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PETITIONER: STATE OF KERALA

       Vs.

RESPONDENT: ARAVIND RAMAKANT MODAWDAKAR & ORS.

DATE OF JUDGMENT:       10/08/1999

BENCH: R.C.Lahoti, N.Santosh Hedge

JUDGMENT:

SANTOSH HEGDE, J.

     The  State  of  Kerala  has  preferred  these  appeals against  the judgment of a Division Bench of the High  Court of  Kerala dated 11.12.1995 in W.A.  No.1180/1995 and  other connected  appeals whereby the appellate Bench of the Kerala High  Court reversed the judgment of a learned Single  Judge of  the  said High Court dated 28.9.1995 in a batch of  writ petitions   being  O.P.    Nos.12240/1994-F  and   connected matters.

     The  original writ petitioners, who are respondents in the  various appeals before us, filed writ petitions  before the  High  Court of Kerala, challenging  the  constitutional validity  of the provisions contained in Item 4(1)(f) of the Schedule to the Kerala Motor Vehicles Taxation Act, 1976, as amended  by  Section  4  of the  Kerala  Finance  Act,  1994 (hereinafter referred to as ‘the Act’) whereby the State had enhanced  the  rate  of  quarterly tax  in  respect  of  the contract carriage vehicles operating inter-State.  They also sought  certain  other  incidental   reliefs.   The  primary contention  of  the petitioners in these petitions was  that the  reduction  of tax liability in favour of  the  vehicles covered  by  intra-State  contract carriage  permit  without granting  the same benefit to inter-State contract carriages amounted to an arbitrary discrimination between the vehicles of  persons similarly situated, hence, the same is violative of  Article  14 of the Constitution of India.   The  learned Single  Judge  who heard the batch of writ petitions  by  an elaborate  judgment came to the conclusion that the contract carriages  covered by intra-State permit formed a  different class  for  the  purpose of levying motor  vehicles  tax  as compared  to contract carriages which are covered by  inter- State  permits.   After discussing the various case-laws  on the subject, he held that the legislature has under Entry 56 or 57 of List II of the 7th Schedule a power to impose taxes which  are compensatory and/or regulatory in nature, and  by virtue  of the power vested in the State under Section 22 of the  Act,  the  State has the power to reduce the  tax  with reference to a particular type of vehicle in public interest which  power  had  been exercised by the  State  rightly  by reducing  the  levy of tax in favour of  contract  carriages

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covered by intra-State permits.  He negatived the contention of  the  respondent-writ petitioners that this reduction  of tax  in favour of contract carriages covered by  intra-State permits  only  violated Article 14 of the Constitution.   He upheld  the  contention  of  the  State  that  the  contract carriages   covered  by  inter-State   permits  did  form  a different  class  of  contract   carriages  as  compared  to contract carriages which are covered by inter-State permits. He  also  held that this classification within the class  of contract  carriages was a reasonable classification for  the purpose of levy of tax.  Having come to the said conclusion, he proceeded to dismiss the writ petitions.

     In  appeal, the Division Bench of the said High  Court took  a contrary view and held that the above classification within  the class of contract carriages based on the  nature of  permits  covering these vehicles would be arbitrary  and violative  of Article 14 of the Constitution since the  said classification had no nexus with the object of taxation.  It also  held  that  the  motor   vehicles  taxation  being   a compensatory  and regulatory tax, there could be no two-tier tax  measure  based  on the nature of permit held  by  these contract  carriages  and if there was any justification  for the  State to reduce the tax burden on the class of contract carriages  covered  by  intra- State permits to  lessen  the hardship  to its operators, the same would equally apply  to the   operators  of  the   contract  carriages  covered   by inter-State permits also.

     In  these  appeals  on  behalf of  the  State,  it  is contended  by  Mr.  C.S.  Vaidyanathan,  learned  Additional Solicitor  General, that impugned classification is based on well  defined, intelligible differentia which is  reasonable and  would  not offend Article 14 of the  Constitution.   He also  contended  that the State had ample power  for  giving exemption  or  reduction of tax under Section 22 of the  Act and  the concession given in the instant case to intra-State contract carriages was with an object to reduce the hardship of this category of vehicle owners which hardship, according to  him,  was  not  there so  far  as  inter-State  contract carriage  owners are concerned.  He also contended that  the legislature  had ample power under the Act if it so  chooses to  tax  a  particular  class of  vehicle  differently  from another  class of vehicle and the courts cannot review these decisions   if  there  is  no   abuse  of  its  powers   and transgression   of  the  legislative   function.   He   also questioned  the  wisdom  of the Division Bench of  the  High Court  in  assessing  the hardships suffered  by  particular owners  of the contract carriages, taking into consideration hypothetical  factors such as the possible distances covered by  these  two  types of contract  carriages.   Per  contra, defending  the  judgment  of the appellate Bench,  Mr.   TLV Iyer,  learned  senior  counsel appearing on behalf  of  the respondents,  contended that as has been held by a catena of decisions  of this Court, the taxing power under Entry 56/57 of  List  II  of  the  7th  Schedule  being  regulatory  and compensatory  in nature, the same cannot be  discriminatory, He attacked the reasoning of the classification which, inter alia, relied upon the difference in seating capacity between the  contract  carriages covered by inter-State permits  and those  covered  by  intra-  State   permits.   It  was   his contention that the difference in seating capacity cannot be a  ground to form an artificial classification from  amongst similar   group  of  vehicles  or  operators.   He   further contended  that,  as a matter of fact, inter-State  vehicles

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have  a  heavier  axel weight and power  hence  would  cause greater  damage and wear and tear to the roads and since the measure of taxation is compensatory in nature, if at all the power  of exemption is to be exercised under Section 22, the same  should  have  been done in favour of  the  inter-State vehicles rather than in favour of intra-State vehicles.

     We  have  considered  the arguments on behalf  of  the parties  so  also  perused both the judgments  of  the  High Court.   Though  originally  there was a  challenge  to  the constitutional  validity of the provision contained in  Item 4(1)(f)  of the Schedule to the Act, as amended by Section 4 of the Kerala Finance Act, 1994 and also to the Notification issued under Section 22 of the Act whereby the State reduced the  burden  of  levy  on vehicles  covered  by  intra-State contract  carriage permits, during the course of  arguments, it  seems the challenge was confined only to the  difference in  levy giving up the challenge of constitutional validity. Obviously,  as  we  see because of the fact  that  the  writ petitioners   would  not  gain   anything  by  getting   the notification  quashed but were interested in getting similar benefits  for themselves which could not have been  achieved by getting the Notification quashed.

     Certain  fact-situations  in this case  are  admitted. The authority of the State to levy tax under its legislative power  based  on  Entries  56 or 57 of List II  of  the  7th Schedule  is  admitted.   It is also an admitted  fact  that under sub-section (1) of Section 3 of the Act, the State has power  to  levy tax on every motor vehicle used or kept  for use  in  the  State at the rates specified  for  such  motor vehicles  in  the  Schedule  to   the  Act.   Prior  to  the Notification  in  question, the rates of tax as between  the inter-State  vehicles  and intra-State vehicles were  equal. By virtue of the Notification issued under Section 22 of the Act,  the  State  reduced the rate of taxation  on  contract carriage vehicles covered by intra-State permits to Rs.500/- per  seat  per quarter from Rs.1,000;  without reducing  the same  for  the  contract carriages  covered  by  inter-State permits.   It  is  also a settled position in law  that  the actual user of the road by the vehicles which are covered by the  requisite permits is not always a relevant factor since the  taxable event under Section 3(1) of the Act occurs when the  vehicle  is  used  or is kept for  use  in  the  State. Therefore,  once  the vehicle becomes liable for payment  of tax  the extent and quantity of use by the vehicle is not  a decisive  factor for the purpose of levy of tax as could  be seen  from  the judgment of this Court in the case  of  M/s. International  Tourist Corporation etc.  etc.  v.  State  of Haryana  & Ors.  (AIR 1981 SC 774).  Coming to the power  of the State in legislating taxation law, the court should bear in  mind  that the State has a wide discretion in  selecting the persons or objects it will tax and thus a Statute is not open  to attack on the ground that it taxes some persons  or the  objects and not others.  It is also well-settled that a very  wide  latitude is available to the Legislature in  the matter  of classification of objects, persons and things for the  purpose  of taxation.  While considering the  challenge and  nature that is involved in these cases, the courts will have  to bear in mind the principles laid down by this Court in  the case of M/s.  Murthy Match Works etc.  etc.  v.  The Asstt.   Collector  of  Central  Excise (AIR  1974  SC  497) wherein    while    considering     different    types    of classifications, this Court held "that a pertinent principle of  differentiation, which was, visibly linked to productive

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process,  had  been adopted in the broad  classification  of power-users  and manual manufacturers.  It was irrational to castigate  this  basis as unreal.  The failure  however,  to mini-  classify  between large and small sections of  manual match  manufacturers  could not be challenged in a Court  of law, that being a policy decision of Government dependent on pragmatic  wisdom  playing on imponderable forces  at  work. Though refusal to make rational classification where grossly dissimilar  subjects  are  treated by the law  violates  the mandate   of   Article  14,  even   so,   as   the   limited classification  adopted in the present case was based upon a relevant  differentia  which had a nexus to the  legislative end  of taxation, the Court could not strike down the law on the  score that there was room for further  classification." Keeping  in  mind the above principles of law, we  will  now proceed  to examine the contentions of the parties in  these cases.   The State in its counter has stated that in view of the  decision  of the Transport Development  Committee,  the State  proceeded  to increase the rate of tax in respect  of the  contract carriages having seating capacity of more than 20 passengers.  The increase was effected for the purpose of having  a uniform pattern in respect of tax structure in all States.   Since the tax in respect of contract carriage Omni Bus’ is the lowest in the State of Kerala when compared with other  States, the State felt the necessity to increase  the same.  Hence, by Notification No.SRO 181/93 an amendment was brought  to  clause (f) of "Item 4" in the Schedule  of  the Taxation  Act.   It is further stated in the said  affidavit that  after the above increase was brought about in  respect of  contract carriages in general, the Government felt  that the  increase  will cause hardship to the contract  carriage operators  having  intra-State  operations.   Therefore,  in exercise  of the power conferred by Section 22 of the Kerala Motor  Vehicles  Taxation  Act, 1976,  the  Government  have enforced  a  reduction  in  respect of the rate  of  tax  in intra-State  contract  carriages.  It is also stated that  a decision  was taken to change the pattern in respect of  the contract  carriage  vehicles  taxation when  the  Government introduced  the  Rural  Finance  Bill  of  1994  and  having considered  the various representations of the operators  of intra-State contract carriages, the Government considered it necessary  to  reduce  the  rate of tax in  order  to  avoid hardship,  the Notification in question reducing the rate of taxation  to  this class of vehicles was introduced.  It  is also  stated  in  the counter affidavit  that  the  contract carriages covered by inter- State permits do form a separate class   as  against  the   contract  carriages  covered   by intra-State  permits  inasmuch  as the former,  namely,  the contract carriages having inter-State permits have a seating capacity  of 35 whereas intra-State carriages have a seating capacity  varying  from 50 to 55.  This is also  a  relevant factor,  according to the State, to classify reasonably  the two  types of contract carriages we have referred to  above. Whereas  the  arguments on behalf of the  writ  petitioners- respondents  have been that both types of contract carriages are  covered by a permit issued under Section 74 of the  Act and,  in fact, there is hardly any difference between  these two  types  of  carriages with reference to  the  nature  of operation  except that in the case of inter-State  carriages they  have the right to go beyond the territorial limits  of the  State  of Kerala while the intra-State  carriages  will have to operate within the territory of the State of Kerala. It  is also contended that if at all the usage of roads is a relevant factor then the intra-State vehicles used the roads within  the  State of Kerala much more than the  inter-State

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vehicles.   Certain  hypothetical examples in regard to  the usage  of  roads  by these vehicles have been cited  by  the petitioners-  respondents  which  found   favour  with   the Division  Bench in the impugned judgment.  It is stated that an  intra-State  contract  carriage   can  travel  from  the North-most  part to the South- most part of Kerala using the roads  in Kerala more than an inter-State contract  carriage which may be travelling outside the State of Kerala within a point   very  close  to  the   boundary  of  Kerala   State. Therefore,  it  is contended that the burden of  road  usage could  be more in the case of intra-State permit holders and the  tax in question being compensatory in nature, there  is no  justification for reducing the tax rate in favour of the intra-State  contract carriages.  We think this argument  of long or short usage of road is purely hypothetical and would not  be  a sole guideline to test the validity of  a  taxing Statute;   even if such Statute is a compensatory/regulatory taxation.   The tax levied under the legislative power found in  Entry  56  or  57  of List II of  the  7th  Schedule  is primarily  a  tax,  though  it may  be  compensatory  and/or regulatory  in  nature  and, therefore,  while  testing  the constitutional  validity  of a taxing Statute it may not  be safe  to  rely upon the hypothetical factors as against  the wisdom  of  the legislature.  In regard to measure  of  road user  both  the sides can give contrary arguments which  may look  convincing.   Hence the examples of this nature  would not  carry  the argument to any logical conclusion.   Having noticed  the  fact  that  the area  of  judicial  review  is considerably  limited  in testing the validity of  a  taxing Statute  and considering the impugned classification in  its factual  background, it seems the two permits are  different from  very  nature  of their operation:   while  one  allows operation  within the State only the other allows  operation beyond  the boundaries of the State.  Even though in generic terms  both  are  contract carriages, there  are  individual restrictions  and  advantages  attached  to  each  of  these permits  which could be exclusive to themselves.  As  argued on  behalf  of the respondents, even the types  of  vehicles used  by the holders of these permits, in most cases, if not in  all cases, are different.  The carrying capacity of  the vehicles   concerned  covered  by   these  two  permits   is different.  Thus in many factual ways these vehicles covered by  two  different  permits do form  separate  and  distinct class.   So long as this classification is not arbitrary  or unreasonable,  the  courts  will  not  interfere  with  this classification  which is the prerogative of the legislature. Now coming to the nexus of the classification with object of taxation,  it should be noted that in the present cases  the classification is made for the purpose of granting exemption under  Section 22 of the Act.  Grant of  exemption/reduction under this Section is in "Public interest", therefore, nexus of  this  classification will have to be traced  to  "Public interest"  which  is again within the realm  of  legislative wisdom  unless  tainted  by perversity  or  absurdity.   The validity  of  Section 22 of the Act has not been  questioned which Section empowers the State in public interest to grant exemptions  in  such a manner as it deems fit to a class  of people.  Once we hold that the contract carriages covered by intra-State  permits  and inter-State permits can  form  two distinct  and  separate classes within the larger  class  of contract  carriages, we find it difficult to hold that  this classification  is either unreasonable or it lacks nexus  to the object or is violative of Article 14.  The opinion as to public  interest  contemplated under Section 22 of  the  Act will  have  to  be  formed by the State  after  taking  into

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consideration the various factors which affect the public at large.   Definitely,  in the absence of a challenge to  this decision-making  process on facts, it will not be open to us to  substitute  our  views  in this matter to  that  of  the opinion  formed by the State.  For the reasons stated above, with  respect, we are unable to concur with the judgment  of the  appellate  Bench  of  the Kerala High  Court  which  is impugned  before  us and the same is set aside.  During  the pendency of the proceedings before the learned Single Judge, the   petitioners-respondents  had  obtained   a   stay   of collection  of  tax  in  respect of  the  contract  carriage vehicles  involved  in  the writ petitions before  the  High Court.  While dismissing their petitions, the learned Single Judge  directed that the petitioners should pay the  balance tax  due  up to 30th September, 1995 in  equal  instalments. From  records  we are unable to find whether there  was  any interim  order  of  stay during the pendency of  the  appeal before the Division Bench.  But it is clear from the records of this Court that the stay sought for by the State in these appeals  was  rejected.  Taking into consideration the  fact that  at  least after the judgment of the Division Bench  of Kerala High Court delivered on 11.12.1995, there has been no stay  or any other interim order in favour of the State,  we are  of  the  opinion that it would be just  and  fair  that inspite  of the fact that we have allowed the appeal of  the State, the State should not demand the enhanced tax from the respondents  which  may  have become due by virtue  of  this judgment  for the period between the date of judgment of the Division Bench i.e.  11.12.1995 and today, that is, the date of  the judgment of this Court.  The appeals are accordingly allowed with the above directions, upholding the validity of the notification impugned herein, setting aside the judgment of  the  Division Bench of the High Court of Kerala in  W.A. No.1180/95  and connected matters.  There shall, however, be no order as to costs.