2025 (2) TMI 892 - HC - VAT / Sales Tax

Section 3C entertainment tax cess on cinema tickets upheld as constitutional for cultural welfare fund

The Kerala Film Exhibitors Federation, P.V. Basheer Versus State Of Kerala, The Secretary To Government, Thiruvananthapuram, The Kerala Cultural Activists Welfare Fund Board, Thiruvananthapuram and Others.

Kerala HC upheld the constitutional validity of Section 3C of the Kerala Local Authorities Entertainments Tax Act, 1961, which levies a cess on cinema ... Constitutional validity of Section 3C of the Kerala Local Authorities Entertainments Tax Act, 1961 - Section 5 of the Kerala High Court Act, 1958 - levy of cess on cinema tickets to fund the Kerala Cultural Activists' Welfare Fund - HELD THAT:- The Cess levied under Section 3C of the Act of 1961 and collected is for the Kerala Cultural Activists' Welfare Fund, established under the Act of 2010. This Cess shall not exceed Rs. 3/- per cinema admission where the ticket price is more than Rs. 25/-. The local authority has to collect the Cess along with the tax on cinema admission and, after deducting the collection charges at a rate specified by the Government, has to transfer the proceeds to the Kerala Cultural Activists' Welfare Fund Board. The Cess is levied on the cinema viewers and not on the theatre owners. The impugned provision seeks to levy a cess on the ticket purchased by cinema viewers for the purpose of entertainment, and, therefore, it is clearly relatable to entertainment under Entry 62 of List II, VII Schedule to the Constitution of India. In the case of M/s. Vijayalakshmi Rice Mill [2006 (8) TMI 307 - SUPREME COURT], the Hon'ble Supreme Court, had an occasion to consider the term 'Cess'. In this case, a cess under the Andhra Pradesh Rural Development Act, 1986, which was in addition to the purchase of sales tax, was the subject matter of challenge. The contention was that the enactment does not fall in any of the entries in List II or List III of Schedule VII to the Constitution of India. The Supreme Court considered the question of whether the said impost was a fee or a tax. In that context, the Supreme Court elaborated on the term 'Cess' and held that ordinarily, Cess is also a tax but is a special kind of tax. The Cess can also mean a tax levied for a special purpose or as an increment to the existing tax and, in given circumstances, a fee. In the case at hand, entertainment tax is already levied under the Act of 1961 and the Cess under Section 3C is an additional levy. Thus, the contention of the learned Senior Advocate for the Appellants that under Entry 62 of List II of Schedule VII to the Constitution of India, only tax can be levied, and Cess cannot be levied is without merit. The Cess is another term for the tax that is levied, which is a special kind of tax. The levy of impugned Cess is traceable to Entry 62 of List II, VII Schedule to the Constitution of India. If the levy of the impugned Cess on entertainment improves the quality of entertainment, then a broad correlation will be established. We find a correlation between the Cess on entertainment levied on the cinema viewers as a fee and the utilisation of the Fund for the welfare of cultural activists. That is because the levy on cinema viewers contributes to the welfare of cultural artists in the State and the overall development of cultural and artistic ethos. When cultural activities relatable to art are supported and valued, it fosters a culture that appreciates art. This then creates a positive cycle of creativity and appreciation. When society encourages and supports artists, the overall artistic ethos strengthens, leading to quality artistic output - the impugned Cess can be traced to the legislative power of the State Government to Entries 62 and 66 of List II, Schedule VII to the Constitution of India, and the levy of this Cess is relatable to the benefits received by the cinema viewers on whom the Cess is levied. Challenge to levy of impugned Cess on the grounds of violation of Articles 14 and 19 of the Constitution of India - HELD THAT:- The Cess impugned is to be collected by the local authority. The proceeds of the Cess have to be remitted by the local authority to the account of the Kerala Cultural Activists' Welfare Fund Board. There is no role for the theatre owners, and the levy does not fall on them. No data has been provided to demonstrate how this levy amount per ticket has affected the functioning of the theatre owners' business. This argument is not supported by adequate pleadings and cannot be accepted. Conclusion - i) The constitutionality of Section 3C upheld, affirming the State's legislative competence under Entry 62 of List II. ii) The cess was a valid tax on entertainment, serving a specific purpose of funding the welfare of cultural activists. There is no merit in the challenge. There is no error in the view taken by the learned Single Judge - Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the levy of a cess under Section 3C of the Kerala Local Authorities Entertainments Tax Act, 1961 (Act of 1961) for the Kerala Cultural Activists' Welfare Fund (Act of 2010) falls within the legislative competence of the State under Entries 62 and 66 of List II, Seventh Schedule (State List), having regard to the nature of the impost (tax/cess/fee) and the doctrine of pith and substance. 2. Whether the impugned cess can be sustained as a 'cess' or 'fee' distinct from a tax, and if so whether the requisite quid pro quo or nexus exists between the persons charged (cinema viewers) and the benefits conferred on cultural activists. 3. Whether the Central Cine-Workers Welfare Fund Act, 1981 (Central Act) occupies the field or creates repugnancy such that the State enactment (Section 3C/Act of 2010) is constitutionally invalid under Articles 245-254 and the distribution of legislative subjects between the Union, State and Concurrent Lists. 4. Whether the impugned levy infringes fundamental rights under Articles 14 and 19 of the Constitution by discriminatory application or unreasonable burden on trade/business of theatre owners. ISSUE-WISE DETAILED ANALYSIS Issue 1 - State legislative competence: levy under Entry 62 (tax on entertainments) and Entry 66 (fees) - legal framework Legal framework: Article 245-246 read with Seventh Schedule allocate legislative fields. Entry 62 (pre- and post-GST language) concerns taxes on entertainments; Entry 66 permits fees in respect of matters in the State List (excluding court fees). Doctrine of pith and substance governs characterization of legislation; entries must be read liberally; incidental encroachments ignored. Precedent Treatment: The Court relied on Drive-in Enterprises (Supreme Court) for application of pith and substance to entertainment levies and on Hoechst/Kesoram for principles of legislative competence and presumption of constitutionality. Municipal Committee, Patiala was cited for judicial notice of legislative wisdom in policy matters. Interpretation and reasoning: The Court examined Section 3C's object, operation and effects: a levy not exceeding Rs.3 on cinema admissions over Rs.25, collected by local authorities with proceeds remitted to the State-constituted Welfare Fund. In pith and substance the impost is on entertainment (the cinema viewer), not on theatre owners. The levy is therefore relatable to Entry 62. Entry 62 post-GST still preserves local authorities' power to levy entertainment taxes; the constitutional amendment/GST did not negate State competence for local entertainment levies relevant here. Ratio vs. Obiter: Ratio - a levy in form of cess on cinema admission which is aimed at financing improvement/welfare connected to cultural activity is, in pith and substance, a levy on entertainment and therefore within Entry 62. Observations about the GST-era Government orders and administrative misapprehensions are ancillary (obiter) to competence analysis. Conclusions: Section 3C is traceable to Entry 62; the Court holds the State legislature had competence to enact the provision as a levy on entertainment. Issue 2 - Nature of levy: cess v. tax v. fee and the requirement of quid pro quo under Entry 66 Legal framework: Judicial distinction between tax and fee: a tax raises revenue for general purpose; a cess is typically a tax for a special purpose; a fee often requires some benefit or privilege. Entry 66 allows fees in respect of State List matters. Judicially accepted tests permit a broad correlation (not necessarily proximate) between payors and beneficiaries for fees. Precedent Treatment: M/s Vijayalakshmi Rice Mill and India Cement and Mohit Mineral decisions expounded meaning of 'cess' (a special purpose tax) and relaxations in the strict quid pro quo requirement for fees. Vijayalakshmi Rice Mill clarified that a 'reasonable relationship' or general benefit suffices; the earlier strict quid pro quo doctrine has been moderated. Interpretation and reasoning: The Court held that 'cess' is ordinarily a kind of tax for a specified purpose and may be treated as an increment to an existing tax. Section 3C's cess is an additional levy to the existing entertainment tax and thereby fits within the concept of cess/tax under Entry 62. As to Entry 66 and the requirement of quid pro quo, the Court applied the modern test: direct/proximate benefit is not necessary; a broad correlation suffices. The Fund's purpose (promoting welfare of cultural activists engaged in performing and related arts) has a reasonable nexus to the enhancement of cultural ethos and ultimately the quality of entertainment consumed by cinema viewers; this general benefit satisfies the quid pro quo/fee analysis. Ratio vs. Obiter: Ratio - cess may be treated as a special tax and a fee may be sustained where a reasonable (not necessarily direct) nexus exists between payors and the public/regulative purpose; the cess under Section 3C satisfies that test. Observations on specific entries of the Act of 2010 (definitions of cultural activist/activity) serve the nexus analysis but are explanatory. Conclusions: The impugned cess is a valid species of tax/fee; Entry 66 (as read with Entry 62) permits levying this impost because a broad correlation (general benefit) exists between the payors (cinema viewers) and the object of the Fund. Issue 3 - Doctrine of pith and substance vis-à-vis Central Cine-Workers Act, 1981 (field occupation/repugnancy) Legal framework: Where legislation may overlap between State and Union/Concurrent fields, pith and substance determines true character; Article 254 resolves inconsistency where necessary. Incidental encroachments are disregarded. Precedent Treatment: Koluthara Exports (Constitution Bench) was considered: that decision struck down a levy where State could not place burden on non-employers under Entry 23 (Concurrent). Drive-in Enterprises reiterated pith and substance application to entertainment levies. Interpretation and reasoning: The Court distinguished Koluthara Exports: Central Act targets a narrowly defined class of cine-workers (eligibility linked to employment in feature films and remuneration thresholds) for social security; its pith and substance lies in social security for specified cine-workers. In contrast, Section 3C's pith and substance is a levy on entertainment to fund welfare/promotional measures for a broad category of cultural activists; the principal character is taxation of entertainment. Even if some overlap with Entries 23/24 arises, the overlap is incidental and not repugnant; no field-occupation by the Central Act negates the State's competence for an entertainment cess related to State objectives. Ratio vs. Obiter: Ratio - the Central Act does not occupy the entire field such that the State cess is invalid; distinct pith and substance sustains co-existence. Distinguishing Koluthara Exports is part of the operative ratio. Conclusions: No repugnancy or field occupation by the Central Act invalidates Section 3C; the State levy stands despite potential incidental overlap with Concurrent entries. Issue 4 - Fundamental rights challenge under Articles 14 and 19 Legal framework: Article 14 prohibits arbitrary or discriminatory state action; Article 19(1)(g) protects trade/occupation subject to reasonable restrictions. Burden of proof lies on challenger to demonstrate irrationality, lack of reasonable classification or disproportionate restriction. Precedent Treatment: The Court applied standard principles requiring adequate pleading and proof to establish violation of Articles 14/19 in taxation context and noted presumption of constitutionality of statutes. Interpretation and reasoning: The Court observed the cess is collected from cinema viewers by local authorities and not directly imposed on theatre owners; appellants failed to plead or furnish data showing discriminatory impact or how collection would force business closures. The Federation's locus and procedural deficiencies (membership list, court fee) were noted. No arbitrary classification or disproportionate burden was shown; levy is limited (max Rs.3 on tickets > Rs.25) and has a legislative basis and intelligible differentia satisfying Article 14; restrictions on trade are reasonable in public interest and not shown to be irrational. Ratio vs. Obiter: Ratio - absence of material to substantiate Article 14/19 challenge and the limited, non-arbitrary nature of the levy mean constitutional rights are not infringed. Observations on locus and pleading are ancillary but relevant to standing. Conclusions: Article 14 and Article 19 challenges fail for lack of material and because the levy is a reasonable, constitutionally permissible restriction within the State's legislative competence. Overall Conclusion The Court upheld the constitutionality of Section 3C: the cess is within State competence under Entry 62 (as a levy on entertainment) and Entry 66 (fee insofar as a reasonable nexus exists), the levy is properly characterized in pith and substance, there is no repugnancy with the Central Cine-Workers Act of 1981, and the Articles 14 and 19 challenges lack merit. The Single Judge's dismissal of the writ petition was affirmed and the appeal dismissed.