# FEDERATION OF HOTEL & RESTAURANT ASSOCIATION OF INDIA, ETC v. UNION OF INDIA & ORS

- **Citation:** [1989] 2 S.C.R. 918
- **Court:** Supreme Court of India
- **Decided:** 1989-05-02
- **Case number:** Writ Petition No. 1395 of 1987
- **Bench:** R.S. Pathak, Sabyasachi Mukharji, S. Natarajan, M.N. Venkatachaliah, S. Ranganathan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/federation-of-hotel-restaurant-association-of-india-etc-v-union-of-india-ors-10496
- **Pages:** 52

## Headnote

Hotel Expenditure Act, 1987: Sections 2-5, 6 and 24--Tax at
C
10% ad valorem on chargeable expenditure where room charges in
D
E
F
hotels were Rs.400 per day per individual-Validity of-Competence
r
of Parliament to impose-Classification of hotel for tax purposesWhether arbitrary, violative of Article 14--Whether violative of Article
19( l)(g).
Constitution of India, 1950: Articles 14 and 19( l)(g), Articles 246
and 248, Entry 97 List 1 and Entries 54 and 62, List Il, Seventh
Schedule-Hotel Expenditure Act, 1987-Legislative competence of
Parliament to impose tax-Classification of hotels based on room
charges-Whether arbitrary-Whether permissible--Whether Act
imposed unreasonable restriction on freedom of trade.
Uttar Pradesh Taxation And Land Revenue Laws Act, 1975/
Maharashtra Tax On Luxuries (Hotels And Lodging Houses) Act 1987/
Kera/a Tax On Luxuries In Hotels And Lodging Houses Act, 1976--
Validity of.
The Expenditure Tax Act, 1987, envisaged a tax at 10% ad valorem
on chargeable expenditure incurred in the class of hotels Wherein room
charges for any unit of residential accommodation were Rs.400 per day
per individual. Section S of the Act defined chargeable expenditure to
include expenditure incurred in or payments made in such class of
G
hotels in connection with the provision of any accommodation, residential, or otherwise, food or drink whether at or outside the hotel, or for
any accommodation in such hotel on hire or lease or any other services
envisaged in that Section.
The petitioners, who were engaged in, or associated with the hotel
H
industry challenged the constitutional validity of the Act on grounds of
918
-
HOTEL FEDERATION v. U.0.1.
919
-+
lack of legislativ~ competence and violation of Articles 14 and 19(l)(g) of
A
the Constitution. It was contended that the Act, in its true nature and
'-J
character, was uot one imposing an expenditure-tax, as known to law,
accepted notions of Public Finance, and to legislative practice but was,
in pith and substance, either a tax on luxuries falling within Entry 62 of
List II of the Seventh Schedule, or a tax on the consideration paid for
the purchase of goods constituting an impost of the nature envisaged in
B
_"?'-'
. entry 54 of List II, and was clearly outside the legislative competence of
. i the Union Parliament; that the Act was violative of Article 14 as the
basis on which the hotelS were classified was arbitrary an unintelligible,
having no rational-nexus with the taxing-policy nnder the Act, inas-
-
much as persons similarly situated, and who incurred the same extent
and degree of expenditure on the same luxuries, were differentiated on c
the sole basis that in one case the expenditure was incurred in a hotel
-J--
where one of the rooms had a charge of Rs.400 per day per individual
'
marked for it, while in the other though equally wasteful expenditure
was incurred in a more luxurious restaurant, the latter expenditure was
exempt, that even if more sophisticated and expensive food aud drinks
and other services, envisaged in clauses (a) to (d) of Section S were D
provided in a hotel or catering establishment which fell outside the
class, the expenditure incurred thereon is unaffected by the law, that
}_
the standards and measures for the computation of the chargeableexpenditure under the Act was vague and arbitrary, that the expression
~
'other similar services' in clauses (d) of Section S was· non-specific and
vague; and that the Act was violative of petitioners' fundamental right
E
under Article 19(l)(g) as it imposed unreasonable onerous restrictions
on their freedom of business.
The respondent-Union of India sought to sustain the legislativer.>..
competence of Parliament to enact the law under Article 248 read with
Entry 97 of List I of the Seventh Schedule, contending that the law, in
F
pith and substance, was not one 'with respect to luxuries under Entry
\
62, List I, and the tax on expenditure, as the legislative had chosen to
conceive it, was referrable t

## Text

_Characters 0–39,837 of 125,383. This is a partial read: ask again with offset=39837 for what follows._

A
B
FEDERATION OF HOTEL & RESTAURANT ASSOCIATION
OF INDIA, ETC.
v.
UNION OF INDIA & ORS.
MAY 2, 1989
[R.S. PATHAK, CJ., SABYASACHI MUKHARJI,
S. NATARAJAN, M.N. VENKATACHALIAH AND
S. RANGANATHAN, JJ.]
Hotel Expenditure Act, 1987: Sections 2-5, 6 and 24--Tax at
C
10% ad valorem on chargeable expenditure where room charges in
D
E
F
hotels were Rs.400 per day per individual-Validity of-Competence
r
of Parliament to impose-Classification of hotel for tax purposesWhether arbitrary, violative of Article 14--Whether violative of Article
19( l)(g).
Constitution of India, 1950: Articles 14 and 19( l)(g), Articles 246
and 248, Entry 97 List 1 and Entries 54 and 62, List Il, Seventh
Schedule-Hotel Expenditure Act, 1987-Legislative competence of
Parliament to impose tax-Classification of hotels based on room
charges-Whether arbitrary-Whether permissible--Whether Act
imposed unreasonable restriction on freedom of trade.
Uttar Pradesh Taxation And Land Revenue Laws Act, 1975/
Maharashtra Tax On Luxuries (Hotels And Lodging Houses) Act 1987/
Kera/a Tax On Luxuries In Hotels And Lodging Houses Act, 1976--
Validity of.
The Expenditure Tax Act, 1987, envisaged a tax at 10% ad valorem
on chargeable expenditure incurred in the class of hotels Wherein room
charges for any unit of residential accommodation were Rs.400 per day
per individual. Section S of the Act defined chargeable expenditure to
include expenditure incurred in or payments made in such class of
G
hotels in connection with the provision of any accommodation, residential, or otherwise, food or drink whether at or outside the hotel, or for
any accommodation in such hotel on hire or lease or any other services
envisaged in that Section.
The petitioners, who were engaged in, or associated with the hotel
H
industry challenged the constitutional validity of the Act on grounds of
918
-
HOTEL FEDERATION v. U.0.1.
919
-+
lack of legislativ~ competence and violation of Articles 14 and 19(l)(g) of
A
the Constitution. It was contended that the Act, in its true nature and
'-J
character, was uot one imposing an expenditure-tax, as known to law,
accepted notions of Public Finance, and to legislative practice but was,
in pith and substance, either a tax on luxuries falling within Entry 62 of
List II of the Seventh Schedule, or a tax on the consideration paid for
the purchase of goods constituting an impost of the nature envisaged in
B
_"?'-'
. entry 54 of List II, and was clearly outside the legislative competence of
. i the Union Parliament; that the Act was violative of Article 14 as the
basis on which the hotelS were classified was arbitrary an unintelligible,
having no rational-nexus with the taxing-policy nnder the Act, inas-
-
much as persons similarly situated, and who incurred the same extent
and degree of expenditure on the same luxuries, were differentiated on c
the sole basis that in one case the expenditure was incurred in a hotel
-J--
where one of the rooms had a charge of Rs.400 per day per individual
'
marked for it, while in the other though equally wasteful expenditure
was incurred in a more luxurious restaurant, the latter expenditure was
exempt, that even if more sophisticated and expensive food aud drinks
and other services, envisaged in clauses (a) to (d) of Section S were D
provided in a hotel or catering establishment which fell outside the
class, the expenditure incurred thereon is unaffected by the law, that
}_
the standards and measures for the computation of the chargeableexpenditure under the Act was vague and arbitrary, that the expression
~
'other similar services' in clauses (d) of Section S was· non-specific and
vague; and that the Act was violative of petitioners' fundamental right
E
under Article 19(l)(g) as it imposed unreasonable onerous restrictions
on their freedom of business.
The respondent-Union of India sought to sustain the legislativer.>..
competence of Parliament to enact the law under Article 248 read with
Entry 97 of List I of the Seventh Schedule, contending that the law, in
F
pith and substance, was not one 'with respect to luxuries under Entry
\
62, List I, and the tax on expenditure, as the legislative had chosen to
conceive it, was referrable to residuary power, that the econo1nists'
concept of such an expenditure tax was at best an idea of the manner of
effectuation of fiscal programme and was no limitation on the legislative
power, that the legislative-power recognised the demarcation of distinct G
aspects of the same matter as distinct topics of legislation and that the
challenge to legislative competence overlooked the dichotomy of these
distinct aspects, the line of demarcation, though sometimes thin and
subtle, being real, that the measure adopted for the levy of the tax
did not necessarily determine its essential character and that the object
..
on which the expenditure was laid-out might or might not be an item of H
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920
SUPREME COURT REPORTS
[1989] 2 S.C.R.
luxury, or the expenditure might constitute the price of the goods but, .+
what was taxed was the expenditure aspect which, in itself, was
susceptible of recognition, as a distinct topic of legislation.
Dismissing the Writ Petitions, this Court
HELD: (R.S-. Pathak, CJ., Sabyasachi Mukharji, S. Natarajan
and M.N. Venkatachaliah-Per: Venkatachaliah, J.)
1.1 A law imposing the expenditure tax is well within the legislative competence of Union Parliament under Article 248 read with Entry
97 of Listi. [940E-F]
1.2 The tax envisaged by the Expenditure Tax Act, 1987, is
essentially a tax on expenditure and not on luxuries or sale of goods
falling within the State power. The distinct aspect, namely, the expenditure aspect of the transaction falling with the Union power must be
distinguished and the legislative competence to impose a tax thereon
sustained. [9470-E]
_.,.... -
2.1 If a legislature with limited or qualified jurisdiction transgresses its powers~ such transgression may be open, direct and overt, or
disguised, indirect and covert. The latter kind of trespass is figuratively
referred to as "colourable legislation", connoting that although
apparently the legislature purports to act within the limits of its own
powers yet, in substance and in reality, it encroaches upon a field
prohibited to it, requiring an examination, with some strictness, the
substance of the legislation for determining as to what the legislature
was really doing. [939E-F]
l
-
·'"-
Prafulla Kumar Mukherjee and Ors. v. Bank of Commerce,
[1945] FCR 179, referred to.
2.2 Wherever legislative powers are distributed between the
Union and the States, situations may arise where the two legislative
fields might apparently overlap. It is the duty of the Courts, however
difficult it may be, to ascertain to what degree and to what extent, the
authority to deal with matters falling within these classes of subjects
exists in each legislature and to define, in the particular case before
them, the limits of the respective powers. It could not have been the
intention that a conflict should exist; and, in order to prevent such a
result the two provisions must be read together, and the language of one
interpreted, and, where necessary modified by that of the other. [939F-G]
HOTEL FEDERATION v. U.0.1.
921
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Union Colliery Co. of British Columbia v. Bryden, (1899] AC 580
A
at 587; Lefroy Canada's Federal System., referred to.
2.3 The law 'with respect to' a subject might incidentally 'affect'
another subject in some way; but that is not the same thing as the law
being on the latter subject. There might be overlapping; but the B
overlapping must be in law. The same transaction may involve two or
""
more taxable events in its different aspects. But the fact that there is an
-l overlapping does not detract from the distinctiveness of the aspects. (94IE]
'
Governor General in Council v. Province of Madras, (1945] FCR
-
179 (P.C.) at 193 and Laskin Canadian Constitutional Law, referred
to.
c
~-
2.4 The consequences and effects of the legislation are not the
same thing as the legislative subject matter. It is the true nature and
character of the legislation and not its ultimate economic results that
'matters. (944C]
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2.5 The scope of the present legislation cannot be considered. by
reference to legislative practice because firstly, the question of Iegislalive-practice as to what a particular legislative-entry could be held to
_)_
embrace is inapposite while dealing with a tax which is suigeneris or
non-descript imposed in exercise of the residuary powers so long as such
E
tax is not specifically enumerated in Lists II & III and secondly, there is
no conclusive material indicating that the appropriate legislature had
limited the notion of a tax of this kind within any confines. (944E-G I
Walace Brothers and Company Ltd. v. Commissioner of Income
Tax, Bombay City and Bombay Suburban District, (1948] LR 75, IA
F
/-
86; Navinchandra Mafatlal v. CIT, Bombay City, (1955] 1 SCR 829;
Union of India v. H.S. Dhillon, (1972] 2 SCR 33 at 61; Attorney-
~
General for Ontario v. Attorney-General for Canada, (1912] AC 571 at
581; Croft v. Dunphy, (1933] AC 156 and Azam Jha Bahadurv. Expenditure Tax Officer, (1972] l SCR 470 referred to.
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2.6 The subject of a tax is different from the measure of the levy.
·-...(
The measure of the tax is not determinative of its essential chararter or
'of the competence of the legislature. (946F-G J
M/s. Sainik Motors v. State of Rajasthan, (1962] l SCR 517 and
'
Encyclopaedia Britannica on Luxury Tax, Vol. 14 p. 459, referred to.
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922
SUPREME COURT REPORTS
[!989] 2 S.C.R.
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3.1 Though taxing laws are not outside Article 14, however, hav-
~
ing regard to the wide variety of diverse economic criteria that go into
the formulation of a fiscal-policy, legislature enjoys a wide latitude in
the matter of selection of persons, subject-matter, events, etc., for taxation. A legislature does not, have to tax everything in order to he able to
tax something. if there is equality and uniformity within each group,
B
the law would not be discriminatory. The tests of the vice of discriminalion in a taxing law are, acqirdingly, less rigorous. [948G-H]
:>.::
l
3.2 In examining the allegations of a hostile, discriminatory
'
treatment what is looked into is not its phraseology, but the real effect
of its provisions. The classification must be rational and based on some
-
c qualities and characteristics which are to be found in all the persons
grouped together and absent in the others left out of the class. Besides,
\!'
differentia must also have a rational nexus with the object sught to he
+-
achieved by the law. However, no precise or set formulae or doctrinaire
tests or precise scientific principles of exclusion or inclusion are to be
applied. The test could only be one of palpable arbitrariness applied in
D the context of the felt needs of the times and societal exigencies informed
by experience. [949A, C-E]
3.3 Classification based on differences in the value of articles or
the economic superiority of the persons of incidence are well-recognised. A reasonable classification is one which includes all who are simiE
larly situated and none who are not. In order to ascertain whether
persons are similarly placed, one must look beyond the classification
and to the purposes of the law. [949E-Fl
Jaipur Hosiery Mills Ltd. v. State of Rajasthan, [1970] 2 SCR 26;
Hiralal v. State of U.P., [1973] 2 SCR 502; State of Gujarat v. Sri
F
Ambika Mills Ltd., [1974] 3 SCR 760; G.K. Krishnan v. Tamil Nadu,
~
[1975] 2 SCR 715; I.T.O. v. N. Takim Roy Limbe, (1976] 3 SCR 413;
Secretary of Agriculture v. Central Roig Refining Co., [1949] 338 U.S. ,
604; M/s. Hoechst Pharmaceuticals Ltd. v. State of Bihar, AIR 1983 SC
1019 and Wallace Mendelson: Supreme Court Statecraft; The Rule of
Law and Men, p. 4, referred to.
G
3.4 In the present case, the bases of classification cannot be said
to be arbitrary or unintelligible nor as being without a rational nexus
with the object of the law. A hotel where a unit of residential accommodation is priced at over Rs.400 per day per individual is, in the legislalive wisdom, considered a class apart hy virtue of the economic
H
superiority of those who might enjoy its custom, comforts and services ..
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HOTEL FEDERATION v. U.0.1:"
923
This legislative assumption cannot be condemned as irrational. Judicial
veto is to be exercised only in cases that leave uo room for reasonable
doubt. Constitutionality is presumed. [952B-C]
3.5 The words "other similar services" in Section 5(d) were
intended to embrace services like-but not identical with-those
A
~
described in the preceding words. The content of the expression "other B
· _.l similar services" following, the preceding expressions "by way of
beauty parlour, health club, swimming pool or ..... " has a definite
connotation in the interpretation of such words in such statutory con-
..
· tents. The matter is one of construction whether any particular service
falls within the section and not one of constitutionality. [953E-F]
4. A taxing statute is not, per-se, a restriction of the freedom
under Article 19(l)(g). The policy of a tax, in its effectuation, might, of
course, bring in some hardship in some individual cases. But that is
inevitable, so long as law represents a process of abstraction from the
generality of cases and reflects the highest common-factor. The mere
excessiveness of a tax or even the circumstance that its imposition might
tend towards the diminution of the earnings or profits of the persons of
incidence does not, per-se, and without more, constitute, violation of
the rights under Article 19(1)(g). [954F-G]
Per Ranganathan, J. (Concurring),
c
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5.1 In the context of the social and economic conditions that
prevailed in India, it was a luxury for any person to stay in hotels
charging high rents and providing various types of facilities, amenities
and conveniences such as telephone, television, air-conditioner, etc. An
expenditure on something which is in excess of what is required for
economic and personal well-being would be expenditure on luxury
F
although the expenditure may be of a nature which is incurred by a large
number of people including those ~ot economically well off. [958G-H]
Abdul Kadir & Sons v. State of Kera/a, [1976] 2 SCR 690, relied
on.
-..J
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5.2 The legislature has, particularly in a taxing statute, a considerable amount of latitude and it cannot be held that, in fixing the
standards of indication of luxury, the legislature, has not applied its
mind. In fact, the figures have been amended from time to time and, it
has to be presumed that the legislature had good reason for fixing these
standards. From the scheme of the legislations, the state legislations fall
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924
SUPREME COURT REPORTS
[1989] 2 S.C.R.
within the scope of Entry 62, List I and are, therefore, clearly within +
A
the competence of the State legislatures and are not liable to be
challenged. [9590; 957C]
6.1 In interpreting the scope of the legislative entries in the three
lists, it has to be kept in mind that, while on the one hand, it is desirable
B
that each entry in each of the lists should receive the broadest interpre-
:..c
ta ti on, it is equally important, on the other, that the three lists should l
be read together and harmoniously. [959E-F]
'
6.2 The power of the State legislature to make laws with respect
..
to any of the matters enumerated in List II is subject to the exclusive
c
power of Parliament to make laws with respect to any of the matters
enumerated in List I. Hence, if a matter is covered by an entry in the
Union List, no restrictions can be read into the power of Parliament to
make laws in regard thereto. [959G-H; 960A]
6.3 The legislative entries are so arranged that the power to enact
D
laws in general and the power to impose taxes are separately dealt with.
11!.
Under Article 246(1), the Parliament has exclusive powers to make laws
with respect to any of the matters, including power to impose taxes,
enumerated in List I. [9608-C]
M.P. V. Sundararamier & Co. v. The State of Andhra Pradesh &
E
Another, [1958] SCR 1422 at pp. 1479 and 1490, referred to.
7. It cannot be held that the tax cannot be considered to be an
expenditure tax because it is not on expenditure generally but is
restricted to specific types of expenditure. There is no legal, judicial,
economic or other concept of expenditure tax that would justify any
-""
F
such restrictive meaning. If, conceptually, the expenditure incurred by
a person can be a subject-matter with reference to which a tax can be
~
levied, such taxation can be restricted only to certain items or categories
of expenditure, and its base need not necessarily be so wide as to cover
all expenditure incurred by an assessable entity. Selection of objects
and goods for taxation is the essence of any tax legislation and any
G
limitation is an unlimited curtailment of this selective power of taxation
)....-
of Parliament. [960H; 961A-B, F]
8.1 There is not much of legislative practice which would justify
importing any limitation on the concept of a tax on expenditure under
entry 97 of List I. Once it is granted that the tax need not exhaust the
H
entire universe of the subject-matter, the extent of the subject matter
HOTEL FEDERATION v. U.0.1.
925
~· that should be covered or selected for imposing tax should be entirely
A
left to Parliament subject only to any criteria of discrimination or unreasonableness that may attract the provisions of Part III of the
Constitution. [962D-E, F-G]
State of Madras v. Gannon Dunkerley Co., [1959] SCR 379;
Navinchanda Ma/at Lal v. CIT. [1955] 1 SCR 829; Navnit Lal v. AAC,
I [1965] 1 SCR 909; Harikrishna Bhargava v. Union, [1966] 2 SCR 22
~and Bhagwandas Jain v. Union of India, [1981] 2 SCR 808, referred to.
8.2 Legislative lists cannot be interpreted on the assumption that
there is a deemed entry "Taxes on Expenditure" added to List I as a
result of the decision in Azam Jha's case, [1972] I SCR 470. Entries
cannot be added to the legislative Lists on the basis of decisions of this
Court. In Azam Jha's case, the pith and substance of the Act considered
did not fall under any of the entries in List II or III. However, in the
instant case, the legislation coveres only certain types of expenditure:
The decision in Azam Jha's case cannot help in determining whether the
Expenditure Act 1987 should be construed as imposing tax on expenditure or and on luxuries. [964A-C]
Azam Jha Bahadur v. Expenditure Tax Officer, (1972] l SCR 470
distinguished.
9. Merely because the 1987 Act as well as the State Acts levy taxes
which have ultimate impact on persons who enjoy certain luxuries, the
pith and substance of both cannot be considered to be the same. The
object of a tax on luxury is to 'impose a tax on the enjoyment of certain
types of benefits, facilities and advantages on which the legislature
wishes to impose a curb. The idea is to encourage society to cater better
to the needs of those who cannot afford them. Such a tax may be on the
person offering the'luxury or the person enjoying it. It may be levied on
the basis of the amount received for providing, or the amount paid for
or expended for enjoying, the luxury. Conceivably, it could be on different bases altogether. The object of an expenditure tax is to discourage
expenditure which the legislature considers lavish or ostentations. The
object of the first would be to discourage certain'types of living or
enjoyment while that of tthe second would be to discourage people from
incurring expenditure in unproductive or undesirable channels. If a
general Expenditure Tax Act, like that of 1957, had been enacted, no
challenge to its validity could have been raised because it incidentally
levied the tax on expenditure incurred on luxuries. The fact that there
will be some overrlappling then or that here there is a good deal of such
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926
SUPREME COURT REPORTS
[1989) 2 S.C.R.
A overlapping, because the States have chosen to tax only some types of
-~
luxuries and the Centre to tax, atleast for· the time being, only
expenditure which results in such luxuries, should not be allowed to
draw a curtain over the basic difference between the two categories of
imposts. [968E-H; 969A-B)
B
This distinction is not obliterated merely because of the circums·
,_.
lances that both legislatures have chosen to attack the same area of l
vulnerability, one with a view to keep a check on 'luxuries' and the ·
other with a view to cnrb undesirable 'expenditure'. [969C)
Kera/a State Electricity Board v. Indian Aluminium C.o., [1976) 1
C SCR 562; In re Central Provinces & Berar Sales of Motor Spirit and
Lubricants Taxation Act, 1938, [1939] FCR 18; Province of Madras v.
Boddu Paidanna & Sons, [1942) FCR 90; G.G.-in-Council v. Province
of Madras, 11945) FCR 179; Ra/la Ram v. East Punjab, [1948) FCR
207; Bhagwan Dass Jain v. Union, [1981] 2 SCR 808; Hingir-Rampur
Coal Co. Ltd. v. State of Orissa, [1961) 2 SCR 537 and Sainik Motors v.
D State of Rajasthan, [1962] l SCR 517, referred to.
A.H.F. Lefroy: Canadian Constitution and Laskin: Canadian
Constitutional Law, referred to.
E
ORIGINAL JURISDICTION: Writ Petition No. 1395 of 1987.
etc.
(Under Article 32 of the Constitution oflndia).
N.A. Palkhiwala, T.R. Andhyarujina, Soli J. Sorabjee, R.
tF Dada, S. Ganesh, J.R. Gagrat, R.B. Aggarwala, P.G. Gokhale, V.B.
~.
Aggarwala, R.J. Gagrat, R.B. Hathikhanawala, R.F. Nariman, P.H.
Parekh, Sanjay Bhartari, M.K. Menon, R.K. Dhillon, Ms. Rohini
Chhabra, Ms, Sunita Sharma and Ms. Ayesha Misra for the Petitioners.
1
K. Parasaran, Attorney General, B. Datta, Addi. Solicitor
G General, Dr. V. Gauri Shankar, S.K. Dholakia, P.S. Poti, G.A. Shah,
V. Jaganatha Rao, K. Sudhakaran, Ms. A. Subhashini, B.B. Ahuja,
~
H
H.K. Puri, A Sobba Rao, A.S,Bhasme, K.R. Nambiar, M.N. Shroff,
M. Veerappa, R. Mohan, R. Ayyamperumal and J.P. Mishra for the
Respondents.
The following judgments of the Court were delivered:
•
HOTEL FEDERATION '· U.0.1. (VENKATACHALIAH, J.]
927
VENKATACHALIAH, J. In these writ-petitions under Article
32 of the Constitution of India, petitioners who are engaged in, or
associated with, the Hotel Industry in India challenge the constitutional validity of the Expenditure-Tax Act, 1987 (Central Act 35 of
1987). The Act envisages a tax at 10 per cent advalorem on
'chargeable-expenditure' incurred in the class of Hotels wherein
"room-charges" for any unit of residential accommodation are Rupees
A
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~ four Hundred per day per individual. The 'Chargeable-expenditure'
) ...
) ..
.. ~s defined in Section 5 of the Act include expenditure incurred in or
payments made in such class of hotels in connection with the provision
of any accommodation, residential or otherwise, food or drink
whether at or outside the hotel; or for any accommodation in such
hotel on hire or lease; or any other services envisaged in that Section.
C
However, any expenditure incurred in or paid for in "foreign
exchange" or by persons who enjoy certain diplomatic privileges and
immunities are exempt.
The challenge to the vires of the 'Act' is on grounds of Jack of
legislative-competence and of violation of the rights under Article 14
D
and 19(1)(g). Union of India seeks to sustain the legislative competence to enact the impugned law under Article 248 read with Entry 97
of List I of the Seventh Schedule.
2. Writ Petition No. 1395 of 1987 is quite comprehensive as to
the array of parties and may generally be regarded as representative of
the contentions urged in support of the challenge. The first petitioner
therein is "The Federation of Hotel & Restaurant Association of
lndia"-which is said to be a representative body of over 1,000
member-petitioners in India. Petitioners 2 to 5 are said to be the
Regional Associations of the Federation and Petitioners 6 and 7 are
two Hotel companies which own several hotels in India. Petitioners 8
and 9 are Indian citizens who are the directors and shareholders of
petitioners 6 and 7 respectively. Petitioner 10, is a practising chartered-accountant who claims to use the services in the several Hotels in
India owned by the members of the Federation. The array of petitioners is quite comprehensive so as to include all interests affected so
as to satisfy the requisite standing to sue from all points of view.
3. The Expenditure Tax Bill No. 90 of 1987, preceding the
impugned Act was introduced in the Union Legislature on 21.8.1987.
It became an Act on 14.9.1987. It extends to the whole of India except
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·the State of J ammu and Kashmir. The requisite notification under
Section 1(3) of the Act was issued on 14.10.1987 appointing 1.11.1987
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SUPREME COURT REPORTS
(1989] 2 S.C.R.
A as the date on which the Act shall come into force.
B
c
The Expenditure Tax Bill No. 90 of 1987 states the following as
its objects and reasons:
"The Bill seeks to impose a tax on expenditure incurred in
hotels were the room charges for any Unit of residential
accommodation are four hundred rupees or more per daJt
'"
per individuai. This tax will be levied at the rate of ten pet
cent of the expenditure incurred in connection with provision of any accommodation, food, drinks, and certain other
categories of services. This tax will not apply to expenditure incurred in foreign exchange or in the case of person
enjoying diplomatic privileges."
(Emphasis supplied)
4. A brief survey of the provisions of the Act is perhaps necesD sary to apprehend and assess the grounds of challenge in their true
perspective. Section 4 is the charging section which says:
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"Subject to the provisions of this Act, there shall be
charged on and from the commencement of this Act, a tax ,J..
at the rate of ten per cent of the chargeable expenditure."
The expression 'chargeable-expenditure' is defined in clauses (a), (b);
( c) and (d) of Section 5, which read:
"For the purposes of this Act, chargeable expenditure
means any expenditure incurred in, or payments made to, a·
·-'-.
hotel to which this Act applies, in connection with the provision of,-
(a) any accommodation, residential or otherwise; or
(b) food or drink by the hotel, whether at the hotel
or outside, or by any other person at the hotel.; or
( c) any accommodation in such hotel on hire or
lease; or
( d) any other services at the hotel, either by the hotel
or by any other person, by way of beauty parlour, health
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HOTEL FEDERATION v. U.0.1. [VENKATACHALIAH, J.]
929
club, swimming pool or other similar services."
(Rest of the provisions of Section 5 are omitted as
unnecessary for the present)
The expression 'Assessee', 'Hotel', 'Room-charges' are some of
the material expressions defined in the interpretation clause.
~
2(1) "assessee" means a'person responsible for collecting the expenditure-tax payable under the provisions of
this Act.
2( 6) "Hotel" includes a building or part of a building
where residential accommodation is, by way of business,
provided for a monetary consideration.
2( 10) "room charges" means the charges for a unit of
residential accommodation in a hotel and includes the
A
B
c
charges forD
(a) furniture, air-conditioner, refrigerator, radio,
music, telephone, telivision, and
(b) such other services as are normally included by a
hotel in room rent,
E
but does not include charges.for food, drinks and any
services other than those referred.to in sub-clauses (a) and
(b ). Section 3 is the crucial provision which lays down the
differentia for.the classification of the Hotel to which the
'Act' applies.
Section 3 is the crucial provision which lays down the differentia for
the cl~ssification of the Hotel to which the 'Act' applies. That section
provides that the 'Act' shall apply in relation to any 'chargeableexpenditure', incurred in a hotel wherein the "room-charges" for any
unit of residential accommodation at the time of incurring of such
expenditure are Rs.400 or more per day per individual. The levy of tax
is confined to such class of Hotels which satisfy that statutory-standard. Where, however, compo~ite charges are payable in respect of
both residential accommodation and food, then the "room charges"
for purposes of determination of the criteria attraCting the Act shall
have to be apportioned in the manner to be prescribed. Section 3
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SUPREME COURT REPORTS
[1989] 2 S.C.R.
A enables the assessing-officer to determine the 'room-charges' on such ·*(
reasonable basis as he may deem fit where:
"(i) a composite charge is payable in respect of residential
accommodation, food, drinks and other services, or any of them,
and the case is not l'Qvered by the provisions of sub-section (2),
B
or
c
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(ii) it appears to the Income-tax Officer that the chargeJ.
for residential accommodation, food, drinks or other services are
so arranged that the room charges are understated and other
charges are overstated,"
Sections 6 and 24 envisage and provide for the authorities to
administer Act and engrafts the machinery and procedure of the
Income-tax Act. Section 6(1) says:
"Every Director of Inspection, Commissioner of Incometax, Commissioner of Income-tax (Appeals), Inspecting
Assistant Commissioner of Income-tax, Income-tax Officer
and Inspector of Income-tax shall have the like powers and
perform the like functions under this Act as he has and
performs under the Income-tax Act, and for the exercise of
his power and the performance of his functions, his jurisdiction under this Act shall be the same as he has under the
Income-tax Act."
Se,ction 24 provides:
+
"The provisions of the following sections and
Schedules of the Income-tax Act the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to
time, shall apply with necessary modifications as if the said ~
provisions and the rules referred to expenditure-tax instead
of to income-tax:
2(43B) and (44), 118, 125, 125A, US to 136 (both
~
inclusive), 138, 140, 144A, 159 to 163 (both inclusive), 166,
167, 170, 171, 173 to 179 (both inclusive), 187, 188, 189,
220 to 227 (both inclusive), 229, 231, 232, 237 to 245 (both
inclusive), 254 to 262 (both inclusive) 265, 266, 268, 269,
278B, 278C, 2780, 278E, 281, 281B, 282, 283, 284, 287,
288, 288A, 288B, 289 to 293 (both inclusive), the Second
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HOTEL FEDERATION v. U.0.1. [VENKATACHALIAH, J.)
931
Schedule and the Third Schedule:
Provided that references in the said provisions and
rules to the "assessee" shall be construed as references to
an assessee as defined in this Act."
Section 8(1) provides that every "person responsible for collect1ing" the tax as defined in Section 2(8) shall, before the expiry of four
'months from the 31st day of March in each year furnish or caused to be
furnished to the Income-tax Officer, in the prescribed form and
varified in the prescribed manner a return in respect of the
immediately preceding financial year showing (a) the aggregate of the
payments received in respect of "chargeable-expenditure"; (b) the
amount of the tax collected; ( c) the amount of the tax paid to the credit
of the Central Government; and (d) such other particulars as may be
prescribed.
The incidence of the tax is on the persons who incur the
"chargeable-expenditure" in the class of hotels to which the Act
applies. Section 7 enjoins upon the "person responsible for collecting"
the duty to collect the taxes and pay the same to the credit of the
Central Government. The "room-charges" of Rs.400 per day per individual stipulated in Section 3 is the differentium which keeps apart the
class of hotels to which the Act applies. Petitioners say that Section 3
merely defines the place, viz., the Hotel where a room carries a charge
of Rs.400 per day marked on it and the rest of the incidents and
consequences of the provisions of the 'Act' envisage the levy of a tax
on the 'luxuries' provided at such a place. The legislation, it is urged, is
squarely within Entry 62 of List II within the State-power. The Act, it
is contended, does not impose an "Expenditure Tax" but taxes
'Luxuries'. Even if the legislation has an "expenditure dampening"
objective and seeks to inhibit, by creation of disincentives, ostentatiW. ous and wasteful expenditure, the classification, it is said, has no ra~
tional basis. Persons similarly situated and who incur the same extent
and degree of expenditure on the same luxuries are differentiated on
the sole basis that in one case the expenditure is incurred in a Hotel
where one of the rooms has a charge of Rs.400 per day per individual
marked for it, while in the other though equally wasteful expenditure
is incurred in a more luxurious Restaurant, the latter expenditure is
exempt. It is urged that even if more sophisticated and expensive food
and drinks and other services, envisaged in clauses (a) to (d) of Section
5, are provided in a hotel or catering establishment which falls out-side
the class, the expenditure incurred thereon is unaffected by the law.
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c
D
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SUPREME COURT REPORTS
(1989] 2 S.C.R.
This aspect of under-inclusiveness is assailed as violative of Article 14.
5. Petitioners further contend that the several provisions of the
Act which impose certain statutory-obligations of an onerous nature,
the breach of which are visited with penal consequences, render the
law an unreasonable restriction on the petitioners' fundamental rights
B
under Article 19{l)(g).
c
D
The contentions urged in support of the petitions admit of beiil)l.
noticed and fo~mulated in the following terms:
(a) The 'Act', in its true nature and character, is not one imposing an 'Expenditure-Tax', as known to Law, accepted notions of
Public Finance, and to legislative practice but is, in pith and
substance, either a tax on Luxuries falling within Entry 62 of List
U of the Seventh Schedule; or a tax on the consideration paid for
the purchase of goods constituting an impost of the nature
envisaged in entry 54 of List II, and clearly outside the legislative
competence of the Union Parliament;
(b) that even if the 'Act' is held to impose a tax which is
"sui-generis" or a "non-discript", tax with respect to which the
Union Parliament is competent to make a law under Article 248
~
and Entry 97 of List I, then, at all events, the 'Act' is violative of
E
Article 14 in as much as the differentium on which the Hotels
are classified is arbitrary and unintelligible has no rational-nexus
with the taxing-policy under the 'Act'.
(c) that the 'Act' is violative of Petitioners' fundamental-right•
under Article 19{l){g) as it imposes unreasonable onerous resF
trictions on their freedom of business.
..i...
6. Re: Contention (a):
fl
Sri Palkhivala, learned Senior Counsel for the petitioners, contended that the appellation of 'Expenditure Tax' given to the impost is
G
a misnomer as the concept of "Expenditure-Tax" as known to law and
recognised by the theorists of public finance is not a tax on a few stray
'¥-
items of expenditure but is a term of Art which has acquired a technical import as 'nomen-juris' and that the import envisaged by the Act,
in its true nature and character, is no more and no less than a tax on
Luxuries under Entry 62 list II within the State's exclusive power.
H Learned Counsel urged that the delicate balance in the demarcation in
...
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HOTEL FEDERATION v. U.O.l. [VENKATACHALIAH, J.]
933
')' a federal polity of legislative powers between the Union and the States
would impose on the Union, the repository of the residuary power, the
sensitive task of recognising both the line of demarcation as well as the
constitutional mandate-and a disciplined reluctance-not to cross it.
The contention as to lack of legislative-competence emphasises two
aspects-one with a negative implication and the other of a positive
import. Negatively, it is urged that the impost is not, and does not
~ i.atisfy the concept of an "Expenditure tax" which h2s a technical
~onnotation both in law and in public finance. A tax on certain stray
items of expenditure is not, it is contended, a general "expendituretax". The nomenclature of the levy is really a mere ill-fitting legal mask
for what is really a tax under Entry 62 list I. The nomenclature of the
tax, it is urged, is irrelevant in deciding its true nature and character. It
belongs to the rudiments of the subject, says the learned counsel, that
-1a constitutional-grantee of a power cannot enlarge its own by choosing
for the legislation enacted in exertion of that power, a nomenclature
that corresponds to and seman!ically subsumes with the grant. Shri
Palkhivala submitted that the true nature and concept of "expenditure
tax", as known to the theories of public finance has a specific, well
accepted legal connotation and is a tax levied on income or capital
spent or "consumed" in distinguishment of income or capital "saved".
It is this concept of 'expenditure tax', as a fiscal tool, which has certain
).. social and economic objectives informing its policy. The present
impost and its incidents, it is urged, have no rational connection with
the concept of "expenditure tax" known to and accepted by the principles of public _finance and recognised by established Legislative
practice.
7. Referring to the economists' concept of "expenditure tax",
learned counsel referred us to the report of the Study Group "On
taxation of Expenditure" (Government of India, Ministry of Finance,
April 1987)
"An expenditure tax is generally taken to mean a direct
tax on personal consumption, i.e., the total annual
consumption (minus an exemption, if any) of an individual
A
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D
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tax payer or family. This implies that the tax will be payable
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in the year in which consumption takes place. One can
conceive of the tax base being computed by adding up all
items of expenditure, which are by law defined as consumption expenditure, ................................... .
. . . . . . . . . . . . . . . . or, alternatively, by summing up iJl the
receipts and substracting therefrom expenses of earning
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934
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SUPREME COURT REPORTS
[1989] 2 S.C.R.
income as well as outflows in the form of savings (going into
·~
different types of investments, including repayment of past
loans). In practice, the latter method would be preferable."
(Emphasis Supplied)
"India has the distinction, shared with Sri Lanka, of having'
actually experimented with a direct tax on consumption,
expenditure though the idea itself had caught the imagination of many tax theorists in developed countries, some of
whom had developed practical systems for implemenation.
In both India and Sri Lanka, the tax was introduced on the
basis of the recommendations of Prof. Nicholas Kaldor.
Prof. Kaldor had been invited to come to India by the
Indian Statistical Institute to make an investigation of the
Indian tax system in the light of the revenue requirements
of the Second Five Year Plan. In his report, he recommended the introduction of a direct tax on personal consumption expenditure as a limb of a comprehensive and self
checking system comprising the income tax, (which was
already in operation in India), a tax on capital gains (which
had been tried for two years in the post-war period and
then withdrawn), an annual tax on net wealth, a general
gift tax and a tax on personal expenditure. He envisaged
that these five levies would be assessed simultaneously on
the basis of a single comprehensive return, ..... "
(Emphasis Supplied)
"Under the scheme of expenditure taxation suggested by Prof. Kaldor, a taxpayer would not be required to
give any detailed account of his outlays on consumption but
only a statement of his total outlay as part of a comprehensive tax return showing all his receipts, investments, etc.,
and all the items for which he claimed exemption .... "
"In India too, although the expenditure tax was tried
twice and was given up, there has been a revival of interest
in making expenditure the base for personal taxation.