TaxTMI 
TaxTMI 
1963 (3) TMI 53
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....aluation based upon capital. "Valuation based upon capital" was defined in r. 243 as the capital value of lands and buildings as may be determined from time to time by the valuers of the municipality, who shall take into consideration such reliable data as the owners or the occupiers thereof may furnish either of their own accord or on being called upon to do so. The contention of the appellants was that reading the two rules together, the rate was levied at a percentage of the capital value of open lands and this the municipality could not do. Two submissions were made in support of this contention. In the first place it was urged that r. 350-A read with r. 243 was ultra vires ss. 73 and 75 inasmuch as it permitted the fixation of rate at a percentage of capital value and this was not permitted by the Act, for the word "rate" used in s. 73 (1) (i) had acquired a special meaning by the time the Act came to be passed and meant a tax on the annual value of lands and buildings and not on their capital value. In the second place, it was urged that if the Act permitted the levy of a rate on a percentage of capital value of the lands and buildings rated thereunder, it was ultra vires the....
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....pital value. The High Court pointed out that the municipality, by adopting this method, had done in one step what could be done in two steps, and that would have merely involved first determining the capital value and then the annual value, and then fixing the rate on the annual value at a much higher percentage. It was of the view that it was all a matter of fixing a reasonable rate on open land, and if the rate was otherwise reasonable it would be difficult to hold that the rule levying the rate was ultra vires ss. 73 and 75. Thereupon the appellants applied for a certificate of fitness to enable them to appeal to this Court, which was granted; and that is how the matter has come up before us. The same two points which were raised in the High court have been urged before us. We shall first consider the point, whether r.350-A read with r.243 is ultra vires ss.73 and 75 of the Act. The relevant part of s. 73 is as follows:-- "(1) Subject to any general or special orders which the State Government may make in this behalf and to the provisions of sections 75 and 76, a municipality may impose for the purposes of this Act any of the following taxes, namely:- (i) a rate ....
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....urt held that "the expression 'sale of goods' was, at the time when the Government of India Act, 1935, was enacted, a term of well-recognised legal import in the general law relating to sale of goods and in the legislative practice relating to that topic and must be interpreted in Entry 48 in List II in Sch. VII of the Act as having the same meaning as in the Sale of Goods Act, 1930". It is urged that the legislative practice prevalent in England as well as in India up to 1925 showed that wherever the term "rate" was used in connection with local taxation it meant a tax on the annual value of lands and buildings and not on their capital value. It is therefore necessary to look at the legislative history and practice to find out what the word "rate" meant when the Act was passed in 1925. The word "rate" has come to our country for the purpose of local taxation from England. It will therefore be useful to find out what exactly the word "rate" when used in connection with local taxation meant in England. The English Rating Law is largely derived from the Poor Relief Act, 1601 (43 Eliz. Cap. 2) which provided for raising "weekly or otherwise, by taxation of every inhabitant, parson,....
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....ds and buildings. The very fact that the rate was assessed on the occupier of lands and buildings leads clearly to the inference that the rate was to be levied on the annual value of the land or building to the occupier and had nothing to do with the capital value of the land and building to the owner. In other words, the rate was to be levied on the annual value of the land or building depending upon its letting value and not on the capital value. In 1869, another Act was passed known as the Valuation (Metropolis) Act, 1869, which applied to the city of London. That Act defined a "'ratepayer" as meaning "every person who is liable to any rate or tax in respect of property entered in any valuation list". It also defined "gross value" as meaning "the annual rent which a tenant might reasonably be expected, taking one year with another. to pay for an hereditament". Lastly, it defined the words "rateable value" as meaning "the gross value after deducting therefrom the probable annual average cost of repairs, insurance, and other expenses as aforesaid". Clearly therefore the rate under this Act was a tax leviable on the rateable value, which meant the gross value subject to certain ....
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....ion Act of 1925 to which we have already referred only gave final recognition to this meaning of the word "rate" and consolidated various rates prevailing for various purposes by providing for a general rate for all purposes. This general rate was raised on so much of the pound of the rateable value of each hereditament according to the valuation list. The methods in use for the purpose of arriving at rateable value were generally three. Where the land or building was actually let, the valuation was based on the rent at which it was let. Where, however, the land or building was not let, two methods were evolved for the purpose of finding out the rateable value. The first was to assume a hypothetical tenancy (such as where the same person is the owner and occupier) and find out the rent at which the premises would be let. The second was based on the capital value of the premises. But the tax was not levied on the capital value itself; the capital value was determined on the structural value of the building to be assessed by what was known to be contractor's method or contractor's test in addition to the market value of the land. Sometimes the words "effective capital value" were ....
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....alue are given as the same three, namely, (i) the actual rent if the premises were let, (ii) hypothetical tenancy, and (iii) capital cost from which the annual value was determined at a certain percentage : (see Chapters XII and XIV). That it is the annual value and not the capital value which has always been the basis of the rate upto 1925 is well brought out in the following passage at p. 329 of Ryde "On Rating" :- "Where property is of a kind that is rarely let from year to year, recourse, is sometimes bad to interest on capital value or on the actual cost, of land and buildings, as a guide to the ascertainment of annual value. There was some apparent, if not real, conflict of decisions upon the question whether interest on capital value, or on cost, might be considered at all; but the difficulty disappears if the rule be thus stated : the measure of net annual value is defined by statute as the rent which might reasonably be expected; interest on cost, or on capital value, cannot be substituted for the statutory measure. but in the ab sence of the best evidence, that is, actual rents, it can be looked at as prima facie evidence in order to answer the question....
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....cannot be doubted that in England from where in this country we have borrowed the word "rate", that word had acquired a special meaning namely that it was a tax on the annual value of lands and buildings found in one of the three modes we have already indicated. It is also pertinent to note that Land Tax as such was a different tax altogether in England and was levied for the first time by the Land Tax Act of 1797. Land tax is a charge on land, and not on the income likely to arise from occupation of land and the intention was that it should be borne by the owner of the land. The existence of this tax as distinct from the rate on lands and buildings brings out what the word "rate" has always meant in local taxation in England as indicated above : (see p. 332 of Benn and Lockwood on Rating Valuation Practice, Fifth Edition). Let us now look at the legislative history and practice in India upto 1925. The Bombay City Municipal Act (No. III of 1888), by s. 139 provided for property tax. Section 154 (1) thereof provided for valuation of property assessable to property taxes in these terms : - "In order to fix the rateable value of any building or land assessable to....
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.... Act (No. XVI of 1903), s. 35 provides for a tax on houses, buildings and lands, and the tax is not to exceed 7 per centum of the gross annual letting value of the house, building or land. Here again the word "rate" is not used, although the tax is no more than a rate. The Madras Municipal Act (No. III of 1904) by s. 129 provides for the levy of tax on buildings and lands. It has not used the word "rate" but the levy is on the annual value of buildings and lands and the annual value by s. 130 is deemed to be the gross annual rent at which the lands might reasonably be expected to let from year to year or from month to month (subject to certain deductions). It is remarkable how the words used in the various Indian Acts arc almost the same as in English statutes and how they follow the English definitions of gross value or annual value almost word for words. Though, .therefore, the word "rate" was not used in this Act, the levy was on the annual value of the land. Lastly. the Punjab Municipalities Act, (No. III of 1911) provides for a tax On buildings and lands and it further provides various modes for assessment one of which is based on the annual letting value. Two other ways....
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....ithin the municipality. Further by cl. (b), (c), (d) and (e) of this section, provision is made for a tax on all holdings, a water tax, a lighting tax, and a latrine tax on the annual value of holdings. The other sections prescribe the maximum beyond which the taxes will not be levied. As the tax under s. 82 (1) (a) is on occupation it necessarily follows that it could only be levied on the annual value. It will thus be seen that these Acts which were passed between 1912 and 1925, which repeal the earlier Acts also provide for taxation on lands and buildings, and though the word "rate" is not used in any of these Acts, the tax is still on the annual value of lands and buildings. This shows that there was a uniform legislative history and practice in India also though sometimes the impost was called a tax on lands and buildings and at others a rate. But it was always a tax on theannual value of lands and buildings. In any case wherever it was called a rate it was always on the annual value. It would therefore be not improper to infer that whenever the word "rate" is used with respect to local taxation it means a tax on the annual value of lands and buildings. It will be clear ....
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....was known in legislative history and practice as a rate which the municipalities were being empowered to impose. It may be added herewith 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 go....
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.... 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 be determined 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. 'I he whole difficulty in this case has arisen because unfortunately the words "rate" or "rateable value" have not 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 already referred. Our attention was drawn in this connection to an amendment made in the Madras District Municipalities Act, (No. V of 1920), by the insertion of sub-s. (3) in s. 81 of that Act. This was done in 1930 and provided that "in case of lands which are not used exclusively for agricultural purposes and are not occupied by, or adjacent and appurtenant to, buildings" the property tax may be levied ....
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....capital value or is 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. I/-. The same figure can be arrived at by the other method. Assume that 4 per cent 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 percent will give the same figure, namely, Re. I/-. 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 muni....
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.... capital value is not permitted by the Act and therefore r. 350-A read with r. 243 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 case 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. 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. We therefore allow the appeal and set aside the orde....
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....icipality." There is no doubt that as a result of these sections and rules, the appellants were being made to pay I% of the capital value of their lands as assessed by Corporation's valuers. The appellant's had some objection to the valuation on its merits but it is conceded that these cannot be raised in the present proceedings. Learned counsel for the appellants has, therefore, confined himself entirely to challenging the Corporation's power to impose the levy on the basis of the capital value of the lands. The challenge has been based on two grounds, none of which, to my mind, is sustainable. It is first said that the Corporation's power to levy a tax on lands is confined by s. 73 to that variety of tax which is called a "rate" and a "rate" is an impost which is leviable on the basis of an assessment in respect of the yearly value of property. Hence, it is contended, the Corporation had no power to levy any tax based on the capital value of the lands and its rules giving authority to do so are, therefore, void. The foundation on which this contention rests is that the expression "rate" has a technical meaning namely, a levy on the basis of yearly value of property. Supp....
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....ot be rate at all. So far as our country is concerned, the foundation for the argument is much weaker. We have a large number of statutes in which an impost by a local authority though based on annual value has been called "tax"; see for examples -The Bombay City Municipal Act (Act No. III of 1888), The Madras District Municipalities Act (Act No. IV of 1884). The North-Western Provinces and Oudh Municipalities Act, (Act No. 1 of 1900) and The Central Provinces Municipalities Act (Act XVI of 1903). Our practice has, therefore, departed from the English practice at least to this extent that we do not always call imposts levied for local government or municipal expenses, "rates". Also according to our legislative practice, even a "tax" may be based on annual value ; an assessment on the basis of an annual value need not necessarily be called a "rate". It cannot, therefore, be said that in our country the world "rate" has acquired any technical meaning as indicating only an impost by a local authority assessed on the basis of annual value of property. Our legislatures have described the impost indifferently both as "'tax" and as "'rate" as it suited them and have in each case provid....
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.... be assessed either on capital or on annual value. Obviously the intention is that the tax is not a rate in the technical sense, if there is such a sense in which it must be based on the annual value. The word "rate" must be understood, whatever it might in its technical sense mean, to have been used in the statute to describe a tax the basis of which can be capital value. Then it was said that the explanation does not show that the basis of the tax was not intended to be annual value for one of the well known methods of finding out the annual value is first to find out the capital value and then from it the annual value by finding out what yearly income the capital would produce if invested at a rate of interest which would be considered reasonable at the current market conditions, and it is only for the purpose of finding out the annual value by this method that the explanation provides that the basis of the valuation for the imposition of the rate might be the capital value. This seems to me to be quite an impossible contention. It is based on the assumption that what is imposed being a rate which must be based on annual value, the explanation must be read so as to harmoni....
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....inserted in s. 73 of the Bombay Act which provided that "Nothing in this section shall authorise the imposition of any tax which the Provincial Legislature has no power to impose in the Province under the Government of India Act 1935." It was, therefore., contended that the power to impose the rate based on the capital value of lands even if conferred by s. 73 or s. 75 of the Bombay Act would be void unless it was a tax which the Bombay legislature could lawfully impose under the Government of India Act. This contention is perfectly legitimate. I think 1 should point out now that as this case is concerned with assessment for the years 1947-48 and 1948-49, it is unnecessary to consider the question of legislative competence of the legislature of the State of Bombay under the Constitution. The question then is: Is the tax imposed in the present case outside the powers of the Provincial legislature under the Government of India Act, 1935? The respective powers of the Provincial and Central legislatures as defined by that Act are contained in Lists II and I in the Seventh Schedule to it. Under item 42 of List II, the Provincial Legislatures had power to pass an Act imposing "'taxes ....
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....section is being altered and in reality the tax levied becomes a tax on capital asset ? I feel 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 auhority. One of the more recent of these is R. C. Jall V. Union of India (A.I.R. (1962) S.C. 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. In Ralla Rom v. Prorince of East Punjab ([1948] F. C. R. 207), the Federal Court upheld a Provincial statute which imposed a property tax assessed on the annual value of tile property and rejected the contention that such a tax was really a tax on income which only the Centre could impose under item 54 of List I. I think it may be legitimately said that if a tax expressly levied on land and made assessable on its annual value, that is, its income, is not by reason of such method of assessment a tax on income, a tax on land cannot....