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WHETHER THE EDUCATIONAL INSTITUTIONS IN THE STATE OF
KARNATAKA ARE LIABLE TO PAY PROPERTY TAX ?
1. The educational institutions in the State of Karnataka have been
exempted from the property tax under the Karnataka Municipal
Corporations Act (hereinafter, the Act) by virtue of Section 110 of the
Act which reads as hereunder;
Section 110. General exemptions- (1) The following buildings and
lands shall be exempted from the property tax(i) buildings or vacant lands exclusively used fora) student hostels which are not established or conducted for profit;
b) educational purpose by recognized educational institutions;
c) the offices of Labour Associations registered under the Trade
Union Act, 1926 and belonging to such Association.
2. The
legislative
intendment
granting
exemption
is
quite
understandable. Imparting Education has always been treated as a
religious obligation from the inception of Indian culture. It is
considered as a charity. Even the judicial pronouncements have
recognised and reiterated this facet. Much before the judgments of the
Supreme Court in T.M.A. Pai Foundation v. State of Karnataka, (2002)
8 SCC 481 and P.A. Inamdar v. State of Maharashtra, (2005) 6 SCC
537 this Court in Bapuji Educational Association vs State of Karnataka
recognized the fundamental right of the educational institutions to
establish the institutions. The Court observed that “There can be no two
opinions as to the yeoman service rendered by all those who have
devoted their energy, mind and money with an intense desire to provide
higher educational facilities mainly for the benefit of the needy students
belonging to a specified backward region or caste or community and
through it the society for whose benefit persons with higher technical
education would be available.”
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3. The Karnataka High Court in The Town Municipal Council, Mulki vs
Vijay
College,
Mulki
=
Writ
Petition
5381/1979
decided
on 13:12:1985 considered the question as to whether the buildings
which are exclusively used for education could be subjected to building
tax under Section 94 of the Town Municipality Act. Answering the
question in the negative, this Court held that levy of property tax by the
Town Municipal Council on the buildings belonging to the education
institution should be struck down and ordered accordingly.
4. The Constitution bench of the Supreme Court in T.M.A. Pai
Foundation v. State of Karnataka, (2002) 8 SCC 481, recognized the
right to establish & run the educational institutions as a fundamental
right under the Constitution of India. The Supreme Court held that the
establishment and running of an educational institution where a large
number of persons are employed as teachers or administrative staff, and
an activity is carried on that results in the imparting of knowledge to
the students, must necessarily be regarded as an occupation.
Education, per se, fall under Article 19(1)(g) "Occupation". Occupation
is an activity of a person undertaken as a means of livelihood or a
mission in life. The right to establish and maintain educational
institutions is also sourced to Article 26(a), which grants, in positive
terms, the right to every religious denomination or any section thereof
to establish and maintain institutions for religious and charitable
purposes. Education is a recognized head of charity.
5. Therefore, religious denominations or sections thereof, which do not
fall within the special categories carved out in Article 29(1) and 30(1),
have the right to establish and maintain religious and educational
institutions. This would allow members belonging to any religious
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denomination, including the majority religious community, to set up an
educational institution. Given this, the phrase "private educational
institution" would include not only those educational institutions set up
by the secular persons or bodies, but also educational institutions set up
by
religious
denominations.
Education used
to
be charity or
philanthropy in good old times and the tradition continues. Even now,
imparting education has come to be a mission in life for some altruists.
This core declaration is followed by the Supreme Court in P.A.
Inamdar v. State of Maharashtra, (2005) 6 SCC 537.
6. However, Section 110(2) provides for imposition of “Service
Charges” by the BBMP on the educational institutions.
This sub-
section says that nnotwithstanding the exemptions granted under this
section it shall be open to the corporation to collect service charges for
providing civic amenities and for general or special services rendered
at such rates as may be prescribed. The Government has framed the
Rules namely the Bruhat Bangalore Mahanagara Palike Property Tax
Rules, 2009 (hereinafter called the Rules). These are published by way
of Notification No. UDD 220 MNU 2006(P), Bangalore, dated 13th
January, 2009. Rule 10 of the Rules read as follows:
10. Levy of service charges for the buildings exempted from property
tax.
Service charges for providing civic amenities in respect of buildings
exempted from property tax under section 110 excluding places of
worship shall be charged at the rate of 25 percent of the property tax
exempted plus cess as applicable to such land or building or both;
Provided that subject to clause (b) of sub-section (1) of section 110,
such exempted properties that are let out for commercial purpose
shall be charged at regular rates of property tax applicable for that
zone and category.
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7. Subsequently, BBMP issued a Notification - I bearing No. COMMR/
BBMP-DC (RES)/ 321-A/08-09, Bangalore, dated 31:1:2009. Under
this Notification at Category XVI, the Service Charges to be paid in
respect of the buildings exempted from property tax under Section 110
of the Act is fixed at 25% of the property tax.
8. However, a question may arise whether the imposition is valid
without quid-pro-quo. The legal position as declared by the Supreme
Court in Municipal Corpn., Amritsar v. Senior Supdt. of Post Offices,
(2004) 3 SCC 92, is that the declared the law in this regard as follows;
8. The question, whether the demand so made was by way of “service
charge” or “tax”, need not detain us any longer. The demand so
made was with regard to the services rendered to the respondents'
Department, like water supply, street-lighting, drainage and
approach roads to the land and buildings. In the counter, the
respondents averred that they are paying for the services rendered by
the appellant Corporation by way of water and sewerage charges and
power charges separately. It is also categorically averred that no
other specific services are being provided to the respondents for
which the tax in the shape of service charges can be levied and
realized from the respondents. There is no provision in the Municipal
Corporation Act for levying service charges. The only provision is by
way of tax. Undisputedly, the appellant Corporation is collecting the
tax from general public for water supply, street-lighting and
approach roads etc. Thus, the “tax” was sought to be imposed in the
garb of “service charges”. The interplay of the constitutional and
legal provisions being well cut and well defined, it was clearly not
within the competence of the Corporation to impose tax on the
property of the Union of India, the same being violative of Article
285(1) of the Constitution.”
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9. Again in a recent decision, the Supreme Court in Dewan Chand
Builders & Contractors v. Union of India,(2012) 1 SCC 101 declared
as hereunder;
“9. … The neat and terse definition of ‘tax’ which has been given by
Latham, C.J., in Matthews v. Chicory Mktg. Board is often cited as
a classic on this subject. ‘A tax’, said Latham, C.J., ‘is a compulsory
exaction of money by public authority for public purposes
enforceable by law, and is not payment for services rendered’. In
bringing out the essential features of a tax this definition also assists
in distinguishing a tax from a fee. It is true that between a tax and a
fee there is no generic difference. Both are compulsory exactions of
money by public authorities; but whereas a tax is imposed for public
purposes and is not, and need not, be supported by any
consideration of service rendered in return, a fee is levied
essentially for services rendered and as such there is an element of
quid pro quo between the person who pays the fee and the public
authority which imposes it. If specific services are rendered to a
specific area or to a specific class of persons or trade or business in
any local area, and as a condition precedent for the said services or
in return for them cess is levied against the said area or the said
class of persons or trade or business the cess is distinguishable from
a tax and is described as a fee. Tax recovered by public authority
invariably goes into the consolidated fund which ultimately is
utilised for all public purposes, whereas a cess levied by way of fee
is not intended to be, and does not become, a part of the
consolidated fund. It is earmarked and set apart for the purpose of
services for which it is levied.”
10.
A fee is levied essentially for services rendered and as such there
is an element of quid pro quo between the person who pays the fee and
the public authority which imposes it. If specific services are rendered
to a specific area or to a specific class of persons or trade or business
in any local area, and as a condition precedent for the said services or
in return for them cess is levied against the said area or the said class
of persons or trade or business the cess is distinguishable from a tax
and is described as a fee. A fee is earmarked and set apart for the
purpose of services for which it is levied. In the instant case, the
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contribution of BBMP towards the educational institutions like the
petitioners is completely nil given the fact that the petitioners have been
paying the required charges to various Government department
concerned. When there is absolutely no quid pro quo for the service
charges sought to be levied, the BBMP may not justify imposition of
service charges.
11.
Fee is a sum of money taken in respect of a benefit arising out of
the temporary use of land. It implies some consideration moving to the
public either in the form of a liberty, privilege or service. In other
words, for the valid imposition of a fee, there must be a corresponding
benefit. Having regard to the compensatory nature of the levy, the fee
must bear a reasonable relationship to the providing of benefit.
12.
Though the terminology used in the impugned Rules is ‘service
charge’, in effect the Rules propose to impose service tax. The nature
of the impugned imposition is tax. As held by the Supreme Court in
Bharat Sanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1, if it is a
service then the Central Government alone can levy service tax under
Entry 92-C of List I of Schedule 7 to the Constitution of India. The
State Legislature has no competence to impose the service tax in the
guise of service charges. Though the charges levied are termed as
service charges but in effect the same is in the nature of imposing tax.
Since the same is imposed without any authority of law, it is opposed to
Article 265 of the Constitution of India which specifically says that no
tax shall be levied or collected except by authority of law.
13.
Constitutional validity of
Rule 10 of the Bruhat Bangalore
Mahanagara Palike Property Tax Rules, 2009 was challenged before
the High Court of Karnataka in several writ petitions.
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14.
The High Court felt that the question of imposing Service Charge
arises only if the buildings of the educational institutions are exempted
from property tax under Section 110(2). Hence the writ petitions are
disposed permitting the educational institutions to apply to BBMP
seeking exemption. If the exemption is granted, the educational
institutions can still challenge imposition of Service Charges.
15.
The BBMP notification mandates that every application for
exemption shall be accompanied by 25% of the property tax amount.
This appears to be one-time payment. On getting the exemption, the
buildings of the educational institutions fall outside the purview of
property tax. However they are liable to pay service charges. On the
grounds above stated, even the imposition of service charge can be
challenged before the High Court.
S. BASAVARAJ,
Daksha Legal
Advocates
Unit No.1, 2nd floor,
No.11, Jeevan Buildings (new block)
Kumara Park East,
Bangalore 560001
Ph: +91 080 41138502
Cel: 9845065416
email: raj@dakshalegal.com