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PETITIONER: SHRI PRITHVI COTTON MILLS LTD. & ANR.

       Vs.

RESPONDENT: BROACH BOROUGH MUNICIPALITY & ORS.

DATE OF JUDGMENT: 25/04/1969

BENCH: HIDAYATULLAH, M. (CJ) BENCH: HIDAYATULLAH, M. (CJ) SHELAT, J.M. BHARGAVA, VISHISHTHA HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR  192            1970 SCR  (1) 358  1969 SCC  (2) 283  CITATOR INFO :  R          1970 SC1292  (7)  RF         1971 SC 231  (6)  R          1972 SC1061  (89,100,139,174)  RF         1972 SC1148  (5)  RF         1972 SC2205  (21)  RF         1973 SC1461  (596)  R          1974 SC1069  (63)  RF         1975 SC1116  (3)  RF         1975 SC2299  (190,607)  R          1977 SC1686  (6)  R          1978 SC 803  (26)  R          1979 SC1550  (14,19)  E          1984 SC1291  (12)  RF         1984 SC1780  (11)  F          1985 SC1683  (6,7)  RF         1988 SC 587  (15)  R          1989 SC 516  (30)  F          1990 SC 781  (47)

ACT: Bombay Municipal Boroughs Act, 1925, s. 73-Levy of ’rate’ on tax and buildings-’Rate’ held not to include tax on  capital value  or  percentage of capital value-Defect sought  to  be removed  by  Gujarat Imposition of Taxes  by  Municipalities (Validation)  Act,  1963-Enactment  of  s.  99  of   Gujarat Municipalities  Act to give power to municipalities to  levy tax on capital value or percentage of capital value of lands and buildings-Power of State Legislature under item 49  List II  of Seventh Schedule to Constitution levy tax on  capital value of buildings-Efficacy of Validating Act-Principles  on which retrospective validation can be upheld..

HEADNOTE: Section 73 of the Bombay Municipal Boroughs Act, 1925 allows the  municipality  to levy ’a rate on building or  lands  or both situate within the municipality’.  The Rules under  the Act applied the rates on the basis of the percentage on  the capital  value of lands and buildings. In  Patel  Gordhandas

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Hargovindas  v. Municipal Commissioner, Ahmedabad, [1964]  2 S.C.R.  608  this Court held that the term  ’rate’  must  be given the special meaning it had acquired in English law and must  be  confined to an impost on the basis of  the  annual letting  value; it could not be validly levied on the  basis of capital value though capital value could be used for  the purpose of working out the annual letting value.  Faced with this  decision  the Gujarat Legislature passed  the  Gujarat Imposition  of  Taxes by  Municipalities  (Validation)  Act, 1963.  By s. 3 of this Act past assessment and collection of ’rate’ on lands and buildings on the basis of capital  value or a percentage of capital value was declared valid  despite any  judgment  of a court or Tribunal to the  contrary,  and future  assessment  and collection on the basis  of  capital value for the period before and after the Validation Act was authorised.   At  the  same time s. 99 was  enacted  in  the Gujarat Municipalities Act to provide for the levy of a  tax on  lands and buildings "to be based on the  annual  letting value or the capital value or a percentage of capital  value of the buildings or lands or both." Appellant  No.1 was a company carrying on the  manufacturers of  cotton  goods  at  Broach.   It  was  assessed  for  the assessment  years 1961-62, 1962-63 and 1963-64 to a rate  on lands  and  buildings under s. 73 of  the  Bombay  Municipal Boroughs  Act  on the basis of a percentage of  the  capital value.    It  filed  writ  petitions  in  the   High   Court challenging the said assessments.  After the Validation  Act of 1963 was passed it amended the petitions to challenge the validity  and efficaciousness of s. 3 of the said Act.   The High  Court  dismissed  the writ  petitions.   Appeals  with certificate were filed before this Court. HELD  :  (i) When a legislature sets out to validate  a  tax declared  by  a  court to be illegally  collected  under  an ineffective or invalid law, the cause for ineffectiveness or invalidity must be removed before validation can be said  to take  place  effectively.  The most important  condition  is that  the legislature must possess the power to  impose  the tax,  for  if  it  does not, the  action  must  ever  remain ineffective and illegal.  Granted legislative competence  it is not sufficient to declare merely that the decision of the                             389 court  shall not bind, for that is tantamount  to  reversing the  decision  in  exercise  of  judicial  power  which  the legislature  does  not  possess  or  exercise.   A   Court’s decision must always bind unless the conditions on which  it is  based  are so fundamentally altered  that  the  decision could not have been given in the altered circumstances. [392 H-393 8] Ordinarily,  a  court holds a tax to  be  invalidly  imposed because  the power to tax is wanting or the statute  or  the ’rules  or  both are invalid or do not  sufficiently  create jurisdiction.   Validation of a tax so declared illegal  may be done only if the grounds of illegality or invalidity  are capable of being removed and are in fact removed and the tax thus  made legal.  Sometimes this is done by  providing  for jurisdiction  where  jurisdiction  has  not  been   properly invested  before.   Sometimes this is  done  by  re-enacting retrospectively a valid and legal taxing provision and  then by  fiction making the tax already collected to stand  under the re-enacted law.  Sometimes the legislature gives it  own meaning  and interpretation of the law under which  the  tax was collected and by legislative flat makes the new  meaning binding  on  courts.   The legislature may  follow  any  one method or all of them and while it does so it may neutralise the  effect  of  the earlier decision  of  the  court  which

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becomes ineffective after the change of the law. [393B-D] Whichever method is adopted it must be within the competence of  the  legislature and legal and adequate  to  attain  the object of validation.  If the legislature has the power over the  subject-matter and competence to make a valid  law,  it can  at.  any  time  make  such a  valid  law  and  make  it retrospectively  so -as to bind even past transaction.   The validity  of  a  Validating  law,  therefore,  depends  upon whether  the legislature possesses the competence  which  it claims  over  the subject-matter and whether in  making  the validation it removes the defect which the courts had  found in  the  existing  law  and  makes  adequate  provisions  in Validating law for a valid imposition of the tax. [393D-F] (ii) After  this Court’s decision in Sudhir  Chandra  Nawn’s case it could no    longer  be  questioned  that  the  State Legislature had power under entry 49    of  List II  of  the Seventh  Schedule to the Constitution to levy a tax  on  the capital  value of lands and buildings.  It was open  to  the State legislature to authorise the municipality to levy  the same tax indicating the mode of levy.  This the  legislature had done by enacting s. 99 of the Gujarat Municipalities Act and  by indicating the different modes which may be  adopted in making the levy, one such mode being a percentage of  the capital value. [394C-E] Sudhir Chandra Nawn v. Wealth-tax Officer, Calcutta,  A.I.R. 1969 S.C. 59, applied. (iii)     The legislature by the Validation Act provided for the following matters.   First,  it  stated that no  tax  or ’rate by whichever name called and laid on the capital value of  lands  and  buildings must be  deemed  to  be  invalidly assessed,  imposed,  collected or recovered  simply  on  the ground  that  a rate is based on the annual  letting  value. Next  it provided that the tax must be deemed to be  validly assessed, imposed, collected or recovered and the imposition must be deemed to be always so authorised.  The  legislature by  this enactment retrospectively imposed the tax on  lands and  buildings based on their capital value and as  the  tax was  already  imposed, levied and collected on  that  basis, made the imposition, levy collection and recovery of the tax valid, notwithstanding the declaration by the court that  as ’rate’, the levy was incompetent.  The legislature not  only equated  the tax collected to a tax on lands  and  buildings which it had the power to levy, but also to a rate giving  a new meaning to the word ’rate’ Sup.C.I/69-11. 390 and  while doing so it put out of action the effect  of  the decisions  of the courts to the contrary.  The  exercise  of power  by the legislature was valid because the  legislature does  possesses  the  power  to levy  a  tax  on  lands  and buildings  based on capital value thereof and in  validating the  levy on that basis, the implication of the word  ’rate’ could  be  effectively  removed and the  tax  on  lands  and buildings  imposed  instead.   The tax  therefore  could  no longer  be  questioned on the ground that s. 73 spoke  of  a rate  and  the  imposition  was  not  a  rate  as   properly understood but a tax on capital value. [394F-395E]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals.  Nos. 2197 and 2198 of 1966. Appeals  from  the judgment and decree dated  September  10, 1966 of the Gujarat High Court in Special Civil Applications Nos. 846 of 1963 and 765 of 1964.

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A.   K. Sen, A. K. Verma, D. Datta and Ravinder Narain,  for the appellants (in both the appeals). M.   C. Chagla and I. N. Shroff, for the respondents Nos.  1 and 2 (in both the appeals). B.   Sen and S. P. Nayar, for respondent No. 3 (in both  the appeals). The Judgment of the Court was delivered by Hidayatullah, C.J. These matters arise under Art. 226 of the Constitution  and are appeals by certificate granted by  the High  Court  of  Gujarat against  its  judgment  and  order, September 10, 1966.  The appellant No. 1 is a Company  which has  spinning and weaving mills at Broach  and  manufactures and  sells cotton yarn and cloth.  Respondent No. 1  is  the Broach  Borough Municipality constituted under S. 8  of  the Bombay  Municipal  Boroughs Act, 1925.  In  the  assessments years   1961-62,  1962-63  and  1963-64   the   Municipality purporting  to  act  under s. 73  of  the  Bombay  Municipal Boroughs  Act, 1925 and the Rules made thereunder imposed  a purported  rate  on  lands and buildings  belonging  to  the respondent  at  a certain percentage of the  capital  value. Section  73  of the Act allows the Municipality to  levy  "a rate  on  buildings  or lands or  both  situate  within  the municipal  borough".   The Rules under the Act  applied  the rates on the basis of the percentage on the capital value of lands and buildings., The  assessments lists were  published and tax was imposed according to the rates calculated on the basis of the capital value of the property of the  appellant and  bills  in  respect of the tax were  served.   The  writ petitions  were filed to question the assessment and to  get the assessment cancelled. During the pendency of the writ petitions the legislature of Gujarat   passed   the  Gujarat  Imposition  of   Taxes   by Municipalities (Validation) Act, 1963.  As a result the writ petitions were amen- 391 ded  and  the  Validation  Act  was  also  questioned.   The appellants also filed a second writ petition questioning the validity of the Validation Act under Arts. 19(1)(f), (g) and 265  of  the Constitution.  By the order under  appeal  here both   the   writ  petitions  were  dismissed   although   a certificate of fitness was granted. The  Validation  Act was presumably passed because  of  the, decision   of  this  Court  reported  in  Patel   Gordhandas Hargovindas  v.  Municipal Commissioner,  Ahmedabad(1).   In that case the validity of the Rules framed by the  Municipal Corporation   under   s,  73  were   called   in   question, particularly Rule 350A for rating open lands which  provides that the rate on the area of open lands shall be levied at 1 per  centum  on  the valuation  based  upon  capital  value. Dealing  with the word ’rate’ as used in these statutes,  it was  held by this Court that the word ’rate’ had acquired  a special meaning in English legislative history and  practice and also in Indian legislation and it meant a tax for  local purposes  imposed by local authorities.  The basis  of  such tax was the annual value of the lands or buildings.  It  was discussed in the case that there were three methods by which the  rates  could be imposed : the first was  to  take  into account  the  actual rent fetched by the  land  or  building where it was actually let the second was,. where it was  not let,   to   take  rent  based   on   hypothetical   tenancy, particularly  in  the case of buildings; and the  third  was where neither of these two modes was available, by valuation based  on, capital value from which annual value had  to  be found by applying suitable percentage which might not be the same for lands and buildings.  It was held that in S. 73 the

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word ’rate’ as used must have been used in the special sense in which the word was understood in the legislative practice of India before that date.  Rule350A Which laid the rate  on land at a percentage of the valuation based upon capital was therefore  declared ultra vires the Act itself.   In  short, the word ’rate’ was given a specialised meaning and was held to  mean  a kind of imposition the annual letting  value  of property,  if  actually let out, and on a  notional  letting value if’ the property was not let out.  The legislature  of Gujarat  then passed the Validation Act seeking to  validate the  imposition  or the tax as well as to avoid  any  future interpretation  of the Act on the lines on which  Rule  350A was construed.  The Act came into force on January 29, 1964. After defining the expressions used in the Act and providing for  its application, the Act enacted S. 3  which  concerned validation of impositions and collections of taxes or  rates by Municipalities in certain cases.  That section reads  as. follows               "3. Validation of imposition and collection of               taxes  or rates by municipalities  in  certain               cases.               (1)   [1954] 2 S.C.R. 608.               392               Notwithstanding  anything  contained  in   any               judgment,  decree  or  order  of  a  Court  or               Tribunal  or  any other authority, no  tax  or               rate  assessed  or  purporting  to  have               been  assessed  by a  municipality  under  the               relevant  municipal  law  or  any  rules  made               thereunder  on the basis of the capital  value               of  a building or land, as the case may be  or               on  the basis of a percentage of such  capital               value,   or  recovered  by  the   municipality               commencement  of this Act shall be  deemed  to               invalidly  assessed,  imposed,  collected   or               recovered  by reason of the  assessment  being               based  on the capital value or the  percentage               of  the capital value, and not being based  on               the  annual letting value, of the building  or               land, as the case may be, and the  imposition,               collection and recovery of the tax or rate  so               assessed and the provisions of the rules  made               under  the relevant municipal law under  which               the tax or rate was so assessed shall be valid               and shall be deemed always to have been  valid               and shall not be called in question merely  on               the  ground that the assessment of the tax  or               rate on the basis of the capital value of  the               building  or land, as the case may be,  or  on               the  basis  of a percentage  of  such  capital               value  was not authorised by law; and  accord-               ingly any tax or rate, so assessed before  the               commencement  of this Act and leviable  for  a               period  prior  to such  commencement  but  not                             collected    or    recovered    before      such               commencement,  may be collected and  recovered               in accordance with the relevant municipal law,               and the rules made thereunder." If  this  section  is valid then the  imposition  cannot  be questioned and the short question which arises in this  case is  as  to the validity of this section.  It is  not  denied that  a  legislature  does possess  the  power  to  validate statutes  and to pass retrospective laws.  It is,  however,, contended that the Validation Act is ineffective in carrying

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out  its avowed object.  This is the only point which  falls for consideration in these appeals. Before  we examine s. 3 to find out whether it is  effective in  its  purpose  or  not  we may  say  a  few  words  about validating statutes in general.  When a legislature sets out to  validate  a  tax declared by a  court  to  be  illegally collected under an ineffective or an invalid law, the  cause for  ineffectiveness  or invalidity must be  removed  before validation can be said to take place effectively.  The  most important condition, of course, is that the legislature must possess  the power to impose the tax, for, if it  does  not, the  action  must  ever  remain  ineffective  and   illegal. Granted legis- 393 lative  competence, it is not sufficient to  declare  merely that  the decision of the Court shall not bind for  that  is tantamount to reversing the decision in exercise of judicial power which the legislature does not possess or exercise.  A court’s  decision must always bind unless the conditions  on which  it  is based are so fundamentally  altered  that  the decision   could  not  have  been  given  in   the   altered circumstances.   Ordinarily,  a  court holds  a  tax  to  be invalidly  imposed because the power to’ tax is  wanting  or the  statute  or  the rules or both are invalid  or  do  not sufficiently  create the jurisdiction.  Validation of a  tax so  declared  illegal  may be done only if  the  grounds  of illegality  or invalidity are capable of being  removed  and are in fact removed and the tax thus made legal.   Sometimes this   is   done  by  providing   for   jurisdiction   where jurisdiction   had  not  been  properly   invested   before. Sometimes  this  is done by  re-enacting  retrospectively  a valid and legal taxing provision and then by fiction  making the tax already collected to stand under the re-enacted law. Sometimes   the  legislature  gives  its  own  meaning   and interpretation of the law under which the tax was  collected and by legislative fiat, makes the new meaning binding  upon courts.  The legislature may follow any one method or all of them  and while it does so it may neutralise the  effect  of the earlier decision of the court which becomes  ineffective after the change of the law.  Whichever method is adopted it must  be within the competence of the legislature and  legal and  adequate  to attain the object of validation.   If  the legislature  has  the  power  over  the  subject-matter  and competence to make a valid law, it can at any time make such a  valid law and make it retrospectively so as to bind  even past  transactions.   The  validity  of  a  Validating  law, therefore,  depends upon whether the  legislature  possesses the  competence which it claims over the subject-matter  and whether in making the validation it removes the defect which the courts had found in the existing law and makes  adequate provisions  in the Validating law for a valid imposition  of the tax. The  inquiry  in this case may begin by asking  whether  the legislature  possesses competence to pass a law  imposing  a tax  on lands and buildings on the basis of a percentage  of their  capital  value.  If the  legislature  possesses  that power  then it can authorise the Municipality to  levy  that tax.   To test the proposition we may consider s.  99  which has now been enacted in the Gujarat Municipalities Act.   It reads :               "99.  Taxes which may be imposed.               (1)   Subject to any general or special orders               which  the State Government may make  in  this               behalf  and to the provisions of sections  101               and  102,  a municipality may impose  for  the

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             purposes  of  this Act any  of  the  following               taxes, namely:-               394               (i)   a tax on buildings or lands situate with               in  the municipal borough to be based  on  the               annual letting value or the capital value or a               percentage  of capital value of the  buildings               or lands or both; Learned counsel for the appellants did not contend that this section was outside the powers of the legislature.  In fact, he could not, in view of entry 49 of List II of the  Seventh Schedule to the Constitution.  That entry reads : "Taxes  on lands and buildings" and a tax on lands and buildings  based upon  capital  value falls squarely within the  entry.   The doubt  which is created by entry 86 of List I "Taxes on  the capital  value  of  assets",  no  longer  exists  after  the decision of this Court in Sudhir Chandra Nawn v.  Wealth-Tax Officer, Calcutta(1).  In that case the respective ambits of the  two  entries  are explained.  It is  pointed  out  that unlike  the tax contemplated by _entry 49 (List II) the  tax under  entry 8 6 (List 1) is not a direct tax on  lands  and buildings but on net assets, the components of which may  be lands and buildings and other items of assets excluding such liabilities  as may exist.  The incidence of the tax is  not on lands and- buildings as units of taxation but on the  net assets  of  which lands and buildings are only some  of  the components.   This is not the case under entry 49 (List  11) where the tax can be laid directly on lands and buildings as units of taxation.  Therefore, a tax on lands and  buildings is fully within the competence of the legislature and it  is open  to it to authorise the municipality to levy  the  same tax  indicating the mode of levy.  This the legislature  has done by indicating the different modes which may be  adopted in making the levy, one such mode being a percentage of  the capital value.  The  legislature in S. 73 had not authorised the levy of  a tax  in this manner but had authorised the levy of  a  rate. That led to the discussion whether a rule putting the tax on capital  value of buildings answered the description of  the impost in the Act, namely, ’a rate on buildings or lands  or both situate within the Municipal borough’.  It was held  by this Court it did not, because the word ’rate’ had  acquired a special meaning in legislative practice.  Faced with  this situation the legislature exercised its undoubted powers  of redefining  ’rate’  so as to equate it to a tax  on  capital value  and  convert the tax purported to be collected  as  a ’rate’  into a tax on lands and buildings.  The  legislature in the Validation Act, therefore, provided for the following matters.  First, it stated that no tax or rate by  whichever name  called  and  laid on the capital value  of  lands  and buildings must be deemed (1)  A.I.R. 1969 S.C. 59. 395 to  be invalidly assessed, imposed, collected  or  recovreed simply  on  the ground that a rate is based  on  the  annual letting value.  Next it provided that the tax must be deemed to be validly assessed, imposed, collected or recovered  and imposition  must be deemed to be always so authorised.   The legislature  by this enactment retrospectively  imposed  the tax on lands and buildings based on their capital value  and as the tax was already imposed, levied and collected on that basis, made the imposition, levy collection and recovery  of the tax valid, notwithstanding the declaration by the  Court that  as ’rate’, the levy was incompetent.  The  legislature not  only  equated the tax collected to a tax on  lands  and

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buildings,  which  it had the power to levy, but also  to  a rate  giving  a new meaning to the  expression  ’rate’,  and while  doing  so  it put out of action  the  effect  of  the decisions  of the courts to the contrary.  The  exercise  of power  by the legislature was valid because the  legislature does possess the power to levy a tax on lands and  buildings based on capital value thereof and in validating the levy on that  basis, the implication of the use of the  word  ’rate’ could  be  effectively  removed and the  tax  on  lands  and buildings  imposed  instead.  The tax.,  therefore,  can  no longer  be  questioned on the ground that S. 73 spoke  of  a rate  and  the  imposition  was  not  a  rate  as   properly understood but a tax on capital value.  In this view of  the matter  it is hardly necessary to invoke the 14th clause  of s.  73 which contains a residuary power to impose any  other tax not expressly mentioned. In  our judgment these appeals possess no merits  after  the passing  of the Validation Act and must be dismissed but  in the circumstances without any order about costs. G.C.                 Appeals dismissed. 396