Madras High Court
Additional Commissioner Of Income-Tax vs Mrs. Leela Govindan on 18 October, 1977
Author: A. Varadarajan
Bench: A. Varadarajan
JUDGMENT Varadarajan, J.
1. These tax cases arise out of references made by the Income-tax Appellate Tribunal, Cochin Bench (T.C. No. 221 of 1972) and the Income-tax Appellate Tribunal, Madras Bench (T.C. No. 128 of 1974). The year of assessment in T.C. No. 221 of 1972 is 1968-69, while the year of assessment in T.C. No. 128 of 1974 is 1969-70. The assessee in both the cases is the same, one K. Govindan, and he died on March 24, 1969, and after his death his legal representative filed a return for the assessment year 1969-70 up to March 24, 1969.
2. The assessee, Govindan, filed a return for the assessment year 1968-69, admitting a rental income from house properties bearing door Nos. 16, 17, 542, 543 and 549, Poonamallee High Road, and 10, Stringers Road, Madras. The admitted rent from door Nos. 16 and 17, Pooimmallee High Road, was Rs. 6,226, We are concerned in these cases with the income from those two house properties. The annual municipal value of these two properties was Rs. 7,502 and Rs. 10,374 respectively. The Income-tax Officer found, on the basis of those municipal annual valuations, that the income according to Section 23(1) of the Income-tax Act was Rs. 5,021 and Rs. 6,944, respectively, after adding to the annual municipal valuation 1/9th and deducting from the total the full municipal tax and 1/6th for repair, and deducting from the figure so arrived at a sum of Rs. 1,309 at 6 per cent. of that amount towards collection charges. This was on the ground that the income from the properties should be computed on the basis of the annual municipal value or rent received, whichever was higher.
3. In the assessee's appeal to the Appellate Assistant Commissioner it was contended that at the time of the purchase of the properties by the assessee in 1961 there was a subsisting lease dated December 20, 1935, for a period up to May 1, 1969, on a rent of Rs. 225 per mensem with an option for the lessee to extend the lease for a further period of 15 years and the tenancy continued in spite of the change in the ownership. It was further contended that though the rent fixed in the lease deed was Rs. 225 per mensem, the subsequent owners had persuaded the lessees, Messrs. Raval and Company, to pay extra rent at 25 per cent. of the agreed rent, amounting to Rs. 675 per annum, together with Rs. 225 towards annual repairs and a sum of Rs. 2,626 per annum towards municipal taxes, in addition to the agreed rent, and they were thus getting a total sum of only Rs. 6,226 per annum from the lessees and that that was the position when the assessee bought the properties in 1961.
4. Under Section 23(1) of the Income-tax Act for the purposes of Section 22, the annual value of any property shall be deemed to be, (a) the sum for which the property might reasonably be expected to be let from year to year, or (b) 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. Section 22 of the Act lays down that:
" The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than 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, shall be chargeable to income-tax under the head 'Income from house property'."
5. The Appellate Assistant Commissioner thought that, in view of the lease, the asscssee could not be expected to lease the properties for any amount higher than the sum of Rs. 6,226 per annum during the period of the tenancy. In this view he accented the asscssee's contention and treated the income as Rs. 6,226 and deducted the annual municipal taxes of Rs. 5,502 and arrived at Rs. 724 and deducted 1/6th of that amount towards repairs and fixed the net income as Rs. 603 and directed the Income-tax Officer to substitute this figure for the figure of Rs. 11,965 which had been adopted by her.
6. The revenue preferred an appeal before the Income-tax Appellate Tribunal, Cochin Bench, and contended that in view of the fact that the lessees, Messrs. Raval and Company, had sub-leased the properties for an annual rent of Rs. 25,000 the Income-tax Officer was right in computing the income on the basis of the annual municipal value. But the Tribunal found that the rent fixed at Rs. 225 per mensem in the lease deed was genuine rent and had not been fixed low for any ulterior reason. Accordingly, the Tribunal agreed with the Appellate Assistant Commissioner and dismissed the appeal.
7. The legal representative of the asscssce raised the same contention before the Income-tax Officer for the assessment year 1969-70. But she adopted the annual municipal value as the income from the properties, as had been done by her for the previous assessment year 1968-69. The legal representative of the assessce filed an appeal before the Appellate Assistant Commissioner who differed from his predecessor's order dated July 17, 1969, in the appeal relating to the previous assessment year 1968-69 and confirmed the order of the Income-tax Officer. The legal representative of the assessee went up in appeal before the Income-tax Appellate Tribunal, Madras Bench. The Tribunal accepted the view of the Cochin Bench in the revenue's appeal relating to . the previous assessment year 1968-69 and allowed the appeal, accepting the assessce's basis. Hence, these references under Section 256(1) of the Act.
8. The question referred in T.C. No. 221 of 1972 is :
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income from the houses bearing door Nos. 16 and 17, Poonamallee High Road, Madras, should be computed on the basis of the actual annual rental of Rs. 6,226 being taken as the annual value in the absence of evidence to show that the annual rental was not genuine ? "
9. The question referred in T.C. No. 128 of 1974 is :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income from the house properties Nos. 16 and 17, Poonamallee High Road, Madras, should not be computed on the basis of their annual municipal value notionally irrespective of the actual rent received by the assessee ?"
10. As stated above, Section 22 of the Income-tax Act, 1961, lays down that the annual value of the property, excluding any portion thereof occupied by the, assessee for the business or profession carried on by him, the profits whereof are chargeable to income-tax, should be chargeable to income-tax under the head " Income from house property", and Section 23(1) of the Act says that for the purposes of Section 22, the annual value of any property shall he deemed to he, (a) the sum for which the property might reasonably he expected to he let from year to year, or (b) 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. The section docs not say what should be adopted if the annual rent actually received by the assessee or is receivable by the assessee in respect of the property is less than the sum referred to in Clause (a), namely, the sum for which, the property might reasonably be expected to be let from year to year, as in the present case, where the property had been let for a rent of Rs. 225 per mensem by a registered lease deed dated December 20, 1935, for a term extending up to May 1, 1969, with liberty for the lessee to extend the period of the lease by another 15 years, when the assessee in this case purchased the properties in 1961.
11. The learned counsel for the revenue invited our attention to the decision in C. J. George v. Commissioner of Income-tax , to which one of us was a party. There the assessee had constructed a building which he let out to a company on an annual rent of Rs. 33,000. The Income-tax Officer fixed the annual value of the building at Rs. 33,000. The Income-tax Appellate Tribunal was of the view that there was no material on record to accept the assessee's contention that the notional letting value was less than Rs. 33,000 for which the building had actually been let, and, accordingly, the Tribunal rejected the certificate produced by the assessee showing that the annual letting value had been fixed by the local authority at Rs. 18,000. The Bench of the Kerala High Court held that the reasons given by the Tribunal for not accepting the certificate showing the annual letting value fixed by the local authority was not tenable and that prima facie the certificate afforded evidence to sustain the contention of the assessee that the contract rent was in excess of the reasonable rent that could be expected from the building. The present Sub-clauses (a) and (b) of Sub-section (1) of Section 23 of the Income-tax Act had been substituted for the portion, namely : " For the purposes of Section 22, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year " with effect from April 1, 1976, by the Taxation Laws (Amendment) Act, 41 of 1975. No doubt, in the old Section 23 there was the provision that, " for the purposes of Section 22, the annual value of any property shall be deemed to be the same for which the property might reasonably be let from year to year", which is Clause (a) of the present Section 23(1) of the Act, when the decision of the Bench was rendered on June 7, 1973. When that decision, was rendered, the present Clause (b) of Section 23(1), namely, " 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" was not there in Section 23 of the Act. It is perhaps for that reason that the Tribunal rejected the certificate produced by the assessee showing that the annual letting value fixed by the local authority was Rs. 18,000 and observed that the certificate afforded evidence to sustain the contention of the assessee that the contract rent was in excess of the reasonable rent that could be expected from the building. Having regard to these circumstances, we are of the opinion that this decision of the Bench of the Kerala High Court is not in point.
12. The revenue does not dispute the fact that the properties had been let by a registered lease deed by the predecessor-in-title of the assessee as early as in December, 1935, for a fixed rent of Rs. 225 per mensem for a period up to May 1, 1969, to Messrs. Raval and Company with an option to the lessees to continue the lease for a further period of 15 years. It is seen from the decision in Ramachandran v. Raval & Co. [1969] 2 MLJ 8 (Mad), that the assessee had filed an application before the Kent Controller, Madras, for fixation of fair rent in respect of the properties as per the provisions of the Madras Buildings (Lease and Rent Control) Act 18 of 1960, and that the tenants, Messrs. Raval and Company, challenged the maintainability of the application for the fixation of fair rent contending that the rent, in view of the addition of 25 per cent., etc., referred to above, was more than Rs. 400 per mensem and Section 30(iii) of the Madras Buildings (Lease and Rent Control) Act as amended by Act II of 1962, which received the assent of the President on 28th June, 1962, exempted such of the properties involved in these cases, or part thereof, occupied by a tenant if the monthly rent paid by him in respect of the building or part exceeded Rs. 400. That exemption was later removed by Madras Act XI of 1964, which received the assent of the President on 5th June, 1964. The Bench of this court which decided that case on November 26, 1968, held that the Rent Controller had jurisdiction to entertain and dispose of the application for fixation of lair rent filed by the assessee on its merits. Therefore, it is clear that though the lessees, Messrs. Raval and Company, appear to have sublet the building for a larger rent of Rs. 25,000 per annum, what the assessee was entitled to get under the terms of the lease deed dated December 20, 1935, under which the properties had been let by the assessee's predecessor-in-title, was only Rs. 225 per mensem which by persuasion of the subsequent owners of the property had been slightly raised by the addition of the rent, etc., referred to above. The assessee's attempt at having the rent enhanced by the Rent Controller under the provisions of the Madras Buildings (Lease and Rent Control) Act, 18 of 1960, was being thwarted by the lessees, Messrs. Raval and Company, until the decision was rendered by the Bench of this court in the case in Ramachandran v. Raval & Co. [1969] 2 MLJ 8 (Mad) on November 26, 1968. In Jamnadas Prabhudas v. Commissioner of Income-tax [1951] 20 ITR 160 (Bom) it had been held that what the law contemplates is not the actual rent received by the owner of the property but a notional rent which is to be gathered from what the building could reasonably fetch if it is let out. It has been observed in that decision that if actual rent is received, it would undoubtedly be an important factor for the taxing authorities to consider. In Commissioner of Income-tax v. Parbutty Churn Law [1965] 57 ITR 609 (Cal), it has been held that where a tenant has agreed to pay the stipulated rent, the annual letting value can be fixed at a higher figure only if the rent fixed is not genuine or had been fixed at a low. figure for some ulterior reason or other. In the instant case, it could not be stated that the rent hud been fixed by the assessec at Rs. 225 per mensem much less for some ulterior reason. Therefore, it is not open to the revenue to ignore the rent actually received by the assesses who could not claim more than that by reason of the lease under the deed dated December 20, 1935, subject to which alone he had purchased the property in 1961, and contend that the income should be computed on the basis of the annual value of the property which appears to have been arrived at by the local authority, probably on the basis of the rent for which the lessees, Messrs. Raval and Company, had sublet the properties to others.
13. Under these circumstances, we are of the opinion that the Tribunal was right in holding that the contention of the revenue that the income from the properties should be computed on the basis of the annual municipal value ignoring the actual rent received by the assessee was not acceptable. We accordingly answer the questions referred to us in both the cases against the revenue and in favour of the assessee. The assessee will have the costs of both the references. Advocate's fee Rs. 350 one set.