Supreme Court Clarifies States’ Power to Tax Mineral Rights: Mineral Area Development Authority vs. Steel Authority of India (2024)

LEGAL ISSUE: Scope of Entry 50 of List II of the Seventh Schedule of the Constitution, concerning taxes on mineral rights and the limitations imposed by Parliament. CASE TYPE: Constitutional Law, Mineral Law. Case Name: Mineral Area Development Authority & Anr. vs. M/S Steel Authority of India & Anr. Etc. Judgment Date: 25 July 2024

Introduction

Date of the Judgment: 25 July 2024. Citation: 2024 INSC 554. Judges: Dr Dhananjaya Y Chandrachud, CJI, Hrishikesh Roy J, Abhay S Oka J, J B Pardiwala J, Manoj Misra J, Ujjal Bhuyan J, Satish Chandra Sharma J, Augustine George Masih J. Can a state government impose additional taxes on mineral rights, or is this power limited by laws enacted by the Parliament? This question has been at the heart of a long-standing legal debate. The Supreme Court of India, in a landmark judgment, has clarified the extent of the state’s power to tax mineral rights, especially in the context of the Mines and Minerals (Development and Regulation) Act, 1957. This case involved a complex interplay of constitutional provisions and legislative powers between the Union and the States.

Case Background

The case originated from a challenge to the Bihar Coal Mining Area Development Authority (Amendment) Act 1992 and the Bihar Mineral Area Development Authority (Land Use Tax) Rules 1994, which levied taxes on land used for mining. The High Court of Judicature at Patna, relying on previous Supreme Court judgments, struck down the state law. This decision was appealed to the Supreme Court, where a three-judge bench noted a divergence of opinions in earlier judgments and referred the matter to a larger bench of nine judges.

Timeline

Course of Proceedings

The High Court of Judicature at Patna initially ruled against the state, holding that the tax was beyond the scope of Entry 49 of List II of the Seventh Schedule. This decision was challenged in the Supreme Court. A three-judge bench, noting conflicting opinions in previous judgments, referred the matter to a nine-judge bench for a conclusive ruling.

Legal Framework

The core legal framework involves the interpretation of several constitutional entries:

• Entry 54 of List I: Grants the Union Parliament the power to regulate mines and mineral development to the extent it deems expedient in the public interest.
• Entry 23 of List II: Allows state legislatures to regulate mines and mineral development, subject to the provisions of List I.
• Entry 50 of List II: Empowers state legislatures to impose taxes on mineral rights, subject to any limitations imposed by Parliament by law relating to mineral development.
• Entry 49 of List II: Empowers state legislatures to impose taxes on lands and buildings.

The Mines and Minerals (Development and Regulation) Act, 1957, (MMDR Act) was enacted by Parliament to regulate mines and mineral development. Section 9 of the MMDR Act specifies that the holder of a mining lease shall pay royalty for any mineral removed or consumed from the leased area. The MMDR Act also provides for the establishment of the District Mineral Foundation (DMF) and the National Mineral Exploration Trust (NMET) through Sections 9B and 9C respectively, funded by contributions from mining lease holders.

Arguments

Petitioners’ Arguments:

• Royalty is a consideration for the right to mine, not a tax.
• Entry 49 of List II (taxes on lands and buildings) should be interpreted broadly to include mineral-bearing land, with mineral value as a measure for taxation.
• Parliament’s power under Entry 50 of List II is limited to imposing restrictions, not assuming the power to tax mineral rights.
• The MMDR Act does not expressly limit the states’ power to tax mineral rights.

Respondents’ Arguments:

• Royalty is a payment for the privilege of mining, and any levy related to mineral development serves as a limitation on state taxing powers under Entry 50 of List II.
• The MMDR Act is a comprehensive code for mineral regulation, and its provisions limit the states’ power to impose similar levies.
• Entry 49 of List II does not include mineral rights activities; any levy based on mineral value is a tax on mineral rights.
• The Central Government fixes royalty rates to ensure harmonized mineral development, exhausting the field of statutory charges on minerals.

Issues Framed by the Supreme Court

1. 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;
2. 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?
3. 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)?
4. 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?
5. 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?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• Hingir-Rampur Coal Co. Ltd. v. State of Orissa, (1961) 2 SCR 537:* Considered for the interrelationship between Entry 54 of List I and Entry 23 of List II, establishing that state’s power to legislate on mines and minerals is subject to parliamentary laws.
• State of Orissa v. M.A. Tulloch, (1964) 4 SCR 461:* Considered to clarify that the state’s power to legislate on mines and minerals is limited by the extent of parliamentary control.
• Baijnath Kedia v. State of Bihar, (1969) 3 SCC 838:* Considered to hold that the MMDR Act covered the field of minor minerals, limiting state powers.
• H.R.S. Murthy v. Collector of Chittoor, (1964) 6 SCR 666:* Overruled on the point that cess on royalty has a direct relationship with land.
• India Cement Ltd. v. State of Tamil Nadu, (1990) 1 SCC 12:* Overruled on the point that royalty is a tax.
• State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201:* Overruled on the point that royalty is not a tax.
• Laddu Mal v. State of Bihar, 1965 SCC OnLine Pat 30:* Disagreed with for holding that royalty is a levy in the nature of a tax.
• Laxminarayana Mining Co. v. Taluk Development Board, 1972 SCC OnLine Kar 80:* Disagreed with for holding that royalty is a tax on mineral rights.
• Dr. Shanti Swaroop Sharma v. State of Punjab, AIR 1969 Punj and Har 79:* Agreed with for holding that royalty is not a tax, but a payment for the right to enjoy land.
• State of M P v. Mahalaxmi Fabric Mills Ltd, 1995 Supp (1) SCC 642:* Overruled on the point that there was no typographical error in India Cement.
• Orissa Cement Ltd v. State of Orissa, (1991) Supp 1 SCC 430:* Overruled on the point that royalty cannot be used as a measure to tax mineral-bearing land.
• Saurashtra Cement & Chemical Industries Ltd. v. Union of India, (2001) 1 SCC 91:* Overruled on the point that royalty is a tax.
• Quarry Owners Association v. State of Bihar, (2000) 8 SCC 655:* Mentioned for holding that royalty is not a tax, but a return for parting with property.
• State of H P v. Gujarat Ambuja Cement Ltd, (2005) 6 SCC 499:* Mentioned for holding that royalty is not a tax.
• Indsil Hydro Power & Manganese Ltd. v. State of Kerala, (2021) 10 SCC 165:* Mentioned for holding that royalty is a compensation for rights and privileges.
• Bherulal v. State of Rajasthan, 1956 SCC OnLine Raj 9:* Agreed with for holding that royalty is a charge by the owner of minerals for the right of working the same.
• State of Punjab v. Devans Modern Breweries, (2004) 11 SCC 26:* Mentioned for holding that a levy for parting with the privilege of working a mineral is not a tax.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors:

• The need for a clear demarcation of legislative powers between the Union and the States.
• The importance of maintaining a uniform regulatory regime for mineral development.
• The principle that taxation is a distinct power and should not be derived from regulatory entries.
• The recognition that royalty is a contractual consideration for mining rights, not a compulsory exaction for public purposes.

Logical Reasoning:

The court rejected alternative interpretations that would allow states to tax mineral rights beyond the limitations imposed by the Parliament. The final decision was reached by considering the constitutional framework, the legislative history, and the need for a balanced approach between state and union powers.

“The Constitution has to be interpreted in a manner which does not dilute the federal character of our constitutional scheme.”

“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.”

“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.”

Key Takeaways

• States cannot impose additional taxes on mineral rights that are already subject to royalty under the MMDR Act.
• The MMDR Act and its provisions limit the state’s power to impose similar levies.
• States can tax mineral-bearing land, but not using the value of minerals as a measure.
• The Parliament has the power to impose restrictions on state taxing powers related to mineral rights, but not to assume the power to tax mineral rights itself.

Directions

The Registry is directed to take administrative directions from Hon’ble Chief Justice of India for placing the matters before an appropriate Bench.

Development of Law

The Supreme Court has clarified that royalty is not a tax but a contractual consideration for the exercise of mineral rights. The Court has also clarified that Entry 50 of List II is subject to limitations imposed by Parliament by law relating to mineral development. Further, the Court has clarified that while Entry 49 of List II empowers states to tax lands and buildings, this power does not extend to taxing mineral rights or using mineral value as a measure of tax on mineral-bearing lands. This judgment overrules the earlier position of law that royalty is a tax and that the states have no power to tax mineral rights.

Conclusion

The Supreme Court’s judgment in Mineral Area Development Authority vs. Steel Authority of India provides clarity on the complex issue of taxation of mineral rights and mineral-bearing lands. The judgment underscores the importance of maintaining a balance between the legislative powers of the Union and the States, particularly in matters concerning natural resources. It clarifies that while states have the power to tax lands and buildings, they cannot impose additional levies on mineral rights that are already subject to royalty under the MMDR Act. This decision will have significant implications for future cases related to mineral taxation and will ensure that the legislative powers of the states are not unduly curtailed.

Category

Parent category: Constitutional Law

• Child category: Seventh Schedule
• Child category: Mineral Law
• Child category: Taxation

Case Details

Case Number: Civil Appeal No. 3882 of 2011

Court: Supreme Court of India

Year: 2024

Bench: Nine-Judge Bench