TMI Blog2001 (2) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... The challenge to the vires of the Act is on the grounds of lack of legislative competence and violation of rights under articles 14 and 19(1)(g) of the Constitution. The Union of India seeks to sustain the legislative competence to enact the impugned law under article 248 read with entry 97 of List I of the Seventh Schedule. Writ Petition No. 142 of 1999 is concerning tax practitioners and chartered accountants. The first petitioner therein is the All India Federation of Tax Practitioners which is said to be a representative body of 36 associations. The second petitioner is the chamber of income-tax consultants having advocates, chartered accountants and tax practitioners as its members. The third and fifth petitioners are also associations of chartered accountants and the fourth petitioner is a practising chartered accountant. The second petitioner, i.e., Writ Petition No. 1174 of 2000 is filed by the Indian Institute 'of Architects which is a registered society of architects. A brief legislative history is that the service tax was for the first time imposed by the Finance Act, 1994, pursuant to the report submitted by the Chelliah Committee on tax reforms. The Finance Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive power to make any law with respect to any matter not enumerated in the Concurrent List or State List. (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists." Entry 60 of List II of the Seventh Schedule is as follows: "Taxes on professions, trades, callings and employments." Entry 97 of List I of the Seventh Schedule is as follows : "Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists." It is upon these two entries respectively that the parties rely, the respondents contending that entry 97 of the Union List read with article 248(2) authorises and justifies levy of service tax, the petitioners contending that so far as these provisions purport to impose a tax on the service they are really in the nature of a tax on profession falling within entry 60 of List II and thus beyond the legislative competence of Parliament. It is also the contention of the petitioners that the residuary power under entry 97 of List I is not available to Parliament, if the subject is covered by any of the items falling in the State List. Section 66 of the Act is the charging s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross amount charged by such architect from the client for services rendered in professional capacity in any manner." "(r) in relation to the service provided by a practising chartered accountant to a client, shall be the gross amount charged by such accountant from the client for services rendered in professional capacity in any manner." Section 68(1) provides that every "person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed". Sub-section (2) then provides that notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of Chapter VI shall apply to such person as if he is the person liable for paying the service tax in relation to such service. The procedure which is to be followed for collecting the service tax is prescribed by section 70, which, inter alia, requires the person responsible for collecting the tax to file a return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Indian Institute of Architects, who addressed the leading arguments, contended that the appellation of service tax given to the impost is a misnomer as the impost envisaged by the Act in its true nature and character is no more and no less than a tax on profession under entry 60, List II within the State's exclusive power. The nomenclature to the tax, it is urged, is irrelevant in deciding its true nature and character, entry 60 of List II refers to a tax on profession. The entry is used in wider sense and is not restricted to a particular aspect of profession. It is also not subject to any other entry/provision in List II or List III. The cardinal rule of interpretation is that in construing words in a constitutional enactment conferring legislative power they should be given the most liberal construction so that the same may have effect in their widest amplitude. Mr. Datar referred to the following observations of the Supreme Court in the case of Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC); AIR 1955 SC 58: "As pointed out by Gwyer C. J. in United Provinces v. Mt. Atiqa Begum, AIR 1941 FC 16:...none of the items in the Lists is to be read in a narrow or restrict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for reconciling apparently conflicting tax entries follows from the fact that a tax has two elements: the person, thing or activity on which the tax is imposed, and the amount of the tax. The amount may be measured in many ways; but decided cases established a clear distinction between the subject-matter of a tax and the standard by which the amount of tax is measured. These two elements are described as the subject of a tax and the measure of a tax." Mr. Datar sought to demonstrate that looking from any angle service tax must be said to be covered under entry 60 of List II. He stated that the tax on building can be a one time tax, unrelated to the annual rental value, but it can also be based on the total area, age of the building, location, etc. In both the cases, it is a tax on building. Applying the same analogy, Mr. Datar submitted that the levy of professional tax without reference to remuneration or levy with reference to the remuneration/professional receipts would only be a tax on profession. The second limb of the argument of Mr. Datar is that the Union Legislature does not get power to levy tax with reference to residuary power under entry 97 of List I unless it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional activities from the purview of service tax. If the service tax has a substantial connection with "tax on profession", it can well be taken to be a legislation on the topic covered by entry 60. He drew our attention to the observations of Sen J. in para. 12 of the judgment in Southern Pharmaceuticals and Chemicals v. State Of Kerala, AIR 1981 SC 1863: "It is the charging section which gives the true index to the real character of tax...." Again in para. 13, the Supreme Court observed: "In determining whether an enactment is a legislation 'with respect to' a given power, what is relevant is not the consequences of the enactment on the subject-matter or whether it affects it, but whether, in its pith and substance, it is a law upon the subject-matter in question". He also invited our attention to the observations of the Supreme Court in Ujagar Prints v. Union of India [1989] 179 ITR 317 (SC); AIR 1989 SC 516, 529, para. 23: "The expression 'with respect to' in article 246 brings in the doctrine of 'pith and substance' in the understanding of the exercise of legislative power and wherever the question of legislative competence is raised, the test is whether the legislation, loo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entry 60 should be construed widely and so construed it would comprehend within its scope the levy of tax, based on the service rendered by a professional. The learned Attorney General on the contrary, submitted that the law in pith and substance, is not one "with respect to" the provisions under entry 60, List II, but a service tax as the Legislature has chosen to conceive it, is referable to the residuary power under entry 97 of List I. The learned Attorney General submitted that the profession tax is a tax for the privilege of belonging to the profession and being a member of the profession. A tax on profession is distinct form and unrelated to whether the professional earns income or remuneration from actual practice of the profession. A tax on profession can be imposed if a person carries on a profession. Such a tax on profession is irrespective of the question of income. The pith and substance of levy of service tax on professional service actually rendered for remuneration is fundamentally different from levy of tax on a professional who may or may not render services for remuneration. The charging or taxable event and the incidence of the service tax are totally differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rupees to 2,500 rupees at present. He submitted that if the petitioners' submissions were to be accepted it would mean that levy of service tax on professional services actually rendered for remuneration cannot exceed the normal limit prescribed under article 276(1). This, he said, is totally unwarranted. It would mean that article 276 of the Constitution would have to be amended if the impugned service tax is to be considered a tax on profession falling within entry 60 of List II. He submitted that the service tax on the gross receipts received by the professionals is totally different from a tax on profession and does not fall within the scope of entry 60 of the State List and in the absence of any referability to any other entry of List II, it will be covered by entry 97 of List I. The learned Attorney General referred to an unreported judgment of the Division Bench of the Gujarat High Court in Special Civil Applications Nos. 469 of 1999 and 7220 of 1999 decided on December 27, 2000 (Chartered Accountants Association and Gujarat Institute of Civil Engineers and Architects v. Union of India [2001] 252 ITR 53), wherein the Division Bench has overruled an almost identical challeng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same vein. In that case, the challenge was to the levy of tax under the Expenditure-tax Act, 1987, enacted by Parliament. The Act envisaged a tax at 10 per cent. ad valorem on "chargeable expenditure" incurred in the class of hotels wherein "room charges" for any unit of residential accommodation are over Rs. 400 per day per individual. "The chargeable expenditure" included expenditure incurred on payments made in such class of hotels in connection with the provision of accommodation, residential or otherwise, food or drink, etc. The challenge was on the ground that entry 62 in List II conferred exclusive power on the State Legislature to levy tax on luxuries and entry 54 in List II empowered the State to levy tax on the sale of goods. Since the expenditure tax and tax on the sale of goods were covered by the entries in the State List, there was nothing left for Parliament to tax. In the context of the said controversy, which was akin to the present one, the Supreme Court observed: "Indeed, the law 'with respect to' a subject might incidentally 'affect' another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlappin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both in entry 44 of List III. Under article 246(1), Parliament has exclusive power to make laws with respect to any of the matters and those included the power to impose tax enumerated in List I. If a tax does not fall either in the State List or the Concurrent List, Parliament has residuary power under entry 97, List I. In Union of India v. Harbhajan Singh Dhillon [1972] 83 ITR 582 (SC). Sikri C. J., speaking for the Bench, observed as follows: "If this is the true scope of residue powers of Parliament, then we are unable to see why we should not, when dealing with a Central Act, enquire whether it is the legislation in respect of any matter in List II for this is the only field regarding which there is a prohibition against Parliament. If a Central Act does not enter or invade these prohibited fields there is no point in trying to decide as to under which entry or entries of List I or List III a Central Act would rightly fit in." It was further observed by the learned Chief Justice: "... we are definitely of the opinion, as explained a little later, that the scheme of our Constitution and the actual terms of the relevant articles, namely, article 246, article 248 and entry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution. The Supreme Court repelling the challenge to the constitutional validity observed: "As pointed out by this court in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC); [1955] SCR 829 ; AIR 1955 SC 58, following certain earlier decisions referred to therein, the entries in the legislative list should not be read in a narrow or restricted sense and that each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it. It has been accepted as well settled that in construing such an entry conferring legislative powers the widest possible construction according to their ordinary meaning must be put upon the words used therein. In view of this well established rule of interpretation, there can be no reason to construe the words 'taxes on luxuries or entertainments or amusements' in entry 50 as having a restricted meaning so as to confine the operation of the law to be made thereunder only to taxes on persons receiving the luxuries, entertainments, or amusements. The entry contemplates luxuries, entertainments, and amusements as objects on which the tax is to be imposed. If the words are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 250. It was argued that the opening and the concluding portions of article 276(2) should be construed conjunctively to represent the total amount payable in respect of any one person to the authorities enumerated in the article by way of taxes on professions, trades, callings and employments exceeding Rs. 250 per annum. The Supreme Court overruled the above submission and observed as under: "The contention of the appellants that the imposition of tax by the Panchayat Samiti amounts to double taxation and is, therefore, illegal is unsound. A tax on profession is not necessarily connected with income. This is clear from the tax on professions imposed by several municipal authorities at certain rates mentioned in the relevant statutes. A tax on income can be imposed if there is income. A tax on profession can be imposed if a person carries on a profession. Such a tax on profession is irrespective of the question of income." In R.R. Engg. Co. v. Zila Parishad, Bareilly, AIR 1980 SC 1088, the validity of the circumstances and property tax levied under section 119 of the U.P. Kshetra Samitis and Zila Parishads Act was challenged before the Supreme Court. It was held that the tax o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act was invalid. This court, after referring approvingly to the decision in District Board of Farrukhabad, particularly to the statement therein that the name given to a tax did not matter and that what had to be considered was the pith and substance of it, observed: 'A tax on "circumstances and property" is a composite tax and the word "circumstances" means a man's financial position, his status as a whole depending, among other things, on his income from trade or business'. The Full Bench decision under appeal in the instant case, R.R. Engg. Co., has taken the same view of the nature of the tax on circumstances and property by holding that it is not a tax on income but is a tax on a man's financial position, his status as a whole, depending upon his income from trade or business. Earlier, another Full Bench of the Allahabad High Court had held in Zila Parishad, Muzaffarnagar v. Jugal Kishore, AIR 1969 All 40, that the tax on circumstances and property is fundamentally distinct from and cannot be equated with income-tax, that it is not covered by item 82 List I, Schedule 7, of the Constitution and that it is essentially a tax on status or financial position combined with a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elaborate, the professional tax which an architect, consulting engineer or a practising chartered accountant pays is a tax for the privilege of having the right to exercise that particular profession. However, the service tax which each of the aforesaid professionals pays is the tax which he has to pay each time he renders services for remuneration. The tax is thus on the services rendered for remuneration. On the other hand, the professional tax is required to be paid for the privilege of having the right to exercise the profession whether or not the person actually chooses to exercise the profession in a given year or not. The liability to pay professional tax would remain irrespective of the fact whether a person actually renders services or not or whether the services are rendered for remuneration or not. On the other hand, the service tax is to be levied only when the services are rendered by a concerned person for remuneration. The entire edifice of the petitioners' case that the service tax is a tax on the profession must, therefore, fail. Consequently, the reliance on entry 60 in the State List must also fail. There being no other entry in the State List or Concurrent List ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. In Jaipur Hosiery Mills (P.) Ltd. v. State of Rajasthan [1970] 26 STC 341 (SC), a notification under the Rajasthan Sales Tax Act, 1954, exempting from tax the sale of garments which did not exceed Rs. 4 per piece was assailed. The Supreme Court found the classification permissible. It was held: "What has to be borne in mind that in matters of taxation the Legislature possesses the large freedom in the matter of classification. Thus wide discretion can be exercised in selecting persons or objects which will be taxed and the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. 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." In Sri Krishna Das v. Town Area Committee, Chiragaon, AIR 1991 SC 2096; [1990] 3 SCC 645, the Supreme Court observed: "It is for the Legislature or the taxing authority to determine the question of need, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs that they would be required to pay service tax even if their clients do not pay their fees is completely misplaced. It is pointed out by the respondents that as per section 68 of the Finance (No. 2) Act, 1998, and rule 6 of the Service Tax Rules, 1994, in case the clients pay an amount less than that billed to them, the assessee has to only amend the bill, either by modifying the existing bill or by issuing a revised billed amount, to the extent of such non-payment by the client. In fact, rule 6(3) even provides a facility for suo motu adjustment of excess payment of service tax by an assessee. The Act is introduced to cover the service sector which constitutes 40 per cent. of the GDP. If in this process even if it is assumed that a few individuals suffer hardship it cannot be helped and in any event cannot be a ground for declaring the Act as violative of article 19(1)(g) of the Constitution. Thus, contention (c) is also liable to be rejected. In the result, for the foregoing reasons, these petitions fail and are dismissed. However, in the facts and circumstances of the case, there will be no order as to costs. At this stage, learned counsel for the petitioners pray that si ..... X X X X Extracts X X X X X X X X Extracts X X X X
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