1981-VIL-26-SC-DT

Equivalent Citation: [1981] 131 ITR 435 (SC)

Supreme Court of India

Date: 18.08.1981

MRS. SHEILA KAUSHISH

Vs

COMMISSIONER OF INCOME-TAX, DELHI

BENCH

Judge(s)  : BAHARUL ISLAM. and P. N. BHAGWATI.

JUDGMENT

The judgment of the court was delivered by

BHAGWATI J.-These appeals by special leave raise a common question of law relating to the determination of annual value of a building for the purpose of chargeability to tax under the Income-tax Act, 1961, where the building is governed by the provisions of the rent control legislation but the standard rent has not yet been fixed. The facts giving rise to these appeals are few and may be briefly stated as follows,

The assessee constructed a warehouse in Delhi some time in 1961 at total cost of Rs. 4,13,000. The warehouse consisted of two portions on the ground floor, one on the north and the other on the south and also a mezzanine floor and a first floor. On 19th March, 1962, the assessee let out the whole of the first floor to the American Embassy at the rent of Rs. 5,810 per month and subsequently on 1st April, 1964, she let out the northern portion of the ground floor together with the mezzanine floor to the same tenant at the rent of Rs. 6,907 per month and on 7th December, 1964, the southern portion of the ground floor was let out to the same tenant at the rent of Rs. 6,640 per month. Thus, the entire warehouse was let out by the assessee to the American Embassy with different portions let out under different tenancies commencing on different dates. On 17th July, 1967, however, a new lease was entered into between the assessee and the American Embassy for the letting out of the entire warehouse at the rent of Rs. 34,797 per month and this lease came into effect from 1st April, 1968. The assessee thus started receiving rent at the rate of Rs. 34,797 per month in respect of the entire warehouse from 1st April, 1968.

The question arose in the course of the assessment of the assessee to income-tax for the assessment years 1969-70 and 1970-71, as to how the annual value of the warehouse should be determined for the purpose of chargeability to income-tax under the head " Income from house property ". Now, income from house property chargeable to tax is computable under s. 22 which provides that the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, shall be chargeable to income-tax under the head "Income from house property". Where, therefore, the assessee owns a building, the annual value of such building is chargeable to income-tax under the head "Income from house property" under s. 22. But the question immediately arises: how is the annual value to be determined? The answer is provided by s. 23 which lays down the mode of determination of annual value. Sub-section (1) of that section, as it stood at the material time, provided that " 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 let from year to year ". The assessee, therefore, claimed that on a proper construction of sub-s. (1) of s. 23, it was not the actual rent received by the assessee for the warehouse that was material for determining the annual value of the warehouse but the hypothetical amount for which the warehouse might reasonably be expected to let from year to year and since the Delhi Rent Control Act, 1958 (hereinafter referred to as the Rent Act), was applicable in the area in which the warehouse was situate, the warehouse could not reasonably be expected to let from year to year at a rent exceeding the standard rent determinable under the provisions of that Act. The ITO, however, took the view that the actual rent received by the assessee provided the most accurate and satisfactory measure of the amount for which the warehouse might reasonably be expected to let from year to year and the annual value of, the warehouse must, therefore, be taken to be the actual rent received by the assessee and he accordingly assessed the assessee to tax on the basis of the actual rent received by her. The assessee preferred an appeal to the AAC for each of the two assessment years challenging the correctness of the view taken by the ITO and contending that the annual value of the warehouse must be taken to be the standard rent determinable under the provisions of the Rent Act, but the appeals were unsuccessful and the determination of the annual value made by the ITO was affirmed. The Tribunal also took the same view on further appeals by the as and by a consolidated order dated 28th September, 1973, confirmed the assessments made on the assessee on the basis of the actual rent received by her. The Tribunal held relying on the decision of this court in M. M. Chawla v. J. S. Sethi [1970] 2 SCR 390 that, in the absence of fixation of standard rent, the agreed rent which is legally recoverable and not tainted by fraud, relationship or any other consideration must be taken to be the standard rent and hence the actual rent received by the assessee was rightly taken as the annual value of the warehouse. In the mean time, an application was made for the fixation of the standard rent of the warehouse by the new tenant who came to occupy the warehouse after the American Embassy vacated it and on this application, the Rent Controller by an order dated 13th March, 1973, fixed the standard rent at Rs. 34,848 per annum under the provisions of the Rent Act. The assessee, aggrieved by the order dated 28th September, 1973 made by the Tribunal, preferred two applications, one in respect, of each assessment year, seeking reference of five questions which, according to the assessee, arose out of the order of the Tribunal, but the Tribunal by a common order dated 26th February, 1974, rejected the applications on the ground that there was only one question of law which arose out of the order of the Tribunal but that was concluded by, the decision of this court in M. M. Chawla's case [1970] 3 SCR 390 and so far as the other questions were concerned, they were all questions of fact and hence not referable under s. 256(1) of the I.T. Act 1961. The assessee thereupon preferred two applications before the High Court of Delhi under s. 256(2) of the Income-tax Act, 1961, for directing the Tribunal to make a reference, but these applications also met with the same fate and on the same grounds, which found favour with the Tribunal, they were rejected by the High Court by judgment dated 1st February, 1978. This led to the filing of two petitions for special leave to appeal, one in respect of each assessment year, and these petitions were allowed and special leave granted by this court, giving rise to Civil Appeals Nos. 2110 and 2111 of 1978. Since there two appeals were directed against the judgment of the High Court refusing to call for a reference from the Tribunal, the only question which could have been considered by the court in these appeals was as to whether any questions of law arose out of the order of the Tribunal requiring to be referred to the High Court and, therefore, even if the assessee succeeded in the appeals there would not be an end to the litigation but the questions of law formulated by this court would, have to be referred by the Tribunal to the High Court and then the High Court would have to hear the reference and answer the questions referred to it. This would have delayed considerably the final determination of the questions of law arising out of the order of the Tribunal and it was therefore, agreed between the parties that the following two questions of law should be decided by the court in these appeals, since they admittedly arose out of the order of the Tribunal:

" 1. Whether, on the facts and in the circumstances of the case, the actual rent received by the assessee or the standard rent 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 Income-tax Act, 1961 ?

(2) Whether there was any material on record on which the Tribunal could hold that the receipt of Rs. 4,17,674 from the American Embassy would be reasonable rent for which the property might be let in spite of the fact that properties in the immediate neighbourhood let out to the Bank of Baroda and Indian Oxygen Company Ltd. were let at rents considerably lower ? " This court accordingly made an order directing that these two questions of law should be disposed of by the court directly, without calling for a reference from the Tribunal. However, since some doubt was felt whether this court could directly dispose of the two questions of law arising out of the order of the Tribunal without calling for a reference, the assessee by way of abundant caution preferred two petitions for special leave to appeal directly against the order of the Tribunal dated 28th September, 1973, and on these petitions, special leave was granted by this court and that is how Civil Appeal Nos. 1184-1185 of 1981 have come up for hearing before us along with C.A. Nos. 2110 and 2111 of 1978.

Though two questions have been formulated by this court as arising out of the order of the Tribunal dated 28th September, 1973, it is in the first which really formed the subject-matter of controversy between the parties since, in our view, that question has to be answered in favour of the, assessee, it is not necessary to embark upon, a consideration of the second question. So far as the first question is concerned, it stands concluded by the recent decision of this court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700; [1980] 2 SCR 607. There were three appeals decided by a common judgment in that case and the question which arose for determination in these appeals was as to how the annual value of a building should be determined for the levy of house tax where the building is governed by the provisions of the Rent Act, but the standard rent has not yet been fixed. One of these appeals related to case where the building was situate within the jurisdiction of the New Delhi Municipal Committee and was liable to be assessed to house tax under the Punjab Municipal Act, 1911, while the other two related to cases where the building was situate within the limit of the Corporation of Delhi and was assessable to house tax under the Delhi Municipal Corporation Act, 1957. The house tax under both statutes was levied with reference to the " annual value " of the building. The " annual value " was defined in both statutes in the same terms, barring a second proviso which occurred in s. 116 of the Delhi Municipal Corporation Act, 1957, but was absent in s. 3(1)(b) of the Punjab Municipal Act, 1911. This proviso was, however, not material as it dealt with a case where the standard rent was fixed under the provisions of the Rent Act, while in none of the cases before the court was the standard rent fixed in respect of the building involved in such case. According to the definition given in both statutes, the " annual value " of a building meant the gross annual rent at which the building might reasonably be expected to let from year to year. The controversy between the parties centered round the question as to what is the true meaning and effect of the expression " the gross annual rent at which such house or building ...... may reasonably be expected to let from year to year " occurring in the definition in both statutes. The argument of the Municipal authorities was that since the standard rent of the building was not fixed by the Controller under s. 9 of the Rent Act in any of the cases before the court and in each of the cases the period of limitation prescribed by s. 12 of the Rent Act for making an application for fixation of the standard rent had expired, the landlord in each case was entitled to continue to receive the contractual rent from the tenant without any legal impediment and hence the annual value of the building was not limited to the standard rent determinable in accordance with the principles laid down in the Rent Act, but was liable to be assessed by reference to the contractual rent recoverable by the landlord from the tenant. The municipal authorities urged that if it was not penal for the landlord to receive the contractual rent from the tenant, even if it be higher than the standard rent determinable under the provisions of the Rent Act, it would not be incorrect to say that the landlord could reasonably expect to let the building at the contractual rent and the contractual rent, therefore, provided a correct measure for determination of the annual value of the building. This argument was, however, rejected by the court and it was held that even if the standard rent of a building has not been fixed by the Controller under s. 9 of the Rent Act, the landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under the provisions of the Rent 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 by reason of expiration of the period of limitation prescribed by s. 12 of the Rent Act or the building is self-occupied by the owner. Therefore, 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-s. (1) of s. 23 of the I.T. Act, 1961, because these definitions are in identical terms and it was impossible to distinguish the definition of " annual value " in sub-s. (1) of s. 23 of the I.T. Act, 1961, from 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 s. 9 of the Rent Act and the period of limitation prescribed by s. 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-s. (1) of s. 23 of the I.T. 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-s. (1) of s. 23 of the I.T. Act, 1961, may be regarded as having received legislative approval, for, we find that by s. 6 of the Taxation Laws (Amendment) Act, 1975, sub-s. (1) of s. 23 has been amended and it has now been made clear by the introduction of cl. (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 cl. (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-s. (1) of s. 23 of the I.T. 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.

We must, therefore, address ourselves to the question as to what would be the standard rent of the warehouse determinable under the provisions of the Rent Act for the assessment years 1969-70 and 1970-71 the relevant accounting years being 1st April, 1968, to 31st March, 1969, and 1st April, 1969, to 31st March, 1970. Now, " standard rent " is defined in s. 2(k) to mean the standard rent referred to in s. 6 or where the standard rent has been increased under s. 7, such increased rent. Section 6 lays down different formulae for determination of standard rent according to different situations. Clause (A) of sub-s. (1) enacts provisions for determination of standard rent in the case of residential premises, but we need not refer to those provisions, since we are concerned in the present case not with residential premises but with a warehouse which constitutes non-residential premises. The provisions applicable for determination of standard rent in the case of non-residential premises are set out in cl. (B) of sub-s. (1) and there also, we are concerned only with sub-cl. (2) because the warehouse was admittedly let out for the first time after 2nd June, 1944. Since the standard rent of the warehouse was not at any time fixed under the Delhi and Ajmer Merwara Rent Control Act, 1947, or the Delhi and Ajmer Rent Control Act, 1952, the standard rent was liable to be determined under para. (b) of sub-cl. (2), which provides that " the rent calculated on the basis of seven and one-half per cent. per annum of the aggregate amount of the reasonable cost of construction and the market price of the land comprised in the premises on the date of the commencement of the construction " shall be taken to be the standard rent of the premises. There is a proviso to this paragraph which says that " where the rent so calculated exceeds twelve hundred rupees per annum, this clause shall have effect as if for the words 'seven and one-half per cent.' the words 'eight and five-eighths per cent.' had been substituted ". But all these provisions for determination of standard rent are subject to the overriding provision enacted in sub-s. (2) which provides in cl. (b), which is the clause applicable in the present case, since the warehouse was constructed on or after 19th June, 1955, that in the case of such premises "... the annual rent calculated with reference to the rent agreed upon between the landlord and the tenant when such premises were first let out shall be deemed to be the standard rent for a period of five years from the date of such letting out". Now, the first floor of the warehouse was first let out at the rent of Rs. 5,810 per month from 19th March, 1962, and, therefore, under cl. (B) of sub-s. (2), the rent of Rs. 5,810 per month would be the standard rent of the first floor of the warehouse for the period of five years from 19th March, 1962 up to 18th March, 1967, and there after the standard rent would have to be determined under para. (b) sub-cl. (2) of cl. (B) of sub-s. (1) and this latter figure would represent the standard rent of the warehouse determinable under the provisions of the Rent Act for the accounting years 1st April, 1968, to 31st March, 1969, and 1st April, 1969, to 31st March, 1970. The next portion of the warehouse let out to the American Embassy was the northern portion of the ground floor together with the mezzanine floor for the period of five years from 1st April, 1964, up to 31st March, 1969, under cl. (B) of sub-s. (2) and thereafter it would have to be determined under para. (b) of sub-cl. (2) of cl. (B) of sub-s. (1). Thus, for the accounting year 1st April, 1968, to 31st March, 1969, the standard rent of the northern portion of the ground floor and the mezzanine floor determinable under the provisions of the Rent Act would be Rs. 6,907 per month while for the accounting year 1st April, 1969, to 31st March, 1970, the standard rent would he that determinable under para. (b) of sub-cl. (2) of cl. (B) of sub-s. (1). That leaves the southern portion of the ground floor which was first let out to the American Embassy at the rent of Rs. 6,640 per month from 7th December, 1964, and according to cl. (B) of sub-s. (2), the standard rent of this portion would be Rs. 6,640 per month for the period of five years from 7th December, 1964, up to 6th December, 1969, and thereafter it would be determinable under para. (b) of sub-cl. (2) of cl. (B) of sub-s. (1). Thus, for the accounting years 1st April, 1968, to 31st March, 1969, and 1st April, 1969, to 6th December, 1969, the standard rent of the southern portion of the ground floor determinable under the provisions of the Rent Act would be Rs. 6,640 per month, while for the remaining portion of the accounting year from 7th December, 1969, to 31st March, 1970, the standard rent would be determinable under para. (b) of sub-cl. (2) of cl. (B) of sub-s. (1). The annual value of the warehouse for the purpose of chargeability to income-tax for the assessment years 1969-70 and 1970-71 would have to be determined on the basis of the standard rent of different portions of the warehouse determinable under cl. (B) of sub-s. (2), and para. (b) of sub-cl. (2) of cl. (B) of sub-s. (1) of s. 6 of the Rent Act as discussed above.

We accordingly answer question No. 1 in favour of the assessee by holding that the standard rent of different portions of the warehouse determinable under the provisions of the Rent Act, as indicated above, and not the actual rent received by the assessee from the American Embassy should be taken to be the annual value of the warehouse within the meaning of sub-s. (1) of s. 23 of the I.T. Act, 1961. On this view taken by us, the assessee did not press question No. 2 and hence it is not necessary to answer it. We allow the appeals of the assessee to this limited extent and direct that the revenue will pay the costs of the appeals to the assessee.

Appeals allowed in part.

 

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