Supreme Court clarifies tax exemptions for religious and educational buildings: Government of Kerala vs. Mother Superior Adoration Convent (2021)

Introduction

Date of the Judgment: March 1, 2021
Citation: 2021 INSC 118
Judges: R.F. Nariman, J. and B.R. Gavai, J.

Can buildings used for residential purposes by nuns and students in hostels be considered as buildings used for religious or educational purposes, thereby qualifying for tax exemption? The Supreme Court of India recently addressed this question in a series of appeals concerning the Kerala Building Tax Act, 1975. The core issue revolved around whether the term “principally used for religious, charitable or educational purposes” includes residential accommodations that are integral to these activities. The Supreme Court, in this judgment, clarified the scope of this exemption, providing significant relief to religious and educational institutions. The judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice B.R. Gavai, with Justice R.F. Nariman authoring the opinion.

Case Background

The appeals before the Supreme Court arose from various cases in Kerala where the state government sought to levy building tax on residential accommodations used by nuns in convents and students in hostels attached to educational institutions. The state argued that these buildings were primarily for residential purposes and did not qualify for tax exemptions under Section 3(1)(b) of the Kerala Building Tax Act, 1975, which exempts buildings used principally for religious, charitable, or educational purposes.

In one case, the Mother Superior Adoration Convent was assessed for building tax on residential accommodations for nuns undergoing religious training. The convent argued that the residential buildings were integral to their religious activities, as the nuns lived there to receive religious instruction and carry out their duties. Similarly, various educational institutions claimed exemptions for their hostel buildings, arguing that these were essential for students, particularly those from out of town.

Timeline

Course of Proceedings

The initial assessment order by the Tehsildar levying building tax on the Mother Superior Adoration Convent was challenged in the High Court. The High Court quashed the assessment and directed the case to be referred to the government. After the government rejected the representation, the matter was again brought before the High Court. A single judge referred the matter to a Division Bench due to disagreement with an earlier judgment. The Division Bench ruled in favor of the convent, holding that the residential buildings were integral to the religious activities.

Similarly, in cases involving educational institutions, a Division Bench doubted the correctness of a previous decision and referred the matter to a Full Bench. The Full Bench, in State of Kerala & Ors v. Unity Hospital (P) Ltd. decided that hostel buildings owned by educational institutions also qualify for building tax exemption, especially where such facilities are mandatory for approval by regulatory bodies like the Medical Council of India and Nursing Council of India.

Legal Framework

The core legal provision at the heart of this case is Section 3(1)(b) of the Kerala Building Tax Act, 1975, which states:

“3. Exemptions – (1) Nothing in this Act shall apply to- (b) buildings used principally for religious, charitable or educational purposes or as factories or workshops.”

The Act also defines “building” in Section 2(e) as:

“2. Definitions – In this Act, unless the context otherwise requires, (e) “building” means a house, out-house, garage, or any other structure, or part thereof, whether of masonry, bricks, wood, metal or other material, but does not include any portable shelter or any shed constructed principally of mud, bamboos, leaves, grass or thatch or a latrine which is not attached to the main structure.”

The term “residential building” is defined in Section 2(l) as:

“(l) “residential building” means a building or any other structure or part thereof built exclusively for residential purpose including outhouses or garages appurtenant to the building for the more beneficial enjoyment of the main building but does not include hotels, boarding places, lodges and the like.]”

Additionally, Section 5A of the Act imposes a luxury tax on residential buildings:

“5A. Charge of luxury tax – [1) Notwithstanding anything contained in this Act, there shall be charged a luxury tax based on the plinth area at the rate specified in Schedule II, annually on all residential buildings having a plinth area of 278.7 square metres completed on or after the 1st day of April, 1999.”

The Supreme Court examined how these provisions interact, particularly focusing on the interpretation of “principally used for” and how it applies to residential buildings within religious and educational institutions.

Arguments

State of Kerala’s Arguments:

• The State argued that exemption provisions in fiscal statutes must be construed strictly. Any ambiguity should be resolved in favor of the State.
• The term “principally used for religious or educational purposes” should only apply to buildings where the core religious or educational activity takes place. Residential accommodations, such as those for nuns or students, do not directly fall under this category.
• The State contended that the definition of “building” under Section 2(e) of the Act does not include residential accommodations that are not directly used for religious or educational activities.
• The State argued that if residential accommodations are included under the exemption, then such buildings would be liable to luxury tax under Section 5A, which would defeat the purpose of exemption.

Respondents’ Arguments:

• The respondents argued that the Kerala Building Tax Act is a beneficial legislation aimed at furthering religious, charitable, and educational purposes. It should be construed broadly to achieve its objectives.
• They contended that residential accommodations for nuns and students are integral to religious and educational activities. Therefore, these buildings should also qualify for exemption under Section 3(1)(b).
• The respondents emphasized that the term “principally” indicates that the main use of the building should be considered, and in the case of convents and hostels, the main use is tied to religious or educational activities.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether buildings used for residential purposes by nuns in convents can be considered as buildings used principally for religious purposes under Section 3(1)(b) of the Kerala Building Tax Act, 1975?
2. Whether hostel buildings owned by educational institutions can be considered as buildings used principally for educational purposes under Section 3(1)(b) of the Kerala Building Tax Act, 1975?
3. Whether the term “principally used for” in Section 3(1)(b) should be interpreted strictly or liberally in the context of beneficial exemptions?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered various legal authorities to reach its decision. These authorities were categorized by the legal points they addressed.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several key factors. The Court recognized that the Kerala Building Tax Act, 1975, was intended to promote religious, charitable, and educational activities. Therefore, the exemption provision in Section 3(1)(b) should be interpreted in a manner that furthers these objectives. The Court emphasized that a narrow, formalistic interpretation would defeat the purpose of the exemption.

The Court also considered the practical realities of how religious and educational institutions function. It acknowledged that residential accommodations for nuns and students are often essential for these institutions to carry out their activities effectively. For instance, nuns living in a convent receive religious instruction and perform religious duties, while students residing in hostels are better able to pursue their education. Therefore, the Court concluded that such accommodations are directly connected to the core activities of these institutions.

Additionally, the Court noted that the term “principally” in Section 3(1)(b) indicates that the dominant purpose of the building should be considered. In the case of convents and hostels, the dominant purpose is tied to religious or educational activities, even though they also serve a residential function.

Finally, the Court emphasized that in cases of ambiguity, beneficial exemptions should be interpreted liberally in favor of the assessee. This principle was applied to ensure that the exemption for religious and educational institutions was given full effect.

Ratio Decidendi

The Supreme Court held that buildings used for residential purposes by nuns in convents and students in hostels, which are integral to religious and educational activities, are exempt from building tax under Section 3(1)(b) of the Kerala Building Tax Act, 1975. The Court reasoned that the term “principally used for religious or educational purposes” should be interpreted broadly to include buildings that are directly connected to these activities. The Court further stated that the exemption is a beneficial provision aimed at furthering religious and educational purposes and should be interpreted liberally to achieve its objectives.

The Court also emphasized that the term “principally” indicates that the main use of the building should be considered, and in the case of convents and hostels, the main use is tied to religious or educational activities. The Court rejected the State’s argument that the exemption should be construed strictly, stating that beneficial exemptions must be interpreted liberally to give full effect to their purpose.

Obiter Dicta

While the primary focus of the judgment was on the interpretation of Section 3(1)(b) of the Kerala Building Tax Act, 1975, the Supreme Court made several observations that could be considered obiter dicta. These include:

• Deference to High Court Judgments on Local Statutes: The Court reiterated the principle that deference should be given to High Court judgments in interpreting local statutes, particularly when such judgments have stood the test of time. This observation underscores the importance of consistency and stability in legal interpretations at the state level.
• Distinction between Strict and Liberal Interpretation of Exemptions: The Court emphasized that while tax exemptions are generally construed strictly, beneficial exemptions, such as those aimed at promoting religious, charitable, or educational purposes, should be interpreted liberally. This distinction provides guidance for future cases involving similar exemption provisions.
• Purpose of Beneficial Legislation: The Court highlighted that the Kerala Building Tax Act, 1975, is a beneficial legislation aimed at furthering religious, charitable, and educational purposes. This observation underscores the importance of interpreting statutes in a manner that aligns with their intended objectives.

Conclusion

The Supreme Court’s judgment in Government of Kerala v. Mother Superior Adoration Convent provides significant clarification on the scope of tax exemptions for buildings used by religious and educational institutions. By ruling that residential accommodations for nuns and students are integral to religious and educational activities, the Court has ensured that these institutions receive the full benefit of the exemption under Section 3(1)(b) of the Kerala Building Tax Act, 1975.

This judgment underscores the importance of interpreting beneficial exemptions liberally to achieve their intended purpose. It also reinforces the principle that deference should be given to High Court judgments on local statutes, especially when such judgments have been in place for a considerable time. The decision provides a clear framework for resolving similar disputes and underscores the importance of a purposive interpretation of tax laws.