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PETITIONER: KERALA HOTEL & RESTAURANT ASSOCIATION AND ORS.ETC. ETC.

       Vs.

RESPONDENT: STATE OF KERALA AND ORS.

DATE OF JUDGMENT21/02/1990

BENCH: VERMA, JAGDISH SARAN (J) BENCH: VERMA, JAGDISH SARAN (J) RANGNATHAN, S. OJHA, N.D. (J)

CITATION:  1990 AIR  913            1990 SCR  (1) 516  1990 SCC  (2) 502        JT 1990 (1)   324  1990 SCALE  (1)252

ACT:     Kerala General Sales Tax Act, 1963: Sections 5, 9--First Schedule  Item  57--Constitutional  validity--Imposition  of Sales   Tax--Cooked   food  sold  to  affluent   in   luxury hotels--Exemption    with    regard   to    modest    eating houses--Whether discriminatory and violates Article 14.     Tamil  Nadu  General Sales Tax Act, 1959:  Section  3(2) Schedule  I Item 150--Imposition of Sales  Tax--Cooked  food sold to affluent in luxury hotels--Exemption with regard  to modest  eating houses--Whether discriminatory  and  violates Article 14.

HEADNOTE:     The Constitutional validity of similar provisions in the States  of Kerala and Tamil Nadu which result in  imposition of Sales Tax on cooked food sold only in luxury hotels while exempting  the same from sales tax in modest  eating  houses was  challenged  by  some hoteliers in both  States  on  the ground  that  this amounted to  hostile  discrimination  and therefore violative of Article 14 of the Constitution. While the Kerala High Court rejected the challenge, the High Court of  Madras upheld it. Consequently one set of appeals and  a Writ Petition under Article 32 of the Constitution have been preferred  by the unsuccessful hoteliers of Kerala  and  the other set of appeals by the State of Tamil Nadu against  the decision  of the Madras High Court allowing the  Writ  Peti- tions filed before it by the hoteliers.     Upholding  the constitutional validity of  the  impugned provisions in both States, while dismissing the appeals  and Writ  Petition filed by the hoteliers and allowing  the  ap- peals by the State of Tamil Nadu, this Court,     HELD: It is the substance and not form alone which  must be  seen. The difference in the cooked food classified  dif- ferently, taxed and taxfree, is as intelligible and real  as the two types of customers to whom they are served at  these different eating houses. This difference must also be avail- able  to  support  the difference in the  incidence  of  the impugned  sales tax. This classification does bear  rational nexus with the 517

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object sought to be achieved. The object clearly is to raise the  needed  revenue  from this source,  determined  by  the fiscal  policy,  which  can be achieved by  taxing  sale  of costly food on the affluent alone in the society. The  clas- sification  is made by grouping together only  those  places where  costly  food is sold leaving  out  the  comparatively modest  ones. The classification is, therefore,  rounded  on intelligible  differentia and has a rational nexus with  the object sought to be achieved. In other words, those  grouped together  possess a common characteristic  justifying  their inclusion  in the group, but distinguishing them from  those excluded; and performance of this exercise bears a  rational nexus with the reason for the exercise. [526B-D]     The  scope for classification permitted in  taxation  is greater and unless the classification made can be termed  to be  palpably arbitrary, it must be left to  the  legislative wisdom  to choose the yardstick for classification,  in  the background  of  the fiscal policy of the  State  to  promote economic equality as well. It cannot be doubted that if  the classification  is made with the object of taxing  only  the economically  stronger  while leaving out  the  economically weaker sections of society,- that would be a good reason  to uphold  the classification if it does not  otherwise  offend any of the accepted norms of valid classification under  the equality clause. [526F-G]     The predominant object is to tax sale of cooked food  to the  minimum extent possible, since it is a vital  need  for sustenance.  Those who can afford the costlier cooked  food, being  more  affluent, would find the burden  lighter.  This object cannot be faulted on principle and is, indeed,  laud- able.  In  addition, the course adopted has  the  result  of taxing fewer people who are more affluent in the society for raising  the  needed  revenue with the  added  advantage  of greater administrative convenience since it involves dealing with  fewer eating houses which are easier to  locate.  This accords with the principle of promoting economic equality in the  society which must, undoubtedly, govern formulation  of the fiscal policy of the State. [532G-H]     The classification is made in the present case to  bring within  the tax next hotels or eating houses of  the  higher status excluding therefrom the more modest ones. A  rational nexus  exists  of this classification with  the  object  for which  it  is  made ,and the classification  is  rounded  on intelligible  differentia.  This being a relevant  basis  of classification related to the avowed object, the legislature having chosen an existing classification instead of  resort- ing  to  a fresh method of classification, it  cannot  be  a ground of invalidity even assuming there are other better 518 modes of permissible classification. The classification made under the impugned provisions is neither discriminatory  nor arbitrary. [533F-G; 534B]     Ganga  Sugar Corporation Limited v. State of Uttar  Pra- desh  &  Ors., [1980] 1 SCC 223; M/s S. Kodar  v.  State  of Kerala,  [1974]  4 SCC 42.2; P.H. Ashwathanarayana  Setty  & Ors. v. State of Karnataka & Ors., [1989] Suppl. 1 SCC  696; ITO  v. K.N. Takim Roy Rymbai; Federation of Hotel and  Res- taurant  Association  of India & Ors. v. Union  of  India  & Ors.,  [1989] 178 ITR 97; A.R. Krishna lyer & Ors. v.  State of  Madras,  [1956] 7 STC 346; Kadiyala  Chandrayya  v.  The State  of  Andhra, [1957] 8 STC 33 and Budhan  Chowdhary  v. State of Bihar, [1955] 1 SCR 1045, referred to.

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JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal Nos. 912  to 20 of 1988 Etc.     From  the  Judgment and Order dated 23.10. 1987  of  the Kerala High Court in O.P. Nos. 7976, 8543, 8385, 7712, 7761, 8058, 7461, 7709 & 7460/87. WITH Civil Appeal Nos. 4460 to 4480 of 1985.     (From  the Judgment and Order of the Madras  High  Court dated  31.1.  1985 in W.P. Nos. 7, 1586, 1591,  1636,  2079, 2702, 5510, 5718, 5782, 5834, 6035, 6036, 6384, 6497,  7038, 7067, 7079/1981 and 6479/82, 2348/83, 8196/83 and 256 1985.)          AND Writ Petition No. 281 of 1988. (Under Article 32 of the Constitution of India).     T.S.  Krishnamurthy lyer, P.S. Poti, A.S. Nambiar,  C.N. Sree  Kumar, Rajendra Chowdhry, V. Krishna Murthy, S.  Thana Jayan,  K.R.  Nambiar, R.F. Nariman, K.J.  John  and  Thomas Joseph for the appearing parties. The Judgment of the Court was delivered by     VERMA,  J.  These civil appeals and the  connected  writ petition involve decision of the substantially common  ques- tion  arising out of the conflicting decisions of  the  High Courts of Kerala and Madras regarding constitutional validi- ty  of similar provisions in the States of Kerala and  Tamil Nadu  which  result in imposition of sales tax  in  the  two States  on  cooked food sold to the affluent in  the  luxury hotels while exempting the same from sales tax in the modest eating  houses  patronised by the lesser  mortals.  In  both these  States  the eligibility to sales tax of  cooked  food sold only in luxury hotels was challenged on 519 the  ground that it amounted to hostile discrimination.  The Kerala  High Court rejected the challenge while  the  Madras High  Court has upheld it. This has led to filing  of  Civil Appeal  Nos. 912-20 of 1988 against the Kerala High  Court’s decision  and  Writ Petition (Civil) No. 281 of  1988  under Article 32 of the Constitution by the unsuccessful hoteliers of Kerala while Civil Appeal Nos. 4460-80 of 1985 are by the State  of Tamil Nadu against the Madras High  Court’s  deci- sion.  These  conflicting decisions of the two  High  Courts giving  rise to these matters are: Sangu Chakra Hotels  Pvt. Ltd. v. State of Tamil Nadu, [1985] 60 STC 125 (Madras)  and Hotel Elite v. State of Kerala, [1988] 69 STC 119 (Kerala).     Shorn  of  rhetoric and bereft of the  legal  embroidery which invariably constitute bulk of the armoury of constitu- tional attack on such a statutory provision and removing the gloss  of  hypertechnicality from the  arguments,  the  real question is: Whether imposition of sales tax on the sale  of cooked food in the more costly eating places alone  violates the  guarantee of equality enshrined in the Constitution  of our  ’Socialist’  Republic in view of the fact  that  cooked food  sold in the modest eating places catering to the  need of  the common man is not similarly taxed? The challenge  is that  this can be done only by taxing them equally  but  not otherwise.  In other words, the contention is that this  tax burden which is ultimately borne by the consumers of  cooked food  must be shared equally by all consumers and it  cannot be  placed  only  on the more affluent in  the  society  who obviously  are  the  ones frequenting  the  costlier  eating houses,  sale of cooked food wherein is taxed, the  tax  not being  on  the income or status of the consumer but  on  the sale of food for consumption. In substance the question  is: Is this the kind of equality envisaged and guaranteed in our Constitution?

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   It is well-settled that in order to tax some thing it is not necessary to tax everything. So long as those within the tax  net can be legitimately classified together  indicating an intelligible differentia vis-a-vis those left out and the classification  so  made  bears a rational  nexus  with  the object sought to be achieved, the classification is  clearly permissible  and it does not violate Article 14 of the  Con- stitution.  There being obviously no controversy  with  this settled principle, the contention of Shri T.S. Krishnamurthy Iyer  who  led the attack to this  imposition  supported  by other  learned counsel appearing in these matters  is,  that the cooked food sold in all eating houses, be it the  luxury hotels  catering to the affluent or the wayside dhabas  fre- quented  by the commoner, has the common  characteristic  of appeasing the hunger of the consumer, the requirement of the affluent as well as the commoner to appease the hunger being common. On this basis, the main theme of 520 the  argument was that the common purpose of sale of  cooked food in all eating houses being to appease the hunger of the consumer, there can be no reasonable basis for its classifi- cation  with reference to the eating house in which  it  was sold  to  the customers and, therefore, for  exigibility  to sales  tax  the  cooked food could not  be  classified  with reference  to  the place of its sale. Is  this  the  correct approach  to examine the reasonableness and validity of  the classification made in the present case?     In case such an argument is valid, it logically  follows that  in  order to tax sale of cooked food the  States  must levy the sales tax on cooked food sold in all eating  places whether it be a luxury hotel or a roadside dhaba; or not tax it at all, if it wishes to relieve the common man who is  in eternal  pursuit  of adequate means of sustenance,  of  this additional  burden. We must frankly admit that unless it  be the clear mandate of the Constitution we would not  hesitate to reject this argument which, if accepted, may lead to  the disastrous  consequence of equating for taxation  the  haves with  the have-nots even in the matter of sustenance of  the latter. Moreover, such a view may even tempt the legislature to tax all cooked food sold anywhere and we certainly do not wish  to make any contribution to a move in that  direction. Fortunately,  as we read the constitutional  provisions  and the  mandate of equality enshrined therein, such a  view  is not envisaged and the indication indeed is to the contrary.     The  preamble  to the Constitution contains  the  solemn resolve to secure to all its citizens, inter alia,  economic and social justice along with equality of status and  oppor- tunity. The expression ’socialist’ was intentionally  intro- duced  in  the  preamble by  the  Constitution  (FortySecond Amendment)  Act, 1976 with the principal aim of  eliminating inequality  in income and status and standards of life.  The emphasis  on  economic  equality in  our  socialist  welfare society  has  to  pervade all interpretations  made  in  the context of any challenge based on hostile discrimination. It is  on  the  altar of this vibrant concept  in  our  dynamic Constitution that the attack based on hostile discrimination in  the  present case must be tested  when  the  legislature intended to rest content with placing the tax burden only on the haves excluding the havenots from the tax net for satis- fying  the tax need from this source. The reasonableness  of classification  must  be  examined on this  basis  when  the object  of  the taxing provision is not to tax sale  of  all cooked  food  and thereby tax everyone but to  be  satisfied with the revenue raised by taxing only the sale of  costlier food consumed by those who can bear the tax burden.

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521     The  extent  to  which the revenue is  required  from  a particular  source is a matter of fiscal policy and  if  the legislature chooses to be satisfied with the raising of that amount  alone which can be recovered from the  affluent,  it cannot  be faulted for not dragging the impecunious also  in the tax net. Even otherwise the play at the joints permitted to  the  legislature for making classification in  a  taxing provision  is  greater and unless  the  classification  made cannot satisfy the test of reasonableness in the context  of economic  equality envisaged in our society,  a  legislative enactment  which undoubtedly benefits the common man  cannot be  held discriminatory or arbitrary. The Directive  Princi- ples  of  State Policy also enjoin the State to  temper  the legislation towards securing a social order conducive to the promotion  of social and economic equality,  eliminating  as far  as may be the existing inequalities  between  different strata  in  the society. This too is a pointer in  the  same direction.     We  are here concerned with the constitutional  validity of  a legislative provision which has the effect  of  making the cooked food sold in the posh eating houses alone  exigi- ble  to sales tax while exempting from that levy the  cooked food  sold in the moderate eating houses. Reasonableness  to the  classification has to be decided with reference to  the realities  of  life and not in the abstract.  A  discernible dissimilarity  between  those  grouped  together  and  those excluded  is a pragmatic test, if there be a rational  nexus of  such classification with the object to be  achieved.  in the  abstract  all  cooked food may be the  same  since  its efficacy is to appease the hunger of the consumer. But  when the  object is to raise only limited revenue by taxing  only some  category of cooked food sold in eating houses and  not all cooked food sold anywhere, it is undoubtedly  reasonable to  tax only the more costly cooked food. The  taxed  cooked food  being the more costly variety constitutes  a  distinct class with a discernible difference from the remaining  tax- free  cooked food. A blinkered perception of  stark  reality alone  can equate caviar served with champagne in  a  luxury hotel  with the gruel and buttermilk in a village hamlet  on the unrealistic abstract hypothesis that both the meals have the  equal  efficacy to appease the hunger  and  quench  the thirst  of the consumer. Validity of a classification  under our Constitution does not require such a blurred perception.     The cost of meal in these two distinct classes of eating houses  varies  considerably, the cost in  a  modest  eating house  quite often being a mere pittance of that in  a  posh eating  house. Not only that, the incidence of sales tax  on the cost of food served in a posh eating house 522 quite often would not even be noticed by the customer and it may  even  exceed  the total cost of the meal  served  in  a modest  eating house. How can the two meals be then  equated and  classified together by application of the  unreal  test that the efficacy of both meals is to appease the consumers’ hunger? It is the substance and not form alone which must be seen.  The difference in the cooked food classified  differ- ently,  taxed and tax-free, is as intelligible and  real  as the two types of customers to whom they are served at  these different eating houses. This difference must also be avail- able  to  support  the difference in the  incidence  of  the impugned sales tax. This classification does bear a rational nexus  with  the object sought to be  achieved.  The  object clearly  is  to raise the needed revenue from  this  source, determined  by the fiscal policy, which can be  achieved  by

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taxing  sale  of costly food alone and thereby  placing  the burden only on the affluent in the society. The  classifica- tion  is made by grouping together only those  places  where costly  food  is sold leaving out the  comparatively  modest ones. The classification is, therefore, rounded on  intelli- gible  differentia and has a rational nexus with the  object to be achieved.     Having mentioned this broad feature of the case, we  now advert to the specific provisions challenged and the various facets of the attack to their constitutional validity.     The  provisions of the Kerala Act may first  be  stated. The Kerala General Sales Tax Act, 1963 has been amended from time  to time both by the Kerala General Sales  Tax  (Amend- ment) Acts and also by the Kerala Finance Acts. Section 5 of the Kerala General Sales Tax Act is the charging section and the  first Schedule specifies goods subject to single  point tax thereunder. Section 9 of the Act provides for  exemption from  tax  and the goods so exempted are  specified  in  the third schedule to the Act. Item 12 in the third schedule  as it stood prior to 1.4.1976, read: "Item  12--Cooked food including coffee, tea and like  arti- cles  served in a hotel, restaurant or any other place by  a dealer whose total turnover in respect of such food is  less than thirty-five thousand rupees in a year."     The  above provision was amended by Act 45 of 1976  from 1.4.1976. After the said amendment, the provision read: "Cooked food including coffee, tea and like articles  served in a hotel, restaurant or any other place." 523     As  a result of the above amendment, cooked food  speci- fied in Item 12 mentioned above was exempt from sales tax by virtue of Section 9 of the Act.     This was the position until 1987 when the Kerala Finance Act,  1987 was passed, which was brought into  force  retro- spectively  with effect from 1.7.1987. However, we  are  not concerned  with its retrospective operation since an  under- taking  was given in the High Court on behalf of  the  State Government  that retrospective effect would not be given  to this provision. Item 57 in the First Schedule reads:    "57. Cooked food including beverages   At the point of         not falling in any entry in the   first sale in the         fifth schedule in bar attached    State by a dealer         hotels of restaurants and/or      who is liable to         hotels above the grade of two     tax under section         stars.                            5."     Item  12 in the Third Schedule was amended by the  above Finance Act to read as follows: "12.  Cooked  food including coffee, tea and  like  articles served  in  a hotel or a restaurant or any other  place  not falling under Entry 57 of the First Schedule."     In  the Fifth Schedule dealing with goods in respect  of which tax is leviable on two points under sub-section (1) or sub-section  (2) of Section 5 is included foreign liquor  as Item 2.     As a result of the Kerala Finance Act, 1987, Writ  Peti- tions  were filed in the Kerala High Court  challenging  the constitutional  validity  of  the sales tax  levied  on  the cooked food included under Item 57 of the First Schedule  of the  Act on the ground of discrimination because of Item  12 in the Third Schedule of the Act whereby cooked food includ- ing  coffee, tea and the like articles served in a hotel,  a restaurant  or any other place not falling under Item 57  of the  First  Schedule  was exempted. The  Kerala  High  Court dismissed  the  writ petitions. That  decision  reported  in

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Hotel Elite & Ors. v. State of Kerala & Ors., [1988] 69  STC 119 is challenged in one batch of Civil Appeals before us. 524 During  the pendency of these civil appeals, Kerala  Finance Act,1988 was passed amending Entry 57 of the Kerala  General Sales Tax Act, 1963, as under: "For  the  entry in column (2) against Serial  No.  57,  the following entry shall be substituted, namely, "Cooked  Food" including beverages not falling  under  entry 76A of this Schedule sold or served in, (i)  hotels and/or restaurants, the turnover in  respect  of which is twenty lakhs rupees and above; and (ii) bar attached hotels and/or restaurants."     As a result of the above amendment, the category of star hotels  has been removed and in its place hotels or  restau- rants with turnover of rupees twenty lakhs and above and bar attached hotels, etc. are substituted.     The  validity of the above provision was  challenged  by filing an application for amendment in this Court to  incor- porate  additional grounds mentioned in Civil  Miscellaneous Petition Nos. 7569-77 of 1988 in Civil Appeal Nos 912-20  of 1988.  The  application for amendment was  allowed  by  this Court  and it is, therefore, necessary to also consider  the validity of the said amendment introduced by Act 17 of 1988. In  addition, Civil Writ Petition No. 281 of 1988  has  been filed directly in this Court under Article 32 of the Consti- tution,  challenging  the constitutional validity  of  these amendments in the Kerala Act.     The  relevant provisions of the Tamil Nadu Act may  also be noticed. It is the constitutional validity of Item 150 in the First Schedule to the Tamil Nadu General Sales Tax  Act, 1959  which is challenged. By an amendment with effect  from 4.10. 1980 Item 150 reads as under: "Articles  of  food and drinks sold to  customers  in  three star,  four  star  and five star hotels,  as  recognised  by Tourism  Department, Government of India whether such  arti- cles are meant to be consumed in the premises or outside." The  effect  thereof  was to tax sales of  food  and  drinks covered by the above item while exempting those outside  the item. Thereafter Item 525 150 was substituted with effect from 12.6.1981 as under: "Articles  of  food and drinks other  than  those  specified elsewhere  in  this schedule, sold to  customers  in  hotels classified  or approved by the Government of India,  Depart- ment of Tourism." The  challenge to levy of sales tax on the sales covered  by these  items is substantially on the same grounds as in  the Kerala case.         We  shall  now  mention the  arguments  advanced  by learned  counsel  challenging  this imposition  in  the  two States. The power of the State Legislature to levy sales tax by virtue of Entry 54 in list II of the 7th Schedule to  the Constitution  and  the  availability of that  power  in  the present  case  to  impose sales tax on food  and  drinks  by virtue  of Clause (29A) inserted in Article 366 of the  Con- stitution  by the Constitution (Forty-sixth Amendment)  Act, 1982, is rightly not disputed. However, it is contended that the  classification  made of the food and drinks  taxed  and those exempted is discriminatory and arbitrary. It was urged that the classification is not based on the goods taxed  but on the status of the consumers which is not permissible.  It was  urged that the commodity taxed being the same  as  that exempted,  the difference being only in the place  of  their sale, differentiation for taxation on the basis of place  of

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sale  is impermissible. It was argued that Article  366(29A) permits imposition of tax on sale of food and drinks in  any form but it does not permit.a differentiation with reference only to the place of sale. It was also urged that the  clas- sification  in  such  cases based only on  turnover  may  be permissible  for administrative and some other  reasons  but not  on  the place of sale, the status’ of the  customer  or difference in the impact of such tax on the customer. It was also  contended that the classification made with  reference to  the  status  of hotel has no nexus with  the  object  of imposition  of sales tax because the approval for  the  star status  is for a different purpose relating to  tourism  and the  other amenities provided in the hotel. An  attempt  was also  made  to  contend that the quality of  food  need  not necessarily be superior in a hotel of higher star status  as compared  to  an ordinary eating house and the  charges  for food  served in the luxury hotels also include  the  service charges  and not merely the cost of food. Similarly, it  was urged  that a distinction made on the basis of a  bar  being attached to this hotel has no relevance or justification for the  classification made in this context. In reply,  it  was contended  by Shri P.S. Poti and Shri K. Rajendra  Choudhary on behalf of the two State Governments that such classifica- tion being permissible the mode to be 526 adopted  is  the  legislature’s choice which  has  chosen  a pragmatic  mode based on an existing classification  instead of  undertaking  the  exercise of a  new  classification  to identify  the  two categories of eating  houses,  the  sales wherein  should  be  taxed or exempted. It  was  urged  that unless the classification so made is found to be  arbitrary, there is no ground to reject the same and substitute it with another  method  simply because another method may  be  more desirable.  It was also contended that the object  being  to raise only limited revenue from this source, it was  decided to  tax only the sale of costlier food and  thereby  confine the burden only to fewer people on whom the burden would  be light  with  the added advantage of  greater  administrative convenience.     A catena of decisions was cited at the bar on the  point relating to valid classification and the test to be  applied when hostile discrimination is alleged. It is not  necessary to  refer  to all those decisions which  state  the  settled principles  not  in dispute even before us.  The  difficulty really  is in the application of settled principles  to  the facts of each case. It is settled that classification round- ed  on  intelligible differentia is permitted  provided  the classification  made  has a rational nexus with  the  object sought to be achieved. In other words, those grouped togeth- er  must  possess a common characteristic  justifying  their inclusion  in the group, but distinguishing them from  those excluded;  and  performance  of this exercise  must  bear  a rational nexus with the reason for the exercise.     The  scope for classification permitted in  taxation  is greater and unless the classification made can be termed  to be  palpably arbitrary, it must be left to  the  legislative wisdom  to choose the yardstick for classification,  in  the background  of  the fiscal policy of the  State  to  promote economic equality as well. It cannot be doubted that if  the classification  is made with the object of taxing  only  the economically  stronger  while leaving out  the  economically weaker  sections of society, that would be a good reason  to uphold  the classification if it does not  otherwise  offend any of the accepted norms of valid classification under  the equality clause.

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   Broadly stated the points involved in the constitutional attack  to the validity of this classification are, in  sub- stance, only two: (1) Is the classification of sales of cooked food made  with reference  to the eating houses wherein the sales are  made, rounded on an intelligible differentia? and 527 (2)  If  so, does the classification have a  rational  nexus with the object sought to be achieved?           It would be useful at this stage to refer to  some decisions  of this Court indicating the  settled  principles for  determining  validity  of classification  in  a  taxing statute.  In  Ganga Sugar Corporation Limited  v.  State  of Uttar  Pradesh and Ors., [1980] 1 SCC 223, Krishna lyer,  J. speaking for the Constitution Bench held that a  classifica- tion based, inter alia, on "profits of business and  ability to  pay tax" is constitutionally valid. Classification  per- missible  in  a taxing statute of dealers on  the  basis  of different  turnovers for levying varying rates of sales  tax was considered by the Constitution Bench in M/s S. Kodar  v. State  of Kerala, [1974] 4 SCC 422, and Mathew,  J.  therein indicated the true perspective as under:               "As  we said, a large dealer occupies a  posi- tion  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  at- tempt to proportion the payment to capacity to pay and  thus arrive in the end at  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 discrim- inatory 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 part with compar- atively  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)          A recent decision of this Court in P.H. Ashwathana- rayana Setty and Ors. v. State of Karnataka and Ors., [1989] Supp. 1 SCC 696 gives a fresh look to the extent of  classi- fication  held valid in a taxing statute; and the  scope  of judicial review permitted while considering its validity  on the  ground of equality under Article 14. The true  position has been 528 succinctly summarised by Venkatachaliah, J. speaking for the Court, as under: "The problem is, indeed, a complex one not free from its own peculiar  difficulties.  Though other  legislative  measures dealing with economic regulation are not outside Article 14, it  is  well  recognised that the State  enjoys  the  widest latitude  where  measures of economic  regulation  are  con- cerned.  These measures for fiscal and  economic  regulation involve an evaluation of diverse and quite often conflicting economic  criteria and adjustment and balancing  of  various conflicting social and economic values and interests. It  is for  the State to decide what economic and social policy  it should pursue and what discriminations advance those  social

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and economic policies. In view of the inherent complexity of these fiscal adjustments, courts give a larger discretion to the legislature in the matter of its preferences of economic and social policies and effectuate the chosen system in  all possible  and  reasonable ways. If two or  more  methods  of adjustments of an economic measure are available, the legis- lative  preference in favour of one of them cannot be  ques- tioned  on the ground of lack of legislative wisdom or  that the method adopted is not the best or that there were better ways  of adjusting the competing interests and  claims.  The legislature   possesses   the  greatest  freedom   in   such areas  .....  " "The  legislature has to reckon with practical  difficulties of adjustments of conflicting interests. It has to bring  to bear  a pragmatic approach to the resolution of  these  con- flicts  and evolve a fiscal policy it thinks is best  suited to  the felt needs. The complexity of economic  matters  and the  pragmatic  solutions to be found for them defy  and  go beyond  conceptual mental models. Social and economic  prob- lems of a policy do not accord with preconceived stereotypes so as to be amenable to predetermined solutions  .....  " The  lack  of perfection in a legislative measure  does  not necessarily  imply  its unconstitutionality. It  is  rightly said that no economic measure has yet been devised which  is free  from  all  discriminatory impact and that  in  such  a complex  arena in which no perfect alternatives  exist,  the Court  does  well not to impose too rigorous a  standard  of criti- 529 cism,  under the equal protection clause,  reviewing  fiscal services. In G.K. Krishnan v. State of Tamil Nadu this Court referred to, with approval, the majority view in San Antonio Independent  School District v. Rodriguez  speaking  through Justice Stewart: ’No  Scheme  of  taxation, whether the  tax  is  imposed  on property, income or purchases of goods and services, has yet been devised which is free of all discriminatory impact.  In such a complex arena in which no perfect alternatives exist, the Court does well not to impose too rigorous a standard of scrutiny  lest all local fiscal schemes become  subjects  of criticism under the Equal Protection clause’ and  also to the dissent of Marshall, J. who summed  up  his conclusion that: ’In  summary,  it seems to me inescapably  clear  that  this Court has consistently adjusted the care with which it  will review  State discrimination in light of the  constitutional significance of the interests affected and the invidiousness of the particular classification. In the context of economic interests,  we  find  that discriminatory  State  action  is almost  always sustained, for such interests  are  generally far removed from constitutional guarantees. Moreover, "(t)he extremes to which the court has gone in dreaming up rational basis  for  State regulation in that area may  in  many  in- stances be ascribed to a healthy revulsion from the  court’s earlier excesses in using the Constitution to protect inter- ests that have more than enough power to protect  themselves in the legislative halls." "The  observations  of this Court in ITO v. K.N.  Takim  Roy Rymbai  made in the context of taxation laws are  worth  re- calling. (T)he mere fact that a tax falls more heavily on some in the same  category, is not by itself a ground to render the  law invalid. It is only when within the range of its  selection. the  law operates unequally and cannot be justified  on  the basis  of  a  valid classification, that there  would  be  a

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violation of Article 14." (emphasis supplied) 530     In  Federation  of Hotel and Restaurant  Association  of India  and others v. Union of India and others,  [1989]  178 ITR  97 Venkatachaliah, J., delivering the majority  opinion of  the  Constitution  Bench while dealing  with  a  similar objection  to  classification in a taxing statute,  held  as under: "The State, in the exercise of its Governmental power,  has, of necessity, to make laws operating differently in relation to  different groups or class of persons to  attain  certain ends  and must, therefore, possess the power to  distinguish and  classify persons or things. It is also recognised  that no  precise or set formula or doctrinaire tests  or  precise scientific  principles of exclusion or inclusion are  to  be applied.  The test could only be one of palpable  arbitrari- ness  applied in the context of the felt needs 10 the  times and societal exigencies informed by experience.          Classifications  based on differences in the  value of  articles or the economic superiority of the  persons  of incidence  are well recognised. A reasonable  classification is  one  which includes all who are similarly  situated  and none who are not. In order 10 ascertain whether persons  are similarly  placed, one must look beyond  the  classification and to the purposes of the law." (emphasis supplied)     Thus, it is clear that the test applicable for  striking down  a taxing provision on this ground is one of  ’palpable arbitrariness  applied in the context of the felt  needs  of the  times and societal exigencies informed by  experience’; and  the  courts should not interfere with  the  legislative wisdom  of making the classification unless the  classifica- tion is found to be invalid by this test.     In the present case, to assail the constitutional valid- ity  of  the  impugned provisions reliance is  placed  on  a decision  of the Madras High Court in A.R. Krishna lyer  and Ors. v. State of Madras, [1956] 7 STC 346. However, contrary view was taken by the A.P. High Court of the same  provision in the Madras General Sales Tax Act, 1939 in Kadiyala  Chan- drayya  v.  The State of Andhra Pradesh, [1957]  8  STC  33. Subba Rao, C J, as his lordship then was, upheld the classi- fication  in the Andhra decision on the ground that  it  was made as a genuine attempt to adjust the, burden with a  fair and  reasonable  degree  of equality and  to  harmonise  the doctrine of equality with differences 531 inherent in the categories of persons assessed. After refer- ring  to  the principle  of  classification  authoritatively restated  by  this  Court in Budban Chowdhary  v.  State  of Bihar,  [1955] 1 SCR 1045 and quoting the of quoted  passage from Willis on Constitutional Law on this point, Subba  Rao, CJ., as his Lordship then was, proceeded to hold as under: "The  object of the Act, as set out in the preamble.  is  to provide  for the levy of a general tax on the sale of  goods in the State of Andhra. But every taxing legislation makes a genuine attempt to adjust the burden with a fair and reason- able  degree  of  equality. It also aims  to  apportion  the burden  equitably on different categories of  properties  or persons with distinct economic characteristics. It is impos- sible in the nature of things to aim at absolute equality in the  matter of taxation. The State resorts to the  principle of classification in an attempt to harmonise the doctrine of equality  with  differences inherent in  the  categories  of properties  or  persons assessed. In the present  case,  the

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object  to  provide  for the levy of a general  tax  and  to apportion the burden equitably between different  categories of  persons has a reasonable nexus with  the  classification adopted  by the legislature. The question can be  considered from  the  stand-point of the citizen as well  as  from  the stand-point of the State. From the stand-point of the State, the classification can be justified on the ground of equita- ble apportionment of the burden and easy realisation of  the tax.  Articles  of food and drink are more  in  demand  than other  articles. Even in the case of the former, there  will be  a  larger  demand in restaurants,  boarding  houses  and hotels  than in other places like way-side shops. There  may be  small or big dealers even in such commodities,  who  run hotels or keep boarding houses. The State also can  reasona- bly  recover taxes at higher rates from  prosperous  dealers than  from  impecunious ones. From the  stand-point  of  the dealer  also, there is justification for the  varied  rates. The  articles sold, the place where the business is  carried on and the expectation of large profits are the characteris- tics of dealers who are distinct from dealers not covered by the proviso.          Learned  counsel  relied upon the decision  of  the Madras  High Court in Krishna lyer v. The State  of  Madras, wherein  the learned Judges took a different view from  what we have taken. After pointing out that three lines of clas- 532 sification  run through the impugned provision, the  learned judges  considered only the second  classification,  namely, the  distinction  between dealers in articles  of  food  and drinks  sold in hotels, boarding houses and restaurants  and other  dealers in such articles and held that it was  suffi- cient  to deny the validity of the impugned provision.  With great respect we cannot agree. In our view, the characteris- tics of the dealer covered by the proviso should be  cumula- tively considered and, if so looked at, the said  character- istics  will  afford a reasonable  basis  of  classification which  has  a rational nexus with the object  sought  to  be achieved.  We,  therefore, hold that the  classification  is rounded  on intelligible differentia distinguishing  dealers like the assessee and that it has a rational relation to the object sought to be achieved." (emphasis supplied) The  vision  of Subba Rao, C J, as his  Lordship  then  was, portrayed  in  the Andhra decision more than  three  decades earlier, a forerunner in the field, is fully realised  being consistent  with the picture emerging from the decisions  of this  Court  already noticed and promotes the  principle  of economic  equality  governing formulation of  the  country’s fiscal policy. With great respect, we fully concur with  the above  view  taken by Subba Rao, C J, as his  Lordship  then was,  even prior to introduction of the word ’socialist’  in the  Preamble of the Constitution, which further  reinforces its correctness.     The obvious reason for making the classification in  the present case is to group together those eating houses  alone wherein  costlier  cooked food is sold for  the  purpose  of imposition  of  sales tax to raise the needed  revenue  from this  source. The object apparently is to raise  the  needed revenue  from this source by taxing the sale of cooked  food only to the extent necessary and, therefore, tO confine  the levy only to the costlier food. The predominant object is to tax  sale  of cooked food to the  minimum  extent  possible, since  it  is  a vital need for sustenance.  Those  who  can afford the costlier cooked food, being more affluent,  would find  the burden lighter. This object cannot be  faulted  on

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principle and is, indeed, laudable. In addition, the  course adopted  has the result of taxing fewer people who are  more affluent in the society for raising the needed revenue  with the  added advantage of greater  administrative  convenience since it involves dealing with fewer eating houses which are easier to locate. This accords with the principle of promot- ing economic equality in the society which must,  undoubted- ly, govern formulation of the fiscal policy of the State. 533     The  trend  of the up-to-date decisions of  this  Court, already  noticed  does indicate that a  classification  made whereby the tax net covers only the sale of costlier  cooked food  in the posh eating houses while exempting  the  cooked food  sold  in the modest eating houses  at  lesser  prices, thereby  confining  the burden to the more affluent  in  the society,  satisfies the requirements of a valid  classifica- tion. Moreover, the classification so made cannot be  termed as arbitrary, being within the limits upto which the  legis- lature  is given a free hand for making classification in  a taxing statute.     It  has not been shown that any eating house similar  to those  grouped  together for purpose of  taxation  has  been excluded from the group. The classification made is to group together  all eating houses wherein costlier cooked food  is sold.  It has not been shown that the tariff of cooked  food sold  in  any of the exempted eating houses is the  same  or higher than that of those taxed. The tax is applied  equally to all those within the tax net.     It  was urged that eating houses serving cooked food  of the  same  quality but not recognised with the  higher  star status  to  bring  it within the tax net  enjoyed  an  undue advantage not available to those within the tax net. It  was also urged that recognition of a hotel for conferment of the star status was made for a different purpose, namely, promo- tion  of tourism and the other facilities available  therein which have no relevance to the quality of food served there- in.  Admittedly, such recognition entails  several  benefits and seeking recognition depends on volition. In our opinion, such   an  enquiry  is  unwarranted  for  the   purpose   of classification in the present context. It is well-known that the  tariff in hotels depends on its star status,  it  being higher  for the higher star hotels. The object being to  tax cooked food sold at a higher tariff, the status of the hotel where  it is sold is certainly relevant. The  classification is  made  in the present case to bring within  the  tax  net hotels  or  eating  houses of the  higher  status  excluding therefrom  the more modest ones. A rational nexus exists  of this classification with the object for which it is made and the  classification is rounded on intelligible  differentia. This being a relevant basis of classification related to the avowed  object,  the legislature having chosen  an  existing classification  instead  of resorting to a fresh  method  of classification,  it  cannot be a ground of  invalidity  even assuming  there  are  other  better  modes  of   permissible classification.  That  is  clearly  within  the  domain   of legislative  wisdom intrusion into which of judicial  review is  unwarranted.  There is no material placed before  us  to indicate  that with reference to the purpose for  which  the classification has’ been made in 534 the present case, there is a grouping together of dissimilar eating  houses or that similar eating houses have  been  ex- cluded from the class subject to the tax burden..     This  discussion  clearly shows that the attack  to  the constitutional  validity of the impugned provisions in  both

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States has no merit since the classification made is neither discriminatory  nor  arbitrary.  We have  no  hesitation  in rejecting  the  challenge on the aforesaid  grounds  on  the material  produced.  The writ petitions filed in  both  High Courts  as  also in this Court challenging the levy  in  the States of Kerala and Tamil Nadu must fail.     Consequently,  Civil Appeal Nos 912-20 of  1988  against the  judgment of the Kerala High Court as well as  the  con- nected  Civil Writ Petition No. 281 of 1988 challenging  the validity  of the impugned provisions in the Kerala  Act  are dismissed  while Civil Appeal Nos. 4460-80 of  1985  against the  Madras  High Court decision are  allowed  resulting  in dismissal of those writ petitions also. In the circumstances of the case, the parties shall bear their own costs. R.N.J. 535