Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1795 OF 2005

UNION OF INDIA & ORS. .....APPELLANT(S)

VERSUS

M/S N.S. RATHNAM & SONS .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

The respondent herein impugned the validity of Notifications

Nos.102/87-CE and 103/87-CE, both dated 27.03.1987, whereby

whole of the duty of excise was exempted in respect of iron and

steel scrap obtained by breaking the ship subject to the condition

that customs duty should have been levied at the rate of

Rs.1400/- per Light Displacement Tonnage (LDT). With the

stipulation of such a condition, giving the exemption of payment

of excise duty only to those who had paid customs duty at

Rs.1400/- per LDT, another class of persons who also paid

custom duty under Section 3 of the Customs Tariff Act, 1975,

Civil Appeal No. 1795 of 2005 Page 1 of 26

Page 2 albeit at a lesser rate, was excluded. The respondent who

belonged to excluded category, had challenged the said

Notification as arbitrary and violative of Article 14 of the

Constitution. Though the learned Single Judge dismissed the writ

petition, the Division Bench in appeal has accepted the aforesaid

plea of the respondent and vide judgment dated 18.08.2003 held

that the second category of persons shall also be entitled to the

benefit of this Notification. It is this judgment which is impugned

by the Union of India and is the subject matter of the instant

appeal.

2.The facts which are relevant to the aforesaid controversy need to

be traversed at this stage. These are as follows:

The respondent herein is engaged in the business of ship

breaking activities. It had imported a foreign vessel “M.V.

Gonong Mass” for the purpose of breaking it and selling it as

scrap. This ship was purchased by the respondent as a

successful tenderer for a sum of Rs.61 lakhs and at the time of

import, the Collector of Customs, Cochin, assessed the custom

duty and additional duty payable under Section 3 of the Customs

Tariff Act, 1975 on this ship on ad-valorem basis and customs

duty in the sum of Rs.62,16,796.55 was levied on the movable

Civil Appeal No. 1795 of 2005 Page 2 of 26

Page 3 articles in the ship; body of the ship was assessed at 30% and

50% ad-valorem and additional custom duty i.e. countervailing

duty at 12% ad-valorem. The respondent also paid a sum of

Rs.5,68,660/- as sales tax.

3.After import of the ship, the same was dismantled and broken

from which iron and steel scrap was taken out. This iron and

steel scrap is exigible to excise duty. The respondent has

registered itself under the Central Excise Act. The aforesaid iron

and steel scrap which was obtained by breaking the ship was

cleared by the respondent on payment of central excise duty at

the rate of Rs.365/- per tonne as per Notification No.146/86-CE

dated 01.03.1986. Upto this point, there is no dispute. The

relevant period with which we are concerned is from 08.08.1986

to 27.07.1987. During this period, the following materials were

cleared:

09.08.1986 to 26.03.1987 - 3058.49 MT

27.03.1987 to 30.06.1987 - 1249.715 MT

01.07.1987 to 27.07.1987 - 408.180 MT

4.There are certain exemption Notifications issued by the

Government of India under sub-rule (1) of Rule 8 of the Central

Excise Rules, 1944. The details of these Notifications are as

Civil Appeal No. 1795 of 2005 Page 3 of 26

Page 4 under:

Notification No.146/86-CE dated 01.03.1986 which pertains to

“iron and steel from breaking the ship”. It provides for exemption

of goods falling under Heading No.72.15 and 73.09 of the

Schedule to the Central Excise Tariff Act, 1985, from so much of

the duty or excise leviable thereon, which is specified in the said

Schedule, as in excess of the amount calculated at the rate of

Rs.305 per tonne. Proviso to the said Notification lays down the

conditions which need to be fulfilled to avail the benefit of this

Notification. This proviso reads as under:

“Provided that the said goods have been

obtained from breaking of ships, boats and other

floating structures-

(i) On which duty of customs leviable thereon

under the First Schedule to the Customs Tariff

Act, 1975 (51 of 1975) has been paid at the rate

of Rs.1,400/- per Light Displacement tonnage; or

(ii) Imported on or before the 28th day of

February, 1986 and on which appropriate

additional duty leviable thereon under Section 3

of the Customs Tariff Act, 1975 (51 of 1975), has

been paid.”

5.The aforesaid Notification was superseded by another Notification

No.386/86-CE dated 20.08.1986. Under this Notification, whole

of the duty of excise stood exempted on meeting the conditions

mentioned in proviso thereto, provided that the said goods have

Civil Appeal No. 1795 of 2005 Page 4 of 26

Page 5 been obtained from breaking of ships, boats and other floating

structures-

(i)on which duty of customs leviable thereon under the First

Schedule to the Customs Tariff Act, 1975 (51 of 1975) has

been paid at the rate of Rs.1,400/- per LDT; or

(ii)imported on or before the 28th day of February, 1986 and

on which appropriate additional duty leviable thereon under

Section 3 of the Customs Tariff Act, 1975 (51 of 1975), has

been paid.

6.Within few months, another Notification No.102/87-CE dated

27.03.1987 was issued which superseded Notification

No.386/86-CE dated 20.08.1986 as well. In this Notification,

again partial exemption was provided. This exemption was from

so much of the duty of excise leviable thereon, which is specified

in the Schedule to the Central Excise Tariff Act, as in excess of

the amount calculated at the rate of Rs.365 per tonne. However,

in the proviso, the condition that was stipulated which had to be

met to avail the exemption, reads as under:

“Provided that the said goods have been

obtained from breaking of ships, boats and other

floating structures on which has been paid the

duty of customs leviable under the First

Schedule to the customs Tariff Act, 1975 (51 of

1975) at the rate of Rs.1,035/- per Light

Displacement Tonnage and also the additional

Civil Appeal No. 1795 of 2005 Page 5 of 26

Page 6 duty leviable thereon under Section 3 of the said

Customs Tariff Act at the rate of Rs.365 per Light

Displacement Tonnage.”

7.On the same day, another Notification No.103/87-CE dated

27.03.1987 was also issued. Vide this Notification, goods were

exempted from whole of the duty or excise leviable thereon as

specified in the Schedule to the Act falling under the same

Heading Nos. i.e. 72.15 and 73.09 on the fulfillment of the

condition contained in proviso to this Notification, which reads as

follows:

“Provided that the said goods have been

obtained from breaking of ships, boats and

other floating structures on which the duty of

customs leviable thereon under the First

Schedule to the Customs Tariff Act, 1975 (51 of

1975) has been paid at the rate of Rs.1,400/-

per Light Displacement Tonnage.”

8.These two Notifications, both dated 27.03.1987, pertain to same

goods, namely, those falling under Headings 72.15 and 73.09 of

the said Schedule to the Act. However, vide first Notification

No.102/87-CE, if the customs duty leviable on the import of ship

for the purpose of breaking is paid at the rate of Rs.1,035/- per

LDT along with additional duty leviable thereon under Section 3 of

the Customs Tariff Act, the excise duty payable is at the rate of

Rs.365/- per tonne, exempting the remainder as specified in the

Civil Appeal No. 1795 of 2005 Page 6 of 26

Page 7 Schedule. On the other hand, as per Notification No.103/87-CE,

if the customs duty has been paid at the rate of Rs.1400/- per

LDT, the scrap obtained from breaking of such ships is exempted

from the entire excise duty.

9.The respondent herein had paid the duty at the rate of Rs.1035/-

per LDT, albeit, as leviable under the first Schedule to the

Customs Tariff Act. However, as the respondent had cleared the

goods without payment of any excise duty on the assumption that

there was exemption of payment of entire excise duty, appellant

herein issued show cause notice dated 28.07.1987 calling upon

the respondent to show cause as to why an amount of

Rs.25,73,487/- towards excise duty be not demanded under

Section 11 A of the Central Excise Act. Receipt of the aforesaid

show cause notice prompted the respondent to file the writ

petition in the High Court of Madras and challenge the validity of

Notification dated 27.03.1987 on the ground that by this

Notification, total exemption was granted only to those persons

who had paid customs duty at the rate of Rs.1400/- LDT. It was

pleaded that by a Notification dated 20.08.1986, the whole of the

duty of excise levied was exempted if the two conditions as set

out above are satisfied. The limited exemption in excess of

Civil Appeal No. 1795 of 2005 Page 7 of 26

Page 8 Rs.365/- per tonne was restored by the third Notification dated

27.03.1987. However, by the impugned Notifications issued on

the very same day, total exemption was granted only to those

persons who have paid customs duty at Rs.1,400/- per LDT.

According to the respondent, it has resulted in a distinction

between two categories of persons who have paid customs duty,

viz. one set of persons who have paid customs duty at the rate of

Rs.1,400/- per LDT and the second set of persons who have paid

customs duty of lesser amount though as per Section 3 of the

Customs Tariff Act, 1975. This distinction, pleaded the

respondent, was arbitrary, artificial and has no nexus with the

object that is sought to be achieved. When customs duty is

payable under either of the two methods, it is not understood why

exemption is granted only to one set of persons paying customs

duty in a particular method of assessment.

10.The learned Single Judge was not convinced with the aforesaid

case set up by the respondent. He reasoned that the Court could

not direct the Central Government to extend the Notification to a

class to whom it has not been extended as that was a matter

which was entirely within the discretion of the Central

Government. Sustenance was drawn from the judgment of this

Civil Appeal No. 1795 of 2005 Page 8 of 26

Page 9 Court in Kasinka Trading and Another v. Union of India and

Another

1

wherein this Court has held that wide discretion is

available to the Government in the matter of granting, curtailing,

withholding, modifying or repealing the exemptions granted by

earlier notifications and the Government was not bound to grant

exemption to anyone if it so desires.

11.The respondent preferred writ appeal against the said judgment.

The Division Bench vide impugned judgment has reversed the

decision of the learned Single Judge finding sufficient merit in the

case set up and pleaded by the respondent. It is held by the

Division Bench that when the benefit of concessional right is

restored by a notification, there cannot be any discriminatory

treatment to some persons who fall in the same category.

According to the Division Bench, both the categories of importers

paid the duty as leviable under Customs Tariff Act. Once a choice

is given under the said Act and the duty is paid accordingly,

merely because the rate of duty arrived at is different would not

be rational basis for excluding the other class. This reasoning of

the High Court can be found in paras 10 and 11 of the impugned

judgment which are reproduced hereinbelow:

1(1995) 1 SCC 274

Civil Appeal No. 1795 of 2005 Page 9 of 26

Page 10 “10. From the notification or from the Counter

Affidavit, we are unable to find any rational basis

for treating two categories of persons who have

paid the customs duty differently and hence, the

failure to consider the duty already paid by the

appellants on ad valorem basis, on the face of it,

is illegal and therefore, the impugned

notifications, which did not make any provision

for such of those remittance made under the

second category, are clearly arbitrary. As rightly

pointed out, the exemption from excise duty is to

avoid double taxation and the withdrawal of

exemption would mean that the persons would

be paying additional duty under the Customs Act

as well as the excise duty. It is further seen that

the person who had paid the customs duty at the

rate of Rs.1,400/- per Light Displacement

Tonnage would have been totally exempted from

the payment of excise duty. In the light of this

clear and palpable discrimination without any

rational basis, we are of the view that the

appellants have made out a case and that the

impugned notifications are liable to be quashed

in so far as the appellants is concerned.

11. The Supreme Court, in Government of India

Vs. Dhanalakshmi Paper and Board Mills,

Tiruchirappalli, A.I.R. 1989 S.C. 665, has held

that the benefit of concessional right was

bestowed upon the entire group of assesses. The

division of two classes without adopting any

differentia, having a rational relation to the object

of the notification and the withdrawal of the

benefit to one class, while retaining it in favour of

the other is ultra vires. In Thermax Private

Limited Vs. Collector of Customs (Bombay),

A.I.R. 1993 S.C. 1339, the Supreme Court held

that if the person using the goods is entitled to

remission, the importer will be entitled to say that

C.V.D. should only be the amount of

concessional duty and if he has paid more, he

will be entitled to ask for refund. Section 3(1) of

the Customs Tariff Act, 1975 mandates that the

C.A.V. will be equal to the excise duty for the

time being leviable on a like article if produced or

manufactured in India.”

Civil Appeal No. 1795 of 2005 Page 10 of 26

Page 11 12.Mr. Panda, learned senior counsel appearing for the appellants,

submitted that it was entirely within the domain of the

Government to give exemption to particular class of assessees

and it being a policy decision, it would not be open to the High

Court to tinker with the same. For this purpose, he relied on the

judgment of this Court in Kasinka Trading's case, and in

particular paras 8 and 21 thereof, which are as follows:

8. Section 12 of the Customs Act, which is the

charging section, provides that duties of

customs shall be levied at such rates as may be

specified under the Customs Tariff Act, 1975 or

any other law for the time being in force on the

goods imported into India. Section 2 of the

Customs Tariff Act, 1975 read with the First and

Second Schedules thereto lays down the rates

at which duties of customs shall be levied under

the Customs Act on various goods imported into

India. Section 25 of the Act, with which we are

primarily concerned in this batch of appeals,

confers powers on the Central Government to

grant exemptions from levy of duty in “public

interest”. Sub-sections (1) and (2) of Section 25

which are relevant for our purposes provide as

under:

“25. Power to grant exemption from duty.— (1) If

the Central Government is satisfied that it is

necessary in the public interest so to do it may,

by notification in the Official Gazette, exempt

generally either absolutely or subject to such

conditions (to be fulfilled before or after

clearance), as may be specified in the

notification goods of any specified description

from the whole or any part of duty of customs

leviable therein.

(2) If the Central Government is satisfied that it

is necessary in the public interest so to do, it

may, by special order in each case, exempt from

Civil Appeal No. 1795 of 2005 Page 11 of 26

Page 12 the payment of duty, under circumstances of an

exceptional nature to be stated in such order,

any goods on which duty is leviable.”

The power to grant exemption from duty, wholly

or in part, on the plain language of Section 25

(supra) is contingent upon the satisfaction of the

Government that it would be in “public interest”

to do so. Thus, “public interest” is the guiding

criterion for exercising the power under Section

25 (supra).

xx xx xx

21. The power to grant exemption from payment

of duty, additional duty etc. under the Act, as

already noticed, flows from the provisions of

Section 25(1) of the Act. The power to exempt

includes the power to modify or withdraw the

same. The liability to pay customs duty or

additional duty under the Act arises when the

taxable event occurs. They are then subject to

the payment of duty as prevalent on the date of

the entry of the goods. An exemption notification

issued under Section 25 of the Act had the effect

of suspending the collection of customs duty. It

does not make items which are subject to levy of

customs duty etc. as items not leviable to such

duty. It only suspends the levy and collection of

customs duty, etc., wholly or partially and

subject to such conditions as may be laid down

in the notification by the Government in “public

interest”. Such an exemption by its very nature

is susceptible of being revoked or modified or

subjected to other conditions. The supersession

or revocation of an exemption notification in the

“public interest” is an exercise of the statutory

power of the State under the law itself as is

obvious from the language of Section 25 of the

Act. Under the General Clauses Act an authority

which has the power to issue a notification has

the undoubted power to rescind or modify the

notification in a like manner. From the very

nature of power of exemption granted to the

Government under Section 25 of the Act, it

follows that the same is with a view to enabling

the Government to regulate, control and

promote the industries and industrial production

in the country. Notification No. 66 of 1979 in our

Civil Appeal No. 1795 of 2005 Page 12 of 26

Page 13 opinion, was not designed or issued to induce

the appellants to import PVC resin. Admittedly,

the said notification was not even intended as

an incentive for import. The notification on the

plain language of it was conceived and issued

on the Central Government “being satisfied that

it is necessary in the public interest so to do”.

Strictly speaking, therefore, the notification

cannot be said to have extended any

‘representation’ much less a ‘promise’ to a party

getting the benefit of it to enable it to invoke the

doctrine of promissory estoppel against the

State. It would bear repetition that in order to

invoke the doctrine of promissory estoppel, it is

necessary that the promise which is sought to

be enforced must be shown to be an

unequivocal promise to the other party intended

to create a legal relationship and that it was

acted upon as such by the party to whom the

same was made. A notification issued under

Section 25 of the Act cannot be said to be

holding out of any such unequivocal promise by

the Government which was intended to create

any legal relationship between the Government

and the party drawing benefit flowing from of the

said notification. It is, therefore, futile to contend

that even if the public interest so demanded and

the Central Government was satisfied that the

exemption did not require to be extended any

further, it could still not withdraw the exemption.

He stated that the principle laid down in the aforesaid judgment is

followed and reiterated in Shrijee Sales Corporation and

Another v. Union of India

2

and Reliance Industries Ltd. v.

Pravinbhai Jasbhai Patel and Others

3

.

13.He also referred to Ground A in the writ petition and submitted

that the plea of the respondent was that the duty already paid by

2(1997) 3 SCC 398

3(1997) 7 SCC 300

Civil Appeal No. 1795 of 2005 Page 13 of 26

Page 14 the respondent should have been taken into account and only the

balance out of it should have been the rate of duty. He, thus,

submitted that this aspect has not been taken into consideration

by the High Court in the impugned judgment.

14.Learned counsel for the respondent, on the other hand, argued

that all those who paid excise duty as per the provisions of the

Act constitute one single class and, therefore, by restricting the

benefit to only those who had paid custom duty at the rate of

Rs.1,400/- per LDT and excluding other sets of persons like

appellants amounted to hostile discrimination and, therefore, the

High Court rightly held the Notification to be violative of Article 14

of the Constitution.

15.The judgment of this Court in Kasinka Trading's case, no doubt,

lays down the principle that there is wide discretion available to

the Government in the matter of granting, curtailing, withholding,

modifying or repealing the exemptions granted by earlier

Notifications. It is also correct that the Government is not bound

to grant exemption to anyone to which it so desires. When the

duty is payable under the provisions of the Act, grant of

exemption from payment of the said duty to particular class of

persons or products etc. is entirely within the discretion of the

Civil Appeal No. 1795 of 2005 Page 14 of 26

Page 15 Government. This discretion rests on various factors which are to

be considered by the Government as these are policy decisions.

In the present case, however, the issue is not of granting or not

granting the exemption. When the exemption is granted to a

particular class of persons, then the benefit thereof is to be

extended to all similarly situated person. The Notification has to

apply to the entire class and the Government cannot create

sub-classification thereby excluding one sub-category, even when

both the sub-categories are of same genus. If that is done, it

would be considered as violating the equality clause enshrined in

Article 14 of the Constitution. Therefore, judicial review of such

Notifications is permissible in order to undertake the scrutiny as to

whether the Notification results in invidious discrimination

between two persons though they belong to the same class. In

Aashirwad Films v. Union of India and Others

4

, this aspect has

been articulated in the following manner:

9. The State undoubtedly enjoys greater latitude

in the matter of a taxing statute. It may impose a

tax on a class of people, whereas it may not do

so in respect of the other class.

10. A taxing statute, however, as is well known,

is not beyond the pale of challenge under Article

14 of the Constitution of India.

4(2007) 6 SCC 624

Civil Appeal No. 1795 of 2005 Page 15 of 26

Page 16 11. In Chhotabhai Jethabhai Patel & Co. v.

Union of India, AIR 1962 SC 1006 it was stated:

(AIR p. 1021, para 37)

“37. But it does not follow that every other article

of Part III is inapplicable to tax laws. Leaving

aside Article 31(2) that the provisions of a tax

law within legislative competence could be

impugned as offending Article 14 is exemplified

by such decisions of this Court as Suraj Mall

Mohta & Co. v. A.V. Vishvanatha Sastri (AIR

1954 SC 545 : (1955) 1 SCR 448) and

Meenakshi Mills Ltd. v. A.V. Visvanatha Sastri

(AIR 1955 SC 13 : (1955) 1 SCR 787). In K.T.

Moopil Nair v. State of Kerala (AIR 1961 SC

552) the Kerala Land Tax Act was struck down

as unconstitutional as violating the freedom

guaranteed by Article 14. It also goes without

saying that if the imposition of the tax was

discriminatory as contrary to Article 15, the levy

would be invalid.”

12. A taxing statute, however, enjoys a greater

latitude. An inference in regard to contravention

of Article 14 would, however, ordinarily be drawn

if it seeks to impose on the same class of

persons or occupations similarly situated or an

instance of taxation which leads to inequality.

The taxing event under the Andhra Pradesh

State Entertainment Tax Act is on the

entertainment of a person. Rate of

entertainment tax is determined on the basis of

the amount collected from the visitor of a cinema

theatre in terms of the entry fee charged from a

viewer by the owner thereof.

16.It is, thus, beyond any pale of doubt that the justiciability of

particular Notification can be tested on the touchstone of Article

14 of the Constitution. Article 14, which is treated as basic

feature of the Constitution, ensures equality before the law or

equal protection of laws. Equal protection means the right to

Civil Appeal No. 1795 of 2005 Page 16 of 26

Page 17 equal treatment in similar circumstances, both in the priviliges

conferred and in the liabilities imposed. Therefore, if the two

persons or two sets of persons are similarly situated/placed, they

have to be treated equally. At the same time, the principle of

equality does not mean that every law must have universal

application for all persons who are not by nature, attainment or

circumstances in the same position. It would mean that the State

has the power to classify persons for legitimate purposes. The

legislature is competent to exercise its discretion and make

classification. Thus, every classification is in some degree likely

to produce some inequality but mere production of inequality is

not enough. Article 14 would be treated as violated only when

equal protection is denied even when the two persons belong to

same class/category. Therefore, the person challenging the act

of the State as violative of Article 14 has to show that there is no

reasonable basis for the differentiation between the two classes

created by the State. Article 14 prohibits class legislation and not

reasonable classification. What follows from the above is that in

order to pass the test of permissible classification two conditions

must be fulfilled, namely, (i) that the classification must be

founded on an intelligible differential which distinguishes persons

or things that are grouped together from others left out of the

Civil Appeal No. 1795 of 2005 Page 17 of 26

Page 18 group and (ii) that, that differential must have a rational relation to

the object sought to be achieved by the statute in question. If the

government fails to support its action of classification on the

touchstone of the principle whether the classification is

reasonable having an intelligible differentia and a rational basis

germane to the purpose, the classification has to be held as

arbitrary and discriminatory. In Sube Singh v. State of

Haryana

5

, this aspect is highlighted by the Court in the following

manner:

10. In the counter and the note of submission

filed on behalf of the appellants it is averred,

inter alia, that the Land Acquisition Collector on

considering the objections filed by the appellants

had recommended to the State Government for

exclusion of the properties of appellants 1 and 3

to 6 and the State Government had not accepted

such recommendations only on the ground that

the constructions made by the appellants were

of 'B' or 'C' class and could not be easily

amalgamated into the developed colony which

was proposed to be built. There is no averment

in the pleadings of the respondents stating the

basis of classification of structures as 'A' 'B' and

'C' class, nor is it stated how the amalgamation

of all 'A' class structures was feasible and

possible while those of 'B' and 'C' class

structures was not possible. It is not the case of

the State Government and also not argued

before us that there is no policy decision of the

Government for excluding the lands having

structures thereon from acquisition under the

Act. Indeed, as noted earlier, in these cases the

State Government has accepted the request of

some land owners for exclusion of their

properties on this very ground. It remains to be

5(2001) 7 SCC 545

Civil Appeal No. 1795 of 2005 Page 18 of 26

Page 19 seen whether the purported classification of

existing structures into 'A', 'B' and 'C' class is a

reasonable classification having an intelligible

differential and a rational basis germane to the

purpose. If the State Government fails to support

its action on the touchstone of the above

principle then this decision has to be held as

arbitrary and discriminatory. It is relevant to note

here that the acquisition of the lands is for the

purpose of planned development of the area

which includes both residential and commercial

purposes. That being the purpose of acquisition

it is difficult to accept the case of the State

Government that certain types of structures

which according to its own classification are of

'A' class can be allowed to remain while other

structures situated in close vicinity and being

used for same purposes (residential or

commercial) should be demolished. At the cost

of repetition, it may be stated here that no

material was placed before us to show the basis

of classification of the existing structures on the

land proposed to be acquired. This assumes

importance in view of the specific contention

raised on behalf of the appellants that they have

pucca structures with R.C. roofing, Mozaic

flooring etc. No attempt was also made from the

side of the State Government to place any

architectural plan of different types of structures

proposed to be constructed on the land notified

for acquisition in support of its contention that

the structures which exist on the lands of the

appellants could not be amalgamated into the

plan.

17.The question, therefore, that arises is as to whether the two

categories, one mentioned in Notification No.386/86-CE dated

20.08.1986, which is given the benefit and removal of the second

category, which was initially granted same benefit vide

Notification No.102/87-CE dated 27.03.1987, is discriminatory.

Civil Appeal No. 1795 of 2005 Page 19 of 26

Page 20 To put it otherwise, we have to see as to whether the two

categories are identical or there is a reasonable classification

based on intelligible differentia which has nexus with some

objective that is sought to be achieved. The test in this behalf

that is to be applied can again be culled out from the judgment in

Aashirwad's case. It is summarized in para 14, after taking note

of various earlier judgments. This para reads as under:

14. It has been accepted without dispute that

taxation laws must also pass the test of Article

14 of the Constitution of India. It has been laid

down in a large number of decisions of this

Court that a taxation statute for the reasons of

functional expediency and even otherwise, can

pick and choose to tax some. Importantly, there

is a rider operating on this wide power to tax and

even discriminate in taxation that the

classification thus chosen must be reasonable.

The extent of reasonability of any taxation

statute lies in its efficiency to achieve the object

sought to be achieved by the statute. Thus, the

classification must bear a nexus with the object

sought to be achieved. (See Moopil Nair v. State

of Kerala, AIR 1961 SC 552, East India Tobacco

Co. v. State of A.P., AIR 1962 SC 1733, N.

Venugopala Ravi Varma Rajah v. Union of India

(1969) 1 SCC 681 : AIR 1969 SC 1094, Asstt.

Director of Inspection Investigation v. A.B.

Shanthi, (2002) 6 SCC 259 : AIR 2002 SC 2188

and Associated Cement Companies Ltd. v.

Govt. of A.P., (2006 ) 1 SCC 597 : AIR 2006 SC

928).

18.In the present case, we find that the two Notifications both dated

27.03.1987 pertain to same goods namely those falling under

Heading 72.15 and 73.09 of the second Schedule to the Act.

Civil Appeal No. 1795 of 2005 Page 20 of 26

Page 21 Customs duty is leviable on these goods under Section 3 of the

Customs Tariff Act. The said duty can be paid under any of the

two methods. When two methods are permissible under the

statutory scheme itself, obviously option is that of the assessee to

choose in all those methods to pay the custom duty. Duty, thus,

paid is to be naturally treated as validly paid. Merely because

with the adoption of one particular method the duty that becomes

payable is lesser would not mean that two such persons belong

to different categories. The important factors for the purposes of

parity are same in the instant case, viz. the goods are same; they

fall under the same Heading and the custom duty is leviable as

per the Act which has been paid. Therefore, the impugned

Notification giving exemption only to those persons who paid a

particular amount of duty, namely Rs.1,400/- per LDT, would not

mean that such persons belong to a different category and would

be entitled to exemption and not other persons like the

respondent herein who paid the duty on the same goods under

the same Act but on the formula which he opted and which is

permissible, which rate of duty comes to Rs.1,035/- per LDT.

19.It is also important to bear in mind that the appellants have not

supported the withdrawal of exemption by any cogent

Civil Appeal No. 1795 of 2005 Page 21 of 26

Page 22 explanation. The High Court has noted, and rightly so, that

Ground C was taken by the respondent in the writ petition

specifically urging that no rational policy is mentioned for creating

two different classes and no reply to this was given by the

appellants even in the counter affidavit filed to the said petition.

On the other hand, the specific case made out by the respondent

was that the purpose behind Notification No.146/86-CE dated

01.03.1986 and Notification No.386/86-CE dated 20.08.1986 was

to treat the ships imported on or before 28.02.1986 differently and

to avoid double taxation and additional duty equivalent to excise

duty. For this reason, exemption Notification became necessary

which provided exemption from excise duty. It was argued that

the withdrawal of the exemption duty in the cases like that of the

respondent amounted to double taxation. Even this could not be

refuted by the appellants.

20.We are conscious of the principle that the difference which will

warrant a reasonable classification need not be great. However,

it has to be shown that the difference is real and substantial and

there must be some just and reasonable relation to the object of

legislation or notification. Classification having regard to

microscopic differences is not good. To borrow the phrase from

Civil Appeal No. 1795 of 2005 Page 22 of 26

Page 23 the judgment in Roopchand Adlakha v. D.D.A.

6

: “To overdo

classification is to undo equality.”

21.We are also conscious of the principle that in the field of taxation,

the Legislature has an extremely wide discretion to classify items

for tax purposes, so long as it refrains from clear and hostile

discrimination against particular persons or classes (See

Secretary to Govt. of Madras v. P.R. Sriramulu

7

). However, at

the same time, when a substantive unreasonableness is to be

found in a taxing statute/notification, it may have to be declared

unconstitutional. Although the Court may not go into the question

of a hardship which may be occasioned to the tax payers but

where a fair procedure has not been laid down, the validity

thereof cannot be upheld. A statute which provides for civil or evil

consequences must conform to the test of reasonableness,

fairness and non-arbitrariness.

22.In State of U.P. v. Deepak Fertilizers & Petrochemical

Corporation Ltd.

8

, this aspect is succinctly brought about as is

apparent from the following passages in that judgment:

“15. The learned counsel appearing for the State

relying heavily on Kerala Hotel and Restaurant

Assn. v. State of Kerala, (1990) 2 SCC 502,

6(1989) 1 Supp. SCC 116

7(1996) 1 SCC 345

8(2007) 10 SCC 342

Civil Appeal No. 1795 of 2005 Page 23 of 26

Page 24 contended that the State has widest latitude

where measures of economic and fiscal

regulation are concerned. There is no dispute on

this principle of law as enumerated in the

aforesaid decision of this Court. However, this

same law must not be repugnant to Article 14 of

the Constitution i.e. it must not violate the right to

equality of the people of India, and if such

repugnancy prevails then, it shall stand void up

to the level of such repugnancy under Article

13(2) of the Constitution of India. Therefore,

every law has to pass through the test of

constitutionality, which is nothing but a formal

name of the test of rationality. We understand

that whenever there is to be made any type of

law for the purpose of levying taxes on a

particular commodity or exempting some other

commodity from taxation, a sought of

classification is to be made. Certainly, this

classification cannot be a product of blind

approach by the administrative authorities on

which the responsibility of delegated legislations

is vested by the Constitution. In a nutshell, the

notifications issued by the Trade Tax Department

of the State of U.P., dated 10.04.1995 and

15.05.1995 lack the sense of reasonability

because it is not able to strike a rational balance

of classification between the items of the same

category. As a result of this, NPK 23:23:0 is not

given exemption from taxation whereas all other

NPK fertilisers of the same category like that of

NPK 20:20:0 are provided with the exemption

from taxation.

16. The reasonableness of this classification

must be examined on the basis, that when the

object of the taxing provision is not to tax the sale

of certain chemical fertilisers included in the list,

which clearly points out that all the fertilisers with

the similar compositions must be included

without excluding any other chemical fertiliser

which has the same elements and compositions.

Thus, there is no reasonable nexus of such

classification among various chemical fertilisers

of the same class by the state. This court in

Ayurveda Pharmacy [(1989) 2 SCC 285], held

Civil Appeal No. 1795 of 2005 Page 24 of 26

Page 25 that two items of the same category cannot be

discriminated and where such a distinction is

made between items falling in the same category

it should be done on a reasonable basis, in order

to save such a classification being in

contravention of Article 14 of the Constitution of

India.”

23.It was contended by the learned senior counsel for the appellants

that purpose was to give exemption only to those who paid

custom duty at Rs.1,400/- per LDT and since the duty paid by the

respondent herein was lesser in amount, respondent could not

ask for exemption. That may be so. In such a case, the only

option to bring parity was to demand duty on differential amount,

which was even contended by the respondent herein. That

provision should have been incorporated to save the impugned

Notification from the vice of arbitrariness. In fact, that would bring

both the sub-categories completely at par. Thus, while upholding

the view taken by the High Court, we modify the same only to the

extent that the respondent herein shall also be entitled to the

benefit of the exemption Notification subject to the condition that

the duty already paid by the respondent herein on LDT, would be

taken into account and only the balance out of it would be subject

to excise duty.

Civil Appeal No. 1795 of 2005 Page 25 of 26

Page 26 24.The appeal is disposed of in the aforesaid terms without any

order as to cost.

.............................................J.

(A.K. SIKRI)

.............................................J.

(N.V. RAMANA)

NEW DELHI

JULY 29, 2015.

Civil Appeal No. 1795 of 2005 Page 26 of 26