Nomenclature Of Tax Does Not Determine Its Nature Of Levy Or True Character : Supreme Court

The Supreme Court on Friday held that the nomenclature ascribed to a tax does not determine the nature of the levy or its true and essential character.

Holding so, the Court observed that the tax labelled as "water tax" or "sewerage tax" under the UP Water Supply and Sewerage Act is in substance a tax on land and buildings situated with the area of the Jal Sansthan authority. The Court also noted that as per the statutory provisions, the tax labelled as "water tax" was not dependent on the actual consumption of water and was based on the provision for water supply given by the authority.

A bench comprising Justices DY Chandrachud, Vikram Nath and BV Nagarathna observed :

The Court was deciding the case Jalkal Vibhag Nagar Nigam and Ors v. Pradeshiya Industrial and Investment Corporation & Anr, which was an appeal arising from the Allahabad High Court. The respondent Pradeshiya Industrial and Investment Corporation ("Corporation") completed construction of a building in 1991 in Lucknow which was known as "PICUP Bhawan". On January 5, 1995 Jalkal Vibhag Nagar Nigam ("Vibhag") raised a bill of Rs. 46,63,312.50/- towards water tax for the period from October 1986 to March 1995.

By its letter dated 25 January 1995, the Corporation 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.

On rectification, the Vibhag u/s 52(1) of the Act raised a demand of water tax for the amount of Rs.16,45,875.00/-. The Corporation 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.

Case Before Allahabad High Court

The Corporation approached the High Court challenging the levy of water tax and sewage tax on the premise that the Corporation during building's construction did not obtain any water from the pipeline laid down by the Vibhag within the area and neither made a request for fresh water connection.

A challenge was also 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 High Court on March 7, 2014 allowed the petition and directed the Vibhag to refund the water and sewerage taxes levied and collected. On August 9, 2014 the High Court also dismissed the review petition. The High Court relied on the judgment of the Supreme Court in Union of India v. State of U.P (2007) 11 SCC 324

Aggrieved, the Vibhag approached the Top Court. The Top Court on August 7, 2015 while staying the High Court's impugned judgement issued notice in the Special Leave Petition.

Submissions Of Counsels

Appearing for the Vibhag, Senior Advocate Pradeep Kant on the aspect of construction of the Statue (UP Water Supply and Sewerage Act) submitted that the Top Court's judgement in Union of India v. State of U.P. was not an authority for interpreting section 52 of the Act as that case service charge was levied on the Railways. In this regard he further contended that in the present case, the imposition was of water tax and sewerage tax which fell within the ambit of Section 52(1)(a).

On the aspect of challenge to the constitutionality Sections 52(a), 55(b)(i) and 56(b) of the Act, Senior Counsel contended that levy of tax u/s 52(1)(a) was on premises situation within Jal Sansthan's area and the expression "premises" was defined to mean land and building. Justifying the levy, Senior Advocate further contended that though labelled as a water tax, the levy provided for the imposition of a tax on lands and buildings within the meaning of Entry 49 of List II. It was also his contention that in Union of India v. State of U.P Top Court had erroneously interpreted the provisions of Section 52 to be in the nature of a fee and not a tax.

Challenging the levy of water tax, Senior Advocate Madhvi Divan appearing for the corporation submitted that the levy under Section 52(1)(a) though described as a water tax, was a fee and not a tax and though the legislature had used the nomenclature of "water tax", the levy in effect was an exaction on water or water supply. It was also her contention that levy did not constitute a tax on 'lands and buildings' and was thus outside the domain of the State legislature under Article 246 of the Constitution read with Entry 49 of List II.

Issues :

The Court considered the following issues :

Supreme Court's Analysis

1. Levy under Section 52 of the UP Water Supply and Sewerage Act Is A Tax And Not Fee

Discussing the imposition of levy under section 52(1)(a) of the Act as per which levy would be on premises within the area of the Jal Sansthan, where the area is covered by the water supply services of the Jal Sansthan, the bench observed that this stipulation did not render the levy a fee instead of tax.

Relying on section 24(1) and 25(1) of the Act, the bench said 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 the raising of revenue in terms of Section 52(1)(a) is in the nature of a tax. The levy is on premises situated within the area of the Jal Sansthan."

Considering the restrictions u/s 55 of the Act on levy of tax u/s 52, the bench said that the restrictions which were imposed by Section 55 did not render the tax a fee, nor were they indicative of the tax being charged for the actual use of water.

"While imposing the levy in Section 52(1)(a), the legislature has considered it appropriate to restrict the levy within the parameters which are specified in Section 55. That does not alter the fundamental nature of the levy, which is constituted as one on premises (defined to mean land and building) situated within the area of Jal Sansthan," bench further added.

Taking note of section 56 of the Act which dealt with incidence of tax, the bench observed that, "Section 56 is a clear indicator of the tax being in the nature of a compulsory exaction arising out of the fact that the premises comprise of land and building situated within the area of the Jal Sansthan, so long as the restrictions which are contained in Section 55 are not attracted. Section 52 and Section 56 also indicate that the intention of the legislature is to collect water tax and sewerage tax from the occupier of the premises, where the premises are connected with water supply or, as the case may be, with a sewer of the Jal Sansthan and, in case where the premises are not so connected, from the owner of the premises. Therefore, the payment of water tax and sewerage tax is regardless of whether the premises are connected with water supply or with a sewer of the Jal Sansthan. There is no exemption from the payment of water tax or sewerage tax as both the contingencies- the premises being connected with water supply (or, as the case may be, with a sewer of the Jal Sansthan) or there being no such connection- have been covered under the provisions of Section 56."

Reliance was also placed on the Top Court's judgements in Govind Saran Ganga Saran v. CST 1985 Supp SCC 205, Commissioner of Income Tax (Central)- I, New Delhi v. Vatika Township Private Limited (2015) 1 SCC 1, Federation of Hotel and Restaurant Association of India v. Union of India (1989) 3 SCC 634, State of West Bengal v. Kesoram Industries Ltd (2004) 10 SCC 201, to discuss the legislative enactment which provided for the imposition of a tax.

2. Levy u/s 52 Is In Consonance With Entry 49 List II: Taxes on Lands and Buildings

With regards to Ms.Divan's submission that levy u/s 52 of the Act was in consonance of Entry 17 List II which dealt with "water and water supplies" and not Entry 49 List II which dealt with "Taxes on Land and Buildings", the bench observed that the levy under Section 52 fell squarely under the ambit of Entry 49 of List II as it was in the nature of a tax and not a fee.

"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 charging section indicates in unambiguous terms that it is a tax on lands and buildings," bench observed in this regard.

3. Para 23 of Union of India v State of UP Overruled

Noting that there was an evident error in the observations in Para 23 of Union of India v State of UP, the bench also overruled the same in which it was held u/s 52 though the charge was termed as a tax, in substance it was a fee for the supply of water.

Case Title: Jalkal Vibhag Nagar Nigam and Ors v. Pradeshiya Industrial and Investment Corporation & Anr. | Civil Appeal No 6107 of 2021

Citation : LL 2021 SC 583

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