Analysis of Supreme Court Decision in Mother Superior Adoration Convent relating to interpretation of Exemption provisions
Supreme Court Decision in Dilip Kumar and Company had at one point of time appeared to have closed all alternate doors of interpreting exemption provisions by clearly stating that any benefit of doubt in interpreting the exemption provisions shall go to the revenue. However recent Supreme Court judgment in the case of Government of Kerala & Anr. Vs Mother Superior Adoration Convent has again set the ball into motion. This article tries to analyse the Supreme Court judgment as under:
Facts of the case
1. Kerala building Tax Act 1975 exempts building tax u/s 3(1)(b) on “buildings used principally for religious, charitable or educational purposes or as factories or workshops”.
2. The impugned issues relate to exemption from building tax on
a) Residential building for nuns
b) Hostel Accommodations attached to educational institutions
3. Asssessment of building tax was made on assessee on 14-03-2002. Representations were made to government on 10-02-2004, which was turned down on 11-09-2006. Writ petition before single judge was referred to division bench because he doubted earlier decision on the same subject by another single member bench. Decision of division bench got doubted by another division bench and hence matter referred to full bench of Kerala High Court. Supreme Court concurred with full bench and division bench decisions.
Observations of Supreme Court
4. Exemption is based on user and not ownership.(Hence charitable/educational institution need not necessarily be owner of building to enjoy exemption)[Para 11]
5. “Principally” refers that building need not 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” [Para 11]
For example there is exemption in Notification 12/2017 for Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex. “single residential unit” means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family. So, if the residential units is exclusively for residential purposes, still it may qualify for exemption
Whether principally is same as primarily ?
Services by a person by way of renting of precincts of a religious place meant for general public by 12AA trust/10(23C)(v) institution/ 10(23BBA) body or authority is exempt. Religious place” means a place which is primarily meant for conduct of prayers or worship pertaining to a religion, meditation, or spirituality. Here “Primarily” should be construed same as “principally”.
6. Difference between a purpose that is directly related and one which is not directly related with religious or educational activity can be under stood with the help of an example. If nuns are not residing in a building next to a convent so that they may walk over to the convent for religious instruction. Take a case where the neighbouring building to the convent is let out on rent to any member of the public, and the rent is then utilised only for core religious activity. Can it be said that the letting out at market rent would be connected with religious activity because the rental that is received is ploughed back only into religious activity? Letting out a building for a commercial purpose would lose any rational connection with religious activity. The indirect connection with religious activity being the profits which are ploughed back into religious activity would obviously not suffice to exempt such a building. But if on the other hand, nuns are living in a neighbouring building to a convent only so that they may receive religious instruction there, or if students are living in a hostel close to the school or college in which they are imparted instruction, it is obvious that the purpose of such residence is not to earn profit but residence that is integrally connected with religious or educational activity. [Para 12]
7. Quoting Union of India v. Wood Papers Ltd.  4 SCC 256 held that Truly speaking liberal and strict construction of an exemption provision are to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction. This statement of law followed in Star Industries v. Commr. of Customs (Imports)  2 SCC 362[Para 14,15]
8. Quoting CST v. Industrial Coal Enterprises  2 SCC 607 held that in Straw Board Mfg. Co. Ltd. 1989 Supp (2) SCC 523 it was stated that in taxing statutes, provision for concessional rate of tax should be liberally construed and Bajaj Tempo Ltd. v. CIT (1992) 3 SCC 78 it was to stated that provision granting incentive for promoting economic growth and development in taxing statutes should be liberally construed and restriction placed on it by way of exception should be construed in a reasonable and purposive manner so as to advance the objective of the provision. Exemption granted to the respondent from 9-8-1985 when it fulfilled all the prescribed conditions will not cease to operate just because the capital investment exceeded the limit of Rs. 3 lakhs on account of the respondent becoming the owner of land and building to which the unit was shifted. . After all, the respondent had only shifted the unit to its own premises which made it much more convenient and easier for the respondent to carry on the production of the goods undisturbed by the vagaries of the lessor and without any necessity to spend a part of its income on rent. It is not the case of the appellant that there were any mala fides on the part of the respondent in obtaining exemption in the first instance as a unit with a capital investment below Rs. 3 lakhs and increasing the capital investment subsequently to an amount exceeding Rs. 3 lakhs with a view to defeat the provisions of any of the relevant statutes. [Para 16]
9. Quoting State of Jharkhand v. Tata Cummins Ltd.  4 SCC 57 held that when an assessee is promised with a tax exemption for setting up an industry in the backward area as a term of the industrial policy, we have to read the implementing notifications in the context of the industrial policy. In such a case, the exemption notifications have to be read liberally keeping in mind the objects envisaged by the industrial policy and not in a strict sense as in the case of exemptions from tax liability under the taxing statute. [Para 17]
10. Quoting Pondicherry State Coop. Consumer Federation Ltd. v. Union Territory of Pondicherry  1 SCC 206 held that where the question was as to whether the small-scale industry which was engaged in bottling of anhydrous ammonia could be said to be entitled to the exemption from payment of sales tax on the ground that it was manufacturing such goods since there was a general exemption offered by the Andhra Pradesh Government by GOMs No. 117 dated 17-3-1993 to the small-scale industry, the term “manufacturing” not to be construed as per Central Excise Act. The Court, therefore, took the view that a liberal interpretation of the term “manufacture” should have been adopted by the State authorities, more particularly, when the State authorities had granted the certificate of eligibility after due consideration of the facts.[Para 18]
11. Quoting Amara Raja Batteries Ltd. 8 SCC 209 held that The exemption notification must be construed having regard to the purpose and object it seeks to achieve. The Government sought for increase in industrial development in the State. Such a benevolent act on the part of the State, unless there exists any statutory interdict, should be given full effect.[Para 19]
12. Quoting Commr. of Customs (Preventive) v. M. Ambalal & Co.  2 SCC 74 made a clear distinction between exemptions which are to be strictly interpreted as opposed to beneficial exemptions having as their purpose – encouragement or promotion of certain activities. The rule regarding exemptions is that exemptions should generally be strictly interpreted but beneficial exemptions having their purpose as encouragement or promotion of certain activities should be liberally interpreted. This principle followed in avourite Industries  7 SCC 153 (see paragraph 42)[Para 20, 21]
13. In the 5 Judge Bench Judgment in Dilip Kumar & Co.  9 SCC 1, It was held in Dilip Kumar that Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue.[Para 22]
However held by SC in the present case that judgment did not refer to the line of authority which made a distinction between exemption provisions generally and exemption provisions which have a beneficial purpose. Court held that We cannot agree that sub-silentio the line of judgments qua beneficial exemptions has been done away with by this 5-Judge Bench. It is well settled that a decision is only an authority for what it decides and not what may logically follow from it (see Quinn v. Leathem  AC 495 as followed in State of Orissa v. Sudhansu Sekhar Misra  2 SCR 154 at 162,163)[Para 23]
We must first ask ourselves what is the object sought to be achieved by the provision, and construe the statute in accord with such object. And on the assumption that any ambiguity arises in such construction, such ambiguity must be in favour of that which is exempted.[Para 24]
14. Where a High Court construes a local statute, ordinarily deference must be given to the High Court judgments in interpreting such a statute, particularly when they have stood the test of time. (see State of Gujarat v. Zinabhai Ranchhodji Darji  1 SCC 233 at paragraph 10, Bishamber Dass Kohli v. Satya Bhalla  1 SCC 566 at paragraph 11, Duroflex Coir Industries Ltd. v. CST 1993 Supp (1) SCC 568 at paragraph 2, State of Karnataka v. G. Seenappa 1993 Supp (1) SCC 648 at paragraph 3 and Bonam Satyavathi v. Addala Raghavulu 1994 Supp (2) SCC 556 at paragraph 4). This is all the more applicable in the case of tax statutes where persons arrange their affairs on the basis of the legal position as it exists. [Para 25]
Conclusion: This judgment has tried to draw a line between tax exemption in general and exemption provisions with beneficial purpose. Hence the issue is far from being settled as yet. Further many other observations of the court like defining the word “principally” and deference of High Courts for local statutes making this judgment an interesting read.