In a ruling with significant implications for municipal taxation of process-integrated industrial installations, the Punjab & Haryana High Court (Chandigarh Bench) has held that an Ammonia Gas Storage Tank equipped with refrigeration and compression systems cannot be subjected to house tax merely because it is permanently erected on land. The Court explained that an Ammonia Gas Storage Tank equipped with refrigeration machinery, compressors and pressure-control systems, requiring continuous operation and round-the-clock supervision, is functionally integrated with the manufacturing process and constitutes an integral part of plant and machinery, not a taxable building.
The Court clarified that mere fact that an industrial installation is permanently erected upon land or involves substantial civil construction is not determinative of its legal character for house tax purposes, and the court must examine the substance, function and purpose of the installation. Further, the Court clarified that Entry 49 of List II of the Seventh Schedule to the Constitution authorises taxation of lands and buildings, and not of plant and machinery merely because such machinery is situated upon or attached to the land or building.
Once the foundational assumption that the installation is a taxable building is displaced, the entire edifice of assessment, including the adoption of capital cost for computing annual rental value, retrospective levy and carry-forward of assessment for subsequent years, falls away without independent adjudication, added the Court.
The Division Bench comprising Justice Deepak Sibal and Justice Rupinderjit Chahal observed that the Ammonia Gas Storage Tank was not a conventional building or storage shed in which manufactured products were merely kept, but a specialised installation designed for storing ammonia under controlled conditions, equipped with refrigeration machinery, compressors and pressure-control arrangements, requiring continuous operation and round-the-clock supervision. The installation was functionally integrated with the Ammonia manufacturing plant and was necessary for the storage and controlled withdrawal of excess ammonia for its subsequent use in the urea plant and other units, and its utility and function were intrinsically connected with the manufacturing process.
The Court noted that the mere fact that the installation was permanently erected upon the land or involved substantial civil construction could not, by itself, be determinative of its legal character for the purposes of levy of house tax, and that the Court was required to examine the substance, function and purpose of the installation. Referring to Section 3(2) of the Punjab Municipal Act, 1911, which defines ‘building’ as ‘any shop, house, hut, outhouse, shed or stable, whether used for the purposes of human habitation or otherwise, and whether of masonry, bricks, wood, mud, thatch, metal or any other material whatsoever, and includes a wall and a well’, the Court drew a material distinction between a building which merely houses machinery and an installation which itself forms part of the manufacturing apparatus.
The Court further observed that Entry 49 of List II of the Seventh Schedule to the Constitution authorises taxation of lands and buildings and not of plant and machinery merely because such machinery is situated upon or attached to the land or building, and relied upon the decisions of the Supreme Court in New Manek Chowk Spinning & Weaving Mills Co. Ltd. v. Municipal Corporation of the City of Ahmedabad [(1967) 2 SCR 679] and Anant Mills Co. Ltd. v. State of Gujarat [(1975) 2 SCC 175] in support of this proposition.
Briefly, National Fertilizers Limited, a government company, set up a fertilizer factory at Naya Nangal in the district of Ropar, Punjab. On April 17, 1984, the Municipal Council, Nangal issued a supplementary assessment order in respect of an Ammonia Gas Storage Tank situated within the factory premises and called upon the Company to furnish the total cost and date of completion of the installation. The Company informed the Municipal Council that the total capital cost of the Ammonia Gas Storage Tank was Rs. 1.51 crores and that the same had been completed on Feb 02, 1982. The Municipal Council thereafter assessed the annual rental value of the Tank under Section 3(c) of the Punjab Municipal Act, 1911 at 5% of the capital cost, i.e., Rs. 7.59 lakhs allowed a 10% rebate towards repairs and maintenance, and computed the net annual rental value at Rs. 6.83 lakhs. Applying house tax at 15% of the rental value, the tax was assessed at Rs. 1.02 lakhs per annum, and the Tank was sought to be assessed to house tax for the years 1982-83 to 1984-85.
The Company objected, contending that the Ammonia Gas Storage Tank was not a building but an integral part of the plant and machinery. The Municipal Council remained silent on the objections for about four years and, on June 13, 1988, issued a supplementary assessment for 1988-89. After further exchanges, the Deputy Commissioner, Ropar, exercising the powers of the President, Notified Area Committee, Nangal, passed an order dated July 16, 1990, assessing the annual rental value at Rs. 6.83 lakhs and a demand notice dated July 18, 1990, was served demanding Rs. 9.22 lakhs towards tax for the years 1982-83 to 1990-91. For 1991-92, the annual rental value was determined at Rs. 10,25 lakhs.
The Company deposited the demanded amounts under protest and preferred appeals before the Secretary to Government of Punjab, Local Government Department, which was dismissed. The Company then filed petition, which was allowed by the High Court on Sep 19, 1994, with a direction to the appellate authority to decide the matter afresh. The appellate authority thereafter passed the impugned order dated May 30, 1995, holding that the assessment and levy of house tax for the period from 1982-83 to 1989-90, being retrospective in nature, was not permissible, but the assessment for the period from 1991-92 to 1994-95 was valid, and directed that the amount already deposited by the Company be adjusted towards the tax payable for subsequent years instead of being refunded.
