Corporation of the City of Nagpur v. Nagpur Handloom Cloth Market Co. Ltd

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 288 of 1960

Decision Date: 7 December 1962

Coram: J.C. Shah, Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.N. Wanchoo, K.C. Das Gupta

In this case the Supreme Court of India examined a dispute filed on 7 December 1962 between the Corporation of the City of Nagpur and the Nagpur Handloom Cloth Market Company Ltd. The judgment was delivered by Justice J.C. Shah, with Justices Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.N. Wanchoo and K.C. Das Gupta sitting on the bench. The matter was recorded as Corporation of the City of Nagpur versus Nagpur Handloom Cloth Market Co. Ltd, citation 1963 AIR 1192 and 1963 SCR Supl. (2) 796. The dispute centred on the authority of the corporation to levy certain municipal taxes under the City of Nagpur Corporation Act, 1948 (C.P. and Berar 2 of 1950), especially section 5(7), and the corresponding rules, namely the City of Nagpur Corporation Rules, rule 10(a), (b) and (c).

The company had constructed on its own plots a series of two‑storey buildings in Nagpur. The ground floor of each building was intended for use as shops, while the first floor was meant for residential accommodation. The shop premises were provided with lavatories that were connected to the corporation’s drainage system, and water for the shops was supplied by the corporation in accordance with its water standards. Under section 114 of the City of Nagpur Corporation Act, 1948, the corporation imposed conservancy tax and water rates on the basis of the letting value of these buildings. Most of the shops were occupied by individual shop‑keepers. In 1953 the corporation served assessment notices on the shop‑keepers for the taxes applicable to their respective premises.

Several shop‑keepers lodged objections to the assessment notices. After the corporation rejected those objections, the aggrieved shop‑keepers appealed under sections 387 and 130 of the Act, but their appeals were dismissed. Approximately two years later the Nagpur Handloom Cloth Market Company Ltd and one of the shop‑keepers instituted a writ petition in the High Court of Bombay. The petition sought to set aside the demand order dated 2 February 1958 and to restrain the corporation from applying rule 10(a) of the Assessment Rules. The High Court allowed the writ petition, holding that rule 10(a) applied only to residential houses and not to premises occupied for non‑residential purposes; consequently the separate assessment of the shops occupied by the shop‑keepers was deemed invalid. The High Court also rejected the corporation’s argument that the petition should be dismissed for the considerable delay in filing.

The corporation appealed the High Court’s decision to the Supreme Court by way of special leave. The Supreme Court held that the expression “building” in section 5(7) of the Act included a part of a building. By virtue of section 5(7) together with the implications of rule 10(a) and rule 10(c), the corporation was competent to treat each tenement occupied by a different person as a separate building for the purpose of levying tax. Accordingly, the Court affirmed the corporation’s power to assess each shop‑keeper individually under the applicable municipal taxes.

In interpreting rule 10(a) the Court observed that the term ‘family’ does not require a blood or marital relationship among the persons living in a tenement; a single individual may be treated as a family and even a master‑and‑servant relationship falls within the definition. The Court further held that the word ‘occupying’ in rule 10(a) applies with equal force to both residential and non‑residential uses. The appeal, designated Civil Appeal No. 288 of 1960, was filed by special leave against the Bombay High Court judgment dated 8 August 1958 in Special Civil Application No. 174 of 1958. Counsel for the appellant included G S Pathak, S M Hajarnavis, O C Mathur, J B Dadachanji and Bavinder Narain, while the respondents were represented by M C Setalvad, Attorney‑General of India, A L Y Phadke and Naunit Lal. The judgment was delivered on 7 December 1962 by Justice Shah. The Nagpur Handloom Cloth Market Company Ltd, hereinafter referred to as the Company, had erected two buildings on land it owned; each building comprised a ground‑floor shop area and an upper floor intended for residential occupation. To serve the shop occupants, the Company constructed twenty flush lavatories with underground sewers that were linked to the Nagpur Corporation drainage system, and the Corporation had installed a public water supply within two hundred yards of the structures. Under section 114 of the City of Nagpur Corporation Act, 1948 (the Act), the Municipal Corporation levied conservancy tax and water‑rate, both assessed as rates on the annual letting value of buildings and lands within its jurisdiction. It was agreed that a total of two hundred and one shops were occupied by shop‑keepers under a scheme whereby payment of stipulated sums would confer full ownership of the respective shop on the occupier and, upon discharge of all such obligations, the Company would be dissolved. The Court noted that the particulars of that scheme had not been produced, and consequently the material before it did not permit a determination of the precise legal relationship between the shop‑keepers and the Company. For the fiscal year 1953‑54 the Nagpur Corporation resolved to assess each of one hundred and fifty‑five shop‑keepers who occupied the Company’s shops for private conservancy tax, water‑rate and property tax as separate units. Assessment notices were issued to the Company’s Managing Director on 26 September 1953. By a letter dated 30 September 1953 the Company requested that the Corporation serve the notices directly on the individual shop‑keepers. The Corporation complied, and notices of assessment were dispatched to the shop‑keepers, of whom one hundred and twenty out of the one hundred and fifty‑five respondents received the notices.

The shop‑keepers who received the assessment notices filed objections, arguing that the taxes could be levied only on the Company and not on the individual occupants. These objections were presented before the Objection Officer who had been appointed by the Corporation. Both the Managing Director of the Company and a representative of the shop‑keepers gave oral and written submissions on behalf of their respective interests. By an order dated 19 April 1954, the Objection Officer concluded that the Company should be deemed the owner of the houses while the shop‑keepers were to be treated as occupants, and therefore the tax demand ought to be made primarily against the occupants. Neither the shop‑keepers nor the Company initiated any proceeding to challenge that order, and the assessment list was subsequently authenticated in accordance with the applicable rules. Following that authentication, the Corporation served demand notices on the shop‑keepers, requiring them to pay the amounts shown in the assessment list. On 16 December 1954, some of the occupants appealed to the Chief Executive Officer under section 387 of the Act, contending that the assessment was invalid. The Deputy Chief Executive Officer dismissed those appeals as incompetent and observed that, in any event, appeals not filed within the period prescribed by section 379 of the Act were barred by limitation. The shop‑keepers and the Company then each filed separate appeals before the District Judge of Nagpur against the Objection Officer’s order. The District Judge, by his order of 28 October 1955, held that the appeals were barred by the limitation period and that the appellants had failed to demonstrate any sufficient cause for condoning the delay. Subsequently the shop‑keepers moved the Chief Executive Officer to reconsider the tax assessment order. By an order dated 18 April 1956, the Chief Executive Officer stated that, although the Deputy Chief Executive Officer had correctly dismissed the earlier appeals as not maintainable and that the proper statutory remedy for the aggrieved parties would have been an appeal under section 130 of the Act, the appeals remained barred by limitation, leaving him unable to grant any relief. The Chief Executive Officer further expressed the view that, since the houses had been divided into separate shops and allotted to the Company’s shareholders who operated independent businesses, each shop possessed a distinct source of income as defined in rule 10(a) of the assessment rules; consequently, the Objection Officer was justified in treating each shop as an independent unit for the purpose of assessing conservancy cess and water rate. Nearly two years later, the Company together with one shop‑keeper, identified as Sitaram, filed a writ petition in the High Court of Bombay at Nagpur seeking writs of certiorari to quash the demand order dated 19 February 1958, to set aside the assessment bills for the years 1956‑57 and 1957‑58, and to obtain a writ of mandamus prohibiting the Corporation from applying the rule in question.

In the writ petition the respondents sought to restrain the Corporation from applying the provisions of rule 10(a) of the assessment rules to the conservancy tax and water rate and asked that the Corporation not treat the individual shops on the ground floor of the two houses as separate units of assessment for those taxes. The High Court held that rule 10(a) of the assessment rules was intended to apply only to residential houses and not to premises occupied for non‑residential purposes. Consequently, the Court found that the separate assessment of the shops occupied by the shop‑keepers was invalid under the Act read together with the relevant rules. Accordingly, the High Court allowed the petition, set aside the notice of demand dated 19 February 1958 issued by the Corporation for the levy of tax, and quashed that demand. The Corporation, having obtained special leave, appealed the decision before this Court. Counsel for the Corporation raised three principal contentions in support of the appeal. First, it was submitted that the statutory framework creates three distinct stages in taxation: the liability of a taxpayer to pay tax, the assessment or levy of tax in accordance with the procedure prescribed by the statute and its rules, and the collection of tax. Each stage is self‑contained, and where no objection is made to the assessment as prescribed, the validity of that assessment cannot be challenged in a recovery proceeding. Second, counsel argued that the Company’s objection was directed only against the demand and not against the assessment itself, and that, in any event, there was a substantial delay in the commencement of proceedings in the High Court for obtaining relief by way of a writ, which on that basis barred the Company from obtaining relief. Third, it was contended that even on the merits the High Court’s interpretation of rule 10(a) was erroneous, and that every occupant of the shops whose name appeared in the assessment list should be liable to pay the conservancy tax and water rate with respect to the shop he occupied. The judgment further noted that Part IV of the Act deals with taxation, that sections 114 and 115 set out the taxes which the Corporation is obligated or may choose to impose and the procedure for doing so, that sections 116 to 140 govern the assessment of property tax, and that sections 154 to 169 govern the recovery of taxes. Section 130 provides a right of appeal to the District Court against any dispute concerning the liability of any land or building to assessment of property tax or the basis or principle of such assessment, while section 164 allows an appeal against a notice of demand for tax under subsection (1) of section 155, an appeal that lies to a Magistrate under the direction of the District Magistrate.

Section 387 of the Act conferred a general right of appeal, allowing any person aggrieved by an order made under the Act, a rule, or a bye‑law to appeal first to any Corporation Officer appointed by the Chief Executive Officer for the purpose of hearing such appeals; if no such officer had been appointed, the appeal could be made directly to the Chief Executive Officer. The process for assessing conservancy tax and water rate, however, was not set out in the Act itself but was established by the rules framed pursuant to the C. P. & Berar Municipalities Act of 1922, which, by virtue of section 3(2) of the Act, were deemed to have been made under the provisions of the Corporation Act of 1948. In contrast, the method for recovering those taxes was governed by sections 154 to 167 of the Act. Consequently, the matters of imposition, assessment and recovery of conservancy tax and water rate were distributed between the Act and the Rules. In the present case, the Court found it unnecessary to pronounce on the contention raised on behalf of the Corporation, through counsel Mr Pathak, that a taxpayer could not contest the correctness of an assessment order in a recovery proceeding. Although similar provisions in the Bombay District Municipal Act III of 1901 and the Bombay Municipal Boroughs Act, XVIII of 1925 permit a taxpayer to challenge the propriety of an assessment when appealing a notice of demand to a Magistrate, the Court observed that the earlier authorities—The Municipal Borough of Ahmedabad v. The Aryodaya Ginning and Manufacturing Company Ltd. and The Municipality of Ankleshwar v. Chhotalal Ghelabhai Gandhi—did not compel a ruling on that specific plea. The Court also noted a considerable delay in instituting the petition before the High Court under article 226 of the Constitution. The order of the Objection Officer was dated 19 April 1954, and the appeal against that order was dismissed on 22 April 1955. A second order from the Chief Executive Officer followed on 18 April 1956, after which nearly two years elapsed before any High Court proceedings were commenced to challenge that order’s validity. The High Court, however, held that because the Chief Executive Officer had initially decided that the appeal filed before him was incompetent, directing the taxpayer to seek remedy in the District Court under section 130 of the Act, and later, in the 1956 appeal, had found the appeal maintainable yet dismissed it on its merits, indicating that it was barred by limitation, there existed sufficient basis not to deem the shop‑keepers and the Company guilty of laches. Moreover, the High Court observed that following the Chief Executive Officer’s 1956 order, the Corporation was moved by an application under section 143 of the Act, and the petition was subsequently filed without delay. While the Court considered this ground perhaps inadequate, it affirmed that the High Court had exercised its discretion in deciding that, despite the delay, the petition should be entertained, and it could not, on this ground alone, overturn that discretionary judgment, especially since the petitioners sought relief not only for the assessment year 1953‑54 but also for the assessment years 1956‑57 and 1957‑58. The remaining issue for determination, therefore, turned on the correct interpretation of rule 10(a) of the assessment rules concerning conservancy tax and water rate.

In this matter, the Court observed that the petition, cited in 57 Bom. L. R. S 547, was filed under section 143 of the Act immediately after the Corporation had decided on the application, and therefore there was no lapse between the decision and the filing. The Court acknowledged that the argument that the filing was delayed might appear insufficient, but it also recognized that the High Court had exercised its discretionary jurisdiction by deciding that the petition should be entertained despite any alleged delay. Because the discretion to admit a petition rests with the lower court, the Court held that it could not overturn the High Court’s judgment solely on the basis of the alleged delay, particularly since the petitioners were seeking relief not only for the assessment of the year 1953‑54 but also for the assessments of the years 1956‑57 and 1957‑58.

The principal issue for determination, according to the Court, was the proper interpretation of rule 10(a) of the assessment rules that relate to the conservancy tax and the water rate. Section 114 of the governing Act obliges the Corporation to levy, among other taxes, a property tax, a latrine or conservancy tax that is payable by the occupier or owner of private latrines, privies or cesspools, or of premises or compounds that are cleaned by a municipal agency, and a water rate where water is supplied by the Corporation. While the Act itself prescribes the method of assessment for the property tax, it does not prescribe any specific machinery for assessing the conservancy tax or the water rate.

The Court noted that under the C.P. and Berar Municipalities Act, 2 of 1922, section 66 authorized municipalities, including the Municipality of Nagpur, to impose a variety of taxes, and among those taxes were the latrine or conservancy tax and the water rate. Section 71 of the same Act empowered the State Government to make rules under the Act, including rules that regulate tax assessment. Exercising this authority, the Government of Madhya Pradesh issued several sets of rules dealing with the assessment, levy and collection of taxes.

Among those rules, the Court pointed out that rules dated 19 August 1941 declared the liability of buildings and lands for conservancy tax in respect of private latrines. Rule 2, as relevant, provided that a tax was to be imposed on every building or land to which a private latrine, privy or cesspool is attached, or on any resident who uses such facilities, where those facilities are either cleaned by a municipal agency or are connected with the municipal underground sewer, and that the tax was payable by the owner under section 66(1)(h) according to a scale based on the gross annual letting value.

The Court further observed that a comparable set of rules concerning the water rate was promulgated on 28 September 1949. Rule 1, in its material part, stipulated that a water rate was to be imposed on every building or land that does not have a private water supply from the municipal service, or where the resident does not use water from such a supply, and that the building or land is situated within two hundred yards of a public water main or service pipe. The tax was to be levied from the owners or occupiers under section 66(1)(k) according to scales based on the gross annual letting value.

In 1941 the municipal authorities issued rules for the assessment of the conservancy tax. The tax was to be calculated on the basis of the gross annual letting value of each building. Under rule five the authorities were required to issue notices to every person who was affected by the preparation of the assessment list once the assessment was completed. Rule six then gave any affected person the right to object to the assessment, to the valuation, or to both, within a period of thirty days after the notice was published or served. The same rule also required that a hearing be held for anyone who raised an objection. After the objections were considered and any necessary amendments were made to the assessment list, rule eight directed that the revised list be authenticated. Once authenticated, the register became valid from that date and remained in force until the beginning of the half‑year that followed the authentication of a new register. Rule ten dealt with situations where more than one family, each having separate sources of income, occupied separate portions of the same building or group of buildings. Clause (a) of that rule deemed each such portion to be a separate building and required it to be assessed according to its own gross annual letting value as determined under rule one. Clause (b) authorised the municipal committee, at a special meeting if it thought appropriate, to assess the tax on the total gross annual letting value of all the portions together instead of assessing each portion individually. Clause (c) stipulated that a detached building, even when occupied by the same person or family, must be assessed as an independent unit whenever a public right of way or land belonging to another person separated it from any other structure.

Similar provisions were incorporated in the rules that governed the assessment of water rates. The water rate, like the conservancy tax, was imposed as a rate on the gross annual letting value of the premises, and the same clauses (a), (b) and (c) of rule ten were reproduced in identical form for water‑rate assessments. For brevity, reference was made only to the conservancy‑tax assessment rules when discussing the water‑rate provisions. These assessment rules continued to apply even after the C. P. & Berar Municipalities Act of 1922 was repealed by section 3(2) of the Municipalities Act of 1948. The rules were treated as if they had been framed under the 1948 Act for the purpose of determining liability for both conservancy tax and water rates. In addition, the term “building” was defined by section 5(7) of the Act to include a house, outhouse, stable, hut, shed or any other enclosure, whether used as a human dwelling or for any other purpose, and also to cover verandahs, fixed platforms, plinths, door‑steps, walls and similar structures. Because the definition was inclusive, any part of a structure could be regarded as a building for the purpose of levying rates, and the municipal corporation was therefore competent to compile a list of several tenements occupied by different persons, treating each tenement as a separate building for the assessment of tax.

The Court observed that the definition of “building” contained in section 5(7) of the Act states that a building includes a human dwelling or any similar structure and expressly lists verandahs, fixed platforms, plinths, door‑steps, walls and similar features. This definition is inclusive and it implies that any part of a structure may be treated as a building for the purpose of imposing liability to pay rates and for assessing that liability. The Court explained that, when the Act is read together with the assessment rules, both conservancy tax and water rate are to be levied as rates on the gross annual letting value of a property, and that a rate may be imposed only against a person in respect of a tenement or premises that is occupied as an independent unit. The assessment rules therefore provide for the levy of a rate on the gross annual letting value of the building. Because the expression “building” under section 5(7) embraces even a part of a larger structure, the Corporation is authorised to prepare a list of several tenements occupied by different persons and to treat each such tenement as a separate building for the purpose of levying tax. This authority is implicit in rule 10(b) and also in rule 10(c) of the assessment rules. By virtue of those rules, liability to pay conservancy tax and water rate is imposed with respect to a building when the conditions specified in the rules are satisfied, and that liability arises regardless of whether the building is used for residential or non‑residential purposes. Rule 10(a) further clarifies that the Corporation may levy water rate and conservancy tax on separate tenements occupied by different persons as if each tenement were a distinct building. The Court noted that the High Court had previously interpreted the use of the word “family” in rule 10(a) to mean that the rule did not apply to buildings occupied for non‑residential purposes. However, the Court pointed out that the rules governing the imposition of conservancy tax and water rate make all buildings that have attached latrines cleaned by the municipal agency, that are connected to the water distribution system, or that lie within the prescribed distance of a water main, liable to pay the taxes irrespective of the nature of the building’s use. In that view, a building occupied for non‑residential use could be taxed as a single unit even if it is let to multiple tenants or licencees who conduct separate trades or businesses. The Court found that this interpretation was not supported by the scheme of the Act and the assessment rules. It further explained that, if a building is partly occupied for residential purposes and partly for non‑residential purposes, the High Court had held that the residential portions would be treated as separate buildings, with each occupant liable for conservancy tax and water rate based on their own source of income, while the non‑residential portions would not be regarded as separate buildings. The Court concluded that the High Court’s reading of rule 10(a) as excluding non‑residential occupancies was inconsistent with the legislative scheme and the intended application of the assessment rules.

In this case, the Court examined the scope of rule 10(a) and held that the rule was not limited to portions of buildings used for non‑residential purposes merely because the word “family” appeared in the provision. The Court explained that the term “family” acquires a variable meaning from the context in which it occurs and does not, in the setting of the rules, require a relationship of blood or marriage between the persons residing in the tenement. Accordingly, a single individual may be regarded as a family, and even a master and servant may be treated as a family under the rule. The Court further observed that the word “occupy” used in rule 10(a) is not expressly or contextually restricted to residential occupation. In the absence of any indication that occupation is confined to residential use, the rule must be deemed to have general application, meaning that it applies to both non‑residential and residential uses. Consequently, the expression “family” must be read in light of the expression “occupy” within the same rule, and the Court concluded that “family” in this context simply means a person or a group of persons.

Counsel for the Corporation submitted that there was a drafting error in rule 10(a) and that, as a matter of interpretation, the Court should read the expression “family” in that rule as meaning “family or person,” which is the wording used in rule 10(c). He argued that because rule 10(a) and rule 10(c) address the same subject‑matter, the phrase “one family” in rule 10(a) and the phrase “person or family” in rule 10(c) ought to have the same meaning. The Court noted that this contention has a prima facie basis, but it was not necessary to decide the case on that ground. The Court reiterated that the expression “family” does not carry the restricted meaning suggested by the High Court, and that, under the rules, liability to pay conservancy tax and water rate is imposed on every building, including any part of a building occupied as an independent unit, irrespective of the nature of the user.

Counsel for the Company, appearing as the Attorney General, submitted that under the Corporation Act the owner, and not the occupier, is liable for the conservancy tax and water rate, and therefore separate assessments of different units occupied by shop‑keepers could not be made. This plea had not been raised before the High Court. The Court observed that, even setting aside this infirmity, the plea lacked substance. Section 114 of the Act permits a conservancy tax or water rate to be imposed on either the occupier or the owner. Moreover, the rules framed under section 71 of the C. P. Berar Municipality Act of 1922, and continued under the Act of 1948, impose liability for payment of the conservancy tax and water rate in accordance with those provisions.

The Court observed that the liability for conservancy tax and the provisions of the assessment rules were not confined solely to owners. Under rule 4 of the assessment rules, the Corporation was required to compile an assessment list that named every person who was liable to pay the tax. Consequently, the assessment rules expressly permitted that the occupier of a premises could be held responsible for paying both the conservancy tax and the water rate. Section 165 of the Act provided that all sums due from any person in respect of taxes on any land or building constituted a first charge on that land or building and on any movable property situated therein and belonging to that person. However, the section also stipulated that arrears of tax could not be recovered from an occupier who was not the owner if the arrears corresponded to a period during which the occupier had not been in occupation. The Court noted that this provision implicitly recognised that an occupier could be liable to pay the tax even though the occupier was not the owner. The Court further pointed out that the scheme under which the shop‑keepers were occupying the premises had not been produced before it. Nevertheless, it was admitted that the shop‑keepers would become owners of the premises they occupied once they had fully paid the amounts they had agreed to pay and thereby discharged their liability. The Company had treated the shop‑keepers as owners, as shown by its letter dated 30 September 1953. The Court found that the shop‑keepers possessed a substantial interest in the tenements they occupied, making it difficult not to regard them as owners for the purpose of municipal taxation. According to the definition in section 5(37) of the Act, an “owner”, when referred to any land or building, includes the person who is receiving the rent of the land or building or any part thereof, whether on his own account or as an agent, trustee, receiver, or for any religious or charitable purpose, and also includes a person who would receive such rent if the property were let to a tenant. The record contained no evidence that the shop‑keepers were not entitled to let out the premises they occupied; consequently, if they could let out the premises, they would be regarded as owners within the meaning of clause (37) of section 5. In the Court’s view, the High Court had erred in holding that rule 10(a) applied only to buildings occupied for residential purposes. The Court held that the rule applied equally to buildings occupied for non‑residential as well as residential purposes, and to every part of a building occupied by a person or a group of persons who derived a separate source of income, regardless of whether the occupation was residential or non‑residential. Such persons or groups would thereby be liable to pay both the conservancy tax and the water rate. Accordingly, the Court allowed the appeal.

The judgment noted that the petition brought by the Company, as well as the petition filed by the taxpayer named Sitaram Upasrao, had been dismissed by both this Court and the High Court. The dismissal was ordered to be with costs, meaning that the petitioners were required to bear the expenses incurred by the proceedings. The appellate court further observed that, notwithstanding the earlier orders, the appeal filed against the dismissal was granted by the Court. By allowing the appeal, the Court set aside the prior determination that the petition had been dismissed, thereby reversing the earlier decision. The order to dismiss with costs applied to both the Company and the individual taxpayer, indicating that each was held responsible for the legal costs incurred. Accordingly, the final relief granted by the Court consisted of the allowance of the appeal and the imposition of costs against the petitioners. The decision clarified that the earlier dismissals by both courts no longer remained effective after the appellate reversal. The costs awarded were to be paid to the respondents, reflecting the principle that a successful appellant may recover expenses from the opposing party. The order concluded the litigation between the parties on this particular issue, leaving no further matter for adjudication.