Indore Iron and Steel Registered Association vs State of Madhya Pradesh and Ors.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 26 July, 1961

Coram: J.C. Shah, K. Subba Rao, M. Hidayatullah, P.B. Gajendragadkar, Raghubar Dayal

The appellant in this matter was the Indore Iron and Steel Registered Stock‑holders’ Association (Private) Limited, a registered association whose members were engaged in the manufacture and sale of fabricated iron and steel products. Their commercial activities included the production of iron sheets—both plain and corrugated—bars, rods, various light and heavy structural components, nails, joints, wire nails, and a wide range of wires and pipes. These business operations were conducted by the members of the appellant at the locations of Indore and Ratlam, where the association also maintained its registered office.

The State of Madhya Bharat, by virtue of its legislative Act numbered 30 of 1950, imposed a sales tax on specified goods sold within the territory of Madhya Bharat effective from 1 May 1950. Under the provisions of that Act, the Commissioner of Sales Tax for Madhya Bharat and the Sales Tax Officer of Indore were appointed as the authorities responsible for assessing the tax liability under the Act and for collecting the tax in their respective jurisdictions. These two officials were the second and third respondents in the present proceeding.

Section 3 of the Act constituted the charging provision, defining the incidence of the tax. Section 4 dealt with the application of the Act, including the matters of exemption and exclusion. Sub‑section (2) of Section 4 stated that no tax would be payable under the Act on the sale of goods listed in the second column of Schedule 1 when the conditions specified in column 3 of the same schedule were satisfied. The schedule identified “iron and steel” as item 39. Section 5 prescribed the rate of tax, providing that the rate would be fixed by government notification published in the official Gazette, but that the rate could not be less than 1‑9⁄10 per cent nor exceed 6 ¼ per cent. Section 4(3) empowered the government, by means of a notification, to amend Schedule 1 from time to time. Likewise, subsection 5(2) authorised the government, when issuing a notification of the tax payable by a dealer, to specify both the goods concerned and the point of sale at which the tax became payable. It was on the basis of this delegated authority that the State of Madhya Bharat, the first respondent, issued the notifications that are the subject of this appeal.

On 22 May 1950, a notification issued under subsection 5(2) listed, in serial order, the articles that were to be taxed, the stage of sale by traders within Madhya Bharat at which the tax would be levied, and the applicable rate of sales tax expressed as a percentage. Item 27 in that list dealt with goods manufactured from materials other than gold and silver, or goods made from more than one metal, except for circles and sheets of copper, brass and aluminium. The notifications therefore set out the tax liability for such items, mandating that the tax be paid by the producer or importer at the rate of 3‑2⁄10 per cent.

In the notification issued, it was stipulated that the tax must be paid by the producer or importer at the rate of three rupees two annas per cent. Subsequently, Article 286(3) of the Constitution came into force. At that time the provision of Article 286(3) declared that no law made by a State Legislature that imposed, or authorised the imposition of, a tax on the sale or purchase of any goods which Parliament had by law declared to be essential for the life of the community could have effect unless the law had been reserved for the President’s consideration and had received his assent. Thereafter Parliament exercised the power contemplated by that constitutional provision and, by means of section 2 of Act 52 of 1952—known as the Essential Goods (Declaration and Regulation of Tax on Sale or Purchase) Act—made the required declaration. The Act received assent on 9 August 1952. Section 2 of the Act declares that the goods listed in the Schedule are essential for the life of the community. Item 14 in that Schedule specifically refers to “iron and steel”. Consequently, from the date of the Act’s passage, iron and steel were deemed essential goods within the meaning of Article 286(3). Respondent 1, acting on that basis, issued two notifications on 24 October 1953 to give effect to both Article 286(3) and section 2 of the Act. The first notification declared that no tax shall be payable, inter alia, on the sale of iron and steel, and placed “iron and steel” at item 39 in the Schedule. The second notification, issued on the same day, listed under item 9 a comprehensive description of metals and metal articles, expressly excluding iron, steel, gold and silver, and enumerating various metals, their ores, and articles such as utensils, wires, mangars, metal pieces, scraps, cuttings, lanterns, gas stoves and type‑letters, while also excluding circles and sheets of copper, brass and aluminium. It is undisputed that under this second notification the articles in which the appellant’s constituent members dealt were liable to the sales tax mentioned. After the notifications were released, the appellant wrote to respondent 3 seeking exemption from sales tax on the goods and articles dealt with by its members, but respondent 3 rejected the claim and required each constituent member to pay sales tax on its own turnover. In response to that circumstance, the appellant instituted two writ petitions under Article 226 of the Constitution before the High Court of Madhya Bharat at Indore, challenging the assessment orders for the years 1953‑54 and 1954‑55.

The appellant instituted two writ proceedings under Article 226 of the Constitution disputing the validity of the assessment orders that had been effected for the fiscal years 1953‑54 and 1954‑55, identified respectively as Petitions Nos. 26 of 1954 and 48 of 1955. In the first petition the appellant maintained that the assessment order relating to the year 1953‑54 was ultra vires, while in the second petition it asserted the same defect with respect to the assessment order for 1954‑55. By filing these writs the appellant sought a declaration that the assessment orders should be set aside and that the sales tax liability imposed thereon should be extinguished.

The appellant’s substantive argument centred on the contention that the goods dealt with by its constituent members fell within the scope of the parliamentary declaration contained in Section 2 of the Sales Tax Act, and that, consequently, those goods were no longer subject to the levy of sales tax. The respondents opposed this position and urged that the notification issued by Respondent 1 on 24 October 1953 remained valid. They further submitted that Item 27 in the notified list expressly brought the articles in question within the mischief contemplated by the Sales Tax Act, thereby precluding any entitlement of the petitioners to the writs they claimed. The High Court accepted the respondents’ submissions, rejected the appellant’s contentions, and dismissed both writ petitions. The present appeals, numbered 509 and 510 of 1960, were brought before this Court on account of special leave granted by the Supreme Court pursuant to the dismissal orders of the High Court.

Two principal points were advanced before the Court by counsel for the appellant, Mr Viswanatha Sastri. The first point concerned the interpretation of Section 2 of the Act, which incorporates the parliamentary declaration contemplated by Article 286(3) of the Constitution. Counsel argued that the terms “iron and steel” should be understood in their commercial sense rather than in a narrow dictionary definition. He explained that the expression does not refer to raw iron and steel as they emerge from the smelting process, but rather to articles that are exclusively fabricated from iron and steel whereby the identity of the constituent metals has not been lost. In other words, “iron and steel” in this context embraces all articles made wholly of iron and steel that are normally bought and sold by steel merchants. Counsel further submitted that the purpose of Article 286(3) is to protect the consumer’s interest in essential articles declared by Parliament, and that a restrictive dictionary meaning would defeat the object and purpose of the constitutional provision.

The second point relied upon by counsel involved the legislative history of the relevant provisions. He directed the Court’s attention to Section 2(d), Section 3 and the categories enumerated in the Second Schedule of the Iron and Steel (Control of Production and Distribution) Order, 1941. According to counsel, these legislative materials unmistakably demonstrate that the phrase “iron and steel” was intended to be given a broad and wide construction in the statutory context, supporting the appellant’s position that the expression should be interpreted liberally for the purposes of Section 2 of the Act.

Counsel also referred to section 2(a)(vii) of the Essential Supplies (Temporary Powers) Act, 1946 and section 2(a)(vi) of the Essential Commodities Act, 1955. He argued that it would be proper for the Court to examine the legislative history of those statutes to understand the meaning of the words “iron and steel,” and he claimed that the history he cited supported a very liberal construction of those words for the purpose of applying section 2 of the Act. The High Court rejected this line of argument. It held that the expression “iron and steel” appearing in Entry 14 of Schedule 1 of the Act does not extend to the articles made of iron and steel that are the subject of the present proceedings. Counsel seriously questioned the correctness of that conclusion.

The Court noted that, even if it were to accept counsel’s contention that “iron and steel” should be given a broad meaning under the relevant provisions of the Act, the appellant would still be required to demonstrate two separate facts in order to succeed. First, the appellant must prove that the parliamentary declaration made pursuant to section 2 of the Act includes commodities such as those at issue in the present case. Second, the appellant must show that the impugned notification offends article 286(3) of the Constitution. Unless both of these elements are established, the appeals cannot succeed. Having reached the conclusion that even assuming the parliamentary declaration does encompass the commodities in question, it does not automatically follow that the notification violates article 286(3), the Court declined to consider the first element in detail and proceeded on the basis that the term “iron and steel” should be given the broad interpretation advocated by counsel. Assuming, therefore, that the appellant’s articles fall within the scope of the parliamentary declaration, the Court examined whether the notification breaches article 286(3). The provision can be invoked only if three conditions are satisfied. The first condition requires that the law challenged be one enacted by a State Legislature—that is, a legislature of a State that came into existence under and after the Constitution. This condition is satisfied in the present case because the notification was issued under authority delegated to respondent 1 by Act 30 of 1950, and that Act was enacted after the Constitution had been adopted.

The first condition requires that the impugned law be made by a State Legislature that existed after the Constitution came into force. This condition was met because the notification was issued under the authority delegated to respondent 1 by Act 30 of 1950, and that Act was enacted after the Constitution was adopted. The Court then examined the second condition, which also acts as a condition precedent. The second condition demands that the impugned law impose, or authorize the imposition of, a tax on the sale or purchase of any goods that Parliament has by law declared essential for the community’s life. The condition therefore presupposes that, at the time the impugned law was passed, a prior parliamentary declaration identifying the commodity as essential already existed. The critical language of the condition refers specifically to “the sale or purchase of any such goods as have been declared by Parliament by law to be essential for the life of the community.” Consequently, if the parliamentary declaration were made after the impugned enactment, that later declaration could not retrospectively affect the validity of the earlier enactment. Article 286(3) provides that when an existing parliamentary declaration declares a commodity essential, a State Legislature may not impose or authorize a tax on that commodity unless the law has been reserved for the President’s consideration and has received his assent. The third condition stresses that the impugned law must also have been enacted after the Constitution, because the constitutional provision allowing reservation of a law for the President’s consideration could operate only after the President’s office was created. Hence, the third condition reinforces the conclusion derived from the wording of the first condition.

Applying these criteria, the Court found that Act 30 of 1950 satisfies the first condition but fails to satisfy the second condition. The parties conceded that the relevant provisions of the M.B. Act of 1950 authorize the levy of tax on the commodities in dispute and that the notification is otherwise consistent with, and justified by, those provisions. However, because the M.B. Act does not tax goods that Parliament had previously declared essential before the Act’s date, the validity of the Act cannot be challenged on the ground that it was not reserved for the President’s consideration nor that it lacked his assent. The Court therefore held that only when all three conditions prescribed by Article 286(3) are satisfied can the validity of the impugned law be successfully contested.

In this case the Court examined whether the construction of Article 286(3) of the Constitution could be challenged. The Court noted that the question of how Article 286(3) should be understood had previously been addressed on two occasions. The first occasion was in the decision of Sardar Soma Singh v. State of Pepsu and Union of India, reported in 1954 S.C.R. 955, where the learned judge, speaking for the Court, observed that Section 3 of Act 52 of 1952 did not affect the Ordinance that was under attack because that Ordinance had not been made after the commencement of the Act. The judge further explained that Article 286(3) envisages a law which may be, but has not been, reserved for the President’s consideration and has not obtained his assent. This observation, the Court said, points clearly to legislation that is post‑constitutional, since an existing law that continued under Article 372 cannot be said to be awaiting the President’s assent. Consequently, the decision supported the conclusion that the law referred to in the first condition of Article 286(3) must be legislation enacted after the Constitution came into force. The Court added that the same reasoning was echoed in the majority judgment of the case of Firm of A. Gowrishankar v. Sales Tax Officer, Secunderabad.

The Court then turned to Section 3 of the Act itself for further clarification. Section 3 provides that no law made after the commencement of the Act by a State Legislature which imposes or authorises a tax on the sale or purchase of any goods that the Act declares to be essential for the life of the community shall have any effect unless that law has been reserved for the President’s consideration and has obtained his assent. The Court interpreted this provision to show that the declaration of essential goods in the Act was intended to operate prospectively and would affect only those laws made after the Act’s commencement. Accordingly, a law that had been passed before the Act came into force and that authorised a tax on the sale or purchase of certain commodities could not be challenged on the ground that those commodities were later declared essential by the Act. The Court observed that the notification under review, together with the Act under which it was issued, fell outside the scope of Section 3 of the Act. This finding corresponded to the view of the High Court on the second contention raised by the appellant. The Court agreed with the High Court’s conclusion on this point.

Having considered these arguments, the Court held that the appeals must fail. Accordingly, the appeals were dismissed with costs, and the final order was that the appeal was dismissed.