State of Punjab and Another vs British India Corporation Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 639 of 1961; Civil Appeal No. 287 of 1962

Decision Date: 15 February 1963

Coram: K.C. Das Gupta, S.K. Das, A.K. Sarkar, N. Rajagopala Ayyangar

In this matter the Supreme Court of India delivered its judgment on fifteen February 1963. The case was styled State of Punjab and Another versus British India Corporation Limited. The opinion was authored by Justice K C Das Gupta and was pronounced by a bench consisting of Justices K C Das Gupta, S K Das, A K Sarkar and N Rajagopala Ayyangar. The petition was filed by the State of Punjab together with another respondent, while the opposing party was British India Corporation Limited. The judgment was recorded under the citation 1963 AIR 1459 and also appears in the Supreme Court Reporter as 1964 SCR (2) 114, with later citations including R 1968 SC 919, (11) RF 1977 SC2425 (5). The dispute concerned the interpretation of the Punjab Urban Immovable Property Tax Act, 1940, specifically sections three and four, and the meaning of “rent” under rule eighteen of the Punjab Urban Immovable Property Tax Rules, 1941, in the context of a claim for exemption from property tax where the property was purportedly used for the purpose of a factory.

The factual matrix involved two separate appeals. In the first appeal the property consisted of a collection of rooms that were used for indoor games by mill employees, a large hall that served as the Gurkha Guards Club, additional rooms that functioned as the Officers’ Club and residential quarters occupied by workers of the mill. The second appeal concerned a block of two hundred quarters that had been allocated to the factory workers for their habitation. The central question was whether these premises qualified for exemption from taxation under section four of the 1940 Act. The assessing authority had concluded that the properties were liable to tax, and that decision was affirmed by the Deputy Excise and Taxation Commissioner. Dissatisfied, the respondents approached the Punjab High Court under article 226 of the Constitution seeking to have the assessment orders set aside. The High Court, in both appeals, held that the petitioners were entitled to the exemption claimed and consequently quashed the assessment orders. The State of Punjab appealed the High Court’s judgment before this Court. The Supreme Court held that no tax could be levied under the Punjab Urban Immovable Property Tax Act, 1940, in respect of the buildings in either appeal, confirming the High Court’s order. The Court reasoned that in the first appeal the allotment of the buildings for the use of work‑men was necessary for the efficiency of the work‑men, analogous to the way a machine’s efficiency justifies a building’s use for a factory. Similarly, in the second appeal the provision of two hundred quarters was essential for the welfare and efficiency of the work‑men, thereby constituting use for the purpose of a factory. The Court further observed that any use of a building that fulfills a requirement imposed by factory law in order for the factory to operate must be regarded as use for the purpose of a factory, and accordingly the exemption applied.

The Court explained that the term “rent” appearing in clause (ii) of rule 18(4) of the Punjab Urban Immovable Property Tax Rules, 1941, refers strictly to a payment made by a tenant to a landlord for the use of a demised property. The definition expressly excludes any amounts that are paid by persons who hold the property under a licence rather than a tenancy. The Court supported this interpretation by referring to the decision in London Co‑operative Society Ltd. v. Southern Essex Assessment Committee, reported in the 1942 volume of the King’s Bench Reports at page 53, which had adopted the same narrow construction of the word “rent.”

In the present matter, the judgment of the Supreme Court was delivered by Justice Das Gupta on February 15, 1963, after consideration of two civil appeals. The first appeal, designated as Civil Appeal No. 639 of 1961, arose from a judgment dated August 4, 1960, of the Punjab High Court at Chandigarh in Letters Patent Appeal No. 186 of 1957. The second appeal, identified as Civil Appeal No. 287 of 1962, stemmed from a judgment and order dated September 7, 1960, of the same High Court in Civil Writ No. 216 of 1958. The parties before the Court included the State of Punjab and another as appellants, and the respondents were the British India Corporation Ltd. in the first appeal and Shri Gopal Paper Mills Ltd. in the second. Counsel for the appellants comprised the Advocate‑General of Punjab, Mr. S. M. Sikri, together with Mr. N. S. Bindra and Mr. P. D. Menon. The respondents were represented respectively by Mr. Bhagirath Das and Mr. B. P. Maheshwari in the first appeal, and by Mr. A. V. Viswanatha Sastri, Mr. O. P. Malhotra, Mr. O. C. Mathur, Mr. J. B. Dadachanji and Mr. Ravinder Narain in the second. The central issue before the Court was whether certain buildings owned by the respondents were liable to tax under the Punjab Urban Immovable Property Tax Act, 1940. Both sets of buildings were situated within the rating area described in the Schedule to the Act, which ordinarily rendered them taxable under section 3, unless they qualified for the exemption provided in section 4. Section 4 listed categories of property exempt from tax in clauses (a) through (g); clause (g) specifically exempted “such buildings and lands used for the purpose of a factory as may be prescribed.” The term “prescribed” was defined in the Act as being prescribed by rules made under the Act, and rule 18 of the Punjab Urban Immovable Property Tax Rules, 1941, as framed by the Punjab Government, prescribed the buildings and lands that fell within clause (g) of section 4. The Assessing Authority had rejected the respondents’ claims for exemption and had assessed the properties for tax. Subsequent appeals to the Deputy Excise and Taxation Commissioner were dismissed. The respondents then approached the Punjab High Court under article 226 of the Constitution, seeking a writ to quash the Taxation Commissioner’s order. The High Court, in both appeals, concluded that the respondents were entitled to the exemption under rule 18 and set aside the assessment orders. Consequently, the Supreme Court was called upon to determine whether the High Court’s ruling—that the respondents’ buildings fell within the class of properties prescribed for exemption by rule 18 of the 1941 Rules—was correct. The Court noted that the relevant portion of rule 18, which had undergone several amendments, was the version in force in 1956, the year in which the assessment order was made.

In the assessment order the Court reproduced the wording of Rule 18. The rule provides that, under clause (g) of sub‑section (1) of section 4 of the Act, every building and parcel of land that is owned by the proprietor of a factory and that is used for the purpose of a factory shall be exempt from tax, provided that a manufacturing process which uses power is being carried out in the premises and has been so carried out continuously for a period of six months, or, in the case of a seasonal factory, since the beginning of the working season. The rule further states in sub‑rule (4) that the exemption granted by sub‑rules (1) and (2) shall not extend to (i) godowns situated outside the factory compound; (ii) godowns, shops, quarters or any other buildings, whether located inside or outside the factory compound, for which rent is charged either to employees of the factory or to any other persons; and (iii) bungalows or houses that are intended for or occupied by managerial or senior staff, whether those bungalows or houses are inside or outside the factory compound. The Court noted that a proviso to sub‑rule (1) exists but it was not relevant to the present dispute, and that sub‑rules (2) and (3) of Rule 18 were likewise outside the scope of the matter before it.

The operative effect of Rule 18, as explained by the Court, is that a building belonging to a factory proprietor will obtain exemption from tax under section 4 of the Act only if three conditions are fulfilled. First, the building must be used for the purpose of a factory. Second, the factory must be one in which a manufacturing process that involves the use of power has been carried on continuously for six months, or, where the factory operates seasonally, since the start of the working season. Third, the building must satisfy the sub‑conditions that (a) no rent is being charged for it, (b) it is not a godown situated outside the factory compound, and (c) it is not a bungalow or house intended for or occupied by managerial or superior staff.

The Court observed that, in the present cases, there was no dispute that the second condition was satisfied because the factories involved had indeed been conducting a power‑driven manufacturing process for the required continuous period of six months. The Court also accepted that the buildings in question were neither godowns outside the factory compound nor bungalows or houses intended for or occupied by managerial or senior staff. Consequently, the only points of controversy remaining were twofold: whether the buildings were used for the purpose of a factory, and whether any rent was being charged for the use of those buildings. Before turning to the factual matrices of the two appeals, the Court indicated that it must first determine the proper meaning of the expressions “used for the purpose of a factory” and “rent” as employed in Rule 18. The Court emphasized that it was neither necessary nor appropriate to attempt a rigid definition of “use for the purpose of a factory.” The fact that the legislature left the phrase undefined suggested an intention that, whenever a dispute arises over its meaning, the question should be resolved by examining the specific facts of each case.

It was considered reasonable to formulate two guiding principles that would resolve the issue in most situations. The first principle stated that a building would be deemed to be used for the purpose of a factory when it serves a function that the factory law requires in order for the factory to operate. The second principle held that a building would be regarded as used for the purpose of a factory when it is occupied by persons whose presence is essential for the efficient operation of the machinery or for the workmen engaged in the factory. Chapter five of the Factories Act contains several provisions that are aimed at the welfare of factory workers. Section 42 obliges every factory to provide and maintain adequate and suitable washing facilities for the workers. Section 43 authorises the State Government to make rules requiring each factory, or any class or description of factories, to provide suitable places for keeping clothing not worn during working hours and for drying wet clothing. Section 46 empowers the State Government to prescribe that any factory employing more than two hundred and fifty workers must have a canteen or canteens that are provided and maintained by the occupier for the workers’ use. Section 47 mandates that factories employing more than one hundred and fifty workers must furnish adequate shelters, rest rooms, and a suitable lunch room with drinking water where workers can eat meals they bring. Section 48 requires the provision of a suitable room or rooms for children under six years of age of women employees, when more than fifty women are ordinarily employed. Section 92 makes the breach of any provision of the Act, any rule made thereunder, or any written order issued under the Act punishable by imprisonment or fine. Consequently, for a factory to function in compliance with the law, the owner must provide buildings or parts of buildings for the workers’ use as prescribed in the cited sections, and such use must therefore be regarded as “use for the purpose of a factory.” Advances in scientific knowledge have shown that additional facilities and amenities, even those not mandated by the legislation, significantly enhance industrial efficiency, and some of these facilities are indeed necessary to maintain an appropriate standard of efficiency.

In this case, the Court observed that many progressive employers, looking ahead, had spent large sums of money to provide facilities and amenities not required by law and had constructed buildings for that purpose. The Court held that the use of such buildings, when they supply facilities and amenities necessary to maintain a proper standard of efficiency among factory workers, must also be regarded as “use for the purpose of a factory.” The learned Advocate‑General appearing for the State of Punjab agreed that a building erected to house machinery so that the machinery can operate efficiently or be prevented from deteriorating is being used “for the purpose of a factory.” However, he expressed reluctance to extend the same principle to a building employed for maintaining the efficiency of the men who operate the machinery. The Court found no reasonable basis for distinguishing between the two situations and stated that just as a building used to preserve machine efficiency is a “use for the purpose of a factory,” a building used to provide something necessary for preserving worker efficiency should be treated the same way. A substantial number of authorities were cited to illustrate how English courts have interpreted the expressions “industrial purpose” or “purpose other than the manufacturing process or handicraft carried on in the factory” under the Rating and Valuation (Apportionment) Act and the Factory Act 1901. The Court noted that analysing all those authorities would not be useful because the legislative schemes of those Acts differ considerably from the present Act. Consequently, the Court referred only to the decision in London Co‑operative Society Ltd. v. Southern Essex Assessment Committee to demonstrate the recent tendency of English courts to give weight to what is necessary for the welfare and efficiency of workers when deciding such questions. In that case, a refreshment premises for employees of a laundry that was classified as a factory and workshop was considered an “industrial hereditament.” The issue was whether the refreshment area was used solely for a purpose other than the manufacturing process or handicraft carried on in the laundry. The Court of King's Bench rejected that view, holding that the canteen was not used exclusively for a purpose unrelated to manufacturing. Viscount Caldecote, C. J., explained that contemporary considerations of factory equipment and layout show that a canteen does not fall within the category of a place “solely used for some purpose other than the manufacturing process or handicraft carried on in the laundry.” He further observed that similar considerations could aid in determining the character of other parts of a factory, such as lavatories, rooms where surgical first aid is provided, cloakrooms, and various other components of the hereditament.

Tucker J agreed with the earlier conclusion and stated that, in his view, the decisive factor was the fact that the canteen was shown to be necessary and essential for the welfare and efficiency of the workers employed in the clearly industrial part of the undertaking. Applying the two principles earlier set out to the facts of the two appeals required the Court to determine the actual use to which the property in question had been put. In the first appeal, in which British India Corporation Ltd. was the respondent, the matter concerned four separate units: a group of rooms that were used for indoor games by the mill employees; a large hall that functioned as the Gurkha Guards Club; a set of rooms that served as an officers’ club; and residential quarters that were occupied by the mill workers. The Court held that the allocation of these buildings for the use of the workmen was made for a purpose that was necessary to the efficiency of the workmen. In the second appeal, in which Shri Gopal Paper Mills Ltd. was the respondent, the property consisted of two hundred quarters that had been allotted to the factory workers for their occupation. The provision of such quarters was plainly necessary to the welfare and efficiency of the workmen, and consequently the Court found that, in this case as well, the buildings were being used for the purpose of a factory.

The next issue was the meaning of the term “rent” in clause (ii) of Rule 18(4). In a broader sense, rent can mean any payment made for the use of land or buildings, including a payment by a licensee for occupation. In a narrower sense, rent means the payment made by a tenant to a landlord for property that has been demised to the tenant. The question before the Court was whether the rule‑making authority, when it provided that the exemption granted by sub‑rules 1 and 2 of Rule 18 would not apply to quarters and other buildings for which “rent” was charged, intended the word in its broader or its narrower sense. To answer this, the Court examined the way “rent” was used in the Act that gave rise to the rules. At the time the rules were first framed in 1941, the Act employed the word “rent” only in two sections. The first appearance was in section 5, which dealt with the assessment of the annual value of land or building and stipulated that the value should be ascertained “by estimating the gross annual rent at which such land or building might reasonably be expected to let from year to year.” This usage clearly employed “rent” in its strict, narrower sense of a tenant’s payment to a landlord for demised property. The second appearance was in section 14, which related to the recovery of tax in arrears. That section authorized the prescribed authority to serve a notice on any person who paid rent to the person from whom the arrears were due, directing that future rent payments be made directly to the authority and thereby transferring to the authority the right to recover, receive and discharge such rent. Although the wording of the section left some doubt as to whether “rent” was meant in the broader or narrower sense, the marginal note to the section described its subject‑matter as “Recovery of tax from tenants.” Taking that note into account, the Court concluded that the word “rent” in this section was also used in the narrower sense, meaning a payment by a tenant to a landlord for demised property. Consequently, when the rule‑making authority framed the Rules in 1941, it did so with a clear understanding that “rent” referred to the narrower, tenant‑to‑landlord payment.

In the provision that dealt with arrears, the legislature stated that the prescribed authority was authorised to serve a notice on any person who was paying rent to the owner from whom the tax arrears were due. The notice was required to specify the amount of the tax arrears and to demand that all future rent payments by that person be made directly to the prescribed authority. The notice also transferred to the prescribed authority the right to recover, receive and give discharge for such rent. While the wording of the section left it uncertain whether the term “rent” was intended in its narrow or broader sense, the marginal note to the section described its subject‑matter as “Recovery of tax from tenants.” When that note was considered, it became clear that the legislature had used the word “rent” in the narrow sense, meaning payment made by a tenant to a landlord for demised property. When, in 1941, the rule‑making authority began to formulate the Rules, it had before it this clear usage of “rent” in the narrow sense as expressed in section 5 and the marginal note to section 14, both of which indicated that the term was meant in the same limited way. In the absence of any indication to the contrary, it was reasonable to assume that the rule‑making authority would not depart from the meaning that the legislature had employed. Consequently, the authority used the word “rent” in clause (ii) of Rule 18(4) in the same narrow sense, that is, payment by a tenant to a landlord for demised property. The Court therefore concluded that “rent” in clause (ii) of Rule 18(4) meant payment to a landlord by a tenant for the demised property and did not include payments made by licensees. In reaching this conclusion, the Court noted that an argument could be raised that, after the amendments of 1954 and 1957, clauses (d) and (e) of section 4 of the Act employed the word “rent” in a broader sense. However, assuming that view, such later usage could not be taken into account for interpreting the Rule because the Rule had been framed long before those amendments. Turning to the facts of the two appeals before the Court, it was admitted that, in both cases, the property that had been assessed was being used by employees on leave and by licensees. Any payment received from those occupants therefore did not constitute “rent” within the meaning of clause (ii). On that basis, the Court held that no tax was payable under the Punjab Urban Immovable Property Tax Act, 1940, with respect to the buildings involved in the two appeals. The High Court’s decision to set aside the assessment orders was accordingly affirmed, and the appeals were dismissed with costs.