OF INDIA, ETC. v. UNION OF INDIA & ORS.

c entry 44 of List III. Under s. 246(1) Parliament has exclusive power to make laws with respect to any of the matters-and this includes the power to impose taxes-enumerated in List I. In this situation and in view of the fact that the 1980 Act is, in pith and substance, a tax on income, its constitutional validity can be in no doubt at all. -

11Copy pinpoint11. But can the Union enactment of 1987 also be supported for " the same reasons, as imposing an expenditure tax which, as held in Azam Jha's case, 1972 1 SCR 470, falls within the scope of Entry 97 of D List I? Sri Palkiwala says it cannot be. His first contention is that the tax levied by the 1987 Act is not, in fact and in truth, an expenditure tax. He says that it is not sufficient for the legislature to give such a ~ description or label to a tax proposed to be levied by it as does not fall ; under List II and claim that it should be upheld under Entry 97. The --r- tax sought to be imposed should be one which has real existence and recognition in the world of economics. According to him, the econo- mic concept of an expenditure tax is of a tax that is levied not on isolated items of expenditure but one on the totality of the expenditure incurred by an assessable entity, just as income tax has gained recogni-

i ti on as a tax on the total income of a taxable entity. That was the concept of the expenditure tax which Nicholas Kaldor had in mind, which was embodied in the 1957 Act and which, hence, was endorsed with approval by this Court. A tax on a few items of expenditure, it is said, is not necessarily the same as an expenditure tax. Referring to the ~ decisions of this Court upholding the levy of Wealth Tax and Gift Tax in as far as it affected agricultural lands: Gift Tax Officer v. D.H. Nazareth etc., [1971] 1 SCR 195 and Union of India v. H.S. Dhillon, G I 1972] 2 SCR 33, it is submitted that the decisions may well have been different had they been concerned with an imposition only on "lands "" and buildings" by reference to their capital value or only on "agricultural lands" on the occasion of a gift.

12Copy pinpoint12. It is difficult to accept the contention that the tax cannot be considered to be an expenditure tax because it is not on "expenditure" • i•

HOTEL FEDERATION v .. U.0.1. (RANGANATHAN, J.) ·961

'-f generally but is restricted to specific types of expenditure. There is, no A legal, judicial, economic or other concept of expenditure tax that would justify any such restrictive meaning. If, conceptually, the expen- diture incurred by a person can be a subject-matter with reference to which a tax can be levied, there is no reason why such taxation should not be restricted only to certain items or categories of expenditure and ~ why its base should necessarily be so wide as to cover all expenditufe B ""°" \ficurred by an assessable entity. After all, even under the 1957 Act, all hpenditure of all persons was not liable to tax. It substantially · covered only certain types of assessees and certain types of expendi- ture (for ·several types of expenditure were exempted) and that too only when it exceeded certain limits. The analogy of the Income-tax or · Wealth Tax or Gift Tax Acts also does not really help us. Though they are enactments which cover a larger area of the subject matter taxed, )- · that was because the legislature found it expedient to do so and not because they were obliged to cover the entire area of income, wealth or gift. An Act imposing a tax, for example, on hotel receipts alone or dividends alone or on capital gains alone will not be any the less a tax on income within the scope of Entry 82 of List I. Likewise even if the legislature had confined its levy of wealth tax only to certain assets such as lands and buildings or the Gift Tax Act had levied a tax only on 1 gifts of agricultural land, they would not have ceased to fall within the "'f-- scope of the relevant entries of the Union List, so long as, in pith and substance, they are found respectively to be taxes on the capital value of the assets in question or on the transaction of gift. The Central E Excise Act, for example, does not levy excise duty on the manufacture and production of all goods and additional excise duty is levied only in respect of certain goods. So also, in regard to sales tax. It is indeed even possible to say that no tax levy in respect of any subject matter ~- can or does operate universally without any exceptions or exemptions. Selection of objects and goods for taxation is the essence of any tax legislation and any limitation of the nature suggested is an unwar- .lit ranted curtailment of this selective power of taxation of Parliament.

13Copy pinpoint13. There is also no established legislative practice which would enable one to limit the concept of an expenditure tax in the manner ~ suggested. So far as expenditure tax is concerned, the only legislation earlier in force was the 1957 Act which was in force for a period of eight years. Such short lived legislation can hardly furnish the founda- tion of an argument to limit the scope of legislative power to the manner in which it was exercised under that enactment. If, after with- drawing this legislation, Parliament considered that it was not worth- while or possible to impose a tax on all expenditure and that it would H

962 SUPREME COURT REPORTS [1989] 2 S.C.R.

be sufficient, expedient or necessary to impose such a levy only on Y' A lavish spending in certain directions, that cannot certainly be prec- luded on any theory of established legislative practice, as was done in State of Madras v. Gannon Dunkerley Co., [1959] SCR 379 in respect of sales tax. In that case the legislative trend prevalent over decades was relied upon in interpreting the expression "sale of goods" used in B the Constitution. But there the Court was concerned with a legal term, "sale", which had acquired a definite connotation in law and in legisla 1 tive instruments and that analogy cannot be availed of to interpret thtj' scope of Entry 97. On the other hand, even a fairly long-established legislative practice under which income tax levy by the Centre was restricted to items of income stricto sensu (as contrasted with capital gains) was not considered sufficient to place that type of restriction on c the interpretation of the expression "taxes on income" used in the Central Legislative List: vide, Navinchanda Mafat Lal v. CIT, 11955] 1 S~R 829. Not only that, the validity of later definitions of "income" under the Income-tax Act which have a much wider ambit has been upheld as covered by the above legislative entry. See, in this context, D the decisions in Navnit Lal v. AAC, AIR 1965 SC 1375, Bhargava v. Union, [1966] 2 SCR 22 and Bhagwandas v. Union, [1981] 2 SCR 808. There is not even that much of legislative practice, so far as expendi- ture tax is concerned, which would justify our importing any limitation on the concept of a "tax on expenditure" under Entry 97 of List I. A -'\-- perusal of the decision of this Court upholding the validity of the 1957 E Act Azam lha's case, [1972] 1 SCR 470 does not also justify the read- ing in of any such limitation. The wider coverage of the tax made it easier for the Court to pin point its subject matter as "expenditure" and to treat it as a matter falling under the residuary entry, but it does not justify the inference sought to be drawn that a tax cannot be said to

F be a tax with reference to "expenditure" because it does not tax expenditure in general but confines itself to certain types or categories of expenditure. Once it is granted that the tax need not exhaust the 1 entire universe of the subject-matter, the extent of the subject matter ..-f that should be covered or selected for imposing tax should be entirely left to Parliament. subject only to any criteria of discrimination or unreasonableness that may attract .the provi~ions of Part III of the G Constitution.

14Copy pinpoint14. The fact that the 1987 Act seeks to tax only the expenditure on items which can be described as luxuries is, however, used by Sri Palkiwala to support his other contention (which has really troubled me considerably) that the pith and substance of both sets of legisla- H lions is the same, that they both impose a tax only on luxuries or

HOTEL FEDERATION ,,, U,OJ, [RANGANATHAN, J,] 963

entertainments and that the distinction sought to be made on behalf of the Revenue that one is a tax on 'luxuries' while the other is a tax on A the expenditure incurred by a person on luxuries is only a distinction between "Tweedledum" and "Tweedledee", The object and effect of a tax on luxuries is only to curb expenditure on luxuries and such a tax may be imposed, levied or collected either from the provider of luxuries or the person who enjoys them. The object of an expenditure B +.ax is also similar and that can also be levied either on the person who ,~pends the moneys directly, or through some other person, or even from the person who benefits by the incurring of such expenditure. The provision of a luxury and the payment for it are only obverse sides of the same coin and cannot, from any practical point of view, be considered as two separate and independent subject matters of taxa- tion. It is a well settled proposition thac the entries in the legislative c lists should be given the broadest of connotation and, hence, a tax on luxuries by reference to the expenditure thereon will fall clearly under the entry in the State List. The pith and substance of both sets of legislation, therefore, falls only under entry No. 62 of the State List. This being so, Entry 97 of List I will have no applicability at all; that D can be called in aid only to cover matters not specifically enumerated or taxes not mentioned in List II or III. It is, therefore, not possible. it is urged, to sustain the validity of the 1987 Act by reference to Entry 97 of List L

15Copy pinpoint15. The learned Attorney General sought to meet this conten- E tion in two ways. He first urged that the pith and substance of the two legislations are different. A tax on 'luxuries' measured by reference to the amount charged or paid therefor is totally different from a tax to curb opulent or ostentatious expenditure even though the categories of expenditure brought in for taxation by a particular statute may be restricted. The latter cannot be described as a tax on 'luxuries' and does not fall within the scope of Entry 62 of the State List and, in the absence of any referability to any other entry of List II, it is safe from attack under Article 248(2) and will also be covered, if need be, by Entry 97 of List I. The second argument is that, after the decision in Azam Jha's case, [1972] 1SCR470 holding that a "tax on expenditure" ··~ will be legislation covered by Entry 97 in List I, the constitutional position is the same as if, before item 97, a specific entry had been inserted in List I (say, Entry no. 96A) which reads "Taxes on expendi- ture". The result, he says, is that the Central legislation will be squarely covered by an entry in List I and so we need not embark on any investigation as to whether it falls or does not fall under any entry in List II or List III. H

964 SUPREME COURT REPORTS [1989] 2 S.C.R.

16Copy pinpoint16. It seems to me that there is a fallacy in the second line of ~... A argument addressed by the learned Attorney General. I do not think that the legislative lists can be interpreted. as suggested by him, on the assumption that there is a deemed entry, "Taxes on Expenditure ... added to List I as a result of the decision in Azam Jha's case [ 1972] I SCR 470. One cannot add entries to the legislative lists on the basis of B decisions of this Court. In Azam Jha's case', the pith and substance of the Act considered did not fall under any of the entries in List II or Ill, That being so, this Court upheld it by reference to Entry No. 9; describing the tax, having regard to its pith and substance, as a tax on expenditure. Here, however, we have a legislation which covers only certain types of expenditure and the contention of the petitioners is that •these are all items of expenditure pertaining to luxuries. The C decision in Azam Jha's case cannot help us to determine whether the legislation before us should be construed as imposing a tax on expendi- ture or one on luxuries. If, in spite of its dealing with only certain types of expenditure relatable to luxuries, it can be said to be, in pith and substance, not a tax on luxuries, then we may hold that parliament can legislate with reference to it and, for purposes of convenience. take advantage of its description as a tax on expenditure to rest it on Entry 97 of List I. In other words, Entry 97 of List I cannot come to our rescue unless we are in a position to say that the substance of the Central legislation in question is not a tax on luxuries, entertainments .~· or amusements. This takes us to the first part of the argument of the learned Attorney General.

17Copy pinpoint17. Is there a tenable and true distinction between the tax on expenditure levied by the Act and a tax on luxuries? Are Parliament and the State Legislatures dealing with the same 'matter" and taxing one and the same thing, though describing it differently-or are they taxing two different matters or things? Sri Palkiwala says that the -l., subject matter of taxation is 'luxury' and that it is meaningless to consider the expenditure incurred on it as a separate and distinct sub- IF ject matter. The acceptance of such an argument, he says, will lead to double taxation in respect of almost every matter on earth. For inst- ance, A may be taxed on the salary or interest or dividend paid to him G by B as his income and, at the same time, B can be asked to pay a tax ~ on the expenditure incurred by him by way of such salary, interest or dividend payment. A can be asked to pay a wealth tax on the capital value of the assets acquired by him and also asked to pay an expendi- ture tax on the money spent on such acquisition. A can be asked to pay a sales tax on the goods sold by him to B and also asked to pay or H collect a tax on the expenditure incurred by B to purchase the same.

HOTEL FEDERATION v. U.0.1. [RANGANATHAN, J.I 965

Such instances, he says,. can be multiplied and will reduce the argu- ment to an absurdity. A

18Copy pinpoint18. The Attorney General, on the other hand, submits that the question whether both legislation relate to the same matter does not bring out correctly the cotroversy in issue. He says that if the expres- sion "matter", in this context, is understood in its widest sense, it will B .- create chaos in the matter of interpretation of the lists. According to -~him, for applying the doctrine of pith and substance we have to under- stand the expression 'matter' not in a 'gross', but in a 'rare' sense. He

- develops this contention by invoking, to his aid, what may be called the 'aspect' rule as explained in certain text books and judicial decisions. c ....' 19. A.H.P. Lefroy in his 'Canadian Constitution' observes, at p. 98:

"Sec. XX!. Aspect o f legislation: .Subjects which in one aspect and one purpose fall within s. 92 of the Federation D Act and so are proper for provincial legislation may, in another aspect and for another purpose fall withins. 97 and so be prop.er for Dominion legislation. And as the cases which illustrate the principle show, by 'aspect' here must be understood the aspect or point of view of the legislator in legislating, the object, purpose and scope of the legislation. E The word is used subjectively of the legislator, rather than objectively of the matter legislated upon." ,

To similar effect is the passage from Laskin's "Canadian Constitutional Law" extracted in the judgment of Venkatachaliah, J. the Federal Court in the C . P . & B erar Act case [1939 I FCR 18 also touches upon F the 'aspect' theory at p. 49:

""Here are two separate enactments, each in one aspect con- ferring the power to impose a tax upon goods; and it would accord with sound principles of construction to take the more general power, that which extends to the whole of G India as subject to an exception created by the particular power, that which extends to the Province only." (emphasis added)

A similar reference to the 'aspect' of legislation can be seen in Kera/a State Electricity Boardv. Indian Aluminium Co., [1976] 1SCR562 at H p. 573-4.

966 SUPREME COURT REPORTS [1989] 2 S.C.R.

"The argument of the learned Solicitor General apprearing ~iq:;;;:-.;;, A on behalf of the Kerala Electricity Board in support of his "~·"-'" submission that the legislation falls under Entries 26 and 27 of List II may be summarised as follows: Those entries do not enable the State Legislatures to legislate with regard to all conceivable goods like arms, ammunition, atomic B minerals etc. as was argued by Mr. Sen. A legislature while legislating with regard to matters within its competence-. ~ should be deed to know its limits and its legislative autho-}. rity and should not be deemed to be legislating beyond its jurisdiction. One thing that has always got to be kept clear in one's mind is that there may be more than one spect with regard to a particular subject matter" . c (emphasis added)

Relying on this principle, backed by these observations, the learned Attorney-General submits that, properly understood, the pith and substance of the 1987 Act is 'expenditure', not 'luxuries'. D

20Copy pinpoint20. At first blush, the argument of the learned Attorney General may sound a little subtle and somewhat artificial but, on some reflec- tion, legislative competence will indeed be seen to vary with different aspects of a subject matter as understood in a wide sense. This can be r seen from some of the decided cases. The first triumvirate of cases that arose in India under the Government of India Act, viz. In re Central provinces & Berar Act XIV of 1953, [1939] FCR 18; Province of Madras v. B oddu Paidanna & Sons, I1942] FCR 90 and G. G. - in - Counci/v. Province of Madras, [1945] FCR 179, were concerned with the question whether the impugned tax was one on the sale of goods or an excise duty. Interpreting the word 'subject matter' in a broad sense it could perhaps be said that both were taxes with respect to goods. But this concept alone was not sufficient to dispose of the case because the relevant legislative entries did not talk of taxes with respect to goods but referred to taxes in respect of two different activities referable to goods (conveniently described as the 'taxable event'), one the manu- facture and production of goods and the other with sale thereof. In the light of these legislative entries the two different activities could pro- perly regaded as two different matters for taxation and the relevant legislation was held to be one concerned with 'sale' and not with 'manufacture'. In other words, there could be two enactments "each in one aspect conferring the power to impose a tax upon goods". The legislation was held not to be vitiated merely because there was an element of overlapping in that both excise duty and sales tax became

HOTEL FEDERATION v. U.0.1. [RANGANATHAN, J.[ 967

~---;4_ jleviable on the same assessee in respect of the same goods and .by ~reference ·~ to the same sale price when the first sale after manufacture occurs, one by refernce to the. 'manufacture' aspect and the other by reference to the 'sales' aspect. This bifurcation of the two different aspects pertaining to goods was justified by the language of the legisla- tive entries themselves which referred separately to the different sets of activitie·s and put them down in differet legislative lists. Again, on B -1., {the same principle, the· manufacture of electricity may attract excise \duty at the point of its captive consumption (under Entry 84 of List I) and also a tax on the ·consumption or sale of electricity (referrable to

- Entry 53 of List II).

21Copy pinpoint21. The power to levy taxes with respect to 'property' has created similar problems. All States (or corporations and municipali- C ties therein) levy a property tax on the owner or occupier which is almost universally measured by reference to its annual value (viz. the rent it would fetch if let from year to year). The Income-tax Act also charges a tax on the same basis. In other words, in a realistic and practical sense, the tax was levied by both legislatures on the same o amount and with reference to the same matter. But both levies have been upheld under the 1935 Act, the former as a 'tax on lands and buildings, hearths and windows' (Entry 42 of List II) and the latter as a tax on income (under Entry 84 of List I.) Ra/la Ram [1948] FCR 207 pointed out that they were different types of levies one on the land and buildings (generally, but not necessarily, measurable by reference to E the income derived or capable of being derived) and the other on the income (actually or notionally) derived from it. The pith and substance of the former, it was said, was not 'income' (from the property) though the tax was levied on the basis thereof. Expressed differently, it could be said that, though both were taxes with respect to property, they touched different aspects of the above subject matter; the first was a F tax on the aspect of ownership or occupation of property; the second on the aspect of income from property. The decision of this Court in B hagwan Dass Jain v. Union, [1981] 2 SCR 808 is also to the same effect. ·

22Copy pinpoint22. The Hingir -Rampur Coal Co. case [1961] 2 SCR 537 was G concerned with the validity of an Orissa Act which sought to levy a cess not exceeding 5% of the valuation of the coal stacked at pit's mouth. The question was whether this 'fas in pith and substance a duty of excise (Entry 84 of List I) or a fee to regulate and control the· coal mining industry (Entry 66 and 23 of List II). Here again though.the method adopted for recovering the impost was the same as that of an · H

968 SUPREME COURT REPORTS [1989] 2 S.C.R.

excise duty, the validity of the tax was upheld as it related to the aspect ·~ A of control over the industry rather than to the aspect of an impost on production of coal.

23Copy pinpoint23. Sainik Motors case [1962] 1SCR517 furnishes an illustration which comes nearer to the question at issue before us. In that case a B Rajasthan Act purported to levy a tax on passengers and goods measuring it by reference to the fares and freights charged by ,.._ operators for carriage of such passengers or goods. If it were to be ) treated as a tax on 'fares and freights' it would be a tax on income·

c which the State legislature could not levy. But, if treated as a tax on passengers and goods carried by road it was valid under Entry 56 of List II. The validity of the Act was upheld on the latter ground, the court pointing out that the tax was on goods and passengers though - measured by reference to fares and freights. This dichotomy could perhaps also be justified on the basis of the language of Entry 89 of List I. That entry makes a distinction between the two types of imposts and illustrates that two different aspects of the same matter viz. taxes o in respect of vehicles carrying passengers or goods can form separate matters for taxation.

24Copy pinpoint24. In the light of the above entries and decisions, I think that the learned Attorney General is right in urging that, merely because .y the 1987 Act as well as the State Acts levy taxes which have ultimate E impact on persons who enjoy certain luxuries, the pith and substance of both cannot be considered to be the same. The object of a tax on luxury is to impose a tax on the enjoyment of certain types of benefits, facilities and advantages on which the legislature wishes to impose a curb. The idea is to encourage society to cater better to the needs of those who cannot afford them. For instance, a luxury tax may, to cite a F catchy example, encourage construction of "janata" hotels rather than -l., five star hotels. Such a tax may be on the person offering the luxury or the person enjoying it. It may be levied on the basis of the amount received for providing, or the amount paid for or expended for enjoy- ,f# ing, the luxury. Conceivably, it could be on different bases altogether. The object of an expenditure tax-and, that, conceptually, there can G be an expenditure tax is borne out by Azam Jha's case (supra)-is to discourage expenditure ·which the legislature considers lavish or ',...-· ostentatious. The object of the first would be to discourage certain types of living or enjoyment while that of the second would be to discourage people from incurring expenditure in ·unproductive or un- desirable channels. If a general Expenditure Tax Act, like that of H 1957, had been enacted, no challenge to its validity could have been

HOTEL FEDERATION v. U.0.1. {RANGANATHAN, J.] 969

'+ raised because it incidentally levied the tax on expenditure incurred on A luxuries. The fact that there will be sonie overlapping then or that here there is a good deal of such overlapping, because the States have chosen to tax only some types of luxuries and the Centre to tax, atleast for the time being, only expenditure which results in such luxuries, should not be allowed to draw a curtain over the basic difference between the two categories of imposts. For instance, if the conflict B . alleged had been between the present State Acts and an Act of Parlia- lment taxing expenditure incurred in the construction of theatres or the l.naintenance of race .horse establishments or the like, there would

- have been no overlapping at all and the pith and substance of the central tax could well be described as "expenditure" and not "luxuries". This distinction is not obliterated merely because of the circumstance that both legislatures have chosen to attack the same c area of vulnerability, one with a view to keep a check on 'luxuries' and the other with a view to curb undesirable 'expenditure'.

For these reasons, I agree with my learned brother Venkata- chaliah, J. that the validity of the three impugned enactments has to be D upheld and these writ petitions and appeals dismissed.

N.P.V. Petitions dismissed. -~.