Supreme Court Upholds Property Tax on Carpet Area Basis, Denies Exemption to Charitable Institutions: Parivar Seva Sanstha vs. Ahmedabad Municipal Corporation (24 November 2022)

Introduction

Date of the Judgment: 24 November 2022

Citation: 2022 INSC 679

Judges: Sanjiv Khanna, J. and J.K. Maheshwari, J.

Can a charitable institution claim exemption from property tax when the tax is calculated based on the carpet area of the property, rather than its rateable value? The Supreme Court of India recently addressed this question, clarifying the scope of tax exemptions under the Gujarat Provincial Municipal Corporations Act, 1949. This judgment clarifies the applicability of tax exemptions for properties used for public worship or charitable purposes when property tax is calculated based on the carpet area method.

Case Background

The case involves two appeals: one by Parivar Seva Sanstha (Appellant No. 1 Trust) and another by Bai Gulab Hargovandas Jagjivandasni Dikarina Dikarina Will Trust (Appellant No. 2 Trust). Both trusts claimed exemption from general property tax under Section 132(1)(b) of the Gujarat Provincial Municipal Corporations Act, 1949 (GPMC Act). This section provides an exemption for buildings and lands used for public worship or charitable purposes. The Ahmedabad Municipal Corporation had levied property tax on the basis of carpet area under Section 141AA of the GPMC Act. The trusts argued that the exemption under Section 132(1)(b) should apply even when the tax is calculated based on carpet area. Appellant No. 2 Trust also challenged the constitutionality of Rule 8B(4)(i) of the Taxation (Amendment) Rules 2001, arguing that it violates Article 14 of the Constitution by discriminating against charitable hospitals and clinics.

Timeline

Course of Proceedings

The Gujarat High Court had previously ruled against the appellants, stating that the exemption under Section 132(1)(b) of the GPMC Act does not apply when property tax is calculated using the carpet area method under Section 141AA of the GPMC Act. The High Court upheld the validity of Rule 8B(4)(i) of the Taxation Rules. The appellants then appealed to the Supreme Court of India.

Legal Framework

The core of the legal framework revolves around the Gujarat Provincial Municipal Corporations Act, 1949 (GPMC Act), specifically:

• Section 127 of the GPMC Act:

  “(1) For the purposes of this Act, the Corporation shall impose the following taxes, namely: — (a) Property taxes either under section 129 or under section 141AA; [* * * * * ]” This section empowers the Municipal Corporation to impose property taxes either based on rateable value or carpet area.

• Section 129 of the GPMC Act:

  “For the purposes of sub-section (1) of section 127 property taxes shall comprise the following taxes which shall, subject to the exceptions, limitations and conditions hereinafter provided, be levied on buildings and lands in the City: — [* * * * * ] (c) a general tax of not less than twelve per cent. but not more than thirty per cent of their rateable value, which may be levied, if the Corporation so determines on a graduated scale;” This section outlines that property tax includes a general tax based on the rateable value of the property.

• Section 132 of the GPMC Act:

  “(1) The general tax shall be levied in respect of all buildings and lands in the City, the rateable value of which exceeds six hundred rupees except: (a) buildings and lands solely used for purposes connected with the disposal of the dead; (b) buildings and lands or portions thereof solely occupied and used for public worship or for a public charitable purposes; (c) buildings and lands vesting in the Government used solely for public purposes and not used or intended to be used for purposes of trade or profit or vesting in the Corporation, in respect of which the said tax, if levied, would under the provisions hereinafter contained be primarily leviable from the Government or the Corporation, respectively.” This section specifies exemptions from general tax, including those for properties used for public worship or charitable purposes.

• Section 141AA of the GPMC Act:

  “For the purposes of sub-section (1) of section 127, property taxes shall comprise the following taxes which shall, subject to exceptions, limitations and conditions hereinafter provided, be levied on buildings and lands in the City: [* * * * * ] (c) a general tax which may be levied in accordance with the provisions of section 141B, if the Corporation so determines on a graduated scale;” This section provides an alternative method for calculating property tax based on the carpet area of the property.

• Section 141B of the GPMC Act:

  This section details how the general tax is calculated based on carpet area, including different rates for residential and non-residential buildings.

The Court also considered the Taxation (Amendment) Rules 2001, particularly Rule 8B, which specifies factors for increasing or decreasing property tax rates based on the use of the property.

Arguments

The appellants, Parivar Seva Sanstha and Bai Gulab Hargovandas Jagjivandasni Dikarina Dikarina Will Trust, argued that:

• The exemption from general tax under Section 132(1)(b) of the GPMC Act should apply regardless of whether the property tax is calculated based on rateable value or carpet area.
• The use of their properties for charitable purposes should qualify them for exemption, even under the carpet area method of taxation.
• Appellant No. 2 Trust contended that Rule 8B(4)(i) of the Taxation Rules is unconstitutional as it discriminates against charitable hospitals and clinics by applying a higher multiplier (7.0) compared to other charitable institutions (2.0). They argued that their hospital/clinic should be treated similarly to other charitable institutions.

The Ahmedabad Municipal Corporation argued that:

• The exemption under Section 132(1)(b) applies only when the general tax is levied under Section 129, based on rateable value, and not when it is levied under Section 141AA, based on carpet area.
• The provisions from Section 141AA to Section 141F form a complete code for tax computation based on carpet area, and they do not include any exemption like the one under Section 132(1)(b).
• Rule 8B(4)(i) is a valid classification based on the use of the property, and hospitals and clinics, regardless of whether they are run by charitable trusts, can be classified separately for taxation purposes.

The innovativeness of the argument by the Appellant No.2 Trust was that the hospital run by them should be treated at par with other charitable institutions.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the appellants are entitled to exemption from general tax under Section 132(1)(b) of the GPMC Act when the Corporation has levied property tax on the carpet area method under Section 141AA of the GPMC Act?
2. Whether Rule 8B(4)(i) of the Taxation Rules is unconstitutional, illegal, and arbitrary as it violates the principle of equality under Article 14 of the Constitution of India?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Court relied on State of Gujarat and Another v. Shri Ambica Mills Ltd., Ahmedabad and Another [1974] 4 SCC 656* to explain the concept of reasonable classification under Article 14, distinguishing between under-inclusive and over-inclusive classifications.
• The Court cited State of Jammu and Kashmir v. Shri Triloki Nath Kosa and Others [1974] 1 SCC 19* to emphasize the presumption of constitutionality of a statute and the burden on the challenger to prove a violation of constitutional principles.
• The Court referred to Municipal Corporation of Delhi v. Children Book Trust [1992] 3 SCC 390* to interpret “charitable purpose” in the context of municipal tax exemptions, noting that systematic profits disqualify an institution from exemption.
• The Court cited State of Bihar and Others v. Sachchidanand Kishore Prasad Sinha and Others [1995] 3 SCC 86* and Twyford Tea Co. Ltd. and Another v. The State of Kerala and Another [1970] 1 SCC 189* to highlight the wide range of selection and freedom in appraisal the legislature has in taxation matters, and that the burden of proving discrimination is heavy.
• The Court cited R.K. Garg v. Union of India and Others [1981] 4 SCC 675* to state that the laws relating to economic activities should be viewed with greater latitude than laws touching civil rights.
• The Court distinguished State of Kerala v. Haji K. Haji K. Kutty Naha and Others Etc. 1969 1 SCR 645*, noting that the uniform tax in that case was struck down due to its failure to consider relevant factors.
• The Court distinguished Deputy Commissioner of Income Tax and Another v. Pepsi Foods Limited [2021] 7 SCC 413*, stating that the case struck down a proviso in the Income Tax Act as arbitrary.
• The Court distinguished State of Uttar Pradesh and Others v. Deepak Fertilizers & Petrochemical Corporation Ltd. [2007] 10 SCC 342*, where a retrospective withdrawal of tax exemption was struck down.
• The Court distinguished Union of India and Others v. N.S. Rathnam and Sons [2015] 10 SCC 681*, where the court ensured parity by granting exemption subject to payment of differential duty.
• The Court relied on Ganga Sugar Corporation Ltd. v. State of Uttar Pradesh and Others [1980] 1 SCC 223* to support its reasoning, highlighting that uniformity in tax classification should not be struck down lightly.
• The Court referred to Manish Kumar v. Union of India and Others [2021] 5 SCC 1* for the case law on reasonable classification under Article 14.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative scheme of the GPMC Act, which provides separate mechanisms for calculating property tax based on rateable value and carpet area. The Court emphasized that the exemption under Section 132(1)(b) is specifically tied to the rateable value method under Section 129, and it does not extend to the carpet area method under Section 141AA.

The Court also highlighted the need for clarity and uniformity in tax rates to avoid litigation and administrative difficulties. The classification under Rule 8B(4)(i) was deemed reasonable, as it was based on the use of the property and not on the nature of the entity owning it. The Court observed that all hospitals, dispensaries, clinics, maternity homes, etc. have been classified under one head and thereby the levy of taxation in such cases simplifies and is uniform.

The Court also considered the economic implications and the need for municipalities to generate revenue for their administration.

The Court considered the factual aspects of the case, such as the use of the properties and the claims for exemption. However, the legal considerations, including the interpretation of the GPMC Act and the constitutional validity of the rules, weighed more heavily in the Court’s decision.

The Court held that the legislative scheme of the GPMC Act clearly distinguishes between the two methods of property tax calculation, and the exemption under Section 132(1)(b) is specifically tied to the rateable value method. The Court also emphasized the need for clarity and uniformity in tax rates and upheld the classification of hospitals and clinics under Rule 8B(4)(i).

Key Takeaways

• Charitable institutions cannot claim exemption from general tax under Section 132(1)(b) of the GPMC Act when property tax is levied based on carpet area under Section 141AA.
• The exemption under Section 132(1)(b) applies only when the property tax is calculated based on rateable value under Section 129.
• Rule 8B(4)(i) of the Taxation Rules, which imposes a higher multiplier for hospitals and clinics, is constitutionally valid and does not violate Article 14 of the Constitution.
• The classification based on the “use factor” of the property is a valid basis for taxation.
• The judgment emphasizes the need for clarity and uniformity in tax rates to avoid litigation and administrative complexities.

Directions

The Supreme Court did not issue any specific directions, but it dismissed the appeals of both the trusts, upholding the decisions of the Gujarat High Court.

Development of Law

The ratio decidendi of this case is that the exemption under Section 132(1)(b) of the GPMC Act does not apply when property tax is levied on the carpet area basis under Section 141AA of the GPMC Act. This clarifies that the two methods of tax calculation are distinct, and exemptions tied to one method cannot be extended to the other. There is no change in the previous positions of law, but this judgment clarifies the interpretation of the provisions of the GPMC Act.

Conclusion

The Supreme Court dismissed the appeals, affirming that the exemption from general tax for charitable institutions under Section 132(1)(b) of the GPMC Act does not apply when property tax is calculated based on the carpet area method under Section 141AA. The Court also upheld the constitutional validity of Rule 8B(4)(i) of the Taxation Rules, which classifies hospitals and clinics as a separate category for taxation purposes. This judgment provides clarity on the application of tax exemptions under the GPMC Act and reinforces the principle that classifications based on the use of property are valid for taxation purposes.