Appeal No 15 of 1965
Appeal from the judgment and decree dated April 15  161963 of the Bombay High Court in Appeal No 216of 1961 from Original Decree
section T Desai 0
P Malhotra and 0
C Mathur for the appellant
section V Gupte Solicitor General and Rameshwar Nath for the respondent
The Judgment of the Court was delivered by Shelat J
This appeal by certificate obtained from the High Court at Bombay involves the question as to the true meaning of section 154 of the Bombay Municipal Corporation Act III of 1888 and the correct rateable value to be assessed thereunder
The respondent Club runs two race courses one in Bombay and the other at Poona
We are concerned in this appeal with the Bombay race course which is comprised of land and certain structures standing thereon
The said land is the property of the appellant corporation given on lease to the Club for a period of 30 years commencing from June 1 1944 at an annual rent of Rs 375000
The said structures thereon have been built by and belong to the Club
The Club has obtained a licence from the Government of Maharashtra permitting the Club to hold racemeetings at both the Courses and for which it paid a sum of licence fees between the two Courses in the ratio of 2 1 and thus licence fees between the two Courses in the ratio of 1 2 and thus the share of the Bombay Course came to Rs 866666
The rating year in question is 1954 55
The assessment was made on the basis of the Club s accounts for the year 1953 54 that being the year concluded before the assessment
According to these accounts the gross receipts of the Club came to Rs 117 lacs and odd and the expenses 
to Rs 124 lacs and odd the accounts thus showed a loss of Rs 7 lacs and odd
The Deputy Municipal Commissioner who is the assessing authority disallowed expenses totalling Rs 22 lacs and odd as having been wrongly included in the working expenses add determined
1322430 as the gross annual rent and deducting therefrom the 10 percent deduction allowable under section 154 of the Act assessed the net rateable value at Rs 1190187
The respondent Club thereupon filed an appeal before the Small Cause Court Bombay under section 217 of the Act
The Club claimed in all 19 items of expenses which according to it ought to have been allowed
The Club however conceded that items 1 2 4 5 15 16 and 18 were rightly disallowed
The remaining items were 3
Bombay Course upkeep and repairs 6
Track sand and Murum 7
Legal charges 528 8
Licence fee 9
Totalisator upkeep and repairs 10
Bombay Course salaries and wages 11
Motor lorry expenses 12 Grass and charges for maintenance of horses and bullocks 13
Insurance and gardenexpenses 14
Spares for tractors and machinery parts 19
Painting
Out of these items 3 9 and 19 were wholly disallowed by the Deputy Municipal Commissioner while the rest were partially allowed
As regards Item 19 that is painting Counsel for the Club stated before us that he would not press that item
We are therefore no longer concerned with that item
The Small Cause Court agreed with the Deputy Municipal Commissioner in totally disallowing expenses under Items 3 and 9
It allowed however item 7 that is legal charges which were disallowed by the Deputy Municipal Commissioner
Regarding Item 6 the view of the Small Cause Court was that only 712th and not 50 per cent deducted by the assessing authority ought to have been allowed
It was also of the view that only 712th and not 50 per cent of the expenses under Items 10 11 12 13 and 14 ought to have been allowed by the assessing authority
As regards the licence fees the Club had as aforesaid allotted Rs 866666 to the Bombay Race Course
The Small Cause Court confirmed the deduction of 50 per cent only of this amount allowed by the assessing authority
So far as water tax and wheel tax were concerned the Small cause Court confirmed the deduction of 34th of the these taxes made by the authority The Small Cause Court held that the pro fits basis method employed by the assessing authority was properly employed and further held that the Club had failed to prove that the net rateable value of Rs 1190185 determined by the assessing authority was excessive
Before the High Court the Club agitated the same objections
The High Court was of the view that considering the unique nature of the use of the premises by the Club the proper method for determination of the annual rent was the profits basis method but upheld the Club s objections as regards the disallowance of the several items of expenditure
The High Court held that the gross rateable value of the property would after these deductions be Rs 215750 and after deducting therefrom the statutory deduction of 10 percent
the net rateable value would come to Rs 194175 a figure no doubt less than the actual annual rent of Rs 375000 payable by the Club under the said lease
The appellant corporation challenges the correctness of these deductions allowed by the High Court
529 Before we proceed to consider the contentions urged before us on behalf of the Corporation we may first look at some of the provisions of the Act
Under section 139 the Corporation is required to levy property taxes tax on vehicles and animals theatre tax and octroi
Section 140 provides that property taxes mean water tax halalkhor tax and general tax of not less than 8 per cent
and not more than 26 per cent
of the rateable value of lands and buildings education cess and betterment charges
Section 154 is concerned with the valuation of property assessable to property taxes and provides how the rateable value of such property is to be determined
Sub section 1 runs as follows In order to fix the rateable value of any building or land assessable to a property tax there shall be deducted from the amount of the annual rent for which such land or building might reasonably be expected to let from year to year a sum equal to ten percentum of the said annual rent and the said deduction shall be in lieu of all allowances for repairs or on any other account whatever
 The section provides only for the determination of the annual rent not the actual rent paid by the tenant for which such land or building might reasonably be expected to let from year to year and then to fix the rateable value after deducting therefrom 10 percent
of such annual rent in lieu of all allowances for repairs or any other account whatever
The annual rent has to be worked out on the basis of what a hypothetical tenant would be willing to pay as rent for the premises to a hypothetical landlord who is prepared to let the premises from year to year as they stand having regard to all the advantages and disadvantages relating lo Such premises such as the situation the nature of the property the obligations and liabilities attached thereto and other features if any which enhance or decrease their value to such a tenant
The section simply enjoins upon the Municipal Corporation to determine the annual rent and the rateable value of the property therefrom but does not provide for any particular method of rating out of the several well known methods usually followed in such assessments such as the comparative method the contractor s method the unit method and profits basis method that is profit making capacity or valuation by reference to receipts and expenditure
See Ryde on Rating 11th ed 398 and Faraday on Rating 5th ed
p 24 The profits basis method which the assessing authority has adopted in the present case consists in ascertaining the net annual value of the premises which has to be worked out from the profits which are made or which are capable of being made out of the premises
The gross receipts form the starting point of the calculation and they are those shown in the assessee s accounts for the account year concluded last before the making of the proposal
When these have been ascertained the next step is to deduct therefrom the expenses of earning those receipts the cost 530 Of repairs insurance and other expenses necessary to maintain the premises in a state to command the hypothetical rent
The remaining balance is divisible between the tenant that is the tenant s share the landlord that is the hypothetical rent or net annual value and rates
The tenant s share is often estimated by applying a percentage to the tenant s capital or it may be directly taken as a proportion of the divisible balance or by applying a percentage to the receipts
See Halsbury s Laws of England 3rd ed Vol 32 87 88
It must be remembered that it is not the profits which are rateable they serve to indicate the rent at which the premises might reasonably be expected to let particularly where profit is the motive of the hypothetical tenant in taking the hereditament
This method at one stage used to be adopted in the case of public utilities only
But there are a number of decisions which show that at a later stage it began to be employed to other premises also such as foot ball stadia markets race courses etc
One of the earliest cases where this method was applied to undertakings which are not public utilities is the case of R vs Verall1 which was a case of a race course
In Sanddown Park Case2 the Court of Appeal held that in cases where actual receipts and expenditure are accepted as relevant factors for the ascertainment of cross value sums reflecting the tenant s reasonable profit
risk and interest on capital should be together treated as a charge on the divisible profits in priority to other deductions
The profits basis method has also been applied to such premises as grey hound race tracks
Briefly stated the profits basis method is no more than a calculation based on the profit earning capacity of the premises and as stated by Lord Birkenhead LC in Port of London Authority vs Assessment Committee3 By this reckoning the amount of the gross receipts is ascertained and from such amount are deducted the expenses of earning such receipts the deductions provided for by statute interest on tenant s capital and the estimated amount of tenant s profit
The figure so ascertained would give the rating authority a valuable indication as to the rent which the hypothetical tenant would be likely to give for the right to occupy the hereditament in question and therefore would enable them to form an opinion as to the correct amount of the net annual value for the purpose of rating
 In the instant case the profits basis method has been adopted for the last several years and approved by the Small Causes Court in several appeals by the respondent Club
It appears that at one stage the respondent Club raised an objection regarding its application to the present case
We need not go into the comparative merits of the different methods or into the question whether 1 2 1954 47 RT 351 CA quoted in Ryde on Rating
11th ed523 3 at p 281
531 it can suitably be applied in the present case or not as Counsel for the Club stated before us that he was not pressing that objection
We therefore proceed on the footing that this method was properly adopted by the assessing authority
But that does not end the controversy for even
though the principles on which the profits basis method is worked out are fairly well understood there is nevertheless bound to be controversy in regard to actual working expenses shown in the assessee s accounts
A question would often arise whether these expenses are the hypothetical landlord s burden or that of the hypothetical tenant
If they are of the former class they cannot obviously be claimed as deductible expenses for the hypothetical tenant would not take them into account while offering the rent at which he would take the premises on lease
We now proceed to examine the contentions in regard to the items of expenses in controversy in the light of these principles
The first of these items is Item No 3 of Rs 107414 for expenses for upkeep and repairs of the race course
The contention on behalf of the Municipal Corporation was that the 10 per cent statutory deduction allowed by section 1541 covers all expenses for repairs and therefor deduction of costs of repairs and upkeep if allowed would mean a duplicate deduction
Even if 10 statutory deduction were considered inadequate looking to the present rate of prices the legislature has fixed that percentage as a matter of policy and if it is found to be inequitable or otherwise it is for the legislature and not for the Court to alter it
The question however is not the inadequacy of deduction allowed in section 1541 but as to which are the costs of repairs contemplated by the sub section
Under section 108m of the Transfer of Property Act the lessee is required to use the leased premises as a person of ordinary prudence would use them if they were his own and must keep them in as good a condition as he found them and must yield them up in the same condition subject only to fair wear and tear and irresistible force
There would thus be two implied covenants in a lease 1 to keep in repair and 2 to restore in repair
It would therefore be the obligation of the tenant to maintain the premises in good repair and in the same condition at all times during the term of the lease
lessor bears the burden only in respect of dilapidation to the premises caused by reasonable wear and tear and extraordinary causes such as storm flood or accidental fire
It will however be seen that the deed of lease under which the respondent Club took the land on lease expressly excludes the applicability of cl
in of section 108
That being so the question as to whether it is the lessor or the lessee who would be liable to pay for repairs cannot be resolved by the provisions of section 108m
But the expenses in question are not expenses for the upkeep and repairs of either the land or the structures standing on it which have been put up by the Club
Costs of these repairs may conceivably be the land 532 lord s burden
Item 3 represents expenses for the maintenance in good repair of the track which is the source of receipts earned by the Club
it is manifest that the track together with all its fitments has to be maintained properly if the Club were to earn the receipts and secure the largest possible attendance of persons willing to bet at the races and to attract likewise as many horses and their owners to participate in the race meetings held by the Club
A well maintained track is obviously one of the principal attractions inducing as large an attendance as possible
Therefore it would be in the interest of the tenant who takes on lease a race course with profit making motive to maintain the course efficiently and in good order
Disbursements for the upkeep of the course and all its adjuncts consequently are proper outgoings incurred for earning the receipts
They are thus not the landlord s liability and are not part of or included in the statutory deduction of 10 percent
The statutory deduction in section 1541 is in lieu of the cost of repairs insurance etc
incurred by the lessor
There is therefore no question of any duplication if expenses incurred by the Club for the maintenance of the Course were to be allowed as a proper deduction
The High Court was therefore right in deducting those expenses from the gross receipts
Next is Item 9 which comprises expenses for the upkeep and repairs of the totalisator set up by the Club
The totalisator is an apparatus or a mechanical device for registering and showing the total operations and the number of tickets sold to betters on each horse in a race
Obviously it is maintained to ensure efficient and expeditious working of the races
It does mechanically the work which if done by human labour would necessitate employment of a large number of persons
It is almost an indispensable adjunct of a modern race course and is necessary to declare within the short time available to the betters which are the horses on which heavy betting has been done in a particular race and the total amount of betting on each of the competing horses in that race
The expenses incurred in the upkeep and repair of such an adjunct necessary to an efficient race course must necessarily be regarded as the outgoings of the business
The Corporation s contention that it is a machinery and its value therefore is not to be included in rating under section 1542 has no merit as it is part of the necessary equipment of a good race course and its upkeep goes to the making of receipts
The next items in controversy are items 6 10 11 12 13 and 14 that it cost of sand and moorum salaries and charges of employees motor lorry expenses stores and charges for maintenance of horses and bullocks manure and garden expenses spares of tractors and other machinery and lastly the wheel tax and water tax
The only ground on which the Small Cause Court partially allowed these expenses was that since race meetings were held in
Bombay for 6 months in a year only these expenses would partly be borne by the Club and partly by the lessor
The High 533 Court disagreed with this view and rightly allowed the deduction of the entire amount
In our view it is not possible to find any Principle on which it would be possible to hold that if the race meetings are held for 6 months only in Bombay the burden of these disbursements would be on the tenant for 6 months and for the remainder on the lessor
There is nothing in the lease which would show that the lessor had to maintain the track during the time that race meetings were not held in Bombay
Since it is the Turf Club which ran the race meetings it would be the Club s obligation and not that of the lessor to look after the track s upkeep and maintenance and therefore it would be the Club which would bear the costs of its maintenance even during the period when race meetings were not held in Bombay
The distribution of these expenses between the tenant and the landlord made by the assessing authority and the Small Cause Court cannot therefore be supported on any principle nor can it be sustained on the mere ground that race meetings were held in Bombay only for part of the year
The measure in arriving at the net rateable value under section 1541 is what a hypothetical tenant would pay as rent and that would depend upon the amount of profits earned from race meetings held on the race course
To arrive at the correct amount of such profit all expenses reasonably and properly incurred which go to the making of the receipts have to be deducted from the grossreceipts
There was no challenge at any stage that these expenses were not properly incurred for the upkeep and maintenance of the race course
The High Court therefore was right in allowing the deduction of these expenses also
For the relevant year the Club had allotted Rs 866666 out of the licence fee of Rs 13 lacs to the Bombay race course
Counsel urged that the Club was entitled to a deduction of Rs 433333 only as the licence was for a dual purpose viz for the premises as a race course and for permission to conduct race meetings on
the race course
It was argued that for the first the burden would be on the lessor and for the second on the tenant
The licence exhibit B shows that it was granted to the Committee of the respondent Club
The licence is not a joint licence in favour of the Corporation and the Club
The application for it was made by the Committee on behalf of the Club and not by the Municipal Corporation
If the licence was for a dual purpose prima facie the landlord would either apply separately or join the Club in the application
The licence shows that the application was for horse racing in the race courses leased by them at Mahalaxmi Bombay and in the Cantonment at Poona
The licence is granted to the licencees   to hold horse races on the said race courses
 Condition I of the licence prescribes that the Club could hold only 36 race meetings in a year out of which not more than 16 should be allotted to the Poona racecourse
The licence is clearly permission to run race meetings on the two race courses and not an instrument licensing the premises as a race course
It is manifest that since it is the tenant who would hold the race meetings the fees payable for the licence is his burden 534 and not that of the lessor
Mr Desai
however contended that the  scheme of the Bombay Race Courses Licensing Act III of 1912 is to license the premises and then to licence the person who runs races on such premises
He relied strongly on the long title of the
Act which states that it was an Act to provide for the licensing of race courses in the State of Bombay
Reliance was also placed on section 3i which provides that no horse  race shall be held on a race course for which there is no licence for horse racing in force
But the charging section is section 4 under which the owner the lessee or the occupier of a racecourse can apply for a licence for horse racing on a race course
The licence for horse racing and the obligation to obtain it and to pay the fee therefor is on the person who conducts the business of running the race course for horseracing
Such a person can be either the owner the lessee or the occupier of such a racecourse
What section 3 does is to prohibit horse racing on a racecourse unless a licence for horse racing has been obtained in accordance with the provisions of the Act
There is no provision in the Act which Mr Desai could point out which lays down any licence fee for a race course
There is therefore nothing in the Act to warrant the construction that the licence obtained under section 4 has a dual purpose as contended
Therefore there can be no justification for dividing the burden of the licence fees between the tenant and the landlord
Mr Desai however argued that even so the respondent Club was not entitled to claim the deduction of the licence fees because it was not the Club but its Committee which applied for and obtained the licence
The Articles of Association empower the Committee to act in all matters on behalf of the Club
The Committee applied for and obtained the licence on behalf of and as the agent of the Club
The fees were expended on behalf of the Club and as expenses of its business and it is the Club and not the Committee which is licensed to run horse racing on the race course
The Club was therefore entitled to treat the licence fees as its own expenses and claim deduction therefor on the footing that the fees were expenses incurred by it to earn the receipts
As regards the wheel tax and the water tax there is no justification in distributing them on the ground that during the time racemeetings were not held in Bombay it would be the landlord s obligation to pay those taxes
In our view there is no basis for disallowing a part of these taxes
These again were expenses incurred by the Club in the ordinary course of its business and were as necessary as other expenses in connection with its business
Counsel for the Corporation lastly urged that if these expenses were allowed to be deducted the net rateable value arrived at would be less than the actual rent of Rs 375000 payable by the Club to the Corporation and that such a result cannot be contemplated under any method of assessing the rateable value
It is true that the net rateable value as calculated by the High Court comes to Rs 194175 but the rateable value need not always be equal 535 to the actual rent
As aforesaid the measure is what a hypothetical tenant is expected to pay for a lease from year to Year taking the property as it exists with all its privileges advantages and burdens
The leased premises no doubt consist of a large track of land but it must be remembered that under cl
if of the lease the Club is in exclusive possession of only certain portions and the remainder has to be kept open to the public except on race days and when training of horses is held
A large portion of the land has thus to be kept open for being used as playgrounds for the public
It is therefore not surprising that the rateable value as determined by the High Court comes to an amount less than the actual rent payable by the Club
The appeal fails and is dismissed with costs
RKPS Appeal dismissed


Summary:
The respondent club ran a race course and had built certain structures on land in Bombay which it had leased from the appellant corporation at an annual rent of Rs 375 lakhs
It had obtained a licence from the State Government to hold race meetings on its course in Bombay as well as on another course owned by it in Poona for which it had paid a licence fee of Rs 13 lakhs for the relevant I year and had apportioned the fee in the ratio of 2 1 between the Bombay and the Poona courses
For assessment of the correct rateable value of the property for the rating year 1954 55 the assessing authority made an assessment by the profits basis method on the basis of the Club s accounts for the year 1953 54 and in doing so disallowed certain expenses claimed by the Club in determining the net rateable value at Rs 1190187
The respondent club thereupon  filed an appeal before the small Causes Court under section 217 of the Act and although that Court made a few adjustments it held the Club had failed to prove that the net rateable value determined by the assessing authority was excessive
The High Court however in appeal upheld the Club s objections as regards the disallowance of several items of expenditure and held that the gross annual value of the property would after the deductions to be allowed come to Rs 215750 and after deducting therefrom the statutory allowance of 10 percent under section 154 on account of allowances for repairs etc
 the net annual value would come to Rs 194175
In the appeal to this Court it was contended on behalf of the appellant inter alia i that the 10 percent statutory deduction allowed by section 1541 covers all expenses for repairs and therefore deduction of costs of repairs and upkeep of the course if allowed would mean a duplicate deduction ii that the totalisator maintained by the Club being machinery its value was not to be included in rating under s1542 iii that the Club wag entitled to a deduction of only half of the licence fee apportioned to the Bombay Course because that fee covered dual purpose ie for the premises as a race course and for permission to conduct race meetings on the race course for the first the burden would be on the lessor and for the second on the tenant that this was borne out by the scheme of the Bombay Race Courses Licencing Act 3 of 1912 which was to licence the premises and then to licence the person who runs races on such premises and iv that if the expenses claimed were allowed to be deducted the net rateable value arrived at would be less than the actual rent of Rs 375000 payable by the Club to the Corporation and that such a result cannot be contemplated under any method of assessing the rateable value
HELPDismissing the appeal iThe expenses in question were for the maintenance in good repair of the race track which is the source of 526 receipts earned by teh Club
Disbursements for the upkeep of the course and all its adjuncts consequently are proper out goings incurred for earning the receipts
They are not the landlord s obligation and are not part of or included in teh statutory deduction of 10 percent in section 1541 which is in lieu of the cost of repairs insurance etc
incurred bythe lessor
The High Court was therefore right in deducting such expenses from the gross receipts
ii Similarly the expenses incurred for the upkeep and re pair of the totalisator were incurred on an adjunct neces sary to an efficient race course and must necessarily be regarded as the outgoings of the business
The contention that as it was machinery its value could not be included in rating tinder section 1542 had no merit
iii The High Court had rightly allowed the deduction of the entire amount of expenditure in connection with the cost of sand and morum salaries and charges of empolyees motor lorry expenses stores and charges for maintenance of horses and bullocks manure and garden expenses spares of tractors and other machinery and the wheel tax and water tax
The distribution of these expenses between the tenant and the landlord made by the assessing authority and the small Cause Court could not be sustained on the ground that race meetings were held in Bombay only for Part of the year
There was nothing to show that the lessor had to maintain the track during the time when race meetings were not held in Bombay
The measure in arriving at the net rateable value under section 1541 is what a hypothetical tenant would pay as rent and that would depend upon the amount of profits earned from race meetings held on the race course
To arrive at the correct amount of such profit all expenses reasonably and properly incurred which go to the making of the receipts have to be deducted from the gross receipts
533D iv The licence obtained by the Club was clearly permission to run race meetings on the two race courses and not an instrument licensing the premises as a race course
Since it is the tenant who would hold the race meetings the fee payable for the licence is his burden and not that of the lessor
Furthermore there was no provision in Bombay Act 3 of 1912 to warrant the construction that the licence obtained under section 4 had a dual purpose as contended
533H 534D v The rateable value need not always be equal to the actual rent
The measure is what a hypothetical tenant is expected to pay for a lease from year to year taking the property as it exists with all its advantages and burdens
In view of the fact that the Club was only in exclusive possession of some portions of the land and the remainder had to be kept open to the public except on race days it was not surprising that the rateable value came to less than the actual rent
534H 535C Rv
Verall  Sanddown Park CAse 1954 47 R T 351 CA
quoted in Ryde on Rating 11th ed
523 Port of London Authority vs Assessment Committee at p 281 referred to