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Taxation Lawyer: In case of bifurcation of a state, the tax exemption notification of erstwhile state, shall not be applicable to inter-state trade between the bifurcated states; SC.

Supreme Court of India

Justice Sanjiv Khanna, Justice Ranjan Gogoi and Justice S. Abdul Nazeer

Overruling the earlier judgment in CIT v. Swarn Rekha Cokes and Coals Pvt. Ltd; the three Judge Bench of SC {State of M.P. & Ors. v. Lafarge Dealers Association and Ors.} holds in case of creation of the two new states due to bifurcation, exemption or deferment of tax notifications issued before the bifurcation would not apply in the trade inter se between new states, and that for the purpose of sales tax, the two states would be treated as separate states and the sale between them shall be inter state sale.

It was observed in para 24 of the said case:

"24. With respect to reasoning given in paragraph 30 in Swarn Rekha Cokes and Coals Pvt. Ltd. (supra), we would acknowledge that creation of a new State was an unforeseen event and could give rise to unusual situations, but this cannot be a ground and reason to treat inter-state sales between the two successor states as intra-state sales. This would be contrary to the Constitution and even the Statute i.e. the Reorganisation Act. Whenever a new State is created, there would be difficulties and, issues would arise but these have to be dealt within the parameters of the constitutional provisions and the law and not by negating the mandate of the Parliament which has created the new state in terms of Article 3 of the Constitution. Creation of the new political State must be given full legal effect. We would, therefore, respectfully overrule the contrary observations and ratio recorded in paragraphs 29 and 30 in Swarn Rekha Cokes and Coals Pvt. Ltd. (supra) in light of the legal position elucidated and explained above."

The SC sets aside the judgment of High Court in the said case as the High Court held that tax exemption shall be applicable between the trade between the newly created two states i.e. Madhya Pradesh and Chattisgarh.

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