M J Antony: Tax as penalty is not valid

Out Of Court

Although the Supreme Court has delivered several judgements this year distinguishing tax from fee, some loose ends still need to be taken care of.

The Supreme Court and the high courts seem to still be sorting out the distinction between tax and fee. In a recent order, the Supreme Court had declared the principles to be followed by the high courts and asked them to decide the issue in cases before them within five months.Meanwhile, the Supreme Court confronted the problem of interpretation on this score recently in Hardev Motor Transport vs State of Madhya Pradesh.

The issue revived again in the context of contract carriage permits. The transport authorities charged holders of contract carriage permits for using their vehicles as stage carriages. This was contravention of the Motor Vehicles Act. According to the Madhya Pradesh Motor Karadhan Adhiniyam, motor vehicles plying without permits shall pay tax at the rate of Rs 1,500 per seat per month. The same levy shall be applicable if the vehicles run on an unauthorised route or make a trip that's not authorised by the permit.

The law-makers, in their wisdom, imposed a tax by way of penalty. The state can make a law for imposing penalty for non-payment of tax or evasion of tax. But the state cannot indirectly levy a penalty by specifying a rate of tax for violation of a regulation.

In this case, the transporters had paid tax as specified for in permits granted in their favour for contract carriages. The rate of tax payable for a contract carriage is higher than the rate of tax imposed on a stage carriage. For non-payment of tax or for payment of tax for a wrong purpose, a penalty can be imposed.

However, according to the Supreme Court, it is difficult to conceive that a different rate of tax which is not contemplated in the law can be imposed by way of penalty.

In a judgment delivered earlier this year by the constitution bench of the Supreme Court, Jindal Stainless Ltd vs State of Haryana, the principles of imposition of tax, compensatory tax and levy of fee were analysed. Regarding tax, the court said: "Tax is levied as a part of common burden. The basis of a tax is the ability or the capacity of the taxpayer to pay. There is no identification of a specific benefit and even if such identification is there, it is not capable of direct measurement. It is assessed on certain elements of business, such as manufacture, purchase, sale, consumption, use, capital, and so on."

The constitution bench then distinguished licence thus: "A fee is generally a term of a licence. A tax is a payment where the special benefit, if any, is converted into common burden. A tax can be progressive.

However, a fee or a compensatory tax has to be broadly proportional and not progressive. A tax may be progressive or proportional to income, property, expenditure or any other test of ability or capacity.

Compensatory taxes, like fees, are always proportionate to benefits. They are based on the principle of equivalence. A compensatory tax is levied on an individual as a member of a class whereas a fee is levied on an individual as such."

Even though the constitution bench thus elaborately dealt with the issue of tax and fee, in a judgment of the court delivered by a two-judge bench later this year a doubt was cast on the validity of that view. In Vijayalashmi Rice Mill vs Commercial Tax Officer, the court said that the Jindal Steel judgment was delivered in connection with Article 301 of the Constitution and it was not regarding the nature of the fee. Therefore, it cannot be regarded as an authority explaining the nature of a fee.

In the transporters' case, the Supreme Court also underlined that the executive, while fixing the rate of duty, could not be permitted to usurp the legislative power and make a provision which would be inconsistent with the substantive provision of the statute. An owner of a vehicle having one kind of permit could not have been treated as having no permit at all because the transport authorities have reasons to believe that the conditions of permit have been violated. Consequently, the Supreme Court set aside the rule in the Madhya Pradesh law.

But it is doubtful whether the basic questions have been settled. Much will depend upon how the high courts apply the principles laid down by the constitution bench decision. In the present case, the two-judge bench has followed the five-judge bench decision, as it was bound to do.

However, the Vijayalashmi judgment has cast doubt on the applicability of that judgment in other fact-situations. Therefore, it is still too early to say that the last word has been spoken on this contentious issue.