http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: GOVERNMENT SERVANT CO-OPERATIVE HOUSE BUILDING SOCIETYLIMITE

       Vs.

RESPONDENT: UNION OF INDIA AND ORS.

DATE OF JUDGMENT:       05/08/1998

BENCH: SUJATA V. MANOHAR, M. SRINIVASAN

ACT:

HEADNOTE:

JUDGMENT:    [With C.A.No. 8425/94, W.P. (C) No. 758/93, C.A. Nos.            8428/94, 8429/94, 8430/94 and 5652/95]                       J U D G M E N T Mrs. Sujata V. Manohar, J.      The appellants  are the  owners of  properties in Delhi which are  governed by  the Delhi Municipal Corporation Act, 1957 or the Punjab Municipal Act, 1911. Prior to coming into force of the Delhi Rent Control (Amendment) Act, 1988, these properties were  governed by  the Delhi  Rent Control Act of 1958.      By the  Delhi Rent  Control (Amendment)  Act, 1988 sub- sections 3(c)  and (d)  were added in Section 3 of the Delhi Rent Control  Act, 1958.  These provide  that nothing in the said  Act   shall  apply   "(c)  to  any  premises,  whether residential  or   not,  whose  monthly  rent  exceeds  three thousand and  five hundred  rupees"; or "(d) to any premises constructed on  or after  the commencement of the Delhi Rent Control (Amendment)  Act, 1988,  for a  period of  ten years from the  date of  completion of  such construction". On the said provisions  coming into  force the  appellants received notices under Section 126 of the Delhi Municipal Corporation Act for the assessment year 1988-89 and for subsequent years proposing to  revise the rateable value of their properties. The footnote  to these  notices stated that this was in view of the  amendments to  the Delhi  Rent  Control  Act,  1988. Assessments which  were made  pursuant to  such notices were made by  calculating the  rateable value  of the property on the basis  of the  actual annual  rent received.  These  and similar notices  and assessments  are the  subject matter of challenge in the present proceedings.      Under Section  113 of  the Delhi  Municipal Corporation Act, 1957,  the Corporation shall levy, inter alia, property taxes. Under  Section 114 the property taxes shall be levied on lands  and buildings  in Delhi  and shall  consist of the following, namely,  (inter alia)  under  sub-section  (d)  a general tax  of not  less than ten and not and not more than thirty percent  of the rateable value of lands and buildings within the urban areas. Section 116 provides as follows:-           "116.     Determination     of      rateable   value   of   lands   and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

    buildings  assessable  to  property      taxes -  (1) The  rateable value of      any lands  and buildings assessable      to property  taxes  be  the  annual      rent at which such land or building      might reasonably by expected to let      from year to year less -           (a) a  sum of  ten per cent of           the  said  annual  rent  which           shall  be   in  lieu   of  all           allowances   for    costs   or           repairs  and   insurance,  and           other   expenses,    if   any,           necessary to maintain the land           or  building  in  a  state  to           command that rent, and           (b)  the   water  tax  or  the           scavenging tax or both, if the           rent is inclusive of either or           both of the said taxes:      Provided  that   if  the   rent  is      inclusive  of   charges  for  water      supplied by  measurement, then, for      the purpose  of  this  section  the      rent shall  be treated as inclusive      of water  tax on rateable value and      the  deduction  of  the  water  tax      shall be made as provided therein:      provided further that in respect of      any land  or building  the standard      rent of  which has been fixed under      the Delhi  and Ajmer  Rent  Control      act,  1952   (38  of   1952),   the      rateable value  thereof  shall  not      exceed the  annual  amount  of  the      standard rent so fixed.      [Explanation  -   The   expressions      "water tax"  and  "scavenging  tax"      shall  mean   such  taxes  of  that      nature  as  may  be  levied  by  an      appropriate authority.]      (2)..............      (3)..............      To determine the quantum of property tax, therefore, it is necessary  to arrive at the rateable value of the land or building. Under  Section 116(1)  the rateable  value is  the annual rent  at which such land or building might reasonably be expected  to be  let  from  year  to  year  less  certain deductions. We have to consider how the annual rent at which such property  might be reasonably expected to be let, is to be  arrived  at  when  the  rent  of  the  property  is  not controlled under  the Delhi  Rent Control  Act, 1958  or any other rent control legislation.      In the case of The Corporation of Calcutta v. Sm. Padma Debi and  Ors. (1962  [3] SCR  49),  this  Court  considered Section 127?(a)  of the  Calcutta Municipal  Act, 1923. This Section was similar to Section 116(1) of the Delhi Municipal Corporation Act, 1917. Under Section 127(a) the annual value of the  land for building shall be deemed to be gross annual rent at  which the  land or  building might  at the  time of assessment reasonably  be expected  to let from year to year less certain  deductions. The  Court observed  that the word "reasonably" is  not capable of precise definition. It said, (at page  55)" ‘Reasonable’  signifies ‘in  accordance  with reason.’ In  the ultimate analysis it is a question of fact.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

Whether a particular act is reasonable or not depends on the circumstances in  a given  situation. A  bargain  between  a willing  lessor  and  willing  lessee  uninfluenced  by  any extraneous  circumstances  may  afford  a  guiding  test  of reasonableness. An  inflated or  deflated rate of rent based upon  fraud,   emergency,  relationship,   and  such   other considerations  may   take  it   out  of   the   bounds   of reasonableness. Equally  it would be incongruous to consider fixation  of   rent  beyond   the  limits   fixed  by  penal legislation as  reasonable. Under  the Rent Control Act, the receipt of  any rent  higher than  the standard  rent  fixed under the Act is made penal for the landlord."      Therefore,  where   there  is  legislation  fixing  the standard rent  of  the  premises,  the  rent  at  which  the premises could  be reasonably  expected  to  be  let  cannot exceed the  statutory ceiling. But where there is no between a willing  lessor and  willing lessee  uninfluenced  by  any extraneous   circumstances,   affords   a   good   test   of reasonableness.      The same  principle was  reiterated by  this  Court  in Dewan Daulat  Rai Kapoor  and Ors.  v. New  Delhi  Municipal committee and  ors. (1980  [1] SCC  685 at  page 687). After quoting the  above passage  from The Corporation of Calcutta v. Sm. Padma Debi and ors. (Supra), this Court held that the actual rent  payable by  a tenant  to the landlord would, in normal circumstances,  afford reliable  evidence of what the landlord might  reasonably expect to get from a hypothetical tenant, unless  the rent  is inflated or depressed by reason of   extraneous   considerations   such   as   relationship, expectation  of   some  other   benefit  etc.   There  would ordinarily be,  in a free market close approximation between the actual  rent received by the landlord and the rent which he might  reasonably expect  to receive  from a hypothetical tenant.      In the  case of  Dr. Balbir Singh and Ors. etc. Etc. v. Municipal Corporation,  Delhi and  ors. (1985 [2] SCR 439 at pate 452),  also this Court reiterated the test laid down in the above two cases and repeated that in a free market there would ordinarily be a close approximation between the actual rent received  by the  landlord and  the rent which he might reasonably expect  to receive  from a  hypothetical  tenant. (See also East India Commercial Co. Pvt. Ltd. v. Corporation of Calcutta (1998 [4] SCC 368).      Therefore, the  annual rent  actually received  by  the landlord, in the absence of any special circumstances, would be a  good guide to decide the rent which the landlord might reasonably expect  to receive  from a  hypothetical  tenant. Since the premises in the present case are not controlled by any rent  control legislation,  the annual  rent received by the landlord is what a willing lessee, uninfluenced by other circumstances, would  pay to  willing lessor.  Hence, actual annual rent,  in these  circumstances, can  be taken  as the annual rateable  value of the property for the assessment of property  tax.  The  municipal  corporation  is,  therefore, entitled to  revise the  rateable value  of  the  properties which have  been freed  from rent  control on  the basis  of annual rent actually received unless the owner satisfies the municipal corporation  that there  are other  considerations which have affected the quantum of rent.      It was  then submitted on behalf of the appellants that if the  annual rent  actually received is taken as the basis for determining  the rateable  value of  the  property,  the property tax  will become a tax on income of the owner. Such a tax  would be  beyond the  legislative competence  of  the state legislature.  being a  tax on income, it can be levied

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

only by  the Central  Government and  it would  not fall  in entry  49  of  List  II  of  the  Seventh  Schedule  of  the Constitution. It  would, in fact, fall in entry 82 of List I which deals  with taxes  on income  other than  agricultural income. Now,  Entry 49  of List II covers taxes on lands and buildings. As  the High  Court has  pointed out,  the  three lists in  the Seventh  Schedule of  the Constitution have no relevance  to   the  Union  Territory  of  Delhi  since  the Parliament can  made law  respecting all  the entries in all the three  lists. The Delhi Municipal Corporation Act is, in fact,  Parliamentary   Legislation.  Nevertheless,   as  the argument has  been advanced  before us at some length and it may affect  other municipal  legislations, we  will  briefly deal with it.      A similar  argument in connection with the Punjab Urban Immovable property  Tax Act,  1940 was  advanced before  the Federal Court  in the  case of  Ralla Ram v. The Province of East Punjab  (AIR 1949  [36] Federal Court 81). The property tax under  the said Act was based on the annual value of the property. Negativing  the argument  that this  was a  tax on income and  hence was  not covered  by  List  II,  Item  42, dealing  with   taxes  on  lands  and  buildings  under  the Government of  India Act, 1935, the Court said that a proper approach is  to look at the true nature and character of the legislation or  its pith  and substance. If the substance of the legislation is within the express powers, then it is not invalidated if  incidentally it  affects matters  which  are outside  the   authorised  field.  The  Court  analysed  the provisions of  the said  Act and observed that in every case the actual  profit  derived  from  the  property  would  not necessarily be  its annual value. it is possible to conceive of cases in which the property to be taxed does not actually yield any income whatsoever, though every property must have some notional  annual value.  The method  of arriving at the quantum of tax should not be mixed up with the nature of the tax itself.  The essential character of the tax was property tax and  not a  tax on income. It said, (page 86) "This case demolishes the  broad contention  that wherever  the  annual value is  the basis  of a  tax, that  tax becomes  a tax  on income. it  shows that  there are  other factors to be taken into consideration  and that  it is  the essential nature of the tax charged and not the nature of the machinery which is to be looked at."      The Federal  Court  had  referred  to  the  full  bench decision of the Bombay High Court Sir Byramjee Jeejeebhoy v. Province of Bombay and Ors. (AIR 1940 Bombay. 64) which also deals  with   the  urban  immovable  property  tax  to    be calculated by  the municipal commissioner. The same view has been taken  by this  court in  the case  of Patel Gordhandas Hargovindas v.  Municipal commissioner, Ahmedabad (19634 [2] SCR  608).   In  this  case  the  municipal  corporation  of Ahmedabad had  imposed a  rate on  vacant  land  within  the municipal limits.  The rate  was the percentage of valuation based upon  capital. The  contention was that this was a tax on capital  and not  a tax  on property  and was, therefore, beyond the  legislative Province  of East Punjab (Supra) and emphasised the  importance of  the distinction  between  the levy of a tax and the machinery of its calculation including the method  of calculation  and said that the subject matter of the  tax was   obviously something other than the measure provided to  quantify tax by levying the tax on a percentage of the  capital value of the land taxed. The entire scope of the  charging   Section  was   not  changed.  The  tax  was, therefore, a tax on land.      It is  thus well  settled that  an  Act  of  the  State

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

legislature  entitling   a  municipal  corporation  to  levy property tax  on the  basis of  rateable value  of land  and building calculated by the yardstick of annual rent at which such property  can reasonably  be leased  to a  hypothetical lessee, is  valid and within its legislative competence. The tax remains  property tax  and cannot  be viewed as a tax on income. (See  also Bhagwan  Dass Jain  v. Union of India and Ors. (1981 [2] SCC 135, Assistant commissioner of Urban Land Tax and  Ors. v.  The Buckingham and Carnatic Co. Ltd., etc. (1970 [1]  SCR 268), and India Cement Ltd. and ors. v. State of Tamil Nadu and ors. (1990 [1] SCC 12).      Looking to  the charging section of the Delhi Municipal corporation  Act,  1917  which  clearly  imposes  a  tax  on property and  Section 116  which deals  with the  method  of determination of  this tax  with reference  to the  rateable value of lands and buildings, the property tax levied cannot be viewed  as tax  on income.  The basis of valuation is the hypothetical  annual  rent  which  a  willing  lessor  would receive from  a willing  lessee. Obviously in case where the property is  self-occupied there is no question of the owner receiving any  income. In  the case  of properties which are covered by  the Delhi  Rent Control  Act, there  may be many cases where  the annual  rent  received  by  a  landlord  in respect of  a property  may be  different  from  its  annual rateable value.  A property  tax under  the Delhi  Municipal Corporation Act  is, therefore,  not a  tax on income. Since the position  is well  settled we need not elaborate on such instances.      Learned counsel for the Delhi Municipal Corporation has pointed out that in the case of self-occupied properties the Delhi  Municipal   Corporation  has  continued  to  fix  the rateable value on the basis that the property is governed by the Delhi Rent control Act. The arguments of the appellants, therefore, have  centred on properties which are let out and which are not subject to rent control.      In the  premises, we  agree with  the impugned judgment and order  of the Delhi High Court. The appeals and the writ petition are,  therefore, dismissed. There will, however, be no orders as to costs.