CIT vs Sampathammal Chordia (Madras High Court)

“1. Whether, on the facts and in the circumstances of the case and having regard to the provisions of Section 23 of the Income-tax act, 1961, the Appellate Tribunal was right in holding that only the actual rental receipts should be treated as annual letting value though the municipal authorities have fixed the annual value at a higher figure than the actual rent ? and

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the entire corporation tax of Rs. 66,770 should be deducted from the annual value though it is relatable to the earlier years for the purpose of computing the income from property?”

2. They arise out of the assessment of the respondent in respect of the income received by him under the heading “Income from house property” for the assessment year 1977-78 ; the property is situate in the city of Chennai and it is submitted by counsel appearing for the Revenue that the property is one which is subject to the provisions of the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960. As the assessee is not represented before us, we have not had the benefit of submissions on his behalf. We, therefore, proceed on the basis that the property is subject to the provisions of the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960.

3. The assessee received an income of Rs. 1,32,263 being the actual rental income from the property. The said fact is not disputed by the Revenue. The Income-tax Officer, however, did not adopt that figure as the income of the assessee, as according to him, under the provisions of Section 23(1)(a) of the Income-tax Act, 1961, to assess the annual value of the property, the municipality was required to adopt the amount which the assessee was reasonably expected to receive from the property towards rent and the figure, as entered in the books of the corporation of the city of Madras as the annual value of the property being Rs. 1,44,144 that amount was to be treated as the income of the assessee. The assessee being aggrieved by that order went up in an appeal to the Commissioner and thereafter to the Tribunal. The Tribunal has held that the actual annual rent was the same as the rent which the assessee might reasonably be expected to receive from the property for purposes of Section 23(1)(a) of the Income-tax Act, 1961, and the actual rent so received constituted the annual value of the property.

4. The Revenue being aggrieved by that order, questions Nos. 1 and 2 as set out above have been referred to us. The question similar to the second question has already been considered and decided by this court. It is fairly submitted by learned counsel appearing for the Revenue that the assessee, having regard to the law laid down by this court in CIT v. L. Kuppuswamy Chettiar [1981] 132 ITR 416 is entitled to the deduction for the amounts paid pursuant to the demand made for property tax in that year, though the amount demanded and paid related to earlier years. The second question is, therefore, answered in favour of the assessee and against the Revenue.

5. With regard to the first question, counsel relied on the decision of the Supreme Court in Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435, wherein the court answered the question as to whether the actual rent received by the assessee from the property in Delhi should be taken as the annual value of the property, by holding that it is not the actual rent received by the assessee, but is the amount which the assessee was reasonably expected to receive that amount being the standard rent determinable under the provisions of the Delhi Rent Control Act to which the property, was subject–that would be the annual value of the property. The court relied on the decision of the apex court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 wherein it was held that as the definition of the “annual value” given in the Punjab Municipal Act, 1911, and in the Delhi Municipal Corporation Act, 1957, was the rent reasonably expected to be receivable by a landlord and as the landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under the provisions of the Rent Control Act and that would be so equally whether the building has been let out to a tenant who had lost his right to apply for fixation of the standard rent by reason of expiration of the period of limitation or the building is self-occupied by the owner–the annual value would be the standard rent. The Supreme Court in the case of Sheila Kaushish [1981] 131 ITR 435 adopted the same measure for the purpose of determining the “annual value” under the Income-tax Act and held that the annual value is the standard rent determinable under the provisions of tbe Delhi Rent Control Act, and not the actual rent received by the landlord from the tenant.

6. We may notice here that the judgment of the Supreme Court in Sheila Kaushish’s case [1981] 131 ITR 435, was rendered in a case which related to an assessment year during which Section 23(1)(b) of the Income-tax Act was not in the statute book. It is also necessary to notice that the Supreme Court did not consider the case of an assessee and the buildings owned by him in areas where the Rent Control Act is not in force. The decision was rendered in respect of rental income of a building in the city of Delhi, where the Rent Control Act was in force under which the standard rent was determinable. The law laid down in that case cannot be regarded as having laid down that the figure representing the actual rent received by the landlords should be disregarded and some other figure recorded in the municipal or panchayat registers should be substituted and treated as annual value of the building. It is not difficult to visualise instances where the buildings owned by assessees are situated outside the municipal limits, where’the Rent Control Act is not in force, and in such cases, it is difficult to visualise any standard for determining the annual value of the property other than the actual rent received by the owners, so long as the rental can be regarded as not being artificial and not fraudulent.

7. We are therefore unable to accept the submission made by counsel for the Revenue that the actual rent can never be regarded as the amount which the landlord can reasonably be expected to receive from his property, for purposes of Section 23(1)(a) of the Act.

8. Section 23(1)(b) of the Act deals with a situation, where the actual rent received is higher than the amount which the landlord can reasonably be expected to receive, and it is a situation which can ordinarily exist only in places where the Rent Control Act as in force. There is no prescribed machinery or standard in the Act to determine the amount which the landlord can reasonably be expected to receive from his property. The reasonableness depends upon a large number of factors including the location, age and condition of the building, its extent, the amenities available, the prevailing market rate or rental, the amount of the advance or deposit, etc. Normally, the actual rent received corresponds to the rent which a person can reasonably be expected to receive, as the tenant and the landlord can be presumed to act rationally, the landlord seeking the maximum possible rental, while the tenant would seek to pay the minimum possible, the actual rent paid being the amount accepted by both landlord and tenant as reasonable under the given circumstances.

9. It is only in the case of buildings situate in places where there is a prohibition against the charging of rent in excess of the standard rent–the standard rent determined in accordance with the relevant provisions of the Rent Control Act, the standard rent has to be adopted and regarded as the amount which a person owning the building can reasonably be expected to receive as rent.

10. The local authorities who are more often than not starved for funds are periodically engaged in the task of redetermining the value of the properties situated within the limits of that local authority for purposes of levy of property tax. It cannot be assumed that the figure adopted by the local authorities as the annual value will always correspond to the standard rent determinable under the Rent Control Act which is in force in that area.

11. The finding of the Tribunal in this case that the annual value recorded in the municipality was not to be treated as the annual value for the pur pose of the Income-tax Act, cannot be regarded as erroneous. It is the case of the Revenue before us that the annual value recorded in the municipal register is the standard rent determined under the Rent Control Act. There is no evidence whatsoever to support that assertion and even the order of assessment does not contain any such statement. The Assessing Officer had merely adopted the value as entered in the municipal register. The assessee had truthfully stated the actual rent received by him and it is un disputed that figure was not an artificially deflated figure. The first ques tion is, therefore, answered in favour of the assessee and against the Reve nue. As the assessee is not represented before us, there will be no order as to costs.

NF