Holding

The classification of cooked food sold in luxury hotels for sales tax purposes is constitutionally valid as it is based on intelligible differentia and has a rational nexus with the objective of taxing the affluent, and therefore does not violate Article 14.

Summary

The Supreme Court examined the constitutional validity of provisions in the Kerala and Tamil Nadu General Sales Tax Acts that taxed cooked food sold in luxury or star‑rated hotels while exempting the same in modest eating houses. Hoteliers challenged the classification as hostile discrimination violating Article 14. The Court held that the classification is based on intelligible differentia – the economic status of the consumers and the higher tariff of food in upscale establishments – and bears a rational nexus with the objective of raising revenue from the affluent, thereby satisfying the equality clause. It rejected the argument that taxation must be uniform for all cooked food irrespective of place of sale. Consequently, the challenge by the hoteliers failed and the State’s appeal succeeded. The Court dismissed the civil appeals of the petitioners and allowed the State’s appeals, also dismissing the related writ petitions.

Issues considered

Whether the classification of cooked food based on the type of eating house (luxury hotel vs modest eating house) violates Article 14 of the Constitution.
Whether the classification has an intelligible differentia and a rational nexus with the legislative objective of raising revenue.
Whether the tax scheme is discriminatory or arbitrary under the equality clause.

Legislation cited

Constitution (42nd Amendment) Act, 1976
Constitution (46th Amendment) Act, 1982s. Article 366(29A)
Kerala Finance Act, 1987
Kerala Finance Act, 1988
Kerala General Sales Tax Act, 1963s. 5, s. 9, s. Schedule Item 12, s. Schedule Item 57
Tamil Nadu General Sales Tax Act, 1959s. 3(2), s. Schedule Item 150

Subjects

Article 14Equality clauseTax classificationSales taxLuxury hotelsCooked foodFiscal policyDiscriminationConstitutional validityTaxation of affluent

Judgment

KERALA HOTEL & RESTAURANT ASSOCIATION AND ORS.
A
ETC. ETC.
v.
STATE OF KERALA AND ORS.

FEBRUARY 21, 1990

[S. RANGANATHAN, N.D. OJHA AND J.S. VERMA, JJ.]

Kera/a General Sales Tax Act, 1963: Sections 5, 9-FirstSchedu/e
Item 57-Constitutional validity-Imposition of Sales Tax-Cooked
food sold to affluent in luxury hotels-Exemption with regard to modest
C eating houses-Whether discriminatory and violates Article 14.
-
Tamil Nadu General Sales Tax Act, 1959: Section 3(2) Schedule I
Item 150-lmposition of Sales Tax-Cooked food sold to affluent in
luxury hotels-Exemption with regard to modest eating houses-Whe-
the'r discriminatory and violates Article 14.

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 «xempting 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
E 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 It--
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 llllP"'.:
F Petitions 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 appeals by the State of Tamil Nadu. this
Court,
G
HELD: It is the substance and not form alone which must be seen.
The difference in the cooked food classified differently, 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 available to support the difference in the incidence of the
H impugned sales tax. This classification does bear rational nexus with the

516
KERALA HOTEL ASSCN. v. STATE OF KERALA 517

ODject sought to be achieved. The object clearly is to raise the needed
A
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 classification is made by grouping together only those places where
costly food is sold leaving out the comparatively modest ones. The clas-
sification is, therefore, founded on intelligible differentia and has a
rational nexus with the object sought to be achieved. In other words, B
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. [5268-D] ··

The scope for classification permitted in taxation is greater and
unless the classification made can be termed to be palpably arbitrary, it
c
must be left to the legislative wisdom to choose the yardstick for classifi-
cation, 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 he a D
good reason to uphold the classification if it does not otherwise offend
any of the accepted norms of valid classification under the equality
clause. ISZ6F-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 E
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, 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 F
easier to locate. T_his accords with the principle of promoting economic
equality in the society which must, undoubtedly, govern formulation of
the fiscal policy of the State. [S32G-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 G
the more modest ones. A rational nexus exists of this classification with
the object for which it is made. and the classification is founded 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 H
518 SUPREME COURT REPORTS [1990] 1 S.C.R.
modes of permissible classification. The classification made under the ._..,..
A impugned provisions is neither discriminatory nor arbitrary. [533F-G; 5348 I '"'
Ganga Sugar Corporation Limited v. State of Uttar Pradesh &
Ors., [1980] l SCC 223; M/s S. Kadar v. State of Kera/a, [1974] 4 SCC
422; P.H. Ashwathanarayana Setty & Ors. v. State of Karnataka &
B Ors., [1989] Suppl. l SCC 696; ITO v. K.N. Takim Roy Rymbai;
Federation of Hotel and Restaurant Association of India & Ors. v. ,._+.
Union of India & Ors., [1989] 178 ITR 97; A.R. Krishna Iyer & 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] I SCR 1045, referred to.
C 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 ·Ir -'
Court in O.P. Nos. 7976, 8543, 8385, 7712, 7761, 8058, 7461, 7709 & 7460/87.
WITH
D 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, 7079/1981and6479/82,
2348/83, 8196/83 and 256 1985.)
E AND
Writ Petition No. 281of1988.
(Under Article 32.ofthe Constitution oflndia).
T.S. Krishnamurthy Iyer, P.S. Poti, A.S. Nambiar, C.N. Sree \,,a
Kumar, Rajendra Chowdhry, V. Krishna Murthy, S. Thana Jayan, .,
F
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
G involve decision of the substantially common question arising out of
the conflicting decisions of the High Courts of Kerala and Madras
regarding constitutional validity 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
H patronised by the lesser mortals. In both these States the exigibility to
sales tax of cooked food sold only in luxury hotels was challenged on
..
KERALA HOTEL ASSCN. v. STATE OF KERALA [VERMA, J.) 519

tne ground that it amounted to hostile discrimination. The Kerala
High Court rejected. the challenge while the Madras High Court has A
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 unsuccess-
ful hoteliers of Kerala whil"-CivilAppe_aJNos. 4460-80 of 1985 are by
the State of Tamil Nadu against the Madras High Court's decision. B
These coflicting 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 Kera/a, [1988]
69 STC 119 (Kerala).
Shorn of rhetoric and bereft of the legal embroidery which invari-
ably constitute bulk of the armoury of constitutional attack on such a c
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_~ooked food sold in the
modest eating places catering to the need of the common man is not D
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 E
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?

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 legiti- F
mately classified together indicating an intelligible differentia vis-a-vis
thClse left out and the classification so made bears a rational nexus with
the object sought to be achieved, the classification is clearly permissi-
ble and it does not violate Article 14 of the Constitution. There being

...
obviously no controversy with this settled principle, the contention of
Shri T.S. Krishnamurthy Iyer who led the attack to this imposition G
supported by other learned counsel appearing in these matters is, that
the cooked food sold in all eating houses; be it the luxury hotels cater-
ing to the affluent or the wayside dhabas frequented by the commoner,
has the common characteristic of appeasing the hunger of the con-
sumer, the requirement of the affluent as well as the commoner to
appease \he hunger being common. On this basis, the main theme of H
520 SUPREME COURT REPORTS [1990] I S.C.R.

A the argument was that the common purpose of sale of cooked food m
all eating houses being to appease the hunger of the consumer, there
can be no reasonable basis for its classification 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
B 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
C 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
I) 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.
E
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 opportunity. The expression 'socialist' was
intentionally introduced in the preamble by the Constitution (Forty-
Second Amendment) Act, 1976 with the principal aim of eliminating
F 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 con-
G tent with placing the tax burden only on the haves excluding the have-
nots from the tax net for satisfying the tax need from this source. The
reasonableness of classification must be examined on this basis when
I ,.
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
H the tax burden.
KERALA ROJ'EL ASSCN. v. STATE OF KERALA (VERMA, J.] 521

The extent to which the revenue is required from a particular A
soPrce is a matter of fiscal policy and if the legislature chooses to be
satisfied~ith the raising of that amount alone which can be recovered
from'the affluent, it cannot be faulted for not dragging the impe-
cunious also in the tax net. Even otherwise the play at the joints
permitted to the legislature for making classification in a taxing provi-
sion is greater and unless the classification made cannot satisfy the test B
of reasonableness in the context of economic equality envisaged in our
society, a legislative enactment which undoubtedly benefits the com-
mon man cannot be held discnminatory or arbitrary. The Directive
Principles 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
c
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 exigible to sales tax while exempt- D
ing from that levy the cooked food sold in the moderate eoting houses.
Reasonableness ot the classification has to be decided with reference
to the realities of life and not in the abstract. A discernible dissimi-
larity 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 E
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 F
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 effi-
cacy to appease the hunger and quench the thirst of the consumer.
Validity of a classification under our Constitution does not require G
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 H
522 SUPREME COURT REPORTS (1990] 1 S.C.R.
!
A 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 L?•1se. How
can the two meals be then equated and classified together by.::' ilica-
.· tion of the unreal test that the efficacy of both meals is to app~:i'ce the
consumers' hunger? It is the substance and not form alone which must
be seen. The difference in the cooked food classified differently, taxed
B 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 available 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 taxing sale of costly food alone and thereby
c 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, founded on intelligible differentia and has a rational
nexus with the object to be achieved. ·
! •
D
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
E General Sales Tax Act, 1963 has been amended from time to time both
• by the Kerala General Sales Tax'(Amendment) 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 exemp-
tion from tax and the goods so exempted are specified in the third
F 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, res(aurant or any other place by a
dealer whose total turnover in resppect of such food is less
.G t!'an 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
H in a hotel, restaurant or any other place."
KERALA HOTEL ASSCN. v. STATE OF KERALA [VERMA, J.] 523

As a result of the above amendment, cooked food specified in A
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 retrospectively with
effect from 1. 7 .1987. However, we are not concerned with its 8
retrospective operation since an undertaking 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:
c
"57. Cooked food including beverages At the point of first
not falling in any entry in the sale in the State by a
fifth schedule in bar attached dealer who is liable
hotels of restaurants and/or to tax under section
hotels above the grade of two 5.'"
stars. D

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 E
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 (I) or sub-section (2) of Sec-
tion 5 is included foreign liquor as Item 2.
F
As a result of the Kerala Finance Act, 1987, Writ Petitions 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 G
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 Hotel Elite & Ors. v. State of Kerala & Ors.,
[ 1988] 69 STC 119 is challenged in one batch of Civil Appeals before
us.
H
524 SUPREME COURT REPORTS [1990] 1 S.C.R.

During the pendency of these civil appeals, Kerala Finance Act,
A 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,
B
"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 -
c (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 restaurants with turnover
of rupees twenty lakhs and above and bar attached hotels, etc. are
D substituted.

The _validity of the above provision was challenged by filing an
application for amendment in this Court to incorpo~ate additional ~·
grounc!s mentioned in Civil Miscellaneous Petition Nos. 7569-77 of
1988 in Civil Appeal Nos 912-20 of 1988. The application for amend-
E ment 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 Constitution, challenging
the constitutional validity of these amendments in the Kerala Act.

F 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:

G · "Artitles· 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 articles
are meant to be consumed in the premises or outside."

The effect thereof was to tax sales of food and drinks covered by the
H. above item while exempting those outside the item. Thereafter Item
KERALA HOTEL ASSCN. v. STATE OF KERALA [VERMA, J.l 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 clas-
sified or approved by the Government of India, Depart-
A

ment of Tourism."
B
t- 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 c
.... the present case to impose sales tax on food and drinks by virtue of
Clause (29A) inserted in Article 366 of the Constitution by the Con-
stitution (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 .0
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
-.ti 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 sale is impermissible. It was argued that Article
366(29A) permits imposition of tax on sale of food and drinks in any E
form but it does not permit a differentiation with reference only to the

'•
place of sale. It was also urged that the classification 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 F
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 G
,.
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 attahced to this hotel has no relevance or justification for the
classification made in this context. Jn reply, it was contended by Shri
P.S. Poti and Shri K. Rajendra Choudhary on behalf of the two State
Governments that such classification being permissible the mode to be H
526 SUPREME COURT REPORTS [1990] 1 S.C.R.

A 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
B because another method may be more desirable. It was also contended
that the object being to raise only limited revenue from this source, it ··--1
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.

c A catena of decisions was cited at the bar on the point relating to

•
valid classification and the test to be applied when hostile discrimina-
tion 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 founded 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
together must possess a common characteristic justifying their inclu-
sion 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.
E
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 yardstic for t
classification, in the background of the fiscal policy of the State to

"'
promote economic equality as well. It cannot be doubted that if the
F 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.

G Broadly stated the points involved in the constitutional attack to
the validity of this classification are, in substance, only two:

( 1) Is the classification of sales of cooked food made with refe-
. .,
rence to the eating houses wherein the sales are made, founded
on an intelligible differentia? and
H
ERALA HOTEL ASSCN. v. STATE OF KERALA [VERMA, J.J 527

(2) If so, does the classification have a rational nexus with the A
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 clas-
sification in a taxing statute. In Ganga Sugar Corporation Limited
v. State of Uttar Pradesh and Ors., [1980] 1 SCC 223, Krishna Iyer, J. B
i.· speaking for the Constitution Bench held that a classification based,
inter alia, on "profits of business and ability to pay tax" is constitution-
ally valid. Classification permissible 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:
c

~ "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 D
payment to capacity to pay and thus arrive in the end at a
more genuine equality. The capacity of a dealer, in particu-
~· Jar 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 E
others bear a less tax, and it is consequently discriminatory,
really misses the point namely that the former kind of de-
alers 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 comparatively
small dealers. An attempt to proportion the payment to F
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 requlate the economic life of the
society."
(emphasis supplied) G

r A recent decision of this Court in P.H. Ashwathanarayana Setty
and Ors. v. State of Karnataka and Ors., [1989] Supp. I SCC 696 gives
a fresh look to the extent of classification 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 H
528 SUPREME COURT REPORTS

A 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 measu-
res dealing with economic regulation are not outside Arti-
B cle 14, it is well recognised that the State enjoys the widest
latitude where measures of economic regulation are con- 't
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
c should pursue and what discriminations advance those

~
social and economic policies. In view of the inherent comp-
lexity of these fiscal adjustments, courts give a larger dis-
cretion to the legislature in the matter of its preferences of
economic and social policies and effectuate· the chosen
D system in all possible and reasonable ways. If two or more
methods of adjustments of an economic measure are avail-
able, the legislative preference in favor · of one of them
cannot be qustioned on the ground of rnck of legislative -~
wisdom or that the method adopted is not the best or that
there were better ways of ad justing the competing interests
.E and claims. The legislature possesses the greatest freedom
in such areas ..... "

"The legislature has to reckon with practical difficulties of
adjustments of confliciting interests. It has to bring to bear
a pragmatic approach to the resolution of these conflicts '...
F and evolve a fiscal policy it thinks is best suited to the felt
needs. The complexity of economic matters and the pra-
gmatic solutions to be found for them defy and go beyond
conceptual mental models. Social and economic problems
of a policy do not accord with preconceived stereotypes so
as to be amenable to predetermined solutions ..... "
G
:~
The lack of perfection in a legislative measure does not
necessarily imply its unconstitutionality. It is rightly said
that no economic measure has yet b'"n devised which is
free from all discriminatory impact and that in such a comp-
lex arena in which no perfect alternatives exsit, the Court
H does well not to impose too rigorous a standard of criti-
KERALA HOTEL ASSCN. v. STATE OF KERALA [VERMA, J.[ 529

cism, under the equal protection clause, reviewing fiscal A
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 B
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'
c
-1._ 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 D
review State discrimination in light of the constitutional
signaficimce 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 remo-
ved from constitutional guarantees. Moreover, "(t)he E
extremes to which the court has gone in dreaming up

r
,
rational basis for State regulation in that area may in many
instances be ascribed to a healthy revulsion from the
court's earlier excesses in using the Constitution to protect
interests that have more than enough power to protect
themse!ves in the legislative halls." F

"The observations of this Court in ITO v. K,N. Takim Roy
Rymbai made in the context of taxation Jaws are worth
recalling.

(T)he mere fact that a tax falls more heavily on some in the G
same category, is not by itself a gr_ound 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 violation of
ArtiCle 14."
(emphasis supplied) H
530 SUPREME COURT REPORTS I 1990) I S.C.R.

In Federation of Hotel and Restaurant Association of India and ·--r-
A others v. Union of India and others, 11989] 178 !TR 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:

B "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 pre-
cise or set formula or doctrinaire tests or precise scientific
principles of exclusion or inclusion are to be applied. The
c test could only be one of palpable arbitrariness applied in the
context of the felt needs to the times and societal exigencies
informed by experience. t-
Classifications based on differences in the value of
D articles or the economic supperiority of the persons of inci-
dence are well recognised. A reasonable classification is one
which includes all who are similarly situated and none who
are not. In order to ascertain whether persons are similarly
placed, one must look beyond the classification and to the >-
purposes of the law."
E (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 I
context of the felt needs of the times and societal exigencies informed

~
by experience'; and the courts should not interfere with the legislative
F wisdom of making the classification unless the classification is found to
be invalid by this test.

In the present case, to assail the constitutional validity of the
impugned provisions reliance is placed on a decision of the Madras
High Court in A.R. Krishna Iyer and Ors. v. State of Madras, [1956) 7
G 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 Chandrayya v. The State of Andhra Pradesh, [1957] 8 STC >-...
33. Subba Rao, CJ, as his lordship then was, upheld the classification
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
H equality and to harmonise the doctrine of equality with differences
KERALA HOTEL ASSCN. v. STATE OF KERALA [VERMA, J.] 531

inherent in the categories of persons assessed. After referring to the
A
principle of classification authoritatively restated by this Court in
Budhan Chowdhary v. State of Bihar, [1955] 1 SCR 1045 and quoting
the oftquoted 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 B
I
provide for the levy of a general'-tax on the sale of g:>ods 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 impossible in the
nature of things to aim at absolute equality in the matter of c
taxation. The State resorts to the principle of classification in
an attempt to harmonise the doctrine of equality with diffe-
rences inherent in the categories of properties or persons
assessed. In the present case, the object to provide for the
levy of a general tax and to apportion the burden equitably D
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 equitable apportionment of the E
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 restau-
rants, 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 F
houses. The State also can reasonably recover taxs at
higher rates from prosperous dealers than from impecu-
nious 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 characteristics of dealers who are distinct G
from dealers not covered by the proviso.

Learned counsel relied upon the decision of the
Madras High Court in Krishna Iyer 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- H
532 SUPREME COURT REPORTS I1990] 1 S.C.R.
sification run through the impugned provision, the learned
A
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 sufficient
to deny the validity of the impugned prov_ision. With great
B respect we cannot agree. Jn our view, the characteristics of
·.~
the dealer covered by the proviso should be cumulatively
considered and, if so looked at, the said characteristics 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 founded on intel-
ligible differentia distinguishing dealers like the assessee
c and that it has a rational relation to the object sought to be
achieved."
(emphasis supplied)

The vision of Subba Rao, CJ, as his Lordship then was, portrayed in
D 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, CJ, as his Lordship then was, even prior to
E introduction of the word 'socialist' in the Preamble of the Constitu-
tion, 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
p the needed revenue from this source. The object apparently is to raise
the needed revenue from this source by taxing the.sale of cqoked food
.only to the extent necessary and, therefore, to confine _!he 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,
G would find the burden lighter. This object cannot be faulted on princi-
ple 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
H promoting economic equality in the society which must, undoubtedly,
govern formulation of the fiscal policy of the State.
KERALA HOTEL ASSCN. v. STATE OF KERALA [VERMA, J.] 533

The trend of the up-to-date decisions of this Court, already
A
noticed does indicate that a classificatio\l 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 classification. Moreover,
the classification so made cannot be termed as arbitrary, being within , B
the limits upto which the legislature 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
c
tariff of cooked-food s0ld in any of the exempted eating houses is ihe
same or higher than that of those taxed." The tax is applied equally to
all those wiihin the tax net. · -

It was urged that eating houses serving cooked food of the same D
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
...l 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, promotion
of tourism and the other facilities available therein which have no
, relevance to the quality of food served therein. Admittedly, such
recognition entails several benefits and seeking recognition depends
E

on volition. In our opinion, such an enquiry is unwarranted for the
purpose of calssification 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 F
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 founded on
intelligible differentia. This being a relevant basis of classification
related to the avowed object, the legislature having chosen an existing G
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 unwar-
ranted. There is no material placed before us to. indicate that with
reference to the iJUrpose for which the classification has been made in H
534 SUPREME COURT REPORTS [1990] I S.C.R.

A the present case, there is a grouping together of dissimilar eating houses · --r-
or that similar eating houses have been excluded 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 States has no merit since
B 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.

c Consequently, Civil Appeal Nos 912-20 of 1988 against the judg-
ment of the Kerala High Court as well as the connected 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
D of the case, the parties shall bear their own costs.

R.N.J.