Commissioner, Quilon Municipality vs M/S. Harrisons and Crosfield Ltd

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

Court: supreme-court

Case Number: Civil Appeals Nos. 415 to 419 of 1964

Decision Date: 05/10/1964

Coram: J.R. Mudholkar, P.B. Gajendragadkar, K.N. Wanchoo, M. Hidayatullah, Raghubar Dayal

In this case the Court recorded that the petitioner was the Commissioner of Quilon Municipality and the respondent was M S Harrisons & Crosfield Ltd. The judgment was delivered on 5 October 1964 by a bench of five judges: J R Mudholkar, P B Gajendragadkar, K N Wanchoo, M Hidayatullah and Raghubar Dayal. The citation of the decision is reported in 1965 AIR 1174 and 1965 SCR (1) 581. The matter concerned the Kerala Profession Tax (Validation and Re‑assessment) Act, 1958 (Act XIV of 1958), specifically section 2, and the question whether that provision violated article 276 of the Constitution. The Court also noted a relevant provision of the Travancore District Municipalities Act, 23 of 1116 M E, namely section 325, which authorises the making and amendment of rules and raises the issue of whether that power includes the authority to give retrospective effect to rules.

The Court explained the factual background. Before the Constitution came into force, the Quilon Municipality imposed a profession tax under the authority granted by the Travancore District Municipalities Act, 23 of 1116 M E, which corresponds to the year 1940 A D. The tax was levied on a half‑yearly basis on companies and individuals who carried on business within the municipal limits for at least a prescribed period during the year. The rates applicable to the tax were set out in rule 16 of the Second Schedule to that Act and were graduated according to the income of the assessee. Under the original rule 18(2) the income of a person or company conducting business both inside and outside the municipal area was deemed to be a prescribed percentage of the turnover generated inside the municipality. In 1947 a proviso was added to rule 18(2). That proviso provided that for assessees who were subject to income‑tax assessment under the Travancore Income‑tax Act, the income for computing the profession tax would be calculated by taking the total profit of the assessee as shown in the Travancore assessment, dividing it in proportion to the turnover earned inside and outside the municipal area, and then taxing only the portion attributable to the business carried on within the municipality.

The Court further noted that after the Constitution was enacted, section 3 of the Finance Act, 1950 (Act 25 of 1950) repealed the Travancore Income‑tax Act and replaced it with the Indian Income‑tax Act, 1922. Following that change, the municipalities in Travancore began to interpret the reference to the Travancore Income‑tax Act in rule 18 as a reference to the Indian Income‑tax Act. However, the Travancore‑Cochin High Court held that such an interpretation was illegal in a judgment delivered in 1955. Consequently, the appropriate authority issued a notification dated 15 February 1956 amending rule 18. The amendment, which was to take effect from 1 April 1950, stipulated that references to the Travancore Income‑tax Act in that rule would now be read as references to the Indian Income‑tax Act, and that the income for the purpose of the proviso would be computed with reference to the income of the whole of the Indian Union rather than the income of the whole of Travancore State.

In this case, the Court observed that the amendment to the proviso of rule 18(2) made in 1947 was not a mere procedural adjustment. Originally, rule 18(2) required that the income of every assessee who conducted business both inside and outside the municipality be calculated for the purpose of levying profession tax by taking a percentage of the turnover that occurred within the municipal limits. The proviso introduced a distinct mechanism for those assessee who were also subject to income‑tax assessment; it linked the income relevant to profession tax with the total profits of the assessee as assessed under the Travancore Income‑tax Act, thereby creating a new class of taxpayers that had not existed before the proviso was enacted. Moreover, the method of computing income prescribed in the proviso was likely to produce a different tax incidence for the persons covered by it. Consequently, the Court rejected the argument that the proviso left unchanged either the basis or the incidence of the profession tax, finding that such contention could not be sustained [588 F].

The Court further held that the 1956 amendment altered the basis of profit determination for profession tax by substituting reference to the Indian Income‑tax Act in place of the Travancore Income‑tax Act. Under the revised proviso to rule 18(2), the profits of the whole of the Indian Union, rather than merely the profits of the State of Travancore, became the foundation for computing income for profession tax purposes. Because the provisions of the Indian Income‑tax Act differed from those of the Travancore Income‑tax Act, and because the territory of the Indian Union was far larger than that of Travancore, these differences were likely to affect the tax liability of those to whom the amendment applied [590 E‑F].

Finally, the Court rejected the contention that the Kerala Legislature possessed the authority to confer retrospectivity on a validating law and that, having validated the amendment to the proviso as effective from April 1950, the amendment was therefore valid. The Court noted that the proviso had been brought into operation after the commencement of the Constitution, and that the provisions of Article 276 of the Constitution therefore barred the legislature from validating a law that operated retrospectively in contravention of that article [590 F‑H]. The High Court’s decision that the Validation and Reassessment Act of 1958 could not shield the retrospectively applied provision was thus affirmed, and the appeal by the Quilon Municipality was dismissed.

In this case the Court observed that the territory of the Indian Union was considerably larger than the former State of Travancore, and that the differences in geographic scope were likely to produce a different assessment of tax liability for those persons and companies who fell within the amendment under consideration. The Court rejected the contention that the Kerala Legislature possessed the power to give retrospective effect to a validating law and that, because the Legislature had declared the amendment to the proviso to be effective from April 1950, the amendment should be regarded as valid. The Court explained that the proviso had been brought into operation only after the Constitution had come into force, and that therefore the provisions of Article 276 of the Constitution would bar the Legislature from validating the amendment in the manner claimed. The judgment also noted that the earlier decision in Mst. Jaclao Bahuji v. Municipal Committee, Khandwa, [1961] 2 S.C.R. 636, was distinguished and did not control the present controversy. The matter before the Court arose in a civil appellate jurisdiction involving Civil Appeals numbered 415 to 419 of 1964, which were appeals from a judgment and decree dated 12 April 1961 of the Kerala High Court in several original petitions. Counsel for the appellants and counsel for the respondents were respectively instructed, and the judgment was delivered by Justice Mudholkar. The sole question that required determination was whether section 2 of the Kerala Profession Tax (Validation and Reassessment) Act, 1958 (Act No XIV of 1958) was invalid because it contravened the provisions of Article 276 of the Constitution. Article 276(1) was quoted in full, stating that no law of a State relating to taxes for the benefit of the State or a local authority in respect of professions, trades, callings or employments shall be invalid on the ground that it is a tax on income, subject to a proviso concerning pre‑Constitution taxes exceeding two hundred and fifty rupees per annum. It was also established as a matter of common ground that, before the Constitution came into force, the Quilon Municipality, exercising power under section 91 of the Travancore District Municipalities Act, 23 of 1116 M.E. (corresponding to the year 1940), had imposed a profession tax.

The Court observed that the Quilon Municipality, exercising the power granted by section 91 of the Travancore District Municipalities Act, 23 of 1116 M.E., had imposed a profession tax on every company and every person who, among other things, conducted business within the municipal limits for a minimum period during a year. Section 91(1) required the liable company or person to pay the tax on a half‑yearly basis in accordance with the rules set out in Schedule H. The Court noted that Schedule H comprised several rules, but only rules sixteen and eighteen were relevant to the present appeals. Rule sixteen established income slabs for the purpose of assessing the half‑yearly tax. Under this rule the assessors were divided into twelve classes. The first class consisted of assessors whose half‑yearly income exceeded rupees twenty‑one thousand, and they were required to pay a tax of rupees two hundred seventy‑five for each half‑year. The next class, identified as class two, comprised assessors whose half‑yearly income was more than rupees eighteen thousand but did not exceed rupees twenty‑one thousand, and they were required to pay a tax of rupees two hundred twenty‑five for each half‑year. For assessors whose incomes were below rupees eighteen thousand, the liability decreased progressively in each lower slab. The Court further explained that a proviso to sub‑rule (1) of rule sixteen provided that a company whose half‑yearly income exceeded rupees twenty‑one thousand must, notwithstanding any other provision, pay in addition to the maximum half‑yearly tax of rupees two hundred seventy‑five an extra half‑yearly tax on the excess amount, calculated at the rate of one rupee for each hundred rupees or part thereof. Consequently, assessors in the first slab incurred an additional tax over and above rupees two hundred seventy‑five each half‑year. The Court stated that it was not concerned with the remaining sub‑rules of rule sixteen. Turning to rule eighteen, the Court indicated that the rule contained three sub‑rules, but only sub‑rule (1) and sub‑rule (2) were material for consideration. Sub‑rule (1) provided that where a company or person conducted business exclusively within a single municipality during any half‑year, the income attributable to that business for the purpose of levying the profession tax would be deemed to be: (a) where the entity was assessed to income‑tax under the Travancore Income‑tax Act for the year containing the half‑year, one‑half of the amount of profits and gains computed under section eight of that Act; and (b) where the amount of such profits and gains could not be ascertained or where the entity was not assessed to income‑tax, a percentage to be prescribed by the Government of the turnover of the business transacted in the municipal area during the half‑year, or, if that turnover also could not be ascertained, the turnover of the corresponding half‑year of the preceding year. Sub‑rule (2) addressed the situation where a company or person conducted business partly within the municipal area and partly outside that area.

The Court explained that, for the purpose of levying profession tax under the Act, the income attributable to a company or individual from business carried out within the municipal area was to be deemed equal to the portion of turnover specified in clause (b) of sub‑rule (1). That portion was measured either by the turnover of the business in the municipality during the relevant half‑year or, if appropriate, by the turnover in the corresponding half‑year of the preceding year. By a notification dated 28 August 1947, the authority authorised under section 325 of the Act to make rules inserted a proviso to sub‑rule (2). The proviso stated that where a company or person was liable to income tax, the total profits shown in the income‑tax assessment for the entire State for the year containing the half‑year for which profession tax was to be imposed would be divided in proportion to the turnover earned inside the municipal limits and the turnover earned outside those limits. This proportional division was to be used for determining the amount of profession tax payable.

Subsequently, section 3 of the Indian Finance Act of 1950 repealed the Travancore Income‑tax Act, and the municipal authorities interpreted references to the Travancore Income‑tax Act in sub‑rule (1) of rule 18 as references to the Indian Income‑tax Act. The same interpretation was applied to the reference in the proviso to sub‑rule (2). In the case of Harrisons and Crosfield Ltd. v. Commissioner of Quilon Municipality, the Travancore‑Cochin High Court held that the proviso merely provided for the use of profit figures derived from the income‑tax assessment for a particular year, focusing on the assessable area. After the Indian Income‑tax Act became applicable in Travancore, such figures could no longer be ascertained, rendering the entire proviso obsolete. Consequently, the appropriate authority amended sub‑rules (1) and (2) of rule 18 by a notification dated 15 February 1956. The amendment replaced the words “Travancore Income Tax Act” with “Indian Income Tax Act, 1922” and substituted “Section 8” with “Section 10”. It also changed the phrase “whole State” to “whole of the Indian Union”, and stipulated that these amendments were to be deemed effective from 1 April 1950. The validity of these amendments was later challenged in Highland Produce Co. Ltd. v. Commissioner, Alleppey Municipal Council, on the ground that section 325 did not empower the authority to give any rule retrospective effect. The High Court accepted that contention.

The Court noted that the Kerala Legislature had enacted Act 14 of 1958, and that the validity of section 2 of that Act was presently before the Court. The provision of section 2 was quoted in full. It declared that, notwithstanding any judgment, decree or order of any court, the amendments to the Taxation and Finance Rules set out in Schedule I to the Travancore District Municipalities Act, 1116 (XXIII of 1116) and made by Notification No. LS‑11‑13975/55/DD dated 15 February 1956 by the Government of the former State of Travancore‑Cochin, would be deemed to have come into force with effect from 1 April 1950. The provision further stated that the validity of the levy or collection of profession tax made under the said Act and Rules could not be called into question on the ground that the amendments effected by the said notification could not operate retrospectively, and that any profession tax that had been levied but not collected could be collected as if the amendment had been validly made with effect from 1 April 1950. From the language of this provision, the Court observed that the legislature appeared to intend to validate both the levy and the collection of the tax under the amended proviso by expressly validating the amendment of that proviso. The High Court had previously struck down this section, and the matter now presented itself to this Court on appeal by Quilon Municipality and its Commissioner, arising out of the orders numbered O.P. Nos. 196 to 202 of 1955, which had been decided in October 1956.

In the appeal, counsel for the appellants, the Attorney‑General, argued that the purpose of the Act was merely to adapt the administrative machinery for assessing and levying the profession tax to the circumstances that resulted from the repeal of the Travancore Income‑Tax Act by section 3 of the Indian Finance Act, 1950 and its replacement by the Indian Income‑Tax Act. Accordingly, he submitted that the Act did not contravene the provisions of article 276 of the Constitution. He further contended that the retrospective effect attributed to the provision likewise did not offend the constitutional prohibition. To support this position, he relied upon the decision in Mst. Jadao Bahuji v. Municipal Committee Khandwa. The Court then turned to consider, before addressing the effect of the amendment to the proviso made in 1947, whether that proviso merely sought to create a mechanism for implementing the tax. Assuming that, under section 325 of the Travancore District Municipalities Act, the State Government of Travancore possessed the competence to enact the proviso, which it did in 1947, the Court examined rule 18(2) as currently framed. It found that rule 18(2) clearly provided a method for assessing profession tax on a company or individual who carried on business partly within the municipal area and partly outside it. Under sub‑rule (2), the assessing authority was required to determine the turnover of the business conducted by the assessee within the municipal area.

The Court explained that the assessors were required to calculate the profits which the assessee would be deemed to have earned on the basis of the percentage prescribed by the Government under clause (b) of sub‑rule (1). In that way the amount of profits so deduced formed the basis for taxation. The Court then observed that, when the proviso was first enacted in February 1947, it clearly contemplated that the profits earned by the assessee throughout the whole State should be divided between the turnover of the business inside the municipal area and the turnover of the business outside that area. Under the proviso, the total profits were to be taken as the amount disclosed by the income‑tax assessment for the whole State and then apportioned in proportion to the respective turnovers inside and outside the municipality. Consequently, the proviso introduced a new basis for assessing taxable income because it linked the computation of profits to the income‑tax assessment. The Court noted that, under the Travancore Income‑tax Act, only a limited class of deductions was permissible. Therefore, if an assessee incurred expenses that were not allowable deductions under that Act, the profits calculated by reference to the income‑tax assessment could be higher than the actual profits earned by the assessee. The Court admitted that the exact percentage prescribed by the Government of Travancore under clause (b) of sub‑rule (1) of rule 18 was not known. It added that it was possible that the assessable profits determined with reference to that provision might have been lower than those determined under the proviso. In any event, the Court could not say with certainty that the two methods would always produce identical profit figures. From the fact that the State enacted the proviso, the Court held that it was reasonable to assume that the State expected the municipality to obtain a larger revenue than it would have obtained under a calculation based only on sub‑rule (2) of rule 18 read with clause (b) of sub‑rule (1). The Court further observed that the 1947 proviso removed from the category of assessees dealt with by sub‑rule (2) those companies or persons who were already assessable to income‑tax. Sub‑rule (2), as it stood, treated companies and persons transacting business partly inside and partly outside the municipal area on a uniform footing, regardless of whether they were subject to income‑tax. By creating a separate class for those already subject to income‑tax, the proviso altered the basis of assessment of the profession tax and was not merely a procedural device. Accordingly, the Court rejected the Attorney‑General’s contention that the proviso did not affect either the basis or the incidence of the tax.

In examining the amendment introduced in 1956, the Court noted that the change must be viewed in the context of a provision that deals with the basis of taxation rather than merely with the mechanism for implementing the tax. Consequently, the Court posed the question of whether the amended proviso could increase an assessee’s liability. The Court acknowledged that the purpose of the amendment was to adapt the earlier proviso to the situation that arose after the repeal of the Travancore Income‑tax Act. Nevertheless, irrespective of the purpose, the Court held that the effect of the amendment on an assessee’s duty to pay the professional tax had to be ascertained.

The Court explained that the original proviso had connected the determination of taxable profits under the rules with the Travancore Income‑tax Act. By amending sub‑rule (1) of rule 18, the amendment now linked that determination with the Indian Income‑tax Act. In effect, the wording “the whole State” in the original proviso was replaced by the words “the whole of Indian Union.” Counsel for the respondent argued that, because of this substitution, the total profits shown by the income‑tax statement for the entire country would have to be apportioned in the same ratio as the turnover of the business inside the municipality to the turnover outside the municipality for the purpose of assessing the tax. According to that argument, such a method could sometimes result in a substantially larger amount of profit being considered for assessment than would have been the case under the unamended provision.

Counsel further submitted that the assessable profit figure would depend on the permissible deductions allowed under the Indian Income‑tax Act, and that if those deductions were fewer than those permitted under the Travancore Income‑tax Act, the assessable profit calculated under the Indian Act would be higher than the profit that would have been computed under the Travancore Act. The Court observed that the parties had not presented a detailed comparison of the provisions of the Travancore Income‑tax Act, as it stood at the date of the amendment, with the provisions of the Indian Income‑tax Act. Because of that absence, the Court could not definitively state whether the assessable profits under the Indian Act would actually be larger than those under the Travancore Act at that time.

However, the Court could not discount the possibility that the permissible deductions under the Indian Income‑tax Act might be fewer than those under the Travancore Act as it existed at the date of its repeal. Moreover, the Court pointed out that the amendment introduced a different statute as the reference point for ascertaining assessable profits, and that this could potentially increase the tax liability not only of assessees falling within the first slab but also of those in the lower slabs. Counsel for the respondent attempted to illustrate this possibility by referring to specific figures, claiming that for certain periods the present assessee’s liability to pay the tax, as determined under the amended proviso, would be higher than it would have been under the previous provision.

In this matter the Court examined three statements that had been filed in the High Court by the respondents and that were labeled as Exhibit 4, Exhibit 13 and Exhibit 23. All three statements were identical, and the Court referred to the first statement for its analysis. The statement presented data in several columns. Column 1 recorded the year of assessment. Column 2 showed the turnover within the Quilon Municipality. Column 3 displayed the turnover that related to profits assessable under the Travancore Income‑Tax Act. Column 4 indicated the turnover in India as a whole. Column 5 listed the income that would have been assessable under the Travancore Income‑Tax Act had that statute still been in force. Column 6 set out the income assessed under the Indian Income‑Tax Act. Using these figures, the Court computed the amount of income that would have been determined according to the proviso to rule 18(2) before it was amended. For the purpose of illustration the Court designated the figure in column 5 as “X”, the figure in column 3 as “Y” and the figure in column 2 as “Z”. The pre‑amendment income was then expressed as (X ÷ Y) × Z, a figure the Court referred to as taxable income (1). In the last column of the statement the taxable income calculated according to the proviso after its amendment was shown. This post‑amendment figure was derived by dividing the income assessed under the Indian Income‑Tax Act, labelled “A”, by the turnover in India, labelled “B”, and then multiplying the result by the turnover within the Quilon Municipality, “Z”. The resulting amount, A × Z, was called taxable income (2). By comparing the numbers in column 7 (taxable income 1) with those in column 8 (taxable income 2), the Court observed that for the assessment periods ending 30 June 1949, 30 June 1950, 30 June 1951, 30 June 1954 and 30 June 1955, taxable income (2) was lower than taxable income (1). Conversely, for the periods ending 30 June 1952, 30 June 1953 and 30 June 1956, taxable income (2) exceeded taxable income (1). The Attorney‑General contested the accuracy of the figures shown in columns 2 to 5 and the Court therefore treated them as hypothetical. Nevertheless, even on a hypothetical basis, the Court found that applying the amended proviso could increase the tax liability on the same turnover for the same period in certain cases. Consequently, the tax burden could be heightened under the amendment. The Court also noted that the 1956 amendment was intended to take effect from April 1950, coinciding with the repeal of the Travancore Income‑Tax Act, but that the proviso was applied after the commencement of the Constitution, and therefore the provisions of Article 276 remained applicable.

The Court observed that the Kerala Legislature had attempted to give retrospective effect to a validating law. The learned Attorney General, relying on the decision of this Court in Mst. Jadao Bahuji’s case(1), argued that the legislature possessed the competence to grant retrospectivity to a validating statute and that, because the legislature had validated the amendment to the proviso as of April 1950, the amendment was valid and took effect from that date. The Court distinguished the decision cited, namely [1951] 2 S.C.R. 636, holding that the precedent concerned a Validating Act which legitimised the imposition of a tax exceeding Rs. 50 for a period prior to 31 March 1939, not for a period subsequent to that date. In that earlier case the assessee had contended that because the Validating Act was passed after the commencement of section 142‑A of the Government of India Act, 1935, the provincial legislature lacked authority to enact it; the Court had rejected that contention. The matter before the present Court differed, however, because the Validating Act sought to validate a profession tax exceeding Rs. 250 for a period after the commencement of the Constitution. The Court quoted its earlier observations, which run contrary to the Attorney General’s submission: “There can be no doubt that if a law was passed after the amendment and sought to impose taxes on professions etc., for any period after 31 March 1939, it had to conform to the limit prescribed by section 142‑A(2). The prohibition in the second subsection operated to circumscribe the legislative power by putting a date‑line after which a tax in excess of Rs. 50 per annum per person for a period after the date‑line could not be collected unless it came within the proviso” (p. 642). On the basis of these considerations, the Court held that the amendment violated the provisions of Article 276 and that the Kerala Legislature was incompetent to enact section 2 of the Validating Act. Consequently, the Court dismissed the appeals, ordered costs, directed that one set of hearing fees be paid, and recorded that the appeals were dismissed.