ARJUN FLOUR MILLS v. THE STATE OF ODISHA FINANCE DEPARTMENT SECRETARY & ORS.

India Cements (supra) involved qualitatively different issues,

and the said case could not have been brought in by the

assessees herein to try and make inroads into S. Kodar

(supra).

MINERAL AREA DEVELOPMENT AUTHORITY VS. SAIL, (2024) 10 SCC 1 (MADA) 49) The growth of jurisprudence post India Cements (supra)

needs to be highlighted for complete narration of the legal

aspect. Following India Cements (supra) came the case of

State of W.B. vs. Kesoram Industries Ltd. and Others, (2004)

10 SCC 201. In Kesoram (supra), a Constitution Bench was

called upon to decide the validity of a cess levied by the State

on coal-bearing lands. The measure was to be on the basis of

the quantity of the minerals produced. R. C. Lahoti, J. (as the

learned Judge then was), speaking for the majority, observed

that India Cements (supra) contained a typographical error

and it was held in Kesoram (supra) that what was to be

intended to be held in India Cements (supra) was “…..that

cess on royalty is a tax and as such a cess on royalty being a

tax on royalty, is beyond the competence of the State

legislature”. India Cements (supra) was held not to be a

correct declaration of law. Kesoram (supra), however, held

that cess on royalty was beyond the competence of the State

legislatures. This conflict resulted in a reference to a nine-

Judges Bench to decide, the issue whether royalty is a tax or

not.

50) Dealing with the essential characteristics of royalty, a

Nine-Judge bench of this Court in MADA (supra) held: -

“103. The essential characteristics of royalty are that: (i) it is a consideration or payment made to the proprietor of minerals, either the government or a private person; (ii) it flows from a statutory agreement (a mining lease) between the lessor and the lessee;

(iii) it represents a return for the grant of a privilege (to the lessee) of removing or consuming the minerals; and (iv) it is generally determined on the basis of the quantity of the minerals removed.”

51) Similarly, dealing with the essential characteristics of a

tax, this Court held as under: -

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

52) Thereafter, the majority in MADA (supra) held that a

liability arising out of contract cannot be termed as an impost

or tax. After analysing various legislative entries and

judgments, this Court categorically held as follows: -

“137. In view of the above discussion, we hold that both royalty and dead rent do not fulfil the characteristics of tax or impost. Accordingly, we conclude that the observation in India Cement (Supra) to the effect that royalty is a tax is incorrect.” (Emphasis supplied) 38

53) There is one other aspect which requires mention from

MADA (supra). MADA (supra) dealt with the well-settled

concept of measure of tax. The majority in MADA (supra) held

that measure of tax is a matter of legislative policy; that

legislature can select any measure of tax to compute liability,

as long as it had a reasonable nexus with the nature of the tax.

Hence, it was for the legislature to devise an appropriate

measure of tax to compute the tax liability, provided the

measure had a nexus with the nature of levy, that is a tax on

mineral rights. In MADA (supra), S. Kodar (supra) was

expressly noticed on the aspect of measure of tax, when

MADA (supra) held that quantification or measurement of

liability is done on the basis of the procedures laid down by

the competent legislature. Further, MADA (supra) held that

royalty was relatable to the yield of the mineral bearing land

as well as the income in case the minerals vest in a private

person. Further, this Court held that since the yield of the land

is directly connected to the land, the rate fixed on the basis of

the yield cannot be said to be indirectly connected to the land. 39

This Court, in MADA (supra) further held that yield of a

mineral bearing land either in terms of the quantity produced

or in terms of the rate of royalty, can be used as a measure to

tax the mineral bearing land in List II.

54) The holding in MADA (supra) on this aspect,

disapproving the holding in India Cements (supra), is set out

hereinbelow:-

“351. In India Cement [India Cement Ltd. v. State of T.N., (1990) 1 SCC 12] , it was held that royalty cannot be a measure for tax on land because it is indirectly connected with land. [India Cement Ltd. v. State of T.N., (1990) 1 SCC 12, para 23] In our opinion, this holding is not correct in view of the fact that royalty is directly relatable to the yield of the mineral-bearing land. Royalty is calculated on the basis of the output of the mineral produced. Since the yield of the land is directly connected to the land, a rate fixed on the basis of the yield cannot be said to be indirectly connected to the land.

352. Similarly, Orissa Cement [Orissa Cement Ltd. v. State of Orissa, 1991 Supp (1) SCC 430, para 36] held that since royalty is not an income derived from land, it cannot be used to measure the tax on land. [Orissa Cement case, 1991 Supp (1) SCC 430, para 30] Royalty may not be an income in all aspects, but it is directly relatable to the yield of the land. The yield can be adopted as the basis for levy of tax on land. The decision in Orissa Cement [Orissa Cement Ltd. v. State of Orissa, 1991 Supp (1) SCC 430, para 36] has followed a narrow approach to the concept of royalty. Therefore, we hold that the yield of a mineral-bearing land, either in terms of the quantity of mineral produced, or in

terms of the rates of royalty, can be used as a measure to tax the mineral-bearing land under List II Entry 49.”

55) Dealing with Entry 50 of List II and the phrase “any

limitations imposed by Parliament by law relating to mineral

development” occurring therein, this Court held that the said

entry did not constitute an exception to the principle in M.P.V.

Sundararamaier & Co. vs. State of A.P., [1958] SCR 1422 as

accepted in Jindal Stainless Steel vs. State of Haryana, (2017)

12 SCC 1 to the effect that fields of taxation are distinct from

the general subjects of legislation in the Union list and State

list of the Seventh Schedule.

56) In conclusion, this Court in MADA (supra) held as under:-

“J. Conclusions

365. In view of the above discussion, we answer the questions formulated in the reference in terms of the following conclusions: 365.1. Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears; 365.2. List II Entry 50 does not constitute an exception to the position of law laid down in M.P.V. Sundararamier 41

[1958 SCC OnLine SC 22]. The legislative power to tax mineral rights vests with the State Legislatures. Parliament does not have legislative competence to tax mineral rights under List I Entry 54, it being a general entry. Since the power to tax mineral rights is enumerated in List II Entry 50, Parliament cannot use its residuary powers with respect to that subject- matter; 365.3. List II Entry 50 envisages that Parliament can impose “any limitations” on the legislative field created by that entry under a law relating to mineral development. The MMDR Act as it stands has not imposed any limitations as envisaged in List II Entry 50; 365.4. The scope of the expression “any limitations” under List II Entry 50 is wide enough to include the imposition of restrictions, conditions, principles, as well as a prohibition; 365.5. The State Legislatures have legislative competence under Article 246 read with List II Entry 49 to tax lands which comprise of mines and quarries. Mineral-bearing land falls within the description of “lands” under List II Entry 49; 365.6. The yield of mineral-bearing land, in terms of the quantity of mineral produced or the royalty, can be used as a measure to tax the land under List II Entry 49. The decision in Goodricke [1995 Supp (1) SCC 707] is clarified to this extent; 365.7. List II Entries 49 and 50 deal with distinct subject- matters and operate in different fields. Mineral value or mineral produce can be used as a measure to impose a tax on lands under List II Entry 49; 365.8. The “limitations” imposed by Parliament in a law relating to mineral development with respect to List II Entry 50 do not operate on List II Entry 49 because there is no specific stipulation under the Constitution to that effect; and 365.9. The decisions in India Cement [(1990) 1 SCC 12], Orissa Cement [1991 Supp (1) SCC 430, para 36], Federation of Mining Associations of Rajasthan [1992 Supp (2) SCC 239], Mahalaxmi Fabric Mills [1995 Supp 42

(1) SCC 642], Saurashtra Cement [(2001) 1 SCC 91], Mahanadi Coalfields [1995 Supp (2) SCC 686], and P. Kannadasan [(1996) 5 SCC 670] are overruled to the extent of the observations made in the present case.” (Emphasis supplied)

57) The above history leading up to the MADA (supra) is set

out only to demonstrate that India Cements (supra), insofar

as it held that royalty is a tax has been overruled and it has

been held that royalty is a contractual consideration paid by

the mining lessee to the lessor for enjoyment of mineral rights.

58) A close reading of MADA (supra) only reinforces the

conclusion that the legal issue raised and decided in India

Cements (supra) and reversed in MADA (supra) do not create

any dent on the holding in S. Kodar (supra).

59) The Solicitor General of India submits that a curative

petition has been filed challenging the judgment in MADA

(supra). The statement is placed on record.

60) The Union Government had amended the MMDR Act

through the Act 20 of 2026 by inserting Section 9-D thereby

subjecting the power of State Government to impose tax, cess,

or such other levy on mineral rights; or mineral bearing lands,

either based on mineral quantity or mineral value or royalty

payable or otherwise, to such conditions or restrictions as

prescribed by the Central Government.

61) Neither the pendency of the curative petition nor the

subsequent amendment to MMDR Act, affect the findings in

MADA (supra), approving the ratio in S. Kodar (supra). S.

Kodar (supra) rightly held that the legislative competence of

the State Government to impose additional sales tax,

determined with reference to the sales tax payable by a

dealer whose annual turnover exceeds a minimum threshold

and where there is no pass through to consumer, is traceable

to Entry 54 List II as tax on sales of goods and is not ultra vires

as a tax on income of such dealer.

62) So here, we are, back again to where it all began. As

pointed out earlier, S. Kodar (supra) and Hoechst (supra) are

consistent. The concession in Hoechst (supra) did not detract

from the detailed discussion and holding therein on the aspect

of legislative competence. There is no conflict between S.

Kodar (supra) and Hoechst (supra).

63) India Cements (supra) which was also a basis for the

reference of S. Kodar (supra) had really no bearing,

considering that the genre of the dispute involved there was

totally different; the legislative entries were different and the

principles of law that engaged the Court were completely

different.

64) No other argument challenging the correctness of the

finding in S. Kodar (supra) was made at the bar.

CONCLUSION:

65) For the reasons stated above, it is held that, S. Kodar

(supra) has been correctly decided, continues to be a good

law and needs no reconsideration.

66) Let the appeals arising out of challenge to the provisions

under the Orissa Sales Tax Act, 1947 (Civil Appeal No

8763/1994 and Civil Appeal No 8909/1994) and the Punjab

General Sales Tax Act, 1948 (Civil Appeal No 98/2003, Civil 45

Appeal Nos. 831-850/2003, Civil Appeal No 851/2003, Civil

Appeal No 99/2003 and Civil Appeal No 100/2003) be placed

before the Hon’ble Chief Justice for assignment to an

appropriate Bench to be decided in accordance with law as

laid down in S. Kodar (supra).

67) Let the appeals concerning the validity of the levy under

the Punjab Social Security Act, 2000 (Civil Appeal No

7485/2001, SLP (C) Nos 22159-22180/2002, Civil Appeal No

5046/2003 and Civil Appeal No 5637/2008) be segregated

and placed before the Hon’ble Chief Justice for assignment to

an appropriate Division Bench.

The reference is answered accordingly.

……….........................J. [K.V. VISWANATHAN]

New Delhi; November 4, 2026