Sec .23(1) applies if buildings let out by owner to his own company

JUDGMENT

Antony Dominic, J. – These appeals are filed by the Revenue, aggrieved by the orders passed by the Income Tax Appellate Tribunal, Cochin Bench in I.T.A.Nos.201, 200, 203 and 202 of 2002, pertaining to the assessment year 1996-1997. Respondents/assessees are the co-owners of an eight storied building in Calicut. They are also the Shareholders and Directors of a company by name ‘Moidus Medicare Private Limited’, Calicut, which has established ‘National Hospital’. A substantial portion of the building owned by the assessees was let out to the company and the agreed rent is Rs.1 per sq.ft.

2. For the assessment year 1996-1997, applying the provisions of Section 23 of the Income Tax Act, the Assessing Officer assessed the annual value of the building at Rs.4 per sq.ft. on the basis that another portion of the building was let out to the Telephone Department and the rent paid by the Department to the assessees is Rs.4 per sq.ft. In the appeal filed before the Commissioner Income Tax (Appeals), the order of the Assessing Officer has set aside and this order was confirmed by the Tribunal in the appeals filed by the Revenue. Reasoning of the Commissioner of Income Tax (Appeals) and the Tribunal is that the co-owners of the building themselves are the share holders of the company and that if the corporate veil is lifted, the assessees themselves are the lessees also. Therefore, the authorities have taken the view that rent agreed as per the lease deed shall be the basis for the quantification of the annual value and not the method prescribed under Section 23 of the Act. It is in these circumstances, that the Revenue has filed these appeals and the main question of law that is framed for the consideration is whether the Tribunal was right in law and fact and holding that there is no scope to apply Section 23(1) of the Income Tax Act, 1961.

3. We heard the Senior Counsel for the Revenue and the learned counsel appearing for the assessees.

4. Relevant part of Section 23(1), as it stood at the relevant time, read thus:

“Sec.23. Annual Value how determined:

(1) for the purposes of Section 22, the annual value of any property shall be deemed to be-

5. A reading of Section 23 would show that annual value of a property is to be determined for the purposes of Section 22 applying the methods laid down therein. As per Clause (a) of Section 23(1), the annual value shall be deemed to be the sum for which the property might reasonably be let out from year to year. Clause (a) would obviously be applicable to a property which is not let out and in such a case, the such sum, for which the property might be reasonably expected to let, shall be the annual value. On the other hand, a reading of Clause (b) would show that where a property is let and the annual rent received or receivable by the owner is in excess of the reasonably expected sum mentioned in Clause (a), the annual value shall be the amount actually received or receivable by the owner. In other words, as per Clause (b), in a case where the property is let out and if the rent received or receivable is more than the sum for which the property might reasonably be expected to let, the annual value shall be the actual amount that is received or receivable. In other cases, the annual value shall be the sum for which the property might reasonably be expected to let.

6. Insofar as this case is concerned, admittedly the property is owned by the co-owners themselves, who are also the Directors of the lessee company which has established the Hospital. As per the lease agreement between the co-owners and the lessee company, the mutually agreed rent is Rs.1 per sq.ft. However, a portion of the very same building is let out by the co-owners, the assessees herein, to the Telephone Department and the lease rent that is received is Rs.4 per sq.ft.

7. This would show that this is a case to which Clause (b) of Section 23(1) is applicable and the annual value has to be estimated, quantifying the sum for which the property might reasonably be expected to let. It is adopting this method that the Assessing Officer has framed the assessment by fixing the annual value at Rs.4 per sq.ft. which is the rate of rent received for a portion of the building let out by the assessees themselves to the Telephone Department.

8. Learned counsel for the assessee contended that Section 23 (1) cannot be applied to this case for the reason that the co-owners themselves are the Directors of the lessee company. According to us, this argument cannot be accepted for the reason that Section 23 does not exempt cases in which buildings have been let out by the owners to firms or companies in which they are interested. Further no other provision of the Income Tax Act, providing for a different method of fixation of annual rent has shown to us. On the other hand, reading of Section 23 would show that in all cases annual value has to be estimated applying the principles of Section 23. Therefore, since the annual value of the building which was let out was to be estimated, the estimation could be done applying Section 23(1)(b), which precisely was what was done by the Assessing Officer. According to us, the orders passed by the Commissioner of Income Tax and the Tribunal are liable to be set aside and we do so.

Appeals are disposed of answering the question of law in favour of the Revenue and against the assessees.