New Delhi: In 2004, a two-judge bench comprising Justices N. Santosh Hegde and B.P. Singh had held that notwithstanding the creation of two states, exemption or deferment of tax notifications issued before the bifurcation would continue to apply in the new state. For the purpose of sales tax, the judgment said, the two states were deemed to be one because of the legal fiction envisaged under the Reorganisation Act. The two states in question were Bihar and Jharkhand.
On Tuesday, a three-judge bench comprising Chief Justice of India Ranjan Gogoi and Justices S. Abdul Nazeer and Sanjiv Khanna overruled this two judge bench’s decision in Commissioner of Commercial Tax, Ranchi vs M/s Swarn Rekha Cokes and Coals Private Limited and others, and held that the creation of the new political state must be given full legal effect. The three judges said in The State of Madhya Pradesh v Lafarge Dealers Association and others:
“Whenever a new state is created, there would be difficulties and, issues would arise but these have to be dealt within the parameters of the constitutional provisions and the law and not by negating the mandate of the Parliament which has created the new State in terms of Article 3 of the Constitution.”
The bench had to determine the legal effect of the bifurcation of Madhya Pradesh, on exemption or benefit of deferment of sales tax granted under the Madhya Pradesh Commercial Tax Act, 1994 read with the applicable rules. The question was whether an industrial unit that fell under Chhattisgarh would continue to avail the benefits of such an exemption or deferment even after bifurcation.
The Madhya Pradesh high court’s Jabalpur bench had held that any trade and movement of goods between the two states after bifurcation would be inter-state trade and not intra-state trade, and that the Reorganisation Act had not eclipsed this legal position, but had a limited effect to treat the laws in operation in Madhya Pradesh as equally applicable to Chhattisgarh. However, some decisions of the high court favoured the contrary view, in light of the Supreme Court’s 2004 decision in Swarn Rekha Cokes.
Before bifurcation, Madhya Pradesh wanted to attract investors and increase industrial output. To do so, it formulated a policy in 1991 granting sales tax exemption to industrial units with fixed assets above Rs 100 crore.
Both Madhya Pradesh and Chhattisgarh told the court that after bifurcation, trade between the two states would be in the nature of inter-state sales and not intra-state. However, private parties before the court argued that the Reorganisation Act did not withdraw and negate the exemption benefits already granted in unified Madhya Pradesh.
Section 78 of the Reorganisation Act consists of two parts. The first part states the law in force before the appointed date (for the beginning of bifurcation), which in the present case is November 1, 2000, would continue to apply to the successor or reorganised state, as it existed before bifurcation. The second part of Section 78 incorporates a deeming fiction and says that territorial references to such law in the state of Madhya Pradesh shall, until otherwise provided, be construed as territories within the existing state of Madhya Pradesh before the appointed day.
Interpreting the second part of Section 78, the three-judge bench on Tuesday held that a deeming provision is operative for the purposes for which it is created, and the court should be careful not to extend this fiction beyond the legitimate field. Section 79 of the Act envisages adaptations or modifications in the earlier laws enacted in the unified state of Madhya Pradesh by the successor states, within two years of the appointed date by the competent authorities.
“The reorganised states do not usually start as tabula rasa, rather they are successors of the pre-existing erstwhile States. Disorderly and chaotic situation would erupt if the new state was to be created without any laws as on the date of its creation. To overcome this interregnum and vacuum, the Reorganisation Acts uniformly contain provisions which create a legal fiction to the extent that the reorganisation of the State would not affect the applicability of laws to all the territories included within it before and even after the reorganisation.”
The bench added that this is subject to adaptation or modification of the law by the new states, within two years.