V. Balasubrahmanyan, J.
1. One Shanmugha Nadar, a citizen of Madurai City, owned 1-46 cents of vacant land which he laid out into plots for being sold as house sites, in the lay-out plan, an extent of 1-10 cents was covered by the house sites; the balance of 36 cents represented the space left for road purpose.
2. The Madurai City Municipal Corporation functioning under the Madurai City Municipal Corporation Act, 1971(Tamil Nadu Act XV of 1971) by its Commissioner levied property tax on the capital value of Shanmugha Nadar's land of the aggregate extent of 1-46 cents. The basis of the tax, according to the assessments made by the Commissioner, was the market value of the land which was determined at the Rs. 1,000 per cent. On this basis, property tax was levied for two half years in 1970-71 and one half year in 1971-'72. Before the assessing authority, Shanmugha Nadar represented that the basis of the assessment was wrong and the real value of the property could not exceed Rs. 400. This objection was negatived, and assessments were made on the basis I have already mentioned.
3. Thereupon, the land owner filed O.S. No. 390 of 1972 on the file of the III Additional District Munsif, Madurai Town, for a declaration that the levy of property tax in the manner and on the basis aforesaid, was illegal. An ancillary relief for a permanent injunction restraining the Madurai Corporation from collecting tax was also asked for in the suit. The Madurai Corporation resisted the suit on two main grounds One was that the suit was not maintainable in view of the provisions of Section 495(1) of the Madurai City Municipal Corporation Act, 1971. The other objection was that the property tax, as levied, was on a proper basis and in accordance with the statute.
4. The learned District Munsif who tried the suit, took note of the provisions of Section 495(1) of the Act which enacted that an assessment made under the authority of the Act, shall not be impeached by reason of any mistake, unless the provisions of the Act had not been complied with in substance and in effect. The learned District Munsif acted on the evidence of D. W. No. 1, the Municipal Corporation's assessor, to the effect that the capital value of the suit land was fixed on the basis of the sale deeds relating to neighbouring lands and hence, held that it could not be said that the assessment of the market value at the rate of Rs. 1,000 per cent was arbitrary or excessive.
5. Having held that assessment was based on a proper basis of market value, the learned District Munsif held that the tax-payer was not entitled to impeach the assessment on the ground that the assessed value was erroneous. On appeal, the learned Principal District Judge confirmed the decision of the trial Court. He observed that 'An Officer specially deputed by the Government, has inspected the property to ascertain the market value and fix the capital value for the purpose of assessment....'. Therefore, according to the District Judge, it cannot be said that there was no basis for the levy or that the levy itself was wrong or that the provisions of the Madurai City Municipal Corporation Act had not been complied with.
6. The owner has now brought this second appeal before this Court. The arguments at the bar ranged over a fairly wide field. But the principal contention was whether the assessment made by the Madurai Corporation was in substantial compliance with the provisions of the Madurai City Municipal Corporation Act, 1971.
7. The relevant provision authorising the Madurai City Municipal Council to levy the tax, presently in dispute, is to be found in Section 120(4)(a) of the Act. This section reads as under:
Save as otherwise provided in Clause (b), the Council shall, in the case of lands which are not used exclusively for agricultural purposes and are not occupied by, or adjacent and appurtenant to, buildings, levy the property tax on the capital value of such lands at such percentages as it may fix which shall not exceed six per cent. of their capital value.
8. Clause 'b' is omitted because it has no application to the present case. The tax which the Municipal Council is authorised to levy under the above provision is called a property tax which is levied on 'The capital value of certain lands,' the tax being levied at a certain percentage on the capital value subject to a ceiling of 6%.
9. The contention of the learned Counsel for the house owner in this case is that while the Municipal Council has authority under the Act to levy a tax on the capital value of lands, what however has actually been levied in this case is a tax on the market value of the lands, which according to the learned Counsel, is quite a different thing altogether. Learned Counsel for the Municipal Corporation, however, submitted that although the tax is leviable on the capital value under the statute, market value can very well provide the basis for capital value and hence, the assessment in the present case, which is founded on the market value of the property, cannot be questioned on the ground that it is not a tax on capital value.
10. Before discussing the rival contentions I may observe, by way of preface that the learned Counsel for the appellant had not raised the question as to whether a tax on the capital value of lands can at all be leived or authorised to be levied by an enactment passed by the State Legislature. For purpose of this second appeal, therefore, I proceed on the supposition that the tax authorised to be imposed by the Municipal Council under Section 124(a) is a tax which the State Legislature is competent to levy itself or competent to authorise the Municipal Council to levy under the distribution of taxing powers in the Constitution. The only question, therefore to be divided in this second appeal is whether the tax under Section 124(a) being such as it is, viz., a tax on the capital value of the lands, has been properly levied in the present case when the assessment is based on market value of the lands. Learned Counsel for the appellant submitted that there is a well-marked distinction between the conceptions of capital value, on the one hand, and market value, on the other. In his submission the idea of capital value is associated with real economic value, where as the market value as a conception is the result of the forces of supply and demand at any given moment of time.
11. Learned Counsel cited a few decisions. But there is no direct decision on the point of distinction between a tax on the market value of the property and a tax on the capital value of the same. Assistance, however, can be had from a discussion of the subject in a few judgments of the Supreme Court. In Assistant Commissioner of Urban Land Tax, Madras and others v Buckingham and Carnatic Company Limited : 75ITR603(SC) the validity to the Tamil Nadu Urban Land Tax Act, 1966 was questioned. The charging section in that Act levied a tax on the market value of urban land which under Section 6 shall be estimated to be the pries which in the opinion of the Assistant Commissioner or the Tribunal as the case may be, such urban land would have fetched or fetch if sold in the open market on the date of commencement of this Act.' It was urged in that case that this tax which was levied on the market value, was not a tax on land covered by Entry 49 of the State List, and that it impinged on the legislative powers of Parliament under Entry 86 of the Union List. Entry 86 of the Union List in the VII Schedule to the Constitution authorises Parliament to levy 'taxes on the capital value of the assets exclusive of agricultural land, of individuals and companies;...'
The Supreme Court held that urband land tax under the Act did fall under Entry 86 of the Union List.
12. In an earlier case decided by the Supreme Court Patel Gordhanadas Hargovindas v. Municipal Commissioner Ahmedabad : 2SCR608 the Supreme Court had to deal with the validity of a tax levied under Section 73 of the Bombay Municipal Boroughs Act, 1925 read with the Explanation under Section 75 of the Act. Under the provisions aforesaid a Municipality in that state was authorised to levy a rate on vacant lands situate within the Municipal limits. The Municipal Corporation of Ahmedabad framed rules for levy of this rate. Under Rule 350-A framed by that municipality, the rate on the area of open lands was leviable at one per centum on the value of capital. Rule 243 of the same rules defines 'valuation based upon capital', as the capital value of lands and buildings as may be determined from time to time by the valuation of the Municipality. The contention of rate payers in that case was that the rate levied at 1 per centum of the capital value of open lands was beyond the competence of the municipality and beyond the competence of the Provincial Legislature. The matter arose under the Government of India Act, 1933, and it was urged that a rate as such can only be on the annual value of the property and cannot be on the basis of capital value. On this particular point, the Supreme Court held, by a majority, that the impugned rules were ultra vires. Wanchoo, J., giving judgment for the majority observed that 'If the law enjoins that the rate should be fixed on the annual value of lands and buildings, the municipality cannot fix it on the capital value, and then justify it on the ground that the same result could be arrived at by fixing a higher percentage as the rate in case it was fixed in the right way on the annual value ' The learned Judge further observed that 'as the fax in the present case was levied directly as a percentage of the capital value, it was ultra vires the Act and the assessment based in this manner must be struck down as ultra vires the Act.'
13. Sarkar, J. differed from the majority. He expressed the view that the tax which was levied in that case by the Ahmedabad Municipality can not be said to be a tax on the capital value of assets. His observations at page 645 are worthy of attention. 'This tax is leviable on land on the basis of its capital value even though the land may be subject to a charge and even though that charge may exceed the capital value of the land. In such a case, for the purpose of assessment, the charge can be completely ignored and the tax levied notwithstanding that to the owner the property is of no value in view of the charge... Another distinction is that in the case of a tax on capital value of assets, the tax can be levied only on the individual owning the assets.'
14. As I observed, these decisions are not directly in point, but, marks of distinction between a tax on market value, on the one hand, and a tax on capital value on the other, can be gleaned from the discussion. A tax on capital value, properly so called, is a tax on the gross capital value without allowing for any charge or liability on or in respect of the property concerned. By way of contrast, tax on market value can only be on the net market value, that is to say, after charging against the gross value of the property any encumbrance or charge or liability attached to the property in question. In the present case, Section 124(a) of the Act has levied a tax on the capital value. The implications are : (1) that it must be on the value based on the capitalisation of the land and not on the net market value; and (2) the idea of a market is based realisability of prices on the basis of the transfer of property from hand to hand. The conception of capital value on the contary, is based on the continued retention of the property in the hands of the owner and it is based on the conception of a continued or steady return on capital. It is common knowledge that a property because of its location and because of the scarcity of vacant space, may fetch a good price on sale, but, while being retained be incapable of giving any measurable annual or monthly return. In such a case, there will be no correspondence between the capital value of the property and its market value. In the case of capital value, the lower the return the lower the capital value. But the market value is a determinant of market forces which may not have much to do with the rate of return on the land as such.
15. In view of this distinction, the levy of tax under Section 124(a) on the basis of market valuation seems to me to be not authorised by the law. It may be that the appellant himself had put forward only a lower market value as the alternative basis for taxation. The evidence on record shows that he produced sale deeds which showed that Rs, 400 per cent was the prevailing price for vacant land near about this locality. But the fact, however, that the tax-payer had provided a wrong basis, cannot justify the taxing authorities from not complying with the provisions of the Act.
16. The findings of both the Courts below are that that the assessor of the Municipality took note of the market price of similar lands in the locality during the assessment periods in question and arrived at the figure of Rs. 1, 000 on the basis of which the tax was levied. It other words, the basis chosen by the Municipality was market price and not capital value. The capital value, as I already observed, must be determined on the basis of rate of yield or rate of return which must be capitalised on the basis of reasonable return on the capital investment. This method has not been adopted in the present case. I, therefore, held that the assessments impugned by the plaintiff in the suit are bad in law and not in accordance with Section 124(a) of the Act.
17. In the view I hold, on the basis of the assessment actually made in the present case, there is no question of Section 493(1) of the Act being put forward as a bar of the suit. What is here involved is not the mere question of the quantum of assessment, but the impeaching of the very legal basis on which the assessment has been founded. There is to question, therefore; but, that the plaintiff is entitled to challenge the assessment in a Court of Law. Indeed, the proviso to Section 495(1) itself clearly indicates that where an assessment has not complied with the provisions of the Act in substance and in effect, there would be no bar to a civil Court going into the assessments and setting it aside.
18. It was suggested that the plaintiff has straightaway come to Court without exhausting his remedies under the Act. I do not find anything in the proviso to Section 495(1) to show that a suit without exhausting the so-called statutory remedies will be barred If an assessment does not in substance and in effect comply with the provisions of the Act, then it is no answer to the suit to set aside the assessment to say that the plaintiff had not filed an appeal against the assessment.
19. In the result, I allow the appeal, set aside the judgment and decree of both the Courts below. The result is that the plaintiff is entitled to a declaration as prayed for by him and also for an injunction restraining the Madurai Corporation from enforcing its assessment. There will be no order as to costs.