Industrial Areas Fall Within Definition Of "Local Areas" Under Orissa Entry Tax Act: SC Upholds Decisions Of Orissa & Allahabad HCs

The Supreme Court while dealing with a civil appeal filed by OCL India Limited upheld the decisions of the Orissa and Allahabad High Courts and stated that the industrial areas fall within the ambit of the definition of "local areas" as per the Orissa Entry Tax Act, 1999 and the relevant laws and provisions of the Constitution.

The Bench constituting CJI Uday Umesh Lalit, Justice S. Ravindra Bhat and Justice J.B. Pardiwala held –

"The Court is of the opinion that the argument – made by counsel that the levy could not be retrospective, in the facts of this case, is insubstantial. The earlier effort to tax the assessee by demand led to petitions which quashed them – where the legal regime was that some compensatory element had to be disclosed. With the object of curing this defect, the fresh law was enacted by the State of U.P., with retrospective effect which on the application of principles enunciated by this Court, in Sri Prithvi Cotton Mills v. Baroda Borough Municipality & Ors.24, is valid."

The Bench further held –

"In view of the foregoing discussions, this Court finds no reason to interfere with the decision of the Orissa and Allahabad High Courts. The special leave petition and appeals are consequently dismissed as unmerited without any order on costs."

Advocate Braj K Mishra appeared on behalf of the appellant i.e., OCL India Ltd. while Senior Advocate Rakesh Dwivedi appeared for the respondent, i.e., the State of Orissa.

Facts of the case –

The State of Orissa enacted the Orissa Entry Tax Act, 1999 which defined the local area so as to include industrial townships among other areas including areas within the industrial township constituted under Section 4 of the Orissa Municipal Act, 1950, thereby subjecting goods entering into such areas, to entry tax. Section 4 of the 1950 Act provides that the State Government can constitute (a) a notified area council for every "transitional" area; (b) a municipal council for every smaller urban area; and (c) a municipal corporation for every larger urban area.

However, the proviso to Section 4(1) indicates that no such council or corporation: "shall be constituted in any urban area or part thereof which the Governor may, having regard to the size of the area under Municipal services being provided or proposed to be provided by an industrial establishment in that area and such other factors as he may deem fit, by notification, specified to be an industrial township."

M/s. OCL India Ltd. and Steel Authority of India Ltd. (SAIL) impugned the Orissa Act, especially the levy of entry tax. SAIL contended that the imposition of entry tax violates Article 301 of the Constitution. The Court held that whenever a law is impugned as violative of Article 301, the court has to consider whether the enactment facially or patently indicates quantifiable data based on which compensatory taxes sought to be levied. The High Court by its impugned judgment dismissed SAIL's writ petition holding that the Orissa entry tax did not violate any constitutional prohibition and was in conformity with Article 304(a) of the Constitution.

OCL challenged the levy imposed upon it contending that by virtue of certain notifications dated 23.12.1998, the industrial townships set up by it were excluded from the local limits of the Rajgangpur Municipality. It argued that the inclusion of its industrial township as a local area by virtue of the definition of that term in the Orissa Act was unconstitutional. It also contended that the agreement entered with the Municipal Council, in regard to the provision of services and the nature of services provided, its industrial township could not be characterised as a local area. It also relied upon Article 243-Q of the Constitution the object of which was to exclude from within the purview of municipalities and municipal bodies, industrial establishments.

The Writ Petitions of both OCL and SAIL were rejected by the Orissa High Court. Hence, the appeal was filed by the appellant before the Apex Court.

The issue before the Supreme Court was whether the exclusion of an industrial area from the limits of municipal councils or municipalities under the State laws in the exercise of a statutory power or by virtue of a declaration under proviso to Article 243-Q, would result in that area ceasing to be a "local area" within Entry 52 of List II and consequently precluding State from levying and collecting entry tax from those areas.

The Court analysed Entry 52, by first considering the historical context in which it was enacted (for which it traced the previous legislation i.e., Entry 49 of List II of the Seventh Schedule to the Government of India Act, 1935). The Court previously held that etymologically "local" is "relating to" or "pertaining to" a place.

The Supreme Court in the above context noted that "It is immediately clear that in all the decisions, which the appellants relied upon, (save Diamond Sugar Mills (supra) and Shaktikumar M. Sancheti (supra)) the question which had arisen for consideration was whether after the exclusion of an industrial area, either under the provisions of some state law, or in terms of Article 243-Q, such an industrial area was part of a municipality, or a panchayat."

It was further noted by the Court that "In Saij Gram Panchayat (supra), the court rejected the argument that exclusion of an area, which was previously declared as an industrial area, from a panchayat, by virtue of a notification, was contrary to the Gujarat Panchayats Act, 1961 or Article 243-Q of the Constitution of India. Likewise, in MGR Industries (supra), the court held that without a notification under proviso to Article 243-Q, mere declaration of an area as an industrial area or township, did not result in the exclusion of that area, from the coverage of a panchayat. In NOIDA (supra), the question which arose for decision was whether the NOIDA was a local authority for claiming income tax exemption status, under Section 10 (20) of the Income Tax Act, 1961. This Court held that the exclusion of an area from the limits of a municipality ipso facto did not result in its eligibility to seek tax exempt status, under that act. This Court's observations about the effect of Article 243-Q are significant."

The Court also observed –

"To this Court, it is plain that the introduction of Part IX-A by the 74th Amendment to the Constitution was with the intention of strengthening units of local self-government, and ensuring that they were subjected to minimum democratic standards. The proviso to Article 243-Q(1), therefore, has to be read in context, that industrial areas and estates, administered in terms of some legal regime, where some municipal services were provided, could be exempt from the requirements spelt out in Part IX-A of the Constitution."

The Court while rejecting the contentions made by the appellants held –

"The application of state laws regarding industrial areas, therefore, squarely falls within the expression "description of a body constituted for the purposes of local affairs of the State" since no one denies that industrial areas are also part of the State. The record in the present case indicates that the areas excluded from the municipality in OCL's case comprise of several villages. The material on record placed by SAIL also acknowledge that not less than 24,000 houses exist in its industrial area. Likewise in the case of HINDALCO as also SAIL indicate that the industrial estates or area cover large areas. If one keeps these facts in mind, there can be no doubt that such areas would fall within the description "local areas." Reliance placed upon Diamond Sugar Mills (supra) by the appellants in this case is misplaced because in that decision, the Court had to deal with a different set of facts."

Hence, the Apex Court concluded –

"It is also a cardinal rule of interpretation that words of a taxing statute should be read in their ordinary, natural, and grammatical meaning. Further, in construing the words in a constitutional enactment that confers legislative power, a liberal construction should be placed upon the words so that they may have effect in their widest amplitude. The object of the levy, i.e., entry tax, is the regulation of entry of goods in a regular area for consumption, i.e., manufacture, use or sale. There is no dispute that entry of goods into an industrial area or estate is for their use for manufacturing or for processing or for the purposes of their delivery as their ultimate point of destination, i.e. for the purpose of their "consumption, use or sale" within that area. It could even be that the goods enter within the industrial area or estate, as the ultimate point of destination for their use. In any case, the levy would be attracted because the incidence is the entry into the local area."

Accordingly, the Court dismissed the appeals and special leave petition.

Cause Title – M/s. OCL India Ltd. v. State of Orissa & Ors.

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