2012 (6) TMI 424 - AT - Wealth-tax

Valuation of property under Schedule III of the W.T. Act bifurcation of rateable value into two parts viz, legal occupants and illegal occupants Held that - action of the CIT(A) in bifurcating the maintainable ratable value and attributing part of it to legal occupation and illegal occupation is not within the frame work of Rule 5(i) of the Act. As we have already seen wealth tax is levied on the net wealth on the corresponding valuation date. Net wealth in turn is defined to mean the aggregate value of assets owned by the assessee after reducing debts owed in relation to those assets by the assessee. Thus ownership of the property and the fact that it is a let out property is relevant criterion and illegal occupation of the property or actual rent received from lawful tenants all becomes irrelevant. Proceedings under the Income Tax Act for determining income from house property are different and that yardstick cannot be applied in proceedings under the W.T. Act. In terms of Rule 4 the assessee will be entitled to deduction on account of taxes levied by Local Authorities and 15% of GMR. The resultant figure will be NMR which is to multiplied by 12.5 to arrive at the value of the property. Basis of determining by the AO of the value of the property at Rs.5,24,61,625/- based on the Income Tax proceedings cannot be sustained as it was based on erroneous claim made by the Assessee while filing its return of wealth. Order of CIT(A) set aside.

Issues Involved:
1. Valuation of Agra Building for Wealth Tax purposes.
2. Determination of Gross Maintainable Rent (GMR) and Net Maintainable Rent (NMR).
3. Inclusion of municipal taxes paid by tenants in the rental income of the assessee.
4. Application of Rule 5(i) of Schedule III to the Wealth Tax Act.
5. Comparison of proceedings under Income Tax Act and Wealth Tax Act.

Detailed Analysis:

1. Valuation of Agra Building for Wealth Tax Purposes:
The primary issue is the valuation of the property known as Agra Building for the assessment year 2002-03. The assessee had shown the value for Wealth Tax purposes at Rs. 99,862/-, while the AO determined a much higher value based on the rent received/receivable from the property.

2. Determination of Gross Maintainable Rent (GMR) and Net Maintainable Rent (NMR):
The AO computed the income from house property by considering the actual rent received and adding the municipal taxes paid by the tenants, resulting in a higher GMR. The CIT(A) disagreed with this approach, bifurcating the municipal rateable value into legal and illegal occupants and adopting a lower GMR. The Tribunal, however, held that the GMR should be the higher of the actual rent received or the annual value assessed by local authorities, which in this case was Rs. 7,81,470/-.

3. Inclusion of Municipal Taxes Paid by Tenants in the Rental Income of the Assessee:
The AO included the municipal taxes paid by tenants in the rental income of the assessee, arguing that these amounts should be considered as part of the 'rent receivable'. The CIT(A) and the Tribunal disagreed, referencing the Calcutta High Court's decision in CIT vs. Gillanders Arbuthnot & Co. Ltd., which held that municipal taxes paid by tenants do not form part of the annual value for Income Tax purposes.

4. Application of Rule 5(i) of Schedule III to the Wealth Tax Act:
Rule 5(i) stipulates that GMR should be the higher of the actual rent received or the annual value assessed by local authorities. The Tribunal concluded that the CIT(A)'s bifurcation of the rateable value was not within the framework of Rule 5(i). The Tribunal directed that the GMR should be Rs. 7,81,470/-, the annual value assessed by the local authorities.

5. Comparison of Proceedings under Income Tax Act and Wealth Tax Act:
The Tribunal emphasized that proceedings under the Income Tax Act and the Wealth Tax Act are distinct. The criteria for determining income from house property under the Income Tax Act cannot be applied to Wealth Tax proceedings. The Tribunal held that the correct approach under the Wealth Tax Act is to use the annual value assessed by local authorities as the GMR, deduct municipal taxes and 15% of GMR to calculate NMR, and then multiply NMR by 12.5 to arrive at the property's value.

Conclusion:
The Tribunal partly allowed the revenue's appeal, directing the AO to adopt the annual value assessed by local authorities (Rs. 7,81,470/-) as the GMR and compute the property's value accordingly. The Tribunal also clarified that the bifurcation of rateable value into legal and illegal occupants was not justified under the Wealth Tax Act's provisions. The same approach was directed to be applied for the assessment years 2003-04 and 2004-05.

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