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Annual Letting Value of house property under section 23(1)(a) of Income Tax Act, 1961

Nov 22, 2009 Income Tax Case Laws

SUMMARY OF CASE LAW

In respect of properties where restriction under Rent Control Act is not applicable, the annual letting value has got to be determined after taking into consideration various factors and the standard rent or Municipal valuation may be adjusted after taking into account such factors.

CASE LAW DETAILS

Decided by: ITAT, MUMBAI BENCHES, `B’ MUMBAI (THIRD MEMBER),  In The case of: ITO  v. Baker Technical Services Pvt. Ltd.,  Appeal No.: ITA Nos. 5262 to 5264/Mum./2006, Decided on: July 6, 2009

RELEVANT PARAGRAPH

11. Since the controversy revolves around section 23 of the Act, I reproduce the same as under: -

“Annual value how determined.

23.(1) For the purposes of section 22, the annual value of any property shall be deemed to be -

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

……………………………………………………………………”

It is evident from the plain reading of section 23 of the Act; that the annual letting value of the house property is first to be determined on notional basis as the amount at which the property might be expected to be let from year to year. It is settled law that where the property is subjected to Rent Control Act, the fair market rent should not exceed the standard rent. This position is well settled and reference can usefully be made to the decisions of the Hon’ble Supreme Court in reference to Shiela Kaushish (supra) and Amolak Ram Khosla (supra). Reference may also be made to the decision of the Hon’ble Supreme Court, in the case of Motichand Hirachand, AIR 1968 SC 441. In this case their Lordships of the Hon’ble Supreme Court held that in certain circumstances extraneous circumstances may deflate the fair rent. Hon’ble Supreme Court has laid down the following principle of law: -

“It is well recognized principle in rating that both gross value and the net annual value are estimated by reference to the rent at which the property might reasonably be expected to let from year to year. Various methods of valuation are applied instance, by reference to the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of comparable properties or to the profits carried from the property or to the cost of construction” .

12. The Hon’ble Bombay High Court in the case of J K Investors (Bombay) Ltd. (supra) has also laid down the following principles of law: -

“At the cost of repetition, it may in order to arrive at such hypothetical rent, for be mentioned that under section 23(1)(a), the Assessing Officer has to decide the fair rent of the property. While deciding the fair rent, various factors could be taken into account. In such cases various methods like the contractors’ method could be taken into account.

Reference may also be usefully made to the decision of the Bombay Bench of the Tribunal in the case of J K Investors (Bombay) Ltd. vs. DCIT (2000) 74 ITD 274 (Bom). The Tribunal has made the following observation: -

“Since the amount of deposit was refundable, it was nobody’s case that the security deposit as such was to be treated as rent received or receivable. It could not be denied that the assessee was in a position to derive an advantage by getting the deposit. That might be an important consideration while determining the notional value under section 23(1 )(a)”.

This decision of the Bombay Bench of the Tribunal was upheld by the Hon’ble Bombay High Court in (2001) 248 ITR 723 (Bom). So however, the issue as to whether the notional interest can be taken into account in determination of the fair rental value under section 23(1 )(a), was left open by the Hon’ble High Court Since the Bombay High Court has not reversed or adversely commented upon the observation of the Bombay Bench of the Tribunal in the case of J K Investors (Bombay) Ltd. (supra), the view expressed by the Tribunal would be relevant for consideration in determining the fair rental value of the property which is not subject to Rent Control Act.

13. It may be relevant to reiterate that the learned counsel for the assessee has fairly conceded before me that the property in question was not subject to Rent Control Act in the relevant assessment years. It may also be pertinent to mention that the Rent Control Act applicable in Maharashtra has certain exceptions carved out in respect of which the restrictions under the Rent Control Act would not be applicable. For the relevant assessment years under appeal before the Tribunal, the case of the assessee falls under the exceptions, as a result of which restrictions under Rent Control legislation are not applicable. It is in this background the fair rental value of the property has got to be determined. The Revenue authorities as well as the learned Accountant Member have taken into account the actual rent received by the assessee from foreign company from August 1998 to July 1999 as the basis for determination of the fair rental value The present appeals relate to assessment years 2000-01, 2002-03 and 2003-04. The appeal for the assessment year 2001-02 has already been decided by the Tribunal and the issue has been remanded back to the Assessing Officer for determination of the standard rent to be adopted as the annual letting value for purposes of section 23(1 )(a) and assessing the annual letting value of the property in accordance with the provisions of sections 23(1 )(a) and 23(1 )(b). The learned Judicial Member has not doubted the correctness of the decision of the Tribunal in assessee’s own case for the assessment year 2001-02 and therefore has followed the same and set aside the issue and directed the Assessing Officer to determine the standard rent. However, the learned Accountant Member has pointed out that the earlier Bench of the Tribunal has ignored the important factor in this case in deciding that the annual letting value of the property under section 23(1 )(a) was to be adopted as the standard rent as per Rent Control Act. The fact that the property was not subject to Rent Control Act has not been considered by the Division Bench. The Bombay Bench of the Tribunal in the case of Makrupa Chemicals (P) Ltd. (supra) has analysed the decisions of the Supreme Court and various High Courts and come to the conclusion that the rateable value determined under the Municipal laws is not binding on the Assessing Officer while determining the annual letting value under section 23(1 )(a) of the Act, if it can be shown that the rateable value under the Municipal laws does not represent the correct fair rent. It has further been held that where the property is exempt from Rent Control Legislation, fair rent under section 23(1 )(a) of the Act has to be determined after taking into account various factors which inflate or deflate the rent. In the light of the above decision of the Tribunal and having regard to various decisions of the Hon’ble Supreme Court and various High Courts referred to in the order of the learned Accountant Member and also referred to by me in this order, it becomes abundantly clear that in respect of the properties where restriction under Rent Control Act is not applicable, the annual letting value has got to be determined after taking into consideration various factors and the standard rent or Municipal valuation may be adjusted after taking into account such factors. Therefore, I am inclined to agree with the learned Accountant Member to the extent that the correctness of the decision of the Tribunal in assessee’s own case for the assessment year 2001-02 was doubtful. That being so the question that assumes importance is as to whether the earlier order was binding upon the Coordinate bench. The learned Accountant Member has relied upon the Third Member decision of the Tribunal in the case of Napar Drugs (P) Ltd. (supra) to hold that in certain circumstances the decision of the Coordinate Bench may not be followed. There is no doubt about the well established principle of law that ordinarily the earlier decision of the Coordinate Bench has got to be followed. In case the subsequent Bench doubts the correctness of the decision of the earlier Bench of the Tribunal, it would be appropriate to make a reference to the Hon’ble President for constitution of the Larger Bench for reconsideration of the issue. In this connection reference to the decision of the Bombay High Court in the case of Thana Electricity Supply Ltd. (supra) may be relevant. The Hon’ble High Court at Page 734 of the Report have laid down the following principle of law: -

“Though there is no provision like article 141 which specifically lays down the binding nature of the decision of the High Courts, it is well accepted legal position that a single judge of a High Court is ordinarily bound to accept as correct judgments of courts of co­ordinate jurisdiction and of the Division Benches and of the Full Benches of his court and of the Supreme Court. Equally well settled is the position that when a Division Bench of the High Court gives a decision on a question of law, it should generally be followed by a co-ordinate Bench of the same High Court. If the co­ordinate Bench in the subsequent case wants the earlier decision to be reconsidered, it should refer the question at issue to a larger Bench”.

Tags: Annual Letting Value, benches, control act, paragraph 11, relevant paragraph, rent control, restriction, section 23, Supreme Court