Case: Patel Gordhandas Hargovindas Vs. Municipal Commissioner, Ahmedabad

third method of valuation in force in England to which we have already referred. The amendment therefore made in 1930 in the Madras Act does not in any way affect the legislative history and practice relating to the word "rate" which, as we have pointed out was not even used in that Act. We may add that we express no opinion as to the validity of this amendment after the Government of India Act, 1935 and the Constitution of India have come into force.34. It is however urged that it really makes no difference whether the rate is levied at a percentage of the capital value or at a percentage of the annual value arrived at on the basis of capital value by fixing a certain percentage of the capital value as the yield for the year. It is true that mathematically it is possible to arrive at the same figure for the rate by either of these methods. Suppose that the capital value is Rs. 100/- and, as in this case, the rate is fixed at 1 per centum of the capital value, it would work out to Re. 1/-. The same figure can be arrived at by the other method. Assume that 4 percent is the annual yield and thus the annual value of the piece of land, the capital value of which is Rs. 100/-, will be Rs. 4/-. A rate levied at 25 per cent will give the same figure, namely, Re. 1/-. Mathematically, therefore it may be possible to arrive at the same amount of rate payable by an occupant of land, whether the rate is fixed at a particular percentage of the capital value or a particular percentage of the annual value. But this identity would not in our opinion make any difference to the invalidity of the method of fixing the rate on the capital value directly. If the law enjoins that the rate should be fixed on the annual value of lands and buildings, the municipality cannot fix it on the capital value, and then justify it on the ground that the same result could be arrived at by fixing a higher percentage as the rate in case it was fixed in the right way on the annual value. Further by fixing the rate as a percentage of the capital value directly, the real incidence of the levy is camouflaged. In the example which we have given above, the incidence appears as if it is only 1 per cent but in actual fact the incidence is 25 per cent of the annual value. Further if it is open to the municipality to fix the rate directly on the capital value at 1 per cent it will be equally open to it to fix it, say at 10 per cent, which would, taking again the same example, mean that the rate would be 250 per cent of the annual value, and this clearly brings out the camouflage. Now a rate as 10 per cent of the capital value may not appear extortionate but a rate at 250 per cent of the annual value would be impossible to sustain and might even be considered as confiscatory taxation. This shows the vice in the camouflage that results from imposing the rate at a percentage of the capital value and not at a percentage of the annual value as it should be. Lastly, municipal corporations are elected bodies and their members are answerable to their electorates. In such a case it is necessary that the incidence of the tax should be truly known. Taking the example which we have given above, the municipal councillors may not feel hesitant in imposing a rate at 1 per cent of the capital value, but if they were to impose it at 25% of the annual value they may hesitate to do so, because they have to face the electorates also. We are therefore of opinion that though mathematically it may be possible to arrive at the same figure of the actual tax to be paid as a rate whether based on capital value or based on annual value, the levying, of the rate as a percentage of capital value would still be illegal for the reason that the law provides that it should be levied on the annual value and not otherwise. By levying it otherwise directly at a percentage of the capital value, the real incidence of the rate is camouflaged, and the electorate not knowing the true incidence of the tax may possibly be subjected to such a heavy incidence as in some cases may amount to confiscatory taxation. We are therefore of opinion that fixing of the rate at a percentage of the capital value is not permitted by the Act and therefore R. 350-A read with R. 143 which permits this must be struck down, even though mathematically it may be possible to arrive at the same actual tax by varying percentages in the case of capital value and in the case of annual value. It follows therefore that as the tax in the present cases is levied directly as a percentage of the capital value it is ultra vires the Act and the assessment based in this manner must be struck down as ultra vires the Act.35. In the view that we have taken of the meaning of the word "rate" with the result that R. 350-A read with R. 243 has to be struck down as ultra vires the Act it is not necessary to consider the second question raised before us namely whether the explanation would be ultra vires the provincial Legislature because of item 55, List I of the Seventh Schedule to the Government of India Act, 1935 if it authorises the municipality to levy the rate at a percentage of the capital value. We have already said that is not the meaning of the words used in the explanation and the second point therefore does not fall to be considered.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]8. This history of the use of the word "rate" for purposes of local taxation in English Law clearly shows that the word "rate" was used with respect to a tax which was levied on the net annual value or rateable value of lands and buildings and not on their capital value. It would therefore not be wrong to say that in the legislative history and practice in England upto 1925, "rate" for the purpose of local taxation meant a tax on the annual value of lands and buildings liable to such taxation.It will thus be seen that all Indian statutes till 1911 dealing with municipal taxation impose a tax on the annual value of lands or buildings without always using the word "rate". In some of the statutes the word "rate" is used but the tax is again on the annual value.It will be clear further that in India upto the time the Act with which we are concerned was passed, the word "rate" had acquired the same meaning which it undoubtedly had in English legislative history and practice upto the year 1925, when the Rating and Valuation Act came to be passed consolidating the various rates prevalent in England. It would therefore be right to say that be word "rate" had acquired a special meaning in English legislative history and practice and also in Indian legislation where that word was used and it meant a tax for local purposes imposed by local authorities, and the basis of the tax was the annual value of the lands or buildings on or in connection with which it was imposed, arrived at in one of the three ways which we have already indicated. It seems to us therefore that when in 1925 S. 73 (1) of the Act while specifying taxes which could be imposed by a municipal borough used the word "rate" on buildings or lands situate within the municipal borough, the word "rate" must have been used in that particular meaning which it had acquired in the legislative history and practice both in England and India before that date. The matter might have been different if the words in cl. (i) of that section were "a tax on buildings or lands or both situate within the municipal borough", for then the words "tax" would have a wide meaning and would not be confined to any special meaning. But the use of the word "rate" in cl. (i) definitely means that it was that particular kind of tax which in legislative history and practice was known as a "rate" which the municipality could impose and not any other kind of tax. It is true that in the opening words of S. 73 (1) it is said that the municipality may impose any of the following taxes, which are thereafter specified in cls. (i) to (xiv). But when cl. (i) specifies the nature of the tax as a rate on buildings or lands or both we must find out what the word "rate" used therein means, for it could not be an accident that the word "rate" was used in that clause when dealing with a tax on lands or buildings. Further if we find that the word "rate" had acquired a special meaning in legislative history and practice in England and India before 1925 with reference to local taxation, it must follow that when the word "rate" was used in cl. (i) instead of the general word "tax" it was that particular kind of tax which was known in legislative history and practice as a rate which the municipalities were being empowered to impose. It may be added here with some advantage that the word "tax" in the opening words of S. 73 (1) has been used in a general and all pervasive sense as defined in S. 3 (20) of the Act and not in any restricted sense; and therefore when the word "rate" is used in cl. (i) it was clearly used not only in the specific and limited sense, but also with the intention, to convey the meaning that it had acquired by the time the Act was passed. It is remarkable that in some other clauses of S. 73 (1) also the General word "tax" has not been used, though of course all the imposts in cls. (i) to (xiv) are called taxes in the opening words of S. 73 (1) for obvious reason. In cl. (iii) the words used are "a toll on vehicles" which obviously mean that only that kind of tax which was known as toll which could be imposed on vehicles. In cl. (iv) the word used is "octroi" on animals or goods, implying thereby that kind of tax which was known as octroi could be imposed and not any kind of tax within the meaning of the general word "tax". Similarly in cl. (v) the words used are "a terminal tax on goods" meaning thereby that kind of tax which was known as terminal tax could be imposed. Therefore when the first clause of S. 73 (1) gives power to the municipality to impose a rate on buildings or lands it meant that kind of tax which had acquired a special meaning and was known as rate in the legislative history and practice of England as well as of India upto theb. That legislative history and practice we have considered and it shows that the word "rate" whenever used upto 1925 with reference to local taxation meant a tax on the annual value of lands and buildings and not a tax on the capitalhave already pointed out that in England also one basis of valuation for the purpose of rate was to find out first the capital value or the effective capital value. Then a certain percentage of the effective capital value was taken as the annual value and the tax was levied on the annual value so arrived at. In such a case though the tax was levied on the annual value the basis of valuation would still be capital. Therefore the fact that the explanation used the words "the basis of valuation may be capital" it does not mean that the tax would be at such and such percentage of the capital; it only means that in order to arrive at the annual value for purposes of levying rate which is a tax on the annual value, the municipality may use the capital value and then a percentage thereon to arrive at the annual value. This would be in accordance with the third way of arriving at annual value to which we have referred earlier. Therefore we are of opinion taking into account the fact that the word "rate" has been used in the first clause to S. 73 (1), the explanation when it says that in the case of lands basis of valuation may be capital, only means that method of valuation which was in vogue in England and which we have described as the third method of valuation may be used to arrive at the annual value from the capital value and the rate may then redetermined as a tax on the annual value. In this view of the matter R. 350-A read with R. 243 by which the municipality has fixed the tax on the basis of capital value directly is against the provisions of S. 73 (1) (i) and the explanation to S. 75.The whole difficulty in this case has arisen because unfortunately the words "rate" or "rateable value" havent been defined anywhere in the Act, though they have been defined in some other contemporaneous statutes in force at the time the Act was passed and to which we have alreadywhen the explanation uses these words it must in our opinion be held to refer to that well known method of valuation prevailing in England with respect to levy of rates and cannot be read to mean a percentage of the capital value itself. At any rate there are no express words in the explanation to that effect and therefore it should be read to mean the third method of valuation in force in England to which we have already referred. The amendment therefore made in 1930 in the Madras Act does not in any way affect the legislative history and practice relating to the word "rate" which, as we have pointed out was not even used in that Act. We may add that we express no opinion as to the validity of this amendment afterthe Government of India Act, 1935 and the Constitution of India have come intoare therefore of opinion that fixing of the rate at a percentage of the capital value is not permitted by the Act and therefore R. 350-A read with R. 143 which permits this must be struck down, even though mathematically it may be possible to arrive at the same actual tax by varying percentages in the case of capital value and in the case of annual value. It follows therefore that as the tax in the present cases is levied directly as a percentage of the capital value it is ultra vires the Act and the assessment based in this manner must be struck down as ultra vires the Act.35. In the view that we have taken of the meaning of the word "rate" with the result that R. 350-A read with R. 243 has to be struck down as ultra vires the Act it is not necessary to consider the second question raised before us namely whether the explanation would be ultra vires the provincial Legislature because of item 55, List I of the Seventh Schedule tothe Government of India Act, 1935 if it authorises the municipality to levy the rate at a percentage of the capital value. We have already said that is not the meaning of the words used in the explanation and the second point therefore does not fall to befeel no doubt that the question must be answered in the negative. The importance of the distinction between the levy of a tax and the machinery of its collection has often been pointed out by judicial pronouncements of the highest authority. One of the more recent of these is R. C. Jall v. Union of India, AIR 1962 SC 1281  . I suppose the machinery of collection would include the measure of the tax; in any case, I think they are on a par. The subject-matter of taxation is obviously something other than the measure provided for the quantification of the tax.