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Mineral Area Development Authority & Anr. v. M/s Steel Authority of India & Anr. Etc.

33Copy pinpoint33. Article 254 clarifies that if the law made by a State legislature is repugnant to any provisions of a law made by Parliament with respect to any of the matters enumerated in List III, the law made by Parliament would prevail and the law made by the State legislature would be void to the extent of the repugnancy. The issue of repugnancy arises only when both the legislatures are competent to legislate on the subject with respect to List III.26 The issue of repugnancy does not arise if the legislations enacted by Parliament and the State legislatures deal with separate and distinct legislative subject matters. By virtue of Article 248, Parliament has exclusive legislative powers to make laws with respect to any of the matters not enumerated in List II or List III.27 However, how should courts deal with a situation where two legislations, enacted by Parliament and State legislature in pursuance of their respective legislative powers, appear to conflict with each other? The answer lies in Article 246 itself.

34Copy pinpoint34. Article 246 incorporates the principle of federal supremacy. 28 In Hoechst Pharmaceuticals (supra), this Court held that the words “notwithstanding anything contained in clauses (2) and (3)” in Article 246(1) and the words “subject to clauses (1) and (2)” in Article 246(3) embody that principle. The principle postulates that in case of an inevitable conflict between Union and State powers, the Union’s power of legislation over a subject enumerated in List I shall prevail over the State powers of legislation over a subject enumerated in List II and III. However, it is also settled that this principle cannot be resorted to unless there is an irreconcilable direct conflict between the entries in the Union and State Lists.29 Such a conflict must be an actual one and not a mere seeming conflict between the two entries in two lists.30

35Copy pinpoint35. Hoechst Pharmaceuticals (supra) laid down the following principles to resolve any direct conflict between the entries in List I and List II: (i) in case of seeming conflict, the two entries should be read together without giving a narrow and restricted reading to either

26 Ch Tika Ramji v. State of U P, 1956 SCC OnLine SC 9 [26]; State of Maharashtra v. Bharat Shanti Lal Shah, (2008) 27 Article 248, Constitution of India. 28 Kishori Shetty v. The King (1949-50) 11 FCR 650 29 State of Kerala v. Mar Appraem Kuri Co. Ltd. (2012) 7 SCC 106 [39] 30 Offshore Holdings (P) Ltd. v. Bangalore Development Authority (2011) 3 SCC 139 [99]

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of them; (ii) an attempt should be made to see whether the two entries can be reconciled so as to avoid a conflict of jurisdiction; and (iii) no question of conflict arises between two Lists if the impugned legislation in pith and substance appears to fall exclusively under one list and the encroachment upon the other list is incidental.

36Copy pinpoint36. Articles 245 and 246 embody the essence of Indian federalism. The division of legislative powers between Union and States is an emanation of the federal project.31 This division also serves as a constitutional limitation on legislative powers. Parliament cannot entrench upon the plenary power of the State legislatures in the ordinary course, except where the Constitution itself specifically allows it.32 The appropriate legislature must possess legislative competence to enact a law on the subject matter it seeks to legislate.

37Copy pinpoint37. With respect to the powers of taxation, Article 265 provides that no tax shall be levied or collected except by authority of law. In Mafatlal Industries v. Union of India, a nine-Judge Bench of this Court held that the “law” mentioned under Article 265 refers to a valid law whose validity has to be determined with reference to other provisions in the Constitution.33 Therefore, with respect to taxation laws particularly, there is a constitutional requirement that the law imposing tax must be in conformity with the provisions of the Constitution, particularly Part III dealing with the fundamental rights. This is also a constitutional limitation because the appropriate legislature has to ensure that the law is in accord with the principles of equality and non-discrimination. Any legislation enacted by the legislature in excess of its constitutional powers is void.34

31 Constituent Assembly Debates, Vol. 11 (25 November 1949). [Dr. B R Ambedkar – “As to the relation between the Centre and the States, it is necessary to bear in mind the fundamental principle on which it rests. The basic principle of Federalism is that the Legislative and Executive authority is partitioned between the Centre and the States not by any law to made by the Centre but by the Constitution itself. This is what the Constitution does. The States under our Constitution are in no way dependent upon the Centre for their legislative or executive authority. The Centre and the States are co-equal in this matter. It is difficult to see how such a Constitution can be called centralism. It may be that the Constitution assigns to the Centre too large field for the operation of its legislative and executive authority than it to be found in any other federal Constitution. It may be that the residuary powers are given to the Centre and not to the States. But these features do not form the essence of federalism. The chief mark of federalism as I said lies in the partition of the legislative and executive authority between the Centre and the Units by the Constitution. This is the principle embodied in our Constitution.”] 32 See Articles 249, 250, and 252, Constitution of India. 33 [1996] Supp. 10 SCR 585 : (1997) 5 SCC 536 [25] 34 R M D Chamarbaugwalla v. Union of India (1957) SCC OnLine SC 11 [12]

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ii. Interpretation of legislative entries

38Copy pinpoint38. The structure of the legislative entries in the three Lists of the Seventh Schedule follows an express and deliberate pattern. The entries are classified into general and taxing entries.35 In the Union List, entries 1 to 81 enumerate general subject matters, while entries 82 to 92-C pertain to the powers of taxation. Similarly, entries 1 to 45 in the State List enumerate the general entries and entries 46 to 63 provide for taxing entries. The legislature does not derive the power to tax from the general entries - taxation is considered to be a distinct matter for purposes of legislative competence. The distinction between the general and taxing entries was explained by this Court in M P V Sundararamier (supra) in the following manner: “In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 enumerate the taxes which could be imposed by a law by Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, entry 22 in List I is “Railways”, and Entry 89 is “Terminal taxes on goods or passengers, carried by railway, sea, or air; taxes on railway fares and freights”. If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions “Trade and commerce with foreign countries; import and export across customs frontiers”. If these expressions are to be interpreted as including duties to be levied in respect of that trade and commerce, then Entry 83 which is “Duties of customs including export duties” would be wholly redundant. Entries 43 and 44 relate to incorporation regulation and winding up of corporations. Entry 85 provides separately for Corporation tax. Turning to List II, Entries 1 to 44 form one group mentioning the subjects on which the States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. Entry 18, for example, is “Land” and Entry 45 is “Land Revenue”. Entry 23 is “Regulation of mines” and Entry 50

35 R Abdul Quader & Co. v. STO [1964] 6 SCR 867, [8]

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is “taxes on mineral rights”. The above analysis – and it is not exhaustive of the Entries in the Lists – leads to the interference that taxation is not intended to be comprised in the main subject in which it might on an extended construction be regarded as included, but is treated as a distinct matter for purposes of legislative competence. And this distinction is also manifest in the language of Art. 248, Cls. (1) and (2), and of Entry 97 in List I of the Constitution. […] To sum up: […] (2) Under the scheme of the Entries in the Lists, taxation is regarded as a distinct matter and is separately set out.” (emphasis added)

39Copy pinpoint39. The above position of law has been expressly affirmed by the nine-Judge Bench of this Court in Jindal Stainless Ltd v. State of Haryana.36 Thus, it is an accepted principle that the subject matter of taxation is dealt with under distinct entries and, therefore, cannot be traced to a non-taxing entry. The taxing powers of Parliament and the State legislatures are mutually exclusive and clearly demarcated. There can be no overlap between the taxing powers of the Union and the States. Entries relating to taxing powers must be construed with clarity and precision to maintain exclusivity and a construction of a taxation entry which may lead to overlapping must be eschewed.37 If a taxing power is enumerated within a particular legislative list, it is automatically excluded from the purview of subject-matters in other legislative lists. The residuary power of Parliament also includes the power of making any law imposing a tax not mentioned in either List II or List III.

40Copy pinpoint40. The legislative fields or entries in the Seventh Schedule have used general words to define and delineate the legislative powers of Parliament and State legislatures. The rule that words should receive their ordinary, natural, and grammatical meaning applicable to statutes also applies to the entries contained in the Seventh Schedule.38 It

36 Jindal Stainless Steel (supra) [120], [237.5], [639] 37 Godfrey Phillips India Ltd. v. State of UP (2005) 2 SCC 515 [46] 38 Navinchandra Mafatlal v. Commissioner of Income Tax, Bombay City (1954) 3 SCC 623

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is also a well-accepted principle that the entries should not be read in a narrow or pedantic sense but must be given their broadest meaning and the widest amplitude because they are intrinsic to a machinery of government.39 The ambit of the entries extends to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in them.40 Since the Seventh Schedule uses general terms, there is always a possibility of an overlap and conflict between two or more entries.

41Copy pinpoint41. Many entries in the Seventh Schedule may appear to overlap because of the language used in the entries. The necessary corollary to the scheme of legislative distribution is that that any invasion by Parliament in the field assigned to the States and vice versa is a breach of the Constitution.41 Even though the Constitution distributes legislative powers between the Union and the States, there have been situations where a legislation purporting to deal with a subject in one list, touches on a subject in another list. To remedy such situation, the doctrine of pith and substance is used to examine whether the legislature has the competence to enact a law with regard to either of the three lists under the Seventh Schedule of the Constitution.42 There may arise situations where a legislature may frame a law that in substance and reality transgresses its legislative competence. Such a piece of legislation is called “colourable legislation” because the legislature veils its transgression by making it seem as if the legislation is within its legislative competence.43 To examine whether the legislature has transgressed its legislative competence, the substance of the legislation is material. If the subject-matter is in substance beyond the legislative powers of the legislature, the form in which the law is clothed would not save it from the vice of unconstitutionality.44

39 Hans Muller of Nurenburg v. Superintendent, Presidency Jail [1955] 1 SCR 1284; Elel Hotels & Investments Ltd v. Union of India (1989) 3 SCC 698; State of Rajasthan v. G Chawla, 1958 SCC OnLine SC 33 [8]. 40 United Provinces v Atiqa Begum, (1940) 2 FCR 110; Express Hotels (P) Ltd. v. State of Gujarat (1989) 3 SCC 677; Sardar Baldev Singh v. CIT, 1960 SCC OnLine SC 147 [20] 41 Dr. B R Ambedkar, CAD Volume 7 (4 November 1948). 42 A L S P P L Subrahmanyan Chettiar v. Muthuswami Goundan (1940) 2 FCR 188; A S Krishna v. State of Madras [1957] SCR 399 [8]; 43 K C Gajapathi Narayan Deo v. State of Orissa (1953) 2 SCC 178 [11] 44 K C Gajapathi Narayan Deo (supra) [12]

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42Copy pinpoint42. The Constitution has used specific expressions to resolve potential overlaps or conflicts between and among the entries in the three Lists. The entries in the Seventh Schedule have used different phraseologies to either subject or restrict their scope and ambit. Some of the legislative entries in the State List have been made subject to broad or specific limitations or restrictions with respect to the entries in the Union List or Concurrent List. This would emerge from the tabulation set out below:

Phraseology used Entries in State List Subject to the provisions of any 37 law made by Parliament Subject to the provisions of entries 2, 17, 22, 24, 33 in List I Subject to a particular field of 23 legislation in List I Subject to the provisions of entries 26, 27, 57 in List III Subject to the provisions of List I 13 and List III Subject to any limitations imposed 50 by Parliament by law Other than 7, 12, 32, 63 Not including 1, 51, 54, 66

43Copy pinpoint43. The above table is an indication of the extent to which the legislative powers of the States have been restricted, limited, or altogether precluded. The use of the expression “other than” or “not including” serves the purpose of redacting from the ambit of the legislative power of the States to the extent suggested. Where the Constitution intends to limit or preclude the legislative powers of the State to a particular extent, it has used specific terminologies such as “other than” and “not including”.

44Copy pinpoint44. Where the entries have used the phrase “subject to”, the legislative power of the State is made subordinate to Parliament with respect to either the Union List or the Concurrent List. The expression “subject to” conveys the idea of a provision yielding place to another provision

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or other provisions to which it is made subject.45 Therefore, where the Constitution intends to displace or override46 the legislative powers of the States, it has used specific terminology – “subject to”. However, the Constitution has also indicated the extent to which a particular legislative entry under List II is subordinated. For instance, the subjection is either with respect to provisions of List I or List III, or it can also be to the extent of “any limitations” imposed by Parliament by law. Thus, it is imperative that the entries in List II must be read and interpreted in their proper context to understand the extent of their subordination to Union powers.

45Copy pinpoint45. There are numerous entries in the State List where the Constitution has imposed no restrictions on the exercise of the legislative powers of the States.47 With respect to such entries, the absence of any express limitations indicates that the Constitution did not intend to fetter the legislative powers of the States.

46Copy pinpoint46. In addition to the above terminologies, the entries in the Seventh Schedule also indicate the manner in which a restriction or limitation can be imposed on the legislative powers of the State. This assumes clarity from the following tabulation:

Phraseology Used Entries Declared by or under law 23, 27, 67 of List I Declared by Parliament by law 24, 52, 53, 54, 56, 62, 63, 64 of List I Imposed by Parliament by law 50 of List II

47Copy pinpoint47. The Constitution deploys three expressions to signify the manner in which the legislative power could be exercised by Parliament – “declared by or under law”, and “declared by Parliament by law”, and “imposed by Parliament by law” The difference in the character of these provisions can be gathered from the Constitution (Seventh

45 South India Corporation (P) Ltd. v. Secretary, Board of Revenue [1964] 4 SCR 280 [19] 46 State of Bihar v. Kameshwar Singh (1952) 1 SCC 528. [“18. […] It was said that the words “subject to the provisions of List III Entry 42” must be taken to mean that the law-making power under Entry 36 could only be exercised subject to the two conditions as to public purpose and payment of compensation, both of which are referred to in Entry 42. Those words, in my opinion, mean no more than that any law made under Entry 36 by a State Legislature can be displaced or overridden by the Union Legislature making a law under Entry 42 of List III.”] 47 See Entries 4, 5, 6, 8, 9, 10, etc., List II, Seventh Schedule, Constitution of India.

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Amendment) Act 1956 which substituted the expression “declared by Parliament by law” with “declared by or under law made by Parliament” in Entry 6748 of the Union List. The object of the amendment was to enable the delegate under the statute to make the required declaration.49 The expression “by law” means that the legislative power should be effectuated through the provisions of a statute. In comparison, “by or under law” means that the legislative intent could be effectuated either through the provisions of the statute or by any subordinate authority vested with powers in that behalf by the statute.50 It is important to note that Entry 50 of List II use the expression “by law relating to mineral development”. We will have to bear the meaning of the expression “by law” in mind to give an appropriate interpretation to the entry. iii. Fiscal Federalism

48Copy pinpoint48. Federalism is one of the basic features of the Indian Constitution.51 Federalism embodies a division of powers between the units of the federation, that is, the Union and the States. Indian federalism is defined as asymmetric because it tilts towards the Centre, producing a strong Central Government. Yet, it has not necessarily resulted in weak State governments.52 The Indian States are sovereigns within the legislative competence assigned to them. The delicate

48 Entry 67, List I, Seventh Schedule, Constitution of India. [It reads – “Ancient and historical monuments and records, and archaeological sites and remains, declared by or under law made by Parliament to be of national importance.”] 49 Constitution (Seventh Amendment) Act, 1956, State of Objects and Reasons – “Clause 24 – Entry 67 of the Union List refers to “ancient and historical monuments and records, and archaeological sites and remains, declared by Parliament by law to be of national importance. A large number of ancient monuments, archaeological sites, etc. have been declared to be of national importance by an Act of Parliament. It requires another Act of Parliament to make the slightest alteration in, or addition to, the lists in that Act, which seems to be and unduly cumbrous procedure. It is, therefore, proposed to amend the entry substituting for the words “declared by Parliament by law”, the words “declared by or under law made by Parliament”. The same amendment is also proposed to be made in connected provisions, entry 12 of the State List, entry 40 of the Concurrent List and article 49.” 50 In Dr Indramani Pyarelal Gupta v. W R Natu [1963] 1 SCR 721 a Constitution Bench of this Court explained the difference between “by law” and “under law” in the following terms: “15. […] The meaning of the word “under the Act” is well known. “By” an Act would mean by a provision directly enacted in the statute in question and which is gatherable from its express language or by necessary implication therefrom. The words “under the Act” would, in that context, signify what is not directly to be found in the statute itself but is conferred or imposed by virtue of powers enabling this to be done; in other words; bye-laws made by a subordinate law-making authority which is empowered to do so by the parent Act. The distinction is thus between what is directly done by the enactment and what is done indirectly by a subordinate law-making authority which is empowered to do so by the parent Act.” 51 Kesavananda Bharati v. State of Kerala (1973) 4 SCC 225 [582] 52 Granville Austin, Cornerstone of a Nation (OUP, 1966) 187

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balance of power is secured by constitutional courts by interpreting the scheme of distribution of powers.53 In S R Bommai v. Union of India,54 Justice B P Jeevan Reddy observed that the courts should be circumspect in adopting an approach or interpretation which may have an effect of whittling down the powers reserved to the States: “276. The fact that under the scheme of our Constitution, greater power is conferred upon the Centre vis-à-vis the States does not mean that States are mere appendages on the Centre. Within the sphere allotted to them, States are supreme. The Centre cannot tamper with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States. […]”

49Copy pinpoint49. In a federal form of government, each federal unit should be able to perform its core constitutional functions with a certain degree of independence. The Constitution has to be interpreted in a manner which does not dilute the federal character of our constitutional scheme.55 The effort of the constitutional court should be to ensure that State legislatures are not subordinated to the Union in the areas exclusively reserved for them.56

50Copy pinpoint50. In Union of India v. Mohit Minerals Private Limited,57 this Court recognized fiscal federalism as an important attribute of Indian federalism. Fiscal federalism is concerned with the assignment of functions to different levels of government and devolution of appropriate fiscal instruments to carry out these functions. 58 In India, these fiscal instruments typically take the form of tax and debt instruments. Similar to the division of constitutional powers and responsibilities, the Constitution has also shared tax-raising responsibilities between the Union and the States.59

53 In re, Special Reference No. 1 of 1964 [1965] 1 SCR 413; Jindal Stainless Steel (supra) [612] 54 [1994] 2 SCR 644 : (1994) 3 SCC 1 55 Jindal Stainless Steel (supra) [85]. 56 Jindal Stainless Steel (supra) [615]. 57 [2022] 9 SCR 300 : (2022) 10 SCC 700 [56] 58 Wallace E Oates, ‘An Essay on Fiscal Federalism’ (1999) 37(3) Journal of Economic Literature 1120, 1121. 59 The legislative power of Parliament to tax is enumerated in entries 82 to 92B of List I. Similarly, the legislative power of state is enumerated is enumerated in entries 46 to 62 of List II.

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51Copy pinpoint51. The Constitution is cognizant of the imbalance between resources at the disposal of states and the Union. The Constitution remedies the imbalance by way of intergovernmental distribution60 and grants.61 One of basic features of fiscal federalism is that both the Union government and the State governments ought to have adequate fiscal resources to discharge their constitutional responsibilities. List I and List II of the Seventh Schedule contain various subject-matters under which Parliament and the State legislatures can respectively levy taxes. The purpose of such a distribution is to entrust adequate fiscal powers with the legislatures to raise revenues to meet the growing fiscal expenditures and rein in the fiscal deficit. The legislatures can formulate the principles underlying any taxing legislation, define the taxing event or the charge of tax as well the mode and manner of its implementation.

52Copy pinpoint52. The subjects in respect of which the framers of the Constitution desired that there should be uniformity of law throughout the country have been enumerated under the Union List, while matters which may require laws to be made having regard to the particular needs and peculiar problems of each State have been placed under the State List.62 For instance, the State legislatures can tax the consumption or sale of electricity. Although electricity is an important raw material for many industries, the States are allowed to determine the rates of the levy by taking into consideration the particular needs of the State. By laying down a heterogenous distribution of legislative powers, the Constitution underscores that the asymmetry of our federation is an integral aspect of our federal form of governance.

53Copy pinpoint53. Dr B R Ambedkar in his treatise on the evolution of provincial finances in colonial India observed that the cornerstone of the financial relationship between the Federal and State governments was characterized by separation of sources and contributions from the yield.63 Any dilution in the taxing powers of the State legislatures

60 Article 270(2), Constitution of India 61 Articles 273 and 275, Constitution of India 62 Khazan Chand v. State of Jammu and Kashmir (1984) 2 SCC 456 [14] 63 Dr. B R Ambedkar, The Evolution of Provincial Finance in British India: A Study in the Provincial Decentralization of Imperial Finance’ (1923) 152-171.

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will necessarily impact their ability to raise revenues, which in turn will impede their ability to deliver welfare schemes and services to the people. The ability of the State Governments to invest in physical infrastructure, health, education, human capacity, and research and development is directly co-related to the raising of government revenues.64 Constitutional courts have to be cognizant of this context while adjudicating on issues affecting the taxing powers of the State legislatures.

54Copy pinpoint54. While speaking of fiscal federalism in the context of mineral resources, we have to be mindful of the fact that not all states are equally endowed with mineral resources. States such as Chhattisgarh, Jharkhand, and Orissa have greater reserves of mineral resources. Resultantly, the contribution of the mining sector in the state domestic product is higher for these states.65 Despite the abundance of mineral wealth, many of these states lag economically and suffer from, what many economists refer to as, “resource curse”.66 For instance, mineral rich states such as Jharkhand, Chhattisgarh, and Orissa have lower per capita incomes than the national averages.67 Taxation is among the important sources of revenue for these States, impacting on their ability to deliver welfare schemes and services to the people. Fiscal federalism entails that the power of the States to levy taxes within the legislative domain carved out to them and subject to the limitations laid down by the Constitution must be secured from unconstitutional interference by Parliament. iv. Natural resources and the public trust doctrine

55Copy pinpoint55. The public trust doctrine is founded on the principle that certain resources are nature’s bounty which ought to be reserved for the whole populace, for the present and for the future.68 Since these

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resources are intrinsically important to every person in society, the State acts as a public trustee to safeguard them. In M C Mehta v. Kamal Nath,69 Justice Kuldip Singh observed that the State is the trustee of all natural resources which are by nature meant for public use and enjoyment. The learned Judge further observed that the State has a legal duty to protect natural resources which cannot be converted into private ownership.70 The environment and natural resources are national assets and subject to intergenerational equity.71 The public trust doctrine looks beyond the needs of the present generation and obligates the State to protect natural resources for future generations as well.72

56Copy pinpoint56. While dealing with the allocation of spectrum in Centre for Public Interest Litigation v. Union of India,73 this Court held the State should distribute natural resources in consonance with the principles of equality and public trust to ensure against action detrimental to public interest. The public trust doctrine imposes restrictions and obligations on the government to protect long-established public rights over short-term private rights and private gain.74 However, the obligation extends to every person who exercises rights over natural resources to use them without impairing or diminishing the rights of people and long term interests in that property or resource.75 In Reliance Natural Resources Ltd. v. Reliance Industries,76 in the context of Article 29777 of the Constitution, this Court held that the nature of the word “vest” must be seen in the context of the public trust doctrine.78

57Copy pinpoint57. The principle which emanates from the above discussion is that the State holds all natural resources, including minerals, as a trustee of

69 [1996] Supp. 10 SCR 12 : (1997) 1 SCC 388 [34] 70 ibid 71 M C Mehta v. Union of India (2009) 6 SCC 142 [45] 72 T N Godavarman Thirumulpad v. Union of India (2006) 1 SCC 1 [89] 73 [2012] 3 SCR 147 : (2012) 3 SCC 1 74 Fomento Resorts & Hotels Ltd. v. Minguel Martins (2009) 3 SCC 571 [55] 75 Fomento Resorts & Hotels Ltd. (supra) [55] 76 [2010] 5 SCR 704 : (2010) 7 SCC 1 [114] 77 Article 297, Constitution of India. 78 Reliance Natural Resources Ltd. (supra) [122]

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the public and must deal with them in a manner consistent with the nature of such a trust.79

58Copy pinpoint58. The Central Government or the State Government may not always be the “owner” of the underlying minerals. But the Constitution empowers both Parliament (under Entry 54 of List I) and the State legislatures (under Entry 23 of List II) to regulate mines and mineral development, the entrustment to the State being subject to the power of Parliament to regulate the domain. The Constitution has entrusted the Union and the States with the responsibility to regulate mines and mineral development in consonance with the principles of the public trust doctrine and sustainable development of mineral resources. Under the MMDR Act, the Central Government, acting as a public trustee of minerals, regulates prospecting and mining operations in public interest.80 In the process, the legislation seeks to increase awareness of the compelling need to restore the serious ecological imbalance and protect against damage being caused to the nature.81 In Pradeep S Wodeyar v. State of Karnataka,82 one of us (Justice D Y Chandrachud) observed that the essence of the MMDR Act is to “protect humankind and every species whose existence depends on natural resources from the destruction which is caused by rapacious and unregulated mining.” The Court noted that the restrictions under Section 4 of the MMDR Act are intrinsically meant to protect the environment and communities who depend on the environment.

59Copy pinpoint59. The principle that the Union and State Governments act as public trustees of mineral resources has been incorporated in the MMDR Act. Section 4-A empowers the Central Government to prematurely terminate a prospecting license, exploration license, or mining lease, after consultation with the State Government in the interests of (i) the regulation of mines and mineral development; (ii) preservation of the natural environment; (iii) control of floods; (iv) prevention of pollution; (v) avoiding danger to public health or communications; (vi) ensuring the safety of buildings, monuments or other structures; (vii) conservation of mineral resources; and (viii) maintaining safety

79 Natural Resources Allocation, In re, Special Reference No. 1 of 2012 (2012) 10 SCC 1 [88] 80 State of Rajasthan v. Gotan Lime Stone Khanji Udyog (P) Ltd. (2016) 4 SCC 469 [29]; Orissa Mining Corporation Ltd. v. Ministry of Environment & Forests (2013) 6 SCC 476 [58] 81 State (NCT of Delhi) v. Sanjay (2014) 9 SCC 772 [32] 82 [2021] 11 SCR 985 : (2021) 19 SCC 62 [49.3]

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in the mines or for such other purposes.83 Moreover, the MMDR Act now mandates grant of mining leases,84 exploration licences,85 and composite licences86 in respect of notified minerals through the process of auction. The Central Government is empowered to prescribe the terms and conditions subject to which the auction shall be conducted.

60Copy pinpoint60. The regulatory regime under the MMDR Act recognizes the important role of the state in regulating mines and mineral development. This emerges from the stand point of the following perspectives: (i) the State is a public trustee of natural resources, including minerals; (ii) pursuant to its role as a public trustee, the State has been empowered to regulate prospecting and mining operations; (iii) the provisions of the statute reflect the priority of the state to regulate mining and related activities to ensure sustainable mineral development; (iv) prospecting and mining operations may be carried out by both the government as well as private lessees bearing in mind the public interest; and (v) the Government has to ensure that mineral concessions are granted in a fair and transparent manner.

61Copy pinpoint61. Having encapsulated the broad drift of the constitutional and statutory provisions, we now deal with the issues arising in this reference in the ensuing segments. F. Whether royalty is tax i. Royalty under the MMDR Act

62Copy pinpoint62. The MMDR Act was enacted by Parliament in exercise of its legislative power derived from Article 246 read with Entry 54 of List I. The Act seeks to provide for the regulation of mines and development of minerals under the control of the Union. Section 2 contains a declaration in terms of Entry 54 of List I, providing that “it is expedient in the public interest that the Union should

83 See State of Haryana v. Ram Kishan (1988) 3 SCC 416 [7]. [This Court observed that Section 4-A “was enacted with a view to improve the efficiency in this regard and with this view directs consultation between the Central Government and the State Government. The two governments have to consider whether premature termination of a particular mining lease shall advance the object or not, and must, therefore, take into account all considerations relevant to the issue, with reference to the lease in question.”] 84 Section 10B, MMDR Act 85 Section 10BA, MMDR Act 86 Section 11, MMDR Act

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take under its control the regulation of mines and the development of minerals to the extent hereinafter provided.”87 The declaration indicates that Parliament intends to take the regulation of mines and development of mines under the control of the Union to the extent indicated in the statute.

63Copy pinpoint63. Chapter II of the MMDR Act deals with general restrictions on undertaking prospecting and mining operations. Section 4 provides that no person shall undertake any reconnaissance, prospecting or mining operations in any area except under and in accordance with the terms and conditions of a reconnaissance permit; prospecting licence; exploration licence; or mining lease granted under the Act. It also provides that no mineral concession shall be granted otherwise than in accordance with the provisions of the Act and the rules made under it.

64Copy pinpoint64. Section 9 deals with royalties in respect of mining leases. Section 9(1) provides that the holder of a mining lease granted before the commencement of the Act shall, notwithstanding anything contained in the instrument of lease or in any law in force at the commencement of the statute, pay royalty in respect of any mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lessee from the leased area after such commencement, at the rates of royalties prescribed under the Second Schedule. The non-obstante clause is only applicable to mining leases granted before the commencement of the MMDR Act.

65Copy pinpoint65. Section 9(2) provides that the holder of a mining lease granted after the commencement of the MMDR Act is also liable to pay royalty in respect of any mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lessee from the leased area at the rate specified in the Second Schedule. Section 9(3) empowers the Central Government to amend the Second Schedule to enhance or reduce the rate at which royalty shall be payable in respect of minerals enumerated in the Second Schedule. However, it also provides that the enhancement in the rate of royalty in respect of any mineral shall not be done more than once during any period of three years. The then Minister of Mines and Oil (Mr K D Malviya) stated during the Lok Sabha debate preceding the passage of the Bill

87 Section 2, MMDR Act.

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that the purpose of capping further increases in the rates of royalty was to ensure financial security to the private sector.88

66Copy pinpoint66. The rates of royalty payable in respect of minerals in the Second Schedule of the MMDR Act are computed either on an ad valorem basis at a specified percentage of the average sale price or at specific rates on per tonnage basis. While Section 9 authorizes the charging of royalty, the Second Schedule provides the method of computation. The rate of royalty and method of computation differ from mineral to mineral. This Court has held that the Second Schedule has to be read as a part and parcel of Section 9.89

67Copy pinpoint67. The process of mining generally involves two stages: (i) extraction of the ores (also known as run-of-mine mineral) from the earth; and (ii) mineral beneficiation which entails separating the mineral from their ores. Rule 64-B of the Mineral Concession Rules 1960 provides for charging of royalty in case of minerals subjected to processing. It provides that if the processing of run-of-mine mineral is carried out within the leased area, royalty shall be chargeable on the processed mineral removed from the leased area. In case run-of-mine mineral is removed from the leased area to a processing plant located outside the leased area, the royalty shall be chargeable on the unprocessed run-of-mine mineral and not the processed product. Thus, royalty is payable on removal of the mineral from the boundaries of the leased area.90 Rule 64D of the Mineral Concession Rules 1960 deals with the manner of payment of royalty on minerals on ad valorem basis.

68Copy pinpoint68. Section 9A deals with payment of dead rent by the lessee. It provides that the holder of a mining lease shall pay to the State Government dead rent at such rate as may be prescribed in the Third Schedule. However, where the holder of the mining lease also becomes liable to pay royalty under Section 9, such person shall be liable to pay

88 Mr K D Malviya, Lok Sabha Debates, Volume X (9th December to 21st December 1957) 7123. (The Minister stated: “We gave consideration to the question of what should be the minimum time which could give a sense of security to the private sector, so that they could invest their money and have a fairly reasonable view of their investment and production programmes. Suppose we took powers to reduce or increase the royalties every six months, it will make the position very insecure from their point of view. As long as we want a mixed pattern of economy to go on and the private sector to flourish, surely my hon friend does not expect me to put a sense of insecurity in the mind of the private sector, when every six months they will have to ask “look here. Are you going to increase the royalty or are you going to decrease it’ What are you going to do?”.) 89 National Mineral Development Corporation Ltd. v. State of M.P. (2004) 6 SCC 281 [23] 90 Tata Steel Ltd. v. Union of India (2015) 6 SCC 193 [71]

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either royalty or dead rent, whichever is higher. The dead rent is calculated on a rate per hectare basis as specified under the Third Schedule. Section 9A was inserted by an amendment in 1972 with a two-fold purpose, namely to: (i) provide a statutory basis for calculation of dead rent; and (ii) prohibit the Central Government from enhancing the rate of dead-rent more than once during any period of three years.91

69Copy pinpoint69. Section 9B provides for establishment of the District Mineral Foundation92 in any district to work for the interest and benefit of persons and areas affected by mining related operations. The purpose of Section 9-B and the object of the DMF is to further the cause of social justice for those affected by mining related operations, such as tribals who may be dislocated or displaced from their habitat.93 Section 9B(5) provides that the holder of a mining lease shall pay, in addition to the royalty paid under Section 9, an amount which is equivalent to such percentage of the royalty as may be prescribed by the Central Government.

70Copy pinpoint70. Section 9C provides for the establishment of a non-profit autonomous body called the National Mineral Exploration Trust94 for the purposes of regional and detailed exploration in such manner as may be prescribed by the Central Government. Section 9C(4) mandates the holder of a mining lease to pay a sum equivalent of two percent of the royalty paid in terms of Section 9 to the Trust. The purpose of creating the NMET is to use the funds accrued from mining lease- holders for encouraging exploration.

71Copy pinpoint71. Section 13 authorizes the Central Government to make rules regulating the grant of mineral concessions in respect of minerals and for purposes connected therewith. Section 13(2) lists various matters in respect of which the Central Government can make rules. A similar power is vested with the State Government under Section 15 to make rules with respect to minor minerals. Section 25 empowers the Government to recover rent, royalty, tax, fee or other sum due to the Government under the Act as arrears of land revenue.

91 D K Trivedi & Sons v. State of Gujarat (1986) Supp. SCC 20 [45] 92 “DMF” 93 Federation of Indian Mineral Industries v. Union of India (2017) 16 SCC 186 [43] 94 “NMET”

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72Copy pinpoint72. The Central Government has framed the Mineral Concession Rules 1960 in exercise of the powers conferred by Section 13. Rule 31 of the Mineral Concession Rules 1960 provides that the lease deed shall be executed between the lessor and lessee in terms of the Form K. According to the recitals of Form K, the State Government executes the lease deed in favor of the lessor “in consideration of the rents and royalties, covenants and agreement by and in these presents and the Schedule hereunder written reserved and contained and on the part of the lessee/lessees to be paid observed and performed.” Further, all the mine beds/veins/seams with respect to specified minerals lying and being in or under lands are demised by the State Government to the lessee together with the liberties, powers, and privileges to be exercised or enjoyed in connection with the demise. The recitals indicate that the lease deed serves as a statutory agreement between the State Government, being the lessor, and the lessee.

73Copy pinpoint73. Part V of Form K deals with rents and royalties reserved by the lease and specifies the rate and mode of payment of dead rent, royalty, surface rent, and the water rate. This part mandates the lessee to pay royalty to the State Government at the rates prescribed by the Central Government in the Second Schedule to the Act.95 Part VI contains provisions relating to rents and royalties and provides for the mode of computing royalty: “Mode of computation of royalty

2. For the purposes of computing the said royalties the lessee/lessees shall keep a correct account of the mineral/ minerals produced and dispatched. The accounts as well as the weight of the mineral/minerals in stock or in the process of export may be checked by an officer authorized by the Central or State Government.”

74Copy pinpoint74. Part VII contains the covenants of the lessee/lessees. The lessee undertakes to pay the rent, water rate, and royalties specified

95 Mineral Concession Rules 1960, Form K, Part V. It reads: [“Rate and mode of payment of royalty

3. Subject to the provisions of clause 1 of this Part, the lessee/lessees shall during the subsistence of this lease pay to the State Government at such times and in such manner as the State Government may prescribe royalty in respect of any mineral/minerals removed by him/them from the leased area at the rate for the time being specified in the Second Schedule to the Mines and Minerals (Development and Regulation) Act, 1957”]

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under Parts V and VI in addition to the payment of taxes, rates, assessments and impositions being in the nature of public demands from time to time. Party VIII contains the covenants of the State Government. It provides that a lessee paying the rents, water rate, and royalties may quietly hold and enjoy the rights and premises during the term of the lease deed without unlawful interruption from the State Government. ii. Purpose of Section 9 of the MMDR Act

75Copy pinpoint75. The regime of mineral licensing prior to the enactment of the MMDR Act was governed by the Mines and Minerals (Regulation and Development) Act 194896 read with the Mineral Concession Rules

1948. Under the previous regime, all grants and permissions (such as prospecting licences97 and mining leases98) were approved and issued by the State Government. The Industrial Policy Resolution of 1956 proposed an active role for the State in setting up new industrial undertakings to achieve “planned and rapid development.”99 Minerals such as coal, lignite, mineral oils, iron ore, copper, zinc, and atomic minerals were exclusively reserved for the State, while the private sector was allowed to participate along with the public sector in case of minor minerals. The MMDR Act was enacted in pursuance of the above goals stated in the Industrial Policy Resolution. Another important consideration behind the enactment of the MMDR Act was to revise old and outmoded mining lease agreements and allow the private sector reasonable encouragement to develop mines and minerals.100 Through the MMDR Act, both the Central Government, and in case of minor minerals, the State Government, have been assigned a greater responsibility of development of minerals in India. This classification between major and minor minerals was primarily

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done considering the export trade, the earning of foreign exchange, economic development, and industrial progress.101

76Copy pinpoint76. An important distinction between the MMRD Act 1948 and the MMDR Act which replaced it is that the former did not contain a provision similar to Section 9 of the subsequent legislation. Nevertheless, provisions pertaining to royalty were included in the Mineral Concession Rules 1948 as part of the essential conditions of a mining lease.102 At the introduction of the Mines and Minerals (Regulation and Development) Bill in Parliament the then Minister of Mines explained the legislative intent in the following terms: “The existing Act did give authority to the Government through rules to modify the rates and the quantum of royalty that was to be charged by the State Government. We have taken this opportunity to put a maximum limit also. With regard to the time also, at that time there was no limit and it could not be changed so long as the agreement lasted. But now considering all the conditions that prevail these days, we thought that the Government should have the right to examine the whole structure of the rates of royalty and see whether it was desirable to introduce a change in the royalty by way of either an increase or a decrease. If it was considered desirable to increase it, the Government would recommend an increase. If it was desirable to reduce it, a reduction might be made.”103 (emphasis added)

77Copy pinpoint77. The Minister further stated that allowing State Governments to fix the rates of royalty “will not be a healthy feature for trade in that particular commodity.”104 Section 9 sought to remedy the disparity of royalty rates across India.105

101 Ibid, 7124 102 Rule 41, Mining Concession Rules 1948. 103 Lok Sabha Debates, Volume VIII (11th November to 22nd November, 1957, Third Session) 395. 104 Ibid, 462 105 K P Varghese v. ITO (1981) 4 SCC 173 [8]. It was observed that “[…] the speech made by the Mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted.”

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78Copy pinpoint78. Rates of royalty were primarily governed by the terms of lease prior to the enactment of the MMDR Act. Once a mining lease was entered into between a lessor and lessee, the rates of royalty would remain static during the subsistence of the lease. Section 9 of the MMDR Act has enabled the Central Government to examine the rates of royalty in respect of all minerals and modulate them periodically after taking into consideration various factors, including the uniformity of mineral prices. The primary reason for empowering the Central Government to fix the rate of royalty could be traced to the Industrial Policy Resolution which underscored the active and predominant role of the State in organizing and utilizing mineral resources. The State Governments were not empowered to determine royalty in order to maintain a uniform regime of royalty across India. This was intended to promote domestic industry and maintain competitive commodity prices in the international market.106 iii. Contours of a mining lease a. Lease and license

79Copy pinpoint79. Article 31A of the Constitution was inserted by the Constitution (First Amendment) Act 1951 to deal with the saving of laws providing for acquisition of estates: “31A. Saving of law providing for acquisition of estates, etc – Notwithstanding anything contained in article 13, no law providing for – […] (e) the extinguishment or modification of any rights accruing by virtue of any agreement, lease or licence for the purpose of searching for or winning, any mineral or mineral oil, or the premature termination or cancellation of any such agreement, lease or licence, shall be deemed to be void on the ground that it is inconsistent with, or takes away or abridges any of the rights conferred by article 14 or article 19.” (emphasis added)

106 Lok Sabha Debates, Volume VIII (11th November to 22nd November, 1957, Third Session) 463

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80Copy pinpoint80. In Gujarat Pottery Works v. B P Sood, Controller of Mining Leases for India,107 a Constitution Bench of this Court held that the object of Article 31-A(1)(e) was to make laws providing for the extinguishment or modification of leases in connection with mineral rights immune from the provisions of Articles 14, 19, and 31.

81Copy pinpoint81. The expressions ‘lease’ and ‘licence’ have been used in the context of mining operations in the Constitution and in the MMRD Act. Therefore, it is important to understand the meaning of these expressions in their general legal sense to appreciate their application to mineral operations.

82Copy pinpoint82. A “lease” connotes a transfer of a right of enjoyment in immoveable property for a certain time in lieu of consideration.108 Section 105 of the Transfer of Property Act 1882 defines a lease of immoveable property as a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.109 The provision defines ‘lessor’, ‘lessee’, ‘premium’, and ‘rent’. The “transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.” This Court has interpreted the expression “rent” widely to mean any payment for the use or occupation of land or building including the payment by a lessee in respect of the use or occupation of any land or building.110

83Copy pinpoint83. According to Section 3(26) of the General Clauses Act 1897, immoveable property is defined to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.111 Section 2(6) of the Registration Act defines immoveable property to include land, buildings, hereditary allowance, rights of way, lights, ferries, fisheries, or any other benefit to arise out of land, and things attached to earth, or permanently

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fastened to anything which is attached to the earth, except for standing timber, growing crops, and grass.112 A mineral is also a benefit arising out of land. The right to carry out mining operations to extract minerals under a mining lease has been held by this Court to be a right to enjoy immoveable property within the meaning of Section 105.113

84Copy pinpoint84. The expression “licence” is defined in the Indian Easements Act 1882 as follows: “52. “License” defined. – Where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immoveable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a licence.”114

85Copy pinpoint85. In Associated Hotels of India Ltd v. R N Kapoor,115 Justice K Subba Rao (as the learned Chief Justice then was) observed that a lease creates an interest in property, while a licence only permits another to make use of the property, whose legal possession continues to remain with the owner. A lease envisages and transfers an interest in the demised property creating a right in rem in favour of the lessee, while a licence only makes an action lawful which without it would be unlawful.116

86Copy pinpoint86. Under the MMDR Act, a “prospecting licence” is granted for the purpose of undertaking prospecting operations.117 Prospecting operations are defined to mean any operations undertaken for the

112 Section 2(6), Registration Act 1908 113 State of Karnataka v. Subhash Rukmayya Guttedar, (1993) Supp. 3 SCC 290 [6]; Sri Tarkeshwar Sio Thakur jiu v. Dar Dass Dey (1979) 3 SCC 106 [37] 114 Section 52, Indian Easements Act 1882 115 [1960] 1 SCR 368, [28]. [“28. […] The following propositions may, therefore, be taken as well established: (1) To ascertain whether a document creates a licence or lease, the substance of the document must be preferred to the form; (2) the real test is the intention of the parties – whether they intended to create a lease or a licence; (3) if the document creates an interest in the property, it is a lease; but, if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence; and (4) if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negative the intention to create a lease.”] 116 Mangal Amusement Park Private Ltd. v. State of Madhya Pradesh (2012) 11 SCC 713 [15] 117 Section 3(g), MMDR Act

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purpose of exploring, locating, or proving a mineral deposit.118 Chapter III of the Mineral Concession Rules 1960 deals with the grant of prospecting licences in respect of land in which the minerals vest in the government. Form F contained in the Mineral Concession Rules 1960 states that under a prospecting licence, the State Government grants to the licesee the sole rights to enter upon lands and to search, win, carry away or dispose of minerals won. Rule 14 read with Schedule III allows the prospecting licensee to win and carry away a limited quantity of minerals in lieu of the payment of specified royalty. Under a prospecting licence, the licensee does not get an interest in the land or in the minerals contained therein. The licensee is only allowed to carry away a limited quantity of minerals after payment of specified royalty.119 Even a prospecting licensee has to pay royalty to the State Government for carrying away the minerals won during prospecting operations.

87Copy pinpoint87. A “mining lease” is defined under the MMDR Act to mean a lease granted for the purpose of undertaking mining operations and includes a sub-lease granted for such purpose.120 The expression “mining operations” has been defined to mean any operations undertaken for the purpose of winning any mineral. The expression “winning” has been explained by this Court to mean getting or extracting minerals from the mines.121 In Sri Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co,122 Justice R S Sarkaria observed that the expression “mining operations” is expansive, so as to comprehend every activity by which the mineral is extracted or obtained from the earth irrespective of whether such activity is carried out on the surface or in the bowels of the earth. Section 3(fa) defines “production” or any derivative of the word “production” to mean the winning or raising

118 Section 3(h), MMDR Act 119 Mineral Concession Rules 1960, Schedule III 120 Section 3(c), MMDR Act 121 Gujarat Pottery Works v. B P Sood [1967] 1 SCR 695 [18]; Bhagwan Dass v. State of Uttar Pradesh (1976) 3 SCC 784 [13]. [Justice Y V Chandrachud (as the learned Chief Justice then was) observed: “In any case, the definition of mining operations and minor minerals in Section 3(d) and (e) of the Act of 1957 and Rule 2(5) and (7) of the Rules of 1963 shows that minerals need not be subterranean and that mining operations cover every operation undertaken for the purpose of “winning” any minor mineral. “Winning” does not imply a hazardous or perilous activity. The word simply means “extracting a mineral” and is used generally to indicate any activity by which a mineral is secured. “Extracting”, in turn, means, drawing out or obtaining. A tooth is ‘extracted’ as much as is fruit juice and as much as a mineral. Only, that the effort varies from tooth to tooth, from fruit to fruit and from mineral to mineral.”] 122 (1979) 3 SCC 106 [15]

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of mineral within the leased area for the purpose of processing or dispatch. The expression “dispatch” has been defined to mean the removal of minerals or mineral products from the leased area and to include the consumption of minerals and mineral products within such area.123 It is worth noting that royalty is payable under Section 9 on the removal or consumption of minerals by the lessee in the leased area. Thus, essentially royalty is payable on the dispatch of minerals from the leased area.

88Copy pinpoint88. This segment indicates that under a lease deed for mining operations, the owner transfers the interest in the minerals to the lessee in lieu of the payment of rent, which usually takes the form of royalty. To answer whether this payment is akin to a tax, we must understand the nature of a mining lease under the MMDR Act. b. The nature of a mining lease under the MMDR Act and the Mineral Concession Rules 1960

89Copy pinpoint89. The MMDR Act and the Mineral Concession Rules 1960 detail the procedure for the grant of mining leases in three situations: first, where the minerals vest in the government;124 second, where the minerals vest in a person other than the government;125 and third, where the minerals vest partly in the government and partly in a private person.126 Chapter IV of the Mineral Concession Rules 1960 (containing Rules 22 to 40) deals with the grant of mining leases in respect of land in which the minerals vest in the government. Rule 22(1) provides that an application for the grant of a mining lease in respect of land in which the minerals vest in the government shall be made to the State Government. Rule 27 provides the conditions which are applicable to mining leases under Chapter IV. Rule 27(1)(c) provides that the lessee shall pay either dead rent or royalty (whichever is higher) to the State Government.127 Rule 27(1)(d) deals with payment of surface rents, water rents, etc. by the lessee to the State Government.128 Rule 27(2) allows the State Government to

123 Section 3(aa), MMDR Act 124 Chapters II, III, IV, and IVA of Mineral Concession Rules 1960 125 Chapter V, Mineral Concession Rules 1960 126 Rule 53, Mineral Concession Rules 1960 127 Rule 27(c), Mineral Concession Rules 1960. 128 Rule 27(d), Mineral Concession Rules 1960

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include such other conditions as it may deem necessary in regard to matters enumerated therein. Rule 27(3) allows the State Government, either with the previous approval of the Central Government or at the instance of Central Government, to impose such further conditions as may be necessary in the interests of mineral development.

90Copy pinpoint90. Chapter V (containing Rules 41 to 52) deals with the procedure for obtaining prospecting licences or mineral lease in respect of land in which the minerals vest in a person other than the Government. Unlike Rule 22(1), the provisions of Chapter V do not require the lessee to make an application to the State Government. Rule 45 pertains to the conditions of mining leases with respect to minerals vesting in private persons. The relevant part of Rule 45 is produced below: “45. Conditions of mining lease – Every mining lease shall be subject to the following conditions – (i) the provisions of clauses (b) to (l) and (p) to (i) of sub-rule (1) of Rule 27 shall apply to such leases with the modification that in clauses (c) and (d) for the words “State Government” the word “lessor” shall be substituted; […] (iii) the lease may contain such other conditions, not being inconsistent with the provisions of the Act and these rules, as may be agreed upon between the parties; (iv) if the lessee makes any default in payment of royalty as required by Section 9 or commits a breach of any of the conditions of the lease, the lessor shall give notice to the lessee requiring him to pay the royalty or remedy the breach, as the case may be, within sixty days from the date of the receipt of the notice and if the royalty is not paid or the breach is not remedied within such period, the lessor without prejudice to any proceeding that may be taken against the lessee determine the lease; (v) the lessee may determine the lease at any time by giving not less that one year’s notice in writing to lessor.”

91Copy pinpoint91. Rule 45(i) provides that certain specific conditions which apply under Rule 27 to mining leases in respect of minerals which vest in the Government are also applicable to leases of minerals vesting

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in private persons. While under Chapter IV the State Government can stipulate additional conditions, Rule 45(iii) of Chapter V provides that the lease may contain such other conditions, not being inconsistent with the provisions of the MMDR Act and the Mineral Concession Rules, as may be agreed upon between the parties. If the lessee of a mining lease granted under Chapter IV, were to default in the payment of royalty or dead rent or commit a breach of any conditions of the lease the State Government is empowered to determine the lease. In case of a lease governed by Chapter V, the lessor is empowered to determine the mining lease if the lessee defaults in payment of royalty or commits a breach of any of the conditions of the lease. These differences indicates that in case of a mining lease under Chapter V of Mineral Concession Rules: (i) the State Government is not the lessor (that is the proprietor of the minerals who is a private person); and (ii) royalty, dead rent, and other rents are to be payable to the lessor and not the State Government.

92Copy pinpoint92. In State of Meghalaya v. All Dimasa Students Union,129 this Court held that: (i) Chapter V of the Mineral Concession Rules has to be treated to be dealing with minerals owned by private persons; (ii) a mining lease granted according to Chapter V of the Mining Concession Rules 1960 is a mining lease granted by the owner of the minerals and not the State Government; and (iii) no authority can grant a mining lease in respect of minerals which vest with private owners without the authority of such owners.

93Copy pinpoint93. The right of proprietors to grant leases and receive royalty stems from the proprietary interest in the immovable property including the minerals. The MMDR Act regulates the exercise of the proprietary rights in the minerals in the larger public interest.130 The statute specifies the terms of the lease, but the lease deed is ultimately entered between the State Government (or the private person, as the case may be) and the lessee. Similarly, the rates of royalty are fixed by the Central Government under Section 9, but royalty is received by the mining lessor, that is the State Government or a private person.

129 [2019] 8 SCR 297 : (2019) 8 SCC 177 [129]-[130] 130 Monnet Ispat & Energy Ltd (supra) [138]

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iv. Meaning of “royalty”

94Copy pinpoint94. At the outset we clarify that in this reference, we are dealing with ‘royalty’ in the context of the MMDR Act. Royalty is generally understood as compensation paid for rights and privileges enjoyed by the grantee. It has its genesis in the agreement entered into between the grantor and grantee. In Inderjeet Singh Sial v. Karam Chand Thapar,131 this Court observed that royalty is equivalent to the expression “jura regalia” or “jura regia”. Jura regalia is defined as royal prerogatives or rights.132 For centuries, gold and silver mines (also called as royal metals) in the United Kingdom were treated as belonging to the Crown. Royal metals could be mined only after payments in the form of royalties were made to the Crown. The use of the word “royalty” underwent change in the United Kingdom with the decentralization of the sovereignty which was absorbed by the landowners.133 Land ownership was concentrated in the hands of landowners, who conceded the right to work mines to lessees in return for consideration which took the form of dead-rent and royalties.134

95Copy pinpoint95. This Court has had occasion to analyze the meaning of the expression “royalty” in its decisions. In H R S Murthy v. Collector of Chittoor,135 a Constitution Bench observed that royalty connotes a payment made for materials or minerals won from land. In D K Trivedi v. State of Gujarat,136 the distinction between “royalty” and “dead rent” was explained thus: “39. In a mining lease the consideration usually moving from the lessee to the lessor is the rent for the area leased (often called surface rent), dead rent and royalty. Since the mining lease confers upon the lessee the right not merely to enjoy the property as under an ordinary lease but also to extract minerals from the land and to appropriate them for his own use or benefit, in addition to the usual rent for the area

131 [1995] Supp. 4 SCR 53 : (1995) 6 SCC 166. 132 Ramanatha Aiyar, Advanced Law Lexicon (Volume 3) 2789. 133 J U Nef, The Rise of the British Coal Industry (Routledge, 1966) 134 Royal Commission on Mining Royalties, Final Report of the Royal Commission Appointed to Inquire into the Subject of Mining Royalties (1893) 4. 135 [1964] 6 SCR 666 [6] 136 [1986] 1 SCR 479 : (1986) Supp. SCC 20

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demised, the lessee is required to pay a certain amount in respect of the minerals extracted proportionate to the quantity so extracted. Such payment is called “royalty”. It may, however, be that the mine is not worked properly or as not to yield enough return to the lessor in the shape of royalty. In order to ensure for the lessor a regular income, whether the mine is worked or not, a fixed amount is provided to be paid to his by the lessee. This is called “dead rent”. “Dead rent” is calculated on the basis of the area leased while royalty is calculated on the quantity of minerals extracted or removed. Thus, while dead rent is a fixed return to the lessor, royalty is a return which varies with the quantity of minerals extracted or removed. […]” (emphasis added)

96Copy pinpoint96. Minerals are exhaustible and finite resources. Each quantity of mineral removed leads to the depletion of the mineral stock of the mine.137 Under a mining lease, a lessee acquires a right or interest in minerals. This right or interest allows the lessee to extract minerals and consume them. Royalty is a payment made by the lessee to the lessor or proprietor of the minerals for the removal of minerals. Royalty also serves to compensate the lessor for the degradation of the value of the mine because of the extraction of minerals.138

97Copy pinpoint97. In Bherulal v. State of Rajasthan,139 a Division Bench of the Rajasthan High Court explained the concept of royalty in the following terms: “8… In Wharton’s Law Lexicon, ‘royalty’ is defined as “payment to a patentee by agreement on every article made according to his patent, or to an author by a publisher on every copy of his book sold; or to the owner of minerals for the right of working the same on every on or other weight raised.” The present case is of the third kind, namely payment to the owner of minerals for the right of working the same. This payment is based on the

137 W R Sorley, ‘Mining Royalties and their Effect on the Iron and Coal Trades’ (1889) 52(1) Journal of Royal Statistical Society 60, 66 138 Ibid. 139 1956 SCC OnLine Raj 9 [8]

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produce, and the rate is fixed as so much per ton or other weight. It is clear that royalty has nothing to do with where the purchaser is taking the mineral, or to whom he is going to sell it, whether at the place where the mine is situated or at some place hundreds of miles away. […] It is clear, therefore, that royalty is a charge by the owner of minerals from those to whom he gives the concession to remove them, and the charge is on production, the rate being fixed according to weight.” (emphasis added)

98Copy pinpoint98. The essential characteristics of royalty are that (i) it is a consideration or payment made to the proprietor of minerals, either the government or a private person; (ii) it flows from a statutory agreement (a mining lease) between the lessor and the lessee; (iii) it represents a return for the grant of a privilege (to the lessee) of removing or consuming the minerals; and (iv) it is generally determined on the basis of the quantity of the minerals removed.

99Copy pinpoint99. In comparison, dead rent acts as a deterrent against a leaseholder cornering a mining lease and keeping the mineral resources idle.140 Similar to royalty, dead rent is also a statutory imposition and an integral part of the mining lease, but it generally does not serve as a consideration for the removal or consumption of minerals. The dead rent is determined on the basis of the area of land covered by the lease. Imposition of dead rent ensures that the proprietor obtains a fixed rent from the lessee even if the mine remains unworked. Therefore, dead rent is not in addition to royalty but an alternative.

100Copy pinpoint100. If royalty is a consideration paid by the lessee to the lessor as part of the terms of a mining lease, can this payment be considered in the nature of tax? This is the next issue for our consideration. v. Characteristics of Tax

101Copy pinpoint101. Taxation is a mode of raising revenue to fund public expenditure. The power of taxation is an essential and inherent attribute of sovereignty.141 In the decision of the US Supreme Court in McCulloch

140 Government of India, Ministry of Mines, ‘Mineral Royalties’ 27 (January 2011) 141 Thomas Cooley, The Law of Taxation (4th edn, 1924) 149

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v. Maryland,142 Chief Justice John Marshall described the sovereign right of taxation thus: “It is admitted that the power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable, to the utmost extent to which the Government may choose to carry it. The only security against the abuse of this power is found in the structure of the Government itself. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.”

102Copy pinpoint102. Taxes are monetary burdens or charges imposed by legislative power upon persons, or property to raise revenues.143 The government needs requisite funds to discharge its primary governmental functions.144 No responsible government can function and achieve its welfare objectives without levying and collecting taxes.145 The objects to be taxed can be taxed by the legislature according to the exigencies of its needs so long as they happen to be within the legislative competence of the legislature.146 Although the power of taxation is pervasive and an incidence of sovereignty, it is subject to well-defined constitutional limitations.

103Copy pinpoint103. In Matthews v. Chicory Marketing Board,147 Latham CJ defined “tax” as a “compulsory exaction of money by a public authority for public purposes, enforceable by law, and … not a payment for services rendered.” In Commissioner, Hindu Religious Endowment, Madras v. Sri Lakshmindra Thirta Swamiar of Sri Shirur Mutt,148 this Court relied on the above elucidation to enumerate the following essential characteristics of a tax: “44. […] It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without

142 17 U.S. 316 (1819) 143 Amrit Banaspati Co. Ltd. v. State of Punjab (1992) 2 SCC 411 [10] 144 Dena Bank v. Bhikabhai Prabhudas Parekh & Co. (2000) 5 SCC 694 [8] 145 Jindal Stainless Steel [112.2] 146 Rai Ramkrishna v. State of Bihar [1964] 1 SCR 897 [12] 147 60 CLR 263 148 [1954] 1 SCR 1005 : (1954) 1 SCC 412

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the taxpayer’s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.”

104Copy pinpoint104. A tax has the following essential characteristics: (i) it is a compulsory exaction of money by a public authority; (ii) it is imposed under statutory power without the consent of the tax payer; (iii) the demand is enforceable by law; (iv) it is an imposition made for public purposes to meet the general expenses of the state without reference to any special benefit to be conferred on the payer of the tax; and (v) it is part of the common burden.149

105Copy pinpoint105. Article 366(28) defines “taxation” to include “the imposition of any tax or impost, whether general or local or special.” This Court has interpreted the word “tax” in its widest amplitude to include all money raised by taxation.150 In Jindal Stainless Steel (supra), one of us (Justice D Y Chandrachud) held that the expression “any tax” means “any levy which the State is constitutionally competent to legislate.”151

106Copy pinpoint106. One of the issues debated in the reference pertains to the meaning of the word “impost.” Thomas Cooley in the Law of Taxation defines “imposts” to mean “any tax, tribute, or duty.”152 This Court has generally construed the expression “imposts” to include taxes153 and fees154

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realizable by the authority of law.155 In CIT v. McDowell and Co. Ltd.,156 this Court held that the term “impost” means compulsory levy and that “tax” in its wider sense includes all imposts.157 In McDowell (supra), the assesse sought to claim a deduction under Section 43- B(a) of the Income Tax Act 1961 on the payment of bottling fees made to the State Government under the Rajasthan Excise Act 1950. Section 43-B(a) allowed a deduction in respect of any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force. The issue before the two-Judge Bench was whether bottling fees chargeable from the assessee amounted to a tax, duty, cess, or fee. The two-Judge Bench formulated the characteristics of imposts thus: “21. “Tax”, “duty”, “cess” or “fee” constituting a class denotes various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes different kind of impost depending on the purpose for which they are levied. The power can be exercised in any of its manifestation only under any law authorising levy and collection of tax as envisaged under Article 265 which uses only the expression that no “tax” shall be levied and collected except authorized by law. In its elementary meaning conveys that to support a tax legislation action is essential, it cannot be levied and collected in the absence of any legislative sanction by exercise of executive power of State under Article 73 by the Union or Article 162 by the State.

22. Under Article 366(28) “Taxation” has been defined to include the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly. “Impost” means compulsory levy. The well- known and well-settled characteristic of “tax” in its wider sense includes all imposts. Imposts in the context have following characteristics:

155 Indian Banks’ Association v. Devkala Consultancy Service (2004) 11 SCC 1 [18] 156 [2009] 8 SCR 983 : (2009) 10 SCC 755 [22] 157 Reiterated in Jindal Stainless Steel (supra) [20], [395]

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(i) The power to tax is an incident of sovereignty. (ii) “Law” in the context of Article 265 means an Act of legislature and cannot comprise an executive order or rule without express statutory authority. (iii) The term “tax” under Article 265 read with Article 366(28) includes imposts of every kind viz. duty, cess or fees. (iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a “tax” in its technical sense as an impost, general, local or special.”

107Copy pinpoint107. The Court held in McDowell (supra) that bottling fees are a payment made by the assessee to the State Government “as consideration for acquiring the exclusive privilege”158 The payment was held to be neither a fee nor a tax but consideration for the grant of approval by the government to contract on the exclusive right to deal in bottling liquor. Therefore, bottling fees were held not to fall within the purview of Section 43-B(a).

108Copy pinpoint108. The expression “tax” under Article 265 includes every kind of impost in the form of a compulsory exaction. An impost is a compulsory exaction. The power to levy an impost is an incident of sovereignty. A liability arising out of contract cannot be termed as an impost or tax. A consideration paid under a contract to the State Government for acquiring exclusive privileges and rights with respect to a particular activity cannot be termed as an “impost” or “tax” under Article 366(28).

109Copy pinpoint109. The government may demand payments in the nature of a price or consideration for parting with its exclusive privilege to carry on activities of a particular description. Well-known examples involving the parting of the exclusive privilege by the government include telecommunication activities and the manufacture and sale of intoxicants. The price paid for parting with an exclusive privilege vesting in government is neither a tax nor a fee.159 In State of Punjab v.

158 McDowell and Co. Ltd. (supra) [17] 159 Har Shankar v. Excise and Taxation Commissioner (1975) 1 SCC 737 [56]; State Bank of India v. Jage Ram (1980) 3 SCC 599 [20]; Government of Andhra Pradesh v. Anabeshahi Wine and Distilleries Pvt Ltd. (1988) 2 SCC 25 [6]

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Devans Modern Breweries,160 the issue before a Constitution Bench was whether the levy of an import fee by the state on potable liquor manufactured in other states was beyond the legislative competence of the state legislature. Justice R C Lahoti (as the learned Chief Justice then was) speaking for the majority, observed that the State Government has unfettered power to regulate the import of intoxicants in exercise of its regulatory powers. The learned Judge held that the levy was neither a tax nor a fee, but “simply a levy for the act of granting permission or for the exercise of power to part with the privilege.”161 The expression “impost” cannot hence be extrapolated to mean a price levied by the State for granting permission to part with its exclusive privilege. Imposts are such levies that are in the nature of tax.

110Copy pinpoint110. The basic issue for determination is whether royalty payable under Section 9 of the MMDR Act is in the nature of a tax or impost. The need to decide the issue of “whether royalty is tax” arises in the backdrop of the divergence of opinion in the decisions in India Cement (supra) and Kesoram (supra). vi. Royalty is not in the nature of tax a. Prelude to India Cement

111Copy pinpoint111. Whether ‘royalty is a tax’ had been adjudicated upon by several High Courts before the issue reached this Court for decision in India Cement (supra). There was a divergence of view among the High Courts. A few High Courts had held that royalty is not a tax but a consideration for parting with the exclusive privilege over mineral rights. Others had held that royalty was a compulsory exaction, and hence a tax. In its decision in India Cement (supra) this Court referred to them, without actually analyzing their rationale.

112Copy pinpoint112. In Laddu Mal v. State of Bihar,162 the petitioners challenged the notices issued to them by the Assistant Mining Officer, demanding payment of royalty for a period from 1958 to 1964 under the Bihar Minor Mineral Concession Rules 1964. The Division Bench of the Patna High Court held that royalty is a levy in the nature of

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tax because of its compulsory nature. Royalty was held to be a compulsory exaction because it was imposed under a statute and because in the event of non-payment, it was recoverable as arrears of land revenue. However, it was held that the demand of royalty prior to 1964 when the Bihar Minor Mineral Rules came into effect was without the authority of law.

113Copy pinpoint113. In Laxminarayana Mining Co. v. Taluk Development Board,163 licence fees levied on persons engaged in mining under the provisions of the Mysore Village Panchayats and Local Board Act 1959 were challenged before the Mysore High Court. Justice E S Venkataramiah (as the learned Chief Justice then was) held that the State legislature had no legislative power to impose the levy since its subject matter was covered by the MMDR Act. The High Court also held that the levy was in substance a tax on mineral rights.164 In the context of Entry 50 of List II, the High Court observed that: (i) tax on mineral rights includes royalty payable on extracted minerals; (ii) mineral rights and mining activities which are carried out in exercise of mineral rights are indistinguishable; (iii) Parliament has occupied the entire subject matter of the regulation of mines and mineral development as well as tax on mineral rights by virtue of the legislative declaration under the MMDR Act; and (iv) the provisions of the MMDR Act pertaining to the levy, fixation and collection of royalty (Section 9) as well as its recovery as arrears of land revenue (Section 25) suggest that the expression “royalty” under Section 9 connotes the levy of a tax. The essence of the High Court’s decision was that since royalty is in the nature of a tax on mineral rights and is covered by Parliamentary legislation, the legislative power of the State legislature to levy taxes on mineral rights stands excluded.

114Copy pinpoint114. The contrary view of other High Courts (footnoted below) was that royalty is not a tax.165 We will not refer to all the decisions adopting

163 1972 SCC OnLine Kar 80 164 Laxminarayana Mining Co. (supra) [17] 165 Saurashtra Cement & Chemical Industries Ltd. v. Union of India, 1979 SCC OnLine Guj 23 (Gujarat High Court held that royalty payable under Section 9 was not a tax. Therefore, Parliament had legislative competence to prescribe royalty under the MMDR Act in pursuance of its regulatory powers under Entry 54 of List I); Laxmi Narayan Agarwalla v. State of Orissa, 1983 SCC OnLine Ori 16 (The Orissa High Court disagreed with the decisions in Laddu Mal (supra) and Laxminarayana Mining Co. (supra). It was held if royalty is held to be tax, Section 9 would have to be invalidated because Parliament has no legislative power to impose tax under Entry 54 of List I.)

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that view, to avoid multiplicity, except for the decision of the Punjab and Haryana High Court in Dr. Shanti Swaroop Sharma v. State of Punjab.166 In that case, the petitioners challenged the demand of royalty by the State Government under the Punjab Minor Mineral Concession Rules 1964. The petitioners contended that royalty, being a tax, cannot be levied under delegated legislation. The High Court rejected the contention holding that: (i) royalty is a share of produce or profit paid to the owner of land for granting the privilege of producing minerals; (ii) mere occupation of land containing minor minerals does not make the occupier liable to pay royalty; (iii) the liability to pay royalty arises only when a lessee extracts minerals in pursuance of a mining lease; (iv) royalty cannot be termed as a compulsory exaction because the compulsion to pay royalty arises out of the contractual conditions of the mining lease and not through the force of law; (v) the fact that the State Government can recover royalty as arrears of land revenue does not give it a character of tax because other dues such as moneys due under contract and fees can be recovered in the same manner. The High Court disagreed with the decision of the Patna High Court in Laddu Mal (supra). This judicial canvas was available before the seven-Judge Bench in India Cement (supra). b. Divergence between India Cement and Kesoram

115Copy pinpoint115. In India Cement (supra), the seven Judge Bench was called upon to determine the validity of the Madras Panchayat Act 1958. Section 115 of the Act levied a local cess on land revenue payable to government. An explanation to the provision stated that land revenue included royalty. Thus, the impugned provision considered royalty as part of land revenue. The issue was whether the State legislature could levy cess on royalty once Parliament had taken control of the regulation of mines and development of minerals under the MMDR Act.

116Copy pinpoint116. The State’s justification proceeded on the following entries: (i) Entry 45 of List II - land revenue; (ii) Entry 49 of List II - taxes on lands and buildings; (iii) Entry 50 of List II - taxes on mineral rights; and (iv) Entry 66 read with Entry 23 of List II - levy of fees. Justice Sabyasachi Mukharji (as the learned Chief Justice then was) writing for the majority, observed that the cess was levied essentially on

166 AIR 1969 Punj and Har 79

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royalty and not on land revenue, both of which are distinct concepts. The State’s recourse to Entry 45 of List II was negatived. With respect to Entry 49 of List II, Justice Mukharji observed that royalty is directly relatable to the minerals extracted and therefore would only be relatable to Entries 23 and 50 of List II, and not Entry 49 of List II.167 Therefore, the statutory provision was in pith and substance held to be a tax on royalty and not on land. The decision in H R S Murthy (supra), according to which cess paid on royalty has a direct relationship with land and only a remote relationship with minerals, was overruled. A detailed analysis pertaining to Entry 49 of List II has been undertaken in a later segment of this judgment.

117Copy pinpoint117. On Entries 23 and 66 of List II, Justice Mukharji observed that the legislative power of the State legislature to levy fees is denuded by the enactment of the MMDR Act by Parliament. Finally, on Entry 50 of List II, Justice Mukharji observed that the bar provided in Section 9(3) on the enhancement of royalty specified under the Second Schedule also applies to the state legislature. Imposition of cess on royalties was held to have the effect of amending the Second Schedule and was held ultra vires Section 9(3). Section 9 was regarded to be a limitation on the taxing power of the State legislature under Entry 50 of List II.168 Moreover, the Court held that the field is covered by the MMDR Act and hence the legislative power of the state stands denuded.169 Paragraph 34 of the judgment sets out the conclusions: “34. In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State legislature because Section 9 of the Central Act covers the field and the State legislature is denuded of its competence under Entry 23 of List II. In any event, we are of the opinion that cess on royalty cannot be sustained under Entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land.” (emphasis added)

167 India Cement (supra) [33] 168 India Cement (supra) [32] 169 India Cement (supra) [33]

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118Copy pinpoint118. In a concurring opinion, Justice G L Oza held that royalty is not a unit of charge merely on land, but on labour and capital as well. Resultantly, imposition of cess on royalty was held not to be a levy or tax on land in terms of Entry 49 of List II. Justice Oza suggested that the cess could have been saved, if it was levied on surface rent or dead rent. In his view, surface rent or dead rent is relatable to land, hence a cess on surface rent or dead rent would fall within the purview of Entry 49 of List II.

119Copy pinpoint119. In Raojibhai Jivabhai Patel v. State of Gujarat,170 a three judge Bench of this Court referred to India Cement (supra) to reiterate that royalty levied on extracted mineral is in the nature of tax. In a series of subsequent decisions, particularly in Orissa Cement Ltd v. State of Orissa171 and Saurashtra Cement & Chemical Industries Ltd. v. Union of India,172 this Court followed India Cement (supra). In State of M P v. Mahalaxmi Fabric Mills Ltd,173 this Court rejected the submission that paragraph 34 of India Cement (supra) contained a “typographical error”. However, a divergence in opinion on whether royalty is in the nature of tax emerged.

120Copy pinpoint120. In Quarry Owners Association v. State of Bihar, this Court held that royalty “does not constitute usual tax as commonly understood” but includes return for the consideration for parting with the property.174 In Kesoram (supra), a Constitution Bench had to decide on the validity of a cess levied by the State on coal-bearing land. The measure of the cess was relatable to the quantity of minerals produced from land. Whether royalty is a tax was not directly in issue. In fact, Justice Lahoti, speaking for the majority, held that India Cement (supra) was distinguishable because in that case cess was levied on royalty and not on mineral rights or lands. However, the learned Judge felt “constrained” and “duty-bound” to point out a typographical error in the majority opinion in India Cement (supra) to prevent any “adverse impact on subsequent judicial pronouncements”. Paragraph 34 of India Cement (supra) was held to contain a typographical error, which Justice Lahoti explained thus:

170 [1989] Supp. 2 SCR 406 : (1989) Supp. 2 SCC 744 171 [1991] 2 SCR 105 : (1991) Supp. 1 SCC 430 [36] 172 [2000] Supp. 4 SCR 44 : (2001) 1 SCC 91 173 [1995] 1 SCR 756 : (1995) Supp. 1 SCC 642 [12] 174 Quarry Owners Association v. State of Bihar (2000) 8 SCC 655 [34]

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“57. In the first sentence the word “royalty” occurring in the expression “royalty is a tax”, is clearly an error. What the majority wished to say, and has in fact said, is “cess on royalty is a tax”. The correct words to be printed in the judgment should have been “cess on royalty” in place of “royalty” only. The words “cess on” appear to have been inadvertently or erroneously omitted while typing the text of the judgment. This is clear from reading the judgment in its entirety. Vide paras 22 and 31, which precede para 34 abovesaid, Their Lordships have held that “royalty” is not a tax. Even the last line of para 34 records “royalty on mineral rights is not a tax on land but a payment for the user of land”. The very first sentence of the para records in quick succession “… as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature….” What Their Lordships have intended to record is “… that cess on royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature …”. That makes correct and sensible reading. A doubtful expression occurring in a judgment, apparently by mistake or inadvertence, ought to be read by assuming that the Court had intended to say only that which is correct according to the settled position of law, and the apparent error should be ignored, far from making any capital out of it, giving way to the correct expression which ought to be implied or necessarily read in the context, also having regard to what has been said a little before and a little after. No learned Judge would consciously author a judgment which is self-inconsistent or incorporates passages repugnant to each other. Vide para 22, Their Lordships have clearly held that there is no entry in List II which enables the State to impose a tax on royalty and, therefore, the State was incompetent to impose such a tax (cess). The cess which has an incidence of an additional charge on royalty and not a tax on land, cannot apparently be justified as falling under Entry 49 in List II.”

121Copy pinpoint121. The decision in Kesoram (supra) analyzed the nature of royalty to hold that royalty is not a tax, but a payment made to the owner of

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