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

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

the terms and conditions of the license or lease, as the case may be. The form of license and lease agreements is stipulated under the Mineral Concession Rules. The grant of mineral rights is governed by the terms and conditions laid down under Form K of the rules. The State Government cannot change or modify the terms of the prospecting license or mining lease. The proviso to Section 5(1) states that the State Government shall not grant any mineral concession except with the previous approval of the Central Government. Any mineral concession granted in contravention of the provisions of the MMDR Act is void.277 Moreover, Section 21 entails penal sanctions for contravention of Section 4; b. The Central Government prescribes the fiscal exactions (such as royalty, dead rent, and surface rent) for the grant or creation of mineral rights. Section 9 empowers the Central Government to fix the rate of royalties. Section 25 deals with the recovery of unpaid rent, royalty and tax as arrears of land revenue; and c. The MMDR Act governs all aspects relating to both major minerals and minor minerals. Under Section 13, the Central Government is empowered to make rules on all or any matter relating to the grant of mineral concessions. Although Sections 14 and 15 allow the State Government to make rules in respect of minor minerals, the field of minor minerals is covered by the MMDR Act leaving no scope for the state legislature to legislate. In case the Central Government undertakes prospecting or mining operations, Section 17(3) specifies the levies it is bound to pay. Further, the State Government cannot reserve any area under Section 17A without the approval of the Central Government. The Central Government is also empowered to issue directions to the State Government for the conservation of mineral resources or on any policy matter in the national interest. Section 18 empowers only the Central Government to take any measure necessary for mineral development.

218Copy pinpoint218. Two issues have to be addressed: (i) whether the MMDR Act fulfils the requirement of “any limitation” under Entry 50 of List II; and

277 Section 19, MMDR Act

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(ii) whether the MMDR Act contains any provision limiting the taxing powers of the states under Entry 50 of List II.

219Copy pinpoint219. The MMDR Act lays down the means and processes by which the rights to mines and minerals may be exercised or granted by the owner of mineral rights. It is true that the MMDR Act largely denudes the states of their legislative powers with respect to regulation of mines and mineral development under Entry 23 of List II. However, the expression in Entry 50 of List II demonstrates that: (i) Parliament can limit the legislative power of the States to tax minerals; and (ii) the limitation has to be imposed “by law” relating to mineral development.

220Copy pinpoint220. The MMDR Act has a centralizing tendency because the Central Government is tasked with important responsibilities such as setting out the terms and conditions of mining leases, fixing the rates of royalty and issuing guidelines to State Governments in respect of conservation of minerals. This drift towards the Central Government stems from the fact that the principal aim of the MMDR Act is development and conservation of minerals.278 Minerals being a natural and scarce resource, their exploitation has to be scientific and judicious. The MMDR Act enumerates rules and regulations to ensure that the exploration, extraction, and exploitation of minerals follow standards of conservation and sustainability. The Indian State is the trustee of all natural resources, including minerals.279 Therefore, it is a constitutional duty of the State to protect minerals and ensure their exploitation in public interest.

221Copy pinpoint221. By authorizing the Central Government to lay down the terms of mining leases and grant approval to concessions, the MMDR Act seeks to ensure that there is uniformity in the terms for working of mines and extraction of minerals. Uniformity in the terms and conditions of mining leases, rates of royalty, and in the policy approach towards conservation of minerals reduces indiscriminate exploitation of mineral resources and promotes mineral development. The fact that the State Government cannot alter the clauses in the mining lease cannot be understood to mean that all the powers of the State with respect to regulation of mines and mineral development as well as the power to tax mineral rights have been extinguished.

278 Hindu Stone (supra) [10] 279 See M C Mehta v. Kamal Nath (1997) 1 SCC 388

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222Copy pinpoint222. Entry 50 of List II provides that the legislative power of States to tax mineral rights is subject to any limitations imposed by Parliament by law relating to mineral development. A plain reading of the phrase makes it clear that the taxing power is subject to “any limitations” and not a “law relating to mineral development.” If the Constitution intended to restrict the taxing powers under Entry 50 of List II with respect to a parliamentary law, it would not have used the expression “any limitations.” It could have used phraseology such as for example, “Taxes on mineral rights subject to any law relating to mineral development made by Parliament.” Parliament has to ‘impose’ the limitations. That is, Parliament has to expressly specify the limitations by the authority of law. Thus, under Entry 50 of List II the taxing power of the State is subject to the extent that Parliament imposes any limitations “by law” relating to mineral development.

223Copy pinpoint223. The phrase “by law” is also important because it indicates the manner in which Parliament can impose limitations. The expression “by law” means that the legislative power should be effectuated through the provisions of a statute. The purport of including the phrase “by law” in Entry 50 of List II is to indicate that Parliament has to specify the extent to which it is seeks to limit the taxing powers under Entry 50 of List II.

224Copy pinpoint224. Parliament can impose limitations under Entry 50 of List II by means of statutory provisions. There is no specific provision in the MMDR Act which imposes limitations on the power of the States to tax mineral rights. The scheme of the MMDR Act cannot by a process of stretched construction be read to limit the taxing powers of States under Entry 50 of List II.

225Copy pinpoint225. The respondents have referred to Entry 54 of List I to contend that once Parliament enacts a law relating to mineral development, its consequences on the taxing powers of the state legislature under Entry 50 of List II can be implied. In this connection, reference was made to Kesavananda Bharati v. State of Kerala,280 where it was held that powers and limitations could be implied from necessity or from the scheme of the Constitution. Moreover, reference was made

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to the decision in Kalpana Mehta v. Union of India,281 to contend that the Constitution must be interpreted in a manner that leads to the discovery of “constitutional silences or abeyances.” Therefore, it was contended that Entry 50 of List II contemplates an implicit denudation of legislative powers of States once a law relating to mineral development was enacted by Parliament under Entry 54 of List I.

226Copy pinpoint226. The theory of implied limitations was adopted in Kesavananda Bharati (supra) to iterate that the basic structure doctrine serves as an implied limitation on the power of Parliament to amend the Constitution.282 The power of Parliament to amend the Constitution was subjected to the basic structure doctrine. The doctrine of implied limitations is not applicable in the present case in view of the fact that Entry 50 of List II specifies the nature of the limitation and the manner in which it can be imposed. The implication that any law enacted by Parliament under Entry 54 of List I will impliedly denude the powers of the state legislature under Entry 50 of List II will usurp the taxing powers of the States.

227Copy pinpoint227. The principle of constitutional silences has generally been used to step in where the Constitution is silent or where there is a legislative vacuum.283 Entry 50 of List II is clear in its terms – a limitation can be imposed by Parliament by law relating to mineral development. In the face of an express constitutional provision, there is no scope for this Court to use this doctrine to limit the legislative powers of the State.

228Copy pinpoint228. In P Kannadasan v. State of Tamil Nadu,284 a two judge Bench held that Parliament has denuded the States of their power to levy taxes on minerals by making the declaration contained in Section 2 of the MMDR Act. It was further observed that State legislatures cannot levy any tax or cess on minerals so long as the declaration in Section 2 stands. The observations in P Kannadasan (supra) are contrary to the legislative scheme discussed above.

281 [2018] 4 SCR 1 : (2018) 7 SCC 1 282 See I R Coelho v. State of Tamil Nadu (2007) 2 SCC 1 283 Vishaka v. State of Rajasthan (1997) 6 SCC 241; Anoop Baranwal v. Union of India (2023) 6 SCC 161 284 [1996] Supp. 4 SCR 92 : (1996) 5 SCC 670 [35]

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d. Section 9 does not serve as a limitation on the taxing powers of State

229Copy pinpoint229. Having noticed that the scheme of the MMDR Act does not in itself serve as a limitation on the field of taxation under Entry 50 of List II, we now proceed to examine whether the statute contains any provision imposing “any limitations” on it. The respondents contend that Sections 9, 9A, 9B, and 9C expressly impose limitations as contemplated under Entry 50 of List II. We have held in the previous segments of this judgment that royalty is not in the nature of tax but a consideration which is paid to the proprietor for the extraction and removal of mineral under the terms of the mining lease. The MMDR Act empowers the Central Government to specify the rates of royalty under Section 9 read with the Second Schedule. These powers could be validly traced to Entry 54 of List I as they are comprehended within the regulation of mines.

230Copy pinpoint230. Since royalty payable under Section 9 is not a tax on mineral rights, any limitation on the enhancement of the rates of royalty is not the imposition of a tax under Entry 50 of List II. While royalty flows from the exercise of proprietary rights, taxes flow from the sovereign’s right to tax persons, objects and transactions. Section 9 does not expressly impose any limitations on the powers of the State to tax mineral rights. Section 9(3) limits the power of the Central Government to enhance royalty more than once in three years. This limitation does not govern taxes on mineral rights.

231Copy pinpoint231. Dead rent under Section 9A is a price paid by the lessee to the lessor for not working the mines and is paid in alternative to royalty. The payments under Sections 9B and 9C are made as additional royalties and are used for specific purposes. Payment under Section 9B is made to the District Mineral Foundation constituted by the State Government. Similarly, payment under Section 9C is made to the trust created by the Central Government for funding the agencies specified in Section 4(1). The payments under Sections 9B and 9C do not amount to a tax on mineral rights. Sections 9, 9A, 9B, and 9C do not impose any limitations on the taxation powers of the state legislatures under Entry 50 of List II. e. “Any limitation” can extend to prohibition

232Copy pinpoint232. In Jindal Stainless Steel (supra), one of us (Justice D Y Chandrachud) observed that curtailment of legislative powers

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vested in the State may take place through: (i) abstraction; (ii) eclipse; and (iii) limitations or restrictions. 285 The expression “any limitations” finds mention in Entry 50 of List II in the context of taxes on mineral rights. In its ordinary sense, the expression “limitation” means a restriction or containment.286 The Constitution uses the word “limitations” in two provisions – Article 134(2) and Entry 50 of List II of the Seventh Schedule. Article 134 deals with the appellate jurisdiction of Supreme Court in criminal matters. Article 134(2) provides that Parliament may by law confer on the Supreme Court any further powers to entertain and hear appeals from any judgment, final order or sentence in a criminal proceeding of a High Court in the territory of India subject to such conditions and limitations as may be specified in such law.

233Copy pinpoint233. The use of the expression “any” before “limitations” under Entry 50 of List II indicates that the scope of the limitations is expansive and includes “all”287 or “every”288 limitation that could be imposed by Parliament by law relating to mineral development. The expression “any” has to be construed in its context, taking into consideration the scheme, purpose, and subject matter of the enactment,289 or in this case, the scheme of distribution of legislative powers under the Constitution. The expression “any limitations” is indicative of the fact that Parliament has been provided with ample legislative freedom to conceive limitations or restrictions on the legislative powers of the State to tax minerals.

234Copy pinpoint234. Apart from Entry 50 of List II, Entry 57 of List II is the other taxing entry in List II which is subordinate to another entry. It provides for taxes on vehicles, whether mechanically propelled or not, suitable for use on roads, including tramcars and is “subject to the provisions of Entry 35 of List III.” Entry 35 of List III deals with mechanically propelled vehicles including the principles on which taxes on such vehicles are to be levied.

285 Jindal Stainless Steel (supra) [626] 286 Ramanatha Aiyar, Advanced Law Lexicon (Volume 3) 3254 287 LDA v. M K Gupta (1994) 1 SCC 243 [4] 288 Raj Kumar Shivhare v. Directorate of Enforcement (2010) 4 SCC 772 [24] 289 Vivek Narayan Sharma v. Union of India (2023) 3 SCC 1 [132]

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235Copy pinpoint235. In State of Assam v. Labanya Probha Devi,290 a Constitution Bench of this Court explained the inter-relationship between Entry 57 of List II and Entry 35 of List III in the following terms: “11. […] The two entries deal with two different matters though allied ones – one deals with taxes on vehicles and the other with the principles on which such taxes are to be levied. When two entries in the Constitution, whether in the same List or different Lists, deal with two subjects, if possible, an attempt shall be made to harmonize them rather than to bring them into conflict. Taxes on vehicles in their ordinary meaning connote the liability to pay taxes at the rates at which the taxes are to be levied. On the other hand, the expression “principles of taxation” denotes rules of guidance in the matter of taxation. We, therefore, hold that the amending Acts do not come into conflict with the existing law in respect of any principles of taxation, but only deal with a subject-matter which is exclusively within the legislative competence of the State Legislature. In this view, there is no scope for the application of Article 254 of the Constitution.”

236Copy pinpoint236. In Sharma Transport v. Government of AP,291 a three judge Bench held that the exercise of authority by Parliament under Entry 35 of List III will not deprive the State legislature of its exclusive legislative powers referable to Entry 57 of List II: “11. Power to levy taxes on vehicles, whether mechanically propelled or not vests solely in the State Legislature, though it may be open to Parliament to lay down the principles on which the taxes may be levied on mechanically propelled vehicles in the background of Entry 35 of List III. To put it differently, Parliament may lay down the guidelines for the levy of taxes on such vehicles, but the right to levy such taxes vests solely in the State Legislature. No principles admittedly have been formulated by Parliament. In that sense, the Government of India’s communication dated

290 [1967] 3 SCR 611 291 [2001] Supp. 5 SCR 390 : (2002) 2 SCC 188

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30-08-1993 does not in any sense violate the power of the State Legislature or its delegate to levy or exempt taxes from time to time.”

237Copy pinpoint237. Both Entries 50 and 57 of List II are subject to other legislative entries, but with a distinction: Entry 50 specifically uses the word “subject to any limitations” while Entry 57 uses the expression “subject to the provisions”. Under Entry 50, Parliament can impose “any limitations” on the taxing powers of the State, while under Entry 57 read with Entry 35 of List III, Parliament can only prescribe the principles on the basis of which the State can levy taxes on mechanically propelled vehicles. Therefore, Parliament cannot impose any limitation on the field of taxation reserved to the States under Entry 57 of List II, but can lay down guidelines. In contrast, Entry 50 allows Parliament to impose any limitations on the field reserved to the State to tax mineral rights.

238Copy pinpoint238. In Jindal Stainless Steel (supra), one of us (Dr Justice D Y Chandrachud) described the nature of the limitations which may be imposed to contain the legislative powers vested in the State: “626.3. The third source of constitutional containment on the legislative power of a State is in the form of limitations of which clause (3) of Article 286 provides an illustration. Under clause (3), Parliament provides the restrictions and conditions in regard to “the system of levy, rates and other incidents of tax” upon which a law enacted by a State providing for a tax on the nature specified in sub-clauses (a) and (b) is subject. Sub-clause (a) deals with tax on the sale or purchase of goods declared to be of special importance in inter-State trade or commerce by a law enacted by Parliament. Sub-clause (b) deals with a tax on the sale or purchase of goods failing under sub-clauses (b), (c) and (d) of Article 366(29-A). Among other things, a tax on contract for hire purchase and involving transfer of the right to use goods is subject to the restrictions and conditions which are provided by a law enacted by Parliament in regard to the system of levy, rates and other incidents of tax.”

239Copy pinpoint239. Before its omission, Article 286(3) empowered Parliament to specify by law restrictions and conditions on any law of a State levying tax on

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the sale or purchase of goods.292 In Rajasthan Rollers Flour Mills Association v. State of Rajasthan,293 a two-Judge Bench of this Court held that a limitation imposed by a law enacted under Article 286(3) is a restriction upon the plenary power of the State to levy tax on the sale/ purchase of goods and must be construed “strictly.” It was further held that the restrictions imposed by Parliament upon the legislative power of the States must be specified by the law.294

240Copy pinpoint240. In its textual sense, the verb ‘to limit’ means to restrict or constrain. The respondents submit that the word “any limitation” can be interpreted in a manner bestowing absolute authority on Parliament to limit the field of taxation of the state legislature under Entry 50 of List II. However, we need to understand the purport of the expression “limitations” not only in its literal sense, but also IN the constitutional sense.

241Copy pinpoint241. The common thread running between Entry 54 of List I and Entries 23 and 50 of List II is mineral development. The concept of mineral development is closely associated with proper and sustainable exploitation and utilization of mineral resources. Mineral resources are important for the economic development of the nation, considering the fact that they are used as raw materials in many industries. The Constitution had this aspect in mind when it empowered Parliament to bring under its control regulation of mines and mineral development. The rationale was that the Central Government will ensure uniform regulatory standards for mineral operations, especially with respect to major minerals. Moreover, it was envisaged that the Central Government could take effective steps to ensure uniform standards of exploration and extraction of minerals with a view to ensuring their sustainability and conservation. The phrase “through a law relating to mineral development” appearing in Entry 50 of List II indicates that Parliament can limit the field of taxation only in the interests of mineral development. It was in this perspective that the Constitution

292 Article 286(3) before omission read: “(3) Any law of a State shall, in so far as it imposes, or authorizes the imposition of, - (a) A tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) A tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of tax as Parliament may by law specify.” 293 [1993] Supp. 2 SCR 72 : (1994) Supp. 1 SCC 413 [14] 294 Rajasthan Rollers Flour Mills Association (supra) [21]

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empowered Parliament to impose “any limitations” on the legislative field of States to tax mineral rights through a law relating to mineral development.

242Copy pinpoint242. The MMRD Act 1948 was in place when the Constituent Assembly was debating the incorporation of Entry 50 in List II. The framers of the Constitution were aware of the legislative history of the subject of mines and minerals and were aware as to how the Dominion Legislature had interpreted the legislative entries pertaining to regulation of mines and minerals and taxation of mineral rights under the GOI Act 1935.295 The Constituent Assembly negatived the proposal to transfer the entirety of Entry 50 of List II to List I.296 The Constitution did not or could not visualize the effect of taxes on mineral rights on mineral development. Therefore, it left it to the legislative wisdom of Parliament to identify the taxes on mineral rights levied by States may impede mineral development. If Parliament considers that taxes on mineral rights indeed impede mineral development, it can adopt suitable legislative policies to impose limitations on the field of taxation.

243Copy pinpoint243. The legislative subject entrusted to the States to tax mineral rights rests upon the necessity of raising revenues. As discussed in the above segments, Parliament does not possess the legislative field to tax mineral rights either under Entry 54 of List I, being a general entry, or under the residuary powers. The legislative domain to tax mineral rights vests with the State. The legislative power of Parliament to impose “any limitations” is traced to Article 246(1) read with Entry 54 of List I. Parliament can impose limitations, and not levy taxes on mineral rights itself. The subject of taxing mineral rights continues to remain with the States. This understanding also ensures that there is no overlap or conflict between the powers of Union and the taxing field of the States.

244Copy pinpoint244. As held in Jindal Stainless Steel (supra),297 the Constitution understands the expression “limitations” as restrictions, conditions,298

295 D K Trivedi (supra) [31] 296 Constituent Assembly Debates (2nd September 1949) 297 Jindal Stainless Steel [626.3] 298 Article 286(3) (omitted by Constitution (One Hundred and First Amendment) 2016

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or principles.299 However, does the expression “any limitations” include the power to prohibit States from taxing mineral rights? We are of the opinion that the answer must be in the affirmative. Under Entry 50 of List II, the Constitution specifically uses the phrase “any limitations”. The framers of the Constitution intended to empower Parliament to impose “all” and “every” possible limitation on the taxing powers of the State in the interests of mineral development, which may include even a “prohibition.” It had become clear during the course of the hearings, that counsel on both sides largely agreed that Parliament can impose “any limitations” including prohibiting the State legislatures from taxing minerals.300 The crux of the issue pertained to the manner in which Parliament can impose the limitations, which we have already considered in the above segments.

245Copy pinpoint245. The overall scheme of Article 246 read with Entry 54 of List I and Entry 50 of List II makes it clear that Parliament, in the interests of mineral development, can impose “any limitations.” The purport of the expression “any limitations” is wide enough to include the imposition of restrictions, conditions, principles, as well as prohibition. Parliament has the constitutional power to determine whether and if so the manner in which limitations may be imposed. f. Impact of taxes on mineral rights on mineral development

246Copy pinpoint246. The respondents have contended that any levy of taxes on mineral rights by the States under Entry 50 of List II will be against mineral development. Minerals are necessary for economic development. Proper extraction and utilization of mineral resources fulfils the needs of both the domestic industry as well as the demands of the international market.301 The Constitution requires the State to discharge an active role in promoting the development of minerals by adopting a slew of regulatory measures both at the Union and State levels. In other words, the constitutional endeavor of development of minerals proceeds on the basis of co-operative federalism, where both the Union and the States have certain duties and responsibilities. These responsibilities take the form of development of infrastructure, facilitation of exploration and mining activities, conservation of

299 Article 286(2), Constitution of India; Entry 35 of List II, Seventh Schedule, Constitution of India 300 Supreme Court of India, Record of Proceedings, Civil Appeal No. 4056-4064/1999 (14 March 2023) 54. 301 National Mineral Policy 2019, 4

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minerals, and collection of taxes and fees.302 The National Mineral Policy 2019 recommends greater thrust on conservation of minerals, development of scientific methods of mining, human resource development, and protection of environment to meet the requirements of environmentally sustainable mining operations.

247Copy pinpoint247. In India, mining activities are carried out by both the public and private sectors. The Government is required to raise revenues not only to meet the above-mentioned objectives, but also to fund public sector undertakings, such as Mineral Exploration Corporation of India. Additionally, mining activities cannot be carried out without the existence of public order or the lack of a functioning legal system to ensure adherence to contractual obligations. In Jindal Stainless Steel (supra), one of us (Dr Justice D Y Chandrachud) observed that every law which imposes a tax cannot be regarded as a hindrance to trade, commerce, and intercourse. It was observed: “631. […] Neither trade nor commerce can flourish amidst violence, unrest and social disorder. Taxes provide revenue for the State to sustain manifold activities which are geared to providing conditions of social order. The State provides infrastructure both tangible and intangible. Tax revenues form an essential part of the requirements necessary for the States to govern. Taxes are required by Article 265 to be imposed by a law enacted by Parliament or the State Legislatures. Without the power to raise revenues, the ability of the State to create conditions requisite for trade and commerce to exist would be denuded. Hence, as a matter of first principle it cannot be postulated that taxation in whatever form is a burden on trade, commerce and intercourse and that every tax necessarily hinders trade. Such a wide construction cannot be accepted simply because by raising revenues through means of taxation, the State provides a political and legal order based on the rule of law where contractual transactions can be executed effectively. The extreme position that every law which imposes a tax is to be regarded as a hindrance to trade, commerce and intercourse is unsustainable.”

302 ibid

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248Copy pinpoint248. It cannot be assumed that any tax levied by the State legislature under Entry 50 of List II will be ipso facto against mineral development. It is now a well-established principle that an increase in the rate of tax on a particular commodity cannot per se be said to impede free trade and commerce in that commodity.303 In his dissenting opinion in Kesoram (supra), Justice Sinha observed that a tax on minerals rights, which is over and beyond what is provided under the MMDR Act, will lead to an increase in the price of the mineral commodity making it unremunerative. The learned Judge observed that this defeats the purpose of the MMDR Act. The Union of India in its affidavit submitted: “A non-harmonized fiscal regime, with varied levies across States, would result in a scenario where industries located in States with lesser mineral deposits would be forced to procure mineral raw materials at higher prices from States endowed with rich mineral deposits, placing the latter category of States at a significant economic advantage that would come at the cost of the national interest in maximizing economic development from the nation’s mineral wealth […] Therefore a uniform levy of royalty prescribed by the Govt. of India under the MMDRA levels the playing field, thereby promoting the domestic industry across the nation in a manner which is equitable, while at the same time ensuring revenue generation for the States.” It is true that uniformity of prices of mineral commodities ensures the objective of mineral development as envisaged under the MMDR Act. Levy of a tax on mineral rights by the State legislatures may lead to an increase in the prices of the mineral commodity in India. There may arise a situation where a state having the highest reserves of a particular mineral decides to levy a high rate of tax on mineral rights. This may not only distort the market for that particular mineral, but have a cascading effect on allied industries. It is exactly to counteract any adverse impact on the development of minerals in India that the Constitution has empowered Parliament under Entry 50 of List II to impose limitations on the basis of which the State legislature

303 Vrajilal Manilal & Co. v. State of M P (1986) Supp SCC 201 [20]; State of Kerala v. A B Abdul Kadir (1969) 2 SCC 363 [9]; Jindal Stainless Steel (supra) [634]

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can tax mineral rights. If this is the constitutional intendment, it is Parliament which has the responsibility to ensure that there is no adverse effect on development of mineral rights. The legislative powers granted to the State legislatures cannot be whittled down impliedly based on the presumption that all taxes on mineral rights imposed by the State will have adverse economic consequences on mineral development. The Constitution has with foresight visualized this and empowered Parliament to impose “any limitations” on the subject of taxing mineral rights under Entry 50 of List II.

249Copy pinpoint249. It was contended by the respondents that States already have multiple revenue streams arising from the mining and minerals sector. They are: (i) royalty and dead rent payable under Section 9 and 9A of the MMDR Act respectively; (ii) contributions to the District Mineral Foundation under Section 9B; and (iii) auction premium received from successful bidders for mineral blocks for mines allocated under the Mineral (Auction) Rules 2015. The above levies are statutorily collected and the revenue flows to the State as part of the regime for mineral development in place under the MMDR Act. All of these levies, which are statutory in nature, cannot impliedly limit the legislative power of the state legislature to levy a tax on mineral rights. The States have a constitutional and sovereign authority to exercise their taxing powers, within the bounds of the Constitution, to raise adequate revenues for the welfare of the people. I. Scope of Entry 49 i. Land System in India

250Copy pinpoint250. The issue is whether the State legislatures are competent to levy a tax on mineral-bearing land as a unit under Entry 49 of List II. A connected issue is whether mineral produce or royalty can be used as the measure to tax mineral-bearing lands.

251Copy pinpoint251. The general rule in England was that the rights of an owner of land extended to everything in, on, or over land. The position has been explained in Megarry & Wade on The Law of Real Property304: “There is an ancient maxim: cujus est solum, ejus est usque ad coelum et ad inferos, meaning that the owner

304 Megarry and Wade, The Law of Real Property (9th edn, Sweet and Maxwell)

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of the soil is presumed to own everything “up to the sky and down to the centre of the earth.” It has been criticized, but it is a presumption that remains firmly part of English law “encapsulating, in simple language, a proposition of law which has commanded general acceptance.” Above the surface, the development of powered flight has made it impossible to apply the presumption literally. An owner’s rights in the airspace above the land extend only to such height as is necessary for the ordinary use and enjoyment of the land and structures upon it. As regards right beneath the surface, the maxim applies and the owner is presumed to own the minerals beneath. For practical purposes the rights downwards are unlimited.” “An owner can divide the land horizontally or in any other way. He or she can dispose of minerals under the surface, or top floor of a building, so as to make them separate properties. But unless some contrary intention is shown a grant will normally pass the owner’s whole interest in space above and below the land, so that, for example, a lease will give the tenant the right to the airspace above the land let.” The position under the common law in England is that the owner of land is entitled to all mines and minerals underlying the land which they own, subject to certain exceptions.305

252Copy pinpoint252. The colonial regime in India followed a pattern at variance to that prevailing under English law on land ownership and mineral rights. Initially, the colonial state asserted that the soil belonged to the sovereign.306 Acting on the view that it was the proprietor of the soil, the colonial state, under Lord Cornwallis as Governor-General,

305 Megarry and Wade (supra). [“Although prima facie a tenant in fee simple is entitled to all mines and minerals under the land, this is subject to some exceptions. Thus at common law, as modified by statute, the Crown is entitled to all gold and silver mines; and under the Petroleum Act 1998 petroleum existing in its natural condition in strata is vested in the Crown. Licences for extraction (including fracking) can be granted under the Petroleum Act 1998. Under the Coal Act 1938 all interests in coal (except interests arising under a coal mining lease) were vested in the Coal Commission in return for compensation. These interests (including coal-mining leases) were vested subsequently in the National Coal Board, then in the British Coal Corporation, and finally, (following the privatization of coal industry) in the Coal Authority. That body has extensive powers to license coal-mining operations.”] 306 S Sundararaja Iyengar, Land Tenures in the Madras Presidency (1921) 25

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confirmed proprietary rights to soil, including mineral rights, to the zamindars by way of a permanent settlement in territories under British control in India. For instance, the Madras Permanent Settlement Regulation XXV of 1802 vested “the proprietary rights of the soil” in the zamindars and in their heirs and successors.307 The regulations also allowed the zamindars to alienate or dispose of their proprietary rights in their zamindaris.308 Colonial courts recognized that the zamindars were presumed to be the owners of mineral rights in the absence of evidence that they had parted with them.309 Similarly, in the case of inam lands, it was held that the right of the inamdars to the sub-soil minerals was to be inferred from the express words of the grants.310

253Copy pinpoint253. In 1813, the Court of Directors of the East India Company prohibited the government from introducing permanent settlements any further and ordered introduction of the ryotwari system in all unsettled lands in the provinces.311 Thereafter, the colonial state introduced the ryotwari system of land settlement in India. Under it the ryots were treated as proprietors of land with attendant rights and liabilities such as payment of assessment directly to government.312 The ryots

307 Section 2, Regulation XXV of 1802. [It read: 2. Assessment on all lands liable to revenue. Proprietary right vested in zamindars – In conformity to these principles, an assessment shall be fixed on all lands liable to pay revenue to the Government; and, in consequence of such assessment, the proprietary right of the soil shall become vested in the zamindars or other proprietors of land, and in their heirs and lawful successors for ever.”] 308 Section 8, Regulation XXV of 1802. [It read: 8. Proprietors of land may transfer proprietary right in whole or part of their zamindaries. Restrictions under which such transfer is to be made – Proprietors of land shall be at free liberty to transfer without the previous consent of the Government, or of any other authority, to whomever they may think proper, by sale, gift or otherwise, their proprietary right in the whole of in any part of their zamindaris; such transfers of land shall be valid and shall be respected by the Courts of Judicature and by the officers of the Government; provided they shall not be repugnant to the Muhammadan or to the Hindu laws, or to the regulations of the Government. But unless such sale, gift, or transfer shall have been regularly registered at the office of the Collector, and unless the public assessment shall have been previously determined and fixed on such separated portion of land by the Collector, such sale, gift, or transfer shall be of no legal force or effect, nor shall such transaction exempt a zamindar from the payment of any part of the public land-tax assessed on the entire zamindari previously to such transfer, but the whole zamindari shall continue to be answerable for the total land-tax, in the same manner as if no such transaction had occurred.”] 309 See Durga Prasad Singh v. Braja Nath Bose, 1912 SCC Online PC 9. 310 Secretary of State for India in Council v. Srinivasa Chariar, 1920 SCC OnLine PC 89; State of A P v. Duvvuru Balarami Reddy, 1962 SCC OnLine SC 182 [9] 311 S Sundararaja Iyengar, Land Tenures in the Madras Presidency (1921) 120, 151 312 Gopalan v. State of Madras, (1958) 2 MLJ 117; S Sundararaja Iyengar (supra) 153. [“The distinguishing feature of this system is that the state is brought into direct contact with the owner of the land and collects its revenues through its own servants without the intervention of an intermediate agent such the zemindar or farmer, and its object is the creation of peasant proprietors. All the income derived from extended cultivation goes to the state.”]

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were granted pattas which essentially served as evidence of the possession of the land. Thus, the pattadars used to hold lands on lease from the Government.

254Copy pinpoint254. S Sundararaja Iyengar in his treatise on Land Tenures in the Madras Presidency noted that in 1882 the Government declared that it had no proprietary right in the soil.313 The conclusions drawn by the revenue after full enquiry are instructive and are reproduced below: “(1) that the State cannot, without violating the rule and practice dating from time immemorial, assert in this Presidency an exclusive right to minerals in unoccupied lands, but that it is fully entitled to a share in such products as in any other produce of the land; (2) that subject to the payment of a stated proportion of the produce to meet the necessities of the administration, the proprietary right of the ryot in the soil of his holding is absolute and complete; (3) that he is able to able to mortgage, sell, devise or otherwise alienate the land; (4) that, on these principles, property has been changing hands from time immemorial, and for the Government to put forward a claim now, which has never been asserted and which does not rest in law, practice or precedent, would undoubtedly raise a feeling or distrust and discontent which would take long to allay; (5) that it would be straining the State’s privileges to attach the condition of recognition of any exclusive right to minerals on the terms on which lands may be newly occupied, although in the interests of the general public, it may in particular instances be justifiable to do so, in view to the development of the ascertained mineral resources; and (6) that as regards the vast bulks of the land occupied or likely to be occupied for cultivation, such reservation would be absolutely objectless and would only have the effect of creating widespread distrust in the minds of the people.”314

255Copy pinpoint255. The Board of Revenue recognized the rights of zamindars to the minerals, through Standing Orders. The Standing Orders also

313 S Sundararaja Iyengar (supra) 28. 314 ibid.

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governed the rights of the ryotwari pattadars with respect to minerals. For example, Resolution No. 277 of 1888315 declared that the State “lays no claim to minerals” in estates held on sanads of permanent settlement, enfranchised inam lands, etc. Moreover, for ryotwari lands it was declared that the right of the State in minerals is limited “to share in the produce of the minerals worked, commuted in a money payment, if thought necessary, by Government, in like manner with and in addition to the land assessment.” Thus, the colonial state did not claim subsoil rights with respect to lands held under permanent settlements, and only a limited right in lands held under ryotwari pattas. This system of law continued until Independence and even thereafter.

256Copy pinpoint256. The regulation of mines and mineral development before Independence was governed by executive rules. In 1913, Rules for the grant by local governments of licences to prospect for minerals and of mining leases in British India were made by Resolution No. 7552-7581-121 dated 15 September 1913.316 Under these Regulations, prospecting licenses317 could only be granted with respect to minerals which were owned by the Government.318 The rules also required the licencee to pay royalty at a rate specified in Schedule A of the Regulations. The Madras Mining Manual of 1929 contained rules regarding mining and quarrying applicable to the Madras Presidency. Chapter V of the Madras Mining Manual stated that the State’s right to minerals varied according to the tenure on which the land was held. The Madras Mining Manual classified the land into three groups: Group A – Lands in which the State claimed no right to minerals. These included: (a) estates held on sanads of permanent settlement; (b) land held on title-deeds issued under the Waste Land Rules before 7th October 1879 in which no reservation was made of the right of the State to minerals; and (c) lands held on inam tenure.

315 See Dalmia Cement (Bharat) Ltd. v. State of TN (2014) 2 SCC 279 [30] 316 “1913 Regulations” 317 Rule 13, 1913 Rules. [It read: “13. A licence to prospect for minerals, called hereinafter a prospecting licence, shall confer on the licensee the sole right, subject to the conditions contained in the licence, to mine, quarry, bore, dig and search for, win, work and carry away any specified minerals or, in the event of no minerals being specified, all minerals lying, or being within, under or throughout the land specified in the licence.”] 318 Rule 14, 1913 Rules. [It read: “14. A prospecting licence shall be granted only in respect of land in which the mines or minerals are the property of the Government.”]

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Group B – Lands in which the State claimed a share in minerals which included: (a) lands occupied for agricultural purposes under the ryotwari grants; (b) private janmam lands in Malabar and the Nilgiri; and (c) certain lands held under inam tenure. Group C – Lands in which the State claimed full rights in minerals which included unreserved lands and forest lands reserved under the Madras Forest Act 1882.

257Copy pinpoint257. The Dominion Legislature was aware of the above classification of land, which it loosely incorporated under the Mineral Concession Rules 1949 enacted under Section 5 of the MMRD Act. Chapter III and VI of the Mineral Concession Rules 1949 provided for the grant of prospecting licences and mining leases respectively in land in which the minerals belonged to Government. Chapter V dealt with the grant of mineral concessions by private persons. The Concession Rules of 1949 did not contain any provisions dealing with minerals, in respect of lands where the minerals were shared by both the Government and private persons by. The Mineral Concession Rules of 1949 left out lands occupied under ryotwari tenure from their purview.

258Copy pinpoint258. The Mineral Concession Rules 1960 adopted the categorization of land as in the Madras Mining Manual, namely, lands in which minerals vested in government; lands in which minerals vested in a person other than government; and lands in which minerals vested partly in government and partly in private persons. The first category mostly pertained to situations where the land vested with the state by virtue of it being unoccupied or land legislation vesting title to minerals with the State Government. The second category pertained to situations where the State Government had not divested the landowner of their rights in the sub-soil minerals. The third category applied to intermediary tenures such as ryotwari lands where the minerals were shared by both the government and private persons.

259Copy pinpoint259. In Raja Anand Brahma Shah v. State of U P,319 a Constitution Bench accepted that the English system of ownership of lands applied in India, observing that the owner of the surface of land is entitled ex jure to everything beneath the land. It was further observed that a transfer of the right to the surface conveys the right to the minerals

319 [1967] 1 SCR 373 : 1966 SCC OnLine SC 89 [13]

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underneath unless there is an express or implied reservation in the grant of land. In Thressiamma Jacob v. Geologist, Department of Mining and Geology,320 a three-Judge Bench of this Court had to determine whether the holder of jenmon rights owned the mineral wealth lying beneath the soil. The Court traced the history of land tenures in India to hold that the ownership of minerals normally follows the ownership of land, unless the owner is deprived of it by a valid legal process.

260Copy pinpoint260. The legislative power of States to enact land legislation can be traced to Entry 18 of List II which empowers the State legislatures to legislate with respect to matters dealing with “land, that is to say, rights in or over land, land-tenures including the relation of landlord and tenant, and the collection of rents.” Similarly, Entry 42 of List III deals with “acquisition and requisitioning of property.”

261Copy pinpoint261. After Independence, the State legislatures enacted land reform legislation divesting land owners of their sub-soil rights, including rights in the minerals. For instance, Section 48 of the Maharashtra Land Revenue Code 1966 declared that the right to all minerals found either on the surface or underground vest in the State Government which shall have all powers necessary for the proper enjoyment of such rights.321

262Copy pinpoint262. Many states also enacted laws divesting zamindars and inamdars of their proprietary rights. For example, the Uttar Pradesh Zamindari Abolition and Land Reforms Act 1950 vested all the rights of the proprietors in the sub-soil including mines and minerals with the State Government.322 The Maharashtra Personal Inams Abolition Act 1953 abolished inam rights, but saved the rights of the inamdars and jagirdars to mines and minerals. In 1985, the State legislature enacted a law323 vesting all the rights of inamdars and jagirdars to mines and minerals in the State Government. The law sets out the following reasons behind divesting the inamdars and jagirdars of their mineral rights: “Whereas, pursuant to the national policy of bringing the actual cultivator into direct relation with the Government,

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series of land tenure abolition laws for abolition of the intermediary rights, Jagirs and inam tenures have had been enacted, the rights of Inamdars and Jagirdars to mines and minerals have had been specifically saved, thereby allowing such existing rights to survive particularly where the inams are grants of soil; And Whereas, the mines and minerals available in these inam lands are being exploited in the State by such Inamdars for individual gains without being liable to pay any royalty to the State Government and in a manner highly detrimental and prejudicial to public interest; And Whereas, with a view to prevent such exploitation of mines and minerals for individual gains by a few Inamdars and also to prevent the huge loss of royalty by the State Government and to give effect to the policy of the State Government towards securing that the ownership and control of the material resources of the community are so distributed as best to subserve the common good and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment;” The above extract from the Preamble to the statute indicates that the inamdars and jagirdars had title to the minerals granted to them under inam tenure until the State enacted a law to divest them of their mineral rights. Since the inamdars and jagirdars owned the minerals till 1985, they exploited them for their personal gain without paying royalty to the State Government. This also indicates that the rights to mines and minerals continued to remain vested in private landowners long after India gained Independence and the divesting of their mineral rights happened in this case by the operation of legislation enacted by the State.

263Copy pinpoint263. The decision in Thressiamma Jacob (supra) held that the MMDR Act does not declare the proprietary rights of the state in mineral wealth, nor does it contain a provision for divesting the owner of a mine of proprietary rights.324 Rights in minerals generally follow ownership

324 Thressiamma Jacob (supra) [55]

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of the land. The right of an owner of land extends to the sub-soil, including the minerals found underneath the soil, which continues until the State deprives the owner by a valid legal process. Importantly, Section 16(1)(b) of the MMDR Act also recognizes that the rights to minerals does not automatically vest in the State Government.325

264Copy pinpoint264. Article 297 vests the proprietary rights in minerals within the territorial waters and the continental shelf in the Union Government. The provision reads: “297. Things of value within territorial waters or continental shelf and resources of the exclusive economic zone to vest in the Union – (1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purpose of the Union. (2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union. (3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament.”

265Copy pinpoint265. Parliament has enacted the Offshore Areas Mineral (Development and Regulation) Act 2002 326 to provide for development and regulation of mineral resources in the territorial waters, continental shelf, exclusive economic zone, and other maritime zones of India. Section 2 contains a legislative declaration to the effect that the Union is taking under its control the regulation of mines and mineral development in offshore areas to the extent provided under the statute. Similar to the MMDR Act, Chapter II of the OAMDR Act lays down general provisions for acquisition of operating rights in offshore areas. However, unlike the MMDR Act which empowers the

325 Section 16, MMDR Act. 326 “OAMDR Act”

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State Government to grant mineral concessions,327 the OAMDR Act mandates the Central Government to grant the operating rights.328 This difference is a result of the fact that the subsoil minerals are statutorily vested in the States, while the Constitution mandates the vesting of offshore minerals in the Union. Section 16 of the OAMDR Act deals with payment of royalty to the Central Government. The provision reads as follows: “16. Royalty – (1) A lessee shall pay royalty to the Central Government in respect of any mineral removed or consumed from the area covered under his production lease, at the rate for the time being specified in the First Schedule in respect of that mineral. (2) The Central Government may, by notification in the Official Gazette, amend the First Schedule so as to enhance or reduce the rate at which royalty shall be payable in respect of any mineral with effect from such date as may be specified in the notification: Provided that the Central Government shall not enhance the rate of royalty in respect of any mineral more than once during any period of three years.”

266Copy pinpoint266. As held in the above segments, royalty is paid to the proprietor of the minerals for the exercise of mineral rights. Minerals found in offshore areas are constitutionally vested in the Central Government. Therefore, the Central Government can statutorily and contractually demand royalty from lessees for removal or consumption of such minerals. In comparison, subsoil minerals can either be legally vested in the States or continue to remain vested with private landowners. Resultantly, the payment of royalty under Section 9 of the MMDR Act is paid either to the State Government or private landowner, as the case may be.

267Copy pinpoint267. Section 3 of the Haryana Minerals (Vesting of Rights) Act 1973 allowed the State Government to acquire the rights to minerals in any land. In State of Haryana v. Chanan Mal,329 where the validity

327 Section 5, MMDR Act 328 Section 6, OAMDR Act 329 [1976] 3 SCR 688 : (1977) 1 SCC 340

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of Section 3 was assailed, it was argued that the State legislative power to enact the legislation was curtailed by the operation of the MMDR Act. This Court noted that in Section 16(1)(b) of the MMDR Act Parliament has contemplated legislation by the States for vesting of lands containing mineral deposits in the State Government. The Court held that the MMDR Act deals with the regulation of rights to mining without intending to “trench upon powers of State legislatures under Entry 18 of List II read with Entry 42 of List III.”330 Chanan Mal (supra) lays down the principle that the decision of the States to acquire title to minerals does not fall foul of the MMDR Act because the latter does not control the ownership of minerals.

268Copy pinpoint268. The above discussion leads to two conclusions. First, the owner of a land can be divested of sub-soil rights in minerals only through a valid process of law, which has generally taken the shape of land reform legislation enacted by State legislatures. Second, the MMDR Act does not vest the ownership of minerals or mineral rights in the State. It regulates the exercise of rights to minerals which may be owned either by Government, private persons, or by both the Government and private persons. II. Tax on land and buildings

269Copy pinpoint269. Entry 42 of the Provincial Legislative List in the Government of India Act 1935, read as follows: “42. Taxes on lands and buildings, hearths and windows” The Draft Constitution prepared by Shri B N Rau, the Constitutional Adviser adopted the above provision in draft Entry 43 of the Provincial Legislative List.331 The Expert Committee on Financial Provisions suggested the deletion of the words “hearths and windows” from draft Entry 43 of the Provincial Legislative List on the ground that such taxes were not likely to be levied. The Committee observed that they would anyway be covered by the word “buildings.”332 The recommendation of the Expert Committee was accepted by the Drafting Committee.333

330 Chanan Mal (supra) [38] 331 B Shiva Rao, ‘The Framing of India’s Constitution: A Study’ (1966, Volume 3) 181 332 B Shiva Rao (Volume 3) 269 333 B Shiva Rao (Volume 3) 502

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a. Principles governing ‘taxes on lands and buildings’

270Copy pinpoint270. The interpretation of the word “lands” has been considered by this Court in several decisions. In Raja Jagannath Baksh Singh v. State of Uttar Pradesh,334 the provisions of the UP Large Land Holdings Tax Act 1957 were challenged for falling beyond the legislative competence of the State legislature. It was contended that the expression “lands” under Entry 49 of List II does not include agricultural land. Rejecting this contention, Justice P B Gajendragadkar (as the learned Chief Justice then was) speaking for the Constitution Bench held that the word “lands” is wide enough to include all lands, agricultural or otherwise. In Anant Mills Co. Ltd. v. State of Gujarat,335 this Court held that the word “lands” includes not only the face of the earth, but everything under or over it, and has in its legal signification an indefinite extent upward and downward. The above decisions are authority for the proposition that the ambit of the word “lands” under Entry 49 of List II comprises: (i) all types of lands; and (ii) covers everything under or over land.

271Copy pinpoint271. In Ajoy Kumar Mukherjee v. Local Board of Barpeta,336 the constitutionality of an annual tax levied by local boards for the use of land for the purpose of holding markets was challenged before a Constitution Bench. Speaking for the Bench, Justice K N Wanchoo held that the tax was on land used for a market, and not on the market held on land. The Court held that the use to which the land is put can be taken into account while imposing a tax on the land within the meaning of Entry 49 of List II.337 Further, it was observed that the incidence of tax was on the owner or occupier of the land, and not any other person who may come to the market to transact. In conclusion, it was held that the tax was a tax on land, though its incidence depended upon the use of the land as a market. In Government of A P v. Hindustan Machine Tools Ltd.,338 it was held that the State legislature can tax buildings as a unit under Entry 49 of List II, but not the machinery and furniture contained

334 [1963] 1 SCR 220 335 [1975] 3 SCR 220 : (1975) 2 SCC 175 336 [1965] 3 SCR 47 337 Ajoy Kumar Mukherjee (supra) [4]; See Jalkal Vibhag Nagar Nigam v. Pradeshiya Industrial & Investment Corp (2021) 20 SCC 657 [46] 338 [1975] Supp. 1 SCR 394 : (1975) 2 SCC 274 [17]

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in the building. In Ahmedabad Municipal Corporation v. GTL Infrastructure Ltd.,339 this Court held that the word “buildings” has to be interpreted dynamically to extend to all ancillary and subsidiary matters. Consequently, it was held that the State legislature has the legislative power to tax mobile towers under Entry 49 of List II. The principle which emanates from the above decisions is that a tax levied on the activity or service rendered on or in connection with lands and buildings does not fall within the description of taxes on lands and buildings under Entry 49 of List II. However, the legislature may take into account the use of land or buildings for determining the incidence or measure of tax levied under Entry 49 of List II.

272Copy pinpoint272. Further, it is now well-established that a levy of tax on lands and buildings is not concerned with the division of interest or ownership in the units of lands and buildings.340 In Sudhir Chandra Nawn v. WTO,341 a Constitution Bench which dealt with the constitutional validity of Wealth Tax Act 1957, explained the scope of Entry 49 of List II by observing that the tax on lands and buildings is directly imposed on lands and buildings or both as units, and bears a definite relation to it. The decision holds that the State legislature may adopt the annual or capital value of lands and buildings for determining the incidence of tax levied under Entry 49 of List II.

273Copy pinpoint273. In Second Gift Tax Officer, Mangalore v. D H Nazareth,342 this Court dealt with whether Parliament was competent to enact the Gift Tax Act under its residuary powers. In that case, the owner of a coffee plantation had made a gift of coffee plantations by a registered gift deed to his sons. The government demanded gift tax on the transfer of land title. It was contended that taxes on lands and buildings under Entry 49 of List II also cover taxes in respect of gift on lands and buildings. It was further submitted that since the legislative power of taxing gift of land is traceable to Entry 49 of List II, Parliament could not have taken recourse to its residuary powers. Chief Justice M Hidayatullah, speaking for the Constitution Bench, held that the impugned levy was not a tax directly imposed upon

339 [2016] 11 SCR 172 : (2017) 3 SCC 545 [29] 340 Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. (1969) 2 SCC 55; Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality (1969) 2 SCC 283 [5] 341 (1968) 69 ITR 897 342 [1971] 1 SCR 195 : (1970) 1 SCC 749 [10]

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lands and buildings, but a tax upon the transmission of title by gift. The value of lands and buildings was held to be a measure of the value of gifts. Therefore, it was held that Parliament was competent to enact the levy.

274Copy pinpoint274. In D G Gose and Co (Agents) Pvt Ltd v. State of Kerala,343 the validity of the Kerala Building Tax Act 1975 was challenged on the ground of being a tax on the capital value of the assets of an individual under Entry 86 of List I. The Constitution Bench held that a tax on buildings was a direct tax on the assessee’s buildings as such, and was not a personal tax without reference to any particular property. It was further held that a State legislature while imposing a tax under Entry 49 of List II may decide how best to levy it.

275Copy pinpoint275. In view of the above discussion, we can summarize344 the following principles for a tax under Entry 49 of List II: (i) The expression “lands” means all kinds of lands irrespective of the use to which the land is put; (ii) The expression “lands” includes not only the surface but everything under and over the surface; (iii) A tax on lands and buildings is a tax on lands and buildings as units; (iv) The expression ‘tax on lands and buildings as a unit’ is used to distinguish composite taxes which involve imposition of tax cumulatively on all assets such as under Entry 86 of List I; (v) The tax is not a tax on totality, that is, it is not a composite tax on the value of all lands and buildings; (vi) The tax is not concerned with the division of interest in the building or land; (vii) A tax levied on the activity or service rendered on or in connection with lands and buildings does not fall within the description of taxes on lands and buildings under Entry 49 of List II; (viii) The use to which the land is put does not affect the competence of the State legislature to tax it; and

343 [1980] 1 SCR 804 : (1980) 2 SCC 410 344 See Union of India v. H S Dhillon (1971) 2 SCC 779 [74]

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(ix) The legislature may take into account the use of land for determining the measure of taxation under Entry 49 of List II. a. States can impose tax on mineral bearing land

276Copy pinpoint276. A state does not have to tax everything in order to tax something. The legislature has a wide discretion is selecting the persons or objects it wants to tax depending upon social, economic, and administrative considerations.345 This discretion flows from the fact that a legislature which is competent to levy a tax must inevitably be given full freedom to determine “which articles should be taxed in what manner and at what rate.”346 The power to levy a tax includes ancillary powers such as the power to fix the rate, prescribe machinery for the recovery of tax, prevent tax evasion, appoint authorities for collecting taxes, and prescribe the procedure for determining the amount of taxes payable by any individual.347 This Court has generally adopted the approach of giving wide latitude to the legislature in matters of tax and economic regulations,348 provided the law is reasonable349 and avoids clear and hostile discrimination against particular persons or classes.350

277Copy pinpoint277. The power to levy a tax on lands necessarily entails the power to classify lands sought to be taxed depending upon their use and productivity. A flat tax on all lands, irrespective of their use or productivity, may place an unequal burden on owners and occupiers of land. The need to provide a reasonable classification of lands for the purposes of the levy of taxes under Entry 49 of List II emanates from Article 265 of the Constitution which provides that the States shall not levy taxes except by “authority of law”. The expression “law” appearing in Article 265 has been interpreted to mean a valid law which conforms to the other provisions of the Constitution, including Article 14.351 Consequently, the legislature is competent to classify properties into categories and tax them differently. In adjudicating

345 East India Tobacco Company v. State of Andhra Pradesh, 1962 SCC OnLine SC 145; Hiralal Rattanlal v. State of U P (1973) 1 SCC 216 [20] 346 Khyerbari Tea Co. Ltd. v. State of Assam [1964] 5 SCR 975 [44] 347 Khyerbari Tea Co. Ltd. (supra) [19]; Union of India v. A Sanyasi Rao (1996) 3 SCC 465 [16] 348 R K Garg v. Union of India (1981) 4 SCC 675 [8] 349 Mafatlal Industries Ltd. v. Union of India (1997) 5 SCC 536 [343] 350 Federation of Hotel & Restaurant Association of India v. Union of India (1989) 3 SCC 634 [46] 351 K T Moopil Nair v. State of Kerala, 1960 SCC OnLine SC 7 [7]

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the validity of the taxing statutes, this Court has held that the power of the legislature to classify is of “wide range and flexibility” so that it can adjust its system of taxation in all proper and reasonable ways.352

278Copy pinpoint278. The expression “lands” includes lands of every description. A land may be put to use for growing tea leaves or extracting minerals. But what Entry 49 of List II contemplates is the levy of tax on land as a unit, irrespective of the use to which it is put. Therefore, the State legislature is competent while designing the levy under Entry 49 of List II to tax lands which comprise of mines and quarries. In other words, mineral-bearing land also falls within the description of “lands” under Entry 49 of List II.

279Copy pinpoint279. The State legislature has wide discretion to classify lands and levy taxes on them under Entry 49 of List II. This is also evident from the decision of this Court in Spencer & Co. v. State of Mysore,353 where excess land appurtenant to a building was treated as a separate class. This was challenged. Although land appurtenant to a building such as gardens or grounds were treated as part of the building, any such land which exceeded thrice the area of the building was treated as a separate class. Chief Justice S M Sikri, speaking for the Constitution Bench, held that the State legislature has the right to classify lands for the purpose of levying taxes: “13. […] It seems to us that in cities like Bangalore, where land is scarce, excessive use of land as gardens and grounds is not in the public interest and the Legislature can validly tax the excess land on a different and higher basis. It may in a particular case cause hardship but the Legislature cannot be denied the right to classify the lands in such a manner. Three times the area occupied by a building is not a small area and we are unable to hold that his figure is not reasonable.”

280Copy pinpoint280. In their natural state, minerals or ores are part of the earth and remain embedded there unless extracted. It is also established that “lands” include everything over and below the surface. Therefore, constitutionally speaking sub-soil minerals also form part of land.

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The subject of taxation in Entry 49 of List II is land as a unit. The subject of tax in Entry 50 of List II is the mineral rights. Hence, there is a distinction between the legislative field in in the two entries. Ultimately, however it must be borne in mind that both Entries 49 and 50 fall within List II and are hence within the domain of the State legislatures. If the tax is relatable to Entry 50 of List II, the tax on mineral rights must be consistent with any limitations which Parliament imposes in a law relating to mineral development. The interrelationship between Entry 50 of List II with List I, particularly Entry 54 of that list has been examined in an earlier segment.

281Copy pinpoint281. The legislative competence of the States to tax lands under Entry 49 of List II will not be affected by the MMDR Act. In Western Coalfields Ltd. v. Special Area Development Authority,354 the vires of a provision conferring powers on the Municipal Councils and Municipal Corporations to levy tax on lands and buildings was challenged. The provision was argued to be invalid because it allowed the municipalities to tax lands covered by coal mines, which were the subject of legislation by Parliament under the MMDR Act and the Coal Mines (Nationalisation) Act 1973355. Chief Justice Y V Chandrachud, speaking for the majority, rejected the contention on the ground that the tax on lands and buildings had “nothing to do with the development of mines” and, therefore, did not conflict with the power of the Central Government to regulate and develop mines under the Coal Mines Act.356 In the context of the legislative declaration contained in Section 2 of the MMDR Act, the learned Chief Justice observed that though “on account of that declaration, the legislative field covered by Entry 23 List II may pass on to Parliament by virtue of Entry 54 List I, the competence of the State Government to enact laws for municipal administration will remain unaffected by that declaration.” Significantly, the Court observed that the declaration in Section 2 of the MMDR Act does no result in the invalidation of every State legislation relating to mines and minerals.

282Copy pinpoint282. The principle which emanates from Western Coalfield Ltd (supra) is that the legislative declaration under the MMDR Act will only affect

354 [1982] 2 SCR 1 : (1982) 1 SCC 125 355 “Coal Mines Act” 356 Western Coalfields Ltd (supra) [28]

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the legislative power of the State with respect to Entry 23 of List II to the extent the Parliamentary legislation covers the subject-matter. The legislative powers of the State with respect to other subjects under List II, including taxes on lands and buildings, will not be affected or controlled by the MMDR Act. Therefore, the legislative powers of the States to levy a tax falling under Entry 49 of List II remains unaffected. iii. Measure of tax

283Copy pinpoint283. Among its elements a tax has to provide for the charge of tax, the incidence of tax, the measure of the tax and will contain provisions in the nature of the machinery for assessment and recovery. In Rai Ramkrishna v. State of Bihar,357 a Constitution Bench of this Court observed as follows: “12. […] The objects to be taxed so long as they happen to be within the legislative competence of the legislature can be taxed by the legislature according to the exigencies of its needs, because there can be no doubt that the State is entitled to raise revenue by taxation. The quantum of tax levied by the taxing statute, the conditions subject to which it is levied, the manner in which it is sought to be recovered, are all matters within the competence of the legislature, […]”

284Copy pinpoint284. It now a well-settled principle that the determination of the principles for assessing the amount of tax is within the legislative domain.358 The quantification or measurement of liability is done on the basis of the procedures laid down by the competent legislature.359 In situations where the legislature selects one method out of the many available for assessing tax, the courts should not strike down the levy on the ground that the legislature should have adopted another method unless the method is capricious, fanciful, arbitrary or clearly unjust.360 Although the liability may be quantified or measured in many ways, there is a clear distinction between the subject matter of a tax and the standard by which the amount of tax is measured.

357 [1964] 1 SCR 897 : (1963) SCC OnLine SC 31 358 S Kodar v. State of Kerala (1974) 4 SCC 422 [10] 359 Shaktikumar M Sancheti v. State of Maharashtra (1995) 1 SCC 351 [3] 360 Khandige Sham Bhat v. Agricultural Income Tax Officer, Kasargod, 1962 SCC OnLine SC 15 [10]

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285Copy pinpoint285. The pith and substance or true nature and character of the legislation must be determined with reference to the legislative subject matter and the charging section.361 The charging section levying a tax and defining the persons who are liable to pay the tax constitute the core of a taxing statute.362 The distinction between the nature of tax and measure of tax can be gathered from the decision of this Court in Sainik Motors, Jodhpur v. State of Rajasthan.363 In that case, the petitioners challenged the levy of taxes on passengers and goods by the State legislature. The charging section provided that the tax was “in respect of all passengers carried and goods transported by motor vehicles at such rate not exceeding one-eight of the value of the fare or freight.” This Court held that the tax was on passengers and goods which could be traced to Entry 56 of List II of the Seventh Schedule. As regards the measure of the levy, it was held that that the measure was furnished by the amount of the fare and freight charged.

286Copy pinpoint286. It is a settled position that the measure of tax is not a true test of the nature of tax.364 The standard adopted as a measure of tax may be a relevant consideration in determining the nature of tax, but is not conclusive. In Sir Byramjee Jeejeebhoy v. The Province of Bombay,365 the Bombay Provincial Legislature levied ‘urban immovable property tax’ at ten percent of the annual letting value of lands and buildings. The Bombay High Court upheld the validity of the levy. Justice Broomfield observed that the power to impose taxes on lands and buildings meant the power to impose taxes on persons, owners, or occupiers as the case may be in respect of these properties. Justice Harilal Kania (as the learned Chief Justice then was) observed that the adoption of the annual letting value as the standard for fixing the tax rate did not necessarily make it a tax on income. The learned Judge further observed that the standard on which the tax is levied does not determine the nature of the tax.

287Copy pinpoint287. In Ralla Ram v. The Province of East Punjab,366 the issue that fell for consideration of the Federal Court was whether the provisions

361 Federation of Hotel & Restaurant Association of India v. Union of India (1989) 3 SCC 634 [37] 362 B Shama Rao v. Union Territory of Pondicherry, 1967 SCC OnLine SC 29 363 [1962] 1 SCR 517 364 R R Engineering Co. v. Zilla Parishad, Bareilly (1980) 3 SCC 380 [16] 365 1942 SCC OnLine Bom 30 366 1948 SCC OnLine FC 9

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of the Punjab Urban Immoveable Property Tax Act 1940 were ultra vires the legislative powers of the Provincial Legislature. Section 3 of the legislation levied a tax on lands and buildings at a rate not exceeding twenty percent of the annual value. It was contended that the levy was in substance a tax on income since the measure adopted, that is the annual value of lands and buildings, was also used to calculate income from property. Justice Fazl Ali observed that annual value is not necessarily actual income, but only a standard by which income may be measured. The learned Judge analyzed the substance of the impugned levy to observe that the legislation used annual value merely for the purpose of determining the value of the property to be taxed. The Court observed that if a tax is levied on property, it would not be irrational to correlate it to the value of the property and to make some kind of annual value the basis of the tax without intending to tax income. The levy was held to be in pith and substance a tax on land and buildings even though the basis of the tax was similar to the one adopted to measure income.

288Copy pinpoint288. From the above discussion, we can derive the following principles: (i) the incidence of a tax on lands and buildings will likely be on the owner or occupier, as the case may be; (ii) the legislature may adopt a suitable measure for levying the tax on lands and buildings under Entry 49 of List II; and (iii) the measure adopted by legislature does not determine the nature of the tax.

289Copy pinpoint289. In recent decades, this Court has held that there ought to be a “nexus” between the nature of tax and the measure of tax. In Union of India v. Bombay Tyre International Ltd.,367 the issue before a three-Judge Bench of this Court was whether the value of an article for the purposes of excise duty must be determined exclusively with reference to the manufacturing cost and manufacturing profit of the manufacturer or the entire wholesale price368 charged by the manufacturer. The assesses contended that only the measure of manufacturing cost and profit create a direct and immediate nexus between the levy and the manufacturing activity. It was further

367 [1984] 1 SCR 347 : (1984) 1 SCC 467 [14] 368 The wholesale price actually charged by the manufacturer consisted of not merely the manufacturing costs and manufacturing profit but included, in addition, a whole range of expenses and an element of profit (conveniently referred to as “post-manufacturing expenses” and “post-manufacturing profit”) arising between the completion of the manufacturing process and the point of sale by the manufacturer.

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urged that the post-manufacturing expenses and profits ought to be necessarily excluded to preserve the nexus between the nature of tax and the assessment of tax. This Court traced the line of precedent on the measure of tax to observe that a broad standard of reference may be adopted for the purpose of determining the measure of the levy. It was held that any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for the measure of the levy. In CCE v. Grasim Industries Ltd.,369 a Constitution Bench reiterated that there must be a “reasonable nexus” between the nature of tax and the measure of the levy. It was further observed that the measure cannot be controlled by the rigors of the nature of tax.

290Copy pinpoint290. The discussion above indicates that the nexus between the measure and levy of tax need not be “direct and immediate”. The nexus has to be “reasonable” and must have some relationship with the nature of levy. The reasonability of the nexus will largely depend upon the nature of the tax and the means available with the legislature to design the measure of the tax. Since the measure of the levy is a matter of legislative policy and convenience,370 the reasonability of the nexus between the measure and tax has to be determined by the courts on a case-to-case basis. While doing so, the Court will bear in mind the fundamental principle that the legislature possesses a broad discretion in matters of fiscal levies. a. Taxing mineral-bearing land

291Copy pinpoint291. The tax on lands and buildings under Entry 49 of List II is often measured with respect to the income derived from the land or building sought to be taxed. The income derived from land or building is normally measured in terms of the annual value. Section 23 of the Income Tax Act provides that the annual value of property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year.371 Thus, where a land or building is let, the valuation is based on the rent at which it is let.372

369 [2018] 6 SCR 1099 : (2018) 7 SCC 233 370 Express Hotels (P) Ltd. v. State of Gujarat (1989) 3 SCC 677 [25] 371 Section 23, I T Act 1961 372 Patel Gordhandas Hargovindas v. Municipal Commissioner, 1963 SCC OnLine SC 57 [10]

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292Copy pinpoint292. In K T Moopil Nair v. State of Kerala,373 Chief Justice B P Sinha observed that a tax on land or land revenue is assessed on the actual or potential productivity of the land sought to be taxed. The decision noted that a tax has reference to the income actually made or which could have been made. Thus, the principle emanating from this decision is that a tax under Entry 49 of List II may be levied on the actual or potential productivity of the land. In State of Kerala v. Haji K Kutty Naha,374 there was a challenge to the Kerala Buildings Act 1961 which levied tax on buildings in the state based on the floor area. This Court observed that the legislature did not take into consideration factors such as the class to which the building belonged, the nature of construction, the purpose for which it was used, its situation and capacity for profitable user and other relevant circumstances which had a bearing on matters of taxation. It was held that the statute was unconstitutional for treating dissimilar objects similarly. Haji K Kutty Naha (supra) recognized that a tax on lands and buildings must be measured by taking into consideration relevant factors related to the use of the lands or buildings.375

293Copy pinpoint293. In Spencer & Co. (supra), the validity of a property tax assessed at 0.4 percent of the market value was challenged before this Court. It was urged that the levy of the property tax on vacant lands was unconstitutional because it was levied without any relation to the actual or potential income of the land. The Constitution Bench rejected the contention on the grounds that the market value of the land always bears a “definite relationship” to the actual or potential income being derived or derivable from the land.

294Copy pinpoint294. The measure for taxing land may bear a reasonable relationship to the actual or potential productivity of land. Measures such as annual value or market value provide a proximate basis to measure the income derived from land. If the State legislature utilizes the income derived from the land as a measure to quantify a tax on land, it does not trench upon the legislative domain of Union to tax income. The income merely serves as the measure to calculate the levy of taxes

373 [1961] 3 SCR 77 : 1960 SCC OnLine SC 7 [8] 374 [1969] 1 SCR 645 375 Also see New Manek Chowk Spg. & Wvg. Mills v. Ahmedabad Municipality, 1967 SCC OnLine SC 116 [13]

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on land.376 Having looked at the general principles relating to the measure of tax on land, we now look at specific decisions pertaining to taxation of mineral-bearing land.

295Copy pinpoint295. In H R S Murthy (supra), the validity of a land cess under the Madras District Boards Act 1920 was in issue. The cess was levied on the annual rent value of all occupied lands and the tax was measured on the basis of “two annas in the rupee of the annual rent value of all such lands in the district.” In case of lands held directly from the Government, the annual rent value was defined as the assessment, lease amount, royalty or other sum payable to Government. Justice N Rajagopala Ayyangar, speaking for the Constitution Bench distinguished the decisions in Hingir-Rampur (supra) and M A Tulloch (supra) on the ground that the land cess: (i) was not concerned with the development of mines and minerals; (ii) was not collected for development of mining areas, but for the safety, health, convenience, and education of the inhabitants in the local area; and (iii) there was nothing in common between the impugned levy and the MMDR Act. Therefore, it was held that the operation of MMDR Act did not exclude the legislative competence of the State to levy the cess.

296Copy pinpoint296. The petitioners argued in H R S Murthy (supra) that (i) the cess was payable only when the mining lessee paid royalty to the lessor; (ii) when no minerals were extracted, no royalty was payable; and (iii) the cess in effect was a tax on mineral rights. These contentions were rejected because: (i) the levy was in nature and substance a tax on land; (ii) the levy had a remote relationship to mining and to the mineral won from the mine under a contract by which royalty was payable on the quantity of mineral extracted, which did not make it a tax on either the extraction of mineral or on the mineral rights; and (iii) the rent value of a land held under lease is calculated on the basis of the lease amount. In case of a land held under a mining lease, the rent value will include the surface rent, dead rent as well as the royalty payable by the lessee or occupier for the use of the property. The decision in H R S Murthy (supra) supports the position that royalty can be used as a measure to tax mineral bearing land.

376 Ahmedabad Municipal Corporation v. GTL Infrastructure Limited (2017) 3 SCC 545 [19]

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297Copy pinpoint297. The issue of taxing mineral bearing land under Entry 49 of List II also came up before this Court in India Cement (supra). To recap, in India Cement (supra) local cess levied by the State legislature was measured with respect to the land revenue payable to the Government. The definition of land revenue included royalty. Therefore, the issue before the seven-Judge Bench was whether the levy of cess on royalty was valid. Speaking for the majority, Justice Sabyasachi Mukharji observed that the cess was not on land but on royalty. The conclusion rested on the following reasons: (i) since royalty is income arising from land, it is not directly connected to the land; (ii) if royalty is the basis of taxation, no tax can be levied if no mining activities are carried on; and (iii) royalty cannot be used as a measure under Entry 49 of List II because it is exclusively relatable to Entry 50 of List II. Justice Mukharji held that H R S Murthy (supra) was “not a correct approach” to the issue. The decision in India Cement (supra) was followed by a three-Judge Bench in Orissa Cement (supra).

298Copy pinpoint298. In Orissa Cement (supra), Section 5(1) of the Orissa Cess Act 1962 provided that the cess shall be assessed on the annual value of all lands calculated in the manner as provided. Section 5(2) provided for the levy of cess in case of mineral bearing land thus: “5. (2) The rate per year at which such cess shall be levied shall be – In case of lands held for carrying on mining operations in relation to any minerals, such per centum of the annual value as the State Government may, by notification, specify from time to time in relation to such mineral;” The “annual value” was defined in Section 7. And sub-section 3 provided that in case of lands held for carrying on mining operations, annual value shall be the royalty or as the case may be, the dead rent payable by the person carrying on mining operations to the government, or the Pit’s mouth value wherever it has been determined.

299Copy pinpoint299. Speaking for the three-Judge Bench, Justice S Ranganathan observed that there is a difference in principle between a tax on royalties derived from land and a tax on land measured by reference to the income derived from land. The Court observed that the levy was not

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measured by income derived by the assessee from land, as was the case with lands other than mineral lands, but by royalty paid in respect of the land by the assessee to the lessor. The Court relied on India Cement (supra) to hold that royalty cannot be used as a measure to tax mineral-bearing land: “33. […] But the question, what is it that is really being taxed by the legislature? So far as mineral-bearing lands are concerned, is the impact of the tax on the land or on royalties? The change in the scheme of taxation under Section 7 in 1976; the important and magnitude of the revenue by way of royalties received by the State; the charge of the cess as a percentage and, indeed, as multiples of the amount of royalty; and the mode and collection of the cess amount along with the royalties and as part thereof are circumstances which go to show that the legislation in this regard is with respect to royalty rather than with respect to land.”

300Copy pinpoint300. In Federation of Mining Associations of Rajasthan v. State of Rajasthan,377 a three-Judge Bench relied on India Cement (supra) and Orissa Cement (supra) to declare that the State legislature did not have competence to a levy tax on mineral bearing land on the basis of the royalty derived from the land.

301Copy pinpoint301. In the aftermath of the decision in Orissa Cement (supra), the State legislature of Orissa enacted the Orissa Rural Employment, Education and Production Act 1992 to increase the income of the State and compensate the loss faced by the exchequer. The legislation levied a cess on “all lands”. Land was defined to mean “land of whatever description […] and includes all benefits to arise out of lands.” In Mahanadi Coalfields (supra) this Court held that since ‘minerals’ are benefits arising out of land, the charging section imposed a tax on minerals.378 The levy was held in substance to be on mineral rights under Entry 50 of List II. It was observed that since the MMDR Act provides for “all kinds of taxation on minerals and mineral rights,” the State legislature was not competent to levy the tax under Entry 50 of List II.

377 (1992) Supp. 2 SCC 239 [5] 378 Mahanadi Coalfield Ltd. (supra) [19]

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302Copy pinpoint302. The decisions rendered in above judgments, ranging from India Cement (supra) to Mahanadi Coalfields (supra), proceed on two premises: first, the MMDR Act, by providing for all levies with respect to taxation of minerals and mineral rights, completely excludes the legislative competence of the States to tax mineral-bearing land; and second, royalty is not directly connected to land and cannot be used as a measure to tax mineral-bearing land. The first premise has been answered in the earlier segments of this judgment. The MMDR Act does not serve as a limitation on the legislative competence of the States to tax mineral rights under Entry 50 of List II. Moreover, as held in Special Areas Development Authority (supra), the MMDR Act does not impede the legislative competence of the States with respect to legislative entries under List II, including the power to levy taxes on mineral-bearing lands under Entry 49 of List II. The second assumption is also wrong for the reasons we will discuss in the ensuing segments. b. Goodricke

303Copy pinpoint303. Apart from income, the quantum of yield or produce of the lands may also be used to measure the amount of tax. In Buxa Dooars Tea Co. Ltd. v. State of West Bengal,379 the levy of ‘rural employment cess’ on tea estates under the West Bengal Rural Employment and Production Act 1976 was challenged.380 The measure of tax of the levy was based on the quantity of tea dispatched from the estate. The issue before a two-Judge Bench was whether the levy was in respect of tea estates or on the dispatch of tea. The Court held that the measure of the levy defined in terms of the weight of the tea dispatched from the estate had no nexus with the nature of the tax, that is, a tax on land estates. Therefore, it was held that what the legislation really contemplated was a levy on dispatches of tea.

304Copy pinpoint304. In view of Buxa Dooars Tea (supra), the State legislature enacted the West Bengal Taxation Laws (Second Amendment) Act 1989 to amend the Act of 1976. The amendment provided that the rural employment cess would be levied annually on a tea estate at a rate of twelve paise for each kilogram of green tea leaves produced at the estate. In comparison with the previous provision which measured the tax

379 [1989] 3 SCR 293 : (1989) 3 SCC 211 380 “1976 Act”

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on the basis of the quantity of tea dispatched, the measure of the cess in the amended provision was the production of green leaves.

305Copy pinpoint305. The amended provision was challenged before this Court in Goodricke Group Ltd v. State of West Bengal.381 The primary issue before this Court was whether the impugned levy was a levy on lands within the meaning of Entry 49 of List II of the Seventh Schedule. Justice B P Jeevan Reddy, speaking for the three-Judge Bench, observed that the income or yield of a land or building can be taken as a measure of the tax on land and buildings. Hence, the measure of the tax based on the yield from the land was held to be valid: “20. […] In the case before us, the cess is no doubt calculated on the basis of the yield – for every kilogram of tea leaves produced in a tea estate, a particular cess is levied. But that is a well-accepted mode of levy of tax on land. The tax is upon the land – upon the “tea estate” which is classified as a separate category, as a separate unit, for the purpose of levy and assessment of the said cess quantified on the basis of the quantum of produce of the tea estate. It cannot be characterised as a tax on production for that reason. […]”

306Copy pinpoint306. In Goodricke (supra), the petitioners relied on India Cement (supra) and Orissa Cement (supra) to urge that there has to be a direct connection between the land and the levy. The two decisions were distinguished on the following rationale: “21. […] The basis of the judgment – and the ratio of the decision – in our respectful opinion is that it was case where the tax was measured not with reference to or on the basis of the income or yield of the land but with reference to the amount of royalty payable by the lessee to his lessor. It was for this reason that the tax was held to be not upon the land. Royalty is a matter of agreement between the lessor and the lessee; it may also be determined by a statutory provision. But royalty is not a produce of the land; royalty is not the income of the land nor is the royalty the yield of the land – and that is the distinction.”

381 [1994] Supp. 6 SCR 120 : (1995) Supp. 1 SCC 707

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307Copy pinpoint307. It is important to note the above observation to the effect that royalty is not the produce, income, or yield of the land. Royalty is paid by a lessee to the lessor as consideration for the exercise of mineral rights. However, does this preclude the State legislature from using royalty as a measure of taxes on mineral-bearing land? We will deal with this issue in greater detail in a later part of the judgment.

308Copy pinpoint308. Another argument which was addressed in Goodricke (supra) was that no land cess can be levied if there is no yield from the tea estate. Justice Jeevan Reddy negatived this contention by observing that a tea estate will not yield produce if it is not properly tended and nurtured. However, an ordinary prudent owner or occupier of a tea estate would take care to properly nurture of the estate. When tax is measured on the basis of the quantum of production, there is a probability that the tax collected would vary depending upon the amount produced. However, the learned Judge observed that uniformity of taxation is not an essential condition. Goodricke (supra) adopted the standard of an ordinary prudent person to infer that the tea estate will generally be properly nurtured. When the yield from land is used as a measure of the tax on land, the tax is essentially assessed on the actual or potential productivity of the land. The majority in Kesoram (supra) approved Goodricke (supra). We will deal with the relevance of the reasoning in Goodricke (supra) in the context of mineral-bearing land in the following segment.

309Copy pinpoint309. The other issue in Goodricke (supra) was the effect of the declaration in Section 2 of the Tea Act 1953 on the competence of the State legislature to levy the land cess. Parliament had enacted the Tea Act in pursuance of Entry 52 of List I of the Seventh Schedule. Section 2 declares that the Union is taking under its control the tea industry in the public interest. Section 25 imposes a duty of excise on all tea produced in India at a rate not exceeding fifty paise per kilogram as the Central Government may notify.382 The proviso to Section 25(1)

382 Section 25, Tea Act 1953. [It reads: “25. Imposition of cess on tea produced in India – (1) There shall be levied and collected as a cess for the purposes of this Act a duty of excise on all tea produced in India at such rate not exceeding fifty paise per kilogram as the Central Government may, by notification in the Official Gazette, fix: Provided that different rates may be fixed for different varieties or grades of tea having regard to the location of, and the climatic conditions prevailing in, the tea estates or garden producing such varieties or grades of tea and any other circumstances applicable to such production. (2) The duty of excise levied under sub-section (1) shall be in addition to the duty of excise leviable on tea under the Central Excises and Salt Act, 1944 (1 of 1944), or any other law for the time being in force.