1974 (4) TMI 78 - SC - VAT and Sales Tax

Whether there is rationality in the belief of the legislature that capacity to pay the tax increases, by and large, with an increase of receipts? Held that - Appeal dismissed. A 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.

Summary

Issues:
Validity of Tamil Nadu Additional Sales Tax Act, 1970 under State Legislature's competence, violation of fundamental rights under articles 19(1)(f), 19(1)(g), and article 14 of the Constitution.

Analysis:

1. Competence of State Legislature:
The primary issue raised was the competence of the State Legislature to enact the Tamil Nadu Additional Sales Tax Act, 1970. The Supreme Court held that the additional tax imposed by the Act is essentially a tax on the sale of goods, falling within the scope of Entry 54 of List II. The Act aims to increase the tax on the sale or purchase of goods under the Tamil Nadu General Sales Tax Act, 1959. The Court emphasized that the additional tax is levied based on the turnover of a dealer, making it a tax on the aggregate sales by the dealer. Previous judgments supported this view, affirming that such taxes are within the State Legislature's authority.

2. Violation of Fundamental Rights:
a. Article 19(1)(f) and 19(1)(g):
The appellants contended that the Act's provisions restricting dealers from collecting the tax from purchasers violated their fundamental rights under articles 19(1)(f) and 19(1)(g). The Court held that as the tax is on the sale of goods and not shown to be confiscatory, it does not unreasonably restrict the right to carry on trade. While every tax imposes some restriction, the reasonableness of the tax is a legislative matter, provided it does not confiscate property under the guise of taxation.

b. Article 14:
The appellants argued that the Act's varying tax rates based on dealer turnover violated article 14. The Court disagreed, stating that differential taxation based on turnover is constitutional if it serves a legitimate legislative purpose. The classification of dealers for graded taxation based on turnover was upheld, as it aligns with the principle of proportioning tax burdens to capacity to pay. The Court emphasized that the legislature's economic wisdom in tax matters is paramount, and the classification was rational and aimed at achieving social justice.

Conclusion:
The Supreme Court dismissed the appeals and writ petition, upholding the validity of the Tamil Nadu Additional Sales Tax Act, 1970. The Court affirmed the State Legislature's competence to enact the Act, rejected claims of fundamental rights violations, and upheld the differential tax rates based on dealer turnover as constitutionally sound.