TaxTMI 
TaxTMI 
2017 (4) TMI 507
X X X X Extracts X X X X
X X X X Extracts X X X X
.... levy of cess/fee for CL-9 licence and other incidental aspects. The another common factor in both the impugned orders of the learned Single Judge are that in both the group of matters, the learned Single Judge has relied upon the first order of the another learned Single Judge dated 30.09.2015 passed in W.P.Nos.27825/2014 and allied matters in case of Sri M. Madhava Gowda Vs. Under Secretary to Government and Others and the learned Single Judge has also taken note of the fact that the earlier order of the learned Single Judge dated 30.09.2015 in case of Sri M. Madhava Gowda (supra) was carried in Writ appeal at the relevant point of time. In any case, the learned Single Judge in the impugned order by relying upon the earlier order dated 30.09.2015 passed by the another learned Single Judge in case of Sri M.Madhava Gowda (supra) has dismissed the petitions. Under the circumstances, the present appeals before this Court. 4. We have heard Mr.D.C. Prakash, learned Counsel appearing for the appellants and Mr. T.K. Vedamurthy, learned AGA appearing for the respondents. 5. The learned Counsel appearing for both the sides have fairly conceded before us that the present appeals are c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he learned Single Judge has mainly relied upon the earlier decision of another learned Single Judge dated 30-9-2015, we have considered the very said decision of the learned Single Judge dated 30-9-2015 passed in W.P. No. 27825/2014 and allied matters, whereby, the learned Single Judge in the said matter, for the reasons recorded, has dismissed the petitions. We may record that the writ appeal was preferred against the aforesaid decision of the learned Single Judge dated 30-9-2015. But as per the statement made at the Bar, and it is not disputed by the learned Government Advocate appearing for the State that the said appeals were dismissed for non-prosecution mainly for non- removal of the office objection. Under these circumstances, the attempt on the part of the learned Counsel for the appellant was that, even the view taken by the learned Single Judge dated 31-9-2017 in W.P.No.27825/2014, upon which reliance has been placed by the learned Single Judge in the impugned order is erroneous and therefore, this Court may interfere in the appeal. 6. In order to appreciate the contentions, we will take into consideration the decision of another learned Single Judge dated 30-9-2015 in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, 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 speci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9 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 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. 20. The contention raised in ORIENTAL WEAVING MILLS's case referred to supra is similar to the contention now raised in the present writ petitions and rejecting the same, Hon'ble Apex Court has held that exemption granted by the impugned notification from payment of excise duties on "cotton fabrics" produced by certain Co-operative Societies is meant primarily for th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd i.e, any enactment (vi) arbitrariness or unreasonableness. 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. 23. At the cost of repetition, it requires to be noticed that licence is granted to the dealers who deal in sale of liquor which includes Wine, Beer, Fenny under the provisions of Karnataka Excise Act, 1967 and Rules made thereunder. The licence fee prescribed also varies. It is area and population based. 24. The Karnataka Excise Act, 1967 and Rules framed thereunder prescribes issuance of various licences to dealers and different types of licences are issued to different categories of dealers and the table indicated herein below depicts some of the categories of such licences issued to dealers vending liquor. 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 25. At this juncture itself, it requires to be noticed that licence fee prescribed for above referred....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be considered as a separate class. 29. Article 14 of the Constitution of India 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. However, it does not forbid for the purpose of legislation, provided such classification is not arbitrary but rationale, namely, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not 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. 30. Apex Court in the case of THE STATE OF WEST BENGAL vs ANWAR ALI SARKAR AND ANOTHER reported in AIR 1952 SC 75 has held that mere classificati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tate 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 K....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 34. Keeping this in mind, when the impugned notification is perused, it would indicate that liquor dealers holding licence in Form CL-9 operating in Panchayat limits/rural areas and liquor dealers holding licence in Form CL-2 or any other licence are exempted from collecting tax on sale of liquor. In other words tax is to be paid on the liquor sold by dealers holding licence in Form CL-9 and operating in urban areas, licence holders of Form CL-4, licence in Form CL-6A, licence in Form CL-7. Thus, it has to be seen whether this classification for the purposes of levy of tax and granting exemption stands the test of discrimination or whether it offends Article 14 in any manner whatsoever. 35. If the classification of dealers is based on any rationale, it cannot be said that it is violative of Article 14 or imposes unreasonable restriction and hit by Article 19 or Article 304-B. In a given case, the dealer/licence holder may occupy a position of econom....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 16. Wills in his "Constitutional Law, of the United States" has stated at p. 537 : "A state does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods, and even rates for taxation if it does so reasonably." As stated in Weaver's "Constitutional Law" Article 275 at p. 405: "The Fourteenth Amendment was not designed to prevent a state from establishing a system of taxation or from effecting a change in its system in all proper and reasonable ways, nor to require the states to adopt an ironclad rule of equali....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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." 14. We must, therefore, look beyond the 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. It is clear that the role of public sector in the sphere of promoting the national ec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sification 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 an intelligible differentia which distingu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....achieved". 36. Apex Court in the case of STATE OF KARNATAKA AND ANOTHER vs M/S.HANSA CORPORATION reported in (1980)4 SCC 697 was 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or 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 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een enacted by the State Legislature under Entry 54 of List II of VII Schedule to the Constitution of India which provides for levy of tax on sale or purchase of goods in the State and said enactment is in force with effect from 1st April, 2005, on all commodities except Petrol, Aviation Turbine Fuel, Diesel and Sugar cane. Under KVAT Act, tax is levied at every point of sale of goods in the State. First Schedule of the KVAT Act enumerates the list of goods which are exempted. While the goods listed in Third Schedule are liable to tax at 5.5%. As already noticed herein above, with effect from February, 2001 sales tax on liquor was merged with State Excise Duty and all the dealers in various categories enjoyed exemption from levy of VAT on sale of liquor including Beer, Fenny and Wine and 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 . 41. However, with effect from 01.03.2014 the State inserted Entry 59A to Third Schedule of KVAT Act for levy of tax on liquor and co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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). 29. Classification for purposes of taxation or for exempting from tax with reference to the source of the income is integral to the fundamental scheme of the Income-tax Act. Indeed, the entire wrap and woof of the 1961 of the Act has been woven on this pattern. 35. It is not necessary to multiply such instances. 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....". 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." 44. It also requires to be noticed that imposition of different rates of tax on different dealers depending upon their turnover by adopting slab system would be sustainable and same would not be violative of Article 14 and 19 of the Constitution on the ground that 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. 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 col....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ure 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 goods and not upon the income of a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, 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 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and Hotel, Boarding Houses and Lodges located 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. 46. However, a Hotel, Boarding House or Lodge holding licence in CL-7 though located in rural area would also serve liquor only to the residents of the Hotel and their guests who are elite customers and they can afford to pay more for the comfort they enjoy with varying degree of facilities. Thus, condition of licence itself enables the licence holder to fix the price of the liquor irrespective of MRP on account of substantial value addition and as such, the legislature has brought this class of dealer also to taxation. However, Bar and 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. 47. At this juncture, it would be appropriate to note that lic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hereby dismissed. (2) Rule discharged. (3) Costs made easy." 8. Ultimately, petitions were dismissed by the learned Single Judge. 9. It is in the light of the aforesaid reasonings recorded by the learned Single Judge in the order dated 30-9-2015, we need to further examine as to whether the contentions raised by the learned Counsel for the appellant are worthy of acceptance or not. 10. We may, at the outset record that, while interpreting taxing statute, the language used by the State for the levy of tax is to be considered, keeping in view the common parlance test and if there is uncertainty about common parlance test, one may follow dictionary meaning for interpreting any entry or clause for the levying of tax. However, in the matter of grant of exemption, the Legislature has power to grant exemption to a certain class of the product to be used for certain purposes or a particular purpose. It is well settled that when the exemption is to be claimed, strict interpretation would be called for. Further, if the exemption is assailed or the exemption is denied to a particular class of the persons or the dealer, the test would be, whether there was reasonable classificat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of sale in a packed product, that too in an intact condition as made by the manufacturer, cannot be equated, nor can be said to be similarly situated with the person who is vending liquor or wine by holding C.L.9 licence in a bar and restaurant. We may also record that, if any Legislature or a statute is to be contested by the Court, the effort on the part of the Court would be to uphold the Legislature, unless it is made by, against or in breach of any constitutional provision. The presumption would be that it is valid, unless declared invalid by the competent Court. When we find that there is a rational classification with the intelligible differentia, this Court cannot substitute its own reason, unless the Court finds that such classification is highly irrational or there is no any intelligible differentia at all.' In the present case, we do not find that such condition is satisfied. Therefore, the contention raised for discrimination in the grant of exemption cannot be accepted. 13. The next contention raised by the learned Advocate for the appellant on the aspects of levying of tax on the service provided or the ambience provided by the persons holding C.L.9 licence, in ou....