1986 (1) TMI 100 - SC - Income Tax

Whether the cess levied under the Act is of the nature of a fee levied or leviable on a dealer in market area? Held that - If in the guise of a fee the legislation imposes a tax, it is for the court on a scrutiny of the scheme of the levy to determine its real character. If, on a true analysis of the provisions levying the amount, the court comes to the conclusion that it is in fact in the nature of a tax and not a fee, its validity can be justified only by bringing it under any one of the entries in List II of the Seventh Schedule to the Constitution under which the State can levy a tax. The State Government has failed in this case to do so. The levy according to us is not a fee as claimed by the State but it is a tax not leviable by it. The levy of the cess under section 3 is, therefore, liable to be quashed. Section 3 being the charging section and the rest of the sections of the Act being just machinery or incidental provisions, the whole Act is liable to be quashed. We, therefore, declare the entire Act, i.e., the Haryana Rural Development Fund Act, 1983, as unconstitutional on the ground that the State Legislature was not competent to enact it. These appeals, therefore, succeed. The judgment of the Division Bench of the High Court is set aside and the Act is declared void.

Issues Involved:
1. Constitutional validity of the Haryana Rural Development Fund Act, 1983.
2. Nature of the cess levied under the Act - whether it is a tax or a fee.
3. Competence of the State Legislature to enact the Act.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Haryana Rural Development Fund Act, 1983:
The appellants, dealers in agricultural produce, challenged the constitutional validity of the Haryana Rural Development Fund Act, 1983. The Act received the Governor's assent on September 28, 1983, and was published in the State Gazette on September 30, 1983. The High Court of Punjab and Haryana initially found the Act unconstitutional, but the Division Bench upheld its validity. The appellants then brought the case to the Supreme Court.

2. Nature of the Cess Levied Under the Act - Whether it is a Tax or a Fee:
The principal contention was whether the cess levied under the Act is a tax or a fee. The Act imposes a cess on an ad valorem basis at the rate of one percent of the sale proceeds of agricultural produce bought or sold or brought for processing in the notified market area. The cess is in the nature of a compulsory exaction and is recoverable as arrears of land revenue. The State argued that the cess was a fee for services rendered to dealers in the market area. The Supreme Court distinguished between a tax and a fee, noting that a fee must have a direct correlation to the services rendered to the payer. The Court found that the cess lacked this essential correlation, as the funds collected could be spent on any public purpose within the State, not specifically benefiting the dealers.

3. Competence of the State Legislature to Enact the Act:
The State initially attempted to justify the cess under entry 52 of List II of the Seventh Schedule to the Constitution, which authorizes taxes on the entry of goods into a local area for consumption, use, or sale. However, this contention was not pressed before the Supreme Court. The Court emphasized that the distinction between a tax and a fee is recognized by the Constitution, and the State must demonstrate that the levy falls under the relevant entries in List II. The Court concluded that the cess was in the nature of a tax, not a fee, and the State failed to justify its validity under any entry in List II.

Conclusion:
The Supreme Court declared the Haryana Rural Development Fund Act, 1983, unconstitutional. The levy of the cess under Section 3 was quashed, and the entire Act was declared void. A writ was issued to the State Government directing it not to enforce the Act against the appellants. The appeals were allowed with no order as to costs.

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