Supreme Court Clarifies Taxability of Enemy Property: Lucknow Nagar Nigam vs. Kohli Brothers (22 February 2024)

Introduction

Date of the Judgment: 22 February 2024
Citation: 2024 INSC 135
Judges: Justice B.V. Nagarathna and Justice Ujjal Bhuyan

Is property held by the Custodian of Enemy Property considered property of the Union, thereby exempting it from state taxes? The Supreme Court recently addressed this complex issue in a case involving the Lucknow Nagar Nigam and Kohli Brothers Colour Lab. Pvt. Ltd. This judgment clarifies the tax liabilities of properties classified as enemy property under Indian law. The bench comprised of Justice B.V. Nagarathna and Justice Ujjal Bhuyan.

Case Background

The case revolves around a property in Lucknow, identified as enemy property because its owner, the Raja of Mahmudabad, migrated to Pakistan in 1947. A portion of this property is occupied by Kohli Brothers Colour Lab. Pvt. Ltd., who use it for commercial purposes. The Lucknow Nagar Nigam (Municipal Corporation) had been collecting taxes on this property until 1998-1999, when they assessed it based on capital value. The Custodian of Enemy Property for India issued a certificate in 2002, stating the property was vested with them and they were liable to pay taxes. However, the Municipal Corporation sought to recover dues from the assessee, leading to a legal challenge.

Timeline

Course of Proceedings

The assessee, along with other tenants, had previously challenged the assessment orders in the High Court of Allahabad at Lucknow, but this was dismissed. Subsequently, the Municipal Corporation, due to outstanding dues, notified the District Magistrate of their intent to attach the premises. The assessee then filed a writ petition seeking relief from property tax and water tax demands, arguing that the property belonged to the Union of India and was thus exempt. The High Court ruled in favor of the assessee, quashing the recovery notice, which led to the current appeal by the Municipal Corporation to the Supreme Court.

Legal Framework

The Supreme Court considered several key legal provisions:

• The Enemy Property Act, 1968: This Act provides for the continued vesting of enemy property in the Custodian of Enemy Property for India. Section 2(c) defines “enemy property” as any property belonging to, held, or managed on behalf of an enemy. Section 5 outlines that enemy property vested in the Custodian continues to vest in them, even if the enemy status changes. Section 8 details the powers of the Custodian, including the ability to collect taxes, and Section 8A allows the Custodian to sell enemy property with Central Government approval.
• Article 285 of the Constitution of India: This article deals with the exemption of Union property from state taxation. Clause (1) states that Union property is exempt from all taxes imposed by a state unless Parliament provides otherwise. Clause (2) allows states to continue levying taxes on Union property if such taxes were in place before the Constitution’s commencement.
• Article 300-A of the Constitution of India: This article states that no person shall be deprived of his property save by authority of law.
• The Uttar Pradesh Municipalities Act, 1916: This act outlines the taxes that municipalities can impose, including taxes on buildings and lands. Section 129-A(e) excludes buildings and lands vested in the Union of India from taxation, except where Article 285(2) applies.
• The UP Municipal Corporation Adhiniyam, 1959: This act governs municipal corporations in Uttar Pradesh. Section 172 outlines the taxes that can be imposed, subject to Article 285 of the Constitution. Section 177 exempts buildings and lands vested in the Union of India from general tax, except where Article 285(2) applies. Section 179 specifies who is primarily responsible for paying property taxes.

The Court also considered the historical context of enemy property laws, which arose from the need to manage properties of individuals who migrated to enemy countries during conflicts.

Arguments

Submissions of the Appellants (Lucknow Nagar Nigam):

• The Municipal Corporation argued that the property is merely in the custody of the Custodian, not owned by the Union Government.
• They contended that the Enemy Property Act only vests the property in the Custodian for management, not ownership.
• They stated that for the Union Government to claim ownership, it must follow Article 300-A of the Constitution, which requires fair compensation for acquisition of private property.
• They argued that Article 285(1) does not apply because the property is not “of the Union,” and that even if it were, Section 179 of the Act of 1959 allows for taxation of the occupier.
• They relied on the judgment of the Constitution Bench of this Court in Electronics Corporation of India vs. Secretary, Revenue Department, Govt. of Andhra Pradesh, (1999) 4 SCC 458, wherein it was held that Article 285 will not be applicable in cases when the land belonging to the Government of India was leased out to a Government Company.
• They referred to a clarification from the Ministry of Urban Development, stating that service charges are payable by the Union for services provided by Municipal Corporations.
• They argued that the Custodian is empowered to collect taxes from occupants and pay them to the local authority.
• They submitted that there can be no concession or estoppel against the statute.

Submissions of the Respondent No. 1 (Kohli Brothers):

• The assessee argued that the property belongs to the Central Government, specifically the Custodian, and is thus “property of the Union.”
• They relied on the Amendment Act, 2017, which states that enemy property remains vested in the Custodian regardless of changes in circumstances.
• They contended that Article 285 of the Constitution provides an absolute ban on state taxation of Union property.
• They stated that Section 172 of the Act of 1959, read with Section 177, excludes Union property from general tax.
• They argued that the declaration of a property as enemy property is an exercise of police power of the State, and that no compensation is payable for such acquisition.
• They argued that Section 8(2)(vi) of the Act cannot amount to “law” authorizing levy of property tax on Union property under Article 285(1) of the Constitution.
• In the alternative, they requested that any demand be made prospective, considering the hardship caused by past dues.

Submissions of the Respondent No. 2 (Custodian of Enemy Property):

• The Custodian confirmed that the property belongs to a Pakistani national and is vested with them under the Act.
• They stated that while Union property is exempt from state taxation under Article 285(1), there is no exemption for service charges.
• They clarified that they are obligated to pay local taxes since the assessee is running a private business for profit.
• They relied on the case of NDMC vs. State of Punjab, (1997) 7 SCC 339, stating that private parties are not exempt from taxation.

Submissions of the Respondent No. 3 (State of Uttar Pradesh):

• The State of Uttar Pradesh adopted the contentions raised by the Municipal Corporation.
• They submitted that the assessee is a private entity and a lessee of the Custodian, not the Central Government, and cannot claim the benefit of Article 285 of the Constitution.
• They contended that vesting under the Act does not make properties owned by the Central Government.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether statutory vesting of enemy property in the Custodian amounts to expropriation and transfer of ownership, thereby conferring ownership on the Custodian.
2. If ownership is conferred on the Custodian, whether such property becomes Union property under Article 285 of the Constitution, thus exempting it from local taxes.
3. Whether, despite the property becoming Union property, clause (2) of Article 285 enables the appellant to impose taxes on the lessee.
4. Whether the High Court was right in holding in favor of the respondent.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court considered the following authorities:

The Court also referred to Salmond on Jurisprudence, for understanding the concept of ownership and possession.

Judgment

How each authority was viewed by the Court:

• Union of India vs. Raja Mohammad Amir Mohammad Khan [CITATION]: The Court noted that the legal position has changed due to subsequent amendments to the Enemy Property Act.
• Electronics Corporation of India vs. Secretary, Revenue Department, Govt. of Andhra Pradesh [CITATION]: The Court distinguished this case, stating that it was not applicable to the present context of enemy property.
• NDMC vs. State of Punjab [CITATION]: The Court used this case to clarify the scope of tax exemptions under Article 285 but distinguished it from the present case.
• Union of India vs. State of Uttar Pradesh [CITATION]: The Court used this case to differentiate between property taxes and service charges.
• Delhi Administration vs. Madan Lal Nangia [CITATION], Lieutenant Governor of Delhi vs. Matwal Chand (Dead) through LRs [CITATION], Municipal Commissioner of Dum Dum Municipality vs. Indian Tourism Development Corporation [CITATION], and State of Andhra Pradesh vs. V.Subba Rao [CITATION]: The Court used these cases to compare the Custodian’s powers to those of a Receiver or Liquidator, emphasizing that the Custodian does not become the owner of the property.
• State of Uttar Pradesh vs. Uttar Pradesh Rajya Khanij Vikas Nigam Sangharsh Samiti [CITATION]: The Court used this case to emphasize that there can be no estoppel against a statute.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily driven by the interpretation of the Enemy Property Act, 1968 and Article 285 of the Constitution. The Court emphasized that the Custodian of Enemy Property acts as a trustee, not an owner, and that the vesting of property in the Custodian does not transfer ownership to the Union of India. The court also considered the historical context of enemy property laws and the need to protect the rights of the true owners, while ensuring that such properties are not misused.

Fact:Law Ratio

The court’s decision was primarily influenced by legal interpretations (70%) rather than factual aspects (30%) of the case.

Logical Reasoning:

The Court considered alternative interpretations but rejected them based on the specific provisions of the Enemy Property Act and the Constitution. The Court emphasized that the Custodian’s role is to manage the property as a trustee, not to become its owner or transfer ownership to the Union. This interpretation aligns with the legislative intent of protecting the rights of the original owners while ensuring proper management of the properties.

The Court’s reasoning was based on the following points:

• The Custodian acts as a trustee, not an owner.
• The vesting of enemy property in the Custodian is for management, not ownership transfer.
• Enemy property does not become Union property under Article 285.
• Article 285(2) would apply only if the property is Union property.
• The High Court erred in holding that the respondent is not liable to pay taxes.

The Court quoted the following from the judgment:

• “The Custodian of Enemy Property for India who acts on behalf of the Enemy holds in trust the enemy property vested in him under the provisions of the Act. He does so as a trustee and therefore, the principles and legal doctrines applicable to a trustee are applicable to the Custodian accordingly.”
• “The vesting of enemy property in the Custodian is not free from encumbrances but vesting is in accordance with the status of the property as held by the enemy, enemy subject or enemy firm prior to its vesting.”
• “Therefore, it cannot be accepted that the Custodian is acting as the owner of the property and by that logic the enemy property would become the property of the Union.”

There were no dissenting opinions. The bench was unanimous in its decision.

Key Takeaways

• Enemy property vested in the Custodian is not Union property and is therefore not exempt from state taxes.
• The Custodian of Enemy Property acts as a trustee, not an owner, and is responsible for managing the property.
• Occupiers of enemy property are liable to pay property tax and other local taxes.
• Municipal corporations can levy taxes on enemy properties as per existing laws.
• The judgment clarifies the legal status of enemy property and its taxability under Indian law.

Directions

The Supreme Court directed that:

• Any tax amounts already paid by the respondent shall not be refunded.
• No tax demand notices shall be issued for past dues if none have been issued yet.
• From the current fiscal year (2024-2025) onwards, the appellant is entitled to levy and collect property tax, water tax, sewerage charges, and other local taxes.

Conclusion

The Supreme Court’s judgment in Lucknow Nagar Nigam vs. Kohli Brothers provides significant clarity on the taxability of enemy property in India. The Court has firmly established that such properties, though vested in the Custodian, do not become Union property and are therefore subject to state and local taxes. The judgment balances the need for revenue collection by local authorities with the legal framework governing enemy property, ensuring that the Custodian’s role remains that of a trustee rather than an owner. This ruling has important implications for property tax laws and the management of enemy properties across the country.