Case: A.B. Abdul Kadir &amp; Ors Etc Vs. State Of Kerala

2. Learned counsel for the parties are agreed that it is not necessary to set out the facts of the other cases and that the decision in the above two appeals would also govern those other cases. The appellants were dealers in tobacco and tobacco preparations in Mattancherry in erstwhile Cochin State. In 1909 Cochin Tobacco Act (Act 7 of 1084 M.E.) was enacted by the Maharaja of Cochin. Section 4 p of that Act prohibited the transport, import or export, sale and cultivation of tobacco, except as permitted by the Act and the rules framed thereunder. In pursuance of the power given by that Act the Diwan of Cochin made rules relating to matters specified in the Act. Under the rules it became necessary to obtain a licence for cultivation of tobacco plant. Drying, curing, manufacturing and the storing of tobacco cultivated in the State was to be done under the supervision of an Excise officer in licenced manufacturing yards and store houses. The system which was in force for the collection of tobacco revenue up to August 1950 was to auction what were called A class and class shops. In addition, there were class shops, the licence for which was granted either on the recommendation of or in consultation with class licensees. A somewhat similar law was in operation in the erstwhile Travancore State. On April 1, 1950 after the Constitution had come in force and Travancore-Cochin had become a Part State Finance Act (No. 25 of 1950) extended the Central Excises and Salt Act (No. 1 of 1944) to Part State of Travancore-Cochin by section 11 thereof. Section p 13 (2) of the Finance Act provided that "if immediately before the 1st lay of April 1950, there is in force in any State other than Jammu and Kashmir a law corresponding to, but other than, an Act referred to in sub-sections (1) or (2) of section 11, such law is hereby repealed with effect from the said date. . . ". In consequence of this provision in Finance Act, 1950, the rules which were in force on April 1, 1950 were changed in the Cochin area by notification dated August 3, 1950 and the system of auction sales of A class and class shops was done away with and instead graded licence fees were introduced for various classes of licensees, including class licensees. Similar change was made for the Travancore area. Notification dated January 25, 1951 was issued in this context. A class licensees under the new rules were called stockists, class licensees were wholesale sellers and class licensees were retailers. A class licensees were to pay a specified mini mum fee for a fixed maximum quantity of tobacco and tobacco goods possessed by them and an additional fee for an additional quantity. The fee was to be levied only in respect of the tobacco imported into the State The State of Travancore Cochin collected licence fee from the appellants for the period from August 17, 1950 to December 31, 1957. In 1956 the appellants, who were A class licensees, filed writ petitions in Kerala High Court for refund of the licence fee collected from them on the ground that the Cochin and Travancore Tobacco Acts stood repealed by the Finance Act of 1950 because of the extension of the Central Excises and Salt Act to Part State of Travancore-Cochin. The petitions were opposed on behalf of the State and it was contended that the Cochin Act or the similar Travancore Act did not stand repealed from April 1, 1950. It was urged that the State was competent to frame new rules under the Cochin Tobacco Act and the corresponding Travancore Act. It was further stated that the tax in question could be validly levied under entry 60 or 62 of List II of the Seventh Schedule to the Constitution. The High Court dismissed the petitions holding that the laws under which the new rules were framed were in force and were valid under entry 62 of List II of the Seventh Schedule. The 13 appellants then came up in appeal to this Court. It was held by this Court in its judgment dated January 24, 1962 reported in (196 2) Supp. 2 SCR 741 that the Cochin Tobacco Act of 1084 and the rules framed thereunder as also similar provisions in Travancore, requiring licences to be taken out for storage and sale of tobacco and for payment of licence fee in respect t hereof were law corresponding to the provisions ofthe Central Excises and Salt Act, 1944 and hence stood repealed on April 1, 1950 by virtue of section 13(2) of the Finance Act, 1950. It was further held that as the parent Acts, namely, the Cochin Tobacco Act and corresponding Travancore Act had stood repealed, the new rules framed in August 1950 and January 1951 under those Acts for the respective areas of Cochin and Travancore for the issue of licences and payment of fee there fore for storage of tobacco were invalid ab initio.After the above decision of this Court the appellants made a demand to the respondent-State that the amounts of Rs. 1, 14, 750 collected by the State from them by way of licence fee under the invalid rules might be refunded to them. The respondent-State refunded. 73, 500 to the appellants on April 29, 1963. On July 10, 1963 the appellants filed original petition No. 1268 of 1963 in the Kerala High Court for issue of a writ to the respondent State to pay the balance amount of Rs 41.250 which along with interest came to Rs. 52, 800 to the appellants. During the pendency of the above petition on December 16, 1963 the Governor of Kerala promulgated ordinance No. 1 of 1963 which was later replaced by Kerala Luxury Tax on Tobacco (Validation) Act of 1964 (Act of 1964). This Act received the assent of the President on March 3, 1964. Original petition No. 1268 of 1963 was thereupon amended with a view to challenge the validity of the above mentioned Act. In the meanwhile, on January 21, 1964 demand was made in view of the ordinance by the State Government calling upon the appellants to pay the amount of Rs. 73, 500 which had been refunded to them by the State Government. Original petition No. 934 of 1964 was filed by the appellants in the Kerala High Court to challenge the validity of demand notice dated January 21, 1964 as also the vires of theto the appellants, the label given to the tax imposed by the charging section was only a cloak to disguise its real nature of being an excise duty. The State Legislature, as such, was stated to be in competent to levey excise duty on tobacco. It was also stated that the provisions of the Act were violative of the provisions of article 301 of the Constitution. In the meanwhile, a single Judge of the High Court dismissed on July 20, 1964 original petition No. 1268 of 1963 which had been filed by the appellants. The appellants thereupon filed appeal before a Division Bench of the High Court against the judgment of the learned single Judge. The learned Judges of the Division Bench allowed original petition No. 963 of 1964 and quashed demand notice dated January 21 1964 issued by the State asking for refund of Rs.73, 500. The High Court relied upon a decision of this Court in the case of Kalyani Stores v. state of Orissa([1966] 1 S.C.R. 865.) and held that in the absence of any production or manufacture of tobacco inside the appellant- State it was not competent for the State Legislature to impose a take on tobacco imported from outside the State. The provisions of Act 9 of 1964 were held to viol ate article 301 of the Constitution and not protected by article 304. The learned Judges also set aside the judgment Of the single Judge and allowed the appeals against that judgment in original petition No. 1268 o f 1963.The State of Kerala thereafter came up in appeal to this Court. As per judgment dated July 30, 1969 reported in (1970)1 SCR 700   this Court held that the High Court had not correctly appreciated the import of the decision in Kalyani Stores (supra). It was held that only such restrictions or impediments which directly and immediately impeded the free flow of trade, commerce and intercourse fell within the prohibition imposed by article 301. This Court further observed that unless the High Court first came to the finding whether or not there was the infringement of the guarantee under article 301 of the Constitution, the further question as to whether the statute was saved under article 304 (b) did not arise. The case was accordingly sent back to the High Court with the direction to take further affidavits in the matter. The Court left it open to the parties to argue as to whether the levy in question was in substance a duty of excise and as such whether it w as not competent for the State Legislature to enact the provisions inremand affidavits were filed on behalf of the appellants and the respondent-State. The learned Judges of the High Court as per judgment under appeal gave the following findings:"(1) The levy being in respect of goods produced out side the State, it cannot be, and is not, an excise duty falling within entry 84 of the Union List.(2) The tax is on tobacco, an article of luxury, consumed within the taxing territory, levied on the occasion of its stocking and vending by the importers into the taxing territory. It clearly answers the description of luxury tax falling within entry 62 of the State List.(3) There being no competing internal goods, the mere fact that the levy is only on imported goods can only have, like any other tax, the economic effect of reducing the demand by reason of increasing the price. The consequent diminution in the quantity of goods imported into the taxing territory is too remote an effect to be a direct impediment to the free flow of trade offending article 301 of the constitution.(4) However, the payment of the tax in the shape of a licence fee being a condition precedent to bringing the goods into the taxing territory, there would appear to be a direct impediment on the free flow of goods and therefore of trade into that territory notwithstanding that the taxable event is not the movement of the goods but the stocking after completing their journey and reaching their destination, the levy in advance being only for convenience of collection.(5) Even assuming that the levy offends article 301, it is saved by article 304(b) being a reasonable tax levied in the public interest, the condition in the proviso thereto being satisfied by the assent of the President in view of article 255.(6) The guarantee in article 301 and the saving in article 304(b) being in respect of both inter-State and inter State trade, the fact that the taxing territory is only a par t of the State is of no consequence."

Reasoning: The above submission of Mr. Patel, in our opinion, is wellwe are concerned with is the constitutional validity of the Kerala Act 9 of 1964. This Act was enacted subsequent to the above decision of this Court rendered on January 24, 1962. No question relating to the validity of the above mentioned Act in the very nature of things could arise at the time of the earlier decision in 1962. We, therefore, are of the view that the judgment dated January 24, 1962 of this Court does not operate as res judicate regarding the points of controversy with which we are concerned in these appeals.It has next been argued on behalf of the appellants that the levy for the licence fee for stocking and vending of tobacco, even though described as luxury tax in charging section 3 of the Act, is in reality and substance an excise duty on tobacco. Excise duty on tobacco under entry 84 of List I of the Seventh Schedule to the Constitution can only be levied by Parliament and, as such, according to the learned counsel for the appellants, the State Legislature was not competent to enact the impugned Act 9 of 1964. This; contention. in our opinion, is equally devoid of force. Excise duty, it is now well-settled, is a tax on articles produced or manufactured in the taxing country. Generally speaking, the tax is on the manufacturer or the producer, yet laws are to be found which impose a duty of excise at stages subsequent to the manufacture orfact that the levy of excise duty is in the form of licence fee would not detract from the fact that the levy relates to excise duty. It is, however, essential that such levy should be linked with production or manufacture of the excisable article. The recovery of licence fee in such an event would be one of the modes of levy of the excise duty. Where, however, the levy imposed or tax has no nexus with the manufacture or production of an article, the impost or tax cannot be regarded to be one in the nature of excisethat the provisions of the Act fall under entry 84 of List I of the Seventh Schedule to the Constitution must, therefore, be held to be bereft of force.Perusal of the rules shows that it was imperative for the A class licensees to pay the licence fee in advance before they could bring tobacco within the taxable territory. We agree with the learned Judges of the High Court that such levy directly impedes the free flow of trade and as such is violative of article 301 of theis no doubt true that the assent of the President was given subsequent to the passing of the Bill by the legislature but that fact would not affect the validity of the impugned Act in view of the provisions of article 255 of theis well-settled that when power is conferred upon the legislature to levy tax, that power must be widely construed; it must include the power to impose a tax and select the articles or commodities for the exercise of such power; it must likewise include the power to fix the rate and prescribe the machinery for the recovery of tax. This power also gives jurisdiction to the legislature to make such provisions as, in its Opinion, would be necessary to prevent the evasion of theagree with Mr. Krishnamurthy Iyer that the onus of showing that the restrictions on the freedom of trade, commerce or intercourse in the public interest are reasonable, is upon the State. It is also true that no effort was made in the affidavit filed on behalf of the State in this case to show as to how the restrictions were reasonable, but that fact would not necessarily lead the court to hold that the restrictions are unreasonable. If the court on consideration of the totality of facts finds that the restrictions are reasonable, the court would uphold the same in spite of lack of details in the affidavit filed on behalf of the State. In judging the question of reasonableness of restriction in the present case, we must bear in mind that the levy of luxury tax relates to tobacco, the consumption of which involves health hazard. Regulation of the sale and stocking of an article like tobacco which has a health hazard and is considered to be an article of luxury by imposing a licence fee for the same, in our opinion, is a permissible restriction in public interest within article 304(b) of the Constitution. The material on record shows that except for cultivation of tobacco on experimental basis, no tobacco is grown in the area with which we are concerned . The levy of luxury tax is bound to result in raising the price of tobacco in the area of erstwhile States of Travancore and Cochin. Once of the likely effects of the enhancement of the price of a commodity entailing health hazards is to lower its consumption.The fact that there is no commercial production of tobacco in the area with which we are concerned would show that there is no discrimination between tobacco brought from outside that area and the locally grown tobacco because in fact there is no tobacco of the latter category, except that grown on experimentalcontention, in our opinion, is not well founded. The fact that the operation of the Act is confined to a particular area and does not extend to the entire State is due to historical reasons. The object of the Act was to validate the recoveries alreadyare unable to accede to the submission that this Court lost sight of the fact that the Act was not applicable to the Telengana area in holding that its provisions were protected by article 304(b) of the Constitution.It is also true that the levy of tax relates only to the period from August 17, 1950 to December 31, 1957, but that too was due to the historical reason that the licence fee had been realised only during that period and the object of the impugned Act was to validate the recovery alreadyabove argument has a seeming plausibility, but, on deeper examination, we find it to be notabove principle would, however, have no application where, as in the present case, what is sought to be done is to validate the recovery of licence fee for stocking and vending of tobacco. The impugned provisions under which that levy is sought to be made with a retrospective effect have nothing to do, as already pointed out above, with production and manufacture of tobacco. The levy is sought to be made as luxury tax which is within the competence of the State Legislature and not as excise duty which is beyond the legislative competence of the State Legislature. If the levy in question can be justified under a provision which is within the legislative competence of the State Legislature, the levy shall be held to be validly imposed and cannot be considered to bea challenge to the validity of a legal enactment is made on the ground that it is a colourable piece of legislation, what has to be proved to the satisfaction of the court is that though the Act ostensibly is within the legislative competence of the legislature in question, in substance and reality it covers field which is outside its legislative competence. In the present case we find that in enacting the impugned provisions, the State Legislature, as already pointed out above, has exercised a power of levying luxury tax in the shape of licence fee on the vend and stocking of tobacco. The enactment of a law for levying luxury tax is unquestionably within the legislative competence of the State Legislature in view of entry 62 in List II of the Seventh Schedule to the Constitution. As such, it cannot be said that the impugned Act is a colourable piece offar as the present case is concerned, we have already pointed out above that it was within the competence of the State Legislature to make a law in respect of luxury tax and to recover that tax in the shape of licence fee for vend and stocking of tobacco. The State Legislature has sought to validate the recovery of the amounts already made by treating those amounts as luxury tax. The fact that the validation of the levy entailed converting the character of the collection from an impermissible excise duty into permissible luxury tax would not render it unconstitutional. The only conditions are that the levy should be of a nature which can answer to the description of luxury tax and that the State Legislature should be competent to enact a law for recovery of luxury tax. Both these conditions as stated above are satisfied.As regards the power of the legislature to give retrospective operation to a tax legislation, we may also refer to the case of Rai Ramkrishna &Ors. v. State of Bihar ([1964] 1 S.C.R 897.) wherein it was held that where the legislature can make a valid law, it can provide not only for the prospective operation of the material provisions of the said law but can also provide for the retrospective operation of the said provisions. The legislative power was held to include the subsidiary or the auxiliary power to validate law which had been found to be `H invalid. It was also observed that in judging the reasonableness of the retrospective operation of law for the purpose of article 304(b), The test of length of time covered by the retrospective operation could nob by itself be treated as decisive. Again, in the case of Epari Chinna Krishna Moorthy, Proprie tor, Epari Chinna Moorthy &Sons, Berhampur, Orissa v. State of Orissa([1964] 7 S.C.R. 185.) the Constitution Bench of this Court repelled the argument that a legislation should be held to be invalid because its retrospective operation might operate harshly in somea result of the above, we would hold that the impugned provisions are protected by article 304(b) of thecontention, in our opinion, is bereft of force. If a provision regarding the levy of luxury tax is within the competence of the State Legislature, the said Legislature would be well within its competence to enact a law for recovery of an amount which, though already refunded to a party, partakes o f the nature of luxury tax in the light of that law. If an amount can answer to the description of luxury tax, there would be no legal impediment to recovering the same as luxury tax, even though initially it was recovered or sought to be re covered as something different from luxury tax.