TaxTMI 
TaxTMI 
2021 (10) TMI 1071
X X X X Extracts X X X X
X X X X Extracts X X X X
.................................................................................... 6 D Analysis ........................................................................................................... 11 D.1 Statutory Provisions .............................................................................. 11 D.2 Nature of levy under Section 52 of the UP Water Supply and Sewerage Act .......................................................................................... 20 D.3 Entry 49 List II: Taxes on Lands and Buildings ................................. 28 D.4 Tax and fee .............................................................................................. 38 D.5 The 'Railways' judgment ....................................................................... 44 E Conclusion ...................................................................................................... 47 A Factual Background 1 By its judgment dated 7 March 2014, a Division Bench at the Lucknow Bench of the High Court of Judicature at Allahabad allowed a petition under Article 226 of the Constitution of India instituted by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....judgment dated 7 March 2014, the Division Bench of the High Court allowed the writ petition and directed the appellants to refund the water and sewerage taxes levied and collected. The review petition against this judgment was also dismissed by the High Court by order dated 9 August 2014. On 7 August 2015, while entertaining the special leave petition and issuing notice, this Court stayed the operation of the impugned judgments of the High Court. B Issues 4 Principally, two issues arise in these proceedings: - (i) Whether the demand of water tax and sewerage tax is sustainable with reference to the provisions of the UP Water Supply and Sewerage Act; and (ii) Whether the State Legislature has the legislative competence to levy the tax under the provisions of Section 52(1)(a). 5 We must note at the outset that the High Court has allowed the prayer for refund purely on the basis of a judgment of a two-judge Bench of this Court in Union of India v. State of U.P. (supra). The judgment of the High Court has been drafted in a rather casual manner which is evident from the fact that: (i) While extracting from a portion of the judgment of this Court noted above, the High C....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assets, liabilities and obligations and transfer of employees in Chapter- IV; (c) taxes, fees and charges in Chapter-VI; (d) water supply and sewerage services in Chapters-VII-VIII; and (e) penalties and procedure, external control and miscellaneous provisions in Chapters IX to XI. (ii) The scheme of the legislation provides for the levy, imposition, collection and realization of water tax and sewerage tax under Section 52(1); (iii) The decision of this Court in Union of India v. State of U.P. (supra) is not an authority for the interpretation of Section 52 since in that case a service charge was levied on the railways. The challenge to the levy was raised by the railways on the ground that the Jal Sansthan was levying a tax in violation of the provisions of Article 285 of the Constitution and it was this submission which was rejected, by holding that the levy was of a service charge in the nature of a fee and not a tax; and (iv) In the present case, the imposition is of water tax and sewerage tax which falls within the ambit of Section 52(1)(a). Constitutional Challenge 8 Ms Madhavi Divan, Additional Solicitor General appearing on behalf ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e above grounds it has been urged that if the statute is interpreted in a holistic context, it would emerge that: (a) Though labelled as a water tax, the levy under Section 52(1)(a) is in the nature of a fee and not a tax; and (b) In consequence, the levy cannot be sustained under Entry 49 List II. (vii) Entry 17 of List II provides for "water and water supplies". (viii) In sum and substance, the levy under Section 52(1)(a) though described as a water tax, is a fee and not a tax and though the legislature has used the nomenclature of "water tax", the levy in effect is an exaction on water or water supply. 9 Opposing the above submissions challenging the constitutional validity of the statute, Mr Pradeep Kant, Senior Counsel urged that: (i) The two judge Bench of this Court in Union of India v. State of U.P. (supra) has erroneously interpreted the provisions of Section 52 to be in the nature of a fee and not a tax; (ii) In that case the levy imposed by the Jal Sansthan on the railways was a service charge for the use of water and sewerage; the levy was not in the nature of a tax, as a consequence of which this Court came to the conclusion that the im....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l Sansthan. Section 18(1) provides thus: "18. Establishment of Jal Sansthans.- (1) If in the opinion of the State Government, local conditions so require and it is considered necessary or expedient for the improvement of water supply and sewerage services in any area, it may constitute a body to be known as Jal Sansthan for that area." Section 24 specifies the functions of a Jal Sansthan: "24. Functions of a Jal Sansthan.- The functions of a Jal Sansthan shall be as follows: (i) to plan, promote and execute schemes of and operate an efficient system of water supply; (ii) where feasible, to plan, promote and execute schemes of, and operate, sewerage, sewage treatment and disposal and treatment of trade effluents; (iii) to manage all its affairs so as to provide the people of the area within its jurisdiction with wholesome water and where feasible, efficient sewerage service; (iv) to take such other measures, as may be necessary, to ensure water supply in times of any emergency; (v) such other functions as may be entrusted to it by the State Government by notification in the Gazette." Section 25 enunciates the power....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spect of any of the functions specified in Section 24 shall be deemed to have been incurred, entered into or engaged to be done, by. with or for the Jal Sansthan, and all suits or other legal proceedings instituted or which might but for vesting and transfer under sub-section (1) of Section 33, have been instituted or defended by or against the local body, may be continued or instituted or defended by or against the Jal Sansthan." 14 The finance and property of the Jal Sansthan are dealt with in Chapter V of the Act. Section 41 envisages that every Jal Sansthan shall have its own fund which shall be deemed to be a local fund to which shall be credited all monies received by or on behalf of the Jal Sansthan. Section 44 provides for the general principles governing the finance of the Jal Sansthan in the following terms: "44. General principles for Jal Sansthan's Finance.- A Jal Sansthan shall from time to time so fix and adjust its rates of taxes and charges under this Act as to enable it to meet, as soon as feasible, the cost of its operations, maintenance and debt service and where practicable to achieve an economic return on its fixed assets." 15 Chapter VI of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....), five per cent of the market value of the premises; (b) in the case of any other premises, the gross annual rent for which such premises are actually let or where the premises are not let, the gross annual rent for which the premises might reasonably be expected to be let: Provided that the annual value in the case of premises occupied by the owner himself shall be deemed to be twenty-five per cent less than the annual value otherwise determined under this section. (2) The annual value of premises for the purposes of the levy of taxes under subsection (2) of Section 52 shall be assessed by such authority as the State Government may, by general or special order direct, and such authority may be either the Jal Sansthan itself or any other agency as may be specified in the order. (3) Where the assessment is made by the Jal Sansthan or by any other agency the Jal Sansthan or such other agency shall follow the prescribed procedure. (4) Until an assessment of the annual value of premises in any local area is made by the Jal Sansthan or any other agency specified under sub-section (2) the annual value of all premises in that local area, as as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... A Jal Sansthan, from the occupier of the premises; (b) in the case of premises not so connected, from the owner of the premises." 16 As distinct from the levy of taxes, Section 59 enables the Jal Sansthan to fix the cost of water to be supplied by it according to the minimum cost to be charged in respect of each connection. In lieu of charging the cost of water according to volume, the Jal Sansthan is empowered to accept a fixed sum for a specified period on the expected consumption of water during the period. Section 59 provides as follows: "59. Cost of water.- (1) A Jal Sansthan shall, by notification in the Gazette, fix the cost of water to be supplied by it according to its volume, and also the minimum cost to be charged in respect of each connection. (2) A Jal Sansthan may, in lieu of charging the cost of water according to volume, accept a fixed sum for a specified period on the basis of expected consumption of water during that period." Section 60 provides for the fixation of the cost of disposal of waste water by the Jal Sansthan. Section 61 provides for the provision of water meters and the recovery of charges for the rent of the meters ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... surcharge" by providing separate provisions under the Act. In the present case, the controversy is over the liability for the payment of tax. 18 There are two submissions which require our consideration. First is the challenge raised to the constitutionality of the levy under Section 52 of the UP Water Supply and Sewerage Act. Ms Divan has submitted that the levy does not constitute a tax on 'lands and buildings' and is thus, outside the domain of the State legislature under Article 246 of the Constitution read with Entry 49 of List II. Second, that the levy under Section 52(1)(a), though labelled as a water tax, is in the nature of a fee. We shall consider each of these submissions in turn. D.2 Nature of levy under Section 52 of the UP Water Supply and Sewerage Act 19 A legislative enactment which provides for the imposition of a tax may make provisions for (i) The levy of the tax on the basis of a taxable event; (ii) The measure of the tax; (iii) The rate at which the tax will be imposed; (iv) The incidence of the tax; and (v) Assessment, collection, recovery and other incidental provisions. 20 This characterization of the components of a tax has been ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bove that the rate at which the tax is to be imposed is an essential component of tax and where the rate is not stipulated or it cannot be applied with precision, it would be difficult to tax a person. This very conceptualisation of tax was rephrased in CIT v. B.C. Srinivasa Setty [(1981) 2 SCC 460 : 1981 SCC (Tax) 119 : (1981) 128 ITR 294] , in the following manner: (SCC p. 465, para 10) "10. ... The character of computation of provisions in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section."" 22 In Federation of Hotel and Restaurant Association of India v. Union of India (1989) 3 SCC 634, a challenge was raised to the constitutional validity of the Expenditure Tax Act 1987 which imposed an 'expenditure tax' on persons incurring "chargeable expenditure" in a class of hotels. In that case, the petitioners argued that the Act in essence levied a tax on luxuries, which falls within Entry 62 of List II and li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngly, fails." (emphasis supplied) 23 In State of West Bengal v. Kesoram Industries Ltd (2004) 10 SCC 201 a Constitution Bench of this Court held that the measure employed for assessing a tax must not be confused with the nature of the tax. In doing so, Justice RC Lahoti (as the learned Chief Justice then was), adverted to a line of decisions in Ralla Ram v. Province of East Punjab AIR 1949 FC 81, Sainik Motors v. State of Rajasthan AIR 1961 SC 1480, D.G Gose & Co. (Agents) P. Ltd. v. State of Kerala (1980) 2 SCC 410 and Hingir Rampur Coal Co. Ltd. v. State of Orissa AIR 1961 SC 459, and observed "33. [...] It has been long recognised that the measure employed for assessing a tax must not be confused with the nature of the tax. A tax has two elements : first, the person, thing or activity on which the tax is imposed, and second, the amount of tax. The amount may be measured in many ways; but a distinction between the subject-matter of a tax and the standard by which the amount of tax is measured must not be lost sight of. These are described respectively as the subject of a tax and the measure of a tax. It is true that the standard adopted as a measure of the levy may....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lue of the premises, annual value being assessed in the manner indicated in Section 53. The rate of tax in the case of a local area, other than a city, has to be not less than 6 per cent and not more than 14 per cent. In the case of the water tax in a city the rate is to be not less than 7.5 per cent and not more than 12.5 per cent. A similar provision has been incorporated in regard to the levy of a sewerage tax in Section 52(1)(b) and sub-Sections (2) and (3) provide for the measure and the rate of tax. 25 Section 55 contains restrictions on the levy of the tax set out in Section 52. Clause (a) specifies that a tax shall not be levied on land which is used exclusively for agricultural purposes unless water is supplied by the Jal Sansthan for such purpose to that land. Clause (b) of Section 55 contains two further restrictions on the levy of water tax by providing that it shall not be levied on premises: (i) not situated within the radius prescribed of the nearest stand post or other water works on which water is made available to the public by the Jal Sansthan; or (ii) whose annual value does not exceed Rs. 360 and to which no water is supplied by the Jal Sansthan. The restric....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arge and a fee. We have already noticed the provisions of Chapter VI governing the levy and imposition of taxes. Section 59 provides for the fixation of the cost of water to be supplied by the Jal Sansthan according to its volume as well as the minimum cost to be charged in respect of each connection. The Jal Sansthan may, in lieu of charging for the cost of water according to volume, charge a fixed sum on the basis of expected consumption. A similar provision for the recovery of sewerage charges is contained in Section 60. A distinct provision is contained in Section 63 for the recovery of fees. Fees under Section 63 can be recovered for the connection, disconnection or reconnection of water supply or sewer, for testing or supervision or for any other purpose or work executed or supervised as provided in the bye-laws. The provisions of Section 63 indicate that the recovery of a fee is, broadly speaking in relation to a service which is provided. 28 The nomenclature that the legislature has ascribed to the tax does not determine either the nature of the levy or its true and essential character. The legislature may choose a label for a tax. The label however will not determine or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ance Act (Northern Ireland), 1934 [[1986] A.C. 852.] . [...] This case demolishes the broad contention that wherever the annual value is the basis of a tax, that tax becomes a tax on income. It shows that there are other factors to be taken into consideration and that it is the essential nature of the tax charged and not the nature of the machinery which is to be looked at." (emphasis supplied) 30 In a subsequent decision of the Full Bench of the Madras High Court in V Pattabhiraman v. The Assistant Commissioner of Urban Land Tax, North Madras (North West) Ayanavaram AIR 1971 Mad 61 (FB), the validity of the Madras Urban Land Tax Act 1966, which imposed a tax on the basis of the market value of land, was challenged on the ground that it was in substance an income tax. Following the decision in Ralla Ram (supra), the High Court held the law to be within the purview of Entry 49 of List II. 31 In Ajoy Kumar Mukherjee v. Local Board of Barpeta AIR 1965 SC 1561, a Constitution Bench of this Court upheld the validity of an annual tax levied by local boards upon lands used for holding markets created under the Assam Local Self-Government Act 1953. Justice ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gislature. The contention of the appellant that the State legislature was not competent to impose this tax because there is no provision in List II of the Seventh Schedule for imposing a tax on markets as such must therefore fail." (emphasis supplied) Thus, the Court reaffirmed the principle that the use to which the land has been put can be taken into account in imposing a tax which is within the meaning of Entry 49 of List II. 32 In Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. Etc. (1969) 2 SCC 55 a Constitution Bench held that for the purpose of levying a tax under Entry 49 of List II, the State legislature may adopt the annual or capital value of the lands and buildings for determining the incidence of the tax. Justice V Ramaswami (I) observed: "4. The first question to be considered in these appeals is whether the Madras Legislature was competent to enact the legislation under Entry 49 of List II of Schedule VII of the Constitution which reads: "Taxes on lands and buildings". It was argued on behalf of the petitioners that the impugned Act fell under Schedule VII, List I, Entry 86, that is "Taxes on the capital value of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion Bench of this Court enunciated the essential elements of a tax under Entry 49 of List II by observing that "74. The requisites of a tax under Entry 49, List II, may be summarised thus: (1) It must be a tax on units, that is lands and buildings separately as units. (2) The tax cannot be a tax on totality, i.e., it is not a composite tax on the value of all lands and buildings. (3) The tax is not concerned with the division of interest in the building or land. In other words, it is not concerned whether one person owns or occupies it or two or more persons own or occupy it." In other words, it was held that the tax under Entry 49 of List II "is not a personal tax but a tax on property". Consequently, the wealth tax imposed under the Wealth Tax Act was held to be distinct from a tax under Entry 49 of List II. 34 A Bench of three learned judges of this Court in Goodricke Group Limited v. State of WB 1995 Suppl. (1) SCC 707 considered the validity of the levy of an education cess on rural employment by the West Bengal Taxation Laws (Second Amendment) Act 1989. The levy of the rural employment cess was annually imposed on a tea estate at the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re the High Courts was whether a water tax imposed on the annual value of lands and buildings by the Municipality was within the competence of the State legislature. The High Courts, referring to the pith and substance doctrine, observed that though the tax was named as 'water tax', it was not levied on the production of water or on the quantity of water supplied and consumed, but instead was a tax on land and buildings falling under Entry 49 of List II. 36 In view of the above decisions, there can be no manner of doubt that the levy which is imposed under Section 52 is a tax on lands and buildings situated within the area of the Jal Sansthan for the purpose of imposing the tax. The tax is imposed on premises which fall within the territorial area of the Jal Sansthan. The expression 'premises' is defined to mean land and building. The tax is on lands and buildings. The nomenclature of the tax does not indicate its true character and substance. Nor does the fact that the law enables the Jal Sansthan to levy the tax render it a tax on water. The charging section indicates in unambiguous terms that it is a tax on lands and buildings. The legislature has introduced certain restricti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Constitution makes a differentiation between the subject matter of the legislation, and the tax in relation to the said subject matter in the Union, State and Concurrent List in the Seventh Schedule. Justice TL Venkatarama Aiyar, speaking for the majority (4:1), observed that : "51. In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 enumerate the taxes which could be imposed by a law of Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, Entry 22 in List I is "Railways", and Entry 89 is "Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights". If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions "Trade and commerce with foreign countries; import and export across customs frontiers". If these expressions are to be interpreted as including duties to be levied in respect of that trade and commerce, then Entry 83 which is "Duties of customs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e applicability of Entry 17, which is a non-taxing entry, does not arise in this case. D.4 Tax and fee 41 Ms Divan's submission that the tax which is imposed in Section 52(1)(a) is truly speaking a fee is premised on the argument that a true tax on lands and buildings under Entry 49 of List II (i) should be agnostic as between owners and occupiers; (ii) should make no differentiation between those who do and do not consume water; and (iii) should contain no provision for a separate fund into which the revenue of the Jal Sansthan is earmarked. 42 The distinction between a tax and fee has substantially been effaced in the development of our constitutional jurisprudence. At one time, it was possible for courts to assume that there is a distinction between a tax and a fee: a tax being in the nature of a compulsory exaction while a fee is for a service rendered. This differentiation, based on the element of a quid pro quo in the case of a fee and its absence in the case of a tax, has gradually, yet steadily, been obliterated to the point where it lacks any practical or constitutional significance. For one thing, the payment of a charge or a fee may not be truly volunta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r rendering the service is not by itself decisive. That is because the Constitution did not contemplate it to be an essential element of a fee that it should be credited to a separate fund and not to the consolidated fund. It is also increasingly realised that the element of quid pro quo stricto senso is not always a sine qua non of a fee. It is needless to stress that the element of quid pro quo is not necessarily absent in every tax. We may, in this connection, refer with profit to the observations of Seervai in his Constitutional Law, to the effect: [HM Seervai Constitutional Law of India, 2nd Edn, Vol. 2, p 1252, para 2239] "It is submitted that as recognised by Mukherjea, J. himself, the fact that the collections are not merged in the consolidated fund, is not conclusive, though that fact may enable a court to say that very important feature of a fee was present. But the attention of the Supreme Court does not appear to have been called to Article 266 which requires that all revenues of the Union of India and the States must go into their respective consolidated funds and all other public moneys must go into the respective public accounts of the Union and the States. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on to the services rendered, or the advantages conferred, such relation need not be direct, a mere causal relation may be enough. Further, neither the incidence of the fee nor the service rendered need be uniform. That others besides those paying the fees are also benefitted does not detract from the character of the fee. In fact the special benefit or advantage to the payers of the fees may even be secondary as compared with the primary motive of regulation in the public interest. Nor is the court to assume the role of a cost accountant. It is neither necessary nor expedient to weigh too meticulously the cost of the services rendered etc. against the amount of fees collected so as to evenly balance the two. A broad co-relationship is all that is necessary. Quid pro quo in the strict sense is not the one and only true index of a fee; nor is it necessarily absent in a tax." 46 In Sreenivasa General Traders and Others v. State of Andhra Pradesh (1983) 4 SCC 353, a three judge Bench of this Court held: "32. There is no generic difference between a tax and a fee. Both are compulsory exactions of money by public authorities. Compulsion lies in the fact that payment is enforc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as the Jal Sansthan has provided a stand post or waterworks within a stipulated radius of the premises through which water has been made available to the public by the Jal Sansthan. The levy of the tax does not depend upon the actual consumption of water by the owner or occupier upon whom the tax is levied. Unlike the charge under Section 59 which is towards the cost of water to be supplied by the Jal Sansthan according to its volume or, in lieu thereof on a fixed sum, the tax under Section 52 is a compulsory exaction. Where the premises are connected with water supply, the tax is levied on the occupier of the premises. On the other hand, where the premises are not so connected, it is the owner of the premises who bears the tax. The levy under Section 52 (1) is hence a tax and not a fee. Moreover, for the reasons that we have indicated above, it is a tax on lands and buildings within the meaning of Entry 49 of List II. D.5 The 'Railways' judgment 48 The High Court in the present case has relied on the decision of a two judge Bench of this Court in Union of India v. State of U.P. (supra) in support of its decision to order a refund of the taxes collected by the appellants. In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce of sewerage and supply of water. It has to create its own funds and therefore, levy under the Act is a must. In order to supply water and maintain sewerage system, the Jal Sansthan has to incur the expenditure for the same. It is in fact a service which is being rendered by the Jal Sansthan to the Railways, and the Railways cannot take this service from the Jal Sansthan without paying the charges for the same. Though the expression tax has been used in the Act of 1975 but in fact it is in the nature of a fee for the services rendered by the Jal Sansthan. What is contemplated under Article 285 is taxation on the property of the Union. In our opinion the Jal Sansthan is not charging any tax on the property of the Union; what is being charged is a fee for services rendered to the Union through the Railways. Therefore, it is a plain and simple charge for service rendered by the Jal Sansthan for which the Jal Sansthan has to maintain staff for regular supply of water as well as for sewerage system of the effluent discharged by the railway over their platforms or from their staff quarters. It is in the nature of a fee for service rendered and not any tax on the property of the Railway....