Bombay High Court
M.A.E. Paes vs Commissioner Of Income Tax on 17 September, 1997
Equivalent citations: [1998]230ITR60(BOM)
Author: Pratibha Upasani
Bench: Pratibha Upasani
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under s. 256(1) of the IT Act, 1961, at the instance of the assessee, the Tribunal has referred the following question of law to this Court for opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the perquisite in respect of the residential accommodation had to be valued by considering its fair rental value at Rs. 30,000 per annum ?"
2. This reference pertains to asst. yrs. 1975-76, 1976-77 and 1977-78. During the previous years relevant to these assessment years, the assessee was an employee of M/s Herdillia Chemicals Ltd., Bombay. As an employee, he was provided with free furnished residential accommodation by his employer. The value of the perquisite in respect of the said free furnished residential accommodation was determined by the employer of the assessee as Rs. 9,394 per annum. This amount included a sum of Rs. 2,389 in respect of furniture and Rs. 7,905 in respect of the accommodation exclusive of furniture. While making the assessment of the income of the assessee from salary and computing value of the rent free residential accommodation provided to him by the employer for the purpose of computing income chargeable under the head "salaries", the ITO did not accept the value of the perquisite in respect of rent-free residential accommodation determined by the assessee and his employer as the fair rental value of the accommodation. He, therefore, himself computed the fair rental value thereof by taking into account the prevailing rent in that area at Rs. 2,500 per month and included the same in the computation of the salary-income of the assessee under s. 17 of the IT Act, 1961 ("Act"). The assessee appealed to the AAC who did not approve the valuation made by the ITO and held that the valuation of the perquisite of rent-free accommodation at Rs. 9,394, as disclosed by the assessee, was correct. The Revenue appealed to the Tribunal against the order of the AAC. The Tribunal relying upon the Expln. 2 to r. 3(a)(iii) of the IT Rules, 1962 ("Rules") held that the ITO was justified in taking the value of the perquisite in respect of the rent-free residential accommodation at Rs. 30,000 on the basis of the rent prevailing in the same building. In that view of the matter, the Tribunal reversed the order of the AAC and restored that of the ITO. Hence this reference at the instance of the assessee.
3. Sec. 17 of the IT Act defines "salary" to include, inter alia, "perquisite"."Perquisite" has been defined in cl. (2) thereof to include, inter alia, (i) value of rent free accommodation provided to the assessee by his employer, and (ii) value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. Thus, the income of assessee from salary would include the value of rent-free accommodation provided to the assessee by his employer or the value of any concession in the matter of rent respecting any accommodation provided by his employer. The method of valuation of perquisites is laid down in r. 3 of the IT Rules, 1962 ("the Rules"). Clause (a) thereof deals with the determination of the value of rent-free residential accommodation. This rule, so far as relevant, reads :
"3. Valuation of perquisites :
For the purpose of computing the income chargeable under the head "Salaries" the value of the perquisites (not provided for by way of monetary payment to the assessee) mentioned below shall be determined in accordance with the following clauses, namely :
(a) The value of rent-free residential accommodation shall be determined on the basis provided hereunder, namely :-
(i) ......
(ii) ......
(iii) in any other case (A) the value of rent-free residential accommodation which is not furnished shall ordinarily be a sum equal to 10 per cent. of the salary due to the assessee in respect of the period during which the said accommodation was occupied by him during the previous year;
Provided that -
(1) Where the fair rental value of the accommodation is in excess of 20 per cent. of the assessee's salary, the value of the perquisite shall be taken to be 10 per cent. of the salary increased by a sum equal to the amount by which the fair rental value exceeds 20 per cent. of the salary, so, however, that the ITO may, having regard to the nature of the accommodation, determine the sum by which 10 per cent. of the salary is to be increased, as a percentage (not exceeding 100 per cent.) of the amount by which the fair rental value exceeds 20 per cent. of the salary;
(2) where the assessee claims, and the ITO is satisfied that the sum arrived at on the basis provided above exceeds the fair rental value of the accommodation, the value of the perquisite to the assessee shall be limited to such fair rental value;
(B) where the accommodation is furnished, the value of rent-free residential accommodation shall be the aggregate of the following sums, namely :
(1) the fair rental value of the accommodation arrived at in accordance with the provisions of sub-cl. (iii)(A) as if the accommodation were not furnished; and (2) the fair rent for the furniture (including television sets, radio sets, refrigerators, other household appliances and air/conditioning plant or equipment) calculated at 15 per cent. per annum of the original cost of such furniture or if such furniture is hired from a third party, the actual hire charges payable therefor.
Explanation 1 : ......"
Explanation 2 :- For the purpose of sub-cl. (iii), the fair rental value of accommodation which is not furnished shall be the rent which a similar accommodation would realise in the same locality or the municipal valuation in respect of the accommodation, whichever is higher.
(b) The value of residential accommodation provided at a concessional rent shall be determined as the sum by which the value computed in accordance with cl. (a), as if the accommodation were provided free of rent, exceeds the rent actually payable by the assessee for the period of his occupation during the relevant previous year".
We have not set out sub-cls. (i) and (ii) of cl. (a) which deal with valuation of rent-free residential accommodation provided by Government, body or undertaking under the control of the Government, by the Reserve Bank of India, Government company and similar other organisations set out therein because in this case we are concerned with the valuation of rent-free residential accommodation provided by a company which does not fall under any of the above categories.
4. It is clear from a plain reading of r. 3(a)(iii) of the Rules that ordinarily, the value of the rent-free unfurnished residential accommodation should be a sum equal to 10 per cent. of the salary due to the assessee.
However, if the rental value of the accommodation exceeds 20 per cent. of the assessee's salary, in that case, the value of the perquisite has to be fixed in the manner set out in the proviso to r. 3(a)(iii). Expln. 2 appended to r. 3, however, gives an option to the AO to determine the fair rental value of the accommodation as the rent which a similar accommodation would realise in the locality or the municipal valuation of the accommodation, whichever is higher. In the instant case, admittedly, the fair rental value of the accommodation is higher than the municipal valuation, because according to the assessee himself, the municipal valuation is Rs. 5,250 per annum whereas the fair rental value is Rs. 7,005 per annum. The assessee has, therefore, taken the fair rental value of the unfurnished accommodation at Rs. 7,005. The ITO determined the same at Rs. 30,000 per month by taking into account the prevailing rent of similar accommodation, which also was approved by the Tribunal. The controversy is whether the "prevailing rent or the "standard rent" payable under the rent control legislation can be the basis for determination of the fair rental value of the accommodation.
5. According to the assessee, the prevailing rent can never form the basis for determination of the fair rental value of the accommodation. Mr. P. Kaka, learned counsel for the assessee, submits that the fair rental value of the accommodation for the purpose of r. 3(a)(iii) cannot be more than the fair rent determinable under the Rent Control Act. According to him, the rent of accommodation in Bombay is governed by the provisions of the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1947 ("Rent Control Act") and the fair rental value of the accommodation for all purposes including r. 3(a)(iii) of the IT Rules has to be limited to the measure of standard rent determinable on the principles laid down in the said Act. According to him, the Tribunal has committed a manifest error of law in affirming the fair rental value of Rs. 30,000 per annum determined by the ITO on the basis of the prevailing market rent in complete disregard to the "standard rent" payable under the Rent Control Act.
6. The learned counsel submits that the Tribunal can accept the municipal valuation as the fair rental value of the accommodation or the value determined by the assessee, or itself estimate the same by applying the principles laid down in the Rent Control Act for determination of the standard rent or direct the ITO to estimate it accordingly. In support of this contention reliance is placed on the decision of the Supreme Court in Dewan Daulat Rai Kapoor vs. New Delhi Municipal Committee and Mrs. Sheila Kaushish vs. CIT . The learned counsel submits that the ratio of above decisions of the Supreme Court has also been followed in interpreting the expressions "fair rental value" in r. 3(iii) of the IT Rules and "the sum for which the property might reasonably be expected to let from year to year" in s. 23(1)(a) of the IT Act by various High Courts.
7. Dr. V. Balasubramanian, learned counsel for the Revenue, does not dispute the ratio of the above decisions. He, however, contends that it would not apply to the computation of fair rental value for the purpose of r. 3(a)(iii) of the Rules. The fair rental value for the above purpose, according to him, has to be fixed on the basis of prevailing market rent and not the standard rent under the Rent Control Act.
8. We have given our careful consideration to the rival submissions of the counsel for the parties. However, on a careful perusal of r. 3(a)(iii) of the Rules and the decisions of the Supreme Court cited above, we are of the clear opinion that fair rental value of an accommodation has always to be determined with reference to the standard rent payable under the Rent Control Act applicable to the area where the accommodation is situated. The fair rental value for the purpose of perquisite can in no case exceed the standard rent determinable on the principles laid down under the Rent Control Act. The assessing authority would have to arrive at its own figure of standard rent by applying the principles laid down under the Rent Control Act for determination of standard rent and determine the fair rental value of the accommodation on the basis of such figure of standard rent. The expression "rent which a similar accommodation would realise in the same locality" appearing in Expln. 2 to r. 3(a)(iii) has to be construed only to mean the "standard rent", because no property can be expected to realise any rent higher than the standard rent as that would be in breach of the provisions of the Rent Control Act. Moreover the expression used in r. 3(a)(iii) is "fair rental value". The use of the word "fair" is a clear indicator that it is not the prevailing market rent but the "fair rent" which can never be more than the "standard rent".
9. The expression used in r. 3(a)(iii) is "fair rental value" of the accommodation. Expln. 2 enables the AO either to accept the municipal valuation which admittedly has to be fixed on the basis of the standard rent under the Rent Control Act or to ascertain on the basis of the fair rental value himself by ascertaining the rent which similar accommodation would realise in the same locality. The "rent which similar property would realise in the same locality" cannot be more than the standard rent that can be realised by a landlord under the Rent Control Act. This expression cannot be interpreted to mean rent in excess of the standard rent.
10. We are supported in our above conclusion by the ratio of the decision of the Supreme Court in Dewan Daulat Ram Kapoor vs. New Delhi Municipal Committee (supra), where dealing with the expression "the gross annual rent at which such house or building may reasonably be expected to let from year to year" appearing in s. 116 of the Delhi Municipal Corporation Act, 1957, it was held that annual value of the building must be held to be limited by the measure of the standard rent determinable on the principle laid down in Delhi Rent Control Act, 1958. In the above case, the Supreme Court declared the assessment of the annual value of the building by the Municipal Corporation in excess of the standard rent determinable on the principles laid down in Delhi Rent Control Act illegal and ultra vires. The Supreme Court also held that even in respect of self-occupied building, the annual value must be determined on the basis of the standard rent determinable under the provisions of the Rent Control Act. It was observed :
"When the rent control legislation provides for fixation of standard rent, which alone and nothing more than which the tenant shall be liable to pay to the landlord, it does so because it considers the measure of the standard rent prescribed by it to be reasonable. It lays down the norm of reasonableness in regard to the rent payable by the tenant to the landlord. Any rent which exceeds this norm of reasonableness is regarded by the legislature as unreasonable or excessive. When the legislature has laid down this standard of reasonableness, would it be right for the Court to say that the landlord may reasonably expect to receive rent exceeding the measure provided by this standard ? Would it be reasonable on the part of the landlord to expect to receive any rent in excess of the standard or norm of reasonableness laid down by the legislature and would such expectation be countenanced by the Court as reasonable ? The legislature obviously regards recovery of rent in excess of the standard rent as exploitative of the tenant and would it be proper for the Court to say that it would be reasonable on the part of the landlord to expect to recover such exploitative rent from the tenant ? We are, therefore, of the view that, even if the standard rent has not been fixed by the Controller, the landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under the Act and this would be so equally whether the building has been let out to a tenant who has lost his right to apply for fixation of the standard rent or the building is self-occupied by the owner. The assessing authority would, in either case, have to arrive at its own figure of the standard rent by applying principles laid down in the Delhi Rent Control Act, 1958 for determination of standard rent and determine the annual value of the building on the basis of such figure of standard rent".
11. The Supreme Court also referred to its earlier decision in Guntur Municipal Council vs. Guntur Town Rate Payers' Association wherein it was held that there was no distinction between buildings the fair rent of which has actually been fixed by the Controller and those in respect of which no such rent has been fixed. The following observations from the above decision were quoted with approval :
"It is perfectly clear that the landlord cannot lawfully expect to get more rent than the fair rent which is payable in accordance with the principles laid down in the Act. The assessment of valuation must take into account the measure of fair rent as determinable under the Act. It may be that where the Controller has not fixed the fair rent, the municipal authorities will have to arrive at their own figure of fair rent but that can be done without any difficulty by keeping in view the principles laid down in s. 4 of the Act for determination of fair rent".
12. Reference may also be made in this connection to another decision of the Supreme Court in Mrs. Sheila Kaushish vs. CIT (supra) wherein, while interpreting the expression "the sum" for which the property might reasonably be expected to let from year to year appearing in sub-s. (1) of s. 23 of the IT Act, it was held that even if the standard rent of building has not been fixed by the Controller under the Rent Control Act and the period of limitation prescribed under the Rent Control Act for making an application for fixation of the standard rent had expired and it was no longer competent to the tenant to have be standard rent of the building fixed, the annual value of the building, according to the definition given in sub-s. (1) of s. 23 of the IT Act must be held to the standard rent determined under the provisions of the Act and not the actual rent received by the landlord from the tenant.
13. In Dr. Balbir Singh & Ors. vs. M. C. D. & Ors. , the Supreme Court followed the ratio of the decision in Dewan Daulat Rai Kapoor's case (supra) and held that the standard rent determinable on the principles set out in the Rent Control Act as may be applicable, would fix the upper limit of the rateable value of the premises and within such upper limit, the assessing authority would have to determine as to what rent should be charged if the premises are let to the hypothetical tenant. The assessing authority would also have to take into account the rent which the owner of the similar premises constructed earlier and situate in the same or adjoining locality might reasonably be receiving from hypothetical tenant and which would necessarily be within the upper limit of the standard rent of such premises.
14. It is clear from the above decisions that the fair rental value of the premises cannot be more than the standard rent payable under the Rent Control Act. If no standard rent has been fixed in respect of particular premises either because it is in occupation of the owner or his employees or for any other reason and the AO wants to adopt a figure other than the municipal valuation, he will have to determine the standard rent himself by applying the principles laid down in the Rent Control Act and if that figure is higher than the municipal valuation, it will be within his powers to accept the same and to determine the value of the perquisite under r. 3(a)(iii) of the Rules at such higher rate.
15. In the instant case, even according to the assessee, the fair rental value was higher than the municipal valuation. It was, therefore, open to the ITO to accept the same. If according to him, the determination of the fair market value by the assessee was not correct, it was open to him to determine the fair rental value by applying the principles laid down in the Rent Control Act for determination of the standard rent. In the instant case, the ITO has not done so. He has taken the prevailing market rate in the neighbourhood as the measure without ascertaining whether such prevailing market rate was the standard rent or it was in excess of the standard rent. That is not permissible. In that view of the matter, we are of the clear opinion that the ITO was not justified in determining the fair rental value of the accommodation for the purpose of determining the value of the perquisite under r. 3(a)(iii) of the Rules at Rs. 30,000 per annum and the Tribunal was not justified in confirming the same. The ITO could have accepted the fair rental value disclosed by the assessee which was higher than the municipal valuation. If he was not satisfied with the correctness of the same, it was open to him to determine the fair rental value himself by applying the principles laid down in the Rent Control Act for determination of the standard rent.
16. In view of the above, we answer the question referred to us in the affirmative and in favour of the assessee. We make it clear that it will be open to the Tribunal to accept the fair rental value shown by the assessee which is higher than the municipal valuation or if it is not satisfied about the correctness of the same, to determine the same by applying the principles laid down under the Rent Control Act for fixation of the standard rent.
17. This reference is disposed of accordingly with no order as to costs.