Bombay HC Upholds Capital Value Method Of Computation Of Property Tax, Strikes Down Rules Framed Under Mumbai Municipal Corporation Act [Read Judgment]

The court struck down rules 20, 21 and 22 of the capital value rules of 2010 and 2015 as ultra vires to the MMC Act.

A division bench of Justice AS Oka and Justice RI Chagla was hearing several petitions challenging the constitutional validity of the 2009 amendment to the MMC Act, specifically, the change in method of computation of property tax. After the 2009 amendment, property tax was computed based on capital value of a property rather than the rateable value, which is the value obtained after assessing annual the rent of the property.

The lead petition was filed by the Property Owner's Association, an association of owners of properties and old buildings in the city. Some 610 property owners had submitted their affidavits in support to the challenge. Apart from this, similar petitions were also filed by certain trusts that run Parsi temples and agiaries in the city. Some five-star hotels also challenged the said amendment. Apart from the amendment, certain provisions of the said Act were also challenged.

Case Background

The Municipal Corporation of Mumbai, which was established under the BMC Act, appointed Tata Institute of Social Sciences (TISS) to study the system of levy of property tax and to suggest alternative system for such levy. TISS submitted a detailed report recommending that capital value-based system of assessment be adopted in place of annual rental system. TISS studied the practice followed in developing countries. Based on the recommendations of TISS, the BMC Act was amended by the Maharashtra Act No. XI of 2009. The amendment incorporated an option to levy property tax on the basis of capital value as an alternative to the earlier method of levying property tax on the basis of rateable value. Corresponding amendments were made to various provisions of the Mumbai Municipal Corporations Act or BMC Act.

The said Act came into force on March 12, 2012, and the BMC resolved to adopt the system of levy of property tax on lands and buildings on the basis of capital value with effect from April 1, 2010.

Submissions

A battery of senior advocates appeared in the matter, including Rafique Dada, Milind Sathe and VV Tulzapurkar, who argued on behalf of the petitioners. Advocate General AA Kumbhakoni appeared for the state and Advocate SS Pakale appeared on behalf of the BMC.

Rafique Dada submitted that the provisions of Article 243X require the state legislature to provide by law an authority to the municipality to levy, collect and appropriate such taxes, duties, tolls and fees. However, the authority to levy, collect and appropriate tax cannot be given to a committee as the 'Corporation" is different from a "Standing Committee", Dada said.

Under the said amendment of 2009, the standing committee is empowered to impose the relevant taxes under Sections 140(1)a(i) and (ii) and Section 140(1)b(i) and (ii). Hence the said amendment is invalid, petitioners argued.

As for the difference in computation of property tax based on capital value and rateable value, the petitioners submitted that under rateable value, the tax for residential premises was capped at 363 percent of rateable value and for non-residential premises at 916.5 percent of the rateable value. This is a big contrast when compared to the tax on capital value basis, as it has increased from anything between 17.68 times to 212.0 times.

Provisions which permit such high taxation that is far greater than the amounts received by the owners as rent would be grossly unreasonable and expropriatory. It would be violative of Article 19(1)(g) of the Constitution of India, the petitioners said.

It was also submitted that there is excessive, unguided and unbridled delegation to the BMC as it is given the power to choose between the rateable value system and the capital value system. It was further alleged that there is excessive delegation by the BMC on the commissioner and the standing committee. It is also the allegation of the petitioners that the BMC, which itself is a delegate, could not have further delegated any power to the commissioner or the standing committee.

Judgment

After examining the MMC Act and various submissions made on behalf of the petitioners and respondents, the court noted:

"We uphold the constitutional validity of the provisions of the BMC Act which are under challenge. The Capital Value Rules of 2010 shall apply prospectively from the date on which the same were made."

Thereafter, the court examined the said rules: "There is no provision which enables the Commissioner to frame rules for laying down guidelines for determining capital value."

Further, the bench observed: "Rule 20 provides for taking into consideration potential of construction on the vacant land for making valuation. For the purpose of property taxes, not only a vacant land but even a land under construction will have to be treated as a vacant land.

Thus, rule 20 is ultra vires the provisions of sub­sections (1A) and (1B) of section 154 of the BMC Act. There is no difference in Rule 20 of the Capital Value Rules of 2010 and 2015.

Rule 21 of the Capital Value Rules of 2010 lays down a formula for calculation of capital value of open land. Whereas, in Capital Value Rules of 2015, the only change is that "built up area" is replaced by "carpet area".

Rules 20, 21 and 22 of the Capital Value Rules of 2015 are almost identical. Therefore, even the said rules will have to be struck down. Sub rules (1) and (2) of rule 17 are the same as 2010 rules. As a result, capital value of the open land, as provided in rule 17 of the Capital Value Rules of both the years cannot be fixed in accordance with rule 21. Even the rule 3 which refers to rule 21 will be redundant to that extent. No other rule out of 2015 rule is shown to be illegal."

The court also set aside the assessment notices challenged by some of the petitioners, as these notices were based on a final capital value assessed before the said judgment. Thus, the court directed the civic body to re-assess the capital value of the properties in light of the findings recorded. Also, at the request of BMC counsel, it stayed the part striking down Rules 20, 21 and 22 until September 1.

Read the Judgment Here