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Until the year 1978, entertainment tax was collected on the actual number of tickets sold. The owners/exhibitors of cinema theatres were required to make over the actual amount of entertainment tax collected by them for each shoe to the Government. With a view to simplify the collection of tax, Section 5(A) and 5(B) were introduced by the 1978 Amendment Act. These Sections, introduced a new and substitute method of collection of entertainment tax based upon the gross collection capacity of a cinema theatre. A formula was devised to determine the tax payable per show or per week as the case may be. Gross collection capacity meant the total amount that would be collected by a cinema theatre if all the seats therein are filled. But inasmuch as no cinema theatre can expect to have its full capacity filled for each show on each show on each day of the month, a reasonable figure was adopted and the tax payable per show determined. If the exhibitor opted to pay the tax every week, he was entitled to exhibit any number of shows in the week not exceeding 28 shows. This system, which may be called 'composition system', for the sake of convenience, dispensed with the requirement of verification of the number of ticket sold for each show in each cinema theatre. It appears to be convenient to theatre-owners as well since they are relieved of the botheration of submitting returns and establishing their correctness. However, this method was not made applicable to the entire State. The theatres situated within the Municipal Corporations of Madras, Coimbatore and the special grade municipalities continued to be governed by the original system of taxation, which may for the sake of convenience be called 'admission system'. Theatres situated in all other local areas of the State are governed by the composition system.

Petitioner-appellants impugned the validity of Section 5(A)(i) on several grounds all of which have been negatived by the High Court.

S/Sri B.R.L Iyengar, K. Parasarn and Sampath urged the following contentions before us;

1. The Act classifies the theaters in the State with reference to their location i.e., with reference to the local area wherein they are situated. The theatres situated within the municipal corporation limits are subjected to a higher rate of tax than the theatres situated in the selection grade municipalities. Similarly, the theaters situated within the area of selection grade municipalities are subjected to a higher rate of tax than the theatres situated in the first grade municipalities and so on. This classification is an eminently reasonable one. Even the rates of admission prescribed under Tamil Nadu Cinema (Regulation) Act and rules recognize this distinction. By virtue of the impugned amendment, however, several theatres situated within panchayat towns, village panchayats and other lesser grade municipalities, which theatres were hitherto enjoying the benefit of composition system are suddenly deprived of the said beneficial system and placed on par with the theatres situated in corporation areas and special grades municipalities for no other reason than that they happen to fall within the five kilometer radius of such areas. The result is that in a village/municipality abutting a municipal corporation area, while some theatres are governed by the composition systems, the other theatres (which happen to fall within the 'belt') are governed by a different systems, namely admission system. This invidious distinction, amounting to hostile discrimination, has been brought about for no valid reason. Having adopted the gradation of the local area as the basis for method of taxation, rate of tax and all other purposes, there is no justification to treat some of the theatres situated in some of these areas differently. Indeed, the very creation and concept of 'belt' is impermissible.

It is further stated in the counter-affidavit that the distributors are preferring the theatres in the periphery of cooperation and Special Grade Municipality areas for exhibiting first run pictures over the theatres within those areas. It is also averred that in the interior areas of such abutting panchayats, (i.e., outside the five kilometer radius) the theatres exhibit only second run pictures and there is definitely less population in and around such theatres. In those areas, it is stated, there is practically no floating population, whereas in the theatres within the five kilometer belt, mostly first run pictures are exhibited and there is considerable floating population. It is also submitted by the respondents that a number of housing colonies have sprung up just outside the corporation limits and the limits of Special Grade Municipalities, the inhabitants whereof partronise theatres within the belt. All this shows that the classification or the distinction made between theatres situated within the belt and the theatres outside the belt is not an unreasonable one. It also establishes that the theatres within the belt are akin to and comparable to the theatres situated within the areas of corporation and Special Grade Municipalities. It is not disputed that the admission system fetches more revenue to the State. It is precisely for this reason that the said system is continued in the major cities. It cannot be said that the classification has no nexus to the object.