ORISSA CEMENT LTD AND ORS. ETC. ETC. v. STATE OF ORISSA AND ORS. ETC. ETC.

The Judgment of the Court was delivered by c RANGANATHAN, J. These are connected batc,hes of Civil Appeals and Special Leave Petitions. We grant special leave to appeal in all the petitions (condoning the delay in the filing of the unnum- bered one referred to below) and proceed to dispose of all the appeals by this common judgment. The details of the appeals and petitions are, D for sake of convenient reference, tabulated below:

High Court Date of Civil Appeal/ Name of judgment SLP Nos. Appellant

E I. Orissa 17.4.19.80 C.A. 2053-2080/80Tata Iron & Steel Co. Ltd. 7.3.1983 · C.A. 4353-4354/830rissa Cement Ltd. i~

22.12.1989 S.L.P. 1479/90 State of Orissa 22.12.1989 S.L.P. --/90 Orient Paper & F Industries Ltd. &Anr. 13.7.1990 S.L.P. 11939/90 -do-

2. Bihar 10.2.1986 C.A. 592/86 Tata Iron & Steel

G Co. Ltd. '

3. Madhya 28.3.1986 C.A. 1641-1662/86StateofM.P. Pradesh

'H We shall discuss later the manner in which these appeals and petitions have arisen.

ORJSSA CEMENT v. STATE OF ORISSA {RANGANATHAN. J.J 115 A THE ISSUE .... The validity of the levy of a "cess", based on the royalty derived from mining lands, by the States of Bihar, Orissa and Madhya Pradesh is challenged in these petitions and appeals. A seven-Judge Bench of this Court in India Cement, [1990] 1 S.C.C. 12 struck down a similar B levy under a Tamil Nadu Act as beyond the legislative competence of the State Legislature. The assessees, in the matters now before us, claim that the issue here is directly and squarely governed by the above I ·-' decision. The States, on the other hand, claim that the nature and character of the levies imposed by them is totally different from that of the Tamil Nadu levy and that they are entirely within the scope of the States' Legislative powers under the Constitution. This is the issue to c be decided in these matters. As the impugned enactments of Bihar, Orissa and Madhya Pradesh mutually differ from one another in some respects, they will need separate consideration. However, the basic issue being the same, all these matters have been heard together and it is found convenient to dispose of them all by this common judgment. D We may mention in passing that, initially, these matters were listed before a Bench of two Judges of this Court. It referred the matters on 17 .8. 1990 to the learned Chief Justice for the constitution of a larger Bench. The matters have come up before us in pursuance of the direc- tions of the Hon'ble Chief Justice. E THE LEGISLATIVE ENTRIES

-- > It will be convenient, at the outset, to refer to the various entries of the Union and the State Lists in the Seventh Schedule to the Con- -'~

··~ stitution which have a bearing on the issues to be discussed. These are: F List /-(Union List)

, '· ~I' Entry 52: Industries, the control of which by the Union declared by Parlia- ment by law to be expedient in the public interest. ' G Entry 54:

Regulation of mines and mineral development to the extent to which such regulation and development under the control of Union is \ declared by Parliament by law to be expedient in the public interest. H

116 SUPREME COURT REPORTS [1991) 2 S.C.R.

List IJ-(State List) A Entry 18: Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents; transfer and alientation of agricultural land; land improvement and agricultur.il land; colonization. B Entry 23: Regulation of mines and mineral development subject to the ,_ provisions of List I with respect to regulation and development under the control of the Union. c Entry 45: Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for revenue pur- poses and records of rights, and alienation of revenues.

O Entry 49: Taxes on lands and buildings.

Entry 50: Taxes on mineral rights subject to any limitations imposed by £ Parliament by law relating to mineral development.

!Entry 66: Fees in respect of any of the matters in this List, but not includ- ing fees taken in any court. F EARLIER HISTORY

Before proceeding to consider the provisions of the enactments impugned, and the issues debated, before us, it is necessary to set out oeertain earlier controversies that led to India Cement.

ffingir RampurCase [1961-2 S.C.R. 537]

As early as in 1960, this Court had to consider the constitutional validity of the Orissa Mining Areas Development Fund Act, 1952 '(Orissa Act XXVH of 1952). S. 3 of the Act empowered the State Government to constitute mining areas whenever it appeared to the Government that it was necessary and expedient to provide amenities

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.] 117

like communications, water supply and electricity for the better development of such areas or to provide for the welfare of the resi- A dents or workers in areas within which persons employed in a mine or a group of mines reside or work. S. 4 empowered the State Govern- ment to impose and collect a cess or fee on the minerals extracted the rate of which was not to exceed 5% of the valuation of the minerals at the pit'smouth. S.5 provided for the constitution of the Orissa Mining B Areas Development Fund. The proceeds of the cess recovered in pursuance of S. 4 along with other subsidies from Government, local ...l authorities and other public subscriptions were credited to the fund and the expenses for such collection debited thereto. The fund has to be utilised to meet expenditure incurred in connection with such development measures as the State Government might draw up for the purposes above mentioned as well as for the purposes specified in c clauses (a) to (e) of S.5(5). The validity of this levy of cess was chal- lenged by the petitioner coal company in the Hingir Rampur case as ultra vires the powers of the State Legislature because (a) the cess was not a fee but a duty of excise on coal which was a field covered by Entry 84 of List I in the Seventh Schedule and repugnant to the Local D Mines Labour Welfare Fund Act, 1947 (Central Act XXXII of 1947); and (b) even if it was treated as a fee relatable to Entries 23 and 66 of List II in the Seventh Schedule, it was hit by Entry 54 of List I read with the Mines and Minerals (Development & Regulation) Act, (Cent- ral Act LIII of 1948) ('the MMRD Act' for short) or by Entry 52 of List I read with the Industries (Development and Regulation) Act E ('the IDR Act' for short), 1951 (Central Act LXV of 1951). The first of the above arguments was based on the fact that the cess was fixed at a percentage of the valuation of the mineral concerned at pit's mouth. This argument was based on two considerations. The first related to the form and the second to the extent of the levy. Repelling the argu- ment, it was held that the extent of levy of a fee would always depend upon the nature of the services intended to be rendered and the finan- cial obligations incurred thereby and cannot by itself alter the charac- ter of the levy from a fee into that of a duty of excise except where the correlation between the levy and services is not genuine 01 real or where the levy is disproportionately higher than the requirements of the services intended to be rendered. So far as the first consideration was concerned, it was observed that the method in which the fee is recovered is a matter of convenience and by itself it cannot fix upon the levy the character of a duty: of excise. Though the method in which an impost is levied may be relevant in determining its character its significance and effect cannot be exaggerated, The court, therefore, came to the conclusion that the cess levied by the impugned act was H

118 SUPREME COURT REPORTS [1991) 2 S.C.R.

neither a tax nor a duty of excise but a fee. A The second argument turned on the impact of the MMRD Act on • the State's power to levy a fee under Entry 66 read with Entry 23 of List II as a consequence of the declaration contained in S.2 of the Central Act. The Court agreed that a declaration by Parliament in B terms of Entry 54 of List I operated as a limitation on the legislative competence of the State Legislature itself and observed:

"If Parliament by its law has declared that regulation and ... development of mines should in public interest be under the control of the Union, to the extent of such declaration the jurisdiction of the State Legislature is excluded. In c other words, if a Central Act has been passed which con- tains a declaration by Parliament as required by Entry 54, and if the said declaration covers the field occupied by the impugned Act, the impugned Act would be ultra vires not because of any repugnance between the two statutes but because the State Legislature had no juristiction to pass the law." (underlining ours)

However, the answer to the argument was easily found by the Court inasmuch as the declaration on the terms of Entry 54 of List I relied on for the coal company was founded on Act Lill of 1948 which was an Act of the Dominion Legislature and not an Act of Parliament. How- ever, the Court did not stop here. It proceeded to review the provi- ~- sions of Central Act LIII of 1948 and concluded that, if this Act were (.' held to contain the declaration referred to in Entry 23, there would be no difficulty in holding that the declaration covered the field of conser- F vation and development of minerals, and that the said field was indis- ~ tinguishable from the field covered by the impugned Act. In coming to this conclusion the Court pointed out that the rule-making powers conferred on the Central Government under Section 6(2) of the Act included the levy and collection of royalties, fees and taxes in respect of tninerals, mines, quarried, excavated or collected. The circums- 4

G tance that no rules had in fact been framed by the Central Government in regard to the levy and collection of any fees, it was held, would not make any difference, The Court observed:

"What Entry 23 provides is that the legislative compet•:nce of the State Legislature is subject to the provisions of List I H with respect to regulation and development under the con-

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.] 119

trol ofthe Union, and Entry 54 in List I requires a declara- A tion by Parliament by law that regulation and development of niines should be under the control of the Union in public interest. Therefore, if a Central Act has been passed for the purpose of providing for the conservation and develop- ment of minerals, and if it contains the requisite declara- tion, then it would not be competent to the State Legisla- B ture to pass an Act in respect of the subject-matter covered by the said declaration. In order that the declaration should be effective it is not necessary that rules should be made or enforced; all that this required is a declaration by Parlia- ment that it is expedient in the public interest to take the regulation and development of mines under the control of c the Union. In such a case the test must be whether the legislative declaration covers the field or not. Judged by this test there can be no doubt that the field covered by the impugned Act is covered by the Central Act LIII of 1948."

The Court then considered the argument based on Entry 52 of List I D and the provisions of the ID R Act but came to the conclusion that the vires of the impugned Act could not be successfully challenged on this ground.

Wanchoo J., delivered a separate dissenting judgment. He held that the levy was not a fee or a land cess but a duty of excise. He E pointed out (at p.579-80) how taxes could be turned into fees on the so-called basis of quantification with the help of the device of creating a fund and attaching certain services to be rendered out of monies in the fund. In this view, he did not consider the question how far the Central Acts of 1948 and 1951 impaired the State's competence to levy the fees in question. He negatived the State's attempt to bring the levy in question (treating it as a tax) within the scope of Entry 50 of List II. He was of opinion that the expression "taxes on mineral rights" refer- red to taxes on the right to extract minerals and not taxes on the minerals actually extracted. He held that the cess in the present case was not a tax on mineral rights but a tax on the minerals actually produced. It was no different in pith and substance from a tax on goods produced which comes under Item 84 of List I ~duty of excise.

Tulloch case [1964] 4 SCR 461.

The same issue regarding the competence of the Orissa State Legislature to levy the very same cess came up for consideration again H

120 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A in the Tulloch case. The scenario had changed because the levy now challenged was in respect of the period July 1957 to March, 1958 by which time the MMRD Act, 1957 (Central Act 67 of 1957) had been enacted in place of the earlier MMRD Act (Central Act Llll of 1948). The 1948 Act, which had earlier provided for the regulation of mines and oil fields and for the development of minerals, was now limited B only to oil fields and the 1957 Act provided for the regulation of mines and mineral development. S. 2 of the 1957 Act, like the predecessor 1948 Act, contained the following declaration in terms of Entry 54 of List I. It read:

"It is hereby declared that it is expedient in the public c interest that the Union should take under its control the regulation of mines and the development of minerals to the extent hereinafter provided".

but unlike the earlier one this was a declaration contained in an Act of Parliament which had the effect of impairing the legislative compe- D tence of the State under Entry 23 read with Entry 66 of the State List. The hurdle which prevented the Supreme Court from considering the • provisions of the 1948 Act as a bar to the levy of the cess was therefore out of the way. The Court analysed in detail the provisions of the impugned State Act as well as the two Central Acts. It referred to its conclusion in the Hingir-Rampur case that the field covered by the impugned State Act was covered by the 1948 Act and observed that this fully applied to the State Act vis-a-vis the 1957 Act also, particu- larly as Ss. 18(1) and (2) of the 1957 Act were wider in scope and amplitude and conferred larger powers on the Central Government than the corresponding provisions of the 1948 Act. Counsel for the State attempted to distinguish the ambit of the 1957 Act from that of the 1948 Act. But the Court pointed out that the argument could not prevail. S. 13 of the 1957 Act contained an express Pfovision for the levy of a fee. S. 25-though not as categorically as ~- 6 of the 1948 0

Act-clearly implied a power to levy "rent, royalty, iax, fee and other sums" and, besides, S. 18 of the Central Act of.1957 were wider in scope and amplitude and conferred larger powers on the Central G Government than the corresponding provisions of the Act of 1948. It was reiterated, referring to Hingir-Rampur and distinguishing Ch. Tika Ramji & Ors. etc. v. The State of Uttar Pradesh & Ors., [1956] S.C.R. 393 that it was incorrect to think that, until rules were made under S. 13 or steps taken under S.25 to collect fees etc., the Central Act would not cover the field. The Court observed, further: H

• ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.] 121

"But even if the matter was res integra the argument cannot be accepted. Repugnancy arises when two enactments both within the competence of the two Legislatures collide and when the Constitution expressly or by necessary implica- tion provides that the enactment of one Legislature has superiority over the other then to the extent of the repu- gnancy the one supersedes the other. But two enactments may be repugnant to each other even though obedience to each of them is possible without disobeying the other. The test of two legislations containing contradictory provisions is not, however, the only criterion of repugnancy, for if a competent legislature with a superior efficacy expressly or impliedly evinces by its legislation an intention to cover the whole field, the enactments of the other legislature whether passed before or after would be overborne on the ground of repugnance. Where such is the position, the inconsistency is demonstrated not by a detailed comparison of provisions of the two statutes but by the mere existence of the two pieces of legislation. In the present case, having regard to the terms of s. 18( !) it appears clear to us that the intention of Parliament was to cover the entire field and thus to leave no scope for the argument that until rules were framed, there was no inconsistency and no superses- sion of the State Act." E Meeting the argument that the power to levy a fee was an independent -- , head of legislative power under each of the three legislative lists and that the levy of tax under the State Act could be traced to this entry, the Court pointed out the fallacy underlying the argument in ti)e fol- lowing words: F "The material words of the Entries are: "Fees in respect of any of the matters in this List". It is, therefore, a prerequis- ite for the valid imposition of a fee that it is in respect of a "matter in the list". If by reason of the declaration by Parli- ament the entire subject-matter of "conservation and development of minerals" has been taken over, for being G dealt with by Parliament, thus depriving the State of the power which it theretofore possessed, ii would follow that the "matter" in the State List is, to the extent of the decla- ration, subtracted from the scope and ambit of Entry 23 of ---1 the State List. There would, therefore, after the Central

• ' Act of 1957, be "no matter in the List" to which the fee H

122. SUPREME COURT REPORTS [ 1991) 2 S.C.R.

could be related in order to render it valid." A The result was that Tulloch declared the levy of the cess to be, invalid and it was held that, as and from 1.6.1958, the date on which the.1957 Act came into force, the Orissa Act should be deemed to be non-existent for every purpose. B Murthy case (1964-6 S.C.R. 666)

We now come to the third important case on the topic, Murthy v. Collector of Chittoor, which seems to strike a somewhat different note although in both Tulloch and Murthy the judgments were delivered within a few months of each other by Rajagopala Ayyangar J. on C behalf of 5-Judge Benches which were constituted differently.

The erstwhile Province of Madras (later State of Tamil Nadu) had been levying, since long, a cess on land revenue under the Madras ·District Boards Act (Madras Act XIV) of 1920. Under S. 78 of the D Act, a cess was levied on the annual rent value of all occupied lands on .._ whatever tenure held. It was a tax at two annas in the rupee of the · annual rent value of all lands in the district. The annual rent value of the land was to be calculated in the manner prescribed in S. 79 of the Act. The appellant hel.d certain lands under a mining lease (for extrac- tion of iron ore) from the Government which stipulated for the pay- E ment of a stipulated amount of dead rent, a royalty on the basis of every ton of ore mined as well as a surface rent per acre of the surface area occupied or used. In the case of such lands, S. 79(i) provided that {- "the lease amount, royalty or other sum payble to the Government for the lands" shall be taken to be the annual rent value. The appellant . was, therefore, called upon to pay a cess based on the royalty paid by F him to the State Government (of Andhra Pradesh, which had succeeded to the State of Madras in respect of the territories in ques- tion) and it was the validity of this levy which was upheld by the High · Court that came up for the consideration of this Court.

It was contended, on behalf of the appellant, relying on Hingir- G Rampur and Tulloch, that the provision imposing land cess quoad royalty must be held to be repealed by MMRD Act of 1948 or, in any event, by the MMRD Act, 1957 (Central Act LXVII of 1957) and that, after the date when these enactments came into force, the land cess that could be levied must be exclusive of royalty under a mining lease. Distinguishing the decisions cited, this Court rejected the contention. H It observed: ·

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.] 123

"It will be seen that there is no resemblance, whatever, A between the provision of the Orissa Act considered in the two decisions and the provision for the levy of the land cess under ss. 78 and 79 of the Act with which we are con- cerned. Sections 78 and 79 have nothing to do and are not concerned with the development of mines and minerals or their regulation. The proceeds of the land cess are, under s. B 92 of the Act, to be credited to the District fund, into which, under the terms of the Finance Rules in Sch. V to the Act, the land-cess as well as several other taxes, fees and receipts are directed to be credited. This fund is to be used under Ch. VII of the Act with which s. 112 starts "for everything necessary for or conducive to the safety, health, convenience or education of the inhabitants or the ameni- c ties of the local area concerned and everything incidental "to the administration" and include in particular the several matters which are mentioned in those sections. It will thus be seen that there is no connection between the regulation and development of mines and minerals dealt with in the D Central Acts and the 1evy and collection of land-cess for which provision is made by ss. 78 and 79 of the Act. There is therefore no scope at all for the argument that there is anything in common between the Act and the Central Acts of 1948 and 1957 so as to require any detailed examination of these enactments for discovering whether there is any E over-lapping."

A second contention raised before the Court was that, as the impugned land-cess was payable only in the event of the lessee winning the mineral and not when no minerals were extracted, it was in effect a tax on the minerals won and, therefore, on mineral rights. Rejecting F this contention, the Court observed:

"We are unable to accept this argument. When a question arises as to the precise head of legislative power under \ which a taxing statute has been passed, the subject for enquiry is what in truth and substance is the nature of the G tax. No doubt, in a sense, but in a very remote sense, it has relationship to mining as also to the mineral won from the mine under a contract by which royalty is payable on the quantity of mineral extracted. But that does not stamp it as a tax on either the extraction of the mineral or on the mineral right. It is unnecessary for the purpose of this case H

A 124 SUPREME COURT REPORTS (1991} 2 S.C.R.

to examine the question as to what exactly is a tax on min- .. eral rights seeing that such a tax is not leviable by Parlia- ment but only by the State and the sole limitation on the State's power to levy the tax is that it must not interfere with a law made by Parliament as regards mineral develop- ment. Our attention was not invited to the provision of any B such law enacted by Parliament. In the context of ss. 78 and 79 and the scheme of those provisions it is clear that the land cess is in truth a "tax on lands" within Entry 49 of the State List." (emphasis added)

The Court proceeded to explain why the land cess before it was no- c thing else except a land tax falling within Entry 49:

"Under s. 78 of the Act the cess is levied on occupied land on whatever tenure held. The basis of the levy is the "annual rent value" i.e., the value of the beneficial enjoy ment of the property. This being the basis of the Tax and disclosing its true nature, s. 79 provides for the manner in which the "annual rent value" is determined i.e, what is the amount for which the land could reasonably be let, the benefit to the lessor representing the rateable value "or the annual rent value". In the case of ryotwari lands it is the assessment which is payable to the Government that is taken as the rental value being the benefit that accrues to the Government. Where the land is held under lease it is the lease amount that forms the basis. Where land is held under a mining lease, that which the occupier is willing to pay is accordingly treated as the "annual rent value" of the property. Such a rent value would. therefore, necessarily include not merely the surface rent, but the dead rent, as well as the royalty payable by the licensee, lessee or occupier for the user of the property. The position then is that the rent which a tenant might be expected to pay for the property is, in the case of lease-hold interests, treated as the statutory "annual rent value". It is therefore not possible to accept the contention, that the fact that the lessee or licensee pays a royalty on the mineral won, which is in excess of what he would pay if his right over the land extended only to the mere use oft.he surface land, places it in. a category different from other types where the lessee uses the surface of the land alone. In each case the rent

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.] 125

which a lessee or licensee actually pays for the land being the test, it is manifest that the land-cess is nothing else except a land tax."

The judgment of the Supreme Court in the Murthy case (supra) held the field from 1964 to 1990. B Murthy followed:

The above type of levy was not peculiar to the State of Tamil Nadu. In fact, a cess on royalty was bound to be very remunerative to States having a wealth of mineral resources. We are informed that similar cess is being levied in several States. We have already referred to the cess levied in Orissa which came to be consictered by this Court c as early as 1961 and 1964 in the Hingir-Rampur and Tulloch cases. Further cases came 11p for consideration, on the same lines: in Bihar, Associated Cement Co. Ltd. v. State of Bihar, [1979] 27 B.L.J.R. 64 and Tata Iron & Steel Co. v. State, (C.W.J.C. 30/1978 decided on 15.5.84, the subject matter of C.A. 592/86 before us); in Orissa, D Laxmi Narayan Agarwala v. State, A.LR. 1983 Ori. 210; in Rajasthan, Bherulal v. State, A.LR. 1965 Raj. 161; in Punjab, Sharma v. State, A.LR. 1969 P & H 79; in Gujarat, Saurashtra Cement & Chemical Industries Ltd. v. Union, A.LR. 1979 Guj. 180; and Madhya Pradesh, Hirata! Rameshwar Prasad v. State, (M.P. 410/83 decided on 28.3.1986) and M.P. Lime Manufacturers' Association v. State of E M.P., A.LR. 1989 M.P. 264 F.B. and, except for the last two cases from Madhya Pradesh, the others upheld the levy of a cess which depended on royalties, following Murthy.

India Cement case [1990] J S.C.C. 12 F The correctness of the above line of decisions came to be tested in India Cement Ltd. v. State. The Government of Tamil Nadu had granted a mining lease on 19.7.1963 to the appellant for extraction of limestone and kankar for a period of twenty years. The lease deed, • which was in accordance with the Mineral Concession Rules, stipula- ted for the payment of royalty, dead rent and surface rent and also G prov;,~ed that the lessee was bound to pay all Central and State Government dues except land revenue. At the time the lease was obtained, S. 115(1) of the Madras Panchayats Act, 1958 provided for the levy, in each panchayat development block, of a local cess at the rate of 45 paise on every rupee of land revenue payable to the Govern- ment in respect of any land for every fasli. S. 115(2) provided that the H

126 SUPREME COURT REPORTS [1991] 2 S.C.R.

A local cess will be deemed to be public revenue and all the lands and buildings thereon shall be regarded as security therefor. S. 115(3) and (4) set out the various purposes for which the cess levied and collected under S. 115 could be utilised. S. 116 provided for the levy of a local cess surcharge. The maximum amount of such surcharge was originally left to be prescribed by the Government and was in 1970 limited to B Rs.1.50 on every rupee of land revenue and in 1972 to Rs.2.50 on every rupee of land revenue. Apparently inspired by the decision in Murthy, the Tamil Nadu Panchayats (Amendment and Miscellaneous Provisions) Act (Tamil Nadu Act 18 of 1964) added, with full retros- pective effect, the following Explanation to S. 115(1):

"Explanation: In this section and in Sectiop 116, 'land c revenue' means public revenue due on land and includes water cess payable to the government for water supplied or used for the irrigation of land, royalty, lease amount or other sum payable to the government in respect of land held direct from the government on lease or licence, but does not include any other cess or the surcharge payable under Section 116, provided that land revenue remitted shall not be deemed to be land revenue payable for the purpose of this section."

The appellants' challenge in the High Court to this levy-which was consequent on the 1964 amendment-was unsuccessful. The High Court upheld it as a "tax on land" measured with reference to land revenue, royalty or lease or other amount as mentioned in the Expla- j . nation. The challenge based on Entry 54 of List I read with Entry 23 of List II and the provisions of the MMRD Act, 1957 was also repelled, applying the decision in Murthy. The appeal to this Court was referred to a Bench of seven Judges who came to the conclusion that Murthy was wrongly decided and upheld the appellants' objection to the vali- dity of the levy of the cess. It may be necessary to refer, in greater detail, to some passages in the judgment later but it will be convenient, for the present, to summarise the salient conclusions of the Court. These were: G

1Copy pinpoint1. The levy could not be supported under:

(a) Entry 45 of List II: as it is not land revenue, an expres- sion which has a well defined connotation. 'Land revenue' is separate and distinct from 'royalty'. The Explanation to S.115(1) H itself proceeds on the basis that royalty cannot be land revenue

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.] 127

properly so called or conventionally so known. A

(b) Entry 49 of List II: as it is not a tax on land. A tax on land can only be levied on tax as a unit, must be imposed directly on land and must bear a definite relationship to it. There is a clear distinction between a tax directly on land· and a tax on income arising from land. The cess is not a tax directly on land as B a unit but only a tax on royalty which is indirectly connected with land. In the words of Oza. J. it is a tax not only on land but on labour and capital as well. It could have been treated as a tax on land if it had been confined to 'surface rent' instead of 'royalty'.

(c) Entry 50 of List II: as a tax on royalty as it is not a tax on mineral rights and so is outside the purview of Entry 50. Even otherwise, Entry 50 is subject to the provisions of List I and is, therefore, subject to the declaration contained in, and the purview of, the MMRD Act 1957.

2Copy pinpoint2. Even if the cess is regarded as a fee, the State's competence to levy the same can, if at all, only be justified with reference to Entry 23 and Entry 50 of List II but this recourse is not available as the field is already covered by Central Legislation referable to Entry 54 of List I.

3Copy pinpoint3. Murthy was not rightly decided. The view of the Rajasthan, Punjab, Gujarat and Orissa decisions was overruled. In the view taken by the Court, i.e. Madhya Pradesh ruling was not examined in detail, particularly as it was said to be pending in appeal before the Supreme Court.

In issue before us now are the levies of cesses based on royalty from lands containing minerals by the States of Orissa, Bihar and F Madhya Pradesh. Since the relevant statutes vary in detail and the parties concerned have also taken different stands, emphasising diffe- rent aspects, the arguments have to be considered and dealt with sepa- rately, We may, however, mention that the appeals before us include those in the cases of Laxmi Narayan Agarwal/a (Orissa), and Harilal Ramesh war Prasad (Madhya Pradesh) noticed earlier. G

THE VARIOUS ENACTMENTS ORISSA

The invalidation in 1961 of Orissa Act XXVII of 1952 in Hingir- H Rampur apparently rendered it necessary for the State to bring in fresh

128 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

legislation. The Orissa enactment with which we are now concerned is A the Orissa Cess Act (Orissa Act II of 1962) as amended by Act 42 of

1976. According to the Statement of Objects and Reasons accompany- ing the bill, the primary objective of the legislation is to condense and simplify the existing law on the subject by consolidating the different enactments, customs and usages relating to the levy of cess in the B State, to cure defects and deficiencies therein and to introduce uniformity in the levy of cess throughout the State. The Act proposed to adopt a uniform rate of 25 paise in the rupee of the annual rental value and distribute the entire gross collection among the zilla ~-

parishads, panchayat samithis (referred to as 'samithis' in the Act) and grama panchayats in the ratio 5:8: 12 respectively thus providing them with enhanced revenues to enable them to discharge their statutory c responsibilities more efficiently by taking up development works and providing better amenities to the people of the State.Its principal pro- visions are as follows:

(i) Under Section 4, from and after the commencement of the D Act, all lands (other than lands which were not liable to payment of rent or revenue before 1.4.77 and lands which were subject to a tax on land holdings under a 1950 Municipal Act) are made liable to the payment of cess (in addition to any land revenue, tax, cess, rate or fee otherwise payable in respect thereof) determined and payable "as herein provided". A 1976 amendment makes it clear that "lands held for carrying on mining operations" are not exempt from the cess.

(ii) The "rate of cess, assessment land] fixation of cess year" are dealt with by S. 5 which originally read thus:

"5.(1) The cess shall be assessed on the annual value of all lands on whatever tenure held caiculated in the manner hereinafter appearing.

(2) The rate per year at which such cess shall be levied shall be twenty five percentum of the annual value of the land. G (3) x x x"

Sub-section (2) was amended by Act 13 of 1970 by substituting of 50% in place of 25% but a 1982 amendme~t inserted S. SA to provide that, for the period 1.4.1977 to 31.3.1980, the cess would be levied at 25% H of the annual value in respect of lands held for carrying on mining

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.l 129 I operations. S. 5 was again amended by Act 15 of 1988 w .e.f. A 26.10.1988 to read thus:

"(2) The rate at which such cess shall be levied shall be-

a) in case of lands held for carrying on mining operations in relation to any mineral, on such percentum of the annual B value of the said lands as specified against that mineral in Schedule II; and

b) in case of other lands fifty percentum of the annual value."

Clause (a) was again amended by Act 17 of 1989 to read thus: c

"(a) in the case of land held for carrying on mining opera- tions in relation to any mineral, such percentum of the annual value as the State Government may, by notifica- tion, specify from time to time in relation to such mineral". D

It will thus be seen that, in place of a fixed rate, an elasticity was provided for, initially, by requiring the rates to be specified in the Schedule differently for different minerals. Schedule II prescribed the percentages which the cess was to bear to the annual value: the percentages varied from 650% in the case of sand, to 300% in the case E of coal, 200% in re. ect of certain minerals such as iron ore, -' limestone, manganese ore (except those meant for export or cement manufacture), 150% in the case of certain other minerals and 100% in respect of the rest. Further elasticity was provided for in 1989 by leav- ing it to the Government to vary the rates by a simple notification. In consequence of this amendment, Schedule II has been omitted and a F notification has been issued prescribing the percentage of the royalty or the dead rent (as the case may be) that is to be levied as the cess in respect of various items of specified minerals. The rates specified are 650%, 400%, 300%, 200% and 150%. In respect of all minerals not specified in the notification, the rate of cess is to be 100% of the royalty or dead rent. G

(iii) S. 6 specifies the person by whom the cess is payable. In so far as is material for our present purposes, it directs that the cess is payable "(c) by a person for the lands he holds for carrying on mining operations and shall be paid by him to the Government". This clause was inserted in S. 6 simultaneously with the amendment of S. 5 by Act H 42 of 1976.

130 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

(iv) "Annual value" is defined in S. 7 thus: A ''7.Annua/ Value-(l) The annual value of lands held by a raiyat shall be the rent payable by such raiyat to the land- lord immediately under whom he holds the land:

B x x x x x x

(2) In the case of lands held as an estate the annual value shall be the aggregate of-

(a) the amount which the intermediary is entitled to receive on account of revenue or rent Jess the amount pay- c able by such intermediary as revenue to the intermediary immediately superior to him or to the Government, as the case may be; and

(b) the rent, if any, payable in respect of lands in the khas D possession of (the) intermediary.

(3) In the case of lands held for carrying on mining opera- tions, the annual value shall be the royalty or, as the case may be, the dead rent payable by the person carrying on mining operation(s) to the Government." E The Explanation to the section defines "dead rent" and "royalty" in terms of their definitions in the MMRD Act, 1957. It also states that "royalty" would include "any payments made or likely to be made to the Government for the right of raising minerals from the land which shall be calculated on every tonne of such minerals despatched from F the land at the same rate as prescribed under the said Act or such other rate as may be fixed by the Government but not exceeding the amount which would have been otherwise payable as royalty under the said Act". Act 17 of 1989 also amended S. 7(3) to read thus:

"(3) In the case of lands held for carrying on mining opera- G tions, the annual value shall be the royalty or, as the case may be, the dead rent payable by the person carrying on mining operation(s) to the Government or the pit's mouth value wherever it has determined".

This was apparently intended to regulate the cess on coal in respect of which the pit's mouth value had been determined. So a notification

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.I 131

dated 14.8.89 was issued to provide that the cess in respect of coal bearing lands would be 30% of the pit's mouth value of the said ~ mineral.

(v) Sections 8 to 9B provide for the assessment of the cess in respect of various cases. S.9B, inserted by the 1976 amendment, provided:

"9B-Assessment of cess on lands held for mining operations:

(I) The cess payable in respect of lands held for carrying on mining operations shall be assessed in the prescribed manner. c (2) Nothing contained in Sections 8, 9 and 9A shall apply in relation to the assessment of cess in respect of the aforesaid lands: D The prescribed manner of such assessment had been already set out in the Orissa Cess Rules, 1963. Rule 6A, inserted in 1977, deals with this but it is unnecessary for us to consider the details except to mention that it is assessed and collected, along with the amount of royalty or dead rent, by the Mining Officer concerned. E (vi) S. 10 also needs to be referred to. It originally read thus:

-. ' "10. Application of proceeds of the cess: ( 1) Notwithstand- ing anything contained in any other law the amount col- lected as cess shall be credited to the Consolidated Fund of the State and shall be utilised in the following manner, namely:-

(a) amounts collected in respect of lands within the local limits of any Municipality or Notified Area constituted under the Orissa Municipal Act, 1950 shall be paid to the concerned Municipal Council or Notified Area Council, as the case may be; and

(b) amounts other than those referred to in clause (a) shall be distributed in the prescribed manner among the Grama Panchayats, Samitis and Parishads in the ratio of twelve is to eight is to five. H

132 SUPREME COURT REPORTS [ 1991) 2 S.C.R.

Explanation-In this section "Grama Panchayat" mean a A Grama panchayat constituted under the Orissa Grama Panchayats Act, 1948 and "Samiti" and "Parishad" respec·· lively mean the Samiti and Parishad constituted under the Orissa Panchayat Samiti and Zila Parish ad Act, 1959."

B Orissa Act 13 of 1970 substituted the following section for the above:

"JO Application of proceeds of the cess. (1) Notwithstand- ing anything contained in any other law, the amount col- lected as cess shall be credited to the Consolidated Fund of the State and shall be utilised for the following purposes, namely:- c (a) primary education; (b) contribution to Grama-Panchayats; and (c) contribution to Samitis. D Explanation-In this section "Grama Panchayat" means & Grama Panchayat constituted under the Orissa Grama Panchayat Act, 1964 and "Samiti" means a "Panchayat Samiti" constituted under the Orissa Panchayat Samitis Act, 1959. E (2) The proportion in which the amount collected as cess is to be allotted for the said purposes shall be as may be i - prescribed.

As substituted by Act 42 of 1976, it reads: F "10. Application of proceeds of the cess: ( 1) Notwithstand- ing anything contained in any other law, all amounts col- lected as cess shall be credited fifty percentum of those which represent cess collected in respect of lands, other than lands held by carrying on mining operations, shall be G utilised for the following purposes, namely:-

(a) primary education; (b) contribution to Grame Panchayats; and (c) contribution to Samitis.

H (2) The allotment of amounts to be utilised for the pur-

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN. J.] 133

poses mentioned in clause (a), (b) and (c) of sub-section ( 1) A shall be made in such proportion as may be prescribed."

BIHAR:

We shall now turn to the relevant provisions of the Bihar Act. Bihar is governed in this respect by the provisions of the Bengal Cess B Act (Act IX of 1880). It is sufficient to refer to the provisions of Sections 4 to 6, 9 and to certain notifications.

(i) A definition of 'royalty' was introduced in S. 4 of the Act by an ordinance of 1975. It was amended by the Bihar Finance Act, 1981 and then by the Bihar Finance Act, 1982. The definition as amended, w .e.f. 1.4.1982, by the latter reads as follows: c "Royalty for the purpose of this Act in respect of mines and quarries means payment (which includes dead rent) made or likely to be made to the owner of mines and mine- rals for the right of working the same on the quantity or value of such produce by a lessee if the land had been under a lease granted under MMRD Act, 1957, and rules made thereunder and includes any amount which Government may demand from the appropriation of mines and minerals belonging to the Government and any amount that may be paid as or in lieu of royalty for the right of working mines and quarries in areas held or acquired under any Act or agreement".

At the end of the section it added the following 'interpretation clause·:

"Valuation of mineral bearing land" means with reference to assessment of local cess in any year on land held for working mines and quarries the value at pit's mouth of all the mineral extracted from the land in that year

and the Explanation, which defines the value at pit's mouth of a G mineral;

(ii) S. 5 provided that, from and after the commencement of this Act, in any district or part of a district, all immovable property situate therein except otherwise in Section 2 provided shall be liable to the payment of a local cess. H

134 SUPREME COURT REPORTS [ 1991) 2 S.C.R.

(iii) Section 6, again, is a much amended section, As substituted by Ordinance No. 209 of 1975 dated 2.12. 75, it read:

"6. Cess has to be assessed: The local cess shall be assessed on the annual value of lands and until provision to the contrary is made by the Parliament on the royalty of mines and quarries, sale value of the other immovable properties including forest produce and annual net profits from tram- ways and railways as contained respectively as prescribed in this Act and the rate at which the local cess shall be levied for each other shall be-

(a) in the case of royalty, the rate will be determined by c the Government from time to time but it will not exceed the amount of royalty;

(b) in the case such annual net profits, fifteen paise on each rupee of such profits;

(c) in the case of annual value of lands, twenty paise per rupee of the annual value; and

(d) in the case of sale value of immovable properties including first produce, the rate will not exceed 10% and E the State Government may, by notification, prescribe from time to time the commodities on the sale of which cess would be levied along with the rate at which it would be _J . - -

levied".

It was amended by a series of Bihar Cess (Amendment) Ordinances F between 1975 and 1982. It was further amended by the Finance Act., 1982 (w.e.f. 1.4.82), the Finance Act, 1984, the Finance Act, 1985 (w.e.f. 1.8.1985) and the Bihar Cess (Amendment) Ordinance, 1985, After the last of these amendments, the section stood thus:

"S. 6. Cess how to be assessed: The local cess shall be " G assessed on the annual value of the lands and, until pro- vision to the contrary is made by the Parliament, on the royalty of mines and quarries or on value of mineral bear- ing land as the case may be, sale value of other immovable properties including forest produce and annual net profits from tramways and railways ascertained respectively as H prescribed in the Act and the rate at which the local cess

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.[ 135

shall be levied for each year shall be- A (a) in the case of royalty, the rate will be determined by the Government from time to time but it will not exceed five times the amount of royalty, provided that the local cess payable in any one year shall not be less than the amount arrived at by multiplying the dead rent with the B rate of cess determined under clause (a);

( aa) in the case of value of mineral bearing land, where the local cess payable in any year in respect of any mineral bearing land as assessed in clause (a) is less than 30 per cent of the value of mineral bearing land in that year, then, notwithstanding anything hereinbefore contained, the c State Government may assess the local cess at such per- centage of the value of the mineral bearing land, not exceeding [of) 30 per cent, as may be notified in the Official Gazette from time to time although the cess so assessed may exceed five times the amounts of royalty; D

(b) in the case of annual net profit, fifteen paise on each rupee of such profits;

(c) in the case of annual value of land, twenty five paise per rupee of the annual value; and E

--.. ~ (d) in the case of sale value of immovable properties including first produce, the rate will not exceed 30 per cent and the State ·Government may, by notification prescribe from time to time the commodities on the sale of which cess would be levied along with the rates at which it would be F levied".

The Bihar Cess (Amendment) Ordinance, 1987 (replaced by Act 3 of 1988) substituted 40% for 30% in clause (aa).

- (iv) S. 9 of the Act deals with the application of the proceeds of cess. It has been amended from time to time, inter alia in 1976, 1977, 1978, 1979," 1980, 1981 and 1982. After all these amendments, the G

section stood thus:

"9. Application of the proceeds of cess: The proceeds of local cess and all sums levied or recovered as interest or H

136 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

otherwise shall in each district be paid in the district fund- . A (i) at such rate as may, from time to time, be determined by the State Government in the case of local cess on annual value of land; and

B (ii) at such rate as may, from time to time, be determined by the State Government, subject to a maximum of twenty per cent in case of local cess on royalty of mines and quar- ries, or value of mineral bearing land, sale value of other immovable properties, forest produce and annual net profit from tramways and railways, and the remaining amount shall be deposited in the consolidated fund of the State for c the construction and maintenance of other works of public utility;

xxx xxx xxx xxx xxx

D Provided further that out of the remaining amount not less than ten per cent of the amount of the local cess collected under clause (a) or clause (aa) of Section 6 shall be spent for purposes relating to mineral development".

(v) In exercise of the powers conferred by S. 6 above, the State E Government issued a notification on 20.11.80 determining the rate of cess on the amount of royalty of all minerals of the State at 100% w.e.f. 1.2.1980. Our attention has also been drawn to, and some point "-·- made of, a notification dated 20.4.85 by which the State Government, modifying the earlier notification of 1.10.1981, determined the rate of cess "on the amount of royalty of iron ore which is extracted from F manually operated iron ore mines" at 100% w.e.f. 1.10.84 which was followed up by a notification dated 20.11.85 enhancing the rate at 300% on the amount of royalty of iron ore w.e.f. 21.6.85 in respect of mines other than those in which the ore is extracted manually. Other notifications were also issued determining the rate of cess in respect of

G other minerals as indicated bel_ow:

Date of Notification Effective Date Mineral Rate - 20.11.85 21.6.85 Bauxite Ore, sand 500% for stowing

20. 11.85 21.6.85 Copper Ore and 300% H uranium

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.] 137

20. l l.85 21.6.85 Lime stone and A kynite 200% 20.11.85 21.6.85 Coal 30% of pi.l's mouth value or 500% on the amount of royality whichever is greater. B Madhya Pradesh:

In Madhya Pradesh, two statutes have to be considered:

The first is the Madhya Pradesh Upkar Adhiniyam, 1981 (Act 1 of 1982). It provides for the levy of an energy development cess (Part C I), an urban development cess (Part II), ii cess on transfer of vacant land (Part III), and a cess on storage of coal (Part IV). The Act pro- vided that the cesses levied under Parts I and IV should first be credited to the Consolidated Fund of the State but subsequently withdrawn and credited to a separte Electrical Development Fund [Ss. 3(2)1 and Coal Bearing Area Development Fund [s. 12(1)] and that the amounts to the credit of the Funds as well as the cesses collected under Parts II and III should be utilised for special purposes connected respectively with energy development [S. 3(3)]. development of coal-bearing areas [S. 12(2)], -urban development [S. 7(2)] and rural development [S. 9(5)]. Act 2-1 of 1987 changed Part IV into a part dealing with "cess on land held in connection with mineral rights" with full retrospective effect. Part IV, as now substituted, deals only with "land situate in the State and held under a mining lease for unJertaking mining operations in relation to major mineral including operations for raising, winning or extracting coal". Sections 11 and 12 read thus:

"Section 11: There shall be levied and collected a cess on land held in connection with mineral rights at such rate as may be notified by the State Government per ton of major mineral raised and the rate of cess prevailing in respect of coal during the period commencing from the date of commencement of the Principal Act and ending on the date of commencement of the Madhya Pradesh Upkar (Sanshodhan) Adhiniyam, 1987, shall be deemed to be the rate of cess notified under this sub-section in respect of coal:

Provided that subject to the limitation mentioned above the State Government may, by notification, increase or

138 SUPREME COURT REPORTS [ 1991) 2 S.C.R.

reduce the rate of cess at an interval of not less than one year, where the rate is increased it shall not be in excess of ,_ fifty per cent of the rate for the time being in force;

Provided further that every notification under the above proviso shall be laid on the table of the Legislative Assem- B bly and the provisions of Section 24-A of the Madhya Pradesh General Clauses Act, 1957 (No. 3 of 1958) shall apply thereto as they apply to rule.

(2) The rate of cess to be notified for the first time in exercise of the powers conferred by Sub-section ( 1) shall be effective from the [first of) April, 1987. c (3) The cess levied under sub-section (1) shall, subject to and in accordance with the rules made in this behalf, be assessed and collected by such agencies and in such manner as may be prescribed. '-· D (4) The agencies prescribed under sub-section (3) shall for the purpose of assessment, collection and recovery of cess and all matters connected therewith, exercise such of the powers conferred upon the authorities specified in Section 3 of the Madhya Pradesh General Sales TaJ[ Act, 1958 (No. E 2 of 1959) for the purposes aforesaid in respect of sales tax under the said Act and the rules made thereunder, as may be prescribed as if such agencies were the authorities specified in the section 3 and the cess on land held in con- nection with mineral rights were the tax levied under the said Act. F Section 12: The proceeds of the cess on land held in con- nection with the mineral rights may be utilised by the State Government for the general development of the mineral bearing areas.''

G Section 12 has, however, been omitted by an Amending Act of 1989, again, with full retrospective effect i.e. from 1.10.1982.

It appears, however, that there was in force in Madhya Pradesh w.e.f. 1.11.1982 another statute levying mineral development cess. It was the M.P. Karadhan Adhiniyam, 1982 (Act 15 of 1982) as amended by M.P. Acts 1983 and 13 of 1985 which was challenged before the

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.J 139

M.P. High Court in Hiralal Rameshwar Prasad v. State and other connected cases. The Madhya Pradesh Karadhan Adhiniyam, 1982, was enacted by State Legislature "to provide for levy of school build- ing cess, forest development cess and mineral areas development cess and matters incidental thereto". Part II of the Act deals with the school building cess. Section 5 therein requires the holder of every holding of six hectares and above to pay the school building cess as provided therein. The proceeds of the school building cess are required by S. 4 to be credited to a separate Fund supplemented by a State ·contribution equal to 50% thereof and utilised for construction and furnishing of primary school buildings in non-urban areas. Part III of the Act deals with the forest development cess. Section 7 imposes forest development cess on every sale or supply of forest produce by the Forest Department. The proceeds thereof are to be credited to a separate Fund and utilised for social forestry, afforestation, reforesta- tion, forest rehabilitation and other purposes connected with forest development. Then comes Part IV dealing with the mineral areas development cess, the provisions of which are relevant for the purpose 0 of these appeals and it is the charging provision therefor contained in Section 9 which has been attacked as constitutionally invalid. The Section read thus:

"9. Levy of mineral areas development cess on land under mining lease": E (1) There shall be levied and collected on the land held under a mining lease for undertaking mining operation a mineral areas development cess at the rate of twenty five percentum of the rental value thereof. F (2) For the purpose of sub-section (1), rental value shall be equal to the royalty or dead rent, as the case may be, whichever is higher.

(3) The mineral areas development cess shall be payable by the person to whom the mining lease is granted. G (4) The mineral areas development cess shall, subject to and in accordance with the rules made in this behalf, be collected by such agencies and in such manner as may be prescribed and shall be applied towards development of mineral bearing areas''. H

140 SUPREME COURT REPORTS [1991] 2 S.C.R.

A The 1983 amendment substituted the following sub-section ( 1) in Section 9:

"(l) There shall be levied and collected on the land held under a mining lease for undertaking minor operations for a major mineral, a mineral areas development cess at the B rate of one hundred percentum of the rental value thereof".

The 1985 amendment substituted the following sub-section in place of the above w.e.f. 1.8.1985:

"(1) There shall be levied and collected- c (a) on the land held under mining lease for undertaking mining operations for a major mineral other than coal a mineral areas development cess at the rate of one hundred percentum of the rental value thereof; D (b) on the land held under mining lease for undertaking mining operations for coal, a mineral area development cess at the rate of the hundred twenty five percentum of the rental value thereof".

and also made a provision for payment of interest on arrears of cess. E Rules have been framed under this Act called "The Madhya Pradesh Mineral Areas Development Cess Rules, 1982", Rule 3 provided for the collection of the cess every month along with the royalty or dividend. Rule 10 thereof is alone relevant for the purpose of these petitions and read as under: F "10. Application of cess: The State Government shall decide from time to time the manner in which the amount collected from cess shall be utilized for the development of mining lease areas". , In 1985, an amendment substituted the words "mineral bearing" for • G the words "mining lease" in this rule. It will be seen that, unlike the cesses referred to in Part I and III, the Act did not provide for the creation of a separate Fund for the mineral areas development cess. The manner of utilisation thereof was also left to the discretion of the State Government though it had to be spent for development of H mineral bearing areas.

ORJSSA CEMENT v. STATE OF ORISSA [RANGANATIJAN, J.] 141

THE CONTENTIONS A OR/SSA

In the historical and statutory context set out above, the attempt of Sri T.S. Krishnamurthy Iyer, learned counsel for the State of Orissa to save the impugned legislation of that State is two fold. First, he B points out that in India Cement the statute, by Ss. 115 and 116, imposed a cess and surcharge on 'land revenue' and the Explanation to s. 115 defined 'land revenue' to mean 'royalties'. In other words, that was a clear case of a direct cess or tax on royalties. Here, on the other hand, s. 5 makes it clear that what the legislature has provided for is a tax assessed on the annual value of all lands, on whatever tenure held, calculated at a percentage of the annual value of the land. S. 7, which c defines 'annual value', provides for different measures for determining the annual value in respect of lands held under different kinds of tenures; and, in the case of lands held for mining operations, the measure of such annual value is the royalty or dead rent paid to the Government. On a proper construction of the statute, he submits, the cess levied is a cess or tax on land and the 'royalty' is only taken as a measure for determining the quantum of tax. He contends that India Cement only forbids a cess or tax on royalty as such and not a cess or tax on land, which may be measured by reference to the royalty derived from it. He presses in aid of his argument the well-marked distinL1ion between the subject matter of a tax and its measure out- E lined, amongst others, in Ralla Ram's case (1948] F.C.R. 207 at pp. 218, 224 and Bombay Tyre International v. Union, (1984] 1 S.C.C. 487 at pp. 481-4. This argument, Sri Iyer contended, is based on the statut- ory language used in the Orissa Cess Act, 1962 and should prevail independently of the correctness or otherwise of Murthy. Secondly, he submitted that 'royalty' is not a tax and the cess on royalty is also not a F tax but only a fee. This view is supported, he said, by the limitations imposed in the statute on the modes of its utilisation. Being a fee, the State Legislature's competence to impose it has to be determined with reference to EI1try 23 read with Entry 66 of the State List. So doing, the validity of the levy has to be upheld as, in counsel's submission, the declaration contained in, and the provisions of, the MMRD Act, 1957 G ' do not, in anyway, whittle down or impair this competence.

Basically, itwilJ seen, two questions arise-

(1) Can the cess be considered as "land revenue" under Entry 45 or as a "tax on land" under Entry 49 or as a "tax H

142 SUPREME COURT REPORTS I 1991] 2 S.C.R.

on mineral rights" under Entry 50 of the State List? A (2) If the answer to question (1) is in the negative, can the cess be considered to be a fee pertaining to the field covered by Entry 23 of the State List or has the State been denuded of the legislative competence under this Entry B because of Parliament having enacted the MMRD Act, 1957?

Taking up the first question, the attempt to bring the levy under Entry 45 of the State List proceeds in two steps. First, land revenue is the sovereign's share of the proceeds of the land belonging to the sovereign and is represented, in the case of land containing minerals, c by the payment of royalty to the Government. Second, the cess, being an accretion to royalty, partakes of the same character. This argu- ment, however, must fail in view of the categorical observations of the Supreme Court in India Cement, (vide paras 20 and 21) as to the connotation of the expression 'land revenue'. At least, in India D Cement, the statute sought to include royalty within the meaning of 'land revenue' but there is no such provision in the Orissa Act and, this being so, royalty or the tax thereon cannot be equated to land revenue. The cess here cannot be, therefore, brought under Entry 45.

Turning next to Entry 50, though Murthy left open the question how far a levy of this nature can be considered to be a tax on mineral rights (vide page 676), India Cement has chosen to approve the con- trary view of Wanchoo J. in his dissenting judgment in Hingir Rampur (para 30). Actually, it appears that the observations of Wanchoo J. have not been fully examined. The learned Judge held that the tax in the case before him was not a tax on mineral rights because it was levied on the value of the minerals extracted. If his observations in this context are read as a whole, it would seem that he also was of opinion that a tax on royalty would be a tax on mineral rights, for he observed (at pp. 582-3):

"The next contention on behalf of the State of Orissa is that if the cess is not justified as a fee, it is a tax under item 50 of List II of the Seventh Schedule. Item 50 provides for taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development. This raises a question as to what are taxes on mineral rights. Obviously, taxes on mineral rights must be different from taxes on goods produced in the nature of duties of excise. If

ORJSSA CEMENT v. STATE OF ORISSA {RANGANATHAN, J.] 143

taxes on mineral rights also include taxes on minerals produced, there would be no difference between taxes on ·~ mineral rights and duties of excise under item 84 of List I. A comparison of Lists I and II of the Seventh Schedule shows that the sa~e tax is not put in both the Lists. There- fore, taxes on minerals rights must be different from duties of excise which are taxes on minerals produced. The dif- B ference can be understood if one sees that before minerals are extracted and become liable to duties of excise some- body has got to work the mines. The usual method of work- ing them is for the owner of the mine to grant mining leases to those who have got the capital to work the mines. There should therefore be no difficulty in holding that taxes on mineral rights are taxes on the right to extract minerals and c not taxes on the minerals actually extracted. Thus tax on mineral rights would be confined, for example, to taxes on leases of mineral rights and on premium or royalty for that. Taxes on such premium and royalty would be taxes on mineral rights while taxes on the minerals actually extrac- D ted would be duties of excise. It is said that there may be cases where the owner himself extracts minerals and does not give any right of extraction to somebody else and that in such cases in the absence of mining leases or sub-leases there would be no way of levying tax on mineral rights. It is enough to say that these cases also, rare though they are, E present no difficulty. Take the case of taxes on annual value of buildings. Where there is a lease of the building, the annual value is determined by the lease-money; but there are many cases where owners themselves live in buildings. In such cases also taxes on buildings are levied on the annual value worked out according to certain rules. F There would be no difficulty where an owner himself works the mine to value the mineral rights on the same principles on which leases of mineral rights are made and then to tax the royalty which, for example, the owner might h~ve got if instead of working the mine himself he had leased it out to somebody else. There can be no doubt therefore that taxes G on mineral rights are taxes of this nature and not taxes on minerals actually produced. Therefore the present cess is not a tax on mineral rights; it is a tax _on the minerals actually produced. Therefore the present cess is not a tax on mineral rights; it is a tax on the minerals actually pro- duced and can be no different in pith and substance from a H

• 144 SUPREME COURT REPORTS 11991] 2 S.C.R.

tax on goods produced which comes under Item 84 of List A I, as duty of excise. The present levy therefore under s. 4 of the Act cannot be justified as a tax on mineral rights.

However, the conclusion of India Cement is clear that a tax on royalties cannot be a tax on minerals and we are bound thereby. This B apart, we shall also advert, while discussing the second question, to another hurdle in the way of the State's attempt to have recourse to Entry 50, which has also been touched upon by India Cement.

Can, then, the cess be described as a 'tax on land'? The Statute considered in India Cement, as Sri Iyer correctly points out, was diffe- rently worded. It purported to levy a cess on land revenue and c 'royalty' was brought within the definition of that expression. It was, therefore, a case where the levy had no reference to land at all but only to the income from the land, in the case of Government lands, got by way of land revenue or otherwise. Here the statute is different. The objective of the Cess Act as set out earlier, is to levy a cess on all land. D Indeed, originally the idea was to levy a uniform cess at 25% of the annual value of all land which was subsequently raised to 50%. It is argued that the tax here is, therefore, a tax on land and it is immaterial that this tax is quantified with reference to the income yielded by the land. A tax on land may be levied, inter alia with reference to its capital value or with reference to its annual value. One realistic measure of such capital or annual value will be the income that the land will yield just as, for property tax purposes, the annual value is based on the amount for which the property can reasonably let from year to year. The income from the land may be more or less due to a variety of reasons. In the case of agricultural lands, it may depend on the fertility of the soil, the sources of irrigation available, the nature of crops grown and other such factors. Likewise, where the land is one containing minerals, naturally the value (whether annual or capital value) will be more if it contains richer minerals and can be legiti- mately measured by reference to the royalties paid in respect thereof. The mere fact, it is argued, that the annual value is measured with reference to the royalty, dead rent or pit's mouth value of the mineral does not mean that it ceases to have the character of a tax on land. In this context, Sri Iyer places strong reliance on the decision of a Con- stitution Bench of this Court in Ajay Kumar Mukherjea v. Local Board of Barpeta, (1965] 3 S.C.R. 47. There a local Board was authorised to "grant ... a licence for the use of any land as a market and impose an annual tax thereon''. The Court held, examining the Scheme and the language of the provision in question, that the tax imposed was a tax

ORISSA CEMENT v. STATE OF ORISSA [RANGANA1HAN, J.] 145

on land under Entry 49. The Court indicated the following approach to the issue before it: .... "The first question which falls for consideration therefore is whether the impost in the present case is a tax on land within the meaning of Entry 49 of List II of the Seventh Schedule to the Constitution. It is well-settled that the entries in the three legislative lists have to be int.erpreted in their widest amplitude and therefore if a tax can reasonably be held to be a tax on land it will come within Entry 49. Further it is equally well-settled that tax on land may be

• ... ,,. based on the annual value of the land and would still be a tax on land and would not be beyond the competence of the c State legislature on the ground that it is a tax on income: see Ra/la Ram v. The Province of East Punjab, [1948) F.C.R. 207. It follows therefore that the use to which the land is put can be taken into account in imposing a tax on it within the meaning of entry 49 of List II, for the annual value of land which can certainly be taken into account in D imposing a tax for the purpose of this entry would necessa- rily depend upon the use to which the land is put. It is in the light of this settled proposition that we have to examine the -'''k scheme of s. 62 of the Act which imposes a tax under challenge." E On the other hand, it is contended for the respondents that, -- ~ whatever may have been the original intention, the true and real impact of the cess is only on the royalties. It is said that, at any rate, after the amendments of 1976, when lands held for mining operations - ~ were segregated for levy of separate and steep rates of cess based on royalty, the ostensible appearance of levying a tax on all land with reference to annual value has disappeared and a direct, undisguised ' tax on royalties from mining lands has taken its place. It is urged that, for deciding whether the tax is really a tax on land as in Murthy or whether it is really a tax on royalties which has been struck down in A India Cement, it is not the form or the statutory machinery that matters; one has to look at the real substance and true impact of the levy. If this is done, it is said, there can be no doubt that the cess impugned here suffers from the same vice that vitiated the levy in India Cement.

The decision of this Court in Buxa Dooars Tea Co. v. State, -· [1989] 3 S.C.R. 211 was referred to by Sri G. Ramaswamy, learned H _, ·::,,,.

146 SUPREME COURT REPORTS [1991] 2 S.C.R.

counsel for Orient Paper Mills, in support of this contention. In that A case, this Court was concerned with a cess levied annually. Initially S. 4(2) of the relevant statute levied the cess:

"(a) in respect of lands, at the rate of six paise on each rupee of development value thereof; B (b) in respect of coal mines, at the rate of fifty paise on each tonne of coal on the annual despatches therefrom;

(c) in respect of mines other than coal mines and quarries, at the rate of six paise on each rupee of annual net profits thereof". c With effect from 1.4.1981, clause (a) above was amended and clause (aa) inserted to provide for the levy of cess- •

"(a) in respect of lands other than a tea estate, at the rate of six paise on each rupee of development value thereof; ,,...

(aa) in respect of a tea estate at such rate, not exceeding rupees six on each kilogram of tea on the despatches from such tea estate of tea grown therein, as the State Govern- ment may, by notification in the Official Gazette, fix in this behalf:

Provided that in calculating the despatches of tea for the purpose of levy of rural employment cess, such despatches for sale made at such tea auction centres as may be recog- nised by the State Government by notification in the Offi- cial Gazette shall be excluded: • F

Provided further that the State Government may fix diffe- rent rates on despatches of different kinds of tea".

Sub-section (4) was added in Section 4 to enabl~e State Govern- G ment, if it considers necessary so to do, by notification in the Official Gazette, to exempt such categories of despatches or such percentage of despatches from liability to pay the whole or any part of the rural employment cess or reduce the rate of rural employment cess payable thereon, under clause (aa) of sub-section (2), on such terms and condi- tions as may be specified in the notification. With effect from H 1.10.1982, the first proviso to clause (aa) was omitted. It was con-

ORISSA CEMENT v. STATE OF ORISSA [RANGANATHAN, J.) 147

*tended for the tea estate, inter alia that the above levy violated the A provisions of Article 301 of the Constitution and was also beyond the legislative competence of the State Government. Upholding these contentions, the Court.observed: o( ,. "The question then is whether the impugned levy impedes 1 the free flow of trade and commerce throughout the ter- B ritory of India and, if it does, whether it falls within the exception carved out in article 304(b ). If the levy imposes a _, cess in respect of tea estates, it may will be said that even "" though the free flow of trade is impeded in its Government throughout the territory of India, it is in consequence of an "-'.j indirect or remote effect of the levy and that it cannot be said that article 301 is contravened. The contention of the c petitioners is, however, that it is ostensibly only in respect

• ~ of tea estates but in fact it is a levy on despatches of tea. If that contention is sound, there can be no doubt that it constitutes a violation of article 301 unless the legislation is brought within the scope of article 304(b ). To determine D -·~' -' whether the levy is in respect of tea estates or is a levy on '! despatches of tea, the substance of the legislation must be ;..;~ ascertained from the relevant provisions of the statute. It ~. cannot be disputed that the subject of the levy, the nature -~ of which defines the quality of the levy, must not be con- ~ fused with the measure of liability, that is to say, the E quantum of the tax. There is a plenitude of case law sup- porting that principle, among the cases, being Union of "- I ;;..;-; ' l.ndia v. Bombay Tyre International, [1984] 1S.C.R.347.

10. But what is the position here? ......... Now, for determining the true nature of the legislation, whether it is F a legislation in respect of tea estate and therefore of land, or in respect of despatches of tea, we must, as we have said """ take all relevant provisions into account and ascertain the ~} essential substance of it. It seems to us that although the ). ~ impugned provosions speak of a levy of cess in respect of tea estates, what is contemplated is a levy on despatches of G :r:I tea instead. The entire structure of the levy points to that conclusion. If the levy is regarded as one in respect of tea " estates and the measure of the liability is defined in terms of the weight of tea despatched, there must be a nexus between the two indicating a relationship between the levy. ~ on the tea estate and the criteria for determining the H

148 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

measure of liability. If there is no nexus at all it can con- A . ceivably be inferred that the levy is not what it purports to be. The statutory provisions for measuring the liability on account of the levy throws light on the general character of the tax as observed by the Privy Council in Re: A Reference · under the Government of Ireland Act, 1920 and Section 3 of B the Finance Act (Northern Ireland), 1934, [1963] 2 A.E.R. III. In R.R. Engineering Co. v. Zilla Parishad, Barielly, I 1980] 3 SCR 1 this Court observed that the method of determining the rate of levy would be relevant in consider- ing the character of the levy. All these cases were referred to in Bombay Tyer International Ltd., [1984] 1 S.C.R. 347 where in the discussion on this point at page 367 this Court c said:.