TMI Blog2010 (11) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... y did not involve any service as service could only be in relation to property and not by renting of property. Renting of property for commercial purposes is certainly a service and has value for the service receiver. It is well settled that competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary. Object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for which earlier law was enacted. - do not find any ground to set aside giving of retrospective effect to the amendment from 1.6.2007 on which date levy was initially provided - 11597 of 2010 - - - Dated:- 22-11-2010 - CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE AJAY KUMAR MITTAL Mr. Jagmohan Bansal, Advocate for the petitioner. Mr. HPS Ghuman, Senior Standing Counsel for Union of India. Adarsh Kumar Goel, J. 1. This petition seeks declaration of provisions of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994 as ultravires the Constitution. 2. Case set out in the petition is that the petitioner is a public limited company and owner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vable property for business was covered by Entry 49 List II exclusively and not covered by Entry 92C or 97 of List I and thus, was outside the purview of the Central legislature. Further question is as to validity of levy being made retrospectively operative from 1.6.2007. 6. Contentions raised on behalf of the petitioners are as follows:- i) Subject matter of levy of service tax on providing service of renting of property was covered by Entry 49 List II and not by Entry 92C or 97 of List I. In any case, retrospectivity of the levy was beyond legislative competence. Reliance has been placed on judgment of Delhi High Court in Home solution and judgment of Hon'ble the Supreme Court in Ajay Kumar Mukherjee v. Local Board of Barpeta, AIR 1965 SC 156. ii) Transfer of property without any value addition by way of service could not be covered by the levy of service tax. 7. On the other hand, submission on behalf of Union of India is that scope of Entry 49 List II was limited to direct tax on the property and not on any activity in relation to property. In any case, Entry 49 List II had to be read subject to Entries 92C and 97 of List I. Reliance has been placed, inter-alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligious body or to a religious body; or ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre; Explanation - for the purpose of this clause, 'for use in the course or furtherance of business or commerce' includes use of immovable property as factories, office, buildings, warehouses, theatres, exhibition halls and multiple-use buildings. 9. Prior to its amendment by Finance Act, 2010, with effect from 1.6.2007, the definition of taxable service incorporated vide Finance Act, 2007 was as under:- 65(105) 'taxable service' means any service provided or to be provided - (a) to (zzzy) xxx (zzzz) to any person, by any person in relation to renting of immovable property for use in the course or furtherance of business or commerce. 10. Contention on behalf of the petitioners is that in pith and substance, renting of a building was a transaction in respect of land and buildings covered by Entries 18, 45 and 49 of List II in respect of which exclusive jurisdiction to legislate under Article 246(3) was vested in the State Legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to matters in List III subject to Central legislation prevailing in case of repugnancy. 10. Principle of Federal Supremacy can be invoked only if there is irreconcilable conflict in entries in Union and State lists. If two entries can be reconciled by harmonious construction or by applying principle of pith and substance, there is no occasion to apply the principle of federal supremacy. Concept of repugnancy under Article 254 relating to List III is different from repugnancy arising due to overlapping in List I and List II in which case principle of pith and substance is applied to determine legislative competence. Entries in the lists are not powers of legislation but fields of legislation. Taxation is distinct matter for legislative competence. Power to tax cannot be deduced from general entry. There is no overlapping in taxing power. Entries 82 to 92C and 97 of List I and Entries 45 to 63 of List II deal with taxes. There is no entry relating to tax in List III. 11. Every tax may be levied on an object or on an event of taxation. Subject of tax is distinct from incidence of taxation. Tax on property has been described as direct tax and tax on taxable event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Parliament. The principles have been succinctly summarised and restated by a Bench of three learned Judges of this Court on a review of the available decision in Hoechst Pharmaceuticals Ltd. v. State of Bihar, (1983) 4 SCC 45. They are: (1) The various entries in the three lists are not powers of legislation but fields of legislation. The Constitution effects a complete separation of the taxing power of the Union and of the States under Article 246. There is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States. (2) In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State law will be ultra vires and shall have to give way to the Union law. (3) Taxation is considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There the doctrine of pith and substance is to be applied and if the impugned legislation substantially falls within the power expressly conferred upon the legislature which enacted it, an incidental encroaching in the field assigned to another legislature is to be ignored. While reading the three lists, List I has priority over Lists III and II and List III has priority over List II. However, still, the predominance of the Union List would not prevent the State Legislature from dealing with any matter within List II though it may incidentally affect any item in ListI. (emphasis supplied) 43. In Ralla Ram v. Province of East Punjab, AIR 1949 FC 81 the Federal Court made it clear that every effort should be made as far as possible to reconcile the seeming conflict between the provisions of the Provincial legislation and the Federal legislation. Unless the court forms an opinion that the extent of the alleged invasion by a Provincial Legislature into the field of the Federal Legislature is so great as would justify the view that in pith and substance the impugned tax is a tax within the domain of the Federal Legislature, the levy of tax would not be liable to be struck dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Bench observed that it was only a matter of convenience that income was adopted as a yardstick or measure for assessing the tax and the evolvement of such mechanism was not conclusive on the nature of tax. Xxxx xx xx xxx 50 .The Constitution is an organic living document. Its outlook and expression as perceived and expressed by the interpreters of the Constitution must be dynamic and keep pace with the changing times. Though the basics and fundamentals of the Constitution remain unalterable, the interpretation of the flexible provisions of the Constitution can be accompanied by dynamism and lean, in case of conflict, in favour of the weaker or the one who is more needy. Several taxes are collected by the Centre and allocation of revenue is made to States from time to time. The Centre consuming the lion's share of revenue has attracted a good amount of criticism at the hands of the States and financial experts. The interpretation of entries can afford to strike a balance, or at least try to remove imbalance, so far as it can. Any conscious whittling down of the powers of the State can be guarded against by the courts. Let it be said that the federa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the nature of tax though it may constitute one relevant factor out of many for throwing light on determining the general character of the tax. (5) The entries in List I and List II must be so construed as to avoid any conflict. If there is no conflict, an occasion for deriving assistance from non obstante clause subject to does not arise. If there is conflict, the correct approach is to find an answer to three questions step by step as under: One Is it still possible to effect reconciliation between two entries so as to avoid conflict and overlapping? Two In which entry the impugned legislation falls by finding out the pith and substance of the legislation? and Three Having determined the field of legislation wherein the impugned legislation falls by applying the doctrine of pith and substance, can an incidental trenching upon another field of legislation be ignored? (8) The primary object and the essential purpose of legislation must be distinguished from its ultimate or incidental results or consequences, for determining the character of the levy. A levy essentially in the nature of a tax and within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 83 to 92-B in List I and Entries 45 to 63 in List II. List III, the Concurrent List, does not provide for any head of taxation. Entry 96 in List I, Entry 66 in List II and Entry 47 in List III deal with fees. The residuary power of legislation in the field of taxation spelled out by Article 248(2) and Entry 97 in List I can be applied only to such subjects as are not included in Entries 45 to 63 of List II. It follows that taxes on lands and buildings in Entry 49 of List II cannot be levied by the Union. Taxes on mineral rights, a subject in Entry 50 of List II, can also not be levied by the Union though as stated in Entry 50 itself the Union may impose limitations on the power of the State and such limitations, if any, imposed by Parliament by law relating to mineral development to that extent shall circumscribe the States' power to legislate. Power to tax mineral rights is with the States; the power to lay down limitations on exercise of such power, in the interest of regulation, development or control, as the case may be, is with the Union. This is the result achieved by homogeneous reading of Entry 50 in List II and Entries 52 and 54 in List I. So long as a tax or fee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;pith and substance', or its 'true nature and character', for the purpose of determining whether it is legislation with respect to matters in this list or in that. 28. This necessitates as an essential of federal Government the role of an impartial body, independent of general and regional Governments , to decide upon the meaning of division of powers. The court is this body. 29. The position in the present case assumes a slightly different complexion. It is not any part of the petitioners' case that expenditure tax is one of the taxes within the States' power or that it is a forbidden field for the Union Parliament. On the contrary, it is not disputed that a law imposing expenditure tax is well within the legislative competence of Union Parliament under Article 248 read with Entry 97 of List I. But the specific contention is that the particular impost under the impugned law, having regard to its nature and incidents, is really not an expenditure tax at all as it does not accord with the economists' notion of such a tax. That is one limb of the argument. The other is that the law is, in pith and substance, really one imposing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out, in one sense overlap. But in law there is no overlapping. The taxes are separated and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale.... 32. Referring to the aspect doctrine Laskin's Canadian Constitutional Law states: The 'aspect' doctrine bears some resemblance to those just noted but, unlike them, deals not with what the 'matter' is but with what it 'comes within'.... (p. 115) ... it applies where some of the constitutive elements about whose combination the statute is concerned (that is, they are its 'matter'), are a kind most often met with in connection with one class of subjects and others are of a kind mostly dealt with in connection with another. As in the case of a pocket gadget compactly assembling knife blade, screwdriver, fishscaler, nailfile, etc., a description of it must mention everything but in characterizing it the particular use proposed to be made of it dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advice or for auditing of accounts. Similarly, a cost accountant charges his client for advice as well as doing the work of costing. For each transaction or contract, the chartered accountant/cost accountant renders profession based services. The activity undertaken by the chartered accountant or the cost accountant or an architect has two aspects. From the point of view of the chartered accountant/cost accountant it is an activity undertaken by him based on his performance and skill. But from the point of view of his client, the chartered accountant/cost accountant is his service provider. It is a tax on services . The activity undertaken by the chartered accountant or cost accountant is similar to saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumption under the Central Excise Act. Xx xx xxx xxx 43. As stated above, every entry in the Lists has to be given a schematic interpretation. As stated above, constitutional law is about concepts and principles. Some of these principles have evolved out of judicial decisions. The said test is also applicable to taxation laws. That is the reason why the entries in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The State of Haryana levied a tax on passengers and goods under the Haryana Passengers and Goods Taxation Act, 1952. The appellants questioned the vires of Section 3 (3) insofar as the levy of tax on passengers and carriage of goods by their vehicles plying along the national highways. It was urged on behalf of the appellants that there was nothing in the Constitution to prevent Parliament from combining its power to legislate with respect to any matters enumerated in Entries 1 to 96 of List I with its power to legislate under Entry 97 of List I and, if so, then the power to legislate with respect to tax on passengers and goods carried on national highways was within the exclusive legislative competence of Parliament and, therefore, Section 3(3) of the Haryana Passengers and Goods Taxation Act, 1952 was beyond the legislative competence of the State Legislature. This argument was rejected by the Division Bench of this Court, which took the view that before exclusive legislative competence can be claimed for Parliament by resort to Entry 97, List I, the legislative competence of the State Legislature must be established. Entry 97 itself was specific. In that, a matter can be brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossible to hold that the Act was in pith and substance within the State's exclusive powers under Entry 56 of List II. It was held that service tax came within Entry 97 of List I. In the present case, as stated above, we are concerned with Entry 60 of List II. As stated above, service tax is on performance based services itself. It is on professional advice, tax planning, auditing, costing, etc. On each of the exercise undertaken tax becomes payable. Therefore, the above judgment has no application. 12. In the light of above discussion, we may now consider the rival contentions in the present case. 13. By way of Finance Act, 1994, concept of service tax was introduced. The said tax is destination based consumption tax being not a charge on business but on consumer and is leviable on service provided. It is, thus, value added tax. The services may be property based or performance based. 14. As per scheme under the Constitution discussed above, subject of tax falling in power of a particular legislature in one aspect may fall within legislative power of another in other aspect. Such overlapping is unavoidable. Same transaction may involve two or more events in different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the purpose of levying tax under Entry 49, List II the State Legislature may adopt for determining the incidence of tax the annual or the capital value of the lands and buildings. But the adoption of the annual or capital value of lands and buildings for determining tax liability will not, in our Judgment, make the fields of legislation under the two entries overlapping. 17. Apart from the above, following observations in Assistant Commissioner of Urban Land Tax v.The Buckingham and Carnatic Co. Limited, (1969) 2 SCC 55 were also noticed:- The basis of taxation under the two entries is quite distinct. As regards Entry 86 of List I the basis of the taxation is the capital value of the asset. It is not a tax directly on the capital value of assets of individuals, and companies on the valuation date. The tax is not imposed on the components of the assets of the assessee. The tax under Entry 86 proceeds on the principle of aggregation and is imposed on the totality of the value of all the assets. It is imposed on the total assets which the assessee owns and in determining the net wealth not only the encumbrances specifically charged against any item of asset, but the general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t question to be determined is, whether the Act falls within any of the classes of subjects, enumerated in Section 92, and assigned exclusively to the Legislatures of the provinces. If it does, then the further question will arise, whether the subject of the Act does not also fall within one of the enumerated classes of subjects in Section 91, and so does not still belong to the Dominion Parliament. But if the Act does not fall within any of the classes of subjects in Section 91, no further question will remain. 19. In Tamil Nadu Kalyan Mandapam Assn., validity of tax on use of Mandap was considered and plea that the said levy will be hit by Entries 49, 54 or 60 of List II was repelled after referring to judgments in Shri Prithvi Cotton Mills Limited and another v.Broach Borough Municipality and others, (1969) 2 SCC 283, Ralla Ram v. The Province of East Punjab, AIR 1949 FC 81 and The Govt. of AP and another v. Hindustan Machine Tools Limited, (1975) 2 SCC 274, with the following observations:- 40.With regard to the first aspect, it is submitted that in order to constitute a tax on land, it must be a tax directly on land and a tax on income from land cannot come wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a consumption tax as it is borne by the client. Distinguishing the service tax from professional tax, it was observed:- 35. For each contract, tax is levied under the Finance Acts, 1994 and 1998. Tax cannot be levied under that Act without service being provided whereas a professional tax under Entry 60 is a tax on his status. It is the tax on the status of a cost accountant or a chartered accountant. As long as a person/firm remains in the profession, he/it has to pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. Even if the chartered accountant has no work throughout the accounting year, still he has to pay professional tax. He has to pay the tax till he remains in the profession. This is the ambit and scope of Entry 60, List II which is a taxing entry. Therefore, Entry 60 contemplates tax on professions, as such. Entry 60, List II refers to tax on employments . Reference was also made to judgments in C.Rajagopalachari v.Corporation of Madras,AIR 1964 SC 1172 upholding income tax on pension under Entry 82 List I without affecting the scope of Entry 62 List II and in Western India Theatr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cinema house. If there is no show, there is no tax. It cannot be a tax on profession or calling. Professional tax does not depend on the exercise of one's profession but only concerns itself with the right to practice. It appears that in the instant case also no tax can be levied or is leviable under the impugned Act if no mining activities are carried on. Hence, it is manifest that it is not related to land as a unit which is the only method of valuation of land under Entry 49 of List II, but is relatable to minerals extracted. Royalty is payable on a proportion of the minerals extracted. It may be mentioned that the Act does not use dead rent as a basis on which land is to be valued. Hence, there cannot be any doubt that the impugned legislation in its pith and substance is a tax on royalty and not a tax on land. 22. In view of above discussion, we are unable to hold that service tax on service of renting of property is exclusively covered by Entry 49 List II. As already observed, Entry 49 of List II relates to tax on land and building and not any activity relating thereto. Income tax on income from property, wealth tax on capital value of assets including land and build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat by reason of the retrospective effect being given to the law, the assessees were incapable of passing on the excise duty to the buyers. After considering certain American decisions, Ayyangar, J. observed at SCR p. 37 thus: It would thus be seen that even under the constitution of the United States of America the unconstitutionality of a retrospective tax is rested on what has been termed 'the vague contours of the 5th Amendment'. Whereas under the Indian Constitution that grounds on which infraction of the rights a property is to be tested not by the flexible rule of 'due process' but on the more precise criteria set out in Article 19(5), mere retrospectivity in the imposition of the tax cannot per se render the Law unconstitutional on the ground of its infringing the right to hold property under Article 19 (1)(f) or depriving the person of property under Article 31(1). If on the one hand, the tax enactment in question were beyond legislative competence of the Union or a State necessarily different considerations arise. Such unauthorised imposition would undoubtedly not be a reasonable restriction on the right to hold property besides being an unr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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