M/S S B L PRIVATE LIMITED vs. INCOME TAX OFFICER WARD 72 JAIPUR

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE AMIT RAWAL & THE HONOURABLE MRS. JUSTICE C.S. SUDHA THURSDAY, THE 13TH DAY OF APRIL 2023 / 23RD CHAITHRA, 1945 ARB.A NO. 51 OF 2017 AGAINST THE ORDER PASSED IN O.P(ARB).405/2012 ON THE FILE OF THE DISTRICT JUDGE (P), THALASSERY DATED 30/03/2015 REFUSING TO SET ASIDE AWARD NO.23/2011 DATED 03/09/2012. APPELLANT/PETITIONER/RESPONDENT: (PETITIONER IN OP(ARB) 405/2012 OF DISTRICT JUDGE (P)THALASSERY) KANNUR MUNICIPALITY, REPRESENTED BY ITS SECRETARY,MUNICIPAL OFFICE, KANNUR PO, KANNUR.670001. BY ADVS. SRI.R.PARTHASARATHY SRI.RAJESH V.NAIR RESPONDENT/RESPONDENT/CLAIMANT: RESPONDENT IN OP(ARB) 405/2012 ON THE FILE OF THE DISTRICTJUDGE(P) THALASSERY) M/S K.K BUILDERS, A REGISTERED PARTNERSHIP FIRM, REPRESENTED BY ITS MANAGING PARTNER K.K MOHANDAS, S/O K.K KUNHIRAMAN, AGED 57 YEARS, BUSINESS, HAVING ITSREGISTERED OFFICE AT PEARAVOOR, MANATHANA AMSOM,PEARAVOOR PO, PIN.670673, THALASSERY TALUK, KANNUR DISTRICT. BY ADVS. SRI.CIBI THOMAS SRI.O.RAMACHANDRAN NAMBIAR THIS ARBITRATION APPEALS HAVING COME UP FOR ADMISSION ON 13.04.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

Arbitration Appeal.No.51 of 2017 2 AMIT RAWAL & C.S.SUDHA, JJ. ========================================= Arbitration Appeal.No.51 of 2017 ========================================= Dated this the 13th day of April, 2023 J U D G M E N T Amit Rawal, J. The present appeal is directed against the order dated 30/03/2015 rendered in O.P.(Arb.)No.405/2012 passed by the District Judge whereby the petition under Section 34 of the Arbitration and Conciliation Act preferred against the arbitration award bearing No.23/11 dated 03/09/2012 has been dismissed. 2. The facts in brief are that, a concession agreement was entered into between the appellant-Kannur Municipality, hereinafter called 'the Municipality' and M/s.K.K.Builders, hereinafter called 'the builders', for designing, engineering, procurement, construction, operation and maintenance of a central bus terminal complex on BOT (Build, Operate and Transfer) basis. Concession agreement dated 27/10/2004 containing various terms and conditions and schedules attached thereto was entered into. Builder was permitted to charge license fee and other expenses. The builder, as per the terms and

Arbitration Appeal.No.51 of 2017 3 conditions of the agreement, was required to pay an amount of ₹40 lakhs as project development expenses in three installments and ₹10 lakhs was required to be paid to the Municipality for every year of the operation period before the end of accounting year. It is pertinent to mention that the operation period was 29 years 3 months. Under the terms of the clauses of the agreement, the builder is entitled to receive license fee etc. from commercial users during the afore-mentioned period with a condition that there shall not be any creation of encumbrance over the property, building and on completion of the concession period, would transfer the bus stand complex to the Municipality. The supervision and control of the construction of the bus terminal complex was subject to the approval by the Municipality. Clause 10.1(xv) envisaged the termination date of the concession period whereby the rights and interests of the claimant would vest in the Municipality without any further act or deed. Under the various clauses, particularly schedule (A), clause (2.1.2.1) pertaining to plan, the plan of the central bus terminal complex was required to be prepared by the Municipality as the Municipality was having land to the extent of 6.3525 acres under its full possession for the proposed facility.

Arbitration Appeal.No.51 of 2017 4 3. On 24/11/2008, construction of the afore-mentioned bus terminal was completed and was put to use. 4. Municipality raised the demand of charging the Property Tax as provided under Section 233 of the Kerala Municipality Act, 1994 amended from time to time. It is in that background, the builder invoked an arbitration clause 34.2 contained in the aforementioned concession agreement. A former Judge of the High Court was appointed as an Arbitrator and entered into a reference by inviting claims and counter claims/reply. Builder challenged the action of the Municipality in charging the property tax by relying upon the provisions of Section 2(26) and Section 233 and 235 of the Kerala Municipality Act, 1994 and other provisions of the clauses to contend that they were not liable to pay the Municipality tax as they could not be brought under the term and expression of 'owner'. In other words, their status was not as that of an owner but was of an 'occupier' for a limited period of 29 years and 3 months, with certain limitations and conditions binding upon the parties. 5. The Municipality raised the objection with regard to the jurisdiction of the Arbitrator as provided under sub-section (2) of Section 16 of the Arbitration and Conciliation Act that, none of the

Arbitration Appeal.No.51 of 2017 5 clauses of the agreement provided resolution of the dispute with regard to the charging of the property tax. 6. The learned Arbitrator vide award dated 03/09/2012 accepted the claim and rejected the contention. It is thereafter the objection under section 34 were filed, which has been dismissed. 7. Learned counsel appearing on behalf of the appellant in support of the memorandum of appeal has raised the following submissions: (i) the question of jurisdiction as provided under sub-section (2) of Section 16 of the Arbitration and Conciliation Act in view of the judgment rendered by the Hon'ble Supreme Court in Lion Engineering Consultants(M/s) v. State of Madhyapradesh, 2018 KHC 6219 (SC) and keeping in view of the provisions of Section 4 of the Arbitration and Conciliation Act, can be taken at any point of time including in the objections under Section 34. (ii) The Arbitrator is enjoined upon an obligation to decide the question as per the provisions of sub-section (3) of Section 28 of 1996 Act. (iii) There is no definition of 'owner' provided in the Act. (iv) The dispute could have been referred to the Arbitrator pertaining

Arbitration Appeal.No.51 of 2017 6 to the terms and conditions and the schedules of the concession agreement, whereas the imposition, liability of the builder or otherwise was not envisaged or part of the concession agreement. (v) Even the objecting court has also not taken consideration of the aspect of the jurisdiction and therefore there is a patent illegality in view of the judgment rendered by the Hon'ble Supreme Court in State of Chhattisgarh v. M/S Sal Udyog Private Ltd., 2021(6) KLT 1135 (SC). Thus, award is liable to be set aside. 8. Per contra, the learned counsel appearing on behalf of the builder submitted that the award of the Arbitrator is based upon not only the interpretation but examination of the definitions, terms and conditions and clauses of schedules annexed thereto. Municipality did not take any objection at the time of filing of the defence after entering into appearance or at the time of filing defence as envisaged under sub-section (2) of Section 16 of the Act. It amounted to waiver under Section 4 of the Act. The award can be set aside only as per the conditions envisaged in sub-section (2) of Section 34 and none of such conditions has been made out warranting interference under Section 37 of the Act. The award does not suffer from any patent illegality much less the order of the objecting court is also based upon the

Arbitration Appeal.No.51 of 2017 7 examination of the terms and conditions of the agreement and urged this Court for dismissal of the appeal. 9. We have heard learned counsel for the parties and appraised the paper book. 10. There is no quarrel to the fact that the scope of setting aside the award is limited to the provisions extracted hereinunder. The said provisions have been the point of consideration and ponderence for different High Courts as well as the Hon'ble Supreme Court. On examination of each case on the touchstone of the evidence and the material on record, various pronouncements have come and it has been held that if the Arbitrator fails to take into consideration the terms of the conditions of the contract and the objections taken by the respective parties, it would suffer from material irregularity as per the provisions of Section 34 and in view of the provisions of sub-section (3) of Section 28 of the Act. There is also no quarrel to the fact that in view of the ratio decidendi culled out in Lion Engineering the objections qua jurisdiction can be even taken in an objection under Section 34. We have been taken to the objections under Section 34 where such ground has noted. Thus the objection of the builder with regard to the waiver as per Section 4 and sub-section (2) is not countenanced and hereby

Arbitration Appeal.No.51 of 2017 8 rejected. Now the question which arises is whether the Municipality is justified in assailing the award and as well as the order of the objecting court to be suffering from patent illegality as the core question of charging of the property tax was not included in the terms and conditions. For dealing with such arguments, it would be expedient to notice certain clauses of the agreement and as well as the definition of the 'owner' much less the provisions of the property tax and the exemption Clause provided under the Kerala Municipality Act, 1994. Clause 34 envisages resolution of the dispute and the same reads as under : “34. DISPUTE RESOLUTION 34.1 Amicable Resolution (a) Save where expressly stated to the contrary in this Agreement, any dispute, difference or controversy of whatever nature howsoever arising under, out of or in relation to this Agreement including non completion of the Central Bus Terminal Complex between the Parties and so notified in writing by either Party to the other Party (the "Dispute") in the first instance shall be attempted to be resolved amicably in accordance with the conciliation procedure set forth in Sub-clause (b) below. (b) In the event of any Dispute between the Parties, either Party may call upon the Consultant to mediate and assist the Parties in arriving at an amicable settlement thereof. Failing mediation by the Consultant or without the intervention of the Consultant, either Party may require such Dispute to be referred to the Secretary of Kannur Municipality and the Concessionaire, for the time given for amicable settlements. Upon such reference, the said Secretary of Kannur Municipality and the concessionaire shall meet not later that 7 (seven) days of the date of such request to discuss and attempt to amicably resolve the Dispute. If such meeting does not take place within the said period or the Dispute is not amicably settled within 15 (fifteen) days of such meeting between the said Secretary and the Concessionaire, either

Arbitration Appeal.No.51 of 2017 9 Party may refer the dispute to arbitration in accordance with the provisions of Clause 34.2. (c) If the Dispute is not resolved as evidenced by the signing of the written terms of settlement within 30 (thirty) working days of the aforesaid notice in writing or such longer period as may be mutually agreed by the Parties then the provisions of Clause 34.2 shall apply. 34.2 Arbitration 34.2.1 Any Dispute which is not resolved amicably as provided in Clause 34.1 shall be finally decided by reference to arbitration by a Board of Arbitrators appointed pursuant to Clause 34.2.2 sub-clause (b) below. Such arbitration shall be held in accordance with the Rules of Arbitration of the Indian Council of Arbitration and shall be subject to the provisions of the Arbitration Act. 34.2.2 There shall be a Board of three arbitrators of whom each party shall select one and the third arbitrator shall be appointed in accordance with the Rules of Arbitration of the Indian Council of Arbitration. 34.2.3 The arbitrators shall issue a reasoned Award. 34.2.4 The venue of such arbitration shall be Kannur, Kerala State. 34.3 Arbitration Award to be Binding 34.3.1 The Concessionaire and Kannur Municipality undertake to carry out any decision or award of the arbitrators (the "Award") without delay. Awards relating to any Dispute shall be final and binding on the Parties as from the date they are made. 34.3.2 The Concessionaire and Kannur Municipality agree that an Award may be enforced against the Concessionaire and/or Kannur Municipality, as the case may be and their respective assets wherever situated. 34.3.3 This Agreement and rights and obligations of the Parties shall remain in full force and effect pending the Award in any arbitration proceeding hereunder.” 11. On perusal of the same it is evident that save where expressly stated to the contrary in this agreement, any dispute, difference or controversy of whatever nature howsoever arising under, out of or in relation to this agreement including non completion of the Central Bus Terminal Complex between the parties and so notified in

Arbitration Appeal.No.51 of 2017 10 writing by either party to the other party (the "Dispute") in the first instance shall be interpreted in the manner prescribed therein, i.e., first the dispute is required to be referred to a consultant and thereafter on account of failure, the matter is required to be referred to arbitration. The expression 'taxes' provided under the heading, definition and interpretation requires elucidation, the same reads as under : “Taxes means any income tax on corporate income, Sales tax, excise duties, customs duties and local taxes and any impost of like nature (whether Central, State or local) charged, levied or imposed on the goods, materials, equipment and services incorporated in and forming part of the Central Bus Terminal Complex, on the construction, operation and maintenance thereof and on the Project Assets, but excluding any interest, penalties, and other sums in relation thereto imposed on any account whatsoever.” On perusal of the same it is evident that taxes would not only mean any income tax on corporate income, sales tax, excise duties, customs duties and local taxes and any impost of like nature, whether Central, State or local, charged, levied or imposed on the goods, materials, equipment and services incorporated in and forming part of the Central Bus Terminal Complex, on the construction, operation and maintenance thereof and on the project assets, excluding interest and penalties. Clause 2.1.2.1 of Schedule A, which describes that the Municipality to be the owner in possession of the property measuring 6.3525 acres of land, the same reads as under :

Arbitration Appeal.No.51 of 2017 11 “2.1.2.1. Plan The plan of the Central Bus Terminal Complex shall be prepared by Kannur Municipality. The concessionaire shall be free to change the interior design to enhance the project viability with the approval of Kannur Municipality. The proposed site for the Central Bus Terminal Complex is located at Thavakkara, Kannur. The Municipality is having land to the extend of 6.3525 Acres under its full possession for the proposed facility.” 12. Sections 233 and 235 of the Municipality Act deals with the charging of the property tax and exemption of property tax. They are extracted herein below. “233. Property Tax.- (1) Every Council of the Municipality shall, in accordance with the provisions of this Act and the rules as may be prescribed, levy property tax on every building (including the land appurtenant thereto) situated within the area of the respective Municipality and not exempted as per the provisions of the Act. (2) (a) For the purpose of levying property tax, the Government shall, by notification, fix the minimum and maximum limits of rates of basic property tax applicable to one square meter plinth area of the following categories of building in accordance with the use and the date on which they shall come into force, namely:- (i) used for residential purpose; (ii) used for industrial purpose; (iii) used for Schools and Hospitals: (iv) used for amusement parks, mobile telephone tower etc. (v) used for commercial purpose; (vi) used for other purposes; (vii) Any other category of building notified by the Government. (b) The Government may, by notification, fix the minimum and maximum limits of the basic property tax rates of each type of buildings and their subdivisions as mentioned above from (i) to (vii) as applicable to them every five years. Note.- For the purpose of this section "plinth area" means in the case of a single- storeyed building, the area of its floor level (including thickness of wall) of the portion having roof and in the case of a multi- storeyed building with or without cellar-storey, the total area of such floor level (including thickness of wall but excluding the open terrace portion) of each storey of the building.

Arbitration Appeal.No.51 of 2017 12 (3) The Council of the respective Municipality shall, subject to the limit fixed by the Government in accordance with the category of buildings referred to in sub-section (2), fix after complying with the procedure prescribed, the rates of basic property tax (in whole number) to be made applicable to each category of buildings situated in the area of the Municipality on a scale of one square meter plinth area. The rates of basic property tax for all buildings of same category or its sub-categories, as the case may be, shall be the same throughout the area of the Municipality. (4) The limits of the basic property tax rates fixed by the Government under sub-section (2) and subject thereto to the basic property tax rates fixed once by the Municipality under sub-section (3), which shall be in force for a period of five years from the date of its effect, however, five per cent of the effective tax rate in the first year and for the second year and for each subsequent year shall be determined by the Municipality by increasing the tax rate of the immediately preceding year by five per cent. While determining the tax in accordance with the revision of the rate as stated above,- (a) In the case of new, renovated and change of occupancy of buildings, the Secretary shall assess the tax as determined and shall take further action to increase the annual property tax so determined by five per cent of the tax of the immediately preceding year in each subsequent year and this provision shall be included in the demand notice issued for assessment of the tax. (b) In the case of buildings which do not fall under the category mentioned in clause (a) and for which annual property tax has once been assessed, the existing annual property tax shall be increased every year at the rate of five per cent of the tax of the immediately preceding year and this provision shall be included in the demand notice for reassessment of tax: Provided that at the time of revision of such annual property tax the exemptions or increases under sub-section (7) shall not apply. (5) The rates of basic property tax fixed by the Council for the first time under sub-section (3) shall come in to force on such date as the Government may, by notification, appoint in this behalf. (6) Basic property tax of a building,- (i) such amount as is arrived at by multiplying the plinth area of a building with the rate of basic property tax applicable to such building which is rounded to the next higher whole number; (ii) in the case of any class of buildings or subdivisions thereof, on the basis of the plinth area or the fair value of the land or any component of the structure or some or all of these, as prescribed; may be calculated.

Arbitration Appeal.No.51 of 2017 13 (7) In the basic property tax of building calculated as per sub- section (6), on the basis of the factors,- (i) Where the areas of Municipality are classified into different zones, the zone in which the building is located; (ii) availability of road facility to the building; (iii)variation in the plinth area of the building; [xxx] (iv) construction of roof of the building (v) age of the building. (vi) construction of floor of the building (vii) fair value of the land where the building or construction is located. [xxx] (viii) air conditioning facility of the building. [xxx] the Secretary in accordance with the classification of factors specified in the Rules and at the rate fixed for each category, allow deductions and make additions, as the case may be: Provided that the aggregate deductions so allowed in respect of all items shall not exceed seventy five per cent of the basic property tax. (8) The amount so arrived at by allowing deductions and making additions on the basic property tax under sub-section (7) shall be adjusted to the next higher whole number and the amount so assessed shall be the annual property tax of the building. (9) in the case of a building, if two or more uses or its sub- categories referred to in sub-section (2) or any two or more factors referred to in sub-section (7) or two or more kinds of a factor are applicable at the same time, the aggregate of annual property tax shall be assessed by reckoning separately, the property tax as applicable to the respective part of the building: Provided that, if more than one kind of anyone of the factors such as construction of roof of the building, construction of floor of the building, [x x x] are applicable to a building at the same time the annual property tax of the building shall be assessed on the basis of that kind applicable to more than half portion of the aggregate plinth area. (10) After publishing the rate of basic property tax applicable to the area of Municipality and the notification classifying the areas of the Municipality into different zones, the Secretary shall by a public notice, publish the general details helpful to the owners to assess the annual property tax of their buildings by themselves, in accordance with such details as the plinth area of the building, the permissible deductions and the additions that may be made in the basic property tax, by said notice, demand the owners of the building to submit the returns in respect of the property in the prescribed form [within thirty

Arbitration Appeal.No.51 of 2017 14 days] from the date of publication of such public notice. The format/copy of the Form shall be made available to the owners of the building free of cost. (11) The owner of the building or the person authorised by him shall, within the time allowed, submit before the Secretary or the Officer authorised the attested tax return recording all the particulars necessary in connection with the assessment of tax and obtain receipt of acknowledgment. [xxx] (13) On the basis of the return submitted by the owner of the building and on the findings of the Secretary in the inquiry, the Secretary shall assess the annual property tax of the building and levy property tax of the building by issuing demand notice applicable five years to the owner of the building. [xxx] (15) The annual property tax assessed in respect of a building shall be payable in two half-yearly installments. The instalment in respect of any half-year shall be paid on or before the last day of the said half-year and if not paid within that date penalty under sub- section (2) of Section 538 shall be applicable from the next day: Provided that there is no bar for one time payment of annual property tax in the first half-year itself. (16) The Secretary shall revise the annual property tax of the building taking into account the rate of basic property tax applicable to a building under sub-sections (2) and (3) considering the change, if any, occurs in the use of the building, variation, if any, occurs in the plinth area of the building specified in sub-section (6), the deductions and additions in conformity with the variation, if any, occurs in any factor or any kind of factor specified in sub-section (7). The owner of the building shall, within thirty days inform the Secretary in writing the changes that may occur in use etc. and submit revised tax return under sub-section (10). (17) The Municipality shall, in the case of land used exclusively for agricultural purposes and which is more than one hectare in extent, levy, property tax on its annual value excluding one hectare of land, at the rate as fixed by the Council of the Municipality: Provided that such rate shall not exceed the maximum limit, if any rate has been fixed by the Government. Explanation.- For the purpose of this sub-section the annual value shall be deemed to be the rent which may reasonably be

Arbitration Appeal.No.51 of 2017 15 expected, if the land for which property tax is to be assessed is leased out from year to year. (18) The Government may, at any time, inspect the accuracy of the assessment of property tax made by the Secretary in the case of a building and give appropriate direction to the Secretary in this regard and the Secretary shall be bound to comply with it. (19) The Government may, by notification in the Gazette, make rules in respect of the following:- (i) the procedure to be followed by the Council for fixing the rates of basic property tax to be made applicable to the area of the Municipality subject to the limits specified by the Government and for publishing the same; (ii) determination of hte maximum and minimum limit of enhancement of annual property tax;] (iii) for notification classifying the area of Municipality into different zones; (iv) the classification of factors to be made applicable for making deductions and additions on the basic tax, their criteria and the rate of deductions or additions applicable to each kind; (v) the procedure for submitting return containing particulars helpful for the assessment of property tax and the Form of return to be submitted to the Secretary by the tax-payer; [xxx] (vii) the action to be taken against officers who fail to collect information or furnish false information with regard to the assessment of property tax; (viii) procedure for assessing the basic property tax and annual property tax in respect of each building: (ix) for granting exemption and other remission from property tax. (x) any circumstance under which and any condition subject to which it is liable to pay the entire tax or any part thereof or free from such liability to pay tax in respect of the buildings located in a place which is included in or excluded from the area of a Municipality during any half-year, or in respect of buildings re-erected or demolished or lying vacant in the area of Municipality, such circumstances and conditions; (xi) The procedure for recording the change in respect of the ownership of the building in the register of property tax; (xii) other matters incidental to the assessment and realisation of property tax.]” Section 235 .............

Arbitration Appeal.No.51 of 2017 16 “235. Exemption from property tax, service cess etc.- The following buildings and lands shall be exempted from the property tax as may be levied under section 233 and service cess as may be levied under sub-section (4) of section 230, namely:- (a) buildings set apart for public worship and actually so used or used for incidental purposes, religious study centres; (b) buildings exclusively used for educational purposes or educational allied purposes under the ownership of educational institutions, owned by the Central Government, State Government, aided or functioning with the financial assistance of the Central Government or the State Government, and the hostel buildings wherein the students of the said institutions reside; (ba) omitted. (c) hospitals providing treatment to patients at free of cost; (d) buildings which are providing shelter to destitutes, or orphans or physically or mentally challenged persons or persons suffering from fatal diseases or animal, using for chantable purposes and admitting all classes of people; (e) libraries, reading rooms and play grounds which may be used free of charge open to public ; (f) ancient monuments protected under the law relating to the preservation of ancient monuments for the time being in force, or part thereof as are not used as residential houses or as public offices; (g) burial and burning grounds: (h) buildings owned by any Local Self Government Institution and the building attached to the institutions handed over to Local Self Government Institutions by the Government: (i) buildings, if the owner thereof belongs to below poverty line and used as his own dwelling house and having a plinth area of less than thirty square meter. (j) residential buildings constructed and given free of cost by Government or Quasi- Government institutions or Local Self Government institutions as part of welfare activities. Explanation. The exemption granted under this section shall not extend to buildings for which rent is realised by the owners and to residential houses not being hostels attached to educational institutions and to residential houses attached to libraries.” Similarly, sub-section (26) of Section 2 defines as- “(26) "owner" includes- (a) a person who for the time being is receiving or is entitled to receive the amount of lease or the rent of any land or building whether on his own account or on account of himself and others or as an agent, trustee, guardian or receiver for any other person or who should

Arbitration Appeal.No.51 of 2017 17 so receive the amount of lease or the rent or be entitled to receive it if the land or building or part thereof were let to a lessee or a tenant on lease or rent; (b) the person for the time being in charge of the animal, vessel or vehicle in connection with which the word is used,

Arbitration Appeal.No.51 of 2017 18 cause interference in an appeal under Section 37. Accordingly, the orders are affirmed and the arbitration appeal is dismissed. Sd/-

AMIT RAWAL, JUDGE Sd/- C.S.SUDHA, JUDGE Jms/13.04