Commissioner, Quilon Municipality,
Quilon, and another Vs. M/S. Harrisons & Crosfield Ltd.  INSC 217 (5
05/10/1964 MUDHOLKAR, J.R.
GAJENDRAGADKAR, P.B. (CJ) WANCHOO, K.N.
CITATION: 1965 AIR 1174 1965 SCR (1) 581
Kerala Profession Tax (Validation and
Re-assessment) Act, 1958 (Act No. XIV of 1958), s. 2.Whether violative of Art.
276 of the Constitution.
Travancore District Municipalities Act 23 of
1116 M.E.Section 325--Power to make and amend rules under the section whether
includes power to give retrospective operation to rules.
The Quilon Municipality levied, in the
pre-Constitution period, a profession tax under powers conferred by the
Travancore District Municipalities Act (Act 23 of 11 16 M.E., corresponding to
1940 A.D.). The tax was leviable on a half-yearly basis on companies and
persons transacting business in the municipal area for not less than a certain
period in a year. The rates were laid down in rule 16 of the Second Schedule to
the aforesaid Act, and were on a graduated scale varying with the income of the
Under Rule 18(2), as it originally stood the
income of an assessee transacting business inside as well as outside the area
of the Municipality was to be deemed to be a prescribed percentage of the
turnover of the business inside the Municipality. A proviso was however added
to Rule 18(2) in 1947 which laid down that in the case of the assessees who
were assessed to income-tax under the Travancore Income-tax Act, the income for
the purpose of levying the profession tax would be computed in the following
manner i.e. the profits earned by the assessee in the whole State as disclosed
by the assessment under the said Act would be divided in the proportion of the
turnover of the business inside and outside the Municipality and the portion
thus found attributable to the business in the Municipal area would be
subjected to profession tax. In 1950, after the promulgation of the
Constitution, s. 3 of the Finance Act (Act 25 of 1950) repealed the Travancore
Income-tax Act and replaced it by the Indian Income-tax Act, 1922. Thereafter
Municipalities in Travancore began to construe the references to the Travancore
Income-tax Act in rule 18 as references to the Income-tax Act, but this
procedure was held to be illegal by the Travancore Cochin High Court by a
judgment delivered in 1955. The appropriate authority, thereupon by
Notification dated 15th February 1956, amended rule 18 to provide, Inter alia,
that, with effect from 1-450 references to the Travancore Income-tax Act in
that rule would be read as references to the Indian Income-tax Act, and income
under the proviso to sub-rule (2) would be computed with reference to the
income in the whole of the Indian Union instead of the income in the whole of
Travancore State. The amended proviso was also struck down by the High Court,
on the ground that it was retrospective in operation. Thereupon the Kerala
Legislature passed the Kerala Profession Tax (Validation and Reassessment) Act,
1958 (Act 14 of 1958) which in s. 2 provided that the levy of the tax under the
aforesaid amendment would remain valid and would not be open to challenge on
the ground that it had retrospective operation. 'Me respondents who were taxed
by the Quilon Municipality under the amended proviso challenged the Validating
Act before the Kerala High Court contending that it was a post-Constitution law
which in imposing a profession 582 tax of more than Rs. 250 per year on certain
classes of assessees contravened the terms of Art. 276(2) of the Constitution.
This contention was upheld by the High Court.
Aggrieved thereby, the Quilon Municipality
appealed to the Supreme Court.
It was contended on behalf of the appellants
that what the impugned Act did was merely to adapt the machinery for the
assessment and levy of the tax to a situation arising out of the repeal of the
Travancore Income-tax Act and its replacement by the Indian Income-tax Act in
1950, and therefore there was no contravention of Art. 276(2). Nor was the
Article contravened by the retrospective given to the provision in question.
HELD: (i) The proviso to rule 18(2)
introduced in 1947 was not a mere machinery provision. Under rule 18(2) as it
originally stood the income of all assessees transacting business both inside
and outside the Municipality was, for the purpose of levying profession tax,
computed on the basis of a percentage of the turn-over inside the municipality.
The proviso created a different procedure in
the case of those who were assessed to income-tax by linking up their income
for the purpose of the profession tax with their profits in the whole State as
assessed under the Travancore Income-tax Act. Thus a new class of assessees
came into being which had not existed before the proviso was enacted.
The method of computing income laid down in
the proviso was also likely to result in a different incidence of tax liability
in the case of those covered by it. Considering all this, the argument that the
proviso did not affect either the basis or the incidence of the tax, could not
be accepted. [588 F].
(ii) The amendment of 1956 linked up the
determination of the profits liable to profession tax with the Indian Incometax
Act instead of the Travancore Income-tax Act. Also, under the amended proviso
to rule 18(2), the profits in the whole of the Indian Union and not merely in
the State of Travancore, would be the basis of computing income for the purpose
of levying profession tax. The provisions of the Indian and Travancore
Income-tax Acts were different and the territory of the Indian Union was much
larger than that of Travancore, and these differences were likely to affect the
tax liability of those covered by the said amendment. [590 E-F].
(iii) The argument that the Kerala
Legislature was competent to give retrospectivity to a validating law and that
since the legislature had validated the amendment to the proviso as from April
1950, the amendment was valid, could not be accepted. The proviso had been
given operation subsequent to the commencement of the Constitution and the
provisions of Art. 276 would therefore stand in the way of the legislature
which validated it. [590 F-H].
Mst. Jaclao Bahuji v. Municipal Committee,
Khandwa,  2 S.C.R. 636, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 415 to 419 of 1964.
Appeals from the judgment and decree dated
April 12, 1961, of the Kerala High Court in O.P. Nos. 88 of 56, 240 of 1956E,
117 of 1957, 50 of 1958 and 156 of 1958.
C. K. Daphtary, Attorney-General and V. A.
Syeid Muhammad, for the appellants (in all the appeals).
G. B. Pai, J. B. Dadachanji, O. C. Mathur and
Ravinder Narain for the respondents (in all appeals).
583 The Judgment of the Court was delivered
by Mudholkar J. The only point which arises for decision before us in this
group of five appeals from a common judgment delivered by the High Court of
Kerala in six writ petitions, five of which were preferred by the respondents
and one by M/s. Brooke Bond (India) Ltd., is whether s. 2 of the Kerala
Profession Tax (Validation and Reassessment) Act, 1958 (Act No. XIV of 1958) is
invalid on the ground that it violates the provisions of' Art. 276 of the
The relevant part of Art. 276 of the
Constitution runs thus:
"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.
Provided that if in the financial year
immediately preceding the commencement of this Constitution there was in force
in the case of any State or any such municipality, board or authority a tax on
professions, trades, callings or employments the rate, or the maximum rate, of
which exceeded two hundred and fifty rupees per annum, such tax may continue to
be levied until provision' to the contrary is made by Parliament by law, and any
law so made by Parliament may be made either generally or in relation to any
specified States, municipalities, boards or authorities." It is common
ground that before the Constitution came into force the Quilon Municipality
had, in exercise of the power conferred by s. 91 of the Travancore District
Municipalities Act, 23 of 1116 M.E. corresponding to the year 1940 (hereafter
referred to as the Act) imposed a profession tax upon every company and every
person who, among other things, transacts business within the limits of the
municipality for not less than a certain period during a year. Sub-section (1)
of s. 91 further provides that a company or person liable to pay the tax shall
pay a half-yearly tax assessed in accordance with -the rules mentioned in Schedule
H. 'Me Schedule contains, amongst other things, rules, and rules 16 and 18 are
the only rules relevant for consideration in these appeals. Rule 16 sets out
slabs of half-yearly income for the purpose of assessment of companies and
persons to the LlSup./65---12 584 tax. In this rule the assesees are divided
into 12 classes.
In the first class come assessees whose
half-yearly income exceeds Rs. 21,000 who have to pay a tax of Rs. 275 per
half-year. Next below it is cl. (2) which provides that those whose half-yearly
income exceeds Rs. 18,000 but does not exceed Rs. 21,000 shall pay a tax of Rs.
225 every halfyear. The liability of assessees whose incomes are below Rs.
18,000 goes on diminishing in each lower slab. Then there is a proviso to
sub-r. (1) which runs thus "Provided that a company whose half-yearly
income is more than twenty-one thousand rupees shall, notwithstanding anything
contained in this or any other rule, pay in addition to the maximum half-yearly
tax of rupees two hundred and seventy-five and additional half-yearly tax on
such excess calculated at the rate of one rupee per one hundred rupees or part
thereof." With respect to assessees falling within the first slab the
proviso thus imposes an additional tax over and above Rs. 275 every half-year.
We are not concerned with the remaining sub-rules of r. 16. Rule 18 contains
three sub-rules but we are concerned ,only with sub-rr. (1) and (2) and they
are as follows :
"(1) Where a company or person transacts
business in any half-year exclusively in the area of a single municipality, the
income of such company or person from the transaction of such business shall,
for the purpose of levying profession-tax under this Act during the half year,
be deemed to be(a) where income-tax is assessed on such company or person under
the Travancore Income tax Act for the year, comprising the half year, one-half
of the amount at which the profits and gains of such business are computed
under Section 8 of the Travancore Income-tax Act for the purpose of assessing
the income-tax; and (b) where the amount of the said profits and gains is not
ascertainable or where such company or person is not assessed to income tax,
such percentage as our Government may prescribe, of the turn-over of the
business transacted in the area of the municipality during the half-year or
where this is also unascertainable during the corresponding half year of the
585 (2) Where a company or person transacts
business partly in the area of a municipality and partly outside such area, the
income of such company or person from the transaction of business in the area
of the municipality shall, for the purpose of levying profession tax under this
Act, be deemed to be the percentage prescribed under clause (b) of sub rule (1)
of the turnover of the business transacted in such area during the half-year or
the corresponding half-year of the previous year, as the case may be." By
a notification of August 28, 1947 the appropriate authority empowered by s. 325
of the Act to frame rules added the following proviso to sub-r. (2) :
"Provided that in the case of a company
or person assessable to income tax, the total profits earned by the company or
person as disclosed by the Income-tax assessment for the whole State for the year
comprising the half year for which the profession tax is to be levied, shall be
divided in the proportion of the turn-over of the business of the company or
person in the Municipality and outside, for purposes of assessment to
profession tax." By the operation of s. 3 of the Indian Finance Act, 25 of
1950 the Travancore Income-tax Act stood repealed and the municipal authorities
construed the reference to the Travancore Income-tax Act in sub-r. (1) of r. 18
as reference to the Indian Income-tax Act. They also construed the reference to
the Travancore Income-tax Act in the proviso to sub-r. (2) in the same way. In
Harrisons and Crossfield Ltd. v. Commissioner of Quilon Municipality(1) the
Travancore-Cochin High Court held that the proviso had only provided for the
adoption of certain figures representing the total profits as disclosed by the
Income-tax assessment for a particular year in which the emphasis was upon the
assessable area, which, after the coming into force of the Indian Income-tax
Act in the State of Travancore became impossible of ascertainment and that,
therefore, the entire proviso was rendered obsolete. Thereafter, the
appropriate authortiy amended sub-rr. (1) and (2) of r. 18 by notification
dated February 15, 1956 as follows :
"(1) In clause (a) of sub-rule (1) of
rule 18(1) I.L.R. 1955 T.C. 1003.
586 .lm15 (a) for the words 'Travancore
Income Tax Act' wherever they occur, the words and figures 'Indian Income Tax
Act, 1922' shall be substituted.
(b) for the word and figure 'Section 8' the
word and figure 'Section 10' shall be substituted.
(2) In the proviso to sub-rule (2) of Rule 18
for the words 'whole State' the words 'whole of the Indian Union' shall be
substituted. These amendments shall be deemed to have come into effect from 1st
April 1950." The validity of the amendments was challenged before the High
Court in Highland Produce Co. Ltd. v. The Commissioner, Alleppey Municipal
Council(1) on the ground that the power conferred by S. 325 of the Act to frame
rules could not be exercised so as to give retrospective operation to any rule.
The High Court accepted the contention add
thereupon Act 14 of 1958, the validity of S. 2 of which is challenged before
us, was enacted by the Kerala Legislature. That provision reads thus
"Validation of the levy or collection of profession tax under the
Travancore District Municipalities Act, 1116 : Notwithstanding any judgment,
decree or order of any court, the amendments to the Taxation and Finance Rules
contained in Schedule It to, the Travancore District Municipalities Act, 1116
(XXIII of, 1116) made by Notification No. LS. 1113975/55/ DD dated 15th
February, 1956 of the Government of the former State of Travancore Cochin,
shall be deemed to have come into force with effect from the first day of
April, 1950 and the validity of the levy or collection of profession tax made
under the said Act and Rules shall not be called in question on the ground that
the amendments made by the notification aforesaid cannot have any retrospective
operation, and any profession tax so levied but not collected may be collected
as if the said amendment had been validly made with effect from the first day
of April, 1950." It will be clear from the language of this provision that
the legislature purported to validate the levy and collection of the tax under
the amended proviso by validating the amendment of the proviso. The High Court
struck down this section and now the (1) O.P. Nos. 196 to 202 of 1955 decided
in October, 1956.
587 Quilon Municipality and its Commissioner
have come up before us in appeal.
The learned Attorney-General who appears for
the appellants contends that what the Act does is merely to adapt the machinery
for the assessment and levy of the tax to a situation arising out of the repeal
of the Travancore Income-Tax Act by s. 3 of the Indian Finance Act, 1950 and
replacing that Act by the Indian Income-tax Act. It, therefore, according to
him, does not infringe the provisions of Art. 276 of the Constitution. He also
contends that the retrospectivity given to the provision does not infringe the
aforesaid constitutional provision.
In support of the contention he has relied
upon the decision in Mst. Jadao Bahuji v. Municipal Committee Khandwa(1).
Before dealing with the effect of the
amendment made to the proviso added in the year 1947 we must first consider
whether the proviso merely purported to create a machinery for implementing the
tax. We will assume that under s. 325 of the Act it was competent to the State
Government of Travancore to enact the proviso which it did in the year 1947. If
we look at r. 18 (2) as it stands it is clear that it did provide the means of
assessing profession tax upon a company or person transacting business partly
in the area of the municipality and partly outside such area. Under sub-r. (2)
what the assessing authority had to do was to ascertain what was the turnover
of the business transacted by the assessee within the municipal area and
calculate the profits which the assessee will be deemed to have earned on the
basis of the percentage prescribed by the Government under cl. (b) of sub-r.
(1). Thus, the basis for taxation was the amount of profits deduced in this
manner. Now, if we look at the proviso as it stood when it was first enacted in
February, 1947 it would be clear that it contemplates the division of the
profits earned by the assessee in the whole State between the turn-over of the
business within the municipal area and the turn-over of the business outside
the area. The total profits would, under the proviso, be the amount disclosed
by the income-tax assessment for the whole State and their division was to be
in the proportion of the turnover of the business within the municipality and
outside it. Obviously, therefore, what the proviso did was to introduce a new
basis for assessment of the taxable income.
We say so because the assessment of profits
in this way links up their computation with the income assessed for levying
income-tax. Under the Travancore Income-tax Act only a certain set of
deductions (1)  2 S.C.R. 636.
588 were permissible. Now, if an assessee has
in fact expended money for certain purposes but such expenses are not allowable
deductions under the Travancore Income-tax Act, it would follow that the
profits calculated by reference to the income-tax assessment may work out
higher than those actually earned by the assessee. We do not know what was the
percentage prescribed by the Government of Travancore under cl. (b) of sub-r.
(1) of r. 18. But it is possible that the assessable profits determined with
reference to that provision may have been less than those determined under the
proviso. In any case it cannot be said with certainty that the profits arrived
at would have been identical in the two cases. From the fact that the State
enacted the proviso it would not be unreasonable to assume that the State
thereby expected that the municipality would earn more income than under a
computation made under sub-r.
(2) of r. 18 read with cl. (b) of sub-r. (1)
of r. 18.
Another thing which the proviso of 1947 did
was to take out of the category of assessees dealt with by sub-r. (2) of r.
18 such companies or persons as were
assessable to income tax. Sub-rule (2) as it stood, treated companies and
persons transacting business partly in the area of the municipality and partly
outside such area on a uniform footing irrespective of the question whether a
company or a person was assessed to income-tax or not. For the first time the
proviso put in a separate class those who were assessed to income-tax. The
proviso thus affected the basis of assessment of tax and did not merely deal
with the procedure for assessing the tax.
In the circumstances we cannot accept the
contention of the learned Attorney-General that the proviso did not affect
either the basis or the incidence of the tax but merely provided a machinery
for implementing the tax.
Therefore, while dealing with the amendment
made in the year 1956 we have to bear in mind that it was made in a provision
concerning the basis of taxation. The question then would be whether the
amended proviso was likely to enhance an assessee's liability. No doubt, the
object was to adapt the earlier proviso to the situation created by the repeal
of the Travancore Income-tax Act. But whatever was its object, we have to
ascertain its effect on an assessee's liability to pay the profession tax.
The proviso as it originally stood had linked
up the determination of the profits liable to tax under the rules with the
Travancore Income-tax Act. The amendment of sub-r. (1) of 589 r. 18 has the
effect of linking it up with the Indian Income-tax Act. By the amendment of the
proviso the words "the whole of Indian Union" are now to be read
therein for the words "the whole State". Mr. Pai for the respondent contended
that in consequence of the amendment the total profits earned by a company or
person as disclosed by the income-tax statement for the whole of India will now
have to be divided in the same proportion as the turnover of the business of
the company or person within the municipality bore to the turn-over outside the
municipality, 'or the purpose of assessment of the tax. The result of this,
according to him, may sometimes be that a much larger amount of profits will
have to be taken into account for assessing the tax than under the unmended
proviso. He says that the amount of assessable profits would depend upon the
permissible deductions under the Indian Income-tax Act and that if they are
fewerthan before the result would be that assessable profits determine( under
the Indian Income-tax Act would be higher than those under the Travancore
Income tax Act. As no detailed comparison of the provisions of the Travancore
Income-tax Act as it force at the date of the amendment with those of the
Indian Income-tax Act was made during the argument, we are not in a position to
say whether in fact the assessable profits under the Indian Income-tax Act
would have been larger than those under the Travancore Act at that time. We
cannot, however, deny the Possibility of the permissible deductions under the
Indian Income-tax Act being fewer than those under the Travancore Act as it
stood at the date of its repeal. Again, since the amendment introduces a
different statute with reference to which assessable profits are to be
ascertained it is possible that the amended proviso may enhance the tax
liability not only of assesees falling within the first slab but also of
assessees falling in the lower slabs.
Mr. Pai has sought to demonstrate by
reference to actual figures that in respect of certain periods the present
assessee's liability to pay the tax as ascertained under the amended proviso
would be higher than what it would have been under the amended proviso. These
figures are to be found in three statements filed in the High Court by the respondents
and marked as Ex 4, 13 and 23. The statements are identical and we would on
refer to the first of them.
In column 1 of Ex. 4 is mentioned the year of
assessment; in the second column the turnover within the Quilon Municipality is
set out; in the third column the turn-over relating to profits 590 assessable
to Travancore income-tax Act is set out; in the fourth column the turnover in
India is set out; in the fifth column income assessable under the Travancore
Income-tax Act, had it been in force, is set out; in the sixth column income
assessed under the Indian Income-tax Act is set out.
From these figures income computed as per
proviso to r.
18(2) before its amendment has been set out.
If 'X' is the figure in col. 5, 'Y' is the figure in col. 3 and 'Z' the figure
in col. 2, the amount of Income before the amendment of the proviso would then
be x/y x Z. We might call it 'The(1) [i.e. .'taxable income (1)']. In tie last
column of the statement the taxable income computed as per the proviso after its
amendment is set out. This is arrived at by ,dividing the income assessed under
the Indian Income-tax.
Act which we will call 'A' by the turn-over
in India which we will call 'B' and multiplying it by the turnover within the
Quilon Municipality i.e. 'Z'. The taxable income thus arrived at i.e. A x Z
might be called 'TI (2)'. It would appear by the comparison of the figures in
col. 7 with those in col. 8 that in respect of the periods ending on June 30,
1949; June 30, 1950; June 30, 1951; June 30, 1954 and June 30, 1955 TI(2) is
lower than TI(1). But in respect of periods ending on June 30, 1152; June 30,
1953 and June 30, 1956 TI(2) is higher than TI (1). Since the AttorneyGeneral
does not accept the correctness of the figures in columns 2 to 5 we will regard
them as merely hypothetical.
But even on the basis of these hypothetical
figure it is apparent that by applying the amended proviso the quantum of
liability to pay tax on the same turn-over with respect to the same period
would, in certain cases, be higher than what it would have been by applying the
unmended proviso. The burden of tax is thus liable to be increased in certain
We have already pointed out that the
amendment of 1956 was to operate as from April, 1950, that is, from a point of
time coinciding with the repeal of the Travancore Income-tax ct. But then the
proviso is given operation subsequent to the commencement of the Constitution,
and the provisions of Art. 276 would stand in the way of the legislature which
The learned Attorney General relying upon the
decision of this Court in Mst. Jadao Bahuji's case(1) contended that he Kerala
legislature was competent to give retrospectivity to a validating law and that
since the legislature has -validated he amendment to the proviso as from April,1950,
the amendment is valid and took effect from that date. The decision upon (1)
 2 S.C.R. 636.
591 which he has relied is distinguishable.
That was a case in which the Validating Act had validated the imposition of a
tax in excess of Rs. 50 not for a period subsequent to March 31, 1939 but for a
period prior to that date. The contention of the assessee was that as the
Validating Act was passed subsequent to the coming into force of s. 142-A of
the Government of India Act, 1935 it was beyond the competence of the
provincial legislature. This contention was rejected by this Court. The case
before us. however, is different because the Validating Act purported to
validate a profession tax to an extent above Rs. 250 subsequent to the
commencement of the Constitution. The following observations of this Court in
that case in fact militate against the contention of the learned
"There can be no doubt that if a law was
passed after the amendment and sought to impose taxes on professions etc., for
any period after March 31, 1939, it had to conform to the limit prescribed by
s. 142-A(2). The prohibition in the second subsection operated to circumscribe
the legislative power by putting a date-line after which a tax in excess of Rs.
50 per annum per person for a period after the date-line could not be collected
unless it came within the proviso." (p. 642).
For all these reasons the amendment must,
therefore, be regarded as violating the provisions of Art. 276 and we hold that
the Kerala Legislature was incompetent to enact s. 2 of the Validating Act. We
accordingly dismiss the appeals with costs. There will be one set of hearing