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TMI Blog2016 (7) TMI 1157X X X X Extracts X X X X X X X X Extracts X X X X ..... and different consideration to the consumer in contra distinction to a sale by a dealer to a consumer of liquor or wine in a packed form of bottle or container. Under these circumstances, the classification made by the Legislature while granting exemption cannot be said to be on irrational basis, but it can be said that the dealer of liquor or wine is not similarly situated as that of the owner of bar and restaurant with C.L.9 licence, because as we recorded earlier, the manner of sale in a packed product, that too in an intact condition as made by the manufacturer, cannot be equated, nor can be said to be similarly situated with the person who is vending liquor or wine by holding C.L.9 licence in a bar and restaurant. When we find that there is a rational classification with the intelligible differentia, this Court cannot substitute its own reason, unless the Court finds that such classification is highly irrational or there is no any intelligible differentia at all.’ In the present case, we do not find that such condition is satisfied. Therefore, the contention raised for discrimination in the grant of exemption cannot be accepted. As recorded by us herein above, what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and liquor are served, such can be said to be outside the scope of the power of the State to levy tax because tax can only be levied on goods. In his submission, wine, liquor or any other liquor or wine remains as wine or liquor even if its quantity is sub-divided and served in a peg or more than one peg, or beer is served in glass or otherwise. In the circumstances, he prayed that the view taken by the learned Single Judge is erroneous and this Court may consider in the present appeal. 5. We may record that, since in the impugned order, the learned Single Judge has mainly relied upon the earlier decision of another learned Single Judge dated 30-9-2015, we have considered the very said decision of the learned Single Judge dated 30-9-2015 passed in W.P.No. 27825/2014 and allied matters, whereby, the learned Single Judge in the said matter, for the reasons recorded, has dismissed the petitions. We may record that the writ appeal was preferred against the aforesaid decision of the learned Single Judge dated 30-9-2015. But as per the statement made at the Bar, and it is not disputed by the learned Government Advocate appearing for the State that the said appeals were dismissed for n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, where such dealer of certain identified categories sells the liquor, such dealer would not be required to collect the tax as in case of other dealers they are required to do so. 17. A conjoint reading of Section 5(1) of the KVAT Act, Section 8A(1)(c) of KST Act, 1957 and the impugned notification dated 28.02.2014 would clearly indicate that under Section 8A(1)(c) of KST Act, State had power to notify exemption and reduction of tax in respect of any specified class of goods by any specified class of dealers. Whereas, under Section 5(1) of the KVAT Act, goods specified in the First Schedule and any other goods as may be specified by the State can be exempted from payment of tax. Impugned notification would indicate that tax payable under the KVAT Act on sale of liquor including Beer, Fenny, Liqueur and Wine by a dealer who is not a person holding licence in the Forms specified thereunder is exempted. The exemption that is granted is in respect of the goods specified in Entry No.59A of III Schedule and on account of such sale of liquor including Beer, Fenny, Liqueur and Wine is by a dealer who passes on such tax liability on the consumer has been made liable to collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of power to exempt or not. Rule 8(1) of Central Excise Rules, 1944 reads thus: 8. Power to authorize exemption from duty in special cases: (1) The Central Government may from time to time, by notification in the Official Gazette, exempt subject to such conditions as may be specified in the notification any excisable goods from the whole or any part of the duty leviable on such goods. (emphasis supplied) In pursuance to the powers conferred under sub-rule (1) of Rule 8, notifications came to be issued vide notification No.74 of 1959 dated 31.07.1959 and notification No.70 of 1960 dated 30.04.1960 exempting thereunder:- cotton fabrics from payment of excise duties produced by Power Looms owned by certain Co-operative Societies, which was impugned on the ground that they exempt certain classes of person and not classes of goods from the excise duty and exemption if any could have been granted in respect of any particular specified variety of cotton fabrics and not with reference to the persons producing the same variety of those fabrics. Even in the instant case, petitioners are contending that exemption could have been granted on the goods namely, li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flow of trade and commerce and such levy is violative of Articles 14, 19 and 304-B of the Constitution of India. 22. There cannot be any dispute to the proposition that a legislation can be challenged on the grounds of:- (i) lack of legislative competence to make subordinate legislation; (ii) violation of fundamental rights; (iii) violation of any provisions of the Constitution of India; (iv) failure to conform to statute under which it is made or exceeding the limits of authority conferred by the enabling Act; (v) repugnancy to the laws of the land i.e, any enactment (vi) arbitrariness or unreasonableness. For the above proposition, judgment of Apex Court in the case of STATE OF T.N. AND ANOTHER vs P.KRISHNAMURTHY AND OTHERS reported in (2006)4 SCC 517 can be looked up. 23. At the cost of repetition, it requires to be noticed that licence is granted to the dealers who deal in sale of liquor which includes Wine, Beer, Fenny under the provisions of Karnataka Excise Act, 1967 and Rules made thereunder. The licence fee prescribed also varies. It is area and population based. 24. The Karnataka Excise Act, 1967 and Rules framed thereun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Other areas 2,00,000 2,00,000 2,80,000 27. It is not in dispute that dealers holding liquor licence in Form CL-2 and CL-11C sell liquor across the counter to consumers at a sale price not exceeding the MRP indicated on the label of the container or bottle. However, such restriction is not imposed on Bars and Restaurants, Clubs, Star Hotels, Hotel, Boarding Houses and Lodges and this enables them to fix the sale price of the liquor being sold to the customers depending upon the varying degree of facilities provided by them to the customers. 28. The Legislature has inserted Entry 59A in the III Schedule to KVAT Act and has chosen to provide for levy of tax on liquor sold by certain licence holders. Notification II bearing No.FD 21 CSL 2014 dated 28.02.2014 was issued granting exemption to liquor dealers holding licence to Form CL 9 operating in Panchayat limits/Rural areas and liquor dealers holding licence in Form CL-2 or any other licence and has the effect of levying tax on liquor sold by dealers holding licence in Form CL-9 and operating in urban areas, licence in Form CL-4, Form CL-6A, Form CL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the items of the same category. It has been held by Hon ble Apex Court as under: 13. From a perusal of the notifications in question, it is evident that other fertilizers of the NPK category i.e. N.P.K. 12:32:16; N.P.K. 15:15:15; N.P.K. 20:20:0; N.P.K. 14:35:14 are included in the exemption list, whereas it is a matter of fact that the NPK 23:23:0 fertilizer is also a fertilizer of the same category, but it is omitted from the list. According to the notification dated 2-11-1994, the intention of the State was not to tax the sale of potassium phosphatic fertilizers but when we go into enquiry of nomenclature of these chemical compounds, we find that the NPK 23:23:0 is a nitro-phosphate fertilizer which has no potassium (K) ingredient. The Notifications dated 10-4-1995 and 15-5- 1995 clearly include NPK 20:20:0, which is also a nitro-phosphate fertilizer with zero content of potassium (K). This classification made under the notification dated 10-4-1995 does not hold good on the rational basis and is hence subject to scrutiny. The fact remains stagnant that the notifications include a fertilizer NPK 20:20:0 which is of the same category as that of fertilizer NPK 23: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trade Tax Department of the State of U.P., dated 10-4-1995 and 15-5-1995 lack the sense of reasonability because it is not able to strike a rational balance of classification between the items of the same category. As a result of this, NPK 23:23:0 is not given exemption from taxation whereas all other NPK fertilizers of the same category like that of NPK 20:20:0 are provided with the exemption from taxation. 32. It is also well settled law that certain latitude for classification in a taxing statute is extended to the Legislature with a wider note. Classification necessarily implies the making of a distinction or discrimination between the persons so classified and those who are not members of that class. In other words, it is the essence of a classification that upon the class or cast duties or burden different from those resting upon the general public. 33. The State will decide what economic and social policy it requires to pursue. The Courts give a larger discretion to the legislature in the matter of its preferences of economic and social policies and effectuate the chosen system in all possible and reasonable ways. Thus, if a legislation or the subordinate legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution does not enjoin equal protection of the laws as abstract propositions. Laws being the expression of legislative will intended to solve specific problems or to achieve definite objectives by specific remedies, absolute equality or uniformity of treatment is impossible of achievement. Again tax laws are aimed at dealing with complex problems of infinite variety necessitating adjustment of several disparate elements. The Courts accordingly admit, subject to adherence to the fundamental principles of the doctrine of equality, a larger play to legislative discretion in the matter of classification. The power to classify may be exercised so as to adjust the system of taxation in all proper and reasonable ways the Legislature may select persons, properties, transactions :and objects; and apply different methods and even rates of tax, if the ,Legislature does so reasonably. Protection of the equality clause does not predicate a mathematically precise or logically complete or symmetrical classification : it is not a condition of the guarantee of equal protection that all transactions, properties, objects or persons of the same genus must be affected by it or none at all. If the class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form numerically a small community. The Parliament has again been accustomed in enacting tax laws to make a distinction between a Hindu Undivided Family consisting of Hindus and undivided families of Mappillas. By the taxing Acts the Parliament could have treated Mappilla tarwads as units of taxation. But the mere fact that the law could have been extended to another class of persons who have certain characteristics similar to a section of the Hindus but have not been so included is not a ground for striking down the law. In treating a Hindu Undivided Family as a unit of taxation under the Expenditure-tax Act and not a Non-Hindu Undivided Family, the Parliament has not attempted an obvious inequality . (ii) In the case of SHASHIKANT LAXMAN KALE AND ANOTHER vs UNION OF INDIA AND ANOTHER reported in (1990)4 SCC 366 , Apex Court has held that Court must look beyond ostensible classification and to the purpose of the law and apply the test of palpable arbitrariness in the context of the felt needs of the times and societal exigencies informed by experience to determine reasonableness of the classification. Apex Court while upholding the constitutional validity of Section 10-C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * * (6) The law can make and set apart the classes according to the needs and exigencies of the society and as suggested by experience. It can recognise even degree of evil, but the classification should never be arbitrary, artificial or evasive. (7) The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and (2) that differentia must have a rational relation to the object sought to be achieved by the Act. (8) The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short, while Article 14 forbids class discrimination by conferring privileges o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, the Legislature cannot be expected to provide abstract symmetry and if classification rests upon a real and substantial distinction bearing a reasonable and just relation to the thing in respect of which it is made, then it does not amount to discrimination. It has been held by the Apex Court in said judgment as under: 40. This brings us to the second branch of the argument relating to the applicability of Article 14 of the Constitution of India. In this connection, Mr. Krishnamoorthy Iyer submitted in the first place, that the special treatment afforded to the debtors under Section 20 of the Act is wholly discriminatory and is violative of Article 14. Secondly, it was argued on behalf of the appellants in Civil Appeal No. 420 of 1973 that they being stranger auction-purchasers were selected for hostile discrimination as against a bonafide alienee who has been given complete exemption from the operation of the provisions of the Act. It is now well settled that what Article 14 forbids is hostile discrimination and not reasonable classification. Equality before law does not mean that the same set of law should apply to all persons under every circumstance ignoring diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is implicit and inherent in the concept of equality for there can hardly be any country where all the citizens would be equal in all respects. Equality of opportunity would naturally mean a fair opportunity not only to one section or the other but to all sections by removing the handicaps if a particular section of the society suffers from the same. It has never been disputed in judicial pronouncements by this Court as also of the various High Courts that Article 14 permits reasonable classification. But what Article 14 or Article 16 forbid is hostile discrimination and not reasonable classification. In other words, the idea of classification is implicit in the concept of equality because equality means equality to all and not merely to the advanced and educated sections of the society. It follows, therefore, that in order to provide equality of opportunity to all citizens of our country, every class of citizens must have a sense of equal participation in building up an egalitarian society, where there, is peace and plenty, where there is complete economic freedom and there is no pestilence or poverty, no discrimination and oppression, where there is equal opportunity to educat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... science and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give force and life to the intention of the legislature. That was clearly laid down (3 Co Rep 7b) by the resolution of the judges (Sir Roger Manwood, C.B., and the other barons of the Exchequer) in Heydon's case (1584) 3 Co. Rep. 7a, and it is the safest guide today. Good practical advice on the subject was given about the same time by Plowden in his note (2 Plowd. 465) to Eyston v. Studd (1574), 2 Plowd. 463. Put into homely metaphor it is this: A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out ? He must then do as they would have done. A judge must not alter the material of which the Act is woven, but he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pso facto, the statute would be unconstitutional as being violative of Article 14, must be negatived. 17. In order to ascertain whether the classification of local areas for the purposes of levy of tax is reasonable or not, a reference may be made to the impugned notification. Table annexed to the notification shows in all 27 local areas selected for levy of tax. They are again divided into three groups, A, B and C for selecting rates to be levied on different scheduled goods. A mere glance at the local areas selected and those according to the petitioner excluded, viz., areas within the jurisdiction of various Gram Panchayats would bring in bold relief that population criterion appears to have been adopted in selecting local areas for levy of tax. Does population criterion provide a reasonable basis for classification vis-a-vis a tax levied on entry of goods in the area ? It would be undeniable that population basis would provide a reasonable criterion for selecting local areas for the purpose of levy tax simultaneously excluding those which do not answer the population criterion. One unquestionable element scientifically established about a taxing statute is that the yield ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or CL-6A or CL-7 issued under Karnataka Excise (Sale of Indian and Foreign Liquor) Rules, 1968 and they are exempted. 38. The impugned legislation has been enacted by the State Legislature under Entry 54 of list II of VII Schedule of the Constitution of India which provides for levy of tax on sale or purchase of goods in the State and is subject to Entry 92A of List I and as such, there can be no further curtailment of the State s power of taxation. 39. The classification of dealers for the purpose of levy of tax and granting exemption on the basis of turnover is held to be not hit by Article 14 of the Constitution by the Division Bench of this Court in the case of SHANTILAL BROTHERS vs STATE OF KARNATAKA AND ANOTHER reported in (1985)59 STC 178 while upholding the constitutional validity of Section 6-B(i) of Karnataka Sales Tax Act, 1957 which provided for levy of one-half percent of turnover tax on every dealer whose turnover in a year exceeded ` 1 lakh and it came to be held that such classification does not bring in hostile discrimination against any class of dealers or an unreasonable restriction on the freedom of trade guaranteed to citizens and is not violat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vulnerable to attack on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. It has been held by Hon ble Apex Court in the case of INCOME TAX OFFICER, SHILLONG AND OTHERS vs R.TAKIN ROY RYMBAI AND OTHERS reported in (1976)1 SCC 916 to the following effect: 27. While it is true that a taxation law, cannot claim immunity from the equality clause in Article 14 of the Constitution, and has to pass like any other law, the equality test of that article, it must be remembered that the State has, in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence, the legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided in sub-clause (a), the exemption granted under Section 10(26) is likely to operate unequally and cause inequality of treatment between individuals similarly situated. A tribal residing in the scheduled areas earning large income from business located outside the specified areas, would be totally exempt while the non-tribal whose source of income is a share in the same business would be taxed although with reference to the source of the income, both were similarly situated 36. We are not persuaded to accept Mr.Lahiri s argument that the making of the exemption conditional upon the classification envisaged by sub-clause (a) would deter the members of the scheduled tribes from joining the mainstream of national life, or, would be inconsistent with the directive principle of State policy for promotion of educational and economic interests of the weaker sections of the people, particularly the scheduled castes and scheduled tribes. Its primary objective is to provide protection to the weaker sections of the society. Members of the scheduled tribes who are enterprising and resourceful enough to move out of the seclusion of the tribal areas and successfully compete with thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s already pointed out what has been done by the impugned Act is only to provide for a different mode of computation of the additional sales tax by linking the rate of levy to the taxable turnover instead of to the amount of tax assessed under the Act of 1959. The constitutional validity of the levy of additional tax is not in any manner affected by the said change brought about in the mode of levy and computation as a result of the amendments effected by the impugned Act. It was strongly contended on behalf of the petitioners that the prescription of different rates of additional sales tax depending upon the quantum of turnover of the different assessees is totally repugnant to the concept of levy of tax on sales. Another argument advanced by counsel for the petitioners was that since under the amended provisions of Section 2, two dealers selling the same commodity will be liable to pay additional tax at different rates depending upon their respective annual turnovers, there is a clear violation of Article 14 of the Constitution as dissimilar treatment is meted out to persons similarly situated. A further contention urged on behalf of the petitioners was that the levy in its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... novers for the purpose of graded imposition so long as it is based on differential criteria relevant to the legislative object to be achieved is not unconstitutional. A classification, depending upon the quantum of the turnover for the purpose of exemption from tax has been upheld in several decided cases. By parity of reasoning, it can be said that a legislative classification making the burden of the tax heavier in proportion to the increase in turnover would be reasonable. The basis is that just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one. The flat rate is thought to be less efficient than the graded one as an instrument of social justice. The large dealer occupies a position of economic superiority by reason of his greater volume of his business. And to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality. The economic wisdom of a tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue but also to regulate the economic life of the society . 45. Turning my attention back to the facts on hand, it can be seen from the terms of the licence conditions issued to a dealer in Form No.CL-2, the liquor is sold across the counter to consumers at the sale price not exceeding the MRP indicated on the label of the container or the bottle vide Rule 3(2). Whereas, no such restriction of MRP is imposed on Bars and Restaurants, Clubs, Star Hotels, Hotel, Boarding Houses and Lodges covered under the impugned notification where liquor is sold to the customers or served in loose quantities with food articles in the licenced premises as stipulated in the conditions of the licence. The CL-9 holder licences provide the facilities of varying degrees of comforts to different class of elite customers and as such, they would have the advantage of fixing the sale price with value addition without any restriction. It is in this background, as already noticed herein above, from the statement of objects and reasons, levy of tax on sale of liquor including Beer, Fenny, Liqueur and Wine came to be introduced. Thus, it could be seen that State legislature in its economic wisdom of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial value addition taking place on liquor consumed in the premises of a Boarding House and Lodge, has brought this class of dealer under the net of tax, but Bar and Restaurants located in rural area which do not have the advantage of catering to the class of customers of economic superiority are exempted. Thus, the impugned notification dated 28.02.2014 which exempts liquor sold by dealers holding licence in Form No.CL-9 operating in rural areas in comparison with liquor sold by a person operating a Boarding House and Lodge in a rural area holding licence in Form No.CL-7 would form separate class of dealers. The State Legislature in its economic wisdom of taxation having chosen to provide for levy of tax on liquor sold by certain licence holders, considering the potential for tax collection on the huge value addition while exempting others whose sale price is regulated by the MRP indicated on the label of the container cannot be construed as discriminatory. The classification of dealers based on value addition criteria for the purpose of tax levy and exempting the dealers based on area criteria cannot be held to be discriminatory. 48. In view of the aforestated discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne or beer or fenny in the same packing of bottle as being manufactured by the manufacturing company. Whereas, the person holding C.L.9 licence, for vending in bar or bar and restaurant, is providing liquor or wine in pegs and beer in glass/es. It is hardly required to be stated, that if any consumer of the goods is desirous to have only one peg, he will go to a bar or a bar and restaurant, but he will not go to a liquor or wine dealer for buying the whole bottle in the packed form. Therefore, the status of a person who is dealer in liquor and wine and beer or fenny, etc. is different than that of a person holding C.L.9 licence for vending of the liquor in the bar and or bar and restaurant. If the Legislature has made a separate class on account of the aforesaid distinction, it cannot be said that there is no rational classification. If one further examines the matter, the liquor or wine is subjected to tax at a different price and different consideration to the consumer in contra distinction to a sale by a dealer to a consumer of liquor or wine in a packed form of bottle or container. Under these circumstances, the classification made by the Legislature while granting exemption ca ..... 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