The annual value of property for determining the income from house property is deemed to be the sum for which the property might reasonably be expected to be let from year to year or where the property is let and the annual rent received or receivable is in excess of such sum, the amount so received or receivable. It thus follows that the determination of the annual value is to be made at a sum for which the property might be reasonably expected to be let from year to year and this is to be compared with the actual rent received. If the rent received or receivable is higher than the amount at which it would be reasonably expected to be let from year to year, then the actual rent received will be adopted as the annual value.
The standard rent of a property is synonymous with the sum for which the property might reasonably be expected to let from year to year. The assessing officer, therefore, is duty bound to calculate such standard rent and he can fix it by adopting the principles and methodology laid down in the relevant rent laws.
Market rent cannot be more than the standard rent and in a case where the rent actually paid is more than the standard rent, it has to be adopted as the annual letting value of the property irrespective of the fact that the market rent is actually more than the rent received by the assessee. The annual value of the property, which is let out during the relevant year would be the highest of the following three sums: municipal valuation, the fair rent determined by the Rent Control Act and the actual rent received by the owner.
A special bench of the income-tax appellate tribunal has discussed this issue in CIT v Mayur Recreational and Development Ltd (301 ITR (AT) 324), In this case, the property belonging to the assessee was given on rent during the year under consideration and the provisions as contained in section 23(1)(b) were applicable for determining its annual letting value. The annual letting value was shown by the assessee at Rs 52,540 on the basis of municipal valuation.
An annual rent of Rs 31,145 only was received by the assessee during the year under consideration in respect of the property and such valuation was not only made by the municipal corporation at Rs 31,145 initially up to March 31, 1976, but was revised. Since in the year under consideration it was at Rs 52,540, which was higher than the actual rent of Rs 31,145 received by the assessee as well as the standard rent of Rs 31,145 determined by the Controller under the Rent Control Act, it was adopted by the assessee as the annual letting value of the property.
If the standard rent of the property is not fixed or revised by the Controller, the Assessing Authority is at liberty to arrive at a figure of standard rent by applying the principles laid down in the Delhi Rent Control Act, 1958, for determination of standard rent. The property in question being residential premises and having been let out by the assessee after June 2, 1944 and no rent thereof having been fixed under any rent control law, the determination of standard rent was required to be done by applying the provisions of the Delhi Rent Control Act, 1958.
The land was purchased and construction of building thereon was done by the previous owner prior to 1971 and thus, the standard rent fixed in 1971 of the property could be taken as determined by the Controller taking into consideration the actual cost of construction incurred by the previous owner as well as the market price of the land comprised in the premises on the date of the commencement of the construction. At the relevant time, the rate to be applied to such cost for determining the standard rent was 7.5%, which was subsequently increased with effect from December 1, 1988 to 10%.
The assessing officer, however, adopted a value of Rs 37,61,541 paid by the assessee for the purchase of that property from the previous owner as appearing in the accounts as on June 1, 1986 and added a further sum of Rs 9,63,419 incurred on additions and alterations made to the property in the assessment year 1988-89 in order to apply a rate of 10% to determine the standard rent.
On appeal, the tribunal held that the rate of 10% applied by the assessing officer was correct but the cost of the property to the assessee as taken by him for applying this rate was wrong. What was relevant for this purpose was the cost of construction actually incurred by the previous owner or by the original owner as well as the market price of the land on the date of commencement of construction and not the cost of the property to the assessee.
The standard rent was determined by the controller in 1971 and the land having been acquired by the previous owner prior to 1971 as well as the construction having been done by the owner before 1971, the value to be taken as basis under section 6(1)(A)(2)(b) ought to have been considered by the Controller while determining the standard rent in the 1971.
This being so, it was not permissible as per the relevant provisions of section 6 of the Delhi Rent Control Act, 1958, to substitute the base price with the cost of the property to the assessee in order to determine the standard rent.
In order to lawfully increase the standard rent under section 7(1) by an amount not exceeding 10% of the cost of improvement, addition or alteration to the property, the prerequisite condition is that the cost must be incurred by the landlord himself. Therefore, the owner cannot claim any lawful increase in the standard rent under section 7(1) of the Delhi Rent Control Act, 1958.
The assessee was not entitled to claim any increase in the standard rent on this account and the assessing officer was not justified in taking into account the expenditure for determining the standard rent of the property. Therefore, the authorities were not justified in estimating the annual letting value of the property in question at Rs 9,32,888 as against Rs 5,12,932 declared by the assessee in the return.
The aforesaid decision lays down the correct principle for determining the annual value of property, which is in conformity with judgments of courts.
The author is advocate, Supreme Court