Income Tax Issues in relation to Refund

Abhilash T.G, Asst. Professor in Law, CSI College for Legal Studies, Kottayam


Tax refund is the amount, which the tax department gives back to a taxpayer who has paid excess taxes. Refund means, “To pay back”. The refund under the Income Tax Act 1961 signifies return of excess amounts of income tax that a taxpayer has paid to the state or the return by the government of excess taxes paid by an assessee, after taking into consideration income tax, withholdings, tax deductions or credits, and other factors. Withholding of such amount without any reasonable cause amounts to unjust enrichment on the part of state. Therefore, a timely action is required in disposal of refund application for speedy and affordable justice in the administration of tax.

Statutory framework

Before going into detail, it is desirable to quote here the legal provisions relating to refund. Sections 237 to245 in Chapter XIX of the Income Tax Act 1961 highlight the law relating to refund.
Section 237 – Refunds
Section 238 – Person entitled to claim refund in certain special cases
Section 239 – Form of claim for refund and limitation
Section 240 – Refund on appeal, etc
Section 241 – [Omitted] Section 242 – Correctness of assessment not to be questioned
Section 243 – Interest on delayed refunds
Section 244 – Interest on refund where no claim is needed
Section 244A – Interest on refunds ((Prayag Udyog Pvt. Ltd., Allahabad Vs.Union Of India and Others[ 2012]348ITR217(All)- Interest on refund amount is due from the date of actual payment under section 244A(1)(b) to the date of refund)).
Section 245 – Set off refunds against tax remaining payable

Section 244 deals with interest on refund where no claim is needed. It is the obligation of the department to give interest on excess tax collected. When a refund is due to the assessee, in pursuance of an order referred to in Section 240′ and the Assessing Officer does not grant the refund within the stipulated time, the Central Government is required to pay simple interest at the stipulated rate ((Income Tax Act 1961,section 244(2).)). A “refundee” will be an assessee though no assessment proceedings were initiated ((Income Tax Officer, New Delhi vs. Delhi Development Authority(AIR2002SC264).)). Section 240 deals with refund on appeal, etc. This provision clearly lays down that where as a result of any order passed in appeal or other proceedings under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf. The crucial expressions in Section 240 are ‘any amount which becomes due to the assessee as a result of any order passed in any appeal or other proceedings under the Act and the ‘amount becomes due to the assessee’. Section 244 refers to the liability fastened on the Central Government in case of failure to grant refund within the stipulated time in a case where refund is due to the assessee in pursuance of an order referred to in Section 240. A combined reading of both the provisions makes the position clear that it is any amount, which becomes due to the assessee and not necessarily the tax component.

Is the refund taxable?

The tax refund is not your income as it is just a receipt of excess taxes paid and therefore the amount of refund is not taxable. However, interest received on tax refund is taxable. The rate of tax would be as per your applicable slab rate. You may include it in the taxable income of the year in which such refund is received.

Judicial trends

In Union of India (UOI) Through Director of Income Tax vs. Tata Chemicals Ltd ((MANU/SC/0213/2014)),the Supreme Court ruled that refund due and payable to the Assessee is debt-owed and payable by the Revenue. This judgment reiterates the legal position on refund as contained in section 237 of the Income Tax Act 1961.For getting the benefit of section 237,a refund application has to be filed by the assessee ((Under Rule 41 of the Income-tax Rules, 1962 a claim for refund is to be made in Form No. 30. The excess tax can be claimed as refund by filing your income tax return. It will be refunded by issue of cheque or by crediting to your bank account. The department has been making efforts to settle refund claims within four months from the month of filing return)). The claim for refund is to be accompanied by return of income in the form prescribed under Section 139 of the Act unless the claimant has already made such a return to the Income-tax Officer ((Trustees of H.E.H. The Nizam’s Supplemental Family Trust vs. CIT( AIR2000 SC 966).)).

Not refunding an excess amount collected from the assessee can thus result in violation of article 265 of the Indian Constitution ((“No tax shall be levied or collected except by authority of law”)). In the context of this judgment the State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances.

The fundamental legal issue to be discussed in this article is;

1. Whether the Revenue is obliged to pay an interest on interest in the event of its failure to refund the interest payable within the statutory period ?

To answer this issue we must start the discussion by referring to the judgment of the Supreme Court in the case of Sandvik Asia Limited v. Commissioner of Income Tax and Ors (([2006] 2 SCC 508: AIR2006SC1223)), was a case relating to payment of advance tax. In Sandvik case (supra) wherein, the main issue for consideration and determination by the Supreme Court was, whether the Assessee is entitled to be compensated by the Revenue for delay in payment of the amount admittedly due to the Assessee. From the facts of the Sandvik case (supra) there was an inordinate delay on the part of the Revenue in refunding the amount due to the Assessee. Therefore, the apex court had thought it fit that the Assessee should be properly and adequately compensated and therefore in paragraph 51 of the judgment, the Court while compensating the Assessee had directed the Revenue to pay compensation by way of interest.

In Commissioner of Income Tax, Gujarat vs. Gujarat Flouro Chemicals (([2012]348ITR319(SC),2012(8)SCALE660))decided on 23.08.2012, the Assessee by relying upon the judgment of the Division Bench of the Supreme Court in the case of Sandvik Asia Limited v. Commissioner of Income Tax and Ors(supra) argued that it was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to which it was wrongly withheld for a long period. The main issue, which arose for determination in Sandvik Asia [supra], was, whether the Assessee was entitled to be compensated by the Revenue for delay in paying to it the amounts admittedly due. The court held that the Act recognizes the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without authority of law the Revenue must compensate the assessee. In other words, the Assessee was entitled to a refund. However, a refund order was passed in favour of the Assessee. With regard to the payment of interest on the amount ordered to be refunded, the court made some remarks such as in Sandvik Asia [supra], interest was ordered on the basis of equity. It was also ordered to be paid based on Article 265 of the Constitution. Hence the major question was, whether the Revenue was obliged to pay interest on the amount ordered to be refunded. Doubting the correctness of the decision in its earlier judgment in the case of Sandvik Asia Limited v. Commissioner of Income Tax and Ors. (supra) a bench of two learned Judges comprising chief justice S.H. Kapadia, and justice Madan B. Lokur referred the matter to a larger bench for consideration and authoritative pronouncement by order dated 28.08.2012. The larger bench comprising justice H.L. Dattu, Sudhansu Jyoti Mukhopadhaya and M. Yusuf Eqbal settled the issue on 18.09.2013 ((In Commissioner of Income Tax, Gujarat vs. Gujarat Flouro Chemicals (2013)262CTR(SC)269; 2013(296)ELT433(S.C.); [2013]358ITR291(SC);2013(12)SCALE281; (2014)1SCC126))as follows;

“In our considered view, the aforesaid judgment has been misquoted and misinterpreted by the Assessees and also by the Revenue. They are of the view that in Sandvik case (supra) this Court had directed the Revenue to pay interest on the statutory interest in case of delay in the payment. In other words, the interpretation placed is that the Revenue is obliged to pay an interest on interest in the event of its failure to refund the interest payable within the statutory period.

As we have already noticed, in Sandvik case (supra) this Court was considering the issue whether an Assessee who is made to wait for refund of interest for decades be compensated for the great prejudice caused to it due to the delay in its payment after the lapse of statutory period. In the facts of that case, this Court had come to the conclusion that there was an inordinate delay on the part of the Revenue in refunding certain amount which included the statutory interest and therefore, directed the Revenue to pay compensation for the same not an interest on interest.

At a policy level, it is incumbent upon the department and financial ministry to evolve a comprehensive framework for the implementation of law relating to refund in the context of the above decisions. Based on this judgment, it is the responsibility of the Income tax department to give effect to relevant provisions in a manner that is consistent and predictable. The Gujarath Fluro Chemicals case and its dictum will have far-reaching consequences for the disposal of refund applications and cases in India.

Article 265 and the Authority to impose Tax: An Overview

Author: Bineet Kedia, Lecturer-in-Law, Amity University Rajasthan

The origin of the word ‘tax’ is from ‘taxation’ which means an estimate. In India, the system of direct taxation has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient stage and the law giver, cautioned the king against excessive taxation. Kautilya, the author of Arthasastra, emphasizes on equity and justice in taxation ((See,, last accessed on 20th of June, 2013.)).

Since the power to tax is considered to be an inherent sovereign power of a state, the constitutional provisions with respect to taxation are considered as limitations on power to tax. Everything which is subject to the sovereign power is proper object of taxation. Consequently, tax laws generally do not have extra-territorial operations and person or property to be taxed should be within the jurisdiction of the taxing authority. Hence immunity from taxation is extended to the property of other sovereign States in international law as every other sovereign State has to respect the independence and dignity of other Sovereign State.


Article 265 of the Constitution provides embodies an important constitutional principle, namely, that no tax shall be levied or collected except by the authority of the law. The term ‘law’ in this article means statue law, i.e. an Act of the legislature ((S. Gopalan vs. State of Madras, (1958) 2 MLJ 117)). Accordingly no levy can be imposed either by executive action or by the resolution of the House ((State of Kerala vs. K.P. Govindan (1975) 1 SCC 281)). Further the law must be a valid law ((V.N. Shukla., “Constitution of India”, Eastern Book Company, Luckhnow, edt. Tenth, 2001S))and must satisfy the following requirements:

         i.            The law should be one within the legislative competence of the legislature, being covered by the legislative list assigned to it by the Constitution.

       ii.            The law should not be one prohibited by any constitutional provisions like Articles 27, 276, 286, 301 etc ((D.D. Basu, “Shorter Constitution of India”, Prentice Hall of India, New Delhi, 1994)).

     iii.            The law or relevant portion thereof should not void under Article 13, i.e. in conflict with the fundamental rights.

     iv.            The law should not violate any other constitutional limitations such as Article 301 and 304.

In K.T.Moopil Nair vs. State of Kerala ((AIR 1961 SC 552)), certain provisions of the Act which prescribed the procedure for the levy of tax were struck down on the ground of being obnoxious to Article 19(1) (f). This case illustrates that not only levy but matters pertaining to collection of tax also should be under the authority of law.   In this case the uniform rate of tax at Rs.2 per acre levied under the Travancore- Cochin Land Tax Act, 1955 was challenged. The petitioner contended that though he owned considerable tract of forest land but his income from that land was only Rs. 3100 per annum which was insufficient to pay tax. The Court held that ordinarily the tax on land or land revenue was imposed on the actual or potential productivity was discriminatory.

In Tangkhul vs. Simirei Shailei ((AIR 1961 Mani 1)), the custom to render a day’s free labour to the village headmen in every year or to pay him Rs. 50 in lieu thereof had prevailed from time immemorial. The Court held that the amount of Rs. 50 was in the nature of tax and violated Art 265.

In Khazan Chand vs. State of J& K (([1984] 2 SCC 456: AIR 1984 SC 762)), the Court observed that power to make law with respect to tax comprehends within it the power to levy that tax and to determine the persons who are liable to pay such tax, the rate at which tax is to paid and the event which will attract liability in respect of such tax. The power to make a law with respect to a tax includes the power to make provisions in relevant statue with respect to all matters ancillary and incidental to the levy, assessment, collection and recovery of tax.

The scope of Article 265 was examined by Justice Pathak in Govind Saran Ganga Saran vs. S.T.Commercial ((AIR 1985 SC 1041)), wherein he stated the components of tax. The first is the nature of the taxable event, the second is the person on whom the levy is imposed, the third is the rate at which tax is imposed, and fourth is the measure or value to which the rate will be applied for computing the tax liability.

Where the law does not authorize the tax imposed, Article 265 is infringed. In Mainpuri Municipality vs. Kanhaiyalal ((Air 1960 SC 184)), the court held that where the statue conferred the power to levy the toll only on vehicles entering a municipality, a vehicle plying inside the municipal area could not be taxed. .

In Lohia Machines Ltd. vs. U.O.I (([1985] 2 SCC 197. 223)), an important issue which arises is whether an invalid tax could be challenged after the lapse of some time, at the time of collection. It was held that where the statue itself is ultra virus, the lapse of any number of years would not make the collection of tax under statue legal even by acquiescence.

One of the basic questions to be answered is whether the power to tax can be used to regulate apart from collecting revenue. In Lord Krishna Sugar Mills vs. U.O.I ((AIR 1959 SC 1124)), an export promotion scheme for sugar provided for compulsory supply of sugar by factories for export. In order to make a scheme a success it provided that additional excise duty would be levied on quantity of sugar delivered short of the quota. The Court upheld the validity of the scheme and observed that if there was no provision for imposing penal cess on the defaulters, in this case in the form of additional excise duty, there would be no sanction to compel them to deliver their quota of sugar. Therefore, it may be said that every tax is in some way regulatory.

One of the inherent limitation on the power of taxation is that the legislature should not imposes taxes for the benefit of private persons or in aid of private enterprises and should not be in contravention of Article 19 of the Constitution.

A tax is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. In D. Rama Raju vs. State of A.P. (([1972] 1 SCC 70)), the Andhra Pradesh (Krishna and Godavari Delta Area) Drainage Cess Act, 1968 provided for a levy of drainage cess on owners of land to meet the expenditure of flood prevention scheme. The challenge was that the expenditure was for the benefit of other land owners. The Court rejected the contention and upheld the levy.


Retrospective laws are those which decree consequences or create liabilities arising out of facts which existed or transactions which took place before the enactments of the laws, and which consequences or liabilities did not by law exist with respect to such facts or transactions at the time the facts existed or the transactions took place ((K. Parameswaran, “Power of Taxation Under the Constitution”, Eastern Book Company, Lucknow, 1987)). The Indian constitution does not contain any prohibition against retrospective legislation. A Retrospective tax can be challenged on two grounds namely:

         i.            That by such retrospective operation the nature and the character of the tax have been altered, and

       ii.            That such retrospective taxation infringes the fundamental right under Part III of the constitution ((N.M. Renuka, “Taxation and the Constitution”, Current Tax Reporter, 2004)).

The power to tax retrospectively includes the power to levy tax for a period at which time the legislature itself was not in existence ((Laxmi cotton Traders vs. State of Haryana, AIR 1969 Punj 12)). In Chandrana & Co. vs. State of Madras (([1972] 1 SCC 17, 22-23)), in 1957-58 the Mysore legislature was competent to impose 10% ad volorem tax on textiles. But, in 1958 the Central Sales tax Act made imposition of tax on textiles above 2% ad volorem illegal. In 1964, the Mysore legislature imposed a tax on textiles at 10% to operate in 1957-58. The Supreme Court held that a present limitation on the legislature did not disable it from imposing a tax, which it would have otherwise been competent to impose during the relevant period.

The Parliament can step in where a State Legislature has been found incompetent to levy a tax and may even provide for its retrospective operation ((Jaora Sugar Mills vs. State of Madhya Pradesh, AIR 1966 SC 416, 421)). In such cases, the parliament need not re-enact the whole legislation already passed by the State Legislature but need only provide that the State Law shall be deemed to have been enacted by the Parliament.

A series of decision have laid down the proposition of law that where a provision of the taxing statue or an assessment order was held to be invalid by a court of law, the legislature may change the law retrospectively in order to get over the judicial decisions ((Janapada Sabaha vs. Central Provinces Syndicate, (1970) 1 SCC 509)). The retrospectively levy of tax may be challenged on the ground that by such operation the nature and character of tax are altered. Every tax has two essential elements, one of the revenue and other of the regulation. Where the regulatory aspect of a tax is prominent, and if such tax is levied retrospectively, the Court may take the view that it was a penalty rather than a tax ((M.P. Jain, “Indian Constitutional Law”, Wadhwa and Company, Nagpur, 2003)).

Where a tax is levied retrospectively and an assessee has reason to doubt its legality it may be challenged as infringing the Fundament Rights in Part III of the Constitution. Article 20(1) of the Constitution contains a general prohibition against ex-post facto criminal laws. In Tiwari Kanhaiyalal vs. C.I.T (([1975] 4 SCC 101)), the appellant had filed his return under the Income Tax Act, 1922. Later he was proceeded against for filing false return under Income Tax Act, 1961. Under Section 28(4) of the 1922 Act if penalty had been imposed on the assessee, he could not be prosecuted, but there was no such bar under the Act of 1961. It was held that Art 20(1) of the Constitution would not apply because section 28(4) of the 1922 Act did not obliterate the commission of the offence. However the Court held that in as much as Section 227 of the 1961 Act provided for greater punishment than section 52 of the Act of 1922 and to that extent, the appellant was entitled to the benefit of the second part of clause(2) of Art 20 of the Constitution.

A taxing statue may also provide for civil sanctions. When a taxing statue provides for imposition of penalty, the question arises whether the liability is one of criminal nature being for an act or omission constituting an offence, or one of civil liability only. In P. Ummali Umma vs. Insp. Asst. Comm. (([1967] 64 ITR 669 [Ker])), it was held that penalties imposed for evading tax created only civil liability and Article 20(1) was not attracted. This view was approved by the Supreme Court in Shiv Dutt Rai Fateh Chand vs. U.O.I (([1983] 3 SCC 529)), where it was observed that a penalty imposed by sales tax authorities is only a civil liability through penal in character.

An important issue is what is the proper law to be applied for imposition of the penalty whether the law at the time of the act or omission or law at the time of proceeding. In Jain Brothers vs. U.O.I (([1969] 3 SCC 311, 319)), the Constitutional Bench held that the crucial date for the purpose of the penalty was the date of completion of the assessment proceedings. But in Brij Mohan vs. C.I.T (([1979] 4 SCC 118)), the Court observed that the law operating on the date of the wrongful act should determine penalty.

The complaint against retrospective legislation is that it affects vested rights or already completed transactions and that too without too any prior notice. Thus the Courts began to examine such laws under Article 14 and 19 to see whether they impose any unreasonable restriction on the fundamental right of the citizen to carry on trade and business ((K. Parameswaran, “Power of the Taxation under the Constitution”, Eastern Book Company, Luckhnow, 1987)). A legislation which imposes retrospective taxation should have very clear and important objectives, such a prevention of tax evasion, in order to pass the gauntlet of judicial review. Bur, on the other hand, enactments for the validation of a defective levy or collection of tax are generally more leniently viewed by courts because the legislature presumably did not suspect any incompetence or defect when it originally enacted such law. It was held in Sat pal & Co. Ltd. vs. Governor of Delhi (([1979] 4 SCC 232, 242)), that merely because a statue was found to be invalid on the ground of legislative incompetence that does not permanently inhibit the legislature from re-enacting the statue if it is prove that the legislature had power to enact such a statue.

From the above cases it is clear that judicial scrutiny in this area is highly superficial. The Court has not given sufficient reasons to uphold the retrospective tax laws. Moreover, there was no valid notice to the taxpayer of his liability and the law operated for periods when the tax was not legally due.


Definition of Fee

In order to know the true meaning of the fees, we will have found its meaning given in different legislations, such as:

Income Tax Act, 1961

Section 43B ((Sec 43B refers to the deduction allowable in respect of the sum payable by an assessee by the way of tax, duty, cess, fee, or by whatever name called under any law for the time being in force is paid within the stipulated time))of 1961 Act refers to the word “fees” in association with the words “tax”, “duty”, or “cess” and the word “fee” will take colour from other words in whose association it appears ((Dr. I. Vijayakumar, “Business Expenditure Definition of Fees referred to in Section 43B of the Income Tax Act”, Current Tax Reports, Vol. 177, pg. 49  )). The Bombay High Court has explained the meaning of the word ‘fee’ in CIT vs. Shree Warna Sahakari Sakhar Karkhana Ltd (([2002] 173 CTR (Bom) 188: 2002 253 ITR  (Bom).)). by applying the rule of “ejusdem generis” ((It means when particular words pertaining to a class, category or genus are followed by general words, the general words are construed as limited to the things of the same kind as those specified)). In this case, it was held that there is no generic difference between tax and fee, though broadly a tax is a completely extraction as part of common burden without promise of any specific advantages to the classes of taxpayers whereas a fee is payment of service rendered, benefit provided or privileges conferred. The specific benefit or advantage to the payers of fees may even be secondary as compared with primary motive of regulation in public interest.

Thus, the concept of “fees” referred to in Section 43B cannot be equated with levy of audit charges payable for getting the audit of the accounts done. In this case levy of audit charges was nothing but the price required or demanded for the services rendered by the Government Auditors. The provision of section 43B does not apply to Government audit charges. The Court finally held that disallowance on account of outstanding government audit fees could not have been affirmed by the Commissioner and the Tribunal rightly allowed the same.

Om Parkash Aggarwal vs. Giriraj Kishore (([1987] 164 ITR 376 SC)), was the first case where the Supreme Court define the term ‘tax’ to differentiate from the term ‘fee’. In this case, three characteristics of tax have been pronounced which are as follows:

         i.            A tax is imposed under statutory power without the taxpayers’ consent and the payment is enforced by the law;

       ii.            That it is an imposition made for public purposes without reference to any special benefits to be conferred on the payer of tax; and

     iii.            That is part of common burden, the quantum of imposition upon the taxpayer depending generally upon the capacity of the taxpayer to pay.

     iv.            As regards fee the Supreme Court observed that essential qualification of a ‘fee’ is that it is absolutely necessary that the levy of a fee should on the fact of the legislative provision, be correlated to the expenses incurred by the government in rendering the services.

Constitution of India

The term ‘fee’ has been no where defined in the Constitution. The Courts have endeavored to define this term in contradiction to the term tax. In Commissioner H.R.E vs. L.T.Swamiar ((AIR 1952 SC 282: 1954 SCR 1006)), it was held that there is no generic difference between a tax and a fee, but the Indian Constitution recognizes a clear distinction between the two in the three lists in the Seventh Schedule. Each list has a number of tax entries, but at the end also has an entry authorizing levy of fees in respect of any of the matters included in the list ((J.N. Pandey, “Constitutional Law of India”, Central Law Agency, 2004)). For example, Entry 96, List I, reads as “Fees taken in respect of any of the matters within this list but not including fees taken in any court.” Now here expression “any of the matters in the list” necessarily includes also the entries relating to taxation. This means that a fee may be levied even under an enactment relating to the imposition of tax. The prohibition that no tax can be levied or collected without the authority of law, applies only in respect of taxes. The prohibition does not apply in respect of fees ((Ibid)), Section 76 of Madras Hindu Religion Endowment Act, 1927, which provided for a contribution at the rate of 5% of the income of religious institution and an additional levy of one and half percentage where such income exceeds Rs. 1000 to meet the cost of services and auditing, was challenged as imposing not a fee but a tax in reality.

Difference between Fee and Tax

Since quite some time, controversies had been surfacing in regard to the concept of ‘fee’ and how it differs from tax. The term ‘fee’ was explained by the Apex Court in several decisions in the context of legal maxim ‘quid pro quo’ ((Payment made for something received of more or less equivalent value or advantage while a tax was conceived of as a levy for providing common facilities)).

In the above case, the Supreme Court while enumerating the different characteristics of fee and tax expressed the view that distinction between tax and fee lies primarily in the fact that tax is levied as a part of common burden while fee is a payment for a special benefit or privilege. The court held that a tax is a compulsory exaction of money by pubic authority for public purposes enforceable by law and is not payment for service rendered. It was also held that specific definition of fee cannot be formulated as there are different types of fees. But it may be defined as a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenditure incurred by the government in rendering the services ((T.N. Pandey, “Fees VS. Tax- Supreme Court enlarges the concept of Fee”, Current Tax Reports, 2001, Vol.166, at pp.  73)).

The distinction has also been explained in relation to Article 366 of the Constitution where the Court held that the reference in Article 366 to an impost suggested that fee were included in taxation.

The Supreme Court in the case of Indian Mica and Micanite Industries Ltd. ((1971 ASC 1182)), held that before any levy can be upheld as a fee, it must be shown that the levy has reasonable co-relationship with the services rendered by the Government. In brief it can be said that levy must be proved to be a quid pro quo.

In Secunderabad Hyderabad Hotel Owners Association vs. HMC ((AIR 1999 SC 635)), it has been held that though the element of quid pro quo is necessary in order to determine whether license fee is a tax or fee, but it is not essential in cases where the license fee is merely regulatory or compensatory. It may be either regulatory or compensatory. When a fee is charged for rendering specific services certain element of quid pro quo must be there between the services rendered and the fee charged so that the license fee is commensurate with the cost of rendering the services although exact arithmetical equivalence is not expected. In this case the petitioner had challenged the increase in the license fee for trade license for running a lodging and eating house on the ground that the increased license fee was not in the nature of fees since there was no quid pro quo between the fee charged by the respondent municipal corporation and the services rendered by them to the traders.  The court held that the license fee charged for regulating the activities for which license is given as a fee and not tax although no service is rendered.

In Sri Jagananth vs. State of Orissa ((AIR 1954 SC 400)), it has been pointed out that there is no generic difference between a tax and a fee and both are different forms in which the taxing power of a State manifests itself ((Parameswaran, “Power of Taxation under the Constitution”, Eastern Book Company, 1987)). From the above discussion following points of differences can be traced:

         i.            A tax is a common burden and the only return the tax payer gets is the participation in the common benefit of the state. It is common compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for service rendered. Fees, on the other hand, are payments for some special services rendered, or some work done, for the benefit of those from whom payments are demanded. Thus, in fees, there is always an element of quid pro quo which is absent in tax.

       ii.            No tax can be levied outside the tax entries while fees can be levied in respect of non tax entry as well.

     iii.            Another difference is that Art 110(2) and 119(2) which deal with Money Bill lays down expressly that a Bill will not be deemed to be Money Bill by reason only that it provides for the imposition of fines, or the demand or the payment of fees for license or fees for service rendered, whereas a bill dealing with imposition or regulation of a tax will always be regarded as a money bill.


Over the centuries, the financial resources of nation have depended upon its tax policies. Although the Indian constitution has clearly stated that tax can be levied only under authority of law, that is, only when a legislature passes a relevant law; due to the concept of delegated legislation, the executives are playing a larger role in law making today, than ever before. This has led to the abdication of even the essential legislative functions to the executive, which is against the spirit of the constitution. Even the Courts, have upheld the cases of executive or local government making rules and bye-laws, which, in some instances, have been the result of excessive delegation of power. In my view, the Parliament as well as State Legislatures should be more active in enacting comprehensive tax statues.

When we study the post-constitutional judicial decisions over the years, we find that the Courts have consistently applied a liberal interpretation to the tax statues. Consequently, even retrospective taxation has been upheld in most cases. This has lead to the dilution of judicial scrutiny regarding the constitutionality of a particular tax law. Therefore, in my view, even though a liberal interpretation of tax law is necessary, but at the same time courts should not dilute the criteria for testing the constitutionality of a statue.

The term ‘fee’ has not been specifically defined in the Constitution so there is a lot of confusion regarding it. The Courts have diluted the basic premise of a ‘fee’ by holding that quid pro quo, that is, direct relation between the fee levied and the services rendered is not necessary, for a particular levy to be called a fee.