Arjun Flour Mills vs The State Of Odisha Finance Department Secretary

REPORTABLE
2026 INSC 1192


IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8763 OF 1994

ARJUN FLOUR MILLS APPELLANT (S)
VERSUS
THE STATE OF ODISHA FINANCE
DEPARTMENT SECRETARY & ORS.
RESPONDENT (S)

W I T H

CIVIL APPEAL NO. 8909 OF 1994
CIVIL APPEAL NO. 7485 OF 2001
CIVIL APPEAL NO. 98 OF 2003
SPECIAL LEAVE PETITION (CIVIL) NOS. 22159-22180 OF 2002
CIVIL APPEAL NOS. 831-850 OF 2003
CIVIL APPEAL NO. 851 OF 2003
CIVIL APPEAL NO. 99 OF 2003
CIVIL APPEAL NO. 100 OF 2003
CIVIL APPEAL NO. 5046 OF 2003
Signature Not Verified
CIVIL APPEAL NO. 5637 OF 2008
Digitally signed by
VISHAL ANAND
Date: 2026.11.04
17:57:25 IST
Reason:

Page 1 of 47

JUDGEMENT
SURYA KANT, CJI.
A. PROLOGUE

1. The present reference raises a question as to the legislative
competence of a State Legislature, to levy a tax on the sale or
purchase of goods under Entry 54 of List II of the Seventh Schedule
to the Constitution on sales tax payable by a dealer rather than
directly on his turnover.
2. The dichotomy in interpretation arises on account of competing
claims wherein it is the contention of the assessees that such a levy
could be construed as a ‘tax on tax’. It was urged that a levy
measured by the quantum of tax already payable does not fall upon
the ‘sale’ or ‘purchase of goods’, which alone is the subject of Entry
54 of List II, but is, in substance, a levy upon the ‘income’ or the
‘fiscal burden’ of the dealer, and therefore lies beyond the
competence of the State Legislature. The States, on the other hand,
maintain that such a surcharge is nothing more than an
enhancement of the rate of sales tax for a class of dealers, and that
the mode of its computation does not alter its essential character as
a tax on sales.
Page 2 of 47

3. This issue, over the course of nearly three decades, has travelled
from a Two Judge Bench to a Constitution Bench, and thence to a
Seven Judge Bench for consideration. However, it appears that the
legal landscape against which the reference was made has since
undergone a fundamental transformation.

4. In the years during which the reference remained pending, the legal
landscape against which it was made has not stood still. Three
developments, in particular, call for close examination. First , the
decision of a Seven Judge Bench in India Cement Ltd. & Ors. v.
1
State of Tamil Nadu & Ors. , which was perceived to have
unsettled the law, has since been revisited by a Nine Judge Bench in
Mineral Area Development Authority & Anr. v. Steel Authority
2
of India & Anr . Second , the question whether such a levy falls
within the competence of the State Legislature was considered by a
3
Constitution Bench in S. Kodar v. State of Kerala , and the
continued authority of that decision must be assessed in the light of
these subsequent developments. Third , the sales tax regime under
which the impugned levies were imposed has since given way to
newer legislation, first the Value Added Tax enactments and
thereafter the Goods and Services Tax Act, 2017. Each of these

1
(1990) 1 SCC 12.
2
(2024) 10 SCC 1.
3
(1974) 4 SCC 422.
Page 3 of 47

developments bears upon whether the reference continues to survive,
and we shall examine them in the brief course of this judgment.
5. The narrower question which, therefore, falls for our consideration at
the threshold is whether the reference continues to survive for
adjudication by this Bench, or whether, in the light of these
subsequent developments, it has been rendered academic. Since the
answer to that question depends on a careful appreciation of the
impugned levies, the constitutional framework, the decisions that
gave rise to the reference, and the subsequent developments, we
deem it appropriate to set out each of these in some detail before
recording our conclusions.
B. THE IMPUGNED LEVIES

6. The matters before us arise out of three distinct sets of proceedings,
which, though tagged together on account of a common question, are
not identical in all respects. It would, therefore, be beneficial to
notice each of them separately.
B.1. T HE O RISSA S URCHARGE UNDER S ECTION 5-A OF THE O RISSA S ALES T AX
A CT , 1947
7. The lead matter arises out of a challenge to Section 5-A of the Orissa
Sales Tax Act, 1947 ( Orissa Act ), which was inserted by the Orissa
Sales Tax (Amendment) Act, 1990, with effect from 01.07.1990. The
provision required every dealer whose gross turnover exceeded Rs. 10
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lakhs to pay, in addition to the tax payable under the Orissa Act, a
surcharge of 10 per cent of the total tax payable.
8. To put it simply, the structure of the levy demonstrated that the
charge under the Orissa Act continued to be upon the sale or
purchase of goods, at the rates prescribed. However, for the class of
dealers whose gross turnover crossed the statutory threshold, the
quantum of tax so computed was enhanced by one-tenth. The
surcharge did not arise independently of the sales tax; it attached
only to a dealer who was liable to pay sales tax, and it rose or fell in
direct proportion to the tax payable by him, which, in turn, rose or
fell with his taxable turnover.
9. The challenge laid by the appellants is that, because the surcharge is
computed with reference to the tax payable and not with reference to
the turnover, it is not a tax on the sale or purchase of goods within
the meaning of Entry 54 of List II, but a tax on a tax, for which no
entry in List II authorises.
B.2. T HE P UNJAB S URCHARGE UNDER S ECTIONS 5(1-C) AND 30-AA OF THE
UNJAB ENERAL ALES AX CT
P G S T A , 1948
10. The second set of matters arises from the State of Punjab, where
Section 5(1-C) of the Punjab General Sales Tax Act, 1948 ( Punjab
Act ) is materially similar to Section 5-A of the Orissa Act. It imposes
a similar surcharge at the rate of 10 per cent, calculated on the tax
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payable by a dealer on his taxable turnover, rather than on the
turnover itself.
11. The Punjab Act, however, contains a further feature. Section 30-AA
thereof provides that industrial units which were otherwise exempted
from the payment of sales tax under Section 30-A, by way of
incentive or otherwise, would nonetheless be liable to pay the
surcharge. This provision, therefore, raises an additional question,
namely, whether a surcharge which is described as a percentage of
the tax payable can be levied upon a unit which, by reason of an
exemption, has no tax liability, and whether such a levy retains its
character as a surcharge on sales tax.
12. The Punjab and Haryana High Court upheld the validity of both
Section 5(1-C) and Section 30-AA of the Punjab Act. The special leave
petitions preferred against the said judgment expressly frame their
challenge as raising the very question under Entry 54 of List II which
had, by then, been referred to a larger Bench in the lead matter. It is
in this manner that these issues came to be tagged with the present
batch.
B.3. T HE C ESS UNDER THE P UNJAB S OCIAL S ECURITY A CT , 2000
13. The third set of matters arises out of challenges to the Punjab Social
Security Act, 2000. Under the said enactment, the State of Punjab
imposed a cess, calculated as a percentage of the sales tax payable
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by a dealer, the proceeds of which were earmarked for funding social
security measures through the Punjab Social Security Fund.
14. The High Court of Punjab and Haryana struck down the said
enactment, holding, inter alia , that the proceeds of the cess could not
be credited directly to the Punjab Social Security Fund without first
forming part of the Consolidated Fund of the State under Article 266
of the Constitution. The State of Punjab has assailed those
judgments before this Court.
15. The aforementioned matters, therefore, raise an issue which is
wholly distinct from the question referred, namely, the constitutional
mode in which revenues raised by the State are to be received and
appropriated. They have been tagged with the present batch only
because they also involve the anterior question as to whether the
State Legislature was competent, under Entry 54 of List II, to impose
such a levy in the first place.
16. It may thus be seen that while all three sets of matters share a
common question of legislative competence, the second and third
sets raise further questions which are peculiar to them, and which
were not necessarily the subject matter of the reference. This
particular aspect shall be revisited towards the later part of this
judgment.
Page 7 of 47

C. THE CONSTITUTIONAL FRAMEWORK
C.1. T HE D ISTRIBUTION OF T AXING P OWERS
17. The scheme of distribution of legislative powers under the
Constitution is contained in Article 246, read with the three Lists in
the Seventh Schedule. Article 246(3) expressly confers upon the
Legislature of a State the exclusive power to make laws with respect
to the matters enumerated in List II, subject to clauses (1) and (2) of
the said Article. Article 265, in turn, mandates that no tax shall be
levied or collected except by authority of law, which necessarily
means a law enacted by a Legislature competent in that behalf.
18. It is a settled feature of our constitutional scheme that the power to
tax is not to be inferred from a general legislative entry, but must be
traced to a specific taxing entry. This Court, in M.P.V.
4
Sundararamier & Co. v. State of Andhra Pradesh , noticed that
in the Lists, the entries relating to taxation are enumerated
separately from the general subjects of legislation, and that the
power to tax a subject is not comprised within the power to legislate
generally upon that subject. The question of competence in the
present batch must, therefore, be answered by reference to the
taxing entry invoked by the States, namely, Entry 54 of List II.

4
AIR 1958 SC 468.
Page 8 of 47

19. During the time material to the present batch, and prior to its
substitution by the Constitution (One Hundred and First
Amendment) Act, 2016, Entry 54 of List II used to be read as follows:
“ 54. Taxes on the sale or purchase of goods other
than newspapers, subject to the provisions of Entry
92-A of List I. ”
20. The entry thus conferred upon the State Legislatures a plenary
power to tax the sale or purchase of goods, other than newspapers,
subject only to the provisions of Entry 92-A of List I, which reserves
to Parliament the power to tax sales or purchases in the course of
inter-State trade or commerce. The amplitude of this power was
emphasised by a Three Judge Bench of this Court in Hoechst
5
Pharmaceuticals Ltd. & Ors. v. State of Bihar & Ors. , in the
following terms:
“72. ... It is axiomatic that the power of the State
legislature to make a law with respect to the levy and
imposition of a tax on sale or purchase of goods
relatable to Entry 54 of List II of the Seventh Schedule
and to make ancillary provisions in that behalf, is
plenary and is not subject to the power of Parliament
to make a law under Entry 33 of List III. ... When one
entry is made 'subject to' another entry, all that it
means is that out of the scope of the former entry, a
field of legislation covered by the latter entry has
been reserved to be specially dealt with by the
appropriate legislature. Entry 54 of List II of the
Seventh Schedule is only subject to Entry 92-A of
List I ...”

5
(1983) 4 SCC 45.
Page 9 of 47

21. It is equally well established that a legislative entry, particularly a
taxing entry, should be given its broadest amplitude, and that every
ancillary or subsidiary matter that may fairly and reasonably be
understood as falling within it is included within its ambit.
Accordingly, the power to tax the sale or purchase of goods
necessarily encompasses the power to determine the tax rate, vary
the rate according to turnover volume, identify the class of dealers on
whom the tax burden is imposed, and prescribe how the tax is to be
computed, assessed, and recovered.
HE UBJECT OF A AX AND ITS EASURE
C.2. T S T M
22. In this legal background, the submission that a surcharge computed
on the tax payable is a ‘tax on tax’ draws its force from a conflation
between two distinct concepts, namely, the subject matter of a tax
and the measure by which the tax is quantified. The distinction
between the two is now firmly entrenched in our jurisprudence. To
explicate, the subject of a tax is the taxable event whereupon the levy
is imposed, thereby determining the legislative entry to which the law
is relatable, whereas the measure of the tax is the yardstick adopted
by the Legislature to compute the quantum payable.
6
23. This Court, in Union of India v. Bombay Tyre International Ltd. ,
in the context of a duty of excise, held that the nature of the levy is

6
(1984) 1 SCC 467.
Page 10 of 47

to be distinguished from the measure of the levy, and that the
measure adopted for assessing a tax does not determine its
character. To the same effect is the decision in Federation of Hotel
7
& Restaurant Association of India v. Union of India , where it
was observed that the measure employed for assessing a tax must
not be confused with the nature of the tax, and that the Legislature
has, within reasonable limits, a wide latitude in selecting
the measure.
24. It may also be observed that the device of computing a levy as a
percentage of another tax is neither novel nor unique to the States.
The Constitution itself, in Article 271, empowers Parliament to
increase the duties or taxes referred to in Articles 269 and 270 by a
surcharge for purposes of the Union. A surcharge on income tax, for
instance, has always been computed as a percentage of the income
tax payable, and it has never been suggested that such a surcharge
is, for that reason, a tax on a tax charge that falls outside the entry
under which the principal tax is levied. The surcharge is understood,
on all hands, to be an enhancement of the principal levy, partaking
of its character and drawing its validity from the same source.
25. The position thus can be no different when a State Legislature,
acting within its own taxing entry, enhances the tax on the sale or

7
(1989) 3 SCC 634.
Page 11 of 47

purchase of goods for a class of dealers by adopting the same mode
of computation.
D. THE PRECEDENTIAL LANDSCAPE

26. Having briefly traced the constitutional framework that animates the
present controversy, it would be apposite to turn to the three
decisions of this Court which lie at the heart of the reference. Two of
them have upheld levies of the very kind impugned before us; the
third, rendered in an altogether different context, was perceived to
cast a shadow upon them. Each of these decisions warrants careful
examination, as whether the reference remains viable depends, to a
significant extent, on what they decided, or perhaps what they did
not decide.
HE IRST NSTANCE
D.1. T F I
27. The earliest, and in our view the most significant, of these decisions
is that of a Five Judge Bench in S. Kodar (supra) concerning a
batch of writ petitions and civil appeals challenging the validity of the
Tamil Nadu Additional Sales Tax Act, 1970.
28. It is pertinent to note that the scheme of that enactment bears a
striking resemblance to the provisions impugned before us. Section
2(1) thereof provided that the tax payable under the Tamil Nadu
General Sales Tax Act, 1959, shall, in the case of a dealer whose
total turnover for a year exceeds Rs. 10 lakhs, be increased by an
Page 12 of 47

additional tax at the rate of 5 per cent of the tax payable by that
dealer for that year. Section 2(2) provided that, notwithstanding
anything contained in the principal enactment, no dealer referred to
in sub-section (1) shall be entitled to collect the additional tax
payable under the said sub-section. A similar levy was imposed by
Section 3 upon importers and wholesale dealers under the Tamil
Nadu Sales of Motor Spirit Taxation Act, 1939.
29. It is, therefore, evident that the additional tax considered in S.
Kodar (supra) was computed precisely in the manner in which the
levies before us are computed, namely, as a percentage of the tax
payable by the dealer, and not as a percentage of his turnover.
Indeed, the levy in S. Kodar (supra) went a step further than the
Orissa surcharge, inasmuch as it expressly prohibited the dealer
from passing on the incidence of the additional tax to the purchaser.
30. The first contention urged before the Constitution Bench therein was
that the State Legislature had no power to enact the said Act, since
the tax imposed thereby was a tax on the income of the dealer, and
the imposition of such a tax was outside the scope of Entry 54 of List
II. The contention was emphatically rejected, in the following terms:
“9. As regards the contention that the State
Legislature has no power to pass the measure, we
are of the view that additional tax is really a tax on
the sale of goods. The object of the Act, as is clear
from its provisions, is to increase the tax on the sale
Page 13 of 47

or purchase of goods imposed by Tamil Nadu General
Sales Tax Act, 1959 and the fact that quantum of the
additional tax is determined with reference to the
sales tax imposed would not alter its character. It
may be noted that additional tax is to be imposed
only if the turnover of a dealer exceeds Rs 10 lakhs. It
is in reality a tax on the aggregate of sales effected by
a dealer during a year. The additional tax, therefore,
is an enhancement in the rate of the sales tax when
the turnover of a dealer exceeds Rs 10 lakhs a year
and it is a tax on the aggregate of the sales affected
by the dealer during the year. ... This is the correct
view. Entry 54 in List II authorises the state
legislature to impose a tax on the sale or purchase of
goods. So, the contention of the appellants that the
additional sales tax is not a tax on sales but on the
income of the dealer is without any basis.”
31. Three aspects of this reasoning merit emphasis: First , the
Constitution Bench identified the object of the enactment as being to
increase the tax on the sale or purchase of goods. Second , it held
that the quantum of the additional tax is determined with reference
to the sales tax imposed, which would not alter its character. This is
a direct answer to the very contention which is now advanced before
us. Third , it characterised the additional tax as an enhancement in
the rate of sales tax for a particular class of dealers, and therefore as
a tax on the aggregate of the sales effected by them.
32. The Constitution Bench then dealt with the contention that, since
the dealer was prohibited from passing on the incidence of the
additional tax to the purchaser, the additional tax was, unlike sales
tax, a tax on the income of the dealer which he must pay whether or
not he makes any profit. That contention, too, was repelled:
Page 14 of 47

“12. The legal incidence of a tax on sale of goods
under the Tamil Nadu General Sales Tax, 1959 falls
squarely on the dealer. It may be that he can add the
tax to the price of the goods sold and thus pass it on
to the purchaser. But it is not necessary that the
dealer should be enabled to pass on the incidence of
the tax on sale to the purchaser in order that it might
be a tax on sales of goods.
*
15. As we said, the additional tax is a tax upon sales
of goods and not upon the income of a dealer and so
long as it is not made out that the tax is confiscatory,
it is not possible to accept the contention that because
the dealer is disabled from passing on the incidence
of tax to the purchaser, the provisions of the Act
impose an unreasonable restriction upon the
fundamental rights of the appellants under Article
19(1)(g) or 19(1)(f).”

33. In reaching this conclusion, the Constitution Bench relied upon the
8
decisions in J.K. Jute Mills Co. Ltd. v. State of U.P. , and Konduri
9
Buchirajalingam v. State of Hyderabad , which, in turn, followed
10
Tata Iron and Steel Co. Ltd. v. State of Bihar , for the
proposition that it is not an essential characteristic of a sales tax
that the seller must have the right to pass it on to the consumer, and
that a tax can be a sales tax though the primary liability for it is
placed upon a person without giving him any power to recoup it from
any other party.
34. Finally, the Constitution Bench turned down the challenge under
Article 14, holding that a classification of dealers on the basis of their

8
(1962) 2 SCR 1.
9
AIR 1958 SC 756.
10
(1958) 9 STC 267.
Page 15 of 47

turnover, for the purpose of graded imposition, is founded upon an
intelligible differentia, since the large dealer occupies a position of
economic superiority by reason of the greater volume of his business,
and that to make his tax heavier, both absolutely and relatively, is
not arbitrary discrimination but an attempt to proportion the
payment to the capacity to pay.
35. The ratio of S. Kodar (supra) , insofar as it bears upon the present
batch, may thus be summarised as follows: an additional tax or
surcharge, imposed upon a class of dealers and computed as a
percentage of the sales tax payable by them, is in substance an
enhancement of the rate of sales tax, and is therefore a tax on the
sale or purchase of goods within Entry 54 of List II; and it does not
cease to be so either because its quantum is determined with
reference to the sales tax payable, or because the dealer is precluded
from passing it on to the purchaser.
D.2. R EAFFIRMATION OF THE PRINCIPLE IN THE S ECOND C ASE
36. The principle laid down in S. Kodar (supra) was applied, nearly a
decade later, by a Three Judge Bench in Hoechst Pharmaceuticals
(supra) . The levy in that case was a surcharge under Section 5(1) of
the Bihar Finance Act, 1981, which, by notifications dated
15.01.1981, was fixed at the rate of 10 per centum of the total
amount of the tax payable by a dealer whose gross turnover during a
Page 16 of 47

year exceeded Rs. 5 lakhs, in addition to the tax payable by him.
Section 5(3) of the said Act prohibited such a dealer from collecting
the amount of the surcharge from the purchaser. The levy was, in
every material particular, more or less identical to the surcharge
under Section 5-A of the Orissa Act.

37. At the very outset, the principles laid down in S. Kodar (supra)
stated as follows:
“10. In Kodar case, this court upheld the
constitutional validity of the Tamil Nadu Additional
Sales Tax Act, 1970 which imposes additional sales
tax at 5 per cent on a dealer whose annual gross
turnover exceeds Rs 10 lakhs. The charging provision
in sub-section (1) of Section 2 of that Act is in terms
similar to sub-section (1) of Section 5 of the Act, and
provides that the tax payable by a dealer whose
turnover for a year exceeds Rs 10 lakhs shall be
increased by an additional tax at the rate of 5 per
cent of the tax payable by him. ... The court laid down
that: (1) The additional tax levied under sub-section
(1) of Section 2 of that Act was in reality a tax on the
aggregate of sales effected by a dealer during a year
and therefore the additional tax was really a tax on
the sale of goods and not a tax on the income of a
dealer and therefore falls within the scope of Entry 54
of List II of the Seventh Schedule. ...”
38. It is true that before the Bench in Hoechst Pharmaceuticals
(supra) , the relatability of the surcharge to Entry 54 of List II was not
seriously disputed. The Court recorded as follows:
“13. It is fairly conceded that not only sub-section (1)
of Section 5 of the Act which provides for the levy of
surcharge on dealers whose gross turnover during a
year exceeds Rs 5 lakhs, but also sub-section (3) of
Section 5 of the Act which enjoins that no dealer who
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is liable to pay a surcharge under sub-section (1) shall
be entitled to collect the amount of surcharge payable
by him, are both relatable to Entry 54 of List II of the
Seventh Schedule ...”
39. The principal distinction in Hoechst Pharmaceuticals (supra) was,
therefore, fought on a different terrain, namely, the alleged
repugnancy between Section 5(3) of the Bihar Finance Act and
paragraph 21 of the Drugs (Prices Control) Order, 1979, issued
under the Essential Commodities Act, 1955, which permitted
manufacturers of drugs to pass on the liability to pay sales tax. The
Court rejected that challenge, holding that the State's power of
taxation under Entry 54 of List II is plenary and is not subject to the
power of Parliament under Entry 33 of List III.
40. However, it would not be correct to say that Hoechst
Pharmaceuticals (supra) did not engage at all with the character of
the surcharge. While dealing with the challenge under Article 14, the
Court observed that ‘ a surcharge in its true nature and
character is nothing but a higher rate of tax to raise revenue
for general purposes ’. More significantly, while dealing with the
challenge under Article 19(1)(g), the Court squarely confronted the
contention that the surcharge was, in truth, a tax on income, and
rejected it, in the following terms:
“83. ... It is urged that the surcharge does not retain
its avowed character as sales tax but in its true
nature and character is virtually a tax on income, by
Page 18 of 47

reason of the limitation contained in sub-section (3) of
Section 5 of the Act. We are not impressed with the
argument. Merely because a dealer falling within the
class defined under sub-section (1) of Section 5 of the
Act is prevented from collecting the surcharge
recovered from him, does not affect the competence of
the State legislature to make a provision like sub-
section (3) of Section 5 of the Act nor does it become a
tax on his income. It is no doubt true that a sales tax
is, according to the accepted notions, intended to be
passed on to the buyer, and the provisions
authorizing and regulating the collection of sales tax
by the seller from the purchaser are a usual feature of
sales tax legislation. But it is not an essential
characteristic of sales tax that the seller must have
the right to pass it on to the consumer, nor is the
power of the legislature to impose a tax on sales
conditional on its making a provision for sellers to
collect the tax from the purchasers. ...”
41. It is thus evident that the Court independently considered and
rejected the contention that a surcharge computed on the tax
payable is, in substance, a tax on income. In any event, the absence
of a full-fledged discussion in Hoechst Pharmaceuticals (supra) is
of little consequence, since the question had already been
authoritatively determined by the Constitution Bench in S. Kodar
(supra) , which, being binding upon the Three Judge Bench, was
faithfully applied.
D.3. T HE T HIRD C ASE AND THE C ONUNDRUM
42. The third decision, and the one which is said to have given rise to the
difficulty, is that of a Seven Judge Bench in India Cement (supra) It
is necessary to notice at the outset that the said decision was not
concerned with sales tax at all.
Page 19 of 47

43. The appellant in that case held mining leases in respect of limestone
and kankar, and was liable to pay royalty to the State Government
under Section 9 of the Mines and Minerals (Regulation and
Development) Act, 1957 ( MMDR Act ). Section 115 of the Madras
Panchayats Act, 1958, as amended, levied a local cess at the rate of
45 paise on every rupee of land revenue payable, and the
Explanation to Section 115(1) deemed ‘land revenue’ to include
royalty payable in respect of minerals. Section 116 of the said Act
empowered every panchayat union council to levy a local cess
surcharge ‘ as an addition to the local cess levied ... under Section
115 ’. The effect of these provisions was that a cess, and a surcharge
upon that cess, came to be levied upon the royalty payable by
mining lessees.
44. Section 116 of the Madras Panchayats Act, as it stood at the relevant
time, and as extracted in paragraph 7 of the judgment, read
as follows:
“116. Every panchayat union council may levy on
every person liable to pay land revenue to the
government in respect of any land in the panchayat
union a local cess surcharge at such rate as may be
considered suitable as an addition to the local cess
levied in the panchayat development block under
Section 115 provided that the rate of local cess
surcharge so levied shall not exceed two rupees and
fifty paise on every rupee of land revenue payable in
respect of such land.”
Page 20 of 47

45. It may thus be seen that the local cess surcharge under Section 116
was itself a levy computed as an addition to another levy. Yet, the
question that engaged the Seven Judge Bench was not whether a
levy computed on another levy is permissible as such, but whether
the State was competent to levy a cess, and a surcharge upon it, on
royalty. The answer to that question turned entirely upon the nature
of royalty and the field occupied by the MMDR Act.
46. The central question before the Seven Judge Bench was whether the
State Legislature was competent to levy such a cess on ‘royalty’. The
State sought to sustain the levy under Entries 45 (land revenue), 49
(taxes on lands and buildings) and 50 (taxes on mineral rights) of
List II. The Court, speaking through Sabyasachi Mukharji, J. ( as his
Lordship then was ), rejected each of these justifications, and
concluded as follows:
“34. In the aforesaid view of the matter, we are of the
opinion that royalty is a tax, and as such a cess on
royalty being a tax on royalty, is beyond the
competence of the State legislature because Section 9
of the Central Act covers the field and the State
legislature is denuded of its competence under Entry
23 of List II. In any event, we are of the opinion that
cess on royalty cannot be sustained under Entry 49
of List II as being a tax on land. Royalty on mineral
rights is not a tax on land but a payment for the user
of land.”
47. The Court thus declared the cess under Section 115 of the Madras
Panchayats Act to be ultra vires ; the State of Tamil Nadu was
Page 21 of 47

restrained from enforcing the same, and it was directed that the
respondents would not be liable for any refund of cess already paid
or collected.
48. In his concurring opinion, G.L. Oza, J. approached the matter from a
somewhat different perspective. The learned Judge observed that it
was ‘ not very material ’ whether royalty is a tax. He found that the
cess was ‘ nothing but an additional tax ’, which would fall within
Entry 49 of List II if levied on land revenue. A cess charged on
royalty, however, could not be called a levy on land and could not be
sustained under Entry 49.
49. Read as a whole, the decision in India Cement (supra) turned upon
the following considerations: ( i ) the subject of the impugned cess was
royalty, which was payable under a Central enactment, namely, the
MMDR Act; ( ii ) the field of royalty on minerals was fully occupied by
Section 9 of the MMDR Act, made under Entry 54 of List I, so that
the State Legislature stood denuded of its competence under Entries
23 and 50 of List II; and ( iii ) royalty was not land revenue, nor was a
cess on royalty a tax on land, so the Entries 45 and 49 of List II were
also unavailable. The observation that ‘ royalty is a tax ’ was the
premise on which the cess was characterised as a ‘ tax on royalty ’,
and therefore as a levy falling within a field occupied by Parliament.
Page 22 of 47

50. It is of some significance that the decision in India Cement (supra)
did not hold that a levy computed as a percentage of another tax is,
for that reason alone, beyond the competence of the Legislature
which imposed the principal tax. On the contrary, as we have
noticed, the Seven Judge Bench expressly approved the principle laid
11
down in M/s Guruswamy & Co. etc. v. State of Mysore & Ors.
that a cess levied as an increment to an existing tax must be judged
in the same way as the tax to which it is levied. The invalidity of the
cess in India Cement (supra) flowed not from the mode of its
computation, but from the fact that the very foundation of its
increment, namely, ‘royalty’, was itself treated as a levy, for which
the State Legislature had no competence to impose or to tax.
E. THE GENESIS AND JOURNEY OF THE REFERENCE
51. It was against the backdrop of the three decisions explained above
that the lead matter first came up for consideration before a Two
Judge Bench (comprising S.P. Bharucha and V.N. Khare, JJ.). By an
order dated 13.08.1998, the Bench took the view that Hoechst
Pharmaceuticals (supra) and India Cement (supra) appeared to
take different views on the true nature of a levy which is computed
with reference to another levy. In its opinion, the matter raised a
substantial question as to the true nature and character of the
surcharge imposed under Section 5-A of the Orissa Act, and it

11
[1967] 1 SCR 548.
Page 23 of 47

accordingly directed that the papers be placed before the Chief
Justice for the constitution of a larger Bench.
52. Consequent thereto, the matter was placed before a Five Judge
Bench comprising S.P. Bharucha, B.N. Kirpal, V.N. Khare, D.P.
Mohapatra and N. Santosh Hegde, JJ. Upon a perusal of the order of
reference, the Constitution Bench, by its order dated 06.10.1999,
noticed that the decision of a Constitution Bench in S. Kodar
(supra) would also have to be considered.
53. Such an observation had indeed been recorded on the basis that the
initial Two Judge Bench had framed the reference owing to an
apparent divergence between Hoechst Pharmaceuticals (supra) , a
decision of a Three Judge Bench, and India Cement (supra) , a
decision of a seven-Judge Bench. However, the question had, in fact,
been decided by a Five Judge Bench in S. Kodar (supra) , which had
upheld a levy calculated in an identical manner. As any
reconsideration of the correctness of S. Kodar (supra) could be
undertaken only by a Bench of greater strength, the Five Judge
Bench held that a reference to a seven-Judge Bench had become
necessary and directed that the papers be placed before the Chief
Justice for appropriate directions.
54. In the years that followed, the connected matters from the State of
Punjab, noticed in Part B.2 and Part B.3 above, came to be tagged
Page 24 of 47

with the reference, on the footing that they too raised the question as
to the competence of the State Legislature under Entry 54 of List II.
Thereafter, by an order dated 09.01.2024, a Three Judge Bench
presided over by the then Chief Justice of India, appointed Ms.
Anindita Pujari as the common nodal counsel, with a view to
facilitating the orderly hearing of the batch.
55. Thereafter, vide our order dated 12.08.2026, the matter was directed
to be listed for hearing. In the interregnum , Ms. Anindita Pujari
having been designated as a Senior Advocate, Ms. Samapika Biswal,
learned Advocate on Record, was appointed as the nodal counsel in
the matter.
F. DEVELOPMENTS SUBSEQUENT TO THE REFERENCE
56. Be that as it may, during the pendency of the reference, three
significant developments have taken place, each of which bears
directly upon the question whether the reference survives. We shall
notice each of them in turn.
F.1. T HE DECISION IN K ESORAM I NDUSTRIES : T HE F IRST C ORRECTION
57. The first development occurred in State of West Bengal v. Kesoram
12
Industries Ltd. , wherein a Constitution Bench of Five Judges was
called upon to consider, amongst other questions, the effect of the
observation in India Cement (supra) that ‘royalty is a tax’. The

12
(2004) 10 SCC 201.
Page 25 of 47

majority in Kesoram (supra) held that the observation resulted from
an inadvertent error, and that the Seven Judge Bench intended to
say that a cess on royalty is a tax. The majority upon such reading
held that royalty is not a tax, but a payment made to the owner of
the land in consideration of the right to extract minerals.

58. Kesoram (supra) thus significantly narrowed the reach of India
Cement (supra) , and confined it to its context, namely, a cess levied
on royalty in a field covered by Section 9 of the MMDR Act. However,
Kesoram (supra) was a decision of a Five Judge Bench, which had
sought to interpret the decision of a Seven Judge Bench. The
controversy as to whether royalty is a tax could not be said to have
been finally put to rest in Kesoram (supra) . That question was
thereupon, in due course, referred to a Nine Judge Bench.
INERAL REA EVELOPMENT UTHORITY HE OUBT INALLY
F.2. M A D A : T D F
D ISPELLED
59. The second, and in our view decisive, development is the judgment of
a Nine Judge Bench of this Court in Mineral Area Development
13
Authority & Anr. v. Steel Authority of India & Anr. The
majority, speaking through the then Chief Justice of India, held that
royalty is not a tax. It clarified and held that royalty is a contractual
consideration paid by the mining lessee to the lessor for the

13
(2024) 10 SCC 1.
Page 26 of 47

enjoyment of mineral rights, and that it does not bear the essential
characteristics of a tax, namely, a compulsory exaction imposed by
the sovereign by authority of law for public purposes.
60. Consequently, the majority held that the observation in India
Cement (supra) that royalty is a tax was incorrect, and overruled the
said decision to that extent. The majority further held that the
MMDR Act does not denude the State Legislatures of their power to
tax mineral rights under Entry 50 of List II, as it contains no express
limitation on that power, and that a limitation on a taxing power of
the States cannot be implied.
61. The effect of Mineral Area Development Authority (supra) upon
the present reference is self-evident. The very premise on which
India Cement (supra) characterised the cess on royalty as a ‘tax on
a tax’, namely, that royalty is itself a tax, has been authoritatively
displaced by a Bench of greater strength. Consequently, the
observation which the Two Judge Bench perceived to be in tension
with Hoechst Pharmaceuticals (supra) , no longer holds the field.
HE ONSTITUTIONAL RANSITION TO THE OODS AND ERVICES AX
F.3. T C T G S T
62. The third development is of a different, but equally significant,
character. With the enactment of the Constitution (One Hundred and
First Amendment) Act, 2016, the constitutional scheme governing
the taxation of goods and services underwent a fundamental
Page 27 of 47

restructuring. Article 246A was inserted, conferring upon Parliament
and the Legislature of every State a concurrent power to make laws
with respect to the Goods and Services Tax. Clauses (1) and (2) of
Article 246A read as follows:
“246A. (1) Notwithstanding anything contained in
articles 246 and 254, Parliament, and, subject to
clause (2), the Legislature of every State, have power
to make laws with respect to goods and services tax
imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with
respect to goods and services tax where the supply of
goods, or of services, or both takes place in the course
of inter-State trade or commerce.”
63. Simultaneously, Entry 54 of List II was substituted, and now it reads
as follows:
“54. Taxes on the sale of petroleum crude, high speed
diesel, motor spirit (commonly known as petrol),
natural gas, aviation turbine fuel and alcoholic liquor
for human consumption, but not including sale in the
course of inter-State trade or commerce or sale in the
course of international trade or commerce of such
goods.”
64. The general power of the States to tax the sale or purchase of goods,
under which the impugned surcharges were enacted, has thus
ceased to exist in the form in which it was exercised. Entry 54 of List
II now extends only to a limited and specified class of goods. The
transitional provision in the said Amendment Act preserved existing
laws relating to tax on goods or services only until they were
amended or repealed by a competent Legislature, or until the
Page 28 of 47

expiration of one year from the commencement of the Amendment,
whichever was earlier.
65. We may also notice that even prior to the introduction of the Goods
and Services Tax, the sales tax regimes under which the impugned
surcharges were levied had been replaced in both the States
concerned, upon the adoption of the value added tax regime, by the
Orissa Value Added Tax Act, 2004, and the Punjab Value Added Tax
Act, 2005, respectively. The surcharges which are the subject matter
of the present batch, therefore, relate exclusively to assessment
periods under enactments which are no longer on the statute book,
and no fresh levy of the kind impugned is, or can be, made
under them.
G. THE RIVAL POSITIONS ON RECORD
66. Briefly put, the case of the assessees, as set out in the appeals and
the special leave petitions, may be summarised thus: ( i ) Entry 54 of
List II permits only a tax on the sale or purchase of goods, the
taxable event being the transfer of property in goods; ( ii ) a surcharge
computed as a percentage of the tax payable, as opposed to the
turnover, is not measured by the sale, but by the burden of tax
already imposed, and is therefore amounts to a ‘tax on tax’ which no
entry in List II authorises; ( iii ) the decision in India Cement (supra) ,
being that of a Seven Judge Bench, lays down the principle that a
Page 29 of 47

levy calculated with reference to another impost must be tested by
what it is actually measured against, and not by the label which the
enactment gives it; and ( iv ) the decision in Hoechst
Pharmaceuticals (supra) proceeded on a concession and cannot,
therefore, be treated as a binding precedent on the question
of competence.
67. The States, on the other hand, maintain that the question is squarely
covered by S. Kodar (supra) , a decision of a Constitution Bench
which has never been doubted; that the surcharge is nothing but an
enhancement of the rate of sales tax for a class of dealers with a
higher turnover; that the mode of computation of a tax does not
determine its character; and that India Cement (supra) was
concerned with an altogether different levy in a totally alien field.
Insofar as the matters under the Punjab Social Security Act, 2000
are concerned, the State of Punjab additionally contends that the
High Court erred in its interpretation of Article 266 of
the Constitution.
68. It is in the light of these rival positions, and the developments
noticed in Part F above, that the question as to whether the reference
survives must be examined.

Page 30 of 47

H. ISSUES FOR CONSIDERATION
69.
Having regard to the foregoing, the following singular issue falls for
our consideration:
i. Whether, in view of the developments subsequent to the orders
dated 13.08.1998 and 06.10.1999, the question referred to this
Bench continues to survive for adjudication?
70. At the cost of repetition, we may clarify that the question which was
proposed for answer in the reference was, in substance, whether the
imposition of a tax, levy, surcharge or cess, which is calculated on
the basis of a valid sales tax, is beyond the legislative competence of
the State. Issue (i) requires us to consider whether that question
remains a live one, or whether it stands answered by the existing law
declared by this Court.
I. ANALYSIS
I.1. T HE F RAMEWORK G OVERNING R EFERENCES TO L ARGER B ENCHES
71. Article 145(3) of the Constitution mandates that a case involving a
substantial question of law as to the interpretation of the
Constitution shall be heard by a Bench of not less than five Judges.
Beyond this constitutional prescription, the practice of referring a
question to a Bench of larger strength is founded upon the doctrine
of precedent and the binding nature of the law declared by this Court
under Article 141. The practice ensures that the law declared by this
Page 31 of 47

Court speaks with one voice, and that a view expressed by a Bench
of a particular strength is not unsettled by a Bench of
lesser strength.
72. The governing principles were authoritatively crystallised by a
Constitution Bench of this Court in Central Board of Dawoodi
14
Bohra Community & Anr. v. State of Maharashtra & Anr. ,
wherein it was held as follows:
“12. ... (1) The law laid down by this Court in a
decision delivered by a Bench of larger strength is
binding on any subsequent Bench of lesser or coequal
strength.
(2) A Bench of lesser quorum cannot disagree or
dissent from the view of the law taken by a Bench of
larger quorum. In case of doubt all that the Bench of
lesser quorum can do is to invite the attention of the
Chief Justice and request for the matter being placed
for hearing before a Bench of larger quorum than the
Bench whose decision has come up for consideration.
...”
73. The Constitution Bench further clarified that these rules are subject
to the discretion of the Chief Justice, as the master of the roster, to
direct any matter to be placed before a Bench of any strength, and
that a Bench of larger quorum before whom a matter has come up
for hearing may, by way of exception and for reasons to be recorded,
examine the correctness of a view taken by a Bench of
lesser quorum.

14
(2005) 2 SCC 673.
Page 32 of 47

74. Two corollaries follow from these principles, and they are of direct
relevance to the present batch. First , the purpose of a reference is to
resolve a genuine doubt or conflict in the law declared by this Court,
which a Bench of lesser strength is not competent to resolve for
itself. A reference is, therefore, inextricably tethered to the existence
of such a doubt or conflict. Second , the law declared by a Bench of
larger strength is binding upon all Benches of lesser or co-equal
strength. Consequently, where the doubt which occasioned a
reference is resolved by a subsequent decision of a Bench of even
larger strength, the law stands declared by that decision, and the
Bench to which the reference was made would only be called upon to
restate what is already binding.
I.2. W HEN DOES A R EFERENCE C EASE TO S URVIVE ?
75. It is well established that a reference to a larger Bench is not a
separate proceeding detached from the lis ; rather, it constitutes a
step in the adjudication of the appeals in which it is made,
undertaken on account of the Bench hearing those appeals having
considered that, in accordance with judicial discipline, it could not
decide them without first resolving the doubt.
76. It must follow that the continued survival of a reference depends
upon the continued existence of the doubt which occasioned it.
Where the doubt has been authoritatively dispelled, in the
Page 33 of 47

interregnum , whether by a subsequent decision of a Bench of greater
strength, by a legislative or constitutional amendment, or otherwise,
the reference ceases to serve the purpose for which it was made. To
answer it in such circumstances would be to render, in substance,
an opinion on a question that no longer requires an answer, and to
wastefully occupy a larger Bench’s time in restating the settled law.
77. Suffice it to say that a Seven Judge Bench is a scarce institutional
resource, and every such Bench constituted to answer a question
which already stands answered is a Bench not available for the many
questions of genuine constitutional import which await resolution.
More importantly, the parties to the individual appeals, whose rights
and liabilities depend upon the outcome, are compelled to wait for
the answer to a question which the law has, in the meantime,
already supplied. The principle that delay must not be compounded
by procedural inertia applies with no less force to references than it
does to any other proceeding before this Court.
78. We may hasten to add that we do not suggest that a reference must
automatically be returned whenever there is some subsequent
development in the law. There may well be cases where,
notwithstanding subsequent developments, the question referred
retains a live significance, either because it continues to govern a
large number of pending disputes, or because the subsequent
Page 34 of 47

developments themselves give rise to fresh uncertainty. The inquiry
in each case must be whether, having regard to the law as it stands
on the date on which the reference comes up for hearing, there
remains a genuine doubt which only a Bench of the strength to
which the matter has been referred can resolve.
HE ERCEIVED ONFLICT EVISITED
I.3. T P C R
79. The reference, as we have noticed, owes its origin to a perceived
conflict between the ratio laid down in Hoechst Pharmaceuticals
(supra) and India Cement (supra) . With utmost respect to the
Bench that passed the order dated 13.08.1998, we are of the
considered view that, on a careful reading of the two decisions, the
conflict was more apparent than real, even at the time the reference
was made.
80. First , the two decisions were concerned with levies of an altogether
different character, imposed under altogether different entries.
Hoechst Pharmaceuticals (supra) was concerned with a surcharge
on sales tax, imposed under Entry 54 of List II, which is a plenary
taxing entry subject only to Entry 92-A of List I. Whereas, India
Cement (supra) was concerned with a cess on royalty payable under
a Central enactment, which the State sought to justify under Entries
45, 49 and 50 of List II, and which was held to fall within a field
occupied by Parliament under Entry 54 of List I. Further, it is
Page 35 of 47

important to underscore that the decision in India Cement (supra)
S. Kodar (supra) Hoechst
does not advert to the decision in or to
Pharmaceuticals (supra) , nor to any levy under Entry 54 of List II.
81. Second , the reasoning in India Cement (supra) did not turn upon
the mode of computation of the cess. The cess was not held to be
invalid because it was computed on another levy. It was held to be
invalid because the base on which it was levied, namely, royalty, was
treated as a subject which the State Legislature had no competence
to tax, namely the field being covered by Section 9 of the MMDR Act.

82. Thirdly , and perhaps most tellingly, the Seven Judge Bench in India
Cement (supra) itself approved the principle laid down in
Guruswamy (supra) , that when a cess is levied as an increment to
an existing tax, its validity must be judged in the same way as the
validity of the tax to which it is an increment. Perhaps, far from
being in conflict with S. Kodar (supra) and Hoechst
Pharmaceuticals (supra) , this principle furnishes the very
foundation on which those decisions rest. A surcharge which is an
increment to a sales tax is lawful if the sales tax is valid; a cess
which is an increment to a levy which the State is incompetent to tax
is invalid because the principal levy is beyond the State’s reach.
83. Viewed thus, the observation in India Cement (supra) that ‘ a cess
on royalty being a tax on royalty, is beyond the competence of the
Page 36 of 47

State legislature ’ was not a declaration that every levy computed on
another levy is beyond competence. It was a declaration that a levy
on royalty, in the field occupied by the MMDR Act, was beyond the
competence of the State Legislature. The two propositions are
distinct, and the former cannot be extracted from the latter.
HE FFECT OF ESORAM NDUSTRIES SUPRA AND INERAL REA
I.4. T E K I ( ) M A
D EVELOPMENT A UTHORITY ( SUPRA )
84. Even if it were assumed that the observation in India Cement
(supra) was capable of the wider reading which the assessees place
upon it, that observation no longer holds the field. As noticed in Part
F above, a Constitution Bench in Kesoram (supra) first read the
observation that ‘royalty is a tax’ as an inadvertent error, and the
Nine Judge Bench in Mineral Area Development Authority (supra)
in any case has since authoritatively held that royalty is not a tax,
and has overruled India Cement (supra) to that extent.
85. The consequence is that the premise on which the cess in India
Cement (supra) was characterised as a ‘tax on a tax’ has since been
removed. Royalty being a contractual consideration and not a tax, a
cess on royalty is not a tax on a tax at all. The very formulation on
which the assessees rely, namely, that a levy computed on another
tax is impermissible as a ‘tax on tax’, thus finds no support in India
Cement (supra) as it now stands.
Page 37 of 47

86. Respectfully following the principles enunciated in Dawoodi Bohra
(supra) Mineral Area
, the decision of the Nine Judge Bench in
Development Authority (supra) is binding upon this Bench of lesser
strength. There is, therefore, no longer any decision of this Court of a
strength greater than or equal to that of S. Kodar (supra) which can
be said to be in conflict with it. The conflict which occasioned the
reference, whether real or apparent, has ceased to exist.
I.5. T HE C ONTINUED A UTHORITY OF S. K ODAR ( SUPRA )
87. With the shadow cast by India Cement (supra) having been lifted,
the question referred stands squarely answered by S. Kodar (supra) .
It bears repetition that the additional tax in S. Kodar (supra) was
computed as a percentage of the tax payable by the dealer, which is
precisely the mode of computation impugned in the present batch.
The Constitution Bench held, in terms, that “ the fact that quantum
of the additional tax is determined with reference to the sales
tax imposed would not alter its character . ” No subsequent
decision of this Court, of any strength, has doubted this proposition.
88. However, it may be apposite to note that the Union of India has filed
a curative petition challenging Mineral Area Development
Authority (supra) . In 2026, the Parliament furthermore inserted
Section 9D of the MMDR Act, which subjects the States’ power to tax
Page 38 of 47

mineral rights or mineral-bearing land or mineral value or royalty
payable to such conditions as prescribed by the Central Government.
89. Neither the pending curative petition nor the subsequent amendment
to the MMDR Act affects the findings in Mineral Area Development
Authority (supra) approving the ratio in S. Kodar (supra) that the
legislative competence of the State Government to impose additional
sales tax, which is 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 consumers, is traceable to
Entry 54 List II as tax on sales of goods and not ultra vires as a tax
on income of such dealer.
90. The submission that a levy computed on the tax payable is a ‘ tax on
tax ’, and therefore not a tax on the sale of goods, does not, in our
view, bear close scrutiny. We say so for the following reasons. A sales
tax is itself computed as a percentage of the taxable turnover. A
surcharge computed as a percentage of that tax is, therefore, by
simple arithmetic, a further percentage of the same taxable turnover.
To illustrate, a surcharge of 10 per cent upon a sales tax levied at the
rate of 10 per cent of the turnover is, in substance, nothing but an
additional levy of 1 per cent upon the turnover. The subject of the
surcharge remains the sale or purchase of goods; the only difference
lies in the arithmetical route by which the quantum is reached.
Page 39 of 47

Accordingly, the measure of a tax, as we have noticed, does not
determine its character.
91. Equally, the contention that such a surcharge is, in truth, a tax
upon the income of the dealer is belied by its very structure. The
sales tax payable by a dealer, and consequently the surcharge
computed thereon, escalates with his turnover, and not with his
income. A dealer who has made no profit in a year, or who has
suffered a loss, would nonetheless be liable to pay both the sales tax
and the surcharge, so long as his turnover exceeds the prescribed
threshold. A levy which is payable irrespective of the existence of
income, and which bears no relation to the quantum of income,
cannot, by any stretch, be characterised as a tax on income. This
was precisely the reasoning of the Constitution Bench in S. Kodar
(supra) , and of the Three Judge Bench in Hoechst
Pharmaceuticals (supra) .
92. Nor are we persuaded that the concession recorded in Hoechst
Pharmaceuticals (supra) detracts from the authority of the law on
the point. It is our considered view that the binding force of the
proposition does not rest upon Hoechst Pharmaceuticals (supra) ;
instead, it rests upon S. Kodar (supra) , a decision of a Constitution
Bench in which the question of competence was squarely raised,
contested and decided. In any event, as we have noted, the Bench in
Page 40 of 47

Hoechst Pharmaceuticals (supra) independently considered and
rejected the contention that the surcharge was, in its true nature
and character, a tax on income.
93. It may also be noticed that the challenge in the present batch does
not rest upon any feature of the impugned surcharges which
distinguishes them from the levy upheld in S. Kodar (supra) . The
Orissa surcharge and the surcharge under Section 5(1-C) of the
Punjab Act, like the additional tax in S. Kodar (supra) , are imposed
upon a class of dealers defined by reference to the volume of their
turnover, and are computed as a fixed percentage of the sales tax
payable by them. No circumstance has been pointed out which
would take them outside the ratio of that decision.
94. We are, therefore, of the considered view that the question referred to
this Bench is fully answered by the law declared by the Constitution
Bench in S. Kodar (supra) , which continues to hold the field, and
that there is no conflict in the law declared by this Court which
requires resolution by a Seven Judge Bench.
HE LTERED ONSTITUTIONAL ANDSCAPE
I.6. T A C L
95. There is yet another reason why the reference does not merit
adjudication by a larger Bench. As noticed in Part F.3 above, Entry
54 of List II, in the form in which it conferred a general power upon
the States to tax the sale or purchase of goods, no longer exists. The
Page 41 of 47

impugned provisions were enacted under a constitutional entry
which has since been substituted and replaced under State
enactments, first by Value Added Tax legislation, and thereafter by
the Goods and Services Tax regime.
96. The question referred is, thus, of no prospective significance for the
States whose enactments are before us, and of limited significance
for the legacy sales tax regime generally. Insofar as the residuary
goods which continue to be taxed under the substituted Entry 54 of
List II are concerned, the question, if it ever arises, stands governed
by S. Kodar (supra) .
97. We are conscious that the individual assessees continue to have a
stake in the outcome of their appeals, since liabilities for the past
assessment periods may yet be enforced. Our conclusion does not
foreclose their rights. It merely recognises that those rights must be
determined by the regular Benches in accordance with the law as it
stands declared, and not by a larger Bench constituted to resolve a
conflict which no longer exists.
HE ESIDUAL UESTIONS
I.7. T R Q
98. Before parting, we must notice that the batch contains matters
which raise questions that were never the subject matter of the
reference and that are not answered by S. Kodar (supra) .
Page 42 of 47

99. The first such question arises under Section 30-AA of the Punjab Act.
As we have noticed, the said provision requires industrial units
which are otherwise exempted from the payment of sales tax under
Section 30-A to pay the surcharge nonetheless. This raises distinct
questions, including whether a surcharge which is defined as a
percentage of the tax payable can be levied where, by reason of a
statutory exemption, no tax is payable; whether such a levy, in its
true nature, remains an increment to sales tax or becomes an
independent levy; and whether its imposition is consistent with the
scheme of exemption granted under the Punjab Act. These questions
depend, in part, upon the construction of the provisions of the
Punjab Act and the terms of the exemptions granted, and must be
examined on their own merits.
100. The second such question arises in the matters under the Punjab
Social Security Act, 2000. Article 266(1) of the Constitution provides,
inter alia , that all revenues received by the Government of a State
shall form one consolidated fund to be entitled ‘the Consolidated
Fund of the State’. Article 266(3) provides that no moneys out of the
Consolidated Fund of a State shall be appropriated except in
accordance with law and for the purposes and in the manner
provided in the Constitution. The High Court has held that the
proceeds of the cess could not be credited directly to the Punjab
Social Security Fund without first forming part of the Consolidated
Page 43 of 47

Fund of the State. Whether that view is correct is a question of the
constitutional scheme governing public finance, which is wholly
independent of the question of legislative competence under Entry 54
of List II.
101. We have refrained from expressing any opinion on either of these
questions. Both of them, as also any other question peculiar to the
individual matters, are left open, to be decided by the appropriate
regular Bench on their own merits.
J. CONCLUSION AND DIRECTIONS

102. In the light of the foregoing discussion, our conclusions may be
summarised as follows:
i. The reference arose out of a perceived conflict between Hoechst
Pharmaceuticals (supra) and India Cement (supra) , and was
enlarged by the order dated 06.10.1999, on account of the need
to consider S. Kodar (supra) ;
ii. The decision in India Cement (supra) was concerned with a
cess on royalty in a field covered by the MMDR Act. It did not
hold that a levy computed as a percentage of another tax is, for
that reason, beyond the competence of the Legislature, and
imputed that a cess levied as an increment to an existing tax is
to be judged in the same way as that tax;
Page 44 of 47

iii. The premise of India Cement (supra) , namely, that royalty is a
Mineral Area
tax, has been overruled by a Nine Judge Bench in
Development Authority (supra) . There is, therefore, no
subsisting decision of this Court which is in conflict with S.
Kodar (supra) ;

iv. S. Kodar (supra) squarely holds that an additional tax or
surcharge computed as a percentage of the sales tax payable is
an enhancement of the rate of sales tax and a tax on the sale or
purchase of goods within Entry 54 of List II, as it then stood.
That decision continues to hold the field;
v. The constitutional entry and the State enactments under which
the impugned levies were imposed have since been substituted
or replaced, and the question referred is of no prospective
significance;
vi. Consequently, the question referred does not survive for
adjudication by a Seven Judge Bench, and the reference has
been rendered academic.
103. In light of these conclusions and findings, we deem it appropriate to
accordingly direct as follows:
i. The reference is answered as having been rendered infructuous.
The question of the legislative competence of the State
Page 45 of 47

Legislatures to levy the impugned surcharges shall be governed
S. Kodar (supra)
by the law declared in ;
ii. The questions as to (a) the validity of Section 30-AA of the
Punjab General Sales Tax Act, 1948, insofar as it requires
industrial units otherwise exempted from sales tax to pay the
surcharge; and (b) whether the proceeds of the cess levied under
the Punjab Social Security Act, 2000 could be credited directly
to the Punjab Social Security Fund without first forming part of
the Consolidated Fund of the State under Article 266 of the
Constitution, are left open. Nothing stated in this order shall be
construed as an expression of opinion on these questions;
iii. All other contentions of the parties in the individual matters,
including those relating to the assessments, the periods of levy,
and the consequential reliefs, are also left open;
iv. The Registry is directed to list the lead matter, and the
connected matters before the appropriate regular Bench(es) for
disposal on their individual merits, in accordance with the
observations made hereinabove and after taking requisite
directions from the Chief Justice of India on the administrative
side.
Page 46 of 47

104. Before parting, we place on record our appreciation for the
assistance rendered by learned counsel for the parties and by Ms.
Samapika Biswal, learned nodal counsel.
105. Ordered accordingly.



...............................CJI.
(SURYA KANT)
..................................J.
(S.V.N. BHATTI)
..................................J.
(JOYMALYA BAGCHI)
..................................J.
(N.V. ANJARIA)
..................................J.
(ARUN PALLI)
..................................J.
(V. MOHANA)
NEW DELHI;
04.11.2026
Page 47 of 47

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8763 OF 1994

Arjun Flour Mills …….Appellant(s)

Versus
The State of Orissa And Others ……. Respondent(s)


WITH
CIVIL APPEAL NO. 8909 OF 1994
CIVIL APPEAL NO. 7485 OF 2001
CIVIL APPEAL NO. 98 OF 2003
SLP (C) Nos. 22159-22180/2002

CIVIL APPEAL NOS. 831-850 OF 2003
CIVIL APPEAL NO. 851 OF 2003
CIVIL APPEAL NO. 99 OF 2003
CIVIL APPEAL NO. 100 OF 2003
CIVIL APPEAL NO. 5046 OF 2003
AND
CIVIL APPEAL NO. 5637 OF 2008



1

J U D G M E N T

K. V. Viswanathan, J.

BACKGROUND:
1) In S. Kodar vs. State of Kerala, [1975] 1 SCR 121, K.K.
Mathew, J. speaking for a five-Judge Constitution Bench of this
Court, upheld the validity of the Tamil Nadu Additional Sales
Tax Act, 1970 (for short ‘the Tamil Nadu Act’). In a judgment
marked by chilling clarity and characteristic brevity, the
learned Judge held that the State Legislature had the
legislative competence under Article 246 read with Entry 54
of List II of the Seventh Schedule to the Constitution of India to
enact the law; that the levy was a tax on the sale of goods; and
the fact that quantum of the additional tax was determined with
reference to the sales tax imposed would not alter the
character of the levy and that in reality, it was a tax on the
aggregate of the sales effected by a dealer. It was further held
that the provisions did not impose any unreasonable
restrictions on the right to carry on trade and that only
2

because a dealer was disabled from passing on the incidence
of tax to the purchasers, the tax does not cease to be a sales
tax and further that the classification made based on the
turnover was valid. While S. Kodar (supra) was pronounced
on 17.04.1974, a three-Judge Bench of this Court, on
06.05.1983, followed S. Kodar (supra) in Hoechst
Pharmaceuticals Ltd. & Ors. vs. State of Bihar & Ors. (1983)
4 SCC 45.
2) When things stood thus, the constitutional validity of
Section 5-A(1) and 5-A(3) of the Orissa Sales Tax Act, 1947 (for
short ‘the Orissa Act’), as amended by the Orissa Act No 11 of
1990, was raised before the High Court of Orissa. The said
Section provided for levy of surcharge at the rate of 10 per
centum of the total amount of tax payable by a dealer, whose
gross turnover during any year exceeds Rs. 10 lakhs. Relevant
parts of Section 5-A of the Orissa Act reads as under:-
"5-A (1) Every dealer whose gross turnover during any
year exceeds rupees ten lakhs shall, in addition to the tax
payable by him under this Act, also pay a surcharge at the
3

rate of ten per centum of the total amount of tax payable by
him:
Provided that the aggregate of the tax and surcharge
payable under this Act shall not exceed in respect of goods
declared to be of special importance in inter-State trade or
commerce by Section 14 of the Central Sales Tax Act, 1956,
the rate fixed by Section 15 of the said Act:
Provided further that in the case of an Assessment year
which has commenced before the commencement of the
Orissa Sales Tax (Amendment) Act, 1990, turn over of the
whole of such Assessment year shall be taken into account
for purposes of determining whether the dealer is liable to
pay surcharge under this section, but the surcharge shall
be payable only in respect of that part of the turn over
which relates to the period after the commencement of this
section.
xxxxx
(3) Notwithstanding anything to the contrary contained in
any other provisions of this Act, no dealer mentioned in
sub-section (1), who is liable to pay surcharge, shall be
entitled to collect the amount of this surcharge."

3) A Division Bench of the High Court of Orissa, speaking
through Arijit Pasayat, J. (as the learned Judge then was),
followed the judgment in S. Kodar (supra) & Hoechst (supra)
to uphold the levy.
4) The assessees carried the matter to this Court with the
lead matter being Civil Appeal No. 8763 of 1994, viz., M/s
Arjun Flour Mills vs. State of Orissa & Ors.
4

5) Similar issues arose in the State of Punjab. The Punjab
legislature enacted the Punjab General Sales Tax
(Amendment) Act, 2002 (for short ‘the Punjab Act’). By the said
Act, Section 5(1-C) and Section 30(AA) were introduced which
provided for levy of surcharge at the rate of 10 per centum on
the taxable turnover of a dealer, even on certain class of
industries. The said Sections read as under: -
“Section 5(1-C) -- Notwithstanding anything contained in
this Act, there shall be levied and collected on the taxable
turnover of a dealer, a surcharge, which shall be calculated
at the rate of ten per centum of the tax payable by him
under this Act:
Provided that the aggregate of the tax and the surcharge
payable under this Act, shall not exceed in respect of
goods declared to be of special importance in inter-state
trade or commerce by section 14 of the Central Sales Tax
Act, 1956, the rate fixed by section 15 of that Act.

Section 30(AA) -- Notwithstanding any exemption granted
to any class of industries under Section 30-A of this Act,
such industries shall pay the surcharge levied under sub-
section (1-C) of section 5 of the Act, in the manner, as may
be prescribed.”

6) The said provisions were upheld by the High Court of
Punjab & Haryana at Chandigarh vide judgment dated
04.03.2002 in Civil Writ Petition No. 3693 of 2002, in the
following terms:-
5

“As observed by their Lordships of the Supreme Court in
Sarojini Tea Co. (P) Ltd. Vs. Collector of Dibrugarh (1992)
2 SCC 156 and in Indian Aluminum Co. and others vs. State
of Kerala and others, (1996) 7 SCC 637, “the expression
‘surcharge’ in the context of taxation means an additional
imposition which results in enhancement of the tax and the
nature of additional imposition is the same as the tax on
which it is imposed as surcharge.” The State Legislature
being competent to levy tax on the sale or purchase of
goods, the imposition of surcharge cannot be outside its
purview. A tax being a compulsory exaction of money, it is
not an unreasonable restriction on the freedom of trade
and commerce. It is not unconstitutional.”

7) There is one more set of matters from the State of Punjab
where the challenge is to the levy of Social Security Cess
under the Punjab Social Security Act, 2000. At the bar, counsel
were ad idem before us, that this set of matters, arising under
the Punjab Social Security Act, 2000 as amended by Punjab
Act No 18 of 2000, needs to be segregated, delinked from this
batch and heard separately by a Division Bench.
8) On 13.08.1998, when the appeals concerning the Orissa
Act were taken up for hearing, a Division Bench of this Court
referred the appeals to a larger Bench, by passing the
following order:-

6

“It becomes necessary to refer these appeals for hearing
by a larger Bench in the following circumstances:
They challenge the validity of Section 5-A of the Orissa
Sales Tax Act, 1947, which imposes a surcharge on the total
amount of sales tax payable by a dealer. A similar
provision was upheld by a Bench of three learned
Judges of this Court in Hoechst-Pharmaceuticals Ltd &
Ors. vs. State of Bihar & Ors, [1983 (4) SCC 45], but it is
pointed out by learned counsel for the appellants, with
some justification that the judgment proceeded upon a
concession that the provision was relatable to Entry 54
of List II of the VIIth Schedule of the Constitution. The
judgment does, however, add that the surcharge partook
of the nature of the sales tax and, therefore, was within the
competence of the State Legislature. Learned counsel for
appellants drew our attention to the judgment of a
Bench of seven learned Judges of this Court in India
Cements Ltd. & Ors. vs. State of Tami1nadu & Ors.
[1990 (1) SCC 12] where the observations, particularly
in paragraph 20, would seem to take a very different
view: a cess on the royalty payable for excavation of
land was held to be, not a tax on land, but on the royalty,
which was land revenue.
The papers shall be placed before the Hon'ble the Chief
Justice for appropriate directions.”

9) Thereafter, on 06.10.1999, the matter came up before a
five-Judge Bench, when it was felt that the judgment in S.
Kodar (supra) is to be considered, and hence, a reference to
seven-Judge Bench became necessary. The order reads as
under: -

7

“We have read the referral order. We find that the decision
of a Constitution Bench in S. Kodar vs. State of Kerala (1975
(1) SCR 121) will also have to be considered. Therefore, a
reference to a Bench of seven learned Judges becomes
necessary. The papers and proceedings may be placed
before the Hon’ble Chief Justice for appropriate
directions.”


10) On 12.10.2023, the matter was placed before a Bench of
seven Hon’ble Judges when the matter was directed to be
placed on 09.01.2024 and on 09.01.2024 certain housekeeping
directions were made.
11) On 12.08.2026, the matter was placed before the Hon’ble
Chief Justice’s Bench for directions, when the following order
was made:-
“1. In terms of the orders dated 13.08.1998 and 06.10.1999,
these appeals/petitions, which raise the question of
legislative competence of a State Legislature to levy an
additional surcharge calculated on sales tax payable by a
dealer, have been referred to a Bench of Seven Judges.
2. The reference was prompted by the conflicting views
taken by a five Judge Bench in S. Kodar v. State of Kerala,
1975(1) SCR 121 and a Three Judge Bench in Hoechst
Pharmaceuticals Ltd. v. State of Bihar and others, 1983(4)
SCC 45. There also seems to be some degree of conflict
with some observations made by a Seven Judge Bench in
India Cements Ltd. and others v. State of Tamil Nadu and
others, 1990 (1) SCC 12.
3. In this context, a Bench of Seven Judges ought to be
constituted to hear this matter and adjudicate the following
question of law:

8

(i) Whether the imposition of a surcharge/additional
tax/levy/cess/sale/purchase, which is calculated on the
basis of a validly levied sales/purchase tax, is beyond the
competence of the State Legislature?
(ii) Any other issue(s) that may arise during the course of
hearing.”

That is how the matter presents itself before us.


12) Heard Mr. Shubhranshu Padhi and Mr. Sandeep
Sudhakar Deshmukh, learned counsel for the assessees; Mr.
Tushar Mehta, learned Solicitor General, Mr. N Venkataraman
learned Additional Solicitor General, Mr. Pitambar Acharya,
learned Advocate General for Odisha & Mr Vivek Jain, learned
Additional Advocate General for Punjab for the State.
13) At the hearing before us, a preliminary question was
raised as to whether, at all, the reference was warranted and,
in any event whether at all there was any life left in the
reference.
14) To appreciate the above aspects, one needs to
necessarily advert to the holding in S. Kodar (supra). Further,
since the reference is pivoted on the holdings in Hoechst
9

(supra) and India Cements Ltd. and Others vs. State of Tamil
Nadu and Others (1990) 1 SCC 12, there is a need to examine
the said judgments also and the march of law thereafter. This
exercise will also help us unravel whether at all there was any
necessity to allude to the judgment in India Cements (supra),
since that dealt with a wholly different issue altogether.
15) This judgment will only cover the reference arising out of
challenge to the constitutional validity of the provisions in the
Orissa Act and the Punjab Act, as referred to above.
S. KODAR VS. STATE OF KERALA [1975] 1 SCR 121
16) In S. Kodar (supra) , paraphrasing the legal provisions that
were involved for consideration, the following was set out by
this Court :- [ at page 123 of the Reports]
“The appellants filed writ petitions before the High Court
of Madras challenging the validity of the Tamil Nadu
Additional Sales Tax Act (Act No. 14 of 1970), 1970 (hereinafter
referred to as the Act) on the ground that the State Legislature
has no competence to enact it, that its provisions violated their
fundamental rights under Article 19(l)(f), 19(1)(g) and article
14 of the Constitution. The High Court dismissed the writ
petitions by a common Judgment. These appeals are filed on
the basis of a certificate from the High Court.

The material provisions of the Act are as follows. Section
2(1) provides that the tax payable under the Tamil Nadu
10

General Sales Tax Act, 1950, shall, in the case of a dealer
whose total turnover for a year exceeds 10 lakhs of rupees, be
increased by additional tax at the rate of 5 per cent of the tax
payable by that dealer for that year and the provisions of the
Tamil Nadu General Sales Tax Act, 1959, shall apply in relation
to the additional tax payable under the said Act.

Sub-section (2) of s. 2 says that notwithstanding
anything contained in the Tamil Nadu General Sales Tax,
1959, no dealer referred to in sub-section (1) shall be
entitled to collect the additional tax payable under the said
sub-section.

Sub-section ( 3) of s. 2 states that any dealer who
collects the additional tax payable under sub-section (1),
in contravention of the provisions of sub-section (2) shall
be punishable with fine which may extend to one thousand
rupees.

Sub-section (1) of s. 3 says that the tax payable by any
importer or wholesale dealer under the Tamil Nadu Sales
of Motor Spirit Taxation Act, 1939, shall be increased by an
additional tax at the rate of five per cent of the tax payable
under the said Act and the provisions of the said Act shall
apply in relation to the tax payable under the said Act. Sub-
sections (2) and (3) of s. 3 are to the same effect as sub-
sections (2) and (3) of s. 2”


17) As will be seen, Section 2(1) of the Tamil Nadu Act was in
pari materia with the provisions under consideration in the
Orissa Act and the Punjab Act and in S. Kodar (supra) , the
epicentre of the challenge was on the competence of the State
to levy additional sales tax by virtue of the field demarcated
under Entry 54 List II of the Seventh Schedule to the
Constitution of India. A further argument was raised that, in
11

substance, it was also a tax on income since there was a
prohibition from passing on the tax liability onward to the
purchasers.
18) Dealing with the aspect of legislative competence, this
Court in S. Kodar (supra) , while repelling the challenge, held
as under:- [ at page 124 of the Reports]
“As regards the contention that the State Legislature
has no power to pass the measure, we are of the view that
additional tax is really a tax on the sale of goods. The
object of the Act, as is clear from its provisions, is to
increase the tax on the sale or purchase of goods
imposed by Tamil Nadu General Sales Tax Act, 1959
and the fact that quantum of the additional tax is
determined with reference to the sales tax imposed
would not alter its character. It may be noted that
additional tax is to be imposed only if the turnover of a
dealer exceeds Rs. 10 lakhs. It is in reality a tax on the
aggregate of sales effected by a dealer during a year.
The additional tax, therefore, is an enhancement in the
rate of the sales tax when the turnover of a dealer
exceeds Rs. 10 lakhs a year and it is a tax on the
aggregate of the sales affected by the dealer during the
year. The decision in Ernakulam Radio Company v. State
of Kerala which was affirmed by a Division Bench of the
Kerala High Court in Kiliker v. Sales Tax Officer took that
view. The same view was taken by the Andhra Pradesh
High Court in A. S. Ramachandra Rao v. State of Andhra
Pradesh. This is the correct view. Entry 54 in List II
authorises the state legislature to impose a tax on the
sale or purchase of goods. So, the contention of the
appellants that the additional sales tax is not a tax on
sales but on the income of the dealer is without any
basis.”

12

19) Adverting to the aspect of whether a provision providing
for additional sales tax would be bad because it prohibits the
passthrough of the tax, this Court, while discountenancing the
submissions, held as under:- [ at page 124 of the Reports]
“The legal incidence of tax on sale of goods under the
Tamil Nadu General Sales Tax, 1959 falls squarely on the
dealer. It may be that he can add the tax to the price of the
goods sold and thus pass it on to the purchaser. But it is
not necessary that the dealer should be enabled to pass
on the incidence of the tax on sale to the purchaser in
order that it might be a tax on sales of goods.”

20) Further, holding that additional tax is not a tax on income,
this Court, held as under:- [ at page 125 of the Reports]
“As we said, the additional tax is a tax upon sales of
goods and not upon the income of a dealer and so long as
it is not made out that the tax is confiscatory, it is not
possible to accept the contention that because the dealer
is disabled from passing on the incidence of tax to the
purchaser, the provisions of the Act impose an
unreasonable restriction upon the fundamental rights of
the appellants under article 19(1)(g) or 19(1)(f).”

21) Equally, the argument on classification was repelled, by
holding as under:- [at pages 125 -126 of the Reports]
“The last contention namely that the provisions of
the Act impose different rates of tax upon different
dealers depending upon their turnover which in effect
means that the rate of tax on the sale of goods would
vary with the volume of the turnover of a dealer and
are, therefore, violative of article 14 is also without any
basis. Classification of dealers on the basis of their
13

respective turnover for the purpose of graded
imposition so long as it is based on differential criteria
relevant to the legislative object to be achieved is not
unconstitutional. A classification, depending upon the
quantum of the turnover for the purpose of exemption
from tax has been upheld in several decided cases. By
parity of reasoning, it can be said that a legislative
classification making the burden of the tax heavier in
proportion to the increase in turnover would be
reasonable. The basis is that just as in taxes upon income
or upon transfers at death, so also in imposts upon
business, the little man, by reason of inferior capacity to
pay, should bear a lighter load of taxes, relatively as well
as absolutely, than is borne by the big one. The flat rate is
thought to be less efficient than the graded one as an
instrument of social justice. The large dealer occupies a
position of economic superiority by reason of his greater
volume of his business. And to make his tax heavier, both
absolutely and relatively, is not arbitrary discrimination,
but an attempt to proportion the payment to capacity to pay
and thus to arrive in the end at a more genuine equality.
The economic wisdom of a tax is within the exclusive
province of legislature. The only question for the court to
consider is whether there is rationality in the belief of the
legislature that capacity to pay the tax increases, by and
large, with an increase of receipts.

“Certain it is that merchants have faith in such
a correspondence and act upon that faith. . . If
experience did not teach that economic advantage
goes along with larger sales, there would be an
end to the hot pursuit for wide and wider markets...
In brief, there is a relation of correspondence
between capacity to pay and the amount of
business done. Exceptions, of course, there are.
The law builds upon the probables, and shapes the
measure of the tax accordingly... At the very least,
an increase of gross sales carries with it an
increase of opportunity for profit, which supplies a
rational basis for division into classes, at all events
when coupled with evidence of a high degree of
probability that the opportunity will be fruitful".
14

(See the dissenting judgment of Justice
Cardozo, Justice Brandeis and Justice Stone).

The reasoning of the minority in that case appeals to us as
more in consonance with social justice in an egalitarian
state than that of the majority.
As we said, a large dealer occupies a position of
economic superiority by reason of his volume of business
and to make the tax heavier on him both absolutely and
relatively is not arbitrary discrimination but an attempt to
proportion the payment to capacity to pay and thus arrive
in the end at a more genuine equality. The capacity of a
dealer, in particular circumstances, to pay tax is not an
irrelevant factor in fixing the rate of tax and one index of
capacity is the quantum of turnover. The argument that
while a dealer beyond certain limit is obliged to pay higher
tax, when others bear a less tax, and it is consequently
discriminatory, really misses the point namely that the
former kind of dealers are in a position of economic
superiority by reason of their volume of business and form
a class by themselves. They cannot be treated as on a par
with comparatively small dealers. An attempt to proportion
the payment to capacity to pay and thus bring about a real
and factual equality cannot be ruled out as irrelevant in
levy of tax on the sale or purchase of goods. The object of
a tax is not only to raise revenue but also to regulate the
economic life of the society.”
(Emphasis supplied)

HOECHST PHARMACEUTICALS LTD. & ORS. VS. STATE
OF BIHAR & ORS., (1983) 4 SCC 45.
22) Hoechst (supra) concerned the constitutional validity of
sub-section (1) of Section 5 of the Bihar Finance Act, 1981
which provided for the levy of a surcharge on every dealer
whose gross turnover, during the year, exceeds Rs. 5,00,000/,
15

in addition to the tax payable by him, at such rate not
exceeding 10 per centum of the total amount of tax. Further,
Section 5 (3), the validity of which was also challenged,
provided that a dealer was prohibited from collecting the said
amount of surcharge from the purchasers. The principal
contention advanced was that the field of price fixation of
essential commodities in general, and drugs and formulations
in particular, was occupied by the various control orders
issued by the Central Government under Section 3(1) of the
Essential Commodities Act, 1955 (for short “the EC Act”). It
was argued that the EC Act allowed the manufacturer to pass
on the liability to the consumer, and therefore, the State had
no legislative competence to interdict the pass through. The
provision was alternatively attacked on the plea of
repugnancy also. Contending that Section 5(3) was repugnant
to various control orders issued under the EC Act, it was also
argued vis-à-vis Section 5(1) that including transactions
relating to sale or purchase of goods which have taken place
in the course of inter-State trade or commerce are outside the
16

purview of the State legislature and that value cannot be taken
for computation of the gross turnover. The High Court had
upheld the levy relying on S. Kodar (supra).
23) This Court, at the very outset, noticed that apart from the
manufacturers and producers of medicines and drugs which
are essential commodities, the dealers in other commodities
would be indisputably governed by S. Kodar (supra). Hence,
the case was primarily considered from the angle of the
manufacturers and producers of medicines and drugs who
were dealers in essential commodities, who contended that
the controlled prices of which were exclusive of sales tax, as
fixed by control orders issued by the Central Government
under the EC Act.
24) Section 5(1) and 5(3) of the Bihar Act read as under: -
" 5. Surcharge - (1) Every dealer whose gross turn over
during a year exceeds rupees five lakhs shall, in addition
to the tax payable by him under this Part, also pay a
surcharge at such rate not exceeding ten per centum of the
total amount of the tax payable by him, as may be fixed by
the State Government by a notification published in the
Official Gazette :

Provided that the aggregate of the tax and surcharge
payable under this Part shall not exceed, in respect of
17

goods declared to be of special importance in inter-State
trade or commerce by section 14 of the Central Sales Tax
Act, 1256 (Act 74 of 1956), the rate fixed by section 15 of
the said Act:”

"5(3) Notwithstanding anything to the contrary contained in
this Part, no dealer mentioned in sub-s. (1), who is liable to
pay surcharge shall be entitled to collect the amount of this
surcharge."

25) There was a concession mentioned in the judgment
which was noticed in the referral order dated 13.08.1998
which was to the following effect: -
“ 13. It is fairly conceded that not only sub-section (1) of
Section 5 of the Act which provides for the levy of
surcharge on dealers whose gross turnover during a year
exceeds Rs 5 lakhs, but also sub-section (3) of Section 5 of
the Act which enjoins that no dealer who is liable to pay a
surcharge under sub-section (1) shall be entitled to collect
the amount of surcharge payable by him, are both
relatable to Entry 54 of List II of the Seventh Schedule which
reads:
54. Taxes on the sale or purchase of goods other than
newspapers, subject to the provisions of Entry 92-A
of List I."

26) This Court, during the course of the discussion, rejected
the argument that the controlled price is exclusive of sales tax
by observing as under: -
“ 27…… The entire argument built upon sub-para (3) of
para 3 and para 21 of the Control Order showing that the
controlled price is exclusive of sales tax and therefore is in
conflict with sub-section (3) of Section 5 of the Act appears
to be wholly misconceived. It is urged that the appellants
18

in their price-lists have a term embodied that sales tax
would be chargeable from a wholesaler or distributor and
therefore they are entitled to recover sales tax on the sale
of their medicines and drugs cannot possibly prevail. Such
a term would be in clear violation of para 24 of the Control
Order which is an offence punishable under Section 7 of
the Essential Commodities Act…..”

27) This Court noticed further that surcharge partook the
nature of sales tax and it was within the competence of the
State to enact Section 5(1). Further it was held that when the
State legislature had competence to levy tax on sale and
purchase of goods under Entry 54 of List II, it was equally
competent to select the class of dealers on whom the charge
was to fall. This Court held that if that were so, the State
legislature could undoubtedly have enacted Section 5(3)
prohibiting the dealers liable to pay surcharge under sub-
section (1) thereof from recovering the same from the
purchaser. This Court held that that Section 5(3) of the Bihar
Act was also relatable to Entry 54 of List II.
28) The contention that survived the Court’s examination, as
advanced by the manufacturers and producers of essential
commodities who were dealers, was set out in the following
19

terms: -
“ 28….. The contention however is that there is conflict
between para 21 of the Control Order which allows a
manufacturer or producer of drugs to pass on the liability
to pay sales tax and sub-section (3) of Section 5 of the Act
which prohibits such manufacturers or producers from
recovering the surcharge and therefore it is
constitutionally void…..”

29) It was argued that the Court should try to adopt a
harmonious construction and give effect to Paragraph 21 of the
Control Order and hence by virtue of Section 6 of the EC Act,
Paragraph 21 of the Control Order which provided for passing
on of tax liability must prevail.
30) This contention was rejected by holding that it was
misconceived since the appellants being manufacturers or
producers of formulations are not governed by Paragraph 21
of the Control Order but by Paragraph 24 thereof, and
therefore, the price chargeable by them to a wholesaler or
distributor was inclusive of sales tax. This Court found no
conflict between Section 5(3) and Paragraph 24 of the Control
Order. Additionally, it was found that even if some of the
appellants were found to be governed by Paragraph 21 of the
20

Control Order, that would not make any difference. This
Court found that the prohibition under Section 5(3) only meant
that the surcharge payable by such dealers under Section 5(1)
will cut into the profits earned by such dealers. Hence, this
Court found that there was no conflict between Section 5(3)
and Paragraph 21. This Court held that the EC Act was meant
for protecting the consumer’s interest and not the interest of
the manufacturer or producer.
31) Thereafter, in an important paragraph explaining the
distribution of the legislative fields under the Constitution, this
Court, while rejecting the argument based on the theory of
occupied field, explained how it was inapplicable in the
context of Entry 54 of List II by observing as under: -
“ 71. In Ch. Tika Ramji case [AIR 1956 SC 676 : (1956) SCR 393
: 1956 SCJ 625], the court observed that no question of
repugnancy under Article 254 of the Constitution could arise
where Parliamentary legislation and State legislation occupy
different fields and deal with separate and distinct matters
even though of a cognate and allied character and that where,
as in that case, there was no inconsistency in the actual terms
of the Acts enacted by Parliament and the State legislature
relatable to Entry 33 of List III, the test of repugnancy would
be whether Parliament and State legislature, in legislating on
an entry in the Concurrent List, exercised their powers over
the same subject-matter or whether the laws enacted by
21

Parliament were intended to be exhausted as to cover the
entire field, and added:
The pith and substance of argument cannot be imported here
for the simple reason that, when both the Centre as well as
the State Legislatures were operating in the concurrent field,
there was no question of any trespass upon the exclusive
jurisdiction of the Centre under Entry 52 of List I, the only
question which survived being whether, putting both the
pieces of legislation enacted by the Centre and the State
Legislature, there was any such repugnancy, ....
This observation lends support to the view that in cases of
overlapping between List II on the one hand and Lists I and
III on the other, there is no question of repugnancy under
Article 254(1). Subba Rao, J. speaking for the court in Deep
Chand case [AIR 1959 SC 648 : 1959 Supp 2 SCR 8 : 1959 SCJ
1069] , interpreted Article 254(1) in these terms:
Article 254(1) lays down a general rule. Clause (2) is an
exception to that Article and the proviso qualifies the said
exception. If there is repugnancy between the law made by
the State and that made by the Parliament with respect to one
of the matters enumerated in the Concurrent List, the law
made by Parliament shall prevail to the extent of the
repugnancy and law made by the State shall, to the extent of
such repugnancy, be void.
In all fairness to learned counsel for the appellants, it must be
stated that they did not pursue the point any further in view
of these pronouncements.”

72. We are unable to appreciate the contention that sub-
section (3) of Section 5 of the Act being a State law must be
struck down as ultra vires as the field of fixation of price of
essential commodities is an occupied field covered by a
Central legislation. It is axiomatic that the power of the
State legislature to make a law with respect to the levy
and imposition of a tax on sale or purchase of goods
relatable to Entry 54 of List II of the Seventh Schedule and
to make ancillary provisions in that behalf, is plenary
and is not subject to the power of Parliament to make a
law under Entry 33 of List III. There is no warrant for
projecting the power of Parliament to make a law under
Entry 33 of List III into the State's power of taxation under
Entry 54 of List II. Otherwise, Entry 54 will have to be
22

read as: ‘Taxes on the sale or purchase of goods other than
essential commodities et cetera’. When one entry is made
‘subject to’ another entry, all that it means is that out of
the scope of the former entry, a field of legislation
covered by the latter entry has been reserved to be
specially dealt with by the appropriate legislature. Entry
54 of List II of the Seventh Schedule is only subject to
Entry 92-A of List I and there can be no further
curtailment of the State's power of taxation. It is a well
established rule of construction that the entries in the
three lists must be read in a broad and liberal sense and
must be given the widest scope which their meaning is
fairly capable of because they set up a machinery of
Government.

73. The controversy which is now raised is of serious moment
to the States, and a matter apparently of deep interest to the
Union. But in its legal aspect, the question lies within a very
narrow compass. The duty of the court is simply to determine
as a matter of law, according to the true construction of
Article 246(3) of the Constitution, whether the State's power
of taxation of sale of goods under Entry 54 of List II and to
make ancillary provisions in regard thereto, is capable of
being encroached upon by a law made by Parliament with
respect to one of the matters enumerated in the Concurrent
List. The contention fails to take into account that the
Constitution effects a complete separation of the taxing
power of the Union and of the States under Article 246.

74. It is equally well settled that the various entries in the
three Lists are not ‘powers’ of legislation, but ‘fields’ of
legislation. The power to legislate is given by Article 246
and other Articles of the Constitution. Taxation is
considered to be a distinct matter for purposes of
legislative competence. Hence, the power to tax cannot
be deduced from a general legislative entry as an
ancillary power. Further, the element of tax does not
directly flow from the power to regulate trade or
commerce in, and the production, supply and
distribution of essential commodities under Entry 33 of
List III, although the liability to pay tax may be a matter
incidental to the Centre's power of price control.
23

75. “Legislative relations between the Union and the States
inter se with reference to the three Lists in Schedule VII
cannot be understood fully without examining the general
features disclosed by the entries contained in those Lists”:
Seervai in his Constitutional Law of India , 3rd Edn., Vol. 1 at
pp. 81-82. A scrutiny of Lists I and II of the Seventh Schedule
would show that there is no overlapping anywhere in the
taxing power and the Constitution gives independent
sources of taxation to the Union and the States. Following the
scheme of the Government of India Act, 1935, the
Constitution has made the taxing power of the Union and of
the States mutually exclusive and thus avoided the difficulties
which have arisen in some other Federal Constitutions from
overlapping powers of taxation.

76. It would therefore appear that there is a distinction
made between general subjects of legislation and
taxation. The general subjects of legislation arc dealt
with in one group of entries and power of taxation in a
separate group. In M.P.V. Sundararamier & Co. v. State of
A.P. [1958 SCR 1422] this court dealt with the scheme of
the separation of taxation powers between the Union and
the States by mutually exclusive lists. In List I, Entries 1
to 81 deal with general subjects of legislation; Entries 82
to 92-A deal with taxes. In List II, Entries 1 to 44 deal with
general subjects of legislation; Entries 45 to 63 deal with
taxes. This mutual exclusiveness is also brought out by
the fact that in List III, the Concurrent Legislative List,
there is no entry relating to a tax, but it only contains an
entry relating to levy of fees in respect of matters given
in that list other than court-fees. Thus, in our
Constitution, a conflict of the taxing power of the Union
and of the States cannot arise. That being so, it is difficult
to comprehend the submission that there can be intrusion
by a law made by Parliament under Entry 33 of List III
into a forbidden field viz. the State's exclusive power to
make a law with respect to the levy and imposition of a
tax on sale or purchase of goods relatable to Entry 54 of
List II of the Seventh Schedule. It follows that the two laws
viz. sub-section (3) of Section 5 of the Act and para 21 of
the Control Order issued by the Central Government
24

under sub-section (1) of Section 3 of the Essential
Commodities Act, operate on two separate and distinct
fields and both are capable of being obeyed. There is no
question of any clash between the two laws and the
question of repugnancy does not come into play. ”
(Emphasis supplied)

32) The Court further rejected the argument of treatment of
unequals as equals; disproportionate nature of the burden and
the provisions being arbitrary or irrational. Thereafter,
following S. Kodar (supra) , an argument based on
discrimination on the basis of turnover was also rejected.
Equally, the aspect of levy not being a pass through was also
considered and rejected following S. Kodar (supra) and other
line of judgments.
33) What is important to notice is that Hoechst (supra)
followed S. Kodar (supra) and is in consonance with S. Kodar
(supra). There is no conflict between S. Kodar (supra) and
Hoechst (supra) . Certain additional contentions peculiar to
manufacturers and producers of drugs were also discussed
since arguments based on the EC Act were advanced.
34) What is also crucial to note is that Hoechst (supra)
explained the division of the fields of the legislative lists and
25

expressed that Entry 54 of List II was only subject to Entry 92A
of List I which dealt with taxes on sale or purchase of goods
other than newspapers where such sale or purchase takes
place in the course of Inter-State trade or commerce. No part
of the field demarcated in Entry 92 A of List I is trampled was
an undisputed position in S. Kodar (supra). No contention on
that score was canvassed before us either. This aspect would
be relevant when Entry 23 and Entry 50 of List II is contrasted
with Entry 54 of List I. It will be reverted to a little later in the
judgment.
35) With this, the stage now shifts to examine the other aspect
referred to in the referral order about the impact of the
judgment in India Cements (supra) . When India Cements
(supra) is discussed, one must also discuss the subsequent
developments right up to the judgment of the Nine-Judge
Bench in Mineral Area Development Authority vs. SAIL ,
(2024) 10 SCC 1. In the referral order dated 13.08.1998, a
reference was made to the judgment in India Cements
(supra) as an aspect which constrained the reference of the
26

present matter to the larger Bench.
36) At the outset, it is to be noticed that India Cements
(supra) and MADA (supra) were cases which dealt with
mining leases. The legislative field governing them would be
Entry 54 of List I and Entries 23, 45, 49, 50 and 66 of List II. The
said entries are extracted here under: -
“List I- Union List
54. Regulation of mines and mineral development to
the extent to which such regulation and development
under the control of union is declared by parliament
by law to be expedient in the public interest”



List II- State List
23. Regulation of mines and mineral development
subject to the provisions of list one with respect to
regulation and development under the control of the
union.

45. Land revenue, including the assessment and
collection of revenue, the maintenance of land
records, survey for revenue purposes and records of
rights, and alienation of revenues

49. Taxes on lands and buildings.

50. Taxes on mineral rights subject to any
limitations imposed by parliament by law relating to
mineral development.

66. Fees in respect of any of the matters in this List,
but not including fees taken in any court.”

(Emphasis supplied)

27

INDIA CEMENTS LTD. AND OTHERS VS. STATE OF TAMIL
NADU AND OTHERS (1990) 1 SCC 12 ,
37) That brings us to the issue whether the judgment in India
Cements (supra) casts any doubt on the holding in S. Kodar
(supra) warranting a reference to the larger Bench. To
address this issue, a brief reference to the facts and the
holding in India Cements (supra) is inevitable.
38) In India Cements (supra), the question involved was
whether levy of cess on royalty by the State of Tamil Nadu was
within the competence of the State legislature. The provision
in question was Section 115 of the Tamil Nadu Panchayats
(Amendment and Miscellaneous Provisions) Act, 1964
(hereinafter called “the Tamil Nadu Panchayats Act’) which
provided that there shall be levied in every panchayat
development block, a local cess at the rate of 45 paise on
every rupee of land revenue payable to the government in
respect of any land in every Fasli. An explanation was
appended which read as under: -
28

"Explanation.-In this section and in section 116, 'land
revenue' means public revenue due on land and includes
water cess payable to the Government for water supplied
or used for the irrigation of land, royalty, lease amount or
other sum payable to the Government in respect of land
held direct from the Government on lease or licence, but
does not include any other cess or the surcharge payable
under section 116, provided that land revenue remitted
shall not be deemed to be land revenue payable for the
purpose of this section."

39) Section 116 of the Tamil Nadu Panchayats Act provided
that every panchayat union council may levy on every person
liable to pay land revenue to the government in respect of any
land in the panchayat union, a local cess surcharge at such
rate as may be considered suitable as an addition to the local
cess levied in the panchayat development block under
section 115 subject to certain cap provided there on.
40) The appellants therein were holding mining leases inter
alia for limestone and kankar for use in their cement
manufacturing plant. In the lease deed, they were obligated
to pay royalty, dead rent and surface rent at differential rates.
The appellants challenged the levy but the learned Single
Judge of the High Court (Kailasam, J. as the learned Judge then
29

was) dismissed the writ petition by relying on the judgment of
the five-Judge Constitution Bench of this Court in H.R.S.
Murthy vs. Collector of Chittoor , [1964] 6 SCR 666.
According to the High Court, the cess levied was a tax on land
covered under Entry 49 of List II to the Seventh Schedule. The
plea of arbitrariness vis-à-vis Section 116 was negated by
holding that there was a cap provided and hence there was no
arbitrariness in the levy. The Division Bench confirmed the
judgment of the learned Single Judge and held that the levy is
a tax on the land and the reference to land revenue, royalty,
lease amounts were only measures of levy.
41) It was in this background, a seven-Judge Bench of this
Court addressed the question whether cess on royalty is a
demand on land revenue or additional royalty. This Court
dealt with Section 9 of the Mines and Minerals (Regulation and
Development) Act, 1957 (for short “the MMRD Act”) and
examined the issue whether the levy by the State would be
covered in the fields demarcated under Entries 49, 45 or 50 of
30

List II of the Seventh Schedule. The mining lessees (appellants
therein) argued that the levy was nothing but a tax on royalty
and was ultra vires the power of the State legislature, while the
State defended it as a tax on land. This Court rejected the
contention of the State by holding as under: -
“ 20. The said observations were made in the dissenting
judgment, but there was no dissent on this aspect of the
matter. Relying on the aforesaid observations, Mr. Nariman
appearing for the appellant and the petitioners suggested
that the impugned levy in this case is nothing but a tax on
royalty and is therefore ultra vires the State legislature. Mr.
Krishnamurthy Iyer appearing for the State of Tamil Nadu
submitted that the cess in question in the instant case is a
levy in respect of land for every Fasli. He urged that the
words “a local cess at the rate of 45 naye paise on every
rupee of land revenue payable” qualify the words “land
revenue”. These words were only intended, according to
Mr. Krishnamurthy Iyer, to mean cess payable. It is,
however, not possible to accept this submission, in view of
the obligation indicated by the language of the provisions.
Cess is not on land, but on royalty which is included in the
definition of ‘land revenue’. None of the three lists of the
Seventh Schedule of the Constitution permits or
authorises a State to impose tax on royalty…..”
(Emphasis supplied)
42) Rejecting the contention of the State that the levy could
be covered under Entry 45 of List II of the Seventh Schedule
which dealt with land revenue, this Court held as under: -
“ 21……. It has, however, to be borne in mind that
Explanation to Section 115(1) was added and there was an
31

amendment as we have noted before. That very
Explanation makes a distinction between land revenue as
such and royalty which by amendment is deemed to be
land revenue. It is, therefore, recognised by the very
force of that Explanation and the amendment thereto that
the expression ‘royalty’ in Sections 115 and 116 of the Act
cannot mean land revenue properly called or
conventionally known, which is separate and distinct from
royalty.”

43) Repelling the submission of the State that the levy could
be justified under Entry 49 of List II, this Court held: -
“ 22. …But in the instant case, royalty being that which is
payable on the extraction from the land and cess being an
additional charge on that royalty, cannot by the parity of
the same reasoning, be considered to be a tax on land. But
since it was not a tax on land and there is no entry like
Entry 46 in the instant situation like the position before this
Court in the aforesaid decision, enabling the State to
impose tax on royalty in the instant situation, the State was
incompetent to impose such a tax. There is a clear
distinction between tax directly on land and tax on income
arising from land. The aforesaid decision confirmed the
above position…
23. …It is, therefore, not possible to accept Mr.
Krishnamurthy Iyer's submission and that a cess on royalty
cannot possibly be said to be a tax or an impost on land.
Mr. Nariman is right that royalty which is indirectly
connected with land, cannot be said to be a tax directly on
land as a unit……It may be mentioned that the Act does
not use dead rent as a basis on which land is to be valued.
Hence, there cannot be any doubt that the impugned
legislation in its pith and substance is a tax on royalty and
not a tax on land.”

32

44) Thereafter, the Court took up the issue whether the levy
would be covered under Entry 50 of List II. The submission
based on Entry 50 of List II of the State was met with stiff
resistance by the learned Attorney General, who appeared for
the Union of India contending that even if the levy fell within
the Entry 50 List II, it will be controlled by legislation under
Entry 54 of List I. Similarly, the learned Attorney General
resisted the attempt of the State to bring the levy as a fee
contending that Entry 23 of List II with Entry 66 of List II is also
subject to Entry 54 of List I and the declaration made under
Section 2 of the MMDR Act.
45) This Court, in India Cements (supra) , distinguished
H.R.S. Murthy (supra) by holding that the attention of the
Court in H.R.S. Murthy (supra) was not invited to the
provisions of the MMDR Act and Section 9 thereof. Further,
this Court pointed out that Section 9(3) of the MMDR Act, in
turn, stated that royalty payable under Second Schedule of the
Act shall not be enhanced more than once during the period
33

of four years. Hence, the Court found that there was a clear
bar on the State legislature taxing royalty so as to in effect
amend the Second Schedule of the MMDR Act and recorded
the following finding: -
“30. .In the premises, it cannot be right to say that tax
on royalty can be a tax on land, and even if it is a tax, if
it falls within Entry 50 will be ultra vires the State
legislative power in view of Section 9(3) of the Central
Act… ”

46) The Court further held that the field is fully covered by
the Central legislation. It went on to hold that royalty is
directly relatable only to the minerals extracted and on the
principle that the general provision is excluded by the special
one, royalty would be relatable to Entries 23 and 50 of List II
and not Entry 49 of List II. In conclusion, the Court held as
follows: -
“ 34. In the aforesaid view of the matter, we are of the
opinion that royalty is a tax, and as such a cess on royalty
being a tax on royalty, is beyond the competence of the
State legislature because Section 9 of the Central Act
covers the field and the State legislature is denuded of its
competence under Entry 23 of List II. In any event, we are
of the opinion that cess on royalty cannot be sustained
under Entry 49 of List II as being a tax on land. Royalty on
34

mineral rights is not a tax on land but a payment for the user
of land.”
(Emphasis supplied)
The appeal of the mining lessees was allowed and the cess
under Section 115 was held to be ultra vires .
47) As would be clear from the discussion above, India
Cements (supra) concerned the question whether royalty was
a tax and whether cess on royalty could have been imposed
by the State legislature. The competing entries which were
concerned in that case were Entry 54 of List I and Entries 23,
45, 46 and 49 of List II. In S. Kodar (supra), the entry
concerned was only Entry 54 of List II which was only subject
to Entry 92A of List I which dealt with tax on sale or purchase
of goods other than newspapers, where such sale or purchase
takes place in the course of inter-State trade or commerce.
There was no issue with regard to Entry 92A being engaged.
The only other aspect on the issue of competence of the State
legislature in S. Kodar (supra) was the argument that the levy
was in the nature of tax on income since there was a
prohibition to pass through. That argument was also repelled,
35

as notice above. In Hoechst (supra) , the only other Entry
which was engaged along with Entry 54 of List II was Entry 33
of List III which dealt with the essential commodities.
48) India cements (supra) was a case wherein mining
lessees sought to vest the power of levy of cess on royalty on
the Union legislature by contending that royalty was a tax.
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
36

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;
37

( 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
40

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,
43

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
44

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
46