SHIELA KAUSHISH Vs. COMMISSIONER OF INCOME TAX DELHI

JUDGEMENT

(1.) These appeals by special leave raise a common question of law relating to the determination of annual value of a building for the purpose of chargeability to tax under the Indian Income-tax Act, 1961 where the building is governed by the provisions of the Rent Control legislation but the standard rent has not yet been fixed. The facts giving rise to these appeals are few and may be briefly stated as follows;

(2.) The question arose in the course of assessment of the assessee to income-tax for the assessment years 1969-70 and 1970-71 as to how the annual value of the warehouse should be determined for the purpose of chargeability to income-tax under the head "Income from house property". Now income from house property chargeable to tax is computable under Section 22 which provides that the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, shall be chargeable to income-tax under the head "Income from house property". Where, therefore, the assessee owns a building, the annual value of such building is chargeable to income-tax under the head "Income from house property" under Section 22. But the question immediately arises: how is the annual value to be determined The answer is provided by S. 23 which lays down the mode of determination of annual value. Sub-s. (1) of that section as it stood at the material time provided that "for the purposes of, S. 22, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year". The assessee therefore claimed that on a proper construction of sub-section (1) of S. 23, it was not the actual rent received by the assessee for the warehouse that was material for determining the annual value of the warehouse but the hypothetical amount for which the warehouse might reasonably be expected to let from year to year and since the Delhi Rent Control Act 1958 (hereinafter referred to as the Rent Act) was applicable in the area in which the warehouse was situate the warehouse could not reasonably be expected to let from year to year at a rent exceeding the standard rent determinable under the provisions of that Act. The Income-tax officer however, took the view that the actual rent received by the assessee provided the most accurate and satisfactory measure of the amount for which the warehouse might reasonably be expected to let from year to year and the annual value of the warehouse must therefore be taken to be the actual rent received by the assessee and he accordingly assessed the assessee to tax on the basis of the actual rent received by her. The assessee preferred an appeal to the Appellate Assistant Commissioner for each of the two assessment years challenging the correctness of the view taken by the Income-tax Officer and contending that the annual value of the warehouse must be taken to be the standard rent determinable under the provisions of the Rent Act, but the appeals were unsuccessful and the determination of the annual value made by the Income-tax Officer was affirmed. The Tribunal also took the same view on further appeals by the assessee and by a consolidation order dated 28th September, 1973, confirmed the assessments made, on the assessee on the basis of the actual rent received by her. The Tribunal held relying on the decision of this Court in M. M. Chawla v. J. S. Sethi, (1970) 2 SCR 390 that, in the absence of fixation of standard rent, the agreed rent which is legally recoverable and not tainted by fraud, relationship or any other consideration must be taken to be the standard rent and hence the actual rent receive by the assessee was rightly taken as annual value of the warehouse. In the meantime, an application was made for fixation of the standard rent of the warehouse by the new tenant who came to occupy the warehouse after the Ameraican Embassy vacated it and on this application, the Rent Controller by an order dated 13th March, 1973 fixed the standard rent at Rs. 34,848.00 per annum under the provisions of the Rent Act. The assessee aggrieved by the order, dated 28th September 1973 made by the Tribunal, preferred two applications, one in respect of each assessment year, seeking reference of five questions which, according to the assessee, arose out of the order of the Tribunal, but the Tribunal by a common order dated 26th February, 1974, rejected the applications on the ground that there was only one question of law which arose out of the order of the Tribunal but that was concluded by the decision of this Court in M. M. Chawla's case (supra) and so far as the other questions were concerned, they were all questions of fact and hence not referable under S. 256 (1) of the Income-tax Act, 1961. The assessee thereupon preferred two applications before the High Court of Delhi under S. 256 (2) of the Income-tax Act, 1961 for directing the Tribunal to make a reference, but these applications also met with the same fate and on the same grounds which found favour with the Tribunal, they were rejected by the High Court by judgment dated 1st February, 1978. This led to the filing of two petitions for special leave to appeal, one in respect of each assessment year, and these petitions were allowed and special leave granted by this Court, giving rise to civil appeals Nos. 2110 and 2111 of 1978. Since these two appeals were directed against the judgment of the High Court refusing to call for a reference from the Tribunal, the only question which could have been considered by the Court in these appeals was as to whether any questions of law arose out of the order of the Tribunal requiring to be referred to the High Court and therefore even if the assessee succeeded in the appeals there would not be an end to the litigation but the questions of law formulated by this Court would have to be referred by the Tribunal to the High Court and then the High Court would have to hear the reference and answer the questions referred to it. This would have delayed considerably the final determination of the questions of law arising out of the order of the Tribunal and it was, therefore, agreed between the parties that the following two questions of law should be decided by the Court in these appeals, since they admittedly arose out of the order of the Tribunal :

(3.) Though two questions have been formulated by this court as arising out of the order of the Tribunal dated 28th September, 1973, it is the first which really formed the subject matter of controversy between the parties and since, in our view, that question has to be answered in favour of the assessee, it is not necessary to embark upon a consideration of the second question. So far as the first question is concerned, it stands concluded by the recent decision of this Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal. Committee (AIR 1980 SC 541). There were three appeals decided by a common judgment in that case and the question which arose for determination in these appeals was as to how the annual value of a building should be determined for levy of house tax where the building is governed by the provisions of the Rent Act, but the standard rent has not yet been fixed. One of these appeals related to a case where the building was situate within the jurisdiction of the New Delhi Municipal Committee and was liable to be assessed to house tax under the Punjab Municipal Act, 1911 while the other two related to cases where the building was situate within the limit of the Corporation of Delhi and was assessable to house tax under the Delhi Municipal Corporation Act, 1957. The house tax under both statutes was levied with reference to the annual value, of the building. The 'annual value' was defined in both statutes in the same terms, barring a second proviso which occurred in S. 116 of the Delhi Municipal Corporation Act, 1957, but was absent in S. 3 (1) (b) of the Punjab Municipal Act, 1911. This proviso was however not material as it dealt with a case where the standard rent was fixed under the provisions of the Rent Act, while in none of the cases before the Court was the standard rent fixed in respect of the building involved in such case. According to the definition given in both statutes, the 'annual value' of a building meant the gross annual rent at which the building might reasonably be expected to let from year to year. The controversy between the parties centered round the question as to what is the true meaning and effect of the expression "the gross annual rent at which such house or building ............ may reasonably be expected to let from year to year" occurring in the definition in both statutes. The argument of the Municipal Authorities was that since the standard rent of the building was not fixed by the Controller under S. 9 of the Rent Act in any of the cases before the Court and in each of the cases the period of limitation prescribed by S . 12 of the Rent Act for making an application for fixation of the standard rent had expired, the landlord in each case 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 Rent Act, but was liable to be assessed by reference to the contractual rent recoverable by the landlord from the tenant. The Municipal Authorities urged that if it was not penal for the landlord to receive the contractual rent from the tenant even if it be higher than the standard rent determinable under the provisions of the Rent Act, it would not be incorrect to say that the landlord could reasonably expect to let the building at the contractual rent and the contractual rent therefore provided a correct measure for determination of the annual value of the building. This argument was however rejected by the court and it was held that even if the standard rent of a building has not been fixed by the Controller under S. 9 of the Rent Act, the landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under the provisions of the Rent Act and this would be so equally whether the building has been let out to a tenant who has lost his right to apply for fixation of the standard rent by reason of expiration of the period of limitation prescribed by S. 12 of the Rent Act or the building is self-occupied by the owner. Therefore, in either case, according to the definition of 'annual value' given in both statutes, the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant would constitute the correct measure of the annual value of the building. The court pointed out that in each case the assessing authority would have to arrive at its own figure of the standard rent by applying the principles laid down in the Rent Act for determination of the standard rent and determine the annual value of the building on the basis of such figure of the standard rent. The court, on this view, negatived the attempt of the Municipal Authorities in each of the cases to determine the annual value of the building on the basis of the actual rent received by the landlord and observed that the annual value of the building must be held to be limited by the measure of the standard rent determinable on the principles laid down in the Rent Act and it could not exceed such measure of the standard rent. Now this was a decision given on the interpretation of the definition of 'annual value' in the Delhi Municipal Corporation Act, 1957 and the Punjab Municipal Act, 1911 for the purpose of levy of house tax, but it would be equally applicable in interpreting the definition of 'annual value' in sub-sec. (1) of S. 23 of the Income-tax Act, 1961, because these definitions are in identical terms and it is impossible to distinguish the definition of 'annual value' in sub-sec. (1) of S. 23 of the Income-tax Act, 1961 from the definition of that term in the Municipal Corporation Act, 1957, and the Punjab Municipal Act, 1911. We must therefore hold, on an identical line of reasoning, that even if the standard rent of a building has not been fixed by the Controller under S. 9 of. the Rent Act in respect of a building governed by the Rent Act and the period of limitation prescribed by S. 12 of the Rent Act for making an application for fixation of the standard rent having expired, it is not longer competent to the tenant to have the standard rent of the building fixed, the annual value of the building according to the definition given in sub-sec. (1) of S. 23 of the I.-T. Act, 1961 must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant. This interpretation which we are placing on the language of sub-sec. (1) of S. 23 of the Income-tax Act, 1961, may be regarded as having received legislative approval, for we find that by S. 6 of the Taxation Laws (Amendment) Act, 1965, sub-sec. (1) of S. 23 has been amended and it has now been made clear by the introduction of cl. (b) in that sub-section that where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum for which the property might reasonably be expected to let from year to year, the amount so received or receivable shall be deemed to be the annual value of the property. The newly added cl. (b) clearly postulates that the sum for which a building might reasonably be expected to let from year to year may be less than the actual amount received or receivable by the landlord from the tenant. We are therefore of the view that in the present case the standard rent of the warehouse determinable under the provisions of the Rent Act must be taken to be the annual value within the meaning of sub-sec. (1) of S. 23 of the Income-tax Act, 1961 and the Actual rent received by the assessee from the American Embassy cannot of itself be taken as representing the correct measure of the annual value.