Holding

The actual annual rent received, absent special circumstances, is a proper measure of rateable value, and property tax based on it is not a tax on income and is constitutionally valid.

Summary

The appellants, owners of properties in Delhi, challenged notices issued under Section 126 of the Delhi Municipal Corporation Act, 1957 that revised the rateable value of their properties on the basis of actual rent received. The Court examined how to determine rateable value when the rent is not subject to the Delhi Rent Control Act, 1958 or any other rent‑control legislation. It held that, in the absence of artificial rent control, the actual annual rent received by the landlord is a reliable indicator of the rent a willing lessee would pay to a willing lessor and may be taken as the annual rateable value for property‑tax assessment. The Court further ruled that using actual rent to compute rateable value does not convert the property tax into a tax on income, and therefore the levy is within the legislative competence of the State (or Parliament for Delhi) under Entry 49 of List II. Consequently, the appeals and the writ petition were dismissed.

Issues considered

How should the rateable value of a property be determined for property‑tax purposes when the rent is not controlled by any rent‑control legislation?
Whether basing the rateable value on actual annual rent makes the property tax a tax on income, rendering it unconstitutional or beyond the legislative competence of the State/Parliament?
Whether the Delhi Municipal Corporation Act, 1957, as applied to properties freed from rent control, is valid under the constitutional entries applicable to Delhi.

Legislation cited

Constitution of Indias. Article 245, s. Article 246
Delhi Municipal Corporation Act, 1957s. 113, s. 114, s. 116, s. 126

Subjects

property taxrateable valuerent controllegislative competenceDelhi Municipal Corporation Actconstitutional lawincome taxmunicipal taxation

Judgment

A GOVERNMENT SERVANT CO-OPERATIVE •
HOUSE BUILDING SOCIETY AND OTHERS
v.
UNION OF INDIA AND OTHERS

AUGUST 5, 1998
B
[SUJATA V. MANOHAR AND M. SRINIVASAN, JJ.]

Municipalities

C Delhi Municipal Corporation Act, 1957, Sec. 116-Property tax-
Annual Rateable value-Determination of-Property not controlled by Rent
Act-Test of 'reasonably expected rent'-Held, actual annual rent received
by landlord in absence of special circumstances, would afford good test to
decide the rent which landlord might reasonably expect from a hypothetical
tenant and could be taken as annual rateable value of the property and
D the property tax levied thereof cannot be viewed as tax on income-Delhi
Rent Control Act, 1958 (as amended in 1988), Sec. 3.

Constitution of India, Art. 245&246, List-I, Entry 82, list-I/, Entry
49 of Sch. VII-Property tax-legislative competence-State legislature is
E competent to levy such taxes as subject matter fall in Entry 49, list-I I -
Merely because annual rent is taken as the basis for determining the rateable
value of the property, property-tax cannot be viewed as tax on income of the
owner-The method of arriving at the quantum of tax should not be mixed
up with the nature of the tax itself-No relevance to 'Union Territories,'
Parliament can make laws respecting all the entries in all the three lists-
F Delhi Municipal Corporation Act, 1957, Sec. 113, 114, 116.

The appellants are the owners of properties in Delhi, which are
governed by the Delhi Municipal Corporation Act, 1957. The appellant
received notices under Section 126 of the Act for the assessment year 1988-
G 89 and for subsequent years proposing to revise the rateable value of their
properties. The assessments of the rateable value of the properties were made
on the basis of the actual rent received.

In this appeal 1 the question came before this court for consideration is
how to determine the rateable value when the rent of the properties assessable
H to Property-taxes, is not controlled under the Delhi Rent control Act, 1958
996
GOVT. SER. CO-OP. HOUSE BUILD. SOC. v. U.0.1. 997
• or any other rent control legislation. A
Dismissing the appeal, this Court

HELD : 1. Where thefe in no artificial control on the rent which is
charged, the annual rent actually received by the landlord, in the absence of
any special circumstances, would be good guide to decide the rent, which the B
landlord might reasonably expect to receive from a hypothetical tenant. Since
the premises in the present case are not controlled by any rent control
legislation, the annual rent received by the landlord is what a willing lessee,
uninfluenced by other circumstances, would pay to a willing lessor. There
would ordinarily be, in a free-market close approximation between the actual C
received by landlord and the rent which he might reasonably expect to receive 1
from a hypot.hetical tenant. Hence, actual rent, in these circumstances, can /
be taken as the annual rateable value of the property for the assessment of
the property tax. (1000-F-H; 1001-D)

The Corporation of Calcutta v. Smt. Padma Debi & Ors. (1962) 3 SCR D
49; Dewan Dau/at Rai Kapoor and Ors. v. New Delhi Municipal Committee
and Ors., [1980) I SCC 685; DR. Bablir Singh and Ors. etc. etc. v. Municipal
Corporation ofDelhi and Ors., [1985) 2 SCR 439 and East India Commercial
Co. Pvt. Ltd. v, Corporation of Calcutta, (1998) 4 SCC 368, relied on.

2. It cannot be said that if the annual rent is taken as basis for E
determining the rateable value of the property, the property tax will become
a tax on the income of the owner, thus falling beyond the legislative competence
of the State Legislature as tax on income would fall in Entry 82 of List
I instead of Entry 49 of List II of Sch. VII to the constitution. The three lists
in the seventh schedule of the Constitution have no relevance to the union
Territory of Delhi since Parliament can make law respecting all the entries F
in all the three lists. An Act of the State legislature entitling a Municipal
Corporation to levy property tax on the basis of rateable value of the land
and building calculated by the yardstick of annual rent at which such a
property can reasonably be leased to a hypothetical lessee, is valid and within
its legislative competence. The tax remains property tax and cannot be viewed G
as the tax on income. The method of arriving at the quantum of tax should
not be mixed up with the nature of the tax itself. [1001-F-H; 1002-D)

Ra/la Ram v. The Province of East Punjab, AIR (1949) 36 Federal
Court 81; Patel Gordhandas Hargovindas v. Municipal Commissioner,
Ahmedabad, [1964) 2 SCR 608; Bhagwan Dass Jain v. Union of India & H
998 SUPREME COURT REPORTS (1998] 3 S.C.R."

A Ors.. (1981) 2 SCC 135; Asst. Commissioner of Urban Land Tax and Ors. v.
The Buckingham and Carnatic Co. Ltd, etc., [1970) 1 SCR 268 and India·
Cement Ltd. and Ors. v. State of Tamil Nadu and Ors. (1990) 1 SCC 12, relied
on.

Sir Byramjee Jeejeebhoy v. Province of Bombay and Ors., AIR (1940)
B Born. 65, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 8424 of
1994 Etc.

From the Judgment and Order dated 28.5.1993 of the Delhi High Court
C in W.P. No. 2647of1991.

S.K. Dholakia, B.Sen, Rajinder Sachar, S. Balakrishnan, R.N. Keshwani,
S.P. Mittal, C.Nayak, R.K. Maheshwari, Mrs. Shally Bhasin, Ranbir Chandra,
(R.N. Verma) for B.K. Prasad, (D.S. Bawa)-in-poerson K.J. John, Ms. Manju
D Mishra, (R.P. Gupta and Madan Lal Kapoor) (NP) and (Sanjay Parikh) for
Intervenor) for the appearing parties.

The Judgment of the Court was delivered by

MRS. SUJATA V. MANOHAR, J. The appellants are the owners of
E properties in Delhi which are governed by the Delhi Municipal Corporation
Act, 1957 or the Punjab Municipal Act, 1911. Prior to coming into force of the
Delhi Rent Control (Amendment) Act, 1988, these properties were governed
by the Delhi Rent Control Act of 1958.

By the Delhi Rent Control (Amendment) Act, 1988 sub-sections 3(c) and
F (d) were added in Section 3 of the Delhi Rent Control Act, 1958. These
provide that nothing in the said Act shall apply "(c) to any premises, whether
residential or not, whose monthly rent exceeds three thousand and five
hundred rupees"; or "(d) to any premises constructed on or after the
commencement of the Delhi Rent Control (Amendment) Act, 1988, for a period
G of ten years from the date of completion of such construction". On the said [
provisions coming into force the appellants received notices under Section
126 of the Delhi Municipal Corporation Act for the assessment year 1988-89
and for subsequent years proposing to revise the rateable value of their
properties. The footnote to these notices stated that this was in view of the
amendments to the Delhi Rent Control Act, 1988. Assessments which were
H made pursuant to such notices were made by calculating the rateable value
GOVT. SER. CO-OP. HOUSE BUILD. SOC. v. U.0.1. [SUJATA V. MANOHAR, J.] 999

., of the property on the basis of the actual annual rent received. These and A
similar notices and assessments are the subject matter of challenge in the
present proceedings.

Under Section 113 of the Delhi Municipal Corporation Act, 1957, the
Corporation shall levy, inter alia, property taxes. Under Section 114 the property
taxes shall be levied on lands and buildings in Delhi and shall consist of the B
following, namely, (inter alia) under sub-section (d) a general tax pf not less
than ten and not and not more than thirty . percent of the rateable' value of
)
lands and buildings within the urban areas. Section 116 provides as follows:-

"116. Determination of rateable value oflands and buildings assessable
to property taxes - (I) The rateable value of any iands and buildings c
assessable to property taxes be the annual rent at which such land
or building might reasonably by expected to let from year to year less-

(a) a sum of ten per cent of the said annual rent which shall be
in lieu of all allowances for costs or repairs and insurance, and
other expenses, if any, necessary to maintain the land or building
D
in a state to command that rent, and
<:
(b) the water tax or the scavenging tax or both, if the rent is
inclusive of either or both of the said taxes:

Provided that if the rent is inclusive of charges for water supplied by E
measurement, then, for the purpose of this section the rent shall be
treated as inclusive of water tax on rateable value and the deduction
of the water tax shall be made as provided therein:

Provided further that in respect of any land or building the standard
rent of which has been fixed under the Delhi and Ajmer Rent Control F
::::::::::...
act, 1952 (38 of 1952), the rateable value thereof shall not exceed
the annual amount of the standard rent so fixed.

[Explanation - The expressions "water tax" and "scavenging tax" shall
mean such taxes of that nature as may be levied by an appropriate
authority.]
G

(2) ..............
,;
(3) ..............

To determine the quantum of property tax, therefore, it is necessary to arrive H
</
.1000 SUPREME COURT REPORTS [1998] 3 S.C.R

. A at the rateable value of the land or building. Under Section 116( 1) the rateable
value is the annual rent at which such land or building might reasonably be·
expected to be let from year to year less certain deductions. We have to
consider how the annual rent at which such property might be reasonably
expected to be let, is to be arrived at when the rent of the property is not
B controlled under the Delhi Rent Control Act, 1958 or any other rent control
legislation. •

In the case of The Corporation of Calcutta v. Smt. Padma Debi and
Ors., [1962] 3 SCR 49, this Court considered Section 127(a) of the Calcutta
Municipal Act, 1923. This Section was similar to Section 116(1) of the Delhi
C Municipal Corporation Act, 1917. Under Section 127(a) the annual value of
the land or building shall be deemed to be gross annual rent at which the land
or building might at the time of assessment reasonably be expected to let from
year to year less certain deductions. The Court observed that the word
"reasonably" is not capable of precise definition. It said, (at page 55)"
'Reasonable' signifies 'in accordance with reason.' In the ultimate analysis
:0 it is a question of fact. Whether a particular act is reasonable or not depends
on the circumstances in a given situation. A bargain between a willing lessor
and willing lessee uninfluenced by any extraneous circumstances may afford
a guiding test of reasonableness. An inflated or deflated rate of rent based
upon fraud, emergency, relationship, and such other considerations may take
E it out of the bounds of reasonableness. Equally it would be incongruous to
consider fixation of rent beyond the limits fixed by penal legislation as
reasonable. Under the Rent Control Act, the receipt of any rent higher than
the standard rent fixed under the Act is made penal for the landlord."

Therefore, where there is legislation fixing the standard rent of the
F premises, the rent at which the premises could be reasonably expected to be
let cannot exceed the statutory ceiling. But where there is no artificial control
on the rent which is charged, a bargain between a willing lessor and willing
lessee uninfluenced by any extraneous circumstances, affords a good test of
reasonableness.
G The same principle was reiterated by this Court in Dewan Dau/at Rai
Kapoor and Ors. v. New Delhi Municipal Committee and Ors., [1980] 1
SCC 685 at page 687. After quoting the above passage from The Corporation
of Calcutta v. Smt. Padma Debi and ors., (Supra), this Court held that the
actual rent payable by a tenant to the landlord would, in normal circumstances,
H afford reliable evidence of what the landlord might reasonably expect to get
GOVT. SER. CO-OP. HOUSE BUILD. SOC v. U.0.1. [SUJATA V. MANOHAR, l] 1001
from a hypothetical tenant, unless the rent is inflated or depressed by reason A
of extraneous considerations such as relationship, expectation of some other
benefit etc. There would ordinarily be, in a free market close approximation
between the actual rent received by the landlord and the rent which he might
reasonably expect to receive from a hypothetical tenant.

In the case of Dr. Balbir Singh and Ors. etc. v. Municipal Corporation, B
Delhi and ors., [1985] 2 SCR 439 at pate 452, also this Court reiterated the
test laid down in the above two cases and repeated that in a free market there
would ordinarily be a close approximation between the actual rent received
by the landlord and the rent which he might reasonably expect to receive from
a hypothetical tenant. See also East India Commercial Co. Pvt. Ltd. v. C
Corporation a/Calcutta, [1998] 4 SCC 368.

Therefore, the annual rent actually received by the landlord, in the
absence of any special circumstances, would be a good guide to decide the
rent which the landlord might reasonably expect to receive from a hypothetical
tenant. Since the premises in the present case are not controlled by any rent D
control legislation, the annual rent received by the landlord is what a willing
lessee, uninfluenced by other circumstances, would pay to a willing lessor.
Hence, actual annual rent, in these circumstances, can be taken as the annual
rateable value of the property for the assessment of property tax. The municipal
corporation is, therefore, entitled to revise the rateable value of the properties E
which have been freed from rent control on the basis of annual rent actually
received unless the owner satisfies the municipal corporation that there are
other considerations which have affected the quantum of rent.

It was then submitted on behalf of the appellants that if the annual rent
actually received is taken as the basis for determining the rateable value of F
the property, the property tax will become a tax on income of the owner. Such
a tax would be beyond the legislative competence of the state legislature.
Being a tax on income, it can be levied only by the Central Government and
it would not fall in entry 49 of List II of the Seventh Schedule of the
Constitution. It would, in fact, fall in entry 82 of List I which deals with taxes G
on income other than agricultural income. Now, Entry 49 of List II covers taxes
on lands and buildings. As the High Court has pointed out, the three lists
in the Seventh Schedule of the Constitution have no relevance to the Union
Territory of Delhi since the Parliament can made law respecting all the entries
in all the three lists. The Delhi Municipal Corporation Act is, in fact,
Parliamentary Legislation. Nevertheless, as the argument has been advanced H
{
1002 SUPREME COURT REPORTS [1998] 3 S.C.R.

A before us at some length and it may affect other municipal legislations, we will
briefly deal with it.

A similar argument in connection with the Punjab Urban Immovable
property Tax Act, 1940 was advanced before the Federal Court in the case of
·-
Ra/la Ram v. The Province of East Punjab, AIR (1949) 36 Federal Court 81.
B The property tax under the said Act was based on the annual value of the
Property. Negativing the argument that this was a tax on income and hence
was not covered by List II, Item 42, dealing with taxes on lands and buildings
under the Government of India Act, 1935, the Court said that a proper approach
is to look at the true nature and character of the legislation or its pith and
c substance. If the substance of the legislation is within the express powers,
then it is not invalidated if incidentally it affects matters which are outside
the authorised field. The Court analysed the provisions of the said Act and
observed that in every case the actual profit derived from the property would
not necessarily be its annual value. It is possible to conceive of cases in
which the property to be taxed does not actually yield any income whatsoever,
D though every property must have some notional annual value. The method
of arriving at the quantum of tax should not be mixed up with the nature of
the tax itself. The essential character of the tax was property tax and not a ;:-
tax on income. It said, (page 86) "This case demolishes the broad contention
that wherever the annual value is the basis of a tax, that tax becomes a tax
E on income. it shows that there are other factors to be taken into consideration
and that it is the essential nature of the tax charged and not the nature of
the machinery which is to be looked at."

The Federal Court had referred to the full Bench decision of the Bombay
High Court Sir Byramjee Jeejeebhoy v. Province of Bombay and Ors., AIR
F (1940) Bombay. 65 which also deals with the urban immovable property tax ....,:-..
t·
to be calculated by the municipal commissioner. The same view has been
taken by this Court in the case of Patel Gordhandas Hargovindas v.
Municipal Commissioner, Ahmedabad, [1964] 2 SCR 608. In this case the
municipal corporation of Ahmedabad had imposed a rate on vacant land
within the municipal limits. The rate was the percentage of valuation based
G upon capital. The contention was that this was a tax on capital and not a tax
on property and was, therefore, beyond the legislative competence of the
State. The Court relied upon Ra/la Ram v. Province of East Punjab (Supra)
and emphasised the importance of the distinction between the levy of a tax
and the machinery of its calculation including the method of calculation and
H said that the subject matter of the tax was obviously something other than
I

~

GOVT. SER. CO-OP. HOUSE BUILD. SOC. v. U.O.I. [SUJATA V. MANOHAR, JJ 1003
1 the measure provided to quantify tax by levying the tax on a percentage of A
the capital value of the land taxed. The entire scope of the charging Section
was not changed. The tax was, therefore, a tax on land.

It is thus well settled that an Act of the State legislature entitling a
municipal corporation to levy property tax on the basis of rateable value of
land and building calculated by the yardstick of annual rent at which such B
property can reasonably be leased to a hypothetical lessee, is valid and within
its legislative competence. The tax remains property tax and cannot be viewed
as a tax on income. See also Bhagwan Dass Jain v. Union of India and Ors.,
[1981] 2 SCC 135, Assistant Commissioner of Urban Land Tax and Ors. v. The
Buckingham and Carnatic Co. Ltd., etc., [1970] 1 SCR 268 and India Cement C
Ltd. and Ors. v. State a/Tamil Nadu and Ors., [1990] 1 SCC 12.

Looking to the charging section of the Delhi Municipal Corporation
Act, 1917 which clearly imposes a tax on property and Section 116 which
deals with the method of determination of this tax with reference to the
rateable value of lands and buildings, the property tax levied cannot be D
viewed as tax on income. The basis of valuation is the hypothetical annual
rent which a willing lessor would receive from a willing lessee. Obviously in
)
case where the property is self-occupied there is no question of the owner
receiving any income. In the case of properties which are covered by the
Delhi Rent Control Act, there may be many cases where the annual rent
received by a landlord in respect of a property may be different from its E
annual rateable value. A property tax under the Delhi Municipal Corporation
Act is, therefore, not a tax on income. Since the position is well settled we
need not elaborate on such instances.

Learned counsel for the Delhi Municipal Corporation has pointed out F
that in the case of self-occupied properties the Delhi Municipal Corporation
has continued to fix the rateable value on the basis that the property is
governed by the Delhi Rent Control Act. The arguments of the appellants,
therefore, have centred on properties which are let out and which are not
subject to rent control.
G
In the premises, we agree with the impugned judgment and order of the
Delhi High Court. The appeals and the writ petition are, therefore, dismissed.
There will, however, be no orders as to costs.

B.K.S. Appeals/Petition dismissed.