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TMI Blog1979 (12) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... ouse at Karol Bagh, Rs. 311 from a house in Krishan Nagar and Rs. 27,170 from the house in Asaf Ali Road. The ITO completed the original assessments for these two assessment years on November 28, 1962, and March 12, 1964, respectively, accepting the figures of income returned. The dispute in this reference relates to the computation of the income from house property situate at 4/9, Asaf Ali Road, New Delhi. This house, was partly occupied by the assessee for purposes of his own residence and partly let out to various tenants. The portion occupied by the assessee is agreed to be about1/5th of the entire property and the relevant figures in respect of the computation of income from this property as made by the assessee may now be set out : Rs. Rs. " Annual value 38,070 LESS : 1/2 Municipal taxes 1,903 1/6 for repairs 6,345 Ground rent 944 9,192 ------------ 28,878 Less for 1/5 portion occupied for self- residence 5,776 Value of rented premises 23,102 Add : Value of self resident 5,776 Less: Minimum allowable 1,800 ---------- 3,976 --------- The above being more than 10% of the total income, the value of self-residence is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation had started with the annual letting value as determined for municipal tax purposes, namely, Rs. 38,070, for both the years. However, in the reassessment, the ITO has started with the figure of the actual rents received, viz., Rs. 37,117 for the first year and Rs. 46,499 for the second year. The main question in this reference is whether this basis of reassessment is correct or not and the second question which arises is as to whether, in the circumstances of the case, the assessments were rightly reopened under s. 147(b) of the I.T. Act, 1961. These are the two questions which have been referred to us by the Income-tax Appellate Tribunal. But the two questions have been set out in the contrary order and read as follows : " (1) Whether, on the facts and in the circumstances of the case, the Income-tax Officer could take action under section 147 of the Income-tax Act, 1961 ? 2. Whether, in assessment of income from property, bona fide annual value under section 23 is the municipal value of the rental value received by the assessee ? " We have set out the questions in an order different from that set out by the Tribunal for the simple reason that while disposing of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises since the other 1/5th has been in the occupation of the assessee. Apart from the amount of tax involved in the present case being somewhat substantial, the question is a recurring one and is also one of some general importance in the matter of computation of income from house property. It, therefore, needs to be discussed in some detail. Under the I.T. Act, 1961, as also under the Indian I.T. Act, 1922, the annual value of property (consisting of any buildings or lands appurtenant thereto) of which the assessee is the owner is chargeable to income-tax under the head " Income from house, property ". This income from house property is computed in accordance with the provisions contained in ss. 23 to 26 of theAct. The starting point of the computation is the annual value of the property from which the assessee is given several deductions depending upon the nature of the property and also depending upon the various circumstances attendant upon the ownership of the property. This annual value (which was described under the 1922 Act as the " bona fide " annual value, an epithet which has been left out as a surplusage under the new Act) is to be arrived at in the manner set out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y fetch any income, the scheme of the Act is to assess a notional income from the property on the basis that it is let out from year to year and fetches a reasonable rent to the owner. We are not concerned with such a case because we are concerned principally with the portions of the property which have been let out to tenants. Where the owner of a property has actually let out the property to several tenants, there are at least three types of cases that one can envisage : (1) The property is let out by the landlord to the tenant at a rent which can be described as the fair rent or the standard rent in accordance with the local rent laws though in the open market there may be several other houses similarly situated which are fetching higher rents to their owners. (2) The owner has let out the property to a tenant on the basis of an agreed rent. This agreed rent may be in excess of the fair rent or standard rent which may be fixed for such premises under the local rent control legislation. But since no standard or fair rent has been got fixed for the premises in question, the landlord is able to charge a higher rent on an agreed basis. (3) The owner has let out the premises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the rent control legislation the court observed (p. 153 of AIR) : " One may legitimately say under those circumstances that a landlord cannot reasonably be expected to let a building for a rent higher than the standard rent. A law of the land with its penal consequences cannot be ignored in ascertaining the reasonable expectations of a landlord in the matter of rent. In this view, the law of the land must necessarily be taken as one of the circumstances obtaining in the open market placing an upper limit on the rate of rent for which a building can reasonably be expected to let ...... but an open market cannot include a ' black market ', a term euphemistically used to commercial transactions entered into between parties in defiance of law. In that situation, a statutory limitation of rent circumscribes the scope of the bargain in the market. In no circumstances the hypothetical rent can exceed that limit. " Applying the principle in Padma Debi's case [1962] 3 SCR 49, the Supreme Court held in the case of New Delhi Municipal Committee v. M. N. Soi, AIR 1977 SC 302, that where the standard rent in respect of a premises is fixed, the municipal valuation cannot exceed that arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed a standard rent under s. 9, the contract between the landlord and the tenant would determine the liability. It follows from this decision that unless in respect of a particular premises the standard rent is fixed under the Rent Control Act, there would be nothing illegal in the landlord seeking to recover from the tenant the rent for the premises in accordance with the agreement between the parties. This position has been clarified beyond any doubt by the Full Bench of this court in Dewan Daulat Ram Kapur v. New Delhi Municipal Committee [1973] ILR 1 Delhi 363. This was also a case under the Delhi Municipal Corporation Act, 1957, and the court was concerned with laying down principles on the basis of which the annual value for municipal tax purposes could be determined in the case of various types of property. The Full Bench decision ,has taken into account the principles laid down in Sm. Padma Debi's case [1962] 3 SCR 49, Guntur Municipal Council's case, AIR 1971 SC 353 and M. M. Chawla's case [1970] 2 SCR 390 (SC), and has summed up the position as follows towards the end of the judgment : " In the case of rented premises the annual value shall not exceed the standard rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention that even though no standard rent has been fixed, it is only the standard rent that can be the basis for the determination of the annual letting value. Indeed such a contention would be in the teeth of the Full Bench decision and cannot be accepted. Hence, the above decisions clearly show that in a case of this type the actual rent derived from the property is the correct guide to the annual letting value, whether it be for the purposes of the Municipal Acts or for the purposes of the I.T. Act. There can, thus, be no antithesis between the annual value (if correctly determined) for municipal purposes and that determined under the I.T. Act. For both the enactments, the determination has to be done in the same manner and when the figures of actual rent are available there is no reason why they should not furnish the basis for such determination. It is no doubt true that the municipal assessments are fixed by following a certain procedure. The local authority under the Municipalities Act makes a periodical survey of all buildings, determines the gross rent receivable from the property, takes into account the various types of services rendered and so on and then arrives at a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue on the basis of the figure adopted for municipal tax purposes. The High Court upholding the finding of the Tribunal pointed out that under the lease deed the assessee received not only the above rent but also several other considerations, such as, that the expenses for current repairs, salaries of sweepers and payment of electric bills were all to be borne by the lessee which ordinarily would be borne by the lessor. It was in these circumstances that the reasonable letting value of the premises was considered to be higher than what was disclosed by the rent deed. In that case, as already mentioned, the Tribunal adopted the municipal value basis for determining the annual letting value and since Shri Bishamber Lal relies on this aspect of the decision the observations of the learned judge in this context may perhaps be extracted here (p. 169) : " Sir Jamshedji's grievance is that the Tribunal was wrong in accepting the municipal valuation. Sir Jamshedji says that the Tribunal did not take the trouble to find out for itself what was the proper annual value, but it borrowed the opinion formed by the municipality of the proper annual value. If the Tribunal had laid down as a prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Shri Bishamber Lal vehemently contends that this decision clearly shows that the certificate of the municipal authorities cannot be rejected and the actual rent preferred for purposes of the determination of the annual letting value under s. 23. Though prima facie this decision appears to support the contention of the learned counsel for the assessee, we find on a careful perusal that this is not so. Before the Tribunal there were two items of evidence : (1) The figures of rent derived by the assessee from the property under a long term lease containing certain terms and conditions. (2) The certificate issued by the local authority showing that the annual letting value had been fixed at a much lower figure. The court found that the local authority when fixing the annual letting value at a lower figure was aware of the fact that the building had been let out at a higher figure of Rs. 33,000 and that the local authority was also aware of the terms and conditions of the lease agreement. There was also the further fact that there had been an appeal by the assessee to the Panchayat and by a resolution of the Panchayat the monthly rent for the building had been fixed at Rs. 1,500 p.m. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ored, although there may be a case for considering the actual rental income to be not sancrosanct where same circumstances exist to justify such an inference. Apart from the other instances which have already been given we may refer, for example, to an assessee owning a number of godowns which are let on a daily basis during the year. Where several godowns are let out at different rents for varying number of days perhaps it could be said that the actual rent derived by an assessee at the end of the year may not necessarily be the letting value of the premises on the assumption that every godown is let from year to year on a reasonable basis. But barring such cases where there is some reason to reject the rent agreed to between the parties, we are of opinion that the ITO is justified in taking the figures, of the actual rent as the reasonable letting value and completing the assessments on that footing. Before we conclude, we may point out that the provisions of s. 23 have been recently amended to make the above position clear. Section 23(1) now reads as follows : " 23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be-- (a) the sum for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the books of account which were duly produced before the ITO. " He held that, since looking to the factual position it was clear that there was an under-assessment, the initiation of proceedings under s. 147(b) was justified. As already mentioned, the Tribunal does not discuss this aspect of the case specifically. In para. 5 they observe, " that no doubt section 147 comes into operation when it is found that income has been underassessed ". But having come to the conclusion that the income had not been under-assessed it was not necessary for them to give any categorical finding on this aspect of the matter. On the one hand, the counsel for the department contends that the Tribunal must be held to have approved the initiation of the proceedings under s. 147(b) but set aside the reassessment on the merits. On the other hand, Shri Bishamber Lal would have it that the Tribunal has held that both the initiation and the reassessment were not valid in law. As we read it, the Tribunal has not expressed any opinion as to the validity of the initiation of the proceedings under s. 147(b). That question would depend upon, (a) the state of affairs at the time of original assessment and (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned, therefore, we think that, in fairness to the assessee and to the department, we should reply to the question by saying that it is not possible for us to answer this question because the relevant facts have not been found and discussed by the Tribunal and because it has not recorded a clear finding as to the applicability of s. 147(b). In view of our above answers to the questions, it will be necessary for the Tribunal, when the matter goes back to it for the disposal of the appeal conformably to the judgment, to consider the question as to the applicability of s. 147(b) in the circumstances of this case and give its findings. In the result, we answer the second question in favour of the department and against the assessee. Question No. 1 is returned unanswered. There will be no order as to costs. D. R. KHANNA J.--As the facts enumerated in the judgment of my learned brother show, the controversy in this reference pertains to the income from house property situate at 4/9, Asaf Ali Road, New Delhi, which the assessee, namely, Shri H. P. Sharma, owns. The assessee had in the original returns for the assessment years 1962-63 and 1963-64 showed income from these properties a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Municipal Committee [1973] ILR 1 Delhi 363. In the present case, admittedly, the property in question was lying let out in the relevant years. It is not even hinted that this rent was, in any manner tainted by fraud, emergency, etc. In the circumstances, it is the actual rent realised by the assessee which has to be treated as the annual value of the property for purposes of chargeability to the I.T. Act. The hypothetical or notional determination of the annual value can arise where the property is self-occupied or is lying vacant. Here too the indicia or the determining factor is reasonable market rent. One has to place oneself in that situation as if the property is being let out in the open market and what reasonable rent it can fetch. One of the modes for doing this is to ascertain what rents similar properties which are being let out in that year in the locality, are fetching. Here again, the rents which the properties are yielding from old tenancies, may not be wholly relevant or conclusive. There is no gainsaying that in these days of scarcities of properties and rising rents, the old rents are an eye-sore to the landlords, and not unoften, the general grievance of tena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination there may have some relevance. However, by no stretch, the same can be conclusive or binding. It does not absolve the ITO under the income- tax law from judicially determining on his own the market rent. He cannot abdicate or allow his own independent judgment to be mortgaged with what a municipal clerk or an inspector might have done. In this respect one need not comment in any complimentary manner the way in which quite a number of our municipal bodies are working. Local politics, extraneous considerations, and not unoften corruption, negligence and mismanagements do play their, rampant part. To still hold that greater sanctity should be attached to municipal valuation in place of judicial determination, would be wholly unwarranted. Similar is the position of the so-called surveys effected by the low-rung officials of the local bodies. They can as well not take the place of the judicial determination by the ITO just as he cannot entirely delegate his functions to an inspector of his own department, by way of survey or otherwise. Such surveys though to an extent relevant are far more a victim of influences and circumstances, as have been referred to above, with regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legality or wrong-doing associated with income, profits or gains is immaterial for the purpose of taxation. In the leading case of Minister of Finance v. Smith [1927] AC 193, 198 (PC), Lord Haldane said that the I.T. Acts are not necessarily restricted in their application to lawful business only. The revenue merely looks at an accomplished fact ; by bringing the profits to tax, it does not condone or take part in the illegal enterprise. The assessee may be prosecuted for the offence and at the same time taxed upon the profits arising out of its commission. Profits arising from a trade which necessarily involves fraud upon the customs authorities, or from illicit trafficking in drugs, illicit trafficking in liquor contrary to prohibition laws, keeping automatic gaming machines for public use, illegal bets taken by bookmakers on race courses, street betting or betting through the post, or wagering agreements, are all chargeable to tax. They are taxable as profits of business, even if the business involves the perpetration of crimes. A man who lives by regularly receiving and reselling stolen goods would be taxable on the profits. " Pugrees " or " abwabs " illegally exacted from tena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, there has not been any fixation of fair rent of the building in dispute. In the circumstances, the assessee was at liberty to realise whatever rent that was settled with his tenant. (See in this respect the decision of the Supreme Court in the case of M. M. Chalwa v. J. S. Sethi [1970) 2 SCR 390). In my opinion, the decisions of the Kerala High Court in C. J. George v. CIT[1973] 92 ITR 137 cannot be considered to have laid down the correct position of law. Incidentally, a perusal of the facts of this case itself shows how local politics and voting weightage of the panchayat ignored the actual rent which was much higher and reconciled to a much lower municipal valuation. Obviously, such municipal assessments have to be looked down upon. The Legislature has now introduced amendment in s. 23 of the I.T. Act, 1961, so as to specifically provide 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, the amount so received or receivable has to be treated to be the annual value. This amendment in a way may be treated as clarificatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment proceedings are valid. (See in this respect the decisions of the Kerala and Madras High Courts in United Mercantile Co. Ltd. v. CIT [1967] 64 ITR 218 (Ker) and Muthukrishna Reddiar v. CIT [1973] 90 ITR 503 (Ker) and A.L.A. Firm v. CIT [1976] 102 ITR 622 (Mad)]. It need hardly be said that change of opinion presupposes that there was earlier a formation of an opinion. When no such opinion was formed, it will be too far-fetched to assume that a change in that opinion was being effected. Further, the safest and surest guide for ascertaining whether any such opinion was formed at the original assessment stage is to look to the assessment order itself. When it, of its own, does not reveal that the matters and controversies now sought to be raised by way of reassessment were at all before the ITO or considered by him, it would be entirely surmiseful and, therefore, not permissible to still import their existence and consideration. This can, however, be permissible only where the assessment record of that stage overwhelmingly brings out that the matter did come for due consideration and was in fact considered. Mere silence on a matter or absence of discussion in the original orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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