My client's shop is under rent control. The Assessing Officer has taken a notional market rent far above the standard rent as the annual value. Can he?
No — not under the s.23(1)(a) limb. Where the property is governed by rent control legislation, the sum for which it might reasonably be expected to let cannot exceed the standard rent determinable under that legislation, and this is so even where the standard rent has never actually been fixed by the Rent Controller and even where the tenant's right to apply for fixation has become time-barred. But read the caveat: this was decided on s.23(1) before clause (b) existed, and today a higher actual rent received or receivable is taxed under s.23(1)(b) regardless of the standard rent.
Decided by the Supreme Court (P.N. Bhagwati J and Baharul Islam J) on 1981-08-18, reported as 1981 AIR 1729; 1982 SCR (1) 309; 1981 SCC (4) 121; (1981) 131 ITR 435; Civil Appeal Nos. 2110 and 2111 of 1978 with Civil Appeal Nos. 1184-85 of 1981. It bears on section 22, section 23, section 23(1)(a) of the Income Tax Act 1961, in House Property and How Tax Law Is Read matters.
This is the foundation of every argument that an Assessing Officer cannot invent a market rent for a rent-controlled property. Its practical force today is confined to the s.23(1)(a) computation — the notional 'expected rent' used for a self-occupied-plus-deemed-let-out house, a vacant house, or a house let at a rent below the expected rent. Where the property is actually let at a rent above the standard rent, s.23(1)(b), inserted by the Taxation Laws (Amendment) Act 1975 and referred to by the Court itself in this judgment, makes the actual rent the annual value, and the taxpayer cannot use Sheila Kaushish to bring the figure back down to the standard rent. The second limit is territorial and factual: the ceiling only operates where a rent control enactment in fact applies to the property. In Delhi, for instance, the Delhi Rent Control Act does not apply where the rent exceeds Rs 3,500 per month, and the Delhi High Court Full Bench in CIT v. Moni Kumar Subba proceeded on that footing; for such properties the expected rent has to be found by other means and there is no standard-rent ceiling to invoke.
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The assessee built a warehouse in Delhi in 1961 at a cost of Rs 4,13,000. She let the first floor to the American Embassy from 19 March 1962 at Rs 5,810 per month, the northern portion of the ground floor with the mezzanine from 1 April 1964 at Rs 6,907 per month, and a further portion of the ground floor from 7 December 1964 at Rs 6,640 per month. On 17 July 1967 a fresh lease of the entire warehouse was made to the same tenant at Rs 34,797 per month, effective from 1 April 1968. For assessment years 1969-70 and 1970-71 the assessee contended that the annual value under s.23(1) was the hypothetical sum for which the warehouse might reasonably be expected to let, and that because the Delhi Rent Control Act 1958 applied to the area the warehouse could not reasonably be expected to let above the standard rent determinable under that Act. The Income Tax Officer took the actual rent as the annual value; the Appellate Assistant Commissioner and the Tribunal agreed, the Tribunal relying on M.M. Chawla v. J.S. Sethi for the proposition that in the absence of fixation the agreed rent is the standard rent. Meanwhile, on an application by a later tenant, the Rent Controller by order dated 13 March 1973 fixed the standard rent of the warehouse at Rs 34,848 per annum. The Tribunal and then the Delhi High Court refused a reference; special leave was granted, and the parties agreed that the Supreme Court would decide the questions directly without a reference.
The appeals were allowed to the extent that the annual value of the warehouse for assessment years 1969-70 and 1970-71 is the standard rent of its different portions determinable under the Delhi Rent Control Act 1958 and not the actual rent received from the American Embassy. This is so even though no standard rent had been fixed by the Controller under s.9 of that Act and the tenant's right to apply for fixation under s.12 had become time-barred. The Court directed that the standard rent be worked out portion by portion: for five years from first letting, the agreed rent is deemed the standard rent under s.6(2)(b) of the Rent Act, and thereafter the standard rent falls to be computed under paragraph (b) of sub-clause (2) of clause (B) of s.6(1). The Revenue was ordered to pay costs.
Section 22 charges the annual value, and s.23(1) as it then stood defined it as the sum for which the property might reasonably be expected to let from year to year — a hypothetical figure, not a receipt. The point was held to be concluded by Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee, decided on the definition of 'annual value' in the Delhi Municipal Corporation Act 1957 and the Punjab Municipal Act 1911, where the Court had rejected the municipal authorities' argument that because the landlord could lawfully continue to receive the contractual rent once the tenant's limitation had expired, the contractual rent measured the annual value. That reasoning was held to apply directly to s.23(1) because the two definitions are in identical terms and it is impossible to distinguish them. The Court added that its construction had received legislative approval, because s.6 of the Taxation Laws (Amendment) Act 1975 introduced clause (b) into s.23(1) providing that where the property is let and the annual rent received or receivable exceeds the sum for which the property might reasonably be expected to let, the amount so received or receivable shall be deemed to be the annual value — a provision which itself postulates that the expected rent may be less than the actual rent. Having settled the principle, the Court applied the standard-rent formulae in s.6 of the Rent Act to each portion of the warehouse for each accounting year, treating the warehouse as non-residential premises first let after 2 June 1944.
the annual value of the building according to the definition given in sub-section (l) of section 23 of the Income-tax Act, 1961 must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant
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Handle my notice → Ask a CA on WhatsAppNo — not under the s.23(1)(a) limb. Where the property is governed by rent control legislation, the sum for which it might reasonably be expected to let cannot exceed the standard rent determinable under that legislation, and this is so even where the standard rent has never actually been fixed by the Rent Controller and even where the tenant's right to apply for fixation has become time-barred. But read the caveat: this was decided on s.23(1) before clause (b) existed, and today a higher actual rent received or receivable is taxed under s.23(1)(b) regardless of the standard rent. This was decided by the Supreme Court (P.N. Bhagwati J and Baharul Islam J) and bears on section 22, section 23, section 23(1)(a) of the Income Tax Act 1961. It is reported as 1981 AIR 1729; 1982 SCR (1) 309; 1981 SCC (4) 121; (1981) 131 ITR 435; Civil Appeal Nos. 2110 and 2111 of 1978 with Civil Appeal Nos. 1184-85 of 1981. This is the foundation of every argument that an Assessing Officer cannot invent a market rent for a rent-controlled property. Its practical force today is confined to the s.23(1)(a) computation — the notional 'expected rent' used for a self-occupied-plus-deemed-let-out house, a vacant house, or a house let at a rent below the expected rent. Where the property is actually let at a rent above the standard rent, s.23(1)(b), inserted by the Taxation Laws (Amendment) Act 1975 and referred to by the Court itself in this judgment, makes the actual rent the annual value, and the taxpayer cannot use Sheila Kaushish to bring the figure back down to the standard rent. The second limit is territorial and factual: the ceiling only operates where a rent control enactment in fact applies to the property. In Delhi, for instance, the Delhi Rent Control Act does not apply where the rent exceeds Rs 3,500 per month, and the Delhi High Court Full Bench in CIT v. Moni Kumar Subba proceeded on that footing; for such properties the expected rent has to be found by other means and there is no standard-rent ceiling to invoke. If it applies to you, the first step is this: First establish, as a matter of fact and law, that a rent control enactment actually applies to this property — the statute, the area, and any monetary or use-based exclusion in it. If it does not apply, this decision gives you nothing.
The assessee built a warehouse in Delhi in 1961 at a cost of Rs 4,13,000. She let the first floor to the American Embassy from 19 March 1962 at Rs 5,810 per month, the northern portion of the ground floor with the mezzanine from 1 April 1964 at Rs 6,907 per month, and a further portion of the ground floor from 7 December 1964 at Rs 6,640 per month. On 17 July 1967 a fresh lease of the entire warehouse was made to the same tenant at Rs 34,797 per month, effective from 1 April 1968. For assessment years 1969-70 and 1970-71 the assessee contended that the annual value under s.23(1) was the hypothetical sum for which the warehouse might reasonably be expected to let, and that because the Delhi Rent Control Act 1958 applied to the area the warehouse could not reasonably be expected to let above the standard rent determinable under that Act. The Income Tax Officer took the actual rent as the annual value; the Appellate Assistant Commissioner and the Tribunal agreed, the Tribunal relying on M.M. Chawla v. J.S. Sethi for the proposition that in the absence of fixation the agreed rent is the standard rent. Meanwhile, on an application by a later tenant, the Rent Controller by order dated 13 March 1973 fixed the standard rent of the warehouse at Rs 34,848 per annum. The Tribunal and then the Delhi High Court refused a reference; special leave was granted, and the parties agreed that the Supreme Court would decide the questions directly without a reference. The matter was decided on 1981-08-18 by the Supreme Court (P.N. Bhagwati J and Baharul Islam J). On those facts the Supreme Court held as follows. The appeals were allowed to the extent that the annual value of the warehouse for assessment years 1969-70 and 1970-71 is the standard rent of its different portions determinable under the Delhi Rent Control Act 1958 and not the actual rent received from the American Embassy. This is so even though no standard rent had been fixed by the Controller under s.9 of that Act and the tenant's right to apply for fixation under s.12 had become time-barred. The Court directed that the standard rent be worked out portion by portion: for five years from first letting, the agreed rent is deemed the standard rent under s.6(2)(b) of the Rent Act, and thereafter the standard rent falls to be computed under paragraph (b) of sub-clause (2) of clause (B) of s.6(1). The Revenue was ordered to pay costs.
Section 22 charges the annual value, and s.23(1) as it then stood defined it as the sum for which the property might reasonably be expected to let from year to year — a hypothetical figure, not a receipt. The point was held to be concluded by Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee, decided on the definition of 'annual value' in the Delhi Municipal Corporation Act 1957 and the Punjab Municipal Act 1911, where the Court had rejected the municipal authorities' argument that because the landlord could lawfully continue to receive the contractual rent once the tenant's limitation had expired, the contractual rent measured the annual value. That reasoning was held to apply directly to s.23(1) because the two definitions are in identical terms and it is impossible to distinguish them. The Court added that its construction had received legislative approval, because s.6 of the Taxation Laws (Amendment) Act 1975 introduced clause (b) into s.23(1) providing that where the property is let and the annual rent received or receivable exceeds the sum for which the property might reasonably be expected to let, the amount so received or receivable shall be deemed to be the annual value — a provision which itself postulates that the expected rent may be less than the actual rent. Having settled the principle, the Court applied the standard-rent formulae in s.6 of the Rent Act to each portion of the warehouse for each accounting year, treating the warehouse as non-residential premises first let after 2 June 1944. In the words reproduced by the source cited on this page: "the annual value of the building according to the definition given in sub-section (l) of section 23 of the Income-tax Act, 1961 must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant" The decision followed or applied Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 2 SCR 607 — followed and applied to s.23(1); M.M. Chawla v. J.S. Sethi [1970] 2 SCR 390 — the Tribunal's reliance on it was not accepted.
It was decided by the Supreme Court on 1981-08-18 and is reported as 1981 AIR 1729; 1982 SCR (1) 309; 1981 SCC (4) 121; (1981) 131 ITR 435; Civil Appeal Nos. 2110 and 2111 of 1978 with Civil Appeal Nos. 1184-85 of 1981. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 22, section 23, section 23(1)(a), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed to the extent that the annual value of the warehouse for assessment years 1969-70 and 1970-71 is the standard rent of its different portions determinable under the Delhi Rent Control Act 1958 and not the actual rent received from the American Embassy. This is so even though no standard rent had been fixed by the Controller under s.9 of that Act and the tenant's right to apply for fixation under s.12 had become time-barred. The Court directed that the standard rent be worked out portion by portion: for five years from first letting, the agreed rent is deemed the standard rent under s.6(2)(b) of the Rent Act, and thereafter the standard rent falls to be computed under paragraph (b) of sub-clause (2) of clause (B) of s.6(1). The Revenue was ordered to pay costs. It arises in House Property and How Tax Law Is Read matters, on section 22, section 23, section 23(1)(a) of the Income Tax Act 1961, and was decided by P.N. Bhagwati J and Baharul Islam J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not wait for the Rent Controller. The judgment holds that the Assessing Officer must himself work out the standard rent on the principles laid down in the rent control statute; a plea that no standard rent has been fixed is not an answer. Work out the standard rent on the statutory formula and put that computation on record before the Assessing Officer, with the cost of construction, the market price of the land at commencement of construction, and the date of first letting, so the officer has material and not merely a legal proposition. Check the year-by-year effect of any 'first letting' rule in the rent statute — in this case the agreed rent was itself the standard rent for five years from first letting, after which the cost-based formula took over, and the Court computed different figures for different portions and different accounting years. Before relying on the case, check whether the property is in fact let and at what rent. If the actual rent exceeds the expected rent, s.23(1)(b) governs and this decision will not reduce the annual value.
Still good law. The proposition that the standard rent is the ceiling for the s.23(1)(a) expected rent was restated as settled law by a Full Bench of the Delhi High Court in CIT v. Moni Kumar Subba (ITA No. 499 of 2008 and connected appeals, decided 30 March 2011) at conclusions (iv) to (vi) of paragraph 17, which I read at https://indiankanoon.org/doc/726598/?type=print. What does NOT survive is the outcome on these facts: the section was amended after the years in question, and under s.23(1)(b) as it now stands a higher actual rent received or receivable is itself the annual value, so a landlord letting at above the standard rent can no longer be assessed on the lower standard rent. I did not trace any later decision doubting the ceiling principle, and I did not check for any decision distinguishing this judgment other than the Full Bench treatment described above. AMENDMENT WATCH: Section 23 was substituted in its present form by the Finance Act 2001 (Act 14 of 2001) with effect from 1 April 2002; clause (b) of s.23(1), on which the caveat above turns, was first introduced by the Taxation Laws (Amendment) Act 1975 and is referred to in the judgment itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Indian Kanoon print text carries evident OCR artifacts — 'sub-sec. (l)' with a lower-case letter l for the numeral 1, 'indentical' for 'identical', 'Rs. 66401-' for 'Rs. 6,640/-', and 'refusing two call for a reference'. The key_quote is reproduced exactly as printed, including 'sub-section (l)'. The Court's own narrative of the facts and the headnote differ on one detail: the narrative says the northern portion of the ground floor with the mezzanine was let from 1 April 1964 and then that 'the northern portion of the ground floor was let out to the same tenant' from 7 December 1964, while the later computation treats the 7 December 1964 letting as the southern portion — the computation paragraph is the one the result turns on. The judgment also records that the Rent Controller in fact fixed the standard rent of the warehouse at Rs 34,848 per annum by order dated 13 March 1973, on the application of a later tenant, which is close to one month of the contractual rent. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed to the extent that the annual value of the warehouse for assessment years 1969-70 and 1970-71 is the standard rent of its different portions determinable under the Delhi Rent Control Act 1958 and not the actual rent received from the American Embassy. This is so even though no standard rent had been fixed by the Controller under s.9 of that Act and the tenant's right to apply for fixation under s.12 had become time-barred. The Court directed that the standard rent be worked out portion by portion: for five years from first letting, the agreed rent is deemed the standard rent under s.6(2)(b) of the Rent Act, and thereafter the standard rent falls to be computed under paragraph (b) of sub-clause (2) of clause (B) of s.6(1). The Revenue was ordered to pay costs.
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