Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Desai & Sons. on 20 April, 1989
Equivalent citations: [1989]30ITD288(AHD)
ORDER
Per Shri R. M. Mehta, Accountant Member - The following effective ground is ground is raised in this appeal preferred against the order of the AAC :
"On the facts and in the circumstances of the case, and in law, the learned AAC erred in allowing deduction u/s. 23(1) (b) in respect of 26 separate residential units."
2. The respondent in this case is an Association of Persons deriving income from property. The asset. year involved is 1979-80 with the previous year ending 31-3-79. The AOP came into existence with effect from 1-9-77. It started the construction of a property at village Jalalpore, Navsari Distt. Bulsar, in the month of September 1977 and completed the same in the month of April 1978. In the statement of income attached with the return the assessee claim a deduction of Rs. 57,200 under the proviso to section 23(1) of the IT Act, 1961. However by means of a revised working the claim was reduced to Rs. 36,200.
3. The ITO rejected the claim put forward by the assessment and allowed the same to the tune of Rs. 2,400 only. He treated the entire building as one residential unit as against the assessees claim that each of the rooms occupied by independent tenants on the four floor be treated as separate residential units. The relevant reasons recovered by the ITO in rejecting the assessees claim were as under :
"In this connection it is ascertained that the said building was rented to 26 tenants and the property bears only one Census Number of the Gram Panchayat and that there is common passage of or coming and going on first and second floor. The water is being taken out from tube well with the help of Water pump and being stored in storage tank on the top of the building and therefrom water is supplied to each 1 and moreover., the property is ranted to diamond cutters who are running ghanties of diamond cutting and polishing industry in each room and therefore, entire building was one commercial-cum-residential unit and the sub-clause (i) & (ii) of clause (b) of provision of section 23(1) (b) also indicates that in order to constitute a residential unit for the purpose of the section it must have a separate annual value and finds support from the decision of the Kerala High Court in the case of CIT v. Mrs. Elizabeth Varghese [1981] 132 ITR 605 (Part 5) and so I hold that the entire building was one residential unit and not 26 residential unit and the assessee was not entitled to the deduction permissible under the proviso to section 23(1) (b) in respect of each unit and therefore, the claim of the assessee is rejected."
4. In the course of the proceedings before the first appellate authority the assessee sought to distinguish the decision of the Honble Kerala High Court in the case of CIT v. Mrs. Elizabeth Varghese [1981] 132 ITR 605 which had been relied upon by the ITO in rejecting the assessees claim. It was contended that the building had 26 separate units and each of these units had a separate Electric meter and an independent entrance. This was in contradistinction to a single electric meter in the case before the Kerala High Court. The assessee also furnished a list of the tenants along with the Meter Numbers during the course of the hearing as also a certificate from the Gram Panchayat in which it was stated that the building was occupied by 25 tenants. In other words, the assessee canvassed for the acceptance of the claim as made by him during the course of the assessment proceedings viz. Rs. 36,200. The AAC upheld the claim of the assessee on the following lines :
"I have considered the arguments of the appellants counsel. It is seen that the building has ground plus 3 floors with 26 units. Each unit is provided with separate electric meter. Provision for supply of water is made by the owner of the buildings. Appellant has filed a list of tenants and it is also supported by a certificate from the Surpanch of Gram Panchayat. In the case of CIT v. Mrs. Elizabeth Varghese [1981] 132 ITR 605 (Ker) on which the ITO has relied, the building was being used as lodge with common entrance and one electric meter and one water connection. The ITO had allowed deduction in respect of one unit treating the entire building as a composite unit. However, there were separate blocks occupied by the tenants on monthly tenancy basis. Each block was a self contained unit. In Kerala High Court decision, it was held that the expression "building comprising on or more residential units" occuring in proviso to section 23(1) has to be understood as signifying composite structures containing a plurality of residential or dwelling units, such as flats. This condition is fulfilled by the various units in the building owned by the appellant. I therefore, direct that the ITO should allow deduction of Rs. 36,200 claimed under proviso to section 23(1) (c) in respect of units."
5. The learned D. R. Vehemently supported the order of the ITO and reiterated arguments on lines identical to those and had weighed with the ITO in rejecting the assessees claim. According to him the separate room sin the building could not be classified as independent residential units within the meaning of the proviso of section 23(a) (b). It was submitted that mere letting of each of these rooms to separate tenants would not convert them into separate residential units for purposes of claiming separate deduction under the proviso to section 23(1) (b). He placed strong reliance on the decision of the Kerala High Court in the case of Mrs. Elizabeth Varghese (supra) with the further submission that the facts of that case and the present one were identical.
6. At this stage he made a submission to the effect that even otherwise the assessee was not entitled to any deduction what so ever since the property in question had been rented out for commercial purposes to persons who were engaged in cutting and polishing of diamonds. It was stated that the benefit of the proviso to section 23(1) (b) was only available to "residential" properties and nor "commercial".
7. The learned counsel for the assessee on the other hand strongly supported the order of the AAC. At the outset he invited out attention to the order of the ITO for the submission that even the assessing officer had treated the proportion question as a "residential" one and had allowed a deduction of Rs. 245400 u/s 23(1) (b). It was submitted that the issue sought to be raised by the D. R. for the first time before the Tribunal was never the subject matter of dispute at any stage either before the ITO or before AAC. According to him even if the position sought to be pointed out by the DR was assumed to be correct then the matter would be fully covered in favour of the assessee by the decision of the Honble Andhra Pradesh High Court in the case of Dr. J. V. Desai v. CIT [1985] 154 ITR 828 wherein it had been held that as long as the property was a residential one at the time of letting out it would be immaterial as to how the tenant uses the property whether for residential or commercial purposes. The claim for deduction u/s 23(1) (b) could not be denied on that score, alone. It was his further argument that the tenants of the building under consideration used their separate portions for residential purposes as also the carrying out of the activity of polishing and cutting diamonds. This according to him did not convert the property into a "commercial" one.
8. It was further submitted that since the property under consideration came under the Gram Panchayat the levy of property tax came to be worked out under the provisions of the Gram Panchayat Act read with the rules framed thereunder. According to the learned counsel the property tax was levied on the basis of the "capital value" of the building as a whole and not on the basis of "annual letting value" of each separate unit. He also invited our attention to the decision of the Kerala High Court (supra) for the submission that there were distinguishing features inasmuch as in the present case separate electric meters had been provided to each of the tenants whereas in that case there was only one electric meter for the entire building. It was also submitted that in the case before the Honble Kerala High Court the A. L. V. had been worked out for the entire building and not separately for each of the rooms which had been given on rent to different persons. That, according to him, was the case of a "lodge" as against the present case which was the case of a residential property. According to the learned counsel a separate A. L. V. was not possible for each of the units in the present case since the Gram Panchayat had itself provided that the property tax was to be calculated on the basis of capital value and there was no system of calculating the A. L. V.
9. It was further submitted that in any building of the type like the present one there had to be certain portions such as staircase and passages on different floors which were subjected to common use but this according to him would not make the separate residential units into one as had been done by the ITO. He also made a statement at the bar to the effect that in the subsequent asst. years the ITO had accepted the assessees claim although in assessments under section 143(1) of the Act. He finally made an impassioned plea for the confirmation of the order of the AAC.
10. We have examined the rival submissions and have also perused the orders of the lower authorities. The paper book furnished by the assessees counsel has also been duly considered as also the authorities cited at the bar. At the outset we may refer to the proviso to section 23(1) which is presently the subject matter of interpretation before us. This is as follows :
"in the case of a building comprising one or more residential units..........
(1) in respect of any residential unit............................. So, however that the income in respect of any residential unit ................. is in no case a loss.
(this is deleted w.e.f. 1-4-1984)."
From the aforesaid provisions it would be quite clear that the terms building and residential unit are to be given different meanings and are to be treated as two separate objects. The property in question viz. "RAVI KUNJ" has the following distinct features :
(1) Rooms
- Ground floor 5 First floor 8 Second floor 8 Third floor 5 Total 26 (2) All rooms have a separate independent entrance and it is possible to come in and go out without disturbing the other tenants. In any case there is nothing on record to show that there are inter-connecting doors between the rooms.
(3) All rooms have separate electric meters to record the consumption of electric power by each tenant.
(4) Each room is given on rent to separate tenants.
(5) There is a common stair-case for going to the various floors.
(6) Bathrooms and lavatories have been provided on the ground floor and these are 26 in number as per the valuation report of the approved valuer appended at pages 8 to 21 of the paper book (7) The water is stored in a large tank (capacity 16000 litres) as the terrace with the help of a water pump from a tube well and provided in the bathrooms and lavatories.
(8) The tax is levied on the entire building as a single unit by the Gram Panchayat since it does not take into account the A. L. V. of each residential unit separately but levies tax on the capital value of the entire building.
11. It is apparent that there are distinguishing features in between the aforesaid facts and the facts of the case before the Honble Kerala High Court (supra). Before we examine these it would be relevant to record the following observations of their Lordships at page 609 of the report :
"Clauses (a) and (b) of the proviso will, in our opinion, take within their ambit only buildings comprising a plurality of dwelling units like flats, which by themselves will constitute houses or homes. Each such dwelling unit will ordinarily be a separate house in itself with its own electricity meter and water supply connection."
In the present assessees case the rooms on each of the floors have a separate independent entrance, separate tenants, separate electric meters and separate bathrooms and lavatory facilities. The distinguishing features which is noted straight away is the electric meter which was only on for the whole building in the matter before the Honble Kerala High Court.
12. Another distinguishing feature is the situation of the property. In the Kerala case although the situation is not given it is mentioned that the same fell within the jurisdiction of the Municipal Corporation. The natural presumption then is that the property is located in a big city or town. As against this the present assessees property is located at "Jalalpore Village, Navsari, District Bulsar falling within the jurisdiction of the Gram Panchayat for all purposes including property tax.
13. The third distinguishing features is the method of calculating property tax. Their Lordships have observed "that in order to constitute a residential unit for the purpose of the section, it must have a "separate annual value". As there was no such "separate annual value" but the entire building was registered as a single unit with the Municipal Corporation the claim was rejected. In the present matter however the assessment of property tax is done on a separate footing namely the consideration of the capital value of the entire building and not the A. L. V. In other words it was open in the Kerala case to ask for a separate A. L. V. for each of the units but not so in the present assessees case since the A. L. V. on the building/separate units ways never the criteria for levying property tax,. We have according to view the position in the light of this special feature of the case before us viz. the "capital value" of the property and not the "annual value".
14. A word at this stage about it the intent of the Legislature in introducing the aforesaid proviso which was initially mooted in the 1922 Act by the Finance Bill, 1961. The Finance Minister in his Budget Speech observed :
"In order to stimulate construction of housing for the use of persons in low income group, I propose to provide for a deduction of Rs. 600 per annum from the annual value of new residential units completed after 31st March 1961. This concession will be available for a period of three years only from the date of completion."
The same intent was manifest by the corresponding provision in the 1961 Act. These aspects have been duly taken note of by their Lordships of the Kerala High Court.
15. It is an accepted fact in the present case that the various portions of the building are occupied by persons who are engaged in the activity of cutting and polishing diamonds. They are not only undertaking these activities in their respective units but also residing therein. These persons apparently fall in the "low income" group.
16. In the case of a building in a well developed urban area such as a city or a big town the "residential unit/units" may be in the form of a flat or flats with more than one room and with attached bathroom etc. and obviously a separate door to each such flat or flats. However even in such modern structure there would be a common stair-case and a passage or lobby leading to the separate flat or flats. Even the water supply to each of the flats would be from pipes which are connected to over head water tanks either jointly or singly for each flat or set or flats.
17. In the case of the present building as well there is a common stair-case for going to the rooms on the upper floors and there are balconies as well through which the tenants have to pass before going in or coming out of their respective units. The commonness finishes there since each room occupied by a tenant is an independent unit in itself where he works and resides. His doing so does not disturb anybody else and he goes in and out as he pleases.
18. The water supply system is also a normal one when compared to the ones existing in big towns and cities. It has in fact been stated by the assessee that the water facility has been provided as a special measure to attract tenants since the Gram Panchayat does not provide any such facility.
19. In the final analysis we would hold that each room in the building "RAVI KUNJ" occupied by independent tenants would constitute a "residential unit" for purpose of section 23(1) and its provisos. The order of the ARC granting the requisite relief to the assessee (quantum not disputed) is hereby approved.
20. Before we part with this appeal we would like to refer to the argument advanceed before us by the DR to the effect that the assessee is not entitled to any benefit whatsoever since the property is being used for "commercial" purpose by the tenants and not "residential". This point according to us is duly taken care of by the decision of the Honble Andhra Pradesh High Court in the case of Dr. J. V. Desai (supra) where in it was held that the user by the tenant was not relevant as long the property was a residential one when let out. This test stands satisfied in the present case since not apply only had to the ITO himself allowed a deduction of Rs. 2400 u/s. 23(1) to the assessee by treating the entire building as one residential unit but the explanation given by the learned counsel to the use of each unit for commercial cum- residential purposes appearing to be a plausible one.
21. In the result the appeal is dismissed.