JUDGMENT

V. RAMASWAMI, J. :- Special leave granted.

2. The appellant is a registered dealer under the Karnataka Sales Tax Act (hereinafter called the Act). The appellant (hereinafter referred to the assessee) purchases iron scrap from dealers inside and outside the State of Karnataka for the purpose of manufacturing iron ingots, steel rounds and torsteel. These manufactured goods were sold mostly within the State. In respect of the Assessment Years 1972-73 to 1974-75, accepting the contentions of the assessee that the goods sold were manufactured out of tax suffered iron scrap, the Commercial Tax Officer exempted the sales turn-over of the manufactured goods. The Deputy Commissioner of Commercial Taxes in exercise of his powers under section 21 of the Act restricted the exemptions but otherwise confirmed the assessment order by his order dated 11-5-1979. The respondent Commissioner of Taxes, Bangalore initiated proceedings under section 22 (A) of the Act for revising the order of the Deputy Commissioner on the ground that the assessee had been allowed exemption in respect of the turn-over of manufactured goods without verifying as to whether the inputs iron scrap had suffered taxes and that Explanation II to Schedule IV of the Act was applicable or not. The appellant filed the writ petition praying for the issue of a writ certiorari to quash the show cause notice issued by the respondent under Section 22 (A) of the Act challenging the constitutional validity of Section 5(4) of the Act in so far as it pertains to item 2 of Schedule IV to the Act read with Explanation II thereof in respect of its application for the period prior to 1-4-1978 as violative of Article 304 (a) of the Constitution. It may be pointed out at this stage that in Mangalore Metal House v. State of Karnataka (1986) 63 STC 482 the High Court upheld the Explanation II to Schedule IV of the Act which is differently worded in its application for the period subsequent to 1-4-1978. It may also be mentioned that the High Court had confined itself only to the challenge of the constitutional validity of the provision and left open the other question on merits including the validity of the notices to be agitated after exhausting the appellants remedy before the Sales Tax authorities.

3. The High Court was of the view that the provision providing for not levying tax, if at an earlier stage tax has been paid, is only in the nature of exemption and the exemption arises only on proof that the tax has been paid at an earlier stage on the goods out of which the goods in question were manufactured, that there is nexus between the finished goods and the raw material used for manufacturing the same that it is not correct to state that the tax is not payable on the finished goods manufactured out of local raw material but the discrimination if at all would arise only in the quantum of tax payable, for the tax on finished goods will be definitely higher than on the raw material. The High Court was of the further view that there is no discrimination in the rate of tax between the imported items and the local items of finished goods of iron steel as such and that the variation in the quantum of tax is on account of the scheme of taxation working differently on different dealers, those who import raw material and manufacture and those who locally purchase and manufacture and hence such an effect is only indirect result and not having direct or immediate impact. In that view the High Court dismissed the writ petition and gave liberty to the appellant to file objections before the Commissioner of Commerical Taxes for dealing with questions on merits. This appeal has been filed against the said judgment of the High Court.

4. The main point that was urged in this appeal was that Section 5(4) of the Act in so far as it pertains to item 2 in the IV Schedule read with the Explanation II is violative of Art. 304(a) of the Constitution as under that provision the sale of finished goods manufact