Holding

The exemption under item 7 of the Kerala General Sales Tax Act, 1963 must be interpreted with the definition of "cotton fabrics" as it stands at the relevant time, i.e., including the 1969 amendment, so PVC cloth is exempt.

Summary

The State of Kerala appealed against the Agro Industrial Trading Corporation, which claimed exemption from sales tax on PVC cloth under item 7 of the Kerala General Sales Tax Act, 1963. The issue was whether the definition of "cotton fabrics" referred to in the Act, taken from the Central Excises and Salt Act, 1944, should be fixed as of the Act's commencement (1‑April‑1963) or should incorporate later amendments, notably the 1969 amendment that expanded the definition to include PVC‑coated fabrics. The Supreme Court held that the 1963 Act merely references the 1944 definition and therefore the definition evolves with subsequent amendments; it is not a static incorporation. Consequently, the exemption applies according to the definition as amended in 1969, covering PVC cloth for the assessment years 1971‑72 and 1972‑73. The appeal was dismissed.

Issues considered

Whether the reference to the 1944 Central Excises and Salt Act in the Kerala General Sales Tax Act, 1963 constitutes incorporation or mere reference.
Whether the definition of "cotton fabrics" for the purpose of sales‑tax exemption should be fixed at the time of the 1963 Act or include later amendments such as the Finance Act, 1969.
Whether applying the later amendment would render the 1963 Act unworkable or constitute an abdication of legislative function by the Kerala legislature.

Legislation cited

Additional Duties of Excise (Goods of Special Importance) Act, 1957s. 2(c), s. 3
Central Excises and Salt Act, 1944s. First Schedule Item 19
Central Sales Tax Act, 1956s. 14, s. 15
Finance Act, 1969s. Amendment to Central Excises and Salt Act, Item 19
Kerala General Sales Tax Act, 1963s. 9, s. Third Schedule Item 7
Kerala General Sales Tax (Second Amendment) Act, 1967s. Amendment to Third Schedule Item 7

Subjects

statutory interpretationreference vs incorporationsales tax exemptioncotton fabrics definitionPVC clothKerala General Sales Tax ActCentral Excises and Salt Actlegislative intentArticle 286 Constitution of India

Judgment

STATE OF KERALA
A
v. .
ATTESEE,(AGRO INDUSTRIAL TRADING
. CORPORATION) .

OCTOBER 27,, 1988
B
[SABYASACHI MUKHARJI ANDS. RANGANATHAN, JJ.]

Kera/a General Sales Tax Act-Section. 9 and Third Schedule
Item 7-'Cotton fabrics'-Definition of-'As defined in Central Excises
and Salt Act 1944'-Subsequent amendment of definition in Central
Excises and Salt Act-Whether to be taken note of in construing defini-
tion of 'Cotton fabrics' in Sales Tax Act-PVC cloth-Exemption of c
from tax.

Statutory Interpretation-Legislation by incorporation or
reference--Principle of interpretation.
D
Section 9 read with Third Schedule item 7 of the Kerala General
Sales Tax Act 1963 granted exemption from sales tax to certain items
including cotton fabrics. 'Cotton fabrics' was defined as having the
same meaning as assigned to it in item 19 of the First Schedule to the
Central Excises and Salt Act, 1944. This definition of 'cotton fabrics' in
1944 Act was amended in 1969 by the Finance Act 1969. E

In 1957, Parliament enacted the Central Sales Tax Act, 1956 and
Additional Duties of Excise (Goods of Special Importance) Act, 1957
affecting the levy of sales tax and excise duty. Definition of 'cotton
fabrics' occuring in the aforesaid Acts was also related to its definition
under the 1944 Act. F

The respondent-assessee was manufacturing PVC cloth, an item
of goods which was clearly covered by the amended definition but,
perhaps, not by the original one. He claimed exemption from saies tax
in respect> of assessment years 1971'72 and 1972-73.
G
On a reference made to the High Court under the 1963 Act, it
observed• that the concept of 'cotton fabrics' in the Central Excises and'
Salt Act seemed to be integrally linked with the provisions of the Gene-
ral: Sales Tax Act (the Act unde~ which the levy of sales tax was gover-
ned, prior to enforcement of the 1963 Act), and that it would not be
justified. in regarding the latter Act as unaffected by the growing con-· H
601
602 SUPREME COURT REPORTS [ 1988] Supp. 3 S.C.R.

A cept of the term 'cotton fabrics' in the Central Excises and Salt Act, and
that unless the extended definition of the .Central Excises and Salt Act is
imported into the Sales Tax Act, the latter Act would become unwork-
able and ineffectual.

In· the appeals by certificate to this Court, it was submitted on
B behalf of the State-appellant that the PVC cloth manufactured by
respondent was not entitled to exemption from sales tax if the earlier
definition of the 1944 Act, before the amendment, was to apply, and
that the 1963 Act has incorporated in its Third Schedule the definition
of the 1944 Act as it stood at the time of its enactment and that this
incorporation is unaffected by the subsequent changes made in the'l944
Act, that the concept of 'cotton fabrics' in the 1944 and 1963 Acts were
c not integrally linked. and that it is not appropriate to say that unless the
extended definition of the former were imported into the latter, the
latter Act would become unworkable and ineffectual.

On the question whether the exemption given to 'cotton fabrics' in
D
item 7 should be restricted to 'cotton fabrics' as defined in the 1944 Act
as it stood on 1.4.1963 or whether it would also cover goods falling
under the said definition after Its amendment in 1969.

Dismissing the appeals, this Court,
E HELD: (1) It would be correct to say that the 1963 Act brings in
the definitions of the 1944 Act by way of reference or citation and not by
way of incorporation. For a reading of the Act shows that the Act
intended to confer exemption on a number of goods set out in the
Schedule. Of these, since items 5 to 7 are defined in the 1944 Act, the
Act referes to those definitions to ascertain the scope of these items.
F There are no express words used by the statute which will justify an
inference that the intention was to incorporate those definitions, as
standing on that date into the 1963 Act. [613A-C]

Secretary of State v. Hindustan Cooperative Insurance Society
G Ltd., [1931] 58 I.A. 259; Collector of Customs v. Nathella Sampathu
Chetty & another, [1962] 3 SCR 786; Ram Sarup v. State, [1963] 3 SCR
858; Ram Kirpalv. State, [1970] 3 SCR 233; New Central Jute Mills Co.
Ltd. v. The Assistant Collector, [1971] 2 SCR 92; Bhajva v. Gopikabai,
[1978] 3 SCR 561; Mahindra & Mahindra Ltd. v. Union, [1979] 2 SCR
1038 and Western Coal Fields v. Special Area Development Authority,
H [1982] 2 SCR 1, referred to.
r STATE OF KERALAv. A.l.T.C. 603

(2) 'Silk fabrics' as defined in item 20 of the 1944 Act was
A
included in 1961 in the CST Act and the 1957 Act. The fact that 'cotton
fabrics' though listed as item 12 in the Scltedule to the 1944 Act was not
brought into the list in s. 14 till I.10.1958 or that 'silk fabrics' was
dropped from the list ins. 14 w.e.f. 11.6.1968 though it continues in the
Schedule to the 1944 Act does not alter the position that these three Acts
are inter-connected and that certain goods taken out from the Schedule B.
to the 1944 Act were to be subjected to the special treatment outlined in
the CST Act and the 1957 Act. l615A-BJ

(3) Though the 1963 Act referred only to the definitions in the
1944 Act, the entries in the Schedule have to be juxtaposed into the
broad pattern or scheme evolved by the 1956-57 enactments. Even
assuming that the reference in the items of the Schedule to the defini- c
tions in the 1944 Act is by way of incorporation and not reference, one
cannot escape the conclusion that the circumstances are covered by the
exceptions outlined •in the decision of this Court in State of Madhya
Pradesh v. Narasimhan, [1976] 1 SCR 6. They certainly fall within the
scope of exception (a) mentioned therein and also fall within exception D
(c) if 'unworkable and ineffectual' are read to take in also 'unrealistic
and impractical'. [616D-E]

(4) The 1963 Act on a proper construction, does indicate a policy
that certain items which are subject to additional excise duty should be
left out of sales tax levy except in cases where there is a specific indica- E
tion or provision of the Act to the contrary. The Kerala State legislature
cannot be said to have attracted the 1944 Act definition with their
future amendment, blindly and without application of mind. On the
other hand, it has been done in pursuance of a scheme, a purpose and a
policy. It cannot, therefore, be said that there has been any abdication
of its legislative functions by the Kerala legi~lature. [618F-G] F

B. Shama Rao v. The Union Territory of Pondicherry, [1967] 2
SCR 650, distinguished.

Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Com-
missioner of Sales Tax and Ors., [1974] 2 SCR 879, referred to. G.

- (5) The High Court was right in the view it took viz., that the
scope of the exemption available under item 7 of the Third Schedule to
the 1963 Act will vary according to the scope of the corresponding entry
in the Schedule to the 1944 Act as it stands at the relevant time. So far
as assessment years 1971-72 and 1972-73 are concerned the definition of H
604 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

cotton fabrics in item 19 of the Schedule to the 1944 Act, as amended by
A
the Finance Act 1969 w.e.f. I.4.1969, will apply. [6I8H; 619A-B]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 207-
208 (NT) of 1979.

B From the Judgment and Order dated 10th August, 1977 of the
Kerala High Court in T.R.C. Nos. 61and62 of 1976.

P .S. Foti and K.R. Nambiar for the Appellants.

T.S. Krishnamoorthy Iyer, S.B. Sawhney and V.B. Saharya for
the Respondents. ·
c
The Judgment of the Court was delivered by

S. RAN GANATHAN, J. 1. A very interesting question as to the
principles of interpretation of legislation by in~orporation or refe-
D rences arises for consideration in these appeals arising out of certain
assessments to sales tax in Kerala. Section 9 of the Kerala General
Sales Tax Act 1963 which came into force on 1.4.1963 granted exemp-
tion from sales tax on goods specified in the third Schedule to the said
Act. These included the following:

E 5. Sugar as defined in item 1 of the First Schedule to
the Central Excises and Salt Act, 1944;

6. Tobacco as defined in item 4 of the First Schedule
to the Central Excises and Salt Act, 1944 and

F 7. Cotton fabrics, silk fabrics, woollen fabrics and
rayon or artificial silk fabrics as defined in item Nos. 19, 20,
21 and 22 respectively of the First Schedule to the Central
Excises and Salt Act, 1944.

The question before us is whether, in respect of the assessment years
G 1971-72 and 1972-73, with which we are concerned, the exemption
given to 'cotton fabrics' under item 7 above should be restricted to
'cotton fabrics' as defined in the Central Excises & Salt Act, 1944 ('the
1944 Act') as it stood on 1.4.1963 or whether it would also cover goods
falling under the said definition after its amendment in 1969.

H 2. Though we are concerned only with the interpretation of the
STATE OF KERALAv.° A.l.T.C. [RANGANATHAN, J.] 605

Kerala General Sales Tax Act, 1963, it is necessary to refer back to the A
earlier history of some Central as well as State legislations:

(i) We start with the 1944 Act. By this Act, excise duty was
levied on the manufacture or production of various types of goods
enumerated in the First Schedule to the Act. Item 19 (originally item
12) of the First Schedule, as it stood on 1.4.1963, defined 'cotton B
fabrics' thus:

"cotton fabrics-

'Cotton Fabrics' mean all varieties of fabrics manufactured
either wholly or partly from cotton and include dhoties, C
sarees, chadars, bed sheets, bed-spreads, counter-panes
and table cloths, but do not include any such fabric xxx xxx
xxx xxx xxx''

Item 19 was amended by the Finance Act, 1969. After amendment, it
reads thus: D

"Cotton Fabrics

'Cotton Fabrics' means all varieties of fabrics manufac-
tured either wholly or partly from cotton and_ includes
dhoties, sarees, chaddars, bed sheets, bed spreads, counter E
panes, table cloths, embroidery in the piece, in strips or in
motifs and fabrics impregnated or coated with preparations
of cellulose derivatives or of other artificial plastic materials
but does not include xxx xxx"
(Underlining ours)
F
The question set out earlier assumes importance because the res-
pondents-assessees deal in "P.V.C. Cloth", an item of goods which is
clearly covered by the amended definition hut, perhaps, not by the
original one.

(ii) In 1957, there were certain legislations of Parliament affect- G
ing the levy of i sales tax and excise duty. The first of these was the
Central Sales Tax Act, 1956, (C.S.T. Act) passed in pursuance of
Article 286 (3) of the Constitution of India which reads thus:

"Any law of a State shall, in so far as it imposes or
authorises the imposition of, a tax on the sale or purchase H
606 BUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

. of goods declared by Parliament by law to be of special
A importance Jn inter-state traoe' cir ~Qmmerce; oe subject to
such restrictions and conditions in regard to the system of
levy, rates and other incidents of the tax as Parlia.ment may
by law specify."

B The C.S.T. Act received the assent of the President on 24.12.56·. S. 14
of the Act declared certain goods to be goods of special importance in
inter-state trade. or commerce. (hereinafter referred to as 'declared
goods'.) These included, as on 1.4.1963, tl)e following:

"(ii-a) cotton fabrics, as defined in Item No. 19 of the First
Schedule to the Central Excises and Salt Act, 1944;
c
xxx xxx xxx

(vii) rayon or artificial silk fabrics, as defined in Item
No. 22 of the First Schedule to the Central Excises and Salt
D Act, 1944 (1of1944),

{viii) sugar, as defined in Item.No; I of the.First Schedule
to the Central Excises and Salt Act, 1944 ( 1 of 1944)

(ix) tobacco, as defined in Item No. 4 of the First Schedule
E to the Central Excises and Salt Act, 1944 (1of1944) '
'
(x) woollen fabrics, as defined in Item No. 21 of the First
Schedule to the Central Excises and Salt Act, 1944.

(xi) silk fabrics as defined in Item N0 . 20 of the First
p Schedule to the Central Excises and Salt Act, 1944."

The definitions of the above goods were thus related to their defini-
tions under the 1944 Act. S. 15 of the Act imposed certain restrictions
and conditions in regard to tax on sale or purchase of declared goods
within a State. It may be mentioned that this section, as originally
G enacted in 1956, had been amended w.e.f. 6.6.1957, by Act 16 of 1957
and, again, by Act 31of1956, w.e.f. 1.10.1958.

(iii) About the same time as the C.S.T. Act, Parliament also
enacted the Additional Duties of Excise (Goods of Special Impor-
tance) Act, 1957 ('the 1957 Act'). The statement of objects and
H reasons of this Act reads as follows:
~:

i
~
g-'
...
r.f"c-
,STATE,tO~ KERALAv,¢.l.T.C[R~NGANATflAN, J.} 607

':• "The object of this legislation is to impose additional duties A
of excise in ·replacement of, the sales tax levied 'by the
Union and the States on sugar, tobacco and mill made tex-
tiles and to distribute the net proceeds of these taxes,
except the proceeds attributable to Union Territories, to
the States. The distribution of the proceeds of the addi-
tional duties broadly followed the pattern recommended by B
the Second Finance Commission. Provision has been made
that the States which levy a tax on the sale or purchase of
these commodities after Ist April,_ 1958 do not participate
in the distribution of the net proceeds. Provision is made. i_n
the Act for including these goods in the category of goods
declared to be of special importance in inter-state trade or
commerce so that, following the imposition of uniform
c
duties of excise on them, the rates of sales tax, if levied by
the State are subject from Ist April, ·1958 to the restrictions
ins. 15 of the Central Sales Tax Act: 1956."

) S. 3 of ·this Act originally levied an additional excise duty on sugar, D
tobacco, cotton fabrics, rayon or artificial sl!k and woollen fabrics and
s. 2(c) defined the above goods as having the meanings respectively
assigned to them in item Nos. 8, 9, 12, 12A and 12B (subsequently
changed as item 1, 4, 19·, 21 and 22 respectively) of.the First Schedule
;- to the 1944 Act. It may be mentioned here that the Finance Act, 1961
had amended s. 14 of the C.S.T. Act by including, as item (xi): "silk E
fabrics as defined in item 20 of the First Schedule of the 1944 Act". It
also simultaneously amended the 1957 Act by adding a reference to
'silk fabrics' in s. 3(1), in the definition clause s. 2(c) as well in the
Schedule. However, in 1968, when the Central Sales Tax Act was
amended against by deleting the reference to 'silk fabrics', there was
no corresponding amendment in the 1957 Act. The Finance (No. 2) F
Act, 1977, substituted the word "man-made fabrics" for the words
"rayon or artificial silk fabrics" w.e.f. 8.8.1977 and included a defini-
tion of the new expression in item 22 of the Schedule to the 1944 Act
and the 1957 Act.

S. 7 of the Act, as originally enacted, declared that the goods G
declared to be of special importance would, from 1.4.1968, be subject
to the restrictions and conditions specified ins. 15 of the Central Sales
Tax Act. This section was omitted, w.e.f, 1.10.1958, by Act 31of1958
which also amended s. 15 of the Central Sales Tax Act.

(iv) The· levy of sales tax in Kerala was formerly governed by the H
608 SUPREME COURT REPORTS [19881) Supp. 3 S.C.R.
·-:'!

A Central Sales Tax Act {Act XI of 1125)-Malayalam Era 1125 cor- ·
responds to 1950 of the Gregorian Calendar. This A.ct was amended by
the General Sales Tax (Amendment) Ordinance, (No. 8 of 1957)
w.e.f. 14.12.57, the Ordinance being replaced by the General Sales Tax
(Amendment) Act VII of 1958 with retrospective effect from the same
date. This amendment Act inserted s. 5A ln the 1125 Act which
B exempted certain goods from the levy of sales tax. Sub-section (1) of
this section read thus:

"5A. Exemption of the tax on the sale of mill-made textile
(otherthan pure silk), tobacco and sugar:

(1) The sale by any dealer of-
c
(i) mill-made textile, other than pwe silk,

(ii) tobacco, and

D (iii) sugar;

other than stock of such goods in his possession, custod)I or
control immediately before the 14th day of December,
1957, shall, as from that date, be exempt from taxation
unders. 3, sub-s. (1)."
E
This Act was replaced by the Kerala General Sales Tax Act, 1963 ('the
1963Act'), as already mentioned w.e.f. 1.4.63.

(v) We have already referred to s. 9 and item 7 of the Third
Schedule to the 1963 Act. The Kerala General Sales Tax (Second
F Amendment) Act, (Act 16 of 1967) amended item 7 of 1963 Act to
read as follows w.e.f. 1.9.1967:

"7. Cotton fabrics, woollen fabrics, and rayon or artificial
silk fabrics as defined in item nos. 19, 21 and 22 respec-
tively of the First Schedule to the Central Excises & Salt
G Act, 1944."

In other words, the exemption granted to 'silk fabrics' was taken away.
A mention may also. be made that by reason of a later amendment,
'silk fabrics' was included as one of the items on which single point tax
was leviable under the 1963 Act. This item, in the First.Schedule to the
H Act as it stood on 1.4.1980, read:
STATE OF KERALAv. A.J.T.C. [RANGANATHAN, J.I 609

"101 'Silk fabrics', that is to say, all varieties of fabrics
A
manufactured either wholly or partly from silk including
embroidery in piece, in strips or in mofits, but not including
such fabrics on which duty of excise is leviable under sub-
section (1) of Section 3 of the Additional Duties of Excise
(Goods of Special Importance) Act (Central Act 58 of
1957)". B

(vi) Reference may also be made to one more enactment,
though it has no direct bearing on the issue before us. This is the
Additional Duties of Excise (Textiles and Textile Articles) Act, 1978
(Central Act 40 of 1978). This Act charged an additional duty of excise
in respect of various goods specified in the Schedule to the Act over
and above the duty chargeable on them under the 1944 Act. These c
goods included "cotton fabrics" "silk fabrics", "woollen fabrics",
"man-made fabrics" and "wool tops" as defined in items 19, 20, 21, 22
and 43 of the First Schedule to the 1944 Act.

3. These are the relevant statutory provisions. On these the D
question to be considered is: What is the effect of the mention of the
definition of "cotton fabrics" given in the 1944 Act in the Schedule to
the 1963 Act? Does it attract only the said definition as on 1.4.1963 or
also the subsequent amendments thereto? To appreciate the conten-
tions urged, it is necessary to moke a brief reference to the principles
of interpretation of an enactment which, for purposes of convenience, E
refers to or incorporates a provision of another. These have been
discussed in various earlier decisions viz. Secretary of State v.
Hindustan Cooperative Insurance Society Ltd., [1931] 58 I.A. 259,
Collector of Customs v. Nathe/la Sampathu Chetty & another, [1962] 3
S.C.R. 786, Ram Sarup v. State, [1963] 3 SCR 858, Ram Kirpal v.
State, [1970] 3 S.C.R. 233, New Central Jute Mills Co. Ltd. v. The F
Assistant Collector, [1971] 2 SCR 92, State of Madhya Pradesh v.
Narasimhan, [1976] 1 S.C.R. 61, Bhajya v. Gopikabai, [1978] 3 S.C.R.
561, Mahindra & Mahindra Ltd. v. Union, [1979],2 S.C.R. 1038 and
Western Coal Fields v. Special Area Developmen(Authority, [1982] 2
S.C.R. 1. It is unnecessary to make a detailed reference to these deci-
sions. It is sufficient to say that they draw a distinction between refe- G
rential legislation which merely contains a 'reference to, or citation
of', a provision of another statute and a piece of referential legislation
which incorporates within itself a provision of another statute. In the
.former case, the provision of the second statute, along with all .its
amendments an.d variations from time to time, should be read into the
first statute. In the latter case, the position will be as outlined in H
610 SUPREME couii.t REPORTS [1988] Supp. 3 S.C.R.

A Ntirtisimhan, [1976] 1 S.C.R. 6 where, afier refori:irlg to Secretary of
State v. Hindustan Cooperative Insurance Society Ltd., [1931] 58 I.A.
259, this Court summed up the position thus:

"On a' consideraiioii of tliese authorities, therefore, it
seems that the following proposition emerges:

where a subsequent A~t incorporates provisions of a
previous Act then the borrowed provisions become an
integral aiid iiJdependent part of the subsequent Act arid
are iotaliy unaffected by any repeal or ameridilieilt in the
previous Act. This principle, hdwever, will not apply in the
following cases:

(a)· where the sub~equent Act and the previous Act are
supplemental to each oiher;

(b) where the two Acis are in pari materia;

(c) where the amendment in the previous Act, if not
inlported into the subsequent Act also; would render the
subsequent Act wholly unworkable and ineffectual; and

( d) where the amendment of the previous Act, either
expressly orJ>y necessary intendment, applies the said pro-
visions to the subsequent Act."

Applying the above principles to the facts of the present case; the High
Court in its judgment Ort a reference made to it under the 1963 Act
(and reported i/:i 41 S.T.C. 1) observed:

"In the light of the principles thus formulated, it seems
unnecessary for us to labouqhe point whether we are con-
fronted in these#cases with a "reference" or "citation" on
the one hand, or an "iricorporaiioil" on the other, of the
definition of 'cotton fabrics' in item 19 of the Schedule 1 of
the Central Excise and Salt Act, into the provisions of Secc
tipn 9 read with item No. 7 of the III Schedule of the
General Sales Tax Act, 1963. If the definition was merery
by way of 'reference or 'citation', the refe~ed or cited pro-
visio·n grows and shrinks with the changes in the parent
statute. Even in the case of an- incorporated definition
while the general principle is that the incorporated defini-
9111
STATE OF.KERAl:AY. A.I.T..C. IRANGANATilAN, J.J 611 _:~.,~

tion remains static and is unaffected by the developments
A
or fluctuations of the parental source from which it was
incorporated, two of the well-recognised exceptions
formulated by the Supreme Court in State of M.P. v. M. V.
Narasimhan, AIR 1975 SC 1835 seem to apply here, that is,
exceptions(a) and(c), xxx. The concept of 'cotton fabrics'
in the Central Excises and Salt Act seems to be integrally B
linked with the provisions of the General Sales Tax Act and
we do not think that we would be justified in regarding the
latter Act as unaffected by the growing concept of the term
'cotton fabrics' in the Central Excises and Salt Act. We feel
too, that unless the extended definition of the Central
Excises and Salt Act is imported into the Sales Tax Act, the
latter Act would become unworkable and ineffectual."
c

4. Sri Potti, learned counsel for the State of Kerala, submitted
that the P. V .C. cloth manufactured by the respondents in this case was
not entitled to exemption from sales tax if the earlier definition of the
1944 Act, before the amendment, were to apply. He submitted that D
the 1963 Aci hac incorporated in its third schedule the definition of the
1944 Act as it stood at the time of its enactment and that this incorpo-
ration is unaffected by subsequent changes in the 1944 Act. He
contested the correctness of the High Court's observations that the
concept of 'cotton fabrics' in, the 1944 and 1963 Acts were integrally
linked and that, unless the extended definitions of the former were E
imported into the latter, the latter Act would become unworkable and
ineffectual. According to him, the provisions of the CST Act and the
1957 Act have been unnecessarily brought into the discussion in order
to forge a connection between the various enactments and in an
attempt to lend strength to an argument that the exemption of an item
of goods from the levy of sales tax by the State was correlated to the F
existence of a levy of additional excise duty in respect of those very
goods under the 1957 Act. He submits that this argument is not tenable
and that there is no connection between the 1944 Act, the CST Act,
the 1957 Act and the 1963 Act. His submissions are these:

(a) When the Kerala Act of 1125-M.E. was amended by G
Act VII of 1958 w.e.f. 14.12.1957, the Kerala State Legislature
was fully alive to the proposals to introduce the CST Act and the
f. 1957-Act; nevertheless, the description of items granted exemp-
tion from sales tax was worded differently and not correlat¢'d to
the definitions of the 1944 Act;
H
612 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

(b) Silk fabrics. were not eligible for exemption under the
A 1125 Act as amended in 1957 and remained liable to sales tax till
31.3.1963 though additional excise on them had been introduced
w .e.f. 1.4.1963. The exemption from sales tax was conferred
only on 1.4.1963 by the 1963 Act. Again, this exemption was
taken away w.e.f. 1.9.1967 although such fabrics continued to be
B subject to additional excise duty. Thus, though it is true that,
between 14.12.1957 and 31.3.1961 there was sales tax but no
additional excise duty on pure silk textiles and between 1.4.1863
and 31.8.1967 there was additional excise duty but no sales tax
on silk fabrics, it is equally true that between 1.4.1961 and
31.3.1963 and again after 1.9.1967 they are liable to both sales
tax and additional excise duty. It is thus not possible to view the
c two levies as supplementary to, or inter-dependent on, each
other.

(c) The 1963 Act only incorporntes a definition coritained
in the 1944 Act. The 1957 Act is an independent Act, applicable
'D to some of the goods to which the 1944 Act are applicable. It has
its own schedule, the descriptions in which need not be-though
they generally are-identical with those in the schedule to the
1944 Act. The 1944 and 1957 Acts may be somewhat inter-linked
but there is no justification to import that connection also for the
purposes of the 1963 Act.
E
(d) The objects and reasons of the 1957 Act explicitly state
that the levy of additional excise duty on goods thereunder does
not preclude the State legislatures from levying any sales tax un
only, such levy will be subject to the restrictions contained in the
CST Act.
F
( e) It should not also be overlooked that the 1963 Act is an
enactment of a State legislature. To construe entry 7 in its
Schedule as authorising the applicability, not merely of the then
current definition of the 1944 Act but its future amendments as
well, will render it subject to the vice of excessive delegation. In
G this context, our attention is drawn to the decisions of the
• Supreme Court in Shama Rao, [1967] 2 SCR 657, r;waiwr
Rayon, (1974] 2 SCR 345 and International Cotton, (1975] 2
S.C.R 879. To avoid such an infirmity, we are asked to place a
restrictive interpretation on the 1963 Act, even assuming for
.;to
purposes of argument that it may be capable of a wider
H interpretation.
STATE OF KERALAv. )\..I.T:C. [RAt1GANATHAN, J.I 613

5. There is some force in these contentions, but, after hearing
both counsel, we are of opinion that the conclusion of the High Court
should be upheld. In the first place, we think it would be correct to say
that the 1963 Act brings in the definitions of the 1944 act by way of .
reference or citation and not by way of incorporation. For, a reading
the Act shows that the Act intended to confer exemption on a number
of goods set out in the Schedule. Of these, since items 5 to 7 are B
defined in the 1944 Act, the Act refers to those definitions to ascertain
the scope of these items. There are no express words used by the
statute which will justify an inference that the intention was to in-
c11tporate those definitions, as standing on that date, into the 1963
Act. That apart, as pointed out by the High Court, the question
Whether it is an instance of reference or citation as contrasted with
incorporation pales into significance if all the Central and State enact-
c
ments referred to at the outset are really part of an integrated scheme
evolved to achieve a particular purpose. In this context, Sri Krishna-
murthy Iyer, invited our attention to a passage from Hind Engineering
Co. v. CST, [1973] 31 STC 115, dealing with an identical entry in
regard to 'cotton fabrics' in Schedule A of the Bombay· Sales Tax Act, D
1959, where a deivision bench of the Gujarat High Court trace_d the .
genesis of the exemption of 'cotton fabrics' from the liability to sales
tax. We .do not think it necessary to extract the whole of it here,
particularly as the provisions of the Bombay legislations in this context
and their history are not identical with those of the Kerala statute. It is
clear, however, that the provisions of exemption from sales tax on the E
items with which we are concerned here and certain others cannot be
understood in isolation but should be read in the background of cer-
tain historical developments pertaining to sales tax levy. These may
now be briefly referred to.

6. Article 286 · of the Constitution of India imposed certain F
.restrictions on the legislative powers of the States in the matter oflevy
of sales tax on sales taking place outside the State, sales in the course
of import or export, sales in the course of interestate trade or com-
merce and sales of declared goods.· The Sales Tax Acts in force in
several States were not in conformity with the provisions of the Con-
stitution and attempts to bring those laws to be in conformity with G
these provisions gave rise to a lot of litigation. This led to an amend-
ment of Art. 286. Clause (2) of the article, as it stands, since 11th
September, 1956, authorised Parliament to formulate principles for
determining when sale or purchase of goods c~n be said to take place
in the course of import or export or in the course of inter-State trade or
commerce. Clause (3) was amended, in terms already set out, to H
614 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

restrict the powers of a State to impose sales or p\lrchase tax on
A
declared goods. The C.S.T. Act, 1956 which came into force on
5: 1. 1957 formulated the principles referred to in Article 286(2). As
already mentioned, this Act was amended, inter alia, by Act 16 of 1957
w.e.f. 6.6. 1957 and by Act 31of1958 w;e.f. L 10.1958, S. 14 listed the
goods which are considered to be of special importance in inter-sta.te
trade or commerce which included the six items set out earlier. S. 15
of the Act, as originally enacted, was brought into force only w.e.f.
1. 10.1958. It stipulated that levy of sales tax on declared goo(ls s.houlcl
not be at a rate exceeding 2% or be levied at more than one point in a
State. Before this section came into force, it was amended by Act 16 of
1957 which retained the first restriction and, so for as thll. se~oncl i~
concerned, provided that the tax should be levied only on the last sale
c or purchase inside the State and even tha.t sho\lld po\ Pe leviecl whe11
that last sale or purchase is in tl:ie course of inter-state traclll or com,
merce as defined. Act 31 of 1958 amended S. 15 to impose certain
modified restrictions and conclitions with the details of which we are
not here concerned. These restrictions clearly entailed loss of revenue
D to the States and it was cosidered expedient and desirable to com-
pensate the State for the proportionate loss of sales tax incurred by
them. Thus, even betore s. 15 was brought into. force, the Central
Government decided to pass an Act to provide for the \evy and collec-
tion of additional duties of ex~ise on certain goods an<l for U1e ctistrib11-
tion of a part of the net proceeds thereof among !lie State iI1 p11rs11ance
E of the principles of distribution recommended by the Secopq Finance
Commission i11_ its report dated30.9. 1957: This proposal to levy addh
tional duties of excise on certain special goods was a part a11cl parcel of
an integrated scheme under which sales tax levied at different rates by
the States on certain goocls was ultimately substitutecl by the levy of
additional duties of excise on such goocls ancl the States were com,
F pensated by payment of a part of the net proceeds of the said adclj-
tional levy on such goods. That this clearly was the genesis and object
of the 1957 Act also appears from its objects and reasons set out
earlier. Some of the items liable to excise cluty were picked out froitt
the Schedule to the 1944 Act. They were listed among the declared
goods of section 14 of the CST Act and also made liable to additional
G excise duty under the 1957 Act. A .perusal of the lists under these three
enactments show that out of the items listed in the Schedµle to the
1944 Act, sugar, tobacco, cotton fabrics, rayon or artificial fabrics and
woollen fabrics were categorised as declared goods and subjected to
additional excise duty. When the numerical order of these items in the
1944 Act (originally 8, 9, 12, 12A, 12B) came to be chap.ged.jn, 1960 (as
H 1, 4, 19, 22, 21) a corresponding change was effected in the)957 Act.
STATE OF KERALAv. A.l.T.C. [RANGANATHAN, J.] 615

'Silk fabrics' as defined in item 20 of the 1944 Act was included in 1961
in th<: CST Act a11d the 1957 Act. The f~~t that 'cotton fabrics' though I\
listed as item U in the Schellµle t!> tjle 1944 Act was not brought into
the list ins. 14 till l.10. l958 or that 'silk f~brics' was dropped frol)l the
!js\ ip s. 14 w·e·f· l l.6.19(i8 tho11gh it ePntjnµes \n \he Schecjµ\e (o the
1944 Aft does nµt alter !h<: pµsit\pn \h~t thes<: (hree ~cts ere intH-
~onnected ap!i Ot<\t feftain gpocjs tai><:l1 O!J! from the Scheflul!' to the ~
;,
1944 A~! wen: !P b<: sµpje~\e4 I!> !hie speeil!! !reatment putl\l\ef! i11 th<: l'.
(:ST ;\ct !Ind th!' 19§7 A~t·

7. This l)ll!Y !:>e so, says Sri Potti, hu.! ther!' is np justificatipn to
briqg the \963 A~t intg this grolJp. ~is shor\ pqint is (h~t the State
legisla\l!fe js @mPle\ely free wi!hi~ its flf>!Ila\n. Its power tp leyy sales ~
tax inchic\es ~ pp\ver !fl !eYY i! t!!:li'. ol1 sales of d~elared goops as well.
Nor is such P9W@r il1'1ibiteq py th<: leyy of an '!fif!itional e~~ise duty op
cer\ain goops. T!w 1957 l!l)len?me11f!fl the H2§ Act IJl!lde l1o refe-
ren~e even tO the 1944 Act. TIJe 1963 Act umk@s no rioferepce ieith<:r tO
the CST A~t or !P the 19§7 Act Sri P()tti emphasises, pointing out t()
. the prllctical effects of th!' two legjslllti()ns (the 1963 Act and th<: 1957 ~
AcO t9 which llttenti!:>!! !l11s !:>eeri invitee\ a,lre~dy, that it was not the
poley pf t!le K,~ral~ S\i!t\! ~gi~li!!!lf!' IP n~wpt !rolll sales lalf gorc!s
w!li~h suffere<;l 11dditio11f1\ e,.ei~!' <;Iu.ty. Tit~ s~les tax !'lf~l)lption is ~on
ferrecj flll fl totally in\l@Pl'llPl'll! pljsis,. It js npt ljnke!! to the f!µ~!JH
tipns i!l, or variljtipn of, t!l!' \f!'i!lffien\ upper tl)e C&T Act al\!! th~ 1957
Act. Th~ descript!!>!l 9f i!!"ms 5, 7 find 8, by sinw!y incorpoH!i11g th(' F
definitions then rel\Pi!Y av11i!;ibl~ i!J \he 194:1 ;\.ct (not the CST A;ct pf
the 1957 Act), Wi\S not iDl~l!c!!'!! to pfing about the resµlt tlrnl thf!S!'
d!!finitions sho1Jlp be rei!c\ ip !ht' !!grt pf the chang!'S that \pey 'll'!Y
yncJE"r~q fpr !h~ P!!fPPs@S et Ip(' !944 A~I ·

&. Sri f Ptti is ~~rtail11Y ~PH!'e! ill si!lfing t!rn! !Ii!' wordi11gs µf IP!' f.
;\.9ts (!o '!Pt show i!n @Jt;i~t 'RHl'lilliol\ li~twe!'!l the liability IP P~¥
apdition;il excise duty app !lie @~!'l)lP!i<'!J ffPI!! !!>e levy of si!l!'s \M
0

UJ\cler the 1963 Act. ~ut i! \V!>!!lcl nPl b!' cprr!'ft \o Si!Y that the P.f!Wi,
sions of the \att!'r eim p~ i!llerpreted without r('f!'r!'nce to the· Pt!l!'r
two jegislatjons. Tjie CST Act has a definite il)lP'!cl on the lllflnl\H aµq
extent of sales t~x !eYY, in so {ar as declared gppps ;ire concernep, fpr p
.such levy cannot transgress the lilllitations and restrictions of s. 15
thereof. S. 15 applies in respect of goods listed ins: 14 which, in turn,
is linj(ed tp the list in the l944 Act. Th!' 1957 Act also has a beari'!g P!l
!Ii!' sa)es taii: levy pf v;irjpus States. By levyillg sales tax pn a11 item
cov~r~p py tpe &chep4Je IP the 1957 Act, the Stat(' will hav~ \() fpreg(l
its sh~r~ Ol\ flis(rip4liP!l of tne prpceeds of the 11clflitjonal elfcis!' PH!Y Ii
616 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

A levied. Whether it should impose sales tax on an item of declared
goods, limited by the restrictions ins. 15 of the CST Act and at the risk
of losing a share in the additional excise duty levied in respect of those
very items, is for the State to determine. As pointed out by Sri Potti, it
was open to the Kerala Legislature to decide-and it did so also-that
on some items there should be one or other of the levies or both of
El them and to modify these levies depending upon its own financial
exigencies. But these factual or periodical variations do not detract
from the basic reality that the policy of sales tax levy on declared goods
has to keep in view, and be influenced by, the provisions of the CST
Act and the 1957 Act. The reference to the 1944 Act definitions for
purposes of grant of exemption in the 1963 Act as enacted originally as
well as when the latter was amended in 1967 and the specific reference
c to the 1957 Act when the First Schedule to the 1963 Act was amended
in 1980 are quite significant in this context. We, therefore, think that,
though the 1963 Act referred only to the definitions in the 1944 Act,
the entries in the Schedule' have to be juxtaposed into the broad
pattern or scheme evolved by the 1956-57 enactments set out earlier in
D the judgment. Doing so, and even assuming that the reference in the
items of the Schedule to the definitions in the 1944 Act is by way of
incorporation and not reference, one cannot escape the conclusion
that the circumstances are covered by the exceptions outlined in
Narasimhan, (1976] l SCR 6. They certainly fall within the scope of
exception (a) mentioned therein and also fall within exception (c) if we
E read "unworkable and ineffectual" to take in also "unrealistic and
impractical".

9. We do not find much substance in the arguments of Shri Patti
based on Shama Rao, [1967] 2 SCR 657. This decision really concerned
a delegation of power to the executive Government to decide contents
F of a legislation by allowing it a latitude in fixing a date for its com-
mencement. It cannot be understood as an authority for the proposi-
tion that a State legislature can adopt only the existing provisions of a
statutes passed by another legislature but not its future amendments
and modifications. In the first place, such a proposition will strike at
the very root of the concept of referential legislation as explained in
G the decisions referred to above and the distinction drawn by them
between cases of mere reference or citation on the one hand and of
incoporation, on the other. Secondly, in Shama Rao only three :if the
five Judges expressed an opinion about this aspect of the case. Their
view point was presented by Shela! J. in the following words:

H "The question then is WheJher in extending the Madras Act
STATE OF KERALAv. A.l.T.C. [RANGANATHAN, J.I 617

in the manner and to the extent it did under sec. (2)(1) of A
the Principal Act the Pondicherry legislature abdicated its
legislative power in favour of the Madras legislature. It is
manifest that the Assembly refused to perform its legisla-
tive functions entrusted under the Act constituting it. It
may be that a mere refusal may not amount to abdication if
B
the legislature instead of going through the full formality of
legislation applies its mind to an existing statute enacted by
another legislature for another jurisdiction, adopts such an
Act and enacts to extend it to the territory under its juris-
diction. In doing so, it may perhaps be said that it has laid
down a policy to extend such an Act and directs the execu-
tive to apply and implement such an Act. But when it not c
only adopts such an Act but also provides that the Act
applicable to its territory shall be the Act amended in
future by the other legislature, there is nothing for it to
predicate what the amended Act would be. Such a case
would be clearly one of non-application of mind and one of
D
refusal to discharge the function entrusted to it by the
Instrument constituting it. It is difficult to see how such a
case is not one of abdication or effacement in favour of
another legislature at least in regard to that particular
matter."

This conclusion has been explained and distinguished in the Gwalior E
Rayon, case [1974] 2 SCR 879 in which Khanna J. and Mathew J.
delivered separate but concurring judgments. Khanna J. said:

"It would appear from the above that the reason which
prevailed with the majority in striking down the Pondi-
cherry Act was the total surrender in the matter of sales tax F
legislation by the Pondicherry Legisl&ture in favour of the
Madras Legislature. No such surrender is involved in the
.present case because of the Parliament having adopted in
one particular respect the rate of local sales tax for the·
'" purpose of central sales tax. Indeed, as mentioned earlier,
the adoption of the local sales tax is in pursuance of a G
legislative policy induced by the desire to prevent evasion
of the payment of central sales tax by discouraging inter-
State sales to unregistered dealers. No such policy could be
discerned in the Pondicherry Act which was struck down by
this Court.
H
618 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

Another distinction, though not very material, is that in the
Pondicherry case the provisions of the Madras Act along
with the subsequent amendments were made applicable to
an area which was within the Union Territory of Pondi-
cherry and not in Madras State. As against that, in the
present case we find that the Parliament has adopted the
B rate of local sales tax for certain purposes of the Central
Sales Tax Act only for the territory of the Stae for which
the Legislature of that State had prescribed the rate of sales
tax. The central sales tax in respect of the territory of a
State is ultimately assigned to that State under artcle 269 of
the Constitution and is imposed for the benefit of that
State. We would, therefore, hold .that the appellants
cannot derive much assistance from the above mentioned
decision of this •Court."

Methew J. observed:

D "We think that the principle of the ruling in Shama Rao v.
Pondicherry, (supra) must be confined to the facts of the
case. It is doubtful whether there is any general principle
which precludes either Parliament or a State legislature
from adopting a law and the future amendments to· che law
passed respectively by a State legislature or Parliament and
E incorporating them in its legislation. At any rate, there can
be no such prohibition when the adoption is noi of the
entire corpus of law on a subject but only of a provision and
its future amendments and that for a special reason or
p~rpose.''

F 10. We have attempted to show that the 1963 Act, on a proper
construction, does indicate a policy that certain items which are sub-
ject to additi<mal excise duty should be left out of sales tax levy except
in cases where there is a specific indication or provision of the Act to
,the contrary. The Kerala State legislature cannot be said to have
attracted the 1944 Act definitions with their future amendment,
blindly and without application of mind. On the other hand, it has
been done in pursuance of a scheme, a purpose and a policy. It cannot,
therefore, be said that there has been any abdication of its legislative
functions by the Kerala legislature.

11. For the above reasons, we are of opinion, that the High
fl Court was right in the view it took viz. that the scope of the exemption
STATE OF KERALAv. A.I.T.C. [RANGANATHAN, "J.] 619

available under item 7 of the third Schedule to the 1963 Act will vary A
according to the scope of the corresponding entry in the Schedule to
the 1944 Act as it stands at the relevant time. So far as assessment
years 1971-72 and 1972-73 are concerned, the definition of 'cotton
fabrics' in item 19 of the Schedule to the 1944 Act, as amended by the
Finance Act 1969 w.e.f. 1.4.1969, will apply.
B
12. Sri Krishnamurthy Iyyer for the assessees contended that it
is possible to spell out, from certain passages in the judgment of the
High Court where judicial decisions are discussed, an inference that
the High Court was inclined to the view that PVC Cloth would be
covered ·even by the previous unamended definition in the 1944 Act.
He also attempted to support this view by citing certain cases. Sri Potti C
contested the correctness of both these arguments. In the view we have
taken on the main issue, we consider it unnecessary to go into this
question. In any event, the High Court has returned no specific answer
to this issue which was clearly an aspect of the questions posed for its
consideration by the Tribunal (at page 42 of the paper book) and, even
if we had accepted the contention of Sri Potti that only the definition D
as on 1.4.1964 would apply, we would have perhaps only leftit to the
High Court to consider this aspect of the matter afresh.

13. Sri Krishnamurthy Iyer also submitted that the certificate of
fitness of appeal granted by the High Court (page 115 of the paper
book) is defective inasmuch as it does not spedfy the substantial ques- E
tions of law wh:lch, in the view of the High Court, needed considera-
tion by this Court. But we do not think we need go into this aspect or
reject the appeal as defective. Since the appeal does involve a substan-
tial question of law of great importance (which we have discussed
above), we have proceeded to dispose of the appeal on merits.
F
14. In the result, the appeal fails and is U1smissed. We, however,
make no order as to costs.

R.P.D. Appeal dismissed.

_j