CIA-III

INTERPRETATION OF STATUTES

CASE ANALYSIS

Mineral Area Development Authority v Steel Authority of India

SUBMITTED TO: SUBMITTED BY:

DR.KRITI GURBAAZ SINGH PURI

20213223
Case Name: Mineral Area Development Authority v Steel Authority of India

Bench: D.Y Chandrachud, CJI, Hrisikesh Roy J, A.S Oka J, B.V Nagarathana J, J.B.
Pardiwala J , Manoj Misra J, Ujjal Bhuyan J, S.C. Sharma J, A.G. Masih J.

PARTIES:

Appellant: Mineral Area Development Authority etc. through its Secretary; Secretary of
Mineral Development Authority

Respondent: M/s Steel Authority of India; State of Bihar; Industries and Commerce
Association through Proprietor; Sitaram Singh Hard Coke Manufacturers; Hindustan
Mallcables and Forgins Ltd; Dhanbad Bricks Field Owners Association; Abdul Halim; The
Small Scale Bee-hive Hardcoke Producers Association; Coalfield Refractory
Manufacturers Association.

FACTS:

The issue of state governments' legislative competence to levy cess or tax on mining royalties
has been a contentious and long-drawn legal battle in India's judicial landscape. The roots of the
dispute can be traced back to 1989 when a seven-judge bench of the Supreme Court, in the
landmark case of India Cement Ltd v State of Tamil Nadu, delivered a seminal verdict. The
bench held that "royalty is a tax" under the centrally legislated Mines and Minerals
(Development and Regulation) Act of 1957, thereby stripping state governments of the power to
impose any cess on royalties paid by mining lease holders. This ruling sparked a wave of
challenges and conflicting judgments across various high courts in the country.

In 1995, a three-judge Supreme Court bench in State of Madhya Pradesh v Mahalaxmi Fabric
Mills Ltd further solidified the position established in the India Cements case, upholding the
conclusion that "royalty is a tax." However, nearly a decade later, in 2004, a five-judge bench
of the apex court in State of West Bengal v Kesoram Industries Ltd delivered a split verdict
that sent shockwaves through the judicial system. By a narrow 3:2 majority, the bench ruled
that there had been a grave "typographical error" in the India Cements judgment, and the
intended meaning was "cess on royalty is a tax," not "royalty is a tax" itself. This
interpretation created a direct conflict with the previous rulings and threw the jurisprudence on
the subject into disarray.

Parallel to this legal tug-of-war, several states like West Bengal and Bihar had enacted
legislations to levy additional cesses and taxes on land revenue from mineral-bearing lands.
These measures were challenged before their respective high courts, leading to a divergence of
opinions. The Calcutta High Court struck down West Bengal's cesses on coal mining, citing
the India Cements case, while the Allahabad High Court upheld Uttar Pradesh's cess on
minor minerals.

Amidst this quagmire of conflicting verdicts and a multitude of litigations, the Supreme Court,
in 2011, acknowledged the "prima facie" conflict between the decisions in India Cements
and Kesoram Industries. In a bid to resolve this longstanding legal tangle, a three-judge
bench referred the matter to a larger nine-judge Constitution Bench, recognizing its "far-
reaching implications."

After years of delay and administrative hurdles, the landmark case of Mineral Area
Development Authority v Steel Authority of India, which had its genesis in a 1999 writ
petition challenging the Bihar Coal Mining Area Development Authority (Amendment) Act,
finally came up for hearing before the nine-judge Constitution Bench. Led by Chief Justice D.Y.
Chandrachud, this highest constitutional bench commenced its hearings on February 27, 2024,
marking a significant milestone in the protracted legal saga. After eight days of intensive
arguments and deliberations, the bench reserved its judgment on March 14, 2024, poised to
deliver a definitive ruling that would determine the legislative boundaries between the
central and state governments on the crucial issue of taxation of mining royalties.

ISSUES:

1. Whether ‘royalty’ determined under the Mines and Minerals (Regulation & Development)
Act, 1957 is in the nature of tax?

2. Can the State Legislature while levying a tax on land under the State List levy tax based on the
value of the produce of land?
3. Is the state legislature denuded of its powers to tax and regulate mines and minerals due to the
provisions of the Mines and Minerals (Development & Regulation) Act, 1957?

4. What is the true nature of royalty extracted from mines?

5. Whether the majority decision in State of West Bengal v Kesoram Industries Ltd. (2004) is in
conflict with the law laid down in India Cement Ltd. v State of Tamil Nadu (1990)?

6. What is the scope of the expression “taxes on mineral rights” under Entry 50 of the State List?

REASONING:

The crux of the legal battle lies in determining whether state governments possess the legislative
competence to levy taxes or cesses on royalties paid by mining lease holders under the central
Mines and Minerals (Development and Regulation) Act, 1957. The conflicting viewpoints
emanate from two landmark Supreme Court judgments – India Cement Ltd v State of Tamil
Nadu (1989) and State of West Bengal v Kesoram Industries Ltd (2004). In the former, a
seven-judge bench held that "royalty is a tax" under Section 9 of the Mines Act, implying that
states lack the power to impose any cess on such royalties since the central Act "covers the
field." This position was reaffirmed in Mahalaxmi Fabric Mills (1995), rejecting claims of a
"typographical error."

However, in Kesoram Industries (2004), a narrow 3:2 majority ruled that the intended meaning
in India Cements was "cess on royalty is a tax," not that royalty itself is a tax. The majority
reasoned that royalty is merely an income to the lessor (owner) and not a tax since even private
owners can charge royalty. Consequently, states were deemed competent to levy taxes or cesses
on land revenue, including mining areas under their jurisdiction. The dissenting opinion,
however, argued that the Mines Act established complete parliamentary control over mineral
wealth, "denuding" states of any power to impose taxes on mineral rights granted under the
central Act.

This direct conflict between the two apex court judgments on whether "royalty is a tax" or "cess
on royalty is a tax" created an intra-court constitutional crisis, with far-reaching ramifications on
center-state fiscal relations. To establish an authoritative position and demarcate the respective
legislative domains, the Supreme Court has now referred the long-festering issue to a nine-judge
Constitution Bench, which commenced hearings in 2024 after years of delay.

RULES AND AIDS OF INTERPRETATION OF STATUTES:

1. Doctrine of Pith and Substance: This principle requires the Court to look at the true nature
and essence of the legislation, rather than just its literal terms or form. The judges may examine
the 'pith and substance' of the Mines and Minerals Act to determine whether it occupies the
entire field of taxation on minerals, thereby ousting state legislation on the subject.

2. Doctrine of Colourable Legislation: The Court may scrutinize whether the state laws levying
taxes or cesses on mining royalties are a colourable exercise of power, essentially encroaching
upon a field reserved for the Center under the guise of levying taxes on land revenue.

3. Harmonious Construction: The judges may attempt to harmoniously construe the Mines Act
and state laws by reading them together and avoiding a direct conflict, unless it is impossible to
do so. This approach aims to uphold the validity of both laws to the extent possible.

4. Purposive Interpretation: The Court may interpret the provisions of the Mines Act and
relevant entries in the Seventh Schedule (Union and State Lists) based on their underlying
purpose, object, and intent, rather than just their literal meaning.

SCOPE OF INTERPRETATION:

The nine-judge bench's interpretation will delineate the legislative competencies of

the Centre and states on taxation of mining activities and minerals, by examining
the extent to which the central Mines Act occupies this field and whether it
intended to exclude state laws. Applying doctrines like pith and substance, the
Court will assess if the Act's royalty provisions aim at regulation or taxation. It will
attempt harmonious construction to balance the Centre's regulatory powers with
states' revenue rights and fiscal federalism. Guidelines will be provided on the
territorial nexus and direct link required for states to levy valid taxes/cesses on
mining royalties. Necessary limitations may be imposed to prevent
disproportionate burdens by state laws on centrally regulated mining operations.
Ultimately, the bench aims to overrule or affirm precedents to establish a
consistent position upholding constitutional distribution of powers and facilitating
collaborative resource governance between the Centre and states.

ANALYSIS:

The long-drawn legal battle over the legislative competence of states to levy taxes or cesses on
mining royalties strikes at the very core of India's quasi-federal structure and the delicate balance
of powers between the Center and states. The conflicting judgments of the Supreme Court's
different benches, with one ruling that "royalty is a tax" under the central Mines Act and
the other asserting that it is merely a "cess on royalty," have created a state of judicial
inconsistency and uncertainty. This lack of clarity on the precise scope of the Mines Act and
the extent to which it occupies the field has led to concerns over the potential erosion of states'
fiscal autonomy and their ability to raise revenues from mineral resources within their territories.
The dissenting view in Kesoram Industries highlights the apprehension that a broad
interpretation of the Mines Act as covering the entire "field of taxation on minerals" could
severely curtail the states' taxation powers over mining activities, effectively "denuding" them of
their fiscal autonomy. This case touches upon the sensitive issue of resource federalism and the
equitable distribution of revenue from natural resources between the Center and resource-rich
states. A pro-center verdict could strain center-state financial relations and potentially discourage
investment and economic activity in the mining sector within states, leading to disputes over the
sharing of mineral wealth.

Critics argue that a restrictive interpretation limiting states' taxation powers could amount to
regulatory overreach by the Center, going against the principles of cooperative federalism. On
the other hand, proponents of a centralized approach cite the need for uniform regulation of a
national resource of strategic importance. Amidst these contrasting perspectives, the nine-judge
Constitution Bench's ruling is crucial to establish stable and coherent jurisprudence, providing
much-needed legal certainty on this pivotal issue that lies at the intersection of constitutional
principles, legislative competence, fiscal federalism, and the overall economic and regulatory
landscape surrounding the mining sector.
CONCLUSION:

The nine-judge bench, after carefully considering the conflicting precedents, the constitutional
principles at stake, and the tools of statutory interpretation, concludes that the legislative field of
taxation on minerals is not entirely occupied by the central Mines and Minerals (Development
and Regulation) Act, 1957.

While the Parliament's power to regulate mines and minerals under Entry 54 of the Union List is
undisputed, the Court finds that the Act does not manifest an intent to completely exclude state
legislation on the subject of taxation related to mining activities within their respective
territories.

Applying the doctrine of pith and substance and purposive interpretation, the bench holds that
the true nature and object of the Mines Act is to provide a regulatory framework for mining
leases and operations, rather than to comprehensively cover the field of taxation on minerals. The
Act's provisions on royalties are aimed at ensuring a share of revenue for the resource-owning
entity, rather than imposing a tax per se.

The Court harmoniously construes Section 9 of the Mines Act, which requires lessees to pay
royalties, as not precluding state governments from levying taxes or cesses on such royalties
under their constitutionally derived taxation powers. Such state taxes have a sufficient territorial
nexus with the mining activities and land within their jurisdiction.

The bench overrules the earlier judgment in India Cement Ltd v State of Tamil Nadu (1989),
which erroneously concluded that "royalty is a tax" under the Mines Act. It affirms the majority
view in State of West Bengal v Kesoram Industries Ltd (2004) that the intended meaning was
"cess on royalty is a tax," not royalty itself being a tax.

However, the Court imposes certain limitations and guidelines to prevent state laws from
encroaching upon the central legislation through colourable exercise of power. Any state taxes or
cesses must have a direct and inseparable nexus with the mining activities and land revenue, and
should not impose disproportionate or discriminatory burdens on mining operations regulated by
the central Act.
In upholding the states' legislative competence to levy taxes on mining royalties, subject to the
above conditions, the bench aims to strike a balanced approach that preserves the principles of
fiscal federalism and cooperative federalism. This interpretation harmonizes the Center's
regulatory powers over mineral resources with the states' autonomy to raise revenues from their
respective territories, fostering a collaborative framework for resource governance.

The authoritative pronouncement by the nine-judge Constitution Bench provides much-needed

jurisprudential clarity and stability on this longstanding issue, while also safeguarding the
constitutional distribution of legislative powers between the Center and states.