CASES REFERRED AT PARAS 1. 13 STC 529(SC) - East India Tobacco v. State of Andhra Pradesh (Foll) 1 2. 88 Supp 3 SCR 155 - P.M Ashwathnarayana Shetty v. State of Karnataka (Foll) 1 3. 74 STC 102(SC) - Federation of Hotel and Restaurant Association of India v. Union of India (Foll) 1 4. 77 STC 253 - Kerala Hotel and Restaurant Association v. State of Kerala (Foll) 1 5. (1970) 1 SCC 189 : AIR 1970 SC 1133 - The Twyford Tea Co. Ltd. v. The State of Keraia (Foll) 1 6. (1993 (1) SCC 364) - Gannon Dunkearley and Co. v. State of Rajasthan (Foll) 1 7. 96 STC 130 - Venkateshwara Theatre v. State of Andhra Pradesh (Foll) 2 8. (1973 411 US 1) - San Antonio independent School District v. Rodrigues (Foll) 2 9. (1974) 4 SCC 422 : AIR 1974 SC 2272 - S. Kodar v. State Of Kerala (Foll) 7 10. (1983) 4 SCC 45 - Hochest Pharmaceuticals Ltd. v. State of Bihar (Foll) 8

Sri B.V Katageri, Advocate for Petitioners

Sri K.M Shivayogiswamy, Govt. Pleader for Respondents

Tirath S. Thakur, J.:—

In the field of taxation, the Legislature enjoys an extremely wide discretion as regards classification of items and the choice of persons, method and rates for the levy of taxes that it may decide to impose. While fiscal Statutes are not totally immune from challenge on the touch-stone of Article 14 of the Constitution, so long as the legislature refrains from a clear and hostile discrimination, the Courts would not substitute their own standards and classifications for those made by the legislature. It is also equally well settled that the State does not have to tax everything in order to tax something and that its choice of picking up Districts, Batches, Persons, Methods and even rates for taxation if made reasonable ought to be respected by the Courts. See 1) East India Tobacco v. State of Andhra Pradesh . 13 STC 529SC. P.M Ashwathnarayana Shetty v. State of Karntaka . 88 Supp 3 SCR 155. 3. Federation of Hotel and Restaurant Association of India v. Union of India . 74 STC 102SC. 4. Kerala Hotel and Restaurant Association v. State of Kerala . 77 STC 253. 5. The Twyford Tea Co. Ltd. v. The State of Kerala . 1970 1 SCC 189 6. Gannon Dunkerley and Co. v. State of Rajasthan . 1993 1 SCC 364..

2. In Venkateshwara Theatre v. State of Andhra Pradesh the Supreme Court quoted with approval the following passage from the decision of San Antonio Independent School District v. Rodrigues where Stewart J. speaking for the majority made the following classic statement.

“No scheme of taxation whether the tax is imposed on property in question or purpose of goods and services, has yet been devised which is free of all discriminatory impact. In such a complex area in which no perfect alternatives exists the Court does well not to impose too rigorous standards of scrutiny lest all local fiscal schemes becomes subjects of criticism under the equal protection clause”.

3. The petitioner Company is engaged in Hotel business which was in terms of Entry 8(V)(a) of the II Schedule to the Karnataka Sales Tax Act, 1957, assessed to tax under the Act at the rate of 4% upto the 31st of March 1996. By Karnataka Taxation Laws (Amendment) Act, 1997 (Act No. 7/1997), the rate of tax leviable under the said entry has been raised from 4% to 8%. The Act apart from other amendments substituted sub-sections (1), (2) and (3) of Section 17 of the parent Act, which deals with the composition method of payment of, tax payable under the Act Sub-Section (4) of Section 17 as it stood earlier and the table below Clause (i) thereof has been substituted by the following:—

“(4)(i) Notwithstanding anything contained in sub-sections (1) to (3), but subject to such conditions and in such circumstances as may be prescribed, the assessing authority or the area may, if a hotelier or a restaurateur (other than a hotelier or a restaurateur engaged in reselling of goods purchased by him in the course of inter-State trade or commerce or a dealer engaged in vending of liquour including beer), whose total turnover in a year is not exceeding fifty lakh rupees, so elects, accept in lieu of the amount of tax payable by him under this Act during any year, by way of composition, an amount at the rate of four per cent of his total turnover.”

4. In the present Writ Petition, the petitioner has called in question the validity of the Amending Act to the extent the same amends Entry 8(V)(a) and substitutes the provisions contained in Section 17(4)(1) by the provisions extracted above.

5. Mr. Kategeri, Learned Counsel for the petitioner, did not pursue for long his challenge to the amendment of Entry 8(5)(a) of the II Schedule which as stated earlier simply enhances the rate of tax prescribed from 4% to 8%. The Legislative competence of the State to levy a sales tax on the sale of the items that fall under the said Entry, not being in dispute, the petitioner had even otherwise an uphill tax in assailing the enhancement in the rate of tax. As noticed, at the very outset, the Legislature enjoys considerable freedom in not only choosing the items which it would like to tax but also the rates at which such tax may be levied. In having chosen to enhance the rate, prescribed for the sale of items falling under Entry 8(5)(a), from 4% to 8% it committed no constitutional aberration, which may call for correction from this Court. I have therefore no hesitation in rejecting the challenge to the amendment in so far as the same pertains to Entry 8(5)(a) of the II Schedule to the Act is concerned.

6. Coming then to the only other argument advanced by Mr. Katageri, the challenge to Section 17(4)(1) as substituted by the Amending Act was entirely founded on the plea that the Legislature had by restricting the composition method of payment of taxes to cases where the total turnover of a hoteliar or a Restaurier does not exceed Rs. 50 lakhs, brought about a hostile discrimination between Horteliers and Restauriers with less than Rs. 50 lakhs turnover on one hand and those with turnovers exceeding the said figure. The petitioners annual turnover being in excess of 50 lakhs it is in terms of the substituted provision not entitled to claim the benefit of composition, which on a plain reading of the provision is admissible only to Hoteliers or Restauriers with a turnover of less than Rs. 50 lakhs per annum. The question in other words is whether the classification made by the Legislature for purposes of granting the benefit of composition under Section 17 of the Act between assessees whose income is more than 50 lakhs and those whose income is less than the said amount is discriminatory so as to fall foul of Article 14 of the Constitution. The answer must in my opinion be in the negative. I say so because a classification based on economic considerations is permissible under Article 14 of the Constitution. Assessees carrying on Hotel or Restaurant business, having a turnover of less than Rs. 50 lakhs per annum could be considered to be a class distinct from others whose sales turnover may be in excess of the said amount. In permitting assessment and recovery of sales tax under the Act, by composition method envisaged under Section 17, only in cases where the turnover of the Assessees from Hotel or Restaurant business was less than Rs. 50 lakhs p.a, the Legislature did not either make a classification that was irrational nor could it be said that the classification made had no nexus with the object sought to be achieved. The object behind the amendied provision in so far as it restricted the right to invoke the composition method to only assessees with a turnover of less than Rs. 50 lakhs per annum was to apply a lower tax rate to sales conducted by a Hotelier or Restaurateur with less than the prescribed level of turnover. By doing so, the Legislature intended to subject those eating at smaller Hotels and Restaurants to a lower rate of tax by permitting the Hotelier & Restaurateur to pay taxes by the composition method. Classifying such smaller establishments which generally cater to the middle and lower status of the society for the purpose of levy of a lower rate of tax by adoption of the composition method of payment cannot be said to be either artificial, illusory or irrational nor can the classification be dubbed as one without an intelligible differential.

7. Hotel and Restaurants turning out business, in excess of Rs. 50 lakhs p.a, cannot equate themselves with a vast majority of humbler eating places, who are not so popular either because of lack of resources to boost sales or because of lack of facilities demanded by the discerning eaters. A classification based on the magnitude of the business turned out by the dealer cannot therefore be said to be per se discrimatory so as to be offensive to Article 14 of the Constitution. It is noteworthy that the Act does not discriminate between those falling in one or the other of the two categories envisaged by the amended provision. It operates uniformly for all those that fall in one or the other category of dealers. It is therefore difficult to hold that the amended provision is discrimatory, just because the nature of business being carried on by the two classes of the assessees is the same. I draw sustenance for the view taken by me from the decision of the Supreme Court in S. Kodar v. State Of Kerala . 1974 4 SCC 422 where one of the questions that fell for consideration was whether different rates of tax could be imposed upon different dealers depending upon their turn-overs. Answering the question in the affirmative the Court held that classification of dealers on the basis of their turn-over for the purpose of graded imposition was permissible so long as it was based on a differential criteria relevant to the legislative object sought to be achieved. The following passage from the decision is in this regard apposite:—

“The last contention namely that the provisions of the Act impose different rates of tax upon different dealers depending upon their turnover which in effect means that the rate of tax on the sale of goods would vary with the volume of the turnover of a dealer and are, therefore, violative of Article 14 is also without any basis. Classification of dealers on the basis of their respective turnover 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 ciassification, 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, then 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 larger dealer occupies a position of economic superiority by reason of his greater volume of 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 is within the exclusive province of legislature. The only question for the Court to consider is whether there is rationality in the belief of the legislature that capacity to pay the tax increases, by and large, with an increase of receipts.”

(Emphasis supplied)

8. Reference may also be made to Hochest Pharmaceuticals Ltd. v. State of Bihar . 1983 4 SCC 45. where A.P Sen, J. speaking for the Court observed that on questions of economic Regulation and related matters, the Court must defer to legislative judgment, and that the equality clause of Article 14, did not prevent the State from classifying a class of persons who must bear a burden, heavier than the rest. The Court affirmed the view expressed in Kodar's case that the capacity to pay tax increased with an increase in receipts. The legal position was pithily summed up in the following para from the decision:

“On questions of economic regulations and related matters, the court must defer to the legislative judgment. When the power to tax exists, the extent of the burden is a matter for the discretion of the law-makers. It is not the function of the Court to consider the propriety or justness of the tax, or enter upon the realm of legislative policy. If the evident intent and general operation of the tax legislation is to adjust the burden with a fair and reasonable degree of equality, the constitutional requirement is satisfied. The equality clause in Article 14 does not take from the State a power to classify a class of person who must bear the heavier, burden of tax. The classification having reasonable basis does not offend against that clause merely because it is not made with mathematical nicety or because in practice it results in some inequalities. In Kodar case, the constitutional validity of a similar levy was upheld on the capacity to pay.

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The economic wisdom of a tax is within the exclusive province of the legislature. The only question for the court to consider is whether there is rationality in the belief of the legislature that capacity to pay the tax increases by and large with an increase of receipts. The view taken by the Court in Kodar case, is consonance with social justice in an egalitarian State and therefore the contention based on Article 14 of the Constitution must fail.”

(Emphasis supplied)

9. In the result, this Writ Petition fails and is hereby dismissed.