Delhi High Court rules professional services of lawyers cannot be taxed under Commercial Establishment; grants Property Tax exemption

Delhi High Court rules professional services of lawyers cannot be taxed under Commercial Establishment; grants Property Tax exemption

Finding no reason to interfere with the single judge’s verdict, the bench dismissed the appeal terming it as being ‘without merit’

The Delhi High Court has held that since services rendered by Advocates are professional activities, they cannot be levied with taxes under the ‘Commercial Establishment’ category. The Court has ruled that lawyers' "professional activity" cannot be considered a "commercial activity." Consequently, the Court stated that an advocate's office located within a residential building was not liable for property tax under the Delhi Municipal Corporation Act, as it does not fall under the category of a "business building."

The Court ruled that the "professional activity" conducted by lawyers does not fall within the scope of clause 9 (a) (b) (i) and (ii) of the Delhi Municipal Corporation (Property Taxes) Bye-laws, 2004.

In the South Delhi Municipal Corporation vs BN Magon case, the bench of Justice Najmi Waziri and Justice Sudhir Kumar Jain was hearing an appeal against the decision of the single judge in January 2015.

In a significant ruling, the bench underlined, “The rule of a strict interpretation of taxation statute has to be applied. There is no scope of reading any derivative meaning or of reading any intent of the statute. In so far as the statute has not included ‘professional activity’ of lawyers as ‘commercial activity,’ the former cannot be put to tax.”

Finding no reason to interfere with the single judge’s verdict, the bench termed the appeal as being "without merit” and dismissed it.

The issue arose in 2013 when the Municipal Corporation of Delhi (MCD) issued two orders after assessing the property tax on a lawyer for running a ‘commercial activity’ in his Greater Kailash-2 premises.

Advocates and professionals engage in commercial and non-domestic activities, which makes them subject to taxation. The fact that these activities are conducted within residential premises, as permitted under MPD 2021 for specific users, does not convert the nature of the activity into residential. The provisions in MPD 2021 regarding professional activity do not restrict the powers of the Corporation outlined in sections 115 and 115A of the Delhi Municipal Corporation Act, 1957 (DMC Act). The lawyer challenged the assessment orders, which were eventually quashed by the order of a single judge of the High Court.

The MCD submitted before the division bench that it had the power to levy property tax on all lands and buildings under its jurisdiction. Therefore, unless consciously excluded, there could not be any building, property, or activity that could not be taxed.

Some of MCD’s contentions were:

· A building or a part of it used for the transaction of the business or for keeping of books, accounts and records shall be considered as a ‘business building’ and, therefore, subject to levy of property tax.

· A lawyer’s services fall within the category of professional activity and, that part of the building used for a professional activity would fall within the definition of a ‘business building’ as per a clause of the 2004 by-laws.

· The clause categorically includes office buildings premises solely or principally used as an office or for official purposes.

· The ambit of a ‘business building’ was wide as well as inclusive under the

Delhi Municipal Corporation Act, 1957

Activities carried out by advocates/professionals are commercial and non-domestic in nature, and, therefore, subject to tax. Simply because such activity is carried out from residential premises, as per permitted use under MPD 2021, the activity would not become residential.

The respondent refuted the MCD’s contentions. He submitted that the single judge had dealt with each of them.

The Court stated that the MCD’s contentions were ex-facie untenable, as there was no such ‘deeming provision’ in law for taxation. It mentioned, “Taxation powers have to be specifically mentioned and categories of taxable activity have to be defined.”

It further noted that the Master Plan of Delhi, 2021 permitted professional activity in residential buildings, subject to certain conditions. The bench added, “However, what is to be noted is that the provision of MPD does not empower the (municipal) corporation to levy a tax for the professional activity being carried out from residential buildings.”

The Court referred to a previous ruling by a Division Bench of the Bombay High Court in the case of Sakharam Narayan Kherdekar v. City of Nagpur Corporation & Ors. The judgment, in that case, concluded that the performance of professional activities by advocates did not fall within the scope of the term "business." It also established that professional establishments, such as those run by lawyers, should not be equated with "establishments" as defined under the Bombay Shops and Establishment Act, 1948, which primarily referred to "shops."

The Court also cited the Supreme Court judgment in V. Sasidharan v. M/s. Peter and Karunakar and others AIR 1984 SC 1700. In that case, it was held that the "professional activity" carried out by lawyers did not fall under the classification of a "commercial establishment" or a "business activity." Furthermore, the judgment clarified that a firm of lawyers should not be considered as a "commercial establishment.

Referring to the decision of the Supreme Court in the State of West Bengal vs Kesoram Industries Ltd And Others case, the bench stated that under the DMC Act, there was no power to tax ‘professional activities’ carried out from residential buildings.

Importantly, the clause of the by-laws refers only to a ‘professional establishment.’ It does not define either ‘professional’ or ‘establishment.’

The Judges emphasized, “The rate of taxation is another issue, but for taxation to extend to a class of activity, such activity must be specified, defined and included in that class/category. Neither the Act, nor the by-laws define 'professional activity' carried out by advocates, architects, doctors, etc.”

The Court, while dismissing the appeal, stated that the taxation statute must be strictly interpreted, leaving no room for extrapolating meanings or inferring intentions. Since the statute did not classify the "professional activity" of lawyers as a "commercial activity," it could not be subjected to taxation. The Court emphasised that the Bye-laws in question could not override the statute itself.

While standing counsel Sanjeev Sabharwal and advocate Shweta appeared for the MCD, advocate BN Magon represented himself, along with advocate Neeraj Gulati.