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PETITIONER: S. KODAR

       Vs.

RESPONDENT: STATE OF KERALA

DATE OF JUDGMENT17/04/1974

BENCH: MATHEW, KUTTYIL KURIEN BENCH: MATHEW, KUTTYIL KURIEN RAY, A.N. (CJ) ALAGIRISWAMI, A. GOSWAMI, P.K. SARKARIA, RANJIT SINGH

CITATION:  1974 AIR 2272            1974 SCC  (4) 422  CITATOR INFO :  F          1980 SC 271  (4)  RF         1983 SC 394  (8)  F          1983 SC1019  (6,9,10,85,86)  F          1985 SC  12  (7,9,11,12)  F          1990 SC 913  (26)

ACT: Tamil  Nadu Additional Sales Tax  Act.  1970--Constitutional validity--Whether  outside  the  scope  of  entry  54,  List II--Whether  violates fundamental right under Art.  19(1)(f) and (g). Constitution of India, 1950--Art. 19(1)(f) and (g) Entry 54. List II, Schedule VII.

HEADNOTE: The  Tamil  Nadu  Additional  Sales-tax  Act  1970   imposed additional  sales-tax of 5% on a dealer whose  annual  total turnover exceeded Rs. ten lacs.  Writ petitions  questioning the constitutional validity of the Act were dismissed by the High  Court.  In appeal it was contended that (i) the  State legislature  had  no power to enact the Act as the  tax  was outside  the  scope of entry 54 of List II;  (ii)  that  the provisions of the Act violated the fundamental rights of the appellant  under Art. 19(1)(f) and (g) of  the  Constitution and  (iii) that the provisions of the Act imposed  different rates  of  tax  upon different dealers  depending  on  their turnover  and were, therefore. violative of Art. 14  of  the Constitution. Dismissing the appeal. HELD  :  (1)  The  contention of  the  appellants  that  the additional sales-tax is not a tax on sales but on the income of the dealers is without any basis.  The additional tax  is really a tax on the sale of goods.  The object of the Act is to increase the tax on the sale or purchase of goods imposed by  the Tamil Nadu General Sales-tax Act, 1959 and the  fact that  quantum  of  the additional  tax  is  determined  with reference  to  the  sales-tax imposed would  not  alter  its character.   The additional sales-tax is to be imposed  only if  the turnover of a dealer exceeds Rs. 10 lacs.  It is  in reality a tax on the aggregate of sales effected by a dealer

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during a year. [123D-E] Kilikar  v.  Sales  Tax Officer, 21 S.T.C. 253,  and  A.  S. Ramachandra  Rao V. State of Andhra Pradesh, 25 S.T.C.  133, approved. (2)(a)  It  cannot be said that the provisions  of  the  Act imposed  any unreasonable restrictions upon the  appellants’ right to carry on trade.  It is no doubt true that every tax imposes  some  restrictions  upon  the  right  to  carry  on business but it would not follow that the imposition of  tax in  question  was  an  unreasonable  restriction  upon   the appellants’ fundamental right to carry on trade.   Generally speaking,  the  amount  or  rate  of  a  tax  is  a   matter exclusively within legislative judgment and as long as a tax retains  its  avowed character and does not  confiscate  the property  to  the  State  under the  guise  of  a  tax,  its reasonableness is outside the judicial ken. [123F-124A] (b)  It  is not necessary that the dealer should be  enabled to pass on the incidence of the tax on sale to the purchaser in  order  that  it might be a tax on  the  sale  of  goods. Although the legal incidence of a tax on sale of goods under the Act falls squarely on the dealer, it may be that he  can add the tax to the price of the goods sold and thus pass  it on to the purchaser.  It is not possible to say that because a dealer is disabled from passing on the incidence of tax to the  purchaser to provisions of the Act impose  unreasonable restriction  upon the fundamental rights of  the  appellants under Art. 19(1) (f) or 19(1) (g). [124B-C, C] J.   K.  Jute Mills Co. v. State of U.P., [1962] 2 S.C.R.  1 at  13,  and Konduri Buchirajaligam v. State  of  Hyderabad, [1958] 9 S.T.C. 397, referred to. (3)  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.  A 122 flat  rate is thought to be less efficient than  the  graded one as an instrument of social justice.  The economic wisdom of  a tax is within the exclusive province  of  legislature. The only question for the Court to consider it 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.  An attempt to proportion the  payment to  capacity to pay and thus bring about a real and  factual equality cannot be ruled out as irrelevant in levy of tax on the  sale of purchase of goods.  The object of a tax is  not only to raise revenue but also to regulate the economic life of the society. [124H-125D; 126A-B]

JUDGMENT: ORIGINAL JURISDICTION : Writ Petition No. 363 of 1969. Petition Under Article 32 of the Constitution of India.                             WITH CIVIL APPEALS Nos. 1010-1011 OF 1973. From the Judgment and Order dated the 6th April, 1972 of the Madras High Court in W.P. Nos. 3826-3827/70.                             AND CIVIL APPEALS Nos. 2552-2559/72, 179-180/74, 2/73, 2684/ 72, 1022/73. From the Judgment and Order dated 11th August 1971 of Madras High  Court in W.P. Nos. 3551-52, 3564-3567,  4056-57/  70,, 3967-668/70, 3934/70, 3960/70 and 496/71 respectively.                             AND CIVIL APPEAL No. 967 OF 1971. From  the Judgment and Order dated 19th August, 1971 of  the

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Madras High Court in WP No. 4469/70.                          AND CIVIL APPEAL Nos. 929-930 OF 1973. From  the Judgment and Order dated the 11th August, 1971  of the Madras High Court in W.P. No. 293 of 1971. K.   Jayaram  for  the Petitioners (In WP. 363/69)  and  for the, Appellants in CAS.  Nos. 1010-1011/73, 2552-2559/72 and 2/73. D. D. Sharma for the Appellant in CA 2684/72. Mrs.  S. Gopalakrishnan for the Appellant In CAS. 927/73 and 179-80/74. K.   S.  Ramamurthy and B. R. Agarwala for the appellant  in CA 1022/73. K.   S. Ramamurthy and D. N. Gupta for the Appellant in CAS. 929-30/73. Dr.   Syed Mohammed and K. M. K. Nair for Respondent in  WP. 363/69. S.   Govind  Swaminadhan, Advocate General for the State  of Tamil  Nadu,  A.  V. Rangam, K. Venkataaswami  and  Miss  A. Subhashini for Respondent In all the appeals. 123 The Judgment of the Court was delivered by MATHEW, J.-The question raised in the Civil Appeals are sub- stantially  the same as those raised in the  writ  petition. We  will deal with the Civil Appeals and our decision  there will govern and dispose of the writ petition. The appellants filed writ petitions before the High Court of Madras challenging the validity of the Tamil Nadu Additional Sales  Tax  Act  (Act No. 14  of  1970),  1970  (hereinafter referred  to  as  the  Act) on the  ground  that  the  State Legislature  has  no  competence  to  enact  it,  that   its provisions  violated their fundamental rights under  article 19(1)(f), 19(1)(g) and article 14 of the Constitution.   The High  Court  dismissed  the  writ  petitions  by  a   common judgment.   These  appeals  are  filed on  the  basis  of  a certificate from the High Court. The material provisions of the Act are as follows.   Section 2(1)  provides  that the tax payable under  the  Tamil  Nadu General Sales Tax Act, 1950, shall, in the case of a  dealer whose total turnover for a year exceeds 10 lakhs of  rupees, be increased by additional tax at the rate of 5 per cent  of the  tax  payable  by  that dealer for  that  year  and  the provisions  of the Tamil Nadu General Sales Tax  Act,  1959, shall apply in relation to the additional tax payable  under the said Act. Sub-section  (2) of s. 2 says that notwithstanding  anything contained  in  the Tamil Nadu General Sales  Tax,  1959,  no dealer  referred to in sub-section (1) shall be entitled  to collect  the  additional  tax payable under  the  said  sub- section. Sub-section (3) of s. 2 states that any dealer who  collects the  additional  tax  payable  under  sub-section  (1),   in contravention of the provisions of sub-section (2) shall  be punishable  with  fine  which may  extend  to  one  thousand rupees. Sub-section  (1)  of s. 3 says that the tax payable  by  any importer  or wholesale dealer under the Tamil Nadu Sales  of Motor  Spirit Taxation Act, 1939, shall be increased  by  an additional  tax  at  the rate of five per cent  of  the  tax payable  under the said Act and the provisions of  the  said Act  shall  apply in relation to the tax payable  under  the said Act.  Sub-sections (2) and (3) of s. 3 are to the  same effect as sub-sections (2) and (3) of s. 2 Section 4 relates to the rule making power.  In the exercise of  this power, rules have been framed which are called  the

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Tamil Nadu Additional Sales Tax Rules, 1970. The appellants contend firstly that the legislature of Tamil Nadu has no power to enact the Act as the tax imposed by the Act  is  a  tax on the income of the dealer,  and  that  the imposition  of such a tax is outside the scope of  entry  54 List  II. Secondly, they contend that the provision  of  the Act  in so far as it prohibits a dealer from collecting  the tax  from  purchaser, is an  unreasonable  restriction  upon their  fundamental right to carry on trade under article  19 (1) (g) and of their right to hold property under article 19 (1)  (f).  Thirdly, they submit that the provisions  of  the Act are violative of their fundamental 124 right  under article 14 in that they impose different  rates of  tax on the sale of same goods according to the  turnover of the dealer. As regards the contention that the State Legislature has  no power  to  pass  the  measure,  we  are  of  the  view  that additional  tax is really a tax on the sale of  goods.   The object  of the Act, as is clear from its provisions,  is  to increase the tax on the sale or purchase of goods imposed by Tamil  Nadu  General Sales Tax Act, 1959 and the  fact  that quantum  of the additional tax is determined with  reference to the sales tax imposed would not alter its character.   It may  be noted that additional tax is to be imposed  only  if the  turnover  of a dealer exceeds Rs. 10 lakhs.  It  is  in reality a tax on the aggregate of sales effected by a dealer during  a  year.   The  additional  tax,  therefore,  is  an enhancement  in the rate of the sales tax when the  turnover of  a dealer exceeds Rs. 10 lakhs a year and it is a tax  on the aggregate of the sales affected by the dealer during the year.   The decision in Ernakulam Radio Company v. State  of Kerala(1)  which  was affirmed by, a Division Bench  of  the Kerala  High Court in Kiliker v. Sales Tax  officer(2)  took that  view.  The same view was taken by the  Andhra  Pradesh High  Court  in  A. S. Ramachandra Rao v.  State  of  Andhra Pradesh.(3)  This is the correct view.  Entry 54 in List  II authorises the state legislature to impose a tax on the sale or purchase of goods.  So, the contention of the  appellants that  the additional sales tax is not a tax on sales but  on the income of the dealer is without any basis. As regards the second contention that the provisions of  the Act  ,are  violative  of  the  fundamental  rights  of   the appellants  under article 19(1)(f) and 19(1)(g), as the  tax is  upon  the  sale  of  goods  and  is  not  shown  to   be confiscatory,  it cannot be said that the provisions of  the Act   impose   any  unreasonable   restrictions   upon   the appellants’ right to carry on trade.  It is, no doubt,  true that  every tax imposes some restriction upon the  right  to carry  on  a  business; but it would  not  follow  that  the imposition  of  the  tax  in  question  is  an  unreasonable restriction upon the appellants’ fundamental right to  carry on  trade.  Generally speaking, the amount or rate of a  tax is a matter exclusively within the legislative judgment  and as long as a tax retains its avowed ,character and does  not confiscate  property to the State under the guise of a  tax, its reasonableness is outside the judicial ken. But  it was contended that as the dealer is prohibited  from passing  ,on  the  incidence of tax to  the  purchaser,  the additional tax, unlike sales tax, is a tax on income of  the dealer which he must pay whether he makes any profit or  not and  is,  therefore,  an unreasonable  restriction  ,on  his fundamental rights under article 19 (1 ) (g). The legal incidence of tax on sale of goods under the  Tamil Nadu  General Sales Tax, 1959 falls squarely on the  dealer.

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It may be that he can add the tax to the price of the  goods sold  and thus pass it on to the purchaser.  But it  is  not necessary  that the dealer should be enabled to pass on  the incidence of the tax on sale to the purchaser in order  that it might be a tax on sales of goods. (1) 18 S. T. C. 445,  449.             (2) 21 S. T. C. 253. (3)  25 S. T. C. 133.                             125 In J.K. Jute Mills Co. V. State of U.P.(1) this Court  said, although it is true that sales tax is, according to accepted notions,  intended  to  be  passed  on  to  the  buyer,  and provisions  authorising  and regulating  the  collection  of sales  tax  by  the seller from the purchaser  are  a  usual feature  of  sales tax legislation, it is not  an  essential characteristic of a sales tax that the seller must have  the right to pass it on to the consumer, nor is the power of the legislature  to  impose a tax on sales  conditional  on  its making  a provision for sellers to collect the tax from  the purchasers.               In   Konduri  Buchirajalingam  v.   State   of               Hyderabad,(2) this Court said ;               "It  is  then  said  that  the  sales  tax  is               essentially  an indirect tax and therefore  it               cannot  be demanded of the  appellant  without               allowing  him to recoup himself by  collecting               the  amount of the tax from the  persons  with               whom he deals.  This Court has already decided               in the case of Tap Iron and Steel Co.  Limited               v. The State of Bihar [1958] 9 S.T.C. 267 that               in law a sales tax need not be an indirect tax               and that a tax can be a sales tax though  the,               primary liability for it is put upon a  person               without  giving  him any power to  recoup  the               amount  of  the tax payable,  from  any  other               party." As we said, the additional tax is a tax upon sales of  goods and not upon the income of a dealer and so long as it is not made out that the tax is confiscatory, it is not possible to accept  the contention that because the dealer  is  disabled from passing on the incidence of tax to, the purchaser,  the provisions  of  the Act impose an  unreasonable  restriction upon the fundamental rights of the appellants under article: 19(1)(g) or 19(1)(f). 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  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 turn over 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

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position  of economic superiority by reason of  his  greater volume of his business.. (1) [1962] 2. S. C. R. 1 at 13. (2) [1958] 9 S, T. C. 397. 126 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.               "Certain  it is that merchants have  faith  in               such a correspondence and act upon that faith.               If  experience  did not  teach  that  economic               advantage goes along with larger sales,  there               would  be an end to the hot pursuit  for  wide               and  wider  markets.  In  brief,  there  is  a               relation of correspondence between capacity to               pay   and   the  amount  of   business   done.               Exceptions,  of  course, there are.   The  law               builds  upon  the  probable,  and  shapes  the               measure  of the tax accordingly. At  the  very               least, an increase of gross sales carries with               it  an  increase of  opportunity  for  profit,               which  supplies a rational basis for  division               into classes, at all events when coupled, with               evidence of a high degree of probability  that               the opportunity will be fruitful".               (See  the  dissenting judgment(1)  of  Justice               Cardozo, Justice Brandeis and Justice Stone). The reasoning of the minority in that case appeals to us  as more  in  consonance with social justice in  an  egalitarian state than that of the majority. As  we said, a large dealer occupies a position of  economic superiority by reason of his volume of business and to  make the tax heavier on him both absolutely and relatively is not arbitrary  discrimination but an attempt to  proportion  the payment  to capacity to pay and thus arrive in the end at  a more  genuine  equality.   The  capacity  of  a  dealer,  in particular  circumstances, to pay tax is not  an  irrelevant factor  in fixing the rate of tax and one index of  capacity is  the  quantum  of turnover.  The argument  that  while  a dealer  beyond certain limit is ,obliged to pay higher  tax, when  others  bear  a  less  tax,  and  it  is  consequently discriminatory,  really  misses the point  namely  that  the former  kind  of  dealers  are in  a  position  of  economic superiority by reason of their volume of business and form a class  by themselves.  They cannot ,be treated as on  a  par with comparatively small dealers.  An attempt to  proportion the  payment to capacity to pay and thus bring about a  real and  factual equality cannot be ruled out as  irrelevant  in levy of tax on the sale or purchase of goods.  The object of a tax is not only to ,raise revenue but also to regulate the economic life of the society. We  dismiss the appeals and writ petition with  costs.   One set of hearing fee. P.B.R.                 Appeals and petitions dismissed. (1)  Stewart Dry Goods Co. v. Lewis, 294 U. S. 550. 127