1. Vide Mah. Act 11 of 2009, the State of Maharashtra amended the Mumbai Municipal Corporation Act, 1888 (MMC Act) to enable BMC to levy property tax based on “capital value” of the properties as against the rateable value of the properties as provided for in the MMC Act, 1888, prior to the said amendment.
2. One of the main objects of introducing / shifting to the capital value system was to remove the disparities in tax liabilities between old and new properties / buildings. The earlier method was based on RLR (Residential Letting Rates) / Annual Letting Value of the property.
3. Under the earlier method, the tax was collected on the basis of rateable value fixed by BMC; and the rateable value was fixed from the date of first occupation, based on certain factors, such as location of the property, i.e. ward-wise and locality-wise; and rateable value of the Property remained unchanged once they were assessed and occupied (except in case of change of user); and rates were revised periodically. The Revised rates were applicable for newly developed properties once they were occupied, and this is the precise reason for disparity in tax liability of old properties and new properties, wherein the rateable value of old properties remained frozen once it was assessed, and the new properties were liable to pay taxes as per contemporary rateable value.
a) The 4th proviso to impugned section 140A frustrate the mandate of Article 14 of the Constitution of India, i.e. to say, whereas Article 14 guarantees all persons the equality before the law, the said section confers exemption from increased payment of taxation, to all the residential unit holders having upto a 46.45 sq. mtr (500 sq. ft.) carpet area, irrespective of the capital value of the property concerned.
b) The discrimination lies wherein (i) the properties having identical capital value, but some of the properties would not be subjected to increased tax liability and some of the properties would be subjected to increased tax liability; and (ii) where the capital value of the properties substantially differs, the properties bearing a very high capital value would not be subjected to increased tax liability, but properties bearing comparatively much lesser capital values would be subjected to increased tax liability.
c) The Stamp Duty Ready Reckoner rates for the year 2010, which is taken as a base value for arriving at a Capital value of Residential properties, divides the entire Mumbai into 124 Zones and 575 Sub-Zones; and the base value of the properties situated therein in each of the zone and sub-zone varies from Rs.19,400/- per sq. mtr (Entry No.333) to Rs.3,79,400/- per sq. mtr (Entry No.75).
(d) The repercussion of the 4th proviso, when read with 1st and 3rd proviso to said section, would continue at the lapse of 5 years, wherein the class of individuals set out in the 4th proviso would stand to benefit at the cost of remaining individuals, although both the classes stands on similar footing, and therefore, the solemn object of introducing capital value based system to “reduce disparity in burden of tax”, is frustrated and in fact defeated.
(e) The said 4th proviso would also create a situation wherein in the same residential Building, comprising units of 500 sq. ft. of carpet area and just above 500 sq. ft. carpet area, the individuals having a flat of 500 sq. ft. would not be liable for the increase in the tax, but individuals even having a 510 sq. ft. of flat may be subjected to increase of tax two times over the preceding year.
(a) In the scheme of taxation vis a vis to civic services provided under the mandate of law (sections 61 to 63B of MMC Act), at least two broad classes can be ascertained – (i) A Class of persons who owns or is otherwise liable to pay property tax; (ii) A Class of persons who live in “slums” and “Houseless” who are not liable to pay property tax, but otherwise are entitled to minimum basic civic services. Therefore, it would not be incorrect to say that the “former” class bears the burden of the “latter”.
(b) 4th proviso to said impugned section, as far as residential units are concerned, further creates “two class” of persons in the “former” class, one who owns residential units admeasuring about / upto 46.45 sq. mtrs / 500 sq. ft. carpet area (about 2BHK flat), and another class of persons who owns residential units admeasuring above 45.46 sq. mtrs / 500 sq. ft. carpet area.
(c) Whereas impugned section 140A creates “two class” of persons in the “former”, by virtue of 4th proviso, one class of persons is sought to be exempted from additional burden of tax and the second class is further burdened with (a) outgo of more money due to introduction of property based in capital value; (b) the additional share of burden which is sought to be exempted by virtue of 4th proviso to section 140A, including the burden as set out in Clause (a) hereinabove, thereby frustrating the very object of rationalizing the burden of taxation on each of the property.
(a) The 4th proviso sought to sympathize with the prosperous class who have the privilege of having a 46.45 sq. mtr (500 sq. ft. flat) (Nearly 2 BHK flat) in the city of Mumbai and the proviso completely overlooks the class of “Houseless”, who are waiting to be housed. There is absolutely no reason or merit in granting the exemption from increased tax liability to the said class of people.
(b) By no stretch of imagination it can be argued that individuals who own a residential units upto 500 sq. ft. in the city of Mumbai constitute a poor class / weaker section of the society. On the contrary, by levying tax uniformly on both the classes, a substantial equality / rationality in the levy of tax burden could have been achieved.
(c) The 4th proviso sought to confer exemption to a privileged class and ignoring the deprived class. A combined reading of sections 63(a), 63(aa), 63(jjc), 63(jje), 354C(1)(A)(c), 354RM to 354RQ and section 460 of the MMC Act, 1888, and Article 243W (a)(i) and Entry Nos.3, 9, 10, 11 of 12th Schedule to the Constitution of India, obliges the Respondent No.2, inter alia, to attend to the needs of “Houseless”.
(d) It is further submitted that budgetary constraints of BMC may ordinarily discourage it to embark upon and implement “Housing Schemes” for the “Houseless” and for those living on “footpath”, i.e. Mahatma Gandhi Path Kranti Yojna. Etc; and therefore it is irrational to subsidize the privilege class of persons owning about 46.45 sq. mtr (500 sq. ft.) of flat in Mumbai.
a) Section 3(b) of the Maharashtra Act No.VI of 2012, inserted sub section (2A) to section 140A of the MMC Act, 1888, which permits the BMC to recover taxes for earlier three years, i.e. 2010-11, 2011-12 and 2012-13.
b) The permitting the recovery of tax for earlier years is illegal, for it is inconsistent with the mandate of other provisions of the MMC Act, 1888, more particularly of section 139 of the MMC Act, 1888.
c) Although retrospective exaction of taxation is not altogether impermissible, but at the same time, it cannot be invoked indiscriminately; and it has to be seen and evaluate in each case of its due application.
d) The taxing power of the Local bodies is limited to the extent, for carrying out its obligatory and discretionary functions under the statute. That in area of taxation, Local bodies do not enjoy the same freedom and latitude as otherwise being enjoyed by the Parliament and the State Legislature. There are inherent limitations on the part of Local bodies to recover taxes, that is to say, they can impose and recover taxes, “Only for the purposes of the Act” under which they are incorporated.
e) The Local bodies 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 to the Local body.
f) The limit to which the Corporation can tax is therefore, circumscribed by the need to finance the functions, obligatory or optional, which it has to or may undertake to perform. It will be not open to the Local body to collect more than it needs for the functions it performs.
g) And, Local bodies make budgetary provisions for each year and are entitled to exact tax for the said amount. The Corporation is obliged to prepare annually the estimates of expenditure and income, comprising therein, inter alia, an estimate of expenditure to be incurred by the Corporation in the next ensuing official year; and inter alia, a statement of proposal as to the taxation which it will, in his opinion, be necessary or expedient to impose under the provisions of this Act, for the next ensuing official year. Therefore, there is no room for permitting the recovery of tax for erstwhile years, for, the local body is always entitled to raise revenue which is required by them, for the concerned fiscal year.
h) The Local bodies, similarly, cannot raise the rate of taxation to such an extent, or to recover purported tax for earlier years, as to provide a “surplus” which is much more than what it needs for carrying out the functions assigned to it.
i) In the instance case, section 139 of the MMC Act, 1888, expressly declare that,” For the purposes of this Act, taxation shall be imposed as follows …...”.
j) Chapter III of the MMC Act, 1888, comprising duties and powers of the Municipal Authorities, in section 61, 62, 62A, 62B, 62BB, 62C, 62D, 62E lays down the obligatory duties of the Corporation, i.e. BMV; and Section 63 lays down the discretionary nature of functions which may be undertaken by the Corporation.
k) Section 125 of the said Act obliges the Commissioner of the Corporation to prepare annually the estimates of expenditure and income, comprising therein, inter alia, an estimate of expenditure to be incurred by the Corporation in the next ensuing official year; and inter alia, an estimate of receipts and income for the next ensuing official year, other than from taxation; and, a statement of proposal as to the taxation which it will, in his opinion, be necessary or expedient to impose under the provisions of this Act, for the next ensuing official year.
l) Therefore, there is no room for to permit the recovering of tax for erstwhile years, for, the local body is always entitled to raise revenue which is required by them, for the concerned fiscal year.
m) The same principle would apply to the fixation of rates of taxation and if per chance the Corporation fixes rates which are unreasonable, there is control in the court to strike down such an unreasonable impost.
a) The main objects of introducing / shifting to the capital value system was to remove the disparities in tax liabilities between old and new properties / buildings. The earlier method was based on RLR (Residential Letting Rates) Annual Letting Value.
b) The earlier method of valuation have led to a huge disparity whereby old properties were paying much less tax as compared to new properties; and the disparity had widened with the passage of time. The situation had reached a stage whereby owners of flats constructed in posh locality in South Mumbai, say forty or fifty years back, were paying lesser taxes than a newly constructed property situated even in far away suburbs like Borivali, for the equivalent area, inspite of the fact that those properties in South Mumbai commanded much higher value than the properties at far away suburbs.
c) Therefore, it was proposed to introduce levying of property tax on lands or buildings based on their Capital value.
d) Therefore, if any rationalization of burden of tax is to be achieved, the new tax system, i.e. Capital Value system, should provide a framework wherein the burden of tax on old properties should reasonably increase, and at the same time, the burden of tax on newer properties should decrease, or, at least it should not increase; and thereby some degree of rationality / reasonableness / equality / parity / fairness / equivalence may be achieved in the burden of tax among various users of properties.
e) Now look at the very basic framework of the capital value system. It sought to levy property tax on “all” lands and buildings, based on their capital value. This system does not distinguish old properties or newer properties.
f) The 1st proviso to section 140A(1) of the MMC Act, 1888, is clearly indicative of the fact that, by reason of adoption of levy of property tax on buildings and lands based on their capital value, the tax burden on the “subject” may increase substantially and multi fold; and therefore, it is provided that there should be some cap to any such increase; and therefore a cap of 2 times for buildings and lands used for residential purposes and 3 times for non-residential purposes was sought to be mandated.
g) Therefore, in the new system, it may be noted that, whereas there would be an increase of tax burden on old properties, to the extent of 2 times and 3 times, but there is no corresponding decrease or stability in tax burden on newer properties, and there would be simultaneous increase of tax burden on newer properties as well.
h) The only beneficiaries of this capital value system, whose tax liability would be reduced, are the owners of properties, who have let out their property on Leave & License, and who were subjected to excessive property tax under the erstwhile Rateable value system. By introduction of this system, the levy is made neutral, irrespective of whether the property is let out on Leave & License or self-occupied.
i) Therefore, the “means” adopted to achieve the ends, fails to achieve the ends, i.e. rationality in the burden of taxation over the “subjects”.
a) Ordinarily a tax on land is assessed on the actual or the potential productivity of the land sought to be taxed. In other words, the tax has reference to the income actually made, or which could have been made, with due diligence, and, therefore, is levied with due regard to the incidence of the taxation.
b) The expression “Rate" is used to indicate an impost levied by a local authority to raise funds for its expenses; and had acquired a special meaning, and it meant a tax for local purposes, imposed by local authorities, on the basis of a percentage of the Annul Letting value, for which the land or building might reasonably fetch.
c) Notwithstanding the fact that “levy based on rate” based on “Annual letting value” had led to great disparity on the share of burden of taxation among the “various Ratepayers”; the nexus of levy, based on Annual letting value had a cogent and balanced nexus with the incidence of taxation.
d) Nonetheless there is no nexus with the capital value of a property and the nature of the levy. By levying it directly at a percentage of the capital value, the real incidence of taxation is camouflaged.
e) The levy based on capital value of the property has no reference to income, either actual or potential, from the property sought to be taxed. Hence, it may be rightly be stated that the Act obliges every person who holds land or building to pay the tax at a particular rate prescribed, whether or not he makes any income out of the property; or whether or not the property is capable of yielding any income.
f) Whereas there is no challenge to the legislative competence of the State to levy tax on lands and buildings based on their capital value, the levy of tax/ rate based on capital value may be permissible only in those cases where Rateable value of the property cannot be ascertained and therefore the concerned property may be valued on the basis of its capital value, and may be taxed accordingly.
a) The 1st proviso to section 140A(1) of the MMC Act, 1888, is clearly indicative of the fact that, by reason of adoption of levy of property tax on buildings and lands based on their capital value, the tax burden on the “subject” may increase substantially and multi fold; and therefore, it is provided that there should be some cap to any such increase; and therefore a cap of 2 times for buildings and lands used for residential purposes and 3 times for non-residential purposes was sought to be mandated.
b) Section 140A(2A) of the MMC Act, 1888, further empowers the MMC to recover from the “Ratepayer” the difference of tax liability, which may arise due to valuation based on Rateable value and capital value, for earlier three years, i.e. for the year 2010-11, 2011-12, 2012-13.
c) Therefore, a subject, in respect of his residence ,if was paying a property tax of say Rs.10,000/-, in the financial year 2012-13, he may be asked to shell out Rs.70,000/-for the year 2013-14; and a subject, in respect of his business, if paying a property tax of say Rs.20,000, in the year 2012-13, may be asked to shell out at least Rs.2,00,000/- for the year 2013-14.
Fairness and uniformity are basic principles of property tax assessment, whatever system of taxation may be employed. Whereas similar civic services are provided by the Municipality to all “Rate payers”, the “Rate”, i.e. the tax must fall on them, “equally”, as far as practicable; That each of the criteria, which has no bearing / nexus with the quantum / degree of the services which are provided by the Local Body, shall not be considered in the valuation of the Capital Value of the Property; and therefore there is no reason to charge more tax or less tax, based on “Age of the Building, construction type.
The Rules are ultra vires of the parent Act, under which they are enacted, that is to, it is in clear breach section 154(1A)(b) of the MMC Act. Section 154(1A)(b) inter alia, provides that the Commissioner while fixing the Capital value, inter alia, shall consider the carpet area of the building.
Whereas in the Rules, the Capital value of the Building is based on SDRR, and SDRR is based on Built up area, thus the Rules prescribe the ascertainment of the capital value of the Buildings on built-up area.
Whereas in the Rules, the Capital value of the Building is based on SDRR, and SDRR is based on Built up area, thus the Rules prescribe the ascertainment of the capital value of the Buildings on built-up area.
The Rules are ultra vires of the parent Act, under which they are enacted, that is to say, they are in clear breach section 154(2) Mumbai Municipal Corporation Act, 1888.
Section 154(2) of the MMC Act expressly states that the value of any machinery contained in or situate in any land or building shall not be included in valuing the capital value of the said land and building.
The value of the Buildings mentioned in the Stamp Duty Ready Reckoner are inclusive of machinery within the building such as Electrical Lifts and Pumps.
Thus deriving the capital value based on the said SDRR in which the value of machinery inheres, and using that as a base for levying property tax, would be ex-facie illegal.
The Legislature was conscious of the fact that (a) SDRR is based on built up area; (b) The valuations indicated in SDRR includes machinery which inheres in any building; (c) MMC Act and Stamp Act are not pari material Acts; (d) SDRR is only for the limited purpose of levying Stamp duty on the transactions of sale and purchase of lands or buildings, and therefore SDRR may not truly reflect the correct valuation of any land or building.
The Legislature have had expressly chosen to use the expression “Shall have regard while fixing the base value”. If the Legislature had wanted SDRR to be considered as a base value of lands or buildings, it may have expressed its intention by stating so.
And, therefore, comprehensive reliance on the valuation indicated in SDRR is ex-facie unlawful, and deserves to be declared so.
The Hon’ble Bombay High Court have had the occasion to observe that, … it is now, a well settled principle of law that the ready reckoner is prepared by the State Govt for the purpose of computing Stamp duty payable on transaction. The Ready Reckoner cannot be regarded as an accurate reflection of market value…”. The observation of this Court assumes significance, for, the Court was unequivocal in stating that, “a well settled principle of law…”. (2014) 1 MhLJ 152.
a) Art. 265 of the Constitution imposes a limitation on the taxing power of the State, in so far as it provides that the State shall not levy or collect a tax, except by authority of law, that is to say, a tax cannot be levied or collected by a mere executive fiat. It has to be done by authority of law, which must mean valid law enacted by the competent Legislature.
b) In order that the law may be valid, the tax proposed to be levied must be within the legislative competence of the Legislature imposing a tax and authorizing the collection thereof; and, secondly, the tax must be subject to the conditions laid down in Article 13 of the Constitution. One of such condition envisaged by Article 13(2) is that the Legislature shall not make any law which takes away or abridges the equality clause in Article 14, which enjoins the State not to deny to any person, equality before the law or the equal protection of the laws of the country. It cannot be disputed that if the Act infringes the provisions of Article 14 of the Constitution of India, it must be struck down as unconstitutional.
a) The Indian Constitution, most noticeable under Article 14 and 19 permitted Courts to undertake inquiries into the substantive fairness of the legislations, which Courts undertook under classification and reasonableness tests respectively.
b) "It is now well established that while article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differential which distinguished persons or things that are grouped together from others left out of the group and, (ii) that differentia must have a rational relation to the object sought to be achieved by the statute in question. The differentia which is the basis of the classification and the object of the Act are two distinct things.
a) Classification means segregation in classes which have a systematic relationship, usually found in common properties and characteristics. It postulates a rational basis and does not mean hording together of certain persons and classes arbitrarily. The law can make and set apart the classes according to the needs and exigencies of the society and as suggested by experience.
b) The classification may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration.
c) Though a law ex-facie appears to treat all that fall within a class alike, if in effect it operates unevenly on persons or property similarly situated, it may be said that the law offends the equality clause. It will then be the duty of the court to scrutinize the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely, a law may treat persons who appear to be similarly situated differently; but on investigation they may be found not to be similarly situated. To state it differently, it is not the phraseology of a statute that governs the situation but the effect of the law that is decisive.
d) What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. In substance, the differentia required is that it must be real and substantial, bearing some just and reasonable relation to the object of the legislation. The fact that the classification by itself is reasonable is not enough to support it unless there is nexus between the classification and the object to be achieved. Art. 14 certainly apply where equals are treated differently without any reasonable basis.
a) The constitutional standards by which the sufficiency of the differentia which forms a valid basis for classification may be measured, has been repeatedly stated by the courts. If it rests of a difference which bears a fair and just relation to the object for which it is proposed, it is constitutional. To put it differently, the means must have nexus with the ends.
b) If legislation discriminates one person or class of persons against others similarly situated and denies to the former the privileges that are enjoyed by the latter, it may be regarded as "hostile" in the sense that it affects injuriously the interests of that persons or class.
c) That while good faith and knowledge of the existing conditions on the part of a Legislature are to be presumed, if there is nothing on the face of the law or the surrounding circumstances brought to the notice of the Court on which the classification may reasonably be regarded as based, the presumption of constitutionality cannot be carried to the extent of always holding that there must be some undisclosed and unknown reasons for subjecting certain individuals or corporations to discriminating legislation.
d) A statute may direct its provisions against one individual person or things or to several individual person or things but no reasonable basis of classification may appear on the fact of it or be deducible from the surrounding circumstances; or matters of common knowledge. In such a case the Court will strike down the law as an instance of naked discrimination.
e) In determining the validity or otherwise of a statute or of the statutory provision, the Court have to examine whether such classification is or can be reasonably regarded as based upon some differentia which distinguishes such persons or things grouped together from those left out of the group; and whether such differentia has a reasonable relation to the object sought to be achieved by the statute.
f) The intelligible differentia classification test often focused on why the classification was carried out. While the definition of the class was readily ascertainable and one could fathom whom the law would apply to, the Courts often found that the class was not created on the basis of some acceptable or reasonable standard of general applicability based on the inherent properties or the characteristics of the class created. In such cases, the Court looked for reasonable, ascertainable or inherent basis of general applicability on the strength of which the discrimination was sought to be carried out. The Court would investigate the reasonableness and justifications of dividing persons into different groups and look to see if there were compelling reasons to distinguish between two classes.
g) In determining the impact of State action upon constitutional guarantees which are fundamental, it follows that the extent of protection against impairment of a fundamental right is determined not by the object of the Legislature nor by the form of the action, but by its direct operation upon the individual's rights, that is to say, It is not the object of the authority, making the law, nor the form of action, it is the effect of the law and of the action upon the right which attracts the jurisdiction of the Court to grant relief.
h) The above principles may be borne in mind by the Courts when they are called upon to adjudge the constitutionality of any particular law attacked as discriminatory and violative of the equal protection of the laws.
The law of the Constitution is not only for those who govern, and, for the theorist, but also for the bulk of the people, for the common man, for whose benefit & pride, and, safeguard, the Constitution has also been written.
Number of Writ Petitions have been filed in the Bombay High Court, inter alia, challenging this system of taxation. Janhit Manch, to which the present author is a Member, has also filed a PIL in the Bombay High Court in this respect.