Adv. Srijana Adhikari et al. v. Office of the Prime Minister and Council of Ministries et al. (Writ no.: 079-WC-0014, Certiorari)

Background of the Case

Advocate Srijana Adhikari and Chartered Accountant Shailendra Uprety filed a writ petition before the Supreme Court of Nepal challenging the constitutionality of:

• Section 2(af) of the Income Tax Act, 2058, and
• Clause 3(a) of the Council of Ministers’ decision dated 2074/12/12 B.S.

The petitioners contended that, under Schedule 8(4) of the Constitution, the authority to levy house rent tax lies exclusively with local governments, regardless of whether the income is earned by natural persons or institutions.

They argued that permitting the federal government to tax institutional rental income under the corporate income tax regime violated the Constitution and related federal statutes, undermining the principle of local fiscal autonomy.

Petitioners’ Arguments

• The federal government’s taxation of institutional rental income conflicted with the Constitution’s allocation of powers between federal and local levels.
• Allowing federal taxation encroached upon local governments’ authority to collect house rent tax from all relevant sources.
• The impugned statutory provision and Cabinet decision were unconstitutional, creating legal uncertainty for taxpayers.

Court’s Decision

The Supreme Court (Constitutional Bench) dismissed the writ petition, holding that:

• Schedules 5(9) and 8(4) of the Constitution must be interpreted harmoniously.
• Rental income of natural persons is subject to house rent tax by local governments.
• Rental income of institutions falls within the federal income tax regime under the Income Tax Act, and there is no constitutional conflict.
• Prima facie, the bench did not find the statutory provision and Cabinet decision unconstitutional.

Outcome and Current Status

• The judgment settled the long-standing dispute regarding the jurisdiction of house rent tax and provided certainty for institutional taxpayers.
• However, a subsequent decision made by the division bench of Supreme court allowing local bodies to collect house rent tax and issue tax notices has reignited the debate, with ongoing cases currently pending before the Constitutional Bench.

Significance of the Case

• Clarification of Tax Jurisdiction: The case clarified the division of authority between federal and local governments regarding taxation of rental income.
• Harmonization of Constitutional Schedules: It reinforced the principle that federal and local powers must be interpreted harmoniously to avoid conflicts.
• Legal Certainty for Taxpayers: Provided guidance on how house rent tax applies to institutions versus natural persons.
• Ongoing Legal Implications: The decision has prompted continued judicial review, highlighting the evolving nature of fiscal federalism in Nepal.