O.P. Agarwal v. G.R. Kishori

149 OM PARXASH AGARWAL ETC.ETC. v. GIRl RAJ KISHORI & ORS. ETC.ETC. JANUARY 28, 1986 [O. CHINNAPPA REDDY AND E.S. VENKATARAMIAll, JJ.] Constitution oflndia, Art. 265, 266 and List ll, of Seventh Schedule - State Legislature - Tax not to be imposed under guise of 'fee' - Jurisdiction of Court to scrutinise scheme of levy to determine real character. Haryans Rural Development Fund Act, 1983, s.3- Lev)' of 'Cess' under the Act - Not 'fee' but 'tax' - State Legislature - Whether competent to enact the Act. The Haryana Rural Development Fund Act, 1983 by section 3 provides that there shall be levied on the dealer for the _J._ purposes of the Act, a cess, on ad valorem basis, at the rate of one per centum of the sale proceeds. of agricultural produce bought' or sold or brought for processing in the notified market area. The dealer is, in his turn, entitled to pass on the burden of the cess paid by him to the next purchaser of the agricultural produce from him. Section 4(1) of the Act provides for the creation of a fund called the Haryana Rural Development Fund (hereinafter referred to as 'the Fund') which is vested in the State Government. Sub-section (3) of section 4 of the Act provides that the amount of cess shall be credited to the Fund within such period as may be prescribed. ,sub-section (5) of section 4 of the Act states that the Fund shall be applied by the State Government to Dl!et the expenditure incurred in the rural areas, in connection with the development of roads, hospitals, means of colllDWlication, water-supply, sanitation facilities and for the welfare of agricultural labour or for any other scheme approved by the State Government for the development of the rural areas. The expression 'rural areas' has been defined in section 2(h) of the Act as an area the population of which does not exceed 20,000 persons. 91. The appellants, who are dealers in agricultural produce -1 carrying on business in certain notified market areas, / questioned the validity of the Act before the High Court of ### . A B c D E F G u· A B c E F G H 150 - SUPREME COURT REPORTS . [1986] 1 s.c.R. Punjab & Haryana. The learned single judge found that the Act was unconstitutional and struck it down, Aggrieved by the ·)I.. decision of the learned single judge, the State of Haryana filed a Letters Patent Appeal before the Division Bench of the High Court. The Division Bench allowed the appeal, set aside the judgment of the learned single judge and upheld the constitutional validity of the Act, on the ground that it was in the nature of a fee and, therefore, it could be levied as a fee imposed on dealers carrying on business within market area for services rendered to them by the State Government. Hence .,..... these appeals by Special Leave. It was contended on behalf of the appellants that the cess levied under the Act was in the nature of a tax and it did not fall under any of the Entries in List II of the Seventh Schedule to the Constitution under which the State Legislature could levy a tax. On the other hand, counsel for the respondent-State argued (i) that it was in the nature of a fee and it was not necessary that there should be a direct correlation between the levy and the services to be rendered and that such correlation could be of "general character and l not of mathematical exactitude"; (ii) that there was a reciprocal relationship between the levy of the fee and the services that were being rendered and (iii) that the impugned legislation had been enacted to fulfill the objectives contained in Articles 46,47,48 and 48A of the Constitution and the majority of dealers were directly benefited by the objects on which the amount collected as ceas was spent. Allowing the appeals, llELD: l.(i) The llaryana Rural Development Fund Act, 1983 is unconstitutional, since the State Legislature was not competent to enact it. The judgment of the Division Bench of). the High Court is set aside and the Act is declared void. [163 D-E) l(ii) It is constitutionally impermissible for any State Government to collect any amount which is not strictly of the nature of a fee in the guise of a fee. If in the guise of a fee the legislation imposes a tax it is for the court on a scrutiny of the scheme of the levy to determine its real character. If on a true analysis of the provisions levying the amount, the court comes to the conclusion that it is, in fact, in the nature of a tax and not a fee, its validity can)lf be justified only by bringing it under any one of the Entries 0,P,AGARWAL v. G,R.KISHORI 151 in List II of the Seventh Schedule ' to the Constitution under which the State can levy a tax. [163 B-C] In the instant case, the State Government has failed 'to do so. The levy is not a fee as claimed by the State but it is a tax not leviable by it. The levy of the cess under section 3 is, therefore, liable to be quashed. Section 3 being the charging section and the rest of the sections of the Act being juat machinery or incidental provisions, the whole Act is liable to be quashed. [163 C-ll] l{iii) The fact that the Act is claimed to have been enacted pursuant to the Directive Principles of State Policy contained in Articles 46,47,48 and 48A of the Consti,tution and that the dealers are permitted by the Act to pass on the cess to the purchasers of the Agricultural produce from them have no bearing on the question involved here. [158 A-Bl 2. The distinction between a tax and a fee is recognised by the constitution. In determining a levy as a fee the true test ml1St be whether its primary and essential purpose is to render specifiC services to a specified area or class, u· being of no consequence that the State may ultimately and indirectly be benefited by it Entry 66 empowers the State to levy fees in respect of any of the matters in List II. It 'is no doubt true that under Entry 66 of the List II it is permissible for the State to levy any amount by way of fees in respect of any of the matters in that List. The relevant Entry in the present case is entry 28 dealing with Markets and Fairs' but the amount so levied should be truly a fee and not a tax with the mask of a fee. The primary meaning of taxation is raising money for. purposes of Government by means of contributions from individual persons, a compulsory exaction of money by a public authority for public purposes enforceable ·" at law and not a payment for services rendered. [158 c; 158 D-1!] A B c D E F G H Matthews v. Chicory Marketing Board, 60 C.L.R. 263,276 and lbe Commissioner, Hindu llel.igious ~ts, lladraa v. Sri Lskslulindrs Thirtha Swam1ar of Sri Sbirur "1tt, [1954] s.c.R. 1005 relied upon. Sreenivasa General Traders & Ors. etc. v. State of .AndWa Pradesh & Ors. etc., [1983] 3 S.C.R. 843, "1nicipal Corporation of Delhi .and Ors. v. llobd. Yasin etc., [1983] 2 s.c.R. 999 and Southern l'barmaceuticsls & a.emtcsls Trichnr & Ors. etc. v. State of Kerala & Ors. etc., [1982) l s.c.R. 519 distinguished. A B c D E F G H 152 SUPREME COURT REPORTS [1986] 1 s.c.R. Sreeni, vasa General Traders & Ors. etc. v. State of Andhra Pradesh & Ors •• (1983] 3 s.c.R. 843 referred to. In the instant case, the Fund, vests· in the State Government and_ not in the IIIJilicipality or a marketing committee or any other local authority having limited function specified in the enactment under which it is constituted. The definition of the expression 'rural areas' in section 2(h) of the Act is as vague as it can be. It means an area the population of which does not exceed 20,000 persons. It need not necessarily be a local.area as it is ordinary understood. Ordinarily a local area means a Municipal Corporation, a Town Municipality, a Panchayat, a Notified Area, a Sanitary Board etc •••• Any geographical area the population of which does not exceed 20, 000 persona can be conveniently brought within the scope of section 2(h) of the Act. If it is understood tha_t way even urban areas can be divided into areas with population not exceeding 20, 000 and labelled as rural areas. Even if a town or a city having a population exceeding 20,000 persons, is excluded from the scope of the expression 'rural areas'• the area in which the amJunt credited to the Fund can be spent is almost 90 per cent of the total area of the State of Haryana. There is no specification in the Act that the amJunt or a substantial part of the amJunt collected by way of cess under section 3 of the Act will be spent on any public purpose with in the market area where the dealer is carrying on his business. The purposes over which the Fund can be spent are the same purposes on which any amJunt collected by way of tax is spent by any State and there is nothing which is done specially to benefit the dealer. When any amJunt is spent from the Fund the interest of the dealers is not at all kept. in view even generally. There is no other restriction imposed on the manner in which the Fund can be spent. The cese, therefore, partakes of the character of a part of the COllllD)n burden which has to be levied and collected only as a tax. A dealer who pays the cess under the Act may as one of the members of the general public derive some benefit from the expenditure of the fund incurred by the State Government. The benefit so derived by him is merely incidental to the fact that he happens to be a person residing in the State. of Haryana. It is not the same as the benefit which a dealer in a market area would derive by the expenditure of its funds by a marketing colllllittee or as the benefit which a person living in a town or a city would derive by the expenditure incurred by the municipality concerned. (161 A; 162 A-Bl ' A B c D E F G H .., O.P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J.] 153 3. lb.ere is practically no difference between the Consolidated Fund which vests in the State snd the Fund which also vests in the State. Amounts credited to the Consolidated Fund and the amounts credited to the Fund can both be spent practically on any public purpose almost . throughout the State. In such a situation it is difficult to hold that there exists any correlation between the amount paid by way of cess under the Act and the services tendered to the person from whom it is collected. lb.e impost in these cases lacks the essential qualification of a 'fee namely 'that it is absolutely necessary that the levy of fees should on the face of the legislative provision, be correlated to the expenses incurred by Govern~ ment in rendering services'. In fact, there is no correlation at all. [162 C-E] CIVIL APPELLATE JURISDICTION Civil Appeals Nos. 2808 of 1985 etc. From the Judgment and Order dated 20.5.1985 of the Punjab and Haryana High Court in L.P.A. No. 1055 of 1984. ###### V.M. Tarkunde, Shankar Ghosh, P.N. Puri, s.c. Khunger, O.P. Gill, S.K. Mittal, Bhal Singh Malik, Vishal Malik, G.K. Bansal, Ji.S, GUpta, S.D. Sharma, P.C. Kapur, K.G. Bhagat, Sunil Kr. Jain, A.K. Goel, Ajit Pudissery, K.B, Rohtagi, L.K. Pandey, Sarv Mitter, R;P, GUpta, P,N. Puri, R.A. GUpta, K.K. Mohan and·D.N •. Mishra for the appearing Appellants. Kapil Sibbal, H.L. Sibbal Advocate General for State of Haryana, J.K. Sibbal, I.S. Goel, S.V. Singh and C.V. Subba Rao for the appearing Respondents. The Judgment of the Court was delivered by VENKATARAMIAH, J. The appellants in the above appeals are dealers in agricultural produce carrying on business in certain notified market areas set up under the Punjab Agricultural Produce Markets Act, 1961 in the State of Haryana. They **have** **questioned** **in** **these** appea~s **the** **constitutional** **validity** of the Haryana Rural Development Fund Act, 1983 (Haryana Act No. 12 of 1983) (hereinafter referred to as 'the Act'), The Act received the assent of the Governor of Haryana on the 28th September, 1983 and was published in the State Gazette under the Notification dated September 30, 1983. The A B c D E F G H 154 SUPRF.ME COURT REPORTS [1986) 1 s.c.a. Act came into force on its publication. Section 3 oJo the Act **provides that with** **effect** **from** **such date as** **the** **Stat1?** **Govern-** _**"::I..**_ ment may by notification appoint in that behalf, thure shall be levied on the dea!er for the purposes of the Act,, '8 cess, on ad valorem basis at the rate of one per centum of the sale proceeds of agricultural produce bought or !IOld or brought for processing in the notified market area. It, however provides **that** **except** **in** **case** **of** **agricultural** **produce** bro~Jght. _**fot**_ processing, no cess shall be leviable in respect of any transaction in which delivery of the agricultudl produce bought or sold is not actually made. The cess is payable by thE• dealer in such manner as may be prescribed to such officer or person as may be appointed or designated by the State Government in that behalf. The dealer is, in his turn, entitled to pass on the burden of the cess paid by him to the next purchaser of the agricultural produce from him. He may, therefore, add the same in the cost of the agricultural produce or the goods **processed or manufactured out of** **it.** **The** **arrears** **of** **cess** **are** **recoverable** **as** **arrears** **of** **land** **revenue.** Th~ **expression** 'dealer' is defined by section 2(c) of the Act. 'Oeakr' means any person who within the notified market area sets up, establishes or continues or allows to be continued any place for the purchase, sale, storage or processing of agricultural **produce, or in the** **notified** **area purchases,** **sells,** **stores** **or** **processes such** **agricultural** **produce. A** **'notified** **market** **area'** iooans any area notified under section 6 of the Punjab Agricultural Produce Markets Act, 1961 to be a notified market area. 'Agricultural produce' means all produce whether processed or not, of agriculture, horticulture, animal husbandry or forest as may be prescribed. These definitions are found in section 2 of the Act. Section 4(1) of the Act provides for the creation of a fund called the Haryana Rural Development Fund (hereinafter referred to as 'the Fund') which is vested in the State Government. The Fund is to be administered by such officer or officers of th' State Government as may be appointed by it in that behalf. Sub-section (3) of section 4 of the Act provides that the **amount** **of** **cess** **paid** **to** **the** **concerned** **officer** **by** **virtue** **of** section 3 of the Act shall be credited to the Fund within such period as may be prescribed. Sub-section (4) of sect:lon 4 of the Act provides that any grants made by the State Governioont and local authorities shall also be credited to the Fund. Sub-section (5) of section 4 of the Act states that the Fund shall be applied by the State Government to 11>~t the O.P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J,] 155 expenditure incurred in the rural areas, in connection with A **the development** **of** **roads,** **hospitals,** **means** **of** **comrm.Inication,** x water-supply, sanitation facilities and for the welfare '+- of agricultural labour or for any other scheme approved by the State Government for the development of the rural areas. The Fund can also be utilised to meet· the cost of administering the Fund. Section 5 of the Act provides that any person who contravenes the provisions of the Act or the rules framed thereunder shall be punishable with fine which may ~xtend to five hundred rupees or up to the amount of cess which the dealer is liable to pay, whichever is more. By section 6 of the Act the State Government is empowered to make rules to carry into effect the purposes of this Act. Section 7 of the Act grants protection to State Government or any officer of the State Government or·the Haryana State Agricultural Marketing Board or a local authority fonctioning under the Act against any action that may be taken against it or him in respect of any action taken .in good faith under the Act. Section 8 of the Act empowers the State Government to remove any difficulty which may arise in giving effect to the provisions of the Act. A reading of the Act shows that it imposes a cess on ad **valorem** **basis** **at** **the** **rate** **of** **one per** **centum.** **of** **the** **sale** proceeds of the agricultural produce bought or sold or brought for processing in the notified market area on the dealer B c D carrying on business within the notified market area. The cess E **is** **in** **the nature** **of** **a compulsory** **exaction.** **'nle arrears** **of** **cess** **if** **any,** **can be recovered as arrears** **of** **land revenue,** **and** **any** **person** **who** **contravenes the** **provisions** **of** **the** **Act** **is** **liable** **to** **be** **prosecuted** **for** **an** **offence** **punishable under** **section** **5** **of** **the** Act. The Act, however, provides that the cess collected under ,, it shall be credited to the Fund for being spent as provided F ·"'in sub-section (5) of section 4 of the Act in the rural areas **in** **connection with the development** **of** **roads,** **hospitals,** **means** **of** **communication,** **water-supply,** **sanitation** **facilities** **and** **for** **the** **welfare** **of** **agricultural** **labour or** **for** **any** **other** **scheme** approved by the State Government for the development of rural **areas.** **The** **expression** **'rural** **area' has been** **defined** **in** **section** **G** 2(h) of the Act as an· area the population of which does not exceed 20,000 persons. These are the principal features of the Act. The appellants who became liable to pay the cess on the ~; coming into force of the Act questioned its validity before the High Court of Punjab & Haryana. The petitions filed by H them were first heard in the High Court by a single Judge. The 156 SUPREME COURT REPORTS [1986] 1 s.c.R • . A B c D E F G H learned single Judge found that the Act was unconstitutional and struck it down. Aggrieved by the decision of the learned -'. single Judge the State of Haryana filed a Letters Patent Appeal for the Division Bench of the High Court. The Division Bench allowed the appeal, set aside the judgment of the learned single Judge and upheld the constitutional validity of the Act. The writ petitions which had been filed by the appellants were dismissed. These appeals by special leave are filed against the judgment of the Division Bench of the High Court. It is convenient to reproduce here the relevant parts of sections 3 & 4 and sectiop 2(h) of the Act. r-· ·; "3. (1 )- With effect from such date, as the State Government may by notification appoint in this behalf, there shall be levied on the dealer for the **purposes** **of** **this** **Act,** **a** **cess** **on ad valorem** **basis,** at the rate of one per centum of the sale-proceeds of agricultural produce bought or sold or brought **for .proccessing in the** **notified** **market** **area ••••••••** 4. (1 )- There shall be constituted a fund called the llaryana Rural Development Fund and it shall **vest** **in** **the** **State** **Government •••••••••••••••••••••••** (3) The amount of cess paid to the officer or the person shall be credited to the Haryana Rural Development Fund within such period as may be prescribed. ( 4) To the credit of the Fund shall be placed ~). (a) all collections of cess under section 3, and (b) grants from the authorities. ~ ######,. State Government and local · (5) The Fund shall be applied by the State Govern**ment** **to** **meet** **the expenditure incurred,** **in** **the** **rural** **areas,** **in** **coIUlection with the development** **of** **roads,** **hospitals,** **means** **of** **coilllillnication,** **water-supply,** sanitation facilities and for the welfare of agricultural labour or for any other scheme approved by the State Government for the development of rural .o;_ areas. The Fund may also be utilised to meet the ;, cost of administering the Fund. O.P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J.] 157 2. (h)'rural area' means an area the population of **which does not exceed twenty thousand persons."** The principal contention urged by the appellants before us is that the cess levied under the Act is in the nature of a tax and it does not fall under any of the Entries in List II of the Seventh Schedule to the Constitution under which the State Legislature. can levy a tax. Although when the proceedings were pending in the High Court an attempt was made on the **part** **of** **the** **State** **to** **sustain** **the** **cess** **as a** **tax** **leviable** **under** A B c D E F G H -~. Entry 52 of the List II of the Seventh Sahedule to the Constitution which authorises a State Legislature to . levy **"taxes** **on** **the** **entry** **of** **goods** **into** **a** **local** **area** **for** **consump-** **tion,** **use ·or** **sale** **therein",** **neither** **the** **learned** **single** **Judge** nor the Division Bench accepted the said contention. In these appeals the said contention is not pressed before us. The ground on which the Division Bench upheld the constitutional validity of the cess was that it was in the nature of a fee **and,** **therefore,** **it** **could** **be** **levied** **as a** **fee** **imposed** **on** **dealers** **carrying** **on** **business within** **market** **area for** **services** **rendered** . '\ to them by the State Government. The very same contention is urged before us in these appeals on behalf of the State **Government. In support** **of** **its** **contention** **the** **State** **Government** **has** **relied** **upon** **the** **decisions** **of** **this** **Court** **in** **Sreenivasa** General Traders & Ors. etc. v. State of Andhra Pradesh & Ors. etc.,[1983] 3 S.C.R. 843., Municipal Corporation of Delhi and Ors. v. Mohd. Yasin etc., [1983] 2 S.C.R. 999., and Southern Pharmaceuticals & Chemicals Trichur & Ors. etc. v. State of Kerala & Ors. etc., [1982] l s.c.R. 519 and it is argued that **it** **is** **not** **necessary** **that** **there** **should** **be a** **direct** **correlation** between the levy and the services to be rendered and that such _J_ **correlation** **could** **be** **of** **"general** **character** **and** **not** **of** "· **ma.themeiical** **exactitude** **[0 ]** **•** **It** **is** **argued** **that** **in** **the** **instant** **cases** **there** **is** **a** **reciprocal** **relationship** **between** **the** **levy** **of** the fee and the services that are being rendered. It is submitted on behalf of the State Government that the impugned legislation had been enacted to fulfil the objectives contained in ArtiCles 46, 47, 48 and 48A of the Constitution, that the dealer from whom the cess is collected is only a **collecting** **agent** **_and** **the** **burden** **of** **the** **cess** **is** **passed** **on** **the** **next purchaser and** **that** **since** **out** **of** **91** **notified** **areas** **in** **the** **State** **of** **Haryana 61** **are** **located** **in** **the** **rural** **areas,** **the** #### ~ majority of dealers were directly benefited by the objects on ,....... **which** **the** **anx:>unt** **collected-as** **cess** **is** **spent.** # **l** A B c D E F G H 158 SUPREME COURT REPORTS [1986] 1 s.c.R. The fact that the Act is claimed to have been enacted _:"-_ pursuant to the ~irective Principles of State Policy contained in Articles 46, 47, 48 and 48A of the Constitution and that the dealers are permitted by the Act to pass on the cess to the purchaser of the agricultural produce from him have no bearing on the question involved here. In these appeals we are relieved of the necessity of finding out whether the cess in **question** **is** **a tax** **leviable** **by** **the** **State,** **since** **such a claim** **is** **not** **made** **before** **us..** **The** **only** **question** **which remains** **to** **be** considered is whether the cess levied under the Act is of the **natur_e** **of** **fee** **levied** **or** **leviable** **on a** **dealer** **in** **a market** **area.** The distinction between a tax and a fee is recognised by the **Constitution** **which while empowering Parliament** **and** **the** **State** Legislature to levy taxes under the relevant Entries in List I and List II respectively also refers to the power of the appropriate legislature to levy fees in respect of matters **specified** **in** **the** **said** **Lists** **and** **also** **in** **the** **Concurrent** **List** and tests have been laid down by this Court for determining the true character of a levy. In determining a levy as a fee _;,J_ **the** **true** **test** **must** **be** **whether** **its** **primary** **and** **essential** **purpose** **is** **to** **render** **specific** **serv.ices** **to** **a** **specified** **area** **or** **class** **it** **being** **of** **no** **consequence** **that** **the** **State** **may** **ultimately** and indirectly be benefited by it. As observed in M.P. V. Sundararamier & Co. v. The State of Andhra Pradesh & Anr., [1958] S.C.R. 1422., in List II of the Seventh Schedule to the **Constitution** **Entries** **1** **to** **44 form one group mentioning** **the** subjects on which the States can legislate and Entries 45 to 63 in that List form another group dealing with taxes that may be levied by States. Entry 64 refers to offences against laws with respect to any of the matters in List II and Entry 65 **refers** **to** **jurisdiction** **of** **courts.** **Entry 66** **empowers** **the** **State** ~) to levy fees in respect of any of the matters in List II. **Unless** **the** **cess** **in** **question** **can be brought under any** **of** **the** Entries from 45 to 63 it cannot be levied as a tax at all. It is no doubt truethat under Entry 66 of List II it is permissible for the State to levy any amount by way of fees in **respect** **of** **any** **of** **the** **mattersin** **that** **List.** **The** **relevant** **Entry** in the present case is Entry 28 dealing with ;Markets and **Fairs'** **but** **the** **amount** **so** **levied** **should** **be** **truly** **a** **fee** **and** **not** **a** **tax** **with** **the** **mask** **of** **a** **fee.** **The** **primary meaning** **of** **taxation** **is** **raising** **money** **for** **putposes** **of** **Government** **by** **means** **of** ~ **contributions** **from** **indiVidual** **persons,** **a compulsory** **exaction** **Jllllllll** of money by a public authority for public purposes enforceable **at** **law** **and** **.P.ot** **a payment** **for** **services** **rendered.** **"A** **tax·** **is** **a** A _B_ c D E F G H _)(_ ·l.. O.P.AGARwAL v. G.R.KlSHORI [VENKATARAMI.AH, J.] 159 compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for services rendered" is a famous statement of Latham C. J. in Matthews v. Chicory Marketing Board., 60 C.L.R, 263, 276. The above statement truly brings out the essential characteristics of a tax. This statement has been quoted with approval by our Court in The Commissioner, Hindu Religious Endowments, Madras v. Sri Lskshmindra Thirtha Swamiar of Sri Shirur Mutt., [1954] S.C.R. 1005. Mukherjea, J. who delivered the opinion of the Constitution Bench in the above case observed at pages 1040-41 thus: **11A** **neat** **definition** **of** **what** **'tax'** **means** **has been** given by Latham C.J. of. the High Court of Australia **in** **Matthews** **v.** **Chicory Marketing Board.** **'A** **tax',** **according** **to** **the learned Chief** **Justice,** **'is- a** **co.mpulsory** **exaction** **of** **money** **by** **public** **authority** for public purposes enforceable by law and is not **payment** **for** **services** **rendered'. This** **definition** **brings** **out** **in** **our** **opinion,** **the** **essential** **charac-** **teristiCs** **of** **a** **tax** **as** **distinguished** **from** **other** **forms** **of** **imposition which,** **in** **a** **general** **sense,** **are** **included** **within** **it.** **It** **is** **said** **that** **the** **essence** **of** **taxation** **is** **compulsion,** **that** **is** **to** **say,** **ft** **is** **imposed under** **statutory** **power** **without** **the** **tax-** **payer's** **consent** **and** **the** **payment** **is** enforce~ **by** **law.** **The** **second** **characteristic** **of** **tax** **is** **that** **it** **is** imposition made for public purpose without **reference** **to** **any** **special** **benefit** **to** **be** **conferred** **on** the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general **revenue,** **which** **when** **collected** **forms** **part** **of** **the** public revenues of the State. As the object of a tax is not to confer any special benefit upon any **particular** **individual,** **there** **is,** **as** **it** **is** **said** **no** element of quid .l'.!:Q. quo between the tax-payer and the public authority. Another feature of taxation **is** **that** **as** **it** **is** **a part** **of** **the** **common** **burden,** **the** quantum of imposition upon the tax-payer depends generally upon his capacity to pay." The three principal characteristics of a tax noticed by Mukherjea, J. in the above passage are: (i) that it is imposed under statutory power without the tax-payer's consent and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is A B ###### c D E F G H 160 SUPm!E COURT REPORTS [1986) l s.c.R. apart of the common burden, the quantum of imposition upon the tax-payer depending generally upon the capacity of the taxpayer to pay. As regards fees Mukherjea, J, observed in the above decision thua: "Coming now to fees, a "fee" is generally defined to be a charge for a special service rendered to ·individuals by some govermental agency. The amount _of_ fee levied is supposed to be based on the expenses incurred by the government in rendering the service, though in many cases the costs are arbitrarily assessed. Ordinarily, the fees are uniform and no account is taken of the varying abilities of different recipients to pay. These are undoubtedly some of the general characteristics, but as there may be varioua kinds of fees, it is not possible to formulate a definition that would be applicable to all cases. **x x x x x x x x x x x x x** If, as we hold, a fee is regarded as a sort of return or consideration for services rendered, it is absolutely necessary that the levy of fees should on the face of the legislative provision, be correlated to the expenses incurred by government in rendering the services." In Sreenivasa General Traders & Ors. (supra) the fee which ·was collected was payable to the marketing comnittee · and . it WllS to be spent by the marketing committee on purposes for which it was establi'shed. In Municipal Corporation of Delhi ' Ors. V• **Mohd.** Yasin etc. (supra) the aOX>unt collected by the Municipal· Corporation was spent on the limited purposes for which it bad ·be.,n established. In Southern Pharmaceuticals & **Cbemicala** Trichur & Ors. (supra) it was held that there wss a broad correlation between the fee collected and the cost of the establishment needed for the enforcement of the Abkari Act which came up for consideration in that case insofar as the **licences** **were concerned.** **In** **none** **of** **these** **three** **cases** **it** **has** been stated that a fee may be validly imposed when no services either directly or indirectly are rendered to the person from whom it is collected. These cases are indeed distinguishable from the present case. In each of these cases it was held that the levy satisfied the tests of a fee. O,P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J.] 161 _As_ mentioned earlier a cess collected under section 3 of the Act is no doubt required to be credited to the Fund constituted under section 4(1) of the Act. The Fund, however, vests in the State Government and not in the municipality or a marketing committee or any other local authority having limited functions specified in the enactment under "hich it is constituted. The State Government is entitled under subsection (5) of sectfan 4 of the Act to spend the cess, credited to the Fund, in the rural areas, in connection with the development of roads, hospitals, means of communication, water-supply, sanitation facilities and for the welfare of agricultural labour or for any other scheme approved by the State Government for the development of the rural areas. This sub-section authorises the State Government to spend the money credited to the Fund virtually on any object which the State **Government** **considers** **to** **be** **the** **development** **of** **rural** **areas.** **The** definition of the expression 'rural area' in section 2(h) of the Act which is extracted above is as vague as it can be. It means an area the population of "hich does not exceed 20,000 **person.** **-It** **need** **not** **necessarily** **be** **a** **local** **area** **as** **it** **is** ordinary understood. Ordinarily a local area means a Municipal Corporation, a Town Municipality, a Panchayat, a Notified Area, a Sanitary Board etc. Any geographical area the population of which does not exceed 20,000 persons can be conveniently brought within the scope of section 2(h) of the Act. If it is understood that way even urban areas can be divided into areas with population not exceeding 20,000 and labelled as **rural** ~reas. **Even** **if** **we** **exclude** **from** **the** **scope** **of** **the** **expres-** **sion** **'rural.** **area',** **a town or a** **city** **having a** **population** exceeding 20,000 persons, the area in which the amourtt credited to the Fund can be spent is alm<ist 90 per cent ·of the '\ total area of the State of Haryana. The amount may be spent on any purpose which the .State Government considers to be purpose intended for the development of the rural areas. There is no specification in the Act that the amount or a substantial part of the amount collected by way of cess under section 3 of the Act will be spent on ariy public purpose within the market area where the dealer is carrying on his business. The purposes over which the Fund can be spent are the same purposes on which any amount collected by way of tax is spent by any State and there is nothing which . is done specially to benefit the dealer •. When any amount is spent from the Fund the interest of the dealers is not at all kept in view even generally. There is no other ·restriction imposed on the manner in which the **Fund** **can be** **spent.** **The** **cess,** **therefore,** **partakes** **of** **the** A B c D E F G H 162 SUPREME COURT REPORTS (1986] l s.c.R. A character of a part of the connnon burden which has to be levied and collected only as a tax. A dealer who pays the cess ..._ under the Act may as one of the members of the general public derive some benefit from the expenditure of the Fund incurred by the State Government. The benefit .so derived by him is merely incidental to the fact that he happens to be person residing in the State of Haryana. It is not 'the same as the Jl benefit which a dealer in a market area would derive by the expenditure of its funds by a marketing committee or as the benefit which a person living in a town or a city would derive .~ by the expenditure incurred by the municipality concerned. The fact that the Fund is created under the Act is a mere cloak to cover the true character of the levy in question. There is c practically no difference between the Consolidated Fund which vests in the State and Fund which also vests in the State. Amunts credited to the Consolidated Fund and the ruoounts credited to the Fund can both be spent practically on any public purpose almost throughout the State. In such a situation it is difficult to hold that there exists any D correlation between the amount paid by way of cess under the ·;; Act and the services rendered to the person from whom it is collected. The impost in these cases lacks the essential qualification of a fee namely 'that it is absolutely necessary that the levy of fees should on the face of the legislative provision, be correlated to the expenses incurred by E Government in rendering services' (See Sri Shirur Mutt's case (supra). In fact there is no correlation at all. . Reliance is, however, placed on behalf of the State Government on the decision of this Court in The Hingi~r Coal Co. Ltd. & Ors. v. The State of Orissa & Ors., in which ###### the validity of the Orissa Mining Areas Development Fund Act, > F 1952 was upheld. In that case the question was whether the, cess levied thereunder was a fee or a duty of excise on coal within Entry 84 of List I of the Seventh Schedule to the Constitution. This Court case to the conclusion that it was an **amount** **levied** **essentially** **for** **services** **rendered** **in** **the** **areas** which were declared as mining areas in the State of Orissa. In G that case the mining area involved was about 3341. 79 acres, H that case the mining area involved was about 3341. 79 acres, i.e. about 5,5, sq. miles. The cess collected in that Act could be spent on improving the communication, by constructing good roads, supply of water and education to the labour force in order to attract workmen to the mining area in question. ~ The case before us is entirely different from the above said case. As mentioned earlier, the amount collected by way of cess under the Act can be spent by the State Government at its . O.P,AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J,] 163 will on any purpose which it considers to be the development of alDDst the entire rural area of the State of Haryana. It is constitutionally impermissible .for any State Government to collect any aDDunt which is not stri.ctly of the nature of a fee- in the guise of a fee. If in the guise of a fee the legislation imposes a tax it is for the Court on scrutiny of the scheme of the levy to determine its real character. If on a true analysis of the provisions levying the amount, the Court comes to the conclusion that it is, in fact, in the nature of a tax and not a fee, its validity can be justified only by bringing it under any one of the Entries in List II of the Seventh Schedule to the Constitution under ## **J** which the State can levy a tax. The State Government has failed in. this case to do so. The levy according to us not a fee as claimed by the State but it is a tax not leviable by it. The levy of the cess under section 3 is, therefore, liable to be -quashed. Section 3 being the charging section and the rest of the sections of the Act being just machinery or incidential provisions, the whole Act is liable to ·be quashed. We, therefore, ·declare the entire Act, i.e. the Haryana Rural Development Fund Act, 1983 as unconstitutional on the ground that the State Legislature was not competent to enact it. A B c D E **These** **appeals,** **therefore,** **succeed.-** **The** **judgre.nt** **of** **the** Division Bench of the High Court is set aside and the Act is declared void. A writ shall issue to the State Government in these appeals directing the State Government notto enforce the Act against the appellants.~ There shall, however, be no order F **as** **to** **costs.** **M.L.A.** Appeals allowed.