G. Ramanujam, J.
1. The plaintiff, Nadar Mahajana Sangam is the appellant herein. It filed a suit against the defendant, the Madurai Municipality for a declaration that the enhancement of property tax from Rs. 1,426-50 to Rs. 3,282-39 per half year made in 1968 was invalid and for a permanent injunction restraining the Municipality from collecting the enhanced tax. Its case was that it was running a boarding and lodging house in East Masi Street, Madurai Town from 1965, that it is collecting a rent of Rs. 1 for a single room and Rs. 2 for a double room per day, that the Municipality originally levied and collected tax at Rs. 1,426-70 per half year based on the said rentals, that in 1968 the Municipality suddenly enhanced the tax to Rs. 4,416-08 for a half year, Which was however reduced by the Municipal Council to Rs. 3,282-39 and that the enhancement in tax from Rs. 1,426-50 to Rs. 3,282-39 is illegal and arbitrary. The plaintiff also questioned the validity of the assessment proceedings on the ground that the procedure contemplated under the Madras District Municipalities Act has not been duly followed.
2. The defendant contended that the plaintiff is running a boarding and lodging house with 36 single rooms, 7 double rooms and 2 deluxe rooms apart from three dining-halls, two kitchens and store rooms with a running hotel, that the said lodge situate in the busiest locality in Madurai Town, has got good business, that the actual rents collected by the plaintiff for all the rooms is much more than Rent and Rs. 2 for single and double rooms respectively, that the plaintiff for the purpose of avoiding a higher tax by the municipality has resorted to the device of collecting rents under various heads such as charges for electricity, bedding, hot--water, service, donation etc and that, therefore, the property tax was raised on the basis of the actual rents, received in accordance with the provisions of the Madras District Municipalities Act and the rules framed thereunder after issuing proper notice to the plaintiff and after hearing his objections. The defendant also contended that the suit is barred under Section 354 of the Madras District Municipalities Act.
3. The trial Court accepted the case of the municipality and dismissed the suit.
4. On appeal, the lower appellate Court considered the following two points (1) whether the enhancement of tax under Rule 4 of Schedule IV of the Madras District Municipalities Act is not valid for the reason that no opportunity was given to the plaintiff to make its representations and (2) whether the basis of calculation of annual income of the lodge is arbitrary as alleged by the plaintiff. The lower appellate Court held that the enhancement of tax has rightly been made under Rule 4 of Schedule IV and that the plaintiff had due and effective opportunity to make its representations, before the enhancement was made. With regard to the basis of the calculation of the annual rental value, it held that the basis adopted by the municipality is both on the hypothetical value as well as profits basis and that it is neither arbitrary nor capricious. In that view the lower appellate Court confirmed the decision of the trial Court.
5. In this appeal the plaintiff reiterates the same two contentions which were urged before the lower appellate Court. So far as the first contention is concerned, it is said that the enhancement could have been made only under Rule 8(2) and not under Rule 4 of Schedule IV. According to the learned Counsel any amendment of the assessment books at any time between one general revision and another will have to be made only under Rule 8(2) and the revision made in this case under Rule 4 cannot, therefore, be valid. The learned Counsel refers to the decision in Municipal Council v. Bandi Butchayya (1958) 1 A.W.R. 66. in support of his stand. In that case Bhimasankaram, J. said that the primary object of Rule 4 is to direct an amendment of the register so as to show the correct assessment and not to deal with the merits of the assessment, that an amendment made might occasionally involve an enhancement to tax but it does so only indirectly and that from a reading of Rules 4 and 6 to 11 of Schedule IV together it is clear that Whenever the value of the property is to be altered it has to be done only by the executive authority under Rule 8 and not by the Council under Rule 4. Tb e learned Judge took note of the words 'inadequately assessed' in Rule 4(1) and stated that though the words would cover cases of under-assessment due to wrong valuation of the rent to be taxed as well as cases of such assessment due to wrong amount being taxed on the basis of correct valuation, Rule 4 is intended to cover the former case and Rule 8 will come into play in the latter case, where wrong amount of tax has been fixed on the basis of a correct valuation. With respect, I am not inclined to accept the reasoning given by the learned Judge and to restrict the scope of the words 'inadequately assessed' contained in Rule 4. It may be 'that Rule 4 partly serves the purpose contemplated by Rule 8. But it must be remembered that Rule 4 deals with the power of the municipal council while Rule 8 deals with the powers of the executive authority. It is not possible to restrict the power of the municipal council under Rule 4 only to cases where inadequacy is assessment arises by reason of wrong calculation of tax on the basis of correct valuation and not where the valuation adopted by the executive authority is wrong. As pointed out by Ismail, J., in Shanmugham v. Coimbatore Municipality (1970) 2 M.L.J. 19 . Rules 4(1) and 8(2) are intended to operate in two different circumstances. Ismail, J., has held in that case that the question whether a property has been inadequately assessed or not will have relevancy to the point of time at which the original assessment was made, that if the property undergoes change as a result of which the assessment has to be altered, no question of the property originally having been inadequately assessed will arise, and that in such a case the assessment books have to be amended only by invoking the power under Rule 8(2). According to the learned Judge if inadequacy of assessment arises as a result of additions to the existing building or reconstruction of the existing building the assessment books could be rectified only by invoking Rule 8(2) and not Rule 4(1). I am therefore, of the view that Rule 4(1) has been properly invoked in this case.
6. As regards the second contention that the basis adopted for fixing the annual value is arbitrary, it is submitted by the learned Counsel for the appellant that the defendant in this case has adopted the annual value by taking the gross receipts giving an arbitrary deduction of 50 per cent therefrom for services etc. and that the cost of services etc., has not been duly and properly valued. According to him there are four call boys, two sweepers, two clerks, one manager and one watchman. The rooms have been furnished with cots, Dunlop mattresses, Dunlop pillows, a table, a chair, a teapoy and a mirror and all rooms are electrified and bath attached. A hotel is also run for the convenience of the lodgers though an aggregate sum of Rs. 4 is collected for a single room and Rs. 8 for double room, the actual rent is only one rupee for single rooms and Rs. 2 for double rooms and the balance represents the amounts collected under various heads for various services. It is said that for each room 50 paise is charged for electricity, 50 paise for bedding, 50 paise for hot water, 50 paise for sanitation and 50 paise for services and 50 paise towards donation. In this connection the learned Counsel also points out that even under proviso (b) to Section 82(2) the value of the furniture has to be excluded from the valuation. In support of his stand the learned Counsel referred to the following decisions.
7. In V.S.T.T. II. Madarasa v. Melapalayam Municipality : AIR1959Mad506 . Ramachandra Iyer, J. (as he then was) while considering the proper basis for the levy of property tax in respect of private markets held that having regard to the nature of the fees that are generally collected in a market, it cannot be said that all of them constitute income from the property as such that, the levy of property tax by a municipality in respect of a market on the basis of a gross income is not correct as that income would include not only the rent for the use of the property but also other payments made or fees received by the owner of the market and that, therefore, the fees levied in a market which are not in the nature of rent but which could by virtue of Section 260(2) of the District Municipalities Act and the notifications issued thereunder be collected could not properly form the basis for assessment of property tax on the market. He also held that where an assessment of tax includes an item which could not properly be included, the whole assessment would be invalid, unless the part which is invalid is severable from the rest, relying on the decision of the Supreme Court in Ramanarain Sons Limited v. Assistant Commissioner of Sales Tax (1955) 2 M.L.J. 302: A.I.R. 1955 Mad. 394. The Supreme Court in Municipal Corporation of Greater Bombay v. R.W. India Turf Club Limited (1968) 2 S.G.J. 207: (1968) 1 S.G.R. 625: A.I.R. 1968 S.G. 485. considered the basis for the levy of property tax in respect of certain premises where a club was being run by a lessee. In that case it was held that the annual value has to be worked out on the basis of what a hypothetical tenant would be willing to pay as rent of the premises to a hypothetical landlord who is prepared to let the premises from year to year as they stand, having regard to all the advantages and disadvantages relating to such 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 to such a tenant and that though the statute is silent as to the method by which the annual rent and rateable value is to be fixed, the municipality can. also adopt any one of the following four methods namely (1) comparative method, (2) contractor's method, (3) unit method and (4) profits basis method. In that case the Supreme Court found that the profits basis method had been adopted by the assessing authority but the proper deductions have not been given to find out the net yield from the property. Their Lordship s of the Supreme Court pointed out:
The profits basis method which the assessing authority has adopted in the present case consists in ascertaining the rent annual value of the premises which has to be worked out from the profits which are made and which are capable of being made out of the premises. The gross receipts form the starting point of the calculation and they are those shown in the assessee's accounts for the account year concluded last before the making of the proposal. When these have been ascertained, the next step is to deduct therefrom the expenses of earning those receipts, the cost of repairs, insurance and other expenses necessary to maintain the premises is a state to command the hypothetical rent...It must be remembered that it is not the profits which are rateable; they serve to indicate the rent at which the premises might reasonably be expected to let, particularly where profit is the motive of the hypothetical tenant in taking the hereditament. This method at one stage used to be adopted in the case of public utilities only. But there are a number of decisions which show that at a later stage it began to be employed to other premises also such as football stadia, markets, race courses etc.
8. The principle of the above decision was followed by this Court in Municipal Council, Tirunelveli v. Haniffa (1969) M.L.J. 495. In that case the basis of the valuation adopted by the Tirunelveli Municipality in relation to a building called 'Nellai Lodge' in Tirunelveli came up for consideration. There, the owner of the premises consisting of seven rooms had let out the same to a certain lessee for running a lodge on a monthly rental of Rs. 210. Subsequently the property tax originally levied on the premises at Rs. 208-10 per half year was enhanced to Rs. 768 calculated on the basis of the net income which could be secured by the lessee by letting out the room?. The claim of the municipality was that each room would fetch a sum of Rs. 5, per day, that giving an allowance for the vacancy, for 20 days the rent that, each room would fetch would be Rs. 100 per month and for seven rooms it would came to Rs. 700 and that after deducting the cost of expenses for maintenance, advertisement charges, salaries, services etc., the rental value under Section 82 would easily corns to Rs. 768 per half year. The said enhancement was challenged in a civil Court. Ramamurti, J., speaking for the Bench expressed the view that under Section 82(2) the annual value of the property shall be deemed to be the gross annual rent at which it may be reasonably expected to be let from month to month or from year to year subject to certain deductions, that is, the rent which the hypothetical tenant may be reasonably expected to pay for the property in question, that though the proviso (a) to the said sub-section provides an alternative method' of valuation called the contractor's method under normal circumstances the municipality would determine the value under that method only in cases where it is not possible to determine the annual value on the basis of the gross annual rent at which the building may be reasonably expected to be let and that the Municipality has got a right to adopt either the method contemplated in Sub-section (2) or the method referred to in the proviso thereto. The learned Judge referred with approval the following statement in Ryde on Rating, 11th Edn. as page 437:
Cost or capital value can only be referred to in the absence of the best evidence, namely that of actual rents, and even in cases where there are no actual rents, the evidence afforded by the receipts and expenditure or by the assessments of comparable hereditaments will often be a better guide to the hypothetical rent than cost.
The learned Judge ultimately observed:.
Though the municipality while determining the annual rent value is not bound by the actual rent paid by the tenant, the rent fixed under the lease deeds should normally be taken as the best prima facie evidence in the absence of proof that any other element was responsible for fixing up a lower rent. If the municipality wants to enhance the rent, there must be proof that a hypothetical tenant intending to use the property for the same purpose 'would pay more. It is not the case of the municipality that properties similarly situated with similar advantages can reasonably be let for a higher rent; again it is not the case of the municipality that the rent fixed under the several lease deeds is not an adequate or reasonable rent or there has been any deliberate under-valuation. If the claim of the municipality based upon the subsequent use to which the tenant would put the property in future were accepted, it will lead to strange and anomalous results besides serious hardship and injustice to the owners of the property.
The learned Counsel for the appellant very strongly relies on the above observations of Ramamurti, J. and submits that the actual amount collected as rent should be taken as the basis for arriving at the rental value and not the other amounts which are collected towards services, hiring of furniture, etc.
It is seen from Exhibit B-1 the inspection report dated 20 March, 1968 of the Commissioner of the defendant-municipality that the annual value has been arrived at as under:
36 single rooms at Rs. 4 per day
7' double rooms at Rs. 8 perday.
2 Deluxe rooms at Rs. 5 perday.
Total per day.
Total rent per month for all the rooms
50 per cent reduction for vacancy, services etc.
Net for the rooms
Rental value for office rooms:
3 dining halls and store rooms.
Total rent per month
Annual rental value. Rs.
The above calculation shows that the municipality has adopted a hybrid method in that for the rooms it had adopted the profits basis method, and for the other portions of the building it had adopted the rental basis. It is not, therefore, possible to agree with the learned Counsel for the appellant that the method adopted in this case is exclusively profits basis. It is not also possible to accept the case of the municipality that the basis adopted is exclusively, the rental basis. But whatever be the method that has been adopted, the question is whether proper deductions have been allowed so as to arrive at the annual rental value. The above calculation shows that the municipality has taken the actual amounts collected from the occupants of the rooms as the rents received and has given there form a deduction of 50 per cent towards vacancy and services etc. It is not clear whether the cost of services referred to includes the cost of providing bedding, furniture etc. If the 50 per cent deduction represents the actual cost of providing furniture bedding and other services, it may not be possible to question the validity of the assessment. But in this case, though in Exhibit B-1 it is stated that 'till now in cases of lodges the Council has been adopting a policy of taking the total income into account and then giving a certain percentage (usually 50 to 60 per cent) as allowance for the service charges and, or likely vacancies, there is no reason for this lodge to be treated separately and that the fact that the management is issuing receipts artificially under various heads need not make the Council change its policy'. No evidence has been produced before the Court to show that the deduction at 50 per cent has uniformly been adopted in respect of all the lodges in the city, nor any rule or by-law fixing 50 per cent as the quantum of deduction has been pointed out. As a matter of fact the municipality examined D.W.1 its Assistant Revenue Officer and in his evidence he does not indicate anywhere the basis for taking 50 per cent of the receipts as vacancy and service charges etc. Both the Courts below have held that the rental value fixed by the municipality is neither arbitrary nor capricious, presumably on the ground that deduction of 50 per cent is sufficient to cover the service charges etc. The lower appellate Court says this:
I am unable to see anything arbitrary or capricious in the assessment. For example, if the plaintiff lodge does not charge anything for rent but collects adequate amount from the lodger under various heads like donation, charges for electricity service, bedding etc., would it mean that the municipality cannot levy any property-tax on the building? Obviously not. Ordinarily a room in a lodge must have the minimum necessities viz., bedding electricity, service etc., though the extra amenities can be charged separately. A room in a lodge is inconceivable without these fundamental amenities of bedding, electricity etc. These charges must be properly classified under rent. What is more, the plaintiff-lodge also collects donations from all the lodgers....
The view of the lower appellate Court is that the sum collected from the occupants has to be taken as rent. If that is so, then there is no necessity to make a deduction of 50 per cent towards services etc. That shows that even the assessing authority proceeded on the basis that only 50 per cent of the amounts collected can be treated as rent. In my view the Courts below have not gone into the question as to what is the basis on which the 50 per cent, deduction is allowed, and if there is no basis, either statutory or otherwise, the cost of services etc., has actually to be found out and deducted from the total receipts from the rooms. As already stated, the municipality has not furnished any material before the Court to show that the 50 per cent deduction is based on any practice uniformly followed by the municipality in the case of all lodges. Though the report refers to such a practice no document has been produced to prove such a practice. Not even one comparable instance has been given to show that the cost of services etc., will come only to 50 per cent of the aggregate receipts. In the absence of any practice or comparable data, the authorities should have calculated the actual cost of services etc., so as to arrive at the actual rents from the rooms. A rough and ready basis adopted by the municipality deducting the cost of services-etc., at 50 per cent of the receipts appears to be somewhat arbitrary. According to the appellant the cost of services will be more than 75 per cent and the assessing authority should have actually worked out the cost of all the services provided for by the appellant or the cost of like services provided for by other running, similar lodges before proceeding to calculate the rental value from the building: in question. I do not, however, say that the municipality is bound by the nomenclature given by the appellant for the amounts realised, as it is possible for it to camouflage the rental collections by bringing it under various other heads such as services etc. But that will not enable the municipality to fix arbitrarily 50 per cent of the total receipts as rents without actually finding out the cost of such services etc.
The learned Counsel also submits that the authorities below have not kept in mind proviso (b) to Section 82(2) which specifically excludes cost of furniture from the rental value of the building and this entirely vitiates the assessment. If the 50 per cent is taken to cover the cost of providing furniture also, then it cannot be said that the assessing authority has not kept in mind the above proviso.
9. The result is, though all the other contentions of the appellant cannot be upheld, the submission that the cost of services etc., had not been properly ascertained and deducted from the gross receipts before the actual rental value is fixed for the building has to be accepted and the enhanced levy has to be set aside. It is however, made clear that it is open to the municipality to collect the levy before the enhancement or to proceed to make a fresh assessment as per law.
10. The second appeal is, therefore, allowed and the decrees and judgments of the Courts below are set aside. There will, however, be no order as to costs. No leave.