CHAPTER - II

Constitutional Provisions and the

Indirect Taxes

1. Scheme of the Constitution and Indirect Tax

For any statute to be legally enforceable in India, it has to

be first Constitutional. The constitutionality of the statue is

judged on the facts that there must be specific provision in the

Constitution of India for the enactment of the statute.

There is one categorical and specific provision under

Article 265 of the Constitution of India that, “No tax shall be

levied or collected except by authority of law”. 1 The Hon’ble

Supreme Court of India has held that the this provision under

Article 265 of the Constitution of India is applicable not only for

levy but also for the collection of taxes and the expression

“assessment” within its compass covers both the aspects

carried out by the executive functionary. 2 This provision has

withstood the tests of legality in later judgments also.

1
V. N. Shukla’s, Constitution of India Eleventh Edition, 2008, Eastern Book
Company, Lucknow, p 778.
2
Chottabhai v. Union of India, 1962, SCR Supl., (2), p. 1006.
19
 Therefore, it is required that whole of the process of

taxation must follow the procedures which are valid under the

law and must adhere to law i.e. substantive one as well as

procedural one too. Therefore, in other words it is provided in the

Constitution of India that every step should be taken to ensure

that levy and collection of the taxes is strictly in accordance with

law – not only substantive one but the procedural law, as well.

Hon’ble Supreme Court of India has also held that an act done in

violation of constitutional mandate is void and no right flows out

of that void act to the State.3 It has also been held that

Constitutional right of citizens should not be watered down,

however desirable the end result of a particular case may be and

denial of right to recover unlawfully collected tax is denial of the

protection given to a citizen by Article 265 of the Constitution. 4

Further, it has been held that because of inherent

complexity of fiscal adjustments of diverse elements in the field

of tax, legislature is permitted a large discretion in the matter of

3
Mafatlal Industries Ltd. v Union of India , 1997, ELT, p 0247 S.C.
4
Supra note 2.
20
classification to determine not only what should be taxed but

also the manner in which tax may be imposed.5

The Constitution of India is Federal in nature. Powers of

the Central government as well as those of the State

government have been bifurcated. There are three lists to the

Seventh Schedule of the Constitution, the first list is known as

Union List, the second list is known as State List and the third list

is known as Concurrent List.

In respect of matters given in Union list, only Parliament

has the power to enact the law. In respect of matters given in

State List, only the State Legislatures have the power to make

the law. And in respect to Concurrent List both the Central

government and the State governments have the power to make

the law. 6

However, in relation to matters concerning Concurrent List

if there is any conflict or repugnancy in the laws passed by the

Parliament and the State Legislature, the law passed by the

5
Gujarat Ambuja Cements Ltd. v. Union of India, 2005, ELT, p 33 S.C.
6
See Article 246 of the Constitution of India, supra note 1, p 732.
21
Parliament shall prevail over the law passed by the State to the

extent of that repugnancy, conflict or inconsistency.7

There are 97 entries in the Union List8, 66 entries in the

State List9, 47 entries in the Concurrent List10. However, the

entries in all the three lists are generally given in the wide

possible terms. Not only that as the matters concerning those

lists are to be taken into consideration for framing law in future

by different wings, it is utmost necessary to give widest

amplitude to the words of different entries. However, as it is

always found that there is overlapping, the doctrine of ‘pith and

substance’ is applied to find out the true scope of the words used

in different entries.

The doctrine of the ‘pith and substance’ means that

whatever is specifically provided in a particularly entry prevails

over anything, though incidental or connected does not fall

within the scope of that entry if the said incidence of the matter is

specifically covered by any other entry in other list.

7
See Article 254 of the Constitution of India, supra note 1, p 756.
8
Id., p 1075.
9
Id., p 1079.
10
Id., p 1081.
22
 2. Competency of Parliament to pass the law relating

Indirect Taxes:

The relevant entries in these three lists for collection and

levy of indirect taxes by the Central government are provided in

the Union list.

(i) Customs Duty

The customs laws are enacted with an authority drawn

from the constitution. It is seen that entry 83 of the Union list11

provides for the levy and collection of duties of customs including

export duties. These taxes are indirect taxes as it has been held

that the Customs duties are, in their essence, trading taxes and

may be said to be more concerned with the commodity in

respect of which the taxation is imposed than with the particular

person from whom the tax is extracted.12

(ii) Central excise Duty

Similarly, the Central Excise duty is also collected with

authority of the Constitution. It is seen that entry 84 of the Union

11
Id., p 1078.
12
Attorney General of British Columbia v. Kingcome Navigation Co. (1934) A.C. p
45.
23
List13 provides for the levy and collection of another important

indirect tax i.e. duties of excise on tobacco and other goods

manufactured or produced in India except –

(a) Alcoholic liquors for human consumption;

(b) Opium, Indian hemp and other narcotic drugs and

narcotics,

But including medicinal and toilet preparations containing alcohol

or any substance included in sub-paragraph (b) of this entry,

(iii) Service Tax

Although, entry 92–c of the Union List14 provides for the levy

and collection of taxes on services but this entry has been

included recently and the date from which it will be effective is to

be notified later on. Therefore, this tax is still collected as per

Finance Act, 1994. Anfter the imposition of this tax, its validity on

various counts i.e. levy, mode of levy, collection etc. was tested

in various cases before the courts but the same has been

approved to be correct but for few shortcomings noticed in the

judgments and the most significant on this is case of Laghu

13
Supra note 1, p 1078.
14
Id., p 1078.
24
Udyog Bharati. 15 These shortcomings have been dealt with by

passing of various legislations by the parliament with

retrospective effect.

3. Constitution of Tribunals and its legislative

competence

Due to rising number of pending cases in the courts of law,

a need was felt for the speedy and alternate machinery for the

redressal of the disputes. Therefore, part XIV-A16 was added to

enable Parliament to constitute administrative tribunals for

dealing with the disputes regarding recruitment and condition of

service of persons appointed to public service by the 42nd

Amendment to The Constitution of India 1976. Parliament may

by law provide for the jurisdiction, power and authority of such

tribunals and prescribe the procedure to be followed by them.17

This Article provided for the exclusion of jurisdiction of all courts

except that of the Supreme Court under Article 13618. It was

further provided that similar tribunals may be established with

respect to matters such as tax, foreign exchange, industrial or

labour disputes, land reforms, elections of legislative bodies, etc.

15
Laghu Udyog Bharati v. Union of India, AIR, 1999, SC, p 2596.
16
Supra note 1, p 904.
17
Ibid.
18
Id., p 501.
25
 While administrative tribunals falling within the scope of

Article 323-A19 can be established only by Parliament, tribunals

under Article 323-B20 may be established both by Parliament and

State Legislatures with respect to matters falling within their

legislative competence. Again, while under Article 323-A only

one tribunal for the Union and one for each State or two or more

States may be established under Article 323-B, a hierarchy of

tribunals may be created. The parliament, therefore, has powers

to make laws, to provide for the adjudication or trial by tribunals

of any disputes, complaints, or offences with respect to all or any

of the matters of levy, assessment, collection and enforcement

of any tax under Article 323B(2)(a).21 The Customs Excise and

Service Tax Appellate Tribunal earlier Customs Excise and Gold

(Control) Appellate Tribunal was also established for these

purposes in the year 1982.22 It is important to mention here that

Customs Excise and Gold (Control) Appellate Tribunal now

Customs Excise and Service Tax Appellate Tribunal has been

established under section 129 of the Customs Act, 196223.

19
Id., p 904.
20
Ibid.
21
Ibid.
22
CEGAT Notification No. 1/CEGAT/82 dated 25-10-1982, For reference see R.
K. Jain’s, Central Excise Law Manual, Golden Jubilee Edition, 2010 (March),
Centax Publication Pvt. Ltd., p 3.12.
23
Ibid.
26
 Therefore, there are two types of Tribunals, i.e. one formed

under Articles 323A or 323B of the Constitution of India and the

other ones formed under any statute. The Tribunals formed

under Articles 323A or 323B of the Constitution of India are high

power Tribunals as compared to the tribunals established under

any statute other than the Constitution of India. But nevertheless

the functioning of both type of tribunals in effect is similar for all

purposes.

The Constitution of India further provides for the exclusion

of the jurisdiction of all courts except the jurisdiction of the

Supreme Court of India under Article 13624 of the Constitution of

India with respect to all or any of the matters falling within the

jurisdiction of the said tribunals.25

This exclusion of the jurisdiction of the High Courts was

propounded as theory of ‘alternative institutional mechanisms’ to

defend the establishment of Administrative Tribunals which were

conferred jurisdiction over service related matters. In respect of

24
Supra note 1, p 501.
25
See Article 323-B(3)(d) of the Constitution of India. Id., p 904.
27
the grave concern with the increasing pendency of litigation

before the various High Courts in India, the Hon’ble Supreme

Court of India accepted the policy of choice of creation of

separate administrative tribunals which were characterized as

‘substitutes’. The Hon’ble court even went one step further and

approved the provisions of exclusion of the ‘judicial review’ by

the High Courts in these matters.26

This position was later on reconsidered and was changed

and it was finally resolved by the Hon’ble Supreme Court of India

that judicial review is part of basic structure of the Constitution,

and declared that this clause 3(d) of Articles 323-B27 was

unconstitutional to the extent that excluded the jurisdiction of the

High Courts under Articles 226 and 227 and that of the Supreme

Court under Article 32.28 Therefore, the judicial remedies under

Articles 32, 226 and 227, wherever appropriate, are now

available against the decisions of all tribunals constituted under

Article 323-A and 323-B. Also Certain other exceptional

circumstances warranting interference by the High Court under

Article 226 recognised by judicial pronouncements are, the

26
S.P. Sampath Kumar v. Union of India, 1985,SCC, (4), p 458.
27
Supra note 1, p 905.
28
L. Chandra Kumar v. Union of India, AIR,1997, SC, p 1125.
28
decision is mala fide, the decision is prompted by extraneous

considerations, the decision is made in contravention of

principles of natural justice or any constitutional provisions.29

4. Concluding Remarks

Since the tribunals started functioning and replaced the

High courts, the need arose that there is necessity that Law

Commission looked into their functioning and it was also

necessary that they were in no way less independent and

competent than the High Courts. Therefore, it was necessary

that they were presided over by a judicial member of the rank of

a sitting or retired judge of a high court. Even other members, as

far as possible, could be taken from amongst the judges.

Induction of the judges would ensure independence, efficiency

and fair administration of justice and also confidence of people in

them. This was necessary because the only available remedy

against the decision of the Tribunals under Article 136 could not

be easily availed by every one.30

29
Basheer Ahammed v. Collector Of Custom & Central Excise, 1992, ELT, p 583
Kerala.
30
R. K. Jain v. Union of India, AIR, 1993, SC, p 1769.
29
 It has been observed by even the hon’ble High Court of

Karnataka that a remedy by way of appeal to Supreme Court

becoming nugatory on account of high costs even for an

economically viable and profit making company, this may be

indicative of failure of Indian judicial system and amounts to

denial of constitutional rights of citizens of India as enshrined in

Constitution.31 Moreover, the Constitution guarantees free and

independent judiciary and the constitutional scheme of

separation of powers can be easily and seriously undermined, if

the legislatures were to divest the regular courts of their

jurisdiction in all matters, entrust the same to newly created

Tribunals which are not entitled to protection similar to the

constitutional protection afforded to the regular Courts.32

-o-o-o-o-o-

31
Premier Irrigation Equipment Ltd. v. Union of India, 1998, ELT, p 29
(Karnatka).
32
Pareena Swarup v. Union of India, 2008, ELT, p 210(SC).
30