END TERM PROJECT

Interpretation of Statutes

CASE ANALYSIS ON

State of Jharkand & Ors. v. Ambay Cements & Anr.

Submitted to: Submitted by:

Prof. Debashri Sarkar Aparajita
Marwah
2017BALLB80

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 TABLE OF CONTENTS

BACKGROUND.........................................................................................................................................3
NAME & CITATION.................................................................................................................................4
BENCH.......................................................................................................................................................4
MATERIAL FACTS...................................................................................................................................5
ISSUES RAISED........................................................................................................................................7
CONTENTIONS.........................................................................................................................................8
PROVISIONS AND DOCTRINES INVOKED........................................................................................11
LITERATURE CITED..............................................................................................................................12
JUDGEMENT IN PERSONAM AND JUDGEMENT IN REM...............................................................13
CONCLUSION.........................................................................................................................................16
ACKNOWLEDGEMENTS.......................................................................................................................17

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 BACKGROUND

The case arose as an appeal preferred by the State of Jharkhand through the Commissioner of
Commercial Taxes, Ranchi, Jharkhand and five others against the judgement passed by the
division bench in the High Court of Ranchi.
The main crux of the case revolved around the Industrial Policy of 1995, which was propogated
by the Government of Bihar. It provided for certain incentives to the newly set up industrial units
in the small-scale sector. Certain clauses in the Policy allowed for an exemption from Sales Tax
on purchase of raw material as well as on sale of finished products. The amended Policy also
contained certain reliefs for the pipeline industries. The time limit for the start of commercial
production was relaxed, wherein they could start within 5 years after obtaining permission from
the State Government in the Industries Department. Later on, even newly set up small scale
industries were entitled to tax free purchase of raw material as also tax free sale of finished
products. Additionally, pipe line industrial units were mandated to seek prior permission of
the Industries Department in order to avail tax incentives.

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 NAME & CITATION

 STATE OF JHARKAND & ORS. V. AMBAY CEMENTS & ANR.

 (2005) 1 SCC 368

BENCH

Judges:
S.N. VARIAVA, DR. AR. LAKSHMANAN & S.H. KAPADIA

Counsels:
Mr. A Saran, learned Additional Solicitor General, appeared for the appellants and Mr.
Gopichand Bharukha, learned senior counsel, appeared for respondent No.1.

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 MATERIAL FACTS

The Industrial Policy of 1995, was amended to provide tax benefits to industrial units that have
obtained registration from Industries Department/Industrial Area Development
authority/Director of Industries or having obtained from competent Authority of the
Government of India Registration Certificate/Letter of Intent etc. They also had to seek
permission of the State Government in the Industries Department.

M/s Ambey Cements, a small scale industry are the respondents in this case. They had obtained
a temporary Registration Certificate from the General Manager, District Industries Centre,
Dhanbad. Thereafter, they had applied for the grant of tax exemption, to the Joint
Commissioner of Commercial Taxes(Admn.). The same was granted with the conditition,
that they would obtain prior permission from the State Government in the Industries
Department. Upon examining the application for the certificate, the Joint Commissioner
rejected the same stating that the respondents had failed obtain the prior permission from
the Industries Department, and were therefore contravening the provisions laid down in the
statutory notification.

The respondent had applied for the eligibility certificate (for tax exemption) as per the
notifications of the Industrial Policy 1995 on 2.4.2001 but had failed to obtain prior
permission of the State Government in the Industries Department. As a result, their
application for the certificate for for exemption from payment of sales tax on purchase of
raw materials and exemption from payment of sales tax on sale of finished products was
rejected by the Joint Commissioner on 11.9.2000. The grounds for rejection was the lack of
prior permission from the Department of Industries.

Aggrieved by this order of the Joint Commissioner, a writ petition was filed before the
Jharkhand High Court, by the Respondent. The same was vehemently opposed by the
appellant who filed a counter affidavit, which stated that the respondent had failed to
adhere to the statutory notifications.

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The petition succeeded and the Court ordered the authorities that the temporary
Registration Certificate issued by the General Manager, District Industry Centre can be
treated as prior permission of the State Government, the same would fulfil the criterion
under the statutory notification.

Aggrieved by the order passed the High Court in the writ petition, the State of Jharkhand
filed a Special Leave Petition before the Supreme Court of India. The Order of the High
Court was stayed on 10.7.2003.

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 ISSUES RAISED

The main issues of the dispute were:

1. Whether the temporary Registration Certificate can be treated as prior permission from
the State Government (Industries Department) for the purpose of the Notification?
2. Whether the conditions prescribed by the Authorities for grant of exemption are
mandatory for availing the same?
3. Whether the High Court can in exercise of writ jurisdiction can direct grant of exemption
contrary to the terms thereof and overlooking the statutory conditions prescribed for such
grant in the absence of any challenge to the validity of such conditions?

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 CONTENTIONS

APPELLANTS:

The main contention of the Appellant was that the High Court had erred in allowing the
respondent’s writ petition and allowing the exemption. The direction of granting the exemption
was made without seeing all the facts, the Court had overlooked that the respondent had not
complied with the statutory conditions prescribed under the Notifications issued by the State
Government in terms of the Industrial Policy 1995 for such grant. The conditions prescribed
were mandatory requirements for the grant of exemption, in view of the Appellants.
Furthermore, the Court granted the exemption to the respondent overlooking the conditions
precedent, even without any challenge to the legality and validity of those conditions. Their
final submission was that the non-compliance of the provisions laid down would directly
disentitle the respondent from grant of exemption.

RESPONDENTS:

The respondent’s main submission was that the grant of the Temporary Registration
Certificate granted by the Industries Department of the State Government sufficed the
requirement of prior permission contemplated under the Notifications. Moreover, there was
nothing in the Notifications that mandated a separate permission for being eligible for the
incentives/exemption granted under the said Notifications. It was further submitted that the
Department of Industries, government of Bihar had promulgated that Industrial Policy with a
view to grant several incentives including the exemption of sales tax to aim towards boosting
growth and development of industries in the State. This policy promulgated by the State was
adopted in its entirety by the State of Jharkhand along with all Notifications and Directions
issued pursuant to it.

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The Registration Certificate issued by the General Manager, District Industries Center for
production of Cement was also presented and it was proven that it was valid for a period of five
years. And the respondent would be exempt for the same time frame, since the certificate
constitutes the requisite prior permission of the State Government. The relevant part of the
notification was referred to, it is as follows:
“1. In place of the present entries of Clause 1 (a) of the aforesaid notification the following
entries should be substituted:
1A. By a new Industrial unit is meant such unit in which the production work has
commenced between 1st September 1995 and 31st August, 2000 and which has got sanction
letter/advertisement letter/letter of intent/Registration Certificate from Industrial
Department/Industrial Area Development Authority/Director of Industries and Competent
Officer of the Government of India:
But all such units in which 500 crores or more capital will be invested for expansion then
they shall be considered as new units for the purpose of this Notification;
But it is also that for the purpose of this Notification all those units shall be considered as
new units which has commenced production within 5 years after taking prior permission
from the Industry Department of the State Government before 31st August, 2000 even if
those units which commence production after 31st August, 2000.”

It was further submitted that that the respondent has set up its establishment in the year 2000 and
started its commercial production from 2.4.2001. Likewise the permanent Registration
Certificate was obtained by them on 30.4.2001 and it also affirmed that they commenced
production on 2.4.2001. It was only after the commencement of commercial production, that the
respondent had applied for the exemption certificate on the requisite application form for
granting sales tax exemption on purchasing raw materials and on sales of finished goods on
2.4.2001. It was also submitted that after the filing of the application for the exemption before
the Deputy Commissioner of Commercial Taxes, the case of the respondent was recommended
to the Joint Commissioner of Commercial Taxes (Admn.), by the said Deputy Commissioner
after a perusal of all relevant documents. Additionally, the order passed by the Deputy
Commissioner was heavily reliant on the inspection of the respondent’s premises, only after a
thorough perusal of the documents by the Assistant Commissioner of Commercial Taxes. It is

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obvious from the Order passed by the Deputy Commissioner of Commercial Taxes, that he paid
due consideration to the second proviso to S.O 58 dated 2.3.2000, and even affirmed that the
temporary Registration Certification issued by the General Manager, District Industries Center,
Dhanhad, under the provisions of the Industrial Policy, was sufficient in terms of prior
permission required under the Statutory Notification.

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 PROVISIONS AND DOCTRINES INVOKED

The following provisions were referred to in the matter:

Article 136 in The Constitution Of India 1949

“136. Special leave to appeal by the Supreme Court

1) Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion, grant
special leave to appeal from any judgment, decree, determination, sentence or order in any
cause or matter passed or made by any court or tribunal in the territory of India.

2) Nothing in clause ( 1 ) shall apply to any judgment, determination, sentence or order

passed or made by any court or tribunal constituted by or under any law relating to the
Armed Forces.”

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 LITERATURE CITED

The following judgements were mentioned and discussed before the Court:

The respondent used the Supreme Court Cases of Bajaj Tempo Ltd., Bombay vs. Commissioner
of Income Tax, Bombay City-III, Bombay, (1992) 3 SCC 78, Commissioner of Sales Tax vs.
Industrial Coal Enterprises, (1999) 2 SCC 607 and State of Bihar & Ors. vs. Suprabhat Steel
Ltd. & Ors., (1999) 1 SCC 31 to establish the point that with regards to taxing statutes,
specifically the provisions dealing with concessional rate of tax, ought to be subject to a liberal
construction.

However, the respondent’s submission was not accepted by the Court. The Court ultimately
ruled that provisions of exemption clauses are required to be construed strictly, a broad and
liberal interpretation will not be suitable. Secondly, if the condition precedent for the exemption
resulted in alteration or change due to any subsequent event, the exemption would no longer be
in operation.

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 JUDGEMENT IN PERSONAM AND JUDGEMENT IN REM

After duly considering both sides of the dispute, the Supreme Court ruled in favour of the
appellants stating that the certificate issued by the Industries Department cannot be considered as
prior permission within the ambit of the amended Statutory Notification. And the obtaining of
such a certificate does not fulfil the condition precedent to avail the exemption on tax. According
to the Court, it was evident from the language of the notifications that a separate prior permission
was needed from the Industries Department before 31.8.2000, in addition to the temporary
registration. And only such separate permission would fulfil the mandatory criteria in order to
avail the tax exemption laid out for any unit.

Therefore the respondent’s contention that the temporary registration certificate issued by the
Industries Department should be construed as prior permission was wholly incorrect. The
notification in question mandates a separate prior permission from the Industries Department
before 31.8.2000, and the same is a condition precedent for any unit to be considered for
eligibility for the tax exemption, there is no scenario where this requirement can be overridden.
Since it was already admitted by the respondents that they have not obtained prior permission of
the State Government in the Industries Department, the respondent’s industrial unit cannot be
considered eligible for the tax exemption envisaged in the statutory notifications. The Court said:

“In our opinion, the application for exemption of the respondent has been rightly rejected by
the authorities concerned for non-fulfilment of the statutory obligation on the part of the
respondent by not obtaining prior permission of the State Government. In our view, the
condition prescribed by the authorities for grant of exemption are mandatory for availing
the exemption and the High Court exercising jurisdiction under Article 226  of the
Constitution cannot direct the grant of exemption in favour of the respondent overlooking
the statutory conditions prescribed for such grant and that too in the absence of any
challenge to the validity of such condition. The observations made by the High Court that the
grant of temporary registration certificate in favour of respondent No.1 was sufficient and
the same was equivalent to prior permission as prescribed under the Notifications is not

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correct. We are of the opinion that the High Court has failed to appreciate the provisions
laid down in the statutory Notifications S.O. 57 and S.O. 58 dated 2.3.2000 which expressly
provide for obtaining prior permission separately. Non-compliance thereof would disentitle
the respondent from grant of exemption.”

It was noted that the year of establishment of the respondent’s unit was 2000, and they only
commenced production in 2001. The Bihar Industrial Policy Resolution, 1995 and the
statutory Notification issued by the Commercial Tax Department, very evidently defined
new production units as those which commenced production between between1.9.1995 and
31.8.2000 and were granted license/memorandum/letter of intent or registration certificate
from the competent industries Department or Industrial Area Development Authority or
Directorate of Industry or competent authority of the Government of India. The amended
notifications thus mandated three necessary preconditions, for the purposes of availing
exemption from payment of sales tax on purchase of raw materials and exemption from
payment of sales tax on sale of finished products. These are as follows:

“(I) Industrial unit should obtain registration certificate from the competent Authority of the
Industries Department.

(II) It should also have obtained prior permission from the State Government in the
Industries Department before 31st August, 2000.

(III) Industrial unit should commence production within 5 years from the date of obtaining
prior permission.”

Any exception or exemption provision in law, especially in a taxing statute cannot be

construed liberally. It has to be construed strictly. Moreover, the Court cannot exceed the
bounds of the notification/provision, the conditions prescribed in the policy as well as the
exemption notifications have to be mandatorily adhered to. The failure to comply with

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condition precedent, means that the respondent cannot avail the tax exemption and his
petition is liable to be dismissed.

While it is absolutely essential to follow a mandatory rule, in case of a directory rule

substantial compliance might be sufficient. The court stated that: “Whenever the statute
prescribes that a particular act is to be done in a particular manner and also lays down that
failure to comply with the said requirement leads to severe consequences, such requirement
would be mandatory. It is the cardinal rule of the interpretation that where a statute
provides that a particular thing should be done, it should be done in the manner prescribed
and not in any other way. It is also settled rule of interpretation that where a statute is penal
in character, it must be strictly construed and followed. Since the requirement, in the instant
case, of obtaining prior permission is mandatory, therefore, non-compliance of the same
must result in canceling the concession made in favour of the grantee-the respondent
herein.” 

Hence the order of the High Court was set aside and the appeal succeeded.

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 CONCLUSION

A cardinal principle of interpretation was upheld by the Court. The appeal succeeded. The Court
did not allow the respondent’s unit to be eligible for the tax exemption provided under the
notification, on the grounds that they had not fulfilled the condition precedent, since they had
failed to obtain prior permission. And likewise, their certificate of temporary registration did not
constitute prior permission. The Court upheld that taxing statutes (especially in terms of legal
exceptions or exemption provisions) cannot be construed liberally.

While mandatory rule must be strictly observed, substantial compliance might suffice in the
case of a directory rule. Whenever a statute makes a provision for something, it has to be
followed exactly as it is provided, i.e. the act is to be done in a particular manner, as
provided in the statute. The failure to adhere to the statutory requirements would lead to
severe consequences, since the requirement was mandatory in nature.

In this case, the respondent applied for exemption and was directed to obtain prior
permission from the Industries Department within the stipulated time-frame, however their
ignorance of this direction and failure to obtain the permission proves that they did not meet
the conditions that were stipulated in the statutory notification. They thus, breached the
statutory obligation which was binding on them. In the Court’s opinion, since the
requirement was mandatory in nature, their non-compliance ought to result in revoking the
benefit they were going to avail.

“it is the cardinal rule of interpretation that where a statute provides that a particular
thing should be done, it should be done in the manner prescribed and not in any other
way. It is also settled rule of interpretation that where a statute is penal in character, it
must be strictly construed and followed.”
 

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 ACKNOWLEDGEMENTS

I would like to express my heartfelt gratitude to my teacher,

Prof. Debashri Sarkar
who gave me the golden opportunity to do this enriching project on this case study which
has helped me enhance my knowledge exponentially about the concept; understand the
scope in totem; learn the applicable laws and correlate the present state of affairs
worldwide as well in our country.
Her helpful insights in this subject have guided me to make this project.

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