Commission of Income Tax vs M.K. Shivraj Singhji

R.C. Mankad, J.—The Income Tax Officer computed the total income of the assessee for the assessment year 1972-73 at Rs. 2,48,764,

which, inter alia, included income from a self-occupied property on the same basis as in the earlier year. The Commissioner of Income Tax called

for and examined the records and proceedings of the assessment and noticed that the computation of income from property was not correctly

made by the Income Tax Officer, inasmuch as, in the opinion of the Commissioner, the annual letting value ought to have been taken on the basis of

the value of the property disclosed by the assessee in his wealth-tax return. It appears that, for the purpose of wealth-tax, the value of the property

disclosed was Rs. 1,90,800. Therefore, according to the Commissioner, the annual letting value of the property, for the purpose of Income Tax,

ought to have been adopted at Rs. 9,540 as against Rs. 2,500 adopted by the Income Tax Officer in his assessment order. As the Income Tax

Officer had failed to adopt the correct value of the property which was in the occupation of the assessee, in the opinion of the Commissioner, the

assessment made by the Income Tax Officer was erroneous and prejudicial to the interest of the Revenue to the extent of the value of the self-

occupied property. The Commissioner, therefore, invoked the power vested in him u/s 263 of the Income Tax Act, 1961 (the ""Act"" for short), and

called upon the assessee to show cause as to why the assessment should not be revised. The assessee resisted the action of the Commissioner.

The Commissioner, however, rejected the contentions raised on behalf of the assessee and directed the Income Tax Officer to recompute the total

income of the assessee after determining the correct annual letting value of the property.

Being aggrieved by the order of the Commissioner, the assessee carried the matter in appeal before the Income Tax Appellate Tribunal (""the

Tribunal"" for short). The Tribunal, relying on the decision of this court in Sakarlal Balabhai Vs. Income Tax Officer, Special Investigation Circle IV,

Ahmedabad and Another, , held that the basis of determining the annual letting valued is interest on the cost of building or land, which provides a

reasonable basis for determining the annual letting value of the property. The provisions of section 7 of the Wealth-tax Act provide for

determination of the value of a property on the basis of its fair market value, i.e., the value the property would fetch, if sold in the open market. The

basis, however, for determining the notional income from self-occupied property is the actual cost or the capital cost of the building and the return

therefrom. The Tribunal, therefore, rejected the Revenue''s contention that the annual letting value of the self-occupied property, for the purpose of

Income Tax, ought to be determined on the basis of the value disclosed in the wealth-tax return. The Tribunal observed that it was not disputed

before it that the rental income, in the assessment year under reference, was determined on the basis of the actual cost as in the earlier years. The

property occupied by the assessee was constructed in the year 1930 and there was no material to indicate that there was any alteration or

renovation made in the property so as to increase the capital value of the property. It was further observed that, had the property been let out in

the year of occupation by the assessee, the rent would have been the subject-matter of the Rent Control Act and no variation in the rent would

have been possible unless there was material to indicate that there were renovations or alterations resulting in an increase in the capital cost or the

utility of the building. The Tribunal, therefore, disagreed with the conclusion reached by the Commissioner that the income from self-occupied

property owned by the assessee required recomputation in the light of the value adopted for the purpose of wealth-tax. In the result, the Tribunal

allowed the assessee''s appeal and set aside the order passed by the Commissioner u/s 263 of the Act.

The Tribunal has, as directed by this court, referred to us, for our opinion, the following questions, u/s 256(2) of the Act :

(1) Whether the Commissioner of Income Tax was right in law in concluding that the rental value in respect of self-occupied property for the

purpose of Income Tax ought to be determined on the basis of the value disclosed in the wealth-tax records ?

(2) Whether, while the basis for determining the value of property for the purpose of levy of wealth-tax is the fair market value or the notional sale

price, the basis for determining the notional income from property is the actual cost or the capital cost of the building and return therefrom ?

(3) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in setting aside the order of the

Commissioner of Income Tax made u/s 263 of the Income Tax Act, 1961 ?

In Sakarlal Balabhai Vs. Income Tax Officer, Special Investigation Circle IV, Ahmedabad and Another, , this court held that the rate of interest

on the cost of the building and land may provide a reasonable basis for determining the annual letting value of the property, more particularly when

the property is occupied by the owner. In the instant case, it is not disputed that, as in the past years, the Income Tax Officer had adopted the

figure of annual letting value at Rs. 2,500 on the basis of net return calculated on the cost of the property. It thus appeared that the basis for

working out the annual letting value of the property occupied by the assessee is, as held by this court, reasonable. Rent control law is in force in

Gurajat and this law provides for the determination of the standard rent. The standard rent under the rent control law has to be adopted as the

basis for determining the annual letting value. Annual letting value may be less, but cannot exceed the standard rent.

In Dewan Daulat Rai Kapoor and Others Vs. New Delhi Municipal Committee and Others, , the Supremn Court held that the annual value of a

building, for the purposes of house tax, whether u/s 3(1)(b) of the Punjab Municipal Act, 1911, or u/s 116 of the Delhi Municipal Corporation

Act, 1957, is limited to the measure of standard rent determinable on the principles laid down in the Rent Control Act and it cannot exceed such a

measure of standard rent. The assessing authority would have to arrive at its own figure of standard rent by applying the principles laid down in the

Rent Control Act for determination of the standard rent and determine the annual value of the building on the basis of such figure of standard rent.

Explaining this decision of the Supreme Court in Dewan Daulat Rai Kapoor and Others Vs. New Delhi Municipal Committee and Others, , the

Supreme Court, in Dr. Balbir Singh and Others Vs. M.C.D. and Others, , observed that in Dewan Daulat Rai Kapoor and Others Vs. New Delhi

Municipal Committee and Others, , the Supreme Court only decided that even if the landlord was lawfully entitled to receive the contractual rent

from the tenant, such contractual rent could not be taken to be the ratable value of the building, because the reasonable expectation of the landlord

to receive rent from a hypothetical tenant could not possibly exceed the standard rent determinable in accordance with the provisions laid down in

the Rent Control Act. The standard rent determinable on the principles laid down in the Rent Control Act was laid down by the court as the upper

limit of the rent which the landlord may expect to receive from a hypothetical tenant if the building were let out to him from year to year. The court

did not hold that, even if the actual rent receivable by the landlord from the tenant or the rent which the owner may reasonably expect to receive

from a hypothetical tenant were lower than the standard rent determinable in accordance with the principles laid down in the Rent Control Act, the

standard rent must still be taken to be the ratable value of the building.

No provision of law has been pointed out under which the standard rent could be determined on the basis of the market value of the property

from year to year. Having regard to the provisions of the rent control law in force in Gujarat, had the assessee let out the property occupied by him

in the earlier years at the rent of Rs. 2,500 per annum, he could not have increased the rent except as provided in the rent control law. Ordinarily,

the rent at which the property is first let is the standard rent. In the instant case, the annual letting value of the property occupied by the assessee

has been estimated at Rs. 2,500 on the basis of the cost of the property and the return therefrom. In other words, Rs. 2,500 per annum is

estimated to be the rent at which the property was expected to be let. Once this position is clear, there was no question of increasing this rent

which, if the assessee had let out the premises, would be the standard rent. However, under no circumstances, could the market value of the

property disclosed in the wealth-tax return of the assessee for the assessment under reference have been adopted as the basis for working out the

annual letting value of the property. There is no warrant for adopting such a basis. We, therefore, fully agree with the view taken by the Tribunal.

In the result, we answer questions Nos. 1 and 2 in the negative and against the Revenue, and question No. 3 in the affirmative and against the

Revenue. Reference answered accordingly with no order as to costs.