We live in a highly complex world and therefore subject of taxation is bound to be complex, involving numerous facets and dimensions.
The first elementary principle which governs any Municipal taxation is that the Taxes levied by Municipalities are compensatory in nature. Municipal Corporation Of Greater Mumbai Versus Kamla Mills Limited: AIR 2003 SC 2998; Kunnathat Thathunni Moopil Nair Versus State Of Kerala: AIR 1961 SC 552
Municipalities levy taxes under respective State legislations. In area of Municipal taxation, the State Govts do not enjoy the same freedom and latitude as otherwise being enjoyed by them in other direct and indirect taxation. There are statutory limitations for Municipalities to levy taxes, that is to say, they can impose and recover taxes, “Only for the purposes of the Act” under which they are incorporated; and to the extent for carrying out its obligatory and discretionary functions under the statute, in which they are regulated and governed.
The Municipalities have been assigned certain obligatory functions which it must perform and for which it must find money by taxation. It has also been assigned certain discretionary functions. If it undertakes any of them, it must find money. Even though the money that has to be found may be large, it is not unlimited, for, it must be only for the discharge of functions whether obligatory or optional assigned and undertaken by it.
It will be not open for the Municipalities to collect more than it needs for the functions it performs. This is known as Compensatory nature of taxation. The Municipalities, therefore cannot raise the rate of taxation to such an extent, as to provide a “surplus” which is much more than what it needs for carrying out the functions assigned to it.
Having regard to the scheme of taxation of MMC Act, 1888, it does not permit Municipality to recover taxes, in excess of their needs. Section 139 of the MMC Act, 1888, expressly declare that, “For the purposes of this Act, taxation shall be imposed as follows …...”.
And therefore the Municipalities are obliged to make budgetary provisions for each year and are entitled to exact tax for the said amount.
And this is the reason, the retrospective imposition of tax for earlier years, is not permissible, as the Municipalities are always entitled to raise revenue which is required by them, for the concerned fiscal year. [1988 Mah LR 1783; (1991) 3 BCR 385; 184 ITR 81]
In the scheme of taxation (Sections 125 to 127 of the MMC Act), for every financial year starting from 1st April, Accounts are require to be prepared and budget being finalized every year, comprising an estimate of expenditure to be incurred by the Municipal Corporation in the next ensuing official year; and inter alia, an estimate of receipts and income for the next ensuing official year from their properties and investments; and a statement of proposals as to the taxation which will be necessary or expedient to impose, in the next ensuing official year; and an estimate of all balances, if any, which will be available for re-appropriation or expenditure at the commencement of the next ensuing official year [(Section 125(1)(b) and 125(2)(b)].
However, in view of introduction of Levy of property taxes, in the year 2013 (Retrospective operation from financial year 1st April, 2010) on the basis of Capital Value of the property, by virtue of Section 140A, the Tax rate are prescribed in multiple of five years and are revised every five years, with a limit of increase of maximum 40%.
However, it is equally necessary to understand the attributes of erstwhile system of taxation based on Annual Letting Value of the property.
The nature of Levy of Property Tax is called Rate, and was levied as a percentage of the Annual Letting Value (also called as Rateable value) of the concerned property.
Due to the peculiar nature of tax, the property tax are regarded as “Rate”, and not as “Tax” or “Fee”. The Apex Court in a case before it (AIR 1963 SC 1742), had the occasion to distinguish the rate from tax or fee, wherein it was stated that rate is an hybrid of tax and fee, as it has the elements of both, and is more in the nature of compensation paid for the services availed, although not directly attributable to the measurable benefits of the services availed.
The Annual Letting Value of the property is arrived at in any of the three ways. (1) the actual rent fetched by such land or building, where it is actually let; (2) where it is not let, rent based on hypothetical tenancy particularly in the case of buildings; and (3) where either of these two modes are not available, by valuation based on capital value, from which annual value has to be found by applying a suitable percentage. The Constitution Bench in the case of Patel Gordhandas Hargovindas versus Municipal Commissioner, Ahemadabad (AIR 1963 SC 1742), by majority, have ruled that by imposing a tax directly as a percentage of capital value of the property, is ultra vires the Act.
The Annual Letting Value of the property would mean the Annual Rent (minus 10% percent of such Annual Rent) which would be paid by the hypothetical tenant for the concerned property.
Nevertheless, the ascertainment of annual letting value of any premises /unit of flat, more particularly of those premises which are exempted from the purview of Rent control Legislations, is extremely complex. The Hon’ble Bombay High Court in the landmark case of Dalamal Towers versus MMC, 2013 (1) BCR 426, whilst interpreting Section 154 and other relevant provisions of MMC Act, 1888, have ruled that –
(1) Where the premises are exempt from the operation of the Maharashtra Rent Control Act, 1999, by the provisions of Section 3, the assessing authority in determining the annual rent at which the premises might reasonably be expected to let from year to year under Section 154(1) is not constrained by the outer limit of the standard rent determinable with reference to the provisions of the Rent Act;
(2) Where the premises are exempt from the provisions of the Maharashtra Rent Control Act, 1999 , it is not unlawful for the landlord to claim or receive an amount in excess of the standard rent since the provisions of Section 10 would not be attracted. In such a case, the actual rent received by the landlord is, in the absence of special circumstances, a relevant consideration which may be borne in mind by the assessing authority while determining the rateable value for the purposes of municipal taxation under Section 154(1) of the Mumbai Municipal Corporation Act, 1888. The assessing authority must have regard to all relevant facts and circumstances while applying the standard of reasonableness under Section 154(1), including the prevalent rate of rents of lands and buildings in the vicinity of the property being assessed, the advantages and disadvantages relating to the premises, such as, the situation, the nature of the property, the obligations and liabilities attached thereto and other features, if any, which enhance or decrease their value.
In my view, the basic fallacy in the aforesaid ruling is the observation of the Hon’ble Court when it says that - To hold otherwise would be to deprive the Municipal Corporation of the revenue which it legitimately needs for providing essential civic amenities and services. (Para 41). The Hon’ble Court, with utmost respect, misses the basic principle of Municipal taxation is that Municipalities do not enjoy the same freedom and latitude as otherwise being enjoyed by the Executive govts of the State and Central.
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