Kashi Prasad Kataruka v. Commissioner Of Income-tax

S.K. Jha, J.

1. This is a reference under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") made by the Income Tax Appellate Tribunal, Patna Bench, in which the following question of law has been referred to this court for our opinion :

"Whether, on the facts and in the circumstances of the case, for determination of the annual value under Section 23, the rent fixed by the Rent Control Act [Bihar Buildings (Lease, Rent and Eviction) Control Act, 1947] could be taken into consideration "

2. The facts giving rise to this reference are very short. The assessee is an individual and derives income from a firm and commission from the Life, Insurance Corporation of India. He owns a house which is used for residential purposes. For the assessment year 1968-69, the assessee showed the income from the residential house at Rs. 1,500 only. The Income Tax Officer rejected the amount shown by the assessee and, after considering the area of the building and the possible rent at which it could be let out, took the annual value at Rs. 18,000 and after deducting the municipal taxes and one-sixth for repairs and deduction under Section 23(2) at Rs. 1,800, calculated the net annual value of the building in question at Rs. 11,950. Restricting it within 10% of the total income as provided under proviso (2) to Section 23(2) of the Act, he took Rs. 8,553 as income from the residential house. The stand taken by the assessee was that the building was situated within Patna Municipal Corporation area where the Rent Control Act, namely, the Bihar Buildings (Lease, Rent and Eviction) Control Act, 1947, was in force. The fair rent of the building had been fixed by the Rent Controller at Rs. 480 per month. The annual letting value, in any event, therefore, could not exceed the rate of rent which was fixed by the Rent Controller under the provisions of the Rent Control Act. This argument was rejected by the Income Tax Officer. The assessee having appealed to the Appellate Assistant Commissioner, the argument regarding the acceptability of the fair rent as fixed by the Rent Controller found no greater favour with the Appellate Assistant Commissioner. But the found that the annual value as estimated by the Income Tax Officer was excessive and, therefore, he reduced it to a figure of Rs. 14,400. The assessee pursued the matter before the Tribunal. It was urged before the Tribunal on behalf of the assessee that the house was situated in Patna where the Rent Control Act was in force. Under these circumstances it was contended that the income from this source should be determined in accordance with the Rent Control Order. The assessee also filed a copy of the order of the Rent Controller fixing the fair rent of the building at Rs. 480 per month only. The Tribunal rejected the contention of the assessee. Nevertheless, the Tribunal found that there was no basis in support of the valuation taken by the Appellate Assistant Commissioner at Rs. 14,400. To quote the language of the Tribunal itself:

"The Appellate Assistant Commissioner had taken the annual letting value at Rs. 14,400 which is based on guess and there is no material to support it and, as such, the figure taken by the Appellate Assistant Commissioner could not be accepted."

3. Having thus held, curiously enough, the Tribunal observed that as no materials were available on the records to determine the annual letting value, yet ou estimate the annual net income for the purposes of taxation under Section 23 could be determined on estimate at Rs. 6,000 after allowance of all admissible deductions as income from the residential house.

4. As already observed above, according to the assessees case, the reasonable annual letting value of the building was Rs. 5,760 only out of which deductions permissible under Section 23 were also to be made in favour of the assessee. The Tribunal, however, on estimate fixed the annual letting value at Rs. 10,500 and after giving all necessary deductions determined the net taxable income under this head at Rs. 6,000. Mr. K. N. Jain, learned counsel for the assessee, contended that where the Rent Control Act was in force and fair rent had been fixed in accordance with the provisions of the Act it was not open to any landlord to let the building out at a figure higher than the rate fixed by the Rent Controller, for, in the event of such a transgression, the landlord would be attracting the penal provisions under the Act. That being so, even for the purposes of Section 23 of the Act, no rent higher than the rate fixed by the Rent Controller was capable of being charged. As such, it could not be said that the inherent capacity of the hereditament to fetch profits was in any way and to any extent greater than that fixed by the Rent Controller.

5. Before considering the validity of this submission, I think it worthwhile to notice here the principles underlying the fixation of annual letting value for the purposes of Section 23 of the Act, Though the tax under the the head, "income from building" is a tax on income, it is well-settled that it is not a tax upon rents but upon the inherent capacity of the hereditament to yield profit. The standard selected as a measure of the amount of the income to be taxed in respect of the building capable of occupation is the annual value. If the owner of such properties should be himself in occupation of them, it by no means follows that he will, in fact, derive from them an income equal to this annual value, but as he has the use and enjoyment of the properties, it is, for the purposes of the statute, presumed that he does derive from them an income equal in amount to this annual value and the tax is assessed upon such a presumed notional income. The value for the purposes of taxation, however, is, as held by Lord Atkinson in the case of Governors of the Rotunda Hospital v. Coman [1920] 7 TC 517 that of the inherent capacity of the hereditament and is a wholly different thing from including for taxing purposes, as part of its value, the profits gained by the use of this capacity. The law in this regard is the same as incorporated in Section 23 of the Act as the law in England. Till the Rent Control Act had come into force in various States, frequently questions arose as to whether the rent which was charged by a landlord, from a tenant could always be taken as conclusive of the measure of annual letting out value for the purposes of taxation and it was repeatedly held that the rent as received from the tenant was not conclusive for the purposes of the annual letting value under the taxation laws. But even in those cases it had always been held that valuation by the municipality or local authority may be prima facie taken to be the correct annual value although evidence may be given to show that it is wrong. As observed by Kania, Acting C. J. (as he then was) in the case of D. M. Vakil v. Commissioner of Income Tax : [1946]14ITR298(Bom) while dealing with the scope and purport of section 9(2) of the 1922 Act, which corresponds to Section 23 of the present Act; ,

"The legislature has, therefore, expressly provided that the tax shall be payable by the assessee in respect of the bona fide annual value irrespective of the question whether he receives that value or not. Section 9(2) provides that for the purposes of this section, the expression annual value shall be deemed to mean the sum for which the property might reasonably be expected to let from year to year. It is again significant to note that the word used is might and not can or is . Reading these two paragraphs of Section 9 together, it is clear that the income from property is thus an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. It is further provided in the section that if the owner occupies the property he has to pay tax calculated in the manner provided therein. Therefore, by reason of the fact that the property is not let out, the assessee does not escape taxation."

6. The principle so enunciated has never been questioned or doubted. Indeed, a seven judges Full Bench of the Lahore High Court in the case of Lalla Mal Sangham Lal v. Commissioner of Income Tax has held that in estimating the sum for which a property might reasonably be expected to let from year to year, for the purpose of assessing the owner of such property to Income Tax under Section 9 of the Indian Income Tax Act, 1922, the amount paid by the tenant on account of municipal house tax should be included, that is, should be treated as part of the rent payable by the tenant to the landlord. The term "annual value " does not necessarily mean the annual money benefit derivable from the property by the landlord. The amount of rent payable by the tenant to the landlord is, however, only prima facie evidence of annual value and a consideration of the rents paid for similar and similarly situated properties in the locality may show the "annual value" in any particular instance to be less or more than the rent actually paid. These were the principles so well-established that never could any such controversy with regard to the measure of valuation for the purposes of Section 23 have arisen before the various Rent Control Acts came into force in the various States of this country.

7. After the coming into force of the various Rent Control Acts one thing is very clear and that is this, that no landlord is permitted by law to receive anything more than the rate of fair rent fixed by the Rent Controller. For, charging of any higher rent would at once subject the landlord to penal consequences arising out of the infractions of law. There is only one statute regarding rent control, namely, the Bihar Buildings (Lease, Rent and Eviction) Control Act, operative in this State. Whereas most of the various Rent Control Acts and other statutes provide that the municipal valuation of the building shall be fixed by-the municipal authorities on the basis of the provisions as contained in the Rent Control Acts, so far as the Bihar Act is concerned, the position is just the reverse. The Rent Controller is enjoined under the Bihar Act to fix fair rent on the basis of the municipal valuation as fixed by the municipal authorities either under the Bihar and Orissa Municipal Act or under the Patna Municipal Corporation Act. Therefore, with regard to the doubt raised by the Tribunal in the appellate order as to whether fair rent could be duly fixed by the Rent Controller under the Bihar Rent Control Act in respect of the buildings which were used for residential purposes, suffice it to say that the basis of fixation of fair rent under the Rent Control Act is the municipal valuation. It is on that basis that the present rate of rent fixed at Rs. 480 per month should be presumed to have been fixed. In appropriate cases fair rent may have been fixed in respect of buildings which were not actually in occupation of tenants but were being intended to be let out to a prospective tenant under Section 6 of the Bihar Buildings (Lease, Rent and Eviction) Control Act and when once such a rent had actually been fixed and subsequently the tenant quits and the landlord conies into occupation of the building for his residential purposes, it cannot be said that so long as the house was in occupation of the tenant bona fide and reasonable letting value on the basis of the inherent capacity of the hereditament to fetch profits would be on the basis of the rate as fixed by the Rent Controller, but the measure would be different when an erstwhile landlord comes into occupation of such a building for his own residential purposes. In principle I do not see any justification to hold that so long as the building is tenent-ed its inherent capacity to fetch profits is less than when the building comes into use and occupation of the landlord for his residential purposes. Learned counsel for the assessee placed reliance on two decisions of the Supreme Court in the case of the Corporation of Calcutta v. Padma Debi : [1962]3SCR49 and the case of Gitntur Municipal Council v. Guntur Town Rate Payers Association : [1971]2SCR423 . In the case of Corporation of Calcutta, Subba Rao J. (as he then was), speaking for the court, while dealing with Section 127(a) of the Culcutta Municipal Act, 1923, held as follows :

"It is said that Section 127(a) does not contemplate the actual rent received by a landlord but a hypothetical rent which he can reasonably be expected to receive if the building is let. So stated the proposition is unexceptionable. Hypothetical rent may be described as a rent which a landlord may reasonably be expected to get in the open market. 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."

8. In the case of Guntur Municipal Council, while construing the provisions of Section 82 of the Madras District Municipalities Act, it was held by the Supreme Court that the test essentially was what rent the premises could lawfully fatch if let out to a hypothetical tenant. The municipality was not free to assess any arbitrary annual value and had to look to and was bound by the fair or standard rent which would be payable for a particular premises under the Rent Control Act in force. These two decisions of the Supreme Court do not only support the contention of learned counsel for the assessee that where fair rent had been fixed by the Rent Controller it is not open to treat the capacity of profits which the property can fetch to be anything more than what on the basis of fair rent was fixed by the Controller but also go to support the principle which is involved in the construction of Section 23 of the Act, namely, what is the hypothetical rent which may be presumed for the hereditament in question, what is its inherent capacity to fetch by way of profit. If such a capacity is limited to the ceiling which is put by the order of the Rent Controller under the Rent Control Act, it is dificult to see on what basis a different reasonable annual letting value can be fixed in respect of such building for the purposes of Section 23 of the Act. But that extreme principle may not be invoked in the instant case.

9. As already stated above, the Tribunal has held that there is no material on record to give any indication of any other reasonable annual letting value of the building in question. That being so, the Tribunal committed the same error which it had accused the Appellate Assistant Commissioner to have committed by acting on nothing more than a guess-work. The fixing of annual letting value on "estimate", as the Tribunal calls it, is nothing else but fixing it on a "guess", which the Tribunal holds, the Appellate Assistant Commissioner did.

10. Taking into consideration the test to be applied in the instant case and even applying the test laid down in the cases which had arisen before the various Rent Control Acts had come into force, suffice it to say that it had always been presumed that municipal valuation afforded an indication as to the reasonable annual letting value of a building which could be rebutted and either reduced or enhanced only on the basis of other materials on record for the purpose of such rebuttal. In the instant case the Rent Controller has fixed the rate of rent on the basis of municipal valuation as in law he was bound to do. A presumption with regard to such a valuation as being reasonable annual letting value for the purposes of Section 23 certainly attached to it and in the absence of any other material on record it was the only safe guide on the basis of which the annual letting value for the purposes of Section 23 could be fixed.

11. Thus, taking into consideration the question in all its ramifications, I am constrained to hold that, on the facts and in the circumstances of the case, for determination of the annual value under Section 23, the rent fixed by the Rent Control Act [Bihar Buildings (Lease, Rent and Eviction) Control Act, 1947], could be taken into consideration. I, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. But, in the circumstances of the case, there shall be no order as to costs.

S.N.P. Singh, C.J.

12. I agree.