Mineral Area Development Authority Etc vs M/S Steel Authority Of India

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE/ORIGINAL JURISDICTION

Civil Appeal Nos. 4056-4064 of 1999

Mineral Area Development Authority & Anr. …Appellants

Versus

M/S Steel Authority of India & Anr Etc. …Respondents

With

Civil Appeal No. 7937 of 2019 With Writ Petition (Civil) No. 512 of 2018 With Civil Appeal No. 7938 of 2019 With Civil Appeal No. 7936 of 2019 With Civil Appeal No. 6221 of 2008 With Civil Appeal No. 5250 of 2019 With Writ Petition (C) No. 729 of 2019 With Signature Not Verified Writ Petition (C) No. 1029 of 2019 Digitally signed by Sanjay Kumar With Special Leave Petition (C) No. 16028 of 2021 Date: 2024.07.25 16:20:33 IST Reason:

With Civil Appeal No. 4286 of 2023

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4 With Civil Appeal No. 6499 of 2008 With Civil Appeal No. 97 of 2009 And With Special Leave Petition (Civil) No. 26160 of 2008

5 JUDGMENT

Dr Dhananjaya Y Chandrachud, CJI

Table of Contents

A. Background .............................................................................................................. 9

B. Issues ...................................................................................................................... 13

C. Submissions ........................................................................................................... 14

i. Submissions of the petitioners ......................................................................... 14

ii. Submissions of the respondents ...................................................................... 18

D. Distribution of legislative fields relating to mines and minerals........................ 24

E. Underlying constitutional philosophy .................................................................. 29

i. Scheme of distribution of legislative powers and constitutional limitations 29

ii. Interpretation of legislative entries ................................................................... 35

iii. Fiscal Federalism................................................................................................ 41

iv. Natural resources and the public trust doctrine .............................................. 45

F. Whether royalty is tax ............................................................................................ 48

i. Royalty under the MMDR Act ............................................................................. 48

ii. Purpose of Section 9 of the MMDR Act............................................................. 54

iii. Contours of a mining lease ................................................................................ 56

a. Lease and license ............................................................................................. 56

6 b. The nature of a mining lease under the MMDR Act and the Mineral Concession

Rules 1960 ........................................................................................................ 61

iv. Meaning of “royalty” .......................................................................................... 65

v. Characteristics of Tax ........................................................................................ 68

vi. Royalty is not in the nature of tax ..................................................................... 73

a. Prelude to India Cement ................................................................................... 73

b. Divergence between India Cement and Kesoram ............................................. 76

c. Royalty is not a tax ............................................................................................ 80

G. Inter-relationship between Entry 23 of List II and Entry 54 of List I ................... 84

i. Meaning of “regulation of mines” and “mineral development”...................... 84

ii. Analysis of Hingir-Rampur, M A Tulloch, and Baijnath Kedia ......................... 90

iii. Examination of the “extent” of the MMDR Act ................................................. 98

H. Inter-relationship between Entry 50 of List II and Entry 54 of List I ................. 104

i. Taxes on mineral rights .................................................................................... 106

a. Mineral rights duty ........................................................................................... 106

b. Meaning of the expression “mineral rights” ..................................................... 107

c. Taxes on mineral rights ................................................................................... 113

ii. The limitations on the taxing power of the State under Entry 50 of List II .. 116

a. Entry 50 of List II does not constitute an exception to the Sundararamier

principle ........................................................................................................... 117

b. Nature of “any limitation” ................................................................................. 124

c. Scheme of the MMDR Act does not serve as “any limitation” ......................... 129

d. Section 9 does not serve as a limitation on the taxing powers of State........... 134

7 e. “Any limitation” can extend to prohibition ........................................................ 135

f. Impact of taxes on mineral rights on mineral development ............................. 142

I. Scope of Entry 49 ................................................................................................. 146

i. Land System in India ........................................................................................ 146

ii. Tax on land and buildings ................................................................................ 157

a. Principles governing ‘taxes on lands and buildings’ ........................................ 158

a. States can impose tax on mineral bearing land .............................................. 162

iii. Measure of tax................................................................................................... 166

a. Taxing mineral-bearing land ............................................................................ 170

b. Goodricke ........................................................................................................ 176

iv. Measure of tax on mineral-bearing land ......................................................... 180

a. Decoupling of minerals from land .................................................................... 180

b. Minerals as measure of tax on land ................................................................ 188

J. Conclusions .......................................................................................................... 198

8 PART A

A. Background

1. The present batch of appeals bears on the distribution of legislative powers

between the Union and the States on the taxation of mineral rights. The

legislative entry which lies at the core of the present reference is Entry 50 of List

II of the Seventh Schedule to the Constitution. The entry deals with taxes on

mineral rights subject to “any limitations imposed by Parliament by law relating

to mineral development.” Regulation of mines and mineral development is

enumerated under both the Union List (Entry 54 of List I) and the State List (Entry

23 of List II) of the Seventh Schedule. The entrustment of the subject to the State

legislatures under Entry 23 of List II is made subject to the provisions of Entry 54

of List I.

2. Parliament enacted the Mines and Minerals (Development and Regulation) Act,

1957 1 in exercise of its legislative powers under Article 246 of the Constitution.

The subject which the legislation predominantly covers is relatable to Entry 54 of

List I. The MMDR Act is a comprehensive code for the regulation of mines and

development of minerals. Section 9 provides that the holder of a mining lease

shall pay royalty in respect of any mineral removed or consumed from the leased

area at the specified rates. In India Cement Ltd. v. State of Tamil Nadu, 2 a

seven-Judge Bench of this Court held that royalty is tax and the state legislatures

lack competence to levy taxes on mineral rights because the subject-matter is

covered by the MMDR Act. The Court also held that royalty cannot be used by

the State legislature as a measure of tax on mineral-bearing lands under Entry

49 of List II. Later in time, in State of West Bengal v. Kesoram Industries Ltd. 3

1 “MMDR Act” 2 (1990) 1 SCC 12 [34] 3 (2004) 10 SCC 201 [71]

9 PART A

a Constitution Bench of this Court held that the decision in India Cement (supra)

stemmed from an inadvertent error and clarified that royalty is not a tax.

3. In the aftermath of India Cement (supra) and Kesoram (supra), State

legislatures exercised their legislative powers to impose taxes on mineral-

bearing land in pursuance of Entry 49 of List II by applying the mineral value or

royalty as the measure of the tax. 4 States such as Rajasthan 5 and Uttar Pradesh 6

also sought to impose environment and health cess and fees for transporting

coal and coal-dust collected from mines. The constitutional validity of these levies

was challenged before the High Courts on the ground that they were beyond the

legislative competence of the State legislatures. The levies were also assailed

on the ground that they were in violation of the law laid down in India Cement

(supra).

4. One such matter is Civil Appeal No. 4056-64 of 1999, where the petitioners

initially filed writ petitions before the High Court of Judicature at Patna

challenging the validity of the Bihar Coal Mining Area Development Authority

(Amendment) Act 1992 and the Bihar Mineral Area Development Authority (Land

Use Tax) Rules 1994, which levied tax 7 on land being used for mining. Relying

on India Cement (supra), the High Court allowed the petition by holding that the

4 Mineral Area Development Authority v. Steel Authority of India, Civil Appeal No. 4056-64 of 1999; Sanghi Infrastructures MP Ltd. v. Union of India, Writ Petition (C) No. 512 of 2018. 5 Ambuja Cement v. State of Rajasthan, Diary No. 21291 of 2023; Wolkem Industries v. State of Rajasthan, Civil

Appeal No. 8273 of 2013; Wonder Cement Ltd. v. State of Rajasthan, Civil Appeal No. 4588 of 2017. 6 Kanoria Chemicals v. State of UP, Civil Appeal No. 1295 of 2008; Hindalco Industries Ltd. v. State of UP, Civil

Appeal No. 3869 of 2014. 7 Section 89, Bihar Coal Mining Area Development Authority Act 1986. [It reads:

Levy of Tax on Use of Land for Other Than Agricultural and Residential Purposes – (1) The Authority shall subject to the provisions of this Act and Rules framed thereunder levy tax, by notification published in the Official Gazette on land being by any person, group of persons, company, the Central Government or the State Government, Local or Corporate Body for mining, commercial or industrial purposes with the prior approval of the State Government. Provided that the tax so levied shall not exceed Rupees 1.50 per square meter annually for any such land but such tax shall not be levied on land which is subject to Holding Tax. (2) The State Government shall, out of the tax so levied and collected, determine the amount to be deposited into the consolidated Fund of the State Government from time to time.”]

10 PART A

tax was not within the scope of Entry 49 of List II of the Seventh Schedule. The

correctness of the High Court’s decision was assailed before this Court. On 30

March 2011, a Bench of three Judges noticed the divergence between India

Cement (supra) and Kesoram (supra) and referred the following questions to a

Bench of nine Judges to provide a decisive ruling:

a. Whether ‘royalty’ determined under Sections 9/15(3) of the MMDR Act is in

the nature of tax;

b. Can the State Legislature while levying a tax on land under Entry 49 List II of

the Seventh Schedule of the Constitution adopt a measure of tax based on

the value of the produce of land? If yes, then would the constitutional position

be any different insofar as the tax on land is imposed on mining land on

account of Entry 50 List II and its interrelation with Entry 54 List I?

c. What is the meaning of the expression “Taxes on mineral rights subject to any

limitations imposed by Parliament by law relating to mineral development”

within the meaning of Entry 50 of List II of the Seventh Schedule of the

Constitution of India? Does the MMDR Act contain any provision which

operates as a limitation on the field of legislation prescribed in Entry 50 of List

II of the Seventh Schedule of the Constitution of India? In particular, whether

Section 9 of the MMDR Act denudes or limits the scope of Entry 50 of List II?

d. What is the true nature of royalty/ dead rent payable on minerals produced/

mined/ extracted from mines?

e. Whether the majority decision in Kesoram (supra) could be read as departing

from the law laid down in India Cement (supra)?

11 PART A

f. Whether “taxes on lands and buildings” in Entry 49 List II of the Seventh

Schedule to the Constitution contemplate a tax levied directly on the land as

a unit having definite relationship with the land?

g. What is the scope of the expression “taxes on mineral rights” in Entry 50 of

List II of the Seventh Schedule to the Constitution?

h. Whether the expression “subject to any limitation imposed by Parliament by

law relating to mineral development” in Entry 50 of List II refers to the subject

matter in Entry 54 of List I of the Seventh Schedule to the Constitution;

i. Whether Entry 50 of List II read with Entry 54 of List I of the Seventh Schedule

to the Constitution constitute an exception to the general scheme of Entries

relating to taxation being distinct from other Entries in all the three Lists of the

Seventh Schedule to the Constitution as enunciated in M P V Sundararamier

& Co. v. State of Andhra Pradesh8;

j. Whether in view of the declaration under Section 2 of the MMDR Act made in

terms of Entry 54 of List I of the Seventh Schedule to the Constitution

and the provisions of the said Act, the State legislature is denuded of its power

under Entry 23 of List II and/ or Entry 50 of List II; and

k. What is the effect of the expression “subject to any limitation imposed by

Parliament by law relating to mineral development” on the taxing power of the

State legislature in Entry 50 of List II, particularly in view of its uniqueness in

the sense that it is the only entry in all the entries in three Lists (Lists I, II, and

III) where the taxing power of the State legislature has been subjected to “any

limitation imposed by Parliament by law relating to mineral development.”

8 (1958) 1 SCR 1422

12 PART B

B. Issues

5. During the course of the hearing, 9 counsel for the petitioners and respondents

agreed that the main questions that fall for determination by this Court could be

reframed in the following terms:

a. What is the true nature of royalty determined under Section 9 read with

Section 15(1) of the MMDR Act? Whether royalty is in the nature of tax;

b. What is the scope of Entry 50 of List II of the Seventh Schedule? What is

the ambit of the limitations imposable by Parliament in exercise of its

legislative powers under Entry 54 of List I? Does Section 9, or any other

provision of the MMDR Act, contain any limitation with respect to the field in

Entry 50 of List II?

c. Whether the expression “subject to any limitations imposed by Parliament

by law relating to mineral development” in Entry 50 of List II pro tanto

subjects the entry to Entry 54 of List I, which is a non-taxing general entry?

Consequently, is there any departure from the general scheme of

distribution of legislative powers as enunciated in M P V Sundararamier

(supra)?

d. What is the scope of Entry 49 of List II and whether it covers a tax which

involves a measure based on the value of the produce of land? Would the

constitutional position be any different qua mining land on account of Entry

50 of List II read with Entry 54 of List I?

9 Civil Appeal No. 4056-4064 of 1999, Mineral Area Development Authority v. Steel Authority of India, Transcript of

Hearing, 27 February 2024, 8-9.

13 PART C

e. Whether Entry 50 of List II is a specific entry in relation to Entry 49 of List II,

and would consequently subtract mining land from the scope of Entry 49 of

List II?

6. The Union of India has filed an affidavit stating that the issues in this reference

do not involve the interpretation of Entry 53 of List I of the Seventh Schedule

which pertains to oilfields, mineral oil resources, petroleum and petroleum

products. Counsel on both sides have not addressed submissions on any issues

pertaining to the interpretation of Entry 53 of List I. We have accordingly neither

discussed nor considered any issues pertaining to Entry 53 of List I. We have

circumscribed the scope of the reference to the above-mentioned issues referred

to the nine-Judge Bench as reframed in the above terms.

C. Submissions

i. Submissions of the petitioners

7. Mr Rakesh Dwivedi, learned senior counsel, made the following submissions:

a. Royalty is the consideration for parting with the right to work the mine and win

minerals which are vested either in the Government or a private person. Section

9 of the MMDR Act statutorily determines the price to be compulsorily paid by

the lessee to the lessor in lieu of the grant of rights under a mining lease.

Royalty paid by the lessee under Section 9 does not meet either the criteria of

a ‘tax’ or an ‘impost’ under Article 366(28) of the Constitution. Therefore, royalty

is not a tax on either minerals or mineral rights;

14 PART C

b. Entry 49 of List II - “taxes on lands and buildings” - must be construed

expansively because it is not subordinated to any other entry in the Seventh

Schedule. The expression “lands” in Entry 49 has been interpreted to include

all kinds of lands, including mineral-bearing land. Minerals continue to remain

a part of the land until they are extracted. Therefore, the value of minerals can

be used as a measure to tax mineral bearing land;

c. Entry 54 of List I and Entry 23 of List II are general entries relating to the subject

matter of regulation of mines and mineral development. Entry 23 of List II has

been expressly subordinated to the provisions of List I with respect to regulation

and development under the control of the Union. Thus, the subject matter

available to the State legislature under Entry 23 of List II is the residue of what

is left after declaration by Parliament under Entry 54 of List I. Moreover, Entries

54 of List I and 23 of List II, being general entries, do not provide a source of

imposing any kind of tax;

d. The legislative power of the State legislatures to levy tax on mineral rights under

Entry 50 of List II has been made subject to “any limitations imposed by

Parliament by law relating to mineral development.” Parliament has no

legislative competence to tax with respect to any subject matter enumerated in

List II of the Seventh Schedule. Parliament cannot assume to itself the power

to tax mineral rights, but can only impose limitations on the states when they

exercise their powers in pursuance of Entry 50 of List II;

e. The limitations contemplated under Entry 50 of List II have to be express

because they deprive the State legislatures of their plenary power to impose

tax. The MMDR Act does not expressly limit the legislative competence of the

State legislatures to tax mineral rights. Royalty is neither tax, nor an exaction

15 PART C

in the nature of tax. It cannot serve as a limitation envisaged by Entry 50 of List

II;

f. Under Entry 50 of List II, the limitations are required to be imposed “by law”

made by Parliament. They cannot be imposed by a delegate acting under

parliamentary legislation; and

g. Entry 54 of List I read with Entry 50 of List II is not an exception to the principle

laid down in M P V Sundararamier (supra). Entry 54 of List I is a regulatory

entry, while Entry 50 of List II is a taxing entry. The power to impose “any

limitations” under Entry 50 of List II cannot be interpreted so as to bestow upon

Parliament legislative powers to tax mineral rights. There cannot be any overlap

of the power of taxation because the legislative power of Union and States to

tax is mutually exclusive and clearly demarcated under the Seventh Schedule.

8. Mr S Niranjan Reddy, learned senior counsel, made the following submissions:

a. It is a settled law that the rights to sub-soil minerals vest in the title holder of the

land. The ownership to sub-soil minerals generally follows the ownership of the

land, unless the owner of the land is deprived of the same by some valid legal

process;

b. Ordinarily, the land owner, or the mining lessor, contractually requires the

lessee to pay royalty as a compensation for the loss of the value of minerals

from the land. Under Section 9 of the MMDR Act, Parliament has statutorily

capped the amount of royalty that can be contractually collected by the lessor.

Moreover, Section 9(3) of the MMDR Act (which limits the power of the Central

Government to increase the rates of royalty) does not serve as a limitation on

the taxing power of the State legislatures under Entry 50 of List II;

16 PART C

c. The Constitution is cognizant of the fact that the legislative power of the States

to tax mineral rights may impede mineral development. Therefore, the

Constitution has empowered Parliament to limit or restrict the taxing powers of

the State legislatures under Entry 50 of List II by a law relating to mineral

development; and

d. The word “lands” under Entry 49 of List II includes lands of every character. The

measure of a tax cannot determine the nature of tax. The productivity of land

can be used as a measure for levy of taxes on lands. Resultantly, mineral

produced from a land can always be used as a measure to tax lands.

9. Mr Vijay Hansaria, learned senior counsel, made the following submissions:

a. The MMDR Act only deals with the regulation of mines and mineral

development. Further, the legislation does not seek to legislate on the entire

field of mines and minerals, but only to the extent provided. The levies such as

royalty and dead rent payable under the MMDR Act are not in the nature of tax

but only a payment for a right to enjoy the land and the usufruct of the land;

b. Entry 50 of List II, being a taxing entry, has to be construed with clarity and

precision. The expression “law relating to mineral development” occurring in

Entry 50 of List II has to be construed in light of Section 18 of the MMDR Act

which deals with mineral development. Section 18 does not impose any

express limitation on the legislative power of the states to tax mineral rights;

and

c. Parliament does not have the legislative powers to tax minerals rights using its

residuary powers because the subject matter has been expressly enumerated

in the State List.

17 PART C

10. Ms Sansriti Pathak, learned counsel, made the following submissions:

a. The State, being the proprietor of minerals, can receive royalty for parting

with its mineral rights and can also levy tax on the same minerals in the

capacity of the sovereign; and

b. The expression “any limitations” appearing in Entry 50 of List II cannot be

construed to mean prohibition. Parliament can only limit the exclusive

legislative powers of the State legislature to tax minerals, but cannot prohibit

them.

ii. Submissions of the respondents

11. Mr R Venkataramani, the learned Attorney General for India, made the following

submissions:

a. The grant of permission to undertake any activity in relation to a mineral is

based on certain terms and conditions prescribed under the MMDR Act. The

consideration for the grant of such permission is royalty, which in essence is

the demand for parting with the privilege of working the mineral;

b. It is immaterial whether royalty is designated as a tax. Any levy relating to

mineral development, in so far as it is in relation to mineral rights, will serve as

a limitation on the taxing powers of the State legislature under Entry 50 of List

II;

c. Both Entry 54 of List I and Entry 50 of List II constitute a family of entries. Taxes

on minerals rights must be understood as such levies, charges, impositions or

demands that are related to mineral development. Entry 50 of List II cannot be

a source of authority for imposing any levy, charge, impost, or demand which

18 PART C

is either unconnected with mineral development or in relation to any other alien

purpose, such as education cess;

d. The MMDR Act contemplates all manner of levies, charges, imposts, or

demands that can be legitimately provided for having a nexus with mineral

rights. Therefore, the provisions of the MMDR Act will be treated as a limitation

on the power of the States to demand or impose similar levies, imposts or

demands of the same nature. Although Entry 50 of List II is a taxing entry, it will

be limited by a law relating to mineral development enacted under a general

entry, that is, Entry 54 of List I; and

e. Entry 49 of List II cannot include any matter in relation to mineral rights

activities. Any levy with reference to the value of mineral produced from a

mineral bearing land will be treated as a levy in relation to mineral rights.

12. Mr Tushar Mehta, the learner Solicitor General of India, made the following

submissions:

a. The only pertinent issue in this reference is whether the State Government can

impose levies under Entry 50 of List II over and above the amount of royalty

received by them under the MMDR Act. The State legislature’s competence to

tax mineral rights under Entry 50 does not extend to taxing other aspects such

as mining activities and minerals produced;

b. The Central Government fixes the rates of royalty to ensure harmonized

development of minerals in India. The MMDR Act exhausts the field of statutory

charges and levies on minerals and thereby denudes the power of the State

legislature to impose any levy relating to mineral development. The MMDR Act

19 PART C

occupies the entire field of legislation covered by both Entries 23 and 50 of List

II;

c. In the context of mineral-bearing lands, the words “lands” used in Entry 49 of

List II can only mean the surface of the land. It cannot be interpreted

expansively to include sub-soil minerals because the subject matter of mines

and minerals is covered by Entry 54 of List I and Entries 23 and 50 of List II. If

mineral produce or mineral rights are used as a measure for taxation of lands

under Entry 49 of List II, it will impact the Union’s powers to legislate under

Entry 54 of List I to limit the taxes on mineral rights in the manner contemplated

in Entry 50 of List II; and

d. Any levy imposed by the States with reference to the value of minerals

produced is in pith and substance a tax on mineral rights under Entry 50 of List

II. Since subject-matter of mineral rights covered by Entry 50 of List II is limited

by a parliamentary law, giving an expansive reading to Entry 49 of List II by

interpreting lands to include mineral deposits will lead to an overlap between

the two entries.

13. Mr Harish Salve, learned senior counsel, made the following submissions:

a. Entry 50 of List II is sui generis because it is the only legislative entry which

limits the taxing power of the State legislatures by reference to a general law;

b. The MMDR Act is a complete code on all aspects relating to regulation of mines

and development of minerals. All mineral rights are granted according to the

provisions of the central legislation regardless of whether that the minerals vest

in the State Government;

20 PART C

c. The important issue in this reference pertains to the nature of “any limitations”

mentioned under Entry 50 of List II. The State legislature’s power under Entry

50 of List II is excluded if taxes on mineral rights become incompatible with

mineral development as contemplated by a regulatory law enacted under Entry

54 of List I. Any levy by State legislatures under Entry 50 of List II impinges

upon mineral development;

d. Royalty belongs to the same genus as a tax on mineral rights in the sense that

both are exactions by the sovereign in exercise of their statutory powers. The

expression “taxes on mineral rights” has a very narrow focus and has to be

interpreted accordingly. In a constitutional sense, the expression “tax on

mineral rights” connotes that exaction which gives the States the share of the

mineral produced. The royalty payable under Section 9 of the MMDR Act meets

that definition;

e. The expression “mineral development” used in Entry 50 of List II has to be

traced to the entire architecture of the MMDR Act. Therefore, the entirety of the

MMDR Act serves as a limitation on the taxing powers of the State legislatures

under Entry 50 of List II. Further, other provisions of the MMDR Act cover the

taxing powers of the State legislature by satisfying the threshold of “any

limitation” under Entry 50 of List II;

f. The tax on mineral rights can only be a tax on an owner (who is a private

person) of minerals seeking to monetize the mineral resources. Resultantly, the

State Government can exercise its legislative powers under Entry 50 of List II

only in situations where the mineral rights vest in private persons; and

g. The measure of tax must have a nexus with the nature of tax. In India, all

minerals vest in the State. Ownership of land does not give the owner the right

21 PART C

to the sub-soil minerals. Therefore, a tax on mineral bearing land cannot be

imposed on the owner on the basis of the value of the sub-soil minerals.

14. Dr A M Singhvi, learned senior counsel, made the following submissions:

a. Royalty and dead rent are compulsory imposts under the MMDR Act, and not

a result of negotiations leading to a contractual agreement. Royalty meets the

criteria of tax under Article 366(28) of the Constitution;

b. The legislative declaration under Section 2 of the MMDR Act denudes the

States of any power to tax mineral rights under Entry 50 of List II. Even if the

legislative declaration does not ipso facto exclude the legislative competence

of the State legislatures under Entry 50 of List II, the MMDR Act contains

specific provisions such as Sections 9, 9A, and 9B imposing taxes on mining

lessees which occupy the field of taxation of mineral rights;

c. The express language of Entry 50 of List II suggests that the taxing power of

the State legislature is subordinated by a legislation made under Entry 54 of

List I. This necessarily implies that Entry 54 of List I read with Entry 97 of List I

empowers Parliament to tax mineral rights; and

d. Entry 54 of List I read with Entry 97 of List I implies a sui generis and complete

code on the legislative subject of regulation of mines and mineral development

and taxation of minerals and mineral rights. Therefore, Entry 54 of List I and

Entry 50 of List II constitute an exception to the principle laid down in M P V

Sundararamier (supra).

15. Mr Darius Khambata, learned senior counsel, made the following submissions:

a. The limitations imposed by Parliament under Entry 50 of List II need not be

express, they can also be implied. Therefore, once Parliament imposes

22 PART C

charges or levies under a law relating to mineral development, it occupies the

entire field pertaining to the subject-matter of Entry 50 of List II; and

b. The MMDR Act is a complete code on the regulation of mineral development,

including the field of taxation or exactions on minerals and mineral rights. The

scheme of the MMDR Act is such that Parliament not only imposes a tax on

mineral rights, but also curtails the powers of the State legislature under Entry

50 of List II.

16. Mr A K Ganguly, learned senior counsel, submitted that minerals cannot

constitute as a measure for tax on land because they cease to be a part of land

once extracted.

17. Mr S K Bagaria, learned senior counsel, submitted that the totality of levies

pertaining to minerals and mineral rights are comprised in Sections 9, 9A, 9B,

and 9C of the MMDR Act which leave nothing for the State legislature to tax

under Entry 50 of List II. Moreover, the expression ‘tax on mineral rights’ under

Entry 50 of List II will not empower State legislatures to levy tax on minerals.

18. Mr Arvind Datar, learned senior counsel, made the following submissions:

a. Since Entry 50 of List II is “subject to” any limitations imposed by Parliament by

law relating to mineral development, the legislative power of the State

legislature to tax mineral rights must yield to parliamentary legislation, that is,

the MMDR Act. The taxing powers under Entry 50 of List II are made subject to

a law made by Parliament to maintain uniformity and promote mineral

development; and

b. The scope of taxes on mineral rights under Entry 50 of List II is limited and only

entails a taxation on the activity of excavation and mining. This has already

23 PART D

been accounted for under the MMDR Act. The taxes on minerals produced is

akin to an excise duty and can only be levied under Entry 84 of List I, and the

taxes on sale of minerals can be levied under Entry 54 of List II.

19. Mr Sujit Ghosh, learned senior counsel, submitted that the sovereign right of the

State legislature can be curtailed by Parliament in the interests of mineral

development. Counsel further contended that the ‘aspect’ of taxation of mineral

rights has been taken over by Parliament by virtue of Section 9 of the MMDR

Act.

20. Ms Aishwarya Bhati, the Additional Solicitor-General of India, submitted that the

taxing powers of the State legislatures under Entry 50 of List II is not eclipsed by

a taxing power of Parliament, but by a regulatory power. The learned ASG also

emphasized that the concept of inter-generational equity has to be borne in mind

by this Court to balance the legislative power of the State legislatures to tax

mineral rights against the need for the development of minerals.

D. Distribution of legislative fields relating to mines and minerals

21. A mineral is an inorganic substance found either on or under the surface of the

earth. 10 Minerals are natural and non-renewable resources. They serve as vital

raw materials for the core sectors of the economy. India produces a diversity of

minerals such as coal, iron-ore, bauxite, manganese and chromite. Many

industries, especially those critical to the infrastructure sector such as power,

10 Ramanatha Aiyar Advanced Law Lexicon (Volume 3) 3543; In Banarsi Dass Chadha v. Lt Governor, Delhi

Administration, (1978) 4 SCC 11 [4]. (Justice O Chinappa Reddy, on behalf of a three-Judge Bench observed: “The word “mineral” is not a term of Article. It is a word of common parlance, capable of a multiplicity of meanings depending upon the context. For example, the word is occasionally used in a very wide sense to denote any substance that is neither animal nor vegetation. Sometimes it is used in a narrow sense to mean no more than precious metals than gold and silver. Again, the word “minerals” is often used to indicate substances obtained from underneath the surface of the earth by digging or quarrying.”); V P Pithupitchai v. Special Secretary to the Government of TN, (2003) 9 SCC 534.

24 PART D

steel, cement, and aluminum, are heavily dependent on minerals. For example,

coal is an essential raw material for several key industries such as iron, steel,

and cement, which in turn are basic ingredients for almost all manufacturing

industries and physical infrastructure.

22. Most of the minerals are spatially located in a few mineral rich states, namely,

Andhra Pradesh, Chhattisgarh, Gujarat, Jharkhand, Karnataka, Madhya

Pradesh, Orissa, Rajasthan, and West Bengal. 11 Since mineral resources are a

shared inheritance of the people, it has always been the imperative of the Indian

state to ensure equitable distribution of mineral wealth to sub-serve the common

good. 12 Considering the socio-economic importance of mineral resources to

economic development, the Constitution has emphasized that the state shall play

an important role in facilitating and regulating mining activities.

23. The history of the distribution of legislative powers relating to the regulation of

minerals and development of mineral rights could be traced to the Government

of India Act 1915-19 13. Section 45A of the GOI Act 1915 provided for the

classification of subjects in relation to the functions of government as central and

provincial subjects for the purpose of distinguishing the functions of the

Governor-General in Council and the Indian Legislature from those of the local

governments and local legislatures. Pursuant to Section 45A and Section 129A

(which empowered the Governor-General to make further provisions for the

regulation of certain matters by rules), the Governor-General prescribed the

Devolution Rules. The Devolution Rules prescribed the distribution of the

11 Ligia Norohna et al, ‘Resource Federalism in India: The Case of Minerals’ (2009) 44(8) Economic and Political

Weekly 51, 52. 12 Government of India, Ministry of Mines, ‘National Mineral Policy 2019’ 13 “GOI Act 1915”

25 PART D

subject-matter of the regulation of mines and mineral resources in the following

manner:

“Part I Central Subjects

25. Control of mineral development in so far as such control is reserved to the Governor General in Council under rule made or sanctioned by the Secretary of State, and regulation of mines.

Part II Provincial Subjects

24. Development of mineral resources which are Government property; - subject to rules made or sanctioned by the Secretary of State, but not including the regulation of mines.”

24. The primary aim behind the introduction of the Devolution Rules was to transfer

certain responsibilities to provincial legislative assemblies. 14 However, the

colonial state reserved to itself almost the entirety of the subject matter relating

to mineral development and regulation of mines. The provincial legislatures were

given limited power to the extent of development of mineral resources which

were Government property. The Government of India Act 1935 15 retained the

distribution of legislative powers between the Centre and Provinces. Section 100

of the GOI Act 1935 demarcated the legislative powers of the Federal and

Provincial Legislatures. 16 The relevant entries relating to mines and mineral

development were as follows:

14 See Debates in the House of Commons on the Government of India Act 1919 (3rd December 1919) 15 “GOI Act 1935” 16 GOI Act 1935, Section 100. (It read:

Subject matter of Federal and Provincial Laws: (1) Notwithstanding anything in the two next succeeding subsections, the Federal Legislature has and a Provincial Legislature has not, power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to this Act (hereinafter called the “Federal Legislative List”).

26 PART D

“List I. – Federal Legislative List

36. Regulation of mines and oilfields and mineral development to which such regulation and development under a Federal control is declared by Federal law to be expedient in the public interest.

List II. – Provincial Legislative List

23. Regulation of mines and oilfields and mineral development subject to the provisions of List I with respect to regulation and development under Federal control.

44. Taxes on mineral rights, subject to any limitations imposed by any Act of the Federal Legislature relating to mineral development.”

25. During the debates in the House of Commons on the above entries, the then

Solicitor General stated that the provinces could enact their own regulations if

there was any “inaction” by the Federal Legislature. 17 Thus, legislative power in

relation to regulation of mines and mineral development was accorded to both

the Federal and Provincial Legislatures. However, the subject matter in the

Provincial Legislative List was made subject to the provisions of the Federal

Legislative List. The Dominion Legislature enacted the Mines and Minerals

(2) Notwithstanding anything in the next succeeding sub-section, the Federal Legislature, and subject to the preceding sub-section, a Provincial Legislature also, have power to make laws with respect to any of the matters enumerated in List III in the said Schedule (hereinafter called the “Concurrent Legislative List”). (3) Subject to the two preceding sub-sections, the Provincial Legislature has, and the Federal Legislature has not, power to make laws for a Province or any part thereof with respect to any of the matters enumerated in List II in the said Schedule (hereinafter called the “Provincial Legislative List”). (4) The Federal Legislature has power to make laws with respect to matters enumerated in the Provincial Legislature List except for a Province of any part thereof.”) 17 Government of India Bill, Seventh Schedule (Legislative Lists) Hansard (Volume 301) (13 May 1935). [The

Solicitor General said: “If there is inaction at the Centre the Provinces can go ahead with their own regulations and developments, but to the extent to which the Centre desires and declares by law that there shall be central regulations and control, then the subject comes out of the purely restricted Provincial field and becomes a subject of control at the Centre.”]

27 PART D

(Regulation and Development) Act 1948 in pursuance of the subject contained

in Entry 36 of the Federal Legislative List.

26. Entry 44 of the Provincial Legislative List enumerated the subject matter of taxes

on mineral rights, but made the taxing power of the Provinces subject to any

legislation relating to mineral development enacted by the Federal Legislature.

This scheme of the distribution of legislative powers with respect to the subject-

matter of mines and mineral development as well as the taxation of mineral rights

is reflected in the Constitution.

27. The Seventh Schedule to the Constitution enumerates the following entries

pertaining to regulation of mines and mineral development and the taxation of

mineral rights:

“List I – Union List

54. Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.

List II – State List

23. Regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union.

50. Taxes on mineral rights subject to any limitation imposed by Parliament by law relating to mineral development.”

28 PART E

28. Although the above entries are substantially similar to the scheme under the GOI

Act 1935, one of the differences lies in the removal of “oil fields” from Entry 54 of

List I and Entry 23 of List II. The regulation and development of oil fields is now

enumerated under Entry 53 of List I. 18 The other difference is that while the GOI

Act 1935 required a declaration by Federal law, the Constitution now requires a

declaration by Parliament. The entry pertaining to taxes on mineral rights is

largely similar to Entry 44 of the Provincial Legislative List, except for the fact

that Entry 44 provided for imposition of “any limitations” by “any Act” enacted by

the Federal Legislature relating to mineral development, while Entry 50 of List II

does not include the expression “any Act” enacted by Parliament. Before we

delve into the intricacies of the interpretation of the legislative entries, we need

to bear in mind the constitutional philosophy underlying the Indian federal setup.

E. Underlying constitutional philosophy

i. Scheme of distribution of legislative powers and constitutional

limitations

29. Part XI of the Constitution deals with the relations between the Union and the

States. Article 245 provides that subject to the provisions of the Constitution,

Parliament may make laws for the whole or any part of the territory of India and

the Legislature of a State may make laws for the whole or any part of the State. 19

The power to enact laws is inherently related to the sovereignty of the Union and

State legislatures in their respective fields. 20 While the sovereign legislative

18 Entry 53 of List I, Seventh Schedule, Constitution of India. [It reads: “53. Regulation and development of oil fields

and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable.”] 19 Article 245, Constitution of India 20 Jindal Stainless Steel v. State of Haryana, (2017) 12 SCC 1 [617]

29 PART E

powers of Parliament and the State legislatures are plenary, they are subject to

well-defined constitutional limitations. The language of Article 245 makes the

exercise of legislative powers expressly subject to the provisions of the

Constitution. Therefore, laws made by a legislature may be void not only for the

lack of legislative power in respect of the subject-matter, but also for

transgressing constitutional limitations. 21 It is the duty of constitutional courts to

resolve disputes regarding a breach of constitutional limits by the Union and

State legislatures. 22

30. The scheme of distribution of legislative powers between Parliament and the

State legislatures is embodied in Article 246. Article 246 is similar to Section 100

of the GOI Act 1935. Article 246 deals with the subject matter of laws made by

Parliament and the Legislatures of States and is set below:

“246. Subject-matter of laws made by Parliament and by the Legislatures of States –

(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to makes laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the “Union List”).

(2) Notwithstanding anything in clause (3), Parliament and, subject to clause (1), the Legislature of any State also, have the power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the “Concurrent List”)

(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the

21 H M Seervai, Constitutional Law of India, Volume 3 (4th edn.) [22.6] 2306; State of Kerala v. Mar Appraem Kuri

Company Ltd., (2012) 7 SCC 106, [41]. 22 State of West Bengal v. Committee for Protection of Democratic Rights, (2010) 3 SCC 571

30 PART E

matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the “State List”)

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List.”

31. Article 246 confers exclusive power on Parliament to make laws with respect to

any of the matters enumerated in List I (the Union List) of the Seventh Schedule.

The exclusive power of the State legislatures with respect to the matters

enumerated in List II is subject to the exclusive legislative powers of Parliament.

In Hoechst Pharmaceuticals v. State of Bihar, 23 this Court culled out the

following principles underlying Article 246:

a. Parliament has exclusive power to make laws with respect to the matters

enumerated in List I;

b. The non-obstante clause in Article 246(1) provides for predominance or

supremacy of the Union legislature;

c. The legislative powers of the Union legislature is not encumbered by anything

contained in Articles 246(2) and 246(3) for these clauses are expressly limited

and made subject to the non-obstante clause in Article 246(1);

d. The State legislature has exclusive power to make laws with respect to any

of the matters enumerated in List II;

e. The exclusive power of the State legislature to legislate with respect to any

of the matters enumerated in List II has to be exercised subject to Article

23 (1983) 4 SCC 45

31 PART E

246(1), that is, the exclusive power of Parliament to legislate with respect to

matters enumerated in List I;

f. Consequently, in case of any conflict between an entry in List I and an entry

in List II which is not capable of reconciliation, the power of Parliament to

legislate with respect to a matter enumerated in List I must supersede pro

tanto the exercise of power of the State legislature; and

g. Both Parliament and State legislatures have concurrent powers of legislation

with respect to any of the matters enumerated in List III, the law enacted by

Parliament prevailing in the event of any inconsistency or conflict.

32. Article 245 (read with Article 246) is the source of the legislative powers of

Parliament and the State legislatures. The entries in the Seventh Schedule

delineate the subject matter over which the appropriate legislature can enact

laws. The entries are legislative heads and not the source of legislative powers. 24

A legislation could be composite in nature, drawing upon several entries in a

particular list. 25 Such a legislation is referred to as a “ragbag” legislation.

33. Article 254 clarifies that if the law made by a State legislature is repugnant to any

provisions of a law made by Parliament with respect to any of the matters

enumerated in List III, the law made by Parliament would prevail and the law

made by the State legislature would be void to the extent of the repugnancy. The

issue of repugnancy arises only when both the legislatures are competent to

legislate on the subject with respect to List III. 26 The issue of repugnancy does

not arise if the legislations enacted by Parliament and the State legislatures deal

24 Calcutta Gas Company (Proprietary) Ltd v. State of West Bengal, 1962 Supp (3) SCR 1, [8] 25 Ujagar Prints (II) v. Union of India, (1989) 3 SCC 488 [53]; State of West Bengal v. Committee for Protection of

Democratic Rights, (2010) 3 SCC 571 [27]. 26 Ch Tika Ramji v. State of U P, 1956 SCC OnLine SC 9 [26]; State of Maharashtra v. Bharat Shanti Lal Shah,

(2008)

32 PART E

with separate and distinct legislative subject matters. By virtue of Article 248,

Parliament has exclusive legislative powers to make laws with respect to any of

the matters not enumerated in List II or List III. 27 However, how should courts

deal with a situation where two legislations, enacted by Parliament and State

legislature in pursuance of their respective legislative powers, appear to conflict

with each other? The answer lies in Article 246 itself.

34. Article 246 incorporates the principle of federal supremacy. 28 In Hoechst

Pharmaceuticals (supra), this Court held that the words “notwithstanding

anything contained in clauses (2) and (3)” in Article 246(1) and the words “subject

to clauses (1) and (2)” in Article 246(3) embody that principle. The principle

postulates that in case of an inevitable conflict between Union and State powers,

the Union’s power of legislation over a subject enumerated in List I shall prevail

over the State powers of legislation over a subject enumerated in List II and III.

However, it is also settled that this principle cannot be resorted to unless there is

an irreconcilable direct conflict between the entries in the Union and State Lists. 29

Such a conflict must be an actual one and not a mere seeming conflict between

the two entries in two lists. 30

35. Hoechst Pharmaceuticals (supra) laid down the following principles to resolve

any direct conflict between the entries in List I and List II: (i) in case of seeming

conflict, the two entries should be read together without giving a narrow and

restricted reading to either of them; (ii) an attempt should be made to see whether

the two entries can be reconciled so as to avoid a conflict of jurisdiction; and (iii)

no question of conflict arises between two Lists if the impugned legislation in pith

27 Article 248, Constitution of India. 28 Kishori Shetty v. The King, (1949-50) 11 FCR 650 29 State of Kerala v. Mar Appraem Kuri Co. Ltd, (2012) 7 SCC 106 [39] 30 Offshore Holdings (P) Ltd. v. Bangalore Development Authority, (2011) 3 SCC 139 [99]

33 PART E

and substance appears to fall exclusively under one list and the encroachment

upon the other list is incidental.

36. Articles 245 and 246 embody the essence of Indian federalism. The division of

legislative powers between Union and States is an emanation of the federal

project. 31 This division also serves as a constitutional limitation on legislative

powers. Parliament cannot entrench upon the plenary power of the State

legislatures in the ordinary course, except where the Constitution itself

specifically allows it. 32 The appropriate legislature must possess legislative

competence to enact a law on the subject matter it seeks to legislate.

37. With respect to the powers of taxation, Article 265 provides that no tax shall be

levied or collected except by authority of law. In Mafatlal Industries v. Union of

India, a nine-Judge Bench of this Court held that the “law” mentioned under

Article 265 refers to a valid law whose validity has to be determined with

reference to other provisions in the Constitution. 33 Therefore, with respect to

taxation laws particularly, there is a constitutional requirement that the law

imposing tax must be in conformity with the provisions of the Constitution,

particularly Part III dealing with the fundamental rights. This is also a

constitutional limitation because the appropriate legislature has to ensure that

the law is in accord with the principles of equality and non-discrimination. Any

31 Constituent Assembly Debates, Vol. 11 (25 November 1949). [Dr. B R Ambedkar – “As to the relation between

the Centre and the States, it is necessary to bear in mind the fundamental principle on which it rests. The basic principle of Federalism is that the Legislative and Executive authority is partitioned between the Centre and the States not by any law to made by the Centre but by the Constitution itself. This is what the Constitution does. The States under our Constitution are in no way dependent upon the Centre for their legislative or executive authority. The Centre and the States are co-equal in this matter. It is difficult to see how such a Constitution can be called centralism. It may be that the Constitution assigns to the Centre too large field for the operation of its legislative and executive authority than it to be found in any other federal Constitution. It may be that the residuary powers are given to the Centre and not to the States. But these features do not form the essence of federalism. The chief mark of federalism as I said lies in the partition of the legislative and executive authority between the Centre and the Units by the Constitution. This is the principle embodied in our Constitution.”] 32 See Articles 249, 250, and 252, Constitution of India. 33 (1997) 5 SCC 536 [25].

34 PART E

legislation enacted by the legislature in excess of its constitutional powers is

void. 34

ii. Interpretation of legislative entries

38. The structure of the legislative entries in the three Lists of the Seventh Schedule

follows an express and deliberate pattern. The entries are classified into general

and taxing entries. 35 In the Union List, entries 1 to 81 enumerate general subject

matters, while entries 82 to 92-C pertain to the powers of taxation. Similarly,

entries 1 to 45 in the State List enumerate the general entries and entries 46 to

63 provide for taxing entries. The legislature does not derive the power to tax

from the general entries - taxation is considered to be a distinct matter for

purposes of legislative competence. The distinction between the general and

taxing entries was explained by this Court in M P V Sundararamier (supra) in

the following manner:

“In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 enumerate the taxes which could be imposed by a law by Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, entry 22 in List I is “Railways”, and Entry 89 is “Terminal taxes on goods or passengers, carried by railway, sea, or air; taxes on railway fares and freights”. If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions “Trade and commerce with foreign countries; import and export across customs frontiers”. If these expressions are to be interpreted as including duties to be levied in respect of that trade and commerce, then Entry 83 which is “Duties of customs including export duties” would be wholly redundant. Entries 43 and 44 relate

34 R M D Chamarbaugwalla v. Union of India, 1957 SCC OnLine SC 11 [12] 35 R Abdul Quader & Co. v. STO, (1964) 6 SCR 867, [8]

35 PART E

to incorporation regulation and winding up of corporations. Entry 85 provides separately for Corporation tax. Turning to List II, Entries 1 to 44 form one group mentioning the subjects on which the States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. Entry 18, for example, is “Land” and Entry 45 is “Land Revenue”. Entry 23 is “Regulation of mines” and Entry 50 is “taxes on mineral rights”. The above analysis – and it is not exhaustive of the Entries in the Lists – leads to the interference that taxation is not intended to be comprised in the main subject in which it might on an extended construction be regarded as included, but is treated as a distinct matter for purposes of legislative competence. And this distinction is also manifest in the language of Art. 248, Cls. (1) and (2), and of Entry 97 in List I of the Constitution. […]

To sum up: […] (2) Under the scheme of the Entries in the Lists, taxation is regarded as a distinct matter and is separately set out.”

(emphasis added)

39. The above position of law has been expressly affirmed by the nine-Judge Bench

of this Court in Jindal Stainless Ltd v. State of Haryana. 36 Thus, it is an

accepted principle that the subject matter of taxation is dealt with under distinct

entries and, therefore, cannot be traced to a non-taxing entry. The taxing powers

of Parliament and the State legislatures are mutually exclusive and clearly

demarcated. There can be no overlap between the taxing powers of the Union

and the States. Entries relating to taxing powers must be construed with clarity

and precision to maintain exclusivity and a construction of a taxation entry which

may lead to overlapping must be eschewed. 37 If a taxing power is enumerated

within a particular legislative list, it is automatically excluded from the purview of

36 Jindal Stainless Steel (supra) [120], [237.5], [639] 37 Godfrey Phillips India Ltd. v. State of UP, (2005) 2 SCC 515 [46]

36 PART E

subject-matters in other legislative lists. The residuary power of Parliament also

includes the power of making any law imposing a tax not mentioned in either List

II or List III.

40. The legislative fields or entries in the Seventh Schedule have used general words

to define and delineate the legislative powers of Parliament and State

legislatures. The rule that words should receive their ordinary, natural, and

grammatical meaning applicable to statutes also applies to the entries contained

in the Seventh Schedule. 38 It is also a well-accepted principle that the entries

should not be read in a narrow or pedantic sense but must be given their broadest

meaning and the widest amplitude because they are intrinsic to a machinery of

government. 39 The ambit of the entries extends to all ancillary and subsidiary

matters which can fairly and reasonably be said to be comprehended in them. 40

Since the Seventh Schedule uses general terms, there is always a possibility of

an overlap and conflict between two or more entries.

41. Many entries in the Seventh Schedule may appear to overlap because of the

language used in the entries. The necessary corollary to the scheme of

legislative distribution is that that any invasion by Parliament in the field assigned

to the States and vice versa is a breach of the Constitution. 41 Even though the

Constitution distributes legislative powers between the Union and the States,

there have been situations where a legislation purporting to deal with a subject

in one list, touches on a subject in another list. To remedy such situation, the

doctrine of pith and substance is used to examine whether the legislature has

38 Navinchandra Mafatlal v. Commissioner of Income Tax, Bombay City, (1954) 3 SCC 623 39 Hans Muller of Nurenburg v. Superintendent, Presidency Jail (1955) 1 SCR 1284; Elel Hotels & Investments Ltd

v. Union of India, (1989) 3 SCC 698; State of Rajasthan v. G Chawla, 1958 SCC OnLine SC 33 [8]. 40 United Provinces v Atiqa Begum, (1940) 2 FCR 110; Express Hotels (P) Ltd. v. State of Gujarat, (1989) 3 SCC

677; Sardar Baldev Singh v. CIT, 1960 SCC OnLine SC 147 [20] 41 Dr. B R Ambedkar, CAD Volume 7 (4 November 1948).

37 PART E

the competence to enact a law with regard to either of the three lists under the

Seventh Schedule of the Constitution. 42 There may arise situations where a

legislature may frame a law that in substance and reality transgresses its

legislative competence. Such a piece of legislation is called “colourable

legislation” because the legislature veils its transgression by making it seem as

if the legislation is within its legislative competence. 43 To examine whether the

legislature has transgressed its legislative competence, the substance of the

legislation is material. If the subject-matter is in substance beyond the legislative

powers of the legislature, the form in which the law is clothed would not save it

from the vice of unconstitutionality. 44

42. The Constitution has used specific expressions to resolve potential overlaps or

conflicts between and among the entries in the three Lists. The entries in the

Seventh Schedule have used different phraseologies to either subject or restrict

their scope and ambit. Some of the legislative entries in the State List have been

made subject to broad or specific limitations or restrictions with respect to the

entries in the Union List or Concurrent List. This would emerge from the

tabulation set out below:

Phraseology used Entries in State List Subject to the provisions of any law made 37 by Parliament Subject to the provisions of entries in List I 2, 17, 22, 24, 33 Subject to a particular field of legislation in 23 List I Subject to the provisions of entries in List III 26, 27, 57 Subject to the provisions of List I and List III 13 Subject to any limitations imposed by 50 Parliament by law Other than 7, 12, 32, 63 Not including 1, 51, 54, 66

42 A L S P P L Subrahmanyan Chettiar v. Muthuswami Goundan, (1940) 2 FCR 188; A S Krishna v. State of Madras,

1957 SCR 399 [8]; 43 K C Gajapathi Narayan Deo v. State of Orissa, (1953) 2 SCC 178 [11] 44 K C Gajapathi Narayan Deo (supra) [12]

38 PART E

43. The above table is an indication of the extent to which the legislative powers of

the States have been restricted, limited, or altogether precluded. The use of the

expression “other than” or “not including” serves the purpose of redacting from

the ambit of the legislative power of the States to the extent suggested. Where

the Constitution intends to limit or preclude the legislative powers of the State to

a particular extent, it has used specific terminologies such as “other than” and

“not including”.

44. Where the entries have used the phrase “subject to”, the legislative power of the

State is made subordinate to Parliament with respect to either the Union List or

the Concurrent List. The expression “subject to” conveys the idea of a provision

yielding place to another provision or other provisions to which it is made

subject. 45 Therefore, where the Constitution intends to displace or override 46 the

legislative powers of the States, it has used specific terminology – “subject to”.

However, the Constitution has also indicated the extent to which a particular

legislative entry under List II is subordinated. For instance, the subjection is either

with respect to provisions of List I or List III, or it can also be to the extent of “any

limitations” imposed by Parliament by law. Thus, it is imperative that the entries

in List II must be read and interpreted in their proper context to understand the

extent of their subordination to Union powers.

45. There are numerous entries in the State List where the Constitution has imposed

no restrictions on the exercise of the legislative powers of the States. 47 With

45 South India Corporation (P) Ltd. v. Secretary, Board of Revenue, (1964) 4 SCR 280 [19] 46 State of Bihar v. Kameshwar Singh, (1952) 1 SCC 528. [“18. […] It was said that the words “subject to the

provisions of List III Entry 42” must be taken to mean that the law-making power under Entry 36 could only be exercised subject to the two conditions as to public purpose and payment of compensation, both of which are referred to in Entry 42. Those words, in my opinion, mean no more than that any law made under Entry 36 by a State Legislature can be displaced or overridden by the Union Legislature making a law under Entry 42 of List III.”] 47 See Entries 4, 5, 6, 8, 9, 10, etc., List II, Seventh Schedule, Constitution of India.

39 PART E

respect to such entries, the absence of any express limitations indicates that the

Constitution did not intend to fetter the legislative powers of the States.

46. In addition to the above terminologies, the entries in the Seventh Schedule also

indicate the manner in which a restriction or limitation can be imposed on the

legislative powers of the State. This assumes clarity from the following tabulation:

Phraseology Used Entries Declared by or under law 23, 27, 67 of List I Declared by Parliament by law 24, 52, 53, 54, 56, 62, 63, 64 of List I Imposed by Parliament by law 50 of List II

47. The Constitution deploys three expressions to signify the manner in which the

legislative power could be exercised by Parliament – “declared by or under law”,

and “declared by Parliament by law”, and “imposed by Parliament by law” The

difference in the character of these provisions can be gathered from the

Constitution (Seventh Amendment) Act 1956 which substituted the expression

“declared by Parliament by law” with “declared by or under law made by

Parliament” in Entry 67 48 of the Union List. The object of the amendment was to

enable the delegate under the statute to make the required declaration. 49 The

expression “by law” means that the legislative power should be effectuated

through the provisions of a statute. In comparison, “by or under law” means that

the legislative intent could be effectuated either through the provisions of the

48 Entry 67, List I, Seventh Schedule, Constitution of India. [It reads – “Ancient and historical monuments and

records, and archaeological sites and remains, declared by or under law made by Parliament to be of national importance.”] 49 Constitution (Seventh Amendment) Act, 1956, State of Objects and Reasons – “Clause 24 – Entry 67 of the

Union List refers to “ancient and historical monuments and records, and archaeological sites and remains, declared by Parliament by law to be of national importance. A large number of ancient monuments, archaeological sites, etc. have been declared to be of national importance by an Act of Parliament. It requires another Act of Parliament to make the slightest alteration in, or addition to, the lists in that Act, which seems to be and unduly cumbrous procedure. It is, therefore, proposed to amend the entry substituting for the words “declared by Parliament by law”, the words “declared by or under law made by Parliament”. The same amendment is also proposed to be made in connected provisions, entry 12 of the State List, entry 40 of the Concurrent List and article 49.”

40 PART E

statute or by any subordinate authority vested with powers in that behalf by the

statute. 50 It is important to note that Entry 50 of List II use the expression “by law

relating to mineral development”. We will have to bear the meaning of the

expression “by law” in mind to give an appropriate interpretation to the entry.

iii. Fiscal Federalism

48. Federalism is one of the basic features of the Indian Constitution. 51 Federalism

embodies a division of powers between the units of the federation, that is, the

Union and the States. Indian federalism is defined as asymmetric because it tilts

towards the Centre, producing a strong Central Government. Yet, it has not

necessarily resulted in weak State governments. 52 The Indian States are

sovereigns within the legislative competence assigned to them. The delicate

balance of power is secured by constitutional courts by interpreting the scheme

of distribution of powers. 53 In S R Bommai v. Union of India, 54 Justice B P

Jeevan Reddy observed that the courts should be circumspect in adopting an

approach or interpretation which may have an effect of whittling down the powers

reserved to the States:

“276. The fact that under the scheme of our Constitution, greater power is conferred upon the Centre vis-à-vis the States does not mean that States are mere appendages on the Centre. Within the sphere allotted to them, States are supreme. The

50 In Dr Indramani Pyarelal Gupta v. W R Natu, (1963) 1 SCR 721 a Constitution Bench of this Court explained the

difference between “by law” and “under law” in the following terms: “15. […] The meaning of the word “under the Act” is well known. “By” an Act would mean by a provision directly enacted in the statute in question and which is gatherable from its express language or by necessary implication therefrom. The words “under the Act” would, in that context, signify what is not directly to be found in the statute itself but is conferred or imposed by virtue of powers enabling this to be done; in other words; bye-laws made by a subordinate law-making authority which is empowered to do so by the parent Act. The distinction is thus between what is directly done by the enactment and what is done indirectly by a subordinate law-making authority which is empowered to do so by the parent Act.” 51 Kesavananda Bharati v. State of Kerala, (1973) 4 SCC 225 [582] 52 Granville Austin, Cornerstone of a Nation (OUP, 1966) 187 53 In re, Special Reference No. 1 of 1964, (1965) 1 SCR 413; Jindal Stainless Steel (supra) [612] 54 (1994) 3 SCC 1

41 PART E

Centre cannot tamper with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States. […]”

49. In a federal form of government, each federal unit should be able to perform its

core constitutional functions with a certain degree of independence. The

Constitution has to be interpreted in a manner which does not dilute the federal

character of our constitutional scheme. 55 The effort of the constitutional court

should be to ensure that State legislatures are not subordinated to the Union in

the areas exclusively reserved for them. 56

50. In Union of India v. Mohit Minerals Private Limited, 57 this Court recognized

fiscal federalism as an important attribute of Indian federalism. Fiscal federalism

is concerned with the assignment of functions to different levels of government

and devolution of appropriate fiscal instruments to carry out these functions. 58 In

India, these fiscal instruments typically take the form of tax and debt instruments.

Similar to the division of constitutional powers and responsibilities, the

Constitution has also shared tax-raising responsibilities between the Union and

the States. 59

51. The Constitution is cognizant of the imbalance between resources at the disposal

of states and the Union. The Constitution remedies the imbalance by way of

intergovernmental distribution 60 and grants. 61 One of basic features of fiscal

federalism is that both the Union government and the State governments ought

55 Jindal Stainless Steel (supra) [85]. 56 Jindal Stainless Steel (supra) [615]. 57 (2022) 10 SCC 700 [56] 58 Wallace E Oates, ‘An Essay on Fiscal Federalism’ (1999) 37(3) Journal of Economic Literature 1120, 1121. 59 The legislative power of Parliament to tax is enumerated in entries 82 to 92B of List I. Similarly, the legislative

power of state is enumerated is enumerated in entries 46 to 62 of List II. 60 Article 270(2), Constitution of India 61 Articles 273 and 275, Constitution of India

42 PART E

to have adequate fiscal resources to discharge their constitutional

responsibilities. List I and List II of the Seventh Schedule contain various subject-

matters under which Parliament and the State legislatures can respectively levy

taxes. The purpose of such a distribution is to entrust adequate fiscal powers

with the legislatures to raise revenues to meet the growing fiscal expenditures

and rein in the fiscal deficit. The legislatures can formulate the principles

underlying any taxing legislation, define the taxing event or the charge of tax as

well the mode and manner of its implementation.

52. The subjects in respect of which the framers of the Constitution desired that there

should be uniformity of law throughout the country have been enumerated under

the Union List, while matters which may require laws to be made having regard

to the particular needs and peculiar problems of each State have been placed

under the State List. 62 For instance, the State legislatures can tax the

consumption or sale of electricity. Although electricity is an important raw material

for many industries, the States are allowed to determine the rates of the levy by

taking into consideration the particular needs of the State. By laying down a

heterogenous distribution of legislative powers, the Constitution underscores that

the asymmetry of our federation is an integral aspect of our federal form of

governance.

53. Dr B R Ambedkar in his treatise on the evolution of provincial finances in colonial

India observed that the cornerstone of the financial relationship between the

Federal and State governments was characterized by separation of sources and

contributions from the yield. 63 Any dilution in the taxing powers of the State

62 Khazan Chand v. State of Jammu and Kashmir, (1984) 2 SCC 456 [14] 63 Dr. B R Ambedkar, The Evolution of Provincial Finance in British India: A Study in the Provincial Decentralization

of Imperial Finance’ (1923) 152-171.

43 PART E

legislatures will necessarily impact their ability to raise revenues, which in turn

will impede their ability to deliver welfare schemes and services to the people.

The ability of the State Governments to invest in physical infrastructure, health,

education, human capacity, and research and development is directly co-related

to the raising of government revenues. 64 Constitutional courts have to be

cognizant of this context while adjudicating on issues affecting the taxing powers

of the State legislatures.

54. While speaking of fiscal federalism in the context of mineral resources, we have

to be mindful of the fact that not all states are equally endowed with mineral

resources. States such as Chhattisgarh, Jharkhand, and Orissa have greater

reserves of mineral resources. Resultantly, the contribution of the mining sector

in the state domestic product is higher for these states. 65 Despite the abundance

of mineral wealth, many of these states lag economically and suffer from, what

many economists refer to as, “resource curse”. 66 For instance, mineral rich states

such as Jharkhand, Chhattisgarh, and Orissa have lower per capita incomes

than the national averages. 67 Taxation is among the important sources of

revenue for these States, impacting on their ability to deliver welfare schemes

and services to the people. Fiscal federalism entails that the power of the States

to levy taxes within the legislative domain carved out to them and subject to the

64 ‘State Finances: A Study of Budgets of 2023-2024, Revenue Dynamics and Fiscal Capacity of Indian States’

Reserve Bank of India (December 2023) 28. 65 Ligia Noronha, et al, ‘Resource Federalism in India: The Case of Minerals’ (2009) 44(8) Economic and Political

Weekly 51, 53. 66 Economic Survey 2016-2017, Ministry of Finance, Government of India (January 2017) 292. (“Resource curse”

refers to the phenomenon of economies with abundant natural resources having the tendency to grow less rapidly than resource-scarce economies.”) 67 Ministry of Statistics and Programme Implementation, State-wise date on per capita income’ (24 July 2023) <

https://www.pib.gov.in/PressReleasePage.aspx?PRID=1942055>

44 PART E

limitations laid down by the Constitution must be secured from unconstitutional

interference by Parliament.

iv. Natural resources and the public trust doctrine

55. The public trust doctrine is founded on the principle that certain resources are

nature’s bounty which ought to be reserved for the whole populace, for the

present and for the future. 68 Since these resources are intrinsically important to

every person in society, the State acts as a public trustee to safeguard them. In

M C Mehta v. Kamal Nath, 69 Justice Kuldip Singh observed that the State is the

trustee of all natural resources which are by nature meant for public use and

enjoyment. The learned Judge further observed that the State has a legal duty

to protect natural resources which cannot be converted into private ownership.70

The environment and natural resources are national assets and subject to

intergenerational equity. 71 The public trust doctrine looks beyond the needs of

the present generation and obligates the State to protect natural resources for

future generations as well. 72

56. While dealing with the allocation of spectrum in Centre for Public Interest

Litigation v. Union of India, 73 this Court held the State should distribute natural

resources in consonance with the principles of equality and public trust to ensure

against action detrimental to public interest. The public trust doctrine imposes

restrictions and obligations on the government to protect long-established public

68 Joseph L Sax, ‘The Public Trust Doctrine in Natural Resource Law: Effective Judicial Intervention’ (1970) Michigan Law Review 471, 484. 69 (1997) 1 SCC 388 [34] 70 ibid 71 M C Mehta v. Union of India, (2009) 6 SCC 142 [45] 72 T N Godavarman Thirumulpad v. Union of India, (2006) 1 SCC 1 [89] 73 (2012) 3 SCC 1

45 PART E

rights over short-term private rights and private gain. 74 However, the obligation

extends to every person who exercises rights over natural resources to use them

without impairing or diminishing the rights of people and long term interests in

that property or resource. 75 In Reliance Natural Resources Ltd. v. Reliance

Industries, 76 in the context of Article 297 77 of the Constitution, this Court held

that the nature of the word “vest” must be seen in the context of the public trust

doctrine. 78

57. The principle which emanates from the above discussion is that the State holds

all natural resources, including minerals, as a trustee of the public and must deal

with them in a manner consistent with the nature of such a trust. 79

58. The Central Government or the State Government may not always be the

“owner” of the underlying minerals. But the Constitution empowers both

Parliament (under Entry 54 of List I) and the State legislatures (under Entry 23

of List II) to regulate mines and mineral development, the entrustment to the

State being subject to the power of Parliament to regulate the domain. The

Constitution has entrusted the Union and the States with the responsibility to

regulate mines and mineral development in consonance with the principles of the

public trust doctrine and sustainable development of mineral resources. Under

the MMDR Act, the Central Government, acting as a public trustee of minerals,

regulates prospecting and mining operations in public interest. 80 In the process,

the legislation seeks to increase awareness of the compelling need to restore the

74 Fomento Resorts & Hotels Ltd. v. Minguel Martins, (2009) 3 SCC 571 [55] 75 Fomento Resorts & Hotels Ltd. (supra) [55] 76 (2010) 7 SCC 1 [114] 77 Article 297, Constitution of India. 78 Reliance Natural Resources Ltd. (supra) [122] 79 Natural Resources Allocation, In re, Special Reference No. 1 of 2012, (2012) 10 SCC 1 [88] 80 State of Rajasthan v. Gotan Lime Stone Khanji Udyog (P) Ltd. (2016) 4 SCC 469 [29]; Orissa Mining Corporation

Ltd. v. Ministry of Environment & Forests, (2013) 6 SCC 476 [58].

46 PART E

serious ecological imbalance and protect against damage being caused to the

nature. 81 In Pradeep S Wodeyar v. State of Karnataka, 82 one of us (Justice D

Y Chandrachud) observed that the essence of the MMDR Act is to “protect

humankind and every species whose existence depends on natural resources

from the destruction which is caused by rapacious and unregulated mining.” The

Court noted that the restrictions under Section 4 of the MMDR Act are intrinsically

meant to protect the environment and communities who depend on the

environment.

59. The principle that the Union and State Governments act as public trustees of

mineral resources has been incorporated in the MMDR Act. Section 4-A

empowers the Central Government to prematurely terminate a prospecting

license, exploration license, or mining lease, after consultation with the State

Government in the interests of (i) the regulation of mines and mineral

development; (ii) preservation of the natural environment; (iii) control of floods;

(iv) prevention of pollution; (v) avoiding danger to public health or

communications; (vi) ensuring the safety of buildings, monuments or other

structures; (vii) conservation of mineral resources; and (viii) maintaining safety in

the mines or for such other purposes. 83 Moreover, the MMDR Act now mandates

grant of mining leases, 84 exploration licences, 85 and composite licences 86 in

respect of notified minerals through the process of auction. The Central

Government is empowered to prescribe the terms and conditions subject to

81 State (NCT of Delhi) v. Sanjay, (2014) 9 SCC 772 [32] 82 (2021) 19 SCC 62 [49.3] 83 See State of Haryana v. Ram Kishan, (1988) 3 SCC 416 [7]. [This Court observed that Section 4-A “was enacted

with a view to improve the efficiency in this regard and with this view directs consultation between the Central Government and the State Government. The two governments have to consider whether premature termination of a particular mining lease shall advance the object or not, and must, therefore, take into account all considerations relevant to the issue, with reference to the lease in question.”] 84 Section 10B, MMDR Act 85 Section 10BA, MMDR Act 86 Section 11, MMDR Act

47 PART F

which the auction shall be conducted.

60. The regulatory regime under the MMDR Act recognizes the important role of the

state in regulating mines and mineral development. This emerges from the stand

point of the following perspectives: (i) the State is a public trustee of natural

resources, including minerals; (ii) pursuant to its role as a public trustee, the State

has been empowered to regulate prospecting and mining operations; (iii) the

provisions of the statute reflect the priority of the state to regulate mining and

related activities to ensure sustainable mineral development. (iv) prospecting

and mining operations may be carried out by both the government as well as

private lessees bearing in mind the public interest; and (v) the Government has

to ensure that mineral concessions are granted in a fair and transparent manner.

61. Having encapsulated the broad drift of the constitutional and statutory provisions,

we now deal with the issues arising in this reference in the ensuing segments.

F. Whether royalty is tax

i. Royalty under the MMDR Act

62. The MMDR Act was enacted by Parliament in exercise of its legislative power

derived from Article 246 read with Entry 54 of List I. The Act seeks to provide for

the regulation of mines and development of minerals under the control of the

Union. Section 2 contains a declaration in terms of Entry 54 of List I, providing

that “it is expedient in the public interest that the Union should take under its

control the regulation of mines and the development of minerals to the extent

hereinafter provided.”87 The declaration indicates that Parliament intends to take

87 Section 2, MMDR Act.

48 PART F

the regulation of mines and development of mines under the control of the Union

to the extent indicated in the statute.

63. Chapter II of the MMDR Act deals with general restrictions on undertaking

prospecting and mining operations. Section 4 provides that no person shall

undertake any reconnaissance, prospecting or mining operations in any area

except under and in accordance with the terms and conditions of a

reconnaissance permit; prospecting licence; exploration licence; or mining lease

granted under the Act. It also provides that no mineral concession shall be

granted otherwise than in accordance with the provisions of the Act and the rules

made under it.

64. Section 9 deals with royalties in respect of mining leases. Section 9(1) provides

that the holder of a mining lease granted before the commencement of the Act

shall, notwithstanding anything contained in the instrument of lease or in any law

in force at the commencement of the statute, pay royalty in respect of any mineral

removed or consumed by him or by his agent, manager, employee, contractor or

sub-lessee from the leased area after such commencement, at the rates of

royalties prescribed under the Second Schedule. The non-obstante clause is

only applicable to mining leases granted before the commencement of the

MMDR Act.

65. Section 9(2) provides that the holder of a mining lease granted after the

commencement of the MMDR Act is also liable to pay royalty in respect of any

mineral removed or consumed by him or by his agent, manager, employee,

contractor or sub-lessee from the leased area at the rate specified in the Second

Schedule. Section 9(3) empowers the Central Government to amend the Second

Schedule to enhance or reduce the rate at which royalty shall be payable in

49 PART F

respect of minerals enumerated in the Second Schedule. However, it also

provides that the enhancement in the rate of royalty in respect of any mineral

shall not be done more than once during any period of three years. The then

Minister of Mines and Oil (Mr K D Malviya) stated during the Lok Sabha debate

preceding the passage of the Bill that the purpose of capping further increases

in the rates of royalty was to ensure financial security to the private sector. 88

66. The rates of royalty payable in respect of minerals in the Second Schedule of the

MMDR Act are computed either on an ad valorem basis at a specified percentage

of the average sale price or at specific rates on per tonnage basis. While Section

9 authorizes the charging of royalty, the Second Schedule provides the method

of computation. The rate of royalty and method of computation differ from mineral

to mineral. This Court has held that the Second Schedule has to be read as a

part and parcel of Section 9. 89

67. The process of mining generally involves two stages: (i) extraction of the ores

(also known as run-of-mine mineral) from the earth; and (ii) mineral beneficiation

which entails separating the mineral from their ores. Rule 64-B of the Mineral

Concession Rules 1960 provides for charging of royalty in case of minerals

subjected to processing. It provides that if the processing of run-of-mine mineral

is carried out within the leased area, royalty shall be chargeable on the

processed mineral removed from the leased area. In case run-of-mine mineral is

removed from the leased area to a processing plant located outside the leased

88 Mr K D Malviya, Lok Sabha Debates, Volume X (9th December to 21st December 1957) 7123. (The Minister

stated: “We gave consideration to the question of what should be the minimum time which could give a sense of security to the private sector, so that they could invest their money and have a fairly reasonable view of their investment and production programmes. Suppose we took powers to reduce or increase the royalties every six months, it will make the position very insecure from their point of view. As long as we want a mixed pattern of economy to go on and the private sector to flourish, surely my hon friend does not expect me to put a sense of insecurity in the mind of the private sector, when every six months they will have to ask “look here. Are you going to increase the royalty or are you going to decrease it’ What are you going to do?”.) 89 National Mineral Development Corporation Ltd. v. State of M P, (2004) 6 SCC 281 [23]

50 PART F

area, the royalty shall be chargeable on the unprocessed run-of-mine mineral

and not the processed product. Thus, royalty is payable on removal of the mineral

from the boundaries of the leased area. 90 Rule 64D of the Mineral Concession

Rules 1960 deals with the manner of payment of royalty on minerals on ad

valorem basis.

68. Section 9A deals with payment of dead rent by the lessee. It provides that the

holder of a mining lease shall pay to the State Government dead rent at such

rate as may be prescribed in the Third Schedule. However, where the holder of

the mining lease also becomes liable to pay royalty under Section 9, such person

shall be liable to pay either royalty or dead rent, whichever is higher. The dead

rent is calculated on a rate per hectare basis as specified under the Third

Schedule. Section 9A was inserted by an amendment in 1972 with a two-fold

purpose, namely to: (i) provide a statutory basis for calculation of dead rent; and

(ii) prohibit the Central Government from enhancing the rate of dead-rent more

than once during any period of three years. 91

69. Section 9B provides for establishment of the District Mineral Foundation 92 in any

district to work for the interest and benefit of persons and areas affected by

mining related operations. The purpose of Section 9-B and the object of the DMF

is to further the cause of social justice for those affected by mining related

operations, such as tribals who may be dislocated or displaced from their

habitat. 93 Section 9B(5) provides that the holder of a mining lease shall pay, in

addition to the royalty paid under Section 9, an amount which is equivalent to

such percentage of the royalty as may be prescribed by the Central Government.

90 Tata Steel Ltd. v. Union of India, (2015) 6 SCC 193 [71] 91 D K Trivedi & Sons v. State of Gujarat, 1986 Supp SCC 20 [45]. 92 “DMF” 93 Federation of Indian Mineral Industries v. Union of India, (2017) 16 SCC 186 [43]

51 PART F

70. Section 9C provides for the establishment of a non-profit autonomous body

called the National Mineral Exploration Trust 94 for the purposes of regional and

detailed exploration in such manner as may be prescribed by the Central

Government. Section 9C(4) mandates the holder of a mining lease to pay a sum

equivalent of two percent of the royalty paid in terms of Section 9 to the Trust.

The purpose of creating the NMET is to use the funds accrued from mining lease-

holders for encouraging exploration.

71. Section 13 authorizes the Central Government to make rules regulating the grant

of mineral concessions in respect of minerals and for purposes connected

therewith. Section 13(2) lists various matters in respect of which the Central

Government can make rules. A similar power is vested with the State

Government under Section 15 to make rules with respect to minor minerals.

Section 25 empowers the Government to recover rent, royalty, tax, fee or other

sum due to the Government under the Act as arrears of land revenue.

72. The Central Government has framed the Mineral Concession Rules 1960 in

exercise of the powers conferred by Section 13. Rule 31 of the Mineral

Concession Rules 1960 provides that the lease deed shall be executed between

the lessor and lessee in terms of the Form K. According to the recitals of Form

K, the State Government executes the lease deed in favor of the lessor “in

consideration of the rents and royalties, covenants and agreement by and in

these presents and the Schedule hereunder written reserved and contained and

on the part of the lessee/lessees to be paid observed and performed.” Further,

all the mine beds/ veins/ seams with respect to specified minerals lying and being

in or under lands are demised by the State Government to the lessee together

94 “NMET”

52 PART F

with the liberties, powers, and privileges to be exercised or enjoyed in connection

with the demise. The recitals indicate that the lease deed serves as a statutory

agreement between the State Government, being the lessor, and the lessee.

73. Part V of Form K deals with rents and royalties reserved by the lease and

specifies the rate and mode of payment of dead rent, royalty, surface rent, and

the water rate. This part mandates the lessee to pay royalty to the State

Government at the rates prescribed by the Central Government in the Second

Schedule to the Act. 95 Part VI contains provisions relating to rents and royalties

and provides for the mode of computing royalty:

“Mode of computation of royalty

2. For the purposes of computing the said royalties the lessee/lessees shall keep a correct account of the mineral/minerals produced and dispatched. The accounts as well as the weight of the mineral/minerals in stock or in the process of export may be checked by an officer authorized by the Central or State Government.”

74. Part VII contains the covenants of the lessee/lessees. The lessee undertakes to

pay the rent, water rate, and royalties specified under Parts V and VI in addition

to the payment of taxes, rates, assessments and impositions being in the nature

of public demands from time to time. Party VIII contains the covenants of the

State Government. It provides that a lessee paying the rents, water rate, and

95 Mineral Concession Rules 1960, Form K, Part V. It reads:

[“Rate and mode of payment of royalty 3. Subject to the provisions of clause 1 of this Part, the lessee/lessees shall during the subsistence of this lease pay to the State Government at such times and in such manner as the State Government may prescribe royalty in respect of any mineral/minerals removed by him/them from the leased area at the rate for the time being specified in the Second Schedule to the Mines and Minerals (Development and Regulation) Act, 1957”]

53 PART F

royalties may quietly hold and enjoy the rights and premises during the term of

the lease deed without unlawful interruption from the State Government.

ii. Purpose of Section 9 of the MMDR Act

75. The regime of mineral licensing prior to the enactment of the MMDR Act was

governed by the Mines and Minerals (Regulation and Development) Act 1948 96

read with the Mineral Concession Rules 1948. Under the previous regime, all

grants and permissions (such as prospecting licences97 and mining leases98)

were approved and issued by the State Government. The Industrial Policy

Resolution of 1956 proposed an active role for the State in setting up new

industrial undertakings to achieve “planned and rapid development.” 99 Minerals

such as coal, lignite, mineral oils, iron ore, copper, zinc, and atomic minerals

were exclusively reserved for the State, while the private sector was allowed to

participate along with the public sector in case of minor minerals. The MMDR Act

was enacted in pursuance of the above goals stated in the Industrial Policy

Resolution. Another important consideration behind the enactment of the MMDR

Act was to revise old and outmoded mining lease agreements and allow the

private sector reasonable encouragement to develop mines and minerals. 100

Through the MMDR Act, both the Central Government, and in case of minor

minerals, the State Government, have been assigned a greater responsibility of

development of minerals in India. This classification between major and minor

96 “MMRD Act 1948” 97 Rule 13, Mineral Concession Rules 1948. [It read: “13. Restrictions on grant of prospecting licence – (1) No

prospecting license shall be granted to any person unless he holds a certificate of approval from the State Government concerned. […]”; Rule 17, Mineral Concession Rule 1948. It reads: “17. State Government may grant or refuse a license – (1) Subject to the provisions of rule 13, the State Government may grant or refuse the license.”] 98 Rule 26, Mineral Concession Rules 1948. [It read: “26. Restrictions on grant of mining leases – (1) No mining

lease shall be granted to any person unless he holds a certificate of approval from the State Government concerned or is covered by Rule 12.”] 99 Cabinet Secretariat, Industrial Policy Resolution (30 April 1956) 100 Mr J R Mehta, Lok Sabha Debates, Volume X (9th December to 21st December 1957) 7111.

54 PART F

minerals was primarily done considering the export trade, the earning of foreign

exchange, economic development, and industrial progress. 101

76. An important distinction between the MMRD Act 1948 and the MMDR Act which

replaced it is that the former did not contain a provision similar to Section 9 of the

subsequent legislation. Nevertheless, provisions pertaining to royalty were

included in the Mineral Concession Rules 1948 as part of the essential conditions

of a mining lease. 102 At the introduction of the Mines and Minerals (Regulation

and Development) Bill in Parliament the then Minister of Mines explained the

legislative intent in the following terms:

“The existing Act did give authority to the Government through rules to modify the rates and the quantum of royalty that was to be charged by the State Government. We have taken this opportunity to put a maximum limit also. With regard to the time also, at that time there was no limit and it could not be changed so long as the agreement lasted. But now considering all the conditions that prevail these days, we thought that the Government should have the right to examine the whole structure of the rates of royalty and see whether it was desirable to introduce a change in the royalty by way of either an increase or a decrease. If it was considered desirable to increase it, the Government would recommend an increase. If it was desirable to reduce it, a reduction might be made.” 103

(emphasis added)

101 Ibid, 7124 102 Rule 41, Mining Concession Rules 1948. 103 Lok Sabha Debates, Volume VIII (11th November to 22nd November, 1957, Third Session) 395.

55 PART F

77. The Minister further stated that allowing State Governments to fix the rates of

royalty “will not be a healthy feature for trade in that particular commodity.” 104

Section 9 sought to remedy the disparity of royalty rates across India. 105

78. Rates of royalty were primarily governed by the terms of lease prior to the

enactment of the MMDR Act. Once a mining lease was entered into between a

lessor and lessee, the rates of royalty would remain static during the subsistence

of the lease. Section 9 of the MMDR Act has enabled the Central Government to

examine the rates of royalty in respect of all minerals and modulate them

periodically after taking into consideration various factors, including the

uniformity of mineral prices. The primary reason for empowering the Central

Government to fix the rate of royalty could be traced to the Industrial Policy

Resolution which underscored the active and predominant role of the State in

organizing and utilizing mineral resources. The State Governments were not

empowered to determine royalty in order to maintain a uniform regime of royalty

across India. This was intended to promote domestic industry and maintain

competitive commodity prices in the international market. 106

iii. Contours of a mining lease

a. Lease and license

79. Article 31A of the Constitution was inserted by the Constitution (First

Amendment) Act 1951 to deal with the saving of laws providing for acquisition of

estates:

104 Ibid, 462 105 K P Varghese v. ITO, (1981) 4 SCC 173 [8]. It was observed that “[…] the speech made by the Mover of the Bill

explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted.” 106 Lok Sabha Debates, Volume VIII (11th November to 22nd November, 1957, Third Session) 463

56 PART F

“31A. Saving of law providing for acquisition of estates, etc –

Notwithstanding anything contained in article 13, no law providing for –

[…]

(e) the extinguishment or modification of any rights accruing by virtue of any agreement, lease or licence for the purpose of searching for or winning, any mineral or mineral oil, or the premature termination or cancellation of any such agreement, lease or licence,

shall be deemed to be void on the ground that it is inconsistent with, or takes away or abridges any of the rights conferred by article 14 or article 19.”

(emphasis added)

80. In Gujarat Pottery Works v. B P Sood, Controller of Mining Leases for

India, 107 a Constitution Bench of this Court held that the object of Article 31-

A(1)(e) was to make laws providing for the extinguishment or modification of

leases in connection with mineral rights immune from the provisions of Articles

14, 19, and 31.

81. The expressions ‘lease’ and ‘licence’ have been used in the context of mining

operations in the Constitution and in the MMRD Act. Therefore, it is important to

understand the meaning of these expressions in their general legal sense to

appreciate their application to mineral operations.

107 (1967) 1 SCR 695

57 PART F

82. A “lease” connotes a transfer of a right of enjoyment in immoveable property for

a certain time in lieu of consideration. 108 Section 105 of the Transfer of Property

Act 1882 defines a lease of immoveable property as a transfer of a right to enjoy

such property, made for a certain time, express or implied, or in perpetuity, in

consideration of a price paid or promised, or of money, a share of crops, service

or any other thing of value, to be rendered periodically or on specified occasions

to the transferor by the transferee, who accepts the transfer on such terms. 109

The provision defines ‘lessor’, ‘lessee’, ‘premium’, and ‘rent’. The “transferor is

called the lessor, the transferee is called the lessee, the price is called the

premium, and the money, share, service or other thing to be so rendered is called

the rent.” This Court has interpreted the expression “rent” widely to mean any

payment for the use or occupation of land or building including the payment by a

lessee in respect of the use or occupation of any land or building. 110

83. According to Section 3(26) of the General Clauses Act 1897, immoveable

property is defined to include land, benefits to arise out of land, and things

attached to the earth, or permanently fastened to anything attached to the

earth. 111 Section 2(6) of the Registration Act defines immoveable property to

include land, buildings, hereditary allowance, rights of way, lights, ferries,

fisheries, or any other benefit to arise out of land, and things attached to earth,

or permanently fastened to anything which is attached to the earth, except for

standing timber, growing crops, and grass. 112 A mineral is also a benefit arising

out of land. The right to carry out mining operations to extract minerals under a

108 Mulla on the Transfer of Property Act 1882 (13th edn) 109 Section 105, Transfer of Property Act 1882 110 State of Punjab v. British India Corporation, (1964) 2 SCR 114 [15] 111 Section 3(26), General Clauses Act 1897. 112 Section 2(6), Registration Act 1908

58 PART F

mining lease has been held by this Court to be a right to enjoy immoveable

property within the meaning of Section 105. 113

84. The expression “licence” is defined in the Indian Easements Act 1882 as follows:

“52. “License” defined. - Where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immoveable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a licence.” 114

85. In Associated Hotels of India Ltd v. R N Kapoor, 115 Justice K Subba Rao (as

the learned Chief Justice then was) observed that a lease creates an interest in

property, while a licence only permits another to make use of the property, whose

legal possession continues to remain with the owner. A lease envisages and

transfers an interest in the demised property creating a right in rem in favour of

the lessee, while a licence only makes an action lawful which without it would be

unlawful. 116

86. Under the MMDR Act, a “prospecting licence” is granted for the purpose of

undertaking prospecting operations. 117 Prospecting operations are defined to

mean any operations undertaken for the purpose of exploring, locating, or

proving a mineral deposit. 118 Chapter III of the Mineral Concession Rules 1960

113 State of Karnataka v. Subhash Rukmayya Guttedar, 1993 Supp (3) SCC 290 [6]; Sri Tarkeshwar Sio Thakur jiu

v. Dar Dass Dey, (1979) 3 SCC 106 [37]. 114 Section 52, Indian Easements Act 1882 115 (1960) 1 SCR 368, [28]. [“28. […] The following propositions may, therefore, be taken as well established: (1)

To ascertain whether a document creates a licence or lease, the substance of the document must be preferred to the form; (2) the real test is the intention of the parties – whether they intended to create a lease or a licence; (3) if the document creates an interest in the property, it is a lease; but, if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence; and (4) if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negative the intention to create a lease.”] 116 Mangal Amusement Park Private Ltd. v. State of Madhya Pradesh, (2012) 11 SCC 713 [15]. 117 Section 3(g), MMDR Act 118 Section 3(h), MMDR Act

59 PART F

deals with the grant of prospecting licences in respect of land in which the

minerals vest in the government. Form F contained in the Mineral Concession

Rules 1960 states that under a prospecting licence, the State Government grants

to the licesee the sole rights to enter upon lands and to search, win, carry away

or dispose of minerals won. Rule 14 read with Schedule III allows the prospecting

licensee to win and carry away a limited quantity of minerals in lieu of the

payment of specified royalty. Under a prospecting licence, the licensee does not

get an interest in the land or in the minerals contained therein. The licensee is

only allowed to carry away a limited quantity of minerals after payment of

specified royalty. 119 Even a prospecting licensee has to pay royalty to the State

Government for carrying away the minerals won during prospecting operations.

87. A “mining lease” is defined under the MMDR Act to mean a lease granted for the

purpose of undertaking mining operations and includes a sub-lease granted for

such purpose. 120 The expression “mining operations” has been defined to mean

any operations undertaken for the purpose of winning any mineral. The

expression “winning” has been explained by this Court to mean getting or

extracting minerals from the mines. 121 In Sri Tarkeshwar Sio Thakur Jiu v. Dar

Dass Dey & Co, 122 Justice R S Sarkaria observed that the expression “mining

operations” is expansive, so as to comprehend every activity by which the

mineral is extracted or obtained from the earth irrespective of whether such

119 Mineral Concession Rules 1960, Schedule III 120 Section 3(c), MMDR Act 121 Gujarat Pottery Works v. B P Sood, (1967) 1 SCR 695 [18]; Bhagwan Dass v. State of Uttar Pradesh, (1976) 3

SCC 784 [13]. [Justice Y V Chandrachud (as the learned Chief Justice then was) observed: “In any case, the definition of mining operations and minor minerals in Section 3(d) and (e) of the Act of 1957 and Rule 2(5) and (7) of the Rules of 1963 shows that minerals need not be subterranean and that mining operations cover every operation undertaken for the purpose of “winning” any minor mineral. “Winning” does not imply a hazardous or perilous activity. The word simply means “extracting a mineral” and is used generally to indicate any activity by which a mineral is secured. “Extracting”, in turn, means, drawing out or obtaining. A tooth is ‘extracted’ as much as is fruit juice and as much as a mineral. Only, that the effort varies from tooth to tooth, from fruit to fruit and from mineral to mineral.”] 122 (1979) 3 SCC 106 [15]

60 PART F

activity is carried out on the surface or in the bowels of the earth. Section 3(fa)

defines “production” or any derivative of the word “production” to mean the

winning or raising of mineral within the leased area for the purpose of processing

or dispatch. The expression “dispatch” has been defined to mean the removal of

minerals or mineral products from the leased area and to include the

consumption of minerals and mineral products within such area. 123 It is worth

noting that royalty is payable under Section 9 on the removal or consumption of

minerals by the lessee in the leased area. Thus, essentially royalty is payable on

the dispatch of minerals from the leased area.

88. This segment indicates that under a lease deed for mining operations, the owner

transfers the interest in the minerals to the lessee in lieu of the payment of rent,

which usually takes the form of royalty. To answer whether this payment is akin

to a tax, we must understand the nature of a mining lease under the MMDR Act.

b. The nature of a mining lease under the MMDR Act and the Mineral

Concession Rules 1960

89. The MMDR Act and the Mineral Concession Rules 1960 detail the procedure for

the grant of mining leases in three situations: first, where the minerals vest in the

government; 124 second, where the minerals vest in a person other than the

government; 125 and third, where the minerals vest partly in the government and

partly in a private person. 126 Chapter IV of the Mineral Concession Rules 1960

(containing Rules 22 to 40) deals with the grant of mining leases in respect of

land in which the minerals vest in the government. Rule 22(1) provides that an

123 Section 3(aa), MMDR Act 124 Chapters II, III, IV, and IVA of Mineral Concession Rules 1960 125 Chapter V, Mineral Concession Rules 1960 126 Rule 53, Mineral Concession Rules 1960

61 PART F

application for the grant of a mining lease in respect of land in which the minerals

vest in the government shall be made to the State Government. Rule 27 provides

the conditions which are applicable to mining leases under Chapter IV. Rule

27(1)(c) provides that the lessee shall pay either dead rent or royalty (whichever

is higher) to the State Government. 127 Rule 27(1)(d) deals with payment of

surface rents, water rents, etc. by the lessee to the State Government. 128 Rule

27(2) allows the State Government to include such other conditions as it may

deem necessary in regard to matters enumerated therein. Rule 27(3) allows the

State Government, either with the previous approval of the Central Government

or at the instance of Central Government, to impose such further conditions as

may be necessary in the interests of mineral development.

90. Chapter V (containing Rules 41 to 52) deals with the procedure for obtaining

prospecting licences or mineral lease in respect of land in which the minerals

vest in a person other than the Government. Unlike Rule 22(1), the provisions of

Chapter V do not require the lessee to make an application to the State

Government. Rule 45 pertains to the conditions of mining leases with respect to

minerals vesting in private persons. The relevant part of Rule 45 is produced

below:

“45. Conditions of mining lease – Every mining lease shall be subject to the following conditions –

(i) the provisions of clauses (b) to (l) and (p) to (i) of sub-rule (1) of Rule 27 shall apply to such leases with the modification that in clauses (c) and (d) for

127 Rule 27(c), Mineral Concession Rules 1960. 128 Rule 27(d), Mineral Concession Rules 1960

62 PART F

the words “State Government” the word “lessor” shall be substituted;

[…]

(iii) the lease may contain such other conditions, not being inconsistent with the provisions of the Act and these rules, as may be agreed upon between the parties;

(iv) if the lessee makes any default in payment of royalty as required by Section 9 or commits a breach of any of the conditions of the lease, the lessor shall give notice to the lessee requiring him to pay the royalty or remedy the breach, as the case may be, within sixty days from the date of the receipt of the notice and if the royalty is not paid or the breach is not remedied within such period, the lessor without prejudice to any proceeding that may be taken against the lessee determine the lease;

(v) the lessee may determine the lease at any time by giving not less that one year’s notice in writing to lessor.”

91. Rule 45(i) provides that certain specific conditions which apply under Rule 27 to

mining leases in respect of minerals which vest in the Government are also

applicable to leases of minerals vesting in private persons. While under Chapter

IV the State Government can stipulate additional conditions, Rule 45(iii) of

Chapter V provides that the lease may contain such other conditions, not being

inconsistent with the provisions of the MMDR Act and the Mineral Concession

Rules, as may be agreed upon between the parties. If the lessee of a mining

lease granted under Chapter IV, were to default in the payment of royalty or dead

rent or commit a breach of any conditions of the lease the State Government is

empowered to determine the lease. In case of a lease governed by Chapter V,

63 PART F

the lessor is empowered to determine the mining lease if the lessee defaults in

payment of royalty or commits a breach of any of the conditions of the lease.

These differences indicates that in case of a mining lease under Chapter V of

Mineral Concession Rules: (i) the State Government is not the lessor (that is the

proprietor of the minerals who is a private person); and (ii) royalty, dead rent, and

other rents are to be payable to the lessor and not the State Government.

92. In State of Meghalaya v. All Dimasa Students Union, 129 this Court held that:

(i) Chapter V of the Mineral Concession Rules has to be treated to be dealing

with minerals owned by private persons; (ii) a mining lease granted according to

Chapter V of the Mining Concession Rules 1960 is a mining lease granted by the

owner of the minerals and not the State Government; and (iii) no authority can

grant a mining lease in respect of minerals which vest with private owners without

the authority of such owners.

93. The right of proprietors to grant leases and receive royalty stems from the

proprietary interest in the immovable property including the minerals. The MMDR

Act regulates the exercise of the proprietary rights in the minerals in the larger

public interest. 130 The statute specifies the terms of the lease, but the lease deed

is ultimately entered between the State Government (or the private person, as

the case may be) and the lessee. Similarly, the rates of royalty are fixed by the

Central Government under Section 9, but royalty is received by the mining lessor,

that is the State Government or a private person.

129 (2019) 8 SCC 177 [129]-[130] 130 Monnet Ispat & Energy Ltd (supra) [138]

64 PART F

iv. Meaning of “royalty”

94. At the outset we clarify that in this reference, we are dealing with ‘royalty’ in the

context of the MMDR Act. Royalty is generally understood as compensation paid

for rights and privileges enjoyed by the grantee. It has its genesis in the

agreement entered into between the grantor and grantee. In Inderjeet Singh

Sial v. Karam Chand Thapar, 131 this Court observed that royalty is equivalent

to the expression “jura regalia” or “jura regia”. Jura regalia is defined as royal

prerogatives or rights. 132 For centuries, gold and silver mines (also called as royal

metals) in the United Kingdom were treated as belonging to the Crown. Royal

metals could be mined only after payments in the form of royalties were made to

the Crown. The use of the word “royalty” underwent change in the United

Kingdom with the decentralization of the sovereignty which was absorbed by the

landowners. 133 Land ownership was concentrated in the hands of landowners,

who conceded the right to work mines to lessees in return for consideration

which took the form of dead-rent and royalties. 134

95. This Court has had occasion to analyze the meaning of the expression “royalty”

in its decisions. In H R S Murthy v. Collector of Chittoor, 135 a Constitution

Bench observed that royalty connotes a payment made for materials or minerals

won from land. In D K Trivedi v. State of Gujarat, 136 the distinction between

“royalty” and “dead rent” was explained thus:

“39. In a mining lease the consideration usually moving from the lessee to the lessor is the rent

131 (1995) 6 SCC 166. 132 Ramanatha Aiyar, Advanced Law Lexicon (Volume 3) 2789. 133 J U Nef, The Rise of the British Coal Industry (Routledge, 1966) 134 Royal Commission on Mining Royalties, Final Report of the Royal Commission Appointed to Inquire into the

Subject of Mining Royalties (1893) 4. 135 (1964) 6 SCR 666 [6] 136 1986 (Supp) SCC 20

65 PART F

for the area leased (often called surface rent), dead rent and royalty. Since the mining lease confers upon the lessee the right not merely to enjoy the property as under an ordinary lease but also to extract minerals from the land and to appropriate them for his own use or benefit, in addition to the usual rent for the area demised, the lessee is required to pay a certain amount in respect of the minerals extracted proportionate to the quantity so extracted. Such payment is called “royalty”. It may, however, be that the mine is not worked properly or as not to yield enough return to the lessor in the shape of royalty. In order to ensure for the lessor a regular income, whether the mine is worked or not, a fixed amount is provided to be paid to his by the lessee. This is called “dead rent”. “Dead rent” is calculated on the basis of the area leased while royalty is calculated on the quantity of minerals extracted or removed. Thus, while dead rent is a fixed return to the lessor, royalty is a return which varies with the quantity of minerals extracted or removed. […]”

(emphasis added)

96. Minerals are exhaustible and finite resources. Each quantity of mineral removed

leads to the depletion of the mineral stock of the mine. 137 Under a mining lease,

a lessee acquires a right or interest in minerals. This right or interest allows the

lessee to extract minerals and consume them. Royalty is a payment made by the

lessee to the lessor or proprietor of the minerals for the removal of minerals.

Royalty also serves to compensate the lessor for the degradation of the value of

the mine because of the extraction of minerals. 138

97. In Bherulal v. State of Rajasthan, 139 a Division Bench of the Rajasthan High

Court explained the concept of royalty in the following terms:

137 W R Sorley, ‘Mining Royalties and their Effect on the Iron and Coal Trades’ (1889) 52(1) Journal of Royal

Statistical Society 60, 66 138 Ibid. 139 1956 SCC OnLine Raj 9 [8]

66 PART F

“8… In Wharton’s Law Lexicon, ‘royalty’ is defined as “payment to a patentee by agreement on every article made according to his patent, or to an author by a publisher on every copy of his book sold; or to the owner of minerals for the right of working the same on every on or other weight raised.” The present case is of the third kind, namely payment to the owner of minerals for the right of working the same. This payment is based on the produce, and the rate is fixed as so much per ton or other weight. It is clear that royalty has nothing to do with where the purchaser is taking the mineral, or to whom he is going to sell it, whether at the place where the mine is situated or at some place hundreds of miles away. […] It is clear, therefore, that royalty is a charge by the owner of minerals from those to whom he gives the concession to remove them, and the charge is on production, the rate being fixed according to weight.”

(emphasis added)

98. The essential characteristics of royalty are that (i) it is a consideration or payment

made to the proprietor of minerals, either the government or a private person; (ii)

it flows from a statutory agreement (a mining lease) between the lessor and the

lessee; (iii) it represents a return for the grant of a privilege (to the lessee) of

removing or consuming the minerals; and (iv) it is generally determined on the

basis of the quantity of the minerals removed.

99. In comparison, dead rent acts as a deterrent against a leaseholder cornering a

mining lease and keeping the mineral resources idle. 140 Similar to royalty, dead

rent is also a statutory imposition and an integral part of the mining lease, but it

generally does not serve as a consideration for the removal or consumption of

minerals. The dead rent is determined on the basis of the area of land covered

by the lease. Imposition of dead rent ensures that the proprietor obtains a fixed

140 Government of India, Ministry of Mines, ‘Mineral Royalties’ 27 (January 2011)

67 PART F

rent from the lessee even if the mine remains unworked. Therefore, dead rent is

not in addition to royalty but an alternative.

100. If royalty is a consideration paid by the lessee to the lessor as part of the terms

of a mining lease, can this payment be considered in the nature of tax? This is

the next issue for our consideration.

v. Characteristics of Tax

101. Taxation is a mode of raising revenue to fund public expenditure. The power of

taxation is an essential and inherent attribute of sovereignty. 141 In the decision of

the US Supreme Court in McCulloch v. Maryland, 142 Chief Justice John

Marshall described the sovereign right of taxation thus:

“It is admitted that the power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable, to the utmost extent to which the Government may choose to carry it. The only security against the abuse of this power is found in the structure of the Government itself. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.”

102. Taxes are monetary burdens or charges imposed by legislative power upon

persons, or property to raise revenues. 143 The government needs requisite funds

to discharge its primary governmental functions. 144 No responsible government

can function and achieve its welfare objectives without levying and collecting

taxes. 145 The objects to be taxed can be taxed by the legislature according to the

141 Thomas Cooley, The Law of Taxation (4th edn, 1924) 149 142 17 U.S. 316 (1819) 143 Amrit Banaspati Co. Ltd. v. State of Punjab, (1992) 2 SCC 411 [10] 144 Dena Bank v. Bhikabhai Prabhudas Parekh & Co., (2000) 5 SCC 694 [8] 145 Jindal Stainless Steel [112.2]

68 PART F

exigencies of its needs so long as they happen to be within the legislative

competence of the legislature. 146 Although the power of taxation is pervasive and

an incidence of sovereignty, it is subject to well-defined constitutional limitations.

103. In Matthews v. Chicory Marketing Board, 147 Latham CJ defined “tax” as a

“compulsory exaction of money by a public authority for public purposes,

enforceable by law, and … not a payment for services rendered.” In

Commissioner, Hindu Religious Endowment, Madras v. Sri Lakshmindra

Thirta Swamiar of Sri Shirur Mutt, 148 this Court relied on the above elucidation

to enumerate the following essential characteristics of a tax:

“44. […] It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer’s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without 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 particular individual, there is, as it is said, no element of quid pro quo between the taxpayer 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 taxpayer depends generally upon his capacity to pay.”

104. A tax has the following essential characteristics: (i) it is a compulsory exaction of

money by a public authority; (ii) it is imposed under statutory power without the

consent of the tax payer; (iii) the demand is enforceable by law; (iv) it is an

imposition made for public purposes to meet the general expenses of the state

146 Rai Ramkrishna v. State of Bihar, (1964) 1 SCR 897 [12] 147 60 CLR 263 148 (1954) 1 SCC 412

69 PART F

without reference to any special benefit to be conferred on the payer of the tax;

and (v) it is part of the common burden. 149

105. Article 366(28) defines “taxation” to include “the imposition of any tax or impost,

whether general or local or special.” This Court has interpreted the word “tax” in

its widest amplitude to include all money raised by taxation. 150 In Jindal

Stainless Steel (supra), one of us (Justice D Y Chandrachud) held that the

expression “any tax” means “any levy which the State is constitutionally

competent to legislate.” 151

106. One of the issues debated in the reference pertains to the meaning of the word

“impost.” Thomas Cooley in the Law of Taxation defines “imposts” to mean “any

tax, tribute, or duty.”152 This Court has generally construed the expression

“imposts” to include taxes 153 and fees154 realizable by the authority of law. 155 In

CIT v. McDowell and Co. Ltd., 156 this Court held that the term “impost” means

compulsory levy and that “tax” in its wider sense includes all imposts. 157 In

McDowell (supra), the assesse sought to claim a deduction under Section 43-

B(a) of the Income Tax Act 1961 on the payment of bottling fees made to the

State Government under the Rajasthan Excise Act 1950. Section 43-B(a)

allowed a deduction in respect of any sum payable by the assessee by way of

tax, duty, cess or fee, by whatever name called, under any law for the time being

in force. The issue before the two-Judge Bench was whether bottling fees

149 See Mahant Sri Jagannath Ramanuj Das v. State of Orissa, (1954) 1 SCC 455 [11] 150 D G Gose and Co. (Agents) (P) Ltd. v. State of Kerala, (1980) 2 SCC 410 [5]. 151 Jindal Stainless Steel (supra) [730.1] 152 Thomas Cooley, The Law of Taxation (4th edn, 1924) 74 153 Sea Customs Act, S 20(2), In re, 1963 SCC OnLine SC 40 [37] (Held that customs duty or excise duty was an

impost within the meaning of Article 366(28)); 154 CCE v. Chhata Sugar Co. Ltd., (2004) 3 SCC 466 [36] (It was observed that an impost can be either a tax or

fee.) 155 Indian Banks’ Association v. Devkala Consultancy Service, (2004) 11 SCC 1 [18] 156 (2009) 10 SCC 755 [22] 157 Reiterated in Jindal Stainless Steel (supra) [20], [395]

70 PART F

chargeable from the assessee amounted to a tax, duty, cess, or fee. The two-

Judge Bench formulated the characteristics of imposts thus:

“21. “Tax”, “duty”, “cess” or “fee” constituting a class denotes various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes different kind of impost depending on the purpose for which they are levied. The power can be exercised in any of its manifestation only under any law authorising levy and collection of tax as envisaged under Article 265 which uses only the expression that no “tax” shall be levied and collected except authorized by law. In its elementary meaning conveys that to support a tax legislation action is essential, it cannot be levied and collected in the absence of any legislative sanction by exercise of executive power of State under Article 73 by the Union or Article 162 by the State.

22. Under Article 366(28) “Taxation” has been defined to include the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly. “Impost” means compulsory levy. The well- known and well-settled characteristic of “tax” in its wider sense includes all imposts. Imposts in the context have following characteristics:

(i) The power to tax is an incident of sovereignty.

(ii) “Law” in the context of Article 265 means an Act of legislature and cannot comprise an executive order or rule without express statutory authority.

(iii) The term “tax” under Article 265 read with Article 366(28) includes imposts of every kind viz. duty, cess or fees.

(iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a “tax” in its technical sense as an impost, general, local or special.”

71 PART F

107. The Court held in McDowell (supra) that bottling fees are a payment made by

the assessee to the State Government “as consideration for acquiring the

exclusive privilege”158 The payment was held to be neither a fee nor a tax but

consideration for the grant of approval by the government to contract on the

exclusive right to deal in bottling liquor. Therefore, bottling fees were held not to

fall within the purview of Section 43-B(a).

108. The expression “tax” under Article 265 includes every kind of impost in the form

of a compulsory exaction. An impost is a compulsory exaction. The power to levy

an impost is an incident of sovereignty. A liability arising out of contract cannot

be termed as an impost or tax. A consideration paid under a contract to the State

Government for acquiring exclusive privileges and rights with respect to a

particular activity cannot be termed as an “impost” or “tax” under Article 366(28).

109. The government may demand payments in the nature of a price or consideration

for parting with its exclusive privilege to carry on activities of a particular

description. Well-known examples involving the parting of the exclusive privilege

by the government include telecommunication activities and the manufacture

and sale of intoxicants. The price paid for parting with an exclusive privilege

vesting in government is neither a tax nor a fee. 159 In State of Punjab v. Devans

Modern Breweries, 160 the issue before a Constitution Bench was whether the

levy of an import fee by the state on potable liquor manufactured in other states

was beyond the legislative competence of the state legislature. Justice R C

Lahoti (as the learned Chief Justice then was) speaking for the majority,

158 McDowell and Co. Ltd. (supra) [17] 159 Har Shankar v. Excise and Taxation Commissioner, (1975) 1 SCC 737 [56]; State Bank of India v. Jage Ram,

(1980) 3 SCC 599 [20]; Government of Andhra Pradesh v. Anabeshahi Wine and Distilleries Pvt Ltd., (1988) 2 SCC 25 [6] 160 (2004) 11 SCC 26

72 PART F

observed that the State Government has unfettered power to regulate the import

of intoxicants in exercise of its regulatory powers. The learned Judge held that

the levy was neither a tax nor a fee, but “simply a levy for the act of granting

permission or for the exercise of power to part with the privilege.”161 The

expression “impost” cannot hence be extrapolated to mean a price levied by the

State for granting permission to part with its exclusive privilege. Imposts are such

levies that are in the nature of tax.

110. The basic issue for determination is whether royalty payable under Section 9 of

the MMDR Act is in the nature of a tax or impost. The need to decide the issue

of “whether royalty is tax” arises in the backdrop of the divergence of opinion in

the decisions in India Cement (supra) and Kesoram (supra).

vi. Royalty is not in the nature of tax

a. Prelude to India Cement

111. Whether ‘royalty is a tax’ had been adjudicated upon by several High Courts

before the issue reached this Court for decision in India Cement (supra). There

was a divergence of view among the High Courts. A few High Courts had held

that royalty is not a tax but a consideration for parting with the exclusive privilege

over mineral rights. Others had held that royalty was a compulsory exaction, and

hence a tax. In its decision in India Cement (supra) this Court referred to them,

without actually analyzing their rationale.

112. In Laddu Mal v. State of Bihar, 162 the petitioners challenged the notices issued

to them by the Assistant Mining Officer, demanding payment of royalty for a

161 Devans Modern Breweries (supra) [113] 162 1965 SCC OnLine Pat 30

73 PART F

period from 1958 to 1964 under the Bihar Minor Mineral Concession Rules 1964.

The Division Bench of the Patna High Court held that royalty is a levy in the

nature of tax because of its compulsory nature. Royalty was held to be a

compulsory exaction because it was imposed under a statute and because in the

event of non-payment, it was recoverable as arrears of land revenue. However,

it was held that the demand of royalty prior to 1964 when the Bihar Minor Mineral

Rules came into effect was without the authority of law.

113. In Laxminarayana Mining Co. v. Taluk Development Board, 163 licence fees

levied on persons engaged in mining under the provisions of the Mysore Village

Panchayats and Local Board Act 1959 were challenged before the Mysore High

Court. Justice E S Venkataramiah (as the learned Chief Justice then was) held

that the State legislature had no legislative power to impose the levy since its

subject matter was covered by the MMDR Act. The High Court also held that the

levy was in substance a tax on mineral rights. 164 In the context of Entry 50 of List

II, the High Court observed that: (i) tax on mineral rights includes royalty payable

on extracted minerals; (ii) mineral rights and mining activities which are carried

out in exercise of mineral rights are indistinguishable; (iii) Parliament has

occupied the entire subject matter of the regulation of mines and mineral

development as well as tax on mineral rights by virtue of the legislative

declaration under the MMDR Act; and (iv) the provisions of the MMDR Act

pertaining to the levy, fixation and collection of royalty (Section 9) as well as its

recovery as arrears of land revenue (Section 25) suggest that the expression

“royalty” under Section 9 connotes the levy of a tax. The essence of the High

Court’s decision was that since royalty is in the nature of a tax on mineral rights

163 1972 SCC OnLine Kar 80 164 Laxminarayana Mining Co. (supra) [17]

74 PART F

and is covered by Parliamentary legislation, the legislative power of the State

legislature to levy taxes on mineral rights stands excluded.

114. The contrary view of other High Courts (footnoted below) was that royalty is not

a tax. 165 We will not refer to all the decisions adopting that view, to avoid

multiplicity, except for the decision of the Punjab and Haryana High Court in Dr.

Shanti Swaroop Sharma v. State of Punjab. 166 In that case, the petitioners

challenged the demand of royalty by the State Government under the Punjab

Minor Mineral Concession Rules 1964. The petitioners contended that royalty,

being a tax, cannot be levied under delegated legislation. The High Court

rejected the contention holding that: (i) royalty is a share of produce or profit paid

to the owner of land for granting the privilege of producing minerals; (ii) mere

occupation of land containing minor minerals does not make the occupier liable

to pay royalty; (iii) the liability to pay royalty arises only when a lessee extracts

minerals in pursuance of a mining lease; (iv) royalty cannot be termed as a

compulsory exaction because the compulsion to pay royalty arises out of the

contractual conditions of the mining lease and not through the force of law; (v)

the fact that the State Government can recover royalty as arrears of land revenue

does not give it a character of tax because other dues such as moneys due under

contract and fees can be recovered in the same manner. The High Court

disagreed with the decision of the Patna High Court in Laddu Mal (supra). This

165 Saurashtra Cement & Chemical Industries Ltd. v. Union of India, 1979 SCC OnLine Guj 23 (Gujarat High Court

held that royalty payable under Section 9 was not a tax. Therefore, Parliament had legislative competence to prescribe royalty under the MMDR Act in pursuance of its regulatory powers under Entry 54 of List I); Laxmi Narayan Agarwalla v. State of Orissa, 1983 SCC OnLine Ori 16 (The Orissa High Court disagreed with the decisions in Laddu Mal (supra) and Laxminarayana Mining Co. (supra). It was held if royalty is held to be tax, Section 9 would have to be invalidated because Parliament has no legislative power to impose tax under Entry 54 of List I.) 166 AIR 1969 Punj and Har 79

75 PART F

judicial canvas was available before the seven-Judge Bench in India Cement

(supra).

b. Divergence between India Cement and Kesoram

115. In India Cement (supra), the seven Judge Bench was called upon to determine

the validity of the Madras Panchayat Act 1958. Section 115 of the Act levied a

local cess on land revenue payable to government. An explanation to the

provision stated that land revenue included royalty. Thus, the impugned provision

considered royalty as part of land revenue. The issue was whether the State

legislature could levy cess on royalty once Parliament had taken control of the

regulation of mines and development of minerals under the MMDR Act.

116. The State’s justification proceeded on the following entries: (i) Entry 45 of List II

- land revenue; (ii) Entry 49 of List II - taxes on lands and buildings; (iii) Entry 50

of List II - taxes on mineral rights; and (iv) Entry 66 read with Entry 23 of List II -

levy of fees. Justice Sabyasachi Mukharji (as the learned Chief Justice then was)

writing for the majority, observed that the cess was levied essentially on royalty

and not on land revenue, both of which are distinct concepts. The State’s

recourse to Entry 45 of List II was negatived. With respect to Entry 49 of List II,

Justice Mukharji observed that royalty is directly relatable to the minerals

extracted and therefore would only be relatable to Entries 23 and 50 of List II,

and not Entry 49 of List II. 167 Therefore, the statutory provision was in pith and

substance held to be a tax on royalty and not on land. The decision in H R S

Murthy (supra), according to which cess paid on royalty has a direct relationship

with land and only a remote relationship with minerals, was overruled. A detailed

167 India Cement (supra) [33]

76 PART F

analysis pertaining to Entry 49 of List II has been undertaken in a later segment

of this judgment.

117. On Entries 23 and 66 of List II, Justice Mukharji observed that the legislative

power of the State legislature to levy fees is denuded by the enactment of the

MMDR Act by Parliament. Finally, on Entry 50 of List II, Justice Mukharji observed

that the bar provided in Section 9(3) on the enhancement of royalty specified

under the Second Schedule also applies to the state legislature. Imposition of

cess on royalties was held to have the effect of amending the Second Schedule

and was held ultra vires Section 9(3). Section 9 was regarded to be a limitation

on the taxing power of the State legislature under Entry 50 of List II. 168 Moreover,

the Court held that the field is covered by the MMDR Act and hence the legislative

power of the state stands denuded. 169 Paragraph 34 of the judgment sets out

the conclusions:

“34. In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State legislature because Section 9 of the Central Act covers the field and the State legislature is denuded of its competence under Entry 23 of List II. In any event, we are of the opinion that cess on royalty cannot be sustained under Entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land.”

(emphasis added)

168 India Cement (supra) [32] 169 India Cement (supra) [33]

77 PART F

118. In a concurring opinion, Justice G L Oza held that royalty is not a unit of charge

merely on land, but on labour and capital as well. Resultantly, imposition of cess

on royalty was held not to be a levy or tax on land in terms of Entry 49 of List II.

Justice Oza suggested that the cess could have been saved, if it was levied on

surface rent or dead rent. In his view, surface rent or dead rent is relatable to

land, hence a cess on surface rent or dead rent would fall within the purview of

Entry 49 of List II.

119. In Raojibhai Jivabhai Patel v. State of Gujarat, 170 a three judge Bench of this

Court referred to India Cement (supra) to reiterate that royalty levied on

extracted mineral is in the nature of tax. In a series of subsequent decisions,

particularly in Orissa Cement Ltd v. State of Orissa 171 and Saurashtra Cement

& Chemical Industries Ltd. v. Union of India, 172 this Court followed India

Cement (supra). In State of M P v. Mahalaxmi Fabric Mills Ltd, 173 this Court

rejected the submission that paragraph 34 of India Cement (supra) contained a

“typographical error”. However, a divergence in opinion on whether royalty is in

the nature of tax emerged.

120. In Quarry Owners Association v. State of Bihar, this Court held that royalty

“does not constitute usual tax as commonly understood” but includes return for

the consideration for parting with the property. 174 In Kesoram (supra), a

Constitution Bench had to decide on the validity of a cess levied by the State on

coal-bearing land. The measure of the cess was relatable to the quantity of

minerals produced from land. Whether royalty is a tax was not directly in issue.

170 1989 Supp (2) SCC 744 171 (1991) Supp 1 SCC 430 [36] 172 (2001) 1 SCC 91 173 1995 Supp (1) SCC 642 [12] 174 Quarry Owners Association v. State of Bihar, (2000) 8 SCC 655 [34].

78 PART F

In fact, Justice Lahoti, speaking for the majority, held that India Cement (supra)

was distinguishable because in that case cess was levied on royalty and not on

mineral rights or lands. However, the learned Judge felt “constrained” and “duty-

bound” to point out a typographical error in the majority opinion in India Cement

(supra) to prevent any “adverse impact on subsequent judicial pronouncements”.

Paragraph 34 of India Cement (supra) was held to contain a typographical error,

which Justice Lahoti explained thus:

“57. In the first sentence the word “royalty” occurring in the expression “royalty is a tax”, is clearly an error. What the majority wished to say, and has in fact said, is “cess on royalty is a tax”. The correct words to be printed in the judgment should have been “cess on royalty” in place of “royalty” only. The words “cess on” appear to have been inadvertently or erroneously omitted while typing the text of the judgment. This is clear from reading the judgment in its entirety. Vide paras 22 and 31, which precede para 34 abovesaid, Their Lordships have held that “royalty” is not a tax. Even the last line of para 34 records “royalty on mineral rights is not a tax on land but a payment for the user of land”. The very first sentence of the para records in quick succession “… as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature….” What Their Lordships have intended to record is “… that cess on royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature …”. That makes correct and sensible reading. A doubtful expression occurring in a judgment, apparently by mistake or inadvertence, ought to be read by assuming that the Court had intended to say only that which is correct according to the settled position of law, and the apparent error should be ignored, far from making any capital out of it, giving way to the correct expression which ought to be implied or necessarily read in the context, also having regard to what has been said a little before and a little after. No learned Judge would consciously author a judgment which is self-inconsistent or incorporates passages repugnant to each other. Vide para 22, Their Lordships have clearly held that there is no entry in

79 PART F

List II which enables the State to impose a tax on royalty and, therefore, the State was incompetent to impose such a tax (cess). The cess which has an incidence of an additional charge on royalty and not a tax on land, cannot apparently be justified as falling under Entry 49 in List II.”

121. The decision in Kesoram (supra) analyzed the nature of royalty to hold that

royalty is not a tax, but a payment made to the owner of land who may be a

person and may not necessarily be the state. 175 It held that India Cement (supra)

was caused by “an apparent typographical error or inadvertent error” and should

not be understood as a correct declaration of law. Kesoram (supra) also

expressed its disagreement with Mahalaxmi Fabric Mills (supra) to the extent it

had held that there was no “typographical error” in India Cement (supra).

Importantly, Kesoram (supra) concurred with India Cement (supra) on the

aspect that cess on royalty is beyond the legislative competence of the state

legislatures. 176

122. The divergence on the point of law between India Cement (supra) and Kesoram

(supra) is apparent and pertains to whether or not royalty is a tax. For the reasons

to follow, we are of the opinion that royalty does not meet the characteristic

requirements of a tax.

c. Royalty is not a tax

123. On first principles, royalty is a consideration paid by a mining lessee to the lessor

for enjoyment of mineral rights and to compensate for the loss of value of

minerals suffered by the owner of the minerals. The marginal note to Section 9

states that royalties are “in respect of mining leases.” The liability to pay royalty

175 Kesoram (supra) [71] 176 Kesoram (supra) [115].

80 PART F

arises out of the contractual conditions of the mining lease. 177 A failure of the

lessee to pay royalty is considered to be a breach of the terms of the contract,

allowing the lessor to determine the lease and initiate proceedings for recovery

against the lessee.

124. Section 9 of the MMDR Act statutorily regulates the right of a lessor to receive

consideration in the form of royalty from the lessee for removing or carrying away

minerals from the leased area. Prior to the enactment of the MMDR Act, such a

condition was treated as part of a mining lease. The object of empowering the

Central Government to specify rates of royalty for major minerals was to ensure

a certain level of uniformity in mineral prices in view of the domestic and

international market.

125. The fact that the rates of royalty are prescribed under Section 9 of the MMDR

Act does not make it a “compulsory exaction by public authority for public

purposes” because: (i) the compulsion stems from the contractual conditions of

the mining lease agreed between the lessor and lessee; (ii) the demand is not

made by a public authority, but the lessor (which can either be the State

Government or a private party); and (iii) the payment is not for public purposes,

but a consideration paid to the lessor for parting with their exclusive privileges in

the minerals. Moreover, the fact that Section 25 allows recovery of royalty due to

the Government under the MMDR Act or “under the terms of the contract” as

arrears of land does not make royalty “an impost enforceable by law.” Section 25

is a standard recovery provision allowing the government to recover any dues

payable to it, flowing from statute or the terms of a contract. Pertinently,

177 See Rules 27 and 45, Mineral Concession Rules 1960

81 PART F

contractual payments due to the government cannot be deemed to be a tax

merely because the statute provides for their recovery as arrears.

126. There are major conceptual differences between royalty and a tax: (i) the

proprietor charges royalty as a consideration for parting with the right to win

minerals, while a tax is an imposition of a sovereign; (ii) royalty is paid in

consideration of doing a particular action, that is, extracting minerals from the

soil, while tax is generally levied with respect to a taxable event determined by

law; 178 and (iii) royalty generally flows from the lease deed as compared to tax

which is imposed by authority of law.

127. Under the MMDR Act, the Central Government fixes the rates of royalty, but it is

still paid to the proprietor by virtue of a mining lease. In case the minerals vest in

the government, the mining lease is signed between the State Government (as

lessor) and the lessee in pursuance of Article 299 of the Constitution. Through

the mining lease, the government parts with its exclusive privilege over mineral

rights. A consideration paid under a contract to the State Government for

acquiring exclusive privileges cannot be termed as an impost. Since royalty is a

consideration paid by the lessee to the lessor under a mining lease, it cannot be

termed as an impost.

128. This Court has held that royalty is not a tax, in several decisions. In State of H P

v. Gujarat Ambuja Cement Ltd, 179 a three judge Bench of this Court held royalty

not to be a tax. The subsequent decision in Indsil Hydro Power & Manganese

Ltd. v. State of Kerala 180 brought out the distinction between tax and royalty in

the following terms:

178 Goodyear India Ltd v. State of Haryana, (1990) 2 SCC 71 [27] 179 (2005) 6 SCC 499 180 (2021) 10 SCC 165 [56]

82 PART F

“56. Thus, the expression “royalty” has consistently been construed to be compensation paid for rights and privileges enjoyed by the grantee and normally has its genesis in the agreement entered into between the grantor and the grantee. As against tax which is imposed under a statutory power without reference to any special benefit to the conferred on the payer of the tax, the royalty would be in terms of the agreement between the parties and normally has direct relationship with the benefit or privilege conferred upon the grantee.”

129. The principles applicable to royalty apply to dead rent because: (i) dead rent is

imposed in the exercise of the proprietary right (and not a sovereign right) by the

lessor to ensure that the lessee works the mine, and does not keep it idle, and in

a situation where the lessee keeps the mine idle, it ensures a constant flow of

income to the proprietor; (ii) the liability to pay dead rent flows from the terms of

the mining lease; 181 (iii) dead rent is an alternate to royalty; if the rates of royalty

are higher than dead rent, the lessee is required to pay the former and not the

latter; and (iv) the Central Government prescribes the dead rent not in the

exercise of its sovereign right, but as a regulatory measure to ensure uniformity

of rates.

130. In view of the above discussion, we hold that both royalty and dead rent do not

fulfil the characteristics of tax or impost. Accordingly, we conclude that the

observation in India Cement (supra) to the effect that royalty is a tax is incorrect.

181 Rules 27 and 45, Mineral Concession Rules 1960

83 PART G

G. Inter-relationship between Entry 23 of List II and Entry 54 of List I

131. The subject of regulating mines and mineral development is enumerated in Entry

23 of List II. However, Parliament can under Entry 54 of List I bring the regulation

of mines and mineral development under its control to the extent that such control

is declared by Parliament by law to be expedient in the public interest. Entry 54

of List I has three pre-requisites: (i) Parliament must make a law; (ii) the law must

contain a legislative declaration that it is in the public interest to bring the

regulation of mines and mineral development under its control; and (iii) the law

must lay down the extent to which Parliament desires to control the field relating

to the regulation of mines and mineral development. Entry 54 of List I exclude

the legislative power of the state legislature under Entry 23 of List II to the extent

to which the Parliamentary law covers the field. The interrelationship between

Entry 54 of Union List and Entry 23 of State List has been dealt with by this Court

in numerous decisions, which will be discussed in the following segments.

i. Meaning of “regulation of mines” and “mineral development”

132. Entry 54 of List I and Entry 23 of List II are general or regulatory entries dealing

with the same subject matter, namely of “regulation of mines and mineral

development.” These entries deal with regulation of two aspects: (i) regulation of

mines; and (ii) mineral development. By making Entry 23 of List II subordinate to

Entry 54 of List I, the Constitution tilts the balance of legislative powers with

respect to the regulation of mines and mineral development in favor of the Union.

133. Before delving further into the inter-relationship between the two entries, we

deem it necessary to define the subject matter of the entries. The subject-matter

84 PART G

of the entries has to be understood from both the text and the context in which

the words have been used.

134. The expression “regulation” generally means to manage the governance of an

enterprise by means of rules or laws. 182 In K Ramanathan v. State of Tamil

Nadu, 183 this Court explained the meaning of the power to regulate in the

following terms:

“19. It has often been said that the power to regulate does not necessarily include the power to prohibit, and ordinarily the word “regulate” is not synonymous with the word “prohibit”. This is true in a general sense and in the sense that mere regulation is not the same as absolute prohibition. At the same time, the power to regulate carries with it full power over the thing subject to regulation and in absence of restrictive words, the power must be regarded as plenary over the entire subject. It implies the power to rule, direct and control, and involves the adoption of a rule or guiding principle to be followed, or the making of a rule with respect to the subject to be regulated. The power to regulate implies the power to check and may imply the power to prohibit under certain circumstances, as where the best or only efficacious regulation consists of suppression. It would therefore appear that the word “regulation” cannot have any inflexible meaning as to exclude “prohibition”. It has different shades of meaning and must take its colour from the context in which it is used having regard to the purpose and object of the legislation, and the Court must necessarily keep in view the mischief which the legislature seeks to remedy.”

135. The word “regulate” is of wide import and the breadth of its meaning depends on

the context in which it is used. This Court has construed the power to regulate to

include the power to: (i) grant or revoke a permission or licence including

182 Ramanatha Aiyar Advanced Law Lexicon (Volume 3) 4778. 183 (1985) 2 SCC 116 [19]

85 PART G

incidental or supplemental powers; 184 (ii) prohibit depending upon the context

and circumstance; 185 (iii) control or adjust by rule or to subject to governing

principles; 186 and (iv) issue directions. 187 Thus, the expression “regulation”

appearing in Entry 54 of List I and Entry 23 of List II must also receive a wide

meaning, in keeping with the principle that the words used in the legislative

entries must be interpreted broadly.

136. A “mine” is generally defined as an excavation in the earth for the purpose of

obtaining minerals. 188 The expression was defined under the Mines Act 1952 to

primarily mean any excavation for the purposes of searching for or obtaining

minerals 189 and to include the place where such excavation is carried on. 190 The

184 State of Tamil Nadu v. Hind Stone, (1981) 2 SCC 205 [10]; State of Uttar Pradesh v. Maharaja Dharmander

Prasad Singh, (1989) 2 SCC 505 [52] 185 Talcher Municipality v. Talcher Regulated Market Committee, (2004) 6 SCC 178 [14]; Union of India v. Asian

Food Industries Ltd, (2006) 13 SCC 542 [43] 186 UP Coop. Cane Unions Federations v. West UP Sugar Mills Association, (2004) 5 SCC 430 [20]; Balmer Lawrie

& Company Limited v. Partha Sarathi Sen Roy, (2013) 8 SCC 345 [24] 187 Subramanian Swamy v. State of Tamil Nadu, (2014) 5 SCC 75 [67] 188 Lord Provost and Magistrates of Glasgow v. Faire, (1888) [L.R] 13 App. Cas. 657 189 Section 2(j) “mine” means any excavation where any operation for the purpose of searching for or obtaining

minerals has been or is being carried on and include – (i) All borings, bore holes, oil wells and accessory crude conditions plants, including the pipe conveying mineral oil within the oil fields; (ii) All shafts, in or adjacent to and belonging to a mine, whether in the course of being sunk or not; (iii) All levels and inclined planes in the course of being driven; (iv) All open cast workings; (v) All conveyers or aerial rope-ways provided for bringing into or removal from a mine of minerals or other articles or for the removal of refuse therefrom; (vi) All adits, levels, planes, machinery, works, railways, tramways and sidings in or adjacent to and belonging to a mine; (vii) All protective works being carried out in or adjacent to a mine; (viii) All workshops and stores situated within the precincts of a mine and under the same management and used primarily for the purposes connected with that mine or a number of mines under the same management; (ix) All power stations, transformer sub-substations, convertor stations, rectifier stations and accumulator, storage stations for supplying electricity or mainly for the purpose of working the mine or a number of mines under the same management; (x) Any premises for the time being used for depositing sand or other material for use in a mine or for depositing refuse from a mine or in which any operations in connection with such sand, refuse or other material is being carried on, being premises exclusively occupied by the owner of mine; (xi) Any premises in or adjacent to and belonging to a mine on which any process ancillary to the getting dressing or preparation for the sale of minerals or of coke is being carried on. 190 Offshore Areas Mineral (Development and Regulation) Act 2002. Section 4(k) defines “mine” to mean “any place

in the offshore area wherein any exploration or production operation is carried on, together with any vessel, erection, appliance, artificial island or platform and premises in the offshore area used for the purposes of exploration, winning, treating or preparing minerals, obtaining or extracting any mineral or metal by any mode or method, and includes any area covered by a composite licence, or an exploration licence, or a production lease where exploration or production operation has been, or is being, or may be, carried on under the provisions of this Act.

86 PART G

Occupational Safety, Health and Working Conditions Code 2020 191 has adopted

a similar definition of mine under Section 2(1)(zl). The Working Conditions Code

also defines “minerals” to mean all substances which can be obtained from the

earth by mining, digging, drilling, dredging, hydraulicing, quarrying or by any

other operation and to include mineral oils. 192 These definitions are indicative of

the fact that: (i) the expression “mines” includes both the process by which

minerals are extracted from the earth as well as the place where such extraction

takes place; and (ii) minerals are obtained from the mine by the process of

mining.

137. The expression “regulation of mines” can be understood in the backdrop of above

discussion to mean the management of both the process of extracting minerals

as well the place where such minerals will be extracted from sub-surface levels.

The MMDR Act gives shape and meaning to the expression “regulation of mines

and mineral development” through its provisions and the subordinate rules. To

that effect, we find provisions under the MMDR Act pertaining to prospecting or

mining operations under lease or licence, 193 restrictions on the grant of mineral

concessions, 194 periods for which prospecting licences 195 or mining leases 196

may be granted or renewed, and royalties in respect of mining leases. 197 Chapter

III deals with the procedure for obtaining mineral concessions in respect of land

in which the minerals vest in the government. Chapter IV empowers the

government to frame rules for regulating the grant of mineral concessions.

Chapter V deals with the special powers of Central Government to undertake

191 “Working Conditions Code 2020” 192 Section 2(1)(zm), Working Conditions Code 2020. 193 Section 4, MMDR Act 194 Section 5, MMDR Act 195 Section 7, MMDR Act 196 Section 8, MMDR Act 197 Section 9, MMDR Act

87 PART G

prospecting or mining operations in respect of lands in which the minerals vest

in the Government of a State or any other person. 198 Thus, Chapters II to V of

the MMDR Act invariably deal with aspects regulating the place of extraction of

minerals and the process by which mines are worked. These provisions govern

aspects such as conceding land to a person for carrying out mining operations

(mining concession) or granting licences for working mines and winning minerals,

which are integral to the concept of “regulation of mines”. The fixation of rates of

royalty under Section 9 read with the Second Schedule is also covered within the

scope of “regulation of mines and mineral development.”

138. Entry 54 of List I and Entry 23 of List II do not use the expression “minerals”

simpliciter. The entries use the term “mineral development”. In Premium

Granites v. State of Tamil Nadu, a two judge Bench observed that the MMDR

Act and the rules framed thereunder furnish the scope and purport of the word

“mineral development.”199 In that case, it was held that the scientific exploitation

of minerals without waste is a part of “mineral development” as envisaged by the

MMDR Act and the rules. In Quarry Owners Association (supra) a two-Judge

Bench defined the ambit of the expression “regulation of mines and mineral

development”, observing:

“31. […] The word “regulation” may have a different meaning in different context but considering it in relation to the economic and social activities including the development and excavation of mines, ecological and environmental factors including States’ contribution in developing, manning and controlling such activities, including parting with its wealth, viz. the minerals, the fixation of the rate of royalties would also be included within its meaning.”

198 Section 17, MMDR Act 199 (1994) 2 SCC 691 [48]

88 PART G

139. In Tata Iron & Steel Co. Ltd. v. Union of India, 200 it was held that the concept

of “mineral development” can include captive mining, an assessment of its

requirement by different industries and equitable distribution of mining leases.

Tata Iron & Steel (supra) was decided in the context of the unamended Section

8(3) of the MMDR Act which allowed the Central Government to renew mining

leases “in the interests of mineral development.”

140. As a concept, mineral development is a term of wide import. It encompasses

exploitation of minerals, reduction of wastage in the beneficiation process,

regulation of mining activities for ecological and environmental factors and

equitable distribution of mineral resources and mining leases. Mineral

development has been expressly recognized in Chapter VI of the MMDR Act.

Section 18(1) mandates the Central Government to take all such steps as may

be necessary by making rules for the conservation and systematic development

of minerals in India and for the protection of the environment by preventing or

controlling any pollution which may be caused by prospecting or mining

operations. Section 18(2) indicates that the Central Government may make rules

on matters pertaining inter alia to regulation of mining operations in any area;

regulation of the excavation or collection of minerals from any mine; development

of mineral resources in any area; regulation of arrangement of storage of

minerals; and regulation of prospecting operations, disposal or discharge of

waste slime or tailing arising from mining operations. In terms of Section 18,

Parliament has framed the Mineral Conservation and Development Rules 2017

to provide a framework for conservation of minerals, systematic and scientific

mining, development of minerals and protection of the environment. 201

200 (1996) 9 SCC 709 [64] 201 Mineral Conservation and Development Rules 2017

89 PART G

141. The expression “mineral development” has also been understood under the

MMDR Act in a comprehensive manner, to include all activities and transactions

relating to the working of mines, extracting of minerals, their storage and

disposal, as well as the conservation of the environment. Having established the

meaning and scope of the subject-matter in Entry 54 of List I and Entry 23 of List

II, we now analyze the inter-relationship between the two entries in greater detail.

ii. Analysis of Hingir-Rampur, M A Tulloch, and Baijnath Kedia

142. In Hingir-Rampur Coal Co. Ltd. v. State of Orissa, 202 writ petitions were filed

before this Court challenging the Orissa Mining Areas Development Fund Act

1952 203 which levied cess on the petitioner’s colliery. The petitioner argued that

the cess levied under the Orissa Act was beyond the legislative competence of

the State legislature because it was in reality a levy of excise duty on the coal

produced. In the alternative, it was argued that the cess was relatable to Entry

23 of List II which would be ultra vires having regard to the provisions of Entry 54

of List I read with the MMRD Act 1948, which was the applicable legislation at

the time. The respondent state sought to repel the petitioner’s contention by

arguing that the cess was a fee relatable to Entries 23 and 66 of List II whose

validity is not affected by Entry 54 of List I read with the MMRD Act. Thus, this

Court was called upon to decide two issues: (i) whether the impugned levy was

in the nature of a fee relatable to Entries 23 and 66 of List II; and (ii) the legislative

competence of the State legislature to impose the levy in view of Entry 54 of List

I read with the MMRD Act.

202 (1961) 2 SCR 537 203 “Orissa Act”

90 PART G

143. The Orissa Act provided that the rate of the levy shall not exceed five percent of

the valuation of minerals at the pit’s mouth. The statute further provided that the

proceeds of the cess recovered shall be utilized to meet the expenditure for

providing amenities such as communications, water supply and electricity for the

better development of the mining areas and improve the welfare of labour and

persons residing or working in the mining areas. This Court analyzed the scheme

of the Orissa Act to observe that it was enacted for the purpose of the

development of mining areas in the State. It was held that the cess was in the

nature of a fee because: (i) it had an element of quid pro quo; (ii) it was collected

into a specific fund; (iii) its application was regulated by a statute and confined to

its purposes; and (iv) there was a definite co-relationship between the impost

and the purpose of the legislation which was to render service to the notified

area. 204

144. Having established that the cess was in the nature of a fee, the next issue before

this Court was whether the State legislature had the competence to impose the

levy in view of Entry 54 of List I read with the MMRD Act 1948. Justice P B

Gajendragadkar (as the learned Chief Justice then was) writing for the majority,

explained the inter-relationship between Entry 54 of List I and Entry 23 of List II

in the following terms:

“24. […] The jurisdiction of the State Legislature under Entry 23 is subject to the limitation imposed by the latter part of the said Entry. If Parliament by its law has declared that regulation and development of mines should in public interest be under the control of the Union, to the extent of such declaration the jurisdiction of the State Legislature is excluded. In other words, if a Central Act has been passed which contains a declaration by Parliament as required by

204 Hingir-Rampur (supra) [19]

91 PART G

Entry 54, and if the said declaration covers the field occupied by the impugned Act the impugned Act would be ultra vires, not because of any repugnance between the two statutes but because the State Legislature had no jurisdiction to pass the law. The limitation imposed by the latter part of Entry 23 is a limitation on the legislative competence of the State Legislature itself. This position is not in dispute.”

145. This Court held that the test to determine the legislative competence of the state

legislature in respect of a particular subject-matter relating to regulation of mines

and mineral development is whether that matter is covered by the legislative

declaration in the MMRD Act 1948. This Court examined the provisions of the

MMRD Act 1948 which contained a legislative declaration under Section 2. 205

Section 6 of the MMRD Act 1948 empowered the Central Government to make

rules for the conservation and development of minerals. Section 6(2) empowered

Parliament to make rules in respect of several subject matters, including the levy

and collection of royalties, fees or taxes in respect of minerals mined, quarried,

excavated or collected. In this respect, the observations made by Justice

Gajendragadkar are relevant and extracted below:

“Section 6 of the Act, however, empowers the Central Government to make rules by notification in the Official Gazette for the conservation and development of minerals. Section 6(2) lays down several matters in respect of which rules can be framed by the Central Government. This power is, however, without prejudice to the generality of powers conferred on the Central Government by Section 6(1). Amongst the matters covered by Section 6(2) is the levy and collection of royalties, fees or taxes in respect of minerals mined, quarried, excavated or collected. It is true that no rules have in fact been framed by the Central Government in regard to the levy and collection of any fees; but, in

205 Section 2, MMRD Act 1948. [It read: “2. Declaration as to expediency of control by Central Government:- It is

hereby declared that it is expedient in the public interest that the Central Government should take under its control the regulation of mines and oilfields and the development of minerals to the extent hereinafter provided.”]

92 PART G

our opinion, that would not make any difference. If it is held that this Act contains the declaration referred to in Entry 23 there would be no difficulty in holding that the declaration covers the field of conservation and development of minerals, and the said field is indistinguishable from the field covered by the impugned Act. What Entry 23 provides is that the legislative competence of the State Legislature is subject to the provisions of List I with respect to regulation and development under the control of the Union, and Entry 54 in List I requires a declaration by Parliament by law that regulation and development of mines should be under the control of the Union in public interest. Therefore, if a Central Act has been passed for the purpose of providing for the conservation and development of minerals, and if it contains the requisite declaration, then it would not be competent to the State Legislature to pass an Act in respect of the subject-matter covered by the said declaration. In order that the declaration should be effective it is not necessary that rules should be made or enforced; all that this required is a declaration by Parliament that it is expedient in the public interest to take the regulation and development of mines under the control of the Union. In such a case the test must be whether the legislative declaration covers the field or not. Judged by this test there can be no doubt that the field covered by the impugned Act is covered by the Central Act 53 of 1948.”

(emphasis added)

146. The test laid down by this Court in Hingir-Rampur (supra) is whether the

legislative declaration under a Parliamentary law enacted in pursuance of Entry

54 of List I covers the subject-matter. If the subject matter is covered by the

legislative declaration, the legislative competence of the States with respect to

that subject-matter is pro tanto denuded. Applying this test, it was held that the

subject-matter of the levy of fees for conservation and development of minerals

was covered by the MMRD Act 1948.

93 PART G

147. The next issue before this Court was whether the declaration contained in the

MMRD Act was constitutionally valid in view of Entry 54 of List I. The MMRD Act

1948 was a pre-constitutional legislation enacted by the Dominion Legislature

governed by the GOI Act 1935. It was held that even though the state legislation

covered the same field as the MMRD Act, the legislative declaration made under

the MMRD Act did not constitutionally amount to the requisite declaration by

Parliament in terms of Entry 54 of List I. 206 Therefore, this Court concluded that

the limitation imposed by Entry 54 of List I did not impair the legislative

competence of the State to enact the legislation under Entry 23 read with Entry

66 of List II. In view of the conclusion reached, the majority opined that it was

unnecessary to consider the validity of the Orissa Act in terms of Entry 50 of List

II. 207

148. Justice Wanchoo recorded his dissent from the opinion of the majority by holding

that the cess in question was a duty of excise falling squarely within Entry 84 of

List I, 208 and consequently, beyond the legislative competence of the State

legislature. The learned Judge held that the cess was levied at a rate not

exceeding five percent of the value of the minerals at the pit’s mouth on all

extracted minerals. Since all the extracted minerals were goods produced, a cess

on the value of such extracted minerals was held to constitute excise duty. 209

Unlike the majority opinion, Justice Wanchoo dealt with the issue of the

206 Hingir-Rampur (supra) [35] [“35. […] We reach this position that the field covered by Act 53 of 1948 is

substantially the same as the field covered by the impugned Act but the declaration made by Section 2 of the said Act does not constitutionally amount to the requisite declaration by Parliament, and so the limitation imposed by Entry 54 does not come into operation in the present case.”] 207 Hingir-Rampur (supra) [37] 208 Entry 84, before the Constitution (One Hundred and First Amendment) Act 2016, read as follows:

“84. Duties of excise on tobacco and other goods manufactured or produced in India except – (a) Alcoholic liquors for human consumption; (b) Opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.” 209 Hingir-Rampur (supra) [47]

94 PART G

legislative competence of the State legislature to impose the cess in view of Entry

50 of List II. The learned Judge held that the cess was not a tax on mineral rights,

but rather a tax on minerals actually produced, and therefore not covered by

Entry 50 of List II.

149. In State of Orissa v. M A Tulloch, 210 a Constitution Bench was concerned with

the validity of the same Orissa Act which was under consideration in Hingir-

Rampur (supra). The respondents challenged the demand for the payment of

fees made by the State Government for the period from July 1957 to March 1958

under the Orissa Act for being ultra vires. It must be noted that the MMDR Act

was brought into force as and from 1 June 1958. The Constitution Bench

analyzed the relevant constitutional and statutory provisions, and precedent to

reiterate the following principles of law:

(i) The power of the State to enact legislation on the subject matter of

“mines and mineral development” under Entry 23 of List II is plenary and

subject to the provisions of Entry 54 of List I;

(ii) Section 2 of the MMDR Act contains the requisite legislative declaration

in terms of Entry 54 of List I. To the extent to which the Union

Government has taken the regulation of mines and development of

minerals under its control, so much was withdrawn from the ambit of the

power of the State legislature under Entry 23 of List II. The legislation of

the State enacted under Entry 23 of List II would, to the extent of that

“control”, be superseded or be rendered ineffective; 211

210 (1964) 4 SCR 461 211 M A Tulloch (supra) [5]

95 PART G

(iii) The legislative power of the state remains intact beyond the “extent” of

the MMDR Act. Therefore, the crucial enquiry has to be directed to

ascertain the “extent” of the Parliamentary legislation;

(iv) Where a competent legislature with superior legislative powers

expressly or impliedly evinces by its legislation an intention to cover the

whole field, the enactments of the other legislature whether passed

before or after would be superseded on the ground of repugnance. 212

Section 18(1) evinces the Parliamentary intention to cover the entire field

relating to conservation and development of minerals. Therefore, the fact

that the Central Government has not framed any regulation along the

lines of the Orissa Act was not relevant; and

(v) The declaration under Section 2 of MMDR Act has taken over the entire

field of conservation and development of minerals. Resultantly, the

particular subject matter would be subtracted from the scope and ambit

of Entry 23 of List II and the State legislature would also lose the

legislative competence to levy a fee under Entry 66 of List II. 213

150. In M A Tulloch (supra), the Constitution Bench held that the legislative

competence of the States to levy fees under Entry 66 of List II is also affected to

the extent to which the subject-matter of regulation of mines and mineral

development is taken over by the Parliamentary declaration under Entry 54 of

List I.

151. The third major decision dealing with the inter-relationship between Entry 54 of

List I and Entry 23 of List II is Baijnath Kedia v. State of Bihar. 214 In that case,

212 M A Tulloch (supra) [14] 213 M A Tulloch (supra) [15] 214 (1969) 3 SCC 838

96 PART G

an amendment to the Bihar Land Reforms Act 1950 and the rules pertaining to

the modification of the terms and conditions of leases of minor minerals were

challenged. Having held that it was bound by Hingir-Rampur (supra) and M A

Tulloch (supra), the issue before this Court was the extent to which the

declaration by Parliament left any scope for the state legislature. The Court

observed that by the legislative declaration under Section 2 read with Section 15,

the whole of the field relating to minor minerals came within the jurisdiction of

Parliament and no scope was left for the State legislature. Although Section 15

allowed the State legislature to make rules, it did not create a scope for legislation

at the state level. 215 Consequently, it was held that the amendment to the Bihar

Act was without jurisdiction. In Hingir-Rampur (supra) and M A Tulloch (supra),

it was held that the whole field of conservation and development of minerals was

covered by the MMDR Act. In Baijnath Kedia (supra), it was held that the field

of minor minerals was covered by the central legislation, thereby depriving the

state legislation of its plenary legislative power under Entry 23 of List II to that

extent.

152. The Solicitor General has relied on the above decisions to submit that the

consequence of the whole of the legislative field being occupied by Parliament

under the MMDR Act is that the state legislatures possess only such powers as

are expressly conferred on them by Parliament. The propositions put forth by the

Solicitor General can be encapsulated as follows:

a. Hingir-Rampur (supra) shows that the subject-matter of statutory levies

pertaining to minerals is covered by the legislative declaration. Although

215 Baijnath Kedia (supra) [21]

97 PART G

the MMDR Act does not contain a provision similar to Section 6 of the

MMRD Act 1948, it provides for statutory levies such as royalty and

dead-rent. Thus, Parliament has covered the subject-matter of statutory

levies relating to mineral rights and the state legislature has no power to

impose a levy in the form of taxes on mineral rights under Entry 50 of

List II;

b. M A Tulloch (supra) held that a Parliamentary legislation enacted under

Entry 54 of List I also impacts the independent legislative powers of

States with respect to Entry 66 of List II. This reasoning will be applicable

to Entry 50 of List II with greater force, more so, because this entry is

expressly subject to any law made by Parliament relating to mineral

development; and

c. In Baijnath Kedia (supra) there were no express provisions under the

MMDR Act limiting the state legislature from enacting legislation relating

to leases of minor minerals, but this Court held that such a limitation was

implied. Similarly, the Parliamentary law, the MMDR Act, impliedly

excludes the legislative competence of the state with respect to Entry 50

of List II.

153. The above arguments will be dealt with in the ensuing segment relating to the

interpretation of Entry 50 of List II.

iii. Examination of the “extent” of the MMDR Act

154. The respondents submit that the MMDR Act is a complete code and occupies

the entire field relating to regulation of mines and mineral development, leaving

nothing for the state legislature under Entry 23 of List II. It was also submitted

98 PART G

that the scope of the MMDR Act and the rules made under it has to be given an

exhaustive interpretation because they were enacted in the “public interest.” The

Solicitor General recounted the following public interest considerations

underpinning the MMDR Act: (i) provision of national legal landscape for

protection, exploration, and extraction of minerals; (ii) ushering a uniform

structure of regulation and development of minerals; and (iii) ensuring sustained

development of the mineral sector at the national level to ensure availability of

domestic minerals to industries.

155. The MMDR Act and the Mineral Concession Rules 1960 comprise of a complete

code, containing exhaustive provisions in respect of the grant and renewal of

prospecting licenses and mining leases in lands belonging to government as well

as lands belonging to private persons. 216 Section 2 of the MMDR Act declares

that the Union is acting in public interest to take under its control the regulation

of mines and development of minerals to the extent provided. In State of Tamil

Nadu v. Hind Stone, 217 the Court observed that “[t]he public interest which

induced Parliament to make the declaration contained in Section 2 of the Mines

and Minerals (Regulation and Development) Act, 1957, has naturally to be the

paramount consideration in all matters concerning the regulation of mines and

the development of minerals.”

156. In Bharat Coking Coal Ltd. v. State of Bihar, 218 the issue before a two judge

Bench was whether the State Government had legal authority to execute leases

in favor of the respondents for collection of slurry on payment of royalty. This

Court held that the state legislature lacked authority in law to regulate the

216 State of Assam v. Om Prakash Mehta, (1973) 1 SCC 584 [12]; 217 (1981) 2 SCC 205 [6] 218 (1990) 4 SCC 557

99 PART G

disposal of slurry. Section 18 of the MMDR Act was held to cover the field of the

disposal of waste of a mine (including coal slurry), thereby denuding the

legislative power of the state legislature with respect to that subject matter. It was

further held that once the state legislature’s power under Entry 23 of List II is

denuded, the State Government ceases to have any executive authority in the

matter relating to the regulation of mines and mineral development in view of

Article 162 of the Constitution. 219 Thus, both the legislative and the executive

powers of the State were held to be taken away to the extent to which the MMDR

Act covered the subject matter dealing with regulation of mines and mineral

development. 220

157. This Court has to give credence to the public interest considerations

underpinning the MMDR Act while interpreting its scope and ambit. The

expression “public interest” occurring in both Entry 54 of List I and Section 2 of

the MMDR Act indicates that the provisions of the legislation do not merely cover

the interests of private individuals (such as owners of private property or holders

of mining leases) relating to the regulation of mines and mineral development.

The public interest underpinning the MMDR Act synonymizes with the collective

welfare of the people and is informed by the dictates of the public trust

doctrine. 221 At the same time, the underlying public interest has to be construed

in view of the entire legislative scheme, purpose, and object of the enactment. 222

219 Article 162, Constitution of India. [It reads:

162. Extent of executive power of State – Subject to the provision of this Constitution, the executive power of a State shall extend to the matters with respect to which the Legislature of the State has power to make laws: Provided that in any matter with respect to which the Legislature of a State and Parliament have power to make laws, the executive power of the State shall be subject to, and limited by, the executive power expressly conferred by this Constitution or by any law made by Parliament upon the Union or authorities thereof.”] 220 Sandur Manganese & Iron Ores Ltd v. State of Karnataka, (2010) 13 SCC 1 [39] 221 Sayyed Ratanbhai Sayeed v. Shirdi Nagar Panchayat, (2016) 4 SCC 631 222 Meerut Development Authority v. Association of Management Studies, (2009) 6 SCC 171 [67]

100 PART G

158. The latter part of Entry 23 of List II makes the entry “subject to the provisions of

List I with respect to regulation and development under the control of the Union.”

Entry 54 of List I provide that Parliament can regulate mines and mineral

development “to the extent to which such regulation and development under the

control of the Union is declared by Parliament by law to be expedient in the public

interest.” The text of Entry 54 of List I indicates that besides declaring that it is

taking under its control any subject relating to the regulation of mines and mineral

development, Parliament has to specify the extent to which the Parliamentary

regulation is deemed expedient in the public interest. The legislative domain of

the States under Entry 23 of List II is excluded only to the extent of the field

covered by the provisions of the MMDR Act. The expression “to the extent

provided” refers to the subject matter or fields covered by the Parliamentary

legislation.

159. During the proceedings of the Constituent Assembly pertaining to present Entry

23 of List II, Mr Brajeshwar Prasad moved a motion to move the entire field of

“regulation of mines and mineral development” under the Union List. He

reasoned that mines constitute a vital subject and should remain a subject under

the Union List. 223 Consequently, a motion was moved to transfer Entry 23 of List

II (which was draft Entry 28 of List II then) to the Union List. However, the

amendment was negatived by the Assembly. 224 This indicates that the

Constituent Assembly deemed it necessary that state legislatures must also have

223 Constituent Assembly Debates, Volume IX, 898 (31st August 1949). [Mr. Brajeshwar Prasad explained his aim

in introducing the motion in the following words: “My whole aim in moving this amendment is to make redundant entry 28, of List II. I am clear in my own mind that Mines constitute a vital subject as important as Defence, Foreign Affairs and Communications. I am of opinion that if the system of defence is going to be organized on sound line then Mines must remain a Central subject. I do not want to give the Provinces the power even to “regulate mines and oil fields and mineral development subject to the provisions of List I” as has been provided for in entry 28 of List II.”] 224 Constituent Assembly Debates, Volume IX, 898 (2nd September 1949)

101 PART G

necessary legislative powers with respect to the regulation of mines and mineral

development. The legislative field of the states would stand abstracted once

Parliament makes a declaration evincing an intent to takeover the regulation and

development of mines and specifies the extent to which control of the field by the

Union is deemed to be in the public interest.

160. The requirement of a legal declaration under Entry 54 of List I serves twofold

purposes: first, it enables a clear demarcation of the subject matter under the

control of Parliament and determines the extent of such control; and second, it

enshrines the precept of the rule of law where the basis for trenching upon the

legislative powers of the State has to be found in a law made by Parliament. The

Parliamentary enactment through which legislative control is being assumed by

the Union, to the exclusion of state legislatures, cannot be abstract, vague, and

general. While Parliament has the power to denude the field given to the states

under Entry 23 of List II by making a declaration in the law which it enacts

pursuant to the field reserved by Entry 54 of List I, the law enacted by Parliament

must specify the field of regulation and development which it has taken over, and

the extent to which the control of the Union is deemed to be in the public interest.

161. The use of the expression “to the extent” under Entry 54 of List I carries the

consequence that the Parliamentary legislation has to specify the subject matter

or field over which it seeks to legislate. In M A Tulloch (supra), this Court held

that the intention of the legislation to occupy a particular subject matter has to be

gathered from the words of the provisions. 225 As a consequence, the coverage

of the fields by Parliament has to be express. The ambit of the MMDR Act has to

225 M A Tulloch (supra) [14]. [It reads: “14. […] In the present case, having regard to the terms of Section 18(1) it

appears clear to us that the intention of Parliament was to cover the entire field and thus to leave no scope for the argument that until the rules were framed, there was no inconsistency and no supersession, of the State Act.”]

102 PART G

be determined from the express words used in the provisions and not by mere

implications or inference. This legal principle has already been accepted by this

Court. 226

162. In Ishwari Khetan Sugar Mills v. State of Uttar Pradesh, 227 a Constitution

Bench was called upon to interpret the ambit of Entry 52 of List I and Entry 24 of

List II. The Industries (Development and Regulation) Act 1951 228 was enacted by

Parliament to assume control over specified industries in pursuance of Entry 52

of List I. Section 2 of the IDR Act contained the legislative declaration to the effect

that the Union shall take under its control the industries specified in Schedule I.

The majority, speaking through Justice D A Desai, observed that the legislative

declaration under the IDR Act has the effect of denying the legislative powers to

the state legislature under Entry 24 of List II. 229 Therefore, it was held that the

legislative declaration contained under Section 2 of the IDR Act has to be

construed strictly. The Court held that the legislative competence of state

legislature would be eroded only to the extent to which control was assumed by

the Union in terms of the legislative declaration under the IDR Act. A legislative

declaration which has the impact of denuding or depriving the legislative power

of the state legislature has to be construed strictly.

163. The inter-relationship between Entry 54 of List I and Entry 23 of List II can be

formulated as follows:

(i) The state legislatures possess plenary legislative power in respect of

regulation of mines and mineral development under Entry 23 of List II;

226 Ishwari Khetan Sugar Mills v. State of Uttar Pradesh, (1980) 4 SCC 136; Rajasthan Roller Flour Mills Association

v. State of Rajasthan, 1994 Supp (1) SCC 413 [14] 227 (1980) 4 SCC 136 228 “IDR Act” 229 Ishwari Khetan Sugar Mills (supra) [11]

103 PART H

(ii) Entry 23 of List II is, however, subject to the operation of Entry 54 of

List I;

(ii) The field under Entry 23 of List II is subordinated to the extent to which

Parliament has brought under its control the regulation of mines and

development of minerals under the MMDR Act;

(iii) The expression of the legislative intention to cover a particular field

relating to mines and mineral development excludes or denudes the

legislative powers of the State with respect to that particular field; and

(iv) Parliamentary intention to cover a particular field relating to the

regulation of mines and mineral development and the extent to which

control of the Union is regarded to be in the public interest has to be

ascertained from the language of the statute.

Keeping these principles in mind, we now move on to analyzing the inter-

relationship between Entry 54 of List I and Entry 50 of List II.

H. Inter-relationship between Entry 50 of List II and Entry 54 of List I

164. The respondents contend that the legislative declaration contained under

Section 2 along with the other provisions of the MMDR Act serves as a “limitation”

on the legislative powers of state legislatures to tax minerals under Entry 50 of

List II. The main thrust of the argument of the respondents is that anything

encompassed in a “law relating to mineral development” serves as a limitation

on the field of taxation under Entry 50 of List II. Moreover, it was submitted that

the MMDR Act leaves no legislative room for the state legislature in respect of

the subject matter of mines and mineral development, including taxes on mineral

rights. On the contrary, the petitioners submit that the MMDR Act can only have

104 PART H

the effect of abstracting the State’s legislative field with respect to Entry 23 of List

II. It was further contended that the MMDR Act does not contain any provision

limiting the field of the states with respect to the taxation of mineral rights.

165. To recap, Entry 50 of List II reads thus:

“Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.”

Entry 50 of List II has two elements: (i) the legislative field governing taxes on

mineral rights is given exclusively to the states; (ii) the field given to the states is

subject to any limitations imposed by Parliament by law relating to mineral

development. Entry 50 of List II is a taxing entry. The limitations on the field

created by Entry 50 of List II is however, contemplated to be created by a law

which relates to mineral development. The legislative competence of Parliament

to enact a “law relating to mineral development” can be traced to Entry 54 of List

I, which is a general entry. Therefore, the taxing powers of the state with respect

to mineral rights under Entry 50 of List II can be restricted by Parliament by its

regulatory power under Entry 54 of List I.

166. To delve into the inter-relationship between Entry 54 of List I and Entry 50 of List

II, we have to primarily address the following questions: (i) what is a tax on

mineral rights; (ii) whether Entry 50 of List II is an exception to the general rule

laid down in M P V Sundararamier (supra); (iii) what is the nature of the

limitations envisaged by the Constitution on the taxing powers of the state; and

(iv) whether the MMDR Act imposes limitations on the taxing powers of the state.

105 PART H

i. Taxes on mineral rights

a. Mineral rights duty

167. The expression “taxes on mineral rights” was originally used in the GOI Act 1935.

The Constitution uses a similar expression. Therefore, it is important to

understand the context in which the term “taxes on mineral rights” (in its myriad

forms) came to occupy the discourse.

168. Under the law in England, landlords would receive royalties for exercising their

mineral rights or assigning them to other persons or lessees. 230 However, in the

latter part of the nineteenth century and the early twentieth century, it was

recognized that landlords received the benefits of royalty often at the cost of the

welfare of the miners. The Royal Commission on Mining Royalties narrated in its

report of 1893 that:

“[W]itnesses examined on behalf of the working miners expressed the opinion that royalties and wayleaves, where fixed in amount, are often so high that in depressed times, when coal falls greatly in price, the royalty owner continues to receive his full royalty, whilst the miner suffers from a reduction in wages, or a closing of mines; their efforts to avert any reduction sometimes taking the form of a strike.” 231

To counter the appropriation of royalties by landowners, the lawmakers decided

to levy tax on royalties received by them 232 with a view to increase revenue

generation and enhance the welfare measures for miners. 233

230 Lloyd George, ‘The Budget, The Land and The People: The New Land Value Taxes Explained and Illustrated’

(2nd edn, 1909) 48. 231 Royal Commission on Mining Royalties, Final Report of the Royal Commission appointed to inquire into the

subject of mining royalties (1893) 14. 232 Lloyd George (n 230) 51 233 Mr. Lloyd George (Hansard, Volume 11) 28 September 1909

106 PART H

169. The Parliament in England imposed a mineral rights duty by Finance Act 1910.

Section 20 imposed a duty “on the rental value of all rights to work minerals and

of all mineral way leaves” at the rate of “one shilling for every twenty shillings of

that rental value.” The rental value was calculated in the following manner: (i)

where the right to work the minerals was the subject of a mining lease, the

amount of rent paid in the last working year; (ii) where minerals were being

worked by the proprietor, an amount fixed by the Commissioners of Inland

Revenue as equivalent to rent; and (iii) in case of mineral wayleave, the amount

of rent paid by the working lessee in the last working year. Lloyd George, the

Chancellor of the Exchequer, stated while introducing the legislative proposal

that the duty on mineral rights imposed “tax upon royalties and way-leaves

actually received by the owners of those rights.” 234 The Chancellor further

clarified that the mineral rights duty was introduced as part of taxes on land. 235 It

was in this context that the concept of taxes on mineral rights was introduced in

England and was later entrenched in the colonial regime by the GOI Act 1935.

b. Meaning of the expression “mineral rights”

170. The Constitution does not define “mineral rights”. The expression has not been

defined in the MMDR Act or the rules framed under it. Though the expression

“mineral rights” is used in Entry 50 of List II, it does not find mention in any of the

other related legislative entries – Entry 54 of List I and Entry 23 of List II. The

expression has to be given its ordinary and natural meaning by adopting an

interpretative approach which eschews rigidity. Mineral rights are inextricably

234 Hansard, Volume 11, 22 September 1909 235 Hansard, Volume 35, 5 March 1912

107 PART H

connected to property. Any understanding of “mineral rights” must be prefaced

on an understanding of the basics of property law.

171. In a regime of private property, the rules governing access to and control of

resources are organized around the idea that resources are on the whole

separate objects belonging to particular individuals. 236 These resources can

comprise of immovable and movable property, both corporeal and incorporeal.

In a social order based on private property, an owner’s decision of the manner in

which they put the resource to use is generally upheld by society as final. 237 A

person who owns a resource has the right to determine its use. The ownership

of a resource also precludes the claims of other persons or individuals with

respect to that particular resource. 238

172. In the context of land, it is well-established that the ownership of land includes

the ownership of underlying minerals, unless the right to minerals has been

expressly reserved by law. 239 Therefore, an owner of land has rights to the

surface of the land and to sub-soil resources. 240 Surface rights are rights to the

surface of the land and include the right to use land, construct buildings, install

machinery and equipment, and plant trees or dig wells. Surface rights can also

be sold or transferred to another person. The right to minerals entails the right to

monetize mineral resources by either consuming them or selling them to third

parties. The right to minerals emanates from the concept of the ownership of

property.

236 Jeremy Waldron, ‘What is Private Property?’ (1985) 5(3) Oxford Journal of Legal Studies 313, 327. 237 Ibid, 327. 238 James Y Stern, ‘The Essential Structure of Property Law’ (2017) 115(7) Michigan Law Review 1167, 1176. 239 Thressiamma Jacob v. Geologist, Department of Mining & Geology, (2013) 9 SCC 725 240 State of West Bengal v. Union of India, (1964) 1 SCR 371 [18]

108 PART H

173. Counsel have drawn attention to dictionary meanings attributed to “mineral

rights”. Black’s Law Dictionary defines “mineral right” as “an interest in minerals

in land, with or without ownership of the surface of the land; a right to take

minerals or a right to receive royalty.”241

174. Corpus Juris Secundum defines the term “mineral right” as follows:

“It is the right or title to all, or to certain specified, minerals in a given tract. It is a broader term and is more inclusive than the term “oil and gas”, and it has been held that, in the light of the surrounding facts and circumstances under which it is used, it may not be necessarily include the right to oil and gas.” 242

175. In Pennsylvania Coal Co. v. Mahon, 243 the US Supreme Court observed that

the right to coal consists of the right to mine it. Entry 50 of List II uses the

expression “mineral rights” in the plural. It hence envisages a bundle of rights

associated with the ownership of minerals. The owner of minerals may transfer

the rights to the minerals to another person. Once transferred, the lessee stands

in the shoes of the owner/ lessor by acquiring his interest in the minerals,

according to the terms and conditions of the agreement. Usually, the right to mine

includes two related activities: (i) excavation of minerals; and (ii) removal or

consumption of the extracted minerals. The process of excavating minerals

generally entails the right to enter upon and occupy the land for the purpose of

working the mines to extract minerals. The removal or consumption of minerals

allows the lessee to monetize the extracted minerals.

176. The meaning of the expression “mineral rights” has been discussed in a few

judicial decisions in India. In a decision of the Calcutta High Court rendered in

241 Black’s Law Dictionary (6th edn,1990) 995 242 Corpus Juris Secundum (Volume 58) 15 243 260 US 393 (1922)

109 PART H

1905, it was held that grant of mineral rights “must be taken to carry as incident

to it the power not only to go upon the land and work the minerals known to be

underground but to go to the land and conduct the ordinary preliminary

operations by boring or otherwise to ascertain (when it is not known) if there are

minerals underground.” 244 In Tata Chemicals Ltd. v. State of Gujarat, 245 the

Gujarat Mineral Rights Tax Act 1985 imposed a tax on the mineral rights of

holders of mining leases in respect of minerals specified in the Schedule. 246 A

Division Bench of the Gujarat High Court, speaking through Justice A M Ahmadi

(as the learned Chief Justice then was) repelled the challenge to the validity of

the legislation. The Court drew a distinction between mining rights and mineral

rights thus:

“51. [a] mining right is a right to enter upon and occupy land for the purpose of working it with a view to obtaining the minerals deposited therein whereas a mineral right is a right or title to all or to certain specified minerals in a given tract. It is, therefore, clear that a person having a mining right is entitled to work the mine with a view to winning the minerals deposited therein but unless he is given a right to remove or consume the mineral, he cannot do so. It is the latter right which is known as the mineral right which the impugned legislation seeks to tax.”

The Gujarat High Court held that a mining right is a right to enter upon and

occupy land for the purpose of working. A mineral right is a right or title to certain

specified minerals in a given tract. Therefore, the High Court followed the

244 Kumar Ramessur Malia v. Ram Nath Bhattacharjee, 1905 SCC OnLine Cal 55 245 1988 SCC OnLine Guj 13 246 Section 3, Gujarat Mineral Rights Tax Act 1985. Section 3 reads: “On and from the commencement of this Act,

there shall be levied and collected a tax on mineral rights at such rates not exceeding the maximum specified in Column 2 of the Schedule against minerals specified in column 1 of that Schedule as the State Government may, from time to time by notification in the Official gazette, fix.”

110 PART H

principle that a lessee acquires mineral rights if the lessor grants them the

permission to remove minerals from the leased area.

177. In his dissenting opinion in Kesoram (supra), Justice S B Sinha sought to draw

a distinction between “minerals” and “mineral rights” by observing that mineral

rights “cannot be construed as mineral already extracted as contradistinguished

from being capable of extraction or otherwise in a state or form when embedded

in the earth.” 247 The learned Judge observed that when a mineral is extracted, it

may be a culmination of the right to deal in the mineral but the mineral rights

would not include a right to dispatch extracted minerals. Justice Sinha observed

that the right to receive royalty is also a mineral right. According to him mineral

rights extend till the extraction of minerals from the earth and do not include the

right to dispatch the extracted minerals. There is a fallacy in Justice Sinha’s

observations. Statutorily, royalty is a consideration by the lessee to the lessor for

winning the minerals and removing them from the leased area. Section 9 of

MMDR Act imposes royalty on removal or consumption of minerals by lessee.

Royalty, is paid on dispatch of minerals. Thus, mineral rights do not culminate

with the extraction of minerals, but include the right to dispatch the extracted

minerals as well.

178. The Constitution is a living organic document and must be interpreted in that

spirit. 248 Enumerated legislative powers ought to be interpreted with a wide and

liberal spirit to ensure that the legislatures have the requisite authority to legislate

and to allow the executive to govern. The expression “mineral rights” must be

construed in this spirit to ensure that the taxing powers of the State under Entry

247 Kesoram (supra) [400] 248 Saurabh Chaudri v. Union of India, (2003) 11 SCC 146 [71]; Navtej Singh Johar v. Union of India, (2018) 10

SCC 1 [95].

111 PART H

50 of List II are not unnecessarily curtailed. The natural meaning of the

expression “mineral rights” will include the entire bundle of rights that follow

ownership of minerals, including rights which can be transferred to a lessee

through a mining lease. These rights will include the right to extract minerals by

working the mines, winning the minerals, and monetizing the minerals obtained

by removing or consuming them.

179. The breadth and scope of mineral rights has also been recognized under the

MMDR Act. In a situation where the minerals vest with the State by operation of

law, the right to those minerals also vests with the State. However, the State can

assign or transfer its mineral rights by way of a mining lease to a lessee. This

has been contemplated by the Mineral Concession Rules read with Form K. In

Part I of Form K, the Government grants its mineral rights to the lessee, including

liberties, powers, and privileges. However, it is important to note that the lessee

is only granted rights in the minerals specified in Part I of Form K. The

Government can reserve to itself the right to work the other minerals found in the

same demised land or to grant a lease to a separate person to work and remove

these other minerals. 249 Part II of Form K of the Mineral Concession Rules 1960

enumerates the liberties, powers, and privileges of the lessee. It provides that

the lessee has the liberty and power at all times during the term of demise to

enter upon the land demised and search, mine, bore, dig, drill, win, work, dress,

249 Part IV, Form K, Mineral Concession Rules 1960. [“1. Liberty and power for the State Government, or to any

lessee or persons authorized by it in that behalf to enter into and upon the said lands and to search for, win, work, dig, get, raise, dress, process, convert and carry away minerals other than the said minerals and any other substances and for those purposes to sink, drive, make, erect, construct, maintain and use such pits, shafts, inclines, drifts, levels and other lines, waterways, airways, water courses, drains, reservoirs, engines, machinery, plant, buildings, canals, tramways, railways, roadways, and other works and conveniences as may be deemed necessary or convenient. Provided that in the exercise of such liberty and power no substantial hindrance or interference shall be caused to or with the liberties, powers and privileges of the lessee/lessees under these presents and that fair compensation (as may be mutually agreed upon or in the event of disagreement as may be decided by the State Government) shall be made to the lessee/ lessees for all loss or damage sustained by the lessee/ lessees by reason or in consequence of the exercise of such liberty and power.”]

112 PART H

process, convert, carry away, and dispose of the minerals. Part II of Form K

further provides that a lessee has liberty and power to use the demised land to

sink pits, 250 use machinery equipment 251 construct buildings, roadways, and

railways, 252 to beneficiate any ore produced from the lands and carry away such

beneficiated ore, 253 and clear undergrowth and brushwood and utilize any trees

or timber standing or found on the demised lands.

180. Having explained the scope of the expression “mineral rights”, the next issue

pertains to the scope and ambit of “taxes on mineral rights.”

c. Taxes on mineral rights

181. The respondents have contended that the meaning of the term “taxes on mineral

rights” must be derived from the related entries in List II, namely Entries 45 and

49. It was contended that since the incidence of the tax imposed in light of Entries

45 and 49 is on the owner of land, the incidence of tax on mineral rights is also

on the owner of land, that is the private lessor. On the contrary, the petitioners

have refuted the respondent’s submission on the ground that the tax under Entry

50 of List II can also be applied with respect to lessees who hold the land or

building on lease from the Government.

182. Conceptually, a tax has four elements – (i) the nature of the tax which prescribes

the taxable event attracting the levy; (ii) the person who is liable to pay tax; (iii)

the rate at which the tax is paid; and (iv) the measure or value to which the rate

will be applied for computing the liability. 254

250 Form K, Part II, Rule 2, Mineral Concession Rules 1960 251 Rule 3, Mineral Concession Rules 1960 252 Rule 4, Mineral Concession Rules 1960 253 Rule 8(a), Mineral Concession Rules 1960 254 Govind Saran Ganga Saran v. CST, 1985 Supp SCC 205 [6]; Mathuram Agrawal v. State of M P, (1999) 8 SCC

667 [12]; Union of India v. Mohit Minerals (P) Ltd., (2022) 10 SCC 700 [97]

113 PART H

183. The subject matter of taxation has been exhaustively enunciated in the Union

and State Lists in the Seventh Schedule of the Constitution. 255 The occurrence

of the taxable event creates or attracts the liability to tax. 256 For example, In re

Sea Customs Act, S.20(2), 257 this Court held that in the case of excise duties,

the taxable event is the manufacture of goods and the duty is not directly on the

goods but the manufacture thereof. Thus, the activity of the manufacture of

goods attracts the liability for the levy of excise duties.

184. The incidence of taxation pertains to the manner in which the burden of tax would

fall on a person. 258 The incidence of tax was exemplified by the decision of this

Court in State of Karnataka v. Drive-In Enterprise. 259 While dealing with the

validity of an entertainment tax imposed by the State of Karnataka, it was held

that since an entertainment necessarily requires a person who is entertained,

the incidence of the tax is on the persons entertained. The incidence of tax is

relatable to the person who bears the ultimate burden of the tax.

185. The subject matter of Entry 50 of List II is “taxes on mineral rights.” As discussed

in the above segment, ‘mineral rights’ is a comprehensive term to mean the

bundle of rights with respect to minerals. The taxable event under Entry 50 of

List II would relate to the exercise of mineral rights.

186. In his dissenting opinion in Hingir-Rampur (supra), Justice Wanchoo observed

that taxes on mineral rights would mean taxes on the right to extract minerals

and not taxes on the minerals actually extracted. He opined that a tax on mineral

rights would be confined, for example, to taxes on leases of mineral rights and

255 Chhotabhai Jethabhai Patel and Co. v. Union of India, 1962 Supp (2) SCR 1 [68] 256 Goodyear India Ltd. v. State of Haryana, (1990) 2 SCC 71 257 (1964) 3 SCR 787 [23] 258 Godfrey Phillips India Ltd v. State of UP, (2005) 2 SCC 515 [47] 259 (2001) 4 SCC 60 [13]

114 PART H

on premium or royalty for that. In the process, Justice Wanchoo differentiated

between taxes on minerals produced and taxes on mineral rights. According to

this view, the process of working mines to extract minerals has to necessarily

precede the production of minerals. The process of working mines, according to

the learned Judge, attracts liability under “taxes on mineral rights”, while taxes

on minerals extracted form part of taxes on goods produced, in the nature of

duties of excise.

187. The working of a mine can be undertaken either by the owner or by another to

whom the right to work the mine has been granted by a mining lease. In the latter

case, the lessee has to pay royalty to the lessor as a consideration for removing

or consuming the minerals from the leased area. The right to receive royalty is

an integral part of the mineral rights of the lessor. However, as discussed in the

segments above, royalty is not a tax. Therefore, royalty would not be

comprehended within the meaning of the expression “taxes on mineral rights.”

The scope of taxes on mineral rights includes taxes on the right to extract

minerals. Taxes on mineral rights also take within their fold other aspects relating

to the exercise of mineral rights such as working the mines and dispatching

minerals from the leased area. However, the legislature has to ensure that the

exercise of the taxing powers relatable to the field under Entry 50 of List II does

not foray into a duty of excise or a tax on the sale of minerals.

188. The taxable event with respect to taxes on mineral rights will be the exercise of

mineral rights. The incidence of the tax on mineral rights depends upon who is

exercising the right. We do not agree with the respondents that the incidence of

a tax on mineral rights would necessarily have to be on the owner of the land. A

tax under Entry 49 of List II is not only levied on the owner of the land, but also

115 PART H

an occupier. 260 Similarly, a tax on mineral rights could be levied on any person

who has an interest in the minerals.

189. The measure of tax is a matter of legislative policy. The legislature can select any

measure of tax to compute liability, as long as it has a reasonable nexus with the

nature of the tax. Hence, it is for the legislature to devise an appropriate measure

of tax to compute the tax liability, provided the measure has a nexus with the

nature of levy, that is a tax on mineral rights.

ii. The limitations on the taxing power of the State under Entry 50 of

List II

190. Entry 50 of List II is unique because though it is a taxing entry, it is made subject

to “any limitations imposed by Parliament by law relating to mineral

development.” Thus, the taxing power of the state is capable of being controlled

by a non-fiscal enactment by Parliament relating to the development of minerals.

This seems to recognize that a fiscal imposition in the nature of a tax on mineral

rights by a state may impact on the development of minerals. That is why the

former has been made subject to a law relatable to mineral development enacted

by Parliament.

191. The common thread between Entry 54 of List I and Entries 23 and 50 of List II is

the use of the phrase “mineral development”. Entry 54 of List I and Entry 23 of

List II deal with the same subject matter namely, of the regulation of mines and

mineral development, where the latter is subordinated to the former to the extent

to which Parliament brings the field under its control. In the above segments, we

have analyzed the decisions of this Court in Hingir-Rampur (supra), MA Tulloch

260 See Anant Mills Co. Ltd. v. State of Gujarat (1975) 2 SCC 175

116 PART H

(supra), and Baijnath Kedia (supra) where it was held that Entry 23 of List II is

pro tanto excluded to the extent to which the Parliamentary legislation enacted

in terms of Entry 54 of List I covers the field.

a. Entry 50 of List II does not constitute an exception to the

Sundararamier principle

192. The position which was enunciated in M P V Sundararamier (supra) and

accepted in Jindal Stainless Ltd (supra) is that the field of taxation is distinct

from the general subjects of legislation in the Union and State lists of the Seventh

Schedule. The issue which needs to be addressed is whether Entry 50 of List II

is an exception to the position which has been laid down in M P V

Sundararamier (supra) in view of the fact that the ambit of a taxing entry is

sought to be restricted by a regulatory entry. A related issue is whether

Parliament has the legislative competence to tax mineral rights under its

residuary powers.

193. The decision in Hoechst Pharmaceuticals (supra) interpreted the relationship

between Entry 54 of List II and Entry 92A of List I. Entry 54 of List II, before

amendment, was subject to the provisions of Entry 92A of List I. 261 The entry was

substituted by the Constitution (One Hundred and First Amendment) Act 2016.

The Bihar Finance Act 1981 levied a surcharge on dealers. The law was made

pursuant to the field of legislation in Entry 54 of List II. The Act prohibited dealers

from collecting surcharge. It was contended that the prohibition on dealers

recovering the surcharge was inconsistent with the Drug (Price Control) Order

261 Entry 54 of List II, before substitution by the Constitution (One Hundred and First Amendment) Act 2016 read:

“54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I)

117 PART H

1979 issued under the Essential Commodities Act, which allowed the

manufacturer or producer of drugs to pass on the liability to pay sales tax. The

Essential Commodities Act was enacted for the regulation, production, supply,

distribution and pricing of essential commodities and is relatable to Entry 33 of

List III. 262 One of the issues before this Court was whether the State power to tax

the sale of goods under Entry 54 of List II could be encroached upon by a law

made by Parliament with respect to one of the matters enumerated in List III.

194. This Court referred to M P V Sundararamier (supra) to reiterate that: (i) taxation

is considered to be a distinct matter for purposes of legislative competence; (ii)

the power to tax cannot be deduced from a general legislative entry; (iii) the

taxing powers of the Union and the States are mutually exclusive without any

overlap; and (iv) this is also evident from the fact that there is no taxing entry in

List III. The Court held that a law made by Parliament under a general entry, that

is, Entry 33 of List III, cannot intrude into the plenary power of the state legislature

to levy taxes on the sale or purchase of goods under Entry 54 of List II. Further,

it was held that the 1981 Act and the Control Order operated in separate and

distinct fields without inconsistency or overlap.

195. The decision in Hoechst Pharmaceuticals (supra) is an authority for the

following legal propositions: (i) the principle of federal supremacy will not apply

where there is no direct conflict between the legislative powers of Union and

States; (ii) Parliament cannot acquire legislative competence with respect to

subject matters of taxation enumerated under List II under the guise of regulatory

262 Entry 33, List III, Seventh Schedule, Constitution of India. (It reads:

[“33. Trade and commerce in, and the production, supply and distribution of – (a) the products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and imported goods of the same kind as such products; […]”]

118 PART H

entries; and (iii) since taxing entries are mutually exclusive, the principle of

federal supremacy is not generally applicable with respect to taxing entries under

Lists I and II.

196. Entry 54 of List I is a regulatory entry dealing with the regulation of mines and

mineral development. The regulatory entries in Lists I and II of the Seventh

Schedule are distinct from taxing entries. Though the power to levy taxes is an

incident of sovereignty, it is subject to constitutional limitations. Giving an

extended interpretation to general entries to include the power of taxation will

grant arbitrary and unconstitutional authority to the Union and States. Since Entry

54 of List I is a general entry, it will not include the power of taxation.

197. The subject of Entry 54 of List I is “regulation of mines and mineral development”.

In contrast, the subject of Entry 50 of List II is “taxes on mineral rights”. Each of

these terms has a specific connotation. Whereas Entry 54 of List I encompass a

broad subject matter covering the regulation of mines and mineral development,

the taxing entry in Entry 50 of List II is confined to mineral rights. Entry 23 of

List II also encompasses the “regulation of mines and mineral development” as

a legislative field for the states. Since Entry 54 of List I also deals with the

“regulation of mines and mineral development”, the states’ domain under Entry

23 of List II is subject to the limitations created by Entry 54 of List I. Despite the

positioning of Entry 23 in List II, the Constitution has specifically enumerated the

taxing field with respect to mineral rights in Entry 50 of List II. Taxation of mineral

rights is hence, traceable to Entry 50 of List II. If the framers had intended that

the field of taxing mineral rights would be subsumed in the general entry covering

the regulation of mines and mineral development, namely, Entry 23 of List II,

there would have been no reason to provide for a specific taxing entry on mineral

119 PART H

rights in Entry 50 of List II. Therefore, just as the field of taxing mineral rights

does not fall under Entry 23 of List II, it does not fall under Entry 54 of List I which

uses similar language and is not a taxing entry. While the imposition of taxes on

mineral rights is a field entrusted to the State legislatures in List II, it is subject to

a law enacted by Parliament on mineral development. While the imposition of

taxes on mineral rights is a field exclusively entrusted to the State legislatures

(and not to Parliament) in the State List, Parliament can while making provisions

in a law relating to mineral development make provisions which ensure that the

exercise of the taxing power by the states does not adversely affect the

development of minerals. This power of Parliament to impose limitations or

conditions which ensure that that the exercise of the taxing power of the states

does not impede mineral development distinct from the power to tax mineral

rights which is entrusted to the state legislatures.

198. If Parliament has no legislative competence to tax mineral rights under Entry 54

of List I, can it make use of its residuary powers to gain legislative competence?

The answer has to be in in the negative. Article 246 exclusively empowers the

state legislatures to make laws with respect to entries in List II, which includes

taxes on mineral rights. Article 248 provides that the residuary powers of

Parliament shall include the power of making any law imposing a tax not

mentioned in either the State List or Concurrent List. Under Entry 97 of List I

Parliament can make a law with respect to any other matter not enumerated in

List II or List III including any tax not mentioned in either of those Lists.

199. During the debates in the Constituent Assembly, Dr. B R Ambedkar explained

that the purpose of Entry 97 of List I is to include “anything not included in List II

120 PART H

or List III.” 263 In International Tourist Corporation v. State of Haryana, 264 this

Court held that it is necessary to establish the legislative incompetence of the

State legislature before Parliament can claim exclusive legislative competence

by resorting to the residuary power. A matter can be brought under Entry 97 only

if it is not enumerated in List II or List III and in the case of a tax if it is not

mentioned in List II. Importantly, it was also observed that the residuary powers

of the Union cannot be interpreted so expansively as to whittle down the power

of the State legislatures. A subject can be brought under Entry 97 of List I only if

it is not enumerated in either List II or List III. 265

200. In Province of Madras v. Boddu Paidanna, 266 Chief Justice Maurice Gwyer

speaking for the Federal Court observed that “[i]t is natural enough, when

considering the ambit of an express power in relation to an unspecified residuary

power, to give a broad interpretation to the former at the expense of the latter.”

The enumeration of taxes on mineral rights in List II is a constitutional

entrustment to the states. This Court is bound to abide by the constitutional

distribution of legislative powers. The distribution also subserves the principles

of fiscal federalism.

201. In Mahalaxmi Fabric Mills (supra), 267 the constitutional validity of Section 9(3)

of the MMDR Act and a notification fixing new rates of royalty was in question.

The Central Government sought to increase the rate of royalty to compensate

the state, which had suffered financial losses as a result of the invalidation of the

cess imposed by it by the decision in India Cement (supra). The notification was

263 Constituent Assembly Debates, Volume 9 (1 September 1949) 264 (1981) 2 SCC 318 [6-A] 265 See All India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527 [46] 266 (1942) 4 FCR 90 267 1995 Supp (1) SCC 642

121 PART H

challenged before the High Court of Madhya Pradesh for excessively increasing

the rates of royalty by 400 per cent to 2000 per cent as compared to the royalty

fixed in 1981 on various varieties of coal. The High Court held that the notification

was outside the purview of Section 9(3) of the MMDR Act. Against the decision

of the High Court, appeals were filed before this Court. The main contention of

the petitioners was that since royalty is a tax, as held in India Cement (supra),

Entry 54 of List I is a general entry and did not empower Parliament to impose

the tax.

202. This Court held that once Parliament enacts a law under Entry 54 of List I and

occupies the field in connection with the regulation of mines and mineral

development, the state legislature will lose legislative competence with respect

to both Entries 23 and 50 of List II. Further, it was observed that since royalty is

a tax, the legislative competence of Parliament to enact Section 9 of the MMDR

Act could be traced to both Entries 54 and 97 of List I. 268

203. The decision in Mahalaxmi Fabric Mills (supra) was followed by a two judge

Bench in Saurashtra Cement (supra). 269 In State of Orissa v. Mahanadi

Coalfields Ltd., 270 a three judge Bench held that the MMDR Act has made

exhaustive provisions for “all kinds of taxation on minerals and mineral rights –

tax, royalty – fee – dead rent, etc.” which denudes the state legislature of the

power to enact any law or to impose any tax or other levy with reference to Entry

23 or Entry 50 of List II.

204. As discussed in the above segments, the field of tax on mineral rights vests with

the state legislature. Parliament cannot impose a tax on mineral rights under

268 Mahalaxmi Fabric (supra) [14] 269 (2001) 1 SCC 91 [11] 270 1995 Supp (2) SCC 686.

122 PART H

Entry 54 of List I. Parliament cannot resort to its residuary powers to tax mineral

rights when the subject matter is specifically enumerated in Entry 50 of the State

List. The fixation of the rates of royalty under Section 9 can be validly traced to

Entry 54 of List I because royalty is not a tax. The fixation of the rates of royalty

falls with the regulatory powers of Parliament under Entry 54 of List I. The

decisions in Mahalaxmi Fabric Mills (supra), Saurashtra Cement (supra), and

Mahanadi Coalfields (supra) do not reflect the correct position of law.

205. Entry 50 of List II is not an exception to the Sundararamier principle which is

that taxing entries are enumerated separately from the general entries in Lists I

and II of the Seventh Schedule. The field of taxation cannot be derived from

regulatory legislative entries and has to be derived from a specified taxing entry.

This principle has now been well-entrenched in our constitutional

jurisprudence. 271 A legislature has incidental and subsidiary powers with respect

to a legislative entry. However, the power to tax is neither incidental nor

subsidiary to the power to legislate on a particular matter in the nature of a

regulatory entry. 272

206. Entry 50 of List II is subordinated only to the extent of any limitations that may

be imposed by Parliament by law relating to mineral development. Unless

Parliament imposes a limitation, the plenary power of the state legislature to levy

taxes on mineral rights is unaffected.

207. The question of an overlap between the taxing entry and general entry does not

arise because Parliament cannot impose taxes on minerals under Entry 54 of

List I. There is no direct conflict between the taxing powers of the States under

271 Federation of Hotel & Restaurant Association of India v. Union of India, (1989) 3 SCC 634 [74]; State of

Karnataka v. State of Meghalaya, (2023) 4 SCC 416 [66] 272 State of Mysore v. D Cawasji and Co, (1970) 3 SCC 710 [8]

123 PART H

Entry 50 of List II and the regulatory powers of the Union. Resultantly, the

principle of federal supremacy has no application in the instant case. Hence,

while Entry 50 of List II is sui generis, it does not constitute an exception to the

position of law laid down in M P V Sundararamier (supra).

b. Nature of “any limitation”

208. Having established that the state legislature has exclusive power to enact laws

relating to taxes on mineral rights under Entry 50 of List II the next issue is to

determine the nature of the limitations that Parliament can constitutionally

impose on the exercise of the taxing powers of the states. To recap, the latter

part of Entry 50 of List II has three elements: (i) any limitations; (ii) imposed by

Parliament by law; and (iii) relating to mineral development. As held in above

segments, the element of “law relating to mineral development” can be traced to

Entry 54 of List I. Parliament has enacted the MMDR Act in pursuance of Article

246 read with Entry 54 of List I.

209. In respect to the first element, the petitioners have argued that Parliament has

not expressly imposed any limitation under the MMDR Act on the taxing powers

of the state under Entry 50 of List II. On the contrary, the respondents argue that

the overall scheme of the MMDR Act in itself constitutes a limitation on the taxing

powers of the state under Entry 50 of List II.

210. There is a significant distinction as regard the nature of the restraints imposable

by Parliament on the legislative field of the states to regulate mines and the

development of minerals, as contrasted with the Parliamentary restraints

contemplated on the taxing power of the states over mineral rights. In relation to

the former, this distinction emerges from the language of Entry 54 of List I and

124 PART H

Entry 23 of List II. As regards the latter, the language of Entry 50 of List II needs

analysis for this purpose. We will take up the regulatory power of the states over

mines and mineral development under Entry 23 of List II. Entry 23 of List II is

expressly subject to the provisions of List I with respect to regulation and

development under the control of the Union. The expression “subject to”

indicates that the Constitution subordinates Entry 23 of List II to the entries in List

I with respect to regulation and development under the control of the Union. In

other words, where there is an entry in List I relating to regulation and

development under the control of the Union, Entry 23 of the State list has to yield

to it. Entry 54 of List I is one such entry, which envisages the regulation of mines

and mineral development. Entry 54 of List I is conditioned by three requirements

– (i) a declaration by Parliament by law; (ii) envisaging that control of the Union

is expedient in the public interest; and (iii) an indication by Parliament in the law

of the extent of the control by the Union. Once these three conditions are fulfilled,

the field for the states is abstracted away to the extent that is envisaged in the

Parliamentary law. The relationship between Entry 23 of List II and Entry 54 of

List I is that the latter results in a denudation of the legislative field of the states

to the extent envisaged by Parliament by law. The expression ‘extent’ leaves it

entirely to Parliament to determine whether the extent of the control by the Union

is to be total or partial. The denudation of the legislative field of the states follows

such a declaration by Parliament and the extent would be determined by the

provisions of the law (the MMDR Act) enacted by Parliament.

211. We may now contrast this with Entry 50 of List II. Entry 50 of List II gives the

legislative field of taxing mineral rights to the states. But while doing so, it makes

it subject to limitations imposed by Parliament by law relating to mineral

125 PART H

development. The words “subject to” appear in both Entry 23 and in Entry 50 of

List II. They are words which indicate primacy of Parliament. But in Entry 50 of

List II, the Constitution envisages that the field of taxing mineral rights which is

given to the states will be subject to (i) limitations; (ii) imposed by a law of

Parliament relating to mineral development. The expression “regulation of mines”

does not find place in Entry 50 of List II (as it does in Entry 23 of List II). Moreover,

the law by Parliament relating to mineral development may impose limitations.

Entry 50 of List II does not result in the field of taxing mineral rights being

conferred on Parliament. This is clear also because there is no specific entry in

List I giving the field of taxing mineral rights to the Union. The field of taxing

mineral rights is exclusive to the states and continues to remain with them but

the field is subject to the limitations imposed by Parliamentary law relating to

mineral development. Parliament can determine whether, and if so, how the

taxing power of the states over mineral rights should be limited in order to ensure

that it does not impede or retard mineral development. If Parliament does so and

indicates the nature of the limitations, the states are bound to abide by them

while exercising the taxing power over mineral rights. The authority to impose a

tax on mineral rights remains with the states but is subject to the limitations

envisaged by a law enacted by Parliament in relation to the development of

minerals. Under Entry 23, the regulatory power of the State is denuded by

Parliament, while in case of Entry 50 the legislative field assigned to the states

to tax mineral rights is only limited.

212. The supremacy of Parliament is one of the fundamental features of the English

legal system. Our constitutional democracy envisages the supremacy of the

Constitution. The subjection of all constitutional authorities to the mandate of a

126 PART H

written Constitution is the fundamental feature of our Constitution. 273 This Court

in In re Powers, Privileges and Immunities of State legislature, Special

Reference No. 1 of 1964 274 observed that the supremacy of the Constitution is

fundamental to the existence of the federal unit and of the member States as a

protection against destruction or impairment of the delicate balance of power.

The Constitution is the source of the legislative powers of both Union and the

states. Any limitation on the exercise of plenary powers has to be situated within

the Constitution and not beyond.

213. In Umeg Singh v. State of Bombay, 275 a Constitution Bench held that any

limitation on the legislative power of the state legislature must be express:

“13. […] The legislative competence of the State can only be circumscribed by express prohibition contained in the Constitution itself and unless and until there is any provision in the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there is no fetter or limitation on the plenary powers which the State Legislature enjoys to legislate on the topics enumerated in the Lists 2 and 3 of the Seventh Schedule to the Constitution. […]”

“14. The fetter or limitation upon the legislative power of the State Legislature which had plenary powers of legislation within the ambit of the legislative heads specified in the Lists 2 and 3 of the Seventh Schedule to the Constitution could only be imposed by the Constitution itself and not by any obligation which had been undertaken by either the Dominion Government or the Province of Bombay or even the State of Bombay. Under Article 246 the State Legislature was invested with the power to legislate on the topics enumerated in Lists 2 and 3 of the Seventh Schedule to the Constitution and this power was by virtue of Article 245(1) subject to the provisions of the Constitution. The Constitution itself

273 Kalpana Mehta v. Union of India, (2018) 7 SCC 1 [218] 274 (1965) 1 SCR 413 [39] 275 (1955) 2 SCR 164

127 PART H

laid down the fetters or limitations on this power e.g. in Article 303 or Article 286(2). But unless and until the court came to the conclusion that the Constitution itself had expressly prohibited legislation on the subject either absolutely or conditionally the power of the State Legislature to enact legislation within its legislative competence was plenary. Once the topic of legislation was comprised within any of the entries in the Lists 2 and 3 of the Seventh Schedule to the Constitution the fetter or limitation on such legislative power had to be found within the Constitution itself and if there was no such fetter or limitation to be found there the State Legislature had full competence to enact the impugned Act no matter whether such enactment was contrary to the guarantee given, or the obligation undertaken by the Dominion Government or the Province of Bombay or even the State of Bombay.”

214. In Firm Bansidhar Premsukhdas v. State of Rajasthan, 276 this Court reiterated

Umeg Singh (supra) by observing that the legislative competence of Parliament

or of the State legislature can only be circumscribed by express prohibition

contained in the Constitution. It was further observed that unless there is a

provision in the Constitution expressly prohibiting legislation on the subject either

absolutely or conditionally, there is no fetter or limitation on the plenary powers

which the legislature is endowed with for legislating on the topics enumerated in

the relevant Lists.

215. Any limitation on the plenary legislative powers of either the Union or the States

with respect to a subject in the relevant Lists must be express and specified by

the Constitution.

276 1966 Supp (SCR) 81 [7]

128 PART H

c. Scheme of the MMDR Act does not serve as “any limitation”

216. The Union has argued that (i) the MMDR Act occupies the entirety of the subject

matter pertaining to mineral development, leaving no scope for the State

legislatures to legislate under Entry 50 of List II; (ii) the MMDR Act abstracts the

legislative powers of the States under Entry 50 of List II; (iii) the MMDR is a

complete code with respect to the regulation of mines and mineral development

and no part of the field is left for the States to legislate including on taxation of

mineral rights.

217. The respondents have drawn our attention to the following architecture of the

MMDR Act to press the point that the states have been deprived of legislative

control in respect of mineral development:

a. Although the State Government is the owner of minerals, the MMDR Act

defines the rights which can be created in those minerals. Section 4 provides

that no person can undertake prospecting or mining operations except in

accordance with the terms and conditions of the license or lease, as the case

may be. The form of license and lease agreements is stipulated under the

Mineral Concession Rules. The grant of mineral rights is governed by the

terms and conditions laid down under Form K of the rules. The State

Government cannot change or modify the terms of the prospecting license or

mining lease. The proviso to Section 5(1) states that the State Government

shall not grant any mineral concession except with the previous approval of

the Central Government. Any mineral concession granted in contravention of

129 PART H

the provisions of the MMDR Act is void. 277 Moreover, Section 21 entails penal

sanctions for contravention of Section 4;

b. The Central Government prescribes the fiscal exactions (such as royalty,

dead rent, and surface rent) for the grant or creation of mineral rights. Section

9 empowers the Central Government to fix the rate of royalties. Section 25

deals with the recovery of unpaid rent, royalty and tax as arrears of land

revenue; and

c. The MMDR Act governs all aspects relating to both major minerals and minor

minerals. Under Section 13, the Central Government is empowered to make

rules on all or any matter relating to the grant of mineral concessions.

Although Sections 14 and 15 allow the State Government to make rules in

respect of minor minerals, the field of minor minerals is covered by the MMDR

Act leaving no scope for the state legislature to legislate. In case the Central

Government undertakes prospecting or mining operations, Section 17(3)

specifies the levies it is bound to pay. Further, the State Government cannot

reserve any area under Section 17A without the approval of the Central

Government. The Central Government is also empowered to issue directions

to the State Government for the conservation of mineral resources or on any

policy matter in the national interest. Section 18 empowers only the Central

Government to take any measure necessary for mineral development.

218. Two issues have to be addressed: (i) whether the MMDR Act fulfils the

requirement of “any limitation” under Entry 50 of List II; and (ii) whether the

MMDR Act contains any provision limiting the taxing powers of the states under

Entry 50 of List II.

277 Section 19, MMDR Act

130 PART H

219. The MMDR Act lays down the means and processes by which the rights to mines

and minerals may be exercised or granted by the owner of mineral rights. It is

true that the MMDR Act largely denudes the states of their legislative powers with

respect to regulation of mines and mineral development under Entry 23 of List II.

However, the expression in Entry 50 of List II demonstrates that: (i) Parliament

can limit the legislative power of the States to tax minerals; and (ii) the limitation

has to be imposed “by law” relating to mineral development.

220. The MMDR Act has a centralizing tendency because the Central Government is

tasked with important responsibilities such as setting out the terms and

conditions of mining leases, fixing the rates of royalty and issuing guidelines to

State Governments in respect of conservation of minerals. This drift towards the

Central Government stems from the fact that the principal aim of the MMDR Act

is development and conservation of minerals. 278 Minerals being a natural and

scarce resource, their exploitation has to be scientific and judicious. The MMDR

Act enumerates rules and regulations to ensure that the exploration, extraction,

and exploitation of minerals follow standards of conservation and sustainability.

The Indian State is the trustee of all natural resources, including minerals. 279

Therefore, it is a constitutional duty of the State to protect minerals and ensure

their exploitation in public interest.

221. By authorizing the Central Government to lay down the terms of mining leases

and grant approval to concessions, the MMDR Act seeks to ensure that there is

uniformity in the terms for working of mines and extraction of minerals. Uniformity

in the terms and conditions of mining leases, rates of royalty, and in the policy

approach towards conservation of minerals reduces indiscriminate exploitation

278 Hind Stone (supra) [10] 279 See M C Mehta v. Kamal Nath, (1997) 1 SCC 388

131 PART H

of mineral resources and promotes mineral development. The fact that the State

Government cannot alter the clauses in the mining lease cannot be understood

to mean that all the powers of the State with respect to regulation of mines and

mineral development as well as the power to tax mineral rights have been

extinguished.

222. Entry 50 of List II provides that the legislative power of States to tax mineral rights

is subject to any limitations imposed by Parliament by law relating to mineral

development. A plain reading of the phrase makes it clear that the taxing power

is subject to “any limitations” and not a “law relating to mineral development.” If

the Constitution intended to restrict the taxing powers under Entry 50 of List II

with respect to a parliamentary law, it would not have used the expression “any

limitations.” It could have used phraseology such as for example, “Taxes on

mineral rights subject to any law relating to mineral development made by

Parliament.” Parliament has to ‘impose’ the limitations. That is, Parliament has

to expressly specify the limitations by the authority of law. Thus, under Entry 50

of List II the taxing power of the State is subject to the extent that Parliament

imposes any limitations “by law” relating to mineral development.

223. The phrase “by law” is also important because it indicates the manner in which

Parliament can impose limitations. The expression “by law” means that the

legislative power should be effectuated through the provisions of a statute. The

purport of including the phrase “by law” in Entry 50 of List II is to indicate that

Parliament has to specify the extent to which it is seeks to limit the taxing powers

under Entry 50 of List II.

224. Parliament can impose limitations under Entry 50 of List II by means of statutory

provisions. There is no specific provision in the MMDR Act which imposes

132 PART H

limitations on the power of the States to tax mineral rights. The scheme of the

MMDR Act cannot by a process of stretched construction be read to limit the

taxing powers of States under Entry 50 of List II.

225. The respondents have referred to Entry 54 of List I to contend that once

Parliament enacts a law relating to mineral development, its consequences on

the taxing powers of the state legislature under Entry 50 of List II can be implied.

In this connection, reference was made to Kesavananda Bharati v. State of

Kerala, 280 where it was held that powers and limitations could be implied from

necessity or from the scheme of the Constitution. Moreover, reference was made

to the decision in Kalpana Mehta v. Union of India, 281 to contend that the

Constitution must be interpreted in a manner that leads to the discovery of

“constitutional silences or abeyances.” Therefore, it was contended that Entry 50

of List II contemplates an implicit denudation of legislative powers of States once

a law relating to mineral development was enacted by Parliament under Entry 54

of List I.

226. The theory of implied limitations was adopted in Kesavananda Bharati (supra)

to iterate that the basic structure doctrine serves as an implied limitation on the

power of Parliament to amend the Constitution. 282 The power of Parliament to

amend the Constitution was subjected to the basic structure doctrine. The

doctrine of implied limitations is not applicable in the present case in view of the

fact that Entry 50 of List II specifies the nature of the limitation and the manner

in which it can be imposed. The implication that any law enacted by Parliament

280 (1973) 4 SCC 225 [210] 281 (2018) 7 SCC 1 282 See I R Coelho v. State of Tamil Nadu (2007) 2 SCC 1

133 PART H

under Entry 54 of List I will impliedly denude the powers of the state legislature

under Entry 50 of List II will usurp the taxing powers of the States.

227. The principle of constitutional silences has generally been used to step in where

the Constitution is silent or where there is a legislative vacuum. 283 Entry 50 of

List II is clear in its terms – a limitation can be imposed by Parliament by law

relating to mineral development. In the face of an express constitutional

provision, there is no scope for this Court to use this doctrine to limit the

legislative powers of the State.

228. In P Kannadasan v. State of Tamil Nadu, 284 a two judge Bench held that

Parliament has denuded the States of their power to levy taxes on minerals by

making the declaration contained in Section 2 of the MMDR Act. It was further

observed that State legislatures cannot levy any tax or cess on minerals so long

as the declaration in Section 2 stands. The observations in P Kannadasan

(supra) are contrary to the legislative scheme discussed above.

d. Section 9 does not serve as a limitation on the taxing powers of State

229. Having noticed that the scheme of the MMDR Act does not in itself serve as a

limitation on the field of taxation under Entry 50 of List II, we now proceed to

examine whether the statute contains any provision imposing “any limitations” on

it. The respondents contend that Sections 9, 9A, 9B, and 9C expressly impose

limitations as contemplated under Entry 50 of List II. We have held in the previous

segments of this judgment that royalty is not in the nature of tax but a

consideration which is paid to the proprietor for the extraction and removal of

mineral under the terms of the mining lease. The MMDR Act empowers the

283 Vishaka v. State of Rajasthan, (1997) 6 SCC 241; Anoop Baranwal v. Union of India; (2023) 6 SCC 161 284 (1996) 5 SCC 670 [35]

134 PART H

Central Government to specify the rates of royalty under Section 9 read with the

Second Schedule. These powers could be validly traced to Entry 54 of List I as

they are comprehended within the regulation of mines.

230. Since royalty payable under Section 9 is not a tax on mineral rights, any limitation

on the enhancement of the rates of royalty is not the imposition of a tax under

Entry 50 of List II. While royalty flows from the exercise of proprietary rights, taxes

flow from the sovereign’s right to tax persons, objects and transactions. Section

9 does not expressly impose any limitations on the powers of the State to tax

mineral rights. Section 9(3) limits the power of the Central Government to

enhance royalty more than once in three years. This limitation does not govern

taxes on mineral rights.

231. Dead rent under Section 9A is a price paid by the lessee to the lessor for not

working the mines and is paid in alternative to royalty. The payments under

Sections 9B and 9C are made as additional royalties and are used for specific

purposes. Payment under Section 9B is made to the District Mineral Foundation

constituted by the State Government. Similarly, payment under Section 9C is

made to the trust created by the Central Government for funding the agencies

specified in Section 4(1). The payments under Sections 9B and 9C do not

amount to a tax on mineral rights. Sections 9, 9A, 9B, and 9C do not impose any

limitations on the taxation powers of the state legislatures under Entry 50 of List

II.

e. “Any limitation” can extend to prohibition

232. In Jindal Stainless Steel (supra), one of us (Justice D Y Chandrachud)

observed that curtailment of legislative powers vested in the State may take

135 PART H

place through: (i) abstraction; (ii) eclipse; and (iii) limitations or restrictions. 285

The expression “any limitations” finds mention in Entry 50 of List II in the context

of taxes on mineral rights. In its ordinary sense, the expression “limitation” means

a restriction or containment. 286 The Constitution uses the word “limitations” in two

provisions – Article 134(2) and Entry 50 of List II of the Seventh Schedule. Article

134 deals with the appellate jurisdiction of Supreme Court in criminal matters.

Article 134(2) provides that Parliament may by law confer on the Supreme Court

any further powers to entertain and hear appeals from any judgment, final order

or sentence in a criminal proceeding of a High Court in the territory of India

subject to such conditions and limitations as may be specified in such law.

233. The use of the expression “any” before “limitations” under Entry 50 of List II

indicates that the scope of the limitations is expansive and includes “all” 287 or

“every” 288 limitation that could be imposed by Parliament by law relating to

mineral development. The expression “any” has to be construed in its context,

taking into consideration the scheme, purpose, and subject matter of the

enactment, 289 or in this case, the scheme of distribution of legislative powers

under the Constitution. The expression “any limitations” is indicative of the fact

that Parliament has been provided with ample legislative freedom to conceive

limitations or restrictions on the legislative powers of the State to tax minerals.

234. Apart from Entry 50 of List II, Entry 57 of List II is the other taxing entry in List II

which is subordinate to another entry. It provides for taxes on vehicles, whether

mechanically propelled or not, suitable for use on roads, including tramcars and

285 Jindal Stainless Steel (supra) [626] 286 Ramanatha Aiyar, Advanced Law Lexicon (Volume 3) 3254 287 LDA v. M K Gupta, (1994) 1 SCC 243 [4] 288 Raj Kumar Shivhare v. Directorate of Enforcement, (2010) 4 SCC 772 [24] 289 Vivek Narayan Sharma v. Union of India, (2023) 3 SCC 1 [132]

136 PART H

is “subject to the provisions of Entry 35 of List III.” Entry 35 of List III deals with

mechanically propelled vehicles including the principles on which taxes on such

vehicles are to be levied.

235. In State of Assam v. Labanya Probha Devi, 290 a Constitution Bench of this

Court explained the inter-relationship between Entry 57 of List II and Entry 35 of

List III in the following terms:

“11. […] The two entries deal with two different matters though allied ones – one deals with taxes on vehicles and the other with the principles on which such taxes are to be levied. When two entries in the Constitution, whether in the same List or different Lists, deal with two subjects, if possible, an attempt shall be made to harmonize them rather than to bring them into conflict. Taxes on vehicles in their ordinary meaning connote the liability to pay taxes at the rates at which the taxes are to be levied. On the other hand, the expression “principles of taxation” denotes rules of guidance in the matter of taxation. We, therefore, hold that the amending Acts do not come into conflict with the existing law in respect of any principles of taxation, but only deal with a subject- matter which is exclusively within the legislative competence of the State Legislature. In this view, there is no scope for the application of Article 254 of the Constitution.”

236. In Sharma Transport v. Government of AP, 291 a three judge Bench held that

the exercise of authority by Parliament under Entry 35 of List III will not deprive

the State legislature of its exclusive legislative powers referable to Entry 57 of

List II:

“11. Power to levy taxes on vehicles, whether mechanically propelled or not vests solely in the State Legislature, though it may be open to Parliament to lay down the principles on which the taxes may be levied on mechanically propelled

290 (1967) 3 SCR 611 291 (2002) 2 SCC 188

137 PART H

vehicles in the background of Entry 35 of List III. To put it differently, Parliament may lay down the guidelines for the levy of taxes on such vehicles, but the right to levy such taxes vests solely in the State Legislature. No principles admittedly have been formulated by Parliament. In that sense, the Government of India’s communication dated 30-08- 1993 does not in any sense violate the power of the State Legislature or its delegate to levy or exempt taxes from time to time.”

237. Both Entries 50 and 57 of List II are subject to other legislative entries, but with

a distinction: Entry 50 specifically uses the word “subject to any limitations” while

Entry 57 uses the expression “subject to the provisions”. Under Entry 50,

Parliament can impose “any limitations” on the taxing powers of the State, while

under Entry 57 read with Entry 35 of List III, Parliament can only prescribe the

principles on the basis of which the State can levy taxes on mechanically

propelled vehicles. Therefore, Parliament cannot impose any limitation on the

field of taxation reserved to the States under Entry 57 of List II, but can lay down

guidelines. In contrast, Entry 50 allows Parliament to impose any limitations on

the field reserved to the State to tax mineral rights.

238. In Jindal Stainless Steel (supra), one of us (Dr Justice D Y Chandrachud)

described the nature of the limitations which may be imposed to contain the

legislative powers vested in the State:

“626.3. The third source of constitutional containment on the legislative power of a State is in the form of limitations of which clause (3) of Article 286 provides an illustration. Under clause (3), Parliament provides the restrictions and conditions in regard to “the system of levy, rates and other incidents of tax” upon which a law enacted by a State providing for a tax on the nature specified in sub- clauses (a) and (b) is subject. Sub-clause (a) deals with tax on the sale or purchase of goods declared to be of special importance in inter-State trade or

138 PART H

commerce by a law enacted by Parliament. Sub- clause (b) deals with a tax on the sale or purchase of goods failing under sub-clauses (b), (c) and (d) of Article 366(29-A). Among other things, a tax on contract for hire purchase and involving transfer of the right to use goods is subject to the restrictions and conditions which are provided by a law enacted by Parliament in regard to the system of levy, rates and other incidents of tax.”

239. Before its omission, Article 286(3) empowered Parliament to specify by law

restrictions and conditions on any law of a State levying tax on the sale or

purchase of goods. 292 In Rajasthan Rollers Flour Mills Association v. State of

Rajasthan, 293 a two-Judge Bench of this Court held that a limitation imposed by

a law enacted under Article 286(3) is a restriction upon the plenary power of the

State to levy tax on the sale/ purchase of goods and must be construed “strictly.”

It was further held that the restrictions imposed by Parliament upon the legislative

power of the States must be specified by the law. 294

240. In its textual sense, the verb ‘to limit’ means to restrict or constrain. The

respondents submit that the word “any limitation” can be interpreted in a manner

bestowing absolute authority on Parliament to limit the field of taxation of the

state legislature under Entry 50 of List II. However, we need to understand the

purport of the expression “limitations” not only in its literal sense, but also IN the

constitutional sense.

292 Article 286(3) before omission read:

“(3) Any law of a State shall, in so far as it imposes, or authorizes the imposition of, - (a) A tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) A tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub- clause (c) or sub-clause (d) of clause (29A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of tax as Parliament may by law specify.” 293 1994 Supp (1) SCC 413 [14] 294 Rajasthan Rollers Flour Mills Association (supra) [21]

139 PART H

241. The common thread running between Entry 54 of List I and Entries 23 and 50 of

List II is mineral development. The concept of mineral development is closely

associated with proper and sustainable exploitation and utilization of mineral

resources. Mineral resources are important for the economic development of the

nation, considering the fact that they are used as raw materials in many

industries. The Constitution had this aspect in mind when it empowered

Parliament to bring under its control regulation of mines and mineral

development. The rationale was that the Central Government will ensure uniform

regulatory standards for mineral operations, especially with respect to major

minerals. Moreover, it was envisaged that the Central Government could take

effective steps to ensure uniform standards of exploration and extraction of

minerals with a view to ensuring their sustainability and conservation. The phrase

“through a law relating to mineral development” appearing in Entry 50 of List II

indicates that Parliament can limit the field of taxation only in the interests of

mineral development. It was in this perspective that the Constitution empowered

Parliament to impose “any limitations” on the legislative field of States to tax

mineral rights through a law relating to mineral development.

242. The MMRD Act 1948 was in place when the Constituent Assembly was debating

the incorporation of Entry 50 in List II. The framers of the Constitution were aware

of the legislative history of the subject of mines and minerals and were aware as

to how the Dominion Legislature had interpreted the legislative entries pertaining

to regulation of mines and minerals and taxation of mineral rights under the GOI

Act 1935. 295 The Constituent Assembly negatived the proposal to transfer the

entirety of Entry 50 of List II to List I. 296 The Constitution did not or could not

295 D K Trivedi (supra) [31] 296 Constituent Assembly Debates (2nd September 1949)

140 PART H

visualize the effect of taxes on mineral rights on mineral development. Therefore,

it left it to the legislative wisdom of Parliament to identify the taxes on mineral

rights levied by States may impede mineral development. If Parliament considers

that taxes on mineral rights indeed impede mineral development, it can adopt

suitable legislative policies to impose limitations on the field of taxation.

243. The legislative subject entrusted to the States to tax mineral rights rests upon the

necessity of raising revenues. As discussed in the above segments, Parliament

does not possess the legislative field to tax mineral rights either under Entry 54

of List I, being a general entry, or under the residuary powers. The legislative

domain to tax mineral rights vests with the State. The legislative power of

Parliament to impose “any limitations” is traced to Article 246(1) read with Entry

54 of List I. Parliament can impose limitations, and not levy taxes on mineral

rights itself. The subject of taxing mineral rights continues to remain with the

States. This understanding also ensures that there is no overlap or conflict

between the powers of Union and the taxing field of the States.

244. As held in Jindal Stainless Steel (supra), 297 the Constitution understands the

expression “limitations” as restrictions, conditions, 298 or principles. 299 However,

does the expression “any limitations” include the power to prohibit States from

taxing mineral rights? We are of the opinion that the answer must be in the

affirmative. Under Entry 50 of List II, the Constitution specifically uses the phrase

“any limitations”. The framers of the Constitution intended to empower

Parliament to impose “all” and “every” possible limitation on the taxing powers of

the State in the interests of mineral development, which may include even a

297 Jindal Stainless Steel [626.3] 298 Article 286(3) (omitted by Constitution (One Hundred and First Amendment) 2016 299 Article 286(2), Constitution of India; Entry 35 of List II, Seventh Schedule, Constitution of India

141 PART H

“prohibition.” It had become clear during the course of the hearings, that counsel

on both sides largely agreed that Parliament can impose “any limitations”

including prohibiting the State legislatures from taxing minerals. 300 The crux of

the issue pertained to the manner in which Parliament can impose the limitations,

which we have already considered in the above segments.

245. The overall scheme of Article 246 read with Entry 54 of List I and Entry 50 of List

II makes it clear that Parliament, in the interests of mineral development, can

impose “any limitations.” The purport of the expression “any limitations” is wide

enough to include the imposition of restrictions, conditions, principles, as well as

prohibition. Parliament has the constitutional power to determine whether and if

so the manner in which limitations may be imposed.

f. Impact of taxes on mineral rights on mineral development

246. The respondents have contended that any levy of taxes on mineral rights by the

States under Entry 50 of List II will be against mineral development. Minerals are

necessary for economic development. Proper extraction and utilization of mineral

resources fulfils the needs of both the domestic industry as well as the demands

of the international market. 301 The Constitution requires the State to discharge

an active role in promoting the development of minerals by adopting a slew of

regulatory measures both at the Union and State levels. In other words, the

constitutional endeavor of development of minerals proceeds on the basis of co-

operative federalism, where both the Union and the States have certain duties

and responsibilities. These responsibilities take the form of development of

infrastructure, facilitation of exploration and mining activities, conservation of

300 Supreme Court of India, Record of Proceedings, Civil Appeal No. 4056-4064/1999 (14 March 2023) 54. 301 National Mineral Policy 2019, 4

142 PART H

minerals, and collection of taxes and fees. 302 The National Mineral Policy 2019

recommends greater thrust on conservation of minerals, development of

scientific methods of mining, human resource development, and protection of

environment to meet the requirements of environmentally sustainable mining

operations.

247. In India, mining activities are carried out by both the public and private sectors.

The Government is required to raise revenues not only to meet the above-

mentioned objectives, but also to fund public sector undertakings, such as

Mineral Exploration Corporation of India. Additionally, mining activities cannot be

carried out without the existence of public order or the lack of a functioning legal

system to ensure adherence to contractual obligations. In Jindal Stainless Steel

(supra), one of us (Dr Justice D Y Chandrachud) observed that every law which

imposes a tax cannot be regarded as a hindrance to trade, commerce, and

intercourse. It was observed:

“631. […] Neither trade nor commerce can flourish amidst violence, unrest and social disorder. Taxes provide revenue for the State to sustain manifold activities which are geared to providing conditions of social order. The State provides infrastructure both tangible and intangible. Tax revenues form an essential part of the requirements necessary for the States to govern. Taxes are required by Article 265 to be imposed by a law enacted by Parliament or the State Legislatures. Without the power to raise revenues, the ability of the State to create conditions requisite for trade and commerce to exist would be denuded. Hence, as a matter of first principle it cannot be postulated that taxation in whatever form is a burden on trade, commerce and intercourse and that every tax necessarily hinders trade. Such a wide construction cannot be accepted simply because by raising revenues through means of taxation, the State provides a political and legal order based on

302 ibid

143 PART H

the rule of law where contractual transactions can be executed effectively. The extreme position that every law which imposes a tax is to be regarded as a hindrance to trade, commerce and intercourse is unsustainable.”

248. It cannot be assumed that any tax levied by the State legislature under Entry 50

of List II will be ipso facto against mineral development. It is now a well-

established principle that an increase in the rate of tax on a particular commodity

cannot per se be said to impede free trade and commerce in that commodity. 303

In his dissenting opinion in Kesoram (supra), Justice Sinha observed that a tax

on minerals rights, which is over and beyond what is provided under the MMDR

Act, will lead to an increase in the price of the mineral commodity making it

unremunerative. The learned Judge observed that this defeats the purpose of

the MMDR Act. The Union of India in its affidavit submitted:

“A non-harmonized fiscal regime, with varied levies across States, would result in a scenario where industries located in States with lesser mineral deposits would be forced to procure mineral raw materials at higher prices from States endowed with rich mineral deposits, placing the latter category of States at a significant economic advantage that would come at the cost of the national interest in maximizing economic development from the nation’s mineral wealth […] Therefore a uniform levy of royalty prescribed by the Govt. of India under the MMDRA levels the playing field, thereby promoting the domestic industry across the nation in a manner which is equitable, while at the same time ensuring revenue generation for the States.”

It is true that uniformity of prices of mineral commodities ensures the objective of

mineral development as envisaged under the MMDR Act. Levy of a tax on

303 Vrajilal Manilal & Co. v. State of M P, 1986 Supp SCC 201 [20]; State of Kerala v. A B Abdul Kadir, (1969) 2 SCC

363 [9]; Jindal Stainless Steel (supra) [634].

144 PART H

mineral rights by the State legislatures may lead to an increase in the prices of

the mineral commodity in India. There may arise a situation where a state having

the highest reserves of a particular mineral decides to levy a high rate of tax on

mineral rights. This may not only distort the market for that particular mineral, but

have a cascading effect on allied industries. It is exactly to counteract any

adverse impact on the development of minerals in India that the Constitution has

empowered Parliament under Entry 50 of List II to impose limitations on the basis

of which the State legislature can tax mineral rights. If this is the constitutional

intendment, it is Parliament which has the responsibility to ensure that there is

no adverse effect on development of mineral rights. The legislative powers

granted to the State legislatures cannot be whittled down impliedly based on the

presumption that all taxes on mineral rights imposed by the State will have

adverse economic consequences on mineral development. The Constitution has

with foresight visualized this and empowered Parliament to impose “any

limitations” on the subject of taxing mineral rights under Entry 50 of List II.

249. It was contended by the respondents that States already have multiple revenue

streams arising from the mining and minerals sector. They are: (i) royalty and

dead rent payable under Section 9 and 9A of the MMDR Act respectively; (ii)

contributions to the District Mineral Foundation under Section 9B; and (iii) auction

premium received from successful bidders for mineral blocks for mines allocated

under the Mineral (Auction) Rules 2015. The above levies are statutorily

collected and the revenue flows to the State as part of the regime for mineral

development in place under the MMDR Act. All of these levies, which are

statutory in nature, cannot impliedly limit the legislative power of the state

legislature to levy a tax on mineral rights. The States have a constitutional and

145 PART I

sovereign authority to exercise their taxing powers, within the bounds of the

Constitution, to raise adequate revenues for the welfare of the people.

I. Scope of Entry 49

i. Land System in India

250. The issue is whether the State legislatures are competent to levy a tax on

mineral-bearing land as a unit under Entry 49 of List II. A connected issue is

whether mineral produce or royalty can be used as the measure to tax mineral-

bearing lands.

251. The general rule in England was that the rights of an owner of land extended to

everything in, on, or over land. The position has been explained in Megarry &

Wade on The Law of Real Property304:

“There is an ancient maxim: cujus est solum, ejus est usque ad coelum et ad inferos, meaning that the owner of the soil is presumed to own everything “up to the sky and down to the centre of the earth.” It has been criticized, but it is a presumption that remains firmly part of English law “encapsulating, in simple language, a proposition of law which has commanded general acceptance.” Above the surface, the development of powered flight has made it impossible to apply the presumption literally. An owner’s rights in the airspace above the land extend only to such height as is necessary for the ordinary use and enjoyment of the land and structures upon it. As regards right beneath the surface, the maxim applies and the owner is presumed to own the minerals beneath. For practical purposes the rights downwards are unlimited.”

“An owner can divide the land horizontally or in any other way. He or she can dispose of minerals under the surface, or top floor of a building, so as to make them separate properties. But unless some contrary

304 Megarry and Wade, The Law of Real Property (9th edn, Sweet and Maxwell)

146 PART I

intention is shown a grant will normally pass the owner’s whole interest in space above and below the land, so that, for example, a lease will give the tenant the right to the airspace above the land let.”

The position under the common law in England is that the owner of land is entitled

to all mines and minerals underlying the land which they own, subject to certain

exceptions. 305

252. The colonial regime in India followed a pattern at variance to that prevailing under

English law on land ownership and mineral rights. Initially, the colonial state

asserted that the soil belonged to the sovereign. 306 Acting on the view that it was

the proprietor of the soil, the colonial state, under Lord Cornwallis as Governor-

General, confirmed proprietary rights to soil, including mineral rights, to the

zamindars by way of a permanent settlement in territories under British control

in India. For instance, the Madras Permanent Settlement Regulation XXV of

1802 vested “the proprietary rights of the soil” in the zamindars and in their heirs

and successors. 307 The regulations also allowed the zamindars to alienate or

dispose of their proprietary rights in their zamindaris. 308 Colonial courts

305 Megarry and Wade (supra). [“Although prima facie a tenant in fee simple is entitled to all mines and minerals

under the land, this is subject to some exceptions. Thus at common law, as modified by statute, the Crown is entitled to all gold and silver mines; and under the Petroleum Act 1998 petroleum existing in its natural condition in strata is vested in the Crown. Licences for extraction (including fracking) can be granted under the Petroleum Act 1998. Under the Coal Act 1938 all interests in coal (except interests arising under a coal mining lease) were vested in the Coal Commission in return for compensation. These interests (including coal-mining leases) were vested subsequently in the National Coal Board, then in the British Coal Corporation, and finally, (following the privatization of coal industry) in the Coal Authority. That body has extensive powers to license coal-mining operations.”] 306 S Sundararaja Iyengar, Land Tenures in the Madras Presidency (1921) 25 307 Section 2, Regulation XXV of 1802. [It read: 2. Assessment on all lands liable to revenue. Proprietary right

vested in zamindars – In conformity to these principles, an assessment shall be fixed on all lands liable to pay revenue to the Government; and, in consequence of such assessment, the proprietary right of the soil shall become vested in the zamindars or other proprietors of land, and in their heirs and lawful successors for ever.”] 308 Section 8, Regulation XXV of 1802. [It read: 8. Proprietors of land may transfer proprietary right in whole or part

of their zamindaries. Restrictions under which such transfer is to be made – Proprietors of land shall be at free liberty to transfer without the previous consent of the Government, or of any other authority, to whomever they may think proper, by sale, gift or otherwise, their proprietary right in the whole of in any part of their zamindaris; such transfers of land shall be valid and shall be respected by the Courts of Judicature and by the officers of the Government; provided they shall not be repugnant to the Muhammadan or to the Hindu laws, or to the regulations of the Government. But unless such sale, gift, or transfer shall have been regularly registered at the office of the Collector, and unless the public assessment shall have been previously determined and fixed on such separated portion of land by the Collector, such sale, gift, or transfer shall be of no legal force or effect, nor shall such transaction exempt a zamindar from the payment of any part of the public land-tax assessed on the entire zamindari

147 PART I

recognized that the zamindars were presumed to be the owners of mineral rights

in the absence of evidence that they had parted with them. 309 Similarly, in the

case of inam lands, it was held that the right of the inamdars to the sub-soil

minerals was to be inferred from the express words of the grants. 310

253. In 1813, the Court of Directors of the East India Company prohibited the

government from introducing permanent settlements any further and ordered

introduction of the ryotwari system in all unsettled lands in the provinces. 311

Thereafter, the colonial state introduced the ryotwari system of land settlement

in India. Under it the ryots were treated as proprietors of land with attendant rights

and liabilities such as payment of assessment directly to government. 312 The

ryots were granted pattas which essentially served as evidence of the

possession of the land. Thus, the pattadars used to hold lands on lease from the

Government.

254. S Sundararaja Iyengar in his treatise on Land Tenures in the Madras Presidency

noted that in 1882 the Government declared that it had no proprietary right in the

soil. 313 The conclusions drawn by the revenue after full enquiry are instructive

and are reproduced below:

“(1) that the State cannot, without violating the rule and practice dating from time immemorial, assert in this Presidency an exclusive right to minerals in unoccupied lands, but that it is fully entitled to a share in such products as in any other produce of the land; (2) that subject to the payment of a stated

previously to such transfer, but the whole zamindari shall continue to be answerable for the total land-tax, in the same manner as if no such transaction had occurred.”] 309 See Durga Prasad Singh v. Braja Nath Bose, 1912 SCC Online PC 9. 310 Secretary of State for India in Council v. Srinivasa Chariar, 1920 SCC OnLine PC 89; State of A P v. Duvvuru

Balarami Reddy, 1962 SCC OnLine SC 182 [9] 311 S Sundararaja Iyengar, Land Tenures in the Madras Presidency (1921) 120, 151 312 Gopalan v. State of Madras, (1958) 2 MLJ 117; S Sundararaja Iyengar (supra) 153. [“The distinguishing feature

of this system is that the state is brought into direct contact with the owner of the land and collects its revenues through its own servants without the intervention of an intermediate agent such the zemindar or farmer, and its object is the creation of peasant proprietors. All the income derived from extended cultivation goes to the state.”] 313 S Sundararaja Iyengar (supra) 28.

148 PART I

proportion of the produce to meet the necessities of the administration, the proprietary right of the ryot in the soil of his holding is absolute and complete; (3) that he is able to able to mortgage, sell, devise or otherwise alienate the land; (4) that, on these principles, property has been changing hands from time immemorial, and for the Government to put forward a claim now, which has never been asserted and which does not rest in law, practice or precedent, would undoubtedly raise a feeling or distrust and discontent which would take long to allay; (5) that it would be straining the State’s privileges to attach the condition of recognition of any exclusive right to minerals on the terms on which lands may be newly occupied, although in the interests of the general public, it may in particular instances be justifiable to do so, in view to the development of the ascertained mineral resources; and (6) that as regards the vast bulks of the land occupied or likely to be occupied for cultivation, such reservation would be absolutely objectless and would only have the effect of creating widespread distrust in the minds of the people.”314

255. The Board of Revenue recognized the rights of zamindars to the minerals,

through Standing Orders. The Standing Orders also governed the rights of the

ryotwari pattadars with respect to minerals. For example, Resolution No. 277 of

1888 315 declared that the State “lays no claim to minerals” in estates held on

sanads of permanent settlement, enfranchised inam lands, etc. Moreover, for

ryotwari lands it was declared that the right of the State in minerals is limited “to

share in the produce of the minerals worked, commuted in a money payment, if

thought necessary, by Government, in like manner with and in addition to the

land assessment.” Thus, the colonial state did not claim subsoil rights with

respect to lands held under permanent settlements, and only a limited right in

314 ibid. 315 See Dalmia Cement (Bharat) Ltd. v. State of TN, (2014) 2 SCC 279 [30]

149 PART I

lands held under ryotwari pattas. This system of law continued until

Independence and even thereafter.

256. The regulation of mines and mineral development before Independence was

governed by executive rules. In 1913, Rules for the grant by local governments

of licences to prospect for minerals and of mining leases in British India were

made by Resolution No. 7552-7581-121 dated 15 September 1913. 316 Under

these Regulations, prospecting licenses 317 could only be granted with respect to

minerals which were owned by the Government. 318 The rules also required the

licencee to pay royalty at a rate specified in Schedule A of the Regulations. The

Madras Mining Manual of 1929 contained rules regarding mining and quarrying

applicable to the Madras Presidency. Chapter V of the Madras Mining Manual

stated that the State’s right to minerals varied according to the tenure on which

the land was held. The Madras Mining Manual classified the land into three

groups:

Group A – Lands in which the State claimed no right to minerals. These included:

(a) estates held on sanads of permanent settlement; (b) land held on title-deeds

issued under the Waste Land Rules before 7th October 1879 in which no

reservation was made of the right of the State to minerals; and (c) lands held on

inam tenure.

Group B – Lands in which the State claimed a share in minerals which included:

(a) lands occupied for agricultural purposes under the ryotwari grants; (b) private

316 “1913 Regulations” 317 Rule 13, 1913 Rules. [It read: “13. A licence to prospect for minerals, called hereinafter a prospecting licence,

shall confer on the licensee the sole right, subject to the conditions contained in the licence, to mine, quarry, bore, dig and search for, win, work and carry away any specified minerals or, in the event of no minerals being specified, all minerals lying, or being within, under or throughout the land specified in the licence.”] 318 Rule 14, 1913 Rules. [It read: “14. A prospecting licence shall be granted only in respect of land in which the

mines or minerals are the property of the Government.”]

150 PART I

janmam lands in Malabar and the Nilgiri; and (c) certain lands held under inam

tenure.

Group C – Lands in which the State claimed full rights in minerals which included

unreserved lands and forest lands reserved under the Madras Forest Act 1882.

257. The Dominion Legislature was aware of the above classification of land, which it

loosely incorporated under the Mineral Concession Rules 1949 enacted under

Section 5 of the MMRD Act. Chapter III and VI of the Mineral Concession Rules

1949 provided for the grant of prospecting licences and mining leases

respectively in land in which the minerals belonged to Government. Chapter V

dealt with the grant of mineral concessions by private persons. The Concession

Rules of 1949 did not contain any provisions dealing with minerals, in respect of

lands where the minerals were shared by both the Government and private

persons by. The Mineral Concession Rules of 1949 left out lands occupied under

ryotwari tenure from their purview.

258. The Mineral Concession Rules 1960 adopted the categorization of land as in the

Madras Mining Manual, namely, lands in which minerals vested in government;

lands in which minerals vested in a person other than government; and lands in

which minerals vested partly in government and partly in private persons. The

first category mostly pertained to situations where the land vested with the state

by virtue of it being unoccupied or land legislation vesting title to minerals with

the State Government. The second category pertained to situations where the

State Government had not divested the landowner of their rights in the sub-soil

minerals. The third category applied to intermediary tenures such as ryotwari

lands where the minerals were shared by both the government and private

persons.

151 PART I

259. In Raja Anand Brahma Shah v. State of U P, 319 a Constitution Bench accepted

that the English system of ownership of lands applied in India, observing that the

owner of the surface of land is entitled ex jure to everything beneath the land. It

was further observed that a transfer of the right to the surface conveys the right

to the minerals underneath unless there is an express or implied reservation in

the grant of land. In Thressiamma Jacob v. Geologist, Department of Mining

and Geology, 320 a three-Judge Bench of this Court had to determine whether

the holder of jenmon rights owned the mineral wealth lying beneath the soil. The

Court traced the history of land tenures in India to hold that the ownership of

minerals normally follows the ownership of land, unless the owner is deprived of

it by a valid legal process.

260. The legislative power of States to enact land legislation can be traced to Entry

18 of List II which empowers the State legislatures to legislate with respect to

matters dealing with “land, that is to say, rights in or over land, land-tenures

including the relation of landlord and tenant, and the collection of rents.” Similarly,

Entry 42 of List III deals with “acquisition and requisitioning of property.”

261. After Independence, the State legislatures enacted land reform legislation

divesting land owners of their sub-soil rights, including rights in the minerals. For

instance, Section 48 of the Maharashtra Land Revenue Code 1966 declared that

the right to all minerals found either on the surface or underground vest in the

State Government which shall have all powers necessary for the proper

enjoyment of such rights. 321

319 1966 SCC OnLine SC 89 [13] 320 (2013) 9 SCC 725 321 Section 48, Maharashtra Land Revenue Code 1966

152 PART I

262. Many states also enacted laws divesting zamindars and inamdars of their

proprietary rights. For example, the Uttar Pradesh Zamindari Abolition and Land

Reforms Act 1950 vested all the rights of the proprietors in the sub-soil including

mines and minerals with the State Government. 322 The Maharashtra Personal

Inams Abolition Act 1953 abolished inam rights, but saved the rights of the

inamdars and jagirdars to mines and minerals. In 1985, the State legislature

enacted a law323 vesting all the rights of inamdars and jagirdars to mines and

minerals in the State Government. The law sets out the following reasons behind

divesting the inamdars and jagirdars of their mineral rights:

“WHEREAS, pursuant to the national policy of bringing the actual cultivator into direct relation with the Government, series of land tenure abolition laws for abolition of the intermediary rights, Jagirs and inam tenures have had been enacted, the rights of Inamdars and Jagirdars to mines and minerals have had been specifically saved, thereby allowing such existing rights to survive particularly where the inams are grants of soil;

AND WHEREAS, the mines and minerals available in these inam lands are being exploited in the State by such Inamdars for individual gains without being liable to pay any royalty to the State Government and in a manner highly detrimental and prejudicial to public interest;

AND WHEREAS, with a view to prevent such exploitation of mines and minerals for individual gains by a few Inamdars and also to prevent the huge loss of royalty by the State Government and to give effect to the policy of the State Government towards securing that the ownership and control of the material resources of the community are so distributed as best to subserve the common good and that the operation of the economic system does

322 Section 6, UP Zamindari Abolition and Land Reforms Act 1950 323 Maharashtra Abolition of Subsisting Proprietary Rights to Mine and Minerals in Certain Lands Act 1985.

153 PART I

not result in the concentration of wealth and means of production to the common detriment;”

The above extract from the Preamble to the statute indicates that the inamdars

and jagirdars had title to the minerals granted to them under inam tenure until

the State enacted a law to divest them of their mineral rights. Since the inamdars

and jagirdars owned the minerals till 1985, they exploited them for their personal

gain without paying royalty to the State Government. This also indicates that the

rights to mines and minerals continued to remain vested in private landowners

long after India gained Independence and the divesting of their mineral rights

happened in this case by the operation of legislation enacted by the State.

263. The decision in Thressiamma Jacob (supra) held that the MMDR Act does not

declare the proprietary rights of the state in mineral wealth, nor does it contain a

provision for divesting the owner of a mine of proprietary rights. 324 Rights in

minerals generally follow ownership of the land. The right of an owner of land

extends to the sub-soil, including the minerals found underneath the soil, which

continues until the State deprives the owner by a valid legal process. Importantly,

Section 16(1)(b) of the MMDR Act also recognizes that the rights to minerals

does not automatically vest in the State Government. 325

264. Article 297 vests the proprietary rights in minerals within the territorial waters and

the continental shelf in the Union Government. The provision reads:

“297. Things of value within territorial waters or continental shelf and resources of the exclusive economic zone to vest in the Union –

324 Thressiamma Jacob (supra) [55] 325 Section 16, MMDR Act.

154 PART I

(1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purpose of the Union.

(2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union.

(3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament.”

265. Parliament has enacted the Offshore Areas Mineral (Development and

Regulation) Act 2002 326 to provide for development and regulation of mineral

resources in the territorial waters, continental shelf, exclusive economic zone,

and other maritime zones of India. Section 2 contains a legislative declaration to

the effect that the Union is taking under its control the regulation of mines and

mineral development in offshore areas to the extent provided under the statute.

Similar to the MMDR Act, Chapter II of the OAMDR Act lays down general

provisions for acquisition of operating rights in offshore areas. However, unlike

the MMDR Act which empowers the State Government to grant mineral

concessions, 327 the OAMDR Act mandates the Central Government to grant the

operating rights. 328 This difference is a result of the fact that the subsoil minerals

are statutorily vested in the States, while the Constitution mandates the vesting

326 “OAMDR Act” 327 Section 5, MMDR Act 328 Section 6, OAMDR Act

155 PART I

of offshore minerals in the Union. Section 16 of the OAMDR Act deals with

payment of royalty to the Central Government. The provision reads as follows:

“16. Royalty – (1) A lessee shall pay royalty to the Central Government in respect of any mineral removed or consumed from the area covered under his production lease, at the rate for the time being specified in the First Schedule in respect of that mineral.

(2) The Central Government may, by notification in the Official Gazette, amend the First Schedule so as to enhance or reduce the rate at which royalty shall be payable in respect of any mineral with effect from such date as may be specified in the notification:

Provided that the Central Government shall not enhance the rate of royalty in respect of any mineral more than once during any period of three years.”

266. As held in the above segments, royalty is paid to the proprietor of the minerals

for the exercise of mineral rights. Minerals found in offshore areas are

constitutionally vested in the Central Government. Therefore, the Central

Government can statutorily and contractually demand royalty from lessees for

removal or consumption of such minerals. In comparison, subsoil minerals can

either be legally vested in the States or continue to remain vested with private

landowners. Resultantly, the payment of royalty under Section 9 of the MMDR

Act is paid either to the State Government or private landowner, as the case may

be.

267. Section 3 of the Haryana Minerals (Vesting of Rights) Act 1973 allowed the State

Government to acquire the rights to minerals in any land. In State of Haryana v.

156 PART I

Chanan Mal, 329 where the validity of Section 3 was assailed, it was argued that

the State legislative power to enact the legislation was curtailed by the operation

of the MMDR Act. This Court noted that in Section 16(1)(b) of the MMDR Act

Parliament has contemplated legislation by the States for vesting of lands

containing mineral deposits in the State Government. The Court held that the

MMDR Act deals with the regulation of rights to mining without intending to

“trench upon powers of State legislatures under Entry 18 of List II read with Entry

42 of List III.” 330 Chanan Mal (supra) lays down the principle that the decision of

the States to acquire title to minerals does not fall foul of the MMDR Act because

the latter does not control the ownership of minerals.

268. The above discussion leads to two conclusions. First, the owner of a land can be

divested of sub-soil rights in minerals only through a valid process of law, which

has generally taken the shape of land reform legislation enacted by State

legislatures. Second, the MMDR Act does not vest the ownership of minerals or

mineral rights in the State. It regulates the exercise of rights to minerals which

may be owned either by Government, private persons, or by both the

Government and private persons.

ii. Tax on land and buildings

269. Entry 42 of the Provincial Legislative List in the Government of India Act 1935,

read as follows:

“42. Taxes on lands and buildings, hearths and windows”

329 (1977) 1 SCC 340 330 Chanan Mal (supra) [38]

157 PART I

The Draft Constitution prepared by Shri B N Rau, the Constitutional Adviser

adopted the above provision in draft Entry 43 of the Provincial Legislative List. 331

The Expert Committee on Financial Provisions suggested the deletion of the

words “hearths and windows” from draft Entry 43 of the Provincial Legislative List

on the ground that such taxes were not likely to be levied. The Committee

observed that they would anyway be covered by the word “buildings.” 332 The

recommendation of the Expert Committee was accepted by the Drafting

Committee. 333

a. Principles governing ‘taxes on lands and buildings’

270. The interpretation of the word “lands” has been considered by this Court in

several decisions. In Raja Jagannath Baksh Singh v. State of Uttar

Pradesh, 334 the provisions of the UP Large Land Holdings Tax Act 1957 were

challenged for falling beyond the legislative competence of the State legislature.

It was contended that the expression “lands” under Entry 49 of List II does not

include agricultural land. Rejecting this contention, Justice P B Gajendragadkar

(as the learned Chief Justice then was) speaking for the Constitution Bench held

that the word “lands” is wide enough to include all lands, agricultural or otherwise.

In Anant Mills Co. Ltd. v. State of Gujarat, 335 this Court held that the word

“lands” includes not only the face of the earth, but everything under or over it,

and has in its legal signification an indefinite extent upward and downward. The

above decisions are authority for the proposition that the ambit of the word

331 B Shiva Rao, ‘The Framing of India’s Constitution: A Study’ (1966, Volume 3) 181 332 B Shiva Rao (Volume 3) 269 333 B Shiva Rao (Volume 3) 502 334 (1963) 1 SCR 220 335 (1975) 2 SCC 175

158 PART I

“lands” under Entry 49 of List II comprises: (i) all types of lands; and (ii) covers

everything under or over land.

271. In Ajoy Kumar Mukherjee v. Local Board of Barpeta, 336 the constitutionality of

an annual tax levied by local boards for the use of land for the purpose of holding

markets was challenged before a Constitution Bench. Speaking for the Bench,

Justice K N Wanchoo held that the tax was on land used for a market, and not

on the market held on land. The Court held that the use to which the land is put

can be taken into account while imposing a tax on the land within the meaning

of Entry 49 of List II. 337 Further, it was observed that the incidence of tax was on

the owner or occupier of the land, and not any other person who may come to

the market to transact. In conclusion, it was held that the tax was a tax on land,

though its incidence depended upon the use of the land as a market. In

Government of A P v. Hindustan Machine Tools Ltd., 338 it was held that the

State legislature can tax buildings as a unit under Entry 49 of List II, but not the

machinery and furniture contained in the building. In Ahmedabad Municipal

Corporation v. GTL Infrastructure Ltd., 339 this Court held that the word

“buildings” has to be interpreted dynamically to extend to all ancillary and

subsidiary matters. Consequently, it was held that the State legislature has the

legislative power to tax mobile towers under Entry 49 of List II. The principle

which emanates from the above decisions is that a tax levied on the activity or

service rendered on or in connection with lands and buildings does not fall within

the description of taxes on lands and buildings under Entry 49 of List II. However,

336 (1965) 3 SCR 47 337 Ajoy Kumar Mukherjee (supra) [4]; See Jalkal Vibhag Nagar Nigam v. Pradeshiya Industrial & Investment Corp,

(2021) 20 SCC 657 [46] 338 (1975) 2 SCC 274 [17] 339 (2017) 3 SCC 545 [29]

159 PART I

the legislature may take into account the use of land or buildings for determining

the incidence or measure of tax levied under Entry 49 of List II.

272. Further, it is now well-established that a levy of tax on lands and buildings is not

concerned with the division of interest or ownership in the units of lands and

buildings. 340 In Sudhir Chandra Nawn v. WTO, 341 a Constitution Bench which

dealt with the constitutional validity of Wealth Tax Act 1957, explained the scope

of Entry 49 of List II by observing that the tax on lands and buildings is directly

imposed on lands and buildings or both as units, and bears a definite relation to

it. The decision holds that the State legislature may adopt the annual or capital

value of lands and buildings for determining the incidence of tax levied under

Entry 49 of List II.

273. In Second Gift Tax Officer, Mangalore v. D H Nazareth, 342 this Court dealt with

whether Parliament was competent to enact the Gift Tax Act under its residuary

powers. In that case, the owner of a coffee plantation had made a gift of coffee

plantations by a registered gift deed to his sons. The government demanded gift

tax on the transfer of land title. It was contended that taxes on lands and buildings

under Entry 49 of List II also cover taxes in respect of gift on lands and buildings.

It was further submitted that since the legislative power of taxing gift of land is

traceable to Entry 49 of List II, Parliament could not have taken recourse to its

residuary powers. Chief Justice M Hidayatullah, speaking for the Constitution

Bench, held that the impugned levy was not a tax directly imposed upon lands

and buildings, but a tax upon the transmission of title by gift. The value of lands

340 Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd., (1969) 2 SCC 55; Shri Prithvi

Cotton Mills Ltd. v. Broach Borough Municipality, (1969) 2 SCC 283 [5] 341 (1968) 69 ITR 897 342 (1970) 1 SCC 749 [10]

160 PART I

and buildings was held to be a measure of the value of gifts. Therefore, it was

held that Parliament was competent to enact the levy.

274. In D G Gose and Co (Agents) Pvt Ltd v. State of Kerala, 343 the validity of the

Kerala Building Tax Act 1975 was challenged on the ground of being a tax on the

capital value of the assets of an individual under Entry 86 of List I. The

Constitution Bench held that a tax on buildings was a direct tax on the assessee’s

buildings as such, and was not a personal tax without reference to any particular

property. It was further held that a State legislature while imposing a tax under

Entry 49 of List II may decide how best to levy it.

275. In view of the above discussion, we can summarize 344 the following principles for

a tax under Entry 49 of List II:

(i) The expression “lands” means all kinds of lands irrespective of the use to

which the land is put;

(ii) The expression “lands” includes not only the surface but everything under

and over the surface;

(iii) A tax on lands and buildings is a tax on lands and buildings as units;

(iv) The expression ‘tax on lands and buildings as a unit’ is used to distinguish

composite taxes which involve imposition of tax cumulatively on all assets

such as under Entry 86 of List I;

(v) The tax is not a tax on totality, that is, it is not a composite tax on the value

of all lands and buildings;

(vi) The tax is not concerned with the division of interest in the building or land;

343 (1980) 2 SCC 410 344 See Union of India v. H S Dhillon, (1971) 2 SCC 779 [74]

161 PART I

(vii) A tax levied on the activity or service rendered on or in connection with lands

and buildings does not fall within the description of taxes on lands and

buildings under Entry 49 of List II;

(viii) The use to which the land is put does not affect the competence of the State

legislature to tax it; and

(ix) The legislature may take into account the use of land for determining the

measure of taxation under Entry 49 of List II.

a. States can impose tax on mineral bearing land

276. A state does not have to tax everything in order to tax something. The legislature

has a wide discretion is selecting the persons or objects it wants to tax depending

upon social, economic, and administrative considerations. 345 This discretion

flows from the fact that a legislature which is competent to levy a tax must

inevitably be given full freedom to determine “which articles should be taxed in

what manner and at what rate.”346 The power to levy a tax includes ancillary

powers such as the power to fix the rate, prescribe machinery for the recovery of

tax, prevent tax evasion, appoint authorities for collecting taxes, and prescribe

the procedure for determining the amount of taxes payable by any individual. 347

This Court has generally adopted the approach of giving wide latitude to the

legislature in matters of tax and economic regulations, 348 provided the law is

reasonable 349 and avoids clear and hostile discrimination against particular

persons or classes. 350

345 East India Tobacco Company v. State of Andhra Pradesh, 1962 SCC OnLine SC 145; Hiralal Rattanlal v. State

of U P, (1973) 1 SCC 216 [20]. 346 Khyerbari Tea Co. Ltd. v. State of Assam, (1964) 5 SCR 975 [44] 347 Khyerbari Tea Co. Ltd. (supra) [19]; Union of India v. A Sanyasi Rao, (1996) 3 SCC 465 [16] 348 R K Garg v. Union of India, (1981) 4 SCC 675 [8] 349 Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536 [343] 350 Federation of Hotel & Restaurant Association of India v. Union of India, (1989) 3 SCC 634 [46]

162 PART I

277. The power to levy a tax on lands necessarily entails the power to classify lands

sought to be taxed depending upon their use and productivity. A flat tax on all

lands, irrespective of their use or productivity, may place an unequal burden on

owners and occupiers of land. The need to provide a reasonable classification of

lands for the purposes of the levy of taxes under Entry 49 of List II emanates

from Article 265 of the Constitution which provides that the States shall not levy

taxes except by “authority of law”. The expression “law” appearing in Article 265

has been interpreted to mean a valid law which conforms to the other provisions

of the Constitution, including Article 14. 351 Consequently, the legislature is

competent to classify properties into categories and tax them differently. In

adjudicating the validity of the taxing statutes, this Court has held that the power

of the legislature to classify is of “wide range and flexibility” so that it can adjust

its system of taxation in all proper and reasonable ways. 352

278. The expression “lands” includes lands of every description. A land may be put to

use for growing tea leaves or extracting minerals. But what Entry 49 of List II

contemplates is the levy of tax on land as a unit, irrespective of the use to which

it is put. Therefore, the State legislature is competent while designing the levy

under Entry 49 of List II to tax lands which comprise of mines and quarries. In

other words, mineral-bearing land also falls within the description of “lands” under

Entry 49 of List II.

279. The State legislature has wide discretion to classify lands and levy taxes on them

under Entry 49 of List II. This is also evident from the decision of this Court in

Spencer & Co. v. State of Mysore, 353 where excess land appurtenant to a

351 K T Moopil Nair v. State of Kerala, 1960 SCC OnLine SC 7 [7] 352 Khandige Sham Bhat v. Agricultural Income Tax Officer Kasargod, 1962 SCC OnLine SC 15 [7] 353 (1971) 2 SCC 217

163 PART I

building was treated as a separate class. This was challenged. Although land

appurtenant to a building such as gardens or grounds were treated as part of the

building, any such land which exceeded thrice the area of the building was

treated as a separate class. Chief Justice S M Sikri, speaking for the Constitution

Bench, held that the State legislature has the right to classify lands for the

purpose of levying taxes:

“13. […] It seems to us that in cities like Bangalore, where land is scarce, excessive use of land as gardens and grounds is not in the public interest and the Legislature can validly tax the excess land on a different and higher basis. It may in a particular case cause hardship but the Legislature cannot be denied the right to classify the lands in such a manner. Three times the area occupied by a building is not a small area and we are unable to hold that his figure is not reasonable.”

280. In their natural state, minerals or ores are part of the earth and remain embedded

there unless extracted. It is also established that “lands” include everything over

and below the surface. Therefore, constitutionally speaking sub-soil minerals

also form part of land. The subject of taxation in Entry 49 of List II is land as a

unit. The subject of tax in Entry 50 of List II is the mineral rights. Hence, there is

a distinction between the legislative field in in the two entries. Ultimately, however

it must be borne in mind that both Entries 49 and 50 fall within List II and are

hence within the domain of the State legislatures. If the tax is relatable to Entry

50 of List II, the tax on mineral rights must be consistent with any limitations

which Parliament imposes in a law relating to mineral development. The

interrelationship between Entry 50 of List II with List I, particularly Entry 54 of that

list has been examined in an earlier segment.

164 PART I

281. The legislative competence of the States to tax lands under Entry 49 of List II will

not be affected by the MMDR Act. In Western Coalfields Ltd. v. Special Area

Development Authority, 354 the vires of a provision conferring powers on the

Municipal Councils and Municipal Corporations to levy tax on lands and buildings

was challenged. The provision was argued to be invalid because it allowed the

municipalities to tax lands covered by coal mines, which were the subject of

legislation by Parliament under the MMDR Act and the Coal Mines

(Nationalisation) Act 1973 355. Chief Justice Y V Chandrachud, speaking for the

majority, rejected the contention on the ground that the tax on lands and buildings

had “nothing to do with the development of mines” and, therefore, did not conflict

with the power of the Central Government to regulate and develop mines under

the Coal Mines Act. 356 In the context of the legislative declaration contained in

Section 2 of the MMDR Act, the learned Chief Justice observed that though “on

account of that declaration, the legislative field covered by Entry 23 List II may

pass on to Parliament by virtue of Entry 54 List I, the competence of the State

Government to enact laws for municipal administration will remain unaffected by

that declaration.” Significantly, the Court observed that the declaration in Section

2 of the MMDR Act does no result in the invalidation of every State legislation

relating to mines and minerals.

282. The principle which emanates from Western Coalfield Ltd (supra) is that the

legislative declaration under the MMDR Act will only affect the legislative power

of the State with respect to Entry 23 of List II to the extent the Parliamentary

legislation covers the subject-matter. The legislative powers of the State with

354 (1982) 1 SCC 125 355 “Coal Mines Act” 356 Western Coalfields Ltd (supra) [28].

165 PART I

respect to other subjects under List II, including taxes on lands and buildings, will

not be affected or controlled by the MMDR Act. Therefore, the legislative powers

of the States to levy a tax falling under Entry 49 of List II remains unaffected.

iii. Measure of tax

283. Among its elements a tax has to provide for the charge of tax, the incidence of

tax, the measure of the tax and will contain provisions in the nature of the

machinery for assessment and recovery. In Rai Ramkrishna v. State of

Bihar, 357 a Constitution Bench of this Court observed as follows:

“12. […] The objects to be taxed so long as they happen to be within the legislative competence of the legislature can be taxed by the legislature according to the exigencies of its needs, because there can be no doubt that the State is entitled to raise revenue by taxation. The quantum of tax levied by the taxing statute, the conditions subject to which it is levied, the manner in which it is sought to be recovered, are all matters within the competence of the legislature, […]”

284. It now a well-settled principle that the determination of the principles for

assessing the amount of tax is within the legislative domain. 358 The quantification

or measurement of liability is done on the basis of the procedures laid down by

the competent legislature. 359 In situations where the legislature selects one

method out of the many available for assessing tax, the courts should not strike

down the levy on the ground that the legislature should have adopted another

method unless the method is capricious, fanciful, arbitrary or clearly unjust. 360

357 (1963) SCC OnLine SC 31 358 S Kodar v. State of Kerala, (1974) 4 SCC 422 [10] 359 Shaktikumar M Sancheti v. State of Maharashtra, (1995) 1 SCC 351 [3] 360 Khandige Sham Bhat v. Agricultural Income Tax Officer, Kasargod, 1962 SCC OnLine SC 15 [10]

166 PART I

Although the liability may be quantified or measured in many ways, there is a

clear distinction between the subject matter of a tax and the standard by which

the amount of tax is measured.

285. The pith and substance or true nature and character of the legislation must be

determined with reference to the legislative subject matter and the charging

section. 361 The charging section levying a tax and defining the persons who are

liable to pay the tax constitute the core of a taxing statute. 362 The distinction

between the nature of tax and measure of tax can be gathered from the decision

of this Court in Sainik Motors, Jodhpur v. State of Rajasthan. 363 In that case,

the petitioners challenged the levy of taxes on passengers and goods by the

State legislature. The charging section provided that the tax was “in respect of

all passengers carried and goods transported by motor vehicles at such rate not

exceeding one-eight of the value of the fare or freight.” This Court held that the

tax was on passengers and goods which could be traced to Entry 56 of List II of

the Seventh Schedule. As regards the measure of the levy, it was held that that

the measure was furnished by the amount of the fare and freight charged.

286. It is a settled position that the measure of tax is not a true test of the nature of

tax. 364 The standard adopted as a measure of tax may be a relevant

consideration in determining the nature of tax, but is not conclusive. In Sir

Byramjee Jeejeebhoy v. The Province of Bombay, 365 the Bombay Provincial

Legislature levied ‘urban immovable property tax’ at ten percent of the annual

letting value of lands and buildings. The Bombay High Court upheld the validity

361 Federation of Hotel & Restaurant Association of India v. Union of India, (1989) 3 SCC 634 [37] 362 B Shama Rao v. Union Territory of Pondicherry, 1967 SCC OnLine SC 29 363 (1962) 1 SCR 517 364 R R Engineering Co. v. Zilla Parishad, Bareilly, (1980) 3 SCC 380 [16] 365 1942 SCC OnLine Bom 30

167 PART I

of the levy. Justice Broomfield observed that the power to impose taxes on lands

and buildings meant the power to impose taxes on persons, owners, or occupiers

as the case may be in respect of these properties. Justice Harilal Kania (as the

learned Chief Justice then was) observed that the adoption of the annual letting

value as the standard for fixing the tax rate did not necessarily make it a tax on

income. The learned Judge further observed that the standard on which the tax

is levied does not determine the nature of the tax.

287. In Ralla Ram v. The Province of East Punjab, 366 the issue that fell for

consideration of the Federal Court was whether the provisions of the Punjab

Urban Immoveable Property Tax Act 1940 were ultra vires the legislative powers

of the Provincial Legislature. Section 3 of the legislation levied a tax on lands and

buildings at a rate not exceeding twenty percent of the annual value. It was

contended that the levy was in substance a tax on income since the measure

adopted, that is the annual value of lands and buildings, was also used to

calculate income from property. Justice Fazl Ali observed that annual value is not

necessarily actual income, but only a standard by which income may be

measured. The learned Judge analyzed the substance of the impugned levy to

observe that the legislation used annual value merely for the purpose of

determining the value of the property to be taxed. The Court observed that if a

tax is levied on property, it would not be irrational to correlate it to the value of

the property and to make some kind of annual value the basis of the tax without

intending to tax income. The levy was held to be in pith and substance a tax on

land and buildings even though the basis of the tax was similar to the one

adopted to measure income.

366 1948 SCC OnLine FC 9

168 PART I

288. From the above discussion, we can derive the following principles: (i) the

incidence of a tax on lands and buildings will likely be on the owner or occupier,

as the case may be; (ii) the legislature may adopt a suitable measure for levying

the tax on lands and buildings under Entry 49 of List II; and (iii) the measure

adopted by legislature does not determine the nature of the tax.

289. In recent decades, this Court has held that there ought to be a “nexus” between

the nature of tax and the measure of tax. In Union of India v. Bombay Tyre

International Ltd., 367 the issue before a three-Judge Bench of this Court was

whether the value of an article for the purposes of excise duty must be

determined exclusively with reference to the manufacturing cost and

manufacturing profit of the manufacturer or the entire wholesale price 368 charged

by the manufacturer. The assesses contended that only the measure of

manufacturing cost and profit create a direct and immediate nexus between the

levy and the manufacturing activity. It was further urged that the post-

manufacturing expenses and profits ought to be necessarily excluded to

preserve the nexus between the nature of tax and the assessment of tax. This

Court traced the line of precedent on the measure of tax to observe that a broad

standard of reference may be adopted for the purpose of determining the

measure of the levy. It was held that any standard which maintains a nexus with

the essential character of the levy can be regarded as a valid basis for the

measure of the levy. In CCE v. Grasim Industries Ltd., 369 a Constitution Bench

reiterated that there must be a “reasonable nexus” between the nature of tax and

367 (1984) 1 SCC 467 [14] 368 The wholesale price actually charged by the manufacturer consisted of not merely the manufacturing costs and

manufacturing profit but included, in addition, a whole range of expenses and an element of profit (conveniently referred to as “post-manufacturing expenses” and “post-manufacturing profit”) arising between the completion of the manufacturing process and the point of sale by the manufacturer. 369 (2018) 7 SCC 233

169 PART I

the measure of the levy. It was further observed that the measure cannot be

controlled by the rigors of the nature of tax.

290. The discussion above indicates that the nexus between the measure and levy of

tax need not be “direct and immediate”. The nexus has to be “reasonable” and

must have some relationship with the nature of levy. The reasonability of the

nexus will largely depend upon the nature of the tax and the means available

with the legislature to design the measure of the tax. Since the measure of the

levy is a matter of legislative policy and convenience, 370 the reasonability of the

nexus between the measure and tax has to be determined by the courts on a

case-to-case basis. While doing so, the Court will bear in mind the fundamental

principle that the legislature possesses a broad discretion in matters of fiscal

levies.

a. Taxing mineral-bearing land

291. The tax on lands and buildings under Entry 49 of List II is often measured with

respect to the income derived from the land or building sought to be taxed. The

income derived from land or building is normally measured in terms of the annual

value. Section 23 of the Income Tax Act provides that the annual value of property

shall be deemed to be the sum for which the property might reasonably be

expected to let from year to year. 371 Thus, where a land or building is let, the

valuation is based on the rent at which it is let. 372

292. In K T Moopil Nair v. State of Kerala, 373 Chief Justice B P Sinha observed that

a tax on land or land revenue is assessed on the actual or potential productivity

370 Express Hotels (P) Ltd. v. State of Gujarat, (1989) 3 SCC 677 [25] 371 Section 23, I T Act 1961 372 Patel Gordhandas Hargovindas v. Municipal Commissioner, 1963 SCC OnLine SC 57 [10] 373 1960 SCC OnLine SC 7 [8]

170 PART I

of the land sought to be taxed. The decision noted that a tax has reference to the

income actually made or which could have been made. Thus, the principle

emanating from this decision is that a tax under Entry 49 of List II may be levied

on the actual or potential productivity of the land. In State of Kerala v. Haji K

Kutty Naha, 374 there was a challenge to the Kerala Buildings Act 1961 which

levied tax on buildings in the state based on the floor area. This Court observed

that the legislature did not take into consideration factors such as the class to

which the building belonged, the nature of construction, the purpose for which it

was used, its situation and capacity for profitable user and other relevant

circumstances which had a bearing on matters of taxation. It was held that the

statute was unconstitutional for treating dissimilar objects similarly. Haji K Kutty

Naha (supra) recognized that a tax on lands and buildings must be measured by

taking into consideration relevant factors related to the use of the lands or

buildings. 375

293. In Spencer & Co. (supra), the validity of a property tax assessed at 0.4 percent

of the market value was challenged before this Court. It was urged that the levy

of the property tax on vacant lands was unconstitutional because it was levied

without any relation to the actual or potential income of the land. The Constitution

Bench rejected the contention on the grounds that the market value of the land

always bears a “definite relationship” to the actual or potential income being

derived or derivable from the land.

294. The measure for taxing land may bear a reasonable relationship to the actual or

potential productivity of land. Measures such as annual value or market value

provide a proximate basis to measure the income derived from land. If the State

374 (1969) 1 SCR 645 375 Also see New Manek Chowk Spg. & Wvg. Mills v. Ahmedabad Municipality, 1967 SCC OnLine SC 116 [13]

171 PART I

legislature utilizes the income derived from the land as a measure to quantify a

tax on land, it does not trench upon the legislative domain of Union to tax income.

The income merely serves as the measure to calculate the levy of taxes on

land. 376 Having looked at the general principles relating to the measure of tax on

land, we now look at specific decisions pertaining to taxation of mineral-bearing

land.

295. In H R S Murthy (supra), the validity of a land cess under the Madras District

Boards Act 1920 was in issue. The cess was levied on the annual rent value of

all occupied lands and the tax was measured on the basis of “two annas in the

rupee of the annual rent value of all such lands in the district.” In case of lands

held directly from the Government, the annual rent value was defined as the

assessment, lease amount, royalty or other sum payable to Government.

Justice N Rajagopala Ayyangar, speaking for the Constitution Bench

distinguished the decisions in Hingir-Rampur (supra) and M A Tulloch (supra)

on the ground that the land cess: (i) was not concerned with the development of

mines and minerals; (ii) was not collected for development of mining areas, but

for the safety, health, convenience, and education of the inhabitants in the local

area; and (iii) there was nothing in common between the impugned levy and the

MMDR Act. Therefore, it was held that the operation of MMDR Act did not

exclude the legislative competence of the State to levy the cess.

296. The petitioners argued in H R S Murthy (supra) that (i) the cess was payable

only when the mining lessee paid royalty to the lessor; (ii) when no minerals were

extracted, no royalty was payable; and (iii) the cess in effect was a tax on mineral

rights. These contentions were rejected because: (i) the levy was in nature and

376 Ahmedabad Municipal Corporation v. GTL Infrastructure Limited, (2017) 3 SCC 545 [19]

172 PART I

substance a tax on land; (ii) the levy had a remote relationship to mining and to

the mineral won from the mine under a contract by which royalty was payable on

the quantity of mineral extracted, which did not make it a tax on either the

extraction of mineral or on the mineral rights; and (iii) the rent value of a land held

under lease is calculated on the basis of the lease amount. In case of a land held

under a mining lease, the rent value will include the surface rent, dead rent as

well as the royalty payable by the lessee or occupier for the use of the property.

The decision in H R S Murthy (supra) supports the position that royalty can be

used as a measure to tax mineral bearing land.

297. The issue of taxing mineral bearing land under Entry 49 of List II also came up

before this Court in India Cement (supra). To recap, in India Cement (supra)

local cess levied by the State legislature was measured with respect to the land

revenue payable to the Government. The definition of land revenue included

royalty. Therefore, the issue before the seven-Judge Bench was whether the levy

of cess on royalty was valid. Speaking for the majority, Justice Sabyasachi

Mukharji observed that the cess was not on land but on royalty. The conclusion

rested on the following reasons: (i) since royalty is income arising from land, it is

not directly connected to the land; (ii) if royalty is the basis of taxation, no tax can

be levied if no mining activities are carried on; and (iii) royalty cannot be used as

a measure under Entry 49 of List II because it is exclusively relatable to Entry 50

of List II. Justice Mukharji held that H R S Murthy (supra) was “not a correct

approach” to the issue. The decision in India Cement (supra) was followed by a

three-Judge Bench in Orissa Cement (supra).

298. In Orissa Cement (supra), Section 5(1) of the Orissa Cess Act 1962 provided

that the cess shall be assessed on the annual value of all lands calculated in the

173 PART I

manner as provided. Section 5(2) provided for the levy of cess in case of mineral

bearing land thus:

“5. (2) The rate per year at which such cess shall be levied shall be –

In case of lands held for carrying on mining operations in relation to any minerals, such per centum of the annual value as the State Government may, by notification, specify from time to time in relation to such mineral;”

The “annual value” was defined in Section 7. And sub-section 3 provided that in

case of lands held for carrying on mining operations, annual value shall be the

royalty or as the case may be, the dead rent payable by the person carrying on

mining operations to the government, or the Pit’s mouth value wherever it has

been determined.

299. Speaking for the three-Judge Bench, Justice S Ranganathan observed that there

is a difference in principle between a tax on royalties derived from land and a tax

on land measured by reference to the income derived from land. The Court

observed that the levy was not measured by income derived by the assessee

from land, as was the case with lands other than mineral lands, but by royalty

paid in respect of the land by the assessee to the lessor. The Court relied on

India Cement (supra) to hold that royalty cannot be used as a measure to tax

mineral-bearing land:

“33. […] But the question, what is it that is really being taxed by the legislature? So far as mineral- bearing lands are concerned, is the impact of the tax on the land or on royalties? The change in the scheme of taxation under Section 7 in 1976; the important and magnitude of the revenue by way of royalties received by the State; the charge of the

174 PART I

cess as a percentage and, indeed, as multiples of the amount of royalty; and the mode and collection of the cess amount along with the royalties and as part thereof are circumstances which go to show that the legislation in this regard is with respect to royalty rather than with respect to land.”

300. In Federation of Mining Associations of Rajasthan v. State of Rajasthan, 377

a three-Judge Bench relied on India Cement (supra) and Orissa Cement

(supra) to declare that the State legislature did not have competence to a levy

tax on mineral bearing land on the basis of the royalty derived from the land.

301. In the aftermath of the decision in Orissa Cement (supra), the State legislature

of Orissa enacted the Orissa Rural Employment, Education and Production Act

1992 to increase the income of the State and compensate the loss faced by the

exchequer. The legislation levied a cess on “all lands”. Land was defined to mean

“land of whatever description […] and includes all benefits to arise out of lands.”

In Mahanadi Coalfields (supra) this Court held that since ‘minerals’ are benefits

arising out of land, the charging section imposed a tax on minerals. 378 The levy

was held in substance to be on mineral rights under Entry 50 of List II. It was

observed that since the MMDR Act provides for “all kinds of taxation on minerals

and mineral rights,” the State legislature was not competent to levy the tax under

Entry 50 of List II.

302. The decisions rendered in above judgments, ranging from India Cement (supra)

to Mahanadi Coalfields (supra), proceed on two premises: first, the MMDR Act,

by providing for all levies with respect to taxation of minerals and mineral rights,

completely excludes the legislative competence of the States to tax mineral-

377 1992 Supp (2) SCC 239 [5] 378 Mahanadi Coalfield Ltd. (supra) [19]

175 PART I

bearing land; and second, royalty is not directly connected to land and cannot be

used as a measure to tax mineral-bearing land. The first premise has been

answered in the earlier segments of this judgment. The MMDR Act does not

serve as a limitation on the legislative competence of the States to tax mineral

rights under Entry 50 of List II. Moreover, as held in Special Areas Development

Authority (supra), the MMDR Act does not impede the legislative competence

of the States with respect to legislative entries under List II, including the power

to levy taxes on mineral-bearing lands under Entry 49 of List II. The second

assumption is also wrong for the reasons we will discuss in the ensuing

segments.

b. Goodricke

303. Apart from income, the quantum of yield or produce of the lands may also be

used to measure the amount of tax. In Buxa Dooars Tea Co. Ltd. v. State of

West Bengal, 379 the levy of ‘rural employment cess’ on tea estates under the

West Bengal Rural Employment and Production Act 1976 was challenged. 380

The measure of tax of the levy was based on the quantity of tea dispatched from

the estate. The issue before a two-Judge Bench was whether the levy was in

respect of tea estates or on the dispatch of tea. The Court held that the measure

of the levy defined in terms of the weight of the tea dispatched from the estate

had no nexus with the nature of the tax, that is, a tax on land estates. Therefore,

it was held that what the legislation really contemplated was a levy on dispatches

of tea.

379 (1989) 3 SCC 211 380 “1976 Act”

176 PART I

304. In view of Buxa Dooars Tea (supra), the State legislature enacted the West

Bengal Taxation Laws (Second Amendment) Act 1989 to amend the Act of 1976.

The amendment provided that the rural employment cess would be levied

annually on a tea estate at a rate of twelve paise for each kilogram of green tea

leaves produced at the estate. In comparison with the previous provision which

measured the tax on the basis of the quantity of tea dispatched, the measure of

the cess in the amended provision was the production of green leaves.

305. The amended provision was challenged before this Court in Goodricke Group

Ltd v. State of West Bengal. 381 The primary issue before this Court was whether

the impugned levy was a levy on lands within the meaning of Entry 49 of List II

of the Seventh Schedule. Justice B P Jeevan Reddy, speaking for the three-

Judge Bench, observed that the income or yield of a land or building can be taken

as a measure of the tax on land and buildings. Hence, the measure of the tax

based on the yield from the land was held to be valid:

“20. […] In the case before us, the cess is no doubt calculated on the basis of the yield – for every kilogram of tea leaves produced in a tea estate, a particular cess is levied. But that is a well-accepted mode of levy of tax on land. The tax is upon the land – upon the “tea estate” which is classified as a separate category, as a separate unit, for the purpose of levy and assessment of the said cess quantified on the basis of the quantum of produce of the tea estate. It cannot be characterised as a tax on production for that reason. […]”

381 1995 Supp (1) SCC 707

177 PART I

306. In Goodricke (supra), the petitioners relied on India Cement (supra) and Orissa

Cement (supra) to urge that there has to be a direct connection between the land

and the levy. The two decisions were distinguished on the following rationale:

“21. […] The basis of the judgment – and the ratio of the decision – in our respectful opinion is that it was case where the tax was measured not with reference to or on the basis of the income or yield of the land but with reference to the amount of royalty payable by the lessee to his lessor. It was for this reason that the tax was held to be not upon the land. Royalty is a matter of agreement between the lessor and the lessee; it may also be determined by a statutory provision. But royalty is not a produce of the land; royalty is not the income of the land nor is the royalty the yield of the land – and that is the distinction.”

307. It is important to note the above observation to the effect that royalty is not the

produce, income, or yield of the land. Royalty is paid by a lessee to the lessor as

consideration for the exercise of mineral rights. However, does this preclude the

State legislature from using royalty as a measure of taxes on mineral-bearing

land? We will deal with this issue in greater detail in a later part of the judgment.

308. Another argument which was addressed in Goodricke (supra) was that no land

cess can be levied if there is no yield from the tea estate. Justice Jeevan Reddy

negatived this contention by observing that a tea estate will not yield produce if

it is not properly tended and nurtured. However, an ordinary prudent owner or

occupier of a tea estate would take care to properly nurture of the estate. When

tax is measured on the basis of the quantum of production, there is a probability

that the tax collected would vary depending upon the amount produced.

However, the learned Judge observed that uniformity of taxation is not an

essential condition. Goodricke (supra) adopted the standard of an ordinary

prudent person to infer that the tea estate will generally be properly nurtured.

178 PART I

When the yield from land is used as a measure of the tax on land, the tax is

essentially assessed on the actual or potential productivity of the land. The

majority in Kesoram (supra) approved Goodricke (supra). We will deal with the

relevance of the reasoning in Goodricke (supra) in the context of mineral-

bearing land in the following segment.

309. The other issue in Goodricke (supra) was the effect of the declaration in Section

2 of the Tea Act 1953 on the competence of the State legislature to levy the land

cess. Parliament had enacted the Tea Act in pursuance of Entry 52 of List I of the

Seventh Schedule. Section 2 declares that the Union is taking under its control

the tea industry in the public interest. Section 25 imposes a duty of excise on all

tea produced in India at a rate not exceeding fifty paise per kilogram as the

Central Government may notify. 382 The proviso to Section 25(1) empowers the

Central Government to prescribe different rates of cess for different varieties or

grades of tea. The issue was whether the levy under Section 25 (which is

measured on the basis of the quantum of tea produced) denuded the State

legislature of the competence to impose a cess on land adopting the same

measure.

310. The Court observed that both the levies are different – while excise duty is on

the produce of the land, land cess is a tax on land. Section 25 of the Tea Act

382 Section 25, Tea Act 1953. [It reads:

“25. Imposition of cess on tea produced in India – (1) There shall be levied and collected as a cess for the purposes of this Act a duty of excise on all tea produced in India at such rate not exceeding fifty paise per kilogram as the Central Government may, by notification in the Official Gazette, fix: Provided that different rates may be fixed for different varieties or grades of tea having regard to the location of, and the climatic conditions prevailing in, the tea estates or garden producing such varieties or grades of tea and any other circumstances applicable to such production. (2) The duty of excise levied under sub-section (1) shall be in addition to the duty of excise leviable on tea under the Central Excises and Salt Act, 1944 (1 of 1944), or any other law for the time being in force. (3) The provisions of the Central Excises and Salt Act, 1944 (1 of 1944), and the rules made thereunder, including those relating to refund and exemption from duty, shall, so far so may be, apply in relation to the levy and collection of the duty of excise under this section as they apply in relation to the levy and collection of the duty of excise on tea under the said Act.”]

179 PART I

enacted by Parliament was held not to deprive the State legislature of its power

to levy a tax on lands comprised in a tea estate. The declaration in Section 2 of

the Tea Act was held not to affect the legislative competence of the State

legislature to levy land cess since it did not seek to control the cultivation of tea

but sought to tax tea estates. The land cess was construed not to be on the tea

industry, but a cess on land comprised in tea estates.

311. The decision indicates that the field reserved to the States under Entry 49 of List

II is to impose a tax on land as a unit, without seeking to control the activity or

use taking place on the land which is taxed. Similarly, a tax on mineral-bearing

land is a tax on the land as a unit; it does not seek to control the mining activity

which takes place on the land. Therefore, there is no conflict between the taxing

field of the States under Entry 49 of List II to levy a on tax mineral-bearing land

and the power of Union to regulate mines and mineral development under the

legislative head of Entry 54 of List I.

iv. Measure of tax on mineral-bearing land

a. Decoupling of minerals from land

312. The respondents contend that the value of minerals cannot be used as a

measure of tax on land because minerals are effectively decoupled from mineral-

bearing lands by land reform legislation enacted by the States. It was submitted

that the decoupling occurred when the minerals were legally vested in the State.

Consequently, it was submitted that since the right to minerals vests with the

State, the value of minerals cannot be used as a measure to tax land. Another

interesting point of submission on behalf of the respondents was that when the

State transfers the mineral rights to the lessee under a mining lease, the lessee

180 PART I

acquires the right to the minerals only upon their extraction and payment of

royalty.

313. The petitioners rebut the above submissions of the respondents by arguing that

there is no provision under the MMDR Act providing for notional segregation of

minerals from land. It was contended that the land and minerals remain legally

and naturally intertwined until the minerals are extracted from the land in exercise

of mineral rights. The decoupling occurs only when a lessee exercises their

mining rights to work the mines and win the sub-soil minerals. Moreover, it was

submitted that under a mining lease, the lessee is granted a lease of the demised

area along with the mineral rights. The logical corollary to the petitioners’

argument is that the lessee acquires the rights to the minerals at the signing of

the mining lease and therefore, the value of minerals can be validly used as a

measure for taxing mineral bearing land.

314. In view of the above submissions, the first issue that we need to address is

whether a mining lease also comprises a lease of land along with the mineral

rights. Section 3(ac) of the MMDR Act defines “leased area” to mean the area

specified in the mining lease within which the mining operations can be

undertaken and includes the non-mineralised area required and approved for

activities falling under the definition of “mine”. There are other provisions under

the MMDR Act which also deal with mineral bearing land. Section 6 prescribes

the maximum area with respect to which a mineral concession may be granted.

Thus, determination and ascertainment of land area is the first step towards the

grant of a mineral concession. 383 Section 9 fixes the rate of royalty in respect of

383 See Kaviraj Basudevanand v. Mahant Harihar Gir, (1974) 2 SCC 514 [9]. [This Court held that the mining lease

will have to conform to the provisions of Section 6 of the MMDR Act regarding the maximum area for which the mining leave will have effect.]

181 PART I

any mineral removed or consumed by the lessee or their agent from the leased

area. Section 9-A envisages the payment of dead rent “for all the areas included

in the instrument of lease.” Thus, dead rent is relatable to the area specified in

the mining lease. Section 11(10) requires the holder of a composite licence to

submit a report to the State Government specifying the area required for mining

lease and the State Government shall grant mining lease for such area. The

above provisions indicate that the leased area forms an integral part of a mining

lease. However, the position becomes clearer when we look at the provisions of

the Mineral Concession Rules.

315. Rule 31 of the Mineral Concession Rules requires a mining lease to be executed

in terms of Form K or in a form as near thereto as circumstances of each case

may require. The preamble to Form K grants and demises unto the lessee all

“those the mines beds/veins seams” with respect to the specified mineral situated

lying and being in or under the lands referred to in Part I. Part I details the area

of the lease and its description. The mining lease makes it evident that the

demise is for the minerals and not the area of land in which the minerals are

found. There may arise situations where the lands may be owned by private

individuals, but the minerals are vested in the State. To remedy such situations,

Rule 72 of the Mineral Concession Rules mandates the holder of a mining lease

to pay annual compensation to the occupier of the surface rights. The provision

states that in case of agricultural land, the amount of annual compensation shall

be worked out on the basis of the average annual net income from the cultivation

of similar land for the previous three years. In case of non-agricultural land, the

amount of annual compensation shall be worked out on the basis of the average

annual letting value.

182 PART I

316. Under the scheme of the MMDR Act, the mining lease holder is required to obtain

the surface rights where the land is not owned by them. For instance, Rule 22 of

the Mineral Concession Rules deals with the applications for grant of mining

leases. Rule 22(3)(h) requires the applicant for grant of mineral rights to submit

a statement in writing stating that they have obtained surface rights over the area

or have obtained the consent of the owner for starting mining operations in case

the lessee is not the owner. 384 A similar pre-condition has been laid down with

respect to the grant of a prospecting licence. 385 Further, Rule 27(1)(t) requires

the mining lessee to pay to the occupier of the surface of the land such

compensation as may become payable under the Mineral Concession Rules.

Importantly, Rule 36 states that the boundaries of the area covered by a mining

lease shall run vertically downwards below the surface towards the centre of the

earth. Thus, the sub-soil activities are spatially restricted by the surface area.

317. The government can acquire surface rights for public purposes, including mining,

and lease it to the lessee. The acquisition of surface rights by the Government

takes place in accordance with the land acquisition legislations. For example, the

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation

and Resettlement Act 2013 empowers the Government to acquire land in any

area for any public purpose. 386 In case the owner is a private person, the surface

right could be granted to the mining lessee by virtue of a separate lease deed.

384 Rule 22(3)(h), Mineral Concession Rules 1960. It reads: “(h) a statement in writing that the applicant has, where

the land is not owned by him, obtained surface rights over the area or has obtained the consent of the owner for starting mining operation. Provided further that the consent of the owner for starting mining operations in the area or part thereof may be furnished after the execution of the lease deed but before entry into the said area; Provided also that no further consent would be required in the case of renewal where consent has already been obtained during grant of the lease.” 385 Rule 9(2)(g), Mineral Concession Rules 1960. 386 See Sections 11 and 12, Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and

Resettlement Act 2013.

183 PART I

The rights to the surface will generally be concomitant with the rights to the

minerals.

318. The issue of severance between surface rights and mineral rights came up

before a Constitution Bench of this Court in Burrakur Coal Co. Ltd. v. Union of

India 387 in the context of the Coal Bearing Areas (Acquisition and Development)

Act 1957. 388 The Coal Bearing Areas Act was enacted by Parliament to establish

public control over the coal mining industry and its development by providing for

the acquisition by the State of unworked land containing or likely to contain coal

deposits or of rights in or over such land. Section 4 allows the Central

Government to issue a preliminary notification giving notice of its intention to

prospect for coal with respect to a particular land in any locality. Once the

notification is issued under Section 4, any prospecting licence or mining lease

with respect to that land ceases to have effect. Sections 7 and 9 empower the

Central Government to acquire whole or part of any lands in which coal is

obtainable. On the publication of the declaration of acquisition under Section 9,

the land or the rights in or over the land vest absolutely in the Central