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
ST Desai Avadh Behari and B P Maheshwari for the appellants
AV Viswanatha Sastri and A G Ratnaparkhi for the respondents
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 section 58j 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 section 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 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 section 75b 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 section 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 section 73 of the Bombay Boroughs Act are used beneficially the assessment of such buildings shall be made as specified in sub section 2 and 3 of section 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 section 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 sections 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 section 31 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 section 78 sub section
1 cl
d and Explanation to section 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 section 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 valuation
Counsel for the Municipality sought to rely upon The Madras and Southern Mahratta Railway Co Ltd vs 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 section 81 sub section
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 section 82 Sub section
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 ILR 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 section 822 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 section 822 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 vs The Pratap Spinning Weaving and Manufacturing Cop 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 ILR 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 vs 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 section 73x 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 R280 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


Summary:
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 section 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 section 58 of the Bombay Municipal Boroughs Act 1925 was illegal and ultra vires
The Madras and Southern Mahratta Railway Co Ltd vs The Bezwada Municipality ILR  not applicable
The Borough Municipality of Amalner vs The Pratap Spinning Weaving and Manufacturing Co Ltd Amalner ILR  not approved
Motiram Keshavdas vs Ahmedabad Municipal Borough  referred to