THE LOKMANYA MILLS versus THE BARSI BOROUGH MUNICIPALITY

.~larch r4,

THE BARSI BOROUGH MUNICIPALITY

(J. L. KAPUR and J. C. SHAH, JJ.)

Municipality -House tax-Fixation of -Annual letting value-Rule directing computation on floor area-If intra vires-M ethod of computation-Bombay Municipal Boroughs Act, 1925 (Born. 18 of 1925), s. 58, r. 2C.

The Bombay Municipal Boroughs Act, 1925, empowered 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 oi 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 pro-vided 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 company owning textile mill) to pay house and water taxes which were assessed as rates which was paid by the appellants under pro-test.

The question to be determined was whether by r. 2C the Municipality was entitled to collect tax leviable as rate after computing the annual letting value solely on the area of the factory and building relating thereto.

Held, that rate may be levied by municipality under the Bombay Municipal Boroughs Act, r925, on the valuation made on the basis of capital or on the annual letting value of building and not on valuation computed merely on the floor area of the structures, such rate was clearly not tax based either on the capital value or on the annual letting value, for "annual letting value" postulates rent which hypothetical tenant may reasonably be expected to pay for the building if Jet. The Municipality had no power under the Act to ignore the methods of valuation prescribed by the Act, and to adopt method not sanctioned by the Act.

By prescribing valuation computed on the area of the fac-tory building the Barsi Municipality not only fixed arbitrarily the annual letting value which bore no relation to the rental which hypothetical tenant may reasonably be txpected 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.

The rule adopting flat and uniform rate on the assump- · tion that all factory buildings within the area of municipality were not alike in essential features and \Vere 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 2C by the Barsi Borough Municipality under s. 58 of the Bombay Municipal Boroughs Act. 1925, was illegal and ultra vires.

The Madras and Southern M ahratta Railway Co. Ltd. v. The Bezwada Municipality, I.L.R. 1945 Mad. r, not applicable.

The Borough Municipality of Amalner v. The Pratap Spinning Weaving and Manufacturing Co. Ltd., Amalner, l.L.R. 1952 Born. 918, not approved.

Motiram Kcshavdas v. Ahmedabad Municipal Borough, (1942) 44 Born. 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 appelants.

A. V. Viswanatha Sastri and A.G. Ratnaparkhi, for the respondents.

1961. March 14. The Judgment of the Court was delivered by

SHAH, J.-Those five appeals raise common ques-tion 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-herein-after called the Act. The Lokmanvf1 Mills-hereinafter called the appellants-are company registered under the Indian Companies Act holding an extensive 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, Borough Municipality constituted under the Act is bys. 73,

The Loktnanya, JU ills v. The Barsi Borough Jl.1 unicipality

Shah ].

The Lokmanya ]Hills

v. The Barsi Borough Municipality

Shah ].

entitled to levy rate on lands and buildings and also water-rate. Under the rules framed by the Munici-pality, house-tax and water-tax were levied on build-ings and non-agricultural lands on their annual letting value at uniform rates whether the purpose was re-sidential, 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 General Body of the Municipa-lity resolved that the rental value for levying 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 tax-payers, and after obtaining the approval of the Government of Bombay, the new rules were made operative from April I, 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 of s. 73 of the Bombay Boroughs Act of 1925, at rates mentioned in the ScheduJ.e attached to these rules."

Rule 2B:-In case Government buildings coming under Proviso 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 20 :-As regards Mills, factories and build-ings relating thereto, the annual letting value shall be fixed at Rs. 40 per 100 square feet or part there-of 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.

N ote:-Assessment shall be made at the ordinary

1 S.C.R. SUPREME COURT REPORTS

. 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 that 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 Muni-cipality is entitled to collect tax leviable as 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 ss. 75 and 76, to impose for the purposes of the Act any one or more of the classes of taxes, amongst which are included rate on buildings or lands or both situate within the municipal borough and general water-rate which may be imposed in the form of rate assessed on buildings or lands or in any other form. Section 75 prescribes the procedure preliminary to imposing tax. The procedure for assessing the

The Lokmanya Mills v.

The Barsi Dorough

Municipality

Shah ].

The Lokmanya .1.Vlills v. The Barsi Horough Municipality Shah j.

liability to rates on lands and buildings is prescribed by ss. 78 to 84 of the Act which provide for prepara-tion of the assessment list, its authentication and amendment. When rate on building or lands or both is imposed, the Chief Officer causes an assess-ment-list of all buildings or lands or lands and build-ings in the municipal borough to be prepared contain-ing 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 ins. 3(1) of the Act as meaning the annual rent for which any building or land, exclusive of furniture or machinerv contained or situate therein or thereon might reasoii'ably be ex-pected to Jet from year to year, and shall include all payments made or agreed to be made by tenant to the owner of tho building or land on account of occupation, taxes, insurance or other charges inciden-tal to his tenancy.Bys. 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 lauds and buildings based on capital or the annual letting value. By the rules in operation prior to April 1, 194 7, 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). Evon 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 valuation computed on the floor area of the struc-tures, and not on the capital value nor on the annual rent for which the buildings may reasonably be ex-pected to let. This was clearly not tax based on the annual letting value, for "Annual letting value" postulates rent which hypothetical tenant may rea-sonably be expected to pay for the building if let. rate may be levied under the Act on valuation made on capital or on the annual letting value. If the rate

1 S.C.R. SUPREME COURT REPORTS

is to be levied on the hasis of capital value, the build-ing to be taxed must be valued according to some re-cognised 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 hypothetical tenant may pay in respect of the build-ing. The Municipality ignored both the methods of valuation and adopted 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 tenant may reason-ably pay, but rendered the statutory right of the tax-payer to challenge the valuation illusory. An assess-ment list prepared under s. 78, before it is authenti-cated and finalised, must be published and the tax-payers must be given an opportunity to object to the valuation. By the assessment list in which the valua-tion is not based upon the capital value of the build-ing 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 Go., Ltd. v. The Bezwada JYJunicipality (') decided by the Judi-ciitl 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, tax for general purposes and 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 build-ing, 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 r.

The Lokin<111ya Ill ills v.

The Barsi JJorough Municipality

Shah J.

The Lok1nanya Al ills v. The Barsi Borough lliunicipality Shah J.

building subject to certain deductions. The Munici-pality of Bezwada levied property tax on piece of vacant land belonging to the Madras and Southern Mahratta Railway Company on the annual value com-puted at 6% of its capital value. This method of t11xation 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 con-tention 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 recog-nised methods of arriving at the rent which hypo-thetical tenant may reasonably be expected to pay for the lands in question. This case has in our judg-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 recognis-ed 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., Ltd., Amal-ner (1 ). In that case, the court negatived the chal-lenge to the validity of the rules similar to those impugned in these appeals. The Amalner Munici-pality had by rules framed under the Bombay Munici-pal Boroughs Act sought to levy rate equal to per-centage of the annual letting value which was com-puted on the floor area of "mills and factories". The court held that the method of taxation adoptecl by · the Municipality had remained unchallenged for · long time, that the rules had been sanctioned by the Government and they were not shown to be "caprici-ous, arbitrary and unreasonable" and that the valua-tion of the property by reference to the floor area was

\I) l.L.R. (1952) Bom. 918.

I S.C.R. SUPREME COURT REPORTS

not altogether unknown to the law of rating. The High Court also observed that in assessing the rent which 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 fiat and uniform rate, the principle of fixing the annual let-ting 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 fair basis for determin-ing the valuation of the building in question. In our view, this approach to 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 com-. pound of the mills, may be separately let at the uni-form 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, may reasonably fetch if let out to tenants and in the virtual depriva-tion to the rate-payer of his statutory right to object to the valuation.Another judgment of the Bombay High Court in Motiram Keshavdrts v. Ahmedabad Municipal Bor-ough (1) calls for reference. It was held in Motiram's case that water-tax imposed by the Ahmedabad Municipality as rate not depending upon the value of the property assessed but in lump sum was not rate for the purpose of s. 73(x) of the Bombay Munici-pal Boroughs Act, 1925 and the rule which authoris-ed the levy of such lump sum was ultra vires.

(1) {1942) Born. L.R. 280 40 •

The Lohmanya Mills

The Barsi Borough Municipality

Shah ].

I96I These appeals must be allowed and the decrees pas-sed by the High Court set aside and the decrees pas-sed by the District Court of Shola pur restored with v. costs in this court and the High Court. One hearing fee.

The Lokmanya Mills

The Ba1si Borough

Muni&ipality

Appeals allowed.

Shah ].

Mar&h x4.

ENDUPURI NARASIMHAM AND SON

THE STATE OF ORISSA AND OTHERS

(S. K. DAS, J. L. KAPUR, M. HIDAYATULLAH,

J. C. SHAH and T. L. VENKATARAMA ArYAR, JJ.)

Sales Tax-Transactions intra-State and inter-State-Test-Constitution of India, Art. 286(2)-0rissa Sales Tax Act, r947 (XIV of r947), s. 5(2)(a)(II).

The petitioner who was registered dealer under the Orissa Sales Tax Act, 1947, was carrying on the business of purchasing and reselling castor seeds, etc., in the State of Orissa. Under declaration given by him for the purpose of obtaining his regis-tration certificate the goods purchased by him in Orissa were to be resold in that State. He purchased certain commodities inside the State but in contravention of his declaration sold the goods to dealers outside the State. The Sales Tax Officer inclu-ded in the taxable turnover of the petitioner the purchase made by him inside the State in accordance with s. 5(2)(a)(II) of the Act. The contention of the petitioner was that the purchase was in course of inter-State trade and was exempted under Art. 286(2) of the Constitution of India.

Held, that the transaction of sale which has been taxed was wholly inside the State of Orissa and was distinct and sepa-rate from the sale made by the purchaser to dealers outside the State. The former transaction was taxable nnder s. 5(2)(a)(II) of the Act while the latter was exempted under Art. 286(2) of the Constitution.

Messrs. Mohanlal Hargovind Das v. The State of Madhya Pradesh, [1955] 2 S.C.R. 509, distinguished.

In order that sale or purchase might be inter-State, it is essential that there must be transport of goods from one State