Appeals Nos 415 to 419 of 1964
Appeals from the judgment and decree dated April 12 1961 of the Kerala High Court in OP 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 Ms Brooke Bond India Ltd is whether section 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  article 276 of the Constitution
The relevant part of article 276 of the Constitution runs thus 2761 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 section 91 of the Travancore District Municipalities Act 23 of 1116 ME 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 section 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 LlSup65 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 21000 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 18000 but does not exceed Rs 21000 shall pay a tax of Rs 225 every half year
The liability of assessees whose incomes are below Rs 18000 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 busi ness 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 previous year
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 section 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 section 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 Crosfield Ltd vs Commissioner of Quilon Municipality1 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 TC 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 vs The Commissioner Alleppey Municipal Council1 on the ground that the power conferred by section 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 section 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
11 1397555 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 collec tion 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 OP 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 section 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 article 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 vs Municipal Committee Khandwa1
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 section 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
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 1 588 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 iden tical 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 deter mination 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 exhibit 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 182 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 xy x Z
We might call it The1 ie 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 ie Z 
The taxable income thus arrived at ie 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 TI2 is lower than TI1
But in respect of periods ending on June 30 1152 June 30 1953 and June 30 1956 TI2 is higher than TI 1
Since the Attorney General 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 circumstances
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 article 276 would stand in the way of the legislature which validated it
The learned Attorney General relying upon the decision of this Court in Mst
Jadao Bahuji s case1 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 1 591 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 section 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 obser vations of this Court in that case in fact militate against the contention of the learned Attorney General  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 section 142 A2
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 article 276 and we hold that the Kerala Legislature was incompetent to enact section 2 of the Validating Act
We accordingly dismiss the appeals with costs
There will be one set of hearing fees
Appeals dismissed


Summary:
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 ME corresponding to 1940 AD
The tax was leviable on a half yearly basis on companies and persons transacting busi ness 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 assessee
Under Rule 182 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 182 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 ie 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 section 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 re ferences 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 4 50 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 section 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 article 2762 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 article 2762
Nor was the Article contravened by the retrospective given to the provision in question
HELD i The proviso to rule 182 introduced in 1947 was not a mere machinery provision
Under rule 182 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 Income tax Act instead of the Travancore Income tax Act
Also under the amended proviso to rule 182 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 article 276 would therefore stand in the way of the legislature which validated it
590 F H
Jaclao Bahuji vs Municipal Committee Khandwa  distinguished