Drawing a line between General Tax Exemption & Exemption for a beneficial purpose

The Hon’ble Supreme Court of India (Bench: Rohinton Fali Nariman & B.R. Gavai) in the matter of Government of Kerala vs Mother Superior Adoration Convent (Citation – 2021 (376) E.L.T. 242 (S.C.) has tried to draw a line between a General Tax Exemption and Exemption for a beneficial purpose. However, what exactly falls within the scope of ‘beneficial exemption’ has not been elaborated by the Apex Court. 

I. Relevant Facts:

1. Building tax was levied on:

a. residential accommodation for nuns who underwent religious training to become nuns of a convent (respondent), located at Thodupuzha town in Idukki district.

b. Hostel accommodations attached to various educational institutions in Kerala.

2. The Kerala High Court in the matter of State of Kerala vs Unity Hospital (P) Ltd, had decided to exempt the buildings in question.

3. Several appeals were then preferred by the State of Kerala (appellant) before the Hon’ble Supreme Court, against the aforesaid judgement passed by the Kerala High Court.

II. Relevant provision:

The relevant provisions of the Kerala Building Tax Act 1975 (the act) are reproduced hereunder for your perusal:

“2. Definitions. – In this Act, unless the context otherwise requires,

(e) ”building” means a house, out-house, garage, or any other structure, or part thereof, whether of masonry, bricks, wood, metal or other material, but does not include any portable shelter or any shed constructed principally of mud, bamboos, leaves, grass or thatch or a latrine which is not attached to the main structure.

(i) ”owner” includes a person who for the time being is receiving, or is entitled to receive, the rent of any building, whether on his own account or on account of himself and others or as an agent, trustee, guardian or receiver for any other person or who should so received the rent or be entitled to receive it if the building or part thereof were let to a tenant;

(l) ”residential building” means a building or any other structure or part thereof built exclusively for residential purpose including outhouses or garages appurtenant to the building for the more beneficial enjoyment of the main building but does not include hotels, boarding places, lodges, and the like.]

3. Exemptions. – (1) Nothing in this Act shall apply to –

(a) buildings owned by the Government of Kerala or the Government of India or any local authority; and

(b) buildings used principally for religious, charitable, or educational purposes or as factories or workshops.

Explanation. – For the purposes of this sub-section, “charitable purpose” includes relief of the poor and free medical relief.

III. Issue involved:

The core issue involved here is whether residential accommodation for nuns and student hostels attached to educational institutions are entitled for exemption from building tax under section 3(1)(b) of the act.

IV. Contentions of the Appellant

1. The appellant was on the footing that exemption from building tax could be availed only if the building was principally used for religious or educational purposes and not for an activity which has no direct connection with the religious/educational activity.

2. Section 2(e) of the act specifically defines ‘building’ and no religious/educational activities were carried on at the buildings which accommodated the nuns and students.

3. Reliance was placed on the matter of Dilip Kumar {2018 (361) E.L.T. 577 (S.C.)}, wherein the Apex court was of the view that strict rule of interpretation needs to be applied, even in case of any ambiguity.

4. Thus, the appellant contended that an exemption provision contained in a fiscal statute must be construed strictly and in case of doubt or ambiguity must be construed in favour of the state.

V. Contentions of the Respondent

1. The respondent brought in the aspect that building should be exempt as a beneficial legislation since it is meant to further religious, charitable, and educational purposes.

2. The exemption should not be construed in a narrow fashion and should be construed in a liberal manner in accordance with the object sought to be achieved.

3. Thus, the respondent fiercely contended that there has to be a wider interpretation in cases where exemption is claimed for the benefit of society at large.

VI. Decision of Supreme Court

1. The Apex court held that beneficial exemptions having their purpose as encouragement or promotion of certain activities should be liberally interpreted.

2. In case of ambiguity in a beneficial exemption provision, it should be interpreted in favour of the assessee.

VII. Observations of the Supreme Court

1. The apex court has elucidated that an exemption is based on user and not ownership i.e., the charitable/educational institution need not necessarily be owner of building to enjoy exemption.

2. The word “principally” in the provision, does not mean that the building needs to be exclusively used for impugned purpose. Dominant object therefore is the test to be applied. What is important to note is that the expression “used principally for” is wider than the expression “as”

3. As opposed to the case of Dilip Kumar which followed the strict rule of interpretation even in case of confusion, this Hon’ble constitution bench has made a clear distinction between general exemption and exemption having a beneficial purpose.

4. Thus, the Hon’ble Supreme court has observed that strict rule of interpretation may not be required for construction of beneficial exemption.

MY VIEW:

1. In my humble view, this judgement has tried to draw a line between tax exemption in general and exemption with a beneficial purpose. If the revenue distinguishes between a general exemption and beneficial exemption, it will reduce the ambiguity in deciding a case and also provide comfort to the litigants struggling with claims having a beneficial purpose.

2. Although what exactly falls within the scope of ‘beneficial exemption’ has not been elaborated, the Hon’ble Supreme Court has provided that an exemption provision should be liberally construed if it aims to promote economic growth or has some valuable reason behind it.