M.A.E. PAES VS COMMISSIONER OF INCOME-TAX
1999 P T D 3447
[230 I T R 601
[Bombay High Court (India)]
Before Dr. B. P. Saraf and Dr. Pratibha Upasani, JJ
M.A.E. PAES
versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No.68 of 1986, decided on 17/09/1997.
Income-tax---
----Salary---Perquisite---Rent-free residential accommodation provided by employer to employee---Valuation of perquisite---Fair rental value of accommodation to be determined with reference to standard rent payable under Rent Control Act---Fair rental value not to exceed standard rent-- Word "fair" indicates that it is not prevailing market rent---Indian Income Tax Act, 1961, S.17---Indian Income-tax Rules, 1962, R.3(a)(iii). Expln. 2.
On a perusal of Rule 3(a)(iii) of the Income-tax Rules, 1962, in computing the value of the perquisite of rent-free residential accommodation provided by an employer to his employee, the fair rental value of the accommodation has always to be determined with reference to the standard rent payable under the Rent Control Act applicable to the area where the accommodation is situated: The fair rental value for the purpose of the perquisite can in no case exceed the standard rent determinable on the principles laid down under the Rent Control Act. The assessing authority would have to arrive at its own figure of standard rent by applying the principles laid down under the Rent Control Act for determination of the standard rent and determine the fair rental value of the accommodation on the basis of such figure of standard rent. The expression "rent which a similar accommodation would realise in the same locality" appearing in Explanation 2 to Rule 3(a)(iii) of the Rules has to be construed only to mean the "standard rent", because no property can be expected to realise any rent higher than the standard rent as that would be in breach of the provisions of the Rent Control Act. Moreover, the expression used in Rule 3(a)(iii) is "fair rental value". The use of the word "fair" is a clear indicator that it is not the prevailing market rent but the "fair rent" which can never be more than the "standard rent".
If no standard rent has been fixed in respect of the particular premises either because it is in the occupation of the owner or his employees or for any other reason and the Assessing Officer wants to adopt a figure other than the municipal valuation, he will have to determine the standard rent himself by applying the principles laid down in the Rent Control Act and if that figure is higher than the municipal valuation, it will be within his powers to accept the same and to determine the value of the perquisite under Rule 3(a)(iii) of the Rules at such higher rate.
During the previous years relevant to the assessment years 1975-76, 1976-77 and 1977-78, the assessee was provided with free furnished residential accommodation by his employer. The value of the perquisite. in respect of the said free furnished residential accommodation was determined by the employer of the assessee at Rs.9,394 per annum. This amount included a sum of Rs.2,389 in respect of furniture and Rs.7,005 in respect of the accommodation exclusive of furniture. While making the assessment of the income of the assessee from salary and computing the value of the rent free residential accommodation provided to him by the employer for the purpose of computing the income chargeable under the head "Salaries", the Income-tax Officer did not accept the value of the perquisite in respect of rent-free residential accommodation determined by the assessee and his employer as the fair rental value of the accommodation. He computed the fair rental value thereof by taking into account the prevailing rent in that area at Rs.2,500 per month and included the same in the computation of the salary income of the assessee under section 17 of the Income Tax Act, 1961; On appeal, the Appellate Assistant Commissioner held that the valuation of the perquisite of rent-free accommodation at Rs.9,394 as disclosed by the assessee was correct. On further appeal, the Tribunal held that the income- tax Officer was justified in taking the value of the perquisite in respect of the rent-free residential accommodation at Rs.30,000 on the basis of the rent prevailing in the same building. On a reference:
Held, that the Tribunal was not right in holding that the perquisite in respect of the residential accommodation had to be valued by considering its fair rental value at Rs.30,000 per annum. It would be open to the Tribunal to accept the fair rental value shown by the assessee which was higher than the municipal valuation or if it was not satisfied about the correctness of the same, to determine the same by applying the principles laid down under the Rent Control Act for fixation of the standard rent.
Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee (1980) 122 ITR 700 (SC) fol.
Balbir Singh (Dr.) v. ~M.C.D. (1985) 152 ITR 388 (SCE; Guntur Municipal Council v. Guntur Town Rate Payers' Association (1971) 2 SCR 423; AIR 1971 SC 353 and Sheila Kaushish (Mrs.) v. CIT (1981) 131 ITR 435 (SC) ref.
P. Kaka instructed by Crawford Bayley & Co. for the Assessee.
Dr. V. Balasubramanian with P.S. Jetley and J.P. Deodhar for the Commissioner.
JUDGMENT
DR. B.P. SARAF, J.---By this reference under section 256(1) of the income Tax Act, 1961, at the instance of the assessee, the Income-tax Appellate Tribunal has referred. the following question of law to this Court for opinion:
"Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the perquisite in respect of the residential accommodation had to be valued by considering its fair rental value at Rs.30,000 per annum?"
This reference pertains to the assessment years 1975-76, 1976-77 and 1977-78. During the previous years relevant to these assessment years, the assessee was an employee of Herdillia Chemicals Ltd., Bombay. As an employee, he was provided with free furnished residential accommodation by his employer. The value of the perquisite in respect of the said free furnished residential accommodation was determined by the employer of the assessee at Rs.9,394 per annum. This amount included, a sum of Rs.2,389 in respect of furniture and Rs.7,005 in respect of the accommodation exclusive of furniture. While making the assessment of the income of the assessee from salary and computing the value of the rent-free residential accommodation provided to him by the employer for the purpose of computing the income chargeable under the head "salaries", the Income-tax Officer did not accept the value of the perquisite in respect of rent-free residential accommodation determined by the assessee and his employer as the fair rental value of the accommodation. He, therefore, himself computed the fair rental value thereof by taking into account the prevailing rent in that area at Rs.2,500 per month and included the same in the computation of the salary income of the assessee under section 17 of the Income Tax Act, 1961 ("the Act"). The assessee appealed to the Appellate Assistant Commissioner who did not approve the valuation made by the Income-tax Officer and held that the valuation of the perquisite of rent-free accommodation at Rs.9,394, as disclosed by the assessee, was correct. The Revenue appealed to the Income-tax Appellate Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal, relying upon Explanation 2 to Rule 3(a)(iii) of the Income-tax Rules, 1962 ("the Rules"), Meld that the Income-tax Officer was justified in taking the value of the perquisite in respect of the rent-free residential accommodation at Rs.30,000 on the basis of the rent prevailing in the same building. In that view of the matter, the Tribunal reversed the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. Hence, this reference at the instance of the assessee.
Section 17 of the Income-tax Act defines "salary" to include, inter alia, "perquisite". "Perquisite" has been defined in clause (2) thereof to include, inter alia, (i) the value of rent-free accommodation provided to the assessee by his employer, and (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. Thus, the income of the assessee from salary would include the value of rent-free accommodation provided to the assessee by his employer or the, value of any concession in the matter of rent respecting any accommodation provided by his employer. The method of valuation of perquisites is laid down in Rule 3 of the Income-tax Rules, 1962 ("the Rules"). Clause (a) thereof deals with the determination of the value of rent- free residential accommodation. This rule, so far as is relevant, reads:
"3. Valuation of perquisites. ---For the purpose of computing the income chargeable under the head 'salaries' the value of the perquisites (not provided for by way of monetary payment to the assessee) mentioned below shall be determined in accordance with the following clauses, namely:---.
(a) The value of rent-free residential accommodation shall be determined on the basis provided hereunder, namely:--- ....
(iii) in any other case,---
(A) the value of rent-free residential accommodation which is not furnished shall ordinarily be a sum equal to 10 per cent of the salary due to the assessee in respect, of the period during which the said accommodation was occupied by him during the previous year:
Provided that---
(1) where the fair rental value of the accommodation is in excess of 20 per cent of the assessee's salary, the value of the perquisite shall be taken to be 10 per cent of the salary increased by a sum equal to the amount by which the fair rental value exceeds 20 per cent of the salary: so, however, that the Income-tax Officer may, having regard to the nature of the accommodation, determine the sum by which 10 per cent of the salary is to be increased, as a percentage (not exceeding 100 per cent.) of the amount by which the fair rental value exceeds 20 per cent of the salary;
(2) where the assessee claims, and the Income-tax Officer is satisfied that the sum arrived at on the basis provided above exceeds the fair rental value of the accommodation, the value of the perquisite to the assessee shall be limited to such fair rental value;
(B) where the accommodation is furnished, the value of rent-free residential accommodation shall be the aggregate of the following sums, namely:---
(1) the fair rental value of the accommodation arrived at in accordance with the provisions of sub-clause (iii)(A) as if the accommodation were not furnished; and
(2) the fair rent for the furniture (including television sets, radio sets, refrigerators, other household appliances and air conditioning plant or equipment) calculated at 15 per cent. per annum of the original cost of such furniture or if such furniture is hired from a third party, the actual hire charges payable therefor .....
Explanation 2.---Forthe purposes of sub-clause (iii), the fair rental value of accommodation which is not furnished shall be the rent which a similar accommodation would realise in the same locality or the municipal valuation in respect of the accommodation whichever is her. (emphasis supplied).
(b) The value of residential accommodation provided at a concessional tent shall be determined as the sum by which the value computed in accordance with clause (a), as if the accommodation were provided free of rent exceeds the rent actually payable by the assessee for the period of his occupation' during the relevant previous year."
We have not set out sub-clauses (i) and (ii) of clause (a) which deal with valuation of rent-free residential accommodation provided by a Government body or an undertaking under the control of the Government, by the Reserve Bank of India, a Government company and similar other organisations set out therein because in this case we are concerned with the valuation of rent-free residential accommodation provided by a company which does not fall under any of the above categories.
It is clear from a plain reading of Rule 3(a)(iii) of the Rules that ordinarily, the value of the rent-free unfurnished residential accommodation should be a sum equal to 10 per cent of the salary due to the assessee. However, if the rent value of the accommodation exceeds 20 per cent. of the assessee's salary, in that case, the value of the perquisite has to be fixed in the manner set out in the proviso to Rule 3(a)(iii).` Explanation 2 appended to Rule 3, however, gives an option to the Assessing Officer to determine the fair rental value of the accommodation as the rent which a similar accommodation would realise in the locality or the municipal valuation of the accommodation, whichever is higher. In the instant case, admittedly, the fair rental value of the accommodation is higher than the municipal valuation, because according to the assessee himself, the municipal valuation is Rs.5,250 per annum whereas the fair rental value is Rs.7,005 per annum. The assessee has, therefore, taken the fair rental value of the unfurnished accommodation at Rs.7,005. The Income-tax Officer determined the same at Rs.30,000 per annum by taking into account the prevailing rent of similar accommodation, which also was 'approved by the Tribunal. The controversy is whether the "prevailing rent" or the "standard rent" payable under the rent control legislation can be the basis for determination of the fair, rental value of the accommodation.
According to the assessee, the prevailing rent can never form the basis for determination of the fair rental value of accommodation. Mr. P. Kaka, learned counsel for the assessee, submits that the fair rental value of the accommodation for the purpose of Rule 3(a)(iii) cannot be more than the fair rental determinable under the Rent Control Act. According to him, the rent for accommodation in Bombay is governed by the provisions of the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1947 ("the Rent Control Act"), and the fair rental value of the accommodation for all purposes including Rule 3(a)(iii) of the Income-tax Rules to be limited to the measure of standard rent determinable on the principles laid down in the said Act. According to him, the Tribunal has committed a manifest error of law in affirming the fair rental value of Rs.30,000 per annum determined by the Income-tax Officer on the basis of the prevailing market rent in complete disregard of the "standard rent" payable under the Rent Control Act.
Learned counsel submits that the Tribunal can accept the municipal valuation as the fair rental value of the accommodation or the value determined by the assessee, or itself estimate the same by applying the principles laid down in the Rent Control Act for determination of the standard rent or direct the Income-tax Officer to estimate it accordingly. In support of this contention reliance is placed on the decisions of the Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee (1980) 122 ITR 700 and Mrs. Sheila Kaushish v. CIT (1981) 131 ITR 435. Learned counsel submits that the ratio of the above decisions of the Supreme Court has also been followed in interpreting the expressions "fair rental value" in Rule 3(a)(iii) of the Income-tax Rules and "the sum for which the property might reasonably be expected to let from year to year" in section 23(I)(a) of the Income-tax Act by the various High Courts.
Dr. V. Balasubramanian, learned counsel for the Revenue, does not dispute the ratio of the above decisions. He, however, contends that it would not apply to the computation of the fair rental value for the purpose of Rule 3(a)(iii) of the Rules. The fair rental value for the above purpose, according to him, has to be fixed on the basis of the prevailing market rent and not the standard rent under the Rent Control Act.
We have given our careful consideration to the rival submission of counsel Ion the parties. However, on a careful perusal of Rule 3(a)(iii) of the Rules and the decisions of the Supreme Court cited above, we are of the clear opinion that the fair rental vale of an accommodation has always to be determined with reference to the, standard rent payable under the Rent Control Act applicable .to the area where the accommodation is situated. The fair rental value for the purpose of the perquisite can in no case exceed the standard rent determinable on the principles laid down under the Rent Control Act. The assessing authority would have to arrive at its own figure of standard rent by applying the principles laid down under the Rent Control Act for determination of the standard rent and determine the fair rental value of the accommodation on the basis of such figure of standard rent. The expression "rent which a similar accommodation would realise, in the same locality" appearing in Explanation 2 to Rule 3(a)(iii) has to be construed only to mean the "standard rent", because no property can be expected to realise any rent higher than the standard rent as that would be in breach of the provisions of the Rent Control Act. Moreover, the expression used in Rule 3(a)(iii) is "fair rental value". The use of the word "fair" is a clear indicator that it is not the prevailing market rent but the "fair rent" which can never be more than the "standard rent".
The expression used in Rule 3(a)(iii) is "fair rental value" of the accommodation. Explanation 2 enables the Assessing Officer either to accept the municipal valuation which admittedly has to be fixed on the basis of the standard rent under the Rent Control Act or to ascertain on the basis of the fair rental value himself by ascertaining the rent which similar accommodation would realise in the same locality. The "rent which similar property would realise in the same locality" cannot be more than the standard rent that can be realised by a landlord under the Rent Control Act. This expression cannot be interpreter' to mean rent in excess of the standard rent.
We are supported in our above conclusion by the ratio of the decision of the, Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee (1980) 122 ITR 700, where dealing with the expression "the gross annual rent at which such. house or building may reasonably be expected to be let from year to year" appearing in section 116 of the Delhi Municipal Corporation Act, 1957, it was held that the annual value of the building must be held to be limited by , the measure of the standard rent determinable on the principles laid down in the Delhi Rent Control Act, 1958. In the above case, the Supreme Court declared the assessment of the annual value of the building by the Municipal Corporation in excess of the standard rent determinable on the principles laid down in the Delhi Rent Control Act illegal and ultra, vines. The Supreme Court also held that even in respect of self-occupied buildings, the annual value must be determined on the basis of the standard rent determinable under the provisions of the Rent Control Act. It was observed (page 716):
"When the rent control legislation provides for fixation of standard rent, which alone and nothing more than which the tenant shall be liable to pay to the landlord, it does so because it considers the measure of the standard rent prescribed by it to be reasonable. It lays down the norm of reasonableness in regard to the rent payable by the tenant to the landlord. Any rent which exceeds this norm of reasonableness is regarded by the Legislature as unreasonable or excessive. When the Legislature has laid down this standard reasonableness, would it be right for the Court to say that the landlord may reasonably expect to receive rent exceeding the measure provided by this standard? Would it be reasonable on the part of the landlord to expect to receive any rent in excess of the standard or norm of reasonableness laid down by the Legislature and would such expectation be countenanced by the Court as reasonable? The Legislature obviously regards recovery of rent in excess of the standard rent as exploitative of the tenant and would it be proper for the Court to say that it would be reasonable on the part of the landlord to expect to recover such exploitative rent from the tenant? We are, therefore, of the view that, even if the standard rent has not been fixed by the Controller, the landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under the Act and this would be so equally whether the building has been let out to a tenant who has lost his right to apply for fixation of the standard rent or the building is self-occupied by the owner. The assessing authority would, in either case, have to arrive at its own figure of the standard rent by applying the principles laid down in the Delhi Rent Control Act, 1958, for determination of the standard rent and determine the annual value of the building on the basis of such figure of standard rent. "
The Supreme Court also referred to its earlier decision in Guntur Municipal Council v. Guntur Town Rate Payers' Association (1971) 2 SCR 423; AIR 1971 SC 353, wherein it was held that there was no distinction "between buildings the fair rent of which has actually been fixed by the Controller and those in respect of which no such rent has been fixed". The following observations from the above decision were quoted with approval (page 355 of AIR 1971 SC):
"It is perfectly clear that the landlord cannot lawfully expect to get more rent than the fair rent which is payable in accordance with the principles laid, down in the Act. The assessment of valuation must take into account the measure of fair rent as determinable under the Act. It may be that where the Controller has not fixed the fair rent the municipal authorities will have to arrive at their own figure of fair rent but that can be done without any difficulty by keeping in view the principles laid down in section 4 of the Act for determination of fair rent. "
Reference may also be made in this connection to another decision. of the Supreme Court in Mrs. Sheila Kaushish v. CIT (1981) 131 ITR 435, wherein, while interpreting the expression "the sum" for which the property might reasonably be expected to let from year to year appearing in sub section (1) of section 23 of the Income-tax Act, it was held that even if the standard rent of a building has not been fixed by the Controller under the Rent Control Act and the period of limitation prescribed under the Rent Control Act for making an application for fixation of- the standard, rent had expired and it was no longer competent to the tenant to have the standard rent of the building fixed, the annual value of the building, according to the definition given in subsection (1) of section 23 of the Income-tax Act must be held to be the standard rent determined under the provisions of the Act .and not the actual rent received by the landlord from the tenant.
In Dr. Balbir Singh v. M.C.D. (1985) 152 ITR 388, the Supreme Court followed the ratio of the decision in Dewan Daulat Rai Kapoor' s case (1980) 122 I.TR 700 (SC) and held that the standard rent determinable on the principles set out in the Rent Control Act as may be applicable, would fix the upper limit of the rateable value of the premises and within such upper limit, the assessing authority would have to determine as to what rent should be charged if the premises are let to the hypothetical tenant. The assessing authority would also have to take into account the rent which the owner of the similar premises constructed earlier and situate in the same or adjoining locality might reasonably be receiving from a hypothetical tenant and which would necessarily be within the upper limit of the standard rent for such premises
It is clear from the above decisions that the fair rental value of the premises cannot be more than the standard rent payable under the Rent Control Act. If no standard rent has been fixed in respect of particular premises either because it is in the occupation of the owner or his employees or for any other reason and the Assessing Officer wants to adopt a figure other than the municipal valuation, he will have to determine the standard rent himself by applying the principles laid down in the Rent Control Act and if that figure is higher than the municipal valuation, it will be within his powers to accept the same and to determine the value of the perquisite under Rule 3(a)(iii) of the Rules at such higher rate.
In the instant case, even according to the assessee, the fair rental value was higher than the municipal valuation. It was, therefore, open to the Income-tax Officer to accept the same. If, according to him, the determination of the fair market value by the assessee was not correct, it was open to him to determine the fair rental value by applying the principles laid down in the Rent Control Act for determination of the standard rent. In the instant case, the Income-tax Officer has not done so. He has taken the prevailing market rate in the neighbourhood as the measure without ascertaining whether such prevailing market rate was the standard rent or it was in excess of the standard rent. That is not permissible. In that view of the matter, we are of the clear opinion that the Income-tax Officer was not justified in determining the fair rental value of the accommodation for the purpose of determining the value of the perquisite under Rule 3(a)(iii) of the Rules at Rs.30,000 per annum and the Tribunal was not justified :.. confirming the same. The Income-tax Officer could have accepted the fair rental value disclosed by the assessee which was higher than the municipal valuation. If he was not satisfied with the correctness of the same, it was open to him to determine the fair rental value himself by applying the principles laid down in the Rent Control Act for determination of the standard rent. '
In view of the above, we answer the question referred to us in the affirmative and in favour of the assessee. We make it clear that it will be open to the Tribunal to accept the fair rental value shown by the assessee which is higher than the municipal valuation or if it is not satisfied about the correctness of the same, to determine the same by applying the principles laid down under the Rent Control Act for fixation of the standard rent.
This reference is disposed of accordingly with no order as to costs.
M.B.A./3102/FC Reference disposed.