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PETITIONER: THE MUNICIPAL COUNCIL, MADURAI

       Vs.

RESPONDENT: R. NARAYANAN ETC.

DATE OF JUDGMENT18/08/1975

BENCH: KRISHNAIYER, V.R. BENCH: KRISHNAIYER, V.R. RAY, A.N. (CJ) MATHEW, KUTTYIL KURIEN FAZALALI, SYED MURTAZA

CITATION:  1975 AIR 2193            1976 SCR  (1) 333  1975 SCC  (2) 497  CITATOR INFO :  O          1980 SC1008  (21)

ACT:      Madras District  Municipalities Act,  1920, 2. 321 (2)- Licence fee on hoteliers-If can be treated as tax.

HEADNOTE:      The appellant  increased the  licence  fee  imposed  on hoteliers  respondents  under  s.321  (2),  Madras  District Municipalities Act,  1920, and they challenged the increase. The appellant  justified the  increase on the basis that the fee under  the section is a tax and falls under "tax on land and building’  in Entry  49, List  II, VII  Schedule of  the Constitution.  The   High  Court   held  in  favour  of  the respondents. ^      Dismissing the appeal to this Court,      HELD: (l)  The appellant would be competent to impose a property tax  at any Particular rate it chooses. the user of the land  and building  as a  restaurant or hotel furnishing sufficient nexus for the legislature to impose a tax. [339H, 340A]      Ajoy Kumar  v. Local Board [1965] 3 S.C.R. 47, referred to.      (2)  But the  fec imposed  under s. 321(2) in this ease           is not a tax. [336G]           (a)  Section 321(2) authorises the collection of a                fee in contradiction to tax. 1335B]           (b)  Section 321 is in a part of the Act different                from the  part dealing  with taxation.  While                the nomenclature  of the levy or the location                of a  section in  the Act  is not conclusive.                they  are   relevant  factors.  for  deciding                whether the  fee imposed  is a  tax  or  not.                [335-CD]      Liberty Cinema Case [1965] 2 S.C.R. 477, referred to.           (c)  Section  78(1A)   authorises  the   levy   of                property  tax.  Section  78(3)  contains  the                mandatory   procedural    prescriptions   for                imposing  taxes.  When  the  legislature  has

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              carefully provided  in  the  sub-section  for                previous  invitation   and  consideration  of                objections  to  enhancement  of  tax  levies,                resort to  s. 321(2) to impose a tax as a fee                would  frustrate  the  processual  protection                written into  the law  in  regard  to  fiscal                measures, [338 BCE]           (d)  Schedule V  with which  s.  321  is  directly                linked  sets   out   a   number   of’   petty                occupations  all   of  which,   theoretically                cannot be  carried on  except on  land or  in                buildings. If the licence-fee in s. 321(2) is                read as land tax the fee in relation to every                item of  activity set  out  in  the  Schedule                would be  tax on  the basis  of  the  trivial                activity furnishing  the legal  nexus between                the tax  and  the  land.  But,  it  would  be                straining  the   language  to   justify   the                imposition of a tax on the land, on the basis                of such a flimsy or casual connection

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeals Nos. 1656 to 1659 of 1973.      Appeal by  special leave  from the  judgment and  order dated the  29th September,  1972 of the Madras High Court in Writ Appeals Nos. 191, 23, 24 & 190 of 1968 respectively.      S. Challaswamy and K. Hillgorani, for the appellant. 8-L839SupCI/75 334      A. K.  Sen, A.  V. Rangam‘  and A.  Subashini, for  the respondents.      The Judgment of the Court was delivered by      KRISHNA  IYER,   J.-The  die-hard  ’tax’-’fee’  dilemma survives, as  these appeals,  by special leave, attest, long after this Court has dispelled the fiscal-legal confusion on the point  in a  series of rulings. The cases before us were provoked by  a sudden escalation of licence ’fee’ imposed on all homelier  by the common appellant, the Maduari Municipal Council  (now  it  is  a  Corporation,  but  that  makes  no difference) (Council,  for short).  The scale of fees which, perhaps, merely  defrayed the  cost of  issuing the licence, was moderate  to begin  with and  paid periodically  by  the respondents who  run hotels within the municipal limits; but their present  grievance is  that the resolution of December 28, 1965,  whereby a  sharp spurt in the rates of fee was Cr brought about, has been tainted with ’unconstitutionality’.      The authority, to justify the levy qua fee, must render some special  services to  the category from whom the amount is exacted  and the  total sum  so  collected  must  have  a reasonable correlation  to the  cost of such services. Where these dual  basic features  are absent,  you cannot  legally claim from the licensee under the label ’fee’. D      This Court  has, as  late as the Salvation Army Case(l) set out  the tests beyond doubt. When the respondents (writ- petitioners) challenged  the fee  raise, the plea in defence first was that the impost was a fee strictly so called, that it was  requited by  adequate benefits  and that  the larger lay-out on  the inspecting  staff  and  allied  items,  both necessitated and  validated the  new increase.  However,  on later and  better  reflection,  may  be,  the  inspirational source for which was stated to be this Court’s pronouncement in the Liberty Cinema Case(2), the Council rightly abandoned

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the fee-cum-quid  pro quo formula and anchored itself on the right to  exact the  higher rate  as  a  ’tax  on  land  and building’  under  Entry  49  of  List  II,  in  the  Seventh Schedule,  read  with  s.  321(2)  of  the  Madras  District Municipalities Act,  1920 (for  short, the  Act). This volte face as  it were,  was not objected to by the opposite party and the  writ petitions and writ appeals were disposed of on that footing.  The learned  Single Judge upheld the levy but the appellate  Bench upset  it. The  appellant  Council  has journeyed to  this Court  to repair  the blow on its revenue since  there  are  1,200  and  odd  hotel-keepers  similarly situated in the Madurai Municipal limits, although only four have figured as respondents here. The financial dimension of the decision is, indeed, considerable.      Shri Chellaswamy,  counsel for  the Council,  has  been refreshingly fair  in his  submissions and consistently with the case  urged in  the High  Court to support the levy, has grounded his defence of the ’feehike’ on the taxing power of the municipal  body under  the Act.  The core of the matter, therefore, is  whether the  context and  text of the statute and other  surrounding circumstances  warrant the validation of the levy as a tax in essence, be its name what it may.      (1) [1975] 1. S. C. C. 509.       (2) [1965] 2 S. C. R.                                                         477. 335      Let us  formulate the  problems for facility of logical handling. Agreed, as both parties now are, that this licence fee stands  or falls  as a  tax, the  principal question  is whether the  ’fee’ provided  for in  s. 321(2)  of the  Act, under which  it is collected, is a tax at all, having regard to the  anatomy of  the Act.  If it  can be so regarded, the next point  is whether  Entry 49 of List II can bring within its constitutional  compass the  licence fee  for running  a hotel trade.  Thirdly, if  that is  permissible,  are  there other incurable  infirmities ?  These apart, some matters of subsidiary moment  do arise  and may  be considered  in  the appropriate sequence.      The initial  terminological hurdle  in the  way of  the appellant is  that s.  321(2)  of  the  Act  authorizes  the collection  of   a  licence  fee  in  contra-distinction  to property tax  in s.  78 of the Act. (cf. Ajoy Kumar v. Local Board(l). Naturally,  Shri A.  K. Sen,  counsel for  the con testants, insisted  that  the  Act  had  made  a  deliberate dichotomy  between  the  two  types  of  levy,  placed  them subject-wise  in   different  parts   of  the   statute  and meaningfully referred  to them  as ’tax’ and ’fee’ in ss. 78 and 321(2), respectively. Counsel for the appellant, relying on certain passages in Liberty Cinema, (supra) desired us to slur over  the verbal error. True, mere nomenclature cannot, without more,  lead to  rejection of the plea of tax, though it is  a relevant  factor, since,  to some  extent,  Liberty Cinema (supra)  has  whittled  down  the  efficacy  of  this circumstance. This Court there observed, at p. 483:           "Now, on  the first question, that is, whether the      levy is  in return  for services, it is said that it is      so because  s. 548  (of Calcutta  Municipal Act  33  of      1951) uses  the word  ’fee’. But, surely, nothing turns      on the  words used.  The word  ’fee’ cannot  be said to      have acquired  a rigid technical meaning in the English      language indicating only a levy in return for services.      No authority  for such a meaning of the word was cited.      However that  may be,  it is conceded by the respondent      that the  Act uses  the word ’fee’ indiscriminately. It      is admitted  that some  of the  levies  authorised  are      taxes though  called fees. Thus, for example, as Mitter

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    J (in  the High Court, Division Bench) pointed out, the      levies authorised  by ss.  218, 222  and 229 are really      taxes though  called fees, for no services are required      to be  rendered in respect of them. The Act, therefore,      did not intend to use the word fee as referring only to      a levy in return for services.                                           " (emphasis, ours)      We have therefore to have a view of the concerned parts of the  Act with a comparative eye on the Calcutta Municipal Act which fell for decision in Liberty Cinema (supra). Every local authority,  under the  relevant statute, has the power to tax,  so as  to finance the various welfare activities it is expected  to fulfil.  Similarly such  local  bodies  also exercise the  police powers  of the State to the extent they are vested       (1) [1965] 3 S.C.R. 47. 336      in  them   by  the   State  law   for  the  purpose  of controlling,  regulating   and  proscribing   operations  of individuals which may need to be conditioned by licences and permissions or  prohibited in  public interest  because they are noxious  or dangerous.  Towards these ends, licences and fees for  services, if  any, rendered may be prescribed. The Madras Act, like other similar statutes, embraces both types of activities  in a  systematized  way.  Thus  Taxation  and Finance are covered by Part 1 III while Public Health-Safety and  Convenience,   comes  under   Part  IV,  Procedure  and Miscellaneous, which  include general  provisions  regarding licences and  permissions, are  clubbed together in Part Vl. Section 78,  empowering property tax levy, falls in Part III (Taxation and  Finance), while  s. 321,  relating to licence fees, is located in Part VI. The scheme thus separates issue of licences  and levy of licence fees from taxes on property and other  items. Prima  facie,  in  the  absence  of  other compelling factors,  to lug  in a taxing provision into Part VI may, therefore, lead to obscurity and confusion.      The Calcutta  Municipal Act, 1951, also has some scheme of sorts  and deals  with Finance  in Part  III, Taxation in Part IV and Public Health, Safety and Convenience in Part V. In the  same Part,  Chapter XXVI  deals with a miscellany of matters like  Inspection and  Regulation of Premises, and of Factories, Trades  and Places  of Public Resort. Section 443 deals with  licensing and  control of theatres, circuses and places of  public amusement.  Strangely  enough,  s.  548(1) which relates  to  ’licence  and  written  permission’  also empowers in  addition to  any other  matter required  to  be specified under any other Section of this Act-      (a) * * * *      (b) * * * *      (c) * * * *      (d) * * * *      (e)  the tax  or fee,  if any,  paid for the licence or           written permission." F There  is  thus  in  s.  548  an  extra  power  specifically conferred to  levy tax or fee, which is significantly absent in the Madras Act (We are aware there is some obscurity here because cinema licensing is provided for earlier in s. 443).      It is this provision of the Calcutta Act (s. 548) which fell for  construction before  this Court  in Liberty Cinema (supra). While  one may  discern a broad scheme in that Act, there is  some wobbling  in the sense that a power to tax is oddly placed  in a Chapter primarily concerned with licences and permissions.  The Madras  Act, on the other hand, speaks with more  precision and relegates licences and licence fees to a Part different from Taxation and Finance. The procedure

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for each is also delineated separately. For these reasons we refuse to  aceede to the contention that ’fee’ in s. 321 (2) is a tax.      Shri A.  K. Sen  has cited  a catena  of Madras  cases, spread over several decades, where, under this very Act, fee has been  interpreted as  fee with a tag of special services in lieu of such payment. He has 337 further pressed  the drafting  indifference while  using the words ’fee’  and ’tax’ in s.548 of the Calcutta Act to repel the  application  of  the  observations  in  Liberty  Cinema (earlier quoted) to the provisions of the Madras Act. In the latter, the  contrast is  boldly projected  not only  in the phraseology but  in the  chapter-wise dealing  with the  two topics. We feel the force of this submission.      Shri Chellaswamy sought to counter the contention based on the  location of  s.321 in a Part which has nothing to do with taxation.  In Liberty  Cinema (supra)  this  Court  had occasion to warn against reaching any conclusion, when there is a  tax-fee conflict based on the col location of subjects in a statute or the placement of a provision under a certain rubric as  clinching. What  is telling  is the totality, not some isolated indicium. A short-cut is often a wrong-cut and a fuller  study of  the statute  to be  construed cannot  be avoided. Sarkar,  J. (as  he then  was), in  Liberty  cinema (supra), observed at p. 488:           "It was  also contended  that the levy under s.548      (of the Calcutta Municipal Act) must be a fee and not a      tax, for all provisions as to taxation are contained in      Part IV  of the  Act, while  this section  occurred  in      Chapter XXXVI headed ’Procedure’ in Part VIII which was      without a heading. It was pointed out that Part V dealt      with ’Public  Health Safety and Convenience’ and s. 443      which was  included in  Chapter XXVI  contained in this      Part was headed ’Inspection and Regulation of Premises,      and of  Factories, Trades and Places of Public Resort’.      A cinema  house, it is not disputed, is included in the      words ’Places  of public  resort’. It  was,  therefore,      contended that  a levy  outside Part  IV could not be a      tax  and  hence  must  be  a  fee  for  services.  This      contention was  sought to be sup ported by the argument      that s.443 occurred in a Part concerning Public Health,      Safety and  Convenience and therefore the intention was      that the  levy authorised  by the  section would  be in      return for work done for securing public health, safety      and Convenience  and was  hence a  fee. We  are  wholly      unable to  accept this contention. Whether a particular      levy is  a fee  or  tax  has  to  be  decided  only  by      reference to  the terms  of  the  section  as  we  have      earlier  stated.   Its  position   in  the  Act  cannot      determine its  nature; an  imposition which  is by  its      terms a  tax and  not a  fee, which  in our opinion the      present imposition is, cannot become a fee by reason of      its having  been  placed  in  a  certain  part  of  the      statute. The  reference to the heading of Part V can at      most indicate  that  the  provisions  in  it  were  for      conferring benefit  on the  public at large. The cinema      house owners  paying the  levy would not as such owners      be getting  that benefit. We are not concerned with the      benefit, if  any, received  by them  as members  of the      public for  that is not special benefit meant for them.      We are  clear in  our mind that if looking at the terms      of the  provision authorising the levy, it appears that      it is  not for  special services rendered to the person      on whom  the levy  is  imposed,  it  cannot  be  a  fee

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    wherever  it   may  be   placed  in   the  statute.   A      consideration 338      of where  ss.443 and  548 are  placed  in  the  Act  is      irrelevant for  determining whether the levy imposed by      them is a fee or a tax." So we  do not  rest our conclusion solely on the location of s. 321 in a different Part from Taxation, while we recognise it as  an indicator,  among a  variety of  considerations of course, when  drafting precision is absent, judicial caution has to be alerted.      To recapitulate,  in the Madras Act, Chapter VI of Part III is  devoted to  Taxation and  Finance. Section  78(1)(a) authorizes levy  of property  tax. The  section sets out the other taxes  a Municipal  Council  may  levy  Section  78(3) together   with   a   proviso,   contains   the   procedural prescriptions for imposing taxes. Admittedly, there has been no compliance  with this  procedure and, if such conformance is mandatory,  as it  is, the  case of  tax set  up  by  the appellant  collapses   (Vide:  Atlas   Cycle  Industries  v. Haryana(1). Whether  some minor  defect or  deficiency  will defeat the  validity of the tax is moot but since here there is a  total failure  to adhere or advert to the procedure in s.78, we need not consider hypothetical shortfalls and their impacts.      Counsel for the appellant resourcefully urged that when two constructions  are possible,  we should opt in favour of validity since  law leans towards life and must sustain, not stifle it.  The statute,  other things  being equal, must be interpreted us  res magis valeat gaum pareat("): see Broom’s Legal Maxims ( 10 ed. ) p. 361, Craies on Statutes (6th ed.) p. 95  and Maxwell  on Statutes  (11th ed.)  p  221  In  his submission it  is possible  to uphold  the ’levy’, miscalled ’fee’, on  the basis  that it is a tax. The argument is that ignoring the placement of s. 321 (2) in Part VI and blurring the precision  of the  word ’fee’ used, we can still look at the pith and substance of the matter and regard it as a ’tax on land  and buildings’ provided for in Entry 49, List II of the Seventh  Schedule. He relied on Ajoy Kumar (supra) where also a  landholder who  was holding a market on his land was directed to take out a licence and pay Rs. 600/- per year as licence fee,  challenged the  validity of  the claim  on the score that  the State had no power to tax markets. Repelling this contention,  this Court  held that the use to which the land was  put furnished sufficient nexus for the Legislature to impose  a tax  on land. In that connection, the following observations lay down the guide-lines:           "It is  well-settled that the entries in the three      legislative lists  have  to  be  interpreted  in  their      widest amplitude and there fore if a tax can reasonably      be held  to be  a tax on land it will come within entry      49. Further it is equally well-settled that tax on land      may be  based on the annual value of the land and would      still be  a tax on land and would not be beyond the com      petence of  the State legislature on the ground that it      is a  tax on  income: (See Ralla Ram v. The province of      East Punjab:  (1948 FCR 207). It follows therefore that      the use  to which  the land  is put  can be  taken into      account in imposing a tax (1) [1972]  1 S.  C. R. 127. (2)Quoted in Liberty cinema: P. 484. 339      on it  within the  meaning of  entry 49 of List II, for      the annual  value of  land which can certainly be taken      into account  in imposing a tax for the purpose of this

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    entry would  necessarily depend  upon the  use to which      the land is put." (p. 49). x    x    x    x    x                     x           "It will  be seen  from the  provisions  of  these      three subsections  (sub-ss. (1)  to (3) of s. 62 of the      Assam Local  self Government  Act l953-Act  25 of l953)      that power of the board to impose the tax arises on its      passing  a   resolution  that   no  land   within   its      jurisdiction shall be used as a market. Such resolution      clearly affects  land within  the jurisdiction  of  the      board and on the passing of such a resolution the board      gets the further power to issue licences for holding of      markets  on   lands  within   its  jurisdiction   by  a      resolution and  also the  power to impose an annual tax      thereon." (p.49) x x ". x    x    x    x    x           "..s. 62(2) which used the words ’impose an annual      tax thereon,  clearly shows  that  the  word  ’thereon’      refers to  any land  for which  a licence is issued for      used as a market and not to the word ’market’. Thus the      tax in  the present case being on land would clearly be      within the competence of the state legislature." (p.5l)      Generously following  the line of thinking presented by Shri Chellaswamy,  based  on  Ajoy  Kumar  (supra)  we  find difficulty in  applying its  ratio to  s. 321 (2). There the tax was  on land  and the  expression ’thereon’  underscores this idea. Once the tax is on land, the link between the tax and the  land-user like  running a  market or hotel based on the let ting value is good, but in the present case there is nothing to  indicate that  it is a tax at all. Secondly, the phraseology does not suggest that it is a tax on the land or the building.,  on the  other hand. it is on the licence-fee for plying  a particular  trade. It is not possible to blink at this vital distinction between Ajoy Kumar (supra) and the persent  case.   Maybe  that  the  Madurai  Municipality  is perfectly within  its competence  in imposing a property tax at any  particular rate  it chooses. The user of the land or building  as  a  restaurant  or  hotel  being  the  link  as explained above,  the fact  that  there  is  a  tax  on  all property within  the municipality  does not  mean that  this local body cannot levy an additional tax or surcharge on the land or  building if  put to a particular specialist use. We see no  impediment in  the municipal authority taxing hotels at a  certain rate  exercising its  power to impose property tax provided  there are  no other  legal impediements in the way. We are not pursuing the existence or otherwise of other impediments because that does not fall for our consideration in this case.      Shri A..  K. Sen is right is his submission that unlike in the  Assam Act  considered in  Ajoy Kumar  (supra) in the present case we do not even find the expression ’tax’ used.      The Municipal  resolution might  have been saved had we been able to spell out a taxing power on property from s.321 (2) of  the Act.  For, there  is no  gainsaying the  state’s right to tax land and buildings 340 and the nexus between the tax and the power may be land use. Since A  running a  restaurant or  cinema house is clearly a use of  building, a  tax thereon,  based on  such  user,  is constitutionally impeccable. Such is not the case here.      Thus the  plea that  s. 321  (2) lends  itself to being regarded as  a tax,  indifferently described  as fee, breaks down for  two reasons.  When the  Legislature has  carefully provided  in   s.78  (3)   for   previous   invitation   and consideration of  objections to  enhancement of  tax levies,

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resort to  the device  of tax  disguised as fee, under s.321 (2), may  not  require  any  such  procedural  fairness  and discipline and thus will frustrate the processual protection written into the law in regard to fiscal measures. Secondly, Schedule V,  with which s.321 is directly linked, sets out a host  of   petty  and   lucrative  ventures  all  of  which, theoretically, cannot  be  carried  on  except  on  land  or buildings. Can  it be  that some flimsy or casual connection with terra  firma will  furnish the  legal nexus between the tax imposed  and the  land on  which the  work is done ? For example, washing soiled clothes is an item in Schedule V. It is straining  judicial credulity  to snapping  point to  say that such  trivial user  justifies a  tax on  the land  when washing is  done. Running  a hotel  or market  or  permanent circus or theatre may stand on a different footing. The com- monsense of  the common  man is the best legal consultant in many  cases   and  eschewal  of  hyper-technical  and  over- sophisticated legal  niceties helps  the vision.  We  cannot list out  what, in  law, will  serve as a nexus between land and tax  thereon but,  in a  given  case  like  in  a  hotel business, land-use may easily be discerned. The snag is that in the  present appeals  the levy  is not on land but on the licence for business and bearing in mind the identity of the legal concept,  we reject  the contention  that the impugned resolution was  an innocent  tax on property. The case falls between two  stools. It  is not  a fee ex concessionis it is not a  tax ex  facie. We  further repel  the request to read licence-fee in  s. 321  (2) as  land tax  into every item of activity set  out in Schedule V, from washing soiled clothes on a  broad stone  to  using  a  central  place  as  a  posh restaurant.      The cumulative  result of  the multiple  submissions we have been  addressed is  that  the  impugned  resolution  is invalid. We  do not bar the door for the Municipality or the State to  pursue other  ways to  tax  hotel-keepers,  acting according to  law and  under the  power to  tax in Entry 49, List II,  of the  Seventh  Schedule,  while  dismissing  the appeals      The legal  controversy in  this case  is stricken  with more than  marginal obscurity  and indeed, has exercised our minds on  the diverse aspects of law considerably. Moreover, the battle  is between a local authority which is in need of financial resources  to fulfil  its functions  and a host of hoteliers who  flourish in private business. Bearing in mind the conspectus  of circumstances, we regard this case as one where the  proper order  will be  that parties do bear their own costs throughout. V.P.S                                     Appeals dismissed. 341