Safiya Malik

The High Court of Karnataka Single Bench of Justice Sachin Shankar Magadum held that Gram Panchayats have no authority to impose property tax on industrial properties located within areas notified under the Karnataka Industrial Areas Development Act, 1966 (KIAD Act), unless there exists an express notification issued by the State Government under Section 37 of the Act withdrawing such areas from the jurisdiction of the Karnataka Industrial Areas Development Board (KIADB). The Court quashed the demand notices issued by the respondent Gram Panchayat on the ground that they were issued without statutory authority and held the levy of such taxes as ultra vires. The Court further observed that in the absence of jurisdiction conferred by a valid notification, the imposition of taxes by Gram Panchayats within KIADB areas amounted to a colourable exercise of power. Consequently, the Court allowed the writ petitions filed by the petitioners and set aside all impugned demand notices issued by the respective Panchayats.

The batch of writ petitions was filed by multiple petitioners, including various industrial establishments situated in the Sompura Industrial Area and other KIADB-designated industrial zones across Karnataka. The petitions were filed under Articles 226 and 227 of the Constitution of India, challenging the legality and validity of property tax demand notices issued by different Gram Panchayats, primarily the Sompura Grama Panchayat and Tumkur Mahanagara Palike.

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The petitioners are companies and industrial entities operating in notified industrial areas established and developed by the Karnataka Industrial Areas Development Board (KIADB). These areas were acquired and developed under the provisions of the KIAD Act, 1966. The core grievance of the petitioners was that various Gram Panchayats had issued demand notices seeking payment of property tax on buildings and properties situated within KIADB industrial zones.

The petitioners contended that the impugned tax demands were without jurisdiction as the areas concerned continued to fall under the exclusive administrative and planning jurisdiction of KIADB. They relied heavily on Section 37 of the KIAD Act, 1966, which stipulates that industrial areas can be withdrawn from the jurisdiction of KIADB only through an express notification issued by the State Government. In the present cases, no such notification had been issued by the State Government.

The petitioners further referred to Section 23 and Section 47 of the KIAD Act. Section 23(2) permits the KIADB to contribute funds to local authorities for discharge of functions but does not authorize such authorities to independently levy taxes in KIADB areas. Section 47 provides that the KIAD Act shall override any other law in case of inconsistency.

They also cited Schedule-IV of the Karnataka Gram Swaraj and Panchayat Raj Act, 1993, as amended by Act No. 44 of 2015, which specifies that Gram Panchayats have the power to levy property tax only if jurisdiction is conferred through a notification issued by the State Government.

Respondent KIADB filed a statement of objections affirming the petitioners' stance. It was categorically asserted that the industrial areas where the petitioners operate have not been denotified or withdrawn from KIADB jurisdiction under Section 37 of the Act. Therefore, the KIADB maintained that Gram Panchayats have no authority to issue demand notices or levy property tax in these areas.

On the other hand, the respondent Gram Panchayats filed detailed objections claiming that they were providing basic civic amenities and infrastructure services to the industrial units within their jurisdiction. Based on this, they claimed a lawful right to impose property tax under Schedule-IV of the Panchayat Raj Act, 1993. It was further submitted that the impugned tax demands were legal and sustainable.

The Gram Panchayat also raised a preliminary objection regarding the maintainability of the writ petitions, contending that the petitioners had an efficacious statutory remedy under Section 201 of the Panchayat Raj Act. The Panchayat referred to Rule 37 of the Karnataka Grama Swaraj and Panchayat Raj (Taxes, Rates and Fees of Grama Panchayats) Rules, 2021, under which the Chief Executive Officer of the Zilla Panchayat acts as the appellate authority and the petitioners were required to deposit 50% of the demanded tax to avail the appellate remedy.

In support of their position, the Gram Panchayats relied on decisions rendered in M/s. Sanghvi Foods Pvt. Ltd. vs. The Panchayat Development Officer & Another and M/s. Satrac Engg. Pvt. Ltd. vs. The Secretary/Panchayat Development Officer & Another, which held that Gram Panchayats are authorized to levy property tax under Section 199 read with Schedule-IV of the Karnataka Gram Swaraj Act.

Additionally, the Gram Panchayats cited a lease-cum-sale agreement entered into with KIADB, which they claimed contained a clause permitting local authorities to collect taxes.

To counter this, the petitioners referred to a recent circular issued by the State Government dated 16.07.2024, wherein all Panchayats, Municipalities, and Corporations were directed not to exercise jurisdiction in KIADB industrial areas, particularly in matters of development plans, building permissions, and taxation. The circular clarified that such authority remains solely with the KIADB and Karnataka State Small Industries Development Corporation (KSSIDC).

The Court recorded that "Section 37 of the KIAD Act provides the legal basis for transferring jurisdiction from KIADB to other authorities. It explicitly states that the State Government may, upon being satisfied that the purposes for which the industrial area was constituted have been substantially fulfilled, withdraw such area or part thereof from the jurisdiction of the Board through a formal notification."

The Court stated, "Until such notification is issued, the jurisdiction of KIADB remains intact and exclusive."

While referring to Section 23(2), the Court observed, "This implies that the Gram Panchayat or any other local body has no automatic right to impose or recover taxes from units within industrial areas unless specifically authorized by the KIADB or through statutory mechanism."

Quoting Section 47 of the KIAD Act, the Court noted, "The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law."

In examining Schedule-IV to the Panchayat Raj Act, the Court observed, "The language used in the Schedule is clear: the power to impose tax on properties within KIADB or other notified industrial areas is subject to Government notification."

"The phrase 'subject to notification' is a legislative condition precedent and must be interpreted harmoniously with the provisions of the KIAD Act, particularly Section 37," the Court added.

Referring to the Circular dated 16.07.2024, the Court stated, "The circular unequivocally states that the KIADB alone is the competent authority for sanctioning development plans, layout plans, and building plans within designated industrial areas or estates."

The Court also observed, "In view of the admitted position that no notification has been issued under Section 37 of the KIAD Act withdrawing the subject industrial area from the jurisdiction of KIADB, the jurisdiction of respondent – Gram Panchayat to levy property tax simply does not arise."

The Court further noted, "Statutory power to levy taxes must necessarily flow from an express legislative provision or a valid statutory delegation, and cannot be inferred from a contractual clause or incidental recital in a private arrangement such as a lease-cum-sale agreement."

Quoting Article 265 of the Constitution, the Court recorded, "No tax shall be levied or collected except by authority of law."

The Court concluded this section stating, "Unless the statute explicitly confers the power to levy and collect tax, any such action by a statutory body, including local authorities, is liable to be struck down as being without jurisdiction."

The Court proceeded to allow all the writ petitions filed by the industrial establishments. It held that the impugned demand notices were illegal, arbitrary, and issued without jurisdiction.

The Court stated, "Writ petitions are allowed."

It directed, "The impugned demand notices issued by the respondent - Gram Panchayat are hereby quashed and set aside."

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Further, the Court recorded, "In the findings recorded supra, this Court is of the view that the jurisdiction of a statutory authority to levy tax must be firmly rooted in express statutory sanction, and any imposition of tax without such authority is unconstitutional."

The Court held that since the Gram Panchayat lacked jurisdiction in the absence of a notification under Section 37 of the KIAD Act, the demand notices could not be sustained. The Court observed that it was not appropriate to direct the petitioners to avail the alternate appellate remedy under Section 201 of the Panchayat Raj Act because the fundamental issue involved a lack of jurisdiction.

It concluded, "The statutory challenge in this case involves the vires and jurisdictional competence of the assessing authority itself."

Advocates Representing The Parties:

For the Petitioners: Sri. Mohamed Nasiruddin, Advocate; Smt. Latha S. Shetty, Advocate

For the Respondents: Sri. Bopanna B., Additional Government Advocate for State of Karnataka; Sri. Ramesh Ananthan, Advocate for Gram Panchayat; Sri. P.V. Chandrashekar, Advocate for KIADB; Sri. M.S. Devaraju, Advocate for Gram Panchayat; Sri. Subramanya R., Advocate for Tumkur Mahanagara Palike

Case Title: M/s. Kalpatharu Breweries & Distilleries Pvt. Ltd. & Others vs. The State of Karnataka & Others

Case Number: Writ Petition No. 26031/2017 C/W Connected Petitions

Bench: Justice Sachin Shankar Magadum