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TMI Blog1979 (9) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment dated July 7, 1966, and dismissed the appeal of the State. The matter came to this Court, and it also dismissed the appeal by its judgment dated August 13,. 1968, reported in State of Kerala v. Haji K. Haji K. Kutty Naha and others. This was so because the Legislature had adopted merely the floor area of the building as the basis of the tax irrespective of all other considerations. The intention to introduce a fresh Bill and to levy a nonrecurring tax on building was stated in the Finance Minister's budget speech of 1910-71. A Bill was published some time in June, 1970, and it was stated there that the Act would be brought into force with effect from April 1, 1970. The Bill was introduced in the Legislative Assembly on July S, 1973, and was referred to a Select Committee. The Committee submitted its report on March 28, 1974. It recommended that the Act may be brought into force from April 1, 1973. As the Bill could not be taken up during the budget session, the Government of the State promulgated the Kerala Building Tax ordinance, 1974, on July 27, 1974 to give effect to the provisions of the Bill as reported by the Select Committee. It was followed by another ordinance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r effects so considered." So if a tax is levied on all that one owns, or his total assets, it would fall within the purview of entry 86 of List I, and would be outside the legislative competence of a State Legislature, e.g. a tax on one's entire wealth. That entry would not authorise a tax imposed on any of the components of the assets of the assessee. A tax directly on one's lands and buildings will not therefore be a tax under entry 86. On the other hand, entry 49 of List Ir is as follows,- "49. Taxes on lands and buildings." If therefore a tax is directly imposed on "buildings", it will bear a direct relation to the buildings owned by their assessee. It may be that the building owned by an assesse may be a component of his total assets, but a tax under entry 86 will not bear any direct or definable relation to his building. A tax on "buildings" is therefore a direct tax on the assessee's buildings as such, and is not a personal tax without reference to any particular property. It has to be appreciated that in almost all cases, a tax has two elements which have been precisely stated by Seervai in his "Constitutional Law of India," second edition, volume 2, as follows, at pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets. For the purpose of levying tax under entry 49 List II the State Legislature may adopt for deter mining the incidence of tax the annual or the capital value of the lands and buildings. But the adoption of the annual or capital value of lands and buildings for determining tax liability will not, in our judgment, make the fields of legislation under the two entries overlapping." The decision in Sudhir Chandra Nawn's case was followed by this Court in Assistant Commissioner of Urban Land Tax and others v. F. The Buckingham and Carnatic Co. Ltd., Etc.(1) where the vires of the Madras Urban Land Tax Act, 1966, was challenged with reference to entry 86 of List I of the Seventh Schedule. The legal position on that aspect of the controversy was reiterated as follows,- "But in a normal case a tax on capital value of assets bears no definable relation to lands and buildings which may or may not form a component of the total assets of the assessee. But entry 49 of List II, contemplates a levy of tax on lands and buildings or both as units. It is not concerned with the division of interest or ownership in the units of lands or buildings which are brought to tax. Tax on lands and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Bihar(1) and it was held that that was not beyond the legislative competence of the State Legislature. Nor can the choice of April 1, 1973 as the date of imposition of the building tax be assailed as discriminatory with reference to article 14 of the Constitution. It will, be enough for us to refer in this connection to the following passage from this Court's decision in Union of India and another v. M/s. Parameshwaran Match Works Etc. Which was a case under the Central Excise and Salt Act, 1944.- "The choice of a date as a basis for classification cannot always be dubbed as arbitrary even if no particular reason is forthcoming for the choice unless it is shown to be capricious or whimsical in the circumstances. When it is seen that a line or a point there must be and there is no mathematical or logical way of finding it precisely, the decision of the legislature or its delegate must be accepted unless we can say that it is very wide of the reasonable mark. See Louisville Gas Co. v. Alabama Power Co.-240 U.S. 30 at 32 (1927) per Justice Holmes." It has not been shown in this case how it could be said that the date (April 1, 1973) for the levy of the tax was wide of the reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the word must receive its natural and ordinary meaning as "including the fabric of which it is composed, the ground upon which its walls stand and the ground embraced within those walls." That appears to us to be the correct meaning of "building." The Act contains its own definition of what is meant by "building", and clause (e) of section 2 is to the following effect,- "(e) "building" means a house, out-house, garage, or any other structure or part thereof, whether of masonry, bricks, wood, metal or other material, but does not include any portable shelter or any shed constructed principally of mud, bamboos, leaves, grass or thatch or a. latrine which is not attached to the main structure." There are two explanations to the clause, but they are not relevant for the controversy before us. The definition therefore makes it quite clear that. as a house, out-house, garage or any other structure cannot be erected without the ground on which it is to stand, the expression "building" includes, the fabric of which it is composed, the ground upon which its walls stand and the ground within those walls. It is A equally clear that the ground referred to above would not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r entity of the ground on which the building stands, so that tho tax imposed under it is a tax both on lands and buildings and both the entities should be separately recognised and determined, and taxed as such. As has been stated, the location or value of the land has importance of its own, and contributes to the value of the building standing on it, but that does not justify the argument that what the Act provides is a tax on lands and buildings, and not merely on buildings. There is also the further fact that while the Act provides the method of arriving at the capital value of the building, on the basis of the annual value, it does not provide any method of assessing the annual or capital value of the ground on which the building stands. We shall next examine the other argument that the method of determining the capital value of a building on the basis of its annual value is hypothetical and arbitrary and should be struck down as unconstitutional. We have given our reasons for holding that the tax on buildings, under the provision of the Act, has been imposed by virtue of entry 49 of List II of the Seventh Schedule of the Constitution. So when the State Legislature had taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and expenditure, usually applied to public utility undertakings. 3. The "contractor's method", by which it is assumed, in the absence of any other and better way of estimating the rent, that the tenant would arrive at it by finding the figure for which a contractor would provide him with premises neither more nor less suitable for his purpose, and the rate of interest on that cost which the contractor would charge him as rent. 4. The "unit method" by which schools may be valued at so much a place, hospitals at so much a bed, or certain industrial premises at so much-a furnace, or other unit of output. There is nothing to prevent any of the four methods from being applied either singly, or in combination, as overall checks to the same building. The fundamental object in each of these methods is to find out the rent which a tenant might reasonably be expected to pay for a building. It is the expectation which is to be reasonable and not necessarily the rent, for the reasonable expectation would exclude any so-called black market rent. Halsbury (Vol. 23 p. 119 third edition) has in fact defined "rate" to mean "a rate the proceeds of which are applicable to local purposes of a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that the Legislature should have adopted another method which, in the opinion of the court. Is more reasonable, unless it is convinced that the method adopted is capricious, fanciful, arbitrary or clearly unjust." It may be mentioned that this Court has held in Assistant Commissioner of Urban Land Tax(supra) that "for the purpose of Ievying tax under entry 49, List II, the State Legislature may adopt for determining the incidence of tax the annual or the capital value of the lands and buildings." There is therefore no justification for the argument to the Contrary We may as well deal here with the ancillary argument that the building tax could not, at any rate, have been based on the "gross annual rent" of the building. Thus argument has arisen because clause (a) of section 2 of the Act defines "annual value" as follows,- 1 "annual value" of a building means the gross annual rent at which the building may at the time of completion be expected to let from month to month or from year to year." It is therefore true that the expected gross annual rent has been made the annual value of a building, but that, by itself, cannot be said to be open to objection for two reasons. Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risprudence, second edition, in para 762, on which reliance has been placed by Mr. Govindan Nair as follows.- "A valuation of real property for taxation may be made by capitalizing gross income therefrom, if the percentage used is sufficient to cover legitimate deductions and a fair net return to the owner." Reference may also be made to Faraday on Rating which shows that the gross value of a building is often made the datum point by statue and there is nothing unusual or illegal about it-particularly when there are statutable deductions from it as in the present case. Then it has been argued that under the Kerala Municipal Corporation Act, 1961, the annual value is largely determined on the basis of the value of the land on which the building has been constructed and the land appurtenant thereto, but it is not permissible to make it the basis of levying the tax on buildings under the Act as it purports to be a tax only on buildings and not on lands or on lands and buildings. Reference for this argument has been made to that part of section 102(1) of the Kerala Municipal Corporation Act which provides that a building shall be assessed "together with its site and other adjacent p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s some land as an appurtenance to a building, then if the word "appurtenance" has been used in its true sense, it is an integral part of the building to which it belongs, while if the word has been used loosely, it will have its separate existence-quite apart from the building. In either case, its value will not come in for addition to the annual value of the building. It would not matter, therefore, if under the Corporation Act the annual value of a building includes the value of the appurtenances. for that is really the true annual value of the building concerned. Another argument which has been advanced is that the multiple of 16 for ascertaining the capital value of a building on the basis of its annual value, is unrealistic and arbitrary and should be held to be "confiscatory". It has been pointed out that competing returns from investments range from 12 to 18 per cent on long term bank deposits. It has also been argued that mere multiplication of the annual value would give an unrealistic value and is not a satisfactory method of arriving at the capital value. As has been pointed out earlier, the Legislature has decided to impose a non-recurring tax on buildings in the State. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpiry of the term of the deposit or the certificate. The term of deposit is often quite long if it has to yield income at the rate of 10 per cent or so. If however the deposit is for a short period of say six months, the income from interest may not be far in excess of 6.25 per cent, which appears to be the basis for fixing the multiple at 16. Mr. Dewan has invited our attention to a statement prepared by him showing building tax on gross annual rent, and he has argued that, in one of the cases before us, while the cost of construction of the building was only Rs. 2,79,686.20 its annual rental income is Rs. 1,34,400,00, its capital value works to Rs. 21,50,400. On and the building tax on it will amount to Rs. 3,04.,610.00. It has been urged that the building tax will thus be far in excess of the cost of construction, and would be extortionate. But the argument misses the point that only the cost of construction of the structure cannot be the full capital value of the building. It also overlooks the fact that the entire cost of construction, on Mr. Dewan's own showing, would be recovered in about two years because of the high rental income, and if the owner has to pay a non-recurri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne method is perfect, or final, or above criticism. As it is, we are unable to think that the multiple of 16 suffer from any constitutional or legal infirmity. The legality of the building tax has however been challenged on the further ground that the Act, does not provide any procedural machinery for the assessment of the annual value of buildings and is really a colourable exercise of legislative power. The argument has been advanced with reference to sub-section (1) of section 5 and has been supported on the basis of this Court's decisions in Kunnathat Thathuni Moopil Nair v. The State of Kerala, Raja Jagannath Baksh Singh v. The State of Uttar Pradesh and Rai Ramkrishna and others v. The States of Bihar ( supra) . Sub-section (1) of section 5 of the Act, which is the charging section, provides that the building tax shall be charged at the rate specified in the Schedule where its capital value exceeds Rs. 20,000/-. Clause (f) of section 2 states that the "capital value' of a building means the value arrived at by multiplying its annual value by 16. So if the annual value of a building can be ascertained with finality, by any satisfactory procedure prescribed by law, it would o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the calculation of any other tax or impost that may be permissible under the other statute. In such a case, where the necessary machinery for determining the annual value has been provided in the Act and/or the rules of the local authority, there is no reason or necessity for providing another machinery in the other Act and rules. Doing so would really mean making avoidable and unnecessary provision, and may nave the disadvantage of creating confusion and inconsistency for no useful purpose. A case of the nature contemplated by sub-section (2) of section 6 is on a different footing for there are reasons to take the view that the annual value fixed for the building by the local authority is too low. Everything therefore turns on the question whether the law governing the levy and fixation of annual value of buildings in the areas of the local authorities concerned provide the necessary procedure and the machinery for their assessment and final fixation. It is not disputed before us that the three Acts which bear on the question are the Kerala Municipal Corporation Act, 1961, the Kerala Municipalities Act, 1960, and the Kerala Panchayats Act, 1960. We had occasion to refer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procedure and the machinery for the proper fixation of the annual value of buildings. In the Panchayat Act also, provision has been made in section 68 for ascertaining the annual rental value of buildings. Section 144 provides for appeals and revisions. Under sub-section (1) of that section the appeal lies to the Panchayat and then under sub-section (2) to the Deputy Director. Sub-section (3) gives power to the State Government also to call for and examine the record and pass an appropriate order. Then there are the Kerala Panchayats (Taxation and Appeal) Rules, 1963. That Act also thus provides the necessary procedure and machinery for determining the annual value of buildings in a satisfactory manner. It is therefore futile to contend that there is no adequate procedure or machinery in the three Acts mentioned above for the satisfactory and proper determination of the annual value, of buildings. That value can therefore very well be made the basis for determining the capital value of a building and thereby fixing the building tax under the charging section. Moreover, sections 9 to 16 of the Act contain the procedure and the machinery for the assessment of the building tax on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng it up in proportion to the number of years of the tenancy, cannot be said to arise. Thirdly, learned counsel have not been able to refer to any provision of the Kerala Buildings (Lease and Rent Control Act, 1965, under which the building tax could be taken into consideration in fixing the fair rent of the building and section 29 of the Act has prevented that being done. Lastly, it has been argued that while section 18 of the Act provides that the tax may be paid in such instalments as may be prescribed, the proviso to sub-section (1) of section 11, which deals with appeals, renders that provision negatory as it states that no such appeal shall lie unless the building tax has been paid. The concern of the learned counsel in advancing this argument is justified; but if the aforesaid provisions of sections 11 and 18 are read harmoniously it would appear that if an, assessee is entitled to pay the building tax in instalments under the prescription referred to in section 18, he will not be identified to file an appeal if he has paid those instalments as and when they fall due. That is a fair and reasonable view to take of the relevant provisions of the Act, and we hold accordingly. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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