FEDERATION OF WINES MERCHANTS ASSOCIATION vs. THE STATE OF KARNATAKA

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 30th DAY OF SEPTEMBER, 2015

BEFORE

THE HON’BLE MR.JUSTICE ARAVIND KUMAR

WRIT PETITION NO. 27825/2014 C/W WRIT PETITION NOS. 14620-14624/2014 AND 13078-13082/2014 (T-RES)

W.P.NO. 27825/2014

BETWEEN:

SRI M.MADHAVA GOWDA, S/O DASHRATHA GOWDA AGED ABOUT 42 YEARS DHARMASHREE NILAYA BELLARY VILLAGE & POST SULLIA TALUK D.K.-574 212.

... PETITIONER

(BY SRI. SACHIN B.S., FOR SRI ARUNA SHYAM M, ADVOCATES)

AND:

FINANCE DEPARTMENT

VIDHANA SOUDHA

BENGALURU-560 001.

D.K. DISTRICT

MANGALURU-574 212. ...RESPONDENTS

(BY PROF. RAVIVARMA KUMAR, ADVOCATE GENERAL A/W SRI. T.K. VEDAMURTHY, HCGP)

THIS WRIT PETITION IS FILED UNDER ARTICLE 226 & 227 OF THE CONSTITUTION OF INDIA, PRAYING TO QUASH THE IMPUGNED NOTIFICATION DATED 28.02.2014 ISSUED BY THE R-1, IN SO FAR AS THE PETITIONER’S LICENCE IN FORM CL-7 IS CONCERNED VIDE ANNEXURE- A.

W.P.NOS. 14620-624/2014

BETWEEN:

S/O LATE MUNIYAPPA

AGED ABOUT 43 YEARS

CL-9, LICENSEE,

NO.75 (OLD NO. 39)

MATHIKERE MAIN ROAD

GOKULA 1ST STAGE

YASHWANTHPURA,

BENGALURU-560 028.

S/O LATE MOTTEGOWDA

AGED ABOUT 52 YEARS

CL-9, LICENSEE

NO.4:457. SARJAPURA ROAD,

VARTHUR HOBLI,

BENGALURU-560 087.

S/O GOVINDAIAH

AGED ABOUT 31 YEARS

CL-9, LICENSEE,

NO.87:2, SHOP NO.2 AND 3

T.M.R. MAIN ROAD

MATHIKERE

BENGALURU-560 028.

S/O LATE CHIKKAVENKATAKAIAH

AGED ABOUT 52 YEARS

CL-9, LICENSEE

NO.42:1, 1ST MAIN ROAD

GOVARDHANA BUILDING

YASHWANTHPURA,

BENGALURU-560 028.

S/O GOVINDAIAH

AGED ABOUT 33 YEARS

CL-9 AND RVB LICENSEE,

NO.22, 23 AND 24,

PRABHAT COMPLEX,

K.G. ROAD,

BENGALURU-560 001.

..PETITIONERS

(BY SRI. UDAY HOLLA, SR. COUNSEL FOR SRI. MOHAN BHAT, ADVOCATES)

AND:

REPRESENTED BY ITS PRINCIPAL SECRETARY

FINANCE DEPARTMENT

VIDHANA SOUDHA

BENGALURU-560 001.

…RESPONDENTS

(BY PROF. RAVIVARMA KUMAR, ADVOCATE GENERAL A/W SRI. T.K. VEDAMURTHY, HCGP)

THESE WRIT PETITIONS ARE FILED UNDER ARTICLE 226 & 227 OF CONSTITUTION OF INDIA PRAYING TO DECLARE CLAUSES 8 AND 9 OF THE KARNATAKA VALUE ADDED TAX (AMENDMENT) ACT 2014 (KARNATAKA ACT NO. 15 OF 2014) DATED 28.02.2014 VIDE ANNEXURE-G AND ULTRA VIRES AND OPPOSED TO THE STATE’S POLICY OF MERGING THE SALES TAX AND CONSEQUENTLY CLAUSE 9 OF THE AMENDMENT INSERTING ENTRY 59 A TO THE THIRD SCHEDULE TO THE KVAT ACT IS ULTRA VIRES AS FAR AS PETITIONERS ARE CONCERNED.

W.P.NOS. 13078-13082/2014

BETWEEN:

A BODY REGISTERED UNDER THE KARNATAKA SOCIETIES REGISTRATION ACT, KARNATAKA

HAVING ITS REGISTERED OFFICE AT

FIRST FLOOR, NAYAK’S COMPLEX,

NATIONAL HIGH WAY 66

UDUPI-576 103

REPRESENTED BY ITS

GENERAL SECRETARY

V. GOVINDRAJ HEGDE

S/O LATE B. SANJEEV HEGDE,

AGED ABOUT 52 YEARS.

S/O LATE MR. SANNE GOWDA

AGED ABOUT 62 YEARS

NO.689, BAZAAR STREET

NARABAD MOHALLA

MYSURU-570 001.

S/O MR. CHIKKAVENKATAIAH

AGED ABOUT 45 YEARS

NO.35, GROUND AND FIRST FLOOR,

MARIYAPPA COMPLEX

GANGANAGAR

BENGALURU-560 035.

S/O MR. CHIKKAVENKATAIAH

AGED ABOUT 55 YEARS

NO.1, KATHA NO.90,

SY.NO.21, VIGNANANAGARA

VIBHUTIPURA,

BENGALURU-560037.

S/O MR. THIMMAIAH

AGED ABOUT 45 YEARS

NO.529/A, 14TH CROSS

BANASHANKARI 2ND STAGE

BENGALURU-560 078.

…PETITIONERS

6 (BY SRI. HARISH V.S. FOR M/S DNS LAW HOUSE, ASSOCIATES, ADVOCATES)

AND:

REPRESENTED BY ITS PRINCIPAL SECRETARY

FINANCE DEPARTMENT

VIDHANA SOUDHA

AMBEDKAR VEEDHI,

BENGALURU-560 001.

…RESPONDENTS

(BY PROF. RAVIVARMA KUMAR, ADVOCATE GENERAL A/W SRI. T.K. VEDAMURTHY, HCGP)

THESE WRIT PETITIONS ARE FILED UNDER ARTICLE 226 & 227 OF CONSTITUTION OF INDIA PRAYING TO DECLARE CLAUSES 8 AND 9 OF THE KARNATAKA VALUE ADDED TAX (AMENDMENT) ACT 2014 (KARNATAKA ACT NO. 15 OF 2014) VIDE ANNEXURE-B ARE ULTRA VIRES AND OPPOSED TO THE STATE’S POLICY OF MERGING SALES TAX WITH EXCISE DUTY WITHOUT PREJUDICE TO THE ABOVE AND IN ANY CASE CLAUSE 9 OF THE KVAT AMENDMENT ACT INSERTING ENTRY 59A INTO THE THIRD SCHEDULE TO THE KVAT ACT IS ULTRA VIRES.

7 THESE WRIT PETITIONS BEING HEARD AND RESERVED, COMING ON FOR PRONOUNCEMENT OF ORDERS THIS DAY, THE COURT MADE THE FOLLOWING:

O R D E R

Petitioners in these writ petitions are challenging the constitutional validity of Entry No.59A of the III Schedule to Karnataka Value Added Tax Act, 2003 (for short ‘KVAT Act’) which came to be inserted by KVAT (Amendment) Act, 2014 i.e., Act No.15/2014 and the notification dated 28.02.2014 issued in exercise of the power under Section 5(1) of the KVAT Act.

Petitioners have contended that Karnataka Sales Tax Act, 1957 (for short ‘KST Act’) provided for levy of sales tax for almost 50 years and empowered the State to confer exemption by issue of notification either with reference to goods or class of goods or dealers or class of dealers. With effect from February, 2001 the Sales Tax levied on liquor was merged with State Excise Duty by introducing amendment to Karnataka Sales Tax Rules and even after KVAT Act coming into force, all the

9 dealers in various categories through out the State enjoyed exemption from levy of VAT and in order to merge Sales Tax with duty, amendment to Karnataka Excise (Excise Duties and Fees) Rules, 1968 was brought whereunder additional duty was levied on Liquor, Fenny, Wine and Beer and imposition of sales tax was given up. On account of Rule 2AE and 2AF being added to the original Karnataka Excise (Excise Duty and Fee) Rules, 1968, sales tax was merged with additional excise duty and thereby uniform levy of all kinds of licences within the State of Karnataka being brought about has been now thwarted by deleting Entry in Sl.No.34 of I Schedule of KVAT Act and inserting Entry No.59A in III Schedule by levying tax at the rate of 5.5% and at the same time, correspondingly issuing notification dated 28.02.2014 under Section 5(1) of the Act exempting all categories of dealers other than

10 person holding licence in Form No.CL-9 for vending Liquor in the Bruhat Bengaluru Mahanagara Palike area, City Municipal Corporation areas and Town Municipal Council or Town Panchayat areas issued under Karnataka Excise (Sale of Indian and Foreign Liquor) Rules, 1968 or CL-4 or CL-6A or CL-7 issued under the Karnataka Excise (Sale of Indian and Foreign Liquor )Rules, 1968 and contend that by virtue of this notification, the State has attempted to over come the legislative limitation imposed on the State not to exempt dealers or class of dealers from levy of tax under KVAT Act and the device adopted by the State to confer exemption in respect of liquor sold by the dealers who are not holding certain stated categories of licences under Excise Law and it amounts to class oriented discrimination.

It is further contended that KVAT Act does not empower the State to charge on class of persons and as such, levy on certain class of dealers is illegal and without jurisdiction. The scheme of KVAT Act is multi point levy and the impugned levy levying VAT on last point and omitting to levy VAT on the manufacturer and Mysore Sales International Limited (State owned Corporation) is violative of Articles 14, 19 and 304B of the Constitution.

The effect of the impugned notification is that while only a category of dealers like Hotels, Restaurants and Bars would be liable to tax under KVAT Act, other dealers who deal in identical goods like manufacturers and sole distributors are exempted and hence liable to be quashed.

12 It is also contended that the exemption notification unreasonably discriminates between the dealers situated in village panchayat’s limits and dealers situated in limits other than village panchayat.

It is also contended that there is no rational nexus between rural Bars and the Bars located either in panchayat areas or city areas and distinction sought to be placed by the State amounts to classification or distinction without any basis.

It is further contended that by the impugned notification it exempts the licence holder of Form No.9 in village panchayat area though licence holder having licence in Form No.7 and carrying on similar business in village panchayat area, is liable to pay tax has resulted in discrimination and violative of Article 14 of the Constitution of India. On these grounds, petitioners

13 have sought for declaring clause 8 and 9 of the Karnataka Value Added Tax (Amendment) Act, 2014 (Karnataka Act No.15/2014) being declared as ultravires and opposed to State Policy of merging sales tax with excise duty and consequently, for quashing the notification dated 28.02.2014. In support of their submission, they have relied upon the following judgments: (1) AIR 1963 SC 98 ORIENT WEAVING MILLS (P) LTD. AND ANOTHER vs UNION OF INDIA AND OTHERS

(2) ILR 1999 KAR 1814 BASAVARAJ NAGOOR vs STATE OF KARNATAKA AND ANOTHER

(3) ILR 2000 KAR 870 STATE OF KARNATAKA AND OTHERS vs BASAVARAJ NAGOOR AND OTHERS

(4) AIR 1962 SC 1733 M/S.EAST INDIA TOBACCO CO. ETC. vs STATE OF ANDHRA PRADESH AND ANOTHER

(5) AIR 1991 SC 1722 STATE OF MAHARASHTRA AND ANOTHER vs RAMESH NARAYAN PATIL

(6) (1997)11 SCC 179 CHOKSI TUBE COMPANY LTD vs UNION OF INDIA AND OTHERS

(7) (1981)2 SCC 410 VISHNUDAS HUNDUMAL AND OTHERS vs STATE OF MADHYA PRADESH AND OTHERS

(8) AIR 1952 SC 75 THE STATE OF WEST BENGAL vs ANWAR ALI SARKAR AND ANOTHER

(9) (1969)2 SCC 710 THE STATE OF RAJASTHAN AND ANOTHER vs M/S.GHASIRAM MANGILAL ETC.

(10) (2007)10 SCC 342 STATE OF UTTAR PRADESH AND OTHERS vs DEEPAK FERTILIZERS AND PETROCHEMICAL CORPORATION LTD.

(11) (2013)8 SCC 519 STATE OF MAHARASHTRA AND ANOTHER vs INDIAN HOTEL AND

15 RESTAURANTS ASSOCIATION AND OTHERS

(12) (2007)6 SCC 317 GUPTA MODERN BREWERIES vs STATE OF J & K AND OTHERS

(13) 2006 (4) Kar.L.J 700 THE KARNATAKA BANK LIMITED, MANGALORE AND OTHERS vs UNION OF INDIA

(14) (2011)10 SCC 292 RANBAXY LABORATORIES LIMITED vs UNION OF INDIA AND OTHERS

(15) (2007)2 SCC 365 STATE OF KERALA AND OTHERS vs UNNI AND ANOTHER

(16) (2006)4 SCC 517 STATE OF T.N. AND ANOTHER vs P.KRISHNAMURTHY AND OTHERS

It is contended by the learned Advocate General that classification is done at the inception itself and the licence issued to retail shops in Form No.CL-9 would indicate that sale of liquor would take place in a sealed bottle and it would not be allowed to be consumed in the premises and licencees are required to adhere to the prescribed Maximum Retail Price (‘MRP’) and MRP Bottled Liquor is taxed under the Karnataka Excise Act where no value addition takes place and same liquor would be distinguishable while being consumed with meals and sold in loose and submits that there will be value addition and to plug the revenue leakage on account of percentage of value addition being high when liquor being sold in loose quantities. He would further submit that issuance of licence itself is based on geographical location namely, rural and urban and submits that Bars and Restaurant

17 vending liquor by virtue of licence issued in Form No.9 operating or conducting business in urban areas and rural areas cannot be placed on the same pedestal. He submits that it is liquor as a product which is taxed and not the dealer and the liability is on the person who vends such liquor to recover and pay and tax is not levied on the person. On this ground, he sustains the validity of the impugned legislation as well as the consequential exemption notification issued. He would further contend that Section 5 is in parimateria with Rule 8 of the Central Excise Rules and as such, he seeks for dismissal of the writ petitions. In support of his submissions, he has relied upon the following judgments: (1) (1995)1 SCC 574 KHODAY DISTILLERIES LTD. AND OTHERS vs STATE OF KARNATAKA AND OTHERS

18 (2) (1985)59 STC 178 SHANTILAL & BROTHERS vs STATE OF KARNATAKA AND ANOTHER

(3) (1985)58 STC 12 K.M.MOHAMED ABDUL KHADER FIRM vs THE STATE OF TAMIL NADU AND OTHERS

(4) (1983)4 SCC 45 M/S.HOECHST PHARMACEUTICALS LTD AND OTHERS vs STATE OF BIHAR AND OTHERS

(5) (1976)1 SCC 916 INCOME TAX OFFICER, SHILLONG AND OTHERS vs R.TAKIN ROY RYMBAI AND OTHERS

(6) (1969)1 SCC 681 N.VENUGOPALA RAVI VARMA RAJAH vs UNION OF INDIA AND ANOTHER

(7) (1990)4 SCC 366 SHASHIKANT LAXMAN KALE AND ANOTHER vs UNION OF INDIA AND ANOTHER

(8) (1989) SUPP (1) SCC 696 P.M.ASWATHANARAYANA SETTY AND OTHERS vs STATE OF KARNATAKA AND OTHERS

(9) (1989)3 SCC 634 FEDERATION OF HOTEL AND RESTAURANT ASSOCIATION OF INDIA ETC. vs UNION OF INDIA AND OTHERS

(10) (1978)2 SCC 1 PATHUMMA AND OTHERS vs STATE OF KERALA AND OTHERS

(11) (1980)4 SCC 697 STATE OF KARNATAKA AND ANOTHER vs M/S.HANSA CORPORATION

(12) (1996)10 SCC 304 KHODAY DISTILLERIES LTD. AND OTHERS vs STATE OF KARNATAKA AND OTHERS

(13) AIR 1962 SC 955 KEDAR NATH SINGH vs STATE OF BIHAR

(14) W.P.No.21792/2013 (DD 17.06.2013) S.P.SWAMINATHAN vs THE JOINT COMMISSIONER FOR TRANSPORT AND SECRETARY

20 (Amendment) Act, 2014 (Karnataka Act No.15/2014) are liable to be declared as ultra vires of the Constitution of India and as such, the notification bearing No.FD 21 CSL 2014, Bangalore dated 28.02.2014 is liable to be quashed?”

HISTORICAL BACKGROUND:

21 points of its sale and having found that the department of Excise with its continuous monitoring is in an advantageous position to collect the tax, State resolved to levy and collect Additional Excise Duty at the point of manufacture/import in substitution to levying sales tax at all points. Hence, with effect from 16.02.2001 liquor was exempted from sales tax and Additional Excise Duty in lieu of sales tax was introduced in the State.

FACTUAL MATRIX: 7. In 2014-15 Budget, the policy statement of the State was to levy tax on liquor as a measure aimed at Additional Resource Mobilisation (‘ARM’) and the said State policy envisaged under the Budget of 2014-15 reads as under: “472. The current system of Excise Tax on liquor is unable to capture substantial value addition that

22 takes place in retail sale of liquor by clubs, lodging houses, star hotels, bar and restaurants. I therefore propose to levy lower VAT of 5.5% on liquor sold by bar and restaurants operating in urban areas and by clubs, lodging houses and star hotels.”

In the background of the above stated State policy and in order to levy tax on liquor, the Legislature has inserted Entry No.59-A in the III Schedule to the KVAT Act by way of Karnataka Value Added Tax (Amendment) Act, 2014 (Karnataka Act No. 15/2014) and it would be apt to note the statement of objects and reasons in introducing the amendment Bill, 2014 to insert the said Entry, which reads as under: STATEMENT OF OBJECTS AND REASONS

“It is considered necessary to amend the Karnataka Value Added Tax Act, 2003 to give effect to the proposals made in the Budget particularly to provide for levy of tax on sale of liquor including beer, fenny, liqueur and wine by bar and restaurants operating in urban areas and by clubs,

23 lodging houses and star hotels, and matters connected therewith. Hence, the Bill.”

PREFACE:

24 DISTILLERIES LIMITED & OTHERS vs STATE OF KARNATAKA reported in (1995)1 SCC 574 can be looked up.

RE: LEGISLATIVE POWER:

25 impugned enactment namely, clauses 8 and 9 of Amendment of Act 15/2014 and the consequential notification dated 28.02.2014 on the principal ground that under Section 5 of KVAT Act State has no power to grant exemption to dealers and it can grant exemption to goods only, unlike the power which was available to the State under Section 8A of the erstwhile Karnataka Sales Tax Act, 1957, which provision provided for grant of exemption for both goods and dealers and as such, it is contended that the impugned notification is beyond the power available under Section 5 of KVAT Act, and as such, it is liable to be quashed.

26 invalid. For this proposition, the judgment of Apex Court in KEDAR NATH vs STATE OF BIHAR reported in AIR 1962 SC 955 can be looked up. Although tax laws are subject to Article 14 of the Constitution, a larger discretion in classification is given to the legislature in tax matters than in other spheres. This is, in view of the inherent complexity of fiscal adjustment of diverse elements. A taxing statute is not open to attack on the ground that it taxes some persons or objects and not others. The State has a wide discretion in selecting the objects or persons that it will tax and in order to tax something, it is not bound to tax everything. It is well settled that whenever a statute makes a distinction, it has to satisfy two tests in order to conform to Article 14 of the Constitution namely, (1) it must make a classification and (2) classification should have a rational nexus to the objects sought to be achieved. In

27 this regard, judgments of Apex Court in the case of ITO, SHILLONG vs NTR RYMBAI reported in AIR (1976)1 SCC 916 and NVR VARMA RAJAH vs UNION OF INDIA reported in AIR (1969)1 SCC 681 can be looked up.

“14. It is a well-settled proposition of law that a fiscal legislation has to be construed strictly and one has to look merely at what is said in the relevant provision; there is nothing to be read in; nothing to be implied and there is no rule for any intendment. (see Cape Brandy

28 Syndicate vs. IRC and Ajmera Housing Corporation vs. CIT)” .

KVAT ACT, 2003 KST ACT, 1957 5. Exemption of Tax: (1) Goods specified in the First Schedule and any other goods as may be specified by a notification by the State Government shall be exempt from the tax payable under this Act (subject to such restrictions and conditions as may be specified in the notification).

(1-A) Any notification issued under sub-section (1), shall 8-A.Power of State Government to notify exemptions and reductions of tax – (1) The State Government may, by notification, make an exemption, or reduction in rate in respect of any tax payable under this Act.---

(a) on the sale or purchase of any specified goods or class of goods, at all

29 be valid until it is cancelled or varied, notwithstanding that the tax payable in respect of such goods is modified by amendment to this Act.

(2)

Notwithstanding anything contained in this Act, the Government may, in such circumstances and subject to such conditions as may be specified, by notification, and subject to such rules as may be prescribed, exempt the whole or any part of the tax payable for any period on sale of goods made to or made by a new industrial unit, in respect of which the Government has already notified exemption of tax under the provisions of the Karnataka Sales Tax Act, 1957 (Karnataka Act 25 of 1957), and such exemption on purchase or sales shall be by way of refund of tax collected on purchases or sales made by such industrial unit.

points in the series of sales by successive dealers; or

(b) by any specified class of persons, in regard to the whole or any part of their turnover; or

(c) on the sale or purchase of any specified class of goods by any specified class of dealers in regard to the whole or part of their turnover.

(2) to (6) xxx

31 dealers. Thus, under both the Acts, the specified goods or class of goods can be exempted from tax and Section 5(1) of the KVAT Act would indicate that such exemption would be subject to such restrictions and conditions as may be specified in the notification.

32 indicate that under Section 8A(1)(c) of KST Act, State had power to notify exemption and reduction of tax in respect of any specified class of goods by any specified class of dealers. Whereas, under Section 5(1) of the KVAT Act, goods specified in the First Schedule and any other goods as may be specified by the State can be exempted from payment of tax. Impugned notification would indicate that tax payable under the KVAT Act on sale of liquor including Beer, Fenny, Liqueur and Wine by a dealer who is not a person holding licence in the Forms specified thereunder is exempted.

The exemption that is granted is in respect of the goods specified in Entry No.59A of III Schedule and on account of such sale of liquor including Beer, Fenny, Liqueur and Wine is by a dealer who passes on such tax liability on the consumer has been made liable to collect the same and pass it on to the consumer. Hence,

33 petitioners cannot contend that levy of tax is permissible only on the goods and the impugned legislation empowers the State to levy tax on certain class of dealers which is beyond the power available under Section 5(1) of the KVAT Act. Petitioners also cannot contend that State cannot choose the class of dealer from being exempted, inasmuch as, the later portion of Section 5(1) would indicate that such exemption can be granted by the State “subject to such restriction and condition as may be specified in the notification” and the impugned notification would indicate that exemption is granted in respect of “liquor” sold by dealer who is not a person holding licence in the Forms indicated under the said notification. Hence, it cannot be contended that impugned notification has been issued without power under Section 5(1) of the KVAT Act.

5A. (1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after removal) as may be specified in the notification, excisable goods of any specified description from the whole or any part of the duty of excise leviable thereon;

Provided that, unless specifically provided in such notification, no exemption therein shall apply to excisable goods which are produced or manufactured –

35 (i) In a free trade zone or a special economic zone and brought to any other place in India; or

(ii) by a hundred per cent export- oriented undertaking and brought to any other place in India.”

(emphasis supplied)

In exercise of such power conferred, Government of India has exempted excise duty payable by class of persons.

Rule 8(1) of Central Excise Rules, 1944 reads thus:

36 “8. Power to authorise exemption from duty in special cases:

(1) The Central Government may from time to time, by notification in the Official Gazette, exempt subject to such conditions as may be specified in the notification any excisable goods from the whole or any part of the duty leviable on such goods.”

(emphasis supplied)

In pursuance to the powers conferred under sub-rule (1) of Rule 8, notifications came to be issued vide notification No.74 of 1959 dated 31.07.1959 and notification No.70 of 1960 dated 30.04.1960 exempting thereunder:- “cotton fabrics” from payment of excise duties produced by Power Looms owned by certain Co- operative Societies, which was impugned on the ground that they exempt certain classes of person and not classes of goods from the excise duty and exemption if

37 any could have been granted in respect of any particular specified variety of “cotton fabrics” and not with reference to the persons producing the same variety of those fabrics. Even in the instant case, petitioners are contending that exemption could have been granted on the goods namely, liquor as indicated in Entry 59A of III Schedule but not with reference to certain licence holders only i.e., dealers and this is beyond the power available under Section 5(1) of the KVAT Act.

38 fabrics” not owning more than four Power Looms, from unreasonable competition by big producers. Hence, it was held that it made a valid classification between the goods produced by big establishments and similar goods produced by small Power Loom weavers who suffer from handicaps to which big establishments are not subject to. Hence, it was held that there has been no excessive delegation of power to exempt under Rule 8(1) nor are the notifications bad insofar as they exempt certain “classes of person” and not “classes of goods” from the excise duty. The impugned notification on hand exempts liquor sold by retail sellers in sealed bottles under the specified condition of MRP and liquor sold by Bar and Restaurants operating in rural areas without scope for much value addition unlike liquor along with food and refreshments sold by Bar and Restaurants of urban areas and liquor sold in similar

39 manner by Boarding House and Lodges in rural areas by following the specific conditions attached to the licence for such sale and thereby they would have relative economic edge and there is scope of value addition and as such, impugned enactment as well as notification is not ultra vires and is within the State’s power under Section 5(1) of the Act. RE: DISCRIMINATION:

40 to discrimination and impedes free flow of trade and commerce and such levy is violative of Articles 14, 19 and 304-B of the Constitution of India.

41 For the above proposition, judgment of Apex Court in the case of STATE OF T.N. AND ANOTHER vs P.KRISHNAMURTHY AND OTHERS reported in (2006)4 SCC 517 can be looked up.

LICENCE CATEGORY OF DEALERS Form CL-2 Retail Liquor Shops Form CL-4 Clubs Form CL-6A Star Hotels Form CL-7 Hotel, Boarding Houses & Lodges Form CL-9 Restaurants & Bars Form CL-11C MSIL

(a) City Municipal Corporations

(b) City Municipal Council

(c) Town Municipal Council

(d) Other areas

(ii) Population based: (a) population more than 20 lakhs in respect of City Municipal Corporation.

Even the licence fee prescribed for grant of CL-2, CL-9 and CL-7 licences is dependent on the area/population as could be seen from the following tabular column:

Sl.No. Area in operation or Population

CL-2 CL-9 CL-7 (a) City Municipal Corporation having population of more than 20 lakhs

4,46,000 6,00,000 6,60,000 (b) Other City Municipal Corporation areas

3,64,000 4,62,000 5,80,000 (c) City Municipal Council areas

3,30,000 3,64,000 4,30,000 (d) Town Municipal Council areas/Town Panchayat areas

2,50,000 2,60,000 3,64,000 (e) Other areas 2,00,000 2,00,000 2,80,000

45 Panchayat limits/Rural areas and liquor dealers holding licence in Form CL-2 or any other licence and has the effect of levying tax on liquor sold by dealers holding licence in Form CL-9 and operating in urban areas, licence in Form CL-4, Form CL-6A, Form CL-7. Thus it has to be examined as to whether exempted class can be considered as a separate class.

46 found in others who are left out but those qualities or characteristics must have reasonable relation to the object of the legislation. The twin tests which the impugned legislation or notification will have to pass are: (1) Classification must be based on an intelligible differentia which distinguishes those that are grouped together from others; and (2) That differentia must have rational relation to the object sought to be achieved.

47 classification must not be arbitrary but must also be rational and it must not only be based on some qualities or characteristics which are to be found in all persons grouped together and which is not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of legislation.

48 made and in the facts obtained in the said case, it was held that the impugned notifications therein does not strike rational balance of classification between the items of the same category. It has been held by Hon’ble Apex Court as under:

“13. From a perusal of the notifications in question, it is evident that other fertilizers of the NPK category i.e. N.P.K. 12:32:16; N.P.K. 15:15:15; N.P.K. 20:20:0; N.P.K. 14:35:14 are included in the exemption list, whereas it is a matter of fact that the NPK 23:23:0 fertilizer is also a fertilizer of the same category, but it is omitted from the list. According to the notification dated 2-11-1994, the intention of the State was not to tax the sale of "potassium phosphatic fertilizers" but when we go into enquiry of nomenclature of these chemical compounds, we find that the NPK 23:23:0 is a "nitro-phosphate fertilizer" which has no potassium (K) ingredient. The Notifications dated 10-4- 1995 and 15-5-1995 clearly include NPK 20:20:0, which is also a nitro-phosphate fertilizer with zero content of potassium (K). This classification made under the notification dated 10-4-1995 does not hold good on the rational basis and is hence subject to scrutiny. The fact remains stagnant that the notifications include a fertilizer NPK 20:20:0 which is of the same

49 category as that of fertilizer NPK 23:23:0, because both are nitro-phosphate fertilizers. This shows that the State has not classified the two commodities on a rational basis for the purpose of imposing tax. This court in the case of Tata Motors Ltd. v. State of Maharashtra and Ors. [(2004) 5 SCC 783], has held: "15. ….It is no doubt true that the State has enormous powers in the matter of legislation and in enacting fiscal laws. Great leverage is allowed in the matter of taxation laws because several fiscal adjustments are to be made by the government depending upon the needs of the Revenue and the economic circumstances prevailing in the State. Even so an action taken by the State cannot be irrational and so arbitrary so as to one set of rules for one period and another set of rules for another period by amending the laws in such a manner as to withdraw the benefit that had been given resulting in higher burden so far as the assessee is concerned without any reason. Retrospective withdrawal of the benefit of set-off only for a particular period should be justified on some tangible and rational ground, when challenged on the ground of unconstitutionality." 15. The learned counsel appearing for the State relying heavily on Kerala Hotel and Restaurant Association & Ors. v. State of Kerala & Ors. [AIR 1990 SC 913],

50 contended that the State has widest latitude where measures of economic and fiscal regulation are concerned. There is no dispute on this principle of law as enumerated in the aforesaid decision of this Court. However, this same law must not be repugnant to the Article 14 of the Constitution, i.e., it must not violate the right to equality of the people of India, and if such repugnancy prevails then, it shall stand void up to the level of such repugnancy under Article 13(2) of the Constitution of India. Therefore, every law has to pass through the test of constitutionality, which is nothing but a formal name of the test of rationality. We understand that whenever there is to be made any type of law for the purpose of levying taxes on a particular commodity or exempting some other commodity from taxation, a sort of classification is to be made. Certainly, this classification cannot be a product of a blind approach by the administrative authorities on which the responsibility of delegated legislations is vested by the Constitution. In a nutshell, the notifications issued by the Trade Tax Department of the State of U.P., dated 10- 4-1995 and 15-5-1995 lack the sense of reasonability because it is not able to strike a rational balance of classification between the items of the same category. As a result of this, NPK 23:23:0 is not given exemption from taxation whereas all other NPK fertilizers of the same category like that of NPK 20:20:0 are provided with the exemption from taxation.”

52 reasonable classification namely, one which includes all who are similarly situated and none who are not, then it would pass the test of arbitrariness. In order to ascertain whether persons are similarly placed, one must look beyond the classification and the intent of legislation.

53 granting exemption stands the test of discrimination or whether it offends Article 14 in any manner whatsoever.

54 being permissible. In the following judgments, similar view has been expressed. (i) It has been held by the Apex Court in N.VENUGOPALA RAVI VARMA RAJAH vs UNION OF INDIA AND ANOTHER reported in (1969)1 SCC 681 that a taxing statute is not exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations are objects and if classification is rationale, Legislature is free to choose objects of taxation. It has been held as under: “14. Equal protection clause of the Constitution does not enjoin equal protection of the laws as abstract propositions. Laws being the expression of legislative will intended to solve specific problems or to achieve definite objectives by specific remedies, absolute equality or uniformity of treatment is impossible of achievement. Again tax laws are aimed at dealing with complex problems of infinite variety necessitating adjustment of several

55 disparate elements. The Courts accordingly admit, subject to adherence to the fundamental principles of the doctrine of equality, a larger play to legislative discretion in the matter of classification. The power to classify may be exercised so as to adjust the system of taxation in all proper and reasonable ways the Legislature may select persons, properties, transactions :and objects; and apply different methods and even rates of tax, if the ,Legislature does so reasonably. Protection of the equality clause does not predicate a mathematically precise or logically complete or symmetrical classification : it is not a condition of the guarantee of equal protection that all transactions, properties, objects or persons of the same genus must be affected by it or none at all. If the classification is rational, the Legislature is free to choose objects of taxation, impose different rates, exempt classes of property from taxation, subject different classes of property to tax in different ways and adopt different modes of assessment. A taxing statute may contravene Article 14 of the Constitution if it seeks to impose on the same class of property, persons, transactions or occupations similarly situate; incidence of taxation, which leads to obvious inequality. A taxing statute is not, therefore, exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations or objects.

"Class legislation is that which makes an improper discrimination by conferring particular privileges upon a class of persons, arbitrarily selected from a large number of persons, all of whom stand in the same relation to the privilege granted and between whom and the persons not so favoured no reasonable distinction or substantial difference can be found justifying the inclusion of one and the exclusion of the other from such privilege...... A classification must not be

57 arbitrary, artificial or evasive and there must be a reasonable, natural and substantial distinction in the nature of the class or classes upon which the law operates. In respect to such distinction, a legislative body has a wide discretion and an Act will not be held invalid unless the classification is clearly unreasonable and arbitrary."

(ii) In the case of SHASHIKANT LAXMAN KALE AND ANOTHER vs UNION OF INDIA AND ANOTHER

58 reported in (1990)4 SCC 366, Apex Court has held that Court must look beyond ostensible classification and to the purpose of the law and apply the test of ‘palpable arbitrariness’ in the context of the felt needs of the times and societal exigencies informed by experience to determine reasonableness of the classification. Apex Court while upholding the constitutional validity of Section 10-C of Income Tax Act, 1961 has held as under: “8. The main question for decision is the discrimination alleged by the petitioners. The principles of valid classification are long settled by a catena of decisions of this Court but their application to a given case is quite often a vexed question. The problem is more vexed in cases falling within the grey zone. The principles are that those grouped together in one class must possess a common characteristic which distinguishes them from those excluded from the group; and this characteristic or intelligible differentia must have a rational nexus with the object sought to be achieved by the enactment. It

59 is sufficient to cite the decision in In Re th Special Courts Bill, 1978 [1979] 2 SCR 476 and to refer to the propositions quoted at pp. 534-537 therein. Some of the propositions are stated thus: (SCC pp.424- 25, para 72) "(2) The State, in the exercise of its governmental power, has of necessity to make laws operating differently on different groups or classes of persons within its territory to attain particular ends in giving effect to its policies, and it must possess for that purpose large powers of distinguishing and classifying persons or things to be subjected to such laws. (3) The Constitutional command to the State to afford equal protection of its laws sets a goal not attainable by the invention and application of a precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary. (4) The principle underlying the guarantee of Article 14 is not that the same rules of law should be applicable to all persons within the Indian territory or that the same remedies should be made available to them irrespective of

60 differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is substantially the same. * * * (6) The law can make and set apart the classes according to the needs and exigencies of the society and as suggested by experience. It can recognise even degree of evil, but the classification should never be arbitrary, artificial or evasive. (7) The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and (2) that differentia must have a rational relation to the object sought to be achieved by the Act.

61 (8) The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short, while Article 14 forbids class discrimination by conferring privileges or imposing liabilities upon person arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned.

* * * (11) Classification necessarily implies the making of a distinction or discrimination between persons classified and those who are not members of that class. It is the essence of a classification that upon the class are cast duties and burdens different from those resting upon the general public. Indeed, the very idea of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of constitutionality."

62 determine reasonableness of the classification. It is clear that the role of public sector in the sphere of promoting the national economy and the context of felt needs of the times and societal exigencies informed by experience gained from its functioning till the enactment are of significance. There is no dispute that the impugned provision includes all employees of the public sector and none not in the public sector. The question is whether those left out are similarly situated for the purpose of the enactment to render the classification palpably arbitrary. It is only if this test of palpable arbitrariness applied in this manner is satisfied, that the provision can be faulted as discriminatory but not otherwise. Unless such a defect can be found, the further question of construing the provision in such a manner as to include all employees and not merely employees of public sector companies, does not arise.

(iii) When constitutional validity of Section 20 of Kerala Agriculturists’ Debt Relief Act, 1970 came up for consideration before Apex Court in the case of PATHUMMA AND OTHERS vs STATE OF KERALA AND OTHERS reported in (1978)2 SCC Page 1 on the ground of discrimination also, said

63 contention was negatived and held that while making classification, the Legislature cannot be expected to provide abstract symmetry and if classification rests upon a real and substantial distinction bearing a reasonable and just relation to the thing in respect of which it is made, then it does not amount to discrimination. It has been held by the Apex Court in said judgment as under: “40. This brings us to the second branch of the argument relating to the applicability of Article 14 of the Constitution of India. In this connection, Mr. Krishnamoorthy Iyer submitted in the first place, that the special treatment afforded to the debtors under Section 20 of the Act is wholly discriminatory and is violative of Article 14. Secondly, it was argued on behalf of the appellants in Civil Appeal No. 420 of 1973 that they being stranger auction-purchasers were selected for hostile discrimination as against a bonafide alienee who has been given complete exemption from the operation of the provisions of the Act. It is now well settled that what Article 14 forbids is

64 hostile discrimination and not reasonable classification. Equality before law does not mean that the same set of law should apply to all persons under every circumstance ignoring differences and. disparities between men and things. A reasonable classification is inherent in the very concept of equality, because all persons living on this earth are not alike and have different problems. Some may be wealthy; some may be poor; some may be educated; some may be uneducated; some may be highly advanced and others may be economically backward. It is for the State to make a reasonable classification which must fulfil two conditions: (1) The classification must he founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group. (2) The differentia must have a reasonable nexus to the object sought to be achieved by the statute. In the case of Shri Ram Krishna Dalmia v. Shri Justice S. R. Tendolkar & Ors. (AIR 1958 SC 538) the Court after considering a large number of its previous decisions observed as follows : "It is now well established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to, pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on

65 an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and (ii) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration".

This case has been relied upon in a large number of cases right from 1959 upto this date. In the case of State of Kerala & Anr. v. N. M. Thomas (supra) one of us (Fazal Ali, J.) while delivering the concurring judgment observed as follows regarding the various aspects of the concept of equality : (SCC p.376, para 158) "It is also equally well-settled by several authorities of this Court that Article 16 is merely an incident of Article 14. Article 14 being the genus is of universal application whereas - Article 16 is the species and seeks to obtain equality of opportunity in the services under the State. The theory of reasonable classification is implicit and inherent in the concept of equality for there can hardly be any country where all the

66 citizens would be equal in all respects. Equality of opportunity would naturally mean a fair opportunity not only to one section or the other but to all sections by removing the handicaps if a particular section of the society suffers from the same. It has never been disputed in judicial pronouncements by this Court as also of the various High Courts that Article 14 permits reasonable classification. But what Article 14 or Article 16 forbid is hostile discrimination and not reasonable classification. In other words, the idea of classification is implicit in the concept of equality because equality means equality to all and not merely to the advanced and educated sections of the society. It follows, therefore, that in order to provide equality of opportunity to all citizens of our country, every class of citizens must have a sense of equal participation in building up an egalitarian society, where there, is peace and plenty, where there is complete economic freedom and there is no pestilence or poverty, no discrimination and oppression, where there is equal opportunity to education, to work, to earn their livelihood so that the goal of social justice is achieved".

67 examining as to whether classification legislation based on population criteria for the purpose of levy of tax i.e., ‘rural’ and ‘urban’ would amount to hostile discrimination and thereby attracts Article 14 of the Constitution or not and has been answered in the negative by upholding the impugned legislation. It has been held by the Apex Court as under:

“15. There is always a presumption of constitutionality of a statute. If the language is rather not clear and precise as it ought to be, attempt of the Court is to ascertain the intention of the legislature and put that construction which would lean in favour of the constitutionality unless such construction is wholly untenable. However, where one has to look at a section not very well drafted but the object behind the legislation and the purpose of enacting the same is clearly discernible, the Court cannot hold its hand and blame the draftsman and chart an easy course of striking down the statute. In such a situation the Court should be guided by a creative approach to ascertain what was intended to be done by the legislature in enacting the legislation and so construe it as to give force and life to the intention of the

68 legislature. This is not charting any hazardous course but is amply borne out by an observation worth reproducing in extenso in Seaford Court Estates Ltd. v. Asher (1949) 2 All ER 155. It reads as under: "Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticised. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he

69 must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give "force and life" to the intention of the legislature. That was clearly laid down (3 Co Rep 7b) by the resolution of the judges (Sir Roger Manwood, C.B., and the other barons of the Exchequer) in Heydon's case (1584) 3 Co. Rep. 7a, and it is the safest guide today. Good practical advice on the subject was given about the same time by Plowden in his note (2 Plowd. 465) to Eyston v. Studd (1574), 2 Plowd. 463. Put into homely metaphor it is this: A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out ? He must then do as they would have done. A judge must not alter the material of which the Act is woven, but he can and should iron out the creases".

This view was re-affirmed in Norman v. Norman (1950) 1 All ER 1082. 16. Let it be remembered that the impugned measure is a taxing statute and in the matter of taxing statute the legislature enjoys a larger discretion in the

70 matter of classification so long as it adheres to the fundamental principle underlying the doctrine of classification. The power of the legislature to classify is of wide range and flexibility so that it can adjust its taxation in all proper and reasonable ways. In Khyerbari Tea Co. Ltd., & Anr. v. The State of Assam (1964)5 SCR 975 this Court observed as under: "It is, of course, true that the validity of tax laws can be questioned in the light of the provisions of Arts. 14, 19; and Art. 301 if the said tax directly and immediately imposes a restriction on the freedom of trade; but the power conferred on this Court to strike down a taxing statute if it contravenes the provisions of Articles 14, 19 or 301 has to be exercised with circumspection, bearing in mind that the power of the State to levy taxes for the purpose of governance and for carrying out its welfare activities is a necessary attribute of sovereignty and in that sense it is a power of paramount character". It was also observed that legislature which is competent to levy a tax must inevitably be given full freedom to determine which articles should be taxed, in what manner and at what rate. It would, therefore, be idle to contend that a State must tax everything in order to tax something. In tax matters, "the State is allowed to pick

71 and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably" (see Willis on 'Constitutional Law', p.587). This statement of law has been approved by this Court in the case of East India Tobacco Co. v. State of Andhra Pradesh (AIR 1962 SC 1753. The question, therefore, is, whether a tax of a certain kind can be levied on entry of goods in certain local areas, the classification of local areas, if found to be reasonable, the levy of tax would not be invalid on the ground that choosing certain areas only excluding some others would violate Article 14. Whether in this case the classification is reasonable would be presently examined but the contention that if the State Government is granted a choice in the matter of selection of local area, ipso facto, the statute would be unconstitutional as being violative of Article 14, must be negatived. 17. In order to ascertain whether the classification of local areas for the purposes of levy of tax is reasonable or not, a reference may be made to the impugned notification. Table annexed to the notification shows in all 27 local areas selected for levy of tax. They are again divided into three groups, A, B and C for selecting rates to be levied on different scheduled goods. A mere glance at the local areas selected and those according to the petitioner excluded, viz., areas within the jurisdiction of various Gram

72 Panchayats would bring in bold relief that population criterion appears to have been adopted in selecting local areas for levy of tax. Does population criterion provide a reasonable basis for classification vis-a-vis a tax levied on entry of goods in the area ? It would be undeniable that population basis would provide a reasonable criterion for selecting local areas for the purpose of levy tax simultaneously excluding those which do not answer the population criterion. One unquestionable element scientifically established about a taxing statute is that the yield from the tax must be sufficiently in excess of cost of collection so that the tax which is levied for augmenting public finances to be utilised for public good would be productive. Where the cost of administrative machinery required to be set up for collecting tax is either marginally lower or equal or marginally higher than the yield from the tax, the measure would be uneconomic if not counterproductive. Now, if the tax in this case is levied on the entry of scheduled goods in local areas, the yield would be directly proportionate to the consumption of the goods in local areas and the consumption of goods is directly related to the population within the local area. Viewed from this angle, population criterion would provide a reasonable basis for classification for selectively levying the tax by choosing local area and by specifying different rates so as to make the tax productive. Therefore, there is no

73 substance in the contention that the classification in this case was unreasonable. The High Court was accordingly in error in holding that Section 3 did not permit the State Government to pick and choose local areas for the levy of tax and that levy of tax under Section 3 in all local areas within Karnataka State was a minimum condition for exercise of the power under Section 3. The contention must, accordingly be negatived.”

74 tax payable under Entry 59A of III Schedule on sale of liquor including Beer, Fenny, liqueur and Wine by a dealer who is not a person holding licence in Form No.CL-9 for vending in Bruhat Bangalore Mahanagara Palike area, City Municipal Corporation areas, City Municipal Council areas and Town Municipal Council or Town Panchayat areas issued under Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 or dealer who is not holding licence in CL-4 or CL-6A or CL-7 issued under Karnataka Excise (Sale of Indian and Foreign Liquor) Rules, 1968 and they are exempted.

75 be no further curtailment of the State’s power of taxation.

76 guaranteed under Article 14 and 19(1)(g) of the Constitution of India.

77 under the Karnataka Excise (Excise Duties and Fees) Rules, 1968 Additional Duty was levied on liquor, Fenny, Wine and Beer which was due to merger of sales tax with excise duty and Rule 2AE and 2AF being added to Karnataka Excise (Excise Duty and Fee) Rules, 1968 .

78 vending liquor in Bruhat Bangalore Mahanagara Palike area, City Municipal Corporation areas, City Municipal Council areas and Town Municipal Council or Town Panchayat areas. The said notification also exempts tax payable on liquor when it is sold by certain categories of dealers.

79 Hon’ble Apex Court in the case of INCOME TAX OFFICER, SHILLONG AND OTHERS vs R.TAKIN ROY RYMBAI AND OTHERS reported in (1976)1 SCC 916 to the following effect: “27. While it is true that a taxation law, cannot claim immunity from the equality clause in Article 14 of the Constitution, and has to pass like any other law, the equality test of that article, it must be remembered that the State has, in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence, the legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. Nor the mere fact that a tax falls more heavily on some in the same category, is by itself a ground to render the law invalid. It is only when within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a

80 violation of Article 14. (See East India Tobacco Co. v. State of Andhra Pradesh (AIR 1962 SC 1733)); Vivian Joseph Ferriera v. Municipal Corporation of Greater Bombay ((1972)1 SCC 70) ; Jaipur Hosiery Mills v. State of Rajasthan ((1970)2 SCC 26).

Suffice it to say that classification of sources of income is integral to the basic scheme of the 1961 Act. It is nobody’s case that the entire scheme of the Act is irrational and violative of Article 14 of the Constitution. Such an extravagant contention has not been canvassed before us.

Thus the classification made by the aforesaid sub- clause (a) for purposes of exemption is not unreal or unknown. It conforms to a well recognized pattern.

It is based on intelligible differentia. The object of this differentiation between income accruing or received from a source in the specified areas and the income accruing or received from a source outside such areas is to benefit not only the members of the schedule tribes residing in the specified areas but also to benefit economically such areas. If the contention advanced by Mr.Lahiri is

81 accepted and a member of the scheduled tribe residing in a specified area is held entitled to the exemption irrespective of whether the source of his income lies within or outside such areas, it will lead to potentially mischievous results and evasion of tax by assessees who do not belong to the scheduled tribes. All that a non-tribal assessee in India need do would be to enter into a sham partnership with a member of the scheduled tribe residing in the specified area and ostensibly give him under the partnership a substantial share of the profits of the business while, in reality, pay the tribal only a nominal amount. Moreover, but for the condition provided in sub-clause (a), the exemption granted under Section 10(26) is likely to operate unequally and cause inequality of treatment between individuals similarly situated. A tribal residing in the scheduled areas earning large income from business located outside the specified areas, would be totally exempt while the non-tribal whose source of income is a share in the same business would be taxed although with reference to the source of the income, both were similarly situated

82 promotion of educational and economic interests of the weaker sections of the people, particularly the scheduled castes and scheduled tribes. Its primary objective is to provide protection to the “weaker sections” of the society. Members of the scheduled tribes who are enterprising and resourceful enough to move out of the seclusion of the tribal areas and successfully compete with their Indian brethren outside those areas and rise to remunerative positions in service or business, cease to be “weaker sections”. In any case, the State is the best judge to formulate its policies and to decide how far and for what period and in what situations, the members of a particular scheduled tribe residing in a particular tribal area, should be afforded the protection and benefit in the matter of promotion of their educational and economic interests.”

83 be ruled out as irrelevant in levy of tax on the sale or purchase of goods. It has been held by Hon’ble Apex Court in the case of K.M.MOHAMED ABDUL KHADER FIRM vs THE STATE OF TAMIL NADU AND OTHERS reported in (1985)58 STC 12 to the following effect: “The first contention urged on behalf of the petitioners is that since the State Legislature had already provided for the levy of a tax on sales by the Act of 1959 and had also enacted a further statute authorising the levy and collection of a surcharge which is in truth and substance the imposition of an additional sales tax, it could not legally go on legislating further enactments providing again for levy of additional sales tax. On this basis it is contended that the provisions of the impugned Act, 1976 are ultra vires and devoid of legislative competence. We see no substance in this contention. The impugned enactment has merely amended the 1970 Act. It has not introduced a new tax; what it has done is only to amend the 1970 Act by providing for a different method of computation of the additional tax leviable under that Act. The validity of the 1970 Act has been upheld by a Constitution Bench of this Court in the case of S. Kodar v. State of Kerala (1974) 34 STC 73 (SC) :1975)1 SCR 121. Hence there is no longer any scope for the

84 petitioners to contend that the State Legislature had no competence to provide for the levy of additional sales tax. The nature and identity of the additional sales tax imposed by the 1970 Act have not been in any way altered by the impugned Act. As already pointed out what has been done by the impugned Act is only to provide for a different mode of computation of the additional sales tax by linking the rate of levy to the taxable turnover instead of to the amount of tax assessed under the Act of 1959. The constitutional validity of the levy of additional tax is not in any manner affected by the said change brought about in the mode of levy and computation as a result of the amendments effected by the impugned Act. It was strongly contended on behalf of the petitioners that the prescription of different rates of additional sales tax depending upon the quantum of turnover of the different assessees is totally repugnant to the concept of levy of tax on sales. Another argument advanced by counsel for the petitioners was that since under the amended provisions of Section 2, two dealers selling the same commodity will be liable to pay additional tax at different rates depending upon their respective annual turnovers, there is a clear violation of Article 14 of the Constitution as dissimilar treatment is meted out to persons similarly situated. A further contention urged on behalf of the

85 petitioners was that the levy in its present form is really a tax on 'gross income' and not a tax on 'sales' and hence it is ultra vires the State Legislature as it has no competence to levy a tax on income other than agriculture income. Another ground of attack pressed by Counsel was that the levy of additional sales tax under the impugned Act is confiscatory in nature, that it imposes unreasonable restrictions on the petitioner’s right to carry on business and offends Article 19 of the Constitution, particularly in view of the prohibition contained in sub- section (2) of section 2 against collection of additional tax from the consumers. Yet another point taken in the Writ Petitions but not very seriously urged at the time of hearing is that the levy of additional tax under the impugned Act offends Article 301 of the Constitution since the imposition of the additional liability would seriously affect the business of the petitioners and on account of their inability to bear the heavy burden their right to carry on freely trade, commerce and intercourse within the territory of India will be adversely affected.

In Konduri Buchirajalingam vs.State of Hyderabad (1958)9 STC 397 (SC) this Court said: “It is then said xxx from another party.’

As we said, the additional tax is a tax upon sales of

86 goods and not upon the income of a dealer and so long as it is not made out that the tax is confiscatory, it is not possible to accept the contention that because the dealer is disabled from passing on the incidence of tax to the purchaser, the provisions of the Act impose an unreasonable restriction upon the fundamental rights of the appellants under article 19 (1) (g) or 19 (1) (f)”. Dealing with the contention that since the provisions of the Act imposed different rates of tax on different dealers depending upon their turnover there was a violation of Article 14 of the Constitution, Mathew J., who spoke for the Court observed: "The last contention, namely, that the provisions of the Act impose different rates of tax upon different dealers depending upon their turnover which in effect means that the rate of tax on the sale of goods would vary with the volume of the turnover of a dealer and are, therefore, violative of article 14 is also without any basis. Classification of dealers on the basis of their respective turnovers for the purpose of graded imposition so long as it is based on differential criteria relevant to the legislative object to be

87 achieved is not unconstitutional. A classification, depending upon the quantum of the turnover for the purpose of exemption from tax has been upheld in several decided cases. By parity of reasoning, it can be said that a legislative classification making the burden of the tax heavier in proportion to the increase in turnover would be reasonable. The basis is that just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one. The flat rate is thought to be less efficient than the graded one as an instrument of social justice. The large dealer occupies a position of economic superiority by reason of his greater volume of his business. And to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality. The economic wisdom of a tax is within the exclusive province of the legislature. The only question for the court to consider is whether there is rationality in the belief the legislature that capacity to pay the tax increases, by and large, with an increase of receipts.

"Certain it is that merchants have faith in such a correspondence and act upon that faith…… If experience did not teach that economic advantage goes along

88 with larger sales, there would be an end to the hot pursuit for wide and wider markets .....In brief, there is a relation of correspondence between capacity to pay and the amount of business done. Exceptions, of course, there are. The law builds upon the probables, and shapes the measure of the tax accordingly...... At the very least, an increase of gross sales carries with it an increase of opportunity for profit, which supplies a rational basis for division into classes, at all events when coupled with evidence of a high degree of probability that the opportunity will be fruitful". Stewart Dry Goods Company v. Levis 294 US 550 (See the dissenting judgment of Justice Cardozo, J., Brandeis and Stone J.)

The reasoning of the minority in that case appeals to us as more in consonance with social justice in an egalitarian state than that of the majority.

As we said, large dealer occupies a position of economic superiority by reason of his volume of business and to make the tax heavier on him both absolutely and relatively, is not arbitrary discrimination but an attempt to proportion the payment to capacity to pay and thus arrive in the end at a more genuine equality. The capacity of a dealer, in particular circumstances, to pay tax is not an irrelevant factor in fixing the rate of tax and one index of capacity is the quantum of turnover. The argument that while a

89 dealer beyond certain limit is obliged to pay higher tax, when others bear a less tax, and it is consequently discriminatory, really misses the point, namely, that the former kind of dealers are in a position of economic superiority by reason of their volume of business and form a class by themselves. They cannot be treated as on a par with comparatively small dealers. An attempt to proportion the payment to capacity to pay and thus bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on the sale or purchase of goods. The object of a tax is not only to raise revenue but also to regulate the economic life of the society".

90 notification where liquor is sold to the customers or served in loose quantities with food articles in the licenced premises as stipulated in the conditions of the licence. The CL-9 holder licences provide the facilities of varying degrees of comforts to different class of elite customers and as such, they would have the advantage of fixing the sale price with value addition without any restriction. It is in this background, as already noticed herein above, from the statement of objects and reasons, levy of tax on sale of liquor including Beer, Fenny, Liqueur and Wine came to be introduced. Thus, it could be seen that State legislature in its economic wisdom of taxation has chosen to provide for levy of tax on liquor sold by certain dealers namely, Bar and Restaurants operating in urban areas i.e., licence issued in Form No.CL-9 and in respect of Star Hotels, Clubs and Hotel, Boarding Houses and Lodges located

91 anywhere in the State considering the potential for tax collection being huge, and at the same time, exemption has been extended to similar licence holders running Bar and Restaurants by operating them in rural areas considering the fact of low value addition between the price at which liquor is purchased and sold to customers in rural areas.

92 Restaurants located in the same rural area which would not cater to the elite class of customers or customers of economic superiority have been exempted by virtue of notification dated 28.02.2014.

93 residents of the Hotel and their guests who obviously would come from far off places. The customers of this category are affordable class who are willing to pay more for the comfort with varying degree of facilities. Hence, it enables the dealer to fix the rates of liquor without any restriction. Thus, the Legislature with the sole intention of capturing substantial value addition taking place on liquor consumed in the premises of a Boarding House and Lodge, has brought this class of dealer under the net of tax, but Bar and Restaurants located in rural area which do not have the advantage of catering to the class of customers of economic superiority are exempted. Thus, the impugned notification dated 28.02.2014 which exempts liquor sold by dealers holding licence in Form No.CL-9 operating in rural areas in comparison with liquor sold by a person operating a Boarding House and Lodge in a rural area

94 holding licence in Form No.CL-7 would form separate class of dealers. The State Legislature in its economic wisdom of taxation having chosen to provide for levy of tax on liquor sold by certain licence holders, considering the potential for tax collection on the huge value addition while exempting others whose sale price is regulated by the MRP indicated on the label of the container cannot be construed as discriminatory. The classification of dealers based on value addition criteria for the purpose of tax levy and exempting the dealers based on area criteria cannot be held to be discriminatory.

Hence, I proceed to pass the following:

ORDER

(1) Writ petitions are hereby dismissed. (2) Rule discharged. (3) Costs made easy.

SD/- JUDGE

*sp