2007 (9) TMI 188 - HC - Income Tax

When AO satisfied that annual rent of house property was much lower than expected rent & no standard rent has been fixed by rent controller then AO should determine annual value & expected rent by following guidelines of Rent control act not on basis of rent paid by other tenants in premises.

Issues Involved:
1. Justification of deleting the addition made under 'Income from house property' based on rent received from a similar portion rented to a third party.
2. Determination of annual value of property rented to M/s. Wool House based on actual rent received versus rent receivable from a third party.
3. Applicability of section 23(1)(b) of the Income-tax Act for determining annual value each year.

Issue-wise Detailed Analysis:

1. Justification of Deleting the Addition Made Under 'Income from House Property':
The Tribunal deleted the addition made by the Assessing Officer (AO) under the head 'Income from house property' by estimating higher rent for the portion rented to M/s. Wool House. The AO had determined the rent based on the rent received from Canara Bank for the 1st and 2nd floors, asserting that the rent received from M/s. Wool House was significantly lower due to the close relationship between the assessee and M/s. Wool House. The Tribunal, however, upheld the Commissioner of Income-tax (Appeals) decision, which found no basis for raising the rent based solely on higher rent received from other tenants, considering M/s. Wool House was an old tenant with periodically enhanced rent.

2. Determination of Annual Value of Property Rented to M/s. Wool House:
The Tribunal directed that the annual value of the property rented to M/s. Wool House should be determined based on the actual rent received, rather than the rent receivable from a similar portion rented to a third party. The Tribunal referred to section 23(1)(a) and section 23(1)(b) of the Income-tax Act, emphasizing that the actual rent received from M/s. Wool House should be considered, given the long-standing tenancy and periodic rent enhancements.

3. Applicability of Section 23(1)(b) for Determining Annual Value Each Year:
The Tribunal held that section 23(1)(b) applies to the premises occupied by M/s. Wool House, and the reasonableness of the rent agreed upon could be examined when the rent was initially fixed, but not subsequently. The Tribunal noted that each year's assessment proceeding is separate, and the annual value of a house property is to be determined separately each year in accordance with the provisions of the Income-tax Act.

Legal Provisions and Precedents:
The judgment extensively discussed relevant provisions of the Income-tax Act, particularly sections 22 and 23, which deal with the determination of annual value for the purpose of income tax under 'Income from house property.' The court also referred to several Supreme Court decisions, including New Delhi Municipal Committee v. M. N. Soi, Dr. Balbir Singh v. M. C. D., Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee, and Mrs. Sheila Kaushish v. CIT, which established that the annual value for tax purposes should be based on standard or fair rent, not necessarily the actual rent received, especially in cases where rent control legislation applies.

Conclusion:
The High Court concluded that the AO is entitled to determine the annual value of the property and the expected rent receivable when the actual rent received is significantly lower than the expected rent. The AO should follow the guidelines provided under the Rent Control Act while making this determination. The court answered the questions of law accordingly, affirming the Tribunal's decision but emphasizing the need for adherence to the Rent Control Act's provisions.

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