TMI Blog1991 (4) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... ghest rate of admission fee in a theatre. Since all theatres, wherein Rs. 2.50 and above per seat are treated alike, almost all theatres in the State are practically treated alike. (c) Smaller the theatre, the impact of the levy will be greater, as compared to a bigger theatre. II. (a) Section 4-A provides for levy of tax on composition basis and the payment of tax therein is on the basis of "gross collection capacity", concept of which is unrelated to the realities and is oppressive. (b) Section 4-A results in levy of tax on income or capacity and the impost ceases to be a tax on entertainment. III. Concessions granted to regional films under sections 4 and 4-A are violative of article 14 of the Constitution. IV. Proviso to section 4-A discriminates between same kinds of regional films by applying different rates dependent upon their production being in Karnataka or outside Karnataka State. V. The levy under sections 4 and 4-A are restrictions on freedom of trade and the Act having not received the assent of the President, offends article 304(b) of the Constitution. VI. The special features of mini-theatre as in W.P. No. 6081 of 1988, having a small capacity of 300 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the theatre). 5.. The next proviso to section 4 provides for the levy of show tax on the cinema theatres who have opted for the levy of tax under section 4-A, when the films exhibited are non-regional films. In fact this proviso should have come earlier immediately after section 4 and the main table. 6.. Section 4(2) prohibits the proprietor of a cinema theatre from collecting the show tax from the persons admitted to the cinema theatre for entertainment. As per section 4(3) there is a further concession in favour of the regional films screened in theatres in a locality having a population not exceeding 15,000. Section 4-A provides for an alternative manner of paying the entertainment tax in lieu of the levy under sections 3 and 3-A. The levy is based on the gross collection capacity. The phrase "gross collection capacity" is defined in the explanation to section 4-A(1). This is a concept equated to the entire accommodation being filled up in the theatre on any day and the aggregation of all the payments received for such admission. On the face of it this is a simple procedure which would save the cinema theatre owners from maintaining an elaborate account for the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aka and the regional films produced outside Karnataka. This is also highlighted as vitiating the charge under section 4 and as contravening article 14 of the Constitution as well as article 304(b). 9.. The State in its objection statement has sought to justify the levy. The unit of tax being the show of films, it was contended that there is nothing wrong in levying a uniform tax on the show, as a measure of levy. The regional films are treated lightly when compared to other films, obviously to encourage the regional languages which essentially belong to the people of this State. The film is not only a medium of entertainment but also is a medium of education. The regional culture would be enriched by encouraging only the regional languages, since languages are, after all, the medium through which the culture could be expressed. It is further pointed out that, as far as the production of films in the State of Karnataka is concerned, the State is backward in that respect. The number of studios are not much and their names are given in the objection statement. These studios are not fully occupied since the studios at Madras and Bombay attract most of the producers of films. In these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, was discriminatory, confiscatory and was violative of articles 14 and 19(1)(g) of the Constitution. Section 4-A introduced by the Amending Act is also challenged on the very same grounds on which section 4 is challenged." The impugned section 4 in the said case is found in para 43 of the order and para 44 gives section 4-A. Schemes of sections 4 and 4-A and the table comprised in them are substantively similar to the present sections 4 and 4-A though the concessions given to the regional films was not found in the earlier section 4. Similarly, section 4(2) found in the present provision against the exhibitor passing on the tax burden on the person admitted to the cinema theatre was not there earlier. The present section 4 is thus attacked as more drastic and onerous since the exhibitor cannot pass on the burden to the audience. 12.. Though earlier, show tax could be indirectly passed on to the audience, the said fact was not the basis for upholding the provisions though the court refers to the possibility of this burden being passed on to the audience (vide para 61). The said benefit was considered to negative the attack against section 4 as confiscatory in nature (para 62) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they cannot be treated in the same manner as urban theatre owners, whose theatres are luxurious, spacious and has the benefit of a larger audience. Small town theatre owners contend that metropolitan theatre owners are more capable who could pay a higher tax. The grouping of all theatre owners in the State as a single class, is attacked as an "over-inclusive". 17. The problem of classification and the restraint with which courts venture to examine the classification under a taxation law has been brought out by the Supreme Court in State of Gujarat v. Shri Ambica Mills Ltd. AIR 1974 SC 1300. Mathew, J., speaking for the Constitution Bench, held at page 1313, thus: "A reasonable classification is one which includes all who are similarly situated and none who are not. The question then is: what does the phrase 'similarly situated' mean? The answer to the question is that we must look beyond the classification to the purpose of the law. A reasonable classification is one which includes all persons who are similarly situated with respect to the purpose of the law. The purpose of a law may be either the elimination of a public mischief or the achievement of some positive public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events-self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. (See Joseph Tussman and Jacobus ten Breck 'The Equal Protection of the Laws' 37 California Rev. 341)." 18.. The urban theatre owner may, as well, say that he has to invest a huge capital to put up even a small theatre, having regard to the cost of the land and labour and his recurring expenditure also is quite heavy and therefore, he should not be taxed in the same manner as a rural theatre owner, the latter having not spent much on capital investment can afford to pay a higher tax annually. The object of section 4 is to levy the tax on the giver of the entertainment; the unit of taxation is the exhibitor, as a single entity; therefore in the abstract, it is possible to say that an exhibitor having already incurred heavy expenditure should not be further burdened heavily, unlike a small town theatre owner; added, the rental value per show payable for exhibition in a bigger town is certainly higher than in a smaller town. Entertainment tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e harshness was too patent and could not be covered by any veil of legality or constitutionality. The position was the same in Nalla Raja's case AIR 1967 SC 1458. The background to the ultimate conclusion, is found at page 1468: "Sections 3 and 4 are charging sections and they say in effect that a person will have to pay an additional assessment per acre in respect of both dry and wet lands. They do not lay down how the assessment should be levied. No notice has been prescribed, no opportunity is given to the person to question the assessment on his land. There is no procedure for him to agitate the correctness of the classification made by placing his land in a particular class with reference to ayacut, acreage or even taram. The Act does not even nominate the appropriate officer to make the assessment to deal with questions arising in respect of assessments and does not prescribe the procedure for assessment. The whole thing is left in a nebulous form. Briefly stated under the Act there is no procedure for assessment and however grievous the blunder made there is no way for the aggrieved party to get it corrected. This is a typical case where a taxing statute does not provide a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fanciful or arbitrary or clearly unjust. A classification can be over-inclusive or under-inclusive. In the former case, situations or classes which ought to have been included are brought within the ambit of law and in the latter cases situations or classes which ought to have been ordinarily included are left out. In either case it does not seem proper to strike down the classification as a whole, unless it is incapable of extrication into the good and the bad or is so patently arbitrary and unjust." Re: Concessions: In a recent decision in Sri Krishna Das v. Town Area Committee, Chirgaon [1990] 77 STC 395 (SC); [1990] 3 SCC 645, levy of tax referred as weighing dues was challenged as discriminatory, in view of the exemptions granted to a few of the products. The observations of the Supreme Court found at page 404 of STC (page 654 of SCC) are: "The contention that the tax is discriminatory in view of the exemptions granted to some of the products and to those that enter the TAC by rail or motor transport is equally untenable. It is for the legislature or the taxing authority to determine the question of need, the policy and to select the goods or services for taxation. The cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent attention can throw any new light upon the subject and never declare a statute, void, unless the nullity and invalidity of the Act are placed, in their judgment beyond reasonable doubt. A reasonable doubt must be solved in favour of the legislative action, and the Act be sustained.'" 23.. The developed studios situated in Madras or Bombay may enable the production of a Kannada film there at a cheaper cost, when compared to the films produced in Karnataka; there may be several factors resulting in an advantage to a film producer outside Karnataka, such as modern studios with facilities for procuring the films speedily and at a cheaper cost, recording facilities of sound and music, or availability of technicians, etc. In view of the dubbing of languages, it is possible to produce a Kannada or other regional language films outside the State by engaging actors and artists willing to act for a lower remuneration (who may not even know the language in which the film is produced). The competitive strength of a commercial product or of a film does not necessarily depend upon its cost, unless the competitive prices are patently divergent and glaringly the price structure of one is far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even within a State, there are often backward areas which can be developed only if some special incentives are granted. If the incentives in the form of subsidies or grant are given to any part or unit of a State so that it may come out of its limping or infancy to compete as equals with others, that, in our opinion, does not and cannot contravene the spirit and the letter of Part XIII of the Constitution. However, this is permissible only if there is a valid reason, that is to say, if there are justifiable and rational reasons for differentiation. If there is none, it will amount to hostile discrimination." Some of the observations of the Supreme Court in Video Electronics Pvt. Ltd. [1990] 77 STC 82 (SC); AIR 1990 SC 820 are very relevant to the instant cases before us. After referring to Indian Cement's case [1988] 69 STC 305 (SC); AIR 1988 SC 567 and articles 301 and 304 of the Constitution, the Supreme Court pointed out the need to harmonise the various provisions of the Constitution, which includes power given to the States to levy tax for its purposes. The need to enabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales tax is influenced by various political, economic and social factors. Prevalence of differential rate of tax on sales of the same commodity cannot be regarded in isolation as determinative of the object to discriminate between one State and another. Under the Constitution originally framed, revenue from sales tax was reserved for the States." At page 101 of STC [page 832 (para 24) of AIR]: "Every differentiation is not discrimination. The word 'discrimination' is not used in article 14 but is used in articles 16, 303 and 304(a). When used in article 304(a), it involves an element of intentional and purposeful differentiation thereby creating economic barrier and involves an element of unfavourable bias. Discrimination implies an unfair classification." At page 103 of STC (page 833 of AIR): "Economic unity of India is one of the constitutional aspirations of India and safeguarding the attainment and maintenance of that unity are objectives of the Indian Constitution. It would be wrong, however, to assume that India as a whole is already an economic unit. Economic unity can only be achieved if all parts of whole of Union of India develop equally, economically. Indeed, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and as in all constitutional adjudications the substance of the matter has to be looked into to find out whether there is any discrimination in violation of the constitutional mandate." At page 108 of STC (page 836 of AIR) referring to the Indian Cement case [1988] 69 STC 305 (SC) it was observed thus: "..........where there was a naked blanket preference in favour of locally manufactured goods as against goods coming from outside the State. These cases, as we read these, dealt with a conferment of exemption without any reason or concession in favour of indigenous manufactured goods which was not available in respect of the goods imported into that State." 26.. Therefore, it is clear that grant of exemption or concession to the locally produced goods is not per se unconstitutional and question of discrimination would arise only in the case of blanket and naked preference which could be termed as an act of hostile discrimination; but, preference if based on sound economic policy, to bring the State on par with other Indian States, the legislative policy will be sustained. The taxation law to be invalidated on the ground of arbitrariness or as an interference with the fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same film whether liked or disliked and whether there is audience or no audience." The object behind the impugned rule was accepted by the Court; but its implementation was not properly done; this is clear from what is stated further: "Further, in the absence of any material on record, we fail to understand as to how a period of 12 weeks in an year has been provided for exhibiting Kannada films. As to what is the rationale behind fixing 12 weeks in an year, remains unexplained. We agree with the learned State counsel that the impugned rule has been made in public interest and a very laudable object is sought to be achieved in the interest of the State. But without ascertaining and finding out (as no material in this regard has been placed on the record) whether all the theatres in the State would, fairly and without incurring loss, be able to exhibit Kannada films for 12 weeks in an year, a provision is made for exhibition of Kannada films for 12 weeks, which, on the face of it, appears, to be wholly arbitrary and unreasonable. " The ratio of the above decision in Kapoor Investments (P) Ltd. ILR 1989 Kar 183 has nothing to do with the present grievances made out by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether there had been any real discrimination in the facts and circumstances of this case." These observations in no way lay down a peremptory principle to the effect that a graded rate of tax alone could be imposed, classifying the theatres with reference to their localities, size, etc. The Supreme Court held that such a graded imposition by classifying the theatres appropriately was not unreasonable nor improper; in other words the principle to be adopted was left to the legislative wisdom; it does not mean that in every case, if this classification is not resorted, the imposition would become arbitrary. Test of arbitrariness lies elsewhere. Unreasonableness and arbitrariness has to be found out from the impact of the impost on the fundamental rights of the petitioners. 28.. In R.C. Cooper's case AIR 1970 SC 564 this principle was stated by the Supreme Court, at page 593: "Under the Constitution, protection against impairment of the guarantee of fundamental rights is determined by the nature of the right, the interest of the aggrieved party and the degree of harm resulting from the State action. Impairment of the right of the individual and not the object of the State in ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here were better ways of adjusting the competing interests and claims. The Legislature possesses the greatest freedom in such areas." 31.. The decision of this Court reported in the case of Kamat Co. v. State of Karnataka [1991] 80 STC 226 pertains to the exemption given to a particular co-operative society, which, on the face of it affected the rival traders and hence the executive action in granting the exemption was struck down. This has no relevance to the instant case. Re: Articles 301 and 304(b) Re: Contention V: 32.. In B.P. Automobiles case [1984] 55 STC 93 (Kar) at page 107, the Bench observed: "Normally a tax which is non-discriminatory and in relation to goods used in inter-State trade or commerce, not so excessive or prohibitive as to become a direct and immediate impediment in the free-flow of trade and commerce, on sale of goods does not violate article 301." 33.. Here levy of tax is not on goods, but on the entertainment. Mr. Srinivasan contends that the favour shown to the regional films produced in Karnataka affects the free-flow of the films produced outside Karnataka, into Karnataka and thus article 301 is attracted; if so, such a law requires President ..... X X X X Extracts X X X X X X X X Extracts X X X X
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