With soaring rents and high property values, tax payers may have to face a substantial burden even in respect of the income, which is not earned by them. While income in respect of one self-occupied residential house is exempt under section 22 of the Income-tax Act, 1961, tax is required to be paid on the annual value of more than one house property.

Under section 23(1)(a), the annual value of any property is deemed to be the sum for which the property might reasonably be expected to let from year to year. The fact that the owner has not earned any income from the property is entirely irrelevant. What is charged under section 22 is the annual value of the ownership of the property, irrespective of the fact whether or not any income is either actually received or has accrued to the assessee.

The word ?reasonably? used in section 23(1)(a) 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 annual rent.

The actual rent payable by a tenant to the landlord would, in normal circumstances, afford reliable evidence of what the owner might reasonably expect to get from a hypothetical tenant, unless the rent is inflated or depressed by reason of extraneous considerations, such as relationship, expectation of some other benefits, etc. But where rent of the building is subject to rent control legislation, this approximation may and often does get displaced.

What the law contemplates by ?annual value? is not actual rent received by the owner of the property but a notional income, which is to be gathered from what a hypothetical tenant would pay for the property under assessment. If actual rent is received that would be an important factor for the taxing authorities to consider, but that would not in every case be the annual value. Municipal valuation also is not the only test that can be applied in determining the annual value.

In C.I.T. v. Hemraj Mahabir Prasad Ltd. (279 I.T.R. 522), the Calcutta High Court observed that if the property is let out to a tenant who sub-lets it and gets a higher rent, the same cannot be a determining factor for assessing annual value under section 23(1) at the hands of the lessor, even where the creation of the tenancy or the lease is found to be genuine. Such a valuation has since been consistently accepted by the department.

The interpretation has to be made on the reasoning that even if a person does not earn any income on account of the house not being let out, he is still liable to pay income-tax on the notional value under clause (a). Inasmuch as if it is let out, it would not be the actual rent received but would be a notional rent.

In John Tinson and Co v. C.I.T. (298 I.T.R. 407), the Delhi High Court considered whether the assessing officer is duty bound to compute the ?annual value of property? or ?the sum for which the property might reasonably be expected to be let? as contemplated by sections 22 and 23 of the Act, only on ?standard rent? basis if he disbelieves the rent stated to be receivable by the assessee.

While considering the issue, the court held that section 23 stipulates the method by which the annual value of any property should be assessed to tax under section 22. Section 23(1)(a) states that the annual value of property shall be deemed to be the sum for which it may reasonably be expected to let from year to year.

The assessing officer would invariably have to carry out this computation. This is because that section 23(1)(b) envisages that even where the property is let out and the assessing officer accepts the veracity of the sum stated by the owner to be receivable by it as rent, this actual rent if it is higher than the ?sum for which the property might reasonably be expected to let? (viz, standard rent), would constitute the basis of computation for taxation.

This is the conclusion arrived at by the Calcutta High Court in C.I.T. v. Satya Co Ltd (140 C.T.R. 569). This is also the opinion of the Madras High Court as is evident from a reading of C.I.T. v. Parasmal Chordia (233 I.T.R. 147), in which it has been opined that the provisions of section 23(1)(a) apply to both, owner-occupied property and property which is let out, and that the measure of valuation to determine the annual value must be the same in both cases, viz, the standard or fair rent.

In C.I.T. v. Shrimati Bhagwani Devi (298 I.T.R. 413), the Jharkhand High Court held that, under the Jharkhand Rent Control Act, 2000, both, the landlord and the tenant can approach the rent controller for determination of fair rent/standard rent but neither the assessee nor the tenant, W, approached the controller for determination of fair rent of the ground floor of the premises. In such circumstances, if the annual rent paid by W was less than the fair rent or standard rent of the tenanted premises, then the amount of rent paid by the tenant could not correctly determine the annual value of the property.

In John Tinson and Company P Ltd. v. C.I.T. (298 I.T.R. 407), the Delhi High Court held that the assessing officer is duty bound to calculate the standard rent of a property under section 23. For this purpose, it is incumbent on the assessee to provide all necessary information and material to the assessing officer so that he can discharge this obligation.

The standard rent is synonymous with ?the sum for which the property might reasonably be expected to let from year to year?. Section 23(1) is a deeming provision and if the legislature intended that it would be reasonable that income-tax must be paid on actual rent basis, it should have expressly and unequivocally stated so.

To conclude, a healthy balance has been introduced by the amendments carried out in 1975 because prior thereto it was possible for an assessee to insist that the standard rent should be calculated for the purpose of assessability to income-tax and actual rent/income should be ignored. This equilibrium should not be disturbed by interpreting the provisions of the Act in a manner such as would permit a person to be subjected to tax beyond the ?income?, which has actually been received by him.

The author is advocate, Supreme Court