2020 (5) TMI 128 - HC - VAT and Sales Tax

Constitutional validity of the Kerala Tax on Paper Lotteries Act, 2005 - levy of licence fee on the draw of lotteries - vires of Section 5BA of the KGST Act - main ground of attack against validity of the impugned Act is the lack of legislative competence of the state - principles of res-judicata - refund of tax already paid - HELD THAT - The sale of lottery tickets does not involve any sale of goods. Inspite the lottery tickets representing a chance or a right to a conditional benefit of winning the prize, it was held that, it is nothing else but an actionable claim and no sale of goods is involved, within the meaning of the sales tax laws - apart from wording of the charging section tax on paper lotteries , the taxable event upon which the charge is to be imposed is totally absent. There is no much dispute that the draw is only a measure provided for the purpose of fixing the quantum of tax and it cannot be said that tax is levied on the draw. Hence the draw also cannot be considered as a taxable event. While evaluating the issue regarding validity of the charging section and with respect to its alleged vagueness, uncertainties or ambiguities, even on accepting the contentions of the respondents that the taxable event is the entire activity of the scheme of lottery, it is necessary for this court to consider whether the impugned Act is extra territorial in operation. Under Article 246 (3) of the Constitution, legislature of any state has power to make laws for such state or any part thereof. There is no power at all to make any law with respect to any event happening in other states. As defined under the Act, the lottery is a scheme intended for distribution of prize by lot or by chance, by which a person purchases the ticket for participating in the chance for winning a prize - In the case at hand, it cannot be disputed that, organising and conduct of the lottery by the 1st respondent / State of Sikkim is what is sought to be taxed. In this context, question arose as to whether the activity in organisation and conduct of the lottery is in any manner done within the territorial limits of the State of Kerala. The only part of the activity which takes place within the State of Kerala is the distribution and marketing of tickets, probably through advertisements, enumerating the prize money as well as the price of the ticket and the date of draw etc. In the above context, even assuming that the expression tax on paper lotteries contained in the charging section indicates the whole lot of activity of the conduct of lotteries, whether the taxable event falls within the territorial limits of the State of Kerala, is the question posed. Can a part of the activity of distribution and sale of tickets within the State of Kerala alone can be taxed under the guise of the term tax on paper lotteries , contained in the charging Section? The levy of tax is on the organising state or on the person appointed by that state for selling the lottery tickets within the State of Kerala. A person so appointed cannot be construed as a person responsible for organizing and conducting of the lottery. Further it has to be noted that the measure of tax is the draw, which takes place outside the territory of the state. The rate of tax is to be fixed based on the number and type of draws. The draws are conducted by the organizing state within their territory. But the person appointed for sale of the lottery is insisted upon, by virtue of provisions contained in Section 10, to make payment of the tax in advance, based on the draws proposed to be taking place in the organising state. Section 10 insists upon that the Promoter should pay the full amount of tax in advance based on the particulars of the draws, which are intended to be conducted by the organizing state, during the month commencing from the next succeeding month. Since the definition of the word Promoter includes the state which is organising the lottery, it has became obligatory on the part of the state which organises the lottery to pay the tax, if the person appointed for sale of the ticket fails to pay the tax in advance - it is assured that the levy and collection of tax will be made only with respect to the draws of the schemes for which tickets are marketed within the State of Kerala. The above aspect would again persuade this court to draw an inference that, what is sought to be taxed indirectly is the sale of the lottery tickets within the State of Kerala, which is prohibited by virtue of the law. Doctrine of constructive res judicata - HELD THAT - In the present writ petition the challenge is against the constitutional vires of a statute on various grounds including the legislative competence of the state. Hence it cannot be said that the doctrine of constructive res judicata would apply in the case at hand. Refund of the tax amount already paid by the appellants / writ petitioners - HELD THAT - It is evident that the liability has not been passed on to the customer of the lotteries. It is pointed out that, the State of Sikkim cannot be said to be gaining any unwanted or unmerited monetary benefit, if the refund if effected. When the money in question belongs to a State and the dispute is in between two States, the doctrine of unjust enrichment cannot be applied. It is clear that the Distributor has not passed on the liability to the consumers. But, as pointed out by the respondents, the writ petitioners have not furnished any materials to prove that the liability has been ultimately borne by the 1st appellant State. Nor it is proved through any convincing materials that such liability has been paid by the 2nd appellant Distributor, out of the commission he had received from the State of Sikkim. At any rate, as contended, if the State of Sikkim is the ultimate person who borne the liability, there cannot be contended that the doctrine of unjust enrichment will apply. On the other hand, if it is of Distributor who had borne the liability, proof is required to the effect that the same has not been recouped from the State of Sikkim - Proof regarding quantity of the tax collected is also not available. Therefore we hold that the appellants will be entitled for refund of the tax paid from the State Government, on their producing proper accounts and proof as to who had ultimately borne the burden. Such proof being produced, the State of Kerala is held liable for making refund. The Kerala Tax on Paper Lotteries Act, 2005 is hereby declared as unconstitutional and invalid. The appellants will be at liberty to make claim for refund of the tax already collected by the State of Kerala from the appellants under the said Act, on producing proper accounts and proof. If any such claim is received it is for the 1st respondent, State of Kerala, to consider the same and to pass appropriate orders making refund of the amount due, based on evaluation of such proof. The refund if any due shall be effected without any delay, on submission of such claim. Appeal allowed.

Summary

Issues Involved:
1. Legislative Competence
2. Ambiguities in the Charging Section
3. Extra Territorial Operation
4. Estoppel and Constructive Res Judicata
5. Doctrine of Prospective Overruling
6. Refund of Tax Paid

Issue-wise Detailed Analysis:

1. Legislative Competence:
The appellants challenged the constitutional validity of the Kerala Tax on Paper Lotteries Act, 2005, arguing that the state legislature lacked the competence to impose such a tax. They contended that "lotteries organized by the Government of India or the Government of a State" fall under Entry 40 of List I (Union List) of the 7th Schedule of the Constitution, which is within the exclusive legislative competence of the Parliament. The state defended the Act by asserting that the conduct of lotteries falls under "gambling" in Entry 62 of List II (State List), thus within the state legislature's competence. The court analyzed various precedents and concluded that the state organized lotteries are a specific subject under Entry 40 of List I, which carves them out of the general expression of "betting and gambling" in Entry 34 of List II. Consequently, the state legislature lacks competence to levy tax on state organized lotteries under Entry 62 of List II. The court held that the power to tax is distinct from the power to regulate, and the impugned Act was beyond the legislative competence of the state.

2. Ambiguities in the Charging Section:
The appellants argued that the charging section of the Act was ambiguous, uncertain, and vague, failing to specify the taxable event clearly. The court noted that the charging section must convey the essential components of taxation, including the taxable event, the person liable to pay, the rate of tax, and the measure of value. The court found that the charging section of the Act did not clearly define the taxable event, leading to ambiguity. The court emphasized that a taxing statute must be clear and unambiguous, and any uncertainty in the legislative scheme defining the components of the levy would be fatal to its validity. The court concluded that the charging section failed to create a clear charge or provide a specific taxing event, rendering the Act invalid.

3. Extra Territorial Operation:
The appellants contended that the Act had extra-territorial operation as the draw of the lottery, which is the measure of tax, took place outside Kerala. The court examined whether the taxable event occurred within the territorial limits of Kerala. It found that the entire activity of organizing and conducting the lottery, except for the distribution and marketing of tickets, took place outside Kerala. The court held that merely marketing tickets within Kerala did not establish a sufficient territorial nexus to justify the tax. The court concluded that the Act imposed an indirect tax on the sale of lottery tickets, which was prohibited by law, and the tax on other activities of organizing and conducting the lottery was extra-territorial.

4. Estoppel and Constructive Res Judicata:
The respondents argued that the appellants were estopped from challenging the Act as they had previously paid the tax and had challenged only Section 10 of the Act in an earlier writ petition. The court held that there can be no estoppel against a statute and that compliance with the law before it is declared invalid does not preclude challenging its validity. The court also rejected the application of constructive res judicata, noting that the earlier writ petition did not involve the same parties or the same grounds of challenge.

5. Doctrine of Prospective Overruling:
The respondents contended that any declaration of the Act's invalidity should apply prospectively. The court held that the doctrine of prospective overruling could only be invoked by the Supreme Court and not by the High Court. The court cited precedents to emphasize that once a law is declared invalid, the collection made under such law also stands invalidated. The court concluded that the doctrine of prospective overruling was not applicable in this case.

6. Refund of Tax Paid:
The appellants sought a refund of the tax already paid under the invalid Act. The respondents argued that the refund would amount to unjust enrichment. The court noted that the tax paid belonged to the State of Sikkim and formed part of its public exchequer. The court held that the doctrine of unjust enrichment did not apply to the state and that the refund should be made to the State of Sikkim, which bore the ultimate liability. The court directed the State of Kerala to refund the tax collected, upon the appellants producing proper accounts and proof of the ultimate burden.

Conclusion:
The court allowed the appeal, set aside the judgment of the Single Judge, and declared the Kerala Tax on Paper Lotteries Act, 2005, as unconstitutional and invalid. The appellants were granted liberty to claim a refund of the tax paid, subject to providing proof of the ultimate burden.