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TMI Blog1953 (4) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ntra vires' and the assessment list which has been properly made in accordance with the provisions of the Municipal Act is not open to any objection. The learned Judge has held that the rule is 'ultra vires'; he has, therefore, granted the plaintiffs the declarations and injunction as claimed by them. It is this decree which is challenged before us by Mr. Pursholtam on behalf of the Municipal Corporation, and the principal point which he has argued before us is that the learned Judge was wrong in holding that Rule 350A was 'ultra vires'. Some other issues were framed in the trial Court and they have been decided by the learned trial Judge. Those issues, however, have not been argued before us. That is how the short but important question which calls for our decision in this appeal is whether Rule 350A framed by the Municipal Corporation of the City of Ahmedabad is 'intra vires' or not. 2. All the plaintiffs own open plots within the jurisdiction of the Corporation and they have been called upon to pay the rate on their respective open lands according to the assessment list prepared on the basis of Rule 35GA. This rule first lays down the manner in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id assets, their action would be 'ultra vires'. If that be so, a Municipality would likewise be acting beyond its jurisdiction if it purported to levy a tax on the value of the capital assets. 4. The Municipal Corporation, however, contends that the rate in question does not amount to a capital levy at all, but that it is a rate on open land and the value of the capital has been utilised merely as a means or machinery to enable the Municipal Corporation to levy a reasonable rate on the said open plot. In support of this, contention, the Municipal Corporation relies upon the explanation to Section 75 of the Municipal Boroughs Act. Section 75 lays down the procedure preliminary to imposing a tax. It provides that before imposing a tax a municipality shall, by a resolution passed at a general meeting, specify, among other things, (iii) in the case of a rate on buildings or lands or both, the basis for each class-of the valuation on which such rate is to be imposed; and the explanation to Section 75 adds that in the case of lands the basis of valuation may be either capital or annual letting-value. According to the Municipal Corporation, all that Rule 350A has purported to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide for any particular manner in which the tax should be levied. In other words, the power of the Provincial Legislature to levy the tax on lands is unqualified and absolute. In the present case, the power of the Municipal Corporation to levy a tax on the open land is similar in extent to the power of the local Legislature. It is, therefore, necessary to examine the nature and effect of Rule 350A in the light of this power. The rule, no doubt, adopts the basis of capital value for levying the rate, and indeed the explanation to Section 75 of the Municipal Boroughs Act in terms allows the Municipal Corporation to adopt such a basis. If, by adopting this basis, the inevitable result would be that the rate which is ultimately levied amounts to a capital levy and is, therefore, 'ultra vires', it would be necessary to hold that, not only is Rule 350A 'ultra vires', but the 'Explanation' to Section 75 itself is 'ultra vires'. 7. I do not, however, feel driven to this conclusion because I am disposed to hold that a distinction must be made between a rate or tax which is levied on land on the basis of its capital value and a tax which is levied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the encumbrances to which it as subject, and to levy the rate on the value of the land so determined. In other words, the municipal rate or tax would not be concerned to determine the real economic capital value of the asset in question, but to find out the market value of the land apart from its real capital value in the economic sense and levy its tax on it. In this way, the capital value of the open land determined by the Municipal Corporation under Rule 350A would not always or necessarily be the same as the capital value of the same land if it was determined by the Central Legislature for the purpose of levying a tax under Item 55 in List I. 9. It may be conceded that in some cases the capital value may work out to be the same in cases falling under Entry 55 of List I and those falling under Entry 42 of List II. But even in these cases the object with which the capital value is determined and the ultimate use which is proposed to be made of this capital value in levying a tax on lands under Entry 42 of List II should not be confused with the object with which capital value may be determined and the use which may be made of such capital value by legislation passed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt were considering the question as to whether the tax leviable under the Punjab Urban Immovable Property Tax Act amounted to a tax on income and thus trespassed on Item 54 in List I of sch. VII to the Government of India Act. In repelling the argument that the tax levied by the Provincial Legislature amounted to a trespass of the kind alleged, Mr. Justice Fazl Ali examined the real purpose and the object of the tax and he emphasized that though the method and mode adopted by the Provincial Legislature in determining the reasonable amount of tax may appear to be similar to the method and mode which may be adopted by the Central Legislature in levying tax on income as such, in essence the two taxes are different and there is no question of trespass by one on the field of the other. Mr. Seervai has relied on these decisions. 11. It would be useful in this connection to refer to the decision of the Full Bench of this Court in -- Sir Byramjee Jeejeebhoy v. Province of Bombay AIR1940Bom65 (D). The Full Bench was concerned with the provisions of the Urban immovable Property Tax Act, II of 1932, and the question raised before them was whether the tax levied under the said Act under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rates such as the ordinary municipal rates in England, which are neither taxes on income nor taxes on property, but a personal charge on the occupier. Clearly it is impassible to say that the employment of annual value as the measure of the impugned tax is any indication that it is a tax on income." In other words, the learned Judges who decided this case adopted the test of what is described as the 'pith and substance' of the Act. They set out to discover the essential character of the tax and they came to the conclusion that the essential character of the tax was that it was a tax on property, and not a tax on income. It would be noticed that the Full Bench came to this conclusion though it did appear to the learned Judges that the method adopted in deciding the annual letting value of the property was very similar to the method that would be adopted in deciding the income of the property for the purpose of Income Tax. In my opinion, it would be legitimate to rely on this decision in support of the view that the character of the means or machinery devised by the Legislature for levying a tax would not by itself determine the character of the tax as such We must exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for sale could be & was levied on the first sale by the manufacturer or producer, so that 'qua' the manufacturer or producer there could have been apparently a double tax--one by the Central Government under the duty of excise for the production or manufacture of the article, and the other by the Provincial Government for the sale of the said article. And yet their Lordships held that the two taxes which the manufacturer was called upon to pay were economically two separate and distinct imposts. The Provincial power flowing from Entry 48 in List II was very liberally construed as extending to sales of every kind, whether first sales or not, and a Central power available under Entry 45 in List I was in a sense limited to the power to levy the tax on goods immediately after their production and manufacture and before they joined the stock of the goods in the market. It would thus be noticed, that, though in some cases the two taxes might appear to overlap, that was not held to constitute an infirmity in the validity of the Provincial Act. This view of the Federal Court has been expressly upheld by the Privy Council in -- 'Governor-General in Council v. Province of Madra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of the assessment plus a reasonable ground rent for the land comprised in the holding. Under Section 98-A of the Madras City Municipal Act, 4 of 1919, power is conferred upon the Municipality to levy a tax on property called the "property tax". Section 99 authorises the municipality to levy taxes at such percentages of the annual value of buildings and lands as may be fixed by the commissioner subject to the limitation that the aggregate of the percentage so fixed shall not, in the case of any land or building, be less than 15 1/2 per cent, or greater than 20 per cent, of its annual value, Section 100, which deals with the method of assessment of property tax, provides that the annual value of the premises falling under Section 100(2)(a) proviso shall be deemed to be 6 per cent, of the total of the estimated market value of the land at the time of the assessment and the estimated cost of erecting the building at such time after deducting, for depreciation a reasonable amount which shall in no case be less than 10 per cent, of such cost. Section 128(1) of the Uttar Pradesh Municipalities Act 2 of 1916 empowers the municipality to levy a tax on the annual valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expression "capital value of the assets" in Entry 55 was by no means clear. He, however, added that it may be that what was intended was a tax on the total value of the assets in the nature of a capital levy. Mr. Justice Kania, on the other hand, expressed his clear opinion that under Entry 55 the tax should be on the total capital assets and not on individual portions of a person's capital. 16. It has been argued before us by Mr. Purshottam that Entry 55 in List I would not permit the Central Legislature to levy a tax on the capital value of a part of the assets, and, as such, even if the tax imposed by Rule 350A by the Municipal Corporation amounts to a tax on the capital value of an asset, it cannot be said to constitute any trespass on Entry 55 in List I. Mr. Purshottam has however, himself invited our attention to another decision of this Court in --'J. N. Duggan v. Comr. of I. T. [1952]21ITR458(Bom) (J) in which a contrary view has been expressed with some emphasis by Chagla C. J. In this case the Court was considering the question as to whether the Income Tax and Excess Profits Tax (Amendment) Act, 1947, was 'ultra vires' of the Legislature. By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d value of lands and buildings" and that "Therefore, the power of the Provincial Legislature is restricted to tax on lands and buildings without taking into consideration the capital value of lands and buildings." With very great respect, I am unable to agree-with this last observation. It Is clear that the scope of Entry 42 in List II was not argued fully before the learned Chief Justice and, in fact, the Court was not directly called upon to consider-the proper construction of the said Entry at all. Therefore, the attention of the learned Chief Justice was not drawn to the legislative history on the topic and it was not pointed out to him that in many Provincial Municipal Acts power has been expressly given to the Municipalities to impose a tax on lands after adopting the basis of" the capital value of the said lands. As I have-already pointed out, I have come to the conclusion that even if the capital value of lands is-taken into consideration by the Municipal Corporation in determining the amount of tax to be levied on the open land, the tax does not become a tax on the capital value of the assets. But, with respect, I do not read these observations of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis, the municipality is not bound or always expected to determine the annual value or yield or return of the said property. It is significant that in the present case it is not disputed that in determining the capital value of the land the Corporation did take into account all the relevant facts as mentioned in the written statement. Besides, even if it is assumed that by adopting the basis of capital value the municipality must determine the annual value of the property and levy tax on such value, it would make no difference in the result. In such a case, the municipality may levy a much higher rate of tax on the annual value of the property determined on the basis of its capita! value. By adopting this procedure two steps are taken, while the Ahmedabad Corporation has adopted the shorter method of determining the tax in one step. The substance of the matter is that the municipality can levy a tax on lands in the light of its capital value. I would like to add that the Municipal Acts in other States, to which I have already referred expressly require the municipalities to determine the annual value of the properties in the manner mentioned therein. In the present case, the Munic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove shall be levied at 1 per cent, of the valuation based on Capital .... etc., etc." It is the contention of the plaintiffs that the abovementioned Rule 350-A, the assessment list prepared on the basis of the rate stated in Rule 350-A and the actual levy of the rate are all illegal and 'ultra vires' of the powers of the municipality. Now, the point of law which this appeal raises is this: Is it within the competence of the Provincial Legislature to levy a tax on lands & buildings on the basis of the capital value thereof? If the answer is in the affirmative, Rule 350-A of the taxation rules of the Ahmedabad Municipality would be within the competence of the municipality to make & the levy of the impugned rate upon open lands of the plaintiffs would be 'intra vires' of the powers of the municipality. 20. Now, there has been a considerable controversy in this case between the plaintiffs and the defendant as to the nature of the impugned tax, i.e. whether it is a tax on the capital value of the lands, in other words a capital levy, or a tax on lands. The plaintiffs contend that the word "assets" in entry No. 55 of the legislative List I in schedule V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 58, prescribing the tax selected, and in such resolution and in such rules specify (i) ...... (ii) ........ (iii) in the case of a rate on buildings or lands or both, the basis, for each class, of the valuation on which such rate is to be imposed; etc., etc." There is an Explanation at the foot of Section 75, and the Explanation says: "In the case of lands the basis of valuation may be either capital or annual letting-value." 21. Thus, it is clear from the provisions of the charging Section 73 read with Section 75 that the impugned tax is essentially a rate on lands, and a recourse to the capital value of the lands was taken only as a means or basis for the assessment of the rate. The 'Explanation' to Section 75 was introduced into the Act, not as the subject of taxation but as the measure of the taxation to which lands or buildings may be subjected . In the House of Lords case (1881) 6 AC 315 (A) Lord Penzance, distinguishing between the case of a merchant or trader, who was taxed not in respect of any property which he possessed and of which he enjoyed the fruits but only upon the profits which he realised annually in his trade, and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dard basis of assessment of municipal property taxes?" It would thug be permissible to make the amount of the tax correspond to the value of the property and, in our view, nothing further was done when the words "capita! value" were used in the 'Explanation to Section 75 of the Act and the words "1 per cent, of the valuation based on capital" were introduced in Rule 350-A. They would not make the impugned tax a tax on the capital value. 22. I have pointed out above that it has been settled by authority that the nature and character of a tax are to be determined from the charging sections. In -- 'Sir Byramjee Jeejeebhoy v. Province of Bombay', (D) it was sought to be shown on behalf of the appellant that the impugned tax, which was an urban Immovable property tax levied under Section 22 of the Bombay Finance Act, 1932, as amended by the Bombay Finance Amendment Act, 1939, was a tax on income as it was assessed on the same basis as Income Tax, i.e. on annual value or the amount at which the property might reasonably be expected to let. That contention was negatived and it was held that the mode of assessment of a tax did not determine its charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Section 73 imposes no limitation on the taxing power of a municipality, i. e. no limit is prescribed as to the amount of the tax which may be imposed. Power to impose a rate on buildings or lands means power to impose taxes on persons, owners or occupiers as the case may be, in respect of these properties. As to the method of assessment, Section 75 says that in the case of lands, the basis of valuation may be either capital value or annual letting value. The only restriction upon the taxing power of the Provincial Legislature, which restriction, must also govern the taxing power of the municipality, is that it cannot tux the capital value itself. In this case, I am satisfied that the capital value itself of the lands was not the subject-matter of the taxation, but it was taken into consideration only as a measure of the taxation. In -- 'Provincial Treasurer of Alberta v. Kerr 1933 AC 710 (K), also it was observed that the identification of the subject-matter of the tax was only to be found in the charging section, and if we turn to Section 73 of the Act here, we do not find any warrant therein for the contention that the impugned tax was a tax on the capital value. In --' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as given by the Provincial Legislature to the municipalities to levy a tax on the capital value of the properties. The point, in substance, is that it is the charging section which determines the nature and character of the tax and the charging section in this case shows that the impugned tax is not a tax falling under Entry 55 of List I but that it is a tax on lands falling under Entry 42 of List II. 25. There Is a real and distinct, though at times subtle, distinction between the two positions one in which the capital value is directly the subject-matter of taxation and the other in which the capital value is to be turned to as a measure or machinery or basis for assessing a tax on property. In the latter position, the measure or basis may be described in terms of a certain percentage of the capital value. But that is merely a way or manner of expressing in words that the capital value has been taken as a guide for calculating a tax. For instance, let us assume that on taking the capital value as a basis or machinery for determining the quantum of a tax on land, the municipal authorities came to the conclusion that the tax on a given land should be X rupees. Now if X rupees work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court must endeavour the conflict by considering the scheme of the Act and if necessary by. even modifying the language; in other words, by ascertaining the pith and substance of the conflicting provisions. The observations of the learned Chief Justice in 'Subrahmanyan Chettiar (L)' and in 'In re the Central Provinces and Berar Act No. XIV of 1938 (G)', which are quoted above, would effectively meet the contention of the plaintiffs that there would be a conflict between the powers of the Federal Legislature and Provincial Legislature in case we hold that it is within the competence of the Provincial Legislature to levy a tax on lands on the basis of capital value. In a question arose whether the Madras General Sales Tax Act, 1939, which imposed a tax on the sale of goods, was not an encroachment on the part of the Provincial Legislature in the field of the Central Legislature, and it was held that the term "duty of excise" was a flexible term and that its meaning may in particular circumstances be narrowed down to effect a reconciliation between the two Jurisdictions. It was observed by Lord Simonds, who delivered the judgment of the Judicial Committee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... great as to justify the view that in pith and substance the impugned tax is a tax on the capital value. 27. In this connection, we may refer once again to the case of --'Ralla Ram v. The Province of East Punjab', (C). A question arose in that case whether the Punjab Urban Immovable Property Tax Act (Punjab Act XVII of 1940) was beyond the competence of the Provincial Legislature which enacted it. Sub-section (1) of Section 3 of that Act, to which I have already referred, provided : "There shall be charged, levied and paid an annual tax on buildings and lands situated in the rating areas shown in the Schedule to this Act at such rate, not exceeding twenty 'per centum' of the annual value of such, buildings and lands etc., etc." It was argued on behalf of the appellant in that case that the moment it was seen that the basis of the tax was the annual value of property, which was the very basis used by the Indian Income Tax Act for assessing income from property, it should be held that it was in substance "a tax on income" which was a subject outside the authorised field of the Provincial Legislature. Mr. justice Fazl Ali, who delivered the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital value is a factor which plays an important role in the levy of a tax on the capital value of the assets of a person and also in the levy of a tax on the lands of that person, it would not follow that the two taxes are not distinct taxes but must fall under the same denomination, i.e., under Entry 55 of List I. From what has been stated above, it would follow in our case that wherever the capital value is the basis of a tax, it could not be said as a matter of infallible deduction that the tax is a tax on the capital value. 29. In -- 'Gallagher v. Lynn 1937 AC 863 (N), also, the proper approach to a question such as the one before us was expressed thus "by Lord Atkin (p. 870) : "..........It is well established that you are to look at the 'true nature and character of the legislation:' ....If, on the view of the statute as a whole, you find that the substance of the legislation is within the express powers, then it is not invalidated if incidentally it affects matters which are outside the authorized field. The legislation must not under the guise of dealing with one matter in fact encroach upon the forbidden field. Nor are you to look only at the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al value of the assets and a tax on lands on the basis of their capital value, is not merely academic, artificial or imaginary, but a real one. If the land is capable of beneficial enjoyment by some person, the owner thereof is rateable and would be liable to pay a tax upon it on the basis of its capital value to the municipality under Entry 42 of List II. Bub he would be immune from having to pay a tax on the capital value of it under Entry 55 of List I, if the real capital value is nil by reason of the encumbrances upon it. In -- 'West Bromwich School Board v. Overseers of West Bromwich (1884) 13 QBD 929 (O) a question arose of the ratability of a school board in respect of a public elementary school belonging to them and it was observed by Bowen L. J. (p. 942) : ".......I will assume that in the hands of the school-board it is not capable of being beneficially occupied; but we must consider whether it is capable of being beneficially occupied in the hands of any other person. If land is by law struck with sterility when in any and everybody's hands, so that no profit can be derived from the occupation of it, it cannot be rated to the relief of the poor. But if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a person's assets and also for the Provincial Legislature to levy a tax on his lands on the basis of the capital value thereof, for in law there is no Overlapping. 32. While considering the question whether the Government of India Act, 1935, intended to confer upon the Provincial Legislatures competence to legislate on the subject of levying a tax on lands on the basis of the capital value thereof, it would be useful to examine the legislative history and practice on the subject. In India before the passing of the Government of India Act, 1935. It was observed by Lord Macmillan in -- 'Croft v. Dunphy AIR 1933 PC 16 (P), that (p. 19) : "When a power is conferred to legislate on a particular topic it is important, in determining the scope of the power, to have regard to what is ordinarily treated as embraced within that topic in legislative practice and particularly in the legislative practice of the State which has conferred the power." In AIR1940Bom65 (D)', also their Lordships looked into the legislative practice prevailing in England and in India at the time when the Government of India Act, 1935, was passed. Beaumont C. J. in the course of his judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nicipality on holdings. 33. Then we turn to the Madras City Municipal Act, No. 4 of 1919. Section 99 of the Act gives power to the Council to levy a tax on buildings-and lands, at such percentages of the annual value thereof as may be fixed by the Commissioner subject to the limitation that the aggregate of the percentage so fixed shall not, in the case of any land or building, be less than 15 1/2 per cent, or greater than 20 per cent, of its annual value. Then there is Section 100, Sub-section (2) of which says that the annual value of lands and buildings shall be deemed to be the gross annual rent at which they may reasonably be expected to let from month to month or from year to year. Then comes the important proviso to Sub-section (2) and the proviso says: "Provided that (a) in the case of (i) any Government or railway building; or (ii) any building of a class not ordinarily let, the gross annual rent of which cannot in the opinion of the-commissioner be estimated, the annual value of the premises shall be deemed to be six per cent-of the total of the estimated market value of the land at the time of assessment and the estimated cost of erecting the building at such tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he estimated value of the construction of the buildings, in other words the capital value of the property. It would thus appear from the legislative practice in India prior to 1935 that the capital value of lands or buildings was a factor which in no mistakable manner influenced the question or a rate to be levied thereupon. To put the matter in a different form, it would appear that prior to 1935, in certain provinces in India, competence was conferred by the Legislatures upon the municipalities to levy a tax on lands and buildings on the basis of the capital value thereof. There is nothing to show in the provisions of the Bombay Municipal Boroughs Act, 1925, that the said competence was sought to be withdrawn from the municipalities in the province of Bombay by the Provincial Legislature. On the contrary, 'Explanation' to Section 75 of the Act would show that the competence was in terms preserved in case of lands, because the 'Explanation' says that in the case of lands the basis of valuation may be either capital value or annual letting value. There is nothing in the language of the Legislative Lists in Schedule VII to the Government of India Act, 1935, to show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of [1952]21ITR458(Bom) (J)' and it is argued that the term "assets" in Entry 55 of List I does not mean the totality of the assets of an assessed ,but includes a part of his assets as well, that the open lands of the plaintiffs are parts of their assets and that, therefore Rule 350-A, under which these lands are assessed to a rate of 1 per cent, of the valuation based on capital, impinges upon Entry 55 of List I and Invades the exclusive sphere of the Centre 1 Legislature. In -- Col. Sir Duggan v. Comr. J. T.', (J) it was contended, on the authority of observations made by the learned Judges in the case of -- 'Sir Byramji Jeejeebhoy v. The Province of Bombay', (D) that entry 55 of List I contemplated a tax on the totality of assets, and not on individual assets of an assesses; but that contention was negatived by the learned Chief Justice. In the present appeal, it is not necessary for us to determine the scope of Entry 55 of List I by construing the word "assets" which occurs in that entry, since even if it be assumed that the tax levied under Entry 55 of List I is a tax on individual assets as distinguished from the totality of assets, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten statement). From this Mr. Desai's argument is that we must hold that the impugned tax is a tax on capital value. I am of the view that such an important point of law which has to be decided on the charging section and upon authorities cannot be concluded by a mere statement of a party in a pleading. Mr. Desai's submission must, therefore, be rejected. The next contention of Mr. Desai is that the expression "basis of valuation may be capital value" in the 'Explanation' to Section 75 imports a notion of the return or interest on the capital value and that, therefore, in levying a rate on land we must calculate a percentage on the return or interest on the capital value and not a percentage of the capital value itself. The submission is more verbal than substantial. Let us assume that the tax on land, upon calculating a percentage on the return or interest on the capital value thereof is X rupees. Now it is always easy to express the same quantity X rupees in terms of a percentage on the capital value itself. There is therefore no substance in the contention of Mr. Desai. Where open lands are not let out as in the present case, the annual letting value m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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