TMI Blog2011 (11) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... he Legislature. Discrimination resulting from fortuitous circumstances arising out of particular situations, in which some of the tax payers find themselves, is not hit by Article 14 if the legislation, as such, is of general application and does not single them out for harsh treatment. Advantages or disadvantages to individual assesses are accidental and inevitable and are inherent in every taxing Statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line. - Decision of HC set aside - decided in favor of revenue. - 2960 to 2964, 3659 & 5616 of 2006 and 990 of 2007 - - - Dated:- 3-11-2011 - H.L. DATTU and CHANDRAMAULI KR. PRASAD, JJ. JUDGMENT H.L. Dattu, J. 1. The present batch of eight appeals arises out of the common Judgment and Order dated 25.07.2005 passed by the High Court of Gujarat at Ahmedabad in the Special Civil Application No. 735 of 1999 and connected applications filed under Article 226 of the Constitution of India. Since these appeals involve common question of law, they are disposed of by this common Judgment and Order. 2. All the parties in these present appeals before us were duly served but none a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrears of direct as well as indirect tax as on 31.3.1998 constitute one class, and any further classification among them on the basis of the date of issuance of Demand Notice or Show Cause Notice would be artificial and discriminatory. The High Court concluded by directing the Revenue to consider the claims of the respondents for grant of benefit under the Scheme, afresh, in terms of the Scheme. The relevant portions of the impugned judgment of the High Court is extracted below: "In the light of the above, we shall now consider whether definition of "tax arrears" contained in Section 87( m )( ii )( b ) is arbitrary, irrational or violative of the doctrine of equality enshrined under Article 14 of the Constitution and whether the petitioners are entitle to avail benefit under Scheme. A reading of the speech made by the Finance Minister and the objects set out in memorandum to Finance (No. 2) Bill, 1998 shows that the Scheme was introduced with a view to quick and voluntary settlement of tax dues outstanding as on 31.3.1998 under various direct and indirect tax enactments by offering waiver of a part of the arrears of taxes and interest and providing immunity against prosecution an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edabad-I conducted a surprise inspection of the premises of the factory on 5.9.1997. The Revenue Officers examined the statutory Central Excise Records and physically verified the stocks at various stages of manufacturing in the presence of two independent panchas and respondent no. 2, under the Panchnama dated 5.9.1997. The Revenue Officers found that the respondents have cleared the Man Made Fabric admeasuring 38,726 l.m. of Rs. 5,38,449/- without the payment of excise duty of Rs. 84,290/-. In this regard, the Statement of respondent no. 2 was recorded on 5.9.1997 under Section 14 of the Central Excise Act, 1944 (hereinafter referred to as "the Excise Act"). The respondent no. 2, in his Statement has admitted the processing of the said fabric in his factory, after registering it in the lot register, and its subsequent clandestine removal without payment of the excise duty. Accordingly, a Show Cause Notice dated 06.01.1999 was issued to the respondents demanding a duty of Rs. 84,290/- under Section 11A of the Excise Act along with an equal amount of penalty under Section 11AC of the Excise Act, and further penalty under Rule 173 Q of the Central Excise Rules, 1944 [hereinafter ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Briefly, the Scheme permits the settlement of "tax arrear" as defined in Section 87(/w) of the Act. It is necessary to extract the relevant provisions of the Scheme: "Section 87 - Definitions. In this Scheme, unless the context otherwise requires, ** ( h ) "direct tax enactment" means the Wealth-tax Act, 1957 or the Gift-tax Act, 1958 or the Income-tax Act, 1961 or the Interest-tax Act, 1974 or the Expenditure-tax Act, 1987; ( j ) "indirect tax enactment" means the Customs Act, 1962 or the Central Excise Act, 1944 or the Customs Tariff Act, 1975 or the Central Excise Tariff Act, 1985 or the relevant Act and includes the rules or regulations made under such enactment; ** ( m ) "tax arrear" means,- ( i ) in relation to direct tax enactment, the amount of tax, penalty or interest determined on or before the 31st day of March, 1998 under that enactment in respect of an assessment year as modified in consequence of giving effect to an appellate order but remaining unpaid on the date of declaration; ( ii ) in relation to indirect tax enactment,- ( a ) the amount of duties (including drawback of duty, credit of duty or any am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that beneficial legislations should have liberal construction with a view to implementing the legislative intent but where such beneficial legislation has a scheme of its own there is no warrant for the Court to travel beyond the scheme and extend the scope of the statute on the pretext of extending the statutory benefit to those who are not covered by the scheme. " 7. In Hemalatha Gargya v. Commissioner of Income-tax, A.P., [2003] 9 SCC 510, this Court has held: "10. Besides, the Scheme has conferred a benefit on those who had not disclosed their income earlier by affording them protection against the possible legal consequences of such non-disclosure under the provisions of the Income Tax Act. Where the assessees seek to claim the benefit under the statutory scheme they are bound to comply strictly with the conditions under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions of the Scheme are stated in such plain language." 8. In Union of India v. Charak Pharmaceuticals ( India ) Ltd ., [2003] 11 SCC 689, tins Court has observed thus: "8. If benefit is sought under a scheme, like KV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of interest, penalty and immunity from prosecution on payment of arrears of direct tax at the current rates. In respect of indirect tax, where in recent years the adjustment of rates has been very sharp, an abatement of 50 per cent of the duty would be available alongwith waiver of interest, penalty and immunity from prosecution" 13. The Finance Minister, whilst replying to the debate after incorporating amendments to the Finance (No. 2) Bill, 1998, made a Speech dated 17.7.1998. The relevant portion of the Speech, which highlights the object or purpose of the Scheme, is extracted below: "The Kar Vivad Samadhan Scheme has evoked a positive response from a large number of organizations and tax professionals. Hon'ble Members of Parliament have also taken a keen interest in the scheme. The lack of clarity in regard to waiver of interest and penalty in relation to settlement of tax arrears under the indirect tax enactments is being taken care of by rewording the relevant clauses of the Finance Bill. I have also carefully considered the suggestions emanating from various quarters including the Standing Committee on Finance to extend the scope of this scheme so as to included ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 12. In our view, the Scheme was in substance a recovery scheme though it was nomenclatured as a "litigation settlement scheme" and was not similar to the earlier Voluntary Disclosure Scheme. As stated above, the said Scheme was a complete code by itself. Its object was to put an end to all pending matters in the form of appeals, references, revisions and writ petitions under the IT Act/WT Act. " 17. In Master Cables ( P ) Ltd. v. State of Kerala, [2007] 5 SCC 416, this Court has held: "8. The Scheme was enacted with a view to achieve the purposes mentioned therein viz. recovery of tax arrears by way of settlement. It applies provided the conditions precedent therefor are satisfied. " 18. Further, the object of the Scheme and its application to Customs and Central Excise cases involving arrears of taxes has been explained in detail by the Trade Notice No. 74/98 dated 17.8.1998 issued by the Commissioner of Central Excise and Customs, Ahmedabad-I. The relevant portion of the said Trade Notice has been extracted below: OFFICE OF THE COMMISSIONER OF CENTRAL EXCISE CUSTOMS: AHMEDABAD-1 Trade Notice No. : 74/98 Basic No. : 34/98 Sub : Kar Vivad Samadhan Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking the benefits of the Samadhan Scheme and makes suitable declaration as provided thereunder (discussed further later) there must be dispute pending between the party and the Dptt. (Section 98( h )( c ) of Finance Act refers). In other words, if in any case, there is no Show Cause Notice pending nor the party is in dispute at the appellate/revision stage nor there is an admitted petition in the court of law where parties is contesting the stand of the Dptt., but certain arrears of revenue due in case, are pending payment, the benefits of the scheme will not be available in such case. B. TYPES OF REVENUE ARREARS CASES COVERED BY THE SCHEME 4.4 The intention of the scheme is to cover almost all categories of cases involving revenue in arrears and in dispute on Customs and Central Excise side (with few exceptions mentioned specifically in section 95 of Finance Act). The cases covered may involved duty, cess, fine, penalty or interest - whether already determined as due or yet to be determined (in cases where show cause/Demand Notice is yet to be decided). The term duty has been elaborated to include credit of duty, drawback of duty or any amount representing as duty. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issuing a trade notice sufficient care is taken by the authorities concerned as it guides the traders to regulate their business accordingly. Hence whatever is the legal effect of the trade notice as contended by the learned Senior Counsel for the respondent, the last portion of the above trade notice cannot be faulted as it is in accordance with the views expressed by this Court. Though a trade notice as such is not binding on the Tribunal or the courts, it cannot be ignored when the authorities take a different stand for if it was erroneous, it would have been withdrawn. " 21. However, the Trade Notice, as such, is not binding on the Courts but certainly binding on the assessee and can be contested by the assessee. (see CCE v. Kores ( India ) Ltd., [1997] 10 SCC 338; Union of India v. Pesticides Manufacturing and Formulators Association of India, [2002] 8 SCC 410; and CCE v. Jayant Dalai ( P. ) Ltd., [1997] 10 SCC 402) 22. Shri. R.P. Bhatt, learned senior counsel, has appeared for the Revenue and the respondents in civil appeal no. 5616 of 2006 are represented by Shri. Paras Kuhad, learned senior counsel. 23. Learned senior counsel Shri. R.P. Bhatt, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emand Notice has been issued by the Revenue as on 31.3.1998 and which are still unpaid and are in dispute on the date of filing of declaration. He submits that the said Trade Notice indicates that the concept of actual determination or assessment has been extended to the Show Cause Notice in order to grant the benefit of the Scheme to duty demanded in such Show Cause Notice. He submits that the Show Cause Notice is in the nature of tentative charge, which has been included in the ambit of the Scheme in order to realize the tax/duty dues but not yet paid. He submits that the Scheme contemplates the conferring of the benefits only on the quantified duty either determined by way of adjudication or demanded in a Show Cause Notice. Learned senior counsel contends that in the present case, the Show Cause Notice demanding the duty was issued to the respondents only on 6.1.1999 and, therefore, the duty was determined as quantified only on the issuance of the Show Cause Notice. Hence, respondents are not eligible to avail the benefit under this Scheme. Learned senior counsel submits that the cut-off date of on or before 31.3.1998 prescribed by Section 87( m )( ii )( b ) cannot be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion among them just on the basis of issuance of Show Cause Notice is arbitrary and unreasonable. The criterion of date of issuance of Show Cause Notice is per se unreasonable as based on fortuitous circumstances. It is neither objective nor uniformly applicable. He further submits that the High Court has correctly struck down the words "on or before the 31st day of March 1998" in Section 87( m )( ii )( b ) and, thereby, created a right in favour of assessee to claim benefit under the Scheme for all arrears of tax arising as on 31.3.1998. He further submits that by application of the doctrine of severability, the Scheme can operate as a valid one for all purposes. Learned senior counsel submits that the carving out of sub-group only on the basis of whether Show Cause Notice has been issued or not and the Scheme being made effective from prospective date would render the operation or availability of Scheme variable or uncertain, depending on case to case. He further submits that this has no relation with the purpose of the Scheme which is beneficial in nature. He further submits that the date of issuance of Show Cause Notice is not controlled by the assessee. Therefore, it is fort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment'. He further argues that in view of the object of the Scheme to collect revenue, the Scheme envisages two elements: first, the determination of the amount of tax due and payable on or before 31.3.1998 and, second, whether the tax so determined is in arrears on date of declaration under Section 88. In other words, he submits that the tax so determined on or before 31.3.1998 should be in arrears on the date of declaration under Section 88. Learned senior counsel, in support of his submissions, relies on the decision of this Court in Government of India v. Dhanalakshmi Paper and Board Mills [1989] Supp. (1) SCC 596. 25. Taxation is a mode of raising revenue for public purposes. In exercise of the power to tax, the purpose always is that a common burden shall be sustained by common contributions, regulated by some fixed general rules, and apportioned by the law according to some uniform ratio of equality. 26. The word 'duty' means an indirect tax imposed on the importation or consumption of goods. 'Customs' are duties charged upon commodities on their being imported into or exported from a country. 27. The expression 'Direct Taxes' include those assessed upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n than in some other exercises of legislation'. When the wisdom of the legislation while making classification is questioned, the role of the Courts is very much limited. It is not reviewable by the Courts unless palpably arbitrary. It is not the concern of the Courts whether the classification is the wisest or the best that could be made. However, a discriminatory tax cannot be sustained if the classification is wholly illusory. 29. Kar Vivad Samadhan Scheme is a step towards the settlement of outstanding disputed tax liability. The Scheme is a complete Code in itself and exhaustive of matter dealt with therein. Therefore, the courts must construe the provisions of the Scheme with reference to the language used therein and ascertain what their true scope is by applying the normal rule of construction. Keeping this principle in view, let us consider the reasoning of the High Court. 30. The tests adopted to determine whether a classification is reasonable or not are, that the classification must be founded on an intelligible differentia which distinguishes person or things that are grouped together from others left out of the groups and that the differentia must have a ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cesses, interest, fine or penalty must have been determined as on 31.03.1998 but not paid as on the date of declaration and secondly, the date of issuance of Demand or Show Cause Notice on or before 31.03.1998, which is not disputed but the duties remain unpaid on the date of filing of declaration. Therefore, in our view, the Scheme 1998 does not violate the equal protection clause where there is an essential difference and a real basis for the classification which is made. The mere fact that the line dividing the classes is placed at one point rather than another will not impair the validity of the classification. The concept of Article 14 vis-a-vis fiscal legislation is explained by this Court in several decisions. 31. In Amalgamated Tea Estates Co. Ltd. v. State of Kerala, [1974] 4 SCC 415, this Court has held: 8. It may be pointed out that the Indian Income Tax Act also makes a distinction between a domestic company and a foreign company. But that circumstance per se would not help the State of Kerala. The impugned legislation, in order to get the green light from Article 14, should satisfy the classification test evolved by this Court in a catena of cases. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minative, though due to some fortuitous circumstances arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine. But, in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification so long as it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reasonable ways (see Ram Krishna Dalmia v. Justice S.R. Tendolkar and Khandige Sham Bhat v. Agricultural Income Tax Officer, Kasaragod ) Keeping the above principles in view, we find no violation of Article 14 in treating pending cases as a class different from decided cases. It cannot be disputed that so far as the pending cases covered by clause ( i ) are concerned, they have been all treated alike. " 33. In Jain Bros v. Union of India, [1969] 3 SCC 311, the issue before this Court was whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f factors which the Court will be reluctant and perhaps ill-equipped to investigate. In this imperfect world perfection even in grouping is an ambition hardly ever accomplished. In this context, we have to remember the relationship between the legislative and judicial departments of Government in the determination of the validity of classification. Of course, in the last analysis Courts possess the power to pronounce on the constitutionality of the acts of the other branches whether a classification is based upon substantial differences or is arbitrary, fanciful and consequently illegal. At the same time, the question of classification is primarily for legislative judgment and ordinarily does not become a judicial question. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the Judicature cannot rush in where even the Legislature warily treads. All these operational restraints on judicial power must weigh more emphatically where the subject is taxation. . 19. It is well-established that the modern state, in exercising its sovereign power of taxation, has to deal with complex factors relating to the objects to be taxed, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Elel Hotels and Investments Ltd. v. Union of India, [1989] 3 SCC 698, this Court has held: "20. It is now well settled that a very wide latitude is available to the legislature in the matter of classification of objects, persons and things for purposes of taxation. It must need to be so, having regard to the complexities involved in the formulation of a taxation policy. Taxation is not now a mere source of raising money to defray expenses of Government. It is a recognised fiscal tool to achieve fiscal and social objectives. The differentia of classification presupposes and proceeds on the premise that it distinguishes and keeps apart as a distinct class hotels with higher economic status reflected in one of the indicia of such economic superiority." 37. In P.M. Ashwathanarayana Setty v. State of Karnataka, [1989] Supp. (1) SCC 696, this Court has held: "... the State enjoys the widest latitude where measures of economic regulation are concerned. These measures for fiscal and economic regulation involve an evaluation of diverse and quite often conflicting economic criteria and adjustment and balancing of various conflicting social and economic values and interests. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt certain classes of property from any taxation at all, may impose different specific taxes upon different trades and professions." "It cannot be said that it is intended to compel the State to adopt an iron rule of equal taxation." In the words of Cooley : "Absolute equality is impossible. Inequality of taxes means substantial differences. Practical equality is constitutional equality. There is no imperative requirement that taxation shall be absolutely equal. If there were, the operations of government must come to a stop, from the absolute impossibility of fulfilling it. The most casual attention to the nature and operation of taxes will put this beyond question. No single tax can be apportioned so as to be exactly just and any combination of taxes is likely in individual cases to increase instead of diminish the inequality." 27. "Perfect equality in taxation has been said time and again, to be impossible and unattainable. Approximation to it is all that can be had. Under any system of taxation, however, wisely and carefully framed, a disproportionate share of the public burdens would be thrown on certain kinds of property, because they are visible and tangible, while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment dependent on pragmatic wisdom playing on imponderable forces at work. Though refusal to make rational classification where grossly dissimilar subjects are treated by the law violates the mandate of Article 14, even so, as the limited classification adopted in the present case was based upon a relevant differentia which had a nexus to the legislative end of taxation, the Court could not strike down the law on the score that there was room for further classification." 42. In State of U.P. v. Kamla Palace, [2000] 1 SCC 557, this Court has observed: 11. Article 14 does not prohibit reasonable classification of persons, objects and transactions by the legislature for the purpose of attaining specific ends. To satisfy the test of permissible classification, it must not be "arbitrary, artificial or evasive" but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the legislature. (See Special Courts Bill, 1978, Re, seven-Judge Bench; R.K. Garg v. Union of India , five-Judge Bench.) It was further held in R.K. Garg case that laws relating to economic activities or those in the field of taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r v. State of Kerala , East India Tobacco Co. v. State of A.P. , N. Venugopala Ravi Varma Rajah v. Union of India , Asstt. Director of Inspection Investigation v. A.B. Shanthi and Associated Cement Companies Ltd. v. Govt. of A.P .) 44. In Jai Vijai Metal Udyog Private Limited, Industrial Estate, Varanasi v. Commissioner, Trade Tax, Uttar Pradesh, Lucknow, [2010] 6 SCC 705, this Court held: 19. Now, coming to the second issue, it is trite that in view of the inherent complexity of fiscal adjustment of diverse elements, a wider discretion is given to the Revenue for the purpose of taxation and ordinarily different interpretations of a particular tariff entry by different authorities as such cannot be assailed as violative of Article 14 of the Constitution. Nonetheless, in our opinion, two different interpretations of a particular entry by the same authority on same set of facts, cannot be immunised from the equality clause under Article 14 of the Constitution. It would be a case of operating law unequally, attracting Article 14 of the Constitution. 45. To sum up, Article 14 does not prohibit reasonable classification of persons, objects and transactions b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income tax in that area. The challenge under Article 14 was that the income of the petitioner was from areca nut and pepper crops, which were harvested after November in every year while persons who grew certain other crops could harvest before November and thus escape the liability to pay tax. It was held that, that was only accidental and did not amount to violation of Articlel4. In Jain Bros. v. Union of India (supra), Section 297(2)( g ) of Income Tax Act, 1961 was challenged because under that Section proceedings completed prior to April, 1962 was to be dealt under the old Act and proceedings completed after the said date had to be dealt with under the Income Tax Act, 1961 for the purpose of imposition of penalty. April 01, 1962 was the date of commencement of Income Tax Act, 1961. It was held that the crucial date for imposition of Penalty was the date of completion of assessment or the formation of satisfaction of authority that such act had been committed. It was also held that for the application and implementation of the new Act, it was necessary to fix a date and provide for continuation of pending proceedings. It was also held that the mere possibility that some o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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