Income Tax Ordinance (XXXI of 1979)---

----S.19---Income from property---Annual value---Determination of---Phrase "property might reasonably be expected to let from year to year"-- Connotation---Annual rental value has to be fixed keeping in view the reasonable expectation of a property to be let out from year to year-- Distinction to be maintained between vacant property and property rented out to tenant in view of restrictive laws against eviction of tenant and enhancement of rent.

From the words "properly might reasonably be expected to let from year to year" it is clear that what has to be seen is as to what is the rent on which property could reasonably be expected to let out from year to year. The annual rental value has to be fixed keeping in view the reasonable expectation of a property to be let out from year to year. Where a property is already under occupation of the tenant and there is law against the ejection of the tenant and restriction of enhancement of rent it could not be said that the property could reasonably be expected to be let out on a higher rent than what is being paid by the tenant occupying the property.

1989 PTD (Trib.) 859 fol.

Abdul Haq Kang for Appellant.

Liaquat Chaudhary, D.R. for Respondent.

Date of hearing: 4th November, 1990.

ORDER

ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER).---This is an appeal filed by an individual deriving income from three different sources, namely, from salary as a director of company, interest income and property income. The appeal relates to the assessment year 1988-89.

2. In this appeal the only grievance of the assessee is in regard to the property income. The facts of the case are that there is a building called Lahore Paper Market in the Paper Market, Lahore which was constructed in 1974. The assessee has 39% shares in this property. The assessee declared the Annual Letting Value of this property at Rs. 1,83,996 and after deducting the wealth-tax, property tax, collection charges and 1/5th as repair charges net divisible income was declared at Rs. 98,503. The assessee's 39% share was declared at Rs. 38,416. The ITO, however, did not accept the declared version and he estimated the A.L.V. of this property on estimate basis. Total number of shops in the market is 48 which were bifurcated by the assessing officer into lots of bigger shops and smaller shops. 28 shops were smaller in size for which monthly rent was estimated by the ITO at Rs. 2,000 and A.L.V. of these shops was worked out at Rs. 6,72,000. The rent for 20 bigger shops was estimated at Rs. 2,500 per month and the A.L.V. was estimated at Rs. 6,00,000. Thus, total A.L.V. was worked out at Rs. 12,72,000. The learned ITO allowed 1/5th as repair charges and property tax as well as collection charges. The total expenses were allowed at Rs. 2,78,593 and net divisible income out of this property was worked out at Rs, 9,37,407. The assessee's 39% share was thus estimated at Rs. 3,65,099. The learned CIT (A) on appeal reduced the rent of bigger shops to Rs. 1,500 per month while for the smaller shops the rent was reduced to Rs.1.000 per month. He thus worked out the ALV as under:--

After allowing statutory expenses at Rs. 1,83,393 net divisible income was worked out at Rs. 5,12,607 and the assessee's 39% share was reduced to Rs.1,99,917. The learned counsel for the assessee contended that this market was constructed in 1974 and all the shops had been rented out in 1974. It was submitted that since this is a commercial market normally no shop is vacated by the tenants and because of the enforcement of Rent Restriction Ordinance the rent cannot be enhanced. Therefore, the A.L.V. adopted by the officer below is incorrect inasmuch as the A.L.V. of the property had to be fixed by the I.T.O. to be a sum for which the property might reasonably be expected o0 let out from year to year. He submitted that in view of the fact that the shops are occupied by the tenants and the rent cannot be increased the shops cannot be reasonably expected to be let out on higher rent. It was further submitted that under the Rent Restriction Ordinance a tenant cannot i: e ejected except on specific grounds. In support of his contention he ha. relied upon the Tribunal decision reported as 1989 PTD (Trib) 859. The learned counsel for the assessee further submitted that in a case of Indian jurisdiction reported as (1978)-113-ITR-136 the Madras High Court has even held that where the landlord was receiving certain rent from the tenant and the tenant had sublet the property on a higher rent and the Revenue Authorities worked out the ALV on the basis of the sub-lessee's payment of rent, the ALV could not be enhanced more than the actual rent received by the landlord.

3. The learned D.R., on the other hand, contended that the property situated in a commercial market and is very valuable, therefore, the I.T.O. had rightly worked out the ALV of the property. It was submitted that the shops in question are very valuable being in specialised commercial market of paper and the rent adopted by the ITO was more than reasonable.

4. We have considered the arguments of the parties. Though the learned D.R. is right in saying that the property is situated in a most valuable commercial market and the normal rental value of the shops in such market would be much higher than what had even been estimated by the ITO. However, the contention of the learned counsel for the assessee has also considerable force. Under section 19 the ALV has been defined as under:--

"Annual value" of any property shall be deemed to be sum for which the property might reasonably be expected to let from year to year."

From the words which have been underlined by us it is clear that what has to be seen is as to what is the rent on which a property could reasonably be expected to let out from year to year. The Annual rental value has to be fixed keeping in view the reasonable expectation of a property to be let out from year to year. Where a property is already under occupation of the tenant and there is law against the ejection of the tenant and restriction of enhancement of rent it could not be said that the property could reasonably be expected to be let out on a higher rent than what is being paid by the tenant occupying the property. The Tribunal has earlier held the same view in the reported case cited above 1989 PTD (Trib.) 859. In that case the Tribunal observed as follows:--

"For the foregoing reasons the annual value fixed by the assessing officer in disregard to the Rent Restriction Laws is held to be unreasonable."

The learned counsel for the assessee has produced before us a Rent Register of the Lahore Paper Market which gives the details of the various tenants occupying the various shops since 1974. The respective rent paid by the various tenants has also been shown. It may be noted that the assessing officer had issued a notice under section 61 of the Income-tax Ordinance to the assessee calling for his explanation in regard to the valuation of the property. In reply the assessee had taken precisely the same plea which he has taken before us. The reply has been reproduced in the assessment order itself. The relevant portion of the assessee's reply is reproduced below:--

"(1). Rental income is derived from a market comprising of 48 shops and it is apparent that all the shops cannot have access to the main/open. The area of the shops is smaller with a maximum 8' x 12'. The tenants are there since the opening of building 15 years back. The rent charged is subject to the ad valorem increase of 20% to 25% every three years and this fact can be verified from the sitting tenants.

It will not be out of place to mention that rent in a similar building/market in the same locality is being charged in line with that charged by us. Photocopy of the rent receipt is enclosed for your reference.

(2) The Wealth-tax Officer had also conducted the similar enquiry, and assessed the property at the same value as declared. (Copy of the order is enclosed)."

5. It appears that the I.T.O. did not consider these points and he rejected the assessee's pleas by giving vague remarks. The I.T.O. rejected the assessee's plea with the following observations:--

"The rent receipts as declared by the assessee are absolutely disproportionate to the prevailing Annual Letting Value at the material time. The shops even of smaller size cannot be had against the rent Rs. 149, 250 and 500 as disclosed by the assessee. As mentioned earlier the property is situated in the area of a specific commercial significance, enquiries from the adjoining markets revealed that the shops cannot be let out for the amount less than Rs3 000 4 000 per month."

It would be seen from the above observation that the plea taken by the assessee was completely ignored by the assessing officer. The I.T.O. did not verify as to whether the assessee's plea that actual rent received by him was correct or not. He also ignored the plea of the assessee that in the similar building the same rent was being charged as by the assessee.

6. Keeping all these facts in view we are respectfully in agreement with the view taken by the Tribunal in reported case cited above. We, therefore, set aside the orders of the officers below and remit the case back to the I.T.O. with the direction that he should determine the A.L.V. of the property afresh on the basis of the actual rent received by the assessee and also keeping in view the Rent Restriction Ordinance.

M.B.A./1213/T Appeal accepted.