2013 (7) TMI 72 - CALCUTTA HIGH COURT

Validity of West Bengal Tax on Entry of Goods into Local Areas Act, 2012 questioned - whether the purpose for which the proceeds of Entry Tax was sought be spent could be treated as compensatory in nature? - Held that:- Utilization of the proceeds of Entry Tax under the impugned Entry Tax Act for the purpose specified in Sub-clause (g) of creating, developing and maintaining pollution free atmosphere in the concerned areas has remote connection, if not, no connection with developing and facilitating trade and commerce, even though the same might improve the quality of life for citizens.

In view of the law laid down by in Atiabari Tea Company Ltd. (1960 (9) TMI 94 - SUPREME COURT), the impugned Entry Tax must be held to restrict the right to free trade, commerce and intercourse, throughout the territory of India, even though the restriction is reasonable and in public interest.There can be no doubt that the State Legislature has exclusive power to enact legislation imposing a tax on the entry of goods into a local area, for consumption use or sale therein by virtue of Entry 52 of List II of the Seventh Schedule to the Constitution of India. However, this power is subject to the limitations imposed by the Constitution itself, particularly Part XIII thereof.

The imposition of a compensatory tax, being a judicially devised exception to the restrictions of Articles 301 and 303 of the Constitution of India, the tests judicially enunciated in Jindal Stainless Ltd. (2010 (4) TMI 849 - SUPREME COURT OF INDIA) to examine whether the impugned tax on movement of goods from one area to another is, in effect and substance, a compensatory tax, must strictly be applied before the validity of an enactment imposing the impugned tax can be upheld, notwithstanding non-compliance of the requisites of Article 304(b) of the Constitution of India.

What distinguishes a compensatory tax is that a compensatory tax is imposed for a specific purpose or a few specific identifiable purposes, to pay for expenses in connection with specific projects, whether completed, in progress or in contemplation, which provide specific, tangible, measurable benefits to the tax payers as a class and is based on the ‘principle of equivalence’ and/or ‘quid pro quo’ and/or ‘pay for value’. A tax on the other hand generates revenue, but not necessarily for any specific identifiable purpose.

To clear the test of compensatory tax, the onus lies on the State to show the exact purpose or purposes for which the levy is imposed, which should be identifiable, measurable, directly beneficial to the tax payers as a class, who in the instant case, would primarily be the traders and manufacturers of the local area, who import goods from outside the State and/or outside the country.

The State has failed to disclose details of projects in contemplation, projects in progress and/or completed projects, providing facilities to the trading community, which the levy would pay for, and show that the expected proceeds of such levy are more or less equivalent to the estimated expenditure on such projects. To qualify as a compensatory tax, the Statute imposing the tax must facially indicate that the tax is a recompense for identifiable, measurable benefits to the class of tax payers as a whole on the principle of equivalence. If the statute does not contain particulars of the corresponding benefits in return for the tax, details may be disclosed by affidavit.

It is reiterated that a compensatory tax would not cease to be a compensatory tax, only because of some excess collection, which may have to be diverted towards the revenue of the State. However, imposition of the tax would necessarily have to be preceded by the exercise of ascertaining the approximate financial requirements for specific and/or earmarked projects and balancing the same with the targeted tax receipts. The State should be able to justify the basis on which the rate of tax has been determined.

The impugned Entry Tax Act does not indicate the quantifiable or measurable benefits to be provided in lieu of the levy. The data on the basis of which the compensatory tax is sought to be levied is neither disclosed in the impugned Entry Tax Act or the Affidavit-in-Opposition filed by the State.

There being no disclosure of the quantifiable benefits or the proportionality of the levy to the quantifiable benefits, either in the impugned Act or by way of affidavit, the tax does not meet the test of compensatory tax, even though the tax imposed by the impugned Act may be in public interest, and perhaps reasonable too.

The previous sanction of the President of India not having been obtained, before enactment of the impugned Entry Tax Act, this court is constrained to hold that the impugned Entry Tax Act is ultra vires Section 304(b) of the Constitution of India - writ petitions are disposed of accordingly.