1985 (1) TMI 278 - HC - VAT and Sales Tax

Summary

Issues involved:
1. Constitutional validity of item 150 in the First Schedule to the Tamil Nadu General Sales Tax Act, 1959.
2. Demand for sales tax on articles of food and drink supplied by hotels u/s 3(2) read with item 150.
3. Legislative competence of the State Legislature to levy sales tax on transactions involving supply of food.
4. Violation of the guarantee of equality under article 14 of the Constitution of India.

Summary:

1. Constitutional validity of item 150 in the First Schedule to the Tamil Nadu General Sales Tax Act, 1959:

The petitions challenged the constitutional validity of item 150 in the First Schedule to the Tamil Nadu General Sales Tax Act, 1959, which mandated sales tax on articles of food and drink supplied by hotels classified or approved by the Government of India, Department of Tourism. The court examined the history of sales tax on food in hotels and referenced Supreme Court judgments that had previously held such transactions as non-taxable service rather than a sale.

2. Demand for sales tax on articles of food and drink supplied by hotels u/s 3(2) read with item 150:

The court noted that the petitioners received notices demanding sales tax on food and drinks supplied in their hotels, which they contested on the basis that their hotels were not classified under item 150. The amended item 150 included all hotels classified or approved by the Department of Tourism, Government of India. The court held that the retrospective validation of tax on such transactions by the Constitution (Forty-sixth Amendment) Act, 1982, did not invalidate the demand notices.

3. Legislative competence of the State Legislature to levy sales tax on transactions involving supply of food:

The court discussed the legislative competence of the State Legislature to levy sales tax on food supplied in hotels, referencing the Constitution (Forty-sixth Amendment) Act, 1982, which expanded the definition of "tax on the sale or purchase of goods" to include the supply of food as part of service. The court concluded that the State Legislature had the competence to levy such a tax.

4. Violation of the guarantee of equality under article 14 of the Constitution of India:

The court addressed the argument that item 150 violated article 14 by discriminating against hotels approved by the Department of Tourism. The court found no rational basis for this classification, as there was no nexus between the classification and the object of the Sales Tax Act. The court held that the classification was arbitrary and lacked a reasonable basis, thus violating article 14.

Conclusion:

All writ petitions were allowed, and the court declared that the State Government and tax authorities could not recover sales tax based on item 150 from hotels approved by the Department of Tourism. The court granted a certificate for appeal to the Supreme Court under article 134A, noting the substantial question of law involved and the pending writ petition on the same issue in the Supreme Court.