Kerala High Court
South India Corporation Private Ltd., ... vs State Of Kerala Represented By Chief ... on 5 September, 1967
Equivalent citations: AIR 1968 KERALA 105, ILR (1967) 2 KER 490, 1967 KER LJ 982, 1968 KER LT 1001
Bench: K.K. Mathew, V. Balakrishna Eradi
JUDGMENT Krishnamoorthy Iyer, J.
1. This Original Petition filed under Article 226 of the Constitution is to declare that the provisions of the General Sales Tax Act. 1125 ((Act XI of 1126) imposing tax on works contracts' are not enforceable in any part of the Kerala State subsequent to 26-1-1960 and to issue a writ of certiorari or other appropriate writ and quash the orders Exts. P-l to P-5 assessing the petitioner to sales tax on 'works contracts', for the assessment years 1960-61 and 1961-62.
2. The petitioner is a private limited company incorporated under the Indian Companies Act and having its principal office at Mattancherry originally in the Cochin State, then in the State of Travancore-Cochin and now in the State of Kerala. The Sales Tax Officer, Special Circle, Mattancherry, assessed the petitioner to sales tax for the years 1960-6] and 1961-62 evidenced by the assessment orders Exts P-l and P-3. These orders include assessments on the turnover on 'works contracts' undertaken by the petitioner. The contention raised by him that the turnover with respect to 'works contracts' could not be subject to sales tax was overruled by the Sales Tax Officer and by the Appellate Assistant Commissioner of Agricultural Income-tax and Sales Tax Ernakulam, in appeals filed against the orders Exts. P-l and P-3. The orders of the appellate authority are Exts. P-2 and P-4. In appeals filed against Exts. P-2 and P-4, the Sales Tax Appellate Tribunal agreed with the view taken by the Sales Tax Authorities. The order of the Sales Tax Appellate Tribunal is Ext. P-5. Tax Revision Cases 22 of 1966 and 23 of 1966 filed under Section 41 of the Kerala General Sales Tax Act, 1963 to revise the decision of the Appellate Tribunal were also heard along with the original petition.
3. It is necessary to state at this stage the exact factual position relating to the levy of the impugned tax. The State of Travancore and the State of Cochin were two separate sovereign States having plenary powers of taxation. The Travancore General Sales Tax Act XVIII of 1124 and the Cochin General Sales Tax Act XV of 1121 as amended by Act V of 1124 imposed tax on 'works contracts' also. As a result of the merger of the two States the State of Travancore-Cochin was formed with a common legislature The said legislature enacted the Travancore-Cochin Genera] Sales Tax Act (XI of 1125) imposing sales tax on 'works contracts'. The Act was published in the Travancore-Cochin Gazette dated 17th January 1950 and Section 1(3) thereof provided that the Act would come into force on such date as the Government might by notification in the Gazette appoint. The requisite notification was issued by the Government on May 29, 1950, bringing the Act into force from Mav 30. 1950, after the Constitution The Travancore-Cochin General Sales Tax Act (XI of 1125) repealed the Acts of the Travancore and Cochin States from May, 30, 1950. On 1st of November 1956, the States Reorganisation Act of 1956 came into force and the State of Kerala was formed comprising the area covered by the Travan-core-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--Act XII of 1957--amending the name of the Act T. C. Act XI of 1125 into General Sales Tax Act (XI of 1125) and extending its operation to the whole of the State of Kerala. The said Act came into force on 1st October 1957. The Kerala Legislature also passed the Kerala Surcharge on Taxes Act, 1957 (Act XI of 1957) for levy of surcharges on taxes on agricultural income, on the sale or purchase of goods and on profession This came into force on 1st September 1957 The General Sales Tax Act (XI of 1125) has been repealed by the Kerala General Sales Tax Act (Act XV of 1963) which came into force on 1-4-1963. This Act does not authorise the imposition of tax on 'works contracts'.
4. The petitioner unsuccessfully challenged the imposition of Sales Tax on 'works contracts' for the assessment year 1952-53 under the T. C. General Sales Tax Act (Act XI of 1125) and for the assessment years 1956-57, 1957-58 under the General Sales Tax Act (XI of 1125) in proceedings under Articles 226 and 227 of the Constitution in this Court. The decision of this Court reported in South India Corporation (Pt.) Ltd. v. Secretary, Board of Revenue, Trivandrum, 1961 Ker LJ 255 :(AIR 1962 Ker 72) (FB) was reversed in appeal by their Lordships of the Supreme Court in South India Corporation (P) Ltd. v. Secretary, Board of Revenue, Trivandrum, AIR 1964 SC 207 on the ground that in view of the agreement dated 25-2-1950 entered into between the President of India and the Rajpramukh of the State of Travancore-Cochin incorporating the recommendations made by the Indian States Finance Enquiry Committee with some modification, the State ceased to have any power, to impose tax in respect of 'works contracts' during the period of ten years covered by the agreement. The term of the agreement expired on 26-1-1960. The assessment of the petitioner to tax on 'works contracts' for the assessment years 1960-61 and 1961-62 has been made on the ground that the right to levy sales tax on 'works contracts' will revive after 26-1-1960.
5. The points raised by the learned counsel for the petitioner can be stated broadly under two heads.
(1) that the levy of tax on 'works contracts' under the provisions of the General Sales Tax Act (Act XI of 1125) for the period from 26-1-1960 to 30-3-1963 is not saved by Article 277 of the Constitution.
(2) that the levy is violative of Article 14 of the Constitution.
6. Point (1). The submission of the learned counsel of the petitioner on this point centred round Articles 277, 278 and 372 of the Constitution. The scope and the combined effect of these Articles have been discussed by their Lordships of the Supreme Court in more than one decision. Subba Rao, J. considered the question whether Article 372 is subject to Articles 277 and 278 of the Constitution in AIR 1964 SC 207 and observed thus at page 215:
"Article 372 is a general provision; and Article 277 is a special provision. It is settled law that a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where the special provision does not apply. The earlier discussion makes it abundantly clear that the Constitution gives a separate treatment to the subject of finance, and Article 277 saves the existing taxes etc. levied by States, if the conditions mentioned therein are complied with. While Article 372 saves all pre-Constitution valid laws, Article 277 is confined only to taxes, duties, cesses or fees lawfully levied immediately before the Constitution. Therefore, Article 373 cannot be construed in such a way as to enlarge the scope of the saving of taxea, duties, cesses or fees. To state it differently. Article 372 must be read subject to Article 277.
X X X X While Article 372 is subject to Article 278, Article 278 operates in its own sphere in spite of Article 372. The result is that Article 278 overrides Article 372; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under Article 372, the Union and the State Governments can enter into an agreement in terms of Article 278 in respect of Part B States depriving the State law of its efficacy. In one view Article 277 excludes the operation of Article 372, and in the other view, an agreement in terms of Article 278 overrides Article 372."
7. To the same effect are the observations of Rajagopala Ayyangar, J. in the decision of the Supreme Court in C. Raja-gopalachari v. Corporation of Madras, AIR 1964 SC 1172. It was contended by the learned counsel for the petitioner that even though the Travancore-Cochin General Sales Act (XI of 1125) is a pre-Constitution law for the purpose of Article 372, since there was no levy on the basis of the said enactment prior to the date of the Constitution and till 30-5-1950 even for some time after the Constitution, the levy of sales tax on 'works contracts' under the said enactment is not saved by Article 277 of the Constitution. We have no hesitation to overrule this contention as devoid of any merit. The formation of the State of Travancore-Cochin was from July 1st 1949. After the formation of the State of Travancore-Cochin, the existing laws of Travancore and the existing laws of Cochin were continued and were in force in the respective territories. On 26-1-1950 the date of the Con-stitution, sales tax was being levied on works contracts, in the territory of Travan-core and in the territory of Cochin under the Travancore Sales Tax Act and the Cochin Sales Tax Act, the validity of which is beyond dispute.
Though the Travancore-Cochin General Sales Tax Act (XI of 1125) which repealed the Travancore Act and Cochin Act, was published in the Gazette dated 17th January 1950, it was brought into force only on 30-5-1950. Until the said date the Travancore and Cochin Acts were in force. There was therefore a valid levy of tax on 'works contracts' by the Government of Travancore-Cochin State before the commencement of the Constitution. In the absence of an intention to discontinue the levy the effect of Article 277 of the Constitution would be to vest the Government of Travancore-Cochin with the power to continue the law on the basis of the legislative sanction in force on the date of the Constitution, until provision to the contrary is made by Parliament by law The enactments in force in the territories of Travancore and Cochin were repealed on 30-5-1950, On 29-5-1950 by a notification issued by 'the Government under Section 1 (3) of the Travancore-Cochin General Sales Tax Act (XI of 1125) the Raid enactment which among other things imposed sales tax on 'works contracts' was brought into force from 30-5-1950.
The legislative competence regarding the Travancore-Cochin General Sales Tax Act (XI of 1125) in so far as it expressed the desire to continue the levy of sales tax on 'works contracts' in continuation of the law that was in force till then cannot be disputed At this stage it is advantageous to reproduce Article 277 of the Constitution which reads thus-
"277. Any taxes, duties, cesses or fees which, immediately before the commencement of this Constitution, were being lawfully levied by the Government of any State or by any municipality or other local authority or body for the purposes of the State, municipality, district or other local area may, notwithstanding that those taxes, duties, cesses or fees are mentioned in the Union List, continue to be levied and to be applied to the same purpose until provision to the contrary is made by Parliament by law."
8. The impugned tax was the tax which was "being lawfully levied by the State of Travancore-Cochin before the commencement of the Constitution. The scope of S. 143 (2) of the Government of India Act, 1935 which is practically identical with Article 277 of the Constitution came up for consideration before the Supreme Court in Ram Krishan Ram Nath v. Janpad Sabha, AIR 1967 SC 1073. Section 143 (2) of the Government of India Act, 1935 reads thus:
"143(2). Any taxes, duties, cesses or fees which, immediately before the com-mencement of Part 111 of this Act, were being lawfully levied by any Provincial Government, municipality or other local authority or body for the purpose of the Province, municipality, district or other local area under a law in force on the first day of January, Nineteen hundred and thirty-five, may notwithstanding that those taxes, duties, cesses or fees are mentioned in the Federal Legislative List, continue to be levied and to be applied to the same purpose until provision to the contrary is made by the Federal Legislature "
Though the plea that the effect of Section143 (2) of the Government of India Act, 1935 is to vest the Provincial Legislature with plenary powers of legislation in respect of taxes etc. which were being lawfully levied by local authorities prior to the commencement of the Act was overruled, the extent of the legislative content in the said provision was stated by their Lordships of the Supreme Court, in the decision referred to in these words:
"In the context the relevant words of the sub-section could only mean 'may continue to be levied if so described by the Provincial Legislature' which is indicated by or is implicit in the use of the expression 'may' in the clause 'may be continued until provision to the contrary is made by the Federal Legislature' This would therefore posit a limited legislative power in the Province to indicate or express a desire to continue or not to continue the levy. If in the exercise of this limited power the Province desires to discontinue the tax and effect? a repeal of the relevant statute, the repeal would be effective. Of course, in the absence of legislation indicating a desire to discontinue the tax, the effect of the provision of the Constitution would be to enable the continuance of the power to levy the tax but doe? not alter the fact that the provision by its implication confers a limited legislative power to desire to not to desire the continuance of the levy subject to the overriding power of the Central Legislature to put an end to its continuance and it is on the basis of the existence of this limited legislative power that the right of the Provincial Legislature to repeal the taxation provision under the Act of 1920 could be rested "
9. In the decision in Amraoti Municipality v. Ramchandra, AIR 1964 SC 1166 their Lordships of the Supreme Court adopted the above interpretation to the construction of Article 277 of the Constitution The Travancore-Cochin General Sale? Tax Act (XI of 1125) by imposing sale? tax only manifested the legislative intent to continue the tax on 'works contracts' which was being lawfully levied prior to the commencement of the Constitution and does not violate Article 277 of the Constitution and is therefore within the legislative competence.
10. The next submission of the learned counsel for the petitioner was that in view of the agreement dated 25-2-1950 entered into between the President of India and the Rajpramukh of the State of Travan-core-Cochin under Articles 278, 291, 295 and 306 of the Constitution, the tax on 'works contracts' cannot be levied even after 26-1-1960. It is necessary to examine the soundness of this contention. Article 278 of the Constitution is in the following terms:
"278. (1) Notwithstanding anything in this Constitution, the Government of India may, subject to the provisions of clause (2), enter into an agreement with the Government of a State specified in Part B of the First Schedule with respect to-
(a) the levy and collection of any tax or duty leviable by the Government of India in such State and for the distribution of the proceeds thereof otherwise than in accordance with the provisions of this Chapter:
(b) the grant of any financial assistance by the Government of India to such State In consequence of the loss of any revenue which that State used to derive from any tax or duty leviable under this Constitution by the Government of India or from any other sources:
(c) the contribution by such State in respect of any payment made by the Government of India under Clause (1) of Article 291, and when an agreement is so entered into, the provisions of this Chapter shall in relation of such State have effect subject to the terms of such agreement.
(2) An agreement entered into under Clause (1) shall continue in force for a period not exceeding ten vears from the commencement of this Constitution:
Provided that the President may at any time after the expiration of five years from such commencement terminate or modify any such agreement if after consideration of the report of the Finance Commission he thinks it necessary to do so".
With the abolition of the special status of Part B States the above Article became unnecessary and it was therefore repealed by the Constitution (Seventh Amendment) Act, 1956
11. In N. T. Patel and Co. v Dy. Commr of Agricultural Income Tax and Sales Tax, Trivandrum, 1964 Ker LJ 738, a Division Bench of this Court took the view that period of ten years covered by the aforesaid agreement is period of suspension and the right to levy sales tax in respect of 'works contracts' revived on 26th January 1950 and It will continue to subsist until provision to the contrary is made by Parliament by law. The correctness of this decision was challenged before us by the learned counsel for the petitioner.
12. It has been decided by their Lordships of the Supreme Court in AIR 1964 SC 207 that the agreement dated '25-2-1950 took into consideration the tax leviable on 'works contracts' which the Travancore-Cochin State was authorised to levy for a temporary period under Article 277 of the Constitution and the validity of the agreement is not in any way affected by the Constitution (Seventh Amendment) Act, 1956 and the agreement will have its full operation. But in the above decision their Lordships specifically left open the legal position after the expiry of the period covered by the agreement by making the following observation:
"We are not concerned here with the legal position after the expiry of the said period and we do not propose to express our view thereon."
13. We shall therefore examine the decision in 1964 Ker LJ 738.
14. To appreciate the said decision, it is necessary to consider the legal effect of the agreement dated 25-2-1950 entered into between the President of India and the Rajpramukh of Travancore-Cochin on Article 277 of the Constitution.
15. Articles 277 and 278 of the Constitution are contained in Part XII thereof. The background for the inclusion of Articles 277 and 278 in Part XII of the Constitution is stated by their Lordships of the Supreme Court in AIR 1964 SC 207 in these words:
"The relevant provisions which have a bearing an the said question are found in Part XII of the Constitution, Chapter 1 deals with finance; and this chapter contains a scheme of federal financial integration in the States. Though the Constitution conferred upon the Union and the States independent powers of taxation and constituted separate consolidated funds, it evolved a procedure for an equitable readjustment of the taxes collected between the Union and the States. But 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 States and introduce difficulties in the administration, To avoid this. Article 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 made applicable to Part B States. They had plenary powers of taxation. Their relationship with the paramount power differed 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 revenue. The provisions of Part XII of the Constitution, with the saving embodied in Article 277, may have met the situation obtaining in Part A States, but they were inadequate for Part B Slates. Therefore, a special provision under Arti-cle 278 was made in respect of Part B States enabling them to enter into an agreement with the Union embodying terms contrary to the other provisions of the Constitution in respect of levy and collection of taxes and the grant of any financial assistance to such State or States".
The agreement of 25-2-1950 entered into between the President of India and the Rajpramukh of the State of Travancore-Cochin is under Articles 278, 291, 295 and 306 of the Constitution, The relevant portions of the agreement of 25-2-1950 read thus:
"Whereas provision is made by Articles 278, 291, 295 and 306 of the Constitution of India for certain matters to be governed by agreement between the Government of India and the Government of a State specified in Part B of the First Schedule to the Constitution:
X X X X Now therefore, the President of India and the Rajpramukh of Travancore-Cochin, have entered into the following agreement namely:
The recommendations of the Indian States Finances Enquiry Commission, 1948-49, (hereafter referred to as the Committee) contained in Part I of its Report read with Chapters I, II, III of Part-II of its Report, in so far as they apply to Travancore-Cochin (hereinafter referred to as the State) together with the recommendations contained in the Committee's Second Interim Report, are accepted by the parties thereto, subject to the following modifications namely:
(1) With reference to paragraph 6 of the committee's Second Interim Report, the date of federal financial integration of the State shall be 1st April 1950 (2) ....
(3) The committee's formula of guaranteeing the 'federal' revenue-gap for the first five years after federal financial integration and of tapering it down over the next five years will be applied to the combined 'federal' revenue-gap of the former Indian States, Travancore and Cochin, taken together, computed as in (2) above.
X X X X Subject to the provisions of the Constitution of India, this agreement, shall, except where the context of the Committee's Report and of this agreement otherwise require, remain in force for a period of ten years from the commencement of the Constitution of India"
It will thus be seen that the agreement incorporates as its terms the Report of the Committee subject to the modifications contained therein. The portions of the report which are relevant for the disposal of the original petition are contained in Part II, Chapter II, Clauses 9 and 11(2) therein and they are reproduced below:
"Clause 9: "With effect from the prescribed date, the Centre will take all 'fede-ral' sources of Revenue and all 'federal items of expenditure in States, together with the administration of the Department concerned. The Centre must also take over all current outstandings (including pending assessments refunds and arrears), liabilities, claims, etc., and all productive and unproductive Capital Assets connected with these Departments. (The question of consequential financial adjustments, if any, required on capital account between the Centre and the States is dealt with in Chapter III below)".
Clause 11 (2): "With effect from the prescribed date, all 'rights and immunities' enjoyed or claimed by the States, whether expressly or by usage, and whether relating to 'federal' revenues and taxes generally (present or future), or to specific matters such as Railways, Customs, Posts and Telegraphs, Opium, Salt, etc. will terminate and must be extinguished. Thereafter, their constitutional position in respect of these matters should be the same as that of Provinces under the new Constitution of India."
The effect of this agreement read with the Report which forms part of the same is summed up in these words by their Lordships of the Supreme Court in AIR 1964 SC 207:
"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 subsidising the State by filling up the said revenue-Pap. 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 authorised 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."
The contention on behalf of the petitioner was that since by the agreement under Article 278 the State Government has absolutely and without any reservation surrendered the right to levy the tax on 'works contracts' as well, envisaged by Article 277 of the Constitution, the right to levy the same stood extinguished and cannot revive after the expiry of the agreement. The contention on behalf of the Revenue was based on the wording of Article 277 and according to the learned Government Pleader the power to levy under Article 277 will continue unless a law is made to the contrary by Parliament and in so far as the Parliament has not made any such law the agreement under Article 278 can only suspend the levy during its currency and after that period the power under Article 277 to levy the tax will revive There is, no doubt, support for the contention of the learned Government Pleader in 1964 Ker LJ 738.
In Union of India v. Maharaia Kishan-garh Mills Ltd. AIR 1961 SC 683, their Lordships of the Supreme Court had to consider the legal effect of the agreement dated 25-2-1950 entered into under Articles 278, 291. 295 and 306 of the Constitution between the President of India and the Rajpramukh of Rajasthan. The facts were Maharaja Kishangarh Mills Ltd. had a stock of manufactured cotton cloth on 1st April 1949 and they also manufactured cloth during the period 1st of April 1949 to March 31, 1950. In respect of such cloth an excise duty was payable under the Rajas-than Excise Duties Ordinance, 1949. After the passing of the Constitution of India, the Central Excises and Salt Act, 1944 was extended to the State of Rajasthan by Section 11 of the Finance Act of 1950 as from 1-4-1950. The Union of India claimed to realise the balance of excise duty payable by the Mills to the State of Rajasthan prior to 1-4-1950 on the basis of the agreement dated 25-2-1950. It was contended by the Union of India that by virtue of the said agreement the Union of India became entitled to claim and recover all excise duties from April 1, 1949 whether assessed or un-assessed which the State of Rajasthan was entitled to recover from the Mills even though the Central Excises and Salt Act, 1944 was extended to the State of Rajasthan only from 1-4-1950. The contention raised by the Mills was that the agreement of 25-2-1950 was in effect overridden by Article 277 and the agreement contemplated by Article 278 is in respect of a duty leviable by the Government of India.
In decreeing the suit of the Union of India, Sinha. C J. observed thus:
"It is noteworthy that the provisions of Article 278 override pro tanto other provisions of the Constitution including Article 277 and the terms of the agreement override the provisions of the Chapter, namely, Chapter I of Part XII. In this Chapter are contained Articles 264 to 291 Thus, on a construction of the provisions of Arts. 277 and 278, it is clear that in the absence of any agreement between the Government of India and the Government of State specified in part B. duties of customs which immediately before the commencement of the Constitution were being lawfully levied by the Government of such a State continue to be levied by that State until provision to the contrary is made by Parliament by law, notwithstanding that such a duty is mentioned in the Union List. Article 277, therefore, is in the nature of a saving provision permitting the States to levy a tax or a duty which, after the Constitution, could be levied only by the Centre. But Article 277 must yield to any agreement made between the Government of India and the Government of a State in Part B in respect of such taxes or duties, etc. The provision to the contrary contemplated by Article 277 was made by the Finance Act, XXV of 1950, S. 11, which extended the Central Excises and Salt Act, 1944, along with other Acts to the whole of India except the State of Jammu and Kashmir. But that section has effect only from April 1, 1950, and therefore does not apply to the arrears of duty of excise now in controversy. The agreement envisaged by Article 278 was entered into as aforesaid on February 25, 1950. That agreement conceded to the Centre the right to levy and collect the arrears of the duty in question. The reasons given by the High Court for the conclusion that in spite of Article 278 read with the agreement aforesaid, the Union Government was not entitled to realise the arrears are -- (1) that the agreement does not contain any specific provision about levy and collection of cotton excise duty in Raiasthan, (2) that the mere approval in the agreement of the principles set out in the report is not enough in view of Article 277 which made a distinctly different provision from that contemplated in the report and (3) that the agreement could be only with respect to a duty which was leviable by the Government of India. In our opinion, none of these reasons aforesaid can stand in the way of the Union of India ....... It is true that Article 277 has saved, for the time being, until Parliament made a provision to the contrary, the power of the State of Rajasthan to law such a duty, but that is only a saving provision in terms subject to the provisions of Article 278. Thus, the combined operation of Arts. 277 and 278 read with the agreement vests the power of levy and collection of the duty in the Union of India. It is only in the absence of an agreement like the one we have in this case that the Rajasthan Government could continue to levy and collect the duty in question. The agreement between the two Governments completely displaced the operation of Article 277 in regard inter alia to the levy of this duty so far as the State of Rajasthan is concerned. It is clear, there-fore that the High Court was in error in holding that Article 277 was any answer to the claim of the Government of India and should override the provisions of Art 278 read with the agreement. On a proper construction of those provisions, in our opinion the result is just to the contrary."
The above passage was quoted with approval in AIR 1964 SC 207. Though in AIR 1964 SC 207 the question under consideration was left open their Lordships observed that the saving under Article 277 is subject to the agreement under Article 278 "as by the agreement effective adjustments were made to meat 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". These observations of their Lordships conclusively establish that after the agreement under Article 278, Article 277 ceases to be operative between the parties thereto. If so the right of the Government to continue the levy conferred by Article 277 should also cease from the date of the agreement. It is not the case for the respondent that the effect of the agreement of 25-2-1950 is only to constitute the Union Government as the agent of the Government of Travnncore-Cochin State for collection
16. We are therefore unable to accept the contention advanced on behalf of the State that the effect of the agreement was only to suspend during its currency the power of the State to levy the taxes and duties falling under the category of "Federal sources of revenue" which could otherwise have been continued to be levied by it on and after 26-1-1950 by virtue of Article 277 of the Constitution. The agreement read along with the report makes it abundantly clear that the surrender by the State and the taking over by the Centre of the "Federal sources of revenue" was not for any limited period but was a permanent arrangement because the scheme was one of federal financial integration and the whole object inderlying the agreement was to bring about parity as between Part B States entering into such agreements and the Part A States with respect to matters concerning federal revenue In order to cushion the financial shock which may result to the Part B States on account of the sudden withdrawal of all federal sources of revenue and to avoid any serious dislocation in the administration of such State, provision was made in the agreement for the Centre subsidising the State for a limited period in order to fill up the revenue gap. The formula evolved was one guaranteeing to the-State the full extent of the federal revenue gap for the first five years after the federal financial integration and thereafter, tapering it down over the next five years. The agreement proceeds on the assumption that within this period of ten years the Part B States would be able to attain a state of financial stability by tapping new sources of revenue in respect of matters enumerated in List II of the Seventh Schedule to the Constitution and by increasing the rates of existing State taxes etc. The fixation of the period of 'en years in the agreement has relevantv only to this scheme of subsidy We therefore overrule the contention of the learned Government Pleader that the effect of the agreement was only to suspend for a period of ten years the State's power to levy and collect taxes with respect to federal sources of Revenue.
17. We are therefore of the view following the principles enunciated in AIR 1961 SC 683 and AIR 1964 SC 207 that by the execution of the agreement dated 25-2-1950 the effect of Article 277 has been completely wiped out between the parties and It is no longer open to the State to fall back upon Article 277 after the expiry of the agreement.
18. Further the Travancore-Cochin General Sales Tax Act (XI of 1125) was brought into force only on 30-5-1950, after the date of the agreement between the President of India and the Raipramukh of Travancore-Cochin Since there was no levy of sales tax on 'works contracts' by the Government of the State between 25-2-1950 and 30-5-1950, the date on which the T.-C. General Sales Tax Act (XI of 1125) was brought into force, the counsel for the petitioner submitted that there was a hiatus or period of discontinuity in the levy and there was no power to continue the levy, as it was already broken. It is not necessary to consider this contention as we take the view that since Article 277 of the Constitution ceased to be operative between the parties to the agreement after 25-2-1950 the limited legislative power to continue the levy under Article 277 was not there to sustain the provisions of the Travancore-Cochin General Sales Tax Act to levy sales tax on 'works contracts' It is not open to the Revenue to relv on Article 277 of the Constitution to legalise the levy of sales tax on 'works contracts'.
19. The next submission of the learned counsel for the petitioner was based upon the import of the words "may continue to be levied" in Article 277 of the Constitution. The submission of the counsel for the petitioner was that to sustain the levy under Article 277 of the Constitution it is necessary to satisfy three conditions, namely (1) the tax must be one which was being lawfully levied by the Government of any State immediately before the commencement of the Constitution, (2) the identity of the body that collects the tax the area for whose benefit the tax is to be utilised and the purposes for which the utilisation is to take place should continue to be the same and (3) the rate of tax is not enhanced nor its incidence in any manner altered, so that it continues to be the same tax According to the learned counsel there has been a variation of conditions (2) and (3) and it is no longer possible for the Government of the Stale to exercise the power of levy under Article 277 of the Constitution Counsel contended that the rate of tax in force in the assessment years is very much higher than what was in force immediately before the cornmencement of the Constitution that the identity of the body collecting the tax has been altered and the purpose for which the utilisation is to take place is not the same This is an aspect which was not raised or considered in 1964 Ker LJ 738 The Supreme Court in AIR 1964 SC 1166 hasheld that the words "was being lawfully levied" in Article 277 of the Constitution mean "was actually levied" and not "could lawfully levy" and "levy" does not in the context mean imposition of tax. Rajagopala Ayyangar, J. observed:
"The last portion of Article 277 uses the words 'continue to be levied' and 'to be applied to the same purposes'. By reason of this collection between the concept of the levy and of application of the proceeds of the tax, the Constitution-makers obviously intended the word 'levy to be understood as including the collection of the tax, for it is only when a tax is collected that any question of its application to a particular purpose would arise."
The content of the words "may continue to be levied" in Article 277 of the Constitution was summarised by Rajagopala Ayyangar, J. in AIR 1962 SC 1073, AIR 1964 SC 1166 and AIR 1964 SC 1172 saying (1) that the tax must be one which was lawfully levied by the Government of any State etc. for the purposes of the State etc. before the commencement of the Constitution, (2) that the identity of the body that collects the tax, the area for whose benefit the tax is to be utilised and the purposes for which the utilisation is to take place continue to be the same, and (3) that the existing range and rate of taxes are not enhanced nor its incidence in any manner altered, so that it continues to be the same tax. The learned counsel relied on the above decisions in support of his plea.
20. We shall now take up for consideration whether condition (3) is satisfied. The suggestion on behalf of the petitioner that by the amendments of the Travancore-Cochin General Sales Tax Act (XI of 1125) from time to time, the tax on electrical goods, cement, etc. which are involved in 'works contracts' has been increased cannot be ruled out as absolutely irrelevant. It was contended that the rate of tax leviable under the General Sales Tax Act, 1125 (Act XI of 1125) has been enhanced by the Kerala Surcharge on Taxes Acts of 1957 and 1960. There was some discussion at the bar as to whether the Kerala Surcharge on Taxes Acts of 1957 and 1960 enhance the sales tax payable under the General Sales Tax Act, 1125 (Act XI of 1125). The contention advanced on behalf of the State was that these enactments do not really enhance the sales tax payable on 'works contracts'. In Erna-kulam Radio Co. v. State of Kerala 1966 Ker LT 809 the question whether Section 3 of Surcharge on Taxes Act, 1957 is a tax on sales or tax on a tax on the sale of goods was considered by one of us sitting single. It was observed by Mathew, J. that "The object of the Act, as is clear from the preamble, is only to increase the tax on the sale or purchase of goods and the fact that its quantum is determined with reference to the sales tax imposed would not alter its character. Counsel for the petitioner submitted that since no surcharge could he realised by the dealer from the purchaser there is no meaning in the contention of the State that it is a tax on the sale of goods. It may be noted that surcharge is to be imposed on a dealer if the turnover exceeds Rs. 30,000 a year. It is a tax on the aggregate of sales effected by the dealer during the year in question. The surcharge therefore is really an enhancement of the sales tax when the turnover of the dealer exceeds Rs. 30,000 a year, and is a tax on the aggregate of sales effected by the dealer during the year."
The above decision was confirmed in Writ Appeal 139 of 1966. There is also force in the contention that in view of the Kerala Surcharge on Tax Acts 1957 and 1960, the incidence of tax also has been changed.
21. It was contended on behalf of the State, that if there is no legislative competency for the Kerala Surcharge on Tax Acts 1957 and 1960, in respect of 'works contracts' there is no bar to collect sales tax on 'works contracts' on the basis of the General Sales Tax Act, 1125 (Act XI of 1125). The learned Government Pleader based his submission on the doctrine of severability made applicable to taxing statutes by the decisions of the Supreme Court. In applying the principle of severability, one of the tests is stated by their Lordships of the Supreme Court in R.M.D. Chamarbaugwalla v. Union of India, AIR 1957 SC 628 at p. 637 in these words:--
"Even when the provisions which are valid are distinct and separate from those which are invalid, if they all form part of a single scheme which is intended to be operative as a whole, then also the invalidity of a part will result in the failure of the whole. Vide Crawford on Statutory Construction pp. 218-219."
The question of the effect of partial invalidity is discussed in these words in Craw-ford on Statutory Construction, (1940), at pp. 216-218 "Simply because a statute happens to be unconstitutional or invalid in part, does not necessarily mean that the part which is not invalid must also fail, not even though the statute be penal. It is only where the valid parts are so clearly dependent upon and so inseparably connected with the invalid parts that they cannot be separated without defeating the object of the statute, that they too must fall with those carts which are invalid. It is also well to remember that separability is not dependent upon whether the various provisions are contained in the same section, for the division of a statute into sections is purely artificial. In determining separability, the test is whether the legislature has manifested an intention to deal with a part of the subject matter covered, irrespective of the rest of the subject matter; if such an intention is manifest, the subject matter is separable. If the valid parts are complete in themselves and inde-pendent of the invalid parts and capable of being executed according to the intention of the legislature, they must be sustained by the court, notwithstanding partial invalidity. The invalid parts, however, may be dropped only where the part which is retained is fully operative as a law And where the invalid and the valid parts are independent and essentially and inseparably connected in substance, there is a strong presumption that the legislature would not have enacted one part without the other, and the entire statute will fall. A similar result will occur where all the provisions of an Act are connected as parts of a single scheme. In such a case, if the main object or purpose is invalid, those provisions which are incidental will also fall. But in any instance, there to a presumption that the legislature intended for the Statute or Act to be effective in its entirety, unless something in the Act indicates to the contrary."
22. According to the legislative intent. which alone is relevant, under Article 277 --competency or no competency apart--the assessment of turnover on 'works contracts' to sales tax should be based on the General Sales Tax Act, 1125 (Act XI of 1125) and the Kerala Surcharge on Taxes Act of 1957 as amended in 1960. The legislative intent is not to assess 'works contracts' on the basis of the General Sales Tax Act, 1125 alone after the passing of Acts XI of 1957 and 1960. These three Acts form part of a single scheme for the imposition of sales tax If so, it cannot be sustained under Article 277 of the Constitution
23. It is therefore not necessary to consider the two other aspects, namely, whether the area for which the tax is to be applied and the purpose for which it is to be utilised remain the same. We have therefore to hold differing from 1964 Ker LJ 738 that subsequent to the terms of the agreement dated 25-2-1950, the right to levy the tax under Article 277 does not revive
24. We shall now take up the second point raised on behalf of the petitioner, whether the levy of sales tax on 'works contracts' offends Article 14 of the Constitution. The contention of the learned counsel for the petitioner was that there is a differential treatment accorded to persons doing business in the area which originally formed the District of Malabar in the Madras State.
The General Sales Tax Act, 1125 (Act XI of 1125} is applicable to the whole of Kerala State The charging Section provides for the levy of sales tax on 'works contracts' in the entire State of Kerala. There was no attempt on the part of the State to contend that on the basis of this enactment sales tax can be levied on 'works contracts' on dealers in the Malabai area. In the matter of levy of sales tax on 'works contracts' there is therefore prima facie a differentia] treatment. It has been repeatedly laid down by the Supreme Court that the legislature has always the power to make special law to attain particular objects and for that purpose the authority has to select or classify persons, objects or transactions upon which the law is intended to operate.
The tax on 'works contracts' in the Travancore-Cochin area is sought to be levied under Article 277 of the Constitution and in continuation of the legal sanction in force immediately before the Constitution. It is not a levy sought to be imposed for the first time after the State Reorganisation Act, 1956. If so, there is no scope for the applicability of Article 14 of the Constitution. Further in this case there are no sufficient materials also to hold that Article 14 of the Constitution is attracted. In order that Article 14 may apply it has to be established that an applicant has been treated different from persons similarly circumstanced without reasonable basis and such differentia! treatment is made without any justification Materials to come to that conclusion are absent in this case. We therefore overrule the plea based on Article 14 of the Constitution
25. The above discussion leads to the conclusion that the impugned orders cannot be sustained. We would therefore allow the original petition and issue a writ of certiorari and quash Exts P-l to P-5. In view of the above conclusion we would also allow the tax revision cases without any order as to costs MATHEW, J.
26. I regret my inability to agree.
27. The facts of the case have been stated in the Judgment of my learned brethren. The question for consideration is whether the State Government was competent to levy and collect sales-tax on the turnover of works contract for the period covered by the assessment order impugned In these proceedings. The Supreme Court in AIR 1964 SC 207 did not decide the question whether it is competent for the State Government to levy sales-tax on works contract after the expiry of the period of the agreement entered into between the Government of India and the State Government under Article 278 etc. on 25-2-1950. The question was expressly left open. But it was contended on behall of the assesses that the 'radiating potencies' of the observations go beyond the actual holding in the decision and have the effect of deciding this question also The assesses- relied on a passage in the judgment of the Supreme Court, and that passage runs:
"It would be unreasonable to construe the agreement as to exclude from its operation certain taxes which the State was authorised to levy for a temporarv 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."
If the Supreme Court has decided in that case that by virtue of the agreement the power to continue to levy the tax nag been extinguished for ever, I do not think, there is any meaning in their Lordships leaving open the question whether the power would revive or not after the period of agreement. And when I look into the decision of the Supreme Court in Union of India v. G. R. Silk Mfg. (Wvg.) Co. Ltd. AIR 1064 SC 1903 delineating the scope of an agreement under Article 278. I have no doubt that the observations cannot have that effect.
28. Article 277 is an Article which enables a State Government to continue to levy taxes and duties which, were being lawfully levied immediately before the commencement of the Constitution notwithstanding the fact that the taxes and duties are mentioned expressly or impliedly in the Union List. The Article gives a power, a faculty, to the State Government, which it otherwise would not have possessed. It is only logical that if the State is enabled to continue to levy a tax by Article 277 which was being lawfully levied before the commencement of the Constitution, there must be a limited legislative capacity for the State Legislature for enacting a law for that purpose. The Supreme Court has held that the result of the conferment of the power to continue to levy the tax which was being lawfully levied before the commencement of the Constitution is that it impliedly gave the State a limited legislative capacity. See the observations in AIR 1962 SC 1073, quoted in the judgment of my learned brethren, and also the observations in AIR 1964 SC 1166.
The Cochin General Sales-tax Act, Act XV of 1121 as amended by Act V of 1124 continued to be in force till 30-5-1950 when it was repealed by the Travancore-Cochin General Sales-tax Act, Act XI of 1125. The Travancore-Cochin General Sales-tax Act was a law in force within the meaning of Article 372 at the time when the Constitution came into operation. The Supreme Court said in AIR 1964 SC 207 that Article 372 is subject to the provisions of Article 277 There was no bar to the continuance of a law in force relating to levy of taxes and duties if it satisfied the provisions of Article 277 The provisions in the Travancore-Cochin General Sales-tax Act of 1125 relating to the taxability of turnover of works contract to sales-tax and the rate of the tax being practically the same as those contained in the Cochin General Sales-tax Act of 1121, there was no inhibition in the State in continuing to levy sales-tax on turnover of works contract under that enactment after the Cochin General Sales-tax Act was repealed. The effect of the agreement entered into on 25-2-1950 between the Government of India and Government of the State under Article "278 of the Constitution upon the power of the State to continue to levy the tax under that Act will be considered presently.
Now I am only concerned with the question whether the State, in the exercise of its limited legislative capacity, could have enacted or brought into actual force those provisions relating to eligibility to tax the turnover of works contract contained in the Travancore-Cochin General Sales-tax Act of 1125, after the cimmencement of the Constitution. If, for any reason it is held that those provisions in the Travancore-Cochin General Sales-tax Act 1125, did not continue to operate as a law in force under Article 372 or that the State had no legislative capacity to enact those provisions or put into actual force those provisions after the agreement was entered into, the result would be that the corresponding provisions in the Cochin General Sales-tax Act 1121 as amended in 1124 would have continued as law: and the State could have justified the assessment and collection of the tax under these provisions notwithstanding that the assessment and collection were purported to be made under the General Sales-tax Act 1125.
You can repeal a law only if you have capacity to enact it.
"There is no doubt that the general principle is that the power of a legislative body to repeal a law is co-extensive with its power to enact such a law, as would be seen from the following passage in the judgment by Lord Watson in Attorney-General for Ontario v. Attorney-General for the Dominion, 1896 AC 348 at p. 366:
'Neither the Parliament of Canada nor the Provincial legislatures have authority to repeal statutes which they could not directly enact'." (See AIR 1962 SC 1073 at p. 1080} If there was no legislative capacity to enact or put into actual force those provisions in the Travancore-Cochin General Sales-tax Act after the agreement, there was no legislative capacity to repeal the corresponding provisions in the Cochin General Sales-tax Act. In any view there was a law in the State imposing sales-tax upon turnover of works contract before and after the agreement was entered into."
29. The next question for consideration is whether the agreement entered into between the Rajpramukh of the T C. State and the President of India had the effect of extinguishing the power of the State Government under Article 277 to levy the tax for ever or whether that power would revive after the expiry of the period of the agreement.
30. The power of the two Governments to enter into an agreement under Article 278 is conditioned by the provisions in that Article. I am not ignoring the fact that the agreement was entered into under the provisions of Articles 292, 295 and 306 also, but these Articles have no relevancy for the question in issue. Article 278 was as follows:
"(1) Notwithstanding anything in this Constitution, the Government of India, may, subject to the provisions of Clause (2), enter into an agreement with the Government of State specified in Part B of the First Schedule with respect to --
(a) the levy and collection of any tax or duty leviable by the Government of India in such State and for the distribution of the proceeds thereof otherwise than in accordance with the provisions of this Chapter;
(b) the grant of any financial assistance by the Government of India to such State in consequence of the loss of any revenue which that State used to derive from any tax or duty leviable under this Constitution by the Government of India or from any other sources
(c) the contribution by such State in respect of any payment made by the Government of India under Clause (1) of Article 291, and, when an agreement is so entered into, the provisions of this Chapter shall in relation to such State have effect subject to the terms of such agreement.
(2) An agreement entered into under Clause (1) shall continue in force for a period not exceeding ten years from the commencement of this Constitution:
Provided that the President may at any time after the expiration of five years from such commencement terminate or modify any such agreement if after consideration of the report of the Finance Commission bethinks it necessary to do so."
The Article in so far as it is relevant to the present purpose said that the Government of India may enter into an agreement with the Government of a State in respect of the levy and collection of any tax or duty leviable by the Government of India and that the agreement would be subject to the provisions of Clause (2), which said that the agreement shall continue in force for a period not exceeding ten years from the commencement of the Constitution. In considering the constitutional scope of an agreement under Article 278, it is necessary to keep in view the ambit of the Article. The two Governments could not have entered into an agreement which would be outside the purview of Article 278, and then claimed for it the constitutional efficacy attaching to an agreement within the scope of that Article. If the agreement touched matters not dealt with by Article 278(1), the constitutional validity of that part of the agreement will have to be adjudged on other considerations. In other words, if the agreement related to matters outside the scope of the subject matter dealt with by Article 278(1), then that part of the agreement can be treated only as a mere executive agreement and its validity determined on that basis. It would not have the constitutional effect of an agreement entered into under Article 278. I say this, because of the assumption made that in interpreting the scope of the agreement, the only relevant consideration is what is stated in the Report of the Indian States Finances Enquiry Committee.
I think, the proper way to look at the matter is first to consider the scope of Article 278(1), and then determine the actual content of the agreement, and if there is any ambiguity or dubiety in it, read the agreement in such a way as to harmonise its provisions with the terms of the Article, if that is possible. The scope of Article 278 came up for consideration in AIR 1964 SC 1903 Wan-choo J. (as he then was) speaking for the Court, said:
"When Article 278 (1) (a) speaks of levy and collection it does not deal with legislative competence but only with the actual levy of tax and its collection; and this in our opinion is clear from the later provision which relates to the distribution of the proceeds resulting from such levy and collection. It is true that sometimes the word "levy" also includes imposition of tax and not merelv its assessment and collection; but in the context in which the words "levy and collection" have been used in Article 278 (1) it seems to us that they only cover the assessment and collection and not the imposition of a tax. We may in this connection refer to the words of Article 277, which speaks of any taxes, duties, cesses or fees which were being lawfully levied by the Government of any State or by any municipality or other local authority or body These words came up for consideration by this Court in Town Municipal Committee v. Ramchandra AIR 1964 SC 1166 and it was held that in the context the words "being lawfully levied in Article 277" meant that the tax was actually levied and not merelv that a law imposing a tax had been made. Similarly in the context of Article 278 (1) (a) the levy and collection of any tax, followed as it is by the distribution of its proceeds, mean the actual assessment and collection of the tax and the way in which that should be done have no reference to legislative competence as to the imposition of the tax. We are of opinion that Article 278 (1) (a) deals only with public revenues and how they should be assessed and collected and distributed between the Union of India and Part B States, in case there is an agreement in that behalf between the Union of India and Part B States It further provide;- that in case of such agreement the earlier provisions of the Chapter relating to the levy collection and distribution of taxes and duties would not apply and the agreement would prevail for a maximum period of ten vears............Thus it becomes possible to the Government of India if it so decide? to enter into an agreement with a Part B State with respect to a tax leviable by the Government of India, that the tax shall be assessed and collected by the State through its own officers and the State may retain the entire proceeds 30 assessed and collected even though the executive power of the Union under Article 73 extends to matters with respect to which Parliament has power to make laws and ordinarily if a law as to taxation is passed by Parliament within its power its assessment and collection would be by officers under the Government of India. Article 278 (1) (a) however permits that such assessment and collection may also by agreement be left to the States in spite of the provisions in other parts of the Constitution. The non obstinate clause however with which Article 278 (1) opens does not in our opinion affect the legislative competence of Parliament even with respect to duties and taxes which are dealt with by an agreement under Article 278 (1) (a)."
I have made this rather long quotation to show the scope of Article 278 in the words of the Supreme Court itself. It is clear from what the Court has said that Article 278 (1) dealt only with assessment and collection of tax and not with its imposition. If that be BO, the agreement of 25.2-1950 could relate only to the assessment and collection of tax and not with its imposition, namely the declaration of liability to be taxed. The implied limited legislative power of the State to impose the tax as distinguished from its assessment and collection could not constitutionally have been the subject matter of the agreement. That power, in spite of the agreement remained with the legislative organ of the State. This is also clear from what the Supreme Court has said in that case:
"Nor do we see anything in Article 278(1) which in any way affects the legislative competence of Parliament or of State Legislature to pass any law within their respective powers. All that it provides is that the earlier provisions in the Chapter relating to levy, collection and distribution of any tax or duty may be varied for a certain period on an agreement between the Government of India and the Government of a Part B State. This was clearly necessary in view of the fact that many sources of revenue of States which came to form Part B States had to be taken over by the Government of India in view of the division of powers of taxation in List I and List II of the Seventh schedule to the Constitution and that might have created a gap in the revenues of Part B States Therefore, the Government of India was given the power for a period of ten years at the outset to come to an agreement with any Part B State in the matter of levy or collection of any tax or duty leviable by it and its distribution." The matter can be looked at from another angle. When the agreement was entered into the Cochin General Sales-tax Act was an existing law in actual operation in that part of the Slate. If the agreement under Article 278(1) could relate only to assessment and collection of tax how can it affect the pro-visions of the Cochin General Sales-tax Act pertaining to this matter? , The agreement did not expressly repeal those provisions in the Cochin Act. Nor was there an implied repeal, because there could be no repugnancy between those provisions in that Act imposing tax on works contract and the terms of the agreement, as ex hypothest these terms could relate only to the assessment and collection of the tax. I do not know how the provisions of the Travancore-Cochin General Sales-tax Act relating to exigibility to tax the turnover of works contract stood abrogated by the agreement, or how the effect of Article 277 was wiped out between the parties to the agreement. The effect of the agreement is not a matter left to implication only. Article 278 (1) expressly provided that the other provisions in that Chapter shall have effect subject to the terms of the agreement, and not for wiping out of any provision in the chapter.
So it comes to this: if an agreement under Article 278 could only have dealt with levy and collection of tax which the Government of India could have levied, I would presume that the agreement in question only dealt with that matter for a period of ten years at the maximum. Why should I not indulge in that presumption, when I see that the parties who entered into the agreement are two persons, representing two States, sovereign in their own spheres, and when the agreement did not expressly surrender the entire power of the State under Article 277 for ever? Of the consequence which might follow if one were to construe the agreement otherwise. I will advert in the sequel. The limited legislative power of the State to impose tax on the turnover of works contract could constitutionally not have been the subject matter of the agreement, and therefore, I would presume, was not the subject matter of the agreement. The power to assess and collect the tax alone could have been dealt with by the agreement and the power could have been granted only for a period not exceeding ten years. I cannot see how it is possible to limit the effect of Article 278 (2) and say that the period of ten years has relevaney only to the scheme of subsidy. I would go further and say--though that may not be necessary for the case -- that whatever might be the terms of the agreement entered into between the two Governments the effect of the agreement cannot last for a period of more than ten years from the commencement of the Constitution.
An agreement granting power to assess and collect the tax beyond the period of ten years would have been ultra vires Article 278 and therefore, beyond the competence of the parties to the agreement. The only contingency in which the Dower of the State to continue to levy the tax can be permanently extinguished is legislation to the contrary by Parliament. As indicated already, if the agreement dealt with matters other than those provided in Articles 278. 292, 295 and 306, the law will treat that part of the agreement as a mere executive agreement and adjudge its validity by other considerations. If the agreement provided for the extinguishment for ever of the entire power of imposing the tax as well es its assessment and collection, the validity of that part of the agreement dealing with matters not dealt with by these Articles will have to be adjudged in the light of general principles. If, as a matter of fact, the agreement provided for the extinguishment of the power to continue to levy the tax beyond the period of 10 years and in a contingency other than legislation to the contrary by Parliament, would it be valid even as an executive agreement is the question.
I do not think that any State under the Constitution can enter into a contract by way of executive agreement parting with a constitutional power unless expressly or impliedly provided for in the Constitution. Lord Blackburn said in Ayer Harbour Trustees v. Oswald, (1883) 8 AC 623 at p. 634:
"Whether that body be one which is seeking to make a profit for shareholders, or, as in the present case, a body of trustees acting solely for the public good, I think in either case the powers conferred on the body empowered to take the land compulsorily are intrusted to them, and their successors, to be used for the furtherance of that object which the legislature has thought sufficiently for the public good to justify it in intrusting them with such powers; and, consequently, that a contract purporting to bind them and their successors not to use those powers is void."
If a statutory body cannot enter into a contract to part with a power entrusted to it by the legislature, I think, the case is a fortiori in the case of a political body like the State.
31. Therefore, my conclusion is: by Article 277 the State Government was given power to continue to levy the tax which was being lawfully levied before the commencement of the Constitution. It is admitted that sales-tax on turnover of works contract was being lawfully levied under the Cochin General Sales-tax Act. The State had got a limited legislative capacity for effectuating the power under Article 277. In the exercise of that limited legislative capacity, the relevant provisions in the T. C. General Sales-tax Act, were put into force. If it is held that by virtue of the agreement the State had no legislative power to enact or put into force those provisions in the Travancore-Cochin General Sales-tax Act, it had also no power to repeal the corresponding provisions in the Cochin General Sales-tax Act, for if there was no legislative capacity to enact, the power of repeal, which stems from that legislative capacity, was also wanting. In any view of the matter, there was a law imposing tax on turnover of worke contract and that law was valid. The agreement entered into between the Government of India and the Government of the State under Article 278 could relate only to the levy and collection which in the context according to the Supreme Court ruling in AIR 1964 S.C. 1903 can only mean assessment and collection of a tax leviable by the Government of India. The agreement did not repeal expressly or impliedly those provisions in the Cochin General Sales-tax Act reating to exigibility to tax turnover of' works contract.
The State had legislative capacity to impose sales-tax on works contract, notwithstanding the agreement, which could relate only to assessment and collection of, the tax, as distinguished from its imposition, and therefore, had capacity to enactj the corresponding provisions in the Travancore-Cochin General Sales-tax Act An agreement under Article 278, whatever be its contents, cannot operate for a period beyond ten years from the commencement of the Constitution. The power to assess and collect the tax beyond a period of ten years could not have been a subject of the agreement, as that would have been ultra vires the provisions of Article 278 (2), and so beyond the competence of the parties thereto. Such an agreement, if treated as mere executive agreement, would not have been valid, since the State Government could not constitutionally have contracted to part with the power, as that power was intended by the Constitution to remain vested in the State until provision to the contrary is made by Parliament. As a matter of fact, the agreement related only to levy and collection of the tax, and since the ten years period expired on 25-1-1960, the power to the State to continue to levy and collect the tax revived as Parliament has not made any provision to the contrary. I agree with the conclusion in 1964 Ker LJ 738.
32. It was contended on behalf of the petitioner that the structure of the tax has been changed by the enactment of the Ker-ala Surcharge on Taxes Act, 1957, and the amendment thereto by Act 12 of 1960, with the result that the rate and the incidence of the tax have been altered, and therefore, the State Government cannot levy and collect sales-tax under the General Sales-tax Act, 1125. It is not contended that the rate of the sales-tax imposed by the Travancore-Cochin General Sales-tax Act as subsequently amended, was higher than that prescribed by the Cochin General Sales-tax Act on the turnover of works contract. The contention is that surcharge being only an increase in the rate of sales-tax the imposition of surcharge on the turnover of works contract would enhance the rate of tax and therefore, as one of the conditions for the applicability of Article 277 is not satisfied, sales-tax also cannot be collected on that turnover. I think, notwithstanding the enactment of the Kerala Surcharge on Taxes Act, it was open to the State Government to levy and collect sales-tax under the General Sales-tax Act of 1125 on the turnover of works contract. It was argued that though sales-tax and surcharge are imposed under different enactments the legislative aim was to treat all these enactments as part and parcel of a single scheme of taxation and so the structure of the tax was altered. The submission was that since surcharge being an increase of sales-tax and of the same nature and character, and as all the enactments are so inseparably connected as to form an indivisible scheme of taxation, the rate of the tax has been increased, and therefore, the assessment and collection of sales-tax would be invalid. If the legislative aim was that the provisions of these enactments should operate cumulatively and that either there must be a levy under all the enactments or no levy at all even under the General Sales-tax Act, the argument would have force.
33. Here, there are three separate enactments, one relating to the levy of sales-tax alone, and' the other two to the levy of surcharge. Surcharge is a distinct levy. In the legislative practice of this country surcharge has always been treated as a distinct and separate levy although its nature and sometimes its incidence may be the same as the tax to which it is a surcharge. I say this because surcharge is not leviable on the turnover of works contract unless the turnover of the dealer exceeds Rs. 30.000/-, whereas sales-tax is leviable even if the turnover is less than Rs. 30.000/-. The surcharge has always to be borne by the dealer, whereas it is open to the dealer to pass on sales-tax to the purchaser. (See S. 3 of the Kerala Surchage on Taxes Act. 1957V
34. Article 271 of the Constitution reads as follows "Notwithstanding a anything in articles 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India."
Article 269 says that taxes and duties mentioned in the Article shall be levied and collected by the Government of India and shall be assigned to the States Article 270 provides that taxes on income other than agricultural income will V collected by the Government of India and distributed between the Union and the States in the manner provided in Clause (2) of that Article These Articles make it clear that the destination of a tax levied may be for purposes of State Government, but the surcharge for the use of the Government of India. The assessment of surcharge in administrative practice is also a distinct assessment. Again, take a case where the turnover of works contract of a dealer in a year does not exceed Rupees 30,000, no surcharge can be levied. Does it follow that no sales-tax also could be levied? If the argument of the petitioner is sound, then, the turnover cannot be assessed to sales-tax also as the texture of the tax has been altered. And when I ask the question how that would affect the power of the State under Article 277 to levy and collect sales-tax, I am met with the answer that though the rate of sales-tax in such a cast has not been increased the old tax structure is gone, and so the collection would offend Article 277. The fallacy underlying the answer is the result of an inadmissible reading of the Article itself. The Article enables the State to continue to levy and collect the tax which was being levied and collected before the commencement of the Constitution. Where is the increase in the rate of the tax in the illustration put, and what is the change in its incidence so that it might be said that the third condition laid down by the Supreme Court in AIR 1962 SC 1073 at p. 1080 has not been satisfied. I see none.
35. I doubt, when there are distinct legislative enactments, whether any doctrine of severability of the language or of application has any relevancy. That the purpose of the legislature at the time of the passing of the Travancore-Cochin General Sales-tax Act was to levy sales-tax alone is clear. By the passing of the Kerala Surcharge on Taxes Act in 1957 and the amendment to it in 1960, what is the inference as to the legislative purpose? To say that because surcharge is an Increase in sales-tax when the turnover reaches a particular figure the purpose of the legislature in enacting all these acts was to make the levy under all the enactments an indivisible one, would be making a violent presumption as to the legislative purpose. The enactments are in no sense depended or involved with each other. They are to be taken as enacted distributively and not with the intention that either all or none will be operative. There can be no doubt that the Kerala Surcharge on Taxes Act of 1957 and the amendment to it in 1960 are valid legislation?
What is in question in this case might be the validity of the application of the provisions of those Acts to turnover of works contract. As the State Government is given the power under Article 277 to continue to levy the tax only at the rate at which the tax was levied and collected immediately before the commencement of the Constitution, the application of the provisions of that Act and its amendment to the turnover in question would enhance the rate of the tax and make the levy of surcharge on turnover of works contract un-constituonal. It will certainly be open to an assessee in such a case to contend that no surcharge can be levied on the turnover, but he cannot say that the levy of sales-tax under the General Sales-tax Act is also bad. If, for instance, instead of passing the Kerala Surcharge on Taxes Act the legislature or Government had simply increased the rate of sales-tax leviable on the turn-over of works contract, it could have been contended that since there is only an indivisible tax at a particular rate, and as the State Government cannot continue to levy and collect the tax at the rate which prevailed immediately before the commencement of the Constitution, because the rate has been indivisibly enhanced, the levy is bad. But this is not the situation here. The wording of the Article would indicate that it was open to the State Government to continue to levy the tax at the old rate. As the Kerala Surcharge on Taxes Act is a distinct legislative enactment, and is not indivisibly connected with the General Sales-tax Act, the levy of sales-tax alone can be open to no objection.
36. The question of severability falls into two classes. One relates to a situation in which some applications of the same languge in a statute are valid and other applications invalid, the other to statutes containing particular languge, whether words, phrases, sentences or sections, which is invalid and other languge entirely constitutional. These two aspects of the problem will have to be kept separately in dealing with a question of this nature. The first aspect relates to separable application, and the second to the problem of separable language. The question to be asked in this case is can It be said that the provisions of these Acts were so mutually connected with and dependent on each other so as to warrant the belief that the legislature intended them as a whole, and that if the provisions of the Kerala Surcharge on Taxes Act could not be applied to the turnover of works contract, the legislature would not have intended the application of the relevant provisions of the General Sales-tax Act also to that turnover. In other words, the question is whether the legislature intended the levy and collection of sales-tax under the provisions of the General Sales-tax Act on the turnover of works contract had it known when it enacted the Kerala Surcharge on Taxes Act of 1957 that the provisions therein cannot validly apply to that turnover
37. Difficult problems of statutory construction generally arise because the legislature had not thought of the Particular situation which has come before the Court, and accordingly had no real intention as to how the law should be construed with respect to it. Under such circumstances, when the legislature was not aware of the particular problem, Judges searching for legislative aim must try to discover what the legislature would have said if the particular situation would have been brought to its attention Where the legislative purpose is not known the Court must conjecture as to what the legislature would have done if it had known of the particular situation. See "Separability and Separability Clauses in the Supreme Court" by Robert L. Stern". I have no doubt what the legislature would have said in the situation here presented. I cannot imagine the legislature saying that it did not intend to levy and collect sales-tax under the General Sales-tax Act on turnover of works contract, as the levy and collection of surcharge under the provisions of Kerala Surcharge on Taxes Act on that turnover would be unconstitutional. Nor can I say after looking into these enactments that they are so dependent on each other or otherwise so connected that the legislature intended the provisions of the General Sales-tax Act as regards the exi-gibility to tax of turnover of works contract to operate only if surcharge can constitutionally be levied on that turnover under the provisions of the Surcharge on Taxes Act. I think that it was competent to the State Government to collect sales-tax on the turnover of works contract for the period in question under the General Sales-tax Act.
38. I agree with the finding in the judgment of my learned brethren on the question of the applicability of Article 14 of the Constitution to the facts of this case.
39. No data has been placed before the Court for holding that the tax collected will not be applied for the same purpose as the tax levied and collected before the commencement of the Const7itution was applied. Nor is there any substance in the contention that the increase in the rate of sales-tax for some of the materials used in the construction of the works undertaken by the petitioner is an increase in the rate of sales-tax on the turnover of works contract as the question in issue is whether the rate of sales-tax on the turnover of works contract has been altered
40. I would, therefore, hold in the Tax Revision Cases that the orders of assessment impugned are bad to the extent of the levy of surcharge on the turnover of works contract, and modify the orders to that extent, but would confirm them in other respects. I would dispose of the O. P. accordingly. Considering the circumstances. I would make no order as to costs. BY COURT
41. In view of the majority opinion, the Tax Revision Cases and the O. P. are allowed. The parties will bear their costs.