1. Since common issues are involved in these appeals the same are consolidated and disposed of by a single order for the sake of convenience.
2. The common controversy raised in these appeals by the assessee relates to the nature and quantum of income from "Honest House" situated at Vallabh Vidyanagar. The said property was originally owned by Shri P. B. Patel and its value was shown at Rs. 4 lakhs. Shri P. B.Patel was living in the house along with his father a Shri B. I. Patel and mother Smt. Madhuben B. Patel. The owner of the said property Shri P. B. Patel had earlier given it on rent to Elecon Engg. Co. Ltd. at the rate of Rs. 1,250 per month. In September, 1977 Shri P. B. Patel sold this property to the assessee-company for a consideration of Rs. 7 lakhs and in addition the assessee-company incurred registration expenses of Rs. 90,68 (sic). The assessee company further carried out renovation and additions in the property and by the end of the asst.
yr. 1981-82, the total investments made in the property stood at Rs. 12,47,160. Besides the assessee-company also provided air-conditioning costing Rs. 3,00,000 and furniture and furnishing at a cost of Rs. 1,08,147. The total investment thus comes to Rs. 16,61,307. Immediately after the purchase, the assessee-company gave this property on rent to Elecon Engg. Co. Ltd. at the rate of Rs. 1,250 per month in July, 1978 and further Rs. 1,500 in January, 1980. A portion was also let out to Power Build Ltd. - another limited company belonging to this Patel group at a monthly rent of Rs. 750 per month. Shri P. B. Patel along with his family continued to reside in the building. It was claimed that Elecon Engg. Co. Ltd. got the property on rent for the residence of the Managing Director Shri B. I. Patel, father of the original owner Shri P. B. Patel. A portion was separately taken on rent by Power Build Ltd. from the assessee-company for the residence of Smt. Madhuben B.Patel, mother of the original owner Shri P. B. Patel.
3. The first grievance of the assessee is that the learned CIT(A) ought to have held that income from 'Honest House' is taxable as business income of the assessee-company and not income from house property. This issue stands covered against the assessee and in favour of the Revenue by the order of the Tribunal, Ahmedabad Bench in ITA Nos. 98 to 101/Ahd/1988 relating to asst. yrs. 1978-79 to 1981-82 vide order dt.
5th Jan., 1995. Respectfully following the aforesaid order of the Tribunal, we decline to interfere and hold that the action of the AO in assessing the income under the head "income from property" is justified.
4. The next grievance relates to the determination of income assessable in the hands of the assessee-company. According to the assessee the actual rent received should be treated as income and not the rent estimated by the Asstt. CIT, Baroda. The AO in his order for asst. yr.
1978-79 has given the detailed description of the property as also the details of the investments made therein right from its purchase in 1977 for Rs. 7 lakhs. The AO has dealt with the question of determination of ALV in para 6 of this order where he has noted as under : "In view of the fact that the property has been constructed as per liking and convenience of occupants the question of rent reasonably be expected from year to year cannot be compared with other properties situated in that area. The reason is that there is no other property of such huge investment and description which can be compared to Honest House in the area. As is clear from the details of investment made in the Honest House given above that though the company is not occupying the Honest House for its own activity the investment in the property are being made to suit the convenience and requirement of the directors of the other companies who are occupants." The AO has further noted that since the expenses on electricity, maintenance and depreciation etc., were disallowed, these were also to be taken note of in determining the ALV of the property. Before the AO, it was pointed out that in a place like Vallabh Vidyanagar where the property is situated there would be no other comparable property in its vicinity. Moreover, as it was purchased with a specific objective and purpose and persons of user in mind it may not have any other alternate tenant available giving even the rent paid by Elecon Engg. Co. Ltd. It was claimed that the rent received in these years should be taken as the correct ALV of the property. Reliance was placed on the civil Court's order under Rent Control Act fixing the standard rent at Rs. 1,250 per month for Elecon Engg. Co. Ltd. and Rs. 750 per month for Power Build Ltd. The AO rejected the civil Court's order mainly because it was applicable from 1986 onwards and not for prior period and also because civil Court's order was amongst interested parties. The learned AO further noted that the prior owners of the property were the occupants who sold it to the assessee-company who in turn let it out to two companies, viz., Elecon Engg. Co. & Power Build Ltd. of which they were the Chairman and Managing Director and thus the same persons continued to enjoy the occupation of the property. He further noted that though the property was let out to two separate entities there was no separate demarcation of the areas let out to each of them. Since the parties for whom the property was taken on rent, e.g., Managing Director and Chairman of the two companies respectively were the husband and wife, the AO held that recourse to the civil Court for fixation of standard rent was not independent or an objective action.
The AO, therefore, taking note of the Supreme Court decisions relied on by in the cases of Dewan Daulatrai Kapoor vs. New Delhi Municipal Committee (1980) 122 ITR 700 (SC) and Mrs. Shiela Kaushish vs. CIT (1981) 131 ITR 435 (SC) held that in view of cl. (b) in sub-s. (1) of s. 23, w.e.f. 1976 the Department was to take note of the actual rent even if the standard rent was lower. The AO quoted authorities like Shri Roshanlal Nanavati, the author of "Theory & Practice of Valuation" (page 53 1st Edn., 1968) and Ved Prakash Verma in "Law & Practice of Wealth-tax" 1978 Edn., p. 11 to hold that 7 to 8 per cent return on the investment in the property was reasonable as against 3 per cent taken by the Municipal authorities. Keeping in view the close association and relationship amongst the owners and tenants, he concluded that 8 per cent return on the cost as reasonable rent and took ALV at Rs. 7,280 for asst. yr. 1978-79, for one month and 12 days; Rs. 79,725 for asst.
yr. 1979-80; Rs. 97,520 for asst. yr. 1980-81 and Rs. 1,32,928 for asst. yr. 1983-84 and accordingly computed the income under the head "income from house property".
5. On appeal, the learned CIT(A) confirmed the action of the AO observing as under : "One thing is certain that right from Supreme Court's decision in the case of CIT vs. Chugandas & Co. (1965) 55 ITR 17 (SC) income from house property owned by an assessee is to be taxed under the head 'income from house property' and not under the head "profits and gains of business and profession". In the instant case there is no direct nexus with the business of the appellant with the renting of the property to the Managing Director and Chairman of the principals. It is also held in Sakarlal Balabhai vs. ITO (1975) 100 ITR 97 (Guj) that in absence of any better way of estimating rent, the rate of interest on cost of building and land may provide a reasonable basis for determining the ALV more particularly when the property is occupied by the owner. In the instant case the peculiar facts as brought out by the AO and the appellant establishes that the property is at a place where there are no similarity placed properties and, therefore, even though it is let out, the concept of fair market rent cannot be applied. This is also true because the property in question is occupied by the same persons who were occupied prior to its purchase by the appellant. The appellant company has also explained that it was their business properties to earn rent. In view thereof return of 8 per cent as estimated by the AO is fairly reasonable, keeping in view the commission earned from the tenant company. On facts and in law, therefore, I see no justification in interfering with the decision of the AO for all these years." 6. Shri K. C. Patel, the learned counsel for the assessee submitted that the ALV shown by the assessee was fair and reasonable and ought to have been accepted by the authorities below. He submitted that Vallabh Vidyanagar is extremely small village managed by Gram Panchayat where majority of the residents are students who again stay in the hostels.
There are only three major industries in Vallabh Vidyanagar, namely, M/s Elecon Engg. Co. Ltd., Shree Vallabh Glass Works Ltd. and M/s Gujarat Machinery Manufacturers Ltd. Shree Vallabh Glass Works Ltd. have their own housing colony whereas Gujarat Machinery Manufacturers have less number of employees and they are having their own housing arrangements. Consequent to this, there are no tenants available who would like to pay high rent and to occupy the premises. The present Managing Directors of Vallabh Glass Works Ltd. and Gujarat Machinery Manufacturers Ltd., are residing at Bombay. The learned counsel submitted with confidence that the rent paid for the Honest House is today the highest rent paid for any building in Vallabh Vidyanagar. The learned counsel further submitted that the assessee had approached the Nagar Panchayat, Vallabh Vidyanagar and requested them to give rateable value of this building as per their record. Nagar Panchayat, an independent body has valued Rs. 5,020 towards annual rental value of this building while in fact, the assessee has received more rent from Elecon Engg. Co. Ltd. and M/s Power Build Ltd. According to the learned counsel in the light of this, the rent realised by the assessee considering all the above factors is reasonable. He further submitted that the rent has been gradually increased as and when the additions were made or facilities provided by the assessee. The learned counsel for the assessee further submitted that after receiving the assessment orders, the assessee issued letters to M/s Elecon Engg. Co. Ltd. and M/s Power Build Co. Ltd. to increase the rent but Elecon Engg. Co. Ltd. and Power Build Ltd. have filed applications in the civil Court at Anand for fixing up the rent of the Honest House considering the prevailing Rent Control Act. The learned civil Judge, Anand has fixed up standard rent at Rs. 1,250 and Rs. 750 per month from M/s Elecon Engg. Co. Ltd. and M/s Power Build Ltd. respectively. The learned counsel for the assessee heavily relied upon the order of the learned civil Judge, Anand is support of his contentions that the ALV shown by the assessee was fair and reasonable.
7. Shri M. P. Lohia, the learned Departmental Representative took us through the assessment order which gives a vivid picture of grandeur and magnitude of Honest House. He pointed out that the house is built up on total plot area of 5,015.19 sq. mtrs. which consists of land area of eight plots bearing survey Nos. (1) C. S. 1675 Plot No. K177, (2) C.S. 1676/Plot No. K178, (3) C. S. 1677/Plot No. K. 179, (4) C. S.1678/Plot No. K180, (5) C. S. 1689/Plot No. 1657, (6) C. S. 1690/Plot No. 1658, (7) C. S. 1691/Plot No. 1659 and (8) C. S. 1692/Plot No.1660. According to the Departmental Representative is an imposing structure, built to the tastes befitting the effluent high class members of the society. The quality of the materials used is also expensive and building is furnished with luxurious and extravagant gadgetry, as is evident from the report of the Inspector who visited the building and got plans of the building from the assessee. He further submitted that the assessee-company who owns building and the two lessee companies, viz., Elecon Engg. Co. Ltd. and Power Build Ltd. belonged to the same group, i.e., B. I. Patel. The building is occupied by Shri B. I. Patel, his wife Smt. Madhuben B. Patel and their son Shri P. B. Patel who was the original owner of the building and who later on sold it to the assessee-company. Under the circumstances the AO rightly rejected the assessee's contention that the ALV shown by the assessee on the basis of actual rent received was fair and reasonable. In support of his contentions he relied upon the following authorities : 8. We have considered the rival submissions and perused the facts on record. No doubt, Vallabh Vidyanagar where the property known as "Honest House" is situated is governed by a Gram Panchayat but it cannot be called a village in the real sense because, it is a seat of great learning where multi-faculty university known as Sardar Patel University is located. It is also littered with fairly good number of big and small industrial units. It is evident from the details given in the assessment order that the property under consideration is no ordinary property befitting a village. It is a huge mansion with two main entrances situated at total plot area of 5,015.19 sq. mtrs. It is also evident from the materials gathered by the AO from the assessee that the building has an imposing structure, built to the tastes befitting the effluent high class members of the society. The quality of materials used is also expensive and the building is furnished with luxuries and extravagant gadgetry. The construction is on ground floor and first floor. The constructed area of the building on ground floor is 799.44 sq. mtrs. and it contains 30 separate portions as per plan submitted by the assessee. There are four units of bed-rooms each containing an independent sitting room and toilet attached to each unit. Besides the building also contains huge dining space in front of kitchen. The first floor of the building contains two units consisting of huge bed-rooms attached with toilet and a sitting room which are connected by a lounge. The property was originally built in accordance with the requirements and tastes of the family of Shri P. B. Patel, son of Shri B. I. Patel and Smt. Madhuben B. Patel. Later on Shri P. B.Patel sold this property to the assessee-company who let out the same to two of its sister concerns, viz., Elecon Engg. Co. and Power Build Ltd. for the residential house of their Chairman and Managing Director who happen to be Shri B. I. Patel and his wife Smt. Madhuben B. Patel.
Shri P. B. Patel, the original owner of the building also lives with his father and mother. Thus, the persons who built the property according to their requirements and tastes continued to live in the same building. The letting out of the property was only a device to reduce the incidence of tax by showing a nominal ALV. In a case like this the surrounding circumstances cannot be ignored and one has to apply the test of human probabilities. Under the circumstances no reliance can be placed on the certificate issued by the Gram Panchayat fixing the annual rateable value at a nominal figure of Rs. 5,020.
Similarly, the assessee's reliance on the order of the civil Judge, Anand fixing the standard rent at Rs. 1,250 and Rs. 750 for Elecon Engg. Co. Ltd. and Power Build Ltd. respectively is of no assistance to the assessee because the same was based on the conduct and reasoning given by the parties in question who were closely related. Under the circumstances as held by the Gujarat High Court in the case of Sakarlal Balabhai (supra), in the absence of any better way of estimating the rent of huge palatial building, the rate of interest on cost of building and land may provide a reasonable basis for determining the annual letting value of property more particularly when the property is occupied by the owners themselves or by their close relatives. In the case of Smt. Pratima Roy (supra) the Hon'ble Calcutta High Court has held that in determining the real annual value under s. 22 r/w s. 23 of the IT Act, 1961, the rent receivable should be taken into consideration and not the amount actually/supposed to have been received by the assessee. Therefore, where an assessee leased out his house property and the Tribunal found that the lease deed was not genuine because the lease was to a firm consisting of near relatives of the assessee and no reason was given for the fixing of the rent at a very low sum, it would be justified in upholding the determination of the annual value at a higher sum. As stated above, the assessee-company entered into lease deeds with two of its group companies and from the facts it is evident that the rent fixed was on the lower side. In view of the size of the property, its quality of construction and the capital invested thereon. Under the circumstances we hold that the action of the authorities below fixing the ALV at 8 per cent return on the cost is fair and reasonable and no interference is called for.