FEDERATION OF HOTEL & RESTAURANT ASSOCIATION OF INDIA, ETC. v. UNION OF INDIA & ORS

Citation: [1989] 2 S.C.R. 918

Court: Supreme Court of India

Bench: R.S. PATHAK, SABYASACHI MUKHERJI, S. NATARAJAN, M.N. VENKATACHALIAH, S. RANGANATHAN

Case summary

The petitioners, who were engaged in, or associated with the hotel industry challenged the constitutional validity of the Act on grounds of 2 The legislature has, particularly in a taxing statute, a considerable amount of latitude and it cannot be held that, in fixing the...

Judgment text

FEDERATION OF HOTEL & RESTAURANT ASSOCIATION OF INDIA, ETC. v. UNION OF INDIA & ORS. MAY 2, 1989 [R. S. PATHAK, CJ. , SABYASACHI MUKHARJI, S. NATARAJAN, M. N. VENKATACHALIAH AND S. RANGANATHAN, JJ. ] - Hotel Expenditure Act, 1987: Sections 2-5, 6 and 24--Tax at 10% ad valorem on chargeable expenditure where room charges in hotels were Rs. 400 per day per individual-Validity of-Competence r of Parliament to impose-Classification of hotel for tax purposes- Whether arbitrary, violative of Article 14--Whether violative of Article 19(l)(g). Constitution ofIndia, 1950: Articles 14 and 19( l)(g), Articles 246 and 248, Entry 97 List 1 and Entries 54 and 62, List Il, Seventh Schedule-Hotel Expenditure Act, 1987-Legislative competence of Parliament to impose tax-Classification of hotels based on room charges-Whether arbitrary-Whether permissible--Whether Act imposed unreasonable restriction on freedom oftrade.

Uttar Pradesh Taxation And Land Revenue Laws Act, 1975/ Maharashtra Tax On Luxuries (Hotels And Lodging Houses) Act 1987/ Kera/a Tax On Luxuries In Hotels And Lodging Houses Act, 1976-- Validity of. The Expenditure Tax Act, 1987, envisaged a tax at 10% ad valorem on chargeable expenditure incurred in the class of hotels Wherein room charges for any unit of residential accommodation were Rs. 400 per day per individual. Section S of the Act defined chargeable expenditure to include expenditure incurred in or payments made in such class of hotels in connection with the provision of any accommodation, residential, or otherwise, food or drink whether at or outside the hotel, or for any accommodation in such hotel on hire or lease or any other services envisaged in that Section.

The petitioners, who were engaged in, or associated with the hotel industry challenged the constitutional validity of the Act on grounds of lack of legislativ~ competence and violation of Articles 14 and 19(l)(g) of -+ the Constitution. It was contended that the Act, in its true nature and '-J character, was uot one imposing an expenditure-tax, as known to law, accepted notions of Public Finance, and to legislative practice but was, in pith and substance, either a tax on luxuries falling within Entry 62 of List II of the Seventh Schedule, or a tax on the consideration paid for the purchase of goods constituting an impost of the nature envisaged in _"? '-' . entry 54 of List II, and was clearly outside the legislative competence of .

i the Union Parliament; that the Act was violative of Article 14 as the basis on which the hotelS were classified was arbitrary an unintelligible, having no rational-nexus with the taxing-policy nnder the Act, inasmuch as persons similarly situated, and who incurred the same extent and degree of expenditure on the same luxuries, were differentiated on the sole basis that in one case the expenditure was incurred in a hotel -J-- where one of the rooms had a charge of Rs.

400 per day per individual ' marked for it, while in the other though equally wasteful expenditure was incurred in a more luxurious restaurant, the latter expenditure was exempt, that even if more sophisticated and expensive food aud drinks and other services, envisaged in clauses (a) to (d) of Section S were provided in a hotel or catering establishment which fell outside the class, the expenditure incurred thereon is unaffected by the law, that the standards and measures for the computation of the chargeable- }_ expenditure under the Act was vague and arbitrary, that the expression ~ 'other similar services' in clauses (d) of Section S was·non-specific and vague; and that the Act was violative of petitioners' fundamental right under Article 19(l)(g) as it imposed unreasonable onerous restrictions on their freedom of business. The respondent-Union of India sought to sustain the legislativecompetence of Parliament to enact the law under Article 248 read with r. >..

Entry 97 of List I of the Seventh Schedule, contending that the law, in pith and substance, was not one 'with respect to luxuries under Entry 62, List I, and the tax on expenditure, as the legislative had chosen to \ conceive it, was referrable to residuary power, that the econo1nists' concept of such an expenditure tax was at best an idea of the manner of effectuation of fiscal programme and was no limitation on the legislative power, that the legislative-power recognised the demarcation of distinct aspects of the same matter as distinct topics of legislation and that the challenge to legislative competence overlooked the dichotomy of these distinct aspects, the line of demarcation, though sometimes thin and subtle, being real, that the measure adopted for the levy of the tax did not necessarily determine its essential character and that the object on which the expenditure was laid-out might or might not be an item of .

luxury, or the expenditure might constitute the price of the goods but, . + what was taxed was the expenditure aspect which, in itself, was susceptible of recognition, as a distinct topic of legislation. Dismissing the Writ Petitions, this Court HELD: (R. S-. Pathak, CJ. , Sabyasachi Mukharji, S. Natarajan and M. N. Venkatachaliah-Per: Venkatachaliah, J. ) 1. 1 A law imposing the expenditure tax is well within the legislative competence of Union Parliament under Article 248 read with Entry 97 of Listi. [940E-F] - 1. 2 The tax envisaged by the Expenditure Tax Act, 1987, is _. ,.... essentially a tax on expenditure and not on luxuries or sale of goods falling within the State power. The distinct aspect, namely, the expenditure aspect of the transaction falling with the Union power must be distinguished and the legislative competence to impose a tax thereon sustained. [9470-E] 2.

1 If a legislature with limited or qualified jurisdiction transgresses its powers~ such transgression may be open, direct and overt, or disguised, indirect and covert. The latter kind of trespass is figuratively l - ·'"referred to as "colourable legislation", connoting that although apparently the legislature purports to act within the limits of its own powers yet, in substance and in reality, it encroaches upon a field prohibited to it, requiring an examination, with some strictness, the substance of the legislation for determining as to what the legislature was really doing. [939E-F] Prafulla Kumar Mukherjee and Ors. v. Bank of Commerce, [1945] FCR 179, referred to. 2. 2 Wherever legislative powers are distributed between the Union and the States, situations may arise where the two legislative fields might apparently overlap.

It is the duty of the Courts, however difficult it may be, to ascertain to what degree and to what extent, the authority to deal with matters falling within these classes of subjects exists in each legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions must be read together, and the language of one interpreted, and, where necessary modified by that of the other. [939F-G] Union Colliery Co. of British Columbia v. Bryden, (1899] AC 580 t at 587; Lefroy Canada's Federal System. , referred to. 2. 3 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 overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects.

But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. (94IE] "" -l ' Governor General in Council v. Province ofMadras, (1945] FCR 179 (P. C. ) at 193 and Laskin Canadian Constitutional Law, referred to. 2. 4 The consequences and effects of the legislation are not the ~same thing as the legislative subject matter. It is the true nature and character of the legislation and not its ultimate economic results that 'matters. (944C] 2. 5 The scope of the present legislation cannot be considered.

by reference to legislative practice because firstly, the question of Iegislalive-practice as to what a particular legislative-entry could be held to embrace is inapposite while dealing with a tax which is suigeneris or _)_ non-descript imposed in exercise of the residuary powers so long as such tax is not specifically enumerated in Lists II & III and secondly, there is no conclusive material indicating that the appropriate legislature had limited the notion of a tax ofthis kind within any confines. (944E-GI Walace Brothers and Company Ltd. v. Commissioner of Income Tax, Bombay City and Bombay Suburban District, (1948] LR 75, IA 86; Navinchandra Mafatlal v. CIT, Bombay City, (1955] 1 SCR 829; /- Union of India v. H. S. Dhillon, (1972] 2 SCR 33 at 61; Attorney- General for Ontario v. Attorney-General for Canada, (1912] AC 571 at ~ 581; Croft v. Dunphy, (1933] AC 156 and Azam Jha Bahadurv. Expenditure Tax Officer, (1972] l SCR 470 referred to. 2.

6 The subject of a tax is different from the measure of the levy. ·-... ( The measure of the tax is not determinative of its essential chararter or 'of the competence of the legislature. (946F-GJ M/s. Sainik Motors v. State of Rajasthan, (1962] l SCR 517 and Encyclopaedia Britannica on Luxury Tax, Vol. 14 p. 459, referred to. ' 'f 3. 1 Though taxing laws are not outside Article 14, however, hav- ~ ing regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal-policy, legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc. , for taxation. A legislature does not, have to tax everything in order to he able to tax something. if there is equality and uniformity within each group, the law would not be discriminatory. The tests of the vice of discriminalion in a taxing law are, acqirdingly, less rigorous. [948G-H] :>. :: l 3.

2 In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect ' of its provisions. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. Besides, differentia must also have a rational nexus with the object sught to he ! ' +achieved by the law. However, no precise or set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience. [949A, C-E] 3. 3 Classification based on differences in the value of articles or the economic superiority of the persons of incidence are well-recognised. A reasonable classification is one which includes all who are similarly situated and none who are not.

In order to ascertain whether persons are similarly placed, one must look beyond the classification and to the purposes of the law. [949E-Fl Jaipur Hosiery Mills Ltd. v. State ofRajasthan, [1970] 2 SCR 26; Hiralal v. State of U. P. , [1973] 2 SCR 502; State of Gujarat v. Sri Ambika Mills Ltd. , [1974] 3 SCR 760; G. K. Krishnan v. Tamil Nadu, ~ [1975] 2 SCR 715; I. T. O. v. N. Takim Roy Limbe, (1976] 3 SCR 413; Secretary of Agriculture v. Central Roig Refining Co. , [1949] 338 U. S. , 604; M/s. Hoechst Pharmaceuticals Ltd. v. State ofBihar, AIR 1983 SC 1019 and Wallace Mendelson: Supreme Court Statecraft; The Rule of Law and Men, p. 4, referred to. 3. 4 In the present case, the bases of classification cannot be said to be arbitrary or unintelligible nor as being without a rational nexus with the object of the law. A hotel where a unit of residential accommodation is priced at over Rs.

400 per day per individual is, in the legislalive wisdom, considered a class apart hy virtue of the economic superiority of those who might enjoy its custom, comforts and services.. ~ i This legislative assumption cannot be condemned as irrational. Judicial veto is to be exercised only in cases that leave uo room for reasonable doubt. Constitutionality is presumed. [952B-C] 3. 5 The words "other similar services" in Section 5(d) were intended to embrace services like-but not identical with-those ~ described in the preceding words. The content of the expression "other · _. l similar services" following, the preceding expressions "by way of beauty parlour, health club, swimming pool or ..... " has a definite connotation in the interpretation of such words in such statutory con- .. · tents. The matter is one of construction whether any particular service falls within the section and not one of constitutionality. [953E-F] 4.

A taxing statute is not, per-se, a restriction of the freedom under Article 19(l)(g). The policy of a tax, in its effectuation, might, of course, bring in some hardship in some individual cases. But that is inevitable, so long as law represents a process of abstraction from the generality of cases and reflects the highest common-factor. The mere excessiveness of a tax or even the circumstance that its imposition might tend towards the diminution of the earnings or profits of the persons of incidence does not, per-se, and without more, constitute, violation of the rights under Article 19(1)(g). [954F-G] Per Ranganathan, J. (Concurring), 5. 1 In the context of the social and economic conditions that prevailed in India, it was a luxury for any person to stay in hotels charging high rents and providing various types of facilities, amenities and conveniences such as telephone, television, air-conditioner, etc.

An expenditure on something which is in excess of what is required for economic and personal well-being would be expenditure on luxury although the expenditure may be of a nature which is incurred by a large number of people including those ~ot economically well off. [958G-H] Abdul Kadir & Sons v. State of Kera/a, [1976] 2 SCR 690, relied on. -.. J 5. 2 The legislature has, particularly in a taxing statute, a considerable amount of latitude and it cannot be held that, in fixing the standards of indication of luxury, the legislature, has not applied its mind. In fact, the figures have been amended from time to time and, it has to be presumed that the legislature had good reason for fixing these standards. From the scheme of the legislations, the state legislations fall + within the scope of Entry 62, List I and are, therefore, clearly within the competence of the State legislatures and are not liable to be challenged. [9590; 957C] 6.

1 In interpreting the scope of the legislative entries in the three lists, it has to be kept in mind that, while on the one hand, it is desirable that each entry in each of the lists should receive the broadest interpre- :.. c tation, it is equally important, on the other, that the three lists should l be read together and harmoniously. [959E-F] ' 6. 2 The power of the State legislature to make laws with respect .. to any of the matters enumerated in List II is subject to the exclusive power of Parliament to make laws with respect to any of the matters enumerated in List I. Hence, if a matter is covered by an entry in the Union List, no restrictions can be read into the power of Parliament to make laws in regard thereto. [959G-H; 960A] 6. 3 The legislative entries are so arranged that the power to enact 11!. laws in general and the power to impose taxes are separately dealt with.

Under Article 246(1), the Parliament has exclusive powers to make laws with respect to any of the matters, including power to impose taxes, enumerated in List I. [9608-C] M. P. V. Sundararamier & Co. v. The State ofAndhra Pradesh & Another, [1958] SCR 1422 at pp. 1479 and 1490, referred to. 7. It cannot be held that the tax cannot be considered to be an expenditure tax because it is not on expenditure generally but is restricted to specific types of expenditure. There is no legal, judicial, economic or other concept of expenditure tax that would justify any -"" such restrictive meaning. If, conceptually, the expenditure incurred by a person can be a subject-matter with reference to which a tax can be levied, such taxation can be restricted only to certain items or categories ~ of expenditure, and its base need not necessarily be so wide as to cover all expenditure incurred by an assessable entity.

Selection of objects and goods for taxation is the essence of any tax legislation and any limitation is an unlimited curtailment of this selective power of taxation ).... of Parliament. [960H; 961A-B, F] 8. 1 There is not much of legislative practice which would justify importing any limitation on the concept of a tax on expenditure under entry 97 of List I. Once it is granted that the tax need not exhaust the entire universe of the subject-matter, the extent of the subject matter ~· that should be covered or selected for imposing tax should be entirely left to Parliament subject only to any criteria of discrimination or unreasonableness that may attract the provisions of Part III of the Constitution. [962D-E, F-G] State of Madras v. Gannon Dunkerley Co. , [1959] SCR 379; Navinchanda Ma/at Lal v. CIT. [1955] 1SCR 829; Navnit Lal v. AAC, I [1965] 1 SCR 909; Harikrishna Bhargava v. Union, [1966] 2 SCR 22 ~and Bhagwandas Jain v. Union ofIndia, [1981] 2 SCR 808, referred to. 8.

2 Legislative lists cannot be interpreted on the assumption that there is a deemed entry "Taxes on Expenditure" added to List I as a result of the decision in Azam Jha's case, [1972] I SCR 470. Entries cannot be added to the legislative Lists on the basis of decisions of this Court. In Azam Jha's case, the pith and substance of the Act considered did not fall under any of the entries in List II or III. However, in the instant case, the legislation coveres only certain types of expenditure: The decision in Azam Jha's case cannot help in determining whether the Expenditure Act 1987 should be construed as imposing tax on expenditure or and on luxuries. [964A-C] Azam Jha Bahadur v. Expenditure Tax Officer, (1972] l SCR 470 distinguished. 9. Merely because the 1987 Act as well as the State Acts levy taxes which have ultimate impact on persons who enjoy certain luxuries, the pith and substance of both cannot be considered to be the same.

The object of a tax on luxury is to 'impose a tax on the enjoyment of certain types of benefits, facilities and advantages on which the legislature wishes to impose a curb. The idea is to encourage society to cater better to the needs of those who cannot afford them. Such a tax may be on the person offering the'luxury or the person enjoying it. It may be levied on the basis of the amount received for providing, or the amount paid for or expended for enjoying, the luxury. Conceivably, it could be on different bases altogether. The object of an expenditure tax is to discourage expenditure which the legislature considers lavish or ostentations. The object of the first would be to discourage certain'types of living or enjoyment while that of tthe second would be to discourage people from incurring expenditure in unproductive or undesirable channels.

If a general Expenditure Tax Act, like that of 1957, had been enacted, no challenge to its validity could have been raised because it incidentally levied the tax on expenditure incurred on luxuries. The fact that there will be some overrlappling then or that here there is a good deal of such