1966 (9) TMI 139 - SC - Indian Laws

Legislature can impose health cess on liquor shop rent as valid excise duty collection method

SHINDE BROS. Versus DEPUTY COMMISSIONER RAICHUR

The SC addressed whether the Mysore Legislature could enact the Health Cess Act, 1962, imposing health cess on shop rent for liquor licenses. The majority ... Competence of the Mysore Legislature to enact the Health Cess Act, 1962 - levy of health cess on shop rent - Power to levy sales tax as well as excise duty in the same legislature - Nature of levy of excise duty - licences for the sale of Toddy and for sale of arrack - expression 'duty of excise' - whether the amount for which the exclusive privilege of selling liquor is sold by action can be said to be a duty of excise - Whether the revenue realised at a public auction of the privilege to sell an excisable commodity is a duty of excise? SIKRI, J. - HELD THAT:- The method of collection does not change the nature of the tax or run counter to any legislative power, rival or other. The duty is uniform. Each notification fixes the amount of duty payable and the sale price including the duty. Where goods have first to be obtained from breweries or distilleries the price at which they can be got (which price does not include excise duty) is also fixed. The excise contractor who bids at the auction knows the fixed sale price, the amount of duty which his bid would represent and then estimates the likely sales and bids for the privilege. The right to collect excise duties is thus framed to him for a lump payment which the State takes as the excise duty in final settlement. As I said the business of excise contractors is a speculative business. Government is not concerned with whether they sell more or less. The Government fixes the upset price for such auctions based on statistics of sales and consumptions available to it and is quite satisfied when the highest bid is satisfactory. To say that such a collection of excise duty renders the levy into a rent for a shop is to miss the reality. If the privilege to sell liquor produced in the State and that produced elsewhere in India are both auctioned on the condition that the duty on both kinds of liquor is the same, the requirements of the constitutional provision as to countervailing duties would be amply satisfied. It would be making a fetish of equal rates if one wanted absolute equality not only in rates but in everything. Further imposition of countervailing duties is not compulsory. The legislature need not impose them if it cannot make them equal. It is argued that the words used here are 'excise revenue' and not 'excise duty'. It is hardly a question of semantics. The distinction sought to be made is without a difference. Wanchoo, J. had discussed the nature of excise duty before proceeding to compare the auction money with duties of excise and he found that sale of the privilege to the highest bidder was a method of realising 'duty' and he obviously meant excise duty. I find that it furnishes a complete answer and is indistinguishable on the slender ground that the expression 'excise revenue' or 'duty' have been used and not the expression 'excise duty'. To hold otherwise is to depart from this and the earlier case and to overrule them. I am, therefore, of the opinion that the so called shop-rent was only a means of collecting excise duty and the health cess which was an additional levy alongwith the excise duty was perfectly valid. Being a new tax it cannot be described as a tax on tax. The earlier tax only furnished a measure. I would according confirm the decision of the High Court and dismiss the appeals with costs. R.S. Bachawat, J. - HELD THAT:- A charge for a license to sell an excisable article may be a fee or a tax. If it is a tax. it can satisfy the test of a duty of excise, when it is so connected with the manufacture or production of the article as to be, in effect, a tax on the manufacture or production. Otherwise, such a tax does not fall within the classification of a duty of excise. The charge paid for the license to sell either arrack or beer has no connection with the production of the liquor. The toddy license gives the privilege of sale of toddy. The licensee is not necessarily a producer of toddy. If he produce, toddy, he pays tax at the prescribed rate on each tree from which toddy is drawn. As a producer of toddy he pays the tree tax. The charge for the toddy license has no connection with the production of today. The shop rent or the charge for the license to sell arrack, beer or toddy does not satisfy the test of a duty of excise. As the shop rent is not a duty of excise the State legislature is not competent to make a law levying a surcharge on the shop rent under Entry 51, List II. The Mysore Health Cess Act, 1962, in so far as it purports to levy a surcharge on the shop rent cannot he sustained under Entry .51, List II. I express no opinion on the question whether this levy under the Mysore Health Cess Act, 1962 can be justified under some other Entry in List II. But as Counsel for the State did not seek to justify the levy under any other Entry, I am bound to hold that the Act, so far as it makes this levy, is unconstitutional. It is not quite clear whether the surcharge of nine naya paise in the rupee on the shop rent, though called a health cess, can be justified independently of the Health Cess Act, 1962. Under the Mysore Excise Act and the Hyderabad Abkari Act, the State Government could grant the exclusive. privileges of sale of liquor on such terms and conditions as it thought fit. It could impose the condition that the grantees would pay a fixed shop rent and a surcharge of nine naya paise in the rupee thereon. A charge of ₹ 500 as shop rent and a surcharge of nine naya paise in the rupee thereon are, in effect, a charge of ₹ 545 for shop rent. The appellants cannot claim refund of the surcharge called the health cess on shop rent, if it was or could be collected by the State Government by virtue of its powers under the existing Excise Acts. On the other hand, the State Government is liable to refund the surcharge if it was and could be collected under the Mysore Health Cess Act, 1962 only. In the absence of arguments and fuller materials, the point is left open. In the result, the appeals are allowed in part, it is declared that the Mysore Health Cess Act, 1962. so far as it makes a levy of health cess on shop rent is beyond the powers of the State legislature and is invalid. The question whether the Mysore Health Cess Act, 1951 is valid as also the question whether the appellants are entitled to refund of the health cess collected from there are left open, and they are relegated to a suit. ORDER - In accordance with the opinion of the majority, the appeals are allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in these appeals were:(a) Whether the Mysore Legislature was competent to enact the Mysore Health Cess Act, 1962, imposing a health cess on certain items of State revenue, including shop rent paid by licensees for the exclusive privilege of selling toddy and arrack, having regard to the constitutional entries in List II of the Seventh Schedule.(b) Whether the health cess imposed under the Act was in substance a tax on tax (a surcharge on an existing tax), and if so, whether such a levy was constitutionally permissible.(c) Whether the shop rent or kist paid by the licensees for the exclusive privilege of retail sale of toddy or arrack constituted a 'duty of excise' within Entry 51, List II of the Constitution and Schedule A of the impugned Act, thereby justifying the levy of health cess under the Act.(d) Whether the levy of health cess on shop rent was ultra vires the State Legislature's powers under the Constitution.(e) Ancillary issues included the nature and definition of excise duty, the relationship between the levy of excise duty and the levy of health cess, and the validity of retrospective imposition of the health cess.2. ISSUE-WISE DETAILED ANALYSIS(a) Competence of the Mysore Legislature to enact the Health Cess Act, 1962Relevant legal framework and precedents: The Constitution of India divides legislative powers between the Union and the States through the Seventh Schedule. Entry 51, List II, empowers States to levy duties of excise on alcoholic liquors for human consumption. The Mysore Health Cess Act, 1962, imposed a health cess at the rate of nine naye paise per rupee on specified items of State revenue, including excise duties.Court's interpretation and reasoning: The Court examined the charging section (Section 3) and recovery section (Section 4) of the Health Cess Act, 1962, which levied the cess on land revenue, State revenue items listed in Schedule A, and local authority taxes in Schedule B. Schedule A included duties of excise leviable by the State under any law on alcoholic liquors and narcotic drugs.The Court held that the legislature was competent to levy a health cess on existing State revenues, including excise duties, as a surcharge or increment, even though the Act did not use the words 'surcharge' or 'additional duty'. The form or name of the levy (being a cess) did not detract from its substance as a tax on existing State revenue items.Key evidence and findings: The Act's provisions showed that the health cess was to be levied and collected along with the underlying taxes and duties, applying the same rules for assessment and recovery. The Court held that the word 'on' in the charging section meant the cess was a percentage of the existing revenue items, not a tax on the tax itself.Application of law to facts: The Court concluded that the State Legislature had legislative competence under List II entries to impose the health cess on excise duties and other State revenues specified.Treatment of competing arguments: The appellants argued that the health cess was a tax on tax and that no entry in the Constitution authorized such a levy. The Court rejected this, holding that the health cess was a surcharge on existing taxes and was within legislative competence.Conclusion: The Mysore Legislature was competent to enact the Health Cess Act, 1962, imposing a health cess on specified State revenues.(b) Whether the shop rent paid by licensees for exclusive privilege of selling toddy or arrack is a duty of exciseRelevant legal framework and precedents: Entry 51, List II, authorizes States to levy duties of excise on alcoholic liquors manufactured or produced in the State. The Mysore Excise Act, 1901, and the Hyderabad Abkari Act governed excise duties and licensing in the State. Sections 16 to 18 of the Mysore Excise Act empowered the Government to grant exclusive privileges of manufacture or sale and to levy duties by various modes, including payment for such privileges.Judicial precedents considered included the Federal Court and Privy Council decisions on the nature of excise duty, including the principle that excise duty is primarily a duty on manufacture or production of goods, but may be collected at convenient stages, including by auction of privileges.Court's interpretation and reasoning: The Court analyzed the nature of the 'shop rent' paid by licensees, which was in fact the amount bid at auctions for the exclusive privilege of retail sale of toddy or arrack. The Court noted that the licensee might or might not be the actual producer, but the payment was effectively a composition amount equivalent to excise duty collected in advance.The majority held that this payment was a duty of excise because:It was a levy connected with goods produced or manufactured in the State.The method of collection (auction of exclusive privilege) did not alter the nature of the duty.The ultimate incidence of the excise duty was on the consumer, but the duty was collected from the licensee as a producer or manufacturer or their agent.The levy was uniform and fixed by notification, including the duty and minimum retail price, ensuring uniform incidence.Historical legislative practice and judicial decisions supported the validity of such auction-based collection of excise duties.However, the minority took the view that the shop rent was not a duty of excise because:The taxable event for excise duty is manufacture or production, whereas the shop rent was a payment for the privilege of sale, a business activity.The licensee might not be the producer; in arrack and beer cases, the licensee was not involved in manufacture.The payment bore no relation to quantity or value of goods produced or manufactured.The levy was not uniform in incidence and was unrelated to production, thus failing the test for excise duty.Therefore, the health cess imposed on shop rent was beyond the State's legislative competence under Entry 51, List II.Key evidence and findings: The Court examined the Mysore Excise Act provisions, licensing conditions, auction notifications, and the nature of payments made by licensees. It also reviewed judicial precedents defining excise duty and distinguishing it from sales tax or license fees.Application of law to facts: The majority applied the principle that excise duty is a tax on manufacture or production and that collection methods may vary, including by auction of privileges, to hold the shop rent was an excise duty. The minority applied the test of close connection to manufacture and uniform incidence to hold otherwise.Treatment of competing arguments: The majority rejected the argument that the levy was a tax on tax or that it was a mere license fee. The minority emphasized the absence of direct connection to manufacture and the nature of the payment as privilege for sale.Conclusion: The majority held shop rent was a duty of excise; the minority held it was not.(c) Validity of the levy of health cess on shop rent under the Mysore Health Cess Act, 1962Relevant legal framework and precedents: The health cess was levied as a percentage on items of State revenue, including excise duties. The constitutional competence to levy such a surcharge depends on whether the underlying item is a duty of excise within Entry 51, List II.Court's interpretation and reasoning: The majority held that since the shop rent was a duty of excise, the health cess imposed on it was a valid surcharge within the legislative competence of the State. The minority held that since shop rent was not a duty of excise, the health cess imposed on it was invalid and ultra vires.Key evidence and findings: The Court noted the absence of any other constitutional entry relied upon by the State to justify the levy on shop rent. The minority emphasized that the State did not seek to justify the health cess under any other entry.Application of law to facts: The validity of the health cess depended on the classification of shop rent; the majority upheld it, the minority struck it down.Treatment of competing arguments: The majority rejected the contention that the health cess was a tax on tax and held it was a surcharge on a valid excise duty. The minority held the health cess was an invalid tax on a non-excisable item.Conclusion: The health cess on shop rent was valid according to the majority; invalid according to the minority.(d) Retrospective levy of health cessRelevant legal framework and precedents: Retrospective taxation is generally permissible if clearly authorized by law. The Court noted precedents upholding retrospective increases in excise duties.Court's interpretation and reasoning: The Court rejected the contention that retrospective imposition of the health cess was invalid, citing legislative powers and precedents supporting retrospective taxation.Conclusion: The retrospective levy of health cess was valid.(e) Other ancillary issuesThe Court considered the nature of the levy under the Mysore Excise Act and the Hyderabad Abkari Act, the distinction between excise duty and sales tax, and the legislative practice of collecting excise duties by auction of privileges. It held that the method of collection does not alter the nature of the duty, which is a tax on manufacture or production.3. SIGNIFICANT HOLDINGS'Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience.''The taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. We may in this connection contrast sales tax which is also imposed with reference to goods sold where, the taxable event is the act of sale.''The Mysore Legislature was competent to enact the Mysore Health Cess Act, 1962, imposing a health cess on excise duties and other State revenues specified in the Act. The health cess is a surcharge on existing taxes and is not invalid merely because it is called a cess or because it is a tax on tax.''The shop rent or kist paid by licensees for the exclusive privilege of selling toddy or arrack is a duty of excise within Entry 51, List II of the Constitution, as it is a levy connected with the manufacture or production of goods, collected by auction of exclusive privileges, and the method of collection does not alter its nature.''The health cess imposed on the shop rent under the Mysore Health Cess Act, 1962, is valid and within the legislative competence of the State.''Retrospective imposition of the health cess is valid and supported by legislative powers and judicial precedents.''The Explanation to Item 1 in Schedule A of the Health Cess Act, 1962, which sought to include fees and other amounts payable under Section 18 of the Mysore Excise Act as excise duties, was struck down as ultra vires.'Final determinations:The appeals were allowed to the extent of declaring that the State had no authority to levy health cess on shop rent under the Mysore Health Cess Act, 1962, only according to the minority view; the majority upheld the levy.The Explanation to Schedule A of the Health Cess Act was struck down.The health cess on tree tax and other excise duties was valid.The retrospective levy of health cess was valid.The question of validity of the Mysore Health Cess Act, 1951, and refund claims under it were left open.