1998 (11) TMI 633 - HC - VAT and Sales Tax

Issues Involved:
1. Whether the Andhra Pradesh Tax on Luxury Act (Act 28 of 1996) is in pith and substance a tax on the sale of tobacco or a tax on the supply of luxury, viz., tobacco?
2. Whether the State Legislature in enacting Act 28 of 1996 encroached upon the field occupied by the Parliament under entry 52 of List I, i.e., the Tobacco Board Act, 1975?
3. Whether the levy of luxury tax on the supply of tobacco impedes the free movement of goods and is, therefore, violative of Articles 301, 302, and 304 of the Constitution of India?
4. Whether the levy of 50 paise in a rupee on chewing tobacco preparations commonly known as khara masala, kimam, zarda, dokta, sukha, and surti is violative of Article 14 and, therefore, discriminatory and arbitrary?

Detailed Analysis:

1. Nature of the Tax:
The court examined whether the levy under the Andhra Pradesh Tax on Luxury Act (Act 28 of 1996) is a tax on the sale of tobacco or the supply of luxury, viz., tobacco. The charging section (Section 3A) of the Act specifies that the tax is levied on the turnover of receipts of a tobacconist relating to the supply of luxuries, namely, tobacco products. The court noted that the essential character of the levy is on the supply of luxury, viz., tobacco products, and not on the sale. The use of sale as a measure for assessing the tax does not change the essential character of the levy. The court concluded that the impugned legislation is within the legislative competence of the State Legislature under entry 62 of List II, which pertains to taxes on luxuries.

2. Encroachment on the Field Occupied by Parliament:
The court analyzed whether the State Legislature, by enacting Act 28 of 1996, encroached upon the field occupied by the Parliament under entry 52 of List I, specifically the Tobacco Board Act, 1975. The Tobacco Board Act regulates the production, export, and import of tobacco. The court held that the scope of the Tobacco Board Act is limited to regulating the tobacco industry and does not cover the field of taxation on luxuries. Therefore, the impugned legislation, which imposes a luxury tax on tobacco, does not encroach upon the field occupied by the Parliament. The court distinguished between the regulation of an industry and the imposition of a tax on luxuries, concluding that the State Legislature retains the competence to levy a luxury tax on tobacco.

3. Violation of Articles 301, 302, and 304:
The court considered whether the levy of luxury tax on the supply of tobacco impedes the free movement of goods and violates Articles 301, 302, and 304 of the Constitution. Article 301 guarantees freedom of trade, commerce, and intercourse throughout the territory of India. Article 302 allows Parliament to impose restrictions on this freedom in the public interest, and Article 304 permits States to impose reasonable restrictions on trade, commerce, and intercourse within the State. The court noted that the impugned Act exempts inter-State transactions from the levy of luxury tax, thereby not violating Article 301. The court also referenced previous judgments, including Atiabari Tea Co. Ltd. v. State of Assam and State of Madras v. N.K. Nataraja Mudaliar, to support the view that the tax does not directly impede trade and commerce and is, therefore, not violative of Articles 301 to 304.

4. Violation of Article 14:
The court addressed the contention that the levy of 50 paise in a rupee on certain chewing tobacco preparations is arbitrary, discriminatory, and violative of Article 14 of the Constitution. The court upheld the levy, reasoning that the objective is not only to raise additional revenue but also to discourage the use of tobacco products due to their harmful effects on health. The court found that there is a rational nexus between the levy and the objective of protecting public health, and therefore, the levy is not discriminatory or arbitrary.

Conclusion:
The court upheld the validity of the Andhra Pradesh Tax on Luxury Act (Act 28 of 1996) and Act No. 9 of 1997, concluding that the State Legislature is competent to enact the legislation under entry 62 of List II of the Seventh Schedule to the Constitution of India. The writ petitions challenging the validity of the legislation were dismissed.

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