# STATE OF KERALA v. soum INDIA CORPORATION(P) LTD

- **Citation:** [1971] Supp. 1 S.C.R. 236
- **Court:** Supreme Court of India
- **Decided:** 1971-03-29
- **Case number:** Civil Appeals Nos. 175 to 178 A of 1969
- **Bench:** S. M. Siicri, G. K. Mitter, K. S. Hegde, A. N. Grover, P. Jaganmohan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-kerala-v-soum-india-corporation-p-ltd-5518
- **Pages:** 8

## Headnote

Constitution of India, 1950, Arts. 271 and 218-Repea/ and re-enact·
ment of tax laws: if affects continuity of levy-Agreement under Art. 278
by which State agrees with Union not to impose tax-If breaks continuity
of levy.
The State of Travancore and Cochin, before 26th January 1950, bad
plenary powers of legislation and under the Travancore General Sales Tax
Act, 1948, and the Cochin General Sales Tax Act, 1945, as amended in
1948, they levied sales-tax on works contracts. As a result of the merger
of the two states into a Part B State under the Constitution. the TravancoreCochin General Sales Tax Act, 1950, was enacted, and, after the State of
Kerala came into existence in 1956, the Act was called the Kerala General
Sales Tax Act, arrd its operation was extended the whole of the State.
That Act enabled the imposition of sales tax on works contracts, but, on
February, 25, 1950, an agreement was entered into between the Raj Pramukh and the Union of India, under Art. 278 of the Constitution, under
which. the State had no power to impose sales-tax in respect of works
contracts. That agreement, was to enure for ten years.
For the period 26th January 1960 to 3bt March, 1960, the State
levied sales tax on works contracts. On the question whether the levy was
saved by Art. 277 of the Constitution.
HELD: Under Art. 277, any taxes which, immediately before the
commencement of"the Constitution, were· being lawfully levied by a State,
may, notwithstanding that the taxes are mentioned in the Union list in
the Constitution continue to be levied by the State until provision to the
contrary is made by Parliament. The impost of sales-tax on works contracls
is, under the Constitution, beyond the competence of the States but would
be within that of Parliament by virtue of item 97, List I, VII Schedule
and Art. 248 of the Constitution. Therefore, sales-tax on works contracts
which were being lawfully levied by the States of TravanCore and Cochin
before 26th January 1950, could under Art. 277, be continued to be levied.
The fact that former Acts were repealed and re-enacted would not take
the case out of Art. 277, because, all that the Article requires is a continuity
in the levy of taxes without any change in their character. But this essential condition of continuity in the levy for the validity of the imposition
of the tax was broken in the present case, by the agreement under Art.
278.
Articles 277 and 278 were engrafted in the Constitution with the
object of maintaining financial stability of the new States. The agreement
shows that there \\'as liberal financial assistance to make up for the los.s of
revenue which the State was deriving from the sales-tax on works contracts.
Since the agreement broke the continuity of the levy of sales-tax on werks
contracts, and there was nothing in Art. 277 to resuscitate it when the
agreen1ent came to an end in 1960, no sales-tax on works conti::acts was
leviablo by the State after 26th January 1960. [240A·B, E·A; 241A; 243A·
F]
South India Corporation (P) Ltd. v. Secretary Board of Revenue,
Trivandrum, [1964] 4 S.C.R. 280, referred to.
KERALA v. s. I. CORP. (Mitter, J.)
.237

## Text

236
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STATE OF KERALA
v.
soum INDIA CORPORATION(P) LTD.
March 29, 1971
[S. M. SIICRI, C. J., G. K. MITTER, K. S. HEGDE, A. N. GROVER
AND P. JAGANMOHAN REDDY, JJ.)
Constitution of India, 1950, Arts. 271 and 218-Repea/ and re-enact·
ment of tax laws: if affects continuity of levy-Agreement under Art. 278
by which State agrees with Union not to impose tax-If breaks continuity
of levy.
The State of Travancore and Cochin, before 26th January 1950, bad
plenary powers of legislation and under the Travancore General Sales Tax
Act, 1948, and the Cochin General Sales Tax Act, 1945, as amended in
1948, they levied sales-tax on works contracts. As a result of the merger
of the two states into a Part B State under the Constitution. the TravancoreCochin General Sales Tax Act, 1950, was enacted, and, after the State of
Kerala came into existence in 1956, the Act was called the Kerala General
Sales Tax Act, arrd its operation was extended the whole of the State.
That Act enabled the imposition of sales tax on works contracts, but, on
February, 25, 1950, an agreement was entered into between the Raj Pramukh and the Union of India, under Art. 278 of the Constitution, under
which. the State had no power to impose sales-tax in respect of works
contracts. That agreement, was to enure for ten years.
For the period 26th January 1960 to 3bt March, 1960, the State
levied sales tax on works contracts. On the question whether the levy was
saved by Art. 277 of the Constitution.
HELD: Under Art. 277, any taxes which, immediately before the
commencement of"the Constitution, were· being lawfully levied by a State,
may, notwithstanding that the taxes are mentioned in the Union list in
the Constitution continue to be levied by the State until provision to the
contrary is made by Parliament. The impost of sales-tax on works contracls
is, under the Constitution, beyond the competence of the States but would
be within that of Parliament by virtue of item 97, List I, VII Schedule
and Art. 248 of the Constitution. Therefore, sales-tax on works contracts
which were being lawfully levied by the States of TravanCore and Cochin
before 26th January 1950, could under Art. 277, be continued to be levied.
The fact that former Acts were repealed and re-enacted would not take
the case out of Art. 277, because, all that the Article requires is a continuity
in the levy of taxes without any change in their character. But this essential condition of continuity in the levy for the validity of the imposition
of the tax was broken in the present case, by the agreement under Art.
278.
Articles 277 and 278 were engrafted in the Constitution with the
object of maintaining financial stability of the new States. The agreement
shows that there \\'as liberal financial assistance to make up for the los.s of
revenue which the State was deriving from the sales-tax on works contracts.
Since the agreement broke the continuity of the levy of sales-tax on werks
contracts, and there was nothing in Art. 277 to resuscitate it when the
agreen1ent came to an end in 1960, no sales-tax on works conti::acts was
leviablo by the State after 26th January 1960. [240A·B, E·A; 241A; 243A·
F]
South India Corporation (P) Ltd. v. Secretary Board of Revenue,
Trivandrum, [1964] 4 S.C.R. 280, referred to.
KERALA v. s. I. CORP. (Mitter, J.)
.237
Civil Appellate Jurisdiction : Civil Appeals Nos. 175 to 178
A
of 1969.
Appeals from the judgements and orders dated February 6,
1968 and September 5, 1967 of the Kerala High Court Writ Appeal.
No. 243 of 1967, T.R.C. Nos. 22 and 23 of 1966 and Original
Petition No. 1046 of 1966.
B
M. C. Chaghla and A. G. Puddissery, for the appellants (in
all the appeals.)
S. T. Desai A. S. Nambiar and K. R. Nambiar, for the respondent (in all the appeals).
c
The Judgment of the Court was delivered by
Mitter, J.-All these four appeals are by certificate granted
by the High Court of Kerala.
Three of them arise out of a
common judgement in T.R.C. Nos. 22 and 23 of 1966 and Original Petition No. 1046 of 1966. Appeal No. 175 of 1969 is from
the judgment in Writ Appeal No. 243 of 1967 arising out of
original Petition No. 1723 of 1965.
The respondent, a private limited company having its principal place of business at Mattancherry originally in the State of
Cochin but now in the S!aite of Kerala, was assessed by th~ State
tax Officer, Special Circle, Mattancherry, to sales-tax for the years
1960-61 and 1961-62 on turnovers which included "works contracts" executed by the respondent.
Before the taxing authorities
the contention raised by the respondent was that the turnover
on these contracts could not be subject to sales tax. Tax Revision
Cases 22 and 23 of 1966 were filed in the High Court under s. 41
of the Keralai General Sales Tax Act, 1963 to revise the decision
of the Tribunal. These were heard by the High Court along with
the Original Petition No. 1046 of 1966. Civil Appeal No. 175
of 1969 relates to the assessment for the year 1959-60 by which
a turnover of Rs. 6,09,954.98 relating to works contracts was included.
The Tribunal upheld the levy of sa.tes tax on works
contracts relating to the period 26th January 1960 to March 31.
1960 and remanded the case. The respondent thereupon filed
0. P. No. 1723 of 1965.
A single Judge of the High Court
quashed the impugned order and this was conlinned in Writ
Appeal No. 243 of 1967. The Sta.te, the Kerala Sales-tax Appellate Tribunal and the Inspecting Assistant Commissioner of
Agricultural Income-tax and Sales-tax, Ernakulam have come up
in appeals to this Court and the common respondent is the
company.
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SUPRBMB COURT REPORTS
(1971] SUPP. S.C.)..
The Central question in all these appeals is, whether the
provisions of the General Sales Tax Act XI of Jl25 (correspon-
<ling to Christian era 1950) imposing a tax on works contracts were
enforceable in the State of Kerala subsequent to January 26, 1960.
The history behind the present Jaw of sales tax on this point in
the State of Kerala is 36 follows. The territory of the said State
is composed inter alia of major parts of the erstwhile States of
Trava.ncore and Cochin which were separate sovereign States
ruwing plenary powers of taxation.. U oder the Sales Tax Act
of both these States tax was exigible on works contracts. The
Cochin Act was known as the Cochin General Sales Tax Act XV
of 1121 (Christian era 1945) as amended by Act V of Jl24
(Christian era. 1948 AD).
The Travancore Act was known as
the Travancore General Sales Tax Act XVIII of 1124 (correspon·
ding to 1948). As a result of the merger of the two States, the
State of Travancore-Cochin with a common legislature emerged
as ai part B State under the Constitution of India as originally in
force. The said legislature enacted the Travancore Cochin General Sales Tax Act XI of 1125 (corresponding to 1949 A.O.) im·
posing sales tax on works contracts. The Act was published in
the local ga.zette on January, 17, 1950 but under the provisions
of s. 1(3) thereof it came into force on May 30, 1950 i.e., after
the date of the promulgation of the Constitution. The last men·
tioned Act repealed the acts of the Tiavancore and Cochin States
but enacted identicail provisions of taxation regarding works
contracts. The State of Kerala came into existence as a result
of the States Re-organisation Act as from 1st November 1956.
The Kerala Legisla.ture passed the Travancore Cochin General
Sales Tax Amendment Act, 1957 amending the name of the
Travancore Cochin Act XI of 1125 and extending its operation
to the whole of the State of Kerala. This Act came into force
on October 1, 1957. The sa.id Legisiature also passed (he Kerala
Surcharge on Taxes Act, 1957 (12 of 1957) for levy surcharge
on various taxes including those
on sales or purchase
of goods etc. This came into force on 1st September, 1957. The
General Sales Tax Act (XI of 1125) was replaced by the Kerala
General SaJes Tax Act (XV of 1963) which came into force on
April !, 1963. There was no provision in this Act for imposition
of tax on works contracts.
Even before the litigations giving rise to the present set of
appeals, the respondent had challenged the imposition of sales
tax on works contracts for the assessment years l 952...53 a~ also
for the years 1956-57 and 1957-58 before the High Court of
Kerala under Art. 226 and Art. 227 of the Constitution. The High
Court's decision in favour of the taxing authorities ws~ upset in
apeal to this Court in the year 1964, in South India Corporatio11
KBRALA v. s.1. CORP. (Mitter,J.)
(P) Ltd .. v. Secretary Board of Revenue, Trivandrum ('). Although
the appellant in that ca6e raised various contentions before this
Court to negative its liability to sales tax on works contracts, this
Court held that during the period covered by the agreement (which
was to enure for ten years) dated February 25, 1950 entered into
between the Raij Pramukh of Tra vancore and the Union of India
under Art. 278 of the Constitution the State had no power to impose sales tax in respect of works contracts but the Court expressed
no opinion as to whether such tax would be leviable after the expiry
of the period of the agreement as this point was not involved in the
appeal.
In the insta.nt cases the points urged on behalf of the assessee
before the High Court were :
(i) That the levy of the tax on works contracts under the
provisions of the General Sales Tax Act XI of 1125 for
the period 26th January 1960 to 30th March 1963 is not
saved by Art. 277 of the Constitution; and
239
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(ii) the levy is violative of Art. 14 of the Constitution.
D
Two learned Judges of the High Court Bench constituted to hear
the first three ma.tiers came to the conclusion that the right to levy
tax did not survive after the period covered by the agreement dated
25th February, 1950.
The third learned Judge took a different
view. But all the three Judges were agreed that the levy if otherwise justified was not violative of Art. 14 of the Constitution.
There can be no doubt-and indeed there wa~ no suggestionthat after the Constitution came into force it was not open to the
States to levy sales tax on works contracts under any Entry in List
II of the Seventh Schedule to the Constitution. In The StaJe nf
Madras v. Ganon Dunkerley & Co. (Madras) Ltd. (') it was held
that Entry 48 in List II in Schedule VIII of the Government of
India Act, 1935 did not extend to imposing a tax on the value of
materials used in construction works, and that the provision introduced into the Madras General Sa-les Tax Act 1939 by the Amending Act of 1947 authorising the imposition of such tax was
ultra vires.
Any such imposition -under Entry 54 of List II of
the Seventh Schedule to the Constitution would meet the same
fate.
At the same time it must be noted that in Mithan Lal v.
The State of Delhi and an;ither (') this Court held that Parliament
was competent to impose a tax on the supply of materials in building contra.els and to impose it under the name of sales tax, as was
done by Part C States (Laws) Act, 1950 by virtue of which the
(1) [1964] 4 S. C.R. 280
(2) [19591 S. C.R. 379
(3) [1959 S. C.R. 445]
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S.UPREMB ·COURT REPORTS
[1971] SUPP. s.c.R.
Chief Commissioner of Delhi issued a notification extending the
operation of the Bengal Finance (Sales Tax) Act, 1941 to Delhi.
'I
However, as the States of Travancore and Cochin had pleRary
powers of legislation they could levy tax on works contracts describing the same as sales tax. The levy of such taxes after the
26th January 1950 would depend on the construction of the relevant provisions of the Constitution as applicable to the said territories. Apart from the provisions of Arts 277 and 278 (which now
stands repealed by the Constitution (Seventh Amendment) Act,
1956) their validity would have to be determined under Art. 372
of the Constitution. This Court has held in a number of cases
tha~ "a pre-Constitution law made by a competent authority,
though it has lost its legislative competency under the Constitution, shall continue in force, provided the law does not contravene'
the 'other provisions' of the Constitution". It would be enough
to refer to the above dictum based on a catena of decisions mentioned in the South India Corporation (P) Ltd. case (supra) at
pp. 294-295.
Art. 372 is a. general provision meant to secure the continuance of existing laws in force in the territory of India on the
advent of the Constitution. Art. 277 however engrafted a special
provision for saving the impost of certain taxes, duties, cesses etc.
which were being lawfully levied therefore In the following
terms:-
"Any taxes, duties, cesses or fees which, immediately
before the commencement of this Constitution, were being
lawfully levied by the Government of any Sta.le or by
any municipality or other local a.uthority or body for the
purposes of the State, municipality, district or other local
area may, notwithstanding that those taxes, duties, cesses
or fees a.re mentioned in the Union List, continue to be
levied and to be applied to the same purposes until provision to the contrary is made by Parliament by Jaw."
The impost of sales tax on works contracts though beyond
the competence of the States would be within that of Parliament
by virtue of item 97 of List I of Seventh Schedule a,nd Art. 248
of the Constitution. It would therefore follow that if there was
no other law touching this point, sales taxes on works contracts
which were being lawfully levied by the Governments of the States
of Travancore and Cochin before 26th January 1950 would continue to be levied and to be applied to the sa.me purposes until
provision to the contrary was made by Parliament by law. The
fact that the Sales Ta.x Acts of the former States of Travancore
and Cochin were repealed but identical provisions were re-enacted
in the later Acts would not take the case out of Art. 277.
All
KBRALA v. s. (. CORP. (Mitter, J.)
that the said article requires is that there should be a continuity
in the levy of ta.xes and so long as the character of the taxes did
not change they would be saved by the said article.
We have however also to take note of Art. 278 which has
now disappeared from the Constitution but held the field in 1950
when an agreement was entered into in terms thereof by and between the President of India ood the Raj Pramukh of Travancore.
Art. 278 run as follows:-
"(!) Notwithstanding anything in this Constitution,
the Government of India may, subject to the ptovisions
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 t&x or duty levi·
able 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 ai;sistance 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 a.ny
payment made ·by the Government of India
under clause (!) of Article 291 a.nd 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 a.ny such agreement if after consideration of the report of the Finance Commission he thinks
it necessary to do so."
The decision of this Court in The South India Corporation (P)
Ltd. (supra) elucidates the purpose of Art. 278 and the object with
which the President of India entered into the agreement with the
Raj Pramukh of Tnwancore. For our present purpose it will
16-1 S.C. India/71
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SUPREME COURT REPORTS
[1971) SUPP. s.c.R.
suffice to quote a portion of the said judgement. According to
that judgment the agreement :
"Incorporated the recommendations made by the Indian States Finances Enquiry Committee with some modi·
fications and the Union of India a.greed to recoup the State
for the loss caused to it by reason of the federal financial
integration in the manner described thereunder. It was
not a piecemeal agreement confined to a few items, but
ai comprehensive one to fill up the entire revenue-gap
caused to the State by reason- of some of its sources of
revenue having been taken away by the Union or otherwise lost to it."
Further (see p. 292) :
"The agreement, read with the Report, makes the following position clear : The loss arising to the State on
account of the federal fina.ncial integration in the State
was ascertained and a provision was made for subsidising
the State by filling up the said revenue-gap. The agree·
ment 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 Sta.le was authorised
to levy for a temporary period ............ that saving was
subject to an agreement and, as by the agreement effective adjustments were made to meet the loss which the
Sta.le 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 Court also opined that it was not called upon to decide whether the said power revived after the expiry of ten years from
the commencement of the Constitution, for all the impugned as·
sessments fell within the said period. The Court observed that
there was no force in the contention that because Art. 278 was
omitted by the Constitution (Seventh Amendment) Act, 1956, the
a.greement entered into in exercise of a power thereunder automatically came to an end and thereafter the power of the State
to levy the tax would come into life again.
It was enough for the Court in that case to say that the a,greement would have its full force unless the Constitution (Seventh
Amendment) Act, 1956 in terms avoided it and in the result it
held that the impugned assessment orders were not validly made
KERI.LA v. s. I. CORP. (Mitter, J.)
by the sales tax authorities in excrci$e of the power saved by Art.
277 of the Constitution.
The question directly arises before 11$ as to whether Art. 277
would still have effect in regard to the power to Jevy taxes falling
within its scope after the said agreement of 25th February 1950
came to an end. The a.nswer must clearly be in the negative because the essential condition for the validity of the imposition is
the continuity of the levy and once there is a break in its operation it ceases to be effective and it cannot matter that no provision to the contrary a.s envisaged by Art, 277 was made by Parliament
It is clear that Art. 277 and particularly Art. 278 were en1lrafted in the Constitution with the immediate object of maintaining the financial viability of the new States for such time as the
Parliament thought proper. So far as the State of Kerala was
concerned the need for financial assistance was met by the agreement between the President of India and the Ra.j Pramukh of
Travancore. That agreement itself shows that there wa.s liberal
assistance for the first five years which was to be tapered off in
another five years' time. It would ncit be wrong to observe that
it was contemplated that a.ftcr ten years the State of Kera!a would
be able to find its own feet and do without any special assistance
from the Centre. One of the objects of the said agreement was to
recoup tbe State of Kerafa for the loss of revenue which that State
used to derive from inter alia, the sales tax on works contracts
being a tax which was leviable under the Constitution by the Government of India alone. The agreement came to an end in 1960
a.nd with it the financial assistance rendered in terms thereof. The
agreement broke the continuity of the levy of sales tax on works
contracts and there is nothing in Art. 277 to resuscitate it.
In the result we must hold that sales tax on works contracts
was not leviable by tbe State of Kerala a.fter the 26th January 1960
under the Kerala General Sales Tax Act XI of 1125. The appeals therefore fail and are dismissed with costs. There will be
one set of hearing fee.
V.P.S.
Appeals dismissed.
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