PSB Industries India Pvt. Ltd. Vs CIT (Delhi High Court)- Section 22 of the Act makes “income from house property” as chargeable to income tax. After excluding such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax.
It is the annual value of the property which becomes chargeable to income tax under this head. Section 23, already extracted above, stipulates the manner in which such an annual value is to be determined. It is clear from Clause (a) of sub-Section (1) of Section 23 of the Act that in case the annual rent received is less than the sum for which the property might reasonably be expected to let from year to year, it is the said sum and not the annual rent which would be the annual value chargeable to tax. Only in case where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable shall be taxed. Thus, it is the higher of the two which is chargeable to tax. Along with this specific provisions under Section 23, there is no defence of the assessee that disclosing the annual rent as the annual letting value for the purposes of tax was bona fide. In the instant case, the assessee had entered into an agreement to lease out the property to Punjab National Bank Ltd. on a sum of Rs. 1 lac per annum. The total area of constructed building leased out by the assessee is given in second schedule to the Lease Agreement, which is 1,23,490 sq. ft. The approved valuer has valued the annual letting value of total constructed area of 1,2 3,490 sq. ft. at Rs. 75,63,360/-
Interestingly, when the AO found that the sum of Rs. 67 Crores was taken as interest free security and in these circumstances, the property would reasonably expect adjustment of rent than mentioned in the Lease Agreement and the assessee was called upon to give the valuation. The assessee himself filed the annual letting value by the approved valuer of total constructed area of 1,23,490 sq. ft. at Rs. 75,63,360/-. This was done at the instance of the AO when the assessee was exposed and confronted with the aforesaid facts. Had the assessee kept in mind the provisions of Section 23 of the Act, which it was supposed to, the assessee would have found that the sum for which the property might reasonably be expected from year to year is adjustment than the sum disclosed in the Lease Agreement. In this behalf, the Tribunal has observed, and rightly so, is as under:
“The word “reasonably” appearing in Clause (a) is very important. What the landlord 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 value. The actual rent payable by a tenant to the landlord would, in normal circumstances, afford reliable evidence of what the landlord might reasonably expect to get from a hypothetical tenant, unless the rent is inflated or depressed by reason of extraneous consideration such as relationship, expectation of some other benefit etc. There would be ordinarily be in a free market close approximation between actual rent received by the landlord and the rent which he might reasonably expect to get from a hypothetical tenant. In the case before us, the assessee had received interest free deposits of Rs. 67 Crores because which the rent received was low. The annual rent of Rs. 1 lac of the property having area of 1,23,490 sq. ft. let out to a bank cannot be treated s reasonable to which property could be let out from year to year. In the case of Babulal Raj Garhia [4 ITR 148), the Calcutta High Court held that a Lease Deed is not a conclusive evidence of bona fide annual value of the property. Therefore, the contention of the assessee that rent received by the assessee is evidenced by Lease Deed is not a conclusive evidence of bona fide annual value of the property. Further, the deeming provisions of Section 23(1) are mandatory in nature and, therefore, the assessee was required to admit the annual value of the property for which, it might reasonably be let out from year to year rather than adopting the figure of Rs. 1 lac per annum which is grossly depressed because of security deposit of Rs. 67 Crores equivalent 6700 years of annual rent received by the assessee.
Further, the assessee had received Rs. 67 Crores as security deposit which has been given by the assessee to its sister concerns without any interest. The assessee had let out 1,23,490 sq. ft. of the area to Punjab National Bank for a sum of Rs. 1 lac, which gives annual rent per sq. ft. at Rs. 0.80/-. It is unbelievable that the annual letting value of any property in city like Gurgaon will be at the rate of Rs. 0.80 per sq. ft. The assessee was aware of its annual letting value because of which he had taken interest free advance of Rs. 67 Crores which has been diverted free of interest to sister concerns. Had this money been put in fixed deposit @ 8%, the assessee would have received interest of Rs. 5,36,00,000/- per annum. If the assessee had offered any income from security deposits or invested in its own business, it would have been argued for the purpose of penalty under Section 271(1)(c) of the Act that the assessee was under bona fide belief to admit income as per Lease Agreement, though the income of the house property was to assessed as per provisions of Clause (a) of Section 23(1) of the Act. The assessee preferred to divert the security deposits of Rs. 67 Crores to group concerns free of interest. The assessee‟s valuer has valued annual letting value of the property at Rs. 75,63,360/- which has been accepted by the assessee and the same has not been agitated before the appellate authorities. Therefore, the annual letting value of the property at Rs. 75,63,360/- has attained finality. The diffence in market rent as determined by approved valuer (Rs. 61.25/sq.ft./annum) and rent received (Rs. 0.80/sq.ft./annum) is too large to believe that the assessee was under bona fide belief that market rent was Rs. 0.80 per square feet. From these facts, it is evident that the assessee had planned its affairs in such a way that minimum tax would be payable.”
14. In a case like this, we are of the view that explanation of the assessee was not bona fide. Explanation 1 to Section 271(1)(c) of the Act would be fully applicable and the AO was justified in imposing the penalty which was upheld upto the Tribunal level.