Tax Exemption Dispute After Madhya Pradesh and Chhattisgarh Bifurcation Resolved

The case of The State of Madhya Pradesh and Others vs. Lafarge Dealers Association and Others revolves around the legal ramifications of the bifurcation of Madhya Pradesh and the formation of Chhattisgarh. The primary question addressed by the Supreme Court was whether the tax exemption or deferment benefits granted under the Madhya Pradesh Commercial Tax Act, 1994, would continue to be applicable in both states post-bifurcation.

The dispute arose after the Madhya Pradesh Reorganisation Act, 2000, led to the division of the state into two separate entities—Madhya Pradesh and Chhattisgarh. Several industrial units that had been granted tax exemption prior to the bifurcation found themselves located in one of the two newly formed states, leading to uncertainty about the continuation of these benefits.

Arguments of the Petitioner

The State of Madhya Pradesh contended:

“After the bifurcation of Madhya Pradesh, any trade between the two states must be considered as inter-state trade, and tax benefits granted in the past cannot extend beyond state boundaries.”

The state further argued:

Exemptions were granted within the legal framework of a unified Madhya Pradesh, and they cannot be enforced across state boundaries after the bifurcation.
Any trade or movement of goods between the two states is now categorized as inter-state trade, which is governed by the Central Sales Tax Act and not the state tax laws of Madhya Pradesh or Chhattisgarh.
The principle of state sovereignty dictates that each state must manage its taxation independently post-reorganisation.

Arguments of the Respondent

The Lafarge Dealers Association and other private industrial units contended:

“The bifurcation does not affect the continuation of tax exemption benefits granted prior to the division, as the exemption is linked to industrial incentives that were meant to apply uniformly.”

The respondents further argued:

The Madhya Pradesh Reorganisation Act did not explicitly repeal the exemptions, and the benefit must be available until the expiry of the originally granted period.
The Adaptation of Laws Order, 2000, ensured the continuation of existing laws, including tax exemptions, in both states.
Their industrial investments were made based on the promise of long-term tax benefits, and revoking them post-bifurcation would constitute unfair treatment.

Supreme Court’s Verdict

The Supreme Court, led by a bench comprising Ranjan Gogoi, S. Abdul Nazeer, and Sanjiv Khanna, ruled in favor of the State of Madhya Pradesh and Chhattisgarh. The Court held:

“The formation of Chhattisgarh as a separate state means that trade between Madhya Pradesh and Chhattisgarh now qualifies as inter-state trade. Tax exemptions that were valid for intra-state transactions cannot automatically extend beyond state boundaries without legislative action.”

The Court ruled:

Tax exemptions granted under Madhya Pradesh laws apply only within the territorial jurisdiction of Madhya Pradesh post-bifurcation.
Any trade or movement of goods between Madhya Pradesh and Chhattisgarh now falls under inter-state trade regulations.
The continuation of tax exemptions must be expressly provided for by new legislation enacted by either state.
The Court overruled previous decisions that suggested a legal fiction allowing the continuation of exemptions across both states.

Key Takeaways from the Judgment

State bifurcation results in distinct tax jurisdictions, impacting previously granted tax exemptions.
Inter-state trade regulations take precedence over state tax laws post-reorganisation.
Existing tax exemptions do not automatically extend beyond newly defined state boundaries unless explicitly legislated.
Industrial investors must rely on updated state policies rather than previous exemptions in restructured territories.

This ruling clarifies the legal status of tax exemptions after state bifurcations, reinforcing the principle that state tax policies cannot extend beyond their revised territorial boundaries post-reorganisation.

Petitioner Name: The State of Madhya Pradesh and Others.
Respondent Name: Lafarge Dealers Association and Others.
Judgment By: Justice Ranjan Gogoi, Justice S. Abdul Nazeer, Justice Sanjiv Khanna.
Place Of Incident: Madhya Pradesh and Chhattisgarh.
Judgment Date: 09-07-2019.

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