On Friday, a Supreme Court division bench comprised of CJI UU Lalit, Justices S. Ravindra Bhat and J B Pardiwala upheld states' authority to levy entry taxes from Industrial Townships/Areas. Furthermore, industrial townships are considered a "local area" for the purposes of entry tax.

The court noted that the Diamond Sugar Mills Ltd decision was not rendered in the context of the applicability or imposition of entry tax, or whether such areas excluded by virtue of notifications under the proviso to Article 243-Q(1) ceased to be local areas.

“the exclusion of an industrial area or areas from the limits of municipal councils or municipalities under the state laws in exercise of 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 further stated: “The provisions in Part IX-A of the Constitution provide for constitution of municipalities, their duration, powers and responsibilities of authorities of the municipalities. Municipalities were conceived as vibrant democratic units of self-governance. Their term or duration was provided to be for five years; regular elections, to elect representatives of municipalities were contemplated. The special features of the municipalities contemplated by the provisions contained in Part IX-A, however need not be present in other bodies created by law, such as Boards, etc. Such statutory bodies, like industrial estates may perform some municipal functions. However, that some municipal functions are performed by such bodies ipso facto does not result in their acquiring the features of municipalities which are contemplated by Part IX-A of the Constitution.”

The appellants primarily relied on the Constitution Bench decision in Diamond Sugar Mills Ltd. & Anr. v. State of Uttar Pradesh & Anr., which held that a "local area" is defined as an area administered by a local body such as a municipality, a district Board, a local board, a Panchayat, or the like, and that factory premises are not covered by the aforementioned expression. They contended that areas falling within industrial townships were neither local areas nor municipalities, and thus the imposition of an entry tax on goods entering such industrial township for use, sale, or consumption must be declared unconstitutional due to the State Legislature's inability to levy the same. Respondents, on the other hand, contended that industrial areas are not excluded from state territories and remain subject to state authority and legislative powers.

The issue raised in these appeals was: “whether the exclusion of an industrial area or areas from the limits of municipal councils or municipalities under the state laws in exercise of 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?”

Case Details:

OCL India Limited vs State of Orissa

 2022 LiveLaw (SC) 911 | CA 2348 OF 2004