Calcutta High Court
Commissioner Of Income Tax vs Hemraj Mahabir Prasad Ltd. on 10 August, 2005
Equivalent citations: (2005)199CTR(CAL)105, [2005]279ITR522(CAL)
Author: D.K. Seth
Bench: Dilip Kumar Seth, Maharaj Sinha
JUDGMENT D.K. Seth, J.
1. This appeal has been admitted on the following grounds :
"Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in directing the AO to adopt the gross rent received by the assessee being lessor from the let out property for the purpose of computing income from house property in place of much higher rent fetched by the lessee by sub-letting the same property ?"
Facts :
2. Before we embark upon the exercise to answer this question, we may briefly refer to the facts of the case in the context whereof we are supposed to answer the same. The assessee is the owner of the house property since leased out by the assessee to M/s HMP Services Ltd. (HMPS) for a period of 21 years. In terms of the said agreement for lease the assessee was to receive rent @ Rs. 21,000 p.m. The assessee has also received an interest-free loan of Rs. 50 lakhs from the lessee for the period of continuation of the lease. The assessee declared its income from the said house property at an annual rent of Rs. 2,52,000. Whereas, on the basis of the fact that the lessee HMPS let out the said house property at an annual rent of Rs. 18,33,000 to different tenants including a nationalized bank, the AO assessed the annual value at Rs. 18,33,000 as the income of the assessee from the said house property. Admittedly, HMPS is being assessed to tax in respect of its actual receipt of Rs. 18,33,000 under the head "income from other sources". It was also found that apart from the nationalized bank, which was paying a very high rate of rent, all the other tenants are paying rent at a rate that would justify the annual income at Rs. 2,52,000.
2.1 The order of AO, however, was reversed by the CIT(A) and this reversal was affirmed by the learned Tribunal, against the order of which the present appeal has been filed.
2.2 It may also be noted that for the earlier years the annual value of the house property was assessed at Rs. 2,52,000 right from the year 1987-88. This was followed in the assessment under challenge for the years 1991-92 and 1993-94.
Sec. 23(1): The principle :
3. According to Mr. Mallick, Clause (b) of Sub-section (1) of Section 23 of the IT Act, 1961, is applicable in this case and that the actual rent received shall be the income from the house property in case the annual value is less than the actual rent received. Therefore, according to him, the annual value is to be determined. Clause (a) prescribes that a house, which has not been let out, is to be valued at the annual rent expected from the house property if it were let out. According to Mr. Mallick this is to be decided on the basis of the market rate of the rent available. In the present case there is a comparable unit in respect of the selfsame house out of which the HMPS is getting the annual rent of Rs. 18,33,000. Therefore, the valuation was rightly assessed by the AO. He relied on the decision in the matter of Babulal Raj Garhia, In re (1936) 4 ITR 148 (Cal) at p. 150; and Liquidator, Mahmudabad Properties Ltd. v. CIT since affirmed (sic) in CIT v. H.P. Sharma (1980) 122 ITR 675 (Del) and Smt. Protima Roy v. CIT .
3.1 In our view, the decision in Smt. Protima Roy (supra) by a Division Bench of this Court proceeded in a situation where the leasing out was a facade and not a genuine one and, therefore, in the said decision the rent shown in the lease deed was ignored and the property was supposed to be assessed on the basis of bona fide annual value as determined under Section 23 of the Act being the. sum at which the property might reasonably be expected to let from year to year. This decision would not help Mr. Mallick in view of the fact of the present case, where the genuineness of the lease was not questioned or doubted and on the other hand the lease was held to be legal and valid.
3.2 The provisions contained in Section 23 of the IT Act, 1961 are identical with the provisions contained in Section 174 of the Calcutta Municipal Corporation Act, 1980 (CMC Act). For the purpose of arriving at the annual value of a holding (building), the Courts have always adopted the process of municipal valuation as identical with the process to be followed under Section 23. In Mrs. Sheila Kaushish v. CIT , the standard rent determined under the provisions of the Delhi Rent Control Act was held to be the annual value of the building according to the definition given in Section 23(1) of the Act as it stood prior to its amendment in 1975 and not the actual rent received by the landlord from the tenant.
3.3 By the 1975 amendment, Clause (b) was inserted in Section 23(1) postulating a case in which a building might reasonably be expected to let from year to year may be less than the actual amount received or receivable by the landlord from the tenant. In the said decision in Mrs. Sheila Kaushish (supra), the question, whether the actual rent received by the assessee or the standard rent determined under the Delhi Rent Control Act should be taken to be the annual value of the property within the meaning of Section 23 of the Act, was held to be concluded and covered by the decision in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee .
3.4 In the said decision in Dewan Daulat Rai Kapoor (supra) the apex Court had held :
"In either case, according to the definition of "annual value" given in both statutes, the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant would constitute the correct measure of the annual value of the building. The Court pointed out that in each case the assessing authority would have to arrive at its own figure of the standard rent by applying the principles laid down in the Rent Act for determination of the standard rent and determine the annual value of the building on the basis of such figure of the standard rent. The Court, on this view, negatived the attempt of the municipal authorities in each of the cases to determine the annual value of the building on the basis of the actual rent received by the landlord and observed that the annual value of the building must be held to be limited by the measure of the standard rent determinable on the principles laid down in the Rent Act and it could not exceed such measure of the standard rent. Now, this was a decision given on the interpretation of the definition of "annual value" in the Delhi Municipal Corporation Act, 1957, and the Punjab Municipal Act, 1911, for the purpose of levy of house tax, but it would be equally applicable in interpreting the definition of "annual value" in Sub-section (1) of Section 23 of the IT Act, 1961, because these definitions are in identical terms and it was impossible to distinguish the definition of that term in the Delhi Municipal Corporation Act, 1957, and the Punjab Municipal Act, 1911. We must, therefore, hold, on an identical line of reasoning, that even if the standard rent of a building has not been fixed by the controller under Section 9 of the Rent Act and the period of limitation prescribed by Section 12 of the Rent Act for making an application for fixation of the standard rent having expired, it is no longer competent to the tenant to have the standard rent of the building fixed, the annual value of the building according to the definition given in Sub-section (1) of Section 23 of the IT Act, 1961, must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant. This interpretation which we are placing on the language of Sub-section (1) of Section 23 of the IT Act, 1961, may be regarded as having received legislative approval for, we find that by Section 6 of the Taxation Laws (Amendment) Act, 1975, Sub-section (1) of Section 23 has been amended and it has now been made clear by the introduction of Clause (b) in that Sub-section that where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum for which the property might reasonably be expected to let from year to year, the amount so received or receivable shall be deemed to be the annual value of the property. The newly added Clause (b) clearly postulates that the sum for which a building might reasonably be expected to let from year to year may be less than the actual amount received or receivable by the landlord from the tenant. We are, therefore, of the view that in the present case the standard rent of the warehouse determinable under the provisions of the Rent Act must be taken to be annual value within the meaning of Sub-section (1) of Section 23 of the IT Act, 1961, and the actual rent received by the, assessee from the American Embassy cannot of itself be taken as representing the correct measure of the annual value."
3.5 In Dr. Balbir Singh v. Municipal Corporation of Delhi , it was held that even if the assessee was able to show by proof or prevailing circumstances, such as the nature of the building, its situation or state of repair, that he could not reasonably expect to get from a hypothetical tenant an amount of rent up to or equal to even the standard rent, then and in that event, the ratable value of the building need not still be determined at the standard rent. Our High Court in CIT v. Kishanlal and Sons (Udyog) (P) Ltd. by a Division Bench, following Dr. Balbir Singh (supra), held that there may be cases where the lessor may not get the amount of rent expected as standard rent since the assessee was liable to pay tax on the income from the house property even if the house is kept vacant. Therefore, it would be the actual rent received, if it is less than the standard rent, would be the valuation under Section 23(1)(a). In the said decision it was held that because of the presence of Clause (b), Clause (a) of Section 23(1) must refer to, and only to, vacant property, which was not let out. If a property is actually let out, then the expectation of its letting out becomes an actual reality, and the proof of expectation, can be made in the best manner possible, by producing evidence of the rental which is being actually received by the assessee. In the process this decision followed Mrs. Sheila Kaushish (supra) by the apex Court. The reasoning to support this finding, as expressed, was that in considering the annual value of property for any assessment year, that assessment year, as far as practicable, should be taken in isolation, as if that assessment year stood by itself. Property which is already tenanted at the beginning of the assessment year, cannot be expected to be let from year to year at any figure higher than the rent which is being produced actually by the property in question. Clause (a) of Section 23(1) of the IT Act, 1961, applies not only to property which is vacant and not under any lease deed, but is also applicable to property which is already tenanted and subject to the continuing fixed rental; but in the latter case, the property is to be treated as tenanted property; the word "vacant" is not to be read into the section, nor any notion of the property being treated as vacant. Clause (b) of Section 23(1) refers to a situation where the rent received or receivable by the assessee is higher than the expected market rental value of the property itself. But this does not mean that because of the presence of Clause (b), Clause (a) of Section 23(1) must refer to, and only to, vacant property, which is not let out. If a property is actually let out, then the expectations of its letting out become an actual reality and the proof of the expectation, can be made in the best manner possible by producing evidence of the rental which is being actually received by the assessee. In the absence of any finding that the deed was a sham deed, created for the purpose of showing the property as tenanted, though in reality, a vacant property, and the learned Tribunal having accepted the deed as genuine, since the assessee was not receiving the higher standard rent, the expected rent of the property according to Section 23(1)(a) was the rent actually received, for the simple reason that even if the standard rent were assumed to be higher, yet the assessee was not receiving that higher standard rent.
3.6 Another Division Bench of this Court in CIT v. India Co. Ltd. , in a case where none of the agreements was disbelieved or were held to be collusive, the actual receipt by the assessee was held to be the basis of consideration by the Tribunal for the purpose of assessing the income from the house property. The decision in Protima Roy (supra) and Smt Pratima Roy v. CIT were distinguished in the said decision on the ground that in that decision the agreement was found to be ingenuine, which was not the case there. Thus, the two decisions in Protima Roy (supra) and Smt. Pratima Roy (supra) cited by Mr. Mallick would not be of any assistance in the present case where the agreement was held to be genuine.
3.7 Whether the lessee received higher amount or not is wholly immaterial for the purpose of determining the income from the house property assessed at the hands of the lessor/assessee. Section 23(1) as it stands has two aspects. One is in respect of vacant house, which is not let out, where a notional annual value is to be determined as being expected to be the rent if it were let out. In such case we do not think that there would be any difficulty in determining the income out of such house property on the basis of standard rent or the municipal valuation as the case may be. Since the provisions of Section 23(1) are identical with those of Section 174 of the Calcutta Municipal Corporation Act, 1980 (CMC Act), therefore, it would not be unreasonable to assess the valuation under Section 23(1) of the house property on the basis of the annual value determined under the CMC Act.
The present case : The rent received by the sub-lessee : Whether a determining factor:
4. Admittedly in this case the annual value of the building has been assessed under the CMC Act at an amount less than the annual rent actually received by the assessee. Since this property has been let out, therefore, it would be governed under Clause (b) of Section 23(1) where it is provided that in case where the house is let out the annual value would be the amount of rent actually received. In this case it is not necessary to lay down as to what would happen if the actual receipt is less than the annual value determined under the Municipal Act, in view of the fact that in this case the actual rent received is more than the annual value determined under the Municipal Act. On a plain reading of Section 23(1)(b) the actual rent received by the assessee would be the determining factor for assessment of the income from the house property on account of the fact that such actual receipt is higher than the annual value determined under the Municipal Act.
4.1 If the property is let out to a tenant who sublets it and gets a higher rent the same cannot be a determining factor for assessing annual value under Section 23(1) at the hands of the lessor where the creation of the tenancy or the lease is found to be genuine. Such a valuation has since been consistently accepted by the Department. There seems to be no reason for deviation from the consistent view taken by the learned Tribunal on the alleged ground that the lessee received a higher amount of rent. The interpretation has to be made on the reasoning that even if a person does not earn any income on account of the house not being let out he is still liable to pay income-tax on the notional value under Clause (a). Inasmuch as if it is (not) let out then it would not be the actual rent received but would be a notional rent. The word "actual rent received" would be the rent received by the assessee actually, not the rent received by the lessee, which the assessee does not receive actually. We cannot overlook the existence of the expression 'actual receipt' and interpret the same to mean a notional receipt. If we hold so, it would give an uncannalised, unbridled and unguided power on the AO to determine the valuation on any imaginary amount though the lessor does not receive such amount. It is the income from the house on which tax is charged. It does not mean what he would have earned if he were in the position of the lessee and had the opportunity to get a better rent.
4.2 Even then, in the present case, it is not that the IT Department was not realizing tax. on income from the house property out of the rent received by the lessee. The rent received by the lessee was also being assessed at the hands of the lessee as income from other sources. Therefore, the IT authority cannot tax the same amount as income at the hands of the assessee.
Interest-free loan : Whether a factor for determining income from house property: 5. Now coming to the question in relation to the advance or interest-free loan received by the lessor/assessee from the lessee free of interest during the continuance of the lease. Whatever may be the relation between the parties, this amount is a loan or advance and not a rent. Whether there is any agreement to waive the interest or not is a separate question. It may be a subject-matter of Section 68 or Section 69 of the IT Act. The agreement to waive interest would not be a factor for determining the annual valuation of the house property under Section 23. Section 23 deals with the rent receivable or actually received where the house is let out.
The alleged equivalent interest since waived cannot be added to the rent. The rent is recoverable from the tenant as agreed between the parties. The alleged interest since waived cannot be treated as a part of the rent. The lessor can never recover, in case of dispute, the alleged interest since waived on the advance, as part of the rent. As such, the alleged interest, since waived, does not form part of the income from the house property determinable under Section 23(1).
5.1 Similar question arose in CIT v. Satya Co. Ltd., (1994) 75 Taxman 193 (Cal), a Division Bench of this Court, dealing with the identical question, held that when the annual value is determined under Section 23(1)(a) with reference to the fair rent then no further addition can be made to such value. The fair rent takes into consideration everything. The notional interest on the deposit is not the actual rent received or receivable. Under Section 23(1)(b) only the actual rent received or receivable can be taken into consideration and not any notional advantage. The rent is an actual sum of money payable by the tenant for use of the premises to the landlord. Specific provisions have been made in the Act for including perquisite 01 benefit sought to be treated as income in the definition of the income under Section 2(24) of the Act. Specific provisions have also been made under different heads for adding such benefits or perquisites as income while computing income under those heads, e.g., salary, business. The computation of the income under the head 'House property' is on a deemed basis. The tax has to be paid by reason of the ownership of the property. Even if one does not incur any sum on account of repairs, a statutory deduction therefor is allowed and where on repairs expenses are incurred in excess of such statutory limit, no deduction for such excess is allowed. The deductions for municipal taxes and repairs are not allowed to the extent they are borne by the tenant. However, even such actual reimbursements for municipal taxes, insurance, repairs or maintenance of common facilities are not considered as part of the rent and added to the annual value. Accordingly, there can be no scope or justification whatsoever for making any addition for any notional interest for determining the annual value.
5.2 Any benefit or advantage derived from the interest-free advance by way of saving of interest or of earning interest or making profits by investing such deposit would be available in computing the income of the assessee under other heads. Such notional interest can never be added to the rent in the absence of any provision to this effect in Sections 22 or 23. Schedule III to the WT Act, 1957, inserted by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, lays down the method of valuation of different assets including immovable property. Rule 5 of Part 'B' of Schedule III of the said Act lays down the manner in which the gross annual rent in relation to an immovable property is to be determined. There it is statutorily recognized that the gross annual rent means where the property is let, the amount received or receivable by the owner as annual rent or the annual value assessed by the local authority in whose area the property is situated for the purpose of levy of property tax or any other tax on the basis of such assessment, whichever is higher. In this rule an Explanation is added to define the meaning of the expression 'annual rent'. Proviso (iii) to the said Explanation reads as under :
"Provided that in the following cases, such actual rent under sub-Clauses, (a) and (b) shall be increased in the manner specified below :
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(iii) where the owner has accepted any amount as deposit (not being advance payment towards rent for a period of three months or less), by the amount calculated at the rate of 15 per cent per annum on the amount of deposit outstanding from month to month for the number of months (excluding part of a month) during which such deposit was held by the owner in the previous year, and if the owner is liable to pay interest on such deposit, the increase to be made under this clause shall be limited to the sum by which the amount calculated as aforesaid exceeds the interest actually paid:"
5.3 There is no such corresponding provision in Section 23(1). In the absence of any such corresponding provision in Section 23(1), the notional interest on the interest-free advance cannot be included, within the component of income from house property. Inasmuch as Court cannot read something in the statute when there is none.
5.4 Having regard to the principles enunciated by us as discussed above, the reasoning given in the decision in Satya Co. Ltd. (supra) appears to be correct and justified and we are inclined to follow the same. The notional interest on interest-free loan would neither be a determining factor nor a component to be taken into consideration for determining the annual value for assessing the income from the house property in terms of Section 23(1) of the IT Act, 1961.
Conclusion :
6. In order to determine the annual value of the house property for the purpose of assessing income from house property under Section 23(1)(a) where the house is not let out, the standard rent determined under the Rent Act or the annual value determined under the CMC Act shall be the basis.
6.1 But where the house is let out and the actual rent received is higher than the standard rent or the municipal valuation, then such actual rent received shall be the basis for assessing the income from house property under Section 23(1)(b).
6.2 The receipt of higher rent by the lessee would not be a factor for determining the annual value and thus the rent received by the lessee cannot be a factor for assessing the income from house property under Section 23(1)(b) at the hands of the lessor assessee.
6.3 The notional interest since waived on the interest-free loan not forming part or component of the rent and being irrecoverable from the lessee as rent in case of dispute, the same can never be a factor to be taken into consideration for determining the actual rent received for the purpose of Section 23(1)(b).
Order :
7. In the result, the appeal fails and is accordingly dismissed. The order passed by the learned Tribunal is hereby affirmed. We answer the question in the negative.
7.1 However, there will be no order as to costs.
Maharaj Sinha, J.
8. I agree.