ITR/22/1999 1/9 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 22 of 1999 For Approval and Signature: HONOURABLE MR.JUSTICE JAYANT PATEL HONOURABLE MR.JUSTICE AKIL KURESHI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= COMMISSIONER OF INCOME-TAX - Applicant(s) Versus SARABHAI PRIVATE LIMITED - Respondent(s) ========================================================= Appearance : MR MANISH R BHATT for Applicant(s) : 1, MR RK PATEL for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE JAYANT PATEL and HONOURABLE MR.JUSTICE AKIL KURESHI Date : 04/07/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE JAYANT PATEL) ITR/22/1999 2/9 JUDGMENT 1. The question referred to this Court reads as under: “Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to take the ALV on the basis of rent received by the assessee or the basis of rental agreement and not on the basis of gross rental value determined by Small Causes Court?” 2. To examine the aforesaid question, some facts may have relevance which can be summarised as under: 3. The Assessee is a Private Ltd. Company. It is having various properties situated at different places and one of the property which is concerned with the present Reference is known as Shantisadan located at Ahmedabad. As per the Assessee, on the basis of the rental agreement, it had received rental income of Rs.27,467/- from the property of Shantisadan and the said income was shown in the return by the Assessee. However, in the assessment proceedings, the Assessment Officer based on the gross rental value of the property assessed by Small Causes Court, directed for assessment on the basis of such Annual Letting Value of the property at Rs.1,57,675/-. 4. The Assessee preferred an appeal against the decision of the Assessment Officer and in Appeal, the Commissioner of Income Tax(Appeals) ITR/22/1999 3/9 JUDGMENT observed inter alia that so far as the property of Shantisadan at Ahmedabad is concerned, the actual rent received was Rs.27,467/-, but as the Small Causes Court has fixed the rental value of Rs.1,36,508/-, and after adding 1/9th of the future, the Annual Letting Value comes to Rs.1,57,675/-, the same is rightly given effect by the Assessing Officer and therefore, the decision of the Assessing was confirmed. 5. The matter was carried further before the Appellate Tribunal and the Tribunal had observed inter alia that the rent as such, is required to be considered on the basis of the standard rent if fixed by the Court as per the Rent Act and as per law, if standard rent is not fixed, it can be fixed by the Assessing Officer also. However, as the rental income was there on record, the Tribunal ultimately directed the Assessing Officer to determine the annual value on the basis of the rent received by the Assessee on the basis of rental income. Under these circumstances, the present Reference to this Court on the question referred to hereinabove. 6. We have heard Mr. Bhatt, learned counsel appearing for the Revenue and Mr.Karia for R.K.Patel for the Assessee. 7. The contention of the learned counsel for the Revenue is that if the Annual Letting Value is ITR/22/1999 4/9 JUDGMENT fixed by the Small Causes Court for the Municipal Tax purpose, the same could be the basis for arriving at the actual rental income for the purpose of taxation. It was submitted that the income of two other properties of the very Assessee, the assessment based on the Annual Letting Value fixed by the Small Causes Court, is accepted and therefore, it was submitted that the same could be the valid criteria for assessment. He submitted that the Assessing Officer as well as the C.I.T. (Appeals), rightly adopted the criteria, but the Tribunal has reversed. It was the contention that the approach of the Tribunal was erroneous. 8. Whereas, on behalf of the Assessee, Mr. Karia, relied upon the decision of the Apex Court in the case of Dewan Daulat Rai Kapoor Vs. New Delhi Municipal Committee & Anr. reported at 22 ITR 700, and in the case Mrs.Sheila Kaushish Vs. Commissioner of Income Tax, Delhi reported at 131 ITR 435 and also the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. M.Ratanchand Chordia reported at 228 ITR 626, and contended that as such, even for income tax purpose, the Annual Letting Value has to be as per the standard rent determined under the Rent Control Act and the basis of Annual Letting Value for Municipal Taxation is not the correct approach and therefore, the Tribunal has rightly observed and reversed the decision of the ITR/22/1999 5/9 JUDGMENT Assessing Officer and the Commissioner (Appeals). 9. We may refer to the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. M.Ratanchand Chordia (supra), wherein, after considering the aforesaid both the decisions of the Apex Court in the case of Dewan Daulat Rai Kapoor (supra) as well as in the case of Mrs.Sheila Kaushish (supra), the observations have been made by the Madras High Court for considering the question which has relevance for the question, which is to be decided by us in the present proceedings. 10.It may be observed that in the said decision, the observations of the Apex Court in the case of Dewan Daulat Rai Kapoor at para 703 were extracted, which we find it proper to extract. The same reads as under: “The actual rent payable by a tenant to the landlord would, in normal circumstances, afford reliable evidence of what the landlord might reasonably expect to get from a hypothetical tenant, unless the rent is inflated or depressed by reason of extraneous considerations such as relation, expectation of some other benefit, etc. There would ordinarily be in a free market close approximation between the actual rent received by the landlord and the rent which he might reasonably expect to receive from a hypothetical tenant. But where the rent of the building is subject to rent control legislation, this approximation may and often does get displaced. It is, therefore, ITR/22/1999 6/9 JUDGMENT necessary to consider the effect of rent control legislation on the determination of annual value.” 11.Apart from the above, it is required to consider the effect of the Rent Control Legislation for the purpose of deriving income by the Landlord of the property. It can hardly be disputed that as per the Rent Control Legislation, there is a fetter or restriction over the enforceable right with the landlord to recover the rent exceeding the standard rent. It may be said that if the right of the landlord is to be enforced under the Rent Control Legislation for recovery of rent, it would not exceed the standard rent. On the contrary, the violation of certain provisions of the Rent Control Act may invite further severe consequences including that of the prosecution etc. 12.If the matter is to be examined for the Assessment of the Annual Letting Value by the local authority of a property, it may stand on different consideration. In a case where the property is not in occupation of any tenant or rather is in occupation of the owner or in absence of any relationship of the landlord or the tenant, it also may stand on different footing. But in cases where there is fetter on the rights of the landlord to recover the rent exceeding the standard rent, even in the cases ITR/22/1999 7/9 JUDGMENT of the assessment of the Annual Letting Value of the property, a local authority may not be justified in assessing such value of the property and the reason obvious is that one law provides a fetter upon the right of the landlord to recover the rent exceeding the standard rent, the same is required to be considered even for the tax purpose by the local authority. Further, in cases of the property in which there is no relationship of the landlord or tenant, it may stand on different consideration. In any case, the assessment of a property for municipal taxation purpose by a local authority would stand on altogether different aspects inasmuch as such taxation is in discharge of the obligation upon the local authority as per the relevant legislation. Therefore, while imposing taxation, as per the Municipal laws, the different consideration may prevail. The parity cannot be considered for assessing the income of a landlord and at that stage, the relevant criteria or consideration would be a fetter or restriction provided by the Rent Control Legislation upon the landlord to receive the rental income of the property. 13.As in the present case, there is no fixation of standard rent by any competent Court under the Rent Control Legislation, such may not apply or if the standard rent is to be fixed as per the scheme of the Rent Control Legislation, it may ITR/22/1999 8/9 JUDGMENT be required to be computed and calculated. However, as the language of the relevant provisions of the Income Tax Act is the higher amount to be considered and it is not a case of the Revenue that the standard rent if assessed as per the Rent Control Legislation, may exceed the actual rental income received by the Assessee, the income as assessed based on the actual rental rental income was rightly directed by the Tribunal. 14.At this stage, we may extract the observations made by the Madras High Court in the decision of Commissioner of Income Tax (supra) at page 629, relevant of which reads as under: “...the annual letting value of the premises should be determined in accordance with the rent control legislation, where the property situated in a place covered by rent control legislation....” “The presumption would be that the Municipal Corporation would have followed only the Municipal Corporation Act. Under Section 100 thereof, there is no rule for determining the annual letting value on the basis of the value of the land and the building. Therefore, in view of the abovesaid two decisions of the Supreme Court, it is not possible to accept the contention put forward by the Department that the annual letting value as fixed by the municipality, should be accepted. There is also no evidence on record to show that the rent received by the assessee is low because of any extraneous considerations, like relationship between the landlord and the tenant or any other contract. In the ITR/22/1999 9/9 JUDGMENT absence of such evidence we are not in a position to reject the conclusion arrived at by the Tribunal that the actual rent received by the assessee would form the fair rent, as contemplated under the Rent Control Act.” 15.So is in the present case inasmuch as the Tribunal was right in setting aside the assessment based on the Annual Rental Value and was right in directing the assessment based on the actual rental income received by the Assessee on the basis of the rental agreement. Hence, we answer the question in affirmative in favour of Assessee against Revenue. 16.Disposed of accordingly. (JAYANT PATEL, J.) (AKIL KURESHI, J.) *bjoy