2008 (12) TMI 714 - HC - VAT and Sales Tax

Luxury tax ruling: Clubs /= Hotels. Retrospective amendment overturned.

The court found that including 'club' in the definition of 'hotel' and inserting an Explanation to section 2(4) of the Karnataka Tax on Luxuries Act, 1979 ... Amendments made to section 2(4) of the Karnataka Tax on Luxuries Act, 1979 by Act No. 5 of 2000 - Whether unconstitutional and beyond the powers of the State Government? Held that:- The inclusion of 'club' in the definition of 'hotel' and the Explanation inserted to section 2(4) of the Act by way of an amendment with retrospective effect are not legal, valid and correct; therefore point is answered accordingly. Appeal allowed. Issues Involved:(a) Legality and validity of including 'club' in the definition of 'hotel' and the insertion of Explanation to section 2(4) of the Karnataka Tax on Luxuries Act, 1979 with retrospective effect.(b) Whether the order of the learned single judge warrants interference.Issue-wise Detailed Analysis:(a) Legality and Validity of Including 'Club' in the Definition of 'Hotel' and the Insertion of Explanation to Section 2(4) of the Act with Retrospective Effect:The court analyzed the distinction between clubs and hotels, noting that clubs are formed by associations of individuals for specific purposes, whereas hotels are commercial entities established for profit. The court emphasized that hotels operate with a profit motive, while clubs do not, and thus, the two cannot be equated. The court cited the Bangalore Golf Club case, which held that a hotel does not include a club, prompting the State Legislature to amend the definition of 'hotel' to include clubs. However, the court found this amendment improper, as the element of business, which is essential for levying luxury tax, is absent in clubs.The court highlighted that the definition of 'hotel' in section 2(4) of the Act includes the phrase 'by way of business,' which implies a commercial activity. The Explanation inserted, which includes the words 'whether or not in the course of business,' conflicts with the main definition. This conflict results in treating unequals equally, violating Article 14 of the Constitution of India. The court referred to the Supreme Court's decision in S. Sundaram Pillai v. V.R. Pattabiraman, which stated that an Explanation should clarify and support the main provision without changing its meaning.The court also addressed the retrospective nature of the amendment, noting that tax statutes creating new liabilities should operate prospectively, not retrospectively. This principle was supported by the Supreme Court's decision in R. Rajagopal Reddy v. Padmini Chandrasekharan. The retrospective amendment was deemed violative of natural justice, as clubs could not collect and remit tax for past transactions. The court concluded that the retrospective amendment was bad in law and liable to be struck down.(b) Whether the Order of the Learned Single Judge Warrants Interference:The court found that the learned single judge erred in upholding the amendment and dismissing the writ petitions. The judge's observation that the Legislature could levy tax on clubs irrespective of their business activity was contrary to the definition of 'hotel' in section 2(4) of the Act and violated Article 14 of the Constitution. The court emphasized that each word in a statutory provision must be given its weight, and the Explanation should not override the main definition.The court held that the inclusion of 'club' in the definition of 'hotel' and the Explanation inserted to section 2(4) of the Act with retrospective effect were not legal, valid, or correct. Consequently, the appeals were allowed, the common order of the learned single judge was set aside, and the writ petitions were allowed. The amended provisions and the Explanation were struck down as bad in law, and the impugned notices were quashed. The court declared that a club cannot be equated to a hotel for the purpose of levying luxury tax under the Act.