Shiela Kaushish Vs. Commissioner of
Income-Tax, Delhi [1981] INSC 141 (18 August 1981)
BHAGWATI, P.N.
BHAGWATI, P.N.
ISLAM, BAHARUL (J)
CITATION: 1981 AIR 1729 1982 SCR (1) 309 1981
SCC (4) 121 1981 SCALE (3)1225
CITATOR INFO :
R 1982 SC 16 (2)
ACT:
Income Tax Act, 1961, 5. 23(1)-Income from
house property-Chargeability to income tax-"Annual value" of
building-Determination of-Whether standard rent determinable under provisions
of Rent Act or actual rent received by landlord from tenant.
Words and Phrases-"Annual
Value"-Meaning of-Income Tax Act, 1961, S. 23(1).
HEADNOTE:
The appellant-assessee constructed a
warehouse and let out different portions under different tenancies commencing
on different dates. Later on a new lease was entered into between the assessee
and her tenant for letting out of the entire warehouse and the assessee started
receiving rent at the rate of Rs. 34,797/- per month in respect of the entire
warehouse from 1st April, 1968.
In the course of assessment of the assessee
for the assessment years 1969-70 and 1970-71 the question arose 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". The assessee claimed before the Income. Tax officer that on a
proper construction of sub-section (I) of section 23, it was not the actual
rent received by her from 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 be let from year to year, and since the Delhi
Rent Control Act 1958 was applicable in the area in which the warehouse was
situate, the warehouse could not reasonably be expected to be let from year to
year at a rent exceeding the standard rent determinable under the provisions of
that Act. The Income Tax officer rejected this claim and 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.
The assessee's appeals for each of the two
assessment years to the Appellate Assistant Commissioner were unsuccessful. The
Income-Tax Tribunal took the same view on further appeals by the assessee and
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.
310 The assessee's applications to the
Tribunal as well as to the High Court for the making of a reference under
section 256 of the Income-Tax Act, 1961 were also dismissed.
Allowing the appeals to this Court,
HELD: 1. The annual value of the building
according to the definition given in sub-section (l) of section 23 of the
Income-Tax Act, 1961 is the standard rent determinable under the provisions of
the Rent Act and not the actual rent received by the landlord from the tenant.
[316 H-317 A]
2. In Dewan Daulat Rai Kapoor etc. v. New
Delhi Municipal Committee [1980] 2 S.C.R. 607 a decision of this Court 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, it was held that even if the standard rent of a building has not
been fixed by the Controller under section 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 equally so whether the building has been let out to a tenant who
has lost his right to apply for fixation of standard rent by reason of
expiration of the period of limitation prescribed by section 12 of the Rent Act
or the building is self-occupied by the owner, and that the standard rent
determinable under the provisions of the Rent Act and not the actual rent
received by the landlord would constitute the correct measure of the annual
value of the building. [314 H, 316 A-C]
3. This decision though 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, would be equally applicable in interpreting the definition of
'annual value' in sub-section (I) of section 23 of the Income-Tax Act, 1961
because these definitions are in identical terms and it is impossible to
distinguish the definition of 'annual value' in sub section (1) of section 23
of the Income Tax Act, 1961 from the definition of that term in the Municipal
Corporation Act 1957, and the Punjab Municipal Act, 1911.
In the instant case 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 rents of different portions of the warehouse determinable under clause
(b) of sub-section (2) and paragraph (b) of sub-clause (2) of clause (B) of
sub-section (I) of section 6 of the Rent Act.
[319 C]
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 2110 and 21 1 1 of 1978.
Appeals by special leave from the judgment
and order dated the 1st February, 1978 of the Delhi High Court in I.T.C. Nos.
14 and 15 of 1974.
311 WITH Civil Appeal Nos. 1184-85 of 1981.
Appeals by special leave from the order dated
the 28th September, 1973 of the Income Tax Appellate Tribunal Delhi Bench in
I.T.A. No 386 and 387 of 1972-73.
Soli J. Sorabjee, T.A. Ramachandran, Parkash
Sarup, Ravinder Narain and Talat Ansari for the Appellant in all the Appeals.
P.A. Francis, S.P. Nayar and Miss A.
Subhashini for the Respondent in all the Appeals.
The Judgment of the Court was delivered by C
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 ID 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 a 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.
5810/- 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. 6907/- per month and on 7th December, 1964 the
northern portion of the ground floor was let out to the same tenant at the rent
of Rs. 6640/- 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
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
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 312 purpose of chargeability to income tax under the head "Income from
house property". Now income from house property chargeable to tax is
computable under section 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 section 22. But the question
immediately arises: how is the annual value to be determined ? The answer is
provided by section 23 which lays down the mode of determination of annual
value. Sub-section (l) 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-section (I) of section 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 Income Tax
officer 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
Appellate Assistant Commissioner for each of the two assessment years challenging
the correctness of the view taken by the Income- tax officer 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 Income-tax
officer was affirmed. The Tribunal also took the same view on further appeals
by the assessee 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. Chawala v. J S. Sethi, [1970] 2 SCR 390 that, in the 313 absence of
fixation of standard rent, the agreed rent which is legally A 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 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. 34,848.00 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
(supra) and so far as the other questions were concerned, they were all
questions of fact and hence not referable under section 256 (1) of the Income-
tax Act, 1961. The assessee thereupon preferred two applications before the
High Court of Delhi under section 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 these two appeals were directed against the judgment of the High Court
refusing two 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 ques-
314 tions 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 he reasonable rent for which the property might be let
in spite of the fact that properties in the immediate neighborhood 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
directed 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 the first which really formed the subject matter of controversy
between the parties and 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 etc.
etc.
v. New Delhi Municipal Committee.(1) 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 315 building should be determined for 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 a 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 section 116 of the Delhi Municipal Corporation Act, 1957, but was
absent in section 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. L. 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
section 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 section 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 hower 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 section
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 section 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 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, .911 for
the purpose of levy of house tax, but it would be equally applicable in
interpreting, the definition of 'annual value' in sub-sec.
(1) of section 23 of the Income-tax Act,
1961, because these definitions are in identical terms and it is impossible to
distinguish the definition of 'annual value' in sub-sec. (I) of section 23 of
the Income-tax Act, 1961 from the definition of that term in the Municipal
Corporation Act, 1957. and the Punjab Municipal Act, 1911. We must therefore
hold, on an indentical 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 (l) of section 23 of the Income-tax Act, 1961 must be held to be
the standard rent determinable under 317 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 sec. 23 of the
Income-tax 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 (I) 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 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
of 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 the annual value within the
meaning of sub- section (1) of section 23 of the Income-tax Act, 1961 D 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 year 1969-70 and
1970-71 the relevant accounting years being 1st April 1968 to 31st March 1969
and I st April 1969 to 31 st March 1970. Now 'standard rent' is defined in
section 2 (k) to mean the standard rent referred to in section 6 or where the
standard rent has been increased under section 7, such increased rent. Section
6 lays down different formulae for determination of standard rent according to
different situations. Clause (A) of sub-section (1) enacts provisions for
determination of standard rent in 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 clause (B) of sub- section (I)
and there also, we are concerned only with sub- clause (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 318
Control Act, 1952, the standard rent was liable to be determined under
paragraph (b) of sub-clause (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-eighth per cent" had been substituted." But all
these provisions for determination of standard rent are subject to the
overriding provision enacted in sub-section (2) which provides in clause (b),
which is the clause applicable in the present case since the warehouse was
constructed on or after 19th June, 1955, that in 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. 5810/- per month from 19th March 1962 and therefore under
clause (b) of sub-section (2) the rent of Rs. 5810/- 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 thereafter the standard rent
would have to be determined under paragraph (b) sub-clause (2) of clause (B) of
sub-section (I) 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 clause (b)
of sub section (2) and thereafter it would have to be deter mined under
paragraph (b) of sub- clause (2) of clause (B) of sub section (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. 6907/- per month while for the
accounting year 1st April 1969 to 31st March 1970, the standard rent would be
that determinable under paragraph (b) of sub-clause (2) of clause (B) of
sub-section (1). That leaves the southern portion of the ground floor which was
first let out to the American Embassy at the rent of Rs.
6640/- per 319 month from 7th December 1964,
and according to clause (b) of sub- A section (2), the standard rent of this
portion would be Rs. 66401- per month for the period of five years from 7th
December, 1964 up to 6th December, 1969 and thereafter it would be determinable
under paragraph (b) of sub-clause 2 of clause (B) of sub-section (1). Thus for
the accounting year 1 st April 1968 to 31 st March 1969 and I st 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. 66401- 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
paragraph (b) of sub-clause (2) of clause (B) of sub-section (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
clause (b) of sub-section (2) and paragraph (b) of sub-clause (2) of clause (B)
of sub-section (1) of section 6 of the Rent Act as discussed above. D 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 be the annual value
of the warehouse within the meaning of sub-section (I) of section 23 of the
Income-tax Act, 1961. On this view taken by us, the 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.
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