Having looked at the legislation in a bit more detail I think it is about what types of populated area will be examined for parishing assessment purposes. If you were to use adjacent villages as one such area, one village could have over 1000 residents and the other 75. Would you want to form a Parish Council for each of those villages, or would you rather form one to cover both on neighbourhood criteria for example. In another possible case, you might want to set up a town Council, where one doesn't exist but several wards might be dead set against it. In such an instance those wards in favour might be regarded as a community within a town.