1. This is an appeal by the ITO against the order of the AAC dated 2-10-1982 in the 1977-78 income-tax assessment proceedings.
2. For the assessment year 1977-78, previous year ending 31-3-1977, on 5-10-1977, the assessee filed a return declaring total income of Rs. 29,870. Among the income so declared, the assessee returned income of Rs. 1,047 from the self-occupied flat being Flat No. 71, Chitrakut, Altamount Road, Bombay. The net income from house property at Rs. 1,047 was returned thus:Municipal rateable value as per certificate 4,285Add: One-ninth 476 4,761Less: Municipal taxes at the rate of Rs. 176.58 per month 2,119Less: Half for self-occupation of Rs. 1,800, 2,642 whichever is less--under Section 23(1) 1,321Less: (1) One-sixth repairs 220 1,321 (2) Insurance--Rs. 4.53 per month 54 274Net chargeable income from house property: 1,047 Dealing with this issue, it is seen that the ITO accepted the municipal rateable value at Rs. 4,840 (as disclosed by the assessment order) even though such figure is not to be seen in the computation of property income as filed by the assessee and reproduced earlier. The ITO proceeded to observe that: The annual value of property is computed on the basis of the sum for which the property might reasonably be expected to let from year to year, which is estimated at Re. 1 per sq. ft. The assessee has property on a floor of 2,000 sq. ft. area and as such, the annual value of property is estimated at Rs. 24,000.
Proceeding on the basis that the annual letting value of the property was Rs. 24,000 as against the figure returned by the assessee of Rs. 476, the ITO computed the assessee's income from property at Rs. 16,370, against the income from property returned at Rs. 1,047.
3. On appeal to the AAC, the assessee relied on the decision of the Supreme Court in Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435 and urged that the assessee's income from self-occupied property, of necessity, had to be computed on the basis of rateable value as fixed by the corporation, viz., Rs. 4,285 so that the assessee's property income was correctly computed at Rs. 1,047. The AAC accepted the assessee's appeal.
On the facts and in the circumstances of the case, the AAC erred in allowing the rateable value as per municipal valuation instead of actual rent receivable. The Supreme Court decision, referred to by the AAC, is in respect of rateable value computed under the Rent Control Act and does not apply to the present case.
5. Shri Joy for the revenue fairly and properly accepted that the municipal rateable value of a flat, as fixed by the corporation, is Rs. 4,285 and that since in arriving at that value in accordance with relevant provision of the Bombay Municipal Corporation Act, a deduction of 10 per cent for repairs was already made, according to the assessee, the gross annual letting value was Rs. 4,671, which was the starting point of the computation of the income from property. Shri .Toy urged that the Supreme Court in Mrs. Sheila Kaushish's case (supra) does not necessarily mean what the AAC has accepted it to mean. According to Shri Joy, the ITO is bound to ascertain the annual letting value in accordance with the provisions of Section 23(1)(a) of the Income-tax Act, 1961 ('the Act'), which is applicable for the year under consideration, the relevant words being 'the sum for which the property might reasonably be expected to let from year to year'. Shri Joy urged that it cannot be that a flat of 2,000 sq. ft. at Chitrakut, in one of the most prestigious locality of the city, could be expected to let at less than Rs. 400 a month as would be apparent if the assessee's submission be correct. In the circumstances, Shri Joy urged that the value, as adopted by the ITO, was proper and that, accordingly, the ITO's order be restored.
6. Shri Dastur for the assessee submits that the amendment to Section 23(1), as made with effect from 1-4-1976, properly speaking, is not applicable as the property under consideration has not been let out.
According to Shri Dastur, inasmuch as the relevant phrase to be considered is 'the sum for which the property might reasonably be expected to let from year to year' is the same as phrase used in the Bombay Municipal Corporation Act, the ITO was bound to accept the valuation as made by the corporation authorities. In this regard, Shri Dastur heavily relied on the decision of the Calcutta High Court in CIT v. Prabhabati Bansali [1983] 141 ITR 419. Shri Dastur pointed out that even though that was a decision of the Calcutta High Court, the Court was considering the computation of property income of a house property known as 'Radia House' situated in Bombay. Shri Dastur urged that as such the Calcutta High Court had to consider the provisions of the Bombay Municipal Corporation Act. Shri Dastur urged that the Calcutta High Court applied the principles laid down by the Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 and Mrs. Sheila Kaushish's case (supra). On that basis, stated Shri Dastur, the Calcutta High Court observed as under: ... Therefore, in view of that position and the municipal law and in view of the decision of the Supreme Court, it appears to us that the income from house property must be computed on the basis of the sum which might reasonably be expected to let from year to year and with the annual municipal value provided such a value is not above the standard rent receivable and that would be the safest guide for this purpose and the rent actually received would not be of any relevance.
Shri Dastur pointed out that in the present case, admittedly, the property was not let out. He submitted that as such, the question of any rent actually received does not arise. According to him, if the standard rent is less than the value fixed by the municipal corporation then alone the assessment has to be made on the basis of the standard rent and if the standard rent is more than the value fixed by the municipal corporation, one of necessity, has to consider the value as fixed by the municipal corporation. In the circumstances, Shri Dastur urges that the decision of the AAC is correct and appeal by the department be dismissed.
7. Having heard the parties and examined the record, we are of the opinion that Shri Dastur's submission is not supported by the decision of the Calcutta High Court on which he has heavily relied on. True, at page 433 the Court has observed what it had observed and which has been brought to our notice by Shri Dastur and as reproduced above (sic).
However, on that basis, it does not follow that the ITO is bound to accept the annual letting value as fixed by the corporation. When one turns to the judgment of the Court, one finds the Court's observation as under: . . . The Supreme Court observed that where 'fair rent' relating to the house in question in New Delhi was fixed in 1941 under the New Delhi House Rent Control Order, 1939, and that fixation continued to be valid notwithstanding the repeal of the Control Order, even after the Delhi Rent Control Act 59 of 1958 came into force, the fair rent determined the standard rent which still affected the assessment of rates of the house in question for fixation of rates for assessment of house tax under th e Punjab Municipal Act, notwithstanding the fact that the landlord was deriving at the time of fixation a much higher rent than the standard rent. Therefore, the ratio of the said decision is that the annual value under the Municipal Corporation should be fixed on the basis of standard rent receivable by the houses in question. This principle has been extended by the Supreme Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 1TR 700. There also the Supreme Court observed that in relation to a building within the jurisdiction of the New Delhi Municipal Committee or the Corporation of Delhi, even if the standard rent had not been fixed by the Controller under the Delhi Rent Control Act, 1958, the landlord could not reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under that Act. This would be so equally whether the building had been let out to a tenant who had lost his right to apply for fixation of standard rent or the building was occupied by the owner himself. This principle, as the Supreme Court noted, would apply to self-occupied house and further when rent control legislation provided for fixation of standard rent which along and nothing more than which the tenant should be liable to pay to the landlord, it did so because it considered the measure of the standard rent prescribed by it to be reasonable. It laid down the norm of reasonableness in regard to the rent payable by the tenant to the landlord. Any rent which exceeded this norm of reasonableness was regarded by the Legislature as unreasonable or excessive. The Legislature obviously regarded recovery of rent in excess of the standard rent as exploitative of the tenant and would it be proper for the Court to say that it would be reasonable on the part of the landlord to expect to recover such exploitative rent from the tenant 8. Now, in the instant case, the property in question has not been let out. It is an accepted position that the property is self-occupied property.
The issue is whether in a case like this, the ITO is bound to accept the annual letting value as fixed by the corporation or whether the ITO has necessary jurisdiction independently to arrive at the annual letting value on the basis of the provisions of Section 23(1)(a). In other words, the issue is whether merely because the phraseology used in the Bombay Municipal Corporation is identical with the phraseology used in Section 23(1)(a), the ITO has, of necessity, to abdicate his jurisdiction and the ITO is required merely to follow the valuation as made by the corporation.
9. We are of the opinion that the ITO cannot be allowed to abdicate his jurisdiction. In point of fact, Shri Dastur seriously did not urge that proposition. As one can fairly understand the principles laid down by the Supreme Court, one has to consider that even if the building be occupied by the owner himself, the measure of the annual value of the property is on the measure of the standard rent prescribed by it to be reasonable.
10. We enquired of Shri Dastur the point of time at which the assessee made the investment in the flat and the amount so invested. Shri Dastur stated that the assessee had purchased the flat in 1964 for an amount of Rs. 1,07,000. In reply to a query concerning the fixation of standard rent under the Bombay Rent Control Act, Shri Dastur stated that the rent to be fixed under the Bombay Rent Control Act as the standard rent has to be so fixed as to give a reasonable net return allowing the landlord a fair return on his investment in land and a return at a higher rate of interest on the investment in the construction of the property under consideration.
11. Having heard the parties and examined the record, we are of the opinion that the AAC's reliance on the decision of the Supreme Court in Smt. Sheila Kaushish's case (supra) was misconceived. In Smt. Sheila Kaushish's case (supra) one was concerned with the property that was let out at a figure much higher than the municipal annual letting value. In that background, one has to appreciate the decision of the Court, as would be seen from the headnote, which is as under: ... that the annual value of the warehouse had to be determined on the basis of the standard rent of different portions of the warehouse determinable as follows: (a) since five years had elapsed from the first letting of the first floor its standard rent had to be determined on the basis of cost of construction and market value of land under Section 6(1)(B)(2) of the Delhi Rent Control Act for both years; (b) since five years from the first letting of the northern portion of the ground floor and the mezzanine floor would elapse only on March 31, 1969, the standard rent of those portions would be Rs. 6,907 per month for the accounting period ending March 31, 1969, relevant to the assessment year 1969-70 under Section 6(2)(b), and the standard rent for the assessment year 1970-71 had to be ascertained on the basis of cost of construction and market value of land under Section 6(1)(B)(2); (c) since five years from the first letting of the southern portion of the ground floor would elapse only on December 6, 1969, the standard rent would be the agreed rent for the whole of the accounting period for the assessment year 1969-70 and for the period up to December 6, 1969, for the assessment year 1970-71; and for the period after December 6, 1969, the standard rent would be that ascertainable under Section 6(1)(B)(2) on the basis of cost of construction and market value of the land.
It would thus be manifest that according to the Court irrespective of the fact that the property was let out and irrespective of the fact that there was certain municipal valuation as made by the appropriate authorities for the purposes of computation of income from properties, one has to proceed on the basis of standard rent as would be fixed under the relevant enactment. When one turns to the earlier decision of the Supreme Court in Dewan Daulat Rai Kapoor's case (supra), after considering the earlier decision of the Supreme Court having a bearing on the issue, the Court observed as under: It is in the light of these decisions that we must consider whether in the case of a building in respect of which no standard rent has been fixed by the Controller under the Delhi Rent Control Act, 1958, the annual value must be limited to the measure of standard rent determinable under that Act or it can be determined on the basis of the higher rent actually received by the landlord from the tenant. .
. .
It was, thus, held that the prohibition in Section 4 and Sub-section (1) of Section 5 against recovery by the landlord of any amount in excess of the standard rent was operative only after the standard rent was fixed by the Controller under Section 9 and, until the standard rent was so fixed, it was lawful for the landlord to receive the contractual rent from the tenant and if the period of limitation prescribed for making an application for fixation of the standard rent had expired, the tenant could not, thereafter, get the standard rent fixed by the Controller and would continue to be liable to pay the contractual rent to the landlord. The revenue relied on this decision and contended that, since in each of the present appeals the building was let out to the tenant, but its standard rent was not fixed by the Controller under Section 9 and the period of limitation for making an application for fixation of the standard rent had expired, the landlord 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 Act, but was liable to be assessed by reference to the contractual rent recoverable by the landlord from the tenant. ...
The Court answered by observing that for the purposes of income-tax assessment, one has to ignore the contractual rent and proceed on the basis of the standard rent. As would be seen from the head-note, the Court observed: . . . It is difficult to see how the annual value of a building could vary according as it is tenanted or self-occupied.
(ii) When the rent control legislation provides for fixation of standard rent, which alone and nothing more than which the tenant shall be liable to pay to the landlord, it does so because it considers the measure of the standard rent prescribed by it to be reasonable. It lays down the norm of reasonableness in regard to the rent payable by the tenant to the landlord. Any rent which exceeds this norm of reasonableness is regarded by the Legislature as unreasonable or excessive. The Legislature obviously regards recovery of rent in excess of the standard rent as exploitative of the tenant and would it be proper for the Court to say that it would be reasonable on the part of the landlord to expect to recover such exploitative rent from the tenant 12. Considering these observations, we are of the opinion that while making the assessment under the Act and when dealing with the question under Section 23(1)(a), the ITO has himself to consider the issue and arrive at 'the sum for which the property might reasonably be expected to let from year to year'.
13. Since, in the present case, the property has not been let out, no question would arise of fixation of standard rent. However, one has hypothetically to consider that such a question as having been arisen in the course of assessment for the year 1977-78, as the ITO has to ascertain under the provisions of Section 23(1)(a), 'the sum for which the property might reasonably be expected to let from year to year'.
Now, considering the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1947, commentary by J.H. Dalai, fourth revised edition, one sees as under: In respect of premises erected after September 1940, the appeal court of the Bombay Small Causes Court [Sorab D. Talati v. Joseph Michem, Appeal No. 101 of 1949; Lalkaka, Ch. J. and Barodawalla, J. (decided on 15-12-1949)] laid down the principles as under: (7) With respect to a building built after 1-9-1940, the only fair criterion that the court must adopt must be based on the reasonable return to the landlord on his investment.
(2) Reasonable rate of net return on the investment allowed was 5 per cent per annum on the cost of the building and 4 per cent per annum on the value of the land. To the net return were added the outgoings such as municipal rates and taxes, per cent for repairs, 1 /8 per cent for insurance, 61 per cent for depreciation on 90 per cent of the cost of construction of the building. On the whole, for buildings in Bombay City, the gross returns allowed were 8 2/3 per cent per annum on the cost of the building and 6 per cent per annum on the value of the land. The aforesaid outgoings were based on the assumption that the life of the building would be 60 years. If the life of the building is ascertained to be 40 years, 87 per cent more may be allowed for depreciation and if the life of the building is ascertained to be 80 years, 36 per cent less may be allowed for depreciation. If there are additional amenities of lift, electricity and water or the landlord renders other services to the tenants, a reasonable return therefor should be added to the outgoings.
The aforesaid discussion is sufficient to show that the appeal court of the Bombay Small Causes Court in that case [Sorab D. Talati v. Joseph Michem, Appeal No. 101 of 1949; Lalkaka Ch. J. and Barodawala J. (decided on 15-12-1949)] erred in quantifying the particular rates for return on the investment and the outgoings and in laying down a general principle that the rent which includes the outgoings and return on a general principle that the rent which includes and return on the investment in excess of the particular rates is excessive. This has been recognised by the appeal court of the Bombay Small Causes Court in other cases. In one case, looking to the insecure nature of the tenure, i.e., a monthly lease and semi-permanent nature of the construction (i.e., having been erected with secondhand materials), the court permited 1 per cent allowance for repairs, 0.125 per cent for insurance and 8.723 per cent for depreciation on 90 per cent of the cost of construction (Nathalal Mohanlal v. Bai Sitabai Desai, Appeal No. 169 of 1950).
In respect of the buildings erected after November 1951, the court has in view of the rise in the rate of interest of gilt edged securities and of the bank rate since November 1951 allowed a higher return than that of 4 per cent on land value and 5 per cent on the cost of construction (S.B. Jaiswal v. K. Jagmohandas, R.A.N. Nos.
1668 of 1953, decided on 21-11-1954 and Somabai V. Patel v. Ishwaribhai P. Daftari, R.A.N. No. 138 to 143 of 1954, decided on 18-7-1955). The said rate rose to 3 per cent in November 1951 and thereafter to 4 per cent in the middle of 1953 and to 4.13 per cent in the middle of 1954.
14. We are of the opinion that, in the circumstances of the case, one has to consider the issue as to what would be the standard rent fixed for this flat as on 1964, when the investment of Rs. 1,07,000 was first made in the flat. Considering the point of time of the investment and the amount of investment, we are of the opinion that a person so investing would naturally and reasonably expect the net return of at least 7.5 per cent. Proceeding on that basis, on the investment of Rs. 1,07,000, the net return would be Rs. 8,025. Since this would be the net return to be expected, one of necessity has to consider the municipal tax which will have to be borne by the owner which in the present case comes to Rs. 2,119; one has equally to take into account the maintenance of property. Now, considering that fact, we are of the opinion that as on 1964, it would be proper to expect this flat to be let out at Rs. 1,000 per month as against Rs. 2,000 per month, as adopted by the ITO for the year under consideration. In arriving at this figure of Rs. 1,000 per month, i.e., Rs. 12,000 per year, it would be manifest that we have taken into account for repairs and maintenance a sum of Rs. 1,856, an allowance which we are making for the purposes of repairs, contribution to the society, insurance and similar other expenditure. For the reasons indicated above, we are of the opinion that the AAC erred in merely accepting the submission of the assessee.
For the reasons indicated above properly appreciating the principles laid down by the Supreme Court in two cases and by the Calcutta High Court, we find that the assessee's case cannot be accepted in full. We further find that equally, the ITO's case cannot be accepted in entirety. In the circumstances, we direct that the assessee's income from property be computed on the basis that the starting point of computation would be not Rs. 4,761 as urged by the assessee and not Rs. 24,000 as taken by the ITO, but Rs. 12,000. From that stage, one will have to make the computation in the manner otherwise done by both the parties.