This Article is written by Adv. Dilpreet Kaur Kharbanda.This is an effort to analyse the judgment of Ballabhadas Mathuradas Lakhani v. Municipal Committee, Malkapur. Along with that, the topic of Professional Tax has also been delved into, as to who collects it, on whom it is levied and how it is different from Income Tax. Article 276 of the Indian Constitution has also been discussed to understand the power bestowed on the states to collect tax irrespective of tax being a subject matter of the union list. Furthermore, the concept of Precedent along with Article 141 has been elucidated.

Introduction

Hugh Dalton, defines Tax as a “compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the taxpayer in return, and not imposed as penalty for any legal offence”. Taxes are the biggest source of government revenue and this revenue is used by the government for various developments in the country and even opening the country to international businesses and capital investment. The same has been simplified in the form of a flow chart.

The tax structure in India can be divided into 2 main heads, Direct Taxes and Indirect Taxes. As the name suggests, Direct Taxes are paid directly to the government like Income Tax and Corporate Tax, whereas, Indirect Taxes are paid through an intermediary like Sales Tax and Value Added Tax. Taxes are collected by both states and the central government. The powers are divided/distributed by Article 246 under the three lists mentioned in Seventh Schedule of the Indian Constitution. Income Tax is levied and collected by the Central Government under Entry 82 of List 1 whereas, a somewhat similar kind of a Tax on professions, termed as Professional Tax is collected by the State Government under Entry 60 of List 2. If we look, there seems to be an overlap between the two. However, the difference is maintained by imposing a limitation as provided under Article 276 of the Indian Constitution. The case of Ballabhadas Mathuradas Lakhani v. Municipal Committee, Malkapur also deals with the concepts relating to the professional tax, how the power to impose such tax lies with the states, the limits imposed to keep the powers in check and what happens when these limits are surpassed.

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Details of the Case

Case Name: Ballabhdas Mathuradas Lakhani v. Municipal Committee, Malkapur

Equivalent Citations: AIR 1970 SC 1002, (1970) 2 SCC 267, 1970 MAH LJ 561

Court: Supreme Court of India 

Bench: J. J.C. Shah, K.S. Hegde and A.N. Grover

Appellant: Ballabhdas Mathuradas Lakhani & Ors.

Respondent: Municipal Committee, Malkapur

Date of Judgment: 01.04.1970

Legal Provisions Involved: Article 276(2) and Article 141 of the Indian Constitution, Section 142 A of the Government of India Act, 1935.

Facts of Ballabhadas Mathurdas Lakhani vs. Municipal Committee, Malkapur, (1970)

  • A suit was filed by the appellants before the Civil Judge, Class I, Khamgaon for restraining the Municipality from recovering the Bale and Boja Tax for 1953-54 and the seasons ahead. Moreover, to refund the amount of ₹6,980/2/- paid for three (3) years from 1950 to 1953.
  • The Civil Judge passed a judgment in favour of the appellants and ordered an Injunction and the municipality to refund the amount paid by the appellants.
  • The Municipality preferred an appeal to the District Court. The District Court reversed the judgment of the trial court and held that the municipality was correct to levy tax on the rates prevailing on 31st March 1939 as it was in consonance with Section 142A(2) of the Government of India Act, 1935 and was entitled to retain ₹1,867/4/-.
  • Second Appeal was preferred to the High Court of Bombay at Nagpur where the Full Bench decided on the issue of whether Section 148(2) of C.P. & Berar Municipality Act, 1922 applies when the recovery is violative of Article 276 (2) and Section 142-A (2) of the Government of India Act. 
  • The Hon’ble High Court upheld the injunction part of the judgment of the trial court but refused to agree with the civil judge on the point of refund of the tax amount to the appellants.
  • Against the judgement of the Bombay High Court, this present appeal has been filed after a certificate is being granted by the High Court under Article 133(1)(c) of the Constitution of India.

Issues raised 

There were two main issues raised before the Hon’ble Supreme Court:

  1. Whether the suit for refund of tax is maintainable against the municipality?
  2. Whether the Tax levied by the Municipality is valid in the eyes of law?

Judgment in Ballabhadas Mathurdas Lakhani vs. Municipal Committee, Malkapur, (1970)

Hon’ble Supreme Court held that the appeal filed by the appellants for the refund of the tax paid to the Municipality is absolutely maintainable. Court held the excess of the tax imposed by the Municipality to be violative of limits provided under Article 276 of the Constitution. Furthermore, the court restored the judgment of the trial court and held the excess of the tax levied under the Notification of 1940 to be invalid and asked the Municipality to abide by the limitation set under Article 276(2) of the Indian Constitution. 

Rationale behind the Judgement 

Issue No. 1

The Supreme Court relied on the judgment of Bharat Kala Bhandar v. Municipal Committee of Dhamangaon (1965), While relying on the judgement of the court with regard to excess of the tax imposed by the municipality, the Supreme Court compared the same with the judgment passed by the Bombay High Court, Nagpur Bench. Bombay High Court took into consideration the Bharat Kala Bhandar case but at the same time exclaimed that the relevant provisions (Section 83, 84 and 85 of the Government of India Act, 1935) applicable to the matter at hand were not brought to the court’s notice at the time and thus reversed the trial court’s judgment with regards to the refund of tax paid to the Municipality.

The Supreme Court clearly pointed out an error on the part of the Bombay High Court in doing so. Further, on the issue, the Hon’ble Court while discussing the judgment of Bharat Kala Bhandar held that any excess amount of tax collected by the Municipality under Section 66(1)(b) of the C.P. and Berar Municipalities Act, 1922 is violative of the limits prescribed by Article 276 of the Indian Constitution and is completely invalid and hence should be refunded to the taxpayers (appellants). 

Further, the Supreme Court pointed out another error on the part of the Hon’ble Bombay High Court in relying on the judgment of Firm Seth Radha Kishan v. Administrator Municipal Committee, Ludhiana (1963)and held it to be irrelevant to the facts of the case at hand. In the Firm Seth Radha Kishan case, the issue revolved around levying tax under an inapplicable entry whereas, the present case is clearly with regards to excess tax being levied which is in contrast to the limits prescribed under the Constitution of India.

Thus, the Hon’ble Supreme concluded that the suit for refund of the excess tax paid is maintainable in the court of law and restored the judgment of the civil judge with regard to this issue.

Issue No. 2 

The issue revolved around the fact as to whether the municipality was legally correct to levy tax at the modified rates provided by the 1940 Notification. To understand whether the Notification of 1940 would be applicable to the facts of the case, Hon’ble Supreme Court, went down the road of legislative history of the tax levied in Berar. That legislative history is condensed into the following pointers:

The Berar Municipal Act, 1886

(Promulgated by the Viceroy and Governor-General)

  • 1905: Municipality was constituted under Section 41(1)(a)(b) of the Berar Municipal Act, 1886.
  • 1912: Municipality levied “Bale and Boja Tax” on cotton Ginning and Pressing Factories {Came into effect from 1st October, 1912} at the following rates:

            > 8 pies per bale of 10 maunds 

            > 10 pies per bale of 14 maunds

Notification By The Governor- General

  • Repealed the Berar Municipality Act.
  • Extended the Application of Central Provinces Municipalities Act, 1922 to the area of Berar.

Government Of India Act, 1935

  • Under Section 47 of the Act, Berar was said to be Administered with the central provinces as one province.

India And Burma (Miscellaneous Amendment) Act, 1940 {came into effect on 1st April 1939}

By this Act:

  • Section 142-A was incorporated under the Government of India Act,1935 which imposed limits on taxes on professions, trades and callings.
  • Section 142-A (2) proviso, provided that the levy of tax by the Municipality over and above the Government limits would remain in force only till the parliament makes a law contrary to it.

Notification Under Section 67(5) Of C.P. And Berar Municipalities Act, 1922

  • The municipality first of all on 2nd October, 1939 resolved to revise the tax rates. 
  • By 2nd January 1940 notification, the new tax rate of 4 annas per bale was effected from 1st October 1939

Berar Laws (Provincial) Act, 1941

  • Central Provinces Municipalities Act, 1922 was renamed as Central Provinces and Berar Municipalities Act.
  • As per Section 3 of the Act, all the previous provisions, orders, and notifications under the Central Provinces Municipalities Act, 1922 were deemed to be effective.

Professions Tax Limitation Act, 1941

  • This Act was enacted by the Parliament to give effect to the limitations provided by  Section 142-A.
  • Section 2 of the Act limits tax on professions, trades, and callings to ₹50 per annum per person.
  • Section 3 provides certain exemptions where Section 2 would not apply and the schedule of the act provides those exemptions.

Repeal Of Professions Tax Limitation Act, 1941

  • The act was repealed by the Adaptation of Laws Order, 1950.
  • After the repeal of the act, limitations on tax were said to be continued under Article 276 of the Indian constitution after the repeal of the Government of India Act, 1935.

Thus, the Hon’ble Court taking into consideration the flow of provisions and notifications, held that at the time of the FY ending 31st March 1939, the only notification in existence was that of one issued in 1912, where the rates were 8 pies per bale of 10 maunds and 10 pies per bale of 14 maunds. The notification of 1940 that modified the rates to 4 annas per bale, was not in effect at the end of the FY 1939, rather it came into effect on 1st October of the same year. 

Thus, the 1940 notification of levying tax at higher rates is hit by the limitation set out in Section 142-A of the Government of India Act, 1935 and it cannot be revived under Article 276(2) of the Indian Constitution.

Moreover, the respondents cannot levy taxes as per the 1940 notification under the garb/protection of  Item No. 4 of the Schedule to the Professions Tax Limitation Act, 1941 or Section 2 or 3 of the Act, as the words used are ‘u/s 66(1)(b) of the Central Provinces Municipalities Act, 1922’ whereas in the case at hand, the provision is Section 66 of Central Provinces and Berar Municipalities Act, 1922, both are different. Thus, the Municipality was held to be competent to impose tax at a rate not exceeding ₹250 per annum.

Thus, the Supreme Court held the Municipality was not legally correct to impose tax at the increased rates and restored the judgment passed by the trial court.

Important provisions  

Article 276 of the Indian Constitution 

First of all, the most important provision here to be discussed is Article 276 of the Indian Constitution. The provision opens with a non-obstante clause, putting Article 246 on the sidelines, giving power to the state-made law to prevail on the subject of taxes. Article 246 divides the subject matters on which the Parliament and the legislatures of the states can make laws. 

There is no abnegating the fact that List I of VIIth Schedule, Entry 83 provides that the Parliament is solely competent to legislate on the subject of taxes on income, but Article 276 of the Indian Constitution has created an exception by giving the state legislatures power to impose tax on certain aspects. Article 276 is made on the lines of List IInd Entry 60 of VIIth Schedule which reads as “taxes on professions, trades, callings and employments”.

Therefore, the states are completely competent to levy taxes but this power is limited as compared to the Parliament because of the presence of the rider provided under Article 276, that the amount of tax cannot exceed ₹2,500.

The competence of the state legislature to levy professional tax has been validated by the Hon’ble Supreme Court time and again in various cases. In Kamta Prasad v. Ex. Officer, Ballabgarh (1973), the Hon’ble SC affirmed the power conferred on the State, local bodies and municipalities to levy taxes under Article 276 of the Indian Constitution. Similar views have been put forth in the cases of Kisan Supdu v. Bhusanal B. Municipality (1965), Sushil Chander v. State of U.P. (1967), by the Kerala High Court in the case of K.G. Prakasan v. State of Kerala (1973).

The amount of ₹2,500 under Article 276(2) was amended by the 60th Amendment Act of 1988 on the Recommendation of the Sarkaria Committee. Before the amendment, the limit set was ₹250.

Article 276 is a modified form of Article 142A of the Government of India Act, 1935 and the purpose of making it a part of the act has been discussed by the Hon’ble Supreme Court in the case of Jadao Bahuji v. Municipal Committee, Khandwa (1961). Three main purposes were pointed out:

  • Clear any doubt considering professional tax as income tax
  • Limiting the power of the provinces to levy tax to ₹50 and
  • Preserving the existing valid laws

Looking at the purpose of enacting Section 142A and thus Article 276, makes it amply clear that this provision is a well balanced provision. It gives the state legislatures power to levy professional tax (which is a type of tax levied on income) but at the same time, an upper limit is provided so that there is a check and the power given is not misused in any way. The same was stressed upon by the Hon’ble Supreme Court in the Bhallabhbas case, that municipalities cannot impose taxes beyond the ordained limits set by the Constitution.

Article 141 of the Indian Constitution 

Article 141 of the Indian Constitution provides that the laws that are laid down by the Supreme Court would act as a Precedent and thus would be binding on all the courts in the territory of India. 

The same provision of this kind was also part of The Government of India Act,1935 as Section 212 which provided that the precedents set by the Privy Council and Federal Courts would be binding on the Indian Courts. 

Precedents can be said to be of 4 types, Authoritative (mandatory to be followed by the courts), Persuasive (convincing in nature but courts have complete discretion in making the final decision), Conditional (Binding in nature but can be exempted in certain circumstances or conditions prevalent) and Declaratory (Declaring/ applying the law which already exists).

Law of Precedents is basically a judge-made law. If we go by basic logic, the reasoning given by the courts only eases the interpretation and application of the law or we can say it bridges any gap that exists, so that complete justice can be done.

The Supreme Court in the case of B. Shama Rao v. Union Territory of Pondicherry (1967), held that a decision of a court is binding in nature not because of its conclusion but in regards to its ratio and the principle that is laid down therein.

However, at the same time, the decisions of the Supreme Court should be well-reasoned and well-argued for them to be treated as laws and binding on other courts. The same has been dealt with by the Supreme Court in the case of S. Shanmugavel Nadar v. State of Tamil Nadu (2002), wherein court held the rule of sub-silento is an exception to the law of precedents.

The Supreme Court in the Bhallabhadas Mathuradas case as well, stressed upon the gravitas of Article 141 of the Indian Constitution and that the precedents set by the Supreme Court cannot be ignored merely on the basis of the provisions not brought to the attention or notice of the court. Thus, the judgments passed by the Hon’ble Supreme Court act as precedents for the courts where the same question of law arises provided in those judgments that the point of law is well contended, discussed and explained by the court.

Professional Tax

As the name suggests, tax is applicable to all professions but not limited to them. It is also applicable to employees, trades, freelancers and businesses. Professional tax is levied on the basis of the income of the person, but there is a limitation imposed by Article 276 of the Indian Constitution in the form of a maximum cap of ₹2,500 that distinguishes it from income tax.

Professional Tax is levied by the State Government and thus differs from state to state. In Karnataka, as per The Karnataka Tax on Professions, Trades, Calling and Employment Act, 1976 persons earning more than ₹ 25,000 per month have to pay ₹200 per month as Professional Tax. In Telangana, individuals have to pay professional tax as per The Telangana Professional Tax Act, 1987 where as per the set slabs, individuals earning below ₹15,000 are exempted from paying tax, persons earning between ₹15,000-₹20,000 has to pay ₹150 and ₹200 if earning above ₹20,000 per month. Whereas in Haryana, professional tax is not levied any more. It was remitted in the State of Haryana by the notification of 2019.

Difference between Income Tax and Professional Tax

Sr. No.BasisIncome Tax Professional Tax 

1.
Collecting Authority 		Income Tax is collected by the central government.Professional Tax is collected by the respective state governments.

2.		 Governing ActIncome Tax is governed by Income Tax Act, 1961.Professional Tax is governed by separate state legislations but finds its roots from Article 276 of the Indian Constitution.

3.
 Payee		Income tax is applicable to all individuals, companies, partnerships, associations, local authorities, and all who have a source of income.Professional Tax is paid by individuals who earn a salary, who are professionals like advocates, doctors, freelancers and those who are involved in employment, callings and trade

4.
 How Paid		Income tax is paid annually at the end of the financial year. If a person is employed, the employer deducts TDS from the salary.Professional Tax is paid monthly. If the individual is employed, the employer deducts the professional tax and submits it to the commercial tax department.

5.		 LimitationThere is no upper limit set under the law. There are different slabs set by the government as per which the income tax has to be paid.There is an upper limit set as to how much tax can be collected by the state government or the local body or municipality. The limit set is ₹2500 per annum as provided under Article 276 of the Indian Constitution.

The Indian constitution has bestowed upon the states the power to impose taxes on professions, trades, callings and employments under Article 276. But, at the same time, limitations have also been imposed to keep this power in check. Thus, reading Article 276 with the intricacies of Professional Tax concludes that levying excess tax than that is allowed is invalid in the eyes of law. As observed in the case of Ballabhadas Mathuradas Lakhani v. Municipal Committee, Malkapur, if any municipality or a local body collects tax and is above the provided limit, the same has to be refunded back.

Relevant case laws

Bharat Kala Bhandar v. Municipal Committee of Dhamangaon (1965)

Hon’ble Supreme Court deciphered the rationale behind the enactment of Section 142-A of the Government of India Act, 1935. The clear demarcations have been provided in the legislative powers of the centre and the provinces under the seventh schedule of the Government of India Act, which are also a part of the preservation constitution in the form of three lists under the Seventh Schedule. The power to collect income-based taxes has been conferred on the centre. But, taking into consideration the laws legislated before 1935, the powers to levy taxes have been bestowed on the local governments. This was in contrast to Section 100 of the Act. To correct the contrast and  to keep the powers in the hands of the municipalities and local bodies also, Article 142-A was enacted by the then government but a limit of ₹50 was also imposed to keep the local bodies in check. Supreme Court while dealing with the issue regarding the increase of tax from one anna to four annas per bhoja and bale. The court accepted that the committee was constitutionally authorised to collect the tax. But the court, while rejecting the argument of the Municipal Committee of collecting the tax in excess as only irregular in nature, held that where the power to recover tax is provided but with an upper limit, if that limit is crossed, it would completely mean ousting the jurisdiction. Furthermore, the court categorically held, “where the validity of a provision of a statute can be upheld upon a possible construction of that provision it would be the duty of the court to construe it so as to avoid rendering the provision unconstitutional and reject a construction which will invalidate the provision”. 

R.R. Engineering Co. v. Zilla Parishad, Bareilly (1980)

With regard to the limit set on the amount of tax to be levied, a word of caution was given by the Hon’ble Supreme Court in the case of R.R. Engineering Co. v. Zilla Parishad, Bareilly (1980). While deciding the validity of the U.P. Kshetra Samitis and Zila Parishads Act (1961), the Hon’ble Court held, “An excessive levy on circumstances will tend to blur the distinction between a tax on income and a tax on circumstances. Income will then cease to be a mere measure or yardstick of the tax and will become the very subject matter of the tax. Restraint in this behalf will be a prudent prescription for the local authorities to follow”.

Director of Settlements, A.P. v. M.R. Apparao (2002)

Hon’ble Supreme Court in the case of Director of Settlements, A.P. v. M.R. Apparao (2002), held that the laws laid down by the Supreme Court are precedents and all the courts have to follow the same, whether or not certain aspects or legal provisions were brought to the notice of the court. Being unaware of certain legal aspects does not absolve the courts from following the laws laid down by the Supreme Court. Hon’ble Supreme Court categorically mentioned that the High Courts and the subordinate courts have a duty to follow and abide by the decisions of the SC. The judgement of a lower court that refuses to follow the clear directions or mandates set in a judgement, would be a nullity. The Supreme Court also relied on the judgement of Narinder Singh v. Surjit Singh (1983) and held the High Courts to be bound by the orders of the Supreme Court.

Conclusion 

Taxes are the source of revenue generation for the government but the limits imposed by the different legislations have to be abided by. The judgment of the Ballabhadas Mathuradas Lakhani case is one of the important decisions that came quite early in time. The judgement settled two legal points. Firstly, the municipalities can levy tax on professions, employment, callings and trades under the various state legislations.  But, at the same time, it has to be levied within limits specified under Article 276(2) of the Indian Constitution. Secondly, if the law is settled on any point and there is a precedent that exists, the courts would be deemed to be bound by that precedent.

Frequently Asked Questions (FAQs)

Who collects Professional Tax in India?

Professional tax is collected by the commercial tax departments of respective states.

Which law governs Professional Tax in India?

Professional tax in India finds its roots in Article 276 of the Indian Constitution. However, with professional tax being a state subject, different states have different legislations governing professional tax.

Do freelancers have to pay Professional Tax?

Yes, freelancers are also considered professionals and thus, depending upon their income and the slab that they fall in, in their respective states, they have to pay professional tax.

Is Professional Tax the same as Income Tax?

No, both are different. Professional Tax is levied by the state governments, whereas income tax is collected by the central government. Moreover, there is a bar set above which the professional tax cannot be collected whereas there is no bar as to how much income tax can be collected.

Who all are exempted from paying Professional Tax?

Some of those who are exempted from paying professional tax are members of the forces, Badli workers, individuals above 65 years of age, individuals with mental or physical disability, individuals who are owners of educational institutions and those who are parents of a disabled child living.

What does Stare Decisis mean? Is the Doctrine of Stare Decisis applicable in India?

Stare Decisis is a Latin term which means to stand by what is held or to stand by the decisions of the court. The doctrine of Stare Decisis is applicable in India. It is reflected in Article 141 of the Indian Constitution which provides that all the courts are bound by the law settled by the Supreme Court and would act as Precedents. The Ratio Decidendi part of the judgment is binding on the courts and not the Obiter Dicta (opinion of the judge). The judgments passed by a larger bench of the Supreme Court are not only binding on the lower courts but also on the lower benches and even in cases where the strength of the judges is equal. The underlining importance of this doctrine is that it brings stability, consistency and equilibrium in the legal arena. With the binding nature of the judgments, interpretation of the statutes and unity of opinion settle the law for the greater good of the public.

References

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