In Mulchand Odhavji v. Rajkot Borough Municipality, 1971 (3) SCC 53, a Constitution Bench of Supreme Court invalidated the Municipality of Rajkot’s levy of octroi duty. The case originated from the United States of Saurashtra where the Saurashtra Terminal Tax and Octroi Ordinance of 1949 allowed the state government to levy octroi duty from the towns and cities specified in Schedule I until these municipalities enacted their own rules for the levy of octroi duty. Rajkot was one such town and in 1953 the municipality enacted its own rules for the levy of octroi duty.
In 1956, the state government removed Rajkot from Schedule I of the 1949 Ordinance. However, in Mulchand Odhavji, the 1953 rules for levying octroi duty were invalidated by the trial court for violating the rule-making procedure in the parent legislation.
Following this invalidation and in appeal to Supreme Court , a secondary question arose as to whether the municipality could still collect octroi duty for the period that the 1953 rules were in force. In other words, did the levy of octroi duty by the state government under the 1949 Ordinance revive after the 1953 rules were invalidated? Justice JM Shelat, speaking for a Constitution Bench of Supreme Court held:
“8. … As already stated, Ordinance 47 of 1949, was promulgated to meet the transitional situation when municipalities in towns and cities of Saurashtra were yet to be constituted. […] The rules framed by the Government were thus put in the field until the time when the municipalities could frame rules of their own and levy and collect the octroi duty. […] While issuing the said notification, the intention obviously was that once the municipal rules came into operation the Government rules, insofar as they pertained to the respondent-Municipality, would cease to operate.
The Government rules, however, were to cease to operate as the notification provided “from the date the said Municipality put into force their independent bye-laws.” It is clear beyond doubt that the Government rules would cease to apply from the time the respondent Municipality brought into force its own bye-laws and rules under which it could validly impose, levy and recover the octroi duty.
The said notification did not intend any hiatus when neither the Government rules nor the municipal rules would be in the field. Therefore, it is clear that if the bye-laws made by the respondent Municipality could not be legally in force for some reason or the other, for instance, for not having been validly made, the Government rules would continue to operate as it cannot be said that the Municipality had “put into force their independent bye-laws.”
The decision in Mulchand Odhavji admittedly did not concern an amendment simpliciter and relied on the text of the state government rules which stipulated when they would operate. However, two important observations may be made.
First, Supreme Court observed that it would be an anomalous situation whereby a court invalidated a freshly enacted rule, but because of such invalidation and the courts’ simultaneous enforcement of the repeal of the earlier rule, no rule of taxation held the field despite the state government having such power and there being no fault with the earlier rule.
Second, the court gave effect to the state government’s rules despite Rajkot being removed from Schedule I of the 1949 Ordinance.
This was a recognition that the omission of Rajkot was only done because of the corresponding enactment of the municipality’s separate rules. This was even though the omission was done by an entirely separate authority (the state government) from the enacting authority (the municipality). Thus, the Constitution Bench in Mulchand Odhavji adopted a broader approach of examining the entirety of the legislative circumstances and reversed both the omission and insertion steps of the legislative process after invalidating the unconstitutional rule.