The Lokmanya Mills Vs. The Barsi
Borough Municipality  INSC 94 (14 March 1961)
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)
Municipality--House tax--Fixation of--Annual
letting value--Rule directing computation on floor area--If intra vires--Method
of computation--Bombay Municipal Boroughs Act, 1925 (Bom. 18 of 1925) s. 58, r.
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 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
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 nonagricultural lands on their annual letting
value at uniform rates whether the purpose was residential, business or
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 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
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 entitledto 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 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 nonagricultural
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 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
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 Municipalities
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 judgment 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 percentage 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
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.