In the case of Godhara Borough Municipality, Godhara v/s. Godhara Electricity Co. Ltd., AIR 1968 SC 1504, the Supreme Court has described the contractors' method of calculating the valuation of a property thus:
9. Rule 4 of Godhra Municipal Rules shows what properties are to be valued on the capital basis. What the capital basis is not defined. The capital value however can be determined in the way laid down in Gordhandas's case, (1964) 2 SCR 608 = (AIR 1963 SC 1742) (supra) by adopting the contractor's method. What that method is has been explained in Ryde on Rating (Eleventh Edition) Chapter 20. In R. v. School Board for London, (1885) 55 LJMC 33 on appeal (1886) 17 QBD 733 Cave, J. applied the contractor's test to schools. Ryde points out that it was tacitly recognised as applicable in various other cases. The principle on which the contractor's basis rests are given by the author at page 439 and the method of its applications is given at page 442. The learned author notes that in "applying the contractor's basis it is possible to discern five stages. The first stage is the estimation of the cost of construction of the building." There is a difference of view as to whether it is better to take the cost of replacing the actual building but otherwise in an up- to-date form. The second stage is "to make deductions from the cost of construction to allow for age, obsolescence and any other factors necessary to arrive at the effective capital value". The third stage is to estimate the cost of the land. The fourth stage is to apply the market rate or rates at which money can be borrowed or invested to the effective capital value of the building and the land. The fifth stage is to consider whether the result of the fourth stage really represents what the hypothetical tenant would pay for the annual tenancy on the statutory terms and to make any adjustments necessary to ensure that no higher rent is fixed as the basis of assessments than that which it is believed the owner would really be willing to pay for the occupation of the premises.
10. The contractors' method of calculation of the ratable value has thus been approved by the Supreme Court. In the present case, the Corporation has calculated the annual letting value at 8% of the cost of construction. In the case of Century Spinning and Manufacturing Co. ltd. And Ors. v/s. District Municipality of Ulhasnagar & Ors., AIR 1968 SC 859, the Supreme Court observed that a municipal Corporation can arrive at the annual letting value by choosing one or the other of the recognised methods, the only restriction being that it must specify the method which it proposes to adopt for the purposes of calculation of the amount.
Bombay High Court
Pimpri Chinchwad Municipal ... vs Tata Engineering And Locomotive ... on 11 August, 2009
Bench: Nishita Mhatre
Citation:2009(5) ALLMR 529:2009(5)MHLJ647 Bom
1. The petitioner Municipal Corporation is aggrieved by the order passed by the trial Court i.e. the Principal Judge of the Small Causes Court, Pune in Municipal Appeal No.11 of 1987. The petitioner has also challenged the decision of the Additional District Judge in Civil Appeal No.271 of 1988 which confirms the decision of the Small Causes Court.
2. The short facts giving rise to the present petition are as follows:
The respondent company owns a factory within the municipal limits of the petitioner Corporation. These factory premises consist of shares, factory buildings, residential flats for the employees of a company and a hostel for apprentices, trainees of the company. The premises also consist of open yards, a truck track for testing trucks, school, a petrol pump, underground water tank, generator house and other such structures. This entire campus of structures which constitute the factory premises were assessed at the ratable value of 25,35,126/- on the basis of the annual rental value of Rs.28,16,806/-. The Corporation claims that it has levied property taxes on the respondent's premises in accordance with the Bombay Provincial Municipal Corporations Act, 1949. The property tax has been calculated by fixing the annual letting value of the properties within the municipal limits.
3. The corporation desired to revise the annual letting value from Rs.28,16,806 to Rs.83,56,359/-. The method followed by the Petitioner Corporation was by assessing the property on the basis of 8% of the cost of construction of the property.
As a consequence the rateable value was also to be increased. The Corporation accordingly issued a notice to the company, directing it to show cause as to why the annual letting value should not be increased as proposed. The company filed its objections. These objections were rejected by the Corporation. The annual letting value was thus fixed at 8% of the total cost of construction which was submitted by the respondent company. The rateable value was calculated and revised in accordance with law.
4. Aggrieved by the decision of the Corporation, the respondent Company challenged the same by preferring Municipal Appeal No.11 of 1987 before the Principal Judge of the Small Causes Court, Pune. The main contentions raised by the company were that (i) no personal hearing was afforded to it; (ii) that the method of determining the annual letting value @8% of the cost of construction was incorrect and excessive and therefore, the ratable value fixed on the basis of the annual letting value was arbitrary and unjust; (iii) no civic amenities had been provided for therespondent company's property; (iv) that the cost of construction included the cost of evidence, fittings, fixtures, sanitary facilities, etc.; (v) that no hypothetical tenant would pay Rs.74,74,525/- for the premises; (vi) that some areas of the premises were open to the sky and the generator house and the factory sheds required constant repairs because of the vibrations of the heavy machinery in use there; (vii) water was purchased from MIDC, and in these circumstances, charging a flat rate of 8% for the entire premises was not justified.
5. The Principal Judge of the Small Causes Court allowed the appeal and held that the assessment based by pegging the annual letting value on a flat rate of 8% of the construction cost in respect of the buildings and other premises of the Company was excessive and unreasonable. The annual letting value was fixed @5% of the cost of construction i.e. Rs.52,22,720/- and the ratable value was fixed at Rs.
47,00,448/-. This was the value fixed in respect of all structures on the Company's property, other than the hostel accommodation for the Company's trainees and the residential flats for the Company's staff.
6. The petitioner Corporation being aggrieved by the decision in the municipal Appeal preferred an appeal before the District Court. The District Court while deciding the appeal on 10.3.1992 confirmed the order of the Principal Judge by concluding that the ratable value fixed by the Corporation was excessive and unreasonable. Both the aforesaid orders have been challenged in the present petition.
7. The main submissions advanced on behalf of the Corporation by Mr.Dhakephlakar, learned Counsel appearing for it, are that no reasons whatsoever have been given by either the Principal Judge or the appellate Court while deciding that 8% of the construction cost was too high for determining the annual letting value.
It is pointed out that while the trial Court had criticised the municipal Corporation for calculating the annual letting value at a flat rate of 8% of the construction cost, it had similarly accepted 5% of the construction cost as the annual letting value, at a flat rate. It is submitted that the structures inside the complex of the industrial unit are part and parcel of the whole unit and, therefore, there was no scope for assessing each structure at a different rate. The learned Counsel also points out that there is no material on record to indicate why the method of determination of the annual letting value by using contractors' method was incorrect. He submits that this method for determining the annual letting value was a reliable method, recognised by the Courts of law. He submits that by using this method, the cost of construction is required to be considered. The learned Counsel points out that an amount less than the cost of construction as submitted by the company has been accepted by the Corporation while determining the annual letting value. He urges that the cost of construction as submitted obviously includes only those structures which have been constructed. The learned Counsel then points out various judgments of the Supreme Court to which I will presently advert.
8. Per contra, Mr.Gorwadkar, appearing for the respondent company submits that the structures on the company's campus must be assessed differently as they were used for different purposes. He submits that the structures which house the factory premises cannot be equated with the hostel in which rent free accommodation is provided to the trainees and apprentices of the company nor with the residential flats allotted to the employees. He points out that the entire area is self occupied and, therefore, rent free and hence, the question of determining what a hypothetical tenant would pay for the premises does not arise. The learned Counsel then submits that no civic amenities or facilities which the Corporation is expected to provide under the BPMC Act have been provided to the company's premises. He submits that in such a case, the value of the civic amenities which the company has provided for itself must be discounted while determining the annual letting value. He further submits that property tax is a compensatory tax and therefore akin to a fee.
He urges that if property tax is viewed from this angle, a demand made by the petitioner Corporation was excessive in view of there being no civic amenities provided to the company. He submits further that the concept of reasonableness must be borne in mind while accepting and calculating the annual letting value on the basis of the contractor's method. He points out that the reasonable ratable value cannot be beyond the standard rent as held in various judgments of the Apex Court and this Court. He therefore submits that there is no need to interfere with the impugned decisions since the Courts below have fixed a reasonable rate while determining the ratable value payable by the Company.
9. In the case of Godhara Borough Municipality, Godhara v/s. Godhara Electricity Co. Ltd., AIR 1968 SC 1504, the Supreme Court has described the contractors' method of calculating the valuation of a property thus:
9. Rule 4 of Godhra Municipal Rules shows what properties are to be valued on the capital basis. What the capital basis is not defined. The capital value however can be determined in the way laid down in Gordhandas's case, (1964) 2 SCR 608 = (AIR 1963 SC 1742) (supra) by adopting the contractor's method. What that method is has been explained in Ryde on Rating (Eleventh Edition) Chapter 20. In R. v. School Board for London, (1885) 55 LJMC 33 on appeal (1886) 17 QBD 733 Cave, J. applied the contractor's test to schools. Ryde points out that it was tacitly recognised as applicable in various other cases. The principle on which the contractor's basis rests are given by the author at page 439 and the method of its applications is given at page 442. The learned author notes that in "applying the contractor's basis it is possible to discern five stages. The first stage is the estimation of the cost of construction of the building." There is a difference of view as to whether it is better to take the cost of replacing the actual building but otherwise in an up- to-date form. The second stage is "to make deductions from the cost of construction to allow for age, obsolescence and any other factors necessary to arrive at the effective capital value". The third stage is to estimate the cost of the land. The fourth stage is to apply the market rate or rates at which money can be borrowed or invested to the effective capital value of the building and the land. The fifth stage is to consider whether the result of the fourth stage really represents what the hypothetical tenant would pay for the annual tenancy on the statutory terms and to make any adjustments necessary to ensure that no higher rent is fixed as the basis of assessments than that which it is believed the owner would really be willing to pay for the occupation of the premises.
10. The contractors' method of calculation of the ratable value has thus been approved by the Supreme Court. In the present case, the Corporation has calculated the annual letting value at 8% of the cost of construction. In the case of Century Spinning and Manufacturing Co. ltd. And Ors. v/s. District Municipality of Ulhasnagar & Ors., AIR 1968 SC 859, the Supreme Court observed that a municipal Corporation can arrive at the annual letting value by choosing one or the other of the recognised methods, the only restriction being that it must specify the method which it proposes to adopt for the purposes of calculation of the amount.
11. In Dr.Balbir Singh & ors. v/s. M/s.M.C.D. & Ors., AIR 1985 SC 339, it was held that the ratable value of a building, whether tenanted or self occupied, is limited by the measure of standard rent arrived at by the assessing authority by applying principles laid down in the Rent Act. It has also been held that the test for determining the standard rent is not what the standard rent actually is but the rent which the owner reasonably expects to receive from an hypothetical tenant. Such expectation cannot go beyond the standard rent.
12. In the case of Municipal Corporation of Greater Bombay v/s. Kamla Mills Ltd., (2003) 6 SCC 315, the Supreme Court did not accept the contention of the assessee in that case that no ratable value can be fixed in respect of the premises occupied by the owner himself. The Court observed that the ratable value had to be determined on the basis of what an hypothetical tenant would offer as reasonable rent.
13. In my opinion, therefore, both the Courts below have decided the issue on wrong premises and surmises. Once it is accepted that the method adopted for calculating the annual letting value can be approved then the question of determining the percentage at which the annual letting value should be charged for determining the ratable value must be left to the Municipal Corporation. There is no material on record to indicate why the rate levy of 8% of the construction cost as the annual letting value was incorrect. The reason for disapproving this amount as reflected from the impugned orders is because the structures are used differently and certain areas of the complex are open to the sky. In my opinion, when the tax is to be assessed of an industrial unit and the annual letting value is to be determined on the cost of construction, it would matter little whether some parts of the complex are open to the sky. The cost of construction would obviously take these factors into account and therefore the question of reducing the amount because of the nature of the use of such construction does not arise. Further, the ratable value is to be determined in accordance with section 7 of the Taxation Rules contained in Chapter VIII in Schedule D of the BPMC Act. In the present case, the Corporation has taken the construction value at a lower amount than the value reported to the Corporation by the company and it is on this basis that the annual letting value and the ratable value has been calculated.
14. The submission of Mr.Gorwadkar that the property tax must be corelated to the availability of civic amenities, water, etc, cannot be accepted. It is now well settled that the property tax is a tax and not a fee. It cannot be termed as a compensatory tax, akin to a fee, as sought to be argued on behalf of the company.
Reliance was placed on the judgment of the Supreme Court in the case of Jindal Stainless ltd & Anr. v/s. State of Haryana & Ors., (2006) 7 SCC 241. In that case, the Supreme Court observed that the concept of compensatory taxes was propounded in Automobile Transport (Rajasthan) Ltd. v/s. State of Rajasthan, (1963) 1 SCR 491.
The apex Court has drawn a distinction between tax on the one hand and fee or a compensatory tax on the other. They have observed thus:
42. A tax can be progressive. However, a fee or a compensatory tax has to be broadly proportional and not progressive. In the principle of equivalence, which is the foundation of a compensatory tax as well as a fee, the value of the quantifiable benefit is represented by the costs incurred in procuring the factility/services, which costs in turn become the basis of reimbursement/recompense for the provider of the services/facilities. Compensatory tax is based on the principle of "pay for the value". It is a sub- class of "a fee". From the point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property, expenditure or any other test of ability or capacity (principle of ability). Taxes may be progressive rather than proportional. Compensatory taxes, like fees, are always proportional to benefits. They are based on the principle of equivalence. However, a compensatory tax is levied on an individual as a member of a class, whereas a fee is levied on an individual as such. If one keeps in mind the "principle of ability" vis-a-vis the "principle of equivalence", then the difference between a tax on one hand and a fee or a compensatory tax on the other hand can be easily spelt out. Ability or capacity to pay is measurable by property or rental value. Local rates are often charged according to the ability to pay.
Reimbursement or recompense are the closest equivalence to the cost incurred by the provider of the services/facilities. The theory of compensatory tax is that it rests upon the principle that if the Government by some positive action confers upon individual(s), a particular measurable advantage, it is only fair to the community at large that the beneficiary shall pay for it. The basic difference between a tax on one hand and a fee/compensatory tax on the other hand is that the former is based on the concept of burden whereas compensatory tax/fee is based on the concept of recompense/reimbursement. For a tax to be compensatory, there must be some link between the quantum of tax and the facility/services/ Every benefit is measured in terms of costs which has to be reimbursed by compensatory tax is a recompense/reimbursement."
15. In my opinion, as it is now well settled that property tax cannot be considered to be a fee, the question of accepting the submission on behalf of the learned Counsel for the Company that it is a compensatory tax payable on account of a particular measurable advantage conferred upon an individual by the Government or a local authority does not arise.
16. In my view, this judgment has no application to the facts in the present case.
The interpretation sought to be placed on this judgment by the learned Counsel for the Company is unacceptable. Property taxes need not be levied on the basis of quid pro quo.
17. The petition is therefore, allowed. Rule made absolute. No costs.
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