Woodland Associates Pvt. Ltd vs. ITO (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: December 13, 2012 (Date of publication)

Click here to download the judgement (Woodland_ALV_23_1_a_municipal_rateable_value.pdf)

S. 23(1)(a): Annual Letting Value has to be determined as per market rent & not municipal rateable value if property is not subject to “bona fide” rent control

The assessee let out two flats, one to its director and the other to its shareholder, for an aggregate rent of Rs. 4.52 lakhs. The assessee claimed that the rental income was assessable as business profits as the properties were held as a business asset. In the alternative, it was claimed that as the property was subject to rent control law, the rent received from the tenants had to be treated as the Annual Letting Value (ALV) and not the market rent of the properties. The AO & CIT(A) rejected the claim and held that the market rent of the properties, which was computed at Rs. 78 lakhs, was the ALV assessable as “Income from house property“. The Tribunal had to consider (i) whether the rent was assessable as “business profits” or as “Income from house property” and (ii) whether for purposes of s. 23(1)(a), the AO was entitled to treat the market rent as the ALV or he had to confine himself to the standard rent/ municipal valuation of the property. HELD by the Tribunal:

(i) Rental income has to be assessed as “Income from house property” even if the business of the assessee is to let out property. However, property let out to the director for her residence has to be treated as business user of the property and the rental income from such user has to be treated as business income (East India Housing 42 ITR 49 (SC), Vazir Sultan Tobacco 173 ITR 290 (AP) & New India Maritime 253 ITR 732 (Mad) followed);

(ii) As regards the determination of ALV in respect of income assessable as house property, it has been held by the Third Member in Baker Technical Services 126 TTJ 455 (Mum)(TM) that the ALV in respect of property which is not covered by the Rent Control Act has to be determined on the basis of the market rent. The municipal rateable value determined under the municipal law is not binding on the AO if he is able to show that the said rateable value does not represent the correct fair rent. In Reclamation Reality, the view of the Third Member in Baker Technical Services was not followed on the ground that it was contrary to the judgement of the Bombay High Court in M. V. Sonavala 177 ITR 246 and it was held that the municipal ratable value has to be considered as the ALV. The decision of the Third Member has the same binding force as that of the Special Bench and was required to be followed by the Division Bench in Reclamation Reality. It wrongly relied on M.V. Sonavala, which was a case dealing with property covered under the Rent Control Act. Also, the issue as to whether, if the Municipal Rateable Value does not give the correct fair rent, should still be taken as the ALV for properties not covered under the Rent Control Act was not an issue in M. V. Sonavala. This aspect has been considered in Baker Technical Services & Moni Kumar Subba 333 ITR 38 (Del) (FB) and it was held that if the municipal rateable value was not the fair rent, it was not binding on the AO;

(iii) The assessee’s argument that the property, having been let out to an individual, is subject to rent control law is not acceptable because the tenant is the daughter of a director and substantial shareholder of the assessee. The Rent Control Act applies only to bona fide letting out of properties and not to a colourable transaction which is only an arrangement to reduce tax liability. Accordingly the ALV has to be determined based on the fair rent in the market charged in comparable cases.

Note: The difference in opinion between this decision (& Tivoli Invstment 130 ITD 521 (Mum)) and Reclamation Realty (which was followed in Monisha Jaising 51 SOT 182 (Mum) & Gagan Trading) on whether the municipal rateable value has to be taken as the ALV u/s 23(1)(a) deserves to be referred to a Special Bench. The controversy was earlier referred to the Special Bench and withdrawn owing to pendency of the appeal in the High Court.

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