Are States' Powers To Tax Mineral Rights Limited By MMDR Act? Supreme Court 9-Judge Bench Discusses [Day 2]

“ If a tax is a land tax, obviously entry 23 of List I does not impose any fetters. But if the tax on land is albeit a tax on mineral-bearing land, can it not be postulated that the levy of the tax will have some impact on the development of minerals? If so, would it not be open to the Parliament to prescribe limitations even though you are really seeking to exercise your power under Entry 49…when you are choosing to levy tax on a mineral-bearing land, is it not open to the Parliament under Entry 23 of List I to impose restraints on limitations even when you are exercising power”.

Entry 49 of List 2 relates to the State's power to levy taxes on lands and buildings. Entry 50 of List 2 relates to the State's power to levy taxes on mineral rights subject to limitations imposed by the Parliament's law.

The post-lunch session saw the Chief Justice, referring to the above question, contemplate the nature of the levy, pondering whether it is a tax on mineral rights or a combination of land and mineral rights.

“For us to put forth that proposition which I was trying to say earlier, we will then have to say that the levy itself is not under land but is a tax on mineral rights or that it is a tax on land and mineral rights. It's sort of a ragbag legislation.”

The hearings today culminated the arguments of the different state governments which pondered on the purpose and scope of Entry 50 List II of the 7th Schedule and its interplay with Entry 49 List II.

Senior Advocate Mr Rakesh Dwivedi representing the State of Jharkhand emphasized the crucial nature of Entry 50, highlighting that while Parliament can amend laws and introduce limitations, it must explicitly state that it intends to restrict Entry 50 List II. The importance of preserving the state's taxing power was underscored, cautioning against any attempt to silently strip away vital taxing authority.

“As far as entry 50 is concerned, the Parliament can make an amendment in the existing law or any other law and provide limitations. But it will have to spell out that it is doing so in order to limit entry 50 list II. It is of very vital importance, the state's taxing power, so it cannot sub-silentio while prescribing some fees/royalty/surface rent etc take away a vital power of the taxing rent.”

Justice Nagarathna agreeing to the same, stressed that any limitation imposed by Parliament should align with the overarching interest of mineral development. This sentiment was echoed by Justice Roy, who emphasized the need to give weight to the historical context, particularly the debates in the Constituent Assembly. He pointed out that although there was an attempt to shift Entry 50 to the Union List, it was explicitly rejected, reinforcing its position in the State List.

“Some emphasis has to be given that this was specifically moved to bring in the ambit of the union list but then it was specifically rejected to say that it will remain in the state list. So the debate in the constituent assembly will have to be given some meaning and some emphasis.”

The discussion further delved into the question of whether Entry 50 is a specific entry distinct from Entry 49. Senior Advocate Dwivedi, referring to the Kesoram case, argued that the Court in Kesoram recognized both Entry 49 and Entry 50 as viable powers for the states. Chief Justice Chandrachud expanded on this, invoking the Principle of Rag Bag Legislation. He elucidated that the powers under both Entry 49 and 50 can coexist, not only in the context of the Union List but also within the State List.

The CJI opined, “ In such a scenario the Principle of Rag-Bag Legislation would be applicable. It is not only in relation to the Union list. The state has a power both under Entry 50 and 49 of List II, powers can be combined in both the Entries.”

Mr Dwivedi offered a nuanced analysis, drawing parallels with parliamentary law principles. He highlighted that when analyzing entries in the State List, the court must assess whether any entry, taken in isolation or conjunction with others, finds support in the State List. If support is found, the court then examines if there is a clash with any actions Parliament may have taken concerning other entries. This process, he emphasized, follows the doctrine of harmonious construction, a last-resort approach to avoid rendering any Entry redundant.

The Key arguments of Mr Dwivedi can be enlisted as follows :

1. Entry 49 in List II is the exclusive entry of taxing power with respect to land and buildings;

2. There is no other Entry in List II which operates on the same field as a tax on lands and buildings as a unit. As the aggregate it may come in Entry 6 as an asset;

3. Mining land in particular may not be outside the hold of Entry 49 List II;

4. The framers of the constitution had therefore contemplated that the state legislature should have the competence to impose tax on land and buildings of all kinds, notwithstanding the other regulatory entries as the regular entries by themselves do not contain taxing;

5. As long as the measure of tax which has been adopted has close and proximate nexus with the land, keeping in mind its user or non-user, the levy of tax by the states would be valued and competent;

6. The measure of tax is directly and intricately connected with the land, this remains undisputed and it's not a case where mineral-bearing land alone is being targetted;

7. In other cases, the annual value of land does include the annual value of minerals, though it applies across the board, but in the case of mineral-bearing land, the annual value is determined on the basis of the mineral value dispatched. The incidence of the tax is entirely on the land and the measure also has a proximate nexus with the land from which the mineral has been extracted infact until extraction it lay embedded in the land and hence falls under Entry 49 List II;

8. If the decision in Kesoram is right in holding that Royalty is not tax then there is no provision at all in the MMDR Act 1957 which imposes specifically and expressly any limitations whatsoever on the state's legislative competence under Entry 50 List II, so therefore all the laws impugned would be valid even in Entry 49 and 50 are read together

Senior Advocate Mr. S Niranjan Reddy, representing the State of Andhra Pradesh, delved into the constitutional nuances of taxation. He underscored the term "impost" under Article 366 (28), indicating that Entry 50 empowers states not only to tax but also to impose an impost. Reddy argued that if an impost shares characteristics with a tax, it should be treated as such unless it exhibits distinctive features, such as funds not going to the consolidated fund.

“ Taxation for the purpose of the constitution will use an impost. This means that Entry 50 which allows the state to tax, enables the state to have an impost also….If the impost otherwise has all the characteristics of a tax, it will be a tax . If it has characteristics which are completely distinguished - like the amounts to not go to the consolidated fund for example, then impost may have a separate meaning.”

Mr Reddy further contended that If Royalty is payable as a share in respect of any mining lease area, such royalty would be equally payable to any individual who would have mining rights.

“Section 9 of the MMDR Act does not provide that even if royalty is payable by the govt. or the private individual, the amount received by the land/mine owner that can also be subjected to tax under Entry 50 List II. The MMDR Act does not anywhere prescribe that the State is precluded from the imposition of tax.”

The counsel placed reliance on S.2 of the MMDR Act which provides :

“Declaration as to the expediency of Union control

2. It is hereby declared 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”

A Limitation Power of The Parliament Cannot Be Converted into A Taxing Power - Sr Adv Hansaria

Senior Advocate Hansaria, appearing for the mineral development authority of the state of UP, asserted that Entry 50 doesn't grant the Union the power to tax mineral rights. He emphasized that it acts as a limitation on the state's authority rather than enabling the Parliament to tax. Hansaria argued that if royalty is deemed a tax, it should fall under specific entries between 82-92(b) of List I, and a limitation power on the state cannot transform into an enabling power for the Parliament.

“They cannot apply a limitation power on the state, to be an enabling power on the Parliament.”

Referring to Section 2 of the MMDR Act, Hansaria contended that the Parliament's powers were confined to those delineated in the Act, primarily under Section 18 concerning mineral development. He explained that any restrictions under Entry 50 would be limited to Section 18, and the Parliament had consciously refrained from imposing restrictions on the state's authority to levy taxes on mineral rights.

“Therefore restriction if any under Entry 50- limitation power can be referred only to Section 18 MMDR Act and the Parliament has chosen not to make any restriction on the State power to levy taxes on mineral rights.”

On Entry 50 List II Being Sui-Generis & The 3 Balances In Union-State Legislation - Mr Salve's Overview

Senior Advocate Harish Salve, representing the Eastern Zone Mining Corporation, provided historical context, highlighting the economic disparities resulting from varying royalty rates among states. Salve argued that Entry 50's language goes beyond mere development or conservation and is uniquely crafted for holistic national welfare.

“Entry 50 language is sui-generis and is not just tagged to development or conservation alone.”

He outlined three balances in Union and State legislation: Occupied Field, Denudation, and Repugnancy.

“Though used interchangeably, the three have very different meanings. Denudation is the expression used sometimes in conjunction with the occupied field for the physicals of entries which Parliament by law declare, whats the effect of that declaration? And to what extent does it remove the content of the corresponding state entry….Then we have another Entry which says 'so and so subject to' there the occupational field is more important and the third is the do and don't test- the repugnancy, where if Parliament has made one law as opposed the state's law, then we say Parliament's law will prevail.”

Mr Salve simplified that the present matter pertains only to two key considerations: 1. The interplay between Entry 50 and 49 of List II; 2. The connotations of the limitations introduced in Entry 50 expressly.

The Union will expand further on these two aspects in tomorrow's hearing.

Background

The Supreme Court is hearing on the multifaceted taxation matter of mineral-bearing lands. The key reference question involved in the present matter is to examine the nature and scope of royalty as prescribed under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and whether it could be termed as tax.

The bench headed by CJI DY Chandrachud comprises Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih. Among the batch are petitions challenging the Bihar Coal Mining Area Development Authority (Amendment) Act, 1992 and the rules framed thereunder, which imposed additional cess and taxes on land revenue due from mineral-bearing lands.

The matter was referred to 9 judge bench in 2011. A three-judge bench headed by Justice SH Kapadia had framed eleven questions to be referred to the nine-judge bench. These include important tax law questions such as whether 'royalty' can be considered as being like tax and can the State Legislature while levying a tax on land adopt a measure of tax based on the value of the produce of land. The three-judge bench clarified in this case that the reason why it was not referred to a five-judge bench and directly referred to a nine-judge bench because prima facie, there appeared to be some conflict in the decisions of State of West Bengal v. Kesoram Industries Ltd. and Ors which was delivered by a bench of five-Judges and India Cement Ltd. and Ors. v. State of Tamil Nadu and Ors. which were delivered by seven-judge benches.

Case details : Mineral Area Development v. M/S Steel Authority Of India & Ors (CA N0. 4056/1999)