1998 (11) TMI 619 - HC - VAT and Sales Tax

Issues Involved:
1. Validity of Section 2(1) of the Karnataka Tax on Luxuries Act, 1979.
2. Competence of the State Legislature to levy tax on telephone charges.
3. Double taxation under entry 97 of List I of the Second Schedule.
4. Interpretation of "luxury" and its application to telephone charges.
5. Application of previous circulars and retrospective tax liability.

Detailed Analysis:

1. Validity of Section 2(1) of the Karnataka Tax on Luxuries Act, 1979
The petitions challenged the validity of Section 2(1) of the Karnataka Tax on Luxuries Act, 1979, which includes charges for telephone services in the definition of "charges for lodging." The petitioners argued that this inclusion was unreasonable, arbitrary, and violated Articles 14, 19(1)(g), 245, 246, and 300-A of the Constitution of India. The court examined the definition of "luxury" under Section 2(4-B) and "luxury provided in a hotel" under Section 2(5) of the Act, which includes various amenities such as air-conditioning, telephone, television, etc. The court concluded that the charging section (Section 3) creates liability for tax on "luxury provided in a hotel," which includes telephone charges as per the definition under Section 2(5).

2. Competence of the State Legislature to Levy Tax on Telephone Charges
The petitioners contended that under the Seventh Schedule of the Constitution, List I empowers the Parliament to enact laws regarding telephones, and hence the State Legislature was not competent to include telephone charges in the luxury tax. The court referred to the Supreme Court's interpretation in Express Hotels Pvt. Ltd. v. State of Gujarat, which held that the concept of tax on luxuries in entry 62, List II, encompasses all manifestations or emanations of the notion of "luxuries" and is not limited to tangible goods. The court found that the inclusion of telephone charges in the definition of "luxury provided in a hotel" was within the competence of the State Legislature.

3. Double Taxation under Entry 97 of List I of the Second Schedule
The petitioners argued that the inclusion of telephone charges in the luxury tax amounted to double taxation, as service tax on telephone services was already levied under entry 97 of List I. The court dismissed this contention, stating that the tax on luxury provided in a hotel, which includes telephone charges, is distinct from the service tax levied on telephone services under the Finance Act, 1994.

4. Interpretation of "Luxury" and Its Application to Telephone Charges
The petitioners relied on the principle of noscitur a sociis and the Supreme Court's decision in Pardeep Aggarbatti v. State of Punjab, arguing that "luxury" should not include telephone charges. The court, however, referred to the Supreme Court's observations in Express Hotels Pvt. Ltd. and A.B. Abdul Kadir v. State of Kerala, which held that "luxury" includes services and activities that provide enjoyment over and above the necessities of life. The court concluded that telephone services in a hotel are considered a luxury and fall within the definition of "luxury provided in a hotel."

5. Application of Previous Circulars and Retrospective Tax Liability
The petitioners pointed to a circular issued by the Commissioner on February 15, 1983, which stated that telephone charges were not liable for luxury tax. The court noted that no tax was levied on telephone charges in the past based on this circular, and it had not been withdrawn. The court found it unreasonable to charge tax retrospectively and quashed the circular prospectively from April 1, 1998. Therefore, petitioners were not liable for tax on telephone charges until March 31, 1998.

Conclusion:
The court dismissed the petitions, upholding the validity of Section 2(1) and (5) of the Karnataka Tax on Luxuries Act, 1979, and confirmed the competence of the State Legislature to levy tax on telephone charges as part of the luxury provided in a hotel. However, it quashed the circular dated February 15, 1983, prospectively from April 1, 1998, exempting petitioners from tax liability on telephone charges until March 31, 1998.

← Previous Next →