2014 (6) TMI 588 - HC - VAT and Sales Tax

Liability in terms of section 3D of the Karnataka Tax on Luxuries Act, 1979 - Held that - The levy is attacked mainly on the ground of legislative competence and secondly on the ground that it is misfit into the scheme of the Act; that it seeks to levy luxury tax more than once on the very facility; and thirdly on the premise that by seeking the levy on luxury not availed of or utilised, it renders itself unconstitutional in terms of the judgment of the Supreme Court in the case of Godfrey Phillips 2005 (1) TMI 391 - SUPREME COURT OF INDIA - The activity if it is not required by an average member of the society, it can constitute luxury, is the meaning one can attribute to this paragraph. It is not as though an average member of the society cannot survive or cannot live even without such facilities as are made available in the petitionerclubs. It may be a different matter that such facilities are otherwise also available in other places, but when a facility is made available in a club and exclusively for its members and in the nature of such facilities as is defined under the Act, it can undoubtedly be termed as an activity in the nature of a luxury. There is no doubt that the expression that luxury means an activity of enjoyment or indulgence which is costly, is suggestive of only availed or utilised of the activity or indulgence in the activity. To this extent, the observation here is clearly at variance with the observations of the Supreme Court in the case of Express Hotels Private Ltd. 1989 (5) TMI 52 - SUPREME Court , wherein the Supreme Court has observed that for constituting a luxury, it need not necessarily be availed of and has a comparing situation to levy of tax on notional concept. A particular example in the case is a notional income. It is also further linked to a measure of the levy, in the sense, that a levy on special matter when it is on actual person is termed as a measure of levy so long as there is some nexus between the levy and the subject-matter. The justification is that there cannot be any reasonableness in a levy under the taxing statute and even if the tax is on a notional basis, it is an aspect of measure of levy. If there is no scope for interpretation in a taxing statute, which violates a constitutional provision it will have to be declared as unconstitutional, but in the given case, as it is found that the computation made in the case of the petitioner, being not based on a proper understanding of the provisions of section 3D of the Act, it has become necessary for the court to discuss about the scope of this charging section and to so interpret and understand the provision that it is not only effectuated but also does not violate any of provisions of the Constitution. Section 3D when understood in this manner in fact is free from any allegations of being bad either for want of legislative competence or on the ground of being discriminatory or as on imposing any unreasonable restrictions on any profession, trade or employment or such other grounds. The challenge to the validity of section 3D while fails on the grounds urged on behalf of the petitioners, the stand taken by the State Government in its counter and orders passed by the authorities under the Act to subject to tax, the petitioner-clubs on the premise that levy under section 3D is on the basis of total number of members in the club irrespective of the actual contents of section 3D is a clear wrong application and understanding of the provision and the assessment orders if have been passed on such understanding, are required to be redone to bring them, in conformity with section 3D as understood and interpreted in this decision. - Decided against appellants.

Summary

Issues Involved:
1. Constitutional validity of the levy of "luxury tax" under section 3D of the Karnataka Tax on Luxuries Act, 1979.
2. Legislative competence of the State Legislature to levy such tax under entry 62 of List II of the Seventh Schedule to the Constitution of India.
3. Whether the levy aligns with the scheme of the Act.
4. Whether the levy constitutes double taxation.
5. Whether the levy is discriminatory or imposes unreasonable restrictions.

Detailed Analysis:

1. Constitutional Validity of the Levy of "Luxury Tax" Under Section 3D:
The petitioners, various clubs registered under the Karnataka Societies Registration Act, 1960, challenged the constitutional validity of the luxury tax levied under section 3D of the Karnataka Tax on Luxuries Act, 1979. They argued that the levy is beyond the competence of the State Legislature and not in line with the general scheme of the Act, particularly sections 3B and 3C, which also deal with luxury tax.

2. Legislative Competence of the State Legislature:
The petitioners argued that the levy under section 3D is beyond the scope of entry 62 of List II of the Seventh Schedule to the Constitution of India, as it taxes common facilities rather than luxuries. They relied on the Supreme Court judgment in Godfrey Phillips India Ltd. v. State of U.P., which stipulates that a valid luxury tax must identify the taxable person, the taxable facilities, and the taxable event. The petitioners contended that section 3D fails to meet these criteria as it imposes tax on mere membership rather than actual enjoyment of luxury.

3. Alignment with the Scheme of the Act:
The petitioners argued that section 3D is inconsistent with sections 3B and 3C of the Act, which levy tax based on actual charges collected for luxuries. Section 3D, however, imposes tax based on the number of club members, which the petitioners claimed is effectively a tax on membership rather than on luxury facilities.

4. Double Taxation:
The petitioners contended that the levy under section 3D constitutes double taxation as it taxes the same facilities already taxed under section 3B. They argued that once luxuries provided in a club are taxed under section 3B, there cannot be a further levy under section 3D.

5. Discriminatory or Unreasonable Restrictions:
The petitioners also challenged the levy on the grounds of discrimination and unreasonable restrictions, arguing that it violates articles 14 and 19 of the Constitution of India. They pointed out that the exemptions for youth clubs and senior citizens create an unjustifiable classification.

Court's Decision:

Legislative Competence:
The court held that the State Legislature has the competence to levy tax on luxuries under entry 62 of List II. The court noted that the concept of luxury is subjective and can vary from person to person. The court referred to the Supreme Court's judgment in Godfrey Phillips, which declared that a tax on luxuries should be on facilities beyond the reach of the average member of society. The court found that the facilities provided by the petitioner-clubs, being exclusive and costly, qualify as luxuries.

Alignment with the Scheme of the Act:
The court found that section 3D, when read with Explanation I, which defines luxury as more than one facility provided in a club, is consistent with the scheme of the Act. The court interpreted section 3D as imposing tax on clubs based on the luxury facilities provided to members who pay for them, rather than on mere membership.

Double Taxation:
The court rejected the argument of double taxation, holding that section 3D is an independent levy and not a duplication of the tax under section 3B. The court found that section 3D imposes tax based on the provision of multiple luxury facilities, which is distinct from the levy under section 3B.

Discriminatory or Unreasonable Restrictions:
The court held that the exemptions for youth clubs and senior citizens are valid classifications and do not violate articles 14 or 19 of the Constitution. The court found that the levy is justified as it targets exclusive facilities beyond the reach of the average citizen.

Conclusion:
The court upheld the constitutional validity of section 3D of the Karnataka Tax on Luxuries Act, 1979. It directed that assessments under section 3D should be redone in accordance with the interpretation provided in the judgment, ensuring that tax is levied based on the provision of multiple luxury facilities to members who pay for them, rather than on mere membership numbers. The writ petitions were disposed of with these directions.