Lokmanya Mills vs Barsi Borough Municipality

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 125 to 129 of 1957

Decision Date: 14 March 1961

Coram: J.C. Shah, J.L. Kapur

In the matter titled Lokmanya Mills versus Barsi Borough Municipality, the Supreme Court of India delivered its judgment on the fourteenth day of March, 1961. The opinion was authored by Justice J. C. Shah, who was joined by Justice J. L. Kapur. The case was recorded under the citations 1961 AIR 1358 and 1962 SCR (1) 306, and it was later referenced in several subsequent reports, including R 1967 SC 1801, RF 1968 SC 859, and RF 1973 SC 1021. The petition was filed by Lokmanya Mills, the appellant, against the respondent, the Barsi Borough Municipality, seeking relief from the tax demand issued under the Bombay Municipal Boroughs Act, 1925. The Act, particularly section 58 and rule 2C, empowered a municipal authority to levy house tax on lands and buildings either on the basis of capital value or on the annual letting value, the latter being defined as the rent that a reasonable tenant might be expected to pay from year to year.

The General Body of the Barsi Municipality, exercising its powers under section 58, framed a set of new rules for rate assessment. According to those rules, all buildings and non‑agricultural lands were to be rated on their annual letting value; however, for mills, factories, and structures associated with such industrial enterprises, rule 2C prescribed that the annual letting value be fixed solely on the basis of the floor area of the premises. Acting upon this rule, the Municipality issued demand notices to Lokmanya Mills, a corporate entity that owned a textile mill, requiring payment of house and water taxes calculated on the basis of the floor‑area method. Lokmanya Mills complied with the payment but did so under protest, asserting that the method of valuation employed was not authorized by the statute. The central question presented to the Court was whether rule 2C validly authorized the Municipality to levy a rate after determining the annual letting value exclusively from the factory’s floor area, thereby bypassing the statutory requirement that the annual letting value reflect a rent realistic to a hypothetical tenant. The Court held that a municipal rate may be levied only on a valuation derived either from the capital value or from a genuine annual letting value, and not on a computation based merely on floor area. The Court explained that “annual letting value” necessarily implies an estimate of rent that a reasonable tenant would pay, which cannot be inferred simply from the dimensions of a building. Consequently, the Municipality’s adoption of a floor‑area based valuation was ultra vires, as it disregarded the valuation methods stipulated by the Act. By fixing an arbitrary annual letting value unrelated to any conceivable rental market, the rule effectively denied the taxpayer a meaningful right to contest the valuation, rendering rule 2C illegal and beyond the powers conferred upon the Municipality under the Bombay Municipal Boroughs Act, 1925.

The Court observed that the rule in question limited the assessment to the physical area of a building rather than to its monetary valuation. It held that adopting a flat and uniform rate on the assumption that all factory buildings within the municipal limits possessed identical essential features and were used for the same purposes was contrary to the provisions of the Act. The defect in the rule, the Court explained, lay in its presumption of a uniform return per square foot for structures that belong to different classes and therefore would reasonably command different rental amounts if let to tenants. Moreover, the rule effectively stripped the rate‑payer of the statutory right to challenge the valuation because the objection that could be raised under the Act related to valuation, not to area. Consequently, the Court declared that Rule 20 issued by the Barsi Borough Municipality under section 58 of the Bombay Municipal Boroughs Act, 1925, was illegal and beyond the authority of the municipality. The Court further noted that the decision in Madras and Southern Mahratta Railway Co. Ltd. v. Bezwada Municipality, reported in I.L.R. 1945 Mad 1, did not apply to the present case, and that the rulings in the Borough Municipality of Amalner v. Pratap Spinning Weaving and Manufacturing Co. Ltd., reported in I.L.R. 1952 Bom 918, and in Motiram Keshavdas v. Ahmedabad Municipal Borough, reported in (1942) 44 Bom L.R. 280, were not approved as authority for the matter.

The Court then set out the procedural background of the appeals that were before it. The appeals, numbered 125 to 129 of 1957, were filed by special leave against the judgment and decree dated 7 October 1952 of the Bombay High Court in the second appeals numbered 601 to 605 of 1952. Counsel for the appellants consisted of senior advocates, while counsel for the respondents represented the municipality. The judgment was delivered on 14 March 1961 by Justice Shah. All five appeals raised a common issue concerning the validity of Rule 2C framed by the respondent, the Municipality of Barsi, under subsection 58(j) of the Bombay Municipal Boroughs Act, 1925. The appellants, identified as Lokmanya Mills, were a company incorporated under the Indian Companies Act and owned a sizeable parcel of land designated as City Survey No. 2554 within the municipal borough. On this land, the company had erected a factory, warehouses, bungalows, and other ancillary structures. The respondent municipality, constituted under the Act, was authorized by section 73 to levy a rate on lands and buildings as well as a water‑rate. Under its own rules, the municipality imposed house‑tax and water‑tax on buildings and non‑agricultural lands based on their annual letting value at uniform rates, irrespective of whether the use was residential, commercial, or industrial. In 1944 the municipality resolved to increase the assessment of lands and buildings within its jurisdiction. After correspondence with the Commissioner of the Central Division, the municipal general body decided that the rental value for letting rates on mills and factories would be fixed at forty rupees for every one hundred square feet. Notices of this resolution were issued under section 75(b) of the Act, inviting objections from taxpayers. Following the approval of the Government of Bombay, the new rules became effective on 1 April 1947, and the rules applicable to the appeals were identified for further consideration.

Rule 2A provided that the assessment of house‑tax on all lands, buildings and non‑agricultural lands, except for Government buildings that fell within Proviso A of section 73 of the Bombay Boroughs Act of 1925, should be made at the rates specified in the Schedule attached to those rules. Rule 2B stated that where Government buildings covered by Proviso A of section 73 were used for beneficial purposes, the assessment of such buildings must be carried out in accordance with sub‑sections 2 and 3 of section 74. Rule 2C dealt specifically with mills, factories and the buildings associated with them. It fixed the annual letting value at forty rupees for each hundred square feet or part thereof for every floor, ground floor or cellar, and required that tax be levied on that annual letting value at the ordinary rate. An explanatory note clarified that “buildings pertaining thereto” meant structures located within the compound of a mill, such as warehouses, godowns and shop premises, but expressly excluded residential structures, namely bungalows and out‑houses. A further note indicated that any building not covered by Rule 2C would be assessed at the ordinary rate. Under this new scheme, the Municipality prepared an assessment list covering factory buildings and the related structures, and issued demand notices requiring the appellants to pay the newly assessed house‑tax and water‑tax. The appellants complied with the payments, but did so under protest, and subsequently instituted five suits in the Court of the Civil Judge, Junior Division of Barsi, seeking recovery of amounts that they claimed were levied in excess of what was due under the earlier assessment system. In each of those suits, the central issue raised concerned the validity of Rule 2C as framed by the Municipality for imposing rates on mills, factories and other related buildings.

The trial court held that Rule 2C was valid, within the Municipal authority, and dismissed the suits for refund of the house‑tax and water‑tax. On appeal, the District Court at Sholapur declared Rule 2C to be “illegal and ultra vires” and, by way of injunction, restrained the Municipality from making any further claim or demand for house‑tax or other taxes from the appellants on the basis of that rule. The High Court of Judicature at Bombay set aside the District Court’s decree, rejecting the view that Rule 2C was ultra vires. The appellants then obtained special leave to appeal the High Court’s judgment. The sole question that required determination in those appeals was whether, under Rule 2C, the Municipality was empowered to levy a tax calculated as a rate after determining the annual letting value solely on the area of the factory and its related buildings. Section 73 of the Bombay Boroughs Act authorises the Municipality, subject to any general or special orders that the State Government may issue and in accordance with sections 75 and 76, to impose, for the purposes of the Act, one or more classes of taxes, including a rate on buildings or lands situated within the municipal borough.

In this case, the Court explained that the municipal authority was empowered to levy taxes on lands or both lands and buildings situated within the municipal borough, as well as a general water‑rate that could be imposed in the form of a rate on buildings or lands or in any other manner. Section 75 of the Act set out the preliminary procedure that had to be followed before any tax could be imposed. The detailed procedure for assessing liability to rates on lands and buildings was laid down in sections 78 to 84 of the Act, which required the preparation of an assessment list, its authentication and any necessary amendment. Whenever a rate on a building or lands, or both, was imposed, the Chief Officer was required to cause an assessment list covering all buildings, lands or both in the municipal borough to be prepared. That list had to contain, among other matters, the names of the owners, the valuation of each property based either on its capital value or its annual letting value, as appropriate, and the amount of tax assessed on that valuation. The term “annual letting value” was defined in section 3(1) of the Act as the annual rent that any building or land, exclusive of furniture or machinery situated therein, could reasonably be expected to fetch from year to year. The definition also required that the value include any payments or agreed payments by a tenant to the owner for occupation, taxes, insurance or other charges incidental to the tenancy. Section 78, sub‑section (1), clause (d) and the explanation to section 75 clarified that the rate levied on lands and buildings could be assessed either on the valuation based on capital or on the annual letting value. Under the rules that were in force before 1 April 1947, both house‑tax and water‑tax were levied as rates on all lands, buildings and non‑agricultural lands according to the annual letting value, except for Government buildings. Even after the new rules were introduced, house‑tax and water‑tax continued to be levied as rates on all buildings and non‑agricultural lands. However, for buildings that fell within rule 2C, the rate was assessed on a valuation calculated solely on the floor area of the structures, and not on either the capital value or the annual rent that the buildings might reasonably be expected to fetch. This method clearly did not rely on the annual letting value, because that concept presupposes a rent that a hypothetical tenant would reasonably be expected to pay. The Act permits a rate to be levied on a valuation made on capital or on the annual letting value. If the rate is to be based on capital value, the building must be valued according to a recognised method of valuation; if the rate is to be based on annual letting value, the building must be valued at the annual rental that a hypothetical tenant could reasonably be expected to pay. By adopting a valuation based on floor area, the Municipality ignored both of the statutory methods of valuation and employed a method that was not sanctioned by the Act.

The Court observed that the Municipality had calculated the valuation of the factory building solely on the basis of its floor area. In doing so, the Municipality arbitrarily fixed an annual letting value that bore no connection to the rent a tenant could reasonably be expected to pay. Consequently, the statutory right of the taxpayer to contest the valuation was rendered ineffective. The Court noted that, under section 78, an assessment list must be published before it is authenticated and finalised, and that taxpayers must be afforded an opportunity to object to the valuation contained in that list. Because the assessment list in the present case derived the valuation not from the capital value of the building or from the rental that the building might fetch, but merely from the floor area, any objection that the taxpayers could raise was effectively limited to the measurement of area rather than to the amount of the valuation itself. The Municipality’s counsel attempted to rely on the decision in The Madras and Southern Mahratta Railway Co., Ltd. v. The Bezwada Municipality (1), a judgment of the Judicial Committee of the Privy Council, to support the proposition that a rate based on a valuation proportionate to floor area was validly levied. The Court explained that, under section 81, sub‑section (2) of the Madras District Municipalities Act, 1920, a tax for general purposes as well as a water and drainage tax could be levied at such fractions of the annual value of lands or buildings, or both, as the Municipal Council might fix. Section 82, sub‑section (2) of the same Act provided that the annual value of lands and buildings should be the gross annual rent at which they could reasonably be expected to be let. However, the proviso to that provision stipulated that, in the case of any Government or Railway building, the annual value of the premises would be deemed to be six per cent of the total of the estimated value of the land and the estimated present cost of erecting the building, subject to certain deductions, as recorded in I.L.R. (1945) Mad 1. The Court recounted that the Municipality of Bezwada had levied a property tax on a vacant parcel of land belonging to the Madras and Southern Mahratta Railway Company by computing the annual value as six per cent of its capital value. The Railway Company challenged this method, arguing that any valuation method other than that prescribed by the proviso to section 82(2) was implicitly prohibited. The Court rejected that contention, observing that the substantive enactment of section 82(2) remained general and unqualified except insofar as it pertained to the specific subjects mentioned in the proviso. Since open lands were not covered by the proviso, the Municipality was competent to levy tax under section 82(2) on the annual value, which could be determined by any recognised method of arriving at the rent that a hypothetical tenant might reasonably be expected to pay for the lands in question. The Court held that the Bezwada case had no relevance to the present dispute. It further stated that, had the Municipality of Barsi employed any of the recognised methods of valuation to assess the annual letting value, the tax would not have been vulnerable to challenge; however, the method adopted was not a recognised method of levying the rate.

In the present case the Court observed that if the municipality had employed a recognized method of assessing the annual letting value, the assessment could not be questioned; however, the method that had been adopted was not one of the recognized methods of levying the rate. The High Court, in reaching its conclusion, referred to its earlier decision in The Borough Municipality of Amalner v. The Pratap Spinning Weaving and Manufacturing Co. Ltd., Amalner (1). In that earlier case the Court had rejected a challenge to the validity of rules that were similar to those now under scrutiny. The Amalner Municipality, by means of rules framed under the Bombay Municipal Boroughs Act, sought to levy a rate equal to a percentage of the annual letting value calculated on the basis of the floor area of “mills and factories.” The Court held that the taxation method had remained unchallenged for a long period, that the rules had received governmental sanction, and that they were not shown to be capricious, arbitrary or unreasonable. Moreover, the Court stated that determining a property’s value by reference to floor area was not unknown to rating law. The High Court further observed that, in assessing the rent a hypothetical tenant might pay, several methods are available to the municipality; if, after examining all factory buildings within its jurisdiction, the municipality concluded that the rent a reasonable tenant would pay corresponded with the rent fixed by applying a flat and uniform rate, then the principle of fixing the annual letting value on the basis of floor area would not be open to challenge. The earlier judgment assumed that all factory buildings within the Amalner Municipality were alike in essential features, intended for similar purposes, and that the municipal authority was satisfied that the rule produced a fair basis for valuation.

The Court, however, rejected that approach as impermissible in the present rating problem under the Act. It noted that no evidence was placed on record showing that the factories and the “buildings relating thereto,” such as warehouses, godowns and shops situated within the mill compound, could be let separately at the uniform rate prescribed by the municipality. The defect in the rule, the Court explained, lies in its presumed uniformity of return per square foot for structures of different classes that are not similar in nature, thereby depriving the rate‑payer of the statutory right to object to the valuation. For further reference, the Court cited another decision of the Bombay High Court, Motiram Keshavdas v. Ahmedabad Municipal Borough (1). In that case it was held that a water‑tax imposed by the Ahmedabad Municipality in the form of a lump‑sum charge, independent of the assessed property value, did not constitute a rate within the meaning of section 73(x) of the Bombay Municipal Boroughs Act, 1925, and that the rule authorising such a lump‑sum levy was ultra vires.

In this case, the Court observed that the rate imposed under section 73(x) of the Bombay Municipal Boroughs Act, 1925, together with the rule that permitted the collection of the lump‑sum amount, was beyond the authority of the municipality. The Court relied on the decision reported as (2) (1942) Bom. L. R. 280 to support this conclusion. Accordingly, the Court directed that the appeals be allowed. The judgments issued by the High Court were to be set aside, and the judgments rendered by the District Court of Sholapur were to be reinstated. The Court further ordered that costs be awarded in this Court and in the High Court, and that a single hearing fee be charged. The appeals were therefore allowed.