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TMI Blog2017 (4) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... dental 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 covered by the Division Bench decision of this Court d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 W.P.No.27825/2014, which is the basis for the impugned order and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods 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 specified in the notification" and the impugned notification would indicate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 the protection of petty producers of "cotton fabrics" not owning more than four Power Looms, from unreasonable competition b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 category of dealers is dependent on the area and population and said criteria has nexus with the volume of business in the area. 26. Under the Karnataka Excise Act, 1967 the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought 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 classification, however, is not enough to get over the inhibition of Article 14. It has been held that classification must not be arbitrary but must also be rational and it must not only be based on some qualities or characteristics which are to be found in all persons grouped together and which is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Kerala & Ors. [AIR 1990 SC 913], contended that the State has widest latitude where measures of economic and fiscal regulation are concerned. There is no dispute on this principle of law as enumerated in the aforesaid decision of this Court. However, this same law must not be repugnant to the Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 economic superiority by reason of his great volume of his business. It has been held by the Apex Court in the case of K.M.MOHAMMED ABDUL KHADER FIRM vs THE STATE OF TAMIL NADU AND OTHERS reported in 1985(58) STC 12 while dealing with the contentious issue of levy of additional tax at different rates on different d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly 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 equality to prevent the classification of property for purposes of taxation or the imposition of different rates upon different classes." Weaver again says at p. 397: "Class legislation is that which makes an improper discrimination by conferring particular privileges upon a class of persons, arbitrarily selected from a lar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 protection of its laws sets a goal not attainable by the invention and application of a precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 economy and the context of felt needs of the times and societal exigencies informed by experience gained from its functioning till the enactment are of significance. There is no dispute that the impugned provision includes all employees of the public sector and none not in the public sector. The question is whether those left out are similarly situate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust 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 distinguishes persons or things that are grouped together from others left out of the group; and (ii) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to be done by the legislature in enacting the legislation and so construe it as to give force and life to the intention of the legislature. This is not charting any hazardous course but is amply borne out by an observation worth reproducing in extenso in Seaford Court Estates Ltd. v. Asher (1949) 2 All ER 155. It reads as under: "Whenever a statute comes up for consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 legislature which is competent to levy a tax must inevitably be given full freedom to determine which articles should be taxed, in what manner and at what rate. It would, therefore, be idle to contend that a State must tax everything in order to tax something. In tax matters, "the State is allowed to pick and choose districts, objects, persons, methods and even rates for taxat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The contention must, accordingly be negatived." 37. In the background of catena of decisions above referred to, the impugned legislation and notification is being examined. Under Section 9 of the KVAT Act, the levy is passable to consumer and it specifically enables the dealer to charge and collect tax from the customers or in other words, tax can be passed on to customers. Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 correspondingly notification dated 28.02.2014 (impugned in these writ petitions) was also issued granting exemption in respect of certain categories of dealers . 42. A perusal of the above referred impugned notification would indicate that the State Government has exempted tax payable on the liquor sold by a dealer who is not a person holding licence in Form No.CL-9 for vending liquor in B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur 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 recognized pattern. It is based on intelligible differentia. The object of this differentiation between income accruing or received from a source in the specified areas and the income accruing or received from a source outside such areas is to benefit not only the members of the schedule tribes residing in the specified areas but also to benefit economically such areas. If the contention advanced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates 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 collection of a surcharge which is in truth and substance the imposition of an additional sales tax, it could not legally go on legislating further enactments providing again for levy of additional sales tax. On this basis it is contended that the provisions of the impugned Act, 1976 are ultra vires and devoid of legislative competence. We see no substance in this contention. The impugned enactment has mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (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 dealer and so long as it is not made out that the tax is confiscatory, it is not possible to accept the contention that because the dealer is disabled from passing on the incidence of tax to the purchaser, the provisions of the Act impose an unreasonable restriction upon the fundamental rights of the appellants under article 19 (1) (g) or 19 (1) (f)". Dealing with the contention that since the provisions of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse, 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 tax heavier on him both absolutely and relatively, is not arbitrary discrimination but an attempt to proportion the payment to capacity to pay and thus arrive in the end at a more genuine equality. The capacity of a dealer, in particular circumstances, to pay tax is not an irrelevant factor in fixing the rate of tax and one index of capacity is the quantum of turnover. The argument that while a dealer beyond certain limit is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 licence fee fixed for a dealer holding licence in Form No.9 and operating in urban areas is ` 6.00 lakhs, whereas, licence fee prescribed for a similar licence holder who is running Bar and Restaurant business in rural area is ` 2.00 lakhs though both the class of licence holders run the same business. This exemption is extended to Bar and Restaurants operating in rural areas considering the fact of no value addition between the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reting 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 classification made out and whether such classification is based on intelligible differentia or not. 11. We will now further consider the contention keeping in view the aforesaid broad parameters. We may also state that the decisions on the other legal issues are already referred to by the learned Single Judge in the order dated 30- 9-2015 and as the order of the learned Single Judge itself, for the reasoning recorded is reproduced herein above, we need not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 our view is misconceived. The obvious reason is that, the State while granting exemption has not referred to any of the aspects of service provided or the ambience provided or the charges levied thereto. There cannot be second opinion on the aspect that under the Act, the tax has to be levied on goods and not on the services provided or the ambience provided by the dealer or the bar or bar and restaurant. At the same time, if the test of common parlance i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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