1975 (11) TMI 160 - SC - Indian Laws

Whether the provisions of the Luxury Tax on Tobacco (Validation) Act, 1964 (Act 9 of 1964) enacted by the State Legislature of Kerala are void on the grounds that (1) the State Legislature lacked the legislative competence to enac that Act, and (2) the provisions of the Act contravened article 301 of the Constitution and were not protected by article 304? Held that - The fact that the levy of excise duty is in the form of licence fee would not detract from the fact that the levy relates to excise duty. It is, however, essential that such levy should be linked with production or manufacture of the excisable article. The recovery of licence fee in such an event would be one of the modes of levy of the excise duty. Where, however, the levy imposed or tax has no nexus with the manufacture or production of an article, the impost or tax cannot be regarded to be one in the nature of excise duty. The charging section 3 of this Act creates a liability for payment of luxury tax on the stocking and vending of tobacco. There is no provision of this Act which is concerned with production or manufacture of tobacco or which links the tax under its provisions with the manufacture or production of tobacco. The same is the position of the rules issued on August 3, 1950 and January 25, 1951 and Mr. Krishnamurthy Iyer on behalf of the appellants has frankly conceded that those rules are in no way concerned with the production or manufacture of tobacco. It would, therefore follow that the levy of tax contemplated by the provisions of section 3 of the Act has nothing to do with the manufacture or production of tobacco and, as such, cannot be deemed to be in the nature of excise duty. Argument that the provisions of the Act fall under entry 84 of List I of the Seventh Schedule to the Constitution must, therefore, be held to be bereft of force. We agree with the learned Judges of the High Court that such levy directly impedes the free flow of trade and as such is violative of article 301 of the Constitution. The requirement of the proviso regarding the sanction of the President has been satisfied. It is no doubt true that the assent of the President was given subsequent to the passing of the Bill by the legislature but that fact would not affect the validity of the impugned Act in view of the provisions of article 255 of the Constitution. section 6 of the impugned Act is invalid because it provides for payment of an amount which had been refunded in pursuance of the order of this Court is bereft of force. Appeal dismissed.

Issues Involved:
1. Legislative competence of the State Legislature to enact the Luxury Tax on Tobacco (Validation) Act, 1964.
2. Violation of Article 301 of the Constitution.
3. Protection under Article 304(b) of the Constitution.
4. Nature of the levy as excise duty or luxury tax.
5. Validity of retrospective application and recovery of refunded amounts.

Detailed Analysis:

1. Legislative Competence of the State Legislature:
The primary issue was whether the State Legislature of Kerala had the legislative competence to enact the Luxury Tax on Tobacco (Validation) Act, 1964. The appellants argued that the levy was in reality an excise duty, which falls under Entry 84 of List I of the Seventh Schedule to the Constitution, thus within the exclusive competence of the Parliament. The Supreme Court held that the levy of luxury tax on the stocking and vending of tobacco was not linked to the production or manufacture of tobacco. Therefore, it did not constitute an excise duty. The Act was deemed to fall under Entry 62 of List II, which pertains to taxes on luxuries, and thus within the legislative competence of the State Legislature.

2. Violation of Article 301 of the Constitution:
The appellants contended that the provisions of the Act violated Article 301 of the Constitution, which ensures the freedom of trade, commerce, and intercourse throughout the territory of India. The Supreme Court agreed with the High Court's finding that the levy of tax as a condition precedent to the entry of goods into a place directly impeded the free flow of trade to that place, thus violating Article 301.

3. Protection under Article 304(b) of the Constitution:
The next issue was whether the levy of tax was protected under Article 304(b) of the Constitution. Article 304(b) allows the State Legislature to impose reasonable restrictions on the freedom of trade, commerce, or intercourse with or within the State as required in the public interest, provided the Bill or amendment has the previous sanction of the President. The Supreme Court noted that the requirement of the President's sanction was satisfied and held that the levy of luxury tax on tobacco, an article involving health hazards, was a reasonable restriction in public interest. Therefore, the provisions of the Act were protected under Article 304(b).

4. Nature of the Levy as Excise Duty or Luxury Tax:
The appellants argued that the levy, although described as a luxury tax, was in reality an excise duty. The Supreme Court reiterated that excise duty is a tax on articles produced or manufactured in the taxing country and must be linked with production or manufacture. Since the levy under the Act was on the stocking and vending of tobacco and had no nexus with its production or manufacture, it was not an excise duty but a luxury tax, falling under Entry 62 of List II.

5. Validity of Retrospective Application and Recovery of Refunded Amounts:
The appellants challenged the retrospective application of the Act and the recovery of amounts already refunded as per the Supreme Court's earlier order. The Supreme Court held that the State Legislature was competent to enact a law for the recovery of an amount that partakes the nature of luxury tax, even if it had been refunded. The retrospective validation of the levy was within the legislative competence of the State Legislature and was not considered a colourable piece of legislation.

Conclusion:
The Supreme Court dismissed the appeals, upholding the validity of the Luxury Tax on Tobacco (Validation) Act, 1964. The Court found that the Act was within the legislative competence of the State Legislature, did not violate Article 301, and was protected under Article 304(b). The levy was deemed a luxury tax, not an excise duty, and the retrospective application and recovery of refunded amounts were valid. The parties were ordered to bear their own costs.

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