Municipal Tax on Rental Income - Constitutional Position
by K.L. Rathee*
Cite as : (1996) 5 SCC (Jour) 15
Under the scheme of our Constitution, property tax is leviable by the State Government or a local authority under Entry 49 - "Taxes on lands and buildings" of List II of Schedule VII to the Constitution of India, whereas tax on income is leviable by the Central Government under Entry 82 - "Taxes on income other than agricultural income" of List I of Schedule VII to the Constitution.
The term 'income' came to be interpreted by the Supreme Court in Bhagwan Dass Jain v. Union of India1 thus: (AIR Headnote)
"The word 'income' in Entry 82 should be interpreted in its widest amplitude. Even in its ordinary economic sense, the expression 'income' includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income. The tax levied under the Act is on the income (though computed in an artificial way) from house property in the above sense and not on house property. Entry 49 of List II of the Seventh Schedule to the Constitution is not, therefore, attracted. The levy in question squarely falls under Entry 82 of List I of the Seventh Schedule to the Constitution."
This ruling was approvingly referred to by a Bench of seven learned Judges of the Supreme Court in India Cement v. State of Tamil Nadu2 in the following words: (SCC p. 26, para 23)
"In Bhagwan Dass Jain v. Union of India1 this Court made a distinction between the levy on income from house property which would be an income tax and the levy on house property itself which would be referable to Entry 49 List II."
Apparently, while the tax under Entry 49 of List II is a tax on property, the tax under Entry 82 of List I includes income from property even where such property is in the owner's own occupation. There is indeed one exception to this. This exception is specifically provided for in Article 276 of the Constitution which authorises a State or other local authority in a State to levy a tax on "professions, trades, callings and employments" in the following words:
"276. (1) Notwithstanding anything in Article 246, no law of the legislature of a State relating to taxes for the benefit of the State or of a municipality, district board, local board or other local authority therein in respect of professions, trades, callings or employments, shall be invalid on the ground that it relates to a tax on income.
(2) The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings, and employments shall not exceed Rs 2500 per annum...."
The reason for the incorporation of this provision in the Constitution is to empower the State or local authority to levy a tax on professions, etc., declaring that such a tax will not be invalid on the ground that it is a tax relating to income provided it is kept within the stipulated limit, namely, Rs 2500 per annum. In the light of this clear provision there is no scope for the argument that the Constitution envisaged the State Governments to tax income from rentals. If the intention of Constitution-makers was to permit the State or local authority to impose such tax on full or a portion of income from land and buildings such a provision would have been made in the Constitution. In the absence of such a provision, it is illegal on the part of the municipal authorities to levy property tax on the full or a portion of the rental income from land and buildings.
It will be relevant to mention in this connection that before Section 23 of the Income Tax Act, 1961 was amended with effect from 1-4-1976, the tax on income was levied on the basis of the reasonable letting value and not on the basis of actual rent received or receivable. It is only after the amendment of Section 23 of the Income Tax Act that income tax is levied on the actual rent received or receivable. Taking a cue from this amendment, in 1980 there were attempts to bring in similar amendments to Section 116 of the Delhi Municipal Corporation Act, 1957, and Section 3 of the Punjab Municipal Act, 1911. Fortunately, these efforts were given up presumably because this amendment would have meant violation of Article 270 of the Constitution which ordains that taxes on income (with certain exceptions contained in Article 276 of the Constitution) can be levied and collected only by the Government of India. Even in the case of Union Territories like Delhi, Parliament has no power to entrust the power of levying and collecting tax on income derived from rent to the municipal authorities because of the stipulation "Subject to the provisions of this Constitution" (Article 270 in the present case) contained in Article 245 of the Constitution. Thus, the municipal authorities as the law now stands cannot levy and collect property tax on the incomes of rent.
- (1981) 2 SCC 135 : AIR 1981 SC 907
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- (1990) 1 SCC 12
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