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PETITIONER: THE LOKMANYA MILLS

       Vs.

RESPONDENT: THE BARSI BOROUGH MUNICIPALITY

DATE OF JUDGMENT: 14/03/1961

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L.

CITATION:  1961 AIR 1358            1962 SCR  (1) 306  CITATOR INFO :  R          1967 SC1801  (6,13)  RF         1968 SC 859  (7)  RF         1973 SC1021  (4,9)

ACT: Municipality--House    tax--Fixation   of--Annual    letting value--Rule  directing computation on floor  area--If  intra vires--Method of computation--Bombay Muncipal Boroughs  Act, 1925 (Bom. 18 of 1925) s. 58, r. 2C.

HEADNOTE: The  Bombay  Municipal  Boroughs  Act,  1925,  empowered   a municipality to levy rates on lands and buildings which were to be assessed on the valuation based on the capital or  the annual  letting value.  The Act defined the  annual  letting value  inter alia as the annual rent for which any  building or  land  might reasonably be expected to let from  year  to year.  The General Body of the Municipality of Barsi  framed new rules under s. 58 of the Act for levying rates: for  all buildings  and  non-agricultural lands the rate  was  to  be levied  on  the  annual letting value,  but  for  mills  and factories and buildings relating thereto it was provided  by r.  2C that the annual letting value was to be fixed on  the floor area.  The Municipality issued notices of demand under the new r. 2C calling upon the appellant (which is a company owning  a textile mill) to pay house and water  taxes  which were  assessed  as rates which was paid  by  the  appellants under protest. The  question  to  be determined was whether by  r.  2C  the Municipality was entitled to collect tax leviable as a  rate after computing the annual letting value solely on the  area of the factory and building relating thereto. Held, that a rate may be levied by a municipality under  the Bombay  Municipal Boroughs Act, 1925, on the valuation  made on the basis of capital or on the annual letting value of  a building and not on a valuation computed merely on the floor area  of the structures, such a rate was clearly not  a  tax based  either on the capital value or on the annual  letting value,  for "annual letting value" postulates rent  which  a hypothetical  tenant may reasonably be expected to  pay  for the  building if let.  The Municipality had no  power  under the Act to ignore the methods of valuation prescribed by the

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Act, and to adopt a method not sanctioned by the Act. By prescribing valuation computed on the area of the factory building  the Barsi Municipality not only fixed  arbitrarily the  annual  letting  value which bore no  relation  to  the rental  which  a  hypothetical  tenant  may  reasonably   be expected to pay but rendered the statutory right of the  tax payer  to challenge the valuation illusory as the  objection which  the  tax payer could raise thereto was  in  substance restricted  to  the  area of the building  and  not  to  its valuation. 307 The rule adopting a flat and uniform rate on the  assumption that all factory buildings within the area of a municipality were  not alike in essential features and were not  intended to be used for purposes which were alike was not permissible under the Act. The vice of the rule lies in an assumed uniformity of return per  square  foot which structures of different  classes  in their nature not similar, may reasonably fetch if let out to tenants and in the virtual deprivation to the rate payer  of his  statutory right to object to the valution.  Rule 20  by the  Barsi Borough Municipality under S. 58 of  the  Bombay, Municipal Boroughs Act, 1925, was illegal and ultra vires. The  Madras  and Southern Mahratta Railway Co. Ltd.  v.  The Bezwada Municipality I.L.R. 1945 Mad. 1, not applicable. The  Borough Municipality of Amalner v. The Pratap  Spinning Weaving  and  Manufacturing Co. Ltd., Amalner,  I.L.R.  1952 Bom. 918, not approved. Motiram Keshavdas v. Ahmedabad Municipal Borough, (1942)  44 Bom.  L.R. 280, referred to

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 125 to  129 of 1957. Appeals by special leave from the judgment and decree  dated October 7, 1952, of the Bombay High Court in Second  Appeals Nos. 601 to 605 of 1952. S.T.  Desai, Avadh Behari and B. P. Maheshwari,  for  the appellants. A.V.  Viswanatha  Sastri and A. G. Ratnaparkhi,  for  the respondents. 1961.  March 14.  The Judgment of the Court was delivered by SHAH,  J.-These five appeals raise a common  question  about the  validity  of  Rule 2C  framed  by  the  respondent--the Municipality of Barsi under s. 58(j) of the Bombay Municipal Boroughs Act, 1925-hereinafter called the Act.  The Lokmanya Mills-hereinafter   called  the  appellants-are  a   company registered  under  the  Indian  Companies  Act  holding   an expensive  area  of  land City Survey No.  2554  within  the Municipal Borough on which are constructed buildings of  the factory,   ware-houses,  bungalows  and   other   structures appurtenant  to  the  factory.  The  respondent,  a  Borough Municipality constituted under the Act is by s. 73, 308 entitled  to levy a rate on lands and buildings and  also  a water-rate.   Under  the rules framed  by  the  Municipality house-tax  and water-tax were levied on buildings  and  non- agricultural lands on their annual letting value at  uniform rates  whether  the  purpose was  residential,  business  or manufacturing. In 1944, the Municipality resolved to enhance the assessment of  lands  and  buildings  within  its  area..  After   some correspondence with the Commissioner, Central Division,  the

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General  Body of the Municipality resolved that  the  rental value  for leaving rates on mills and factories  within  its limits  be  fixed  at  Rs. 40 for  every  100  square  feet. Notices  of this resolution under s. 75(b) of the  Act  were issued  and  objections  to the  proposed  enhancement  were invited from the taxpayers and after obtaining the  approval of  the  Government  of  Bombay, the  new  rules  were  made operative  from April 1, 1947.  The rules relevant  for  the purposes of these appeals are:               Rule  2A:-"The assessment of house-tax on  all               lands,  buildings and non-agricultural  lands,               other than Government, buildings coming  under               Proviso A of s. 73 of the Bombay Boroughs  Act               of  1925, at rates mentioned in  the  Schedule               attached to these rules."               Rule, 2B:-In case Government buildings  coming               under  Proviso  A  of  s.  73  of  the  Bombay               Boroughs   Act  are  used  beneficially,   the               assessment of such buildings shall be made  as               specified in sub-s. 2 and 3 of s. 74.               Rule  2C:-As  regards  Mills,  factories   and               buildings relating thereto, the annual letting               value shall be fixed at Rs. 40 per 100  square               feet or part thereof for every floor.,  ground               floor or cellar and the tax shall be  assessed               on  the  said  annual letting  value,  at  the               ordinary rate.                Explanation:-The words "buildings  pertaining               thereto" include buildings in the compound  of               the Mills such as ware-houses, godowns,  shops               of  the  mills  etc.  but  does  not   include               residential buildings that is to say bungalows               and out-houses.               Note:-Assesstnent   shall  be  made   at   the               ordinary               309               rate  on buildings which are not  taxed  under               rule 2C above. The  Municipality prepared an assessment list under the  new scheme  of  taxation  in respect of  factory  buildings  and buildings  relating  thereto and issued  notices  of  demand calling  upon the appellants to pay house-tax and  water-tax newly  assessed thereon.  The appellants paid under  protest the tax demanded, and filed five suits in the ’court of the, Civil Judge, Junior Division of Barsi to recover the amounts levied  by  the Municipality in excess of  the  amounts  due under  the  old scheme.  In all these suits,  the  principal issue raised was about the validity of rule 2C framed by the Municipality  for  levy of rates "on  Mills,  Factories  and other  buildings  relating thereto".  The trial  court  held that  rule  2C was valid and within the  competence  of  the Municipality and dismissed the suits for refund of house-tax and  water-tax.   The District Court at Sholapur  in  appeal declared rule 2C "illegal and ultra vires" and by injunction restrained the Municipality from making any claim or  demand for  house-tax  and other taxes from the appellants  on  the basis of them rule.  The High Court of Judicature at Bombay, set aside the decree of the District Court disagreeing  with the view that rule 2C was ultra vires. In  these  appeals  filed with  special  leave  against  the judgments  of the High Court, the only question which  falls to  be determined is whether by rule 2C the Municipality  is entitled- to collect tax leviable as a rate after  computing the  annual letting value solely on the area of the  factory and  buildings related thereto.  By s. 73, the  Municipality

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is authorised subject to any general or special orders which the  State  Government may make in that behalf  and  to  the provisions  of as. 75 and 76, to impose for the purposes  of the  Act  any one or more of the classes of  taxes,  amongst which  are  included a rate on buildings or  lands  or  both situate within the municipal borough and general  water-rate which  may  be  imposed in the form of a  rate  assessed  on buildings  or  lands  or  in any  other  form.   Section  75 prescribes the procedure preliminary to imposing a tax.  The procedure for assessing the 310 liability  to rates on lands and buildings is prescribed  by ss. 78 to 84 of the Act which provide for preparation of the assessment  list, its authentication and amendment.  When  a rate  on  building or lands or both is  imposed,  the  Chief Officer causes ail assessment-list of all buildings or lands or  lands  and  buildings in the  municipal  borough  to  be prepared  containing inter alia the names of the owner,  the valuation  based on capital or annual letting value  as  the case may be on which the property is assessed and the amount of  tax assessed thereon.  The expression  "Annual;  letting value"  is  defined  in s. 3(1) of the Act  as  meaning  the annual  rent  for which any building or land,  exclusive  of furniture  or  machinery  contained or  situate  therein  or thereon  might  reasonably be expected to let from  year  to year,  and shall include all payments made or agreed  to  be made  by a tenant to the owner of the" building or  land  on account  of  occupation, taxes, insurance or  other  charges incidental to his tenancy. By  s. 78 sub-s. (1) cl. (d) and Explanation to s.  75,  the rate to be levied on lands and buildings may be assessed  on the valuation of the lands and buildings based on capital or the  annual letting value.  By the rules in operation  prior to  April  1, 1947, house-tax and water-tax were  levied  as rates   in  respect  of  all  lands,  buildings   and   non- agricultural  lands  on  the annual  letting  value  (except Government buildings).  Even under the new rules,  house-tax and  water-tax  continued  to be levied in  respect  of  all buildings and, non-agricultural lands as rates: but the rate in respect of buildings falling within rule 2C was  assessed on a valuation computed on the floor area of the structures, and  not  on the capital value nor on the  annual  rent  for which the buildings may reasonably be expected to let.  This was clearly not a tax based on the annual letting value, for "Annual letting value" postulates rent which a  hypothetical tenant may reasonably be expected to pay for the building if let.   A rate may be levied under the Act on valuation  made on capital or on the annual letting value.  If the rate 311 is to be levied on the basis of capital value, the  building to  be  taxed must be valued according  to  some  recognised method  of  valuation: if the rate is to be  levied  on  the basis  of  the annual letting value, the  building  must  be valued at the annual rental which a hypothetical tenant  may pay  in respect of the building.  The  Municipality  ignored both  the  methods  of valuation and adopted  a  method  not sanctioned by the Act.  By prescribing valuation computed on the area of the factory building, the Municipality not  only fixed  arbitrarily  the annual letting value which  bore  no relation  to the rental which a tenant may  reasonably  pay, but  rendered  the  statutory right of  the  tax.  payer  to challenge  the  valuation  illusory.   An  assessment   list prepared  under  s.  78,  before  it  is  authenticated  and finalised, must be published and the taxpayers must be given an   opportunity  to  object  to  the  valuation.   By   the

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assessment list in which the valuation is not based upon the capital  value  of  the building or  the  rental  which  the building  may  fetch, but on the floor area,  the  objection which the tax-payers may raise is in substance restricted to the area and not to the valuation. Counsel for the Municipality sought to rely upon The  Madras and  Southern  Mahratta  Railway Co., Ltd.  v.  The  Bezwada Municipality  (1) decided by the Judicial Committee  of  the Privy Council, in support of the plea that the rate based on valuation in proportion to the floor area is validly levied. By  s.  81 sub-s. (2) of the Madras  District  Municipalites Act,  1920,  a  tax for general purposes  and  a  water  and drainage  tax  were to be levied at such  fractions  of  the annual  value of lands or buildings or both as may be  fixed by the Municipal Council.  By s. 82 Sub-s. (2) of that  Act, the annual value of lands and buildings was to be the  gross annual rent at which they may reasonably be expected to let, but  by the proviso, it was enacted that in the case of  any Government  or  Railway building, the annual  value  of  the premises  shall  be  deemed to be 6% of  the  total  of  the estimated  value of the land and the estimated present  cost of erecting the (1)  I.L.R. (1945) Mad 1. 312 building subject to certain deductions.  The Municipality of Bezwada  levied  property  tax on a  piece  of  vacant  land belonging  to  the  Madras  and  Southern  Mahratta  Railway Company  on the annual value computed at 6% of  its  capital value.   This  method  of taxation  was  challenged  by  the Railway  Company  on  the contention  that  all  methods  of valuation other than the method prescribed by the proviso to s.  82(2)  were by necessary implication  prohibited.   This contention  was rejected because the generality of the  sub. stantive enactment was left unqualified except in so far  as it  concerned the particular subjects to which  the  proviso related.  Open lands were not covered by the proviso and  it was  competent to the municipality to levy the tax under  s. 82(2) on the annual value and that value would be determined by  any  of the recognised methods of arriving at  the  rent which  a hypothetical tenant ’may reasonably be expected  to pay for the lands in question.  This case has in our  judge- ment no relevance to the present case. If  the  Municipality  of  Barsi  had  adopted  any  of  the recognised  methods  of valuation for assessing  the  annual letting value, the tax would not, be open to challenge,  but the  method adopted was not a recognised method  of  levying the rate.’ The  High  Court  relied upon its earlier  judgment  in  The Borough  Municipality  of  Amalner v.  The  Pratap  Spinning Weaving  and Manufacturing Co.p Ltd., Amalner (1).  In  that case,  the court negatived the challenge to the validity  of the  rules similar to those impugned in these appeals.   The Amalner  Municipality had by rules framed under  the  Bombay Municipal Boroughs Act sought to levy a rate equal to a per- centage  of the annual letting value which was  computed  on the  floor  area of "mills and factories".  The  court  held that the method of taxation adopted by the Municipality  had remained  unchallenged for a long time,, that the rules  had been sanctioned by the Government and they were not shown to be  "capricious,  arbitrary and unreasonable  and  that  the valuation of the property by reference to the floor area was (1)  I.L.R. (1952) Bom. 918. 313 not altogether unknown to the law of rating.  The High Court also  observed  that  in  assessing  the  rent  2  which   a

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hypothetical tenant may pay several methods are open to  the Municipality  and  if  on examining the  cases  of  all  the factory    buildings   within   their   jurisdiction,    the Municipality concluded that the rent which the  hypothetical tenant may reasonably be expected to pay for those buildings fits  in with the rent which they had fixed by adopting  the flat  and uniform rate  the principle of fixing  the  annual letting  value on the basis of the floor area would  not  be open  to  challenge.  It was assumed in that case  that  all factory   buildings   within  the  area   of   the   Amalner Municipality  were.  alike in essential  features  and  were intended to be used for purposes which were alike, and  that probably  the Municipality may have been satisfied that  the principle enunciated in the rule impugned worked out on  the whole  as a fair basis for determining the valuation of  the building  in  question.   In our view, this  approach  to  a rating problem arising under the Act is not permissible.  In any  event, there is no evidence on the record of this  case that the factories and "buildings relating thereto" such  as ware-houses,  godowns and shops of the Mills situate in  the compound of the mills, may be separately  let at the uniform rate prescribed’ by the Municipality.  The vice of the  rule lies  in  an assumed uniformity of return  per  square  foot which   structures of different classes which are  in  their nature  not  similar,  way reasonably fetch if  let  out  to tenants and in the virtual deprivation to the rate-payer  of his statutory right to object to the valuation. Another  judgment  of  the  Bombay  High  Court  in  Motiram Keshavdas  v.  Ahmedabad  Muncipal  Borough  (1)  calls  for reference.   It was held in Motiram’s case that a  water-tax imposed  by  the  Ahmedabad  Municipality  as  a  rate   not depending  upon the value of the property  assessed  but  in lump  sum was not a rate for the purpose of s. 73(x) of  the Bombay  Municipal  Boroughs  Act, 1925 and  the  rule  which authorised the levy of such a lump sum was ultra vires (2) (1942) Bom. L. R.280 40 314 These appeals must be allowed and the decrees passed by  the High Court set aside and the decrees passed by the  District Court of Sholapur restored with costs in this court and  the High Court.  One hearing  fee.                                        Appeals allowed.