Nomenclature Ascribed To Tax Does Not Determine Either The Nature Of Levy Or Its True Character: Supreme Court

By holding that the nomenclature that the legislature has ascribed to a tax does not determine either the nature of the levy or its true and essential character, a Bench of the Supreme Court has held that the true nature of the levy under Section 52 of the UP Water Supply and Sewerage Act is that of a tax on lands and buildings within the meaning of Entry 49 of List II of the Seventh Schedule.

"The legislature may choose a label for a tax. The label however will not determine or for that matter clarify the nature of the levy. The nature of the levy has to be deduced from the nature of the tax, the provision which specifies the taxing event and, as in the case of Section 52, the unit upon which the levy is to be imposed. The legislature may choose a label for the tax based on the nature of the levy. On the other hand, the legislature may choose a label having a relationship with the function of the authority which imposes the tax as in the present case," held the Bench of Justice DY Chandrachud, Justice Vikram Nath and Justice BV Nagarathna.

The Bench also clarified that the tax labelled as the water tax is not dependent upon the consumption or connection of water supply by the authority.

"The levy of the tax does not depend upon the actual consumption of water by the owner or occupier upon whom the tax is levied. Unlike the charge under Section 59 which is towards the cost of water to be supplied by the Jal Sansthan according to its volume or, in lieu thereof on a fixed sum, the tax under Section 52 is a compulsory exaction. Where the premises are connected with water supply, the tax is levied on the occupier of the premises. On the other hand, where the premises are not so connected, it is the owner of the premises who bears the tax. The levy under Section 52 (1) is hence a tax and not a fee. Moreover, for the reasons that we have indicated above, it is a tax on lands and buildings within the meaning of Entry 49 of List II," It observed.

The Court decided two issues in the case,

(i) Whether the demand of water tax and sewerage tax is sustainable with reference to the provisions of the UP Water Supply and Sewerage Act; and

(ii) Whether the State Legislature has the legislative competence to levy the tax under the provisions of Section 52(1)(a).

In this case, the Appellant Jalkal Vibhag Nagar Nigam had demanded water tax from the Respondent Pradeshiya Industrial and Investment Corporation which constructed a building PICUP Bhawan. The First Respondent sought a clarification on the location of the sewer and water stand post and other water pipelines; distance from PICUP Bhawan and a copy of the relevant notification or order prescribing the 'radius' under Section 55(b)(i) of the UP Water Supply and Sewerage Act.

The bill was rectified on 28 January 1995 by which a demand of water tax for the amount of Rs.16,45,875.00/- was raised in terms of the provisions of Section 52(1). The Respondent by its communication of 31 January 1995, once again, sought certain clarifications. The Appellant clarified the queries and reiterated its demand. The 1st Respondent deposited an amount of Rs. 3,46,500.00/- under protest on 15 March 1995, and a further sum of Rs. 9,41,942.77/- on 29 April 1995.

On 7 September 1995, a writ petition was instituted by the 1st Respondent under Article 226 of the Constitution of India for challenging the levy of water tax and sewerage tax on the premise that the First Respondent had, during the construction of the building, not obtained any water from the pipeline laid down by the Appellants within the area nor had it made a request for a fresh water connection. A challenge was raised to the validity of Sections 52(a), 55(b)(i) and 56(b) of the UP Water Supply and Sewerage Act on the ground that they are ultra vires the provisions of Article 265 of the Constitution.

The Division Bench of the Allahabad High Court allowed the petition and asked the Appellants to refund the amount. The Review Petition was also dismissed by the High Court. The High Court allowed the petition based upon a judgment of the Supreme Court in the matter of Union of India v. State of U.P (2007 (11) SCC 324).

Rival Submissions

Pradeep Kant, Senior Counsel appearing on behalf of the Appellants, has submitted that the decision of this Court in Union of India v. State of U.P. (supra) is not an authority for the interpretation of Section 52 since in that case a service charge was levied on the railways. The challenge to the levy was raised by the railways on the ground that the Jal Sansthan was levying a tax in violation of the provisions of Article 285 of the Constitution and it was this submission which was rejected, by holding that the levy was of a service charge in the nature of a fee and not a tax; and In the present case, the imposition is of water tax and sewerage tax which falls within the ambit of Section 52(1)(a).

Madhavi Divan, Additional Solicitor General appearing on behalf of the 1st Respondent, submitted that the levy under Section 52(1)(a) though described as a water tax, is a fee and not a tax and though the legislature has used the nomenclature of "water tax", the levy in effect is an exaction on water or water supply. The levy does not constitute a tax on 'lands and buildings' and is thus, outside the domain of the State legislature under Article 246 of the Constitution read with Entry 49 of List II.

The Court's Analysis

The Court analyzed the nature of the levy under Section 52 of the UP Water Supply and Sewerage Act, the Bench observed that while imposing the levy under clause (a) of Section 52(1) the legislature has provided that the levy will be on premises situated within the area of the Jal Sansthan, where the area is covered by the water supply services of the Jal Sansthan.

Regarding Sections 24(1) and 25(1), the Bench pointed out that, these provisions indicate that the levy of tax is intended to secure adequate means of finance for the Jal Sansthan to undertake its activities. But that the raising of revenue in terms of Section 52(1)(a) is in the nature of a tax.

The Court also noted certain restrictions in Section 55 with respect to land which is exclusively used for agricultural purposes and with respect to premises situated within the prescribed radius from the nearest stand-post or other waterworks and held:-

The Court observed, "These restrictions do not detract from the nature of the levy nor would the liability which is imposed on the owner and occupier be anything other than a tax on lands and building within the meaning of Entry 49 of List II. The water tax and sewerage tax are taxes levied in order to augment the finances of the Jal Sansthan for the purpose of meeting the cost of its operation, maintenance and services, so as to achieve an economic return on its fixed assets."

The Bench further stated,

"There can be no manner of doubt that the levy which is imposed under Section 52 is a tax on lands and buildings situated within the area of the Jal Sansthan for the purpose of imposing the tax. The tax is imposed on premises which fall within the territorial area of the Jal Sansthan. The expression 'premises' is defined to mean land and building. The tax is on lands and buildings. The nomenclature of the tax does not indicate its true character and substance. Nor does the fact that the law enables the Jal Sansthan to levy the tax render it a tax on water."

The Bench overruled the observations in paragraph 23 of the decision in Union of India v. State of U.P.

"The observations of the Court that though the charges are loosely termed as tax, it is in substance a fee, is per incuriam and in any event not reflective of a correct reading of the provisions of the statute," the order stated.

The Bench allowed the appeal by stating, "We reject the constitutional challenge to the validity of Sections 52 (1)(a), Section 55(b)(1) and Section 56 of the UP Water Supply and Sewerage Act. The appeals shall accordingly stand allowed and the judgment of the High Court of Judicature at Allahabad at its Lucknow Bench dated 7 March 2014 shall stand set aside."

Case Title: Jalkal Vibhag Nagar Nigam & Ors. Versus Pradeshiya Industrial and Investment Corporation & Anr.

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