TMI Blog1981 (9) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transactions being construed as lease. As per the particulars furnished by the assessee, the area in the occupation of such licensees under the " Leave and Licence " system was 11,159.56 sq. ft. as against the area of 19,787.44 sq. ft. in the occupation of the tenants under regular tenancy agreements, the actual area of the building being 30,947 sq. ft. The actual receipts per year from the licensees by way of licence fees were Rs. 1,58,51,120 as against Rs. 86,036.86, being receipts from the tenants. The total receipts from both categories of occupants were Rs. 2,84,548.08. While furnishing these figures of actual receipts, the assessee claimed that the annual value should be determined not with reference to the actual receipts but with reference to the fair rent. It was claimed that the sum of Rs. 86,036.86 being the rent received from the tenants for the portion of 19,787.44 sq. ft. in their occupation represented fair rent or rent which that portion might reasonably be expected to fetch and the fair rent which the portion of 11,159.56 sq. ft. in the occupation of licensees might be estimated proportionately at Rs. 48,544.09 as against the actual receipts of Rs. 1,58,511.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct in applying the theory of standard rent to that part of the building which was in the occupation of the licensees and holding that the standard rent of that area could not be more than the actual rent fetched from the other portion in the occupation of the tenants. It was submitted that in the case of a tenant-occupied premises governed by the Rent Control Act, the standard rent as defined in that Act might be taken as representing the sum for which the premises might reasonably be expected to be let but in case of the premises not occupied by tenants only the commercial rent which the premises would fetch if let out in the open market should be taken as the sum for which it might reasonably be expected to let for the purpose of determination of the annual value under s. 23 of the I.T. Act, 1961. Another argument of the Revenue was that what was collected from the so-called licensees in the guise of licence fees or compensation stood on the same footing as rent and that portion in the occupation of licensees must be presumed to fetch the same amount by way of rent if let out in the absence of any evidence to the contrary and the assessee had not adduced any evidence against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in the occupation of the remaining area of 19,787.44 sq. ft. was accepted by the ITO himself as representing the annual value of that portion of the building. According to the Tribunal, this itself was proof of the fact that the sum of Rs. 1,98,511.20 paid by the licensees by way of licence fee for the lesser area of 11,159.56 sq. ft. was far in excess of the sum for which that portion might reasonably be expected to let from year to year. The Tribunal, therefore, was unable to accept the contention of the Revenue that the sum of Rs. 1,98,511.20 which was actually realised by the owners of the building by way of licence fees from the licensees in occupation of the lease area of 11,159.56 sq. ft. must be presumed to represent the annual value of that portion of the buildings. The Tribunal referred to the observations of the Supreme Court in the case of Nalinikant A.. Mody v. Narayan Row [1966] 61 ITR 428. The Tribunal was of the view that in a case where there was controversy as to whether the income realised by the owner from the occupants of the property was in excess of the sum for which that property might reasonably be expected to let from year to year, one of the tests for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under the head 'Income from house property' ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Income-tax Officer to redetermine the annual value of the property under section 23(1) of the Income-tax Act, 1961, afresh with reference to its rateable value as determined by the Municipal Corporation ?" The question, as we have indicated before, is whether in determining the annual value of the property known as Radia House for the purpose of computing the income assessable under the head " Income from house property ", the Tribunal was justified in directing that it should be done by the ITO keeping in view the municipal rateable valuation. This question, in our opinion, has to be adjudicated in the light of the provision of law and on the clear authorities on this point. Section 22 of the I.T. Act, 1961, enjoins that the annual value of property consisting of any building or lands appurtenant thereto of which the assessee was the owner, other than such portions of such property as he might occupy for the purposes of any business or profession carried on by him the profits of which were chargeable to income-tax, should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon any building or land shall not be included in the rateable value of such building or land. (3) Notwithstanding anything contained in this section, the rateable value in the case of building, (a) owned by or belonging to the Government or the Bombay Housing Board constituted under the Bombay Housing Boards Act, 1948, or other similar body constituted by any law for the time being in force for the purpose of providing housing accommodation; (b) constructed, purchased or occupied on or after the 1st day of April, 1947, as part of a recognised scheme of subsidised housing for industrial workers or persons belonging to lower income groups or proper classes ; and (c) comprising in part or in whole of tenements let out to such workers or persons on a monthly rent, inclusive of all service and other charges not exceeding rupees thirty-two and fifty naye paise for each such tenement shall be fixed (i) with respect to such tenements comprised therein, with retrospective effect from the date of their construction, purchase or occupation as stated in clause (b) on the actual rent charged for such tenements and not on the rent, for which such tenements might reasonably be expected to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to several Supreme Court decisions at p. 940 of the report it was observed that a combined reading of the provisions of the Act and the Rent Control Act left no room for doubt that a contract for rent higher than the standard rent was not only not enforceable but also the landlord would be committing an offence if he collected rent above the standard rent. Therefore, it was observed that if anything in excess of certain sum of money was realised by the assessee as the rent the same would not be the reasonable letting value of the property. It was above the standard rent and could not be computed as income from house property. In this connection reference was made to the decisions in the case of Nalinikant Ambalal Mody v. S. A. L. Narayan Row, CIT [1966] 61 ITR 428 (SC), Corporation of Calcutta v. Smt. Padma Debi, AIR 1962 SC 15-1, and the decision of the Supreme Court in the case of Guntur Municipal Council v. Guntur Town Rate Payers' Association, AIR 1971 SC 353. This question directly came up for consideration before the Kerala High Court in the case of C. J. George v. CIT [1973] 92 ITR 137, a decision upon which the Tribunal relied. There the assessee constructed a building wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be let for any amount higher than Rs. 6,226 per annum during the period of the lease and accordingly arrived at the income from property after necessary deductions at Rs. 603. The Appellate Tribunal agreed with this view. On a reference to the High Court at the instance of the Revenue it was held that though the lessees might have sublet the building for a larger rent, what the assessee was entitled to get under the terms of the lease deed dated December 20, 1935, was only Rs. 225 per mensem which by persuasion had been slightly raised. As it could not be said that the rent fixed under the lease deed was not genuine or bad been fixed under the lease deed at a lower figure for some ulterior reason or other, it was not open to the Revenue to ignore the rent actually received by the assessee who could not claim more than that by reason of the lease deed subject to which alone he purchased the property and contend that the income should be computed on the basis of the annual value of the property which probably had been arrived at by the local authority on the basis of the rent received by the lessees. Accordingly, the Tribunal was right in its conclusion. The Division Bench of the Mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that fixation continued to be valid notwithstanding the repeal of the Control Order, even after the Delhi Rent Control Act 59 of 1958 came into force, the fair rent determined the standard rent which still affected the assessment of rates of the house in question for fixation of rates for assessment of house tax under the Punjab Municipal Act, notwithstanding the fact that the landlord was deriving at the time of fixation a much higher rent than the standard rent. Therefore, the ratio of the said decision is that the annual value under the Municipal Corporation should be fixed on the basis of standard rent receivable by the houses in question. This principle has been extended by the Supreme Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700. There also the Supreme Court observed that in relation to a building within the jurisdiction of the New Delhi Municipal Committee or the Corporation of Delhi, even if the standard rent bad not been fixed by the Controller under the Delhi Rent Control Act, 1958, the landlord could not reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... building fixed, the annual value of the building according to the definition given in sub-s. (1) of s. 23 of the I.T. Act, 1961, must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant. This interpretation which we are placing on the language of sub-s. (1) of s. 23 of the I.T. Act, 1961, may be regarded as having received legislative approval, for, we find that by s. 6 of the Taxation Laws (Amendment) Act, 1975, sub-s. (1) of s. 23 has been amended and it has now been made clear by the introduction of cl. (b) in that sub-section that where the property is 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 cl. (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 landlord from the tenant. " On s. 154 of the Bombay Municipal Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e net annual rent of the property. It is a well recognised principle in rating that both gross value and net annual value are estimated by reference to the rent at which the property might reasonably be expected to let from year to year. Various methods of valuation are applied in order to arrive at such hypothetical rent, for instance by reference to the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of comparable properties or to the profits earned from the property or to the cost of construction. The expression 'gross value' means the rent at which a hereditament might reasonably be expected to let from year to year. The rent which a tenant could afford to give is calculated rebus sic stantibus, that is to say, with reference to the property in its existing physical condition and to the mode in which it is actually used. The hypothetical tenant includes all persons who might possibly take the property including the person actually in occupation, even though he happens to be the owner of the property. The rent is that which he will pay in the 'higgling of the market', taking into account all existing ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonably be expected to let from year to year, the annual rent received or receivable shall be taken as the annual value of the property. Where the property is let out only for a part of the previous year, the annual rent for this purpose will be the rent received or receivable for a period of twelve months calculated on the basis of the average rent received or receivable for the period the property was actually let out. This amendment has come into force with effect from 1-4-1976 and is, accordingly, applicable in relation to the assessment year 1976-77 and subsequent years (Section 6 (part) of the Amending Act). " Therefore, in a case where the actual rent received is higher than that for which the property might reasonably be expected to let from year to year in respect of an income accruing subsequent to the amendment different considerations might arise. But we are not concerned with such a situation in the instant case. Therefore, in view of that position and the municipal law and in view of the decision of the Supreme Court, it appears to us that the income from house property must be computed on the basis of the sum which might reasonably be expected to let from year to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nition of business in s. 2(4) was of a wide amplitude and it could embrace within itself dealing in real property as also the activity of taking the property on lease, setting up a market thereon and letting out shops and stalls in the market. The Supreme Court further held that, on the facts, the taking of the property on lease and sub-letting portions thereof was a part of the business and trading activity of the assessee-company and the income of the assessee-company fell under s. 10 of the Act, and that where, as in that case, the income could appropriately fall under s. 10 as being the business income, no resort could be made to s. 12. The liability to tax under s. 9 of the Indian I.T. Act was of the owner of the buildings and of land appurtenant thereto. In case the assessee was the owner of the buildings or land appurtenant thereto, he would be, according to the Supreme Court, liable to pay tax under s. 9; even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. It would also make no difference if the assessee was a company which bad been incorporated with the object of buying and developing the landed properties and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT v. Piara Singh [1980] 124 ITR 40. There it was held that for a business loss, which was an illegal business, deduction could be allowable under s. 10 of the Act. This proposition cannot be disputed. The illegal gains from a business is certainly taxable. But that is not the issue before us. Therefore, the observations of the Supreme Court in the said case cannot be of much assistance for the learned advocate for the Revenue. Reliance was also placed on the decision of the Supreme Court in the case of Bhagwan Dass Jain v. Union of India [1981] 128 ITR 315, and our attention was drawn to the observations of the Supreme Court at p. 319 of the report where the court referred to the observation of Lord Macnaghten in his celebrated judgment in Attorney-General v. London County Council [1900] 4 TC 265 ; [1901] AC 35, " Income-tax ...... is a tax on income ". Our attention was also drawn to p. 320 of the report where the decision of the Supreme Court was referred to say what was the natural and grammatical meaning of the word "income" According to the dictionary meaning, it meant " a thing that comes in ".Therefore, it was argued that, as the money came in, this amount should be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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