HOTEL ELITE Vs. STATE OF KERALA

JUDGEMENT

(1.) This batch of writ petitions is by the owners of hotels and restaurants, some of them bar attached and others classified as 'star hotels' having above two stars. The petitioners challenge the validity of the Kerala Finance Act 18/1987 in so far as it relates to the imposition of sales tax on item 57 of Schedule.1 and item 4 of Schedule V of the Kerala General Sales Tax Act (the Act for short). S.2(2) of the Finance Act amends S.5(1) substituting clauses (ii) and (iii) by clauses (ii) to (v) introduced by the amendment. The Schedules to the Act are also amended and the 5th Schedule is introduced by amending sub-section (1) of S.5. The Finance Act 18/1987 received the assent of the Governor of Kerala on the 20th of August, 1987 and was published in the Gazette on the same day. As per sub-s. (2) of S.1 the Finance Act, 1987 shall be deemed to have come into force on the 1st day of July, 1987. The Act as it stood prior to the amendment had totally exempted "cooked food including coffee, tea and like articles served in a betel, restaurant or any other place" as per 12 entry of the Third Schedule. Entry 12 of the Third Schedule was amended by adding the words "not falling under entry 57 of the First Schedule." By entry 57 of the First Schedule introduced by the amendment "cooked food including beverages not falling under any entry in Fifth Schedule sold or served in Bar attached hotels and restaurants and/ or hotels above the grade of two stars" is made subject to levy of sales tax at the rate of 10 per cent at the point of first sale in the State by a dealer who is liable to tax under S.5. Thus with effect from 1st July, 1987 cooked food and beverages sold in Bar attached hotels and hotels above the grade of two stars are liable to tax at the point of first sale in the State. As per entry 36 of the First Schedule of the Act as it stood prior to the amendment "liquor other than foreign liquor, arrack and toddy" was liable to tax at 55 per cent at the point of first sale in the State by a dealer who is liable to tax under S.5. Explanations l and 2 to the entry make it clear that the expression "liquor" includes all sorts of intoxicating drinks manufactured in the State and "foreign liquor" means liquor manufactured in any country other than India and brought to India. Entry 4 of the Fifth Schedule introduced by the amendment relates to "liquor other than foreign liquor, arrack and toddy" and a levy of sales tax is imposed at two points, first at the point of first sale in the State by a dealer liable to tax under S.5, and again at the point of last sale in the State by a dealer who is also liable to tax under S.5. The rate of tax at the first point is 45 per cent and at the second point 15 per cent.

(2.) The competence of the State Legislature to impose sales tax on these items is not in question in view of the 46th amendment of the Constitution introducing Clause.29(A) to Art.366 where by the scope of entry 54 of List.2 of the Seventh Schedule to the Constitution is rendered wide enough to cover cooked food and beverages served in hotels and restaurants. The aforesaid amendments to the KGST Act introduced by the Finance Act 18/1987 are challenged as violative of Art.14 of the Constitution. Its retrospective effect from 1st July, 1987 is also challenged on the same ground. Even though some of the petitioners have raised a point based on Art.19(1)(g) of the Constitution in the writ petitions, no such point was argued before us. The petitioners confine their challenge to the impugned provisions of the Act based only on Art.14 of the Constitution.

(3.) According to the petitioners the classification of hotels and restaurants as Bar attached or of above the grade of two stars into one class for the purpose of levy and all other hotels and restaurants into another class not brought into the tax net is discriminatory and violative of Art.14 of the Constitution. It is now well established by the decisions of the Supreme Court that while Art.14 forbids class legislation, it does not forbid reasonable classification for the purpose of legislation. In order, however, to pass the test of permissible classification, two conditions must be fulfilled, namely, (i) the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (ii) the differentia must have a rational nexus to the object sought to be achieved by the statute in question. The classification may be founded on different bases: it may be geographical or according to objects or occupations or the like (vide Budhan Choudhry v. State of Bihar, AIR 1955 SC 191 (vol. 42)). It is also beyond controversy that taxation laws mast also pass the test of Art.14. To decide whether a taxation law is discriminatory or not it is necessary to bear in mind that the State has a vide discretion in selecting the persona or objects it will tax and the Statute is not open to attack on the ground that it taxes some persons or objects and not others. It is only when within the range of its selection the law operates unequally, and that cannot be justified on the basis of any valid classification that it would be violative of Art.14 (vide the decision of the Supreme Court in East India Tobacco Co. v. State of Andhra Pradesh, 13 STC 529). The Supreme Court accepts the following proposition of law stated at page 587 by Willis on Constitutional Law: