HOECHST PHARMACEUTICALS LTD. AND ANOTHER ETC. v. STATE OF BIHAR AND OTHERS

i7o SUPREME COURT REPORTS [1983) 3s.c.R.. "No doubt experience of past difficulties has made the provisions of the . Indi~n Act more exact in some particulars, and the existence of the Concurrent List has made it easier to distinguish between those matters which are essential in determining to which list particular provision should be attributed and those which are merely incidental. But the overlapping of subject•matter is not avoided by substituting three lists for two, or even by arranging for a hierarchy of jurisdictions. Subjects must still pve11ap, and where they do, the question must ·be asked what in pith and substance is the effect of the enactment ·of which complaint is inade, and in ·what list c is ·its true .nature arid character to be found. If these questions could not be asked, much beneficent 'legislation would-be stifled at birth, and many of the subjects entrus- ted to provincial legislation could never effectively be . dealt with.''

D It would therefore appear that apparent corrflict with the Federal power had to be resolved by .apphcation of the· doctrine of pith .and substance and incidental encroachment. ·Once it is found that a law made by the Provincial Legislature was with respect. to one of the matters enumerated jn the Provincial List, the degree or extent of the invasion into the forbidden field was immaterial. "The invasion E of the provinces into subjects in the Federal List", in the words of· .Lord Porter, "•was important" :

,: ·. ~-.not ...... because the validity· of an Act can .be ,determined by discriminating between degrees of inva- F sion, .but for the purpose of determining as to what is the pith and substance of the impugned Act. Its pro- visions may advance so far into federal territory as to show .that .its true nature is not covered with Provincial matters, but the question is not, has it trespassed more G or Jess, but is the trespass, whatever it be, such as to show that the pit!J. and substance of the impugned Act is not money-lending but promissory notes or banking ? Once that question is determined tlie Act falls on one or the other side of the line and can be seen as valid or invalid according to its true content.'' H The passage quoted above places the precedence according to the three lists in its proper perspective. In answering the objection that

lli>ECHST v. B!HAR (Sen, i.) i71 view does not give sufficient effect to the non-obstante clause in s. 100(1) oft.he Governmeat of India Act, 1935, as between the three A lists, the Privy Council observed :

"Where they come in conflict, List I has priority over Lists III and II and List III has priority. over List II." .. ' A B But added:

"The priority of the Federal Legislature would not prevent the Provincial Legislature from dealing with any matter within List JI . though it may 'incidentally affect any item in List I.". c It would therefore appear thaf the constitutionality of the law is to be judged by its real subject matter and not by its illcidental effect on any topic of legislation in another field. D The decision of the Privy <;::ouncil in Prafulla Kumar Mukherjee' " case; supra, has been repeatedly approved by tl;le Federal Court and this Co1;1rt as laying down the correct rule to be applied in !esolving ' conflicis which arise from overlapping powers in mutually exclusive lists. It may be added as a corollary of the pith and substance rule that once it is found that in pith and substance an impugned Act ls E a law on a permitted field· any incidental encroachment on a for- bidden field.does not affect the·competence of the legislature to enact that Act; Ral/a Ram v. Province of East Punjaq('), State of Bombay v. Nerothamdas Jethabai & Anr.( 2 ), State of fJombay v. F. N. Balsara(•), A. S. Krishna v. State of Madras('), .M. Karunanidhi v. Union of F India('). Union of India v. H. S. Dhillon(') and Southern Pharmaceuti- cals & Chemicals Trichur & Ors. etc. v. State of Kerala & Ors. etc.(')

In Laskin's Canadian Constitutional Law, 4th edn., it is . observed at p. 24 that the doctrine of paramountcy is tied up with G

(1) [1948] F.C.R. 207 at pp. 226-27. (2) ·[1951] S.C.R. 51 at pp. 64-65. (3) [1951] S.C.R. 682. . (4) 11957] S.C.R. 399. H (5) [1979] 3 S.C.R. 254. (6) [1972] 2 S.C.R. 33. (7) [1982] l SC!!- 519.

i72 SUPREME COURT REPORTS [19S3].J s.c.R. the "trenching" doctrine in the first of the four propositions formu- A lated by Lord Tomlin in Attorney-General for Canada v. Attorney General for Britain Columbia & Ors.( 1) ~ase, and then he goes into the question, : "What is the basis of the paramountcy doctrine ?" Laskin quotes from L~froy's Canada's Federal System at p. 126 :

'·But the rule as to predominance of Dominion legis- B . Jatiorl it may be confidently said, can only be invoked in cases of absolutely conflicting legislations in pari materia, when it would be an impossibility to give effect to both the Dominion and the provincial enactments."

C The learned author refers two the two decisions of the Privy Council in Attorney-General of Ontario v. Attorney-General of Canada(') and City of Montreal v. Montreal Street Railway(') laying down that :

"There.must be a real conflict between tire two Acts, that is, the two enactn1ents 'must come into collision' ...... D or 'comes into conflict ..... over a field of jurisdiction common to both'." •

Laskin observes that the "conflict'" test espoused by these authorities seems clear enough in principle even if it raises problems E in application. He then at p. 26 notices that there is a recent trend. in the decisions of the Supreme Court of Canada to the strict view of paramountcy reflected in the· conflict· or collision test, which 'he describes as the test of operating incompatibility and observes at p. 27: F "It is necessary to be reminded at all times that no issue of paramountcy can arise unless there is in existence federal and provincial l~gislation which, independently considered, is in each case valid. If either piece of legis- . lation, standing alone, is invalid there is no occasion to consider whether the field has been occupied. The issue G that will have been resolved in such case would be the . anterior one of the "matter" embraced by the legislation, whether of Parliament or of the provincial legislature, as the case may be." H (I) L.R. [1930] A.C. 111. (2) L.R. [18961 A.C. 348, (3) L.R. [1912] A.C. 333.

HOECHST v. BIHAR (Sen, J.) 173

At p. 28, he states : A "The doctrine of occupied field applies only where there is a clash between Dominion legislation and provincial legislation within a!! area common to both."

Here there is no such conflict. The Union and the State laws B operate on two different and distinct fields and both .the laws are capable of being ·obeyed.

Questions of conflict between tbe jurisdiction of Parliament of the Dominion and of the Provincial Legislature have frequently come up before the Privy Council and we may briefly refer to the decisions c relied upon though they are of little assistance to the appellants. In Grand Trunk Railway Company of Canada v. · Attorney-General of Canada('), Lord Dunedin observed :

The construction of the provisions of the British North America Act has been frequently before their D Lordships. It does not seem necessary to recaptiulate the decisions. But a .comparison of two cases decided in the year 1894 - viz., Attorney-General of Ontario v. Attorney- General of Canada(') and Tennant v. Union Bank of C11nada( 3) - seem to establish these two propositions. First, that there can be a domain in which provincial and E Dominion legislation may overlap, in which case neither legislation will be ultra vires, if the field is clear; and secondly, that if the field it not clear, and in such a domain the two legislations meet,. then the Dominion legislation must prevail." ·F In a later decision of the Privy Council in Attorney-General for Canada v. Attorney-General for British Columbia & O~s. case, supra, Lord. Tomlin summarized in four propositions the result of the earlier decisions of the Board on the question of conflict between the G Dominion and Provincial Legislatures. The third proposition is to the effect that it is within the competence of the Dominion Parlia- ment to provide for matters which, though otherwise within the t H (I) L.R. [1907] A.C. 65. (2) L.R. [18941 A.C. 189. (3) L.R. [1894) A.C. 31,

174 SUPREME COURT REP6RTS (1983] 3 S.C.R.

legislative cometence of the Provincial Legislature, are necessarily A incidental to effective legislation by Parliament of the Dominion upon ' a subject oflegislation expressly enumerated in s. 91. The fourth proposition on which the entire argument of learned counsel for. the appellants proceeds is based upon the dictum of Lord Dunedin in Grand Trunk Railway Company's case, supra, set out above. 8. ·' It is well settled that the validity of an Act. is not affected if it incidentally trenches upon matters outside the authorized field and therefore it is necessary to inquire in each case what is the pith and substance of the Act impugned. If the Act, when so viewed,. substantially falls within the powers expressly conferred upon the c Legislature which enacted it, then it · cannot be held to be invalid merely because it incidentally encroaches on matters which have been assigned to another Legislature. ·

In Board of Trustees of the Lethbrige Northern Irrigation District & Anr. v. Independent Order of Foresters('), Viscotint, D Caldccote, L.C. observed :

"These sections have been the subject of repeated examination .in the Judicial Committee, and there can no longer be any doubt as to the proper principles to their interpretation, difficult though they may be in application. Lord Haldane, in delivering the judgment of the Judicial Committee in :Great West Saddlary Co. v. The King(') said "The rule of constraction is that general language in the heads of s. 92 yields to particular expressions in s. 91, where the latter are unambiguous." In a later decision of the Judicial Committee, Attorney-General for Canada v. Attorney-General for British Columbia, supra, Lord Tomlin summarized in four propositions the result . 'of the ealier decisions of the Board on questions of con- ftict between the Dominion and the Provincial Legislatures. The first proposition is to the effect that the legislation of the Provincial Parliament of the Dominion, so long as it strictly relates to subjects of legislation expressly enume- rated ins. 91, is of paramount authority, even though it trenches upon matters assigned to . the Provincial H (I) L.R. [19401 A.C. 513. (2) L.R. [1921) 2 A.C. 91, 116.

. HOECHST v. BIHAR (Sen, J.) 175

Legislatures by s. 92, Lord Tomlin referred to Tennant v. Union Bank of Canada, supra, as the authority for · this A statement."

Viscount Caldecote then observed :

''In. applying these principles, as their Lordships B propose to do, an inquiry must first be made as to the "true nature and character of the enactment in question" (Citiun Insurance Co. of Canada v. Wi/iain Parsons) (supra) or, to use Lord Watson's ivords in delivering° the judgment of the Judicial Committee in Union Colliery Com- pany of British Co /umbia v. Bryden(') as to their "pith and c substance'\ Their Lordships now addres themselves to that_ inquiry."

"Legislation", said Lord Maugham in delivering the judgment of the Privy Council in Attorney-Genera/ for Alberta v. Attorney· General for Canada,(') "given in pith and substance within one of the D classes specially enumerated in s. 91 is beyond the legislative compe· tence of the Provincial Legislature under s. 91 ". At p. 370 of the Report, Lord Maugham laid down on behalf of the Privy Council :

"Since 1894 it has been a settled principle _that if a E subject of legislation by the Province is c>nly incidental or ancillary to one of the classes of subjects enumerated ·in s. 91 and is properly within one of the subjects enume· rated in s. 92, then legisiation by the Province is comeptent unless and until the _Dominion Parliament chooses to occupy the field by /egis/atian." F (Emphasis supplied.)

Lord Maugham's reference to the year 1894 points to 'the decision of the Privy Council in Attorney-Genera/ for Ontario v. , Attorney-General for Canada, supra. G In Attorney-Genera/for Canada v. Attorney-General for the Province of Quebed,(8) Lord Porter in delivering the judgment of the Board drew attention to these principles and then observed: H (I) L.R. [1899] A.C. 580. (2) L.R. [1943] A.C. 356. (3) [1946] A C. 33,

176 &UPREME COURT REPORTS [1983] 3 s.c.1t

."In calling attention to these principles the,ir A Lordships are but repeating what has many times been set forth in the judgments of the Board, and it only remahis to apply them to the individual case under consideration .. ,

Tne rule of pith and substance laid down by the Privy Council

B was reaffirmed by Viscount Simon . in . Attorney-Genera/ of Sasketchewan v. Attorney-General of Canada &'Ors.(')

This was emphasized very clearly by Lord Atkin while dealing with the validity of the Milk and Milk Products Act (!\'orthern Ireland) which was impugned as violating s. 4 of the Government of C Ireland Act, 1920 in Ga/lahagher v. Lynn(2 ) in his own terse language:

'.'It is well established that you are to look at the ."true nature and character" of the legislation; Russell v. The Queen(') "the pith and substance of the. legislation". D 'If on the view of the statute as whole, you find that the substance of the legislation is within the express powers, then it is now invalidated if incidentally it affects matters which are outside the authorized field."

E . Much stress is laid on the fourth propo>tition formulated by Lord Tomlin in Attorney-General for Canada v. Attorney-Genera/ for British Columbia & Ors.. (rnpra) based on the dictum of Lord Dunedin in Grand Trunk Railway Company of Canada's case, supra, which, even at the cost of repetition, we may set out below : .F "4. There can be a domain in which provincial and Dominioi:i legislation may overlap, in which case neither legislation will be ultra vires if the field is plear, b4t,if the field is not clear and the two legislations meet the Dominion legislation must prevail : see Grand .Trunk ·R .. G of Canada v. Attorney:Genera/ of Canada, (supra)." ) The question is whether the field is not clear and· the two legis,lations meet and therefore on the doctrjne of Federal supremac~ sub·s (3)

H , (1) L.R. [1949] A.C. 110. (2) L.R. [1937) A.C. at p.870. (3) L.R. [1882! 7 A.C. 829,

HOECHST v. BIHAR (Sen, J.) 177 of s. 5 of the Act must be struck down as· ultra vires The principle ' deducible from the dictum of Lord Dunedin as applied to the distribution of legislative powers under Art 246 of the Consititution, ·is that when the validity of an Act is challenged as ultra vires, the answer lies to the question, what is the pith and substance of the impugned Act ? No doubt, in many cases it can be said that the enact• ment which is under considerat_ion inay be regarded from more than one angle and as operating in more than one field. If however, the matter dealt with comes within any of the clas'es of subjects enumerated in List II, then it is under the terms of Art. 246 (3) not to be deemed to come.within the classes of subjects assigned exclusi- vely to Parliament under Art. 246 (I) even though the classes of subjects looked at signly overlap in many respects. The whole distri- c bution of powers must be looked at iis Gwyer, C. J. observed in C.P. & Berar Taxation Act's·case, supra, in determining the question of validity of the Act in question. Moreover, as Gwyer, C.J. laid dov;n in Subrahmanyaif Chettiar's case, (supra), and affirmed by their Lordships of the Privy Council in Prafulla Kumar Mukh~rjee's case, D (supra) it is within the competence of the State Legislature under Art. 246 (3) to provide for matters which, though within the competence of Parliament, are necessarily incidental to effective legislation by the State Legislature on the subject of legislation expressly enumera- te.ct in List II. E We must then pass on to the contention advanced by learned counsel foi the appellants that there is repugnancy between rnb-s (3) of s. 5 of the Act and paragraph 21 of the Drugs (Price Control) Order and therefore sub-s. (3) of s. 5 of the Act is void t.o that extent. Ordinarily, the laws could be said to be repugnant when they. involve impossibility of obedience to them simultaneously but ·there may be cases in which enactments may be inconsistent although obedience to each of them may be possible without disobeying the other. The question of "repugnancy" arises only with reference to a legislation falling .in the Conc;irrent List but it can be cured by resort to Art. 254 (2). · G

As we have endeavoured so far, the question raised as to the constititutional validity of sub·s. (3) of s. 5 of the Act has to be determined by application of the rule of the .pith and substance whether or not the subject-matter of the impugned legislation was comp~tently enacted under Art. 246, and therefore tho question of repugnancy under Art. 254 was not a matter in issue, The submission

178 SUPREME COURT REPORTS (1983] 3 s.c.R.

' put forward on behalf of tbe appellants however is that there is direct collision and/or irreconci!iable conflict between sub-s. (3) of s. 5 of the Act which is relatable to Entry 54 of List II of the Seventh Schedule and paragraph · 21 of the Control Order issued by the Central Government under sub-s. (1) of s. 3 of the Essential Commodities Act which is relatable to Entry 33 of Li!it III. It is sought to be argued that the words "a law made by Parliament which B ·Parliament is competent to enact" must be construed to mean not only a law made by Parliament with respect to one of the matters enumerated in the Concurrent List. but they are wide enough to include a law made by Parliament with respect to any of the matters enumerated in the Union List. The argument was put in this form. c . In considering whether, a State law is repugnant to a law made by Parliament, two questions arise : First, is the law made by Parliament viz. the Essential Commodities Act, a valid law ? For, if ii is not, no . question of repugnancy to a State law can arise. If however it is a valid law, the question as to what constitutes repugnancy directly arises. The_Second question turns on a construction of the words ."a law made by Parliament which Parliament is competent to enact" in Art. 254 (!).

Strong reliance is placed on the judgment of the .High Court of Australia in Clyde Engineering Company Limited v. Cowburn(') E and to a passage in Australian Federal Constitutional Law by Colin Howard, 2nd edn. at pp. 34-35. Our attention is also drawn to two other decisions of the High Court of Australia : E.~ parte Mc Lean(') and Stock Motor Ploughs Limited v. Forsyth.\') The deeis;on in Clyde .. Engineering Company's cases, supra, is an authority for the proposi- . tion that two enactments may be inconsistent where one statute takes F :away the rights conferred by the other although obedience to .each one of them may be possible without disobeying the other. The contention is that paragraph 21 of the Control Order confers a right 1 on the manufacturers and producers of medicines and drugs to· pass on the liability for sales ·tax while .sub-s. (3) of s. 5 of the Act prohibits such manufacturers or producers from passing on such liability. The argument cannot prevail for two obvious reasons viz : (I) Entry 54 of List His a tax entry and therefore there ·is no ques- ) tion of repugnacy between sub-s. (3) of s. 5 of the Act which is a

H (I) [1926] 37 Com. L.R. 466. (2) [1930] 43 Com. L.R. 472. (3) (1932j 48 Com, L.R. 12~,

HOECHST v. BIHAR (Sen, J.) 179

law made by the State Legislature for the imposition of tax on sale or purchase of goods relatable to Entry 54 and paragraph 21. of the A Control Order issued by the Central Government under sub-s. '(!) of s. 3 of the Essential Commodities Act which is a law made by Parliament relatable to Entry 33 of List III. And (2) The question of "repugnancy' can only arise in connection with the subjects enumera' ted in the Concurrent List as regards which both the Union and the B State Legislatures have concurrent powers so that the question of conflict between laws made by both Legislatures relating io the same subject may arise.

This Court has considered the question of repugnancy in several cases and in Deep Chand v. The State of Uttar Pradesh & c Ors,(') the result of the authorities was thus stated by Subba Rao, J.:

"Nicholas in his Australian Constitution, 2nd edn., p. 303, refers to three tests of inconsistency or repugnancy :

I. There may be inconsistency in the actual terms of the competing statutes;

2. Though there may be no direct conflict, a .State law may be inoperative because the Commonwealth Jaw, or the award of the Commonwealth Court, is inten- ded to be a complete exhaustive Code; and

3. Even in the absence of intention, a conflict may arise F when both State and Commonwealth seek to exercise.their powers over the same subject-matter."

In Ch. Tika Ramji & Ors. v. The State of Uttar Pradesh &. Ors.(') the Court accepted the above three rules evolved by Nicholas, among (j others, as useful guides to test the question of repugnancy. ,( Art. 254 of the Constitution makes provision first, as to what

•• would happen in the case of conflict between a Central and State

(I) [1959] Supp. 2 S.C.R. g, (2) [1956] S.C.R. 393.

180 SUPREME COURT REPORTS [1983] 3 s.c.R.

law with regard to the subjects. enumerated in the Concurrent List, A and secondly, for. resolving such conflict. Art. 254(1) enunciates the normal rule that in the event of a conflict between a Union and a State law in the concurrent field, the former prevails over the latter. Cl. (I) lays down that if a State law relating to a concurrent subject is 'repugnant' . to a Union law relating to that subject, then, whether the Union law is prior or later in time, the Union· law will prevail and the State law shall, to the extent of such repugnancy, be void. To the general rule laid down in cl. (I), cl. (2) engrafts an exception, viz., that if the President assents to a State law which has been reserved for his consideration, it will prevail notwithstanding its repugnancy to an earlier law of the Union, both laws d1:aling with c a concurrent subject. In such a case, the Central Act will give way to the State Act only to the extent of inconsistency betwe1:n the two, and no more. In short, the result of obtaining the assent of the President to a State Act which is inconsistent with a previous Union law relating to a concurrent subject 'Yould be that the State Act will D prevail in that State and override the provisions of the Central Act in their applicability to that State only. The predominance of the · State law may however be taken away if Parll'ament legislates under the proviso to cl. (2). The proviso to Art. 254(2) empowers the Union Parliament to repeal or amend a repugnant State law, either directly, i or by itself enacting a law repugnant to the Stat.e law with respect to the 'same matter'.' Even though the' subsequent law made by Parlia- ment does not expressly repeal a State law, even then, the State law will become void as soon as the subsequent Jaw of Parliament creating repugnancy is made. A State law would be repugnant to the Union law when there is direct conflict between the two laws. Such repµg- F nancy may also.arise where both laws operate in the same field and ,;"' the two canriot possibly stand together. : Se.e: Zaverbhai Amaidas v. State of Bombay('). M. Karunanidhi v. Union of India(') and T. Barai v. Henry Ah Hoe & Anr.(1)

We may briefly refer to the three Australian decisions relied G upon. As stated above, the decision in Clyde Engineering Company's case (supra), lays down that inconsistency is also created when one statute takes away rights conferred by the other. In Ex Parle ) McLean's case, supra,. Dixon J. laid down ·another test viz., two

H (I) [1955] l S.C.R. 799. (2) (1979] 3 S.C.R. 254. (3) \J983) 1 S.C.C. 1771

HOECHST ii. BIHAR (Sen, J.) 181 statutes could be said to be inconsistent if they, in respect of an identical subject-matter, imposed identical duty upon the subject, but provided for different sanctions for enforcing those duties. In Stock Motor Ploughs Limited's case, supra, Evatt, J. held that even in respect of cases where two laws impose one and the same duty of obedience there may be inconsistency. As already stated the contro- versy in these appeals falls to be determined by the true nature and character of the impugned enactment, its pith and substance, as to whether it falls within the legislative competence of' the State Legis- lature under Art. 246(3) _and does not involve any question of rcpug- nancy under Art. 254(1).

We fail to comprehend the basis for the submission put forward c on behalf of the appellants that there is repugnancy between sub-s. (3) of s. 5 of the Act which is relatable to Entry 54 of List fl of the Seventh Schedule and paragraph 21 of the Control Order issued ·by the Central Government under sub-s._ II) of s. 3 of the Essential Commodities Act relatable to Entry. 33 of List III and therefore D sub-s. (3) of s. 5 of the Act which is. a Jaw made by the State Legis- _lature is void under Art. 254(1). The question ofrepugnancy under Art. 254(1) between a law made, by Parliament and a law made by the State Legislature arises only in case both the legislations occupy . the same field with respect to one -0f the matters enumerated in the E Concurrent List, and there Is direct conflict between the two laws. It is only when both these requirements are fulfilled that the State law will, to the extent of repugnancy become void. Art. 254(1) has no application to cases of repugnancy due to overlapping found between List II on the one hand and List I and List III on the other. If such overlapping exists in any_ particular case, the State law will be ultra vires b</ause of the non-obstante clause in Art. 246(1) read with the opening words "Subject to" in Art. 246(3). In such a case, the State Jaw will fail not·became of repugnance to the Union law but due to want of legislative competence. It is no doubt true that the 'expression "a law made by Parliament which Parliament is compe- tent to enact" in Art. 254(1) is · susceptible of a construction that repugnance between a State law and a law made by Parliament may take place outside the concurrent sphere because Parliament is competent to enact law with respect to subjects included in List III .as well as "List I". But if Art. 254( I) is read as a whole, it will be c1: seen that it is expressly made subject to (2) which makes reference to repugnancy in the field of Concurrent List-in other words, if cl. (2) is to be the guide in the determination of scope of cl. (I), the .

SU~REME CoURT REPORTS [t9s3i 3 s.c.ii.. repugnancy between Union and State Jaw must be taken to refer only to the Concurrent field. Art. 254( 1) speaks of a State Jaw being repugnant to (a) a Jaw made by Parliament or (b) .an existing Jaw.

There was a controversy at one time as to whether the succeed- ing words "with respect to one of the matters enumerated in the Concurrent List" govern both (a) and (b) or (h) alone. It is now B settled that the words "with respect to" qualify both the clauses in Art. 254(1) viz. a law made by Parliament which Parliament is competent to enact as well as any provlsion of an existing Jaw, The underlying principle is that the questio.n or repugnancy arises only when both the Legislatures are competent to legislate in the same c field i.e. with respect to one of the matters enumerated in the Con- current List. Hence, Art. 254(1) can not apply unk:ss both the Union and the State laws relate to a subject specified in the Con- current List, and they occupy the same field.

This construction of ours. is supported by tl~e observations of D Venkatarama Ayyar, J. speaking for the Court in A. S. Krishna's case, supra, while dealing withs. 107(1) of the. Governm<mt of India Act, 1935 to the effect:

"For this section to apply, two conditions mu:it be · fulfilled : (I) The provisions of the Provincial law and those of the Central legislation must both be in respect of a matter which is enumerated in the Concurrent List, and (2) they must be repugnant to each other. It is only when both these requirements are satisfied· that the Provincial law will, to the extent of the repugnancy, become void."

In Ch. Tika Ramji's case, supra, the Court observed that no question of repugnancy under Art. 254 of the Constitution could· arise where parliamentary legislation and State legislation occupy different fields and deal with separate and distinct matters even G; though~f a cognate and allied character and that where, as in that case, there was no inconsistency in the actual terms of the Acts ) enacted by Parliament and the State Legislature relatable to Entry 3 3 of List III, the test of repugnancy would be whether Parliament and State Legislature, in legislating on an e.ntry in the Concurrent List, exercised their powers over the same subject-matter or whether the laws enacted by Parliament were intended to be exhausted as to ~over the entire field, and added :

HOECHST v. BIHAR (Sen,'/.)

"The pith and substance argument cannot be imported here for the simple reason that, when both the Centre as well as the State Legislatures were operating in the con· current field, there was no questicm of any trespass upon the exclusive jurisdiction of the Centre under Entry 52 of List I, the only question which survived being whether put in both the pieces of legislation enacted by the Centre and the State Legislature, there was any such IV repugnancy." • ' This observation lends support to the view that i~ cases of over- lapping between List II on the one hand and Lists I and III on the other, there is no question of repugnancy under Art. 254(1). Subba c· , Rao, J. speaking for the Court in Deep Chand' s case, supra, inter- preted Art. 254( I) in these terms :

"Art. 254(1) lays down a general rule. Clause (2) is an exception to that Article and the proviso qualified .the D said exception. If there is repugnancy between the law made by the State and ihat made by the Parliament with .tfij respect to one of the matters enumerated in the Con- ' current List, the law made by Parliament shall prevail to the extent of the repugnancy and law made by lhe State' shall, to the extent of such repugnancy, be void." E

In all fairness to learned counsel for the appellants, it must be stated that they did not pursue the point any further in view of these pronouncements.

We are unable to appreciate the contention that sub-s. (3) of s. 5 of the Act being a State law must be struck down as ultra vires a< the field of fixation of price of essential commodities is an occupied field covered by a central legislation. It is axiomatic that the power of the State Legislature to make a law with respect to thdevy and imposition of a tax cin sale or purchase of goods relatable to Entry 54 of List II of the Seventh Schedule and to make ancil1ary pro- visions in that behalf, is plenary and is not subject to the power. of Parliament to make a law under Entry 33 of List III. There is no warrant for projecting the power of Parliament to make a law under Entry 33 of List III into the State's power of taxation under Entry 54 of List IL Otherwise, Entry 54 .will have to be read as : 'Taxes on the sale or purchase of goods other than essential commodities etc-

184 SUPREME COURT REPORTS (1983) 3s.c.R.

cetra'. When one entry is made 'subject to' another entry, all that it means is that out of the scope of the former entry, a field of legis- lation covered by the latter entry has . been reserved to be specially dealt with by the appropriate Legislature. Entry 54 of List II of the Seventh Schedule is only subject to Entry 92A of Lis.t l and there can be no further curtailment of the State's power of taxation. It is a well established rule of construction that the entries in the three lists must be read in a broad and liberal sense and must be given the . widest scope which their meaning is fairly capab!e of because they ·set up a machinery of Government.

The controversy which is now raised is of serious moment to c the St<1tes, and a matter apparently of deep interest to the Union. But in its legal aspect, the question· lies within a very narrow com- pass. The duty of the Court is simply to determine as a matter of law, according to the true construction of Art. 246(3) of the Consti: tution, whether the State\ power of taxation of sale of goods under Entry 54 of List II and to make ancillary provisions in regard thereto, D is capable of being encroached upon by a law made by Parliament with respect to one of the matters enumerated in the Concurrent List. The contention fails to take into account that the Constitution effects a complete separation of the taxing power of the Union and of the States under Art. 246. E It is equally well settled that the various entries in the three lists are not 'powers' of legislation, but . 'fields' of legislation. The power to legislate is given by Art. 246 and other "rticles of the Constitution. Taxation is considered to be a distinct matter for F pnrposes of legislative competence. Hence, the power to tax cannot be deduced from a general legislative entry as an ancillary power. Further, the element of tax does not directly flow from tlie. power to regulate trade or commerce in, and the production, supply and distribution of essential commodities under Entry 33 of List III, although the liability to pay tax may. be a matter incidental to the G Centre's power of price .control.

"Legislative relations between the Union and the States inter se with reference to tl1e 'three lists in Schedule VII cannot be' under- stood fully without examining the general features disd:ised by the .H entries contained in those Lists : "Seervai in his Constitutional Law of India, 3rd edn. vol. I at pp,. 81-82. A scrutiny of Lists I and II of the Seventh Schedule would show that there is no .overlapping

iiOECHST v. BJHAR (Sen, J.) i85 anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States. Following the A scheme of the Government oflndia Act, 1935, the Constitution has made the taxing power of the Union and of the States mutually exclusive and thus avoided the difficulties which have arisen in some other F~deral Constitutions from overlapping powen of taxntion. B It would therefore appear that there is a distinction made between general subjects of legislation an·d taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. In M.P. Sundararamier & Co. v. The State .of Andhra Pradesh & Anr.( 1) This Court dealt with the · scheme of the separaiion of taxation powers between the Union and c the States by mutually exclusive lists. In List I, Entries I to 81 deal with general subjects of legislation; Entries 82 to 92A deal with taxes. In List II, Entries I to 44 deal with general subjects of legislation; Entries 45 to 63 deal with taxes. This mutual exclusiveness is also brought out by the fact that in List III, the Concurrent Legislative List, there is no entry relating to a tax, but it only contains an D entry relating to levy of fees in respect of· matters given in that list other than court-fees. Thus, in our Constitution, a conflict of the taxing power of the Union and of the States cannot arise. That being so, it is difficult to comprehend the submission that there can be intrusion by a law made by Parliament under Entry 33 of List III E into a forbidden field viz. the State's exclusive power to make a Jaw with respect to· the levy and impo3ition of a tax on sale or purchase of goods relatable to Entry 54 of List II of the Seventh Schedule. It follows that the two laws viz. sub-s. (3) of s. 5 of the Act and paragraph 21 of the Control Order issued by the Central Government m1der sub-s. (l) of s. 3 of the Essential Commodities Act, operate on F two separate and distinct fields and both are capable of being obeyed. There is no question of any clash between the two laws and the question of repugnancy does not come into play .

.The remaining part of the case presents little difficulty. It G would be convenient to deal with the contention based on Arts. 14 and 19 (1) (g) of the Constitution together as the submissions more or less proceed on the similar lines: It is urged that the provision contained in sub-s. (3) of s. 5 of the act is violative of Art. 14 of the Constitution inasmuch as it is wholly arbitrary and irrational and it H

(6) [1958] S.C.R. 1422.

SUPERME cotiR.P REPORTS i1983j 3s.c.R.. treats "unequals as equals". It is urged that the Essential Commo- A dities Act treats certain controlled commodities and their sellers in a special manner by fixing controlled prices. The dealers so treated by this Central law are so circumstanced that they cannot be equated with other dealers who can raise their sale prices and absorb the surcharge levied under sub-s: (I) of s. 5 of the act and a class of B dealers like manufacturers and producers of medicines and drugs and other dealers of essential commodities who cannot raise their sale prices beyond the controlled price are being treated similarly without any rational basis. Once the fact of different classes being separate is taken, then a State law which treats both classes equally and visits them with different burdens would be violative 6f Art. 14. The State c cannot by treating 'equals as unequals' impose different burdens on different classes. It is submitted that the. restriction imposed by sub- s. 3 of s, 5 of the act which preve11ts the manufacturers and producers of medicines and drugs and other essential commodities from passing on the liability to pay surcharge is confiscatory and imposes a disproportionate burden on such manufacturers and producers or other dealers.

These two abstract questions have been convassed on the basis that each of the appellants was a dealer having a gross turnover of Rs. 5 lakhs or more in a year and therefore liable to pay surcharge, in addition to the tax payable by him, under sub-s. (1) of s. :5 of the Act. It is lamentable that there is no factual foundation laid to support the contention that the levy of surcharge under sub-s. (!) of s. 5 of the Act imposes a disproportionate burden on a certain class of dealers such as manufacturers or producers of drugs and phar- F maceuticals or dealers engaged in the business of distribution and saie of motor-trucks etc. to support the assertion that sub-s. (3) of s. 5 of the Act which prohibits such persons from passing on the liability to pay surcharge is arbitrary or irrational, or that it treats 'unequals as equals' and thus infringes Art. 14· of the Constitution or is confiscatory in nature. G There is no ground whatever for holding that sub-s. (3) of s. 5 of the Act is arbitrary· or irrational or that it treats 'unequals as equals', or that it imposes a disproportionate burden on a certain class of dealers. It must be remembered that sub-s. (I} of s. 5 of tlte Act H provides for the levy of a surcharge having a gross turnover of Rs 5 lakhs or more in a year at a uniform rate of 10 per centum of the tax payable by them, irrespective whether they are dealers in essential

HOECHST v. BIHAR (Sen, i.) i87 commodities or not. A surcharge in its true ~ature and character is nothing but a higher rate of tax to raise revenue for general pur• A poses. The levy of surcharge under sub-s. (I) of s. 5 of the Act falls uniformly on a certain class of dealers depending upon their capacity to bear the additional burden. From a fiscal point of view, a sales tax on a manufacturer or producer involves the complication of price-structure. It is apt to increase the price of the commodity, and tends to be shifted forward to the consumer. The manufacturers B or producers often formulate their prices in terms of ceriain profit targets. Their initial response would be to raise prices by the full amount of the tax. Where the conventional mark-up leaves sub- stantial unrealized profits, successful tax shifting is possible regard- less of the nature of the tax. If, on the other hand, the tax cannot c be passed on to the consumer. it must be shifted backwards to owners inputs. Despite theoretical approach of economists,. busi- nessmen always iegard the tax as a, cost and make adjustments accordingly, and this is brought out by John C . .Winfrey on Public Finance at p. 402 in the following passage : D "The businessman ........ ·-- ..... has been skeptical regarding the entire approach of marginal cost pricing. His position has been that taxes are treated as a cost when determining prices, be it as part of a full-cost- --""'\ . pricing" rule, by application of a conventional mark-up E rate defined net of tax, or by pricing to meet a net of tax target rate of return. According to these formulas, a change in tax rate leads ~o an adjustment in price. The profits tax becomes a quasi sales tax. The fact that such a price policy is not consistent with the usual concepts of profit maximization does not disprove its existence." F

Pausing here for a moment, we may observe that a surcharge being borne by the manufacturers and producers of medicines and drugs under sub-s. (3) of s. 5 of the Act, the controlled .price of such medicines and drugs to the consumer will ;remain the same. From G the figures set out above, it will be' seen that the business carried on by the appellants in the State of Bihar alone is of such magnitude that they have the capacity to bear the additional burden of surcharge levied under sub-s. (I) of s. 5 of the Act. It rough'y - works out to one paisa per rupee of the sale price of the manu· H factored commodity. There is no material placed on record that the surcharge levied under sub-s. (!) of s. _5 of the Act imposes a

188 stiPREMB COURT REPORTS ti 9SJ) j S.C.R, \ disproportional~ burd1:n on the appellants or that it is confiscatory in· nature.

The argument of arbitrariness is an argument of despair. Sub-s. (I) of s. of the Act levies Surcharge on dealers whose gross turnover in a year exceeds Rs. 5 lakhs.irrespective of whether such dealers deal in essential commodities or not. It is a general tax and j __' all dealers falling within the class cfefined under sub-s. ( 1) of s. 5 of the Act have been levied the surcharge at a uniform rate• of JO per centum of the tax .. It will be noticed that· first proviso to sub-s. (I) of s. 5 enjoins that the aggregate ·of the tax and· surcharge payable c under the Act shall not exceed, in respect of goods declared to be of special importance in inter-State trade or com·merce by s. 14 of the Central Sales Tax Act, 1956, the rate fixed bys. 15 thereof. Under s. 14 of the Act, almost all commodities which are essential to the life of the community are declared to be goods of special importance in inter-State trade or commerce and therefore the maximum sales tax leviable on sale or purchase of such goods cannot exceed 4 per cent. It would therefore app~ar' that generally dealers having a gross turnover of Rs. 5 Iakhs in a year dealing in commodities covered by s. 14 will not have to bear the burden of surcharge under sub-s. (l) of s'. 5 of the Act. It is the misfortune of these appellants that medicines and drugs are not declared to be of special importance in respect of inter-State trade or commerce by s. I 4 of the Central Sales Tax Act. Titat apart, the appellants as mlnufacturers or pro- ducers of drugs under paragraph 24(1) have to bear the burden of · sales iax on the controlled price that they can.not charge to a whole- salera price higher than (a) the retail price minus 14 per cent thereof, in the case of ethical. drugs; and (bJ the retail price minus 12 per cent thereof, in the case of non-ethical drugs. Under para- graph 24(2) they cannot sell t? a retailer at a price higher than {a) the retail price minus 12 per cent thereof; in the case of ethical drugs; and (b) the retail price minus IO per cent thereof, in the case of non-ethical drugs. These provisions merely indicate that there-is G a margin of 14 per cent to the wholesaler in the case of ethical drugs and of 12 per cent in the case of non-ethical drugs, and the wholesaler has a margin of 2 per cent -in either case when he sells to the retailer. In contrast, the profit margins of manufacturers and producers of medicines and drugs is considerably higher. Under the scheme of the Drugs (Price Control) Order, the calculation. of the retail price of formulations under paragraph IO has to be accordance with the formula set out therein. One of the elements that enters

HOECHST v. Bil!Aa (Sen, J.) 189

into the price ftructure is the 'ma1k-up' which is defined in para- graph I-1 to include _distribution cost, outward freight, promotional expenses, manufacturers margin and trade commission. Clauses (!) to (3) of the Third Schedule show that the mark-up ranges from 40% in the case formulations specified in category (i), 55% in the case of formulations specified in category (ii) and 100% in the case of formulations specified in category (iii). This gives an indication of the extent of profits earned by the manufacturers and producers of formulations.

In Market situations where uncertainty about demand pre- vails and .mark-up pri_cing is practised, the usual response is to attempt to shift taxes to the consumer. Musgrave in his Public .C Finance in Theory and Practice observes that economists like to think of business behaviour as being rational, in the sense of follow- ing a maximising rule, but businessmen. may not act ~ationally. They regard the tax as a cost and make adjustments accordingly : D "One of these is the practice of markup· or margin pricing. Under this rule, costs are "marked-up" to allow for a customary ratio of profits to costs, or price is set such as to leave profits (i.e., sales minus cost) a custo- mary fraction of sales. Whether this gives rise to shifting depends on ho;,, costs and margins are defined. E Shifting occurs if the tax is included as a cost, or if the margin if defined net of tax."

It would therefore appear that businessmen are skeptical . regard- ing the entire approach of marginal cost pricing. 1 heir position is that taxes are treated as a cost when determining prices, be it as part ofa "full-cost-pricing" rule, by application of a conventional mark-up rate defined net of tax, or by pricing to meet a net of tax target rate of return. According to these formulae, a change in tax rate leads to an adjustment in price.· If the appellants find that the levy of surcharge under sub-s. of s. 5 of the Act cannot be borne within the present price structure of medicines and drugs, they have the right to apply to the Central Government for revision of the retail price of formulations under paragraph 15 of the Control Order. H It was a startling proposition advanced by learned counsel for the appellants t)lat the court was wron!! in [(odor'~ case in

190 SUPREMe COURT REPORTS [1983] 3 S.C.R

justifying on the basis of economic superiority the burden of addi- A tional sales tax on a certain class of dealers. It was held. by the Court relying upon the dissenting opinion of Cardozo, J. in Stewart Dry Goods Co. v. Lewis [1935] 294 US 550 that a gross sales tax graduated at increasing rates with the volume of sales ori a certain class of dealers does not offend against Art. 14 of the Costitution. B The contention that ability to pay is not a relevant criterion for upholding the validity of sub-s. (3) of s. 5. of the Act cannot be accepted. To say the least, there is · no basis for this s~bmission. It is beyond the scope of this judgment to enter into Intricacies of public finance viz. objectives and criteria of a tax, problems of shift- ing et cetera. Nor is it necessary for us to enter into a discussion c of the so called benefit principle, or the alternative approach. of ability to pay. There is probably widespread agreement now that taxes that fall on ihe 'better-off' rather than the worse-off' and arc progressive rather tean proportional, are to be preferred. The con- cept of 'abil.ity-to-pay' irnplies both equal treatment of people with equal ability, however measured, and the progressive rate structure. D The 'ability-to-pay' doctrine has strong affinities to ·egalitarian sociaf philosophy, both support measures designed to reduce in- equalities of wealth and income.

On questions of economic regulations and related mailers, the E Court must defer to the legislative judgment. Wher. the power to tax exists, the extent of the burden is a matter for discretion of the law-makers. It is ~ot the function of the Court to consider the propriety or justness of the tax, or enter upon the realm of legisla- tive policy. If the evident. intent and general operation of the tax legislation is to adjust the burden with a fair and reasonable degree of equality, the constitutional reqqirement is satisfied. The equality clause in Art. 14 does not take from the State power to classify a class of persons who must bear the heavier burden,of tax. The classification having some reasonable basis does not offend against that clause merely because it is not made with mathematical nicety or because in practice it results in some inequalities.

In Kodar's case, supra, the constitutional validity of a ·similar · (

levy was upheld on the capacity to pay. It was oliserved :

"The large dealer.occupies a possition-of economic superiority by reason of his greater volume of his busi- ness. An:d to make his tax heavier, both abi.ollltely and relatively, is n~t arbitrary discri!l1ination,, but an attempt

HOECHST v. BIHA~ (Sen, J.) 191

to proportion the payment to capacity to pay and thus to arrive in the end at more genuine equality." A The economic wisdom of a tax is within the exclusive proYince ~ of the Legislature. The only question for the Court to .consider is whether there is rationality in the belief of the Legislature tha.t capacity to P.aY the tax increases by and large with. an .increase of B receipts. The view taken by .the Conrt in Kodar's case, supra, is in consonance with. social justice in an egalitarian State and therefore the contention based. on Art. 14 of the Constitution must fail ..

The contention tliat sub·s. (3) of s. 5 of the Act imposes an unreasonable restricition upon the freedom of trade guaranteed c under Art. 19 (I) (g) of the Costitution proceeds on the basis that iales tax being essentially an in direct tax, it was not compeient for the Legislature to make a provision prohibiting ·the dealer from collecting the amount of surcharge cannot prevail. It \s urged .that the surcharge does not retain its avowed character as sales tax but in its true gature and character is virtually a tax on income, by reMon of the limitation contained in sub·.s. (3) of s. 5 pf the. Act. We are not impressed with the argument. Merely because a de~ler falling wihin the class defined under sub·s. (!) of s. 5 of the Act is preve11ted from collecting the surcharge recovered from him, does not affect the competence of the State Legislature to make a provision like sul;>-s. E (3) of s. 5 of the Act nor does it become a tax on hi$ income. It is not doubt true that a sales tax is, according to the accepted notions, intended to be passed 011 to the buyer, and the provisions authoriz· ing and regulating the collection. of sales tax by the seller. from the purchaser are a usual feature of sales tax legislation. But it is not an essential characteristic of a sales tax that the seller must . have the right to pass it on to the consumer, nor is the power of the Legisla· ture to impose a tax on sales conditional on _its making a _provision for sellers to collect the tax from the purchasers. Whether · a law should be enacted, imposing a sales tax, or validating· the imposition of sales tax, when the seller is not in a position to pass it on to the consumer, is a matter of policy and does not efiect the competence . of the Legislature : see : The Tata Iron & Steel Co. Ltd. v. The State of Bihar( 1) : M/s. J.K. Jute Mills Co. Ltd. v. The State of .Uttar Pradesh & Anr.(') S. Kodar v. State of Kera/a.(') The contention based on the Art. 19 (1) (g) cannot therefore be sustained. H (I) [1958] S.C.R. 1355. (2) [19621 2 S.C.. R I. (3) [1975] I S.C,R. 121,

192 SUPREME COURT REPORTS (1983) 3 s.c.R.

. : There was quite some discussion at the Bar as to whether the A assent of the President is justiciable. ·1t was submitted that since not only sub-s. (I} of s. 5 of the Act which provides for the levy of a surcharge on dealers having a gross turnover of Rs. 5 Jakhs in a year but a!so sub-s. (3) thereof which interdicts that no such dealer shall he entitled to recover the amount of surcharge collected. from him, B 'are both relatable to Entry 54 of List H of the Seventh Schedule, there was no occas;on for the Governor to have referred ·the Bill · under Art. 200 to the President for his assent. It is some what strange that this argument should be advanced for the first time after a lapse of 30 years of the inauguration of the ·Consititution. Immediate provocation for this argument appears to be r,n obiter dictum of Lord Cl Diplock while delivering the judgment of the Judicial Committee in Teh Cheng Poh@ Char Meh v. Public Prosecutor, Malaysia(!) that "the Courts are not powerless when there is a failure to exercise the power of revocation of a Proclamation of Emergency "issued by the · Ruler of Malaysia under s. 47 (2) of the Internal Security Act. The ultimate decision of the Privy Council was that since by· virtue of s. 47 (2) of that Act the security area proclamation remained lawful until revoked hy resolutions of both Houses of Parliament or hy the Ruler, it could not be deemed to lapse because the conditions upon which the Ruler had exercised his discretion to make the Proclama- tion were no longer in existence. That being so, the decision in Teh E Cheng Poh's case, supra, is not an authority for the proposition· that the assent of the President is justiciable nor can it be spelled out that t that Court can enquire into the reasons why the Bill was reserved by the Governor under Art. 200 for the assent of the President nor whether the Presi1ent applied his mind to the question whether F there was repugnancy between ihe Bi11 reserved for his consideration and received his assent under Art. 254 (2).

The constitutional positiJn of a Governor is clearly defined. The Governor is made a comrilponent part of the Legislaiure of a State under Art. 168 because every Bill passed by the State Legisla- G tion has to be reserved for the assent of the Governor u'iider Art.

200. Under that Article, the Governor can adopt one ·of the three courses, namely : (1) He may give his assent to it, in which case the Bill becomes a law; or (2) He may except in the case of a 'Money- Bill' withbold his assent therefrom; in which cases the Bill falls H through unless the procedu.re indicated in the first proviso is followed

(I) L.R. [1980] A.C. 458 at 473.

• HOECHST v. B!HAR (Sen, J.) 193

i. e. return the Bill to the Assembly for consideration with a message; or (3) He may "on the advice of the Council of Ministers" A- res.erve the Bill for the consideration of the President, in which case the President will adopt the procedure laid down in Art. 201. The first "proviso to Art. 200 deals with a situation where the Governor is bound to give his assent and the Biil is reconsidered and passed by the Assembly. The second proviso to that Article makes the reserva- B tion for the Consideration of the President obligatory where the Bill would, "if it becomes law, dergoate from the powers of the High Court". Under Art. 201, v.;hen a Bill is reserved by the Governor for the consideration of the President, the President can adopt two courses, namely : (I) He may give his assent to it in which case again the Bill becomes a law; or (2) He may except where the Bill is not a c . 'Money Bill', direct the Governor to return the Bill to the House or, as the case may be, the Houses of the Legislature of the State toge- ther with such message as is mentioned in the first proviso to Art.

200. When a Bill is so reserved by the President, the House or Houses shall reconsider it accordingly within a period of six months from the date of receipt of such message and.if it is again passed by D the House or Houses with or without amendment, it shall be presented again to the President for his consideration. Thus, it is clear that a Bill passed by the State Assembly may become law if the Governor gives bis assent to it or if, having been reserved by the Governor for the consideration of the President, it is assented to by the President. E There is no provision in the Constitution wl)ich lays down that a Bill which has been assented to by the President would b.e ineffec- tive as an Act if there was no compelling necessity for the Governor to reserve it for the assent of the President. A Bill which attracts Art 254 (2) or Art. 304 (b) where it is _introduced or moved in the F Legislative Assembly of a State without the previous sanction of the President or which attracted Art. 31 (3) as it was then in force, or fallip.g under the second proviso to Art .. 200 has necessarily to be reserved for the consideration of the President. There may also be a Bill passed hy the State Legislature where there may be a genuine G doubt about the applicability of any of the. provisions of the Constitu- tion which require the assent of the President to be given to it in order that it may be effective as an Act. In such a case, it is for the Governor to exercise his discretion and to decide whether he should · assent to the Bill or should reserve it for consideration of the H President to avoid any furture complication Even if it ultimately turns out that there was no necessity for the Governor' to hav~

194 SUPREME COURT REPORTS (1983) 3 s.c.R.

~eserve~ a· Bill for the consideration of the President, still he having A done so and obtained the assent of the President, the Act so passed cannot. be held to be unconstitutfonal on the ground of want of proper' assent. This aspect of the matter, as the Jaw now stands, is not open to scrutiny by the courts. Jn the instant case, . the Finance Bill which ultimately became the Act in question was a consolidating B Act relating to different subjects and perhaps the Governor felt that it was necessary to reserve it for the assent of the President. We have no hesitation in holding that the assent of the President i' not justiciable, and we cannot spell out any infirmity arising out of his decbion to give such assent.

c There still remains the contention that for the purpo,,e of levying surcharge it is impermissible to take into account the method· of computation of gross turnover, the turnover representing safos in the course of inter-State trade and outside the State and sales in the "course of export out of India. It is urged that the non-obstante clause in s. i of the Act has the effect of taking these transactions out of the· purview of the Act with the result that a dealer is not required nor is he entitled to include them in the calculations of his turnover liable to tax thereunder. The submission is that sub-s. (1) of s. 5 of the Act is ultra vires the State Legislature in so far as for purposes of levying the charge, the incidence of liability of a dealer to pay such surcharge depends on his gross turnover as defined in s. 2 (j) of the Act. In support of the contention, reliance was placed on the follow- ing passage in the judgment.of this Court in A. V. Ferna11dez v. State of Kera/a(') :

"There is a broad distinction between the provisions contained in the statute. in regard to . the exemptions of tax or refund or rebate·of tax on the one hand and.in regard to the non-liabilitY to tax or non-imposition of tax on the other. In the former case, but for the provi- sions as regards the exemptions or refund or rebate or tax, the sales or purchases' would have . to be included·in the gross turnover of the dealer because they are prima facie liable to tax and tlte only thing which the dealer is entitled to in respect tJ:iereof is the deduction from the gross turnover in order to arrive at the net turnover on H which the tax can be imposed. In ·the latter case, the • ~I) . p957j S.C.R. 837 at p, 852-3,

t HOECHEST v. B!HAR (Sen, J.) 195

sales. or purchases are exempted from taxation altogether. The Legislaiure cannot enact a law imposing or autho· rising the imposition of a tax thereupon and they are not liable to any such imposition of tax. If they are thus not liable to tax, no tax can be levied or. imposed on them and they do not come within the purview of the act at all. The very fact of their non-liability to' tax is sufficient to exclude them from the calculation of the B . gross turnover as well as the net turnover on which sales (ax can be levied or imposed.

The submission appears to proceed on a misapprehension of tP,e principles laid down in Fernandez's case~ supra. c . To understand the ratio deducible in Femandez's case, supra, a few facts have to be stated. The business of the assessee in that case consisted in the purchase of copra, manufacture. of coconut oil and cake therefrom and sale of oil and cake to parties inside the State and sale of oil to parties outside the State. ,In .1951,the D Travancore-Cochin General Sales Tax Act, 1125 was amended by addition of s. 26 which' incorporated the ban of.Art. 286 of the \ Constitution and was .in pari materia with s. 7 of the Act. For the year 1951-52, the Sales Tax Officer assessed the assessee to sales tax on a net assessable turnover by taking the value of the whole of the copra purchased by him, adding thereto the respective values of the oil and cake sold irisidb the State and deducting only the value of the copra relatable to the oil sold inside the State. It was contended by the assessee that in the calculation of the net turnover, he was entitled to include the total value of the oil sold by him, both inside and outside the State, and deduct therefrom the total value of the copra purchased bY., him and further, under the . overriding provision of s. 26 of the Act, he was entitled to have the yalue of the oil sold outside the State deducted. The main controversy between the parties centred around the method of computation of the net turn- over. The contention advanced by the assessee was rejected by the High Court, which limited the deduction ·to purchase of copra rela- G table to the sales inside the 'state. In affirming that decision, this Court observed that so far as sales of coconut oil outside the State were concerned, they were, as it were, by reason of s. 26 of the Act read in conjunction with Art. 286, taken out of the purview of the Act, and that they had the effect of setting· at naught and obliter- H ating in regard thereto_ the provisions contained in the Act relating to tl:e imposi_tion of tax on the sale or purchase of such goods and in

196 SUPREME COURT REPORTS [198:1) 3 s.c.R. ·

particular the provision contained in the charging section, s. 3, and the provisions contained in r. 20(2) and other provisions which were .incidental to the process of levying such tax. The aforementioned passage relied upon cannot be read out of context in which it appears · and if so read, it is hardly of any assistance to the appellants. 'B In the penultimate pargraph in Fernandez's case, supra, the Court after laying down that the non-obstanre clause in s. 26 had the effect of taking sales in the course of inter-State trade and outside the State out of the purview of the Act with the result that the dealer was not required nor entitled to include them in computation 'C of the turnover liable to tax thereunder, observed:

"This position is not at all affected by the provision with regard to registration and submissions of returns of the sales tax by the dealers under the Act. The legislature, " in spite of its disability in the matter of the imposition D of sales tax by virtue of the provisions of Art. 286 of the Constitution, may for the purposes of the registration of a dealer and submission of the returns of sales tax include these transactions in the dealer's turnover. Such inclusion, however, for the purposes aforesaid would not affect the non-liability of these transactions to levy or E . imposition of sales tax by virtue of t)le provisions of { Art. 286 of the Constitution and the corresponding pro- vision enacted in the Act, as above."

The decision in Fernandez's case, supra, is therefore cfoarly an F authority for the proposition that the State Legislature notwith- standing Art. 286 of the Constitution while making a law under Entry 54 of List II of the Seventh Schedule can, for purpose's of the registration of a dealer and submission of returns of sales tax, in- clude the transactions covered by Art. 286 of the Constitution. That being· so, the constitutional validity of sub-s. ( l) of s. S of the Act which provides for the classification of dealers whose gross turnover during a year exceeds Rs. 5 lakhs for the purpose of levy of surcharge, in addition to. the tax payable by him, is not assailable. So long as sales in the course of inter-State trade and commerce or sales outside the State and sales in the course of H import into, or export out of the territory of India are not taxed, there is nothing to prevent the State Legislature while making a law for the levy of a surcb!lr!le µn<ler Entry 54 pf i,ist ll of the :Seve11til

lii>Eclist f. BIHAR (Sen, J.) 197

Schedule to take into account the total turnover of the dealer within the State and provide, as has been done by sub-s. (1) of s. 5 of the A Act, that if the gross turnover of such dealer exceeds Rs. 5 lakhs in a year, he shall, in addition to the tax, also pay a surcharge at such rate not exceeding 1O per centum of the tax as may be provided. The liability to pay a surcharge is not on the gross turnover including the transactions covered by Art. 286 but is only on inside sales and the B surcharge is sought to .be levied on dealers who have a position of economic superiority.. The definition of gross turnover in s. 2(j) of the Act is adopted not for the purpose of bringing to surcharge inter-State sales or outside sales or.sales in the course of import into, or export of goods out of the territory of India, but is only for the purpose of classifying dealers Within the State and to identify the class of dealers liable to pay such surcharge. The underlying object is to clas-ify dealers into those who are economically superior and those who arc not.. That is to say, the imposition. of surcharge is on those who have the capacity to bear the burderi of addit.ional tax. There is sufficient territorial nexus between the persons sought to be charged and the State seeking to tax them. Sufficiency of terri- D torial nexus involves . a consideration of two elements viz. : (a) the connection must be real and not illusory, and (b) the liability sought to be imposed must be pertinent to that territorial connection : State of Bombay v. R.M.D. Chamarbaugwa!a( 1}, The Tata Iron & Steel Co. Ltd. v. State of Bihar('), and lnternotiona/ Tourist Corporation E etc. etc. v. State of Haryana & Ors.(8) The gross turnover of a dealer is taken into account in sub-s. (I} of s. 5 of the Act for the purpose of identifying the class of dealers liable to pay a sur- charge not. on the gross turnover but on the tax payable by them.

For these reasons, these aPPeals and the connected writ F petitions and special leave petitions are dismissed with no order as to costs.

H.L.C .

(I) [19571 S.C.R. 874. (2) [19581 S.C.R. 1355. (3) [1981)2 S.C.R. 364,