Ita/765/2009 Of Commissioner Of Income Tax, Calicut v. Dr. K.m. Mehaboob

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC &THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU FRIDAY, THE 9TH DAY OF SEPTEMBER 2016/18TH BHADRA, 1938 ITA.No. 765 of 2009 -------------------AGAINST THE ORDER IN ITA 202/2002 of I.T.A.TRIBUNAL,COCHIN BENCHDATED 03-03-2005 APPELLANT/APPELLANT:-------------------- THE COMMISSIONER OF INCOME TAX, CALICUT. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT: ---------------------- DR.K.M.MEHABOOB, M/S.MOIDU'S MEDICARE (P) LTD., MAVOOR ROAD, CALICUT. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON09-09-2016 ALONG WITH CONNECTED CASES, THE COURT ON THE SAME DAYDELIVERED THE FOLLOWING: ITA.No.765 of 2009 APPENDIX PETITIONER'S ANNEXURES: ANNEXURE A: COPY OF ASSESSMENT ORDER DATED 25/3/99FOR THE AY 1996-97. ANNEXURE B: COPY OF THE ORDER OF THE COMMISSIONEROF INCOME TAX (APPEALS) DATED 11/3/2002. ANNEXURE C: COPY OF THE ORDER OF THE INCOME TAXAPPELLATE TRIBUNAL DATED 3/3/2005. ANNEXURE D: COPY OF THE ORDER OF THE ITAT DATED29/8/2002. ANTONY DOMINIC & DAMA SESHADRI NAIDU, JJ. 'CR'- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - I.T.A.Nos.443, 527, 528 & 765 of 2009 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Dated this the 9[th] day of August, 2016 Antony Dominic, J. JUDGMENT These appeals are filed by the Revenue, aggrieved by the orders passed by the Income Tax Appellate Tribunal, CochinBench in I.T.A.Nos.201, 200, 203 and 202 of 2002, pertaining tothe assessment year 1996-1997. Respondents/assessees are theco-owners of an eight storied building in Calicut. They are alsothe Shareholders and Directors of a company by name 'MoidusMedicare Private Limited', Calicut, which has established'National Hospital'. A substantial portion of the building ownedby the assessees was let out to the company and the agreed rent isRs.1 per sq.ft. 2. For the assessment year 1996-1997, applying theprovisions of Section 23 of the Income Tax Act, the AssessingOfficer assessed the annual value of the building at Rs.4 per sq.ft. : 2 : on the basis that another portion of the building was let out to theTelephone Department and the rent paid by the Department tothe assessees is Rs.4 per sq.ft. In the appeal filed before theCommissioner Income Tax (Appeals), the order of the AssessingOfficer has set aside and this order was confirmed by the Tribunalin the appeals filed by the Revenue. Reasoning of theCommissioner of Income Tax (Appeals) and the Tribunal is thatthe co-owners of the building themselves are the share holders ofthe company and that if the corporate veil is lifted, the assesseesthemselves are the lessees also. Therefore, the authorities havetaken the view that rent agreed as per the lease deed shall be thebasis for the quantification of the annual value and not themethod prescribed under Section 23 of the Act. It is in thesecircumstances, that the Revenue has filed these appeals and themain question of law that is framed for the consideration is I.T.A.Nos.443, 527, 528 & 765 of 2009 : 3 : whether the Tribunal was right in law and fact and holding that there is no scope to apply Section 23(1) of the Income Tax Act,1961. 3. We heard the Senior Counsel for the Revenue and the learned counsel appearing for the assessees. 4. Relevant part of Section 23(1), as it stood at the relevant time, read thus: “Sec.23. Annual Value how determined: (1) for the purposes of Section 22, the annual value ofany property shall be deemed to be- (a) the sum for which the property mightreasonably be expected to let from year to year;or (b) where the property is let and the annualrent received or receivable by the owner inrespect thereof is in excess of the sum referredto in clause (a), the amount so received orreceivable.” : 4 : I.T.A.Nos.443, 527, 528 & 765 of 2009 : 3 : whether the Tribunal was right in law and fact and holding that there is no scope to apply Section 23(1) of the Income Tax Act,1961. 3. We heard the Senior Counsel for the Revenue and the learned counsel appearing for the assessees. 4. Relevant part of Section 23(1), as it stood at the relevant time, read thus: “Sec.23. Annual Value how determined: (1) for the purposes of Section 22, the annual value ofany property shall be deemed to be- (a) the sum for which the property mightreasonably be expected to let from year to year;or (b) where the property is let and the annualrent received or receivable by the owner inrespect thereof is in excess of the sum referredto in clause (a), the amount so received orreceivable.” : 4 : 5. A reading of Section 23 would show that annual value of aproperty is to be determined for the purposes of Section 22applying the methods laid down therein. As per Clause (a) ofSection 23(1), the annual value shall be deemed to be the sum forwhich the property might reasonably be let out from year to year.Clause (a) would obviously be applicable to a property which isnot let out and in such a case, the such sum, for which theproperty might be reasonably expected to let, shall be the annualvalue. On the other hand, a reading of Clause (b) would show thatwhere a property is let and the annual rent received or receivableby the owner is in excess of the reasonably expected summentioned in Clause (a), the annual value shall be the amountactually received or receivable by the owner. In other words, asper Clause (b), in a case where the property is let out and if therent received or receivable is more than the sum for which the : 5 : property might reasonably be expected to let, the annual valueshall be the actual amount that is received or receivable. In othercases, the annual value shall be the sum for which the propertymight reasonably be expected to let. 6. Insofar as this case is concerned, admittedly the propertyis owned by the co-owners themselves, who are also the Directorsof the lessee company which has established the Hospital. As perthe lease agreement between the co-owners and the lesseecompany, the mutually agreed rent is Rs.1 per sq.ft. However, aportion of the very same building is let out by the co-owners, theassessees herein, to the Telephone Department and the lease rentthat is received is Rs.4 per sq.ft. 7. This would show that this is a case to which Clause (b) of Section 23(1) is applicable and the annual value has to beestimated, quantifying the sum for which the property might : 6 : reasonably be expected to let. It is adopting this method that theAssessing Officer has framed the assessment by fixing the annualvalue at Rs.4 per sq.ft. which is the rate of rent received for aportion of the building let out by the assessees themselves to theTelephone Department. 8. Learned counsel for the assessee contended that Section23 (1) cannot be applied to this case for the reason that the co-owners themselves are the Directors of the lessee company.According to us, this argument cannot be accepted for the reasonthat Section 23 does not exempt cases in which buildings havebeen let out by the owners to firms or companies in which theyare interested. Further no other provision of the Income Tax Act,providing for a different method of fixation of annual rent hasshown to us. On the other hand, reading of Section 23 wouldshow that in all cases annual value has to be estimated applying I.T.A.Nos.443, 527, 528 & 765 of 2009 : 7 : the principles of Section 23. Therefore, since the annual value of the building which was let out was to be estimated, the estimationcould be done applying Section 23(1)(b), which precisely waswhat was done by the Assessing Officer. According to us, theorders passed by the Commissioner of Income Tax and theTribunal are liable to be set aside and we do so. I.T.A.Nos.443, 527, 528 & 765 of 2009 : 7 : the principles of Section 23. Therefore, since the annual value of the building which was let out was to be estimated, the estimationcould be done applying Section 23(1)(b), which precisely waswhat was done by the Assessing Officer. According to us, theorders passed by the Commissioner of Income Tax and theTribunal are liable to be set aside and we do so. Appeals are disposed of answering the question of law infavour of the Revenue and against the assessees. SD/- ANTONY DOMINIC JUDGE jes SD/- DAMA SESHADRI NAIDU JUDGE