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India Cement Ltd. v. State of Tamil Nadu

Supreme Court of India · 25 October 1989 · 7 judges · 1990 AIR 85; 1989 SCR Supl. (1) 692; 1990 SCC (1) 12

Overruled in whole or in part by Mineral Area Development Authority v. Steel Authority of India (2024), which says: “we conclude that the observation in India Cement (supra) to the effect that royalty is a tax is incorrect.”

A cess levied under Section 115 of the Madras Panchayats Act, 1958 on royalty payable under mining leases was held beyond the State Legislature's competence, with the declaration operating prospectively and no refund of cess already collected.

Facts

The appellant held a mining lease for limestone and kankar in Tamil Nadu and paid royalty at rates fixed under Section 9 of the Mines and Minerals (Regulation and Development) Act, 1957, a Central Act. Section 115 of the Madras Panchayats Act, 1958 levied a local cess of 45 paise on every rupee of land revenue, and a retrospective Explanation added in 1964 defined land revenue to include royalty. Section 116 allowed a further surcharge. The Collector demanded cess on royalty for 1961 to 1964. The Madras High Court, relying on H.R.S. Murthy v. Collector of Chittoor, upheld the levy as a tax on land under Entry 49 of List II. The company appealed, and connected appeals and writ petitions raised the same question.

Questions before the Court

  1. Is a cess on royalty a tax on land within Entry 49 of List II, or a tax on royalty?
  2. Can the State Legislature levy such a cess under Entries 23, 45 or 50 of List II when Parliament, under Entry 54 of List I, has enacted the Mines and Minerals (Regulation and Development) Act, 1957?

What the Court held

  • Entries in the Seventh Schedule are fields of legislation to be read widely, but a levy must be placed by its pith and substance. The cess was not on land but on royalty, which by the Explanation was only deemed to be land revenue; it was not land revenue under Entry 45.
  • Entry 49 of List II covers taxes directly on land as a unit. Royalty is payable on minerals extracted, so a cess on royalty is a tax on royalty and not a tax on land.
  • Royalty is a tax, and a cess on royalty, being a tax on royalty, is beyond the State's competence because Section 9 of the Central Act covers the field and the State is denuded of power under Entries 23 and 50 of List II. The approach in H.R.S. Murthy was said not to be correct.
  • Because the cess had been collected on the basis of H.R.S. Murthy, the levy was declared ultra vires prospectively. The State was restrained from enforcing it further, but was not liable to refund cess already paid or collected.

Why it matters

The judgment holds that a State cannot levy a cess on mining royalty, either as a tax on land under Entry 49 of List II or under Entries 23 and 50, where Parliament's law under Entry 54 of List I governs royalty. It disapproves the reasoning in H.R.S. Murthy v. Collector of Chittoor, and it applies the declaration of invalidity prospectively so that collected cess need not be refunded.

In the Court's words

Copied from the official judgment; each passage links to its page.

“Royalty is payable on a proportion of the minerals extracted. 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.”
Sabyasachi Mukharji, J.Page 14 of the judgment
“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 s. 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.”
Sabyasachi Mukharji, J.Page 17 of the judgment
“It is not in dispute that the cess which the Madras Village Panchayat Act proposes to levy is nothing but an additional tax and originally it was levied only on land revenue, apparently land revenue would fall within the scope of entry 49 but it could not be doubted that royalty which is a levy or tax on the extracted mineral is not a tax or a levy on land alone and if cess is charged on the royalty it could not be said to be a levy or tax on land”
Oza, J.Page 21 of the judgment

Provisions interpreted

Related judgments

Case and bench

Parties
India Cement Ltd. v. State of Tamil Nadu etc.
Case
Civil Appeal No. 62 (N) of 1970 etc.
Decided
25 October 1989
Bench
Mukharji, Sabyasachi, Venkataramiah, E.S. (CJ), Misra, Rangnath, Oza, G.L., Ray, B.C., Singh, K.N., Natrajan, S.
Opinions
Unanimous in result. Main judgment delivered by Sabyasachi Mukharji, J.; Oza, J. agreed with the conclusions but gave his own reasons.

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