Holding

The cess imposed by the Haryana Rural Development Fund Act, 1983 is a tax, not a fee, and the State Legislature lacks competence to enact the Act; therefore the Act is unconstitutional and void.

Summary

The appellants, dealers in agricultural produce operating in notified market areas of Haryana, challenged the Haryana Rural Development Fund Act, 1983 which imposed a 1% cess on the sale proceeds of agricultural produce and credited the amount to a state‑vested fund for rural development. They contended that the levy was a tax, not a fee, and therefore beyond the competence of the State Legislature under List II of the Seventh Schedule. The High Court initially struck down the Act, but a Division Bench reversed that decision, holding the levy to be a fee. The Supreme Court examined the nature of the levy, applying the test that a fee must be correlated to specific services rendered, and found no such correlation; the cess was a compulsory exaction for general public purposes, i.e., a tax. Since the State could not levy such a tax without a valid entry in List II, the Act was unconstitutional. The Court set aside the Division Bench judgment, declared the Act void, and issued a writ directing the State not to enforce it.

Issues considered

The nature of the levy under Section 3 of the Haryana Rural Development Fund Act, 1983: fee or tax?
Whether the State Legislature of Haryana is competent to enact the Act under any entry in List II of the Seventh Schedule.
Whether the levy falls within any permissible entry for the imposition of a tax by a State.

Legislation cited

Constitution of Indias. Art. 265, s. Art. 266, s. List II of Seventh Schedule
Haryana Rural Development Fund Act, 1983s. s.2(h), s. s.3, s. s.4
Punjab Agricultural Produce Markets Act, 1961

Subjects

tax vs feecessconstitutional validityState Legislature competenceList II Seventh ScheduleHaryana Rural Development Fund Actagricultural marketrural developmentSupreme Court of India

Judgment

149

A
OM PARXASH AGARWAL ETC.ETC.
v.
GIRl RAJ KISHORI & ORS. ETC.ETC.

JANUARY 28, 1986
B
[O. CHINNAPPA REDDY AND E.S. VENKATARAMIAll, JJ.]

Constitution oflndia, Art. 265, 266 and List ll, of
Seventh Schedule - State Legislature - Tax not to be imposed
under guise of 'fee' - Jurisdiction of Court to scrutinise
scheme of levy to determine real character. -
Haryans Rural Development Fund Act, 1983, s.3- Lev)' of
'Cess' under the Act - Not 'fee' but 'tax' - State Legislature
c
- Whether competent to enact the Act.
The Haryana Rural Development Fund Act, 1983 by section
3 provides that there shall be levied on the dealer for the
J. purposes of the Act, a cess, on ad valorem basis, at the rate
of one per centum of the sale proceeds. of agricultural produce
D
bought' or sold or brought for processing in the notified
market area. The dealer is, in his turn, entitled to pass on
the burden of the cess paid by him to the next purchaser of
the agricultural produce from him. Section 4(1) of the Act
provides for the creation of a fund called the Haryana Rural
Development Fund (hereinafter referred to as 'the Fund') which
E
is vested in the State Government. Sub-section (3) of section
4 of the Act provides that the amount of cess shall be
credited to the Fund within such period as may be prescribed.
,sub-section (5) of section 4 of the Act states that the Fund
shall be applied by the State Government to Dl!et the expendi-
ture incurred in the rural areas, in connection with the
development of roads, hospitals, means of colllDWlication, F
water-supply, sanitation facilities and for the welfare of
agricultural labour or for any other scheme approved by the
State Government for the development of the rural areas. The
expression 'rural areas' has been defined in section 2(h) of
the Act as an area the population of which does not exceed
20,000 persons. G

91. The appellants, who are dealers in agricultural produce
-1 carrying on business in certain notified market areas,
./ questioned the validity of the Act before the High Court of
u·
150 • SUPREME COURT REPORTS . [1986] 1 s.c.R.
A

Punjab & Haryana. The learned single judge found that the Act
was unconstitutional and struck it down, Aggrieved by the ·)I..
decision of the learned single judge, the State of Haryana
filed a Letters Patent Appeal before the Division Bench of the
High Court. The Division Bench allowed the appeal, set aside
B the judgment of the learned single judge and upheld the
constitutional validity of the Act, on the ground that it was
in the nature of a fee and, therefore, it could be levied as a
fee imposed on dealers carrying on business within market area
for services rendered to them by the State Government. Hence .,.....
these appeals by Special Leave.
c It was contended on behalf of the appellants that the
cess levied under the Act was in the nature of a tax and it
did not fall under any of the Entries in List II of the
Seventh Schedule to the Constitution under which the State
Legislature could levy a tax. On the other hand, counsel for
the respondent-State argued (i) that it was in the nature of a
fee and it was not necessary that there should be a direct
correlation between the levy and the services to be rendered
and that such correlation could be of "general character and l
not of mathematical exactitude"; (ii) that there was a
reciprocal relationship between the levy of the fee and the
services that were being rendered and (iii) that the impugned
E legislation had been enacted to fulfill the objectives
contained in Articles 46,47,48 and 48A of the Constitution and
the majority of dealers were directly benefited by the objects
on which the amount collected as ceas was spent.
Allowing the appeals,

F llELD: l.(i) The llaryana Rural Development Fund Act, 1983
is unconstitutional, since the State Legislature was not
competent to enact it. The judgment of the Division Bench of).
the High Court is set aside and the Act is declared void.
[163 D-E)
l(ii) It is constitutionally impermissible for any State
G Government to collect any amount which is not strictly of the
nature of a fee in the guise of a fee. If in the guise of a
fee the legislation imposes a tax it is for the court on a
scrutiny of the scheme of the levy to determine its real
character. If on a true analysis of the provisions levying
the amount, the court comes to the conclusion that it is, in
H
fact, in the nature of a tax and not a fee, its validity can)lf
be justified only by bringing it under any one of the Entries ·
0,P,AGARWAL v. G,R.KISHORI 151

' A
in List II of the Seventh Schedule to the Constitution under
which the State can levy a tax. [163 B-C]
In the instant case, the State Government has failed 'to
do so. The levy is not a fee as claimed by the State but it is
a tax not leviable by it. The levy of the cess under section 3
is, therefore, liable to be quashed. Section 3 being the B
charging section and the rest of the sections of the Act
being juat machinery or incidental provisions, the whole Act
is liable to be quashed. [163 C-ll]
l{iii) The fact that the Act is claimed to have been
enacted pursuant to the Directive Principles of State Policy
contained in Articles 46,47,48 and 48A of the Consti,tution and
that the dealers are permitted by the Act to pass on the cess c
to the purchasers of the Agricultural produce from them have
no bearing on the question involved here. [158 A-Bl
2. The distinction between a tax and a fee is recognised
by the constitution. In determining a levy as a fee the true
test ml1St be whether its primary and essential purpose is to
render specifiC services to a specified area or class, u· D
being of no consequence that the State may ultimately and
indirectly be benefited by it Entry 66 empowers the State to
levy fees in respect of any of the matters in List II. It 'is
no doubt true that under Entry 66 of the List II it is
permissible for the State to levy any amount by way of fees in
respect of any of the matters in that List. The relevant Entry E
in the present case is entry 28 dealing with Markets and
Fairs' but the amount so levied should be truly a fee and not
a tax with the mask of a fee. The primary meaning of taxation
is raising money for. purposes of Government by means of
contributions from individual persons, a compulsory exaction
of money by a public authority for public purposes enforceable F
·" at law and not a payment for services rendered. [158 c;
158 D-1!]
Matthews v. Chicory Marketing Board, 60 C.L.R. 263,276
and lbe Commissioner, Hindu llel.igious ~ts, lladraa v.
Sri Lskslulindrs Thirtha Swam1ar of Sri Sbirur "1tt, [1954]
s.c.R. 1005 relied upon. G
Sreenivasa General Traders & Ors. etc. v. State of
.AndWa Pradesh & Ors. etc., [1983] 3 S.C.R. 843, "1nicipal
Corporation of Delhi .and Ors. v. llobd. Yasin etc., [1983] 2
s.c.R. 999 and Southern l'barmaceuticsls & a.emtcsls Trichnr &
Ors. etc. v. State of Kerala & Ors. etc., [1982) l s.c.R. 519
distinguished. H
152 SUPREME COURT REPORTS [1986] 1 s.c.R.

A Sreeni,vasa General Traders & Ors. etc. v. State of Andhra
Pradesh &Ors •• (1983] 3 s.c.R. 843 referred to.
In the instant case, the Fund, vests· in the State
Government and_ not in the IIIJilicipality or a marketing
committee or any other local authority having limited function
specified in the enactment under which it is constituted. The
definition of the expression 'rural areas' in section 2(h) of
B the Act is as vague as it can be. It means an area the
population of which does not exceed 20,000 persons. It need
not necessarily be a local.area as it is ordinary understood.
Ordinarily a local area means a Municipal Corporation, a Town
Municipality, a Panchayat, a Notified Area, a Sanitary Board
etc •••• Any geographical area the population of which does not '
c exceed 20, 000 persona can be conveniently brought within the
scope of section 2(h) of the Act. If it is understood tha_t way
even urban areas can be divided into areas with population not
exceeding 20, 000 and labelled as rural areas. Even if a town
or a city having a population exceeding 20,000 persons, is
excluded from the scope of the expression 'rural areas'• the
D area in which the amJunt credited to the Fund can be spent is
almost 90 per cent of the total area of the State of Haryana.
There is no specification in the Act that the amJunt or a
substantial part of the amJunt collected by way of cess under
section 3 of the Act will be spent on any public purpose with
in the market area where the dealer is carrying on his
E business. The purposes over which the Fund can be spent are
the same purposes on which any amJunt collected by way of tax
is spent by any State and there is nothing which is done
specially to benefit the dealer. When any amJunt is spent from
the Fund the interest of the dealers is not at all kept. in
view even generally. There is no other restriction imposed on
F the manner in which the Fund can be spent. The cese,
therefore, partakes of the character of a part of the COllllD)n
burden which has to be levied and collected only as a tax. A
dealer who pays the cess under the Act may as one of the
members of the general public derive some benefit from the
expenditure of the fund incurred by the State Government. The
G benefit so derived by him is merely incidental to the fact
that he happens to be a person residing in the State. of
Haryana. It is not the same as the benefit which a dealer in a
market area would derive by the expenditure of its funds by a
marketing colllllittee or as the benefit which a person living in
a town or a city would derive by the expenditure incurred by
H the municipality concerned. (161 A; 162 A-Bl
O.P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J.] 153
A
3. lb.ere is practically no difference between the Conso-
lidated Fund which vests in the State snd the Fund which also
vests in the State. Amounts credited to the Consolidated Fund
and the amounts credited to the Fund can both be spent practi-
cally on any public purpose almost . throughout the State. In
such a situation it is difficult to hold that there exists any B
correlation between the amount paid by way of cess under the
Act and the services tendered to the person from whom it is
collected. lb.e impost in these cases lacks the essential
qualification of a 'fee namely 'that it is absolutely necessary
that the levy of fees should on the face of the legislative
.., provision, be correlated to the expenses incurred by Govern~
c
ment in rendering services'. In fact, there is no correlation
at all. [162 C-E]

CIVIL APPELLATE JURISDICTION Civil Appeals Nos. 2808 of
1985 etc.

From the Judgment and Order dated 20.5.1985 of the D
Punjab and Haryana High Court in L.P.A. No. 1055 of 1984.
V.M. Tarkunde, Shankar Ghosh, P.N. Puri, s.c. Khunger,
O.P. Gill, S.K. Mittal, Bhal Singh Malik, Vishal Malik, G.K.
Bansal, Ji.S, GUpta, S.D. Sharma, P.C. Kapur, K.G. Bhagat,
Sunil Kr. Jain, A.K. Goel, Ajit Pudissery, K.B, Rohtagi, L.K.
Pandey, Sarv Mitter, R;P, GUpta, P,N. Puri, R.A. GUpta, K.K. E
Mohan and·D.N •. Mishra for the appearing Appellants.
Kapil Sibbal, H.L. Sibbal Advocate General for State of
Haryana, J.K. Sibbal, I.S. Goel, S.V. Singh and C.V. Subba
Rao for the appearing Respondents.

The Judgment of the Court was delivered by F

VENKATARAMIAH, J. The appellants in the above appeals are
dealers in agricultural produce carrying on business in
certain notified market areas set up under the Punjab Agricul-
tural Produce Markets Act, 1961 in the State of Haryana. They
have questioned in these appea~s the constitutional validity G
of the Haryana Rural Development Fund Act, 1983 (Haryana Act
No. 12 of 1983) (hereinafter referred to as 'the Act'),
The Act received the assent of the Governor of Haryana
on the 28th September, 1983 and was published in the State
Gazette under the Notification dated September 30, 1983. The
H
154 SUPRF.ME COURT REPORTS [1986) 1 s.c.a.

A Act came into force on its publication. Section 3 oJo the Act
provides that with effect from such date as the Stat1? Govern- "::I..
ment may by notification appoint in that behalf, thure shall
be levied on the dea!er for the purposes of the Act,, '8 cess,
on ad valorem basis at the rate of one per centum of the sale
proceeds of agricultural produce bought or !IOld or brought for
processing in the notified market area. It, however provides
B that except in case of agricultural produce bro~Jght. fot
processing, no cess shall be leviable in respect of any trans-
action in which delivery of the agricultudl produce bought or
sold is not actually made. The cess is payable by thE• dealer
in such manner as may be prescribed to such officer or person
as may be appointed or designated by the State Government in
c that behalf. The dealer is, in his turn, entitled to pass on
the burden of the cess paid by him to the next purchaser of
the agricultural produce from him. He may, therefore, add the
same in the cost of the agricultural produce or the goods
processed or manufactured out of it. The arrears of cess are
recoverable as arrears of land revenue. Th~ expression
D 'dealer' is defined by section 2(c) of the Act. 'Oeakr' means
any person who within the notified market area sets up,
establishes or continues or allows to be continued any place
for the purchase, sale, storage or processing of agricultural
produce, or in the notified area purchases, sells, stores or
processes such agricultural produce. A 'notified market area'
E iooans any area notified under section 6 of the Punjab
Agricultural Produce Markets Act, 1961 to be a notified market
area. 'Agricultural produce' means all produce whether
processed or not, of agriculture, horticulture, animal
husbandry or forest as may be prescribed. These definitions
are found in section 2 of the Act. Section 4(1) of the Act
F provides for the creation of a fund called the Haryana Rural
Development Fund (hereinafter referred to as 'the Fund') which
is vested in the State Government. The Fund is to be
administered by such officer or officers of th' State
Government as may be appointed by it in that behalf.
Sub-section (3) of section 4 of the Act provides that the
G amount of cess paid to the concerned officer by virtue of
section 3 of the Act shall be credited to the Fund within such
period as may be prescribed. Sub-section (4) of sect:lon 4 of
the Act provides that any grants made by the State Governioont
and local authorities shall also be credited to the Fund.
Sub-section (5) of section 4 of the Act states that the Fund
H shall be applied by the State Government to 11>~t the
O.P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J,] 155

expenditure incurred in the rural areas, in connection with A
the development of roads, hospitals, means of comrm.Inication,
x water-supply, sanitation facilities and for the welfare
of agricultural labour or for any other scheme approved by the
State Government for the development of the rural areas. The
Fund can also be utilised to meet· the cost of administering
the Fund. Section 5 of the Act provides that any person who B
contravenes the provisions of the Act or the rules framed
thereunder shall be punishable with fine which may ~xtend to
five hundred rupees or up to the amount of cess which the
dealer is liable to pay, whichever is more. By section 6 of
'+-- the Act the State Government is empowered to make rules to
carry into effect the purposes of this Act. Section 7 of the
Act grants protection to State Government or any officer of c
the State Government or·the Haryana State Agricultural Market-
ing Board or a local authority fonctioning under the Act
against any action that may be taken against it or him in
respect of any action taken .in good faith under the Act.
Section 8 of the Act empowers the State Government to remove
any difficulty which may arise in giving effect to the provi- D
sions of the Act.
A reading of the Act shows that it imposes a cess on ad
valorem basis at the rate of one per centum. of the sale
proceeds of the agricultural produce bought or sold or brought
for processing in the notified market area on the dealer
carrying on business within the notified market area. The cess E
is in the nature of a compulsory exaction. 'nle arrears of cess
if any, can be recovered as arrears of land revenue, and any
person who contravenes the provisions of the Act is liable to
be prosecuted for an offence punishable under section 5 of the
Act. The Act, however, provides that the cess collected under
,, it shall be credited to the Fund for being spent as provided F
·"'in sub-section (5) of section 4 of the Act in the rural areas
in connection with the development of roads, hospitals, means
of communication, water-supply, sanitation facilities and for
the welfare of agricultural labour or for any other scheme
approved by the State Government for the development of rural
areas. The expression 'rural area' has been defined in section G
2(h) of the Act as an· area the population of which does not
exceed 20,000 persons. These are the principal features of the
Act.
The appellants who became liable to pay the cess on the
~; coming into force of the Act questioned its validity before
the High Court of Punjab & Haryana. The petitions filed by H
them were first heard in the High Court by a single Judge. The
156 SUPREME COURT REPORTS [1986] 1 s.c.R •

.A
learned single Judge found that the Act was unconstitutional
and struck it down. Aggrieved by the decision of the learned -'.
single Judge the State of Haryana filed a Letters Patent
Appeal for the Division Bench of the High Court. The Division
Bench allowed the appeal, set aside the judgment of the
learned single Judge and upheld the constitutional validity of
the Act. The writ petitions which had been filed by the appel-
B
lants were dismissed. These appeals by special leave are filed
against the judgment of the Division Bench of the High Court.
It is convenient to reproduce here the relevant parts of r-·
·;
sections 3 &4 and sectiop 2(h) of the Act.
"3. (1 )- With effect from such date, as the State
Government may by notification appoint in this
c behalf, there shall be levied on the dealer for the
purposes of this Act, a cess on ad valorem basis,
at the rate of one per centum of the sale-proceeds
of agricultural produce bought or sold or brought
for .proccessing in the notified market area ••••••••
4. (1 )- There shall be constituted a fund called ~).
D
the llaryana Rural Development Fund and it shall
vest in the State Government •••••••••••••••••••••••

(3) The amount of cess paid to the officer or the
person shall be credited to the Haryana Rural
Development Fund within such period as may be
E
prescribed.

(4) To the credit of the Fund shall be placed -

(a) all collections of cess under section 3, and
F
State Government and local ·
,. ~
(b) grants from the
authorities.

(5) The Fund shall be applied by the State Govern-
ment to meet the expenditure incurred, in the rural
areas, in coIUlection with the development of roads,
G
hospitals, means of coilllillnication, water-supply,
sanitation facilities and for the welfare of agri-
cultural labour or for any other scheme approved by
the State Government for the development of rural .o;_
areas. The Fund may also be utilised to meet the ;,
cost of administering the Fund.
H
O.P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J.] 157

2. (h)'rural area' means an area the population of
which does not exceed twenty thousand persons." A
The principal contention urged by the appellants before
us is that the cess levied under the Act is in the nature of a
tax and it does not fall under any of the Entries in List II
of the Seventh Schedule to the Constitution under which the
State Legislature. can levy a tax. Although when the proceed-
ings were pending in the High Court an attempt was made on the B
part of the State to sustain the cess as a tax leviable under
-~. Entry 52 of the List II of the Seventh Sahedule to the
Constitution which authorises a State Legislature to . levy
"taxes on the entry of goods into a local area for consump-
tion, use ·or sale therein", neither the learned single Judge
nor the Division Bench accepted the said contention. In these
appeals the said contention is not pressed before us. The c
ground on which the Division Bench upheld the constitutional
validity of the cess was that it was in the nature of a fee
and, therefore, it could be levied as a fee imposed on dealers
carrying on business within market area for services rendered
. '\
to them by the State Government. The very same contention is
urged before us in these appeals on behalf of the State D
Government. In support of its contention the State Government
has relied upon the decisions of this Court in Sreenivasa
General Traders & Ors. etc. v. State of Andhra Pradesh & Ors.
etc.,[1983] 3 S.C.R. 843., Municipal Corporation of Delhi and
Ors. v. Mohd. Yasin etc., [1983] 2 S.C.R. 999., and Southern
Pharmaceuticals & Chemicals Trichur & Ors. etc. v. State of E
Kerala & Ors. etc., [1982] l s.c.R. 519 and it is argued that
it is not necessary that there should be a direct correlation
between the levy and the services to be rendered and that such
J correlation could be of "general character and not of
"· ma.themeiical exactitude 0 • It is argued that in the instant
cases there is a reciprocal relationship between the levy of F
the fee and the services that are being rendered. It is
submitted on behalf of the State Government that the impugned
legislation had been enacted to fulfil the objectives
contained in ArtiCles 46, 47, 48 and 48A of the Constitution,
that the dealer from whom the cess is collected is only a
collecting agent _and the burden of the cess is passed on the G
next purchaser and that since out of 91 notified areas in the
State of Haryana 61 are located in the rural areas, the
~ majority of dealers were directly benefited by the objects on
,....... which the anx:>unt collected-as cess is spent.

H

l
158 SUPREME COURT REPORTS [1986] 1 s.c.R.

A
The fact that the Act is claimed to have been enacted :"-
pursuant to the ~irective Principles of State Policy contained
in Articles 46, 47, 48 and 48A of the Constitution and that
the dealers are permitted by the Act to pass on the cess to
the purchaser of the agricultural produce from him have no
bearing on the question involved here. In these appeals we are
B relieved of the necessity of finding out whether the cess in
question is a tax leviable by the State, since such a claim is
not made before us.. The only question which remains to be
considered is whether the cess levied under the Act is of the
natur_e of fee levied or leviable on a dealer in a market area.
The distinction between a tax and a fee is recognised by the
c Constitution which while empowering Parliament and the State
Legislature to levy taxes under the relevant Entries in List I
and List II respectively also refers to the power of the
appropriate legislature to levy fees in respect of matters
specified in the said Lists and also in the Concurrent List
and tests have been laid down by this Court for determining
D the true character of a levy. In determining a levy as a fee ;,J
the true test must be whether its primary and essential
purpose is to render specific serv.ices to a specified area or
class it being of no consequence that the State may ultimately
and indirectly be benefited by it. As observed in M.P. V.
Sundararamier & Co. v. The State of Andhra Pradesh & Anr.,
E [1958] S.C.R. 1422., in List II of the Seventh Schedule to the
Constitution Entries 1 to 44 form one group mentioning the
subjects on which the States can legislate and Entries 45 to
63 in that List form another group dealing with taxes that may
be levied by States. Entry 64 refers to offences against laws
with respect to any of the matters in List II and Entry 65
F
refers to jurisdiction of courts. Entry 66 empowers the State ~)
to levy fees in respect of any of the matters in List II.
Unless the cess in question can be brought under any of the
Entries from 45 to 63 it cannot be levied as a tax at all. It
is no doubt truethat under Entry 66 of List II it is permis-
sible for the State to levy any amount by way of fees in
G respect of any of the mattersin that List. The relevant Entry
in the present case is Entry 28 dealing with ;Markets and
Fairs' but the amount so levied should be truly a fee and not
a tax with the mask of a fee. The primary meaning of taxation
is raising money for putposes of Government by means of ~
contributions from indiVidual persons, a compulsory exaction Jllllllll
H of money by a public authority for public purposes enforceable
at law and .P.ot a payment for services rendered. "A tax· is a
O.P.AGARwAL v. G.R.KlSHORI [VENKATARAMI.AH, J.] 159

compulsory exaction of money by public authority for public
)( A
purposes enforceable by law and is not a payment for services
rendered" is a famous statement of Latham C. J. in Matthews v.
Chicory Marketing Board., 60 C.L.R, 263, 276. The above state-
ment truly brings out the essential characteristics of a tax.
This statement has been quoted with approval by our Court in
The Commissioner, Hindu Religious Endowments, Madras v. Sri
B
Lskshmindra Thirtha Swamiar of Sri Shirur Mutt., [1954] S.C.R.
1005. Mukherjea, J. who delivered the opinion of the Consti-
tution Bench in the above case observed at pages 1040-41 thus:
11
A neat definition of what 'tax' means has been
given by Latham C.J. of. the High Court of Australia
in Matthews v. Chicory Marketing Board. 'A tax',
according to the learned Chief Justice, 'is- a
co.mpulsory exaction of money by public authority
c
for public purposes enforceable by law and is not
payment for services rendered'. This definition
brings out in our opinion, the essential charac-
teristiCs of a tax as distinguished from other
·l.. forms of imposition which, in a general sense, are D
included within it. It is said that the essence of
taxation is compulsion, that is to say, ft is
imposed under statutory power without the tax-
payer's consent and the payment is enforce~ by law.
The second characteristic of tax is that it is
imposition made for public purpose without
E
reference to any special benefit to be conferred on
the payer of the tax. This is expressed by saying
that the levy of tax is for the purposes of general
revenue, which when collected forms part of the
public revenues of the State. As the object of a
tax is not to confer any special benefit upon any
F
particular individual, there is, as it is said no
element of quid .l'.!:Q. quo between the tax-payer and
the public authority. Another feature of taxation
is that as it is a part of the common burden, the
quantum of imposition upon the tax-payer depends
generally upon his capacity to pay." G
The three principal characteristics of a tax noticed by
Mukherjea, J. in the above passage are: (i) that it is imposed
under statutory power without the tax-payer's consent and the
payment is enforced by law; (ii) that it is an imposition made
for public purposes without reference to any special benefit
to be conferred on the payer of the tax; and (iii) that it is H
160 SUPm!E COURT REPORTS [1986) l s.c.R.

A
apart of the common burden, the quantum of imposition upon the
tax-payer depending generally upon the capacity of the tax-
payer to pay. As regards fees Mukherjea, J, observed in the
above decision thua:
"Coming now to fees, a "fee" is generally defined
to be a charge for a special service rendered to
B ·individuals by some govermental agency. The amount
of fee levied is supposed to be based on the
expenses incurred by the government in rendering
the service, though in many cases the costs are
arbitrarily assessed. Ordinarily, the fees are
uniform and no account is taken of the varying
c abilities of different recipients to pay. These are
undoubtedly some of the general characteristics,
but as there may be varioua kinds of fees, it is
not possible to formulate a definition that would
be applicable to all cases.

D x x x x x x x x x x x x x

If, as we hold, a fee is regarded as a sort of
return or consideration for services rendered, it
is absolutely necessary that the levy of fees
should on the face of the legislative provision, be
E correlated to the expenses incurred by government
in rendering the services."
In Sreenivasa General Traders & Ors. (supra) the fee
which ·was collected was payable to the marketing comnittee · and .
it WllS to be spent by the marketing committee on purposes for
which it was establi'shed. In Municipal Corporation of Delhi '
F Ors. V• Mohd. Yasin etc. (supra) the aOX>unt collected by the
Municipal· Corporation was spent on the limited purposes for
which it bad ·be.,n established. In Southern Pharmaceuticals &
Cbemicala Trichur &Ors. (supra) it was held that there wss a
broad correlation between the fee collected and the cost of
the establishment needed for the enforcement of the Abkari Act
G which came up for consideration in that case insofar as the
licences were concerned. In none of these three cases it has
been stated that a fee may be validly imposed when no services
either directly or indirectly are rendered to the person from
whom it is collected. These cases are indeed distinguishable
from the present case. In each of these cases it was held that
H the levy satisfied the tests of a fee.
O,P.AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J.] 161
A
As mentioned earlier a cess collected under section 3 of
the Act is no doubt required to be credited to the Fund
constituted under section 4(1) of the Act. The Fund, however,
vests in the State Government and not in the municipality or a
marketing committee or any other local authority having
limited functions specified in the enactment under "hich it is
constituted. The State Government is entitled under sub- B
section (5) of sectfan 4 of the Act to spend the cess,
credited to the Fund, in the rural areas, in connection with
the development of roads, hospitals, means of communication,
water-supply, sanitation facilities and for the welfare of
agricultural labour or for any other scheme approved by the
State Government for the development of the rural areas. This
sub-section authorises the State Government to spend the money c
credited to the Fund virtually on any object which the State
Government considers to be the development of rural areas. The
definition of the expression 'rural area' in section 2(h) of
the Act which is extracted above is as vague as it can be. It
means an area the population of "hich does not exceed 20,000
D
person. -It need not necessarily be a local area as it is
ordinary understood. Ordinarily a local area means a Municipal
Corporation, a Town Municipality, a Panchayat, a Notified
Area, a Sanitary Board etc. Any geographical area the popula-
tion of which does not exceed 20,000 persons can be convenien-
tly brought within the scope of section 2(h) of the Act. If it
is understood that way even urban areas can be divided into E
areas with population not exceeding 20,000 and labelled as
rural ~reas. Even if we exclude from the scope of the expres-
sion 'rural. area', a town or a city having a population
exceeding 20,000 persons, the area in which the amourtt credi-
ted to the Fund can be spent is alm<ist 90 per cent ·of the
F
'\ total area of the State of Haryana. The amount may be spent on
any purpose which the .State Government considers to be purpose
intended for the development of the rural areas. There is no
specification in the Act that the amount or a substantial part
of the amount collected by way of cess under section 3 of the
Act will be spent on ariy public purpose within the market area
G
where the dealer is carrying on his business. The purposes
over which the Fund can be spent are the same purposes on
which any amount collected by way of tax is spent by any State
and there is nothing which . is done specially to benefit the
dealer •. When any amount is spent from the Fund the interest of
the dealers is not at all kept in view even generally. There
H
is no other ·restriction imposed on the manner in which the
Fund can be spent. The cess, therefore, partakes of the
162 SUPREME COURT REPORTS (1986] l s.c.R.

A character of a part of the connnon burden which has to be
levied and collected only as a tax. A dealer who pays the cess ..._
under the Act may as one of the members of the general public
derive some benefit from the expenditure of the Fund incurred
by the State Government. The benefit .so derived by him is
merely incidental to the fact that he happens to be person
residing in the State of Haryana. It is not 'the same as the
Jl benefit which a dealer in a market area would derive by the
expenditure of its funds by a marketing committee or as the
benefit which a person living in a town or a city would derive .~
by the expenditure incurred by the municipality concerned. The
fact that the Fund is created under the Act is a mere cloak to
cover the true character of the levy in question. There is
c practically no difference between the Consolidated Fund which
vests in the State and Fund which also vests in the State.
Amunts credited to the Consolidated Fund and the ruoounts
credited to the Fund can both be spent practically on any
public purpose almost throughout the State. In such a
situation it is difficult to hold that there exists any
D correlation between the amount paid by way of cess under the ·;;
Act and the services rendered to the person from whom it is
collected. The impost in these cases lacks the essential
qualification of a fee namely 'that it is absolutely necessary
that the levy of fees should on the face of the legislative
provision, be correlated to the expenses incurred by
E Government in rendering services' (See Sri Shirur Mutt's case
(supra). In fact there is no correlation at all. .
Reliance is, however, placed on behalf of the State
Government on the decision of this Court in The Hingi~r
Coal Co. Ltd. & Ors. v. The State of Orissa &Ors., in which
the validity of the Orissa Mining Areas Development Fund Act, >
F 1952 was upheld. In that case the question was whether the ,
cess levied thereunder was a fee or a duty of excise on coal
within Entry 84 of List I of the Seventh Schedule to the
Constitution. This Court case to the conclusion that it was an
amount levied essentially for services rendered in the areas
which were declared as mining areas in the State of Orissa. In
G that case the mining area involved was about 3341. 79 acres,
i.e. about 5,5, sq. miles. The cess collected in that Act
could be spent on improving the communication, by constructing
good roads, supply of water and education to the labour force
in order to attract workmen to the mining area in question. ~
The case before us is entirely different from the above said
H case. As mentioned earlier, the amount collected by way of
cess under the Act can be spent by the State Government at its
. O.P,AGARWAL v. G.R.KISHORI [VENKATARAMIAH, J,] 163

will on any purpose which it considers to be the development A
of alDDst the entire rural area of the State of Haryana.
It is constitutionally impermissible .for any State
Government to collect any aDDunt which is not stri.ctly of the
nature of a fee- in the guise of a fee. If in the guise of a
fee the legislation imposes a tax it is for the Court on B
scrutiny of the scheme of the levy to determine its real
character. If on a true analysis of the provisions levying the
amount, the Court comes to the conclusion that it is, in fact,

J in the nature of a tax and not a fee, its validity can be
justified only by bringing it under any one of the Entries in
List II of the Seventh Schedule to the Constitution under
which the State can levy a tax. The State Government has
c

failed in. this case to do so. The levy according to us not a
fee as claimed by the State but it is a tax not leviable by
it. The levy of the cess under section 3 is, therefore, liable
to be -quashed. Section 3 being the charging section and the D
rest of the sections of the Act being just machinery or inci-
dential provisions, the whole Act is liable to ·be quashed. We,
therefore, ·declare the entire Act, i.e. the Haryana Rural
Development Fund Act, 1983 as unconstitutional on the ground
that the State Legislature was not competent to enact it. E

These appeals, therefore, succeed.- The judgre.nt of the
Division Bench of the High Court is set aside and the Act is
declared void. A writ shall issue to the State Government in
these appeals directing the State Government notto enforce the
Act against the appellants.~ There shall, however, be no order F
as to costs.

M.L.A. Appeals allowed.