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TMI Blog2002 (8) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1979 (hereinafter referred to as "the KTL Act") prescribing levy of luxury tax on gutka at 20 per cent by Karnataka Act No. 2 of 2001 and making the levy retrospective in operation with effect from April 1, 2000 by Karnataka Act No. 5 of 2001 as bad in law; and (3) quashing of notices issued under sections 4, 2(6-B) of the KTL Act and the orders made under section 5-A(3) of the Act/demand notices, etc. Now, let me briefly set out the facts as set out by the petitioners in Writ Petition Nos. 9368-9374 of 2001 for the sake of convenience. 3.. The provisions contained in the KST Act empower the State of Karnataka to levy sales tax on sales and purchases of various items of goods. Sl. No. 9-A of Part "T" of the Second Schedule to the Act provides for levy of sales tax on tobacco products. Prior to the amendment of Sl. No. 9-A of Part "T" of the Second Schedule, the levy of tax on tobacco products was at 8 per cent and gutka was not treated as one of the items of tobacco products. However, by means of amendment made to the said provision, gutka was included as one of the tobacco products and the rate of tax was increased from 8 per cent to 20 per cent. The amended Sl. No. 9-A of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. Elaborating this submission they pointed out that even if the levy of luxury tax as has been levied is considered as a reasonable restrictions imposed on the freedom of trade, commerce or intercourse in public interest, since neither the previous nor subsequent sanction of the President of India has been obtained as required under proviso given to article 304(b) of the Constitution, the said provision is not saved and therefore it is liable to be struck down on the ground that it does not have the protection under article 304(b) of the Constitution. They also submitted that the conjoint reading of the provisions in KTL Act which provides for levy of luxury tax on gutka at 20 per cent is considered along with section 17-A of the said Act which makes section 28-A of the KST Act applicable which provides for establishment of check-posts or barriers or both, it would be clear that the restrictions are on intercourse throughout the territory of India. The learned counsel while referring to the definition of stock of luxuries as set out in section 2(6-B) and also charging section 4-B of the KTL Act, pointed out that since there are no manufacturers of gutka in the State of Karnata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such refunds by invoking the theory of unjust enrichment, the stockist in the State are placed in a great disadvantage than their counterparts in other States where there is no levy of luxury tax. They submitted that out of 29 States in the country, there is no levy of luxury tax on gutka in 23 States and gutka is banned in the States of Tamil Nadu and Andhra Pradesh. Therefore, they submitted that the levy of luxury tax in the State of Karnataka creates a two-tier price on gutka, one within Karnataka loaded with 20 per cent luxury tax and 4 per cent entry tax and to others outside the State costing less by an equivalent amount, and under these circumstances it is reasonable to infer that the preference of manufacturers of gutka would be to market their product outside the State; and stockists in the State who receive supplies from manufacturers located in other States cannot compete with others who sell gutka outside the State. They also relied upon the decisions of the honourable Supreme Court in the cases of A.B. Abdul Kadir v. State of Kerala reported in AIR 1976 SC 182, Atiabari Tea Co. Ltd. v. State of Assam reported in AIR 1961 SC 232, Automobile Transport (Rajasthan) Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 14 of the Constitution of India. It is their submission that when all other tobacco products including cigarettes, which are costlier and more harmful than gutka are being taxed only at 4 per cent, gutka alone is singled out and picked up for hostile discrimination for levy of luxury tax at very high rate of 20 per cent even if entry tax at 4 per cent is paid. It is their contention that there is absolutely no justification to levy luxury tax at 20 per cent in addition to 4 per cent of entry tax on gutka. In support of this contention, the learned counsel also relied upon the decision of the Allahabad High Court in the case of Varshney General Sales [2003] 130 STC 202; 1995 UPTC 105 and drew my attention to the paragraphs 96 to 98 of the judgment. Fourthly, they submitted that the legislation on tobacco industry being the exclusive domain of the Parliament under entry 52 of the Union List, the levy of luxury tax on gutka, which is a tobacco product, is outside the competency of State Legislature under entry 62 of the State List. In other words, it is their submission that levy of luxury tax on gutka is beyond the competency of the State Legislature as the field is occupied by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as such it is not permissible for the State to continue to levy sales tax on gutka in the State and discontinuance of the sales tax on gutka would result in revenue loss of Rs. 30 crores per annum and therefore it is necessary to increase the rate of luxury tax on gutka from 4 per cent to 20 per cent amending the Luxuries Tax Act. In other words, it is their submission that the impugned levy is liable to be quashed on the ground that it is colourable piece of legislation. Finally, it is submitted by Sri B.P. Gandhi that gutka not being a luxury item, levy of luxury tax on gutka is unconstitutional. He pointed out that since gutka is being consumed by common and poor people and it is being sold in a pouch costing around Re. 1 to Rs. 3, gutka cannot be treated as an item of luxury. Therefore, it is his submission that levy of luxury tax on gutka is beyond the legislative competency of the State; and it is only on luxury items, the State could levy luxury tax under entry 62 of the List II of the Seventh Schedule. In support of this submission, the learned counsel relied upon the decision of the honourable Supreme Court in the case of C. Rajagopalachari v. Corporation of Madras repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited Motors (India) Ltd. reported in [1953] 4 STC 133; AIR 1953 SC 252, State of Madras v. N.K. Nataraja Mudaliar reported in [1968] 22 STC 376; 1 SCST 773, Hansraj Bagrecha v. State of Bihar reported in [1971] 27 STC 4; 1 SCST 796, State of Kerala v. A.B. Abdul Kadir reported in AIR 1970 SC 1912, Vrajlal Manilal Co. v. State of Madhya Pradesh reported in [1986] 63 STC 1 (SC); 1 SCST 692. It is his further submission that the decisions of the Kerala High Court in the case of I.T.C. Limited [2002] 127 STC 409 and Allahabad High Court in the case of Varshney General Sales [2003] 130 STC 202; 1995 UPTC 105 have no bearing to the facts of the present case as the tax on gutka is levied in respect of stock held by a dealer. It is also the submission of the learned AdvocateGeneral that the view expressed by the Kerala High Court in the case of I.T.C. Limited [2002] 127 STC 409 and by the High Court of Allahabad in the case of Varshney General Sales [2003] 130 STC 202; 1995 UPTC 105 that the levy of luxury tax in those cases interfere with freedom of trade, commerce and intercourse guaranteed to the petitioners under article 301 of the Constitution of India, is not a correct principle of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of Andhra Pradesh reported in [1958] 9 STC 298; AIR 1958 SC 468, J.K. Jute Mills Co. Ltd. v. State of Uttar Pradesh [1961] 12 STC 429 reported in AIR 1961 SC 1534, Chhotabhai Jethabai Patel and Co. v. Union of India reported in AIR 1962 SC 1006, Rai Ramkrishna v. State of Bihar reported in [1963] 50 ITR 171; AIR 1963 SC 1667, Ram Chandra Kailash Kumar & Co. v. State of U.P. reported in AIR 1980 SC 1124. Thirdly, he pointed out that tobacco and tobacco products having been held to be as luxury items by the honourable Supreme Court, the tax on such luxury goods at 20 per cent cannot be considered as either excessive or unreasonable or discriminatory in nature as violative of the rights guaranteed to the petitioners under article 14 of the Constitution of India. It is his submission that it is an accepted policy of the Government to impose heavy taxes upon commodities considered dangerous to health and life of human beings, the twin object of levying such heavy tax being to desist the people from consuming the commodities which are hazardous to their health and also to collect huge revenue to the State. In this connection he drew my attention to the statements made in paragraph 5 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State to levy luxury tax, the learned Advocate-General pointed out that the said contention is totally misconceived for two reasons. Firstly, he pointed out that the prohibition placed under section 15 of the CST Act being only with regard to the levy of sales tax above the rate of 4 per cent and in the instant case the levy is one of luxury tax by the State in exercise of power conferred on it under entry 62 of List II, the prohibition contained in section 15 of the CST Act cannot have any application. Secondly, he pointed out that under item (ix) of section14 of the CST Act, tobacco products and various sub-headings are mentioned. Subheading 2404.40 is not one of the items mentioned in section 14(ix). Even though the Schedule to the Central Tariff Act, 1985 has undergone change and as a result of Finance Bill of 2001, entry 2404.04 (pan masala and gutka) were inserted, such amendments to the Central Excise Tariff Act, 1985 do not affect the provisions of section 14(ix) of the CST Act which continued to remain as they were in 1988. It is his further submission that every amendment subsequently carried out to the Central Excise Tariff Act does not automatically become part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, like an addiction to alcohol. Gutka is generally consumed for pleasure and enjoyment. The petitioners have failed to place any material to show that gutka is being consumed only by a lower strata of society. Even if it so, that cannot be a ground to treat gutka as not an item of luxury. If, as a matter of fact, gutka is being consumed by the poorer sections of the society, may be, they are using it as a substitute for other items of luxury on account of lower price fixed for it. While a sum of Rs. 2 to Rs. 5 is not a big amount and is of no consequence for a well-to-do person; but for a poor person who earns a small amount, the expenditure incurred on gutka is of serious consequence to him and for the living condition of his family. Any expenditure incurred on something, which is not of necessity and which is in excess of what is required for economic and personal well being, would be an expenditure of luxury. The number of people who consume an item, need not always necessarily be a factor to decide whether an item consumed by the people is an item of necessity or luxury. The test is, whether the article in question is an article of need or necessity for day-to-day living. If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in public interest. Sub-clause (1) of article 303 of the Constitution further provides that notwithstanding anything in article 302, neither Parliament nor the Legislature of a State shall have power to make any law giving, or authorising the giving of any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. However, sub-clause (2) of article 303 of the Constitution empowers the Parliament to make any such law referred to in sub-clause (1) of article 303 of the Constitution of India, if it is declared by such law made by the Parliament that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. Clause(a) of article 304 of the Constitution provides that notwithstanding anything in article 301 or 303, the Legislature of State could impose, on goods imported from outside the State or the Union territory, any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are received; (iii) in respect of any stockist mentioned in sub-clauses (i) and (ii), the value of stock of luxuries shall include,- (a) excise duty, countervailing duty paid or payable on such luxuries by a manufacturer or importer thereof, as the case may be, and; (b) transport charges, insurance charges, packing charges, forwarding and handling charges, if any, for carrying such luxuries to any premises, godown, warehouse or any other place of the stockist in the State. 2(9) "Turnover of stock of luxuries"-in relation to a stockist, in respect of any year, means the aggregate of the value of stocks of luxuries. As rightly pointed out by the learned Advocate-General, the luxury tax is not imposed on the movement of goods. It does not, in any way, interfere with the import of freedom of trade, commerce and intercourse either to the State of Karnataka or outside the State of Karnataka. As it could be seen from sub-section (1) of section 4-B of the KTL Act, tax is levied and collected on the "turnover of the stocks of luxuries". Sub-section (2) of section 4-B further provides that the tax levied under sub-section (1) shall be paid by every registered stockist or a stockist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 301 of the Constitution of India. Levy of luxury tax at a maximum rate on the turnover of stock of goods irrespective of the source of acquisition, in my view cannot be treated as impinging the right to free trade, commerce and intercourse guaranteed throughout the country. As rightly pointed out by the learned Advocate-General, the petitioners have not placed any materials before this Court to show that the imposition of the luxury tax, has in any manner, as a matter of fact, restricted the free movement of goods in the course of either intraState or inter-State. On the other hand, it is the submission of the learned Advocate-General that the business of intra-State movement of gutka has substantially gone up even after the impugned tax. In the absence of any material placed by the petitioners to show that free movement of gutka has been actually affected on account of imposition of luxury tax, I have no reason to not to accept the submission of the learned Advocate-General on behalf of the State that the imposition of luxury tax in any manner affected the free movement of goods in the course of inter-State trade. The honourable Supreme Court has taken the view that it is onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le we are construing imposes a constitutional limitation on the power of the Parliament and State Legislatures to levy taxes, and generally, but for such limitation, the power of taxation would be presumed to be for public good and would not be subject to judicial review or scrutiny. Thus considered we think it would be reasonable and proper to hold that restrictions freedom from which is guaranteed by article 301, would be such restrictions as directly and immediately restrict or impede the free-flow or movement of trade. Taxes may and do amount to restrictions, but it is only such taxes as directly and immediately restrict trade that would fall within the purview of article 301. The argument that all taxes should be governed by article 301 whether or not their impact on trade is immediate or mediate, direct or remote, adopts, in our opinion, an extreme approach which cannot be upheld." (Emphasis supplied) In the case of Andhra Sugars Ltd. [1968] 21 STC 212 (SC); AIR 1968 SC 599 (at page 608 of AIR and 225 of STC), while considering the tax levied under section 21 of the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Act, on sugarcane would interfere right of freedo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 of the judgment (pages 99 and 100 STC) observed as follows: "20. The question as we see is, how to harmonise the construction of the several provisions of the Constitution. It is true that if a particular provision being a taxing provision or otherwise impedes directly or immediately the free-flow of trade within the Union of India, then it will be violative of article 301 of the Constitution. It has further to be borne in mind that article 301 enjoins that trade, commerce and intercourse throughout the territory of India shall be free. The first question, therefore, which one has to examine in this case is, whether the sales tax provisions (exemption, etc.) in these cases directly and immediately restrict the free-flow of trade and commerce within the meaning of article 301 of the Constitution. We have examined the scheme of article 301 of the Constitution read with article 304 and the observations of this Court in Atiabari's case AIR 1961 SC 232; [1961] 1 SCR 809, as also the observations made by this Court in Automobile Transport (Rajasthan) Ltd.'s case AIR 1962 SC 1406; [1963] 1 SCR 491. In our opinion, Part XIII of the Constitution cannot be read in isolation. It is part an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame State and movement from one State to another. In this connection, reference may also be made to the observations in Bengal Immunity's case [1955] 6 STC 446 (SC); [1955] 2 SCR 603; AIR 1955 SC 661. Both the preceding cases clearly establish that if a taxing provision in respect of intra-State sale does not offend article 301, logically it would not affect the freedom of trade in respect of free-flow and movement of goods from one part of the country to the other under article 301 as well." Therefore, in the light of enunciation of law made by the honourable Supreme Court in the decisions referred to above, I have no hesitation to hold that levy of luxury tax on "turnover of stock of luxuries" held by a "stockist " will not in any manner interfere with the freedom of trade, commerce and intercourse guaranteed to the petitioner under article 301 of the Constitution of India. In my considered view, the decision of Allahabad High Court in the case of Varshney General Sales [2003] 130 STC 202; 1995 UPTC 105 has no application to the facts of the present case. The charging section under U.P. Act is section 3 of the Act. The combined reading of the charging section and the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods in the course of inter-State trade and commerce." Even otherwise, I am of the view, merely because 20 per cent of luxury tax is levied, it is not possible to take the view that the levy of luxury tax interferes with free movement of trade, commerce and intercourse. The Constitutional provisions and the power conferred on the Parliament and the State Legislature in the three Lists of the Seventh Schedule of the Constitution are, if properly understood, in my considered view, there is no scope to come to the conclusion that levy of luxury tax by the State in exercise of constitutional power conferred on it under entry 62 of List II of the Seventh Schedule, requires to be struck down as being an interference for free trade, commerce and intercourse guaranteed under article 301 of the Constitution of India only on the ground that the tax so levied is on higher side. In the light of the above discussion, I am of the view, the question of the State obtaining previous sanction of the President before introduction of the Bill in question, was totally unnecessary. It is only in cases where the State Legislature intends to impose reasonable restriction on the freedom of trade, commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the right guaranteed to the petitioners under articles 14 and 19(1)(g) of the Constitution of India or it is confiscatory in nature. As rightly pointed out by the learned Advocate-General it is well-settled that the State Legislature, which has power to levy luxury tax prospectively has also the power to levy luxury tax retrospectively. The only question is, if a law is made retrospective in operation, whether such a law would impinge the rights guaranteed to the petitioners under articles 14 and 19(1)(g) or any other provisions of the Constitution of India. In the instant case, as noticed by me earlier, it is not possible to take such a view. Merely because, the assessees are not in a position to pass on the luxury tax to the consumers of gutka and therefore, the assessees are liable to pay, in my view is not a ground to hold the retrospective operation of provision is unconstitutional. It is well-settled that assessees' inability to transmit tax burden to customers is no reason to assail a taxing provision. The facts of the present case would indicate that in view of the decision of the honourable Supreme Court in the case of Kothari Products [2000] 119 STC 553, the State is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Constitution. In the exercise of such a power, it will be competent for the Legislature to enact a law, which is either prospective or retrospective. In Union of India v. Madan Gopal Kabra [1954] SCR 541; [1954] 25 ITR 58; AIR 1954 SC 158, it was held by this Court that the power to impose tax on income under entry 82 of List I in Schedule VII to the Constitution, comprehended the power to impose income tax with retrospective operation even for a period prior to the Constitution. The position will be the same as regards laws imposing tax on sale of goods." Therefore, in the light of the above discussion the grievance of the petitioners that Act No. 5 of 2001 to the extent it makes retrospective in operation empowering the State to levy luxury tax with effect from 1st April, 2000 is liable to be rejected. 11.. Now the next question is whether the levy of luxury tax on tobacco at 20 per cent in addition to 4 per cent of entry tax is liable to be struck down as being highly arbitrary, unreasonable and violative of rights guaranteed to the petitioners under article 14 of the Constitution of India. I am unable to accept the submission of the learned counsel appearing for the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te differently for the purpose of imposition of luxury tax, having regard to the distinguishing features in the matter of taste, price, the nature and status of consumers and the potential to rope in larger sections of the society, more particularly poorer sections of the society, which may have a serious effect on the society in future, on account of consumption of gutka, the classification made cannot be said as unfair, discriminatory, unreasonable and has no direct nexus with the object sought to be achieved. As noticed by me earlier, the twin object of imposing the tax is to minimise the consumption of the said two injurious products and also raise more resources. May be the consumers of cigarette are enlightened affluent sections of the society who are aware of the injurious effect of consuming cigarette while consumers of gutka being poorer sections of the society who are not aware of the injurious consequence of consuming gutka, if the State intends to desist them from consuming gutka who are accustomed to it and also intends to prevent people getting addicted to it in a larger public interest, it is not permissible for this Court to examine the same in mathematical exactitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en by the High Court of Allahabad in the case of Varshney General Sales [2003] 130 STC 202; (1995) UPTC 105. Therefore, in the light of what is stated above, I have no hesitation to reject the contention of the learned counsel appearing for the petitioners that the impugned levy is liable to struck down on the ground that it affects the rights guaranteed to the petitioners under article 14 of the Constitution of India. 12.. There is also no merit in the fourth contention advanced by the learned counsel appearing for the petitioners that since the Parliament has an exclusive domain to make legislation with regard to tobacco industry under Union List, the levy of luxury tax on gutka, which is a tobacco product, is outside the competency of the State Legislature. The entry 62 of List II confers power on the State Legislature to make legislation providing for levy of taxes on luxuries including taxes on entertainment, amusements, betting and gambling. Therefore, there cannot be any doubt that the State Legislature has a legislative competency to levy luxury tax on luxury items. Entry 52 of List I confers power on the Parliament to make legislation with regard to industries, the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76 has observed that: "if the two fields were different and the Central legislation did not intend at all to cover that field, the field was clear for the operation of State legislation and there was no repugnancy at all between Act No. 65 of 1951 and the U.P. Sugarcane (Regulation of Supply and Purchase) Act (24 of 1953)." Similar is the view expressed by the honourable Supreme Court in the case of State of U.P. v. Synthetics and Chemicals Ltd. [1992] 87 STC 289; 2 SCST 1268. At page 1270 of SCST and 306 of STC, it is observed as follows: "The control exercised by the Central Government by virtue of section 18G of the IDR Act is in a field far removed from the taxing power of the State under entry 54 of List II. So long as the impugned legislation falls in pith and substance within the taxing field of the State, the control of the Central Government in exercise of its power under the IDR Act in respect of a controlled industry falling under entry 52 of List I cannot in any manner prevent the State from imposing taxes on the sale or purchase of goods which are the products of such industry and which are referable to entry 33 of List III." Therefore, I do not find any merit in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said provision. Since the luxury tax is levied, as noticed by me earlier, on stock of luxury items and there being no element of sale or purchase, the levy of luxury tax cannot be held to be invalid on the ground that it runs counter to the provisions contained in clause (a) of section 15 of the CST Act. Nodoubt, it is one of the contentions of the learned counsel appearing for the petitioners that though the impugned tax is called as a luxury tax, as a matter of fact and in substance, it is a sales tax and the imposition of tax is a colourable exercise of power by the State. I am unable to accept this contention. When the Legislature is conferred with the power to levy luxury tax under entry 62 of List II, merely because the impugned tax came to be enhanced from 4 per cent to 20 per cent consequent upon the decision of the honourable Supreme Court in the case of Kothari Products [2000] 119 STC 553, it is not possible to take a view that what is levied is sales tax and not luxury tax. Secondly, as rightly pointed out by the learned Advocate-General, in sub-section (ix) of section 14 of the CST Act, tobacco and various sub-headings are mentioned. Gutka is not one of the item men ..... X X X X Extracts X X X X X X X X Extracts X X X X
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