K.S. Ramamurti, J.
1. The common point which arises in all the three appeals relates to the basis on which property tax is leviable upon the building, called Nellai Lodge, situate in Tirunelveli Junction. The Municipality is the appellant in all the three appeals.
2. The firm of S.C.M. Sheik Mohamed and Brothers are conducting a lodging house under the name and style of ' Nellai Lodge ' in the premises in question as lessees thereof. The plaintiff in O.S.No. 58 of 1959 on the file of the District Munsif's Court, Tirunelveli, (out of which S.A. No. 1071 of 1961, arises), who is the owner of a portion of the premises, has leased out to 'Nellai Lodge ', 7 upstairs rooms, in Door No. 174/7 to 174/13 on a monthly rent of Rs. 210. The plaintiff is a brother of the partners of the firm and is also a partner thereof. The property tax levied upon the premises 174/7 to 174/13 which was originally Rs. 208-10 for half year, was enhanced by the Municipal Council, Tirunelveli, on the rental estimate of Rs. 768 calculated on the basis of the net income which could be secured by letting out the 7 rooms. The claim of the municipality was that each room would fetch a rent of Rs. 5 per day; making allowance for Vacancy rent for 20 days would be Rs. 100 per room; Rs. 700 for 7 rooms; expenses for maintenance, advertisement charges, salaries of servants, etc., were deducted and the rental Value thus calculated under Section 82 of the District Municipalities Act was fixed at Rs. 708 per half year.
3. The plaintiff in O.S. No. 192 of 1960 (out of which A.S.No. 105 of 1963 arises) is one S.C. M. Haniffa who is the owner of the building 174/A-4 to A-9, Nellaippar High Road in Tirunelveli Junction. He too has leased out the property to the firm of Nellai Lodge, of which he is also a partner, on a rent of Rs. 177-50 per month. The property tax originally was Rs. 42-81 and here too the Municipality raised the property tax to Rs. 208-47, in respect of each room on the same basis calculated upon the income which this plaintiff would be recovering from the tenants as lodgers. The plaintiff in the suit O.S. No. 193 of 1960, (out of which A.S.No. 106 of 1963 arises) is one S.C.M.S. Mohammed who is the owner of Door Nos. 174/A-l, 174/A-2 and 174/A-3 in Tirunelveli. The plaintiff has leased out these three buildings to the firm on a monthly rent of Rs. 100. Here too the Municipality seeks to levy property tax on an enhanced rate, on the basis of the annual rental income (of the individual rooms) which would be realised from the tenants or the lodgers. The case of the plaintiffs in all the three suits is that the Municipality is not entitled to levy property tax on the basis of the rent which the firm have been or would be collecting from the individual lodgers of the rooms, that what the Municipality is seeking to do is virtually levying tax upon the profits of Nellai Lodge in the hands of the individual partners and in that process the income is fixed and apportioned as between the several rooms taking the rental income received by the Nellai Lodge and making allowances as to vacancies and for expenses. Second Appeal No. 1071 of 1961 was filed first in this Court, and the two appeals from the decision in O.S. Nos. 192 and 193 of 1960 preferred to the District Court, Tirunelveli, have been withdrawn to this Court to be tried and disposed of along with Second Appeal No. No. 1071 of 1961.
4. There is no dispute about the main facts that the firm, after taking the building on lease had effected improvements and invested capital to make it a pucca lodging house, that there are 42 rooms in all, that the rooms are furnished with cots, necessary mattresses, chairs, pillows, bed sheets, tables, easy chairs, mirrors, that the rooms are also attached with bath room, wash basin, fans and that there are also call boys rendering service. The rent which the Nellai Lodge is getting from the lodgers is referable not only to the occupation of the rooms as such but it includes charges for all these amenities provided therein. It is again not in dispute that the rent which the three plaintiffs are getting as lessors is not a reasonable or fair rent and that those rooms if leased out as rooms, they would fetch higher rent from any third party. In all these three cases, documentary evidence has been adduced showing that the rent for which these rooms were let out by the lessors is the proper rent and that these rooms will not fetch higher rent. The Courts below in all the three cases, have found as a fact, on a consideration of the oral and documentary evidence, that the rent stipulated under the lease deeds is a fair rent and. the lease deeds represent genuine transactions. No argument was advanced before us that similar rooms in the locality would fetch higher rents or that there has been any clever attempt on the part of the lessors to evade payment of property tax by mentioning untrue recitals in the lease deeds. In other words, there is no controversy about the basic essential facts and the only point that was stressed before us related to the question whether the Municipality can rely upon the rent which the Nellai Lodge collects from individual lodgers as the main basis for determining the correct rental value under Section 82 of the District Municipalities Act (hereinafter referred to as the Act).
5. Section 78 of the District Municipalities Act is the charging section which empowers the Municipality to levy property tax. Section 82 which deals with the method of assessment to property tax is on these terms:
(1) Every building shall be assessed together with its site and other adjacent premises occupied as an appurtenance thereto unless the owner of the building is a different person from the owner of such site or premises.
(2) The annual value of lands and buildings shall be deemed to be the gross annual rent at which they may reasonably be expected to let from month to month or from year to year (less a deduction in the case of buildings of ten per cent. of that portion of such annual rent which is attributable to the buildings alone apart from their sites and the adjacent lands occupied as an appurtenance thereto) and the said deduction shall be in lieu of all allowance for repairs or on any other account whatever:
(a) in the case of
(i) any Government or railway building or
(ii) any building of a class not ordinarily let the gross annual rent of which cannot in the opinion of the Executive Authority, be estimated
the annual value of the premises shall be deemed to be six per cent. of the total of the estimated value of the land and the estimated present cost of erecting the building after deducting for depreciation a reasonable amount which shall in no case be less than ten per centum of such cost; and
(b) machinery and furniture shall be excluded from valuations under this section.
(Sub-section (3) omitted as not relevant.) .
The scheme of the Act is to levy the property tax upon the owner and the basis of assessment is the value of the hereditament or the property in the hands of the owner. The annual value is to be determined not with reference to the value of the property in the hands of an occupier, i.e., the value of the property to the owner is the basic standard in making the assessment under the Act. This feature which is essentially different from the basis of assessment under the English Rating Acts must be borne in mind in the proper interpretation of Section 82 and in the application of the principles enunciated in the English decisions. From the earliest times, under the Rating Act in England, it is the inhabitant who is taxed and it is in respect of the value of his occupation that the rate is levied as distinct from the value of the property to the owner. Under the District Municipalities Act, the annual value is the annual value of the property belonging to the owner and the property belonging to the tenant, whether machinery or furniture will have to be excluded. Further if the lands belonged to one person and buildings to another, property tax cannot be levied upon the annual value of the lands and the buildings put together. The property tax will have to be assessed separately. In this valuation, the value of machinery and furniture, even if provided by the landlord, should be excluded. (In some other States, like Bombay, etc., the value of the machinery and furniture also is included in the determination of the annual value). But in all the States, the law is uniform that the properties provided by the tenant, either machinery or furniture or any other amenity, will have to be excluded in the determination of the annual value. Section 82 (2) of the Act provides that the annual value of the lands and the buildings shall be deemed to be the gross annual rent at which they may be reasonably expected to be let from month to month or from year to year subject to certain deductions. This is what is familiarly known as the spectre of the hypothetical tenant i.e., the rent which the hypothetical tenant might reasonably be expected to pay for the property in question. The proviso to this sub-section provides an alternative method in the case of Government or railway buildings or buildings which are of a class not ordinarily let and the gross annual rent of which cannot be estimated, the annual value of the premises shall be deemed to be six per cent. of the estimated value of the lands and the buildings at the estimated cost of erecting such building subject to certain deductions and depreciation. This valuation is called contractor's method of valuation. Under normal circumstances, it is expected that the Municipality would determine the annual value under the proviso i.e., the contractor's methods, only in cases where it is not possible to determine the annual value on the basis of the gross annual rent at which the buildings may reasonably be expected to be let; but it is not obligatory or compulsory upon the Municipality to resort to the proviso only in the contingency of the determination of the gross annual rent not being possible or impracticable. The Municipality has got the right to effect either the former or the latter method of assessment. In M. & S. M. Railway Co. Ltd. v. Bezwada Municiaplity I.L.R. (1945) Mad. 1: L.R. 71 IndAp 113 : (1944) 2 M.L.J 25 the Privy Council affirmed the Bench decision of the Madras High Court reported in M. & S. M. Railway Co. Ltd. v. Municipal Council, Bezwada : (1941)2MLJ189 , and held that the proviso to Section 82 (2) of the Act does not impose a restriction in the power of the Municipality, that the method of arriving at the annual value by taking a percentage of the capital value is to be utilised only in the case of classes of buildings to which the proviso applies, and that the proviso does not affect the generality of the substantive enactment in the sub-section unqualified except in so far as concerns the particular subjects to which the proviso relates. The Privy Council has held that the Municipality is not precluded from adopting the percentage of the capital value of the property as a method of ascertaining its annual value for imposition of property tax merely by reason of the fact that this method is specially enjoined in the particular instances mentioned in the proviso. In this connection, reference may be made to the two Bench decisions of this Court arising under the corresponding provision in the Madras City Municipal Act, Section 100, Sub-section (2) proviso. In General Committee, Madras Club v. City Municipal Council (1954) 1 M.L.J. 671, the Corporation attempted to levy property tax upon the premises known as Madras Club on the capital value basis in the view that the Madras Club building was of a class not ordinarily let. On an appeal, the Chief Judge of the Court of Small Causes, accepted the contention of the Club and held that the premises should be assessed under Section 100 (2) and not under the proviso. This view was affirmed by the Bench on a reference to this Court under the provisions of the Madras City Municipal Act. A perusal of the judgment of Rajamannar, C.J., shows that the proviso should be invoked in cases where the building is of a class not ordinarily let and that the mere fact that the building has not actually been let was not sufficient to bring it within the proviso. This Bench decision was followed in a later Bench decision in Addison Paints and Chemicals v. Commissioner, Corporation of Madras : (1962)2MLJ440 . In that case the Corporation levied property tax upon the premises of Messrs. Addison Paints and Chemicals (Private) Ltd., Madhavaram High Road, Madras, on the basis of the capital value under the proviso to Section 100 (2). On a similar reference to this Court, the Bench held that the proviso was not applicable. Here too, the reasoning of the Bench, shows that the proviso was held inapplicable because the building is not of a class that could not be let and the fact that the building has not been factually let was not conclusive and that if once it is proved that the building is capable or of susceptible or suitable for being let out that is sufficient to attract Section 100 (2) of the City Municipal Act and rule out the proviso. It is unnecessary to refer to other decisions taking a similar view in other High Courts on the interpretation of the corresponding provision. Though according to the decision of the Privy Council referred to above, the Municipality is not obliged or compellable to adopt this or the other method, the main provision, Section 82 (2) should normally be applied as that furnishes a safe and working rule of the spectre of the hypothetical tenant. The proviso ought to be resorted to only in exceptional cases like railway property dealt with in M. & S. M. Ry. Co. Ltd. V. Bezwada Municiaplity (1944) 2 M.L.J. 25 : I.L.R. (1945) Mad. I.L.R. 71 IndAp 113. See Century Spg. and . v. District Municipality of Ulhasanagar : 2SCR211 Vide also the following observations of Scott, Lord Justice, in Robinson Brothers (Brewers) Ltd. v. Houghton and Chesterle Street Assessment Committee L.R. (1937) 2 K.B. 445 :
Where better evidence is in the circumstances of a particular hereditament impossible, resort may be had to either capital value or cost of construction, either of which can, with appropriate corrections be converted into approximately equivalent terms of annual value.
and also the following statement in Ryde on Rating, 11th Edition, at 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 receipts and expenditure or by the assessments of comparable hereditaments will often be a better guide to the hypothetical rent than cost.
Whichever method the Municipality adopts, the property, the Value of which is determined is only the property belonging to the owner and no part of the property of the tenant should be included in the computation. In the instant case, we are concerned only with the proper application of Section 82 (2) and there is no need to consider the scope of the proviso.
6. The question therefore is, what is the rent which a hypothetial tenant would pay to the premises in question. Mr. Ramanujam, learned Counsel for the Municipality urged that in deciding that criterion, the actual rent realised by the landlord, though relevant, is not conclusive or decisive and that the rent of a hypothetical tenant should be determined by taking into account all the aspects of the matter including the potentiality of the property in question of being put to a particular use yielding good profits in the hands of the tenant. He urged that if the property is such as to afford peculiar facility for the carrying on of a particular kind of business, that facility would enhance the value of the building and if that business is likely to yield profits, those profits would constitute an important element in the calculation of the hypothetical tenant, as to the rent which he would be prepared to pay to the building in question. Learned Counsel urged that calculated in this manner, the rent which a tenant would offer would be the figure arrived at by the Municipality, i.e., to make a rough calculation of the room-rent which the tenant would realise from the lodgers every month making allowances for vacancies for a particular number of days every month and also making allowances for deductions (a) towards expenses incurred for services rendered to the lodgers (b) the interest upon the capital invested by the tenant to provide for the other amenities like furniture, electric fans, wash basin etc., and also making allowance for a margin of profit to the tenant. He invited our attention to some of the decisions in England and India and a recent decision of the Supreme Court, the Bombay Race Course case, reported in Municipal Corporation, Greater Bombay v. R.W.1. Turef Club : 1SCR525 , in which the profit-basis-method was adopted by the Supreme Court in determining the rent which a hypothetical tenant would be willing to pay for the premises. The profit-basis-method is the well-accepted basis and is one of the practical working rules, to determine 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 as it stands with all the advantages and disadvantages and with all the special features, if any, which would enhance or decrease the ental value in the mental calculation of the tenant. The cases relied upon by Mr. Ramanujam are clearly distinguishable as cases in which the property as available for letting and to be enjoyed by the tenant, was special building and adopted for particular purpose, particular trade or particular business like a hospital or a cinema theatre or even a race course or Public Licensing House--cases in which the property once let out, is straightaway put to the particular use, and employed in his trade or business, by the tenant. Our attention has not been drawn to any case in which the profit basis has been adopted where a building, as an ordinary building, is let out and the tenant thereafter invests his capital and does several things upon the property and also provides various amenities for putting the property to a particular use, a lodging house. It is only after such improvement, alteration and treatment of the property by the tenant that the property becomes suitable for a particular purpose and if the property tax is levied on the basis of the potential earning capacity of the premises in the altered situation in the hands of the tenant the property tax which is levied is not on the property of the landlord but it is essentially a tax upon the profits of the business of the tenant and would also amount to levy of property tax upon the property belonging to both the owner' and the tenant which again is contrary to Section 82. Under the guise of levying property tax it would not be competent to the municipality to levy tax upon the profits earned by the tenant in his business though the municipality seeks to levy and recover the tax from the owner. It is here the distinction in the law of Rating in England that tax is levied upon the value of the holding in the hands of the occupier as distinct from the owner becomes relevant as emphaised in the decision of the Supreme Court in Corporation of Calcutta V. Sm. Padma Debi : 3SCR49 . In that case the question arose whether the Corporation of Calcutta in estimating the gross annual rent at which the building might reasonably be let is bound by the rental Value and the standard rent fixed under the Rent Control Act. The contention of the Corporation of Calcutta that the Corporation is not bound by the standard rent under the Rent Control Act and can adopt the standard of rent of a hypothetical tenant was not accepted by the Calcutta High Court (Vide Calcutta Corporation v. Sm. Padma Debi A.I.R. 1957 Cri. 466 and on appeal the decision of the Calcutta High Court was affirmed by the Supreme Court in preference to the contrary view taken in Mongharam Jiwandas v. Municipal Corporation of The City of Bombay A.I.R. 1951 Bom. 320 and in the Madras High Court in Madurai Municipality v. Kamakshisundaram Chettiar I.L.R. (1956) Mad. 530: (1955) 2 M.L.J. 369. The following is the corresponding provision in the Calcutta Municipal Act, Section 127-A of which is in similar terms as in the Madras Act:
The annual value of land and the annual Value of any building erected for letting purposes or ordinarily let shall be deemed to be the gross annual rent at which the land or building might at the time or assessment reasonably be expected to be let from year to year less in the case of a building an allowance of ten per cent for the cost of repairs and for all other expenses necessary to maintain the building in a state to command such gross rent.
In interpreting the aforesaid provision this is what the Supreme Court had observed:
We shall first look at the provisions of the section to ascertain the meaning. The crucial words are gross annual rent at which the land or building might at the time of assessment reasonably be expected to let from year to year'. The dictionary meaning of the words ' to let' is ' grant use of for rent or hire'. It implies that the rent which the landlord might realise if the house was let is the basis for fixing the annual value of the building. The criterion therefore is the rent realisable by the landlord and not the value of the holding in the hands of the tenant.
Thus it is seen the main basis is the rent realised by the landlord i.e. The Value of the holding in his hands and not the value of the holding in the hands of the tenant after he had invested capital and effected several improvements and changes and made it suitable for a particular purpose after providing Various amenities.
7. At this stage we may refer to the decision in Secretary of State v. Madras Municipality I.L.R.(1887) Mad. 38 which arose under Section 123 of the City of Madras Municipal Act on which also reliance was placed by Mr. Ramanujam. The Government had built and was maintaining a Lying-in Hospital at Madras on which the municipality assessed property tax on the basis of rental of Rs. 1,000 a month; in appeal the Magistrate reduced the assessment to Rs. 7,920 having regard to the letting value of the buildings in the neighbourhood and there was a reference to the High Court. On behalf of the Government, the contention was that the proper rental would be the rent which would be offered by other persons who may require the building for ordinary purposes, i.e., purposes other than that for which the building was specially built and adopted, while the contention of the municipality was that the hypothetical tenant should be a person who required the building for a special purpose and what the hypothetical landlord would demand and obtain from that hypothetical tenant requiring the building for purposes for which it was built and was suitable, i.e. hospital. The Bench upheld the contention of the municipality and followed the principle enunciated in the leading decision in The Queen v. The School Board for London 55 L.J. Q.B.D. 53 to the effect that in such cases where the building is constructed and adopted for a particular purpose, in order to find out what a hypothetical tenant will give, we must not take the man who does not want the premises for use for which the property was built, but wants to use the same for some other purpose but should take the hypothetical tenant who is prepared to take the property for the purpose for which it was built and that, it is only in the case in which it is not possible to find out such a hypothetical tenant that it will be open to find out the rent which some other tenant would pay by using the property for the best subsidiary purpose. It may be relevant to extract the following observations at page 43:
Having these principals in view, we are of opinion that the Lying-in Hospital should not be valued at the rent which it would fetch if it were offered in the open market without reserve. Admittedly there is but one building in Madras specially eligible for use as a Lying-in Hospital, and it is occupied by the owner. If the owner, the only person likely to require the premises, were excluded from the market, then the hypothetical tenant would take advantage of the absence of demand for it and pay no more than those who require it for use other than as a hospital would chose to pay. No prudent, landlord, who is aware of the fact that only one person requires the building for use as a hospital, would offer it in the open market without reserve.
Nor can any reserve rent which the landlord may arbitrarily demand be taken to represent the standard value. If such demand is far in excess of the special convenience or benefit which the hypothetical tenant can expect to derive from the occupation, the tenant would prefer to rent less suitable buildings and adapt them to his requirements, though at some expense, for to forego the special convenience if it is not indispensable.
The standard Value is then what a tenant requiring the building for use as a hospital would consider it reasonable to pay from year to year rather than resort to renting a less suitable building and adapting it to his requirements at his expense. In this sense, the standard value is the higher reserve rent which the owner of the property offering it in the open market would reasonably demand and below which sum he would not be willing to let.
We do not see how this decision supports the contention of the municipality. This decision lays down the well-known principle that in estimating the rent which a hypothetical tenant may reasonably be expected to offer he would take into account all that would reasonably affect the mind of the intending tenant with particular reference to the intrinsic quality of the hereditament i.e., its adaptability for a particular purpose. Even so, the principle underlying this decision is that for purpose of valuation the value of the property to the owner is the standard in making the assessment--Vide the observations of the Supreme Court in Corporation of Calcutta v. Smt. Padma Debi : 3SCR49 , where Secretary of State v. Madras Municipality I.L.R.(1881) Mad. 38, is referred to with approval.
8. Learned Counsel relied upon some English decisions in support of his contention that if the property affords opportunity for the carrying on of a profitable trade, that fact also must be taken into account for determining the rent which a hypothetical tenant would pay. That principle is well settled and the question is only the application of that principle to the instant case. It is sufficient to refer to the decision of the House of Lords in Robinson Bros. v. Houghton Assistant Committee (1938) 2 All E.R. 79, affirming the decision of the Court of Appeal in Robinson Brothers v. Houghton Assistant Committee (1937) 2 All E.R. 298. That case dealt with rating of a fully licensed public house in which the firm of brewers instead of letting the public house to a tenant, put a manager in charge of it and considerable quantity of beer sold in the premises was one that was brewed by the company. A large number of licenced public houses were occupied by brewers and managed by the managers in the employment of such brewers. In determining the rating capacity, the question arose whether the probable profits which a hypothetical tenant could make by selling in this licenced public house beer manufactured in his (tenant's) brewery could be taken into account. In a very earlier decision in Bradford-on-Avon Assessment Committee v. White L.R. (1898) 2 Q.B. 630 which was followed by the subsequent decisions it was held that such profits which a hypothetical tenant would make could not be taken into account. This view was over-ruled by the Court of Appeal and affirmed by the House of Lords. Reliance was placed upon the following observations of Lord Macmillan at pages 85 and 86:
It is the rent which a hypothetical tenant might reasonably be expected to pay. The hypothetical tenant may reasonably be expected to pay the rent which in the letting market for such premises would be offered as the result of the competition existing in that market. The valuing authority must gauge both the extent of the competition in the market and the rent likely to be offered and accepted in that market. In the case of a public-house I can see no justification for including browers among the competitors but excluding the rent which they would offer. The motives which actuate buyers in a market may be of all kinds, but it is not their motives but their bids, that matter. In the case of trade premises, the competitors for the tenancy are presumably always actuated by a consideration of a profit which they think they can make by utilising the premises and they will have this in view when they make their bids. The brewer who wishes the premises because he thinks he can make money by subletting them to a tied tenant is influenced by perfectly legitimate business considerations. He offers the rent which he thinks it worth his while to pay to obtain the tenancy. Why should the rent which he is prepared to pay be excluded from consideration in fixing the market value of the tenancy. He is one of the competitors in the market, and the figure which he is prepared to pay is an element which ought clearly to be taken into account in arriving at the market price.
The reasoning in the judgments in the Bradford case L.R. (1898) 2 Q.B. 630 appears to me to confuse two quite different things. Where as between landlord and tenant, personal elements extraneous to the ordinary relation of lessor and lessee are introduced into the contract of tenancy then the so-called rent paid is not rent in the economic any more than in the legal sense. As the phrase goes there is present a consideration other than the rent. Of this there is no better instance than the so-called rent paid by a tied tenant for the rent is artificially reduced by reason of the personal restrictions imposed on him. Consequently the tied rent is properly disregarded in determining what rent the hypothetical tenant might reasonably be expected to pay on ordinary terms. But the rent which a brewer is prepared to pay for the tenancy of a public-house because he sees his way to make a profit for himself by sub-letting it to a tied tenant is not vitiated by any such consideration as applies between the brewer and his tied tenant. The brewer thinks that he can make a profitable use of the premises by sub-letting them to a tied tenant, and so is disposed to offer a high rent for tenancy. The object of making a profitable use of the premises is just the ordinary motive which actuates competitors in a letting market. Out of the attractions which a public-house offers in the market is the facility of letting it to a tied tenant. As between the brewer and the landlord to whom the brewer makes his offer of tenancy there is no question of any ' personal or temporary contract under which the business is to be carried on ' upon the premises such as the judges in the Bradford case L.R. (1898) 2 Q.B. 630 rightly say ought to be excluded from consideration. Nor in taking into account the rent which a brewer would pay is there any violation of the principle that the Valuation must be rebus sic stantibus. It is precisely because the hereditament is a public-house and is to continue to be used as such that it attracts the brewer's competition.
While, therefore, evidence as to the rents which brewers would be prepared to pay for the tenancy of a public-house, whether they propose to sublet it to a tied tenant or to occupy it themselves through a manager, is in my opinion both competent and relevant in estimating the rent which a hypothetical tenant of the public-house might reasonably be expected to pay, it by no means follows that the rent which could be obtained from a brewer is necessarily to be taken as the gross annual value.
The principle underlying this line of cases is clearly distinguishable. The letting value of a lying-in Hospital or a well-equipped cinema theatre or a licenced public house or a well-equipped nursing horns adapted for a surgeon stand or. entirely different footing. In determining the annual value, the value of the property in the hands of the owner, its intrinsic value and its potentiality undoubtedly enter into the computation and the profits which a tenant would hope to make upon taking the property on lease would also be relevant. In the instant case, the property in question belonged to three separate individuals and they were ordinary buildings with rooms and without anything more. It is well-settled principle of rating that the property is to be considered in its existing physical condition and not to the mode in which it is later on actually used. In 32, Halsbury's Law of England, 3rd edition, page 67, Section 95, it is stated:
Actual conditions affecting property when valuation made. The rent which a tenant could afford to give is calculated rebus sic stantibus that is to say with reference to the hereditament in its existing physical condition and to the mode in which it is actually used.
In Ryde on Rating (Eleventh Edition), at page 371, the basic principles of valuation are set out. At page 372, the learned author while emphasising the relevance of the condition existing at the time of the rating had observed:
And the house must be valued as it stands; a dwelling-house must be valued as such, and not at a higher value which it would possess if converted into a shop: the supposition of a tenancy is only a mode of ascertaining the existing value to the existing occupier.
This rule does not run counter to the principle that if a building is suitable or adapted and suited for a particular purpose, i.e., the potentiality of a trade or business being carried on, that circumstance should not be taken into account. The intrinsic quality of the hereditament is one thing and the personal capacity of a potential tenant is totally different one. What is relevant is the special features and adaptability of the hereditament. If the property by itself is just like any other property the rental value cannot be determined with reference to the personal skill, capacity or the qualities of a potential tenant because he cannot be said to be a hypothetical tenant of the ordinary premises. This distinction between the intrinsic quality of the hereditament and personal skill and capacity of a potential tenant is well brought out in the* following observations of Lord Parker of Waddington in Metropolitan Water Board v. Chertsey Union Assessment Committee (1916) 1 A.C. 337 :
It is true that in the Hertford case (1902) 2 K.B. 597 Collins M.R. mentions the ' user ' of the hereditament in question as an element of value but it appears that he employed this expression as meaning ' Fitness for the purpose for which the hereditament was actually used' In this sense the ' user ' can legitimately be taken into account as an element of value, but the fact that any particular use is made of a hereditament is not otherwise material to its value.
If all the three landlords have combined together and made the necessary alterations provided all these amenities and the services and the property is made readily available in the market as a full-equipped and furnished lodging house, the basis of rating would be entirely different and the stand taken up by the municipality may be justified. The hypothetical tenant that is referred to is not a tenant who would put the property to a particular use by reason only of his special skill and capacity and by reason of his readiness to invest capital and take the risk. By way of illustration, we may refer to the decision in Globe Theatres V. Chief Judge, Small Cause Court : AIR1947Bom108 which dealt with the rating of a cinema theatre in Bombay and in which the principle of the English decisions was followed that if a tenant takes a premises particularly suited to him for a particular business, the profits which the tenant expects to make is a factor which may be taken into account in fixing the annual Value. The locality of the theatre, the rent which the lessees of the theatres in the neighbourhood are paying, the accommodation in the theatre, the percentage of the different classes of seats its reputation for exhibiting class pictures or otherwise are all relevant aspects to be taken into consideration is bearing upon the profits which would enter into the mental calculation of the hypothetical tenant.
9. The decision in B. N. Ry. Co. v. Calcutta Corporation (1947) 2 M.L.J. 106: L.R. 74 IndAp 1: A.I.R. 1947 P.C. 50 relied upon on behalf of the municipality is not of much relevance. There, the B. N. R. Railway Co., purchased certain extent of Vacant land in the City of Calcutta in 1926, and had kept it in reserve, against the company's future requirements; the Railway Officers Club was occasionally using the land for the practice of the game of golf, but not as a regular golf course. The contention of the railway was that the property tax should be levied on the basis that the hypothetical tenant would not be putting the property to any other use and must be presumed to keep the land Vacant or at the most use it as an imperfect golf course as was done by the Railway Officers Club. The Privy Council (affirming the decision of the Calcutta High Court) did not accept this argument and held that the rental value should be on the basis of the value of the land in the neighbourhood without any conditions attached to the user of the property. The argument that the hypothetical tenant would be a tenant who was precluded from using the property as a vacant land in the normal course was not accepted. We do not see how this decision helps the appellant. If the property at the time of the lease was a well-furnished and well-equipped lodging house but the owners kept it Vacant for some precarious occasional use, the position may be different. The property in the hands of the lessor was the ordinary building and that should be the basis of the assessment.
10. The Bombay Race Course case reported in Municipal Corporation, Greater Bombay v. R.W. 1, Turf Club : 1SCR525 , too is not of any assistance to the municipality. The Bombay Race Club, after taking the land in question on lease from the Corporation of Bombay converted it into a pucca race course in respect of which huge investment had been made. There, the property was in the hands of the owners themselves, i.e., the race club. The annual rent of the land in question had to be worked out on the basis of what a hypothetical tenant would be willing to pay as rent to the hypothetical landlord who was prepared to let the premises, the entire race club as it stood, with 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 all the other features which would enhance or decrease their value to such a tenant. The municipality adopted the profit-basis method or the profit earning capacity of the premises for determining how the mind of a hypothetical tenant would work taking into account the gross receipts and the disbursement; in other words, what rent a hypothetical tenant would offer, taking into account the admissibile deduction and also leaving a reasonable margin of profit for the tenant. On behalf of the Race Club no dispute was raised and the Club accepted the profit basis method as the proper one in determining the annual value. It is on that concession of the Race Club that the whole discussion proceeded; the controversy centered round only on the aspect of the permissible deductions out of the gross income.
11. Even assuming that in the instant case, a hypotherical tenant could be presumed to have made his own schemes of using these three premises as one single lodging house, the rent fixed under the three lease deeds will have to be taken as the rent for which the properties could be reasonably be expected to be let to such a category of tenants making allowance for all the expenses and deductions, cost of investment, depreciation, etc. in Robinson Bros. v. Houghton Assistant Committee (1938) 2 A.E.R. 79 already referred to). Though the municipality while determining the annual rental 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 injustices to the owners of the property. For instance a lease of the building may be for a period, say 15 or 20 years, fixing, a rent of Rs. 100 per month and at that time when the property is leased, that particular rent of Rs. 100 per month would be quite reasonable because the property may be unproductive and unimpressive land or building. The tenant by his skill and investment of large capital may put the property to a totally different profitable use. If at that stage i.e., in the altered condition, property tax is levied on the basis that a hypothetical tenant would take the property on lease for a much higher rent, say Rs. 500 per month, the rent which the landlord had already stipulated for 16 years, Rs. 1,200 per annum, may not be even sufficient to pay the enhanced property tax. So far as the lessor, the owner is concerned, he having entered into a binding lease for a period of 15 or 20 years at a rent of Rs. 100 per month, could not recover anything more by way of rent. The rent fixed by him in the then condition of the property was quite reasonable; perhaps the maximum. If the municipality is permitted to levy property tax on the basis, say Rs. 5,000 per annum, the tax would completely consume the entire rental income which the owner may be getting, thus virtually amounting to deprivation or destruction of the property itself. There is no use owning the property without getting any return by way of its income. Take for instance another illustration: A person may own a building, i.e., a house, available for letting. The municipality may seek to levy property tax not on the actual rent for which it was previously let out but on a different basis on the ground that a resourceful tenant with skill and capacity would invest capital and labour over this property making it suitable for a hotel (because there is no hotel in the neighbourhood and make a calculation about the rooms and accommodation available and the probable rent, arrive at the gross income, make allowances for expenses, margin of profit and determine the rental value on the basis which a hypothetical tenant would offer. In the case of some other building which was till then used as a hotel, the municipality may seek to levy property tax on the basis that a resourceful hypothetical tenant would convert that building, though up till then used as a hotel, into a profitable nursing home because there is no nursing home in the neighbourhood and the rental value determined upon what a hypothetical tenant, with the assistance of a leading surgeon would offer as rent. One can visualise innumerable such circumstances and contingencies in which this power of taxation can be used by the municipality in a most oppressive manner which would be worse than even confiscation of property. It is because of this harsh and unjustifiable result that the decisions have emphasised the basic distinction between intrinsic qualities of the hereditement and the personal capacity and qualities of a potential tenant. We may refer to the following statement of the law in Graham Eyre's Rating Law and Valuation (1963 Edn. at page 46);
The fact that a particular occupier, as a result of his skill and ability, makes more profit than would usually be made on the hereditament must not be reflected in the assessment of rental value. Profits are not reteable. However, in cases where there is no or insufficient rental evidence a consideration of what profit may be or is made on the hereditament might serve to indicate what rent a tenant would give to have the opportunity to making the profit. Just as the special skill of the particular occupier to make extra profit must be dis-regarded so must the failure of the actual occupier to take profit available to him be ignored.
12. Reference may be made to a Bench decision of this Court in Salem Municipal Council v. Subramaniam I.L.R. : (1958)1MLJ217 , in which the facts were somewhat similar, and which lends considerable support to the respondents to the instant case. In that case, a dramatic house which was later on converted into cinema house in the year 1926, belonged to one Angappa Pillai and his nephew Velayudham Pillai. The premises was rented out together with the machinery and furniture etc. to a firm one Oriental Talkies on a daily rental of Rs. 20. Velayudham Pillai was a partner in this Oriental Talkies. In the family partition, the Cinema house fell to the share of Velayudham Pillai, subject to the lease in favour of Oriental Talkies, with the result that Velayudham Pillai was a partner of a lessee firm and at the same time the owner of the building i.e., the lessor of the building. Out of the monthly rental of Rs. 600 for the cinema house calculated at the rate of Rs. 20 per day, the municipality had apportioned Rs. 150 as the rental for the furniture, Rs. 350 rental for the machinery and Rs. 100 for the rental of the building and on this basis the rental value was calculated at Rs. 1,110 and assessment levied on that basis. Later on, the municipality attempted to levy property tax on the basis that the income received for the theatre would be Rs. 5,000 ,a month. Large amounts were paid as property tax by Velayudham Pillai under protest and his son later on filed a suit attacking the levy as illegal and asking for refund of the tax illegally collected. The Bench held that the levy of property tax by the municipality in this manner taking the income which the Oriental Talkies, the firm, was getting, was illegal and was not the proper basis. The Bench has pointed out that what the municipality had done was to have illegally equated the profits which the party was earning as the rental for the building and that the municipality had committed a serious factual error in having so equated partnership profits as rental. In that case too (as in the instant case) it was not the case of the municipality that the rental of Rs. 20 per day i.e., Rs. 600 per month payable by the firm, Oriental Talkies, to the owner Valayudham Pillai was not a fair and adequate rent. The municipality accepted that was the fair rent, but nevertheless attempted to levy property tax on the basis of the profits of the firm which was negatived. Dealing with this question, the Bench observed::
Turning to the enhanced assessment in regard to which refund is asked for in paragraph 15 of the plaint, there cannot be the slightest doubt that the basis of the levy viz, that the owner Velayudham Pillai was getting a rent of Rs. 5,000 per mensem was totally incorrect First of all, this is a factual error. The Commissioner had before him the agreement of partnership, Exhibit A-21. That document clearly shows that the Oriental Taklies was to pay a monthly rental of Rs. 600 for the theatre as usual to the owner Velayudham Pillai. Then under the partnership formed for exploiting the building by putting on boards dramas by the Krishna Nataka Sabha, Velayudham Pillai and Muthukrishnan Chettiar two of the partners, were to receive 25 per cent of the taking minus certain charges on the foot of their contribution to the partnership, viz., Oriental Talkies placing at the disposal of the Krishna Nataka Sabha their entire staff, furniture, electric fittings, are lamps, undertaking of the sanitary arrangements, maintenance charge of furniture, etc., it is not the case for the Municiaplity that notwithstanding the sum of Rs. 600 being expressed as rental to the owner Velayudham Pillai, the real rental was something else. On the other hand, the Commissioner has equated the partnership profit as the rental for the building. This was sought to be supported on the ground of the Commissioner's proceedings Exhibit B-19 wherein he refers to the accounts and an alleged statement by K. R. Ramaswami. In the case of the former the accounts have been totally disbelieved by the Commissioner and therefore the accounts cannot be made the basis for determining what was the actual rent paid by the Nataka Sabha to Velayudham Pillai. In regard to the alleged statement said to have been made by K. R. Ramaswami it is not clear whether that gentleman was thinking of the entire amount which had to be paid to Oriental Talkies or the rent payable to Velayudham Pillai. It was a factual error therefore on the part of the Commissioner to have equated the partnership profits with the rental.
The aforesaid reasoning clearly governs the instant case.
13. Reference may also be made to the judgment of Ramachandra Iyer, J., as he then was, in V. S. T. T. H. Madarasa v. Melapalayam Municipality I.L.R. : AIR1959Mad506 , in which it was held that property tax cannot be levied on the basis of licence fees levied in a market in Ooty. It was pointed out that the word ' rent' implies a return or profit for the use of the property, i.e., payment, that can legitimately be taken as a basis for the calculation of the annual value would be that which would be referable to the use of the property and not any other kind of income which the owner may get.
14. For all these reasons, we have no hesitation in holding that the basis of levy of property tax by the municipality in the instant case is illegal. This is a clear case in which the levy of tax is not within the framework of Section 82 (2) and the scheme of the Act and there is no substantial compliance with the provisions of the Act. The very basis of the levy is wrong. Considerations which have been taken into account by the municipality in determining the annual value of the building are extraneous and outside the purview of Section 82 (2). This is a clear case in which the provisions of the Act had been contravened and the municipality has taken an erroneous view, clearly coming under Section 354 (2). This is not a case in which the Civil Court is asked to function as a Court of appeal against the order of the assessing authority. The principle as to when a suit is maintainable is well-settled and there is no need to refer to the cases in detail. (Vide Salem Municipal Council v. Subramanian I.L.R : (1958)1MLJ217 , and Municipal Council, Tenali v. Sri Rama Talkies, Tenali (1960) 2 A.W.R. 45.
15. For all these reasons the Appeal Nos. 105 and 106 of 1963 and the Second Appeal No. 1071 of 1961 are dismissed with costs throughout. The three suits are decreed as prayed for.