Hallmark Automation (P) Ltd. vs Assistant Commissioner Of Income ...
1995 Latest Caselaw 798 Del

ORDER

M. A. BAKHSHI, J. M.

These three appeals of the assessee relating to asst. yrs. 1987-88 to 1989-90 involving common issue are disposed of by this consolidated order. The main dispute is relating to determination of the annual letting value of part of the building at 22, Community Centre, New Friends Colony, New Delhi. The appellant-company is basically deriving income from manufacture and sale of electronic components. It has purchased a plot of land from C. D. A. in an open auction in February, 1978, at a total cost of Rs. 3,88,000. The construction of the building was started in September, 1979 and completed in December, 1983. The assessee-company had entered into agreements of lease both dt. 19th Feb., 1979, with two ladies, namely, Simran Singh and Punita Singh. These two ladies are closely related to the managing director of the company. The area of 4,800 sq. ft. was agreed to be let out to Simran Singh at a monthly rent of Rs. 24,000 from the date of handing over of possession. In the case of Punita Singh for the area of 2,400 sq. ft. a monthly hire charge had been agreed at Rs. 12,000. Simran Singh entered into sub-lease agreement on 14th Aug., 1979, with M/s Continental Device (India) Ltd. for letting out of 4,800 sq. ft. area at a monthly rent of Rs. 24,000 from the date of handing over of possession of the premises. As per cl. 1(iii) of sub-lease agreement, the Continental Device (India) Ltd. agreed to advance certain sums of money towards the construction/finishing of the said premises.

2. Similarly, Punita Singh also entered into a sub-lease agreement with Delta Electronics Pvt. Ltd. on 1st Sept., 1986, subleasing 2,400 sq. ft. of space at a monthly rent of Rs. 12,000 from the date of handing over of the possession of the premises. Assessee filed returns of income for asst. yrs. 1987-88 to 1989-90. For asst. yr. 1987-88 for which the previous year ended on 31st Aug., 1986, assessee disclosed gross rent of Rs. 2,88,000 from CDIL. Similarly, for asst. yr. 1988-89 assessee disclosed the gross rent of Rs. 4,32,000 and for asst. yr. 1989-90 for which the previous year comprised of 19 months, the actual rent received has been reflected at Rs. 6,84,000.

3. The AO considering the fact that the property has been let out to the close relatives who in turn having sublet the same to the sister concerns of the assessee, held that the rent disclosed from the property was exceptionally low. He accordingly assessed the annual letting value of the let out portion of the building as under :

Asst. yr.

Asst. yr.

Rental value assessed

Rental value assessed

(Rs.)

(Rs.)

1987-88

6,33,800

1988-89

10,36,800

1989-90

17,78,400

Assessee appealed to the CIT(A) but without any success. The AO has calculated the rental value as per market rate s. 11 per sq. ft. per month for asst. yr. 1987-88. For the subsequent assessment years, the market rate has been slightly increased.

4. The learned counsel for the assessee contended that as per provisions of s. 23 of the IT Act, 1961, the income from house property is to be assessed either as per the standard market rent or as per the actual rent received or receivable, whichever is higher. In this case, according to the learned counsel, the cost of land being Rs. 3,88,000 and cost of construction at Rs. 9,30,128 the standard rent at the rate of 8.625% under s. 6 of the Rent Control Act works out to Rs. 1,13,689. As against the standard rent, assessee has shown more rent received from the tenants. The AO according to the learned counsel was not justified in assessing the higher rental value in contravention of the well settled law laid down by their Lordships of the Supreme Court in the case of Mrs. Sheila Kaushish vs. CIT (1981) 131 ITR 435 (SC); Diwan Daulat Rai Kapoor vs. New Delhi Municipal Committee (1980) 122 ITR 700 (SC); Dr. Balbir Singh vs. M. C. D. & Ors. (1985) 152 ITR 388 (SC) and Amolak Ram Khosla vs. CIT (1981) 131 ITR 589 (SC).

5. Referring to the allegation of the AO that the lease agreements are between the sister concerns and not genuine, the learned counsel contended that there was no monetary benefit to the management of various companies in so far as the tax on all the three companies was at the same rate. Whatever rent was paid by the sister concerns to the appellant company has been allowed as deduction in their assessments. If higher rent had been paid to the appellants, the sister concerns would get deduction in respect of same. There was thus no tax planning involved in the matter of letting out of the property at allegedly lower rent.

6. Learned counsel further contended that the AO has ignored the comparable lease rent rates prevalent in the adjoining vicinity in arriving at the conclusion that the rent received by the assessee was lower than the market rent.

7. Learned counsel also referred to the assessment made by the municipal authorities. The rental value of the building has been assessed as per the actual rent received. However, benefit at the rate of 10% of the loan calculated at Rs. 4,188 per month has been assessed to tax apart from the actual rent received. Learned counsel fairly conceded that he has no objection in assessment of the benefit on account of the loan advanced for the construction of the house property to be added as the rent received in respect of the let out portion. The learned counsel also conceded that after the amendment of the Rent Control Act, the provisions of s. 6 will not be applicable for determination of the standard rent. He further clarified that for asst. yr. 1987-88 and for asst. yr. 1988-89 the standard rent as worked out at 1,13,689 under Rent Control Act cannot be ignored.

8. Learned Departmental Representative, on the other hand, contended that under s. 23 of the IT Act, 1961, the annual value of the property is deemed to be -

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

(b) that the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in cl. (a), the amount so received or receivable.

The learned Departmental Representative, contended that the decisions referred to by the learned counsel for the assessee are inapplicable to the fact of this case in view of the provisions of s. 23 having been modified from time to time. According to the learned Departmental Representative as per cl. (a) of s. 23, the AO has got to ascertain in every case the letting out value of the property which might reasonably be expected. In this case, according to the learned Departmental Representative, the AO had made enquiries and determined the annual letting value on the basis of the rent prevalent in the vicinity. The actual rent received was only a camouflage and in any case the expected rent being more than the actual rent shown by the assessee, the AO was justified in making the assessment on the basis of the market rent prevalent in the area, contended the learned Departmental Representative. It was accordingly urged that the appeals of the assessee may be dismissed.

9. We have given our careful consideration to the rival contentions. The annual letting value of the house property is assessable as per provisions of s. 23 of the Act. The said section as applicable to the relevant assessment years reads as under :

"23. (1) For the purposes of s. 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 is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in cl. (a), the amount so received or receivable."

10. If we go by the language of s. 23, it would seem as if the annual letting value of the property has got to be assessed as per the expected rental value that may be prevalent in the market. However, their Lordships of the Honble Supreme Court have time and again held that where the property is governed by the Rent Control Act, the expected rent of the house property cannot be more than the standard rent assessable under the provisions of the Rent Control Act. We may usefully refer to the decision of the Supreme Court in the case of Dr. Balbir Singh vs. MCD (supra). In this case, their Lordships held as under :

"Under the provisions of the DMC Act, 1957, the criteria for determining rateable value of a building is the annual rent at which such building might reasonably be expected to be let from year to year less certain deductions. The word "reasonably" is very important. What the owner might reasonably expect to get from a hypothetical tenant if the building were let from year to year, affords the statutory yardstick for determining the rateable value. What is reasonable is a question of fact and it depends on the facts and circumstances of a given situation. Ordinarily, "a bargain between a willing Lesser and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness" and in normal circumstances, the annual rent payable by a tenant to the landlord would afford reliable evidence of what the landlord may reasonably expect to get from the hypothetical tenant, unless the rent is inflated or depressed by reason of extraneous considerations such as relationship, expectation of some other benefit, etc. There would ordinarily be a close approximation between the actual rent received by the landlord and the rent which he might reasonably expect to receive from a hypothetical tenant. But in the case of a building subject to the rent control legislation, this approximation may and often does get displaced, because under the rent control legislation, the landlord cannot claim to recover from the tenant more than the standard rent and his reasonable expectation must, therefore, be limited by the measure of the standard rent lawfully recoverable by him."

11. Therefore, for purposes of determination of the annual letting value under cl. (a) of s. 23(1), the first question that is expected to be pondered by the AOs is as to whether the property is subject to the statutory controls under the relevant Rent Control Act. In case the relevant provisions of the Rent Control Act are applicable, the AO is bound to determine the standard rent of the premises in accordance with provisions of that Act. Under the Delhi Rent Control Act which is applicable in this case, s. 9 prescribes the manner in which standard rent has got to be determined. Where the standard rent has been determined by the rent control authority AO shall have no difficulty in ascertaining the standard rent as determined by such authority. However, where the standard rent has not been determined by the rent control authority, the AO is duty bound to do the exercise himself and determine the standard rent as per the provisions of the relevant Rent Control Act. In the case of Diwan Daulat Ram Kapoor vs. New Delhi Municipal Committee (supra) a question arose for determination as to how the rateable value of a building should be determined for levy of property tax where the building is covered by the provisions of Delhi Rent Control Act, 1958, but the standard rent has not yet been fixed. It has been contended on behalf of the municipal authorities that since the standard rent of the building was not fixed by the Controller under s. 9 of the Delhi Rent Control Act, 1958, and the period of limitation prescribed by s. 12 of that Act for making an application for fixation of the standard rent had expired, the landlord was entitled to receive the actual rent from the tenant without any legal impediment and, hence, the rateable value of the building was not limited to the standard rent determinable in accordance with the principles laid down in the Rent Control Act but was liable to be assessed by reference to the contractual rent recoverable by the landlord from the tenant. Rejecting the contentions raised on behalf of the municipal authorities their Lordships of the Supreme Court held that even if the standard rent of a building has not yet been fixed by the Controller under s. 9 of the Rent Control Act, the landlord cannot reasonably expect to receive from hypothetical tenant anything more than the standard rent determinable under the provisions of Rent Control Act and this would be so equally where the building has been let out to a tenant who has lost his right to apply for fixation of the rent by reason of expiration of the period of limitation prescribed by s. 12 of the Rent Act or the building is self occupied by the owner. Their Lordships further held that the standard rent determinable under the provisions of the Rent Act would constitute the correct measure of rateable value of the building. The Court pointed out that in each case the AO would have to arrive at its own figure of the standard rent by applying the principles laid down in the Rent Act for determination of the standard rent and determine the rateable value of the building on the basis of the actual rent received by the landlord and the rateable value of the building must be held to be limited by the measure of the standard rent determinable on the principles laid down in the Rent Act. This decision is, therefore, an authority for the proposition that the rateable value of the building is limited by the measure of the standard rent arrived at by the assessing authority by applying the principles laid down in the Rent Act and cannot exceed the figure of the standard rent so arrived at by the assessing authority. However, s. 23 of the IT Act, 1961, has been amended w.e.f. 1st April, 1985, which provides for assessment of the annual letting value on the basis of expected rental value or the actual rent received or receivable whichever is higher. Therefore, after determination of the standard rent as per the provisions of the relevant Rent Control Act the assessing authority has got to find out as to what is the actual rent received or receivable by the owner. If the rent received is more than the standard rent, then the actual rent received has got to be assessed as the annual letting value of the house property. If the rent received is lower, then the standard rent shall be deemed to be the annual value of the house property. Now, in this case, the assessee has worked out the standard rent as assessable under the provisions of Rent Control Act. The working of standard rent which is not disputed before us is at Rs. 1,13,689 for asst. yr. 1987-88 and Rs. 1,36,327 each for asst. yrs. 1988-89 and 1989-90. Admittedly the rent received or receivable is more than the standard rent. Therefore, the higher of the two values would be assessable as the annual letting value of the house property.

12. There is a dispute regarding the actual rent received/receivable by the assessee in respect of the house property. As already stated, while giving the facts of this case, the assessee had entered into lease agreements with two ladies for letting out of the property at Rs. 24,000 and Rs. 12,000 per month from the date of handing over of the possession of the property. The house property in question has been completed in December, 1993. Assessee has disclosed the rental income for asst. yr. 1987-88 at the rate of Rs. 24,000 per month. The monetary benefit which has been assessed by the municipal authorities on account of loan of Rs. 10,05,000 from the sublessee to the owners has not been disclosed by the assessee. However, there being no objection on behalf of the assessee for assessment of such a benefit, we take the sum of Rs. 4,188 per month as the rent received till the loan has actually been liquidated on this account. As per the assessment order of the municipal authorities, the loan has been liquidated on 31st Aug., 1988. Therefore, the actual rent received in respect of 4,800 sq. ft. area would be assessed at Rs. 28,188 per month till 31st Aug., 1988. From 1st Sept., 1988, the actual rent received in respect of 4,800 sq. ft. would be assessed at Rs. 24,000 per month only.

13. With regard to 2,400 sq. ft. area leased to Punita Singh, assessee has not disclosed any rent for asst. yr. 1987-88. This is notwithstanding the terms of the agreement executed between the assessee and Punita Singh on 19th Feb., 1979. Assessee had completed the building in the year 1983. No reasons have been given as to why rental income in respect of 2,400 sq. ft. area has not been disclosed for asst. yr. 1987-88. The mere fact that the lessee had sublet that portion of the building in the subsequent assessment year is not sufficient for excluding rental income as was receivable by the assessee in respect of that portion of the building from Punita Singh, since under s. 23, the value to be taken into account is the actual rent received or receivable. The assessee was entitled to receive the rent from Punita Singh in respect of 2,400 sq. ft. area from the date of handing over of possession. The building has been completed in December, 1983. The agreements with Punita Singh and Simran Singh had been executed simultaneously. There is no evidence on record to suggest that 2,400 sq. ft. area could not have been handed over to Punita Singh as and when 4,800 sq. ft. had been handed over to Simran Singh. The mere fact that lessee, namely, Punita Singh had not sublet the premises to any company, would not be sufficient to hold that the assessee-company was not entitled to receive the rent in respect of that portion of the building.

14. We, therefore, hold that apart from the rent of Rs. 28,188 assessable as above, a sum of Rs. 12,000 per month is also assessable as the actual rent receivable for asst. yr. 1987-88. The AO shall assess the income from house property by taking the annual letting value of the building at Rs. 40,188 X 12 as above.

For asst. yr. 1988-89, income from house property shall be assessed on the same basis as for asst. yr. 1987-88.

For asst. yr. 1989-90 the previous year is ending on 31st March, 1989. The rental income for 4,800 sq. ft. area shall be assessed at Rs. 28,188 per month up to 31st Aug., 1988. From 1st Sept., 1988 to 31st march, 1989, the rent at the rate of Rs. 24,000 per month shall be assessed in respect of that area. For the portion under occupation of Delta Electronic Pvt. Ltd. of 2,400 sq. ft. area, the rental value at the rate of Rs. 12,000 per month shall be assessed. The deductions as permissible under the law shall be allowed by the AO in computing the income from house property. We may clarify that for the subsequent assessment years where the provisions of the Rent Control Act are not applicable, our decision shall not be a precedent as the AO shall be free to assess the market rent prevalent in the area without there being any restrictions under the Rent Control Act in respect of the property in question.

15. This disposes of the major common issue involved in these appeals of the assessee.

16. We shall not deal with the remaining grounds of appeal for the respective assessment years.

17. For asst. yr. 1987-88, the only other ground is relating to levy of interest under ss. 215 and 217. The prayer made before us is for allowance of consequential relief. Since there will be some reduction in the income, assessee is entitled to consequential relief. The AO is directed to allow the same.

18. For asst. yr. 1988-89, the assessee had claimed deduction under s. 80M at Rs. 43,695. The AO restricted the deduction to Rs. 36,000. For asst. yr. 1989-90 the CIT(A) has estimated the expenditure for earning of dividend income at Rs. 1,000. As against that, for asst. yr. 1988-89 the expenditure has been estimated at 10% of the gross dividend. In our view, the estimation of expenditure at Rs. 1,000 is more reasonable. We accordingly direct the AO to recalculate the deduction under s. 80M after deducting a sum of Rs. 1,000 only from the gross income.

18.1 The other ground involved in this appeal is relating to disallowance under s. 43B of Rs. 13,704. A sum of Rs. 5,232 on account of sales-tax and Rs. 7,268 out of provident fund had remained unpaid as on the close of the previous year. The AO made the disallowance which was confirmed by the CIT(A). On careful consideration of the rival contentions, we are of the view that provisions of s. 43B have wrongly been invoked in respect of provident fund payments as the payment had not become due as on 31st Aug., 1987. As held by their Lordships of the Andhra Pradesh High Court in the case of Srikakollu Subbarao & Co. vs. Union of India (1988) 173 ITR 708 (AP) s. 43B is not applicable in respect of such statutory payments as are not due for payment before the end of the previous year. The said decision of the Andhra Pradesh High Court has been superseded by the retrospective amendment in respect of payments referred to in cl. (a) of s. 43B. However, provident fund is not covered under cl. (a) but is covered under cl. (b) of s. 43B. The Tribunal in the case of IAC vs. Indian Aluminium Cables Ltd. (1991) 40 TTJ (Del) 148 : (1992) 41 ITD 80 (Del) has held that the retrospective amendment of s. 43B is not applicable in respect of provident fund payments. Respectfully following the aforementioned decision of the Tribunal in the case of IAC vs. Aluminium Cables Ltd. (supra), we hold that the disallowance of provident fund amounting to Rs. 7,264 is not warranted. The same is accordingly deleted. The disallowance of Rs. 5,232 on account of unpaid sales-tax is, however, confirmed. As provided under s. 43B deduction in respect of this disallowance of Rs. 5,232 shall be allowed to the assessee in the year of payment, i.e., asst. yr. 1989-90. The AO is directed to allow deduction to the assessee in that year in respect of payment as provided under s. 43B.

19. The only other ground for the year under appeal is relating to interest under s. 215/217. Consequential relief has been prayed for. As a result of reduction of income, assessee is entitled to the relief. The AO is directed to allow consequential relief in respect of the levy of interest.

20. No other ground of appeal has been pressed before us.

21. In asst. yr. 1989-90, the only other ground for this year is relating to deduction under s. 80M claimed at Rs. 78,651. The assessee had disclosed gross dividend of Rs. 1,31,085. The assessee had claimed deduction by calculating the same on the gross dividend income. The AO was of the view that some expenses might have been incurred by the assessee for earning the dividend income. He estimated the expenditure so incurred at Rs. 21,085. Deduction under s. 80M was thus calculated at Rs. 1,10,000.

22. On appeal, the CIT(A) held that there was no justification for estimating the expenses incurred by the assessee at Rs. 21,085. He has estimated the expenditure at Rs. 1,000 and allowed deduction by calculating the same on the dividend of Rs. 1,30,085. In our view, the decision of the CIT(A) in estimating the expenditure at Rs. 1,000 only as attributable to the dividend income is reasonable. It is not disputed that deduction under s. 80M is permissible with reference to the net dividend income. In the absence of any details about the expenditure incurred by the assessee in connection with the earning of dividend income, the estimation of expenditure at Rs. 1,000, in our view, is not excessive or unreasonable. We, therefore, dismiss this ground of appeal.

23. There is no other ground of appeal for asst. yr. 1989-90.

24. The appeals for asst. yrs. 1987-88, 1988-89 and 1989-90 are partly allowed.