STATE OF MADHYA PRADESH AND OTHERS versus LAFARGE DEALERS ASSOCIATION AND OTHERS on 9 July 2019

924

SUPREME COURT REPORTS

[2019] 18 S.C.R.

ATHE STATE OF MADHYA PRADESH AND OTHERS

v.

LAFARGE DEALERS ASSOCIATION AND OTHERS

(Civil Appeal No. 5302 of 2019)

B

JULY 09, 2019

[RANJAN GOGOI, CJI, S. ABDUL NAZEER ANDSANJIV KHANNA, JJ.]

Taxation – Sales Tax – Madhya Pradesh Reorganisation Act,2000 – ss.78, 79, 80, 85 and 86 – Bifurcation of erstwhile unifiedCState of Madhya Pradesh into two States, namely, a reorganisedState of Madhya Pradesh and the new State of Chhattisgarh in termsof the Madhya Pradesh Reorganisation Act – Effect of, on exemptionor benefit of deferment of sales tax granted under Madhya PradeshCommercial Tax Act, 1994 read with the applicable rules – DeemingDprovision envisaged in s.78 – Whether industrial units, which weregranted exemption and were after bifurcation located in thereorganised State of Madhya Pradesh or the new State ofChhattisgarh, would continue to enjoy the benefit of exemption/deferment of tax in the other State while conducting inter-Statetransaction(s) from the State they are located to the new State ofEChhattisgarh or the reorganised State of Madhya Pradesh, as thecase may be – Held: No – The second part of s.78 incorporates adeeming fiction, the effect whereof, is that the laws enacted by Stateof Madhya Pradesh before the reorganisation would continue toapply to the areas forming part of the new State of Chhattisgarhand also the reorganised State of Madhya Pradesh, but within theirFterritorial confines – The enactments or the laws in force in theunified State of Madhya Pradesh would continue to apply to thetwo States, not as one or the same enactment or law, but as twoseparate enactments or laws as applicable to two different States –On and from the appointed date of 1[st] November, 2000 any tradeGbetween the State of Chhattisgarh and the State of Madhya Pradeshand vice-versa would be inter-state trade and not intra-state trade –The deeming fiction and the provisions of the Reorganisation Actnowhere postulate that the trade would continue to remain intra-state trade and not inter-state trade between the two States – Infact, any deeming fiction to the said effect would have fallen afoulH

and would be contrary to Art. 286 of the Constitution as it stoodbefore amendment on 16[th] September, 2016 – Madhya PradeshCommercial Tax Act, 1994 – Madhya Pradesh General Sales TaxAct, 1958 – s.12 – Central Sales Tax Act, 1956 – s.8(5) – Constitutionof India – Art.286 (before amendment on 16-09-16) – Legal Fiction –Deeming provision.

Taxation – Inter-state Sales – Reorganisation of States –Creation of two new successor States from one State – Effect – Held:Creation of a new State can give rise to unusual situations, but thiscannot be a ground and reason to treat inter-State sales betweenthe two successor states as intra-State sales – This would be contraryto the Constitution and even the Statute i.e. the Reorganisation Act– Whenever a new State is created, there would be difficulties and,issues would arise but these have to be dealt within the parametersof the constitutional provisions and the law and not by negating themandate of the Parliament which has created the new State in termsof Art.3 of the Constitution – Creation of the new political Statemust be given full legal effect – Constitution of India – Art.3.

Re-organization of States – Theory of continuity of laws innew State after or post the reorganisation – Held: Principle of “cleanstate”, as it exists in the international law in relation to the statesuccession, which means that the successor state generally doesnot inherit the prior treaty obligations or rights of a predecessorstate, is different from adjustment of territories which the Parliamentundertakes and enforces u/Art. 3 – The reorganised states do notusually start as tabula rasa, rather they are successors of the pre-existing erstwhile States – Reorganisation Act(s) uniformly containprovisions which create a legal fiction to the extent that thereorganisation of the State would not affect the applicability of lawsto all the territories included within it before and even after thereorganisation – However, this is subject to another dictum/rulethat the existing laws as earlier applicable to the territories wouldbe applicable to the new State until the new State provides foradaptation or modification of the law by way of repeal or amendment– Madhya Pradesh Reorganisation Act, 2000 – ss. 78 and 79 –Bihar Reorganisation Act, 2000 – ss.84 and 85 – Doctrines /Principles – Theory of continuity of laws – Principle of “clean slate”– Constitution of India – Art.3.

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AMadhya Pradesh Reorganisation Act, 2000 – s.85 – Meaningand effect of the primacy given to provisions of the ReorganisationAct in terms of s.85 – Held: s.85 of the Reorganisation Act statesthat provisions of the said enactment shall have effectnotwithstanding anything inconsistent contained in any other law– Therefore, provisions of the Reorganisation Act have been givenBprimacy over any other law – However, this primacy is not meant todenude and over-ride the legal effect envisaged by the Constitutionconsequent to the creation of the successor State of Madhya Pradeshand the State of Chhattisgarh (from the erstwhile unified State ofMadhya Pradesh) which would henceforth have separateCgovernment(s) comprising of different legislature and executive.

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Interpretation of Statutes – Pari materia provisions – BiharReorganisation Act, 2000 – ss.84 and 85 – Bifurcation of erstwhileunified State of Bihar into two States, namely, a reorganised Stateof Bihar and the new State of Jharkhand – Effect and interpretationof ss.84 and 85 of the Bihar Reorganisation Act which are analogousDto ss.78 and 79 of the Madhya Pradesh Reorganisation Act – Held:The effect of ss.84 and 85 of the Bihar Reorganisation Act was toensure continuity of laws enacted by the unified State of Bihar inthe new State of Jharkhand which had been created by transfer ofterritories which earlier formed part of the State of Bihar – LegalEfiction created by s.84 of the Bihar Reorganisation Act – The saidfiction does not postulate and cannot be extended to imagine thatfor the purpose of sale transactions or even for other purposes, thenew State did not have any political and constitutional existence asa separate state and that till a new law was enacted, the two Stateswere to be treated as one political State as it was before theFreorganisation – The sale transactions which were hitherto intra-state sales being within the unified State of Bihar, would becomeinter-state transactions once the two new States had come intoexistence – Madhya Pradesh Reorganisation Act, 2000 – ss.78 and79.GLegal Fiction – Deeming provision – Purpose and objective– Held: A deeming provision is operative for the purposes for whichit is created and the Court should be careful not to extend this fictionbeyond the legitimate field and the purposes for which the legislaturehad adopted the fiction – The purpose and objective for creatingfiction must be kept in mind.H

THE STATE OF MADHYA PRADESH v.LAFARGE DEALERS ASSOCIATION

Conclusion

THE STATE OF MADHYA PRADESH v.LAFARGE DEALERS ASSOCIATION

Words and Phrases – ‘Inter-state’ trade – Meaning –Difference between ‘intra-State’ and ‘inter-State’ sales – Held: Asper Art. 286 of the Constitution, States are not competent to enactany legislation relating to taxation of ‘inter-state sales’ – Theexpression ‘inter-state’ trade has specific legal connotation andmeaning – It refers to transfer or movement of goods from one Stateto another – Taxation – Sales Tax – Constitution of India, 1950 –Art. 286 (before amendment on 16-09-16).

Practice and Procedure – New Plea – Contention raised byprivate parties/ assessee for the first time in Supreme Court – Thecontention was not raised in the writ petition before the High Courtor even in pleadings before the Supreme Court – Supreme Courtdeclining to decide the contention and leaving it open to the privateparties / assessee to raise the plea before the authorities inappropriate proceedings under the statute – Taxation – Sales Tax –Inter-State transaction.

Disposing of the appeals, the Court

HELD:1.1. It was submitted by the two States that witheffect from the appointed day the new State of Chhattisgarh hadcome into existence and hence the trade inter-se or between theterritories now forming part of the State of Chhattisgarh and thereorganised State of Madhya Pradesh would be in the nature ofinter-state sales and not intra-state sales. They contended thatthe Sales Tax Act as earlier applicable to the unified State ofMadhya Pradesh would be applicable in the reorganised State ofMadhya Pradesh and the new State of Chhattisgarh but withinthe territorial confines and limits of the two States. Accordingly,it was contended by the two States that the units situated withinthe territorial limits/boundaries of the reorganised State of MadhyaPradesh and the new State of Chhattisgarh would continue to enjoybenefit of exemption in respect of intra-state trade within theparticular state and not in respect of inter-state trade betweenthe two states. The stand taken by the State of Madhya Pradeshand the State of Chhattisgarh is correct and merits acceptanceon consideration of the case in the context of Sections 78, 79, 80,85 and 86 of the Madhya Pradesh Reorganisation Act, 2000.[Paras 13 and 14][946-D-H]

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A1.2. Section 78 of the Madhya Pradesh Reorganisation Actconsists of two parts. The first part states that the provisions ofthe Reorganisation Act shall not be deemed to have affected anychange in the territories to which any law in force immediatelybefore the appointed date extends or applies. In other words,the law in force before the appointed date, which in the presentBcase is 1[st] November, 2000, would continue to apply to thesuccessor or reorganised State of Madhya Pradesh as it existedbefore bifurcation. This is natural and normal as the laws enactedby the legislature and the executive of the State of MadhyaPradesh would obviously apply to the territories forming part ofCit after its reorganisation/ division. However, the second part ofSection 78 incorporates a deeming fiction when it states thatterritorial references to such law in the State of Madhya Pradesh,i.e. the laws enacted by the legislature and executive of the Stateof Madhya Pradesh before bifurcation, shall until otherwiseprovided by the competent legislature or other competentDauthority be construed as meaning the territories within theexisting state of Madhya Pradesh before the appointed day. Theeffect, thereof, is that the laws enacted by the State of MadhyaPradesh before the reorganisation would continue to apply to theareas forming part of the new State of Chhattisgarh and also thereorganised State of Madhya Pradesh, but within their territorialEconfines. The enactments or the laws in force in the unified Stateof Madhya Pradesh would continue to apply to the two States, notas one or the same enactment or law, but as two separateenactments or laws as applicable to two different States. [Para14][947-A-F]F1.3. The deeming fiction incorporated for the purpose ofsecond part of Section 78 of the Madhya Pradesh ReorganisationAct does not postulate and state that the territories which wereearlier part of the State of Madhya Pradesh but now form part ofthe State of Chhattisgarh would continue to remain part of theGreorganised State of Madhya Pradesh or should be treated aspart and parcel of the other state. This is not what is postulatedin Section 78. Deeming fiction in terms of Section 78 does notextend and include any such stipulation, either expressly or bynecessary implication. Indeed, this is not even remotelyvisualised. A deeming provision is operative for the purposes forHwhich it is created and the Court should be careful not to extend this fiction beyond the legitimate field and the purposes for whichthe legislature had adopted the fiction. The purpose and objectivefor creating fiction must be kept in mind. In the presentenactment, the object and purpose of the deeming provisionenvisaged in Section 78 of the Reorganisation Act is limited andrestricted to the enforcement of enactment/laws as they existedin the unified State of Madhya Pradesh to the new State ofChhattisgarh, and nothing more and beyond. [Para 15][947-G-H;948-A-C]

1.4. Section 79 of the Madhya Pradesh Reorganisation Actstates that the appropriate Government of the reorganised Stateof Madhya Pradesh and the new State of Chhattisgarh may, beforethe expiration of two years from the appointed date, by an order,as may be necessary or expedient, make such adaptations ormodifications in the earlier laws enacted in the unified State ofMadhya Pradesh by way of repeal or amendment. Thereupon,every law shall have effect subject to the adaptations ormodifications made, until further repealed, modified or amendedby the competent legislature or other competent authority.Explanation to the said section states that ‘appropriateGovernment’ in respect of any law means the Central Governmentin respect of matters enumerated in the Union List and in respectof any law in its application to a state, the State Government.[Para 16][948-C-E]

1.5. Section 80 of the Madhya Pradesh Reorganisation Actrelates to the construction or interpretation of the laws made bythe State of Madhya Pradesh before the appointed date. It statesthat notwithstanding that no provision or insufficient provisionhas been made in terms of Section 79, the court, tribunal orauthority interpreting such laws made by the unified State ofMadhya Pradesh would construe the law in such a manner as tofacilitate its application to the successor States of Madhya Pradeshand Chhattisgarh without effecting the substance. In other words,the court, tribunal or authority while interpreting the laws wouldgo by the substance and with the objective and purpose offacilitating the application of laws in relation to the successorStates of Madhya Pradesh and Chhattisgarh, notwithstanding thefact that the legislature or the competent authority in relation tothe laws applicable to the States of Madhya Pradesh and A

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AChhattisgarh have not passed any law before or within theexpiration period of two years from the appointed date. [Para17][948-F-G; 949-A]

1.6. Section 85 of the Madhya Pradesh Reorganisation Actstates that the provisions of the said enactment shall have effectBnotwithstanding anything inconsistent contained in any other law.Therefore, the provisions of the Reorganisation Act have beengiven primacy over any other law. However, this primacy is notmeant to denude and over-ride the legal effect envisaged by theConstitution consequent to the creation of the successor State ofMadhya Pradesh and the State of Chhattisgarh which wouldChenceforth have separate government(s) comprising of differentlegislature and executive. On and from the appointed date of 1[st]November,2000 any trade between the State of Chhattisgarh andthe State of Madhya Pradesh and vice-versa would be inter-statetrade and not intra-state trade. The deeming fiction and theprovisions of the Reorganisation Act nowhere postulate that theDtrade would continue to remain intra-state trade and not inter-state trade between the two States. In fact, any deeming fictionto the said effect would have fallen afoul and would be contrary toArticle 286 of the Constitution as it stood before amendment on16[th] September, 2016. [Para 18][949-B-D]

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1.7. As per Article 286 of the Constitution [as it stood beforeamendment on 16[th] September, 2016], States are not competentto enact any legislation relating to the taxation of ‘inter-statesales’. The expression ‘inter-state’ trade has specific legalconnotation and meaning. It refers to transfer or movement ofFgoods from one state to another. Such transactions,notwithstanding that the situs of sale would necessarily be at afixed location, are inter-state sale or trade and not intra-statesale or trade. Thus, when there is a movement of goods betweenthe two states without there being a transfer of title to theconsignor or consignee, compliance would have to be made withGthe relevant laws applicable to such inter-state transactions. Thisposition will hold good and equally apply in respect of the inter-state sales between the new State of Chhattisgarh and thereorganised State of Madhya Pradesh and vice-versa. Themovement of goods from one State to another is in the nature ofinter-state sales. The fact that two separate States are formedH

after the bifurcation, which were once a single entity for thepurpose of levying sales tax, would be of no consequence so asto disturb the legal and constitutional impact by which twoseparate States were created and the legal effect of Article 286as regards the inter-State character of inter-State transactions.[Para 18][950-C-E]

1.8. Section 86 of the Madhya Pradesh Reorganisation Actstates that in case any difficulty arises in giving effect to theprovisions of the said Act, the President may, by an order, doanything as may be necessary and expedient for removing thedifficulties. However, such order cannot be inconsistent with theprovisions of the Reorganisation Act. Proviso states that no ordershall be made after the expiry of three years from the appointeddate. [Para 19][950-F-G]

2.1. The effect of Sections 84 and 85 of the BiharReorganisation Act, 2000 (which are analogous to ss.78 and 79of the Madhya Pradesh Reorganisation Act, 2000) was to ensurecontinuity of laws enacted by the unified State of Bihar in the newState of Jharkhand which had been created by transfer of territorieswhich earlier formed part of the State of Bihar. These sectionsincorporating a deeming fiction were to ensure that the new Stateof Jharkhand would continue to be governed by the pre-existinglaws as, otherwise, there would be a disorderly and chaoticsituation where the new State would not be governed by any law.This is the true effect of the legal fiction created by Section 84 ofthe Bihar Reorganisation Act, 2000, i.e., the reorganisation ofthe state would not affect the applicability of the existing laws inthe state to all territories included within it before and even afterthe reorganisation. The said fiction does not postulate and cannotbe extended to imagine that for the purpose of sale transactionsor even for other purposes, the new state did not have any politicaland constitutional existence as a separate state and that till anew law was enacted, the two States were to be treated as onepolitical State as it was before the reorganisation. The saletransactions which were hitherto intra-state sales being withinthe unified State of Bihar, would become inter-state transactionsonce the two new States had come into existence. The provisionsdo not stipulate that such transactions would continue to betreated as intra-state transactions notwithstanding creation of thenew State. [Para 23][954-G-H; 955-A-D]

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A2.2. Creation of a new State was an unforeseen event andcould give rise to unusual situations, but this cannot be a groundand reason to treat inter-state sales between the two successorstates as intra-state sales. This would be contrary to theConstitution and even the Statute i.e. the Reorganisation Act.Whenever a new State is created, there would be difficulties and,Bissues would arise but these have to be dealt within theparameters of the constitutional provisions and the law and notby negating the mandate of the Parliament which has created thenew state in terms of Article 3 of the Constitution. Creation ofthe new political State must be given full legal effect. The contraryCobservations and ratio recorded in paragraphs 29 and 30 in SwarnRekha Cokes and Coals Pvt. Ltd. case are overruled in light of thelegal position elucidated and explained above. [Para 24][955- D-F]

Commissioner of Commercial Taxes, Ranchi and Anotherv. Swarm Rekha Cokes and Coals Pvt. Ltd. (2004) 6DSCC 689 : [2004] 2 Suppl. SCR 633 – overruled.

M.P.V. Sundararamier & Co. v. State of Andhra Pradeshand Another AIR 1958 SC 468 : [1958] SCR 1422 –followed.

ERanjan Sinha and Another v. Ajay Kumar Vishwakarmaand Others (2017) 14 SCC 774 : [2017] 7 SCR 194and B. S. Goraya v. U.T. of Chandigarh (2007) 6 SCC397 : [2007] 8 SCR 458 – relied on.

Sri Peera Mohammad B. S. Mahamood Saheb v. TheState of Andhra Pradesh 1960 (11) STC 456 – affirmed.F

Case Law Reference

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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5302of 2019.

From the Judgment and Order dated 16.07.2012 of the High Courtof Madhya Pradesh, Principal Seat at Jabalpur in Writ Petition No. 5308of 2004(O).

With

Civil Appeal Nos. 461, 460, 7073 of 2005, 2343 of 2007, 5303,5304, 5305, 5306, 5308 and 5307 of 2019.

Vivek K. Tankha, S. Ganesh, Sr. Advs., Harsh Parashar, AmanPandey, Bharat Sangal, Ms. Anindita Deka, Ms. Babita Kushwaha,Navnit Kumar (for M/s. Corporate Law Group), Rohit Ghosh,Mrs. Bina Gupta, Kshitij Vaibhav, Akshat Shrivastava, Ms. PoojaShrivastava, Ms. Manjeet Kirpal, Sunny Choudhary, Rahul Kaushik,Nishanth Patil, Mrs. Swarupama Chaturvedi, B. S. Banthia, Advs. forthe parties.

The Judgment of the Court was delivered by SANJIV KHANNA, J.

1. Leave granted in all the special leave petitions.

2. This judgment would dispose of the afore-captioned appealswhich relate to the legal effect of bifurcation of the State of MadhyaPradesh into the successor State of Madhya Pradesh and the State ofChhattisgarh by the Madhya Pradesh Reorganisation Act, 2000(“Reorganisation Act”, for short) on exemption or benefit of defermentof sales tax granted under the Madhya Pradesh Commercial Tax Act,1994 read with the applicable rules. The question to be answered iswhether the industrial unit in the reorganised State of Madhya Pradeshand under the new State of Chhattisgarh would continue to avail thebenefit of such exemption or deferment even after the bifurcation inboth the states, irrespective of the location of the industrial unit whichwould be in one of the two states.

3. Civil Appeal Nos. 460, 461, 7073 of 2005 and 2343 of 2007arise from the judgments of the Division Bench of the Madhya PradeshHigh Court, Jabalpur Bench, upholding judgment of the learned SingleJudge dismissing the Writ Petition by the manufacturer/dealer of cementinter-alia recording that on enforcement of the Reorganisation Act, twoseparate states viz., the State of Madhya Pradesh and the State of A

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AChhattisgarh had come into existence as postulated by the Constitutionof India and hence, benefit of the exemption or deferment of sales taxwould be restricted and confined to the boundaries/limits of the state inwhich the unit was located and would not operate beyond the limits ofthe state boundary. It was observed that any trade and movement ofgoods between the two states henceforth would be inter-state trade andBnot intra-state trade and the provisions of the Reorganisation Act hadnot removed and eclipsed this legal position but had a limited effect totreat the laws in operation in the State of Madhya Pradesh as equallyapplicable to the State of Chhattisgarh.

4. The other set of appeals arising from Special Leave PetitionC(Civil) Nos. 10520 of 2013, 1334, 10165, 23297 of 2014, 6729 and 16550of 2016 have been preferred by the State of Madhya Pradesh and theState of Chhattisgarh impugning decisions of the High Court of MadhyaPradesh, which have in view of the pronouncement of this Court inCommissioner of Commercial Taxes, Ranchi and Another v. SwarnRekha Cokes and Coals Pvt. Ltd. and Others[1]taken a contrary viewDand held that notwithstanding the creation of the two states, exemptionor deferment of tax notifications issued before the bifurcation wouldcontinue to apply in the new state and that for the purpose of sales tax,the two states were deemed to be one because of the legal fictionenvisaged vide Sections 78 and 79 of the Reorganisation Act.E5. At this stage, it would be appropriate to mention that a DivisionBench of this Court (Ashok Bhan and V.S. Sirpurkar, JJ.) vide orderdated 12[th] September, 2007 had observed that certain facts and provisionsof law which were not taken note of in Swarn Rekha’s case (supra),had come to light and therefore they had thought it appropriate to referFthe appeals to a larger Bench for consideration.

6. Before we deal with the rival contentions, it would beappropriate to notice and take on record the undisputed position. Stateof Madhya Pradesh in exercise of powers conferred under Section 12of the Madhya Pradesh General Sales Tax Act, 1958 and Section 8(5)of the Central Sales Tax Act, 1956 (for convenience we would refer toGthe two enactments as the “Sales Tax Act” for short), with a view toattract investors and increase industrial output in the State, had videnotification dated 19[th] February, 1991 formulated a policy for grant ofsales tax exemption to industrial units having fixed assets above Rs. 100

crores. Quantum of exemption from tax was to be equal to the capitalinvestment in the fixed assets and the duration or period was 11 yearsfrom the date of commencement of commercial production or the dateon which quantum of exempted tax reached the limit equivalent to thevalue of capital investment in the fixed assets. It is an undisputed positionthat private parties/assessee to the present appeals being entitled to thebenefit/exemption were issued a certificate of eligibility for exemptionfrom tax by the Directorate of Industries in the unified State of MadhyaPradesh.

7. The industrial units belonging to the private parties/assesseesituated in the unified State of Madhya Pradesh after the bifurcation interms of the Reorganisation Act would necessarily fall in the area/boundary forming a part either of the reorganised State of Madhya Pradeshor the new State of Chhattisgarh. As noticed above, the precise issuebefore us is whether these industrial units, which were granted exemptionand were after the bifurcation located in the reorganised State of MadhyaPradesh or the new State of Chhattisgarh, would continue to enjoy thebenefit of exemption/deferment of tax in the other state while conductinginter-state transaction(s) from the state they are located to the newState of Chhattisgarh or the reorganised State of Madhya Pradesh, asthe case may be.

8. Before we dwell into the respective contentions and elaborateour reasons, it would be appropriate to reproduce relevant provisions ofthe Reorganisation Act, viz. Sections 2(e), (f), (j) and (k), Sections 3, 4and 5 and Sections 78, 79, 80, 85 and 86(1) which are as under:

“Section 2 (e), (f), (j) and (k) of the Reorganisation Act Part I

PRELIMINARY

2. Definitions. —In this Act, unless the context otherwise requires, —

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(e) “existing State of Madhya Pradesh” means the State of MadhyaPradesh as existing immediately before the appointed day; (f) “law” includes any enactment, ordinance, regulation, order,bye-law, rule, scheme, notification or other instrument having, A

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Aimmediately before the appointed day, the force of law in thewhole or in any part of the existing State of Madhya Pradesh; xx xxxx

(j) “successor State”, in relation to the existing State of MadhyaPradesh, means the State of Madhya Pradesh or Chhattisgarh; B

(k) “transferred territory” means the territory which on theappointed day is transferred from the existing State of MadhyaPradesh to the State of Chhattisgarh; Sections 3, 4 and 5 of the Reorganisation Act CPart II

REORGANISATION OF THE STATE OF MADHYA PRADESH

3. Formation of Chhattisgarh State.— On and from theappointed day, there shall be formed a new State to be known asthe State of Chhattisgarh comprising the following territories ofthe existing State of Madhya Pradesh, namely:—

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Bastar, Bilaspur, Dantewada, Dhamtari, Durg, Janjgir-Champa,Jashpur, Kanker, Kawardha, Korba, Koriya, Mahasamund,Raigarh, Raipur, Rajnandgaon and Surguja districts, and thereuponthe said territories shall cease to form part of the existing State ofEMadhya Pradesh.

4. State of Madhya Pradesh and territorial divisionsthereof.— On and from the appointed day, the State of MadhyaPradesh shall comprise the territories of the existing State ofMadhya Pradesh other than those specified in section 3.

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5. Amendment of the First Schedule to the Constitution.—On and from the appointed day, in the First Schedule to theConstitution, under the heading “I. THE STATES”, —

(a) in the paragraph relating to the territories of the State of MadhyaPradesh, after the words, brackets and figures, “the RajasthanGand Madhya Pradesh (Transfer of Territories) Act, 1959 (47 of1959)”, the following shall be added, namely: —

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“but excluding the territories specified in section 3 of the MadhyaPradesh Reorganisation Act, 2000.”; (b) after entry 25, the following entry shall be inserted, namely:

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“26. Chhattisgarh: The territories specified in section 3 of theMadhya Pradesh Reorganisation Act, 2000.”

Sections 78, 79, 80, 85 & 86 of the Reorganisation Act PART X

LEGAL AND MISCALLANEOUS PROVISIONS

78. Territorial extent of laws.— The provisions of Part II ofthis Act shall not be deemed to have effected any change in theterritories to which any law in force immediately before theappointed day extends or applies, and territorial references in anysuch law to the State of Madhya Pradesh shall, until otherwiseprovided by a competent Legislature or other competent authoritybe construed as meaning the territories within the existing Stateof Madhya Pradesh before the appointed day.

79. Power to adapt laws.— For the purpose of facilitating theapplication in relation to the State of Madhya Pradesh orChhattisgarh of any law made before the appointed day, theappropriate Government may, before the expiration of two yearsfrom that day, by order, make such adaptations and modificationsof the law, whether by way of repeal or amendment, as may benecessary or expedient, and thereupon every such law shall haveeffect subject to the adaptations and modifications so made untilaltered, repealed or amended by a competent legislature or othercompetent authority.

Explanation. — In this Section, the expression “appropriateGovernment” means as respects any law relating to a matterenumerated in the Union List, the Central Government, and asrespects any other law in its application to a State, the StateGovernment.

80. Power to construe laws.— Notwithstanding that no provisionor insufficient provision has been made under section 79 for theadaptation of a law made before the appointed day, any court,tribunal or authority, required or empowered to enforce such lawmay, for the purpose of facilitating its application in relation to theState of Madhya Pradesh or Chhattisgarh, construe the law insuch manner, without affecting the substance, as may be necessary A

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Aor proper in regard to the matter before the court, tribunal orauthority.

85. Effect of provisions of the Act inconsistent with otherlaws.— The provision of this Act shall have effect notwithstandinganything in consistent therewith contained in any other law.

B86. Power to remove difficulties.— (1) If any difficulty arisesin giving effect to the provisions of this Act, the President may, byorder, do anything not in consistent with such provisions whichappears to him to be necessary or expedient for the purpose ofremoving the difficulty:

CProvided that no such order shall be made after the expiry of aperiod of three years from the appointed day.”

9. The Reorganisation Act, which was to commence from theappointed day, was notified by the Central Government vide NotificationNo. S.O. 827(E), dated 14[th] September, 2000 published in the Gazette ofDIndia, Extraordinary Part II sec.3(ii) with 1[st] November, 2000 as theappointed date. Accordingly, on 1[st] November, 2000 the erstwhile Stateof Madhya Pradesh was bifurcated and divided into the reorganisedState of Madhya Pradesh and the new State of Chhattisgarh. The politicalmap of the country underwent a change. The reorganised State of MadhyaPradesh and the new State of Chhattisgarh were described as “successorEState” vide clause (j) to Section 2 of the Reorganisation Act. Thetransferred territories, which were to form part of the State ofChhattisgarh, were demarcated and specified in Section 3 of theReorganisation Act. As per Section 4, the reorganised State of MadhyaPradesh was to comprise of the existing territories other than thosespecified in Section 3 i.e., the territories which shall now form part ofFthe State of Chhattisgarh. The expression “law” as defined in clause (f)to Section 2 of the Reorganisation Act included any enactment, ordinance,regulation, order, notification, etc., in force immediately before theappointed day in the whole or any part of the erstwhile or unified Stateof Madhya Pradesh. The law by definition would include delegatedGlegislation and also the exemption notification issued under the SalesTax Act, and the certificate of eligibility for exemption from tax issuedunder the Sales Tax Act.

10. Section 5 of the Reorganisation Act states that on and fromthe appointed day, in the First Schedule to the Constitution under theHheading “THE STATES” after entry 25, entry 26 shall be inserted by mentioning the State of Chhattisgarh which shall comprise of the territoriesspecified in Section 3 of the Reorganisation Act. Similarly, in relation toand in the case of Madhya Pradesh, necessary changes will be made inthe territories forming part of the State by excluding the territories specifiedin Section 3 of the Reorganisation Act.

11. Before interpreting Sections 78 and 79 of the ReorganisationAct which are in pari materia to Sections 84 and 85 of the BiharReorganisation Act, 2000, we would like to reproduce paragraphs 26,27, 28, 29 and 30 of Swarn Rekha (supra), which read as under:

“26. The question then arises, as to what is the true meaning andimport of Sections 84 and 85 of the Act?

27. We have earlier reproduced Sections 84 and 85 of the Act.As earlier noticed, Sections 3 to 6 which form part of Part II ofthe Act provide for the formation of new States to be known asthe State of Jharkhand and the State of Bihar. The territoriesspecified in Section 3 constitute the new State of Jharkhand andthe remaining territories fall within the territory of the State ofBihar. However, Section 84 in express terms, provides that theprovisions of Part II shall not be deemed to have effected anychange in the territories to which any law in force immediatelybefore the appointed day extended or applied and the territorialreferences in any such law to the State of Bihar shall, untilotherwise provided by a competent legislature or other competentauthority, be construed as meaning the territories within the existingState of Bihar before the appointed day. Section 85 provides thatfor the purpose of facilitating the application in relation to theState of Bihar or Jharkhand of any law made before the appointedday, the appropriate Government may, before the expiration oftwo years from that day, by order, make such adaptations andmodifications of the law, whether by way of repeal or amendment,as may be necessary or expedient, and thereupon every such lawshall have effect subject to the adaptations and modifications somade until altered, repealed or amended by a competent legislatureor other competent authority. The language in these sections isclear and unambiguous. These sections provide that the laws whichwere applicable to the undivided State of Bihar would continue toapply to the new States created by the Act. The laws that operatedcontinue to operate notwithstanding the bifurcation of the erstwhileState of Bihar and creation of the new State of Jharkhand. They A

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continue in force until and unless altered, repealed or amended. Itis not disputed before us and indeed it cannot be disputed in viewof the wide definition given to “law” in Section 2(f) of the Act thatthe notification issued under Section 7(3)(b) of the Bihar FinanceAct, 1981 is law within the meaning of Sections 84 and 85 of theAct. Thus, the notification published in the Bihar Gazette on 22-12-1995 bearing SO No. 478 continues to operate in the State ofJharkhand till such time as it is altered, repealed or amended. Byvirtue of Section 84, the territorial references in any such law(which includes the notification in question), to the State of Biharshall be construed as meaning the territories within the existingState of Bihar before the appointed day, until otherwise providedby a competent legislature or other competent authority. A conjointreading of both these provisions makes it abundantly clear thatthe territorial references in any law in force immediately beforethe appointed day must be construed as meaning the territorieswithin the existing State of Bihar before the appointed day. Tofacilitate their application in respect of the State of Bihar orJharkhand, the appropriate Government may, before the expirationof two years from that day, by order, make such adaptations andmodifications of the law as it may consider necessary or expedientby way of repeal or amendment. Till such law is so repealed oramended in accordance with law, it shall have effect. After theiramendment or alteration, they shall have effect subject to theadaptations and modifications made. We, therefore, find nodifficulty in holding that the notification of the Government of Biharissued under Section 7(3)(b) of the Bihar Finance Act, 1981 andpublished in the gazette on 22-12-1995 being SO No. 478 is lawas defined by Section 2(f) of the Act. The said notification holdsthe field and applies to all the territories which comprised theundivided State of Bihar. The States of Bihar and Jharkhand havebeen vested with power to make such adaptations andmodifications of the law as they may consider necessary orexpedient. This they can do by issuance of order before theexpiration of two years from the appointed day. After theadaptations and modifications of the law, the law shall have effectas so modified or adapted till such time as a competent legislatureor other competent authority further alters, repeals or amendssuch law.

28. This is not the first time that a provision such as Section 84 ofthe Act has come up for interpretation by this Court. Section 88of the Punjab Reorganisation Act, 1966 is also identically wordedas Section 84 of the Act. That provision came up for considerationbefore this Court in at least three decisions which have beenbrought to our notice, namely, State of Punjab v. Balbir Singh,Sher Singh v. Financial Commr. of Planning and Dhayanandv. Union of India. In the first of these cases i.e. in State ofPunjab v. Balbir Singh this Court was concerned with anadministrative order and not a law with which we are concernedin the instant case. Section 88 of the Punjab Reorganisation Actwas noticed as also the definition of law under Section 2(g) ofthat Act. Section 2(g) of that Act did not define law as widely asit has been defined under Section 2(f) of the Act. This Courtagreed with the High Court that the impugned administrative ordersin question were not law within the meaning of Section 2(g) ofthat Act and hence, were not saved by Section 88. However, thisCourt held that when there is no change of sovereignty and it ismerely an adjustment of territories by reorganisation of a particularState, the administrative orders made by the Government of theerstwhile State continue to be in force and effective and bindingon the successor States until and unless they are modified, changedor repudiated by the Governments of the successor States. ThisCourt observed that no other view is possible to be taken as thatwill merely bring about chaos in the administration of the newStates. Their Lordships found no principle in support of the standthat administrative orders made by the Government of the erstwhileState automatically lapsed and were rendered ineffective on thecoming into existence of the new successor States. Their Lordshipsfurther distinguished a case where there was no change ofsovereignty and there was merely an adjustment of territories bythe reorganisation of a particular State, from a case of absorptionof one State in another by accession, conquest, merger orintegration. The same view was taken by this Court in the othertwo judgments referred to earlier. We are of the view that theprinciples laid down in Balbir Singh case fully apply to the factsof this case having regard to the identical legislative provisionand, particularly so when the notification in question is by definitionlaw and not a mere administrative order.

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29. The next question which arises is whether the aforesaidnotification has been altered or modified by the State of Jharkhand.It was sought to be argued before us that the State of Jharkhandhas announced its own industrial policy on 25-8-2001 and,therefore, the industrial policy of 1995 and the notification bearingSO No. 478 dated 22-12-1995 issued under Section 7(3)(b) of theAct will have no legal force in the State of Jharkhand. The HighCourt in Swarn Rekha case has considered this aspect of thematter and we find ourselves in complete agreement with theview taken by the High Court. There is nothing in the industrialpolicy of 2001 which alters, amends or repudiates the notificationdated 22-12-1995. It deals with new industrial units set up after15-11-2000 and, therefore, whatever benefits or incentives areprovided for in the said policy are applicable to new industrialunits set up after 15-11-2000. In the instant case, we are concernedwith industrial units set up before 15-11-2000 and which werefound eligible for grant of exemption certificate under the industrialpolicy of the State of Bihar of the year 1995. Moreover, theindustrial policy of the State of Jharkhand will not apply to theunits already existing before that date. In these circumstances inthe absence of anything in the Industrial Policy, 2001 of theGovernment of Jharkhand or in the notification or order issued bythe Government of Jharkhand, Notification No. SO No. 478 dated22-12-1995 must continue to operate in the State of Jharkhandand the appellants or respondents concerned, as the case may be,must be held entitled to the benefits and incentives envisaged bythe said notification.

The submission which found favour with the High Court ofJharkhand at Ranchi in Civil Appeal No. 3765 of 2003 is that thestatutory notification issued by the erstwhile State of Biharenvisaged only intra-State sale transactions and not inter-Statesale transactions. With the coming into existence of two States,incentive by way of exemption from payment of sales tax cannotbe claimed in respect of transactions which can now be categorisedas inter-State sale transactions. The submission overlooks theprovisions of Sections 84 and 85 of the Act, which create a legalfiction. It is well settled that in interpreting a provision creating alegal fiction, the court must ascertain the purpose for which thefiction is created and having done so, to assume all those factsand consequences which are incidental or inevitable corollaries to

the giving effect to the fiction. When the law requires that animaginary state of affairs should be treated as real, then unlessprohibited from doing so, one must also imagine as real theconsequences and incidents which, if the putative state of affairshad in fact existed, must inevitably have flowed from oraccompanied it. As Lord Asquith in East End Dwellings Co.Ltd. v. Finsbury Borough Council, All ER at p. 589 observedthat having done so, you must not cause or permit your imaginationto boggle when it comes to the inevitable corollaries of that stateof affairs. Section 84 bids us to imagine that despite the divisionof the erstwhile State of Bihar into two States, any law in forceimmediately before the appointed day, notwithstanding territorialreferences in them, shall, until otherwise provided by the competentlegislature or other competent authority, be construed as meaningthe territories within the existing State of Bihar before the appointedday. In simple words, though the law may refer to the State ofBihar, and though the State of Bihar has been bifurcated into twoby creating the State of Jharkhand, the laws in force before theappointed day must continue to operate in the territories whichformed the erstwhile State of Bihar. This, of course, is subject toamendment, alteration or repudiation by a legislature or othercompetent authority. The statutory notification relied upon,therefore, continues to operate throughout the territories whichearlier constituted the State of Bihar. Under Section 85, they shallcontinue to operate until repealed or amended in the mannerprovided. As a natural consequence, the entrepreneurs are entitledto the benefits and incentives provided in the said notification.Having regard to the overriding provisions of this Act, as envisagedunder Section 91, the statutory notifications must prevail and thebenefits flowing therefrom must accrue to the beneficiaries. Wemust not permit our mind to boggle by imagining that what wasone State earlier has now become two and consequently whatwere intra-State sale transactions earlier are now inter-State saletransactions. If any law in force before the appointed day musthave effect in the absence of its modification or repeal, the benefitunder that law must flow notwithstanding the fact that in realityintra-State sale transactions may have become inter-State saletransactions. Law gives authority to the State concerned to bringabout a change in the state of affairs, if it so considers necessaryor expedient by modifying or amending the law or by altering, AB

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repealing or amending it by legislation. We have, therefore, nodoubt that the High Court of Jharkhand at Ranchi was wrong indismissing the writ petition on the ground that the notification of22-12-1995 could not apply to inter-State sale transactions.

30. We have carefully considered the decisions relied upon byShri Rakesh Dwivedi in Rattan Lal & Co. v. Assessing Authority,State of Mysore v. P.B. Hussain Kunhi & Co. and CST v.Minerva Minerals and we find that none of those decisions inany manner advances the case of the State. The decisions inthose cases depended on the interpretation of the provisions ofthe Acts concerned which were not at all similar to the provisionswith which we are concerned in the instant appeals. In Civil AppealNo. 2450 of 2003, the High Court of Patna on a similar groundhas rejected the claim of the appellants. It noticed the earlierdecision of the High Court, but distinguished the same on the groundthat in the case in hand, the industrial unit was situated in theState of Jharkhand while the benefit was being claimed in theState of Bihar. In view of our earlier findings, this would not be arelevant consideration for rejecting the writ petition. Moreover, ifthis principle were to be upheld, it would result in arbitrary resultsinasmuch as the entrepreneurs whose industrial units operate inthe State of Bihar will get the benefit of exemption from paymentof sales tax on purchase of raw materials in the State of Jharkhand,but their counterparts in the State of Jharkhand would not be entitledto such benefit. We must not lose sight of the fact that anunforeseen event may give rise to unusual situations. Faced withsuch situations, the legislature has to find appropriate methodsand solutions to deal with them. When the State of Biharannounced its industrial policy in the year 1995, it could not foreseethat the State will be divided five years later. But when the divisionof the State became a reality, Parliament had to make appropriateprovisions to carry on the administration in the two States. If thelaws in force were to lapse on the day the division was effected,a chaotic situation would have emerged inasmuch as the newlycreated State would be rendered a State without laws. It is,therefore, that provisions like Sections 84 and 85 of the Act areenacted to maintain continuity, and at the same time authorise theStates to make such modifications and adaptations as areconsidered necessary by mere issuance of orders within two years,and thereafter by legislation or exercise of power by the competent authority. Such provisions have necessarily to be incorporated inlegislations relating to reorganisation of States. It is, therefore,appropriate that such legislations must be construed in the light ofthe unusual situation created by the creation of a new State andthe object sought to be achieved.”

12. Relying upon the aforesaid ratio and interpretation of Sections78 to 80, 85 and 86 of the Reorganisation Act, learned counsel for theprivate parties/assessee have submitted that the Reorganisation Act didnot withdraw and negate the benefit of exemption which was alreadygranted in respect of the entire area forming part of unified State ofMadhya Pradesh. Provisions of the Reorganisation Act protect andenforce the “law” which included the exemption notification in force inthe unified State of Madhya Pradesh on the appointed day. Reliancewas placed on the Adaptation of Laws Order, 2000 Notification No. F1/17/-2000/C.Tax/V dated 30[th] November, 2002 with effect from 1[st]November, 2000, the relevant portion of which reads as under:

“2. The laws, as amended from time to time, specified in theSchedule to this order, which are in force in the State of MadhyaPradesh immediately before the formation of the State ofChhattisgarh, are hereby extended to and shall be in force in theState of Chhattisgarh until repealed or amended. Subject to themodifications that in all the laws for the words “Madhya Pradesh”wherever they occur the word “Chhattisgarh” shall be substituted.

3. Anything done or any action taken (including any appointment,notification, notice, order, rule, form, regulation, certificate orlicence) in exercise of the powers conferred by order under thelaws specified in the Schedule shall continue to be in force in theState of Chhattisgarh.”

The Schedule to the said Notification, it was highlighted, includedthe Sales Tax Act and the rules framed thereunder. Accordingly, theAdaptation of Laws Order states that subject to the modification in theform of substitution of the word “Madhya Pradesh” with the word“Chhattisgarh”, “the law” would continue to apply and had remained inforce and would be effective for the balance period of 11 years or till thequantum of exemption was reached. Further, Section 80 of theReorganisation Act empowers the court, tribunal or authority to enforce“the law” for the purpose of facilitating its application to the reorganisedState of Madhya Pradesh and the new State of Chhattisgarh in a manner, A

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Awithout affecting its substance, as would be necessary or proper in regardto the matter before the court, tribunal or authority. This prime objectivemust keep in mind by the Court while interpreting the provisions. Section85 in the nature of a non-obstante or overriding clause mandates thatthe provisions of the Act would have effect notwithstanding anythinginconsistent contained in any other law. Therefore, the exemptionBnotification must be interpreted as in force in both the States i.e. thereorganised State of Madhya Pradesh and the new State of Chhattisgarhas if the unified State of Madhya Pradesh had not been bifurcated. Thiswould be the only way to reconcile Part X of the Reorganisation Actand give effect to the legal fiction created by Sections 78 and 79 of theCReorganisation Act. Section 78 by incorporating a deeming fiction enuresto the benefit given to the private parties/assessee was not denied andfully given effect to.

13. The two States, on the other hand, submit that with effectfrom the appointed day the new State of Chhattisgarh had come intoexistence and hence the trade inter-se or between the territories nowDforming part of the State of Chhattisgarh and the reorganised State ofMadhya Pradesh would be in the nature of inter-state sales and notintra-state sales. The Sales Tax Act as earlier applicable to the unifiedState of Madhya Pradesh would be applicable in the reorganised Stateof Madhya Pradesh and the new State of Chhattisgarh but within theEterritorial confines and limits of the two States. Therefore, the unitssituated within the territorial limits/boundaries of the reorganised Stateof Madhya Pradesh and the new State of Chhattisgarh would continueto enjoy benefit of exemption in respect of intra-state trade within theparticular state and not in respect of inter-state trade between the twostates. This is the exact purport and meaning behind Section 78 and 79Fof the Reorganisation Act. Reliance was placed on the judgment of theDivision Bench of the Andhra Pradesh High Court in Sri PeeraMohammad Mahamood Saheb v. The State of Andhra Pradesh[2],which we would advert to at the appropriate stage.

14. Having considered the contention of the parties and in theGcontext of Sections 78, 79, 80, 85 and 86 of the Reorganisation Act, wefeel that the stand taken by the State of Madhya Pradesh and the Stateof Chhattisgarh is correct and merits acceptance. We have alreadyreproduced the aforesaid provisions and partly interpreted them inparagraphs 9 and 10 and would now proceed to interpret Sections 78

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and 79 of the Reorganisation Act. Section 78 of the Reorganisation Actconsist of two parts. The first part states that the provisions of theReorganisation Act shall not be deemed to have affected any change inthe territories to which any law in force immediately before the appointeddate extends or applies. In other words, the law in force before theappointed date, which in the present case is 1[st] November, 2000, wouldcontinue to apply to the successor or reorganised State of MadhyaPradesh as it existed before bifurcation. This is natural and normal asthe laws enacted by the legislature and the executive of the State ofMadhya Pradesh would obviously apply to the territories forming part ofit after its reorganisation/division. As a result of bifurcation some areasthat were earlier part of the State of Madhya Pradesh would now formpart of the new State of Chhattisgarh, albeit this would not matter andaffect application of the laws as they applied prior to the appointed dateto the territories that required a part of the reorganised State of MadhyaPradesh. Section 78, no doubt uses the word ‘deemed’ but in fact, thefirst part does not incorporate/create any deeming fiction and ratherpostulates and states the obvious. However, the second part of Section78 incorporates a deeming fiction when it states that territorial referencesto such law in the State of Madhya Pradesh, i.e. the laws enacted by thelegislature and executive of the State of Madhya Pradesh beforebifurcation, shall until otherwise provided by the competent legislatureor other competent authority be construed as meaning the territorieswithin the existing state of Madhya Pradesh before the appointed day.The effect, thereof, is that the laws enacted by the State of MadhyaPradesh before the reorganisation would continue to apply to the areasforming part of the new State of Chhattisgarh and also the reorganisedState of Madhya Pradesh, but within their territorial confines. Theenactments or the laws in force in the unified State of Madhya Pradeshwould continue to apply to the two states, not as one or the sameenactment or law, but as two separate enactments or laws as applicableto two different states.

15. The deeming fiction incorporated for the purpose of secondpart of Section 78 does not postulate and state that the territories whichwere earlier part of the State of Madhya Pradesh but now form part ofthe State of Chhattisgarh would continue to remain part of the reorganisedState of Madhya Pradesh or should be treated as part and parcel of theother state. This is not what is postulated in Section 78. Deeming fictionin terms of Section 78 does not extend and include any such stipulation,either expressly or by necessary implication. Indeed, this is not even AB

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Aremotely visualised. This Court in B. S. Goraya vs. U.T. ofChandigarh[3], in paragraphs 6 to 8 had observed that a deeming provisionis operative for the purposes for which it is created and the Court shouldbe careful not to extend this fiction beyond the legitimate field and thepurposes for which the legislature had adopted the fiction. The purposeand objective for creating fiction must be kept in mind. In the presentBenactment, the object and purpose of the deeming provision envisagedin Section 78 of the Reorganisation Act is limited and restricted to theenforcement of enactment/laws as they existed in the unified State ofMadhya Pradesh to the new State of Chhattisgarh, and nothing moreand beyond.

C16. Section 79 of the Reorganisation Act states that the appropriateGovernment of the reorganised State of Madhya Pradesh and the newState of Chhattisgarh may, before the expiration of two years from theappointed date, by an order, as may be necessary or expedient, makesuch adaptations or modifications in the earlier laws enacted in the unifiedState of Madhya Pradesh by way of repeal or amendment. Thereupon,Devery law shall have effect subject to the adaptations or modificationsmade, until further repealed, modified or amended by the competentlegislature or other competent authority. Explanation to the said sectionstates that ‘appropriate Government’ in respect of any law means theCentral Government in respect of matters enumerated in the Union ListEand in respect of any law in its application to a state, the StateGovernment.

17. Section 80 relates to the construction or interpretation of thelaws made by the State of Madhya Pradesh before the appointed date.It states that notwithstanding that no provision or insufficient provisionFhas been made in terms of Section 79, the court, tribunal or authorityinterpreting such laws made by the unified State of Madhya Pradeshwould construe the law in such a manner as to facilitate its application tothe successor States of Madhya Pradesh and Chhattisgarh withouteffecting the substance. In other words, the court, tribunal or authoritywhile interpreting the laws would go by the substance and with theGobjective and purpose of facilitating the application of laws in relation tothe successor States of Madhya Pradesh and Chhattisgarh,notwithstanding the fact that the legislature or the competent authorityin relation to the laws applicable to the States of Madhya Pradesh and Chhattisgarh have not passed any law before or within the expirationperiod of two years from the appointed date.

18. Section 85 of the Reorganisation Act states that the provisionsof the said enactment shall have effect notwithstanding anythinginconsistent contained in any other law. Therefore, the provisions of theReorganisation Act have been given primacy over any other law.However, this primacy is not meant to denude and over-ride the legaleffect envisaged by the Constitution consequent to the creation of thesuccessor State of Madhya Pradesh and the State of Chhattisgarh whichwould henceforth have separate government(s) comprising of differentlegislature and executive. On and from the appointed date of 1[st]November,2000 any trade between the State of Chhattisgarh and theState of Madhya Pradesh and vice-versa would be inter-state trade andnot intra-state trade. The deeming fiction and the provisions of theReorganisation Act nowhere postulate that the trade would continue toremain intra-state trade and not inter-state trade between the two States.In fact, any deeming fiction to the said effect would have fallen afouland would be contrary to Article 286, as it stood before amendment on16[th] September, 2016 and reads as under:

“286. Restrictions as to imposition of tax on the sale orpurchase of goods: - No law of a State shall impose, or authorise the imposition of, atax on the sale or purchase of goods where such sale or purchasetakes place (a) outside the State; or (b) in the course of the import of the goods into, or export of thegoods out of, the territory of India.

(2) Parliament may by law formulate principles for determiningwhen a sale or purchase of goods takes place in any of the waysmentioned in clause (1).

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A(b) a tax on the sale or purchase of goods, being a tax of thenature referred to in sub-clause (b), sub-clause (c) or sub-clause(d) of clause (29-A) of Article 366, be subject to such restrictions and conditions in regard to the systemof levy, rates and other incidents of the tax as Parliament may byBlaw specify.”

As per the said Article, states are not competent to enact anylegislation relating to the taxation of ‘inter-state sales’, an expressionwhich, in the context of the Constitution, has been subject matter ofseveral decisions explaining the difference between ‘intra-state’ and‘inter-state’ sales. The expression ‘inter-state’ trade has specific legalCconnotation and meaning. It refers to transfer or movement of goodsfrom one state to another. Such transactions, notwithstanding that thesitus of sale would necessarily be at a fixed location, are inter-state saleor trade and not intra-state sale or trade. Thus, when there is a movementof goods between the two states without there being a transfer of title toDthe consignor or consignee, compliance would have to be made with therelevant laws applicable to such inter-state transactions. This positionwill hold good and equally apply in respect of the inter-state sales betweenthe new State of Chhattisgarh and the reorganised State of MadhyaPradesh and vice-versa. The movement of goods from one state toanother is in the nature of inter-state sales. The fact that two separateEstates are formed after the bifurcation, which were once a single entityfor the purpose of levying sales tax, would be of no consequence so asto disturb the legal and constitutional impact by which two separate Stateswere created and the legal effect of Article 286 as regards the inter-state character of inter-state transactions.F19. Section 86 of the Reorganisation Act states that in case anydifficulty arises in giving effect to the provisions of the said Act, thePresident may, by an order, do anything as may be necessary andexpedient for removing the difficulties. However, such order cannot beinconsistent with the provisions of the Reorganisation Act. Proviso statesthat no order shall be made after the expiry of three years from theGappointed date.

20. In Ranjan Sinha and Another v. Ajay Kumar Vishwakarmaand Others[4], three Judges’ Bench of this Court have elucidated that theParliament, under Article 3 of the Constitution, is empowered to form a H4 (2017) 14 SCC 774

new State by separation of territory from any State or by uniting two ormore States. Article 4 of the Constitution states that the law made bythe Parliament with reference to Article 3 may contain supplemental,consequential and incidental provisions. When the territory of the existingState is reorganised by the Parliament under Article 3, there is no changeof sovereignty and it is only a case of adjustment of territories as someportion of the territories forming part of the existing state would nowform part of the newly formed state or get merged in a new state. In thelatter case, the laws which were applicable to the territories of thereorganised state would continue to apply to the territories of the newstate until the newly created state adapts or subject to its competencyamends or repeals the existing and applicable laws. It was held:

“36. At the cost of repetition, we may mention that under Article3 of the Constitution, Parliament can alter, amend, amalgamate,form new States, diminish or increase area of a State. The principleof “clean slate” as applicable in international law is not applicablewhen reorganisation takes place under Article 3 of the Constitution.The reorganised States do not usually start as tabula rasa, ratherthey are successors of a pre-existing erstwhile States. UnderBROA, Jharkhand was carved out of Bihar and the other separateStates came into existence on 15-11-2000. If the laws in forcewere to lapse on the date the division was effected, a chaoticsituation would have emerged inasmuch as the newly createdState would be rendered a State without laws. To avoid suchsituation, provisions like Sections 84 and 85 of BROA have beenenacted to maintain continuity, and at the same time authorisingthe States to make such modifications and adaptations as areconsidered necessary by mere issuance of orders within two years,and thereafter by legislation.”

This decision had referred to several earlier enactments by theParliament under Article 3 beginning with the States Reorganisation Act,1956 till the Bihar Reorganisation Act, 2000 which had similar provisionsunder the heading ‘Territorial extent of laws’ and ‘Power to adaptlaws’ as in the present case. Referring to Section 84 of the BiharReorganisation Act, 2000, which is identically worded as Section 78 ofthe Reorganisation Act, this Court in Ranjan Sinha (supra) held asunder:

“29. Section 84 contains two legal fictions, first is that thereorganisation of Bihar would not affect the applicability of laws A

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Amade by the State of Bihar to all territories included in it beforereorganisation and after the reorganisation. In other words, a lawmade by Bihar shall be applicable to all the territories of theerstwhile State of Bihar including the territories of the State ofJharkhand even after reorganisation. The second fiction is thatuntil Jharkhand provides for it by way of amendment or otherwise,Bterritorial reference in any law to the State of Bihar shall mean allthe territories in Bihar before reorganisation. For instance, if Biharhad made a law as applicable to entire Bihar, it shall apply toBihar and Jharkhand until it is amended by the new State. Theterritories to which the said Act is made applicable would alsoinclude the territories which were included in Jharkhand. SectionC85 is an enabling provision which empowers both the States tomake adaptations and modification of the law by way ofamendment to the law as applicable to the newly formed State.”

While interpreting Section 84 and 85 of the Bihar ReorganisationAct, 2000 analogous to Section 78 and 79 of the Reorganisation Act, thisDCourt in Ranjan Sinha (supra) had dealt with and affirmed the underlinedtheory of continuity of laws in the new state after or post the reorganisationobserving that the principle of “clean slate”, as it exists in the internationallaw in relation to the state succession, which means that the successorstate generally does not inherit the prior treaty obligations or rights of aEpredecessor state, is different from the adjustment of territories whichthe Parliament undertakes and enforces under Article 3. The reorganisedstates do not usually start as tabula rasa, rather they are successors ofthe pre-existing erstwhile States. Disorderly and chaotic situation woulderupt if the new state was to be created without any laws as on the dateof its creation. To overcome this interregnum and vacuum, theFReorganisation Act(s) uniformly contain provisions which create a legalfiction to the extent that the reorganisation of the State would not affectthe applicability of laws to all the territories included within it before andeven after the reorganisation. However, this is subject to another dictum/rule that the existing laws as earlier applicable to the territories would beGapplicable to the new state until the new state provides for adaptation ormodification of the law by way of repeal or amendment. The time periodprovided for such adaptations and modifications is generally two yearsfrom the appointed day, i.e. the day by which the Central Government inthe Official Gazette provides for the creation of the two states by transferof territories from one state to another.H

21. The Constitutional Bench judgment in M.P.V. Sundararamier& Co. v. State of Andhra Pradesh and Another[5], had examined andrejected several contentions of the dealers carrying on business in thecity of Madras for restraining the State of Andhra from imposing salestax on sales effected in favour of merchants carrying on business in theState of Andhra. One of the contentions raised related to the trueinterpretation of Section 53 of the Andhra State Act, 1953, the argumentbeing that though for political purposes the State of Andhra was a separateState, but for enforcement of laws as they stood on the date of division/bifurcation, the State of Andhra was deemed to be a part of the State ofMadras. This contention was rejected holding that the States of Andhraand Madras were two separate States and were governed by two separatethough identical Acts. Accordingly, when the sales tax enactment asapplicable had provided for single levy on successive sales of yarn, itwould have application to sales in the State of Madras or Andhra, as thecase may be, and not in the other State or inter-state sales. Section 53had provided that the laws in existence in the territories which wereconstituted and had become part of the State of Andhra would continueto be governed by the laws which were enacted by the State of Madras.In terms of Section 53, the laws enacted by the State of Madras wouldcontinue to operate as before. It had not stipulated that the States wouldcontinue to be one. For clarity and convenience, we would reproduceparagraph 60 of the said judgment, which reads as under:

“60. (VI) Another contention urged by the petitioners is that thelevy of tax proposed to be made by the Andhra State on the saleof yarn by them to dealers in the State of Andhra is illegal becauseunder the Madras Act and the Rules made thereunder, wherethere are successive sales of yarn the tax can be imposed at onlyone point, and as the Government of Madras had already imposeda tax on the sale within that State, a second levy on the selfsamegoods by the State of Andhra is unauthorised and that thereforethe threatened proceedings for assessment are incompetent. Thiscontention is clearly untenable. When the Madras Act providesfor a single levy on successive sales of yarn, it can have onlyapplication to sales in the State of Madras, as it would beincompetent to the Legislature of Madras to enact a law to operatein another State. But it is argued that S.53 of the Andhra StateAct, 1953 on its true interpretation enacts that though for political A

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Apurposes Andhra is to be regarded as a separate State, for theenforcement of laws as they stood on that date it should be deemedto be a part of the State of Madras. We do not agree with thisinterpretation. In our opinion, S. 53 merely provides that the lawsin existence in the territories which were constituted into the Stateof Andhra should continue to operate as before. In fact, by anBAdaptation Order issued on November 12, 1953, even the nameof Andhra was substituted for Madras in the Madras GeneralSales Tax Act. There is no substance in this contention.”

22. In the context of the above provisions of the ReorganisationAct, we would now reproduce relevant portion of the judgment of theCDivision Bench of High Court of Andhra Pradesh in Sri PeeraMohammad Mahamood Saheb v. The State of Andhra Pradesh(supra), which had also dealt with the situation pursuant to bifurcation ofthe State of Madras into the reorganised State of Madras and the newState of Andhra. Referring to identical provisions, it was held that Section3 of the Andhra State Act, 1953 states that the territories enumeratedDwould, from the appointed date i.e. 1[st] October, 1953, cease to be theterritories of the State of Madras and would be the territories of the newState of Andhra. Further, the laws in force in the territories in the Stateof Andhra prior to its constitution shall continue to remain in force evenafter its creation. Accordingly, one of the Acts namely the Madras GeneralESales Tax Act, 1939, would continue to apply to the new State of Andhraand the word ‘Madras’ used in said Act would be replaced/substitutedby the word ‘Andhra’. To this extent, Section 53 of the Andhra StateAct which is pari materia to Section 78 of the Reorganisation Act,2000, declares that notwithstanding the emergence of the State of Andhra,there shall be no change in the laws in force. This provision was madeFfor avoiding any hiatus and the same set of laws, therefore, would continueto be operative in the States of Madras and Andhra.

23. We have quoted the relevant portions of the judgment in thecase of Swarn Rekha Cokes and Coals Pvt. Ltd. (supra) and have nodifficulty in agreeing to the dictum as enunciated in paragraphs 26, 27Gand 28, but find it difficult to agree with the ratio recorded in paragraph29. The effect of Sections 84 and 85 of the Bihar Reorganisation Act,2000 was to ensure continuity of laws enacted by the unified State ofBihar in the new State of Jharkhand which had been created by transferof territories which earlier formed part of the State of Bihar. Thesesections incorporating a deeming fiction were to ensure that the newH

State of Jharkhand would continue to be governed by the pre-existinglaws as, otherwise, there would be a disorderly and chaotic situationwhere the new State would not be governed by any law. This is the trueeffect of the legal fiction created by Section 84 of the BiharReorganisation Act, 2000, i.e., the reorganisation of the state would notaffect the applicability of the existing laws in the state to all territoriesincluded within it before and even after the reorganisation. The saidfiction does not postulate and cannot be extended to imagine that for thepurpose of sale transactions or even for other purposes, the new statedid not have any political and constitutional existence as a separate stateand that till a new law was enacted, the two States were to be treated asone political State as it was before the reorganisation. The saletransactions which were hitherto intra-state sales being within the unifiedState of Bihar, would become inter-state transactions once the two newStates had come into existence. Provisions do not stipulate that suchtransactions would continue to be treated as intra-state transactionsnotwithstanding creation of the new State.

24. With respect to reasoning given in paragraph 30 in SwarnRekha Cokes and Coals Pvt. Ltd. (supra), we would acknowledgethat creation of a new State was an unforeseen event and could giverise to unusual situations, but this cannot be a ground and reason to treatinter-state sales between the two successor states as intra-state sales.This would be contrary to the Constitution and even the Statute i.e. theReorganisation Act. Whenever a new State is created, there would bedifficulties and, issues would arise but these have to be dealt within theparameters of the constitutional provisions and the law and not by negatingthe mandate of the Parliament which has created the new state in termsof Article 3 of the Constitution. Creation of the new political State mustbe given full legal effect. We would, therefore, respectfully overrule thecontrary observations and ratio recorded in paragraphs 29 and 30 inSwarn Rekha Cokes and Coals Pvt. Ltd. (supra) in light of the legalposition elucidated and explained above.

25. In the end, we must take note of one of the submissions madeby the private parties/assessee that under the exemption clauses eventhe inter-state transactions were entitled to some benefits. This contentionwas not raised in the writ petition or even in the pleadings before us andhas been urged and argued for the first time. We would not like to commentand decide this contention in vacuum and leave it open to the privateparties/assessee to raise this plea before the authorities in appropriate AB

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Aproceedings under the statute. In other words, the authorities wouldexamine whether the inter-state transactions were entitled to any benefitand if so, whether the private parties/assessee herein fulfil and meet therequirements to claim such benefit. We have not expressed any opinioneither way on this contention. It was pointed out that in several casesadjudication orders may have been passed and the private parties/assesseeBmay not have preferred appeals in view of the writ petitions filed bythem and the present proceedings. As recorded above, some of the privateparties/assessee had succeeded before the High Court. We wouldobserve that it will be open to the private parties/assessee to challengethe adjudication orders in accordance with law and if required, by filingCapplication under Section 14 of the Limitation Act, 1963, or otherapplicable provisions of the state enactments for exclusion of time duringwhich the proceedings have remained pending before the High Courtand this Court. In such cases, it would be appropriate for the authoritiesto exclude such time period as we are overruling the ratio laid down inparagraphs 29 and 30 in Swarn Rekha Cokes and Coals Pvt. Ltd.D(supra).

26. Accordingly, the appeals arising from Special Leave Petition(Civil) Nos. 10520 of 2013, 1334, 10165, 23297, 23592 of 2014, 6729 and16550 of 2016 preferred by the State of Madhya Pradesh and the Stateof Chhattisgarh are allowed and the Civil Appeal Nos. 460, 461, 7073 ofE2005 and 2343 of 2007 preferred by the private parties/assessee aredismissed in terms of the aforesaid observations, findings and directions.

Bibhuti Bhushan Bose

Appeals disposed of.

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