Standard rent has to be computed as per the Rent Control Act even if same is not fixed

By | October 6, 2015

HIGH COURT OF BOMBAY

Vimal R. Ambani

v.

Deputy Commissioner of Income-tax

S.C. DHARMADHIKARI AND A.K. MENON, JJ.

IT APPEAL NO. 625 OF 2000
I.T.R. NO. 269 OF 1999

MARCH  20, 2015

J.D. Mistri, Sr. Adv., P.C. Tripathi and Raj Darak for the Appellant. Vimal Gupta, Sr. Adv. and Sham V. Walve for the Respondent.

JUDGMENT

A.K. Menon, J. – By this common order, we dispose of the above income-tax reference and the income-tax appeal.

2. The assessee, along with two others, had purchased premises for a consideration of Rs. 17,75,000. The assessee claims to have one-third share in the property. On September 29, 1986, the assessee filed a return of income at Rs. 979 in respect of the assessment year 1986-87. The appellant-assessee also submitted a letter, in which, the computation of income was explained and the same was computed on the basis of the rateable value as arrived at by the Municipal Corporation of Ahmedabad. It was contended that this rateable value should be adopted for purposes of computing the property income. The Assessing Officer, in his order dated August 22, 1988, under section 143(3) of the Income-tax Act, 1961, followed the view taken in the earlier years in respect of the same assessee to the effect that the annual value should be determined on the basis of the standard rent and not on the basis of the rateable value as determined by the municipal corporation. He further took the view that in determining the standard rent, the return on the investment should be calculated at 12 per cent. and computed the income from house property at Rs. 57,760 instead of Rs. 979 as per the return filed by the appellant-assessee.

3. Being aggrieved by the order, the appellant preferred an appeal to the Commissioner (Appeals), who dismissed the appeal upholding the assessment made. In further appeal before the Income-tax Appellate Tribunal, his appeal came to be dismissed by an order dated October 20, 1999. It is this order that is the subject matter of challenge in the above income-tax appeal. The following question of law has been proposed :

“Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was right in holding that in computing the property income under section 23 of the Income-tax Act, 1961, the annual letting value of one-third share in the self-occupied property at Vimal House, Ahmedabad, has to be the sum equivalent to the standard rent under the Rent Control Act and not the municipal rateable value.”

4. In the meantime, the Tribunal, on the application of the assessee-appellant referred the following questions of law, arising out the order of the Tribunal dated December 23, 1991, in respect of the assessment years 1982-83 and 1983-84, for opinion and answer of this court :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the annual letting value of the self-occupied property at Ahmedabad has to be the sum equivalent to the standard rent under the Bombay Rent Control Act and not the municipal rateable value in computing the property income under section 23 of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming that the orders of the Commissioner of Income-tax under section 263 of the Income-tax Act holding that the original assessment computing the property income on the basis of the municipal rateable value was erroneous and prejudicial to the interests of the Revenue ?”

5. The Tribunal had proceeded on the basis of the decisions in respect of the same assessee in the previous years.

6. Before us, Mr. Mistri, learned senior counsel appearing for the assessee-appellant, has taken us through the decision of this court in the matter of M.V. Sonavala v. CIT [1989] 177 ITR 246  in which, this court had an occasion to consider various questions (in relation to various assessment years). The Division Bench of this court, inter alia, considered the issue of computation of annual value of the properties within the meaning of section 23(1)(a) of the Income-tax Act, 1961, as applicable to the relevant assessment years. The Department and the Tribunal had held that the annual value of the properties requires to be taken at the amounts actually received by the assessee as compensation in respect of different properties and not at their municipal rateable value. The Tribunal relied upon a judgment of the Hon’ble Supreme Court in the case of Motichand Hirachand v. Bombay Municipal Corpn. AIR 1968 SC 441. On behalf of the assessee, it was contended that a more recent decision of the Hon’ble Supreme Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 had clearly laid down that, subject to rent control legislation which provided for fixation of standard rent, the standard rent alone could be the basis for fixation of municipal rateable value for the purpose of levy of municipal taxes.

7. It is submitted on behalf of the assessee relying upon a decision of the Hon’ble Supreme Court in the case of Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435 that the annual value of the property is required to be determined with reference to the standard rent and not the actual rent received. While deciding the said appeal in M.V. Sonavala’scase (supra), the Division Bench of this court followed a decision of the Calcutta High Court in the case of CIT v. Prabhabati Bansali [1983] 141 ITR 419 and held that for the purpose of computing the annual letting value, sum for which the property might reasonably be let from year to year or the annual municipal value is to be taken. The Division Bench of this court followed the view taken by the Calcutta High Court and directed the Department to determine the annual value of the properties accordingly.

8. In another decision of this court in the case of Smt. Smitaben N. Ambani v. CWT [2010] 323 ITR 104  one of the questions raised was, “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that while applying the provisions of rule 1BB for valuing the self-occupied property, municipal rateable value has to be adopted instead of standard rent ?” This court held, in respect of the said question, that while applying the provisions of rule 1BB for valuing the self-occupied property, municipal rateable value with the addition of statutory deductions, if any, may be adopted instead of the standard rent, for arriving at the gross maintainable rent.

9. Mr. Mistri was at pains to submit that although while computing the value for the purpose of section 22 and while arriving at the annual value for the purpose of section 23, the fair rent receivable in respect of the property is to be taken into account, however, the same will be limited by the standard rent applicable in the facts of a particular case.

10. In this respect, it will be necessary to refer to a later decision of this court in the matter of CIT v. Tip Top Typography[2014] 368 ITR 330 to which, one of us (S. C. Dharmadhikari J.) is a party, in which decision, this court has followed the decision of the Full Bench of Delhi High Court (CIT v. Moni Kumar Subba [2011] 333 ITR 38 and the conclusions in the said Full Bench decision are relevant to the facts of the case at hand, which read as under (page 361) :

“(i) Annual letting value would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances.
(ii) An inflated or deflated rent based on extraneous consideration may take it out of the bounds of reasonableness.
(iii) Actual rent received, in normal circumstances, would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration.
(iv) Such annual letting value, however, cannot exceed the standard rent as per the rent control legislation applicable to the property.
(v) If standard rent has not been fixed by the Rent Controller, then it is the duty of the Assessing Officer to determine the standard rent as per the provisions of rent control enactment.
(vi) The standard rent is the upper limit, if the fair rent is less than the standard rent, then it is the fair rent which shall be taken as annual letting value and not the standard rent . . .

We would like to remark that still the question remains as to how to determine the reasonable/fair rent. It has been indicated by the Supreme Court that extraneous circumstances may inflate/deflate the ‘fair rent’. The question would, therefore, be as to what would be circumstances which can be taken into consideration by the Assessing Officer while determining the fair rent. It is not necessary for us to give any opinion in this behalf, as we are not called upon to do so in these appeals. However, we may observe that no particular test can be laid down and it would depend on facts of each case. We would do nothing more than to extract the following passage from the Supreme Court judgment in the case of Motichand Hirachand v. Bombay Municipal Corporation [1968] AIR 1968 SC 441, 442 :

‘It is 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 carried from the property or to the cost of construction.'”

11. Accordingly, while determining the annual letting value in respect of properties which are subject to rent control legislation and in cases where the standard rent has not been fixed, the Assessing Officer shall determine the same in accordance with the relevant rent control legislation. If the fair rent is less than the standard rent, then it is the fair rent which shall be taken as annual letting value and not the standard rent. This will apply to both, self-acquired properties and general cases where property is let out. While carrying out the exercise under section 23(1) of the Act, the Departmental authorities shall follow these guidelines reproduced above provided in the Full Bench decision of the Delhi High Court and followed by a Division Bench of this court in the case of Tip Top Typography (supra).

12. Reference will also have to be made to a decision of this court in the case of Smt. Kokilaben D. Ambani v. CIT [2014] 49 taxmann.com 371  wherein, we have dealt with the aforesaid questions and the guidelines set out in the various judgments have been referred to therein.

13. Accordingly, the appeal is allowed and the impugned order dated October 20, 1999, is set aside. The matter stands remanded for consideration in accordance with the aforesaid norms. No order as to costs.

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