1. These are appeals of the assessee challenging the orders dated 29-3-2004 and 1-6-2004 of the Commissioner (Appeals)-IV, Hyderabad, as erroneous. Facts of the cases, issues involved, rival submissions thereon as well as the assessee herein happening to be one and the same, these proceedings are consolidated together for the sake of convenience by this common order.
2.2 Assessee, an individual, deriving income mainly from salary, has purchased a property, Shop No. A-O, Lekhraj Market, Sector IV, Indira Nagar, Lucknow. He claimed to have let out this property for a rent of Rs. 1,000 for one day in each of the years under appeal. Based on such rents, he computed the annual value of this property at Rs. 3,65,000 and thereupon computed loss from house property at Rs. 90,250 in the following manner- Such loss was sought to be set off against the other incomes, viz.
income from salary disclosed in the returns for each of these two years. Thus, assessee filed return for the assessment year 2000-0 1, declaring an income of Rs. 96,900, after setting off loss from house property computed at Rs. 90,250 against income from salary of Rs. 1,87,146. Rejecting the assessees claim for loss from house property of Rs. 90,250, the assessing officer determined the total income of the assessee at Rs. 1,87,146. Similarly, for the succeeding assessment year, viz. 2001-02, though the original return filed by the assessee on 31-7-2001, claiming similar loss was accepted under Section 143(1)(a), subsequently a notice under Section 148 was issued, and thereafter, assessment was completed under Section 143(3) on 29-3-2004 rejecting the assessees claim for loss from house property, and determining the total income of the assessee at Rs. 2,10,230. In the said assessment, besides the salary income of Rs. 2,09,230, the rental income for one day of Rs. 1,000 shown by the assessee in the original return, was treated as income from other sources.
2.3 On appeal, the Commissioner (Appeals), for both the years did not approve the method of computation of loss from house property adopted by the assessee, though he also did not approve the action of the assessing officer for the assessment year 2001-02 in assessing the income of Rs. 1,000 from the shop shown by the assessee under the head 'Other sources' and held that it was assessable under the head 'House property' only. Considering the evidence in the form of affidavit of the tenant, Mr. Sher Bahadur Singh, who has also furnished his PAN and copy of DD for the rent paid, filed by the assessee, Commissioner (Appeals) concluded that the fact of letting out the property for one day is acceptable. He confirmed the action of the assessing officer in rejecting assessees claim of loss of Rs. 90,250 from house property in each of these years. Taking note of the fact that as per the receipt for municipal taxes produced by the assessee indicated the annual value of the property at Rs. 2,068, he directed the assessing officer to recompute the income from house property, adopting this sum of Rs. 2,068 for purposes of Section 23(1)(a) as the sum for which the property could be reasonably expected to be let.
2.4 Aggrieved by the orders of the Commissioner (Appeals) in this behalf, assessee has filed the present appeals before this Tribunal for both the assessment years.
In terms of Explanation 1(b) below Section 23(1), as it stood prior to 1-4-2003, the rent received for one day in each of the previous years relevant for the assessee for the years under appeal, correctly formed the basis for arriving at the Annual Value of Rs. 3,65,000. This being in excess than the value of Rs. 2,068 arrived at under Section 23(1)(a), and since it is higher of the two values which have to be mandatorily taken as annual value of the house property under Section 23(1) and (b) of the Act, rejection of the claim for loss is not justified. The provisions of Section 23(1), more particularly the Explanation thereunder, relevant for the years under appeal, which came into effect from 1-4-1976, as explained by CBDT Circular No. 204, dated 24-7-1976 has to be given complete effect. The orders of the lower authorities, being inconsistent with these provisions of law and the instructions of the CBDT, are liable to be set aside. The advantages given by the statute cannot be taken away, and hence the entitled deduction claimed by the assessee for the years under appeal may be given, by rejecting the stand of the revenue which is based on presumptions and conjectures.
4. On the other hand, the learned departmental Representative countered, to say in brief, by defending the orders impugned herein, besides pointing out that the assessee has only adopted a device by letting out the property at high rent for one day of each of the years under appeal, and taking it as a base for arriving at the annual value, not for the purposes of offering the same to tax, but for claiming higher vacancy allowance for the remaining days of the year.
5.1 Rival submissions heard and relevant orders read, besides going through the concerned papers filed on record. After doing so, unlike in the stand of the assessee though stressed and stretched by the strenuous arguments of his learned Counsel, I find substantial force in the defence of the revenue, which the learned departmental Representative well highlighted with his zeal and efforts in his effective arguments, short and sweet besides provoking the thought, giving rise to the detailed discussions and for the reasons stated, here under: 5.2 Even though the assessing officer has even doubted the genuineness of the letting out of the property in question for a rent of Rs. 1,000 per day, and treated it as sham, since it was let out just for one day only in each of the two years under appeal, and also assessed such rent (claimed to have been received) under the head Other sources instead of the head House property, we are not concerned with those aspects of the matter since the Commissioner (Appeals) in the order impugned herein has already decided those issues in favour of the assessee, and the revenue has not preferred any appeal against the findings of the Commissioner (Appeals) in that behalf. Thus, the dispute to be resolved in this appeal is confined to the determination of annual value of the property for purposes of computing the income under the head 'Property', and whether the disclosure of exorbitant figure of annual value of the property by the assessee, on the basis of rent claimed to have been received by him for one day, is a tax planning device permissible within the framework of law, or is it a colourable device to evade or reduce the incidence of tax.
5.3 The provisions of Section 23(1), as they stood prior to their amendment by the Finance Act, 2001 with effect from 1-4-2002, which are relevant for the purposes of these appeals read as under- 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 in Clause (a), the amount so received or so receivable;" The term 'annual rent' in Clause (b) of Section 23(1) above, is defined in Explanation 1 which reads as under: Explanation 1 : For the purposes of this sub-section, annual rent means - (a) in case where the property is let throughout the previous year the actual rent received or receivable by the owner in respect of such year; and (b) in any other case, the amount which bears the same proportion to the amount of the actual rent received or receivable by the owner for the period for which the property is let, as the period of twelve months bears to such period." 5.4 From the above provisions, it is clear that what is taxable as income from house property under Section 22 is the annual value, which is either the sum for which the property might reasonably be expected to let from year to year, or where the property is let, the annual rent received or receivable, whichever is higher. The provisions of Section 23(1) thus stipulate certain element of estimation of rent, and prescribes assessment of such notional income, if it is higher than the income actually received. The Explanation 1 below Section 23(1), extracted above, defines 'Annual Rent' as the annual value or the rent received or receivable for the whole year it is let out for the entire year, or in any case the amount which bears the same proportion to the, amount of the actual rent received or receivable by the owner for the period for which the property is let, as the period of twelve months bears to such actually let out period.
5.5 In the instant case, the assessee has let out the property for just one day in each of the two years for a rent of Rs. 1,000, and in terms of Clause (b) of Explanation below Section 23(1) extracted above, worked out the annual rent at Rs. 3,65,000. Revenue would have been happier and gladly accepted such calculation of annual rent at a higher figure, if the same was offered for tax, but such a calculation was made only to claim higher deductions towards repairs worked out at 1/4th in terms of Section 24(1)(i) and vacancy allowance of Rs. 3,64,000 in terms of Section 24(ix) of the Act and to ultimately determine a loss of Rs. 90,250 under the head 'House property', which was sought to be set off against income declared from other sources, including salaries. This claim of loss by the assessee was rejected by the assessing officer and his action was also confirmed by the Commissioner (Appeals) for both. the years.
5.6 From the fact that in each of the two years under appeal, the assessee has let out the property for only one day, for an exorbitant rent of Rs. 1,000, and on that basis, in terms of Explanation 1 below Section 23(1), claimed annual rent at Rs. 3,65,000 as against municipal valuation of annual rent at Rs. 2,068, the lower authorities were justified in apprehending that the assessee has adopted only a device to reduce the tax liability, by claiming set off of a figure of loss under the head 'House property', against incomes derived from other heads. No doubt evidence in the form of affidavit of the tenant or his PAN may establish his identity of the tenant beyond doubt and copy of the DD for the rent received may also and to satisfy the doubts as to the genuineness of the transaction. But, even if genuine, the circumstances of the case and ultimate claim of loss under the head House property, year after year, by claiming receipt of rent for only one day in each year interpolating it for arriving at the annual rent of the year, only to ultimately claim higher figures of deduction towards repairs and vacancy allowance, expose the device adopted by the assessee by entering into transactions of made up nature. The question for consideration before me is as to whether such a device comes within the framework of tax planning permissible under law or assumes the character of a colourable device to evade tax.
5.7 For this purpose, we may examine as to whether the claims of higher annual value in terms of Section 23(1), consequential higher deductions in the form of repairs and vacancy allowance, consequent determination of a figure of loss under the head Income from house property and ultimate benefit in the form of taxes on incomes from other heads on account of set off of such loss under the head 'House property' against incomes determined under other heads, are permissible in law. As per Section 23(1) of the Act, it is broadly the higher of the sum for which the property may reasonably let or the annual rent actually received or receivable, that has to be taken as annual value assessable to tax under Section 22 of the Act. As for the 'sum for which the property might reasonably let', it is a settled position of law, as approved by several High Courts, such as the Kerala High Court in the case of C.J.George v. CIT ; the Calcutta High Court in CIT v.Prabhabati Bansali Delhi High Court in CIT v. R.Dalmia ; the Madras High Court in CIT v. M. R.Alagappan , referred to by the Commissioner (Appeals) as well in the orders impugned herein, that value determined by the municipal authorities for assessment of property tax could be adopted.
Such valuation for the property in the instant case, determined by the municipal authorities, as evident from the copy of the tax receipt furnished by the assessee, is only Rs. 2,068 per annum.
5.8 As against the said amount of Rs. 2,068, determined by the municipal authorities for purposes of levy of property tax, which, as per the ratio decidendi referred to by the Commissioner (Appeals) above, may be adopted as the rent for which the property might reasonably be let, in terms of Section 23(1)(a), the assessee claimed annual rent in terms of Section 23(1)(b) of Rs. 3,65,000. This sum of annual rent was arrived at on the basis of rent for one day of Rs. 1,000 received by the assessee, during each of the two years under appeal. The point that now arises for our consideration is as to whether determination of annual rent at Rs. 3,65,000 is in order and in accordance with law.
5.9 For this purpose, we may note that the term annual rent mentioned in Section 23(1)(b) has been defined in Explanation 1 below Section 23(1), which we have already extracted above. We have to see as to whether the claim of annual rent of Rs. 3,65,000 under Section 23(1)(b) for being compared with the sum for which the property might reasonably let in terms of Section 23(1)(b) is in conformity with Section 23(1)(b) and Explanation 1 below Section 23(1). The said Explanation, at the cost of repetition, may be reproduced below for ready reference Explanation 1: For the purposes of this sub-section,'annual rent'means (a) in case where the property is let throughout the previous year the actual rent received or receivable by the owner in respect of such year; and (b) in any other case, the amount which bears the same proportion to the amount of the actual rent received or receivable by the owner for the period for which the property is let, as the period of twelve months bears to such period." The above definition speaks of annual rent in respect of two kinds of properties, i.e. one which is let out throughout the previous year; and others which are not let out throughout the year. As the property is not let out throughout the year, the instant case of the assessee falls under Clause (b), i.e. in any other case as stated in the said Explanation, and as such, annual rent would have to be worked out in the same proportion to the amount of the actual rent received, as the period of twelve months bears to such actually let out period. The formula derived by the Commissioner (Appeals) on the basis of this clause is as follows The above formula devised by the Commissioner (Appeals) appears to be incorrect inasmuch as he arrived at the figure of Rs. 3,65,000 in the numerator in the instant case only by multiplying the rent received for one day of Rs. 1,000 with 365 days. That being so, there appears to be no logic behind putting that very figure of 365 in the denominator. For the other numerator, i.e. Period for which it is let out, since the property is let out only for one day, the figure '1 in the instant case is inconsequential. However, if it is let out for many days, the result could be anomalous and even absurd.
5.10 The assessee, in the instant case has let out the property only for one day in each of the years under appeal. The first question that arises is as to whether 'one day' can be treated as a period, for the purposes of the above Explanation, so as to arrive at annual rent on the basis of rent for such one day. The word 'period' is not defined in the Income Tax Act. Hence, it has to be understood giving general grammatic and contextual meaning. The general, and grammatic meaning of the word 'period' indicates a length of time and it starts somewhere and ends somewhere, and the time from the beginning to the end alone can be termed as a period. Since one day is only a unit, and it is some such units, i.e. days or months together, that constitute a period, in my considered view, one day for which the property is let in the instant case, cannot be termed as a period.
5.11 Further, even going by the context in which the word period was used, I find that the above clause prescribing the formula by way of proportion ends with the words 'as the period of twelve months bears to such period'. From these concluding words of the clause, more specifically the words twelve months, it is evident that the property should have been let out at least for a period of one month or any fraction over and above that, so as to assume a reasonable proportion to arrive at rent for 12 months. Thus, what the Explanation contemplates is application of a multiple of '12' at the most to arrive at the annual rent. As against it, by letting out the property just for one day as in the instant case, the assessee desires to apply a multiple of 365 to arrive at the annual rent, which according to me, is not permissible giving a reasonable interpretation of' Clause (b) of the above Explanation. If there was no reasonable multiple at all in contemplation of the legislation, while bringing the Explanation 1 under Section 23(1) on the statute book, then the concluding words should have been a year or 365 days, and not 12 months. Since a higher multiple would only result in determination of higher annual rent, for being adopted as annual value under the head Income from house property, it could equally be argued that there was no need to think that only a reasonable multiple for arriving at the amount chargeable to tax was contemplated by the statute. However, as the deduction by way of vacancy allowance provided under Section 24(ix) would set off' any enhancement in the annual rent and annual value, by a matching figure of deduction, the assessee would stand to gain to an unreasonable extent by way of deduction towards repairs worked out at 1/4th of the pitched up annual value thus determined, if an unreasonable multiple is allowed to be adopted.
5.12 Any other interpretation of Explanation 1 under Section 23(1) would lead to absurd results, and would even amount to sanction by Legislature of the device for evasion of tax as in the instant case, by mechanical creation of loss under the head House property income by letting out the property at an exorbitant rent for one day, and based on it arriving at rent for 365 days, and after claiming deduction towards repairs there from, claiming vacancy allowance for 364 days under Section 24(ix), thus determining a loss for being set off against incomes assessable under the other heads. Thus, if the device adopted by the assessee is accepted as permissible under law, it would amount to approving interpretation which would lead to absurd results, for the following reasons- (a) An assessee, letting out the property only for one day for Rs. 1,000, stands in a better position, than a person who lets out the property for the entire year. It is so, because, if be lets out for all the 365 days at the rate of Rs. 1,000 per day, he would not get vacancy allowance and has to pay tax on the annual value of rent received at Rs. 3,65,000, whereas by letting it out for only one day, he gets vacancy allowance of Rs. 3,64,000 by way of deduction in terms of Section 24(1)(ix), with the repairs at 1/4th of the annual rent of Rs. 3,65,000, resulting as a loss from house property, eligible to be set off against incomes declared from other heads of income.
(b) This can be a perennial source of notional loss which could be claimed for being set off against income from other heads year after year, to reduce the incidence of tax on income from other heads.
Greater the amount for which the property is let out for one day, greater would be the annual value, though greater would be the loss under the head Property and consequential gains in the form of tax on the incomes disclosed under other heads of income, against which loss from house property is set off. Thus, this loss could be multiplied by letting out the property for a higher figure of rent for one day to mitigate the tax liability for an year to a desired extent. For example, while the assessee in the instant case has claimed to have let out the property for one day at Rs. 1,000, and arrived at a loss of Rs. 90,250 under the head 'House property', the loss would be Rs. 1,80,500, if the property is let out for Rs. 2,000, as calculated below: (c) As this loss can be set off against income from other heads and there would be substantial relief in the matter of tax on the incomes disclosed under other heads, any assessee can artificially arrange his transaction of letting out the property for one day in such a way as to claim vacancy allowance for the rest of the year and consequential loss under the head 'Property' to reduce the incidence of tax on the income from other heads. When the advantage on account of reduction in tax liability is increasing, it would not be difficult to find an accommodative tenant who can pay an exorbitant rent for one day, so as to give a colour of genuineness to the transaction of tenancy for one day.
Therefore, on a reasonable interpretation of the provisions of Explanation 1 to Section 23(1), I am of the view that for arriving at the annual rent of a property, Explanation I contemplates that the property is let out at least for a period of one month.
5.13 Further, a combined reading of Section 23(1)(b) and Explanation 1 there under, indicates that they deal with the determination of annual value of properties which are not under self-occupation, but let out.
The property in the instant case is let outjust for one day. The act of letting out just for one day, as against the act of keeping it vacant for 364 days, does not lend a colour of let out property. A let out property is one which is either actually let out, or remaining vacant till it is actually let out. It is the predominant use of the property either by letting out or not doing so during a year either by actual use or otherwise, whether intentionally or otherwise that determines the nature of the property. When the property, by way of a device is let out only for one day in a year, it cannot be said that the character of the property is that of a'let out property', ignoring the predominant character of vacancy of the property for 364 days.
5.14 In this view of the matter, I feel that annual rent contemplated in Clause (b) under Section 23(1), as defined in Explanation 1 there under, in respect of the property under consideration in the instant case, cannot be determined on the basis of one day's rent received by the assessee. That being so, while one of the two alternative figures under Section 23(1)(a), which has to be adopted as annual value of the property is Rs. 2,068, the other one contemplated under Section 23(1)(b) being annual rent, since not capable of being ascertained, has to be taken as either NIL or the actual rent received for one day of Rs. 1,000. Since there is no dispute now with regard to the fact that the rent received of Rs. 1,000 from the property for one day is assessable under the head 'Property' and not under any other head, it would not be correct to take the annual rent under Section 23(1)(b) as NIL In any event, whether it is taken as NIL or as Rs. 1,000, higher of the amounts determined under Section 23(1)(a) and under Section 23(1)(b) being Rs. 2,068, the annual value of the property has to be taken at Rs. 2,068 only.
5.15 In view of the reasons above assigned after discussions aforesaid, I find no merit in the grounds of appeals by the assessee, consequently sustaining the impugned orders of the Commissioner (Appeals).
6. In the result, both the appeals of the' assessee are dismissed hereby.