The Vijayawada Muncipal Council vs The Vijayawada Hotel Owners Association

Sambasiva Rao, J.—The Vijayawada Municipal Council, which was the respondent in S.A. Nos. 173 and 174 of 70 has brought these Letters Patent Appeals against the judgment of our learned brother Ramachandra Rao, J. allowing the said second appeals and setting aside the decrees and judgments of the Courts below. The second Appeals arise out of O.S. Nos. 451/66 and 143/68 which were filed by the Vijayawada Hotel Owner''s Association challenging the enhancement of licence fee by the appellant Municipal Council on meals and coffee hotels as illegal, arbitrary and capricious and for a permanent injunction restraining the Municipality and its staff from collecting the enhanced licence fee and for costs. O.S. No. 451/66 on the file of the District Munsiff''s Court, Vijayawada, was in respect of the enhancement in the licence fees made in the year 1965 and O.S. No. 143/66 was in respect of the enhancement effected in the year 1968. The enhancement was made on the basis of dividing hotels and restaurants into eight categories The plaintiff challenged not only the classification but also the enhancement on the ground that it was not commensurate with the services rendered by the Municipality. The defence of the Municipality as stated in the written statement was that the classification was legal and proper, that it was incurring large amount of expenses towards supervision and establishment charges and therefore it was wrong to say that the enhanced licence fee was not commensurate with the services rendered by the Municipality. The only point urged before and considered by the Trial Court was whether the enhancement was arbitrary and opposed to principles of natural justice. It found that the division of hotels and restaurants into eight categories was valid and proper. It further found that the Municipality was spending more towards issue and enforcement of licensing provisions than what it was getting by way of licence fee and consequently there was justification for enhancement of the fee. According to it, the services rendered to the bigger hotels were much more than those rendered to small hotels. In the result, it held that the enhancement was legal and valid and dismissed the suits.

In the appeals preferred by the plaintiff, the appellate Court called for findings on two additional points. They were : (1) What was the amount which was being realised towards licence fee and what was the expenditure incurred by the Municipality in connection with the services to be rendered by the Municipality towards the regulation of the conduct of the business for which licences are to be issued, and (2) Whether there was any deficit and if so, to what extent and what is the enhancement that can reasonably be proposed to meet the deficit The trial Court submitted findings on these two issues against the plaintiff.

The appellate Court, after receipt of these findings, reached the conclusion that the Municipality did not keep any separate account of the income and expenditure relating to the levy of licence fees and that the services rendered by it were wholly disproportionate to the fee levied and therefore there was no justification for enhancement of the licence fee.

In the lower appellate Court, however, the Municipality took up a new stand by filing an additional written statement contending that the impugned levy is not fees levied for any services rendered, but amounted to a tax. That Court, on a consideration of the case law, held that licence fee was not levied for rendering any services and for that reason no question of correlating the levy with the cost of any services would arise. It further held that the license fee was in fact a tax. In this view, it dismissed the appeals and the suits.

The plaintiff preferred the two second appeals against these decisions. Before Ramachandra Rao, J., who heard the second Appeals, it was argued by the learned counsel for the plaintiff appellant that the first appellate Court took a wrong view in thinking that the licence fee was a tax. It was further contended that even supposing it was a tax, the procedure prescribed by the Municipalities Act for levying and increasing the tax has not been followed and therefore the imposition was illegal. Learned counsel for the respondent before the learned single judge challenged the finding of the first appellate Court that no services were rendered by the Municipality and that the amount of the licence fee levied was not commensurate with the cost of the special services rendered by the Municipality to the hotels. It was his further submission that the licence fee is in fact a tax and the prescribed procedure was followed for levying it.

Ramachandra Rao, J, rejected the first contention of the learned counsel for the Municipality holding that it was covered by concurrent findings. It is a question of fact and is not open to challenge in second appeal. On a brief consideration of the evidence, the learned judge also found that the Municipality had failed to establish that it was rendering any special services to the hotels apart from the obligatory services. So, that contention of the Municipality failed before the learned judge.

The next question considered by Ramachandra Rao, J, is whether the levy of the licence fee could be supported as a tax. If the answer to this question is in the affirmative, then the Municipality is under no obligation of rendering any services commensurate with the levy. After referring to Corporation of Calcutta and Another Vs. Liberty Cinema, and Pitchiah Reddiar v. Municipal Council Madurai 1969-I M.L.J. 4 our learned brother concluded that unless it is established that the licence fee is levied for the purpose of rendering any special services, it would not partake the character of fee and that it should be treated only as a tax. The provisions of the A.P. Municipalities Act do not show that the municipality is required to render any special services or that the licensee is entitled to any benefits. In the light of these conclusions the learned Judge held that the levy does not amount to a fee for services to be rendered and it is only a tax. Then the question raised by the learned counsel for the plaintiff appellant in the second Appeals remained viz. that even if it is a tax, it is invalid for the reason that the prescribed procedure for levying and enhancing it has not been followed. Since this aspect of the matter was not considered by the appellate court, our learned brother called for findings on the two following questions () What is the procedure laid down by the Act and the Rules thereunder for imposing the impugned licence fee as a tax, and (2) Whether the Municipality has followed the statutory procedure in levying the said licence fee as a tax. The answers of the lower appellate Court to these two newly formulated questions are : (1) that Secs. 81 to 83of the A.P. Municipalities Act lay down the rules for imposing the impugned licence fee as a tax and (2) that the Municipality has not followed the statutory procedure for levying the said licence fee at a tax.

These findings were impugned before the learned single judge by the learned counsel for the Municipality contending that Sec. 344 of the Municipalities Act lays down the procedure for levying the licence fee and that procedure has been fallowed. So, in his submission, the levy is not vitiated by the failure on the part of the Municipality to follow the prescribed procedure. This contention was rejected by Ramachandra Rao, J, who held that the licence fee, which is a tax, could not be imposed by following the procedure bid down in Sec. 344 of the Act. He also recorded that :

It is not disputed by the learned counsel for the respondent that if the licence fee is to he construed as tax and the statutory procedure laid down by Sections 81 and 83 of the Act applies, the procedure prescribed by the aforesaid sections has not been followed by the Municipality.

Accepting the findings of the first appellate Court, the learned Judge struck down the enhancement of the licence fee as illegal and void. In the result, he allowed the two Second Appeals and decreed the two suits as prayed for. These two Letters Patent Appeals are the consequence of this decision of our learned brother.

Sri N.V.B. Shankara Rao appearing for the Municipality appellant raised two contentions : (1) The levy is a fee which is commensurate with the services rendered to the hotels and restaurants by the Municipality, and (2) In any case the imposition can be sustained as tax and since the procedure prescribed under Sec. 344 for the purpose of levy has been followed, the levy is valid and can be enforced.

The first question need not detain us for long. It is a question of fact and the finding of the Appellate Court was affirmed by our learned brother. We cannot interfere with the findings of fact in a Letters Patent Appeal. This contention should, therefore, be summarily rejected.

The next contention now survives for consideration. To elaborate learned counsel''s submission in this behalf : What is levied on the hotels is a licence fee. It is so referred to in Sec. 344 of the A.P. Municipalities Act. The nature of licence fee and the manner of its levy are prescribed by Sec. 344. The consequence of this is that the validity of the levy of licence fee, even though it is a tax, will have to be judged only in the light of the provisions of Sec. 344 and not in accordance with Secs. 81 to 83 No doubt, the latter three sections deal with taxes and the procedure for levying them. At the same time the Act separately and clearly provides for the imposition of licence fee in Sec 344 So, it is not possible and indeed it is fallacious to test the validity of the imposition of the licence fee in the light of any provisions of the Municipalities Act other than Sec. 344.

Obviously the endeavour of the learned counsel is to meet the objection raised on behalf of the plaintiff respondent, which found acceptance at the hands of our learned brother, that the procedure for imposing licence fee, which is tax, his not been followed. As we have already taken note of, in the view of the learned judge, the procedure for imposing any tax is prescribed under Secs. 81 to 83 of the Municipal ties Act. Now, to test the validity of Sri Shankara Rao''s argument, it will have to be seen whether the Municipalities Act provides for any other category of levy. It postulates only two levies viz., tax and fee. If the levy is for meeting the expenses for rendering services by the Municipality, then it is clearly fee. If no such services are rendered or expected to be rendered or required to be rendered (sic) the Act or under the rules made thereunder then it cannot be fee. If the levy is not fee, it can only belong to the other category viz., tax. In this case, the courts below and cur learned brother have found that the Municipality is not required and indeed has not been rendering any special services for collecting this licence fee. Once that conclusion is reached, the nature of the levy becomes clear. As per the provisions of the Act and its schemes, it can only be a tax, though it is given the nomenclature ''licence fee''. Once it is tax, the procedure specifically laid down by the Act for its imposition should be followed. Otherwise, the levy of tax would be illegal.

There is abundance of support to this view in the two Supreme Court decisions reported in Corporation of Calcutta and Another Vs. Liberty Cinema, and Nagar Mahapalika Varanasi v. Durga Das AIR 1968 S.C. 1119. In the first of the two cases the Supreme Court was considering the validity of the enhancement of licence fee on cinema houses by the Calcutta Municipal Corporation under the Calcutta Municipal Act. It may be not here that Sec. 548 of that Act corresponds to Sec. 344 of the A.P. Municipalities Act which provides for levy of licence fees. Like Sec. 344, Sec. 548 of the Calcutta Act provides for levy of licence fee. So, the Supreme Court was considering whether the enhancement of the licence fee provided under Sec. 548 was valid or not. While considering the validity of the levy, the learned judges had to consider whether it was a fee for services rendered. The learned judges held that in order to make a levy a fee for services rendered, the levy must confer special benefit on the persons on whom it is imposed. Looking at the terms of the provision authorising the levy, the learned judges, who took the majority view, held that it was not for special services rendered to the person on whom the levy was imposed. They further held that consideration of where the relevant provisions are placed in the Act is irrelevant for determining whether the levy imposed is a fee or a tax. Since no special services were expected to be rendered in return for the levy of the licence fee on cinema houses, the majority was of the opinion that it was a tax, despite the fact that it was referred to as licence fee in Sec. 548.

In Nagar Mahapalika Varanasi Vs. Durga Das Bhattacharya and Others, a question very much similar to the one we are dealing with was raised. Ramaswamy, J. speaking for the Supreme Court, observed in paragraphs 7 and 8 as follows :

We shall assume in favour of the appellant that the tax-element is predominant in the imposition of the fee upon the respondents under the impugned bye-laws and the licence fee is therefore in the nature of tax. Even upon that assumption the imposition of the fee under the machinery contemplated by section 294 of the Act is ultra vires the powers of the Municipal Board. The reason is that if the imposition is in the nature or a tax the procedure contemplated by Sections 131 to 135 of the Act should be followed by the Municipal Board and in the absence of such procedure being followed the imposition of this kind of ice would be ultra vires. It is manifest from Section 128 (1) (iii) and (iv) that it is competent to the Municipality to impose a tax on vehicles plying for hire or kept within the Municipality and also on trades, callings and vocations including rickshaw drivers and rickshaw owners. But the imposition of such a tax can only be lawfully made by the Municipal Board after following the procedure prescribed under Sections 131 to 135 of the Act.

It was, however, contended for the appellant that u/s 294 of the Act the Municipal Board has authority to impose a licence fee by enacting a bye-law for that purpose u/s 298 of the Act. It was said that Section 294 of the Act contemplates the charge of a tee not only in the restricted sense of a fee for which quid pro quo is provided but also in the sense of a fee in which the taxation element is predominant. It was hence argued that the procedural machinery for the imposition of tax contemplated under Sections 131 to 135 of the Act need not be followed in such a case. We are unable to accept this argument as correct. According to the scheme of the Act there is a sharp and clear distinction between taxes properly so called and fees. There is a logical and clear cut division of the Act into several Chapters, and taxes, by whatever designation they may be called, are all comprehended and dealt with in Chapter V and by that Chapter alone. And what is permitted to be imposed by Section 294 which occurs in Chapter VIII is only a fee in the restricted sense as distinguished from a tax. To put it differently, the Act contemplates only two categories of imposts i.e. taxes enumerated in Chapter V and fees mentioned in Sections 293. 293A and 294 of Chapter VIII. It is not contemplated in the scheme of the Act that there should be a third category of impost of licence fee which is in the nature of a tax for which the procedure contemplated by Chapter IX is applicable. In our opinion, the Scheme of Chapter VIII of the Act shows that provisions contained therein are meant for the purpose of regulation of certain trades and professions and for maintenance of public satiety and convenience of the inhabitants of the municipality. The fees mentioned in Section 294 are meant to be imposed for the purpose of regulation of trade and professions and for rendering services. It is not contemplated by the Act that Licence fees imposed by Section 294 should be merged in the public revenues of the Municipality and should go for the upkeep of the roads and other matters of general public utility. It is therefore not permissible for the Municipal Board to impose a tax on the respondents under the guise of a licence fee without following the mandatory procedure for imposition of the taxes prescribed by Sections 131 to 135 of the Act, otherwise there will be a circumvention of the provisions of Sections 131 to 135 of the Act. It is manifest that Section 294 of the Act must be interpreted in such a manner as to prevent the circumvention of the safeguards of the provisions of Sections 131 to 135 of the Act.

Thus, the legal position is placed beyond pale of any doubt. The Act contemplates only two categories of imposts i.e., taxes and fees. A third category of impost of licence fee, which is in the nature of a tax, is not contemplated. It is, therefore not permissible for the Municipal Board to impose a tax on hotels and restaurants under the guise of a licence fee without following the mandatory procedure for imposition of the taxes prescribed by Secs. 81 to 83.

From this conclusion it follows that the view taken by our learned brother is perfectly in accordance with the statute and the law on the point. We see no error which would justify any interference with the view taken by our learned brother. In the result, the two Letters Patent Appeals fail and are dismissed with costs in L.P.A. No. 191/72. The parties will bear their own costs in L.P.A. 192/72.