Supreme Court Highlights The Purpose Of Court Fees: There Is No Justification For The State To Profit Excessively From High Court Fees Or To Generate Revenue For General Administration.

Case title:

The Secretary To Government Ofmadras & Anr. vs. P.R. Sriramulu & Anr.

Date of Order:

22/11/1995

Bench:

Faizan Uddin (J)

Parties:

Petitioner- The Secretary to Government Of Madras & Anr.

Respondent- P.R. Sriramulu & Anr.

SUBJECT

• The Supreme Court has been instructed to review the ruling dated March 3, 1975, given by the Madras High Court in Writ Petition No. 749/1966, P.R. Sriramulu & Anr. vs. The Secretary to the Government of Madras, Home Department, along with a set of other Writ Petitions and Civil Appeals. This ruling declared Article (1) in Schedule (1) of the Tamilnadu Court Fees and Suits Valuation Act, 1955, as well as Sub-rule (1) of Rule (1) of Order II of the High Court Fees Rules, 1956 (which are based on Article (1) of Schedule (1) of Madras Act No. XIV of 1955), to be invalid in relation to the imposition of Court Fees on an ad-valorem scale.
• The Supreme Court ruled that for a levy to be considered a fee, it must primarily intend to provide specific services to a defined group, with a general correlation between the collected amount and the service expenses. 
• This correlation need not be mathematically precise but should exhibit a broad alignment. Legislative economic measures are granted substantial discretion, and Courts refrain from imposing strict scrutiny. 
• The High Court's findings regarding the State's profit and the separation of criminal and civil justice expenses were deemed incorrect due to overlooking supplementary affidavits and complexities. Judicial Officers often handle both civil and criminal cases, making clear separation impractical. While specific expenditure calculations are challenging, a broad correlation between expenses and fee collection suffices.
• The High Court's stance, which sought an exact equivalence and separated criminal and civil expenses, was found flawed, and the Court concluded that a broad correlation between fees and services exists, satisfying the essential character of a fee.

OVERVIEW

• The basic background leading to the aforementioned appeal is as follows: Certain plots of land owned by the first and second respondents, located in Tondiarpet, were acquired at the request of the Public Works Department. 
• This led to the issuance of awards, specifically Award No. 6 and Award No. 8, both dated March 5, 1962, and March 10, 1962, respectively. In response to a referral made under Section 18 of the Land Requisition Act, the IVth Assistant City Civil Judge in Madras increased the compensation upon the request of the first and second respondents. Dissatisfied with the outcome, the respondents appealed to the High Court seeking further compensation enhancement.
• In terms of the Madras Court Fees and Suits Valuation Act of 1955, the Court Fee payable for such appeals was calculated as a percentage of the total claim, using an ad-valorem approach at a rate of 7 1/2 percent. Importantly, this levy had no upper limit, meaning that it was applied without any cap on the amount. 
• The first and second respondents challenged the validity of these provisions related to the ad-valorem Court Fee calculation under the 1955 Act. Their argument was centered around the contention that this levy was not only excessively high but also arbitrary, unreasonable, and unjustified. They believed that it bore no meaningful connection to the actual cost of administering justice and essentially functioned as a form of taxation rather than a legitimate Court Fee. According to their perspective, Court Fees should reflect the actual expenses of running the judicial system and should not serve as a mechanism for generating general revenue for the government's administration.
• Furthermore, the respondents maintained that the historical practice of Court Fee imposition, prior to 1955, had been to impose an ad-valorem fee up to a certain limit, beyond which the fee was reduced. 
• They pointed out that the fee structures in other states across the country were also established on different principles, not solely relying on an ad-valorem fee without any upper restriction. Consequently, they sought to have these particular provisions declared as invalid.

ISSUES RAISED

• What characterizes the fees collected in a court as outlined in Entry 3, List II of the 7th Schedule of the Constitution? Is the charged fee categorized as a tax or a legitimate fee?
• Is the legislative power being deceptively exercised, as the State appears to be raising revenue under the guise of imposing a fee? This is due to the excessive nature of the levy, to the extent that it pretends to be a fee but in actuality functions as a tax.
• Does the imposition of Court Fees on an ad-valorem basis, without any upper limit, essentially transform the levy into a tax? This transformation arises from the fact that, considering the nature of the services provided (which involve settling disputes), there comes a point where the increase in the subject matter's value beyond an ad-valorem levy ceases to be a fee and instead becomes a tax.
• Are the contested charges genuinely fees? This is questioned due to the absence of a direct link between the services offered and the levy. Furthermore, the State's profitability from the administration of civil justice, including expenditures on both civil and criminal justice, raises doubts about the correlation between the levy and the actual expenses incurred in justice administration

ARGUMENTS ADVANCED BY THE RESPONDENT

• Counsel representing the respondents argued that the Supreme Court's decision in the Asnwanatha Narayana Setty case did not ultimately endorse the ad-valorem levy of Court Fees without an upper limit. They contended that this decision cannot be used to support the appellant's claim that such a levy is lawful and justified. 
• While the last sentence of paragraph 88 in the mentioned report did state that the scheme cannot be upheld yet cannot be struck down either, the respondents' counsel focused on this aspect and overlooked the preceding paragraphs. Those earlier paragraphs strongly indicated that the ad-valorem principle, while not an ideal basis for fee distribution, doesn't necessarily have unconstitutional flaws.
• It's evident from the entirety of the decision that the Supreme Court neither invalidated the ad-valorem levy of Court Fees without an upper limit nor fully endorsed it. The Court expressed concerns about the scheme, leading to references in paragraph 95 of the same report to the rationalization of Court Fees under the "Rajasthan Act and the Karnataka Act," where the ad-valorem rate was 10 percent, a different scenario than the present case before us.

JUDGEMENT ANALYSIS

• Mr. Kelu Eradi, Joint Secretary to the Government of Tamil Nadu, supported the imposition of ad-valorem Court Fees and opposed the writ petitions. However, during the arguments, Mr. J. Shiva Kumar, Deputy Secretary to the Government, filed a supplementary counter affidavit on behalf of the Government. Despite this, the High Court did not consider the supplementary affidavit and proceeded to decide the writ petitions.
• Referring to the precedent set in the case of Corporation of Madras vs. Spencer & Co., the High Court accepted a group of writ petitions and appeals, invalidating the mentioned provisions. The basis for this decision was that the imposition of an ad-valorem flat rate of 7 1/2 percent without any upper limit was deemed unreasonable. This was because it would be inequitable and unreasonable to place the burden of the entire cost, or an excessively disproportionate share, of the service on a specific group of litigants, especially when the cost needed to be distributed among multiple parties.
• The judgment of the High Court was appealed to the present Court, which allowed the appeal and overturned the High Court's decision. The matter was sent back to the High Court with specific guidance. 
• The Court emphasized that a fair analysis of various financial aspects, both inflows and outflows, related to the administration of civil justice was necessary. It was noted that the State needed to demonstrate that the levied amount was indeed proper court fees, and if any increase was made, the State had to justify it.
• In light of these considerations, the Court ruled to allow the appeal, revoke the High Court's judgment, and refer the case back to the High Court. The High Court was instructed to grant the writ petitioners the opportunity to respond to the affidavit dated October 11, 1966. Subsequently, the High Court was tasked with determining whether the fees in question truly constituted court fees or were effectively taxes on litigants or litigation.
• After reviewing the submitted affidavits and the available evidence, the High Court reached the conclusion in the disputed judgment that the imposition of an unbounded flat rate Court Fee at 7 1/2 percent lacked the principle of quid pro quo. 
• The Court deemed this levy not necessary to compensate for the actual cost of services provided or to address any increased expenses in the administration of civil justice. The High Court also found that there was no rational basis justifying the demand for a flat rate.
• Furthermore, the High Court determined that the imposed levy appeared to resemble a tax more than a legitimate fee, and it disproportionately burdened a specific group of litigants. The Court ruled that such a burden was unreasonable and arbitrary in nature. The High Court's analysis excluded certain government expenditures, such as those related to criminal justice administration, from being debited to the litigants as compensation for the cost of civil justice administration. Additionally, the High Court noted that the records indicated a profit made by the State ranging from 9 to 21 lakhs during the year 1955-56.
• Based on these findings, the High Court invalidated Article 1 in Schedule 1 of the Tamil Nadu Court Fees and Suits Valuation Act, as well as sub-rule 1 of Rule 1 of the High Court Rules, 1956, both of which were based on Article 1 of Schedule 1 of Madras Act No. 14 of 1955. This invalidation formed the basis for the appeal that has been brought forth.
• The Supreme Court, in its judgment, observed that prior to British rule in India, the administration of justice was considered a fundamental duty of the State without imposing any charge on individuals seeking redress in court. Historical accounts reveal that during the Moghul rule and even before, there were no fees associated with civil justice administration, and justice was freely provided. British rule introduced regulations imposing Court Fees, initially at a nominal level, gradually increased to deter frivolous litigation and misuse of the legal process.
• Over time, the purpose behind imposing higher Court Fees seems to have shifted from promoting just claims to fulfilling the revenue needs of State Governments. The Central Court Fees Act of 1870 established a relatively reasonable fee structure, but with the growth in financial requirements of State Governments, many States subsequently created their own Court Fees Acts or significantly altered the original legislation, resulting in substantial fee hikes that now resemble a burdensome tax on litigants.
• The transformation from a nominal fee aimed at preventing misuse of the legal system to a substantial revenue-generating measure seems to have departed from the initial intent of fostering fair and accessible justice.
• In I.M.& M Industries Vs. State of Bihar [AIR 1971 SC 1182] Court expressed the view that before any levy can be upheld as a fee, it must be shown that the levy has a reasonable correlation with the services rendered by the Government. In simpler terms, the imposition of the fee should be demonstrated to have a fair exchange for the services provided. However, achieving an exact match between the fee and the services is impractical, and the anticipated connection is more of a general nature rather than precise mathematics. Additionally, it's been noted that establishing the relationship between the services offered and the fee charged is primarily a matter of factual consideration.
• In the case of Om Prakash vs. Giri Raj Kishori [AIR 1986 SC 726], the Supreme Court noted in paragraph 10 that the key criterion for classifying a levy as a fee is whether its fundamental purpose is to provide particular services to a defined region or group, even if the State gains an indirect benefit from it in the long run.
• The Supreme Court determined that the High Court, upon comparing the Court Fees scales and recognizing the differences between the 1922 and 1955 Acts, arrived at a conclusion. The High Court found that the levy of 7 1/2 percent under Article 1 of Schedule 1 of the 1955 Madras Act, calculated on an ad-valorem flat rate without any limit, lacks the necessary characteristics for a valid Court Fees levy. 
• According to the High Court, this levy leans more toward being a form of tax rather than adhering to the principle of quid pro quo. In simpler terms, there is no direct connection between the Court Fees collected and the services provided to litigants in the administration of civil justice.
• Additionally, the High Court held that the imposed rate unfairly burdens a specific group of litigants, constituting an unreasonable and arbitrary imposition. After examining the affidavit submitted by Mr. Kelu Eradi on behalf of the Government and reviewing the statements in the supplemental counter affidavit from 1955 to 1965, the High Court found that, except for 1954-55, the State consistently generated annual profits ranging from 9 to 21 lakhs.
• Regarding 1954-55, the High Court noticed that total receipts were Rs. 122.12 lakhs against expenditures of Rs. 124.94 lakhs. The expenditure included Rs. 36.70 lakhs for criminal courts, Rs. 3.57 lakhs for Presidency Magistrate Courts, Rs. 6.26 lakhs for Law Officers of the Government, and Rs. 58.31 lakhs for Civil & Sessions Courts. 
• The High Court concluded that expenses associated with government Law Officers cannot be attributed to the litigants' compensation for the cost of justice administration. Moreover, the High Court reasoned that criminal courts do not serve litigants in the same manner as civil courts, and costs related to criminal justice administration should not be considered part of the cost of administering civil justice.
• Based on these arguments, the High Court deduced that by deducting the mentioned sums from the Civil and Sessions Courts' category, the net balance for 1954-55 would be less than Rs. 78.41 lakhs, indicating that the State earned a profit of Rs. 43.71 lakhs over the expenditure of about Rs. 78.41 lakhs in that year.
• The Supreme Court ruled that for a levy to be considered a fee, it must primarily intend to provide specific services to a defined group, with a general correlation between the collected amount and the service expenses. This correlation need not be mathematically precise but should exhibit a broad alignment. Legislative economic measures are granted substantial discretion, and Courts refrain from imposing strict scrutiny. 
• The High Court's findings regarding the State's profit and the separation of criminal and civil justice expenses were deemed incorrect due to overlooking supplementary affidavits and complexities. Judicial Officers often handle both civil and criminal cases, making clear separation impractical. While specific expenditure calculations are challenging, a broad correlation between expenses and fee collection suffices.
• The High Court's stance, which sought an exact equivalence and separated criminal and civil expenses, was found flawed, and the Court concluded that a broad correlation between fees and services exists, satisfying the essential character of a fee.
• In the course of its decision, the Supreme Court noted that the State of Madras amended its Court Fees rules, abandoning the uniform 7 1/2 percent ad-valorem Court Fees and implementing a slab system with a tapering scale, effective from September 11, 1968. This amendment is evident from an affidavit dated November 1, 1973, filed by S.P. Ambrose, Special Secretary to the Government of Tamil Nadu, Home Department, before the High Court.
• The Supreme Court emphasized that the administration of justice is a service that the State is obligated to provide to its citizens. It asserted that the fees collected from litigants should generally not exceed the cost of administering justice, as there is no justification for the State to profit excessively from high court fees or to generate revenue for general administration. 
• The Court highlighted the need for total Court fee receipts to broadly cover the cost of justice administration. Additionally, it pointed out the importance of uniformity in Court fee scales across the country, given the significant differences observed in various states. The possibility of implementing a fixed maximum chargeable fee was also suggested for serious consideration.

CONCLUSION

• Undoubtedly, the administration of justice holds a prominent role as a State function. However, in contemporary times, the scope of State responsibilities has considerably expanded, encompassing a broad spectrum of activities. 
• Beyond maintaining law and order, the State is now tasked with establishing a framework that enables citizens to assert their rights against various entities, including the State itself, statutory parties, and Government Corporations. 
• These entities have become significant litigants due to their involvement in diverse social, economic, and industrial realms, a notable shift from the past.
• This transformation has led States to enact legislative amendments, introducing fees as a means to cover the costs associated with various aspects of the judicial system. These expenses include salaries, allowances, and pensions for Judicial Officers and administrative staff, as well as provisions for their accommodation, court building maintenance, transportation, libraries, stationery, and other essential components. 
• These measures aim to sustain the machinery engaged in administering justice amid the expanded role of the State.