S. Ranganathan, J.

1. This is a reference under section 256(1) of the Income-tax Act, 1961, arising out of reassessment to income-tax made on the respondent, H. P. Sharma, for the assessment years 1962-63 and 1963-64, for which the corresponding previous years were the financial years which ended on March 31, 1962, and March 31, 1963, respectively. For the assessment year 1962-63, the assessee returned a property income of Rs. 30,356 and income from other sources of Rs. 1,590. The property income of Rs. 30,356 was comprised of an income from a house property at Esplanade Road, Delhi, computed at Rs. 1,782, income from a house in Karol Bagh, computed at Rs. 2,810, and income from a house property in Asaf Ali Road, computed at Rs. 25,764. Similarly, for the assessment year 1963-64 the assessee had returned a property income of Rs. 32,073 which comprised of Rs. 1,782 from the house at Esplanade Road, Rs. 2,810 from the house at Karol Bagh, Rs. 311 from a house in Krishan Nagar and Rs. 27,170 from the house in Asaf Ali Road. The ITO completed the original assessments for these two assessment years on November 28, 1962, and March 12, 1964, respectively, accepting the figures of income returned.

2. The dispute in this reference relates to the computation of the income from house property situate at 4/9, Asaf Ali Road, New Delhi. This house was partly occupied by the assessee for purposes of his own residence and partly let out to various tenants. The portion occupied by the assessee is agreed to be about 1/5th of the entire property and the relevant figures in respect of the computation of income from this property as made by the assessee may now be set out:

Rs.

Rs.

" Annual value

38,070

LESS:

" Municipal taxes

1,903

" for repairs

6,345

" Ground rent

944

9,192

28,878

Less for 1/5 portion occupied for self- residence

5,776

Value of rented premises

23,102

Add : Value of self resident

5,776

Less: Minimum allowable

1,800

3,976

The above being more than 10%

of the total income, the value

of self-residence is taken @10%

of the total income

2,662

Total

25,764"

3. In the above computation the sum of Rs. 38,070 with which the assessee had started represents the figure of annual value arrived at by the municipal authorities for the purposes of property tax assessment under the Punjab Municipal Act.

4. Similarly, for the assessment year 1963-64, the assessee again started with the figure of Rs. 38,070 and computed the income from the Asaf Ali Road house at Rs 27,170. The figure thus returned by the assessee for the two years was accepted by the ITO as already stated.

5. Subsequently, the assessments have been reopened under section 147(b) of the Income-tax Act, 1961. In the reassessment for 1962-63, the ITO has proceeded to recompute the income from the property on the basis of a sum of Rs. 37,118, which he found was the actual rent derived by the assessee from the above property during the year of account. Starting in this way he has made the computation as follows :

Rs.

Rs.

" A.L.V.

37,118

Less 1 / 2 house tax

1,903

35,215

Less 1 / 6 for repairs

5,859

Ground rent

944

6,813

28,402

Self-occupied portion.

The assessee has occupied a portion of the building for residential purpose. I take rental income of this portion at Rs. 400 per month, i.e., Rs. 4,800, during the accounting period. Notional income from self-occupied property is computed as under:

A.L.V.

4,800

Less allowance limited to 1,800

1,800

3,000

1 / 6 for repairs

500

2,500

Total

30,902"

6. In other words, as against the sum of Rs. 25,664 assessed previously, he has now taken the income at Rs. 30,902. Similarly, for the assessment year 1963-64, he has started with a figure of Rs. 46,499 which he found was the actual rent which had been derived by the assessee from the above premises during the previous year. Starting with this figure he has arrived at the property income of Rs. 38,719 in place of Rs. 27,170 which had been originally returned and accepted.

7. It will be seen from the above figures that so far as the merits of reassessment are concerned the difference between the original assessment and the reassessment consists of the difference in the starting figures for the computation of the income from the property. In the original assessments the computation had started with the annual letting value as determined for municipal tax purposes, namely, Rs. 38,070, for both the years. However, in the reassessment, the ITO has started with the figure of the actual rents received, viz., Rs. 37,117 for the first year and Rs. 46,499 for the second year. The main question in this reference is whether this basis of reassessment is correct or not, and the second question which arises is as to whether, in the circumstances of the case, the assessments were rightly reopened under section 147(b) of the Income-tax Act, 1961. These are the two questions which have been referred to us by the Income-tax Appellate Tribunal. But the two questions have been set out in the contrary order and read as follows:

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Officer could take action under section 147 of the Income-tax Act, 1961

2. Whether, in assessment of income from property, bona fide annual value under section 23 is the municipal value of the rental value received by the assessee "

8. We have set out the questions in an order different from that set out by the Tribunal for the simple reason that while disposing of the appeals the Tribunal came to the conclusion that the computation of income from the property as made in the original assessments was quite right and in accordance with law and, therefore, consequently the action under section 147 was not valid in law. In other words, the Tribunal did not go into the question whether, assuming that the reassessments were right and the original assessments were not, the proceedings initiated under section 147(b) were valid in law, though the AAC touched upon this question briefly and gave a finding that the provisions of section 147 were attracted in the present case. It was not necessary for the Tribunal to go into this question at all because the Tribunal was of opinion that the method adopted by the assessee showing the annual value of the property on the basis of municipal valuation was in accordance with the law and that merely because a higher rental income had been received in a particular year, it cannot be said that the income from the property had been under-assessed. We, therefore, think that it will be convenient for us to first consider the second question which has been referred to us as to whether the income from the property should be computed on the basis of the municipal value as was done previously or on the basis of the rental value as done in the course of the reassessments.

9. Before proceeding to discuss the question we may, however, set out here one circumstance which may be relevant for the decision of both the issues before us. This is that there has always been a disparity between the municipal valuation of the property and the actual rent derived by the assessee from the above property. The following figures are not in dispute:

Year ended

Municipal valuation

Actual rent

31-3-1959

32,400

30,785

31-3-1960

38,070

25,968

31-3-1961

38,070

30,575

31-3-1962

38,070

37,117

31-3-1963

38,070

46,499

31-3-1964

43,580

51,480

10. The municipal valuation pertains to the entire premises, whereas the rents derived pertain only to the 4/5ths of the premises since the other 1/5th has been in the occupation of the assessee. Apart from the amount of tax involved in the present ease being somewhat substantial, the question is a recurring one and is also one of some general importance in the matter of computation of income from house property. It, therefore, needs to be discussed in some detail.

11. Under the Income-tax Act, 1961, as also under the Indian Income-tax Act, 1922, the annual value of property (consisting of any buildings or lands appurtenant thereto) of which the assessee is the owner is chargeable to income-tax under the head " Income from house property ". This income from house property is computed in accordance with the provisions contained in sections 23 to 26 of the Act. The starting point of the computation is the annual value of the property from which the assessee is given several deductions depending upon the nature of the property and also depending upon the various circumstances attendant upon the ownership of the property. This annual value (which was described under the 1922 Act as the " bona fide " annual value, an epithet which has been left out as a surplusage under the new Act) is to be arrived at in the manner set out in section 23(1) of the Act. This section originally laid down that 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. In other words, though the tax under this head also is a tax on income, it is not a tax upon rents but upon the inherent capacity of the hereditament to yield profit. The tax is charged on the artificial or notional income of the property even if in fact the owner receives no income whatever because he is occupying the property or for other reasons or even if there is no possibility of his receiving any income from the property. This was made clear, as early as 1946, by the Bombay High Court in D. M. Vakil v. CIT : [1946] 14 ITR 298 [LQ/BomHC/1945/104] , where the court pointed out that:

"Under section 9 of the Indian Income-tax Act, 1922, the tax is to be payable by an assessee in respect of the bona fide annual value of the property irrespective of the question whether he receives that value or not. The income from property is an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. The liability does not depend on the power of the owner to let the property, as it also does not depend on the capacity of the owner to receive the bona fide annual value."

12. In that case, the assessees were trustees under the will of a lady which provided that during the lifetime of the husband of the testatrix, he and some of his children had a right to occupy a bungalow free of rent. The trustees contended that they could not be said to have realised any income whatsoever from the trust property and therefore they were not liable to pay income-tax in respect of that property. This contention was rejected.

13. The above decision was followed by the Bombay High Court in Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT : [1963] 48 ITR 507 [LQ/BomHC/1962/116] and by the Calcutta High Court in the case of CIT v. Biman Behari Shaw Shebait : [1968] 68 ITR 815. [LQ/CalHC/1967/59] The Calcutta High Court also held in Mahmudabad Properties Ltd. : [1972] 83 ITR 470 that even where the property was in a state of disrepair it would have an annual value and this should be arrived at after a proper consideration of all the circumstances of the case.

14. This principle is indeed Well settled and also clear from the language of the section and there is no doubt that where the property does not actually fetch any income, the scheme of the Act is to assess a notional income from the property on the basis that it is let out from year to year and fetches a reasonable rent to the owner. We are not concerned with such a case because we are concerned principally with the portions of the property which have been let out to tenants.

15. Where the owner of a property has actually let out the property to several tenants, there are at least three types of cases that one can envisage:

(1) The property is let out by the landlord to the tenant at a rent which can be described as the fair rent, or the standard rent in accordance with the local rent laws though in the open market there may be several other houses similarly situated which are fetching higher rents to their owners.

(2) The owner has let out the property to a tenant on the basis of an agreed rent. This agreed rent may be in excess of the fair rent or stand and rent which may be fixed for such premises under the local rent control legislation. But since no standard or fair rent has been got fixed for the premises in question, the landlord is able to charge a higher rent on an agreed basis.

(3) The owner has let out the premises to a tenant at a rent which bears no relation to either the market rent or the fair or standard rent. The rent thus agreed upon between the landlord and the tenant is found to be either highly inflated or grossly understated and the difference is on account of some special circumstances such as the mutual relationship between the parties, fraud or collusion and the like.

16. Judicial decisions have considered the effect of these types of contracts in relation to the reasonable annual letting value of the premises. Some of these cases have been decided under the language of several Municipal Acts which also provide for the determination of the annual value of the house property on the same basis, namely, as the sum for which the property might reasonably be expected to let from year to year. Some of the decisions have been rendered under the Income-tax Act. It is now necessary to refer to these decisions.

17. In Corporation of Calcutta v. Sm. Padma Debi : [1962] 3 SCR 49 [LQ/SC/1961/275] : AIR 1962 SC 151 [LQ/SC/1961/275] , the Corporation of Calcutta had fixed the annual value of certain premises belonging to the respondents on the basis of the actual rent derived by the owners from the premises. However, immediately thereafter the standard rent of the premises was fixed by the Rent Controller at a much smaller figure and the owners raised the objection that the Corporation had no power to fix the annual value at a figure higher than the standard rent. This objection was upheld by the Supreme Court. Referring to the language of section 127(a) of the Calcutta Municipal Act, the court observed (p. 153 of AIR):

"The word reasonably in the section throws further light on this interpretation. The word reasonably is not capable of precise definition. Reasonable signifies in accordance with reason. In the ultimate analysis it is a question of fact. Whether a particular act is reasonable or not depends on the circumstances in a given situation. A bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship, and such other considerations may take it out of the bounds of reasonableness. Equally it would be incongruous to consider fixation of rent beyond the limits fixed by penal legislation as reasonable."

18. After referring to the provisions of the rent control legislation the court observed (p. 153 of AIR):

" One may legitimately say under those circumstances that a landlord cannot reasonably be expected to let a building for a rent higher than the standard rent. A law of the land with its penal consequences cannot be ignored in ascertaining the reasonable expectations of a landlord in the matter of rent. In this view, the law of the land must necessarily be taken as one of the circumstances obtaining in the open market placing an upper limit on the rate of rent for which a building can reasonably be expected to let...but an open market cannot include a black market, a term euphemistically used to commercial transactions entered into between parties in defiance of law. In that situation, a statutory limitation of rent circumscribes the scope of the bargain in the market. In no circumstances the hypothetical rent can exceed that limit."

19. Applying the principle in Padma Debis case : [1962] 3 SCR 49 [LQ/SC/1961/275] , the Supreme Court held in the case of New Delhi Municipal Committee v. M. N. Soi, AIR 1977 SC 302 [LQ/SC/1976/362] , that where the standard rent in respect of a premises is fixed, the municipal valuation cannot exceed that arrived at on the basis of the standard rent. The same principle has also been applied for income-tax purposes in Kashi Prasad Kataruka v. CIT : [1975] 101 ITR 810 (Pat) [LQ/PatHC/1975/51] .

20. The principle in Padma Debis case : [1962] 3 SCR 49 [LQ/SC/1961/275] was followed and perhaps given a wider basis by the decision of the Supreme Court in Guntur Municipal Council v. Guntur Town Rate Payers Association, : AIR 1971 SC 353 [LQ/SC/1970/373] . In this case, the Guntur Municipality had sought to revise the annual value of buildings on some basis which is not quite clear from the judgment. But the Guntur Town Rate Payers Association objected to such a revision and contended that the annual value had to be computed in the context of the rent that was payable under the rent control legislation. Thus, the only point which the court was called upon to decide was whether before the fixation of a fair rent of any premises the municipality was bound to make assessment in the light of- the provisions contained in the Rent Acts. This question was answered in the affirmative. The court held that under the Municipalities Act there was no distinction between buildings the fair rent of which had been actually fixed by the Controller and those in respect of which no such rent had been fixed. It was perfectly clear that the landlord could not lawfully expect to get more rent than the fair rent which was payable in accordance with the principles laid down in the Rent Control Act and the assessment of valuation must take into account the measure of fair rent as deducible under that Act. This might mean that where the Controller had not fixed the fair rent the municipal authorities would have to arrive at their own figure of fair rent but that could be done without difficulty by keeping in view the principles of the relevant rent control legislation. So far as the position in Delhi, however, is concerned, it appears that the principle of the Guntur Municipal Councils case, : AIR 1971 SC 353 [LQ/SC/1970/373] , may not be applicable. In M.M. Chawla v. J.S. Sethi : [1970] 2 SCR 390, the Supreme Court had occasion to examine the provisions of the Delhi Rent Control Act, 1958, and this decision makes it clear that the prohibition laid down in sections 4 and 5 of the Rent Control Act on a landlord from receiving amounts in excess of the standard rent would come into operation only after the standard rent has been fixed and not before. Until the Rent Controller has fixed a standard rent under section 9, the contract between the landlord and the tenant would determine the liability. It follows from this decision that unless in respect of a particular premises the standard rent is fixed under the Rent Control Act, there would be nothing illegal in the landlord seeking to recover from the tenant the rent for the premises in accordance with the agreement between the parties. This position has been clarified beyond any doubt by the Full Bench of this court in Dewan Daulat Ram Kapur v. New Delhi Municipal Committee [1973] ILR 1 Del. 363. This was also a case under the Delhi Municipal Corporation Act, 1957, and the court was concerned with laying down principles on the basis of which the annual value for municipal tax purposes could be determined in the case of various types of property. The Full Bench decision has taken into account the principles laid down in Sm. Padma Debis case : [1962] 3 SCR 49 [LQ/SC/1961/275] , Guntur Municipal Councils case, : AIR 1971 SC 353 [LQ/SC/1970/373] and M. M. Chawlas case : [1970] 2 SCR 390 (SC), and has summed up the position as follows towards the end of the judgment :

"In the case of rented premises the annual value shall not exceed the standard rent if fixed by the Controller or statutorily determined under the Delhi Rent Act and, in other cases where the standard rent has not been fixed or determined as aforesaid, the annual value shall not exceed the agreed rent unless the agreed rent is tainted by fraud, collusion, emergency, relationship and such other considerations.

In the case of premises not let in the year of assessment but let at any time previous to it, the annual value shall not exceed the standard rent if fixed earlier by the Controller or statutorily determined under the Delhi Rent Act and, in the absence of such fixation or determination, the annual value shall not exceed the agreed rent in the earlier years.

In the case of premises which have never been let at any time or premises whose annual value is being fixed for the first time, the annual value shall not exceed the amount arrived at in accordance with the provisions of section 6(1)(A)(2)(b) or section 6(1)(B)(2)(b) of the Delhi Rent Act as the case may be and, in case it is not so ascertainable then on the principles contained in sub-section (4) of section 9 of the Delhi Rent Act."

21. It is only necessary to extract one further observation from this judgment at page 381. Their Lordships observed :

" Where there is an actual tenancy, it is as if the hypothetical tenant has materialised into actuality. The rent paid in pursuance of an agreement which is not tainted by fraud, emergency, relationship and such other considerations as are pointed out in Padma Debis case : [1962] 3 SCR 49 [LQ/SC/1961/275] is a good measure of the rent for which any particular premises may reasonably be expected to be let within the meaning of the Municipal Act. Such agreed rent would be subject to the ceiling provided by the standard rent if it has been fixed by the Controller or has been statutorily determined under the relevant Rent Act. If such standard rent has not been fixed by the Controller or statutorily determined under the Rent Act, the agreed rent will be legally recoverable according to Chawlas case : [1970] 2 SCR 390 and would not, therefore, be rent for which the premises cannot be reasonably expected to let."

22. In the present case, it is not the contention of the assessee that the rent derived by him from the property was not recoverable by him either because the standard rent had been fixed in respect thereof or for some other reason. It is not his contention that even though no standard rent has been fixed, it is only the standard rent that can be the basis for the determination of the annual letting value. Indeed such a contention would be in the teeth of the Full Bench decision and cannot be accepted. Hence, the above decisions clearly show that in a case of this type the actual rent derived from the property is the correct guide to the annual letting value, whether it be for the purposes of the Municipal Acts or for the purposes of the Income-tax Act. There can, thus, be no antithesis between the annual value (if correctly determined) for municipal purposes and that determined under the Income-tax Act. For both the enactments, the determination has to be done in the same manner and when the figures of actual rent are available there is no reason why they should not furnish the basis for such determination. It is no doubt true that the municipal assessments are fixed by following a certain procedure. The local authority under the Municipalities Act makes a periodical survey of all buildings, determines the gross rent receivable from the property, takes into account the various types of services rendered and so on and then arrives at a figure for the purposes of the annual municipal valuation. Of course, if such an annual value has been assessed in or about the relevant time and after taking into consideration all the relevant factors and if the figures of actual rent are not available, then the figure of annual value determined for the municipal purposes can be presumed to be the correct figure of annual value and can, if the ITO agrees, be adopted also for income-tax purposes. But the figure of assessment for the municipal tax purposes is only a piece of evidence and it cannot override the figure of actual rent as the basis for determination of annual value when such figure of actual rent is available to the ITO.

23. We should not, however, be understood to say that the figure of actual rent derived by the assessee will be in all cases conclusive of the reasonable annual value of the premises. Sm. Padma Debts case : [1962] 3 SCR 49 briefly outlined the various types of circumstances in which the rent paid and received by and between the parties may not represent the true annual letting value. It is also fairly obvious that merely because the two parties agree upon a particular rent, it cannot in all circumstances be conclusive of the real and reasonable letting value of the premises. Instances where the rental value agreed between the parties have been rightly rejected can also be found in the judicial decisions. In the matter of Babulal Raj Garhia : [1936] 4 ITR 148 (Cal) [LQ/CalHC/1936/68] is a case in which the assessee contended that the annual rental value stipulated in the lease deed should be adopted for the purposes of determining the income from house property. But the Commissioner found that the agreed lease deed was between the assessee and a company in which he held controlling interest and at a rate of rent which was only about 1/6th of the rent which he was realising in former years and in the first nine months of the year of account before he transferred the property to the company. In the face of this finding the assessees counsel did not even attempt to argue before the High Court that the rent fixed in the lease deed would provide conclusive evidence on which to base the annual value of the property. Similarly, in the case of Jamnadas Prabhudas v. CIT : [1951] 20 ITR 160 (Bom) [LQ/BomHC/1951/45] , the Tribunal had rejected the figure of actual rent received under a lease deed and had preferred to rest the annual value on the basis of the figure adopted for municipal tax purposes. The High Court upholding the finding of the Tribunal pointed out that under the lease deed the assessee received not only the above rent but also several other considerations, such as, that the expenses for current repairs, salaries of sweepers and payment of electric bills were all to be borne by the lessee which ordinarily would be borne by the lessor. It was in these circumstances that the reasonable letting value of the premises was considered to be higher than what was disclosed by the rent deed. In that case, as already mentioned, the Tribunal adopted the municipal value basis for determining the annual letting value and since Shri Bishamber Lal relies on this aspect of the decision the observations of the learned judge in this context may perhaps be extracted here (p. 169):

"Sir Jamshedjis grievance is that the Tribunal was wrong in accepting the municipal valuation. Sir Jamshedji says that the Tribunal did not take the trouble to find out for itself what was the proper annual value, but it borrowed the opinion formed by the municipality of the proper annual value. If the Tribunal had laid down as a principle that in every case municipal valuation should be the only determining factor, we would undoubtedly have interfered and we would have asked the Tribunal to state a question on which we would have laid down what the correct law was. But as far as this particular case is concerned, it is clear that the municipal valuation by itself has not been the only evidence which the Tribunal has considered. Not only that, but the Tribunal has not laid down that in every case the municipal valuation should be the only test that should be applied in order to determine what is the annual value of a property. As it happens, in this particular case on a consideration of all the factors the Tribunal has come to the conclusion that the proper annual value of the property is the value fixed by the municipality."

24. Shri Bishamber Lal tries to make use of this decision by saying that the adoption of the municipal value is a proper basis for arriving at the income from property and that, therefore, the original assessment cannot be said to be incorrect when it proceeded to do so. We shall refer to this aspect of the matter a little later while dealing with the first question. But for the time being it is sufficient to remark that as already pointed out there can be in principle no difference between the annual letting value whether it is for the purposes of the Income-tax Act or for the purposes of the Municipal Act and if the ITO chooses to base the income from property on the actual rent derived from the property and there are no considerations as have been indicated above to show that the rent derived by the assessee is not a fair and reasonable rent for the premises the computation of annual value by the ITO cannot be challenged.

25. It only remains to refer to the decision of the Kerala High Court in C.J. George v. CIT : [1973] 92 ITR 137. [LQ/KerHC/1973/142] In that case, the assessee constructed a building which he let out to a company at an annual rent of Rs. 33,000. The ITO fixed the annual value of the building on this basis. The assessee had relied, for a plea to reduce this annual value, on a certificate produced from the municipal authorities which showed that the annual letting value had been fixed by the local authority at Rs. 18,000. But this material was rejected by the Tribunal which confirmed the assessment made by the ITO. The High Court, however, reversed the finding of the Tribunal. Shri Bishamber Lal vehemently contends that this decision clearly shows that the certificate of the municipal authorities cannot be rejected and the actual rent preferred for purposes of the determination of the annual letting value under section 23. Though prima facie this decision appears to support the contention of the learned counsel for the assessee, we find on a careful perusal that this is not so. Before the Tribunal there were two items of evidence : (1) The figures of rent derived by the assessee from the property under a long term lease containing certain terms and conditions. (2) The certificate issued by the local authority showing that the annual letting value had been fixed at a much lower figure. The court found that the local authority when fixing the annual letting value at a lower figure was aware of the fact that the building had been let out at a higher figure of Rs. 33,000 and that the local authority was also aware of the terms and conditions of the lease agreement. There was also the further fact that there had been an appeal by the assessee to the Panchayat and by a resolution of the Panchayat the monthly rent for the building had been fixed at Rs. 1,500 p.m. In other words, the certificate of the local authority in this case afforded evidence to sustain the contention of the assessee that the contract rent was in excess of the reasonable rent that could be expected from the building. It was in these circumstances that it was held that the Tribunal erred in rejecting this item of evidence which was very relevant for the determination of the point at issue. In that case, the Kerala High Court came to the conclusion that there were circumstances to show that the rent in the lease deed did not represent the proper rent for such a building in the appropriate locality. This decision, therefore, does not lay down any principle contrary to what has been set out and discussed earlier.

26. In the present case, apart from the fact that the municipal valuation was fixed at Rs. 38,070 some time in 1959-60 there is nothing to indicate the basis on which that municipal valuation had been made. On the contrary, the ITO has available before him the figures of actual rent derived from the property and on the reasoning of the Full Bench of this court in Dewan Daulat Ram Kapurs case [1973] ILR 1 Del. 363, it is difficult to hold that the ITO erred in adopting the actual rent derived as the reasonable letting value of the premises.

27. In our opinion, a lot of confusion and misapprehension is generated by a general assumption that the income from the property assessed for income-tax purposes is a notional income. We think it is a very broad statement. No doubt the statement is correct in the sense that the income from the property is assessed in the hands of the owner irrespective of the fact whether he actually derives any income therefrom or not. It is also true that in certain circumstances the rent actually derived by him may not be capable of being treated as the annual letting value of the property and in such a case the surplus amount realised by him will escape liability to tax altogether. [See Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT : [1966] 61 ITR 428 (SC)]. But there is no reason to interpret the section in such a way that there is always or necessarily a gap between the actual rent derived and the reasonable rent which the property can obtain if let from year to year. There is no reason why the actual rent derived on a monthly or annual basis between parties who deal with each other at arms length should be ignored, although there may be a case for considering the actual rental income to be not sacrosanct where same circumstances exist to justify such an inference. Apart from the other instances which have already been given we may refer, for example, to an assessee owning a number of godowns which are let on a daily basis during the year. Where several godowns are let out at different rents for varying number of days perhaps it could be said that the actual rent derived by an assessee at the end of the year may not necessarily be the letting value of the premises on the assumption that every godown is let from year to year on a reasonable basis. But barring such cases where there is some reason to reject the rent agreed to between the parties, we are of opinion that the ITO is justified in taking the figures of the actual rent as the reasonable letting value and completing the assessments on that footing.

28. Before we conclude, we may point out that the provisions of section 23 have been recently amended to make the above position clear. Section 23(1) now reads as follows :

"23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be-

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable :..."

29. These amendments, of course, make the provisions quite clear and bring to charge the entire rent received from a property even where it may be found to be in excess of the reasonable or even standard or fair rent for some reason or the other. However, there will be one difference between the old and the amended provisions. Under the section as it previously stood, the figure of actual rent received would not be conclusive and it would be open to the department to consider and for the assessee to urge that the rent agreed to between the parties is either understated or excessive or should not be taken into account as a fair rent or standard rent has been actually fixed for the premises. But it looks as if, after the amendment, the rent actually derived by the assessee would be conclusive and even if the assessee is able to show that for some genuine reasons the rent does not reflect the real value of the property or that a lower standard rent has been fixed he might not be able to tone down the annual letting value.

30. For the reasons discussed above, we are of opinion that where the figures of actual rent received by the assessee from a house property are available the assessment of income from property should be based on such figures and not on the municipal value determined for the premises which is only a piece of evidence to arrive at the reasonable letting value. The second question is answered accordingly.

31. Turning to the first question, the ITO did not set out in the assessment order the circumstances in which the assessment was reopened. It was only a reopening of the assessment under section 147(b) and it is not clear whether the assessee raised any objections before the ITO contending that the reopening was invalid. However, when the matter went before the AAC, he gave a clear finding to the following effect:

"It appears that the appellant had returned the income from property on the basis of municipal valuation. But the actual rent received was higher and this material fact was not disclosed before the ITO although it is stated that the rent received was entered in the books of account which were duly produced before the ITO."

32. He held that, since looking to the factual position it was clear that there was an under-assessment, the initiation of proceedings under section 147(b) was justified. As already mentioned, the Tribunal does not discuss this aspect of the case specifically. In para. 5 they observe, " that no doubt section 147 comes into operation when it is found that income has been under assessed "But having come to the conclusion that the income had not been under-assessed it was not necessary for them to give any categorical finding on this aspect of the matter. On the one hand, the counsel for the department contends that the Tribunal must be held to have approved the initiation of the proceedings under section 147(b) but set aside the reassessment on the merits. On the other hand, Shri Bishamber Lal would have it that the Tribunal has held that both the initiation and the reassessment were not valid in law. As we read it, the Tribunal has not expressed any opinion as to the validity of the initiation of the proceedings under section 147(b). That question would depend upon, (a) the state of affairs at the time of original assessment and (b) the availability of information before the ITO giving him reason to believe that income had escaped assessment. So far as the first aspect is concerned, though at the time of hearing of the appeal before the Tribunal the figures of municipal valuation as well as actual rent for a number of years were available from which they were able to find that the actual rent in some of the years was less than the municipal valuation and in some of the years higher, it is not quite clear whether the ITO had been adopting the municipal valuation all along consciously in spite of having the figures of actual rent available before him. At that time, the ITO did not have the benefit of the judicial decisions discussed above and he could choose to adopt either figure as the basis. If this is so, Shri Bishamber Lal says, the ITO had, after considering the two figures, chosen the basis of municipal valuation and having done so, a mere change of opinion by him cannot justify action under section 147(b). On the other hand, in the two years under reference, the finding of the AAC is that at the time of original assessment the ITO had not applied his mind to the figures of actual rent. It is possible that just as in the years under reference, even in earlier years the figures of actual rent were not adverted to by the ITO. In that event also, Shri Bishamber Lal contends, the ITO was entitled, in the absence of any evidence regarding the actual rent, to rely on the municipal valuation as furnishing a proper and correct basis of assessment and merely because subsequently the ITO comes to know that the actual rents derived were much more, he cannot seek to reopen the assessments and determine the property income on another basis which may also be open to him in law. The attempt of Shri Bishamber Lai is to bring the present case within the principle of the ruling of the Supreme Court in CIT v. Simon Carves Ltd. : [1976] 105 ITR 212. [LQ/SC/1976/274] It is argued that in this case the requirements of section 147(b) are not fulfilled and that it is a mere case of a change of opinion on the part of the ITO as to which one of the two alternative basis available for the assessment should be adopted.

33. As we have already stated, in our opinion, the Tribunal has not looked into the facts at all so far as this question is concerned and there are no clear findings of fact on this issue. So far as the first question is concerned, therefore, we think that, in fairness to the assessee and to the department, we should reply to the question by saying that it is not possible for us to answer this question because the relevant facts have not been found and discussed by the Tribunal and because it has not recorded a clear finding as to the applicability of section 147(b). In view of our above answers to the questions, it will be necessary for the Tribunal, when the matter goes back to it for the disposal of the appeal conformably to the judgment, to consider the question as to the applicability of section 147(b) in the circumstances of this case and give its findings. In the result, we answer the second question in favour of the department and against the assessee. Question No. 1 is returned unanswered. There will be no order as to costs.

34. As the facts enumerated in the judgment of my learned brother show, the controversy in this reference pertains to the income from house property situate at 4/9, Asaf Ali Road, New Delhi, which the assessee, namely, Shri H. P. Sharma, owns. The assessee had in the original returns for the assessment years 1962-63 and 1963-64 showed income from these properties as per valuations shown in the municipal records. The assessments followed accordingly.

35. Later, the ITO noticed that the actual rent enjoyed by the assessee from that property exceeded the municipal valuation and this fact had not been disclosed by the assessee at the original assessment stage. Having obtained information about that subsequently, he had recourse to reassessment proceedings under section 147(b)/ 148 of the Income-tax Act, 1961. For the first year involved, the actual rent realised was less than the municipal valuation but the same related to 4/5ths portion of the property. If the rental value of the other 1/5th portion, which was in the possession of the assessee, was taken into account, the total rent exceeded the municipal valuation. For the second year, the total rent itself was far in excess of the municipal valuation. The present reference also raises the controversy whether this recourse to reassessments was valid.

36. Section 22 of the Income-tax Act, 1961, provides for chargeability to income-tax of the annual value of any building or land owned by an assessee. Sections 23 to 27 next elaborate the modes of computation of the annual value. Basically it is the sum for which the property might reasonably be expected to let from year to year. The determining factor thus is the reasonable expectancy of the rent from the property. Further, its determination is not of static nature. In fact, the expectancy has to be determined from year to year. A sort of a hypothetical situation is to be created as if the property is being let out and what rent it would fetch in the open market. This exercise in the field of hypothetical circumstances, however, is meaningless where the property is itself found to be let out in the relevant year. In the existence of such actual tenancy, it is as if the hypothetical tenancy has materialised into actuality. The rent paid in pursuance of an agreement which is not tainted by fraud, emergency, relationship and such other considerations is the best index and the most appropriate measure of rent which any particular property may reasonably be expected to yield. There is no further scope left in such a situation to speculate or venture into the realm of hypothesis as to the possible market rent. This position has been well recognised in the Full Bench decision of the Delhi High Court in the case of Dewan Daulat Ram Kapur v. New Delhi Municipal Committee [1973] ILR 1 Del. 363.

37. In the present case, admittedly, the property in question was lying let out in the relevant years. It is not even hinted that this rent was, in any manner tainted by fraud, emergency, etc. In the circumstances, it is the actual rent realised by the assessee which has to be treated as the annual value of the property for purposes of chargeability to the Income-tax Act.

38. The hypothetical or notional determination of the annual value can arise where the property is self-occupied or is lying vacant. Here too the indicia or the determining factor is reasonable market rent. One has to place oneself in that situation as if the property is being let out in the open market and what reasonable rent it can fetch. One of the modes for doing this is to ascertain what rents similar properties which are being let out in that year in the locality, are fetching. Here again, the rents which the properties are yielding from old tenancies, may not be wholly relevant or conclusive. There is no gainsaying that in these days of scarcities of properties and rising rents, the old rents are an eye-sore to the landlords, and not unoften, the general grievance of tenants is that they are being harassed and even sought to be evicted to enable the landlords to enjoy higher rents. Vacant possession not only increases considerably the market value of the property but also results in potential higher rental yields.

39. This is the reality of the situation very much prevalent and cannot be ignored when it comes to income-tax assessments. The ITO has, therefore, to put himself in the situation as if the property is being let out in the open market and what reasonable rent it is likely to fetch.

40. Reference and emphasis to notional rent, as pointed out by the Bombay High Court in the case of D. M. Vakil v. CIT : [1946] 14 ITR 298 [LQ/BomHC/1945/104] , is thus entirely in the context where the property is self-occupied or lying vacant. It is only in this situation that such rent has to be determined. This notion of hypothetical rent has absolutely no bearing and is entirely besides the mark where the property is found to be actually let out. Here hypothetical or notional rent has to be treated as having materialised into actuality, vide the aforesaid decision of the Full Bench of the Delhi High Court in the case of Daulat Ram Kapur [1973] ILR 1 Del. 363.

41. It, therefore, follows that hypothetical determination of notional rent has little relevance for the present reference as the property in dispute was entirely let out for the assessment year 1963-64 and was mostly let out during the preceding year. It is only with respect to the small 1/5th portion of the property which was in the self-occupation of the assessee during the first year that this determination has to be done. For this the practical approach and the safe guide is to compute it proportionately keeping in view the rent realised from the portion of the let out property, although it may also be said that in cases where the let out portion is the subject-matter of an old tenancy, the vacant portion may still yield higher rent as per rising trends in the market rents.

42. In the fixation of annual value of the property under the Income-tax Act, it is difficult to see how the municipal valuation comes into the picture. The Legislature has not enjoined that the annual value should be fixed as per the municipal valuation. Instead the barometer is the reasonable market rent. It is correct that under the municipal law also, the same market rent is generally the criterion laid down and to this extent the determination there may have some relevance. However, by no stretch, the same can be conclusive or binding. It does not absolve the ITO under the income-tax law from judicially determining on his own the market rent. He cannot abdicate or allow his own independent judgment to be mortgaged with what a municipal clerk or an inspector might have done. In this respect one need not comment in any complimentary manner the way in which quite a number of our municipal bodies are working. Local politics, extraneous considerations, and not unoften corruption, negligence and mismanagements do play their rampant part. To still hold that greater sanctity should be attached to municipal valuation in place of judicial determination, would be wholly unwarranted. Similar is the position of the so-called surveys effected by the low-rung officials of the local bodies. They can as well not take the place of the judicial determination by the ITO just as he cannot entirely delegate his functions to an inspector of his own department, by way of survey or otherwise. Such surveys though to an extent relevant are far more a victim of influences and circumstances, as have been referred to above, with regard to local bodies.

43. The decision of the Supreme Court and other High Courts to which my learned brother has made reference, and which refer to standard or fair rents under rent laws, pertain to determination of municipal valuation. The position under the municipal laws is substantially different. Under those laws, the valuations are attached to the properties, and the local bodies are empowered and interested to levy taxes on those properties only. Income-tax law, on the other hand, has a different scope and purpose. Its primary concern is not the property as such, but the income enjoyed by an individual, corporate body, etc. If such individual or corporate body, etc., happens to own any property or enjoys income therefrom, it is those incomes which become chargeable to income-tax. Sections 22 to 27 only lay down the guidelines as to how such incomes are to be computed. In the ultimate analysis, the focus is always on the income aspect. The annual value is also determined in the context of the income. Thus Beaumont C.J. in, In re Patiala State Bank : [1941] 9 ITR 95 (Bom) [LQ/BomHC/1940/118] at page 112 observed : " income-tax is a tax on a person in relation to his income ".

44. In this respect, it need hardly be stated that under the income-tax law any income, whether enjoyed lawfully or unlawfully, is taxable. Income enjoyed from smuggling is as good an assessable income. A trader who earns money by adulteration or sells commodities in black market at rates over and above those controlled and fixed under the Essential Commodities Act, or otherwise, cannot escape from the assessability of his income. He cannot be heard to say that since all his acts were against law or penal in character and punishable, therefore, he should have immunity from tax laws. Similar is the position of a landlord who charges rent over and above the standard or fair rent. He cannot be rendered in a privileged position of eating the cake and having it too. He cannot escape by asserting that so far as the rent realisations are concerned, he is law unto himself and can collect any amount irrespective of any inhibition placed by rent laws, but when it comes to taxation, he must retain all that income and tell the ITO that he should treat him as an innocent law abiding citizen.

45. The discussion at page 91 of the Law and Practice of Income Tax by Kanga and Palkhivala (7th Edn.), Vol. I, shows that the taint of illegality or wrong-doing associated with income, profits or gains is immaterial for the purpose of taxation. In the leading case of Minister of Finance v. Smith [1927] AC 193, 198 (PC), Lord Haldane said that the Income-tax Acts are not necessarily restricted in their application to lawful business only. The revenue merely looks at an accomplished fact; by bringing the profits to tax, it does not condone or take part in the illegal enterprise. The assessee may be prosecuted for the offence and at the same time taxed upon the profits arising out of its commission. Profits arising from a trade which necessarily involves fraud upon the customs authorities, or from illicit trafficking in drugs, illicit trafficking in liquor contrary to prohibition laws, keeping automatic gaming machines for public use, illegal bets taken by bookmakers on race courses, street betting or betting through the post, or wagering agreements, are all chargeable to tax. They are taxable as profits of business, even if the business involves the perpetration of crimes. A man who lives by regularly receiving and reselling stolen goods would be taxable on the profits. " Pugrees " or " abwabs " illegally exacted from tenants by landlords, or income derived by trustees from forbidden investments or acts amounting to breaches of trust, are also within the purview of the Act. Similarly, losses arising from an unlawful business are allowable.

46. In my opinion, therefore, irrespective of whether there has been any fixation of fair rent or not under the rent Acts, when a person is actually enjoying a particular rent and the same is not tainted by collusion, it is this rent which is assessable in his hands as the income of the property. To hold it otherwise, is to open flood gates of multifold manipulations. A landlord may in collusion with an amenable tenant get a nominal rent fixed for a property, and use that as a magical umbrella with him to repulse any demands of the ITO, and at the same time under its shield, collect any rent from future tenants. The general argument commonly advanced in such situations is that a future tenant will not pay more than the fair rent and the landlord too dare not realise for fear of being prosecuted and punished. This argument again proceeds on premises divorced from realities. In these days of scarcity of properties, how many of the tenants while obtaining lease and being in dire need of accommodation are able to dictate to their landlords for abiding by fair rents, and how many of them later in the rut of their busy lives brook of prosecuting their landlords and disturb their own peace The less said in this respect is the better. Overwhelming of them just reconcile to an approach of drift or laissez-faire, and abide by whatever rent is agreed upon. The reality of this situation again cannot be ignored in income-tax assessments. Suffice it to say that till the tenant asserts and succeeds in such cases to get the agreed rent reduced to a fair rent, or the landlord himself sees better sense to reduce that, it is the agreed rent which must prevail. There is no public morality or legal ethics involved in courts to be extra-soft to landlords who do not do so, and attempt to make the best of both worlds, on the one hand realising exorbitant rents and on the other hand escaping with impunity with nominal taxes. They cannot be heard to say that so far as charging of rents are concerned, it is entirely a matter of their discretion, but when it comes to payment of tax, such rents are either treated as fanciful or not amenable to tax law.

47. Moreover, in the present case, there has not been any fixation of fair rent of the building in dispute. In the circumstances, the assessee was at liberty to realise whatever rent that was settled with his tenant. (See in this respect the decision of the Supreme Court in the case of M. M. Chalwa v. J. S. Sethi : [1970] 2 SCR 390).

48. In my opinion, the decisions of the Kerala High Court in C. J. George v. CIT : [1973] 92 ITR 137 [LQ/KerHC/1973/142] cannot be considered to have laid down the correct position of law. Incidentally, a perusal of the facts of this case itself shows how local politics and voting weight age of the panchayat ignored the actual rent which was much higher and reconciled to a much lower municipal valuation. Obviously, such municipal assessments have to be looked down upon.

49. The Legislature has-now introduced amendment in section 23 of the Income-tax Act, 1961, so as to specifically provide 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, the amount so received or receivable has to be treated to be the annual value. This amendment in a way may be treated as clarificatory in nature.

50. As observed in Raja Ragavendra Singh v. State of Punjab : [1976] 102 ITR 40 (Punj), the term " income " has very wide meaning. All incomes are assessable unless specifically exempted. In Gooptu Estates Ltd. v. CIT [1929] 4 ITC 146; : AIR 1930 Cal 1 [FB], where the assessee sub-let a building and enjoyed profits, the income was held assessable under section 56 as one enjoyed from other sources. The illegality of business, profession or vocation thus does not exempt its profits from tax, as the revenue is not concerned with the taint of the illegality of the income or the source.

51. Adverting to the next question as to whether the resorts to reassessments under sections 147(b) and 148 of the Act were justified or not, it is noteworthy that both the ITO arid the AAC have clearly observed that the assessee had not disclosed at the original assessment stage that the rents realised exceeded those mentioned in the municipal records. The Tribunal has not controverted this finding, perhaps it did not consider it appropriate to go into the same after having held that the municipal valuation should have a sway over the rent realised. My learned brother has on this score sent the matter back to the Tribunal for giving a finding on this aspect. I will only like to observe in this connection that the Second Explanation to section 147 itself makes it clear that the production before the ITO of account books or other evidence from which material evidence could with due diligence have been discovered by the ITO will not necessarily amount to disclosure within the meaning of this section. The Supreme Court too has, in the decision Kalyanji Mavji & Co. v. CIT : [1976] 102 ITR 287 [LQ/SC/1975/515] and CIT v. A. Raman and Co. : [1968] 67 ITR 11 (SC), observed that information in order to justify reassessment may be obtained even from the record of original assessment from an investigation of the material on record or the facts disclosed thereby or from other enquiry or research into facts or law. " To inform " means to " to impart knowledge" and the detail available to the ITO in the papers filed before him does not by its mere availability become an item of information. It is transmuted into an item of information in his possession only if, and only when, its existence is realised and its implications are recognised. Where the ITO had not in the original assessment proceedings applied his mind, the reassessment proceedings are valid. [See in this respect the decisions of the Kerala and Madras High Courts in United Mercantile Co. Ltd. v. CIT : [1967] 64 ITR 218 (Ker) [LQ/KerHC/1966/250] and Muthukrishna Reddiar v. CIT : [1973] 90 ITR 503 (Ker) [LQ/KerHC/1972/174] and A. L. A. Firm v. CIT : [1976] 102 ITR 622 (Mad)] [LQ/MadHC/1975/17] .

52. It need hardly be said that change of opinion presupposes that there was earlier a formation of an opinion. When no such opinion was formed, it will be too far-fetched to assume that a change in that opinion was being effected. Further, the safest and surest guide for ascertaining whether any such opinion was formed at the original assessment stage is to look to the assessment order itself. When it, of its own, does not reveal that the matters and controversies now sought to be raised by way of reassessment were at all before the ITO or considered by him, it would be entirely surmiseful and, therefore, not permissible to still import their existence and consideration. This can, however, be permissible only where the assessment record of that stage overwhelmingly brings out that the matter did come for due consideration and was in fact considered. Mere silence on a matter or absence of discussion in the original order does not imply that the ITO adjudicated upon the same one way or the other. Having made these observations, I concur with the overall conclusion of my learned brother that question No. 2 should be answered in favour of the revenue in terms of the observations made above. As regards question No. 1, the same is returned unanswered, to be adjudicated afresh by the Tribunal in accordance with law.