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CASE NO.: Appeal (civil)  2415 of 2000

PETITIONER: The Associated Cement Cos. Ltd.

RESPONDENT: State of Madhya Pradesh & Anr.

DATE OF JUDGMENT: 05/04/2005

BENCH: RUMA PAL,ARIJIT PASAYAT & C.K. THAKKER

JUDGMENT: J U D G M E N T

ARIJIT PASAYAT, J.

                Appellant calls in question legality of the judgment rendered by  a Division Bench of the Madhya Pradesh High Court at Jabalpur upsetting  judgment of a learned Single Judge who held that the Municipal Council,  Kymore, presently known as Kymore Nagar Panchayat (hereinafter referred  to as the ’Municipal Council’) is bound by the Government Order dated  15.12.1995 issued by the State Government under the Madhya Pradesh  Municipalities Act, 1961 (in short the ’Act’). Learned Single Judge was  of the view that the power vests with the State Government who issued  the said Government Order and there is no justification on the part of  the Municipal Council in making the impugned demands on the basis of  rates fixed by it. It was consequentially declared that the present  appellant was not liable to pay the differential sum and was only  required to pay tax at the rate of 0.20% as fixed by the State  Government.  

       The factual position which is almost undisputed is essentially as  follows:

       The appellant, a company registered under the Companies Act, 1956  (in short the ’Companies Act’) has its head office at Bombay and is  engaged in manufacture of various kinds of cement. It has one cement  manufacturing plant at Kymore known as Kymore Cement Works. On 2.5.1991  the Municipal Council in exercise of powers conferred under Section  127(1)(xvi) of the Act had resolved to impose export tax on cement and  other commodities which are exported from the limits of the Municipal  Council.  A Notification was duly published in the Official Gazette on  12.7.1991 levying terminal tax on cement at the rate of 0.50 per cent  on the price of the cement. Challenge was made to the said Notification  before the High Court and ultimately before this Court but without any  success.

       Undisputedly, the Notification dated 2nd May, 1991 was issued in  exercise of power conferred under sub-sections (5) and (7) of Section  129 of the Act. The State Government accorded sanction to the proposal  of the Municipal Council for imposition of terminal tax within whole of  the municipality in terms of clause (xvi) of sub-section (1) of Section  127 of the Act. Thereafter, the State Government issued a General  Circular i.e. Government Order dated 15.12.1995 indicating that there  must be uniformity in the rates of export tax all over the State of  Madhya Pradesh. So far as cement is concerned, the rate prescribed was  0.20 per cent on the price of the cement. The appellant received a  notice on 6.8.1996 followed by a letter dated 23.8.1996 requiring  payment of export tax at the rate of 0.50 per cent on the price of the  cement as was prescribed in the Notification dated 2.5.1991. Since the

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appellant was paying tax at the rate of 0.20 per cent it was directed  to pay the differential amount.  

       A writ petition was filed by the appellant questioning the  demand. It was contended that the Municipality is only entitled to  recover the export tax on cement at the rate prescribed by the State  Government and not as claimed by the municipality. It cannot impose tax  on its own as the imposition is always subject to the approval of the  State Government. Since the State Government in order to bring  uniformity all over the State of Madhya Pradesh had issued a Government  Order dated 15.12.1995 fixing the rate at 0.20 per cent on the price of  cement, the Municipal Council cannot recover the tax at the old rate.  

       The writ petition was contested by the Municipal Council and it  was stated that there cannot be any challenge to its competence to  recover the export tax on cement at the rate prescribed by the  Notification dated 2.5.1991 and the order passed by the State  Government cannot override the said Notification.  

Learned Single Judge came to hold that the Municipal Council  cannot recover the tax at the old rate being of the view that when the  State Government acted in terms of Sections 127 and 129 of the Act, the  Municipal Council had no option but to obey. It is to be noted that  there were two writ petitions filed by the two different assessee and  one of them was by the present appellant.  

Learned Single Judge’s order was challenged by filing two Letter  Patent Appeals. By the impugned judgment, the Division Bench held that  the levy was a legislative function of the Municipality and the State  Government did not have a statutory power to interfere with the levy.  According to the Division Bench, the Notification dated 2.5.1991 held  the field and the legislative enactment could not have been subjugated  or superseded by exercise of the power by the State Government under  any statutory provision or executive instruction. Once the executive  function had been exercised by the Municipal Council and the levy had  been imposed, the State Government could have only undone the same by  another legislative enactment as contemplated under sub-section (2) of  Section 127 of the Act as it stood at the relevant point of time by  framing rules which were subsequently framed under Section 355 read  with Section 127(1)(xvi) of the Act. The rules were known as Terminal  Tax (Assessment and Collection) on the Goods exported from Madhya  Pradesh Municipal Limits Rules, 1996 (in short the ’Rules’). The Rules  were published in the official Gazette on 7.3.1997.  

       In support of the appeal, learned counsel for the appellant  submitted that the relevant period to which the dispute relates is from  January to June, 1996.  He submitted that the view taken by the learned  Single Judge is the correct view. On a bare reading of various  provisions the position is clear that the Division Bench’s view that  the Municipal Council had the legislative competence to levy the tax  and that the State’s role in the whole scheme was not in any way  intended to override the powers conferred on it is wrong.   

       In response, learned counsel for the Municipal Council submitted  that the Division Bench has rightly come to hold that the State  Government’s role was really advisory and it cannot be said that the  State’s Government Order/Circular which was merely in the nature of  instruction had the effect of overriding the Notification dated  2.5.1991.  

       In order to appreciate the rival submissions it would be  necessary to take note of the provisions of Sections 127, 129, 130 and  131 as they stood at the relevant point of time. They so far as  relevant read as follows:-                  

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"Section 127- (1) A Council  may, from time to time,  and subject to the provisions of this Chapter, and  any general or special order which the State  Government may make in this behalf, impose in the  whole or in any part of the Municipality any of the  following taxes, for the purposes of  this Act,  namely:-

               xxx                     xxx                     xxx

(v)     an octroi on animals or goods brought within  the limits of the Municipality for sale, consumption  or use within such limits;

               xxx                     xxx                     xxx

(xvi)a terminal tax on goods or animals imported into  or exported from the limits of the Municipality:

       Provided that a terminal tax under  this clause and an octroi under clause  (v) shall not be in force in any  Municipality at the same time;

                                xxx                     xxx                     xxx

(xxiii)any other tax, which the State Legislature has  power to impose under the Constitution of India.

               xxx                     xxx                     xxx      

(2)The State Government may, by rules made under this Act,-

(a)     regulate the imposition, assessment and  collection of taxes under this Act;

(b)     prevent the evasion of taxes imposed under  this Act; and

(c)     prescribe the maximum and minimum limits as  to the amount or rate of any tax.

xxx                     xxx                     xxx

(4)  Subject to the provisions of Article 277 of the  Constitution of India, any tax which immediately before  the commencement of this Act, was being lawfully levied  by the Municipal Committee, Municipal Council or  Municipal Board, as the case may be, notwithstanding  that such tax is not specified in sub-section (1), shall  continue to be levied by the Council.  

(5)     The imposition of any tax under this section  shall be subject to the provisions of any other  enactment for the time being in force.  

Section 129: Procedure in imposing taxes: (1) A  Council may pass a resolution to propose the  imposition of any tax under section 127. The proposal

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shall define the class of persons or description of  property proposed to be taxed, the amount or rate of  the tax to be imposed and the system of assessment and  collection to be adopted.

(2) When such a resolution has been passed, the  Council shall publish a notice in the prescribed form  and manner along with the resolution.

(3) Any inhabitant of the Municipality objecting to  the proposed tax may, within thirty days from the  publication of the notice, submit his objection, in  writing to the Council.

(4) The Council shall take the proposal and all  objections received thereto into consideration at a  special meeting, and may modify the proposal so as  not to affect their substance, and may then forward  them to the State Government, along with all  objections received, its decisions thereon and its  reasons therefor. If the Council decides to modify  the proposals so as to affect their substance, it  shall punish them again in the manner prescribed in  sub-section (2) along with a notice indicating that  they are in modification of those previously  published for objection.

(5) The State Government may, on receiving such  proposal either refuse to sanction them or sanction  them-

(i)     without modification or with such  modifications not involving in  increase of the proposed rate as it  thinks fit; or (ii)    subject to such condition as to the  application within the Municipality to  any purpose or purposes of this Act as  may be specified, of the whole or any  part of the proceeds of such tax, as  it may deem fit.  

(6)     No modification affecting the substance shall  be made under sub-section (5), unless and until the  modification has been accepted by the Council at a  special meeting.

(7)     If any proposal for taxation has been  sanctioned under sub-section (5), the State Government  may, by notification direct the imposition of the tax  as sanctioned from such date which shall not be  earlier than thirty days from the date of publication  of such notification as may be specified therein, and  thereupon the tax shall come into effect as from the  date so specified:

Provided that where the tax so imposed is payable  annually-

(i)     the tax shall become payable with effect  from the Ist day of April, Ist day of  July, Ist day of October or Ist day of  January, as the case may be, next  following such imposition;

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(ii)    and becomes payable on a date other than  the Ist day of April, it shall be payable  quarterly till the Ist day of April next  following.

(8)     A notification of the imposition of a tax under  this section shall be conclusive evidence that the  tax has been imposed in accordance with the  provisions of this Act.  

Section 130- Abolition or variation in tax: The  Council may, with the prior approval of the State  Government, abolish, suspend or reduce the rate of  any tax.     Section 131-Power of State Government in regard to  relief in taxes: If, on a complaint made to it or  otherwise, it appears to the State Government that  any tax levied by a Council is unfair in its  incidence or that such levy or any part thereof  is  obnoxious to the interest of the inhabitants of the  Municipality, it may, by an order, require the  Council to remove the objections to any such tax  within such time as may be specified therein, and on  the failure of Council to comply with the order  within the time so specified to the satisfaction of  the State Government, the State Government may, by  notification and subject to such conditions or  restrictions as may be specified therein, abolish,  suspend or reduce the amount or rate of any tax.

       A bare reading of Section 127 shows that the Municipal Council  may from time to time and subject to the provisions of the Chapter  (i.e. Chapter VII relating to "Municipal Taxation") in question and its  general or special order which the State Government may make in that  behalf impose in the whole or in any part of the Municipality any of  the taxes for the purposes of the Act.  

       The present dispute relates to clause (xvi) of sub-section (1) of  Section 127 of the Act. Under the constitutional scheme the power to  levy the tax of the nature levied under Section 127 of the Act is that  of the State Government which is clear from the fact that though the  Council may impose any tax for the purposes of the Act, the same is  subject to any general or special order which the State Government may  make in that behalf. Furthermore, sub-section (2) of Section 127  authorises the State Government to regulate the imposition, assessment  and collection of tax under the Act and also prescribes the maximum and  minimum limits as to the amount or rate of tax. The position is also  clear from clause (xxiii) which empowers the Municipality to levy such  tax, which the State Legislature has power to impose under the  Constitution of India. The source of power to levy is the one conferred  on the State Legislature. The Municipality does not have any  independent source. The power under Section 127 is exercised by the  Municipality by delegation and is a case of delegated legislation.  Section 129 is the procedural section dealing with the procedure for  imposing taxes. The conditions contemplated in Section 129 are: (a)  proposal to be passed by the Council for the purpose of imposition of  any tax under Section 127; (b) when a resolution in terms of sub- section (1) is passed the Council is required to publish a Notification  in the prescribed form and manner along with the resolution; (c) under  sub-section (3) any inhabitant of the Municipality may submit his  objection in writing to the Council within the specified period; (d)  under sub-section (4) the proposal and all objections received thereto  are to be placed for consideration at a special meeting. The procedure

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to be followed when the Council decides to modify the proposal is also  indicated. Sub-section (5) is very relevant for the present dispute in  the sense that on receiving the proposal the State Government has two  options. It may either sanction the proposal or refuse to sanction the  same. When the State Government sanctions the proposal with  modification or with such modification not involving in increase of the  proposed rates as it thinks fit or subject to such conditions as to the  application within the Municipality to any purpose or purposes of the  Act which may be specified regarding application of the whole or any  part of the proceeds of the tax. When any proposal for tax has been  sanctioned under sub-section (5), the State Government may under sub- section (7) by Notification direct the imposition of the tax as  sanctioned in the manner prescribed. Sub-section (8) provides that when  a Notification of the imposition of tax under the Section is issued the  same is conclusive evidence that the tax has been imposed in accordance  with the provisions of the Act. Sub-section (6) is of great importance  in the sense that no modification affecting the substance under sub- section (5) shall be made unless and until the modification had been  accepted by the Council at a special meeting. Section 130 deals with  abolition or variation in tax by the Council with prior approval of the  State Government. Section 131 deals with power of the State Government  having regard to the relief in taxes. The provision can be set in  motion on receipt of any complaint or suo motu by the State Government.  In the latter case, the State Government can act if it appears to it  that any tax levied by Council is unfair in its incidence or that levy  or any part thereof is obnoxious to the interest of the inhabitants of  the Municipality. In either of the situations, the State Government may  require the Council to remove objections to any such tax within a  specified time and in case the Council fails to comply with the order  within the time so specified to the satisfaction of the State  Government, it may by Notification and subject to such conditions or  restrictions as may be specified abolish, suspend or reduce the amount  or rate of any tax.  

       At this juncture, it would be relevant to take note of the  Government Order/Circular dated 15.12.1995. The same reads as follows:

               "Madhya Pradesh Government                 Government of Local Administration                 Mantralaya, Vallabh Bhawan, Bhopal          No.F4/1/1/A3/95                 Bhopal Dt.15.12.1995

To

All Commissioners, Municipal Council, Madhya Pradesh

All Chief Municipal Officers, Nagar Palika Parishad/Nagar Panchayat, Madhya Pradesh

Subject: Regarding imposition of terminal  Tax

       There is provision for levy of terminal tax  under Clause xvi of sub-section (1) of Section 127 of  the Madhya Pradesh Municipalities Act, 1961 and   procedure for levy of terminal tax has been laid down  under Section 129. In exercise of the powers

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conferred under both the sections and cancelling all  the earlier instructions on the subject, the State  Government hereby instructs to impose the terminal  tax under the following limits and conditions:

1)      No barrier shall be put for recovery of the  terminal tax neither contractual procedure will be  adopted. Where barrier post has been established,  that should be immediately removed.  For the recovery  of the terminal tax the same procedure should be  adopted which is applicable for the recovery of  commercial tax and in the case of Krishi Upaj Mandi  their licence holder should be made responsible for  the recovery of the tax. For this purpose if any  amendment in the bye-law is required, that should be  done accordingly.  

(2)     In view of the uniformity of the terminal tax  in whole of the State, the rate is proposed in the  annexed schedule.

(3)     All such goods which are exported out of the  country shall be exempted from the terminal tax.

(4)     All such other goods which are carried or sent  from one place to another within the State for  distribution under the Public Distribution Scheme by  the Food Corporation of India/Civil Supply  Corporation/Other Agencies of the State Government  shall also be kept exempted from the terminal tax.

There is no provision for imposition of terminal tax  under the Madhya Pradesh Municipal Corporation Act,  1956 but the Municipal Corporation may levy this tax  under the approval of the State Government since many  of the Municipal Corporation have desired to levy  terminal tax, the State Government hereby grant  general approval for levy of the terminal tax to all  the Municipal Corporations. The above mentioned  conditions shall be applicable in the case of the  Municipal Corporation also.  

                                       Sd/-                                 (C.S. Chadha)                         Principal Secretary                         Government of Madhya Pradesh                         Local Administration Deptt."   

       Though the Government Order refers Sections 127 and 129 of the  Act, it is to be noted that there was no proposal by the Municipal  Council for reduction of the rate of tax. In terms of sub-section (1)  of Section 127, the power to impose the tax has to be exercised by the  Council which is of course subject to any general or special order of  the State Government. The Municipal Council exercises the power as a  delegatee and the power exercised under Section 127 as noted above is a  delegated legislation. Since the Municipal Council has not proposed for  any variation in the rate of tax the question of the State Government  passing any general or special order in that regard is not  contemplated. It is to be further noted that the Government Order  treats the matter as instruction to all municipalities.

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       So far as Section 129 is concerned, there is no question of any  suo motu fixation of rate by the State Government. In fact while acting  on the proposal by the Municipal Council, the State Government can  direct modification affecting the substance of the proposal. But the  same cannot be given effect to unless and until the modification has  been accepted by the Council at a special meeting. In the instant case  that contingency has not arisen. Though in terms of Section 131 the  State Government can initiate the action for reduction in the rate that  can only be done if the enumerated circumstances exist. That situation  has also not arisen in the instant case and admittedly the State  Government has not acted in terms of Section 131 of the Act. Therefore,  the Division Bench is right in its view that the circular of the State  Government dated 15.12.1995 is really of no consequence. Further  changes under Section 127 can be introduced in terms of sub-section (2)  of Section 127 by framing rules. In the instant case, the rules were  framed in March 1997 and did not have any retrospective effect.  

We, therefore, find no reason to interfere with the judgment of  the Division Bench though some of the observations and conclusions are  not correct. Ultimate conclusion that the Municipal Council’s stand  that Circular dated 15.12.1995 did not bind it to reduce the tax does  not suffer from any infirmity.  

The appeal is accordingly dismissed with no order as to costs.