of the ADE Act, then "no sums shall be payableto that State under this paragraphin respect of that financialyear, unless the Central Governmentby special order directs otherwise." In other words, the consequence of a State levyingand collectinglocal sales tax on the sale of declaredgoods is that It might entail, subject to the Central Governmentdirecting otherwise, such state losing its share of the ADE collectedin that financial year. Significantly,Delhiis not one of the Statesmentionedtherein.

8. With effect from 1.3.1965 mill-madesilk fabrics was totally exempt from both excise duty under the CE Act as well as from additionalduty underthe ADE Act. In 1968 it was decidedto take silkfabricsoutsidethe purviewof Section14 CST Act on accountof the fact that the States not going to be compensatedby additionalduties of excisein lelationto Silk fabrics. Accordinglyin the FinanceAct, 1968 the followingchange it; was proposed: ''ProvisionRelationto CentralSales Tax All items on which additionaldutiesof exciseare being leviedin lieu of sales tax have been includedin Section 14 ofthe CentralSales Act, which read with Section14 imposes a restriction on the levy of locM sales tax. Mill-made silk fabrics was also included with effect from 1.3.1961,due to the replacementof sales tax by r Iv WP(C) 3750/2000 page no 7 of 25 '4 IIkV' bj=fc -I . • ' I i- 0'kf-' >i, (h:- •<•;•: • ( fi: • V r excise duties. as well As basic additional additional excise duties have been totally exempted on mill-made fabrics with effect from 1.3.1965, it has been decided to delete item (xi) from section 14 of the Central Sales Tax Act, thereby lifting the restrictions imposed on the States to levy sales tax under their local laws on silk fabrics, [clause 43]. " (emphasissupplied) ^

9. As aresult, with effectfrom 11.5.1968,'silkfabrics' was dropped from Section 14 CST Act. Consequent upon the above change, the restrictionon levy of local sales tax as stipulatedby Section 15 of the CST Act did not apply. However,silk fabrics continuedto feature in the First Schedule to the ADE Act. \ The DST Act ^

10. Priorto its becomingaState,Delhiwas aUnionTerritoryin respect of which the Parliamentexercised legislativepowers. Accordingly,in \ respect of Delhi, Parliamentwas competentto enact a law imposingtax on the sale and purchaseof goods other than newspapers,under Article 245 of the Constitutionof India read with Item No. 54 in List II of ScheduleVII thereof.Thus the Delhi Sales Tax Act 1975 (DST Act) was enactedby Parliamentprovidingfor sales tax to be leviedon sales taking place withinthe Union Territoryof Delhi. Under the DST Act, sales tax WP(C)3750/2000 ' page no 8 of 25 o ^ • 4 • V- V |i • |;V ^ -i' !'' • •/. :. X '1 r-c,^ ri V •' $•.: • •• . n:- i' sSv-ii:' I': '•• I.- -i St V., • .£.V f -' :k V was levied on silk fabrics till its withdrawalwith effect from 1.4.1998 upon representationsmade by the petitioner,an associationof silk and textiles traders. At this stage the question of the applicabilityof the restrictionunder S.15 CST Act did not arise as Delhi was still a Union Territory.

11. After the 69 Amendmentin the Constitution,effective21.12.1991, Delhi was given the status of a State and called the National Capital o Territory of Delhi(NCTD). The legislative assembly of the NCTDn empoweredto makelaws on all the mattersin ListII ofSchedule7except those mentionedin Entries No. 1, 2and" 18 of the State List and Entries 64, 65 and 66 so far as it relatedto Entries1,2 and 18. In otherwords,the legislativecompetenceof the Delhi State Legislativeassembly to levy local sales tax on silkfabricsremainedunchanged.

12. What IS importantto note is that although 'silk fabrics' continuedto feature in the First Schedule to the ADE Act, it did not mean that the legislativeassembly of the NCTD could not make alaw levying local ^sales tax on such goods. What it meant was that if NCTD chose to levy sales tax on silk fabrics in any financialyear, then, subjectto the central govemment.dir^tingotherwise,NCTD might stand to lose its share of the ADE for that financialyear. As far as the rate of local sales tax WP(C) 3750/2000 page no 9 of 25 / M : 'i : s I" concerned, since the restriction under Section 15 CST stood removed with effect from 11.5.1968,the local sales tax on silk fabrics under the DST could be higher than 4%. Facts of the present case

13. The presentpetitionschallengethe impugnednotificationslevying local sales tax on silk fabrics and issuedunder the DST Act. The first is a notification issued on 31.3.1999 by the Lt. Governor GNCTD, RespondentNo.2 herein, imposing sales tax on silk fabrics with effect from 1.4.1999 at the rate of 3paise in the rupee. This was initially challengedby the petitionerassociationin Writ Petition(C) 3173/1999in this Court. Rule DB was issued and the matter was listed for final disposal. Accordingto the petitioners,during the pendencyof this writ petitionthe FinanceMinistergave an assuranceto adelegationofthe silk traders that the sales tax would be withdrawn.Acting on this assurance, the petitioneron 10.1.2000withdrewthe said writpetition.

14. Accordingto the petitioners,insteadof withdrawingthe sales tax as - assured.RespondentNo.2 issued two notificationson 15.1.2000.By the first notification, 'silk fabrics' was inserted as Entry 34 in the First Scheduleto the DST Act. By the secondnotification,the rate of sales tax was increasedto 12 paisein arupeeon silkfabrics. This was followedby WP(C) 3750/2000 page no 10 of 25 \1 •A • | , --' •H I'"- $-• afurthernotificationdated 31.3.2000whereby 'silkfabrics' was deleted from the First Schedule of the DST Act and added to the Second Schedule. As a result, the rate of sales tax on silk fabrics was reduced from 12 paise to 4 paisein the rupee.

15. Thereafter, the present writ petitions were filed challengingthe . I notificationsas mentioned in para 1 hereinabove. On 14.7.2000 this Courtdirectednoticeto issuein the writ petitionsand rule DB was issued on 18.5.2001. Meanwhileby aNotificationdated 31.3.2001 'silkfabrics' was deletedfrom the SecondScheduleto the DST Act and includedin the Schedulethereofwhich meant that underSection7DST Act it was • \ fully exempt from sales tax. With effect from 3.7.2003, 'silk and ^ garmentsmade ofsilk but not includingsareesmade ofsilk' was included in the FirstSchedule(subjectto tax @12 paisein the rupee)and 'Sarees made of silk' was includedin the Second Schedule(subjectto tax @4 u paisemthe rupee).^Silkfabrics'continuedin the ThirdScheduleand was totallyexemptfrom sales tax. The resultantpositionis that since 1.4.2001 ^ there is no local sales tax on silk fabrics.

16. Therefore,the issue in the presentpetitionsconcernsthe validityof the impositionof local sales tax on silk fabrics under the DST Act at the followingratesfor the followingperiods: WP(C) 3750/2000 page no 11 of 25 i ¥ I i'y/ ^ V ••• -I t- - • m,, r'-i ' %'-i ' '• If:)-' •r p:^ •' t&k'i • tei'!. • f-S-'v f|:;' iv •• 'i. i-ji- S!: Ii. f-, J, (i) At the rate of 3 paisein the rupeefor the periodfrom 31.3.1999till

15.1.2000 (ii) At the rate of 12 paise in the rupee for the period from 16.1.2000 till 31.3.2000 (iii) At the rate of4 paise in the rupee for the period from 1.4.2000till

31.3.2001 I

17. On 1.8.2002the followinginterimorder was passed by this Court on an applicationfor stay (CM No 1128/2002)filed by the petitioners: "Beforewe take up this applicationfor orders, let the members of the petitionerassociationfile affidavitsstating as to what amount they had collected as sales tax on silk fabrics for the period 15 January to 31 March, 2000 and when was the same deposited within the Sales Tax Department. The requisiteaffidavitsshall be filed within two weeks with advancecopies to learnedcounselfor the respondents,who will have instructionsthereonbeforethe next date. If any further informationis required by the Department, learnedcounselfor them may have the same collectedfrom learned counsel for the petitioner." '

18. Pursuantto the aforesaidorder,membersof the petitionerassociation have filed individualaffidavitsin this Court. While the proprietorof M/s. SareeSansMhas filed an affidavitindicatingthat he has chargedonly 3% sales tax on silk fabrics for the for the period 15 January to 31 March, 2000 all'theothers have said that they have charged,for this period, 12% WP(C)3750/2000 pageno 12of 25 ^ \d .V- ' U • ^i">. •' '/ / p, {.• ^.1' )•' -A r sales tax. Submissionsof Counsel

19. Mr. Harish Malhotra, learned senior counsel appearing for the petitionerssubmits that since silk fabrics continueto figure as goods of special importancein the First Schedule to the ADE Act, the GNCTD was precludedfrom levyinglocal sales tax on those goods. Relyingon a letter dated 5.10.19998 written by the Additional Secretary in the Ministryof Finance,Governmentof India, he submittedthat as long as the GNCTD was partakingof the share of the proceedsunder the ADE Act, it could not levy local sales tax on silk fabrics. Accordinglythe notificationsimposing sales tax at the rate of 3%, 12% and 4% were invalid.Alternatively,he submittedthat even if one were to assumethat local sales tax could be levied on silk fabrics,it could not in any event exceed 4% as long as it was listed in the ADE Act as goods of special ' importance.In support of this submission,Mr.Malhotraplaced leliance upon the judgmentof the Hon'bleSupreme Court in State ofKerala v. .M/s. Attesee (Agro IndustrialTradingCorporation)AIR 1989 SC 222 and mparticularthe observationscontainedin para 6of the judgmentto If the followingeffect: The fact that 'cotton fabrics' though listed asjtem 12 in the Si ' ^>. . , WP(C) 3750/2000 page no 13 of 25,, A;, j:. i Ki •• '- S v;'-' ^ r 1.-< ' ir•H

111. • • ^ r. -, b'' t . • •• •' P 'I ' t 'f i ¥ Schedule to the 1944 Act was not brought into the list in Section 14 till 1.10.1958 or that 'silk fabrics' was dropped from the list in Section 14 with effectfrom 11.6.1968though it continuesin the Scheduleto the 1944 Act does not alter the position that these three Acts are inter-connectedand that certain goods taken out from the Schedule to the 1944 Act were to be subjectedto the special treatmentoutlined in the CST Act and the 1957 Act." -4, It is submitted that by virtue of the above declaration of the law, it becomesclearthat 'declaredgoods' which continueto featurein the First Scheduleto the ADE Act, cannotbe subjectto local sales tax in excess of what is stipulatedin Section 15 of the CST Act, notwithstandingthe fact that the goods no longerfeaturein Section 14 of the CST Act.

20. In reply, Mr. H.L. Taneja and Mr, J.R. Goel, learned counsel appearing for the Respondents 1 and 2, submitted that the decision in Attesee (supra) is distinguishablein its applicationto the facts of the present case. They further submit that State is not precluded from levyingsales tax on silk fabrics at the rate of 4paise in the rupee or any higher rate notwithstandingthe fact that the rate of ADE in relation to these goods under the ADE Act is 'Nil'. Mr. Goel further submittedthe I mere fact that an item figured in the First Scheduleto the ADE Act did I I - ~ not affectthe legislativecompetenceof the State to enactalaw levying WP(C) 3750/2000 fSJ' • page no 14 of 25 9^ local sales tax under Entry 54 of List II of Schedule VII to the ">1 Constitution, The legalpositionon the inter-connectednessofthe CST, CE andADEActs

21. The legal positionthat emergesfrom the above discussionin paras 2 to 12 on the inter-connectednessof the CST, CE and ADE Acts may be summarized thus: (a) From 29.4.1961till 11.5.1968'silk fabrics' featuredas ^goods of special importance' (declared goods) in Section 14 CST Act. During this period, by virtue of the restrictionin Section 15 (a) CST Act, the local sales tax on silk fabrics in the Statesincluding Delhi could not be higherthan 4%. (b) The ADE was enactedwith aview to compensatingthe Statesfor the loss of revenueon accountof the restrictionon theirpowersto levy local sales tax on declaredgoods higherthan 4% (whichwas \ the maximumpermissibleCST in relationto such goods).In other words declaredgoods within the meaning of Section 14 CST Act would be amenableto the levy of ADE and the ensuing revenue collected would be shared between the States on an agreed revenuesharingbasis as speltout in ScheduleII to the ADE. (c) Silk fabrics continuedto figure in the Scheduleto the ADE from I WP(C) 3750/2000 page no 15 of 25 li ' ' V m I I; f, ( H H-"'

3.'' '--t •< I • •, \ ' ' '0:' • •, I' S' "V' f i P' i I-:i: I',"' , 1961 onwards but the rate of duty of ADE was 'Nil' with effect from 1.3.1965. What this meant was that with effect from

1.3.1965,Delhi (or for that matterany State)was not in fact being compensatedwith the revenuecollectedas ADE on 'silkfabrics'. Acknowledging this anomaly, the Finance Act, 1968 removed 'silk fabrics' from the purview of Section 14 CST Act with effect from 11.5.1968.This was done to enable the states to levy local sales tax on silk fabrics at a rate higher than 4%. However, 'silk fabrics' continuedto feature in the First Scheduleto the ADE Act with 'nil' rate ofduty. (e) Although 'silk fabrics' continuedto feature in the First Schedule ADE Act, it did not mean that the legislativeassembly of the NCTD could not make a law levying local sales tax on such goods. What it only m^ant was that if NCTD chose to levy sales • ' tax on silk fabricsin any financialyear, then, subjectto the central government directing otherwise, NCTD might stand to lose its shareofthe ADE for that financialyear.

22. At the time when the impugned notificationsWere made, the above positionprevailed.In otherwords, by virtueof the removalof silk fabrics WP(C)3750/2000 pageno 16of 25 W p:.: •V I K'. from the purviewofSection 14 CST there was no restrictionon the levy of local sales tax on silk fabrics at a rate higher than 4%. Even assuming j that silk fabricscontinuedto remain as declaredgoods for the purposeof Section 14 CST Act, that only meant that the local sales tax in respectof such goods could not be higher than 4% by virtue ofSection 15 (a) CST ^ Act. Therefore,in any view of the matterthe challengeto the validityof" ® the impugnednotificationsto the extentthey seek to levy local sales tax on silk fabrics at the rate of 3% and later 4% cannot be sustained. The Supreme Court's decision in Attesee

23.The only questionthat remainsis whetherthere was any restrictionon ' \ \ the state charging local sales tax higher than 4% on account of the fact ^ fabrics continuedto figure in the ADE Act as goods of special importance. In other words are the impugned notifications dated

15.1.2000by which sales tax was levied at the rate of 12% on silk fabrics from 16.1.2000till 31.3.2000invalidon this score. Considerablereliance has been placed by the petitioners on the observationsof the Hon'ble SupremeCourt in Attesee (supra).Therefore,we proposeto examinethis judgment in some detail. , ' • • •

24. The goods involved in the said case was 'P.V.C. Cloth' which was ' . I I ' covered by!the definitionof 'cotton fabrics' under the First Scheduleto h.: mC) 375012000] pagenol7of25 f:; li..- ••f .. f, I'l'. f- '! 6 [ ®4.' 3V'i II P.T -v. • V I v l|0 the CE Act after its amendmentin 1969. However, PVC Cloth was not covered by the original definition of 'cotton fabrics' as on 1.4.1963. Under the KeralaGeneralSales Tax, 1963 (KeralaAct), Item No. 7 of the Third Schedule exempted mill-made textile as specified in the First Schedule to the CE Act from local sales tax. The Kerala Act was amendedwith effectfrom 1.9.1967by taking away the exemptionfor silk fabrics and retainingit only for "cotton fabrics", "woollenfabrics" and j "artificial silk fabrics". The Hon'ble Supreme Court formulated the question arising in the case in para 1 of the judgmentthus: "whetherin aspect of assessment years 1971-72 and 1972-73, with which we are ' concerned, the exemption given to 'cotton fabrics' under item 7 above ,. shouldbe restrictedto 'cottonfabrics' as definedin the CE Act as it stood ' £ • irf ' II |;r ic' I

1.4.1963 or whetherit would also cover goods falling under the said definitionafter its amendmentin 1969." The SupremeCourt appliedthe doctrineof 'legislationby referenceand legislationby incorporation'and concludedthat the subsequentaniendmentsto the CE Act would apply to the definitionof 'cottonfabrics' underthe KeralaAct as well. !•'' L>'

25. In para,6 of its judgment,the Hon'ble Supreme Court observed (as extractedin para 18 hereinabove)that there was an interconnectionin the three enactments,viz., the CE Act, the CST Act and the ADE Act. It ^ . I WP(C>37SW2m pag,ncIS.f2S Hv -•hr- 4- « ! -V thereafternoticed the submissionof the learnedcounsel for the State m this context as under: i '7. This may be so, says Sri Potti, but there is no justificationto bring the 1963 Act into this group. His short point is that the State legislatureis completelyfree within its domain. Its power to levy sales tax includes a power to levy a tax on sales of declaredgoods as well. Nor is such power inhibitedby the levy of an additional excise duty on certain goods. The 1957 amendmentto the 1125 Act made no referenceeven to the 1944 Act. The 1963 Act makesno referenceeitherto the CST Act or to the 1957 Act. Sri Potti emphasizes,pointingout to the practical effectsof the two legislations(the 1963 Act and the 1957 Act) to whichattentionhas beeninvitedalready,thatit was not the policy of the,Kerala State legislatureto exempt from sales tax goods whichsufferedadditionalexciseduty. The salestax exemptionis conferredon a totally independentbasis. It is not linked to the fluctuationsin, or variationof, the treatmentunder the CST Act and the 1957 Act. The descriptionof items 5,7 and 8, by simply incorporatingthe definitionsthen readily available in the 1944 Act (not the CST Act or the 1957 Act), was not intendedto bring out the result that these definitionsshould be read in the light of the changes that they may undergofor the purposesof the 1944 Act. The SupremeCourtdisposedof this submissionas under: '8. Sn Pottiis certainlycorrectin sayingthatthe wordingsofthe Acts do not show an exactcorrelationbetweenthe liabilityto pay additionalexcise duty and the exemptionfroni the levy of sales tax under the 1963 Act. But it would not be correctto say that the provisionsofthe lattercan be inteipretedwithoutreferenceto the othertwo legislations. The CST Act has adefiniteimpacton the manner and extent of sales tax levy, in so far as declared goods are concerned, for such levy cannot transgress the htmtetions and restrictionsof Section 15 thereof. Section 15 ^phesin respectof goods listedin Section 14 which, in turn, is linked to the list in the 1944 Act. The 1957 Act also ha^ a WP(C) 3750/2000 page no 19 of 25 •sS n i: • :I 'A _ • bearingon the salestax levy ofvariousStates.By levyingsales covered by the Scheduleto the 1957 Act, the State will have to forgo its share on distribution of the proceeds of the additional duty levied. Whether it should imposesales tax on an item of declaredgoods, limitedby the restrictionsin Section 15 of the CST Act and at the risk of Is j! I losingasharein the additionalexciseduty leviedin respectof I^very items,is for the State to determine.As pointedout 1''y Potti,it was open to the KeralaLegislatureto decide- and - that on some items there shouldbe one or otherof and to modify these levies depending upon its own financialexigencies. But thesefactualor periodical variationsdo not detractfrom the basic realitythat the policyof sales tax levy on declaredgoods has to keep in view, and be influencedby, the provisionsof the CST Act and the 1957 Act The referenceto the 1944 Act definitionsfor purposesof exemptionin the 1963 Act as enactedoriginallyas well ^^tterwas amendedin 1967and the specificreference the 1957 Act when the First Schedule to the 1963 Act was amended m 1980 are quite significant in this context. We, therefore, think that, though the 1963 Act referred only to the defmitionsin the 1944 Act, the entriesin the Schedulehave to be juxtaposedinto the broadpatternor schemeevolvedby the 1956- 57 enactments set out earlier in the judgment. Doing so, and even assumingthat the referencein the items of the Schedule to the definitionsin the 1944 Act is by way of incorporation and not reference,one cannotescape the conclusionthat the circumstances are covered by the exceptions outlined in Narasimhan (1976) 1 SCR 6: (AIR 1975 SC 1835). They certainly fall within the scope of exception (a) mentioned therein and also fall within exception (c) if we read "unworkableand ineffectual"to take in also "unrealisticand impractical." p If.: li; \ \

26. The pentral question in Attessee was about the definitionof the . I WP(C)3750/2000 _ page no 20 of 25 , ii.' . words PVC Cloth' and whetherthe assesseecould take advantageof the doctrineof legislationby seekingto contend that the amended definition of the term 'cottonfabrics' as obtainingin the ADE Act and the CE Act should be read into the definitionof those very words occurringin the Kerala Act. The Hon'bleSupremeCourt, keepingin view the particular Li-''. provisionsof the Kerala Act and the legislativepolicy followed by that r\ State, answeredthe point in favour of the assessee.This is thereforethe ratio of Attesee. The issue there did not concern the legislative competenceof the Kerala Legislatureto levy sales tax on 'PVC Cloth' consideringthe fact that cotton fabrics continued to figure in the ADE 1-r Act. In the circumstances,we fail to see how the saidjudgmentin can apply to the facts of the presentcases. Here the questionis whether the impugnednotificationslevyinglocal sales tax on 'silkfabrics' can be legally sustainedin view of the same item figuring in the First Schedule to the ADE Act.

27. Secondly,even while discussingthe interconnectednessof the CE > Act, the CST and the ADE the Hon'bleSupremeCourtinAUeseedid not say that the Statelackedlegislativecompetenceto levy local sales tax on ati item that figures in the First Schedule to the ADE Act. On the contrary,it Was pointedout in para 8that the only consequencewas that WP(C) 3750/2000 page no 21 of 25 k r f'V r.: if it did chooseto levy salestax on such conunodityin any financialyear, f' the State would have to forego its share of the revenuescollectedunder the ADE Act for that financial year, subject to any directions to the contrary by the central government. Conclusionson thepresentcases --4^

28. As alreadynoticed,the underlyingscheme of the ADE Act is that the States that are made to forego higher rate of local sales tax vis-a-vis declared goods by virtue of Section 15 of CST Act should be compensatedthroughthe ADE Act in respectofsuch 'declaredgoods'. If, , however, the States are unable to recover any duty whatsoever as IS i \ additionaltax of excise under the ADE Act, as in the presentcase, then ^ there would no be justificationfor retentionof the said goods in Section 14 of the CST Act. Worse still would be to subject such goods to the restrictionin terms of Section 15 CST even after such goods have been deletedfrom Section 14 thereofmerely becauseit continuesto figure in the FirstScheduleto the ADE Act. The intentionofParliamentcertainly was not that the Statesbe made to lose revenueat both ends, i.e., through the CST Act by inclusion of the declared goods under Stoion 14 resulting in the restrictionon the fate of local sales tax by virtue of Section15 thereofand by not being able to collectADE as well sincethe If ;'V WP(C) 3750/2000 page no 22 of 25 ^ •!"i P r' "" . u i'i - , . •<? ' I : ^ V ii" it-' u': W'- m: rSf"* •'" H :45 rate of duty for that puipose is 'Nil'. Therefore, the intention of the Parliament in the instant case in deleting the 'silk fabrics' from the purview of the CST Act is clear. It was with aview to permittingthe States to levy local sales tax on the said goods without the fetter of Section 15 of the CST Act. That fettercannot be soughtto be continued II to be imposedby the mere fact that the goodsfigurein the ADE Act even rA. if they are subject to 'Nil' duty. In that view of the matter, we do not think that the letterdated 11.10.1998of the AdditionalSecretaryof the Departmentof Revenueis based on acorrectunderstandingof the legal positionand thereforeit is of no assistanceto the petitioners.

29. Even if one were to acceptthe argumentthat the rate ofduty ofADE being 'Nil' makes no differenceas long as the States share the overaU revenuesunder the ADE, even then there is nothingin the ADE Act that impingeson the legislativecompetenceof the state to levy local sales tax on suchgoods.The only consequenceas speltout in the SecondSchedule to the ADE Act is that the Statehas to foregoits shareofthe ADE subject • I to the directionsofthe CentralGovernment. This legalpositionhas been explamed by the Hon'ble Supreme Court in AUesee as well as in the i -;• •: . > ' ^'~W' ';• subsequentdecisionin State of Bihar v. Bihar Chamberof Commerce [(1996) 9see 136 =(1996) 103 STC 1]. Here the chaUengewas to the WP(C) 3750/2000 page no 23 of 25 > I 'i'" #1i ''"I m m validity of the Bihar Tax on Entry of Goods into Local Areas for Consumption,Use or Sale thereinAct, 1993. It was contendedon behalf of certainassesseesthat insofaras tobaccofiguredin the FirstScheduleto the ADE Act, no entry tax on those goods could be leviedby the State of Bihar. Repellingthis contentionthe Hon'ble Supreme Court explained / thus (SCC, p.156): M ^ ?• by Parliamentvi'ith referenceto Entry 84 • Seventh Scheduleto the Constitutionwhereas the impugnedenacti^ntis made by the State with referenceto Entry • on sale or purchase of goodsIS conferredupon the Statesand the Statesalone by Entry52 Ent^ 4 nr referenceto Entry 52 or for that matter with referenceto Entry 54. The ADE referenceto Article252 irf^fhP of the Constitution,which article empowersParliamentto make a mentionedin List H, if two or more to make a law in that b^alf. ^e impugned Act is also not relatable to any of the ^cles 249 to 253 whici) are in the nature of exertionsto the normal nile that Parliamentcan make no law with respect to the entnes mList II. If so, it follows that the aSe not deimded or deprived of their power to make a law either Entry52 or with referenceto Entry54 in List TT n. ^at power remams untouched and unaffected All that enacting the ADE Act is that it" will levy additiond duties of excise and distributea part of the proceeds among the Stat« providedthe Statesdo not fevy taxefoS or purchase of the scheduled commodities. ParWht to Lo provided the consequencethat follows if any State levies tax on commodities;all that happensis that r proceedsof additional financialyear Even this is subjectto the HntipJ nf Dow?r of the • f ^2. •

30. RecentlyaDivisionBench of this Courtin M.R.TobaccoPvt. Ltd. v. lji-i / WP(C) 3750/2000 page no 24 of 25 ; I p f • -^1 Union of India (2006) 145 STC 211 upheld the validity of the ^7 notificationdated 31.3.2000,which is one of the notificationschallenged here, in the contextof the inclusionof 'gutka'in the FirstScheduleto the DST Act. A similar argument as advanced in the present case was negativedby this Court in the said decision.The resultantpositionis that even if silk fabrics continuedto figure in the First Scheduleto the ADE jp' Act, the GNCTDis notprecludedfrom levyinglocalsalestax on the said goods at a rate higher than 4%. Therefore the challenge to the notifications,dated 15.1.2000that levied sales tax at the rate of 12% on silk fabricsfrom 16.1.2000till 31.3.2000must also fail.

31. For all the above reasons,these writ petitionsare dismissedwith no orderas to costs.StayApplicationstandsdisposedof accordingly. ;• •u* • 'i : • {. ry'.\t<: •I H , • '/-• • '1' . '• S. MURALIDHAR,J. h VIKRAMAJITSEN, J. OCTOBER 19, 2006 WP(C) 3750/2000 page no 25 of 25