THE LOKMANYA MILLS v. THE BARSI BOROUGH MUNICIPALITY

In these appeals filed with special leave against the judgments of the High Court,, the only question which falls to be determined is whether by rule 2C the Muni cipality is entitled to collect tax leviable as a rate after computing the annual letting value solely on the area of the factory and buildings related thereto. By s. 73, the Municipality is authorised subject to any general or special orders which the State Government may make in that behalf and to the provisions of ss. 75 and 76, to impose for the purposes of the Act any one or more of the classes of taxes, amongst which are included a rate on buildings or lands or both situate within the municipal borough and general water-rate which may be imposed in the form of a rate assessed on buildings or lands or in any other form. Section 75 prescribes the procedure preliminary to imposing a tax. The procedure for assessing the ,. The Lokmanya .1.Vlills v. The Barsi Horough Municipality Shah j. • 310 SUPREME COURT REPORTS [1962] liability to rates on lands and buildings is prescribed by ss. 78 to 84 of the Act which provide for prepara tion of the assessment list, its authentication and amendment. When a rate on building or lands or both is imposed, the Chief Officer causes an assess ment-list of all buildings or lands or lands and build ings in the municipal borough to be prepared contain ing inter alia the names of the owner, the valuation based on capital or annual letting value as the case may be on which the property is assessed and the amount of tax assessed thereon. The expression "Annual letting value" is defined ins. 3(1) of the Act as meaning the annual rent for which any building or land, exclusive of furniture or machinerv contained or situate therein or thereon might reasoii'ably be ex pected to Jet from year to year, and shall include all payments made or agreed to be made by a tenant to the owner of tho building or land on account of occupation, taxes, insurance or other charges inciden tal to his tenancy. Bys. 78 sub-s. (1) cl. (d) and Explanation to s. 75, the rate to be levied on lands and buildings may be assessed on the valuation of the lauds and buildings based on capital or the annual letting value. By the rules in operation prior to April 1, 194 7, house-tax and water-tax were levied as rates in respect of all lands, buildings and non-agricultural lands on the annual letting value (except Government buildings). Evon under the new rules, house-tax and water-tax continued to be levied in respect of all buildings and non-agricultural lands as rates: but the rate in respect of buildings falling within rule 2C was assessed on a valuation computed on the floor area of the struc tures, and not on the capital value nor on the annual rent for which the buildings may reasonably be ex pected to let. This was clearly not a tax based on the annual letting value, for "Annual letting value" postulates rent which a hypothetical tenant may rea sonably be expected to pay for the building if let. A rate may be levied under the Act on valuation made on capital or on the annual letting value. If the rate ·I J ,, The Lokin<111ya Ill ills v. The Barsi JJorough Municipality Shah J. • , . 1 S.C.R. SUPREME COURT REPORTS 311 is to be levied on the hasis of capital value, the build ing to be taxed must be valued according to some re cognised method of valuation: if the rate is to be levied on the basis of the annual letting value, the building must be valued at the annual rental which a hypothetical tenant may pay in respect of the build ing. The Municipality ignored both the methods of valuation and adopted a method not sanctioned by the Act. By prescribing valuation computed on the area of the factory building, the Municipality not only fixed arbitrarily the annual letting value which bore no relation to the rental which a tenant may reason ably pay, but rendered the statutory right of the tax payer to challenge the valuation illusory. An assess ment list prepared under s. 78, before it is authenti cated and finalised, must be published and the tax payers must be given an opportunity to object to the valuation. By the assessment list in which the valua tion is not based upon the capital value of the build ing or the rental which the building may fetch, but on the floor area, the objection which the tax- payers may raise is in substance restricted to the area and not to the valuation. Counsel for the Municipality sought to rely upon The Madras and Southern Mahratta Railway Go., Ltd. v. The Bezwada JYJunicipality (') decided by the Judi ciitl Committee of the Privy Council, in support of the plea that the rate based on valuation in proportion to the floor area is validly levied. By s. 81 sub-s. (2) of the Madras District Municipalites Act, 1920, a tax for general purposes and a water and drainage tax were to be levied at such fractions of the annual value of lands or buildings or both as may be fixed by the :Municipal Council. By s. 82 sub-s. (2) of that Act, the annual value of lands and buildings was to be the gross annual rent at which they may reasonably be expected to let, but by the proviso, it was enacted that in the case of any Government or Railway build ing, the annual value of the premises shall be deemed to be 6% of the total of the estimated value of the land and the estimated present cost of erecting the (1) I.L.R. (1945) Mad r. The Lok1nanya Al ills v. The Barsi Borough lliunicipality Shah J. 312 SUPREME COURT REPORTS [1962J building subject to certain deductions. The Munici pality of Bezwada levied property tax on a piece of vacant land belonging to the Madras and Southern Mahratta Railway Company on the annual value com puted at 6% of its capital value. This method of t11xation was challenged by the Railway Company on the contention that all methods of valuation other than the method prescribed by the proviso to s. 82(2) were by necessary implication prohibited. This con tention was rejected because the generality of the sub stantive enactment was left unqualified except in so far as it concerned the particular subjects to which the proviso related. Open lands were not covered by the proviso and it was competent to the municipality to levy the tax under s. 82(2) on the annual value and that value would be determined by any of the recog nised methods of arriving at the rent which a hypo thetical tenant may reasonably be expected to pay for the lands in question. This case has in our judg ment no relevance to the present case. If the Municipality of Barsi had adopted any of the recognised methods of valuation for assessing the annual letting value, the tax would not be open to challenge, but the method adopted was not a recognis ed method of levying the rate. The High Court relied upon its earlier judgment in The Borough Municipality of Amalner v. The Pratap Spinning Weaving and Manufacturing Co., Ltd., Amal ner (1 ). In that case, the court negatived the chal lenge to the validity of the rules similar to those impugned in these appeals. The Amalner Munici pality had by rules framed under the Bombay Munici pal Boroughs Act sought to levy a rate equal to a per centage of the annual letting value which was com puted on the floor area of "mills and factories". The court held that the method of taxation adoptecl by · the Municipality had remained unchallenged for a · long time, that the rules had been sanctioned by the Government and they were not shown to be "caprici ous, arbitrary and unreasonable" and that the valua tion of the property by reference to the floor area was \I) l.L.R. (1952) Bom. 918. • '. ' . " The Lohmanya Mills v. The Barsi Borough Municipality Shah ]. I S.C.R. SUPREME COURT REPORTS 313 not altogether unknown to the law of rating. The High Court also observed that in assessing the rent which a hypothetical tenant may pay, several methods are open to the Municipality and if on examining the cases of all the factory buildings within their the Municipality concluded that the jurisdiction, rent which the hypothetical tenant may reasonably be expected to pay for those buildings fits in with the rent which they had fixed by adopting the fiat and uniform rate, the principle of fixing the annual let ting value on the basis of the floor area would not be open to challenge. It was assumed in that case that all factory buildings within the area of the Amalner Municipality were alike in essential features and were intended to be used for purposes which were alike, and that probably the Municipality may have been satisfied that the principle enunciated in the rule impugned worked out on the whole as a fair basis for determin ing the valuation of the building in question. In our view, this approach to a rating problem arising under In any event, there is no the Act is not permissible. evidence on the record of this case that the factories and "buildings relating thereto" such as ware-houses, godowns and shops of the Mills situate in the com . pound of the mills, may be separately let at the uni- form rate prescribed by the Municipality. The vice , of the rule lies in an assumed uniformity of return per square foot which structures of different classes which are in their nature not similar, may reasonably fetch if let out to tenants and in the virtual depriva tion to the rate-payer of his statutory right to object to the valuation. • - ( ' Another judgment of the Bombay High Court in Motiram Keshavdrts v. Ahmedabad Municipal Bor ough (1) calls for reference. It was held in Motiram's case that a water-tax imposed by the Ahmedabad Municipality as a rate not depending upon the value of the property assessed but in lump sum was not a rate for the purpose of s. 73(x) of the Bombay Munici- • pal Boroughs Act, 1925 and the rule which authoris ed the levy of such a lump sum was ultra vires. (1) {1942) Born. L.R. 280 40 • ' I96I The Lokmanya Mills v. The Ba1si Borough Muni&ipality Shah ]. Mar&h x4. 314 SUPREME COURT REPORTS [1962] These appeals must be allowed and the decrees pas sed by the High Court set aside and the decrees pas sed by the District Court of Shola pur restored with costs in this court and the High Court. One hearing fee. Appeals allowed. ENDUPURI NARASIMHAM AND SON v. THE STATE OF ORISSA AND OTHERS (S. K. DAS, J. L. KAPUR, M. HIDAYATULLAH, J. C. SHAH and T. L. VENKATARAMA ArYAR, JJ.) Sales Tax-Transactions intra-State and inter-State-Test Constitution of India, Art. 286(2)-0rissa Sales Tax Act, r947 (XIV of r947), s. 5(2)(a)(II). ' The petitioner who was a registered dealer under the Orissa Sales Tax Act, 1947, was carrying on the business of purchasing and reselling castor seeds, etc., in the State of Orissa. Under a declaration given by him for the purpose of obtaining his regis tration certificate the goods purchased by him in Orissa were to be resold in that State. He purchased certain commodities inside the State but in contravention of his declaration sold the goods to dealers outside the State. The Sales Tax Officer inclu ded in the taxable turnover of the petitioner the purchase made by him inside the State in accordance with s. 5(2)(a)(II) of the Act. The contention of the petitioner was that the purchase was in course of inter-State trade and was exempted under Art. 286(2) of the Constitution of India. Held, that the transaction of sale which has been taxed was wholly inside the State of Orissa and was distinct and sepa rate from the sale made by the purchaser to dealers outside the State. The former transaction was taxable nnder s. 5(2)(a)(II) of the Act while the latter was exempted under Art. 286(2) of the Constitution. Messrs. Mohanlal Hargovind Das v. The State of Madhya Pradesh, [1955] 2 S.C.R. 509, distinguished. In order that a sale or purchase might be inter-State, it is essential that there must be transport of goods from one State