What is Property tax !!

What is Property tax !!

The property tax is a kind of impost / tax levied by Local bodies / Municipalities, upon lands and buildings, situate in their territorial jurisdiction. 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. 

Under the scheme of our Constitution, the Municipalities are institution of self governance, independent of the Executive govts., although being subject to direct superintendence by the respective State govts. And being institutions of self governance, the Municipalities are empowered to levy taxes, to discharge their legal obligations and functions, spelled out in the statute under which they are incorporated or regulated. The statutory pattern of municipal governance is substantially the same all over the country. The State govts derive their powers to impose tax on land and buildings under Entry 49 of List II, in the seventh schedule of the Constitution of India.

The nature of impost is called rate, and is levied as a percentage of the annual letting value (also called as rateable value) of the concerned property. 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. As a matter of fact, the Constitution Bench of the Apex Court 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 which would be paid by the hypothetical tenant for the concerned property. The hypothetical tenant would include persons who are in actual occupation of the property as an owner. 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 MMC2013 (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 Ld. Judge misses the basic principle of Municipal taxation is that Local bodies do not enjoy the same freedom and latitude as otherwise being enjoyed by the Executive govts of the State and Central, as elaborated hereinafter.

As a matter of fact, immediately after this ruling, the basis of Assessment of property tax, have been changed from Annual Letting Value of the premises to Capital Value of the premises. And, whereas number of Writ Petitions (about 100) have been filed in the Bombay High Court, inter alia, challenging various provisions of MMC Act, 1888, and the Rules framed by the Municipal Commissioner by virtue of powers delegated to him under the MMC Act, 1888, the same is pending for final hearing, till writing of this piece.

http://commonlaw-sandeep.blogspot.com/2014/04/property-tax-based-on-capital-value-is.html

In the area of taxation, Local bodies do not enjoy the same freedom and latitude as otherwise being enjoyed by the Executive govts of the State and Central. 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 and undertaken by the Local body.

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; and in the exercise of their taxing powers, it is not permissible for them to exact more then they need to discharge their functions and obligations. And therefore the Local bodies 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 Local bodies 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]

There are stringent procedures being stipulated in the statutes, in the event the Municipalities intends to increase the property tax. The grounds to challenge arbitrary increase in property taxes may include (a) the procedure stipulated under the law was not followed, resulting in the frustration of equality clause of Article 14 of the Constitution of India. Further, by not following the procedure, the imposition may be regarded as without jurisdiction, as the Authorities can acquire and assume jurisdiction to levy tax, only after the procedure prescribed is duly complied with, for which Writ jurisdiction of the High Courts may be invoked. In this respect, Sections 162(2), 163, 164 and 165 of the Mumbai Municipal Corporation may be referred. The Apex Court in a case before it had the occasion declaring that failure to observe the procedure prescribed would result in violation of Article 265 of the Constitution of India. The Municipal Authorities are obliged to pass reasoned Orders whilst deciding objections as to revision or increase of property tax.(AIR 2003 SC 4278; (2005) 1 SCC 625; AIR 1965 SC 1321; Writ Petition (L) No.275 of 2016, Judgment dated 25.02.2016; WP 2835 of 2013, Judgment dated 23.11.2015; (1990) 4 SCC 90; AIR 2007 SC 3153; AIR 1964 SC 322; (2015) 3 BCR 476; (2005) 1 MhLJ 547;  )

However, if the dispute is relating to the “measure” of the tax correctness of high rateable value, or relating to applying erroneous rate, are to be agitated in Appeal before competent court of jurisdiction, for which Writ jurisdiction may not be available. (2002) 6 BCR 561.

Further, the Apex Court have struck down the laws on the premise of Procedural impropriety in framing rules, regulations, etc. / subordinate legislation relating to property taxation. (AIR 1987 SC 1802; AIR 1991 SC 1362.)

Whereas change of use of the premises is an essential attribute of any property, the Municipal authorities cannot deny the benefit of statutory limit, stipulated under the provision of law, in the event of steep increase in property taxes. May please refer Section 140A of the Mumbai Municipal Corporation Act, 1888.

http://commonlaw-sandeep.blogspot.com/2016/11/bmc-capital-value-property-tax-regime.html

The Apex Court in the case of MCGM versus Polychem (AIR 1974 SC 1779), have expressly ruled that Land under construction should be treated as vacant land, and should be assessed accordingly.

The property tax legislations may be challenged on various grounds, like the excessive delegation of powers; irrational grouping of class of properties or persons subjected to taxation who are characteristically differently situated; exempting a class of persons from the rigour of property taxation without any rational basis.

The Constitutional validity of a law, which is challenged on the grounds that it is discriminatory and frustrate Article 14 of the Constitution of India, is tested on the premise of satisfaction of two conditions – (a) The classification / grouping of persons (applicability and non applicability of the law) must be based on rational and sound parameters; and (b) such classification must further the Objects for which the law was sought to be enacted.

The mandate of Article 14, that the State shall not deny to any person equality before the law, is designed to protect all persons against legislative discrimination; and is designed to check legislations which confers privileges or imposes obligations, upon a class of persons only and not upon others, without any reasonable and sound basis.

Article 14 analysis, inter alia, deals with cases where the law makes irrational / unjustified (arbitrary) / unreasonable grouping of persons, and thereby grant benefits / imposes obligations, upon some persons and not upon other persons, although both classes of persons are similarly situated; or where the law imposes obligations upon all persons, although the class of persons included in the said law are differently positioned in their life. And even if the grouping of persons or things are said to be rational, it is further necessary that criterion of classification of persons or things, proposed in the law, has a direct relationship with the object of the law.

The concept of equality before law, implies that among equals, the law should be equal, and the likes should be treated alike. Article 14 proceeds on the premise that equality of treatment is required to be given to persons who are equally circumstanced; and the persons who are in fact unequally situated / circumstanced, cannot be treated at par.

Further, it may be appreciated that the nature of property tax substantially differs from other forms of taxation, like the Income tax, or GST etc. Like for example, whereas in any other forms of taxation, like the Income tax or GST, the Legislature or the Executive may exempt a class of persons from paying tax; but the shortfall in the revenue that would result from said exemption, would not fall upon the rest of the class. The exemption is independent, of the burden of other class of persons who are subjected to said taxation.

In Property taxes, it is not so. In property tax, Local bodies prepares budget for every year and are entitled to raise tax for meeting their budget. Now, supposing the Municipal Corporation has made a budget of Rs.100 for a particular year; then, the Municipal Corporation would raise Rs.100, in certain defined  proportions, from every occupant, dwelling and carrying out business activities within its territory.

Now if, any class of persons are exempted from paying any tax or exempted from paying increased tax, the shortfall from their “burden of share” would be compensated by putting extra burden upon rest of the class”, for the simple reason that ultimately Rs.100 is to be raised and collected.

Some of the landmark rulings of Apex Court in Municipal administration may be referred at following citations - AIR 1963 SC 1742, AIR 1968 SC 1232, AIR 1974 SC 1779, AIR 1979 SC 321.

Sandeep Jalan

Advocate

https://www.litigationplatform.com/