TaxTMI 
TaxTMI 
2001 (8) TMI 1445
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....ve power of the State because it seeks to empower the municipalities to levy house tax on the capital value of the property occupied by the owner and this subject falls within the exclusive domain of the parliament under Entry 86 of List-I (Union List) of the Seventh Schedule of the Constitution. They have further averred that Section 3(1) of the Act is discriminatory and violative of Article 14 of the Constitution of India because the classification made between the land or building on the basis of their occupation by tenant or owner is artificial, arbitrary and irrational and has no nexus with the object of imposing tax on land or building. 3. The respondents have defended the impugned provision by asserting that the house tax is being levied on land or building and not on capital assets of the owner and the State Legislature is competent to legislate on this subject under Entry 49 of List-II (Stat List) of the Seventh Schedule of the Constitution. They have averred that for the purpose of giving effect to the mandate of the provisions contained in Part IX-A of the Constitution, the Punjab Municipal Act, 1911 was amended by the State Legislature imposing greater burden on the ....
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.... leviable and ii) When the improvement of the land due to canal irrigation has been excluded from account in assessing the land revenue the amount of owner's rate or water advantage rate or other rate imposed in respect of such improvement; b) In the case of any house or building, the gross annual rent at which such house or building, together with its appurtenances and any furniture that may be let for use or enjoyment forthwith, may reasonably be expected to let from year to year subject to the following deductions; i) such deduction not exceeding 20 per cent of the gross annual rent as the committee in each particular case may consider a reasonable allowance on account of the furniture let therewith; ii) a deduction of 10 percent for the cost of repairs and for all other expenses necessary to maintain the building in a state to command such gross annual rent. The deduction under sub-clause shall be calculated on the balance of the gross annual rent after the deduction (if any) under Sub-clause (i); iii) where the land is let with a building, such deduction not exceeding 20 percent of the gross annual rent, as the committee in each....
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....nnual value shall be five per cent on the sum obtained by adding the present market value of the land and estimated cost of erecting the building less ten per cent depreciation; Provided that in the calculation of annual value of any land and building, no account shall be taken of the furniture or machinery thereon; c) in the case of any land on which no building has been erected but on which a building can be erected and on any land on which a building is in the process of erection, the annual value shall be fixed at five per cent of the estimated market value of such land; d) in the case of any land on which no building has been erected but on which a building can be erected or which is partially built and is being used by erecting tenants, temporary structures for the purpose of accommodating marriage parties, circus shows or for any entertainment purposes or such other purpose as may be specified in this behalf by the committee with the previous sanction of the state government the annual value shall be twenty per cent of the estimated market value of such land. Section 3(8a) of the Act. (8a) "market value" means the market value of ....
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....already imposed and Section 62-A(2) confers upon the State Government to require a Municipal Committed to modify the rate of any tax already imposed. Sections 63 to 67 contain the procedure for preparation of assessment list, publication and completion of assessment list, public notice of time fixed for revising assessment list, settlement of lists and further amendments of assessment list. Sub-section(3) of Section 67 empowers the municipality to revise the assessment in terms of the amended Section 3(1) of the Act. Section 68(1) provides for preparation of new assessment list after a period of five years. Sub-section (2) thereof lays down that the annual value of the land or building occupied by the tenant may be revised when revision in the rent is made. Section 68-A empowers Municipal Committees to amend the assessment already made. Section 70(1) empowers the Municipal Committees to exempt in whole or in part any person form payment of tax for a period not exceeding one year. Likewise, Section 71 empowers the State Government to grant exemption in whole or in part time to time to any person or class of persons or any property form payment of tax. 6. Learned Counsel for the p....
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...., the criteria was the gross annual rent at which such house or building, together with its appurtenances and any furniture that may be let for use or enjoyment forthwith may reasonably be expected to let from year to year subject to certain deductions. [Section 3(1)(b)]. Sub-clauses (i) to (ii) of Section 3(1) (b) related to different types of deductions. Clause (c) of Section 3(1) provided for determination of annual value of any house or building of which the gross annual rent could not be determined under Clause (b). In neither of the three clauses of Section 3(1), i.e. (a), (b) or (c), any reference was made to the occupation of land, house or building by the tenant or the owner. The amended Section 3(1) lays down two different modes for determination of annual value for land or building which is in the occupation of tenant and land or building which is occupied by the owner. In the first case, the annual value means the gross annual rent at which the land and building has actually been let. In the second case, the annual value is 5% on the sum obtained by adding the present market value of land and estimated cost of erecting building less 10% depreciation, Clauses (c) and (d)....
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....al value of property is the basis of a tax, that tax does not necessarily become a tax on income. There are other factors to be taken into consideration. It is the essential nature of the tax charged and not the nature of the machinery which is to be looked at.... In substance, the property tax levied by S.S. Punjab Urban Immovable Property Tax Act, 1940 falls within item 42 of the Provincial list and is not a tax on income falling within item 54 of the Federal List, Government of India Act, although the basis of the tax is the annual value of the building. It is not impossible to reconcile the seeming conflict between the provision of the Act in question and the income-tax Act. The extent of the alleged invasion by the Provincial Legislature into the field of the Federal Legislature is not so great in the case in question as to justify the view that in pith and substance the impugned tax is a tax on income. It is, therefore, within the legislative competence of the Punjab Legislature to levy such a tax." 11. In Ajoy Kumar Mukherjee v. Local Board of Barpeta, A.I.R. 1965 S.C. 1561, a Constitution Bench of the Supreme Court considered the challenged to the levy of tax on....
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.... (Underlining is ours) 13. In Assistant Commissioner of Urban Land Tax, Madras and Ors. v. Buckingham and Carnatic Company Ltd. and Ors., A.I.R. 1970 S.C. 169, the legislative competence of the State of Madras to enact Madras Urban Land Tax Act, 1966 was upheld and the argument that there was a conflict between Entry 86 of List and Entry 49 of List II was rejected in the following words; "There is no conflict between Entry 86 of List I and Entry 49 of List II, the basis of taxation under the two entries is quite distinct. As regards Entry 86 of List I the basis of the taxation is the capital value of the asset. It is not a tax directly on the capital value of assets of individuals and companies on the valuation date, the tax is not imposed on the components of the assets of the assessee. The tax under Entry 86 proceeds on the principles of aggregation and is imposed on the totality of the value of all the assets. It is imposed on the total assets which the assessee owns and in determining the net wealth not only to encumbrances specifically charged against any item of assets, but the general liability of the assessee to pay his debts and to discharge his lawful obligati....
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....nts of which may be lands and buildings and other items of assets excluding such liabilities as may exist. The incidence of the tax is not on lands and buildings as units of taxation but on the net assets of which lands and buildings are only some of the components. This is not the case under entry 49 (List II) where the tax can be laid directly on lands and buildings as units of taxation. Therefore, a tax on lands and buildings is fully within the competence of the legislature and it is open to it to authorise the municipality to levy the same tax indicating the mode of levy. This the legislature has done by indicating the different modes which may be adopted in making the levy, one such mode being a percentage of the capital value." (Emphasis added). 15. The last mentioned two decisions were relied upon by another Constitution Bench of the Supreme Court in D.G. Gose and Co. v. State of Kerala and Anr., (1980)2 S.C.C. 410 for upholding the constitutional validity of Kerala Building Tax Act, 1975. In that case, it was argued on behalf of the appellant that the tax in question was a tax on the capital value of the assets of an individual or company and falls within the s....
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....d bears no nexus with the object of determination of annual value for levy of house tax under Section 61(a). Ld. counsel laid emphasis on the fact that Entry 49 of List-II of the Seventh Schedule empowers the State Legislature to enact law for imposition of taxes on land and buildings and from that point of view, different yard-sticks or modes cannot be adopted for determination of annual value for the purpose of levy of house tax. They gave several examples to show that by virtue of the amended definition of annual value, two properties having similar area, cost and quality of construction and situation will be subjected to house tax at different rates simply because one is occupied by the tenant and the other by the owner and submitted that this differentiation has no rational relation with the object of legislation, namely, determination of annual value for levy of house tax. Some of the learned counsel also argued that Section 8(8a) should be declared unconstitutional because the legislature has not laid down any guide-line for determination of the market value in accordance with the principles contained in Section 23 of the Land Acquisition Act, 1894 or in accordance with the ....
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....he observations made in that decision are extracted below: "According to the definition occurring in Section 3(1)(b) of the Punjab Municipal Act (3 of 1911) annual value of a building would be the gross annual rent at which the building may reasonably be expected to let from year to year. It is obvious from this definition that unlike the English Law where the value of occupation by a tenant is the criterion for fixing annual value of the building for rating purposes, here it is the value of the property to the owner which is taken as the standard for making assessment of annual value. The criterion is the rent realisable by the landlord and not the value of the holding in the hands of the tenant. The rent which the landlord might realise if the building were let is made the basis for fixing the annual value of the building. What the landlord might reasonably expect to get from a hypothetical tenant, if the building were let from year to year, affords the statutory yardstick for determining the annual value, there would ordinarily be in a free market close approximation between the actual rent received by the landlord and the rent which he might reasonably expect to receiv....
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....departure from the un-amended section, inasmuch as, it lays down two different criteria for determination of annual value of the same land or building depending on the factum of its occupation by the tenant or the owner. In the case of land or building which is in the occupation of a tenant, the annual value is to be determined on the basis of gross annual value at which the same has been actually let with a provision that in the event of increase in the rent, the Municipal Committee may make corresponding increase in the annual value. As against this, in the case of land or building occupied by the owner, the annual value is 5% on the sum obtained by adding the present market value of the land and estimated cost of erecting the building minus 10% depreciation. Proviso to Section 3(1)(b) lays down that the calculation of annual value of any land or building should be made without considering the furniture or machinery thereon. The market value of the land or building is to be determined in accordance with the principles contained in Section 23 of the Land Acquisition Act, 1894 or in accordance with the Registration Act, 1908. 24. It is, thus, evident that after the amendment of ....
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....t and scope of the doctrine of equality enshrined in Article 14 and other related Articles, i.e., Articles 15 and 16 has been considered in several cases. Article 14 of the Constitution declares that the State shall not deny to any person equality before the law or the equal protection of law within the territory of India. It is one of the most valuable and important guarantee given to the people. However, this does not mean that all laws must be general in character and universal in application and the State does not have the power to distinguish or classify persons or things for the purpose of legislation. Rather, it must be treated as settled that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purpose of legislation. The broad test of reasonable classification envisages the existence of two conditions, namely, (1) that the classification must be founded on an intelligible different which distinguishes persons or things that are grouped together from others left out of the group and (ii) that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded ....
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....to give a practical content to that guarantee by accommodating it with the practical needs of the society and it should not be allowed to submerge and drawn the precious guarantee of equality. The doctrine of classification should not be carried to a point where instead of being a useful servant, it becomes a dangerous master," 28. However, in relation to the laws relating to taxation, the courts have repeatedly held that very wide latitude is available to the Legislature while classifying the objects, persons or things for the purpose of taxation -- East India Tobacco Co. v. State of A.P., A.I.R. 1962 S.C. 1773; State of M.P. v. Bhopal Sugar Industries Ltd., A.I.R. 1964 S.C. 1179; State of Kerala v. Aravind Ramakant Modawdakar, A.I.R. 1999 S.C. 2970; R.K. Garg v. Union of India, (1981)4 S.C.C. 675 and State of Maharashtra v. Madhukar Balkrishna Badiya, (1988)4 S.C.C. 290. But, at the same time, it has been held that the Court will not hesitate to strike down a statute simply because the differentiation in the imposing of tax on similarly situated persons or things is not motivated -K.T. Moopil Nair v. State of Kerala, A.I.R. 1961 S.C. 552 and State of M.P. v. Bhopal Sugar Indus....
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....ased on Article 14 of the Constitution..." 30. In R.K. Garg v. Union of India (supra), a Constitution Bench of the Supreme Court dealt with this aspect of the matter at length and held as under;- "Now while considering the constitutional validity of a statute said to be violative of Article 14, it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in discharge of its constitutional function of judicial review. The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. ..........Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularl....
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....proach which must guide and inspire the legislature in dealing with complex economic issues." 31. In State of Maharashtra v. Madhukar Balkrishna Badiya (supra), a Division Bench of the Supreme Court observed as under; "About discrimination it is well to remember that a taxation law cannot claim imunity from the equality clause in Article 14 of the Constitution. But in view of the intrinsic complexity of fiscal adjustments of diverse elements, considerably wide discretion and latitude in the matter of classification for taxation purpose is permissible. See the observations of this Court in ITO v. R. Takin Roy Rymbai. Also see the observations in Meenakshi v. State of Karnataka, Anant Mills Co. Ltd. v. State of Gujarat and Khandige Sham Bhat v. Agricultural Income Tax Officer. " 32. We may now refer to some of the decisions which have direct bearing on the issue raised in these petitions. In New Manek Chowk Spg. and Wvg. Mills Co. Ltd. v. Municipal Corporation of the City of Ahmedabad, A.I.R. 1967 S.C. 1801 the petitioner successfully challenged the levy of property tax on the basis of a flat rate per 100 square feet of its floor area and all other textile mills, facto....
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....ases operate as denial of equality. This Court in a resent judgment has decided that the levy of tax in exercise of the power under Entry 49, List-II of the Seventh Schedule in respect of factory buildings in a municipal area based on floor area was illegal : New Manek Chowk Spinning & Weaving Mills Co. Ltd. v. Municipal Corporation of City ofAhmedabad, (1967)2 S.C.R. 679=(A.I.R. 1967 S.C. 1801). The Court held in that case that the method of adopting a flat rate for a floor area for determining the annual value adopted by the Corporation of Ahmedabad in exercise of the powers conferred upon it by the Bombay Provincial Municipal Corporation Act 49 of 1949 was against the provisions of the Act and the Rules made thereunder as well as all recognised principles of valuation for the purpose of taxation. If levy of tax in the municipal district based on floor area in respect of a factory building violates Article 14 of the Constitution when the tax is sought to be levied by the Municipal Corporation, we see no reason to uphold the tax imposed under the impugned Act when the State in exercise of legislative authority conferred by Entry 49, List-II, Schedule VII, imposes liability to tax ....
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..... The facts of the first case show that classification of the holdings made on the basis of situation (buildings on principle main road, main road and other), type of construction (pucca building with RCC roof, pucca building with asbestos/ corrugated roof and other) etc. were declared by the High Court of Patna to be unconstitutional. While reversing the judgment of the High Court, their Lordships of the Supreme Court observed as under:- "Treating all pucca buildings with RCC roof as one class and subjecting them to uniform rate of tax - subject, of course, to the location and nature of user - cannot be said to amount to hostile discremination so as to offend Article 14. A mere possibility of a better classification is no ground to strike down the classification made by the statutory authority - more particularly in the case of a taxing enactment. Saying so, would be to deny the "range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rate of rates applicable". There would be any number of distinguishing features even among, say, pucca buildings with RCC roof depending upon the quality....
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.... wisdom. In the instant case, in the year 1992, when the impugned provision was enacted, there existed two classes of cinema-owners" one, those who were receiving grant-in-aid; under some incentive scheme enunciated by the State Government; and two, such cinema-owners as were not receiving such grant-in-aid. The grant-in-aid schemes promulgated by the State Government were temporary schemes having a life span of, three to five years which extended incentive depending on the population of the place where the cinema house was situated. The incentive was by way of grant-in-aid equivalent to a certain percentage of the quantum of entertainment tax collected by the cinema-owners for the State Government. As a condition precedent to the entitlement for such grant-in-aid the cinema-owners were subjected to a disability of not charging the fee for admission beyond a ceiling i.e. Rs. 2.50, later on revised to Rs. 5. Such cinemaowners formed a class by themselves different and distinct from those cinema-owners who were not receiving any grant-in-aid under an incentive scheme and/or were free to charge fee for admission without any restriction as to the upper limit, i.e. their fee fo....