1989 (10) TMI 53 - SC - VAT and Sales Tax

Whether levy of cess on royalty is within the competence of the State Legislature? Held that - It is not in dispute that the cess which the Madras Village Panchayat Act proposes to levy is nothing but an additional tax and originally it was levied only on land revenue , apparently land revenue would fall within the scope of entry 49 but it could not be doubted that royalty which is a levy or tax on the extracted mineral is not a tax or a levy on land alone and if cess is charged on the royalty, it could not be said to be a levy or tax on land and, therefore, it could not be upheld as imposed in exercise of jurisdiction under entry 49 List II by the State Legislature.

Issues Involved:
1. Competence of State Legislature to levy cess on royalty.
2. Nature of cess on royalty-whether it is a tax on land or mineral rights.
3. Constitutional validity of Section 115(1) of the Madras Panchayats Act, 1958.
4. Relationship between the Mines and Minerals (Regulation and Development) Act, 1957, and State legislation.
5. Retrospective application of the levy and its implications.

Issue-wise Detailed Analysis:

1. Competence of State Legislature to Levy Cess on Royalty:
The primary issue was whether the State Legislature had the competence to levy cess on royalty. The court examined whether the levy could be justified under entries 49, 50, or 45 of List II of the Seventh Schedule of the Constitution. The court concluded that none of these entries authorized the State to impose a tax on royalty. Entry 45 deals with land revenue, a well-known concept existing before the Constitution. Entry 49 pertains to taxes on lands and buildings, but royalty, being indirectly connected with land, cannot be considered a tax directly on land. Entry 50 deals with taxes on mineral rights, subject to limitations imposed by Parliament. The court found that the State Legislature could not justify the levy under any of these entries, making the cess on royalty beyond the competence of the State Legislature.

2. Nature of Cess on Royalty-Tax on Land or Mineral Rights:
The court analyzed the nature of the cess on royalty, determining that it was not a tax on land but on royalty, which is included in the definition of "land revenue" in the Explanation to Section 115 of the Act. The court referred to various precedents and legal principles, concluding that royalty is a payment for the user of land, not a tax on land itself. The court also noted that the cess on royalty is not related to land as a unit but to minerals extracted, making it a tax on royalty rather than land.

3. Constitutional Validity of Section 115(1) of the Madras Panchayats Act, 1958:
The court examined the constitutional validity of Section 115(1) of the Act, which sought to levy a local cess at 45 paise on every rupee of land revenue payable to the Government, including royalty. The court found that the Explanation to Section 115 artificially expanded the meaning of "land revenue" to include royalty, which was not permissible. The court held that the impugned legislation, in its pith and substance, was a tax on royalty and not on land, making it ultra vires the State Legislature's powers.

4. Relationship Between the Mines and Minerals (Regulation and Development) Act, 1957, and State Legislation:
The court discussed the relationship between the Mines and Minerals (Regulation and Development) Act, 1957, a Central Act, and the State legislation. The Central Act, passed under entry 54 of List I, took control of mines and minerals, regulating royalty rates. Section 9 of the Act specified the rates of royalty, and the Central Government had the power to amend these rates. The court held that the State Legislature's levy of cess on royalty interfered with the Central Act's provisions, making it invalid.

5. Retrospective Application of the Levy and Its Implications:
The court considered the retrospective application of the levy and its implications. Given the decision in H. R. S. Murthy's case, which upheld the cess on royalty, the amounts had been collected based on that decision. The court declared the levy ultra vires prospectively, meaning the State could not enforce the cess any further but was not liable to refund the amounts already collected. This approach balanced the need for legal certainty with the practical implications of the retrospective application.

Conclusion:
The court allowed the appeals and writ petitions, declaring the cess on royalty under Section 115 of the Madras Panchayats Act, 1958, ultra vires the State Legislature's powers. The State of Tamil Nadu was restrained from enforcing the cess any further, but the amounts already collected were not subject to refund. The decision emphasized the need for legislative competence and the constitutional framework governing the regulation of mines and minerals.

← Previous Next →