TMI Blog2007 (9) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... nal was justified in directing that annual value of the property in respect of a portion rented to M/s. Wool House should be determined as actual rent received from M/s. Wool House, when because of the close relationship between the assessee and M/s. Wool House, the annual value should be determined on the consideration of rent receivable indicated by the rent received by the assessee from a similar portion of the building from a third party? 3. Whether, on the facts and circumstances of the case and in law, the learned Tribunal was justified in holding that the provisions of section 23(1)(b) would be applicable and reasonableness of rent agreed upon could have been examined when the rent was initially fixed, but not subsequently, considering the fact that each year's assessment proceeding is separate and that annual value of a house property is to be determined separately each year in accordance with the provisions of the Income-tax Act ?" 2. The assessee owns a house property in Main Road, Ranchi. She received rent income of Rs. 1,06,800 from the tenant, namely, Canara Bank, for the1st and 2nd floors of the building and Rs. 4,800 from M/s. Wool House the underground portion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction at the time when the tenanted premises was let out to the said firm M/s. Wool House was very much lower as compared to that when the property was let out to Canara Bank. Learned counsel submitted that the assessee cannot unilaterally enhance the rent because enhancement was subject to an agreement with the tenant and in the absence of fair rent fixed under the provisions of the Bihar Building (Lease, Rent and Eviction) Control Act, 1947, the rent has to be co-related with the municipal valuation and tax thereon. Learned counsel further submitted that the provisions of section 23(1)(b) would be applicable when the rent was initially fixed sometimes 25 years back. Only during that period the rent 'agreed upon could have been examined in the light of the provisions of section 23, but not subsequently because the assessee has no unilateral power to enhance the rent. Learned counsel lastly submitted that the pro visions of section 23(1)(b) has to be applied in a fair and reasonable manner keeping in view the facts and circumstances of the case. If the provisions are applied in a mechanical way disregarding the facts and circumstances of the case, then the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the own according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year i which such taxes are actually paid by him. Explanation .—For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise. (2) Where the property consists of a house or part of a house which— (a) is in the occupation of the owner for the purposes of his own residence ; or (b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,the annual value of such hou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of rating to the concept of a rent which has been held to be fair rent in the past but does not bear a real relationship to the prevailing conditions of the market for accommodation if it was uncontrolled, we find it impossible to get over the ratio decidendi of this court in Smt. Padma Debi's case [1962] 3 SCR 49; AIR 1962 SC 151, which we are bound to follow. This was that, if a rent which is higher than that which can be legally demanded by the land lord and actually paid by a tenant, despite the fact that such violation of the restriction on rent chargeable by law is visited by penal consequences, the municipal authorities cannot take advantage of this defiance of the law by the land lord. Rating cannot operate as a mode of sharing the benefits of illegal rackrenting indulged in by rapacious land lords for whose activities the law prescribes condign punishment. 12. Cases were referred to before us by Mr. S. T. Desai where income-tax had to be paid on income illegally made even by indulging in criminal activities. In those cases, however, the basis of taxation was the actual income and not a determination of what a prudent man could reasonably do to get the income. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this definition is very important. What the owner might reasonably expect to get from a hypothetical tenant, if the building were let from year to year, affords the statutory yardstick for determining the rateable value. Now, what is reasonable is a question of fact and it depends on the facts and circumstances of a given situation. Ordinarily, 'a bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness' and, in normal circumstances, the actual rent payable by a tenant to the land lord would afford reliable evidence of what the land lord may reasonably expect to get from the hypothetical tenant, unless the rent is inflated or depressed by reason of extraneous considerations such as relationship, expectation of some other benefit, etc. There would ordinarily be a close approximation between the actual rent received by the land lord and the rent which he might reasonably expect to receive from a hypothetical tenant. But in the case of a building subject to rent control legislation, this approximation may and often does get displaced, because under rent control legislation, the land lord cannot cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt was relating to the assessment of annual value for levy of house tax where the building is governed by the provisions of the rent control legislation but the standard rent has not been fixed. Their Lordships observed (page 714) "But more than the decision in the Life Insurance's case [1970] 1 SCR 248, it is the Guntür Municipal Council's case [ 2 SCR 423, which is nearest to the present cases and is almost indistinguishable. In that case also, as in the present cases, the standard rent of the building was not fixed by the Controller and under the Andhra Pradesh Rent Act, which applied in the town of Guntur, in the absence of fixation of the fair rent, it was lawfully competent to the land lord to recover rent in excess of the fair rent determinable under that Act. Moreover, the Andhra Pradesh Rent Act did not prescribe any clear cut formula to be applied mechanically for statutorily determining the standard rent, but it was left to the Controller to fix the standard rent having regard to, (a) the prevailing rates of rent in the locality for the same or similar accommodation in similar circumstances during the 12 months prior to 5th April, 1944; (b) the rental value entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause it does not fix the standard rent which would be binding on the land lord and the tenant, which can be done only by the Controller under the Act, but it merely arrives at its own estimate of standard rent for the purpose of determining the annual value of the building. That is a perfectly legitimate function within the scope of the jurisdiction of the assessing authority." 17 In the case of Bhagwant Rai v. State of Punjab [1995] 5 SCC 440, the fact of the case was that the appellant was having a house in Sangrur. For the assessment year 1987-88, the respondent have assessed the rateable value of the house at Rs. 1,50,472.50 after giving standard deductions under the Punjab Municipal Act, 1911. The basis on which the property was assessed was the rent being received by the appellant from State Bank of India to whom they had let out at Rs. 12,687 per month. The question fell for con sideration was whether the actual rent received by the appellant from the tenant would be the measure for determining annual value. The Supreme Court, after considering the similar decisions in the case of New Delhi Municipal Committee v. M. N. Soi [1976] 4 SCC 535 and in the case of Dr. Balbir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Rent Act and not actual rent recovered by the land lord from the tenant. Their Lordships of the Supreme Court held (page 440 of 131 ITR and page 125 of [1981] 4 SCC) : "4. Though two questions have been formulated by this court as arising out of the order of the Tribunal dated September 28, 1973, it is the first which really formed the subject-matter of controversy between the parties and since, in our view, that question has to be answered in favour of the assessee, it is not necessary to embark upon a consideration of the second question. So far as the first question is concerned, it stands concluded by the recent decision of this court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 (SC) ; [1980] 1 SCC 865. There were three appeals decided by a common judgment in that case and the question which arose for determination in these appeals was as to how the annual value of a building should be determined for levy of house tax where the building is governed by the provisions of the Rent Act, but the standard rent has not yet been fixed. One of these appeals related to a case where the building was situate within the jurisdiction of the N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonably expect to let the building at the contractual rent and the contractual rent therefore provided a correct measure for determination of the annual value of the building. This argument was however rejected by the court and it was held that even if the standard rent of a building has not been fixed by the Controller under section 9 of the Rent Act, the land lord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under the provisions of the Rent Act and this would be so equally whether the building has been let out to a tenant who has lost his right to apply for fixation for the standard rent by the reason of expiration of the period of limitation prescribed by section 12 of the Rent Act or the building is self-occupied by the owner. Therefore, in either case, according to the definition of 'annual value' given in both statutes, the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the land lord from the tenant would constitute the correct measure of the annual value of the building. The court pointed out that in each case the authority would have to arrive at its ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum for which the property might reasonably be expected to let from year to year, the amount so received or receivable shall be deemed to be the annual value of the property. The newly added clause (b) clearly postulates that the sum for which a building might reasonably be expected to let from year to year may be less than the actual amount received or receivable by the land lord from the tenant. We are therefore of the view that in the present case the standard rent of the warehouse determinable under the provisions of the Rent Act must be taken to be the annual value within the meaning of sub-section (1) of section 23 of the Income-tax Act, 1961, and the actual rent received by the assessee from the American Embassy cannot of itself be taken as representing the correct measure of the annual value. 5. We must therefore address ourselves to the question as to what would be the standard rent of the warehouse determinable under the provisions of the Rent Act for the assessment years 1969-70 and 1970-71 the relevant accounting years being April 1, 1968, to March 31, 1969, and April 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onth from March 19, 1962, and, there fore, under clause (b) of sub-section (2) the rent of Rs. 5,810 per month would be the standard rent of the first floor of the warehouse for the period of five years from March 19, 1962, up to March 18, 1967, and thereafter the standard rent would have to be determined under paragraph (b), sub-clause (2) of clause (B) of sub-section (1) and this latter figure would represent the standard rent of the ware house determinable under the provisions of the Rent Act for the accounting years April 1, 1968, to March 31, 1969, and April 1, 1969, to March 31, 1970. The next portion of the warehouse let out to the American Embassy was the northern portion of the ground floor together with the mezzanine floor for the period of five years from April 1, 1964, up to March 31, 1969, under clause (b) of sub-section (2) and thereafter it would have to be determined under paragraph (b) of sub-clause (2) of clause (B) of sub-section (1). Thus, for the accounting year April 1, 1968, to March 31, 1969, the standard rent of the northern portion of the ground floor and the mezzanine floor determinable under the provisions of the Rent Act would be Rs. 6,907 per month whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 25, 1971, settled a trust appointing his wife and one practising advocate as the trustees. On March 29, 1971, the said Bipinbhai made a gift of the said bungalow in favour of the trustees so as to form part of the initially settled trust property. Admittedly, the value of the said property was shown therein as Rs. 2,15,000. It appears that immediately thereafter, the property was let out on April 1, 1971, to the brother of the settlor, one Suhas Vadilal, for a sum of Rs. 500 per month. Admittedly, no lease deed or rent deed was executed in that connection. According to the assessee, on the basis of the rent agreed to be paid by Suhas Vadilal, the annual letting value of the property could be computed at Rs. 6,000 only. It has been found by the Tribunal that the agreed rent of Rs. 500 was just one-third of the expected monthly rent of Rs. 1,500. There are various factors which affect the rental of premises and no hard and fast rule can be laid down for all cases. The criterion of reasonable return to the land lord from the property would be a fair criterion and the percentage of return on the value of the property adopted by the Tribunal cannot be said to be in any manner unj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent for any building not in the occupation of a tenant." 22.Section 7 of the Act confers power to the Controller to redetermine the fair rent in certain cases. Section 7 reads as under "7. Redetermination of fair rent in certain cases.—(1) If at any time after the fair rent of a building has been determined under section 5 or 6 it appears to the Controller that subsequent to such determination some addition, improvement of alteration not included in the repairs, which the land lord is bound to make under any law. Contract or custom, has been made to the building at the land lord's expense, the Controller may after making such inquiry, as he thinks fit, redetermine the fair rent of the building. (2) Any increase in the fair rent allowed under sub-section (1) shall not in any month exceed 5/8 per cent. of the cost of addition, improvement or alteration." 23 From a perusal of the provisions of the aforementioned sections, it is manifestly clear that the fair rent of the buildings can be determined both at the instance of the land lord and also at the instance of the tenant in the occupation of the building and also, in certain cases, as contemplated under section 7 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 104. (3) The value of any machinery or furniture which may be on a holding, shall not be taken into consideration in estimating the annual value Of such holding under this section." 27. As per section 23(1) (a) of the Income-tax Act, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. In other words, assessment shall have to be made of the value as provided under the Act. The fact that the owner has not earned any income from the property is entirely irrelevant. What was charged under section 22 was the annual value of the ownership of the property irrespective of the fact whether or not any income was either actually received or had accrued to the assessee. The word "reasonably" used in section 23(1)(a) is very important. What the owner might reasonably expect to get from a hypothetical tenant, if the building were let from year to year, affords the statutory yardstick for determining the annual rent. The actual rent payable by a tenant to the landlord would, in normal circumstances, afford reliable evidence of what the land lord might reasonably expect to get from a hypothetic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of John Tinson and Co. P. Ltd. v. CIT [2008] 298 ITR 407;[2006] 157 Taxman 410, the Delhi High Court following the question considered (page 409) : "1. Whether the Assessing Officer is duty bound to compute the 'annual value of property' or 'the sum for which the property might reasonably be expected to be let' as contemplated by sections 22 and 23 of the Income-tax Act, 1961, only on 'standard rent' basis if he disbelieves the rent stated to be receivable by the assessee ? 2. Whether computation under sections 22 and 23 of the Income tax Act, 1961, must be on standard rent basis irrespective of whether this exercise has been carried out by the Rent Controller ?" 31 While considering the question, the court observed (page 409) : "Section 23 stipulates the method by which the annual value of any property should be assessed to tax under section 22. Section 23(1)(a) states that the annual value of property shall be deemed to be the sum for which it may reasonably be expected to let from year to year. The Assessing Officer would invariably have to carry out and complete this computation. This is for the reason that section 23(1) (b) envisages that even where the property i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 297 (Delhi) the Assessing Officer had incorrectly computed the market rent of the house and had added the difference between the market rent so calculated and rent which was being actually paid. The same result was reached in L. Bansidhar and Sons v. CIT [1993] 201 ITR 655 (Delhi) where, however, it was clarified that the position stood changed with effect from the 1976 amendment, after which the actual rent would be relevant only if it is higher than the standard rent. Once again the decision of this court in CIT v. Vinay Bharatram and Sons [2003] 261 ITR 632 is topical. The Department had assailed the following remand order of the Commissioner of Income-tax (Appeals) (page 634) : 'The Assessing Officer is directed to redetermine the annual value of the property in accordance with my findings, he will limit the same to the higher of the following (a) the municipal valuation, (b) the fair rent determinable under the Rent Control Act, and (c) the actual rent paid by the assessee (?) This direction I feel fairly and reasonably gives effect to the pronouncements of the Supreme Court on the subject from time to time'. The Income-tax Appellate Tribunal (ITAT) had affirmed the remand or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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