Supreme Court Upholds Constitutional Validity of Expenditure Tax Act, 1987, Distinguishing It from State Luxury Taxes

Large Bench clarifies legislative competence of Union Parliament under Entry 97 of List I, rejecting challenge that Expenditure Tax is merely a disguised luxury tax under State List; affirms wide legislative latitude in fiscal classification and taxation policies

In a landmark judgment dated May 2, 1989, a five-judge Bench of the Supreme Court of India dismissed writ petitions challenging the constitutional validity of the Expenditure Tax Act, 1987. The challenge, primarily brought by the Federation of Hotel and Restaurant Association of India and other stakeholders in the hotel industry, contended that the Act was an unconstitutional intrusion on the States' legislative domain and violated Articles 14 and 19(1)(g) of the Constitution.

The Expenditure Tax Act, 1987, enacted by Parliament, imposes a 10% tax on “chargeable expenditure” incurred in hotels where room charges for any unit of residential accommodation are Rs. 400 or more per day per individual. The tax covers expenditures on accommodation, food, drinks, and certain other services, with exemptions for foreign exchange payments and persons enjoying diplomatic privileges.

Petitioners argued that the Act was essentially a disguised tax on luxuries, which falls under Entry 62 of List II of the Seventh Schedule and is within the exclusive legislative competence of the States, not Parliament. They also contended that the Act’s classification-applying only to hotels charging Rs. 400 or more for rooms-was arbitrary, violating the equality guarantee under Article 14. Further, they asserted that the Act imposed unreasonable restrictions on their freedom of trade under Article 19(1)(g).

The Union of India defended the Act’s validity on several grounds. It submitted that the tax was a “tax on expenditure” covered by the residuary Entry 97 of List I and Article 248, which grants Parliament exclusive power to legislate on matters not enumerated in Lists II and III. The Attorney General emphasized that the “expenditure” aspect constituted a distinct subject matter, different from a tax on “luxuries” or “sale of goods.” The Court was urged to recognize the “aspect” doctrine, which permits different legislative powers to apply to different facets of the same subject matter.

The Court undertook a detailed examination of the nature of “expenditure tax” in economic and legal terms. Drawing on expert reports, earlier Supreme Court precedents including Azam Jha Bahadur v. Expenditure Tax Officer (1972), and international jurisprudence, the Court recognized that while the economic concept of expenditure tax traditionally covers total personal consumption, there is no legal requirement that such tax must be universally applied to all expenditure. Parliament may select specific categories of expenditure for taxation.

Further, the Court acknowledged the principle of “colourable legislation” and the need to identify the “pith and substance” or “true nature and character” of the legislation. It held that even if there is some overlap between Union and State laws, that does not render both invalid, provided the laws deal with distinct aspects or purposes.

Applying the “aspect” doctrine, the Court distinguished the State luxury taxes-which tax the enjoyment or provision of luxuries under Entry 62 of List II-from the Expenditure Tax Act, which taxes the act of incurring expenditure itself, a matter within Parliament’s residuary powers. The Court rejected the petitioners’ argument that the tax’s object and effect were the same, noting that taxing expenditure aims to discourage lavish spending generally, whereas luxury taxes target particular goods or services.

On the challenge under Article 14, the Court held that the classification of hotels based on room charges was reasonable, bearing a rational nexus to the objective of taxing ostentatious expenditure. The Court emphasized the wide latitude given to fiscal policy and classification in taxation laws and found no hostile discrimination.

Regarding the Article 19(1)(g) claim, the Court held that mere imposition of a tax does not constitute an unreasonable restriction on trade or business. The hardships alleged by the petitioners were insufficient to invalidate the Act.

In conclusion, the Supreme Court upheld the constitutional validity of the Expenditure Tax Act, 1987, affirming Parliament’s competence to legislate under Entry 97 of List I and Article 248. The Court’s judgment clarifies the interplay of Union and State legislative powers in fiscal matters, endorses the application of the “aspect” doctrine to resolve overlaps, and reaffirms the broad discretion of the legislature in taxation policy.

Statutory provisions:- Article 14, Article 19(1)(g), Article 32, Article 245, Article 246, Article 248, Entry 97 of List I, Entry 62 of List II of the Seventh Schedule to the Constitution of India, Expenditure Tax Act, 1987 (Central Act 35 of 1987), Income Tax Act (referenced for procedural context)

This report synthesizes the Supreme Court’s detailed reasoning and outcome in Federation of Hotel and Restaurant v. Union of India, underscoring its significance for constitutional law on taxation and federal legislative competence.

Federation of Hotel and Restaurant v. Union of India, (SC) : Law Finder Doc Id # 89079