Government Servant Co-Operative House Building Society Vs. Union of India & Ors  INSC 389 (5 August 1998)
V. Manohar, M. Srinivasan Mrs. Sujata V. Manohar, J.
8425/94, W.P. (C) No. 758/93, C.A.
Nos.8428/94, 8429/94, 8430/94 and 5652/95]
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.
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.
footnote to these notices stated that this was in view of the amendments to the
Delhi Rent Control Act, 1988.
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
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 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
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
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.
- The expressions "water tax" and "scavenging tax" shall
mean such taxes of that nature as may be levied by an appropriate authority.]
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.
case of The Corporation of Calcutta v. Sm. Padma Debi and Ors. (1962  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.
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.
same principle was reiterated by this Court in Dewan Daulat Rai Kapoor and Ors.
v. New Delhi Municipal committee and ors. (1980  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
case of Dr. Balbir Singh and Ors. etc. Etc. v. Municipal Corporation, Delhi and ors. (1985  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  SCC 368).
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.
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.
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 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
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  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  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.
thus well settled that an Act of the State 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 
SCC 135, Assistant commissioner of Urban Land Tax and Ors. v. The Buckingham
and Carnatic Co. Ltd., etc. (1970  SCR 268), and India Cement Ltd. and ors.
v. State of Tamil Nadu and ors. (1990  SCC 12).
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.
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.
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.