Holding

The Expenditure Tax Act, 1987 is a valid expenditure tax within Parliament’s residuary power under Article 248/Entry 97 of List I and does not violate Articles 14 or 19(1)(g); the State luxury taxes are likewise valid under Entry 62 of List II.

Summary

The Federation of Hotel & Restaurant Association of India and other hotel operators challenged the Expenditure Tax Act, 1987, alleging that Parliament lacked legislative competence and that the Act violated Articles 14 and 19(1)(g) by arbitrarily classifying hotels based on a Rs.400 per day room charge and imposing an unreasonable tax on luxury expenditure. The Union argued that the tax is an "expenditure tax" falling within Parliament’s residuary power under Article 248 read with Entry 97 of List I, and that the classification has a rational nexus with the policy objective of curbing lavish spending. The Court examined the doctrine of "colourable legislation", the distinction between tax on expenditure and tax on luxuries, and the permissible breadth of legislative classification in taxation statutes. It held that the Act is a valid expenditure tax within Union competence, that the classification is reasonable, and that the tax does not infringe Articles 14 or 19(1)(g). The State luxury tax statutes were also upheld under Entry 62 of List II. Consequently, all writ petitions were dismissed.

Issues considered

Whether the Expenditure Tax Act, 1987 is within the legislative competence of Parliament under Article 248 and Entry 97 of List I.
Whether the Act is in substance a tax on luxuries falling within Entry 62 of List II, thereby exceeding Union power.
Whether the classification of hotels based on a Rs.400 per day room charge is arbitrary and violative of Article 14.
Whether the tax imposes an unreasonable restriction on the freedom of trade and business under Article 19(1)(g).
Whether the State luxury tax statutes are valid under Entry 62 of List II.

Legislation cited

Expenditure Tax Act, 1987s. 2, s. 24, s. 3, s. 4, s. 5, s. 6
Income Tax Acts. 118, s. 125, s. 125A, s. 126, s. 127, s. 128, s. 129, s. 130, s. 131, s. 132, s. 133, s. 134, s. 135, s. 136, s. 138, s. 140, s. 144A, s. 159, s. 160, s. 161, s. 162, s. 166, s. 167, s. 170, s. 171, s. 173, s. 174, s. 175, s. 176, s. 177, s. 178, s. 179, s. 187, s. 188, s. 189, s. 220, s. 221, s. 222, s. 223, s. 224, s. 225, s. 226, s. 227, s. 229, s. 231, s. 232, s. 237, s. 238, s. 239, s. 240, s. 241, s. 242, s. 243, s. 2(43B), s. 2(44), s. 244, s. 245, s. 254, s. 255, s. 256, s. 257, s. 258, s. 259, s. 260, s. 261, s. 262, s. 265, s. 266, s. 268, s. 269, s. 278B, s. 278C, s. 278D, s. 278E, s. 281, s. 281B, s. 282, s. 283, s. 284, s. 287, s. 288, s. 288A, s. 288B, s. 289, s. 290, s. 291, s. 292, s. 293
Kerala Tax on Luxuries in Hotels and Lodging Houses Act, 1976
Maharashtra Tax on Luxuries (Hotels and Lodging Houses) Act, 1987
Uttar Pradesh Taxation and Land Revenue Laws Act, 1975

Subjects

expenditure taxluxury taxlegislative competenceArticle 14Article 19(1)(g)federalismtax classificationarbitrarinessfreedom of traderesiduary powerUnion ListState List

Judgment

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

MAY 2, 1989
B
[R.S. PATHAK, CJ., SABYASACHI MUKHARJI,
S. NATARAJAN, M.N. VENKATACHALIAH AND

C
S. RANGANATHAN, JJ.]

Hotel Expenditure Act, 1987: Sections 2-5, 6 and 24--Tax at
10% ad valorem on chargeable expenditure where room charges in
-
hotels were Rs.400 per day per individual-Validity of-Competence r
of Parliament to impose-Classification of hotel for tax purposes-
Whether arbitrary, violative of Article 14--Whether violative of Article
19( l)(g).
D
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.
E
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.
F
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, residen-
tial, 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
the Constitution. It was contended that the Act, in its true nature and
A
'-JC

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
the sole basis that in one case the expenditure was incurred in a hotel c
-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 chargeable-
}_ expenditure 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 legislative-
competence of Parliament to enact the law under Article 248 read with
r.>.. 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
920 SUPREME COURT REPORTS [1989] 2 S.C.R.

A
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

B 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 legisla-

c
tive 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 expendi-
ture aspect of the transaction falling with the Union power must be
distinguished and the legislative competence to impose a tax thereon
D sustained. [9470-E]

2.1 If a legislature with limited or qualified jurisdiction trans-
gresses its powers~ such transgression may be open, direct and overt, or
disguised, indirect and covert. The latter kind of trespass is figuratively l -
referred to as "colourable legislation", connoting that although
·'"-
E 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]

F 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
G 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
H interpreted, and, where necessary modified by that of the other. [939F-G]
HOTEL FEDERATION v. U.0.1. 921

Union Colliery Co. of British Columbia v. Bryden, (1899] AC 580 A
t 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] D

2.5 The scope of the present legislation cannot be considered. by
reference to legislative practice because firstly, the question of Iegisla-
live-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. Expen-
diture Tax Officer, (1972] l SCR 470 referred to.
G
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. H
'
'f
922 SUPREME COURT REPORTS [!989] 2 S.C.R.

3.1 Though taxing laws are not outside Article 14, however, hav-
A ~
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 taxa-
tion. 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 discrimina-
lion in a taxing law are, acqirdingly, less rigorous. [948G-H] :>.::
l
3.2 In examining the allegations of a hostile, discriminatory
'
c
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
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-recogni-
sed. A reasonable classification is one which includes all who are simi-
E 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 accommo-
dation is priced at over Rs.400 per day per individual is, in the legisla-
live wisdom, considered a class apart hy virtue of the economic
H superiority of those who might enjoy its custom, comforts and services .. ~
i

HOTEL FEDERATION v. U.0.1:" 923

This legislative assumption cannot be condemned as irrational. Judicial
A
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
~ 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 c
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 D
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),
E
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 G
5.2 The legislature has, particularly in a taxing statute, a consi-
derable 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 H
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
be read together and harmoniously. [959E-F]
l
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
power of Parliament to make laws with respect to any of the matters
c 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
limitation is an unlimited curtailment of this selective power of taxation )....-
G
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 un-
reasonableness 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, B
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 c
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 expendi- D
ture 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 E
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 F
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 diffe-
rent 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 G
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 H
•
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 t-
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.
F 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.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:
H
HOTEL FEDERATION '· U.0.1. (VENKATACHALIAH, J.] 927

VENKATACHALIAH, J. In these writ-petitions under Article
A
32 of the Constitution of India, petitioners who are engaged in, or
associated with, the Hotel Industry in India challenge the constitu-
tional 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 B
~ 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 compe-
tence 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 E
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 F
and 9 are Indian citizens who are the directors and shareholders of
petitioners 6 and 7 respectively. Petitioner 10, is a practising char-
tered-accountant who claims to use the services in the several Hotels in
India owned by the members of the Federation. The array of peti-
tioners is quite comprehensive so as to include all interests affected so
as to satisfy the requisite standing to sue from all points of view. G
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
·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 H
928 SUPREME COURT REPORTS (1989] 2 S.C.R.

A as the date on which the Act shall come into force.

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
B 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 provi-
sion of any accommodation, food, drinks, and certain other
categories of services. This tax will not apply to expendi-
ture incurred in foreign exchange or in the case of person
c enjoying diplomatic privileges."

(Emphasis supplied)

4. A brief survey of the provisions of the Act is perhaps neces-
D sary to apprehend and assess the grounds of challenge in their true
perspective. Section 4 is the charging section which says:

"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."
E
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·
F hotel to which this Act applies, in connection with the pro- ·-'-.
vision of,-

(a) any accommodation, residential or otherwise; or

(b) food or drink by the hotel, whether at the hotel
G 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
H or by any other person, by way of beauty parlour, health
HOTEL FEDERATION v. U.0.1. [VENKATACHALIAH, J.] 929

club, swimming pool or other similar services."
A
(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. B
~ 2(1) "assessee" means a'person responsible for col-
lecting 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, c
·+ provided for a monetary consideration.

2( 10) "room charges" means the charges for a unit of
residential accommodation in a hotel and includes the
charges for- D

(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. F

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 'chargeable-
expenditure', incurred in a hotel wherein the "room-charges" for any
unit of residential accommodation at the time of incurring of such G
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-stan-
dard. 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 H
930 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

(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,"
c 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 Income-
D tax, 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 juris-
E diction 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
F Schedules of the Income-tax Act the Income-tax (Certi-
ficate 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:

G 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,
H 288, 288A, 288B, 289 to 293 (both inclusive), the Second
HOTEL FEDERATION v. U.0.1. [VENKATACHALIAH, J.) 931

Schedule and the Third Schedule:
A
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 collect- B
1ing" 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 c
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 D
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 indi-
vidual 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 E
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" F
objective and seeks to inhibit, by creation of disincentives, ostentati-
W. 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 G
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. H
932 SUPREME COURT REPORTS (1989] 2 S.C.R.

This aspect of under-inclusiveness is assailed as violative of Article 14.
A
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).

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 impos-
ing an 'Expenditure-Tax', as known to Law, accepted notions of
...
c 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
D 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 res-
F trictions on their freedom of business. ..i...

6. Re: Contention (a): fl

Sri Palkhivala, learned Senior Counsel for the petitioners, con-
tended 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 techni-
cal 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

,_
HOTEL FEDERATION v. U.O.l. [VENKATACHALIAH, J.] 933

')' a federal polity of legislative powers between the Union and the States
A
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 B
~ 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 "expenditure-
tax". 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 c
-1- a 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 D
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 princi- E
ples 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, F
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
tax payer or family. This implies that the tax will be payable G
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 consump-
tion expenditure, ................................... .
. . . . . . . . . . . . . . . . or, alternatively, by summing up iJl the
receipts and substracting therefrom expenses of earning H
934 SUPREME COURT REPORTS [1989] 2 S.C.R.

income as well as outflows in the form of savings (going into ·~
A different types of investments, including repayment of past
loans). In practice, the latter method would be pre-
ferable."

(Emphasis Supplied)
B
"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 imagina-
tion 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
c 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 recom-
D mended the introduction of a direct tax on personal con-
sumption 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
E 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)

F "Under the scheme of expenditure taxation sugges-
ted 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 comprehen-
sive tax return showing all his receipts, investments, etc.,
and all the items for which he claimed exemption .... "
G
"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. In
particular, it has been maintained that India should
seriously consider moving towards a progressive expendi-
H ture tax for three important reasons:
HOTEL FEDERATION '· U.0.l. [VENKATACHALIAH, J.] 935

(a) it will promote savings;
A

(b) it would be, on the whole, more equitable than
the present or any practicable forin of income
tax; and

(c) it will significantly reduce the inducement for B
direct tax evasion."

In Musgrave on 'Public Finance', referring to the concept of .·

- Personal Expenditure Tax, it is stated:

" ..... In analQgy to the income tax, the taxpayer would
determine his total consumption for the year, subtract what- c
-+' ever personal exemptions or deductions were allowed, and
apply a progressive rate schedule to the remaining amount
of taxable consumption".

(Emphasis Supplied) D

Sri Palkhivala also referred to certain passages of Nicholas Kaldor
"On Expenditure Tax" and the same eminent economists report on
"Indian Tax Reform", to reinforce the submission that the concep-
tualisation of 'Expenditure-Tax', as a fiscal tool for economic regula-
tion, has a specific and definite connotation and the "Tax" so con- E
ceptualised by experts on public finance is an entirely different idea
from the one-built into the present legislation. The very concept of
'Expenditure Tax' envisaged in the impuged legislation, it is urged, is
unknown to accepted principles of public finance and is the result of a
grave misconception as to the essential nature and incidents of what in
law and legislative practice is recognised as 'Expenditure Tax'. The F
whole exercise, learned counsel said, is a draft on credibility and that
the Finance Minister's speech on the Bill leaves no doubt that what the
Government wanted from the law was ryally a tax on "Luxuries". The
impost, it is urged, is not susceptible of any other legitimate under-
standing than that it is in substance and effect, a tax on "Luxuries"
within the States' power. Sri Palkhivala emphasised the relevance G
of what was implicit in the observations of this court in Azam Jha
Bahadur v. Expenditure Tax Officer, [1972] 1 SCR 470 made while
upholding the legislative competence of the Union Parliament to enact
the Expenditure Tax Act 1957, as referable to the residuary Entry 97
of List I. The implication of the observations of this Court at page 479
of the report, according to learned counsel, is that what distinguished H
936 SUPREME COURT REPORTS [1989] 2 S.C.R.

an "expenditure-tax" from a levy under Entry 62 of List II, was that -'(
A
the scheme of taxation took into account the totality of expenditure
over a unit of time, as distinct from sums laid out on stray purchases of
luxuries.

8. Shri Palkhivala, then, submitted that the notion of expendi-
B ture tax, as recognised by legislative-practice is a relevant factor. In
Croft v. Dunphy, [1933 I AC 156 Lord Mc Millan held that when power
is conferred on the legislature on a particular topic it is important, in.

-
determining the scope of the power.• to have regard to what, in legisla-
tive practice, is ordinarily treated as embraced within the topic and
particularly in legislative practice of the State which has conferred the
power. In Wallace Brothers & Co. Ltd. v. CIT, Bombay City, [1948]
c L.R. 75, IA 86 Lord Uthwatt referred to the permissibility and,
indeed, the importance to refer to the legislative-practice as to what is
ordinarily treated as within the topic of legislation in understanding
the scope of a legislative-power. The notion of expenditure-tax in the
scheme of the Expenditure Tax Act, 1957, would, it is urged, detract
D from such legislative-practice.

9. The second limb of the argument is that the impost is clearly
of the nature of a tax on luxuries within Entry 62 of List I. The simple
test, according to the argument, is whether, if a State legislature had ~
enacted a similar law it would not have been held to be within its
E competence under Entry 62 of List II? The answer would, according to
the submission, be in emphatic affirmation, Referring to the concept
of a luxury tax, learned counsel referred to the New Encyclopaedia
Britanica Vol. 7 which referring to "luxury-tax" says:

"Luxury tax, excise levy on goods or services con-
F sidered to be luxuries rather than necessities. Modern
examples are taxes on jewellery and perfume. Luxury taxes
may be levied with the intent of taxing the rich, as in the
case of the late 18th-and early 19th-century British taxes on
carriages and manservants; or they may be imposed in a
deliberate effort to alter consumption patterns, either for
G moral reasons or because of some national emergency. In
modern times, the revenue production of luxury taxes has
probably overshadowed the moral argument for them.
Furthermore, the progressive nature of the early taxes
began to be lost as more lower-income people's
"luxuries" were taxed in the interest of generating addi-
H tional revenue; an example is the amusement tax."
HOTEL FEDERATION v. U.0.1. [VENKATACHALIAH, J.] 937

On the analogy-Of the wealth-tax envisaged by Entry 86 of List I A
it was urged that even as the concept of "wealth" for the imposition of
a tax thereon is not the individual components of the assets of the
assessee but a totality of all assets which the assessee owns, so is the
concept of "expenditure" which does not consist of a few stray items of
expenditure but a systematised reckoning of expenditure for and dur-
ing a particular unit of time. B

• 10. It was then urged that recourse to the residuary power under
Article 248 read with Entry 97 of List I should be the very last refuge
and would be available if, and only if, the other entries in the State and
concurrent lists do not cover the topic.

Reliance was also placed on the observations of the Federal c
--+' Court in Subrahmanyan Chettiar v. Muttuswami Goundan, AIR 1941
FC 47 where it was held:

"But resort to that residual power should be the very
last refuge. It is only when all the categories in the three D
Lists are.absolutely exhausted that one can think of falling
back upon a nondescript."

Shri Palkhivala recalled the following words of caution sounded
by Chinnappa Reddy, J. in International Tourist Corporation v. State
of Haryana, [1981) 2 SCR 364: E

" ..... Before exclusive legislative competence can
be claimed for Parliament by resort to the residuary power,
the legislative incompetence of the State legislature must
be clearly established. Entry 97 itself is specific that a
matter can be brought under that entry only if it is not F
enumerated in List II or List III and in the case of a tax if it
is not mentioned in either of those lists. In a Federal Con-
stitution like ours where there is a division of legislative
subjects but the residuary power is vested in Parliament,
such residuary power cannot be so expansively interpreted
as to whittle .down the power of the State legislature. That G
might affect and jeopardise the very federal principle. The
federal nature of the constitution demands that an interpre-
tation which would allow the exercise of legislative power
by Parliament pursuant to the residuary powers vested in it
to trench upon State legislation and which would thereby
destroy or belittle state autonomy must be rejected H
938 SUPREME COURT REPORTS [1989] 2 S.C.R .•

A Sri Palkhivala also sought to demonstrate how, looked at from another '(
angle, the levy presents an anomalous situation by splitting-up a trans-
action which would otherwise be one of sale of goods and isolating the
price of the goods for separate treatment as a distinct subject-matter
for levy of expenditure-tax, thus robbing the State-power of its
substance.
B
Learned Advocate General for the State of Kerala who inter-
vened made submissions which while being substantially on the lines o~
the petitioners' contentions, however, sought to qualify that legisla-'
live-competence to the extent of operation of the 'Act' in the Union
territories could be sustained.
c 11. Learned Attorney General on the contrary, submitted that
the law, in pith and substance, is not one "with respect to" Luxuries
under Entry 62 List I and the tax on expenditure, as the legislature has
chosen to conceive it, is referrable to residuary power. Learned
Attorney General said that the economists' concept of such a expendi-
D ture tax is at best an idea of the manner of effectuation of fiscal pro-
gramme and is no limitation on the legislative power. Indeed, if a topic
is not shown to fall within the fields of legislation in Lists II or III, no
further inquiry is necessary in order to support the legislative compe-
tence of the Union to legislate on the topic. The purpose of incorporat-
ing a separate List for the Union, as observed in Union of India v. H.S.
E Dhillon, [1972] 2 SCR 33 at 671 is:

" ........... there is some merit and legal effect in
having included specific items of List I for when there are three
lists it is easier to construe List II in the light of Lists I and
II. If there had been no List I, many items in List II would
F perhaps have been given much wider interpretation than can
be given under the present scheme. Be that as it may, we
have the three lists and a residuary power and therefore it ..
seems to us that in this context if a Central Act is challenged
as being beyond the legislative competence of Parliament, it
is enough to enquire if it is a law with respect to matters or
G taxes enumerated in List I!. -If it is not, no further question
arises."

(Emphasis Supplied)

Learned Attorney General characterised the petitioners' conten-
H tion that the impugned impost is really a tax on luxuries or that one
HOTEL FEDERATION v. U.0.I. [VENKATACHALIAH, J.] 939

'I aspect of the taxable event in the sale of goods had impermissibly been
isolated for the creation of an artificial idea 'expenditure', suffers from A
certain basic fallacies. The legislative-powers, it is urged, recognise the
demarcation of distinct aspects of the same matter as distinct topics of
legislation and that the present challenge to legislative competence
overlooks the dichotomy of distinct aspects of the same matter con-
_)_ stituting distinct fields of legislation, the line of demarcation, though B
~ometimes thin and subtle, being real. Learned Attorney-General
- urther contended that the measure adopted for the levy of the tax

.. does not necessarily determine its essential character and that the
object on which the expenditure is laid-out might be an item of luxury
or it might not be one; or the "expenditure" might constitute the price
of the goods but, what is taxed is the "expenditure" aspect which, in
itself, is susceptible of recognition, as a distinct topic of legislation. c
-4I

12. We have bestowed our careful consideration to these rival
contentions. The principal question is whether the tax envisaged by
the impugned law is within the legislative competence of the Union
Parliament. In that sense, the constitutionality of the law becomes D
essentially a question of power which in a federal constitution, unlike a
legally omnipotent legislature like the British Parliament, turns upon
the construction of the entries in the legislative lists. 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 "colour- E
. able 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
/' the purpose of determining what is that the legislature was really
doing. Wherever legislative powers are distributed between the Union F
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 G
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.

The Judicial Committee in Prafulla Kumar Mukherjee and Ors.
v. Bank of Commerce, [1945] FCR 179 referred to with approval the H
940 SUPREME COURT REPORTS [1989] 2 S.C.R.

A following observations of Sir Maurice Gwyer CJ. in Subrahmanyan '(
Chettiar's case:

"It must inevitably happen from time to time that legisla-
tion, though purporting to deal with a subject in one list,
touches also on a subject in another list, and the different
B provisions of the enactment may be so closely intertwined
that blind observance to a strictly verbal interpretatio~1
would result in a large number of statutes being declare<l
invalid because the legislature enacting them may appear
to have legislated in a forbidden sphere. Hence the rule
which has been evolved by the Judicial Committee,
whereby the impugned statute is examined to ascertain its
c 'pith and substance', or its 'true nature and character,' for
the purpose of determining whether it is legislation with
respect to matters in this list or in that."

This necessitates as an "essential of federal Government the role
D of an impartial body, independent of general and regional Govern-
ments", to decide upon the meaning of decision of powers. The Court
is this body.

13. The position in the present case assumes a slightly different Jc
complexion. It is not any part of the petitioners' case that 'expendi-
E lure-tax' is one of the taxes within the States' power or that it is a
forbidden field for the Union Parliament. On the contrary, it is not
disputed that a law imposing 'expenditure-tax' is well within the
legislative competence of Union Parliament under Article 248 read
with Entry 97 of List I. But the specific contention is that the particular
impost under the impugned law, having regard to its nature and inci- ·"
F dents, is really not an 'expenditure tax' at all as it does not accord with
the economists' notion of such a tax. That is one limb of the argument.
The other is that the law is, in pith and substance, really one imposing ,;
a tax on luxuries or on the price paid for the sale of goods. The crucial
questions, therefore, are whether the economists' concept of such a
tax qualifies and conditions the legislative-power and, more impor-
G tantly, whether "expenditure" laid-out on what may be assumed to be y
"luxuries" or on the purchase of goods admits of being isolated and
identified as a distinct aspect susceptible of recognition as a distinct
field of tax-legislation.

14. In Lefroy's 'Canada's Federal System' the learned author
H referring to the "aspects of legislation" under Sections 91 and 92 of the
'I
HOTEL FEDERATION v. U.0.J. [VENKATACHALIAH, J.] 941

"f. Canadian Constitution i.e., British North America Act 1867 observed
A
that "one of the most interesting and important principles which have
been evolved by judicial decisions in connection with the distribution
' of Legislative Power is that subjects which in one aspect and for one
purpose fall within the power of a particular legislature may in another
aspect and for another purpose fall within another legislative power.
_)_ Learned author says: B
i " ..... that by 'aspect' must be understood the aspect or
~ point of view of the l~gislator in legislating the object,
purpose, and scope of the legislation that the word is used
subjectively of the legislator, rather than objectively of the
matter legislated upon."
·C
-+-, In Union Colliery Co. of British Columbia v. Brydeti, See. 1899
AC 580 at 587, Lord Haldane said:

"It is remarkable the way this Board has reconciled the
provisions of section 91 and section 92, by recognizing that D
the subjects which fall within section 91 in one aspect, may,
under another aspect, fall under section 92."

~' Indeed, 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 E
the overlapping must be in law. The same transaction may involve two
or more taxab:., events in its different aspects. But the fact that there is
an overlapping does not detract from the distinctiveness of the aspects.
Lord Simonds in Governor General in Council v. Province of Madras,
(1945] FCR 179 P.C. at 193 in the context of concepts of Duties of
~
Excise and Tax on Sale of Goods said: · F
,.. " ..... The two taxes the one levied on a manufacturer in
respect of his goods, the other on a vendor in respect of his
sales, may, as is there pointed out, in one sense overlap.
But in law there is no overlapping. The taxes are separate
and distinct imposts. If in fact they overlap, that may be G
because the taxing authority, imposing a duty of excise,
finds it convenient to impose that duty at the moment when
the excisable article leaves the factory or workshop for the
first time on the occasion of its sale ...... ''

15. Referring to the "aspect" doctrine Laskin's "Canadian Con- H
stitutional Law" states:
942 SUPREME COURT REPORTS I1989 J 2 S.C.R.
"The 'aspect' doctrme bears some resembiance to those "(
A just noted but, unlike them, deals not with what the 'mat-
ter' is but with what it 'comes within' ..... "
(p. 115)

" ..... it applies where some of the constitutive elements
B about whose conbination the statute is concerned (that is,
they are its 'matter'), are a kind most often met with in.
connection with one class of subjects and others are of a
kind mostly dealt with in connection with another. As in
the case of a pocket gadget compactly assembling knife
blade, screwdriver, fishscaler, nailfile, etc., a dscription of
it must mention everything but in characterizing it the
c particular use proposed to be made of it determines what it
is." +
(p. 116)

" I pause to comment on certain correlations of
D operative incompatibility and the 'aspect' doctrine. Both
grapple with the issues arising from the composite nature of
a statute, one as regards the preclusory impact of federal
law on provincial measures bearing on constituents of
federally regulated conduct, the other to identify what
parts of the whole making up a 'matter' bring it within a
E class of subjects ..... "
(p. 117)

The distinction between what is "ancillariness" and what
"incidentally affecting" the treatise says:

F " . . . . . There is one big difference though it is little
mentioned. Ancillariness is usually associated with an
explicit 'statutory provision of a peripheral nature; talk ~
about 'incidentally affecting' crops up in connection with
the potential of a non-differentiating statute to affect indis-
criminately in its application matters assertedly immune
from control and others. But it seems immaterial really y
whether it is its words or its works which draw the flotsam
within the statute's wake."
(p. 115)

16. Referring to the flexibility in the modes of effectuating a tax
1-1 in view .of innate complexities iii the fiscal adjustment of diverse
HOTEL FEDERATION v. U.0.l. [VENKATACHALIAH, J.] 943

economic factors inherent in the formulation of a policy of taxation
A
and the variety of policy-options open to the State, J Rauls in
"Modern Trends in Analytical and Normative Jurisprudence" (Intro-
duction to Jurisprudence by Lord Lloyd of Hampstead & Freeman,.
5th Edn.) observe<!,:

~. " ..... In practice, we must usually choose between several B
unjust, or second best, arrangements; and then we look to
nonideal theory to find the least unjust scheme. Sometimes
this scheme will include measures and policies that a
• perfectly just system would reject. Two wrongs can make a
right in the sense that the best available arrangement may
contain a balance of imperfections, an adjustment of com- C
pensating injustices."

Adverting to "Expenditure-dampening" policies and the choice
of measures designed to reduce the aggregate demand for goods and
services, the "Dictionary of Economic Terms" by Allan Gilpin says:
D
"Expenditure-dampening Policies: Government measures
designed to reduce the aggregate demand for goods and
services in the community. The measures may consist of
raising taxes (q.v.) lowering government expenditure or
curtailing hire-purchase or other credit facilities.
E
EXPENDITURE-SWITCHING POLICIES.

Expenditure-switching Policies: Government measures
designed to influence the pattern of expenditure by the
community. For example, the taxing of imported goods
may effect a switch of expenditure from imported to home- F
produced goods; devaluation of the nation's currency may
have the same effect as imports hecome more expensive.
See EXPENDITURE-DSAMPENING POLICIES."

Learned Attorney General also referred to the following obser-
vations in The British Tax System (by J .A. Kay M.A. King) to indicate G
that a tax on expenditure need not necessarily be an expenditure-tax in
the economists' reckoning of things:

"An annual expenditure tax, which seeks to measure
an individual's spending in each separate year of assess-
ment, poses very serious administrative problems, because H
944 SUPREME COURT REPORTS [1989] 2 S.C.R.

it requires that his assets be assessed annually ...... "
A
" ..... But there is a much easier way of reaching a more
•
accurate answer. You simply measure how much foreign
currency you took with you, add the amount of currency
you bought while abroad, and substract what was left when
B you got back. You measure, not the expenditure itself, but
the sources of the expenditure, and can thus achieve a sim- ·i
pie and reliable measure on the basis of a small number·of '
recorded (and readily verifiable) transactions."

It is trite that the true nature and character of the 1-gislation
must be determined with reference to a question of the power of the
c legislature. The consequences and effect 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.

D 'Indeed, as an instance of different aspects of the same matter,
being the topic of legislation under different legislative powers,
reference may be made to the annual-letting value of a property in the
occupation of a person for his own residence being, in one aspect, the
measure for levy of property-tax under State-law and in another aspect
constitute the notional or presumed income for purpose of income-tax.
E
16. Petitioners' reference to legislative-practice as determining
the scope of the present legislation does not assist them. There are two
infirmities in the contention. The first is that the question of legisla-
tive-practice as to what a particular legislative-entry could be held to
embrace is inapposite while dealing with a tax which is sui-generis or -\
F non-descript imposed in exercise of the residuary powers so long as
such tax is not specifically enumerated in Lists II & III. Secondly,
there is no conclusive material indicating that the approp1iate legisla- 'i
ture had limited the notion of a tax of this kind within any confines. It
is relevant to recall the words of Lord Uthwatt in Walace Brothers case
in 1959 SCR 379 at 402;
G
"The point of the reference is emphatically not to seek a
pattern to which a due exercise of the power must conform.
The object is to ascertain the general conception involved
in the words in the enabling Act."

H But as observed in Navinchandra Mafatlal v. CIT, Bombay City,
HOTEL FEDERATION v. U.0.1. [VENKATACHALIAH, J.] 945

[1955] 1 SCR 829 the meaning the word "income" is given in the A
Income-tax Act is not determinative of its content as an entry in a
legislative list. Das J. observed:

" ..... It is, therefore; clear that none of the authorities
relied on by Mr. Kolah establish what may be called a
legislative practice indicating the connotation of the term B
"income", apart from the Income-tax statute. In our view,
it will be wrong to interpret the word "income" in entry 54

- in the light of any supposed English legislative practice as
contended for by Mr. Kolah ....... "
(p. 835)

17. In Unionoflndiav.H.S. Dhillion, [1972]2SCR33at61this C
Court dealt with the scope of the Residuary power under Entry 97 List
I. Referring to following observations of Lord Loreburn in Attorney-
General for Ontario v. Attorney-General, for Canada (See: (1912) AC
571at581:
D
"Now, there can be no doubt that under this organic
instrument the powers distributed between the Dominion
on the one hand and the provinces on the other hand, cover
the whole area of self-government within the whole area of
Canada. It would be subversive of the entire scheme and
policy of the Act to assume that any point of internal self- E
government was withheld from Canada."
(Emphasis Supplied)

It was held that the last portion of the above excerpt applied a fortiori
to the Constitution of the Sovereign, Democratic Republic. Sikri CJ.
proceeded to observe (See: 1972 (2) SCR 33 at 61): F

" .... If this is the true scope of residuary powers of Parlia-
ment, then we are unable to see why we should riot, when
dealing with a Central Act, enquire whether it is legislation
in respect of any matter in List II for this is the only field
regarding which there is a prohibition against Parliament. G
If a Central Act does not enter or invade these prohibited
fields there is no point in trying to decide as to under which
entry or entries of List I or List III a Central Act would
rightly fit in."

Then, considering the includibility of the value of agricultural H
946 SUPREME COURT REPORTS [1989] 2 S.C.R.

A property in the wealth of the assessee under the Wealth Tax Act
despite the exclusionary words in Entry 86, List I the learned Chief
Justice said:

" We are· definitely of the opinion, as explained a
little later, that the scheme of our Constitution and the
B actual terms of the relevant articles, namely, Art. 246, Art.
248 and Entry 97 List I, show that any matter, including tax, l
which has not been allotted exclusively to the State Legisla-
tures under List II or concurrently with Parliament under
List III, falls within List I, including Entry 97 of that list
read with Art. 248."
c It was held that the subject did not fall under Entry 49 List II and that
despite the exclusion in Entry 86 List I the Union, as the repository of
the residuary power, had the competence to legislate as long as the
topic was not allotted to or within the State-power. It was further
observed:
D
"It seems to us unthinkable that the Constitution-
makers, while creating a sovereign democratic republic,
withheld certain matters or taxes beyond the legislative _.{..
competency of the legislatures in this country either legis-
lating singly or jointly ..... "
E
" ..... There is no principle that we know of which debars
Parliament from relying on the powers under specified
entries 1 to 96, List I, and supplement them with the
powers under Entry 97 List I and Art. 248, and for that
matter powers under entries in the Concurrent List."
F (p. 74)

18. The snbject of a tax is different from the measure of the levy.
The measure of the tax is not determinative of its essential character or
of the competence of the legislature. In Mis. Sainik Motors v. State of
Rajasthan, [ 1962] 1 SCR 517 the provisions of a State-law levying a tax
G on passengers and goods under Entry 56 of List I were assailed on the
ground that the State was, in the guise of taxing passengers and goods,
in snbstance and reality taxing the income of the stag.e carriage
operators or, at any rate, was taxing the "fares and freights'', both
outside of its powers. It was pointed out that the operators were
required to pay the tax calculated at a rate related to the value of the
·H fare and freight. Repelling the contention, Hidayatullah J. speaking
for the Court said:
HOTEL FEDERATION v. U.O.I. [VENKATACHALIAH, J.I 947

" .... We do not agree that the Act, in its pith and substance, lays the
A
tax ·upon income and not upon passengers and goods. Section 3, in
terms, speaks of the charge of the tax "in respect of all passengers
carried and goods transported by motor vehicles", and ihough the
measure of the tax is furnished by the amount of fare and freight
charged, it does not cease to be a tax on passengers and goods ..... "
B

.r Indeed, reference may be made to the following statement in
Encyclopaedia Britannica (Vol. 14 page 459) on 'Luxury Tax':

- "A different approach to luxury taxation, much less
frequently found, seeks to single out the luxury component
of spending on a given object rather than taxing specified C
goods and services as luxuries. One example of this is the
Massachusetts 5% tax on restaurant meal of $ 1 or more
"
(Emphasis supplied)

19. The submissions of the learned Attorney-General that the D
tax is essentially a tax on expenditure and not on Luxuries or sale of
goods falling within the State power, must, in our opinion, be accepted.
As contended by the learned Attorney General, 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. Contention (a) is, in our opinion, E
unsubstantial and, accordingly, fails.

20. Re: Contention (b):

It is urged that the application of the Act is confined to hotels
where the "room-charges" for any unit of residential accommodation F
are Rs.400 or more per day per individual, while expenditure of grea-
ter magnitude and quantum incurred in other hotels is not exigible to
the tax, either because such room-charges are less than Rs.400 or
because the establishment which, though providing food and drink and
other services envisaged by Section 5, may not provide residential
accommodation. This distinction, it is said, is violative of the constitu- G
tional pledge of equality. The averments in this behalf in the
memorandum of writ petition are these:

"There is no basis or intelligible differentia for discriminat-
ing between the levy of the tax on expenditure over food or
drink provided by a hotel and the food or drink provided by H
948 SUPREME COURT REPORTS [1989] 2 S.C.R.

1
a restaurant or eating house not situated in a hotel (or in a ~
A
hotel to which the Act does not apply) even though the cost
of food or beverage is higher than that on similar items in
an applicable Hotel. There is also no intelligible differentia
for discriminating between levying of tax on expenditure
on food and drinks outside the hotel which is provided by
B the hotel and not levying tax on expenditure on food and
drinks incurred outside the hotel but which is not prl\vided r ,lo-_
by the hotel, even though the latter expenditure may be ~
more greater than the former .... "

"The arbitrariness and lack of intelligible differentia is
even more apparent in respect of clause 5(d) read with
c Exception (c). To give an example, if a shop or office is
owned by the hotel in the hotel, any expenditure incurred
in such a shop or office would attract expenditure tax but if
such a shop or office is not owned or managed by the hotel
even though situated in the hotel premises, such expendi-
D ture in by the hotel would not be liable to the impugned
expenditure tax."

"By way of illustration it may be pointed out that in
the City of Bombay there are numerous restaurants like,
Talk of the Town, China Garden, Gazebo and Gaylord
E which are similarly situated in every way to restaurants
located in applicable hotels, from the point of view of their
decor, furnishing, the range of the menu, the pricing of the
items, the standards of service. The clientele of such
restaurants are also as affluent as the class of people who
patronise restaurants which are located in applicable
F hotels. Further more, many of the said independent
restaurants are far more luxurious and expensive than
restaurants and/or dining rooms attached to applicable
hotels in the City of Bombay which have one or more
rooms charging a daily tariff of rupees 400 or more per
person."
G y
It is now well settled though taxing laws are not outside Article
14, however, having regard to the wide variety of diverse economic
criteria that go into the formulation of a fiscal-policy legislature en joys
a wide latitude in the matter of selection of persons, subject-matter,
events, etc., for taxation. The tests of the vice of discrimination in a
H taxing law are, accordingly, less rigorous. In examining the allegations
HOTEL FEDERATION v. U.O.l. [VENKATACHALIAH, J.] 949

of a hostile, discriminatory treatment what is looked into is not its
phraseology, but the real effect of its provisions. A legislature does A
no.t, as an old saying goes, have to tax everything in order to be able to
tax something. If there is equality and uniformity within each group,
the law would not be discriminatory. Decisions of this Court on the
matter have permitted the legislatures to exercise an extremely wide
discretion in classifying items for tax purposes, so long as it refrains B
y from clear and hostile discrimination against particular persons or
1 classes.

But, with all this latitude certain irreducible desiderata of equa-
lity shall govern classifications for differential treatment in taxation
laws as well. The classification must be rational and based on some
qualities and characteristics which are to be found in all the persons c
grouped together and absent in the others left out of the class. But this
alone is not sufficient. Differentia must have a rational nexus with the
object sought to be achieved by the law. The State, in the exercise of
its Governmental power, has, of necessity, to make laws operating
differently in relation to different groups or class of persons to attain D
certain ends and must, therefore, possess the power to distinguish and
classify persons or things. It is also recognised that no precise or set
formulae or doctrinaire tests or precise scientific principles of exclu-
sion or inclusion are to be applied. The test could only be one of
palpable arbitrariness applied in the context of the felt needs of the
times and societal exigencies informed by experience. E

21. Classifications based on differences in the value of articles or
the economic superiority of the persons of incidence are well recog-
nised. A reasonable classification is one which includes all who are
similarly situated and none who are not. In order to ascertain whether
persons are similarly placed, one must look beyond the classification F

.. and to the purposes of the law .

In Jaipur Hosiery Mills Ltd. v. State of Rajasthan, (1970] 2 SCC
27 a notification under the Rajasthan Sales-tax Act, 1950, exempting
from tax the sale of garments which did not exceed Rs.4 per piece was
-./. assailed. This court found the classification permissible. It was held:. G

" ..... It has to be borne in mind that in matters of taxa-
tion the Legislature possesses the large freedom in the mat-
ter of classification. Thus wide discretion can be exercised
in selecting persons or objects which will be taxed and the
statute is not· open to attack on the mere ground that it H
950 SUPREME COURT REPORTS [1989] 2 S.C.R.

takes some persons or objects and not others. It is only ''
A
when within the range of its selection the law operates
unequally and cannot be justified on the basis of a valid
classification that there would be a violation of Article 14."

In Hiralalv. State of UP, [1973] 2 SCR 502 this Court said:
B
" .... it is open to the legislature to define the nature of the i
goods, the sale or purchase of which should be brought to 4
tax. Legislature was not incompetent to separate the
processed or split pulses from the unsplit or unprocessed
pulses and treat the two as separate and independent
goods.''
c
" ..... But the legislature has wide powers of classification -l.
in the case of taxing statutes."
(p. 510)

D " ..... The classification between the processed or split
pulses, and unprocessed or unsplit pulses is a reasonable
classification. It is based on the use to which those goods
can be put. Hence, in our opinion, the impugned classifica-
tion is not violative of Art. 14."
(p, 511)
E
In State of Gujarat v. Sri Ambika Mills Ltd., [1974] 3 SCR 760
Mathew J. said:

"Statutes are directed to less than universal situations. Law
reflects distinction that exist in fact or at least appear to
F exist in the judgment of legislations-those who have the
responsibility for making law fit fact. Legislation is essen-
tially empiric. It addresses itself to the more or less crude
outside world and not to the neat, logical models of the
mind. Classification is inherent in legislation. To recognize
marked differences that exist in fact is living law; to dis-
G regard practical differences and concentrat'' on some
abstract identities is lifeless logic."

"In the utilities, tax and economic regulation cases, there
are good reasons for judicial self-restraint if not judicial
deference to legislative judgment. The legislature after all
H has the affirmative responsibility. The Courts have only the
HOTEL FEDERATION v. U.0.J. [VENKATACHAL!AH, J.] 951

power to destroy, not to reconstruct. When these are added
A
to the complexity of economic regulation, the uncertainty,
the liability to error, the bewildering conflict of the
experts, and the number of times the judges have been
overruled by events-self-limitation can be seen to be the
path to judicial wisdom and institutional prestige and
stability." B
(p. 784)

In G.K. Krishnan v. Tamil Nadu, ~1975] 2 SCR 715 Mathew J.

- referred to the following observations of the Supreme Court of U.S.A.
in San Antonio School Districtv. Rodrigues,:
c
"Thus we stand on familiar ground when we continue to
_J_
acknowledge that the Justices of this Court lack both the
expertise and the familiarity with local problems so neces-
sary to the making of wise decisions with respect to the
raising and disposition of public revenues. Yet, we are
urged to direct the States either to alter· drastically the D
present system or to throw out the property tax altogether
in favour of some other form of taxation. No scheme of
taxation, whether the tax is imposed on property, income,
or purchases of goods and services, has yet been devised
which is free of all discriminatory impact. In such a
complex arena in which no perfect alternatives exist, the E
Court does well not to impose too rigorous a standard of
scrutiny lest all local fiscal schemes become subjects of
criticism under the Equal Protection Clause."
(p. 729)

In I. T. 0. v. N. Takim Roy Limbe, [1976] 3 SCR 413 it was held: F

" ..... Given legislative competence, the legislature has
ample freedom to select and classify persons, districts,
goods, properties, incomes and objects which it would tax,
and which it would not tax. So long as the classification
made within this wide and flexible range by a taxing statute G
does not transgress the fundamental principles underlying
the doctrine of equality, it is not vulnerable on the ground
of discrimination merely because it taxes or exempts from
tax some incomes or objects and not others. Nor the mere
fact that tax falls more heavily on some in the same cate-
gory, is by itself a ground to render the law invalid. It is only H
952 SUPREME COURT REPORTS [ 1989] 2 S.C.R.

when within the range of its selection, the law operates ,,
A
unequally and cannot be justified on the basis of a valid
classification, that there would be a violation of Article
14."

In the present case, the bases of classification cannot be said to
B he arbi!rary or unintelligible nor as being without a rational nexus with
the object of the law. A hotel where a unit of residential accommoda-
tion is priced at over Rs.4UU per Jay per individual is, in the legislative j

-
wisdom, considered a class apart by virtue of the economic superiority
of those who might enjoy its custom, comforts and services. This
legislative assumption cannot be condemned as irrational. It is equally
well recognised that judicial veto is to be exercised only in cases that
c leave no room for reasonable doubt. Constitutionally is presumed.
These words of James Bradley Thayer may be recalled:

"This rule recognizes that, having regard to the great, com-
plex ever-unfolding exigencies of government, much which
D will seem unconstitutional to one man, or body of men, may
reasonably not seem so to another; that the constitution
often admits of different interpretations; that there is often
a range of choice and judgment; that in such cases the con-
stitution does not impose upon the legislature any one
specific opinion, but leaves open this range of choice; and
E that whatever choice is rational is constitutional."
(Emphasis Supplied}

[See: Supreme Court Statecraft; The Rule of Law and
Men: Wallace Mendelson: p. 4.]

F Thayer also referred to the words of a Chief Justice of Penn-
sylvania way back in 1811 which are also worth recalling:

"For weighty reasons, it has been assumed as a principle in
constitutional construction by the Supreme Court of the
United States, by this court, and every other court of repu-
G tation in the United States, that an Act of the legislature is
not he declared void unless the violation of the constitu·
tional is so manifest as to leave no room for reasonable
doubt."

In Secretary of Agriculture v. Central Roig Refining Co., [1949]
H 338 U.S. 604 the Supreme Court of USA said:
HOTEL FEDERATION v. U.O.J. !VENKATACHALIAH, J.] 953

" ..... This court is not a tribunal for relief for crudities
A
and inequities of complicated experimental economic
Legislation."

In Mis Hoechst Pharmaceuticals Ltd. v. State of Bihar, AIR 1983
SC 1019 it was observed:
B
" ..... On questions of economic regulations and related
matters, the court must defer to the legislative-judgment.
When the power to tax exists, the extent of burden is a

- matter for the discretion of the law-makers. It is not the
function of the Court to consider the propriety or justrn,ss
of the tax or enter upon the reality of Legislative policy. If
the evident intent and general operations of the tax legisla- C
tion is to ad just the burden with a fair reasonable degree of
equality, the constitutional requirement is satisfied ..... "

22. It is contended that the standards and measures for the com-
putation of the "chargeable-expenditure" under the Act is vague and D
arbitrary. It is pointed out that the e~pression or "other similar
services" in clauses (d) of Section 5 is non-specific and vague. This
argumeni does not commend itself to us. It is true that when the
~ statute says "other similar services" it does not contemplate that the
"other services" shall, in all respects, be the same. If they were the
same then words would, indeed, be unnecessary. These were intended E
~ to embrace services like-but not identical with-those described in
the preceding words.

The content of the expression "other similar services" following,
as it does, the preceding expressions "by way of beauty parlour, health
club, swimming pool or ... " has a definite connotation in the interpre- F
tation of such words in such statutory contexts. The matter is one of
construction whether any particular service falls within the section and
not one of constitutionality.

We find contention (b) also not acceptable either.
G
23. Re: Contention (c):

It is urged that the provisions ofthe Act impose an unreasonable
restriction on the petitioners' fundamental right under Article
19(1)(g). It is averred in the petition:
H
954 SUPREME COURT REPORTS [1989) 2 S.C.R.

" The various taxes to which the hotel industry is '>;
A
subject to are mentioned in the earlier part of this Petition.
Thus in respect of food and beverages consumed in a hotel,
the element of taxes representing sales tax and the present
Expenditure-Tax works out, for example in Maharashtra,
to as much as thirty five per cent. Likewise, in respect of
B the room tariff, element of tax works out, for example in ;..._
Gujarat, to as much as thirty seven per cent. The details of-{
the said calculations are given in Exhibit 'D' annexed to

c
this Petition. The hotel industry today is subject to an
extremely heavy dose of taxation in the shape of income-
tax and even the recent tax on works contracts. The
Petitioners say that the tourism, industry is now not in a
position to sustain any additional burden and the impugned
-
tax is literally the last straw on the camel's back ...... " ....
It is also contended:

D " . . . . . Several of the hotels belonging to members of
Petitioners Associations have entered into long-term con-
tracts for supply of food and beverages and for providing
accommodation. The execution of such contracts would be-
come onerous and even impossible in view of the levy of .,+.-
the present Expenditure-Tax. There is no provision in the
E Act or any separate legislation whereby hotels can pass on
~
such a tax to persons who have contractually agreed to
avail of any services at contracted rates ..... ''

24. A taxing statute is not, per-se, a restriction of the freedom
under Article 19(1)(g). The policy of a tax, in its effectuation, might, ..I..
F 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. Every ._
cause, it is said, has its martyrs. Then again, the mere excessiveness of
a tax or even the circumstances that its imposition might tend towards
the diminution of the earnings or profits of the persons of incidence
G does not, per-se, and without more, constitute violation of the rights y
under Article 19(1)(g). Fazal Ali J., though in a different context, in
Sonia Bhatia v. State of U.P. & Ors., [1981) 3 SCR 239 at 258
observed:

" The Act seems to implement one of the most
H important constitutional directives contained in Part IV of
HOTEL FEDERATION v. U.0.1. [RANGANATHAN, J.] 955

'~ the Constitution of India. If in this process a few indivi- A
duals suffer severe hardship that cannot be helped, for indi-
victual interests must yield to the larger interests of the
community or the country as inceed every noble cause
claims its martyr."
B
Contention (c) is also insubstaµtial.
,..i.__

1 25. In the result, for the foregoings reasons, these petitions fail
and are dismissed. However, in the circumstances of the case there will
~
be no order as to costs.

RANGANATHAN, J. l. I have perused the judgment of my c
learned brother Vcnkatachaliah, J. in this batch of writ petitions as
).. well as in the two connected batches of matters viz. CA Nos. 338 and
339 of 1981 and WP Nos. 254-261of1981. I respectfully agree with his
conclusions in all these matters but wish to add a few words, primarily
in so far as the constitutional validity of the Expenditure Act, 1987 is
concerned. As my learned brother has set out, analysed and discussed D
in detail the provisions of the various statntes, the validity of which is
in question, I shall avoid a repetition of the same and confine myself
only to the consideration of the crucial issues for determination.
~~
2. The contentions of the assessees in the three batches of cases
above referred to, prima facie, sought to make out a state of direct E
collision between a group of State enactments on the one hand and a
couple of Central enactments on the other, which cannot be averted
save by declaring one set of the enactments to be invalid. The power-
ful, if also "diplomatic", endeavour of the learned Attorney General,
),. . appearing for the Union of India, was to show that these sets of enact-
ments are not really on a collision course at all but, on the contrary, F
are proceeding on parallel lines and that each of the sets of legislations
is quite safe from attack on the ground of legislative incompetence.
-- Whether this contention is acceptable and both sets of enactments can
be saved or whether one of the two has tcrgive way to the other is the
question for consideration in these batches of cases.
G
3. The set of State enactments which blazed the trial (to be
"""" followed up by others) and hence are prior inpoint of time, is that
comprising of various statutes passed by several States in India. The
specific State legislation which are in challenge in the petitions and
appeals before us (as indicated in the brackets at the end) are:
H
956 SUPREME COURT REPORTS I 1989] 2 S.C.R.

(a) Gujarat Tax on Luxuries (Hotels and Lodging Houses) Act )I
A (No. 24 of) 1977.
(C.A. 338, 339/1981; W.P.
Nos. 7990,8338,8339,
9110of 1981)

B (b) Tamil Nadu Tax on Luxuries in Hotels and Lodging Houses ~
Ordinance, 1980 followed by an act (Act No. 6 of 1981) (
(WP 162)82) ~

( c) Karnataka Tax on Luxuries (Hotels and Lodging Houses) ~
Act (No. 22 of) 1979.
(WP 1271-2/82)
c
(d) West Bengal Entertainments and Luxuries (Hotels and
Restaurants) Tax Act (No. 21 of) 1972.
(WP 5321/85)

D The States of Uttar Pradesh, Maharashtra and Kerala have also passed
similar enactments, being the:

(a) Uttar Pradesh Taxation and Land Revenue Laws Act, (No. ~
8) of 1975;

E (b) Maharashtra Tax on Luxuries (Hotels & Lodging Houses)
Act (XLI of) 1987; and

(c) Kerala Tax on Luxuries in Hotels and Lodging Houses Act
(No. 32 of) 1976 repealing Kerala Ordinance No. 5 of 1976.

F 4. The above statutes have apparently been enacted by the
various State Legislatures in exercise of the legislative powers con-
ferred on them under article 246(3) of the Constitution, read with ,'I
Entry 62 of List II in the Seventh Schedule to the Constitution of
India, which runs:

G "62. Taxes on luxuries, including taxes on entertainments,
amusements, betting and gambling."

(Some aspects thereof are also sought to be related to Entry 54 of List
II, but as this stands on the same footing as Entry 62 for the purposes
of the present case, no separate reference is made to Entry 54
H hereinafter). This is clear because the short title to each of the above
HOTEL FEDERATION v. U.0.1. [RANGANATHAN, J.] 957

enactments describes it as an Act to provide for the "imposition" or
-+· "the levy and collection" of a tax on "luxuries" or '~entertainment and A
luxuries" in or provided in "hotels" or "hotels and restaurants" or
"hotels and lodging houses". Although "luxuries and entertainments"
may be provided or availed of in various ways and could all be made
-- the subject matter of a tax by virtue of the entry above referred to,
· these enactments are confined only (o one type of such entertainments · B

" . and luxuries viz. those provided. in hotels, restaurants or lodging
. houses as defined under the relevant enactments. Also, only certain
specified classes of entertajnments or luxuries provided in such places
are brought to tax. The details of the imposition, levy and collection of·
the taxes vary with the enactments and need not be repeated here. It is
quite clear from the scheme of the legislations that they all fall within
the scope of Entry 62 of List II set out earlier. My learned brother has c
,. held so and I agree. Indeed, their validity would, perhaps, have gone
I unchallenged but for the enactment of Parliament of the Hotel
Receipts Tax, 1980, (hereinafter referred to as 'the 1980 Act'). When,
in pursuance of the 1980 Act, a tax on son,e of the receipts of a hotelier
was sought to be charged w .e.f. 1st February, 1981, it was but natural D
for some of the affected hoteliers to rush to Court for relief against this
. two-pronged taxation of their receipts. Writ petitions were filed chal-
lenging the competence of both sets of enactments and these have now
come up for final hearing. It must, however, be mentioned here that
~ the levy of the Hotel Receipts Tax 'was withdrawn after a year;
nevertheless it was in operation for one 'assessment year and hence the E
challenge to its validity is not purely academic. The validity of the 1980
Act has been upheld by my learned brother as traceable to Entry 82 of
List I in the Seventh Schedule to the Constitution. Taxes on income
other than agricultural income. I respectfully agree.
~ --. , 5. The relief conferred by the withdrawal of the 1980 Act was, F
however, short-lived; it was only a "lull before the storm" which
descended on all hoteliers in the form of the Expenditure Tax Act,
1987 (hereinafter referred to as 'the· 1937 Act'). Before referring to
this enactment, the validity of which has been challenged in writ peti-
tion no. 1393 of 1987, it will be convenien( to run back on the time
machine by a period of three decades. G

>. 6. Mr. Nicholas Kaldor, Reader in Economics in the University
of Cambridge, was the proponent of a lery styled as "Expenditure
Tax". When the Government of India requested him, sometime in the ~
fifties, to have a look at the system of direct taxation prevailing in this
country and make his recommendations for a comprehensive scheme H
!
958 \ SUPREME COURT REPORTS [1989] 2 S.C.R.
'
A of tax reform, he.· suggested, inter alia, the levy of an "expenditure
tax". His opinion was that such a levy, supplementing an income tax
levy at rates lower than those prevalent then, would enable· the
Government to more effectively harness its resources. In the course of
arguments before us, copious references have been made to passages
from Nicholas Kaldor's book ('An Expenditure Tax' published by
B George Allen & Unwin Ltd. of U.K.) and his 'Survey Report on
Indian Tax Reform' (published by the Government of India) out it will
be sufficient to mention here that Prof. Kaldor's report was imple-
mented by Parliament by enacting the Expenditure Tax Act, 1957
(hereinafter referred to as 'the 1957 Act'). The validity of the above
Act was challenged before this Court but unsuccessfully. The decision
C- _of this Court is reported as Azamjah v. E. T.O., [1972] 1 SCR470. The
nature and scope of the Act have been dealt with in the above decision
and it is unnecessary to repeat the same here.

·1. The 1957 Act was withdrawn after a few years; to be precise,
·r
with effect from assessment year 1965-66. It was given up both because
D it was found to be too cumbersome and difficult to administer and also
because the yield of revenue therefrom was not substantial due to the
limited number of assessees it covered. After it was given up, as
already mentioned, the 1980 Act occupied the field for a very short
time, the pendency of writ petitions challenging its validity having
perhaps largely contributed to its withdrawal. After some interval,
E · now, Parliament has come in with the 1987 Act. The ambit a!ld scope
of this Act along with, on the one hand, its distinguishing features, as
·contrasted with the 1957 and 1980 Acts and its similarities, when com-
pared to the State legislations, on the other, have been brought out in
·the judgme.nts of brother Venkatachaliah J. and do not need repetition
, here. It is in this background that we have to determine the pith and
F,_ substance of the 1987 Act and decide whether Parliament had the ""
legislative competence to enact the same or not.

___ 8. The short question that one has to answer in these. cases is
whether the levies in question by the States and the Union can both
stand or whether we have to treat the1evies as either tax on 'luxuries'
or as tax on 'income' or 'expendituret and thus uphold one of them but
not both. I do not think there can by any doubt at all that, in the
context of the social and economic conditions that prevailed in India, it A
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. The decision of this
H Court in Abdul Kadir & Sons v. State of Kera/a, [1976] 2 SCR 690, and
HOTEL FEDERATION v. U.0.1. (RANGANATHAN, J.J 959

--{ in particular, the discussion at pages 699 to 70 I places this beyond all
A
doubt. This aspect has also been discussed by Thakkar, J. of the
Gujarat High Court (as His Lordship then ~?s) in the judgment under
appeal and I am in agreement with his reasonings and conclusion that
the Gujarat statute has been validly enacted in exercise of the 'powers
available to the State legislatures under Entry 62 of List II. This applies
equally to. the other impugned State enactments as well. Bt
r 9. It has been argu~d that the monetary ceilings for the rents
have been fixed at such low figures that even temporary stay at a not so
confortable hotel or lodging house, when a person is constrained to go
outside his hometown, will become a luxury,· according to these
standards. Indeed some statistics have been supplied by the Gujarat
petitioners in support of such a contention. But this, I .think, is a
c
) . matter which must be left to legislative determination. As is well
known the legislature has, particularly in a taxing statute, a consider-
able .amount of latitude and there is no material to hold 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, D
one has to presume that the legislature had good reason for fixing
these standards. The State legislations are therefore, clearly, within
the competence of the State legislatures and are not liable to be
challenged.

10 .. It seems equally clear that the pith and legislation of the 1980 E
Act is, as held by Venkatachaliah, J. traceable to Entry 82 of List L In
interpreting the scope of the legislative entries in the. three lists, we
have to keep in mind that, while on the one hand, it is desirable .that
each entry in each of the lists should receive the broadest interpreta-
tion, it is equally important, on the other, that the three lists should be
~.. read together and harmoniously, Our attention was drawn to some of F
the entries in List II which show that the legislative power in respect
thereof are to be exercised. subject to the powers of Parliament
envisaged under List I, vide entry Nos. 2, 17, 22, 23, 24, 26, 27, 32, 33
and 50. There is no doubt that these entries have to be read subject to
the entries of List I which have been mentioned or the powers of
Parliament referred to therein. These, however, are instances of G
entries which, on their very language, are controlled by entries in List
I. But even apart from these instances, the language of clause (1) and
(3) of article makes it clear that 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 power of Parliament to make laws with respect
to any .of ·the !natters enumerated in List I. Hence, ifa matter is H
960 SUPREME COURT REPORTS [1989] 2 S.C.R.

covered by an entry in the Union List, no restrictions can be read into ',...
A
the power of Parliament to make laws in regard thereto. This is so far
as the general power of legislation is concerned. As pointed out by this
Court in Sundararamier's case, (1958 S.C.R. 1422 at pp. 1479 and
1490), the legislative entries are so arranged that the power to enact
laws in general and the power to impose taxes are separately dealt
l3 with. The subject matters of taxation available to Parliament are. ).._
enumerated in entries 82 to 97 of List I, those available to the State'
legislatures in entries 45 to 63 of List II and those available to both inf

c
entry 44 of List III. Under s. 246(1) Parliament has exclusive power to
make laws with respect to any of the matters-and this includes the
power to impose taxes-enumerated in List I. In this situation and in
view of the fact that the 1980 Act is, in pith and substance, a tax on
income, its constitutional validity can be in no doubt at all.
-
11. But can the Union enactment of 1987 also be supported for "
the same reasons, as imposing an expenditure tax which, as held in
Azam Jha's case, 1972 1 SCR 470, falls within the scope of Entry 97 of
D List I? Sri Palkiwala says it cannot be. His first contention is that the
tax levied by the 1987 Act is not, in fact and in truth, an expenditure
tax. He says that it is not sufficient for the legislature to give such a
~
description or label to a tax proposed to be levied by it as does not fall ;
under List II and claim that it should be upheld under Entry 97. The --r-
tax sought to be imposed should be one which has real existence and
E recognition in the world of economics. According to him, the econo-
mic concept of an expenditure tax is of a tax that is levied not on
isolated items of expenditure but one on the totality of the expenditure
incurred by an assessable entity, just as income tax has gained recogni-

i
ti on as a tax on the total income of a taxable entity. That was the
concept of the expenditure tax which Nicholas Kaldor had in mind,
F which was embodied in the 1957 Act and which, hence, was endorsed
with approval by this Court. A tax on a few items of expenditure, it is
said, is not necessarily the same as an expenditure tax. Referring to the ~
decisions of this Court upholding the levy of Wealth Tax and Gift Tax
in as far as it affected agricultural lands: Gift Tax Officer v. D.H.
Nazareth etc., [1971] 1 SCR 195 and Union of India v. H.S. Dhillon,
G I 1972] 2 SCR 33, it is submitted that the decisions may well have been
different had they been concerned with an imposition only on "lands ""
and buildings" by reference to their capital value or only on
"agricultural lands" on the occasion of a gift.

H
12. It is difficult to accept the contention that the tax cannot be
considered to be an expenditure tax because it is not on "expenditure"
•
i•

"..
HOTEL FEDERATION v .. U.0.1. (RANGANATHAN, J.) ·961

'-f generally but is restricted to specific types of expenditure. There is, no A
legal, judicial, economic or other concept of expenditure tax that
would justify any such restrictive meaning. If, conceptually, the expen-
diture incurred by a person can be a subject-matter with reference to
which a tax can be levied, there is no reason why such taxation should
not be restricted only to certain items or categories of expenditure and
~ why its base should necessarily be so wide as to cover all expenditufe B
""°" \ficurred by an assessable entity. After all, even under the 1957 Act, all
hpenditure of all persons was not liable to tax. It substantially ·
covered only certain types of assessees and certain types of expendi-
ture (for ·several types of expenditure were exempted) and that too
only when it exceeded certain limits. The analogy of the Income-tax or ·
Wealth Tax or Gift Tax Acts also does not really help us. Though they C
are enactments which cover a larger area of the subject matter taxed,
)- · that was because the legislature found it expedient to do so and not
because they were obliged to cover the entire area of income, wealth
or gift. An Act imposing a tax, for example, on hotel receipts alone or
dividends alone or on capital gains alone will not be any the less a tax
on income within the scope of Entry 82 of List I. Likewise even if the D
legislature had confined its levy of wealth tax only to certain assets
such as lands and buildings or the Gift Tax Act had levied a tax only on
1 gifts of agricultural land, they would not have ceased to fall within the
"'f-- scope of the relevant entries of the Union List, so long as, in pith and
substance, they are found respectively to be taxes on the capital value
of the assets in question or on the transaction of gift. The Central E
Excise Act, for example, does not levy excise duty on the manufacture
and production of all goods and additional excise duty is levied only in
respect of certain goods. So also, in regard to sales tax. It is indeed
even possible to say that no tax levy in respect of any subject matter
~- can or does operate universally without any exceptions or exemptions.
Selection of objects and goods for taxation is the essence of any tax F
legislation and any limitation of the nature suggested is an unwar-
.lit ranted curtailment of this selective power of taxation of Parliament.

13. There is also no established legislative practice which would
enable one to limit the concept of an expenditure tax in the manner
~ suggested. So far as expenditure tax is concerned, the only legislation G
earlier in force was the 1957 Act which was in force for a period of
eight years. Such short lived legislation can hardly furnish the founda-
tion of an argument to limit the scope of legislative power to the
manner in which it was exercised under that enactment. If, after with-
drawing this legislation, Parliament considered that it was not worth-
while or possible to impose a tax on all expenditure and that it would H
962 SUPREME COURT REPORTS [1989] 2 S.C.R.

be sufficient, expedient or necessary to impose such a levy only on Y'
A
lavish spending in certain directions, that cannot certainly be prec-
luded on any theory of established legislative practice, as was done in
State of Madras v. Gannon Dunkerley Co., [1959] SCR 379 in respect
of sales tax. In that case the legislative trend prevalent over decades
was relied upon in interpreting the expression "sale of goods" used in
B the Constitution. But there the Court was concerned with a legal term,
"sale", which had acquired a definite connotation in law and in legisla
1
tive instruments and that analogy cannot be availed of to interpret thtj'
scope of Entry 97. On the other hand, even a fairly long-established
legislative practice under which income tax levy by the Centre was
restricted to items of income stricto sensu (as contrasted with capital
gains) was not considered sufficient to place that type of restriction on
c the interpretation of the expression "taxes on income" used in the
Central Legislative List: vide, Navinchanda Mafat Lal v. CIT, 11955] 1
S~R 829. Not only that, the validity of later definitions of "income"
under the Income-tax Act which have a much wider ambit has been
upheld as covered by the above legislative entry. See, in this context,
D the decisions in Navnit Lal v. AAC, AIR 1965 SC 1375, Bhargava v.
Union, [1966] 2 SCR 22 and Bhagwandas v. Union, [1981] 2 SCR 808.
There is not even that much of legislative practice, so far as expendi-
ture tax is concerned, which would justify our importing any limitation
on the concept of a "tax on expenditure" under Entry 97 of List I. A -'\--
perusal of the decision of this Court upholding the validity of the 1957
E Act Azam lha's case, [1972] 1 SCR 470 does not also justify the read-
ing in of any such limitation. The wider coverage of the tax made it
easier for the Court to pin point its subject matter as "expenditure"
and to treat it as a matter falling under the residuary entry, but it does
not justify the inference sought to be drawn that a tax cannot be said to

F
be a tax with reference to "expenditure" because it does not tax
expenditure in general but confines itself to certain types or categories
of expenditure. Once it is granted that the tax need not exhaust the 1
entire universe of the subject-matter, the extent of the subject matter ..-f
that should be covered or selected for imposing tax should be entirely
left to Parliament. subject only to any criteria of discrimination or
unreasonableness that may attract .the provi~ions of Part III of the
G Constitution.

14. The fact that the 1987 Act seeks to tax only the expenditure
on items which can be described as luxuries is, however, used by Sri
Palkiwala to support his other contention (which has really troubled
me considerably) that the pith and substance of both sets of legisla-
H lions is the same, that they both impose a tax only on luxuries or
HOTEL FEDERATION ,,, U,OJ, [RANGANATHAN, J,] 963

entertainments and that the distinction sought to be made on behalf of
the Revenue that one is a tax on 'luxuries' while the other is a tax on A
the expenditure incurred by a person on luxuries is only a distinction
between "Tweedledum" and "Tweedledee", The object and effect of
a tax on luxuries is only to curb expenditure on luxuries and such a tax
may be imposed, levied or collected either from the provider of
luxuries or the person who enjoys them. The object of an expenditure B
+.ax is also similar and that can also be levied either on the person who
,~pends the moneys directly, or through some other person, or even
from the person who benefits by the incurring of such expenditure.
The provision of a luxury and the payment for it are only obverse sides
of the same coin and cannot, from any practical point of view, be
considered as two separate and independent subject matters of taxa-
tion. It is a well settled proposition thac the entries in the legislative c
lists should be given the broadest of connotation and, hence, a tax on
luxuries by reference to the expenditure thereon will fall clearly under
the entry in the State List. The pith and substance of both sets of
legislation, therefore, falls only under entry No. 62 of the State List.
This being so, Entry 97 of List I will have no applicability at all; that D
can be called in aid only to cover matters not specifically enumerated
or taxes not mentioned in List II or III. It is, therefore, not possible. it
is urged, to sustain the validity of the 1987 Act by reference to Entry 97
of List L

15. The learned Attorney General sought to meet this conten- E
tion in two ways. He first urged that the pith and substance of the two
legislations are different. A tax on 'luxuries' measured by reference to
the amount charged or paid therefor is totally different from a tax to
curb opulent or ostentatious expenditure even though the categories of
expenditure brought in for taxation by a particular statute may be
restricted. The latter cannot be described as a tax on 'luxuries' and F
does not fall within the scope of Entry 62 of the State List and, in the
absence of any referability to any other entry of List II, it is safe from
attack under Article 248(2) and will also be covered, if need be, by
Entry 97 of List I. The second argument is that, after the decision in
Azam Jha's case, [1972] 1SCR470 holding that a "tax on expenditure"
··~
will be legislation covered by Entry 97 in List I, the constitutional G
position is the same as if, before item 97, a specific entry had been
inserted in List I (say, Entry no. 96A) which reads "Taxes on expendi-
ture". The result, he says, is that the Central legislation will be
squarely covered by an entry in List I and so we need not embark on
any investigation as to whether it falls or does not fall under any entry
in List II or List III. H
964 SUPREME COURT REPORTS [1989] 2 S.C.R.

16. It seems to me that there is a fallacy in the second line of ~...
A
argument addressed by the learned Attorney General. I do not think
that the legislative lists can be interpreted. as suggested by him, 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. One cannot add entries to the legislative lists on the basis of
B 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 Ill,
That being so, this Court upheld it by reference to Entry No. 9;
describing the tax, having regard to its pith and substance, as a tax on
expenditure. Here, however, we have a legislation which covers only
certain types of expenditure and the contention of the petitioners is
that •these are all items of expenditure pertaining to luxuries. The
C decision in Azam Jha's case cannot help us to determine whether the
legislation before us should be construed as imposing a tax on expendi-
ture or one on luxuries. If, in spite of its dealing with only certain types
of expenditure relatable to luxuries, it can be said to be, in pith and
substance, not a tax on luxuries, then we may hold that parliament can
D legislate with reference to it and, for purposes of convenience. take
advantage of its description as a tax on expenditure to rest it on Entry
97 of List I. In other words, Entry 97 of List I cannot come to our
rescue unless we are in a position to say that the substance of the
Central legislation in question is not a tax on luxuries, entertainments .~·
or amusements. This takes us to the first part of the argument of the
E learned Attorney General.

17. Is there a tenable and true distinction between the tax on
expenditure levied by the Act and a tax on luxuries? Are Parliament
and the State Legislatures dealing with the same 'matter" and taxing
one and the same thing, though describing it differently-or are they
F taxing two different matters or things? Sri Palkiwala says that the -l.,
subject matter of taxation is 'luxury' and that it is meaningless to
consider the expenditure incurred on it as a separate and distinct sub- IF
ject matter. The acceptance of such an argument, he says, will lead to
double taxation in respect of almost every matter on earth. For inst-
ance, A may be taxed on the salary or interest or dividend paid to him
G by B as his income and, at the same time, B can be asked to pay a tax ~
on the expenditure incurred by him by way of such salary, interest or
dividend payment. A can be asked to pay a wealth tax on the capital
value of the assets acquired by him and also asked to pay an expendi-
ture tax on the money spent on such acquisition. A can be asked to pay
a sales tax on the goods sold by him to B and also asked to pay or
H collect a tax on the expenditure incurred by B to purchase the same.
HOTEL FEDERATION v. U.0.1. [RANGANATHAN, J.I 965

Such instances, he says,. can be multiplied and will reduce the argu-
ment to an absurdity. A

18. The Attorney General, on the other hand, submits that the
question whether both legislation relate to the same matter does not
bring out correctly the cotroversy in issue. He says that if the expres-
sion "matter", in this context, is understood in its widest sense, it will B
.- create chaos in the matter of interpretation of the lists. According to
-~him, for applying the doctrine of pith and substance we have to under-
stand the expression 'matter' not in a 'gross', but in a 'rare' sense. He

- develops this contention by invoking, to his aid, what may be called
the 'aspect' rule as explained in certain text books and judicial
decisions.
c
....' 19. A.H.P. Lefroy in his 'Canadian Constitution' observes, at
p. 98:

"Sec. XX!. Aspect o f legislation: .Subjects which in one
aspect and one purpose fall within s. 92 of the Federation D
Act and so are proper for provincial legislation may, in
another aspect and for another purpose fall withins. 97 and
so be prop.er for Dominion legislation. And as the cases
which illustrate the principle show, by 'aspect' here must be
understood the aspect or point of view of the legislator in
legislating, the object, purpose and scope of the legislation. E
The word is used subjectively of the legislator, rather than
objectively of the matter legislated upon." ,

To similar effect is the passage from Laskin's "Canadian Constitutional
Law" extracted in the judgment of Venkatachaliah, J. the Federal
Court in the C . P . & B erar Act case [1939 I FCR 18 also touches upon F
the 'aspect' theory at p. 49:

""Here are two separate enactments, each in one aspect con-
ferring the power to impose a tax upon goods; and it would
accord with sound principles of construction to take the
more general power, that which extends to the whole of G
India as subject to an exception created by the particular
power, that which extends to the Province only."
(emphasis added)

A similar reference to the 'aspect' of legislation can be seen in Kera/a
State Electricity Boardv. Indian Aluminium Co., [1976] 1SCR562 at H
p. 573-4.
966 SUPREME COURT REPORTS [1989] 2 S.C.R.

"The argument of the learned Solicitor General apprearing ~iq:;;;:-.;;,
A
on behalf of the Kerala Electricity Board in support of his "~·"-'"
submission that the legislation falls under Entries 26 and 27
of List II may be summarised as follows: Those entries do
not enable the State Legislatures to legislate with regard to
all conceivable goods like arms, ammunition, atomic
B minerals etc. as was argued by Mr. Sen. A legislature while
legislating with regard to matters within its competence-. ~
should be deed to know its limits and its legislative autho-}.
rity and should not be deemed to be legislating beyond its
jurisdiction. One thing that has always got to be kept clear in
one's mind is that there may be more than one spect with
regard to a particular subject matter" .
c (emphasis added)

Relying on this principle, backed by these observations, the learned
Attorney-General submits that, properly understood, the pith and
substance of the 1987 Act is 'expenditure', not 'luxuries'.
D
20. At first blush, the argument of the learned Attorney General
may sound a little subtle and somewhat artificial but, on some reflec-
tion, legislative competence will indeed be seen to vary with different
aspects of a subject matter as understood in a wide sense. This can be r
seen from some of the decided cases. The first triumvirate of cases that
E arose in India under the Government of India Act, viz. In re Central
provinces & Berar Act XIV of 1953, [1939] FCR 18; Province of
Madras v. B oddu Paidanna & Sons, I1942] FCR 90 and G. G. - in -
Counci/v. Province of Madras, [1945] FCR 179, were concerned with
the question whether the impugned tax was one on the sale of goods or
an excise duty. Interpreting the word 'subject matter' in a broad sense
F it could perhaps be said that both were taxes with respect to goods. But
this concept alone was not sufficient to dispose of the case because the
relevant legislative entries did not talk of taxes with respect to goods
but referred to taxes in respect of two different activities referable to
goods (conveniently described as the 'taxable event'), one the manu-
facture and production of goods and the other with sale thereof. In the
G light of these legislative entries the two different activities could pro-
perly regaded as two different matters for taxation and the relevant
legislation was held to be one concerned with 'sale' and not with
'manufacture'. In other words, there could be two enactments "each in
one aspect conferring the power to impose a tax upon goods". The
legislation was held not to be vitiated merely because there was an
H element of overlapping in that both excise duty and sales tax became
HOTEL FEDERATION v. U.0.1. [RANGANATHAN, J.[ 967

~---;4_ jleviable on the same assessee in respect of the same goods and .by
~reference
·~
to the same sale price when the first sale after manufacture A
occurs, one by refernce to the. 'manufacture' aspect and the other by
reference to the 'sales' aspect. This bifurcation of the two different
aspects pertaining to goods was justified by the language of the legisla-
tive entries themselves which referred separately to the different sets
of activitie·s and put them down in differet legislative lists. Again, on B
-1., {the same principle, the· manufacture of electricity may attract excise
\duty at the point of its captive consumption (under Entry 84 of List I)
and also a tax on the ·consumption or sale of electricity (referrable to

- Entry 53 of List II).

21. The power to levy taxes with respect to 'property' has
created similar problems. All States (or corporations and municipali- C
ties therein) levy a property tax on the owner or occupier which is
almost universally measured by reference to its annual value (viz. the
rent it would fetch if let from year to year). The Income-tax Act also
charges a tax on the same basis. In other words, in a realistic and
practical sense, the tax was levied by both legislatures on the same o
amount and with reference to the same matter. But both levies have
been upheld under the 1935 Act, the former as a 'tax on lands and
buildings, hearths and windows' (Entry 42 of List II) and the latter as a
tax on income (under Entry 84 of List I.) Ra/la Ram [1948] FCR 207
pointed out that they were different types of levies one on the land and
buildings (generally, but not necessarily, measurable by reference to E
the income derived or capable of being derived) and the other on the
income (actually or notionally) derived from it. The pith and substance
of the former, it was said, was not 'income' (from the property) though
the tax was levied on the basis thereof. Expressed differently, it could
be said that, though both were taxes with respect to property, they
touched different aspects of the above subject matter; the first was a F
tax on the aspect of ownership or occupation of property; the second
on the aspect of income from property. The decision of this Court in
B hagwan Dass Jain v. Union, [1981] 2 SCR 808 is also to the same
effect. ·

22. The Hingir -Rampur Coal Co. case [1961] 2 SCR 537 was G
concerned with the validity of an Orissa Act which sought to levy a cess
not exceeding 5% of the valuation of the coal stacked at pit's mouth.
The question was whether this 'fas in pith and substance a duty of
excise (Entry 84 of List I) or a fee to regulate and control the· coal
mining industry (Entry 66 and 23 of List II). Here again though.the
method adopted for recovering the impost was the same as that of an · H
968 SUPREME COURT REPORTS [1989] 2 S.C.R.

excise duty, the validity of the tax was upheld as it related to the aspect ·~
A of control over the industry rather than to the aspect of an impost on
production of coal.

23. Sainik Motors case [1962] 1SCR517 furnishes an illustration
which comes nearer to the question at issue before us. In that case a
B Rajasthan Act purported to levy a tax on passengers and goods
measuring it by reference to the fares and freights charged by ,.._
operators for carriage of such passengers or goods. If it were to be )
treated as a tax on 'fares and freights' it would be a tax on income·

c
which the State legislature could not levy. But, if treated as a tax on
passengers and goods carried by road it was valid under Entry 56 of List
II. The validity of the Act was upheld on the latter ground, the court
pointing out that the tax was on goods and passengers though
-
measured by reference to fares and freights. This dichotomy could
perhaps also be justified on the basis of the language of Entry 89 of
List I. That entry makes a distinction between the two types of imposts
and illustrates that two different aspects of the same matter viz. taxes
o in respect of vehicles carrying passengers or goods can form separate
matters for taxation.

24. In the light of the above entries and decisions, I think that
the learned Attorney General is right in urging that, merely because .y
the 1987 Act as well as the State Acts levy taxes which have ultimate
E 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. For instance, a luxury tax may, to cite a
F catchy example, encourage construction of "janata" hotels rather than -l.,
five star hotels. 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 enjoy- ,f#
ing, the luxury. Conceivably, it could be on different bases altogether.
The object of an expenditure tax-and, that, conceptually, there can
G be an expenditure tax is borne out by Azam Jha's case (supra)-is to
discourage expenditure ·which the legislature considers lavish or ',...-·
ostentatious. The object of the first would be to discourage certain
types of living or enjoyment while that of the second would be to
discourage people from incurring expenditure in ·unproductive or un-
desirable channels. If a general Expenditure Tax Act, like that of
H 1957, had been enacted, no challenge to its validity could have been
HOTEL FEDERATION v. U.0.1. {RANGANATHAN, J.] 969

'+ raised because it incidentally levied the tax on expenditure incurred on A
luxuries. The fact that there will be sonie overlapping then or that here
there is a good deal of such 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. For instance, if the conflict B
. alleged had been between the present State Acts and an Act of Parlia-
lment taxing expenditure incurred in the construction of theatres or the
l.naintenance of race .horse establishments or the like, there would

- have been no overlapping at all and the pith and substance of the
central tax could well be described as "expenditure" and not
"luxuries". This distinction is not obliterated merely because of the
circumstance that both legislatures have chosen to attack the same
c
area of vulnerability, one with a view to keep a check on 'luxuries' and
the other with a view to curb undesirable 'expenditure'.

For these reasons, I agree with my learned brother Venkata-
chaliah, J. that the validity of the three impugned enactments has to be D
upheld and these writ petitions and appeals dismissed.

N.P.V. Petitions dismissed.
-~.