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TMI Blog2001 (8) TMI 1445X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 municipalities and with a view to enable them to generate more revenue to meet the add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 particular case may consider reasonable on account of the actual expenditure, if any, annually incurred by the owner on the upkeep of the land in a state to command such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the land or the building which is determined in accordance with the principles contained in Section 23 of the Land Acquisition Act, 1894, or as determined in accordance with the provisions of the Registration Act, 1908. Section 61(a) of the Act 61. Taxes which may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed 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 petitioners argued that even though the language of amended Section 3(1)(b) suggests that it is a tax on land or building occupied by the owner, but in reality it is a tax on capital assets of the owner and a legislation on this subject can be enacted only by the Parliament under Entry 86 of List ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) of Section 3(1) provide for determination of annual value in case of land on which no building has been erected. In terms of Section 3(8a) which has been inserted by Punjab Act No. 11 of 1994, market value means the market value of the land or building which is determined in accordance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 land used as market on the ground that in substance, it was a tax on market and not on land, while rejecting the challenge, the Supreme Court observed as under; It is well settled that the entries in three legislative lists have to be interpreted in their widest amplitude and, therefore, if a tax can reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 obligations have to be taken into account. In certain exceptional case, where a person owes no debts and is under no enforceable obligation to discharge any liability out of his assets, it may be possible to break up the tax which is leviable on the total assets into components and attribute a component to lands and buildings owned by an assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly 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 scope of Entry 86 of List I and not under Entry 49 of List II of the Seventh Schedule and, therefore, it was beyond the legislative competence of the State. The Supreme Court rejected the challenge and held as under; It may be that the building owned by an assessee may be a component of his total assets, but a tax under Entry 86 will not bear an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 provisions of the Registration Act, 1908 and it has been left to the sweet-will of the municipalities to devise either of the modes. They have also assailed Section 67(3) by arguing that it confers un-bridled and un-guided power upon the municipalities to undertake exercise for re-determination of the annual value of the land or building in terms of amended Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 receive from hypothetical tenant. But where the rent of the building is subject to rent control legislation, this approximation may and often does get displaced. 21. In Balbir Singh's case (supra), the Supreme Court explained the first decision by making the following observations: The rateable value of a building, whether tenanted or self occupied, is limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 3(1), the annual value of the two identically situated properties, i.e., the same area, same type of construction (qualitative and quantitative) and same price may be altogether different depending on its occupation by the tenant or the owner. If the property is in occupation of the tenant, then the annual value for the purpose of levy of house tax will be determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on different basis. There are cases where the legislature itself makes a complete classification of person or things and apply to them which it enacts and others where legislature merely lays down the law to be applied to the persons or things answering to a given description or exhibiting certain common characteristics, but being unable to make a complete and precise classific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, 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 Industries Ltd. (supra). 29. In K.T. Moopil Nair v. State of Kerala (supra) a Constitution Bench of the Supreme Court considered the Constitutionally of the Travancore-Cochin Land Tax Act, 1955 [as amended by the Travancore-Cochin Land Tax (Amendment) Act, 1957]. While striking down the tax charging section on the ground that it created inequality, their Lordships of the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with greater play in the joints has to be allowed to the legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. The Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, factories, buildings of the universities etc., while striking down the charging section of Bombay Provincial Municipal Corporation Act, 1949, the Constitution Bench of the Supreme Court observed as under:- There was nothing to show that conditions pre-requisite for determination of annual value of textile factories in Ahmedabad on the basis of rental value per foot super of floor area existed at the relevant time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 buildings solely on floor area. The vice of the Act in the present case is more pronounced than it was in New Manek Chowk Spinning and Weaving Mills case (1967)2 S.C.R. 679 - (A.I.R. 1967 S.C. 1801): in that case the Rules under which the tax was sought to be levied on the basis of floor area were restricted in their operation to factory buildings within the Corporation limits of Ahmedabad, whereas Act 19 of 1961 which is ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved 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 of finish, the nature of fittings, the dimensions of rooms, the type of material used in construction and so on and so forth. It would be an endless quest. It would not be easy to draw the lines of distinction. It may not be possible to evolve a classification to cater to all these several distinctions. Even if it is so evolved, not only would it be too complex and elaborate, it would leave too much discretion to assessing author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for admission to entertainment could be more than Rs. 2.50 or Rs. 5. Such classification is clear, well defined and real. The object sought to be achieved was to encourage the cinema-owners in boosting entertainment facilities available to the people. That was achieved by providing grant-in-aid under an incentive scheme to one class of cinema-owners and by permitting recovery of a certain amount by way of charges for maintenance to such other class o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of market value is not sufficient to save the provision from the charge of discrimination. 40. The assertion made in the written statements filed on behalf of the municipalities that the impugned amendment has co-relation with the services provided by them deserves to be discarded for the simple reason that no material has been placed before the Court to prove that different types of services and amenities are provided by the municipalities to different types of properties. Rather, during the course of arguments, learned counsel for the respondents had to concede that the services provided by the municipalities are common to all types of properties irrespective of their occupation by the tenant or the owner. 41. We also do not find any substance in the argument of the learned counsel for the respondents that the impugned provision should be declared ultra vires to the Constitution because all the tenanted premises have been treated at par for the purpose of determination of annual value. This argument of the learned counsel misses the central point raised by the petitioners, namely, determination of market value of land or building only from the point of view of its occupatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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