VAT exemption to liquor dealers can’t be availed by Bars in Karnatka :HC

By | July 26, 2016
(Last Updated On: July 26, 2016)

Held

The basic distinction is that the one who is dealer in liquor and wine is selling the liquor or wine or beer or fenny in the same packing of bottle as being manufactured by the manufacturing company. Whereas, the person holding C.L.9 licence, for vending in bar or bar and restaurant, is providing liquor or wine in pegs and beer in glass/es. It is hardly required to be stated, that if any consumer of the goods is desirous to have only one peg, he will go to a bar or a bar and restaurant, but he will not go to a liquor or wine dealer for buying the whole bottle in the packed form. Therefore, the status of a person who is dealer in liquor and wine and beer or fenny, etc. is different than that of a person holding C.L.9 licence for vending of the liquor in the bar and or bar and restaurant. If the Legislature has made a separate class on account of the aforesaid distinction, it cannot be said that there is no rational classification. If one further examines the matter, the liquor or wine is subjected to tax at a different price and different consideration to the consumer in contra distinction to a sale by a dealer to a consumer of liquor or wine in a packed form of bottle or container. Under these circumstances, the classification made by the Legislature while granting exemption cannot be said to be on irrational basis, but it can be said that the dealer of liquor or wine is not similarly situated as that of the owner of bar and restaurant with C.L.9 licence, because as we recorded earlier, the manner of sale in a packed product, that too in an intact condition as made by the manufacturer, cannot be equated, nor can be said to be similarly situated with the person who is vending liquor or wine by holding C.L.9 licence in a bar and restaurant. We may also record that, if any Legislature or a statute is to be contested by the Court, the effort on the part of the Court would be to uphold the Legislature, unless it is made by, against or in breach of any constitutional provision. The presumption would be that it is valid, unless declared invalid by the competent Court. When we find that there is a rational classification with the intelligible differentia, this Court cannot substitute its own reason, unless the Court finds that such classification is highly irrational or there is no any intelligible differentia at all.’ In the present case, we do not find that such condition is satisfied. Therefore, the contention raised for discrimination in the grant of exemption cannot be accepted.

HIGH COURT OF KARNATAKA

Heaven Inn (Bar Attached)

v.

State of Karnataka

JAYANT PATEL AND B. SREENIVASE GOWDA, JJ.

WRIT APPEAL NOS. 1425 AND 1707-1727 OF 2016

JULY  4, 2016

K.G. Raghavan, Sr. Counsel and D.C. Prakash, Adv. for the Appellant. Shweta Krishnappa for the Respondent.

ORDER

B. Sreenivase, J. — As in all appeals common questions arise for consideration, they are being considered simultaneously.

2. The present appeals are directed against the order dated 25.04.2016 passed by the learned Single Judge of this Court whereby the learned Single Judge based on the earlier order passed by another learned Single Judge dated 30.09.2015 in W.P.No.27825/2014 and allied matters has dismissed the present petitions.

3. We have heard Sri. K.G. Raghavan, learned Senior counsel appearing with Sri. D.C. Prakash, learned counsel for appellant and Smt. Swetha Krishnappa, learned High Court Government Pleader appearing for the respondents.

4. The learned Counsel for the appellant mainly raised two contentions. One was that there is discrimination in grant of exemption by the State, in as much as, appellant is having C.L.9 licence for vending in City Municipal Corporation area. In his submission, if exemption is available to liquor shop or wine dealer, there is no reason why the restaurant or hotel where liquor is being provided/sold would be deprived of the benefit of exemption. Another contention raised by the learned Counsel for the appellant was that under Karnataka Value Added Tax Act, 2003 (herein after referred to as the Act), there is no power to levy tax on the services provided, or the extra charges levied by the bar and restaurant for the liquor being served together with the refreshments or without refreshments. Therefore, if the State while levying tax considers the matter differently, merely because a different ambience is provided and wine and liquor are served, such can be said to be outside the scope of the power of the State to levy tax because tax can only be levied on goods. In his submission, wine, liquor or any other liquor or wine remains as wine or liquor even if its quantity is sub-divided and served in a peg or more than one peg, or beer is served in glass or otherwise. In the circumstances, he prayed that the view taken by the learned Single Judge is erroneous and this Court may consider in the present appeal.

5. We may record that, since in the impugned order, the learned Single Judge has mainly relied upon the earlier decision of another learned Single Judge dated 30-9-2015, we have considered the very said decision of the learned Single Judge dated 30-9-2015 passed in W.P.No. 27825/2014 and allied matters, whereby, the learned Single Judge in the said matter, for the reasons recorded, has dismissed the petitions. We may record that the writ appeal was preferred against the aforesaid decision of the learned Single Judge dated 30-9-2015. But as per the statement made at the Bar, and it is not disputed by the learned Government Advocate appearing for the State that the said appeals were dismissed for non-prosecution mainly for non-removal of the office objection. Under these circumstances, the attempt on the part of the learned Counsel for the appellant was that, even the view taken by the learned Single Judge dated 31-9-2017 in W.P.No.27825/2014, upon which reliance has been placed by the learned Single Judge in the impugned order is erroneous and therefore, this Court may interfere in the appeal.

6. In order to appreciate the contentions, we will take into consideration the decision of another learned Single Judge dated 30-9-2015 in W.P.No.27825/2014, which is the basis for the impugned order and we may examine as to whether the order can be said as erroneous or not or further considered in the present appeal.

7. Since in the impugned order, the learned Single Judge has only extracted certain portions, we find it appropriate to extract the relevant observations made by the learned Single Judge in the above decision dated 30-9-2015 for ready reference, which reads as under :

“15. A bare reading of Section 5(1) of the KVAT Act would indicate that goods specified in the I Schedule and any other goods that may be specified by a notification by the State Government would be exempt from the tax payable under the Act, subject to such condition and restriction, as may be specified in the notification. Reading of Section 8-A of erstwhile KST Act would indicate that State Government was empowered to grant exemption or reduction in rate in respect of any tax payable under the said Act under the eventualities referred to clause (a) to (c) of sub-section (1). The said clauses would indicate that State Government may by notification make an exemption or reduction in rate in respect of any tax payable under the said Act on the sale or purchase of any specified goods or class of goods or by any specified class of persons or on the sale or purchase of any specified goods by any specified class of dealers. Thus, under both the Acts, the specified goods or class of goods can be exempted from tax and Section 5(1) of the KVAT Act would indicate that such exemption would be subject to such restrictions and conditions as may be specified in the notification.

16. In the background of discussion made herein above, when the impugned notification is perused, it would indicate that it exempts tax payable on “sale of liquor” and it does not exempt the dealer as such. However, where such dealer of certain identified categories sells the liquor, such dealer would not be required to collect the tax as in case of other dealers they are required to do so.

17. A conjoint reading of Section 5(1) of the KVAT Act, Section 8A(1)(c) of KST Act, 1957 and the impugned notification dated 28.02.2014 would clearly indicate that under Section 8A(1)(c) of KST Act, State had power to notify exemption and reduction of tax in respect of any specified class of goods by any specified class of dealers. Whereas, under Section 5(1) of the KVAT Act, goods specified in the First Schedule and any other goods as may be specified by the State can be exempted from payment of tax. Impugned notification would indicate that tax payable under the KVAT Act on sale of liquor including Beer, Fenny, Liqueur and Wine by a dealer who is not a person holding licence in the Forms specified thereunder is exempted. The exemption that is granted is in respect of the goods specified in Entry No.59A of III Schedule and on account of such sale of liquor including Beer, Fenny, Liqueur and Wine is by a dealer who passes on such tax liability on the consumer has been made liable to collect the same and pass it on to the consumer. Hence, petitioners cannot contend that levy of tax is permissible only on the goods and the impugned legislation empowers the State to levy tax on certain class of dealers which is beyond the power available under Section 5(1) of the KVAT Act. Petitioners also cannot contend that State cannot choose the class of dealer from being exempted, inasmuch as, the later portion of Section 5(1) would indicate that such exemption can be granted by the State “subject to such restriction and condition as may be specified in the notification” and the impugned notification would indicate that exemption is granted in respect of “liquor” sold by dealer who is not a person holding licence in the Forms indicated under the said notification. Hence, it cannot be contended that impugned notification has been issued without power under Section 5(1) of the KVAT Act.

18. In fact, under the Central Excise Act, 1944 a provision which is in parimateria with Section 5 of the KVAT Act can be found. Section 5A(1) of Central Excise Act, 1944 which is similar to Section 5 of the KVAT Act reads as under:

“Power to grant exemption from duty of excise

5A. (1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after removal) as may be specified in the notification, excisable goods of any specified description from the whole or any part of the duty of excise leviable thereon;

Provided that, unless specifically provided in such notification, no exemption therein shall apply to excisable goods which are produced or manufactured –

(i)In a free trade zone or a special economic zone and brought to any other place in India; or
(ii)by a hundred per cent export-oriented undertaking and brought to any other place in India.”

(emphasis supplied)

In exercise of such power conferred, Government of India has exempted excise duty payable by class of persons.

19. The Hon’ble Apex Court in the case of Orient Weaving Mills Pvt Ltd & Another v. Union of India and Othersreported in AIR 1963 SC 98 was examining the constitutional validity of Rule 8(1) of Central Excise Rules, 1944 as to whether it suffers from the vice of excessive delegation of power to exempt or not.

Rule 8(1) of Central Excise Rules, 1944 reads thus:

“8. Power to authorise exemption from duty in special cases:

(1) The Central Government may from time to time, by notification in the Official Gazette, exempt subject to such conditions as may be specified in the notification any excisable goods from the whole or any part of the duty leviable on such goods.”

(emphasis supplied)

In pursuance to the powers conferred under sub-rule (1) of Rule 8, notifications came to be issued vide notification No.74 of 1959 dated 31.07.1959 and notification No.70 of 1960 dated 30.04.1960 exempting thereunder:- “cotton fabrics” from payment of excise duties produced by Power Looms owned by certain Co-operative Societies, which was impugned on the ground that they exempt certain classes of person and not classes of goods from the excise duty and exemption if any could have been granted in respect of any particular specified variety of “cotton fabrics” and not with reference to the persons producing the same variety of those fabrics. Even in the instant case, petitioners are contending that exemption could have been granted on the goods namely, liquor as indicated in Entry 59A of III Schedule but not with reference to certain licence holders only i.e., dealers and this is beyond the power available under Section 5(1) of the KVAT Act.

20. The contention raised in ORIENTAL WEAVING MILLS’s case referred to supra is similar to the contention now raised in the present writ petitions and rejecting the same, Hon’ble Apex Court has held that exemption granted by the impugned notification from payment of excise duties on “cotton fabrics” produced by certain Co-operative Societies is meant primarily for the protection of petty producers of “cotton fabrics” not owning more than four Power Looms, from unreasonable competition by big producers. Hence, it was held that it made a valid classification between the goods produced by big establishments and similar goods produced by small Power Loom weavers who suffer from handicaps to which big establishments are not subject to. Hence, it was held that there has been no excessive delegation of power to exempt under Rule 8(1) nor are the notifications bad insofar as they exempt certain “classes of person” and not “classes of goods” from the excise duty. The impugned notification on hand exempts liquor sold by retail sellers in sealed bottles under the specified condition of MRP and liquor sold by Bar and Restaurants operating in rural areas without scope for much value addition unlike liquor along with food and refreshments sold by Bar and Restaurants of urban areas and liquor sold in similar manner by Boarding House and Lodges in rural areas by following the specific conditions attached to the licence for such sale and thereby they would have relative economic edge and there is scope of value addition and as such, impugned enactment as well as notification is not ultra vires and is within the State’s power under Section 5(1) of the Act.

RE: DISCRIMINATION:

21. The thrust of the arguments advanced by the learned Advocates appearing for the petitioners has been that impugned notification unreasonably discriminates between the dealers in liquor carrying on business selectively since a person holding licence in Form CL-9 carrying on business in village panchayat areas is exempted but it does not exempt a similar licence holder carrying on similar business in the same area and as such, there is no rationale and it amounts to discrimination and impedes free flow of trade and commerce and such levy is violative of Articles 14, 19 and 304-B of the Constitution of India.

22. There cannot be any dispute to the proposition that a legislation can be challenged on the grounds of:-

(i)lack of legislative competence to make subordinate legislation;
(ii)violation of fundamental rights;
(iii)violation of any provisions of the Constitution of India;
(iv)failure to conform to statute under which it is made or exceeding the limits of authority conferred by the enabling Act;
(v)repugnancy to the laws of the land i.e, any enactment
(vi)arbitrariness or unreasonableness.

For the above proposition, judgment of Apex Court in the case of State of T.N. And Another v. 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.

LICENCECATEGORY OF DEALERS
Form CL-2Retail Liquor Shops
Form CL-4Clubs
Form CL-6AStar Hotels
Form CL-7Hotel, Boarding Houses & Lodges
Form CL-9Restaurants & Bars
Form CL-11CMSIL

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 quantum of licence fee prescribed is based on classification of areas on population criterion. They are classified as under:

(i) Area based:

(a)City Municipal Corporations
(b)City Municipal Council
(c)Town Municipal Council
(d)Other areas

(ii) Population based:

(a)population more than 20 lakhs in respect of City Municipal Corporation.

Even the licence fee prescribed for grant of CL-2, CL-9 and CL-7 licences is dependent on the area/population as could be seen from the following tabular column:

Sl.No.Area in operation or PopulationCL-2CL-9CL-7
(a)City Municipal Corporation having population of more than 20 lakhs4,46,0006,00,0006,60,000
(b)Other City Municipal Corporation areas3,64,0004,62,0005,80,000
(c)City Municipal Council areas3,30,0003,64,0004,30,000
(d)Town Municipal Council areas/Town Panchayat areas2,50,0002,60,0003,64,000
(e)Other areas2,00,0002,00,0002,80,000

27. It is not in dispute that dealers holding liquor licence in Form CL-2 and CL-11C sell liquor across the counter to consumers at a sale price not exceeding the MRP indicated on the label of the container or bottle. However, such restriction is not imposed on Bars and Restaurants, Clubs, Star Hotels, Hotel, Boarding Houses and Lodges and this enables them to fix the sale price of the liquor being sold to the customers depending upon the varying degree of facilities provided by them to the customers.

28. The Legislature has inserted Entry 59A in the III Schedule to KVAT Act and has chosen to provide for levy of tax on liquor sold by certain licence holders. Notification – II bearing No.FD 21 CSL 2014 dated 28.02.2014 was issued granting exemption to liquor dealers holding licence to Form CL– 9 operating in Panchayat limits/Rural areas and liquor dealers holding licence in Form CL-2 or any other licence and has the effect of levying tax on liquor sold by dealers holding licence in Form CL-9 and operating in urban areas, licence in Form CL-4, Form CL-6A, Form CL-7. Thus it has to be examined as to whether exempted class can be considered as a separate class.

29. Article 14 of the Constitution of India forbids class discrimination by conferring privileges or imposing liabilities upon person arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed. However, it does not forbid for the purpose of legislation, provided such classification is not arbitrary but rationale, namely, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not found in others who are left out but those qualities or characteristics must have reasonable relation to the object of the legislation. The twin tests which the impugned legislation or notification will have to pass are:

(1)Classification must be based on an intelligible differentia which distinguishes those that are grouped together from others; and
(2)That differentia must have rational relation to the object sought to be achieved.

30. Apex Court in the case of The State of West Bengal v. 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 not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of legislation.

31. Apex Court in the case of State of Uttar Pradesh And Others v. Deepak Fertilizers & Petrochemical Corportion Ltdreported in (2007)10 SCC 342 was examining as to whether the exemption of Urea NPK 23:23:0 (product of the assessee) – petitioner which was exempted from tax being withdrawn was discriminatory or otherwise and in this background, it has been held that whenever any type of law is to be made for the purposes of levying tax on a particular commodity or exempting some other commodity from taxation, a sort of classification is to be made and in the facts obtained in the said case, it was held that the impugned notifications therein does not strike rational balance of classification between the items of the same category. It has been held by Hon’ble Apex Court as under:

“13. From a perusal of the notifications in question, it is evident that other fertilizers of the NPK category i.e. N.P.K. 12:32:16; N.P.K. 15:15:15; N.P.K. 20:20:0; N.P.K. 14:35:14 are included in the exemption list, whereas it is a matter of fact that the NPK 23:23:0 fertilizer is also a fertilizer of the same category, but it is omitted from the list. According to the notification dated 2-11-1994, the intention of the State was not to tax the sale of “potassium phosphatic fertilizers” but when we go into enquiry of nomenclature of these chemical compounds, we find that the NPK 23:23:0 is a “nitro-phosphate fertilizer” which has no potassium (K) ingredient. The Notifications dated 10-4-1995 and 15-5-1995 clearly include NPK 20:20:0, which is also a nitro-phosphate fertilizer with zero content of potassium (K). This classification made under the notification dated 10-4-1995 does not hold good on the rational basis and is hence subject to scrutiny. The fact remains stagnant that the notifications include a fertilizer NPK 20:20:0 which is of the same category as that of fertilizer NPK 23:23:0, because both are nitro-phosphate fertilizers. This shows that the State has not classified the two commodities on a rational basis for the purpose of imposing tax. This court in the case of Tata Motors Ltd. v. State of Maharashtra and Ors. [(2004) 5 SCC 783], has held:

“15. ….It is no doubt true that the State has enormous powers in the matter of legislation and in enacting fiscal laws. Great leverage is allowed in the matter of taxation laws because several fiscal adjustments are to be made by the government depending upon the needs of the Revenue and the economic circumstances prevailing in the State. Even so an action taken by the State cannot be irrational and so arbitrary so as to one set of rules for one period and another set of rules for another period by amending the laws in such a manner as to withdraw the benefit that had been given resulting in higher burden so far as the assessee is concerned without any reason. Retrospective withdrawal of the benefit of set-off only for a particular period should be justified on some tangible and rational ground, when challenged on the ground of unconstitutionality.”

15. The learned counsel appearing for the State relying heavily on Kerala Hotel and Restaurant Association & Ors. v. State of 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 14 of the Constitution, i.e., it must not violate the right to equality of the people of India, and if such repugnancy prevails then, it shall stand void up to the level of such repugnancy under Article 13(2) of the Constitution of India. Therefore, every law has to pass through the test of constitutionality, which is nothing but a formal name of the test of rationality. We understand that whenever there is to be made any type of law for the purpose of levying taxes on a particular commodity or exempting some other commodity from taxation, a sort of classification is to be made. Certainly, this classification cannot be a product of a blind approach by the administrative authorities on which the responsibility of delegated legislations is vested by the Constitution. In a nutshell, the notifications issued by the Trade Tax Department of the State of U.P., dated 10-4-1995 and 15-5-1995 lack the sense of reasonability because it is not able to strike a rational balance of classification between the items of the same category. As a result of this, NPK 23:23:0 is not given exemption from taxation whereas all other NPK fertilizers of the same category like that of NPK 20:20:0 are provided with the exemption from taxation.”

32. It is also well settled law that certain latitude for classification in a taxing statute is extended to the Legislature with a wider note. Classification necessarily implies the making of a distinction or discrimination between the persons so classified and those who are not members of that class. In other words, it is the essence of a classification that upon the class or cast duties or burden different from those resting upon the general public.

33. The State will decide what economic and social policy it requires to pursue. The Courts give a larger discretion to the legislature in the matter of its preferences of economic and social policies and effectuate the chosen system in all possible and reasonable ways. Thus, if a legislation or the subordinate legislation would pass the test of reasonable classification namely, one which includes all who are similarly situated and none who are not, then it would pass the test of arbitrariness. In order to ascertain whether persons are similarly placed, one must look beyond the classification and the intent of legislation.

34. Keeping this in mind, when the impugned notification is perused, it would indicate that liquor dealers holding licence in Form CL-9 operating in Panchayat limits/rural areas and liquor dealers holding licence in Form CL-2 or any other licence are exempted from collecting tax on sale of liquor. In other words tax is to be paid on the liquor sold by dealers holding licence in Form CL-9 and operating in urban areas, licence holders of Form CL-4, licence in Form CL-6A, licence in Form CL-7. Thus, it has to be seen whether this classification for the purposes of levy of tax and granting exemption stands the test of discrimination or whether it offends Article 14 in any manner whatsoever.

35. If the classification of dealers is based on any rationale, it cannot be said that it is violative of Article 14 or imposes unreasonable restriction and hit by Article 19 or Article 304-B. In a given case, the dealer/licence holder may occupy a position of 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 v. 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 dealers depending upon their turnover would be permissible and repelling the contention of levy being non collectable from the persons being not violative of Article 14 of the Constitution, and such classification being permissible. In the following judgments, similar view has been expressed.

(i) It has been held by the Apex Court in N.Venugopala Ravi Varma Rajah v. Union of India And Another reported in (1969)1 SCC 681 that a taxing statute is not exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations are objects and if classification is rationale, Legislature is free to choose objects of taxation. It has been held as under:

“14. Equal protection clause of the Constitution does not enjoin equal protection of the laws as abstract propositions. Laws being the expression of legislative will intended to solve specific problems or to achieve definite objectives by specific remedies, absolute equality or uniformity of treatment is impossible of achievement. Again tax laws are aimed at dealing with complex problems of infinite variety necessitating adjustment of several disparate elements. The Courts accordingly admit, subject to adherence to the fundamental principles of the doctrine of equality, a larger play to legislative discretion in the matter of classification. The power to classify may be exercised so as to adjust the system of taxation in all proper and reasonable ways the Legislature may select persons, properties, transactions :and objects; and apply different methods and even rates of tax, if the ,Legislature does so reasonably. Protection of the equality clause does not predicate a mathematically precise or logically complete or symmetrical classification : it is not a condition of the guarantee of equal protection that all transactions, properties, objects or persons of the same genus must be affected by it or none at all. If the classification is rational, the Legislature is free to choose objects of taxation, impose different rates, exempt classes of property from taxation, subject different classes of property to tax in different ways and adopt different modes of assessment. A taxing statute may contravene Article 14 of the Constitution if it seeks to impose on the same class of property, persons, transactions or occupations similarly situate; incidence of taxation, which leads to obvious inequality. A taxing statute is not, therefore, exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations or objects.

16. Wills in his “Constitutional Law, of the United States” has stated at p. 537 :

“A state does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods, and even rates for taxation if it does so reasonably.”

As stated in Weaver’s “Constitutional Law” Article 275 at p. 405:

“The Fourteenth Amendment was not designed to prevent a state from establishing a system of taxation or from effecting a change in its system in all proper and reasonable ways, nor to require the states to adopt an ironclad rule of 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 large number of persons, all of whom stand in the same relation to the privilege granted and between whom and the persons not so favoured no reasonable distinction or substantial difference can be found justifying the inclusion of one and the exclusion of the other from such privilege………A classification must not be arbitrary, artificial or evasive and there must be a reasonable, natural and substantial distinction in the nature of the class or classes upon which the law operates. In respect to such distinction, a legislative body has a wide discretion and an Act will not be held invalid unless the classification is clearly unreasonable and arbitrary.”

18. The Mappilla families governed by the Marumakkattayam Law reside in a small part of the country and form numerically a small community. The Parliament has again been accustomed in enacting tax laws to make a distinction between a Hindu Undivided Family consisting of Hindus and undivided families of Mappillas. By the taxing Acts the Parliament could have treated Mappilla tarwads as units of taxation. But the mere fact that the law could have been extended to another class of persons who have certain characteristics similar to a section of the Hindus but have not been so included is not a ground for striking down the law. In treating a Hindu Undivided Family as a unit of taxation under the Expenditure-tax Act and not a Non-Hindu Undivided Family, the Parliament has not attempted an “obvious inequality””.

(ii) In the case of Shashikant Laxman Kale And Another v. Union Of India And Another reported in [1990] 4 SCC 366, Apex Court has held that Court must look beyond 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. Apex Court while upholding the constitutional validity of Section 10-C of Income Tax Act, 1961 has held as under:

“8. The main question for decision is the discrimination alleged by the petitioners. The principles of valid classification are long settled by a catena of decisions of this Court but their application to a given case is quite often a vexed question. The problem is more vexed in cases falling within the grey zone. The principles are that those grouped together in one class must possess a common characteristic which distinguishes them from those excluded from the group; and this characteristic or intelligible differentia must have a rational nexus with the object sought to be achieved by the enactment. It is sufficient to cite the decision in In Re th Special Courts Bill, 1978 [1979] 2 SCR 476 and to refer to the propositions quoted at pp. 534-537 therein. Some of the propositions are stated thus: (SCC pp.424-25, para 72)

“(2) The State, in the exercise of its governmental power, has of necessity to make laws operating differently on different groups or classes of persons within its territory to attain particular ends in giving effect to its policies, and it must possess for that purpose large powers of distinguishing and classifying persons or things to be subjected to such laws.

(3) The Constitutional command to the State to afford equal 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 of classification in any given case. Classification is justified if it is not palpably arbitrary.

(4) The principle underlying the guarantee of Article 14 is not that the same rules of law should be applicable to all persons within the Indian territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is substantially the same.

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(6) The law can make and set apart the classes according to the needs and exigencies of the society and as suggested by experience. It can recognise even degree of evil, but the classification should never be arbitrary, artificial or evasive.

(7) The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and (2) that differentia must have a rational relation to the object sought to be achieved by the Act.

(8) The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short, while Article 14 forbids class discrimination by conferring privileges or imposing liabilities upon person arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned.

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(11) Classification necessarily implies the making of a distinction or discrimination between persons classified and those who are not members of that class. It is the essence of a classification that upon the class are cast duties and burdens different from those resting upon the general public. Indeed, the very idea of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of constitutionality.”

14. We must, therefore, look beyond the ostensible classification and to the purpose of the law and apply the test of ‘palpable arbitrariness’ in the context of the felt needs of the times and societal exigencies informed by experience to determine reasonableness of the classification. It is clear that the role of public sector in the sphere of promoting the national 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 situated for the purpose of the enactment to render the classification palpably arbitrary. It is only if this test of palpable arbitrariness applied in this manner is satisfied, that the provision can be faulted as discriminatory but not otherwise. Unless such a defect can be found, the further question of construing the provision in such a manner as to include all employees and not merely employees of public sector companies, does not arise.

(iii) When constitutional validity of Section 20 of Kerala Agriculturists’ Debt Relief Act, 1970 came up for consideration before Apex Court in the case of Pathumma And Others v. State of Kerala And Others reported in [1978] 2 SCC Page 1 on the ground of discrimination also, said contention was negatived and held that while making classification, the Legislature cannot be expected to provide abstract symmetry and if classification rests upon a real and substantial distinction bearing a reasonable and just relation to the thing in respect of which it is made, then it does not amount to discrimination. It has been held by the Apex Court in said judgment as under:

“40. This brings us to the second branch of the argument relating to the applicability of Article 14 of the Constitution of India. In this connection, Mr. Krishnamoorthy Iyer submitted in the first place, that the special treatment afforded to the debtors under Section 20 of the Act is wholly discriminatory and is violative of Article 14. Secondly, it was argued on behalf of the appellants in Civil Appeal No. 420 of 1973 that they being stranger auction-purchasers were selected for hostile discrimination as against a bonafide alienee who has been given complete exemption from the operation of the provisions of the Act. It is now well settled that what Article 14 forbids is hostile discrimination and not reasonable classification. Equality before law does not mean that the same set of law should apply to all persons under every circumstance ignoring differences and. disparities between men and things. A reasonable classification is inherent in the very concept of equality, because all persons living on this earth are not alike and have different problems. Some may be wealthy; some may be poor; some may be educated; some may be uneducated; some may be highly advanced and others may be economically backward. It is for the State to make a reasonable classification which must fulfil two conditions: (1) The classification must he founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group. (2) The differentia must have a reasonable nexus to the object sought to be achieved by the statute. In the case of Shri Ram Krishna Dalmia v. Shri Justice S. R. Tendolkar & Ors. (AIR 1958 SC 538) the Court after considering a large number of its previous decisions observed as follows :

“It is now well established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to, pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which 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 that there must be a nexus between the basis of classification and the object of the Act under consideration”.

This case has been relied upon in a large number of cases right from 1959 upto this date. In the case of State of Kerala & Anr. v. N. M. Thomas (supra) one of us (Fazal Ali, J.) while delivering the concurring judgment observed as follows regarding the various aspects of the concept of equality : (SCC p.376, para 158)

“It is also equally well-settled by several authorities of this Court that Article 16 is merely an incident of Article 14. Article 14 being the genus is of universal application whereas – Article 16 is the species and seeks to obtain equality of opportunity in the services under the State. The theory of reasonable classification is implicit and inherent in the concept of equality for there can hardly be any country where all the citizens would be equal in all respects. Equality of opportunity would naturally mean a fair opportunity not only to one section or the other but to all sections by removing the handicaps if a particular section of the society suffers from the same. It has never been disputed in judicial pronouncements by this Court as also of the various High Courts that Article 14 permits reasonable classification. But what Article 14 or Article 16 forbid is hostile discrimination and not reasonable classification. In other words, the idea of classification is implicit in the concept of equality because equality means equality to all and not merely to the advanced and educated sections of the society. It follows, therefore, that in order to provide equality of opportunity to all citizens of our country, every class of citizens must have a sense of equal participation in building up an egalitarian society, where there, is peace and plenty, where there is complete economic freedom and there is no pestilence or poverty, no discrimination and oppression, where there is equal opportunity to education, to work, to earn their livelihood so that the goal of social justice is achieved”.

36. Apex Court in the case of State of Karnataka And Another v. M/S.Hansa Corporation reported in [1980] 4 SCC 697 was examining as to whether classification legislation based on population criteria for the purpose of levy of tax i.e., ‘rural’ and ‘urban’ would amount to hostile discrimination and thereby attracts Article 14 of the Constitution or not and has been answered in the negative by upholding the impugned legislation. It has been held by the Apex Court as under:

“15. There is always a presumption of constitutionality of a statute. If the language is rather not clear and precise as it ought to be, attempt of the Court is to ascertain the intention of the legislature and put that construction which would lean in favour of the constitutionality unless such construction is wholly untenable. However, where one has to look at a section not very well drafted but the object behind the legislation and the purpose of enacting the same is clearly discernible, the Court cannot hold its hand and blame the draftsman and chart an easy course of striking down the statute. In such a situation the Court should be guided by a creative approach to ascertain what was intended 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 consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticised. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give “force and life” to the intention of the legislature. That was clearly laid down (3 Co Rep 7b) by the resolution of the judges (Sir Roger Manwood, C.B., and the other barons of the Exchequer) in Heydon’s case (1584) 3 Co. Rep. 7a, and it is the safest guide today. Good practical advice on the subject was given about the same time by Plowden in his note (2 Plowd. 465) to Eyston v. Studd (1574), 2 Plowd. 463. Put into homely metaphor it is this: A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out ? He must then do as they would have done. A judge must not alter the material of which the Act is woven, but he can and should iron out the creases”.

This view was re-affirmed in Norman v. Norman (1950) 1 All ER 1082.

16. Let it be remembered that the impugned measure is a taxing statute and in the matter of taxing statute the legislature enjoys a larger discretion in the matter of classification so long as it adheres to the fundamental principle underlying the doctrine of classification. The power of the legislature to classify is of wide range and flexibility so that it can adjust its taxation in all proper and reasonable ways. In Khyerbari Tea Co. Ltd., & Anr. v. The State of Assam [1964] 5 SCR 975 this Court observed as under:

“It is, of course, true that the validity of tax laws can be questioned in the light of the provisions of Arts. 14, 19; and Art. 301 if the said tax directly and immediately imposes a restriction on the freedom of trade; but the power conferred on this Court to strike down a taxing statute if it contravenes the provisions of Articles 14, 19 or 301 has to be exercised with circumspection, bearing in mind that the power of the State to levy taxes for the purpose of governance and for carrying out its welfare activities is a necessary attribute of sovereignty and in that sense it is a power of paramount character”.

It was also observed that 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 taxation if it does so reasonably” (see Willis on ‘Constitutional Law’, p.587). This statement of law has been approved by this Court in the case of East India Tobacco Co. v. State of Andhra Pradesh (AIR 1962 SC 1753. The question, therefore, is, whether a tax of a certain kind can be levied on entry of goods in certain local areas, the classification of local areas, if found to be reasonable, the levy of tax would not be invalid on the ground that choosing certain areas only excluding some others would violate Article 14. Whether in this case the classification is reasonable would be presently examined but the contention that if the State Government is granted a choice in the matter of selection of local area, ipso facto, the statute would be unconstitutional as being violative of Article 14, must be negatived.

17. In order to ascertain whether the classification of local areas for the purposes of levy of tax is reasonable or not, a reference may be made to the impugned notification. Table annexed to the notification shows in all 27 local areas selected for levy of tax. They are again divided into three groups, A, B and C for selecting rates to be levied on different scheduled goods. A mere glance at the local areas selected and those according to the petitioner excluded, viz., areas within the jurisdiction of various Gram Panchayats would bring in bold relief that population criterion appears to have been adopted in selecting local areas for levy of tax. Does population criterion provide a reasonable basis for classification vis-a-vis a tax levied on entry of goods in the area ? It would be undeniable that population basis would provide a reasonable criterion for selecting local areas for the purpose of levy tax simultaneously excluding those which do not answer the population criterion. One unquestionable element scientifically established about a taxing statute is that the yield from the tax must be sufficiently in excess of cost of collection so that the tax which is levied for augmenting public finances to be utilised for public good would be productive. Where the cost of administrative machinery required to be set up for collecting tax is either marginally lower or equal or marginally higher than the yield from the tax, the measure would be uneconomic if not counterproductive. Now, if the tax in this case is levied on the entry of scheduled goods in local areas, the yield would be directly proportionate to the consumption of the goods in local areas and the consumption of goods is directly related to the population within the local area. Viewed from this angle, population criterion would provide a reasonable basis for classification for selectively levying the tax by choosing local area and by specifying different rates so as to make the tax productive. Therefore, there is no substance in the contention that the classification in this case was unreasonable. The High Court was accordingly in error in holding that Section 3 did not permit the State Government to pick and choose local areas for the levy of tax and that levy of tax under Section 3 in all local areas within Karnataka State was a minimum condition for exercise of the power under Section 3. 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. Under Entry 59A of III Schedule of KVAT Act, tax is levied on sale of liquor including Beer, Fenny, Liqueur, Wine which are goods or commodities. Under the impugned notification exemption is on sale of such liquor, etc. by a dealer in rural area namely, the tax payable under Entry 59A of III Schedule on sale of liquor including Beer, Fenny, liqueur and Wine by a dealer who is not a person holding licence in Form No.CL-9 for vending in Bruhat Bangalore Mahanagara Palike area, City Municipal Corporation areas, City Municipal Council areas and Town Municipal Council or Town Panchayat areas issued under Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 or dealer who is not holding licence in CL-4 or CL-6A or CL-7 issued under Karnataka Excise (Sale of Indian and Foreign Liquor) Rules, 1968 and they are exempted.

38. The impugned legislation has been enacted by the State Legislature under Entry 54 of list II of VII Schedule of the Constitution of India which provides for levy of tax on sale or purchase of goods in the State and is subject to Entry 92A of List I and as such, there can be no further curtailment of the State’s power of taxation.

39. The classification of dealers for the purpose of levy of tax and granting exemption on the basis of turnover is held to be not hit by Article 14 of the Constitution by the Division Bench of this Court in the case of SHANTILAL & BROTHERS v. State Of Karnataka And Another reported in [1985] 59 STC 178 while upholding the constitutional validity of Section 6-B(i) of Karnataka Sales Tax Act, 1957 which provided for levy of one-half percent of “turnover tax” on every dealer whose turnover in a year exceeded Rs. 1 lakh and it came to be held that such classification does not bring in hostile discrimination against any class of dealers or an unreasonable restriction on the freedom of trade guaranteed to citizens and is not violative of rights guaranteed under Article 14 and 19(1)(g) of the Constitution of India.

40. KVAT Act has been enacted by the State Legislature under Entry 54 of List II of VII Schedule to the Constitution of India which provides for levy of tax on sale or purchase of goods in the State and said enactment is in force with effect from 1st April, 2005, on all commodities except Petrol, Aviation Turbine Fuel, Diesel and Sugar cane. Under KVAT Act, tax is levied at every point of sale of goods in the State. First Schedule of the KVAT Act enumerates the list of goods which are exempted. While the goods listed in Third Schedule are liable to tax at 5.5%. As already noticed herein above, with effect from February, 2001 sales tax on liquor was merged with State Excise Duty and all the dealers in various categories enjoyed exemption from levy of VAT on sale of liquor including Beer, Fenny and Wine and under the Karnataka Excise (Excise Duties and Fees) Rules, 1968 Additional Duty was levied on liquor, Fenny, Wine and Beer which was due to merger of sales tax with excise duty and Rule 2AE and 2AF being added to Karnataka Excise (Excise Duty and Fee) Rules, 1968 .

41. However, with effect from 01.03.2014 the State inserted Entry 59A to Third Schedule of KVAT Act for levy of tax on liquor and 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 Bruhat Bangalore Mahanagara Palike area, City Municipal Corporation areas, City Municipal Council areas and Town Municipal Council or Town Panchayat areas. The said notification also exempts tax payable on liquor when it is sold by certain categories of dealers.

43. In the matters of tax laws, larger discretion is extended to the State Legislature and ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax and which it would not tax, so long as the classification made within this wide and flexible range, by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality and it would not be vulnerable to attack on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. It has been held by Hon’ble Apex Court in the case of Income Tax Officer, Shillong And Others v. R.Takin Roy Rymbai And Others reported in [1976] 1 SCC 916 to the following effect:

“27. While it is true that a taxation law, cannot claim immunity from the equality clause in Article 14 of the Constitution, and has to pass like any other law, the equality test of that article, it must be remembered that the State has, in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence, the legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. Nor the mere fact that a tax falls more heavily on some in the same category, is by itself a ground to render the law invalid. It is only when within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a violation of Article 14. (See East India Tobacco Co. v. State of Andhra Pradesh (AIR 1962 SC 1733)); Vivian Joseph Ferriera v. Municipal Corporation of Greater Bombay ((1972)1 SCC 70) ; Jaipur Hosiery Mills v. State of Rajasthan((1970)2 SCC 26).

29. Classification for purposes of taxation or for exempting from tax with reference to the source of the income is integral to the fundamental scheme of the Income-tax Act. Indeed, the entire wrap and woof of the 1961 of the Act has been woven on this pattern.

35. It is not necessary to multiply such instances. Suffice it to say that classification of sources of income is integral to the basic scheme of the 1961 Act. It is nobody’s case that the entire scheme of the Act is irrational and violative of Article 14 of the Constitution. Such an extravagant contention has not been canvassed before us. Thus the classification made by the aforesaid sub-clause (a) for purposes of exemption is not unreal or unknown. It conforms to a well 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 Mr.Lahiri is accepted and a member of the scheduled tribe residing in a specified area is held entitled to the exemption irrespective of whether the source of his income lies within or outside such areas, it will lead to potentially mischievous results and evasion of tax by assessees who do not belong to the scheduled tribes. All that a non-tribal assessee in India need do would be to enter into a sham partnership with a member of the scheduled tribe residing in the specified area and ostensibly give him under the partnership a substantial share of the profits of the business while, in reality, pay the tribal only a nominal amount. Moreover, but for the condition provided in sub-clause (a), the exemption granted under Section 10(26) is likely to operate unequally and cause inequality of treatment between individuals similarly situated. A tribal residing in the scheduled areas earning large income from business located outside the specified areas, would be totally exempt while the non-tribal whose source of income is a share in the same business would be taxed although with reference to the source of the income, both were similarly situated

36. We are not persuaded to accept Mr.Lahiri’s argument that the making of the exemption conditional upon the classification envisaged by sub-clause (a) would deter the members of the scheduled tribes from joining the mainstream of national life, or, would be inconsistent with the directive principle of State policy for promotion of educational and economic interests of the weaker sections of the people, particularly the scheduled castes and scheduled tribes. Its primary objective is to provide protection to the “weaker sections” of the society. Members of the scheduled tribes who are enterprising and resourceful enough to move out of the seclusion of the tribal areas and successfully compete with their Indian brethren outside those areas and rise to remunerative positions in service or business, cease to be “weaker sections”. In any case, the State is the best judge to formulate its policies and to decide how far and for what period and in what situations, the members of a particular scheduled tribe residing in a particular tribal area, should be afforded the protection and benefit in the matter of promotion of their educational and economic interests.”

44. It also requires to be noticed that imposition of different rates of tax on different dealers depending upon their turnover by adopting slab system would be sustainable and same would not be violative of Article 14 and 19 of the Constitution on the ground that attempt to proportion the payment to capacity to pay and thus, bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on the sale or purchase of goods. It has been held by Hon’ble Apex Court in the case of K.M.Mohamed Abdul Khader Firm v. 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 merely amended the 1970 Act. It has not introduced a new tax; what it has done is only to amend the 1970 Act by providing for a different method of computation of the additional tax leviable under that Act. The validity of the 1970 Act has been upheld by a Constitution Bench of this Court in the case of S. Kodar v. State of Kerala [1974] 34 STC 73 (SC) :1975)1 SCR 121. Hence there is no longer any scope for the petitioners to contend that the State Legislature had no competence to provide for the levy of additional sales tax. The nature and identity of the additional sales tax imposed by the 1970 Act have not been in any way altered by the impugned Act. As already pointed out what has been done by the impugned Act is only to provide for a different mode of computation of the additional sales tax by linking the rate of levy to the taxable turnover instead of to the amount of tax assessed under the Act of 1959. The constitutional validity of the levy of additional tax is not in any manner affected by the said change brought about in the mode of levy and computation as a result of the amendments effected by the impugned Act.

It was strongly contended on behalf of the petitioners that the prescription of different rates of additional sales tax depending upon the quantum of turnover of the different assessees is totally repugnant to the concept of levy of tax on sales. Another argument advanced by counsel for the petitioners was that since under the amended provisions of Section 2, two dealers selling the same commodity will be liable to pay additional tax at different rates depending upon their respective annual turnovers, there is a clear violation of Article 14 of the Constitution as dissimilar treatment is meted out to persons similarly situated. A further contention urged on behalf of the petitioners was that the levy in its present form is really a tax on ‘gross income’ and not a tax on ‘sales’ and hence it is ultra vires the State Legislature as it has no competence to levy a tax on income other than agriculture income. Another ground of attack pressed by Counsel was that the levy of additional sales tax under the impugned Act is confiscatory in nature, that it imposes unreasonable restrictions on the petitioner’s right to carry on business and offends Article 19 of the Constitution, particularly in view of the prohibition contained in sub- section (2) of section 2 against collection of additional tax from the consumers. Yet another point taken in the Writ Petitions but not very seriously urged at the time of hearing is that the levy of additional tax under the impugned Act offends Article 301 of the Constitution since the imposition of the additional liability would seriously affect the business of the petitioners and on account of their inability to bear the heavy burden their right to carry on freely trade, commerce and intercourse within the territory of India will be adversely affected.

In Konduri Buchirajalingam v.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 Act imposed different rates of tax on different dealers depending upon their turnover there was a violation of Article 14 of the Constitution, Mathew J., who spoke for the Court observed:

“The last contention, namely, that the provisions of the Act impose different rates of tax upon different dealers depending upon their turnover which in effect means that the rate of tax on the sale of goods would vary with the volume of the turnover of a dealer and are, therefore, violative of article 14 is also without any basis. Classification of dealers on the basis of their respective turnovers for the purpose of graded imposition so long as it is based on differential criteria relevant to the legislative object to be achieved is not unconstitutional. A classification, depending upon the quantum of the turnover for the purpose of exemption from tax has been upheld in several decided cases. By parity of reasoning, it can be said that a legislative classification making the burden of the tax heavier in proportion to the increase in turnover would be reasonable. The basis is that just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one. The flat rate is thought to be less efficient than the graded one as an instrument of social justice. The large dealer occupies a position of economic superiority by reason of his greater volume of his business. And to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality. The economic wisdom of a tax is within the exclusive province of the legislature. The only question for the court to consider is whether there is rationality in the belief the legislature that capacity to pay the tax increases, by and large, with an increase of receipts.

“Certain it is that merchants have faith in such a correspondence and act upon that faith…… If experience did not teach that economic advantage goes along with larger sales, there would be an end to the hot pursuit for wide and wider markets……… In brief, there is a relation of correspondence between capacity to pay and the amount of business done.

Exceptions, of course, there are. The law builds upon the probables, and shapes the measure of the tax accordingly……. At the very least, an increase of gross sales carries with it an increase of opportunity for profit, which supplies a rational basis for division into classes, at all events when coupled with evidence of a high degree of probability that the opportunity will be fruitful”. Stewart Dry Goods Company v. Levis 294 US 550 (See the dissenting judgment of Justice Cardozo, J., Brandeis and Stone J.)

The reasoning of the minority in that case appeals to us as more in consonance with social justice in an egalitarian state than that of the majority.

As we said, large dealer occupies a position of economic superiority by reason of his volume of business and to make the 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 obliged to pay higher tax, when others bear a less tax, and it is consequently discriminatory, really misses the point, namely, that the former kind of dealers are in a position of economic superiority by reason of their volume of business and form a class by themselves. They cannot be treated as on a par with comparatively small dealers. An 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. The object of a tax is not only to raise revenue but also to regulate the economic life of the society”.

45. Turning my attention back to the facts on hand, it can be seen from the terms of the licence conditions issued to a dealer in Form No.CL-2, the liquor is sold across the counter to consumers at the sale price not exceeding the MRP indicated on the label of the container or the bottle vide Rule 3(2). Whereas, no such restriction of MRP is imposed on Bars and Restaurants, Clubs, Star Hotels, Hotel, Boarding Houses and Lodges covered under the impugned notification where liquor is sold to the customers or served in loose quantities with food articles in the licenced premises as stipulated in the conditions of the licence. The CL-9 holder licences provide the facilities of varying degrees of comforts to different class of elite customers and as such, they would have the advantage of fixing the sale price with value addition without any restriction. It is in this background, as already noticed herein above, from the statement of objects and reasons, levy of tax on sale of liquor including Beer, Fenny, Liqueur and Wine came to be introduced. Thus, it could be seen that State legislature in its economic wisdom of taxation has chosen to provide for levy of tax on liquor sold by certain dealers namely, Bar and Restaurants operating in urban areas i.e., licence issued in Form No.CL-9 and in respect of Star Hotels, Clubs and Hotel, Boarding Houses and Lodges located anywhere in the State considering the potential for tax collection being huge, and at the same time, exemption has been extended to similar licence holders running Bar and Restaurants by operating them in rural areas considering the fact of low value addition between the price at which liquor is purchased and sold to customers in rural areas.

46. However, a Hotel, Boarding House or Lodge holding licence in CL-7 though located in rural area would also serve liquor only to the residents of the Hotel and their guests who are elite customers and they can afford to pay more for the comfort they enjoy with varying degree of facilities. Thus, condition of licence itself enables the licence holder to fix the price of the liquor irrespective of MRP on account of substantial value addition and as such, the legislature has brought this class of dealer also to taxation. However, Bar and Restaurants located in the same rural area which would not cater to the elite class of customers or customers of economic superiority have been exempted by virtue of notification dated 28.02.2014.

47. At this juncture, it would be appropriate to note that licence fee fixed for a dealer holding licence in Form No.9 and operating in urban areas is Rs. 6.00 lakhs, whereas, licence fee prescribed for a similar licence holder who is running Bar and Restaurant business in rural area is Rs. 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 price at which liquor is purchased and sold to customers in rural areas. However, a Hotel, Boarding House and Lodge holding licence in Form CL-7 though located in rural area, liquor is served only to the residents of the Hotel and their guests who obviously would come from far off places. The customers of this category are affordable class who are willing to pay more for the comfort with varying degree of facilities. Hence, it enables the dealer to fix the rates of liquor without any restriction. Thus, the Legislature with the sole intention of capturing substantial value addition taking place on liquor consumed in the premises of a Boarding House and Lodge, has brought this class of dealer under the net of tax, but Bar and Restaurants located in rural area which do not have the advantage of catering to the class of customers of economic superiority are exempted. Thus, the impugned notification dated 28.02.2014 which exempts liquor sold by dealers holding licence in Form No.CL-9 operating in rural areas in comparison with liquor sold by a person operating a Boarding House and Lodge in a rural area holding licence in Form No.CL-7 would form separate class of dealers. The State Legislature in its economic wisdom of taxation having chosen to provide for levy of tax on liquor sold by certain licence holders, considering the potential for tax collection on the huge value addition while exempting others whose sale price is regulated by the MRP indicated on the label of the container cannot be construed as discriminatory. The classification of dealers based on value addition criteria for the purpose of tax levy and exempting the dealers based on area criteria cannot be held to be discriminatory.

48. In view of the aforestated discussion, this Court is of the considered view that contentions raised by the petitioners are without merit and they are hereby rejected.

Hence, I proceed to pass the following:

ORDER

(1)Writ petitions are hereby dismissed.
(2)Rule discharged.
(3)Costs made easy.”

8. Ultimately, petitions were dismissed by the learned Single Judge.

9. It is in the light of the aforesaid reasonings recorded by the learned Single Judge in the order dated 30-9-2015, we need to further examine as to whether the contentions raised by the learned Counsel for the appellant are worthy of acceptance or not.

10. We may, at the outset record that, while interpreting taxing statute, the language used by the State for the levy of tax is to be considered, keeping in view the common parlance test and if there is uncertainty about common parlance test, one may follow dictionary meaning for interpreting any entry or clause for the levying of tax. However, in the matter of grant of exemption, the Legislature has power to grant exemption to a certain class of the product to be used for certain purposes or a particular purpose. It is well settled that when the exemption is to be claimed, strict interpretation would be called for. Further, if the exemption is assailed or the exemption is denied to a particular class of the persons or the dealer, the test would be, whether there was reasonable 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 further burden our order with the aforesaid case laws referred.

12. The first contention raised by the learned Counsel for the petitioner that there is a discrimination in the grant of exemption by the Legislature, if examined, it appears that the person holding C.L. 9 licence is different than a liquor and wine dealer, because the C.L.9 licence, is for vending of the liquor and wine in the bar or bar and restaurant. The basic distinction is that the one who is dealer in liquor and wine is selling the liquor or wine or beer or fenny in the same packing of bottle as being manufactured by the manufacturing company. Whereas, the person holding C.L.9 licence, for vending in bar or bar and restaurant, is providing liquor or wine in pegs and beer in glass/es. It is hardly required to be stated, that if any consumer of the goods is desirous to have only one peg, he will go to a bar or a bar and restaurant, but he will not go to a liquor or wine dealer for buying the whole bottle in the packed form. Therefore, the status of a person who is dealer in liquor and wine and beer or fenny, etc. is different than that of a person holding C.L.9 licence for vending of the liquor in the bar and or bar and restaurant. If the Legislature has made a separate class on account of the aforesaid distinction, it cannot be said that there is no rational classification. If one further examines the matter, the liquor or wine is subjected to tax at a different price and different consideration to the consumer in contra distinction to a sale by a dealer to a consumer of liquor or wine in a packed form of bottle or container. Under these circumstances, the classification made by the Legislature while granting exemption cannot be said to be on irrational basis, but it can be said that the dealer of liquor or wine is not similarly situated as that of the owner of bar and restaurant with C.L.9 licence, because as we recorded earlier, the manner of sale in a packed product, that too in an intact condition as made by the manufacturer, cannot be equated, nor can be said to be similarly situated with the person who is vending liquor or wine by holding C.L.9 licence in a bar and restaurant. We may also record that, if any Legislature or a statute is to be contested by the Court, the effort on the part of the Court would be to uphold the Legislature, unless it is made by, against or in breach of any constitutional provision. The presumption would be that it is valid, unless declared invalid by the competent Court. When we find that there is a rational classification with the intelligible differentia, this Court cannot substitute its own reason, unless the Court finds that such classification is highly irrational or there is no any intelligible differentia at all.’ In the present case, we do not find that such condition is satisfied. Therefore, the contention raised for discrimination in the grant of exemption cannot be accepted.

13. The next contention raised by the learned Advocate for the appellant on the aspects of levying of tax on the service provided or the ambience provided by the persons holding C.L.9 licence, in 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 is applied, the goods or the item will change its form and is being marketed in different form, in comparison to the other dealer who is marketing the goods or the item in a different form. As recorded by us herein above, what is being marketed by applying the test of common parlance, is the peg/s of the liquor or wine and not a bottle of wine or liquor in packed form. Hence, we find that applying the test of common parlance, it cannot be said that the State has indirectly tried to levy tax for the services provided or the ambience provided by the person holding C.L.9 licence for vending liquor or wine or fenny or beer. Hence, we find that the said contention also cannot be accepted.

In view of the above, read with the reasons already considered by the learned Single Judge, we do not find any case is made out for interference. Hence, appeal is devoid of merits and therefore dismissed.

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