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Union of India v. M/S. N.S. Rathnam & Sons

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 1795 of 2005)Decided 29 Jul 2015
Civil Appeal No. 1795 of 2005
Justice A.K. Sikri · Justice N.V. Ramana

Background

The respondent, a ship-breaking business, imported a foreign vessel to break up and sell as scrap, and paid customs duty on it at a lower rate than Rs. 1,400 per Light Displacement Tonnage (LDT). Two 1987 excise exemption notifications exempted excise duty on such scrap only for importers who had paid customs duty at the Rs. 1,400/LDT rate, excluding those like the respondent who paid at a lesser rate. The respondent challenged this classification as arbitrary and discriminatory; a Division Bench of the High Court agreed and extended the exemption to the respondent's category, and the Union of India appealed to the Supreme Court against that ruling.

Decision Breakdown

The Supreme Court held that while the legislature has wide latitude in tax classification, a classification must still have a real and substantial relationship to the object of the notification and cannot be arbitrary: here, excluding importers who paid a lesser (but still lawful) customs duty rate had no reasonable basis distinguishing them from those who paid the higher rate, especially since the shortfall could simply have been collected as a differential duty. The Court upheld the High Court's view that the respondent's category was also entitled to the exemption, but modified it to direct that the customs duty already paid by the respondent be credited, with excise duty payable only on the balance, bringing the two categories to parity rather than giving an unconditional windfall exemption. The appeal was accordingly disposed of in these modified terms, with no order as to costs.

Lesson Learnt

A government notification that grants a tax exemption to one category of taxpayers while excluding a similarly-situated category, without a real and substantial justification for the distinction, can be struck down or modified by courts as violating the constitutional guarantee of equality (Article 14), even in tax matters, where legislatures normally get wide deference.

Official source (sci.gov.in)View Judgment (PDF)

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