Karnataka High Court
Sri Banashankari Leasing Co. Ltd. And ... vs State Of Karnataka And Another on 18 June, 1991
Equivalent citations: [1992]194ITR650(KAR), [1992]194ITR650(KARN)
Author: S. Mohan
Bench: S. Mohan
JUDGMENT S. Mohan, C.J.
1. The appeals arise out of the judgment of our learned brother, Justice Rajendra Babu, rendered in two Writ Petitions Nos. 17042 and 17043 of 1989 (see [1990] 182 ITR 8), wherein, though the petitioners were different in that the appellant in W. A. No. 2147 of 1989 was a leasing company, while the appellant, namely, in W. A. No. 2148 of 1989 was an automobile company, they challenged the constitutional validity of entry 19 of the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976 (hereinafter referred to as "the Act"), in so far as it purports to levy a flat rate of tax of Rs. 2,500 per annum on every company. The charging section under that Act is section 3. That says in sub-section (2) that any person exercising any profession or calling or engaged in trade-public or private-shall be liable to pay tax at the rate mentioned in the corresponding entry in the third column of the Schedule. It is under the Schedule that entry 19 provides a flat rate of taxation at the rate of Rs. 250 per annum on every company registered under the Companies Act, 1956, and engaged in any profession, trade or calling. though originally it was Rs. 250 per annum, it was increased to Rs. 2,500 by the Karnataka Act 15 of 1989.
2. This was challenged on the ground that a flat rate is impermissible in law, in disregard of the paying capacity of the company. It was further urged that the Legislature ought to have made a distinction between the nature of profession, trade or calling carried on by the company. In other words, a distinction ought to be made depending on the nature of the profession, trade or calling. In support of this, reliance was placed on a few decisions of the Supreme Court, but the learned judge negatived these contentions. Hence, they have come up in appeal.
3. In these two appeals which arise out of the common judgment of our learned brother, Rajendra Babu J., learned counsel for the appellants, Sri B. Veerabhadrappa, urged two points for consideration-(1) Every company, irrespective of the nature of its profession, trade or calling, is subject to a flat rate of taxation of Rs. 2,500 and while, in the case of individuals, a classification is made depending upon the nature of the profession or trade, a similar distinction ought to have been made in relation to companies. After all, as laid down in P. Rajendran v. State of Madras, , the classification must have a nexus to the object to be achieved. In so far as it is not done, it is bad in law.
4. Secondly, it is urged that a flat rate, irrespective of the paying capacity and irrespective of the nature of the profession, trade or calling, has been struck down by the Supreme Court in many cases. The ratio of those decisions will have to be applied here, namely, State of Kerala v. Haji k. Haji k. Kutty Naha, , where, without any classification, a building tax was sought to be levied in disregard of the nature, age and situation of the building, and that was struck down. Then again, in Kodar (S.) v. State of Kerala, , when an additional surcharge on sales tax was levied, this method of levy of over rate of tax was deprecated. Thus, according to him, entry 19 must be struck down as violative article 14.
5. In meeting this contention, learned Government Advocate, Mr. H. L. Dattu, would urge that there is a clear distinction between individuals as opposed to companies. the appellants which are companies cannot compare themselves with individuals and try to make out a classification and contend that the same treatment as accorded to individuals is not accorded to companies. In matters of taxation, the Legislature has got the widest latitude and flexibility to tax, depending upon the nature of the tax. Here is a case where, under the Act in question, what is sought to be taxed are professions, trades or callings. In so far as companies are concerned, the Legislature thought that irrespective of the nature of its profession, trade or calling, a company registered under the Companies Act is liable to tax, and a flat rate can be levied. In support of this submission, Murthy Match Works v. Asst. Collector of Central Excise, , is cited. Again, a Division Bench of this court has upheld a flat rate of entertainment tax on video parlours, on the ground that once a clear distinction could be maintained between video parlours on the one hand and cinema theatres on the other, a further distinction as to video parlours will not render the levy of taxation invalid. State of Karnataka v. Ganesha Krishna Bhat [1990] ILR (2) Kar 1045, is an authority for this proposition.
6. Having regard to the above submission, we will consider these two points seriatim,- (1) Whether entry 19, in so far as companies registered under the Companies Act, is the subject of profession tax, irrespective of the nature of the profession, trade or calling, is invalid. In order to appreciate this point, we will now extract section 3 of the Act :
"3. Levy and charge of tax. - (1) There shall be levied and collected a tax on professions, trades, callings and employments for the benefit of the State.
(2) Every person who exercises any profession or calling or is engaged in any trade or holds any appointment, public or private, or is employed in any manner in the State, specified in the second column of the Schedule, shall be liable to pay to the State Government tax at the rate mentioned in the corresponding entry in the third column of the said Schedule :
Provided that no tax shall be payable by persons referred to in S1. Nos. 2, 3 and 8 of the Schedule who have attained sixty-five years of age :
Provided further that the levy and collection of tax from any person under this section shall be subject to the restriction specified in clause (2) of article 276 of the Constitution :
Provided further that no tax shall be payable by a person in respect of any year if the period during which he exercise such profession or calling or is engaged in the trade or holds the appointment or is employed does not exceed one hundred and twenty days in that year."
7. By reading this section, it is clear that this is the charging section. Section 3(2) makes a reference to the Schedule. The Schedule under section 3(2) prescribes the rate of taxation for a profession, trade, calling and employment. The Schedule covers individuals from entries 1 to 15 and, thereafter, entry 16 talks of individuals or institutions, while entry 17 talks of co-operative societies; entry 18 deals with banking companies and the comes companies. We may usefully extract the same :
"19. Companies registered under the Companies Act, 1956, and engaged in any profession, trade or calling. Rs. 250 per annum"
8. Though, originally, the rate of tax was Rs. 250 per annum, it is the common case before us that it was increased to Rs. 2,500 per annum by Karnataka Act No. 15 of 1989. A careful reading of this entry shows that, on levying profession tax, what the appellants want to contend is that, in so far as individuals under entries 1 to 15 are treated differently depending upon the nature of the profession or trade, the same treatment should be accorded to companies. We do not think so. Under the law of taxation, the Legislature has got the widest amplitude and the greatest flexibility. As Cooly said long ago, in order to tax something, it is not necessary to tax every thing. Having regard to the widest discretion that is available to a Legislature in the field of taxation, under the Schedule a distinction is made between individuals on the one hand as opposed to companies on the other. Such a distinction is a well-defined one. All that entry 19 makes it clear is that, where it is a company registered under the Companies Act, 1956, that has got a distinct legal personality of its own. Where, therefore, such a distinction is maintained, the appellants (companies) cannot favourably compare with individuals and try to bring out inequalities. It is well settled in las that equality means treating equals as equals and not unequals. Once this position is arrived at, in that a company is a person distinct from individuals, no principle of equality can ever arise. Then again, the law equality is not one of arithmetic exactitude as E1 Darado will put it. Therefore, it is not open to the appellants to contend that the classification must have a nexus with the object to be achieved. Only when a classification is made by the Legislature, the court can examine whether such a classification is sound in law. It was this which was pointed out in the very decision cited by the appellants, namely, P. Rajendran v. State of Madras, , where it was observed as follows :
"... It is true that article 14 does not forbid classification, but the classification has to be justified on the basis of the nexus between the classification and the object to be achieved, even assuming that territorial classification may be a reasonable classification. The fact however that the classification by itself is reasonable is not enough to support it unless there is nexus between the classification and the object to be achieved. Therefore, as the object to be achieved in a case of kind with which we are concerned is to get the best talent for admission to professional colleges, the allocation of seats district-wise has no reasonable relation with the object to be achieved. If anything, such allocation will result in many cases in the object being destroyed, and if that is so, the classification, even if reasonable, would result in discrimination, inasmuch as better qualified candidates from one district may be rejected while less qualified candidates from other districts may be admitted from either of the two sources."
9. But this case does not afford any assistance to the appellants. Therefore, we reject the first of the contentions. Then, coming to the flat rate of taxation-point No. 2-what is relied on is state of Kerala v. Haji K. Haji K. Kutty Naha . That is a case with reference to the Kerala buildings tax. In paragraph 5 (at p. 380), it is observed as follows :
"5. But in enacting the Kerala Buildings Tax Act no attempt an any rational classification is made by the Legislature. As already observed, the Legislature has not taken into consideration in imposing tax the class to which a building belongs, the nature of construction, the purpose for which it is used, its situation, its capacity for profitable user and other relevant circumstances which have a bearing on matters of taxation. They have adopted merely the floor area of the building as the basis of tax irrespective of all other considerations. Where objects, persons or transactions essentially dissimilar are treated by the imposition of a uniform tax, discrimination may result for, in our view, refusal to make a rational classification may itself in some cases operate as denial of equality. This court, in a recent judgment, has decided that the levy of tax in exercise of the power under entry 49, List II, of the Seventh Schedule in respect of factory buildings in a municipal area based on floor area was illegal : New Manek Chowk Spinning and Weaving Mills Co. Ltd. v. Municipal Corporation of the City of Ahmedabad . The court held in that case that the method of adopting a flat rate for a floor area for determining the annual value adopted by the Corporation of Ahmedabad in exercise of the powers conferred upon it by the Bombay Provincial Municipal Corporation Act 49 of 1949 was against the provisions of the Act and the Rules made thereunder as well as all recognised principles of valuation for the purpose of taxation. If levy of tax in a municipal district based on floor area in respect of a factory building violates article 14 of the Constitution when the tax is sought to be levied by the Municipal Corporation, we see no reason to uphold the tax imposed under the impugned Act when the State, in exercise of legislative authority conferred by entry 49, List II, Sch. VII, imposes liability to tax buildings, solely on floor area. The vice of the Act in the present case is more pronounced than it was in New Manek Chowk Spinning and Weaving Mills' case ; in that case, the Rules under which the tax was sought to be levied on the basis of floor area were restricted in their operation to factory building within the Corporation limits of Ahmedabad, whereas Act 19 of 1961, which is challenged in the present case applies to the whole State of Kerala in respect of buildings completed on or after March 2, 1961, whatever may be the nature or class of the building, the use to which it is put, materials used in its construction and the extent of profitable user to which the building may be put, its cost and its economic rental. It is unnecessary in the circumstances to consider whether imposition of tax only on buildings constructed after March 2, 1961, and exempting buildings completed before that date may not violate article 14 of the Constitution."
10. As could be clearly seen, where, irrespective of the nature of construction, the purpose for which it was used, the situation, its capacity for profitable use and other relevant circumstances which have a bearing on the matter of taxation have been disregarded, undoubtedly, it would be bad in law. Then again, in Kodar (S.) v. State of Kerala, , the head note reads thus :
"Brief Note :- (C) 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 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 most 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. An attempt to proportion the payment top 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. Minority view in Stewart Dry Goods Co. v. Lewis [1935] 294 US 550, relied on."
11. In contra distinction to these two decisions, we may now usefully refer to Murthy Match Works v. Asst. Collector of Central Excise, . In paragraph 15 (at p. 503), it is observed as follows :
"15. Certain principles which bear upon classification may be mentioned here. It is true that a State may classify persons and objects for the purpose of legislation and pass laws for the purpose of obtaining revenue or other objects. Every differentiation is not a discrimination. But classification can be sustained only it is founded on pertinent and areas differences as distinguished from irrelevant and artificial ones. The constitutional standard by which the sufficiency of the differential which form a valid basis for classification may be measured, has been repeatedly stated by the courts. If it rests on a difference which bears a fair and just relation to the object for which it is proposed, it is constitutional. To put it differently, the means must have nexus with the ends. Even so, a large latitude is allowed to the State for classification upon a reasonable basis and what is reasonable is a question of practical details and a variety of factors which the court will be reluctant and perhaps ill-equipped to investigate, In this imperfect would perfection even in grouping is an ambition hardly ever accomplished. In this context, we have to remember the relationship between the legislative and judicial departments of Government in the determination of the validity of classification. Of course, in the last analysis, courts possess the power to pronounce on the constitutionality of the acts of the other branches whether a classification is based upon substantial differences or is arbitrary, financial and consequently illegal. At the same time, the question of classification is primarily for legislative judgment and ordinarily does not become a judicial question. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the judicature cannot rush in where even the Legislature warily treads. All these operational restraints on judicial power must weigh more emphatically where the subject is taxation."
12. Again it is observed in paragraph 18 as under (at p. 504) :
"18. Another proposition which is equally settled is that merely because there is room for classification it does not follow that legislation without classification is always unconditional. The court cannot strike down a law because it has not made the classification which commends itself to the court as proper. Nor can the legislative power be said to have been unconstitutionally exercised because within the class a sub-classification was reasonable but has not been made."
13. Therefore, from this ruling, it is clear that a classification may commend itself to the court, but that does not mean that the legislation itself was bad. In State of Karnataka v. Ganesha Krishna Bhat [1990] ILR 2 (Kar) 1045, where the Karnataka Entertainment Tax Act under section 4B levied a flat rate of tax on all video parlours, the question arose as to whether it was valid. A Division Bench of this court, after referring to various rulings of the Supreme Court, held as under :
"10. In the present case, the Act classified all video parlours into one category and treats them alike apart from the ordinary cinematograph shows exhibited by theatres-permanent, semi-permanent or touring. Learned counsel appearing for the respondents admitted this classification between theatres showing ordinary cinematograph films on the one hand and video parlours on the other as reasonable. The only question for our consideration is whether further classification is required depending upon the population in an area or the size of the town or nearness to the city, etc. As stated above, in the absence of further classification on the ground that there is scope for further classification the courts cannot strike down the levy. Flat rate of tax as held in Ganga Sugar, Murthy Match Works and Avinder Singh is not per se discriminatory.
Section 4B of the Act provides for taxation on video parlours in lieu of taxation provided under section 3 or 3A or 4A of the Act. It is a consolidated sum of charge on the activity of showing video shows instead of adopting a cumbersome process of fixing the capacity of a theatre, the number of shows held and dependent on the number of shows held the tax should be assessed. A rough and ready rule is adopted on the basis of each video cassette parlour irrespective of the days of shows, the capacity or the number of shows exhibited by him. This position would be necessitated considering the huge spurt in video parlours in the State irrespective of the fact that they are either in rural or urban areas and that is one of the modes of collection of tax and less difficult for the parlour owners to pay the tax. This obviates the necessity of maintaining account books, issue of tickets and the periodical visits of the officers to the parlours and the procedure for assessment. Thus, this measure adopted by the Legislature therefore cannot be stated to be unreasonable."
14. These two cases afford a complete answer to the second of the contentions urged on behalf of the appellants. Therefore, we reject this point as well.
15. In the result, agreeing with the learned single judge, we dismiss the writ appeals. However, there shall be no order as to costs.