The Supreme Court, while dismissing a plea filed by the Municipal Corporation of Greater Mumbai (MCGM) about the levy of tax based on the future or intended use of land, held that the tax could be levied only based on the present position and, until an occupancy certificate is issued, the tax can be collected only as land and not as a building. While the judgement, at present, is limited to Mumbai, it will have repercussions if other municipalities also adopt the same method to calculate property tax.
In an order issued on 7 November 2022, the bench of chief justice UU Lalit and justice Ajay Rastogi says, "...since the statutory provisions do not contemplate any likelihood of exploitation of capacity in future, the capital value of the land and building must be based on the situation 'in presenti'. It must be clarified here that in projects which are in progress, the value addition to the property would be an ongoing feature. However... it would mean that the governing principle must be the actual use and not the intended use in future."
The case related to MCGM's decision to levy property tax based on capital value as an alternative to the earlier method of assessing property tax based on rateable value. MCGM has amended the Mumbai Municipal Corporation (MMC) Act and created capital value rules in 2010 and 2015.
Several petitions were filed challenging the validity of computation and levy of property tax based on the capital value system. The petitions also challenged the vires of the capital value rules of 2010 and the capital value rules of 2015. Some of the petitions also challenged the amendment effected to the MMC Act about the implementation of the capital value system for computing and assessing property tax.
After an exchange of pleadings, all the matters were taken up for hearing with writ petition No2492 of 2014 filed by the Property Owners' Association and others as the lead matter. After considering the rival submissions, the Bombay High Court (HC) rejected the challenge as to the validity of various provisions of the MMC Act. It, however, held rules 20, 21 and 22 of the capital value rules 2010 and 2015 to be ultra vires the provisions of the MMC Act.
MCGM then challenged the HC decision before the apex court. During the hearing, the counsel for the Corporation contended that the rules were framed based on detailed discussion.
Senior counsel Neeraj Kishan Kaul, representing Indian Hotels Company Ltd, which had filed an intervention petition, submitted that the property tax as a percentage of value was confiscatory and exorbitant. "On facts, it was stated that initially for a property situated in the city, a property tax was to the tune of Rs6.29 crore per annum, which had now risen to Rs17.78 crore showing an increase of 275%."
Senior counsel Dr Milind Sathe, representing some entities, who have filed intervention applications, submitted that till the potential of the property was translated into a habitable building, the land must be treated and taxed only as land and not going by its buildable potential. He further submitted that the process of fixing and/or changing the value, must be done in the same financial year.
Senior counsel V Sreedharan, representing MCGM, informed the bench that under the new system, only 32.20% of units suffered an increase, while 21.95% of the units actually benefited as a result of the reduction in the property taxes. He also submitted that the overall tax demand of the Corporation under the capital value assessment actually decreased by 12% to Rs2,908 crore compared to Rs3,308 crore under the relatable value system. The tax demand for residential units got reduced to Rs949 crore from Rs1,030 crore while that for the offices and banks was reduced to Rs65 crore from Rs979 crore and to Rs222 crore from Rs342 crore, respectively, he submitted.
After perusing the submissions, and the order passed by the Bombay HC, the apex court held that the empowerment in terms of clauses (a) to (e) read with sub-Section (1B) or the conferral of rulemaking power would not permit MCGM to determine the capital value beyond the scope of clauses (a) to (e).
"Thus, for the purpose of determining capital value, only the present physical attributes and status of the land and building can be considered and not the future prospects of the land," the bench says.
While rule 20 of the capital value rules of 2010 and 2015 empowers the MCGM commissioner to consider the capability of the open land of utilising more than 1-floor space index (FSI) or any transfer of development right (TDR), the Supreme Court says it would go well beyond the permissible scope delineated by the provisions of Section 154 of the MMC Act.
The statute certainly empowers and contemplates the imposition of property tax on the capital value, the bench noted. However, it clarified that the capital value must answer the postulates in subclauses (a) to (e) of sub-Section (1A) read with sub-Section (1B) of Section 154.
"In the circumstances, the challenge raised by the Corporation must fail and we dismiss the appeal preferred by the Corporation," the apex court ruled.
(Contempt Petition (C) No38 of 2021 in Special Leave Petition (C) No17009 of 2019 Date: 7 November 2022)