2016 (11) TMI 724 - HC - Income Tax

Income from house property - Annual value estimation u/s 23 - assessee contended that Section 23 (1) cannot be applied to this case for the reason that the coowners themselves are the Directors of the lessee company - Held that - Admittedly the property is owned by the co-owners themselves, who are also the Directors of the lessee company which has established the Hospital. As per the lease agreement between the co-owners and the lessee company, the mutually agreed rent is ₹ 1 per sq.ft. However, a portion of the very same building is let out by the co-owners, the assessees herein, to the Telephone Department and the lease rent that is received is ₹ 4 per sq.ft. This would show that this is a case to which Clause (b) of Section 23(1) is applicable and the annual value has to be estimated, quantifying the sum for which the property might reasonably be expected to let. It is adopting this method that the Assessing Officer has framed the assessment by fixing the annual value at ₹ 4 per sq.ft. which is the rate of rent received for a portion of the building let out by the assessees themselves to the Telephone Department. Assessee s contention that Section 23 (1) cannot be applied to this case for the reason that the coowners themselves are the Directors of the lessee company cannot be accepted for the reason that Section 23 does not exempt cases in which buildings have been let out by the owners to firms or companies in which they are interested. Further no other provision of the Income Tax Act, providing for a different method of fixation of annual rent has shown to us. On the other hand, reading of Section 23 would show that in all cases annual value has to be estimated applying the principles of Section 23. Therefore, since the annual value of the building which was let out was to be estimated, the estimation could be done applying Section 23(1)(b), which precisely was what was done by the Assessing Officer. - Decided aganist assessee

Summary

Issues:
Assessment of annual value of a building for the assessment year 1996-1997 based on rental income discrepancy between co-owners and lessee company.

Analysis:
The case involved an appeal by the Revenue against the orders of the Income Tax Appellate Tribunal regarding the assessment year 1996-1997. The co-owners of a building in Calicut, who were also shareholders and directors of a company operating a hospital in the building, had let out a substantial portion of the building to the company at a lower rent than another portion let out to the Telephone Department. The Assessing Officer assessed the annual value of the building at a higher rate based on the rent received from the Telephone Department. The Commissioner of Income Tax (Appeals) and the Tribunal set aside this assessment, considering the relationship between the co-owners and the lessee company. The main legal question was whether Section 23(1) of the Income Tax Act, which determines the annual value of a property, was correctly applied in this case.

The relevant part of Section 23(1) states that the annual value of a property can be determined based on the rent it might reasonably be expected to fetch annually or the actual rent received if it exceeds the expected amount. In this case, since the building was owned by the co-owners who were also directors of the lessee company, the rent agreement was at a lower rate than the rent received from the Telephone Department. The Assessing Officer used Clause (b) of Section 23(1) to estimate the annual value based on the higher rent received. The argument made by the counsel for the assessee that Section 23(1) cannot be applied due to the relationship between the co-owners and the lessee company was rejected by the court.

The court held that Section 23 does not exempt cases where buildings are let out to firms or companies in which the owners have an interest. Since no other provision in the Income Tax Act provided for a different method of determining annual rent, the court concluded that Section 23 must be applied in all cases to estimate the annual value. Therefore, the orders of the Commissioner of Income Tax and the Tribunal were set aside in favor of the Revenue, upholding the application of Section 23(1)(b) to calculate the annual value of the building based on the higher rent received.