By TIOL News Service

ERNAKULAM, NOV 28, 2016: THE ISSUE IS - Whether the owner of a building can claim exemption from application of Section 23 of I-T Act for quantification of annual letting value of his building, by pleading that he had let out the building to a company in which he is substantially interested. NO IS THE VERDICT.

Facts of the case:

The assessees are the co-owners of an eight storied building in Calicut. They are also the Shareholders and Directors of a company by name 'Moidus Medicare Private Limited', Calicut, which has established 'National Hospital'. A substantial portion of the building owned by the assessees was let out to the company and the agreed rent is Rs.1 per sq.ft. For the A.Y 1996-1997, applying the provisions of Section 23, the AO assessed the annual value of the building at Rs.4 per sq.ft. on the basis that another portion of the building was let out to the Telephone Department and the rent paid by the Department to the assessees was Rs.4 per sq.ft. On appeal, the CIT(A) as well as the ITAT was of the view that the co-owners of the building themselves were the share holders of the company and that if the corporate veil was lifted, the assessees themselves were the lessees also. Therefore, the authorities have taken the view that rent agreed as per the lease deed shall be the basis for the quantification of the annual value and not the method prescribed u/s 23.

Having heard the parties, the High Court held:

++ admittedly the property is owned by the co-owners themselves, who are also the Directors of the lessee company which has established the Hospital. As per the lease agreement between the co-owners and the lessee company, the mutually agreed rent is Rs.1 per sq.ft. However, a portion of the very same building is let out by the co-owners, the assessees herein, to the Telephone Department and the lease rent that is received is Rs.4 per sq.ft. This would show that this is a case to which Clause (b) of Section 23(1) is applicable and the annual value has to be estimated, quantifying the sum for which the property might reasonably be expected to let. It is adopting this method that the AO has framed the assessment by fixing the annual value at Rs.4 per sq.ft. which is the rate of rent received for a portion of the building let out by the assessees themselves to the Telephone Department;

++ the assessee's counsel contended that Section 23 (1) cannot be applied to this case for the reason that the coowners themselves are the Directors of the lessee company. According to us, this argument cannot be accepted for the reason that Section 23 does not exempt cases in which buildings have been let out by the owners to firms or companies in which they are interested. Further no other provision of the Income Tax Act, providing for a different method of fixation of annual rent has shown to us. On the other hand, reading of Section 23 would show that in all cases annual value has to be estimated applying the principles of Section 23. Therefore, since the annual value of the building which was let out was to be estimated, the estimation could be done applying Section 23(1)(b), which precisely was what was done by the AO, and hence the orders passed by the CIT(A) and the Tribunal are liable to be set aside.

(See 2016-TIOL-2870-HC-KERALA-IT)