JUDGMENT
Ajoy Nath Ray, J.
1. This is a reference matter entertained by us on Section 256(2) of the Income-tax Act, 1961, at a time before Section 260A got introduced into it.
2. The appellant-Department felt aggrieved in this case with the order of the Tribunal since it accepted the annual letting value of certain premises owned by the assessee-company at the figure of Rs. 10,800.
3. The Assessing Officer had fixed the annual letting out value at Rs. 54,000 basing his decision upon the municipal valuation of the property upon which municipal rates were to be calculated at a specified fraction or percentage.
4. The assessment years involved in this case are 1983-84 to 1986-87.
5. The assessee’s case on the facts was that from as early as 1962, the annual letting value of the property was Rs. 10,800 only. That was because of a duly registered lease for 30 years which had been executed in that year in respect of the property.
6. No doubt it is an admitted position that the lease was executed in favour of the wife of a director of the assessee-company.
7. We shall have something to say about the low nature, even or the extremely low nature, of this rental at a later portion of the judgment, but we have to decide the principal question of law on which the reference was entertained.
8. Section 23 as it stood at the material time, and in so far as it concerns our case is set out below :
“23. Annual value how determined.–(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 is let and the annual 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.”
9. The rest of this section is not set out as the later parts do not concern our case materially. The principal point of controversy in law in this case is, if an assessee owns some property and has let it out at a certain rental, then whether the annual value of the property still to be computed taking the property, as notionally vacant, in case the situation is such, that the actual rental received, is reasonably lower than the rental which could be obtained in the assessment year in question, had the property being vacant at the commencement of that year, and had been let out freshly at that time-It will be easier to appreciate the questions of law formulated, once the rough and ready controversy, as formulated above, is kept in mind. The questions formulated were as follows :
“1. Whether, on the finding of the Tribunal that it is not the case of the Revenue that standard rent of the premises in question was more than Rs. 10,800 per annum is based on any relevant material or perverse ?
2. Whether, on the facts and in the circumstances of the case and having regard to the annual municipal value of the property during the relevant period, the finding of the Tribunal that the annual letting value for the purpose of Section 23(1) should not be taken at a figure of higher than Rs. 10,800 is based on a correct principle of law ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in estimating the annual letting value of the property of Rs. 10,800 only ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not upholding the determination of the annual letting value of the property at Rs. 54,000 by the Assessing Officer ?”
10. It will be seen that the central legal question out of the four questions above is the second one.
11. In the findings at the various stages of the departmental decisions, the registered deed of 1962 fixing the annual rental at Rs. 10,800 has been considered. Although the Assessing Officer pointed out the large and spacious nature of the property in question, and also the several families which resided there, there was no finding that the deed of 1962 was a sham deed, brought about for the purpose of showing to the Revenue authorities the property as a tenanted one, although in reality, it was a vacant property.
12. The Tribunal has also accepted the deed of 1962 as a genuine deed.
13. We proceed to answer the second question as formulated above, therefore, on the basis that the annual rental is the rental received by the assessee from 1962 onwards, and also during the assessment years in question, as the genuine return on the assessee’s property, as a genuine deed of lease entered into by the parties at arms length.
14. Were the factual situation, as per the finding of the departmental decisions, otherwise, were the deed a sham one, or a mere eyewash, the property would have to be treated as vacant property for tax purposes, and the decisions in that regard are all unanimous. It is unnecessary for us to refer to the decisions which deal with such deeds, which are not genuine or are fraudulent.
15. But even in the case of genuine lettings out, is the assessee’s property to be valued at the actual rental received, or at the higher potential annual value (if the property were vacant) in the assessment year in question ? Three Supreme Court cases were relied on in this regard before us, and where this issue arises those cases are generally referred to in every well considered decision. One was the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee . That dealt with a piece of property in Delhi and a provision regarding house tax provided that the rateable value thereof shall not exceed the annual amount of standard rent for the property.
16. In that case the standard rent, however, had not actually been fixed. That the Supreme Court noticed that under the provisions of law applicable, the landlord would incur a penalty in case it received any rent in excess of the standard rent fixed under the Act. The opinion of the Supreme Court was that the assessing authority would have to apply the principles of the Delhi Rent Control Act, 1958, for determination of standard rent and determine the annual value of the building on the basis of such figure of the standard rent.
17. Another Supreme Court case was that of Dr. Balbir Singh v. Municipal Corporation of Delhi [1985] 152 ITR 388. The Supreme Court opined in that case that if the owner of the building is able to show by proof or prevailing circumstances, such as the nature of the building, its situation or state of repair, that he could not reasonably expect to get from a hypothetical tenant an amount of rent, up to or equal to even the standard rent, then and in that event, the rateable value of the building need not still be determined at the standard rent.
18. The third case was that of Mrs. Sheila Kaushish v. CIT . The question of law involved in that case related to the determination of annual value of a building for income-tax purposes where the building is governed by the provisions of the rent control legislation but the standard rent has not yet been fixed. That was the case of letting out of a warehouse where the owner had succeeded in getting a very lucrative rate. The assessee, however, claimed that it was not the actual rent, which would be the proper value to take, for the purposes of Sub-section (1) of Section 23 of the Income-tax Act, but the proper valuation for that purpose, would be the hypothetical amount for which the concerned warehouse might reasonably be expected to let from year to year, as applicable under the Delhi Rent Control Act, 1958.
19. Although the standard rent had not been fixed, and the time for fixation of the standard rent by way of an application from the tenant had expired permanently, even then, the Supreme Court opined, that for the purposes of Section 23(1), the standard rent as determinable under the Rent Control Act would provide the basis of valuation for income-tax purposes, and not the actual rent received by the landlady from the tenant.
20. Mr. Agarwalla cited several cases supporting the case of the Department before us. He gave us the case of Padmasundara Rao v. State of Tamil Nadu , submitting that if Section 23 of the Income-tax Act is clear in its wording, then it must be followed, even if it causes hardship to the assessee. In the same line is the case of CIT v. Anjum M.H. Ghaswala . No doubt an assessee, who has let out his property under a lease, can get only the rent for his property, but if the law requires the property to be valued notionally as a vacant one, then such law must be followed, even if the assessee would thereby have to pay tax on an income, which he has not earned, but is still taken as income in his hands by the express words of a section of the Income-tax Act. We are given by Mr. Agarwalla the case of Smt. Pratima Roy v. CIT , a very short one page decision of the Division Bench wherein, following the case of the same assessee, reported at Smt. Protima Roy v. CIT , the Division Bench opined, that the rent receivable should be taken into consideration and not the amount actually supposed to have been received by the assessee.
21. In the root case of Smt. Protima Roy [1982] 138 ITR 536, a Division Bench of our High Court presided over by Justice Sabyasachi Mukharji (as his Lordship then was), held that the deed producing the rental income was a sham one and various family members were involved therein. No doubt, if the deed is a mere facade, then the lease rental is not really the lease rental at all. Mr. Agarwalla tried to draw some parallel between our case and these cases, saying that the lessee here is the assessee director’s wife, and therefore, a close family member like in Smt. Protima Roy’s case .
22. Whether strictly needed for the purposes of answering all the four questions or not, Mr. Khaitan also submitted, that the figure of Rs. 10,800 was fixed in 1962 and the property, and its expected letting out value today, should not be the yardstick for determining the reasonable letting value of 1962. As an instance of a case, where the agreed rent was fair and reasonable, at least at the time when the property was let out, he gave us the case of CIT v. Modi Industries Ltd. (No. 4) [1993] 200 ITR 350, a decision of the Delhi High Court, then presided over by Justice B.N. Kirpal, as his Lordship then was.
23. Mr. Khaitan also gave us the case of the Madras High Court Division Bench, i.e., in Addl. CIT v. Mrs. Leela Govindan [1978] 113 ITR 136 where the Division Bench observed, in the context of house property income taxation, that the rent of Rs. 225 fixed per month in that case was not to be ignored during the assessment. It was said there, that the assessee could not claim anything more than the said small amount, because of a lease dated December 20, 1935, during the subsistence of which he had purchased the property in 1961.
24. In view of the above case law the second question is to be decided by us, the main factor being the effect of the lease deed of 1962 on the annual value of the property for the purposes of Section 23 of the Income-tax Act.
25. We are of the opinion that in considering the annual value of the property for any assessment year, that assessment year, as far as practicable, should be taken in isolation, as if that assessment year stands by itself. The property which is already tenanted at the beginning of the assessment year, cannot be expected to let from year to year at any figure higher than the rent which is being produced actually by the property in question. Clause (a) of Section 23(1), applies not only to property which is vacant and not under any lease deed, but is also applicable to property which is already tenanted and subject to a continuing fixed rental; but in the latter case, the property is to be treated as tenanted property; the word “vacant” is not to be read into the section, nor any notion of the property being treated as vacant.
26. Clause (b) of Section 23(1) refers to a situation where the rent received or receivable by the assessee is higher than the expected rental market value of the property itself. It would, today, cover a situation like the one in the case of Mrs. Sheila Kaushish , mentioned above. The higher rental would wipe out the expected lower rental value of the warehouse.
27. But this does not mean, that because of the presence of Clause (b), Clause (a) of Section 23(1) must refer to, and only to, vacant property which is not let out. If a property is actually let out, then the expectation of its letting out becomes an actual reality, and the proof of the expectation, can be made in the best manner possible, by producing evidence of the rental which is being actually received by the assessee.
28. To put in simple terms, a good student who is going to take a Maths paper is expected to score about 80 marks in 100 but if the question arises as to what that good student can be expected to score in a Maths paper, which he had already taken, and in which he has already scored 92, the answer will be that the expectation is 92, and the expectation has reached its sweet reality also.
29. We are aware that the word “expected” usually denotes something which has not yet taken place, but is in the womb of the future forecast or the imagination. But it has already been said before and, the same has been followed more than once, that the life of the law has not been logic, but experience. In a case we were to interpret Section 23(1)(a) as referring to property which is vacant only, and which might only be expected to let out at a future time, which has not yet occurred, we would be opining that this very important section of annual value of house property, makes no specific provision as to the annual value of house property actually let out, when such rent is either equal to or lower than the normal expectation of rent.
30. The interpretation of Section 23 should not be such as to cause it to have holes and gaps. The interpretation which we have put makes Section 23 a complete whole. It also prevents taxation of the assessee as regards notional income or notional wealth. There are many instances where owners of very huge properties in cities with rent control legislation, receive very small amounts of rent, but if those huge properties were vacated, those would fetch annually a fortune and a wealth for the assessee. If the notional value is taken as the true and correct interpretation of Section 23, then these owners of old rented property, would come under a very heavy tax incidence, without even having the income to pay it from. The situation would be very odd. A person usually pays a percentage of his income as income-tax. In this rather hypothetical situation, which we have avoided, the person would be paying, perhaps, many thousand per cent. above his income, derived from the old rents, as income-tax on such meagre income.
31. On the above basis, the second question has to be answered in favour of the assessee and in the affirmative. Once the second question gets answered in the above manner, questions Nos. 3 and 4 follow suit. The letting value being the value for the purposes of Section 23(1)(a), it is the correct yardstick (thus answering question No. 3) and the yardstick of municipal valuation is not the correct one (thus answering question No. 4).
32. We now come to a very disturbing aspect of this case. A search has been mentioned in the order of the Assessing Officer. Mr. Agarwalla, appearing for the Department, told us that there has been a later search in 1991 also. The reports of that search are not in the papers before us but Mr. Agarwalla read out from it in open court for the benefit of all. He said that the report mentions that the inspecting officer went into the property in question at Bally-gunge Park (which is one of the best, if not the best residential area in our town) and he found several acres of land, two perfectly maintained bungalows, manicured gardens and a cow shed.
33. It also appears that the residents of this nice haven are the director, the director’s good house wife, and their four obedient children, who have their own prosperous families now.
34. Although we cannot base our decision on these conclusions, yet we feel no doubts in our minds, that if this property actually continued to fetch Rs. 10,800 only per year for a sound, prosperous and prudent businessman, he would not have one night’s wink of good sleep, until he succeeded by a vacating suit, or otherwise, to have the stranger tenant thrown out. We have also no doubts, that the good director entertains no such improper wishes about his lessee wife.
35. If a point of perversity had been raised about the genuine nature of the lease deed of 1962, had arguments been advanced vigorously in that regard at the different stages of the Department, we would have had great pleasure in having the deed of 1962 re-examined by the Tribunal on remand. However, the point of perversity is raised in regard to only one finding of the Tribunal in question No. 1. The finding is that the Tribunal noted, without any material, that the case of the Revenue was not that the standard rent was more than Rs. 10,800 per month. It was absolutely unjustifiable for the Tribunal to enter such a finding. The purpose of the Revenue’s appeal was to have the annual valuation raised and it had made no concession of any sort in that regard. The first question has got to be answered, therefore, in favour of the Revenue and by answering that that finding of the Tribunal is without material and perverse.
36. But such answering of the first question cannot alter the net effect of this reference ; even if the standard rent is assumed to be above Rs. 10,800 per year, yet the assessee is not receiving that higher standard rent ; since the assessee is not receiving the higher standard rent, the expected rent of the property as per Section 23(1)(a) is the rent actually received. Questions Nos. 2, 3 and 4 are thus left unaffected by the answer to the first question.
37. As such the reference is disposed of by answering the first question in favour of the Revenue and questions Nos. 2, 3 and 4 in favour of the assessee.
38. The order of the Tribunal thus remains untouched by us, excepting that its finding as mentioned in question No. 1 be treated as deleted. We end this judgment by wishing that the fortunate cows might prosper in their posh sheds, in one of the best residential localities of our town.
Indira Banerjee, J.
39. I agree, except that if I had written the judgment I would perhaps have not written the last line.